-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CD0Oao6AjWGqH/Gxtfh5842TKJmAnVuqk7osYvMC2RqESEDac+hwiCRfVCBjrIwo qgQiYiKHQCXNemgWFsukAg== 0001012870-00-000306.txt : 20000203 0001012870-00-000306.hdr.sgml : 20000203 ACCESSION NUMBER: 0001012870-00-000306 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREATER BAY BANCORP CENTRAL INDEX KEY: 0000775473 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 770387041 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25034 FILM NUMBER: 518387 BUSINESS ADDRESS: STREET 1: 2860 WEST BAYSHORE ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4153751555 MAIL ADDRESS: STREET 1: 2860 BAYSHORE ROAD STREET 2: 420 COWPER ST CITY: PALO ALTO STATE: CA ZIP: 943011504 FORMER COMPANY: FORMER CONFORMED NAME: MID PENINSULA BANCORP DATE OF NAME CHANGE: 19941031 FORMER COMPANY: FORMER CONFORMED NAME: SAN MATEO COUNTY BANCORP DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K405 FOR PERIOD ENDING DECEMBER 31, 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from to ----------------- ----------------. Commission File No. 0-25034 GREATER BAY BANCORP (Exact name of registrant as specified in its charter)
California 77-0387041 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization)
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) 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. [X] The aggregate market value of the Common Stock held by non-affiliates, based upon the closing sale price of the Common Stock on January 24, 2000, as reported on the Nasdaq National Market System, was approximately $460,826,000. 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 24, 2000, 12,837,382 shares of the Registrant's Common Stock were outstanding. DOCUMENT INCORPORATED BY REFERENCE: PART OF FORM 10K INTO WHICH INCORPORATED: - ---------------------------------- ----------------------------------------- Definitive Proxy Statement for Annual Part III Meeting of Shareholders to be filed within 120 days of the fiscal year ended December 31, 1999 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, Bay Area Bank, Bay Bank of Commerce, Cupertino National Bank, Golden Gate Bank, Mid-Peninsula Bank and Peninsula Bank of Commerce) 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 Bancorp Greater Bay is a bank holding company operating Bay Area Bank ("BAB"), Bay Bank of Commerce ("BBC"), Cupertino National Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank ("MPB") and Peninsula Bank of Commerce ("PBC"). The Company also owns GBB Capital I and GBB Capital II, both of which are Delaware statutory business trusts, which were formed for the exclusive purpose of issuing and selling Trust Preferred Securities ("TPS"). Greater Bay also includes the following operating divisions: Greater Bay Bank Contra Costa Region ("CCR"), Greater Bay Bank Fremont Region ("FR"), Greater Bay Bank Santa Clara Valley Commercial Banking Group ("SCVG"), Greater Bay Bank SBA Lending Group ("SBA Group"), Greater Bay Corporate Finance Group ("CFG"), Greater Bay International Banking Division ("IBD"), Greater Bay Trust Company ("GBTC"), Pacific Business Funding ("PBF") and Venture Banking Group ("VBG"). The Company provides a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. The Company operates throughout Silicon Valley, the San Francisco Peninsula and the East Bay Region, with eighteen offices located in Cupertino, Fremont, Hayward, Millbrae, Palo Alto, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara and Walnut Creek. At December 31, 1999, the Company had total assets of $2.6 billion, total net loans of $1.7 billion and total deposits of $2.3 billion. History Greater Bay became a multi-bank holding company as the result of the merger (the "1996 Merger"), effective November 27, 1996, of Cupertino National Bancorp ("Cupertino") and Mid-Peninsula Bancorp ("Mid-Peninsula"). Mid-Peninsula was incorporated as a California Corporation on November 14, 1984 under the name San Mateo County Bancorp as the bank holding company of WestCal National Bank. In 1994, WestCal National Bank was merged into MPB, which commenced operations in October 1987. Concurrently San Mateo County Bancorp changed its name to Mid- Peninsula Bancorp. The name was then changed to Greater Bay Bancorp as a result of the 1996 Merger. Upon consummation of the 1996 Merger, CNB became a wholly- owned subsidiary of Greater Bay. CNB commenced operations in May 1985. Greater Bay has continued to expand its presence within its market area by affiliating with other quality banking organizations, and select niche financial services companies. In addition the Company has been successful in opening key regional bank locations to respond to market and client demands, while also selectively opening key new businesses that expand the Company's product offerings. The following provides a chronological listing of the Company has completed since November 27, 1996:
Year Commenced Date of Merger Entity Former Bank Holding Company Operations - ------------------------------------------------------------------------------------------------------------- December 23, 1997 PBC none 1981 May 8, 1998 Golden Gate Pacific Rim Bancorporation ("PRB") 1976 August 31, 1998 Pacific Business n/a 1995 Funding Corporation/1/ May 21, 1999 BAB Bay Area Bancshares 1979 October 15, 1999 BBC Bay Commercial Services ("BCS") 1981
/1/ Pacific Business Funding Corporation ("PBFC") was an asset-based lending and factoring company which now operates as a division of CNB and conducts business under the name PBF. These mergers were all accounted for as a pooling-of-interests and, accordingly, all of the financial information of the Company for the periods prior to the mergers had been restated as if the mergers has occurred at the beginning of the earliest reporting period presented. On March 3, 1997, GBB Capital I, a statutory business trust, was formed for the exclusive purpose of issuing and selling TPS and using the proceeds from the sale of the TPS to acquire Junior Subordinated Debentures issued by Greater Bay. On May 18, 1998 GBB Capital II, a statutory business trust, was formed for the exclusive purpose of issuing and selling additional TPS. Company Goals: The Company strives to achieve seven primary goals. These goals include: . Developing a greater banking presence throughout the San Francisco Bay Area and other selected markets primarily in Northern California by increasing the number of banking offices available to clients; Since November 1996, the Company also commenced new business initiatives, including CCR, CFG, FR, SCVG and IBD. 1 . Reaching a critical mass in the Company's market areas to meet the competitive challenges of the banking and financial services industries; . 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 lower cost capital; . Realizing operating efficiencies through the acquisition of banking and financial services companies under a holding company umbrella; . 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 banking and financial services subsidiaries to cross-sell services. Super Community Banking Philosophy In order to meet the demands of the increasingly competitive banking and financial services industries, we have adopted a business philosophy referred to as the "Super Community Banking Philosophy". Our Super Community Banking Philosophy is based on our 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 our menu of products and services. We also believe that banks who affiliate with Greater Bay and implement our Super Community Banking Philosophy are better able to build successful client relationships as the holding company provides cost effective administrative support services while promoting bank autonomy and flexibility in serving client needs. To implement this philosophy, we operate each of our banking subsidiaries by retaining their independent names and separate Boards of Directors. Our banking subsidiaries have established strong reputations and client 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 increased client lending capacity, business cash management and international trade finance 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. All of these centralized services are designed to enhance the ability of the relationship manager to expand their client relationship base. Corporate Growth Strategy The Company's primary goal is to become the preeminent independent financial services company in Northern California. 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 pursues opportunities to expand its market share through select acquisitions that management believes complement the Company's businesses. Management pursues acquisition opportunities in contiguous and infill market areas. Consistent with the Company's operating philosophy and growth strategy, Greater Bay regularly evaluates opportunities to acquire banks and other financial services companies that complement the Company's existing business, expand its market coverage and share and enhance its client product offerings. 2 Recent Events On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares") the former holding company of Mt. Diablo National Bank ("MDNB"), merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of MD Bancshares were converted into an aggregate of 1,395,499 shares of Greater Bay's stock. The stock was issued to MD Bancshares' shareholders in a tax-free exchange accounted for as a pooling-of-interests. As of December 31, 1999, MD Bancshares has $220.5 million in assets, $205.5 million in deposits and $12.8 million in shareholders' equity. MDNB has offices located in Danville, Pleasanton and Lafayette, California. On December 14, 1999, Greater Bay and Coast Bancorp, the holding company of Coast Commercial Bank ("CCB"), a California state chartered bank, signed a definitive agreement for a merger between the two companies. The agreement provides for Coast Bancorp shareholders to receive approximately 3,105,000 shares of Greater Bay 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. The transaction is expected to be completed early in the second quarter of 2000, subject to regulatory and shareholder approvals. As of December 31, 1999, Coast Bancorp had $370.0 million in assets, $300.6 million in deposits and $33.0 million in shareholders' equity. CCB's offices are located in Aptos, Capitola, Santa Cruz, Scotts Valley and Watsonville, California. On January 26, 2000, Greater Bay, Bank of Santa Clara ("BSC") and GBB Merger Corp. signed a definitive agreement for a merger between BSC and GBB Merger Corp., as a result of which BSC will become a wholly owned subsidiary of Greater Bay. The agreement provides for BSC shareholders to receive approximately 2,017,000 shares of Greater Bay stock, subject to certain adjustments based on movements in Greater Bay's stock price in a tax-free exchange to be accounted for as a pooling-of-interests. The transaction is expected to be completed late in the second quarter of 2000, subject to regulatory and shareholder approvals. As of December 31, 1999, BSC had $326.9 million in assets, $293.7 million in deposits and $31.4 million in shareholders' equity. BSC has eight offices located in Milpitas, San Jose, Santa Clara and Sunnyvale, California. Assuming the acquisitions of MD Bancshares, Coast Bancorp and BSC had been completed as of December 31, 1999, the Company would have had proforma assets of $3.5 billion, deposits of $3.1 billion and $238.0 million of shareholders' equity on a pooled basis. Greater Bay Bancorp's Family of Companies The following provides a summary of all of the affiliated banks and operating divisions of the Company. Banks Bay Area Bank BAB presently has one full service regional office. At December 31, 1999, BAB had total assets of $170.2 million, total net loans of $115.4 million and total deposits of $152.6 million. Bay Bank of Commerce BBC presently has three full service regional offices. At December 31, 1999, BBC had total assets of $143.6 million, total net loans of $100.1 million and total deposits of $130.4 million. Cupertino National Bank CNB presently has seven locations, including five full service regional offices. At December 31, 1999, CNB had total assets of $1.0 billion, total net loans of $727.6 million and total deposits of $887.1 million. Golden Gate Bank 3 Golden Gate presently has one full service regional office. On December 31, 1999, Golden Gate had total assets of $205.1 million, total net loans of $104.5 million and total deposits of $191.3 million. Mid-Peninsula Bank MPB presently has four full service regional offices. On December 31, 1999, MPB had total assets of $820.2 million, total net loans of $508.7 million and total deposits of $705.5 million. Peninsula Bank of Commerce PBC presently has one full service regional office. On December 31, 1999, PBC had total assets of $256.9 million, total net loans of $158.7 million and total deposits of $234.2 million. Operating Divisions Greater Bay Trust Company GBTC provides trust services to support the trust needs of the Banks' business and personal clients. These services include, but are not limited to, custodial, investment management, estate planning resources and employee benefit plan services. Venture Banking Group VBG 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. Greater Bay Bank SBA Lending Group The SBA Group provides loans to smaller businesses on which the Small Business Administration ("SBA") generally provides guarantees between 65% to 80% of the principle loan amount. In 1994, the SBA named CNB's SBA Group a Preferred Lender. The SBA awards Preferred Lender status to lenders who have demonstrated superior ability to generate, underwrite and service loans that the SBA guarantees. This status results in more rapid turnaround of loan applications submitted to the SBA for approval. Pacific Business Funding 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. Greater Bay Bank Santa Clara Valley Commerical Banking Group 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 their business. The services include a full range of deposit accounts, cash management and credit facilities custom-tailored to meet the specific needs of its clients. Greater Bay Corporate Finance Group CFG primarily focuses on originating loans to companies that have revenues in excess of $20 million and financing requirements in the range of $5 million to $250 million. CFG participates in syndicated loan transactions and direct sourced transactions where CFG is the lead agent. Greater Bay Bank Contra Costa Region and Greater Bay Bank Fremont Region The Company believes that the East Bay has a tremendous potential for growth. In order to establish a presence in the East Bay market, the Company formed CCR and FR. Each of these offices offers a full line of business banking services. 4 International Banking Division IBD provides a wide range of financial services to support the international banking needs of the Banks' clients, including identifying certain risks of conducting business abroad and, providing international letters of credit and trade finance services. In 1999, the Export-Import Bank of the United States ("Ex-Im Bank") granted IBD level "A" delegated authority status to provide foreign receivable financing to local exporters. Ex-Im Bank allows "A" level delegated authority lenders to approve working capital loans up to $3.5 million per exporter, and to approve an aggregate total of up to $50 million in loans. Banking Services The Company 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, including 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 clients and include cash management and international trade finance 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 primary 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, technology, real estate, wholesale and service businesses. The Banks provide interim real estate loans primarily in the Banks' service areas for single-family residences, which typically range between approximately $500,000 and $1.0 million, multi-unit projects, which typically range between approximately $1.5 million and $4.0 million and commercial real estate, primarily owner-occupied, which typically range between $1.5 million to $7.5 million. The Banks also provide medium term commercial real estate loans or credits, typically ranging between $1.0 million and $10.0 million for the financing of commercial or industrial buildings where the owners either use the properties for business purposes or derive income from tenants. Market Area The Banks concentrate on marketing their services to small and medium- sized businesses, professionals and individuals in Alameda, Contra Costa, Santa Clara, San Francisco and San Mateo Counties. . BAB's primary base of operations is in Redwood City, California and includes central San Mateo County. San Mateo county has a population of approximately 701,000. . BBC's primary base of operations is San Leandro, California and extends through Alameda and Southern Contra Costa counties. Alameda County and Contra Costa County have populations of approximately 1,400,000 and 918,000, respectively. . 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 1,641,000. . Golden Gate's primary base of operations is centered in the City and County of San Francisco. San Francisco County has a population of approximately 745,000. . MPB's primary base of operations is centered in Palo Alto, California and extends north through San Mateo County. MPB has formed operating divisions located in Alameda and Contra Costa Counties. . PBC's primary base of operations is centered in Millbrae, California, and includes northern San Mateo County and extends into San Francisco County. 5 The commercial base of Alameda, 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 has exhibited positive economic and employment trends, there is no assurance that such trends will continue. A deterioration in economic conditions could have a material adverse impact on the quality of the Company's loan portfolio and the demand for its products 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 which exceed individual officer approval limits are approved on a pooled- authority basis up to a maximum limit for each Bank. Loan requests exceeding these limits are submitted to the Company's 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 Company's Officers' Loan Committee are submitted to the Directors' Loan Committee. The Directors' Loan Committee consists of at least one outside director of each of the Banks. Each of these committees meets 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 Company's Officers' Loan Committee, Chief Administrative 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. Loan Portfolio The composition of the Company's gross loan portfolio at December 31, 1999 was as follows: . Approximately 69.3% were commercial loans, including 25.1% which were commercial real estate term loans; . Approximately 21.7% were in real estate construction and land loans, which are split evenly between commercial properties and residential projects; . Approximately 5.4% were other real estate term loans, primarily secured by residential real estate; . The balance of the portfolio consists of consumer loans. The interest rates the Banks charge vary with the degree of risk, size and maturity of the loans. In addition, competition from other financial services companies and analyses of the client's deposit relationship with the Bank and the Bank's cost of funds impact the interest rate charged on loans. Commercial Loans. In their commercial loan portfolios, the Banks provide personalized financial services to the diverse commercial and professional businesses in their market areas. Commercial loans, including those made by the VBG, consist primarily of short-term loans (normally with a maturity of under one year) to support business operation. The Banks focus on businesses with annual revenues generally between $1.0 million and $100.0 million with borrowing needs generally between $2.0 million and $10.0 million. The Banks' commercial clients are drawn from a wide variety of manufacturing, technology, real estate, wholesale and service businesses. Commerical loans also include those loans made by the CFG. 6 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 timedeposits 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 VBG provides innovative lending products and other financial services, tailored to the needs of start-up and development-stage companies. The VBG's typical clients include technology companies, ranging from multimedia, software and telecommunications providers to bio-technology and medical device firms. 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 any revenues for several years. The Company often receives warrants from these companies as part of the compensation for its services. As of December 31, 1999, the VGB had loans outstanding to start-up and development phase companies of approximately $40 million. The CFG specializes in providing commercial loans to small and medium sized, non-investment grade middle market companies. Credit facilities are designed to supplement the borrower's ongoing working capital needs, assist with the purchase of fixed assets or aid in the financing of strategic acquisitions. Loan facilities are typically collateralized by a first priority security interest in all of the borrower's assets and are generally structured based on the value of the borrower's assets or the company's historical cash flow. The CFG sources its own relationships as well as participating in syndicated loan transaction lead by other financial institutions serving the CFG's identified market niche. The Company participates in many SBA programs and, through the SBA Group, 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 to the customer. 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. 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 $5.0 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 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 borrowers who intend to construct a single family residence on the lot generally within twelve months. In addition, the Banks also 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 $15.0 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 20-25 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 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. 7 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 that commercial banks provide to customers. The Banks' deposits 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 8.2% of its trust assets under management in liquid funds that are retained in CNB money market demand accounts. At December 31, 1999, these funds totaled $57.1 million. The VBG is another source of deposits as most of the start-up phase companies have significant liquidity that is deposited in CNB as part of the banking relationship. At December 31, 1999, clients of the VBG had $322.8 million in deposits at CNB. PBC holds $111.1 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. Trust Services The GBTC, 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 GBTC were $697.4 million at December 31, 1999, compared to $649.3 million at December 31, 1998, and $577.7 million at December 31, 1997. Competition The banking and financial services industry 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 services 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 non-bank 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 range of financial services than the Banks. In addition, recent federal legislation may have the effect of further increasing the pace of consolidation within the financial services industry. See "Item 1. Business - Supervision and Regulation - Financial Services Modernization Legislation." In order to compete with the other financial services providers, the Banks principally rely upon local promotional activities, personal relationships established by officers, directors, and employees with their customers, and specialized services tailored to meet the needs of the communities served. 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 their correspondents. The Banks have eighteen offices located in Alameda, Contra Costa, Santa Clara, San Francisco and San Mateo Counties in California. Neither the deposits nor loans of the offices of the Banks exceed 1% of all financial services companies located in the counties in which the Banks operate. Economic Conditions, Government Policies, Legislation, and Regulation The Company's profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by the Banks on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Banks on their interest-earning assets, such as loans extended to their clients and securities held in their investment portfolios, comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of Greater Bay and the Banks, such as inflation, recession and unemployment, and the impact which 8 future changes in domestic and foreign economic conditions might have on Greater Bay and the Banks cannot be predicted. The Company's business 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 Greater Bay and the Banks 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 and financial services providers are frequently made in the U.S. Congress, in the state legislatures, and before various regulatory agencies. See "Item 1. Business - Supervision and Regulation." Employees At December 31, 1999, the Company had 430 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 General 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 shareholders of Greater Bay. Set forth below is a summary description of the material laws and regulations which relate to the operations of Greater Bay and the Banks. The description is qualified in its entirety by reference to the applicable laws and regulations. Greater Bay Greater Bay, as a registered bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (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." 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. 9 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. 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. Greater Bay's securities are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such, Greater Bay 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 the Currency (the "Comptroller"). BAB, BBC, Golden Gate, MPB, and PBC, as California chartered banks, are subject to primary supervision, periodic examination, and regulation by the California Department of Financial Institutions (the "DFI") and the Federal Deposit Insurance Corporation (the "FDIC"). To a lesser extent, the Banks are also subject to certain regulations promulgated by the Federal Reserve. If, as a result of an examination of a bank, the FDIC 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 FDIC. 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 the bank's deposit insurance, which for a California chartered bank would result in a revocation of the bank's charter. The DFI has many of the same remedial powers. None of the Banks have been subject to any such actions by their respective regulatory authorities. 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 reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements. Further, the Banks are required to maintain certain levels of capital. See "- Capital Standards." Financial Services Modernization Legislation On November 12, 1999, President Clinton signed into law the Gramm- Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among 10 commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Generally, the Financial Services Modernization Act: . Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; . Provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; . Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries; . Provides an enhanced framework for protecting the privacy of consumer information; . Adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system; . Modifies the laws governing the implementation of the Community Reinvestment Act ("CRA"); and . Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order for Greater Bay to take advantage of the ability to affiliate with other financial services providers, Greater Bay must become a "Financial Holding Company" as permitted under an amendment to the BHCA. To become a Financial Holding Company, Greater Bay would file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and well-managed. In addition, the Federal Reserve must also determine that each insured depository institution subsidiary of Greater Bay has at least a "satisfactory" CRA rating. See "- The Banks - Community Reinvestment Act and Fair Lending Developments." Greater Bay currently meets the requirements to make an election to become a Financial Holding Company. Greater Bay's management has not determined at this time whether it will seek an election to become a Financial Holding Company. Greater Bay is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of Greater Bay and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, Greater Bay desires to utilize any of its expanded powers provided in the Financial Services Modernization Act. The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the BHCA or permitted by regulation. A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be "well-capitalized" and "well- managed." The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank's total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank's assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities. 11 The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, BAB, BBC, Golden Gate, MPB and PBC will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as a national bank. In order to form a financial subsidiary, the bank must be well-capitalized, and the bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. Greater Bay and the Banks do not believe that the Financial Services Modernization Act will have a material adverse effect on our operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that Greater Bay and the Banks face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than Greater Bay and the Banks. Dividends and Other Transfers of Funds Dividends from the Banks constitute the principal source of income to Greater Bay. Greater Bay is a legal entity separate and distinct from the Banks. The Banks are subject to various statutory and regulatory restrictions on their ability to pay dividends to Greater Bay. Under such restrictions, the amount available for payment of dividends to Greater Bay by the Banks totaled $50.8 million at December 31, 1999. In addition, the DFI and the Federal Reserve 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 activities also have authority to prohibit the Banks from engaging in activities that, in their respective opinions, constitute unsafe or unsound practices in conducting their business. It is possible, depending upon the financial condition of the bank in question and other factors, that the bank regulatory activities 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 authorities 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. An insured depository institution is prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. See "- Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and "- Capital Standards" for a discussion of these additional restrictions on capital distributions. 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 of designated amounts. Further, such secured loans and investments by the Banks to or in Greater Bay or to or in any other affiliate are limited, individually, to 10.0% of the respective bank's capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20.0% of the respective bank's capital 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." 12 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 relatively 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 risk-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%. 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 corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions 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 its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 1999, each of the Banks and Greater Bay 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. 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 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. 13 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 operations, 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, 1999, 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 Banks began paying, in addition to their 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. Effective 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. Interstate Banking and Branching The BHCA permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide- and state-imposed concentration limits. Greater Bay 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 activities. The CRA generally requires the federal 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. A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and CRA obligations 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 examinations conducted in November 1999, MPB was rated outstanding and BAB, CNB, Golden Gate and PBC were rated satisfactory. BBC was examined in 1997 and was 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. The statement provides guidance to financial institutions, providers of data services, and all examining personnel of the federal banking agencies regarding the potential year 2000 problem. The federal banking agencies conducted year 2000 compliance examinations to ascertain whether a bank's year 2000 readiness presented an unsafe and unsound banking practice. The Company's core banking systems successfully responded to the century date change. The Company will continue to monitor its major vendors and clients throughout year 2000. 14 Factors That May Affect Future Results of Operations In addition to the other information contained in this report, the following risks may affect the Company. If any of these risks occurs, our business, financial condition or operating results could be adversely affected. Failure to successfully execute our growth strategy or to integrate recently acquired subsidiaries could adversely affect our performance. Our financial performance and profitability will depend on our ability to execute our corporate growth strategy and manage our recent and possible future growth. Although management believes that it has substantially integrated the business and operations of recently acquired subsidiaries, there can be no assurance that unforeseen issues relating to the assimilation of these subsidiaries will not adversely affect us. In addition, any future acquisitions and our continued growth may present operating and other problems that could have an adverse effect on our business, financial condition and results of operations. Our financial performance will also depend on our ability to maintain profitable operations through implementation of our Super Community Banking Philosophy, which is described earlier. Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have recently experienced. Changes in market interest rates may adversely affect our performance. Our 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 our current volume and mix of interest-bearing liabilities and interest- earning assets, our 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 we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations. Our Bay Area business focus and economic conditions in the Bay Area could adversely affect our operations. Our operations are located in Northern California and concentrated primarily in Alameda, Contra Costa, San Francisco, San Mateo and Santa Clara Counties, which includes the area known as the "Silicon Valley". As a result of this geographic concentration, our results depend largely upon economic conditions in these areas. A deterioration in economic conditions in our 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 our loan portfolio, the demand for our products and services, which in turn may have a material adverse effect on our results of operations. We are subject to government regulation that could limit or restrict our activities, which in turn could adversely impact our operations. 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 our shareholders. These regulations can sometimes impose significant limitations on our operations. In addition, these regulations are constantly evolving and may change significantly over time. Significant new laws or changes in existing laws or repeal of existing laws may cause our results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for us. Competition may adversely affect our performance. The financial services business in our market areas is highly competitive. It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers. We face competition both in attracting deposits and in making loans. We compete for loans principally through the interest rates and loan fees we charge and the efficiency and quality of 15 services we provide. Increasing levels of competition in the banking and financial services businesses may reduce our market share or cause the prices we charge for our services to fall. Our results may differ in future periods depending upon the nature or level of competition. If a significant number of borrowers, guarantors and related parties fail to perform as required by the terms of their loans, we will sustain losses. A significant source of risk arises from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have 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 our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations. ITEM 2. PROPERTIES. The Company occupies its administrative offices under a lease which, including options to renew, expires in 2002. PBC owns its main office located in Millbrae, California. BBC owns an office space adjacent to its main office located in San Leandro, California. The Company leases seventeen additional offices throughout the San Francisco Bay Area under operating leases. Those leases expire under various dates, including options to renew, through August 2019. The Company believes its present facilities are adequate for its present needs but anticipates the need for additional facilities as it continues to grow. 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, 1999. 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 the 2-1 stock split effective as of April 30, 1998.
Cash dividends For the period indicated High Low declared -------- ------- -------------- 1999 Fourth Quarter.............................................. $43.44 $33.81 $ 0.12 Third Quarter............................................... 36.00 31.88 0.12 Second Quarter.............................................. 33.25 28.25 0.12 First Quarter............................................... 33.00 27.75 0.12 1998 Fourth Quarter.............................................. $35.00 $24.50 $0.095 Third Quarter............................................... 39.00 23.38 0.095
16 Second Quarter.............................................. 36.00 28.88 0.095 First Quarter............................................... 31.38 24.13 0.095
The company estimates that there were approximately 3,300 shareholders at December 31, 1999. On December 22, 1999, Greater Bay completed a private offering of 535,000 shares of restricted common stock to institutional investors. U.S. Bancorp Piper Jaffray, Inc. and Keefe, Bruyette & Woods, Inc. acted as placement agents for the offering. Proceeds from the offering were $19,795,000, less placement agent fees of $834,000. On January 10, 2000, Greater Bay filed a registration statement on Form S-3 (333-94343) to register the shares, which has not yet become effective. Greater Bay intends to use the net proceeds from the offering for general corporate purposes. 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-25 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-22 through A-23 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-26 through A-66 under the caption "Consolidated Balance Sheets", "Consolidated Statements of Operations", "Consolidated Statements of Comprehensive Income", "Consolidated Statements of Shareholders' 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Company intends to file a definitive proxy statement for the 2000 Annual Meeting of Shareholders (the "Proxy Statement") with the Securities and Exchange Commission within 120 days of December 31, 1999. Information regarding directors of Greater Bay will appear under the caption "DISCUSSION OF THE PROPOSALS RECOMMENDED BY THE BOARD - Proposal 1: "Election of 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. 17 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. 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 Sheet at December 31, 1999 and 1998............................. A - 26 Consolidated Statement of Income for each of the years in the three-year period ended December 31, 1999, 1998 and 1997 respectively.......................... A - 27 Consolidated Statement of Comprehensive Income for each of the years in the three-year period ended December 31, 1999, 1998 and 1997 respectively........ A - 28 Consolidated Statement of Changes in Shareholders' Equity for each of years in the three-year period ended December 31, 1999, 1998 and 1997 respectively.. A - 29 Consolidated Statement of Cash Flows for each of the years in the three- year period ended December 31, 1999, 1998 and 1997 respectively..................... A - 30 Notes to the Consolidated Financial Statements....................................... A - 31 Independent Auditors' Report......................................................... A - 67
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 1999 the Company filed three reports on Form 8-K as described below. On October 19, 1999, the Company filed a report on Form 8-K reporting under Item 5. Other Events (i) the closing of its merger with Bay Commercial Services on October 15, 1999 and (ii) the Company's financial results for the period ended September 30, 1999. On December 16, 1999, the Company filed a report on Form 8-K reporting under Item 5. Other Events (i) the signing of a definitive agreement on December 14, 1999 for a merger with Coast Bancorp, (ii) the fourth quarter dividend declaration and (iii) the addition of the Company to the Nasdaq Financial - 100 Index. On December 28, 1999, the Company filed a report on Form 8-K reporting under Item 5. Other Events the consummation of a private equity offering on December 22, 1999. 18 (c) Exhibits Required by Item 601 of Regulation S-K Reference is made to the Exhibit Index on page 22 for exhibits filed as part of this report. (d) Additional Financial Statements Not applicable. 19 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 27th day of January, 2000. Greater Bay Bancorp By /s/ DAVID L. KALKBRENNER --------------------------- David L. Kalkbrenner President and 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 January 27, 2000 - ------------------------------------------ Officer and Director David L. Kalkbrenner (Principal Executive Officer) /s/ STEVEN C. SMITH Executive Vice President, January 27, 2000 - ------------------------------------------ Chief Administrative Steven C. Smith Officer and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ GEORGE R. COREY Director January 27, 2000 - ------------------------------------------ George R. Corey Director , 2000 - ------------------------------------------ John M. Gatto /s/ JAMES E. JACKSON Director January 27, 2000 - ------------------------------------------ James E. Jackson /s/ STANLEY A. KANGAS Director January 27, 2000 - ------------------------------------------ Stanley A. Kangas /s/ REX D. LINDSAY Director January 27, 2000 - ------------------------------------------ Rex D. Lindsay
20
Signature Title Date /s/ GEORGE M. MARCUS Director January 27, 2000 - ------------------------------------------ George M. Marcus /s/ DUNCAN L. MATTESON Director January 27, 2000 - ------------------------------------------ Duncan L. Matteson /s/ GLEN McLAUGHLIN Director January 27, 2000 - ------------------------------------------ Glen McLaughlin /s/ REBECCA Q. MORGAN Director January 27, 2000 - ------------------------------------------ Rebecca Q. Morgan /s/ DICK J. RANDALL Director January 27, 2000 - ------------------------------------------ Dick J. Randall Director , 2000 - ------------------------------------------ Donald H. Seiler /s/ WARREN R. THOITS Director January 27, 2000 - ------------------------------------------ Warren R. Thoits
21 EXHIBIT INDEX - --------------
EXHIBIT NO. EXHIBIT - ------- ------- 2.1 Agreement and Plan of Reorganization by and between Greater Bay Bancorp and Coast Bancorp dated December 15, 1999 (1) 3.1 Articles of Incorporation of Greater Bay Bancorp, as amended (2) 3.2 Bylaws of Greater Bay Bancorp, as amended (2) 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 (3) 4.2 Junior Subordinated Indenture dated as of March 31, 1997 between Greater Bay Bancorp and Wilmington Trust Company, as Trustee (4) 4.3 Officers' Certificate and Company Order, dated March 31, 1997 (4) 4.4 Certificate of Trust of GBB Capital I (5) 4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997 (5) 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 (4) 4.6.2 Successor Administrative Trustee and First Amendment to Amended and Restated Trust Agreement (2) 4.7 Trust Preferred Certificate of GBB Capital I (4) 4.8 Common Securities Certificate of GBB Capital I (4) 4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington Trust Company, dated as of March 31, 1997 (4) 4.10 Agreement as to Expenses and Liabilities, dated as of March 31, 1997 (4) 4.11 Form of Subordinated Debentures (6) 4.12 Supplemental Debenture Agreement of Cupertino National Bancorp dated as of November 22, 1996 (5) 4.13 Supplemental Debenture Agreement dated November 27, 1996 between Cupertino National Bancorp and Mid-Peninsula Bancorp (5) 4.14 Supplemental Debenture Agreement, dated as of March 27, 1997 (4) 4.15 Indenture between Greater Bay Bancorp and Wilmington Trust Company, as Debenture Trustee, dated as of August 12, 1998 (7) 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 (7) 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 (7) 4.19 Form of Exchange Capital Security Certificate (filed as Exhibit A-1 to Exhibit 4.5 hereto) 4.20 Common Securities Guarantee Agreement of Greater Bay Bancorp, dated as of August 12, 1998 (7) 4.21 Series B Capital Securities Guarantee Agreement of Greater Bay Bancorp and Wilmington Trust Company dated as of November 27, 1998 (2) 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 (7) 4.23 Registration Rights Agreement between Greater Bay Bancorp and The Leo K.W. Lum PRB Revocable Trust dated May 8, 1998 (8) 4.24 Securities Purchase Agreement, dated as of December 21, 1999, between Greater Bay Bancorp and the investors identified therein (9) 4.25 Registration Rights Agreement, dated as of December 22, 1999, between Greater Bay Bancorp and the investors identified therein (9) 10.1 Employment Agreement with David L. Kalkbrenner, dated as of January 1, 1999 (10)(11) 10.2 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between Greater Bay Bancorp and David L. Kalkbrenner (10) 10.3 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between Mid-Peninsula Bank and Susan K. Black (10) 10.4 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between Cupertino National Bank and David R. Hood (10) 10.5 Employee Supplemental Compensation Benefits Agreement, dated as of April 6, 1998, between Greater Bay Bancorp and Gregg A. Johnson (10) 10.6 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between Greater Bay Bancorp and Steven C. Smith (10)
22 10.7 Greater Bay Bancorp 401(k) Profit Sharing Plan (10)(12) 10.8.1 Greater Bay Bancorp Employee Stock Purchase Plan (10)(13) 10.8.2 Amendment to Greater Bay Bancorp Employee Stock Purchase Plan (10)(12) 10.9 Greater Bay Bancorp Change in Control Pay Plan I (10)(12) 10.10.1 Greater Bay Bancorp Change in Control Pay Plan II (10)(12) 10.10.2 Amendment No. 1 to Greater Bay Bancorp Change in Control Pay Plan II (10)(11) 10.11 Greater Bay Bancorp Termination and Layoff Pay Plan I (10)(12) 10.12.1 Greater Bay Bancorp Termination and Layoff Pay Plan II (10)(12) 10.12.2 Amendment No. 1 to Greater Bay Bancorp Termination and Layoff Pay Plan II (10)(11) 10.13.1 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan (10)(12) 10.13.2 Amendment to Greater Bay Bancorp 1997 Elective Deferred Compensation Plan (2)(10) 10.14 Greater Bay Bancorp 1996 Stock Option Plan, as amended (2)(10) 10.15 Form of Indemnification Agreement between Greater Bay Bancorp and with directors and certain executive officers (4) 10.15.1 Agreement, dated November 4, 1999, between Greater Bay Bancorp and Wells Fargo Bank, National Association 10.15.2 Revolving Line of Credit Note, dated November 4, 1999, given by Greater Bay Bancorp in favor of Wells Fargo Bank, National Association 12.1 Statement re Computation of Ratios of Earnings to Fixed Charges 21 Subsidiaries of the Registrant 23.1 Consent of PricewaterhouseCoopers LLP 27.1 Restated Financial Data Schedules for the years ended December 31, 1999 and 1998 (included in electronic filing through EDGAR) 27.2 Restated Financial Data Schedules for the year ended December 31, 1997 (included in electronic filing through EDGAR) 27.3 Restated Financial Data Schedules for the quarters ended December 31, 1999 and September 30, 1999 (included in electronic filing through EDGAR) 27.4 Restated Financial Data Schedules for the quarters ended June 30, 1999 and March 31, 1999 (included in electronic filing through EDGAR) 27.5 Restated Financial Data Schedules for the quarters ended December 31, 1998 and September 30, 1998 (included in electronic filing through EDGAR) 27.6 Restated Financial Data Schedules for the quarters ended June 30, 1998 and March 31, 1998 (included in electronic filing through EDGAR)
- ------------------ 1. Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K filed with the SEC on December 16, 1999. 2. Incorporated by reference from Greater Bay Bancorp's Annual Report on Form 10-K filed with the SEC on February 17, 1999. 3. Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed with the SEC on November 25, 1998. 4. Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K dated June 5, 1997. 5. Incorporated by reference from Greater Bay Bancorp's Registration Statement on Form S-1 (File No. 333-22783) filed with the SEC on March 5, 1997. 6. 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 7. Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K filed with the SEC on August 28, 1998. 8. Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K filed with the SEC on May 20, 1998. 9. Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K filed with the SEC on December 28, 1999. 10. Represents executive compensation plans and arrangements of Greater Bay Bancorp. 11. Incorporated by reference from Greater Bay Bancorp's Quarterly Report on Form 10-Q filed with the SEC on May 4, 1999. 12. Incorporated by reference from Greater Bay Bancorp's Annual Report on Form 10-K filed with the SEC on March 31, 1998. 13. Incorporated herein by reference from Greater Bay Bancorp's Proxy Statement for Annual Meeting of Shareholders filed with the SEC on May 13, 1997.
23 SELECTED FINANCIAL INFORMATION The following table represents the selected financial information at and for the five years ended December 31, 1999:
Years Ended December 31, ---------------------------- (Dollars in thousands, except per share amounts) 1999 1998* Statement of Operations Data ---------------------------- Interest income $ 175,350 $ 134,998 Interest expense 71,618 54,659 ---------------------------- Net interest income 103,732 80,339 Provision for loan losses 12,249 6,369 ---------------------------- Net interest income after provision for loan losses 91,483 73,970 Other income 17,319 9,716 Nonrecurring - warrant income 14,508 945 ---------------------------- Total other income 31,827 10,661 Operating expenses 61,159 50,752 Other expenses - nonrecurring 12,160 1,341 ---------------------------- Total operating expenses 73,319 52,093 ---------------------------- Income before income tax expense & merger and other related nonrecurring costs 49,991 32,538 Income tax expense 15,706 10,706 ---------------------------- Income before merger and other related nonrecurring costs and extraordinary items 34,285 21,832 Merger and other related nonrecurring costs, net of tax (6,486) (1,674) --------------------------- Net income before extraordinary items 27,799 20,158 Extraordinary items (88) - ---------------------------- Net income $ 27,711 $ 20,158 ============================ Per Share Data (1) Income per share (before merger, nonrecurring, and extraordinary items) Basic $ 2.45 $ 1.80 Diluted 2.32 1.70 Net income per share Basic $ 2.28 $ 1.69 Diluted 2.17 1.59 Cash dividends per share (2) $ 0.48 $ 0.38 Book value per common share $ 12.55 $ 10.08 Shares outstanding at year end 12,806,115 11,743,127 Average common shares outstanding 12,146,000 11,927,000 Average common and common equivalent shares outstanding 12,794,000 12,683,000 Performance Ratios Return on average assets (before merger, nonrecurring and extraordinary items) 1.31% 1.28% Return on average common shareholders' equity (before merger, nonrecurring and extraordinary items) 22.62% 19.92% Return on average assets 1.22% 1.20% Return on average common shareholders' equity 21.09% 18.67% Net interest margin (3) 4.91% 5.15% Balance Sheet Data - At Period End Assets $ 2,624,965 1,882,391 Loans, net 1,715,284 1,184,753 Investment securities 470,105 397,412 Deposits 2,300,888 1,602,342 Subordinated debt - 3,000 Trust Preferred Securities 50,000 50,000 Common shareholders' equity 160,755 118,436 Asset Quality Ratios Nonperforming assets to total loans and OREO 0.31% 0.31% Nonperforming assets to total assets 0.21% 0.20% Allowance for loan losses to total loans 2.17% 2.01% Allowance for loan losses to non- performing assets 701.62% 641.87% Net charge-offs to average loans 0.10% 0.15% Regulatory Capital Ratios Leverage Ratio 7.93% 7.97% Tier 1 Capital 9.35% 10.03% Total Capital 10.81% 12.74% Years Ended December 31, ---------------------------------------------------------- (Dollars in thousands, except per share amounts) 1997* 1996* 1995* Statement of Operations Data ---------------------------------------------------------- Interest income $ 107,020 $ 79,110 $ 68,023 Interest expense 39,969 27,375 23,494 ---------------------------------------------------------- Net interest income 67,051 51,735 44,529 Provision for loan losses 7,078 3,029 1,274 ---------------------------------------------------------- Net interest income after provision for loan losses 59,973 48,706 43,255 Other income 8,867 8,432 6,291 Nonrecurring - warrant income 1,162 92 - ---------------------------------------------------------- Total other income 10,029 8,524 6,291 Operating expenses 43,864 39,978 38,125 Other expenses - nonrecurring - - - ---------------------------------------------------------- Total operating expenses 43,864 39,978 38,125 ---------------------------------------------------------- Income before income tax expense & merger and other related nonrecurring costs 26,138 17,252 11,421 Income tax expense 9,371 6,415 4,309 ---------------------------------------------------------- Income before merger and other related nonrecurring costs and extraordinay items 16,767 10,837 7,112 Merger and other related nonrecurring costs, net of tax (2,282) (1,991) - ---------------------------------------------------------- Net income before extraordinary items 14,485 8,846 7,112 Extraordinary items - - - ---------------------------------------------------------- Net income $ 14,485 $ 8,846 $ 7,112 ========================================================== Per Share Data (1) Income per share (before merger, nonrecurring, and extraordinary items) Basic $ 1.36 $ 0.99 $ 0.81 Diluted 1.28 0.94 0.78 Net income per share Basic $ 1.29 $ 0.81 $ 0.69 Diluted 1.21 0.77 0.65 Cash dividends per share (2) $ 0.30 $ 0.22 $ 0.20 Book value per common share $ 8.64 $ 7.81 $ 7.35 Shares outstanding at year end 11,396,992 10,921,888 10,521,125 Average common shares outstanding 11,243,000 10,903,000 10,381,000 Average common and common equivalent shares outstanding 11,939,000 11,490,000 10,860,000 Performance Ratios Return on average assets (before merger, nonrecurring and extraordinary items) 1.21% 1.07% 1.03% Return on average common shareholders' equity (before merger, nonrecurring and extraordinary items) 16.26% 12.10% 11.02% Return on average assets 1.15% 0.95% 1.03% Return on average common shareholders' equity 15.42% 10.76% 11.02% Net interest margin (3) 5.69% 6.04% 6.98% Balance Sheet Data - At Period End Assets 1,456,119 $ 1,119,880 $ 846,007 Loans, net 892,736 702,301 510,529 Investment securities 261,295 166,383 174,678 Deposits 1,279,709 997,392 748,335 Subordinated debt 3,000 3,000 3,000 Trust Preferred Securities 20,000 - - Common shareholders' equity 98,701 85,533 77,339 Asset Quality Ratios Nonperforming assets to total loans and OREO 0.74% 1.61% 2.05% Nonperforming assets to total assets 0.47% 1.02% 1.25% Allowance for loan losses to total loans 2.13% 1.79% 1.80% Allowance for loan losses to non- performing assets 280.79% 110.01% 86.47% Net charge-offs to average loans 0.25% 0.07% 0.26% Regulatory Capital Ratios Leverage Ratio 8.04% 7.65% 9.14% Tier 1 Capital 10.79% 10.30% 12.60% Total Capital 12.30% 11.87% 14.32%
*Restated on a historical basis to reflect the mergers between Greater Bay Bancorp and CNB, PBC, PRB (the parent of Golden Gate) PBFC, BA Bancshares (the parent of BAB) and BCS (the parent of BBC) on a pooling-of-interests basis. (1) Restated to reflect 2-for-1 stock split effective as of 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) Net interest margin for 1999, 1998 and 1997 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 5.21%, 5.33%, 6.11% and 6.41% for 1999, 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) is a bank holding company operating Bay Area Bank ("BAB"), Bay Bank of Commerce ("BBC"), Cupertino National Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank ("MPB") and Peninsula Bank of Commerce ("PBC"). The Company also owns GBB Capital I and GBB Capital II, both of which are Delaware statutory business trusts, which were formed for the exclusive purpose of issuing and selling Cumulative Trust Preferred Securities ("TPS"). Greater Bay also includes the operating divisions: Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Santa Clara Valley Commerical Banking Group, Greater Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding and the Venture Banking Group. The Company provides a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. The Company operates throughout Silicon Valley, the San Francisco Peninsula and the East Bay Region, with 18 offices located in Cupertino, Fremont, Hayward, Millbrae, Palo Alto, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara and Walnut Creek. At December 31, 1999, the Company had total assets of $2.6 billion, total net loans of $1.7 billion and total deposits of $2.3 billion. All of the Company's mergers were accounted for as a pooling-of-interests and, accordingly, all of the financial information for the Company for the periods prior to the mergers has been restated as if the mergers had occurred at the beginning of the earliest reporting period presented. 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's operating results included merger, nonrecurring and extraordinary items of $7.9 million ($2.0 million net of tax), $3.1 million ($1.4 million net of tax) and $884,000 ($378,000 net of tax) in 1999, 1998 and 1997, respectively. The following table summarizes net income, net income per share and key financial ratios before and after merger, nonrecurring and extraordinary items for the years presented.
