<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997
REGISTRATION NO.: 333-37169
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
GREATER BAY BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
<TABLE>
<S> <C> <C>
CALIFORNIA 6711 77-0387041
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2860 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
(650) 813-8200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID L. KALKBRENNER
CHIEF EXECUTIVE OFFICER
2860 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
(650) 813-8200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH A COPY TO:
<TABLE>
<S> <C>
T. HALE BOGGS, ESQ. THOMAS G. REDDY, ESQ.
MANATT, PHELPS & PHILLIPS, LLP MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
11355 W. OLYMPIC BOULEVARD 3 EMBARCADERO CENTER, #1800
LOS ANGELES, CALIFORNIA 90064 SAN FRANCISCO, CALIFORNIA 94111
(310) 312-4269 (415) 393-2188
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement has become effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[GREATER BAY BANCORP LETTERHEAD]
October 22, 1997
To Our Shareholders:
We are pleased to enclose a Notice of Special Meeting (the "GBB Meeting") of
Greater Bay Bancorp ("GBB") and a Joint Proxy Statement/Prospectus (the "Joint
Proxy Statement/Prospectus") relating to actions to be taken at the GBB
Meeting. At the GBB Meeting, the shareholders will be asked to approve the
principal terms of the Agreement and Plan of Reorganization dated as of
September 5, 1997 (the "Reorganization Agreement"), by and among GBB, GBB
Acquisition Corp., a California corporation and wholly-owned subsidiary of GBB
("Newco"), and Peninsula Bank of Commerce, a California state chartered bank
("PBC"), pursuant to which, among other things, Newco will be merged with and
into PBC (the "Merger") with PBC surviving the Merger and thereafter operating
as a banking subsidiary of GBB. Upon consummation of the Merger, each
outstanding share of common stock, no par value, of PBC will be converted into
the right to receive shares of common stock, no par value, of GBB ("GBB
Stock"), as described in the Reorganization Agreement, in an exchange intended
to be tax free except to the extent of any cash received in lieu of fractional
shares or pursuant to the exercise of statutory dissenters' rights. Shares of
GBB Stock outstanding immediately prior to the Merger will remain outstanding
after the consummation of the Merger. A copy of the Reorganization Agreement is
attached to the Joint Proxy Statement/Prospectus as Appendix A.
At the GBB Meeting, the shareholders of GBB will also be asked to approve a
proposal to amend the articles of incorporation of GBB to increase the number
of shares of GBB Stock authorized to be issued by GBB, and to approve a
proposal to amend, upon consummation of the Merger, the Greater Bay Bancorp
1996 Stock Option Plan to increase the number of shares of GBB Stock which may
be issued pursuant to the exercise of incentive or nonqualified stock options
granted under such plan.
The Board of Directors of GBB has carefully considered the terms and
conditions of the above-described proposals and believes them to be in the best
interests of and fair to the shareholders of GBB. The Board has unanimously
approved the Reorganization Agreement and the transactions contemplated
thereby. The Board has also approved the proposals regarding amendments to
GBB's articles of incorporation and the Greater Bay Bancorp 1996 Stock Option
Plan. Hovde Financial, Inc., an investment banking firm retained by GBB, has
expressed its opinion that the consideration to be received in the Merger is
fair to GBB's shareholders from a financial point of view. A copy of this
opinion is attached to the Joint Proxy Statement/Prospectus as Appendix D.
Whether or not you plan to attend the GBB Meeting, please sign and return the
accompanying proxy card in the postage-paid envelope as soon as possible so
that your shares will be represented at the GBB Meeting. The Board of Directors
recommends that you vote "FOR" each proposal listed on the proxy card. If you
attend the GBB Meeting and ask to vote in person, you may withdraw your proxy
at that time. It is important that your shares of GBB Stock be represented at
the GBB Meeting.
/s/ David L. Kalkbrenner /s/ John M. Gatto /s/ Duncan L. Matteson
David L. Kalkbrenner John M. Gatto Duncan L. Matteson
President and Co-Chairman of the Board Co-Chairman of the Board
Chief Executive
Officer
<PAGE>
GREATER BAY BANCORP
2860 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 19, 1997
TO THE SHAREHOLDERS OF GREATER BAY BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the call of the
Board of Directors, the Special Meeting of Shareholders (the "GBB Meeting") of
Greater Bay Bancorp, a California corporation ("GBB"), will be held at the
principal administrative offices of GBB, located at 2860 West Bayshore Road,
Palo Alto, California 94303, on Wednesday, November 19, 1997 at 5:00 p.m.,
California time, for the following purposes, all as set forth in the attached
Joint Proxy Statement/Prospectus:
1. Approval of Reorganization Agreement. To approve the principal terms of
the Agreement and Plan of Reorganization dated as of September 5, 1997 (the
"Reorganization Agreement"), by and among GBB, GBB Acquisition Corp., a
California corporation and a wholly-owned subsidiary of GBB ("Newco"), and
Peninsula Bank of Commerce, a California state chartered bank ("PBC"),
pursuant to which, among other things, Newco will merge with and into PBC (the
"Merger"), with PBC surviving the Merger and thereafter operating as a banking
subsidiary of GBB. Upon consummation of the Merger, each outstanding share of
common stock, no par value, of PBC will be converted into the right to receive
shares of common stock, no par value, of GBB ("GBB Stock"), as described in
the Reorganization Agreement, in an exchange intended to be tax free except to
the extent of any cash received in lieu of fractional shares or pursuant to
the exercise of statutory dissenters' rights. Shares of GBB Stock outstanding
immediately prior to the Merger will remain outstanding after the consummation
of the Merger. A copy of the Reorganization Agreement is attached to the Joint
Proxy Statement/Prospectus as Appendix A.
2. Amendment of Articles of Incorporation. To amend the articles of
incorporation of GBB to increase to 12,000,000 the number of shares of GBB
Stock authorized to be issued by GBB;
3. Amendment of Greater Bay Bancorp 1996 Stock Option Plan. To amend, upon
consummation of the Merger, the Greater Bay Bancorp 1996 Stock Option Plan to
increase by 456,326 the number of shares of GBB Stock issuable thereunder, and
to provide that all of the shares issuable under such plan may be issued
pursuant to the exercise of incentive or nonqualified stock options granted
under such plan, in order to accommodate the greater number of eligible
employees after the Merger and to provide for future requirements; and
4. Other Business. To consider and transact such other business as may
properly be brought before the GBB meeting and any adjournment or adjournments
thereof.
Only those shareholders of record at the close of business on October 21,
1997 are entitled to notice of and to vote at the GBB Meeting.
If the Merger is consummated, holders of GBB Stock who comply with the
requirements of Chapter 13 of the California General Corporation Law ("Chapter
13") may have the right to receive from GBB a cash payment of the fair market
value of their shares determined in accordance with Chapter 13. See
"DISSENTING SHAREHOLDERS' RIGHTS--GBB" in the attached Joint Proxy
Statement/Prospectus for a discussion of the availability of dissenters'
rights and a description of the procedures which must be followed to enforce
such rights under Chapter 13, a copy of which is attached as Appendix C
thereto and incorporated herein by this reference.
<PAGE>
More detailed information about the specified proposals and other matters
regarding the GBB Meeting is included in the attached Joint Proxy
Statement/Prospectus.
By order of the Board of Directors
/s/ Warren R. Thoits
Warren R. Thoits, Secretary
Palo Alto, California
October 22, 1997
- -------------------------------------------------------------------------------
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO
SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR
NOT YOU PLAN TO ATTEND THE GBB MEETING IN PERSON. IF YOU DO ATTEND THE
GBB MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND VOTE IN PERSON. THE
PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE, WHETHER OR NOT
YOU ATTEND THE GBB MEETING.
IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS,
PLEASE INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE
GBB MEETING.
