-----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, EVvXfMJUqhW1oeHQbT2G+9OllZswuDIs+wR/B2NW4KzffInm1Wb5eNvwvmYRAlaD 8yA3nHr4YUKWLbNyugcEbA== 0001012870-02-000734.txt : 20020414 0001012870-02-000734.hdr.sgml : 20020414 ACCESSION NUMBER: 0001012870-02-000734 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020215 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25034 FILM NUMBER: 02551670 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-K 1 d10k.txt FORM 10-K FOR PERIOD ENDED 12/31/2001 ================================================================================ 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, 2001 [_] 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 9.00% Cumulative Trust Preferred Securities of GBB Capital V Guarantee of Greater Bay Bancorp with respect to the 9.00% Cumulative Trust Preferred Securities of GBB Capital V 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. [_] The aggregate market value of the Common Stock held by non-affiliates, based upon the closing sale price of the Common Stock on February 6, 2002, as reported on the Nasdaq National Market System, was approximately $1,179,915,000. 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 February 6, 2002, 50,029,620 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, 2001
================================================================================ ANNUAL REPORT ON FORM 10-K 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 "we" or "our" 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, Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast Commercial Bank, Cupertino National Bank, Golden Gate Bank, Mid-Peninsula Bank, Mt. Diablo National Bank, Peninsula Bank of Commerce and San Jose National Bank) operates, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. Our 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 Bancorp ("Greater Bay", on a parent-only basis, and "we" or "our", on a consolidated basis) is a bank holding company with 11 bank subsidiaries: Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast Commercial Bank, Cupertino National Bank, Golden Gate Bank, Mid-Peninsula Bank, Mt. Diablo National Bank, Peninsula Bank of Commerce, and San Jose National Bank. We also conduct business through the following divisions: CAPCO, Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Carmel, Greater Bay Bank Marin, Greater Bay Bank Santa Clara Valley Group, Greater Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay International Banking Division, Greater Bay Trust Company, Matsco, Pacific Business Funding and the Venture Banking Group. We provide a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. We operate throughout the San Francisco Bay Area including Silicon Valley, San Francisco and the San Francisco Peninsula, the East Bay, Santa Cruz, Marin, Monterey, and Sonoma Counties, with 45 offices located in Aptos, Blackhawk, Capitola, Carmel, Cupertino, Danville, Fremont, Hayward, Lafayette, Los Gatos, Millbrae, Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Rafael, San Ramon, Santa Clara, Santa Cruz, Saratoga, Scotts Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville. At December 31, 2001, we had total assets of $7.9 billion, total loans, net, of $4.4 billion and total deposits of $5.0 billion. 1 History Greater Bay became a multi-bank holding company as the result of the November 1996 merger of Cupertino National Bancorp and Mid-Peninsula Bancorp. Mid-Peninsula Bancorp was incorporated in 1984 under the name San Mateo County Bancorp as the bank holding company of WestCal National Bank. In 1994, WestCal National Bank was merged with Mid-Peninsula Bank, 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. On consummation of the November 1996 merger between Cupertino National Bancorp and Mid-Peninsula Bancorp, we changed our name to Greater Bay Bancorp and Cupertino National Bank became a wholly-owned subsidiary. Cupertino National Bank 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 we have been successful in opening key regional bank locations to respond to market and client demands, while also selectively opening key new businesses that expand our product offerings. The following provides a chronological listing of mergers and acquisitions that we have completed since November 27, 1996:
Year commenced Date of merger Entity Former bank holding company operations -------------- ------ --------------------------- ---------- December 23, 1997 Peninsula Bank of Commerce none 1981 May 8, 1998 Golden Gate Bank Pacific Rim Bancorporation 1976 August 31, 1998 Pacific Business Funding Corporation (1) n/a 1995 May 21, 1999 Bay Area Bank Bay Area Bancshares 1979 October 15, 1999 Bay Bank of Commerce Bay Commercial Services 1981 January 31, 2000 Mt. Diablo National Bank Mt. Diablo Bancshares 1993 May 18, 2000 Coast Commercial Bank Coast Bancorp 1982 July 21, 2000 Bank of Santa Clara none 1973 October 13, 2000 Bank of Petaluma none 1987 November 30, 2000 The Matsco Companies, Inc. (2) n/a 1983 March 30, 2001 CAPCO Financial Company Inc. (3) n/a 1990 October 23, 2001 San Jose National Bank SJNB Financial Corp. 1982
- -------- (1) Operates as a division of Cupertino National Bank and conducts business under the name Pacific Business Funding. (2) Operates as a division of Cupertino National Bank and conducts business under the name Matsco. (3) Operates as a division of Cupertino National Bank and conducts business under the name CAPCO. With the exception of the acquisitions of The Matsco Companies, Inc. and CAPCO, all of these acquisitions were accounted for as a pooling-of-interests and, accordingly, all of our financial information for the periods prior to the acquisitions has been restated as if the acquisitions had occurred at the beginning of the earliest reporting period presented. The acquisitions of The Matsco Companies, Inc. and CAPCO were accounted for using the purchase accounting method. On December 18, 2001, we signed a definitive merger agreement with ABD Insurance and Financial Services, Inc. ("ABD"). ABD is the largest independently owned insurance brokerage and employee benefits consulting organization in the western United States. ABD has over $1.0 billion of insurance premiums serviced and in excess of $100 million in revenue for the 11 month period ended December 31, 2001. 2 Our Goals We strive toward six primary goals. These goals include: . High Credit Quality. Non-performing asset levels continue to be below our peer group. We've also implemented tighter underwriting standards and more aggressive management of non-accruals to adjust for current economy. . Core Deposit Growth. In addition to pursuing acquisition-driven deposit growth, we strive to expand our deposit franchise internally through market penetration and cross-selling as part of our relationship banking model. . Net Interest Margin. Though declining rates have resulted in margin compression, we have eased the compression with our interest rate risk mitigation strategy and client relationship pricing initiatives. We believe our relationship-based banking model positions us to deal with sustained margin compression more effectively. . Efficiency. We continue to actively manage our efficiency ratio, by reducing expenses and increasing personal productivity. . Relationship Management. This value proposition continues to benefit our clients and our shareholders. As a market differentiator, the close relationship with a knowledgeable, decision-empowered banker appeals to business owners, managers and executives who demand a greater level of service. And for Greater Bay Bancorp, the relationship delivers better control, higher quality loans and continuing opportunities for revenue development. . Acquisition Strategy. We will continue to target well-managed, high performing banks and other financial services companies that offer growth and profit opportunities in key markets. Through disciplined transaction execution, we have brought nine banks and three specialty finance firms into the Greater Bay Bancorp family. Regional 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 "Regional Community Banking Philosophy". Our Regional 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 Regional 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. 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, we currently intend to continue to market our 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. 3 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, international trade finance services, and upon the completion of our acquisition of ABD, currently expected to close in the first quarter of 2002, business insurance products. 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 Our primary goal is to become the preeminent independent financial services company in Northern California. Our primary business strategy is to focus on increasing our market share within the communities we serve through continued internal growth. We also pursue opportunities to expand our market share through select acquisitions that management believes complement our businesses. Management pursues acquisition opportunities in contiguous and infill market areas. In 2001, with the proposed acquisition of ABD, we have begun to focus on expanding fee based products in addition to our traditional banking services. Consistent with our operating philosophy and growth strategy, Greater Bay regularly evaluates opportunities to acquire banks and other financial services companies that complement our existing business, expand our market coverage and share and enhance our client product offerings. Greater Bay Bancorp's Family of Companies The following provides a summary of all of our affiliated banks and operating divisions. Banks Bank of Petaluma Bank of Petaluma presently has four full service regional offices. At December 31, 2001, Bank of Petaluma had total assets of $392.2 million, total net loans of $136.0 million and total deposits of $230.1 million. Bank of Santa Clara Bank of Santa Clara presently has eight full service regional offices. At December 31, 2001, Bank of Santa Clara had total assets of $538.5 million, total net loans of $230.2 million and total deposits of $350.7 million. Bay Area Bank Bay Area Bank presently has one full service regional office. At December 31, 2001, Bay Area Bank had total assets of $367.1 million, total net loans of $158.7 million and total deposits of $214.4 million. Bay Bank of Commerce Bay Bank of Commerce presently has three full service regional offices. At December 31, 2001, Bay Bank of Commerce had total assets of $299.6 million, total net loans of $130.4 million and total deposits of $158.2 million. Coast Commercial Bank Coast Commercial Bank presently has seven full service regional offices. At December 31, 2001, Coast Commercial Bank had total assets of $565.1 million, total net loans of $210.8 million and total deposits of $342.6 million. 4 Cupertino National Bank Cupertino National Bank presently has seven locations, including five full service regional offices. At December 31, 2001, Cupertino National Bank had total assets of $2.1 billion, total net loans of $1.5 billion and total deposits of $1.3 billion. During 2001, we formed and funded CNB Investment Trust I ("CNBIT I") and CNB Investment Trust II ("CNBIT II"), both of which are Maryland real estate investment trusts and subsidiaries of Cupertino National Bank. CNBIT I and CNBIT II provides Cupertino National Bank with flexibility in raising capital. Golden Gate Bank Golden Gate Bank presently has one full service regional office. On December 31, 2001, Golden Gate Bank had total assets of $437.9 million, total net loans of $205.8 million and total deposits of $234.7 million. Mid-Peninsula Bank Mid-Peninsula Bank presently has five full service regional offices. On December 31, 2001, Mid-Peninsula Bank had total assets of $1.5 billion, total net loans of $880.2 million and total deposits of $1.0 billion. Mt. Diablo National Bank Mt. Diablo National Bank presently has four full service regional offices. At December 31, 2001, Mt. Diablo National Bank had total assets of $524.1 million, total net loans of $192.0 million and total deposits of $312.6 million. Peninsula Bank of Commerce Peninsula Bank of Commerce presently has one full service regional office. On December 31, 2001, Peninsula Bank of Commerce had total assets of $431.7 million, total net loans of $212.7 million and total deposits of $242.7 million. San Jose National Bank San Jose National Bank presently has four full service regional offices. On December 31, 2001, San Jose National Bank had total assets of $857.2 million, total net loans of $491.3 million and total deposits of $541.1 million. Operating Divisions of the Banks CAPCO CAPCO is engaged in providing account receivable financing to small business located in the Pacific Northwest. At December 31, 2001, CAPCO had approximately $25.2 million in loans outstanding. Greater Bay Bank Carmel Region, Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont Region and Greater Bay Bank Marin Region We believe that the East Bay, Marin County, and Monterey County have a tremendous potential for growth. In order to establish and expand our presence in these markets, we formed the Carmel, Contra Costa, Fremont, and Marin regional offices. Each of these offices offers a full line of business banking services. 5 Greater Bay Bank Santa Clara Valley Group Greater Bay Bank Santa Clara Valley Group offers a full line of business banking services, catering to the needs of small to medium-sized businesses, professional firms and the 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 our clients. Greater Bay Bank SBA Lending Group The Greater Bay Bank SBA Lending Group provides loans to smaller businesses on which the Small Business Administration ("SBA") generally provides guarantees between 65% to 80% of the principal loan amount. The SBA has named both Coast Commercial Bank and Cupertino National Bank as Preferred Lenders. The SBA awards Preferred Lender status to lenders that 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. The group is able to utilize this status to provide this same level of service to clients of all of the Banks. Greater Bay Corporate Finance Group Greater Bay Corporate Finance Group primarily focuses on originating loans to companies that have revenues in excess of $20.0 million and financing requirements in the range of $5.0 million to $250.0 million. Greater Bay Corporate Finance Group participates in syndicated loan transactions and direct sourced transactions where Greater Bay Corporate Finance Group is the lead agent. At December 31, 2001, Greater Bay Corporate Finance Group had $99.7 million in syndicated loan transactions outstanding and $69.2 million in direct financing transactions. Greater Bay Trust Company Greater Bay Trust Company provides trust services to support the trust needs of the Banks' business and private banking clients. These services include, but are not limited to, custodial, investment management, estate planning resources and employee benefit plan services. International Banking Division International Banking Division 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, documentary collections and other trade finance services. In 2001, the Export-Import Bank of the United States increased the International Banking Division's delegated authority status from the "Medium" level to the "High" level to provide foreign receivable financing to local exporters. The Export-Import Bank allows "High" level delegated authority lenders to approve working capital loans up to $5.0 million per exporter, and to approve an aggregate total of up to $75.0 million in loans. Matsco Matsco is engaged in providing financial products, primarily loans and leases, to the dental and veterinary health professions. At December 31, 2001, Matsco's outstanding loans and leases totaled $491.8 million. Approximately 80% of Matsco's outstanding loans and leases were to dental businesses, with the remainder to veterinarians. Pacific Business Funding Pacific Business Funding is an asset-based lending and factoring division that provides alternative funding and support programs designed to enhance our small business banking services. 6 Venture Banking Group Venture Banking Group serves the needs of companies in their start-up and development phase, allowing them to access a banking relationship early in their development. The loans to this target group of clients are generally secured by the accounts receivable, inventory and equipment of the companies. The financial strength of these companies also tends to be bolstered by the presence of venture capital investors among their shareholders. Banking Services We provide 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 deposit 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 construction 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 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, Marin, Monterey, Santa Clara, San Francisco, San Mateo, Santa Cruz, and Sonoma Counties. . Bank of Petaluma's primary base of operations is in Petaluma, California and extends through Sonoma County. Sonoma County has a population of approximately 450,000. . Bank of Santa Clara's primary base of operations is in Santa Clara, California, which is located in the geographic area referred to as "Silicon Valley". Bank of Santa Clara's operation extends throughout Santa Clara County. Santa Clara County has a population of approximately 1,737,000. . Bay Area Bank's primary base of operations is in Redwood City, California and includes central San Mateo County. San Mateo county has a population of approximately 730,000. . Bay Bank of Commerce'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 1,454,000 and 930,000, respectively. 7 . Coast Commercial Bank's primary base of operations is in Santa Cruz, California and extends through Santa Cruz County. Coast Commercial Bank also maintains a banking office in Monterey County. Santa Cruz County and Monterey County have populations of approximately 255,000 and 399,000 respectively. . Cupertino National Bank's primary base of operations is in Cupertino, California, which is in the center of the geographic area referred to as "Silicon Valley". Cupertino National Bank's operations extend throughout Santa Clara County. . Golden Gate Bank's primary base of operations is centered in the City and County of San Francisco. San Francisco County has a population of approximately 801,000. . Mt. Diablo National Bank's primary base of operations is Danville, California and extends through Contra Costa and northern Alameda Counties. . Mid-Peninsula Bank's primary base of operations is centered in Palo Alto, California and extends from northern Santa Clara County through San Mateo County. Mid-Peninsula Bank also maintains banking offices in Alameda, Contra Costa, and Marin Counties. . Peninsula Bank of Commerce's primary base of operations is centered in Millbrae, California, and includes northern San Mateo County and extends into San Francisco County. . San Jose National Bank's primary base of operations is centered in San Jose, California, and includes Santa Clara County. The commercial base of Alameda, Contra Costa, Marin, Monterey, Santa Clara, Santa Cruz, San Francisco, San Mateo and Sonoma 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 our geographic concentration, our results depend largely upon economic conditions in these areas. While the economy in our market areas exhibited weakness in 2001, recent employment reports and other economic indicators have offered positive signs for the economy for the latter half of 2002. No assurance can be given that significant improvement in the economy will occur in 2002. A prolonged economic downturn could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services, and accordingly on our results of operations. See "Item 1. Business--Factors That May Affect Future Results of Operations." Matsco markets its dental and veterinarian financing services nationally. At December 31, 2001, approximately $338.1 million of Matsco's outstanding loans and leases are with borrowers located outside of the State of California. Those loans and leases are distributed throughout the United States, with the largest volume having been originated in Florida, where Matsco has outstanding loans and leases totaling approximately $37.3 million. Similarly, the Greater Bay Corporate Finance Group participates in syndicated loan transactions which are originated nationally. At December 31, 2001, approximately $46.6 million in outstanding syndicated loans participated by the Greater Bay Corporate Finance Group are with borrowers located outside the State of California. Our other operating divisions primarily conduct business in the San Francisco Bay Area. 8 Lending Activities Underwriting and Credit Administration Each Bank's lending activities are guided by the basic lending policies established by Greater Bay and approved by each Bank's 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 our 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 Mid-Peninsula Bank, the Senior Vice President and Chief Credit Officer of Greater Bay, and three Regional Credit Administrators. All members of the Officers' Loan Committee are also officers of the individual Banks. Loan requests which exceed the limits of our Officers' Loan Committee are submitted to the Directors' Loan Committee. The Directors' Loan Committee consists of at least one 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. Our credit administration function includes an internal loan review and the regular use of two outside loan review firms. In addition, our Officers' Loan Committee, Credit Risk Management 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 review our allowance for loan losses. Loan Portfolio The composition of our gross loan portfolio at December 31, 2001 was as follows: . Approximately 73.8% were commercial loans. 42.4% of the commercial loans were commercial real estate term loans; . Approximately 16.6% were in real estate construction and land loans, which are split evenly between commercial properties and residential projects; . Approximately 5.5% 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 varies 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 Venture Banking Group, consist primarily of short-term loans (normally with a maturity of up to one year) to support business operations. 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. Commercial loans also include those loans made by the Greater Bay Corporate Finance Group. Commercial loans typically include revolving lines of credit collateralized by inventory, accounts receivable and equipment. In underwriting commercial loans, we emphasize the borrower's earnings history, capitalization and secondary sources of repayment. In some instances, we require third party guarantees or highly liquid collateral (such as time deposits and investment securities). Commercial loan pricing is generally at a rate tied to the prime rate, as quoted in the Wall Street Journal, or the Banks' reference rates. 9 The Venture Banking Group provides innovative lending products and other financial services, tailored to the needs of start-up and development-stage companies. The Venture Banking Group's typical clients include venture capital and 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 many of these technology companies are in the start-up or development phase, they may not generate any revenues for several years. We often receive warrants from these companies as part of the compensation for our services. As of December 31, 2001, the Venture Banking Group had loans outstanding to start-up and development stage companies of approximately $78.0 million. The Greater Bay Corporate Finance Group specializes in providing commercial loans to small and medium sized, non-investment grade middle market companies. We design credit facilities to supplement ongoing working capital needs, purchase fixed assets or finance strategic acquisitions. Loan facilities are typically collateralized by a first priority security interest in all of the borrower's assets and are generally underwritten based on the value of the borrower's assets or historical cash flow. The Greater Bay Corporate Finance Group sources its own relationships and has participated in syndicated loan transactions led by other financial institutions. Greater Bay Corporate Finance Group has not participated in any syndicated loan transactions led by another financial institution since January of 2000. We participate in many SBA programs through the Greater Bay Bank SBA Lending Group, which 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 SBA Lending Group 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 SBA Lending Group 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 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 SBA Lending Group generally sells the guaranteed portion of its SBA loans in the secondary market. Matsco offers a complete range of financial products and services to meet the needs of dentists and veterinarians throughout their professional career. Matsco's principal financial products, which are marketed nationwide, include practice start-up financing, practice expansion financing, practice acquisition financing, working capital and financing for retirement planning. These products are structured as either equipment leases or loans. 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. 10 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 or derives income from tenants. Our 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 lower of actual or 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 at a floating rate and are reviewed for renewal on an annual basis. The Banks also have a minimal portfolio of credit card loans, issued as an additional service to its clients. Deposits The Banks obtain deposits primarily from small and medium-sized businesses, business executives, professionals and other individuals. Each of the Banks offers the usual and customary range of depository products 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 our business 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. Cupertino National Bank has two business units that provide significant support to its deposit base. The Greater Bay Trust Company has approximately 8.7% of its trust assets under management in liquid funds that are retained in Cupertino National Bank money market demand accounts. At December 31, 2001, these funds totaled $54.8 million. The Venture Banking Group is another source of deposits as most of the start-up phase companies have significant liquidity that is deposited in Cupertino National Bank as part of the banking relationship. At December 31, 2001, the Venture Banking Group's clients had $419.0 million in deposits at Cupertino National Bank. Trust Services The Greater Bay Trust Company, which is a division of Cupertino National Bank, 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 were $629.7 million at December 31, 2001, compared to $773.8 million at December 31, 2000 and $697.4 million at December 31, 1999. 11 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 nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than the Banks. In order to compete with 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 45 offices located in Alameda, Contra Costa, Marin, Monterey, San Francisco, San Mateo, Santa Clara, Santa Cruz and Sonoma counties in California. As of June 30, 2001, the latest date for which the FDIC branch data is available, the Bank's deposits represented 1.17% of the deposits for all financial service companies in Alameda County, 1.35% of the deposits for all financial service companies in Contra Costa County, 4.73% of the deposits for all financial service companies in San Mateo County, 8.01% of all deposits in Santa Clara County, 11.25% of all deposits in Santa Cruz County and 2.52% of all deposits in Sonoma County. The Bank's deposits represent less than 1% of the deposits for all financial service companies in Marin and San Francisco Counties. The Bank's total deposits represents 3.02% of the deposits for all financial service companies in the San Francisco Bay Area, which includes Napa and Solano Counties in addition to the above eight counties. Economic Conditions, Government Policies, Legislation, and Regulation Our 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 our 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 future changes in domestic and foreign economic conditions might have on Greater Bay and the Banks cannot be predicted. 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") influence our business. 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. We cannot fully predict the nature and impact on Greater Bay and the Banks of any future changes in monetary and fiscal policies. 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." 12 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 As a registered bank holding company, Greater Bay and its subsidiaries are subject to the Federal Reserve Board's supervision, regulation and examination under the Bank Holding Company Act of 1956, as amended (the "BHCA"). In addition, effective on February 1, 2002, Greater Bay became a financial holding company under the BHCA as amended by the Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). For further information on the Financial Services Modernization Act, see --"Financial Services Modernization Legislation" below. As a bank holding company, Greater Bay was required to seek the Federal Reserve Board's prior approval before acquiring ownership or control of more than 5% of the outstanding shares of any class of voting securities, or substantially all the assets, of any company, including a bank or bank holding company. As a financial holding company, the Federal Reserve Board's prior approval is not required to acquire ownership or control of entities engaged in specified financial activities. The existing restrictions, however, on directly or indirectly acquiring a bank or bank holding company are still applicable. Further, as a bank holding company, Greater Bay was generally allowed to engage, directly or indirectly, only in banking and other activities that the Federal Reserve Board deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. As a financial holding company, Greater Bay is permitted to engage in a full range of financial activities, including banking, which the Federal Reserve Board determines to be financial in nature, incidental to such financial activities or complimentary to a financial activity. Greater Bay is required by the Federal Reserve to maintain certain levels of capital. See "--Capital Standards, below." 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. 13 The Banks We have three national banking subsidiaries and eight bank subsidiaries which are California chartered banks and members of the Federal Reserve. The national banks are subject to primary supervision, examination, and regulation by the Office of the Comptroller of the Currency (the "Comptroller") and are also subject to regulations of the Federal Deposit Insurance Corporation ("FDIC") and the Federal Reserve. The state chartered banks are subject to primary supervision, periodic examination, and regulation by the California Commissioner of Financial Institutions ("Commissioner") and the Federal Reserve and are also subject to regulations of the FDIC. If, as a result of a bank examination, the Comptroller or the Federal Reserve 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 these regulatory agencies. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the bank's deposit insurance, which for a California chartered bank would result in a revocation of the bank's charter. The Commissioner has many of the same remedial powers. Various requirements and restrictions under the laws of California and the United States affect the Banks' operations. 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, capital requirements, and disclosure of obligations to depositors and borrowers. Further, the Banks are required to maintain certain levels of capital. See "--Capital Standards." USA Patriot Act of 2001 On October 26, 2001, President Bush signed the USA Patriot Act of 2001. Enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act is intended to strengthen U.S. law enforcement's and the intelligence communities' ability to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institution of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: . due diligence requirements for financial institutions that administer, maintain, or manage private banks accounts or correspondent accounts for non-U.S. persons; . standards for verifying customer identification at account opening; . rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; . reports by nonfinancial trades and business filed with the Treasury Department's Financial Crimes Enforcement Network for transactions exceeding $10,000 and; . filing of suspicious activities reports securities by brokers and dealers if they believe a customer may be violating U.S. laws and regulations. Greater Bay is not able to predict the impact of such law on its financial condition or results of operations at this time. 14 Financial Services Modernization Legislation General. 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 repealed 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 restricted 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 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. The law also: . 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, and . addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. 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. Financial Holding Companies. Bank holding companies that elect to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or are incidental or complementary to activities that are financial in nature. Greater Bay became a financial holding company on February 1, 2002. Activities that are financial in nature include: . securities underwriting, . dealing and market making, . sponsoring mutual funds and investment companies, . insurance underwriting and agency, . merchant banking, and . activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines from time to time to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. 15 Prior to electing to become a financial holding company, and in order to maintain that status, all of the bank holding company's depository institution subsidiaries must be well capitalized, well managed and, except in limited circumstances, in compliance with the Community Reinvestment Act. Failure to comply with the financial holding company requirements could lead to divestiture of subsidiary banks or require all our activities to conform to those permissible for a bank holding company. No Federal Reserve approval is required for a financial holding company to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. A bank holding company that is not also a financial holding company is limited to engaging in banking and such other activities as determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Merchant Banking Restrictions. While BHCA generally prohibits bank holding companies from owning more than 5 percent of the voting stock of non-financial companies, with limited exceptions, the Financial Services Modernization Act authorizes merchant banking activities. Permissible merchant banking investments are defined as investments that meet two important requirements: . the investment may only be held for a period of time to enable the resale of the investment (generally current regulations allow for a 10-year holding period for direct investments and a 15-year holding period for investments in private equity funds), and . while the investment is held by the financial holding company, the investment financial holding company may not routinely manage or operate the commercial firm except as necessary or required to obtain a reasonable return on the investment on resale (regulation presumes that officer or director interlocks involve routine management). In addition, there are limits on bank funding of portfolio companies owned by the bank's parent holding company, transactions between the bank and portfolio companies and on cross-marketing activities between banks and portfolio companies owned by the same financial holding company. However, current rules do not prevent a depository institution from marketing the shares of private equity funds controlled by an affiliated financial holding company, and does not apply to situations in which the financial holding company owns less than 5 percent of the voting shares of the portfolio company. Furthermore, in December 2001, federal regulators adopted new capital requirements for merchant banking activities. The rule employs a sliding scale based on each banking organization's aggregate equity investment in non-financial entities and Tier I capital, requiring banks or holding companies to hold regulatory capital equal to . 8 cents for every $1 of equity investment up to 15% of Tier 1 capital; . 12 cents for every $1 of investments for the next 10% of Tier 1 capital; and . 25 cents for every $1 exceeding 25% of Tier 1 capital. The first 15% of investments that banking companies make through small-business investment companies (SBICs) is exempt, however, the sliding scale applies for any such investment over 15%. Expanded Bank Activities. 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. 16 A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be "well-capitalized," "well-managed" and in compliance with the Community Reinvestment Act. 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. 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, the Bank 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 rule as applicable to national banks. Privacy. Under the Financial Services Modernization Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to the rules, financial institutions must provide: . initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; . annual notices of their privacy policies to current customers; and . a reasonable method for customers to "opt out" of disclosures to nonaffiliated third parties. These privacy provisions will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. It is not possible at this time to assess the impact of the privacy provisions on Greater Bay's financial condition or results of operations. 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 $106.5 million at December 31, 2001. In addition, the California Department of Financial Institutions 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 agencies also have authority to prohibit the Banks from engaging in activities that, in the opinion of the applicable bank regulatory authority, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the applicable bank regulatory authority could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the FDIC, the Comptroller and the Federal Reserve 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. 17 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% 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." Capital Standards The federal banking agencies 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 guidelines 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. The federal banking regulators may set capital requirements higher than the minimums described above for holding companies whose circumstances warrant it. For example, a financial institution experiencing or anticipating significant growth may be expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve has also indicated that it will consider a "tangible Tier 1 capital leverage ratio" (deducting all intangibles) and other indications of capital strength in evaluating proposals for expansion or new activities. 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, 2001, each of the Banks and Greater Bay exceeded the required ratios for classification as well capitalized. 18 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: . internal controls, information systems and internal audit systems; . loan documentation; . credit underwriting; . asset growth; . earnings; and . 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: . conduct periodic asset quality reviews to identify problem assets; . estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses; . compare problem asset totals to capital; . take appropriate corrective action to resolve problem assets; . consider the size and potential risks of material asset concentrations; and . provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These new guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves. Premiums for Deposit Insurance Through the Bank Insurance Fund ("BIF"), the FDIC insures the deposits of Greater Bay's depository institution subsidiaries up to prescribed limits for each depositor. The amount of FDIC assessments paid by each BIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution's capitalization risk category and supervisory subgroup category. An institution's capitalization risk category is based on the FDIC's determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution's supervisory subgroup category is based on the FDIC's assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. 19 The assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. An increase in the assessment rate could have a material adverse effect on Greater Bay's earnings, depending on the amount of the increase. The FDIC is authorized to terminate a depository institution's deposit insurance upon a finding by the FDIC that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution's regulatory agency. The termination of deposit insurance for one or more of Greater Bay's subsidiary depository institutions could have a material adverse effect on Greater Bay's earnings, depending on the collective size of the particular institutions involved. All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds, commonly referred to as FICO bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation. The FDIC established the FICO assessment rates effective for the fourth quarter of 2001 at approximately $.0184 per $100 annually for assessable deposits. The FICO assessments are adjusted quarterly to reflect changes in the assessment bases of the FDIC's insurance funds and do not vary depending on a depository institution's capitalization or supervisory evaluations. 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. The Banks have the ability, subject to certain restrictions, to acquire by acquisition or merger branches outside their 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 Community Reinvestment Act 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 Community Reinvestment Act obligations into account when regulating and supervising other activities. In December 2000, the federal banking agencies established annual reporting and public disclosure requirements for certain written agreements that are entered into between insured depository institutions or their affiliates and nongovernmental entities or persons that are made pursuant to, or in connection with, the fulfillment of the Community Reinvestment Act. A bank's compliance with its Community Reinvestment Act obligations is based on a performance-based evaluation system which bases Community Reinvestment Act 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 Community Reinvestment Act performance, the appropriate bank regulatory agency assigns a rating of "outstanding", "satisfactory", "needs to improve" or "substantial noncompliance". The results of the most recent exam for each of the Banks are as follows. 20
Date of most recent Bank examination CRA rating ---- -------------- ------------ Bay Area Bank November 1999 Satisfactory Bay Bank of Commerce October 1997 Satisfactory Bank of Petaluma September 1998 Outstanding Bank of Santa Clara December 2000 Satisfactory Coast Commercial Bank May 1999 Outstanding Cupertino National Bank October 1999 Outstanding Golden Gate Bank November 1999 Satisfactory Mt. Diablo National Bank February 1999 Satisfactory Mid-Peninsula Bank November 1999 Outstanding Peninsula Bank of Commerce November 1999 Satisfactory San Jose National Bank October 1999 Satisfactory
The regulatory agencies for Bay Bank of Commerce, Coast Commercial Bank, Mid-Peninsula Bank, and Peninsula Bank of Commerce completed examinations of those institutions in December 2001. The regulatory agencies have not yet issued any reports on those examinations. Management does not expect any significant changes in these banks' ratings. Employees At December 31, 2001, we had 1,160 full-time employees. None of the employees is covered by a collective bargaining agreement. We consider our employee relations to be satisfactory. Factors That May Affect Future Results of Operations In addition to the other information contained in this report, the following risks may affect us. 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 Regional 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. 21 Our Bay Area business focus and economic conditions in the Bay Area could adversely affect our 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, Marin, Monterey, San Francisco, San Mateo, Santa Cruz, Santa Clara and Sonoma counties, which includes the area known as the "Silicon Valley". As a result of this geographic concentration, our results depend largely upon economic and business conditions in these areas. The economy in our market areas has exhibited weakness. Many publicly and privately held technology firms have experienced a decline in their stock prices and valuations. At the same time, firms in the technology industry have experienced greater difficulty than in the past in obtaining capital and funding. The inability of such firms to obtain necessary capital and funding has adversely affected existing business and resulted in a significant slowdown in the growth of the technology industry. A prolonged or further decline in economic and business conditions in our market areas, particularly in the technology and real estate industries on which the Bay Area depends, could have a material impact on the quality of our loan portfolio or the demand for our products and services, which in turn may have a material adverse effect on our results of operations. A continued weakening in the national economy might further exacerbate local economic conditions. The extent of the future impact of these events on economic and business conditions cannot be predicted. Our future warrant income can not be predicted. We have historically obtained rights to acquire stock, in the form of warrants, in certain clients as part of negotiated credit facilities. We may not be able to realize gains from these equity instruments in future periods due to fluctuations in the market prices of the underlying common stock of these companies. The timing and amount of income, if any, from the disposition of client warrants typically depend upon factors beyond our control, including the general condition of the public equity markets, levels of mergers and acquisitions activity, and legal and contractual restrictions on our ability to sell the underlying securities. Therefore, future gains cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. In addition, a significant portion of the income we realize from the disposition of client warrants may be offset by expenses related to our efforts to build an infrastructure sufficient to support our present and future business activities, as well as expenses incurred in evaluating and pursuing new business opportunities. 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 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. 22 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. We occupy our administrative offices under a lease which, including options to renew, expires in 2007. The Banks own eleven of their offices and lease 62 additional offices throughout the San Francisco Bay Area. Those leases expire under various dates, including options to renew, through December 2017. We believe our present facilities are adequate for our present needs but anticipate the need for additional facilities as we continue to grow. We believe that, if necessary, we could secure suitable alternative facilities on similar terms without adversely affecting operations. ITEM 3. LEGAL PROCEEDINGS. From time to time, we are involved in certain legal proceedings arising in the normal course of our business. Management believes that the outcome of these matters will not have a material adverse effect on us. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) We held a special meeting of shareholders on October 23, 2001. (b) Not applicable. (c) At the special meeting, shareholders voted to approve (1) the merger with SJNB Financial Corp. and (2) an increase of 4,000,000 shares reserved for issuance under the Company's Amended and Restated 1996 Stock Option Plan. The results of the voting were as follows:
Votes Broker Matter Votes for against Withheld Abstentions non-votes ------ ---------- --------- -------- ----------- --------- Merger with SJNB Financial Corp. 28,414,598 1,001,988 NA 94,130 -0- Option share increase 21,887,712 7,333,404 NA 289,600 -0-
(d) Not applicable. 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol "GBBK". The quotations shown reflect the high and low closing sales prices for our common stock as reported by Nasdaq. The following information has been restated to reflect the 2-for-1 stock split which became effective on October 4, 2000.
