-----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, GuI7A0BArfD5V8n+Yo6pzZWa65iJ/c2ceDWklfBU5xg085MCcXgdCE562Qto8DhG bCu5iaf/Dt3NF9xmQdgAow== 0001012870-99-000576.txt : 19990219 0001012870-99-000576.hdr.sgml : 19990219 ACCESSION NUMBER: 0001012870-99-000576 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990217 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: SEC FILE NUMBER: 000-25034 FILM NUMBER: 99544785 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 FORM 10-K PERIOD ENDING DECEMBER 31, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- FORM 10-K (Mark one) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-25034 ---------------- GREATER BAY BANCORP (Exact name of registrant as specified in its charter) California 77-0387041 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
2860 West Bayshore Road, Palo Alto, California 94303 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650) 813-8200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value 9.75% Cumulative Trust Preferred Securities of GBB Capital I Guarantee of Greater Bay Bancorp with respect to the 9.75% Cumulative Trust Preferred Securities of GBB Capital I Preferred Share Purchase Rights (Title of classes) ---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the Common Stock held by non-affiliates, based upon the closing sale price of the Common Stock on January 29, 1999, as reported on the Nasdaq National Market System, was approximately $272,319,000. Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. Such determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 29, 1999, 9,666,002 shares of the Registrant's Common Stock were outstanding. ---------------- DOCUMENT INCORPORATED BY REFERENCE: PART OF FORM 10-K INTO WHICH INCORPORATED: Definitive Proxy Statement for Annual Meeting of Shareholders to be Part III filed within 120 days of the fiscal year ended December 31, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I Discussions of certain matters contained in this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which Greater Bay Bancorp (referred to as the "Company" when such reference includes Greater Bay Bancorp and its subsidiaries, collectively, "Greater Bay" when referring only to the parent company and "the Banks" when referring only to Greater Bay's banking subsidiaries, Cupertino National Bank, Mid-Peninsula Bank, Peninsula Bank of Commerce and Golden Gate Bank) operates, projections of future performance, perceived opportunities in the market and statements regarding the Company's mission and vision. The Company's actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. For a discussion of some of the factors that might cause such a difference, see "Item 1. Business--Factors That May Affect Future Results of Operations". ITEM 1. BUSINESS. Greater Bay Greater Bay is a bank holding company operating Cupertino National Bank ("CNB"), Mid-Peninsula Bank ("MPB"), Peninsula Bank of Commerce ("PBC") and Golden Gate Bank ("Golden Gate") along with its operating divisions Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Corporate Finance Group, Greater Bay Bank Contra Costa Regional Banking Office, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding, Venture Banking Group and the Small Business Administration Division. The Company has 14 regional offices in San Jose, Cupertino, Santa Clara, Palo Alto, Redwood City, San Mateo, Millbrae, San Bruno, San Francisco and Walnut Creek, California. At December 31, 1998, the Company had total assets of $1.6 billion, total net loans of $1.0 billion and total deposits of $1.3 billion. History Greater Bay Bancorp is the result of the merger (the "1996 Merger"), effective November 27, 1996, of Cupertino National Bancorp ("Cupertino") and Mid-Peninsula Bancorp ("Mid-Peninsula"). Cupertino was formed in 1984 as the holding company for CNB, a national banking association which began operating in 1985. Mid-Peninsula was formed in 1984 under the name San Mateo County Bancorp ("San Mateo") as the bank holding company of San Mateo County National Bank, which subsequently changed its name to WestCal National Bank ("WestCal") in 1991. In 1994, WestCal was merged into MPB, a California state chartered bank organized in 1987, and San Mateo concurrently changed its name to Mid- Peninsula Bancorp. Effective December 23, 1997, the Company completed a merger (the "PBC Merger") with PBC, whereby PBC became a wholly-owned subsidiary of Greater Bay. PBC was formed in 1981, as a California state chartered bank. Effective May 8, 1998, the Company completed a merger with Pacific Rim Bancorporation ("PRB"). PRB was formed in 1993 as the holding company for Golden Gate Bank, whereby Golden Gate Bank became a wholly-owned banking subsidiary of Greater Bay. Effective August 31, 1998, the Company completed a merger with Pacific Business Funding Corporation ("PBFC"), which now operates as a division of CNB and conducts business under the name Pacific Business Funding ("PBF"). All mergers were accounted for as pooling-of-interests business combinations and, accordingly, all financial data for the periods prior to the mergers have been restated to include the results of the acquired entities. The Company was created with the intention of achieving seven primary goals. These goals included: . Developing a greater banking presence throughout the San Francisco Bay Area by increasing the number of banking offices available to clients; . Reaching a critical mass in the Company's market areas in order to better meet competitive challenges inherent in the banking and financial services industries; 2 . Maximizing the utilization of capital by increasing the float and marketability of its common stock and, by virtue of its larger size, obtaining access to a lower cost of capital; . Realizing operating efficiencies through a combination of the Banks; . Generating increased loan and fee income as a result of the higher lending limits available to the combined entity; . Leveraging marketing expense to improve the return on the combined entity's marketing investment; and . Enabling the Banks to cross-sell services. Super Community Banking Philosophy In order to meet the demands of the increasingly competitive banking and financial services industries, management has adopted a business philosophy referred to as the "Super Community Banking Philosophy." The Super Community Banking Philosophy is based on management's belief that banking clients value doing business with locally managed institutions that can provide a full service commercial banking relationship through an understanding of the clients' financial needs and the flexibility to deliver customized solutions through Greater Bay's menu of products and services. Management further believes that banks are better able to build successful client relationships by affiliating with a holding company that provides cost effective administrative support services while promoting bank autonomy and flexibility. To implement this philosophy, Greater Bay operates the Banks as separate subsidiaries by retaining their independent names and separate Boards of Directors. The Banks have established strong reputations and customer followings in their market areas through attention to client service and an understanding of client needs. In an effort to capitalize on the identities and reputations of the Banks, the Company currently intends to continue to market its services under each Bank's name, primarily through each Bank's relationship managers. The primary focus for the Banks' relationship managers is to cultivate and nurture their client relationships. Relationship managers are assigned to each borrowing client to provide continuity in the relationship. This emphasis on personalized relationships requires that all of the relationship managers maintain close ties to the communities in which they serve, so they are able to capitalize on their efforts through expanded business opportunities for the Banks. While client service decisions and day-to-day operations are maintained at the Banks, Greater Bay offers the advantages of affiliation with a multi-bank holding company by providing expanded client support services, such as business cash management, international trade services and accounting services. In addition, Greater Bay provides centralized administrative functions, including support in credit policy formulation and review, investment management, data processing, accounting, loan servicing and other specialized support functions. This allows the Banks to focus on client service. Corporate Growth Strategy The Company's primary goal is to become the preeminent financial services company based in the San Francisco Bay Area. The Company's primary business strategy is to focus on increasing its market share within the communities it serves through continued internal growth. The Company also will pursue opportunities to expand its market share through select acquisitions that management believes complement the Company's businesses. Management will pursue acquisition opportunities to expand its presence in its current market areas of San Francisco, Santa Clara and San Mateo Counties, and to establish a presence in other parts of the Bay Area and California. Consistent with the Company's operating philosophy and growth strategy, Greater Bay regularly evaluates opportunities to acquire banks and other financial service companies that complement the Company's existing business, expand its market coverage and share and enhance its client product offerings. Recent Events On January 26, 1999 the Company and Bay Area Bancshares ("BA Bancshares"), the holding company of Bay Area Bank, a California state charted bank ("BAB"), signed a definitive agreement for a merger between the two 3 companies. The agreement provides for BA Bancshares shareholders to receive approximately 1,393,000 shares of Greater Bay Bancorp stock subject to certain adjustments based on movements in the Company's stock price, in a tax-free exchange to be accounted for as a pooling-of-interests. Following the transaction, the shareholders of BA Bancshares will own approximately 12.7% of the combined company. The Company expects to complete the transaction in the second quarter of 1999, subject to the approval of BA Bancshares shareholders and regulatory approvals. As of December 31, 1998 BA Bancshares had $155.3 million in assets, $136.5 million in deposits, and $14.4 million in shareholders' equity. BAB's office is located in Redwood City, California. The combined Company, on a pro-forma basis, would have had total assets of approximately $1.8 billion and equity of over $107.0 million at December 31, 1998. The transaction is anticipated to be slightly accretive to the Company's core earnings in 1999 based on anticipated reductions in operating expenses and revenue enhancements resulting from an expanded product line, increased lending capacity and an increased market awareness that can be utilized by BAB. Management of each of the organizations believe that significant opportunities exist to enhance the spectrum of financial services offered to both existing and future clients of BAB while also increasing market penetration in the San Francisco Peninsula market areas. The Banks and Operating Divisions Cupertino National Bank CNB presently has seven offices, including five full service branches. At December 31, 1998, CNB had total assets of $688.3 million, total net loans of $500.2 million and total deposits of $569.7 million. Mid-Peninsula Bank MPB presently has four offices, including three full service branches. On December 31, 1998, MPB had total assets of $530.6 million, total net loans of $307.0 million and total deposits of $445.5 million. Peninsula Bank of Commerce PBC presently has two banking offices. On December 31, 1998, PBC had total assets of $234.0 million, total net loans of $109.8 million and total deposits of $214.8 million. PBC holds $89.6 million from a single depositor (the "Special Deposit"). Due to the uncertainty of the time the Special Deposit will remain with PBC, management has invested a significant portion of the proceeds from this deposit in agency securities with maturities of less than 90 days. Golden Gate Bank Golden Gate presently has one office. On December 31, 1998, Golden Gate had total assets of $127.0 million, total net loans of $67.6 million and total deposits of $117.4 million. Operating Divisions The Banks have various operating divisions. These divisions include the Greater Bay Trust Company, the Venture Banking Group, the Small Business Administration ("SBA") Division, and the asset-based speciality finance division, PBF. In addition, consistent with Greater Bay's operating philosophy and growth strategy, in 1998, the Company formed the Greater Bay Bank Santa Clara Valley Commercial Banking Group ("SCVG"), Greater Bay Corporate Finance Group ("CFG"), Greater Bay Bank Contra Costa Banking Office ("CCBO") and the Greater Bay International Banking Division ("IBD"). Greater Bay Trust Company provides trust services to support the trust needs of the Bank's business and personal clients. These services include, but are not limited to, custodial, investment management, estate planning resources and employee benefit plan services. 4 The Venture Banking Group serves the needs of companies in their start-up and development phase, allowing them to access a banking relationship early in their development. The loans to this target group of clients are generally secured by the accounts receivable, inventory and equipment of the companies. The financial strength of these companies also tends to be bolstered by the presence of venture capital investors among their shareholders. The SBA Division provides loans to smaller businesses that are generally 65% to 80% guaranteed by the SBA. In 1994, the SBA named CNB's SBA Division a Preferred Lender. The SBA awards Preferred Lender status to lenders who have demonstrated superior ability to generate, underwrite and service loans guaranteed by the SBA. This status results in more rapid turnaround of loan applications submitted to the SBA for approval. PBF is an asset-based lending and factoring division that provides alternative funding and support programs designed to enhance the Company's small business banking services. SCVG offers a full line of business banking services, catering to the needs of small to medium-sized businesses, professional firms and executives who own and operate them. The services include a full range of deposit accounts, cash management and credit facilities custom-tailored to meet the specific needs of its clients. SCVG further solidifies the Company's strong presence in the Silicon Valley. CFG primarily focuses its efforts on obtaining middle market lending clients that have revenues in excess of $20 million and financing requirements in the range of $5 million to $250 million. The clients will fall into two categories: 1.) syndicated loan transactions, and 2.) direct sourced transactions where CFG will be the lead agent. CCBO was formed to expand the Company's presence into the East Bay market. The Company believes the East Bay has tremendous potential for growth and is contiguous to its existing markets. IBD provides a wide range of financial services to support the international banking needs of the Bank's clients, including identifying certain risks of conducting business abroad and, providing international letters of credit and trade finance services. Banking Services Greater Bay provides a wide range of commercial banking and financial services to small and medium-sized businesses, real estate developers and property managers, business executives, professionals and other individuals. The Banks offer a wide range of deposit products. These include the normal range of personal and business checking and savings accounts, time deposits and individual retirement accounts. The Banks also offer a wide range of specialized services designed to attract and service the needs of customers and include cash management and international trade services for business clients, traveler's checks, safe deposit and MasterCard and Visa merchant deposits services. The Banks also engage in the full complement of lending activities, including commercial, real estate and consumer loans. The Banks provide commercial loans for working capital and business expansion to small and medium-sized businesses with annual revenues generally in the range of $1.0 million to $100.0 million with a focus on business clients with borrowing needs between $2.0 million and $10.0 million. The Banks' commercial clients are drawn from a wide variety of manufacturing, wholesale and service businesses. The Banks provide interim real estate loans primarily for construction in the Banks' primary service areas of single-family residences, which typically range between approximately $500,000 and $1.0 million, and multi-unit projects, which typically range between approximately $1.5 million and $4.0 million. The Banks provide medium term commercial real estate loans or credits, typically ranging between $750,000 and $3.0 million for the financing of commercial or industrial buildings where the owners either use the properties for business purposes or derive income from tenants. 5 Market Area The Banks concentrate on marketing their services to small and medium-sized businesses, professionals and individuals in Contra Costa, Santa Clara, San Francisco and San Mateo Counties. . CNB's primary base of operations is in Cupertino, California, which is in the center of the geographical area referred to as "Silicon Valley," and CNB's operations extend throughout Santa Clara County. Santa Clara County has a population of approximately 1,690,000; . MPB's primary base of operations is centered in Palo Alto, California and extends north through San Mateo County. San Mateo County has a population of approximately 715,000. MPB has recently formed an operating division located in Contra Costa County. Contra Costa has a population of approximately 900,000; . PBC's primary base of operations is centered in Millbrae, California, and includes northern San Mateo County and extends into San Francisco County; . Golden Gate's operations are centered in the City and County of San Francisco. San Francisco County has a population in excess of 790,000. The commercial base of Contra Costa, Santa Clara, San Francisco and San Mateo Counties is diverse and includes computer and semiconductor manufacturing, professional services, biotechnology, printing and publishing, aerospace, defense and real estate construction, as well as wholesale and retail trade. As a result of its geographic concentration, the Company's results depend largely upon economic conditions in these areas. While the economy in the Company's market areas have exhibited positive economic and employment trends, there is no assurance that such trends will continue. A deterioration in economic conditions could have material adverse impact on the quality of the Company's loan portfolio and the demand for its product and services, and accordingly its results of operations. See "Item 1. Business-- Factors That May Affect Future Results of Operations." Lending Activities Underwriting and Credit Administration The lending activities of each of the Banks is guided by the basic lending policies established by its Board of Directors. Each loan must meet minimum underwriting criteria established in the Bank's lending policy. Lending authority is granted to officers of each Bank on a limited basis. Loan requests exceeding individual officer approval limits are approved by the Officers Loan Committees of the respective Banks. Loan requests exceeding these limits are submitted to the Greater Bay Officers Loan Committee, which consists of the President and Chief Executive Officer of Greater Bay, the Executive Vice President and Chief Lending Officer of Greater Bay, the Executive Vice President and Chief Credit Officer of MPB and the Senior Vice President and Chief Credit Officer of Greater Bay. All members of the Officers Loan Committee are also officers of the individual Banks. Loan requests which exceed the limits of the Greater Bay Officers Loan Committee are submitted to the Directors Loan Committee for final approval. The Directors Loan Committee consists of five outside directors. Each of these committees meet on a regular basis in order to provide timely responses to the Banks' clients. The Company's credit administration function includes an internal review and the regular use of an outside loan review firm. In addition, the Greater Bay Officers Loan Committee, Chief Operating Officer/Chief Financial Officer and Controller review information at least once a month related to delinquencies, nonperforming assets, classified assets and other pertinent information to evaluate credit risk within each Bank's loan portfolio and to recommend general reserve percentages and specific reserve allocations. The Board of Directors of Greater Bay and each of the Banks review this same information on a monthly basis. Loan Portfolio The composition of the Company's gross loan portfolio at December 31, 1998 was as follows: . Approximately 45.3% were commercial loans; . Approximately 17.3% were in real estate construction and land loans, primarily for residential projects; 6 . Approximately 29.7% were real estate term loans, primarily secured by commercial properties; and . The balance of the portfolio consists of consumer loans. The interest rates the Banks charge for the vary with the degree of risk, size and maturity of the loans. Rates are generally affected by competition, associated factors stemming from the client's deposit relationship with the Bank and the Banks' cost of funds. Commercial Loans. In their commercial loan portfolio, the Banks provide personalized financial services to the diverse commercial and professional businesses in their market areas. Commercial loans, including those made by the Venture Banking Group, consist primarily of short-term loans (normally with a maturity of under one year) for working capital and business expansion. The Banks' focus is on businesses with annual revenues generally between $1.0 million and $100.0 million with borrowing needs generally between $2.0 and $10.0 million. The Banks' commercial clients are drawn from a wide variety of manufacturing, wholesale and service businesses. Commercial loans typically include revolving lines of credit collateralized by inventory, accounts receivable and equipment. Emphasis is placed on the borrower's earnings history, capitalization, secondary sources of repayment, and in some instances, third party guarantees or highly liquid collateral (such as time deposits and investment securities). Commercial loan pricing is generally at a rate tied to the prime rate (as quoted in the Wall Street Journal) or the Banks' reference rates. The Venture Banking Group serves the needs of companies in their start-up and development phase. Typical clients include technology companies, ranging from multimedia, software and telecommunications providers to bio-technology and medical device firms. The Venture Banking Group provides innovative lending products and other financial services, tailored to the needs of start- up and growth-stage companies. Borrowings are generally secured by minimum cash balances, accounts receivable, intellectual property rights, inventory and equipment of the companies. Because these companies are in the start-up or development phase, many of them will not generate earnings for several years. The Company often receives warrants from these companies as part of the compensation for its services. The Company participates in many SBA programs and, through CNB, is a "preferred lender." Preferred lender status is granted to a lender which has made a certain number of SBA loans and which, in the opinion of the SBA has staff who are qualified and experienced in this area. As a preferred lender, the Company has the authority to authorize, on behalf of the SBA, the SBA guaranty on loans under the 7A program. This can represent a substantial savings in serving a customer's needs. The Company utilizes both the 504 program, which is focused toward longer-term financing of buildings, and other long-term assets, and the 7A program which is primarily used for financing of the equipment, inventory and working capital needs of eligible businesses generally over a three- to seven-year term. The Company's collateral position in the SBA loans is enhanced by the SBA guaranty in the case of 7A loans, and by lower loan-to-value ratios under the 504 program. The Company generally sells the guaranteed portion of its SBA loans in the secondary market. Real Estate Construction and Land Loans. The Banks' real estate construction loan activity focuses on providing short-term (generally less than one year maturity) loans to individuals and developers with whom the Banks have established relationships for the construction primarily of single family residences in the Banks' market areas. Prior to 1994, the Banks concentrated their construction loan activity on owner-occupied custom residences. During 1994, as real estate values began to stabilize, the Banks also entered the construction loan market for multi-unit single family residential projects. Subsequently, the Banks continued to expand their real estate construction portfolio with the help of the improving real estate market in Northern California. Real estate construction loans for single family residences typically range between approximately $500,000 and $1.0 million, and for multi-unit projects typically range between approximately $1.5 million and $4.0 million. Residential real estate construction loans are typically secured by first deeds of trust and require guarantees of the borrower. The economic viability of the project and the borrower's credit-worthiness are primary considerations in the loan underwriting decision. Generally, these loans provide an attractive yield, but may carry a higher than normal risk of loss or delinquency, particularly if general real estate values decline. The Banks utilize approved 7 independent local appraisers and loan-to-value ratios which generally do not exceed 65% to 75% of the appraised value of the property. The Banks monitor projects during the construction phase through regular construction inspections and a disbursement program tied to the percentage of completion of each project. The Banks also occasionally make land loans to persons who intend to construct a single family residence on the lot generally within twelve months. In addition, the Banks have occasionally in the past, and may to a greater extent in the future, make commercial real estate construction loans to high net worth clients with adequate liquidity for construction of office and warehouse properties. Such loans are typically secured by first deeds of trust and require guarantees of the borrower. Real Estate Term Loans. The Banks provide medium-term commercial real estate loans secured by commercial or industrial buildings where the owner either uses the property for business purposes ("owner-user properties") or derives income from tenants ("investment properties"). The Company's loan policies require the principal balance of the loan, generally between $400,000 and $3.0 million, to be no more than 70% of the stabilized appraised value of the underlying real estate collateral. The loans, which are typically secured by first deeds of trust only, generally have terms of no more than seven to ten years and are amortized over 20 years. Most of these loans have rates tied to the prime rate, with many adjusting whenever the prime rate changes; the remaining loans adjust every two or three years depending on the term of the loan. Consumer and Other Loans. The Banks' consumer and other loan portfolio is divided between installment loans secured by automobiles and aircraft, and home improvement loans and equity lines of credit which are often secured by residential real estate. Installment loans tend to be fixed rate and longer- term (one-to-five year maturity), while the equity lines of credit and home improvement loans are generally floating rate and are reviewed for renewal on an annual basis. The Banks also have a minimal portfolio of credit card loans, issued as an additional service to its clients. Deposits The Banks obtain deposits primarily from small and medium-sized businesses, business executives, professionals and other individuals. Each of the Banks offers the usual and customary range of depository products provided by commercial banks. The Banks' deposits typically are not received from a single depositor or group of affiliated depositors, the loss of any one of which would have a material adverse effect on the business of the Company or any of the Banks. Rates paid on deposits vary among the categories of deposits due to different terms, the size of the individual deposit, and rates paid by competitors on similar deposits. CNB has two business units that provide significant support to its deposit base. The Greater Bay Trust Company has approximately 10% of its trust assets under management in liquid funds that are retained in CNB money market demand accounts. At December 31, 1998, these funds totaled $76.5 million. The Venture Banking Group, which finances companies in their start-up and development stage, is another source of deposits as most of the start-up phase companies have significant liquidity that is deposited in the bank as part of the banking relationship. At December 31, 1998, clients of the Venture Banking Group had $106.5 million in deposits at CNB. Trust Services The Greater Bay Trust Company, which is a division of CNB, offers a full range of fee-based trust services directly to its clients and administers several types of retirement plans, including corporate pension plans, 401(k) plans and individual retirement plans, with an emphasis on the investment management, custodianship and trusteeship of such plans. In addition, the Greater Bay Trust Company acts as executor, administrator, guardian and/or trustee in the administration of the estates of individuals. Investment and custodial services are provided for corporations, individuals and nonprofit organizations. Total assets under management by the Greater Bay Trust Company were $649.3 million at December 31, 1998, compared to $577.7 million at December 31, 1997, and $418.0 million at December 31, 1996. 8 Competition The banking and financial services business in California generally, and in the Banks' market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers. The Banks compete for loans, deposits and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Banks. In order to compete with the other financial service providers, the Banks principally rely upon local promotional activities, personal relationships established by officers, directors and employees with its clients, and specialized services tailored to meet its clients' needs. In those instances where the Banks are unable to accommodate a customer's needs, the Banks may arrange for those services to be provided by its correspondents. The Banks have fourteen offices, located in Contra Costa, Santa Clara, San Francisco and San Mateo Counties. Neither the deposits nor loans of the offices of the respective Banks exceed 1% of all financial services companies located in such counties. Effect of Economic Conditions, Governmental Policies and Legislation The Company's profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the interest rates the Banks pay on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates the Banks receive on interest-earning assets, such as loans extended to its clients and securities held in its investment portfolio, comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of the Company and the Bank, such as inflation, recession and unemployment, and the impact which future changes in domestic and foreign economic conditions might have on the Company and the Bank cannot be predicted. The business of the Company is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact on the Company of any future changes in monetary and fiscal policies cannot be predicted. From time to time, legislative acts, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in the U.S. Congress, in the state legislatures and before various bank regulatory agencies. See "Item 1. Business--Supervision and Regulation." Employees At December 31, 1998, the Company had 313 full-time employees. None of the employees are covered by a collective bargaining agreement. The Company considers its employee relations to be satisfactory. Supervision and Regulation Bank holding companies and banks are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of stockholders of the Company. Set forth below is a summary description of certain laws which relate to the regulation 9 of Greater Bay and the Banks. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. In recent years, Congress has discussed and evaluated significant legislative proposals and reforms affecting the financial services industry. Such proposals include legislation to revise the Glass-Steagall Act and the Bank Holding Company Act of 1956, as amended (the "BHCA"), and the expand permissible activities for banks, principally to facilitate the convergence of commercial and investment banking. Certain proposals also sought to expand insurance activities of banks. It is unclear whether any of these proposals, or any form of them, will be introduced in the current Congress and become law. Consequently, it is not possible to determine what effect, if any, they may have on Greater Bay and the Banks. Greater Bay Greater Bay, as a registered bank holding company, is subject to regulation under the BHCA. Greater Bay is required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA. The Federal Reserve may conduct examinations of Greater Bay and its subsidiaries. The Federal Reserve may require that Greater Bay terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, Greater Bay must file written notice and obtain approval from the Federal Reserve prior to purchasing or redeeming its equity securities. Under the BHCA and regulations adopted by the Federal Reserve, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, Greater Bay is required by the Federal Reserve to maintain certain levels of capital. See "Capital Standards" herein. Greater Bay is required to obtain the prior approval of the Federal Reserve for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve is also required for the merger or consolidation of Greater Bay and another bank holding company. Greater Bay is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, Greater Bay, subject to the prior approval of the Federal Reserve, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under Federal Reserve regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations or both. 10 Greater Bay is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, Greater Bay and its subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Financial Institutions. The Company's securities are registered with the Securities and Exchange Commission under the Exchange Act. As such, the Company is subject to the information, proxy solicitation, insider trading, and other requirements and restrictions of the Exchange Act. The Banks CNB, as a national banking association, is subject to primary supervision, examination and regulation by the Office of the Comptroller of Currency (the "Comptroller"). MPB, PBC and Golden Gate as California state chartered banks and members of the Federal Reserve System, are subject to primary supervision, periodic examination and regulation by the Commissioner of the Department of Financial Institutions ("Commissioner") and the Federal Reserve. If as a result of an examination of a bank, the bank regulatory agencies should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the bank regulatory agencies. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the bank, to assess civil monetary penalties, to remove officers and directors and ultimately to terminate a bank's deposit insurance, which would result in a revocation of the bank's charter. None of the Banks has been subject of any such actions by their respective regulatory agencies. The Federal Deposit Insurance Corporation ("FDIC") insures the Banks' deposits in the manner and to the extent provided by law. For this protection, the Banks pay a semiannual statutory assessment. See "Premium for Deposit Insurance" herein. Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Banks. State and federal statutes and regulations relate to many aspects of the Banks' operations, including levels of capital, reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and capital requirements. Dividends and Other Transfers of Funds The Company is a legal entity separate and distinct from the Banks. The Banks are subject to various statutory and regulatory restrictions on their abilities to pay dividends to the Company. Under such restrictions, the amount available for payment of dividends to the Company by the Banks totaled $24.6 million at December 31, 1998. In addition, the California Department of Financial Institutions and the Federal Reserve Board have the authority to prohibit the Banks from paying dividends, depending upon the Banks' financial condition, if such payment is deemed to constitute an unsafe or unsound practice. The bank regulatory agencies also have authority to prohibit the Banks from engaging in activities that, in their respective opinions, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the bank regulatory agencies could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the bank regulatory agencies have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Banks or Greater Bay may pay. See "Prompt Corrective Action and Other Enforcement Mechanisms" herein and "Capital Standards" herein for a discussion of these additional restrictions on capital distributions. 11 The Banks are subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, Greater Bay or other affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of Greater Bay or other affiliates. Such restrictions prevent Greater Bay and such other affiliates from borrowing from the Banks unless the loans are secured by marketable obligations or other acceptable collateral of designated amounts. Further, such secured loans and investments by the Banks to or in Greater Bay or to or in any other affiliate is limited to 10% of the respective bank's capital stock and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20% of the respective banks' capital stock and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving Greater Bay and other controlling persons of the Banks. Additional restrictions on transactions with affiliates may be imposed on the Banks under the prompt corrective action provisions of federal law. See "Prompt Corrective Action and Other Enforcement Mechanisms" herein. Capital Standards The Federal Reserve, the Comptroller and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with high credit risk, such as commercial loans. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. Prompt Corrective Action and Other Enforcement Mechanisms Federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 1998, each of the Banks, and the Company as a whole exceeded the required ratios for classification as "well capitalized". An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. See "Potential Enforcement Action" herein. 12 Safety and Soundness Standards The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These new guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves. Premiums for Deposit Insurance The Banks' deposit accounts are insured by the Bank Insurance Fund ("BIF"), as administered by the FDIC, up to the maximum permitted by law. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operation, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the institution's primary regulator. The FDIC charges an annual assessment for the insurance of deposits, which as of December 31, 1998, ranged from 0 to 27 basis points per $100 of insured deposits, based on the risk a particular institution poses to its deposit insurance fund. The risk classification is based on an institution's capital group and supervisory subgroup assignment. Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), at January 1, 1997, the Bank began paying, in addition to its normal deposit insurance premium as a member of the BIF, an amount equal to approximately 1.3 basis points per $100 of insured deposits toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery of the savings and loan industry. Members of the Savings Association Insurance Fund ("SAIF"), by contrast, pay, in addition to their normal deposit insurance premium, approximately 6.4 basis points. Under the Paperwork Reduction Act, the FDIC is not permitted to establish SAIF assessment rates that are lower than comparable BIF assessment rates. Beginning no later than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for members of the BIF and the SAIF. The Paperwork Reduction Act also provided for the merging of the BIF and the SAIF by January 1, 1999 provided there were no financial institutions still chartered as savings associations at that time. However, as of January 1, 1999, there were still financial institutions chartered as savings associations. Should the insurance funds be merged before January 1, 2000, the rate paid by all members of this new fund to retire the Fico Bonds would be equal. Interstate Banking and Branching The BHCA currently permits bank holding companies from any state to acquire banks and the bank holding companies located in any other state, subject to certain conditions, including certain nationwide - and state-imposed concentration limits. The Company has the ability, subject to certain restrictions, to acquire by acquisition or merger branches outside its home state. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets. Community Reinvestment Act and Fair Lending Developments The Banks are subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal 13 banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. A bank's compliance with its CRA obligations is based on a performance-based evaluation system which bases CRA ratings on an institution's lending service and investment performance. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." Based on an examination conducted as of March 1998, MPB was rated outstanding. Based on examinations conducted as of March 1996, September 1995 and June 1995, CNB, PBC and Golden Gate were rated satisfactory. Year 2000 Compliance The Federal Financial Institutions Examination Council issued an interagency statement to the chief executive officers of all federally supervised financial institutions regarding year 2000 project management awareness. It is expected that unless financial institutions address the technology issues relating to the coming of the year 2000, there will be major disruptions in the operations of financial institutions. The statement provides guidance to financial institutions, providers of data services, and all examining personnel of the federal banking agencies regarding the year 2000 problem. The federal banking agencies intend to conduct year 2000 compliance examinations, and the failure to implement a year 2000 program may be seen by the federal banking agencies as an unsafe and unsound banking practice. If a federal banking agency determines that the Bank is operating in an unsafe and unsound manner, the Bank may be required to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action being taken, which may include a cease and desist order and fines. Factors That May Affect Future Results of Operations The following discusses certain factors which may affect the Company's financial results and operations and should be considered in evaluating the Company. Ability of Greater Bay to Execute its Business Strategy The financial performance and profitability of the Company will depend on its ability to execute its business strategy and manage its recent and possible future growth. Although management believes that it has substantially integrated the business and operations of the recently acquired Banks and PBF, there can be no assurance that unforeseen issues relating to the assimilation of these Banks and PBF will not adversely affect the Company. In addition, any future acquisitions, including BAB, or continued growth may present operating and other problems that could have an adverse effect on the Company's business, financial condition and results of operations. The Company's financial performance will also depend on its ability to maintain profitable operations through implementation of its Super Community Banking Philosophy. Accordingly, there can be no assurance that the Company will be able to continue the growth or maintain the level of profitability it has recently experienced. Interest Rates The Company's earnings are impacted by changing interest rates. Changes in interest rates impact the demand for new loans, the credit profile of existing loans, the rates received on loans and securities and rates paid on deposits and borrowings. The relationship between the rates received on loans and securities and the rates paid on deposits and borrowings is known as interest rate spread. Given the Company's current volume and mix of interest-bearing liabilities and interest-earning assets, the Company's interest rate spread could be expected to increase during times of rising interest rates and, conversely, to decline during times of falling interest rates. Although the Company believes its current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates may have an adverse effect on the Company's business, financial condition and results of operations. 14 Economic Conditions and Geographic Concentration The Company's operations are located in Northern California and concentrated primarily in Contra Costa San Francisco, Santa Clara and San Mateo Counties, which includes the area known as the "Silicon Valley." As a result of the geographic concentration, the Company's results depend largely upon economic conditions in these areas. A deterioration in economic conditions in the Company's market areas, particularly in the technology and real estate industries on which these areas depend, could have a material adverse impact on the quality of the Company's loan portfolio, the demand for its products and services, and its results of operations. Government Regulation and Monetary Policy The financial services industry is regulated extensively. Federal and State regulation is designed primarily to protect the deposit insurance funds and consumers, and not to benefit the Company's stockholders. Significant new laws or changes in existing laws or repeal of existing laws may cause the Company's results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company. Competition The financial services business in the Company's market areas are highly competitive. It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers. The results of the Company may differ in future periods depending upon the nature or level of competition. Credit Quality A significant source of risk arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The Company has adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the Company's credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect the Company's results of operations. Year 2000 Compliance Most of the Company's operations are dependent on the efficient functioning of the Company's computer systems and software. Computer system failures or disruption could have a material adverse effect on the Company's business, financial condition and results of operations. Many computer programs were designed and developed utilizing only two digits in date fields, thereby creating the inability to recognize the year 2000 or years thereafter. Beginning in the year 2000, these date codes will need to accept four digit entries to distinguish 21st century dates from 20th century dates. This year 2000 issues creates risks for the Company from unforeseen or unanticipated problems in its internal computer systems as well as from computer systems of the Federal Reserve Bank, correspondent banks, customers and suppliers. Failures of these systems or untimely corrections could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's computer systems and programs are designed and supported by companies specifically in the business of providing such products and services. The Company's year 2000 plan includes evaluating existing hardware, software, ATM's, vaults, alarm systems, communication systems and other electrical devices, testing critical application programs and systems, both internally and externally, establishing a contingency plan and upgrading hardware and software as necessary. The initial phase of the project was to assess and identify all internal business processes requiring modification and to develop comprehensive renovation plans as needed. This phase was largely 15 completed in mid-1998. The second phase was to execute those renovation plans and begin testing systems by simulating year 2000 data conditions. This phase was largely completed in 1998. Testing and implementation is planned to be completed during the first half of 1999. Failure to be year 2000 compliant or incurrence of significant costs to render the Company year 2000 compliant could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is evaluating its major customers and suppliers to determine if they are year 2000 compliant. Failure of any material customer or supplier to be year 2000 compliant could have a material adverse effect on the Company. Other Risks From time to time, the Company details other risks with respect to its business and financial results in its filings with the Securities and Exchange Commission. ITEM 2. PROPERTIES. The Company occupies its administrative offices under a lease which, including options to renew, expires in 2007. PBC owns its main office located in Millbrae, California. The Company leases thirteen additional offices throughout the San Francisco Bay Area under operating leases. Those leases expire under various dates, including options to renew, through 2017. The Company believes its present facilities are adequate for its present needs and anticipated future growth. The Company believes that, if necessary, it could secure suitable alternative facilities on similar terms without adversely affecting operations. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company is involved in certain legal proceedings arising in the normal course of its business. Management believes that the outcome of these matters will not have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no submission of matters to a vote of security holders during the fourth quarter of the year ended December 31, 1998. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol "GBBK". The quotations shown reflect the high and low sales prices for the Company's common stock as reported by Nasdaq. The following information is restated to reflect 2-1 stock split effective as of April 30, 1998.
Cash dividends For the period indicated High Low declared (1) ------------------------ ------ ------ -------------- 1998 Fourth Quarter................................ $35.00 $24.50 $0.095 Third Quarter................................. 39.00 23.38 0.095 Second Quarter................................ 36.00 28.88 0.095 First Quarter................................. 31.38 24.13 0.095 1997 Fourth Quarter................................ $26.75 $21.00 $0.075 Third Quarter................................. 22.25 15.94 0.075 Second Quarter................................ 15.75 12.44 0.075 First Quarter................................. 13.82 11.88 0.075
- -------- (1) Includes only those dividends declared by Greater Bay, and excludes those dividends paid by Greater Bay's subsidiaries prior to the completion of their mergers with Greater Bay. In 1998, PBFC made a distribution of $1.2 million to its shareholders. In 1997, PBC declared an annual dividend of $3.20 share, PRB declared and paid a dividend of $100,000 to its sole shareholder and PBFC made a distribution of $208,000 to its shareholders. On a consolidated basis, Greater Bay has declared dividends of $0.54 and $0.48 in 1998 and 1997, respectively. The Company estimates there were approximately 2,500 shareholders at December 31, 1998. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. Information regarding Selected Consolidated Financial Data appears on page A-1 under the caption "Financial Highlights" and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Information regarding Management's Discussion and Analysis of Financial Condition and Results of Operations appears on pages A-2 through A-23 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information regarding Quantitative and Qualitative Disclosures About Market Risk appears on page A-18 through A-19 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Quantitative and Qualitative Disclosures About Market Risk" and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information regarding Financial Statements and Supplementary Data appears on pages A-24 through A-59 under the caption "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Comprehensive Income", "Consolidated Statements of Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Company intends to file a definitive proxy statement for the 1999 Annual Meeting of Shareholders (the "Proxy Statement") with the Securities and Exchange Commission within 120 days of December 31, 1998. Information regarding directors of Greater Bay will appear under the caption "DISCUSSION OF THE PROPOSALS RECOMMENDED BY THE BOARD--Proposal 1: Elect Four Directors" in the Proxy Statement and is incorporated herein by reference. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, and executive officers will appear under the captions "INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS--Section 16(a) Beneficial Ownership Reporting Compliance by Directors and Executive Officers" and "-- Executive Officers" in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information regarding executive compensation will appear under the captions "INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS--How We Compensate Executive Officers", "--How We Compensate Directors" "--Employment Contracts, Termination of Employment and Change of Control Arrangements,"--"Executive Committee's Report on Executive Compensation", "--Compensation Committee Interlocks and Insider Participation" and "--Performance Graph" in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding security ownership of certain beneficial owners and management will appear under the caption "INFORMATION ABOUT GREATER BAY STOCK OWNERSHIP" in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding certain relationships and related transactions will appear under the caption "INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS-- Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated herein by reference. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)1. Financial Statements The following documents are filed as part of this report: Consolidated Balance Sheets........................................... A-24 Consolidated Statements of Operations................................. A-25 Consolidated Statements of Comprehensive Income....................... A-26 Consolidated Statements of Changes in Shareholders' Equity ........... A-27 Consolidated Statements of Cash Flows................................. A-28 Notes to the Consolidated Financial Statements........................ A-29 Report of Independent Accountants..................................... A-60
2. Financial Statement Schedules All financial statement schedules are omitted because of the absence of the conditions under which they are required to be provided or because the required information is included in the financial statements listed above and/or related notes. 3. Exhibits See Item 14(c) below. (b) Reports on Form 8-K During the fourth quarter of 1998 the Company filed two reports on Form 8-K as described below. On December 8, 1998, the Company filed a report on Form 8-K reported under Item 5. Other Event and containing three recent press releases. Those press releases announced 1.) the adoption of a shareholder rights plan by the Company, 2.) consummation of its offer to exchange its $30 million aggregate principle amount of Floating Rate Capital Securities, Series A for a like amount of its registered Floating Rate Capital Securities, Series B and 3.) the hiring of Fred Bailard as Senior Vice President of Cash Management Services. On October 19, 1998, the Company filed a report on Form 8-K reported under Item 5. Other Event and containing two recent press releases. Those press releases announced 1.) financial results of the Company for the third quarter of 1998 and 2.) the hiring of Linda M. Iannone as Senior Vice President and General Counsel of the Company. (c) Exhibits Required by Item 601 of Regulation S-K
Exhibit No. Exhibit ------- ------- 2.1 Agreement and Plan of Reorganization by and between Greater Bay Bancorp and Bay Area Bancshares dated January 26, 1999. (The schedules to this agreement are not being filed herewith. Greater Bay Bancorp agrees to furnish supplemental copies of any omitted schedules to the SEC upon request). 3.1 Articles of Incorporation of Greater Bay Bancorp, as amended. 3.2 Bylaws of Greater Bay Bancorp, as amended. 3.3 Certificate of Determination of Series A Preferred Stock of Greater Bay Bancorp (filed as Exhibit A to Exhibit 4.1 hereto). 4.1 Rights Agreement.(1) 4.2 Junior Subordinated Indenture dated as of March 31, 1997 between Greater Bay Bancorp and Wilmington Trust Company, as Trustee.(2)
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Exhibit No. Exhibit ------- ------- 4.3 Officers' Certificate and Company Order, dated March 31, 1997.(2) 4.4 Certificate of Trust of GBB Capital I.(3) 4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997.(3) 4.6.1 Amended and Restated Trust Agreement of GBB Capital I, among Greater Bay Bancorp, Wilmington Trust Company and the Administrative Trustees named therein dated as of March 31, 1997.(2) 4.6.2 Successor Administrative Trustee and First Amendment to Amended and Restated Trust Agreement. 4.7 Trust Preferred Certificate of GBB Capital I.(2) 4.8 Common Securities Certificate of GBB Capital I.(2) 4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington Trust Company, dated as of March 31, 1997.(2) 4.10 Agreement as to Expenses and Liabilities, dated as of March 31, 1997.(2) 4.11 Form of Subordinated Debentures.(4) 4.12 Supplemental Debenture Agreement of Cupertino National Bancorp dated as of November 22, 1996.(3) 4.13 Supplemental Debenture Agreement dated November 27, 1996 between Cupertino National Bancorp and Mid-Peninsula Bancorp.(3) 4.14 Supplemental Debenture Agreement, dated as of March 27, 1997.(2) 4.15 Indenture between Greater Bay Bancorp and Wilmington Trust Company, as Debenture Trustee, dated as of August 12, 1998.(5) 4.16 Form of Exchange Junior Subordinated Debentures (filed as Exhibit A to Exhibit 4.15 hereto). 4.17 Certificate of Trust of GBB Capital II, dated as of May 18, 1998.(5) 4.18 Amended and Restated Trust Agreement of GBB Capital II, among Greater Bay Bancorp, Wilmington Trust Company and the Administrative Trustees named therein dated as of August 12, 1998.(5) 4.19 Form of Exchange Capital Security Certificate (filed as Exhibit A- 1 to Exhibit 4.18 hereto). 4.20 Common Securities Guarantee Agreement of Greater Bay Bancorp, dated as of August 12, 1998.(5) 4.21 Series B Capital Securities Guarantee Agreement of Greater Bay Bancorp and Wilmington Trust Company dated as of November 27, 1998. 4.22 Liquidated Damages Agreement among Greater Bay Bancorp, GBB Capital II, and Sandler O'Neill and Partners, L.P., dated as of August 7, 1998.(5) 4.23 Registration Rights Agreement between Greater Bay Bancorp and The Leo K.W. Lum PRB Revocable Trust dated May 8, 1998.(6) 10.1 Employment Agreement with David L. Kalkbrenner, dated March 3, 1992.(8), (9) 10.1.1 Amendment No. 1 to Employment Agreement with David L. Kalkbrenner, dated March 27, 1998.(7), (8) 10.2 Employment, Severance and Retirement Benefits Agreement with Steven C. Smith dated July 31, 1995.(3), (8) 10.2.1 Amendment No. 1 to Employment, Severance and Retirement Benefits Agreement with Steven C. Smith, dated March 27, 1998.(7), (8) 10.3 Employment, Severance and Retirement Benefits Agreement with David R. Hood dated July 31, 1995.(3), (8) 10.3.1 Amendment No. 1 to Employment, Severance and Retirement Benefits Agreement with David R. Hood, dated March 27, 1998.(7), (8)
20
Exhibit No. Exhibit ------- ------- 10.4 Greater Bay Bancorp 1996 Stock Option Plan, as amended.(8) 10.5 Greater Bay Bancorp 401(k) Profit Sharing Plan.(7), (8) 10.6.1 Greater Bay Bancorp Employee Stock Purchase Plan.(8), (10) 10.6.2 Amendment to Greater Bay Bancorp Employee Stock Purchase Plan.(7), (8) 10.7 Greater Bay Bancorp Change of Control Pay Plan I.(7), (8) 10.8 Greater Bay Bancorp Change of Control Pay Plan II.(7), (8) 10.9 Greater Bay Bancorp Termination and Layoff Plan I.(7), (8) 10.10 Greater Bay Bancorp Termination and Layoff Plan II.(7), (8) 10.11.1 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan.(7), (8) 10.11.2 Amendment to Greater Bay Bancorp 1997 Elective Deferred Compensation Plan.(8) 10.12 Form of Indemnification Agreement between Greater Bay Bancorp and with directors and certain executive officers.(3) 11.1 Statements re Computation of Earnings per Share. 12.1 Statement re Computation of Ratios of Earnings to Fixed Charges. 21.1 Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 27.1 Financial Data Schedule.
-------- (1) Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed with the SEC on November 25, 1998. (2) Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K (File No. 000-25034) dated June 5, 1997. (3) Incorporated by reference from Greater Bay's Registration Statement on Form S-1 (File No. 333-22783) filed with the SEC on March 5, 1997. (4) Incorporated herein by reference from Exhibit 1 of Cupertino National Bancorp's Form 8-K (File No. 0-18015), filed with the SEC on October 25, 1995. (5) Incorporated by reference from Greater Bay's Current Report on Form 8-K (File No. 000-25034) filed with the SEC on August 28, 1998. (6) Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K filed with the SEC on May 20, 1998. (7) Incorporated by reference from Greater Bay Bancorp's Annual Report on Form 10-K filed with the SEC on March 31, 1998. (8) Represents executive compensation plans and arrangements of Greater Bay Bancorp. (9) Incorporated herein by reference from Exhibit 10.15 to Mid- Peninsula Bancorp's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0-25034), filed with the SEC on March 30, 1995. (10) Incorporated herein by reference from Greater Bay Bancorp's Proxy Statement for Annual Meeting of Shareholders (File No. 000-25034), filed with the SEC on May 13, 1997. (d) Additional Financial Statements Not applicable. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of February, 1999. Greater Bay Bancorp /s/ David L. Kalkbrenner By: _________________________________ David L. Kalkbrenner Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ David L. Kalkbrenner President, Chief Executive February 17, 1999 ______________________________________ Officer and Director David L. Kalkbrenner (Principal Executive Officer) /s/ Steven C. Smith Executive Vice President, February 17, 1999 ______________________________________ Chief Operating Officer Steven C. Smith and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ George R. Corey Director February 17, 1999 ______________________________________ George R. Corey /s/ John M. Gatto Director February 17, 1999 ______________________________________ John M. Gatto /s/ James E. Jackson Director February 17, 1999 ______________________________________ James E. Jackson /s/ Rex D. Lindsay Director February 17, 1999 ______________________________________ Rex D. Lindsay /s/ Leo K. W. Lum Director February 17, 1999 ______________________________________ Leo K. W. Lum /s/ George M. Marcus Director February 17, 1999 ______________________________________ George M. Marcus
22
Signature Title Date --------- ----- ---- /s/ Duncan L. Matteson Director February 17, 1999 ______________________________________ Duncan L. Matteson /s/ Glen McLaughlin Director February 17, 1999 ______________________________________ Glen McLaughlin /s/ Rebecca Q. Morgan Director February 17, 1999 ______________________________________ Rebecca Q. Morgan /s/ Dick J. Randall Director February 17, 1999 ______________________________________ Dick J. Randall /s/ Donald H. Seiler Director February 17, 1999 ______________________________________ Donald H. Seiler /s/ Warren R. Thoits Director February 17, 1999 ______________________________________ Warren R. Thoits
23 SELECTED FINANCIAL INFORMATION The following table represents the selected financial information at and for the five years ended December 31, 1998:
Years Ended December 31, ---------------------------------------------------------- 1998 1997* 1996* 1995* 1994* ---------- ---------- --------- --------- --------- (Dollars in thousands, except per share amounts) Statement of Operations Data Interest income......... $ 112,920 $ 88,527 $ 62,883 $ 53,060 $ 39,946 Interest expense........ 47,472 34,059 22,379 18,961 11,804 ---------- ---------- --------- --------- --------- Net interest income.... 65,448 54,468 40,504 34,099 28,142 Provision for loan losses................. 6,035 6,786 2,594 1,219 1,985 ---------- ---------- --------- --------- --------- Net interest income after provision for loan losses........... 59,413 47,682 37,910 32,880 26,157 Other income............ 6,310 5,379 4,623 3,043 4,120 Nonrecurring--warrant income................. 945 1,162 -- -- -- ---------- ---------- --------- --------- --------- Total other income..... 7,255 6,541 4,623 3,043 4,120 Operating expenses...... 38,711 34,083 29,416 25,962 22,724 Other expenses-- nonrecurring........... 1,341 (1,287) -- 2,135 -- ---------- ---------- --------- --------- --------- Total operating expenses.............. 40,052 32,796 29,416 28,097 22,724 ---------- ---------- --------- --------- --------- Income before income tax expense & merger and other related nonrecurring costs..... 26,616 21,427 13,117 7,826 7,553 Income tax expense...... 8,364 7,526 4,778 2,870 2,794 ---------- ---------- --------- --------- --------- Income before merger and other related nonrecurring costs..... 18,252 13,901 8,339 4,956 4,759 Merger and other related nonrecurring costs, net of tax................. 1,674 2,282 1,991 -- 608 ---------- ---------- --------- --------- --------- Net income............. $ 16,578 $ 11,619 $ 6,348 $ 4,956 $ 4,151 ========== ========== ========= ========= ========= Per Share Data (1) Income per share (before merger and other related nonrecurring costs) Basic.................. $ 1.92 $ 1.51 $ 0.94 $ 0.59 $ 0.61 Diluted................ 1.78 1.41 0.88 0.56 0.56 Net income per share Basic.................. $ 1.75 $ 1.26 $ 0.72 $ 0.59 $ 0.53 Diluted................ 1.62 1.17 0.67 0.56 0.49 Cash dividends per share (2).................... $ 0.38 $ 0.30 $ 0.22 $ 0.20 $ 0.11 Book value per common share.................. $ 9.64 $ 8.23 $ 7.41 $ 7.02 $ 6.55 Shares outstanding at year end............... 9,612,142 9,304,930 9,021,738 8,613,440 8,053,218 Average common shares outstanding............ 9,485,000 9,196,000 8,856,000 8,334,000 7,854,000 Average common and common equivalent shares outstanding..... 10,231,000 9,892,000 9,443,000 8,813,000 8,485,000 Performance Ratios Return on average assets (before merger and other related nonrecurring costs) (3).................... 1.28 % 1.33 % 1.13% 0.82 % 1.09 % Return on average common shareholders' equity (before merger and other related nonrecurring costs) (3).................... 21.72 % 18.86 % 12.97% 8.70 % 11.95 % Net interest margin (4).................... 4.96 % 5.55 % 5.91% 6.09 % 6.98 % Balance Sheet Data--At Period End Assets.................. $1,582,865 $1,217,665 $ 919,924 $ 659,373 $ 552,272 Loans, net.............. 984,487 735,233 564,175 393,378 342,098 Investment securities... 342,294 213,127 135,671 141,024 117,737 Deposits................ 1,342,492 1,071,148 821,133 584,103 475,048 Subordinated debt....... 3,000 3,000 3,000 3,000 -- Trust Preferred Securities............. 50,000 20,000 -- -- -- Common shareholders' equity................. 92,676 76,540 66,834 60,494 52,784 Asset Quality Ratios Nonperforming assets to total loans and OREO... 0.31 % 0.73 % 1.62% 2.40 % 3.45 % Allowance for loan losses to total loans.. 2.12 % 2.18 % 1.76% 1.67 % 1.96 % Allowance for loan losses to non- performing assets...... 676.10 % 298.40 % 108.36% 69.15 % 56.56 % Net (charge-offs) recoveries to average loans.................. (0.16)% (0.28)% 0.01% (0.40)% (0.40)% Regulatory Capital Ratios Leverage Ratio.......... 7.81 % 8.40 % 7.78% 9.53 % 9.89 % Tier 1 Capital.......... 9.90 % 10.72 % 9.83% 12.47 % 13.05 % Total Capital........... 12.94 % 12.31 % 11.47% 14.31 % 14.37 %
- ------- * Restated on a historical basis to reflect the mergers between Greater Bay Bancorp and Cuperfino National Bancorp, PBC, PRB (the parent of Golden Gate) and PBFC, on a pooling-of-interests basis. (1) Restated to reflect 2-for-1 stock split declared for shareholders of record at April 30, 1998. (2) Includes only those dividends declared by Greater Bay, and excludes those dividends paid by Greater Bay's subsidiaries prior to the completion of their mergers with Greater Bay. (3) Including merger and other related nonrecurring costs net of tax of $1.7 million in 1998, $2.3 million in 1997, $2.0 million in 1996 and $608,000 in 1994, ROA for 1998, 1997, 1996, 1995 and 1994 would have been 1.17%, 1.11%, 0.86%, 0.82% and 0.95%, respectively, and ROE for 1998, 1997, 1996, 1995 and 1994 would have been 19.73%, 15.76%, 9.87%, 8.70%, and 10.42%, respectively. (4) Net interest margin for 1998, 1997 and 1996 includes the lower spread earned on the PBC Special Deposit (see Note 7 to the Financial Statements for details). Excluding the PBC Special Deposit, net interest margin would have been 5.16%, 5.78% and 6.08% for 1998, 1997 and 1996, respectively. A-1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the "Company", on a consolidated basis) was formed as the result of the merger in November 1996 between Cupertino National Bancorp, the former holding company for Cupertino National Bank ("CNB"), and Mid-Peninsula Bancorp, the former holding company for Mid-Peninsula Bank ("MPB"). In December 1997 the Company completed a merger with Peninsula Bank of Commerce ("PBC"), whereby PBC became the third wholly owned banking subsidiary of Greater Bay. In May 1998, the Company completed a merger with Pacific Rim Bancorporation ("PRB"), the holding company for Golden Gate Bank ("Golden Gate"), whereby Golden Gate became the fourth wholly owned banking subsidiary of Greater Bay. In August 1998, the Company completed a merger with Pacific Business Funding Corporation ("PBFC"), which now operates as an operating division of CNB and conducts business under the name Pacific Business Funding. All mergers were accounted for as a pooling of interests. All of the financial information for the Company for the periods prior to the mergers has been restated to reflect the pooling of interests, as if they occurred at the beginning of the earliest reporting period presented. CNB, MPB, PBC and Golden Gate are referred to collectively herein as the "Banks." The financial information includes the result of the Company's operating divisions, Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Corporate Finance Group, Greater Bay Bank Contra Costa Banking Office, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding and Venture Banking Group. The following discussion and analysis is intended to provide greater details of the results of operations and financial condition of the Company. The following discussion should be read in conjunction with the information under "Selected Financial Information" and the Company's consolidated financial data included elsewhere in this document. Certain statements under this caption constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include but are not limited to economic conditions, competition in the geographic and business areas in which the Company conducts its operations, fluctuation in interest rates, credit quality and government regulation. Results of Operations The Company reported net income of $16.6 million in 1998, a 42.7% increase over 1997 net income of $11.6 million. The net income in 1997 was an 83.0% increase over 1996 income of $6.3 million. Basic net income per share was $1.75 for 1998, as compared to $1.26 for 1997 and $0.72 for 1996. Diluted net income per share was $1.62, $1.17 and $0.67 for 1998, 1997 and 1996, respectively. The return on average assets and return on average shareholders' equity were 1.17% and 19.73% in 1998, compared with 1.11% and 15.76% in 1997 and 0.86% and 9.87% in 1996, respectively. The Company's operating results included merger and other related nonrecurring costs of $2.7 million ($1.7 million net of tax), $3.3 million ($2.3 million net of tax) and $2.8 million ($2.0 million net of tax) in 1998, 1997 and 1996, respectively. The following table summarizes net income, net income per share and key financial ratios before and after merger and other related nonrecurring costs for the years presented:
Before merger and other After merger and other related nonrecurring related nonrecurring costs costs ------------------------ ------------------------ 1998 1997 1996 1998 1997 1996 ------- ------- ------ ------- ------- ------ (Dollars in thousands, except per share amounts) Net income................ $18,252 $13,901 $8,339 $16,578 $11,619 $6,348 Net income per share: Basic................... $ 1.92 $ 1.51 $ 0.94 $ 1.75 $ 1.26 $ 0.72 Diluted................. $ 1.78 $ 1.41 $ 0.88 $ 1.62 $ 1.17 $ 0.67 Return on average assets.. 1.28% 1.33% 1.13% 1.17% 1.11% 0.86% Return on average shareholders' equity..... 21.72% 18.86% 12.97% 19.73% 15.76% 9.87%
A-2 The increase in 1998 net income was the result of significant growth in loans, deposits and trust assets. This growth resulted in increases in net interest income, trust fees, depositors' service fees and other fee income. Operating expense increases required to service and support the Company's growth partially offset the increase in revenues. Net income for 1998 and 1997 included $945,000 and $1.2 million, respectively, in warrant income resulting from the warrants received from clients of the Banks. During 1998, the Company donated appreciated warrants to the Greater Bay Bancorp Foundation. The contribution of the warrants triggered recognition of warrant income of $945,000, net of related employee incentives, and a donation expense of $1.3 million. The Company recognized a tax benefit of $551,000 from these transactions. The increase in net income in 1997 over 1996 was due primarily to increased growth in interest-earning assets. Additionally, warrant income increased to $1.2 million in 1997, compared with $92,000 in 1996. Net income in 1997 also included approximately $1.7 million ($1.0 million net of tax) of a recovery through insurance of a litigation settlement charge incurred in 1995. The increases were partially offset by the growth in operating expenses. In addition, during 1997 the Company increased its allowance for loan losses to 2.18% of total loans from 1.76% of total loans in 1996. The increase in the allowance for loan losses as a percentage of total loans accounted for $3.7 million of the increased provision for loan losses in 1997. Net Interest Income Net interest income increased 20.2% to $65.4 million in 1998 from $54.5 million in 1997. This increase was primarily due to the $336.5 million, or 34.3%, increase in average interest-earning assets which was partially offset by a 56 basis point decrease in the Company's net yield on interest earning assets. Net interest income increased 34.5% in 1997 from $40.5 million in 1996. This increase was primarily due to the $296.7 million, or 43.3%, increase in average interest-earning assets, which was partially offset by the 36 basis point decrease in the Company's net yield on interest earning assets. The Company's net yield on interest earning assets was reduced by the Special Deposit (discussed in Note 7 of the Notes to the Consolidated Financial Statements). The average deposit balances related to the Special Deposit during 1998, 1997 and 1996 were $88.9 million, $93.4 million and $91.3 million, respectively, on which the Company earned a spread of 2.25%. Excluding the Special Deposit, the 1998, 1997 and 1996 net yield on interest earning assets would have been 5.16%, 5.78% and 6.08%, respectively. A-3 The following table presents, for the years indicated, condensed average balance sheet information for the Company, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are average daily balances.