- -------------------------------------------------------------------------------
<PAGE>
[LOGO OF PENINSULA BANK OF COMMERCE]
October 22, 1997
To Our Shareholders:
We are pleased to enclose a Notice of Special Meeting (the "PBC Meeting") of
Peninsula Bank of Commerce ("PBC") and a Joint Proxy Statement/Prospectus (the
"Joint Proxy Statement/Prospectus") relating to actions to be taken at the PBC
Meeting. At the PBC Meeting, the shareholders will be asked to approve the
principal terms of the Agreement and Plan of Reorganization dated as of
September 5, 1997 (the "Reorganization Agreement"), by and among Greater Bay
Bancorp, a California corporation ("GBB"), GBB Acquisition Corp., a California
corporation and a wholly-owned subsidiary of GBB ("Newco"), and PBC, pursuant
to which, among other things, Newco will be merged with and into PBC (the
"Merger") with PBC surviving the Merger and thereafter operating as a banking
subsidiary of GBB. Upon consummation of the Merger, each outstanding share of
common stock, no par value, of PBC ("PBC Stock") will be converted into the
right to receive shares of common stock, no par value, of GBB ("GBB Stock"),
as described in the Reorganization Agreement, in an exchange intended to be
tax free except to the extent of any cash received in lieu of fractional
shares or pursuant to the exercise of statutory dissenters' rights. Shares of
GBB Stock outstanding immediately prior to the Merger will remain outstanding
after the consummation of the Merger. A copy of the Reorganization Agreement
is attached to the Joint Proxy Statement/Prospectus as Appendix A.
The Board of Directors of PBC has carefully considered the terms and
conditions of the proposed Merger and believes them to be in the best
interests of and fair to PBC's shareholders. The Board has unanimously
approved the Reorganization Agreement and the transactions contemplated
thereby. Hoefer & Arnett Incorporated, an investment banking firm retained by
PBC, has expressed its opinion that the consideration to be received in the
Merger is fair to PBC's shareholders from a financial point of view. A copy of
this opinion is attached to the Joint Proxy Statement/Prospectus as Appendix
E.
Whether or not you plan to attend the PBC Meeting, please sign and return
the accompanying proxy card in the postage-paid envelope as soon as possible
so that your shares will be represented at the PBC Meeting. The Board of
Directors recommends that you vote "FOR" the proposal listed on the proxy
card. If you attend the PBC Meeting and ask to vote in person, you may
withdraw your proxy at that time. It is important that your PBC Stock be
represented at the PBC Meeting.
/s/ George R. Corey /s/ Mark F. Doiron
George R. Corey Mark F. Doiron
Chairman of the Board President and
Chief Executive Officer
<PAGE>
PENINSULA BANK OF COMMERCE
1001 BROADWAY
MILLBRAE, CALIFORNIA 94030
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 19, 1997
TO THE SHAREHOLDERS OF PENINSULA BANK OF COMMERCE:
NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the call of the Board
of Directors, the Special Meeting of Shareholders (the "PBC Meeting") of
Peninsula Bank of Commerce, a California state chartered bank ("PBC"), will be
held at the principal offices of PBC, located at 1001 Broadway, Millbrae,
California 94030, on Wednesday, November 19, 1997 at 5:00 p.m., California
time, for the following purposes, all as set forth in the attached Joint Proxy
Statement/Prospectus:
1. Approval of Reorganization Agreement. To approve the principal terms of
the Agreement and Plan of Reorganization dated as of September 5, 1997 (the
"Reorganization Agreement"), by and among Greater Bay Bancorp, a California
corporation ("GBB"), GBB Acquisition Corp., a California corporation and a
wholly-owned subsidiary of GBB ("Newco"), and PBC, pursuant to which Newco will
merge with and into PBC (the "Merger"), with PBC surviving the Merger and
thereafter operating as a banking subsidiary of GBB. Upon consummation of the
Merger, each outstanding share of common stock, no par value, of PBC will be
converted into the right to receive shares of common stock, no par value, of
GBB ("GBB Stock"), as described in the Reorganization Agreement, in an exchange
intended to be tax free except to the extent of any cash received in lieu of
fractional shares or pursuant to the exercise of statutory dissenters' rights.
Shares of GBB Stock outstanding immediately prior to the Merger will remain
outstanding after the consummation of the Merger. A copy of the Reorganization
Agreement is attached to the Joint Proxy Statement/Prospectus as Appendix A.
2. Other Business. To transact such other business as may properly come
before the PBC Meeting and at any and all adjournments thereof.
Only those shareholders of record at the close of business on October 21,
1997 shall be entitled to notice of and to vote at the PBC Meeting.
If the Merger is consummated, holders of PBC Stock who comply with the
requirements of Chapter 13 of the California General Corporation Law ("Chapter
13") may have the right to receive from PBC a cash payment of the fair market
value of their shares determined in accordance with Chapter 13. See "DISSENTING
SHAREHOLDERS' RIGHTS--PBC" in the attached Joint Proxy Statement/Prospectus for
a discussion of the availability of dissenters' rights and a description of the
procedures which must be followed to enforce such rights under Chapter 13, a
copy of which is attached as Appendix C thereto and incorporated herein by this
reference.
More detailed information about the specified proposal and other matters
regarding the PBC Meeting is included in the attached Joint Proxy
Statement/Prospectus.
By order of the Board of Directors
/s/ Michael E. Vano
Michael E. Vano, Secretary
Millbrae, California
October 22, 1997
<PAGE>
- --------------------------------------------------------------------------------
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO
SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR
NOT YOU PLAN TO ATTEND THE PBC MEETING IN PERSON. IF YOU DO ATTEND THE
PBC MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND VOTE IN PERSON. THE
PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE, WHETHER OR NOT
YOU ATTEND THE PBC MEETING.
IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS,
PLEASE INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE
PBC MEETING.
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<PAGE>
GREATER BAY BANCORP PENINSULA BANK OF COMMERCE
2860 WEST BAYSHORE ROAD 1001 BROADWAY
PALO ALTO, CALIFORNIA 94303 MILLBRAE, CALIFORNIA 94030
JOINT PROXY STATEMENT
FOR SPECIAL MEETINGS OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 19, 1997
- -------------------------------------------------------------------------------
GREATER BAY BANCORP
PROSPECTUS
This Joint Proxy Statement/Prospectus is furnished to the shareholders of
Greater Bay Bancorp, a California corporation ("GBB"), and to the shareholders
of Peninsula Bank of Commerce, a California state chartered bank ("PBC"), in
connection with the solicitation by their respective Boards of Directors of
proxies to be used at special meetings of their shareholders.
At the special meetings of GBB (the "GBB Meeting") and PBC (the "PBC
Meeting"), the shareholders of each company will be asked to consider and act
upon, among other things, a proposal to approve the principal terms of the
Agreement and Plan of Reorganization by and among GBB, GBB Acquisition Corp.,
a California corporation and a wholly-owned subsidiary of GBB ("Newco"), and
PBC, dated as of September 5, 1997 (the "Reorganization Agreement"). A copy of
the Reorganization Agreement is attached to this Joint Proxy
Statement/Prospectus as Appendix A. The Reorganization Agreement provides for,
among other things, the merger (the "Merger") of Newco with and into PBC, with
PBC surviving the Merger and thereafter operating as a banking subsidiary of
GBB. The Reorganization Agreement further provides for the conversion of each
outstanding share of common stock, no par value, of PBC ("PBC Stock") into the
right to receive shares of common stock, no par value, of GBB ("GBB Stock"),
as described in the Reorganization Agreement, in an exchange intended to be
tax free except to the extent of any cash received in lieu of fractional
shares or pursuant to the exercise of statutory dissenters' rights. At the GBB
Meeting, the shareholders of GBB will also be asked to approve a proposal to
amend the articles of incorporation of GBB to increase to 12,000,000 the
number of shares of GBB Stock authorized to be issued by GBB, and to approve a
proposal to amend, upon consummation of the Merger, the Greater Bay Bancorp
1996 Stock Option Plan (the "1996 Option Plan") to increase by 456,326 the
number of shares of GBB Stock issuable thereunder, and to provide that all of
the shares issuable under such plan may be issued pursuant to the exercise of
incentive or nonqualified stock options granted under such plan.
This Joint Proxy Statement/Prospectus is first being mailed to the
shareholders of GBB and PBC on or about October 22, 1997.