Cash dividends For the period indicated High Low declared ------------------------ ------ ------ --------- 2001 Fourth quarter $29.73 $19.98 $0.115 Third quarter 28.45 21.30 0.115 Second quarter 27.46 21.00 0.10 First quarter 42.88 24.81 0.10 2000 Fourth quarter $43.31 $28.12 $ 0.10 Third quarter 34.72 22.38 0.10 Second quarter 24.75 20.00 0.075 First quarter 21.13 18.03 0.075
We estimate that there were approximately 4,100 shareholders of record at December 31, 2001. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. Information regarding Selected Consolidated Financial Data appears on pages A-1 and A-2 under the caption "Selected 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-3 through A-26 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 pages A-22 through A-24 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 A-27 through A-67 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. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. We intend to file a definitive proxy statement for the 2002 Annual Meeting of Shareholders (the "Proxy Statement") with the Securities and Exchange Commission within 120 days of December 31, 2001. 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. 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. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements The following documents are filed as part of this report: Consolidated Balance Sheets at December 31, 2001 and 2000 A-27 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2001 A-28 Consolidated Statements of Comprehensive Income for each of the years in the three-year A-29 period ended December 31, 2001 Consolidated Statements of Shareholders' Equity for each of years in the three-year period ended December 31, 2001 A-30 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001 A-31 Notes to the Consolidated Financial Statements A-32 Report of Independent Accountants A-68
2. Financial Statement Schedules Not applicable. 3. Exhibits See Item 14(c) below. (b) Reports on Form 8-K During the fourth quarter of 2001, the Company filed the following Current Reports on Form 8-K: (1) October 9, 2001 (reporting under Item 5 and 9 the timing of the release of the third quarter 2001 financial results and guidance for the quarter and year ended December 31, 2001); (2) October 17, 2001, as amended on October 18, 2001 (reporting under Item 5 and 9 third quarter 2001 financial results and performance goals for 2001 and 2002); (3) October 24, 2001 (reporting under Item 5 completion of the Company's merger with SJNB Financial Corp.; (4) October 26, 2001 (reporting under Item 5 supplemental consolidated financial information relating to the Company's merger with SJNB Financial Corp); (5) November 6, 2001 (reporting under Item 5 and 9 the presentation for analysts' reference); and (6) December 19, 2001 (reporting under Item 5 and 9 the acquisition of ABD Insurance and Financial Services, Inc. and reaffirmation of guidance). (c) Exhibits Required by Item 601 of Regulation S-K Reference is made to the Exhibit Index on pages 29 through 31 for exhibits filed as part of this report. (d) Additional Financial Statements Not applicable. 26 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 15th day of February, 2002. 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 February 15, 2002 - ----------------------------- Officer and Director David L. Kalkbrenner (Principal Executive Officer) /s/ STEVEN C. SMITH Executive Vice President, February 15, 2002 - ----------------------------- Chief Administrative Steven C. Smith Officer and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ ROBERT A. ARCHER Director February 15, 2002 - ----------------------------- Robert A. Archer /s/ JOHN M. GATTO Director February 15, 2002 - ----------------------------- John M. Gatto /s/ JOHN J. HOUNSLOW Director February 15, 2002 - ----------------------------- John J. Hounslow /s/ JAMES E. JACKSON Director February 15, 2002 - ----------------------------- James E. Jackson /s/ STANLEY A. KANGAS Director February 15, 2002 - ----------------------------- Stanley A. Kangas /s/ DANIEL G. LIBARLE Director February 15, 2002 - ----------------------------- Daniel G. Libarle - ----------------------------- Director Rex D. Lindsay - ----------------------------- Director Arthur K. Lund 27 ANNUAL REPORT ON FORM 10-K (CONTINUED) Signature Title Date --------- ----- ---- /s/ GEORGE M. MARCUS Director February 15, 2002 - ----------------------------- George M. Marcus /s/ DUNCAN L. MATTESON Director February 15, 2002 - ----------------------------- Duncan L. Matteson /s/ GLEN MCLAUGHLIN Director February 15, 2002 - ----------------------------- Glen McLaughlin /s/ LINDA R. MEIER Director February 15, 2002 - ----------------------------- Linda R. Meier /s/ DICK J. RANDALL Director February 15, 2002 - ----------------------------- Dick J. Randall /s/ DONALD H. SEILER Director February 15, 2002 - ----------------------------- Donald H. Seiler /s/ WARREN R. THOITS Director February 15, 2002 - ----------------------------- Warren R. Thoits /s/ JAMES C. THOMPSON Director February 15, 2002 - ----------------------------- James C. Thompson /s/ THADDEUS J. WHALEN, JR. Director February 15, 2002 - ----------------------------- Thaddeus J. Whalen, Jr. 28 EXHIBIT INDEX
Exhibit No. Exhibit - ------- ------- 2 Agreement and Plan of Merger and Reorganization, dated as of December 18, 2001, by and among Greater Bay Bancorp, Alburger Basso deGrosz Insurance Services Inc., and GBBK Corp. (15) 3.1 Articles of Incorporation of Greater Bay Bancorp, as amended and restated (1) 3.2 Bylaws of Greater Bay Bancorp, as amended and restated 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 (2) 4.2 Junior Subordinated Indenture dated as of March 31, 1997 between Greater Bay Bancorp and Wilmington Trust Company, as Trustee (3) 4.3(a) 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 (3) 4.3(b) Successor Administrative Trustee and First Amendment to Amended and Restated Trust Agreement (4) 4.4 Trust Preferred Certificate of GBB Capital I (3) 4.5 Guarantee Agreement between Greater Bay Bancorp and Wilmington Trust Company, dated as of March 31, 1997 (3) 4.6 Agreement as to Expenses and Liabilities, dated as of March 31, 1997 (3) 4.7 Indenture between Greater Bay Bancorp and Wilmington Trust Company, as Debenture Trustee, dated as of August 12, 1998 (5) 4.8 Amended and Restated Trust Agreement of GBB Capital II, among Greater Bay Bancorp, Wilmington Trust Company and the Administrative Trustees named therein dated as of August 12, 1998 (5) 4.9 Common Securities Guarantee Agreement of Greater Bay Bancorp, dated as of August 12, 1998 (5) 4.10 Series B Capital Securities Guarantee Agreement of Greater Bay Bancorp and Wilmington Trust Company dated as of November 27, 1998 (4) 4.11 Amended and Restated Declaration of Trust of GBB Capital III, dated as of March 23, 2000 (6) 4.12 Indenture, dated as of March 23, 2000, between Greater Bay Bancorp and The Bank of New York, as Trustee (6) 4.13 Guarantee Agreement, dated as of March 23, 2000, by and between Greater Bay Bancorp and The Bank of New York, as Trustee (6) 4.14 Amended and Restated Declaration of Trust of GBB Capital IV, dated as of May 19, 2000 (7) 4.15 Indenture, dated as of May 19, 2000, between Greater Bay Bancorp and Wilmington Trust Company, as Trustee (7) 4.16 Common Securities Guarantee Agreement, dated as of May 19, 2000 between Greater Bay Bancorp and Wilmington Trust Company, as Trustee (7) 4.17 Capital Securities Guarantee Agreement, dated as of November 20, 2000, between Greater Bay Bancorp and Wilmington Trust Company, as Trustee (1) 4.18 Form of Amended and Restated Declaration of Trust of GBB Capital V (8)
29
Exhibit No. Exhibit - -------- ------- 4.19 Form of Indenture between Greater Bay Bancorp and Wilmington Trust Company, as Trustee (8) 4.20 Form of Capital Securities Guarantee Agreement (8) 4.21 Form of Common Securities Guarantee Agreement (8) 4.22 Amended and Restated Declaration of Trust of GBB Capital VI dated July 16, 2001 (8) 4.23 Indenture, dated as of July 16, 2001, between Greater Bay Bancorp and The Bank of New York, as Trustee (8) 4.24 Guarantee Agreement, dated as of July 16, 2001, between Greater Bay Bancorp and The Bank of New York, as Trustee (8) 10.1 (a) Employment Agreement with David L. Kalkbrenner, dated as of January 1, 1999 (9)(10) 10.1 (b) Amendment No. 1 to Employment Agreement with David L. Kalkbrenner, dated as of December 11, 2000 (1)(9) 10.2 Employment Agreement with Byron Scordelis, dated March 26, 2001, effective as of May 15, 2001 (9)(11) 10.3 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between Greater Bay Bancorp and David L. Kalkbrenner (9)(10) 10.4 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between Mid-Peninsula Bank and Susan K. Black (9)(10) 10.5 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between Cupertino National Bank and David R. Hood (9)(10) 10.6 Employee Supplemental Compensation Benefits Agreement, dated as of April 6, 1998, between Greater Bay Bancorp and Gregg A. Johnson (9)(10) 10.7 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between Greater Bay Bancorp and Steven C. Smith (9)(10) 10.8 Greater Bay Bancorp 401(k) Profit Sharing Plan (9) 10.9 Greater Bay Bancorp Employee Stock Purchase Plan, as amended (1)(9) 10.10 Greater Bay Bancorp Change in Control Pay Plan I (9)(12) 10.11(a) Greater Bay Bancorp Change in Control Pay Plan II (9)(12) 10.11(b) Amendment No. 1 to Greater Bay Bancorp Change in Control Pay Plan II (9)(13) 10.12 Greater Bay Bancorp Termination and Layoff Pay Plan I (9)(12) 10.13(a) Greater Bay Bancorp Termination and Layoff Pay Plan II (9)(12) 10.13(b) Amendment No. 1 to Greater Bay Bancorp Termination and Layoff Pay Plan II (9)(13) 10.14 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan, as amended (1)(9) 10.15 Greater Bay Bancorp Amended and Restated 1996 Stock Option Plan (9)(14) 10.16 Form of Indemnification Agreement between Greater Bay Bancorp and with directors and certain executive officers (3) 10.17(a) Agreement, dated November 4, 1999, between Greater Bay Bancorp and Wells Fargo Bank, National Association (13)
30
Exhibit No. Exhibit - -------- ------- 10.17(b) Letter Amendment and Revolving Line of Credit Note, effective October 19, 2000, between Greater Bay Bancorp and Wells Fargo Bank, National Association (1) 10.17(c) Letter Amendment and Revolving Line of Credit Note, effective October 31, 2001, between Greater Bay Bancorp and Wells Fargo Bank, National Association 10.18(a) Line of Credit Agreement and Note, dated as of November 1, 2000, by and between Greater Bay Bancorp and Union Bank of California, N.A. (1) 10.18(b) First Amendment to Line of Credit Agreement, dated as of October 30, 2001, between Greater Bay Bancorp and Union Bank of California, N.A. 12.1 Statement re Computation of Ratios of Earnings to Fixed Charges 21 Subsidiaries of the Registrant 23.1 Consent of PricewaterhouseCoopers LLP
- -------- 1. Incorporated by reference from Greater Bay Bancorp's 2000 Annual Report on Form 10-K filed with the SEC on February 1, 2001 2. Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed with the SEC on November 25, 1998 3. Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K dated June 5, 1997 4. Incorporated by reference from Greater Bay Bancorp's 1998 Annual Report on Form 10-K filed with the SEC on February 17, 1999 5. Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K filed with the SEC on August 28, 1998 6. Incorporated herein by reference from Greater Bay Bancorp's Quarterly Report on Form 10-Q filed with the SEC on May 12, 2000 7. Incorporated by reference from Greater Bay Bancorp's Quarterly Report on Form 10-Q filed with the SEC on August 1, 2000 8. Incorporated by reference from Greater Bay Bancorp's Registration Statement on Form S-3 (File Nos. 333-65772 and 333-65772-01) filed with the SEC on July 25, 2001 9. Represents executive compensation plans and arrangements of Greater Bay Bancorp 10. Incorporated by reference from Greater Bay Bancorp's 1999 Annual Report on Form 10-K filed with the SEC on January 31, 2000 11. Incorporated by reference from Greater Bay Bancorp's Quarterly Report on Form 10-Q filed with the SEC on August 3, 2001 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 by reference from Greater Bay Bancorp's Quarterly Report on Form 10-Q filed with the SEC on May 4, 1999 14. Incorporated by reference from Greater Bay Bancorp's Registration Statement on Form S-8 (File No. 333-76004) filed with the SEC on December 27, 2001 15. Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K filed with the SEC on December 19, 2001 31 SELECTED FINANCIAL INFORMATION The following table represents the selected financial information at and for the five years ended December 31, 2001:
2001 2000* 1999* 1998* 1997* ----------- ----------- ----------- ----------- ----------- (Dollars in thousands, except per share amounts) Statement of Operations Data Interest income $ 507,241 $ 423,639 $ 298,634 $ 244,269 $ 202,367 Interest expense 186,232 158,050 106,509 87,395 69,869 ----------- ----------- ----------- ----------- ----------- Net interest income 321,009 265,589 192,125 156,874 132,498 Provision for loan losses 54,727 28,821 14,901 8,715 9,836 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 266,282 236,768 177,224 148,159 122,662 Other income 44,261 34,145 30,337 22,820 19,669 Nonrecurring--warrant income 581 12,986 14,508 945 1,162 ----------- ----------- ----------- ----------- ----------- Total other income 44,842 47,131 44,845 23,765 20,831 Operating expenses 175,591 139,544 121,328 103,491 90,613 Other expenses--nonrecurring -- -- 12,160 1,341 (1,700) ----------- ----------- ----------- ----------- ----------- Total operating expenses 175,591 139,544 133,488 104,832 88,913 ----------- ----------- ----------- ----------- ----------- Income before income tax expense & merger and other related nonrecurring costs 135,533 144,355 88,581 67,092 54,580 Income tax expense 38,106 55,340 30,485 24,145 20,392 ----------- ----------- ----------- ----------- ----------- Income before merger and other related nonrecurring costs 97,427 89,015 58,096 42,947 34,188 Merger and other related nonrecurring costs, net of tax (17,611) (21,851) (6,795) (1,674) (2,283) ----------- ----------- ----------- ----------- ----------- Net income $ 79,816 $ 67,164 $ 51,301 $ 41,273 $ 31,905 =========== =========== =========== =========== =========== Per Share Data(1) Net income per share Basic $ 1.61 $ 1.40 $ 1.15 $ 0.95 $ 0.75 Diluted 1.57 1.33 1.09 0.88 0.71 Income per share (before merger and nonrecurring items)(3) Basic $ 1.96 $ 1.70 $ 1.20 $ 0.98 $ 0.77 Diluted 1.91 1.61 1.14 0.91 0.72 Cash dividends per share(2) $ 0.43 $ 0.35 $ 0.24 $ 0.19 $ 0.15 Book value per common share 9.31 7.92 6.63 5.73 5.13 Shares outstanding at year end 49,831,682 48,748,713 46,174,308 43,876,750 42,510,962 Average common shares outstanding 49,498,000 47,899,000 44,599,000 43,664,000 42,403,000 Average common and common equivalent shares outstanding 50,940,000 50,519,000 47,078,000 46,741,000 45,205,000
- -------- * Restated on a historical basis to reflect the mergers described in notes 1 and 2 of the Company's annual report on a pooling-of-interest basis. (1) Restated to reflect 2-for-1 stock split effective as of April 30,1998 and the 2-for-1 stock split effective as of October 4, 2000. (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) In addition to the principal performance measures in accordance with generally accepted accounting principles, we are providing these supplemental pro forma performance measures to highlight the results of our core operations. We believe that these calculations, which are derived from data presented on the face of our consolidated financial statements, are useful for investors to provide comparability from period to period with regard to our core operations. These calculations are not intended to be a substitute for the principal performance measures in in accordance with generally accepted accounting principles. A-1
2001 2000* 1999* 1998* 1997* ---------- ---------- ---------- ---------- ---------- (Dollars in thousands, except per share amounts) Performance Ratios Return on average assets 1.18% 1.34% 1.33% 1.36% 1.33% Return on average common shareholders' equity 17.77% 19.21% 18.92% 17.69% 15.67% Return on average assets (before merger and nonrecurring items)(1) 1.44% 1.63% 1.39% 1.40% 1.36% Return on average common shareholders' equity(before merger and nonrecurring items)(1) 21.61% 23.29% 19.78% 18.28% 16.06% Net interest margin 5.07% 5.73% 5.41% 5.61% 5.94% Balance Sheet Data--At Period End Assets $7,877,054 $5,818,155 $4,304,811 $3,351,982 $2,691,870 Loans, net 4,370,977 3,973,329 2,813,329 2,070,607 1,646,180 Investment securities 2,970,630 1,091,064 863,590 754,035 574,081 Deposits 4,990,071 4,750,404 3,736,621 2,869,341 2,296,796 Borrowings 2,095,896 463,267 150,577 135,095 90,272 Trust Preferred Securities 218,000 99,500 49,000 49,000 20,000 Preferred stock of real estate investment trust subsidiaries of the Banks 15,000 -- -- -- -- Common shareholders' equity 463,684 385,948 306,114 251,436 218,229 Asset Quality Ratios Nonperforming assets** to total loans and other real estate owned 0.69% 0.32% 0.29% 0.29% 0.49% Nonperforming assets** to total assets 0.39% 0.22% 0.19% 0.18% 0.31% Allowance for loan losses to total loans 2.77% 2.24% 1.89% 1.82% 1.87% Allowance for loan losses to non-performing assets 402.79% 702.37% 685.36% 764.44% 469.08% Net charge-offs to average loans 0.59% 0.33% 0.07% 0.11% 0.18% Regulatory Capital Ratios Leverage Ratio 8.01% 8.79% 8.32% 8.36% 8.96% Tier 1 Capital 10.49% 9.57% 9.92% 10.86% 11.52% Total Capital 12.79% 10.87% 11.23% 12.66% 12.87%
- -------- * Restated on a historical basis to reflect the mergers described in notes 1 and 2 of the Company's annual report on a pooling-of-interest basis. ** Excludes accruing loans past due 90 days or more. (1) In addition to the principal performance measures in accordance with generally accepted accounting principles, we are providing these supplemental pro forma performance measures to highlight the results of our core operations. We believe that these calculations, which are derived from data presented on the face of our consolidated financial statements, are useful for investors to provide comparability from period to period with regard to our core operations. These calculations are not intended to be a substitute for the principal performance measures in in accordance with generally accepted accounting principles. A-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and "we" or "our", on a consolidated basis) is a bank holding company with 11 bank subsidiaries: Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast Commercial Bank, Cupertino National Bank, Golden Gate Bank, Mid-Peninsula Bank, Mt. Diablo National Bank, Peninsula Bank of Commerce, and San Jose National Bank. We also conduct business through the following divisions: CAPCO, Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Carmel, Greater Bay Bank Marin, Greater Bay Bank Santa Clara Valley Group, Greater Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay International Banking Division, Greater Bay Trust Company, Matsco, Pacific Business Funding and the Venture Banking Group. We provide a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. We operate throughout the San Francisco Bay Area including Silicon Valley, San Francisco and the San Francisco Peninsula, the East Bay, Santa Cruz, Marin, Monterey, and Sonoma Counties, with 45 offices located in Aptos, Blackhawk, Capitola, Carmel, Cupertino, Danville, Fremont, Hayward, Lafayette, Los Gatos, Millbrae, Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Rafael, San Ramon, Santa Clara, Santa Cruz, Saratoga, Scotts Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville. We have participated in nine acquisitions during the three-year period ended December 31, 2001, as described in Note 2 of the Notes To Consolidated Financial Statements. With the exception of the acquisitions of The Matsco Companies, Inc. and CAPCO Financial Company, Inc. ("CAPCO") all of these acquisitions were accounted for as a pooling-of-interests and, accordingly, all of our financial information for the periods prior to the acquisitions has been restated as if the acquisitions had occurred at the beginning of the earliest period presented. The acquisitions with The Matsco Companies, Inc. and CAPCO were accounted for using the purchase accounting method and accordingly both divisions' results of operations have been included in the consolidated financial statements since the date of acquisition. All outstanding and weighted average share amounts presented in this report have been restated to reflect the 2-for-1 stock splits effective as of April 30, 1998 and as of October 4, 2000. The following discussion and analysis is intended to provide greater details of our results of operations and financial condition. The following discussion should be read in conjunction with the information under "Selected Financial Information" and our 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. Our 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 we conduct our operations, fluctuation in interest rates, credit quality and government regulation and other factors discuss in the annual report on Form 10-K for the year ended December 31, 2001 under "Item 1. Business--Factors That May Affect Future Results of Operations." A-3 Results Of Operations The following table summarizes income, income per share and key financial ratios for the periods indicated using two different measurements:
Net income ------------------------------------- Year ended Year ended Year ended December 31, December 31, December 31, 2001 2000 1999 ------------ ------------ ------------ (Dollars in thousands, except per share amounts) Income $79,816 $67,164 $51,301 Income per share: Basic $ 1.61 $ 1.40 $ 1.15 Diluted $ 1.57 $ 1.33 $ 1.09 Return on average assets 1.18% 1.34% 1.33% Return on average shareholders' equity 17.77% 19.21% 18.92%
Core earnings (income before nonrecurring warrant income, merger and other related nonrecurring costs, and other nonrecurring expenses) ---------------------------------------- Year ended Year ended Year ended December 31, December 31, December 31, 2001 2000 1999 ------------ ------------ ------------ (Dollars in thousands, except per share amounts) Income $97,090 $81,439 $53,621 Income per share: Basic $ 1.96 $ 1.70 $ 1.20 Diluted $ 1.91 $ 1.61 $ 1.14 Return on average assets 1.44% 1.63% 1.39% Return on average shareholders' equity 21.61% 23.29% 19.78%
Net income for 2001 increased 18.8% to $79.8 million, or $1.57 per diluted share, compared to net income of $67.2 million, or $1.33 per diluted share, for 2000. Results for 2001 included nonrecurring warrant income of $581,000 ($337,000, net of taxes) compared to $13.0 million ($7.6 million, net of taxes) during 2000. In addition, 2001 results included merger and other related nonrecurring costs of $29.2 million ($17.6 million, net of taxes) compared to $33.5 million ($21.9 million, net of taxes) in 2000. Our core earnings for 2001 increased 19.2% to $97.1 million, or $1.91 per diluted share, compared to $81.4 million, or $1.61 per diluted share for 2000. Based on 2001 core earnings, our return on average shareholders' equity was 21.61% and return on average assets was 1.44%. During 2000, our core earnings resulted in a return on average shareholders' equity of 23.29% and a return on average assets of 1.63%. The 19.2% increase in core earnings during 2001 as compared to 2000 was the result of significant growth in loans and investments. For 2001, net interest income increased 20.9% as compared to 2000. This increase was primarily due to a 36.4% increase in average interest-earning assets for 2001 as compared to 2000. The increases in loans, trust assets and deposits also contributed to the 8.5% increase in loan and international banking fees, service charges and other fees, and trust fees. Increases in operating expenses were required to service and support our growth. As a result, increases in revenue were partially offset for 2001 by a 25.8% increase in recurring operating expenses, as compared to 2000. Net income for 2000 increased 30.9% to $67.2 million, or $1.33 per diluted share, compared to net income of $51.3 million, or $1.09 per diluted share, for 1999. Results for 2000 included nonrecurring warrant income of $13.0 million ($7.6 million, net of taxes) compared to $14.5 million ($8.4 million, net of taxes) during 1999. In addition, 2000 results included merger and other related nonrecurring costs of $33.5 million ($21.9 million, net of taxes) compared to $10.8 million ($6.8 million, net of taxes) in 1999. A-4 Our core earnings for 2000 increased 51.9% to $81.4 million, or $1.61 per diluted share, compared to $53.6 million, or $1.14 per diluted share for 1999. Based on 2000 core earnings, our return on average shareholders' equity was 23.29% and return on average assets was 1.63%. During 1999, our core earnings resulted in a return on average shareholders' equity of 19.78% and a return on average assets of 1.39%. The 51.9% increase in core earnings during 2000 as compared to 1999 was also the result of significant growth in loans and investments. For 2000, net interest income increased 38.2% as compared to 1999. This increase was primarily due to a 30.6% increase in average interest-earning assets for 2000 as compared to 1999. The increases in loans, trust assets and deposits also contributed to the 31.0% increase in loan and international banking fees, service charges and other fees, and trust fees. Increases in operating expenses were required to service and support our growth. As a result, increases in revenue were partially offset for 2000 by a 15.0% increase in recurring operating expenses, as compared to 1999. Net Interest Income-Overview During 2001 we continued to experience compression of our net interest margin. This was attributable primarily to the rapidly declining interest rate environment, our asset sensitive balance sheet, slowdown in loan and deposit growth, and to a lesser extent a shift in the mix of our interest earning assets and interest bearing liabilities. In response to those conditions, we changed our balance sheet mix and composition as we shifted the funding source of our specialty finance businesses from a core deposit base to a wholesale funding strategy. This funding shift corresponds with our original strategy for financing these niche specialty finance businesses. The impact of this change has allowed us to also restructure and increase the size of our investment securities portfolio by funding a substantial portion of it with the deposits which previously supported the specialty finance business units. The overall impact of this funding change has been threefold. First, it has increased the overall net interest income from operations, second it has allowed us to improve liquidity and reduce the duration of our investment portfolio and third it has slightly reduced our asset sensitive balance sheet. On a combined basis, this change has positioned us to slightly reduce our exposure to declining interest rates, while also effectively restructuring our balance sheet to take advantage of market interest rates when they move upward. The following table highlights the change in composition of our balance sheet at December 31, 2001 and December 31, 2000:
Assets December 31, 2001 December 31, 2000 ------ ----------------- ----------------- Loans 57.1% 69.8% Investment securities 37.7% 18.8% Other assets 5.2% 11.4% ----- ----- 100.0% 100.0% Liabilities & Equity December 31, 2001 December 31, 2000 -------------------- ----------------- ----------------- Total deposits 63.3% 81.6% Other borrowing 26.6% 8.0% Other liabilities 4.2% 3.8% Equity 5.9% 6.6% ----- ----- 100.0% 100.0%
This change in balance sheet mix produced a reduction in our net interest margin and an increase in average earning assets. The net interest margin during 2001 was 5.07% with average interest earning assets of $6.3 billion. If we had not changed our balance sheet mix, our net interest margin would have been 5.40% with interest earning assets of $5.6 billion. The overall impact on our net interest income and interest rate risk profile has been positive. Without the change in balance sheet mix, our net interest income for 2001 would have been approximately $19.5 million lower. A-5 Current modeling of our interest rate risk indicates that our net interest margin would contract approximately 10 to 15 basis points for every 25 basis point reduction in market interest rates. This relationship is estimated to be reasonable through an additional 25 basis point decline in market interest rates, assuming the mix and composition of our balance sheet remains similar. The balance sheet restructuring has eased to some extent the downward pressure on our net interest margin, but it has not substantially reduced the upside if and when market interest rates begin an upward trend. For every 25 basis point increase in rates, we anticipate that our net interest margin would increase by approximately 10 to 12 basis points. Again, this assumes a similar mix in loans and deposits. However, in an improving economy, we believe that our clients' demand for loans should increase, thus having the effect of increasing the net interest margin at a more rapid pace. For further information regarding our interest rate risk, see "Quantitative and Qualitative Disclosures about Market Risk". A-6 Net Interest Income Net interest income increased 20.9% to $321.0 million in 2001 from $265.6 million in 2000. This increase was primarily due to the $1.7 billion, or 36.4%, increase in average interest-earning assets which was partially offset by a 67 basis point decrease in our net yield on interest-earning assets. Net interest income increased 38.2% in 2000 from $192.1 million in 1999. This increase was primarily due to the $1.1 billion, or 30.6%, increase in average interest-earning assets and a 32 basis point increase in our net yield on interest-earning assets. The following table presents, for the years indicated, our condensed average balance sheet information 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, ---------------------------------------------------------------------------------- 2001 2000 1999 -------------------------- -------------------------- -------------------------- Average Average Average Average yield / Average yield / Average yield / balance(1) Interest rate balance(1) Interest rate balance(1) Interest rate ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (Dollars in thousands) INTEREST-EARNING ASSETS: Fed funds sold $ 91,139 $ 3,660 4.02% $ 214,133 $ 13,080 6.11% $ 225,357 $ 11,614 5.15% Other short term securities 1,389 84 6.05% 44,841 2,978 6.64% 81,121 4,327 5.33% Investment securities: Taxable 1,780,194 120,491 6.77% 871,627 62,250 7.14% 641,584 42,081 6.56% Tax-exempt(2) 184,897 7,455 4.03% 185,879 9,632 5.18% 146,170 7,305 5.00% Loans(3) 4,270,878 375,551 8.79% 3,321,682 335,699 10.11% 2,457,353 233,307 9.49% ---------- -------- ---------- -------- ---------- -------- Total interest-earning assets 6,328,497 507,241 8.02% 4,638,162 423,639 9.13% 3,551,585 298,634 8.41% Noninterest-earning assets 418,216 372,575 299,193 ---------- -------- ---------- -------- ---------- -------- Total assets $6,746,713 507,241 $5,010,737 423,639 $3,850,778 298,634 ========== -------- ========== -------- ========== -------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $2,331,147 64,860 2.78% $2,346,598 91,643 3.91% $1,848,328 61,419 3.32% Time deposits, over $100,000 697,806 31,277 4.48% 780,505 43,101 5.52% 561,754 26,669 4.75% Other time deposits 814,808 36,517 4.48% 214,634 11,525 5.37% 215,600 10,500 4.87% ---------- -------- ---------- -------- ---------- -------- Total interest-bearing deposits 3,843,761 132,654 3.45% 3,341,737 146,269 4.38% 2,625,682 98,588 3.75% Borrowings 1,225,036 53,577 4.37% 192,728 11,781 6.11% 143,033 7,921 5.54% ---------- -------- ---------- -------- ---------- -------- Total interest-bearing liabilities 5,068,797 186,231 3.67% 3,534,465 158,050 4.47% 2,768,715 106,509 3.85% Noninterest-bearing deposits 976,666 965,131 717,178 Other noninterest-bearing liabilities 109,906 79,529 44,754 Trust Preferred Securities 142,093 81,913 49,000 ---------- ---------- ---------- Shareholders' equity 449,251 349,699 271,131 ---------- -------- ---------- -------- ---------- -------- Total shareholders' equity and liabilities $6,746,713 186,231 $5,010,737 158,050 $3,850,778 106,509 ========== -------- ========== -------- ========== -------- Net interest income $321,010 $265,589 $192,125 ======== ======== ======== Interest rate spread 4.34% 4.66% 4.56% Contribution of interest free funds 0.73% 1.06% 0.85% ---- ----- ---- Net yield on interest-earnings assets(4) 5.07% 5.73% 5.41%
- -------- (1) Nonaccrual loans are excluded from the average balance and only collected interest on nonaccrual loans is included in the interest column. (2) Tax equivalent yields earned on the tax exempt securities are 5.80%, 7.61% and 7.46% for the years ended December 31, 2001, 2000 and 1999, respectively, using the federal statutory rate of 35%. (3) Loan fees amortization totaling $11.1 million, $10.2 million and $9.6 million are included in loan interest income for 2001, 2000 and 1999, respectively. (4) Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period. A-7 The most significant impact on our 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. Changes in interest income and expense which are not attributable specifically to either volume or rate are allocated proportionately between both variances. Nonaccrual loans are excluded in average loans. The table below sets forth, for the years indicated, a summary of the changes in average asset and liability balances (volume) and changes in average interest rates (rate).
Year ended December 31, 2001 Year ended December 31, 2000 compared with December 31, 2000 compared with December 31, 1999 favorable / (unfavorable) favorable / (unfavorable) ------------------------------ ------------------------------ Volume Rate Net Volume Rate Net -------- -------- ------- -------- ------- -------- (Dollars in thousands) INTEREST EARNED ON INTEREST-EARNING ASSETS Federal funds sold $ (5,901) $ (3,519) $(9,420) $ (601) $ 2,067 $ 1,466 Other short term investments (2,650) (244) (2,894) (2,241) 892 (1,349) Investment securities: Taxable 61,658 (3,417) 58,241 16,163 4,006 20,169 Tax-exempt (51) (2,126) (2,177) 2,049 278 2,327 Loans 87,361 (47,509) 39,852 86,532 15,860 102,392 -------- -------- ------- -------- ------- -------- Total interest income 140,418 (56,816) 83,602 101,902 23,103 125,005 -------- -------- ------- -------- ------- --------
INTEREST EXPENSE ON INTEREST- BEARING LIABILITIES Deposits: MMDA, NOW and savings 600 26,183 26,783 (18,316) (11,908) (30,224) Time deposits over $100,000 4,257 7,567 11,824 (11,579) (4,853) (16,432) Other time deposits (27,196) 2,204 (24,992) 47 (1,072) (1,025) -------- -------- -------- -------- -------- -------- Total interest-bearing deposits (22,340) 35,955 13,615 (29,848) (17,833) (47,681) Other borrowings (46,054) 4,258 (41,796) (2,972) (888) (3,860) -------- -------- -------- -------- -------- -------- Total interest expense (68,394) 40,213 (28,181) (32,820) (18,721) (51,541) -------- -------- -------- -------- -------- -------- Net increase (decrease) in net interest income $ 72,025 $(16,604) $ 55,421 $ 69,083 $ 4,381 $ 73,464 ======== ======== ======== ======== ======== ========
Interest income in 2001 increased 19.7% to $507.2 million from $423.6 million in 2000. This was primarily due to the significant increase in loans, and investment securities. Loans increased as a result of significant business development efforts by our relationship managers. Investment securities increased as a result of our wholesale funding strategy and the leveraging of our balance sheet. Average interest-earning assets increased $1.7 billion, or 36.4%, to $6.3 billion in 2001, compared to $4.6 billion in 2000. Average loans increased $1.0 billion, or 28.6%, to $4.3 billion in 2001 from $3.3 billion in 2000. Average investment securities, Federal funds sold and other short-term securities, increased 56.3% to $2.1 billion in 2001 from $1.3 billion in 2000. Loans represented approximately 67.5% of total interest-earning assets in 2001 compared to 71.6% in 2000. The average yield on interest-earning assets decreased 111 basis points to 8.02% in 2001 from 9.13% in 2000 primarily reflecting the 475 basis points decline in the fed fund rate during the year. The average yield on loans decreased 132 basis points to 8.79% in 2001 from 10.11% in 2000. Interest expense in 2001 increased 17.8% to $186.2 million from $158.1 million in 2000, reflecting greater volumes of interest-bearing liabilities. Average interest-bearing liabilities increased 43.4% to $5.1 billion in 2001 from $3.5 billion in 2000. The increase was due primarily to the increase in brokered institutional deposit accounts and short term borrowings. A-8 During 2001, average noninterest-bearing deposits increased to $976.7 million from $965.1 million in 2000. As a result of the foregoing, our interest rate spread decreased to 4.34% in 2001 from 4.66% in 2000, and the net yield on interest-earning assets decreased in 2001 to 5.07% from 5.73% in 2000. Interest income increased 41.9% to $423.6 million in 2000 from $298.6 million in 1999, as a result of the increase in average interest-earning assets and an increase in the yields earned. Average interest-earning assets increased 30.6% to $4.6 billion in 2000 from $3.6 billion in 1999 principally as a result of increase in loans. The yield on the higher volume of average interest-earning assets increased 72 basis points to 9.13% in 2000 from 8.41% in 1999, primarily as a result of an increase in market interest rates. Interest expense in 2000 increased 48.4% to $158.1 million from $106.5 million in 1999 primarily as a result of the increase in the 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 27.7% to $3.5 billion in 2000 from $2.8 billion in 1999. As a result of the foregoing, our interest rate spread increased to 4.66% in 2000 from 4.56% in 1999 and the net yield on interest-earning assets increased to 5.73% in 2000 from 5.41% in 1999. We incurred certain client service expenses with respect to our noninterest-bearing liabilities. These expenses include courier and armored car services, check supplies and other related items that are included in operating expenses. If these expenses had been included in interest expense, our net yield on interest-earning assets would have been as follows for each of the years presented.
Years ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Average noninterest bearing demand deposits $976,666 $965,131 $717,178 Client service expenses 2,965 2,694 3,811 Client service expenses, as a percentage of average noninterest bearing demand deposits 0.30 % 0.28 % 0.53 % Impact On Net Yield On Interest-earning Assets: Net yield on interest-earning assets 5.07 % 5.73 % 5.41 % Impact of client service expense (0.04)% (0.06)% (0.11)% -------- -------- -------- Adjusted net yield on interest-earning assets 5.03 % 5.67 % 5.30 % ======== ======== ========
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 our efforts to manage our interest expense. 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-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in our market areas. 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 our systematic methodology employed in determining an adequate allowance for loan losses. A-9 The provision for loan losses in 2001 was $54.7 million, compared to $28.8 million in 2000 and $14.9 million in 1999. In addition, in connection with the acquisitions described in Note 2 of Notes to Consolidated Financial Statements, we made additional provisions for loan losses of $3.5 million in 2001, $8.1 million in 2000 and $2.7 million in 1999 to conform to our allowance methodology. For further information on nonperforming and classified loans and the allowance for loan losses, see "Financial Condition--Nonperforming Assets" and "Financial Condition--Allowance for Loan Losses" herein. Other Income Total recurring other income increased to $44.3 million in 2001, compared to $34.1 million in 2000 and $30.3 million in 1999. The following table sets forth information by category of other income for the years indicated.
Years ended December 31, ------------------------ 2001 2000 1999 ------- ------- ------- (Dollars in thousands) Service charges and other fees $10,602 $ 9,661 $ 8,975 Loan and international banking fees 8,856 8,162 4,275 Gain (loss) on investments, net 6,304 (521) (46) Trust fees 3,610 3,450 2,990 Gain on sale of loans 3,241 2,190 2,058 ATM network revenue 2,887 2,891 2,682 Other income 8,761 8,312 9,403 ------- ------- ------- Total, recurring 44,261 34,145 30,337 Warrant income 581 12,986 14,508 ------- ------- ------- Total $44,842 $47,131 $44,845 ======= ======= =======
The increase in recurring other income in 2001 as compared to 2000 resulted primarily from the $6.8 million increase in the gain on investments, a $1.1 million increase in gain on sale of loans, a $941,000 increase in service charges and other fees and a $694,000 increase in loan and international banking fees. The increases in service charges and other fees and loan and international banking fees were a result of growth in our loan portfolio and fee based deposit products and services. During 2001, we consolidated the investment portfolios of our subsidiary banks (see "--Financial Condition--Investment Securities" below for further details). Primarily as a result of investment sales resulting from this program, we recognized gains on sale of investments, net, of $6.3 million during 2001, as compared to a loss of $521,000 during 2000. During 2001, we recorded a $3.2 million gain on sale of loans, compared to $2.2 million for 2000. $1.2 million of the gains for 2001 relates to the sale of $15.0 million of Matsco's loan production. We made no such sales during 2000. We anticipate selling approximately 20% to 40% of Matsco's loan production in the future. During the first half of 2001, the sale of investment securities allowed us to postpone the sale of Matsco loans. With the slowing of investment securities sales during the second half of 2001, we sold $15.0 million of Matsco's loan production in September 2001. The remainder of the gain on sales of loans relates to the sale of SBA loans during 2001 and 2000. The gain on sale of SBA loans decreased slightly from $2.2 million during 2000 to $2.0 million during 2001 as we elected to retain a higher portion of our SBA production. Other income for 2001 includes $636,000 in income recognized on derivative instruments in accordance with SFAS No. 133. These derivative instruments had previously been treated as interest rate hedges and the unrealized gains and losses on those instruments had been included in other comprehensive income. Other income in 2000 includes $2.1 million in appreciation recognized on the conversion of equity securities received in the settlement of a loan into a publicly traded equity security. A-10 The increase in recurring other income in 2000 as compared to 1999 was a result of $3.9 million increase in loan and international banking fees, a $686,000 increase in service charges and other fees, and a $460,000 increase in trust fees. These increases reflected significant growth in loans, deposits, and trust assets. This increase was offset in part by the loss on investment securities and the decline in other income offset. Warrant income in 2001, 2000 and 1999 included income of $581,000, $13.0 million and $14.5 million net of related employee incentives of $249,000, $4.5 million and $7.3 million, respectively. At December 31, 2001, we held approximately 112 warrant positions. We occasionally receive 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 our control, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. Operating Expenses The following table sets forth the major components of operating expenses for the years indicated.