Before merger, nonrecurring and extraordinary items ----------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 29,722 $ 21,515 $ 15,273 Net income per share: Basic $ 2.45 $ 1.80 $ 1.36 Diluted $ 2.32 $ 1.70 $ 1.28 Return on average assets 1.31% 1.28% 1.21% Return on average shareholders' equity 22.62% 19.92% 16.26%
After merger, nonrecurring and extraordinary items ----------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 27,711 $ 20,158 $ 14,485 Net income per share: Basic $ 2.28 $ 1.69 $ 1.29 Diluted $ 2.17 $ 1.59 $ 1.21 Return on average assets 1.22% 1.20% 1.15% Return on average shareholder's equity 21.09% 18.67% 15.42%
The Company reported net income of $27.7 million in 1999, a 37.5% increase over 1998 net income of $20.2 million. The net income in 1998 was a 39.2% increase over 1997 income of $14.5 million. Basic net income per share was $2.28 for 1999, as compared to $1.69 for 1998 and $1.29 for 1997. Diluted net income per share was $2.17, $1.59 and $1.21 for 1999, 1998 and 1997, respectively. The return on average assets and return on average shareholders' equity were 1.22% and 21.09% in 1999, compared with 1.20% and 18.67% in 1998 and 1.15% and 15.42% in 1997, respectively. A-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The 37.5% increase in 1999 net income as compared to 1998, was the result of significant growth in loans, investments, trust assets and deposits. In 1999, net interest income increased 29.1% as compared to 1998. This increase was primarily due to a 35.5% increase in average interest-earning assets in 1999 compared to the prior year. The impact on income of the increase in average interest-earning assets was partially offset by the decline the net yield earned on interest-earning assets to 5.11% in 1999 as compared to 5.34% in 1998 (see "- Net Interest Income" for additional information on the increase in net interest income). The increases in loans, trust assets and deposits also contributed to the 46.3% increase in trust fees, loan and international banking fees, service charges and other fees. Other income includes $4.0 million in appreciation recognized on the conversion of equity securities received in the settlement of a loan into a publicly traded equity security. Increases in operating expenses were required to service and support the Company's growth. As a result, increases in revenue were partially offset in 1999 by a 20.5% increase in recurring operating expenses, as compared to 1998. Net income in 1999 included nonrecurring expenses, net of nonrecurring income and taxes, of $2.0 million, an increase of $654,000 compared to 1998. In 1999, merger and related nonrecurring costs were $6.5 million, an increase of $4.8 million from 1998. Warrant income, net of related expenses and taxes, was $5.8 million in 1999, an increase of $5.3 million compared to 1998. In 1999, the Company donated $7.8 million in appreciated securities to the Greater Bay Bancorp Foundation. This resulted in $1.2 million in donation expense, net of a tax benefit derived on the transaction, which is a $1.0 million increase compared to 1998. The 39.2% increase in 1998 net income as compared to 1997 was the result of significant growth in loans, investments, trust assets and deposits. In 1998, net interest income increased 19.8% as compared to 1997. This increase was primarily due to a 32.4% increase in average interest-earning assets in 1998 compared to the prior year. The impact on income of the increase in average interest-earning assets was partially offset by the decline the net yield earned on interest-earning assets to 5.34% in 1998 as compared to 5.82% in 1997 (see "- Net Interest Income" for additional information on the increase in net interest income). The increases in loans, trust assets and deposits also contributed to the 5.0% increase in trust fees, loan and international banking fees, service charges and other fees. Increases in operating expenses were required to service and support the Company's growth. As a result, increases in revenue were partially offset in 1998 by a 11.0% increase in recurring operating expenses, as compared to 1997. Net income in 1998 included nonrecurring expenses, net of nonrecurring income and taxes, of $1.4 million, an increase of $569,000 compared to 1997. In 1998, merger and related nonrecurring costs were $1.7 million, a decrease of $608,000 from 1997. Warrant income, net of related expenses and taxes, was $554,000 in 1998, a decrease of $155,000 compared to 1997. In 1998, the Company donated $1.3 million in appreciated securities to the Greater Bay Bancorp Foundation. This resulted in $237,000 in donation expense, net of a tax benefit derived on the transaction. There was no such donation in 1997. In 1997, the Company had nonrecurring income of $1.0 million, net of taxes, related to payment from an insurance carrier of a litigation settlement charge taken in 1995. Net Interest Income Net interest income, excluding capital securities, increased 29.5% to $107.8 million in 1999 from $83.2 million in 1998. This increase was primarily due to the $552.8 million, or 35.5%, increase in average interest-earning assets which was partially offset by a 36 basis point decrease in the Company's net yield on A-3 interest-earning assets. Net interest income, excluding capital securities, increased 21.4% in 1998 from $68.5 million in 1997. This increase was primarily due to the $381.4 million, or 32.4%, increase in average interest-earning assets, which was partially offset by the 43 basis point decrease in the Company's net yield on interest-earning assets. The capital securities were Trust Preferred Securities issued in 1997 and 1998 which cost 8.54% and 9.00% in 1999 and 1998, respectively. Including the capital securities, net interest income increased 30.6% to $113.7 million in 1999 and 22.8% to $87.1 million in 1998. The capital securities were issued primarily as a source of capital and not as a source of liquidity. 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, ------------------------------------------------- 1999 ------------------------------------------------- Average Average Yield/ (Dollars in thousands) Balance (1) Interest Rate - ------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Fed funds sold $ 161,059 $ 8,425 5.23% Other short term securities 70,532 3,830 5.43% Investment securities: Taxable 335,598 22,587 6.73% Tax-exempt (3) 74,276 3,680 4.95% Loans (2) 1,470,272 136,828 9.31% ----------- --------- Total interest-earning assets 2,111,737 175,350 8.30% Noninterest-earning assets 164,179 ----------- --------- Total assets $ 2,275,916 175,350 =========== ---------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $ 1,196,164 43,189 3.61% Time deposits, over $100,000 340,153 16,127 4.74% Other time deposits 80,690 3,794 4.70% ----------- ---------- Total interest-bearing deposits 1,617,007 63,110 3.90% Other borrowings 72,983 4,169 5.71% Subordinated debt 607 68 11.20% ----------- ---------- Total interest-bearing liabilities 1,690,597 67,347 3.98% Trust Preferred Securities 50,000 4,271 8.54% ----------- ---------- Total interest-bearing liabilities and capital securities 1,740,597 71,618 4.11% Noninterest-bearing deposits 374,803 Other noninterest-bearing liabilities 29,132 Shareholders' equity 131,384 ----------- Total liabilities and shareholders' equity $ 2,275,916 $ 71,618 =========== ---------- Net interest income $ 103,732 ========== Including capital securities: - ----------------------------- Interest rate spread 4.19% Contribution of interest free funds 0.72% Net yield on interest-earnings assets(4) 4.91% Excluding capital securities: - ----------------------------- Interest rate spread 4.32% Contribution of interest free funds 0.79% Net yield on interest-earnings assets(4) 5.11%
Years Ended December 31, -------------------------------------------------------- 1998 -------------------------------------------------------- Average Average Yield/ (Dollars in thousands) Balance (1) Interest Rate - ------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Fed funds sold $ 106,129 $ 5,709 5.38% Other short term securities 96,765 5,454 5.64% Investment securities: Taxable 318,283 19,303 6.06% Tax-exempt (3) 48,759 2,440 5.00% Loans (2) 988,968 102,092 10.32% ----------- --------- Total interest-earning assets 1,558,904 134,998 8.66% Noninterest-earning assets 127,332 ----------- --------- Total assets $ 1,686,236 134,998 =========== --------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $ 852,112 31,277 3.67% Time deposits, over $100,000 220,059 11,154 5.07% Other time deposits 89,751 3,979 4.43% ----------- --------- Total interest-bearing deposits 1,161,922 46,410 3.99% Other borrowings 78,115 5,054 6.47% Subordinated debt 3,000 345 11.50% ----------- --------- Total interest-bearing liabilities 1,243,037 51,809 4.17% Trust Preferred Securities 31,671 2,850 9.00% ----------- --------- Total interest-bearing liabilities and capital securities 1,274,708 54,659 4.29% Noninterest-bearing deposits 285,028 Other noninterest-bearing liabilities 18,510 Shareholders' equity 107,990 ----------- Total liabilities and shareholders' equity $ 1,686,236 $ 54,659 =========== --------- Net interest income $ 80,339 ========= Including capital securities: - ----------------------------- Interest rate spread 4.37% Contribution of interest free funds 0.78% Net yield on interest-earnings assets(4) 5.15% Excluding capital securities: - ----------------------------- Interest rate spread 4.49% Contribution of interest free funds 0.84% Net yield on interest-earnings assets(4) 5.34%
Years Ended December 31, -------------------------------------------- 1997 -------------------------------------------- Average Average Yield/ Balance (1) Interest Rate -------------------------------------------- INTEREST-EARNING ASSETS: Fed funds sold $ 86,722 $ 4,662 5.38% Other short term securities 97,586 5,198 5.33% Investment securities: Taxable 161,377 10,677 6.62% Tax-exempt (3) 24,134 1,068 4.43% Loans (2) 807,676 85,415 10.58% ----------- -------- Total interest-earning assets 1,177,495 107,020 9.09% Noninterest-earning assets 87,326 ----------- -------- Total assets $ 1,264,821 107,020 =========== --------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $ 652,370 23,964 3.67% Time deposits, over $100,000 155,810 7,808 5.01% Other time deposits 96,772 4,653 4.81% ----------- -------- Total interest-bearing deposits 904,952 36,425 4.03% Other borrowings 19,343 1,736 8.97% Subordinated debt 3,000 345 11.50% ----------- -------- Total interest-bearing liabilities 927,295 38,506 4.15% Trust Preferred Securities 15,000 1,463 9.75% ----------- -------- Total interest-bearing liabilities and capital securities 942,295 39,969 4.24% Noninterest-bearing deposits 215,785 Other noninterest-bearing liabilities 12,815 Shareholders' equity 93,926 ----------- Total liabilities and shareholders' equity $ 1,264,821 $ 39,969 =========== -------- Net interest income $ 67,051 ======== Including capital securities: - ----------------------------- Interest rate spread 4.85% Contribution of interest free funds 0.85% Net yield on interest-earnings assets(4) 5.69% Excluding capital securities: - ----------------------------- Interest rate spread 4.94% Contribution of interest free funds 0.88% Net yield on interest-earnings assets(4) 5.82%
(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 $4.3 million, $3.9 million and $4.0 million are included in loan interest income for 1999, 1998 and 1997, respectively. (3) Tax equivalent yields earned on the tax exempt securities are 7.17%, 7.23% and 6.38% for the years ended December 31, 1999, 1998 and 1997, 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. 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). A-4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 1999 Compared with December 31, 1998 favorable (unfavorable) ------------------------------------------------------- (Dollars in thousands) (1) (2) Volume Rate Net - -------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Fed funds sold $ 2,842 $ (127) $ 2,715 Other short term securities (1,453) (171) (1,624) Investment securities: Taxable 1,135 2,149 3,284 Tax-exempt 1,248 (8) 1,240 Loans 44,743 (10,007) 34,736 ------------------- --------------- --------------- Total interest-earning assets 48,515 (8,164) 40,351 ------------------- --------------- --------------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings 11,908 4 11,912 Time deposits, over $100,000 5,469 (496) 4,973 Other time deposits (441) 256 (185) ------------------- --------------- --------------- Total interest-bearing deposits 16,936 (236) 16,700 Other borrowings (316) (569) (885) Subordinated debt (276) (1) (277) ------------------- --------------- --------------- Total interest-bearing liabilities 16,344 (806) 15,538 Increase (decrease) in net interest income $ 32,171 $ (7,358) $ 24,813 =================== =============== =============== Year Ended December 31, 1998 Compared with December 31, 1997 favorable (unfavorable) ------------------------------------------------------- (Dollars in thousands) (1) (2) Volume Rate Net - -------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Fed funds sold $ 995 $ 53 $ 1,048 Other short term securities (48) 304 256 Investment securities: Taxable 9,090 (464) 8,626 Tax-exempt 1,171 201 1,372 Loans 17,846 (1,169) 16,677 --------------- --------------- --------------- Total interest-earning assets 29,054 (1,075) 27,979 --------------- --------------- --------------- Interest-bearing liabilities: Deposits: MMDA, NOW and Savings 6,326 989 7,315 Time deposits, over $100,000 2,814 532 3,346 Other time deposits (359) (315) (674) --------------- --------------- --------------- Total interest-bearing deposits 8,781 1,206 9,987 Other borrowings 3,100 218 3,318 Subordinated debt - - - --------------- --------------- --------------- Total interest-bearing liabilities 11,881 1,424 13,305 --------------- --------------- --------------- Increase (decrease) in net interest income $ 17,173 $ (2,499) $ 14,674 =============== =============== ===============
(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. (2) Excludes the impact of capital securities. Interest income in 1999 increased 29.9% to $175.4 million from $135.0 million in 1998. 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 $552.8 million, or 35.5%, to $2.1 billion in 1999, compared to $1.6 billion in 1998. Of this total increase, average loans increased $481.3 million, or 48.7%, to $1.5 billion in 1999 from $989.0 million in 1998. Investment securities, Federal funds sold and other short-term securities, increased 12.6% to $641.5 million in 1999 from $569.9 million in 1998. The average yield on interest-earning assets declined 36 basis points to 8.30% in 1999 from 8.66% in 1998 primarily due to a decline in the average yield on loans which was caused by increased competition and the impact of the Company's focus on slightly larger client credits that generally result in improved client financial controls, but also result in tighter pricing. Loans represented approximately 69.6% of total interest-earning assets in 1999 compared to 63.4% in 1998. The average yield on loans declined 101 basis points to 9.31% in 1999 from 10.32% in 1998. Interest expense, excluding capital securities, in 1999 increased 30.0% to $67.3 million from $51.8 million in 1998. 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 36.0% to $1.7 billion in 1999 from $1.2 billion in 1998 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. A-5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During 1999, average noninterest-bearing deposits increased to $374.8 million from $285.0 million in 1998. However, due to the larger increase in interest-bearing deposits, noninterest-bearing deposits decreased to 18.8% of total deposits at year-end 1999, compared to 19.7% at year-end 1998. As a result of the foregoing, the Company's interest rate spread, excluding capital securities, declined to 4.32% in 1999 from 4.49% in 1998, and the net yield on interest-earning assets declined in 1999 to 5.11% from 5.34% in 1998. Interest income increased 26.1% to $135.0 million in 1998 from $107.0 million in 1997, as a result of the increase in average interest-earning assets offset by a decline in the yields earned. Average interest-earning assets increased 32.4% to $1.6 billion in 1998 from $1.2 billion in 1997 principally as a result of increase in loans. The yield on the higher volume of average interest-earning assets declined 43 basis points to 8.66% in 1998 from 9.09% in 1997, primarily as a result of increased competition for loans. Interest expense, excluding capital securities, in 1998 increased 34.6% to $51.8 million from $38.5 million in 1997 primarily as a result of the increase in volume of interest-bearing liabilities and in the rates paid on interest- bearing liabilities. Corresponding to the growth in average interest-earning assets, average interest-bearing liabilities increased 34.0% to $1.2 billion in 1998 from $927.3 million in 1997. As a result of the foregoing, the Company's interest rate spread, excluding capital securities, declined to 4.49% in 1998 from 4.94% in 1997 and the net yield on interest-earning assets declined to 5.34% in 1998 from 5.82% in 1997. The Company's net yield on interest-earning assets was reduced by the Special Deposit. The average deposit balances related to the Special Deposit during 1999, 1998 and 1997 were $99.0 million, $90.0 million and $95.0 million, respectively, on which the Company earned a spread of 3.1%, 2.25% and 2.5%, respectively. Excluding the Special Deposit, the 1999, 1998, 1997 net yield on interest-earning assets, excluding capital securities, would have been 5.21%, 5.53% and 6.11% respectively. The purchase of bank-owned life insurance ("BOLI") also reduced the Company's net interest spread since the earnings of BOLI are included in other income, while the cost of funding BOLI is included in interest expense. The Company incurred certain client service expenses with respect to its noninterest-bearing liabilities. These expenses include messenger services, check supplies and other related items and are included in operating expenses. If these expenses had included in interest expense, the Company's net yield on interest-earning assets would have been as follows for each of the years presented. A-6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------- (Dollars in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Average noninterest bearing demand deposits $ 374,803 $ 285,028 $ 215,785 Client service expenses 1,244 656 545 Client service expenses, as a percentage of average noninterest bearing demand deposits 0.33% 0.23% 0.25% IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS: Net yield on interest-earning assets 5.11% 5.34% 5.82% Impact of client service expense (0.05)% (0.05)% (0.05)% ---------------------------------------------- Adjusted net yield on interest-earning assets 5.06% 5.29% 5.77% ==============================================
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. Provision for Loan Losses The provision for loan losses represents the current period credit cost associated with maintaining an appropriate allowance for credit losses. The loan loss provision for each period is dependent upon many factors, including loan growth, net charge-off, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in the Company's market area. Periodic fluctuations in the provision for loan losses result from management's assessment of the adequacy of the allowance for loan losses; however, actual loan losses may vary from current estimates. Refer to the section "FINANCIAL CONDITION - Allowance for Loan Losses" for a description of the systematic methodology employed by the Company in determining an adequate allowance for loan losses. The provision for loan losses in 1999 was $12.2 million, compared to $6.4 million in 1998 and $7.1 million in 1997. In addition, in connection with the mergers, the Company made an additional provision for loan losses of $2.7 million, $183,000 and $1.4 million in 1999, 1998 and 1997, respectively, to conform to the Company's allowance methodology. Although loans outstanding have increased substantially, nonperforming loans, comprised of nonaccrual loans, restructured loans, and accruing loans past due 90 days or more have remained relatively low, totaling $5.2 million, or 0.29% of loans outstanding, at December 31, 1999, from $2.8 million, or 0.23% of loans outstanding, at December 31, 1998 and $5.5 million, or 0.60% of loans outstanding, at December 31, 1997. For further information on nonperforming and classified loans and the allowance for loan losses, see--"Nonperforming and Classified Assets" herein. A-7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other Income Total other income increased to $31.8 million in 1999, compared to $10.7 million in 1998 and $10.0 million in 1997. The following table sets forth information by category of other income for the years indicated.
Years Ended December 31, ------------------------------------------ (Dollars in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------- Trust fees $ 2,990 $ 2,473 $ 2,049 Service charges and other fees 2,711 2,056 2,100 Loan and international banking fees 2,833 1,303 1,404 ATM network revenue 2,110 1,966 2,057 Gain on sale of SBA loans 1,010 1,125 940 Gain (loss) on investments, net (19) 374 (8) Other income 5,684 419 325 ------------------------------------------ Total, recurring 17,319 9,716 8,867 Warrant income 14,508 945 1,162 ------------------------------------------ Total $ 31,827 $ 10,661 $ 10,029 ==========================================
The increase in other income in 1999 was a result of $1.5 million increase in loan and international banking fees, a $655,000 increase in service charges and other fees, and a $517,000 increase in trust fees. These increases were a result of significant growth in total loans, total deposits and trust assets. Other income includes $4.0 million in appreciation recognized on the conversion of equity securities received in the settlement of a loan into a publicly traded equity security. As discussed further below, the warrant income resulted from the sale of stock acquired from clients in connection with financing activities. The increase in other income in 1998 was primarily the result of a $424,000 increase in trust fees, and a $185,000 increase in the gain on sale of Small Business Administration ("SBA") loans. The increase in trust fees was due to significant growth in assets under management by Greater Bay Trust Company. Trust assets increased to $649.3 million at December 31, 1998, compared to $577.7 million at December 31, 1997. The increase in the gain on sale of SBA loans was due to an increase in the origination and subsequent sale of SBA loans. Other income in 1999, 1998 and 1997 included warrant income of $14.5 million, $945,000 and $1.2 million net of related employee incentives of $7.3 million, $396,000 and $500,000, respectively. The Company occasionally receives warrants to acquire common stock from companies that are in the start- up or development phase. The Company holds approximately 100 warrant positions. The timing and amount of income derived from the exercise and sale of client warrants typically depend upon factors beyond the control of the Company, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. In November 1999, the voters of San Francisco adopted an ordinance which prohibits financial institutions in San Francisco from imposing surcharges of any kind to non-customers who access automated teller machines ("ATM") to conduct electronic transactions, including cash withdrawals and fund transfers. Other cities in California have either adopted or are considering similar proposals. The Company estimates that approximately $230,000 of ATM network revenue during 1999 was derived from such type of surcharges in the City and County of San Francisco. While the implementation of this ordinance has been delayed through legal challenges and this amount is not material, the successful adoption of similar laws in other areas where the Company operates ATMs could cause a more substantial reduction in ATM network revenue in the future. A-8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Operating Expenses The following table sets forth the major components of operating expenses for the years indicated.
Years Ended December 31, ---------------------------------------------- (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Compensation and benefits $ 35,316 $ 28,822 $ 25,833 Occupancy and equipment 11,256 7,859 6,892 Professional services and legal costs 2,188 2,447 2,523 Client service expenses 1,224 656 545 FDIC insurance and regulatory assessments 491 400 361 Expenses on other real estate owned 13 76 177 Other 10,671 10,492 9,233 ---------------------------------------------- Total operating expenses excluding nonrecurring costs 61,159 50,752 45,564 Contribution to the GBB Foundation and related expenses 12,160 1,341 - Mergers and other related nonrecurring costs 10,331 2,661 3,333 Recovery of legal settlement - - (1,700) ---------------------------------------------- Total operating expenses $ 83,650 $ 54,754 $ 47,197 ============================================== Efficiency ratio 61.71% 60.17% 61.23% Efficiency ratio (before merger, nonrecurring and extraordinary items) 50.52% 56.34% 60.02% Total operating expenses to average assets 3.68% 3.25% 3.73% Total operating expenses to average assets (before merger, nonrecurring and extraordinary items) 2.69% 3.01% 3.60%
A-9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Operating expenses totaled $83.6 million for 1999, compared to $54.8 million for 1998 and $47.2 million for 1997. The ratio of operating expenses to average assets was 3.68% in 1999, 3.25% in 1998, and 3.73% in 1997. Total operating expenses include merger and other related nonrecurring costs and contributions to the Greater Bay Bancorp Foundation (the "Foundation") and related expenses. Excluding these items, operating expense to average assets would have been 2.69% in 1999, 3.01% in 1998 and 3.60% in 1997. The efficiency ratio is computed by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same (or greater) volume of income while a decrease would indicate a more efficient allocation of resources. The Company's efficiency ratio before merger, nonrecurring and extraordinary items for 1999 was 50.52%, compared to 56.34% in 1998 and 60.02% in 1997. During 1998, Greater Bay established the Foundation. The Foundation was formed to provide a vehicle through which the Company, its officers and directors can provide support to the communities in which the Company does business. The Foundation focuses its support on initiatives related to education, health and economic growth. To support the Foundation, the Company contributed appreciated securities, which had an unrealized gain of $7.8 million in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4 million in compensation and other expenses in connection with these appreciated securities. The Company recorded expense of $12.2 million in 1999 and $1.3 million in 1998 which is included in operating expenses. As indicated by the improvements in the efficiency ratio, the Company has been able to achieve increasing economies of scale. In 1999, average assets increased 35% from 1998, while operating expenses, excluding nonrecurring cost, increased only 21%. From 1997 to 1998, average assets increased 33%, while operating expenses, excluding nonrecurring costs increased only 16%. Compensation and benefits expenses increased in 1999 to $35.3 million, compared to $28.8 million in 1998 and $25.8 million in 1997. The increase in compensation and benefits is due primarily to the additions in personnel made in 1999 and 1998 to accommodate the growth of the Company. The increase in occupancy and equipment, client service expense, Federal Deposit Insurance Corporation ("FDIC") insurance and regulatory assessments and other operating expenses was related to the growth in the Company's loans, deposits and trust assets. Income Taxes The Company's effective income tax rate for 1999 was 29.9%, compared to 32.5% in 1998 and 36.5% in 1997. The effective rates were lower than the statutory rate of 42% due to the donation of appreciated securities to the Foundation, state enterprise zone tax credits, and tax-exempt income on municipal securities. The reductions were partially offset by the impact of non deductible merger and other related nonrecurring costs. In 1998, the Company was able to further reduce its effective tax rate through the recognition of certain net operating losses acquired in its merger with PRB. FINANCIAL CONDITION Total assets increased 39.4% to $2.6 billion at December 31, 1999, compared to $1.9 billion at December 31, 1998. Total assets increased 29.3% in 1998 from $1.5 billion at December 31, 1997. The increases in 1999 and 1998 were primarily due to increases in the Company's loan portfolio funded by growth in deposits. A-10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Loans Total gross loans increased 45.0% to $1.8 billion at December 31, 1999, compared to $1.2 billion at December 31, 1998. Total gross loans increased 32.7% in 1998 from $914.2 million at year-end 1997. The increases in loan volumes in 1999 and 1998 were primarily due to an improving economy in the Company's market areas coupled with the business development efforts by the Company's relationship managers. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, service and technology) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are located in a market area that is dependent on the technology and real estate industries and supporting service companies. Thus, a downturn in these sectors of the economy could adversely impact the Company's borrowers. This could, in turn, reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans, while also decreasing the Company's net interest margin. The following table presents the composition of the Company's loan portfolio at the dates indicated.
As of December 31, --------------------------------------------------------------------------- 1999 1998 1997 --------------------------------------------------------------------------- (Dollars in thousands) Amount % Amount % Amount % - ----------------------------------------------------------------------------------------------------------------------------- Commercial $ 758,148 44.2% $ 501,106 42.3% $ 396,448 44.5% Term Real Estate - Commercial 431,226 25.1 316,328 26.7 225,089 25.3 --------------------------------------------------------------------------- Total Commercial 1,189,374 69.3 817,434 69.0 621,537 69.8 Real estate construction and land 372,481 21.7 230,568 19.5 149,960 16.8 Real estate other 92,688 5.4 74,265 6.3 51,765 5.8 Consumer and other 105,457 6.2 91,239 7.7 90,897 10.2 --------------------------------------------------------------------------- Total loans, gross 1,760,000 102.6 1,213,506 102.5 914,159 102.6 Deferred fees and discounts, net (6,681) (0.4) (4,395) (0.4) (3,892) (0.4) --------------------------------------------------------------------------- Total loans, net of deferred fees 1,753,319 102.2 1,209,111 102.1 910,267 102.1 Allowance for loan losses (38,035) (2.2) (24,359) (2.1) (19,032) (2.1) --------------------------------------------------------------------------- Total loans, net $ 1,715,284 100.0% $ 1,184,752 100.0% $ 891,235 100.0% ===========================================================================
As of December 31, -------------------------------------------------- 1996 1995 -------------------------------------------------- (Dollars in thousands) Amount % Amount % - ------------------------------------------------------------------------------------------------------- Commercial $ 333,735 47.8% $ 248,212 49.2% Term Real Estate - Commercial 162,908 23.3 127,228 25.2 -------------------------------------------------- Total Commercial 496,643 71.1 375,440 74.4 Real estate construction and land 118,367 16.9 65,773 13.0 Real estate other 37,466 5.4 29,260 5.8 Consumer and other 62,395 8.9 46,545 9.2 -------------------------------------------------- Total loans, gross 714,871 102.3 517,018 102.4 Deferred fees and discounts, net (3,616) (0.5) (3,064) (0.6) -------------------------------------------------- Total loans, net of deferred fees 711,255 101.8 513,954 101.8 Allowance for loan losses (12,600) (1.8) (9,181) (1.8) -------------------------------------------------- Total loans, net $ 698,655 100.0% $ 504,773 100.0% ===================================================
The following table presents the maturity distribution of the Company's (1) commercial, (2) real estate construction and land, (3) term real estate - commercial and (4) real estate other portfolios and the sensitivity of such loans to changes in interest rates at December 31, 1999.
Term Real estate real estate- construction Real estate (Dollars in thousands) Commercial commercial and land other - ------------------------------------------------------------------------------------------------------ Loans maturing in: One year or less: Fixed rate $ 170,150 $ 21,210 $ 19,989 $ 7,428 Variable rate 329,992 24,023 301,941 21,201 One to five years: Fixed rate 52,931 17,804 1,124 1,344 Variable rate 128,605 66,955 24,742 26,910 After five years: Fixed rate 23,857 201,946 3,125 7,337 Variable rate 52,613 99,288 21,560 28,468 -------------------------------------------------------- Total $ 758,148 $ 431,226 $ 372,481 $ 92,688 ========================================================
A-11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Nonperforming and Classified Assets Management generally places loans on nonaccrual status when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is generally reversed from income. Loans are charged off when management determines that collection has become unlikely. Restructured loans are those where the Banks have granted a concession on the interest paid or original repayment terms due to financial difficulties of the borrower. Other real estate owned ("OREO") consists of real property acquired through foreclosure on the related collateral underlying defaulted loans. The following table sets forth information regarding nonperforming assets at the dates indicated.
As of December 31, --------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans Nonaccrual loans $ 4,333 $ 2,033 $ 3,784 $ 6,255 $ 5,303 Accruing loans past due 90 days or more 10 - 158 1,698 954 Restructured loans 807 796 1,533 1,828 1,530 --------------------------------------------------------------------------- Total nonperforming loans 5,150 2,829 5,475 9,781 7,787 Other real estate owned 271 966 1,429 1,673 2,830 --------------------------------------------------------------------------- Total nonperforming assets $ 5,421 $ 3,795 $ 6,904 $ 11,454 $ 10,617 =========================================================================== Nonperforming assets to total loans and other real estate owned 0.31% 0.31% 0.76% 1.61% 2.05% Nonperforming assets to total assets 0.21% 0.20% 0.47% 1.02% 1.25%
At December 31, 1999, the Company had $4.3 million in nonaccrual loans. Interest income foregone on nonperforming loans totaled $234,000, $123,000 and $571,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company records OREO at the lower of carrying value or fair value less estimated costs to sell. Estimated losses that result from the ongoing periodic valuation of these properties are charged to earnings through a provision for losses on foreclosed property in the period in which they are identified. At December 31, 1999, OREO acquired through foreclosure had a carrying value of $271,000 compared to $966,000 at December 31, 1998. The Company had $807,000 and $796,000 of restructured loans as of December 31, 1999 and 1998, respectively. There were no principal reduction concessions allowed on restructured loans during 1999 and 1998. Interest income from restructured loans totaled $45,000 and $16,000 for the years ended December 31, 1999 and 1998. Foregone interest income, which totaled $0 and $11,000 for the years ended December 31, 1999 and 1998, respectively, would have been recorded as interest income if the loans had accrued interest in accordance with their original terms prior to the restructurings. The Company has three classifications for problem loans: "substandard", "doubtful" and "loss". Substandard loans have one or more defined weakness and are characterized by the distinct possibility that the Banks will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable; and there is a high possibility of loss of some portion of the principal balance. A loan classified as "loss" is considered uncollectible and its continuance as an asset is not warranted. A-12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth the classified loans and other real estate owned at the dates indicated.
As of December 31, -------------------------------------------- (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Substandard $ 23,258 $ 13,487 $ 16,506 Doubtful 1,845 1,188 1,894 Loss - - 49 Other real estate owned 271 966 1,429 ----------------------------------------- Classified assets $ 25,374 $ 15,641 $ 19,878 ========================================= Classified to total loans and other real estate owned 1.45% 1.29% 2.18% Allowance for loan losses to total classified 149.90% 155.74% 95.74%
With the exception of these classified loans, management was not aware of any loans outstanding as of December 31, 1999 where the known credit problems of the borrower would cause management to have serious doubts as to the ability of such borrowers to comply with their present loan repayment terms and which would result in such loans being included in nonperforming or classified asset tables at some future date. Management cannot, however, predict the extent to which economic conditions in the Company's market areas may worsen or the full impact that such an environment may have on the Company's loan portfolio. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured loans, or other real estate owned in the future. Allowance For Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of risk inherent in the Company's loan portfolio. The allowance is increased by provisions charged against current earnings and reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible; recoveries are generally recorded only when cash payments are received. A-13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth information concerning the Company's allowance for loan losses at the dates and for the years indicated.
(Dollars in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Period end loans outstanding $ 1,760,000 $ 1,213,506 $ 914,159 $ 714,871 $ 517,018 Average loans outstanding 1,468,427 $ 988,968 $ 807,676 $ 594,195 482,067 Allowance for loan losses: Balance at beginning of period $ 24,359 $ 19,032 $ 12,600 $ 9,181 $ 9,221 Charge-offs: Commercial (2,359) (1,419) (1,576) (718) (1,187) Term Real Estate - Commercial - (48) (54) (84) (25) ---------------------------------------------------------------------------- Total Commercial (2,359) (1,467) (1,630) (802) (1,212) Real estate construction and land - (7) (243) (127) (410) Real estate other - - - - - Consumer and other (260) (196) (232) (202) (485) ---------------------------------------------------------------------------- Total charge-offs (2,619) (1,670) (2,105) (1,131) (2,107) ---------------------------------------------------------------------------- Recoveries: Commercial 909 399 92 390 621 Term Real Estate - Commercial - 11 1 27 - ---------------------------------------------------------------------------- Total Commercial 909 410 93 417 621 Real estate construction and land - - - 283 3 Real estate other 56 - - - - Consumer and other 336 35 15 21 169 ---------------------------------------------------------------------------- Total recoveries 1,301 445 108 721 793 ---------------------------------------------------------------------------- Net charge-offs (1,318) (1,225) (1,997) (410) (1,314) Provision charged to income (1) 14,994 6,552 8,429 3,829 1,274 ---------------------------------------------------------------------------- Balance at end of period $ 38,035 $ 24,359 $ 19,032 $ 12,600 $ 9,181 =========================================================================== Net charge-offs to average loans outstanding during the period 0.10% 0.15% 0.25% 0.07% 0.26% Allowance as a percentage of average loans outstanding 2.59% 2.46% 2.36% 2.12% 1.90% Allowance as a percentage of period end loans outstanding 2.17% 2.01% 2.13% 1.79% 1.80% Allowance as a percentage of non-performing loans 738.54% 861.05% 347.62% 128.82% 117.90%
(1) Includes $2.7 million, $183,000, $1.4 million and $800,000 in 1999, 1998, 1997 and 1996, respectively, to conform to the Companys' allowance methodology. These amounts are included in mergers and related nonrecurring costs. The Company employs a systematic methodology for determining its allowance for loan losses, which includes a monthly review process and monthly adjustment of the allowance. The Company's process includes a periodic loan by loan review for loans that are individually evaluated for impairment as well as a detailed reviews of other loans (either individually or in pools). This includes an assessment of known problem loans, potential problem loans, and other loans that exhibit indicators of deterioration. The Company's methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan losses that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Quantitative factors also incorporate known information about individual loans including borrowers' sensitivity to interest rate movements and borrowers' sensitivity to quantifiable external factors including commodity and finished goods prices as well as acts of nature (earthquakes, fires, etc.) that occur in a particular period. Qualitative factors include the general economic environment in the Company's marketplace, and in particular, the state of the technology industries based in the Silicon Valley and other key industries in the San Francisco Bay Area. Size and complexity of individual credits in relation to lending officers' background and experience levels, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the Company's methodology. The Company's methodology is, and has been consistently followed. However, as the Company adds new products, increases in complexity, and expands its geographic coverage, the Company will enhance its methodology to keep pace with the size and complexity of the loan portfolio. In this regard, the Company has periodically engaged outside firms to independently assess the Company's methodology, and on an ongoing basis the Company engages outside firms to perform independent credit reviews of its loan portfolio. Management believes that Company's systematic methodology continues to be appropriate given the Company's size and level of complexity. While this methodology utilizes historical and other objective information, the establishment of the allowance for loan losses and the classification of loans, is to some extent, based on the judgment and experience of management. In general, management feels that the allowance for loan losses is adequate as of December 31, 1999. However, future changes in circumstances, economic conditions of other factors could cause management to increase or decrease the allowance for loan losses as necessary. The following table provides a summary of the allocation of the allowance for loan losses for specific loan categories at the dates indicated. The allocation presented should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total amounts available for charge-offs that may occur within these categories. The unallocated portion of the allowance for loan losses and the total allowance is applicable to the entire loan portfolio. A-14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------- 1999 1998 1997 --------------------------------------------------------------------------------- % of Category % of Category % of Category to Gross to Gross to Gross (Dollars in thousands) Amount Loans Amount Loans Amount Loans - --------------------------------------------------------------------------------------------------------------------- Commercial $13,873 43.08% $ 9,662 41.29% $ 6,578 43.37% Term Real Estate - Commercial 5,963 24.50 2,009 26.07 1,598 24.62 --------------------------------------------------------------------------------- Total Commercial 19,836 67.58 11,671 67.36 8,176 67.99 Real estate construction and land 3,354 21.16 2,222 19.00 1,383 16.40 Real estate term 370 5.27 411 6.12 327 5.66 Consumer and other 3,048 5.99 1,749 7.52 985 9.94 --------------------------------------------------------------------------------- Total allocated 26,608 16,053 10,871 Unallocated 11,427 8,306 8,161 --------------------------------------------------------------------------------- Total $38,035 100.00% $24,359 100.00% $19,032 100.00% ================================================================================= --------------------------------------------------------- 1996 1995 --------------------------------------------------------- % of Category % of Category to Gross to Gross (Dollars in thousands) Amount Loans Amount Loans - ------------------------------------------------------------------------------------------------------- Commercial $ 4,749 46.68% $3,361 48.01% Term Real Estate - Commercial 1,253 22.79 1,271 24.61 ------------------------------------------------------- Total Commercial 6,002 69.47 4,632 72.62 Real estate construction and land 1,924 16.56 1,212 12.72 Real estate term 257 5.24 260 5.66 Consumer and other 1,288 8.73 962 9.00 ------------------------------------------------------- Total allocated 9,471 7,066 Unallocated 3,129 2,115 ------------------------------------------------------- Total $12,600 100.00% $9,181 100.00% =======================================================
A-15 At December 31, 1999, the allowance for loan losses was $38.0 million, consisting of a $26.6 million allocated allowance and a $11.4 million unallocated allowance. The unallocated allowance recognizes the model and estimation risk associated with the allocated allowances, and management's evaluation of various conditions, the effects of which are not directly measured in determining the allocated allowance. The evaluation of the inherent loss regarding these conditions involves a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following at the balance sheet date: . The strength and duration of the current business cycle and existing general economic and business conditions affecting our key lending areas; economic and business conditions affecting our key lending portfolios; . Seasoning of the loan portfolio, growth in loan volumes and changes in loan terms; and . The results of bank regulatory examinations. A-16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Investment Securities The Company's investment portfolio is managed to meet the Company's liquidity needs through proceeds from scheduled maturities and is utilized for pledging requirements for deposits of state and political subdivisions and securities sold under repurchase agreements. The portfolio is comprised of U.S. Treasury securities, U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and a modest amount of equity securities, including Federal Reserve Bank stock and Federal Home Loan Bank stock. The Company does not include Federal Funds sold and certain other short-term securities as investment securities. These other investments are included in cash and cash equivalents. Investment securities classified as available for sale are recorded at fair value, while investment securities classified as held to maturity are recorded at cost. Unrealized gains or losses, net of the deferred tax effect, are reported as increases or decreases in shareholders' equity for available for sale securities. The amortized cost and estimated fair value of investment securities at December 31, 1999 and 1998 is as follows:
Gross Gross As of December 31, 1999 Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 6,151 $ - $ (65) 6,086 U.S. agency notes 16,784 - (641) 16,143 Mortgage-backed securities 168,733 - (4,946) 163,787 Tax-exempt securities 33,428 53 (2,186) 31,295 Corporate securities 101,469 - (10,940) 90,529 ------------------------------------------------------------ Total securities available for sale 326,565 53 (18,778) 307,840 ------------------------------------------------------------ HELD TO MATURITY SECURITIES: U.S. Treasury obligations 500 - - 500 U.S. agency notes 29,482 - (667) 28,815 Mortgage-backed securities 59,524 28 (2,018) 57,534 Tax-exempt securities 52,219 123 (2,710) 49,632 ------------------------------------------------------------ Total securities held to maturity 141,725 151 (5,395) 136,481 ------------------------------------------------------------ Other securities 12,397 8,143 - 20,540 ------------------------------------------------------------ Total investment securities $ 480,687 $ 8,347 $ (24,173) $ 464,861 ============================================================
Gross Gross As of December 31, 1998 Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 4,408 $ 26 $ - $ 4,434 U.S. agency notes 31,125 23 (8) 31,140 Mortgage-backed securities 164,578 1,081 (81) 165,578 Tax-exempt securities 32,952 563 - 33,515 Corporate securities 55,168 60 (604) 54,624 ------------------------------------------------------------ Total securities available for sale 288,231 1,753 (693) 289,291 ------------------------------------------------------------ HELD TO MATURITY SECURITIES: U.S. Treasury obligations 1,764 2 (2) 1,764 U.S. agency notes 28,495 22 (58) 28,459 Mortgage-backed securities 37,967 174 (207) 37,934 Tax-exempt securities 33,882 1,004 (15) 34,871 ------------------------------------------------------------ Total securities held to maturity 102,108 1,202 (282) 103,028 ------------------------------------------------------------ Other securities 6,013 - - 6,013 ------------------------------------------------------------- Total investment securities $ 396,352 $ 2,955 $ (975) $ 398,332 ============================================================
A-17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The declines in fair value of the Company's investment portfolio are a result of the increase in overall interest rates which occurred throughout 1999. The maturities of investment securities at December 31, 1999 and 1998 is as follows. Other securities are comprised of equity investments and have no stated maturity and therefore are excluded from this table.