Years Ended December 31, -------------------------------------------------------------------------------------- 1998 1997 1996 ---------------------------- ---------------------------- ---------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance (1) Interest Rate Balance (1) Interest Rate Balance (1) Interest Rate ----------- -------- ------- ----------- -------- ------- ----------- -------- ------- (Dollars in thousands) Interest-Earning Assets: Fed funds sold.......... $ 85,329 $ 4,598 5.39% $ 73,223 $ 3,911 5.34% $ 64,194 $ 3,637 5.67% Other short term securities............. 96,765 5,454 5.64% 97,586 5,287 5.42% 12,569 691 5.50% Investment securities: Taxable................ 281,395 17,114 6.08% 128,856 8,199 6.36% 121,809 7,394 6.07% Tax-exempt (3)......... 42,185 2,104 4.99% 19,064 1,095 5.74% 19,428 990 5.10% Loans (2)............... 812,665 83,650 10.29% 663,107 70,035 10.56% 467,159 50,171 10.74% ---------- -------- ---------- ------- -------- ------- Total interest-earning assets................ 1,318,339 112,920 8.57% 981,836 88,527 9.02% 685,159 62,883 9.18% Noninterest-earning assets................. 102,230 63,303 55,003 ---------- -------- ---------- ------- -------- ------- Total assets........... $1,420,569 112,920 $1,045,139 88,527 $740,162 62,883 ========== -------- ========== ------- ======== ------- Interest-Bearing Liabilities: Deposits: MMDA, NOW and Savings.. $ 761,332 27,634 3.63% $ 575,603 20,653 3.59% $390,996 12,886 3.30% Time deposits, over $100,000.............. 180,626 9,300 5.15% 129,991 6,686 5.14% 94,899 4,689 4.94% Other time deposits.... 48,217 2,464 5.11% 58,342 3,301 5.66% 58,387 3,645 6.24% ---------- -------- ---------- ------- -------- ------- Total interest-bearing deposits.............. 990,175 39,398 3.98% 763,936 30,640 4.01% 544,282 21,220 3.90% Other borrowings........ 74,877 4,879 6.52% 16,931 1,611 9.51% 10,854 814 7.50% Subordinated debt....... 3,000 345 11.50% 3,000 345 11.50% 3,000 345 11.50% Trust Preferred Securities............. 31,671 2,850 9.00% 15,000 1,463 9.75% -- -- 0.00% ---------- -------- ---------- ------- -------- ------- Total interest-bearing liabilities........... 1,099,723 47,472 4.32% 798,867 34,059 4.26% 558,136 22,379 4.01% ---------- -------- ---------- ------- -------- ------- Noninterest-bearing deposits............... 220,832 161,684 112,321 Other noninterest- bearing liabilities.... 15,987 10,865 5,412 Shareholders' equity.... 84,027 73,723 64,293 ---------- ---------- -------- Total liabilities and shareholders' equity.. $1,420,569 $ 47,472 $1,045,139 $34,059 $740,162 $22,379 ========== -------- ========== ------- ======== ------- Net interest income..... $ 65,448 $54,468 $40,504 ======== ======= ======= Interest rate spread.... 4.25% 4.75% 5.17% Contribution of interest free funds............. 0.72% 0.79% 0.74% Net yield on interest- earnings assets (4).... 4.96% 5.55% 5.91%
- -------- (1) Nonaccrual loans are excluded from the average balance and only collected interest on accrual loans is included in the interest column. (2) Loan fees totaling $3.2 million, $3.4 million and $2.5 million are included in loan interest income for 1998, 1997 and 1996, respectively. (3) Tax equivalent yields earned on the tax exempt securities are 7.19%, 8.34% and 7.34% for the years ended December 31, 1998, 1997 and 1996, respectively, using the federal statutory rate of 34%. (4) Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period. A-4 The most significant impact on the Company's net interest income between periods is derived from the interaction of changes in the volume of and rate earned or paid on interest-earning assets and interest-bearing liabilities. The volume of interest-earning asset dollars in loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in the net interest income between periods. The table below sets forth, for the years indicated, a summary of the changes in average asset and liability balances (volume) and changes in average interest rates (rate).
Year Ended December 31, 1998 Year Ended December 31, 1997 Compared with December 31, 1997 Compared with December 31, 1996 favorable (unfavorable) favorable (unfavorable) ---------------------------------- ---------------------------------- Volume Rate Net Volume Rate Net ---------------------- ---------- ---------------------- ---------- (Dollars in thousands) (1) Interest-earning assets: Fed funds sold.......... $ 638 $ 49 $ 687 $ 483 $ (209) $ 274 Other short term securities............. (47) 214 167 4,607 (11) 4,596 Investment securities: Taxable................ 9,091 (176) 8,915 448 357 805 Tax-exempt............. 1,136 (127) 1,009 (21) 126 105 Loans................... 15,071 (1,456) 13,615 20,701 (837) 19,864 ---------- ---------- ---------- ---------- ---------- ---------- Total interest-earning assets............... 25,889 (1,496) 24,393 26,218 (574) 25,644 ---------- ---------- ---------- ---------- ---------- ---------- Interest-bearing liabilities: Deposits: MMDA, NOW and Savings.. 6,322 659 6,981 6,562 1,205 7,767 Time deposits, over $100,000.............. 2,445 169 2,614 1,796 201 1,997 Other time deposits.... (556) (281) (837) (4) (340) (344) ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing deposits............. 8,211 547 8,758 8,354 1,066 9,420 Other borrowings........ 3,348 (80) 3,268 527 270 797 Trust Preferred Securities............. 1,370 17 1,387 967 496 1,463 ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities.......... 12,929 484 13,413 9,848 1,832 11,680 ---------- ---------- ---------- ---------- ---------- ---------- Increase (decrease) in net interest income.. $ 12,960 $ (1,980) $ 10,980 $ 16,370 $ (2,406) $ 13,964 ========== ========== ========== ========== ========== ==========
- -------- (1) The change in interest income and expense not attributable to specific volume and rate changes has been allocated proportionately between the volume and rate changes. Interest income in 1998 increased 27.6% to $112.9 million from $88.5 million in 1997. This was primarily due to the significant increase in loans, the Company's highest yielding interest-earning asset, and investment securities. Loan volume increases were the result of the continuing economic improvement in the Company's market areas, as well as the addition of experienced relationship managers and significant business development efforts by the Company's relationship managers. The increase was partially offset by a decline in the yield earned on average interest-earning assets. Average interest-earning assets increased $336.5 million, or 34.3%, to $1.3 billion in 1998, compared to $981.8 million in 1997. Of this total increase, average loans increased $149.6 million, or 22.6%, to $812.7 million, or 61.6% of average interest-earning assets, in 1998 from $663.1 million, or 67.5% of average interest-earning assets in 1997. Investment securities, Federal funds sold and other short-term securities, increased 58.7% to $505.7 million, or 38.4% of average interest-earning assets in 1998, from $318.7 million, or 32.5% of average interest-earning assets in 1997. The average yield on interest-earning assets declined 45 basis points to 8.57% in 1998 from 9.02% in 1997 primarily due to a decline in the average yield on loans which was caused by increased competition for quality borrowers in the Company's market area and the shift in the mix between lower yielding investments and higher yielding loans. Loans represented approximately 61.6% of total interest-earning assets in 1998 compared to 67.5% A-5 in 1997. If loans would have remained at 67.5% of total interest earning assets in 1998, the yield on interest-earning assets would have been 8.83% and the interest rate spread would have been 4.51%. The average yield on loans declined 27 basis points to 10.29% in 1998 from 10.56% in 1997 primarily due to declines in market interest rates. Interest expense in 1998 increased 39.4% to $47.5 million from $34.1 million in 1997. This increase was due to greater volumes of interest-bearing liabilities coupled with slightly higher interest rates paid on interest- bearing liabilities. Average interest-bearing liabilities increased 37.7% to $1.1 billion in 1998 from $798.9 million in 1997 due primarily to the efforts of the Banks' relationship managers in generating core deposits from their client relationships and the deposits derived from the activities of the Greater Bay Trust Company and the Venture Banking Group. During 1998, average noninterest-bearing deposits increased to $220.8 million from $161.7 million in 1997. Due to that increase, noninterest-bearing deposits comprised 18.2% of total deposits at year-end 1998, compared 17.5% at year-end 1997. As a result of the foregoing, the Company's interest rate spread declined to 4.25% in 1998 from 4.75% in 1997, and the net yield on interest-earning assets declined in 1998 to 4.96% from 5.55% in 1997. Interest income increased 40.8% to $88.5 million in 1997 from $62.9 million in 1996, as a result of the increase in average interest-earning assets offset by a decline in the yields earned. Average interest-earning assets increased 43.3% to $981.8 million in 1997 from $685.2 million in 1996 principally as a result of increase in loans. The yield on the higher volume of average interest-earning assets declined 16 basis points to 9.02% in 1997 from 9.18% in 1996, primarily as a result of increased competition for loans. Interest expense in 1997 increased 52.2% to $34.1 million from $22.4 million in 1996 primarily as a result of the increase in volume of interest-bearing liabilities in addition an increase in rates paid on interest-bearing liabilities. As a result of the utilization of higher cost long term borrowings which provide additional capital to the Company, the average rate paid on average interest-bearing liabilities increased 25 basis points to 4.26% in 1997 from 4.01% in 1996. Corresponding to the growth in average interest-earning assets, average interest-bearing liabilities increased 43.1% to $798.9 million in 1997 from $558.1 million in 1996. As a result of the foregoing, the Company's interest rate spread declined to 4.75% in 1997 from 5.17% in 1996 and the net yield on interest-earning assets declined to 5.55% in 1997 from 5.91% in 1996. Certain client service expenses were incurred by the Company with respect to its noninterest-bearing liabilities. These expenses include messenger services, check supplies and other related items and are included in operating expenses. Had they been included in interest expense, the impact of these expenses on the Company's net yield on interest-earning assets would have been as follows for each of the years presented.
1998 1997 1996 -------- -------- -------- (Dollars in thousands) Average noninterest bearing demand deposits..... $220,832 $161,684 $112,321 Client service expenses......................... 544 444 462 Client service expenses, annualized............. 0.25% 0.27% 0.41% Impact on net yield on interest-earning assets: Net yield on interest-earning assets............ 4.96% 5.55% 5.91% Impact of client service expense................ 0.53% 0.30% 0.10% -------- -------- -------- Adjusted net yield on interest-earning assets (1)............................................ 5.49% 5.85% 6.01% ======== ======== ========
- -------- (1) Noninterest-bearing liabilities are included in cost of funds calculations to determine adjusted net yield of spread The impact on the net yield on interest-earning assets is determined by offsetting net interest income by the cost of client service expense, which reduces the yield on interest-earning assets. The cost for client service expense reflects the Company's efforts to manage its client service expenses. A-6 Provision for Loan Losses The provision for loan losses creates an allowance for future loan losses. The loan loss provision for each year is dependent on many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in the Company's market area. The Company performs a monthly assessment of the risk inherent in its loan portfolio, as well as a detailed review of each asset determined to have identified weaknesses. Based on this analysis, which includes reviewing historical loss trends, current economic conditions, industry concentrations and specific reviews of assets classified with identified weaknesses, the Company makes a provision for loan losses. Specific allocations are made for loans where the probability of a loss can be defined and reasonably determined. The balance of the provision for loan losses is based on historical data, delinquency trends, economic conditions in the Company's market area and industry averages. Annual fluctuations in the provision for loan losses result from management's assessment of the adequacy of the allowance for loan losses, and ultimate loan losses may vary from current estimates. The provision for loan losses in 1998 was $6.0 million, compared to $6.8 million in 1997 and $2.6 million in 1996. In addition, in connection with the mergers, the Company made an additional provision for loan losses of $183,000, $1.4 million and $800,000 in 1998, 1997 and 1996, respectively, to conform to the Companys' reserve allocation methodologies. Although loans outstanding have increased substantially, nonperforming loans, comprised of nonaccrual loans, restructured loans, and accruing loans past due 90 days or more, declined to $2.2 million, or 0.22% of loans outstanding, at December 31, 1998, from $4.2 million, or 0.56% of loans outstanding, at December 31, 1997 and $7.7 million, or 1.34% of loans outstanding, at December 31, 1996. For further information on nonperforming and classified loans and the allowance for loan losses, see--"Nonperforming and Classified Assets" herein. Other Income Total other income increased to $7.3 million in 1998, compared to $6.6 million in 1997 and $4.6 million in 1996. The following table sets forth information by category of other income for the years indicated.
Years Ended December 31, --------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) Trust fees......................................... $ 2,473 $ 2,049 $ 1,426 Service charges and other fees..................... 1,487 1,620 1,429 Gain on sale of SBA loans.......................... 1,037 883 537 Gain (loss) on investments, net.................... 374 (5) (255) Other income....................................... 939 832 1,394 -------- -------- -------- Total, recurring................................. 6,310 5,379 4,531 Warrant income..................................... 945 1,162 92 -------- -------- -------- Total............................................ $ 7,255 $ 6,541 $ 4,623 ======== ======== ========
The increase in other income in 1998 was primarily the result of a $424,000 increase in trust fees, and a $154,000 increase in the gain on sale of SBA loans. The increase in trust fees was due to significant growth in assets under management by Greater Bay Trust Company. Trust assets increased to $649.3 million at December 31, 1998, compared to $577.7 million at December 31, 1997. The increase in the gain on sale of SBA loans was due to an increase in the origination and subsequent sale of SBA loans. Other income in 1998 included warrant income of $945,000, net of related employee incentives. The Company occasionally receives warrants to acquire common stock from companies that are in the start-up or development phase. The timing and amount of income derived form the exercise and sale of client warrants typically depend upon factors beyond the control of the Company, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. A-7 The increase in other income in 1997 was primarily the result of $1.1 million increase in warrant income in 1997, a $623,000 increase in trust fees, and a $346,000 increase in the gain on sale of SBA loans. The increase in trust fees was due to significant growth in assets under management by Greater Bay Trust Company. Trust assets increased to $577.7 million at year-end 1997, compared to $418.0 million at December 31, 1996. The increase in the gain on sale of SBA loans was due to an increase in the origination and subsequent sale of SBA loans. Operating Expenses The following table sets forth the major components of operating expenses for the years indicated.
Years Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) Compensation and benefits........................ $ 22,715 $ 20,495 $ 16,740 Occupancy and equipment.......................... 6,217 5,240 4,437 Professional services and legal costs............ 1,597 1,808 1,730 Client service expenses.......................... 544 444 462 FDIC insurance and regulatory assessments........ 338 285 148 Expenses on other real estate owned.............. 76 177 175 Recovery of legal settlement..................... -- (1,700) -- Other............................................ 8,566 6,048 5,724 -------- -------- -------- Total operating expenses, excluding merger and other related nonrecurring costs.............. 40,053 32,797 29,416 Mergers and other related nonrecurring costs..... 2,661 3,333 2,791 -------- -------- -------- Total operating expenses....................... $ 42,714 $ 36,130 $ 32,207 ======== ======== ======== Efficiency ratio................................. 58.75% 59.22% 71.37% Efficiency ratio, excluding merger and other related nonrecurring costs...................... 55.09% 53.76% 65.18% Efficiency ratio, excluding nonrecurring items (1)............................................. 53.95% 56.95% 65.32% Total operating expenses to average assets....... 3.01% 3.46% 4.35% Total operating expenses to average assets, excluding merger and other related nonrecurring costs........................................... 2.82% 3.14% 3.97%
- -------- (1) Nonrecurring items include warrant income of $945,000, $1.2 million and $92,000 for 1998, 1997 and 1996, respectively, merger and related nonrecurring items of $2.7 million, $3.3 million, and $2.8 million for 1998, 1997 and 1996, respectively, and the $1.7 million recovery of legal settlement in 1997. Operating expenses totaled $42.7 million for 1998, compared to $36.1 million for 1997 and $32.2 million for 1996. The ratio of operating expenses to average assets was 3.01% in 1998, 3.46% in 1997, and 4.35% in 1996. Excluding these items, operating expense to average assets would have been 2.82% in 1998, 3.14% in 1997 and 3.97% in 1996. The efficiency ratio is computed by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same (or greater) volume of income while a decrease would indicate a more efficient allocation of resources. The Company's efficiency ratio for 1998 was 58.75%, compared to 59.22% in 1997 and 71.37% in 1996. During 1998, Greater Bay established the Greater Bay Bancorp Foundation (the "Foundation"). The Foundation was formed to provide a vehicle through which the Company, its officers and directors can provide support to the communities in which the Company does business. The Foundation focuses its support on initiatives related to education, health and economic growth. To support the Foundation, the Company contributed appreciated warrants, which had an unrealized gain of $1.3 million. Concurrently, the Company recorded $1.3 million of expense for the contribution to the Foundation, which is included in other expenses. A-8 As indicated by the improvements in the efficiency ratio and ratio of total operating expenses to average assets, the Company has been able to achieve increasing economies of scale. In 1998, average assets increased 35.9% from 1997, while operating expenses, excluding nonrecurring cost, increased only 17.5%. From 1996 to 1997, average assets increased 41.2%, while operating expenses, excluding nonrecurring costs increased only 15.9%. Compensation and benefits expenses increased in 1998 to $22.7 million, compared to $20.5 million in 1997 and $16.7 million in 1996. The increase in compensation and benefits is due primarily to the additions in personnel made in 1998 and 1997 to accommodate the growth of the Company. The increase in occupancy and equipment, client service expense, FDIC insurance and regulatory assessments and other operating expenses was related to the growth in the Company's loans, deposits and trust assets. Income Taxes The Company's effective income tax rate for 1998 was 30.8%, compared to 35.8% in 1997 and 38.5% in 1996. The effective rates were lower than the statutory rate of 41.2% due to tax-exempt income on municipal securities, the donation of appreciated warrants to the Foundation, as discussed above and were partially offset by the impact of merger costs and other pooling related items. Financial Condition Total assets increased 30.0% to $1.6 billion at December 31, 1998, compared to $1.2 billion at December 31, 1997. Total assets increased 32.4% in 1997 from $919.9 million at December 31, 1996. The increases in 1998 and 1997 were primarily due to increases in the Company's loan portfolio funded by growth in deposits. Loans Total gross loans increased 33.8% to $1.0 billion at December 31, 1998, compared to $754.4 million at December 31, 1997. Total gross loans increased 30.8% in 1997 from $576.8 million at year-end 1996. The increases in loan volumes in 1998 and 1997 were primarily due to an improving economy in the Company's market areas coupled with the business development efforts by the Company's relationship managers. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, service and technology) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are located in a market area that is dependent on the technology and real estate industries and supporting service companies. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy. This could, in turn, reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans, while also decreasing the Company's net interest margin. The following table presents the composition of the Company's loan portfolio at the dates indicated.
As of December 31, ------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------- --------------- --------------- --------------- --------------- Amount % Amount % Amount % Amount % Amount % ---------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (Dollars in thousands) Commercial.............. $ 455,077 46.2% $362,747 49.3% $301,436 53.4% $221,260 56.2% $198,509 57.1% Real estate construction and land............... 173,857 17.7 112,514 15.3 92,820 16.5 43,930 11.2 33,930 9.8 Real estate term........ 299,111 30.4 196,217 26.7 126,651 22.4 96,560 24.5 87,068 25.1 Consumer and other...... 81,089 8.2 82,914 11.3 55,893 9.9 40,409 10.3 37,534 10.8 ---------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans, gross..... 1,009,134 102.5 754,392 102.6 576,800 102.2 402,159 102.2 357,041 102.8 Deferred fees and discounts, net......... (3,343) (0.3) (2,765) (0.4) (2,489) (0.4) (2,097) (0.5) (2,600) (0.7) ---------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans, net of deferred fees......... 1,005,791 102.2 751,627 102.2 574,311 101.8 400,062 101.7 354,441 102.0 Allowance for loan losses................. (21,304) (2.2) (16,394) (2.2) (10,136) (1.8) (6,683) (1.7) (6,960) (2.0) ---------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans, net....... $ 984,487 100.0% $735,233 100.0% $564,175 100.0% $393,379 100.0% $347,481 100.0% ========== ===== ======== ===== ======== ===== ======== ===== ======== =====
A-9 The following table presents the maturity distribution of the Company's commercial, real estate construction and land and real estate term portfolios and the sensitivity of such loans to changes in interest rates at December 31, 1998.
Real estate construction Real estate Commercial and land term ---------- ------------ ----------- (Dollars in thousands) Loans maturing in: One year or less: Fixed rate............................ $ 62,623 $ 6,179 $ 16,190 Variable rate......................... 205,537 143,379 78,451 One to five years: Fixed rate............................ 19,653 -- 33,494 Variable rate......................... 99,213 10,356 48,858 After five years: Fixed rate............................ 28,911 2,311 76,755 Variable rate......................... 39,140 11,632 45,363 -------- -------- -------- Total................................ $455,077 $173,857 $299,111 ======== ======== ========
Nonperforming and Classified Assets Management generally places loans on nonaccrual status when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is generally reversed from income. Loans are charged off when management determines that collection has become unlikely. Restructured loans are those where the Banks have granted a concession on the interest paid or original repayment terms due to financial difficulties of the borrower. Other real estate owned ("OREO") consists of real property acquired through foreclosure on the related collateral underlying defaulted loans. The following table sets forth information regarding nonperforming assets at the dates indicated.
As of December 31, --------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------- (Dollars in thousands) Nonperforming loans Nonaccrual loans..................... $1,858 $2,971 $4,616 $4,833 $ 6,601 Accruing loans past due 90 days or more................................ -- 158 1,237 830 1,518 Restructured loans................... 327 1,062 1,828 1,530 1,972 ------ ------ ------ ------ ------- Total nonperforming loans........... 2,185 4,191 7,681 7,193 10,091 Other real estate owned............... 966 1,303 1,673 2,471 2,214 ------ ------ ------ ------ ------- Total nonperforming assets.......... $3,151 $5,494 $9,354 $9,664 $12,305 ====== ====== ====== ====== ======= Nonperforming assets to total loans and other real estate owned......... 0.31% 0.73% 1.62% 2.40% 3.45%
At December 31, 1998, the Company had $1.9 million in nonaccrual loans. Interest income foregone on nonperforming loans outstanding at year-end totaled $113,000, $479,000 and $633,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company records OREO at the lower of carrying value or fair value less estimated costs to sell. Estimated losses that result from the ongoing periodic valuation of these properties are charged to earnings through a provision for losses on foreclosed property in the period in which they are identified. At December 31, 1998, OREO acquired through foreclosure had a carrying value of $966,000, compared to $1.3 million at December 31, 1997. A-10 The Company had $327,000 and $1,062,000 of restructured loans as of December 31, 1998 and 1997, respectively. There were no principal reduction concessions allowed on restructured loans during 1998. Principal reduction concessions totaling $387,000 were permitted on restructured loans during the year ended December 31, 1997. Interest income from restructured loans totaled $16,000 and $82,000 for the years ended December 31, 1998 and 1997. Foregone interest income, which totaled $11,000 and $10,000 for the years ended December 31, 1998 and 1997, respectively, would have been recorded as interest income if the loans had accrued interest in accordance with their original terms prior to the restructurings. The policy of the Company is to review each loan in the portfolio to identify problem credits. There are three classifications for problem loans: "substandard," "doubtful" and "loss." Substandard loans have one or more defined weakness and are characterized by the distinct possibility that the Banks will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable; and there is a high possibility of loss of some portion of the principal balance. A loan classified as "loss" is considered uncollectible and its continuance as an asset is not warranted. The following table sets forth the classified assets at the dates indicated.
As of December 31, ------------------------- 1998 1997 1996 ------- ------- ------- (Dollars in thousands) Substandard........................................ $12,515 $15,723 $ 8,908 Doubtful........................................... 1,046 1,377 1,760 Loss............................................... -- 49 231 Other real estate owned............................ 966 1,303 1,673 ------- ------- ------- Classified assets................................ $14,527 $18,452 $12,572 ======= ======= ======= Classified assets to total loans and other real estate owned...................................... 1.44% 2.45% 2.19% Allowance for loan losses to total classified assets............................................ 146.65% 88.85% 80.62%
With the exception of these classified assets, management was not aware of any loans outstanding as of December 31, 1998 where the known credit problems of the borrower would cause management to have serious doubts as to the ability of such borrowers to comply with their present loan repayment terms and which would result in such loans being included in nonperforming or classified asset tables at some future date. Management cannot, however, predict the extent to which economic conditions in the Company's market areas may worsen or the full impact that such an environment may have on the Company's loan portfolio. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured loans, or other real estate owned in the future. A-11 Allowance For Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of risk inherent in the Company's loan portfolio and economic conditions in the Company's market areas. See "Provision for Loan Losses" herein. The allowance is increased by provisions charged against earnings and reduced by net loan charge-offs. Loans are charged-off when they are deemed to be uncollectible; recoveries are generally recorded only when cash payments are received. The following table sets forth information concerning the Company's allowance for loan losses at the dates and for the years indicated.
1998 1997 1996 1995 1994 ---------- -------- -------- -------- -------- (Dollars in thousands) Period end loans outstanding............ $1,009,134 $754,392 $576,800 $402,159 $357,041 Average loans outstanding............ $ 815,952 $663,107 $467,159 $371,564 $276,254 Allowance for loan losses: Balance at beginning of period................. $ 16,394 $ 10,136 $ 6,683 $ 6,960 $ 6,072 Charge-offs: Commercial............. (1,256) (1,469) (234) (974) (800) Real estate construction and land.................. (6) (243) (127) (410) (388) Real estate term....... -- (14) (54) -- -- Consumer and other..... (157) (213) (171) (463) (166) ---------- -------- -------- -------- -------- Total charge-offs..... (1,420) (1,939) (586) (1,847) (1,354) ---------- -------- -------- -------- -------- Recoveries: Commercial............. 111 51 343 190 191 Real estate construction and land.................. -- -- 283 3 1 Real estate term....... -- -- -- -- 48 Consumer and other..... 1 9 19 158 17 ---------- -------- -------- -------- -------- Total recoveries...... 112 60 645 351 257 ---------- -------- -------- -------- -------- Net charge-offs........ (1,308) (1,879) 59 (1,496) (1,097) Provision charged to income (1)............. 6,218 8,137 3,394 1,219 1,985 ---------- -------- -------- -------- -------- Balance at end of period................. $ 21,304 $ 16,394 $ 10,136 $ 6,683 $ 6,960 ========== ======== ======== ======== ======== Net recoveries (charge- offs) to average loans outstanding during the period................. (0.16)% (0.28)% 0.01% (0.40)% (0.40)% Allowance as a percentage of average loans outstanding...... 2.61% 2.47% 2.17% 1.80% 2.52% Allowance as a percentage of period end loans outstanding.. 2.12% 2.18% 1.76% 1.67% 1.96% Allowance as a percentage of non-performing loans... 974.99% 391.17% 131.96% 92.91% 68.97%
- -------- (1) Includes $183,000, $1.4 million and $800,000 in 1998, 1997 and 1996, respectively, to conform to the Companys' practices for reserve methodologies. These amounts are included in mergers and related nonrecurring costs. Management considers changes in the size and character of the loan portfolio, changes in nonperforming and past due loans, historical loan loss experience, and the existing and prospective economic conditions when determining the adequacy of the allowance for loan losses. Although management believes that the allowance for loan losses is adequate to provide for both potential losses and estimated inherent losses in the portfolio, future provisions will be subject to continuing evaluations of the inherent risk in the portfolio and if the economy declines or asset quality deteriorates, additional provisions could be required. A-12 The table as follows 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 future losses 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.
1998 1997 1996 1995 1994 ---------------- ---------------- ---------------- --------------- --------------- % 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.............. $ 8,346 45.10% $ 5,445 48.08% $ 3,703 52.26% $2,413 55.02% $3,581 55.60% Real estate construction and land............... 1,454 17.23 829 14.91 1,587 16.09 851 10.92 930 9.50 Real estate term........ 1,679 29.64 1,374 26.01 969 21.96 975 24.01 774 24.39 Consumer and other...... 1,529 8.04 827 10.99 1,133 9.69 802 10.05 673 10.51 ------- ------ ------- ------ ------- ------ ------ ------ ------ ------ Total allocated......... 13,008 8,475 7,392 5,041 5,958 Unallocated............. 8,296 7,919 2,744 1,642 1,002 ------- ------ ------- ------ ------- ------ ------ ------ ------ ------ Total.................. $21,304 100.00% $16,394 100.00% $10,136 100.00% $6,683 100.00% $6,960 100.00% ======= ====== ======= ====== ======= ====== ====== ====== ====== ======
At December 31, 1998, the allowance for credit losses was $21.3 million, consisting of a $13.0 million allocated allowance and a $8.3 million unallocated allowance. The unallocated allowance is composed of two elements. The first element consists of an amount up to 20% of the allocated allowance which recognizes the model and estimation risk associated with the allocated allowances. The second element is based upon 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 conditions that existed December 31, 1998: . Specific industry conditions within portfolio segments, particularly involving the high technology sector and the impact of foreign economic forces upon that sector; . Seasoning of the loan portfolio and growth in loan volumes; . The strength and duration of the current business cycle and existing general economic and business conditions affecting our key lending areas; . Credit quality trends, including trends in nonperforming loans expected to result from changes in existing conditions; and . The results of bank regulatory examinations and the findings of our internal credit examiners. The Officers' Loan Committee reviews these conditions quarterly in discussion with our senior relationship managers. If any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of this condition may be reflected as an allocated allowance applicable to this credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's evaluation of the probable loss concerning this condition is reflected in the unallocated allowance. The allowance for credit losses is based upon estimates of probable losses inherent in the loan portfolio. The amount actually observed for these losses can vary significantly from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. The historical loss analysis, which reviews the losses over 1, 3 and 5 year periods, and evaluations of the current business cycle and economic conditions are used to establish the loan loss factors for problem graded loans which are designed to be A-13 self-correcting by taking into account our recent loss experience. Similarly, by basing the pass graded loan loss factors on historical loss experience, the methodology is designed to take our recent loss experience into account. Loan loss factors are adjusted quarterly based upon the level of net chargeoffs expected by management in the next twelve months. Furthermore, our methodology permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management's judgment, significant factors that affect the collectibility of the portfolio as of the evaluation date are not reflected in the loss factors. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available. The Company recorded provisions in 1998 to bring the allowance for credit losses to a level deemed appropriate by management based upon management's application of the loan loss allowance methodology discussed above. In particular, in the assessment as of December 31, 1998, management focused on factors affecting elements of the high technology sector and the impact of foreign economic forces upon that sector, including seasoning of the loan portfolio coupled with growth in loan volumes and the strength and duration of the current business cycle coupled with existing general economic and business conditions affecting our key lending areas. Investment Securities The Company's investment portfolio is managed to meet the Company's liquidity needs through proceeds from scheduled maturities and is utilized for pledging requirements for deposits of state and political subdivisions and securities sold under repurchase agreements. The portfolio is comprised of U.S. Treasury securities, U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and a modest amount of equity securities, including Federal Reserve Bank stock and Federal Home Loan Bank stock. The Company does not include federal funds sold and certain other short-term securities as investment securities. These other investments are included in cash and cash equivalents. Investment securities classified as available for sale are recorded at fair market value, while investment securities classified as held to maturity are recorded at cost. Unrealized gains or losses, net of the deferred tax effect, are reported as increases or decreases in shareholders' equity for available for sale securities. The amortized cost and estimated market value of investment securities at December 31, 1998 and 1997 is as follows:
As of December 31, 1998 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- -------- (Dollars in thousands) Available for sale securities: U.S. Treasury obligations............. $ 4,408 $ 26 $ -- $ 4,434 U.S. agency notes..................... 28,621 20 (2) 28,639 Mortgage-backed securities............ 152,987 988 (60) 153,915 Tax-exempt securities................. 32,952 563 -- 33,515 Corporate securities.................. 35,517 60 (597) 34,980 -------- ------ ----- -------- Total securities available for sale............................... 254,485 1,657 (659) 255,483 -------- ------ ----- -------- Held to maturity securities: U.S. Treasury obligations............. 1,764 2 (2) 1,764 U.S. agency notes..................... 25,490 -- (58) 25,432 Mortgage-backed securities............ 27,961 86 (179) 27,868 Tax-exempt securities................. 25,942 725 (14) 26,653 -------- ------ ----- -------- Total securities held to maturity... 81,157 813 (253) 81,717 -------- ------ ----- -------- Other securities...................... 5,654 -- -- 5,654 -------- ------ ----- -------- Total investment securities......... $341,296 $2,470 $(912) $342,854 ======== ====== ===== ========
A-14
As of December 31, 1997 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- -------- (Dollars in thousands) Available for sale securities: U.S. Treasury obligations............. $ 10,095 $ 52 $ (2) $ 10,145 U.S. agency notes..................... 38,833 52 (63) 38,822 Mortgage-backed securities............ 102,432 357 (185) 102,604 Tax-exempt securities................. 7,018 199 (5) 7,212 Corporate securities.................. 7,568 62 -- 7,630 -------- ------ ----- -------- Total securities available for sale............................... 165,946 722 (255) 166,413 -------- ------ ----- -------- Held to maturity securities: U.S. Treasury obligations............. 501 1 -- 502 U.S. agency notes..................... 17,798 182 (12) 17,968 Mortgage-backed securities............ 11,324 177 (2) 11,499 Tax-exempt securities................. 14,838 492 (53) 15,277 -------- ------ ----- -------- Total securities held to maturity... 44,461 852 (67) 45,246 -------- ------ ----- -------- Other securities...................... 2,253 -- -- 2,253 -------- ------ ----- -------- Total investment securities......... $212,660 $1,574 $(322) $213,912 ======== ====== ===== ========
The tax effected net unrealized gain on available for sale securities was $581,000 as of December 31, 1998. The following table shows the amortized cost and estimated market value of the Company's investment securities by maturity at December 31, 1998.
2000 2004 Through Through 2009 and 1999 2003 2008 Thereafter Total ------- ------- ------- ---------- -------- (Dollars in thousands) (1) Available for sale securities: U.S. Treasury obligations..... $ 4,308 $ 100 $ -- $ -- $ 4,408 U.S. agency notes (2)......... 15,829 -- 12,792 -- 28,621 Mortgage-backed securities (3).......................... -- 3,033 8,941 141,013 152,987 Tax-exempt securities......... -- 1,601 4,561 26,790 32,952 Corporate securities.......... 4,016 991 -- 30,510 35,517 ------- ------- ------- -------- -------- Total securities available for sale................... 24,153 5,725 26,294 198,313 254,485 ======= ======= ======= ======== ======== Market value.................. $24,197 $ 5,808 $26,601 $198,877 $255,483 ======= ======= ======= ======== ======== Held to maturity securities: U.S. Treasury obligations..... 1,764 -- -- -- 1,764 U.S. agency notes (2)......... -- 23,990 1,500 -- 25,490 Mortgage-backed securities (3).......................... -- -- 7,596 20,365 27,961 Tax-exempt securities......... 1,261 3,598 5,252 15,831 25,942 ------- ------- ------- -------- -------- Total securities held to maturity................... 3,025 27,588 14,348 36,196 81,157 ======= ======= ======= ======== ======== Market value.................. 3,034 27,613 7,528 43,542 81,717 ======= ======= ======= ======== ======== Combined investment securities portfolio: Total investment securities... $27,178 $33,313 $40,642 $234,509 $335,642 ======= ======= ======= ======== ======== Total market value............ $27,231 $33,421 $34,129 $242,419 $337,200 ======= ======= ======= ======== ======== Weighted average yield-total portfolio.................... 5.73% 5.74% 5.25% 6.84% 6.23%
- -------- (1) Other securities are comprised of equity investments and have no stated maturity and therefore are excluded from this table. (2) Certain notes issued by U.S. Agencies may be called, without penalty, at the discretion of the issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates. (3) Mortgage-backed securities are shown at contractual maturity; however, the average life of these mortgage-backed securities may differ due to principal prepayments. For additional information concerning the investments portfolio, see Note 3 of Notes to Consolidated Financial Statements. A-15 Deposits The Company emphasizes developing total client relationships with its customers in order to increase its core deposit base. Deposits reached $1.3 billion at December 31, 1998, an increase of 25.3% compared to deposits of $1.1 billion at December 31, 1997. In 1997, deposits increased 30.4% from $821.1 million at December 31, 1996. The increase in deposits was primarily due to the continued marketing efforts directed at commercial business clients in the Company's market areas, coupled with an increase in deposits related to the new business development activities of the Greater Bay Trust Company and the Venture Banking Group. PBC holds $89.6 million in one demand deposit account (the "Special Deposit"). The Special Deposit represents the proposed settlement of a class action lawsuit not involving the Company. Due to the uncertainty of the time the Special Deposit will remain with PBC, management has invested a significant portion of the proceeds from this deposit in agency securities with maturities of less than 90 days. As previously discussed, the interest rate spread on the Special Deposit was approximately 2.25%, which resulted in a decrease in overall interest rate spreads. Noninterest-bearing demand deposit accounts increased 22.3% to $268.4 million at December 31, 1998, compared to $219.5 million a year earlier. Money market deposit accounts ("MMDA"), negotiable order of withdrawal accounts ("NOW") and savings accounts reached $854.4 million at year-end 1998, an increase of 36.2% from $627.5 million at December 31, 1997. MMDA, NOW and savings accounts were 63.6% of total deposits at December 31, 1998, as compared to 58.6% at December 31, 1997. Time certificates of deposit totaled $219.7 million, or 16.4% of total deposits, at December 31, 1998, compared to $224.2 million, or 20.9% of total deposits, at December 31, 1997. Note 7 of the Notes to the Consolidated Financial Statements presents the maturity distribution of time certificates of deposits at December 31, 1998. As of December 31, 1997, the Company had $10.0 million in brokered deposits outstanding. There were no such deposits as of December 31, 1998. For additional information concerning deposits, see Note 7 of Notes to Consolidated Financial Statements. Other Borrowings Other borrowings consisted of Federal Funds purchased and securities sold under agreements to repurchase, Federal Home Loan advances, and promissory notes. Note 9 of the Notes to the Consolidated Financial Statements provides the amounts outstanding, the short and long term classification, the weighted interest rate and the general terms of these borrowings. Liquidity and Cash Flow The objective of liquidity management is to maintain each Bank's ability to meet the day-to-day cash flow requirements of its clients who either wish to withdraw funds or require funds to meet their credit needs. The Company must manage its liquidity position to allow the Banks to meet the needs of their clients while maintaining an appropriate balance between assets and liabilities to meet the return on investment expectations of its shareholders. The Company monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and repayments and maturities of loans and investments, the Banks utilize brokered deposit lines, sell securities under agreements to repurchase and borrow overnight federal funds. In 1997 the Company issued $20.0 million in Trust Preferred Securities ("TPS") to enhance its regulatory capital base, while also providing added liquidity. In 1998, the Company completed a second offering of TPS in an aggregate amount of $30.0 million. Greater Bay invested $15.0 million of the net proceeds in the Company's subsidiary banks to increase their capital level. The Company intends to use the remaining net proceeds for general corporate purposes or to provide additional capital to the Banks, as it is needed. Under applicable regulatory guidelines, $30.2 million of the TPS qualifies as Tier I capital, and the remaining portion qualifies as Tier 2 capital. As the Company's shareholders' equity increases, the amount of the additional TPS that will count as Tier I capital will increase. A-16 Greater Bay is a company separate and apart from the Banks. It must provide for its own liquidity. Substantially all of Greater Bay's revenues are obtained from management fees, interest received on its investments and dividends declared and paid by the Banks. There are statutory and regulatory provisions that could limit the ability of the Banks to pay dividends to Greater Bay. At December 31, 1998, the Banks had approximately $24.6 million in the aggregate available to be paid as dividends to Greater Bay. Management of Greater Bay believes that such restrictions will not have an impact on the ability of Greater Bay to meet its ongoing cash obligations. As of December 31, 1998, Greater Bay did not have any material commitments for capital expenditures. There are statutory and regulatory provisions that could limit the ability of the Banks to pay dividends to Greater Bay. Net cash provided by operating activities, consisting primarily of net income, totaled $19.9 million for 1998, $14.0 million for 1997 and $10.0 million for 1996. Cash used for investing activities totaled $411.9 million in 1998, $253.7 million in 1997 and $170.1 million in 1996. The funds used for investing activities primarily represent increases in loans and investment securities for each year reported. For the year ended December 31, 1998, net cash provided by financing activities was $341.4 million, compared to $279.8 million in 1997 and $252.3 million in 1996. Historically, the primary financing activity of the Company has been through deposits. In 1998, 1997 and 1996, deposit gathering activities generated cash of $271.3 million, $250.0 million and $236.5 million, respectively. This represents a total of 79.5%, 89.4% and 93.75% of the financing cash flows for 1998, 1997 and 1996, respectively. The increase in financing activities other than deposits are a result of the Company entering into $70.0 million in long-term low cost borrowing agreements in 1998, and the issuance of TPS of $30.0 million and $20.0 million in 1998 and 1997, respectively, which were issued principally to provide capital to the Company (see Capital Resources--below). Capital Resources Shareholders' equity at December 31, 1998 increased to $92.7 million from $76.5 million at December 31, 1997 and from $66.8 million at December 31, 1996. Greater Bay paid dividends of $0.38, $0.30 and $0.22 per share in December 31, 1998, 1997 and 1996, respectively. In 1998, PBFC made a distribution of $1.2 million to its shareholders. In 1997, PBC declared an annual dividend of $3.20 per share, PRB declared and paid a dividend of $100,000 to its sole shareholder and PBFC made a distribution of $208,000 to its shareholders. In 1996, Cupertino National Bancorp declared and paid a dividend of $0.10 per share, Peninsula Bank of Commerce declared an annual dividend of $1.35 per share and PBFC made a distribution of $227,000 to its shareholders. The Company has provided a substantial portion of its capital requirements through the retention of earnings. The Company supplemented its capital base by issuing $30.0 million of TPS in 1998 and $20.0 million of TPS in 1997, which, subject to certain limitations, qualify as Tier 1 capital. A banking organization's total qualifying capital includes two components, core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at least half of total capital, includes common shareholders' equity, qualifying perpetual preferred stock, trust preferred securities and minority interests, less goodwill. Supplementary capital includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, trust preferred securities, certain other capital instruments and term subordinated debt. The Company's major capital components are shareholders' equity and TPS in core capital, and the allowance for loan losses and subordinated debt in supplementary capital. At December 31, 1998, the minimum risk-based capital requirements to be considered adequately capitalized were 4.0% for core capital and 8.0% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (not risk-adjusted) for the preceding quarter. The minimum leverage ratio is 3.0%, although certain banking organizations are expected to exceed that amount by 1.0% or more, depending on their circumstances. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting forth a five-tier system for measuring the capital adequacy of A-17 the financial institutions they supervise. The capital levels of the Company at December 31, 1998 and the two highest levels recognized under these regulations are as follows.
Tier 1 Total Leverage Risk-Based Risk-Based Ratio Capital Ratio Capital Ratio -------- ------------- ------------- Company................................... 7.81% 9.90% 12.94% Well-capitalized.......................... 5.00% 6.00% 10.00% Adequately capitalized.................... 4.00% 4.00% 8.00%
The Company's leverage ratio was 7.81% at December 31, 1998, compared to 8.40% at December 31, 1997. At December 31, 1998, the Company's risk-based capital ratios were 9.90% for Tier 1 risk-based capital and 12.94% for total risk-based capital, compared to 10.72% and 12.31%, respectively, as of December 31, 1997. These ratios all exceeded the well-capitalized guidelines shown above. In addition, at December 31, 1997, each of the Banks had levels of capital that exceeded the well-capitalized guidelines. For additional information on the capital levels and capital ratios of the Company and each of the Banks, see Note 17 of Notes to Consolidated Financial Statements. The Company anticipates that the economic and business conditions in its market areas will continue to expand in 1999, resulting in continued growth in earnings and deposits. To support this continuing growth or future acquisition opportunities, it may be necessary for the Company to raise additional capital through the sale of either debt or equity securities in order for the Company and each of the Banks to remain well-capitalized under applicable regulations. Quantitative and Qualitative Disclosures about Market Risk The Company's financial performance is impacted by, among other factors, interest rate risk and credit risk. The Company utilizes no derivatives to mitigate its credit risk, relying instead on loan review and an adequate loan loss reserve see "--Allowance for Loan Losses" herein. Interest rate risk is the risk of loss in value due to changes in interest rates. This risk is addressed by the Company's Asset Liability Management Committee ("ALCO"), which includes senior management representatives. The ALCO monitors and considers methods of managing interest rate risk by monitoring changes in net portfolio values ("NPV") and net interest income under various interest rate scenarios. The ALCO attempts to manage the various components of the Company's balance sheet to minimize the impact of sudden and sustained changes in interest rates on NPV and net interest income. The Company's exposure to interest rate risk is reviewed on at least a quarterly basis by the Board of Directors and the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Company's change in NPV in the event of hypothetical changes in interest rates and interest liabilities. If potential changes to NPV and net interest income resulting from hypothetical interest rate swings are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity, lengthen the effective maturities of certain interest-earning assets, and shorten the effective maturities of certain interest-bearing liabilities. The Company has focused its investment activities on securities with generally medium-term (7 years to 10 years) maturities or average lives. The Company has utilized short-term borrowings and deposit marketing programs to adjust the term to repricing of its liabilities. Interest rate sensitivity analysis is used to measure the Company's interest rate risk by computing estimated changes in NPV of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for core deposit valuations and off-balance sheet items. This analysis assesses the risk of loss in market rate sensitive instruments in the event of sudden and A-18 sustained increases and decreases in market interest rates of 100 basis points. The following table presents the Company's projected change in NPV for these rate shock levels as of December 31, 1998. All market rate sensitive instruments presented in this table are classified as either held to maturity or available for sale. The Company has no trading securities.
Projected Change ------------------ Change in Interest Rates NPV Dollars Percentage ------------------------ -------- ------- ---------- 100 basis point rise................................ $106,437 $1,818 1.7% Base scenario....................................... 104,619 -- 0.0% 100 basis point decline............................. 107,212 2,593 2.5%
The preceding table indicates that at December 31, 1998, in the event of a sudden and sustained increase in prevailing market interest rates, the Company's NPV would be expected to increase. NPV is calculated based on the net present value of estimated cash flows utilizing market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources. Computation of forecasted effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposits decay, and should be not relied upon as indicative of actual future results. Further, the computations do not contemplate any actions the ALCO could undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual values may differ from those projections presented should market conditions vary from assumptions used in the calculation of the NPV. Certain assets, such as adjustable-rate loans, which represent one of the Company's loan products, have features which restrict changes in interest rate on a short-term basis and over the life of the assets. In addition, the proportion of adjustable-rate loans in the Company's portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinancing activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the NPV. Finally, the ability of many borrowers to repay their adjustable-rate mortgage loans may decrease in the event of significant interest rate increases. Interest Rate Risk Management Interest rate risk management is a function of the repricing characteristics of the Company's portfolio of assets and liabilities. Interest rate risk management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate risk management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby minimizing the effect of interest rate movements on net interest income. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the Company's current portfolio that are subject to repricing at various time horizons: one day or immediate, two days to six months, seven to twelve months, one to three years, four to five years, over five years and on a cumulative basis. The differences are known as interest sensitivity gaps. A-19 The following table shows interest sensitivity gaps for different intervals as of December 31, 1998.