Years ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Compensation and benefits $ 89,699 $ 73,966 $ 65,668 Occupancy and equipment 27,756 23,192 18,999 Dividends paid on Trust Preferred Securities 13,724 7,842 4,201 Legal and other professional fees 7,839 5,345 4,072 Client service expenses 2,965 2,694 3,811 FDIC insurance and regulatory assessments 1,762 1,472 807 Expenses on other real estate owned -- 56 (34) Other 31,846 24,977 23,805 -------- -------- -------- Total operating expenses excluding nonrecurring costs 175,591 139,544 121,329 Contribution to the Greater Bay Bancorp Foundation and related expenses -- -- 12,160 Mergers and other related nonrecurring costs 29,249 33,526 10,818 -------- -------- -------- Total operating expenses $204,840 $173,070 $144,307 ======== ======== ======== Efficiency ratio 55.99% 55.34% 60.90% Efficiency ratio (before merger and other nonrecurring costs) 48.07% 46.56% 54.54% Efficiency ratio excluding dividends paid on Trust Preferred Securities (before merger and other nonrecurring costs) 44.31% 43.94% 52.65% Total operating expenses to average assets 3.04% 3.45% 3.75% Total operating expenses to average assets (before merger and other nonrecurring cost) 2.60% 2.78% 3.15% Total operating expenses to average assets excluding dividends paid on Trust Preferred Securities (before merger and other nonrecurring cost) 2.40% 2.63% 3.04%
Operating expenses totaled $204.8 million for 2001, compared to $173.1 million for 2000 and $144.1 million for 1999. The ratio of operating expenses to average assets was 3.04% in 2001, 3.45% in 2000, and 3.75% in 1999. Total operating expenses include merger and other related nonrecurring costs and contributions to the Foundation and related expenses. 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. Our efficiency ratio for 2001 was 55.99%, compared to 55.34% in 2000 and 60.90% in 1999. Our efficiency ratio before merger, nonrecurring and extraordinary items for 2001 was 48.07%, compared to 46.56% in 2000 and 54.54% in 1999. A-11 As indicated by the general trend of our efficiency ratios over the last several years, we have been able to achieve increasing economies of scale. In 2001, average assets increased 34.6% from 2000, while operating expenses, excluding merger, and other nonrecurring items, increased only 25.8%. From 1999 to 2000, average assets increased 30.1%, while operating expenses, excluding merger and nonrecurring costs increased only 15.0%. Compensation and benefits expenses increased in 2001 to $89.7 million, compared to $74.0 million in 2000 and $65.7 million in 1999. This increase is due primarily to the additions in personnel made in 2001 and 2000 to accommodate our growth. The additions of Matsco and CAPCO in our results were also a contributing factor to the increase in 2001 as compared to 2000 and 1999. Trust Preferred Securities expense was $13.7 million for 2001, compared to $7.8 million for 2000 and $4.2 million for 1999. This increase reflects the sale of $118.5 million in Trust Preferred Securities in 2001 and $50.5 million in Trust Preferred Securities in 2000. A significant portion of the increase in the efficiency ratio in 2001 as compared to 2000 was a result of the issuance of Trust Preferred Securities during 2000 and 2001. The Trust Preferred Securities expense primarily represents a cost of capital, as opposed to the remainder of the expenses which represent traditional operating expense. On a recurring basis, our efficiency ratio increased 1.51% in 2001 as compared to 2000. Excluding the increase in dividends paid on Trust Preferred Securities our recurring efficiency ratio increased only 0.37%. Merger and other related nonrecurring costs include the direct expense related to merger transactions completed and are comprised of financial advisory and professional fees, charges to conform accounting practices and other costs, including expenses related to employee severance, retention and the vesting of certain benefit plans. See Note 14 to the Consolidated Financial Statements for more detail. During 2001, legal and other professional fees increased to $7.8 million, compared to $5.3 million in 2000 and $4.1 million for 1999. This increase relates to our growth and the initiation of consulting projects designed to improve efficiency and risk management in our enterprise. During 1998, Greater Bay established the Greater Bay Bancorp Foundation ("the Foundation"). The Foundation was formed to provide a vehicle through which its officers and directors can provide support to the communities in which we do business. The Foundation focuses its support on initiatives related to education, health and economic growth. To support the Foundation, we contributed appreciated securities which had an unrealized gain of $7.8 million in 1999. We recorded expenses of $12.2 million in 1999 in connection with our GBB Foundation donations which is included in operating expenses. Our goodwill amortization was $1.3 million in 2001, $0 in 2000 and $0 in 1999. Our diluted earnings per share, excluding goodwill amortization, was $1.58 for 2001, $1.33 in 2000 and $1.09 in 1999. Income Taxes Our effective income tax rate for 2001 was 24.9%, compared to 39.4% in 2000 and 34.0% in 1999. The effective rates were lower than the statutory rate of 42% due to state enterprise zone tax credits and tax-exempt income on municipal securities. The reductions were partially offset by the impact of nondeductible merger and other related nonrecurring costs. In 2001, we formed CNB Investment Trust II, which qualifies as a real estate investment trust under the IRS tax code and issued $15.0 million of the real estate investment trust's preferred stock to raise capital. The sale of the preferred stock resulted in a one-time $34.0 million loss for tax purposes and a corresponding $11.4 million permanent reduction in 2001 income tax expense. A-12 FINANCIAL CONDITION Total assets increased 35.4% to $7.9 billion at December 31, 2001, compared to $5.8 billion at December 31, 2000. Total assets increased 35.2% in 2000 from $4.3 billion at December 31, 1999. The increase in 2001 was primarily due to increases in the investment securities portfolio and to a lesser degree, the loan portfolio which was funded by brokered institutional deposits and short term borrowings. The increase in 2000 was primarily due to increases in our loan portfolios funded by growth in deposits. Investment Securities Investment securities increased 272.3% to $3.0 billion at December 31, 2001 compared to $1.1 billion at December 31, 2000. A substantial portion of this increase reflects the shift to wholesale funding sources for our specialty finance divisions that allowed us to increase our investment portfolio by funding it with deposits which previously supported our specialty finance unit and increased leverage of our balance sheet. For further information see "Net Interest Income--Overview" above. During 2001, we transferred our entire portfolio of held to maturity debt securities to the available for sale category. The amortized cost of these securities at the time of transfer was $345.8 million and the securities had an unrealized gain of $11.0 million ($6.4 million, net of taxes) at the time of the transfer. Although our intention to hold a majority of our debt securities to maturity has not changed, the transfer was made to increase our flexibility in responding to future economic changes and to increase efficiency in managing our investment portfolio. Subsequent to the transfer, we sold securities which had been classified as held to maturity at December 31, 2000 with an amortized cost of $43.2 million for a gain of $2.4 million. During 2001, we also consolidated our subsidiary banks' investment portfolios, and therefore liquidated a number of our smaller investment positions. We anticipate that this consolidation will improve our operating efficiencies and the overall yield in our portfolio as our average block sizes increase. During 2001, we sold securities with an amortized cost of $262.9 million for a recognized gain of $6.3 million. Sales included securities previously classified as held to maturity with an amortized cost of $43.2 million for a gain of $2.4 million. In total, these sales resulted in an insignificant reduction in the yield on our investment portfolio despite the declining interest rate environment. We anticipate making further investment securities sales under this program in subsequent quarters. The average life of the portfolio has declined from approximately 7 to approximately 3 1/2 years. We shortened the duration of the investment portfolio to provide additional funding for loan growth. At December 31, 2001, $2.6 billion, or 89.8% of our total investment securities were invested in mortgage and asset backed securities, as compared to $546,000, or 50.0% of the entire portfolio at December 31, 2000. Although the ultimate maturity of these securities is as long as 30 years into the future, due to periodic principal payments and anticipated prepayments, management estimates that the average remaining life of the these securities is approximately 3 1/2 years. Our investment portfolio is managed to meet our liquidity needs through proceeds from scheduled maturities and is utilized for pledging requirements for deposits of state and local subdivisions, securities sold under repurchase agreements, and Federal Home Loan Bank ("FHLB") advances. The portfolio is comprised of U.S. Treasury securities, U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, corporate debt instruments and a modest amount of equity securities, including Federal Reserve Bank stock and FHLB stock. We do 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 on available for sale securities, net of the deferred tax effect, are reported as increases or decreases in shareholders' equity. A-13 For the amortized cost and estimated fair value of the investment securities, the maturity of investment securities by security type and additional information concerning the investments portfolio, see Note 3 of Notes to Consolidated Financial Statements. Loans Total gross loans increased 10.1% to $4.5 billion at December 31, 2001, compared to $4.1 billion at December 31, 2000. Total gross loans increased 41.6% in 2000 from $2.9 billion at year-end 1999. For 2002, we target a loan growth rate of approximately 10%. Our loan portfolio is concentrated in commercial (primarily manufacturing, service and technology) and real estate lending, with the balance in leases and consumer loans. While no specific industry concentration is considered significant, our 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 our borrowers. This could, in turn, reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans, while also decreasing our net interest margin. Although gross loans increased during 2001, we continue to see a change in our corporate borrowers' usage of their lines of credit and a slowing in the commercial construction market, as builders postpone or delay projects that have been in process for several months. We continue to take a conservative posture related to credit underwriting, which we believe is a prudent course of action, especially during slowing economic times. We believe it is in the best interest of Greater Bay Bancorp and its shareholders to focus attention on our quality client relationships and avoid growth on the fringe during these uncertain times. Both of these factors have combined to cause a slowing in the growth of our loan portfolio. While the short-term outlook for loan growth has slowed from late 2000 and early 2001, we are optimistic about the future, as we have continued to invest in new businesses that we believe will bring excellent opportunities for growth and expansion. Our acquisitions of Matsco, a dental equipment lease financing company, at the end of 2000 and CAPCO, an asset-based financing and factoring company, at the end of the first quarter of 2001, are showing excellent growth opportunities as we fully integrate them into the our organization. Our new office in Carmel is now operational and will focus on large depositors, lending and cash management. In addition, the four banks that joined us in 2000 are now fully integrated, both operationally and culturally into our organization. The following table presents the composition of our loan portfolio at the dates indicated.
As of December 31, --------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------- ----------------- ----------------- ----------------- ----------------- Amount % Amount % Amount % Amount % Amount % ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- (Dollars in thousands) Commercial $1,909,056 43.7% $1,807,117 45.5% $1,130,635 40.2% $ 817,934 39.5% $ 709,933 43.1% Term Real Estate--Commercial 1,407,300 32.2 1,096,576 27.6 883,749 31.4 665,595 32.1 491,322 29.8 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total Commercial 3,316,356 75.9 2,903,693 73.1 2,014,384 71.6 1,483,529 71.6 1,201,255 72.9 Real estate construction and land 744,127 17.0 753,936 19.0 531,529 18.9 356,931 17.2 239,925 14.6 Real estate other 246,117 5.6 187,173 4.7 156,284 5.6 121,480 5.9 91,283 5.5 Consumer and other 204,483 4.7 234,721 5.9 179,705 6.4 160,126 7.7 157,520 9.6 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total loans, gross 4,511,083 103.2 4,079,523 102.7 2,881,902 102.5 2,122,066 102.4 1,689,983 102.6 Deferred fees and discounts, net (15,362) (0.4) (14,787) (0.4) (14,114) (0.5) (12,870) (0.6) (12,126) (0.7) ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total loans, net of deferred fees 4,495,721 102.8 4,064,736 102.3 2,867,788 102.0 2,109,196 101.8 1,677,857 101.9 Allowance for loan losses (124,744) (2.8) (91,407) (2.3) (54,459) (2.0) (38,589) (1.8) (31,677) (1.9) ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total loans, net $4,370,977 100.0% $3,973,329 100.0% $2,813,329 100.0% $2,070,607 100.0% $1,646,180 100.0% ========== ===== ========== ===== ========== ===== ========== ===== ========== =====
A-14 The following table presents the maturity distribution of our commercial, real estate construction and land, term real estate--commercial and real estate other portfolios and the sensitivity of such loans to changes in interest rates at December 31, 2001.
Term real Real estate estate-- construction Real estate Commercial commercial and land other ---------- ---------- ------------ ----------- (Dollars in thousands) Loans maturing in: One year or less: Fixed rate $ 100,968 $ 1,788 $ 16,195 $ 15,693 Variable rate 129,742 15,606 118,987 3,049 One to five years: Fixed rate 389,685 192,403 72,661 14,346 Variable rate 620,143 198,505 504,619 45,098 After five years: Fixed rate 399,044 496,686 7,982 14,996 Variable rate 269,474 502,312 23,683 152,935 ---------- ---------- -------- -------- Total $1,909,056 $1,407,300 $744,127 $246,117 ========== ========== ======== ========
Nonperforming 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 and 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, ---------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------ ------ ------ (Dollars in thousands) Nonperforming loans: Nonaccrual loans $30,970 $13,014 $7,139 $4,208 $5,157 Restructured loans -- -- 807 840 1,596 ------- ------- ------ ------ ------ Total nonperforming loans 30,970 13,014 7,946 5,048 6,753 OREO -- -- 271 966 1,541 ------- ------- ------ ------ ------ Total nonperforming assets $30,970 $13,014 $8,217 $6,014 $8,294 ======= ======= ====== ====== ====== Accruing loans past due 90 days or more $ 5,073 $ 4,463 $ 908 $ 244 $ 274 ======= ======= ====== ====== ====== Nonperforming assets to total loans and OREO 0.69% 0.32% 0.29% 0.29% 0.49% Nonperforming assets to total assets 0.39% 0.22% 0.19% 0.18% 0.31% Nonperforming assets and accruing loans past due 90 days or more to total loans and OREO 0.80% 0.43% 0.32% 0.30% 0.51% Nonperforming assets and accruing loans past due 90 days or more to total assets 0.46% 0.30% 0.21% 0.19% 0.32%
A-15 At December 31, 2001, 2000, and 1999, we had $31.0 million, $13.0 million, and $8.2 million in nonperforming loans, respectively. Our ratio of nonperforming assets to total assets at December 31, 2001 was 0.39%, as compared to 0.22% at December 31, 2000 and 0.19% at December 31, 1999. Our ratios compare favorably to the industry average ratio of nonperforming assets to total assets of 0.85% at September 30, 2001, which represents the most recently available data. At December 31, 2001, $13.7 million of the nonperforming loans were syndicated loan transactions. These loans are being aggressively managed. We have not participated in any similar other syndicated loan transactions since January 2000. An additional $6.7 million of the nonperforming loans are venture banking credits. The allowance for loan losses attributable to the entire nonperforming loan portfolio is approximately $16.5 million. The balance of loans past due 90 days or more and accruing increased to $5.1 million at December 31, 2001, compared to $4.5 million at December 31, 2000. In addition to the loans disclosed above as nonaccrual or restructured, management has also identified approximately $12.3 million in loans that, on the basis of information known to us, were judged to have a higher than normal risk of becoming nonperforming. Management cannot, however, predict the extent to which economic conditions may worsen or other factors may impact our borrowers and our 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. Certain financial institutions have elected to use Special Purpose Vehicles ("SPV") to dispose of problem assets. A SPV is typically a subsidiary company with an asset and liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt. Under certain circumstances, these financial institutions may exclude the problem assets from their reported impaired, and nonperforming assets. We do not use those vehicles, or any other structures, to dispose of problem assets. Allowance For Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of known and inherit risk in our 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 uncollectable; recoveries are generally recorded only when cash payments are received. A-16 The following table sets forth information concerning our allowance for loan losses at the dates and for the years indicated.
2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Period end loans outstanding $4,511,083 $4,079,523 $2,881,902 $2,122,066 $1,689,983 Average loans outstanding $4,288,751 $3,330,147 $2,463,215 $1,821,553 $1,505,065 Allowance for loan losses: Balance at beginning of period $ 91,407 $ 54,459 $ 38,589 $ 31,677 $ 23,205 Allowance of entities acquired through acquisitions accounted for under purchase method of accounting 320 10,927 -- -- -- Charge-offs: Commercial (27,243) (11,747) (3,006) (2,389) (2,466) Term real estate--commercial -- -- (16) (51) (59) ---------- ---------- ---------- ---------- ---------- Total commercial (27,243) (11,747) (3,022) (2,440) (2,525) Real estate construction and land -- (376) -- (7) (276) Real estate other -- -- -- -- (13) Consumer and other (492) (371) (536) (462) (428) ---------- ---------- ---------- ---------- ---------- Total charge-offs (27,735) (12,494) (3,558) (2,909) (3,242) ---------- ---------- ---------- ---------- ---------- Recoveries: Commercial 2,383 946 1,337 757 410 Term real estate--commercial -- -- 5 11 10 ---------- ---------- ---------- ---------- ---------- Total commercial 2,383 946 1,342 768 420 Real estate construction and land -- 379 11 -- 6 Real estate other -- -- 7 -- -- Consumer and other 142 291 423 155 101 ---------- ---------- ---------- ---------- ---------- Total recoveries 2,525 1,616 1,783 923 527 ---------- ---------- ---------- ---------- ---------- Net charge-offs (25,210) (10,878) (1,775) (1,986) (2,715) Provision charged to income(1) 58,227 36,899 17,645 8,898 11,187 ---------- ---------- ---------- ---------- ---------- Balance at end of period $ 124,744 $ 91,407 $ 54,459 $ 38,589 $ 31,677 ========== ========== ========== ========== ========== Net charge-offs to average loans outstanding during the period 0.59% 0.33% 0.07% 0.11% 0.18% Allowance as a percentage of average loans outstanding 2.91% 2.74% 2.21% 2.12% 2.10% Allowance as a percentage of period end loans outstanding 2.77% 2.24% 1.89% 1.82% 1.87% Allowance as a percentage of non- performing loans 402.79% 702.37% 685.36% 764.44% 469.08%
- -------- (1) Includes $3.5 million, $8.1 million, $2.7 million, $183,000, and $1.4 million in 2001, 2000, 1999, 1998, and 1997, respectively, to conform to our allowance methodologies which are included in mergers and related nonrecurring costs. We employ a systematic methodology for determining its allowance for loan losses, that includes a monthly review process and monthly adjustment of the allowance. Our process includes a periodic loan by loan review for loans that are individually evaluated for impairment as well as 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. A-17 Our 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 our 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 our markets 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 our methodology. Our methodology is, and has been, consistently followed. However, as we add new products, increase in complexity, and expand our geographic coverage, we will enhance our methodology to keep pace with the size and complexity of the loan portfolio. In this regard, we have periodically engaged outside firms to independently assess our methodology, and on an ongoing basis we engages outside firms to perform independent credit reviews of our loan portfolio. Management believes that our systematic methodology continues to be appropriate given our 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 management's judgment and experience. Management believes that the allowance for loan losses is adequate as of December 31, 2001 to cover known and inherent risks in the loan portfolio. However, future changes in circumstances, economic conditions or 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.
As of December 31, ------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---------------- --------------- --------------- --------------- --------------- % of % of % of % of % of Category Category Category Category Category to Gross to Gross to Gross to Gross to Gross Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans -------- -------- ------- -------- ------- -------- ------- -------- ------- -------- (Dollars in thousands) Commercial $ 66,246 42.32% $37,896 44.30% $20,454 39.23% $15,758 38.54% $12,226 42.01% Term real estate--commercial 19,872 31.20% 15,844 26.88% 8,821 30.67% 4,631 31.37% 3,908 29.07% -------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total commercial 86,118 73.52% 53,740 71.18% 29,275 69.90% 20,389 69.91% 16,134 71.08% Real estate construction and land 9,904 16.50% 10,935 18.48% 5,590 18.44% 4,047 16.82% 2,536 14.20% Real estate other 6,010 5.46% 1,866 4.59% 2,239 5.42% 1,639 5.72% 1,357 5.40% Consumer and other 2,238 4.53% 5,732 5.75% 4,214 6.24% 3,056 7.55% 2,173 9.32% -------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total allocated 104,270 72,273 41,318 29,131 22,200 Unallocated 20,474 19,134 13,141 9,458 9,477 -------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total $124,744 100.00% $91,407 100.00% $54,459 100.00% $38,589 100.00% $31,677 100.00% ======== ====== ======= ====== ======= ====== ======= ====== ======= ======
A-18 At December 31, 2001, the allowance for loan losses was $124.7 million, consisting of a $104.3 million allocated allowance and a $20.5 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 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. During the fourth quarter of 2001, we continued to review all significant areas of our credit portfolio and while there continues to be pressure on the Bay Area's real estate economy, we are not seeing systemic deterioration in our real estate portfolio. The majority of our fourth quarter 2001 charge-offs were related to our syndicated credit and venture banking loan portfolios, which we continue to monitor closely. While we continue to effectively manage the credit risk in these two portfolios, we felt it prudent to increase our loan loss provision by approximately $21.0 million ($12.0 million net of tax) and allocate the majority of the increase to these business areas. Should the economy recover and the credit outlook for these businesses improve, we would adjust our allowance for loan losses to recognize the changing economic environment. Deposits We emphasize developing total client relationships in order to increase our core deposit base. Deposits reached $5.0 billion at December 31, 2001, an increase of 5.0% compared to deposits of $4.8 billion at December 31, 2000. In 2001, due to economic pressures on our clients' cash reserves, we saw a decline in our core deposits. To counter this trend, we increased our use of brokered deposit during 2001. In 2000, deposits increased 27.1% from $3.7 billion at December 31, 1999. During 2001, the increase in deposits was primarily due to the continued marketing efforts directed at commercial business clients in our market areas. While we continue to anticipate deposit growth, we do not expect the growth rate experienced during the year 2000 and 1999 to continue. For 2002, we target a deposit growth rate of 5% to 10%. In this economic environment, we believe our clients are more likely to utilize deposits and cash-on-hand rather than other funding sources. This is particularly evidenced in our venture banking unit, as our business clients focus more on managing current operations rather than business expansion, which has resulted in a reduction in their borrowing needs. The economic slowdown has also impacted our Trust unit as the general market conditions have reduced investments in our money market accounts. Our noninterest-bearing demand deposit accounts decreased 15.9% to $954.0 million at December 31, 2001, compared to $1.1 billion a year earlier. Money market deposit accounts ("MMDA"), negotiable order of withdrawal accounts ("NOW") and savings accounts were $2.3 billion at year-end 2001, a decrease of 2.9% from $2.3 billion at December 31, 2000. MMDA, NOW and savings accounts were 45.7% of total deposits at December 31, 2001, as compared to 49.4% at December 31, 2000. Time certificates of deposit totaled $1.8 billion, or 35.2% of total deposits, at December 31, 2001, compared to $1.3 billion, or 26.7% of total deposits, at December 31, 2000. As of December 31, 2001 and 2000, we had $686.6 million and $161.6 million, respectively in brokered deposits outstanding. A-19 Borrowings Borrowings as of December 31, 2001 and 2000 was $2.1 billion and $463.3 million respectively. At December 31, 2001 borrowings consisted of securities sold under agreements to repurchase, FHLB advances, advances under credit lines, and other notes payable. The growth in the borrowing during 2001 was a result of our loan growth exceeding deposit gathering activities and the wholesale funding strategy. Note 11 of Notes to Consolidated Financial Statements provides the amounts outstanding, the short and long term classification, borrowings outstanding during the year and the general terms of these borrowings. Liquidity and Cash Flow The objective of our liquidity management is to maintain each Bank's ability to meet the day-to-day cash flow requirements of our clients who either wish to withdraw funds or require funds to meet their credit needs. We 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 our shareholders. We monitor 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 can utilize brokered deposit lines, sell securities under agreements to repurchase, obtain FHLB advances or purchase overnight Federal Funds. Greater Bay is a company separate and apart from the Banks. It must provide for its own liquidity and therefore meet its debt service obligations and fund its operations. 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 and their subsidiaries. There are statutory and regulatory provisions that could limit the ability of the Banks to pay dividends to Greater Bay. At December 31, 2001, the Banks had approximately $106.5 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. At December 31, 2001, Greater Bay had existing credit facilities under which it may borrow up to $75.0 million. As of December 31, 2001, Greater Bay did not have any material commitments for capital expenditures. On December 18, 2001, Greater Bay signed a definitive merger agreement with ABD. Under this agreement, Greater Bay will issue convertible preferred stock and cash of approximately $57.5 million upon completion of the merger. Greater Bay has the ability to fund the acquisition of ABD using cash on hand and existing or replacement lines of credit. Net cash provided by operating activities, consisting primarily of net income, totaled $128.6 million for 2001, $120.7 million for 2000 and $65.2 million for 1999. Cash used for investing activities totaled $2.4 billion in 2001, $1.5 billion in 2000 and $910.6 million in 1999. The funds used for investing activities primarily represent increases in loans and investment securities for each year reported. For the year ended December 31, 2001, net cash provided by financing activities was $2.0 billion, compared to $1.4 billion in 2000 and $890.6 million in 1999. Historically, our primary financing activity has been through deposits. In 2001, 2000 and 1999, deposit gathering activities generated cash of $240.0 million, $1.1 billion and $867.5 million, respectively. This represents a total of 12.1%, 70.3% and 97.3% of the financing cash flows for 2001, 2000 and 1999, respectively. The 2001 increase in financing activities other than deposits are a result of our loan growth exceeding deposit gathering activities and the wholesale funding strategy which combined to result in a $1.6 billion increase in borrowings and the issuance of Trust Preferred Securities of $118.5 million in 2001. (see "--Capital Resources", below). Capital Resources Shareholders' equity at December 31, 2001 increased to $463.7 million from $385.9 million at December 31, 2000 and from $306.1 million at December 31, 1999. Greater Bay paid dividends of $0.43, $0.35 and $0.24 per share in December 31, 2001, 2000 and 1999, respectively, excluding dividends paid by subsidiaries prior to the completion of their mergers. A-20 In 2001 and 2000, Greater Bay completed Trust Preferred Securities offerings in the aggregate amounts of $118.5 million and $50.5 million, respectively, to enhance our regulatory capital base and to add liquidity. Under applicable regulatory guidelines, the Trust Preferred Securities qualify as Tier I capital up to a maximum of 25% of Tier I capital. Any additional portion of Trust Preferred Securities would qualify as Tier 2 capital. As of December 31, 2001, $158.2 million of the total Trust Preferred Securities qualify as Tier I Capital and $59.8 million of the Trust Preferred Securities qualify as Tier II Capital. During 2001, we formed and funded CNB Investment Trust I ("CNBIT I") and CNB Investment Trust II ("CNBIT II"), both of which are Maryland real estate investment trusts. CNBIT I and CNBIT II provides Cupertino National Bank with flexibility in raising capital. During 2001, Cupertino National Bank sold 15,000 shares of the 12% Series B Preferred Stock of CNBIT II for $15.0 million (See Note 10 of the Consolidated Financial Statements for further information regarding this transaction). On March 23, 2000, Greater Bay completed a private offering of 648,648 shares of common stock to institutional investors. Proceeds from the offering were $12,000,000 less placement agent's fees of $514,000. On December 22, 1999, Greater Bay completed a private offering of 1,070,000 shares of common stock to institutional investors. Proceeds from the offering were $19,795,000 less placement agent's fees of $834,000. Greater Bay used the net proceeds from both offerings for general corporate purposes. 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. Our major capital components are shareholders' equity and Trust Preferred Securities in core capital, and the allowance for loan losses in supplementary capital. At December 31, 2001, 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 most 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 Office of the Comptroller of the Currency and the FDIC have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. Our capital levels at December 31, 2001 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 -------- ------------- ------------- Greater Bay Bancorp 8.01% 10.49% 12.79% Well-capitalized 5.00% 6.00% 10.00% Adequately capitalized 4.00% 4.00% 8.00%
Our leverage ratio was 8.01% at December 31, 2001, compared to 8.79% at December 31, 2000. At December 31, 2001, our risk-based capital ratios were 10.49% for Tier 1 risk-based capital and 12.79% for total risk-based capital, compared to 9.57% and 10.87%, respectively, as of December 31, 2000. In addition, at December 31, 2001, each of the Banks, had levels of capital that exceeded the well-capitalized guidelines. For additional information on each Banks and our capital levels and capital ratios, see Note 19 of Notes to Consolidated Financial Statements. A-21 Quantitative and Qualitative Disclosures about Market Risk Our financial performance is impacted by, among other factors, interest rate risk and credit risk. We do not utilize derivatives to mitigate our credit risk, relying instead on an extensive loan review process and its allowance for loan losses. See "--Allowance for Loan Losses" herein. Interest rate risk is the change in value due to changes in interest rates. This risk is addressed by our Management Asset & Liability Committee ("ALCO"), which includes senior management representatives. The ALCO monitors interest rate risk by analyzing the potential impact to the net portfolio of equity value and net interest income from potential changes to interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages our balance sheet in part to maintain the potential impact on net portfolio value and net interest income within acceptable ranges despite changes in interest rates. Our exposure to interest rate risk is reviewed on at least a quarterly basis by the Board ALCO and the Management ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net portfolio value in the event of hypothetical changes in interest rates. If potential changes to net portfolio value and net interest income resulting from hypothetical interest rate changes 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, we have implemented strategies to more closely match our balance sheet composition. Although we are doing so to a lesser extent than in prior years, we have generally focused our investment activities on securities with terms or average lives averaging at approximately 31/2 years which effectively lengthens the average duration of our assets. We have utilized short-term borrowings and deposit marketing programs to shorten the effective duration of our liabilities. In addition, we have utilized interest rate swaps and caps to manage the interest rate risk of certain long term debt instruments and deposit liabilities. When these derivative instruments were acquired, they were not an "ineffective hedge" and were accounted for under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133 and 138"). During 2001, we determined that the designation of these derivatives as hedges was no longer appropriate. As a result, upon derecognition of these hedges, we recorded a $191,000 loss to other income on these instruments. Subsequent to derecognition, we recorded a gain of $826,000 on the appreciation of these instruments. Market Value of Portfolio Equity Interest rate sensitivity is computed by estimating the changes in net portfolio of equity value, or market value over a range of potential changes in interest rates. The market value of equity is the market value of our assets minus the market value of its liabilities plus the market value of any off-balance sheet items. The market value of each asset, liability, and off-balance sheet item is its net present value of expected cash flows discounted at market rates after adjustment for rate changes. We measure the impact on market value for an immediate and sustained 100 basis point increase and decrease (shock) in interest rates. The following table shows our projected change in net portfolio value for this set of rate shocks as of December 31, 2001.