2001 2005 Through Through 2010 and (Dollars in thousands) 2000 2004 2009 Thereafter Total - ---------------------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 100 $ 6,051 $ - $ - $ 6,151 U.S. agency notes (1) - 7,002 9,783 - 16,785 Mortgage-backed securities (2) 1,023 6,882 5,734 155,094 168,734 Tax-exempt securities 211 3,197 2,646 27,374 33,427 Corporate securities 996 - - 100,474 101,470 -------------------------------------------------------------------------- Total securities available for sale 2,330 23,132 18,163 282,942 326,567 -------------------------------------------------------------------------- Fair value $ 2,303 $ 22,827 $ 17,512 $ 265,197 $ 307,839 -------------------------------------------------------------------------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations 500 - - - 500 U.S. agency notes (1) 2,000 23,993 3,490 - 29,483 Mortgage-backed securities (2) 75 2,082 9,082 48,285 59,524 Tax-exempt securities 996 3,130 11,670 36,422 52,218 -------------------------------------------------------------------------- Total securities held to maturity 3,571 29,205 24,242 84,706 141,725 -------------------------------------------------------------------------- Fair value 3,564 28,616 23,661 80,640 136,481 -------------------------------------------------------------------------- COMBINED INVESTMENT SECURITIES PORTFOLIO: Total investment securities $ 5,901 $ 52,338 $ 42,405 $ 367,648 $ 468,292 -------------------------------------------------------------------------- Total fair value $ 5,867 $ 51,443 $ 41,173 $ 345,837 $ 444,320 -------------------------------------------------------------------------- Weighted average yield-total portfolio 5.78% 5.99% 6.78% 7.35% 7.12%
(1) Certain notes issued by U.S. Agencies may be called, without penalty, at the discretion of the issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates. (2) Mortgage-backed securities are shown at contractual maturity; however, the average life of these mortgage-backed securities may differ due to principal prepayments. For additional information concerning the investments portfolio, see Note 3 of Notes to Consolidated Financial Statements. Deposits The Company emphasizes developing total client relationships with its customers in order to increase its core deposit base. Deposits reached $2.3 billion at December 31, 1999, an increase of 43.6% compared to deposits of $1.6 billion at December 31, 1998. In 1998, deposits increased 25.2% from $1.3 billion at December 31, 1997. The increase in deposits was primarily due to the continued marketing efforts directed at commercial business clients in the Company's market areas, coupled with an increase in deposits related to the new business development activities of the Greater Bay Trust Company and the Venture Banking Group. A-18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PBC held deposits from a single customer (the "Special Deposit") of $111.1 million and $89.6 million at December 31, 1999 and 1998, respectively. The Special Deposit represents the proposed settlement of a class action lawsuit not involving the Company. 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. As previously discussed, the interest rate spread on the Special Deposit was approximately 3.10% and 2.25% for December 31, 1999 and 1998, which resulted in a decrease in overall interest rate spreads. The Company's noninterest-bearing demand deposit accounts increased 36.8% to $459.5 million at December 31, 1999, compared to $336.0 million a year earlier. Money market deposit accounts ("MMDA"), negotiable order of withdrawal accounts ("NOW") and savings accounts reached $1.4 billion at year-end 1999, an increase of 41.5% from $960.2 million at December 31, 1998. MMDA, NOW and savings accounts were 59.1% of total deposits at December 31, 1999, as compared to 59.9% at December 31, 1998. Time certificates of deposit totaled $482.6 million, or 20.97% of total deposits, at December 31, 1999, compared to $306.3 million, or 19.11% of total deposits, at December 31, 1998. Note 7 of the Notes to the Consolidated Financial Statements presents the maturity distribution of time certificates of deposits at December 31, 1999. As of December 31, 1999, the Company had $19.3 million in brokered deposits outstanding. There were no such deposits as of December 31, 1998. For additional information concerning deposits, see Note 7 of Notes to Consolidated Financial Statements. Other Borrowings At December 31, 1999 other borrowings consisted of Federal Funds purchased and securities sold under agreements to repurchase, Federal Home Loan Bank advances, and advances under credit lines. Note 9 of the Notes to the Consolidated Financial Statements provides the amounts outstanding, the short and long term classification, other borrowings outstanding during the year and the general terms of these borrowings. Liquidity and Cash Flow The objective of liquidity management is to maintain each Bank's ability to meet the day-to-day cash flow requirements of its clients who either wish to withdraw funds or require funds to meet their credit needs. The Company must manage its liquidity position to allow the Banks to meet the needs of their clients while maintaining an appropriate balance between assets and liabilities to meet the return on investment expectations of its shareholders. The Company monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and repayments and maturities of loans and investments, the Banks utilize brokered deposit lines, sell securities under agreements to repurchase and borrows overnight Federal Funds. A-19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Greater Bay is a company separate and apart from the Banks. It must provide for its own liquidity. Substantially all of Greater Bay's revenues are obtained from management fees, interest received on its investments and dividends declared and paid by the Banks. There are statutory and regulatory provisions that could limit the ability of the Banks to pay dividends to Greater Bay. At December 31, 1999, the Banks had approximately $50.8 million in the aggregate available to be paid as dividends to Greater Bay. Management of Greater Bay believes that such restrictions will not have an impact on the ability of Greater Bay to meet its ongoing cash obligations. As of December 31, 1999, Greater Bay did not have any material commitments for capital expenditures. Net cash provided by operating activities, consisting primarily of net income, totaled $32.3 million for 1999, $20.7 million for 1998 and $21.5 million for 1997. Cash used for investing activities totaled $635.3 million in 1999, $458.6 million in 1998 and $295.9 million in 1997. The funds used for investing activities primarily represent increases in loans and investment securities for each year reported. For the year ended December 31, 1999, net cash provided by financing activities was $700.5 million, compared to $398.8 million in 1998 and $315.6 million in 1997. Historically, the primary financing activity of the Company has been through deposits. In 1999, 1998 and 1997, deposit gathering activities generated cash of $698.5 million, $322.6 million and $282.3 million, respectively. This represents a total of 99.7%, 80.9% and 89.34% of the financing cash flows for 1999, 1998 and 1997, respectively. The 1999 increase in financing activities other than deposits are a result of proceeds from the sale of stock of $25.4 million, the Company entering into $70.0 million in long-term low cost repurchase agreements in 1998, and the issuance of TPS of $30.0 million and $20.0 million in 1999 and 1998, respectively, which were issued principally to provide capital to the Company (see Capital Resources - below). Capital Resources Shareholders' equity at December 31, 1999 increased to $160.8 million from $118.4 million at December 31, 1998 and from $98.7 million at December 31, 1997. Greater Bay paid dividends of $0.48, $0.38 and $0.30 per share in December 31, 1999, 1998 and 1997, respectively, excluding dividends paid by subsidiaries prior to the completion of their mergers. In 1999 the Company issued 535,000 shares of stock in a private placement. The proceeds from the offering were $19.0 million, net of issuance costs. Greater Bay intends to use the net proceeds from the offering for general corporate purposes. In 1997 the Company issued $20.0 million in TPS to enhance its regulatory capital base, while also providing added liquidity. In 1998, the Company completed a second offering of TPS in an aggregate amount of $30.0 million. Under applicable regulatory guidelines, the TPS qualifies as Tier I capital up to a maximum 25% of Tier I capital. Any additional portion of TPS would qualify as Tier 2 capital. As of December 31, 1999, all outstanding TPS qualified as Tier I capital. As the Company's shareholders' equity increases, the amount of Tier I capital that can be comprised of TPS will increase. The Company is committed to remaining well-capitalized as defined by regulatory guidelines. If deposit and loan growth continues at current levels, it is anticipated the Company will need to raise additional capital to remain well-capitalized in 2000. The Company is evaluating an additional issuance of TPS as well as other alternatives to meet this anticipated increase in required capital. We anticipate that we will be able to leverage any further issuance of TPS and therefore we do not anticipate that the raising of additional TPS would be dilutive to future net income per share. However, the impact of raising any additional capital on net income per share will depend on the type of capital raised, the terms of the capital, the time period required to invest the capital funds into earning-assets and the type of assets funded. A-20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) A banking organization's total qualifying capital includes two components: core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at least half of total capital, includes common shareholders' equity, qualifying perpetual preferred stock, trust preferred securities and minority interests, less goodwill. Supplementary capital includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, trust preferred securities, certain other capital instruments and term subordinated debt. The Company's major capital components are shareholders' equity and TPS in core capital, and the allowance for loan losses and subordinated debt in supplementary capital. At December 31, 1999, the minimum risk-based capital requirements to be considered adequately capitalized were 4.0% for core capital and 8.0% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (not risk-adjusted) for the preceding quarter. The minimum leverage ratio is 3.0%, although certain banking organizations are expected to exceed that amount by 1.0% or more, depending on their circumstances. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. The capital levels of the Company at December 31, 1999 and the two highest levels recognized under these regulations are as follows:
Tier 1 Total Leverage Risk-Based Risk-Based Ratio Capital Ratio Capital Ratio - ------------------------------------------------------------------------- Company 7.93% 9.35% 10.81% Well-capitalized 5.00% 6.00% 10.00% Adequately capitalized 4.00% 4.00% 8.00%
The Company's leverage ratio was 7.93% at December 31, 1999, compared to 7.97% at December 31, 1998. At December 31, 1999, the Company's risk-based capital ratios were 9.35% for Tier 1 risk-based capital and 10.81% for total risk-based capital, compared to 10.03% and 12.74%, respectively, as of December 31, 1998. In addition, at December 31, 1999, each of the Banks had levels of capital that exceeded the well-capitalized guidelines. For additional information on the capital levels and capital ratios of the Company and each of the Banks, see Note 17 of Notes to Consolidated Financial Statements. A-21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Quantitative and Qualitative Disclosures about Market Risk The Company's financial performance is impacted by, among other factors, interest rate risk and credit risk. The Company utilizes no derivatives to mitigate its credit risk, relying instead on loan review and its allowance for loan losses, see "--Allowance for Loan Losses" herein. Interest rate risk is the risk of loss in value due to changes in interest rates. This risk is addressed by the Company's Asset Liability Management Committee ("ALCO"), which includes senior management representatives. The ALCO monitors and considers methods of managing interest rate risk by monitoring changes in net portfolio values and net interest income under various interest rate scenarios. The ALCO attempts to manage the various components of the Company's balance sheet to minimize the impact of sudden and sustained changes in interest rates on net portfolio value and net interest income. The Company's exposure to interest rate risk is reviewed on at least a quarterly basis by the Board of Directors and the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Company's change in not portfolio value in the event of hypothetical changes in interest rates and interest liabilities. If potential changes to not portfolio value and net interest income resulting from hypothetical interest rate swings are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity, lengthen the effective maturities of certain interest-earning assets, and shorten the effective maturities of certain interest-bearing liabilities. The Company has focused its investment activities on securities with generally medium-term (8 years to 12 years) maturities or average lives. The Company has utilized short-term borrowings and deposit marketing programs to adjust the term to repricing of its liabilities. In addition, the Company has utilized an interest rate swap to manage the interest rate risk of the TPS II securities. This interest rate swap is not an "ineffective hedge" and is accounted for under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". Interest rate sensitivity analysis is used to measure the Company's interest rate risk by computing estimated changes in net portfolio value of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off- balance sheet items. This analysis assesses the risk of loss in market rate sensitive instruments in the event of sudden and sustained increases and decreases in market interest rates of 100 basis points. The following table presents the Company's projected change in net portfolio value for these rate shock levels as of December 31, 1999. All market rate sensitive instruments presented in this table are classified as either held to maturity or available for sale. The Company has no trading securities.
Projected Change Change in ---------------------------------- Interest Rates (Dollars in thousands) Net Portfolio Dollars Percentage Value - ----------------------------------------------------------------------------------- 100 basis point rise $365,830 $ 7,770 2.2% Base scenario 358,020 - 0.0% 100 basis point decline 350,469 (7,591) -2.1%
The preceding table indicates that at December 31, 1999, in the event of a sudden and sustained decrease in prevailing market interest rates, the Company's net portfolio value would be expected to decrease. However, the foregoing analysis does not attribute additional value to the Company's noninterest- bearing deposit balances, which have a significantly higher market value during periods of increasing interest rates. Net portfolio value is calculated based on the net present value of estimated cash flows utilizing market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources. A-22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Computation of forecasted effects of hypothetical interest rate changes is based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposits decay, and should not be relied upon as indicative of actual future results. Further, the computations do not contemplate any actions the ALCO could undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of net portfolio value. Actual values may differ from those projections presented should market conditions vary from assumptions used in the calculation of the net portfolio value. Certain assets, such as adjustable-rate loans, which represent one of the Company's loan products, have features which restrict changes in interest rate on a short-term basis and over the life of the assets. In addition, the proportion of adjustable-rate loans in the Company's portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinancing activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the net portfolio value. Finally, the ability of many borrowers to repay their adjustable-rate mortgage loans may decrease in the event of significant interest rate increases. Interest Rate Risk Management Interest rate risk management is a function of the repricing characteristics of the Company's portfolio of assets and liabilities. Interest rate risk management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate risk management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby minimizing the effect of interest rate movements on net interest income. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the Company's current portfolio that are subject to repricing at various time horizons: one day or immediate, two days to six months, seven to twelve months, one to three years, four to five years, over five years and on a cumulative basis. The differences are known as interest sensitivity gaps. The following table shows interest sensitivity gaps for different intervals as of December 31, 1999:
Immediate 2 Days To 7 Months to 1 Year to (Dollars in thousands) or One Day 6 Months 12 Months 3 Years - ---------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 794 $ -- $ -- $ -- Short term investments 191,700 -- -- -- Investment securities -- 69,990 22,820 94,409 Other securities -- -- -- -- Loans 919,796 495,126 39,254 108,174 Loan losses/unearned fees -- -- -- -- Other assets -- -- -- -- ---------------------------------------------------------------------- Total assets $ 1,112,290 $ 565,116 $ 62,074 $ 202,583 ====================================================================== Liabilities and Equity Deposits $ 1,379,955 $ 397,609 $ 54,834 $ 8,203 Other borrowings -- 47,100 -- -- Subordinated debt -- -- -- -- Trust preferred securities -- -- -- -- Other liabilities -- -- -- -- Shareholders' equity -- -- -- -- ---------------------------------------------------------------------- Total liabilities and equity $ 1,379,955 $ 444,709 $ 54,834 $ 8,203 ---------------------------------------------------------------------- Gap $ (267,665) $ 120,407 $ 7,240 $ 194,380 Cumulative Gap $ (267,665) $ (147,258) $ (140,018) $ 54,362 Cumulative Gap/total assets -10.20% -5.61% -5.33% 2.07%
Total 4 Years More than Total Rate Non-Rate (Dollars in thousands) to 5 Years 5 Years Sensitive Sensitive Total - ----------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ -- $ -- $ 794 $ 94,622 $ 95,416 Short term investments -- -- 191,700 -- 191,700 Investment securities 53,739 238,113 479,071 -- 479,071 Other securities -- -- -- 20,540 20,540 Loans 76,025 121,626 1,760,001 -- 1,760,001 Loan losses/unearned fees -- -- -- (44,716) (44,716) Other assets -- -- -- 122,953 122,953 --------------------------------------------------------------------- Total assets $ 129,764 $ 359,739 $ 2,431,566 $ 193,399 $ 2,624,965 --------------------------------------------------------------------- Liabilities and Equity Deposits $ 734 $ 30 $ 1,841,365 $ 459,523 $ 2,300,888 Other borrowings 22,000 -- 69,100 -- 69,100 Subordinated debt -- -- -- -- -- Trust preferred securities -- 50,000 50,000 -- 50,000 Other liabilities -- -- -- 44,222 44,222 Shareholders' equity -- -- -- 160,755 160,755 --------------------------------------------------------------------- Total liabilities and equity $ 22,734 $ 50,030 $ 1,960,465 $ 664,500 $ 2,624,965 --------------------------------------------------------------------- Gap $ 107,030 $ 309,709 $ 471,101 $ (471,101) -- Cumulative Gap $ 161,392 $ 471,101 $ 471,101 $ -- -- Cumulative Gap/total assets 6.15% 17.95% 17.95% -- --
A-23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The foregoing table indicates that the Company had a one year gap of $(140.0) million, or (5.33)%of total assets, at December 31, 1999. In theory, this would indicate that at December 31, 1999, $140.0 million more in liabilities than assets would reprice if there were a change in interest rates over the next 365 days. Thus, if interest rates were to increase, the gap would tend to result in a lower net interest margin. However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of repricing of both the asset and its supporting liability can remain the same, thus impacting net interest income. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. The impact of fluctuations in interest rates on the Company's projected next twelve month net interest income and net income has been evaluated through an interest rate shock simulation modeling analysis that includes various assumptions regarding the repricing relationship of assets and liabilities, as well as the anticipated changes in loan and deposit volumes over differing rate environments. As of December 31, 1999, the analysis indicates that the Company's net interest income would increase a maximum of 14.1% if rates rose 200 basis points immediately and would decrease a maximum of 13.6% if rates declined 200 basis points immediately. In addition, the results indicate that notwithstanding the Company's gap position, which would indicate that the net interest margin increases when rates rise, the Company's net interest margin increases during rising rate periods due to the basis risk imbedded in the Company's interest- bearing liabilities. In addition, while this analysis indicates the probable impact of interest rate movements on the Company's net interest income, it does not take into consideration other factors that would impact this analysis. These factors would include management's and ALCO's actions to mitigate the impact to the Company and the impact of the Company's credit risk profile during periods of significant interest rate movements. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity analysis table. These prepayments may have significant effects on the Company's net interest margin. Because of these factors and others, an interest sensitivity gap report may not provide a complete assessment of the Company's exposure to changes in interest rates. Year 2000 State of Readiness The Company's mission critical systems successfully responded to the century date change. Accordingly, the Company's core banking systems, including the application software for its deposit, loan and trust computer systems, as well as the electronic funds transfers system with the Federal Reserve, are fully operational and accurately processing customer information and transactions. The Company will continue to monitor its systems and those of its vendors and suppliers over the coming months. Recent Events On January 31, 2000, the company Mt. Diablo Bancshares ("MD Bancshares"), the former holding company of Mt. Diablo National Bank ("MDNB"), merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of MD Bancshares were converted into an aggregate of 1,395,499 shares of Greater Bay's stock. The stock was issued to MD Bancshares' shareholders in a tax-free exchange. The transaction will be accounted for as a pooling-of-interests. The financial information presented herein has not been restated to reflect the merger with MD Bancshares on a pooling-of-interests basis. As of December 31, 1999, MD Bancshares has $220.5 million in assets, $205.5 million in deposits and $12.8 million in shareholders' equity. MDNB has offices located in Danville, Pleasanton and Lafayette, California. A-24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) On December 14, 1999, Greater Bay and Coast Bancorp the holding company of Coast Commercial Bank ("CCB"), a California state chartered bank signed a definitive agreement for a merger between the two companies. The agreement provides for Coast Bancorp shareholders to receive approximately 3,105,000 shares of Greater Bay stock, subject to certain adjustments based on movements in Greater Bay's stock price, in a tax-free exchange to be accounted for as a pooling-of- interests. The transaction is expected to be completed in the second quarter of 2000, subject to regulatory and shareholder approvals. As of December 31, 1999, Coast Bancorp had $370.0 million in assets, $300.6 million in deposits and $33.0 million in shareholders' equity. CCB's offices are located in Aptos, Capitola, Santa Cruz, Scotts Valley and Watsonville, California. On January 26, 2000, the Company, the Bank of Santa Clara ("BSC") and GBB Merger Corp. signed a definitive agreement for a merger between BSC and GBB Merger Corp., as a result of which BSC will become a wholly owned subsidiairy of Greater Bay. The agreement provides for BSC shareholders to receive approximately 2,017,000 shares of Greater Bay stock subject to certain adjustments based on movements in Greater Bay's stock price in a tax-free exchange to be accounted for as a pooling-of-interests. The transaction is expected to be completed in the second quarter of 2000 subject to regulatory and shareholders approvals. As of December 31, 1999, BSC had $326.9 million in assets, $293.7 million in deposits and $31.4 million in shareholders' equity. BSC has offices in Milpitas, San Jose, Santa Clara and Sunnyvale, California. Assuming the acquisitions of MD Bancshares, Coast Bancorp and BSC had been completed on December 31, 1999, Greater Bay would have had proforma assets of $3.5 billion, deposits of $3.1 billion and $238.0 million of shareholders' equity on a pooled basis. Recent Accounting Developments In April 1999, the Financial Accounting Standards Board ("FASB") reached tentative conclusions on the future of the pooling-of-interests method of accounting for business combinations. These tentative decisions include the decision that the pooling-of-interests method of accounting will no longer be an acceptable method to account for business combinations between independent parties and that there should be a single method of accounting for all business combinations, and that method is the purchase method. The FASB agreed that the purchase method should be applied prospectively to business combination transactions that are initiated after the final standard is issued. The FASB has issued an exposure draft during the third quarter of 1999 and expects a final standard will be issued and become effective in the fourth quarter of 2000. A portion of the Company's business strategy is to pursue acquisition opportunities so as to expand its market presence and maintain growth levels. A change in the accounting for business combinations could have a negative impact on the Company's ability to realize those business strategies. A-25 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, ----------------------------------- (Dollars in thousands) 1999 1998* - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 95,416 $ 78,660 Federal funds sold 191,700 62,800 Other short term securities 29,507 77,576 ----------------------------------- Cash and cash equivalents 316,623 219,036 Investment securities: Available for sale, at fair value 307,840 289,291 Held to maturity, at amortized cost (fair value 1999: $136,481 1998: $103,028) 141,725 102,108 Other securities 20,540 6,013 ----------------------------------- Investment securities 470,105 397,412 Total loans: Commercial 758,148 501,106 Term real estate - commercial 431,226 316,328 ----------------------------------- Total commercial 1,189,374 817,434 Real estate construction and land 372,481 230,568 Real estate other 92,688 74,265 Consumer and other 105,457 91,239 Deferred loan fees and discounts (6,681) (4,395) ----------------------------------- Total loans, net of deferred fees 1,753,319 1,209,111 Allowance for loan losses (38,035) (24,359) ----------------------------------- Total loans, net 1,715,284 1,184,752 Property, premises and equipment 18,589 13,329 Interest receivable and other assets 104,364 67,862 ----------------------------------- Total assets $ 2,624,965 $ 1,882,391 =================================== LIABILITIES AND SHAREHOLDERS' EQUITY Total deposits $ 2,300,888 $ 1,602,342 Other borrowings 69,100 83,429 Subordinated debt - 3,000 Other liabilities 44,222 25,184 ----------------------------------- Total liabilities 2,414,210 1,713,955 ----------------------------------- Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trusts holding solely junior subordinated debentures 50,000 50,000 Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, no par value: 4,000,000 shares authorized; none issued - - Common stock, no par value: 24,000,000 shares authorized; 12,806,115 and 11,743,127 shares issued and outstanding as of December 31, 1999 and 1998, respectively 92,096 66,711 Accumulated other comprehensive (loss) (4,748) (59) Retained earnings 73,407 51,784 ----------------------------------- Total shareholders' equity 160,755 118,436 ----------------------------------- Total liabilities and shareholders' equity $ 2,624,965 $ 1,882,391 ===================================
*Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. See notes to consolidated financial statements. A-26 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, --------------------------------------- (Dollars in thousands, except per share amounts) 1999 1998* 1997* - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest on loans $ 136,828 $ 102,092 $ 85,415 Interest on investment securities: Taxable 22,586 19,303 10,301 Tax - exempt 3,681 2,440 1,356 --------------------------------------- Total interest on investment securities 26,267 21,743 11,657 Other interest income 12,255 11,163 9,948 --------------------------------------- Total interest income 175,350 134,998 107,020 --------------------------------------- INTEREST EXPENSE Interest on deposits 63,110 46,410 36,426 Interest on long term borrowings 7,714 6,752 2,165 Interest on other borrowings 794 1,497 1,378 --------------------------------------- Total interest expense 71,618 54,659 39,969 --------------------------------------- Net interest income 103,732 80,339 67,051 Provision for loan losses 12,249 6,369 7,078 --------------------------------------- Net interest income after provision for loan losses 91,483 73,970 59,973 --------------------------------------- OTHER INCOME Trust fees 2,990 2,473 2,049 Loan and international banking fees 2,833 1,303 1,404 Service charges and other fees 2,711 2,056 2,100 ATM network revenue 2,110 1,966 2,057 Gain on sale of SBA loans 1,010 1,125 940 Gain (loss) on investments, net (19) 374 (8) Warrant income, net 14,508 945 1,162 Other income 5,684 419 325 --------------------------------------- Total 31,827 10,661 10,029 --------------------------------------- OPERATING EXPENSES Compensation and benefits 35,316 28,822 25,833 Occupancy and equipment 11,256 7,859 6,892 Contribution to the GBB Foundation and related expenses, net 12,160 1,341 - Merger and other related nonrecurring costs 10,331 2,661 3,333 Recovery of legal settlement - - (1,700) Other expenses 14,587 14,071 12,839 --------------------------------------- Total operating expenses 83,650 54,754 47,197 --------------------------------------- Net income before provision for income taxes and extraordinary items 39,660 29,877 22,805 Provision for income taxes 11,861 9,719 8,320 --------------------------------------- Net income before extraordinary items 27,799 20,158 14,485 Extraordinary items (88) - - --------------------------------------- Net income $ 27,711 $ 20,158 $ 14,485 ======================================= Net income per share - basic** $ 2.28 $ 1.69 $ 1.29 ======================================= Net income per share - diluted** $ 2.17 $ 1.59 $ 1.21 =======================================
*Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. **Restated to reflect 2-for-1 stock split declared for shareholders of record at April 30, 1998. See notes to consolidated financial statements. A-27 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, ----------------------------------------- (Dollars in thousands) 1999 1998* 1997* - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 27,711 $ 20,158 $ 14,485 --------------------------------------- Other comprehensive income: Unrealized gains on securities: Unrealized holding gains (losses) arising during period (net of taxes of $(11,083), $133, and $248 for the years ended December 31, 1999, 1998 and 1997, respectively) (15,274) 184 329 Less: reclassification adjustment for gains (losses) included in net income (net of taxes of $6,085, $154 and $(3) for the years ended December 31, 1999, 1998 and 1997, respectively) 8,404 220 (5) ---------------------------------------- Net change (6,870) 404 324 Cash flow hedge: Cumulative transition effect of adopting SFAS No. 133 (net of taxes of $(744)) as of October 1, 1998 - (1,063) - Change in market value of hedge during the period (net of taxes of $1,092 and $294 for the years ended December 31, 1999 and 1998, respectively) 2,325 418 - Less: reclassification adjustment for swap settlements in net income (net of taxes of $(60) and $(23) for the years ended December 31, 1999 and 1998, respectively) (144) (32) - ---------------------------------------- Net change 2,181 (677) - Other comprehensive income (loss) (4,689) (273) 324 ---------------------------------------- Comprehensive income $ 23,022 $ 19,885 $ 14,809 ========================================
* Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interest basis. See notes to consolidated financial statements. A-28 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Accumulated Other Total For the years ended December 31, 1999, 1998 and 1997 ---------------------- Comprehensive Retained Shareholders' (Dollars in thousands, except per share amounts) Shares** Amount Income (Loss) Earnings Equity - ----------------------------------------------------------------------------------------------------------------------------------- Greater Bay Bancorp, prior to pooling 6,477,774 $ 34,884 $ 71 $ 9,727 $ 44,682 Shares issued to Peninsula Bank of Commerce shareholders 1,295,216 7,141 - - 7,141 Peninsula Bank of Commerce retained earnings prior to pooling - - (53) 6,186 6,133 Shares issued to Pacific Rim Bancorporation shareholders 950,748 8,000 - - 8,000 Pacific Rim Bancorporation retained earnings prior to pooling - - (108) 879 771 Shares issued to Pacific Business Funding Corporation shareholders 298,000 51 - - 51 Pacific Business Funding Corporation retained earnings prior to pooling - - - 59 59 Shares issued to Bay Area Bancorp shareholders 1,164,427 4,143 - - 4,143 Bay Area Bancorp retained earnings prior to pooling - - (5) 5,143 5,138 Shares issued to Bay Commercial Services shareholders 735,723 3,662 - - 3,662 Bay Commercial Services retained earnings prior to pooling - - (15) 5,771 5,756 --------------------------------------------------------------- Balance, December 31, 1996, restated to reflect pooling 10,921,888 57,881 (110) 27,765 85,536 Net income - - - 14,485 14,485 Other comprehensive income, net of taxes - - 324 - 324 Stock options exercised, including related tax benefit 408,626 2,646 - - 2,646 Stock issued in Employee Stock Purchase Plan 30,320 347 - - 347 401(k) employee stock purchase 36,152 531 - - 531 Stock repurchase 6 (89) - - (89) Pacific Business Funding Corporation distribution - - - (208) (208) Cash dividend $0.43 per share*** - - - (4,871) (4,871) --------------------------------------------------------------- Balance, December 31, 1997* 11,396,992 61,316 214 37,171 98,701 Net income - - - 20,158 20,158 Other comprehensive loss, net of taxes - - (273) - (273) Stock options exercised, including related tax benefit 283,396 3,822 - - 3,822 Stock issued in Employee Stock Purchase Plan 29,670 656 - - 656 401(k) employee stock purchase 36,483 1,060 - - 1,060 Stock repurchase (3,414) (143) - - (143) Pacific Business Funding Corporation distribution - - - (1,163) (1,163) Cash dividend $0.37 per share*** - - - (4,382) (4,382) --------------------------------------------------------------- Balance, December 31, 1998* 11,743,127 66,711 (59) 51,784 118,436 Net income - - - 27,711 27,711 Other comprehensive loss, net of taxes - - (4,689) - (4,689) Stock options exercised, including related tax benefit 443,283 4,023 - - 4,023 Stock issued in Employee Stock Purchase Plan 41,651 1,031 - - 1,031 401(k) employee stock purchase 38,005 1,205 - - 1,205 Stock issued in Dividend Reinvestment Plan 5,049 171 - - 171 Pacific Business Funding Corporation distribution - - - (40) (40) Stock issued through private placement 535,000 18,961 - - 18,961 BAB Merger - (6) - - (6) Cash dividend $0.50 per share*** - - - (6,048) (6,048) --------------------------------------------------------------- Balance, December 31, 1999 $12,806,115 $ 92,096 $ (4,748) $ 73,407 $160,755 ===============================================================
* Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. ** Restated to reflect 2-for-1 stock split declared for shareholders of record at April 30, 1998. *** Excluding dividends paid by Greater Bay's subsidiaries prior to the completion of their mergers with Greater Bay. Greater Bay paid dividends of $0.48, $0.38 and $0.30 per share on December 31, 1999, 1998 and 1997, respectively. In 1999, Bay Area Bancshares declared dividends of $0.11 per share. In 1998, Bay Area Bancshares declared dividends of $0.41 per share, Bay Commercial Services declared dividends of $0.40 per share and Pacific Business Funding Corporation made a distribution of $1.2 million to its shareholders. In 1997, Bay Area Bancshares declared dividends of $0.37 per share, Bay Commercial Services declared dividends of $0.30 per share, Peninsula Bank of Commerce declared an annual dividend of $3.20 per share, Pacific Rim Bancorporation declared and paid a dividend of $100,000 to its sole shareholder and Pacific Business Funding Corporation made a distribution of $208,000 to its shareholders. See notes to consolidated financial statements. A-29 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, -------------------------------------------------------- (Dollars in thousands) 1999 1998* 1997* - --------------------------------------------------------------------------------------------------------------------------------- Cash flows - operating activities Net income $ 27,711 $ 20,158 $ 14,485 Reconcilement of net income to net cash from operations: Provision for loan losses 14,994 6,552 8,429 Depreciation and amortization 5,275 2,323 2,200 Deferred income taxes (6,328) (3,308) (4,258) (Gain) loss on sale of investments, net 19 (374) 8 Changes in: Accrued interest receivable and other assets (22,736) (10,422) (5,430) Accrued interest payable and other liabilities 21,634 6,470 5,763 Deferred loan fees and discounts, net 2,286 503 276 ----------------- ---------------- ---------------- Operating cash flows, net 42,855 21,902 21,473 ----------------- ---------------- ---------------- Cash flows - investing activities Maturities and partial paydowns on investment securities: Held to maturity 78,770 66,495 31,475 Available for sale 45,707 546,215 85,442 Purchase of investment securities: Held to maturity (95,041) (101,436) (16,836) Available for sale (123,613) (841,025) (210,297) Other securities (14,527) (3,760) (682) Proceeds from sale of available for sale securities 25,351 195,863 15,595 Loans, net (546,494) (297,846) (197,143) Purchase of property, premises and equipment (6,735) (2,190) (2,943) Investment in other real estate owned - 1,303 (500) Purchase of insurance policies (9,206) (23,480) - ----------------- ---------------- ---------------- Investing cash flows, net (645,788) (459,861) (295,889) ----------------- ---------------- ---------------- Cash flows - financing activities Net change in deposits 698,546 322,633 282,317 Net change in other borrowings - short term (15,569) (21,451) 12,831 Proceeds from other borrowings - long term 2,015 70,000 3,025 Principal repayment - long term borrowings (3,775) (2,265) (865) Proceeds from company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures - 30,000 20,000 Proceeds from sale of common stock 25,351 4,232 3,551 Cash dividends (6,048) (4,382) (4,871) ----------------- ---------------- ---------------- Financing cash flows, net 700,520 398,767 315,988 ----------------- ---------------- ---------------- Net change in cash and cash equivalents 97,587 (39,192) 41,572 Cash and cash equivalents at beginning of period 219,036 258,228 216,656 ----------------- ---------------- ---------------- Cash and cash equivalents at end of period $ 316,623 $ 219,036 $ 258,228 ================= ================ ================ Cash flows - supplemental disclosures Cash paid during the period for: Interest $ 77,483 $ 53,385 $ 39,612 ================= ================ ================ Income taxes $ 9,414 $ 12,485 $ 13,017 ================= ================ ================ Non-cash transactions: Additions to other real estate owned $ - $ 450 $ 1,723 ================= ================ ================ Transfer of appreciated securities to Greater Bay Bancorp Foundation $ 560 $ 1,341 $ - ================= ================ ================
*Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. See notes to consolidated financial statements. A-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1999, 1998 and 1997 NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the "Company" on a consolidated basis) is a bank holding company operating Bay Area Bank ("BAB"), Bay Bank of Commerce ("BBC"), Cupertino National Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank ("MPB") and Peninsula Bank of Commerce ("PBC"). The Company also owns GBB Capital I and GBB Capital II, both of which are Delaware statutory business trusts, which were formed for the exclusive purpose of issuing and selling Cumulative Trust Preferred Securities ("TPS"). Greater Bay also includes the operating divisions: Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding and the Venture Banking Group. The Company provides a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. The Company operates throughout Silicon Valley, the San Francisco Peninsula and the East Bay Region, with 18 offices located in Cupertino, Fremont, Hayward, Millbrae, Palo Alto, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara and Walnut Creek. All of the Company's mergers were accounted for as a pooling-of-interests and, accordingly, all of the financial information for the Company for the periods prior to the mergers had been restated as if the mergers has occurred at the beginning of the earliest reporting period presented. A-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Consolidation and Basis of Presentation The consolidated financial statements include the accounts of Greater Bay and its wholly owned subsidiaries, BAB, BBC, CNB, Golden Gate, MPB, PBC, GBB Capital I and GBB Capital II and its operating divisions. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the 1999 presentation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and the prevailing practices within the banking industry. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, Federal Funds sold and agency securities with original maturities of less than ninety days. Generally, Federal Funds are sold for one-day periods. As discussed in Note 7, PBC holds $111.1 million in one demand deposit account whose funds are comprised of proceeds from a lawsuit settlement. Due to the uncertainty of the time this special deposit (the "Special Deposit") will remain with PBC, management has invested a significant portion of the proceeds in agency securities with maturities of less than 90 days. These securities have been classified as cash and equivalents. BAB, BBC, CNB, Golden Gate, MPB and PBC are required by the Federal Reserve System to maintain noninterest-earning cash reserves against certain of their deposit accounts. At December 31, 1999, the required combined reserves totaled approximately $845,000. Investment Securities The Company classifies its investment securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Investment securities classified as held to maturity are reported at amortized cost; available for sale securities are reported at fair value with net unrealized gains and losses reported (net of taxes) as a component of shareholders' equity. The Company does not have any trading securities. A decline in the fair value of any available for sale or held to maturity security below cost that is deemed other than temporary, results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income is recognized when earned. Realized gains and losses for securities classified as available for sale and held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Required investments in Federal Reserve Bank and Federal Home Loan Bank stocks for the Bank's are recorded at cost. A-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Loans Loans held for investment are carried at amortized cost. The Company's loan portfolio consists primarily of commercial and real estate loans generally collateralized by first and second deeds of trust on real estate as well as business assets and personal property. Interest income is accrued on the outstanding loan balances using the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due 90 days and when full payment of principal or interest is not expected. At the time a loan is placed on nonaccrual status, any interest income previously accrued but not collected is generally reversed and amortization of deferred loan fees is discontinued. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. The Company charges loan origination and commitment fees. Net loan origination fees and costs are deferred and amortized to interest income over the life of the loan, using the effective interest method. Loan commitment fees are amortized to interest income over the commitment period. When a loan is sold, unamortized fees and capitalized direct costs are recognized in the consolidated statements of operations. Other loan fees and charges representing service costs for the repayment of loans, for delinquent payments or for miscellaneous loan services are recognized when earned. Sale and Servicing of Small Business Administration ("SBA") Loans The Company originates loans to customers under SBA programs that generally provide for SBA guarantees of 70% to 90% of each loan. The Company generally sells the guaranteed portion of the majority of the loans to an investor and retains the unguaranteed portion and servicing rights in its own portfolio. Funding for the SBA programs depend on annual appropriations by the U.S. Congress. Gains on these sales are earned through the sale of the guaranteed portion of the loan for an amount in excess of the adjusted carrying value of the portion of the loan sold. The Company allocates the carrying value of such loans between the portion sold, the portion retained and a value assigned to the right to service the loan. The difference between the adjusted carrying value of the portion retained and the face amount of the portion retained is amortized to interest income over the life of the related loan using a method which approximates the interest method. Allowance for Loan Losses The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118 ("SFAS No. 114 and No. 118"), on January 1, 1995. Under these standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Under these standards, any allowance on impaired loans is generally based on one of three methods. It requires that impaired loans be measured at either, 1) the present value of expected cash flows at the loan's effective interest rate, 2) the loan's observable market price, or 3) the fair value of the collateral of the loan. In general, these statements are not applicable to large groups of smaller-balance loans that are collectively evaluated for impairment such as credit cards, residential mortgage, consumer installment loans and certain small business loans. Income recognition on impaired loans conforms to the method the Company uses for income recognition on nonaccrual loans. A-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known losses in the loan portfolio. The allowance is based upon a number of factors, including prevailing and anticipated economic trends, industry experience, estimated collateral values, management's assessment of credit risk inherent in the portfolio, delinquency trends, historical loss experience, specific problem loans and other relevant factors. Additions to the allowance, in the form of provisions, are reflected in current operating results, while charge-offs to the allowance are made when a loss is determined to have occurred. Because the allowance for loan losses is based on estimates, ultimate losses may vary from the current estimates. Other Real Estate Owned Other real estate owned ("OREO") consists of properties acquired through foreclosure and is stated at the lower of carrying value or fair value less estimated costs to sell. Development and improvement costs relating to the OREO are capitalized. Estimated losses that result from the ongoing periodic valuation of these properties are charged to current earnings with a provision for losses on foreclosed property in the period in which they are identified. The resulting allowance for OREO losses is decreased when the property is sold. Operating expenses of such properties, net of related income, are included in other expenses. Gains and losses on the disposition of OREO are included in other income. Property, Premises and Equipment Property, premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which is determined by asset classification, as follows: Buildings 40 years Building improvements 10 years Furniture and fixtures 7 years Automobiles 5 years Computer equipment 2 - 5 years Other equipment 2 - 7 years Amortization of leasehold improvements is computed on a straight-line basis over the shorter of the lease term or the estimated useful lives of the asset, which is generally 10 years. Income Taxes Deferred incomes taxes reflect the estimated future tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. A-34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Derivatives and Hedging Activities The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), effective October 1, 1998. In accordance with the transition provisions of SFAS No. 133, the Company recorded a net-of-tax cumulative-effect-type adjustment of $1.1 million in accumulated other comprehensive income to recognize at fair value all derivatives that are designated as cash-flow hedging instruments. There were no net gains or losses on derivatives that had been previously deferred or gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of hedged items. All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction or a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge). Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash-flow hedges to specific liabilities on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (2) the derivative expires or is sold, terminated, or exercised; or (3) management determines that designation of the derivative as a hedge instrument is no longer appropriate. In these situations where hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current-period earnings. All gains or losses that were accumulated in other comprehensive income will be recognized immediately in earnings upon the discontinuance of hedge accounting. Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement requires companies to classify items of other comprehensive income by their nature in the financial statements and display the accumulated other comprehensive income separately from retained earnings in the equity section of the balance sheet. The changes to the balances of accumulated other comprehensive income are as follows:
Accumulated Other Unrealized Gains Cash Flow Comprehensive (Dollars in thousands) on Securities Hedges Income (Loss) - -------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1997 $ 214 $ - $ 214 Other comprehensive income (loss) in 1998 404 (677) (273) ----------------------------------------------------- Balance - December 31, 1998 618 (677) (59) Other comprehensive income (loss) in 1999 (6,870) 2,181 (4,689) ----------------------------------------------------- Balance - December 31, 1999 $ (6,252) $ 1,504 $ (4,748) =====================================================
A-35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Per Share Data Net income per share is stated in accordance with SFAS No. 128 "Earnings per Share". Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per share is computed by dividing net income by the weighted average number of common shares plus common equivalent shares outstanding including dilutive stock options. All years presented include the effect of the 2-for-1 stock split effective as of April 30, 1998. The following table provides a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the years ended December 31, 1999, 1998 and 1997.
For the year ended December 31, 1999 ----------------------------------------------------- Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------------------------------------------- Net income $ 27,711 Basic net income per share: Income available to common shareholders 27,711 12,146,000 $ 2.28 Effect of dilutive securities: Stock options - 648,000 - ------------------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 27,711 12,794,000 $ 2.17 ================================================
For the year ended December 31, 1998 ---------------------------------------------------- Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------------- Net income $ 20,158 Basic net income per share: Income available to common shareholders 20,158 11,927,000 $ 1.69 Effect of dilutive securities: Stock options - 756,000 - ------------------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 20,158 12,683,000 $ 1.59 =================================================
For the year ended December 31, 1997 ---------------------------------------------------- Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------------- Net income $ 14,485 Basic net income per share: Income available to common shareholders 14,485 11,243,000 $ 1.29 Effect of dilutive securities: Stock options - 696,000 - -------------------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 14,485 11,939,000 $ 1.21 ==================================================
A-36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Segment Information In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131".) SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information. NOTE 2-MERGERS Completed Mergers On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares"), the former holding company of Mt. Diablo National Bank ("MDNB"), merged with and into Greater Bay Company. Upon consummation of the merger, the outstanding shares of MD Bancshares were converted into an aggregate of 1,395,499 shares of Greater Bay's stock. The stock was issued to MD Bancshares' shareholders in a tax-free exchange. The transaction will be accounted for as a pooling-of-interests. The financial information presented herein has not been restated to reflect the merger with MD Bancshares on a pooling-of-interests basis. On October 15, 1999, Bay Commercial Services ("BCS"), the parent of Bay Bank of Commerce, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of BCS were converted into an aggregate of 907,240 shares of Greater Bay's stock. The stock was issued to former BCS shareholders, in a tax-free exchange accounted for as a pooling-of-interests. On May 21, 1999, Bay Area Bancshares ("BA Bancshares"), the former holding company of Bay Area Bank, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of BAB were converted into an aggregate of 1,399,321 shares of Greater Bay's stock. The stock was issued to former BA Bancshares shareholders, in a tax-free exchange accounted for as a pooling-of- interests. On August 31, 1998, Pacific Business Funding Corporation ("PBFC"), an asset-based specialty finance company merged with and into the Company. Upon consummation of the merger, the outstanding shares of PBFC were converted into an aggregate of 298,000 shares of the Company's stock. The stock was issued to former PBFC shareholders, in a tax-free exchange accounted for as a pooling-of- interests. On May 8, 1998, Pacific Rim Bancorporation ("PRB"), the former holding company of Golden Gate, merged with and into a subsidary of Greater Bay. Upon consummation of the merger, the outstanding shares of PRB were converted into an aggregate of 950,748 shares of Greater Bay's stock. The stock was issued to former PRB's sole shareholder in a tax-free exchange accounted for as a pooling- of-interests. On December 23, 1997, PBC merged with a subsidary of Greater Bay. Upon consummation of the merger, the outstanding shares of PBC were converted into an aggregate of 1,328,000 shares (as adjusted to reflect the 2-for-1 stock split) of Greater Bay's stock. The stock was issued to former PBC shareholders, in a tax-free exchange accounted for as a pooling-of-interests. A-37 Pending Mergers (unaudited) On December 14, 1999, Greater Bay and Coast Bancorp, the holding company of Coast Commercial Bank ("CCB"), a California state chartered bank, signed a definitive agreement for a merger between the two companies. The agreement provides for Coast Bancorp shareholders to receive approximately 3,105,000 shares of Greater Bay 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. The transaction is expected to be completed in the second quarter of 2000 subject to regulatory and shareholder approvals. As of and for the year ended December 31, 1999, Coast Bancorp had $17.2 million in net interest income, $4.4 million in net income, $370.0 million in assets, $300.6 million in deposits and $33.0 million in shareholders' equity. On January 26, 2000, Greater Bay, Bank of Santa Clara ("BSC") and GBB Merger Corp. signed a definitive agreement for a merger between BSC and GBB Merger Corp., as a result of which BSC will become a wholly owned subsidiary of Greater Bay. The agreement provides for BSC shareholders to receive approximately 2,017,000 shares of Greater Bay stock subject to certain adjustments based on movements in Greater Bay's stock price in a tax-free exchange to be accounted for as a pooling-of-interests. The transaction is expected to be completed in the second quarter of 2000 subject to regulatory and shareholder approvals. As of and for the year ended December 31, 1999, BSC had $20.0 million in net interest income, $6.9 million in net income, $326.9 million in assets, $293.7 million in deposits and $31.4 million in shareholders' equity. A-38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The following table sets forth the separate results of operations for Greater Bay, BA Bancshares, BCS, PBFC, PRB and MD Bancshares for the periods indicated:
Year ended December 31, Net Interest Income Net Income - ------------- ------------------- ---------- (Dollars in thousands) 1999 ----- Greater Bay $ 103,732 $ 27,711 MD Bancshares 10,009 2,827 --------- -------- Combined $ 113,741 $ 30,538 ========= ======== 1998 ---- Greater Bay $ 65,448 $ 16,578 BA Bancshares 8,170 2,365 Bay Commercial Services 6,107 1,215 --------- -------- Subtotal 79,725 20,158 MD Bancshares 7,363 1,396 --------- -------- Combined $ 87,088 $ 21,554 ========= ======== 1997 ---- Greater Bay $ 47,776 $ 10,013 PRB 4,750 996 PBFC 1,942 610 BA Bancshares 6,781 1,805 Bay Commercial Services 5,389 1,062 --------- -------- Subtotal 66,638 14,486 MD Bancshares 4,295 714 --------- -------- Combined $ 70,933 $ 15,200 ========= ========
Assuming the acquisitions of MD Bancshares, Coast Bancorp and BSC had been completed at December 31, 1999, Greater Bay would have had, on a pooled basis, 1999 proforma net interest income of $150.9 million and net income on a pooled basis of $41.8 million. In all mergers, certain reclassifications were made to conform to the Company's financial presentation. The results of operations previously reported by the separate enterprises for the periods before the merger was consummated and that are included in the current combined amounts presented in the accompanying consolidated financial statements are summarized below. A-39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The following table sets forth the composition of the operations of the Company and BCS, BA Bancshares, PBFC, PBC, PRB and MD Bancshares for the periods indicated.