Total Immediate 2 Days to 7 Months to 1 Year 4 Years More than Total Rate Non-Rate or One Day 6 Months 12 Months to 3 Years to 5 Years 5 Years Sensitive Sensitive Total ---------- --------- ----------- ---------- ---------- --------- ---------- --------- ---------- (Dollars in thousands) Assets Cash and due from banks................ $ 386 $ -- $ -- $ -- $ -- $ -- $ 386 $ 59,589 $ 59,975 Fed funds sold........ 43,600 -- -- -- -- -- 43,600 -- 43,600 Investment securities........... 110,307 27,002 43,225 90,715 17,810 125,157 414,216 -- 414,216 Other securities...... -- -- -- -- -- -- -- 5,654 5,654 Loans................. 607,116 245,448 27,613 54,351 22,737 51,869 1,009,134 -- 1,009,134 Loan losses/unearned fees................. -- -- -- -- -- -- -- (24,647) (24,647) Other assets.......... -- -- -- -- -- -- -- 74,933 74,933 -------- -------- -------- -------- -------- -------- ---------- --------- ---------- Total assets......... $761,409 $272,450 $ 70,838 $145,066 $ 40,547 $177,026 $1,467,336 $ 115,529 $1,582,865 ======== ======== ======== ======== ======== ======== ========== ========= ========== Liabilities and Equity Deposits.............. $857,945 $196,357 $ 26,810 $ 17,370 $ 668 $ 32 $1,099,182 $ 243,310 $1,342,492 Other borrowings...... -- -- 40,135 32,450 -- -- 72,585 -- 72,585 Subordinated debt..... -- -- -- -- 3,000 -- 3,000 -- 3,000 Trust preferred securities........... -- -- -- -- -- 50,000 50,000 -- 50,000 Other liabilities..... -- -- -- -- -- -- -- 22,112 22,112 Shareholders' equity.. -- -- -- -- -- -- -- 92,676 92,676 -------- -------- -------- -------- -------- -------- ---------- --------- ---------- Total liabilities and equity.............. $857,945 $196,357 $ 66,945 $ 49,820 $ 3,668 $ 50,032 $1,224,767 $ 358,098 $1,582,865 ======== ======== ======== ======== ======== ======== ========== ========= ========== Gap................... $(96,536) $ 76,093 $ 3,893 $ 95,246 $ 36,879 $126,994 $ 242,569 $(242,569) -- Cumulative Gap........ $(96,536) $(20,443) $(16,550) $ 78,696 $115,575 $242,569 $ 242,569 $ -- -- Cumulative Gap/total assets............... (6.10)% (1.29)% (1.05)% 4.97% 7.30% 15.32% 15.32% -- --
The foregoing table indicates that the Company had a one year gap of $(16.6) million, or (1.05)% of total assets, at December 31, 1998. In theory, this would indicate that at December 31, 1998, $16.6 million more in liabilities than assets would reprice if there was a change in interest rates over the next 365 days. Thus, if interest rates were to increase, the gap would tend to result in a higher net interest margin. However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of repricing of both the asset and its supporting liability can remain the same, thus impacting net interest income. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. The impact of fluctuations in interest rates on the Company's projected next twelve month net interest income and net income has been evaluated through an interest rate shock simulation modeling analysis that includes various assumptions regarding the repricing relationship of assets and liabilities, as well as the anticipated changes in loan and deposit volumes over differing rate environments. As of December 31, 1998, the analysis indicates that the Company's net interest income would increase a maximum of 10.2% if rates rose 200 basis points immediately and would decrease a maximum of 11.2% if rates declined 200 basis points immediately. In addition, the results indicate that notwithstanding the Company's gap position, which would indicate that the net interest margin increases when rates rise, the Company's net interest margin increases during rising rate periods due to the basis risk imbedded in the Company's interest-bearing liabilities. In addition, while this analysis indicates the probable impact of interest rate movements on the Company's net interest income, it does not take into consideration other factors that would impact this analysis. These factors would include management's and ALCO's actions to mitigate the impact to the Company and the impact of the Company's credit risk profile during periods of significant interest rate movements. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity analysis table. These prepayments may have significant effects on the Company's net interest margin. Because of these factors and others, an interest sensitivity gap report may not provide a complete assessment of the Company's exposure to changes in interest rates. A-20 Year 2000 Compliance State of Readiness The Company has undertaken a major project to ensure that its internal operating systems will be fully capable of processing year 2000 transactions. This project is overseen by the Greater Bay Year 2000 Project Team (the "Year 2000 Project Team"), which reports monthly progress to the Company's Board of Directors. The Company is determining the potential impact of the year 2000 on the ability of the Company's computerized information systems to accurately process information that may be date-sensitive. Any of the Company's programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. The Company utilizes a number of computer programs across its entire operation. The initial phase of the project was to assess and identify all internal business processes requiring modification and to develop comprehensive renovation plans as needed. This phase was largely completed in mid-1998. The second phase was to execute those renovation plans and begin testing systems by simulating year 2000 data conditions. This phase was largely completed in 1998. Final testing and implementation is planned to be completed during the first half of 1999. The Company relies upon third-party software vendors and service providers for substantially all of its electronic data processing and does not operate any proprietary programs which are critical to the Company's operations. Thus, the focus of the Company is to monitor the progress of its primary software providers towards compliance with year 2000 issues and prepare to test actual data of the company in simulated processing of future sensitive dates. As well as evaluating its own internal operating systems, the Company has also initiated discussions with its major customers and suppliers as to their ability to meet year 2000 requirements. The Year 2000 Project Team previously has identified and sought information from significant third party suppliers regarding their year 2000 compliance. Suppliers providing system interdependencies also have been identified, and testing with such suppliers also will occur during this phase of the project. The Year 2000 Project Team continues to work with all targeted suppliers to determine their year 2000 status. As of this time, the Year 2000 Project Team has not identified any significant issues with the identified suppliers. The Company also has identified customers who have a material relationship with the Company and requested such customers to complete a year 2000 survey, which will be used by the Company to assess the overall risk to the Company resulting from such customers' year 2000 compliance. Costs to Address the Year 2000 Issue The Company has budgeted anticipated expenditures of $300,000 to $500,000 in 1998 and 1999 to ensure that its systems are ready for processing information in the year 2000. The Company estimates that it has incurred out-of-pocket expenses of approximately $146,000 in 1998 in connection with year 2000 issues. In addition, the Company has incurred certain costs relating to reallocation of internal resources to address year 2000 issues. The Company expects that the cost of remedial action for its noncompliant year 2000 IT systems will not be material. The Company has not completed its assessment of the year 2000 issue, but currently believes that costs of addressing it will not have a material adverse impact on the Company's financial position. However, if the Company and third parties upon which it relies are unable to address this issue in a timely manner, it could result in a material financial risk to the Company. In order to assure that this does not occur, the Company plans to devote all resources required to resolve any significant year 2000 issues in a timely manner. Risks Presented by the Year 2000 Issue As the Company continues to assess the year 2000 issue, it may identify systems that present a year 2000 risk. In addition, if any third-party software vendors and service providers upon who the Company relies fail to A-21 appropriately address their year 2000 issues, such failure could have a material adverse effect on the Company's business, financial condition and operating results. Should the Company and/or its significant suppliers fail to timely identify, address and correct material year 2000 issues, such failure could have a material adverse impact on the Company's ability to operate. The range of adverse impacts may include the requirement to pay significant overtime to manually process certain transactions and added costs to process certain banking activity through a centralized administrative function. In addition, if corrections made by such suppliers to address year 2000 issues are incompatible with the Company's systems, the year 2000 issue could have a material adverse impact on the Company's operations. Despite the Company's activities in regards to the year 2000 issue, there can be no assurance that partial or total systems interruptions or the costs necessary to update hardware and software would not have a material adverse effect upon the Company's business, financial condition, results of operations and business prospects. Contingency Plans The Year 2000 Project Team currently is in the process of developing contingency plans for year 2000 readiness. The Company has engaged a third party company, which specializes in developing contingency plans for financial institutions for year 2000, to assist the Company in analyzing the impact of year 2000 on its business. This business impact analysis was completed in 1998 and the Company's contingency plans for year 2000 readiness currently are substantially complete. There can be no assurance, however, that such contingency plans will be successful. Recent Events On January 26, 1999 the Company and Bay Area Bancshares ("BA Bancshares"), the holding company of Bay Area Bank, a California state charted bank ("BAB"), signed a definitive agreement for a merger between the two companies. The agreement provides for BA Bancshares shareholders to receive approximately 1,393,000 shares of Greater Bay stock subject to the approval of BA Bancshares shareholders and certain adjustments based on movements in the Company's stock price, in a tax-free exchange to be accounted for as a pooling-of-interests. Following the transaction, the shareholders of BA Bancshares will own approximately 12.7% of the combined company. The transaction is expected to be completed early in the second quarter of 1999 subject to regulatory approvals. As of December 31, 1998 BA Bancshares had $155.3 million in assets, $136.5 million in deposits, and $14.4 million in shareholders' equity. BAB's office is located in Redwood City, California. The combined Company, on a pro-forma basis would have had total assets of approximately $1.8 billion and equity of over $107.0 million at December 31, 1998. The transaction is anticipated to be accretive to the Company's core earnings in 1999 based on anticipated reductions in operating expenses and revenue enhancements resulting from an expanded product line, increased lending capacity and an increased market awareness that can be utilized by BAB. Management of each of the organizations believe that significant opportunities exist to enhance the spectrum of financial services offered to both existing and future clients of BAB while also increasing market penetration in the San Francisco Peninsula market areas. Recent Accounting Developments In July 1998, the Financial Accounting Standards Board reconfirmed its decision to review the accounting for business combinations. That approach includes considering either adopting one method to account for business combinations or reducing the difference in accounting outcomes between the pooling and purchase methods rather than just modifying the conditions specific for pooling-of-interests accounting. The Board issued an Invitation to Comment on a position paper entitled, Methods of Accounting for Business Combinations: Recommendation of the G4+1 for Achieving Convergence, on December 15, 1998, in order to solicit comments on certain issues that will be addressed by the Board as part of its business combinations project. This position paper concludes that the use of a single method of accounting is preferable and that the purchase method is A-22 the appropriate method to use. As such there is a possibility that the pooling of interests method of accounting that the Company has used to account for its previous mergers may not be available at some point in the future. A portion of the Company's business strategy is to pursue acquisition opportunities so as to expand its market presence and maintain growth levels. A change in the accounting for business combinations could have a negative impact on the Company's ability to realize those business strategies. A-23 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, ------------------------ 1998 1997* ----------- ----------- (Dollars in thousands) ASSETS Cash and due from banks.............................. $ 59,975 $ 53,167 Federal funds sold................................... 43,600 75,000 Other short term securities.......................... 77,576 103,549 ----------- ----------- Cash and cash equivalents........................ 181,151 231,716 Investment securities: Available for sale, at fair value.................. 255,483 166,413 Held to maturity, at amortized cost (fair value 1998: $81,717 1997: $45,246)...................... 81,157 44,461 Other securities................................... 5,654 2,253 ----------- ----------- Investment securities............................ 342,294 213,127 Total loans: Commercial......................................... 455,077 362,747 Real estate construction and land.................. 173,857 112,514 Real estate term................................... 299,111 196,217 Consumer and other................................. 81,089 82,914 Deferred loan fees and discounts................... (3,343) (2,765) ----------- ----------- Total loans, net of deferred fees................ 1,005,791 751,627 Allowance for loan losses.......................... (21,304) (16,394) ----------- ----------- Total loans, net................................. 984,487 735,233 Property, premises and equipment..................... 10,961 8,498 Interest receivable and other assets................. 63,972 29,091 ----------- ----------- Total assets..................................... $ 1,582,865 $ 1,217,665 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Total deposits....................................... $ 1,342,492 $ 1,071,148 Other borrowings..................................... 72,585 32,355 Subordinated debt.................................... 3,000 3,000 Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trusts holding solely junior subordinated debentures....... 50,000 20,000 Other liabilities.................................... 22,112 14,622 ----------- ----------- Total liabilities................................ 1,490,189 1,141,125 ----------- ----------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, no par value: 4,000,000 shares authorized; none issued............................. -- -- Common stock, no par value: 24,000,000 shares authorized; 9,612,142 and 9,304,930 shares issued and outstanding as of December 31, 1998 and 1997, respectively**...................................... 57,283 52,269 Accumulated other comprehensive income (loss)........ (96) 223 Retained earnings.................................... 35,489 24,048 ----------- ----------- Total shareholders' equity....................... 92,676 76,540 ----------- ----------- Total liabilities and shareholders' equity....... $ 1,582,865 $ 1,217,665 =========== ===========
- -------- * Restated on a historical basis to reflect the mergers with Pacific Rim Bancorporation and Pacific Business Funding Corporation on a pooling of interests basis. ** Restated to reflect 2-for-1 stock split declared for shareholders of record at April 30, 1998. See notes to consolidated financial statements. A-24 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, ---------------------------- 1998 1997* 1996* --------- -------- -------- (Dollars in thousands, except per share amounts) INTEREST INCOME Interest on loans................................ $ 83,650 $ 70,035 $ 50,171 Interest on investment securities: Taxable........................................ 17,114 8,199 7,394 Tax-exempt..................................... 2,104 1,095 990 --------- -------- -------- Total interest on investment securities...... 19,218 9,294 8,384 Other interest income............................ 10,052 9,198 4,328 --------- -------- -------- Total interest income........................ 112,920 88,527 62,883 --------- -------- -------- INTEREST EXPENSE Interest on deposits............................. 39,398 30,640 21,220 Interest on long term borrowings................. 6,650 2,137 355 Interest on other borrowings..................... 1,424 1,282 804 --------- -------- -------- Total interest expense....................... 47,472 34,059 22,379 --------- -------- -------- Net interest income.......................... 65,448 54,468 40,504 Provision for loan losses........................ 6,035 6,786 2,594 --------- -------- -------- Net interest income after provision for loan losses...................................... 59,413 47,682 37,910 --------- -------- -------- OTHER INCOME Trust fees....................................... 2,473 2,049 1,426 Service charges and other fees................... 1,487 1,620 1,429 Gain on sale of SBA loans........................ 1,037 883 537 Warrant income................................... 945 1,162 92 Gain (loss) on sale of investments, net.......... 374 (5) (255) Other income..................................... 939 832 1,394 --------- -------- -------- Total other income........................... 7,255 6,541 4,623 --------- -------- -------- OPERATING EXPENSES Compensation and benefits........................ 22,715 20,495 16,740 Occupancy and equipment.......................... 6,217 5,240 4,437 Merger and other related nonrecurring costs...... 2,661 3,333 2,791 Recovery of legal settlement..................... -- (1,700) -- Other expenses................................... 11,121 8,762 8,239 --------- -------- -------- Total operating expenses..................... 42,714 36,130 32,207 --------- -------- -------- Net income before provision for income taxes....................................... 23,954 18,093 10,326 Provision for income taxes....................... 7,376 6,474 3,978 --------- -------- -------- Net income................................... $ 16,578 $ 11,619 $ 6,348 ========= ======== ======== Net income per share--basic**.................... $ 1.75 $ 1.26 $ 0.72 ========= ======== ======== Net income per share--diluted**.................. $ 1.62 $ 1.17 $ 0.67 ========= ======== ========
- -------- * Restated on a historical basis to reflect the mergers with Peninsula Bank of Commerce, Pacific Rim Bancorporation and Pacific Business Funding Corporation on a pooling of interests basis. ** Restated to reflect 2-for-1 stock split declared for shareholders of record at April 30, 1998. See notes to consolidated financial statements. A-25 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) Net income........................................ $ 16,578 $ 11,619 $ 6,348 -------- -------- ------- Other comprehensive income: Unrealized gains on securities: Unrealized holding gains arising during period (net of taxes of $420, $157 and $323 for the years ended December 31, 1998, 1997 and 1996, respectively)................................ 578 310 462 Less: reclassification adjustment for gains (losses) included in net income (net of taxes of $154, $(2) and $(105) for the years ended December 31, 1998, 1997 and 1996, respectively)................................ 220 (3) (150) -------- -------- ------- Net change...................................... 358 313 612 Cash flow hedge: Cumulative transition effect of adopting SFAS No. 133 (net of taxes of $(744) as of October 1, 1998...................................... (1,063) -- -- Change in market value of hedge during the period (net of taxes of $294 for the year ended December 31, 1998)..................... 418 -- -- Less: reclassification adjustment for swap settlements included in net income (net of taxes of $(23) for the year ended December 31, 1998).................................... (32) -- -- -------- -------- ------- Net change...................................... (677) -- -- Other comprehensive income (loss)............. (319) 313 612 -------- -------- ------- Comprehensive income.......................... $ 16,259 $ 11,932 $ 6,960 ======== ======== =======
See notes to consolidated financial statements. A-26 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, 1998, 1997 and 1996
Common Stock Accumulated Other Total ----------------- Comprehensive Retained Shareholders' Shares** Amount Income (Loss) Earnings Equity --------- ------- ----------------- -------- ------------- (Dollars in thousands, except per share amounts) Greater Bay Bancorp, prior to pooling....... 7,364,692 $40,108 $(609) $12,885 $52,384 Shares issued to Pacific Rim Bancorporation shareholders........... 950,748 8,000 -- -- 8,000 Pacific Rim Bancorporation accumulated other comprehensive income and retained earnings prior to pooling....... -- -- (93) 338 245 Shares issued to Pacific Business Funding Corporation shareholders........... 298,000 51 -- -- 51 Pacific Business Funding Corporation retained earnings prior to pooling............. -- -- -- (185) (185) --------- ------- ----- ------- ------- Balance, December 31, 1995, restated to reflect pooling....... 8,613,440 48,159 (702) 13,038 60,495 Net income.............. -- -- -- 6,348 6,348 Other comprehensive income, net of taxes... -- -- 612 -- 612 Stock options exercised, including related tax benefit................ 376,478 1,693 -- -- 1,693 Stock issued in Employee Stock Purchase Plan.... 21,264 137 -- -- 137 401(k) employee stock purchase............... 10,556 87 -- -- 87 Cash dividend $0.29 per share ***.............. -- -- -- (2,536) (2,536) --------- ------- ----- ------- ------- Balance, December 31, 1996*................. 9,021,738 50,076 (90) 16,850 66,836 Net income.............. -- -- -- 11,619 11,619 Other comprehensive income, net of taxes... -- -- 313 -- 313 Stock options exercised, including related tax benefit................ 216,720 1,315 -- -- 1,315 Stock issued in Employee Stock Purchase Plan.... 30,320 347 -- -- 347 401(k) employee stock purchase............... 36,152 531 -- -- 531 Cash dividend $0.48 per share ***.............. -- -- -- (4,421) (4,421) --------- ------- ----- ------- ------- Balance, December 31, 1997*................. 9,304,930 52,269 223 24,048 76,540 Net income.............. -- -- -- 16,578 16,578 Other comprehensive loss, net of taxes..... -- -- (319) -- (319) Stock options exercised, including related tax benefit................ 241,059 3,298 -- -- 3,298 Stock issued in Employee Stock Purchase Plan.... 29,670 656 -- -- 656 401(k) employee stock purchase............... 36,483 1,060 -- -- 1,060 Cash dividend $0.54 per share ***.............. -- -- -- (5,137) (5,137) --------- ------- ----- ------- ------- Balance, December 31, 1998.................. 9,612,142 $57,283 $ (96) $35,489 $92,676 ========= ======= ===== ======= =======
- -------- * Restated on a historical basis to reflect the mergers with Cupertino National Bancorp, Peninsula Bank of Commerce, Pacific Rim Bancorporation and Pacific Business Funding Corporation on a pooling of interests basis. ** Restated to reflect 2-for-1 stock split declared for shareholders of record at April 30, 1998. *** Excluding dividends paid by Greater Bays subsidiaries prior to the completion of their mergers with Greater Bay, Greater Bay paid dividends of $0.38, $0.30 and $0.22 per share in December 31, 1998, 1997 and 1996, respectively. In 1998, Pacific Business Funding Corporation made a distribution of $1.2 million to its shareholders. In 1997, Peninsula Bank of Commerce declared an annual dividend of $3.20 per share, Pacific Rim Bancorporation declared and paid a dividend of $100,000 to its sole shareholder and Pacific Business Funding Corporation made a distribution of $208,000 to its shareholders. In 1996, Cupertino National Bancorp declared and paid a dividend of $0.10, Peninsula Bank of Commerce declared an annual dividend of $1.35 per share and Pacific Business Funding Corporation made a distribution of $227,000 to its shareholders. See notes to consolidated financial statements. A-27 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------- 1998 1997* 1996* --------- --------- --------- (Dollars in thousands) Cash flows--operating activities Net income.................................... $ 16,578 $ 11,619 $ 6,348 Reconcilement of net income to net cash from operations: Provision for loan losses.................... 6,035 6,786 2,594 Depreciation and amortization................ 1,541 1,487 1,253 Deferred income taxes........................ (2,020) (4,200) (1,382) (Gain) loss on sale of investments, net...... (374) 5 255 Changes in: Accrued interest receivable and other assets...................................... (8,803) (8,168) (1,029) Accrued interest payable and other liabilities................................. 6,341 6,170 1,750 Deferred loan fees and discounts, net........ 578 276 188 --------- --------- --------- Operating cash flows, net..................... 19,876 13,975 9,977 --------- --------- --------- Cash flows--investing activities Maturities and partial paydowns on of investment securities: Held to maturity............................. 55,507 25,899 25,976 Available for sale........................... 441,778 47,145 32,990 Purchase of investment securities: Held to maturity............................. (91,903) (9,851) (27,254) Available for sale........................... (725,442) (150,740) (54,269) Other securities............................. (3,401) -- -- Proceeds from sale of available for sale securities................................... 195,863 14,598 31,430 Loans, net.................................... (256,221) (177,917) (176,863) Investment in other real estate owned......... -- (500) 1,266 Purchase of property, premises and equipment.. (4,591) (2,341) (3,109) Purchase of insurance policies................ (23,480) -- (240) --------- --------- --------- Investing cash flows, net..................... (411,890) (253,707) (170,073) --------- --------- --------- Cash flows--financing activities Net change in deposits........................ 271,343 250,015 236,526 Net change in other borrowings--short term.... (27,506) 9,830 15,150 Proceeds from other borrowings--long term..... 70,000 3,025 2,015 Principal repayment--long term borrowings..... (2,265) (865) (775) Proceeds from company obligated madatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures................................... 30,000 20,000 -- Proceeds from sale of common stock............ 5,014 2,193 1,917 Cash dividends................................ (5,137) (4,421) (2,536) --------- --------- --------- Financing cash flows, net..................... 341,449 279,777 252,297 --------- --------- --------- Net change in cash and cash equivalents....... (50,565) 40,045 92,201 Cash and cash equivalents at beginning of period....................................... 231,716 191,671 99,470 --------- --------- --------- Cash and cash equivalents at end of period.... $ 181,151 $ 231,716 $ 191,671 ========= ========= ========= Cash flows--supplemental disclosures Cash paid during the period for: Interest..................................... $ 46,195 $ 33,760 $ 22,399 ========= ========= ========= Income taxes................................. $ 10,305 $ 11,190 $ 5,228 ========= ========= ========= Non-cash transactions: Additions to other real estate owned......... $ 450 $ 853 $ 687 ========= ========= =========
- -------- * Restated on a historical basis to reflect the mergers with Peninsula Bank of Commerce, Pacific Rim Bancorporation and Pacific Business Funding Corporation on a pooling of interests basis. See notes to consolidated financial statements. A-28 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998, 1997 and 1996 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Greater Bay Bancorp ("Greater Bay," on a parent-only basis, and the "Company" on a consolidated basis) is a California corporation and bank holding company that was incorporated on November 14, 1984 as San Mateo County Bancorp. The name was changed to Mid-Peninsula Bancorp on October 7, 1994 as a result of the merger between Mid-Peninsula Bank and San Mateo County Bancorp and its wholly owned subsidiary, WestCal National Bank. The name was further changed to Greater Bay Bancorp on November 27, 1996 as a result of the merger between Mid-Peninsula Bancorp and Cupertino National Bancorp (see Note 2). Upon consummation of the merger with Cupertino National Bancorp, Greater Bay became a multi-bank holding company for two wholly owned subsidiaries. On December 23, 1997 the Company merged with Peninsula Bank of Commerce, adding a third wholly owned banking subsidiary to the group. On May 8, 1998, the Company merged with Pacific Rim Bancorporation ("PRB"), the former holding company of Golden Gate Bank ("Golden Gate"), adding a fourth wholly owned banking subsidiary to the group. The four wholly owned bank subsidiaries are Mid-Peninsula Bank ("MPB"), Cupertino National Bank ("CNB"), Peninsula Bank of Commerce ("PBC"), and Golden Gate, collectively the "Banks." On August 31, 1998, the Company merged with Pacific Business Funding Corporation ("PBFC"). Subsequent to the completion of the merger the assets and liabilities of PBFC were assigned to CNB. PBFC has been reformed as an operating division of CNB and conducts business under the name Pacific Business Funding. MPB commenced operations in October 1987 and is a state chartered bank regulated by the Federal Reserve Bank ("FRB") and Department of Financial Institutions of the State of California ("DFI"). CNB commenced operations in May 1985 and is a national banking association regulated by the Office of the Comptroller of Currency ("OCC"). PBC commenced operations in September 1981 and is a state chartered bank regulated by the FRB and the DFI. Golden Gate commenced operations in 1976 and is a state chartered bank regulated by the FRB and the DFI. On March 3, 1997 GBB Capital I, a statutory business trust, was formed for the exclusive purpose of issuing and selling Cumulative Trust Preferred Securities ("TPS") (see Note 8) and using the proceeds from the sale of the TPS to acquire Junior Subordinated Debentures issued by Greater Bay. On May 18, 1998 GBB Capital II, a statutory business trust, was formed for the exclusive purpose of issuing and selling additional TPS and using the proceeds from the sale of the TPS to acquire Junior Subordinated Debentures issued by Greater Bay. The Company provides a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. The Company operates throughout Silicon Valley, the San Francisco Peninsula and the Contra Costa Tri Valley Region, with offices located in San Jose, Cupertino, Santa Clara, Palo Alto, Redwood City, San Mateo, Millbrae, San Bruno, San Francisco and Walnut Creek. Consolidation and Basis of Presentation The consolidated financial statements include the accounts of Greater Bay and its wholly owned subsidiaries, MPB, CNB, PBC, Golden Gate, GBB Capital I and GBB Capital II and its operating divisions Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Corporate Finance Group, Greater Bay Bank Contra Costa Banking Office, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding and Venture Banking Group. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the 1998 presentation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and the prevailing practices within the banking industry. A-29 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold and agency securities with original maturities of less than ninety days. Generally, federal funds are sold for one-day periods. As discussed in Note 7, PBC holds $89.6 million in one demand deposit account whose funds are comprised of proceeds from a lawsuit settlement. Due to the uncertainty of the time this special deposit (the "Special Deposit") will remain with PBC, management has invested a significant portion of the proceeds in agency securities with maturities of less than 90 days. Those securities have been classified as cash and equivalents. MPB, CNB, PBC, and Golden Gate are required by the Federal Reserve System to maintain noninterest-earning cash reserves against certain of their deposit accounts. At December 31, 1998, the required combined reserves totaled approximately $19.4 million. Investment Securities The Company classifies its investment securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Investment securities classified as held to maturity are reported at amortized cost; available for sale securities are reported at fair value with net unrealized gains and losses reported (net of taxes) as a component of shareholders' equity. The Company does not have any trading securities. A decline in the market 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 are recognized when earned. Realized gains and losses for securities classified as available for sale and held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Required investments in Federal Reserve Bank and Federal Home Loan Bank stocks for MPB, CNB, PBC, and Golden Gate are recorded at cost. Loans Loans held for investment are carried at amortized cost. The Company's loan portfolio consists primarily of commercial and real estate loans generally collateralized by first and second deeds of trust on real estate as well as business assets and personal property. Interest income is accrued on the outstanding loan balances using the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due 90 days and when full payment of principal or interest in 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. A-30 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 The Company charges loan origination and commitment fees. Net loan origination fees and costs are deferred and amortized to interest income over the life of the loan, using the effective interest method. Loan commitment fees are amortized to interest income over the commitment period. When a loan is sold, unamortized fees and capitalized direct costs are recognized in the consolidated statements of operations. Other loan fees and charges representing service costs for the repayment of loans, for delinquent payments or for miscellaneous loan services are recognized when earned. Sale and Servicing of Small Business Administration ("SBA") Loans The Company originates loans to customers under SBA programs that generally provide for SBA guarantees of 70% to 90% of each loan. The Company generally sells the guaranteed portion of the majority of the loans to an investor and retains the unguaranteed portion and servicing rights in its own portfolio. Funding for the SBA programs depend on annual appropriations by the U.S. Congress. Gains on these sales are earned through the sale of the guaranteed portion of the loan for an amount in excess of the adjusted carrying value of the portion of the loan sold. The Company allocates the carrying value of such loans between the portion sold, the portion retained and a value assigned to the right to service the loan. The difference between the adjusted carrying value of the portion retained and the face amount of the portion retained is amortized to interest income over the life of the related loan using a method which approximates the interest method. Allowance for Loan Losses The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118 ("SFAS No. 114 and No. 118"), on January 1, 1995. Under these standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Under these standards, any allowance on impaired loans is generally based on one of three methods. It requires that impaired loans be measured at either, 1) the present value of expected cash flows at the loan's effective interest rate, 2) the loan's observable market price, or 3) the fair market value of the collateral of the loan. In general, these statements are not applicable to large groups of smaller-balance loans that are collectively evaluated for impairment such as credit cards, residential mortgage and/or consumer installment loans. Income recognition on impaired loans conforms to the method the Company uses 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 losses in the loan portfolio. The allowance is based upon a number of factors, including prevailing and anticipated economic trends, industry experience, industry and geographic concentrations, estimated collateral values, management's assessment of credit risk inherent in the portfolio, delinquency trends, historical loss experience, specific problem loans and other relevant factors. Additions to the allowance, in the form of provisions, are reflected in current operating results, while charge-offs to the allowance are made when a loss is determined to have occurred. Because the allowance for loan losses is based on estimates, ultimate losses may vary from the current estimates. Other Real Estate Owned Other real estate owned ("OREO") consists of properties acquired through foreclosure and is stated at the lower of carrying value or fair value less estimated costs to sell. Development and improvement costs relating to the OREO are capitalized. Estimated losses that result from the ongoing periodic valuation of these properties are charged to current earnings with a provision for losses on foreclosed property in the period in which they are identified. The A-31 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 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............................................... 5-7 years
Amortization of leasehold improvements is computed on a straight-line basis over the shorter of the lease term or the estimated useful lives of the asset, which is generally 10 years. Income Taxes Deferred incomes taxes reflect the estimated future tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Derivatives and Hedging Activities The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), effective October 1, 1998. In accordance with the transition provisions of SFAS No. 133, the Company recorded a net-of- tax cumulative-effect-type adjustment of $1,063,000 in accumulated other comprehensive income to recognize at fair value all derivatives that are designated as cash-flow hedging instruments. There were no net gains or losses on derivatives that had been previously deferred or gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of hedged items. All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge). Changes in the fair value of a derivative that is highly effective as--and that is designated and qualifies as--a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash-flow hedges to specific liabilities on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (2) the derivative expires or A-32 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 is sold, terminated, or exercised; or (3) management determines that designation of the derivative as a hedge instrument is no longer appropriate. In these situations where hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current-period earnings. All gains or losses that were accumulated in other comprehensive income will be recognized immediately in earnings upon the discontinuance of hedge accounting. Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement requires companies to classify items of other comprehensive income by their nature in the financial statements and display the accumulated other comprehensive income separately from retained earnings in the equity section of the balance sheet. The changes to the balances of accumulated other comprehensive income are as follows:
Accumulated Other Unrealized Gain Cash Flow Comprehensive on Securities Hedges Income (Loss) --------------- --------- ------------- (Dollars in thousands) Balance--December 31, 1997........... $223 $ -- $ 223 Current period change................ 358 (677) (319) ---- ----- ----- Balance--December 31, 1998........... $581 $(677) $ (96) ==== ===== =====
Per Share Data Net income per share is stated in accordance with SFAS No. 128 "Earnings per Share". Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per share is computed by dividing net income by the weighted average number of common shares plus common equivalent shares outstanding including dilutive stock options. All years presented include the effect of the 2-for-1 stock split effective as of April 30, 1998. The following table provides a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the years ended December 31, 1998, 1997 and 1996.
For the year ended December 31, 1998 ----------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- (Dollars in thousands, except per share amounts) Net income............................. $16,578 Basic net income per share: Income available to common shareholders........................ 16,578 9,485,000 $1.75 Effect of dilutive securities: Stock options........................ -- 746,000 -- ------- ---------- ----- Diluted net income per share: Income available to common shareholders and assumed conversions......................... $16,578 10,231,000 $1.62 ======= ========== =====
A-33 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996
For the year ended December 31, 1997 ----------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- (Dollars in thousands, except per share amounts) Net income............................. $11,619 Basic net income per share: Income available to common shareholders........................ 11,619 9,196,000 $1.26 Effect of dilutive securities: Stock options........................ -- 696,000 -- ------- --------- ----- Diluted net income per share: Income available to common shareholders and assumed conversions......................... $11,619 9,892,000 $1.17 ======= ========= ===== For the year ended December 31, 1996 ----------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- (Dollars in thousands, except per share amounts) Net income............................. $ 6,348 Basic net income per share: Income available to common shareholders........................ 6,348 8,856,000 $0.72 Effect of dilutive securities: Stock options........................ -- 587,000 -- ------- --------- ----- Diluted net income per share: Income available to common shareholders and assumed conversions......................... $ 6,348 9,443,000 $0.67 ======= ========= =====
There were options to purchase 51,000 shares that were considered anti- dilutive whereby the options' exercise price was greater than the average market price of the common shares, during the year ended December 31, 1998. There were no options that were considered anti-dilutive during the years ended December 31, 1997 and 1996. 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 1996 merger with Cupertino National Bancorp at a 0.81522 conversion ratio, the 1997 merger with PBC at a 0.96550 conversion ratio and the 1998 mergers with PRB and PBFC at a total of 950,748 and 298,000 shares, respectively. Segment Information In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131".) SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information. A-34 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 NOTE 2--MERGERS On August 31, 1998, PBFC, an asset-based specialty finance company merged with and into the Company. Upon consummation of the merger, the outstanding shares of PBFC were converted into an aggregate of 298,000 shares of the Company's stock. The stock was issued to former PBFC shareholders, in a tax- free exchange accounted for as a pooling-of-interests. On May 8, 1998, PRB, the former holding company of Golden Gate, merged with and into the Company. Upon consummation of the merger, the outstanding shares of PRB were converted into an aggregate of 950,748 shares of the Company's stock. The stock was issued to former PRB's sole shareholder in a tax-free exchange accounted for as a pooling-of-interests. On December 23, 1997, the Company consummated a merger with PBC. Pursuant to terms of the merger agreement, the Company issued approximately 664,000 shares (approximately 1,328,000 shares, as adjusted to reflect the 2-for-1 stock split) of its common stock in exchange for the outstanding common stock of PBC at an exchange ratio of 0.9655 of the Company's common stock for each share of PBC's common stock. The merger was accounted for as a pooling-of-interests. On November 27, 1996, the Company consummated a merger with Cupertino National Bancorp. Pursuant to the terms of the merger agreement, the Company issued approximately 1,586,000 shares (approximately 3,172,000 shares, as adjusted for the 2-for-1 stock split) of its common stock in exchange for the outstanding common stock of Cupertino National Bancorp at an exchange ratio of 0.81522 of the Company's common stock for each share of Cupertino National Bancorp's common stock. The merger was accounted for as a pooling-of- interests. The following table sets forth the separate results of operations for Greater Bay, PBC, PRB and PBFC for the periods indicated:
Year ended December 31, Net Interest Income Net Income ----------------------- ------------------- ---------- (Dollars in thousands) 1997: Greater Bay........................... $47,776 $10,013 PRB................................... 4,750 996 PBFC.................................. 1,942 610 ------- ------- Combined............................ $54,468 $11,619 ======= ======= 1996: Greater Bay........................... $28,824 $3,503 PBC................................... 6,149 1,835 PRB................................... 4,039 541 PBFC.................................. 1,492 469 ------- ------- Combined............................ $40,504 $6,348 ======= =======
In all mergers, certain reclassifications were made to conform to the Company's financial presentation. The results of operations previously reported by the separate enterprises for the periods before the merger was consummated and that are included in the current combined amounts presented in the accompanying consolidated financial statements are summarized below. A-35 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 The following table sets forth the composition of the operations of the Company and PBFC, PRB and PBC for the periods indicated.
PBFC PRB PBC ---------------- ------------------ ------------------ Six months ended Three months ended Nine months ended June 30, 1998 March 31, 1998 September 30, 1997 ---------------- ------------------ ------------------ (Dollars in thousands) Net interest income: Greater Bay Bancorp... $30,077 $13,366 $27,922 Acquired entity....... 1,154 1,285 6,851 ------- ------- ------- Combined............ $31,231 $14,651 $34,773 ======= ======= ======= Provision for loan losses: Greater Bay Bancorp... $ 2,243 $ 866 $ 5,287 Acquired entity....... 100 70 105 ------- ------- ------- Combined............ $ 2,343 $ 936 $ 5,392 ======= ======= ======= Net income: Greater Bay Bancorp... $ 6,628 $ 3,646 $ 6,097 Acquired entity....... 344 60 2,573 ------- ------- ------- Combined............ $ 6,972 $ 3,706 $ 8,670 ======= ======= =======
The following table sets forth the composition of the combined operations of Mid-Peninsula Bancorp and Cupertino National Bancorp for the period indicated.
Nine months ended September 30, 1996 ---------------------- (Dollars in thousands) Net interest income: Mid-Peninsula Bancorp............................... $ 8,878 Cupertino National Bancorp.......................... 11,487 ------- Combined.......................................... $20,365 ======= Provision for loan losses: Mid-Peninsula Bancorp............................... $ 427 Cupertino National Bancorp.......................... 864 ------- Combined.......................................... $ 1,291 ======= Net income: Mid-Peninsula Bancorp............................... $ 2,373 Cupertino National Bancorp.......................... 1,548 ------- Combined.......................................... $ 3,921 =======
There were no significant transactions between the Company and PBFC, the Company and PRB, the Company and PBC or between Mid-Peninsula Bancorp and Cupertino National Bancorp prior to the mergers. All intercompany transactions have been eliminated. A-36 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 NOTE 3--INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities is summarized below:
As of December 31, 1998 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- -------- (Dollars in thousands) AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations......... $ 4,408 $ 26 $ -- $ 4,434 U.S. agency notes................. 28,621 20 (2) 28,639 Mortgage-backed securities........ 152,987 988 (60) 153,915 Tax-exempt securities............. 32,952 563 -- 33,515 Corporate securities.............. 35,517 60 (597) 34,980 -------- ------ ----- -------- Total securities available for sale........................... 254,485 1,657 (659) 255,483 -------- ------ ----- -------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations......... 1,764 2 (2) 1,764 U.S. agency notes................. 25,490 -- (58) 25,432 Mortgage-backed securities........ 27,961 86 (179) 27,868 Tax-exempt securities............. 25,942 725 (14) 26,653 -------- ------ ----- -------- Total securities held to maturity....................... 81,157 813 (253) 81,717 -------- ------ ----- -------- Other securities.................. 5,654 -- -- 5,654 -------- ------ ----- -------- Total investment securities..... $341,296 $2,470 $(912) $342,854 ======== ====== ===== ======== As of December 31, 1997 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- -------- (Dollars in thousands) AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations......... $ 10,095 $ 52 $ (2) $ 10,145 U.S. agency notes................. 38,833 52 (63) 38,822 Mortgage-backed securities........ 102,432 357 (185) 102,604 Tax-exempt securities............. 7,018 199 (5) 7,212 Corporate securities.............. 7,568 62 -- 7,630 -------- ------ ----- -------- Total securities available for sale........................... 165,946 722 (255) 166,413 -------- ------ ----- -------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations......... 501 1 -- 502 U.S. agency notes................. 17,798 182 (12) 17,968 Mortgage-backed securities........ 11,324 177 (2) 11,499 Tax-exempt securities............. 14,838 492 (53) 15,277 -------- ------ ----- -------- Total securities held to maturity....................... 44,461 852 (67) 45,246 -------- ------ ----- -------- Other securities.................. 2,253 -- -- 2,253 -------- ------ ----- -------- Total investment securities..... $212,660 $1,574 $(322) $213,912 ======== ====== ===== ========
A-37 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 The following table shows amortized cost and estimated market value of the Company's investment securities by year of maturity as of December 31, 1998.
2000 2004 Through Through 2009 and 1999 2003 2008 Thereafter Total ------- ------- ------- ---------- -------- (Dollars in thousands) (1) AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations.. $ 4,308 $ 100 $ -- $ -- $ 4,408 U.S. agency notes (2)...... 15,829 -- 12,792 -- 28,621 Mortgage-backed securities (3)....................... -- 3,033 8,941 141,013 152,987 Tax-exempt securities...... -- 1,601 4,561 26,790 32,952 Corporate securities....... 4,016 991 -- 30,510 35,517 ------- ------- ------- -------- -------- Total securities available for sale...... 24,153 5,725 26,294 198,313 254,485 ======= ======= ======= ======== ======== Market value............... $24,197 $ 5,808 $26,601 $198,877 $255,483 ======= ======= ======= ======== ======== HELD TO MATURITY SECURITIES: U.S. Treasury obligations.. 1,764 -- -- -- 1,764 U.S. agency notes (2)...... -- 23,990 1,500 -- 25,490 Mortgage-backed securities (3)....................... -- -- 7,596 20,365 27,961 Tax-exempt securities...... 1,261 3,598 5,252 15,831 25,942 ------- ------- ------- -------- -------- Total securities held to maturity................ 3,025 27,588 14,348 36,196 81,157 ======= ======= ======= ======== ======== Market value............... 3,034 27,613 7,528 43,542 81,717 ======= ======= ======= ======== ======== COMBINED INVESTMENT SECURITIES PORTFOLIO: Total investment securities................ $27,178 $33,313 $40,642 $234,509 $335,642 ======= ======= ======= ======== ======== Total market value......... $27,231 $33,421 $34,129 $242,419 $337,200 ======= ======= ======= ======== ======== Weighted average yield- total portfolio........... 5.73% 5.74% 5.25% 6.84% 6.23%
-------- (1) Other securities are comprised of equity investments and have no stated maturity and therefore are excluded from this table. (2) Certain notes issued by U.S. Agencies may be called, without penalty, at the discretion of the issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates. (3) Mortgage-backed securities are shown at contractual maturity; however, the average life of these mortgage-backed securities may differ due to principal prepayments. Investment securities with a carrying value of $104.2 million and $34.9 million were pledged to secure deposits, borrowings and for other purposes as required by law or contract at December 31, 1998 and 1997, respectively. Investments in the FRB and the FHLB are required in order to maintain membership and support activity levels. A-38 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 Proceeds and realized losses and gains on sales of investment securities for the years ended December 31, 1998, 1997 and 1996 are presented below:
1998 1997 1996 -------- ------- ------- (Dollars in thousands) Proceeds from sale of available for sale securities.................................... $195,863 $14,598 $31,430 Available for sale securities-gains (losses) (1)........................................... $ 374 $ (5) $ (255)
-------- (1) Includes $466,000 of charges in 1996 to conform accounting practices, which is included in merger and other related nonrecurring costs. 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, 1998, 1997 and 1996:
1998 1997 1996 ------- ------- ------- (Dollars in thousands) Balance, January 1................................ $16,394 $10,136 $ 6,683 Provision for loan losses (1)................... 6,218 8,137 3,394 Loan charge-offs................................ (1,420) (1,939) (586) Recoveries...................................... 112 60 645 ------- ------- ------- Balance, December 31.............................. $21,304 $16,394 $10,136 ======= ======= =======
-------- (1) Includes $183,000, $1.4 million and $800,000 of charges in 1998, 1997 and 1996, respectively, to conform accounting practices for the Banks' reserve methodologies and is included in merger and related nonrecurring costs in the consolidated statements of operations. The following table sets forth nonperforming loans as of December 31, 1998, 1997 and 1996. 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 outstanding at year end totaled $114,000, $479,000, and $633,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Interest income recognized on the nonperforming loans approximated $80,000, $206,000, and $508,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
1998 1997 1996 ------- ------- ------- (Dollars in thousands) Nonaccrual loans.................................... $ 1,858 $ 2,971 $ 4,616 Accruing loans past due 90 days or more............. -- 158 1,237 Restructured loans.................................. 327 1,062 1,828 ------- ------- ------- Total nonperforming loans........................... $ 2,185 $ 4,191 $ 7,681 ======= ======= =======
At December 31, 1998 and 1997, the recorded investment in loans, for which impairment has been recognized in accordance with SFAS No. 114 and No. 118, was approximately $1.9 million and $2.8 million, respectively, with corresponding valuation allowances of $696,000 and $568,000, respectively. For the years ended December 31, 1998 and 1997, the average recorded investment in impaired loans was approximately $3.3 million and $4.4 million, respectively. The Company did not recognize interest income on impaired loans during the twelve months ended December 31, 1998, 1997 and 1996. A-39 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 The Company had $327,000 and $1,062,000 of restructured loans as of December 31, 1998 and 1997, respectively. Principal reduction concessions totaling $387,000 were permitted on restructured loans during the year ended December 31, 1997. There were no principal reduction concessions allowed on restructured loans during 1998. Interest income from restructured loans totaled $16,000, $82,000 and $317,000 for the years ended December 31, 1998, 1997 and 1996. Foregone interest income, which totaled $11,000, $10,000 and $8,000 for the years ended December 31, 1998, 1997 and 1996 would have been recorded as interest income if the loans had accrued interest in accordance with their original terms prior to the restructurings. NOTE 5--OTHER REAL ESTATE OWNED At December 31, 1998 and 1997, other real estate owned ("OREO") consisted of properties acquired through foreclosure with a carrying value of $966,000 and $1.3 million, respectively. These balances are included in interest receivable and other assets in the accompanying consolidated balance sheets. There was no allowance for estimated losses. The following summarizes OREO operations, which are included in operating expenses, for the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996 ------- -------- ------- (Dollars in thousands) Real estate operations, net...................... $ 77 $ 247 $ 190 Gain on sale of other real estate owned.......... (1) (124) (15) Provision for estimated losses................... -- 54 -- ------- -------- ------- Net loss from other real estate operations....... $ 76 $ 177 $ 175 ======= ======== =======
NOTE 6--PROPERTY, PREMISES AND EQUIPMENT Property, premises and equipment at December 31, 1998 and 1997 are composed of the following:
1998 1997 ------- ------- (Dollars in thousands) Land....................................................... $ 417 $ 417 Building and premises...................................... 1,561 1,377 Leasehold improvements..................................... 4,703 4,771 Furniture and equipment.................................... 9,794 7,951 Automobiles................................................ 124 123 ------- ------- Total.................................................... 16,599 14,639 Accumulated depreciation and amortization.................. (5,638) (6,141) ------- ------- Premises and equipment, net.............................. $10,961 $ 8,498 ======= =======
Depreciation and amortization amounted to $2.1 million, $1.9 million and $1.5 million for the years ended December 31, 1998, 1997 and 1996, respectively, and have been included in occupancy and equipment expense in the accompanying consolidated statements of operations. A-40 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 NOTE 7--DEPOSITS Deposits as of December 31, 1998 and 1997 are as follows:
1998 1997 ---------- ---------- (Dollars in thousands) Demand, noninterest-bearing........................... $ 268,448 $ 219,495 MMDA, NOW and Savings................................. 854,392 627,475 Time certificates, $100,000 and over.................. 168,075 183,147 Other time certificates............................... 51,577 41,031 ---------- ---------- Total deposits...................................... $1,342,492 $1,071,148 ========== ==========
The following table sets forth the maturity distribution of time certificates of deposit at December 31, 1998.
December 31, 1998 ------------------------------------------------------------- Seven to One to More Three months Four to six twelve three than or less months months years three years Total ------------ ----------- -------- ------ ----------- -------- (Dollars in thousands) Time deposits, $100,000 and over............... $123,309 $27,502 $13,930 $3,334 $-- $168,075 Other time deposits..... 25,231 11,717 10,222 4,375 32 51,577 -------- ------- ------- ------ ---- -------- Total................. $148,540 $39,219 $24,152 $7,709 $ 32 $219,652 ======== ======= ======= ====== ==== ========
At December 31, 1998 and 1997, the Company held $89.6 million and $88.1 million, respectively from a single depositor. Due to the uncertainty of the time the deposit will remain outstanding, management has invested a significant portion in agency securities with maturities of less than 90 days. NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES GBB Capital I and GBB Capital II (the "Trusts") are Delaware business trusts wholly-owned by Greater Bay and were formed for the purpose of issuing Company Obligated Manditorily Redeemable Preferred Securities of Subsidiary Trusts Holding Soley Junior Subordinated Debentures ("TPS"). The TPS are individually described below. Interest on the TPS are payable quarterly and is deferrable, at the option of the Company, for up to five years. Following the issuance of each TPS, the Trusts used the proceeds from the TPS offerings to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (the "Debentures") of Greater Bay. The Debentures bear the same terms and interest rates as the related TPS. The Debentures are the sole assets of the Trusts and are eliminated, along with the related income statement effects, in the consolidated financial statements. Greater Bay has fully and unconditionally guaranteed all of the obligations of the Trusts. Under applicable regulatory guidelines, a portion of the TPS will qualify as Tier I capital, and the remaining portion will qualify as Tier II capital. On March 30, 1997, GBB Capital I completed a public offering of 800,000 shares of 9.75% Cumulative Trust Preferred Securities ("TPS I") in an aggregate amount of $20.0 million. The TPS I accrue interest at an annual rate of 9.75% on the $20.0 million liquidation amount of $25 per share of TPS I. The TPS I are mandatorily redeemable, in whole or in part, upon repayment of the Debentures at their stated maturity of April 1, 2027 or their earlier redemption. The Debentures are redeemable prior to maturity at the option of the Company, on or after April 1, 2002, in whole at any time or in part from time to time. A-41 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 On August 12, 1998, GBB Capital II completed an offering of 30,000 shares of Floating Rate Trust Preferred Securities, Series A ("the Series A Securities") in an aggregate amount of $30.0 million. The Series A Securities issued in the offering were sold in a private transaction pursuant to an applicable exemption from registration under the Securities Act. In November 1998, the Company, through GBB Capital II, completed an offer to exchange the Series A Securities for a like amount of its registered Floating Rate Trust Preferred Securities, Series B ("TPS II"). The exchange offer was conducted in accordance with the terms of the initial issuance of the Series A Securities. The TPS II accrue interest at a variable rate of interest, initially at 7.1875%, on the liquidation amount of $1,000 per share of TPS II. The interest rate resets quarterly and is equal to 3-month LIBOR plus 150 basis points. As part of this transaction, the Company concurrently entered into an interest rate swap to fix the cost of the offering at 7.55% for 10 years (see note 10). The TPS II are mandatorily redeemable, in whole or in part, upon repayment of the Debentures at their stated maturity of September 15, 2028 or their earlier redemption. The Debentures are redeemable prior to maturity at the option of the Company, on or after September 15, 2008, in whole at any time or in part from time to time. The total amount of TPS outstanding at December 31, 1998 and 1997 was $50.0 million and $20.0 million, respectively and the dividends paid on TPS was $2.8 million and $1.5 million in 1998 and 1997, respectively. NOTE 9--BORROWINGS Other borrowings are detailed as follows:
1998 1997 ----------- ----------- (Dollars in thousands) Other borrowings: Short term borrowings: Securities sold under agreements to repurchase.................................... $ -- $ 19,480 Other short term notes payable................. 135 2,675 Advances under credit line..................... -- 7,750 ----------- ----------- Total short term borrowings.................. 135 29,905 ----------- ----------- Long term borrowings: Securities sold under agreements to repurchase... 50,000 -- FHLB advances.................................... 20,000 -- Promissory notes................................. 2,450 2,450 ----------- ----------- Total other long term borrowings............. 72,450 2,450 ----------- ----------- Total other borrowings............................. $ 72,585 $ 32,355 =========== =========== Subordinated notes, due September 15, 2005......... $ 3,000 $ 3,000 ----------- ----------- Total subordinated debt............................ $ 3,000 $ 3,000 =========== ===========
During the years ended December 31, 1998 and 1997, the average balance of securities sold under short term agreements to repurchase was $11,648,000 and $5,278,000, respectively, and the average interest rates during those periods were 5.35% and 5.71%, respectively. Securities sold under short term agreements to repurchase generally mature within 90 days of dates of purchase. The maximum outstanding at any month end was $30.2 million and $19.5 million for the years ended December 31, 1998 and 1997 respectively. During the years ended December 31, 1998 and 1997, the average balance of federal funds purchased was $293,000 and $1,523,000, respectively, and the average interest rates during those periods were 5.53% and 5.32%, A-42 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 respectively. There were no such balances outstanding at December 31, 1998 or 1997. The maximum amount outstanding at any month end was $0 and $9.2 million for the years ended December 31, 1998 and 1997 respectively. The Company has sold securities under long term agreements to repurchase which mature in the year 2003 and have an average interest rate of 5.21%. The counterparties to these agreements have put options which give them the right to demand early repayment. As of December 31, 1998, $40.0 million of these borrowings are subject to early repayment beginning in 1999 and $10.0 million are subject to early repayment beginning in 2000. The FHLB advances will mature in the year 2003 and have an average interest rate of 5.13%. The advances are collateralized by securities pledge to the FHLB. Under the terms of the advances, the FHLB has a put option which gives it the right to demand early repayment beginning in 1999. The promissory notes, which bear an interest rate of 13.76% and will mature April 15, 2000, were offered to PBFC's officers along with other accredited investors within the definition of Rule 501 under the Securities Act of 1933, as amended. The notes are redeemable by the Company at any time. The subordinated notes, which will mature on September 15, 2005, were offered to members of Cupertino National Bank's Board of Directors and bank officers along with other accredited investors within the definition of Rule 501 under the Securities Act of 1933, as amended. The notes bear an interest rate of 11.5%. The notes are redeemable by the Company any time after September 30, 1998 at a premium ranging from 0% to 5%. The notes qualify as Tier 2 capital for the Company. NOTE 10--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company currently uses a single interest-rate swap to convert its floating-rate debt (the TPS II) to fixed rates. This swap was entered into concurrently with the issuance of the debt being hedged. This swap is accounted for as a cash flow hedge under SFAS No. 133. This swap possesses a term equal to the non-callable term of the debt, with a fixed pay rate and a receive rate indexed to rates paid on the debt and a notional amount equal to the amount of the debt being hedged. As the specific terms and notional amount of the swap exactly match those of the debt being hedged the Company meets the "no ineffectiveness" criteria of SFAS No. 133. As such the swap is assumed to be 100% effective and all changes in the market value of the hedge are recorded in other comprehensive income with no impact on the income statement for any ineffective portion. As of December 31, 1998, the unrealized loss on the cash flow hedge was $677,000, net of income taxes, which was included in the balance of accumulated other comprehensive income. The floating rate TPS II combined with the cash flow hedge created a synthetic fixed rate debt instrument. The unrealized loss on the cash flow hedge approximated the unrealized loss the Company would have incurred if it had issued a fixed rate debt instrument. Under current accounting practices, as required by SFAS No. 133, the Company was required to record the unrealized loss on the synthetic fixed rate debt instrument, but it would not have been required to record an unrealized loss if it had issued fixed rate debt. The notional amount of the swap is $30.0 million with a term of 10 years expiring on September 15, 2008. The Company intends to use the swap as a hedge of the related debt for 10 years. The periodic settlement date of the swap results in the reclassifying as earnings the gains or losses that are reported in accumulated comprehensive income. For the year ended December 31, 1998 the Company recognized a net settlement expense of $55,000 for the swap. The estimated net amount of the existing losses at December 31, 1998 that is expected to be reclassified as earnings within the next twelve months, assuming no change in interest rates, would be approximately $147,000, net of taxes. For the years ended December 31, 1997 and 1996, the Company did not have any derivative instruments. The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company's credit committee. A-43 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 NOTE 11--INCOME TAXES Income tax expense was comprised of the following for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ------- ------- ------- (Dollars in thousands) Current: Federal......................................... $ 7,537 $ 8,248 $ 4,276 State........................................... 2,721 2,426 1,084 ------- ------- ------- Total current................................. 10,258 10,674 5,360 Deferred: Federal......................................... (2,255) (3,243) (1,244) State........................................... (627) (957) (138) ------- ------- ------- Total deferred................................ (2,882) (4,200) (1,382) ------- ------- ------- Total expense................................. $ 7,376 $ 6,474 $ 3,978 ======= ======= =======
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, 1998 and 1997 are as follows:
Years Ended December 31, --------------- 1998 1997 ------- ------ (Dollars in thousands) Loan loss reserves.......................................... $ 7,301 $5,061 State income taxes.......................................... 2,276 1,943 Deferred compensation....................................... 1,380 997 Net operating losses........................................ 167 336 Unrealized gains............................................ 70 (247) Purchase accounting adjustments............................. 22 72 Accumulated depreciation.................................... 5 61 Other....................................................... (237) (445) ------- ------ Net deferred tax asset.................................... $10,984 $7,778 ======= ======
Management believes that the Company will fully realize its total deferred income tax assets as of December 31, 1998 based upon the Company's recoverable taxes from prior carryback years, its total deferred income tax liabilities and its current level of operating income. At December 31, 1998, the Company had a federal tax net operating loss carryforward of approximately $478,000 expiring in years 2010, 2011, and 2012. Under provisions of the United States income tax laws these loss carryovers are subject to limitation due to the acquisition of Pacific Rim Bancorporation in 1998. Management does not believe that these limitations will prevent the realization of the benefit of the loss carryovers during the carryover periods. A-44 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 A reconciliation from the statutory income tax rate to the consolidated effective income tax rate follows, for the years ended December 31, 1998, 1997 and 1996:
Years Ended December 31, ------------------ 1998 1997 1996 ---- ---- ---- (Dollars in thousands) Statutory federal tax rate............................ 35.0% 35.0% 35.0% California franchise tax expense, net of federal income tax benefit................................... 5.7% 6.2% 7.1% Tax exempt income..................................... (2.6)% (2.0)% (4.2)% Nondeductible merger costs, net....................... (0.4)% 0.0% 2.6% Contribution of appreciated securities................ (2.0)% 0.0% 0.0% Other, net............................................ (4.9)% (3.4)% (2.0)% ---- ---- ---- Effective income tax rate........................... 30.8% 35.8% 38.5% ==== ==== ====
NOTE 12--OPERATING EXPENSES Merger and other related nonrecurring costs for the years ended December 31, 1998, 1997 and 1996 were comprised of the following:
1998 1997 1996 ------ ------ ------ (Dollars in thousands) Financial advisory and professional fees............... $1,101 $1,083 $1,000 Charges to conform accounting practices................ 183 1,350 1,266 Other costs............................................ 1,377 900 525 ------ ------ ------ Total................................................ $2,661 $3,333 $2,791 ====== ====== ======
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. In July 1995, the Company settled a lawsuit of $1.1 million, net of tax. The Company recovered those losses through insurance coverage for this settlement in 1997. However, due to the uncertainty associated with the recovery, the Company reflected the settlement expense as a charge to 1995 earnings, and the associated recovery in 1997 as a recovery to earnings. Other expenses for the years ended December 31, 1998, 1997 and 1996 were comprised of the following:
1998 1997 1996 ------- ------ ------ (Dollars in thousands) Telephone, postage and supplies....................... $ 1,775 $1,383 $1,163 Legal and other professional fees..................... 1,597 1,808 1,730 Marketing and promotion............................... 1,203 1,237 989 Directors fees........................................ 559 657 515 Client services....................................... 544 444 462 Data processing....................................... 430 478 514 Insurance............................................. 339 313 225 FDIC insurance and regulatory assessments............. 338 285 148 Other real estate owned............................... 76 177 175 Other................................................. 2,919 1,980 2,318 ------- ------ ------ 9,780 8,762 8,239 Contribution to GBB Foundation........................ 1,341 -- -- ------- ------ ------ Total............................................... $11,121 $8,762 $8,239 ======= ====== ======
A-45 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 NOTE 13--EMPLOYEE BENEFIT PLANS Stock Option Plan On November 19, 1997, the Company's shareholders approved an amendment of the Greater Bay Bancorp 1996 Stock Option Plan (the "Bancorp Plan"), to increase by 912,652 the number of shares of Greater Bay stock issuable under the Bancorp Plan. This was done to accommodate the increased number of eligible employees as a result of the merger with PBC. Effective November 27, 1996, the Company's shareholders approved the original Bancorp Plan and authorized an increase in the number of shares previously available for issuance under the Mid-Peninsula Bancorp Plan from 914,074 to 1,503,128 shares to accommodate the merger of Mid-Peninsula Bancorp and Cupertino National Bancorp. Under the terms of the merger, all stock option plans of Cupertino National Bancorp and Mid-Peninsula Bancorp were terminated at the time of the merger and all outstanding options from these plans were assumed by the Bancorp Plan. Outstanding options from the Mid- Peninsula Bancorp plan of 432,652 and outstanding options from the Cupertino National Bancorp plan of 502,146 (converted at a ratio of 0.81522) were assumed by the Bancorp Plan. Options issued under the Bancorp Plan may be granted to employees and nonemployee directors and may be either incentive or nonqualified stock options as defined under current tax laws. The exercise price of each option must equal the market price of the Company's stock on the date of grant. The term of an option may not exceed 10 years and generally vest over a five year period. At December 31, 1998 the total authorized shares issuable under the Bancorp Plan was approximately 2,260,000 shares and the number of shares available for future grants was approximately 715,000 shares. All shares amounts have been restated to reflect the 2-for-1 stock split declared for shareholders of record as of April 30, 1998. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the provisions of SFAS No. 123, the Company is encouraged, but not required, to measure compensation costs related to its employee stock compensation plans under the fair market value method. If the Company elects not to recognize compensation expense under this method, it is required to disclose the pro forma net income and net income per share effects based on the SFAS No. 123 fair value methodology. The Company implemented the requirements of SFAS No. 123 in 1996 and has elected to adopt the disclosure provisions of this statement. A-46 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 At December 31, 1998, the Company had one stock option plan, which is described above. The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting the Bancorp Plan. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation for the Company's stock option plan been determined consistent with SFAS No. 123, the Company's net income per share would have been reduced to the pro forma amounts indicated below (the following reflects the impact of the 2-for-1 stock split):
December 31, -------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands, except per share amounts) Net Income: As reported..................................... $ 16,578 $ 11,619 $ 6,348 Pro forma....................................... $ 15,778 $ 11,210 $ 6,107 Basic net income per share As reported..................................... $ 1.75 $ 1.26 $ 0.72 Pro forma....................................... $ 1.66 $ 1.22 $ 0.69 Diluted net income per share As reported..................................... $ 1.62 $ 1.17 $ 0.67 Pro forma....................................... $ 1.54 $ 1.13 $ 0.65
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 1998, 1997 and 1996, respectively; dividend yield of 1.75%, 1.8% and 2.0%; expected volatility of 39.84%, 22.9% and 19.3%; risk free rates of 4.54%, 6.3% and 6.0%. No adjustments have been made for forfeitures. The actual value, if any, that the option holder will realize from these options will depend solely on the increase in the stock price over the option price when the options are exercised. A summary of the Company's stock option plan as of December 31, 1998, 1997, and 1996 and changes during the years ended on those dates is presented below (as adjusted for the 2 for 1 stock split):
1998 1997 1996 ---------------------- ---------------------- ---------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price ------- -------------- ------- -------------- ------- -------------- Outstanding at beginning of year................ 1,390 $11.27 1,316 $ 7.62 1,242 $ 5.46 Granted................. 558 31.29 312 24.11 482 10.12 Exercised............... (241) 7.15 (217) 4.92 (376) 3.95 Forfeited............... (65) 16.39 (21) 5.27 (32) 6.03 ----- ------ ----- ------ ----- ------ Outstanding at end of year................... 1,642 17.83 1,390 11.27 1,316 7.62 ===== ====== ===== ====== ===== ====== Options exercisable at year-end............... 676 8.63 750 6.97 624 6.32 ===== ====== ===== ====== ===== ====== Weighted average fair value of options granted during the year................... $11.63 $ 6.31 $ 2.87 ====== ====== ======
A-47 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 The following table summarizes information about stock options outstanding at December 31, 1998 (as adjusted for the 2-for-1 stock split).