Projected change Net portfolio ------------------ Change in interest rates value Dollars Percentage ------------------------ ------------- ------- ---------- (Dollars in thousands) 100 basis point rise $1,037,277 $(8,750) -0.84% Base scenario 1,046,027 -- -- 100 basis point decline 1,037,455 (8,571) -0.82%
The preceding table indicates that as of December 31, 2001 an immediate and sustained 100 basis point decrease in interest rates would decrease our net portfolio value by less than 1%. The foregoing analysis attributes significant value to our non-interest-bearing deposit balances. A-22 The market value of portfolio equity is based on the net present values of each product in the portfolio, which in turn is based on cash flows factoring in recent market prepayment estimates from public sources. The discount rates are based on recently observed spread relationships and adjusted for the assumed interest rate changes. Some valuations are provided directly from independent broker quotations. Net Interest Income Simulation The impact of interest rate changes on net interest income and net income are measured using income simulation. The various products in our balance sheet are modeled to simulate their income (and cash flow) behavior in relation to interest rates. Income for the next 12 months is calculated for current interest rates and for immediate and sustained rate shocks. The income simulation model includes various assumptions regarding the repricing relationships for each product. Many of our assets are floating rate loans, which are assumed to reprice immediately, and to the same extent as the change in market rates according to their contracted index. Our non-term deposit products reprice more slowly, usually changing less than the change in market rates and at our discretion. As of December 31, 2001, the analysis indicates that our net interest income for the next 12 months would increase 2.5% if rates increased 100 basis points, and decrease by 3.7% if rates decreased 100 basis points. This analysis indicates the impact of change in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet grows modestly, but that its structure is to remain similar to the structure at year-end. It does not account for all the factors that impact this analysis including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change. Furthermore loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in the analysis. In addition, the proportion of adjustable-rate loans in our portfolio could decrease in future periods if market interest rates remain at or decrease below current levels. Changes that vary significantly from the assumptions may have significant effects on our net interest income. The results of this sensitivity analysis should not be relied upon as indicative of actual future results. Gap Analysis In addition to the above analysis, we also perform a Gap analysis as part of the overall interest rate risk management process. This analysis is focused on the maturity structure of assets and liabilities and their repricing characteristics over future periods. An effective interest rate risk management strategy seeks to match the volume of assets and liabilities maturing or repricing during each period. Gap sensitivity is measured as the difference between the volume of assets and liabilities in our current portfolio that is subject to repricing at various time horizons. The main focus is usually for the one-year cumulative gap. The difference is known as interest sensitivity gaps. A-23 The following table shows interest sensitivity gaps for different intervals as of December 31, 2001:
Total Immediate 2 days To 7 months to 1 Year to 4 years to More than Total rate non-rate or one day 6 months 12 months 3 years 5 years 5 years sensitive sensitive ---------- ----------- ----------- ---------- ---------- ---------- ---------- ----------- (Dollars in thousands) Assets: Cash and due from banks $ -- $ 2,381 $ -- $ -- $ -- $ -- $ 2,381 $ 187,023.0 Short term investments 26,000 -- -- -- -- -- 26,000 -- Investment securities 89,840 482,884 439,502 970,000 305,070 680,333 2,967,629 3,300 Loans 2,172,444 842,802 245,623 628,570 472,046 134,236 4,495,721 -- Loan losses/unearned fees -- -- -- -- -- -- -- (124,744) Other assets -- -- -- -- -- -- -- 320,044 ---------- ----------- ----------- ---------- -------- ---------- ---------- ----------- Total assets $2,288,284 $ 1,328,067 $ 685,125 $1,598,570 $777,116 $ 814,569 $7,491,731 $ 385,623 ========== =========== =========== ========== ======== ========== ========== =========== Liabilities And Equity: Deposits $2,280,119 $ 1,410,392 $ 265,374 $ 62,375 $ 4,919 $ 12,903 $4,036,082 $ 953,989.0 Other borrowings 8,234 928,203 495,145 605,247 57,558 1,509 2,095,896 -- Trust preferred securities -- -- -- -- -- 218,000 218,000 -- Other liabilities -- -- -- -- -- -- -- 94,403 Shareholders' equity -- -- -- -- -- -- -- 478,684 ---------- ----------- ----------- ---------- -------- ---------- ---------- ----------- Total liabilities and equity $2,288,353 $ 2,338,595 $ 760,519 $ 667,622 $ 62,477 $ 232,412 $6,349,978 $ 1,527,076 ========== =========== =========== ========== ======== ========== ========== =========== Gap $ (69) $(1,010,528) $ (75,394) $ 930,948 $714,639 $ 582,157 $1,141,753 $(1,141,453) Cumulative Gap $ (69) $(1,010,597) $(1,085,991) $ (155,043) $559,596 $1,141,753 $1,141,753 $ -- Cumulative Gap/total assets 0.00% -12.83% -13.79% -1.97% 7.10% 14.49% 14.49% 0.00%
Total ---------- Assets: Cash and due from banks $ 189,404 Short term investments 26,000 Investment securities 2,970,929 Loans 4,495,721 Loan losses/unearned fees (124,744) Other assets 320,044 ---------- Total assets $7,877,354 ========== Liabilities And Equity: Deposits $4,990,071 Other borrowings 2,095,896 Trust preferred securities 218,000 Other liabilities 94,403 Shareholders' equity 478,684 ---------- Total liabilities and equity $7,877,054 ========== Gap $ 300 Cumulative Gap $ -- Cumulative Gap/total assets 0.00%
The foregoing table indicates that we had a one year cumulative negative gap of $(1.1) billion, or (13.8)% of total assets, at December 31, 2001. In theory, this would indicate that at December 31, 2001, $1.1 billion 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. Gap analysis has certain limitations. Measuring the volume of repricing or maturing assets and liabilities does not always measure the full impact on the portfolio value of equity or net interest income. Gap analysis does not account for rate caps on products; dynamic changes such as increasing prepay speeds as interest rates decrease, basis risk, or the benefit of non-rate funding sources. The relation between product rate repricing and market rate changes (basis risk) is not the same for all products. The majority of our loan portfolio reprices quickly and completely following changes in market rates, while non-term deposit rates in general move more slowly and usually incorporate only a fraction of the change in rates. Products categorized as non-rate sensitive, such as its noninterest-bearing demand deposits, in the Gap analysis behave like long term fixed rate funding sources. Both of these factors tend to make our actual behavior more asset sensitive than is indicated in the Gap analysis. In fact we expect to experience higher net interest income when rates rise, opposite what is indicated by the Gap analysis. Therefore management uses income simulation, net interest income rate shocks and market value of portfolio equity as its primary interest rate risk management tools. A-24 Pending Transaction On December 18, 2001, we signed a definitive merger agreement with ABD Insurance and Financial Services, Inc. ("ABD"). ABD is the largest independently owned insurance brokerage and employee benefits consulting organization in the western United States. We will issue shares of a new series of convertible preferred stock and cash in a tax-free reorganization for an estimated present value of approximately $193.6 million. That amount includes an initial payment on consummation of the merger of $130 million in convertible preferred stock and cash, and an additional $63.6 million in convertible preferred stock (or common stock in certain instances) and cash subject to ABD meeting specified performance goals in 2002, 2003, 2004, and 2005. The merger, which will be accounted for as a purchase, is expected to be completed in the first quarter of 2002. ABD has over $1.0 billion of insurance premiums serviced and in excess of $100 million in revenue for the 11 month period ended December 31, 2001. Consummation of the acquisition is subject to the receipt of certain regulatory approvals and approval of ABD's shareholders. Recent Accounting Developments Business Combinations --------------------- On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" ("SFAS No. 141"). The standard concludes that all business combinations within the scope of the statement will be accounted for using the purchase method. Previously, the pooling-of-interests method was required whenever certain criteria were met. Because those criteria did not distinguish economically dissimilar transactions, similar business combinations were accounted for using different methods that produced dramatically different financial statement results. SFAS No. 141 requires separate recognition of intangible assets apart from goodwill if they meet one of two criteria, the contractual-legal criterion or the separability criterion. SFAS No. 141 also requires the disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 141 also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. Our definitive merger agreement with SJNB Financial Corp. was signed on June 25, 2001, before the required implementation date, and therefore SFAS No. 141 required us to account for that merger as a pooling of interests, since all the criteria for pooling were met. As a portion of our business strategy is to pursue acquisition opportunities so as to expand our market presence and maintain growth levels, the change in accounting could have a negative impact on our ability to realize those business strategies. As SFAS No. 141 has recently been released, the impact of these changes has yet to be fully determined. Goodwill and Other Intangible Assets ------------------------------------ On July 20, 2001 the FASB also issued SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). It addressed how intangible assets that are acquired individually or within a group of assets (but not those acquired in business combination) should be accounted for in the financial statements upon their acquisition. SFAS No.142 adopts a more aggregate view of goodwill and bases the accounting on the units of the combined entity into which an acquired entity is aggregated. SFAS No. 142 also prescribes that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather tested at least annually for impairment. Intangible assets that have definite lives will continue to be amortized over their useful lives, but no longer with the constraint of the 40 year ceiling. SFAS No. 142 provides specific guidance for the testing of goodwill for impairment which may require re-measurement of the fair value of the reporting unit. Additional ongoing financial statement disclosures are also required. A-25 The provisions of the statement are required to be applied starting with fiscal years beginning after December 15, 2001. The statement is required to be applied at the beginning of the fiscal year and applied to all goodwill and other intangible assets recognized in the financials at that date. Impairment losses are to be reported as resulting from a change in accounting principle. Based on our current level of intangible assets the impact of this standard is not expected to be significant. Selected Loan Loss Allowance Methodology and Documentation Issues ----------------------------------------------------------------- A Staff Accounting Bulletin No. 102 "Selected Loan Loss Allowance Methodology and Documentation Issues" ("SAB No. 102") was released on July 10, 2001. It expresses the staff's views on the development, documentation, and application of a systematic methodology as required by Financial Reporting Release No. 28, Accounting for Loan Losses by Registrants Engaged in Lending Activities, for determining allowances for loan and lease losses in accordance with general accepted accounting principles. In particular, SAB No. 102 focuses on the documentation the staff normally would expect registrants to prepare and maintain in support of their allowances for loan losses. We have a systematic methodology for determining an appropriate allowance for loan losses, consistently followed and supported by written documentation and policies and procedures. None-the-less, in light of SAB No. 102, our methodology and documentation is currently in the process of review. However, any resulting changes are not expected to have a material impact on the financial statements. A-26 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, ---------------------- 2001 2000* ---------- ---------- (Dollars in thousands) A S S E T S ----------- Cash and due from banks $ 189,404 $ 291,605 Federal funds sold 26,000 145,240 Other short term securities -- 39,130 ---------- ---------- Cash and cash equivalents 215,404 475,975 Investment securities: Available for sale, at fair value 2,863,009 688,332 Held to maturity, at amortized cost (fair value 2001: $0 2000: $381,701) -- 371,349 Other securities 107,621 31,383 ---------- ---------- Investment securities 2,970,630 1,091,064 Total loans: Commercial 1,909,056 1,807,117 Term real estate--commercial 1,407,300 1,096,576 ---------- ---------- Total commercial 3,316,356 2,903,693 Real estate construction and land 744,127 753,936 Real estate other 246,117 187,173 Consumer and other 204,483 234,721 Deferred loan fees and discounts (15,362) (14,787) ---------- ---------- Total loans, net of deferred fees 4,495,721 4,064,736 Allowance for loan losses (124,744) (91,407) ---------- ---------- Total loans, net 4,370,977 3,973,329 Property, premises and equipment, net 48,883 39,304 Interest receivable and other assets 271,160 238,483 ---------- ---------- Total assets $7,877,054 $5,818,155 ========== ========== L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y ---------------------------------------------------------------- Total deposits $4,990,071 $4,750,404 Borrowings 2,095,896 463,267 Other liabilities 94,403 119,036 ---------- ---------- Total liabilities 7,180,370 5,332,707 ---------- ---------- Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trusts holding solely junior subordinated debentures 218,000 99,500 Preferred stock of real estate investment trust subsidiaries of the Banks 15,000 -- Commitments and contingencies Shareholders' Equity: Preferred stock, no par value: 4,000,000 shares authorized; none issued -- -- Common stock, no par value: 80,000,000 shares authorized; 49,831,682 and 48,748,713 shares issued and outstanding as of December 31, 2001 and 2000, respectively 206,294 196,121 Accumulated other comprehensive gain (loss) 3,967 (6,035) Retained earnings 253,423 195,862 ---------- ---------- Total shareholders' equity 463,684 385,948 ---------- ---------- Total liabilities and shareholders' equity $7,877,054 $5,818,155 ========== ==========
- -------- * 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-27 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, -------------------------------- 2001 2000* 1999* -------- -------- -------- (Dollars in thousands, except pe share amounts) Interest Income Interest on loans $375,551 $335,699 $233,307 Interest on investment securities: Taxable 120,491 62,250 42,081 Tax--exempt 7,455 9,632 7,305 -------- -------- -------- Total interest on investment securities 127,946 71,882 49,386 Other interest income 3,744 16,058 15,941 -------- -------- -------- Total interest income 507,241 423,639 298,634 -------- -------- -------- Interest Expense Interest on deposits 132,655 146,269 98,588 Interest on long term borrowings 15,158 1,203 4,531 Interest on other borrowings 38,419 10,578 3,390 -------- -------- -------- Total interest expense 186,232 158,050 106,509 -------- -------- -------- Net interest income 321,009 265,589 192,125 Provision for loan losses 54,727 28,821 14,901 -------- -------- -------- Net interest income after provision for loan losses 266,282 236,768 177,224 -------- -------- -------- Other Income Service charges and other fees 10,602 9,661 8,975 Loan and international banking fees 8,856 8,162 4,275 Trust fees 3,610 3,450 2,990 ATM network revenue 2,887 2,891 2,682 Gain on sale of loans 3,241 2,190 2,058 Gain (loss) on sale of investments, net 6,304 (521) (46) Warrant income, net 581 12,986 14,508 Other income 8,761 8,312 9,403 -------- -------- --------
Total 44,842 47,131 44,845 -------- -------- -------- Operating Expenses Compensation and benefits 89,699 73,966 65,668 Occupancy and equipment 27,756 23,192 18,999 Dividends paid on Trust Preferred Securities 13,724 7,842 4,201 Merger and other related nonrecurring costs 29,249 33,526 10,818 Contribution to the Foundation and related expenses, net -- -- 12,160 Other expenses 44,412 34,544 32,461 -------- -------- -------- Total operating expenses 204,840 173,070 144,307 -------- -------- -------- Net income before provision for income taxes 106,284 110,829 77,762 Provision for income taxes 26,468 43,665 26,461 -------- -------- -------- Net income $ 79,816 $ 67,164 $ 51,301 ======== ======== ======== Net income per share--basic** $ 1.61 $ 1.40 $ 1.15 ======== ======== ======== Net income per share--diluted** $ 1.57 $ 1.33 $ 1.09 ======== ======== ========
- -------- * 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 effective on October 4, 2000. See notes to consolidated financial statements. A-28 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, -------------------------- 2001 2000* 1999* ------- ------- -------- (Dollars in thousands) Net income $79,816 $67,164 $ 51,301 ------- ------- -------- Other comprehensive income: Unrealized gains on securities: Unrealized holding gains (losses) arising during period (net of taxes of $9,691, $3,960 and $(9,659) for the years ended December 31, 2001, 2000 and 1999, respectively) 13,860 5,664 (13,814) Less: reclassification adjustment for gains (losses) included in net income (net of taxes of $(2,594), $214 and $19 for the years ended December 31, 2001, 2000 and 1999, respectively) (3,710) 307 27 ------- ------- -------- Net change 10,150 5,971 (13,787) Cash flow hedge: Change in market value of hedge during the period (net of taxes of $(131), $(908) and $1,424 for the years ended December 31, 2001, 2000 and 1999, respectively) (187) (1,298) 2,037 Less: reclassification adjustment for swap settlements in net income (net of taxes of $(50), $(41) and $101 for the years ended December 31, 2001, 2000 and 1999, respectively) (73) (58) 144 Loss recognized on derecognition of derivative instruments as cash flow hedge 112 -- -- ------- ------- -------- Net change (148) (1,356) 2,181 Other comprehensive income (loss) 10,002 4,615 (11,606) ------- ------- -------- Comprehensive income $89,818 $71,779 $ 39,695 ======= ======= ========
- -------- * 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-29 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, 2001, 2000 and 1999
Accumulated Common stock other Total -------------------- comprehensive Retained shareholders' Shares ** Amount income/(loss) earnings equity ---------- -------- ------------- -------- ------------- (Dollars in thousands, except per share amounts) Greater Bay Bancorp, prior to pooling 19,552,274 $ 60,602 $ 48 $ 55,490 $116,140 Shares issued to, and retained earnings of, acquired entities: Bay Area Bancorp 2,709,943 5,376 (2) 6,614 11,988 Bay Commercial Services 1,474,179 3,671 (7) 6,509 10,173 Mt. Diablo Bancshares 2,315,633 8,592 3 311 8,906 Coast Bancorp 5,978,185 20,066 693 4,354 25,113 Bank of Santa Clara 3,877,680 17,003 -- 7,878 24,881 Bank of Petaluma 1,531,516 7,854 315 3,044 11,213 SJNB Financial Corp. 6,437,340 19,943 (94) 23,173 43,022 ---------- -------- -------- -------- -------- Balance, December 31, 1998, restated to reflect pooling of interests 43,876,750 143,107 956 107,373 251,436 Net income -- -- -- 51,301 51,301 Other comprehensive loss, net of taxes -- -- (11,606) -- (11,606) Stock options exercised, including related tax benefits 1,205,378 6,282 -- (59) 6,223 Stock issued in Employee Stock Purchase Plan 83,302 1,031 -- -- 1,031 401(k) employee stock purchases 76,010 1,205 -- -- 1,205 Stock issued in Dividend Reinvestment Plan 26,668 383 -- -- 383 Stock retired by SJNB Financial Corp. (273,000) (3,389) -- (522) (3,911) Pacific Business Funding Corporation distribution -- -- -- (40) (40) Stock issued through private placement 1,179,200 20,761 -- -- 20,761 Cash dividend $0.24 per share*** -- -- -- (10,669) (10,669) ---------- -------- -------- -------- -------- Balance, December 31, 1999* 46,174,308 169,380 (10,650) 147,384 306,114 Net income -- -- -- 67,164 67,164 Other comprehensive income, net of taxes -- -- 4,615 -- 4,615 Stock options exercised, including related tax benefits 1,731,594 11,309 -- -- 11,309 Stock issued in Employee Stock Purchase Plan 93,356 1,538 -- -- 1,538 401(k) employee stock purchases 82,015 1,982 -- -- 1,982 Stock issued in Dividend Reinvestment Plan 18,792 465 -- -- 465 Stock issued through private placement 648,648 11,476 -- -- 11,476 Cash paid in-lieu of fractional shares -- (29) -- -- (29) Cash dividend $0.39 per share*** -- -- -- (18,686) (18,686) ---------- -------- -------- -------- -------- Balance, December 31, 2000* 48,748,713 196,121 (6,035) 195,862 385,948 ---------- -------- -------- -------- -------- Net income -- -- -- 79,816 79,816 Other comprehensive income, net of taxes -- -- 10,002 -- 10,002 Stock options exercised, including related tax benefits 950,110 8,471 -- -- 8,471 Restricted stock grants 58,000 -- -- -- -- Stock issued in Employee Stock Purchase Plan 114,860 2,521 -- -- 2,521 Stock issued in Dividend Reinvestment Plan 25,179 648 -- -- 648 Stock issued in purchase accounting transaction 44,820 1,376 -- -- 1,376 Stock retired by Greater Bay Bancorp (110,000) (2,830) -- -- (2,830) Cash paid in-lieu of fractional shares -- (13) -- -- (13) Cash dividend $0.45 per share*** -- -- -- (22,255) (22,255) ---------- -------- -------- -------- -------- Balance, December 31, 2001 49,831,682 $206,294 $ 3,967 $253,423 $463,684 ========== ======== ======== ======== ========
- -------- * 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 effective on October 4, 2000. *** Excluding dividends paid by Greater Bay's subsidiaries prior to the completion of their mergers with Greater Bay, Greater Bay paid dividends of $0.43, $0.35, and $0.24 per share for the years ended December 31, 2001, 2000, and 1999, respectively. See notes to consolidated financial statements. A-30 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ----------------------------------- 2001 2000* 1999* ----------- ----------- --------- (Dollars in thousands) Cash flows--operating activities Net income $ 79,816 $ 67,164 $ 51,301 Reconcilement of net income to net cash from operations: Provision for loan losses 58,547 47,826 17,646 Depreciation and amortization 15,228 14,540 8,461 Deferred income taxes (13,565) (13,601) (6,661) (Gain) loss on sale of investments, net (6,304) 521 46 Gain on sale of building -- -- (490) Proceeds from loan sales 16,200 -- 74,420 Originations of loans held for sale -- -- (74,514) Changes in: Accrued interest receivable and other assets 6,064 (54,502) (34,809) Accrued interest payable and other liabilities (28,063) 59,016 25,428 Deferred loan fees and discounts, net 663 746 4,505 ----------- ----------- --------- Operating cash flows, net 128,586 121,710 65,333 ----------- ----------- --------- Cash flows--investing activities Maturities and partial paydowns on investment securities: Held to maturity 18,627 125,433 103,567 Available for sale 295,689 87,882 120,176 Purchase of investment securities: Held to maturity -- (246,226) (132,374) Available for sale (2,344,828) (269,000) (255,263) Other securities (77,970) (5,051) (13,664) Proceeds from sale of available for sale securities 262,856 79,556 53,471 Loans, net (458,240) (934,438) (767,981) Loans acquired from business acquisition (14,671) (274,292) -- Payment for business acquisition (8,668) (6,500) -- Cash acquired in business acquisition 517 10,498 Purchase of property, premises and equipment (31,761) (11,973) (12,068) Sale of banking building -- 5,502 2,637 Sale of other real estate owned 259 224 -- Purchase of insurance policies (8,811) (21,819) (9,206) ----------- ----------- --------- Investing cash flows, net (2,367,001) (1,460,204) (910,705) ----------- ----------- --------- Cash flows--financing activities Net change in deposits 239,667 1,013,783 867,270 Net change in other borrowings--short term 1,570,673 196,381 10,217 Proceeds from other borrowings--long term 83,200 126,309 2,015 Principal repayment--long term borrowings (21,501) (10,000) (3,775) Proceeds from company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 118,500 50,500 -- Proceeds from sale of common stock 12,390 26,222 29,408 Repurchase of common stock (2,830) -- (3,911) Cash dividends (22,255) (18,686) (10,668) ----------- ----------- --------- Financing cash flows, net 1,977,844 1,384,509 890,556 ----------- ----------- --------- Net change in cash and cash equivalents (260,571) 46,015 45,184 Cash and cash equivalents at beginning of period 475,975 429,960 384,776 ----------- ----------- --------- Cash and cash equivalents at end of period $ 215,404 $ 475,975 $ 429,960 =========== =========== ========= Cash flows--supplemental disclosures Cash paid during the period for: Interest $ 172,863 $ 162,283 $ 116,212 =========== =========== ========= Income taxes $ 80,557 $ 26,384 $ 24,690 =========== =========== ========= Non-cash transactions: Additions to other real estate owned $ 3,147 $ -- $ -- =========== =========== ========= Transfer of appreciated securities to the Greater Bay Bancorp Foundation $ -- $ 7,200 $ 560 =========== =========== =========
- -------- * 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-31 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2001, 2000 and 1999 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and "we" or "our", on a consolidated basis) is a bank holding company with 11 bank subsidiaries: Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast Commercial Bank, Cupertino National Bank, Golden Gate Bank, Mid-Peninsula Bank, Mt. Diablo National Bank, Peninsula Bank of Commerce, and San Jose National Bank. We also conduct business through the following divisions: CAPCO, Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Carmel, Greater Bay Bank Marin, Greater Bay Bank Santa Clara Valley Group, Greater Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay International Banking Division, Greater Bay Trust Company, Matsco, Pacific Business Funding and the Venture Banking Group. We provide a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. We operate throughout the San Francisco Bay Area including Silicon Valley, San Francisco and the San Francisco Peninsula, the East Bay, Santa Cruz, Marin, Monterey, and Sonoma Counties, with 45 offices located in Aptos, Blackhawk, Capitola, Carmel, Cupertino, Danville, Fremont, Hayward, Lafayette, Los Gatos, Millbrae, Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Rafael, San Ramon, Santa Clara, Santa Cruz, Saratoga, Scotts Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville. We have participated in nine acquisitions during the three-year period ended December 31, 2001, as described in Note 2, Notes To Consolidated Financial Statements. With the exception of the acquisitions with The Matsco Companies, Inc. and CAPCO Financial Company, Inc. ("CAPCO") all of these acquisitions were accounted for as a pooling-of-interests and, accordingly, all our financial information for the periods prior to the acquisitions has been restated as if the acquisitions had occurred at the beginning of the earliest period presented. The acquisitions with The Matsco Companies, Inc. and CAPCO were accounted for using the purchase accounting method and accordingly both company's results of operations have been included in the consolidated financial statements since the date of acquisition. Consolidation and Basis of Presentation The consolidated financial statements include the accounts of Greater Bay and its subsidiaries 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 2001 presentation. Our accounting and reporting policies 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. A-32 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. The Banks are required by the Federal Reserve System to maintain noninterest-earning cash reserves against certain of their deposit accounts. At December 31, 2001, the required combined reserves totaled approximately $17.5 million. Investment Securities We classify our investment securities in accordance with 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. We do 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 FHLB stocks for the Banks and investments in venture funds are classified as other securities and are recorded at cost. Loans Loans held for investment are carried at amortized cost. Our 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 interest method proscribed in the loan agreement. Loans are generally placed on nonaccrual status when the borrowers are past due 90 days unless the loan is well secured and in the process of collection. Loans are also placed on nonaccrual status 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. We charge 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. A-33 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Sale and Servicing of Small Business Administration Loans We originate loans to customers under Small Business Administration ("SBA") programs that generally provide for SBA guarantees of 70% to 90% of each loan. We generally sell the guaranteed portion of the majority of the loans to an investor and retain the unguaranteed portion and servicing rights in our 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. We allocate 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. Accounting for Direct Financing Leases Lease contracts are categorized as direct financing leases for financial reporting purposes if they conform to the definition of direct financing leases set out in statement of SFAS No. 13 "Accounting for Leases". At the time a leasing transaction is executed, we record on our balance sheet the gross lease receivable, estimated residual value of leased equipment, and unearned lease income. Unearned lease income represents the excess of the gross lease receivable plus the estimated residual value over the cost of the equipment leased. Unearned lease income is recognized as leasing income over the term of the lease so as to reflect an approximate constant periodic rate of return on the net investment in the lease. Allowance for Loan Losses In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, a loan is considered impaired, based on current information and events, if it is probable that we 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. Large groups of smaller-balance homogenous loans such as credit cards, residential mortgage, consumer installment loans and certain small business loans are collectively evaluated for impairment. Income recognition on impaired loans conforms to the method we use for income recognition on nonaccrual loans. The allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and probable losses and inherent risks in the loan portfolio. We have a systematic methodology for determining an appropriate allowance for loan losses. 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. A-34 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. Goodwill and Other Intangible Assets Goodwill generated from purchase business combinations consummated prior to the issuance of SFAS No. 142 "Goodwill and Other Intangible Assets," ("SFAS No. 142") was amortized straight-line over 20 years. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside a business combination and the recognition of and measurement of goodwill and other intangible assets subsequent to acquisition. Under the new standard, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but instead they will be tested at least annually for impairment. The standard is applicable for fiscal years commencing after December 15, 2001. During first quarter 2002 we will perform the required impairment tests of goodwill and indefinite-lived intangible assets. We do not expect these tests to have a material effect on our financial conditions or results of operations. 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. Derivatives and Hedging Activities All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, we designate 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). A-35 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) We formally document 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. We also formally assess, 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, we discontinue 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. Earnings Per Share and Share Amounts Basic net earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the period. Diluted net earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options. All outstanding and weighted average share amounts presented in this report have been restated to reflect the 2-for-1 stock split effective as of October 4, 2000. Comprehensive Income In accordance with SFAS No. 130, "Reporting Comprehensive Income", we 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 after tax changes to the balances of accumulated other comprehensive income are as follows:
Accumulated Unrealized other gains / (losses) Cash flow comprehensive on securities hedges income (loss) ---------------- --------- ------------- (Dollars in thousands) Balance--December 31, 1998 $ 1,633 $ (677) $ 956 Other comprehensive income 1999 (13,787) 2,181 (11,606) -------- ------- -------- Balance--December 31, 1999 (12,154) 1,504 (10,650) Other comprehensive income 2000 5,971 (1,356) 4,615 -------- ------- -------- Balance--December 31, 2000 (6,183) 148 (6,035) Other comprehensive income 2001 10,150 (148) 10,002 -------- ------- -------- Balance--December 31, 2001 $ 3,967 $ -- $ 3,967 ======== ======= ========
A-36 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Segment Information In accordance with SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131") we use the "management approach" for reporting business segment information. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. NOTE 2--BUSINESS COMBINATIONS Pooling-of-Interests Accounting Transactions On October 23, 2001, SJNB Financial Corp. the holding company of San Jose National Bank, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of SJNB Financial Corp. were converted into an aggregate of approximately 6,944,000 shares of Greater Bay's common stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with SJNB Financial Corp. on a pooling-of-interests basis. On October 13, 2000, Bank of Petaluma merged with and into DKSS Corp., as a result of which, Bank of Petaluma became a wholly owned subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of Bank of Petaluma were converted into an aggregate of approximately 1,667,000 shares of Greater Bay's common stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Bank of Petaluma on a pooling-of-interests basis. On July 21, 2000, Bank of Santa Clara merged with and into GBB Merger Corp., as a result of which, Bank of Santa Clara became a wholly owned subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of Bank of Santa Clara were converted into an aggregate of 4,002,000 shares of Greater Bay's common stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Bank of Santa Clara on a pooling-of-interests basis. On May 18, 2000, Coast Bancorp, the holding company of Coast Commercial Bank, was merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Coast Bancorp were converted into an aggregate of approximately 6,140,000 shares of Greater Bay's common stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Coast Bancorp on a pooling-of-interests basis. On January 31, 2000, Mt. Diablo Bancshares, the former holding company of Mt. Diablo National Bank, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Mt. Diablo Bancshares were converted into an aggregate of 2,790,998 shares of Greater Bay's common stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Mt. Diablo Bancshares on a pooling-of-interests basis. On January 5, 2000, Saratoga Bancorp, the parent of Saratoga National Bank, merged with and into SJNB Financial Corp. Upon consummation of the merger, the outstanding shares of Saratoga Bancorp were converted into an aggregate of 1,174,249 shares of SJNB Financial Corp's common stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Saratoga Bancorp on a pooling-of-interests basis. A-37 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On October 15, 1999, Bay Commercial Services, the parent of Bay Bank of Commerce, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Bay Commercial Services were converted into an aggregate of 1,814,480 shares of Greater Bay's common stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Bay Commercial Services on a pooling-of-interests basis. On May 21, 1999, Bay Area Bancshares, the former holding company of Bay Area Bank, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Bay Area Bank were converted into an aggregate of 2,798,642 shares of Greater Bay's common stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Bay Area Bancshares on a pooling-of-interests basis. In all mergers, certain reclassifications were made to conform to the our 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.
SJNB Financial Corp Bank of Petaluma Bank of Santa Clara nine months ended nine months ended six months ended September 30, 2001 September 30, 2000 June 30, 2000 ------------------- --------------------- ----------------------- (Dollars in thousands) Net interest income: Greater Bay Bancorp $207,739 $154,013 $89,047 Acquired entity 25,378 7,101 10,195 -------- -------- ------- Combined $233,117 $161,114 $99,242 ======== ======== ======= Net income: Greater Bay Bancorp $ 64,039 $ 38,608 $23,850 Acquired entity 8,262 1,982 2,613 -------- -------- ------- Combined $ 72,301 $ 40,590 $26,463 ======== ======== ======= Coast Bancorp Mt. Diablo Bancshares Bay Commercial Services three months ended twelve months ended nine months ended March 31, 2000 December 31, 1999 September 30, 1999 ------------------- --------------------- ----------------------- (Dollars in thousands) Net interest income: Greater Bay Bancorp $ 36,378 $103,732 $68,498 Acquired entity 5,538 10,009 2,007 -------- -------- ------- Combined $ 41,916 $113,741 $70,505 ======== ======== ======= Net income: Greater Bay Bancorp $ 13,473 $ 27,711 $17,033 Acquired entity 2,035 2,827 486 -------- -------- ------- Combined $ 15,508 $ 30,538 $17,519 ======== ======== =======
A-38 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bay Area Bancshares three months ended March 31, 1999 ---------------------- (Dollars in thousands) Net interest income: Greater Bay Bancorp $18,360 Acquired entity 2,180 ------- Combined $20,540 ======= Net income: Greater Bay Bancorp $ 5,058 Acquired entity 644 ------- Combined $ 5,702 =======
The following table sets forth the separate results of operations for Greater Bay, Mt. Diablo Bancshares, Coast Bancorp, Bank of Santa Clara, Bank of Petaluma, and SJNB Financial Corp. for the periods indicated:
Net interest income Net income ---- ---------- (Dollars in thousands) Year ended December 31, 2000 Greater Bay $231,963 $58,540 SJNB Financial Corp. 33,626 8,624 -------- ------- Combined $265,589 $67,164 ======== ======= Year ended December 31, 1999 Greater Bay $107,933 $27,711 Mt. Diablo Bancshares 10,009 2,827 Coast Bancorp 20,028 6,939 Bank of Santa Clara 17,962 4,403 Bank of Petaluma 8,628 2,304 -------- ------- Subtotal 164,560 44,184 SJNB Financial Corp. 27,565 7,117 -------- ------- Combined $192,125 $51,301 ======== =======
There were no significant transactions between us and any of the acquired entities prior to the mergers. All intercompany transactions have been eliminated. Purchase Accounting Transactions On November 30, 2000, we acquired The Matsco Companies, Inc. for a purchase price of $6.5 million in cash. We may also be required to pay future contingent cash payment of up to $6.0 million based on the performance of Matsco subsequent to the acquisition. The acquisition was accounted for using the purchase method of accounting and, accordingly, The Matsco Companies, Inc.'s results of operations have been included in the consolidated financial statements since the date of acquisition. The source of funds for the acquisition was our available cash. A-39 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of purchase price over the estimated fair values of the net assets acquired, totaling $15.9 million, was recorded as goodwill, and through December 31, 2001 amortized on the straight-line method over twenty years. Prospectively, goodwill will be evaluated for possible impairment under the provision of SFAS No. 142. On March 30, 2001, we completed the acquisition of CAPCO for a purchase price of $8.5 million in cash and 44,820 shares of common stock with a fair value of $1.4 million. The acquisition was accounted for using the purchase method of accounting and, accordingly, CAPCO's results of operations have been included in the consolidated financial statements since the date of the acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of purchase price over the estimated fair values of the net assets acquired, totaling $5.7 million, was recorded as goodwill, and through December 31, 2001 amortized on the straight-line method over twenty years. Prospectively, goodwill will be evaluation for possible impairment under the provision of SFAS No. 142. Pending Transaction On December 18, 2001, we signed a definitive merger agreement with ABD Insurance and Financial Services, Inc. ("ABD"). ABD is the largest independently owned insurance brokerage and employee benefits consulting organization in the western United States. We will issue shares of a new series of convertible preferred stock and cash in a tax-free reorganization for an estimated present value of approximately $193.6 million. That amount includes an initial payment on consummation of the merger of $130 million in convertible preferred stock and cash, and an additional $63.6 million in convertible preferred stock (or common stock in certain instances) and cash subject to ABD meeting specified performance goals during 2002, 2003, 2004 and 2005. The merger, which will be accounted for as a purchase, is expected to be completed in the first quarter of 2002. ABD has over $1.0 billion of insurance premiums serviced and in excess of $100 million in revenue for the 11 month period ended December 31, 2001. Our status as a financial holding company alleviates the need for approval of this acquisition by the Federal Reserve. Consummation of the acquisition is subject to the receipt of certain other regulatory approvals and approval of ABD's shareholders. A-40 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3--INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities is summarized below:
Gross Gross Amortized unrealized unrealized Fair As of December 31, 2001 cost gains losses value - ----------------------- ---------- ---------- ---------- ---------- (Dollars in thousands) Available for Sale Securities: U.S. Treasury obligations $ 19,123 $ 381 $ -- $ 19,504 U.S. agency notes 36,762 1,112 -- 37,874 Mortgage and asset-backed securities 2,556,557 25,292 (11,097) 2,570,752 Tax-exempt securities 120,883 2,300 (595) 122,588 Taxable municipal Securities 7,768 272 (17) 8,023 Corporate securities 117,025 59 (12,816) 104,268 ---------- ------- -------- ---------- Total securities available for sale 2,858,118 29,416 (24,525) 2,863,009 ---------- ------- -------- ---------- Other securities 107,640 5 (24) 107,621 ---------- ------- -------- ---------- Total investment securities $2,965,118 $29,421 $(24,549) $2,970,630 ========== ======= ======== ========== Gross Gross Amortized unrealized unrealized Fair As of December 31, 2000 cost gains losses value - ----------------------- ---------- ---------- ---------- ---------- (Dollars in thousands) Available for Sale Securities: U.S. Treasury obligations $ 12,559 $ 171 $ (2) $ 12,728 U.S. agency notes 135,248 443 (512) 135,179 Mortgage and asset-backed securities 305,061 4,330 (1,070) 308,321 Tax-exempt securities 86,254 1,082 (263) 87,073 Taxable municipal Securities 8,456 79 (42) 8,493 Corporate securities 155,466 94 (19,022) 136,538 ---------- ------- -------- ---------- Total securities available for sale 703,044 6,199 (20,911) 688,332 ---------- ------- -------- ---------- Held To Maturity Securities: U.S. agency notes 26,487 14 (100) 26,401 Mortgage and asset-backed securities 237,234 7,251 (356) 244,129 Tax-exempt securities 104,782 3,655 (301) 108,136 Corporate securities 2,846 189 -- 3,035 ---------- ------- -------- ---------- Total securities held to maturity 371,349 11,109 (757) 381,701 ---------- ------- -------- ---------- Other securities 26,709 4,935 (261) 31,383 ---------- ------- -------- ---------- Total investment securities $1,101,102 $22,243 $(21,929) $1,101,416 ========== ======= ======== ==========
The following table shows amortized cost and estimated fair value of our investment securities by year of maturity as of December 31, 2001.
2003 through 2007 2012 and 2002 2006 through thereafter Total ------- ------- ------- ---------- ---------- (Dollars in thousands) Available For Sale Securities: U.S. Treasury obligations $12,527 $ 6,498 $ -- $ 98 $ 19,123 U.S. agency notes(1) 11,998 22,234 2,530 -- 36,762 Mortgage and asset-backed securities(2) 1,243 9,769 36,865 2,508,682 2,556,559 Tax-exempt securities 3,437 12,603 28,751 76,090 120,881 Taxable municipal Securities 500 6,015 330 922 7,767 Corporate securities 1,250 5,519 14,900 95,357 117,026 ------- ------- ------- ---------- ---------- Total securities available for sale $30,955 $62,638 $83,376 $2,681,149 $2,858,118 ------- ------- ------- ---------- ---------- Fair Value $30,029 $64,235 $86,133 $2,682,612 $2,863,009 ======= ======= ======= ========== ========== Weighted average yield-total portfolio 5.40% 6.35% 7.16% 6.57% 6.57%
- -------- (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 and asset-backed securities are shown at contractual maturity, however, the average life of these mortgage and asset-backed securities may offer due to principal prepayments. A-41 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Investment securities with a carrying value of $2.4 billion and $619.1 million were pledged to secure deposits, borrowings and for other purposes as required by law or contract at December 31, 2001 and 2000, respectively. Other securities includes investments in the Federal Reserve Bank and the FHLB required in order to maintain membership and support activity levels as well as unsold shares received through the exercise of warrants received from clients, equity securities received in settlement of loans, investments in funds managed by outside venture capital funds. Proceeds and realized losses and gains on sales of investment securities for the years ended December 31, 2001, 2000 and 1999 are presented below:
2001 2000 1999 -------- ------- ------- (Dollars in thousands) Proceeds from sale of available for sale securites(1) $262,856 $79,556 $53,471 Available for sale securities-gains(2) $ 6,526 $ 548 $ 88 Available for sale securities-losses $ (222) $(1,069) $ (133)
- -------- (1) 1999 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 warrant received from clients. (2) 1999 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 form clients. Classification of Investment Portfolio During 2001, we transferred our entire portfolio of held to maturity debt securities to the available for sale category. The amortized cost of these securities at the time of transfer was $345.8 million and the securities had an unrealized gain of $11.0 million ($6.4 million, net of taxes) at the time of the transfer. Although our intention to hold a majority of our debt securities to maturity has not changed, the transfer was made to increase our flexibility in responding to future economic changes and to increase our efficiency in managing our investment portfolio. Subsequent to the transfer, we sold securities which had been classified as held to maturity at December 31, 2000 with an amortized cost of $43.2 million for a gain of $2.4 million. 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, 2001, 2000 and 1999:
2001 2000 1999 -------- -------- ------- (Dollars in thousands) Balance, January 1 $ 91,407 $ 54,459 $38,589 Allowance of entities acquired through mergers accounted for under purchase accounting method 320 10,927 -- Provision for loan losses/(1)/ 58,227 36,899 17,645 Loan charge-offs (27,735) (12,494) (3,558) Recoveries 2,525 1,616 1,783 -------- -------- ------- Balance, Dcember 31 $124,744 $ 91,407 $54,459 ======== ======== =======
- -------- (1) Includes $3.5 million, $8.1 million and $2.7 million of charges in 2001, 2000 and 1999 respectively, to conform the practices of acquired entities to our reserve methodologies, which are included in mergers and related nonrecurring costs. A-42 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth nonperforming loans as of December 31, 2001, 2000, and 1999. 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 $1.2 million, $1.3 million and $667,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Interest income recognized on the nonperforming loans approximated $227,000, $16,000 and $649,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
2001 2000 1999 ------- ------- ------ (Dollars in thousands) Nonaccrual loans $30,970 $13,014 $7,139 Restructured loans -- -- 807 ------- ------- ------ Total nonperforming loans $30,970 $13,014 $7,946 ======= ======= ====== Accruing loans past due 90 days or more $5,073 $ 4,463 $ 908 ======= ======= ======
At December 31, 2001 and 2000, the recorded investment in loans, for which impairment has been recognized in accordance with SFAS No. 114 and No. 118, was approximately $31.0 million and $13.0 million, respectively, with corresponding valuation allowances of $16.5 million and $4.0 million respectively. For the years ended December 31, 2001 and 2000, the average recorded investment in impaired loans was approximately $17.9 million and $10.7 million, respectively. We recognized interest income of $1.2 million, $72,000, and $41,000 for the year ended December 31, 2001, 2000 and 1999. We had no restructured loans as of December 31, 2001 and 2000. There were no principal reduction concessions allowed on restructured loans during 2001, 2000, and 1999. Interest income from restructured loans totaled $0, $0 and $45,000 for the years ended December 31, 2001, 2000 and 1999. There was no foregone interest income for the restructured loans for the years ended December 31, 2001, 2000 and 1999. NOTE 5--OTHER REAL ESTATE OWNED At December 31, 2001 and 2000, we did not hold any OREO which consists of properties acquired through foreclosure. The following summarizes OREO operations, which are included in operating expenses, for the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999 ------ ---- ---- (Dollars in thousands) Real estate operations, net $ -- $51 $ 57 (Gain) loss on sale of OREO -- 5 (99) Provision for estimated losses -- -- 8 ------ --- ---- Net loss from other real estate operations $ -- $56 $(34) ====== === ====
A-43 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 6--PROPERTY, PREMISES AND EQUIPMENT Property, premises and equipment at December 31, 2001 and 2000 are composed of the following:
2001 2000 -------- -------- (Dollars in thousands) Land $ 4,300 $ 4,300 Buildings and premises 11,909 12,872 Furniture and equipment 51,470 37,239 Leasehold improvements 17,692 16,584 Vehicles 855 853 -------- -------- Total 86,226 71,848 Accumulated depreciation and amortization (37,343) (32,544) -------- -------- Premises and equipment, net $ 48,883 $ 39,304 ======== ========
Depreciation and amortization amounted to $9.2 million, $8.5 million and $6.7 million for the years ended December 31, 2001, 2000 and 1999 respectively, and have been included in occupancy and equipment expense in the accompanying consolidated statements of operations. During 2000, we sold one bank premises building with a carrying value of $4.8 million for $5.4 million in a sale-lease back transaction. No gain was recognized on the transaction. Gains of $535,000 have been deferred and will be recognized over the term of our lease. During 1999, we sold one bank premises building with a carrying value of $2,637,000 for $4,978,000 in a sale-lease back transaction. We recognized a pre-tax gain of $535,000 on the transaction. Gains of $1,806,000 have been deferred and will be recognized over the 10 year and 5 year terms of our leases. During 2000 we recognized $303,000 of the deferred gain. NOTE 7--DEPOSITS Deposits as of December 31, 2001 and 2000 are as follows:
2001 2000 ---------- ---------- (Dollars in thousands) Demand, noninterest-bearing $ 953,989 $1,133,958 MMDA, NOW and Savings 2,280,119 2,349,041 Time certificates, $100,000 and over 642,073 706,535 Other time certificates 1,113,890 560,870 ---------- ---------- Total deposits $4,990,071 $4,750,404 ========== ==========
The following table sets forth the maturity distribution of time certificates of deposit at December 31, 2001.