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of GBB
under the Securities Act of 1933, as amended (the "Securities Act"), for the
public offering of the shares of GBB Stock to be issued in the Merger. See
"DESCRIPTION OF GBB STOCK AND PBC STOCK--GBB Stock." This Joint Proxy
Statement/Prospectus does not cover any resales of such securities, and no
person is authorized to make any use of this Joint Proxy Statement/Prospectus
in connection with any such resale.
---------------
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION
WITH SHAREHOLDERS' VOTING AND INVESTMENT DECISIONS, SEE "RISK FACTORS" AT PAGE
17.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
THE SHARES OF GBB STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
---------------
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS OCTOBER 22, 1997
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Joint Proxy Statement/Prospectus may
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and as such, may involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of GBB and/or PBC to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. For further information regarding such risks and
uncertainties, see "RISK FACTORS" at page 17.
AVAILABLE INFORMATION
GBB is subject to the informational requirements of the Exchange Act and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy statements and
other information filed by GBB (and its predecessors, Mid-Peninsula Bancorp
and Cupertino National Bancorp) can be inspected and copies of such materials
can be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and New York Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048. The Commission also maintains a Web site
(http://www.sec.gov) at which reports, proxy and information statements and
other information regarding GBB (and its predecessors, Mid-Peninsula Bancorp
and Cupertino National Bancorp) may be accessed. In addition, such reports,
proxy statements and other information can also be inspected at the offices of
The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
GBB has filed with the Commission a Registration Statement on Form S-4 (No.
333-37169) under the Securities Act relating to the shares of GBB Stock to be
issued in connection with the Merger (the "Registration Statement"). This
Joint Proxy Statement/Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits thereto, certain parts of
which are omitted in accordance with the Commission's rules and regulations.
For further information with respect to GBB and the securities offered hereby,
reference is made to the Registration Statement and the exhibits and the
financial statements, notes and schedules filed as a part thereof, which may
be inspected and copied, at prescribed rates, at the public reference
facilities of the Commission, at the addresses set forth in the preceding
paragraph. Statements made in this prospectus are not necessarily complete,
and in each instance are qualified in all respects by reference to the copy of
such document filed as an exhibit to the Registration Statement. All
information concerning GBB contained in the Joint Proxy Statement/Prospectus
has been furnished by GBB, and all information concerning PBC has been
furnished by PBC.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY GBB OR PBC. THIS JOINT PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
JOINT PROXY STATEMENT/ PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF GBB OR PBC SINCE THE DATE HEREOF OR THAT
THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
<PAGE>
COMBINED MARKET AREA
GREATER BAY BANCORP AND PENINSULA BANK OF COMMERCE
BANKING LOCATIONS
* GREATER BAY BANCORP ADMINISTRATIVE OFFICES
. CUPERTINO NATIONAL BANK
(solid box) MID-PENINSULA BANK
(Triangle) PENINSULA BANK OF COMMERCE
[Map of California and inset of map of Santa Clara, San Mateo and San Francisco
Counties indicating the office locations of CNB, MPB & PBC.]
(shaded box) COMBINED MARKET AREA
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY................................................................... 1
The Parties............................................................. 1
The Meetings............................................................ 2
The Merger.............................................................. 2
Dissenters' Rights...................................................... 7
Exchange of Stock Certificates.......................................... 7
Historical and Pro Forma Per Share Data for GBB and PBC................. 8
Comparative Stock Price Information..................................... 10
Selected Financial Data of GBB.......................................... 11
Selected Financial Data of PBC.......................................... 12
Selected Unaudited Pro Forma Combined Financial Information............. 14
RISK FACTORS.............................................................. 17
Risk Factors Relating to the Merger..................................... 17
Risk Factors Relating to the Industry................................... 18
THE GBB MEETING........................................................... 19
Date, Time and Place.................................................... 19
Purpose................................................................. 19
Record Date............................................................. 19
Proxies and Revocability of Proxies..................................... 19
Costs of Solicitations of Proxies....................................... 19
Outstanding Securities; Quorum.......................................... 20
Vote Required........................................................... 20
THE PBC MEETING........................................................... 20
Date, Time and Place.................................................... 20
Purpose................................................................. 20
Record Date............................................................. 20
Proxies and Revocability of Proxies..................................... 20
Costs of Solicitation of Proxies........................................ 21
Outstanding Securities; Quorum.......................................... 21
Vote Required........................................................... 21
BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT--GBB........ 22
BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT--PBC........ 24
THE MERGER................................................................ 25
Background and Reasons for the Merger and Management's Recommendations--
GBB.................................................................... 25
Background and Reasons for the Merger and Management's Recommendations--
PBC.................................................................... 26
Opinion of GBB Financial Advisor........................................ 28
Opinion of PBC Financial Advisor........................................ 30
Conversion of Shares and Conversion Ratio............................... 34
Fractional Shares....................................................... 35
Effective Time of Merger................................................ 35
Regulatory Approvals.................................................... 36
Agreements with Certain Shareholders.................................... 36
Interests of Certain Persons in the Merger.............................. 37
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Certain Federal Income Tax Consequences.................................. 38
Exchange Procedures...................................................... 38
Post-Merger Operations................................................... 39
Sales of GBB Stock....................................................... 39
Nasdaq Listing........................................................... 39
Accounting Treatment..................................................... 39
THE REORGANIZATION AGREEMENT............................................... 40
Conditions to the Merger................................................. 40
Nonsolicitation.......................................................... 41
Expenses................................................................. 41
Treatment of Options..................................................... 41
Termination.............................................................. 41
Covenants; Conduct of Business Prior to Effective Time................... 42
Amendment and Waiver..................................................... 43
THE STOCK OPTION AGREEMENT................................................. 44
General.................................................................. 44
Exercise of Stock Option................................................. 44
Adjustment of Number of Shares Subject to Option......................... 44
Repurchase of Options.................................................... 45
Restrictions on Transfer................................................. 45
Registration Rights...................................................... 45
Effect of Stock Option Agreement......................................... 45
DISSENTING SHAREHOLDERS' RIGHTS............................................ 46
GBB...................................................................... 46
PBC...................................................................... 47
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.......................... 49
DESCRIPTION OF GBB STOCK AND PBC STOCK..................................... 54
GBB Stock................................................................ 54
PBC Stock................................................................ 55
Differences Between Rights of Holders of GBB Stock and PBC Stock......... 55
BUSINESS--GBB.............................................................. 57
History.................................................................. 57
Super Community Banking Philosophy....................................... 57
Corporate Growth Strategy................................................ 58
The Banks................................................................ 58
CNB.................................................................... 58
MPB.................................................................... 58
Banking Services....................................................... 58
Market Area.............................................................. 59
Lending Activities....................................................... 59
Underwriting and Credit Administration................................. 59
Loan Portfolio......................................................... 60
Deposits................................................................. 61
Trust Services........................................................... 62
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Competition............................................................ 62
Employees.............................................................. 62
Properties............................................................. 62
Legal Proceedings...................................................... 62
SUPERVISION AND REGULATION............................................... 63
GBB.................................................................... 63
The Banks and PBC...................................................... 64
Restrictions on Dividends.............................................. 64
Limitations on Affiliated Transactions................................. 65
Common Liability....................................................... 65
Effect of Governmental Policies and Legislation........................ 65
Rechartering Legislation............................................... 66
Capital Standards...................................................... 67
Prompt Corrective Action and Other Enforcement Mechanisms.............. 68
Safety and Soundness Standards......................................... 70
Premiums for Deposit Insurance......................................... 70
Interstate Banking and Branching....................................... 71
Community Reinvestment Act and Fair Lending Developments............... 72
Potential Enforcement Actions.......................................... 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--GBB...................................................... 73
Results of Operations.................................................. 73
Six Months Ended June 30, 1997 and 1996.............................. 73
Net Interest Income................................................ 74
Provision for Loan Losses.......................................... 76
Other Income....................................................... 77
Operating Expenses................................................. 77
Provision for Income Taxes......................................... 78
Years Ended December 31, 1996, 1995 and 1994......................... 78
Net Interest Income................................................ 78
Provision for Loan Losses.......................................... 81
Other Income....................................................... 82
Operating Expenses................................................. 83
Income Taxes....................................................... 84
Financial Condition.................................................... 84
Loans................................................................ 84
Nonperforming and Classified Assets.................................. 85
Allowance For Loan Losses............................................ 87
Investment Securities................................................ 88
Deposits............................................................. 90
Interest Rate Risk Management........................................ 91
Liquidity and Cash Flow.............................................. 92
Capital Resources.................................................... 93
Recent Accounting Pronouncements....................................... 94
Change in Accountant................................................... 96
GBB MANAGEMENT........................................................... 97
Board of Directors and Executive Officers.............................. 97
The GBB Board and Committees........................................... 99
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Compensation of Executive Officers and Directors....................... 100
Summary of Cash and Certain Other Compensation....................... 100
Employment Contracts and Termination of Employment and Change in
Control Arrangements................................................ 101
1996 Option Plan..................................................... 102
Retirement Benefits.................................................. 103