MD Bancshares BCS BA Bancshares PBFC Twelve months ended Nine months ended Three months ended Six months ended (Dollars in thousands) December 31, 1999 September 30, 1999 March 31, 1999 June 30, 1998 - -------------------------------------------------------------------------------------------------------------------------------- Net Interest Income: Greater Bay Bancorp $ 103,732 $ 68,498 $ 18,360 $ 30,077 Acquired Entity 10,009 2,007 2,180 1,154 ---------- --------- -------- -------- Combined $ 113,741 $ 70,505 $ 20,540 $ 31,231 ---------- --------- -------- -------- Net Income: Greater Bay Bancorp $ 27,711 $ 17,033 $ 5,058 $ 6,628 Acquired Entity 2,827 486 644 344 ---------- --------- -------- -------- Combined $ 30,538 $ 17,519 $ 5,702 $ 6,972 ---------- --------- -------- --------
PRB PBC Three months ended Nine months ended March 31, 1998 September 30, 1997 -------------------------------------------------------- Net Interest Income: Greater Bay Bancorp $ 13,366 $ 27,922 Acquired Entity 1,285 6,851 -------- -------- Combined $ 14,651 $ 34,773 -------- -------- Net Income: Greater Bay Bancorp $ 3,646 $ 6,097 Acquired Entity 60 2,573 Combined -------- ------- $ 3,706 $ 8,670 -------- -------
There were no significant transactions between the Company and any of the acquired entities prior to the mergers. All intercompany transactions have been eliminated. A-40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 3-INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities is summarized below:
Gross Gross As of December 31, 1999 Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 6,151 $ - $ (65) $ 6,086 U.S. agency notes 16,784 - (641) 16,143 Mortgage-backed securities 168,733 - (4,946) 163,787 Tax-exempt securities 33,428 53 (2,186) 31,295 Corporate securities 101,469 - (10,940) 90,529 ------------------------------------------------------ Total securities available for sale 326,565 53 (18,778) 307,840 ------------------------------------------------------ HELD TO MATURITY SECURITIES: U.S. Treasury obligations 500 - - 500 U.S. agency notes 29,482 - (667) 28,815 Mortgage-backed securities 59,524 28 (2,018) 57,534 Tax-exempt securities 52,219 123 (2,710) 49,632 ------------------------------------------------------ Total securities held to maturity 141,725 151 (5,395) 136,481 ------------------------------------------------------ Other securities 12,397 8,143 - 20,540 ------------------------------------------------------ Total investment securities $ 480,687 $ 8,347 $ (24,173) $ 464,861 ======================================================
Gross Gross As of December 31, 1998 Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 4,408 $ 26 $ - $ 4,434 U.S. agency notes 31,125 23 (8) 31,140 Mortgage-backed securities 164,578 1,081 (81) 165,578 Tax-exempt securities 32,952 563 - 33,515 Corporate securities 55,168 60 (604) 54,624 ------------------------------------------------------- Total securities available for sale 288,231 1,753 (693) 289,291 ------------------------------------------------------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations 1,764 2 (2) 1,764 U.S. agency notes 28,495 22 (58) 28,459 Mortgage-backed securities 37,967 174 (207) 37,934 Tax-exempt securities 33,882 1,004 (15) 34,871 ------------------------------------------------------- Total securities held to maturity 102,108 1,202 (282) 103,028 ------------------------------------------------------- Other securities 6,013 - - 6,013 ------------------------------------------------------- Total investment securities $ 396,352 $ 2,955 $ (975) $ 398,332 =======================================================
A-41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The following table shows amortized cost and estimated fair value of the Company's investment securities by year of maturity as of December 31, 1999.
2001 2005 Through Through 2010 and (Dollars in thousands) (1) 2000 2004 2009 Thereafter Total - ----------------------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 100 $ 6,051 $ - $ - $ 6,151 U.S. agency notes (2) - 7,002 9,783 - 16,785 Mortgage-backed securities (3) 1,023 6,882 5,734 155,094 168,734 Tax-exempt securities 211 3,197 2,646 27,374 33,427 Corporate securities 996 - - 100,474 101,470 --------------------------------------------------------------------- Total securities available for sale 2,330 23,132 18,163 282,942 326,567 --------------------------------------------------------------------- Fair value $ 2,303 $ 22,827 $ 17,512 $ 265,197 $ 307,839 --------------------------------------------------------------------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations 500 - - - 500 U.S. agency notes (2) 2,000 23,993 3,490 - 29,483 Mortgage-backed securities (3) 75 2,082 9,082 48,285 59,524 Tax-exempt securities 996 3,130 11,670 36,422 52,218 --------------------------------------------------------------------- Total securities held to maturity 3,571 29,205 24,242 84,706 141,725 --------------------------------------------------------------------- Fair value 3,564 28,616 23,661 80,640 136,481 --------------------------------------------------------------------- COMBINED INVESTMENT SECURITIES PORTFOLIO: Total investment securities $ 5,901 $ 52,338 $ 42,405 $ 367,648 $ 468,292 --------------------------------------------------------------------- Total fair value $ 5,867 $ 51,443 $ 41,173 $ 345,837 $ 444,320 --------------------------------------------------------------------- Weighted average yield-total portfolio 5.78% 5.99% 6.78% 7.35% 7.12%
(1) Other securities are comprised of equity investments and have no stated maturity and therefore are excluded from this table. (2) Certain notes issued by U.S. Agencies may be called, without penalty, at the discretion of the issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates. (3) Mortgage-backed securities are shown at contractual maturity; however, the average life of these mortgage-backed securities may differ due to principal prepayments. A-42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Investment securities with a carrying value of $222.9 million and $127.8 million were pledged to secure deposits, borrowings and for other purposes as required by law or contract at December 31, 1999 and 1998, respectively. Other securities includes unsold shares received through the exercise of warrant received from clients, equity securities received in settlement of loans and, investments in the FRB and the FHLB are required in order to maintain membership and support activity levels. Proceeds and realized losses and gains on sales of investment securities for the years ended December 31, 1999, 1998 and 1997 are presented below:
(Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Proceeds from sale of available for sale $ 25,351 $ 195,863 $ 15,595 securities (1) Available for sale securities-gains (losses)(2) $ (19) $ 374 (8)
(1) Proceeds from the sale of available for sale securities excludes $15.3 million related to the sale of equity securities classified as available for sale which were acquired through the execution of a warrant received from clients. (2) Warrant income includes additional gains of $21.2 million related to equity securities classified as available for sale which were acquired through the execution of warrants received from clients. NOTE 4--LOANS AND ALLOWANCE FOR LOAN LOSSES The following summarizes the activity in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997:
(Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Balance, January 1 $ 24,359 $ 19,032 $ 12,600 Provision for loan losses (1) 14,994 6,552 8,429 Loan charge-offs (2,619) (1,670) (2,105) Recoveries 1,301 445 108 ---------------------------------------------- Balance, December 31 $ 38,035 $ 24,359 $ 19,032 ==============================================
(1) Includes $2.7 million and $183,000, and $1.4 million of charges in 1999, 1998 and 1997, respectively, to conform accounting practices for the Banks' reserve methodologies and is included in merger and related nonrecurring costs in the consolidated statements of operations A-43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The following table sets forth nonperforming loans as of December 31, 1999, 1998 and 1997. Nonperforming loans are defined as loans which are on nonaccrual status, loans which have been restructured, and loans which are 90 days past due but are still accruing interest. Interest income foregone on nonperforming loans totaled $234,000, $123,000, and $571,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Interest income recognized on the nonperforming loans approximated $291,000, $80,000, and $206,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
(Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Nonaccrual loans $ 4,333 $ 2,033 $ 3,784 Accruing loans past due 90 days or more 10 - 158 Restructured loans 807 796 1,533 ---------------------------------------------- Total nonperforming loans $ 5,150 $ 2,829 $ 5,475 ==============================================
At December 31, 1999 and 1998, the recorded investment in loans, for which impairment has been recognized in accordance with SFAS No. 114 and No. 118, was approximately $1.4 million and $2.5 million, respectively, with corresponding valuation allowances of $365,000 and $802,000 respectively. For the years ended December 31, 1999 and 1998, the average recorded investment in impaired loans was approximately $1.0 million and $ 4.2 million, respectively. The Company did not recognize interest income on impaired loans during the twelve months ended December 31, 1999, 1998 and 1997. The Company had $807,000 and $796,000 of restructured loans as of December 31, 1999 and 1998, respectively. There were no principal reduction concessions allowed on restructured loans during 1999 and 1998. Interest income from restructured loans totaled $45,000, $16,000 and $82,000 for the years ended December 31, 1999, 1998 and 1997. Foregone interest income, which totaled $0, $11,000 and $10,000 for the years ended December 31, 1999, 1998 and 1997 would have been recorded as interest income if the loans had accrued interest in accordance with their original terms prior to the restructurings. A-44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 5--OTHER REAL ESTATE OWNED At December 31, 1999 and 1998, other real estate owned ("OREO") consisted of properties acquired through foreclosure with a carrying value of $271,000 and $966,000 million, respectively. These balances are included in interest receivable and other assets in the accompanying consolidated balance sheets. There was no allowance for estimated losses. The following summarizes OREO operations, which are included in operating expenses, for the years ended December 31, 1999, 1998 and 1997.
(Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------- Real estate operations, net $ 50 $ 77 $ 247 Gain on sale of other real estate owned (37) (1) (124) Provision for estimated losses - - 54 -------------------------------------- Net loss from other real estate operations $ 13 $ 76 $ 177 ======================================
NOTE 6--PROPERTY, PREMISES AND EQUIPMENT Property, premises and equipment at December 31, 1999 and 1998 are composed of the following:
(Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------ Land $ 769 $ 771 Buildings and premises 2,308 2,728 Leasehold improvements 10,594 6,247 Furniture and equipment 17,463 14,620 Automobiles 306 339 --------------------------- Total 31,440 24,705 Accumulated depreciation and amortization (12,851) (11,376) --------------------------- Premises and equipment, net $ 18,589 $ 13,329 ===========================
Depreciation and amortization amounted to $3.8 million, $2.2 million and $2.2 million for the years ended December 31, 1999, 1998 and 1997, respectively, and have been included in occupancy and equipment expense in the accompanying consolidated statements of operations. A-45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 7--DEPOSITS Deposits as of December 31, 1999 and 1998 are as follows:
(Dollars in thousands) 1999 1998 - ---------------------------------------------------------------------------------- Demand, noninterest-bearing $ 459,523 $ 335,910 MMDA, NOW and Savings 1,358,780 960,152 Time certificates, $100,000 and over 407,915 211,923 Other time certificates 74,670 94,357 ----------------------------------- Total deposits $ 2,300,888 $ 1,602,342 ===================================
The following table sets forth the maturity distribution of time certificates of deposit at December 31, 1999.
December 31, 1999 --------------------------------------------------------------------------------------------- Seven to One to More Three months Four to six twelve three than (Dollars in thousands) or less months months years three years Total - ------------------------------------------------------------------------------------------------------------------------------------ Time deposits, $100,000 and over $ 321,735 $ 52,084 $ 29,573 $ 4,273 $ 250 $ 407,915 Other time deposits 38,276 17,612 13,016 5,584 182 74,670 --------------------------------------------------------------------------------------------- Total $ 360,011 $ 69,696 $ 42,589 $ 9,857 $ 432 $ 482,585 =============================================================================================
At December 31, 1999 and 1998, the Company held $111.1 million and $ 89.6 million, respectively from a single depositor on which the Company earned a spread of 3.1% and 2.25%, respectively. Due to the uncertainty of the time the deposit will remain outstanding, management has invested a significant portion in agency securities with maturities of less than 90 days. NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES GBB Capital I and GBB Capital II (the "Trusts") are Delaware business trusts wholly-owned by Greater Bay and were formed for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures ("TPS"). The TPS are individually described below. Interest on the TPS are payable quarterly and is deferrable, at the option of the Company, for up to five years. Following the issuance of each TPS, the Trusts used the proceeds from the TPS offerings to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (the "Debentures") of Greater Bay. The Debentures bear the same terms and interest rates as the related TPS. The Debentures are the sole assets of the Trusts and are eliminated, along with the related income statement effects, in the consolidated financial statements. Greater Bay has fully and unconditionally guaranteed all of the obligations of the Trusts. Under applicable regulatory guidelines, a portion of the TPS will qualify as Tier I capital, and the remaining portion will qualify as Tier II capital. A-46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 On March 30, 1997, GBB Capital I completed a public offering of 800,000 shares of 9.75% Cumulative Trust Preferred Securities ("TPS I") in an aggregate amount of $20 million. The TPS I accrue interest at an annual rate of 9.75% on the $20 million liquidation amount of $25 per share of TPS I. The TPS I are mandatorily redeemable, in whole or in part, upon repayment of the Debentures at their stated maturity of April 1, 2027 or their earlier redemption. The Debentures are redeemable prior to maturity at the option of the Company, on or after April 1, 2002, in whole at any time or in part from time to time. On August 12, 1998, GBB Capital II completed an offering of 30,000 shares of Floating Rate Trust Preferred Securities, Series A ("the Series A Securities") in an aggregate amount of $30 million. The Series A Securities issued in the offering were sold in a private transaction pursuant to an applicable exemption from registration under the Securities Act. In November 1998, the Company, through GBB Capital II, completed an offer to exchange the Series A Securities for a like amount of its registered Floating Rate Trust Preferred Securities, Series B ("TPS II"). The exchange offer was conducted in accordance with the terms of the initial issuance of the Series A Securities. The TPS II accrue interest at a variable rate of interest, initially at 7.1875%, on the liquidation amount of $1,000 per share of TPS II. The interest rate resets quarterly and is equal to 3-month LIBOR plus 150 basis points. As part of this transaction, the Company concurrently entered into an interest rate swap to fix the cost of the offering at 7.55% for 10 years (see note 10). The TPS II are mandatorily redeemable, in whole or in part, upon repayment of the Debentures at their stated maturity of September 15, 2028 or their earlier redemption. The Debentures are redeemable prior to maturity at the option of the Company, on or after September 15, 2008, in whole at any time or in part from time to time. The total amount of TPS outstanding at December 31, 1999 and 1998 was $50 million and the dividends paid on TPS was $4.3 million, $2.8 million and $1.5 million in 1999, 1998 and 1997, respectively. NOTE 9--BORROWINGS Other borrowings are detailed as follows:
(Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------ Other borrowings: Short term borrowings: Securities sold under agreements to repurchase $ 40,100 $ 7,135 Other short term notes payable - 1,344 Advances under credit lines 7,000 500 --------------------- Total short term borrowings 47,100 8,979 --------------------- Long term borrowings: Securities sold under agreements to repurchase 10,000 50,000 FHLB advances 12,000 22,000 Promissory notes - 2,450 --------------------- Total other long term borrowings 22,000 74,450 --------------------- Total other borrowings $ 69,100 $83,429 ===================== Subordinated notes $ - $ 3,000 --------------------- Total subordinated debt $ - $ 3,000 =====================
A-47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 During the years ended December 31, 1999 and 1998, the average balance of securities sold under short term agreements to repurchase was $14,772,192 and $10,129,332, respectively, and the average interest rates during those periods were 5.64% and 5.17%, respectively. Securities sold under short term agreements to repurchase generally mature within 90 days of dates of purchase. During the years ended December 31, 1999 and 1998, the average balance of federal funds purchased was $186,302 and $428,554, respectively, and the average interest rates during those periods were 5.29% and 5.35%, respectively. There were no such balances outstanding at December 31, 1999 or 1998. The Company has sold securities under long term agreements to repurchase which mature in the year 2003 and have an average interest rate of 5.32%. The counterparties to these agreements have put options which give them the right to demand early repayment. As of December 31, 1999, $10.0 million of these borrowings are subject to early repayment beginning in 2000. The FHLB advances will mature in the year 2003 and have an average interest rate of 5.47%. The advances are collateralized by securities pledged to the FHLB. Under the terms of the advances, the FHLB has a put option which gives it the right to demand early repayment beginning in 1999. The short term notes payable, which bore an interest rate of 13.76% and provided for maturity on April 15, 2000, were issued to PBFC's officers along with other accredited investors within the definition of Rule 501 under the Securities Act of 1933, as amended. The Company redeemed these notes in January 1999. On March 15, 1999 the Company redeemed the $3.0 million in subordinated debt issued in 1995. The Company paid a premium of $150,000 ($88,000 net of tax) on the pay off of the debt. The premium was recorded, net of taxes, as an extraordinary item in March 1999. NOTE 10 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company currently uses a single interest-rate swap to convert its floating-rate debt (the TPS II) to fixed rates. This swap was entered into concurrently with the issuance of the debt being hedged. This swap is accounted for as a cash flow hedge under SFAS No. 133. This swap possesses a term equal to the non-callable term of the debt, with a fixed pay rate and a receive rate indexed to rates paid on the debt and a notional amount equal to the amount of the debt being hedged. As the specific terms and notional amount of the swap exactly match those of the debt being hedged the Company meets the "no ineffectiveness" criteria of SFAS No. 133. As such the swap is assumed to be 100% effective and all changes in the fair value of the hedge are recorded in other comprehensive income with no impact on the income statement for any ineffective portion. As of December 31, 1999, the unrealized gain on the cash flow hedge was $1,528,000, net of income taxes, which was included in the balance of accumulated other comprehensive income. The floating rate TPS II combined with the cash flow hedge created a synthetic fixed rate debt instrument. The unrealized gain on the cash flow hedge approximated the unrealized gain the Company would have incurred if it had issued a fixed rate debt instrument. Under current accounting practices, as required by SFAS No. 133, the Company was required to record the unrealized gain on the synthetic fixed rate debt instrument, but it would not have been required to record an unrealized gain if it had issued fixed rate debt. The notional amount of the swap is $30.0 million with a term of 10 years expiring on September 15, 2008. The Company intends to use the swap as a hedge of the related debt for 10 years. The periodic settlement date of the swap results in the reclassifying as earnings the gains or losses that are reported in accumulated comprehensive income. For the year ended December 31, 1997, the Company did not have any derivative instruments. A-48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company's credit committee. NOTE 11--INCOME TAXES Income tax expense was comprised of the following for the years ended December 31, 1999, 1998 and 1997:
(Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------- Current: Federal $ 13,819 $ 9,627 $ 9,628 State 4,370 3,400 2,950 --------------------------------------- Total current 18,189 13,027 12,578 --------------------------------------- Deferred: Federal (4,993) (2,601) (3,333) State (1,335) (707) (925) --------------------------------------- Total deferred (6,328) (3,308) (4,258) --------------------------------------- Total expense $ 11,861 $ 9,719 $ 8,320 =======================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 1999, 1998 and 1997 are as follows:
Years Ended December 31, ---------------------------- (Dollars in thousands) 1999 1998 - --------------------------------------------------------------------------------- Allowance for loan losses $ 12,192 $ 8,037 State income taxes 3,755 2,387 Deferred compensation 2,218 1,762 Unrealized losses on securities 7,136 70 Accumulated depreciation 191 (33) Net operating losses 14 159 Purchase allocation adjustments 8 22 Other (499) (326) ------------------------------ Net deferred tax asset $ 25,015 $ 12,078 ==============================
Management believes that the Company will fully realize its total deferred income tax assets as of December 31, 1999 based upon the Company's recoverable taxes from prior carryback years, and its current level of operating income. At December 31, 1999, the Company had a federal tax net operating loss carryforward of approximately $40,000 expiring in the beginning of the year 2010. A-49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Under provisions of the United States income tax laws these loss carryovers are subject to limitation due to the acquisition of Pacific Rim Bancorporation in 1998. Management does not believe that these limitations will prevent the realization of the benefit of the loss carryovers during the carryover periods. A reconciliation from the statutory income tax rate to the consolidated effective income tax rate follows, for the years ended December 31, 1999, 1998 and 1997:
Years Ended December 31, --------------------------------------- (Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------- Statutory federal tax rate 35.0% 35.0% 35.0% California franchise tax expense, net of federal income tax benefit 4.9% 5.8% 6.0% --------------------------------------- 39.9% 40.8% 41.0% Tax exempt income -2.5% -2.4% -2.0% Contribution of appreciated securities -6.9% -1.6% 0.0% Nondeductible merger costs 0.3% 1.2% 2.2% Other, net -0.9% -5.5% -4.7% --------------------------------------- Effective income tax rate 29.9% 32.5% 36.5% =======================================
NOTE 12--OTHER INCOME AND OPERATING EXPENSES Other income in 1999, 1998 and 1997 included warrant income of $14.5 million, $945,000 and $1.2 million net of related employee incentives of $7.3 million, $396,000 and $500,000, respectively. The Company occasionally receives warrants to acquire common stock from companies that are in the start-up or development phase. The timing and amount of income derived from the exercise and sale of client warrants typically depend upon factors beyond the control of the Company, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. Occupancy costs for the years ended December 31, 1999, 1998 and 1997 were $6.7 million, $5.5 million and $5.1 million, respectively. Merger and other related nonrecurring costs for the years ended December 31, 1999, 1998 and 1997 were comprised of the following:
(Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Financial advisory and professional fees $ 1,627 $ 1,101 $ 1,083 Charges to conform accounting practices 2,745 183 1,350 Other costs 5,959 1,377 900 --------------------------------------------- Total $ 10,331 $ 2,661 $ 3,333 =============================================
Other costs include severance and other compensation expenses, charges for the write-off of assets retired as a result of the merger, and other expenses including printing costs and filing fees. A-50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Other expenses for the years ended December 31, 1999, 1998 and 1997 were comprised of the following:
(Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Telephone, postage and supplies $ 2,515 $ 2,192 $ 1,785 Legal and other professional fees 2,188 2,447 2,523 Marketing and promotion 1,771 1,439 1,507 Client services 1,224 656 545 Data processing 1,137 665 685 Directors fees 792 888 969 Insurance 491 402 375 FDIC insurance and regulatory assessments 457 400 361 Other real estate owned 13 76 177 Other 3,999 4,906 3,912 --------------------------------------------- $ 14,587 $ 14,071 $ 12,839 =============================================
To support the Greater Bay Bancorp Foundation (the "Foundation"), the Company contributed appreciated securities, which had an unrealized gain of $7.8 million in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4 million in compensation and other expenses in connection with these appreciated securities. The Company recorded $12.2 million in 1999 and $1.3 million in 1998 of expense for the contribution to the Foundation, which is included in operating expenses. In July 1995, the Company settled a lawsuit of $1.1 million, net of tax. The Company recovered those losses through insurance coverage for this settlement in 1997. However, due to the uncertainty associated with the recovery, the Company reflected the settlement expense as a charge to 1995 earnings, and the associated recovery in 1997 as a recovery to earnings. NOTE 13--EMPLOYEE BENEFIT PLANS Stock Option Plan On November 19, 1997, the Company's shareholders approved an amendment of the Greater Bay Bancorp 1996 Stock Option Plan (the "Bancorp Plan"), to increase by 912,652 the number of shares of Greater Bay stock issuable under the Bancorp Plan. This was done to accommodate the increased number of eligible employees as a result of the merger with PBC. Under the terms of the respective mergers, all stock option plans of BAB and BBC were terminated at the time of merger and all outstanding options from these plans were assumed by the Bancorp Plan. Outstanding options from the BAB plan of 29,834 shares (converted at a ratio of 1.38682) and outstanding options from the BBC Plan of 108,318 shares (converted at a ratio of 0.6833) were assumed by the Bancorp Plan. Options issued under the Bancorp Plan may be granted to employees and nonemployee directors and may be either incentive or nonqualified stock options as defined under current tax laws. The exercise price of each option must equal the market price of the Company's stock on the date of grant. The term of an option may not exceed 10 years and generally vests over a five year period. A-51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 At December 31, 1999 the total authorized shares issuable under the Bancorp Plan was approximately 2,279,000 shares and the number of shares available for future grants was approximately 110,000 shares. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the provisions of SFAS No. 123, the Company is encouraged, but not required, to measure compensation costs related to its employee stock compensation plans under the fair value method. If the Company elects not to recognize compensation expense under this method, it is required to disclose the pro forma net income and net income per share effects based on the SFAS No. 123 fair value methodology. The Company implemented the requirements of SFAS No. 123 in 1997 and has elected to adopt the disclosure provisions of this statement. At December 31, 1999, the Company had one stock option plan, which is described above. The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting the Bancorp Plan. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation for the Company's stock option plan been determined consistent with SFAS No. 123, the Company's net income per share would have been reduced to the pro forma amounts indicated below:
December 31, ----------------------------------------- (Dollars in thousands, except per share amounts) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------- Net Income: As reported $27,711 $20,158 $14,485 Pro forma $25,249 $18,620 $14,012 Basic net income per share As reported $ 2.28 $ 1.69 $ 1.29 Pro forma 2.08 $ 1.56 $ 1.25 Diluted net income per share As reported $ 2.17 $ 1.59 $ 1.21 Pro forma $ 1.97 $ 1.47 $ 1.17
A-52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1999, 1998 and 1997, respectively; dividend yield of 1.5%, 1.75% and 1.8%; expected volatility of 29.69%, 39.84% and 22.9%; risk free rates of 6.29%, 4.54% and 6.3%. The weighted average expected life is 5 years. No adjustments have been made for forfeitures. The actual value, if any, that the option holder will realize from these options will depend solely on the increase in the stock price over the option price when the options are exercised. A summary of the Company's stock option plan as of December 31, 1999, 1998, and 1997 and changes during the years ended on those dates is presented below:
1999 1998 1997 ----------------------------------------------------------------------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 1,830 $ 18.54 1,500 $ 11.53 1,304 $ 7.20 Granted 669 37.70 612 30.96 405 21.14 Exercised (259) 8.87 (250) 7.15 (180) 4.97 Forfeited (71) 25.12 (32) 16.38 (29) 7.76 ----------------------------------------------------------------------------------------- Outstanding at end of year 2,169 25.39 1,830 18.54 1,500 11.53 ----------------------------------------------------------------------------------------- Options exercisable at year-end 810 13.71 745 9.14 770 7.14 ----------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $ 12.22 $ 12.19 $ 7.23 -----------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1999 (as adjusted for the 2-for-1 stock split).
Options Outstanding Options Exercisable ------------------------------------------------------------- ---------------------------------------- Number Number Exercise Outstanding Weighted Average Weighted Average Exercisable Weighted Average Price Range (000's) Exercise Price Remaining Life (years) (000's) Exercise Price - --------------------------------------------------------------------------------- ---------------------------------------- $3.06 - $5.25 118 $ 3.93 3.11 107 $ 4.31 $5.30 - $9.38 333 7.28 4.97 309 7.16 $10.88 - $17.31 264 13.07 7.12 188 13.42 $21.13 - $29.50 359 25.30 8.17 115 24.88 $29.56 - $35.03 504 33.49 8.96 90 33.58 $35.88 - $40.81 592 38.50 9.96 1 39.50
401(k) Savings Plan The Company has a 401(k) tax deferred savings plan under which eligible employees may elect to defer a portion of their salary (up to 15%) as a contribution to the plan. The Company matches the employees' contributions at a rate set by the Board of Directors (currently 62.5% of the first 8% of deferral of an individual's total compensation). The matching contribution vests ratably over the first four years of employment. For the years ended December 31, 1999, 1998 and 1997, the Company contributed $1,056,000, $812,000 and $672,000, respectively to the 401(k) plan. A-53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Employee Stock Purchase Plan The Company has established an Employee Stock Purchase Plan, as amended, under section 423(b) of the Internal Revenue Code which allows eligible employees to set aside up to 15% of their compensation toward the purchase of the Company's stock for an aggregate total of 267,868 shares. Under the plan the purchase price is 85% of the lower of the fair value at the beginning or end of each three month offering period. During 1999, employees purchased 41,651 shares of common stock for an aggregate purchase price of $1,031,000 compared to the purchase of 29,670 shares of common stock for an aggregate purchase price of $656,000 in 1998 and 30,320 shares of common stock for an aggregate purchase price of $347,000 in 1997. There were 62,995 shares remaining in the plan available for purchase by employees at December 31, 1999. All share amounts have been restated to reflect the 2-for-1 stock split declared to shareholders of record as of April 30, 1998. Supplemental Employee Compensation Benefits Agreements The Company has entered into supplemental employee compensation benefits agreements with certain executive and senior officers. Under these agreements, the Company is generally obligated to provide for each such employee or their beneficiaries, during their life for a period of up to 15 to 20 years after the employee's death, disability or retirement, benefits as defined in each specific agreement. The agreement also provides for a death benefit for the employee. The estimated present value of future benefits to be paid is being accrued over the vesting period of the participants. The related accumulated accrued liability of at December 31, 1999 and 1998 is approximately $3.0 million and $2.2 million, respectively. The actuarial assumptions used for determining the present value of the projected benefit obligation include a 7% discount rate. Expenses accrued for this plan for the years December 31, 1999, 1998 and 1997 totaled $800,000, $540,000 and $503,000, respectively. Depending on the agreement, the Company and the employees are beneficiaries of life insurance policies that have been purchased as a method of financing the benefits under the agreements. At December 31, 1999 and 1998, the Company's cash surrender value of these policies was approximately $43.8 million and $32.0 million, respectively and is included in other assets. The income recognized on these policies was $1.4 million, $870,000 and $325,000 in 1999, 1998 and 1997, respectively, and is included in other income. Deferred Compensation Plan Effective November 19, 1997, the Company adopted the Greater Bay Bancorp 1997 Elective Deferral Compensation Plan (the "Deferred Plan") that allows eligible officers and directors of the Company to defer a portion of their bonuses, director fees and other compensation. The deferred compensation will earn interest calculated annually based on a short-term interest reference rate. All participants are fully vested at all times in their contributions to the Deferred Plan. At December 31, 1999 and 1998, $1.9 million and $834,000, respectively, of deferred compensation under this plan is included in other liabilities in the accompanying consolidated balance sheets. Additionally, under deferred compensation agreements that were established at PBC prior to its merger with the Company, there was approximately $814,000 and $1.1 million of deferred compensation which is included in other liabilities at December 31, 1999 and 1998, respectively. Change of Control In the event of a change in control, the supplemental employee compensation benefits agreements with certain executive and senior officers may require the Company to make certain payments under those agreements. The company also has plans in place which would require certain payments be made to any employee whose employment is terminated pursuant to a change in control. These potential liabilities are currently not recognized in the accompanying consolidated financial statements. A-54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 14--RELATED PARTY TRANSACTIONS The Company has, and expects to have in the future, banking transactions in the ordinary course of business with directors, executive officers and their affiliates. These transactions are entered into under terms and conditions equal to those entered into in arms length transactions and are made subject to approval by the Directors' Loan Committee and the Board of Directors of the Bank extending the credit. An analysis of total loans to related parties for the years ended December 31, 1999 and 1998 is shown below:
(Dollars in thousands) 1999 1998 - ------------------------------------------------------------------- Balance, January 1 $ 38,720 $ 17,757 Additions 20,933 34,275 Repayments (39,502) (13,312) ----------------------- Balance, December 31 $ 20,151 $ 38,720 ======================= Undisbursed commitments, at year end $ 8,003 $ 5,799 =======================
NOTE 15--COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under all noncancelable operating leases as of December 31, 1999 are below:
(Dollars in thousands) Years Ended December 31, - ---------------------------------------------------------------------- 2000 $ 3,783 2001 4,286 2002 3,596 2003 1,962 2004 1,690 Thereafter 8,902 --------- Total $ 24,219 =========
A-55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The Company subleases that portion of the available space that is not utilized. Sublease rental income for the years ended December 31, 1999, 1998, and 1997 was $572,000, $607,000, and $882,000, respectively. Gross rental expense for the years ended December 31, 1999, 1998, and 1997 was $4.8 million, $3.7 million, and $3.5 million, respectively. Other Commitments and Contingencies The Company occasionally receives warrants to acquire common stock from borrowers that are in the start-up or development phase as consideration for provided financing. As of December 31, 1999, the Company had a portion of its warrants and common stock of these clients in escrow with an approximate fair value of $2.8 million. These equity securities are being held in escrow for the Company's benefit pending resolution of certain contingencies. Although realization is not assured, Management believes it is more likely than not that this amount will be realized. The amount considered realizable could be reduced if stock prices of the companies fall. In the normal course of business, various commitments and contingent liabilities are outstanding, such as guarantees and commitments to extend credit, that are not reflected in the accompanying consolidated financial statements. Commitments to fund loans were $723.1 million and $563.0 million and letters of credit were $48.2 million and $17.5 million, at December 31, 1999 and 1998, respectively. The Company's exposure to credit loss is limited to amounts funded or drawn; however, at December 31, 1999, no losses are anticipated as a result of these commitments. Loan commitments which have fixed expiration dates and require the payment of a fee are typically contingent upon the borrower meeting certain financial and other covenants. Approximately $174.6 million of these commitments relate to real estate construction and land loans and are expected to fund within the next 12 months. However, the remainder relates primarily to revolving lines of credit or other commercial loans, and many of these commitments are expected to expire without being drawn upon, therefore the total commitments do not necessarily represent future cash requirements. The Banks evaluate each potential borrower and the necessary collateral on an individual basis. Collateral varies, but may include real property, bank deposits, debt or equity securities, or business assets. Stand-by letters of credit are conditional commitments written by the Banks to guarantee the performance of a client to a third party. These guarantees are issued primarily related to purchases of inventory by the Banks' commercial clients, and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to clients, and the Banks accordingly use evaluation and collateral requirements similar to those for loan commitments. In the ordinary course of business there are various assertions, claims and legal proceedings pending against the Company. Management is of the opinion that the ultimate resolution of these proceedings will not have a material adverse effect on the consolidated financial position or results of operations of the Company. NOTE 16 - SHAREHOLDERS' RIGHTS PLAN In 1998 Greater Bay adopted a shareholder rights plan designed to maximize the long-term value of the Company and to protect the Company's shareholders from improper takeover tactics and takeover bids that are not fair to all shareholders. In accordance with the plan, preferred share purchase rights were distributed as a dividend at the rate of one right for each common share held of record as of the close of business on November 28, 1998. The rights, which are not immediately exercisable, entitle the holders to purchase one one-hundredth of a share of Series A Preferred Stock at a price of $145.00 upon the occurrence of certain triggering events. In the event of an acquisition not approved by the Board, each right enables its holder (other than the acquirer) to purchase the Preferred Stock at 50% of the market price. Further, in the event the Company is acquired in an unwanted merger or business combination, each right enables the holder to purchase shares of the acquiring entity at a similar discount. Under certain circumstances, the rights may be exchanged for common shares of the Company. The Board may, in its sole discretion, redeem the rights at any time prior to any of the triggering events. A-56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The rights can be exercised and separate rights certificates distributed only if any of the following events occur: acquisition by a person of 10% or more of the Company's common share; a tender offer for 10% or more of the Company's common shares; or ownership of 10% or more of the Company's common shares by a shareholder whose actions are likely to have a material adverse impact on the Company or shareholder interests. The rights will initially trade automatically with the common shares. The rights are not deemed by the Board of Directors to be presently exercisable. NOTE 17--REGULATORY MATTERS The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum capital amounts and ratios (as defined in the regulations) and are set forth in the table below. At December 31, 1999 and 1998 the Company and the Banks met all capital adequacy requirements to which they are subject. A-57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Under the FDICIA prompt corrective action provisions applicable to banks, the most recent notification from the FDIC or OCC categorized each of the Banks as well capitalized. To be categorized as well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. There are no conditions or events since that notification that management believes have changed the risk- based capital category of any of the Banks. The Company and the Banks' actual 1999 and 1998 capital amounts and ratios are as follows:
To Be Well Capitalized For Capital Under Prompt Corrective As of December 31, 1999 Actual Adequacy Purposes Action Provisions ---------------------- -------------------- ---------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------ -------------------- ---------------------- Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 237,035 10.74% $ 176,591 8.00% N/A Bay Area Bank 15,104 10.50 11,511 8.00 $ 14,398 10.00% Bay Bank of Commerce 12,004 10.12 9,484 8.00 11,856 10.00 Cupertino National Bank 97,081 11.03 70,398 8.00 87,997 10.00 Golden Gate Bank 14,645 10.19 11,494 8.00 14,368 10.00 Mid-Peninsula Bank 65,923 10.02 52,656 8.00 65,820 10.00 Peninsula Bank of Commerce 22,458 10.86 16,544 8.00 20,680 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 205,649 9.32% $ 88,296 4.00% N/A Bay Area Bank 13,285 9.23 5,756 4.00 $ 8,634 6.00% Bay Bank of Commerce 10,507 8.86 4,742 4.00 7,113 6.00 Cupertino National Bank 82,337 9.36 35,199 4.00 52,798 6.00 Golden Gate Bank 12,846 8.94 5,747 4.00 8,621 6.00 Mid-Peninsula Bank 57,692 8.77 26,328 4.00 39,492 6.00 Peninsula Bank of Commerce 19,859 9.60 8,272 4.00 12,408 6.00 Tier 1 Capital Leverage (To Average Assets): Greater Bay Bancorp $ 205,649 7.93% $ 103,691 4.00% N/A Bay Area Bank 13,285 7.80 6,815 4.00 $ 8,519 5.00% Bay Bank of Commerce 10,507 7.12 5,900 4.00 7,375 5.00 Cupertino National Bank 82,337 8.05 40,896 4.00 51,120 5.00 Golden Gate Bank 12,846 6.55 7,844 4.00 9,805 5.00 Mid-Peninsula Bank 57,692 7.47 30,883 3.00 38,604 5.00 Peninsula Bank of Commerce 19,859 7.32 10,847 4.00 13,559 5.00
To Be Well Capitalized For Capital Under Prompt Corrective As of December 31, 1998 Actual Adequacy Purposes Action Provisions ---------------------- -------------------- ---------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------ -------------------- ---------------------- Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 187,725 12.74% $ 118,802 8.00% N/A Bay Area Bank 15,800 13.77 9,179 8.00 $ 11,474 10.00% Bay Bank of Commerce 11,817 9.50 9,976 8.00 12,470 10.00 Cupertino National Bank 59,224 10.12 46,822 8.00 58,527 10.00 Golden Gate Bank 10,194 11.01 7,406 8.00 9,257 10.00 Mid-Peninsula Bank 47,111 11.51 32,747 8.00 40,963 10.00 Peninsula Bank of Commerce 18,256 12.37 11,809 8.00 14,761 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 153,717 10.03% $ 59,401 4.00% N/A Bay Area Bank 14,365 12.52 4,590 4.00 $ 6,885 6.00% Bay Bank of Commerce 10,837 8.70 4,988 4.00 7,482 6.00 Cupertino National Bank 48,845 8.35 23,411 4.00 35,116 6.00 Golden Gate Bank 9,036 9.76 3,703 4.00 5,554 6.00 Mid-Peninsula Bank 41,990 10.26 16,373 4.00 24,560 6.00 Peninsula Bank of Commerce 16,408 11.12 5,904 4.00 8,857 6.00 Tier 1 Capital Leverage (To Average Assets): Greater Bay Bancorp $ 153,717 7.97% $ 74,254 4.00% N/A Bay Area Bank 14,365 10.34 4,590 4.00 $ 6,948 5.00% Bay Bank of Commerce 10,837 7.90 5,520 4.00 6,901 5.00 Cupertino National Bank 48,845 7.47 26,138 4.00 32,673 5.00 Golden Gate Bank 9,036 9.30 5,243 4.00 6,554 5.00 Mid-Peninsula Bank 41,990 8.54 15,927 3.00 26,544 5.00 Peninsula Bank of Commerce 16,408 6.65 9,759 4.00 12,198 5.00
A-58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 18--RESTRICTIONS ON SUBSIDIARY TRANSACTIONS Total dividends which may be declared by the Banks without receiving prior approval from regulatory authorities are limited to the lesser of the Banks' retained earnings or the net income of the Banks for the latest three fiscal years, less dividends previously declared during that period. The Banks are subject to certain restrictions under the Federal Reserve Act, including restrictions on the extension of credit to affiliates. In particular, the Banks are prohibited from lending to Greater Bay unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Banks are limited to 10% of the Banks' shareholders' equity, or a maximum of $19.2 million at December 31, 1999. No such advances were made during 1999 or exist as of December 31, 1999. NOTE 19-EARNINGS PER SHARE Per Share Data Net income per share is stated in accordance with SFAS No. 128 "Earnings per Share". Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per share is computed by dividing net income by the weighted average number of common shares plus common equivalent shares outstanding including dilutive stock options. All years presented include the effect of the 2-for-1 stock split effective as of April 30, 1998. The following table provides a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the years ended December 31, 1999, 1998 and 1997.
For the year ended December 31, 1999 ----------------------------------------------- Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount - ------------------------------------------------ ----------------------------------------------- Net income $ 27,711 Basic net income per share: Income available to common shareholders 27,711 12,146,000 $ 2.28 Effect of dilutive securities: Stock options -- 648,000 -- --------------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 27,711 12,794,000 $ 2.17 ============================================= For the year ended December 31, 1998 ----------------------------------------------- Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount - ------------------------------------------------ ----------------------------------------------- Net income $ 20,158 Basic net income per share: Income available to common shareholders 20,158 11,927,000 $ 1.69 Effect of dilutive securities: Stock options -- 756,000 -- --------------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 20,158 12,683,000 $ 1.59 ============================================= For the year ended December 31, 1997 ----------------------------------------------- Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount - ------------------------------------------------ ----------------------------------------------- Net income $ 14,485 Basic net income per share: Income available to common shareholders 14,485 11,243,000 $ 1.29 Effect of dilutive securities: Stock options -- 696,000 -- --------------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 14,485 11,939,000 $ 1.21 =============================================
There were options to purchase 483,000 shares and 51,000 shares that were considered anti-dilutive whereby the options' exercise price was greater than the average market price of the common shares, during the years ended December 31, 1999 and 1998, respectively. There were no options that were considered anti-dilutive during the year ended December 31, 1997. Weighted average shares outstanding and all per share amounts included in the consolidated financial statements and notes thereto are based upon the increased number of shares giving retroactive effect to the 1999 mergers with BCS at a 0.6833 conversion ratio and BA Bancshares at a 1.38682 conversion ratio, the 1998 mergers with PRB and PBFC at a total of 950,748 and 298,000 shares, respectively, and the 1997 merger with PBC at a 0.96550 conversion ratio. NOTE 20--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS The financial statements of Greater Bay Bancorp (parent company only) are presented below: PARENT COMPANY ONLY--BALANCE SHEETS
December 31, (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 1,392 $ 6,354 Investment in subsidiaries 193,255 142,641 Other investments 16,043 17,936 Subordinated debentures issued by subsidiary - 3,000 Other assets 16,925 9,630 --------------------------- Total assets $ 227,615 $ 179,561 =========================== Liabilities and shareholders' equity: Subordinated debt 58,547 54,547 Other liabilities 8,313 6,578 --------------------------- Total liabilities 66,860 61,125 Shareholders' equity: Common stock 92,096 66,711 Accumulated other comprehensive income (4,748) (59) Retained earnings 73,407 51,784 --------------------------- Total shareholders' equity 160,755 118,436 --------------------------- Total liabilities and shareholders' equity $ 227,615 $ 179,561 ===========================
A-59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 PARENT COMPANY ONLY-INCOME STATEMENTS
Years Ended December 31, (Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Income: Interest income $ 489 $ 1,021 $ 400 Cash dividend from subsidiaries - 675 365 Other income - 71 501 --------------------------------- Total 489 1,767 1,266 --------------------------------- Expenses: Interest expense 4,382 3,195 1,458 Salaries 15,684 8,908 5,978 Occupancy and equipment 3,820 2,031 1,218 Merger expenses 3,283 1,877 712 Other expenses 5,494 3,447 1,887 Less: rentals and fees received from Banks (26,201) (15,866) (10,201) --------------------------------- Total 6,462 3,592 1,052 --------------------------------- Income (loss) before taxes and equity in undistributed net income of subsidiaries (5,973) (1,825) 214 Income tax benefit (2,573) (1,616) (249) --------------------------------- Income (loss) before equity in undistributed net income of subsidiaries (3,400) (209) 463 --------------------------------- Equity in undistributed net income of subsidiaries 31,111 20,367 14,022 --------------------------------- Net income $ 27,711 $20,158 $14,485 =================================
A-60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
Years Ended December 31, -------------------------------------------- (Dollars in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------- Cash flows-operating activities Net income $ 27,711 $ 20,158 $ 14,485 Reconciliation of net income to net cash from operations: Equity in undistributed net income of subsidiaries (31,111) (20,367) (14,022) Net change in other assets (9,093) (4,464) (1,944) Net change in other liabilities 4,332 2,140 2,442 -------------------------------------------- Operating cash flow, net (8,161) (2,533) 961 -------------------------------------------- Cash flows-investing activities Purchases of available for sale securities (20,825) (84,130) (8,293) Proceeds from sale and maturities of available for sale securities 20,980 71,939 3,156 Proceeds from sale of OREO - 407 - Dividends from subsidiaries 3,966 3,249 3,617 Capital contribution to the subsidiaries (27,218) (17,500) (13,818) -------------------------------------------- Investing cash flows, net (23,097) (26,035) (15,338) -------------------------------------------- Cash flows-financing activities Net change in other borrowings - short term 7,000 - - Proceeds from private placement of stock 18,954 - - Proceeds from issuance of subordinated debt - 30,000 20,618 Stock issued in dividend reinvestment plan 171 - - Proceeds from exercise of stock options and employees stock purchases 6,259 5,323 2,985 Payment of cash dividends (6,088) (5,869) (4,643) -------------------------------------------- Financing cash flows, net 26,296 29,454 18,960 -------------------------------------------- Net increase in cash and cash equivalents (4,962) 886 4,563 Cash and cash equivalents at the beginning of the year 6,354 5,468 905 -------------------------------------------- Cash and cash equivalents at end of the year $ 1,392 $ 6,354 $ 5,468 ============================================
A-61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 21--FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments. The estimated fair value of financial instruments of the Company as of December 31, 1999 and 1998 are as follows:
1999 1998 ---------------------------- --------------------------- Carrying Carrying (Dollars in thousands) Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------- --------------------------- Financial assets: Cash and due from banks $ 95,416 $ 95,416 $ 78,660 $ 78,660 Short term investments 221,207 221,207 140,376 140,376 Investment securities 470,105 464,861 397,412 398,332 Loans, net 1,715,284 1,699,747 1,184,752 1,186,740 Accrued interest receivable - - - - Financial liabilities: Deposits: Demand, noninterest-bearing 459,523 459,523 335,910 335,910 MMDA, NOW and Savings 1,358,780 1,358,780 960,152 960,152 Time certificates, $100,000 and over 407,915 403,835 211,923 204,206 Other time certificates 74,670 73,923 94,357 108,601 Other borrowings 69,100 68,409 83,429 85,000 Subordinated debt - - 3,000 2,999 Company obligated mandatory redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures 50,000 48,468 50,000 48,829
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Cash Equivalents The carrying value reported in the balance sheet for cash and cash equivalents approximates fair value. A-62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Investment Securities The carrying amounts for short-term investments approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of longer term investments, except certain state and municipal securities, is estimated based on quoted market prices or bid quotations from securities dealers. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing fixed rate loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The fair value of performing variable rate loans is judged to approximate book value for those loans whose rates reprice in less than 90 days. Rate floors and rate ceilings are not considered for fair value purposes as the number of loans with such limitations is not significant. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities and Borrowings The fair value for all deposits without fixed maturities and short term borrowings is considered to be equal to the carrying value. The fair value for fixed rate time deposits and subordinated debt are estimated by discounting future cash flows using interest rates currently offered on time deposits or subordinated debt with similar remaining maturities. The fair value of core deposits does not reflect the market core deposits premium of approximately 10%-12%. Additionally, the fair value of deposits does not include the benefit that results from the low cost of funding provided by the Company's deposits as compared to the cost of borrowing funds in the market. Commitments to Extend Credit and Standby Letters of Credit The majority of the Company's commitments to extend credit carry current market interest rate if converted to loans. Because these commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the table. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic condition, risk characteristics of various financial instruments, and other factors. These estimates are subjective A-63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have significant effect on fair value estimates and have been considered in many of the estimates. NOTE 22--ACTIVITY OF BUSINESS SEGMENTS In 1998, the Company adopted SFAS No. 131. The prior year's segment information has been restated to present the Company's two reportable segments, community banking and trust operations. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." Segment data includes intersegment revenue, as well as charges allocating all corporate-headquarters costs to each of its operating segments. Intersegment revenue is recorded at prevailing market terms and rates and is not significant to the results of the segments. This revenue is eliminated in consolidation. The Company evaluates the performances of its segments and allocates resources to them based on net interest income, other income, net income before income taxes, total assets and deposits. The Company is organized primarily along community banking and trust divisions. Ten of the divisions have been aggregated into the "community banking" segment. Community banking provides a range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professional and other individuals. The GBB Trust division has been shown as the "trust operations" segment. The Company's business is conducted principally in the U.S.; foreign operations are not material. The following table shows each segments key operating results and financial position for the years ended or as of December 31, 1999, 1998 and 1997:
1999 1998 1997 ------------------------------ ------------------------- ------------------------ Community Trust Community Trust Community Trust (Dollars in thousands) banking operations banking operations banking operations - --------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 107,256 $ 369 $ 80,968 $ 859 $ 67,102 $ 141 Other income 14,312 3,007 7,157 2,488 6,274 2,092 Operating expenses 30,015 2,853 32,060 2,429 33,803 1,966 Net Income before income taxes(1) 91,945 121 56,005 918 39,573 267 Total assets 2,590,605 -- 1,845,471 -- 1,440,786 -- Deposits 2,243,057 57,831 1,534,803 67,539 1,213,388 66,321 Assets under management -- 697,435 -- 649,336 -- 577,746
/1/ Includes intercompany earnings allocation charge which is eliminated in consolidation A-64 A reconciliation of total segment net interest income and other income combined, net income before income taxes, and total assets to the consolidated numbers in each of these categories for the years ended December 31, 1999, 1998 and 1997 is presented below.