December 31, 2001 --------------------------------------------------------------- Three Seven to months Four to twelve One to More than or less six months months three years three years Total -------- ---------- -------- ----------- ----------- ---------- (Dollars in thousands) Time deposits, $100,000 and over $330,909 $225,668 $ 65,741 $14,758 $4,997 $ 642,073 Other time deposits 448,671 322,124 300,076 40,758 2,261 1,113,890 -------- -------- -------- ------- ------ ---------- Total $779,580 $547,792 $365,817 $55,516 $7,258 $1,755,963 ======== ======== ======== ======= ====== ==========
A-44 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES GBB Capital I, GBB Capital II, GBB Capital III, GBB Capital IV, GBB Capital V and GBB Capital VI (the "Trusts") are Delaware business trusts of which all the common securities are 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 ("Trust Preferred Securities"). The Trust Preferred Securities are individually described below. Dividends on the Trust Preferred Securities are payable either quarterly or semi-annually and are deferrable, at our option, for up to five years. As of December 31, 2001, all dividend are current. Following the issuance of each Trust Preferred Securities, the Trusts used the proceeds from the Trust Preferred Securities 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 Trust Preferred Securities. 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 Trust Preferred Securities will qualify as Tier I capital, and the remaining portion will qualify as Tier II capital. The following Trust Preferred Securities were outstanding at December 31, 2001.
Amount Date of Stated Optional Security title Issuer outstanding original issue maturity redemption date -------------- --------------- ------------ --------------- --------------- --------------- 9.75% Cumulative Trust Preferred Securities GBB Capital I $ 20,000,000 March 30, 1997 April 1, 2027 April 1, 2002 Floating Rate Trust Preferred Securities, Series B GBB Capital II 29,000,000 August 12, 1998 Sept. 15, 2028 Sept. 15, 2008 10 7/8% Fixed Rate Capital Trust Pass-Through Securities GBB Capital III 9,500,000 March 23, 2000 March 8, 2030 March 8, 2010 10.75% Capital Securities, Series B GBB Capital IV 41,000,000 May 18, 2000 June 1, 2030 June 1, 2010 9% Cumulative Trust Preferred Securities GBB Capital V 103,500,000 August 14, 2001 August 14, 2031 August 14, 2006 Floating Rate Trust Preferred Pass-Through Securities GBB Capital VI 15,000,000 July 27, 2001 July 27, 2031 July 27, 2011 ------------ Total TPS outstanding $218,000,000 ============
The Trust Preferred Securities are mandatorily redeemable, in whole or in part, upon repayment of their underlying Debentures at their respective stated maturities or their earlier redemption. The Debentures are redeemable prior to maturity at our option on or after their respective optional redemption dates. The Trust Preferred Securities issued by GBB Capital I, GBB Capital III, GBB Capital IV and GBB Capital V accrue interest at an annual rate of 9.75%, 10 7/8%, 10.75% and 9.00 %, receptively. The Floating Rate Trust Preferred Securities, Series B issued by GBB Capital II accrue interest at a variable rate of interest, initially at 7.1875% on the outstanding securities. The interest rate resets quarterly and is equal to the 3-month LIBOR rate plus 150 basis points. The Floating Rate Trust Preferred Pass-Thru Securities issued by GBB Capital VI accrue interest at a variable rate of interest, initially at 7.57% on the outstanding securities. The interest rate resets quarterly and is equal to 6-month LIBOR plus 375 basis points. A-45 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On the date of original issue, GBB Capital II and GBB Capital IV completed the issuance of Series A securities. The Series A securities issued in the offering were sold in private transactions pursuant to an applicable exemption from registration under the Securities Act. GBB Capital II and GBB Capital IV completed an offer to exchange the Series A securities for a like amount of its registered Series B securities. The exchange offerings were completed in November 1998 and November 2000, respectively. The exchange offerings were conducted in accordance with the terms of the initial issuance of the Series A securities. GBB Capital II originally issued $30,000,000 of Trust Preferred Securities. In 1998, Coast Commercial Bank purchased $1,000,000 of those securities which were included in Coast Commercial Bank's investment securities at the time of its acquisition by Greater Bay. In accordance with the pooling-of-interests method of accounting, $1,000,000 in Trust Preferred Securities issued by us and Coast Commercial Bank's corresponding investment have been eliminated in consolidation. The total amount of Trust Preferred Securities outstanding at December 31, 2001 and 2000 was $218.0 million and $99.5 million, respectively. The dividends paid on Trust Preferred Securities were $13.7 million, $7.8 million and $4.2 million in 2001, 2000 and 1999, respectively. The expense for these dividends is included in operating expenses. NOTE 9--LEASE SECURITIZATION During 1997, Matsco Lease Finance III a special purpose corporation wholly-owned by The Matsco Companies, Inc. issued the following leased-backed notes; $55 million Series 1997-1A, $45 million Series 1997-2A, $1.6 million Series 1997-1 B and $4.5 million 1997-2B. All Class B certificates, which were subordinate to the Class A certificates, were paid-off as of December 31, 2000. As of December 31, 2001, the note balance on the Series 1997-1 and Series 1997-2 were approximately $17.9 million and $19.7 million, respectively. As of December 31, 2000, the note balances for Series 1997-1 and Series 1997-2 were approximately $28.0 million and $30.0 million, respectively. All of the transactions placed in 1997-2 Series were treated as a sale in accordance with SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" subsequently replaced by SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". The weighted average rate on the combined series of 1997 notes was 5.77% and 5.92% at December 31, 2001 and 2000, respectively. The underlying leases had a carrying value of $16.9 million and $20.7 million for Series 1997-1 and Series 1997-2, respectively at December 31, 2001. The underlying leases have a carrying value of $27.5 million and $30.0 million for Series 1997-1 and Series 1997-2, respectively at December 31, 2000. At December 31, 2001 and 2000, 0.02% and 0.35% of those leases were 90 days or more past due, respectively. The start-up expenses and private placement fees associated with the issuance of the 1997-2 lease-backed notes are expensed at funding. Such amounts related to the 1997-1 notes are amortized over the life of the notes to approximate a constant periodic rate of interest. The Class A certificates are rated "AAA" by Standards and Poor's Rating Services and "Aaa" by Moody's Investors Service and are fully insured by Municipal Bond Insurance Corporation pursuant to the terms of a note guarantee policy. During 1996, Matsco Lease Finance II, a special purpose corporation wholly-owned by The Matsco Companies, Inc., issued $40 million in lease-backed notes, Series 1996-A. These notes were repaid in full during 2001. As of December 31, 2000, the note balance was $5.4 million, with a weighted average interest rate of 6.7% at December 31, 2000. The underlying leases had a carrying value of $7.1 million at December 31, 2000. At December 31, 2000 , 1.11% those leases were 90 days or more past due. The notes were unconditionally guaranteed by Municipal Bond Investor Assurance Corporation pursuant to the terms of a note guarantee policy. The start-up expenses and private placement fees associated with the issuance of the leased-backed notes are amortized over the life of the notes to approximate a constant periodic rate of interest. The notes were rated "AAA" by Standard and Poors and "Aaa" by Moody's. A-46 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) We, as servicer of the underlying leases, remit funds collected on Matsco Lease Finance III to the trustee on a weekly basis. We receive a flat fee per lease as the servicer. In the event an account is delinquent our terms are modified and the servicer has the option to repurchase the transaction or to substitute with a similar account. Pursuant to the acquisitions of The Matsco Companies, Inc., Matsco Lease Finance II and Matsco Lease Finance III became wholly-owned subsidiaries of Greater Bay. NOTE 10--REAL ESTATE INVESTMENT TRUST SUBSIDIARIES OF THE BANKS Formation of CNB Investment Trust I and CNB Investment Trust II During 2001, we formed and funded CNB Investment Trust I ("CNBIT I") and CNB Investment Trust II ("CNBIT II"), both of which are Maryland real estate investment trusts. CNBIT I and CNBIT II provide Cupertino National Bank with flexibility in raising capital. As of December 31, 2001, the net income and assets of CNBIT I and CNBIT II are eliminated in consolidation. Cupertino National Bank contributed participation interests in loans with a book value of $311.3 million, net of reserves, and $500,000 in cash to CNBIT I, in exchange for 100% of the common and preferred stock of the CNBIT I. CNBIT I is a wholly owned subsidiary trust of Cupertino National Bank. Cupertino National Bank contributed participation interests in loans with a book value of $133.4 million, net of reserves, and $15.4 million in investment securities to CNBIT II, in exchange for 100% of the preferred stock of the CNBIT II. The assets contributed to CNBIT II had built in losses of $33.2 million for federal income tax purposes. CNBIT I contributed participation interests in loans with a book value of $200.8 million, net of reserves in exchange for 100% of the common stock of CNBIT II. CNBIT I owns all the common stock of CNBIT II. During 2001, Cupertino National Bank sold 15,000 shares of the 12% Series B Preferred Stock of CNBIT II for $15.0 million. These transactions resulted in recognition of a tax benefit of $11.4 million. NOTE 11--BORROWINGS Borrowings are detailed as follows:
2001 2000 ---------- -------- (Dollars in thousands) Short term borrowings: Securities sold under agreements to repurchase $ 264,727 $ 74,713 Other short term notes payable 34,402 15,419 FHLB advances 1,334,711 192,076 Advances under credit lines 6,800 15,000 ---------- -------- Total short term borrowings 1,640,640 297,208 ---------- -------- Long term borrowings: Securities sold under agreements to repurchase 57,700 -- Other long term notes payable 17,728 51,809 FHLB advances 379,828 114,250 ---------- -------- Total long term borrowings 455,256 166,059 ---------- -------- Total borrowings $2,095,896 $463,267 ========== ========
A-47 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During the years ended December 31, 2001 and 2000, the average balance of securities sold under short term agreements to repurchase was $210.4 million and $86.8 million, respectively, and the average interest rates during those periods were 3.51% and 6.12%, respectively. Securities sold under short term agreements to repurchase generally mature within 90 days of dates of purchase. During the years ended December 31, 2001 and 2000, the average balance of federal funds purchased was $128.4 million and $105.9 million, respectively, and the average 2000 interest rates during those periods were 4.43% and 6.49%, respectively. There was no such balance outstanding at December 31, 2001 and 2000. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of rates and maturities:
Short Term Long Term ---------- --------- (Dollars in thousands) Amount $1,495,911 $218,628 Maturity 2002 2003-2011 Average Rates 3.08% 4.19%
In addition, as of December 31, 2001, we had short-term, unsecured credit facilities from three financial institutions totaling $92.0 million. At December 31, 2001 and 2000, we had advances outstanding of $27.0 million and $15.0 million under these facilities. The average rate paid on these advances was approximately LIBOR + 0.50%. In addition, we were in compliance with all related financial covenants for these credit facilities. NOTE 12--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We have two interest-rate swaps and an interest rate cap to convert our floating-rate debt and deposits to fixed rates. These derivative instruments were entered into concurrently with the issuance of the instruments being hedged. At the inception of these contracts, two of these derivative instruments were accounted for as a cash flow hedge under SFAS No. 133 and 138. These derivative instruments possess a term equal to the non-callable term of the hedged instrument, with a fixed pay rate and a receive rate indexed to rates paid on the instrument and a notional amount equal to the amount of the instruments being hedged. As the specific terms and notional amount of the derivative instruments exactly matched those of the instruments being hedged we meet the "no ineffectiveness" criteria of SFAS No. 133 and 138. As such, the derivative instruments were assumed to be 100% effective and all changes in the fair value of the hedges were recorded in other comprehensive income with no impact on the income statement for any ineffective portion through September 30, 2001. During 2001, we determined that the designation of these derivatives as hedges was no longer appropriate. As a result, upon derecognition of these hedges, we recorded a $191,000 loss to other income on these instruments. Subsequent to derecognition, we have recorded a $826,000 gain on the appreciation of these instruments. The notional amount of the one of the swaps is $40.0 million with a term of up to 10 years expiring on September 15, 2008. We also have an interest rate cap with a notional amount of $15.0 million with a term of up to ten years expiring in July 2011. When entered into, we intended to use the swap as a hedge for the noncallable term of the hedged instrument. The periodic settlement date of the swap results in the reclassifying as earnings the gains or losses that are reported in accumulated comprehensive income. Additionally, we have a $20.0 million prime/fixed interest rate swap used as a fair value hedge. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically. A-48 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 13--INCOME TAXES Income tax expense was comprised of the following for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 -------- -------- ------- (Dollars in thousands) Current: Federal $ 33,908 $ 45,742 $26,332 State 14,103 16,052 8,780 -------- -------- ------- Total current 48,011 61,794 35,112 -------- -------- ------- Deferred: Federal (16,102) (13,476) (6,782) State (5,441) (4,653) (1,869) -------- -------- ------- Total deferred (21,543) (18,129) (8,651) -------- -------- ------- Total expense $ 26,468 $ 43,665 $26,461 ======== ======== =======
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, 2001 and 2000 are as follows:
Years ended December 31, --------------------- 2001 2000 ------- ------- (Dollars in thousands Allowance for loan losses $43,124 $26,072 State income taxes 16,853 10,142 Deferred compensation 11,195 5,616 Unrealized (gains) losses on securities (2,057) 10,387 Accumulated depreciation 1,681 1,220 Net operating losses -- 14 Purchase allocation adjustments 214 416 Leasing operations (8,225) (2,268) Other (202) 1,885 ------- ------- Net deferred tax asset $62,583 $53,484 ======= =======
Management believes that we will fully realize its total deferred tax assets as of December 31, 2001 based upon our recoverable taxes from prior carryback years, and its current level of operating income. A-49 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation from the statutory income tax rate to the consolidated effective income tax rate follows, for the years ended December 31, 2001, 2000 and 1999:
Years ended December 31, ----------------------- 2001 2000 1999 ----- ---- ---- (Dollars in thousands) Statutory federal tax rate 35.0% 35.0% 35.0% California franchise tax expense, net of federal income tax benefit 6.1% 6.7% 5.7% ----- ---- ---- 41.1% 41.7% 40.7% Tax exempt income -2.2% -2.7% -2.7% Contribution of appreciated securities to GBB Foundation -- -- -3.6% Nondeductible merger costs 0.5% 1.3% 0.2% Recognition of losses of CNBIT II in connection with sale of preferred securities (note 10) -10.7% -- -- Life insurance cash surrender value -1.6% -1.2% -1.0% Other, net -2.2% 0.3% 0.4% ----- ---- ---- Effective income tax rate 24.9% 39.4% 34.0% ===== ==== ====
NOTE 14--OTHER INCOME AND OPERATING EXPENSES Other income in 2001, 2000 and 1999 included warrant income of $581,000, $13.0 million and $14.5 million net of related employee incentives of $249,000, $4.5 million and $7.3 million, respectively. We occasionally receive 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 our control, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. To support the GBB Foundation, we contributed appreciated securities, which had an unrealized gain of $7.8 million in 1999. In 1999, we incurred $4.4 million in compensation and other expenses in connection with these appreciated securities. We recorded $12.2 million in 1999 of expense for the contribution to the Foundation, which is included in operating expenses. Merger and other related nonrecurring costs for the years ended December 31, 2001, 2000 and 1999 were comprised of the following:
2001 2000 1999 ------- ------- ------- (Dollars in thousands) Financial advisory and professional fees $ 6,088 $ 8,229 $ 2,114 Charges to conform accounting practices 4,241 8,156 2,745 Other costs 18,920 17,141 5,959 ------- ------- ------- Total $29,249 $33,526 $10,818 ======= ======= =======
A-50 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. Other expenses for the years ended December 31, 2001, 2000 and 1999 were comprised of the following:
2001 2000 1999 ------- ------- ------- (Dollars in thousands) Legal and other professional fees $ 7,839 $ 5,345 $ 4,072 Telephone, postage and supplies 6,027 5,410 5,146 Marketing and promotion 5,648 5,017 4,202 Data processing 4,448 2,879 3,341 Correspondent bank and ATM network fees 3,622 2,122 2,468 Client services 2,965 2,694 3,811 FDIC insurance and regulatory assessments 1,762 1,472 807 Directors fees 1,585 1,758 1,899 Goodwill amortization 1,301 -- -- Insurance 1,135 631 1,093 Other real estate owned -- 56 (34) Other 8,080 7,160 5,656 ------- ------- ------- $44,412 $34,544 $32,461 ======= ======= =======
Occupancy costs for the years ended December 31, 2001, 2000 and 1999 were $17.4 million, $13.5 million and $11.5 million, respectively. NOTE 15--EMPLOYEE BENEFIT PLANS Stock Option Plan At December 31, 2001 the total authorized shares issuable under the Greater Bay Bancorp Amended and Restated 1996 Stock Option Plan (the "Bancorp Plan") was approximately 10,617,000 shares and the number of shares available for future grants was approximately 3,004,000 shares. Options and shares of restricted stock may be granted to employees, nonemployee directors, and consultants. Options 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 our stock on the date of grant. The term of an option may not exceed 10 years and generally vests over a five-year period. The restrictions on shares of restricted stock generally lapse over a five-year period. On November 19, 1997, our shareholders approved an amendment of the Bancorp Plan, to increase by 1,825,304 the number of shares of Greater Bay stock issuable under the Bancorp Plan. On May 17, 2000, our shareholders approved an additional amendment of the Bancorp Plan to increase by 5,000,000 the number of shares issuable under the Bancorp Plan. On October 23, 2001, our shareholders approved an additional amendment of the Bancorp Plan to increase by 4,000,000 the number of shares issuable under the Bancorp Plan to accommodate the increased number of eligible employees as a result of the mergers and as a result of internal growth. A-51 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of our stock options as of December 31, 2001, 2000, and 1999 and changes during the years ended on those dates is presented below:
2001 2000 1999 ---------------- ---------------- ---------------- Weighted Weighted Weighted average average average Shares exercise Shares exercise Shares exercise (000's) price (000's) price (000's) price ------- -------- ------- -------- ------- -------- Outstanding at beginning of year 7,094 $17.54 7,489 $11.45 6,665 $ 9.02 Granted 2,442 25.53 1,602 33.05 1,870 17.43 Exercised (826) 9.04 (1,493) 6.54 (727) 5.80 Forfeited (406) 25.04 (504) 9.03 (319) 8.71 ----- ------ ------ ------ ----- ------ Outstanding at end of year 8,304 20.63 7,094 17.54 7,489 11.45 ===== ====== ====== ====== ===== ====== Options exercisable at year-end 3,760 14.47 3,259 10.60 3,497 7.30 ===== ====== ====== ====== ===== ====== Weighted average fair value of options granted during the year $ 9.19 $14.24 $ 6.07 ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 2001.
Options outstanding Options exercisable --------------------------------- -------------------- Weighted Weighted Weighted Number average average Number average Exercise outstanding remaining exercise exercisable exercise price range (000's) life (years) price (000's) price ----------- ----------- ------------ -------- ----------- -------- $0.00-$9.00 1,019 3.96 $ 5.21 1,007 $ 5.22 $9.20-$19.25 3,433 6.84 16.08 2,214 15.36 $19.50-$25.73 2,519 9.64 24.92 301 21.27 $25.76-$40.31 1,333 8.99 36.00 238 36.74
Under the terms of the respective mergers, the stock option plans of Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast Bancorp and SJNB Financial Corp. were terminated at the time of merger and substitute options were issued under the Bancorp Plan. Option holders under the Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast Bancorp and SJNB Financial Corp. plans received substitute option grants to purchase 239,880 shares, 471,840 shares, 59,668 shares, 216,636 shares, and 1,228,511 shares of Greater Bay stock, respectively. During 2000, we assumed the Mt. Diablo National Bank Stock Option Plan. Options outstanding from the Mt. Diablo National Bank plan were converted to options to purchase 145,428 shares of Greater Bay stock. 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, we are encouraged, but not required, to measure compensation costs related to its employee stock compensation plans under the fair value method. If we elect 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. We implemented the requirements of SFAS No. 123 in 1997 and have elected to adopt the disclosure provisions of this statement. A-52 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) We apply Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in our accounting for stock options. Accordingly, no compensation cost has been recognized for our stock option plan. Had compensation for our stock option plan been determined consistent with SFAS No. 123, our net income per share would have been reduced to the pro forma amounts indicated below:
December 31, ----------------------------- 2001 2000 1999 ------- ------- ------- (Dollars in thousands, except per share amounts) Net income: As reported $79,816 $67,164 $51,301 Pro forma $72,558 $64,187 $47,096 Basic net income per share: As reported $ 1.61 $ 1.40 $ 1.15 Pro forma $ 1.47 $ 1.34 $ 1.06 Diluted net income per share: As reported $ 1.57 $ 1.33 $ 1.09 Pro forma $ 1.42 $ 1.27 $ 1.00
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 2001, 2000, and 1999, respectively; dividend yield of 1.5%, 1.5% and 1.5%; expected volatility of 48.89%, 48.96% and 29.69%; risk free rates of 4.30%, 4.89% and 6.29%. 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. 401(k) Savings Plan We have 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. We match 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). Our matching contributions are made in cash. The matching contribution vests ratably over the first four years of employment. Our employees are not required to maintain any portion of their 401(k) savings in our stock. For the years ended December 31, 2001, 2000 and 1999, we contributed $2.4 million, $1.8 million and $1.5 million, respectively to the 401(k) plan. Employee Stock Purchase Plan We have 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 our stock for an aggregate total of 923,738 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 2001, 2000 and 1999, employees purchased 114,860, 93,356 and 83,302 shares of common stock, respectively. There were 317,800 shares remaining in the plan available for purchase by employees at December 31, 2001. A-53 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Employee Compensation Benefits Agreements We have entered into supplemental employee compensation benefits agreements with certain executive and senior officers. Under these agreements, we are 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 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 at December 31, 2001 and 2000 is approximately $16.7 million and $9.1 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, 2001, 2000 and 1999 totaled $8.2 million, $3.3 million and $1.3 million, respectively. Included for 2001 and 2000, an additional $6.7 million and $1.4 million, respectively, was recorded as part of merger and other related nonrecurring costs in connection with the change in control provisions under the SJNB Financial Corp. and Saratoga supplemental employee compensation benefits agreements programs. Depending on the agreement, the employees and we are beneficiaries of life insurance policies that have been purchased as a method of financing the benefits under the agreements. At December 31, 2001 and 2000, our cash surrender value of these policies was approximately $96.8 million and $83.9 million, respectively and is included in other assets. The income recognized on these polices was $4.1 million, $3.2 million and $1.9 million in 2001, 2000 and 1999, respectively, and is included in other income. Deferred Compensation Plan Effective November 19, 1997, we adopted the Greater Bay Bancorp 1997 Elective Deferral Compensation Plan (the "Deferred Plan") that allows our eligible officers to defer a portion of their salary, bonuses and certain 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, 2001 and 2000, $6.1 million and $3.4 million, 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 Bank of Petaluma, Coast Commercial Bank and Peninsula Bank of Commerce prior to their mergers with us, there was approximately $1.6 million and $2.1 million of deferred compensation which is included in other liabilities at December 31, 2001 and 2000, respectively. Change in Control In the event of a change in control, the supplemental employee compensation benefits agreements with certain executive and senior officers may require us to make certain payments under those agreements. We also have plans in place, which would require certain payments to 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 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16--RELATED PARTY TRANSACTIONS We have, and expect 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, 2001 and 2000 is shown below:
2001 2000 1999 -------- -------- -------- (Dollars in thousands) Balance, January 1 $ 51,323 $ 28,851 $ 48,615 Additions 40,184 51,839 30,600 Repayments (70,600) (29,367) (50,364) -------- -------- -------- Balance, December 31 $ 20,907 $ 51,323 $ 28,851 ======== ======== ======== Undisbursed commitments, at year end $ 63,724 $ 39,744 $ 11,113 ======== ======== ========
NOTE 17--COMMITMENTS AND CONTINGENCIES Lease Commitments We lease certain facilities at which we conduct our operations. Future minimum lease commitments under all non-cancelable operating leases as of December 31, 2001 are below:
(Dollars in thousands) Years ended December 31, 2002 $ 9,835 2003 7,849 2004 7,182 2005 5,923 2006 5,373 Thereafter 25,180 ------- Total $61,342 =======
We sublease that portion of the available space that is not utilized. Sublease rental income for the years ended December 31, 2001, 2000, and 1999 was $1.3 million, $1.5 million and $1.5 million, respectively. Gross rental expense for the years ended December 31, 2001, 2000, and 1999 was $11.2 million, $8.3 million, and $7.5 million, respectively. A-55 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Other Commitments and Contingencies In the normal course of business, we became contractually obligated under various commitments and contingent liabilities, such as guarantees and commitments to extend credit, that are not reflected in the accompanying consolidated financial statements. Generally accepted accounting principles prohibit the recognition of these items in our consolidated balance, but require these amounts to be disclosed. Commitments to fund loans were $1.3 billion and $1.4 billion and letter of credit were $130.0 million and $129.4 million, at December 31, 2001 and 2000, respectively. Our exposure to credit loss is limited to amounts funded or drawn; however, at December 31, 2001, no losses are anticipated as a result of these commitments, based on current information. 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 $385.8 million of these commitments relate to real estate construction 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 us. 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 our operations. NOTE 18--SHAREHOLDERS' RIGHTS PLAN In 1998, Greater Bay adopted a shareholder rights plan designed to maximize our long-term value and to protect our 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 (subject to adjustment) 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 we are 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 our common shares. The Board may, in its sole discretion, redeem the rights at any time prior to any of the triggering events. 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 our common share; a tender offer for 10% or more of our common shares; or ownership of 10% or more of our common shares by a shareholder whose actions are likely to have a material adverse impact on us 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. A-56 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 19--REGULATORY MATTERS The Banks and Greater Bay 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 our 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). At December 31, 2001 and 2000 the Banks and we met all capital adequacy requirements to which they are subject. 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. A-57 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Banks' and our actual 2001 and 2000 capital amounts and ratios are as follows:
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions -------------- ---------------- ---------------- As of December 31, 2001 Amount Ratio Amount Ratio Amount Ratio - ----------------------- -------- ----- -------- ----- -------- ----- (Dollars in thousands) Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $740,653 12.79% $463,270 8.00% $579,088 N/A Bank of Petaluma 23,893 12.10 15,797 8.00 19,746 10.00% Bank of Santa Clara 42,225 13.46 25,097 8.00 31,371 10.00 Bay Area Bank 24,373 10.97 17,774 8.00 22,218 10.00 Bay Bank of Commerce 20,414 11.63 14,042 8.00 17,553 10.00 Coast Commercial Bank 45,520 15.14 24,053 8.00 30,066 10.00 Cupertino National Bank 190,715 10.74 142,060 8.00 177,574 10.00 Golden Gate Bank 29,697 11.18 21,250 8.00 26,563 10.00 Mid-Peninsula Bank 113,565 10.20 89,071 8.00 111,338 10.00 Mt. Diablo National Bank 32,769 12.10 21,665 8.00 27,082 10.00 Peninsula Bank of Commerce 31,571 11.43 22,097 8.00 27,621 10.00 San Jose National Bank 65,401 10.62 49,266 8.00 61,583 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $607,820 10.49% $231,771 4.00% $347,657 N/A Bank of Petaluma 21,414 10.85 7,895 4.00 11,842 6.00% Bank of Santa Clara 38,278 12.20 12,550 4.00 18,825 6.00 Bay Area Bank 21,581 9.71 8,890 4.00 13,335 6.00 Bay Bank of Commerce 18,211 10.38 7,018 4.00 10,527 6.00 Coast Commercial Bank 41,741 13.89 12,020 4.00 18,031 6.00 Cupertino National Bank 155,173 8.74 71,017 4.00 106,526 6.00 Golden Gate Bank 26,342 9.92 10,622 4.00 15,933 6.00 Mid-Peninsula Bank 99,570 8.94 44,550 4.00 66,826 6.00 Mt. Diablo National Bank 29,364 10.84 10,835 4.00 16,253 6.00 Peninsula Bank of Commerce 28,082 10.16 11,056 4.00 16,584 6.00 San Jose National Bank 57,656 9.36 24,639 4.00 36,959 6.00 Tier 1 Capital Leverage (To Average Assets): Greater Bay Bancorp $607,820 8.01% $303,531 4.00% $379,413 N/A Bank of Petaluma 21,414 6.03 14,205 4.00 17,756 5.00% Bank of Santa Clara 38,278 7.03 21,780 4.00 27,225 5.00 Bay Area Bank 21,581 5.91 14,606 4.00 18,258 5.00 Bay Bank of Commerce 18,211 6.12 11,903 4.00 14,878 5.00 Coast Commercial Bank 41,741 7.75 21,544 4.00 26,930 5.00 Cupertino National Bank 155,173 6.36 97,593 4.00 121,991 5.00 Golden Gate Bank 26,342 6.00 17,561 4.00 21,952 5.00 Mid-Peninsula Bank 99,570 6.89 43,354 3.00 72,257 5.00 Mt. Diablo National Bank 29,364 6.02 19,511 4.00 24,389 5.00 Peninsula Bank of Commerce 28,082 6.32 17,773 4.00 22,217 5.00 San Jose National Bank 57,656 8.03 28,720 4.00 35,900 5.00
A-58 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions -------------- ---------------- ---------------- As of December 31, 2000 Amount Ratio Amount Ratio Amount Ratio - ----------------------- -------- ----- -------- ----- -------- ----- (Dollars in thousands) Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $542,819 10.87% $399,499 8.00% $498,915 N/A Bank of Petaluma 19,054 12.05 12,650 8.00 15,811 10.00% Bank of Santa Clara 36,956 11.13 26,563 8.00 33,203 10.00 Bay Area Bank 18,664 10.49 14,234 8.00 17,790 10.00 Bay Bank of Commerce 14,111 10.55 10,700 8.00 13,380 10.00 Coast Commercial Bank 42,724 15.16 22,546 8.00 28,176 10.00 Cupertino National Bank 150,395 10.14 118,655 8.00 148,276 10.00 Golden Gate Bank 20,541 10.13 16,222 8.00 20,280 10.00 Mid-Peninsula Bank 91,401 10.19 71,757 8.00 89,670 10.00 Mt. Diablo National Bank 26,493 11.30 18,756 8.00 23,449 10.00 Peninsula Bank of Commerce 27,228 10.89 20,002 8.00 25,003 10.00 San Jose National Bank 64,995 12.00 43,330 8.00 54,163 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $477,962 9.57% $199,775 4.00% $299,350 N/A Bank of Petaluma 17,058 10.79 6,324 4.00 9,487 6.00% Bank of Santa Clara 32,779 9.87 13,284 4.00 19,922 6.00 Bay Area Bank 16,419 9.23 7,115 4.00 10,674 6.00 Bay Bank of Commerce 12,422 9.28 5,354 4.00 8,028 6.00 Coast Commercial Bank 39,181 13.91 11,267 4.00 16,905 6.00 Cupertino National Bank 131,684 8.88 59,317 4.00 88,966 6.00 Golden Gate Bank 17,993 8.87 8,114 4.00 12,168 6.00 Mid-Peninsula Bank 80,155 8.94 35,864 4.00 53,802 6.00 Mt. Diablo National Bank 23,539 10.04 9,378 4.00 14,070 6.00 Peninsula Bank of Commerce 24,081 9.63 10,002 4.00 15,002 6.00 San Jose National Bank 58,217 10.75 21,662 4.00 32,493 6.00 Tier 1 Capital Leverage (To Average Assets): Greater Bay Bancorp $477,962 8.79% $217,503 4.00% $271,878 N/A Bank of Petaluma 17,058 8.23 8,291 4.00 10,363 5.00% Bank of Santa Clara 32,779 8.18 16,029 4.00 20,035 5.00 Bay Area Bank 16,419 8.18 8,029 4.00 10,041 5.00 Bay Bank of Commerce 12,422 7.55 6,581 4.00 8,230 5.00 Coast Commercial Bank 39,181 9.12 17,185 4.00 21,488 5.00 Cupertino National Bank 131,684 9.06 58,139 4.00 72,693 5.00 Golden Gate Bank 17,993 6.34 11,352 4.00 14,188 5.00 Mid-Peninsula Bank 80,155 7.66 31,392 3.00 52,295 5.00 Mt. Diablo National Bank 23,539 8.15 11,553 4.00 14,443 5.00 Peninsula Bank of Commerce 24,081 7.99 12,056 4.00 15,067 5.00 San Jose National Bank 58,217 8.66 26,890 4.00 33,613 5.00
A-59 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 20--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. 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, 2001, 2000 and 1999.