Stock Options........................................................ 104
Option Exercises and Holdings........................................ 105
Compensation Committee Interlocks and Insider Participation.......... 105
Director Compensation................................................ 105
Certain Relationships and Related Transactions......................... 106
Section 16(a) Beneficial Ownership Reporting Compliance................ 106
BUSINESS--PBC............................................................ 107
General................................................................ 107
Market Area............................................................ 107
Products and Services.................................................. 107
Lending Activities..................................................... 108
Underwriting and Credit Administration............................... 108
Loan Portfolio....................................................... 108
Deposits............................................................... 109
Competition............................................................ 109
Employees.............................................................. 109
Properties............................................................. 110
Legal Proceedings...................................................... 110
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--PBC...................................................... 111
Results of Operations.................................................. 111
Six Months Ended June 30, 1997 and 1996.............................. 111
Net Interest Income................................................ 112
Provision for Loan Losses.......................................... 113
Operating Expenses................................................. 114
Provision for Income Taxes......................................... 114
Years Ended December 31, 1996, 1995 and 1994......................... 115
Net Interest Income................................................ 115
Provision for Loan Losses.......................................... 118
Other Income....................................................... 118
Operating Expenses................................................. 118
Income Taxes....................................................... 119
Financial Condition.................................................... 119
Loans.............................................................. 119
Nonperforming and Classified Assets................................ 120
Allowance for Loan Losses.......................................... 121
Investment Securities.............................................. 123
Deposits........................................................... 125
Interest Rate Risk Management...................................... 126
Liquidity and Cash Flow............................................ 126
Capital Resources.................................................. 127
Recent Accounting Pronouncements....................................... 128
Change in Accountant................................................... 129
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PBC MANAGEMENT............................................................... 130
Compensation of Executive Officers and Directors........................... 130
Summary of Cash and Certain Other Compensation........................... 130
Directors' Fees and 1996 Directors' Stock Option Plan...................... 130
1992 Stock Option Plan..................................................... 131
Deferred Compensation Plan................................................. 131
Salary Continuation Agreement.............................................. 131
Certain Transactions....................................................... 131
Interests of Certain Persons in the Merger................................. 132
INFORMATION CONCERNING GBB MEETING ONLY...................................... 132
Amendment to GBB's Articles of Incorporation............................... 132
Amendment to 1996 Option Plan.............................................. 133
Federal Income Tax Consequences.......................................... 134
Accountants................................................................ 135
Shareholder Proposals...................................................... 135
INFORMATION CONCERNING PBC MEETING ONLY...................................... 136
Accountants................................................................ 136
LEGAL MATTERS................................................................ 136
EXPERTS...................................................................... 136
OTHER MATTERS................................................................ 136
INDEX TO FINANCIAL STATEMENTS................................................ 137
REPORT OF INDEPENDENT ACCOUNTANTS............................................ F-1
GBB'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
Consolidated Balance Sheets................................................ F-2
Consolidated Statements of Operations...................................... F-3
Consolidated Statements of Shareholders' Equity............................ F-4
Consolidated Statements of Cash Flows...................................... F-5
Notes to Consolidated Financial Statements................................. F-6
GBB'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996
Consolidated Balance Sheets (Unaudited).................................... F-29
Consolidated Statements of Operations (Unaudited).......................... F-30
Consolidated Statements of Cash Flows (Unaudited).......................... F-31
Notes to Consolidated Financial Statements (Unaudited)..................... F-32
REPORT OF INDEPENDENT ACCOUNTANTS--PBC....................................... F-34
PBC'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
Consolidated Statements of Condition....................................... F-35
Consolidated Statements of Operations...................................... F-36
Consolidated Statements of Shareholders' Equity............................ F-37
Consolidated Statements of Cash Flows...................................... F-38
Notes to Consolidated Financial Statements................................. F-39
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PBC'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1996
Consolidated Statements of Condition (Unaudited)....................... F-49
Consolidated Statements of Operations (Unaudited)...................... F-50
Consolidated Statements of Cash Flows (Unaudited)...................... F-51
Notes to Consolidated Financial Statements (Unaudited)................. F-52
</TABLE>
vi
<PAGE>
APPENDICES
<TABLE>
<CAPTION>
APPENDIX
--------
<S> <C>
Agreement and Plan of Reorganization................................. A
Stock Option Agreement............................................... B
Certain Provisions of Chapter 13 of the California General
Corporation Law..................................................... C
Hovde Financial, Inc. Fairness Opinion............................... D
Hoefer & Arnett Incorporated Fairness Opinion........................ E
</TABLE>
vii
<PAGE>
INDEX TO CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1992 Plan.................................................................. 131
1996 Merger.................................................................. 1
1996 Option Plan........................ Joint Proxy Statement/Prospectus Cover
Acquisition Transaction..................................................... 44
Affiliate Agreements......................................................... 5
ALLL.................................................................... 26, 67
APB 25...................................................................... 95
Average Closing Price.................................................... 2, 34
Bank Holding Company Act..................................................... 1
Banks........................................................................ 1
BIF......................................................................... 70
Budget Act.................................................................. 63
California Law............................................................... 7
Chapter 13................................................................... 7
CNB.......................................................................... 1
Code........................................................................ 38
Commission............................................... Available Information
Commissioner................................................................ 55
Competing Transaction....................................................... 41
Comptroller................................................................. 64
Conversion Ratio............................................................. 2
Coopers...................................................................... 4
CRA......................................................................... 36
Cupertino................................................................ 1, 57
D&O Tail.................................................................... 37
Delinquency Date............................................................ 55
DFI.......................................................................... 5
Effective Time............................................................... 2
EPS.................................................................... 94, 129
Exchange Act................. Special Note Regarding Forward Looking Statements
Exchange Agent.............................................................. 38
FASB........................................................................ 94
FDIC......................................................................... 5
FDICIA...................................................................... 70
FICO........................................................................ 71
FRB.......................................................................... 5
GBB..................................... Joint Proxy Statement/Prospectus Cover
GBB Board.................................................................... 3
GBB Meeting............................. Joint Proxy Statement/Prospectus Cover
GBB Record Date.............................................................. 2
GBB Stock............................... Joint Proxy Statement/Prospectus Cover
Greater Bay Trust Company.................................................... 1
Hoefer....................................................................... 4
Hoefer Opinion.............................................................. 30
Hovde........................................................................ 4
Hovde Opinion............................................................... 28
Interstate Act.............................................................. 71
Merger.................................. Joint Proxy Statement/Prospectus Cover
Mid-Peninsula............................................................ 1, 57
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MPB.......................................................................... 1
Nasdaq....................................................................... 2
New Certificates............................................................ 38
Newco................................... Joint Proxy Statement/Prospectus Cover
Newco Board.................................................................. 4
Noncompetition Agreements.................................................... 5
Non-Qualified Stock Options................................................ 135
NPAs........................................................................ 26
Old Certificates............................................................ 38
Option................................................................... 6, 44
OREO........................................................................ 73
Payable Date................................................................ 55
PBC..................................... Joint Proxy Statement/Prospectus Cover
PBC Board.................................................................... 3
PBC Directors................................................................ 5
PBC Meeting............................. Joint Proxy Statement/Prospectus Cover
PBC Record Date.............................................................. 2
PBC Stock............................... Joint Proxy Statement/Prospectus Cover
Peat Marwick................................................................ 96
Plan Amendment............................................................. 133
Purchase Event.............................................................. 44
Registration Statement................................... Available Information
Reorganization Agreement................ Joint Proxy Statement/Prospectus Cover
Restricted Securities....................................................... 37
SAIF........................................................................ 71
Sale Date................................................................... 55
San Mateo................................................................... 57
SBA.......................................................................... 1
Securities Act.......................... Joint Proxy Statement/Prospectus Cover
SFAS........................................................................ 94
Shareholder's Agreements..................................................... 5
Stock Option Agreement....................................................... 6
Special Deposit.............................................................. 8
Substitute Options......................................................... 133
Super Community Banking Philosophy....................................... 1, 57
Title III................................................................... 66
Top Up Option.............................................................2, 34
Trust Preferred Securities.................................................. 75
Venture Banking Group........................................................ 1
WestCal..................................................................... 57
</TABLE>
ix
<PAGE>
SUMMARY
The following is a summary of certain information included elsewhere in this
Joint Proxy Statement/Prospectus and is qualified in its entirety by reference
to that information. Shareholders are urged to review carefully the entire
Joint Proxy Statement/Prospectus, including the Appendices.