As of and for As of and for As of and for the Year the Year the Year Ended Ended Ended December 31, December 31, December 30, (Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Net Interest income and other income Total segment net interest income and other income $ 124,944 $ 91,412 $ 75,609 Parent company net interest income and other income (3,893) (1,357) 309 ------------ ------------ ----------- Consolidated net interest income and other income $ 121,051 $ 90,055 $ 75,918 ============ ============ =========== Net Income before taxes Total segment net income before income taxes $ 92,066 $ 56,923 $ 39,840 Parent company net interest before income taxes (32,174) (17,620) (9,486) ------------ ------------ ----------- Consolidated net income before income taxes $ 59,892 $ 39,303 30,354 ============ ============ =========== Total assets Total segment assets $ 2,590,605 $ 1,845,471 $ 1,440,786 Parent company assets 34,360 36,920 15,333 ------------ ------------ ----------- Consolidated total assets $ 2,624,965 $ 1,882,391 $ 1,456,119 ============ ============ ===========
A-65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997
As of and for Year Ended December 31, (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Net interest income and other income Total segment net interest income and other income $ 124,944 $ 91,412 $ 75,609 Parent company net interest inocme and other income (3,893) (1,357) 309 --------------------------------------------------- Consolidated net interest income and other income $ 121,051 $ 90,055 $ 75,918 =================================================== Net income before taxes Total segment net income before income taxes $ 92,066 $ 56,923 $ 39,840 Parent company net income before income taxes (32,174) (17,620) (9,486) --------------------------------------------------- Consolidated net income before income taxes $ 59,892 $ 39,303 $ 30,354 =================================================== Total assets Total segment assets $2,590,605 $1,845,471 $1,440,786 Parent company segment assets 34,360 36,920 15,333 --------------------------------------------------- Consolidated total assets $2,624,965 $1,882,391 $1,456,119 ===================================================
NOTE 23--QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table presents the summary results for the stated eight quarters
December 31, September 30, June 30, March 31, -------------------- --------------------- ---------------- --------------------- (Dollars in Thousands except per shares data)(1) 1999 1998 1999 1998 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income $ 51,259 $ 36,659 $ 45,536 $ 35,522 $ 41,644 $ 32,787 $ 36,911 $ 30,504 Net Interest income 30,105 21,278 26,969 20,661 24,651 19,418 22,107 18,457 Provision for loan loss 6,013 1,986 3,578 1,912 1,697 1,437 981 1,046 Other income 21,069 3,490 4,433 2,630 3,391 2,642 2,634 2,369 Other expenses 28,569 14,195 15,394 13,451 15,199 14,182 14,157 12,711 Income before taxes 16,592 8,587 12,430 7,928 11,046 6,461 9,923 7,069 Net income 9,524 5,959 7,853 5,342 4,347 4,152 5,987 4,708 Net income per share Basic $ 0.77 $ 0.51 $ 0.64 $ 0.46 $ 0.36 $ 0.36 $ 0.50 $ 0.41 Diluted $ 0.73 $ 0.47 $ 0.61 $ 0.42 $ 0.34 $ 0.33 $ 0.48 $ 0.38 * Quarterly amounts have been restated on a historical basis to reflect the mergers with BA Bancshares and Bay Commercial Services on a pooling of interests basis.
A-66 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders of Greater Bay Bancorp: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 19 present fairly, in all material respects, the financial position of Greater Bay Bancorp and its subsidiaries at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Francisco, California January 31, 2000 A-67 EX-10.2 2 EMPLOYEE SUPP COMP BENEFITS AGRMT WITH DAVID L. KALKBRENNER EXHIBIT 10.2 EMPLOYEE SUPPLEMENTAL COMPENSATION BENEFITS AGREEMENT ----------------------------------------------------- This Employee Supplemental Compensation Benefits Agreement (the "Agreement") is made and entered into effective as of January 1, 1998, by and between Greater Bay Bancorp, a California corporation (the "Employer"), and David L. Kalkbrenner, an individual residing in the State of California (the "Employee"). R E C I T A L S --------------- WHEREAS, the Employee is an employee of the Employer, and, since July 1, 1987, has become eligible to participate in the Employee Supplemental Compensation Benefits Plan represented by this Agreement(the "Plan"); WHEREAS, the Employer desires to establish a compensation benefits program as a fringe benefit for certain officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry; WHEREAS, the Employee's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable; WHEREAS, it is deemed to be in the best interests of the Employer to provide the Employee with certain benefits, on the terms and conditions set forth herein, in order to reasonably induce the Employee to remain in the Employer's employment and to compensate the Employee for valuable services heretofore rendered to the Employer; and WHEREAS, the Employee and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Employee, or to the Employee's spouse or the Employee's designated beneficiaries, as the case may be. NOW, THEREFORE, in consideration of the services to be performed by the Employee in the future, as well as the mutual promises and covenants contained herein, the Employee and the Employer agree as follows: A G R E E M E N T ----------------- 1. Terms and Definitions. 1.1 Administrator. The Employer shall be the "Administrator" and, solely ------------- for the purposes of ERISA, as defined in subparagraph 1.11 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. -1- 1.2 Applicable Percentage. The term "Applicable Percentage" shall mean --------------------- that percentage listed on Schedule "A" attached hereto which is adjacent to the number of calendar years which shall have elapsed from the date of the Employee's commencement of employment with and providing personal services to the Employer or, if later, the date on which the Employee became eligible to participate in the Plan represented by this Agreement, and ending on the date payments are to first begin under the terms of this Agreement. Notwithstanding the foregoing or the percentages set forth on Schedule "A", but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (a) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the termination of the Employee's employment by the Employer if such termination is in connection with a "Change in Control" as defined in subparagraph 1.4 below. A termination shall be deemed to be in connection with a Change in Control if, within two (2) years following the occurrence of a Change in Control: (i) the Employee's employment with the Employer is terminated by the Employer other than a Termination for Cause; or (ii) by reason of the Employer's actions any adverse and material change occurs in the scope of the Employee's position, responsibilities, duties, salary, benefits or location of employment; or (iii) the Employer causes an event to occur which reasonably constitutes or results in a demotion, a significant diminution of responsibilities or authority, or a constructive termination (by forcing a resignation or otherwise) of the Employee's employment; (b) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the occurrence of (i) the Employee's death prior to the termination of the Employee's employment by the Employer, or (ii) the Employee's Disability (as defined in subparagraph 1.6 below) other than a Disability that occurs after the termination of the Employee's employment by the Employer; and (c) notwithstanding subclauses (a) and (b) of this subparagraph 1.2, zero percent (0%) in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Employee's death and of which the Employer is the designated beneficiary (the "Employer Cost Recovery Policy"). Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any Employer Cost Recovery Policy, then: (1) the Employee, the Employee's estate, designated beneficiary or Surviving Spouse shall no longer be entitled to receive any of the amounts payable under the terms of this Agreement, and (2) the Employer shall have the right to recover from Employee's estate and/or Surviving Spouse all of the amounts paid to the Employee's estate or Surviving Spouse, as the case may be (with respect to amounts paid prior to the Employee's death or paid to the Employee's estate or Surviving Spouse) or from the Employee's designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after Employee's death. -2- 1.3 Beneficiary. The term "beneficiary" or "designated beneficiary" ----------- shall mean the person or persons whom the Employee shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "E," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof and is completed and signed by the Employee and received by the Administrator prior to the Employee's death. 1.4 Change in Control. The term "Change in Control" shall mean the first ----------------- to occur of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company which owns 100% of the Employer's outstanding voting capital stock): (a) Any "person" (as such term is used in sections 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which becomes the beneficial owner (as that term is used in section 13(d) of the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the Employer's capital stock entitled to vote in the election of directors, other than a group of two or more persons not (i) acting in concert for the purpose of acquiring, holding or disposing of such stock or (ii) otherwise required to file any form or report with any governmental agency or regulatory authority having jurisdiction over the Employer which requires the reporting of any change in control; (b) During any period of not more than two (2) consecutive years, not including any period prior to the adoption of the Plan represented by this Agreement, individuals who, at the beginning of such period, constitute the Board of Directors of the Employer, and any new director (other than a director designated by a person who has entered into an agreement with the Employer to effect a transaction described in clause (a), (c), (d) or (e) of this subparagraph 1.4) whose appointment to the Board of Directors or nomination for election to the Board of Directors was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office, either were directors at the beginning of such period or whose appointment or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) The effective date of any consolidation or merger of the Employer (after all requisite shareholder, applicable regulatory and other approvals and consents have been obtained), other than a consolidation or merger of the Employer in which the holders of the voting capital stock of the Employer immediately prior to the consolidation or merger hold more than fifty percent (50%) of the voting capital stock of the surviving entity immediately after the consolidation or merger; (d) The shareholders of the Employer approve any plan or proposal for the liquidation or dissolution of the Employer; or -3- (e) The shareholders of the Employer approve the sale or transfer of substantially all of the Employer's assets to parties that are not within a "controlled group of corporations" (as that term is defined in section 1563 of the Code) in which the Employer is a member. 1.5 The Code. The "Code" shall mean the Internal Revenue Code of 1986, as -------- amended (the "Code"). 1.6 Disability/Disabled. The term "Disability" or "Disabled" shall have the ------------------- same meaning given such terms in any policy of disability insurance maintained by the Employer for the benefit of employees including the Employee. In the absence of such a policy which extends coverage to the Employee in the event of disability, the terms shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of the Employee's duties to the Employer for at least ninety (90) days. 1.7 Early Retirement Date. The term "Early Retirement Date" shall mean the --------------------- Retirement, as defined below, of the Employee on a date which occurs prior to the Employee attaining sixty-two (62) years of age, as defined below, but after the Employee has attained fifty-nine and one-half (59.5) years of age. 1.8 Effective Date. The term "Effective Date" shall mean the date first -------------- written above. 1.9 Employee Benefits. Except as otherwise stated in this Agreement, the ----------------- term "Employee Benefits" shall mean the Index Employee Benefits, if any, described in and determined in accordance with Schedule "B" and the supplemental benefits described in and determined in accordance with Schedule "C", and reduced or adjusted to the extent: (i) required under the other provisions of this Agreement; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). 1.10 Employer. Except as otherwise set forth in this Agreement, the term -------- "Employer" shall mean Greater Bay Bancorp; provided, however, that for purposes of subparagraph 1.15 (definition of Termination for Cause) and Paragraph 5 (including its subparagraphs, regarding termination of employment), the term "Employer" shall mean Greater Bay Bancorp and its subsidiaries and affiliated entities. 1.11 ERISA. The term "ERISA" shall mean the Employee Retirement Income ----- Security Act of 1974, as amended. 1.12 Plan Year. The term "Plan Year" shall mean the Employer's fiscal year. --------- -4- 1.13 Retirement. The term "Retirement" or "Retires" shall refer to the date ---------- which the Employee acknowledges in writing to the Employer to be the last day the Employee will provide any significant personal services, whether as an employee or independent consultant or contractor, to the Employer or to, for, or on behalf of, any other business entity conducting, performing or making available to any person or entity banking or other financial services of any kind. For purposes of this Agreement, the phrase "significant personal services" shall mean more than ten (10) hours of personal services rendered to one or more individuals or entities in any thirty (30) day period for compensation excluding services, if any, rendered by the Employee after Retirement pursuant to the terms of a consulting agreement described in Schedule "C", if any. 1.14 Surviving Spouse. The term "Surviving Spouse" shall mean the person, ---------------- if any, who shall be legally married to the Employee on the date of the Employee's death. 1.15 Termination for Cause. The term "Termination for Cause" shall mean --------------------- termination of the employment of the Employee by reason of any of the following: (a) The Employee's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Employer, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency or any other regulatory agency or governmental authority having jurisdiction over the Employer, which has a material adverse effect upon the Employer; or (b) The Employee's conviction of any felony which has a material adverse effect upon Employer. 2. Scope, Purpose and Effect. ------------------------- 2.1 Contract of Employment. Although this Agreement is intended to ---------------------- provide the Employee with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Employee and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Employee's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Employee may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart from, and shall have no effect upon, or be affected by, the terms and provisions of said Employment Agreement. 2.2 Fringe Benefit. The benefits provided by this Agreement are granted -------------- by the Employer as a fringe benefit to the Employee and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Employee has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. -5- 3. Payments Upon Early Retirement or Retirement and After Retirement. ----------------------------------------------------------------- 3.1 Payments Upon Early Retirement. The Employee shall have the right to ------------------------------ Retire on a date which constitutes an Early Retirement Date as defined in subparagraph 1.7 above. In the event the Employee elects to Retire on a date which constitutes an Early Retirement Date, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of such Early Retirement Date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". EXAMPLE Payments Upon Early Retirement
Assumptions: - ----------- Age at Early Retirement 60 Normal Retirement Age 62 Projected Benefit Account Value at Age 62 $100,000 Actual Benefit Account Value at Age 60 $20,000 Distribution Period Elected for Benefit Account (Schedule F) 10 yrs. Projected Index Benefit at Age 62 $50,000 Projected Index Benefit at Age 60 $25,000 Applicable Percentage at Age 60 75% First Year Benefit Calculation: Age 60 1) Benefit Account [($20,000 /10) x .75] $ 1,500 2) Index Benefit ($25,000 x .75) $18,750 ------- Total First Year Benefit $20,250 =======
3.2 Payments Upon Retirement. If the Employee shall remain in the ------------------------ continuous employment of the Employer until attaining sixty-two (62) years of age, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee Retires (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of said Retirement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". -6- 3.3 Payments in the Event of Death After Retirement. The Employer agrees ----------------------------------------------- that if the Employee Retires, but shall die before receiving all of the Employee Benefits, the Employer will make such payments to which the Employee may be entitled, to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4. Payments in the Event Death or Disability Occurs Prior to Retirement. -------------------------------------------------------------------- 4.1 Payments in the Event of Death Prior to Retirement. If the Employee -------------------------------------------------- dies while actively employed by the Employer at any time after the Effective Date of this Agreement, but prior to Retirement, the Employer agrees to pay the Employee Benefits to which the Employee is then entitled to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4.2 Payments in the Event of Disability Prior to Retirement. In the ------------------------------------------------------- event the Employee becomes Disabled at any time after the Effective Date of this Agreement but prior to Retirement, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee becomes Disabled (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". 5. Payments in the Event Employment Is Terminated Prior to Retirement. ------------------------------------------------------------------ As indicated in subparagraph 2.1 above, the Employer reserves the right to terminate the Employee's employment, with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Employee's Retirement. In the event that the employment of the Employee shall be terminated, other than by reason of death, Disability or Retirement, prior to the Employee's attaining sixty-two (62) years of age, then this Agreement shall terminate on the date of such termination of employment; provided, however, that the Employee shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Employee's termination: 5.1 Termination Without Cause. If the Employee's employment is ------------------------- terminated by the Employer without cause, and such termination is not subject to the provisions -7- of subparagraph 5.4 below, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". 5.2 Voluntary Termination by the Employee. If the Employee's employment ------------------------------------- is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraph 5.4 below, the Employee shall be entitled to be paid the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B. 5.3 Termination for Cause. If the Employee suffers a "Termination for --------------------- Cause", as defined in subparagraph 1.15 of this Agreement, the Employee shall forfeit any and all rights and benefits the Employee may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Employee by the Employer pursuant to the terms of this Agreement. 5.4 Termination by the Employer on Account of or After a Change in -------------------------------------------------------------- Control. In the event the Employee's employment with the Employer is terminated - ------- by the Employer "in connection with a Change in Control" as described in subparagraph 1.2(a) and as defined in subparagraph 1.4 above, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains fifty-nine and one-half (59.5) years of age or any month thereafter, as requested in writing by the Employee and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Employee does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "F" in the case of the balance in the Benefit Account and (ii) until the Employee's death in the case of the Index Benefit defined in Schedule "B". 5.5 Payments in the Event of Death Following Termination. If the ---------------------------------------------------- Employee shall die prior to receiving all of the applicable benefits described in this Paragraph 5 to which the Employee is entitled, then the Employer will make such payments to the Employee's designated beneficiary. If a valid Beneficiary Designation is not in effect, then the -8- remaining amounts due to the Employee shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 6. Section 280G Benefits Adjustment. If all or any portion of the -------------------------------- amounts payable to the Employee under this Agreement, either alone or together with other payments which the Employee has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), the Employer (and its successor) shall increase the amounts payable under this Agreement to the extent necessary to afford the Employee substantially the same economic benefit under this Agreement as the Employee would have received had no such excise tax been imposed on the payments due the Employee under this Agreement. The determination of the amount of any such excise taxes shall be made initially by the independent accounting firm employed by the Employer immediately prior to the occurrence of the event constituting a Change in Control. If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable to the Employee is greater than the amount initially so determined, then the Employer (or its successor) shall pay to the Executive an amount equal to the sum of (i) such additional excise taxes, and (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse the Employee substantially for any income, excise or other taxes payable by the Employee with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii). 7. Right To Determine Funding Methods. The Employer reserves the right to ---------------------------------- determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Employee, the Employee's spouse or the Employee's beneficiaries under the terms of this Agreement. In the event that the Employer elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Employer shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Employer further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Employee, the Employee's spouse nor the Employee's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Employer pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Employer's obligations pursuant to this Agreement. In connection with the foregoing, the Employee agrees to execute such documents and undergo such medical examinations or tests which the Employer may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, -9- the Employer's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Employee to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Employee, the Employee's spouse and the Employee's beneficiaries of any and all rights to payment hereunder. 8. Claims Procedure. The Employer shall, but only to the extent necessary ---------------- to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Employee, the Employee's spouse, or the Employee's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Employee, the Employee's spouse or the Employee's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Employee, the Employee's spouse or the Employee's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. 9. Status as an Unsecured General Creditor. Notwithstanding anything --------------------------------------- contained herein to the contrary: (i) neither the Employee, the Employee's spouse or the Employee's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Employee, the Employee's spouse or the Employee's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Employer under this Agreement; (iii) all of the Employer's assets shall be and remain the general unpledged and unrestricted assets of the Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employer to pay money in the future; and (v) the Employee, the Employee's spouse and the Employee's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. Notwithstanding subparagraphs (i) through (v) above, the Employer and the Employee acknowledge and agree that, in the event of a Change in Control and at the written request of the Employee, the Employer shall establish, not later than the effective date of the Change in Control, a Rabbi Trust or multiple Rabbi Trusts (the "Trust" or "Trusts") upon such terms and conditions as the Employer in its sole discretion deems appropriate and in compliance with applicable provisions of the Code in order to permit the Employer to make contributions and/or transfer assets to the Trust or Trusts to discharge its obligations pursuant to this Agreement. The principal of the Trust or Trusts and any earnings thereon shall be held separate and apart from other funds of the Employer to be used exclusively for discharge of the Employer's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Employer's general creditors until paid to the Employee or its beneficiaries in such manner and at such times as specified in this Agreement. -10- 10. Discretion of Board to Accelerate Payout. Notwithstanding any of the ---------------------------------------- other provisions of this Agreement, the Board of Directors of the Employer may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the terms of this Agreement, provided that Employee (or the Employee's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Employer's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Employer's Board of Directors and offered to the Employee [or Employee's spouse or designated beneficiaries] on a "take it or leave it basis"). 11. Miscellaneous. ------------- 11.1 Opportunity To Consult With Independent Advisors. The Employee ------------------------------------------------ acknowledges that the Employee has been afforded the opportunity to consult with independent advisors of his or her choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to the Employee under the terms of this Agreement and the (i) terms and conditions which may affect the Employee's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Employee acknowledges and agrees shall be the sole responsibility of the Employee notwithstanding any other term or provision of this Agreement. The Employee further acknowledges and agrees that the Employer shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Employee and further specifically waives any right for the Employee and his or her heirs, beneficiaries, legal representatives, agents, successors, and assigns to claim or assert liability on the part of the Employer related to the matters described above in this subparagraph 11.1. The Employee further acknowledges and agrees that the Employee has read, understands and consents to all of the terms and conditions of this Agreement, and that the Employee enters into this Agreement with a full understanding of its terms and conditions. 11.2 Arbitration of Disputes. All claims, disputes and other matters in ----------------------- question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). -11- In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. 11.3 Attorneys' Fees. In the event of any arbitration or litigation --------------- concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4 Notice. Any notice required or permitted of either the Employee or ------ the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Employer: Greater Bay Bancorp 2860 W. Bayshore Road Palo Alto, California 94303 Attn: President and Chief Executive Officer If to the Employee: David L. Kalkbrenner [omitted] 11.5 Assignment. Neither the Employee, the Employee's spouse, nor any ---------- other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, -12- hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Employee, the Employee's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and shall terminate this Agreement, and the Employer shall thereupon have no further liability hereunder. 11.6 Binding Effect/Merger or Reorganization. This Agreement shall be --------------------------------------- binding upon and inure to the benefit of the Employee and the Employer and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. 11.7 Non-waiver. The failure of either party to enforce at any time or ---------- for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8 Partial Invalidity. If any term, provision, covenant, or condition ------------------ of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9 Entire Agreement. This Agreement, including the schedules and ---------------- exhibits attached hereto and incorporated herein by this reference, contains all of the covenants and agreement, and supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10 Modifications. Any modification of this Agreement shall be ------------- effective only if it is in writing and signed by each party or such party's authorized representative. -13- 11.11 Paragraph Headings. The paragraph headings used in this Agreement ------------------ are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12 No Strict Construction. The language used in this Agreement shall ---------------------- be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13 Governing Law. The laws of the State of California, other than ------------- those laws denominated choice of law rules, and, where applicable, the rules and regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency, shall govern the validity, interpretation, construction and effect of this Agreement. 11.14 Waiver of Prior Plan Benefit. To the extent that the Employee is a ---------------------------- participant in any other supplemental benefit plan provided by the Employer which affords the Employee benefits in the event of the Employee's retirement or death or a change in control of the Employer, it is an express condition precedent to the effectiveness of this Agreement that the Employee execute and deliver the Waiver of Prior Plan Benefit attached as Schedule "D" to this Agreement. IN WITNESS WHEREOF, the Employer and the Employee have executed this Agreement on the date first above-written in the City of Palo Alto, Santa Clara County, California. THE EMPLOYER THE EMPLOYEE GREATER BAY BANCORP, a California corporation By: /s/ Duncan L. Matteson By: /s/ David L. Kalkbrenner ---------------------- ------------------------ Duncan L. Matteson DAVID L. KALKBRENNER Chairman of the Board -14- SCHEDULE A ---------- Applicable Calendar Year Percentage Inception to 12/31/97 100% Per Year Vesting Thereafter 100% -15- SCHEDULE B ---------- INDEX EMPLOYEE BENEFITS ----------------------- 1. Index Employee Benefits Determination. The Index Employee Benefits ------------------------------------- consist of (i) accruals to the Employee's Benefit Account (as described in subparagraph (a) below) during the Employee's employment by the Employer and (ii) the Index Benefit (as described in subparagraph (b) below) after the Employee's employment by the Employer terminates. The Index Employee Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a --------------- liability reserve account on the books of the Employer for the benefit of the Employee. Prior to the date on which the Employee becomes eligible to receive payments under the Plan, such Benefit Account shall be increased (or decreased) each Plan Year by an amount equal to the annual earnings (or loss) for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Employee becomes eligible ------------- to receive payments under the Plan, the Index Benefit for the Employee for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the annual earnings (if any) for that Plan year determined by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual ----- after-tax income from the life insurance contracts described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $892,375 ------------- Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $970,000 ------------- Insurance Company: [omitted] ------------------ Policy Number: [omitted] -------------- Premiums Paid: $970,000 --------------
-16- If such contracts of life insurance are actually purchased by the Employer, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are not purchased or are subsequently surrendered or lapsed, then the Employer shall receive and use annual policy illustrations that assume the above described policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be ---------------- calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefits (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate the Opportunity Cost shall be the Employer's marginal tax rate until the Employee's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Employer is higher or lower. 2. Employee Benefits Payments. The Employee shall be entitled to payment of -------------------------- the Index Employee Benefits on the terms as specified in the Agreement. EXAMPLE INDEX EMPLOYEE BENEFITS Assume Initial Insurance = $1,000,000
[n] [A] [B] [C] Benefit End of Year Cash Surrender Value of Life Index Opportunity Cost Account ----------- ----------------------------- ----- ---------------- [Cumulative] Insurance Policy [Annual Policy [After-Tax One Year U.S. B-C ---------------- Income] Treasury Yield] An-An-1 0 $1, 000,000 -- -- -- 1 $1,050,000 $50,000 $(30,000) $20,000 2 $1,102,500 $52,500 $(31,500) $41,000 3 $1,157,625 $55,125 $(33,075) $63,050
-17- SCHEDULE C ---------- SUPPLEMENTAL BENEFITS --------------------- Provided that the Employee has become entitled to receive payment of the Employee Benefits described in Schedule "B" as provided in the Agreement (whether or not the Employee has elected to defer receipt of any such payments, as provided in the Agreement), the Employee shall be entitled to receive the following supplemental benefits (the "Supplemental Benefits"): 1. Consulting Agreement Payments. The Employee shall receive the Applicable Percentage of the sum of $250,000 per annum, payable in substantially equal monthly installments commencing on the first day of the calendar month immediately following the month in which the Employee attains age sixty-two (62) and continuing through and including the month in which the Employee attains age sixty-five (65). In consideration for such payments, the Employee shall render such consulting services and advice to the Employer as the Employer may reasonably require, such commitment not to require more than forty (40) hours of the Employee's time per month. 2. Defined Benefit Payments. The Employee shall receive the Applicable Percentage of the sum indicated in column (a) below, per annum, payable in substantially equal monthly installments commencing on the first day of the calendar month immediately following the month in which the Employee attains the age indicated below in column (b) and continuing through and including the month in which the Employee attains the age indicated below in column (c). (a) (b) (c) $250,000 65 67 $150,0000 67 69 $125,000 69 73 $90,000 73 81 $50,000 81 85
If the Employee shall die before receiving all of the Supplemental Benefits described in this Schedule "C", the Employer will make such payments to which the Employee may be entitled, to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of -18- this Schedule "C" shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Schedule "C" shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. In the event that the Employee has not become entitled to receive payment of the Employee Benefits described in Schedule "B" on or before the date on which the Supplemental Benefits described in this Schedule "C" would otherwise commence (other than as a result of an agreement between the Employer and the Employee to defer receipt of such payments), then the Employee shall forfeit each monthly installment of payments otherwise payable under this Schedule "C" for each month until the Employee becomes entitled to receive payment of the Employee Benefits specified in Schedule "B". Notwithstanding anything herein or in the Agreement to the contrary, the Supplemental Benefits set forth in this Schedule "C" shall terminate automatically upon the forfeiture or other termination of the Employee's right to receive the Employee Benefits specified in Schedule "B", as provided in this Agreement. -19- SCHEDULE D ---------- WAIVER OF PRIOR PLAN BENEFITS ----------------------------- In consideration for the Employee Benefits made available to the Employee by this Employee Supplemental Compensation Benefits Agreement (the "Agreement"), the Employee acknowledges and agrees as follows: (a) The Employee is a party to that certain Greater Bay Bancorp Executive Salary Continuation Plan made with the Employer or its predecessor dated April 26, 1995 (the "Prior Plan Agreement"); (b) This Agreement and the Employee Benefits hereunder are provided as a substitute for the Prior Plan Agreement and the benefits provided thereunder; (c) The Prior Plan Agreement and the benefits thereunder are hereby terminated effective as of the date of this Agreement; (d) The Employee hereby waives and relinquishes for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successors and assigns, any and all right, entitlement and interest that the Employee has or may have pursuant to the Prior Plan Agreement and the benefits thereunder; (e) The Employee accepts the Employee Benefits afforded by this Agreement in full and complete substitution for the benefits otherwise provided by the Prior Plan Agreement; and (f) Without limiting the scope and effect of subparagraph 11.1 of the Agreement, the Employee (i) has had an opportunity to consult with advisors of the Employee's own choice in determining to enter into this Agreement and this Waiver, (ii) understands that the effect of this Waiver is to terminate, waive and relinquish forever all rights, entitlements and interests that the Employee has or may have under the Prior Plan Agreement and the benefits thereunder as a condition to receiving the Employee Benefits under this Agreement; and (iii) the Employee is entering into this Agreement and this Waiver voluntarily and with full appreciation of the effect of doing so. Dated: , 1998 ---------------------------- --------------------------------- David L. Kalkbrenner I consent to and agree to be bound by the foregoing Waiver: --------------------------------- Spouse of David L. Kalkbrenner -20- SCHEDULE E ---------- BENEFICIARY DESIGNATION ----------------------- To the Administrator of the Greater Bay Bancorp Employee Supplemental Compensation Benefits Agreement: Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Greater Bay Bancorp, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: Primary Beneficiary: - ------------------- - --------------------- --------------------- -------------------------- Name Address Relationship Secondary (Contingent) Beneficiary: - ---------------------------------- - --------------------- --------------------- -------------------------- Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Employee Supplemental Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the remaining unpaid benefit payable according to the terms of my Employee Supplemental Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Employee Supplemental Compensation Benefits Agreement. Dated: , 1998 ---------------------------- --------------------------------- David L. Kalkbrenner -21- CONSENT OF THE EMPLOYEE'S SPOUSE TO THE ABOVE BENEFICIARY DESIGNATION: - ------------------------------------ I, ___________________ , being the spouse of David L. Kalkbrenner, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Employee Supplemental Compensation Benefits Agreement entered into by my spouse effective as of January 1, 1998. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Employee Supplemental Compensation Benefits Agreement and in which I may have a marital property interest. Dated: , 1998 ---------------------------- - ----------------------------------- (Signature) - ----------------------------------- (Type/Print Name) -22- SCHEDULE F ---------- DISTRIBUTION ELECTION --------------------- Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Greater Bay Bancorp, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: ___ sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ___ one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ___ one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: , 1998 ---------------------------- Signed: ---------------------------------- David L. Kalkbrenner -23- EX-10.3 3 EMPLOYEE SUPP COMP BENEFITS AGRMT WITH SUSAN K. BLACK EXHIBIT 10.3 EMPLOYEE SUPPLEMENTAL COMPENSATION BENEFITS AGREEMENT ----------------------------------------------------- This Employee Supplemental Compensation Benefits Agreement (the "Agreement") is made and entered into effective as of January 1, 1998, by and between Mid-Peninsula Bank, a California banking corporation (the "Employer"), and Susan K. Black, an individual residing in the State of California (the "Employee"). R E C I T A L S --------------- WHEREAS, the Employee is an employee of the Employer, and, since September 1, 1987, has become eligible to participate in the Employee Supplemental Compensation Benefits Plan represented by this Agreement (the "Plan"); WHEREAS, the Employer desires to establish a compensation benefits program as a fringe benefit for certain officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry; WHEREAS, the Employee's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable; WHEREAS, it is deemed to be in the best interests of the Employer to provide the Employee with certain benefits, on the terms and conditions set forth herein, in order to reasonably induce the Employee to remain in the Employer's employment and to compensate the Employee for valuable services heretofore rendered to the Employer; WHEREAS, it is the intention of the parties that the Employer's obligations under this Agreement shall be that of an unfunded and unsecured promise to provide the benefits to the Employee set forth hereinafter and except for the contributions, if any, to a secular trust to be established by the Employee as grantor, the Employee and the Employee's beneficiaries shall be unsecured general creditors with respect to any benefits provided under the terms of this Agreement; and WHEREAS, the Employee and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Employee, or to the Employee's spouse or the Employee's designated beneficiaries, as the case may be. NOW, THEREFORE, in consideration of the services to be performed by the Employee in the future, as well as the mutual promises and covenants contained herein, the Employee and the Employer agree as follows: A G R E E M E N T ----------------- 1. Terms and Definitions. --------------------- 1.1. Administrator. The Employer shall be the "Administrator" and, ------------- solely for the purposes of ERISA, as defined in subparagraph 1.11 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. 1.2. Applicable Percentage. The term "Applicable Percentage" shall mean --------------------- that percentage listed on Schedule "A" attached hereto which is adjacent to the number of calendar years which shall have elapsed from the date of the Employee's commencement of employment with and providing personal services to the Employer or, if later, the date on which the Employee became eligible to participate in the Plan represented by this Agreement, and ending on the date payments are to first begin under the terms of this Agreement. Notwithstanding the foregoing or the percentages set forth on Schedule "A", but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (a) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the termination of the Employee's employment by the Employer if such termination is in connection with a "Change in Control" as defined in subparagraph 1.4 below. A termination shall be deemed to be in connection with a Change in Control if, within two (2) years following the occurrence of a Change in Control: (i) the Employee's employment with the Employer is terminated by the Employer other than a Termination for Cause; or (ii) by reason of the Employer's actions any adverse and material change occurs in the scope of the Employee's position, responsibilities, duties, salary, benefits or location of employment; or (iii) the Employer causes an event to occur which reasonably constitutes or results in a demotion, a significant diminution of responsibilities or authority, or a constructive termination (by forcing a resignation or otherwise) of the Employee's employment; (b) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the occurrence of (i) the Employee's death prior to the termination of the Employee's employment by the Employer, or (ii) the Employee's Disability (as defined in subparagraph 1.6 below) other than a Disability that occurs after the termination of the Employee's employment by the Employer; and (c) notwithstanding subclauses (a) and (b) of this subparagraph 1.2, zero percent (0%) in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Employee's death and of which the Employer is the designated beneficiary (the "Employer Cost Recovery Policy"). Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any Employer Cost Recovery Policy, then: (1) the Employee, the Employee's estate, designated beneficiary or Surviving Spouse shall no -2- longer be entitled to receive any of the amounts payable under the terms of this Agreement, and (2) the Employer shall have the right to recover from Employee's estate and/or Surviving Spouse all of the amounts paid to the Employee's estate or Surviving Spouse, as the case may be (with respect to amounts paid prior to the Employee's death or paid to the Employee's estate or Surviving Spouse) or from the Employee's designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after Employee's death. 1.3. Beneficiary. The term "beneficiary" or "designated beneficiary" ----------- shall mean the person or persons whom the Employee shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "E," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof and is completed and signed by the Employee and received by the Administrator prior to the Employee's death. 1.4. Change in Control. The term "Change in Control" shall mean the ----------------- first to occur of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company which owns 100% of the Employer's outstanding voting capital stock): (a) Any "person" (as such term is used in sections 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which becomes the beneficial owner (as that term is used in section 13(d) of the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the Employer's capital stock entitled to vote in the election of directors, other than a group of two or more persons not (i) acting in concert for the purpose of acquiring, holding or disposing of such stock or (ii) otherwise required to file any form or report with any governmental agency or regulatory authority having jurisdiction over the Employer which requires the reporting of any change in control; (b) During any period of not more than two (2) consecutive years, not including any period prior to the adoption of the Plan represented by this Agreement, individuals who, at the beginning of such period, constitute the Board of Directors of the Employer, and any new director (other than a director designated by a person who has entered into an agreement with the Employer to effect a transaction described in clause (a), (c), (d) or (e) of this subparagraph 1.4) whose appointment to the Board of Directors or nomination for election to the Board of Directors was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office, either were directors at the beginning of such period or whose appointment or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; -3- (c) The effective date of any consolidation or merger of the Employer (after all requisite shareholder, applicable regulatory and other approvals and consents have been obtained), other than a consolidation or merger of the Employer in which the holders of the voting capital stock of the Employer immediately prior to the consolidation or merger hold more than fifty percent (50%) of the voting capital stock of the surviving entity immediately after the consolidation or merger; (d) The shareholders of the Employer approve any plan or proposal for the liquidation or dissolution of the Employer; or (e) The shareholders of the Employer approve the sale or transfer of substantially all of the Employer's assets to parties that are not within a "controlled group of corporations" (as that term is defined in section 1563 of the Code) in which the Employer is a member. 1.5. The Code. The "Code" shall mean the Internal Revenue Code of 1986, -------- as amended (the "Code"). 1.6. Disability/Disabled. The term "Disability" or "Disabled" shall have ------------------- the same meaning given such terms in any policy of disability insurance maintained by the Employer for the benefit of employees including the Employee. In the absence of such a policy which extends coverage to the Employee in the event of disability, the terms shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of the Employee's duties to the Employer for at least ninety (90) days. 1.7. Early Retirement Date. The term "Early Retirement Date" shall mean --------------------- the Retirement, as defined below, of the Employee on a date which occurs prior to the Employee attaining sixty-two (62) years of age, as defined below, but after the Employee has attained fifty-nine and one-half (59.5) years of age. 1.8. Effective Date. The term "Effective Date" shall mean the date first -------------- written above. 1.9. Employee Benefits. Except as otherwise stated in this Agreement, ----------------- the term "Employee Benefits" shall mean the Index Employee Benefits, if any, described in and determined in accordance with Schedule "B" and the supplemental benefits described in and determined in accordance with Schedule "C", and reduced or adjusted to the extent: (i) required under the other provisions of this Agreement; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). -4- 1.10. Employer. Except as otherwise set forth in this Agreement, the -------- term "Employer" shall mean Mid-Peninsula Bank; provided, however, that for purposes of subparagraph 1.15 (definition of Termination for Cause) and Paragraph 5 (including its subparagraphs, regarding termination of employment), the term "Employer" shall mean Mid-Peninsula Bank and its subsidiaries and affiliated entities. 1.11. ERISA. The term "ERISA" shall mean the Employee Retirement Income ----- Security Act of 1974, as amended. 1.12. Plan Year. The term "Plan Year" shall mean the Employer's fiscal --------- year. 1.13. Retirement. The term "Retirement" or "Retires" shall refer to the ---------- date which the Employee acknowledges in writing to the Employer to be the last day the Employee will provide any significant personal services, whether as an employee or independent consultant or contractor, to the Employer or to, for, or on behalf of, any other business entity conducting, performing or making available to any person or entity banking or other financial services of any kind. For purposes of this Agreement, the phrase "significant personal services" shall mean more than ten (10) hours of personal services rendered to one or more individuals or entities in any thirty (30) day period for compensation excluding services, if any, rendered by the Employee after Retirement pursuant to the terms of a consulting agreement described in Schedule "C", if any. 1.14. Surviving Spouse. The term "Surviving Spouse" shall mean the ---------------- person, if any, who shall be legally married to the Employee on the date of the Employee's death. 1.15. Termination for Cause. The term "Termination for Cause" shall mean --------------------- termination of the employment of the Employee by reason of any of the following: (a) The Employee's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Employer, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency or any other regulatory agency or governmental authority having jurisdiction over the Employer, which has a material adverse effect upon the Employer; or (b) The Employee's conviction of (i) any felony or (ii) a crime involving moral turpitude or a fraudulent or dishonest act which, in each case, has a material adverse effect on the Employer. 2. Scope, Purpose and Effect. ------------------------- 2.1. Contract of Employment. Although this Agreement is intended to ---------------------- provide the Employee with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Employee and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate -5- the Employee's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Employee may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart from, and shall have no effect upon, or be affected by, the terms and provisions of said Employment Agreement. 2.2. Fringe Benefit. The benefits provided by this Agreement are granted -------------- by the Employer as a fringe benefit to the Employee and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Employee has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. 3. Payments Upon Early Retirement or Retirement and After Retirement. ----------------------------------------------------------------- 3.1. Payments Upon Early Retirement. The Employee shall have the right ------------------------------ to Retire on a date which constitutes an Early Retirement Date as defined in subparagraph 1.7 above. In the event the Employee elects to Retire on a date which constitutes an Early Retirement Date, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of such Early Retirement Date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". -6- EXAMPLE Payments Upon Early Retirement
Assumptions: - ----------- Age at Early Retirement 60 Normal Retirement Age 62 Projected Benefit Account Value at Age 62 $100,000 Actual Benefit Account Value at Age 60 $20,000 Distribution Period Elected for Benefit Account (Schedule F) 10 yrs. Projected Index Benefit at Age 62 $50,000 Projected Index Benefit at Age 60 $25,000 Applicable Percentage at Age 60 75% First Year Benefit Calculation: Age 60 1) Benefit Account [($20,000 )10) x .75] $1,500 2) Index Benefit ($25,000 x .75) $18,750 ------- Total First Year Benefit $20,250 =======