Options Outstanding Options Exercisable --------------------------------------------------- ---------------------------- Number Number Exercise Outstanding Weighted Average Weighted Average Exercisable Weighted Average Price Range (000's) Exercise Price Remaining Life (years) (000's) Exercise Price ------------- ----------- ---------------- ---------------------- ----------- ---------------- $ 3.06-$ 4.68 71 $ 3.75 1.4 71 $ 3.75 $ 4.86-$ 9.38 512 6.78 5.7 426 6.57 $10.88-$17.00 221 11.34 7.8 121 11.49 $17.13-$25.00 286 24.26 9.0 58 24.27 $25.38-$30.00 78 27.85 9.4 -- -- $31.50-$38.50 474 33.61 9.9 -- --
401(k) Savings Plan The Company has a 401(k) tax deferred savings plan under which eligible employees may elect to defer a portion of their salary (up to 15%) as a contribution to the plan. The Company matches the employees contributions at a rate set by the Board of Directors (currently 62.5% of the first 8% of deferral of an individual's total compensation). The matching contribution vests ratably over the first four years of employment. The Company has merged the 401(k) plans of PBC and Golden Gate into the Company's plan. For the years ended December 31, 1998, 1997 and 1996, the Company contributed $812,000, $672,000 and $379,000, respectively to the 401(k) plans. Employee Stock Purchase Plan The Company has established an Employee Stock Purchase Plan, as amended, under section 423(b) of the Internal Revenue Code which allows eligible employees to set aside up to 15% of their compensation toward the purchase of the Company's stock for an aggregate total of 267,868 shares. Under the plan the purchase price is 85% of the lower of the fair market value at the beginning or end of each three month offering period. During 1998, employees purchased 29,670 shares of common stock for an aggregate purchase price of $656,000 compared to the purchase of 30,320 shares of common stock for an aggregate purchase price of $347,000 in 1997 and 21,264 shares of common stock for an aggregate purchase price of $137,000 in 1996. There were 104,646 shares remaining in the plan available for purchase by employees at December 31, 1998. All shares amounts have been restated to reflect the 2-for-1 stock split declared to shareholders of record as of April 30, 1998. Supplemental Employee Compensation Benefits Agreements The Company has entered into supplemental employee compensation benefits agreements with certain executive and senior officers. Under these agreements, the Company is generally obligated to provide for each such employee or their beneficiaries, during a period of up to 15 to 20 years after the employee's death, disability or retirement, annual benefits as defined in each specific agreement. The estimated present value of future benefits to be paid is being accrued over the vesting period of the participants. Expenses accrued for this plan for the years ended December 31, 1998, 1997 and 1996 totaled $540,000, $503,000 and $310,000, respectively. The related accumulated accrued liability of at December 31, 1998 is approximately $2.2 million. Depending on the agreement, the Company and the employees are beneficiaries of life insurance policies that have been purchased as a method of financing the benefits under the agreements. At December 31, 1998 and 1997, the Company's cash surrender value of these policies was approximately $32.0 million and $9.4 million, respectively and is included in other assets. A-48 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 Deferred Compensation Plan Effective November 19, 1997, the Company adopted the Greater Bay Bancorp 1997 Elective Deferral Compensation Plan (the "Deferred Plan") that allows eligible officers and directors of the Company to defer a portion of their bonuses, director fees and other compensation. The deferred compensation will earn interest calculated annually based on a short-term interest reference rate. All participants are fully vested at all times in their contributions to the Deferred Plan. At December 31, 1998, $834,000 of deferred compensation under this plan is included in other liabilities in the accompanying consolidated balance sheets. Additionally, under deferred compensation agreements that were established at PBC prior to its merger with the Company, there was approximately $1.1 million of deferred compensation which is included in other liabilities. Change of Control In the event of a change in control, the supplemental employee compensation benefits agreements with certain executive and senior officers may require payments to be made by the Company that are currently not recognized in the accompanying consolidated financial statements. NOTE 14--RELATED PARTY TRANSACTIONS Loans made to executive officers, directors and their affiliates, are made subject to approval by the Directors' Loan Committee and the Board of Directors. An analysis of total loans to related parties for the years ended December 31, 1998 and 1997 is shown below:
1998 1997 ----------- ----------- (Dollars in thousands) Balance, January 1.................................. $ 16,309 $ 10,374 Additions........................................... 32,729 15,658 Repayments.......................................... (12,376) (9,723) ----------- ---------- Balance, December 31................................ $ 36,662 $ 16,309 =========== ========== Undisbursed commitments, at year end................ $ 5,707 $ 8,296 =========== ==========
NOTE 15--COMMITMENTS AND CONTINGENT LIABILITIES Lease Commitments The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under all noncancelable operating leases as of December 31, 1998 are below:
Years Ended December 31, ------------ (Dollars in thousands) 1999............................................................ $ 3,515 2000............................................................ 3,597 2001............................................................ 3,629 2002............................................................ 3,152 2003............................................................ 1,871 Thereafter...................................................... 8,864 ------- Total......................................................... $24,628 =======
A-49 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 The Company subleases that portion of the available space that is not utilized. Sublease rental income for the years ended December 31, 1998, 1997, and 1996 was $607,000, $882,000, and $309,000, respectively. Gross rental expense for the years ended December 31, 1998, 1997, and 1996 was $3.0 million, $2.8 million, and $2.0 million, respectively. Other Commitments and Contingent Liabilities In the normal course of business, various commitments and contingent liabilities are outstanding, such as guarantees and commitments to extend credit, that are not reflected in the accompanying consolidated financial statements. Commitments to fund loans were $488.1 million and $332.9 million and standby letters of credit were $16.3 million and $15.1 million, at December 31, 1998 and 1997, respectively. The Company's exposure to credit loss is limited to amounts funded or drawn; however, at December 31, 1998, no losses are anticipated as a result of these commitments. Loan commitments which have fixed expiration dates and require the payment of a fee are typically contingent upon the borrower meeting certain financial and other covenants. Approximately $xx million of these commitments relate to real estate construction and land loans and are expected to fund within the next 12 months. However, the remainder relates primarily to revolving lines of credit or other commercial loans, and many of these commitments are expected to expire without being drawn upon, therefore the total commitments do not necessarily represent future cash requirements. The Banks evaluate each potential borrower and the necessary collateral on an individual basis. Collateral varies, but may include real property, bank deposits, debt or equity securities, or business assets. Stand-by letters of credit are conditional commitments written by the Banks to guarantee the performance of a client to a third party. These guarantees are issued primarily related to purchases of inventory by the Banks' commercial clients, and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to clients, and the Banks accordingly use evaluation and collateral requirements similar to those for loan commitments. In the ordinary course of business there are various assertions, claims and legal proceedings pending against the Company. Management is of the opinion that the ultimate resolution of these proceedings will not have a material adverse effect on the consolidated financial position or results of operations of the Company. NOTE 16--SHAREHOLDERS' RIGHTS PLAN In 1998 Greater Bay adopted a shareholder rights plan designed to maximize the long-term value of the Company and to protect the Company's shareholders from improper takeover tactics and takeover bids that are not fair to all shareholders. In accordance with the plan, preferred share purchase rights were distributed as a dividend at the rate of one right for each common share held of record as of the close of business on November 28, 1998. The rights, which are not immediately exercisable, entitle the holders to purchase one one- hundredth of a share of Series A Preferred Stock at a price of $145.00 upon the occurrence of certain triggering events. In the event of an acquisition not approved by the Board, each right enables its holder (other than the acquirer) to purchase the Preferred Stock at 50% of the market price. Further, in the event the Company is acquired in an unwanted merger or business combination, each right enables the holder to purchase shares of the acquiring entity at a similar discount. Under certain circumstances, the rights may be exchanged for common shares of the Company. The Board may, in its sole discretion, redeem the rights at any time prior to any of the triggering events. The rights can be exercised and separate rights certificates distributed only if any of the following events occur: acquisition by a person of 10% or more of the Company's common share; a tender offer for 10% or more of the A-50 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 Company's common shares; or ownership of 10% or more of the Company's common shares by a shareholder whose actions are likely to have a material adverse impact on the Company or shareholder interests. The rights will initially trade automatically with the common shares. The rights are not deemed by the Board of Directors to be presently exercisable. NOTE 17--REGULATORY MATTERS The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum capital amounts and ratios (as defined in the regulations) and are set forth in the table below. At December 31, 1998 and 1997 the Company and the Banks met all capital adequacy requirements to which they are subject. As of December 31, 1998, the most recent notification from the regulators categorized the Company and the Banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Company and the Banks must maintain minimum total risk-based, Tier 1 risk- based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that determination that management believes have changed the institution's category. The Company and the Bank's actual 1998 and 1997 capital amounts and ratios are as follows: A-51 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996
As of December 31, 1998 -------------------------------------------- To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions -------------- ------------- ------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- ------- ----- ------- ----- (Dollars in thousands) Total Capital (To Risk Weighted Assets): Greater Bay Bancorp........... $161,103 12.94% $99,627 8.00% N/A Cupertino National Bank....... 59,224 10.12 46,822 8.00 $58,527 10.00% Golden Gate Bank.............. 10,194 11.01 7,406 8.00 9,257 10.00 Mid-Peninsula Bank............ 47,111 11.51 32,747 8.00 40,934 10.00 Peninsula Bank of Commerce.... 18,256 12.37 11,809 8.00 14,761 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp........... $123,287 9.90% $49,813 4.00% N/A Cupertino National Bank....... 48,845 8.35 23,411 4.00 $35,116 6.00% Golden Gate Bank.............. 9,036 9.76 3,703 4.00 5,554 6.00 Mid-Peninsula Bank............ 41,990 10.26 16,373 4.00 24,560 6.00 Peninsula Bank of Commerce.... 16,408 11.12 5,904 4.00 8,857 6.00 Tier 1 Capital/Leverage (To Average Assets): Greater Bay Bancorp........... $123,287 7.81% $63,132 4.00% N/A Cupertino National Bank....... 48,845 7.47 26,138 4.00 $32,673 5.00% Golden Gate Bank.............. 9,036 6.89 5,243 4.00 6,554 5.00 Mid-Peninsula Bank............ 41,990 7.91 15,927 3.00 26,544 5.00 Peninsula Bank of Commerce.... 16,408 6.93 9,759 4.00 12,198 5.00 As of December 31, 1997 -------------------------------------------- To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions -------------- ------------- ------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- ------- ----- ------- ----- (Dollars in thousands) Total Capital (To Risk Weighted Assets): Greater Bay Bancorp........... $110,595 12.31% $71,882 8.00% N/A Cupertino National Bank....... 40,201 10.03 32,118 8.00 $40,147 10.00% Golden Gate Bank.............. 9,408 12.80 5,878 8.00 7,347 10.00 Mid-Peninsula Bank............ 34,727 11.88 23,416 8.00 29,269 10.00 Peninsula Bank of Commerce.... 15,252 14.33 8,525 8.00 10,657 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp........... $ 96,316 10.72% $35,941 4.00% N/A Cupertino National Bank....... 32,126 8.02 16,059 4.00 $24,088 6.00% Golden Gate Bank.............. 8,523 11.60 2,939 4.00 4,408 6.00 Mid-Peninsula Bank............ 31,064 10.63 11,708 4.00 17,562 6.00 Peninsula Bank of Commerce.... 13,917 13.08 4,263 4.00 6,394 6.00 Tier 1 Capital/Leverage (To Average Assets): Greater Bay Bancorp........... $ 96,316 8.40% $45,873 4.00% N/A Cupertino National Bank....... 32,126 7.08 18,189 4.00 $22,737 5.00% Golden Gate Bank.............. 8,523 9.30 3,666 4.00 4,582 5.00 Mid-Peninsula Bank............ 31,064 8.54 10,935 3.00 18,225 5.00 Peninsula Bank of Commerce.... 13,917 6.65 8,401 4.00 10,501 5.00
A-52 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 NOTE 18--RESTRICTIONS ON SUBSIDIARY TRANSACTIONS Total dividends which may be declared by the Banks without receiving prior approval from regulatory authorities are limited to the lesser of the Banks' retained earnings or the net income of the Banks for the latest three fiscal years, less dividends previously declared during that period. The Banks are subject to certain restrictions under the Federal Reserve Act, including restrictions on the extension of credit to affiliates. In particular, the Banks are prohibited from lending to Greater Bay unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Banks are limited to 10% of the Bank's shareholders' equity, or a maximum of $9.3 million at December 31, 1998. No such advances were made during 1998 or exist as of December 31, 1998. NOTE 19--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, ------------------ 1998 1997* -------- -------- (Dollars in thousands) Assets: Cash and cash equivalents................................ $ 5,284 $ 4,804 Investment in subsidiaries............................... 118,601 86,592 Other investments........................................ 17,936 5,717 Subordinated debentures issued by subsidiary............. 3,000 3,000 Other assets............................................. 8,834 3,198 -------- -------- Total assets......................................... $153,655 $103,311 ======== ======== Liabilities and shareholders' equity: Subordinated debt........................................ $ 54,547 $ 23,618 Other liabilities........................................ 6,432 3,153 -------- -------- Total liabilities........................................ 60,979 26,771 Shareholders' equity: Common stock........................................... 57,283 52,269 Accumulated other comprehensive income................. (96) 223 Retained earnings...................................... 35,489 24,048 -------- -------- Total shareholders' equity........................... 92,676 76,540 -------- -------- Total liabilities and shareholders' equity........... $153,655 $103,311 ======== ========
-------- * Restated on a historical basis to reflect the mergers with Pacific Rim Bancorporation and Pacific Business Funding Corporation. A-53 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 Parent Company Only--Income Statements
Years Ended December 31, --------------------------- 1998 1997* 1996* -------- -------- ------- (Dollars in thousands) Income: Interest income............................. $ 969 $ 389 $ 531 Other income................................ 47 27 142 -------- -------- ------- Total..................................... 1,016 416 673 -------- -------- ------- Provision for loan losses..................... -- -- 113 Expenses: Interest expense............................ 3,195 1,458 -- Salaries.................................... 8,908 5,978 135 Occupancy and equipment..................... 1,966 1,154 461 Other expenses.............................. 5,242 2,532 1,651 Less: rentals and fees received from Banks.. (15,866) (10,201) (460) -------- -------- ------- Total..................................... 3,445 921 1,787 -------- -------- ------- Loss before taxes and equity in undistributed net income of subsidiaries................... (2,429) (505) (1,227) Income tax expense............................ (1,616) (249) 21 -------- -------- ------- Income (loss) before equity in undistributed net income of subsidiaries................... (813) (256) (1,248) -------- -------- ------- Equity in undistributed net income of subsidiaries................................. 17,391 11,875 7,596 -------- -------- ------- Net income.................................... $ 16,578 $ 11,619 $ 6,348 ======== ======== =======
- -------- * Restated on a historical basis to reflect the mergers with Peninsula Bank of Commerce, Pacific Rim Bancorporation and Pacific Business Funding Corporation. A-54 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 Parent Company Only--Statements of Cash Flows
Years Ended December 31, --------------------------- 1998 1997* 1996* -------- -------- ------- (Dollars in thousands) Cash flows-operating activities Net income.................................... $ 16,578 $ 11,619 $ 6,348 Reconciliation of net income to net cash from operations: Equity in undistributed net income of subsidiaries............................... (17,391) (11,875) (7,596) Provision for loan losses................... -- -- 113 Net change in other assets.................. (4,678) (1,601) 271 Net change in other liabilities............. 2,128 2,524 142 -------- -------- ------- Operating cash flow, net...................... (3,363) 667 (722) -------- -------- ------- Cash flows-investing activities Purchases of available for sale securities.... (84,130) (8,293) -- Proceeds from sale and maturities of available for sale securities.......................... 71,940 3,156 -- Proceeds from sale of OREO.................... 407 -- -- Principal repayment of loans receivable....... -- -- 113 Dividends from subsidiaries................... 3,249 3,617 769 Capital contribution to the subsidiaries...... (17,500) (13,818) (1,003) -------- -------- ------- Investing cash flows, net..................... (26,034) (15,338) (121) -------- -------- ------- Cash flows-financing activities Proceeds from issuance of subordinated debt... 30,000 20,618 -- Proceeds from exercise of stock options and employees stock purchases.................... 5,014 2,193 1,954 Payment of cash dividends..................... (5,137) (3,986) (2,311) -------- -------- ------- Financing cash flows, net..................... 29,877 18,825 (357) -------- -------- ------- Net increase in cash and cash equivalents..... 480 4,154 (1,200) Cash and cash equivalents at the beginning of the year..................................... 4,804 650 1,850 -------- -------- ------- Cash and cash equivalents at end of the year.. $ 5,284 $ 4,804 $ 650 ======== ======== =======
- -------- * Restated on a historical basis to reflect the mergers with Peninsula Bank of Commerce, Pacific Rim Bancorporation and Pacific Business Funding Corporation. A-55 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 NOTE 20--FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments. The estimated fair value of financial instruments of the Company as of December 31, 1998 and 1997 are as follows:
1998 1997 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- (Dollars in thousands) Financial assets: Cash and due from banks.................. $ 59,975 $ 59,975 $ 53,167 $ 53,167 Short term investments................... 121,176 121,176 178,549 178,380 Investment securities.................... 342,294 343,846 213,127 215,912 Loans, net............................... 984,487 990,408 735,233 718,670 Financial liabilities: Deposits: Demand, noninterest-bearing............ 268,448 268,448 219,495 219,495 MMDA, NOW and Savings.................. 854,392 854,392 627,475 627,476 Time certificates, $100,000 and over... 168,075 163,419 183,147 183,103 Other time certificates................ 51,577 65,821 41,031 41,013 Other borrowings......................... 72,585 74,156 32,355 19,480 Subordinated debt........................ 3,000 2,999 3,000 3,337 Company obligated mandatory redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures.............................. 50,000 49,829 20,000 21,210
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 longer term investments, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, as such, fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms. 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 A-56 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 loan. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The fair value of performing variable rate loans is judged to approximate book value for those loans whose rates reprice in less than 90 days. Rate floors and rate ceilings are not considered for fair value purposes as the number of loans with such limitations is not significant. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities and Borrowings The fair value for all deposits without fixed maturities and short term borrowings is considered to be equal to the carrying value. The fair value for fixed rate time deposits and subordinated debt are estimated by discounting future cash flows using interest rates currently offered on time deposits or subordinated debt with similar remaining maturities. Derivative Instruments The fair value of the single interest rate swap the Company uses as a cash flow hedge on the TPS II is estimated by discounting future cash flows using current interest rates. The fair value of the hedge is presented in the above table with the fair value of the related TPS II. Commitments to Extend Credit and Standby Letters of Credit The majority of the Company's commitments to extend credit carry current market interest rate if converted to loans. Because these commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the table. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic condition, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have significant effect on fair value estimates and have been considered in many of the estimates. NOTE 21--SUBSEQUENT EVENT On January 26, 1999 the Company and Bay Area Bancshares ("BA Bancshares"), the holding company of Bay Area Bank ("BAB"), signed a definitive agreement for a merger between the two companies. The terms of the A-57 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 agreement provide for BA Bancshares shareholders to receive approximately 1,393,000 shares of Greater Bay Bancorp stock subject to certain adjustments, in a tax-free exchange to be accounted for as a pooling-of-interest. Following the transaction, the shareholders of BA Bancshares will own approximately 12.7% of the combined company. The transaction is expected to be completed early in the second quarter of 1999, subject to approval of BA Bancshares shareholders and regulatory approvals. BAB's office is located in Redwood City, California. NOTE 22--ACTIVITY OF BUSINESS SEGMENTS In 1998 the Company adopted SFAS No. 131. The prior year's segment information has been restated to present the Company's two reportable segments, community banking and trust operations. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." Segment data includes intersegment revenue, as well as charges allocating all corporate-headquarters costs to each of its operating segments. The Company evaluates the performances of its segments and allocates resources to them based on net interest income, other income, net income before income taxes, total assets and deposits. The Company is organized primarily along community banking and trust divisions. Ten of the divisions have been aggregated into the "community banking" segment. Community banking provides a range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professional and other individuals. The GBB Trust division has been shown as the "trust operations" segment. The Company's business is conducted principally in the U.S.; foreign operations are not material. The following table shows each segments key operating results and financial position for the years ended or as of December 31, 1998, 1997 and 1996:
1998 1997 1996 --------------------- --------------------- -------------------- Community Trust Community Trust Community Trust Banking Operations Banking Operations Banking Operations ---------- ---------- ---------- ---------- --------- ---------- (Dollars in thousands) Net interest income (1).................... $ 66,815 $ 859 $ 55,396 $ 141 $ 39,472 $ 501 Other income............ 4,720 2,488 4,422 2,092 3,141 1,340 Operating expenses, ex- cluding merger and other related nonrecur- ring costs............. 37,374 2,429 31,367 1,966 25,731 1,898 Net income before income taxes (1).............. 25,465 918 18,331 267 11,610 (57) Total assets............ 1,550,811 -- 1,203,946 -- 917,677 -- Deposits................ 1,274,953 67,539 1,004,827 66,321 779,416 41,717 Assets under manage- ment................... -- 649,336 -- 577,746 -- 418,053
- -------- (1) Includes intercompany earnings allocation charge which is eliminated in consolidation A-58 GREATER BAY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 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, 1998, 1997 and 1996 is presented below.
1998 1997 1996 ---------- ---------- -------- (Dollars in thousands) Net interest income and other income Total segment net interest income and other income.................................... $ 74,882 $ 62,051 $ 44,454 Parent company net interest income and other income.............................. (2,179) (1,042) 673 ---------- ---------- -------- Consolidated net interest income and other income............................ $ 72,703 $ 61,009 $ 45,127 ========== ========== ======== Net income before taxes Total segment net income before income taxes..................................... $ 26,383 $ 18,598 $ 11,553 Parent company net income before income taxes..................................... (2,429) (505) (1,227) ---------- ---------- -------- Consolidated net income before income taxes................................... $ 23,954 $ 18,093 $ 10,326 ========== ========== ======== Total assets Total segment assets....................... $1,550,811 $1,203,946 $917,677 Parent company assets...................... 32,054 13,719 2,247 ---------- ---------- -------- Consolidated total assets................ $1,582,865 $1,217,665 $919,924 ========== ========== ========
NOTE 23--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
December 31, September 30, June 30, March 31, --------------- --------------- --------------- --------------- 1998 1997 1998 1997 1998 1997 1998 1997 ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands, except per share data) (1) Interest income......... $29,989 $24,853 $29,861 $23,024 $27,510 $21,521 $25,560 $19,129 Net interest income..... 17,494 15,237 16,908 14,179 15,918 12,975 15,128 12,077 Provision for loan losses................. 1,901 1,109 1,791 1,284 1,347 2,340 996 2,053 Other income............ 2,497 1,573 1,661 1,565 1,571 2,564 1,526 839 Other expenses.......... 11,114 12,898 10,573 8,491 11,245 8,357 9,782 6,384 Income before taxes..... 6,976 2,803 6,205 5,969 4,897 4,842 5,876 4,479 Net income.............. 4,983 1,809 4,394 3,822 3,222 3,125 3,979 2,863 Net income per share: Basic.................. $ 0.52 $ 0.20 $ 0.46 $ 0.41 $ 0.34 $ 0.34 $ 0.43 $ 0.31 Diluted................ $ 0.48 $ 0.18 $ 0.43 $ 0.38 $ 0.31 $ 0.32 $ 0.40 $ 0.29
- -------- (1) Quarterly amounts have been restated on a historical basis to reflect the mergers with Peninsula Bank of Commerce, Pacific Rim Bancorporation and Pacific Business Funding Corporation on a pooling of interests basis. A-59 REPORT OF INDEPENDENT ACCOUNTANTS San Francisco, California February 8, 1999 The Board of Directors and Shareholders 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 Subsidiaries (the Company) at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments in 1998. /s/ PricewaterhouseCoopers LLP A-60 EXHIBIT INDEX
Exhibit No. Exhibit ------- ------- 2.1 Agreement and Plan of Reorganization by and between Greater Bay Bancorp and Bay Area Bancshares dated January 26, 1999. (The schedules to this agreement are not being filed herewith. Greater Bay Bancorp agrees to furnish supplemental copies of any omitted schedules to the SEC upon request.) 3.1 Articles of Incorporation of Greater Bay Bancorp, as amended. 3.2 Bylaws of Greater Bay Bancorp, as amended. 3.3 Certificate of Determination of Series A Preferred Stock of Greater Bay Bancorp (filed as Exhibit A to Exhibit 4.1 hereto). 4.1 Rights Agreement.(1) 4.2 Junior Subordinated Indenture dated as of March 31, 1997 between Greater Bay Bancorp and Wilmington Trust Company, as Trustee.(2) 4.3 Officers' Certificate and Company Order, dated March 31, 1997.(2) 4.4 Certificate of Trust of GBB Capital I.(3) 4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997.(3) 4.6.1 Amended and Restated Trust Agreement of GBB Capital I, among Greater Bay Bancorp, Wilmington Trust Company and the Administrative Trustees named therein dated as of March 31, 1997.(2) 4.6.2 Successor Administrative Trustee and First Amendment to Amended and Restated Trust Agreement. 4.7 Trust Preferred Certificate of GBB Capital I.(2) 4.8 Common Securities Certificate of GBB Capital I.(2) 4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington Trust Company, dated as of March 31, 1997.(2) 4.10 Agreement as to Expenses and Liabilities, dated as of March 31, 1997.(2) 4.11 Form of Subordinated Debentures.(4) 4.12 Supplemental Debenture Agreement of Cupertino National Bancorp dated as of November 22, 1996.(3) 4.13 Supplemental Debenture Agreement dated November 27, 1996 between Cupertino National Bancorp and Mid-Peninsula Bancorp.(3) 4.14 Supplemental Debenture Agreement, dated as of March 27, 1997.(2) 4.15 Indenture between Greater Bay Bancorp and Wilmington Trust Company, as Debenture Trustee, dated as of August 12, 1998.(5) 4.16 Form of Exchange Junior Subordinated Debentures (filed as Exhibit A to Exhibit 4.15 hereto). 4.17 Certificate of Trust of GBB Capital II, dated as of May 18, 1998.(5) 4.18 Amended and Restated Trust Agreement of GBB Capital II, among Greater Bay Bancorp, Wilmington Trust Company and the Administrative Trustees named therein dated as of August 12, 1998.(5) 4.19 Form of Exchange Capital Security Certificate (filed as Exhibit A-1 to Exhibit 4.18 hereto). 4.20 Common Securities Guarantee Agreement of Greater Bay Bancorp, dated as of August 12, 1998.(5) 4.21 Series B Capital Securities Guarantee Agreement of Greater Bay Bancorp and Wilmington Trust Company dated as of November 27, 1998. 4.22 Liquidated Damages Agreement among Greater Bay Bancorp, GBB Capital II, and Sandler O'Neill and Partners, L.P., dated as of August 7, 1998.(5) 4.23 Registration Rights Agreement between Greater Bay Bancorp and The Leo K.W. Lum PRB Revocable Trust dated May 8, 1998.(6) 10.1 Employment Agreement with David L. Kalkbrenner, dated March 3, 1992.(8), (9) 10.1.1 Amendment No. 1 to Employment Agreement with David L. Kalkbrenner, dated March 27, 1998.(7), (8) 10.2 Employment, Severance and Retirement Benefits Agreement with Steven C. Smith dated July 31, 1995.(3), (8)
Exhibit No. Exhibit ------- ------- 10.2.1 Amendment No. 1 to Employment, Severance and Retirement Benefits Agreement with Steven C. Smith, dated March 27, 1998.(7), (8) 10.3 Employment, Severance and Retirement Benefits Agreement with David R. Hood dated July 31, 1995.(3), (8) 10.3.1 Amendment No. 1 to Employment, Severance and Retirement Benefits Agreement with David R. Hood, dated March 27, 1998.(7), (8) 10.4 Greater Bay Bancorp 1996 Stock Option Plan, as amended.(8) 10.5 Greater Bay Bancorp 401(k) Profit Sharing Plan.(7), (8) 10.6.1 Greater Bay Bancorp Employee Stock Purchase Plan.(8), (10) 10.6.2 Amendment to Greater Bay Bancorp Employee Stock Purchase Plan.(7), (8) 10.7 Greater Bay Bancorp Change of Control Pay Plan I.(7), (8) 10.8 Greater Bay Bancorp Change of Control Pay Plan II.(7), (8) 10.9 Greater Bay Bancorp Termination and Layoff Plan I.(7), (8) 10.10 Greater Bay Bancorp Termination and Layoff Plan II.(7), (8) 10.11.1 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan.(7), (8) 10.11.2 Amendment to Greater Bay Bancorp 1997 Elective Deferred Compensation Plan.(8) 10.12 Form of Indemnification Agreement between Greater Bay Bancorp and with directors and certain executive officers.(3) 11.1 Statements re Computation of Earnings per Share. 12.1 Statement re Computation of Ratios of Earnings to Fixed Charges. 21.1 Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 27.1 Financial Data Schedule.
- -------- (1) Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed with the SEC on November 25, 1998. (2) Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K (File No. 000-25034) dated June 5, 1997. (3) Incorporated by reference from Greater Bay's Registration Statement on Form S-1 (File No. 333-22783) filed with the SEC on March 5, 1997. (4) Incorporated herein by reference from Exhibit 1 of Cupertino National Bancorp's Form 8-K (File No. 0-18015), filed with the SEC on October 25, 1995. (5) Incorporated by reference from Greater Bay's Current Report on Form 8-K (File No. 000-25034) filed with the SEC on August 28, 1998. (6) Incorporated by reference from Greater Bay Bancorp's Current Report on Form 8-K filed with the SEC on May 20, 1998. (7) Incorporated by reference from Greater Bay Bancorp's Annual Report on Form 10-K filed with the SEC on March 31, 1998. (8) Represents executive compensation plans and arrangements of Greater Bay Bancorp. (9) Incorporated herein by reference from Exhibit 10.15 to Mid-Peninsula Bancorp's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0-25034), filed with the SEC on March 30, 1995. (10) Incorporated herein by reference from Greater Bay Bancorp's Proxy Statement for Annual Meeting of Shareholders (File No. 000-25034), filed with the SEC on May 13, 1997. EX-2.1 2 AGREEMENT & PLAN OF REORGANIZATION EXHIBIT 2.1 AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG GREATER BAY BANCORP AND BAY AREA BANCSHARES January 26, 1999 AGREEMENT AND PLAN OF REORGANIZATION ------------------------------------ THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and entered into as of the 26th day of January, 1999, by and between GREATER BAY BANCORP, a California corporation ("GBB"), and BAY AREA BANCSHARES, a California corporation ("BAB"). WHEREAS, the Boards of Directors of GBB and BAB deem advisable and in the best interests of their respective shareholders the merger of BAB with and into GBB (the "Merger") upon the terms and conditions set forth herein and in accordance with the California General Corporation Law (the "CGCL") (GBB, following the effectiveness of the Merger, being hereinafter sometimes referred to as the "Surviving Corporation"); WHEREAS, the Boards of Directors of GBB and BAB have approved the Merger pursuant to this Agreement and pursuant to the Agreement of Merger by and between GBB and BAB (the "Agreement of Merger"), in substantially the form of Exhibit A attached hereto, pursuant to which BAB will merge with and into GBB - --------- and each outstanding share of BAB common stock, no par value ("BAB Stock"), excluding any BAB Perfected Dissenting Shares (as defined below), will be converted into the right to receive a specified amount of GBB common stock, no par value ("GBB Stock"), upon the terms and subject to the conditions set forth herein; and WHEREAS, the Merger is intended to qualify as a tax-free reorganization within the meaning of the provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, on the basis of the foregoing recitals and in consideration of the mutual covenants, agreements, representations and warranties contained herein, the parties hereto do covenant and agree as follows: ARTICLE 1. DEFINITIONS ----------- Except as otherwise expressly provided for in this Agreement, or unless the context otherwise requires, as used throughout this Agreement the following terms shall have the respective meanings specified below: "Affiliate" of, or a person "Affiliated" with, a specific person(s) is a person that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the person(s) specified. 1 "Affiliated Group" means, with respect to any entity, a group of entities required or permitted to file consolidated, combined or unitary Tax Returns (as defined herein). "Agreement of Merger" has the meaning set forth in the second recital of this Agreement. "Average Closing Price" means the average of the daily closing price of a share of GBB Stock reported on the Nasdaq National Market System during the 20 consecutive trading days ending at the end of the third trading day immediately preceding the Effective Time of the Merger (as defined herein). "BAB 401(k) Plan" means the Bay Area Bank 401(k) Plan. "BAB Conflicts and Consents List" has the meaning set forth in Section 4.6. "BAB Contract List" has the meaning set forth in Section 4.16. "BAB Derivatives List" has the meaning set forth in Section 4.32. "BAB Dissenting Shares" means any shares of BAB Stock held by "dissenting shareholders" within the meaning of Chapter 13 of the CGCL. "BAB Employee Plan List" has the meaning set forth in Section 4.20. "BAB Environmental Compliance List" has the meaning set forth in Section 4.12.2. "BAB Filings" has the meaning set forth in Section 4.5. "BAB Filings List" has the meaning set forth in Section 4.5. "BAB Fully Diluted Book Value Per Share" means the sum of (a) shareholders' equity as reflected on the consolidated financial statements to be provided by BAB to GBB pursuant to Section 11.14, including any adjustments relating to litigation expenses, plus (b) the consideration to be paid upon the exercise of any BAB Stock Option (as defined herein) then issued and outstanding, divided by the sum of (y) the number of shares of BAB Stock then issued and outstanding, plus (z) such number of shares of BAB Stock issuable upon the exercise of any BAB Stock Option. "BAB Indemnification List" has the meaning set forth in Section 4.30. "BAB Insurance List" has the meaning set forth in Section 4.7. "BAB Investment Securities List" has the meaning set forth in Section 4.26. 2 "BAB Intellectual Property List" has the meaning set forth in Section 4.35. "BAB List" means any list required to be furnished by BAB to GBB herewith. "BAB Litigation List" has the meaning set forth in Section 4.10. "BAB Loan List" has the meaning set forth in Section 4.25. "BAB Offices List" has the meaning set forth in Section 4.23. "BAB Operating Losses List" has the meaning set forth in Section 4.24. "BAB Perfected Dissenting Shares" means BAB Dissenting Shares which the holders thereof have not withdrawn or caused to lose their status as BAB Dissenting Shares. "BAB Personal Property List" has the meaning set forth in Section 4.8. "BAB Real Property List" has the meaning set forth in Section 4.9. "BAB SAR Plan" means the Bay Area Bancshares 1996 Stock Appreciation Rights Plan, as amended. "BAB Shareholders' Meeting" means the meeting of BAB's shareholders referred to in Section 6.7. "BAB Stock" has the meaning set forth in the second recital of this Agreement. "BAB Stock Option" means any option issued pursuant to the BAB Stock Option Plan. "BAB Stock Option Plan" means the Bay Area Bancshares 1993 Stock Option Plan, as amended. "BAB Supplied Information" has the meaning set forth in Section 4.34. "BAB Tax List" has the meaning set forth in Section 4.11. "BAB Undisclosed Liabilities List" has the meaning set forth in Section 4.19. "BABANK" means Bay Area Bank, a California state chartered bank and wholly owned subsidiary of BAB. 3 "Banks" means CNB, GGB, MPB and PBC. "Benefit Arrangements" has the meaning set forth in Section 4.20.2. "BHC Act" means the Bank Holding Company Act of 1956, as amended. "Business Day" means any day other than a Saturday, Sunday or day on which a bank chartered under the laws of the State of California is closed. "CFC" means California Financial Code. "CGCL" has the meaning set forth in the second recital of this Agreement. "Certificates" has the meaning set forth in Section 2.5.2. "Classified Credits" has the meaning set forth in Section 6.8. "Closing" means the consummation of the Merger provided for in Article 2 of this Agreement on the Closing Date (as defined herein) at the offices of Greater Bay Bancorp, 2860 West Bayshore Road, Palo Alto, California, or at such other place as the parties may agree upon. "Closing Date" means the date which is the first Friday which follows the last to occur of (i) the approval of this Agreement and the transactions contemplated hereby by the shareholders of BAB, (ii) the receipt of all permits, authorizations, approvals and consents specified in Section 9.3 hereof, (iii) the expiration of all applicable waiting periods under the law, (iv) the expiration of the 30 day period following the mailing by BAB to its shareholders of a notice of approval of the Merger by the outstanding shares pursuant to Section 1301 of the CGCL, or such other date as the parties may agree upon. "CNB" means Cupertino National Bank, a national banking association and wholly owned subsidiary of GBB. "Code" shall have the meaning set forth in the third recital of this Agreement. "Colmery Agreement" means the written agreement dated August 15, 1998 between BAB and Joseph P. Colmery. "Commissioner" means the Commissioner of the Department of Financial Institutions of the State of California. "Competing Transaction" has the meaning set forth in Section 6.1.14. 4 "Comptroller" means the Comptroller of the Currency. "Conversion Ratio" has the meaning set forth in Section 2.2.1. "Covered Person" has the meaning set forth in Section 4.30. "DFI" means the Department of Financial Institutions of the State of California. "Effective Time of the Merger" means the date upon which the Merger is consummated and the Agreement of Merger is filed with the Secretary of State of the State of California. "Employee Plans" has the meaning set forth in Section 4.20.1. "Encumbrance" shall mean any option, pledge, security interest, lien, charge, encumbrance or restriction (whether on voting or disposition or otherwise), whether imposed by agreement, understanding, law or otherwise. "Environmental Regulations" has the meaning set forth in Section 4.12.2. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliates" has the meaning set forth in Section 4.20.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Agent" means Norwest Bank Minnesota, N.A. "Exchange Fund" has the meaning set forth in Section 2.5.1 hereof. "FDIC" means the Federal Deposit Insurance Corporation "Financial Statements of GBB" means the audited consolidated financial statements of GBB consisting of the consolidated balance sheets as of December 31, 1994, 1995, 1996 and 1997, the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended and the related notes thereto and related opinions thereon for the years then ended and GBB's unaudited consolidated balance sheets and consolidated statement of operations and cash flows as of and for the nine month period ended September 30, 1998. "Financial Statements of BAB" means the audited consolidated financial statements of BAB consisting of the consolidated statements of condition as of December 31, 1994, 1995, 1996 and 1997, the related statements of operations, stockholders' equity and cash flows for the years then ended and the related notes thereto and related opinions thereon for the years then ended and BAB's 5 unaudited consolidated statements of financial conditions and statements of operations and cash flows as of and for the nine month period ended September 30, 1998. "Findley Agreement" means the letter agreement dated July 15, 1998 between Gary Steven Findley & Associates and BAB. "FRB" means the Board of Governors of the Federal Reserve System. "GBB 401(k) Plan" means the Greater Bay Bancorp 401(k) Profit Sharing Plan. "GBB Conflicts and Consents List" has the meaning set forth in Section 5.5. "GBB Filings" has the meaning set forth in Section 5.4. "GBB Litigation List" has the meaning set forth in Section 5.19. "GBB Stock" has the meaning set forth in the second recital of this Agreement. "GBB Stock Option Plan" means the Greater Bay Bancorp 1996 Stock Option Plan, as amended. "GBB Supplied Information" has the meaning set forth in Section 5.14. "GBB Undisclosed Liabilities List" has the meaning set forth in Section 5.21. "GGB" means Golden Gate Bank, a California state chartered bank and wholly owned subsidiary of GBB. "Governmental Entity" shall mean any court or tribunal in any jurisdiction or any United States federal, state, municipal, domestic, foreign or other administrative authority or instrumentality. "Hazardous Materials" has the meaning set forth in Section 4.12.2. "Immediate Family" means a person's spouse, parents, in-laws, children and siblings. "Investment Security" means any equity security or debt security as defined in Statement of Financial Accounting Standards No. 115. "IRS" means the Internal Revenue Service. "Merger" has the meaning set forth in the first recital of this Agreement. 6 "MPB" means Mid-Peninsula Bank, a California state chartered bank and wholly-owned subsidiary of GBB. "Operating Loss" has the meaning set forth in Section 4.24. "PBC" means Peninsula Bank of Commerce, a California state chartered bank and wholly owned subsidiary of GBB. "Person" means any individual, corporation, association, partnership, limited liability company, trust, joint venture, other entity, unincorporated body, government or governmental department or agency. "Proxy Statement and Prospectus" means the Proxy Statement and Prospectus that is included as part of the Registration Statement on Form S-4 (as defined herein) and used to solicit proxies for the BAB Shareholders' Meeting and to offer and sell the shares of GBB Stock to be issued in connection with the Merger. "PwC" means PricewaterhouseCoopers LLP, GBB's and BAB's independent accountants. "Related Group of Persons" means Affiliates, members of an Immediate Family or Persons the obligations of whom would be attributed to another Person pursuant to the regulations promulgated by the SEC (as defined herein). "Registration Statement on Form S-4" means the Registration Statement on Form S-4, and such amendments thereto, that is filed with the SEC to register the shares of GBB Stock to be issued in the Merger under the Securities Act and to clear use of the Proxy Statement and Prospectus in connection with the BAB Shareholders' Meeting pursuant to the regulations promulgated under the Exchange Act. "Scheduled Contracts" has the meaning set forth in Section 4.16. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Surviving Corporation" has the meaning set forth in the first recital of this Agreement. "Tanks" has the meaning set forth in Section 4.12.2. "Tax Return" means all returns, declarations, reports, estimates, information returns and statements required to be filed in respect of any Taxes. 7 "Taxes" means (i) all federal, state, local or foreign taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property, corporation and estimated taxes, custom duties, fees, assessments and charges of any kind whatsoever; (ii) all interest, penalties, fines, additions to tax or additional amounts imposed by any taxing authority in connection with any item described in clause (i); and (iii) any transferred liability in respect of any items described in clauses (i) and/or (ii). "Tax Sharing Agreement" means an agreement (whether or not in writing) pursuant to which tax losses of one entity are made available to another entity of the Affiliated Group or Affiliates for purpose of Taxes. "Understanding" means any contract, agreement, understanding, commitment or offer, whether oral or written, which may become a binding obligation if accepted by another Person. ARTICLE 2. TERMS OF MERGER --------------- 2.1. Effect of Merger and Surviving Corporation. At the Effective Time of ------------------------------------------ the Merger, BAB will be merged with and into GBB pursuant to the terms, conditions and provisions of the Agreement of Merger and in accordance with the applicable provisions of the CGCL. By virtue of the Merger, all the rights, privileges, powers and franchises and all property and assets of every kind and description of BAB and GBB shall be vested in and be held and enjoyed by the Surviving Corporation, without further act or deed, and all the interests of every kind of BAB and GBB, including all debts due to either of them on whatever account, shall be the property of the Surviving Corporation as they were of BAB and GBB and the title to any interest in real property and any interest in personal property vested by deed or otherwise in either BAB or GBB shall not revert or be in any way impaired by reason of the Merger; and all rights of creditors and liens upon any property of BAB and GBB shall be preserved unimpaired and all debts, liabilities and duties of BAB and GBB shall be debts, liabilities and duties of the Surviving Corporation and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. 2.2. Stock of BAB. Subject to Section 2.4, each share of BAB Stock issued ------------ and outstanding immediately prior to the Effective Time of the Merger shall, without any further action on the part of BAB or the holders of such shares, be treated on the basis set forth herein. 2.2.1. Conversion of BAB Stock. At the Effective Time of the ----------------------- Merger, pursuant to the Agreement of Merger, each outstanding share of BAB Stock excluding any BAB Perfected 8 Dissenting Shares or shares of BAB Stock held by GBB or the Banks (other than those held in a fiduciary capacity or as a result of debts previously contracted) shall, without any further action on the part of BAB or the holders of any such shares, be automatically cancelled and cease to be an issued and outstanding share of BAB Stock and be converted into (a) 1.44271 shares of GBB Stock in the event the Average Closing Price is less than $30.00; or (b) 1.38682 shares of GBB Stock in the event the Average Closing Price is $30.00 or more (as applicable, the "Conversion Ratio"). 2.2.2. BAB Perfected Dissenting Shares. BAB Perfected Dissenting ------------------------------- Shares shall not be converted into shares of GBB Stock, but shall, after the Effective Time of the Merger, be entitled only to such rights as are granted them by Chapter 13 of the CGCL. Each dissenting shareholder who is entitled to payment for his shares of BAB Stock shall receive such payment in an amount as determined pursuant to Chapter 13 of the CGCL. 2.2.3 Shares Held by GBB or the Banks. Shares of BAB Stock held by ------------------------------- GBB or the Banks (other than those held in a fiduciary capacity or as a result of debts previously contracted) shall be canceled and no consideration shall be issued in exchange therefor. 2.2.4. Dividends, Etc. If, prior to the Effective Time of the -------------- Merger, GBB shall declare a stock dividend or distribution upon or subdivide, split up, reclassify or combine the GBB Stock, or make a distribution on the GBB Stock in any security convertible into GBB Stock, with a record date prior to the Effective Time of the Merger, appropriate adjustment or adjustments will be made to the Conversion Ratio. 2.3. Effect on GBB Stock. On the Effective Time of the Merger, each ------------------- outstanding share of GBB Stock shall remain an outstanding share of GBB Stock and shall not be converted or otherwise affected by the Merger. 2.4. Fractional Shares. No fractional shares of GBB Stock shall be issued ----------------- in the Merger. In lieu thereof, each holder of BAB Stock who would otherwise be entitled to receive a fractional share shall receive an amount in cash equal to the product (calculated to the nearest hundredth) obtained by multiplying (a) the Average Closing Price times (b) the fraction of the share of GBB Stock to which such holder would otherwise be entitled. No such holder shall be entitled to dividends or other rights in respect of any such fraction. 2.5 Exchange Procedures. ------------------- 2.5.1. As of the Effective Time of the Merger, GBB shall have deposited with the Exchange Agent for the benefit of the holders of shares of BAB Stock, for exchange in accordance with this Section 2.5 through the Exchange Agent, certificates representing the shares of GBB Stock issuable pursuant to Section 2.2 in exchange for shares of BAB Stock outstanding immediately prior to the Effective Time of the Merger, and funds in an amount not less than the amount of cash payable in lieu of fractional shares of GBB Stock which would otherwise be issuable in connection 9 with Section 2.2 hereof but for the operation of Section 2.4 of this Agreement (collectively, the "Exchange Fund"). 2.5.2. GBB shall direct the Exchange Agent to mail, promptly after the Effective Time of the Merger, to each holder of record of a certificate or certificates which immediately prior to the Effective Time of the Merger represented outstanding shares of BAB Stock (the "Certificates") whose shares were converted into the right to receive shares of GBB Stock pursuant to Section 2.2 hereof, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as GBB and BAB may reasonably specify), and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of GBB Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by GBB, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of GBB Stock and cash in lieu of fractional shares which such holder has the right to receive pursuant to Sections 2.2 and 2.4 hereof, and the Certificate so surrendered shall forthwith be canceled. In the event a certificate is surrendered representing BAB Stock, the transfer of ownership which is not registered in the transfer records of BAB, a certificate representing the proper number of shares of GBB Stock may be issued to a transferee if the Certificate representing such BAB Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.5, each Certificate shall be deemed at any time after the Effective Time of the Merger to represent only the right to receive upon such surrender the certificate representing shares of GBB Stock and cash in lieu of any fractional shares of stock as contemplated by this Section 2.5. Notwithstanding anything to the contrary set forth herein, if any holder of shares of BAB should be unable to surrender the Certificates for such shares, because they have been lost or destroyed, such holder may deliver in lieu thereof such bond in form and substance and with surety reasonably satisfactory to GBB and shall be entitled to receive the certificate representing the proper number of shares of GBB Stock and cash in lieu of fractional shares in accordance with Sections 2.2 and 2.4 hereof. 2.5.3. No dividends or other distributions declared or made with respect to GBB Stock with a record date after the Effective Time of the Merger shall be paid to the holder of any unsurrendered Certificate with respect to the shares of GBB Stock represented thereby and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.4 until the holder of record of such Certificate shall surrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of GBB Common Stock issued in exchange thereof, without interest, (i) at the time of such surrender, the amount of any cash payable in lieu of a fractional share of GBB Stock to which such holder is entitled pursuant to Section 2.4 and the amount of dividends or other distributions with a record date after the Effective Time of the Merger 10 theretofore paid with respect to such whole shares of GBB Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time of the Merger but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of GBB Stock. 2.5.4. All shares of GBB Stock issued upon the surrender for exchange of BAB Stock in accordance with the terms hereof (including any cash paid pursuant to Section 2.4) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of BAB Stock, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of BAB Stock which were outstanding immediately prior to the Effective Time of the Merger. If, after the Effective Time of the Merger, Certificates are presented to GBB for any reason, they shall be canceled and exchanged as provided in this Agreement. 2.5.5. Any portion of the Exchange Fund which remains undistributed to the shareholders of BAB following the passage of six months after the Effective Time of the Merger shall be delivered to GBB, upon demand, and any shareholders of BAB who have not theretofore complied with this Section 2.5 shall thereafter look only to GBB for payment of their claim for GBB Stock, any cash in lieu of fractional shares of GBB Stock and any dividends or distributions with respect to GBB Stock. 2.5.6. Neither GBB nor BAB shall be liable to any holder of shares of BAB Stock for such shares (or dividends or distributions with respect thereto) or cash from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 2.5.7. The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to the shares of GBB Stock held by it from time to time hereunder, except that it shall receive and hold all dividends or other distributions paid or distributed with respect to such shares of GBB Stock for the account of the Persons entitled thereto. 2.5.8 Certificates surrendered for exchange by any Person constituting an Affiliate of BAB for purposes of Rule 144(a) under the Securities Act shall not be exchanged for certificates representing whole shares of GBB Stock until GBB has received a written agreement from such person as provided in Section 6.10. 2.6. Directors of Surviving Corporation and BABANK Immediately after the --------------------------------------------- Effective Time of the Merger, the Board of Directors of the Surviving Corporation shall be comprised of the persons serving as directors of GBB immediately prior to the Effective Time of the Merger and one current member of BAB's Board of Directors to be appointed by GBB and assigned to Class I (reelection 2001). Such persons shall serve until the earlier of their resignation or removal or until their respective successors are duly elected and qualified. Immediately after the Effective Time of the Merger, the Board of Directors of BABANK shall be comprised of the persons serving as directors of BABANK immediately prior to the Effective Time of the Merger and David L. 11 Kalkbrenner, or such other person designated by GBB and reasonably acceptable to BAB. Such persons shall serve until the earlier of their resignation or removal or until their respective successors are duly elected and qualified; provided, however, that GBB agrees to maintain BABANK's existing Board members for a period of one year following the Effective Time of the Merger. 2.7 Executive Officers of Surviving Corporation and BABANK. Immediately ------------------------------------------------------ after the Effective Time of the Merger, the executive officers of the Surviving Corporation shall be comprised of the persons serving as executive officers of GBB immediately prior to the Effective Time of the Merger. Immediately after the Effective Time of the Merger, the executive officers of BABANK shall be comprised of the persons serving as executive officers of BABANK immediately prior to the Effective Time of the Merger. Such persons shall serve until the earlier of their resignation or termination. ARTICLE 3. THE CLOSING ----------- 3.1. Closing Date. The Closing shall take place on the Closing Date. ------------ 3.2. Execution of Agreements. As soon as practicable after execution ----------------------- of this Agreement, the Agreement of Merger together with all other agreements necessary to consummate the transactions described herein shall be executed by GBB and BAB. On the Closing Date, the Agreement of Merger, together with all requisite certificates, shall be duly filed with the Secretary of State of the State of California as required by applicable law and regulations. 3.3. Further Assurances. At the Closing, the parties hereto shall ------------------ deliver, or cause to be delivered, such documents or certificates as may be necessary in the reasonable opinion of counsel for any of the parties, to effectuate the transactions contemplated by this Agreement. From and after the Effective Time of the Merger, each of the parties hereto covenants and agrees, without the necessity of any further consideration whatsoever, to execute, acknowledge and deliver any and all other documents and instruments and take any and all such other action as may be reasonably necessary or desirable to more effectively carry out the intent and purpose of this Agreement and the Agreement of Merger. ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BAB ------------------------------------- BAB represents and warrants to GBB as follows: 12 4.1. Incorporation, Standing and Power. BAB has been duly organized, --------------------------------- is validly existing and in good standing as a corporation under the laws of the State of California and is registered as a bank holding company under the BHC Act. BABANK is a California state chartered bank duly organized, validly existing and in good standing under the laws of the State of California and is authorized by the DFI to conduct a general banking business. BAB's deposits are insured by the FDIC in the manner and to the fullest extent provided by law. Each of BAB and BABANK has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as presently conducted. Neither the scope of the business of BAB or BABANK nor the location of any of their respective properties requires that either BAB or BABANK be licensed to do business in any jurisdiction other than the State of California where the failure to be so licensed would, individually or in the aggregate, have a material adverse effect on the business, financial condition, results of operations or prospects of BAB on a consolidated basis. BAB has delivered to GBB true and correct copies of its and BABANK's Articles of Incorporation and Bylaws, as amended, and in effect as of the date hereof. 4.2. Capitalization. -------------- 4.2.1. As of the date of this Agreement, the authorized capital stock of BAB consists of 20,000,000 shares of BAB Stock, of which 1,004,141 shares are outstanding. All of the outstanding shares of BAB Stock are duly authorized, validly issued, fully paid and nonassessable. Except for BAB Options covering 83,108 shares of BAB Stock granted pursuant to the BAB Stock Option Plan and 48,000 stock appreciation rights under the BAB SAR Plan, there are no outstanding options, warrants or other rights in or with respect to the unissued shares of BAB Stock nor any securities convertible into such stock, and BAB is not obligated to issue any additional shares of its common stock or any additional options, warrants or other rights in or with respect to the unissued shares of such stock or any other securities convertible into such stock. BAB has furnished GBB a list (the "BAB Option List") setting forth the name of each holder of a BAB Option and stock appreciation right, the number of shares of BAB Stock covered by each such option and stock appreciation right, the vesting schedule of such option and stock appreciation right, the exercise price per share and the expiration date of each such option and stock appreciation right. 4.2.2. As of the date of this Agreement, the authorized capital stock of BABANK consists of 500,000 shares of common stock, of which 100 shares are outstanding and owned of record and beneficially by BAB. All of the outstanding shares of such common stock are duly authorized, validly issued, fully paid and nonassessable, except as provided in California Financial Code Section 662. There are no outstanding options, warrants or other rights in or with respect to the unissued shares of such common stock or any other securities convertible into such stock, and BABANK is not obligated to issue any additional shares of its common stock or any options, warrants or other rights in or with respect to the unissued shares of its common stock or any other securities convertible into such stock. 13 4.3. Subsidiaries. Other than BABANK, BAB does not own, directly or ------------ indirectly (except as a pledgee pursuant to loans or upon acquisition in satisfaction of debt previously contracted), the outstanding stock or equity or other voting interest in any Person. 4.4. Financial Statements. BAB has previously furnished to GBB a copy -------------------- of the Financial Statements of BAB. The Financial Statements of BAB: (a) present fairly the consolidated financial condition of BAB as of the respective dates indicated and its consolidated results of operations and changes in cash flows, for the respective periods then ended, subject, in the case of the unaudited interim financial statements, to normal recurring adjustments; (b) have been prepared in accordance with generally accepted accounting principles consistently applied (except as otherwise indicated therein); (c) set forth as of the respective dates indicated adequate reserves, in the opinion of management of BAB, for loan losses and other contingencies and (d) are based upon the books and records of BAB. 4.5. Reports and Filings. Except as set forth in a list (the "BAB ------------------- Filings List"), since January 1, 1995, each of BAB and BABANK has filed all reports, returns, registrations and statements (such reports and filings referred to as "BAB Filings"), together with any amendments required to be made with respect thereto, that were required to be filed with (a) the FDIC, (b) the DFI, (c) the FRB, (d) the SEC and (e) any other applicable Governmental Entity, including taxing authorities, except where the failure to file such reports, returns, registrations or statements has not had and is not reasonably expected to have a material adverse effect on the business, financial condition, results of operations or prospects of BAB on a consolidated basis. No administrative actions have been taken or orders issued in connection with such BAB Filings. As of their respective dates, to the best knowledge of BAB, each of such BAB Filings (y) complied in all material respects with all laws and regulations enforced or promulgated by the Governmental Entity with which it was filed (or was amended so as to be in compliance promptly following discovery of any such noncompliance); and (z) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any of such BAB Filings fairly presented the financial position of BAB on a consolidated basis, BAB alone and BABANK alone, as the case may be, and was prepared in accordance with generally accepted accounting principles or banking regulations consistently applied, except as stated therein, during the periods involved. BAB has furnished GBB with true and correct copies of all BAB Filings filed by BAB since January 1, 1995. 4.6. Authority of BAB. The execution and delivery by BAB of this ---------------- Agreement and the Agreement of Merger and, subject to the requisite approval of the shareholders of BAB of this Agreement and the transactions contemplated hereby, the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of BAB. This Agreement is, and the Agreement of Merger will be, upon due execution and delivery by the respective parties thereto, a valid and binding obligation of BAB enforceable in accordance with their respective terms, except as the enforceability thereof may be 14 limited by bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles. Except as set forth in a list furnished by BAB to GBB (the "BAB Conflicts and Consents List"), neither the execution and delivery by BAB of this Agreement or the Agreement of Merger, the consummation of the transactions contemplated herein or therein, nor compliance by BAB with any of the provisions hereof or thereof, will: (a) conflict with or result in a breach of any provision of its or BABANK's Articles of Incorporation, as amended, or Bylaws, as amended; (b) constitute a breach of or result in a default (or give rise to any rights of termination, cancellation or acceleration, or any right to acquire any securities or assets) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, franchise, license, permit, agreement or other instrument or obligation to which BAB or BABANK is a party, or by which BAB or BABANK or any of their respective properties or assets are bound; (c) result in the creation or imposition of any Encumbrance on any of the properties or assets of BAB or BABANK; or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to BAB or BABANK or any of their respective properties or assets. Except as set forth in the BAB Conflicts and Consents List, no consent of, approval of, notice to or filing with any Governmental Entity having jurisdiction over any aspect of the business or assets of BAB or BABANK, and no consent of, approval of or notice to any other Person, is required in connection with the execution and delivery by BAB of this Agreement, the Agreement of Merger or the consummation by BAB of the Merger or the transactions contemplated hereby or thereby, except (i) the approval of this Agreement and the Agreement of Merger and the transactions contemplated hereby and thereby by the shareholders of BAB; (ii) such approvals as may be required by the FRB and the DFI; (iii) the filing of the Proxy Statement and Prospectus and Registration Statement on Form S-4 with the SEC; and (iv) the filing of the Agreement of Merger with the Secretary of State. 4.7. Insurance. Each of BAB and BABANK has policies of insurance and --------- bonds with respect to its assets and business against such casualties and contingencies and in such amounts, types and forms as are customarily appropriate for its business, operations, properties and assets. All such insurance policies and bonds are in full force and effect. Except as set forth in a list furnished by BAB to GBB (the "BAB Insurance List"), no insurer under any such policy or bond has canceled or indicated an intention to cancel or not to renew any such policy or bond or generally disclaimed liability thereunder. Except as set forth in the BAB Insurance List, neither BAB nor BABANK is in default under any such policy or bond and all material claims thereunder have been filed in a timely fashion. Set forth in the BAB Insurance List is a list of all policies of insurance carried and owned by either BAB or BABANK showing the name of the insurance company, the nature of the coverage, the policy limit, the annual premiums and the expiration dates. There has been delivered to GBB a copy of each such policy of insurance. 