For the year ended December 31, 2001 ------------------------------------ Income Shares Per share (numerator) (denominator) amount ----------- ------------- --------- (Dollars in thousands, except per share amounts) Net income $79,816 Basic net income per share: Income available to common shareholders 79,816 49,498,000 $1.61 Effect of dilutive securities: Stock options -- 1,442,000 ------- ---------- ----- Diluted net income per share: Income available to common shareholders after assumed conversions $79,816 50,940,000 $1.57 ======= ========== ===== For the year ended December 31, 2000 ------------------------------------ Income Shares Per share (numerator) (denominator) amount ----------- ------------- --------- (Dollars in thousands, except per share amounts) Net income $67,164 Basic net income per share: Income available to common shareholders 67,164 47,899,000 $1.40 Effect of dilutive securities: Stock options -- 2,620,000 ------- ---------- ----- Diluted net income per share: Income available to common shareholders after assumed conversions $67,164 50,519,000 $1.33 ======= ========== ===== For the year ended December 31, 1999 ------------------------------------ Income Shares Per share (numerator) (denominator) amount ----------- ------------- --------- (Dollars in thousands, except per share amounts) Net income $51,301 Basic net income per share: Income available to common shareholders 51,301 44,599,000 $1.15 Effect of dilutive securities: Stock options -- 2,479,000 ------- ---------- ----- Diluted net income per share: Income available to common shareholders after assumed conversions $51,301 47,078,000 $1.09 ======= ========== =====
A-60 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Options to purchase 1,531,000, 66,000 shares and 1,268,000 shares were anti-dilutive whereby the options' exercise price was greater than the average market price of the common shares, during the years ended December 31, 2001, 2000 and 1999, respectively, and were not included in the calculation of diluted net income per share. All years presented have been restated to reflect the 2-for-1 stock split effective as of October 4, 2000. 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 2001 merger with SJNB Financial Corp. at a 1.82 conversion ratio, 2000 mergers with Bank of Petaluma at a 0.5731 conversion ratio, Bank of Santa Clara at a 0.8499 conversion ratio, Coast Bancorp at a 0.6338 conversion ratio and Mt. Diablo Bancshares at a 0.9532 conversion ratio, and the 1999 mergers with Bay Commercial Services at a 0.6833 conversion ratio and Bay Area Bancshares at a 1.38682 conversion ratio. NOTE 21--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, --------------------- 2001 2000 -------- -------- (Dollars in thousands) ASSETS: Cash and cash equivalents $ 59,347 $ 20,152 Investment in subsidiaries 594,660 474,252 Other investments 18,658 25,634 Other assets 48,448 25,984 -------- -------- Total assets $721,113 $546,022 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Subordinated debt $225,775 $118,609 Other borrowings 6,800 -- Other liabilities 24,854 41,465 -------- -------- Total liabilities 257,429 160,074 Shareholders' equity: Common stock 206,294 196,121 Accumulated other comprehensive income 3,967 (6,035) Retained earnings 253,423 195,862 -------- -------- Total shareholders' equity 463,684 385,948 -------- -------- Total liabilities and shareholders' equity $721,113 $546,022 ======== ========
A-61 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) PARENT COMPANY ONLY--STATEMENTS OF OPERATIONS
Years ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Income: Interest income $ 3,098 $ 3,694 $ 551 Cash dividends from subsidiaries 19,585 11,060 6,559 Other income 2,856 1,379 -- -------- -------- -------- Total 25,539 16,133 7,110 -------- -------- -------- Expenses: Interest expense 1,619 8,536 4,382 Salaries 34,588 22,280 17,138 Occupancy and equipment 8,782 6,416 3,821 Merger expenses 10,034 12,479 3,283 Other expenses 24,644 7,784 6,084 Less: rentals and fees received from Banks (62,113) (41,480) (27,653) -------- -------- -------- Total 17,554 16,015 7,055 -------- -------- -------- Income before taxes and equity in undistributed net income of subsidiaries 7,985 118 55 Income tax benefit (4,765) (3,548) (2,782) -------- -------- -------- Income before equity in undistributed net income of subsidiaries 12,750 3,666 2,837 -------- -------- -------- Equity in undistributed net income of subsidiaries 67,066 63,498 48,464 -------- -------- -------- Net income $ 79,816 $ 67,164 $ 51,301 ======== ======== ========
A-62 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
Years ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Cash flows-operating activities Net income $ 79,816 $ 67,164 $ 51,301 Reconciliation of net income to net cash from operations: Equity in undistributed net income of subsidiaries (67,066) (63,498) (48,464) Net change in other assets (3,852) (7,939) (10,230) Net change in other liabilities (24,608) 42,379 4,322 -------- -------- -------- Operating cash flow, net (15,710) 38,106 (3,071) -------- -------- -------- Cash flows-investing activities Purchases of available for sale securities (43,693) (51,517) (20,825) Proceeds from sale and maturities of available for sale securities 6,976 3,123 21,393 Proceeds from sale of OREO - 224 - Dividends from subsidiaries 19,585 10,560 4,166 Capital contribution to the subsidiaries (33,526) (47,736) (29,761) -------- -------- -------- Investing cash flows, net (50,658) (85,346) (25,027) -------- -------- -------- Cash flows-financing activities Net change in other borrowings (4,534) 2,562 7,000 Stock retired by Greater Bay and SJNB Financial Corp. (2,830) - (3,911) Proceeds from private placement of stock - 11,476 20,761 Proceeds from issuance of subordinated debt 122,166 52,062 - Proceeds from sale of common stock 11,640 15,294 11,842 Stock issued in purchase accounting transaction 1,376 - - Payment of cash dividends (22,255) (18,686) (10,669) -------- -------- -------- Financing cash flows, net 105,563 62,708 25,023 -------- -------- -------- Net increase in cash and cash equivalents 39,195 15,468 (3,075) Cash and cash equivalents at the beginning of the year 20,152 4,684 7,759 -------- -------- -------- Cash and cash equivalents at end of the year $ 59,347 $ 20,152 $ 4,684 ======== ======== ========
A-63 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 22--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 or its affiliates unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Banks are limited, in the aggregate, to 20% of each Bank's capital and surplus, as defined by federal regulations, or a maximum of $90.7 million at December 31, 2001. No such advances were made during 2001 or exist as of December 31, 2001. NOTE 23--FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates, methods and assumptions are set forth below for our financial instruments. Our estimated fair values of financial instruments as of December 31, 2001 and 2000 are as follows:
2001 2000 --------------------- --------------------- Carrying Carrying Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- (Dollars in thousands) Financial assets: Cash and due from banks $ 189,404 $ 189,404 $ 291,605 $ 291,605 Short term investments and Fed Funds Sold 26,000 26,000 184,370 176,542 Investment securities 2,970,630 2,970,630 1,091,064 1,101,416 Loans, net 4,370,977 4,413,079 3,973,329 4,008,905 Financial liabilities: Deposits: Demand, noninterest-bearing 953,989 953,989 1,133,958 1,133,958 MMDA, NOW and Savings 2,280,119 2,280,119 2,349,041 2,349,041 Time certificates, $100,000 and over 642,073 644,251 706,535 706,722 Other time certificates 1,113,890 1,117,730 560,870 561,322 Other borrowings 2,095,896 2,110,751 463,267 431,228 Company obligated mandatory redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures 218,000 218,000 99,500 92,365
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. 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 long term investments, except certain state and municipal securities, is estimated based on quoted market prices or bid quotations from securities dealers. A-64 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 are estimated by discounting future cash flows using interest rates currently offered on time deposits 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 our deposits as compared to the cost of borrowing funds in the market. Commitments to Extend Credit and Standby Letters of Credit The majority of our commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the borrower or us, they only have value to the borrower and us. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the above table. Limitations These fair value disclosures represent management's best estimates, based on relevant market information and information about the financial instruments. 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, our 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 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. A-65 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 24--ACTIVITY OF BUSINESS SEGMENTS The accounting policies of the segments are 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. We evaluate the performance of our segments and allocate resources to them based on net interest income, other income, net income before income taxes, total assets and deposits. We are organized primarily along community banking and trust divisions. Eleven 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. Our 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, 2001, 2000 and 1999:
2001 2000 1999 --------------------- --------------------- ---------------------- Community Trust Community Trust Community Trust banking operations banking operations banking operations ---------- ---------- ---------- ---------- ----------- ---------- (Dollars in thousands) Net interest income $ 318,385 $ 1,145 $ 269,941 $ 551 $ 183,662 $ 369 Other income 37,976 4,009 29,889 3,753 41,838 3,007 Operating expenses 104,566 3,012 104,093 2,703 165,546 2,863 Net income before income taxes(1) 178,170 1,826 166,916 1,601 110,232 121 Total assets 7,155,941 -- 5,335,716 -- 4,270,450 -- Deposits 4,935,208 54,814 4,693,241 57,163 3,678,790 57,831 Assets under management -- 629,696 -- 773,791 -- 697,435
- -------- (1) Includes intercompany earnings allocation charge which is eliminated in consolidation 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, 2001, 2000 and 1999 is presented below.
As of and for year ended December 31, ------------------------------------ 2001 2000 1999 ---------- ---------- ---------- (Dollars in thousands) Net interest income and other income Total segment net interest income and other income $ 361,515 $ 317,120 $ 240,863 Parent company net interest income and other income 4,335 (4,400) (3,893) ---------- ---------- ---------- Consolidated net interest income and other income $ 365,850 $ 312,720 $ 236,970 ========== ========== ========== Net income before taxes Total segment net income before income taxes $ 179,996 $ 151,401 $ 110,155 Parent company net income before income taxes (73,712) (40,572) (32,393) ---------- ---------- ---------- Consolidated net income before income taxes $ 106,284 $ 110,829 $ 77,762 ========== ========== ========== Total assets Total segment assets $7,155,941 $5,335,716 $4,270,450 Parent company segment assets 721,113 482,439 34,360 ---------- ---------- ---------- Consolidated total assets $7,877,054 $5,818,155 $4,304,810 ========== ========== ==========
A-66 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 25--QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table presents the summary results for the stated eight quarters:
For the quarter ended --------------------------------------------- December 31, September 30, June 30, March 31, 2001 2001 2001 2001 ------------ ------------- -------- --------- (Dollars in thousands, except per share data) Interest income $129,946 $131,856 $124,669 $120,770 Net interest income 87,892 80,977 77,041 75,099 Provision for loan losses 28,950 8,400 10,049 7,328 Other income 9,684 10,699 13,003 11,456 Other expenses 49,028 44,933 41,669 39,961 Income before taxes 19,598 38,343 38,326 39,266 Net income 7,515 23,826 23,943 24,532 Net income per share: Basic $ 0.15 $ 0.48 $ 0.48 $ 0.50 Diluted $ 0.15 $ 0.46 $ 0.47 $ 0.48 For the quarter ended --------------------------------------------- December 31, September 30, June 30, March 31, 2000 2000 2000 2000 ------------ ------------- -------- --------- (Dollars in thousands, except per share data) Interest income $119,051 $110,812 $101,415 $ 92,361 Net interest income 74,246 68,279 65,064 58,000 Provision for loan losses 6,516 7,994 8,437 5,874 Other income 9,396 11,425 8,567 17,743 Other expenses 37,775 34,938 33,570 36,685 Income before taxes 35,818 29,735 24,880 30,795 Net income 20,913 15,638 13,002 17,611 Net income per share: Basic $ 0.43 $ 0.32 $ 0.27 $ 0.38 Diluted $ 0.41 $ 0.31 $ 0.26 $ 0.36
A-67 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Greater Bay Bancorp: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Greater Bay Bancorp and its subsidiaries (the "Company") at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. /s/ PRICEWATERHOUSECOOPERS LLP San Francisco, California February 13, 2002 A-68 EX-3.2 3 dex32.txt BYLAWS OF GREATER BAY BANCORP, AS AMENDED AND... Exhibit 3.2 BYLAWS OF GREATER BAY BANCORP Amended and Restated As Of May 15, 2001 TABLE OF CONTENTS
PAGE ---- ARTICLE I. Applicability 1 Section 1. Applicability of Bylaws 1 ARTICLE II. Offices 1 Section 1. Principal Executive Office 1 Section 2. Other Offices 1 Section 3. Change in Location or Number of Offices 1 ARTICLE III. Meetings of Shareholders 1 Section 1. Place of Meetings 1 Section 2. Annual Meetings 1 Section 3. Special Meetings 1 Section 4. Notice of Annual, Special or Adjourned Meetings 2 Section 5. Record Date 2 Section 6. Quorum; Action at Meetings 3 Section 7. Adjournment 3 Section 8. Validation of Defectively Called, Noticed or Held Meetings 3 Section 9. Voting for Election of Directors 4 Section 10. Proxies 4 Section 11. Inspectors of Election 4 Section 12. Action by Written Consent 5 ARTICLE IV. Directors 5 Section 1. Number of Directors 5 Section 2. Classification, Election ad Term of Office 6 Section 3. Term of Office 7 Section 4. Vacancies 7 Section 5. Removal 7 Section 6. Resignation 8
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PAGE ---- Section 7. Fees and Compensation 8 ARTICLE V. Committees of the Board of Directors 8 Section 1. Designation of Committees 8 Section 2. Powers of Committees 8 ARTICLE VI. Meetings of the Board of Directors and Committees Thereof 8 Section 1. Place of Meetings 8 Section 2. Organization Meeting 9 Section 3. Other Regular Meetings 9 Section 4. Special Meetings 9 Section 5. Notice of Special Meetings 9 Section 6. Validation of Defectively Held Meetings 9 Section 7. Quorum; Action at Meetings; Telephone Meetings 9 Section 8. Adjournment 10 Section 9. Action Without a Meeting 10 Section 10. Meetings of and Action by Committees 10 ARTICLE VII. Officers 10 Section 1. Officers 10 Section 2. Election of Officers 10 Section 3. Subordinate Officers, Etc. 10 Section 4. Removal and Resignation 10 Section 5. Vacancies 10 Section 6. Chairman of the Board 11 Section 7. President 11 Section 8. Vice President 11 Section 9. Secretary 11 Section 10. Treasurer 11
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PAGE ---- ARTICLE VIII. Records and Reports 11 Section 1. Minute Book - Maintenance and Inspection 12 Section 2. Share Resister - Maintenance and Inspection 12 Section 3. Books and Records of Account - Maintenance and Inspection 12 Section 4. Bylaws - Maintenance and Inspection 12 Section 5. Annual Report to Shareholders 12 ARTICLE IX. Miscellaneous 12 Section 1. Checks, Drafts, Etc. 12 Section 2. Contracts, Etc. - How Executed 12 Section 3. Certificates of Stock 12 Section 4. Lost Certificates 12 Section 5. Representation of Shares of Other Corporations 13 Section 6. Construction and Definitions 13 Section 7. Indemnification of Corporate Agents; Purchase of Liability Insurance 13 ARTICLE X. Amendments 13 Section 1. Amendments 13
II-3 BYLAWS OF GREATER BAY BANCORP ARTICLE I. APPLICABILITY ------------- Section 1. Applicability of Bylaws. These Bylaws govern, except as ----------------------- otherwise provided by statute or its Articles of Incorporation, the management of the business and the conduct of the affairs of the Corporation. ARTICLE II OFFICES ------- Section 1. Principal Executive Office. The location of the principal -------------------------- executive office of the Corporation is 420 Cowper Street, Palo Alto, California 94301-1504. Section 2. Other Offices. The Board of Directors may establish other ------------- offices at any place or places within or without the State of California. Section 3. Change in Location or Number of Offices. The Board of Directors --------------------------------------- may change any office from one location to another or eliminate any office or offices. ARTICLE III MEETINGS OF SHAREHOLDERS ------------------------ Section 1. Place of Meetings. Meetings of the shareholders shall be held ----------------- at any place within or without the State of California designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of the Corporation. Section 2. Annual Meetings. An annual meeting of the shareholders shall be --------------- held within 180 days following the end of the fiscal year of the Corporation at a date and time designated by the Board of Directors. Directors shall be elected at each annual meeting and any other proper business may be transacted thereat. Section 3. Special Meetings. ---------------- (a) Special meetings of the shareholders may be called by a majority of the Board of Directors, the Chairman of the Board, the President or the holders of shares entitled to cast not less than 10 percent of the votes at such meeting. 1 (b) Any request for the calling of a special meeting of the shareholders shall (1) be in writing, (2) specify the date and time thereof which date shall be not less than 35 nor more than 60 days after receipt of the request, (3) specify the general nature of the business to be transacted thereat and (4) be given either personally or by first-class mail, postage prepaid, or other means of written communication to the Chairman of the Board, President, any Vice President or Secretary of the Corporation. The officer receiving a proper request to call a special meeting of the shareholders shall cause notice to be given pursuant to the provisions of Section 4 of this article to the shareholders entitled to vote thereat that a meeting will be held at the date and time specified by the person or persons calling the meeting. (c) No business may be transacted at a special meeting unless the general nature thereof was stated in the notice of such meeting. Section 4. Notice of Annual, Special or Adjourned Meetings. ----------------------------------------------- (a) Whenever any meeting of the shareholders is to be held, a written notice of such meeting shall be given in the manner described in subdivision (d) of this section not less than 10 nor more than 60 days before the date thereof to each shareholder entitled to vote thereat. The notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of the giving of the notice, intend to present for action by the shareholders including, whenever directors are to be elected at a meeting, the names of nominees intended at the time of giving of the notice to be presented by management for election. (b) Any proper matter may be presented at an annual meeting for action, except as is provided in subdivision (f) of Section 601 of the Corporations Code of the State of California. (c) Notice need not be given of an adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, except that if the adjournment is for more than 45 days or if after the adjournment a new record date is provided for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote thereat. (d) Notice of any meeting of the shareholders or any report shall be given either personally or by first class mail, postage prepaid, or other means of written communication, addressed to the shareholder at his address appearing on the books of the Corporation or given by him to the Corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal executive office of the Corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally to the recipient or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice or report in accordance with the provisions of these Bylaws or the General Corporation Law of the State of California, executed by the Secretary, assistant secretary or any transfer agent of the Corporation, shall be prima facie evidence of the notice or report. ----- ----- (e) If any notice or report addressed to the shareholder at his address appearing on the books of the Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon his written demand at the principal executive office of the Corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. Section 5. Record Date. ----------- (a) The Board of Directors may fix a time in the future as a record date for the determination of the shareholders (1) entitled to notice of any meeting or to vote thereat, (2) 2 entitled to receive payment of any dividend or other distribution or allotment of any rights or (3) entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall be not more than 60 nor less than 10 days prior to the date of any meeting of the shareholders nor more than 60 days prior to any other action. (b) In the event no record date is fixed: a. The record date for determining the shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. b. The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given. c. The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. (c) Only shareholders of record at the close of business on the record date are entitled to notice and to vote or to receive a dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date. (d) A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. Section 6. Quorum: Action at Meetings. -------------------------- (a) A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of the shareholders. (b) Except as provided in subdivision (c) of this section, the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number is required by Law or the Articles of Incorporation. (c) The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. Adjournment. Any meeting of the shareholders may be adjourned ----------- from time to time whether or not a quorum is present by the vote of a majority of the shares represented thereat either in person or by proxy. At the adjourned meeting the Corporation may transact any business, which might have been transacted at the original meeting. Section 8. Validation of Defectively Called, Noticed or Held Meetings. ---------------------------------------------------------- (a) The transactions of any meeting of the shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote thereat, not present in person or by proxy, signs 3 a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (b) Attendance of a person at a meeting shall constitute a waiver of notice of, and presence at, such meeting, except (1) when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and (2) that attendance at a meeting is not a waiver of any right to object to the consideration of any matter required by the General Corporation Law of the State of California to be included in the notice but not so included, if such objection is expressly made at the meeting. (c) Any written waiver of notice shall comply with subdivision (f) of Section 601 of the Corporations Code of the State of California. Section 9. Voting for Election of Directors. -------------------------------- (a) Shareholders shall not be permitted to cumulate their votes for the election of directors. (b) Elections for directors may be by voice vote or by ballot unless any shareholder entitled to vote demands election by ballot at the meeting prior to the voting, in which case the vote shall be by ballot. (c) In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors of each class to be elected by such shares are elected as directors. If, at any meeting of shareholders, due to a vacancy or vacancies or otherwise, directors of more than one class of the Board of Directors are to be elected, each class of directors to be elected at the meeting shall be elected in a separate election. Section 10. Proxies. ------- (a) Every person entitled to vote shares may authorize another person or persons to act with respect to such shares by a written proxy signed by him or his attorney-in-fact and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by him or his attorney-in-fact. (b) Any duly executed proxy shall continue in full force and effect until the expiration of the term specified therein or upon its earlier revocation by the person executing it prior to the vote pursuant thereto (1) by a writing delivered to the Corporation stating that it is revoked, (2) by a subsequent proxy executed by the person executing the proxy or (3) by the attendance at the meeting and voting in person by the person executing the proxy. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. The date contained on the form of proxy shall be deemed to be the date of its execution. (c) A proxy which states that it is irrevocable for the period specified therein shall be subject to the provisions of subdivisions (e) and (f) of Section 705 of the Corporations Code of the State of California. Section 11. Inspectors of Election. ---------------------- (a) In advance of any meeting of the shareholders, the Board of Directors may appoint either one or three persons (other than nominees for the office of director) as inspectors of 4 election to act at such meeting or any adjournments thereof. If inspectors of election are not so appointed, or if any person so appointed fails to appear or refuses to act, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse to act) at the meeting. If appointed at a meeting on the request of one or more shareholders or the proxies thereof, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. (b) The duties of inspectors of election and the manner of performance thereof shall be as prescribed in Section 707 of the Corporations Code of the State of California. Section 12. Action by Written Consent. ------------------------- (a) Subject to subdivisions (b) and (c) of this section, any action which may be taken at any annual or special meeting of the shareholders may be taken without a meeting, without a vote and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting in which all shares entitled to vote thereon were present and voted. All such consents shall be filed with the Secretary of the Corporation and maintained with the corporate records. (b) Except for the election of a director by written consent to fill a vacancy (other than a vacancy created by removal), directors may be elected by written consent only by the unanimous written consent of all shares entitled to vote for the election of directors. In the case of an election of a director by written consent to fill a vacancy (other than a vacancy created by removal), any such election requires the consent of a majority of the outstanding shares entitled to vote. (c) Unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholder approval without a meeting by less than unanimous written consent shall be given as provided in subdivision (b) of Section 603 of the Corporations Code of the state of California. (d) Any shareholder giving a written consent, or his proxy holders, or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the Corporation prior to the time that written consents of the number of shares required to authorized the proposed action have been filed with the Secretary of the Corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the Corporation. ARTICLE IV DIRECTORS --------- Section 1. Number of Directors. ------------------- (a) The authorized number of directors shall be no less than eleven (11) nor more than twenty-one (21). The exact number of directors shall be fixed and may be changed from time to time by a resolution adopted by the Board of Directors. (b) The exact number of directors shall be seventeen (17) until changed as provided in subdivision (a) of this section. 5 (c) The maximum or minimum authorized number of directors may only be changed by an amendment of this section approved by the vote or written consent of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the minimum number to a number less than 5 shall not be adopted if the votes cast against its adoption at a meeting (or the shares not consenting in the case of action by written consent) exceed 16-2/3% of such outstanding shares; and provided, further, that in no case shall the stated maximum authorized number of directors exceed two times the stated minimum number of authorized directors minus one. Section 2. Classification, Election and Term of Office. ------------------------------------------- (a) Nomination for election of directors may be made by the Board of Directors or by any holder of any outstanding class of capital stock of the Corporation entitled to vote for the election of directors. Notice of intention to make any nominations shall be made in writing and shall be delivered or mailed to the President of the Corporation not less than twenty-one (21) days nor more than sixty (60) days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than twenty-one (21) days' notice is given to shareholders, such notice of intention to nominate shall be mailed or delivered to the President of the Corporation not later than the close of business on the tenth (10th) day following the day on which the notice of meeting was mailed; provided, further, that if notice of such meeting is sent by third class mail (if permitted by law), no notice of intention to make nominations shall be required. Such notification shall contain the following information to the extent known to the notifying shareholder. (1) the name and address of each proposed nominee; (2) the principal occupation of each proposed nominee; (3) the number of shares of capital stock of the Corporation owned by each proposed nominee; (4) the name and residence address of the notifying shareholder; and (5) the number of shares of capital stock of the Corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, in the discretion of the Chairman of the meeting, be disregarded and upon the Chairman's instructions, the inspectors of election can disregard all votes cast for each such nominee. A copy of this paragraph shall be set forth in a notice to shareholders of any meeting at which directors are to be elected. (b) In the event that the authorized number of directors shall be fixed at nine (9) or more, the Board of Directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist of one-third of the directors or as close an approximation as possible. The initial term of office of the directors of Class I shall expire at the annual meeting to be held during fiscal year 1998, the initial term of office of the directors of Class II shall expire at the annual meeting to be held during fiscal 1999 and the initial term of office of the directors of Class III shall expire at the annual meeting to be held during fiscal year 2000. At each annual meeting, commencing with the annual meeting to be held during fiscal year 1998, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the third annual meeting next succeeding his or her election and until his or her successor shall have been duly elected and qualified. In the event that the authorized number of directors shall be fixed with at least six (6) but less than nine (9), the Board of Directors shall be divided into two classes, designated Class I and 6 Class II. Each class shall consist of one-half of the directors or as close an approximation as possible. At each annual meeting, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the second annual meeting next succeeding his or her election and until his or her successor shall have been duly elected and qualified. Notwithstanding the rule that the classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, resignation or removal. At each annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the Board of Directors shall designate one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality of number of directors among the classes. This section may only be amended or repealed by approval of the Board of Directors and the outstanding shares (as defined in Section 152 of the California General Corporation Law) voting as a single class, notwithstanding Section 903 of the California General Corporation Law. Section 3. Term of Office. Each director, including a director elected to -------------- fill a vacancy, shall hold office until the expiration of the term for which he is elected and until a successor has been elected. Section 4. Vacancies. --------- (a) A vacancy in the Board of Directors exists whenever any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number of directors or otherwise. (b) Except for a vacancy created by the removal al a director, vacancies on the Board of Directors may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director. A vacancy created by the removal of a director shall be filled only by shareholders. (c) The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Section 5. Removal. ------- (a) The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. (b) Any or all of the directors may be removed without cause if such removal is approved by a majority of the outstanding shares entitled to vote; provided, however, that no director may be removed (unless the entire Board of Directors is removed) if whenever the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of his most recent election were then being elected. (c) Any reduction of the authorized number of directors does not remove any director prior to the expiration of his term of office. 7 Section 6. Resignation. Any director may resign effective upon giving ----------- written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 7. Fees and Compensation. Directors may be paid for their services --------------------- in such capacity a sum in such amounts, at such times and upon such conditions as may be determined from time to time by resolution of the Board of Directors, and may be reimbursed for their expenses, if any, incurred in such capacity, including (without limitation) expenses of attendance at any meeting of the Board. No such payments shall preclude any director from serving the Corporation in any other capacity and receiving compensation in any manner therefor. ARTICLE V COMMITTEES OF THE BOARD OF DIRECTORS ------------------------------------ Section 1. Designation of Committees. The Board of Directors may, by ------------------------- resolution adopted by a majority of the authorized number of directors, designate (1) one or more committees, each consisting of two or more directors and (2) one or more directors as alternate members of any committee, who may replace any absent member at any meeting thereof. Any member or alternate member of a committee shall serve at the pleasure of the Board. Section 2. Powers of Committees. Any committee, to the extent provided in -------------------- the resolution of the Board of Directors designating such committee, shall have all the authority of the Board, except with respect to: (a) The approval of any action for which the General Corporation Law of the State of California also requires any action by the shareholders; (b) The filling of vacancies on the Board or in any committee thereof; (c) The fixing of compensation of the directors for serving on the Board or on any committee thereof; (d) The amendment or repeal of these Bylaws or the adoption of new bylaws; (e) The amendment or repeal of any resolution of the Board which by its express terms is not so amenable or resealable; (f) A distribution to the shareholders of the Corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or (g) The designation of other committees of the Board or the appointment of members or alternate members thereof. ARTICLE VI MEETINGS OF THE BOARD OF DIRECTORS ---------------------------------- AND COMMITTEES THEREOF ---------------------- Section 1. Place of Meetings. Regular meetings of the Board of Directors ----------------- shall be held at any place within or without the State of California, which has been designated from time to time by the Board 8 or, in the absence of such designation, at the principal executive office of the Corporation. Special meetings of the Board shall be held either at any place within or without the State of California which has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the Corporation. Section 2. Organization Meeting. Immediately following each annual meeting -------------------- of the shareholders the Board of Directors shall hold a regular meeting for the purpose of organization and the transaction of other business. Notice of any such meeting is not required. Section 3. Other Regular Meetings. Other regular meetings of the Board of ---------------------- Directors shall be held without call at such time as shall be designated from time to time by the Board. Notice of any such meeting is not required. Section 4. Special Meetings. Special meetings of the Board of Directors ---------------- may be called at any time for any purpose or purposes by the Chairman of the Board or the President or any vice president or the Secretary or any two directors. Notice shall be given of any special meeting of the Board. Section 5. Notice of Special Meetings. -------------------------- (a) Notice of the time and place of special meetings of the Board of Directors shall be delivered personally or by telephone to each director or sent to each director by first-class mail or telegraph, charges prepaid. Such notice shall be given four days prior to the holding of the special meeting if sent by mail or 48 hours prior to the holding thereof if delivered personally or given by telephone or telegraph. The notice or report shall be deemed to have been given at the time when delivered personally to the recipient or deposited in the mail or sent by other means of written communication. (b) Notice of any special meeting of the Board of Directors need not specify the purpose thereof and need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. Section 6. Validation of Defectively Held Meetings. The transactions of --------------------------------------- any meeting of the Board of Directors, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. Such waivers, consents and approvals (1) need not specify the purpose of any meeting of the Board of Directors and (2) shall be filed with the corporate records or made a part of the minutes of the meeting. Section 7. Quorum; Action at Meetings; Telephone Meetings. ---------------------------------------------- (a) A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors, unless action by a greater proportion of the directors is required by law or the Articles of Incorporation. (b) A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. (c) Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment so long as all members participating in such meeting can hear one another. 9 Section 8. Adjournment. A majority of the directors present, whether or ----------- not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 9. Action Without a Meeting. Any action required or permitted to ------------------------ be taken by the Board of Directors may be taken without a meeting, if all members of the Board individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effort as a unanimous vote of such directors. Section 10. Meetings of and Action by Committees. The provisions of this ------------------------------------ Article apply to committees of the Board of Directors and action by such committees with such changes in the language of those provisions as are necessary to substitute the committee and its members for the Board and its members. ARTICLE VII OFFICERS -------- Section 1. Officers. The Corporation shall have as officers, a President, -------- a Secretary and a Treasurer. The Treasurer is the chief financial officer of the Corporation unless the Board of Directors has by resolution designated a vice president or other officer to be the chief financial officer. The Corporation may also have at the discretion of the Board, a Chairman of the Board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold two or more offices. Section 2. Election of Officers. The officers of the Corporation, except -------------------- such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by the Board of Directors. Section 3. Subordinate Officers, Etc. The Board of Directors may appoint ------------------------- by resolution, and may empower the Chairman of the Board, if there be such an officer, or the President, to appoint such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are determined from time to time by resolution of the Board or, in the absence of any such determination, as are provided in these Bylaws. Any appointment of an officer shall be evidenced by a written instrument filed with the Secretary of the Corporation and maintained with the corporate records. Section 4. Removal and Resignation. ----------------------- (a) Any officer may be removed, either with or without cause, by the Board of Directors or, except in case of any officer chosen by the Board, by any officer upon whom such power of removal may be conferred by resolution of the Board. (b) Any officer may resign at any time effective upon giving written notice to the Chairman of the Board, President, any vice president or Secretary of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. Section 5. Vacancies. A vacancy in any office because of death, --------- resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office. 10 Section 6. Chairman of the Board. If there is a Chairman of the Board, he --------------------- shall, if present, preside at all meetings of the Board of Directors, exercise and perform such other powers and duties as may be from time to time assigned to him by resolution of the Board and, if there is no President, the Chairman of the Board shall be the chief executive officer of the Corporation and have the power and duties set forth in Section 7 of this Article. Section 7. President. Subject to such supervisory powers, if any, as may --------- be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the chief executive officer and general manager of the Corporation and shall, subject to the control of the Board, have general supervision, direction and control of the business and affairs of the Corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by resolution of the Board. Section 8. Vice President. In the absence or disability of the President, -------------- the vice presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board or as the President may from time to time delegate. Section 9. Secretary. --------- (a) The Secretary shall keep or cause to be kept (1) the minute book, (2) the share register and (3) the seal, if any, of the Corporation. (b) The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by these Bylaws or by law to be given, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board. Section 10. Treasurer. --------- (a) The Treasurer shall keep, or cause to be kept, the books and records of account of the Corporation. (b) The Treasurer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated from time to time by resolution of the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and the Board, whenever they request it, an account of all of his transactions as Treasurer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board or as the President may from time to time delegate. ARTICLE VIII RECORDS AND REPORTS ------------------- Section 1. Minute Book - Maintenance and Inspection. The Corporation shall ---------------------------------------- keep or cause to be kept in written form at its principal executive office or such other place as the Board of Directors may order, a minute book which shall contain a record of all actions by its shareholders, Board or committees 11 of the Board including the time, date and place of each meeting; whether a meeting is regular or special and, if special, how called; the manner of giving notice of each meeting and a copy thereof; the names of those present at each meeting of the Board or committees thereof; the number of shares present or represented at each meeting of the shareholders; the proceedings of all meetings; any written waivers of notice, consents to the holding of a meeting or approvals of the minutes thereof; and written consents for action without a meeting. Section 2. Share Resister - Maintenance and Inspection. The Corporation ------------------------------------------- shall keep or cause to be kept at its principal executive office or, if so provided by resolution of the Board of Directors, at the Corporation's transfer agent or registrar, a share register, or a duplicate share register, which shall contain the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. Section 3. Books and Records of Account - Maintenance and Inspection. The --------------------------------------------------------- Corporation shall keep or cause to be kept at its principal executive office or such other place as the Board of Directors may order, adequate and correct books and records of account. Section 4. Bylaws - Maintenance and Inspection. The Corporation shall keep ----------------------------------- at its principal executive office or, in the absence of such office in the State of California, at its principal business office in that state, the original or a copy of the Bylaws as amended to date. Section 5. Annual Report to Shareholders. The annual report to the ----------------------------- shareholders described in Section 1501 of the Corporations Code of the State of California is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the Board of Directors from issuing annual or other periodic reports to the shareholders of the Corporation as they see fit. ARTICLE IX MISCELLANEOUS ------------- Section 1. Checks, Drafts, Etc. All checks, drafts or other orders for ------------------- payment of money, notes or other evidences of indebtedness, and any assignment or endorsement thereof, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 2. Contracts, Etc. - How Executed. The Board of Directors, except ------------------------------ as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board, no officer, employee or other agent shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 3. Certificates of Stock. All certificates shall be signed in the --------------------- name of the Corporation by the Chairman of the Board or the President or a vice president and by the Treasurer or an assistant treasurer or the Secretary or an assistant secretary, certifying the number of shares and the class or series thereof owned by the shareholder. Any or all of the signatures on a certificate may be by facsimile signature. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Section 4. Lost Certificates. Except as provided in this section, no new ----------------- certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered to the Corporation and canceled 12 at the same time. The Board of Directors may in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions as the Board may require, including provision for indemnification of the Corporation secured by a bond or other adequate security sufficient to protect the Corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 5. Representation of Shares of Other Corporations. Any person ---------------------------------------------- designated by resolution of the Board of Directors or, in the absence of such designation, the Chairman of the Board, the President or any vice president or the Secretary, or any other person authorized by any of the foregoing, is authorized to vote on behalf of the Corporation any and all shares of any other corporation or corporations, foreign or domestic, owned by the Corporation. Section 6. Construction and Definitions. Unless the context otherwise ---------------------------- requires, the general provisions, rules of construction and definitions contained in the Corporations Code of the State of California shall govern the construction of these Bylaws. Section 7. Indemnification of Corporate Agents; Purchase of Liability ---------------------------------------------------------- Insurance. - --------- (a) The Corporation shall, to the maximum extent permitted by the General Corporation Law of the State of California, and as the same may from time to time be amended, indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding to which such person was or is a party or is threatened to be made a party arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 7, an "agent" of the Corporation includes any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative, and includes an action or proceeding by or in the right of the Corporation to procure a judgment in its favor; and "expenses" includes attorneys' fees and any expenses of establishing a right to indemnification under this subdivision (a). (b) The Corporation shall, if and to the extent the Board of Directors so determines by resolution, purchase and maintain insurance in an amount and on behalf of such agents of the Corporation as the Board may specify in such resolution against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the Corporation would have the capacity to indemnify the agent against such liability under the provisions of this Section. ARTICLE X AMENDMENTS ---------- Section 1. Amendments. New bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote. Subject to the next preceding sentence, bylaws (other than a bylaw or amendment thereof specifying or changing a fixed number of directors or the maximum or minimum number, or changing from a fixed to a variable board or vice versa) may be adopted, amended or repealed by the Board of Directors. 13 EX-10.8 4 dex108.txt GREATER BAY BANCORP 401(K) PROFIT SHARING PLAN - -------------------------------------------------------------------------------- Exhibit 10.8 GREATER BAY BANCORP 401(K) PLAN - -------------------------------------------------------------------------------- Greater Bay Bancorp 401(k) Plan ADOPTION AGREEMENT # 005 NONSTANDARDIZED CODE (S)401(k) PROFIT SHARING PLAN The undersigned, Greater Bay Bancorp ("Employer"), by executing this ------------------- Adoption Agreement, elects to become a participating Employer in the Wells Fargo ----------- Bank, N.A. Defined Contribution Master Plan (basic plan document # 01 ) by - ---------- ---- adopting the accompanying Plan and Trust in full as if the Employer were a signatory to that Agreement. The Employer makes the following elections granted under the provisions of the Master Plan. ARTICLE I DEFINITIONS 1.02 TRUSTEE. The Trustee executing this Adoption Agreement is: (Choose (a) ------- or (b)) [_] (a) A discretionary Trustee. See Section 10.03[A] of the Plan. [X] (b) A nondiscretionary Trustee. See Section 10.03[B] of the Plan. [Note: The Employer may not elect Option (b) if a Custodian executes the Adoption Agreement.] 1.03 PLAN. The name of the Plan as adopted by the Employer is Greater Bay ---- ----------- Bancorp 401(k) Plan. - -------------------- 1.07 EMPLOYEE. The following Employees are not eligible to participate in -------- the Plan: (Choose (a) or at least one of (b) through (g)) [X] (a) No exclusions. [_] (b) Collective bargaining employees (as defined in Section 1.07 of the Plan). [Note: If the Employer excludes union employees from the Plan, the Employer must be able to provide evidence that retirement benefits were the subject of good faith bargaining.] [_] (c) Nonresident aliens who do not receive any earned income (as defined in Code (S)911(d)(2)) from the Employer which constitutes United States source income (as defined in Code (S)861(a)(3)). [_] (d) Commission Salesmen. [_] (e) Any Employee compensated on a salaried basis. [_] (f) Any Employee compensated on an hourly basis. [_] (g) (Specify) _________. Leased Employees. Any Leased Employee treated as an Employee under Section 1.31 of the Plan, is: (Choose (h) or (i)) [X] (h) Not eligible to participate in the Plan. [_] (i) Eligible to participate in the Plan, unless excluded by reason of an exclusion classification elected under this Adoption Agreement Section 1.07. 1 Greater Bay Bancorp 401(k) Plan Related Employers. If any member of the Employer's related group (as defined in Section 1.30 of the Plan) executes a Participation Agreement to this Adoption Agreement, such member's Employees are eligible to participate in this Plan, unless excluded by reason of an exclusion classification elected under this Adoption Agreement Section 1.07. In addition: (Choose (j) or (k)) [_] (j) No other related group member's Employees are eligible to participate in the Plan. [X] (k) The following nonparticipating related group member's Employees are eligible to participate in the Plan unless excluded by reason of an exclusion classification elected under this Adoption Agreement Section 1.07: Cupertino National Bank, Mid-Peninsula Bank, Peninsula Bank of -------------------------------------------------------------- Commerce, Bay Bank of Commerce, Coast Commercial Bank, Mt. Diablo National -------------------------------------------------------------------------- Bank, Bank of Petaluma, Bay Area Bank, Bank of Santa Clara, Golden Gate ----------------------------------------------------------------------- Bank and all subsidiaries. -------------------------- 1.12 COMPENSATION. ------------ Treatment of elective contributions. (Choose (a) or (b)) [X] (a) "Compensation" includes elective contributions made by the Employer on the Employee's behalf. [_] (b) "Compensation" does not include elective contributions. Modifications to Compensation definition. (Choose (c) or at least one of (d) through (j)) [_] (c) No modifications other than as elected under Options (a) or (b). [_] (d) The Plan excludes Compensation in excess of $ _____. [X] (e) In lieu of the definition in Section 1.12 of the Plan, Compensation means any earnings reportable as W-2 wages for Federal income tax withholding purposes, subject to any other election under this Adoption Agreement Section 1.12. [_] (f) The Plan excludes bonuses. [_] (g) The Plan excludes overtime. [_] (h) The Plan excludes Commissions. [_] (i) Compensation will not include Compensation from a related employer (as defined in Section 1.30 of the Plan) that has not executed a Participation Agreement in this Plan unless, pursuant to Adoption Agreement Section 1.07, the Employees of that related employer are eligible to participate in this Plan. [_] (j) (Specify) _____. If, for any Plan Year, the Plan uses permitted disparity in the contribution or allocation formula elected under Article III, any election of Options (f), (g), (h) or (j) is ineffective for such Plan Year with respect to any Nonhighly Compensated Employee. Special definition for matching contributions. "Compensation" for purposes of any matching contribution formula under Article III means: (Choose (k) or (l) only if applicable) [X] (k) Compensation as defined in this Adoption Agreement Section 1.12. [_] (l) (Specify) _____. 2 Greater Bay Bancorp 401(k) Plan Special definition for salary reduction contributions. An Employee's salary reduction agreement applies to his Compensation determined prior to the reduction authorized by that salary reduction agreement, with the following exceptions: (Choose (m) or at least one of (n) or (o), if applicable) [X] (m) No exceptions. [_] (n) If the Employee makes elective contributions to another plan maintained by the Employer, the Advisory Committee will determine the amount of the Employee's salary reduction contribution for the withholding period: (Choose (1) or (2)) [_] (1) After the reduction for such period of elective contributions to the other plan(s). [_] (2) Prior to the reduction for such period of elective contributions to the other plan(s). [_] (o) (Specify) _____. 1.17 PLAN YEAR/LIMITATION YEAR. ------------------------- Plan Year. Plan Year means: (Choose (a) or (b)) [X] (a) The 12 consecutive month period ending every December 31. ------------ [_] (b) (Specify) _____. Limitation Year. The Limitation Year is: (Choose (c) or (d)) [X] (c) The Plan Year. [_] (d) The 12 consecutive month period ending every _____. 1.18 EFFECTIVE DATE. -------------- New Plan. The "Effective Date" of the Plan is _____. Restated Plan. The restated Effective Date is January 1, 2001. ---------------- This Plan is a substitution and amendment of an existing retirement plan(s) originally established January 1, 1988. [Note: See the Effective Date Addendum.] ---------------- 3 Greater Bay Bancorp 401(k) Plan 1.27 HOUR OF SERVICE. The crediting method for Hours of Service is: (Choose --------------- (a) or (b)) [X] (a) The actual method. [_] (b) The ___ equivalency method, except: [_] (1) No exceptions. [_] (2) The actual method applies for purposes of: (Choose at least one) [_] (a) Participation under Article II. [_] (b) Vesting under Article V. [_] (c) Accrual of benefits under Section 3.06. [Note: On the blank line, insert "daily," "weekly," "semi-monthly payroll periods" or "monthly."] 1.29 SERVICE FOR PREDECESSOR EMPLOYER. In addition to the predecessor -------------------------------- service the Plan must credit by reason of Section 1.29 of the Plan, the Plan credits Service with the following predecessor employer(s): Cupertino National ------------------ Bank, Mid-Peninsula Bank, Peninsula Bank of Commerce, Bay Bank of Commerce, - --------------------------------------------------------------------------- Coast Commercial Bank, Mt. Diablo National Bank, Bank of Petaluma, Bay Area - --------------------------------------------------------------------------- Bank, Bank of Santa Clara, Golden Gate Bank, Pacific Business Funding, and - -------------------------------------------------------------------------- Matsco Companies Incorporated and all subsidiaries. Such predecessor service - ---------------------------------------------------------------------------- should be credited only for persons employed by the predecessor employer on the - ------------------------------------------------------------------------------- date it became a subsidiary of, or otherwise acquired by the Employer. Service - --------------------------------------------------------------------- with the designated predecessor employer(s) applies: (Choose at least one of (a) or (b); (c) is available only in addition to (a) or (b)) [X] (a) For purposes of participation under Article II. [X] (b) For purposes of vesting under Article V. [_] (c) Except the following Service: ____. [Note: If the Plan does not credit any predecessor service under this provision, insert "N/A" in the first blank line. The Employer may attach a schedule to this Adoption Agreement, in the same format as this Section 1.29, designating additional predecessor employers and the applicable service crediting elections.] 4 Greater Bay Bancorp 401(k) Plan 1.31 LEASED EMPLOYEES. If a Leased Employee is a Participant in the Plan ----------------- and also participates in a plan maintained by the leasing organization: (Choose (a) or (b)) [_] (a) The Advisory Committee will determine the Leased Employee's allocation of Employer contributions under Article III without taking into account the Leased Employee's allocation, if any, under the leasing organization's plan. [_] (b) The Advisory Committee will reduce the Leased Employee's allocation of Employer nonelective contributions (other than designated qualified nonelective contributions) under this Plan by the Leased Employee's allocation under the leasing organization's plan, but only to the extent that allocation is attributable to the Leased Employee's service provided to the Employer. The leasing organization's plan: [_] (1) Must be a money purchase plan which would satisfy the definition under Section 1.31 of a safe harbor plan, irrespective of whether the safe harbor exception applies. [_] (2) Must satisfy the features and, if a defined benefit plan, the method of reduction described in an addendum to this Adoption Agreement, numbered 1.31. ARTICLE II EMPLOYEE PARTICIPANTS 2.01 ELIGIBILITY. ------------ Eligibility conditions. To become a Participant in the Plan, an Employee must satisfy the following eligibility conditions: (Choose (a) or (b) or both; (c) is optional as an additional election) [X] (a) Attainment of age 18 (specify age, not exceeding 21). [_] (b) Service requirement. (Choose one of (1) through (3)) [_] (1) One Year of Service. [_] (2) ___ months (not exceeding 12) following the Employee's Employment Commencement Date. [_] (3) One Hour of Service. [_] (c) Special requirements for non-401(k) portion of plan. (Make elections under (1) and under (2)) (1) The requirements of this Option (c) apply to participation in: (Choose at least one of (a) through (c)) [_] (a) The allocation of Employer nonelective contributions and Participant forfeitures. [_] (b) The allocation of Employer matching contributions (including forfeitures allocated as matching contributions). [_] (c) The allocation of Employer qualified nonelective contributions. (2) For participation in the allocations described in (1), the eligibility conditions are: (Choose at least one of (a) through (d)) [_] (a) ___ (one or two) Year(s) of Service, without an intervening Break in Service (as described in Section 2.03(A) of the Plan) if the requirement is two Years of Service. [_] (b) ___ months (not exceeding 24) following the Employee's Employment Commencement Date. 5 Greater Bay Bancorp 401(k) Plan [_] (c) One Hour of Service. [_] (d) Attainment of age ___ (Specify age, not exceeding 21). Plan Entry Date. "Plan Entry Date" means the Effective Date and: (Choose (d), (e) or (f)) [_] (d) Semi-annual Entry Dates. The first day of the Plan Year and the first day of the seventh month of the Plan Year. [_] (e) The first day of the Plan Year. [X] (f) (Specify entry dates) The first day of each calendar month. ------------------------------------- Time of Participation. An Employee will become a Participant (and, if applicable, will participate in the allocations described in Option (c)(1)), unless excluded under Adoption Agreement Section 1.07, on the Plan Entry Date (if employed on that date): (Choose (g), (h) or (i)) [X] (g) immediately following [_] (h) immediately preceding [_] (i) nearest the date the Employee completes the eligibility conditions described in Options (a) and (b) (or in Option (c)(2) if applicable) of this Adoption Agreement Section 2.01. [Note: The Employer must coordinate the selection of (g), (h) or (i) with the "Plan Entry Date" selection in (d), (e) or (f). Unless otherwise excluded under Section 1.07, the Employee must become a Participant by the earlier of: (1) the first day of the Plan Year beginning after the date the Employee completes the age and service requirements of Code ss.410(a); or (2) 6 months after the date the Employee completes those requirements.] Dual eligibility. The eligibility conditions of this Section 2.01 apply to: (Choose (j) or (k)) [_] (j) All Employees of the Employer, except: (Choose (1) or (2)) [_] (1) No exceptions. [_] (2) Employees who are Participants in the Plan as of the Effective Date. [X] (k) Solely to an Employee employed by the Employer after December 31, 2000. If the Employee was employed by the Employer on or before the specified date, the Employee will become a Participant: (Choose (1), (2) or (3)) [_] (1) On the latest of the Effective Date, his Employment Commencement Date or the date he attains age ___ (not to exceed 21). [X] (2) Under the eligibility conditions in effect under the Plan prior to the restated Effective Date. If the restated Plan required more than one Year of Service to participate, the eligibility condition under this Option (2) for participation in the Code ss.401(k) arrangement under this Plan is one Year of Service for Plan Years beginning after December 31, 1988. [For restated plans only] [_] (3) (Specify) ___. 6 Greater Bay Bancorp 401(k) Plan 2.02 YEAR OF SERVICE - PARTICIPATION. ------------------------------- Hours of Service. An Employee must complete: (Choose (a) or (b)) [_] (a) 1,000 Hours of Service (applies to employees scheduled to work less than 20 hours per week) [X] (b) 0 Hours of Service --- during an eligibility computation period to receive credit for a Year of Service. [Note: The Hours of Service requirement may not exceed 1,000.] Eligibility computation period. After the initial eligibility computation period described in Section 2.02 of the Plan, the Plan measures the eligibility computation period as: (Choose (c) or (d)) [_] (c) The 12 consecutive month period beginning with each anniversary of an Employee's Employment Commencement Date. [X] (d) The Plan Year, beginning with the Plan Year which includes the first anniversary of the Employee's Employment Commencement Date. 2.03 BREAK IN SERVICE - PARTICIPATION. The Break in Service rule described --------------------------------- in Section 2.03(B) of the Plan: (Choose (a) or (b)) [X] (a) Does not apply to the Employer's Plan. [_] (b) Applies to the Employer's Plan. 2.06 ELECTION NOT TO PARTICIPATE. The Plan: (Choose (a) or (b)) ---------------------------- [X] (a) Does not permit an eligible Employee or a Participant to elect not to participate. [_] (b) Does permit an eligible Employee or a Participant to elect not to participate in accordance with Section 2.06 and with the following rules: (Complete (1), (2), (3) and (4)) (1) An election is effective for a Plan Year if filed no later than ____. (2) An election not to participate must be effective for at least _____ Plan Year(s). (3) Following a re-election to participate, the Employee or Participant: [_] (a) May not again elect not to participate for any subsequent Plan Year. [_] (b) May again elect not to participate, but not earlier than the Plan Year following the Plan Year in which the re-election first was effective. (4) (Specify) ___ [Insert "N/A" if no other rules apply]. 7 Greater Bay Bancorp 401(k) Plan ARTICLE III EMPLOYER CONTRIBUTIONS AND FORFEITURES 3.01 AMOUNT. ------ Part I. [Options (a) through (g)] Amount of Employer's contribution. The Employer's annual contribution to the Trust will equal the total amount of deferral contributions, matching contributions, qualified nonelective contributions and nonelective contributions, as determined under this Section 3.01. (Choose any combination of (a), (b), (c) and (d), or choose (e)) [X] (a) Deferral contributions (Code (S)401(k) arrangement). (Choose (1) or (2) or both) [X] (1) Salary reduction arrangement. The Employer must contribute the amount by which the Participants have reduced their Compensation for the Plan Year, pursuant to their salary reduction agreements on file with the Advisory Committee. A reference in the Plan to salary reduction contributions is a reference to these amounts. [X] (2) Cash or deferred arrangement. The Employer will contribute on behalf of each Participant the portion of the Participant's proportionate share of the cash or deferred contribution which he has not elected to receive in cash. See Section 14.02 of the Plan. The Employer's cash or deferred contribution is the amount the Employer may from time to time deem advisable which the Employer designates as a cash or deferred contribution prior to making that contribution to the Trust. [X] (b) Matching contributions. The Employer will make matching contributions in accordance with the formula(s) elected in Part II of this Adoption Agreement Section 3.01. [X] (c) Designated qualified nonelective contributions. The Employer, in its sole discretion, may contribute an amount which it designates as a qualified nonelective contribution. [X] (d) Nonelective contributions. (Choose any combination of (1) through (4)) [X] (1) Discretionary contribution. The amount (or additional amount) the Employer may from time to time deem advisable. [_] (2) The amount (or additional amount) the Employer may from time to time deem advisable, separately determined for each of the following classifications of Participants: (Choose (a) or (b)) [_] (a) Nonhighly Compensated Employees and Highly Compensated Employees. [_] (b) (Specify classifications)__. Under this Option (2), the Advisory Committee will allocate the amount contributed for each Participant classification in accordance with Part II of Adoption Agreement Section 3.04, as if the Participants in that classification were the only Participants in the Plan. [_] (3) __% of the Compensation of all Participants under the Plan, determined for the Employer's taxable year for which it makes the contribution. [Note: The percentage selected may not exceed 15%.] [_] (4) __% of Net Profits but not more than $__. [_] (e) Frozen Plan. This Plan is a frozen Plan effective__. The Employer will not contribute to the Plan with respect to any period following the stated date. 8 Greater Bay Bancorp 401(k) Plan Net Profits. The Employer: (Choose (f) or (g)) [X] (f) Need not have Net Profits to make its annual contribution under this Plan. [_] (g) Must have current or accumulated Net Profits exceeding $__ to make the following contributions: (Choose at least one) [_] (1) Cash or deferred contributions described in Option (a)(2). [_] (2) Matching contributions described in Option (b), except:__. [_] (3) Qualified nonelective contributions described in Option (c). [_] (4) Nonelective contributions described in Option (d). The term "Net Profits" means the Employer's net income or profits for any taxable year determined by the Employer upon the basis of its books of account in accordance with generally accepted accounting practices consistently applied without any deductions for Federal and state taxes upon income or for contributions made by the Employer under this Plan or under any other employee benefit plan the Employer maintains. The term "Net Profits" specifically excludes N/A. [Note: Enter "N/A" if no exclusions apply.] --- If the Employer requires Net Profits for matching contributions and the Employer does not have sufficient Net Profits under Option (g), it will reduce the matching contribution under a fixed formula on a prorata basis for all Participants. A Participant's share of the reduced contribution will bear the same ratio as the matching contribution the Participant would have received if Net Profits were sufficient bears to the total matching contribution all Participants would have received if Net Profits were sufficient. If more than one member of a related group (as defined in Section 1.30) execute this Adoption Agreement, each participating member will determine Net Profits separately but will not apply this reduction unless, after combining the separately determined Net Profits, the aggregate Net Profits are insufficient to satisfy the matching contribution liability. "Net Profits" includes both current and accumulated Net Profits. Part II. [Options (h) through (j)] Matching contribution formula. [Note: If the Employer elected Option (b), complete Options (h), (i) and (j).] [X] (h) Amount of matching contributions. For each Plan Year, the Employer's matching contribution is: (Choose any combination of (1), (2), (3), (4) and (5)) [X] (1) An amount equal to 62.50 % of each Participant's eligible ------ contributions for the Plan Year. [_] (2) An amount equal to __% of each Participant's first tier of eligible contributions for the Plan Year, plus the following matching percentage(s) for the following subsequent tiers of eligible contributions for the Plan Year:__. [_] (3) Discretionary formula. [_] (i) An amount (or additional amount) equal to a matching percentage the Employer from time to time may deem advisable of the Participant's eligible contributions for the Plan Year. [ ] (ii) An amount (or additional amount) equal to a matching percentage the Employer from time to time may deem advisable of each tier of the Participant's eligible contributions for the Plan Year. [_] (4) An amount equal to the following percentage of each Participant's eligible contributions for the Plan Year, based on the Participant's Years of Service: 9 Greater Bay Bancorp 401(k) Plan Number of Years of Service Matching Percentage -------------------------- ------------------- _____ ______ _____ ______ _____ ______ _____ ______ The Advisory Committee will apply this formula by determining Years of Service as follows:__. [_] (5) A Participant's matching contributions may not: (Choose (a) or (b)) [_] (a) Exceed__. [_] (b) Be less than__. Related Employers. If two or more related employers (as defined in Section 1.30) contribute to this Plan, the related employers may elect different matching contribution formulas by attaching to the Adoption Agreement a separately completed copy of this Part II. Note: Separate matching contribution formulas create separate current benefit structures that must satisfy the minimum participation test of Code (S)401(a)(26).] [X] (i) Definition of eligible contributions. Subject to the requirements of Option (j), the term "eligible contributions" means: (Choose any combination of (1) through (3)) [X] (1) Salary reduction contributions. [X] (2) Cash or deferred contributions (including any part of the Participant's proportionate share of the cash or deferred contribution which the Employer defers without the Participant's election). [_] (3) Participant mandatory contributions, as designated in Adoption Agreement Section 4.01. See Section 14.04 of the Plan. [X] (j) Amount of eligible contributions taken into account. When determining a Participant's eligible contributions taken into account under the matching contributions formula(s), the following rules apply: (Choose any combination of (1) through (4)) [_] (1) The Advisory Committee will take into account all eligible contributions credited for the Plan Year. [X] (2) The Advisory Committee will disregard eligible contributions exceeding 8% of the Participant's Compensation. -------------------------------------- [_] (3) The Advisory Committee will treat as the first tier of eligible contributions, an amount not exceeding:__. The subsequent tiers of eligible contributions are:__. [_] (4) (Specify)__. Part III. [Options (k) and (l)]. Special rules for Code (S)401(k) Arrangement. (Choose (k) or (l), or both, as applicable) [X] (k) Salary Reduction Agreements. The following rules and restrictions apply to an Employee's salary reduction agreement: (Make a selection under (1), (2), (3) and (4)) 10 Greater Bay Bancorp 401(k) Plan (1) Limitation on amount. The Employee's salary reduction contributions: (Choose (a) or at least one of (b) or (c)) [_] (a) No maximum limitation other than as provided in the Plan. [X] (b) May not exceed 15 % of Compensation for the Plan Year, subject to ---- the annual additions limitation described in Part 2 of Article III and the 402(g) limitation described in Section 14.07 of the Plan. [_] (c) Based on percentages of Compensation must equal at least__. (2) An Employee may revoke, on a prospective basis, a salary reduction agreement: (Choose (a), (b), (c) or (d)) [_] (a) Once during any Plan Year but not later than __ of the Plan Year. [_] (b) As of any Plan Entry Date. [_] (c) As of the first day of any month. [X] (d) (Specify, but must be at least once per Plan Year) At any time. -------------- (3) An Employee who revokes his salary reduction agreement may file a new salary reduction agreement with an effective date: (Choose (a), (b), (c) or (d)) [_] (a) No earlier than the first day of the next Plan Year. [_] (b) As of any subsequent Plan Entry Date. [X] (c) As of the first day of any month subsequent to the month in which he revoked an Agreement. [_] (d) (Specify, but must be at least once per Plan Year following the Plan Year of revocation)__. (4) A Participant may increase or may decrease, on a prospective basis, his salary reduction percentage or dollar amount: (Choose (a), (b), (c) or (d)) [_] (a) As of the beginning of each payroll period. [X] (b) As of the first day of each month. [_] (c) As of any Plan Entry Date. [_] (d) (Specify, but must permit an increase or a decrease at least once per Plan Year)__. [X] (l) Cash or deferred contributions. For each Plan Year for which the Employer makes a designated cash or deferred contribution, a Participant may elect to receive directly in cash not more than the following portion (or, if less, the 402(g) limitation described in Section 14.07 of the Plan) of his proportionate share of that cash or deferred contribution: (Choose (1) or (2)) [X] (1) All or any portion. [_] (2) __%. 11 Greater Bay Bancorp 401(k) Plan 3.04 CONTRIBUTION ALLOCATION. The Advisory Committee will allocate deferral ----------------------- contributions, matching contributions, qualified nonelective contributions and nonelective contributions in accordance with Section 14.06 and the elections under this Adoption Agreement Section 3.04. Part I. [Options (a) through (d)]. Special Accounting Elections. (Choose whichever elections are applicable to the Employer's Plan) [X] (a) Matching Contributions Account. The Advisory Committee will allocate matching contributions to a Participant's: (Choose (1) or (2); (3) is available only in addition to (1)) [X] (1) Regular Matching Contributions Account. [_] (2) Qualified Matching Contributions Account. [_] (3) Except, matching contributions under Option(s) of Adoption Agreement Section 3.01 are allocable to the Qualified Matching Contributions Account. [X] (b) Special Allocation Dates for Salary Reduction Contributions. The Advisory Committee will allocate salary reduction contributions as of the Accounting Date and as of the following additional allocation dates: The --- last day of each Employer payroll period. ---------------------------------------- [X] (c) Special Allocation Dates for Matching Contributions. The Advisory Committee will allocate matching contributions as of the Accounting Date and as of the following additional allocation dates: The last day of each -------------------- Employer payroll period. ----------------------- [X] (d) Designated Qualified Nonelective Contributions - Definition of Participant. For purposes of allocating the designated qualified nonelective contribution, "Participant" means: (Choose (1) or (2)) [_] (1) All Participants. [X] (2) Participants who are Nonhighly Compensated Employees for the Plan Year. [_] (3) (Specify)__. Part II. Method of Allocation - Nonelective Contribution. Subject to any restoration allocation required under Section 5.04, the Advisory Committee will allocate and credit each annual nonelective contribution (and Participant forfeitures treated as nonelective contributions) to the Employer Contributions Account of each Participant who satisfies the conditions of Section 3.06, in accordance with the allocation method selected under this Section 3.04. If the Employer elects Option (e)(2), Option (g)(2) or Option (h), for the first 3% of Compensation allocated to all Participants, "Compensation" does not include any exclusions elected under Adoption Agreement Section 1.12 (other than the exclusion of elective contributions), and the Advisory Committee must take into account the Participant's Compensation for the entire Plan Year. (Choose an allocation method under (e), (f), (g) or (h); (i) is mandatory if the Employer elects (f), (g) or (h); (j) is optional in addition to any other election.) [X] (e) Nonintegrated Allocation Formula. (Choose (1) or (2)) [X] (1) The Advisory Committee will allocate the annual nonelective contributions in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. [_] (2) The Advisory Committee will allocate the annual nonelective contributions in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. For purposes of this Option (2), "Participant" means, in addition to a Participant who satisfies the requirements of Section 3.06 for the Plan Year, any other Participant entitled to a top heavy minimum allocation 12 Greater Bay Bancorp 401(k) Plan under Section 3.04(B), but such Participant's allocation will not exceed 3% of his Compensation for the Plan Year. [_] (f) Two-Tiered Integrated Allocation Formula - Maximum Disparity. First, the Advisory Committee will allocate the annual Employer nonelective contributions in the same ratio that each Participant's Compensation plus Excess Compensation for the Plan Year bears to the total Compensation plus Excess Compensation of all Participants for the Plan Year. The allocation under this paragraph, as a percentage of each Participant's Compensation plus Excess Compensation, must not exceed the applicable percentage (5.7%, 5.4% or 4.3%) listed under the Maximum Disparity Table following Option (i). The Advisory Committee then will allocate any remaining nonelective contributions in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. [_] (g) Three-Tiered Integrated Allocation Formula. First, the Advisory Committee will allocate the annual Employer nonelective contributions in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. The allocation under this paragraph, as a percentage of each Participant's Compensation may not exceed the applicable percentage (5.7%, 5.4% or 4.3%) listed under the Maximum Disparity Table following Option (i). Solely for purposes of the allocation in this first paragraph, "Participant" means, in addition to a Participant who satisfies the requirements of Section 3.06 for the Plan Year. (Choose (1) or (2)) [_] (1) No other Participant. [_] (2) Any other Participant entitled to a top heavy minimum allocation under Section 3.04(B), but such Participant's allocation under this Option (g) will not exceed 3% of his Compensation for the Plan Year. As a second tier allocation, the Advisory Committee will allocate the nonelective contributions in the same ratio that each Participant's Excess Compensation for the Plan Year bears to the total Excess Compensation of all Participants for the Plan Year. The allocation under this paragraph, as a percentage of each Participant's Excess Compensation, may not exceed the allocation percentage in the first paragraph. Finally, the Advisory Committee will allocate any remaining nonelective contributions in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. [_] (h) Four-Tiered Integrated Allocation Formula. First, the Advisory Committee will allocate the annual Employer nonelective contributions in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year, but not exceeding 3% of each Participant's Compensation. Solely for purposes of this first tier allocation, a "Participant" means, in addition to any Participant who satisfies the requirements of Section 3.06 for the Plan Year, any other Participant entitled to a top heavy minimum allocation under Section 3.04(B) of the Plan. As a second tier allocation, the Advisory Committee will allocate the nonelective contributions in the same ratio that each Participant's Excess Compensation for the Plan Year bears to the total Excess Compensation of all Participants for the Plan Year, but not exceeding 3% of each Participant's Excess Compensation. As a third tier allocation, the Advisory Committee will allocate the annual Employer contributions in the same ratio that each Participant's Compensation plus Excess Compensation for the Plan Year bears to the total Compensation plus Excess Compensation of all Participants for the Plan Year. The allocation under this paragraph, as a percentage of each Participant's Compensation plus Excess Compensation, must not exceed the applicable percentage (2.7%, 2.4% or 1.3%) listed under the Maximum Disparity Table following Option (i). 13 Greater Bay Bancorp 401(k) Plan The Advisory Committee then will allocate any remaining nonelective contributions in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. [_] (i) Excess Compensation. For purposes of Option (f), (g) or (h), "Excess Compensation" means Compensation in excess of the following Integration Level: (Choose (1) or (2)) [_] (1) ___% (not exceeding 100%) of the taxable wage base, as determined under Section 230 of the Social Security Act, in effect on the first day of the Plan Year: (Choose any combination of (a) and (b) or choose (c)) [_] (a) Rounded to __(but not exceeding the taxable wage base). [_] (b) But not greater than $__. [_] (c) Without any further adjustment or limitation. [_] (2) $__ [Note: Not exceeding the taxable wage base for the Plan Year in which this Adoption Agreement first is effective.] Maximum Disparity Table. For purposes of Options (f), (g) and (h), the applicable percentage is:
Integration Level (as Applicable Percentages for Applicable Percentages percentage of taxable wage base) Option (f) or Option (g) for Option (h) - -------------------------------- ------------------------ -------------- 100% 5.7% 2.7% More than 80% but less than 100% 5.4% 2.4% More than 20% (but not less than $10,001) and not more than 80% 4.3% 1.3% 20% (or $10,000, if greater) or less 5.7% 2.7%
[_] (j) Allocation offset. The Advisory Committee will reduce a Participant's allocation otherwise made under Part II of this Section 3.04 by the Participant's allocation under the following qualified plan(s) maintained by the Employer:__. The Advisory Committee will determine this allocation reduction: (Choose (1) or (2)) [_] (1) By treating the term "nonelective contribution" as including all amounts paid or accrued by the Employer during the Plan Year to the qualified plan(s) referenced under this Option (j). If a Participant under this Plan also participates in that other plan, the Advisory Committee will treat the amount the Employer contributes for or during a Plan Year on behalf of a particular Participant under such other plan as an amount allocated under this Plan to that Participant's Account for that Plan Year. The Advisory Committee will make the computation of allocation required under the immediately preceding sentence before making any allocation of nonelective contributions under this Section 3.04. [_] (2) In accordance with the formula provided in an addendum to this Adoption Agreement, numbered 3.04(j). Top Heavy Minimum Allocation - Method of Compliance. If a Participant's allocation under this Section 3.04 is less than the top heavy minimum allocation to which he is entitled under Section 3.04(B): (Choose (k) or (l)) 14 Greater Bay Bancorp 401(k) Plan [X] (k) The Employer will make any necessary additional contribution to the Participant's Account, as described in Section 3.04(B)(7)(a) of the Plan. [_] (l) The Employer will satisfy the top heavy minimum allocation under the following plan(s) it maintains: ___. However, the Employer will make any necessary additional contribution to satisfy the top heavy minimum allocation for an Employee covered only under this Plan and not under the other plan(s) designated in this Option (l). See Section 3.04(B)(7)(b) of the Plan. If the Employer maintains another plan, the Employer may provide in an addendum to this Adoption Agreement, numbered Section 3.04, any modifications to the Plan necessary to satisfy the top heavy requirements under Code (S)416. Related employers. If two or more related employers (as defined in Section 1.30) contribute to this Plan, the Advisory Committee must allocate all Employer nonelective contributions (and forfeitures treated as nonelective contributions) to each Participant in the Plan, in accordance with the elections in this Adoption Agreement Section 3.04: (Choose (m) or (n)) [X] (m) Without regard to which contributing related group member employs the Participant. [_] (n) Only to the Participants directly employed by the contributing Employer. If a Participant receives Compensation from more than one contributing Employer, the Advisory Committee will determine the allocations under this Adoption Agreement Section 3.04 by prorating among the participating Employers the Participant's Compensation and, if applicable, the Participant's Integration Level under Option (i). 3.05 FORFEITURE ALLOCATION. Subject to any restoration allocation required --------------------- under Sections 5.04 or 9.14, the Advisory Committee will allocate a Participant forfeiture in accordance with Section 3.04: (Choose (a) or (b); (c) and (d) are optional in addition to (a) or (b)) [_] (a) As an Employer nonelective contribution for the Plan Year in which the forfeiture occurs, as if the Participant forfeiture were an additional nonelective contribution for that Plan Year. [X] (b) To reduce the Employer matching contributions and nonelective contributions for the Plan Year: (Choose (1) or (2)) [X] (1) in which the forfeiture occurs. [_] (2) immediately following the Plan Year in which the forfeiture occurs. [_] (c) To the extent attributable to matching contributions: (Choose (1), (2) or (3)) [_] (1) In the manner elected under Options (a) or (b). [_] (2) First to reduce Employer matching contributions for the Plan Year: (Choose (a) or (b)) [_] (a) in which the forfeiture occurs, [_] (b) immediately following the Plan Year in which the forfeiture occurs, then as elected in Options (a) or (b). [_] (3) As a discretionary matching contribution for the Plan Year in which the forfeiture occurs, in lieu of the manner elected under Options (a) or (b). [_] (d) First to reduce the Plan's ordinary and necessary administrative expenses for the Plan Year and then will allocate any remaining forfeitures in the manner described in Options (a), (b) or (c), whichever applies. If the Employer elects Option (c), the forfeitures used to reduce Plan expenses: (Choose (1) or (2)) 15 Greater Bay Bancorp 401(k) Plan [_] (1) relate proportionately to forfeitures described in Option (c) and to forfeitures described in Options (a) or (b). [_] (2) relate first to forfeitures described in Option ___. Allocation of forfeited excess aggregate contributions. The Advisory Committee will allocate any forfeited excess aggregate contributions (as described in Section 14.09): (Choose (e), (f) or (g)) [X] (e) To reduce Employer matching contributions for the Plan Year: (Choose (1) or (2)) [X] (1) in which the forfeiture occurs. [_] (2) immediately following the Plan Year in which the forfeiture occurs. [_] (f) As Employer discretionary matching contributions for the Plan Year in which forfeited, except the Advisory Committee will not allocate these forfeitures to the Highly Compensated Employees who incurred the forfeitures. [_] (g) In accordance with Options (a) through (d), whichever applies, except the Advisory Committee will not allocate these forfeitures under Option (a) or under Option (c)(3) to the Highly Compensated Employees who incurred the forfeitures. 3.06 ACCRUAL OF BENEFIT. ------------------ Compensation taken into account. For the Plan Year in which the Employee first becomes a Participant, the Advisory Committee will determine the allocation of any cash or deferred contribution, designated qualified nonelective contribution by taking into account: (Choose (a) or (b)) [X] (a) The Employee's Compensation for the entire Plan Year. [_] (b) The Employee's Compensation for the portion of the Plan Year in which the Employee actually is a Participant in the Plan. Accrual Requirements. Subject to the suspension of accrual requirements of Section 3.06(E) of the Plan, to receive an allocation of cash or deferred contributions, matching contributions, designated qualified nonelective contributions, nonelective contributions and Participant forfeitures, if any, for the Plan Year, a Participant must satisfy the conditions described in the following elections: (Choose (c), or at least one of (d) through (f)) [_] (c) Safe harbor rule. If the Participant is employed by the Employer on the last day of the Plan Year, the Participant must complete at least one Hour of Service for that Plan Year. If the Participant is not employed by the Employer on the last day of the Plan Year, the Participant must complete at least 501 Hours of Service during the Plan Year. [X] (d) Hours of Service condition. The Participant must complete the following minimum number of Hours of Service during the Plan Year: (Choose at least one of (1) through (5)) [X] (1) 1,000 Hours of Service. [_] (2) (Specify, but the number of Hours of Service may not exceed 1,000) ___. [X] (3) No Hour of Service requirement if the Participant terminates employment during the Plan Year on account of: (Choose (a), (b) or (c)) [X] (a) Death. 