3.2. Payments Upon Retirement. If the Employee shall remain in the ------------------------ continuous employment of the Employer until attaining sixty-two (62) years of age, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee Retires (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of said Retirement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". -7- 3.3. Payments in the Event of Death After Retirement. The Employer ----------------------------------------------- agrees that if the Employee Retires, but shall die before receiving all of the Employee Benefits, the Employer will make such payments to which the Employee may be entitled, to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4. Payments in the Event Death or Disability Occurs Prior to Retirement. -------------------------------------------------------------------- 4.1. Payments in the Event of Death Prior to Retirement. If the Employee -------------------------------------------------- dies while actively employed by the Employer at any time after the Effective Date of this Agreement, but prior to Retirement, the Employer agrees to pay the Employee Benefits to which the Employee is then entitled to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4.2. Payments in the Event of Disability Prior to Retirement. In the ------------------------------------------------------- event the Employee becomes Disabled at any time after the Effective Date of this Agreement but prior to Retirement, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee becomes Disabled (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". 5. Payments in the Event Employment Is Terminated Prior to Retirement. ------------------------------------------------------------------- As indicated in subparagraph 2.1 above, the Employer reserves the right to terminate the Employee's employment, with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Employee's Retirement. In the event that the employment of the Employee shall be terminated, other than by reason of death, Disability or Retirement, prior to the Employee's attaining sixty-two (62) years of age, then this Agreement shall terminate on the date of such termination of employment; provided, however, that the Employee shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Employee's termination: 5.1. Termination Without Cause. If the Employee's employment is ------------------------- terminated by the Employer without cause, and such termination is not subject to the provisions of subparagraph 5.4 below, the Employee shall be entitled to be paid the Applicable Percentage of the Employee -8- Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". 5.2. Voluntary Termination by the Employee. If the Employee's employment ------------------------------------- is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraph 5.4 below, the Employee shall be entitled to be paid the following benefits: (a) If the Applicable Percentage at the date of termination is one hundred percent (100%), the Employee shall be paid (i) the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (A) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (B) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". (b) If the Applicable Percentage at the date of termination is less than one hundred percent (100%), the Employee shall be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", based on a ten (10) year (120 month) payout of the Benefit Account balance at termination notwithstanding the Employee's election of a different payout period under Schedule "F", but not more than sixty percent (60%) of the Employee's base salary (i.e., exclusive of any bonuses, incentive payments or other employee benefits to which the Employee would otherwise be entitled) at the date of termination. Such benefit shall be payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (A) for the period of one hundred twenty (120) months, in the case of the balance in the Benefit Account and (B) until the Employee's death, in the case of the Index Benefit defined in Schedule "B" (subject to reduction upon application of the sixty (60%) limitation described above). 5.3. Termination for Cause. If the Employee suffers a "Termination for --------------------- Cause", as defined in subparagraph 1.15 of this Agreement, the Employee shall forfeit any and all rights and benefits the Employee may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Employee by the Employer pursuant to the terms of this Agreement. -9- 5.4. Termination by the Employer on Account of or After a Change in -------------------------------------------------------------- Control. In the event the Employee's employment with the Employer is terminated - ------- by the Employer "in connection with a Change in Control" as described in subparagraph 1.2(a) and as defined in subparagraph 1.4 above, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains fifty-nine and one-half (59.5) years of age or any month thereafter, as requested in writing by the Employee and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Employee does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "F" in the case of the balance in the Benefit Account and (ii) until the Employee's death in the case of the Index Benefit defined in Schedule "B". 5.5. Payments in the Event of Death Following Termination. If the ---------------------------------------------------- Employee shall die prior to receiving all of the applicable benefits described in this Paragraph 5 to which the Employee is entitled, then the Employer will make such payments to the Employee's designated beneficiary. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 6. Section 280G Benefits Adjustment. If all or any portion of the ----------------------------------- amounts payable to the Employee under this Agreement, either alone or together with other payments which the Employee has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), the Employer (and its successor) shall increase the amounts payable under this Agreement to the extent necessary to afford the Employee substantially the same economic benefit under this Agreement as the Employee would have received had no such excise tax been imposed on the payments due the Employee under this Agreement. The determination of the amount of any such excise taxes shall be made initially by the independent accounting firm employed by the Employer immediately prior to the occurrence of the event constituting a Change in Control. If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable to the Employee is greater than the amount initially so determined, then the Employer (or its successor) shall pay to the Employee an amount equal to the sum of (i) such additional excise taxes, and (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse the Employee substantially for any income, excise or other taxes payable by the Employee with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii). 7. Right To Determine Funding Methods. The Employer reserves the right to ---------------------------------- determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Employee, the Employee's -10- spouse or the Employee's beneficiaries under the terms of this Agreement. In the event that the Employer elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Employer shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Employer further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Employee, the Employee's spouse nor the Employee's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Employer pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Employer's obligations pursuant to this Agreement. In connection with the foregoing, the Employee agrees to execute such documents and undergo such medical examinations or tests which the Employer may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Employer's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Employee to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Employee, the Employee's spouse and the Employee's beneficiaries of any and all rights to payment hereunder. 8. Claims Procedure. The Employer shall, but only to the extent necessary ---------------- to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Employee, the Employee's spouse, or the Employee's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Employee, the Employee's spouse or the Employee's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Employee, the Employee's spouse or the Employee's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. 9. Status Under Secular Trust and as an Unsecured General Creditor. --------------------------------------------------------------- (a) The Employee has established a secular trust, identified as the Susan K. Black Secular Trust, a copy of which is attached hereto as Schedule "G" (the "Trust"). The Employer shall make contributions to the Trust as specified in Schedule "C" of this Agreement. The contributions shall be deposited into an account which constitutes the Trust Fund as defined in the Trust. Notwithstanding anything contained herein to the contrary, the Trust Fund shall not be subject to the claims of the Employer's general creditors except as may be expressly stated in the Trust. In the event of a conflict between the provisions of the Trust and this Agreement, the provisions of the Trust shall control. (b) Except as provided in subparagraph 9(a) above: (i) neither the Employee, the Employee's spouse or the Employee's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Employee, the Employee's spouse or the Employee's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Employer under this Agreement; (iii) all of -11- the Employer's assets shall be and remain the general unpledged and unrestricted assets of the Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employer to pay money in the future; and (v) the Employee, the Employee's spouse and the Employee's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. (c) Notwithstanding subparagraphs 9(b)(i) through 9(b)(v) above, the Employer and the Employee acknowledge and agree that, in the event of a Change in Control and at the written request of the Employee, the Employer shall establish, not later than the effective date of the Change in Control, a Rabbi Trust or multiple Rabbi Trusts upon such terms and conditions as the Employer in its sole discretion deems appropriate and in compliance with applicable provisions of the Code in order to permit the Employer to make contributions and/or transfer assets to the Rabbi Trust or Rabbi Trusts to discharge its obligations pursuant to this Agreement. The principal of the Rabbi Trust or Rabbi Trusts and any earnings thereon shall be held separate and apart from other funds of the Employer to be used exclusively for discharge of the Employer's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Employer's general creditors until paid to the Employee or its beneficiaries in such manner and at such times as specified in this Agreement. 10. Discretion of Board to Accelerate Payout. Notwithstanding any of the ---------------------------------------- other provisions of this Agreement, the Board of Directors of the Employer may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the terms of this Agreement, provided that Employee (or the Employee's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Employer's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Employer's Board of Directors and offered to the Employee [or Employee's spouse or designated beneficiaries] on a "take it or leave it basis"). -12- 11. Miscellaneous. ------------- 11.1. Opportunity To Consult With Independent Advisors. The Employee ------------------------------------------------ acknowledges that the Employee has been afforded the opportunity to consult with independent advisors of his or her choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to the Employee under the terms of this Agreement and the (i) terms and conditions which may affect the Employee's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Employee acknowledges and agrees shall be the sole responsibility of the Employee notwithstanding any other term or provision of this Agreement. The Employee further acknowledges and agrees that the Employer shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Employee and further specifically waives any right for the Employee and his or her heirs, beneficiaries, legal representatives, agents, successors, and assigns to claim or assert liability on the part of the Employer related to the matters described above in this subparagraph 11.1. The Employee further acknowledges and agrees that the Employee has read, understands and consents to all of the terms and conditions of this Agreement, and that the Employee enters into this Agreement with a full understanding of its terms and conditions. 11.2. Arbitration of Disputes. All claims, disputes and other matters ----------------------- in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. 11.3. Attorneys' Fees. In the event of any arbitration or litigation --------------- concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The -13- "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4. Notice. Any notice required or permitted of either the Employee ------ or the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Employer: Mid-Peninsula Bank 2860 West Bayshore Road Palo Alto, California 94303 Attention: Human Resources If to the Employee: Susan K. Black [omitted] 11.5. Assignment. Neither the Employee, the Employee's spouse, nor any ---------- other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Employee, the Employee's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and unenforceable without the prior written consent of the Employer. The Employer's consent, if any, to one or more assignments or transfers shall not obligate the Employer to consent to or be construed as the Employer's consent to any other or subsequent assignment or transfer. 11.6. Binding Effect/Merger or Reorganization. This Agreement shall be --------------------------------------- binding upon and inure to the benefit of the Employee and the Employer and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. -14- 11.7. Non-waiver. The failure of either party to enforce at any time or ---------- for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8. Partial Invalidity. If any term, provision, covenant, or ------------------ condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9. Entire Agreement. This Agreement, including the schedules and ---------------- exhibits attached hereto and incorporated herein by this reference, contains all of the covenants and agreement, and supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10. Modifications. Any modification of this Agreement shall be ------------- effective only if it is in writing and signed by each party or such party's authorized representative. 11.11. Paragraph Headings. The paragraph headings used in this ------------------ Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12. No Strict Construction. The language used in this Agreement ---------------------- shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13. Governing Law. The laws of the State of California, other than ------------- those laws denominated choice of law rules, and, where applicable, the rules and regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency, shall govern the validity, interpretation, construction and effect of this Agreement. 11.14. Waiver of Prior Plan Benefit. To the extent that the Employee is ---------------------------- a participant in any other supplemental benefit plan provided by the Employer which affords the Employee benefits in the event of the Employee's retirement or death or a change in control of the Employer, it is an express condition precedent to the effectiveness of this Agreement that the Employee execute and deliver the Waiver of Prior Plan Benefit attached as Schedule "D" to this Agreement. -15- IN WITNESS WHEREOF, the Employer and the Employee have executed this Agreement on the date first above-written in the City of Palo Alto, Santa Clara County, California. THE EMPLOYER THE EMPLOYEE Mid-Peninsula Bank, a California banking corporation By: /s/ Shawn E. Saunders /s/ Susan K. Black --------------------- ------------------ Shawn E. Saunders Susan K. Black Chief Financial Officer -16- SCHEDULE A ---------- Applicable Calendar Year Percentage 12/31/97 70% 12/31/98 80% 12/31/99 90% 12/31/00 100% SCHEDULE B ---------- INDEX EMPLOYEE BENEFITS ----------------------- 1. Index Employee Benefits Determination. The Index Employee Benefits ------------------------------------- consist of (i) accruals to the Employee's Benefit Account (as described in subparagraph (a) below) during the Employee's employment by the Employer and (ii) the Index Benefit (as described in subparagraph (b) below) after the Employee's employment by the Employer terminates. The Index Employee Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a --------------- liability reserve account on the books of the Employer for the benefit of the Employee. Prior to the date on which the Employee becomes eligible to receive payments under the Plan, such Benefit Account shall be increased (or decreased) each Plan Year by an amount equal to the annual earnings (or loss) for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Employee becomes eligible ------------- to receive payments under the Plan, the Index Benefit for the Employee for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the annual earnings (if any) for that Plan year determined by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual ----- after-tax income from the life insurance contracts ----- described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $191,227 ------------- Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $390,000 -------------
If such contracts of life insurance are actually purchased by the Employer, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are not purchased or are subsequently surrendered or lapsed, then the Employer shall receive and use annual policy illustrations that assume the above described policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be ---------------- calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefits (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate the Opportunity Cost shall be the Employer's marginal tax rate until the Employee's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Employer is higher or lower. 2. Employee Benefits Payments. The Employee shall be entitled to payment -------------------------- of the Index Employee Benefits on the terms as specified in the Agreement. EXAMPLE INDEX EMPLOYEE BENEFITS
[n] [A] [B] [C] [D] End of Year Cash Surrender Value of Life Index Opportunity Cost Annual Benefit - ----------- -------------------------------- ----- ---------------- -------------- Insurance Policy [Annual Policy A0 = premium B-C ---------------- Income] A0+Cn-1x.05x An-An-1 (1-42%) 0 $1, 000,000 -- -- -- 1 $1,050,000 $50,000 $29,000 $21,000 2 $1,102,500 $52,500 $29,841 $22,659 3 $1,157,625 $55,125 $30,706 $24,419
Assumptions: Initial Insurance = $1,000,000 Effective Tax Rate = 42% One Year US Treasury Yield = 5% -19- SCHEDULE C ---------- SUPPLEMENTAL BENEFITS --------------------- In addition to the Employee Benefits specified elsewhere in this Agreement, the Employee shall be entitled to receive the following supplemental benefits (the "Supplemental Benefits"): Secular Trust Defined Benefit. Provided that the Employee has not exercised the Employee's withdrawal rights under the Trust, the Employer shall make contributions to the Trust, pursuant to paragraph 9 of the Agreement, on a pre-tax basis in the amounts shown in column (B) of the following table. Such contributions shall be made from time to time in the discretion of the Employer provided that the total amount shown in column (B) below has been contributed to the Trust by the end of the Plan Year shown in column (A) below. (A) (B) 1998 $50,506 1999 $36,384 2000 $40,786 2001 $45,581 2002 $50,799 2003 $56,475 2004 $62,645 2005 $69,347 2006 $76,623 2007 $84,517 2008 $93,079 2009 $102,358 2010 $112,412 2011 $123,299 The aggregate amount of the foregoing contributions shall be subject to adjustment, from time to time, to ensure that the Trust is adequately funded to afford the Employee with a projected defined benefit equal to the Applicable Percentage of Forty Five Thousand Eight Hundred Forty-Six Dollars ($45,846) per annum for twenty (20) years commencing the year in which the Employee attains age sixty-two (62). In the event that the contributions made by the Employer to the Trust as provided above are determined to be insufficient to fund the foregoing Supplemental Benefits, the Employer -20- shall make such further contributions to the Trust as may be necessary to fund fully such Supplemental Benefits. Such determination and adjusting contributions, if required, may be made from time to time at the discretion of the Employer, but in all events not later than the date on which the Employee Retires or otherwise becomes eligible to begin receiving the Employee Benefits specified in Schedule "B". Provided that the foregoing final adjusting contribution, if required, has been made, the Employer shall have no obligation to make further contributions to the Trust once the Employee Retires or otherwise becomes eligible to begin receiving the Employee Benefits specified in Schedule "B". Notwithstanding anything herein or in the Agreement to the contrary, the obligation of the Employer to make the contributions to the Trust as specified above shall terminate automatically upon the forfeiture or other termination of the Employee's right to receive the Employee Benefits specified in Schedule "B", as provided in this Agreement. -21- SCHEDULE D ---------- WAIVER OF PRIOR PLAN BENEFITS ----------------------------- In consideration for the Employee Benefits made available to the Employee by this Employee Supplemental Compensation Benefits Agreement (the "Agreement"), the Employee acknowledges and agrees as follows: (a) The Employee is a party to that certain ___________________________ Agreement made with the Employer or its predecessor dated ____________, 19__ (the "Prior Plan Agreement"); (b) This Agreement and the Employee Benefits hereunder are provided as a substitute for the Prior Plan Agreement and the benefits provided thereunder; (c) The Prior Plan Agreement and the benefits thereunder are hereby terminated effective as of the date of this Agreement; (d) The Employee hereby waives and relinquishes for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successors and assigns, any and all right, entitlement and interest that the Employee has or may have pursuant to the Prior Plan Agreement and the benefits thereunder; (e) The Employee accepts the Employee Benefits afforded by this Agreement in full and complete substitution for the benefits otherwise provided by the Prior Plan Agreement; and (f) Without limiting the scope and effect of subparagraph 11.1 of the Agreement, the Employee (i) has had an opportunity to consult with advisors of the Employee's own choice in determining to enter into this Agreement and this Waiver, (ii) understands that the effect of this Waiver is to terminate, waive and relinquish forever all rights, entitlements and interests that the Employee has or may have under the Prior Plan Agreement and the benefits thereunder as a condition to receiving the Employee Benefits under this Agreement; and (iii) the Employee is entering into this Agreement and this Waiver voluntarily and with full appreciation of the effect of doing so. Dated: , 1998 ---------------------------- ------------------------------- Susan K. Black I consent to and agree to be bound by the foregoing Waiver: - ------------------------------------------ Aris Angelopoulos, Spouse of Susan K. Black -22- SCHEDULE E ----------- BENEFICIARY DESIGNATION ----------------------- To the Administrator of the Mid-Peninsula Bank Employee Supplemental Compensation Benefits Agreement: Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Mid-Peninsula Bank, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: Primary Beneficiary: - ------------------- - ------------------------- -------------------------- ---------------- Name Address Relationship Secondary (Contingent) Beneficiary: - ---------------------------------- - ------------------------- -------------------------- ---------------- Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Employee Supplemental Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the remaining unpaid benefit payable according to the terms of my Employee Supplemental Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Employee Supplemental Compensation Benefits Agreement. Dated: , 1998 ---------------------------- ---------------------------------- Susan K. Black -23- CONSENT OF THE EMPLOYEE'S SPOUSE - -------------------------------- TO THE ABOVE BENEFICIARY DESIGNATION: - ------------------------------------ I, Aris Angelopoulos, being the spouse of Susan K. Black, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Employee Supplemental Compensation Benefits Agreement entered into by my spouse effective as of January 1, 1998. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Employee Supplemental Compensation Benefits Agreement and in which I may have a marital property interest. Dated: , 1998 ---------------------------- - ------------------------------------------- Aris Angelopoulos -24- SCHEDULE F ---------- DISTRIBUTION ELECTION --------------------- Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Mid-Peninsula Bank, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: ---- sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ---- one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ---- one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: , 1998 ---------------------------- Signed: -------------------------------------- Susan K. Black -25- SCHEDULE G ---------- SECULAR TRUST ------------- [to be finalized] -26- EX-10.4 4 EMPLOYEE SUPP COMP BENEFITS AGRMT WITH DAVID R. HOOD EXHIBIT 10.4 EMPLOYEE SUPPLEMENTAL COMPENSATION BENEFITS AGREEMENT ----------------------------------------------------- This Employee Supplemental Compensation Benefits Agreement (the "Agreement") is made and entered into effective as of January 1, 1998, by and between Cupertino National Bank, a California corporation (the "Employer"), and David R. Hood, an individual residing in the State of California (the "Employee"). R E C I T A L S --------------- WHEREAS, the Employee is an employee of the Employer, and, since April 11, 1995, has become eligible to participate in the Employee Supplemental Compensation Benefits Plan represented by this Agreement (the "Plan"); WHEREAS, the Employer desires to establish a compensation benefits program as a fringe benefit for certain officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry; WHEREAS, the Employee's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable; WHEREAS, it is deemed to be in the best interests of the Employer to provide the Employee with certain benefits, on the terms and conditions set forth herein, in order to reasonably induce the Employee to remain in the Employer's employment and to compensate the Employee for valuable services heretofore rendered to the Employer; WHEREAS, it is the intention of the parties that the Employer's obligations under this Agreement shall be that of an unfunded and unsecured promise to provide the benefits to the Employee set forth hereinafter and except for the contributions, if any, to a secular trust to be established by the Employee as grantor, the Employee and the Employee's beneficiaries shall be unsecured general creditors with respect to any benefits provided under the terms of this Agreement; and WHEREAS, the Employee and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Employee, or to the Employee's spouse or the Employee's designated beneficiaries, as the case may be. NOW, THEREFORE, in consideration of the services to be performed by the Employee in the future, as well as the mutual promises and covenants contained herein, the Employee and the Employer agree as follows: A G R E E M E N T ----------------- 1. Terms and Definitions. --------------------- 1.1. Administrator. The Employer shall be the "Administrator" and, ------------- solely for the purposes of ERISA, as defined in subparagraph 1.11 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. 1.2. Applicable Percentage. The term "Applicable Percentage" shall mean --------------------- that percentage listed on Schedule "A" attached hereto which is adjacent to the number of calendar years which shall have elapsed from the date of the Employee's commencement of employment with and providing personal services to the Employer or, if later, the date on which the Employee became eligible to participate in the Plan represented by this Agreement, and ending on the date payments are to first begin under the terms of this Agreement. Notwithstanding the foregoing or the percentages set forth on Schedule "A", but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (a) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the termination of the Employee's employment by the Employer if such termination is in connection with a "Change in Control" as defined in subparagraph 1.4 below. A termination shall be deemed to be in connection with a Change in Control if, within two (2) years following the occurrence of a Change in Control: (i) the Employee's employment with the Employer is terminated by the Employer other than a Termination for Cause; or (ii) by reason of the Employer's actions any adverse and material change occurs in the scope of the Employee's position, responsibilities, duties, salary, benefits or location of employment; or (iii) the Employer causes an event to occur which reasonably constitutes or results in a demotion, a significant diminution of responsibilities or authority, or a constructive termination (by forcing a resignation or otherwise) of the Employee's employment; (b) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the occurrence of (i) the Employee's death prior to the termination of the Employee's employment by the Employer, or (ii) the Employee's Disability (as defined in subparagraph 1.6 below) other than a Disability that occurs after the termination of the Employee's employment by the Employer; and (c) notwithstanding subclauses (a) and (b) of this subparagraph 1.2, zero percent (0%) in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Employee's death and of which the Employer is the designated beneficiary (the "Employer Cost Recovery Policy"). Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any Employer Cost Recovery Policy, then: (1) the Employee, the Employee's estate, designated beneficiary or Surviving Spouse shall no longer be entitled to receive any of the amounts payable under the terms of this Agreement, and -2- (2) the Employer shall have the right to recover from Employee's estate and/or Surviving Spouse all of the amounts paid to the Employee's estate or Surviving Spouse, as the case may be (with respect to amounts paid prior to the Employee's death or paid to the Employee's estate or Surviving Spouse) or from the Employee"s designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after Employee's death. 1.3. Beneficiary. The term "beneficiary" or "designated beneficiary" ----------- shall mean the person or persons whom the Employee shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "E," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof and is completed and signed by the Employee and received by the Administrator prior to the Employee's death. 1.4. Change in Control. The term "Change in Control" shall mean the ----------------- first to occur of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company which owns 100% of the Employer's outstanding voting capital stock): (a) Any "person" (as such term is used in sections 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which becomes the beneficial owner (as that term is used in section 13(d) of the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the Employer's capital stock entitled to vote in the election of directors, other than a group of two or more persons not (i) acting in concert for the purpose of acquiring, holding or disposing of such stock or (ii) otherwise required to file any form or report with any governmental agency or regulatory authority having jurisdiction over the Employer which requires the reporting of any change in control; (b) During any period of not more than two (2) consecutive years, not including any period prior to the adoption of the Plan represented by this Agreement, individuals who, at the beginning of such period, constitute the Board of Directors of the Employer, and any new director (other than a director designated by a person who has entered into an agreement with the Employer to effect a transaction described in clause (a), (c), (d) or (e) of this subparagraph 1.4) whose appointment to the Board of Directors or nomination for election to the Board of Directors was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office, either were directors at the beginning of such period or whose appointment or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) The effective date of any consolidation or merger of the Employer (after all requisite shareholder, applicable regulatory and other approvals and consents have been obtained), other than a consolidation or merger of the Employer in which the holders of the voting capital stock of the Employer immediately prior to the consolidation or merger hold more than fifty percent (50%) of the voting capital stock of the surviving entity immediately after the consolidation or merger; -3- (d) The shareholders of the Employer approve any plan or proposal for the liquidation or dissolution of the Employer; or (e) The shareholders of the Employer approve the sale or transfer of substantially all of the Employer's assets to parties that are not within a "controlled group of corporations" (as that term is defined in section 1563 of the Code) in which the Employer is a member. 1.5. The Code. The "Code" shall mean the Internal Revenue Code of 1986, -------- as amended (the "Code"). 1.6. Disability/Disabled. The term "Disability" or "Disabled" shall ------------------- have the same meaning given such terms in any policy of disability insurance maintained by the Employer for the benefit of employees including the Employee. In the absence of such a policy which extends coverage to the Employee in the event of disability, the terms shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of the Employee's duties to the Employer for at least ninety (90) days. 1.7. Early Retirement Date. The term "Early Retirement Date" shall mean --------------------- the Retirement, as defined below, of the Employee on a date which occurs prior to the Employee attaining sixty-two (62) years of age, as defined below, but after the Employee has attained fifty-nine and one-half (59.5) years of age. 1.8. Effective Date. The term "Effective Date" shall mean the date -------------- first written above. 1.9. Employee Benefits. Except as otherwise stated in this Agreement, ----------------- the term "Employee Benefits" shall mean the Index Employee Benefits, if any, described in and determined in accordance with Schedule "B" and the supplemental benefits described in and determined in accordance with Schedule "C", and reduced or adjusted to the extent: (i) required under the other provisions of this Agreement; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). -4- 1.10. Employer. Except as otherwise set forth in this Agreement, the -------- term "Employer" shall mean Greater Bay Bancorp; provided, however, that for purposes of subparagraph 1.15 (definition of Termination for Cause) and Paragraph 5 (including its subparagraphs, regarding termination of employment), the term "Employer" shall mean Greater Bay Bancorp and its subsidiaries and affiliated entities. 1.11. ERISA. The term "ERISA" shall mean the Employee Retirement Income ----- Security Act of 1974, as amended. 1.12. Plan Year. The term "Plan Year" shall mean the Employer's fiscal --------- year. 1.13. Retirement. The term "Retirement" or "Retires" shall refer to the ---------- date which the Employee acknowledges in writing to the Employer to be the last day the Employee will provide any significant personal services, whether as an employee or independent consultant or contractor, to the Employer or to, for, or on behalf of, any other business entity conducting, performing or making available to any person or entity banking or other financial services of any kind. For purposes of this Agreement, the phrase "significant personal services" shall mean more than ten (10) hours of personal services rendered to one or more individuals or entities in any thirty (30) day period for compensation excluding services, if any, rendered by the Employee after Retirement pursuant to the terms of a consulting agreement described in Schedule "C", if any. 1.14. Surviving Spouse. The term "Surviving Spouse" shall mean the ----------------- person, if any, who shall be legally married to the Employee on the date of the Employee's death. 1.15. Termination for Cause. The term "Termination for Cause" shall --------------------- mean termination of the employment of the Employee by reason of any of the following: (a) The Employee's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Employer, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency or any other regulatory agency or governmental authority having jurisdiction over the Employer, which has a material adverse effect upon the Employer; or (b) The Employee's conviction of (i) any felony or (ii) a crime involving moral turpitude or a fraudulent or dishonest act which, in each case, has a material adverse effect on the Employer. 2. Scope, Purpose and Effect. ------------------------- 2.1. Contract of Employment. Although this Agreement is intended to ---------------------- provide the Employee with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Employee and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer -5- to terminate the Employee's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Employee may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart from, and shall have no effect upon, or be affected by, the terms and provisions of said Employment Agreement. 2.2. Fringe Benefit. The benefits provided by this Agreement are -------------- granted by the Employer as a fringe benefit to the Employee and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Employee has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. 3. Payments Upon Early Retirement or Retirement and After Retirement. ----------------------------------------------------------------- 3.1. Payments Upon Early Retirement. The Employee shall have the right ------------------------------ to Retire on a date which constitutes an Early Retirement Date as defined in subparagraph 1.7 above. In the event the Employee elects to Retire on a date which constitutes an Early Retirement Date, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of such Early Retirement Date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". -6- EXAMPLE Payments Upon Early Retirement
Assumptions: - ----------- Age at Early Retirement 60 Normal Retirement Age 62 Projected Benefit Account Value at Age 62 $100,000 Actual Benefit Account Value at Age 60 $20,000 Distribution Period Elected for Benefit Account (Schedule F) 10 yrs. Projected Index Benefit at Age 62 $50,000 Projected Index Benefit at Age 60 $25,000 Applicable Percentage at Age 60 75%
First Year Benefit Calculation: Age 60 1) Benefit Account [($20,000 10) x .75] $ 1,500 2) Index Benefit ($25,000 x .75) $18,750 ------- Total First Year Benefit $20,250 =======
3.2. Payments Upon Retirement. If the Employee shall remain in the ------------------------ continuous employment of the Employer until attaining sixty-two (62) years of age, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee Retires (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of said Retirement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". 3.3. Payments in the Event of Death After Retirement. The Employer ----------------------------------------------- agrees that if the Employee Retires, but shall die before receiving all of the Employee Benefits, the Employer will make such payments to which the Employee may be entitled, to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts -7- due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4. Payments in the Event Death or Disability Occurs Prior to Retirement. -------------------------------------------------------------------- 4.1. Payments in the Event of Death Prior to Retirement. If the -------------------------------------------------- Employee dies while actively employed by the Employer at any time after the Effective Date of this Agreement, but prior to Retirement, the Employer agrees to pay the Employee Benefits to which the Employee is then entitled to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4.2. Payments in the Event of Disability Prior to Retirement. In the ------------------------------------------------------- event the Employee becomes Disabled at any time after the Effective Date of this Agreement but prior to Retirement, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee becomes Disabled (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". 5. Payments in the Event Employment Is Terminated Prior to Retirement. As ------------------------------------------------------------------ indicated in subparagraph 2.1 above, the Employer reserves the right to terminate the Employee's employment, with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Employee's Retirement. In the event that the employment of the Employee shall be terminated, other than by reason of death, Disability or Retirement, prior to the Employee's attaining sixty-two (62) years of age, then this Agreement shall terminate on the date of such termination of employment; provided, however, that the Employee shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Employee's termination: 5.1. Termination Without Cause. If the Employee's employment is ------------------------- terminated by the Employer without cause, and such termination is not subject to the provisions of subparagraph 5.4 below, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". -8- 5.2. Voluntary Termination by the Employee. If the Employee's ------------------------------------- employment is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraph 5.4 below, the Employee shall be entitled to be paid the following benefits: (a) If the Applicable Percentage at the date of termination is one hundred percent (100%), the Employee shall be paid (i) the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (A) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (B) until the Employee's death, in the case of the Index Benefit defined in Schedule "B. (b) If the Applicable Percentage at the date of termination is less than one hundred percent (100%), the Employee shall be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", based on a ten (10) year (120 month) payout of the Benefit Account balance at termination notwithstanding the Employee's election of a different payout period under Schedule "F", but not more than sixty percent (60%) of the Employee's base salary (i.e., exclusive of any bonuses, incentive payments or other employee benefits to which the Employee would otherwise be entitled) at the date of termination. Notwithstanding the foregoing, the Employee shall be paid not less than seventy percent (70%) of the Employee Benefits specified in Schedule "B", based on a ten (10) year (120 month) payout of the Benefit Account balance at termination notwithstanding the Employee's election of a different payout period under Schedule "F". Such benefit shall be payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (A) for the period of one hundred twenty (120) months, in the case of the balance in the Benefit Account and (B) until the Employee's death, in the case of the Index Benefit defined in Schedule "B" (subject to adjustment as described above). 5.3. Termination for Cause. If the Employee suffers a ----------------------- "Termination for Cause", as defined in subparagraph 1.15 of this Agreement, the Employee shall forfeit any and all rights and benefits the Employee may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Employee by the Employer pursuant to the terms of this Agreement. 5.4. Termination by the Employer on Account of or After a Change in -------------------------------------------------------------- Control. In the event the Employee's employment with the Employer is terminated - ------- by the Employer "in connection with a Change in Control" as described in subparagraph 1.2(a) and as defined in subparagraph 1.4 above, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains fifty-nine and one-half (59.5) years of age or any month thereafter, as requested -9- in writing by the Employee and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Employee does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "F" in the case of the balance in the Benefit Account and (ii) until the Employee's death in the case of the Index Benefit defined in Schedule "B". 5.5. Payments in the Event of Death Following Termination. If the ---------------------------------------------------- Employee shall die prior to receiving all of the applicable benefits described in this Paragraph 5 to which the Employee is entitled, then the Employer will make such payments to the Employee's designated beneficiary. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 6. Section 280G Benefits Adjustment. If all or any portion of the amounts -------------------------------- payable to the Employee under this Agreement, either alone or together with other payments which the Employee has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), the Employer (and its successor) shall increase the amounts payable under this Agreement to the extent necessary to afford the Employee substantially the same economic benefit under this Agreement as the Employee would have received had no such excise tax been imposed on the payments due the Employee under this Agreement. The determination of the amount of any such excise taxes shall be made initially by the independent accounting firm employed by the Employer immediately prior to the occurrence of the event constituting a Change in Control. If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable to the Employee is greater than the amount initially so determined, then the Employer (or its successor) shall pay to the Employee an amount equal to the sum of (i) such additional excise taxes, and (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse the Employee substantially for any income, excise or other taxes payable by the Employee with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii). 7. Right To Determine Funding Methods. The Employer reserves the right to ---------------------------------- determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Employee, the Employee's spouse or the Employee's beneficiaries under the terms of this Agreement. In the event that the Employer elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Employer shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Employer further reserves the right, in its sole and absolute -10- discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Employee, the Employee's spouse nor the Employee's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Employer pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Employer's obligations pursuant to this Agreement. In connection with the foregoing, the Employee agrees to execute such documents and undergo such medical examinations or tests which the Employer may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Employer's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Employee to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Employee, the Employee's spouse and the Employee's beneficiaries of any and all rights to payment hereunder. 8. Claims Procedure. The Employer shall, but only to the extent necessary ---------------- to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Employee, the Employee's spouse, or the Employee's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Employee, the Employee's spouse or the Employee's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Employee, the Employee's spouse or the Employee's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. 9. Status Under Secular Trust and as an Unsecured General Creditor. --------------------------------------------------------------- (a) The Employee has established a secular trust, identified as the David R. Hood Secular Trust, a copy of which is attached hereto as Schedule "G" (the "Trust"). The Employer shall make contributions to the Trust as specified in Schedule "C" to this Agreement. The contributions shall be deposited into an account which constitutes the Trust Fund as defined in the Trust. Notwithstanding anything contained herein to the contrary, the Trust Fund shall not be subject to the claims of the Employer's general creditors except as may be expressly stated in the Trust. In the event of a conflict between the provisions of the Trust and this Agreement, the provisions of the Trust shall control. (b) Except as provided in subparagraph 9(a) above: (i) neither the Employee, the Employee's spouse or the Employee's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Employee, the Employee's spouse or the Employee's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Employer under this Agreement; (iii) all of the Employer's assets shall be and remain the general unpledged and unrestricted assets of the -11- Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employer to pay money in the future; and (v) the Employee, the Employee's spouse and the Employee's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. (c) Notwithstanding subparagraphs 9(b)(i) through 9(b)(v) above, the Employer and the Employee acknowledge and agree that, in the event of a Change in Control and at the written request of the Employee, the Employer shall establish, not later than the effective date of the Change in Control, a Rabbi Trust or multiple Rabbi Trusts upon such terms and conditions as the Employer in its sole discretion deems appropriate and in compliance with applicable provisions of the Code in order to permit the Employer to make contributions and/or transfer assets to the Rabbi Trust or Rabbi Trusts to discharge its obligations pursuant to this Agreement. The principal of the Rabbi Trust or Rabbi Trusts and any earnings thereon shall be held separate and apart from other funds of the Employer to be used exclusively for discharge of the Employer's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Employer's general creditors until paid to the Employee or its beneficiaries in such manner and at such times as specified in this Agreement. 10. Discretion of Board to Accelerate Payout. Notwithstanding any of the ---------------------------------------- other provisions of this Agreement, the Board of Directors of the Employer may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the terms of this Agreement, provided that Employee (or the Employee's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Employer's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Employer's Board of Directors and offered to the Employee [or Employee's spouse or designated beneficiaries] on a "take it or leave it basis"). -12- 11. Miscellaneous. ------------- 11.1. Opportunity To Consult With Independent Advisors. The Employee ------------------------------------------------ acknowledges that the Employee has been afforded the opportunity to consult with independent advisors of his or her choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to the Employee under the terms of this Agreement and the (i) terms and conditions which may affect the Employee's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Employee acknowledges and agrees shall be the sole responsibility of the Employee notwithstanding any other term or provision of this Agreement. The Employee further acknowledges and agrees that the Employer shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Employee and further specifically waives any right for the Employee and his or her heirs, beneficiaries, legal representatives, agents, successors, and assigns to claim or assert liability on the part of the Employer related to the matters described above in this subparagraph 11.1. The Employee further acknowledges and agrees that the Employee has read, understands and consents to all of the terms and conditions of this Agreement, and that the Employee enters into this Agreement with a full understanding of its terms and conditions. 11.2. Arbitration of Disputes. All claims, disputes and other matters ----------------------- in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. 11.3. Attorneys' Fees. In the event of any arbitration or litigation --------------- concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement -13- or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4. Notice. Any notice required or permitted of either the Employee ------ or the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Employer: Cupertino National Bank 2860 West Bayshore Road Palo Alto, California 94303 Shawn E. Saunders Chief Financial Officer If to the Employee: David R. Hood [omitted] 11.5. Assignment. Neither the Employee, the Employee's spouse, nor any ---------- other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Employee, the Employee's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and unenforceable without the prior written consent of the Employer. The Employer's consent, if any, to one or more assignments or transfers shall not obligate the Employer to consent to or be construed as the Employer"s consent to any other or subsequent assignment or transfer. 11.6. Binding Effect/Merger or Reorganization. This Agreement shall be --------------------------------------- binding upon and inure to the benefit of the Employee and the Employer and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or reorganize or sell -14- substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. 11.7. Non-waiver. The failure of either party to enforce at any time or ---------- for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8. Partial Invalidity. If any term, provision, covenant, or ------------------ condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9. Entire Agreement. This Agreement, including the schedules and ---------------- exhibits attached hereto and incorporated herein by this reference, contains all of the covenants and agreement, and supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10. Modifications. Any modification of this Agreement shall be ------------- effective only if it is in writing and signed by each party or such party's authorized representative. 11.11. Paragraph Headings. The paragraph headings used in this ------------------ Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12. No Strict Construction. The language used in this Agreement ----------------------- shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13. Governing Law. The laws of the State of California, other than ------------- those laws denominated choice of law rules, and, where applicable, the rules and regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency, shall govern the validity, interpretation, construction and effect of this Agreement. -15- 11.14. Waiver of Prior Plan Benefit. To the extent that the Employee is ---------------------------- a participant in any other supplemental benefit plan provided by the Employer which affords the Employee benefits in the event of the Employee's retirement or death or a change in control of the Employer, it is an express condition precedent to the effectiveness of this Agreement that the Employee execute and deliver the Waiver of Prior Plan Benefit attached as Schedule "D" to this Agreement. IN WITNESS WHEREOF, the Employer and the Employee have executed this Agreement on the date first above-written in the City of Palo Alto, Santa Clara County, California. THE EMPLOYER THE EMPLOYEE CUPERTINO NATIONAL BANK, a California corporation By: /s/ Shawn E. Saunders /s/ David R. Hood --------------------- ----------------- Shawn E. Saunders David R. Hood Senior Vice President and Chief Financial Officer -16- SCHEDULE A ---------- Applicable Calendar Year Percentage 12/31/97 70% 12/31/98 80% 12/31/99 90% 12/31/00 100% SCHEDULE B ---------- INDEX EMPLOYEE BENEFITS ----------------------- 1. Index Employee Benefits Determination. The Index Employee Benefits consist of ------------------------------------- (i) accruals to the Employee"s Benefit Account (as described in subparagraph (a) below) during the Employee"s employment by the Employer and (ii) the Index Benefit (as described in subparagraph (b) below) after the Employee"s employment by the Employer terminates. The Index Employee Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a liability --------------- reserve account on the books of the Employer for the benefit of the Employee. Prior to the date on which the Employee becomes eligible to receive payments under the Plan, such Benefit Account shall be increased (or decreased) each Plan Year by an amount equal to the annual earnings (or loss) for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Employee becomes eligible to ------------- receive payments under the Plan, the Index Benefit for the Employee for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the annual earnings (if any) for that Plan year determined by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual ----- after-tax income from the life insurance contracts described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $390,000 ------------- Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $390,000 ------------- If such contracts of life insurance are actually purchased by the Employer, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are not purchased or are subsequently surrendered or lapsed, then the Employer shall receive and use annual policy illustrations that assume the above described policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be ---------------- calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefits (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate the Opportunity Cost shall be the Employer's marginal tax rate until the Employee's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Employer is higher or lower. 2. Employee Benefits Payments. The Employee shall be entitled to payment of the -------------------------- Index Employee Benefits on the terms as specified in the Agreement. EXAMPLE INDEX EMPLOYEE BENEFITS
[n] [A] [B] [C] [D] End of Year Cash Surrender Value of Life Index Opportunity Cost Annual Benefit - ----------- -------------------------------- ----- ---------------- -------------- Insurance Policy [Annual A/0/ = premium B-C ---------------- Policy Income] A/0/+C/n-1/x.05x A/n/-A/n-1/ (1-42%) 0 $1, 000,000 -- -- -- 1 $1,050,000 $50,000 $29,000 $21,000 2 $1,102,500 $52,500 $29,841 $22,659 3 $1,157,625 $55,125 $30,706 $24,419 . . .