4.8. Personal Property. Each of BAB and BABANK has good and ----------------- marketable title to all its material properties and assets, other than real property, owned or stated to be owned by BAB or BABANK, free and clear of all Encumbrances except: (a) as set forth in the Financial Statements of BAB; (b) for Encumbrances for current taxes not yet due; (c) for Encumbrances 15 incurred in the ordinary course of business; (d) for Encumbrances that are not substantial in character, amount or extent and that do not materially detract from the value, or interfere with present use, of the property subject thereto or affected thereby, or otherwise materially impair the conduct of business of BAB or BABANK; or (e) as set forth in a list furnished by BAB to GBB (the "BAB Personal Property List.") 4.9. Real Estate. BAB has furnished GBB a list of real property, ----------- including leaseholds and all other interests in real property (other than security interests), owned by BAB or BABANK (the "BAB Real Property List"). Each of BAB and BABANK has duly recorded or caused to be recorded, in the appropriate county, all recordable interests in the real property described in the BAB Real Property List. Either BAB or BABANK has good and marketable title to the real property, and valid leasehold interests in the leaseholds, described in the BAB Real Property List, free and clear of all Encumbrances, except (a) for rights of lessors, co-lessees or sublessees in such matters that are reflected in the lease; (b) for current taxes not yet due and payable; (c) for such Encumbrances, if any, as do not materially detract from the value of or materially interfere with the present use of such property; and (d) as described in the BAB Real Property List. BAB has furnished GBB with true and correct copies of all leases included in the BAB Real Property List, all title insurance policies and all documents evidencing recordation of all recordable interests in real property included in the BAB Real Property List. 4.10. Litigation. Except as set forth in a list furnished by BAB to ---------- GBB (the "BAB Litigation List"), there is no private or governmental suit, claim, action or proceeding pending, nor to BAB's knowledge threatened, against BAB or BABANK or against any of their respective directors, officers or employees relating to the performance of their duties in such capacities or against or affecting any properties of BAB or BABANK which, if adversely determined, would have, individually or in the aggregate, a material adverse effect upon the business, financial condition or results of operations of BAB on a consolidated basis, or the transactions contemplated hereby, or which may involve a judgment against BAB or BABANK in excess of $25,000. Also, except as disclosed in the BAB Litigation List, there are no material judgments, decrees, stipulations or orders against BAB or BABANK or enjoining their respective directors, officers or employees in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area. 4.11. Taxes. ----- (a) Except as set forth in a list furnished by BAB to GBB (the "BAB Tax List"), (A) all material Tax Returns required to be filed by or on behalf of BAB, BABANK or any of their subsidiaries or the Affiliated Group(s) of which any of them is or was a member, have been duly and timely filed with the appropriate taxing authorities in all jurisdictions in which such Tax Returns are required to be filed (after giving effect to any valid extensions of time in which to make such filings), and all such Tax Returns were true, complete and correct in all material respects; (B) all Taxes due and payable by or on behalf of BAB, BABANK or any of their subsidiaries, either 16 directly, as part of an Affiliated Group Tax Return, or otherwise, have been fully and timely paid, except to the extent adequately reserved therefor in accordance with generally accepted accounting principles and/or applicable regulatory accounting principles or banking regulations consistently applied on the BAB balance sheet, and adequate reserves or accruals for Taxes have been provided in the BAB balance sheet with respect to any period through the date thereof for which Tax Returns have not yet been filed or for which Taxes are not yet due and owing; and (C) no agreement, waiver or other document or arrangement extending or having the effect of extending the period for assessment or collection of Taxes (including, but not limited to, any applicable statute of limitation) has been executed or filed with any taxing authority by or on behalf of BAB, BABANK or any of their subsidiaries, or any Affiliated Group(s) of which any of them is or was a member. (b) BAB, BABANK and any of their subsidiaries have complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of Taxes and have duly and timely withheld from employee salaries, wages and other compensation and have paid over to the appropriate taxing authorities all amounts required to be so withheld and paid over for all periods under all applicable laws. (c) GBB has received complete copies of (i) all material income or franchise Tax Returns of BAB, BABANK and any of their subsidiaries relating to the taxable periods since January 1, 1995 and (ii) any audit report issued within the last three years relating to any material Taxes due from or with respect to BAB, BABANK or any of their subsidiaries with respect to their respective income, assets or operations. (d) Except as set forth in the BAB Tax List, no claim has been made by a taxing authority in a jurisdiction where BAB, BABANK or any of their subsidiaries do not file an income or franchise Tax Return such that BAB, BABANK or any of their subsidiaries are or may be subject to taxation by that jurisdiction. (e) Except as set forth in the BAB Tax List: (i) all deficiencies asserted or assessments made as a result of any examinations by any taxing authority of the Tax Returns of or covering or including BAB, BABANK or any of their subsidiaries have been fully paid, and there are no other audits or investigations by any taxing authority in progress, nor have BAB, BABANK or any of their subsidiaries received any notice from any taxing authority that it intends to conduct such an audit or investigation; (ii) no requests for a ruling or a determination letter are pending with any taxing authority; and (iii) no issue has been raised in writing by any taxing authority in any current or prior examination which, by application of the same or similar principles, could reasonably be expected to result in a proposed deficiency against BAB, BABANK or any of their subsidiaries for any subsequent taxable period that could be material. (f) Except as set forth in the BAB Tax List, neither BAB, BABANK or any of their subsidiaries nor any other Person on behalf of BAB, BABANK or any of their subsidiaries has (i) filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the 17 Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by BAB, BABANK or any of their subsidiaries (ii) agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by BAB, BABANK or any of their subsidiaries or has any knowledge that the Internal Revenue Service has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of BAB, BABANK or any of their subsidiaries or (iii) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any predecessor provision thereof or any similar provision of state, local or foreign law with respect to BAB, BABANK or any of their subsidiaries. (g) Except as set forth in the BAB Tax List, no property owned by BAB, BABANK or any of their subsidiaries is (i) property required to be treated as being owned by another Person pursuant to provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986, (ii) constitutes "tax exempt use property" within the meaning of Section 168(h)(1) of the Code or (iii) is "tax-exempt bond financed property" within the meaning of Section 168(g) of the Code. (h) Neither BAB (except with BABANK) nor BABANK (except with BAB) is a party to any Tax Sharing Agreement or similar agreement or arrangement (whether written or not written) pursuant to which it will have any obligation to make any payments after the Closing. (i) Except as set forth in the BAB Tax List, there is no contract, agreement, plan or arrangement covering any Person that, individually or collectively, could give rise to the payment of any amount that would not be deductible by BAB, BABANK or any of their subsidiaries or their respective affiliates by reason of Section 280G of the Code, or would constitute compensation in excess of the limitation set forth in Section 162(m) of the Code. (j) There are no liens as a result of any unpaid Taxes upon any of the assets of BAB, BABANK or any of their subsidiaries. (k) Except as set forth in the BAB Tax List, BAB, BABANK or any of their subsidiaries have no elections in effect for federal income tax purposes under Sections 108, 168, 338, 441, 472, 1017, 1033, or 4977 of the Code. (l) Except as set forth in the BAB Tax list, none of the members of BAB's Affiliated Group has any net operating loss carryovers. (m) BAB agrees, and agrees to cause BABANK or any of their subsidiaries, to cooperate with tax counsel in furnishing reasonable and customary written tax representations to tax counsel for purposes of supporting tax counsel's opinion that the Merger qualifies as a tax-deferred reorganization within the meaning of Section 368(a) of the Code as contemplated in Section 9.6 18 hereof. Such Persons acknowledge that their inability or unwillingness to provide such reasonable and customary written representations could preclude tax counsel from rendering such opinion, with consequences specified elsewhere herein. 4.12. Compliance with Laws and Regulations. ------------------------------------ 4.12.1. Neither BAB nor BABANK is in default under or in breach or violation of (i) any provision its Articles of Incorporation, as amended, or Bylaws, as amended, or (ii) law, ordinance, rule or regulation promulgated by any Governmental Entity, except, with respect to this clause (ii), for such violations as would not have, individually or in the aggregate, a material adverse effect on the business, financial condition, results of operations or prospects of BAB on a consolidated basis or BABANK, as the case may be. 4.12.2. Except as set forth on a list furnished by BAB to GBB (the "BAB Environmental Compliance List"), to the best of BAB's knowledge without further investigation (i) each of BAB and BABANK is in compliance with all Environmental Regulations; (ii) there are no Tanks on or about BAB Property; (iii) there are no Hazardous Materials on, below or above the surface of, or migrating to or from BAB Property; (iv) neither BAB nor BABANK has loans outstanding secured by real property that is not in compliance with Environmental Regulations or which has a leaking Tank or upon which there are Hazardous Materials on or migrating to or from; and (v) without limiting Section 4.10 or the foregoing representations and warranties contained in clauses (i) through (iv), as of the date of this Agreement, there is no claim, action, suit, or proceeding or notice thereof before any Governmental Entity pending against BAB or BABANK or concerning property securing BAB or BABANK loans and there is no outstanding judgment, order, writ, injunction, decree, or award against or affecting BAB Property or property securing BAB or BABANK loans, relating to the foregoing representations (i) - (iv), in each case the noncompliance with which, or the presence of which would have a material adverse effect on the business, financial condition, results of operations or prospects of BAB on a consolidated basis. For purposes of this Section 4.12.2, the term "Environmental Regulations" shall mean all applicable statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations, concessions, franchises, and similar items, of all Governmental Entities and all applicable judicial, administrative, and regulatory decrees, judgments, and orders relating to the protection of human health or the environment, including, without limitation: all requirements, including, but not limited to those pertaining to reporting, licensing, permitting, investigation, and remediation of emissions, discharges, releases, or threatened releases of Hazardous Materials, chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials or wastes whether solid, liquid, or gaseous in nature, into the air, surface water, groundwater, or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials, or wastes, whether solid, liquid, or gaseous in nature and all requirements pertaining to the protection of the health and safety of employees or the public. "BAB Property" shall mean real estate currently owned, leased, or otherwise used by BAB or BABANK, or in which BAB or BABANK has an investment or 19 security interest (by mortgage, deed of trust, sale and lease-back or otherwise), including, without limitation, properties under foreclosure and properties held by BAB or BABANK in its capacity as a trustee or otherwise. "Tank" shall mean treatment or storage tanks, sumps, or water, gas or oil wells and associated piping transportation devices. "Hazardous Materials" shall mean any substance the presence of which requires investigation or remediation under any federal, state or local statute, regulation, ordinance, order, action, policy or common law; or which is or becomes defined as a hazardous waste, hazardous substance, hazardous material, used oil, pollutant or contaminant under any federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601, et seq.); the Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.); the Clean Air Act, as amended (42 U.S.C. Section 7401, et seq.); the Federal Water Pollution Control Act, as amended (33 U.S.C. Section 1251, et seq.); the Toxic Substances Control Act, as amended (15 U.S.C. Section 9601, et seq.); the Occupational Safety and Health Act, as amended (29 U.S.C. Section 651; the Emergency Planning and Community Right-to-Know Act of 1986 (42 U.S.C. Section 11001, et seq.); the Mine Safety and Health Act of 1977, as amended (30 U.S.C. Section 801, et seq.); the Safe Drinking Water Act (42 U.S.C. Section 300f, et seq.); and all comparable state and local laws, including without limitation, the Carpenter-Presley-Tanner Hazardous Substance Account Act (State Superfund), the Porter-Cologne Water Quality Control Act, Section 25140, 25501(j) and (k), 25501.1,25281 and 25250.1 of the California Health and Safety Code and/or Article I of Title 22 of the California Code of Regulations, Division 4, Chapter 30; laws of other jurisdictions or orders and regulations; or the presence of which causes or threatens to cause a nuisance, trespass or other common law tort upon real property or adjacent properties or poses or threatens to pose a hazard to the health or safety of persons or without limitation, which contains gasoline, diesel fuel or other petroleum hydrocarbons; polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde foam insulation. 4.12.3. BAB has provided to GBB phase I environmental assessments with respect to each interest in real property set forth on the BAB Real Property List as to which such a phase I environmental investigation has been prepared by or on behalf of BAB or BABANK. The BAB Real Property list shall disclose each such property as to which such an assessment has not been prepared on behalf of BAB or BABANK. 4.13. Performance of Obligations. Each of BAB and BABANK has -------------------------- performed in all material respects all of the obligations required to be performed by it to date and is not in default under or in breach of any term or provision of any covenant, contract, lease, indenture or any other covenant to which it is a party, is subject or is otherwise bound, and no event has occurred that, with the giving of notice or the passage of time or both, would constitute such default or breach, where such default or breach would have, individually or in the aggregate, a material adverse effect on the business, financial condition, results of operations or prospects of BAB on a consolidated basis. Except for loans and leases made by BAB or BABANK in the ordinary course of business, to BAB's knowledge, no party with whom BAB or BABANK has an agreement that is of material importance to the business of BAB or BABANK is in default thereunder. 20 4.14. Employees. There are no controversies pending or threatened --------- between either BAB or BABANK and any of its employees that are likely to have a material adverse effect on the business, financial condition, results of operations or prospects of BAB on a consolidated basis. Neither BAB nor BABANK is a party to any collective bargaining agreement with respect to any of its employees or any labor organization to which its employees or any of them belong. 4.15. Brokers and Finders. Except for the obligation to Gary Steven ------------------- Findley & Associates set forth in the Findley Agreement and the obligation to Joseph P. Colmery set forth in the Colmery Agreement, copies of which have been delivered to GBB, neither BAB nor BABANK is a party to or obligated under any agreement with any broker or finder relating to the transactions contemplated hereby, and neither the execution of this Agreement nor the consummation of the transactions provided for herein will result in any liability to any broker or finder. 4.16. Material Contracts. Except as set forth in a list furnished by ------------------ BAB to GBB (the "BAB Contract List") hereto (all items listed or required to be listed in such BAB Contract List being referred to herein as "Scheduled Contracts"), neither BAB nor BABANK is a party or otherwise subject to: 4.16.1. any employment, deferred compensation, bonus or consulting contract that (i) has a remaining term, as of the date of this Agreement, of more than one year in length of obligation on the part of BAB or BABANK and is not terminable by BAB or BABANK within one year without penalty or (ii) requires payment by BAB or BABANK of $25,000 or more per annum; 4.16.2. any advertising, brokerage, licensing, dealership, representative or agency relationship or contract requiring payment by BAB or BABANK of $25,000 or more per annum; 4.16.3. any contract or agreement that restricts BAB or BABANK (or would restrict any Affiliate of BAB or BABANK or the Surviving Corporation (including GBB and its subsidiaries) after the Effective Time of the Merger) from competing in any line of business with any Person or using or employing the services of any Person; 4.16.4. any lease of real or personal property providing for annual lease payments by or to BAB or BABANK in excess of $25,000 per annum other than (A) financing leases entered into in the ordinary course of business in which BAB or BABANK is lessor and (B) leases of real property presently used by BABANK as banking offices; 4.16.5. any mortgage, pledge, conditional sales contract, security agreement, option, or any other similar agreement with respect to any interest of BAB or BABANK (other than as mortgagor or pledgor in the ordinary course of its banking business or as mortgagee, secured 21 party or deed of trust beneficiary in the ordinary course of its business) in personal property having a value of $25,000 or more; 4.16.6. other than as described in the BAB Filings or as set forth in the BAB Employee Plan List, any stock purchase, stock option, stock bonus, stock ownership, profit sharing, group insurance, bonus, deferred compensation, severance pay, pension, retirement, savings or other incentive, welfare or employment plan or material agreement providing benefits to any present or former employees, officers or directors of BAB or BABANK; 4.16.7. any agreement to acquire equipment or any commitment to make capital expenditures of $25,000 or more; 4.16.8. other than agreements entered into in the ordinary course of business, including sales of other real estate owned, any agreement for the sale of any property or assets in which BAB or BABANK has an ownership interest or for the grant of any preferential right to purchase any such property or asset; 4.16.9. any agreement for the borrowing of any money (other than liabilities or interbank borrowings made in the ordinary course of its banking business and reflected in the financial records of BAB or BABANK); 4.16.10. any restrictive covenant contained in any deed to or lease of real property owned or leased by BAB or BABANK (as lessee) that materially restricts the use, transferability or value of such property; 4.16.11. any guarantee or indemnification which involves the sum of $25,000 or more, other than letters of credit or loan commitments issued in the normal course of business; 4.16.12. any supply, maintenance or landscape contracts not terminable by BAB or BABANK without penalty on 30 days' or less notice and which provides for payments in excess of $25,000 per annum; 4.16.13. other than as disclosed with reference to Section 4.16.11 of this Section 4.16, any material agreement which would be terminable other than by BAB or BABANK as a result of the consummation of the transactions contemplated by this Agreement; 4.16.14. any contract of participation with any other bank in any loan in excess of $25,000 or any sales of assets of BAB or BABANK with recourse of any kind to BAB or BABANK except the sale of mortgage loans, servicing rights, repurchase or reverse repurchase agreements, securities or other financial transactions in the ordinary course of business; 22 4.16.15. any agreement providing for the sale or servicing of any loan or other asset which constitutes a "recourse arrangement" under applicable regulation or policy promulgated by a Governmental Entity (except for agreements for the sale of guaranteed portions of loans guaranteed in part by the U. S. Small Business Administration and related servicing agreements); 4.16.16. any contract relating to the provision of data processing services to BAB or BABANK; or 4.16.17. any other agreement of any other kind which involves future payments or receipts or performances of services or delivery of items requiring payment of $25,000 or more to or by BAB or BABANK other than payments made under or pursuant to loan agreements, participation agreements and other agreements for the extension of credit in the ordinary course of their business. True copies of all Scheduled Contracts, including all amendments and supplements thereto, have been delivered to GBB. 4.17. Certain Material Changes. Except as specifically required, ------------------------ permitted or effected by this Agreement, since September 30, 1998, there has not been, occurred or arisen any of the following (whether or not in the ordinary course of business unless otherwise indicated): 4.17.1. Any change in any of the assets, liabilities, permits, methods of accounting or accounting practices, business, or manner of conducting business, of BAB or BABANK or any other event or development that has had or may reasonably be expected to have, individually or in the aggregate, a material adverse effect on the assets, liabilities, permits, business, financial condition, results of operations or prospects of BAB on a consolidated basis; 4.17.2. Any damage, destruction or other casualty loss (whether or not covered by insurance) that has had or may reasonably be expected to have a material adverse effect on the assets, liabilities, business, financial condition, results of operations or prospects of BAB on a consolidated basis or that may involve a loss of more than $25,000 in excess of applicable insurance coverage; 4.17.3. Any amendment, modification or termination of any existing, or entry into any new, material contract or permit that has had or may reasonably be expected to have a material adverse effect on the assets, liabilities, business, financial condition, results of operations or prospects of BAB on a consolidated basis; 4.17.4. Any disposition by BAB or BABANK of an asset the lack of which has had or may reasonably be expected to have a material adverse effect on the assets, liabilities, business, financial condition, results of operations or prospects of BAB on a consolidated basis; or 23 4.17.5. Any direct or indirect redemption, purchase or other acquisition by BAB or BABANK of any equity securities or stock appreciation rights or any declaration, setting aside or payment of any dividend (except, in the case of the declaration, setting aside or payment of a cash dividend, as disclosed in the Financial Statements of BAB) or other distribution on or in respect of BAB Stock or stock appreciation rights whether consisting of money, other personal property, real property or other things of value. 4.18. Licenses and Permits. Each of BAB and BABANK has all material -------------------- licenses and permits that are necessary for the conduct of its business, and such licenses are in full force and effect, except for any failure to be in full force and effect that would not, individually or in the aggregate, have a material adverse effect on the business, financial condition, results of operations or prospects of BAB on a consolidated basis. The respective properties, assets, operations and businesses of BAB and BABANK are and have been maintained and conducted, in all material respects, in compliance with all applicable licenses and permits. The respective properties and operations of BAB and BABANK are and have been maintained and conducted, in all material respects, in compliance with all applicable laws and regulations. 4.19. Undisclosed Liabilities. Neither BAB nor BABANK has any ----------------------- liabilities or obligations, either accrued or contingent, that are material to BAB and that have not been: (a) reflected or disclosed in the Financial Statements of BAB; (b) incurred subsequent to December 31, 1997 in the ordinary course of business consistent with past practices; or (c) disclosed in a list furnished by BAB to GBB (the "BAB Undisclosed Liabilities List") or on any other BAB List. BAB does not know of any basis for the assertion against it or BABANK of any liability, obligation or claim (including, without limitation, that of any regulatory authority) that is likely to result in or cause a material adverse change in the business, financial condition, results of operations or prospects of BAB on a consolidated basis that is not fairly reflected in the Financial Statements of BAB or otherwise disclosed in this Agreement. 4.20. Employee Benefit Plans. ---------------------- 4.20.1. BAB has previously made available to GBB copies of each "employee benefit plan," as defined in Section 3(3) of ERISA, of which BAB or any member of the same controlled group of corporations, trades or businesses as BAB within the meaning of Section 4001(a)(14) of ERISA ("ERISA Affiliates") is a sponsor or participating employer or as to which BAB or any of its ERISA Affiliates makes contributions or is required to make contributions and which is subject to any provision of ERISA and covers any employee, whether active or retired, of BAB or any of its ERISA Affiliates, together with all amendments thereto, all currently effective and related summary plan descriptions (to the extent one is required by law), the determination letter from the IRS, the annual reports for the most recent three years (Form 5500 including, if applicable, Schedule B thereto) and the summary of material modifications and all material employee communications prepared in connection with or pertaining to any such plan. Such plans 24 are hereinafter referred to collectively as the "Employee Plans." BAB does not participate in an employee benefit pension plan that is a "multiemployer plan" within the meaning of Section 3(37) of ERISA that would subject BAB or any of its ERISA Affiliates to a material amount of liability with respect to any such plan. Each Employee Plan which is intended to be qualified in form and operation under Section 401(a) of the Code is so qualified and the associated trust for each such Employee Plan is exempt from tax under Section 501(a) of the Code. No event has occurred that will subject such Employee Plans to a material amount of tax under Section 511 of the Code. All amendments required to bring each Employee Plan into conformity with all of the applicable provisions of ERISA, the Code and all other applicable laws have been made. Except as disclosed in a list furnished by BAB to GBB (the "BAB Employee Plan List"), all Employee Plans were in effect for substantially all of 1998, and there has been no material amendment thereof (other than amendments required to comply with applicable law) or increase in the cost thereof or benefits thereunder on or after January 1, 1998. 4.20.2. BAB has previously made available to GBB copies or descriptions of each plan or arrangement maintained or otherwise contributed to by BAB or any of its ERISA Affiliates which is not an Employee Plan and which (exclusive of base salary and base wages) provides for any form of current or deferred compensation, bonus, stock option, stock awards, stock-based compensation or other forms of incentive compensation or post-termination insurance, profit sharing, benefit, retirement, group health or insurance, disability, workers' compensation, welfare or similar plan or arrangement for the benefit of any employee or class of employees, whether active or retired, of BAB or any of its ERISA Affiliates (such plans and arrangements being collectively referred to herein as "Benefit Arrangements"). Except as disclosed in the BAB Employee Plan List hereto, all Benefit Arrangements which are in effect were in effect for substantially all of 1998. There has been no material amendment thereof or increase in the cost thereof or benefits payable thereunder since January 1, 1998. Except as set forth in the BAB Employee Plan List, there has been no material increase in the compensation of or benefits payable to any senior executive employee of BAB since December 31, 1997, nor any employment, severance or similar contract entered into with any such employee, nor any amendment to any such contract, since December 31, 1997. There is no contract, agreement or benefit arrangement covering any employee of BAB which individually or collectively could give rise to the payment of any amount which would constitute an "excess parachute payment," as such term is defined in Section 280G of the Code, or would constitute compensation in excess of the limitation set forth in Section 162(m) of the Code. 4.20.3. With respect to all Employee Plans and Benefit Arrangements, BAB and its ERISA Affiliates are in material compliance (other than noncompliance the cost or liability for which is not material) with the requirements prescribed by any and all statutes, governmental or court orders, or governmental rules or regulations currently in effect, including but not limited to ERISA and the Code, applicable to such plans or arrangements. All material government reports and filings required by law have been properly and timely filed and all information required to be distributed to participants or beneficiaries has been distributed with respect to each Employee Plan. 25 BAB and its ERISA Affiliates have performed all of their obligations under all such Employee Plans and Benefit Arrangements in all material aspects. There is no pending or, to the knowledge of BAB, threatened legal action, proceeding or investigation against or involving any Employee Plan or Benefit Arrangement which could result in a material amount of liability to such Employee Plan. To the knowledge of BAB, no condition exists that could constitute grounds for the termination of any Employee Plan under Section 4042 of ERISA; no "prohibited transaction," as defined in Section 406 of ERISA and Section 4975 of the Code, has occurred with respect to any Employee Plan, or any other employee benefit plan maintained by BAB or any of its ERISA Affiliates which is covered by Title I of ERISA, which could subject any person (other than a person for whom BAB is not directly or indirectly responsible) to a material amount of liability under Title I of ERISA or to the imposition of a material amount of tax under Section 4975 of the Code which could have a material adverse effect on the business, assets, financial condition, results of operations or prospects of BAB on a consolidated basis; nor has any Employee Plan subject to Part III of Subtitle B of Title I of ERISA or Section 412 of the Code, or both, incurred any "accumulated funding deficiency," as defined in Section 412 of the Code, whether or not waived, nor has BAB failed to make any contribution or pay any amount due and owing as required by the terms of any Employee Plan or Benefit Arrangement. No "reportable event" as defined in ERISA has occurred with respect to any of the Employee Plans. Neither BAB nor any of its ERISA Affiliates has incurred nor expects to incur, directly or indirectly, a material amount of liability under Title IV or ERISA arising in connection with the termination of, or a complete or partial withdrawal from, any plan covered or previously covered by Title IV of ERISA which could constitute a liability of GBB or of any of its Affiliates (including BAB) at or after the Effective Time of the Merger. 4.20.4. None of the Employee Plans nor any trust created thereunder has incurred any "accumulated deficiency" as such term is defined in Section 412 of the Code, whether or not waived. Furthermore, neither BAB nor any of its ERISA Affiliates has provided or is required to provide security to any Employee Plan pursuant to Section 401(a)(29) of the Code. Each of the Employee Plans which is intended to be a qualified plan under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service and BAB does not know of any fact which could adversely affect the qualified status of any such Employee Plan. All contributions required to be made to each of the Employee Plans under the terms of the Employee Plan, ERISA, the Code or any other applicable laws have been timely made. The Financial Statements of BAB properly reflect all amounts required to be accrued as liabilities to date under each of the Employee Plans. 4.20.5. Except for Scheduled Contracts set forth in the BAB Contract List or as set forth in the BAB Employee Plan List, as the case may be, each Employee Plan or Benefit Arrangement and each personal services contract, fringe benefit, consulting contract or similar arrangement with or for the benefit of any officer, director, employee or other person can be terminated by BAB within a period of 30 days following the Effective Time of the Merger, without payment of any amount as a penalty, bonus, premium, severance pay or other compensation for such termination. 26 4.20.6. All group health plans of BAB have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code in all material respects. 4.20.7. Neither BAB nor BABANK has used the services of (i) workers who have been provided by a third party contract labor supplier for more than six months or who may otherwise be eligible to participate in any of the Employee Plans or to an extent that would reasonably be expected to result in the disqualification of any of the Employee Plans or the imposition of penalties or excise taxes with respect to the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or any other Governmental Entity; (ii) temporary employees who have worked for more than six months or who may otherwise be eligible to participate in any of the Employee Plans or to an extent that would reasonably be expected to result in the disqualification of any of the Employee Plans or the imposition of penalties or excise taxes with respect to the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or any other Governmental Entity; (iii) individuals who have provided services to BAB or BABANK as independent contractors for more than six months or who may otherwise be eligible to participate in the Employee Plans or to an extent that would reasonably be expected to result in the disqualification of any of the Employee Plans or the imposition of penalties or excise taxes with respect to the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or any other Governmental Entity or (iv) leased employees, as that term is defined in section 414(n) of the Code. 4.20.8. Except as set forth in the BAB Employee Plan List, with respect to each Employee Plan that is funded wholly or partially through an insurance policy, there will be no liability of BAB or BABANK, as of the Closing Date, under any such insurance policy or ancillary agreement with respect to such insurance policy in the nature of a retroactive rate adjustment, loss sharing arrangement or other actual or contingent liability arising wholly or partially out of events occurring prior to the Closing Date. 4.21. Corporate Records. The minute books of each of BAB and BABANK ----------------- accurately reflect all material actions taken to this date by the respective shareholders, board of directors and committees of each of BAB and BABANK. 4.22. Accounting Records. Each of BAB and BABANK maintains ------------------ accounting records which fairly and validly reflect, in all material respects, its transactions and accounting controls exist sufficient to provide reasonable assurances that such transactions are, in all material respects, (i) executed in accordance with its management's general or specific authorization, and (ii) recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting procedures. Such records, to the extent they contain important information pertaining to BAB or BABANK which is not easily and readily available elsewhere, have been duplicated, and such duplicates are stored safely and securely. 27 4.23. Offices and ATMs. BAB has furnished to GBB a list (the "BAB ---------------- Offices List") setting forth the headquarters of each of BAB and BABANK (identified as such) and each of the offices and automated teller machines ("ATMs") maintained and operated by BAB or BABANK (including, without limitation, representative and loan production offices and operations centers) and the location thereof. Except as set forth on the BAB Offices List, neither BAB nor BABANK maintains any other office or ATM or conducts business at any other location, and neither BAB nor BABANK has applied for or received permission to open any additional branch or operate at any other location. 4.24. Operating Losses. BAB has furnished to GBB a list (the "BAB ---------------- Operating Losses List") setting forth any Operating Loss (as herein defined) which has occurred at BAB during the period after December 31, 1997 to the date of the Agreement. To the knowledge of BAB, no action has been taken or omitted to be taken by any employee of BAB that has resulted in the incurrence by BAB of an Operating Loss or that might reasonably be expected to result in the incurrence of any individual Operating Loss which, net of any insurance proceeds payable in respect thereof, would exceed $25,000 on an individual basis or in the aggregate. For purposes of this section "Operating Loss" means any loss resulting from cash shortages, lost or misposted items, disputed clerical and accounting errors, forged checks, payment of checks over stop payment orders, counterfeit money, wire transfers made in error, theft, robberies, defalcations, check kiting, fraudulent use of credit cards or ATMs, civil money penalties, fines, litigation, claims or other similar acts or occurrences. 4.25. Loan Portfolio. BAB has furnished to GBB a list (the "BAB Loan -------------- List") that sets forth (a) as of December 31, 1998, a description of, by type and classification, if any, each loan, lease, other extension of credit or commitment to extend credit by BAB or BABANK; (b) sets forth as of December 31, 1998, by type and classification, all loans, leases, other extensions and commitments to extend credit of BAB or BABANK that are currently classified by its bank examiners or auditors (external or internal) as "Watch List," "Substandard," "Doubtful," "Loss" or any comparable classification; and (c) all consumer loans due to BAB or BABANK as to which any payment of principal, interest or any other amount is currently 90 days or more past due. 4.26. Investment Securities. BAB has furnished to GBB a list (the --------------------- "BAB Investment Securities List") setting forth a description of each Investment Security held by BAB or BABANK on December 31, 1998. The BAB Investment Securities List sets forth, with respect to each such Investment Security: (i) the issuer thereof; (ii) the outstanding balance or number of shares; (iii) the maturity, if applicable; (iv) the title of issue; and (v) the classification under SFAS No. 115. Neither BAB nor BABANK has any Investment Security classified as trading. 4.27. Power of Attorney. Neither BAB nor BABANK has granted any ----------------- Person a power of attorney or similar authorization that is presently in effect or outstanding. 28 4.28. Facts Affecting Regulatory Approvals. To the best knowledge of ------------------------------------ BAB, there is no fact, event or condition applicable to BAB or BABANK which will, or reasonably could be expected to, adversely affect the likelihood of securing the requisite approvals or consents of any Governmental Entity to the Merger and the transactions contemplated by this Agreement. 4.29. Accounting and Tax Matters. To the best knowledge of BAB, -------------------------- neither BAB nor BABANK has through the date hereof taken or agreed to take any action that would prevent GBB from accounting for the business combination to be effected by the Merger as a pooling-of-interests or would prevent the Merger from qualifying as a tax-free reorganization under the Code. 4.30. Indemnification. Other than pursuant to the provisions of --------------- their respective Articles of Incorporation or Bylaws insurance and bond policies, the Findley Agreement and the Colmery Agreement, neither BAB nor BABANK is a party to any indemnification agreement with any of its present officers, directors, employees, agents or other persons who serve or served in any other capacity with any other enterprise at the request of BAB or BABANK (a "Covered Person"), and to the best knowledge of BAB, there are no claims for which any Covered Person would be entitled to indemnification by BAB or BABANK if such provisions were deemed in effect, except as set forth in a list furnished by BAB to GBB (the "BAB Indemnification List"). 4.31. Community Reinvestment Act. BABANK has received rating of -------------------------- "satisfactory" in its most recent examination or interim review with respect to the Community Reinvestment Act. BABANK has not been advised of any supervisory concerns regarding BAB's compliance with the Community Reinvestment Act. 4.32. Derivative Transactions. Except as set forth in a list furnished by ----------------------- BAB to GBB (the "BAB Derivatives List"), neither BAB nor BABANK is a party to or has agreed to enter into an exchange traded or over-the-counter equity, interest rate, foreign exchange or other swap, forward, future, option, cap, floor or collar or any other contract that is not included on the balance sheet and is a derivative contract (including various combinations thereof) or owns securities that are referred to generically as "structured notes," "high risk mortgage derivatives," "capped floating rate notes," or "capped floating rate mortgage derivatives." 4.33. Trust Administration. BAB does not presently exercise trust -------------------- powers, including, but not limited to, trust administration, and neither it nor any predecessor has exercised such trust powers for a period of at least three years prior to the date hereof. The term "trusts" as used in this Section 4.33 includes (i) any and all common law or other trusts between an individual, corporation or other entities and BABANK or a predecessor, as trustee or co- trustee, including, without limitation, pension or other qualified or nonqualified employee benefit plans, compensation, testamentary, inter vivos, and charitable trust indentures; (ii) any and all decedents' estates where BABANK or a predecessor is serving or has served as a co-executor or sole executor, personal representative or administrator, administrator de bonis non, administrator de bonis non with will annexed, or in any similar fiduciary capacity; (iii) any and all guardianships, conservatorships or 29 similar positions where BABANK or a predecessor is serving or has served as a co-grantor or a sole grantor or a conservator or co-conservator of the estate, or any similar fiduciary capacity; and (iv) any and all agency and/or custodial accounts and/or similar arrangements, including plan administrator for employee benefit accounts, under which BABANK or a predecessor is serving or has served as an agent or custodian for the owner or other party establishing the account with or without investment authority. 4.34. Disclosure Documents and Applications. None of the information ------------------------------------- supplied or to be supplied by or on behalf of BAB ("BAB Supplied Information") for inclusion in (a) the Registration Statement on Form S-4 and the Proxy Statement and Prospectus and (b) any other documents to be filed with the SEC, the FRB, the FDIC, the DFI or any other Governmental Entity in connection with the transactions contemplated in this Agreement, will, at the respective times such documents are filed or become effective, or with respect to the Proxy Statement and Prospectus when mailed, contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.35. Intellectual Property. Except as set forth in a list furnished --------------------- by BAB to GBB (the "BAB Intellectual Property List"), BAB and BABANK own or possess valid and binding licenses and other rights to use without payment all material patents, copyrights, trade secrets, trade names, service marks and trademarks used in their respective businesses; and neither BAB nor BABANK has received any notice with respect thereto that asserts the rights of others. BAB and BABANK has in all material respects performed all the obligations required to be performed by them, and are not in default in any material respect under any license, contract, agreement, arrangement or commitment relating to any of the foregoing. 4.36. Year 2000. The mission critical computer software operated by --------- BAB and BABANK is currently capable of providing, or is being adapted to provide, uninterrupted millennium functionality to record, store, process and present calendar dates falling on or after January 1, 2000 in substantially the same manner and with the same functionality as such mission critical software records, stores, processes and presents such calendar dates falling on or before December 31, 1999. The costs of the adaptations referred to in this clause will not have a material adverse effect on the business, financial condition, results of operations or prospects of BAB on a consolidated basis. Neither BAB nor BABANK has received, or reasonably expects to receive, a "Year 2000 Deficiency Notification Letter" (as such term is employed by the FDIC). BAB has disclosed to GBB a complete and accurate copy of its plan, including an estimate of the anticipated associated costs, for addressing the issues set forth in all Federal Financial Institutions Examination Council Interagency Statements as such issues affect BAB and BABANK. Between the date of this Agreement and the Effective Time, BAB shall use commercially practicable efforts to implement such plan. 30 4.37. Insider Loans; Other Transactions. BAB has previously provided --------------------------------- GBB with a listing, current as of January 22, 1999, of all extensions of credit made by BAB and BABANK to each of its executive officers and directors and their related interests (all as defined under Federal Reserve Board Regulation O), all of which have been made in compliance with Regulation O, and Section 23B under the Federal Reserve Act which listing is true, correct and complete in all material respects. Neither BAB nor BABANK owes any amount to, or has any contract or lease with or commitment to, any of the present executive officers or directors of BAB or BABANK (other than for compensation for current services not yet due and payable, reimbursement of expenses arising in the ordinary course of business, options or awards available under the BAB Stock Option Plan or BAB SAR Plan or any amounts due pursuant to BAB's Employee Plans). 4.38. Registration Obligation. Neither BAB nor BABANK is under any ----------------------- obligation, contingent or otherwise, to register any of their respective securities under the Securities Act. 4.39. Accuracy and Currentness of Information Furnished. The ------------------------------------------------- representations and warranties made by BAB hereby or in the BAB Lists or schedules hereto do not contain any untrue statement of a material fact or omit to state any material fact which is necessary under the circumstances under which they were made to prevent the statements contained herein or in such schedules from being misleading. ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF GBB ------------------------------------- GBB represents and warrants to BAB as follows: 5.1. Incorporation, Standing and Power. GBB has been duly organized, --------------------------------- is validly existing and in good standing as a corporation under the laws of the State of California and is registered as a bank holding company under the BHC Act. GBB has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as presently conducted. GBB is duly qualified and in good standing as a foreign corporation, and is authorized to do business, in all states or other jurisdictions in which such qualification or authorization is necessary, except where the failure to be so qualified or authorized would not, individually or in the aggregate, have a material adverse effect on the business, financial condition, results of operations or prospects of GBB on a consolidated basis. True and correct copies of the Articles of Incorporation and Bylaws of GBB have been delivered to BAB. Such Articles of Incorporation and Bylaws are in full force and effect as of the date hereof. 5.2. Capitalization. As of the date of this Agreement, the -------------- authorized capital stock of GBB consists of 24,000,000 shares of common stock, of which 9,608,822 shares were outstanding at December 30, 1998, and 4,000,000 shares of preferred stock, no par value, of which no shares are outstanding. All of the outstanding shares of GBB Stock are duly authorized, validly 31 issued, fully paid and nonassessable. The GBB Stock to be used in the Merger will be duly authorized, validly issued, fully paid and nonassessable. 5.3. Financial Statements. GBB has previously furnished to BAB a copy -------------------- of the Financial Statements of GBB. The Financial Statements of GBB: (a) present fairly the consolidated financial condition of GBB as of the respective dates indicated and its consolidated results of operations and changes in cash flows, as applicable, for the respective periods then ended, subject, in the case of the unaudited consolidated interim financial statements, to normal recurring adjustments; (b) have been prepared in accordance with generally accepted accounting principles consistently applied (except as otherwise indicated therein); (c) set forth as of the respective dates indicated adequate reserves for loan losses and other contingencies; and (d) are based upon the books and records of GBB and its subsidiaries. 5.4. Reports and Filings. Since January 1, 1995, GBB has filed all ------------------- reports, returns, registrations and statements (such reports and filings referred to as "GBB Filings"), together with any amendments required to be made with respect thereto, that were required to be filed with (a) the SEC, (b) the FRB, and (c) any other applicable Governmental Entity, including taxing authorities, except where the failure to file such reports, returns, registrations or statements has not had and is not reasonably expected to have a material adverse effect on the business, financial condition, results of operations or prospects of GBB on a consolidated basis. No administrative actions have been taken or orders issued in connection with such GBB Filings. As of their respective dates, each of such GBB Filings (y) complied in all material respects with all laws and regulations enforced or promulgated by the Governmental Entity with which it was filed (or was amended so as to be in such compliance promptly following discovery of any such noncompliance; and (z) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any of such GBB Filings that was intended to present the financial position of GBB on a consolidated basis fairly presented the financial position of GBB on a consolidated basis and was prepared in accordance with generally accepted accounting principles or banking regulations consistently applied, except as stated therein, during the periods involved. 5.5. Authority. The execution and delivery by GBB of this Agreement --------- and the Agreement of Merger have been duly and validly authorized by all necessary corporate action on the part of GBB. This Agreement is, and the Agreement of Merger will be, upon due execution and delivery by the respective parties hereto, a valid and binding obligation of GBB enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles. Except as set forth in a list furnished by GBB to BAB (the "GBB Conflicts and Consents List"), neither the execution and delivery by GBB of this Agreement or the Agreement of Merger, the consummation of the transactions contemplated herein, nor compliance by GBB with any of the provisions hereof or 32 thereof, will: (a) conflict with or result in a breach of any provision of its Articles of Incorporation, as amended, or Bylaws, as amended; (b) constitute a breach of or result in a default (or give rise to any rights of termination, cancellation or acceleration, or any right to acquire any securities or assets) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, franchise, license, permit, agreement or other instrument or obligation to which GBB or any subsidiary of GBB is a party, or by which GBB, or any subsidiary of GBB or any of its respective properties or assets is bound; (c) result in the creation or imposition of any Encumbrance on any of the properties or assets of GBB or any subsidiary; or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to GBB or any subsidiary of GBB or any of their respective properties or assets. Except as set forth in the "GBB Conflicts and Consents List," no consent of, approval of, notice to or filing with any Governmental Entity having jurisdiction over any aspect of the business or assets of GBB, and no consent of, approval of or notice to any other Person, is required in connection with the execution and delivery by GBB of this Agreement or the Agreement of Merger, or the consummation by GBB of the Merger or the transactions contemplated hereby or thereby, except (i) such approvals as may be required by the SEC, the FRB and the DFI; (ii) filing of the Agreement of Merger with the Secretary of State of the State of California; and (iii) such approvals as may be required to approve for inclusion on the Nasdaq National Market System of the GBB Stock to be issued in the Merger. 5.6. Subsidiaries. As of the date of this Agreement, GBB owns 100% of ------------ the outstanding stock of each of CNB, GGB, MPB, PBC and Pacific Business Funding Corporation. As of the date of this Agreement, and except for its investments in the Banks, GBB Capital I and GBB Capital II, GBB does not own, directly or indirectly (except as a pledgee pursuant to loans or upon acquisition in satisfaction of debt previously contracted), the outstanding stock or equity or other voting interest in any other Person. 5.7. Brokers and Finders. Except for the obligation to Hoefer & ------------------- Arnett Incorporated, as set forth in a letter agreement dated June 22, 1998, as supplemented on November 11, 1998, GBB is not a party to or obligated under any agreement with any broker or finder relating to the transactions contemplated hereby, and neither the execution of this Agreement nor the consummation of the transactions provided for herein will result in any liability to any broker or finder. 5.8. Certain Material Changes. Except as specifically required, ------------------------ permitted or effected by this Agreement or as disclosed in any GBB Filings, since September 30, 1998, there has not been, occurred or arisen any of the following (whether or not in the ordinary course of business unless otherwise indicated): 5.8.1. Any change in any of the assets, liabilities, permits, methods of accounting or accounting practices, business, or manner or conducting business, of GBB or its subsidiaries or any other event or development that has had or may reasonably be expected to have a 33 material adverse effect on the assets, liabilities, permits, business, financial condition, results of operations or prospects of GBB on a consolidated basis; 5.8.2. Any damage, destruction or other casualty loss (whether or not covered by insurance) that has had or may reasonably be expected to have a material adverse effect on the assets, liabilities, permits, business, financial condition, results of operations or prospects of GBB on a consolidated basis; 5.8.3. Any amendment, modification or termination of any existing, or entry into any new, material contract or permit that has had or may reasonably be expected to have a material adverse effect on the assets, liabilities, permits, business, financial condition, results of operations or prospects of GBB on a consolidated basis; or 5.8.4. Any disposition by GBB of an asset the lack of which has had or may reasonably be expected to have a material adverse effect on the assets, liabilities, permits, business, financial condition, results of operations or prospects of GBB on a consolidated basis; or 5.8.5 Any direct or indirect redemption, purchase or other acquisition by GBB or the Banks of any equity securities or stock appreciation rights or any declaration, setting aside or payment of any dividend (except, in the case of the declaration, setting aside or payment of a cash dividend, as disclosed in the Financial Statements of GBB or otherwise declared or paid consistent with past practice) or other distribution on or in respect of GBB Stock or stock appreciation rights whether consisting of money, other personal property, real property or other things of value, except pursuant to the Rights Agreement, dated as of November 17, 1998, between GBB and Norwest Bank Minnesota, N.A. 5.9. Licenses and Permits. GBB and each subsidiary of GBB have all -------------------- material licenses and permits that are necessary for the conduct of their respective businesses, and such licenses are in full force and effect, except for any failure to be in full force and effect that would not, individually or in the aggregate, have a material adverse effect on the business, financial condition, results of operations or prospects of GBB on a consolidated basis. The respective properties, assets, operations and businesses of GBB and each subsidiary of GBB are and have been maintained and conducted, in all material respects, in compliance with all applicable licenses and permits. The properties and operations of GBB and each subsidiary of GBB are and have been maintained and conducted, in all material respects, in compliance with all applicable laws and regulations. 5.10. Corporate Records. The minute books of GBB reflect all ----------------- material actions taken to this date by its shareholders, boards of directors and committees. 5.11. Accounting Records. GBB and its subsidiaries maintain ------------------ accounting records which fairly and validly reflect, in all material respects, their transactions and accounting controls 34 exist sufficient to provide reasonable assurances that such transactions are, in all material respects, (i) executed in accordance with their management's general or specific authorization, and (ii) recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting procedures. Such records, to the extent they contain important information pertaining to GBB and its subsidiaries which is not easily and readily available elsewhere, have been duplicated, and such duplicates are stored safely and securely. 5.12. Facts Affecting Regulatory Approvals. To the best knowledge of ------------------------------------ GBB, there is no fact, event or condition applicable to GBB or any of its subsidiaries which will, or reasonably could be expected to, adversely affect the likelihood of securing the requisite approvals or consents of any Governmental Entity to the Merger and transactions contemplated by this Agreement. 5.13. Accounting and Tax Matters. To the best of GBB's knowledge, -------------------------- GBB has not through the date hereof taken or agreed to take any action that would prevent it from accounting for the business combination to be effected by the Merger as a pooling-of-interests or would prevent the Merger from qualifying as a tax-free reorganization under the Code. 5.14. Disclosure Documents and Applications. None of the information ------------------------------------- supplied or to be supplied by or on behalf of GBB or any of its subsidiaries ("GBB Supplied Information") for inclusion in (a) the Registration Statement on Form S-4 and the Proxy Statement and Prospectus to be mailed to the shareholders of BAB in connection with obtaining the approval of the shareholders of BAB of this Agreement, the Merger and the other transactions contemplated hereby, and (b) any other documents to be filed with the SEC, the FRB, the DFI or any other Governmental Entity in connection with the transactions contemplated in this Agreement, will, at the respective times such documents are filed or become effective, or with respect to the Proxy Statement and Prospectus when mailed, contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.15. Nasdaq Listing. As of the date hereof, GBB Stock is listed on -------------- the Nasdaq National Market System. 5.16. Accuracy and Currentness of Information Furnished. The ------------------------------------------------- representations and warranties made by GBB hereby or in the GBB Lists or Schedules hereto do not contain any untrue statement of material fact or omit to state any material fact which is necessary under the circumstances under which they were made to prevent the statements contained herein or in such schedules from being misleading. 5.17 Year 2000. The mission critical computer software operated by --------- GBB is currently capable of providing, or is being adapted to provide, uninterrupted millennium functionality to record, store, process and present calendar dates falling on or after January 1, 2000 in substantially the same manner and with the same functionality as such mission critical software 35 records, stores, processes and presents such calendar dates falling on or before December 31, 1999. The costs of the adaptations referred to in this clause will not have a material adverse effect on the business, financial condition, results of operations or prospects of GBB on a consolidated basis. GBB has not received, and reasonably expects that it will not receive, a "Year 2000 Deficiency Notification Letter" (as such term is employed by the FDIC). 5.18. Insurance. Each of GBB and the Banks have policies of --------- insurance and bonds with respect to their respective assets and business against such casualties and contingencies and in such amounts, types and forms as are customarily appropriate for their respective business, operations, properties and assets. All such insurance policies and bonds are in full force and effect. No insurer under any such policy or bond has canceled or indicated an intention to cancel or not to renew any such policy or bond or generally disclaimed liability thereunder. Neither GBB nor the Banks are in default under any such policy or bond and all material claims thereunder have been filed in a timely fashion. 5.19. Litigation. Except as set forth in a list furnished by GBB to ---------- BAB (the "GBB Litigation List"), there is no private or governmental suit, claim, action or proceeding pending, nor to GBB's knowledge threatened, against GBB or the Banks or against any of their respective directors, officers or employees relating to the performance of their duties in such capacities or against or affecting any properties of GBB or the Banks which, if adversely determined, would have, individually or in the aggregate, a material adverse effect upon the business, financial condition or results of operations of GBB on a consolidated basis, or the transactions contemplated hereby. Also, except as disclosed in the GBB Litigation List, there are no material judgments, decrees, stipulations or orders against GBB or the Banks or enjoining their respective directors, officers or employees in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area. 5.20. Compliance with Laws and Regulations. Neither GBB nor the Banks ------------------------------------ is in default under or in breach or violation of (i) any provision its Articles of Incorporation, as amended, or Bylaws, as amended, or (ii) law, ordinance, rule or regulation promulgated by any Governmental Entity, except, with respect to this clause (ii), for such violations as would not have, individually or in the aggregate, a material adverse effect on the business, financial condition, results of operations or prospects of GBB on a consolidated basis or the Banks, as the case may be. 5.21. Undisclosed Liabilities. Neither GBB nor the Banks have any ----------------------- liabilities or obligations, either accrued or contingent, that are material to GBB and that have not been: (a) reflected or disclosed in the Financial Statements of GBB; (b) incurred subsequent to December 31, 1997 in the ordinary course of business consistent with past practices; or (c) disclosed in a list furnished by GBB to BAB (the " GBB Undisclosed Liabilities List") or on any other GBB List. GBB does not know of any basis for the assertion against it or the Banks of any liability, obligation or claim (including, without limitation, that of any regulatory authority) that is likely to result in or cause a material adverse change in the business, financial condition, results of operations 36 or prospects of GBB on a consolidated basis that is not fairly reflected in the Financial Statements of GBB or otherwise disclosed in this Agreement. 5.22. Community Reinvestment Act. Each of the Banks has received a -------------------------- rating of at least "satisfactory" in its most recent examination or interim review with respect to the Community Reinvestment Act. None of the Banks has been advised of any supervisory concerns regarding its compliance with the Community Reinvestment Act. 5.23. Employee Benefit Plans. GBB has previously made available to BAB ---------------------- copies of each "employee benefit plan," as defined in Section 3(3) of ERISA, of which GBB or any of its ERISA Affiliates is a sponsor or participating employer or as to which GBB or any of its ERISA Affiliates makes contributions or is required to make contributions and which is subject to any provision of ERISA and covers any employee, whether active or retired, of GBB or any of its ERISA Affiliates, together with all amendments thereto, all currently effective and related summary plan descriptions (to the extent one is required by law), the determination letter from the IRS, the annual reports for the most recent three years (Form 5500 including, if applicable, Schedule B thereto) and the summary of material modifications and all material employee communications prepared in connection with or pertaining to any such plan. Such plans are hereinafter referred to collectively as the "Employee Plans." GBB does not participate in an employee benefit pension plan that is a "multiemployer plan" within the meaning of Section 3(37) of ERISA that would subject GBB to a material amount of liability with respect to any such plan. Each Employee Plan which is intended to be qualified in form and operation under Section 401(a) of the Code is so qualified and the associated trust for each such Employee Plan is exempt from tax under Section 501(a) of the Code. No event has occurred that will subject such Employee Plans to a material amount of tax under Section 511 of the Code. All amendments required to bring each Employee Plan into conformity with all of the applicable provisions of ERISA, the Code and all other applicable laws have been made. All Employee Plans were in effect for substantially all of 1998, and there has been no material amendment thereof (other than amendments required to comply with applicable law) or increase in the cost thereof or benefits thereunder on or after January 1, 1998. ARTICLE 6. COVENANTS OF BAB ---------------- PENDING EFFECTIVE TIME OF THE MERGER ------------------------------------ BAB covenants and agrees with GBB as follows: 6.1. Limitation on BAB's Conduct Prior to Effective Time of the ---------------------------------------------------------- Merger. Between the date hereof and the Effective Time of the Merger, except as contemplated by this Agreement and subject to requirements of law and regulation, BAB agrees to conduct its business (and to cause BABANK to conduct its business) in the ordinary course in substantially the manner 37 heretofore conducted and in accordance with sound banking practices, and BAB and BABANK shall not, without the prior written consent of GBB, which consent will not be unreasonably withheld: 6.1.1. issue, sell or grant any BAB Stock (except pursuant to the exercise of BAB Options outstanding as of the date hereof), any other securities (including long term debt) of BAB or BABANK, or any rights, stock appreciation rights, options or securities to acquire any BAB Stock, or any other securities (including long term debt) of BAB or BABANK; 6.1.2. declare, set aside or pay any dividend or make any other distribution upon or split, combine or reclassify any shares of capital stock or other securities of BAB or BABANK, provided, however, that subject to Section 6.11, BAB may pay to its shareholders its regular cash dividend in amounts consistent with past practices; 6.1.3. purchase, redeem or otherwise acquire any capital stock or other securities of BAB or BABANK or any rights, options, or securities to acquire any capital stock or other securities of BAB or BABANK; 6.1.4. except as may be required to effect the transactions contemplated herein, amend its Articles of Incorporation or Bylaws; 6.1.5. grant any general or uniform increase in the rate of pay of employees or employee benefits; 6.1.6. grant any increase in salary, incentive compensation or employee benefits or pay any bonus to any Person (except as to any amounts accrued as of December 31, 1998 and except as to any increase reasonably necessary to retain an existing employee whose services are critical to the operations of BABANK; provided, however that any such increases or bonuses shall not exceed in the aggregate (and not on an individual basis) 3% of BABANK's compensation expense at December 31, 1998) or voluntarily accelerate the vesting of any employee benefits; 6.1.7. make any capital expenditure (unless previously committed and disclosed to BAB) or commitments with respect thereto in excess of $50,000 in the aggregate, except for ordinary repairs, renewals and replacements; 6.1.8. compromise or otherwise settle or adjust any assertion or claim of a deficiency in taxes (or interest thereon or penalties in connection therewith), extend the statute of limitations with any tax authority or file any pleading in court in any tax litigation or any appeal from an asserted deficiency, or file or amend any federal, foreign, state or local tax return, or make any tax election; 38 6.1.9. grant, renew or commit to grant or renew any extension of credit if such extension of credit, together with all other credit then outstanding to the same Person and all Affiliated Persons, would exceed $200,000 on an unsecured basis, or $500,000 if secured by a lien on real estate or cash (consent shall be deemed granted if within three Business Days of written notice delivered to GBB's Chief Credit Officer, written notice of objection is not received by BAB); 6.1.10. change in any material respect its tax or accounting policies and procedures or any method or period of accounting unless required by generally accepted accounting principles or a Governmental Entity; 6.1.11. grant or commit to grant any extension of credit or amend the terms of any such credit outstanding on the date hereof to any executive officer, director or holder of 10% or more of the outstanding BAB Stock, or any Affiliate of such Person, if such credit would exceed $25,000; 6.1.12. close any offices at which business is conducted or open any new offices except ATM locations; provided, however that BABANK shall give GBB prior notice of new ATM locations; 6.1.13. adopt or enter into any new employment agreement or other employee benefit plan or arrangement or amend or modify any employment agreement or employee benefit plan or arrangement of any such type except for such amendments as are required by law; 6.1.14. initiate, solicit or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal which constitutes, or may reasonably be expected to lead to, any Competing Transaction (as such term is defined below), or negotiate with any person in furtherance of such inquiries or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any of its or BABANK's officers, directors or employees or any investment banker, financial advisor, attorney, accountant or any other representative retained by it or any of its Affiliates to take any such action, and BAB shall promptly notify GBB (orally and in writing) of all of the relevant details relating to all inquiries and proposals which it may receive relating to any of such matters. For purposes of this Agreement, "Competing Transaction" shall mean any of the following involving BAB or BABANK: any merger, consolidation, share exchange or other business combination; a sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets of BAB or BABANK representing 10% or more of the consolidated assets of BAB; a sale of shares of capital stock (or securities convertible or exchangeable into or otherwise evidencing, or any agreement or instrument evidencing, the right to acquire capital stock), representing 10% or more of the voting power of BAB or BABANK; a tender offer or exchange offer for at least 10% of the outstanding shares; a solicitation of proxies in opposition to approval of the Merger by BAB's shareholders; or a public announcement of an unsolicited bona fide proposal, plan, or intention to do any of the foregoing. Notwithstanding any other provision in this Section 6.1.14 or elsewhere in 39 this Agreement, the obligations of BAB in this Agreement are subject to, upon advice of counsel, the continuing fiduciary duties of the Board of Directors of BAB to the shareholders of BAB; provided, however, that nothing herein shall prohibit GBB from terminating this Agreement pursuant to Section 13.1.8 hereof. 