THE PARTIES
GBB. GBB is a California corporation incorporated in 1984 and is registered
as a bank holding company under the Bank Holding Company Act of 1956, as
amended (the "Bank Holding Company Act"). GBB operates Cupertino National Bank,
a national banking association ("CNB"), and Mid-Peninsula Bank, a California
state chartered bank (separately, "MPB" and together with CNB, the "Banks")
with seven regional offices in Cupertino, Palo Alto, San Mateo, San Carlos and
San Jose, California. GBB is the result of the merger, effective November 27,
1996 (the "1996 Merger"), of Cupertino National Bancorp ("Cupertino") and Mid-
Peninsula Bancorp ("Mid-Peninsula"). Because the 1996 Merger was treated as
pooling of interests for accounting and financial reporting purposes, GBB's
financial statements have been restated for the years prior to the 1996 Merger
to include information from both Cupertino and Mid-Peninsula. As of June 30,
1997, GBB had total assets of $719.1 million.
GBB, through the Banks, provides a wide range of commercial banking services
to small and medium-sized businesses, real estate developers and property
managers, business executives, professionals and other individuals, primarily
in the Santa Clara and San Mateo Counties of California. Additionally, GBB
offers several specialized services including a Small Business Administration
("SBA") Department which makes SBA guaranteed loans to assist smaller
businesses, a venture lending division (the "Venture Banking Group") that
services companies in their start-up and development phase and a trust
department (the "Greater Bay Trust Company") that offers a full range of fee-
based trust services directly to its clients.
In order to meet the demands of the increasingly competitive banking and
financial services industries, GBB has adopted a business philosophy it refers
to as the "Super Community Banking Philosophy." The Super Community Banking
Philosophy is based on management's belief that banking customers value doing
business with locally managed institutions that can provide a full service
commercial banking relationship through an understanding of the customer's
financial needs and the flexibility to customize products and services to meet
those needs. Management further believes that banks are better able to build
successful customer relationships by affiliating with a holding company that
provides cost effective administrative support services while promoting bank
autonomy and flexibility through the maintenance of independently chartered
subsidiary banks.
The principal executive office of GBB is located at 2860 West Bayshore Road,
Palo Alto, California 94303, telephone number (650) 813-8200.
PBC. PBC is a California state chartered bank incorporated in 1981. As of
June 30, 1997, PBC had total assets of $207.2 million. PBC strives to provide
the highest-quality service available from a financial institution. Through
such service, PBC attempts to create long-lasting customer relationships.
Because of competition from brokerage firms, insurance companies and other
nonbanks, PBC attempts to offer a variety of products that customers are
seeking from their financial services providers rather than only those products
and services that have traditionally been provided by banks. Its customers
include the area's small businesses and professionals, the owners and employees
of those businesses and individuals residing in the community.
The principal executive office of PBC is located at 1001 Broadway, Millbrae,
California 94030, telephone number (650) 697-4333.
1
<PAGE>
THE MEETINGS
GBB. The GBB Meeting will be held at 5:00 p.m., California time, on
Wednesday, November 19, 1997 at the principal administrative offices of GBB,
located at 2860 West Bayshore Road, Palo Alto, California 94303. GBB's
shareholders will consider and vote on (i) a proposal to approve the principal
terms of the Reorganization Agreement; (ii) a proposal to amend the articles of
incorporation of GBB to increase to 12,000,000 the number of shares of GBB
Stock authorized to be issued by GBB; and (iii) a proposal to amend, upon
consummation of the Merger, the 1996 Option Plan to increase by 456,326 the
number of shares of GBB Stock issuable thereunder, and to provide that all of
the shares issuable under such plan may be issued pursuant to the exercise of
incentive or nonqualified stock options granted under such plan. The close of
business on October 21, 1997 has been set as the record date (the "GBB Record
Date") for determining which shareholders are entitled to receive notice of and
to vote at the GBB Meeting. On the GBB Record Date, there were 3,338,083 shares
of GBB Stock outstanding, held of record by approximately 846 shareholders. See
"THE GBB MEETING."
PBC. The PBC Meeting will be held at 5:00 p.m., California time, on
Wednesday, November 19, 1997 at the principal offices of PBC, located at 1001
Broadway, Millbrae, California 94030. PBC's shareholders will consider and vote
on a proposal to approve the principal terms of the Reorganization Agreement.
The close of business on October 21, 1997 has been set as the record date (the
"PBC Record Date") for determining which shareholders are entitled to receive
notice of and to vote at the PBC Meeting. On the PBC Record Date, there were
673,862 shares of PBC Stock outstanding, held of record by approximately 375
shareholders. See "THE PBC MEETING."
THE MERGER
General. Pursuant to the terms of the Reorganization Agreement, GBB will
acquire PBC through the merger of Newco with and into PBC, with PBC as the
surviving corporation. PBC will thereafter operate as a wholly-owned banking
subsidiary of GBB.
Conversion of Shares. Pursuant to the terms of the Reorganization Agreement,
at the effective time of the Merger (the "Effective Time"), each share of GBB
Stock issued and outstanding immediately prior to the Effective Time shall
remain outstanding as a share of GBB Stock. Each share of PBC Stock issued and
outstanding immediately prior to the Effective Time (other than shares as to
which statutory dissenters' rights are perfected) will automatically, without
any action on the part of the holder thereof, be canceled and converted into
the right to receive a number of shares of GBB Stock (the "Conversion Ratio")
determined as follows:
(i) If the Average Closing Price (as defined below) is greater than
$36.67, a number of shares of GBB Stock equal to the quotient obtained by
dividing (A) $44.00 plus the product of .3333 times the difference between
the Average Closing Price and $36.67, by (B) the Average Closing Price;
(ii) If the Average Closing Price is between $33.33 and $36.67, 1.2
shares of GBB Stock;
(iii) If the Average Closing Price is $32.01 or more and less than
$33.33, a number of shares of GBB Stock equal to the quotient obtained by
dividing $40.00 by the Average Closing Price; and
(iv) If the Average Closing Price is less than $32.01, 1.25 shares of GBB
Stock; provided, however, if the Average Closing Price is less than $30.00,
GBB may exercise the Top Up Option (as defined below), in which case the
Conversion Ratio will equal that number of shares of GBB Stock equal to the
quotient obtained by dividing $37.50 by the Average Closing Price. If GBB
does not elect to exercise the Top Up Option, PBC may terminate the
Reorganization Agreement or may proceed with the Merger, in which case the
Conversion Ratio will be 1.25 shares of GBB Stock.