Assumptions: Initial Insurance = $1,000,000 Effective Tax Rate = 42% One Year US Treasury Yield = 5% -2- SCHEDULE C ---------- SUPPLEMENTAL BENEFITS --------------------- In addition to the Employee Benefits specified elsewhere in this Agreement, the Employee shall be entitled to receive the following supplemental benefits (the "Supplemental Benefits"): Secular Trust Defined Benefit. Provided that the Employee has not exercised the Employee's withdrawal rights under the Trust, the Employer shall make contributions to the Trust, pursuant to paragraph 9 of the Agreement, on a pre-tax basis in the amounts shown in column (B) of the following table. Such contributions shall be made from time to time in the discretion of the Employer provided that the total amount shown in column (B) below has been contributed to the Trust by the end of the Plan Year shown in column (A) below. (A) (B) 1998 $190,832 1999 $46,490 2000 $53,883 2001 $61,935 2002 $70,700 2003 $80,232 2004 $90,594 2005 $101,849 2006 $114,069 The aggregate amount of the foregoing contributions shall be subject to adjustment, from time to time, to ensure that the Trust is adequately funded to afford the Employee with a projected defined benefit equal to the Applicable Percentage of Thirty Six Thousand Nine Hundred Ninety Dollars ($36,990) per annum for twenty (20) years commencing the year in which the Employee attains age sixty-two (62). In the event that the contributions made by the Employer to the Trust as provided above are determined to be insufficient to fund the foregoing Supplemental Benefits, the Employer shall make such further contributions to the Trust as may be necessary to fund fully such Supplemental Benefits. Such determination and adjusting contributions, if required, may be made from time to time at the discretion of the Employer, but in all events not later than the date on which the Employee Retires or otherwise becomes eligible to begin receiving the Employee Benefits specified in Schedule "B". Provided that the foregoing final adjusting contribution, if required, has been made, the Employer shall have no obligation to make further contributions to the Trust once the Employee Retires or otherwise becomes eligible to begin receiving the Employee Benefits specified in Schedule "B". Notwithstanding anything herein or in the Agreement to the contrary, the obligation of the Employer to make the contributions to the Trust as specified above shall terminate automatically upon the forfeiture or other termination of the Employee's right to receive the Employee Benefits specified in Schedule "B", as provided in this Agreement. Defined Benefit Payments. The Employee shall receive the Applicable Percentage of the sum of $68,500 per annum, payable in substantially equal monthly installments commencing on the first day of the calendar month immediately following the month in which the Employee attains age sixty-two (62) and continuing through and including the month in which the Employee attains age sixty-seven (67). If the Employee shall die before receiving all of the Supplemental Benefits described in this Schedule "C", the Employer will make such payments to which the Employee may be entitled, to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Schedule "C" shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Schedule "C" shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. In the event that the Employee has not become entitled to receive payment of the Employee Benefits described in Schedule "B" on or before the date on which the Supplemental Benefits described in this Schedule "C" would otherwise commence (other than as a result of an agreement between the Employer and the Employee to defer receipt of such payments), then the Employee shall forfeit each monthly installment of payments otherwise payable under this Schedule "C" for each month until the Employee becomes entitled to receive payment of the Employee Benefits specified in Schedule "B". Notwithstanding anything herein or in the Agreement to the contrary, the Supplemental Benefits set forth in this Schedule "C" shall terminate automatically upon the forfeiture or other termination of the Employee's right to receive the Employee Benefits specified in Schedule "B", as provided in this Agreement. SCHEDULE D ---------- WAIVER OF PRIOR PLAN BENEFITS ----------------------------- In consideration for the Employee Benefits made available to the Employee by this Employee Supplemental Compensation Benefits Agreement (the "Agreement"), the Employee acknowledges and agrees as follows: (a) The Employee is a party to that certain Cupertino National Bank and Trust Employment, Severance and Retirement Benefits Agreement made with the Employer or its predecessor dated April 14, 1995. Such Agreement, and all amendments, modifications, representations, understandings and interpretations thereof, including, without limitation, the Memorandum of Understanding, dated on or about November 15, 1996, is referred to herein as the "Prior Plan Agreement". This Agreement and the Employee Benefits hereunder are provided as a substitute for the Prior Plan Agreement and the benefits provided thereunder. (b) The Prior Plan Agreement and the benefits thereunder are hereby terminated effective as of the date of this Agreement. (c) The Employee hereby waives and relinquishes for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successors and assigns, any and all right, entitlement and interest that the Employee has or may have pursuant to the Prior Plan Agreement and the benefits thereunder, and accepts the Employee Benefits afforded by this Agreement in full and complete substitution for the benefits otherwise provided by the Prior Plan Agreement. (d) Without limiting the scope and effect of subparagraph 11.1 of the Agreement, the Employee (i) has had an opportunity to consult with advisors of the Employee's own choice in determining to enter into this Agreement and this Waiver, (ii) understands that the effect of this Waiver is to terminate, waive and relinquish forever all rights, entitlements and interests that the Employee has or may have under the Prior Plan Agreement and the benefits thereunder as a condition to receiving the Employee Benefits under this Agreement; and (iii) the Employee is entering into this Agreement and this Waiver voluntarily and with full appreciation of the effect of doing so. Dated: _____________________________, 1998 ______________________________ David R. Hood I consent to and agree to be bound by the foregoing Waiver: ________________________________________ Marleen A. Hood,Spouse of David R. Hood SCHEDULE E ---------- BENEFICIARY DESIGNATION ----------------------- To the Administrator of the Greater Bay Bancorp Employee Supplemental Compensation Benefits Agreement: Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Cupertino National Bank, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: Primary Beneficiary: - ------------------- ________________________ _________________________ ____________________ Name Address Relationship Secondary (Contingent) Beneficiary: - ---------------------------------- ________________________ _________________________ ____________________ Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Employee Supplemental Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the remaining unpaid benefit payable according to the terms of my Employee Supplemental Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Employee Supplemental Compensation Benefits Agreement. Dated: ____________________________, 1998 ______________________________ David R. Hood CONSENT OF THE EMPLOYEE'S SPOUSE TO THE ABOVE BENEFICIARY DESIGNATION: - ------------------------------------ I, Marleen A. Hood, being the spouse of David R. Hood, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Employee Supplemental Compensation Benefits Agreement entered into by my spouse effective as of January 1, 1998. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Employee Supplemental Compensation Benefits Agreement and in which I may have a marital property interest. Dated: _____________________________, 1998 __________________________________ Marleen A. Hood - --------------- SCHEDULE F ---------- DISTRIBUTION ELECTION --------------------- Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Cupertino National Bank, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: ____ sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ____ one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ____ one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: _____________________________, 1998 Signed: ______________________________ David R. Hood SCHEDULE G ---------- SECULAR TRUST ------------- [to be finalized] EX-10.5 5 EMPLOYEE SUPP COMP BENEFITS AGRMT WITH GREGG A. JOHNSON EXHIBIT 10.5 EMPLOYEE SUPPLEMENTAL COMPENSATION BENEFITS AGREEMENT ----------------------------------------------------- This Employee Supplemental Compensation Benefits Agreement (the "Agreement") is made and entered into effective as of April 6, 1998, by and between Greater Bay Bancorp, a California banking corporation (the "Employer"), and Gregg A. Johnson, an individual residing in the State of California (the "Employee"). R E C I T A L S --------------- WHEREAS, the Employee is an employee of the Employer, and, since April 6, 1998, has become eligible to participate in the Employee Supplemental Compensation Benefits Plan represented by this Agreement (the "Plan"); WHEREAS, the Employer desires to establish a compensation benefits program as a fringe benefit for certain officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry; WHEREAS, the Employee's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable; WHEREAS, it is deemed to be in the best interests of the Employer to provide the Employee with certain benefits, on the terms and conditions set forth herein, in order to reasonably induce the Employee to remain in the Employer's employment and to compensate the Employee for valuable services heretofore rendered to the Employer; WHEREAS, it is the intention of the parties that the Employer's obligations under this Agreement shall be that of an unfunded and unsecured promise to provide the benefits to the Employee set forth hereinafter and except for the contributions, if any, to a secular trust to be established by the Employee as grantor, the Employee and the Employee's beneficiaries shall be unsecured general creditors with respect to any benefits provided under the terms of this Agreement; and WHEREAS, the Employee and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Employee, or to the Employee's spouse or the Employee's designated beneficiaries, as the case may be. NOW, THEREFORE, in consideration of the services to be performed by the Employee in the future, as well as the mutual promises and covenants contained herein, the Employee and the Employer agree as follows: A G R E E M E N T ----------------- 1. Terms and Definitions. --------------------- 1.1. Administrator. The Employer shall be the "Administrator" and, ------------- solely for the purposes of ERISA, as defined in subparagraph 1.11 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. 1.2. Applicable Percentage. The term "Applicable Percentage" shall mean --------------------- that percentage listed on Schedule "A" attached hereto which is adjacent to the number of calendar years which shall have elapsed from the date of the Employee's commencement of employment with and providing personal services to the Employer or, if later, the date on which the Employee became eligible to participate in the Plan represented by this Agreement, and ending on the date payments are to first begin under the terms of this Agreement. Notwithstanding the foregoing or the percentages set forth on Schedule "A", but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (a) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the termination of the Employee's employment by the Employer if such termination is in connection with a "Change in Control" as defined in subparagraph 1.4 below. A termination shall be deemed to be in connection with a Change in Control if, within two (2) years following the occurrence of a Change in Control: (i) the Employee's employment with the Employer is terminated by the Employer other than a Termination for Cause; or (ii) by reason of the Employer's actions any adverse and material change occurs in the scope of the Employee's position, responsibilities, duties, salary, benefits or location of employment; or (iii) the Employer causes an event to occur which reasonably constitutes or results in a demotion, a significant diminution of responsibilities or authority, or a constructive termination (by forcing a resignation or otherwise) of the Employee's employment; (b) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the occurrence of (i) the Employee's death prior to the termination of the Employee's employment by the Employer, or (ii) the Employee's Disability (as defined in subparagraph 1.6 below) other than a Disability that occurs after the termination of the Employee's employment by the Employer; and (c) notwithstanding subclauses (a) and (b) of this subparagraph 1.2, zero percent (0%) in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Employee's death and of which the Employer is the designated beneficiary (the "Employer Cost Recovery Policy"). Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any Employer Cost Recovery Policy, then: (1) the Employee, the Employee's estate, designated beneficiary or Surviving Spouse shall no -2- longer be entitled to receive any of the amounts payable under the terms of this Agreement, and (2) the Employer shall have the right to recover from Employee's estate and/or Surviving Spouse all of the amounts paid to the Employee's estate or Surviving Spouse, as the case may be (with respect to amounts paid prior to the Employee's death or paid to the Employee's estate or Surviving Spouse) or from the Employee'L/F designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after Employee's death. 1.3. Beneficiary. The term "beneficiary" or "designated beneficiary" ----------- shall mean the person or persons whom the Employee shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "E," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof and is completed and signed by the Employee and received by the Administrator prior to the Employee's death. 1.4. Change in Control. The term "Change in Control" shall mean the ----------------- first to occur of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company which owns 100% of the Employer's outstanding voting capital stock): (a) Any "person" (as such term is used in sections 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which becomes the beneficial owner (as that term is used in section 13(d) of the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the Employer's capital stock entitled to vote in the election of directors, other than a group of two or more persons not (i) acting in concert for the purpose of acquiring, holding or disposing of such stock or (ii) otherwise required to file any form or report with any governmental agency or regulatory authority having jurisdiction over the Employer which requires the reporting of any change in control; (b) During any period of not more than two (2) consecutive years, not including any period prior to the adoption of the Plan represented by this Agreement, individuals who, at the beginning of such period, constitute the Board of Directors of the Employer, and any new director (other than a director designated by a person who has entered into an agreement with the Employer to effect a transaction described in clause (a), (c), (d) or (e) of this subparagraph 1.4) whose appointment to the Board of Directors or nomination for election to the Board of Directors was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office, either were directors at the beginning of such period or whose appointment or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) The effective date of any consolidation or merger of the Employer (after all requisite shareholder, applicable regulatory and other approvals and consents have been obtained), other than a consolidation or merger of the Employer in which the holders of the voting capital stock of the Employer immediately prior to the consolidation or merger hold more than fifty -3- percent (50%) of the voting capital stock of the surviving entity immediately after the consolidation or merger; (d) The shareholders of the Employer approve any plan or proposal for the liquidation or dissolution of the Employer; or (e) The shareholders of the Employer approve the sale or transfer of substantially all of the Employer'L/F assets to parties that are not within a "controlled group of corporations" (as that term is defined in section 1563 of the Code) in which the Employer is a member. 1.5. The Code. The "Code" shall mean the Internal Revenue Code of 1986, -------- as amended (the "Code"). 1.6. Disability/Disabled. The term "Disability" or "Disabled" shall have ------------------- the same meaning given such terms in any policy of disability insurance maintained by the Employer for the benefit of employees including the Employee. In the absence of such a policy which extends coverage to the Employee in the event of disability, the terms shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of the Employee'L/F duties to the Employer for at least ninety (90) days. 1.7. Early Retirement Date. The term "Early Retirement Date" shall mean --------------------- the Retirement, as defined below, of the Employee on a date which occurs prior to the Employee attaining sixty-two (62) years of age, as defined below, but after the Employee has attained fifty-nine and one-half (59.5) years of age. 1.8. Effective Date. The term "Effective Date" shall mean the date first -------------- written above. 1.9. Employee Benefits. Except as otherwise stated in this Agreement, ----------------- the term "Employee Benefits" shall mean the Index Employee Benefits, if any, described in and determined in accordance with Schedule "B" and the supplemental benefits described in and determined in accordance with Schedule "C", and reduced or adjusted to the extent: (i) required under the other provisions of this Agreement; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). -4- 1.10. Employer. Except as otherwise set forth in this Agreement, the -------- term "Employer" shall mean Greater Bay Bancorp; provided, however, that for purposes of subparagraph 1.15 (definition of Termination for Cause) and Paragraph 5 (including its subparagraphs, regarding termination of employment), the term "Employer" shall mean Greater Bay Bancorp and its subsidiaries and affiliated entities. 1.11. ERISA. The term "ERISA" shall mean the Employee Retirement Income ----- Security Act of 1974, as amended. 1.12. Plan Year. The term "Plan Year" shall mean the Employer's fiscal --------- year. 1.13. Retirement. The term "Retirement" or "Retires" shall refer to the ---------- date which the Employee acknowledges in writing to the Employer to be the last day the Employee will provide any significant personal services, whether as an employee or independent consultant or contractor, to the Employer or to, for, or on behalf of, any other business entity conducting, performing or making available to any person or entity banking or other financial services of any kind. For purposes of this Agreement, the phrase "significant personal services" shall mean more than ten (10) hours of personal services rendered to one or more individuals or entities in any thirty (30) day period for compensation excluding services, if any, rendered by the Employee after Retirement pursuant to the terms of a consulting agreement described in Schedule "C", if any. 1.14. Surviving Spouse. The term "Surviving Spouse" shall mean the ---------------- person, if any, who shall be legally married to the Employee on the date of the Employee's death. 1.15. Termination for Cause. The term "Termination for Cause" shall mean --------------------- termination of the employment of the Employee by reason of any of the following: (a) The Employee's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Employer, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency or any other regulatory agency or governmental authority having jurisdiction over the Employer, which has a material adverse effect upon the Employer; or (b) The Employee's conviction of (i) any felony or (ii) a crime involving moral turpitude or a fraudulent or dishonest act which, in each case, has a material adverse effect on the Employer. 2. Scope, Purpose and Effect. ------------------------- 2.1. Contract of Employment. Although this Agreement is intended to ---------------------- provide the Employee with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Employee and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate -5- the Employee's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Employee may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart from, and shall have no effect upon, or be affected by, the terms and provisions of said Employment Agreement. 2.2. Fringe Benefit. The benefits provided by this Agreement are granted -------------- by the Employer as a fringe benefit to the Employee and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Employee has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. 3. Payments Upon Early Retirement or Retirement and After Retirement. ----------------------------------------------------------------- 3.1. Payments Upon Early Retirement. The Employee shall have the right ------------------------------ to Retire on a date which constitutes an Early Retirement Date as defined in subparagraph 1.7 above. In the event the Employee elects to Retire on a date which constitutes an Early Retirement Date, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of such Early Retirement Date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee'L/F death, in the case of the Index Benefit defined in Schedule "B". -6- EXAMPLE Payments Upon Early Retirement
Assumptions: - ----------- Age at Early Retirement 60 Normal Retirement Age 62 Projected Benefit Account Value at Age 62 $100,000 Actual Benefit Account Value at Age 60 $20,000 Distribution Period Elected for Benefit Account (Schedule F) 10 yrs. Projected Index Benefit at Age 62 $50,000 Projected Index Benefit at Age 60 $25,000 Applicable Percentage at Age 60 75% First Year Benefit Calculation: Age 60 1) Benefit Account [($20,000 )10) x .75] $ 1,500 2) Index Benefit ($25,000 x .75) $18,750 ------- Total First Year Benefit $20,250 =======
3.2. Payments Upon Retirement. If the Employee shall remain in the ------------------------ continuous employment of the Employer until attaining sixty-two (62) years of age, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee Retires (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of said Retirement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". -7- 3.3. Payments in the Event of Death After Retirement. The Employer ----------------------------------------------- agrees that if the Employee Retires, but shall die before receiving all of the Employee Benefits, the Employer will make such payments to which the Employee may be entitled, to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4. Payments in the Event Death or Disability Occurs Prior to Retirement. -------------------------------------------------------------------- 4.1. Payments in the Event of Death Prior to Retirement. If the Employee -------------------------------------------------- dies while actively employed by the Employer at any time after the Effective Date of this Agreement, but prior to Retirement, the Employer agrees to pay the Employee Benefits to which the Employee is then entitled to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4.2. Payments in the Event of Disability Prior to Retirement. In the ------------------------------------------------------- event the Employee becomes Disabled at any time after the Effective Date of this Agreement but prior to Retirement, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee becomes Disabled (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". 5. Payments in the Event Employment Is Terminated Prior to Retirement. As ------------------------------------------------------------------ indicated in subparagraph 2.1 above, the Employer reserves the right to terminate the Employee's employment, with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Employee's Retirement. In the event that the employment of the Employee shall be terminated, other than by reason of death, Disability or Retirement, prior to the Employee's attaining sixty-two (62) years of age, then this Agreement shall terminate on the date of such termination of employment; provided, however, that the Employee shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Employee's termination: 5.1. Termination Without Cause. If the Employee's employment is ------------------------- terminated by the Employer without cause, and such termination is not subject to the provisions of subparagraph 5.4 below, the Employee shall be entitled to be paid the Applicable Percentage of the Employee -8- Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee'L/F death, in the case of the Index Benefit defined in Schedule "B". 5.2. Voluntary Termination by the Employee. If the Employee's employment ------------------------------------- is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraph 5.4 below, the Employee shall be entitled to be paid the following benefits: (a) If the Applicable Percentage at the date of termination is one hundred percent (100%), the Employee shall be paid (i) the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (A) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (B) until the Employee's death, in the case of the Index Benefit defined in Schedule "B. (b) If the Applicable Percentage at the date of termination is less than one hundred percent (100%), the Employee shall be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", based on a ten (10) year (120 month) payout of the Benefit Account balance at termination notwithstanding the Employee's election of a different payout period under Schedule "F", but not more than sixty percent (60%) of the Employee's base salary (i.e., exclusive of any bonuses, incentive payments or other employee benefits to which the Employee would otherwise be entitled) at the date of termination. Such benefit shall be payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (A) for the period of one hundred twenty (120) months, in the case of the balance in the Benefit Account and (B) until the Employee's death, in the case of the Index Benefit defined in Schedule "B" (subject to reduction upon application of the sixty (60%) limitation described above). 5.3. Termination for Cause. If the Employee suffers a "Termination for --------------------- Cause", as defined in subparagraph 1.15 of this Agreement, the Employee shall forfeit any and all rights and benefits the Employee may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Employee by the Employer pursuant to the terms of this Agreement. 5.4. Termination by the Employer on Account of or After a Change in -------------------------------------------------------------- Control. In the event the Employee's employment with the Employer is terminated - ------- by the Employer -9- "in connection with a Change in Control" as described in subparagraph 1.2(a) and as defined in subparagraph 1.4 above, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains fifty-nine and one-half (59.5) years of age or any month thereafter, as requested in writing by the Employee and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Employee does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "F" in the case of the balance in the Benefit Account and (ii) until the Employee's death in the case of the Index Benefit defined in Schedule "B". 5.5. Payments in the Event of Death Following Termination. If the ---------------------------------------------------- Employee shall die prior to receiving all of the applicable benefits described in this Paragraph 5 to which the Employee is entitled, then the Employer will make such payments to the Employee's designated beneficiary. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 6. Section 280G Benefits Adjustment. If all or any portion of the ----------------------------------- amounts payable to the Employee under this Agreement, either alone or together with other payments which the Employee has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), the Employer (and its successor) shall increase the amounts payable under this Agreement to the extent necessary to afford the Employee substantially the same economic benefit under this Agreement as the Employee would have received had no such excise tax been imposed on the payments due the Employee under this Agreement. The determination of the amount of any such excise taxes shall be made initially by the independent accounting firm employed by the Employer immediately prior to the occurrence of the event constituting a Change in Control. -10- If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable to the Employee is greater than the amount initially so determined, then the Employer (or its successor) shall pay to the Employee an amount equal to the sum of (i) such additional excise taxes, and (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse the Employee substantially for any income, excise or other taxes payable by the Employee with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii). 7. Right To Determine Funding Methods. The Employer reserves the right to ---------------------------------- determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Employee, the Employee's spouse or the Employee's beneficiaries under the terms of this Agreement. In the event that the Employer elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Employer shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Employer further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Employee, the Employee's spouse nor the Employee's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Employer pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Employer's obligations pursuant to this Agreement. In connection with the foregoing, the Employee agrees to execute such documents and undergo such medical examinations or tests which the Employer may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Employer's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Employee to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Employee, the Employee's spouse and the Employee's beneficiaries of any and all rights to payment hereunder. 8. Claims Procedure. The Employer shall, but only to the extent necessary ---------------- to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Employee, the Employee's spouse, or the Employee's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Employee, the Employee's spouse or the Employee's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Employee, the Employee's spouse or the Employee's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. -11- 9. Status Under Secular Trust and as an Unsecured General Creditor. --------------------------------------------------------------- (a) The Employee has established a secular trust, identified as the Gregg A. Johnson Secular Trust, a copy of which is attached hereto as Schedule "G" (the "Trust"). The Employer shall make contributions to the Trust as specified in Schedule "C" of this Agreement. The contributions shall be deposited into an account which constitutes the Trust Fund as defined in the Trust. Notwithstanding anything contained herein to the contrary, the Trust Fund shall not be subject to the claims of the Employer's general creditors except as may be expressly stated in the Trust. In the event of a conflict between the provisions of the Trust and this Agreement, the provisions of the Trust shall control. (b) Except as provided in subparagraph 9(a) above: (i) neither the Employee, the Employee's spouse or the Employee's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Employee, the Employee's spouse or the Employee's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Employer under this Agreement; (iii) all of the Employer's assets shall be and remain the general unpledged and unrestricted assets of the Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employer to pay money in the future; and (v) the Employee, the Employee's spouse and the Employee's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. (c) Notwithstanding subparagraphs 9(b)(i) through 9(b)(v) above, the Employer and the Employee acknowledge and agree that, in the event of a Change in Control and at the written request of the Employee, the Employer shall establish, not later than the effective date of the Change in Control, a Rabbi Trust or multiple Rabbi Trusts upon such terms and conditions as the Employer in its sole discretion deems appropriate and in compliance with applicable provisions of the Code in order to permit the Employer to make contributions and/or transfer assets to the Rabbi Trust or Rabbi Trusts to discharge its obligations pursuant to this Agreement. The principal of the Rabbi Trust or Rabbi Trusts and any earnings thereon shall be held separate and apart from other funds of the Employer to be used exclusively for discharge of the Employer's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Employer's general creditors until paid to the Employee or its beneficiaries in such manner and at such times as specified in this Agreement. 10. Discretion of Board to Accelerate Payout. Notwithstanding any of the ---------------------------------------- other provisions of this Agreement, the Board of Directors of the Employer may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the terms of this Agreement, provided that Employee (or the Employee's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Employer's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Employer's Board of Directors -12- and offered to the Employee [or Employee's spouse or designated beneficiaries] on a "take it or leave it basis"). 11. Miscellaneous. ------------- 11.1. Opportunity To Consult With Independent Advisors. The Employee ------------------------------------------------ acknowledges that the Employee has been afforded the opportunity to consult with independent advisors of his or her choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to the Employee under the terms of this Agreement and the (i) terms and conditions which may affect the Employee's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Employee acknowledges and agrees shall be the sole responsibility of the Employee notwithstanding any other term or provision of this Agreement. The Employee further acknowledges and agrees that the Employer shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Employee and further specifically waives any right for the Employee and his or her heirs, beneficiaries, legal representatives, agents, successors, and assigns to claim or assert liability on the part of the Employer related to the matters described above in this subparagraph 11.1. The Employee further acknowledges and agrees that the Employee has read, understands and consents to all of the terms and conditions of this Agreement, and that the Employee enters into this Agreement with a full understanding of its terms and conditions. 11.2. Arbitration of Disputes. All claims, disputes and other matters ----------------------- in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. -13- 11.3. Attorneys' Fees. In the event of any arbitration or litigation --------------- concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4. Notice. Any notice required or permitted of either the Employee ------ or the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Employer: Greater Bay Bancorp 2860 West Bayshore Road Palo Alto, California 94303 Attention: Human Resources If to the Employee: Gregg A. Johnson [omitted] -14- 11.5. Assignment. Neither the Employee, the Employee's spouse, nor any ---------- other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Employee, the Employee's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and unenforceable without the prior written consent of the Employer. The Employer'L/F consent, if any, to one or more assignments or transfers shall not obligate the Employer to consent to or be construed as the Employer's consent to any other or subsequent assignment or transfer. 11.6. Binding Effect/Merger or Reorganization. This Agreement shall be --------------------------------------- binding upon and inure to the benefit of the Employee and the Employer and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. 11.7. Non-waiver. The failure of either party to enforce at any time or ---------- for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8. Partial Invalidity. If any term, provision, covenant, or ------------------ condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9. Entire Agreement. This Agreement, including the schedules and ---------------- exhibits attached hereto and incorporated herein by this reference, contains all of the covenants and agreement, and supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10. Modifications. Any modification of this Agreement shall be ------------- effective only if it is in writing and signed by each party or such party's authorized representative. -15- 11.11. Paragraph Headings. The paragraph headings used in this ------------------ Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12. No Strict Construction. The language used in this Agreement ---------------------- shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13. Governing Law. The laws of the State of California, other than ------------- those laws denominated choice of law rules, and, where applicable, the rules and regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency, shall govern the validity, interpretation, construction and effect of this Agreement. 11.14. Waiver of Prior Plan Benefit. To the extent that the Employee is ---------------------------- a participant in any other supplemental benefit plan provided by the Employer which affords the Employee benefits in the event of the Employee's retirement or death or a change in control of the Employer, it is an express condition precedent to the effectiveness of this Agreement that the Employee execute and deliver the Waiver of Prior Plan Benefit attached as Schedule "D" to this Agreement. IN WITNESS WHEREOF, the Employer and the Employee have executed this Agreement on the date first above-written in the City of Palo Alto, Santa Clara County, California. THE EMPLOYER THE EMPLOYEE Greater Bay Bancorp By: /s/ David L. Kalkbrenner /s/ Gregg A. Johnson ------------------------ -------------------- David L. Kalkbrenner Gregg A. Johnson President -16- SCHEDULE A ---------- Applicable Calendar Year Percentage 12/31/98 0% 12/31/99 0% 12/31/00 0% 12/31/01 0% 12/31/02 0% 12/31/03 20% 12/31/04 40% 12/31/05 60% 12/31/06 80% 12/31/07 100% -17- SCHEDULE B ---------- INDEX EMPLOYEE BENEFITS ----------------------- 1. Index Employee Benefits Determination. The Index Employee Benefits ------------------------------------- consist of (i) accruals to the Employee's Benefit Account (as described in subparagraph (a) below) during the Employee's employment by the Employer and (ii) the Index Benefit (as described in subparagraph (b) below) after the Employee's employment by the Employer terminates. The Index Employee Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a --------------- liability reserve account on the books of the Employer for the benefit of the Employee. Prior to the date on which the Employee becomes eligible to receive payments under the Plan, such Benefit Account shall be increased (or decreased) each Plan Year by an amount equal to the annual earnings (or loss) for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Employee becomes eligible ------------- to receive payments under the Plan, the Index Benefit for the Employee for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the annual earnings (if any) for that Plan year determined by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual ----- after-tax income from the life insurance contracts described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $285,500 ------------ Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $474,500 ------------- If such contracts of life insurance are actually purchased by the Employer, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are not purchased or are subsequently surrendered or lapsed, then the Employer shall receive and use annual policy illustrations that assume the above described policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. -18- d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be ---------------- calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefits (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate the Opportunity Cost shall be the Employer's marginal tax rate until the Employee's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Employer is higher or lower. 2. Employee Benefits Payments. The Employee shall be entitled to payment -------------------------- of the Index Employee Benefits on the terms as specified in the Agreement. EXAMPLE INDEX EMPLOYEE BENEFITS
[n] [A] [B] [C] [D] End of Year Cash Surrender Value of Life Index Opportunity Cost Annual Benefit - ----------- -------------------------------- ----- ---------------- -------------- Insurance Policy [Annual Policy A0 = premium B-C ---------------- Income] A0+Cn-1x.05x An-An-1 (1-42%) 0 $1, 000,000 -- -- -- 1 $1,050,000 $50,000 $29,000 $21,000 2 $1,102,500 $52,500 $29,841 $22,659 3 $1,157,625 $55,125 $30,706 $24,419
Assumptions: Initial Insurance = $1,000,000 Effective Tax Rate = 42% One Year US Treasury Yield = 5% -19- SCHEDULE C ---------- SUPPLEMENTAL BENEFITS --------------------- In addition to the Employee Benefits specified elsewhere in this Agreement, the Employee shall be entitled to receive the following supplemental benefits (the "Supplemental Benefits"): Secular Trust Defined Benefit. Provided that the Employee has not exercised the Employee's withdrawal rights under the Trust, the Employer shall make contributions to the Trust, pursuant to paragraph 9 of the Agreement, on a pre-tax basis in the amounts shown in column (B) of the following table. Such contributions shall be made from time to time in the discretion of the Employer provided that the total amount shown in column (B) below has been contributed to the Trust by the end of the Plan Year shown in column (A) below. (A) (B) 1998 $0 1999 $43,187 2000 $46,309 2001 $49,657 2002 $53,246 2003 $57,096 2004 $61,223 2005 $65,649 2006 $70,395 2007 $75,483 2008 $80,940 2009 $86,791 2010 $93,066 2011 $99,793 -20- The aggregate amount of the foregoing contributions shall be subject to adjustment, from time to time, to ensure that the Trust is adequately funded to afford the Employee with a projected defined benefit equal to the Applicable Percentage of Forty Five Thousand Dollars ($45,0000) per annum for twenty (20) years commencing the year in which the Employee attains age sixty-two (62). In the event that the contributions made by the Employer to the Trust as provided above are determined to be insufficient to fund the foregoing Supplemental Benefits, the Employer shall make such further contributions to the Trust as may be necessary to fund fully such Supplemental Benefits. Such determination and adjusting contributions, if required, may be made from time to time at the discretion of the Employer, but in all events not later than the date on which the Employee Retires or otherwise becomes eligible to begin receiving the Employee Benefits specified in Schedule "B". Provided that the foregoing final adjusting contribution, if required, has been made, the Employer shall have no obligation to make further contributions to the Trust once the Employee Retires or otherwise becomes eligible to begin receiving the Employee Benefits specified in Schedule "B". Notwithstanding anything herein or in the Agreement to the contrary, the obligation of the Employer to make the contributions to the Trust as specified above shall terminate automatically upon the forfeiture or other termination of the Employee's right to receive the Employee Benefits specified in Schedule "B", as provided in this Agreement. -21- SCHEDULE D ---------- WAIVER OF PRIOR PLAN BENEFITS ----------------------------- None -22- SCHEDULE E ---------- BENEFICIARY DESIGNATION ----------------------- To the Administrator of the Greater Bay Bancorp Employee Supplemental Compensation Benefits Agreement: Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Greater Bay Bancorp, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: Primary Beneficiary: - ------------------- - ------------------- ---------------------- ------------------------ Name Address Relationship Secondary (Contingent) Beneficiary: - ---------------------------------- - ------------------- ---------------------- ------------------------ Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Employee Supplemental Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the remaining unpaid benefit payable according to the terms of my Employee Supplemental Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Employee Supplemental Compensation Benefits Agreement. Dated: , 1998 ---------------------------- ------------------------------- Gregg A. Johnson -23- CONSENT OF THE EMPLOYEE'S SPOUSE TO THE ABOVE BENEFICIARY DESIGNATION: - ------------------------------------ I, Barbara Johnson, being the spouse of Gregg A. Johnson, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Employee Supplemental Compensation Benefits Agreement entered into by my spouse effective as of April 6, 1998. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Employee Supplemental Compensation Benefits Agreement and in which I may have a marital property interest. Dated: , 1998 ---------------------------- - -------------------------------------------- Barbara Johnson -24- SCHEDULE F ---------- DISTRIBUTION ELECTION --------------------- Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Greater Bay Bancorp, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: ---- sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ---- one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ---- one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: , 1998 ---------------------------- Signed: ----------------------------------- Gregg A. Johnson -25- SCHEDULE G ----------- SECULAR TRUST ------------- [to be finalized] -26- EX-10.6 6 EMPLOYEE SUPP COMP BENEFITS AGRMT WITH STEVEN C. SMITH EXHIBIT 10.6 EMPLOYEE SUPPLEMENTAL COMPENSATION BENEFITS AGREEMENT ----------------------------------------------------- This Employee Supplemental Compensation Benefits Agreement (the "Agreement") is made and entered into effective as of January 1, 1998, by and between Greater Bay Bancorp, a California banking corporation (the "Employer"), and Steven C. Smith, an individual residing in the State of California (the "Employee"). R E C I T A L S --------------- WHEREAS, the Employee is an employee of the Employer, and, since December 16, 1993, has become eligible to participate in the Employee Supplemental Compensation Benefits Plan represented by this Agreement (the "Plan"); WHEREAS, the Employer desires to establish a compensation benefits program as a fringe benefit for certain officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry; WHEREAS, the Employee's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable; WHEREAS, it is deemed to be in the best interests of the Employer to provide the Employee with certain benefits, on the terms and conditions set forth herein, in order to reasonably induce the Employee to remain in the Employer's employment and to compensate the Employee for valuable services heretofore rendered to the Employer; WHEREAS, it is the intention of the parties that the Employer's obligations under this Agreement shall be that of an unfunded and unsecured promise to provide the benefits to the Employee set forth hereinafter and except for the contributions, if any, to a secular trust to be established by the Employee as grantor, the Employee and the Employee's beneficiaries shall be unsecured general creditors with respect to any benefits provided under the terms of this Agreement; and WHEREAS, the Employee and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Employee, or to the Employee's spouse or the Employee's designated beneficiaries, as the case may be. NOW, THEREFORE, in consideration of the services to be performed by the Employee in the future, as well as the mutual promises and covenants contained herein, the Employee and the Employer agree as follows: A G R E E M E N T ----------------- 1. Terms and Definitions. --------------------- 1.1. Administrator. The Employer shall be the "Administrator" and, ------------- solely for the purposes of ERISA, as defined in subparagraph 1.11 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA. 1.2. Applicable Percentage. The term "Applicable Percentage" shall mean --------------------- that percentage listed on Schedule "A" attached hereto which is adjacent to the number of calendar years which shall have elapsed from the date of the Employee's commencement of employment with and providing personal services to the Employer or, if later, the date on which the Employee became eligible to participate in the Plan represented by this Agreement, and ending on the date payments are to first begin under the terms of this Agreement. Notwithstanding the foregoing or the percentages set forth on Schedule "A", but subject to all other terms and conditions set forth herein, the "Applicable Percentage" shall be: (a) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the termination of the Employee's employment by the Employer if such termination is in connection with a "Change in Control" as defined in subparagraph 1.4 below. A termination shall be deemed to be in connection with a Change in Control if, within two (2) years following the occurrence of a Change in Control: (i) the Employee's employment with the Employer is terminated by the Employer other than a Termination for Cause; or (ii) by reason of the Employer's actions any adverse and material change occurs in the scope of the Employee's position, responsibilities, duties, salary, benefits or location of employment; or (iii) the Employer causes an event to occur which reasonably constitutes or results in a demotion, a significant diminution of responsibilities or authority, or a constructive termination (by forcing a resignation or otherwise) of the Employee's employment; (b) provided payments have not yet begun with respect to the Employee Benefits specified in Schedule "B", one hundred percent (100%) upon the occurrence of (i) the Employee's death prior to the termination of the Employee's employment by the Employer, or (ii) the Employee's Disability (as defined in subparagraph 1.6 below) other than a Disability that occurs after the termination of the Employee's employment by the Employer; and (c) notwithstanding subclauses (a) and (b) of this subparagraph 1.2, zero percent (0%) in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any life insurance policy which the Employer may happen to own at the time of the Employee's death and of which the Employer is the designated beneficiary (the "Employer Cost Recovery Policy"). Furthermore, notwithstanding the foregoing, or anything contained in this Agreement to the contrary, in the event the Employee takes any intentional action which prevents the Employer from collecting the proceeds of any Employer Cost Recovery Policy, then: (1) the Employee, the Employee's estate, designated beneficiary or Surviving Spouse shall no -2- longer be entitled to receive any of the amounts payable under the terms of this Agreement, and (2) the Employer shall have the right to recover from Employee's estate and/or Surviving Spouse all of the amounts paid to the Employee's estate or Surviving Spouse, as the case may be (with respect to amounts paid prior to the Employee's death or paid to the Employee's estate or Surviving Spouse) or from the Employee's designated beneficiary (with respect to amounts paid to the designated beneficiary) pursuant to the terms of this Agreement prior to and after Employee's death. 1.3. Beneficiary. The term "beneficiary" or "designated beneficiary" ----------- shall mean the person or persons whom the Employee shall designate in a valid Beneficiary Designation, a copy of which is attached hereto as Schedule "E," to receive the benefits provided hereunder. A Beneficiary Designation shall be valid only if it is in the form attached hereto and made a part hereof and is completed and signed by the Employee and received by the Administrator prior to the Employee's death. 1.4. Change in Control. The term "Change in Control" shall mean the ----------------- first to occur of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company which owns 100% of the Employer's outstanding voting capital stock): (a) Any "person" (as such term is used in sections 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which becomes the beneficial owner (as that term is used in section 13(d) of the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the Employer's capital stock entitled to vote in the election of directors, other than a group of two or more persons not (i) acting in concert for the purpose of acquiring, holding or disposing of such stock or (ii) otherwise required to file any form or report with any governmental agency or regulatory authority having jurisdiction over the Employer which requires the reporting of any change in control; (b) During any period of not more than two (2) consecutive years, not including any period prior to the adoption of the Plan represented by this Agreement, individuals who, at the beginning of such period, constitute the Board of Directors of the Employer, and any new director (other than a director designated by a person who has entered into an agreement with the Employer to effect a transaction described in clause (a), (c), (d) or (e) of this subparagraph 1.4) whose appointment to the Board of Directors or nomination for election to the Board of Directors was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office, either were directors at the beginning of such period or whose appointment or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) The effective date of any consolidation or merger of the Employer (after all requisite shareholder, applicable regulatory and other approvals and consents have been obtained), other than a consolidation or merger of the Employer in which the holders of the voting capital stock of the Employer immediately prior to the consolidation or merger hold more than fifty -3- percent (50%) of the voting capital stock of the surviving entity immediately after the consolidation or merger; (d) The shareholders of the Employer approve any plan or proposal for the liquidation or dissolution of the Employer; or (e) The shareholders of the Employer approve the sale or transfer of substantially all of the Employer's assets to parties that are not within a "controlled group of corporations" (as that term is defined in section 1563 of the Code) in which the Employer is a member. 1.5. The Code. The "Code" shall mean the Internal Revenue Code of 1986, -------- as amended (the "Code"). 1.6. Disability/Disabled. The term "Disability" or "Disabled" shall ------------------- have the same meaning given such terms in any policy of disability insurance maintained by the Employer for the benefit of employees including the Employee. In the absence of such a policy which extends coverage to the Employee in the event of disability, the terms shall mean bodily injury or disease (mental or physical) which wholly and continuously prevents the performance of the Employee's duties to the Employer for at least ninety (90) days. 1.7. Early Retirement Date. The term "Early Retirement Date" shall mean --------------------- the Retirement, as defined below, of the Employee on a date which occurs prior to the Employee attaining sixty-two (62) years of age, as defined below, but after the Employee has attained fifty-nine and one-half (59.5) years of age. 1.8. Effective Date. The term "Effective Date" shall mean the date -------------- first written above. 1.9. Employee Benefits. Except as otherwise stated in this Agreement, ----------------- the term "Employee Benefits" shall mean the Index Employee Benefits, if any, described in and determined in accordance with Schedule "B" and the supplemental benefits described in and determined in accordance with Schedule "C", and reduced or adjusted to the extent: (i) required under the other provisions of this Agreement; (ii) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (iii) required in order for the Employer to properly comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI). -4- 1.10. Employer. Except as otherwise set forth in this Agreement, the -------- term "Employer" shall mean Greater Bay Bancorp; provided, however, that for purposes of subparagraph 1.15 (definition of Termination for Cause) and Paragraph 5 (including its subparagraphs, regarding termination of employment), the term "Employer" shall mean Greater Bay Bancorp and its subsidiaries and affiliated entities. 1.11. ERISA. The term "ERISA" shall mean the Employee Retirement Income ----- Security Act of 1974, as amended. 1.12. Plan Year. The term "Plan Year" shall mean the Employer's fiscal --------- year. 1.13. Retirement. The term "Retirement" or "Retires" shall refer to the ---------- date which the Employee acknowledges in writing to the Employer to be the last day the Employee will provide any significant personal services, whether as an employee or independent consultant or contractor, to the Employer or to, for, or on behalf of, any other business entity conducting, performing or making available to any person or entity banking or other financial services of any kind. For purposes of this Agreement, the phrase "significant personal services" shall mean more than ten (10) hours of personal services rendered to one or more individuals or entities in any thirty (30) day period for compensation excluding services, if any, rendered by the Employee after Retirement pursuant to the terms of a consulting agreement described in Schedule "C", if any. 1.14. Surviving Spouse. The term "Surviving Spouse" shall mean the ---------------- person, if any, who shall be legally married to the Employee on the date of the Employee's death. 1.15. Termination for Cause. The term "Termination for Cause" shall --------------------- mean termination of the employment of the Employee by reason of any of the following: (a) The Employee's deliberate violation of (i) any state or federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of the Employer, or (ii) of the rules or regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency or any other regulatory agency or governmental authority having jurisdiction over the Employer, which has a material adverse effect upon the Employer; or (b) The Employee's conviction of (i) any felony or (ii) a crime involving moral turpitude or a fraudulent or dishonest act which, in each case, has a material adverse effect on the Employer. 2. Scope, Purpose and Effect. ------------------------- 2.1. Contract of Employment. Although this Agreement is intended to ---------------------- provide the Employee with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Employee and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate -5- the Employee's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Employee may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart from, and shall have no effect upon, or be affected by, the terms and provisions of said Employment Agreement. 2.2. Fringe Benefit. The benefits provided by this Agreement are -------------- granted by the Employer as a fringe benefit to the Employee and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Employee has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement. 3. Payments Upon Early Retirement or Retirement and After Retirement. ----------------------------------------------------------------- 3.1. Payments Upon Early Retirement. The Employee shall have the right ------------------------------ to Retire on a date which constitutes an Early Retirement Date as defined in subparagraph 1.7 above. In the event the Employee elects to Retire on a date which constitutes an Early Retirement Date, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Early Retirement Date occurs (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of such Early Retirement Date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". -6- EXAMPLE Payments Upon Early Retirement Assumptions: - ----------- Age at Early Retirement 60 Normal Retirement Age 62 Projected Benefit Account Value at Age 62 $100,000 Actual Benefit Account Value at Age 60 $20,000 Distribution Period Elected for Benefit Account (Schedule F) 10 yrs. Projected Index Benefit at Age 62 $50,000 Projected Index Benefit at Age 60 $25,000 Applicable Percentage at Age 60 75% First Year Benefit Calculation: Age 60 1) Benefit Account [($20,000 )10) x .75] $ 1,500 2) Index Benefit ($25,000 x .75) $18,750 ------- Total First Year Benefit $20,250 ======= 3.2. Payments Upon Retirement. If the Employee shall remain in the ------------------------ continuous employment of the Employer until attaining sixty-two (62) years of age, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee Retires (or on such later date as may be mutually agreed upon by the Employee and the Employer in advance of said Retirement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". -7- 3.3. Payments in the Event of Death After Retirement. The Employer ----------------------------------------------- agrees that if the Employee Retires, but shall die before receiving all of the Employee Benefits, the Employer will make such payments to which the Employee may be entitled, to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4. Payments in the Event Death or Disability Occurs Prior to Retirement. -------------------------------------------------------------------- 4.1. Payments in the Event of Death Prior to Retirement. If the -------------------------------------------------- Employee dies while actively employed by the Employer at any time after the Effective Date of this Agreement, but prior to Retirement, the Employer agrees to pay the Employee Benefits to which the Employee is then entitled to the Employee's designated beneficiary in lump sum. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee under the terms of this Agreement shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 4.2. Payments in the Event of Disability Prior to Retirement. In the ------------------------------------------------------- event the Employee becomes Disabled at any time after the Effective Date of this Agreement but prior to Retirement, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee becomes Disabled (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". 5. Payments in the Event Employment Is Terminated Prior to Retirement. As ------------------------------------------------------------------ indicated in subparagraph 2.1 above, the Employer reserves the right to terminate the Employee's employment, with or without cause but subject to any written employment agreement which may then exist, at any time prior to the Employee's Retirement. In the event that the employment of the Employee shall be terminated, other than by reason of death, Disability or Retirement, prior to the Employee's attaining sixty-two (62) years of age, then this Agreement shall terminate on the date of such termination of employment; provided, however, that the Employee shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Employee's termination: 5.1. Termination Without Cause. If the Employee's employment is ------------------------- terminated by the Employer without cause, and such termination is not subject to the provisions of subparagraph 5.4 below, the Employee shall be entitled to be paid the Applicable Percentage of the Employee -8- Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (i) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (ii) until the Employee's death, in the case of the Index Benefit defined in Schedule "B". 5.2. Voluntary Termination by the Employee. If the Employee's ------------------------------------- employment is terminated by voluntary resignation, and such resignation is not subject to the provisions of subparagraph 5.4 below, the Employee shall be entitled to be paid the following benefits: (a) If the Applicable Percentage at the date of termination is one hundred percent (100%), the Employee shall be paid (i) the Employee Benefits specified in Schedule "B", payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (A) for the period designated in Schedule "F", in the case of the balance in the Benefit Account and (B) until the Employee's death, in the case of the Index Benefit defined in Schedule "B. (b) If the Applicable Percentage at the date of termination is less than one hundred percent (100%), the Employee shall be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", based on a ten (10) year (120 month) payout of the Benefit Account balance at termination notwithstanding the Employee's election of a different payout period under Schedule "F", but not more than sixty percent (60%) of the Employee's base salary (i.e., exclusive of any bonuses, incentive payments or other employee benefits to which the Employee would otherwise be entitled) at the date of termination. Such benefit shall be payable in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age (or on such later date as may be mutually agreed upon by the Employee and the Employer not less than fifteen (15) days prior to such commencement date) (A) for the period of one hundred twenty (120) months, in the case of the balance in the Benefit Account and (B) until the Employee's death, in the case of the Index Benefit defined in Schedule "B" (subject to reduction upon application of the sixty (60%) limitation described above). 5.3. Termination for Cause. If the Employee suffers a "Termination for --------------------- Cause", as defined in subparagraph 1.15 of this Agreement, the Employee shall forfeit any and all rights and benefits the Employee may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Employee by the Employer pursuant to the terms of this Agreement. 5.4. Termination by the Employer on Account of or After a Change in -------------------------------------------------------------- Control. In the event the Employee's employment with the Employer is terminated - ------- by the Employer -9- "in connection with a Change in Control" as described in subparagraph 1.2(a) and as defined in subparagraph 1.4 above, the Employee shall be entitled to be paid the Applicable Percentage of the Employee Benefits specified in Schedule "B", in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Employee attains fifty-nine and one-half (59.5) years of age or any month thereafter, as requested in writing by the Employee and delivered to the Employer or its successor thirty (30) days prior to the commencement of installment payments; provided, however, that in the event the Employee does not request a commencement date as specified, such installments shall be paid on the first day of each month, beginning with the month following the month in which the Employee attains sixty-two (62) years of age. The installments shall be payable (i) for the period designated in Schedule "F" in the case of the balance in the Benefit Account and (ii) until the Employee's death in the case of the Index Benefit defined in Schedule "B". 5.5. Payments in the Event of Death Following Termination. If the ---------------------------------------------------- Employee shall die prior to receiving all of the applicable benefits described in this Paragraph 5 to which the Employee is entitled, then the Employer will make such payments to the Employee's designated beneficiary. If a valid Beneficiary Designation is not in effect, then the remaining amounts due to the Employee shall be paid to the Employee's Surviving Spouse. If the Employee leaves no Surviving Spouse, the remaining amounts due to the Employee shall be paid to the duly qualified personal representative, executor or administrator of the Employee's estate. 6. Section 280G Benefits Adjustment. If all or any portion of the amounts -------------------------------- payable to the Employee under this Agreement, either alone or together with other payments which the Employee has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), the Employer (and its successor) shall increase the amounts payable under this Agreement to the extent necessary to afford the Employee substantially the same economic benefit under this Agreement as the Employee would have received had no such excise tax been imposed on the payments due the Employee under this Agreement. The determination of the amount of any such excise taxes shall be made initially by the independent accounting firm employed by the Employer immediately prior to the occurrence of the event constituting a Change in Control. -10- If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable to the Employee is greater than the amount initially so determined, then the Employer (or its successor) shall pay to the Employee an amount equal to the sum of (i) such additional excise taxes, and (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse the Employee substantially for any income, excise or other taxes payable by the Employee with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii). 7. Right To Determine Funding Methods. The Employer reserves the right to ---------------------------------- determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Employee, the Employee's spouse or the Employee's beneficiaries under the terms of this Agreement. In the event that the Employer elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Employer shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Employer further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other device used to fund its obligations under this Agreement, at any time, in whole or in part. Consistent with Paragraph 9 below, neither the Employee, the Employee's spouse nor the Employee's beneficiaries shall have any right, title or interest in or to any funding source or amount utilized by the Employer pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Employer's obligations pursuant to this Agreement. In connection with the foregoing, the Employee agrees to execute such documents and undergo such medical examinations or tests which the Employer may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Employer's acquisition of any policy of insurance or annuity. Furthermore, a refusal by the Employee to consent to, participate in and undergo any such medical examinations or tests shall result in the immediate termination of this Agreement and the immediate forfeiture by the Employee, the Employee's spouse and the Employee's beneficiaries of any and all rights to payment hereunder. 8. Claims Procedure. The Employer shall, but only to the extent necessary ---------------- to comply with ERISA, be designated as the named fiduciary under this Agreement and shall have authority to control and manage the operation and administration of this Agreement. Consistent therewith, the Employer shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Employer denying a claim by the Employee, the Employee's spouse, or the Employee's beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Employee, the Employee's spouse or the Employee's beneficiary, as the case may be. Such decision shall set forth the specific reasons for the denial of a claim. In addition, the Employer shall provide the Employee, the Employee's spouse or the Employee's beneficiary with a reasonable opportunity for a full and fair review of the decision denying such claim. -11- 9. Status Under Secular Trust and as an Unsecured General Creditor. --------------------------------------------------------------- (a) The Employee has established a secular trust, identified as the Steven C. Smith Secular Trust, a copy of which is attached hereto as Schedule "G" (the "Trust"). The Employer shall make contributions to the Trust as specified in Schedule "C" of this Agreement. The contributions shall be deposited into an account which constitutes the Trust Fund as defined in the Trust. Notwithstanding anything contained herein to the contrary, the Trust Fund shall not be subject to the claims of the Employer's general creditors except as may be expressly stated in the Trust. In the event of a conflict between the provisions of the Trust and this Agreement, the provisions of the Trust shall control. (b) Except as provided in subparagraph 9(a) above: (i) neither the Employee, the Employee's spouse or the Employee's designated beneficiaries shall have any legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Employer's assets shall be held in or under any trust for the benefit of the Employee, the Employee's spouse or the Employee's designated beneficiaries or held in any way as security for the fulfillment of the obligations of the Employer under this Agreement; (iii) all of the Employer's assets shall be and remain the general unpledged and unrestricted assets of the Employer; (iv) the Employer's obligation under this Agreement shall be that of an unfunded and unsecured promise by the Employer to pay money in the future; and (v) the Employee, the Employee's spouse and the Employee's designated beneficiaries shall be unsecured general creditors with respect to any benefits which may be payable under the terms of this Agreement. (c) Notwithstanding subparagraphs 9(b)(i) through 9(b)(v) above, the Employer and the Employee acknowledge and agree that, in the event of a Change in Control and at the written request of the Employee, the Employer shall establish, not later than the effective date of the Change in Control, a Rabbi Trust or multiple Rabbi Trusts upon such terms and conditions as the Employer in its sole discretion deems appropriate and in compliance with applicable provisions of the Code in order to permit the Employer to make contributions and/or transfer assets to the Rabbi Trust or Rabbi Trusts to discharge its obligations pursuant to this Agreement. The principal of the Rabbi Trust or Rabbi Trusts and any earnings thereon shall be held separate and apart from other funds of the Employer to be used exclusively for discharge of the Employer's obligations pursuant to this Agreement and shall continue to be subject to the claims of the Employer's general creditors until paid to the Employee or its beneficiaries in such manner and at such times as specified in this Agreement. 10. Discretion of Board to Accelerate Payout. Notwithstanding any of the ---------------------------------------- other provisions of this Agreement, the Board of Directors of the Employer may, if determined in its sole and absolute discretion to be appropriate, accelerate the payment of the amounts due under the terms of this Agreement, provided that Employee (or the Employee's spouse or designated beneficiaries): (i) consents to the revised payout terms determined appropriate by the Employer's Board of Directors; and (ii) does not negotiate or in anyway influence the terms of proposed altered/accelerated payout (said decision to be made solely by the Employer's Board of Directors -12- and offered to the Employee [or Employee's spouse or designated beneficiaries] on a "take it or leave it basis"). 11. Miscellaneous. ------------- 11.1. Opportunity To Consult With Independent Advisors. The Employee ------------------------------------------------ acknowledges that the Employee has been afforded the opportunity to consult with independent advisors of his or her choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to the Employee under the terms of this Agreement and the (i) terms and conditions which may affect the Employee's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Employee acknowledges and agrees shall be the sole responsibility of the Employee notwithstanding any other term or provision of this Agreement. The Employee further acknowledges and agrees that the Employer shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Employee and further specifically waives any right for the Employee and his or her heirs, beneficiaries, legal representatives, agents, successors, and assigns to claim or assert liability on the part of the Employer related to the matters described above in this subparagraph 11.1. The Employee further acknowledges and agrees that the Employee has read, understands and consents to all of the terms and conditions of this Agreement, and that the Employee enters into this Agreement with a full understanding of its terms and conditions. 11.2. Arbitration of Disputes. All claims, disputes and other matters ----------------------- in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), in San Francisco, California. In the event JAMS is unable or unwilling to conduct the arbitration provided for under the terms of this Paragraph, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association ("AAA"), in San Francisco, California, shall conduct the binding arbitration referred to in this Paragraph. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS, or if there are none, the rules of procedure used or established by AAA. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in San Jose, California, unless otherwise agreed to by the parties. -13- 11.3. Attorneys' Fees. In the event of any arbitration or litigation --------------- concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, the prevailing party shall be entitled to recover from the non-prevailing party reasonable expenses, attorneys' fees and costs incurred in connection therewith or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered. 11.4. Notice. Any notice required or permitted of either the Employee ------ or the Employer under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party. If to the Employer: Greater Bay Bancorp 2860 West Bayshore Road Palo Alto, California 94303 Attention: Human Resources If to the Employee: Steven C. Smith [omitted] -14- 11.5. Assignment. Neither the Employee, the Employee's spouse, nor any ---------- other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Employee, the Employee's spouse, or any designated beneficiary; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void and unenforceable without the prior written consent of the Employer. The Employer's consent, if any, to one or more assignments or transfers shall not obligate the Employer to consent to or be construed as the Employer's consent to any other or subsequent assignment or transfer. 11.6. Binding Effect/Merger or Reorganization. This Agreement shall be --------------------------------------- binding upon and inure to the benefit of the Employee and the Employer and, as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns. Accordingly, the Employer shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Employer under this Agreement. Upon the occurrence of such event, the term "Employer" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation. 11.7. Non-waiver. The failure of either party to enforce at any time or ---------- for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement. 11.8. Partial Invalidity. If any term, provision, covenant, or ------------------ condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. 11.9. Entire Agreement. This Agreement, including the schedules and ---------------- exhibits attached hereto and incorporated herein by this reference, contains all of the covenants and agreement, and supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 11.10. Modifications. Any modification of this Agreement shall be ------------- effective only if it is in writing and signed by each party or such party's authorized representative. -15- 11.11. Paragraph Headings. The paragraph headings used in this ------------------ Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement. 11.12. No Strict Construction. The language used in this Agreement ---------------------- shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person. 11.13. Governing Law. The laws of the State of California, other than ------------- those laws denominated choice of law rules, and, where applicable, the rules and regulations of the California Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency, shall govern the validity, interpretation, construction and effect of this Agreement. 11.14. Waiver of Prior Plan Benefit. To the extent that the Employee is ---------------------------- a participant in any other supplemental benefit plan provided by the Employer which affords the Employee benefits in the event of the Employee's retirement or death or a change in control of the Employer, it is an express condition precedent to the effectiveness of this Agreement that the Employee execute and deliver the Waiver of Prior Plan Benefit attached as Schedule "D" to this Agreement. IN WITNESS WHEREOF, the Employer and the Employee have executed this Agreement on the date first above-written in the City of Palo Alto, Santa Clara County, California. THE EMPLOYER THE EMPLOYEE Greater Bay Bancorp By: /s/ David L. Kalkbrenner /s/ Steven C. Smith ------------------------ ------------------- David L. Kalkbrenner Steven C. Smith President -16- SCHEDULE A Applicable Calendar Year Percentage 12/31/97 70% 12/31/98 85% 12/31/99 100% SCHEDULE B ---------- INDEX EMPLOYEE BENEFITS ----------------------- 1. Index Employee Benefits Determination. The Index Employee Benefits consist ------------------------------------- of (i) accruals to the Employee's Benefit Account (as described in subparagraph (a) below) during the Employee's employment by the Employer and (ii) the Index Benefit (as described in subparagraph (b) below) after the Employee's employment by the Employer terminates. The Index Employee Benefits shall be determined based upon the following: a. Benefit Account: A Benefit Account shall be established as a liability --------------- reserve account on the books of the Employer for the benefit of the Employee. Prior to the date on which the Employee becomes eligible to receive payments under the Plan, such Benefit Account shall be increased (or decreased) each Plan Year by an amount equal to the annual earnings (or loss) for that Plan Year determined by the Index (described in subparagraph c below), less the Opportunity Cost (described in subparagraph d below) for that Plan Year. b. Index Benefit: After the date on which the Employee becomes eligible to ------------- receive payments under the Plan, the Index Benefit for the Employee for any Plan Year shall be determined by subtracting the Opportunity Cost for that Plan Year from the annual earnings (if any) for that Plan year determined by the Index. c. Index: The Index for any Plan Year shall be the aggregate annual ----- after-tax income from the life insurance contracts described hereinafter as defined by FASB Technical Bulletin 85-4. This Index shall be applied as if such insurance contracts were purchased on the Effective Date. Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $505,000 ------------ Insurance Company: [omitted] ----------------- Policy Number: [omitted] ------------- Premiums Paid: $505,000 ------------- If such contracts of life insurance are actually purchased by the Employer, then the actual policies as of the dates purchased shall be used in calculations to determine the Index and Opportunity Cost. If such contracts of life insurance are not purchased or are subsequently surrendered or lapsed, then the Employer shall receive and use annual policy illustrations that assume the above described policies were purchased from the above named insurance company(ies) on the Effective Date to calculate the amount of the Index and Opportunity Cost. d. Opportunity Cost: The Opportunity Cost for any Plan Year shall be ---------------- calculated by multiplying (a) the sum of (i) the total amount of premiums set forth in the insurance policies described above, (ii) the amount of any Index Benefits (described at subparagraph b above), and (iii) the amount of all previous years after-tax Opportunity Costs; by (b) the average annualized after-tax cost of funds calculated using a one-year U.S. Treasury Bill as published in the Wall Street Journal. The applicable tax rate used to calculate ------------------- the Opportunity Cost shall be the Employer's marginal tax rate until the Employee's Retirement, or other termination of service (including a Change in Control). Thereafter, the Opportunity Cost shall be calculated with the assumption of a marginal forty-two percent (42%) corporate tax rate each year regardless of whether the actual marginal tax rate of the Employer is higher or lower. 2. Employee Benefits Payments. The Employee shall be entitled to payment of the -------------------------- Index Employee Benefits on the terms as specified in the Agreement. EXAMPLE INDEX EMPLOYEE BENEFITS
[n] [A] [B] [C] [D] End of Year Cash Surrender Value of Index Opportunity Cost Annual - ----------- ------------------------ ----- ---------------- ------ Life Insurance Policy [Annual A/0/ = premium Benefit --------------------- Policy A/0/+C/n-1/x.05x ------- Income] (1-42%) B-C A/n/-A/n-1/ 0 $1,000,000 -- -- -- 1 $1,050,000 $50,000 $29,000 $21,000 2 $1,102,500 $52,500 $29,841 $22,659 3 $1,157,625 $55,125 $30,706 $24,419 . . .