16 Greater Bay Bancorp 401(k) Plan [X] (b) Disability. [X] (c) Attainment of Normal Retirement Age in the current Plan Year or in a prior Plan Year. [_] (4) ___ Hours of Service (not exceeding 1,000) if the Participant terminates employment with the Employer during the Plan Year, subject to any election in Option (3). [X] (5) No Hour of Service requirement for an allocation of the following contributions: Salary reduction contributions and matching ------------------------------------------- contributions. -------------- [X] (e) Employment condition. The Participant must be employed by the Employer on the last day of the Plan Year, irrespective of whether he satisfies any Hours of Service condition under Option (d), with the following exceptions: (Choose (1) or at least one of (2) through (5)) [_] (1) No exceptions. [X] (2) Termination of employment because of death. [X] (3) Termination of employment because of disability. [X] (4) Termination of employment following attainment of Normal Retirement Age. [X] (5) No employment condition for the following contributions: Salary ------ reduction contributions and matching contributions. --------------------------------------------------- [_] (f) (Specify other conditions, if applicable): ___. Suspension Accrual Requirements. The suspension of accrual requirements of Section 3.06(E) of the Plan: (Choose (g), (h) or (i)) [X] (g) Applies to the Employer's Plan. [_] (h) Does not apply to the Employer's Plan. [_] (i) Applies in modified form to the Employer's Plan, as described in an addendum to this Adoption Agreement, numbered Section 3.06(E). Special accrual requirements for matching contributions. If the Plan allocates matching contributions on two or more allocation dates for a Plan Year, the Advisory Committee, unless otherwise specified in Option (l), will apply any Hours of Service condition by dividing the required Hours of Service on a prorata basis to the allocation periods included in that Plan Year. Furthermore, a Participant who satisfies the conditions described in this Adoption Agreement Section 3.06 will receive an allocation of matching contributions (and forfeitures treated as matching contributions) only if the Participant satisfies the following additional condition(s): (Choose (j) or at least one of (k) or (l)) [X] (j) No additional conditions. [_] (k) The Participant is not a Highly Compensated Employee for the Plan Year. This Option (k) applies to: (Choose (1) or (2)) [_] (1) All matching contributions. [_] (2) Matching contributions described in Option(s) ___ of Adoption Agreement Section 3.01. 17 Greater Bay Bancorp 401(k) Plan [_] (l) (Specify) ___. 3.15 MORE THAN ONE PLAN LIMITATION. If the provisions of Section 3.15 ------------------------------ apply, the Excess Amount attributed to this Plan equals: (Choose (a), (b) or (c)) [X] (a) The product of: (1) the total Excess Amount allocated as of such date (including any amount which the Advisory Committee would have allocated but for the limitations of Code ss.415), times (2) the ratio of (1) the amount allocated to the Participant as of such date under this Plan divided by (2) the total amount allocated as of such date under all qualified defined contribution plans (determined without regard to the limitations of Code ss.415). [_] (b) The total Excess Amount. [_] (c) None of the Excess Amount. 3.18 DEFINED BENEFIT PLAN LIMITATION. ------------------------------- Application of limitation. The limitation under Section 3.18 of the Plan: (Choose (a) or (b)) [X] (a) Does not apply to the Employer's Plan because the Employer does not maintain and never has maintained a defined benefit plan covering any Participant in this Plan. [_] (b) Applies to the Employer's Plan. To the extent necessary to satisfy the limitation under Section 3.18, the Employer will reduce: (Choose (1) or (2)) [_] (1) The Participant's projected annual benefit under the defined benefit plan under which the Participant participates. [_] (2) Its contribution or allocation on behalf of the Participant to the defined contribution plan under which the Participant participates and then, if necessary, the Participant's projected annual benefit under the defined benefit plan under which the Participant participates. [Note: If the Employer selects (a), the remaining options in this Section 3.18 do not apply to the Employer's Plan.] Coordination with top heavy minimum allocation. The Advisory Committee will apply the top heavy minimum allocation provisions of Section 3.04(B) of the Plan with the following modifications: (Choose (c) or at least one of (d) or (e)) [_] (c) No modifications. [_] (d) For Non-Key Employees participating only in this Plan, the top heavy minimum allocation is the minimum allocation described in Section 3.04(B) determined by substituting __% (not less than 4%) for 3%," except: (Choose (1) or (2)) [_] (1) No exceptions. [_] (2) Plan Years in which the top heavy ratio exceeds 90%. [_] (e) For Non-Key Employees also participating in the defined benefit plan, the top heavy minimum is: (Choose (1) or (2)) 18 Greater Bay Bancorp 401(k) Plan [_] (1) 5% of Compensation (as determined under Section 3.04(B) of the Plan) irrespective of the contribution ate of any Key Employee, except: (Choose (i) or (ii)) [_] (a) No exceptions. [_] (b) Substituting "7 1/2%" for "5%" if the top heavy ratio does not exceed 90%. [_] (2) 0%. [Note: The Employer may not select this Option (2) unless the defined benefit plan satisfies the top heavy minimum benefit requirements of Codess.416 for these Non-Key Employees.] Actuarial Assumptions for Top Heavy Calculation. To determine the top heavy ratio, the Advisory Committee will use the following interest rate and mortality assumptions to value accrued benefits under a defined benefit plan: . If the elections under this Section 3.18 are not appropriate to satisfy the limitations of Section 3.18, or the top heavy requirements under Code ss.416, the Employer must provide the appropriate provisions in an addendum to this Adoption Agreement. ARTICLE IV PARTICIPANT CONTRIBUTIONS 4.01 PARTICIPANT NONDEDUCTIBLE CONTRIBUTIONS. The Plan: (Choose (a) or (b); ---------------------------------------- (c) is available only with (b)) [X] (a) Does not permit Participant nondeductible contributions. [_] (b) Permits Participant nondeductible contributions, pursuant to Section 14.04 of the Plan. [_] (c) The following portion of the Participant's nondeductible contributions for the Plan Year are mandatory contributions under Option (i)(3) of Adoption Agreement Section 3.01: (Choose (1) or (2)) [_] (1) The amount which is not less than: ___. [_] (2) The amount which is not greater than: ___. Allocation dates. The Advisory Committee will allocate nondeductible contributions for each Plan Year as of the Accounting Date and the following additional allocation dates: (Choose (d) or (e)) [_] (d) No other allocation dates. [_] (e) (Specify) ___. As of an allocation date, the Advisory Committee will credit all nondeductible contributions made for the relevant allocation period. Unless otherwise specified in (e), a nondeductible contribution relates to an allocation period only if actually made to the Trust no later than 30 days after that allocation period ends. 4.05 PARTICIPANT CONTRIBUTION - WITHDRAWAL/DISTRIBUTION. Subject to the -------------------------------------------------- restrictions of Article VI, the following distribution options apply to a Participant's Mandatory Contributions Account, if any, prior to his Separation from Service: (Choose (a) or at least one of (b) through (d)) [_] (a) No distribution options prior to Separation from Service. [_] (b) he same distribution options applicable to the Deferral Contributions Account prior to the Participant's Separation from Service, as elected in Adoption Agreement Section 6.03. 19 Greater Bay Bancorp 401(k) Plan [_] (c) Until he retires, the Participant has a continuing election to receive all or any portion of his Mandatory Contributions Account if: (Choose (1) or at least one of (2) through (4)) [_] (1) No conditions. [_] (2) The mandatory contributions have accumulated for at least Plan Years since the Plan Year for which contributed. [_] (3) The Participant suspends making nondeductible contributions for a period of ___ months. [_] (4) (Specify) ___. [_] (d) (Specify) ___. ARTICLE V TERMINATION OF SERVICE - PARTICIPANT VESTING 5.01 NORMAL RETIREMENT. Normal Retirement Age under the Plan is: (Choose ----------------- (a) or (b)) [X] (a) 65 [State age, but may not exceed age 65]. --- [_] (b) The later of the date the Participant attains ___ years of age or the ___ anniversary of the first day of the Plan Year in which the Participant commenced participation in the Plan. [The age selected may not exceed age 65 and the anniversary selected may not exceed the 5th.] 5.02 PARTICIPANT DEATH OR DISABILITY. The 100% vesting rule under Section ------------------------------- 5.02 of the Plan: (Choose (a) or choose one or both of (b) and (c)) [_] (a) Does not apply. [X] (b) Applies to death. [X] (c) Applies to disability. 5.03 VESTING SCHEDULE. ---------------- Deferral Contributions Account/Qualified Matching Contributions Account/Qualified Nonelective Contributions Account/Mandatory Contributions Account. A Participant has a 100% Nonforfeitable interest at all times in his Deferral Contributions Account, his Qualified Matching Contributions Account, his Qualified Nonelective Contributions Account and in his Mandatory Contributions Account. Regular Matching Contributions Account/Employer Contributions Account. With respect to a Participant's Regular Matching Contributions Account and Employer Contributions Account, the Employer elects the following vesting schedule: (Choose (a) or (b); (c) and (d) are available only as additional options) [_] (a) Immediate vesting. 100% Nonforfeitable at all times. [Note: The Employer must elect Option (a) if the eligibility conditions under Adoption Agreement Section 2.01(c) require 2 years of service or more than 12 months of employment.] [X] (b) Graduated Vesting Schedules. 20 Greater Bay Bancorp 401(k) Plan Top Heavy Schedule Non Top Heavy Schedule (Mandatory) (Optional) Years of Nonforfeitable Years of Nonforfeitable Service Percentage Service Percentage ------- ---------- ------- ---------- Less than 1 0% Less than 1 __% 1 25% 1 __% 2 50% 2 __% 3 75% 3 __% 4 100% 4 __% 5 100% 5 __% 6 or more 100% 6 __% 7 or more 100% [_] (c) Special vesting election for Regular Matching Contributions Account. In lieu of the election under Options (a) or (b), the Employer elects the following vesting schedule for a Participant's Regular Matching Contributions Account: (Choose (1) or (2)) [_] (1) 100% Nonforfeitable at all times. [_] (2) In accordance with the vesting schedule described in the addendum to this Adoption Agreement, numbered 5.03(c). [Note: If the Employer elects this Option (c)(2), the addendum must designate the applicable vesting schedule(s) using the same format as used in Option (b).] [Note: Under Options (b) and (c)(2), the Employer must complete a Top Heavy Schedule which satisfies Codess.416. The Employer, at its option, may complete a Non Top Heavy Schedule. The Non Top Heavy Schedule must satisfy Codess.411(a)(2). Also see Section 7.05 of the Plan.] [_] (d) The Top Heavy Schedule under Option (b) (and, if applicable, under Option (c)(2)) applies: (Choose (1) or (2)) [_] (1) Only in a Plan Year for which the Plan is top heavy. [_] (2) In the Plan Year for which the Plan first is top heavy and then in all subsequent Plan Years. [Note: The Employer may not elect Option (d) unless it has completed a Non Top Heavy Schedule.] Minimum vesting. (Choose (e) or (f)) [X] (e) The Plan does not apply a minimum vesting rule. [_] (f) A Participant's Nonforfeitable Accrued Benefit will never be less than the lesser of $ or his entire Accrued Benefit, even if the application of a graduated vesting schedule under Options (b) or (c) would result in a smaller Nonforfeitable Accrued Benefit. Life Insurance Investments. The Participant's Accrued Benefit attributable to insurance contracts purchased on his behalf under Article XI is: (Choose (g) or (h)) [X] (g) Subject to the vesting election under Options (a), (b) or (c). [_] (h) 100% Nonforfeitable at all times, irrespective of the vesting election under Options (b) or (c)(2). 21 Greater Bay Bancorp 401(k) Plan 5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION -------------------------------------------------------------------- OF FORFEITED ACCRUED BENEFIT. The deemed cash-out rule described in Section - ---------------------------- 5.04(C) of the Plan: (Choose (a) or (b)) [_] (a) Does not apply. [X] (b) Will apply to determine the timing of forfeitures for 0% vested Participants. A Participant is not a 0% vested Participant if he has a Deferral Contributions Account. 5.06 YEAR OF SERVICE - VESTING. ------------------------- Vesting computation period. The Plan measures a Year of Service on the basis of the following 12 consecutive month periods: (Choose (a) or (b)) [X] (a) Plan Years. [_] (b) Employment Years. An Employment Year is the 12 consecutive month period measured from the Employee's Employment Commencement Date and each successive 12 consecutive month period measured from each anniversary of that Employment Commencement Date. Hours of Service. The minimum number of Hours of Service an Employee must complete during a vesting computation period to receive credit for a Year of Service is: (Choose (c) or (d)) [X] (c) 1,000 Hours of Service. [_] (d) __ Hours of Service. [Note: The Hours of Service requirement may not exceed 1,000.] 5.08 INCLUDED YEARS OF SERVICE - VESTING. The Employer specifically ----------------------------------- excludes the following Years of Service: (Choose (a) or at least one of (b) through (e)) [X] (a) None other than as specified in Section 5.08(a) of the Plan. [_] (b) Any Year of Service before the Participant attained the age of _. [Note: The age selected may not exceed age 18.] [_] (c) Any Year of Service during the period the Employer did not maintain this Plan or a predecessor plan. [_] (d) Any Year of Service before a Break in Service if the number of consecutive Breaks in Service equals or exceeds the greater of 5 or the aggregate number of the Years of Service prior to the Break. This exception applies only if the Participant is 0% vested in his Accrued Benefit derived from Employer contributions at the time he has a Break in Service. Furthermore, the aggregate number of Years of Service before a Break in Service do not include any Years of Service not required to be taken into account under this exception by reason of any prior Break in Service. [_] (e) Any Year of Service earned prior to the effective date of ERISA if the Plan would have disregarded that Year of Service on account of an Employee's Separation from Service under a Plan provision in effect and adopted before January 1, 1974. 22 Greater Bay Bancorp 401(k) Plan ARTICLE VI TIME AND METHOD OF PAYMENTS OF BENEFITS Code (S)411(d)(6) Protected Benefits. The elections under this Article VI may not eliminate Code (S)411(d)(6) protected benefits. To the extent the elections would eliminate a Code ss.411(d)(6) protected benefit, see Section 13.02 of the Plan. Furthermore, if the elections liberalize the optional forms of benefit under the Plan, the more liberal options apply on the later of the adoption date or the Effective Date of this Adoption Agreement. 6.01 TIME OF PAYMENT OF ACCRUED BENEFIT. ---------------------------------- Distribution date. A distribution date under the Plan means any day the New York -------------------- Stock Exchange and the Trustee are open and conducting business . [Note: The - ---------------------------------------------------------------- Employer must specify the appropriate date(s). The specified distribution dates primarily establish annuity starting dates and the notice and consent periods prescribed by the Plan. The Plan allows the Trustee an administratively practicable period of time to make the actual distribution relating to a particular distribution date.] Nonforfeitable Accrued Benefit Not Exceeding $3,500. Subject to the limitations of Section 6.01(A)(1), the distribution date for distribution of a Nonforfeitable Accrued Benefit not exceeding $3,500 is: (Choose (a), (b), (c) (d) or (e)) [_] (a) __ of the __ Plan Year beginning after the Participant's Separation from Service. [X] (b) The first administratively feasible distribution date following the Participant's Separation from Service. [_] (c) __ of the Plan Year after the Participant incurs __ Break(s) in Service (as defined in Article V). [_] (d) __ following the Participant's attainment of Normal Retirement Age, but not earlier than days following his Separation from Service. [_] (e) (Specify) __. Nonforfeitable Accrued Benefit Exceeds $3,500. See the elections under Section 6.03. Disability. The distribution date, subject to Section 6.01(A)(3), is: (Choose (f), (g) or (h)) [_] (f) __ after the Participant terminates employment because of disability. [X] (g) The same as if the Participant had terminated employment without disability. [_] (h) (Specify) __. Hardship. (Choose (i) or (j)) [X] (i) The Plan does not permit a hardship distribution to a Participant who has separated from Service. [_] (j) The Plan permits a hardship distribution to a Participant who has separated from Service in accordance with the hardship distribution policy stated in: (Choose (1), (2) or (3)) [_] (1) Section 6.01(A)(4) of the Plan. [_] (2) Section 14.11 of the Plan. [_] (3) The addendum to this Adoption Agreement, numbered Section 6.01. 23 Greater Bay Bancorp 401(k) Plan Default on a Loan. If a Participant or Beneficiary defaults on a loan made pursuant to a loan policy adopted by the Advisory Committee pursuant to Section 9.04, the Plan: (Choose (k), (l) or (m)) [X] (k) Treats the default as a distributable event. The Trustee, at the time of the default, will reduce the Participant's Nonforfeitable Accrued Benefit by the lesser of the amount in default (plus accrued interest) or the Plan's security interest in that Nonforfeitable Accrued Benefit. To the extent the loan is attributable to the Participant's Deferral Contributions Account, Qualified Matching Contributions Account or Qualified Nonelective Contributions Account, the Trustee will not reduce the Participant's Nonforfeitable Accrued Benefit unless the Participant has separated from Service or unless the Participant has attained age 59 1/2. [_] (l) Does not treat the default as a distributable event. When an otherwise distributable event first occurs pursuant to Section 6.01 or Section 6.03 of the Plan, the Trustee will reduce the Participant's Nonforfeitable Accrued Benefit by the lesser of the amount in default (plus accrued interest) or the Plan's security interest in that Nonforfeitable Accrued Benefit. [_] (m) (Specify) __. 6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. The Advisory Committee will ------------------------------------ apply Section 6.02 of the Plan with the following modifications: (Choose (a) or at least one of (b), (c), (d) and (e)) [X] (a) No modifications. [_] (b) Except as required under Section 6.01 of the Plan, a lump sum distribution is not available: __. [_] (c) An installment distribution: (Choose (1) or at least one of (2) or (3)) [_] (1) Is not available under the Plan. [_] (2) May not exceed the lesser of __ years or the maximum period permitted under Section 6.02. [_] (3) (Specify) __. [_] (d) The Plan permits the following annuity options: __. Any Participant who elects a life annuity option is subject to the requirements of Sections 6.04(A), (B), (C) and (D) of the Plan. See Section 6.04(E). [Note: The Employer may specify additional annuity options in an addendum to this Adoption Agreement, numbered 6.02(d).] [_] (e) If the Plan invests in qualifying Employer securities, as described in Section 10.03(F), a Participant eligible to elect distribution under Section 6.03 may elect to receive that distribution in Employer securities only in accordance with the provisions of the addendum to this Adoption Agreement, numbered 6.02(e). 6.03 BENEFIT PAYMENT ELECTIONS. ------------------------- Participant Elections After Separation from Service. A Participant who is eligible to make distribution elections under Section 6.03 of the Plan may elect to commence distribution of his Nonforfeitable Accrued Benefit: (Choose at least one of (a) through (c)) [_] (a) As of any distribution date, but not earlier than __ of the __ Plan Year beginning after the Participant's Separation from Service. [X] (b) As of the following date(s): (Choose at least one of Options (1) through (6)) 24 Greater Bay Bancorp 401(k) Plan [_] (1) Any distribution date after the close of the Plan Year in which the Participant attains Normal Retirement Age. [X] (2) Any distribution date following his Separation from Service with the Employer. [_] (3) Any distribution date in the __ Plan Year(s) beginning after his Separation from Service. [_] (4) Any distribution date in the Plan Year after the Participant incurs __ Break(s) in Service (as defined in Article V). [_] (5) Any distribution date following attainment of age and completion of at least Years of Service (as defined in Article V). [_] (6) (Specify) __. [_] (c) (Specify) __. The distribution events described in the election(s) made under Options (a), (b) or (c) apply equally to all Accounts maintained for the Participant unless otherwise specified in Option (c). Participant Elections Prior to Separation from Service - Regular Matching Contributions Account and Employer Contributions Account. Subject to the restrictions of Article VI, the following distribution options apply to a Participant's Regular Matching Contributions Account and Employer Contributions Account prior to his Separation from Service. (Choose (d) or at least one of (e) through (h)) [_] (d) No distribution options prior to Separation from Service. [X] (e) Attainment of Specified Age. Until he retires, the Participant has a continuing election to receive all or any portion of his Nonforfeitable interest in these Accounts after he attains: (Choose (1) or (2)) [_] (1) Normal Retirement Age. [X] (2) 59 1/2 years of age and is at least 100 % vested in these ------- ----- Accounts. [Note: If the percentage is less than 100%, see the special vesting formula in Section 5.03.] [_] (f) After a Participant has participated in the Plan for a period of not less than __ years and he is 100% vested in these Accounts, until he retires, the Participant has a continuing election to receive all or any portion of the Accounts. [Note: The number in the blank space may not be less than 5.] [X] (g) Hardship. A Participant may elect a hardship distribution prior to his Separation from Service in accordance with the hardship distribution policy: (Choose (1), (2) or (3); (4) is available only as an additional option) [_] (1) Under Section 6.01(A)(4) of the Plan. [X] (2) Under Section 14.11 of the Plan. [_] (3) Provided in the addendum to this Adoption Agreement, numbered Section 6.03. [_] (4) In no event may a Participant receive a hardship distribution before he is at least __% vested in these Accounts. [Note: If the percentage in the blank is less than 100%, see the special vesting formula in Section 5.03.] [_] (h) (Specify) __. 25 Greater Bay Bancorp 401(k) Plan [Note: The Employer may use an addendum, numbered 6.03, to provide additional language authorized by Options (b)(6), (c), (g)(3) or (h) of this Adoption Agreement Section 6.03.] Participant Elections Prior to Separation from Service - Deferral Contributions Account, Qualified Matching Contributions Account and Qualified Nonelective Contributions Account. Subject to the restrictions of Article VI, the following distribution options apply to a Participant's Deferral Contributions Account, Qualified Matching Contributions Account and Qualified Nonelective Contributions Account prior to his Separation from Service. (Choose (i) or at least one of (j) through (l)) [_] (i) No distribution options prior to Separation from Service. [X] (j) Until he retires, the Participant has a continuing election to receive all or any portion of these Accounts after he attains: (Choose (1) or (2)) [_] (1) The later of Normal Retirement Age or age 59 1/2. [X] (2) Age 59 1/2 (at least 59 1/2). ------ [X] (k) Hardship. A Participant, prior to this Separation from Service, may elect a hardship distribution from his Deferral Contributions Account in accordance with the hardship distribution policy under Section 14.11 of the Plan. [_] (l) (Specify) ___. [Note: Option (l) may not permit in service distributions prior to age 59 1/2 (other than hardship) and may not modify the hardship policy described in Section 14.11.] Sale of trade or business/subsidiary. If the Employer sells substantially all of the assets (within the meaning of Code (S)409(d)(2)) used in a trade or business or sells a subsidiary (within the meaning of Code (S)409(d)(3)), a Participant who continues employment with the acquiring corporation is eligible for distribution from his Deferral Contributions Account, Qualified Matching Contributions Account and Qualified Nonelective Contributions Account: (Choose (m) or (n)) [_] (m) Only as described in this Adoption Agreement Section 6.03 for distributions prior to Separation from Service. [X] (n) As if he has a Separation from Service. After March 31, 1988, a distribution authorized solely by reason of this Option (n) must constitute a lump sum distribution, determined in a manner consistent with Code (S)401(k)(10) and the applicable Treasury regulations. 6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. The ------------------------------------------------------------ annuity distribution requirements of Section 6.04: (Choose (a) or (b)) [X] (a) Apply only to a Participant described in Section 6.04(E) of the Plan (relating to the profit sharing exception to the joint and survivor requirements). [_] (b) Apply to all Participants. ARTICLE IX ADVISORY COMMITTEE - DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS 9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. If a distribution (other than --------------------------------------- a distribution from a segregated Account and other than a corrective distribution described in Sections 14.07, 14.08, 14.09 or 14.10 of the Plan) occurs more than 90 days after the most recent valuation date, the distribution will include interest at: (Choose (a), (b) or (c)) 26 Greater Bay Bancorp 401(k) Plan [X] (a) 0 % per annum. [Note: The percentage may equal 0%.] --- [_] (b) The 90 day Treasury bill rate in effect at the beginning of the current valuation period. [_] (c) (Specify) ___. 9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS. Pursuant to ------------------------------------------------------- Section 14.12, to determine the allocation of net income, gain or loss: (Complete only those items, if any, which are applicable to the Employer's Plan) [X] (a) For salary reduction contributions, the Advisory Committee will: (Choose (1), (2), (3), (4) or (5)) [X] (1) Apply Section 9.11 without modification. [_] (2) Use the segregated account approach described in Section 14.12. [_] (3) Use the weighted average method described in Section 14.12, based on a ___ weighting period. [_] (4) Treat as part of the relevant Account at the beginning of the valuation period ___% of the salary reduction contributions: (Choose (a) or (b)) [_] (a) made during that valuation period. [_] (b) made by the following specified time: ____. [_] (5) Apply the allocation method described in the addendum to this Adoption Agreement numbered 9.11(a). [X] (b) For matching contributions, the Advisory Committee will: (Choose (1), (2) (3) or (4)) [X] (1) Apply Section 9.11 without modification. [_] (2) Use the weighted average method described in Section 14.12, based on a ___ weighting period. [_] (3) Treat as part of the relevant Account at the beginning of the valuation period ___% of the matching contributions allocated during the valuation period. [_] (4) Apply the allocation method described in the addendum to this Adoption Agreement numbered 9.11(b). [X] (c) For Participant nondeductible contributions, the Advisory Committee will: (Choose (1), (2), (3) or (4)) [X] (1) Apply Section 9.11 without modification. [_] (2) Use the segregated account approach described in Section 14.12. [_] (3) Use the weighted average method described in Section 14.12, based on a ____ weighting period. [_] (4) Treat as part of the relevant Account at the beginning of the valuation period ___% of the Participant nondeductible contributions: (Choose (a) or (b)) [_] (a) made during that valuation period. [_] (b) made by the following specified time: ____. 27 Greater Bay Bancorp 401(k) Plan [_] (5) Apply the allocation method described in the addendum to this Adoption Agreement numbered 9.11(c). ARTICLE X TRUSTEE AND CUSTODIAN, POWERS AND DUTIES 10.03 INVESTMENT POWERS. Pursuant to Section 10.03[F] of the Plan, the ------------------ aggregate investments in qualifying Employer securities and in qualifying Employer real property: (Choose (a) or (b)) [_] (a) May not exceed 10% of Plan assets. [X] (b) May not exceed 100 % of Plan assets. [Note: The percentage may not ---- exceed 100%.] 10.14 VALUATION OF TRUST. In addition to each Accounting Date, the Trustee ------------------ must value the Trust Fund on the following valuation date(s): (Choose (a) or (b)) [_] (a) No other mandatory valuation dates. [X] (b) (Specify) every day the New York Stock Exchange and the Trustee are --------------------------------------------------------- open and conducting business. ----------------------------- 28 Greater Bay Bancorp 401(k) Plan EFFECTIVE DATE ADDENDUM (Restated Plans Only) The Employer must complete this addendum only if the restated Effective Date specified in Adoption Agreement Section 1.18 is different than the restated effective date for at least one of the provisions listed in this addendum. In lieu of the restated Effective Date in Adoption Agreement Section 1.18, the following special effective dates apply: (Choose whichever elections apply) [_] (a) Compensation definition. The Compensation definition of Section 1.12 (other than the $200,000 limitation) is effective for Plan Years beginning after ___. [Note: May not be effective later than the first day of the first Plan Year beginning after the Employer executes this Adoption Agreement to restate the Plan for the Tax Reform Act of 1986, if applicable.] [_] (b) Eligibility conditions. The eligibility conditions specified in Adoption Agreement Section 2.01 are effective for Plan Years beginning after ___. [_] (c) Suspension of Years of Service. The suspension of Years of Service rule elected under Adoption Agreement Section 2.03 is effective for Plan Years beginning after ___. [_] (d) Contribution/allocation formula. The contribution formula elected under Adoption Agreement Section 3.01 and the method of allocation elected under Adoption Agreement Section 3.04 is effective for Plan Years beginning after ___. [_] (e) Accrual requirements. The accrual requirements of Section 3.06 are effective for Plan Years beginning after ____. [_] (f) Employment condition. The employment condition of Section 3.06 is effective for Plan Years beginning after ____. [_] (g) Elimination of Net Profits. The requirement for the Employer not to have net profits to contribute to this Plan is effective for Plan Years beginning after ____. [Note: The date specified may not be earlier than December 31, 1985.] [_] (h) Vesting Schedule. The vesting schedule elected under Adoption Agreement Section 5.03 is effective for Plan Years beginning after ____. [_] (i) Allocation of Earnings. The special allocation provisions elected under Adoption Agreement Section 9.11 are effective for Plan Years beginning after ____. [_] (j) (Specify) ____. For Plan Years prior to the special Effective Date, the terms of the Plan prior to its restatement under this Adoption Agreement will control for purposes of the designated provisions. A special Effective Date may not result in the delay of a Plan provision beyond the permissible Effective Date under any applicable law requirements. 29 Greater Bay Bancorp 401(k) Plan Execution Page The Trustee (and Custodian, if applicable), by executing this Adoption Agreement, accepts its position and agrees to all of the obligations, responsibilities and duties imposed upon the Trustee (or Custodian) under the Master Plan and Trust. The Employer hereby agrees to the provisions of this Plan and Trust, and in witness of its agreement, the Employer by its duly authorized officers, has executed this Adoption Agreement, and the Trustee (and Custodian, if applicable) signified its acceptance, on this 26th day of November, 2001. Name and EIN of Employer: Greater Bay Bancorp 77-0387041 Signed: /s/ Kimberly S. Burgess _________________________________________ Name(s) of Trustee: Wells Fargo Bank, N.A. Signed: /s/ Douglas Murray _________________________________________ Plan Number. The 3-digit plan number the Employer assigns to this Plan for ERISA reporting purposes (Form 5500 Series) is: 001. Use of Adoption Agreement. Failure to complete properly the elections in this Adoption Agreement may result in disqualification of the Employer's Plan. The 3-digit number assigned to this Adoption Agreement (see page 1) is solely for the Master Plan Sponsor's recordkeeping purposes and does not necessarily correspond to the plan number the Employer designated in the prior paragraph. Master Plan Sponsor. The Master Plan Sponsor identified on the first page of the basic plan document will notify all adopting employers of any amendment of this Master Plan or of any abandonment or discontinuance by the Master Plan Sponsor of its maintenance of this Master Plan. For inquiries regarding the adoption of the Master Plan, the Master Plan Sponsor's intended meaning of any plan provisions or the effect of the opinion letter issued to the Master Plan Sponsor, please contact the Master Plan Sponsor at the following address and telephone number: 4365 Executive Drive, Suite 1700, San Diego, CA 92121-2130 (858) 622-6701. Reliance on Opinion Letter. The Employer may not rely on the Master Plan Sponsor's opinion letter covering this Adoption Agreement. For reliance on the Plan's qualification, the Employer must obtain a determination letter from the applicable IRS Key District office. 30 EX-10.17(C) 5 dex1017c.txt LETTER AMENDMENT AND REVOLVING LINE OF CREDIT Exhibit 10.17(c) October 31, 2001 Greater Bay Bancorp 2860 W. Bayshore Road Palo Alto, CA 94303 Attention: Kamran Husain Dear Mr. Husain: This letter amendment (this "Amendment") is to confirm the changes agreed upon between Wells Fargo Bank, National Association ("Bank") and Greater Bay Bancorp ("Borrower") to the terms and conditions of that certain letter agreement between Bank and Borrower dated as of November 4, 1999, as amended from time to time (the "Agreement"). For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree that the Agreement shall be amended as follows to reflect said changes. 1. The Agreement is hereby amended (a) by deleting "October 30, 2001" as the last day on which Bank will make advances under the Line of Credit, and by substituting for said date "January 31, 2002," with such change to be effective upon the execution and delivery to Bank of a promissory note substantially in the form of Exhibit A attached hereto (which promissory note shall replace and be deemed the Line of Credit Note defined in and made pursuant to the Agreement) and all other contracts, instruments and documents required by Bank to evidence such change. In no event shall proceeds of the Line of Credit be used to finance acquisitions. 2. In consideration of the changes set forth herein and as a condition to the effectiveness hereof, immediately upon signing this Amendment Borrower shall pay to Bank a non-refundable fee of $10,000.00. 3. Except as specifically provided herein, all terms and conditions of the Agreement remain in full force and effect, without waiver or modification. All terms defined in the Agreement shall have the same meaning when used herein. This Amendment and the Agreement shall be read together, as one document. 4. Borrower hereby remakes all representations and warranties contained in the Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of Borrower's acknowledgment set forth below there exists no default or defined event of default under the Agreement or any promissory note or other contract, instrument or document executed in connection therewith, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute such a default or defined event of default. 5. The effective date of this Amendment shall be October 31, 2001. Greater Bay Bancorp 2860 W. Bayshore Road Palo Alto, CA 94303 Page 2 Your acknowledgment of this Amendment shall constitute acceptance of the foregoing terms and conditions. If not acknowledged on or before October 31, 2001, Bank agreements herein shall be null and void. Sincerely, WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ Julius Young ---------------- Title: Vice President Acknowledged and accepted as of October 31, 2001: GREATER BAY BANCORP By: /s/ Steven C. Smith ------------------- Title: EVP, CFO & CAO By: /s/ Kamran Husain ----------------- Title: SVP, Finance & Risk Management REVOLVING LINE OF CREDIT NOTE $40,000,000.00 San Francisco, California October 31, 2001 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 Forty Million Dollars ($40,000,000.00), 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 LIBOR-based advance requested hereunder, a period commencing on a Business Day designated by Borrower and continuing for three (3) months, 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 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) either (i) at a fluctuating rate per annum two and one quarter percent (2.25%) below the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be two fifths percent (0.40%) above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto 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) Selection of Interest Rate Options. At any time any portion of this ---------------------------------- Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR selection, (A) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three (3) Business Days after such notice is given, and (B) such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later time during any Business Day if Bank, at it's sole option but without obligation to do so, accepts Borrower's notice and quotes a fixed rate to Borrower. If Borrower does not immediately accept a fixed rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request from Borrower shall be subject to a redetermination by Bank of the applicable fixed rate. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. (c) Taxes and Regulatory Costs. Borrower shall pay to Bank immediately -------------------------- upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (ii) future, supplemental, emergency or other changes in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR. In determining which of the foregoing are attributable to any LIBOR option 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, 2001 and on the maturity date of this Note. (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 January 31, 2002. (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) Kamran Husain, Steven Smith, Shawn Saunders or Mark Eschen, any 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. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first. PREPAYMENT: (a) Prime Rate. Borrower may prepay principal on any portion of this ---------- Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. (b) LIBOR. Borrower may prepay principal on any portion of this Note ----- which bears interest determined in relation to LIBOR at any time and in any amount. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note 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 (2.00%) 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 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 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, CFO & CAO By: /s/ Kamran Husain ----------------- Title: SVP, Finance & Risk Management EX-10.18(B) 6 dex1018b.txt FIRST AMENDMENT TO LINE OF CREDIT AGREEMENT Exhibit 10.18(b) FIRST AMENDMENT TO LINE OF CREDIT AGREEMENT THIS FIRST AMENDMENT TO LINE OF CREDIT AGREEMENT (this "First Amendment") dated as of October 30, 2001 is made and entered into by and between GREATER BAY BANCORP, a California corporation ("Borrower"), and UNION BANK OF CALIFORNIA, N.A., a national banking association ("Bank"). RECITALS: -------- A. Borrower and Bank are parties to that certain Line of Credit Agreement dated as of November 1, 2000 (the "Agreement"). B. Borrower and Bank desire to amend the Agreement to reflect the extension of the credit from October 30, 2001 to January 28, 2002 and to execute Replacement Note. Bank is willing to agree to so amend the Agreement, subject, however, to the terms and conditions of this First Amendment. AGREEMENT: --------- In consideration of the above recitals and of the mutual covenants and conditions contained herein, Borrower and Bank agree as follows: 1. Defined Terms. Initially capitalized terms used herein which are not -------------- otherwise defined shall have the meanings assigned thereto in the Agreement. 2. Amendments to the Agreement. --------------------------- Section 1.1 of the Agreement is hereby amended so as to delete reference to "October 30, 2001" as the Maturity Date and substitute "January 28, 2002" in its place and stead. All references to "Maturity Date" in the Agreement shall refer to " January 28, 2002" in the place and stead of " October 30, 2001". 3. Effectiveness of this First Amendment. This First Amendment shall --------------------------------------- become effective as of the date hereof when, and only when, Bank shall have received all of the following, in form and substance satisfactory to Bank: (a) A counterpart of this First Amendment, duly executed by Borrower; (b) A replacement Note (Base Rate), in the principal amount of Twenty-Five Million Dollars ($25,000,000.00), duly executed by Borrower; (c) An Authorization to Disburse, on Bank's standard form therefor, duly executed by Borrower, authorizing Bank to disburse the proceeds of the loans as provided for in the Agreement; 1 (d) An Authorization to Obtain Credit, Grant Security, Guarantee or Subordinate, on Bank's standard form therefor, duly executed by Borrower; (e) Such other documents, instruments or agreements as Bank may reasonably deem necessary in order to effect fully this First Amendment. 4. Ratification. ------------ (a) Except as specifically amended hereinabove, the Agreement shall remain in full force and effect and is hereby ratified and confirmed; and (b) Upon the effectiveness of this First Amendment, (i) each reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Agreement shall mean and be a reference to the Agreement as amended by this First Amendment, and (ii) each reference in the Agreement to the "Note" or words of like import referring to the Note shall mean and be a reference to the replacement Note (Base Rate) issued pursuant to this First Amendment. 5. Representations and Warranties. Borrower represents and warrants as ------------------------------ follows: (a) Each of the representations and warranties contained in Article 3 of the Agreement, as amended hereby, is hereby reaffirmed as of the date hereof, each as if set forth herein; (b) The execution, delivery and performance of this First Amendment are within Borrower's corporate powers, have been duly authorized by all necessary corporate action, have received all necessary approvals, if any, and do not contravene any law or any contractual restriction binding on Borrower; (c) This First Amendment is, and the replacement Note (Base Rate) when delivered for value received, will be, the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their terms; and (d) Except as described hereinabove, no event has occurred and is continuing or would result from this First Amendment which constitutes an Event of Default under the Note, or would constitute an Event of Default under the Note but for the requirement that notice be given or time elapse or both. 6. Governing Law. This First Amendment shall be deemed a contract under -------------- and subject to, and shall be construed for all purposes and in accordance with, the laws of the State of California. 7. Counterparts. This First Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 2 IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the date and year first above written. "Borrower" GREATER BAY BANCORP, a California corporation By: /s/ Kamran Husain ----------------- Title: Senior Vice President By: ----------------------------- Title: -------------------------- "Bank" UNION BANK OF CALIFORNIA, N.A. By: /s/ Dennis Cattell ------------------ Title: Vice President 3 EX-12.1 7 dex121.txt 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, -------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Income before income taxes........................... $135,533 $144,355 $ 88,581 $ 67,092 $ 54,580 Fixed charges: Interest expense.................................... 186,232 158,050 106,509 87,395 69,869 Interest factor of rental expense................... 3,733 2,778 2,493 1,978 1,760 -------- -------- -------- -------- -------- Fixed charges..................................... 189,965 160,828 109,002 89,373 71,629 Less: interest expense on deposits................... 132,655 146,269 98,588 78,525 64,675 -------- -------- -------- -------- -------- Net fixed charges................................. 57,310 14,559 10,414 10,848 6,954 Earnings, excluding interest on deposits............. $192,843 $158,914 $ 98,995 $ 77,940 $ 61,534 ======== ======== ======== ======== ======== Ratio of earnings, excluding interest on deposits, to net fixed charges(1)............................... 3.36x 10.92x 9.51x 7.18x 8.85x Earnings, including interest on deposits............. $325,498 $305,183 $197,583 $156,465 $126,209 ======== ======== ======== ======== ======== Ratio of earnings, including interest on deposits, to fixed charges(2)................................... 1.71x 1.90x 1.81x 1.75x 1.76x
(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. 1 EX-21 8 dex21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 GREATER BAY BANCORP ANNUAL REPORT ON FORM 10-K SUBISDIARIES 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 ---- ----------------------------- Direct Subsidiaries: Bank of Petaluma California Bank of Santa Clara California Bay Area Bank California Bay Bank of Commerce California Coast Commercial Bank California Cupertino National Bank United States GBBK Corp. California Golden Gate Bank California Matsco Lease Finance, Inc. II Delaware Matsco Lease Finance, Inc. III Delaware Mid-Peninsula Bank California Mt. Diablo National Bank United States Peninsula Bank of Commerce California Pacific Business Funding Corporation California San Jose National Bank United States GBB Capital I Delaware GBB Capital II Delaware GBB Capital III Delaware GBB Capital IV Delaware GBB Capital V Delaware GBB Capital VI Delaware Indirect Subsidiaries: Bay Commerce Capital LLC California Cupertino Capital LLC California CNB Investment Trust I Maryland CNB Investment Trust II Maryland Epic Funding Corporation California Mid- Peninsula Capital LLC California Peninsula Real Estate Corporation California Petaluma Capital LLC California Redwood Capital LLC California Santa Clara Capital LLC California Santa Cruz Capital LLC California EX-23.1 9 dex231.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 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, 333-47747, 333-30812, 333-37722 and 333-76004) and Form S-3 (Nos. 333-61679, 333-70025, 333-94343 and 333-35622) of Greater Bay Bancorp of our report dated February 13, 2002 relating to the consolidated financial statements, which appears in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP San Francisco, California February 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----