"Average Closing Price" means the average of the daily closing price of a
share of GBB Stock reported on the Nasdaq National Market ("Nasdaq") during the
15 consecutive trading days ending at the end of the third trading day
immediately preceding the Effective Time. "Top Up Option" means, in the event
that the Average Closing Price is less than $30.00, the right of GBB to elect
to issue that number of shares of GBB Stock equal to the quotient obtained by
dividing $37.50 by the Average Closing Price.
2
<PAGE>
As described above, the Conversion Ratio (and the resulting value of the GBB
Stock to be received by shareholders of PBC upon such conversion) depends upon
the Average Closing Price of GBB Stock. The following table shows the effective
Conversion Ratio and the value of the GBB Stock into which one share of PBC
Stock will be converted as a function of the Average Closing Price of GBB
Stock.
<TABLE>
<CAPTION>
EACH PBC SHARE
WILL BE CONVERTED VALUE TO BE RECEIVED
ASSUMING A GBB INTO THIS NUMBER PER PBC SHARE
AVERAGE CLOSING PRICE OF: OF GBB SHARES (PAYABLE IN GBB STOCK)
------------------------- ------------------ ----------------------
<S> <C> <C>
$50.00 0.9689 $48.44
48.00 0.9953 47.78
46.00 1.0241 47.11
44.00 1.0555 46.44
42.00 1.0899 45.78
40.00 1.1277 45.11
38.00 1.1696 44.44
36.67 1.2000 44.00
35.00 1.2000 42.00
33.33 1.2000 40.00
32.50 1.2300 40.00
32.00 1.2500 40.00
31.00 1.2500 38.75
30.00 1.2500 37.50
29.00 1.2931 37.50 (Top Up Option)
or 1.2500 36.25 (PBC's option)
28.00 1.3393 37.50 (Top Up Option)
or 1.2500 35.00 (PBC's option)
</TABLE>
For example, if the Average Closing Price is $42.25 (which was the closing
price of GBB Stock on October 20, 1997, as reported by Nasdaq), each
outstanding share of PBC Stock would receive consideration of $45.86 in the
Merger, payable in GBB Stock. Similarly, if the Average Closing Price is
$35.00, each outstanding share of PBC Stock would receive consideration in the
Merger of $42.00 per share, payable in GBB Stock. Alternatively, if the Average
Closing Price is $48.00, each outstanding share of PBC Stock would receive
consideration in the Merger of $47.78 per share, payable in GBB Stock. No
assurance can be given as to what the Average Closing Price will be. No
assurance can be given that the market price of GBB Stock on or after
consummation of the Merger will approximate the Average Closing Price.
Fractional Shares. No fractional shares of GBB Stock shall be issued in the
Merger. In lieu thereof, each holder of PBC 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.
Background and Reasons for the Merger and Management's Recommendations. The
Boards of Directors of GBB and PBC began to consider the possibility of a
business combination of their respective institutions during the first quarter
of 1997. After various discussions and negotiations among certain of their
directors and officers and PBC's financial advisor, PBC accepted a nonbinding
expression of interest letter of GBB on July 29, 1997 to effect the Merger.
Following the acceptance of the expression of interest letter, each party
conducted a due diligence examination of the other. Upon completion of such due
diligence examinations and after certain additional discussions and
negotiations, each of the Board of Directors of GBB (the "GBB Board") and the
Board of Directors of PBC (the "PBC Board") held a meeting to discuss and
evaluate the proposed transaction. After each Board meeting, each Board
received an opinion from its respective financial advisor to the effect that
3
<PAGE>
the consideration to be received in the Merger was fair to its shareholders,
from a financial point of view. After further discussion and evaluation, each
Board approved the Reorganization Agreement. Following the approval of the
Reorganization Agreement and the transactions contemplated thereby by each of
the GBB Board, the Board of Directors of Newco (the "Newco Board") and the PBC
Board, GBB, Newco and PBC entered into the Reorganization Agreement on
September 5, 1997.
Each of the GBB Board and PBC Board believes the Merger to be in the best
interests of their respective institutions, shareholders and banking customers.
Each Board believes that the Merger will position GBB, on a consolidated basis,
closer to its strategic objective of becoming the preeminent independent
financial services provider in the San Francisco Peninsula market area and
strengthen GBB, on a consolidated basis, in terms of management, growth
opportunities and profitability. Furthermore, it is believed that GBB, as a
larger independent financial institution, will be better able to compete with
major banks in the communities now served by MPB, CNB and PBC and will benefit
such communities by providing increased banking services. The parties also
anticipate that the Merger will present significant revenue enhancement
opportunities for the combined entity. These opportunities result from, among
other factors: (i) an increased ability to cross-sell a wider variety of
banking products and services; (ii) the ability to generate increased loan and
fee income from PBC customers as a result of the higher lending limits
available to the combined entity; (iii) the potential to increase overall
market share in the communities presently served by GBB and PBC as a result of
the wider range of products and services to be offered through the combined
entity; and (iv) the ability to leverage marketing expense and thereby improve
the return on the combined entity's marketing investment. The Merger will also
provide PBC shareholders with the benefit of a more liquid market for their
shares. ACCORDINGLY, THE BOARDS OF DIRECTORS OF GBB AND PBC HAVE APPROVED THE
MERGER AND THE TRANSACTIONS CONTEMPLATED IN CONNECTION THEREWITH AND RECOMMEND
APPROVAL OF THE MERGER BY THE SHAREHOLDERS OF GBB AND PBC, RESPECTIVELY. See
"THE MERGER--Background and Reasons for the Merger and Management's
Recommendations--GBB" and "--PBC."
GBB Fairness Opinion. GBB has received a written fairness opinion dated as of
September 5, 1997 from the investment banking firm of Hovde Financial, Inc.
("Hovde") that the consideration to be received in the Merger is fair, from a
financial point of view, to the shareholders of GBB. The Hovde fairness opinion
is attached to this Joint Proxy Statement/Prospectus as Appendix D. See "THE
MERGER--Opinion of GBB Financial Advisor."
PBC Fairness Opinion. PBC has received a written fairness opinion dated as of
September 19, 1997 from the investment banking firm of Hoefer & Arnett
Incorporated ("Hoefer") that the consideration to be received in the Merger is
fair, from a financial point of view, to the shareholders of PBC. The Hoefer
fairness opinion is attached hereto as Appendix E. See "THE MERGER--Opinion of
PBC Financial Advisor."
Conditions to the Merger; Termination. The obligation of each of the parties
to the Reorganization Agreement to consummate the Merger is subject to the
satisfaction or waiver on or before the Effective Time of, among other things,
the following conditions: (i) the approval by the shareholders of GBB and PBC
of the principal terms of the Reorganization Agreement; (ii) the absence of any
judgment, decree, injunction, order or proceeding which prohibits or restricts
the effectuation of, or threatens to invalidate, the Merger; (iii) the receipt
of all required governmental approvals and consents and satisfaction of all
other statutory or regulatory requirements; (iv) the written confirmation from
Coopers & Lybrand L.L.P. ("Coopers") that the Merger will qualify for pooling
of interests accounting treatment; (v) the approval for listing on Nasdaq the
shares of GBB Stock to be issued in the Merger; (vi) the requirement that
neither the holders of five percent (5%) or more of the outstanding shares of
PBC Stock, nor the holders of five percent (5%) or more of the outstanding
shares of GBB Stock shall be perfected dissenting shares; (vii) the requirement
that at the close of business on the last day of the month prior to the
Effective Time, after giving effect to any dividends paid (but excluding
certain Merger-related expenses), the PBC fully diluted book value per share
shall not be less than $20.25; and (viii) the performance of covenants, the
accuracy of representations and warranties and the receipt of various legal
opinions, officers' certificates and other documents, as provided in the
Reorganization Agreement. See "THE REORGANIZATION AGREEMENT."
4
<PAGE>
The Reorganization Agreement may be terminated at any time prior to the
Effective Time by the mutual consent of GBB and PBC, or, among other things, by
either party (i) if any approval of shareholders of GBB or PBC required for the
Merger is not obtained at the applicable meeting; (ii) upon the expiration of
30 days after any regulatory authority or governmental authority denies or
refuses to grant any approval required to be obtained in order to consummate
the transactions contemplated by the Reorganization Agreement unless within 30
days of such denial, all parties agree to submit a new application to the
regulatory or governmental authority which refused to grant such approval; or
(iii) if the Merger is not consummated by March 31, 1998.