Assumptions: Initial Insurance = $1,000,000 Effective Tax Rate = 42% One Year US Treasury Yield = 5% SCHEDULE C SUPPLEMENTAL BENEFITS In addition to the Employee Benefits specified elsewhere in this Agreement, the Employee shall be entitled to receive the following supplemental benefits (the "Supplemental Benefits"): Secular Trust Defined Benefit. Provided that the Employee has not exercised the Employee's withdrawal rights under the Trust, the Employer shall make contributions to the Trust, pursuant to paragraph 9 of the Agreement, on a pre-tax basis in the amounts shown in column (B) of the following table. Such contributions shall be made from time to time in the discretion of the Employer provided that the total amount shown in column (B) below has been contributed to the Trust by the end of the Plan Year shown in column (A) below. (A) (B) 1998 $98,039 1999 $32,277 2000 $36,556 2001 $41,217 2002 $46,290 2003 $51,808 2004 $57,805 2005 $64,320 2006 $71,393 2007 $79,068 2008 $87,390 2009 $96,411 2010 $106,185 2011 $116,768 2012 $128,223 2013 $140,617 The aggregate amount of the foregoing contributions shall be subject to adjustment, from time to time, to ensure that the Trust is adequately funded to afford the Employee with a projected defined benefit equal to the Applicable Percentage of Fifty Seven Thousand Two Hundred Forty Dollars ($57,240) per annum for twenty (20) years commencing the year in which the Employee attains age sixty-two (62). In the event that the contributions made by the Employer to the Trust as provided above are determined to be insufficient to fund the foregoing Supplemental Benefits, the Employer shall make such further contributions to the Trust as may be necessary to fund fully such Supplemental Benefits. Such determination and adjusting contributions, if required, may be made from time to time at the discretion of the Employer, but in all events not later than the date on which the Employee Retires or otherwise becomes eligible to begin receiving the Employee Benefits specified in Schedule "B". Provided that the foregoing final adjusting contribution, if required, has been made, the Employer shall have no obligation to make further contributions to the Trust once the Employee Retires or otherwise becomes eligible to begin receiving the Employee Benefits specified in Schedule "B". Notwithstanding anything herein or in the Agreement to the contrary, the obligation of the Employer to make the contributions to the Trust as specified above shall terminate automatically upon the forfeiture or other termination of the Employee's right to receive the Employee Benefits specified in Schedule "B", as provided in this Agreement. -2- SCHEDULE D ---------- WAIVER OF PRIOR PLAN BENEFITS ----------------------------- In consideration for the Employee Benefits made available to the Employee by this Employee Supplemental Compensation Benefits Agreement (the "Agreement"), the Employee acknowledges and agrees as follows: (a) The Employee is a party to that certain ___________________________ Agreement made with the Employer or its predecessor dated ____________, 19__ (the "Prior Plan Agreement"); (b) This Agreement and the Employee Benefits hereunder are provided as a substitute for the Prior Plan Agreement and the benefits provided thereunder; (c) The Prior Plan Agreement and the benefits thereunder are hereby terminated effective as of the date of this Agreement; (d) The Employee hereby waives and relinquishes for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successors and assigns, any and all right, entitlement and interest that the Employee has or may have pursuant to the Prior Plan Agreement and the benefits thereunder; (e) The Employee accepts the Employee Benefits afforded by this Agreement in full and complete substitution for the benefits otherwise provided by the Prior Plan Agreement; and (f) Without limiting the scope and effect of subparagraph 11.1 of the Agreement, the Employee (i) has had an opportunity to consult with advisors of the Employee's own choice in determining to enter into this Agreement and this Waiver, (ii) understands that the effect of this Waiver is to terminate, waive and relinquish forever all rights, entitlements and interests that the Employee has or may have under the Prior Plan Agreement and the benefits thereunder as a condition to receiving the Employee Benefits under this Agreement; and (iii) the Employee is entering into this Agreement and this Waiver voluntarily and with full appreciation of the effect of doing so. Dated: , 1998 ---------------------------- -------------------------------- Steven C. Smith I consent to and agree to be bound by the foregoing Waiver: - ----------------------------------------------------- Lourdes Smith, Spouse of Steven C. Smith SCHEDULE E ---------- BENEFICIARY DESIGNATION ----------------------- To the Administrator of the Greater Bay Bancorp Employee Supplemental Compensation Benefits Agreement: Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Greater Bay Bancorp, permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death: Primary Beneficiary: - ------------------- - --------------------------- -------------------------- -------------------- Name Address Relationship Secondary (Contingent) Beneficiary: - ---------------------------------- - --------------------------- -------------------------- -------------------- Name Address Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Administrator shall pay all amounts in accordance with the terms of my Employee Supplemental Compensation Benefits Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event, the remaining unpaid benefit payable according to the terms of my Employee Supplemental Compensation Benefits Agreement shall be payable to the personal representatives of the estate of said beneficiary who survived me but died prior to receiving the total benefit provided by my Employee Supplemental Compensation Benefits Agreement. Dated: , 1998 ---------------------------- ---------------------------------- Steven C. Smith CONSENT OF THE EMPLOYEE'S SPOUSE TO THE ABOVE BENEFICIARY DESIGNATION: - ------------------------------------ I, Lourdes Smith, being the spouse of Steven C. Smith, after being afforded the opportunity to consult with independent counsel of my choosing, do hereby acknowledge that I have read, agree and consent to the foregoing Beneficiary Designation which relates to the Employee Supplemental Compensation Benefits Agreement entered into by my spouse effective as of January 1, 1998. I understand that the above Beneficiary Designation may affect certain rights which I may have in the benefits provided for under the terms of the Employee Supplemental Compensation Benefits Agreement and in which I may have a marital property interest. Dated: , 1998 ---------------------------- - ---------------------------------------- Lourdes Smith SCHEDULE F ---------- DISTRIBUTION ELECTION --------------------- Pursuant to the Provisions of my Employee Supplemental Compensation Benefits Agreement with Greater Bay Bancorp, I hereby elect to have any distribution of the balance in my Benefit Account paid to me in installments as designated below: ____ sixty (60) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ____ one hundred twenty (120) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. ____ one hundred eighty (180) monthly installments with the amount of each installment determined as of each installment date by dividing the entire amount in my Benefit Account by the number of installments then remaining to be paid, with the final installment to be the entire remaining balance in the Benefit Account. Dated: , 1998 ---------------------------- Signed: --------------------------------- Steven C. Smith SCHEDULE G ---------- SECULAR TRUST ------------- [to be finalized] EX-10.15.1 7 AGREEMENT BETWEEN REGISTRANT AND WELLS FARGO Exhibit 10.15.1 November 4, 1999 Greater Bay Bancorp 2860 W. Bayshore Road Palo Alto, CA 94303 Attention: Kamran Husain Dear Mr. Husain: This letter is to confirm that Wells Fargo Bank, National Association ("Bank"), subject to all terms and conditions contained herein, has agreed to make available to Greater Bay Bancorp ("Borrower") a revolving line of credit under which Bank will make advances to Borrower from time to time up to and including November 2, 2000 not to exceed the maximum principal amount of $25,000,000.00 (the "Line of Credit"). The proceeds of the Line of Credit shall be used for short term operational cash flow requirements of Borrower and its subsidiaries. Each existing or hereafter acquired subsidiary of Borrower which is a bank is hereinafter referred to a "Bank Subsidiary"). I. CREDIT TERMS: 1. LINE OF CREDIT: (a) Line of Credit Note. Borrower's obligation to repay advances under the ------------------- Line of Credit shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) Borrowing and Repayment. Borrower may from time to time during the ----------------------- term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that (i) the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above, and that (ii) Borrower shall maintain a zero balance on the Line of Credit during the 30 consecutive day period immediately following any period of 180 consecutive days during which the outstanding principal balance of the Line of Credit exceeded zero. Greater Bay Bancorp November 4, 1999 Page 2 II. INTEREST/FEES: 1. Interest. The outstanding principal balance of the Line of Credit -------- shall bear interest at the rate of interest set forth in the Line of Credit Note. 2. Computation and Payment. Interest shall be computed on the basis of a ----------------------- 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in the Line of Credit Note. 3. Commitment Fee. Borrower shall pay to Bank a non-refundable commitment -------------- fee for the Line of Credit equal to $5,000.00, which fee shall be due and payable in full on the date of Borrower's execution of this letter. 4. Collection of Payments. Borrower authorizes Bank to collect all ---------------------- interest and fees due under the Line of Credit by charging Borrower's demand deposit account number 4000-583708 ___ with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. III. REPRESENTATIONS AND WARRANTIES: Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this letter and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this letter. 1. Legal Status. Borrower is a corporation, duly organized and existing ------------ and in good standing under the laws of California and is qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. 2. Authorization and Validity. This letter, the Line of Credit Note, and -------------------------- each other document, contract or instrument deemed necessary by Bank to evidence any extension of credit to Borrower pursuant to the terms and conditions hereof, or now or at any time hereafter required by or delivered to Bank in connection with this letter (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the Greater Bay Bancorp November 4, 1999 Page 3 party which executes the same, enforceable in accordance with their respective terms. 3. No Violation. The execution, delivery and performance by Borrower of ------------ each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or by- laws of Borrower, or result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. 4. Litigation. There are no pending, or to the best of Borrower's ---------- knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. 5. Correctness of Financial Statement. The financial statement of ---------------------------------- Borrower dated June 30, 1999, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the consolidated financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the consolidated financial condition of Borrower, nor has Borrower or any Bank Subsidiary mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. 6. Income Tax Returns. Borrower has no knowledge of any pending ------------------ assessments or adjustments of its income tax payable with respect to any year. Greater Bay Bancorp November 4, 1999 Page 4 7. No Subordination. There is no agreement, indenture, contract or ---------------- instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this letter to any other obligation of Borrower. 8. Permits, Franchises. Borrower possesses, and will hereafter possess, ------------------- all permits, consents, approvals, franchises and licenses required and all rights to trademarks, trade names, patents and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. 9. ERISA. Borrower is in compliance in all material respects with all ----- applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event, as defined in ERISA, has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. 10. Other Obligations. Borrower is not in default on any obligation for ----------------- borrowed money, any material purchase money obligation or any other material lease, commitment, contract, instrument or obligation. 11. Environmental Matters. Except as disclosed by Borrower to Bank in --------------------- writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. Greater Bay Bancorp November 4, 1999 Page 5 IV. CONDITIONS: 1. Conditions of Initial Extension of Credit. The obligation of Bank to ----------------------------------------- extend any credit contemplated by this letter is subject to fulfillment to Bank's satisfaction of all of the following conditions: (a) Documentation. Bank shall have received each of the Loan Documents, ------------- duly executed and in form and substance satisfactory to Bank. (b) Financial Condition. There shall have been no material adverse change, ------------------- as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of a substantial or material portion of the assets of Borrower. 2. Conditions of Each Extension of Credit. The obligation of Bank to make -------------------------------------- each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in ---------- each of the other Loan Documents shall be true on and as of the date of the signing of this letter and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no default hereunder, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such a default, shall have occurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which ------------- may be required in connection with such extension of credit. Greater Bay Bancorp November 4, 1999 Page 6 V. COVENANTS: Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: 1. Punctual Payment. Punctually pay all principal, interest, fees or ---------------- other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein , and immediately upon demand by Bank, the amount by which the outstanding principal balance of the Line of Credit at any time exceeds any limitation on borrowings applicable thereto. 2. Accounting Records. Maintain adequate books and records in accordance ------------------ with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and inspect the properties of Borrower. 3. Financial Statements. Provide to Bank all of the following, in form and -------------------- detail satisfactory to Bank: (a) not later than 95 days after and as of the end of each fiscal year, an audited consolidated financial statement of Borrower, prepared by independent certified public accountants acceptable to Bank, to include balance sheet, income statement, statement of cash flows, together with an unqualified opinion; (b) not later than 50 days after and as of the end of each fiscal quarter, a consolidated financial statement of Borrower, prepared by Borrower, to include balance sheet, income statement and statement of cash flows; (c) promptly upon the occurrence thereof, notify Bank of any formal enforcement action taken or, to the knowledge of Borrower, proposed to be taken against Borrower and/or any of its subsidiaries; and (d) from time to time such other information as Bank may reasonably request. 4. Compliance. Preserve and maintain all licenses, permits, governmental ---------- approvals, rights, privileges and franchises necessary for the conduct of its business; and comply Greater Bay Bancorp November 4, 1999 Page 7 with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of a governmental agency applicable to Borrower and/or its business, except any of the foregoing which, if not preserved, maintained or complied with, would not have a material adverse effect on Borrower. 5. Insurance. Maintain and keep in force insurance of the types and in --------- amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. 6. Facilities. Keep all properties useful or necessary to Borrower's ---------- business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. 7. Taxes and Other Liabilities. Pay and discharge when due any and all --------------------------- indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event that Borrower is obligated to make such payment. 8. Litigation. Promptly give notice in writing to Bank of any litigation ---------- pending or threatened against Borrower with a claim in excess of $1,000,000.00. 9. Financial Condition. Maintain Borrower's financial condition (or, with ------------------- respect to paragraph (c) below, cause all of Borrower's subsidiaries or Bank Subsidiaries (as applicable) to maintain their combined financial condition) as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein), with compliance determined commencing with Borrower's financial statements for the period ending September 30, 1999: Greater Bay Bancorp November 4, 1999 Page 8 (a) Double Leverage Ratio not at any time greater than 1.50 to 1.0 determined as of the end of each fiscal quarter, with "Double Leverage Ratio" ---------------------- defined as the ratio of (i) Borrower's equity investment in all its subsidiaries, to (ii) Borrower's equity. (b) Maintain on a consolidated basis (and cause each Bank Subsidiary to maintain) a capital ratio sufficient to be rated "well capitalized" by the Federal Reserve Board, Federal Deposit Insurance Corporation and each other federal or state regulatory entity or agency which has jurisdiction over Borrower or any Bank Subsidiary and maintains such a rating system; provided, --------- however, that in the event Borrower acquires a Bank Subsidiary after the date of - ------- this Agreement which is not "well capitalized" at the time of such acquisition, Borrower shall cause such Bank Subsidiary to become "well capitalized" within six (6) months following such acquisition. (c) Maintain consolidated net income after taxes not less than $1.00, determined as of each fiscal quarter end on a rolling four (4) quarter basis. Consolidated herein refers to Borrower and all of its subsidiaries. 10. Other Indebtedness. Not create, incur, assume or permit to exist any ------------------ indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, (b) any other liabilities of Borrower and any subsidiaries existing as of, and disclosed to Bank prior to, the date hereof, (c) unsecured and uncommitted operating lines of credit, such as daylight overdraft facilities and Fed Funds lines and the like, (d) other unsecured loans and lines of credit in an aggregate amount not to exceed, on a consolidated basis, 50% of Borrower's consolidated equity preceding the incurring of such indebtedness, and (e) additional unsecured liabilities which are subordinated to the obligations of Borrower to Bank pursuant to agreements in form and content acceptable to Bank; provided that the indebtedness described in clauses (b), (c) and (d) shall not be prior or senior in right of payment to the obligations of Borrower to Bank. 11. Merger, Consolidation, Transfer of Assets. Not merge into or ----------------------------------------- consolidate with any other entity unless Borrower is the surviving entity; nor make any substantial change in the nature of Borrower's business as conducted as of the date hereof; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. Greater Bay Bancorp November 4, 1999 Page 9 12. Loans, Advances, Investments. Not make any loans or advances to or ---------------------------- investments in any person or entity, except (a) any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof, (b) loans and advances to Borrower's subsidiaries, provided that at no time shall the outstanding principal balance of such loans and advances to any Bank Subsidiaries exceed 50% of the equity of such subsidiary, (c) loans and advances in the ordinary course of Borrower's business, (d) additional investments in new subsidiaries, and (e) investments (other than in subsidiaries) in the ordinary course of business. 13. Distributions. Upon and during the continuance of an Event of Default ------------- (as defined in Section VI below), not to declare or pay any distributions to its shareholders either in cash or any other property (other than dividends in the form of stock), nor redeem, retire, repurchase or otherwise acquire any ownership interest in Borrower. 14. Year 2000 Compliance. Perform all acts reasonably necessary to ensure -------------------- that (a) Borrower and any business in which Borrower holds a substantial interest, and (b) all customers, suppliers and vendors that are material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms hereof as Bank may from time to time require. Greater Bay Bancorp November 4, 1999 Page 10 VI. DEFAULT, REMEDIES: 1. Default, Remedies. Upon the violation of any term or condition of any ----------------- of the Loan Documents, or upon the occurrence of any default or defined event of default under any of the Loan Documents (each, an "Event of Default"): (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit extended by Bank to Borrower under any of the Loan Documents and to exercise any or all of the rights of a beneficiary or secured party pursuant to the applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of any such Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. 2. No Waiver. No delay, failure or discontinuance of Bank in exercising --------- any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. Greater Bay Bancorp November 4, 1999 Page 11 VII. MISCELLANEOUS: 1. Notices. All notices, requests and demands which any party is required ------- or may desire to give to any other party under any provision of this letter must be in writing delivered to each party at its address first set forth above, or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a)if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 2. Costs, Expenses and Attorneys' Fees. Borrower shall pay to Bank ----------------------------------- immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the preparation of amendments and waivers, if any, of this letter and the other Loan Documents, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. 3. Successors, Assignment. This letter shall be binding upon and inure to ---------------------- the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith Bank may disclose all documents and information which Bank now has or hereafter may acquire relating to any credit extended by Bank to Borrower, Borrower or its business, or any collateral required hereunder. 4. Entire Agreement; Amendment. This letter and the other Loan Documents --------------------------- constitute the entire agreement between Borrower and Bank with respect to any extension of credit by Bank subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This letter may be amended or modified only in writing Greater Bay Bancorp November 4, 1999 Page 12 signed by each party hereto. 5. No Third Party Beneficiaries. This letter is made and entered into for ---------------------------- the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this letter or any other of the Loan Documents to which it is not a party. 6. Severability of Provisions. If any provision of this letter shall be -------------------------- prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this letter. 7. Governing Law. This letter shall be governed by and construed in ------------- accordance with the laws of the State of California. 8. Confidentiality. Bank acknowledges that it and Borrower and --------------- Borrower's Bank Subsidiaries compete with one another in a number of areas, including competing for potential acquisitions of other financial institutions. In consideration of the foregoing, Bank agrees to execute a Confidentiality Agreement in the form and content of Exhibit B hereto. 9. Arbitration. ----------- (a) Arbitration. Upon the demand of any party, any Dispute shall be ----------- resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this letter. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by the --------------- American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance Greater Bay Bancorp November 4, 1999 Page 13 with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. 91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No ---------------------------------------------------------- provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be -------------------------------------------- active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive law applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three Greater Bay Bancorp November 4, 1999 Page 14 arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, in --------------- any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral; Judicial Reference. Notwithstanding anything -------------------------------------------- herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the ------------- arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or Greater Bay Bancorp November 4, 1999 Page 15 other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. Your acknowledgment of this letter shall constitute acceptance of the foregoing terms and conditions. Bank's commitment to extend any credit to Borrower pursuant to the terms of this letter shall terminate on November 10, 1999, unless this letter is acknowledged by Borrower and returned to Bank on or before that date. Sincerely, WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ James A. Gross -------------------------- Title: Vice President and Relationship Manager ---------------- Acknowledged and accepted as of November 15, 1999: GREATER BAY BANCORP By: /s/ Kamran Husain ----------------- Title: Senior Vice President-Finance By: /s/ Steven C. Smith ------------------- Title: EVP, CAO & CFO EX-10.15.2 8 REVOLVING LINE OF CREDIT WITH WELLS FARGO Exhibit 10.15.2 REVOLVING LINE OF CREDIT NOTE $25,000,000.00 San Francisco, California November 4, 1999 FOR VALUE RECEIVED, the undersigned GREATER BAY BANCORP ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at 420 Montgomery, San Francisco, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Twenty-Five Million Dollars ($25,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined: (a) "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close. (b) "Fixed Rate Term" means, for each advance requested hereunder, a period of three (3) months commencing initially on the Business Day on which such advance is made, and automatically renewing for a period of 3 months at the end of each such 3 month period (or renewed period), during which the outstanding principal amount under this Note related to such advance bears interest determined in relation to LIBOR as in effect on the first Business Day of the applicable 3 month period; provided however, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day that is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. (c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula: LIBOR = Base LIBOR ------------------------------- 100% - LIBOR Reserve Percentage "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time -1- approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter- Bank Market. (ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. (d) "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. INTEREST: (a) Interest. The outstanding principal balance of this Note shall bear -------- interest (computed on the basis of a 360-day year, actual days elapsed) at a fixed rate per annum determined by Bank to be one quarter percent (0.25%) above LIBOR in effect on the first day of the applicable Fixed Rate Term. Bank is hereby authorized to note the interest rate applicable to this Note during the term hereof and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. (b) Additional LIBOR Provisions. --------------------------- (i) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, then the outstanding principal balance hereof, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate. (ii) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank to maintain interest rates -2- based on LIBOR, then any such unlawful LIBOR-based loans then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based loans to remain in effect until the expiration of the Fixed Rate Term applicable thereto, then such permitted LIBOR-based loans shall continue in effect until the expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any LIBOR based interest loans made available to Borrower hereunder, and, absent manifest error, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (iii) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (A) subject Bank to any tax, duty or other charge with respect to making any LIBOR based loans, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Bank; or (C) impose on Bank any other condition; and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any LIBOR based loans hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such LIBOR based loans. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR based loans made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (d) Payment of Interest. Interest accrued on this Note shall be payable on ------------------- the last day of each month, commencing November 30, 1999 and on the maturity date of this Note. -3- (e) Default Interest. From and after the maturity date of this Note, or ---------------- such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note. BORROWING AND REPAYMENT: (a) Borrowing and Repayment. Borrower may from time to time during the ----------------------- term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on November 2, 2000. (b) Advances. Advances hereunder, to the total amount of the principal sum -------- stated above, may be made by the holder at the oral or written request of (i) Steven C. Smith, Shawn E. Saunders, Kamran R. Husain or Mark Eschen, either one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower. (c) Application of Payments. Each payment made on this Note shall be ----------------------- credited first, to any interest then due and second, to the outstanding principal balance hereof, with such payments applied to the oldest Fixed Rate Term first. PREPAYMENT: (a) Borrower may prepay principal on any portion of this Note at any time and in any amount. In consideration of Bank providing this prepayment option to Borrower, or if this Note -4- shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: (i) Determine the amount of interest which would have accrued each month --------- on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) Subtract from the amount determined in (i) above the amount of -------- interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank. EVENTS OF DEFAULT: The occurrence of any of the following shall constitute an "Event of Default" under this Note: (a) The failure to pay, within 5 calendar days after the due date, any principal, interest, fees or other charges hereunder or under any contract, instrument or document executed in connection with this Note; provided however, that with respect to interest, fees or other charges, no Event of Default shall be deemed to have occurred if the same are paid later than the fifth day after the applicable due date but within 30 days after the -5- applicable due date no more than two times during the term of this Note. (b) The filing of a petition by or against Borrower under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors (and, if --- filed against Borrower, the proceeding in question is not dismissed within 60 days after its filing, provided further, that Bank shall not be required to make advances during such 60 day period); the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of Borrower; Borrower becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of Borrower with a book value of $5,000,000.00 or more. (c) The dissolution or liquidation of Borrower. (d) Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which Borrower has incurred (i) any obligation for borrowed money, (ii) any purchase obligation, or (iii) any other liability of any kind to any person or entity, including the holder, and, in the cases of (ii) or (iii) --- the obligation or other liability exceeds $5,000,000.00, and, in the cases of --- (i), (ii) or (iii), the creditor has taken action(s) with respect to such default, which action may consist solely of the sending of a notice of default. (e) Any financial statement provided by Borrower to Bank proves to be incorrect, false or misleading in any material respect. (f) Any violation or breach of any provision of, or any defined event of default under, any addendum to this Note or any loan agreement, guaranty, security agreement, deed of trust, mortgage or other document executed in connection with or securing this Note, and, if such violation or breach is by --- its nature susceptible of being cured, the same is not cured within 30 days after the date Borrower first knew (or, using reasonable due diligence, should have known) thereof. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default, the holder of -------- this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit -6- hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity. (b) Governing Law. This Note shall be governed by and construed in ------------- accordance with the laws of the State of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. GREATER BAY BANCORP By: /s/ Steven C. Smith ------------------- -------------------------- Title: EVP, CAO & CFO ----------------------- By: ----------------------- Title: -------------------- -7- EX-12.1 9 STATEMENT RE COMPUTATION OF RATIOS OF EARNINGS Exhibit 12.1 Greater Bay Bancorp Annual Report of Form 10-K Statements re Computation of Ratios of Earnings to Fixed Charges
For the Years Ended December 31, --------------------------------- 1999 1998 1997 1996 1995 ------------------------------------------------------------------------- Income before Income taxes $ 23,954 $19,171 $16,434 $ 8,046 $ 7,112 Fixed charges: Interest expense 71,618 54,669 39,969 27,376 23,494 Interest factor of rental expense 4,838 3,675 3,484 3,101 2,760 ------------------------------------------------------------------------- Fixed charges 76,456 58,334 43,453 30,476 26,254 Less: interest expense on deposits 63,110 46,410 36,425 24,535 21,057 ------------------------------------------------------------------------- Net fixed charges 13,346 11,924 7,028 5,941 5,197 ------------------------------------------------------------------------- Earnings, excluding Interest on deposits $ 37,300 $31,095 $23,462 $13,987 $12,309 ========================================================================= Ratio of earnings, excluding interest on deposits, to net fixed charges(1) 2.79x 2.61x 3.34x 2.35x 2.37x Earnings, including interest on deposits $100,410 $77,505 $59,887 $38,522 $33,366 ========================================================================= Ratio of earnings, including interest on deposits, to fixed charges(2) 1.31x 1.33x 1.38x 1.26x 1.27x
(1) For the purposes of computing the ratio of earnings, excluding interest on deposits, to net fixed charges, earnings represent income before income taxes plus net fixed charges. Net fixed charges include Interest expense, other than interest on deposits, and that portion of rental expense, generally one third, deemed representative of the interest factor. (2) For the purposes of computing the ratio of earnings, including interest on deposits, to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges include interest expense and that portion of rental expense, generally one third, deemed representative of the Interest factor. EX-21 10 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 GREATER BAY BANCORP ANNUAL REPORT ON FORM 10-K SUBSIDIARIES OF THE REGISTRANT Greater Bay Bancorp owns 100% of the outstanding voting securities of the following corporations, either directly or indirectly, all of which are included in Greater Bay Bancorp's consolidated financial statements. Name Jurisdiction of Incorporation ---- ----------------------------- Bay Area Bank California Bay Bank of Commerce California Cupertino National Bank United States Golden Gate Bank California Mid-Peninsula Bank California Peninsula Bank of Commerce California Pacific Business Funding Corporation California Peninsula Real Estate Corporation California GBB Capital I Delaware GBB Capital II Delaware EX-23.1 11 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-30913, 333-67677, 333-30915, 333-16967 and 333-47747) and Form S-3 (Nos. 333-61679 and 333-70025) of Greater Bay Bancorp of our report dated January 31, 2000 relating to the consolidated financial statements which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Francisco, California January 31, 2000 EX-27.1 12 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1999 REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 95,416 78,660 0 0 191,700 62,800 0 0 307,840 289,291 141,725 102,108 136,481 103,028 1,715,284 1,184,752 (38,035) (24,359) 2,624,965 1,882,391 2,300,888 1,602,342 0 0 113,322 111,613 50,000 50,000 0 0 0 0 92,096 66,711 68,659 51,725 2,624,965 1,882,391 136,828 102,092 26,267 21,743 12,255 11,163 175,350 134,998 63,110 46,410 71,618 54,659 103,732 80,339 12,249 6,369 (19) 374 83,650 54,754 39,660 29,877 39,660 29,877 (88) 0 0 0 27,711 20,158 2.28 1.69 2.17 1.59 4.91 5.15 4,333 2,033 10 0 0 0 0 0 24,359 19,032 (2,619) (1,670) 1,301 445 38,035 24,359 38,035 24,359 0 0 0 0
EX-27.2 13 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1999 REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 72,179 0 82,500 0 192,170 66,872 61,628 892,736 (19,032) 1,456,119 1,279,709 0 57,709 20,000 0 0 61,316 37,385 1,456,119 85,415 11,657 9,948 107,020 36,426 39,969 67,051 7,078 (8) 47,197 22,805 22,805 0 0 14,485 1.29 1.21 5.69 3,784 158 0 0 12,600 (2,105) 108 19,032 19,032 0 0
EX-27.3 14 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1999 REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1999 OCT-01-1999 JUL-01-1999 DEC-31-1999 SEP-30-1999 95,416 108,315 0 0 191,700 188,300 0 0 307,840 298,619 141,725 127,235 136,481 121,991 1,715,284 1,560,081 (38,035) (30,856) 2,624,965 2,435,643 2,300,888 2,169,260 0 0 113,322 82,896 50,000 50,000 0 0 0 0 92,096 71,913 68,659 61,574 2,624,965 2,435,643 39,378 35,629 7,603 6,891 4,277 3,015 51,259 45,536 19,069 16,700 21,154 18,567 30,105 26,969 6,013 3,578 (23) 4 28,569 15,394 16,592 12,430 16,592 12,430 0 0 0 0 9,524 7,853 0.77 0.64 0.73 0.61 4.94 4.92 4,333 5,943 10 0 0 0 0 0 30,856 27,167 (1,406) (680) 277 788 38,035 30,856 38,035 30,856 0 0 0 0
EX-27.4 15 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1999 REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 MAR-31-1999 102,221 87,506 0 0 153,400 111,400 0 0 303,923 292,229 102,432 104,985 97,188 99,741 1,432,187 1,328,808 (27,167) (25,066) 2,264,198 2,084,374 1,967,339 1,808,995 0 0 118,797 100,184 50,000 50,000 0 0 0 0 70,629 68,413 57,433 56,782 2,264,198 2,084,374 32,376 29,445 6,163 5,610 3,105 1,858 41,644 36,911 14,679 12,662 17,093 14,804 24,551 22,107 1,697 961 0 0 15,199 14,157 11,046 9,923 11,046 9,923 0 (88) 0 0 4,347 5,987 0.36 0.50 0.34 0.48 4.81 4.96 3,402 3,019 0 0 0 0 0 0 25,066 24,359 (242) (291) 200 36 27,167 25,066 27,167 25,066 0 0 0 0
EX-27.5 16 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1999 REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-1998 DEC-31-1998 OCT-01-1998 JUL-01-1998 DEC-31-1998 SEP-30-1998 78,660 78,305 0 0 62,800 115,500 0 0 289,291 329,084 101,718 108,809 96,474 103,565 1,209,111 1,023,150 (24,359) (22,798) 1,882,391 1,822,765 1,602,342 1,543,366 0 0 111,613 115,529 50,000 50,000 0 0 0 0 66,701 64,957 51,735 48,913 1,882,391 1,822,765 27,018 26,109 5,818 6,260 2,824 3,153 35,659 35,522 12,013 12,832 14,381 14,861 21,278 20,661 1,986 1,912 320 4 14,195 13,451 8,587 7,928 8,587 7,928 0 0 0 0 5,959 5,342 0.51 0.46 0.47 0.42 4.91 0 2,033 3,199 0 18 0 0 0 0 22,798 20,658 (510) (78) 96 195 24,359 22,798 24,359 22,798 0 0 0 0
EX-27.6 17 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1999 REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-1998 DEC-31-1998 APR-01-1998 JAN-01-1998 JUN-30-1998 MAR-31-1998 97,019 97,309 0 0 141,600 95,900 0 0 324,511 211,058 53,054 60,113 47,810 54,869 1,002,118 951,895 (20,658) (19,303) 1,754,692 1,572,829 1,524,033 1,329,862 0 0 104,615 119,827 20,000 20,000 0 0 0 0 62,643 59,078 43,401 44,062 1,754,692 1,572,829 25,034 23,579 4,565 4,251 3,188 2,674 32,787 30,504 11,244 10,330 13,369 12,047 19,418 18,457 1,437 1,046 42 8 14,162 12,711 6,461 7,068 6,461 7,068 0 0 0 0 4,152 4,708 0.36 0.41 0.33 0.38 0 0 4,134 3,720 75 407 0 0 0 0 19,303 19,032 (183) (893) 32 118 20,658 19,303 20,658 19,303 0 0 0 0
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