6.1.15. change any basic policies and practices with respect to liquidity management and cash flow planning, marketing, deposit origination, lending, budgeting, profit and tax planning, personnel practices or any other material aspect of BAB's business or operations, except such changes as may be required in the opinion of BAB's management to respond to economic or market conditions or as may be required by any Governmental Entity; 6.1.16. grant any Person a power of attorney or similar authority; 6.1.17. make any investment by purchase of stock or securities (including an Investment Security), contributions to capital, property transfers or otherwise in any other Person, except for federal funds or obligations of the United States Treasury or an agency of the United States government, including collateralized mortgage obligations, the obligations of which are entitled to or implied to have the full faith and credit of the United States government or bank qualified investment grade municipal bonds, in any case, in the ordinary course of business consistent with past practices and which are not designated as trading (consent shall be deemed granted if within three Business Days of written notice delivered to GBB's Chief Operating Officer, written notice of objection is not received by BAB); 6.1.18. materially amend or modify any Scheduled Contract or enter into any agreement or contract that would be a Scheduled Contract under Section 4.16 except ATM location contracts in accordance with market conditions; 6.1.19. sell, transfer, mortgage, encumber or otherwise dispose of any assets or release or waive any claim, except in the ordinary course of business and consistent with past practices; 6.1.20. knowingly take any action which would or is reasonably likely to (i) adversely affect the ability of GBB or BAB to obtain any necessary approval of any Governmental Entity required for the transactions contemplated hereby; (ii) adversely affect BAB's ability to perform its covenants and agreements under this Agreement; or (iii) result in any of the conditions to the performance of GBB's or BAB's obligations hereunder, as set forth in Article 9 or 10 herein not being satisfied; 6.1.21. make any special or extraordinary payments to any Person; 6.1.22. reclassify any Investment Security from hold-to-maturity or available for sale to trading; 40 6.1.23. sell any security other than in the ordinary course of business, or engage in gains trading; 6.1.24. take title to any real property without conducting prior thereto an environmental investigation, which investigation shall disclose the absence of any suspected environmental contamination; 6.1.25. knowingly take or cause to be taken any action which would disqualify the Merger as a "reorganization" within the meaning of Section 368 of the Code or prevent GBB from accounting for the business combination to be effected by the Merger as a pooling-of-interests; 6.1.26. settle any claim, action or proceeding involving any material liability for monetary damages or enter into any settlement agreement containing material obligations; 6.1.27. make, acquire a participation in, or reacquire an interest in a participation sold of, any loan that is not in compliance with its normal credit underwriting standards, policies and procedures as in effect on September 30, 1998; or renew, extend the maturity of, or alter any of the material terms of any such loan for a period of greater than six months; 6.1.28. incur any indebtedness for borrowed money or assume, guaranty, endorse or otherwise as an accommodation become responsible for the obligations of any other person, except for (i) in connection with banking transactions with banking customers in the ordinary course of business, or (ii) short-term borrowings made at prevailing market rates and terms; or 6.1.29. agree or make any commitment to take any actions prohibited by this Section 6.1. 6.2. Affirmative Conduct of BAB Prior to Effective Time of the Merger. ---------------------------------------------------------------- Between the date hereof and the Effective Time of the Merger, BAB shall (and shall cause BABANK to): 6.2.1. use its commercially reasonable efforts consistent with this Agreement to maintain and preserve intact its present business organization and to maintain and preserve its relationships and goodwill with account holders, borrowers, employees and others having business relationships with BAB or BABANK; 6.2.2. use its commercially reasonable efforts to keep in full force and effect all of the existing material permits and licenses of BAB and BABANK; 41 6.2.3. use its commercially reasonable efforts to maintain insurance coverage at least equal to that now in effect on all properties for which it is responsible and on its business operations; 6.2.4. perform its material contractual obligations and not become in material default on any such obligations; 6.2.5. duly observe and conform in all material respects to all lawful requirements applicable to its business; 6.2.6. maintain its assets and properties in good condition and repair, normal wear and tear excepted; 6.2.7. promptly upon learning of such information, advise GBB in writing of any event or any other transaction within its knowledge whereby any Person or Related Group of Persons acquires, directly or indirectly, record or beneficial ownership or control (as defined in Rule 13d-3 promulgated by the SEC under the Exchange Act) of 5% or more of the outstanding BAB Stock prior to the record date fixed for the BAB Shareholders' Meeting or any adjourned meeting thereof to approve this Agreement and the transactions contemplated herein; 6.2.8. promptly notify GBB regarding receipt from any tax authority of any notification of the commencement of an audit, any request to extend the statute of limitations, any statutory notice of deficiency, any revenue agent's report, any notice of proposed assessment, or any other similar notification of potential adjustments to the tax liabilities of BAB, or any actual or threatened collection enforcement activity by any tax authority with respect to tax liabilities of BAB; 6.2.9. make available to GBB monthly unaudited balance sheets and income statements of BAB within 25 days after the close of each calendar month; 6.2.10. not later than the 30th day of each calendar month, amend or supplement the BAB Lists prepared and delivered pursuant to Article 4 to ensure that the information set forth in the BAB Lists accurately reflects the then- current status of BAB. BAB shall further amend or supplement the BAB Lists as of the Closing Date if necessary to reflect any additional information that needs to be included in the BAB Lists; 6.2.11. use its commercially reasonable efforts to obtain any third party consent with respect to any contract, agreement, lease, license, arrangement, permit or release that is material to the business of BAB or that is contemplated in this Agreement as required in connection with the Merger; 42 6.2.12. maintain an allowance for loan and lease losses consistent with practices and methodology as in effect on the date of the execution of this Agreement; and 6.2.13. furnish to Manatt, Phelps & Phillips, LLP promptly upon its written request written representations and certificates as deemed reasonably necessary or appropriate for purposes of enabling Manatt, Phelps & Phillips, LLP to render the tax opinion referred to in Section 9.6 hereof. 6.3. Access to Information --------------------- 6.3.1. BAB will afford, upon reasonable notice, to GBB and its representatives, counsel, accountants, agents and employees reasonable access during normal business hours to all of its and BABANK's business, operations, properties, books, files and records and will do everything reasonably necessary to enable GBB and its representatives, counsel, accountants, agents and employees to make a complete examination of the financial statements, business, assets and properties of BAB and BABANK and the condition thereof and to update such examination at such intervals as GBB shall deem appropriate. Such examination shall be conducted in cooperation with the officers of BAB and BABANK and in such a manner as to minimize any disruption of, or interference with, the normal business operations of BAB and BABANK. Upon the request of GBB, BAB will request PwC to provide reasonable access to representatives of PwC working on behalf of GBB to auditors' work papers with respect to the business and properties of BAB and BABANK, including tax accrual work papers prepared for BAB and BABANK during the preceding 60 months, other than (a) books, records and documents covered by the attorney-client privilege, or that are attorneys' work product, and (b) books, records and documents that BAB or BABANK is legally obligated to keep confidential. No examination or review conducted under this section shall constitute a waiver or relinquishment on the part of GBB of the right to rely upon the representations and warranties made by BAB herein; provided, that GBB shall disclose to BAB any fact or circumstance it may discover which GBB believes renders any representation or warranty made by BAB hereunder incorrect in any respect. GBB covenants and agrees that it, its subsidiaries, and their respective representatives, counsel, accountants, agents and employees will hold in strict confidence all documents and information concerning BAB and BABANK so obtained from any of them (except to the extent that such documents or information are a matter of public record or require disclosure in the Proxy Statement and Prospectus or any of the public information of any applications required to be filed with any Governmental Entity to obtain the approvals and consents required to effect the transactions contemplated hereby), and if the transactions contemplated herein are not consummated, such confidence shall be maintained and all such documents shall be returned to BAB. 6.3.2. A representative of GBB, selected by GBB in its sole discretion, shall be authorized and permitted to review each loan, lease, or other credit funded or renewed by BAB or BABANK after the date hereof, and all information associated with such loan, lease or other credit 43 within three Business Days of such funding or renewal, such review to take place, if possible, on BAB's premises. 6.3.3. A representative of GBB, selected by GBB in its sole discretion, shall be permitted by BAB and BABANK to attend all regular and special Board of Directors' and committee meetings of BAB and BABANK from the date hereof until the Effective Time of the Merger; provided, however, that the attendance of such representative shall not be permitted at any meeting, or portion thereof, for the sole purpose of discussing the transactions contemplated by this Agreement or the obligations of BAB under this Agreement. 6.4. Review by Accountants. Promptly upon request of GBB, BAB will --------------------- request PwC to permit representatives of PwC working on behalf of GBB to review and examine the work papers of PwC relating to BAB and BABANK and the Financial Statements of BAB and to review and examine the work papers of PwC relating to any future completed audits or completed reviews of BAB and BABANK. 6.5. Filings. BAB agrees that through the Effective Time of the ------- Merger, each of its or BABANK's reports, registrations, statements and other filings required to be filed with any applicable Governmental Entity will comply in all material respects with all the applicable statutes, rules and regulations enforced or promulgated by the Governmental Entity with which it will be filed and none will contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any such report, registration, statement or other filing that is intended to present the financial position of the entity to which it relates will fairly present the financial position of such entity and will be prepared in accordance with generally accepted accounting principles or applicable banking regulations consistently applied during the periods involved. 6.6. Notices; Reports. BAB will promptly notify GBB of any event of ---------------- which BAB obtains knowledge which has had or may have a materially adverse effect on the financial condition, operations, business or prospects of BAB on a consolidated basis, or in the event that BAB determines that it is unable to fulfill any of the conditions to the performance of GBB's obligations hereunder, as set forth in Article 9 or 11 herein, and BAB will furnish GBB (i) as soon as available, and in any event within one Business Day after it is mailed or delivered to the Board of Directors of BAB or BABANK or committees thereof, any report by BAB or BABANK for submission to the Board of Directors of BAB or BABANK or committees thereof, provided, however, that BAB need not furnish to GBB communications of BAB's legal counsel regarding BAB's rights and obligations under this Agreement or the transactions contemplated hereby, or books, records and documents covered by confidentiality agreements or the attorney-client privilege, or which are attorneys' work product, (ii) as soon as available, all proxy statements, information statements, financial statements, reports, letters and communications sent by BAB to its shareholders or other security holders, and all reports filed by BAB or BABANK with the FRB, the 44 FDIC or the DFI, and (iii) such other existing reports as GBB may reasonably request relating to BAB or BABANK. 6.7. BAB Shareholders' Meeting. Promptly after the execution of this ------------------------- Agreement, BAB will take action necessary in accordance with applicable law and its Articles of Incorporation and Bylaws to convene a meeting of its shareholders to consider and vote upon this Agreement and the transactions contemplated hereby so as to permit the consummation of the transactions contemplated hereby. The Board of Directors of BAB shall, subject to its fiduciary duties, recommend that its shareholders approve this Agreement and the transactions contemplated hereby, and the Board of Directors of BAB shall, subject to its fiduciary duties, use its best efforts to obtain the affirmative vote of the holders of the largest possible percentage of the outstanding BAB Stock to approve this Agreement and the transactions contemplated hereby. 6.8. Certain Loans and Other Extensions of Credit. BAB will promptly -------------------------------------------- inform GBB of the amounts and categories of any loans, leases or other extensions of credit that have been classified by any bank regulatory authority or by any unit of BAB or BABANK or by any other Person as "Criticized," "Specially Mentioned," "Substandard," "Doubtful," "Loss" or any comparable classification ("Classified Credits"). BAB will furnish GBB, as soon as practicable, and in any event within 20 days after the end of each calendar month, schedules including the following: (a) Classified Credits (including with respect to each credit its classification category and the originating unit); (b) nonaccrual credits (including the originating unit); (c) accrual exception credits that are delinquent 90 or more days and have not been placed on nonaccrual status (including its originating unit); (d) credits delinquent as to payment of principal or interest (including its originating unit), including an aging into current-to-29, 30-59, 60-89, and 90+ day categories; (e) participating loans and leases, stating, with respect to each, whether it is purchased or sold and the originating unit; (f) loans or leases (including any commitments) by BAB or BABANK to any BAB or BABANK director, officer at or above the senior vice president level, or shareholder holding 10% or more of the capital stock of BAB, including with respect to each such loan or lease the identity and, to the knowledge of BAB, the relation of the borrower to BAB or BABANK, and the outstanding and undrawn amounts; (g) letters of credit (including the originating unit); (h) loans or leases wholly or partially charged off during the previous month (including with respect to each loan or lease, the originating amount, the write-off amount and its originating unit); and (i) other real estate or assets acquired in satisfaction of debt. 6.9. Applications. Subject to Section 7.5, BAB will promptly prepare ------------ or cause to be prepared the portions of the Proxy Statement and Prospectus as it pertains to BAB or BABANK and any other applications necessary to consummate the transactions contemplated hereby, and further agrees to provide any information requested by GBB for the preparation of any applications necessary to consummate the transactions contemplated hereby. BAB shall afford GBB a reasonable opportunity to review the portions of the Proxy Statement and Prospectus pertaining to BAB or BABANK and all such applications and all amendments and supplements thereto before the filing thereof. BAB covenants and agrees that, with respect to the information relating to BAB or 45 BABANK, the Proxy Statement and Prospectus will comply in all material respects with the provisions of applicable law, and will not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. BAB will use its commercially reasonable efforts to obtain all regulatory approvals or consents necessary to effect the Merger and the transactions contemplated herein. 6.10. Affiliates Agreements. Concurrently with the execution of this --------------------- Agreement, (a) BAB shall deliver to GBB a letter identifying all persons who are then "affiliates" of BAB for purposes of Rule 145 under the Securities Act and (b) BAB shall advise the persons identified in such letter of the resale restrictions imposed by applicable securities laws and shall use reasonable efforts to obtain from each person identified in such letter a written agreement substantially in the form attached hereto as Exhibit B. BAB shall use --------- reasonable efforts to obtain from any person who becomes an affiliate of BAB after BAB's delivery of the letter referred to above, and on or prior to the date of the BAB Shareholders' Meeting to approve this Agreement, a written agreement substantially in the form attached as Exhibit B hereto as soon as --------- practicable after obtaining such status. 6.11. Coordination of Dividends. BAB shall coordinate with GBB the ------------------------- declaration of any dividends that may be allowed pursuant to Section 6.1.2 hereof, and the record date and the payment dates relating thereto, it being the intention of the parties that holders of BAB Stock shall not receive two dividends, or fail to receive one dividend, for any applicable dividend period with respect to their shares of BAB Stock and any shares of GBB Stock any such holder will receive in exchange therefor in the Merger. 6.12. D&O Coverage. In the event that GBB is unable to have BAB's and ------------ BABANK's directors and officers added to GBB's directors' and officers' liability insurance policy pursuant to Section 7.2.6 hereof and upon GBB's request, BAB shall use commercially reasonable efforts to obtain (i) coverage for a period of at least 36 months following the Effective Time of the Merger for the directors and officers of BAB and BABANK under a directors' and officers' liability insurance policy which is no less protective in terms of coverage or limitations than now possessed by BAB covering acts or omissions occurring prior to the Effective Time of the Merger and actions related to this Agreement, and (ii) coverage for a period of at least 36 months following the Effective Time of the Merger under a bankers' blanket bond which is no less protective in terms of coverage or limitations than now possessed by BAB covering acts or omissions occurring prior to the Effective Time of the Merger and actions related to this Agreement. 6.13. Management Indebtedness. BAB shall modify the loans with its ----------------------- directors and officers that are secured by BAB Stock to require repayment of the related indebtedness 12 months after the Effective Time of the Merger. 46 ARTICLE 7. COVENANTS OF GBB ---------------- PENDING EFFECTIVE TIME OF THE MERGER ------------------------------------ GBB covenants and agrees with BAB as follows: 7.1. Limitation on GBB's Conduct Prior to Effective Time of the ---------------------------------------------------------- Merger. Between the date hereof and the Effective Time of the Merger, except as - ------ contemplated by this Agreement and subject to requirements of law and regulation generally applicable to bank holding companies and banks, each of GBB and its subsidiaries shall not, without prior written consent of BAB: 7.1.1. take any action which would or is reasonably likely to (i) adversely affect the ability of GBB to obtain any necessary approvals of any Governmental Entity required for the transactions contemplated hereby; (ii) adversely affect GBB's ability to perform its covenants and agreements under this Agreement; or (iii) result in any of the conditions to the performance of GBB's obligations hereunder, as set forth in Article 9 or 11 herein not being satisfied; 7.1.2. take or cause to be taken any action which would disqualify the Merger as a "reorganization" within the meaning of Section 368 of the Code or prevent GBB from accounting for the business combination to be effected by the Merger as a pooling-of-interests; 7.1.3. amend its articles of incorporation in any respect which would materially and adversely affect the rights and privileges attendant to the GBB Stock; or 7.1.4. agree or make any commitment to take any actions prohibited by this Section 7.1. 7.2. Affirmative Conduct of GBB and Subsidiaries Prior to Effective -------------------------------------------------------------- Time of the Merger. Between the date hereof and the Effective Time of the - ------------------ Merger, GBB shall: 7.2.1. duly observe and conform in all material respects to all lawful requirements applicable to the business of GBB or any subsidiary of GBB; 7.2.2. use its commercially reasonable efforts to obtain any third party consent with respect to any contract, agreement, lease, license, arrangement, permit or release that is material to the business of GBB on a consolidated basis and that is contemplated in this Agreement as required in connection with the Merger; 7.2.3. not later than the 20th day of each calendar month, amend or supplement the GBB Lists prepared and delivered pursuant to Article 5 to ensure that the 47 information set forth in the GBB Lists accurately reflects the then-current status of GBB and its subsidiaries. GBB shall further amend or supplement the GBB Lists as of the Closing Date if necessary to reflect any additional information that needs to be included in the GBB Lists; and 7.2.4. use its commercially reasonable efforts to have BAB's directors and officers added to GBB's directors' and officers' liability insurance policy, providing for coverage for a period of at least 36 months following the Effective Time of the Merger and covering acts or omissions occurring prior to the Effective Time of the Merger and actions related to this Agreement. 7.3. Access to Information. Upon reasonable request by BAB, GBB shall --------------------- (i) make its Chief Operating Officer/Chief Financial Officer and Controller (or another senior officer) available to discuss with BAB and its representatives GBB's operations; and (ii) shall provide BAB with written information which is (a) similar to the written information that BAB reviewed in connection with this Agreement, and (b) related to GBB's business condition, operations and prospects. No examination or review conducted under this section shall constitute a waiver or relinquishment on the part of BAB of the right to rely upon the representations and warranties made by GBB herein; provided, that BAB shall disclose to GBB any fact or circumstance it may discover which BAB believes renders any representation or warranty made by GBB hereunder incorrect in any respect. BAB covenants and agrees that it and its representatives, counsel, accountants, agents and employees will hold in strict confidence all documents and information concerning GBB so obtained (except to the extent that such documents or information are a matter of public record or require disclosure in the Proxy Statement and Prospectus or any of the public information of any applications required to be filed with any Governmental Entity to obtain the approvals and consents required to effect the transactions contemplated hereby), and if the transactions contemplated herein are not consummated, such confidence shall be maintained and all such documents shall be returned to GBB. 7.4. Filings. GBB agrees that through the Effective Time of the ------- Merger, each of its reports, registrations, statements and other filings required to be filed with any applicable Governmental Entity will comply in all material respects with all the applicable statutes, rules and regulations enforced or promulgated by the Governmental Entity with which it will be filed and none will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any such report, registration, statement or other filing that is intended to present the financial position of the entities or entity to which it relates will fairly present the financial position of such entities or entity and will be prepared in accordance with generally accepted accounting principles or applicable banking regulations consistently applied during the periods involved. 7.5. Applications. GBB will promptly prepare and file or cause to be ------------ prepared and filed (i) an application for approval of the Merger with the FRB; (ii) an application for approval of the Merger with the DFI; (iii) in conjunction with BAB, the Registration Statement on Form S-4 48 and the Proxy Statement and Prospectus as it pertains to GBB; and (iv) any other applications necessary to consummate the transactions contemplated hereby. GBB shall afford BAB a reasonable opportunity to review the Proxy Statement and Prospectus and all such applications and all amendments and supplements thereto before the filing thereof. GBB covenants and agrees that the Registration Statement on Form S-4 and the Proxy Statement and Prospectus and all applications to the appropriate regulatory agencies for approval or consent to the Merger, with respect to information relating to GBB or its subsidiaries, will comply in all material respects with the provisions of applicable law, and will not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. GBB will use its commercially reasonable efforts to obtain all regulatory approvals or consents necessary to effect the Merger. 7.6. Blue Sky. GBB agrees to use commercially reasonable efforts to -------- have the shares of GBB Stock to be issued in connection with the Merger qualified or registered for offer and sale, to the extent required, under the securities laws of each jurisdiction in which shareholders of BAB reside. 7.7. Notices; Reports. GBB will promptly notify BAB of any event of ---------------- which GBB obtains knowledge which has had or may have a material adverse affect on the financial condition, operations, business or prospects of GBB on a consolidated basis or in the event that GBB determines that it is unable to fulfill any of the conditions to the performance of BAB's obligations hereunder, as set forth in Article 9 or 10 herein. 7.8. Removal of Conditions. In the event of the imposition of a --------------------- condition to any regulatory approvals which GBB deems to materially adversely affect it or to be materially burdensome, GBB shall use its commercially reasonable efforts for purposes of obtaining the removal of such condition. 7.9. Stock Options and Stock Appreciation Rights. ------------------------------------------- 7.9.1. At and as of the Effective Time of the Merger, GBB shall assume each and every outstanding option to purchase shares of BAB Stock ("BAB Stock Option") and all obligations of BAB under the BAB Stock Option Plan. Each and every BAB Stock Option so assumed by GBB under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the BAB Stock Option Plan and in the other documents governing such BAB Stock Option immediately prior to the Effective Time of the Merger, except that: (i) such BAB Stock Option shall be exercisable for that number of whole shares of GBB Stock equal to the product of (A) the number of shares of BAB Stock that were purchasable under such BAB Stock Option immediately prior to the Effective Time of the Merger multiplied by (B) the Conversion Ratio, rounded down to the nearest whole number of shares of GBB Stock; and (ii) the per share exercise price for the shares of GBB Stock issuable upon exercise of such BAB Stock Option shall 49 be equal to the quotient determined by dividing (A) the exercise price per share of BAB Stock at which such BAB Stock Option was exercisable immediately prior to the Effective Time of the Merger by (B) the Conversion Ratio. Prior to the Effective Time of the Merger, GBB shall issue to each holder of an outstanding BAB Stock Option a document evidencing the assumption of such BAB Stock Option by GBB pursuant to this Section 7.9. 7.9.2. GBB shall comply with the terms of the BAB Stock Option Plan and insure, to the extent required by, and subject to the provisions of, such Plans, that BAB Stock Options which qualify as incentive stock options prior to the Effective Time of the Merger qualify as incentive stock options of GBB after the Effective Time of the Merger. 7.9.3. At or prior to the Effective Time of the Merger, GBB shall take all corporate action necessary to reserve for issuance a sufficient number of shares of GBB Stock for delivery upon exercise of GBB Stock Options assumed by it in accordance with this Section 7.9. 7.9.4 At or prior to the Effective Time of the Merger, GBB shall provide for the cash settlement of the stock appreciation rights granted under the BAB SAR Plan in accordance with the "Change In Control" provisions of such Plan, subject to the cap contained therein and the agreements executed thereunder. 7.10 Reservation, Issuance and Registration of GBB Stock. GBB shall --------------------------------------------------- reserve and make available for issuance in connection with the Merger and in accordance with the terms and conditions of this Agreement such number of shares of GBB Stock to be issued to the shareholders of BAB in the Merger pursuant to Article 2 hereof. 7.11 Nasdaq Listing. GBB shall use its commercially reasonable -------------- efforts to cause the shares of GBB Stock to be issued in the Merger to be approved for listing on the Nasdaq National Market System, subject to official notice of issuance, prior to the Effective Time of the Merger. 7.12 Directors Emeritus. GBB shall assume the obligations of BAB ------------------ under the three Director Emeritus agreements in effect on the date of this Agreement, plus a Director Emeritus agreement (similar to the currently effective Director Emeritus agreements) with Thorwald A. Madsen that BAB may enter into between the date of this Agreement and the Closing Date providing for a five year term and monthly payments over such term in the amount of $1,550. 50 ARTICLE 8. ADDITIONAL COVENANTS -------------------- The parties hereto hereby mutually covenant and agree with each other as follows: 8.1. Best Efforts. Subject to the terms and conditions of this ------------ Agreement, each party will use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the transactions contemplated by this Agreement as promptly as practical. 8.2. Public Announcements. No press release or other public -------------------- disclosure of matters related to this Agreement or any of the transactions contemplated hereby shall be made by GBB or BAB unless the other party shall have provided its prior consent to the form and substance thereof; provided, however, that nothing herein shall be deemed to prohibit any party hereto from making any disclosure which its counsel deems necessary or advisable in order to fulfill such party's disclosure obligations imposed by law. 8.3. Appointment of Directors. GBB agrees to take all necessary ------------------------ action, including, if necessary, increasing the authorized number of its directors, to appoint one member of BAB's Board of Directors to the Board of Directors of GBB effective at and after the Effective Time of the Merger. BAB agrees to take all necessary action including, if necessary, increasing or causing BABANK to increase the authorized number of BABANK's directors, to appoint David L. Kalkbrenner (or such other person designated by GBB and reasonably acceptable to BAB) to the Board of Directors of BABANK, effective at and after the Effective Time of the Merger. 8.4. Environmental Assessment and Remediation. GBB may cause to be ---------------------------------------- prepared at GBB's sole cost and expense within 45 days of the date of this Agreement one or more phase I environmental investigations with respect to the Real Property set forth on the BAB Real Property List. In the event any such phase I environmental investigation report, or any such report which BAB or BABANK has already obtained on any of the Real Property set forth on BAB's Real Property List, discloses facts which, in the sole discretion of GBB, warrant further investigation, GBB shall provide written notice to BAB, and BAB shall be required to cause to be completed within 60 days of such written notice, at the sole cost and expense of GBB, a phase II environmental investigation and report with respect to such property. The consultant engaged by BAB to conduct such investigation and provide such report shall be acceptable to GBB. GBB shall have 10 days from the receipt of such investigation report to object thereto, which objection shall be by written notice. In the event of any such objection, GBB shall engage an environmental consultant satisfactory to BAB who shall provide an estimate of the cost of taking any remedial action recommended or suggested in such phase II environmental investigation report, or which is required by law, or which is determined to be prudent by GBB, in its sole discretion, and, unless the estimated cost of such Remediation is in excess of $100,000 or is not reasonably determinable by 51 such consultant (and written notice thereof provided by BAB to GBB) BAB shall immediately commence such Remediation, all at the sole cost and expense of BAB. In the event such environmental consultant determines that the estimated cost of such remediation is in excess of $100,000 or is not reasonably determinable, GBB shall have the right to terminate the Agreement pursuant to Section 13.1.9 hereof before the expiration of 21 days from the date of such written notice. GBB agrees to keep confidential and not to disclose any nonpublic information obtained in the course of such environmental investigation relating to environmental contamination or suspected contamination of any property on the BAB Real Property List, except as required by law. ARTICLE 9. CONDITIONS PRECEDENT TO THE MERGER ---------------------------------- The obligations of each of the parties hereto to consummate the transactions contemplated herein are subject to the satisfaction, on or before the Closing Date, of the following conditions: 9.1. Shareholder Approval. The Agreement and the transactions -------------------- contemplated hereby shall have received all requisite approvals of the shareholders of BAB. 9.2. No Judgments or Orders. No judgment, decree, injunction, order ---------------------- or proceeding shall be outstanding or threatened by any Governmental Entity which prohibits or restricts the effectuation of, or threatens to invalidate or set aside, the Merger substantially in the form contemplated by this Agreement, unless counsel to the party against whom such action or proceeding was instituted or threatened renders to the other parties hereto a favorable opinion that such judgment, decree, injunction, order or proceeding is without merit. 9.3. Regulatory Approvals. To the extent required by applicable law -------------------- or regulation, all approvals or consents of any Governmental Entity, including, without limitation, those of the FRB and the DFI shall have been obtained or granted for the Merger and the transactions contemplated hereby and the applicable waiting period under all laws shall have expired. All other statutory or regulatory requirements for the valid completion of the transactions contemplated hereby shall have been satisfied. 9.4. Securities Laws. The Registration Statement on Form S-4 shall --------------- have been declared effective by the SEC and shall not be the subject of any stop order or proceedings seeking or threatening a stop order. GBB shall have received all state securities or "Blue Sky" permits and other authorizations necessary to issue the GBB Stock to consummate the Merger. 52 9.5. Listing. The GBB Stock issuable in the Merger shall have been ------- included for listing on the Nasdaq National Market System. 9.6. Tax Opinions. GBB and BAB shall have received from Manatt, ------------ Phelps & Phillips, LLP an opinion reasonably satisfactory to GBB and BAB to the effect that the Merger shall not result in the recognition of gain or loss for federal income tax purposes to GBB or BAB, nor shall the issuance of the GBB Stock result in the recognition of gain or loss by the holders of BAB Stock who receive such stock in connection with the Merger, dated prior to the date the Proxy Statement and Prospectus is first mailed to the shareholders of BAB and GBB and such opinions shall not have been withdrawn or modified in any material respect. 9.7. Pooling of Interests. Prior to the Effective Time of the -------------------- Merger, GBB shall have received from PwC a written confirmation that the Merger will qualify for pooling-of-interests accounting treatment. In making its determination that the Merger will qualify for such treatment, PwC shall be entitled to assume that cash will be paid with respect to all shares held of record by any holder of Dissenting Shares. ARTICLE 10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BAB ---------------------------------------------- All of the obligations of BAB to effect the transactions contemplated hereby shall be subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in writing by BAB: 10.1. Legal Opinion. BAB shall have received the opinion of Linda M. ------------- Iannone, General Counsel of GBB, dated as of the Closing Date, and in form and substance satisfactory to the counsel of BAB, to the effect that: (i) GBB is a corporation validly existing under the laws of the State of California with full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby; (ii) all corporate proceedings on the part of GBB necessary to be taken in connection with the Merger in order to make the same effective have been duly and validly taken; (iii) this Agreement and the Agreement of Merger have been duly and validly authorized, executed and delivered on behalf of GBB and constitute (subject to standard exceptions of enforceability arising from the bankruptcy laws and rules of equity) valid and binding agreements of GBB; and (iv) the shares of GBB Stock to be issued in the Merger will, when issued, be duly authorized, validly issued, fully paid and nonassessable. 10.2. Representations and Warranties; Performance of Covenants. All -------------------------------------------------------- the covenants, terms and conditions of this Agreement to be complied with and performed by GBB on or before the Closing Date shall have been complied with and performed in all material respects. Each of the representations and warranties of GBB contained in Article 5 hereof shall have been true and correct in all material respects (except that where any statement in a representation or 53 warranty expressly includes a standard of materiality, such statement shall be true and correct in all respects) on and as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date or for changes expressly contemplated by this Agreement) on and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date. It is understood and acknowledged that the representations being made on and as of the Closing Date shall be made without giving effect to any update with respect to the GBB Lists in accordance with Section 7.2.3. 10.3. Authorization of Merger. All actions necessary to authorize ----------------------- the execution, delivery and performance of this Agreement by GBB and the Agreement of Merger and the consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken by the Board of Directors of GBB, as required by applicable law, and GBB shall have full power and right to merge pursuant to the Agreement of Merger. 10.4. Absence of Certain Changes. Between the date of this Agreement -------------------------- and the Effective Time of the Merger, there shall not have occurred any event that has had or could reasonably be expected to have a material adverse effect on the business, financial condition, results of operations or prospects of GBB on a consolidated basis, whether or not such event, change or effect is reflected in the GBB Lists as amended or supplemented after the date of this Agreement. 10.5. Officers' Certificate. There shall have been delivered to BAB --------------------- on the Closing Date a certificate executed by the Chief Executive Officer and the Chief Financial Officer of GBB certifying, to the best of their knowledge, compliance with all of the provisions of Sections 10.2, 10.3 and 10.4. 10.6. Fairness Opinion. BAB shall have received a letter from ---------------- Findley & Associates dated as of a date within five Business Days of the mailing of the Proxy Statement and Prospectus to the shareholders of BAB, to the effect that the transactions contemplated by this Agreement are fair from a financial point of view to the shareholders of BAB. ARTICLE 11. CONDITIONS PRECEDENT TO ----------------------- OBLIGATIONS OF GBB ------------------ All of the obligations of GBB to effect the transactions contemplated hereby shall be subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in writing by GBB: 11.1. Legal Opinion. GBB shall have received the opinion of Haines ------------- Brydon & Lea, attorneys for BAB, and in form and substance satisfactory to the counsel of GBB, to the effect that: (i) BAB is a corporation validly existing under the laws of the State of California with full 54 corporate power and authority to enter into this Agreement and the Agreement of Merger and to consummate the transactions contemplated hereby and thereby; (ii) all corporate proceedings on the part of BAB necessary to be taken in connection with the Merger in order to make the same effective have been duly and validly taken; and (iii) this Agreement and the Agreement of Merger have been duly and validly authorized, executed and delivered on behalf of BAB and constitutes (subject to standard exceptions of enforceability arising from the bankruptcy laws and rules of equity) a valid and binding agreement of BAB. 11.2. Representations and Warranties; Performance of Covenants. All -------------------------------------------------------- the covenants, terms and conditions of this Agreement to be complied with and performed by BAB at or before the Closing Date shall have been complied with and performed in all material respects. Each of the representations and warranties of BAB contained in Article 4 hereof shall have been true and correct in all material respects (except that where any statement in a representation or warranty expressly includes a standard of materiality, such statement shall be true and correct in all respects) on and as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date or for changes expressly contemplated by this Agreement) on and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date. It is understood and acknowledged that the representations being made on and as of the Closing Date shall be made without giving effect to any update with respect to the BAB Lists in accordance with Section 6.2.10. 11.3. Authorization of Merger. All actions necessary to authorize ----------------------- the execution, delivery and performance of this Agreement and the Agreement of Merger by BAB and the consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken by the Board of Directors and shareholders of BAB, and BAB shall have full power and right to merge pursuant to the Agreement of Merger. 11.4. Third Party Consents. BAB shall have obtained all consents of -------------------- other parties to its and BABANK'S respective material mortgages, notes, leases, franchises, agreements, licenses and permits as may be necessary to permit the Merger and the transactions contemplated herein to be consummated without a material default, acceleration, breach or loss of rights or benefits thereunder. 11.5. Absence of Certain Changes. Between the date of this Agreement -------------------------- and the Effective Time of the Merger, there shall not have occurred any event that has had or could reasonably be expected to have a material adverse effect on the business, financial condition, results of operations or prospects of BAB on a consolidated basis whether or not such event, change or effect is reflected in the BAB Lists as amended or supplemented after the date of this Agreement. 11.6. Officers' Certificate. There shall have been delivered to GBB --------------------- on the Closing Date a certificate executed by the Chief Executive Officer and the Chief Financial Officer of BAB 55 certifying, to the best of their knowledge, compliance with all of the provisions of Sections 11.2, 11.3, 11.4 and 11.5. 11.7. Fairness Opinion. GBB shall have received a letter from Hoefer ---------------- & Arnett Incorporated dated as of a date within five Business Days of the mailing of the Proxy Statement and Prospectus to the shareholders of BAB, to the effect that the transactions contemplated by this Agreement are fair from a financial point of view to the shareholders of GBB. 11.8. Shareholder's Agreements. Concurrently with the execution of ------------------------ this Agreement, each director of BAB and BABANK shall have executed and delivered to GBB agreements substantially in the form of Exhibit D hereto. --------- 11.9. Agreements Not to Compete. Concurrently with the execution of ------------------------- this Agreement, the directors of BAB shall have executed and delivered to GBB agreements substantially in the form of Exhibit C hereto. --------- 11.10. Affiliates Agreements. Concurrently with the execution of --------------------- this Agreement, GBB shall have received from each person named in the letter or otherwise referred to in Section 6.10 an executed copy of an agreement substantially in the form on Exhibit B hereto. --------- 11.11. Employee Benefit Plans. GBB shall have received satisfactory ---------------------- evidence that all of BAB's employee benefit plans, programs and arrangements, including, without limitation, the BAB 401(k) Plan, have been treated as provided in Article 12 of this Agreement. 11.12. Dissenting Shares. BAB Perfected Dissenting Shares shall ----------------- constitute less than 8% of the outstanding shares of BAB Stock. 11.13. Remediation. All remediation of environmental contamination ----------- or conditions on any BAB Property required by the terms of this Agreement shall have been completed to the satisfaction of GBB. 11.14. BAB Fully Diluted Book Value Per Share. At least five -------------------------------------- Business Days prior to the Effective Time of the Merger, BAB shall provide GBB with BAB's consolidated financial statements as of the close of business on the last day of the month prior to the Effective Time of the Merger. Such financial statements shall have been prepared in all material respects in accordance with generally accepted accounting principles and other applicable legal and accounting requirements, and reflect all period-end accruals and other adjustments. At the close of business on the last day of the month preceding the Effective Time of the Merger, after giving effect to any dividends paid pursuant to Section 6.1.2 hereof, the BAB Fully Diluted Book Value Per Share, as determined in accordance with such financial statements, shall be not less than the BAB Fully Diluted Book Value Per Share as of December 31, 1998 as reflected on the audited consolidated financial statements of BAB for the year then ended, plus the quotient obtained by dividing (a) 56 $199,396 times the number of full calendar months from January 1, 1999 through the last day of the month preceding the Closing Date by (b) the sum of (i) the number of shares of BAB Stock then issued and outstanding plus (ii) such number of shares of BAB Stock issuable upon the exercise of any BAB Stock Option. 11.15. Termination of BAB Stock Option Plan and BAB SAR Plan. GBB ----------------------------------------------------- shall have received satisfactory evidence that the BAB Stock Option Plan and BAB SAR Plan have been terminated prior to the Effective Time of the Merger; provided GBB shall comply with the provisions of Section 7.9. 11.16. Modification of Director and Officer Indebtedness. GBB shall ------------------------------------------------- have received satisfactory evidence that all loans made by BAB or BABANK to officers and directors thereof secured by BAB Stock are modified to require repayment in full 12 months after the Effective Time of the Merger. ARTICLE 12. EMPLOYEE BENEFITS ----------------- 12.1. Employee Benefits. GBB intends to merge the BAB 401(k) Plan ----------------- with and into the GBB 401(k) Plan as soon as administratively feasible after the Effective Time of the Merger. In no event shall the BAB 401(k) Plan be merged with and into the GBB 401(k) Plan, however, unless GBB determines, in its sole discretion, that: (i) the BAB 401(k) Plan is a qualified plan under Section 401(a) of the Code, both as to the form of the BAB 401(k) Plan and as to its operation; and (ii) there are no facts in existence that would be reasonably likely to adversely affect the qualified status of the BAB 401(k) Plan. This analysis shall be made prior to the Effective Time of the Merger and, if the above determinations are made, the BAB 401(k) Plan shall be merged with and into the GBB 401(k) Plan as soon as administratively feasible after the Effective Time of the Merger. If GBB determines in its sole discretion not to merge the BAB 401(k) Plan into the GBB 401(k) Plan, BAB agrees to use its best efforts to have the BAB 401(k) Plan qualified prior to the Effective Time of the Merger. As soon as practicable after the Effective Time of the Merger, all other BAB and BABANK Employee Plans will be discontinued or merged into GBB plans, in the discretion of GBB, and employees of BAB and BABANK shall become eligible for the employee benefit plans of GBB on the same terms as such plans and benefits are generally offered from time to time to employees of GBB and its subsidiaries in comparable positions with GBB or its subsidiaries. For purposes of determining such employment eligibility and vesting under the employee benefit plans of GBB, GBB shall recognize such employees' years of service with BAB or BABANK beginning on the date such employees commenced employment with BAB or BABANK through the Effective Time of the Merger. 57 12.2 Severance Policy. As to BABANK employees, GBB shall abide by ---------------- the Severance Policy of BABANK as adopted on October 20, 1998 and amended on November 3, 1998. ARTICLE 13. TERMINATION ----------- 13.1. Termination. This Agreement may be terminated at any time ----------- prior to the Effective Time of the Merger upon the occurrence of any of the following: 13.1.1. By mutual agreement of the parties, in writing; 13.1.2. By BAB (unless BAB's Board of Directors shall have withdrawn or modified in a manner adverse to GBB in any respect its recommendation of the Merger to the holders of BAB Stock) or GBB immediately upon the failure of the shareholders of BAB to give the requisite approval of this Agreement; 13.1.3. By BAB immediately upon expiration of 20 days from delivery of written notice by BAB to GBB of GBB's breach of or failure to satisfy any covenant or agreement contained herein resulting in a material impairment of the benefit reasonably expected to be derived by BAB from the performance or satisfaction of such covenant or agreement (provided that such breach has not been waived by BAB or cured by GBB, as the case may be, prior to expiration of such 20 day period); 13.1.4. By GBB immediately upon expiration of 20 days from delivery of written notice by GBB to BAB of BAB's breach of or failure to satisfy any covenant or agreement contained herein resulting in a material impairment of the benefit reasonably expected to be derived by GBB from the performance or satisfaction of such covenant or agreement (provided that such breach has not been waived by GBB or cured by BAB, as the case may be, prior to expiration of such 20 day period); 13.1.5. By BAB or GBB upon the expiration of 30 days after any Governmental Entity denies or refuses to grant any approval, consent or authorization required to be obtained in order to consummate the transactions contemplated by this Agreement unless, within said 30 day period after such denial or refusal, all parties hereto agree to resubmit the application to the regulatory authority that has denied, or refused to grant the approval, consent or qualification requested; 13.1.6. By BAB or GBB if any conditions set forth in Article 9 shall not have been met by June 30, 1999 (or July 31, 1999 if any applicable waiting period for a regulatory approval requires additional time), provided, however, that this Agreement shall not be terminated 58 pursuant to this Section 13.1.6 if the relevant condition shall have failed to occur as a result of any act or omission of the party seeking to terminate. 13.1.7. By BAB if any of the conditions set forth in Article 10 shall not have been met, or by GBB if any of the conditions set forth in Article 11 shall not have been met, by June 30, 1999 (or July 31, 1999 if any applicable waiting period for a regulatory approval requires additional time), or such earlier time as it becomes apparent that such condition shall not be met; provided, however, that this Agreement shall not be terminated pursuant to this Section 13.1.7 if the relevant condition shall have failed to occur as a result of any act or omission of the party seeking to terminate; 13.1.8. By GBB if BAB or BABANK shall have failed to act or refrained from doing any act pursuant to Section 6.1.14; or 13.1.9. By GBB under the circumstances set forth in Section 8.4. 13.2. Effect of Termination. In the event of termination of this --------------------- Agreement by either BAB or GBB as provided in Section 13.1, neither BAB nor GBB shall have any further obligation or liability to the other party except (a) with respect to the last sentences of each of Section 6.3.1, Section 7.3 and Section 8.4, (b) with respect to Sections 14.1 and 14.2, and (c) to the extent such termination results from a party's willful and material breach of the warranties and representations made by it, or willful and material failure in performance of any of its covenants, agreements or obligations hereunder. 13.3. Force Majeure. BAB and GBB agree that, notwithstanding ------------- anything to the contrary in this Agreement, in the event this Agreement is terminated as a result of a failure of a condition, which failure is due to a natural disaster or other act of God, or an act of war, and provided neither party has materially failed to observe the obligations of such party under this Agreement, neither party shall be obligated to pay to the other party to this Agreement any expenses or otherwise be liable hereunder. ARTICLE 14. MISCELLANEOUS ------------- 14.1. Expenses. -------- 14.1.1. GBB hereby agrees that if this Agreement is terminated by BAB pursuant to Section 13.1.3, GBB shall promptly and in any event within 10 days after such termination pay BAB all Expenses (as defined in Section 14.1.4 below) of BAB, but not to exceed $175,000. 59 14.1.2. BAB hereby agrees that if the Agreement is terminated by GBB or BAB pursuant to Section 13.1.2 with respect to the failure of BAB shareholders to approve the Agreement and the transactions contemplated hereby, or by GBB pursuant to Section 13.1.4 or Section 13.1.8, BAB shall promptly and in any event within 10 days after such termination pay GBB all Expenses of GBB, but not to exceed $250,000. 14.1.3. Except as otherwise provided herein, all Expenses incurred by GBB or BAB in connection with or related to the authorization, preparation and execution of this Agreement, the solicitation of shareholder approvals and all other matters related to the closing of the transactions contemplated hereby, including, without limitation of the generality of the foregoing, all fees and expenses of agents, representatives, counsel and accountants employed by either such party or its affiliates, shall be borne solely and entirely by the party which has incurred the same. Notwithstanding the foregoing, GBB and BAB shall share equally the cost of printing the Proxy Statement and Prospectus. 14.1.4. "Expenses" as used in this Agreement shall include all reasonable out-of-pocket expenses (including all fees and expenses of attorneys, accountants, investment bankers, experts and consultants to the party and its affiliates) incurred by the party or on its behalf in connection with the consummation of the transactions contemplated by this Agreement. 14.2. Competing Transaction Fee. As an inducement to GBB to enter ------------------------- into this Agreement, in the event this Agreement is terminated by GBB because of a failure by BAB to comply with its obligations under Section 6.1.14, or if BAB or BABANK otherwise consummates a Competing Transaction prior to termination of this Agreement or during the 12-month period following termination of this Agreement, in addition to the Expenses payable to GBB under Section 14.1.2, BAB shall wire to GBB within three Business Days of demand, or shall cause the third party to such a Competing Transaction to wire to GBB within three Business Days of demand, the sum of $1,500,000, which sum the parties acknowledge as representing (i) GBB's direct costs and expenses (including, but not limited to, fees and expenses of financial or other consultants, printing costs, accountants, and counsel) incurred in negotiating and undertaking to carry out the transactions contemplated by this Agreement, including GBB's management time devoted to negotiation and preparation for the transactions contemplated by this Agreement; (ii) GBB's indirect costs and expenses incurred in connection with the transactions contemplated by this Agreement; and (iii) GBB's loss as a result of the transactions contemplated by this Agreement not being consummated. Any payment previously made by BAB pursuant to Section 14.1.2 hereof shall be credited against any amount due under this Section. 60 In the event the Agreement terminates because GBB enters into another merger or acquisition transaction, BAB reserves its rights to assert a claim against GBB (and any successor) for BAB's direct and indirect costs and expenses and for any loss BAB incurs as a result of the transactions contemplated by this Agreement not being consummated. 14.3. Notices. Any notice, request, instruction or other document to ------- be given hereunder by any party hereto to another shall be in writing and delivered personally or by overnight courier or by confirmed facsimile transmission or sent by registered or certified mail, postage prepaid, with return receipt requested, addressed as follows: To GBB: Greater Bay Bancorp 2860 West Bayshore Road Palo Alto, California 94303 Attention: Steven C. Smith Facsimile Number: (415) 494-9220 With a copy to: Greater Bay Bancorp 2860 West Bayshore Road Palo Alto, California 94303 Attention: Linda M. Iannone, Esq. Facsimile Number: (650) 494-9220 To BAB: Bay Area Bancshares 2003 East Bayshore Road Redwood City, California 94063 Attention: Anthony Gould Facsimile Number: (650) 367-6004 With a copy to: Haines Brydon & Lea 235 Pine Street, Suite 1300 San Francisco, California 94104 Attention: Jay Pimentel, Esq. Facsimile Number: (415) 989-3561 Any such notice, request, instruction or other document shall be deemed received (i) on the date delivered personally or delivered by confirmed facsimile transmission; (ii) on the next Business Day after it was sent by overnight courier, postage prepaid with return receipt requested; (iii) or on the third Business Day after it was sent by registered or certified mail, postage prepaid. Any of the persons shown above may change its address for purposes of this section by giving notice in accordance herewith. 61 14.4. Successors and Assigns. All terms and conditions of this ---------------------- Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective transferees, successors and assigns; provided, however, that this Agreement and all rights, privileges, duties and obligations of the parties hereto may not be assigned or delegated by any party hereto and any such attempted assignment or delegation shall be null and void. 14.5. Counterparts. This Agreement and any exhibit hereto may be ------------ executed in one or more counterparts, all of which, taken together, shall constitute one original document and shall become effective when one or more counterparts have been signed by the appropriate parties and delivered to each party hereto. 14.6. Effect of Representations and Warranties. The representations ---------------------------------------- and warranties contained in this Agreement or in any List shall terminate immediately after the Effective Time of the Merger. 14.7. Third Parties. Each party hereto intends that this Agreement ------------- shall not benefit or create any right or cause of action to any person other than parties hereto. As used in this Agreement the term "parties" shall refer only to GBB and BAB as the context may require. 14.8. Lists; Exhibits; Integration. Each List, exhibit and letter ---------------------------- delivered pursuant to this Agreement shall be in writing and shall constitute a part of the Agreement, although Lists and letters need not be attached to each copy of this Agreement. This Agreement, together with such Lists, exhibits and letters, constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior agreements and understandings of the parties in connection therewith. 14.9. Knowledge. Whenever any statement herein or in any list, --------- certificate or other document delivered to any party pursuant to this Agreement is made "to the knowledge" or "to the best knowledge" of any party or another Person, such party or other Person shall make such statement only after conducting an investigation reasonable under the circumstances of the subject matter thereof, and each such statement shall constitute a representation that such investigation has been conducted. 14.10. Governing Law. This Agreement is made and entered into in the ------------- State of California, except to the extent that the provisions of federal law are mandatorily applicable, and the laws of the State of California shall govern the validity and interpretation hereof and the performance of the parties hereto of their respective duties and obligations hereunder. 14.11. Captions. The captions contained in this Agreement are for -------- convenience of reference only and do not form a part of this Agreement and shall not affect the interpretation hereof. 62 14.12. Severability. If any portion of this Agreement shall be ------------ deemed by a court of competent jurisdiction to be unenforceable, the remaining portions shall be valid and enforceable only if, after excluding the portion deemed to be unenforceable, the remaining terms hereof shall provide for the consummation of the transactions contemplated herein in substantially the same manner as originally set forth at the date this Agreement was executed. 14.13. Waiver and Modification; Amendment. No waiver of any term, ---------------------------------- provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision or condition of this Agreement. Except as otherwise required by law, this Agreement and the Agreement of Merger, when executed and delivered, may be modified or amended by action of the Boards of Directors of GBB or BAB without action by their respective shareholders. This Agreement may be modified or amended only by an instrument of equal formality signed by the parties or their duly authorized agents. 14.14. Attorneys' Fees. If any legal action or any arbitration upon --------------- mutual agreement is brought for the enforcement of this Agreement or because of an alleged dispute, controversy, breach, or default in connection with this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and other costs and expenses incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 63 IN WITNESS WHEREOF, the parties to this Agreement have duly executed this Agreement as of the day and year first above written. GREATER BAY BANCORP By: /s/David L. Kalkbrenner ------------------------------------ David L. Kalkbrenner President and Chief Executive Officer ATTEST: /s/Linda M. Iannone - ------------------------------- Secretary BAY AREA BANCSHARES By: /s/Robert R. Haight ------------------------------------ Robert R. Haight President and Chief Executive Officer ATTEST: /s/Janeene Johnson - ------------------------------- Assistant Secretary 64 EXHIBIT LIST ------------ A AGREEMENT OF MERGER B FORM OF AFFILIATE'S AGREEMENT C FORM OF NONCOMPETITION AGREEMENT D FORM OF SHAREHOLDER'S AGREEMENT 65 EX-3.1 3 ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF INCORPORATION OF SAN MATEO COUNTY BANCORP ONE: NAME. The name of the corporation is San Mateo County Bancorp. TWO: PURPOSE. The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporation Code. THREE: AGENT FOR SERVICE OF PROCESS. The name and address of the corporation's initial agent for service of process is: Fred R. Brinkop, 500 Allerton Street, Redwood City, CA 94063. FOUR: AUTHORIZED STOCK. (a) The corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock", respectively. The number of shares of Preferred Stock authorized to be issued is 4,000,000 and the number of shares of Common Stock authorized to be issued is 6,000,000. (b) The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. IN WITNESS WHEREOF, for the purpose of forming this corporation under the laws of the State of California, the undersigned, constituting the sole incorporator of this corporation, has executed these Articles of Incorporation. /s/ Fred R. Brinkop -------------------------- Fred R. Brinkop Sole Incorporator The undersigned declares under penalty or perjury that h is the person who executed these Articles of Incorporation and that this instrument is the act and dead of the undersigned. Executed this 7 day of Nov, 1984, at San Francisco, California. /s/ Fred R. Brinkop -------------------------- Fred R. Brinkop CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF SAN MATEO COUNTY BANCORP Leo D. Taylor and Douglas S. McGlashan hereby certify that: 1. They are the President and Secretary, respectively, of SAN MATEO COUNTY BANCORP, a California corporation. 2. The Articles of Incorporation of this corporation are amended to add the following Article Five: "FIVE: INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS. (a) Limitation of Directors' Liability. The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) Indemnification of Corporate Agents. The corporation is authorized to provide indemnification of its agents (as defined in Section 317 of the California General Corporation Law) for breach of their duty to the corporation and its shareholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by such Section 317, subject to the limits on such excess indemnification set forth in Section 204 of the California General Corporation Law. (c) Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article V shall not adversely affect any right of indemnification or limitation of liability of an agent of the corporation relating to acts or omissions occurring prior to such repeal or modification." 1. 3. The foregoing Certificate of Amendment of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing Certificate of Amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California General Corporation Law. The total number of outstanding shares of capital stock of the corporation is 347,675 shares of Common Stock. The number of shares voting in favor of the Certificate of Amendment of Articles of Incorporation equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding Common Stock. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate of Amendment of Articles of Incorporation are true of our own knowledge. Executed at San Mateo, California this 21st day of June, 1988. /s/ Leo D. Taylor ------------------------------- Leo D. Taylor, President /s/ Douglas S. McGlashan ------------------------------- Douglas S. McGlashan, Secretary 2. CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION Owen D. Conley and Robert M. Lubin certify that: 1. They are the Chairman of the Board and Secretary, respectively, of San Mateo County Bancorp, a California corporation. 2. Article One of the articles of incorporation of this corporation is amended to read as follows: "The name of this corporation shall be Mid-Peninsula Bancorp." 3. The foregoing amendment of articles of incorporation has been duly approved by the board of directors. 4. The foregoing amendment of articles of incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of common stock of the corporation is 465,369. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. There are no shares of preferred stock outstanding. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. DATE: October 3, 1994 /s/ OWEN D. CONLEY --------------------------- Owen D. Conley Chairman of the Board /s/ ROBERT M. LUBIN --------------------------- Robert M. Lubin Secretary MERGER AGREEMENT THIS MERGER AGREEMENT (the "Merger Agreement") is made and entered into as of November 15, 1996, by and between MID-PENINSULA BANCORP, a California corporation ("Mid-Peninsula"), and CUPERTINO NATIONAL BANCORP, a California corporation ("Cupertino"). RECITALS A. Mid-Peninsula is a corporation duly organized, validly existing and doing business in good standing under the laws of the State of California with authorized capital stock of six million (6,000,000) shares of no par value common stock of which, on the date hereof, there are One Million, Six Hundred Thirty-Seven Thousand, Five Hundred Ninety-Three (1,637,593) shares issued and outstanding (individually, a "Mid-Peninsula Share" and together the "Mid- Peninsula Shares") and four million (4,000,000) shares of preferred stock of which, on the date hereof, there are no shares issued and outstanding. B. Cupertino is a corporation duly organized, validly existing and doing business in good standing under the laws of the State of California with authorized capital stock of six million (6,000,000) shares of no par value common stock of which, on the date hereof, there are One Million Nine Hundred Five Thousand, Nine Hundred Fifty-Eight (1,905,958) shares issued and outstanding (individually a "Cupertino Share" and together the "Cupertino Shares") and 4,000,000 shares of preferred stock of which, on the date hereof, there are no shares issued and outstanding. C. Mid-Peninsula and Cupertino have entered into a Second Amended Agreement and Plan of Reorganization and Merger, dated August 20, 1996 (the "Agreement"), which contemplates the merger of Cupertino with and into Mid- Peninsula (the "Merger") upon and in accordance with the terms and conditions set forth in the Agreement and this Merger Agreement. D. The respective Boards of Directors of Mid-Peninsula and Cupertino deem it desirable and in the best interests of Mid-Peninsula and Cupertino and their respective shareholders that Cupertino be merged with and into Mid-Peninsula as provided in the Agreement and this Merger Agreement pursuant to the laws of the State of California and that Mid-Peninsula change its name to Greater Bay Bancorp ("Bancorp") which shall be the surviving corporation ("Surviving Corporation"). E. The respective Boards of Directors of Mid-Peninsula and Cupertino have adopted resolutions approving this Merger Agreement and the Agreement and have recommended that the Merger be approved by the shareholders of their respective corporations. F. The respective shareholders of each of Mid-Peninsula and Cupertino, at meetings duly held, have duly approved and adopted this Merger Agreement, the Agreement and approved the Merger. AGREEMENT NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein set forth and for the purpose of prescribing the terms and conditions of the Merger, the parties hereto agree as follows: ARTICLE I THE MERGER ---------- 1.1 Effect of Merger. At the Effective Time of the Merger (as defined in Article VII hereof), Cupertino shall be merged with and into Mid-Peninsula, Mid-Peninsula shall change its name to Greater Bay Bancorp, which shall thereupon be the Surviving Corporation, and the separate corporate existence of Cupertino shall cease. 