Regulatory Approvals. Applications for prior approval of the Merger were
filed with the Federal Reserve Bank of San Francisco (the "FRB"), the Federal
Deposit Insurance Corporation (the "FDIC"), and the Department of Financial
Institutions of the State of California (the "DFI") on or about October 1,
1997. There can be no assurances that the required approvals will be obtained,
or as to conditions or timing of such approvals. See "THE MERGER--Regulatory
Approvals."
Agreements with Certain Shareholders. PBC has entered into shareholder's
agreements (the "Shareholder's Agreements") with certain shareholders of PBC,
each of whom is also a director of PBC (the "PBC Directors"), pursuant to which
the PBC Directors have agreed (i) to vote all shares of PBC Stock which they
own or hold in trust in favor of the approval of the Reorganization Agreement,
thereby increasing the likelihood that the Reorganization Agreement will be
approved by the shareholders of PBC; and (ii) not to sell or otherwise transfer
any of their shares of PBC Stock prior to the Effective Time. See "THE MERGER--
Agreements with Certain Shareholders."
GBB has entered into noncompetition agreements (the "Noncompetition
Agreements") with each of the PBC Directors, pursuant to which the PBC
Directors have agreed, among other things, not to participate or engage in any
business which is competitive with GBB or PBC for a period of two years after
the Effective Time. See "THE MERGER--Agreements with Certain Shareholders."
Current directors and executive officers of PBC have entered into agreements
(the "Affiliate Agreements") with GBB restricting such persons' ability to sell
shares of GBB Stock which such persons may acquire in connection with the
Merger except in accordance with such Affiliate Agreements. See "THE MERGER--
Agreements with Certain Shareholders."
Interests of Certain Persons in the Merger. At the Effective Time, the GBB
Board will be comprised of 11 directors consisting of the 10 current members of
the GBB Board and George R. Corey, currently Chairman of the PBC Board. In
addition, at the Effective Time, the PBC Board will be comprised of seven
directors, consisting of the six current members of the PBC Board and David L.
Kalkbrenner, President and Chief Executive Officer of GBB. It is anticipated
that Joseph Welch will be appointed Chairman of the Board of PBC as of the
Effective Time.
Mark F. Doiron, President and Chief Executive Officer of PBC, will continue
to serve in such capacities and will be appointed, as of the Effective Time, to
serve on the GBB Executive Management Committee.
The former officers and employees of PBC who become officers or employees of
GBB will be entitled to participate in all employee benefits and benefit
programs of GBB, as the case may be, in accordance with the terms of such plans
or programs.
PBC anticipates purchasing directors' and officers' insurance, which
insurance shall cover persons serving as directors and officers of PBC prior to
the Effective Time for a period of three years from the Effective Time. See
"THE MERGER--Interests of Certain Persons in the Merger."
As of the PBC Record Date, the directors and executive officers of PBC
beneficially owned 223,697 shares of PBC Stock (not including shares such
persons could acquire through the exercise of options), constituting
5
<PAGE>
approximately 33.2% of the outstanding shares of PBC Stock as of such date. The
affirmative vote of an additional 16.9% of the outstanding shares of PBC Stock
entitled to vote at the PBC Meeting will be required in order to approve the
Reorganization Agreement. In addition, directors and executive officers of PBC
held as of such date options to purchase 97,268 shares of PBC Stock, which,
upon the consummation of the Merger, will be assumed by and deemed to be
options granted by GBB, adjusted appropriately to reflect the Conversion Ratio.
See "THE REORGANIZATION AGREEMENT--Treatment of Options." If exercised prior to
the Merger, the shares of PBC Stock acquired will be converted into the right
to receive GBB Stock at the Effective Time in the same manner as will the
shares of PBC Stock held by all other PBC shareholders.
As of the GBB Record Date, the directors and executive officers of GBB held
458,029 shares of GBB Stock (not including shares such persons could acquire
through the exercise of options), constituting approximately 13.7% of the
outstanding shares of GBB Stock as of such date. The affirmative vote of an
additional 36.4% of the outstanding shares of GBB Stock entitled to vote at the
GBB Meeting will be required in order to approve the Reorganization Agreement.
In addition, directors and executive officers of GBB held as of such date
options to purchase 232,946 shares of GBB Stock, of which 136,305 options are
exercisable within 60 days of the GBB Record Date. See "THE MERGER--Interests
of Certain Persons in the Merger."
Stock Option Agreement. As a condition to entering into the Reorganization
Agreement, GBB required PBC to enter into a Stock Option Agreement (the "Stock
Option Agreement"). Pursuant to the Stock Option Agreement, PBC granted to GBB
an option (the "Option") to purchase up to 134,099 shares of PBC Stock
(representing approximately 19.9% of the outstanding shares of PBC Stock) at a
price equal to $32.00 per share, exercisable upon the occurrence of certain
events that create the potential for another party to acquire control of PBC.
Exercise of the Option is subject to DFI approval. The Stock Option Agreement
further provides that GBB may require PBC to purchase at fair market value from
GBB the shares of PBC Stock acquired by GBB pursuant to GBB's exercise of the
Option. However, in no event would PBC be required to pay more than $1.5
million over GBB's aggregate exercise price for the shares of PBC Stock. On
October 20, 1997, the final bid price of PBC Stock was $42.00 per share, as
reported by Hoefer, one of the principal market makers in PBC Stock. See "THE
STOCK OPTION AGREEMENT."
The Stock Option Agreement could have the effect of discouraging persons, who
now or prior to the Effective Time might be interested in acquiring all or a
significant interest in PBC, from considering or proposing such an acquisition,
even if such persons were prepared to propose greater consideration per share
for PBC Stock than the consideration per share represented by the Conversion
Ratio. In addition, the Reorganization Agreement provides that PBC will not
initiate or solicit any inquiries or the making of any proposal which
constitutes, or may reasonably be expected to lead to, any merger,
consolidation, business combination, share exchange, sale or disposition of 10%
or more of PBC's assets, or takeover proposal.
Certain Federal Income Tax Consequences. GBB and PBC have received an opinion
of counsel to the effect that the Merger will qualify for non-recognition of
gain or loss so that none of GBB, PBC or Newco will recognize gain or loss for
federal income tax purposes as a result of the Merger. Such opinion also
concludes that the shareholders of PBC will not recognize gain or loss upon the
exchange of their PBC Stock for GBB Stock in the Merger except to the extent of
any cash received in lieu of fractional shares or pursuant to the exercise of
statutory dissenters' rights. See "THE MERGER--Certain Federal Income Tax
Consequences."
Accounting Treatment of the Merger. The parties anticipate that the Merger
will be treated as a pooling of interests for accounting and financial
reporting purposes. Prior to the Effective Time and as a condition precedent to
the closing, Coopers will confirm in writing the accounting and financial
reporting treatment of the Merger as a pooling of interests.
6
<PAGE>
DISSENTERS' RIGHTS
A holder of GBB Stock who, not later than the date of the GBB Meeting,
delivers to GBB a written demand for dissenters' rights, and who votes against
the approval of the Reorganization Agreement and who complies with all other
applicable requirements of Chapter 13 ("Chapter 13") of the California General
Corporation Law (the "California Law"), will have the right to receive payment
in cash of the "fair market value" of such holder's shares of GBB Stock;
provided, however, that no holder of GBB Stock will be entitled to dissenters'
rights unless holders of at least 5% of the outstanding shares of GBB Stock
have perfected their dissenters' rights in accordance with Chapter 13 of the
California Law. The GBB Board has determined that the "fair market value" of
one share of GBB Stock for this purpose is $37.50, which was the closing sales
price for GBB Stock on September 5, 1997, the day before the public
announcement of the Merger. The procedure for perfecting dissenters' rights is
summarized under the caption "DISSENTING SHAREHOLDERS' RIGHTS--GBB" and the
pertinent provisions of Chapter 13 of the California Law are included as
Appendix C to this Joint Proxy Statement/Prospectus.