1.2 Rights and Duties of Surviving Corporation. At and after the Effective Time of the Merger, all rights, privileges, powers and franchises and all property and assets of every kind and description of Cupertino shall be vested in and be held and enjoyed by Bancorp as the Surviving Corporation, without further act or deed; all the estates and interests of every kind of Cupertino, including all debts due to it, shall be as effectively the property of Bancorp as the Surviving Corporation as they were of Cupertino; the title to any real estate vested by deed or otherwise in Cupertino shall not revert or be in any way impaired by reason of the Merger; and Bancorp shall be deemed to be the same entity as each of Cupertino and Mid-Peninsula and shall be subject to all of their duties and liabilities of every kind and description. All rights of creditors and liens upon any property of Mid-Peninsula or Cupertino shall be preserved unimpaired and all debts, liabilities and duties of Mid-Peninsula or Cupertino shall be the debts, liabilities and duties of Bancorp as the Surviving Corporation and may be enforced against it to the same extent as if such debts, liabilities and duties had been incurred or contracted by it. ARTICLE II CONVERSION OF SHARES -------------------- 2.1 Conversion of Shares. In and by virtue of the Merger and at the -------------------- Effective Time of the Merger, pursuant to this Merger Agreement, each Mid-Peninsula Share and each Cupertino Share issued and outstanding immediately prior to the Effective time of the Merger shall, at the Effective Time of the Merger, be converted. a. Effect on Mid-Peninsula Shares. At the Effective Time of the ------------------------------ Merger, each Mid-Peninsula Share issued and outstanding immediately prior to the Effective Time of the Merger shall, on and after the Effective Time of the Merger, remain issued and outstanding and shall automatically and for all purposes be deemed to represent one share of the common stock, without par value, of Bancorp as the Surviving Corporation ("Bancorp Shares"). b. Conversion of Cupertino Shares. At the Effective Time of the ------------------------------ Merger, each Cupertino Share outstanding immediately prior to the Effective Time of the Merger shall, by virtue of the Merger and without any action on the part of the holder thereof, be exchanged for 2 and converted into .81522 (the "Conversion Ratio") of a Bancorp Share. From and after the Effective Time of the Merger, each holder of Cupertino Shares immediately prior to the Effective Time of the Merger (other than holders of Dissenting Shares, as defined below) shall have the right to receive, upon surrender of the certificates theretofore representing such Cupertino Shares, one or more certificates representing shares of Bancorp Shares equal to the number of Cupertino Shares represented by each surrendered certificate multiplied by the Conversion Ratio. 2.2 Fractional Shares. No fractional Bancorp Shares shall be issued in the ----------------- Merger. In lieu thereof, each record holder of Cupertino Shares who would otherwise be entitled to receive a fractional Bancorp Share shall receive, subject to prior surrender of certificates representing Cupertino Shares, an amount in cash equal to the product (calculated to the nearest hundredth) obtained by multiplying the average of the bid and asked prices quoted by each brokerage firm acting as a market maker of Mid-Peninsula Shares for a Mid- Peninsula Share for each of the twenty (20) consecutive trading days up to and including the last business day of the calendar month end immediately prior to the Closing Date (as defined in the Agreement), by the fraction of a Bancorp Share to which such holder would otherwise be entitled. No such holder shall be entitled to dividends, voting rights, interest, or any other rights in respect of any such fractional share. 2.3 Exchange Procedures. ------------------- a. At and after the Effective Time of the Merger, Mid-Peninsula will deliver or cause to be delivered to U.S. Stock Transfer Corporation, which shall serve as exchange agent (the "Exchange Agent"), such number of blank certificates representing Bancorp Shares sufficient to issue the number of Bancorp Shares issuable in the Merger and an amount of cash sufficient for payment of any fractional shares. b. As soon as practicable after the Effective Time of the Merger, the Exchange Agent will send written notice of exchange procedures to each record holder of certificates representing Cupertino Shares converted pursuant to Section 2.1(b) of this Merger Agreement. c. Upon surrender for cancellation to the Exchange Agent of one or more certificates evidencing Cupertino Shares ("Cupertino Certificates"), accompanied by a duly executed letter of transmittal in proper form, the Exchange Agent shall promptly deliver to each holder of such surrendered Cupertino Certificates one or more new certificates representing the appropriate number of Bancorp Shares ("Bancorp Certificates") to which such holder is entitled, together with one or more checks for payment of cash in lieu of fractional interests to be issued in respect of the Cupertino Shares so surrendered. d. Until Cupertino Certificates have been surrendered and exchanged for Bancorp Certificates as herein provided, each outstanding Cupertino Certificate shall represent, on and after the Effective Time of the Merger, the right to receive the number of Bancorp Shares into which the number of Cupertino Shares shown thereon have been converted. No dividends or other distributions of any kind which are declared payable to holders of record of the Bancorp 3 Shares after the Effective Time of the Merger will be paid to persons otherwise entitled to receive the same until such persons have surrendered their Cupertino Certificates in exchange for Bancorp Certificates in the Manner herein provided, but upon such surrender, such dividends or other distributions, from and after the Effective Time of the Merger, will be paid to such persons in accordance with the terms of such Bancorp Shares. In no event shall the persons entitled to receive such dividends or other distributions be entitled to receive interest on such dividends or other distributions. e. No. transfer taxes shall be payable by any holder of Cupertino Shares in respect of the issuance of Bancorp Certificates for Bancorp Shares, except that if any Bancorp Certificate for Bancorp Shares is to be issued in a name other than that in which the Cupertino Certificate surrendered shall be been registered, it shall be a condition of such issuance that the person requesting such issuance shall properly endorse the certificate or certificates and shall pay to Bancorp any transfer taxes payable by reason thereof, or of any prior transfer of such surrendered certificate, or establish to the satisfaction of Bancorp that such taxes have been paid or are not payable. f. Any Bancorp Shares delivered to the Exchange Agent and not issued pursuant hereto at the end of one (1) year from the Effective Time of the Merger shall be returned to Bancorp, in which event the persons, if any, entitled thereto shall look only to Bancorp for payment thereof. g. Notwithstanding anything to the contrary set forth herein, if any holder of Cupertino Shares shall be unable to surrender his or her Cupertino Certificates because such certificates have been lost or destroyed, such holder may deliver in lieu thereof an indemnity bond in form and substance and with surety satisfactory to Bancorp. h. The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to the Bancorp Shares held by it from time to time hereunder, except that it shall receive and hold all dividends or other distributions paid or distributed with respect to such Bancorp Shares for the account of the persons entitled thereto. All dividends or distributions, and any cash to be paid in lieu of fractional shares, if held by the Exchange Agent for payment or delivery to the holders of unsurrendered certificates representing Cupertino Shares and unclaimed at the end of one (1) year from the Effective Time of the Merger, shall (together with any interest earned thereon) at such time be paid or redelivered by the Exchange Agent to Bancorp, and after such time any holder of certificate representing Cupertino Shares who has not surrendered such certificate to the Exchange Agent shall, subject to applicable law, look as a general creditor only to Bancorp for payment or delivery of such dividends or distributions or cash, as the case may be. 2.4 Dissenting Shareholders. Notwithstanding the provisions of this ----------------------- Article II to the contrary, any Cupertino Shares held by persons who have satisfied the requirements of Chapter 13 of the California General Corporation Law (the "GCL") and who have not effectively withdrawn or lost their dissenters' rights under Chapter 13 (such shares being referred to as "Dissenting Shares"), shall not be converted pursuant to this Merger Agreement, but the holders 4 thereof shall be entitled only to such rights as are afforded them by Chapter 13 of the GCL. Each dissenting shareholder who is entitled to payment for his or her Cupertino Shares pursuant to Chapter 13 of the GCL shall receive payment in an amount determined pursuant to Chapter 13 of the GCL. ARTICLE III ARTICLES OF INCORPORATION ------------------------- At the Effective Time of the Merger, the Articles of Incorporation of Mid-Peninsula, as in effect immediately prior to the Effective Time of the Merger, shall be amended (a) to change its name to Greater Bay Bancorp, (b) to establish a super-majority vote requirement of the Board of Directors equal to a two-thirds vote on certain matters, and (c) to limit the liability of the directors and provide expanded indemnification rights of agents of the Surviving Corporation to the maximum extent permitted by law, as set forth in Exhibit I attached hereto and incorporated herein by this reference, and, as so - --------- amended, shall hereto and incorporated herein by this reference, and, as amended, shall be the Articles of Incorporation of Bancorp as the Surviving Corporation from and after the Effective Time of the Merger until amended in accordance with its provisions and as provided by law. ARTICLE IV BYLAWS ------ At the Effective Time of the Merger, the Bylaws of Mid-Peninsula as in effect immediately prior to the Effective time of the Merger shall be amended (a) to provide for a range in the number of authorized directors of not less than seven (7) and not more than thirteen (13), with the exact number of directors fixed at ten (10); and (b) to require a two-thirds (2/3rds vote of the Board of Directors of Bancorp to approve certain matters affecting Bancorp, including (i) a merger, sale of control or sale of material assets of Bancorp, (ii) acquisitions by Bancorp, (iii) creation of new business units of Bancorp or its subsidiaries, (iv) material changes in operating budgets of Bancorp or its subsidiaries, (v) material changes in the business organization or organizational structure of Bancorp or its subsidiaries, (vi) termination of any executive officer or senior officer appointed to the Executive Management Committee of Bancorp, and (vii) any change in the authorized range of directors; and, as so amended, the Bylaws of Mid-Peninsula shall, at and after the Effective Time of the Merger, be the Bylaws of Bancorp as the Surviving Corporation until further amended as provided by law. ARTICLE V DIRECTORS --------- At the Effective Time of the Merger, the Board of Directors of Bancorp as the Surviving Corporation shall consist of five (5) members appointed by the Board of Directors of Mid-Peninsula and five (5) members appointed by the Board of Directors of Cupertino, in each case as designated in the Agreement. Such persons shall serve as the Directors of the Surviving Corporation until such time as their successors have been duly elected and qualified. 5 ARTICLE VI FURTHER ACTION -------------- The parties shall deliver, or cause to be delivered, such documents or certificates as may be necessary, in the reasonable opinion of counsel for any of the parties, to effectuate the transactions set forth in this Merger Agreement. If, at any time after the Effective Time of the Merger, Bancorp as the Surviving Corporation or its successors or assigns shall determine that any further conveyance, assignment or other documents or any further action is necessary or desirable to further effectuate the transactions set forth herein or contemplated hereby, the officers and directors of the parties hereto shall execute and deliver, or cause to be executed and delivered, all such documents as may be reasonably required to effectuate such transactions. ARTICLE VII EFFECTIVE TIME OF THE MERGER ---------------------------- The Merger will become effective upon the filing, in accordance with Section 1103 of the GCL, of an executed copy of this Merger Agreement and all other requisite accompanying certificates in the office of the California Secretary of State. The date and time of such filing with the California Secretary of State is referred to herein as the "Effective Time of the Merger." ARTICLE VIII CONDITIONS TO MERGER -------------------- The filing of this Merger Agreement with the California Secretary of State as provided in Article VII above is conditioned upon the fulfillment, prior to such filing, of all the conditions to the Merger set forth in the Agreement. ARTICLE IX TERMINATION ----------- This Merger Agreement may, by the mutual consent and action of the Boards of Directors of Mid-Peninsula and Cupertino, be abandoned at any time before or after approval thereof by the shareholders of Mid-Peninsula and Cupertino, but not later than the filing of this Merger Agreement with the California Secretary of State pursuant to Section 1103 of the GCI. This Merger Agreement shall automatically be terminated and of no further force and effect if, prior to the filing of an executed copy hereof with the California Secretary of State as provided in Article VII hereof, the Agreement is terminated in accordance with the terms thereof. ARTICLE X GENERAL PROVISIONS ------------------ 10.1 Successors and Assigns. This Merger Agreement shall be binding upon and enforceable by the parties hereto and their respective successors, assigns and transferees, but this Merger Agreement may not be assigned by any party without the written consent of the other parties. 6 10.2 Governing Law. This Merger Agreement has been executed in the State ------------- of California, and the laws of the State of California shall govern the validity and interpretation hereof and the performance by the parties hereto. 10.3 Amendments. This Agreement, when duly executed and delivered, may ---------- be modified or amended by action of the Board of Directors of Mid-Peninsula and Cupertino to the extent permitted by law without action by their respective shareholders. This Merger Agreement may be modified or amended only by an instrument of equal formality signed by the parties or their duly authorized agents. 10.4 Entire Agreement. This Merger Agreement and the Agreement, ---------------- together with all exhibits hereto and thereto and all documents referenced herein and therein, constitute the entire agreement of Mid-Peninsula and Cupertino, and supersede any prior written or oral negotiations, discussions, understandings and agreements between them, concerning the subject matter contained herein and therein. 10.5 Counterparts. This Merger Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original instrument, but all of which together shall constitute but one and the same agreement. IN WITNESS WHEREOF, Mid-Peninsula and Cupertino, pursuant to the approval and authority duly given by resolution of their respective Boards of Directors, have caused this Merger Agreement to be signed by their respective Presidents and Secretaries on the day and year first above written. CUPERTINO NATIONAL BANCORP, MID-PENINSULA BANCORP, a California corporation a California corporation By /s/ C. Donald Allen By /s/ David L. Kalkbrenner ---------------------------- ----------------------------- C. Donald Allen, President David L. Kalkbrenner, President and Chief Executive Officer and Chief Executive Officer By /s/ Steven C. Smith By /s/ Warren R. Thoits ---------------------------- ----------------------------- Steven C. Smith, Secretary Warren R. Thoits, Secretary 7 EXHIBIT 1 --------- AMENDMENT TO ARTICLES OF INCORPORATION OF MID-PENINSULA BANCORP 1. Article One of the Articles of Incorporation is amended to read as follows: "ONE: NAME. --- The name of the corporation is Greater Bay Bancorp." 2. Article Five of the Articles of Incorporation is amended to read as follows: "FIVE DIRECTOR LIABILITY; INDEMNIFICATION OF AGENTS. ---- (a) The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) The indemnification of an agent as defined in California Corporations Code section 317(a) of this corporation, whether by bylaws, agreement or otherwise, for breach of duty to this corporation and its stockholders, may, to the extent not prohibited under California Corporations Code sections 317 and 204(a) , exceed the indemnification otherwise permitted by section 317 of the Corporations Code." 3. The following Article Six is added to the Articles of Incorporation: "SIX: SUPER-MAJORITY VOTING BY DIRECTORS. --- The vote of not less than two-thirds of all members of the board of directors shall be required to approve any of the following types of matters affecting the corporation. (a) Any merger, sale of control or sale of material assets of the corporation. (b) Any material acquisition by the corporation. (c) The creation of any new business unit of the corporation or any subsidiary of the corporation. (d) Any operating budget, or any material change therein, of the corporation or any subsidiary of the corporation. (e) Any material change in the business organization or organizational structure of the corporation or any subsidiary of the corporation. (f) Termination of the employment of any executive or senior officer appointed to the Executive Management Committee of the corporation. (g) Any change in the authorized range of the number of directors of the corporation." Certificate of Officers Pursuant to Section 1103 of the California Corporations Code Mid-Peninsula Bancorp David L. Kalkbrenner and Carol H. Rowland certify that: 1. They are the duly elected and acting Chief Executive Officer and Chief Financial Officer, respectively, of Mid-Peninsula Bancorp. 2. This certificate is attached to the Merger Agreement dated as of November 15, 1996, providing for the merger of Mid-Peninsula Bancorp and Cupertino National Bancorp, with Mid-Peninsula Bancorp being the surviving corporation of the merger and changing its name to Greater Bay Bancorp. 3. The Merger Agreement in the form attached has been approved by the Board of Directors of the Corporation. 4. The principal terms of the Merger Agreement in the form attached were approved by the corporation by the vote of a number of shares of each class entitled to vote on the merger which equaled or exceeded the vote required, such classes, the total number of outstanding shares of each class entitled to vote on the merger and the percentage vote required of each class being as follows: Name of Class Shares Outstanding Vote Required ------------- ------------------ ------------- Common Stock 1,637,593 Majority of shares outstanding IN WITNESS WHEREOF, the undersigned have executed this certificate on November 15, 1996. /s/ DAVID L. KALKBRENNER /s/ CAROL H. ROWLAND -------------------------- -------------------------- David L. Kalkbrenner Carol H. Rowland Chief Executive Officer Chief Financial Officer The undersigned, Chief Executive Officer and Chief Financial Officer, respectively, of Mid-Peninsula Bancorp, a California corporation, each declares under penalty of perjury that the matters set out in the foregoing Certificate are true of his or her own knowledge. Executed at Palo Alto, California on November 15, 1996. /s/ DAVID L. KALKBRENNER /s/ CAROL H. ROWLAND -------------------------- -------------------------- David L. Kalkbrenner Carol H. Rowland Chief Executive Officer Chief Financial Officer Certificate of Officers Pursuant to Section 1103 of the California Corporations Code Cupertino National Bancorp C. Donald Allen and Heidi R. Wulfe certify that: 1. They are the duly elected and acting Chief Executive Officer and Chief Financial Officer, respectively, of Cupertino National Bancorp. 2. This certificate is attached to the Merger Agreement dated as of November 15, 1996, providing for the merger of Cupertino National Bancorp with and into Mid-Peninsula Bancorp, with Mid-Peninsula Bancorp being the surviving corporation of the merger and changing its name to Greater Bay Bancorp. 3. The Merger Agreement in the form attached has been approved by the Board of Directors of the corporation. 4. The principal terms of the Merger Agreement in the form attached were approved by the corporation by the vote of a number of shares of each class entitled to vote on the merger which equaled or exceeded the vote required, such classes, the total number of outstanding shares of each class entitled to vote on the merger and the percentage vote required of each class being as follows: Name of class Shares Outstanding Vote Required ------------- ------------------ ------------- Common Stock 1,905,958 Majority of shares outstanding IN WITNESS WHEREOF, the undersigned have executed this certificate on November 15, 1996. /s/ C. Donald Allen /s/ Heidi R. Wulfe -------------------------- -------------------------- C. Donald Allen Heidi R. Wulfe Chief Executive Officer Chief Executive Officer The undersigned, Chief Executive Officer and Chief Executive Officer, respectively, of Cupertino National Bancorp, a California corporation, each declares under penalty of perjury that the matters set out in the foregoing Certificate are true of his or her own knowledge. Executed at Cupertino, California on November 15, 1996. /s/ C. Donald Allen /s/ Heidi R. Wulfe -------------------------- -------------------------- C. Donald Allen Heidi R. Wulfe Chief Executive Officer Chief Executive Officer CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION David L. Kalkbrenner and Steven C. Smith verify that: 1. They are the President and Chief Executive Officer and the Assistant Secretary, respectively, of GREATER BAY BANCORP, a California corporation. 2. The Articles of Incorporation of this corporation are amended by adding thereto a new Article SEVEN to read as follows: "SEVEN. ELIMINATION OF CUMULATIVE VOTING. No holder of any class of stock of the corporation shall be entitled to cumulate votes at any election of directors of the corporation." 3. The foregoing amendment of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation entitled to vote with respect to the amendment is 3,300,827. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct to our own knowledge. DATE: May 9, 1997 /s/ David L. Kalkbrenner ------------------------------------ David L. Kalkbrenner, President and Chief Executive Officer /s/ Steven C. Smith ------------------------------------ Steven C. Smith, Assistant Secretary CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION David L. Kalkbrenner and Steven C. Smith certify that: 1. They are the President and Chief Executive Officer and the Assistant Secretary, respectively, of GREATER BAY BANCORP, a California corporation. 2. Paragraph (a) of Article FOUR of the Articles of Incorporation of this corporation is amended to read as follows: "(a) The Corporation is authorized to issue two (2) classes of shares of stock: one class of shares to be called "Common Stock"; the second class of shares to be called "Preferred Stock." The total number of shares of stock of which the Corporation shall have authority to issue is Sixteen Million (16,000,000), of which Twelve Million (12,000,000) shall be Common Stock and Four Million (4,000,000) shall be Preferred Stock." 3. The foregoing amendment of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation entitled to vote with respect to the amendment is 3,339,131. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. DATED: December 2, 1997. /s/ David L. Kalkbrenner ------------------------------- David L. Kalkbrenner, President and Chief Executive Officer /s/ Steven C. Smith ------------------------------- Steven C. Smith, Assistant Secretary SEAL CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION David L. Kalkbrenner and Steven C. Smith certify that: 1. They are the President and the Assistant Secretary, respectively, of Greater Bay Bancorp, a California corporation (the "Corporation"). 2. Article FOUR, Subsection (a) of the Articles of Incorporation of the Corporation is amended to read in its entirety as follows: "This corporation is authorized to issue only two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is 4,000,000 and the number of shares of Common Stock authorized to be issued is 24,000,000. "Upon the amendment of this Article FOUR, Subsection (a) to read as hereinabove set forth, each share of Common Stock issued and outstanding immediately prior to the amendment shall be divided into two (2) shares of Common Stock." 3. The foregoing amendment of the Articles of Incorporation has been duly approved by the Board of Directors of the Corporation. 4. Shareholder approval of the foregoing amendment of the Articles of Incorporation is not required pursuant to Section 902(c) of the California General Corporation Law. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed at Palo Alto, California this 20th day of April, 1998. /s/ David L. Kalkbrenner ------------------------------- David L. Kalkbrenner, President /s/ Shawn E. Saunders ------------------------------- Shawn E. Saunders, Assistant Secretary EX-3.2 4 BYLAWS OF GREATER BAY BANCORP EXHIBIT 3.2 BYLAWS OF GREATER BAY BANCORP TABLE OF CONTENTS
PAGE ---- ARTICLE I Applicability...................................................... 1 Section 1. Applicability of Bylaws............................................ 1 ARTICLE II Offices............................................................ 1 Section 1. Principal Executive Offices........................................ 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........................................................ 3 Section 6. Quorum; Action at Meetings......................................... 3 Section 7. Adjournment........................................................ 4 Section 8. Validation of Defectively Called, Noticed or Held Meetings......... 4 Section 9. Voting for Election of Directors................................... 4 Section 10. Proxies............................................................ 5 Section 11. Inspectors of Election............................................. 5 Section 12. Action by Written Consent.......................................... 5 ARTICLE IV Directors.............................................................. 6 Section 1. Number of Directors................................................ 6 Section 2. Election of Directors.............................................. 6 Section 3. Term of Office..................................................... 7
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Section 4. Vacancies....................................................... 7 Section 5. Removal......................................................... 7 Section 6. Resignation..................................................... 8 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....... 9 Section 1. Place of Meetings.............................................. 9 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......................... 10 Section 7. Quorum; Action at Meetings; Telephone Meetings.................. 10 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............................................ 11 Section 3. Subordinate Officers, Etc....................................... 11 Section 4. Removal and Resignation......................................... 11 Section 5. Vacancies....................................................... 11 Section 6. Chairman of the Board........................................... 11
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Section 7. President....................................................... 11 Section 8. Vice President.................................................. 12 Section 9. Secretary....................................................... 12 Section 10. Treasurer....................................................... 12 ARTICLE VIII Records and Reports............................................. 12 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....... 13 Section 4. Bylaws - Maintenance and Inspection............................. 13 Section 5. Annual Report to Shareholders................................... 13 ARTICLE IX Miscellaneous................................................... 13 Section 1. Checks, Drafts, Etc............................................. 13 Section 2. Contracts, Etc. - How Executed.................................. 13 Section 3. Certificates of Stock........................................... 13 Section 4. Lost Certificates............................................... 13 Section 5. Representation of Shares of Other Corporations.................. 14 Section 6. Construction and Definitions.................................... 14 Section 7. Indemnification of Corporate Agents; Purchase of Liability Insurance....................................................... 14 ARTICLE X Amendments...................................................... 15 Section 1. Amendments...................................................... 15
iii 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. (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. ----- ----- 2 (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) 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 3 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 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. 4 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 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. 5 (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 proxyholders, or a personal representative of the shareholder or their respective proxyholders, 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 seven (7) nor more than thirteen (13). The exact number of directors shall be fixed from time to time, within the limits specified in this subdivision, by an amendment of subdivision (b) of this section adopted by the Board of Directors. (b) The exact number of directors shall be ten (10) until changed as provided in subdivision (a) of this section. (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 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. 6 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 7 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. 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; 8 (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 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. 9 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. 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 10 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. 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. 11 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 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 12 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 13 and canceled 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. 14 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. 15 GREATER BAY BANCORP CERTIFICATION The undersigned hereby certifies that he is the duly elected and acting Assistant Corporate Secretary of Greater Bay Bancorp, a California Corporation, that the foregoing is a true, correct and complete copy of the resolutions duly adopted at the regular meeting of the Board of Directors of Greater Bay Bancorp, duly called and held October 21, 1997, at which a quorum was present and acting throughout, which resolutions are in full force and effect on and as of the date hereof, not having been amended, altered or repealed. IN WITNESS WHEREOF, the undersigned has executed this Certificate this 21st day of October, 1997. /s/ Steven C. Smith ----------------------------- Steven C. Smith Assistant Secretary RESOLUTIONS OF THE BOARD OF DIRECTORS OF GREATER BAY BANCORP WHEREAS, the Board of Directors of Greater Bay Bancorp (the "Corporation") is authorized by the Corporation's Articles of Incorporation and Bylaws to amend the Corporation's Bylaws; WHEREAS, the Corporation's Bylaws currently fix the authorized number of Directors at ten (10) and provide for three roughly equal Classes of Directors: Class I, Class II and Class III; WHEREAS the Board of Directors of the Corporation is currently comprised of ten persons: three (3) Class I Directors, three (3) Class II Directors, and four (4) Class III Directors; WHEREAS, on September 5, 1997, the corporation entered into an Agreement and Plan of Reorganization (the "Agreement") by and among the Corporation, GBB Acquisition Corp., a California corporation and wholly-owned subsidiary of the Corporation ("Newco"), and Peninsula Bank of commerce, a California banking corporation ("PBC"), pursuant to which, among other things, the Corporation will acquire PBC through the merger of Newco with and into PBC (the "Merger"); WHEREAS, pursuant to Section 10.7 of the Agreement, the Corporation is required to take all necessary action to appoint, as of the effective time of the Merger (the "Effective Time"), George R. Corey, current Chairman of PBC, to the Board of Directors of the Corporation; WHEREAS, the Board of Directors has received and reviewed a draft of a proposed amendment to Article IV, Section 1, subdivision (b) for the Corporation's Bylaws fixing the number of authorized Directors at eleven (11) as of the Effective Time; WHEREAS, the Board of Directors believes it is in the best interests of the Corporation and its shareholders to amend the Corporation's Bylaws as contemplated by such proposed amendment; and WHEREAS, the Board of Directors believes it is in the best interests of the Corporation and its shareholders to appoint, as of the Effective Time, Mr. Corey to serve as a Class II Director of the Corporation, to fill the vacancy thus created. NOW, THEREFORE, BE IT HEREBY RESOLVED, that Article IV, Section 1, subdivision (b) of the Corporation's Bylaws is hereby amended to be effective as of the Effective Time to read as follows: "(b) The exact number of directors shall be eleven (11) until changed as provided in subdivision (a) of this section." RESOLVED, FURTHER, that, as of the Effective Time, George R. Corey shall be appointed to Class II of the Board of Directors of the Corporation, to serve until the 1998 Annual Meeting of Shareholders and until his successor is elected and has qualified; RESOLVED, FURTHER, that the officers of the Corporation be, and they each hereby are, authorized, directed and empowered to do or cause to be done all such acts or things and sign and deliver all such documents as such officer(s) may deem advisable or necessary in order to carry out and perform the purposes of these resolutions; and RESOLVED FURTHER, that the Secretary of the Corporation is hereby authorized and directed to compile and certify copies of the Bylaws as amended and to place one copy in the Corporation's minute book and keep another copy at the Corporation's principal executive office where it shall be open to inspection by the shareholders at all reasonable times during office hours, as provided in Section 213 of the Corporations Code. CERTIFICATE OF SECRETARY I, Carleen Maniglia, hereby certify that: 1) I am the duly elected and acting Assistant Secretary of Greater Bay Bancorp, a California Corporation; 2) Set forth below is a true copy of resolutions duly adopted by the Board of Directors at their meeting duly held on March 24,1998. 3) The resolutions set forth below have not been modified or rescinded and are in full force and effect. In witness whereof, I have hereunto set my hand this 25th day of March, 1998. /s/ Carleen Maniglia ------------------- Carleen Maniglia Assistant Corporate Secretary WHEREAS, the Board of Directors of Greater Bay Bancorp (the "Corporation") is authorized by the Corporation's Articles of Incorporation and Bylaws to amend, subject in certain instances to shareholder approval, the Corporation's Bylaws: WHEREAS, the Corporations' Bylaws currently (i) provide that the authorized number of Director shall not be less than seven (7) nor more than thirteen (13); (ii) fix the authorized number of Directors at eleven (11); and (iii) provide for three roughly equal Classes of Directors: Class I, Class II and Class III; WHEREAS, the Board of Directors of the Corporation is currently comprised of eleven (11) persons; three (3) Class I Directors, four (4) Class II Directors, and four (4) Class III Directors; WHEREAS, the Board of Directors has received and reviewed a draft of a proposed amendment to Article IV, Section 1, subdivision (a) of the Corporation's Bylaws which provides that the authorized number of directors shall not be less than nine (9) nor more than seventeen (17); WHEREAS, the Board of Directors has received and reviewed a draft of a proposed amendment to Article IV, Section 1, subdivision (b) of the Corporation's Bylaws fixing the number of authorized Directors at thirteen (13); WHEREAS, the Board of Directors believes it is in the best interest of the Corporation and its shareholders to amend the Corporation's Bylaws as contemplated by such proposed amendments; WHEREAS, the Board of Directors believes it is in the best interests of the Corporation and its shareholders to appoint Roger V. Smith and George M. Marcus to serve as Class II Directors of the Corporation to fill the vacancies thus created; WHEREAS, Edwin E. van Bronkkhorst, who is currently a Class I Director of the Corporation, has expressed his intention to resign from the Board of Directors, effective as of the earlier of (i) the Corporation's 1998 Annual Meeting of Shareholders (the "Annual Meeting:), or (ii) in the event that the Corporation's pending merger transaction with Pacific Rim Bancorporation (the "PRB Merger") is closed prior to the date of the Annual Meeting, the effective time of the PRB Merger; and WHEREAS, in the event that Mr. van Bronkhorst resigns from the Board of Directors as of the effective time of the PRB Merger as described in (ii) above, the Board of Directors believes it is in the best interests of the Corporation and its shareholders to appoint Mr. Leo K.W. Lum to serve as a Class II Director to fill the vacancy thus created, as of the effective time of the PRB Merger; and NOW, THEREFORE, BE IT HEREBY RESOLVED, that Article IV, Section 1, subdivision (a) of the Corporation's Bylaws is hereby amended, subject to the approval of a majority of the outstanding shares of the Corporation, to read in its entirety as follows: "(a) The authorized number of directors shall be no less than nine (9) nor more than seventeen (17). The exact number of directors shall be fixed from time to time, within the limits specified in this subdivision, by an amendment of subdivision (b) of the section adopted by the Board of Directors." RESOLVED FURTHER, that Article IV, Section 1, subdivision (b) of the Corporation's Bylaws is hereby amended, effective immediately, to read in its entirety as follows: "(b) The exact number of directors shall be thirteen (13) until changed as provided in subdivision (a) of this section." RESOLVED FURTHER, that Messrs. Roger V. Smith and George M. Marcus are hereby appointed to Class I of the Board of Directors of the Corporation, to serve until the 1998 Annual meeting of Shareholders and until their successors are elected and have qualified; RESOLVED FURTHER, that in the event that the effective time of the PRB Merger occurs prior to the date of the Annual Meeting; (i) the Board of Directors shall accept Mr. van Bronkhorst's resignation from the Board as of the effective time of the PRB Merger, and (ii) Mr. Leo K.W. Lum shall be appointed to Class II of the Board of Directors of the Corporation, to serve until the 1999 Annual Meeting of Shareholders and until his successor is elected and has qualified; RESOLVED FURTHER, that the officers of the Corporation be, and they each hereby are, authorized, directed and empowered to do or cause to be done all such acts or things and sign and deliver all such documents as such officer(s) may deem advisable or necessary in order to carry out and perform the purposes of these resolutions, including, but not limited to, preparing or causing to be prepared and filing or causing to be filed with the Securities and Exchange Commission, a preliminary proxy statement and a definitive proxy statement to be used in connection with solicitation of approval of the Corporation's shareholders of the amendment of the Corporation's Bylaws to increase the range of the number of authorized directors; and RESOLVED FURTHER, that the Secretary of the Corporation is hereby authorized and directed to compile and certify copies of the Bylaws as amended and to place one copy in the Corporation's minute book and keep another copy at the Corporation's principal executive office where it shall be open to inspection by the shareholders at all reasonable times during office hours, as provided in Section 213 of the Corporations Code. CERTIFICATE OF SECRETARY I, Carleen Maniglia, hereby certify that: 1) I am the duly elected and acting Assistant Secretary of Greater Bay Bancorp, a California Corporation; 2) Set forth below is a true copy of resolutions duly adopted by the Board of Directors at their meeting duly held on July 21, 1998. 3) The resolutions set forth below have not been modified or rescinded and are in full force and effect. In witness whereof, I have hereunto set my hand this 22nd day of July, 1998. /s/Carleen Maniglia ------------------- Carleen Maniglia Assistant Corporate Secretary RESOLVED FURTHER, that Article IV, Section 1 of the Bylaws of Greater Bay Bancorp be, and hereby is, amended to read in full as follows: Section 1. Number of Directors. (a) The authorized number of directors ------------------- shall be no less than nine (9) nor more than seventeen (17). The exact number of directors shall be fixed from time to time, within the limits specified in this subdivision, by an amendment of subdivision (b) of this section adopted by the Board of Directors. The exact number of directors shall be fourteen (14) until changed as provided in subdivision (a) of this section. 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 status maximum authorized number of directors exceed two times the stated minimum number of authorized directors minus one. EX-4.6.2 5 SUCCESSOR ADMINISTRATIVE TRUSTEE EXHIBIT 4.6.2 APPOINTMENT OF -------------- SUCCESSOR ADMINISTRATIVE TRUSTEE -------------------------------- AND --- FIRST AMENDMENT TO ------------------ AMENDED AND RESTATED TRUST AGREEMENT ------------------------------------ GBB CAPITAL I This Appointment of Successor Administrative Trustee and First Amendment to Amended and Restated Trust Agreement (this "First Amendment"), is dated as of June 24, 1998 and is pursuant to Sections 8.10, 8.11 and 10.2(a) of the Amended and Restated Trust Agreement between Greater Bay Bancorp, as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee and the Administrative Trustees named therein, dated as of March 31, 1997 (the "Amended and Restated Trust Agreement"). Capitalized terms used herein and not otherwise defined herein have the respective meanings ascribed thereto in the Amended and Restated Trust Agreement. WHEREAS, James R. Ramsey, an Administrative Trustee of GBB Capital I under the Amended and Restated Trust Agreement, has been removed as an Administrative Trustee by the Common Securityholder pursuant to Section 8.10 of the Amended and Restated Trust Agreement; WHEREAS, Greater Bay Bancorp, as the Common Securityholder, wishes to appoint a successor Administrative Trustee pursuant to Section 8.10 of the Amended and Restated Trust Agreement; and WHEREAS, Shawn E. Saunders, a natural person over the age of 21, and the person whom the Common Securityholder wishes to appoint as successor Administrative Trustee, wishes to accept such appointment pursuant to Section 8.11 of the Amended and Restated Trust Agreement. 1. James R. Ramsey, Administrative Trustee under the Amended and Restated Trust Agreement, is hereby removed as an Administrative Trustee pursuant to Section 8.10 of the Amended and Restated Trust Agreement by Greater Bay Bancorp (in its capacity as Common Securityholder). This First Amendment, when delivered to the removed Trustee, James R. Ramsey, shall constitute delivery of the required Act of the Common Securityholder pursuant to Section 8.10 of the Amended and Restated Trust Agreement. 2. Greater Bay Bancorp, as Common Securityholder, hereby appoints Shawn E. Saunders as successor Administrative Trustee. This First Amendment, when executed and acknowledged by Shawn E. Saunders, the successor Trustee, and delivered to GBB Capital I and the removed Administrative Trustee, James R. Ramsey, shall constitute the instrument accepting such appointment pursuant to Section 8.11 of the Amended and Restated Trust Agreement. 1 3. Shawn E. Saunders hereby accepts the appointment under the Amended and Restated Trust Agreement as successor Administrative Trustee, and accepts the rights, powers, trusts and duties of an Administrative Trustee with respect to the Trust Securities and the Trust, as if he were an original signatory in the capacity as Administrative Trustee (and not in an individual capacity) to the Amended and Restated Trust Agreement. This First Amendment shall constitute the amendment to the Amended and Restated Trust Agreement required to be executed and delivered by the retiring Trustee and the successor Trustee pursuant to Section 8.11 of the Amended and Restated Trust Agreement. GENERAL PROVISIONS As amended by this First Amendment, the Amended and Restated Trust Agreement is in all respects ratified and confirmed and, as amended by this First Amendment, shall be read, taken and construed as one and the same instrument. All other provisions of the Amended and Restated Trust Agreement shall remain unaffected by the foregoing amendment and shall remain in full force and effect. This First Amendment shall become a legally effective and binding instrument as of the date hereof. This First Amendment may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute one and the same instrument. 2 IN WITNESS WHEREOF, the undersigned have executed this First Amendment as of the day and year first above written. Greater Bay Bancorp By: /s/ Steven C. Smith ------------------------------ Name: Steven C. Smith Title: Executive Vice President, Chief Operating Officer and Chief Financial Officer Wilmington Trust Company, as Property Trustee By: /s/ Bruce L. Bisson ------------------------------ Name: Bruce L. Bisson Title: Vice President /s/ David L. Kalkbrenner ------------------------------- David L. Kalkbrenner, as Administrative Trustee /s/ Steven C. Smith ------------------------------- Steven C. Smith, as Administrative Trustee /s/ Shawn E. Saunders ------------------------------- Shawn E. Saunders, as successor Administrative Trustee /s/ James R. Ramsey ------------------------------- James R. Ramsey, as retiring Administrative Trustee EX-4.21 6 SERIES B CAPITAL SECURITIES GUAR AGREEMENT Exhibit 4.21 =================================================== SERIES B CAPITAL SECURITIES GUARANTEE AGREEMENT GREATER BAY BANCORP Dated as of November 27, 1998 =================================================== TABLE OF CONTENTS -----------------
Page ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1 Definitions and Interpretation................................... 2 ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application................................. 6 SECTION 2.2 Lists of Holders of Securities................................... 6 SECTION 2.3 Reports by the Capital Securities Guarantee Trustee.............. 6 SECTION 2.4 Periodic Reports to Capital Securities Guarantee Trustee......... 6 SECTION 2.5 Evidence of Compliance with Conditions Precedent................. 7 SECTION 2.6 Waiver of Events of Default...................................... 7 SECTION 2.7 Notice of Events of Default...................................... 7 SECTION 2.8 Conflicting Interests............................................ 7 ARTICLE III POWERS, DUTIES AND RIGHTS OF CAPITAL SECURITIES GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Capital Securities Guarantee Trustee.... 8 SECTION 3.2 Certain Rights of Capital Securities Guarantee Trustee........... 9 SECTION 3.3 Not Responsible for Recitals or Issuance of Series B Capital Securities Guarantee............................................. 11 ARTICLE IV CAPITAL SECUCRITIES GUARANTEE TRUSTEE SECTION 4.1 Capital Securities Guarantee Trustee; Eligibility................ 12 SECTION 4.2 Appointment, Removal and Resignation of Capital Securities Guarantee Trustee................................................ 12 ARTICLE V GUARANTEE SECTION 5.1 Guarantee........................................................ 13 SECTION 5.2 Waiver of Notice and Demand...................................... 13 SECTION 5.3 Obligations Not Affected......................................... 13 SECTION 5.4 Rights of Holders................................................ 14 SECTION 5.5 Guarantee of Payment............................................. 15 SECTION 5.6 Subrogation...................................................... 15 SECTION 5.7 Independent Obligations.......................................... 15
(i)
ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1 Limitation of Transactions......................................... 15 SECTION 6.2 Ranking............................................................ 16 ARTICLE VII TERMINATION SECTION 7.1 Termination........................................................ 16 ARTICLE VIII INDEMNIFICATION SECTION 8.1 Exculpation........................................................ 17 SECTION 8.2 Compensation and Indemnification................................... 17 ARTICLE IX MISCELLANEOUS SECTION 9.1 Successors and Assigns............................................. 18 SECTION 9.2 Amendments......................................................... 18 SECTION 9.3 Notices............................................................ 18 SECTION 9.4 Benefit............................................................ 19 SECTION 9.5 Governing Law...................................................... 19
(ii) CROSS REFERENCE TABLE
Section of Trust Section of Guarantee Indenture Act of Agreement 1939, as amended 310(a)............................................ 4.1(a) 310(b)............................................ 4.1(c), 2.8 310(c)............................................ Inapplicable 311(a)............................................ 2.2(b) 311(b)............................................ 2.2(b) 311(c)............................................ Inapplicable 312(a)............................................ 2.2(a) 312(b)............................................ 2.2(b) 313.............................................. 2.3 314(a)............................................ 2.4 314(b)............................................ Inapplicable 314(c)............................................ 2.5 314(d)............................................ Inapplicable 314(e)............................................ 1.1, 2.5, 3.2 314(f)............................................ 2.1, 3.2 315(a)............................................ 3.1(d) 315(b)............................................ 2.7 315(c)............................................ 3.1(c) 315(d)............................................ 3.1(d) 316(a)............................................ 1.1, 2.6, 5.4 316(b)............................................ 5.3 316(c)............................................ 9.2 317(a)............................................ Inapplicable 317(b)............................................ Inapplicable 318(a)............................................ 2.1(a) 318(c)............................................ 2.1(b)
_________________________ * This Cross-Reference Table does not constitute part of this Guarantee Agreement and shall not affect the interpretation of any of its terms or provisions. (iii) SERIES B CAPITAL SECURITIES GUARANTEE AGREEMENT This SERIES B CAPITAL SECURITIES GUARANTEE AGREEMENT (the "Series B Capital Securities Guarantee"), dated as of November 27, 1998, is executed and delivered by GREATER BAY BANCORP, a California corporation (the "Guarantor"), and WILMINGTON TRUST COMPANY, a Delaware banking corporation, as trustee (the "Capital Securities Guarantee Trustee" or "Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Series B Capital Securities (as defined herein) of GBB CAPITAL II, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Trust Agreement (the "Trust Agreement"), dated as of August 12, 1998, by and among the trustees of the Issuer named therein, the Guarantor, as sponsor, and the Holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer (i) issued on August 12, 1998 30,000 capital securities, having an aggregate liquidation amount of $30,000,000, such capital securities being designated the Floating Rate Capital Securities, Series A (collectively the "Series A Capital Securities") and (ii) in connection with an Exchange Offer (as defined in the Trust Agreement), hereby executes and delivers this Series B Capital Securities Guarantee for the benefit of Holders of the Series B Capital Securities (as defined in the Trust Agreement); WHEREAS, the Series A Capital Securities issued by the Issuer and proceeds thereof, together with the proceeds from the issuance of the Issuer's Common Securities (as defined herein), were used to purchase the Junior Subordinated Debentures due September 15, 2028 (the "Series A Junior Subordinated Debentures") of the Guarantor which were deposited with the Trustee, as Property Trustee under the Trust Agreement, as trust assets; WHEREAS, as incentive for the Holders to purchase the Series A Capital Securities, the Guarantor irrevocably and unconditionally agreed, to the extent set forth in the Series A Capital Securities Guarantee Agreement dated as of August 12, 1998 (the "Series A Capital Securities Guarantee"), to pay to the Holders of the Series A Capital Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein; WHEREAS, in connection with the offer of the Series A Capital Securities, the Guarantor, the Issuer and Sandler O'Neill & Partners, L.P. executed the Registration Rights Agreement dated August 7, 1998 (the "Registration Rights Agreement"); WHEREAS, the Issuer, in order to satisfy its obligations under the Registration Rights Agreement, intends to offer up to $30,000,000 aggregate Liquidation Amount of its Floating Rate Capital Securities, Series B, which have been registered under the Securities Act of 1933, as amended, pursuant to a registration statement in exchange for a like Liquidation Amount of Series A Capital Securities; WHEREAS, pursuant to the Exchange Offer, the Guarantor is also exchanging up to $30,000,000 aggregate principal amount of the Series A Junior Subordinated Debentures for up to $30,000,000 aggregate principal of the Series B Junior Subordinated Debentures due September 15, 2028 (the "Series B Junior Subordinated Debentures") of the Guarantor; WHEREAS, pursuant to the Exchange Offer, the Guarantor is required to execute this Series B Capital Securities Guarantee and exchange the Series A Capital Securities Guarantee for this Series B Capital Securities Guarantee Agreement; and WHEREAS, the Guarantor also executed and delivered the Common Securities Guarantee Agreement dated as of August 12, 1998, (the "Common Securities Guarantee"), for the benefit of the holders of the Common Securities (as defined herein), the terms of which provide that if an Event of Default (as defined in the Trust Agreement) has occurred and is continuing, the rights of holders of the Common Securities to receive Guarantee Payments under the Common Securities Guarantee are subordinated, to the extent and in the manner set forth in the Common Securities Guarantee, to the rights of Holders of Series A Capital Securities and the Series B Capital Securities to receive Guarantee Payments under the Series A Capital Securities Guarantee and this Series B Capital Securities Guarantee, as the case may be. NOW, THEREFORE, in consideration of the exchange by each Holder of the Series A Capital Securities for the Series B Capital Securities, which exchange the Guarantor hereby acknowledges shall benefit the Guarantor, (or in the event certain Holders do not exchange their Series A Capital Securities, in order to fulfill its obligations to such Holders under the Series A Capital Securities Guarantee) and intending to be legally bound hereby, the Guarantor executes and delivers this Series B Capital Securities Guarantee Agreement for the benefit of the Holders from time to time of the Trust Securities (as defined herein). ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1 Definitions and Interpretation ------------------------------ In this Series B Capital Securities Guarantee, unless the context otherwise requires: (a) capitalized terms used in this Series B Capital Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) terms defined in the Trust Agreement as at the date of execution of this Series B Capital Securities Guarantee have the same meaning when used in this Series B Capital Securities Guarantee unless otherwise defined in this Series B Capital Securities Guarantee, (c) a term defined anywhere in this Series B Capital Securities Guarantee has the same meaning throughout; (d) all references to "the Series B Capital Securities Guarantee" or "this Series B Capital Securities Guarantee" are references to this Series B Capital Securities Guarantee as modified, supplemented or amended from time to time; (e) all references in this Series B Capital Securities Guarantee to Articles and Sections references are to Articles and Sections of this Series B Capital Securities Guarantee, unless otherwise specified; -2- (f) a term defined in the Trust Indenture Act has the same meaning when used in this Series B Capital Securities Guarantee, unless otherwise defined in this Series B Capital Securities Guarantee or unless the context otherwise requires; and (g) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 under --------- the Securities Act of 1933, as amended, or any successor rule thereunder. "Business Day" shall mean any day other than a Saturday or a Sunday, or a ------------ day on which banking institutions in Wilmington, Delaware, San Francisco, California and New York, New York are authorized or required by law or executive order to remain closed. "Capital Securities Guarantee Trustee" shall mean Wilmington Trust Company ------------------------------------ as Trustee under the Series B Capital Securities Guarantee, until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Series B Capital Securities Guarantee and thereafter means each such Successor Capital Securities Guarantee Trustee. "Common Securities" shall mean the securities representing common undivided ----------------- beneficial interests in the assets of the Issuer. "Corporate Trust Office" shall mean the office of the Capital Securities ---------------------- Guarantee Trustee at which the corporate trust business of the Capital Securities Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890- 0001, Attention: Corporate Trust Administration. "Covered Person" shall mean any Holder or beneficial owner of Series B -------------- Capital Securities. "Debentures" shall mean the series of subordinated debt securities of the ---------- Guarantor designated the Floating Rate Junior Subordinated Deferrable Interest Debentures due September 15, 2028, Series B, held by the Property Trustee (as defined in the Trust Agreement) of the Issuer. "Event of Default" shall mean a default by the Guarantor on any of its ---------------- payment or other obligations under this Series B Capital Securities Guarantee; provided, however, that, except with respect to default in respect of any - -------- ------- Guarantee Payment, no default by the Guarantor hereunder shall constitute an Event of Default unless the Guarantor shall have received written notice of the default and shall not have cured such default within 60 days after receipt thereof. "Guarantee Payments" shall mean the following payments or distributions, ------------------ without duplication, with respect to the Series B Capital Securities, to the extent not paid or made by or on behalf of the Issuer: (i) any accumulated and unpaid Distributions (as defined in the Trust Agreement) that are required to be paid on such Series B Capital Securities, to the extent the Issuer has funds legally available therefor at such time, (ii) the redemption price, including all accumulated and unpaid Distributions to the date of redemption (the "Redemption Price"), to the extent the Issuer -3- has funds legally available therefor at such time, with respect to any Series B Capital Securities called for redemption, and (iii) upon a voluntary or involuntary dissolution, winding up or liquidation of the Issuer (other than in connection with the distribution of Debentures to the Holders in exchange for Series B Capital Securities or in connection with the redemption of the Series B Capital Securities, in each case as provided in the Trust Agreement), the lesser of (a) the aggregate of the liquidation amount and all accumulated and unpaid Distributions on the Series B Capital Securities to the date of payment, to the extent the Issuer has funds legally available therefor at such time, and (b) the amount of assets of the Issuer remaining available for distribution to Holders after satisfaction of liabilities to creditors of the Issuer as required by applicable law (in either case, the "Liquidation Distribution"). If an Event of Default has occurred and is continuing, no Guarantee Payments under the Common Securities Guarantee with respect to the Common Securities or any guarantee payment under the Common Securities Guarantee or any Other Common Securities Guarantee shall be made until the Holders of Series B Capital Securities shall be paid in full the Guarantee Payments to which they are entitled under this Series B Capital Securities Guarantee. "Holder" shall mean any holder, as registered on the books and records of ------ the Issuer, of any Series B Capital Securities; provided, however, that, in -------- ------- determining whether the holders of the requisite percentage of Series B Capital Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any Person actually known to a Responsible Officer of the Capital Securities Guarantee Trustee to be an Affiliate of the Guarantor. "Indemnified Person" shall mean the Capital Securities Guarantee Trustee ------------------ (including in its individual capacity), any Affiliate of the Capital Securities Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Capital Securities Guarantee Trustee. "Indenture" shall mean the Indenture, dated as of August 12, 1998, between --------- Greater Bay Bancorp, as issuer of Debentures (the "Debenture Issuer"), and Wilmington Trust Company, as trustee, pursuant to which the Debentures are to be issued to the Property Trustee of the Issuer. "Majority in Liquidation Amount of the Series B Capital Securities" shall ----------------------------------------------------------------- mean, except as provided by the Trust Indenture Act, a vote by Holder(s) of Series B Capital Securities, voting separately as a class, of more than 50% of the aggregate liquidation amount (including the amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Series B Capital Securities. "Officers' Certificate" shall mean, with respect to any Person, a --------------------- certificate signed by the Chairman, the Chief Executive Officer, the President, an Executive or Senior Vice President, a Vice President, the Chief Financial Officer and the Secretary or an Assistant Secretary. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Series B Capital Securities Guarantee shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenants or conditions and the definitions relating thereto; -4- (b) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (c) a statement as to whether or not, in the opinion of each such officer, such condition or covenant has been complied with. "Other Common Securities Guarantees" shall have the same meaning as "Other ---------------------------------- Guarantees" in the Common Securities Guarantee. "Other Debentures" shall mean all junior subordinated debentures, other ---------------- than the Debentures and the Series B Debentures (as defined in the Indenture), issued by the Guarantor from time to time and sold to trusts other than the Issuer to be established by the Guarantor (if any), in each case similar to the Issuer. "Other Guarantees" shall mean all guarantees, other than this Series B ---------------- Capital Securities Guarantee and the Series A Capital Securities Guarantee, to be issued by the Guarantor with respect to capital securities (if any) similar to the Series B Capital Securities, issued by trusts other than the Issuer to be established by the Guarantor (if any), in each case similar to the Issuer. "Person" shall mean a legal person, including any individual, corporation, ------ estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Registration Rights Agreement" shall mean the Registration Rights ----------------------------- Agreement, dated as of August 7, 1998, by and among the Guarantor, the Issuer and the Initial Purchasers named therein, as such agreement may be amended, modified or supplemented from time to time. "Responsible Officer" shall mean, with respect to a Person, any officer ------------------- with direct responsibility for the administration of any matters relating to this Series B Capital Securities Guarantee. "Successor Capital Securities Guarantee Trustee" shall mean a successor ---------------------------------------------- Capital Securities Guarantee Trustee possessing the qualifications to act as Capital Securities Guarantee Trustee under Section 4.1. "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as ------------------- amended. "Trust Securities" shall mean the Common Securities and the Series A ---------------- Capital Securities and Series B Capital Securities, collectively. -5- ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application -------------------------------- (a) This Series B Capital Securities Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Series B Capital Securities Guarantee and shall, to the extent applicable, be governed by such provisions. (b) If and to the extent that any provision of this Series B Capital Securities Guarantee limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. If any provision of this Capital Securities Guarantee modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the modified or excluded provision of the Trust Indenture Act shall be deemed to apply to this Capital Securities Guarantee as so modified or excluded, as the case may be. SECTION 2.2 Lists of Holders of Securities ------------------------------ (a) The Guarantor shall provide the Capital Securities Guarantee Trustee (unless the Capital Securities Guarantee Trustee is otherwise the registrar of the Capital Securities) with a list, in such form as the Capital Securities Guarantee Trustee may reasonably require, of the names and addresses of the Holders of the Series B Capital Securities ("List of Holders") as of such date, (i) within fourteen (14) days after each record date for payment of Distributions (as defined in the Trust Agreement), and (ii) at any other time within 30 days of receipt by the Guarantor of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Capital Securities Guarantee Trustee; provided, however, that the -------- ------- Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Capital Securities Guarantee Trustee by the Guarantor. The Capital Securities Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Capital Securities Guarantee Trustee shall comply with its obligations under Sections 31l(a), 31l(b) and Section 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by the Capital Securities Guarantee Trustee --------------------------------------------------- Within 60 days after August 12 of each year, commencing August 12, 1999, the Capital Securities Guarantee Trustee shall provide to the Holders of the Series B Capital Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Capital Securities Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Capital Securities Guarantee Trustee -------------------------------------------------------- The Guarantor shall provide to the Capital Securities Guarantee Trustee such documents, reports and information as are required by Section 314 (if any) and the compliance certificate -6- required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. Delivery of such reports, information and documents to the Capital Securities Guarantee Trustee is for informational purposes only and the Capital Securities Guarantee Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Guarantor's compliance with any of its covenants hereunder (as to which the Capital Securities Guarantee Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 2.5 Evidence of Compliance with Conditions Precedent ------------------------------------------------ The Guarantor shall provide to the Capital Securities Guarantee Trustee such evidence of compliance with the conditions precedent, if any, provided for in this Series B Capital Securities Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6 Waiver of Events of Default --------------------------- The Holders of a Majority in Liquidation Amount of Series B Capital Securities may, by vote, on behalf of the Holders of all of the Series B Capital Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Series B Capital Securities Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 2.7 Notice of Events of Default --------------------------- (a) The Capital Securities Guarantee Trustee shall, within 10 Business Days after the occurrence of an Event of Default with respect to this Capital Securities Guarantee actually known to a Responsible Officer of the Capital Securities Guarantee Trustee, transmit by mail, first class postage prepaid, to all Holders of the Series B Capital Securities, notices of all such Events of Default, unless such Events of Default have been cured before the giving of such notice; provided, however, that, except in the case of an Event of Default -------- ------- arising from the non-payment of any Guarantee Payment, the Capital Securities Guarantee Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Capital Securities Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Series B Capital Securities. (b) The Capital Securities Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Capital Securities Guarantee Trustee shall have received written notice, or a Responsible Officer of the Capital Securities Guarantee Trustee charged with the administration of the Trust Agreement shall have obtained actual knowledge, of such Event of Default. SECTION 2.8 Conflicting Interests --------------------- -7- The Trust Agreement shall be deemed to be specifically described in this Series B Capital Securities Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE III POWERS, DUTIES AND RIGHTS OF CAPITAL SECURITIES GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Capital Securities Guarantee ----------------------------------------------------- Trustee - ------- (a) This Series B Capital Securities Guarantee shall be held by the Capital Securities Guarantee Trustee for the benefit of the Holders of the Series B Capital Securities, and the Capital Securities Guarantee Trustee shall not transfer this Series B Capital Securities Guarantee to any Person except a Holder of Series B Capital Securities exercising his or her rights pursuant to Section 5.4(b) or to a Successor Capital Securities Guarantee Trustee on acceptance by such Successor Capital Securities Guarantee Trustee of its appointment to act as Successor Capital Securities Guarantee Trustee. The right, title and interest of the Capital Securities Guarantee Trustee shall automatically vest in any Successor Capital Securities Guarantee Trustee, and such vesting and succession of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Capital Securities Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Capital Securities Guarantee Trustee has occurred and is continuing, the Capital Securities Guarantee Trustee shall enforce this Series B Capital Securities Guarantee for the benefit of the Holders of the Series B Capital Securities. (c) The Capital Securities Guarantee Trustee, before the occurrence of any Event of Default (of which, other than an Event of Default consisting of a default in payment, a Responsible Officer of the Property Trustee has actual knowledge) and after the curing of all such Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Series B Capital Securities Guarantee, and no implied covenants or obligations shall be read into this Series B Capital Securities Guarantee against the Capital Securities Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) and is actually known to a Responsible Officer of the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee shall exercise such of the rights and powers vested in it by this Series B Capital Securities Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Series B Capital Securities Guarantee shall be construed to relieve the Capital Securities Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default (of which, other than an Event of Default consisting of a default in payment, a Responsible Officer of the Property Trustee -8- has actual knowledge) and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Capital Securities Guarantee Trustee shall be determined solely by the express provisions of this Series B Capital Securities Guarantee, and the Capital Securities Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Series B Capital Securities Guarantee, and no implied covenants or obligations shall be read into this Series B Capital Securities Guarantee against the Capital Securities Guarantee Trustee; and (B) in the absence of bad faith on the part of the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Capital Securities Guarantee Trustee and conforming to the requirements of this Series B Capital Securities Guarantee; provided, -------- however, that in the case of any such certificates or opinions that by any ------- provision hereof are specifically required to be furnished to the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee shall be under a duty to examine the same to determine whether or not on their face they conform to the requirements of this Series B Capital Securities Guarantee; (ii) the Capital Securities Guarantee Trustee shall not be liable for any errors of judgment made in good faith by a Responsible Officer of the Capital Securities Guarantee Trustee, unless it shall be proved that the Capital Securities Guarantee Trustee or such Responsible Officer was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Capital Securities Guarantee Trustee shall not be liable with respect to any actions taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a Majority in Liquidation Amount of the Series B Capital Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Capital Securities Guarantee Trustee, or exercising any trust or power conferred upon the Capital Securities Guarantee Trustee under this Series B Capital Securities Guarantee; and (iv) no provision of this Series B Capital Securities Guarantee shall require the Capital Securities Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Capital Securities Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Series B Capital Securities Guarantee or indemnity, reasonably satisfactory to the Capital Securities Guarantee Trustee, against such risk or liability is not reasonably assured to it. SECTION 3.2 Certain Rights of Capital Securities Guarantee Trustee ------------------------------------------------------ (a) Subject to the provisions of Section 3.1: (i) the Capital Securities Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting, upon any resolution, certificate, statement, -9- instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Guarantor contemplated by this Series B Capital Securities Guarantee may be sufficiently evidenced by an Officers' Certificate; (iii) whenever, in the administration of this Series B Capital Securities Guarantee, the Capital Securities Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Capital Securities Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate, which, upon receipt of such request, shall be promptly delivered by the Guarantor; (iv) the Capital Securities Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument or other document (or any rerecording, refiling or registration thereof); (v) the Capital Securities Guarantee Trustee may consult with counsel of its selection, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion; and such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees; the Capital Securities Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Series B Capital Securities Guarantee from any court of competent jurisdiction; (vi) the Capital Securities Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Series B Capital Securities Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Capital Securities Guarantee Trustee such security and indemnity, reasonably satisfactory to the Capital Securities Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Capital Securities Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Capital Securities Guarantee Trustee, provided, however, that nothing -------- ------- contained in this Section 3.2(a)(vi) shall be taken to relieve the Capital Securities Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Series B Capital Securities Guarantee; (vii) the Capital Securities Guarantee Trustee shall have no obligation to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Capital Securities Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; -10- (viii) the Capital Securities Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Capital Securities Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any such person appointed with due care by it hereunder; (ix) any action taken by the Capital Securities Guarantee Trustee or its agents hereunder shall bind the Holders of the Series B Capital Securities, and the signature of the Capital Securities Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action; and no third party shall be required to inquire as to the authority of the Capital Securities Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Series B Capital Securities Guarantee, both of which shall be conclusively evidenced by the Capital Securities Guarantee Trustee's or its agent's taking such action; (x) whenever in the administration of this Series B Capital Securities Guarantee the Capital Securities Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Capital Securities Guarantee Trustee (i) may request instructions from the Holders of a Majority in Liquidation Amount of the Series B Capital Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions; and (xi) the Capital Securities Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Series B Capital Securities Guarantee. (b) No provision of this Series B Capital Securities Guarantee shall be deemed to impose any duty or obligation on the Capital Securities Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Capital Securities Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Capital Securities Guarantee Trustee shall be construed to be a duty. SECTION 3.3 Not Responsible for Recitals or Issuance of Series -------------------------------------------------- B Capital Securities Guarantee ------------------------------ The recitals contained in this Series B Capital Securities Guarantee shall be taken as the statements of the Guarantor, and the Capital Securities Guarantee Trustee does not assume any responsibility for their correctness. The Capital Securities Guarantee Trustee makes no representation as to the validity or sufficiency of this Series B Capital Securities Guarantee. -11- ARTICLE IV CAPITAL SECURITIES GUARANTEE TRUSTEE SECTION 4.1 Capital Securities Guarantee Trustee; Eligibility ------------------------------------------------- (a) There shall at all times be a Capital Securities Guarantee Trustee that shall (i) not be an Affiliate of the Guarantor; and (ii) be a corporation or other Person organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia, or a corporation or other Person permitted by the Securities and Exchange Commission to act as an indenture trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least ten million U.S. dollars ($10,000,000), and subject to supervision or examination by federal, state, territorial or District of Columbia authority; it being understood that if such corporation or other Person publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 4.1(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Capital Securities Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Capital Securities Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Capital Securities Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Capital Securities Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.2 Appointment, Removal and Resignation of Capital Securities ---------------------------------------------------------- Guarantee Trustee ----------------- (a) Subject to Section 4.2(b), the Capital Securities Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during an Event of Default. (b) The Capital Securities Guarantee Trustee shall not be removed in accordance with Section 4.2(a) until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Capital Securities Guarantee Trustee and delivered to the Guarantor. (c) The Capital Securities Guarantee Trustee shall hold office until a Successor Capital Securities Guarantee Trustee shall have been appointed or until its removal or resignation. The Capital Securities Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Capital Securities Guarantee Trustee and -12- delivered to the Guarantor, which resignation shall not take effect until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Capital Securities Guarantee Trustee and delivered to the Guarantor and the resigning Capital Securities Guarantee Trustee. (d) If no Successor Capital Securities Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 60 days after delivery of an instrument of removal or resignation, the Capital Securities Guarantee Trustee resigning or being removed may petition any court of competent jurisdiction for appointment of a Successor Capital Securities Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Capital Securities Guarantee Trustee. (e) No Capital Securities Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Capital Securities Guarantee Trustee. (f) Upon termination of this Series B Capital Securities Guarantee or removal or resignation of the Capital Securities Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to the Capital Securities Guarantee Trustee all amounts due to the Capital Securities Guarantee Trustee accrued to the date of such termination, removal or resignation. ARTICLE V GUARANTEE SECTION 5.1 Guarantee --------- The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim that the Issuer may have or assert. The Guarantor fully, knowingly and unconditionally waives any right the Guarantor may have to revoke this Guarantee under Section 2815 of the California Civil Code or otherwise. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 5.2 Waiver of Notice and Demand --------------------------- The Guarantor hereby waives notice of acceptance of this Series B Capital Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3 Obligations Not Affected ------------------------ The obligations, covenants, agreements and duties of the Guarantor under this Series B Capital Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: -13- (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Series B Capital Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Series B Capital Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Series B Capital Securities; (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Series B Capital Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Series B Capital Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; (g) the consummation of the Exchange Offer (subject to Section 7.1 hereof); or (h) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor; it being the intent of this Section 5.3 that the obligations of the Guarantor with respect to the Guarantee Payments shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4 Rights of Holders ----------------- (a) The Holders of a Majority in Liquidation Amount of the Series B Capital Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Capital Securities Guarantee Trustee in respect of this Series B Capital Securities Guarantee or exercising any trust or power conferred upon the Capital Securities Guarantee Trustee under this Series B Capital Securities Guarantee. (b) If the Capital Securities Guarantee Trustee fails to enforce this Series B Capital Securities Guarantee, any Holder of Series B Capital Securities may institute a legal proceeding directly against the Guarantor to enforce the Capital Securities Guarantee Trustee's rights under this Series B Capital Securities Guarantee, without first instituting a legal proceeding against the Issuer, the Capital Securities Guarantee Trustee or any other person or entity. The Guarantor waives any -14- right or remedy to require that any action be brought first against the Issuer or any other person or entity before proceeding directly against the Guarantor. SECTION 5.5 Guarantee of Payment -------------------- This Series B Capital Securities Guarantee creates a guarantee of payment and not of collection. SECTION 5.6 Subrogation ----------- The Guarantor shall be subrogated to all (if any) rights of the Holders of Series B Capital Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Series B Capital Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required - -------- ------- by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Series B Capital Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this Series B Capital Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7 Independent Obligations ----------------------- The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Series B Capital Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Series B Capital Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (h), inclusive, of Section 5.3 hereof. ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1 Limitation of Transactions -------------------------- So long as any Capital Securities remain outstanding, the Guarantor shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Guarantor's capital stock, (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Guarantor (including Other Debentures) that rank pari passu with or junior in right of payment to the Debentures or (iii) make any guarantee payments with respect to any guarantee by the Guarantor of the debt securities of any subsidiary of the Guarantor (including Other Guarantees) if such guarantee ranks pari passu with or junior in right of payment to the Debentures (other than (a) dividends or distributions in shares of, or options, warrants, rights to subscribe for or purchase shares of, common stock of the Guarantor, (b) any Trust Agreement of a dividend in connection with the implementation of a shareholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Series A Capital Securities Guarantee and this Series B Capital Securities Guarantee, (d) as a result of a -15- reclassification of the Guarantor's capital stock or the exchange or the conversion of one class or series of the Guarantor's capital stock for another class or series of the Guarantor's capital stock, (e) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of common stock related to the issuance of common stock or rights under any of the Guarantor's benefit or compensation plans for its directors, officers or employees or any of the Guarantor's dividend reinvestment plans) if at such time (l) there shall have occurred any event of which the Guarantor has actual knowledge that (A) is a Default (as defined in the Indenture) or an Event of Default (as defined in the Indenture) and (B) in respect of which the Guarantor shall not have taken reasonable steps to cure, (2) if the Debentures are held by the Property Trustee, the Guarantor shall be in default with respect to its payment of any obligations under this Series B Capital Securities Guarantee or (3) the Guarantor shall have given notice of its election of the exercise of its right to commence an Extended Interest Payment Period as provided in the Indenture and shall not have rescinded such notice, and such Extended Interest Payment Period, or an extension thereof, shall have commenced and be continuing. SECTION 6.2 Ranking ------- This Series B Capital Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to Senior Indebtedness (as defined in the Indenture), to the same extent and in the same manner that the Debentures are subordinated to Senior Indebtedness pursuant to the Indenture, it being understood that the terms of Article XV of the Indenture shall apply to the obligations of the Guarantor under this Series B Capital Securities Guarantee as if such Article XV were set forth herein in full, (ii) pari passu with the most senior preferred or preference stock now or hereafter issued by the Guarantor and with the Series A Capital Securities Guarantee, any Other Guarantee and, except to the extent set forth therein, the Common Securities Guarantee, any Other Common Securities Guarantee, and any guarantee now or hereafter entered into by the Guarantor in respect of any preferred or preference stock of any Affiliate of the Guarantor, and (iii) senior to the Guarantor's common stock. ARTICLE VII TERMINATION SECTION 7.1 Termination ----------- This Series B Capital Securities Guarantee shall terminate and be of no further force and effect upon (i) full payment of the Redemption Price of all Series B Capital Securities, or (ii) dissolution, winding up or liquidation of the Issuer, immediately following the full payment of the amounts payable in accordance with the Trust Agreement or the distribution of all of the Debentures to the holders of the Trust Securities. Notwithstanding the foregoing, this Series B Capital Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Series B Capital Securities must restore payment of any sums paid under the Series B Capital Securities or under this Series B Capital Securities Guarantee. -16- ARTICLE VII INDEMNIFICATION SECTION 8.1 Exculpation ----------- (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Series B Capital Securities Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Series B Capital Securities Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Series B Capital Securities might properly be paid. SECTION 8.2 Compensation and Indemnification -------------------------------- The Guarantor agrees to pay to the Capital Securities Guarantee Trustee such compensation for its services as shall be mutually agreed upon by the Guarantor and the Capital Securities Guarantee Trustee. The Guarantor shall reimburse the Capital Securities Guarantee Trustee upon request for all reasonable out-of-pocket expenses incurred by it, including the reasonable compensation and expenses of the Capital Securities Guarantee Trustee's agents and counsel, except any expense as may be attributable to the negligence or bad faith of the Capital Securities Guarantee Trustee. The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, action, suit, claim or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The provisions of this Section 8.2 shall survive the termination of this Series B Capital Securities Guarantee and shall survive the resignation or removal of the Capital Securities Guarantee Trustee. -17- ARTICLE IX MISCELLANEOUS SECTION 9.1 Successors and Assigns ---------------------- All guarantees and agreements contained in this Series B Capital Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Series B Capital Securities then outstanding. SECTION 9.2 Amendments ---------- Except with respect to any changes that do not materially adversely affect the rights of Holders of the Capital Securities (in which case no consent of such Holders will be required), this Series B Capital Securities Guarantee may only be amended with the prior approval of the Holders of a Majority in Liquidation Amount of the Series B Capital Securities. The provisions of Section 12.2 of the Trust Agreement with respect to meetings of Holders of the Trust Securities apply to the giving of such approval. This Series B Capital Securities Guarantee may not be amended, and no amendment hereof that affects the Capital Securities Guarantee Trustee's rights, duties or immunities hereunder or otherwise, shall be effective, unless such amendment is executed by the Capital Securities Guarantee Trustee (which shall have no obligation to execute any such amendment, but may do so in its sole discretion). SECTION 9.3 Notices ------- All notices provided for in this Series B Capital Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) If given to the Issuer, in care of the Administrative Trustee at the Issuer's mailing address set forth below (or such other address as the Issuer may give notice of to the Capital Securities Guarantee Trustee and the Holders of the Series B Capital Securities): GBB CAPITAL II c/o Greater Bay Bancorp 2860 West Bayshore Road Palo Alto, California 94303 Attention: Steven C. Smith Telecopy: (650) 494-9193 Telephone: (650) 813-8200 -18- (b) If given to the Capital Securities Guarantee Trustee, at the Capital Securities Guarantee Trustee's mailing address set forth below (or such other address as the Capital Securities Guarantee Trustee may give notice of to the Holders of the Series B Capital Securities): WILMINGTON TRUST COMPANY Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telecopy: (302) 651-1576 Telephone: (302) 651-1000 (c) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Capital Securities Guarantee Trustee and the Holders of the Series B Capital Securities): GREATER BAY BANCORP 2860 West Bayshore Road Palo Alto, California 94303 Attention: Steven C. Smith Telecopy: (650) 494-9193 Telephone: (650) 813-8200 (d) If given to any Holder of Series B Capital Securities, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 9.4 Benefit ------- This Series B Capital Securities Guarantee is solely for the benefit of the Holders of the Series B Capital Securities and, subject to Section 3.1(a), is not separately transferable from the Series B Capital Securities. SECTION 9.5 Governing Law ------------- THIS SERIES B CAPITAL SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. This Series B Capital Securities Guarantee is executed as of the day and year first above written. -19- GREATER BAY BANCORP as Guarantor By: /s/ Steven C. Smith ------------------------------------- Steven C. Smith Executive Vice President, Chief Operating Officer and Chief Financial Officer WILMINGTON TRUST COMPANY, as Capital Securities Guarantee Trustee By: /s/ Bruce L. Bisson ------------------------------------- Bruce L. Bisson Vice President -20- EX-10.4 7 GREATER BAY BANCORP 1996 STOCK OPTION PLAN EXHIBIT 10.4 GREATER BAY BANCORP 1996 STOCK OPTION PLAN, As Amended Effective July 21, 1998 TABLE OF CONTENTS ----------------- Page 1. PURPOSE...........................................................1 2. DEFINITIONS.......................................................1 (a) "Board of Directors"......................................1 (b) "Change in Control".......................................1 (c) "Code"....................................................1 (d) "Committee"...............................................1 (e) "Company".................................................1 (f) "Employee"................................................2 (g) "Exchange Act"............................................2 (h) "Exercise Price"..........................................2 (i) "Fair Market Value".......................................2 (j) "Grantee".................................................3 (k) "ISO".....................................................3 (l) "Nonstatutory Option".....................................3 (m) "Option"..................................................3 (n) "Optionee"................................................3 (o) "Plan"....................................................3 (p) "Restricted Stock"........................................3 (q) "Restricted Stock Award"..................................3 (r) "Restricted Stock Award Agreement"........................3 (s) "Restrict"................................................3 (t) "Retirement"..............................................3 (u) "Service".................................................3 (v) "Share"...................................................3 (w) "Stock"...................................................3 (x) "Stock Option Agreement"..................................3 (y) "Subsidiary"..............................................4 (z) "Substitute Option".......................................4 (aa) "Substitute Restricted Stock Award".......................4 (bb) "Total and Permanent Disability"..........................4 3. ADMINISTRATION....................................................4 (a) Committee Membership......................................4 (b) Committee Procedures......................................4 (c) Committee Responsibilities................................4 4. ELIGIBILITY........................................................5 (a) General Rules...............................................5 (b) Ten-Percent Stockholders....................................5 (c) Attribution Rules...........................................6 (d) Outstanding Stock...........................................6 5. STOCK SUBJECT TO PLAN..............................................6 (a) Basic Limitation............................................6 (b) Additional Shares...........................................6 6. TERMS AND CONDITIONS OF OPTIONS....................................6 (a) Stock Option Agreement......................................6 (b) Number of Shares............................................7 (c) Exercise Price..............................................7 (d) Withholding Taxes...........................................7 (e) Exercisability..............................................7 (f) Term........................................................7 (g) Transferability.............................................8 (h) No Rights as a Stockholder..................................8 (i) Modification, Extension and Renewal of Options..............8 (j) Substitute Options..........................................8 7. TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS....................9 (a) Restricted Stock Award Agreement............................9 (b) Number of Shares............................................9 (c) Withholding Taxes...........................................9 (d) Restrictions...............................................10 (e) Escrow of Restricted Stock.................................10 (f) Termination of Service and Forfeiture of Restricted Stock..10 (g) No Fractional Shares.......................................11 (h) Timing of Distributions: General Rule......................11 (i) Conditions to Issuance of Certificates.....................11 (j) Transferability............................................11 (k) Rights as Stockholder......................................11 (l) Modification, Extension and Renewal of Options.............12 (m) Substitute Restricted Stock Award..........................12 8. PAYMENT FOR SHARES................................................12 (a) General Rule...............................................12 (i) ISOs..............................................12 (ii) Nonstatutory Options..............................12 (iii) Restricted Stock Awards...........................13 ii (b) Surrender of Stock.........................................13 (c) Exercise/Sale..............................................13 (d) Exercise/Pledge............................................13 9. ADJUSTMENT OF SHARES..............................................13 (a) General....................................................13 (b) Reorganizations............................................14 (c) Reservation of Rights......................................14 10. SECURITIES LAWS...................................................14 11. NO RETENTION RIGHTS...............................................14 12. DURATION AND AMENDMENTS...........................................15 (a) Term of the Plan...........................................15 (b) Right to Amend or Terminate the Plan.......................15 (c) Effect of Amendment or Termination.........................15 iii GREATER BAY BANCORP 1996 STOCK OPTION PLAN ------------------------------------------ As Amended Effective July 21, 1998 1. PURPOSE. ------- The purpose of the Plan is to offer selected employees, directors and consultants an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, by purchasing Shares of the Company's Common Stock. The Plan provides for the grant of Nonstatutory Options, ISOs intended to qualify under Section 422 of the Code, and the grant of Restricted Stock Awards. 2. DEFINITIONS. ----------- (a) "Board of Directors" shall mean the Board of Directors of the Company, ------------------ as constituted from time to time. (b) "Change in Control" shall mean the occurrence of either of the ----------------- following events: (i) A change in the composition of the Board of Directors, as a result of which fewer than one-half of the incumbent directors are directors who either: (A) Had been directors of the Company 24 months prior to such change; or (B) Were elected, or nominated for election, to the Board of Directors 24 months prior to such change and who were still in office at the time of the election or nomination; or (ii) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) by the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50 percent or more of the combined voting power of the Company's then outstanding securities. For purposes of this Paragraph (ii), the term "person" shall not include an employee benefit plan maintained by the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (d) "Committee" shall mean a committee of the Board of Directors, as --------- described in Section 3(a), or in the absence of such a committee, the Board of Directors. (e) "Company" shall mean Greater Bay Bancorp, a California corporation, ------- formerly known as Mid-Peninsula Bancorp, a California corporation. (f) "Employee" shall mean: -------- (i) Any individual who is a common-law employee of the Company or of a Subsidiary; (ii) A member of the Board of Directors; and (iii) An independent contractor who performs services for the Company or a Subsidiary and who is not a member of the Board of Directors. Service as an independent contractor or member of the Board of Directors shall be considered employment for all purposes of the Plan, except as provided in Section 4(a). (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (h) "Exercise Price" shall mean the amount for which one Share may be -------------- purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement. (i) "Fair Market Value" shall mean the market price of Stock, determined ----------------- by the Committee as follows: (i) If Stock was traded over-the-counter on the date in question but was not traded on the Nasdaq system or the Nasdaq National Market System, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which Stock is quoted or, if Stock is not quoted on any such system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.; (ii) If Stock was traded over-the-counter on the date in question and was traded on the Nasdaq system or the Nasdaq National Market System, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by the Nasdaq system or the Nasdaq National Market System; (iii) If Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; and (iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons. 2 (j) "Grantee" means an individual who holds a Restricted Stock Award. ------- (k) "ISO" shall mean an employee incentive stock option described in --- Section 422(b) of the Code. (l) "Nonstatutory Option" shall mean a stock option not described in ------------------- Sections 422(b) or 423(b) of the Code. (m) "Option" shall mean an ISO or Nonstatutory Option granted under the ------ Plan and entitling the holder to purchase Shares. (n) "Optionee" shall mean an individual who holds an Option. -------- (o) "Plan" shall mean this Greater Bay Bancorp 1996 Stock Option Plan, as ---- it may be amended from time to time. (p) "Restricted Stock" means shares of Common Stock issued or issuable ---------------- pursuant to a grant of Restricted Stock Award. (q) "Restricted Stock Award" means the right to earn Restricted Stock ---------------------- under the Plan. (r) "Restricted Stock Award Agreement" means a written agreement between -------------------------------- the Company and the Grantee which contains the terms, conditions and restrictions pertaining to his or her Restricted Stock Award. (s) "Restrictions" shall mean (a) the restrictions on sale or other ------------ transfer (b) the exposure to forfeiture set forth in Section 4 of the Restricted Award Agreement and/or (c) the restrictions relating to performance, if any, set forth on Appendix A of the Restricted Stock Award Agreement. (t) "Retirement" shall have the same meaning as "Retirement," as defined ---------- in the Greater Bay Bancorp 401(k) Profit Sharing Plan. (u) "Service" shall mean service as an Employee. ------- (v) "Share" shall mean one share of Stock, as adjusted in accordance with ----- Section 9 (if applicable). (w) "Stock" shall mean the Common Stock of the Company. ----- (x) "Stock Option Agreement" shall mean the agreement between the Company ---------------------- and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option. 3 (y) "Subsidiary" shall mean any corporation, if the Company and/or one or ---------- more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. (z) "Substitute Option" shall mean an option described in Section 6(j). ----------------- (aa) "Substitute Restricted Stock Award" shall mean a restricted stock --------------------------------- award described in Section 7(m). (bb) "Total and Permanent Disability" shall mean that the Optionee or ------------------------------ Grantee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year. 3. ADMINISTRATION. -------------- (a) Committee Membership. The Board of Directors shall have the authority -------------------- to administer the Plan but may delegate its administrative powers under the Plan, in whole or in part, to one or more committees of the Board of Directors. With respect to the participation of Employees who are subject to Section 16 of the Exchange Act, the Plan may be administered by a committee composed solely of two or more members of the Board of Directors who qualify as "nonemployee directors" as defined in Securities and Exchange Commission Rule 16b-3 under the Exchange Act. The Plan may be administered by a committee composed solely of two or more members of the Board of Directors who qualify as "outside directors" as defined by the Internal Revenue Service for awards intended to qualify for an exemption under Section 162(m)(4)(C) of the Code. (b) Committee Procedures. The Board of Directors shall designate one of -------------------- the members of any Committee appointed under paragraph (a) as chairman. Any such Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee. (c) Committee Responsibilities. Subject to the provisions of the Plan, -------------------------- any such Committee shall have full authority and discretion to take the following actions: (i) To interpret the Plan and to apply its provisions; (ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan; (iii) To authorize any person to execute, on behalf of the Company, any instrument (including, but not limited to, Stock Option Agreements and Restricted Stock Award Agreements) required to carry out the purposes of the Plan; 4 (iv) To determine when Options and Restricted Stock Awards are to be granted under the Plan; (v) To select the Optionees and Grantees; (vi) To determine the number of Shares to be made subject to each Option and Restricted Stock Award; (vii) To prescribe the terms and conditions of each Option, including (without limitation) the Exercise Price, to determine whether such Option is to be classified as an ISO or as a Nonstatutory Option, and to specify the provisions of the Stock Option Agreement relating to such Option; (viii) To prescribe the terms and conditions of each Restricted Stock Award, including (without limitation) Restrictions (if any), and to specify the provisions of the Restricted Stock Award Agreement relating to such Restricted Stock Award; (ix) To amend any outstanding Stock Option Agreement and Restricted Stock Award Agreement, subject to applicable legal restrictions and to the consent of the Optionee or Grantee who entered into such agreement; (x) To prescribe the consideration for the grant of each Option and Restricted Stock Award under the Plan and to determine the sufficiency of such consideration; and (xi) To take any other actions deemed necessary or advisable for the administration of the Plan. All decisions, interpretations and other actions of the Committee shall be final and binding on all Optionees and Grantees, and all persons deriving their rights from an Optionee or Grantee. No member of the Committee shall be liable for any action that he or she has taken or has failed to take in good faith with respect to the Plan or any Option or Restricted Stock Award. 4. ELIGIBILITY. ----------- (a) General Rules. Only Employees shall be eligible for designation as ------------- Optionees or Grantees by the Committee. In addition, only Employees who are common-law employees of the Company or a Subsidiary shall be eligible for the grant of ISOs. (b) Ten-Percent Stockholders. An Employee who owns more than 10 percent ------------------------ of the total combined voting power of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for the grant of an ISO unless: 5 (i) The Exercise Price is at least 110 percent of the Fair Market Value of a Share on the date of grant; and (ii) Such ISO by its terms is not exercisable after the expiration of five years from the date of grant. (c) Attribution Rules. For purposes of Subsection (b) above, in ----------------- determining stock ownership, the rules of Section 424(d) of the Code shall apply. (d) Outstanding Stock. For purposes of Subsection (b) above, "outstanding ----------------- stock" shall include all stock actually issued and outstanding immediately after the grant. "Outstanding stock" shall not include shares authorized for issuance under outstanding options held by the Employee or by any other person. 5. STOCK SUBJECT TO PLAN. --------------------- (a) Basic Limitation. Shares reserved for issuance pursuant to the ---------------- exercise of Options and Restricted Stock Awards granted under the Plan shall be authorized but unissued Shares. The aggregate number of Shares which may be issued pursuant to the exercise of Options and Restricted Stock Awards granted under the Plan shall be 1,207,890, all of which may be issued pursuant to the exercise of ISOs, Nonstatutory Options or Restricted Stock Awards granted under the Plan. The number of Shares which are subject to Options or Restricted Stock Awards outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan. (b) Additional Shares. In the event that any outstanding option granted ----------------- under this Plan, including Substitute Options, or the Prior Plan, for any reason expires or is canceled or otherwise terminated, the Shares allocable to the unexercised portion of such option shall become available for the purposes of this Plan. In the event that any outstanding Restricted Stock Award granted under this Plan, including Substitute Restricted Stock Awards, for any reason expires or is canceled, forfeited or otherwise terminated, the Shares allocable to the unearned portion of such Restricted Stock Award shall become available for the purposes of this Plan. 6. TERMS AND CONDITIONS OF OPTIONS. ------------------------------- (a) Stock Option Agreement. Each grant of an Option under the Plan shall ---------------------- be evidenced by a Stock Option Agreement executed by the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. 6 (b) Number of Shares. Each Stock Option Agreement shall specify the ---------------- number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 9. Options granted to any Optionee in a single calendar year shall in no event cover more than 30,000 ------ Shares, subject to adjustment in accordance with Section 9. The Stock Option Agreement shall also specify whether the Option is an ISO or a Nonstatutory Option. (c) Exercise Price. Each Stock Option Agreement shall specify the -------------- Exercise Price. The Exercise Price of an Option shall not be less than 100 percent of the Fair Market Value of a Share on the date of grant, except as otherwise provided in Section 4(b) with respect to ISO's and Section 6(i) with respect to Substitute Options. The Exercise Price shall be payable in a form described in Section 8. (d) Withholding Taxes. As a condition to the exercise of an Option, the ----------------- Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option. The Committee may permit the Optionee to satisfy all or part of his or her tax obligations related to the Option by having the Company withhold a portion of any Shares that otherwise would be issued to him or her or by surrendering any Shares that previously were acquired by him or her. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. The payment of taxes by assigning Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee may impose. (e) Exercisability. Each Stock Option Agreement shall specify the date -------------- when all or any installment of the Option is to become exercisable. The vesting of any Option shall be determined by the Committee at its sole discretion; provided however, that: (i) Each Stock Option Agreement shall provide for immediate exercisability of the entire Option in the event of a Change in Control. (ii) In the event that an Optionee's Service terminates, the Option shall be exercisable only to the extent the Option was vested as of the date of such termination, unless otherwise specified in the Optionee's Stock Option Agreement. (f) Term. Each Stock Option Agreement shall specify the term of the ---- Option. The term of an ISO shall not exceed 10 years from the date of grant, except as otherwise provided in Section 4(b). Subject to the preceding sentence, the Committee at its sole discretion shall determine when an Option is to expire. In the event that the Optionee's Service terminates: (i) As a result of such Optionee's death or Total and Permanent Disability, the term of the Option shall expire twelve months (or such other period specified in the 7 Optionee's Stock Option Agreement) after such death or Total and Permanent Disability but not later than the original expiration date specified in the Stock Option Agreement. (ii) As a result of termination by the Company for cause, the term of the Option shall expire thirty days after the Company's notice or advice of such termination is dispatched to Employee, but not later than the original expiration date specified in the Stock Option Agreement. For purposes of this Paragraph (ii), "cause" shall mean an act of embezzlement, disclosure of any of the secrets or confidential information of the Company, the inducement of any client or customer of the Company to break any contract with the Company, or the inducement of any principal for whom the Company acts as agent to terminate such agency relationship, the engagement of any conduct which constitutes unfair competition with the Company, the removal of Optionee from office by any court or bank regulatory agency, or such other similar acts which the Committee in its discretion determine to constitute good cause for termination of Optionee's Service. As used in this Paragraph (ii), Company includes Subsidiaries of the Company. (iii) As a result of termination for any reason other than Total and Permanent Disability, death or cause, the term of the Option shall expire three months (or such other period specified in the Optionee's Stock Option Agreement) after such termination, but not later than the original expiration date specified in the Stock Option Agreement. (g) Transferability. During an Optionee's lifetime, such Optionee's --------------- ISO(s) shall be exercisable only by him or her and shall not be transferable. An Optionee's Nonstatutory Options shall also not be transferable during the Optionee's lifetime, except to the extent otherwise permitted in the Optionee's Stock Option Agreement. Subject to prior permitted transfers, in the event of an Optionee's death, such Optionee's Option(s) shall not be transferable other than by will, by written beneficiary designation or by the laws of descent and distribution. (h) No Rights as a Stockholder. An Optionee, or a transferee of an -------------------------- Optionee, shall have no rights as a stockholder with respect to any Shares covered by his or her Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section 9. (i) Modification, Extension and Renewal of Options. Within the ---------------------------------------------- limitations of the Plan, the Committee may modify, extend or renew outstanding Options or may accept the cancellation of outstanding Options (to the extent not previously exercised) in return for the grant of new Options at the same or a different price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair such Optionee's rights or increase his or her obligations under such Option. (j) Substitute Options. If the Company at any time should succeed to the ------------------ business of another corporation through merger or consolidation, or through the acquisition of stock or assets of such corporation, Options may be granted under the Plan in substitution of options previously 8 granted by such corporation to purchase shares of its stock which options are outstanding at the date of the succession ("Surrendered Options"). It is specifically intended that this section of the Plan shall authorize the granting and issuance of Substitute Options pursuant to the terms of: (i) the Amended and Restated Agreement and Plan of Reorganization by and between Mid-Peninsula Bancorp and Cupertino National Bancorp dated June 26, 1996, and (ii) the Agreement and Plan of Reorganization by and among the Company, GBB Acquisition Corp., and Peninsula Bank of Commerce dated November 3, 1997. The Committee shall have discretion to determine the extent to which such Substitute Options shall be granted, the persons to receive such Substitute Options, the number of Shares to be subject to such Substitute Options, and the terms and conditions of such Substitute Options which shall, to the extent permissible within the terms and conditions of the Plan, be equivalent to the terms and conditions of the Surrendered Options. The Exercise Price may be determined without regard to Section 6(c); provided however, that the Exercise Price of each Substitute Option shall be an amount such that, in the sole and absolute judgment of the Committee (and if the Substitute Options are to be ISO's, in compliance with Section 424(a) of the Code), the economic benefit provided by such Substitute Option is not greater than the economic benefit represented by the Surrendered Option as of the date of the succession. 7. TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS. ----------------------------------------------- (a) Restricted Stock Award Agreement. Each grant of a Restricted Stock -------------------------------- Award under the Plan shall be evidenced by a Restricted Stock Award Agreement executed by the Grantee and the Company. Such Restricted Stock Award shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions, including any Restrictions, which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Restricted Stock Award Agreement. The Restricted Stock Award Agreement shall specify the purchase price (if any) for the Restricted Stock. The provisions of the various Restricted Stock Award Agreements entered into under the Plan need not be identical. (b) Number of Shares. Each Restricted Stock Award Agreement shall specify ---------------- the number of Shares that are subject to the Restricted Stock Award and shall provide for the adjustment of such number in accordance with Section 9. (c) Withholding Taxes. As a condition to the lapse of any Restrictions to ----------------- the Restricted Stock Award, the Grantee shall make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that arise in connection with such lapse. The Committee may permit the Grantee to satisfy all or part of his or her tax obligations related to the Restricted Stock Award by having the Company withhold a portion of any Shares that otherwise would be issued to him or her or by surrendering any Shares that previously were acquired by him or her. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. The payment of taxes by assigning Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee may impose. 9 (d) Restrictions. Each Restricted Stock Award Agreement shall specify any ------------ Restrictions on the Restricted Stock Award. Each Restricted Stock Award Agreement shall specify the date(s) when all or any Restrictions to the Restricted Stock Award shall lapse or the Restrictions (if any) relating to performance satisfaction of which shall cause such Restrictions to lapse. The lapse of any Restrictions shall be determined by the Committee at its sole discretion. (e) Escrow of Restricted Stock. Until all Restrictions have expired or -------------------------- been removed, the Secretary or such other escrow holder as the Board of Directors may appoint shall retain custody of the stock certificates representing the Restricted Stock subject to the Award; provided, however, that in no event shall the Grantee retain physical custody of any certificates representing shares of Restricted Stock awarded to him or her. (f) Termination of Service and Forfeiture of Restricted Stock. Each --------------------------------------------------------- Restricted Stock Award Agreement shall specify the term of the Restricted Stock Award. Subject to the preceding sentence, the Committee at its sole discretion shall determine when a Restricted Stock Award is to expire. In the event that the Grantee's Service terminates: (i) As a result of such Grantee's death or Total and Permanent Disability, or in the event of Grantee's Retirement, the term of the Restricted Stock Award shall expire and any Restrictions on the Restricted Stock Awards immediately shall lapse upon such death, Total and Permanent Disability or Retirement but not later than the original expiration date specified in the Restricted Stock Award Agreement. (ii) As a result of termination by the Company for cause, or any other event resulting in the termination of Grantee's Service not specified in Section 7(f)(i) above, the term of the Restricted Stock Award shall expire thirty days after the Company's notice or advice of such termination is dispatched to Employee, but not later than the original expiration date specified in the Restricted Stock Award Agreement. In the event that a Grantee's Service terminates for cause, or any other event resulting in the termination of Grantee's service not specified in Section 7(f)(i) above, the Shares subject to the Restricted Stock Award shall be earned only to the extent the such Shares were earned as of the date of such termination, unless otherwise specified in the Grantee's Restricted Stock Award Agreement. In such event, the Grantee shall forfeit the right to earn any Restricted Stock subject to the Restricted Stock Award as to which vesting has not yet occurred, and the Restricted Stock so forfeited shall be returned to the Company. For purposes of this Paragraph (ii), "cause" shall mean an act of embezzlement, disclosure of any of the secrets or confidential information of the Company, the inducement of any client or customer of the Company to break any contract with the Company, or the inducement of any principal for whom the Company acts as agent to terminate such agency relationship, the engagement of any conduct which constitutes unfair competition with the Company, the removal of Grantee from office by any court or bank regulatory agency, or such other similar acts which the Committee in its discretion determine to constitute good 10 cause for termination of Grantee's Service. As used in this Paragraph (ii), Company includes Subsidiaries of the Company. (g) No Fractional Shares. In determining the number of shares of -------------------- Restricted Stock which are earned, fractional shares shall be rounded down to the nearest whole number, provided that such fractional shares shall be aggregated and earned at such time as all Restrictions lapse or expire. (h) Timing of Distributions: General Rule. Except as provided in ------------------------------------- Subsection (i) below, certificates representing Restricted Stock shall be distributed to the Grantee as soon as practicable after all Restrictions have lapsed or expired. (i) Conditions to Issuance of Certificates. The Company shall not be -------------------------------------- required to issue or deliver any certificate or certificates for shares of stock pursuant to this Agreement prior to fulfillment of all of the following conditions: (a) The listing of such shares on all stock exchanges on which such class of stock is then listed; (b) The registration or qualification of such shares under any federal or state securities laws or under rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Board of Directors shall, in its sole and absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Board of Directors shall, in its sole and absolute discretion, determine to be necessary or advisable; (d) The lapse of such reasonable period of time as the Board of Directors may from time to time establish for reasons of administrative convenience; (e) The receipt by the Company of full payment for any applicable withholding tax. (j) Transferability. A Grantee's Restricted Stock Award shall not be --------------- transferable during the Grantee's lifetime, except to the extent otherwise permitted in the Grantee's Restricted Stock Award Agreement. Subject to prior permitted transfers, in the event of a Grantee's death, such Grantee's Restricted Stock Award(s) shall not be transferable other than by will, by written beneficiary designation or by the laws of descent and distribution. (k) Rights as Stockholder. Upon the delivery of Restricted Stock to the --------------------- escrow holder pursuant to the Restricted Stock Award Agreement, the Grantee shall have all the rights of a stockholder of the Company with respect to the Restricted Stock, subject to the Restrictions and the Restricted Stock Agreement, including the right to vote the Restricted Stock and the right to receive 11 all dividends or other distributions paid or made with respect to the Restricted Stock; provided, however, that any additional Shares of Restricted Stock to which Grantee shall be entitled as a result of stock dividends, stock splits or any other form of recapitalization in respect of Shares of Restricted Stock subject to Restrictions shall also be subject to the Restrictions until the Restrictions on the underlying shares of Restricted Stock lapse or expire. (l) Modification, Extension and Renewal of Options. Within the ---------------------------------------------- limitations of the Plan, the Committee may modify, extend or renew outstanding Restricted Stock Awards or may accept the cancellation of outstanding Restricted Stock Awards (to the extent not previously earned) in return for the grant of new Restricted Stock Awards at the same or a different price. The foregoing notwithstanding, no modification of an Restricted Stock Award shall, without the consent of the Grantee, impair such Grantee's rights or increase his or her obligations under such Restricted Stock Award. (m) Substitute Restricted Stock Award. If the Company at any time should --------------------------------- succeed to the business of another corporation through merger or consolidation, or through the acquisition of stock or assets of such corporation, Restricted Stock Awards may be granted under the Plan in substitution of restricted stock awards previously granted by such corporation with respect to shares of its stock which restricted stock awards are outstanding at the date of the succession ("Surrendered Restricted Stock Awards"). The Committee shall have discretion to determine the extent to which such Substitute Restricted Stock Awards shall be granted, the persons to receive such Substitute Restricted Stock Awards, the number of Shares to be subject to such Restricted Stock Awards, and the terms, conditions and restrictions of such Substitute Restricted Stock Awards which shall, to the extent permissible within the terms and conditions of the Plan, be equivalent to the terms, conditions and restrictions of the Surrendered Restricted Stock Awards. The Restrictions may be determined in the sole discretion of the Committee; provided however, that the Restrictions of each Substitute Restricted Stock Award shall be equivalent to the Restrictions represented by the Surrendered Restricted Stock Award as of the date of the succession. 8. PAYMENT FOR SHARES. ------------------ (a) General Rule. The entire consideration for Shares issued under the ------------ Plan shall be payable in lawful money of the United States of America at the time when such Shares are purchased, except as follows: (i) ISOs. In the case of an ISO granted under the Plan, payment ---- shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. However, the Committee (at its sole discretion) may specify in the Stock Option Agreement that payment may be made pursuant to Subsections (b), (c) or (d) below. (ii) Nonstatutory Options. In the case of a Nonstatutory Option -------------------- granted under the Plan, the Committee (at its sole discretion) may accept payment pursuant to Subsections (b), (c), or (d) below. 12 (iii) Restricted Stock Awards. In the case of a Restricted Stock ----------------------- Award granted under the Plan, payment (if any) shall be made only pursuant to the express provisions of the applicable Restricted Stock Award Agreement. (b) Surrender of Stock. To the extent that this Subsection (b) is ------------------ applicable, payment may be made all or in part with Shares which have already been owned by the Optionee or Grantee or his or her representative for more than 6 months and which are surrendered to the Company in good form for transfer. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. (c) Exercise/Sale. To the extent that this Subsection (c) is applicable, ------------- payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price of the Option, or the consideration for the Restricted Stock Award, whichever the case may be, and any withholding taxes. (d) Exercise/Pledge. To the extent that this Subsection (d) is --------------- applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price of the Option, or the consideration for the Restricted Stock Award, whichever the case may be, and any withholding taxes. 9. ADJUSTMENT OF SHARES. -------------------- (a) General. In the event of a subdivision of the outstanding Stock, a ------- declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the value of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make appropriate adjustments in one or more of: (i) The number of Shares available under Section 5 for future grants; (ii) The limit set forth in Section 6(b) and Section 7(b); (iii) The number of Shares covered by each outstanding Option and consideration for each outstanding Restricted Stock Award; or (iv) The Exercise Price under each outstanding Option and Restricted Stock Award. 13 (b) Reorganizations. In the event that the Company is a party to a merger --------------- or other reorganization, outstanding Options and Restricted Stock Awards shall be subject to the agreement of merger or reorganization. Subject to the provisions of Section 6(e)(i) and Section 7(d)(i), such agreement may provide, without limitation, for the assumption of outstanding Options and Restricted Stock Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for payment of a cash settlement equal to the difference between the amount to be paid for one Share under such agreement and the then-current Fair Market Value of such Share on an unrestricted basis, or for the acceleration of their exercisability followed by the cancellation of Options not exercised, or the removal of any or all Restrictions on Restricted Stock Awards, in all cases without the Optionees' or Grantees' consent. Any cancellation of Options shall not occur until after such acceleration is effective and Optionees have been notified of such acceleration and have had reasonable opportunity to exercise their Options. (c) Reservation of Rights. Except as provided in this Section 9, an --------------------- Optionee or Grantee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option and the number of or consideration for Shares subject to a Restricted Stock Award. The grant of an Option or Restricted Stock Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. 10. SECURITIES LAWS. --------------- Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange on which the Company's securities may then be listed. 11. NO RETENTION RIGHTS. ------------------- Neither the Plan nor any Option or Restricted Stock Award shall be deemed to give any individual a right to remain an employee or consultant of the Company or a Subsidiary. The Company and its Subsidiaries reserve the right to terminate the service of any employee or consultant at any time, with or without cause, subject to applicable laws and a written employment agreement (if any). 14 12. DURATION AND AMENDMENTS. ----------------------- (a) Term of the Plan. The Plan, as set forth herein, shall become ---------------- effective as of the Effective Date, provided that the Plan has been approved by the shareholders of the Company in the manner required by applicable law or regulation. The Plan, if not extended, shall terminate automatically ten years after the Effective Date, except that any ISO's granted under the Plan must be granted by September 18, 2006, ten years after the Plan was adopted by the Board of Directors. It may be terminated on any earlier date pursuant to Subsection (b) below. (b) Right to Amend or Terminate the Plan. The Board of Directors may ------------------------------------ amend, suspend or terminate the Plan at any time and for any reason. An amendment of the Plan shall be subject to the approval of the Company's shareholders only to the extent required by applicable laws or regulations. (c) Effect of Amendment or Termination. No Shares shall be issued or sold ---------------------------------- under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option or Restricted Stock Award previously granted under the Plan. 15 EX-10.11.2 8 AMENDMENT TO GREATER BAY BANCORP 1997 EDC PLAN EXHIBIT 10.11.2 AMENDMENT 1998A TO GREATER BAY BANCORP 1997 ELECTIVE DEFERRED COMPENSATION PLAN THIS AMENDMENT 1998A TO THE GREATER BAY BANCORP 1997 ELECTIVE DEFERRED COMPENSATION PLAN ("Amendment 1998A") is made effective as of November 1, 1998, and is made pursuant to the following recitals: A. Greater Bay Bancorp, a California corporation (the "Company"), adopted the Greater Bay Bancorp 1997 Elective Deferred Compensation Plan (the "Plan") at a meeting of the Company's Board of Directors ("Board") on November 19, 1997. Terms used in this Amendment 1998A have the same meanings as in the Plan. B. Section 8.01 of the Plan provides rules for amendment of the Plan. C. The Company has determined that it is in the best interests of the Company and the Subsidiaries (as defined in the Plan) to amend the Plan as set forth in this Amendment 1998A. NOW THEREFORE, in consideration of the foregoing recitals (which are incorporated herein and made an integral part hereof), the Plan is amended as follows: 1. Section 3.02 of the Plan is amended to read in its entirety as follows: Sections 3.02 Election Procedure. The Committee shall provide an ------------------ Election Form to each Employee who is selected by the Committee to participate in the Plan and to become a Participant. Each such selected eligible Employee who elects to make a Deferred Compensation Contribution for the applicable Plan Year shall so specify on the Election Form and shall agree to a corresponding reduction in his or her cash Compensation. A Participant must complete his or her annual Election Form and return it to the Committee on or before such date as the Committee shall specify. In the case of a Participant making an election for the next Plan Year, such date shall be no later than the last day of the calendar month prior to commencement of the Plan Year for which the Participant's election shall be effective. For the initial Plan Year or for an eligible Employee selected for participation during the course of a Plan Year, an eligible selected Employee shall elect to participate during the Plan Year in which he or she first becomes eligible for participation by returning to the Committee his or her properly completed Election Form on the deferral of Compensation for services rendered by such Employee after his or her deferral election. If such eligible Employee does not make an election during the Plan Year in which he or she first becomes eligible, a subsequent election may only be made at the commencement of any succeeding Plan Year. An election made by an eligible selected Employee shall apply only for one Plan Year, and each eligible Employee selected for participation for a subsequent Plan Year must make a separate election for that Plan Year. 2. Any corporation that hereafter becomes a Subsidiary and that adopts the Plan in accordance with Section 9.12 of the Plan shall automatically be deemed to have adopted this Amendment 1998A as part of the Plan. 3. Except as set forth herein, the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this Amendment 1998A to be executed in its name and behalf by its officers thereunto duly authorized. GREATER BAY BANCORP, a California corporation By: /s/ Steven C. Smith --------------------------------- Name: Steven C. Smith Title: Executive Vice President, Chief Operating Officer and Chief Financial Officer CERTIFICATE OF ASSISTANT SECRETARY The undersigned, being duly appointed Assistant Secretary of Greater Bay Bancorp, a California corporation, hereby certifies that the foregoing Amendment 1998A was duly adopted by the Board of Directors of such corporation at a Board meeting on November 17, 1998. /s/ Steven C. Smith --------------------------------- Steven C. Smith Assistant Secretary EX-11.1 9 COMPUTATION OF EARNINGS PER SHARE Exhibit 11.1 GREATER BAY BANCORP FORM 10-K EXHIBIT 11.1 -- STATEMENTS RE COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31, ------------------------- 1998 1997 ------------ ------------ (Dollars and shares in thousands, except per share amounts) Basic Earnings Per Share: Income available to common shareholders.............. $ 16,578 $ 11,619 ============ =========== Weighted average common shares outstanding........... 9,485,000 9,196,000 ============ =========== Basic earnings per share............................. $ 1.75 $ 1.26 ============ =========== Diluted Earnings Per Share: Income available to common shareholders.............. $ 16,578 $ 11,619 ============ =========== Weighted average common shares outstanding........... 9,485,000 9,196,000 Effect of dilutive securities........................ 746,000 696,000 ------------ ----------- Weighted average common and common equivalent shares outstanding......................................... 10,231,000 9,892,000 ============ =========== Diluted earnings per share........................... $ 1.62 $ 1.17 ============ ===========
EX-12.1 10 COMPUTATION RATIOS OF EARNINGS TO FIXED CHARGE Exhibit 12.1 GREATER BAY BANCORP ANNUAL REPORT OF FORM 10-K EXHIBIT 12.1--STATEMENTS RE COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
For the Years Ended December 31, ------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Income before income taxes....... $23,954 $18,093 $10,326 $ 7,826 $ 6,945 Fixed charges: Interest expense............... 47,472 34,059 22,379 18,961 11,804 Interest factor of rental expense....................... 986 841 706 614 537 ------- ------- ------- ------- ------- Fixed charges................ 48,458 34,900 23,085 19,575 12,341 Less: interest expense on deposits........................ 39,398 30,640 21,220 17,743 11,361 ------- ------- ------- ------- ------- Net fixed charges............ 9,060 4,260 1,865 1,832 980 ------- ------- ------- ------- ------- Earnings, excluding interest on deposits........................ $33,014 $22,353 $12,191 $ 9,658 $ 7,925 ======= ======= ======= ======= ======= Ratio of earnings, excluding interest on deposits, to net fixed charges(1)................ 3.64x 5.25x 6.54x 5.27x 8.09x Earnings, including interest on deposits........................ $72,412 $52,993 $33,411 $27,401 $19,286 ======= ======= ======= ======= ======= Ratio of earnings, including interest on deposits, to fixed charges(2)...................... 1.49x 1.52x 1.45x 1.40x 1.56x
- -------- (1) For the purposes of computing the ratio of earnings, excluding interest on deposits, to net fixed charges, earnings represent income before income taxes plus net fixed charges. Net fixed charges include interest expense, other than interest on deposits, and that portion of rental expense, generally one third, deemed representative of the interest factor. (2) For the purposes of computing the ratio of earnings, including interest on deposits, to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges include interest expense and that portion of rental expense, generally one third, deemed representative of the interest factor. EX-21.1 11 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 GREATER BAY BANCORP ANNUAL REPORT ON FORM 10-K EXHIBIT 21.1--SUBSIDIARIES OF THE REGISTRANT Greater Bay Bancorp owns 100.0% of the outstanding voting securities of the following corporations, all of which are included in Greater Bay Bancorp's consolidated financial statements:
Name Jurisdiction of Incorporation ---- ----------------------------- Mid-Peninsula Bank........................... California Cupertino National Bank...................... California Peninsula Bank of Commerce................... California Golden Gate Bank............................. California Pacific Business Funding Corporation......... California GBB Capital I................................ Delaware GBB Capital II............................... Delaware
EX-23.1 12 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements on Form S-8 (dated November 20, 1998, March 11, 1998, July 8, 1997 and July 8, 1997) and Form S-3 (No. 333-61679) of our report dated February 8, 1999, on our audits of the consolidated financial statements of Greater Bay Bancorp and Subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is included in this Annual Report on Form 10-K. We also consent to the reference to our firm under the caption "Experts." /s/ PricewaterhouseCoopers, LLP February 16, 1999 EX-27.1 13 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1998 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 59,975 0 43,600 0 255,483 81,157 81,717 1,005,791 (21,304) 1,582,865 1,342,492 0 94,697 53,000 0 0 57,283 35,393 1,582,865 83,650 19,218 10,052 112,920 39,398 47,472 65,448 6,035 374 42,714 23,954 23,954 0 0 16,578 1.75 1.62 4.25 1,858 0 327 0 16,394 (1,420) 112 21,304 21,304 0 0
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