A holder of PBC Stock who, not later than 30 days after the date on which PBC
delivers the notice of approval of the Merger by the PBC shareholders, delivers
to PBC a written demand for dissenters' rights, who does not vote in favor of
the approval of the Reorganization Agreement and who complies with all other
applicable requirements of Chapter 13 of the California Law, will have the
right to receive payment in cash of the "fair market value" of such holder's
shares of PBC Stock. The PBC Board has determined that the "fair market value"
of one share of PBC Stock for this purpose is $39.50, which was the final bid
price for PBC Stock on September 5, 1997, the day before the public
announcement of the Merger. The procedure for perfecting dissenters' rights is
summarized under the caption "DISSENTING SHAREHOLDERS' RIGHTS--PBC" and the
pertinent provisions of Chapter 13 of the California Law are included as
Appendix C to this Joint Proxy Statement/Prospectus.
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Effective Time, GBB will send to PBC
shareholders of record at the Effective Time a letter of transmittal advising
the shareholders of PBC of the procedure for surrendering certificates
representing shares of PBC Stock in exchange for certificates representing
shares of GBB Stock and cash in lieu of fractional shares of GBB Stock.
SHAREHOLDERS SHOULD NOT SURRENDER THEIR CERTIFICATES UNTIL THEY RECEIVE THE
LETTER OF TRANSMITTAL. All shares of GBB Stock issued in the Merger will be
deemed issued as of the Effective Time.
The holder of a certificate representing shares of PBC Stock will have no
rights with respect to such shares other than to surrender such certificates,
as provided in the letter of transmittal, in exchange for certificates
representing shares of GBB Stock and cash in lieu of fractional shares of GBB
Stock or, in the event such holder has dissented from the Merger, to surrender
such certificates in connection with a request to receive the fair market value
of the shares represented by such certificates. See "DISSENTING SHAREHOLDERS'
RIGHTS." Upon surrender of any certificate representing shares of PBC Stock to
be exchanged for GBB Stock, the holder thereof shall be entitled to receive (i)
a certificate representing the shares of GBB Stock to which such holder is
entitled and a check in the amount of any cash to be paid to such holder; and
(ii) funds on account of dividends and other distributions paid to holders of
record of shares of GBB Stock as of a record date after the Effective Time but
prior to surrender. See "THE MERGER--Exchange Procedures."
7
<PAGE>
HISTORICAL AND PRO FORMA PER SHARE DATA FOR GBB AND PBC
The following summary of comparative per share data sets forth certain
historical information for GBB and PBC, certain pro forma information for GBB
after giving effect to the Merger as a pooling of interests transaction for
accounting purposes, assuming it had been in effect at the beginning of each
period presented, and equivalent pro forma information for PBC based on the pro
forma combined information. This data is based upon and should be read in
conjunction with information set forth in the financial statements and related
notes of GBB and PBC, which are included herein.
<TABLE>
<CAPTION>
GBB & PBC EQUIVALENT OF ONE
PER COMMON SHARE GBB(1) PBC(2) COMBINED(3) PBC SHARE(4)
- ---------------- ------ ------ ------------ -----------------
<S> <C> <C> <C> <C>
NET INCOME:
Six months ended June 30,
1997...................... $ 1.05 $ 2.41 $ 1.26 $ 1.34
Year ended December 31,
1996...................... 1.04 2.65 1.30 1.39
Year ended December 31,
1995...................... 0.96 2.70 1.25 1.34
Year ended December 31,
1994...................... 0.85 2.14 1.07 1.14
CASH DIVIDENDS DECLARED:
Six months ended June 30,
1997...................... $ 0.30 $ 0.00(5)(6) NA(6) NA(6)
Year ended December 31,
1996...................... 0.44 1.35 $ 0.56 $ 0.60
Year ended December 31,
1995...................... 0.30 1.35 0.47 0.50
Year ended December 31,
1994...................... 0.18 1.00 0.30 0.32
BOOK VALUE:
June 30, 1997.............. $14.69 $21.54 $15.69 $16.79
December 31, 1996.......... 13.80 19.78 14.65 15.67
</TABLE>
- --------
(1) The net income for GBB for the periods presented includes certain
nonrecurring income and expense items that are discussed in the section
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--GBB."
(2) In the fourth quarter of 1996, PBC received an approximately $94.0 million
deposit (the "Special Deposit") representing a proposed settlement of a
class action lawsuit not involving PBC. The Special Deposit is currently in
a short-term demand deposit and the funds are invested in short-term
government securities. The amount of the Special Deposit was approximately
$95.2 million and $94.0 million at June 30, 1997 and December 31, 1996,
respectively. Net income per common share for PBC includes $535,500 (net of
tax) and $117,300 (net of tax) of net income for the six months ended June
30, 1997 and the year ended December 31, 1996, respectively, related to the
Special Deposit. The following table shows the net income per share amounts
after excluding the effect of the nonrecurring income related to the
Special Deposit.
<TABLE>
<CAPTION>
GBB & PBC EQUIVALENT OF ONE
NET INCOME PER SHARE GBB PBC COMBINED PBC SHARE
-------------------- ----- ----- --------- -----------------
<S> <C> <C> <C> <C>
Six months ended June 30, 1997...... $1.05 $1.64 $1.13 $1.21
Year ended December 31, 1996........ $1.04 $2.48 $1.27 $1.36
</TABLE>
(3) The pro forma combined per share data for net income has been calculated
using GBB's weighted average number of shares of GBB Stock outstanding for
the period presented, increased by PBC's weighted average number of shares
of PBC Stock outstanding for the period presented multiplied by an assumed
Conversion Ratio of 1.07 shares of GBB Stock for each share of PBC Stock,
as if these shares were outstanding for each period presented. The pro
forma combined per share data for dividends declared represents the sum of
the historical dividends for GBB and the historical dividends for PBC
divided by the sum of GBB shares and PBC shares (adjusted for the assumed
Conversion Ratio of 1.07). The pro forma combined book value per share has
been calculated using shares of outstanding GBB Stock increased by the
shares of outstanding PBC Stock multiplied by an assumed Conversion Ratio
of 1.07 for each share of PBC Stock as if these
8
<PAGE>
shares were outstanding as of the date presented. Such pro forma per share
data assumes no dissenting GBB or PBC shareholders. Because the actual
Conversion Ratio is based on the Average Closing Price, which cannot be
determined until three days prior to the Effective Time, an assumed
Conversion Ratio of 1.07 was used in calculating the pro forma information
in the table. The assumed Conversion Ratio was selected based on the
closing price per share of GBB Stock on September 30, 1997. However, no
assurance can be given as to how the pro forma calculations using an
assumed Conversion Ratio will compare to the actual Conversion Ratio.
(4) The equivalent pro forma PBC per share information has been calculated by
multiplying the pro forma combined per share information by an assumed
Conversion Ratio of 1.07.
(5) PBC has historically declared and paid dividends on an annual basis and
intends to continue this practice for 1997. Under the terms of the
Reorganization Agreement, PBC will pay to its shareholders a cash dividend
for 1997 consistent with past practices, but in no event in an aggregate
amount greater than 65% of net income. The 65% equates to a cash dividend
comprised of 50% of net income from core operations (i.e. exclusive of net
income related to the Special Deposit referred to in footnote 2 above) and
100% of net income related to the Special Deposit.
(6) Because PBC pays dividends on an annual basis, no dividends have been
declared or paid through June 30, 1997. Therefore, combined and equivalent
dividend information has not been presented for the six-month period ended
June 30, 1997.
9
<PAGE>
COMPARATIVE STOCK PRICE INFORMATION
GBB Stock is traded on Nasdaq under the symbol "GBBK." Prior to September 9,
1996, GBB Stock was not listed on any exchange nor was it included for
quotation on Nasdaq. It was, however, traded in the over-the-counter market and
listed with the National Quotation Service. Hoefer and Van Kasper & Company
acted as the primary market makers and facilitated trades in GBB Stock. GBB
Stock was listed on Nasdaq on September 9, 1996. Based on information provided
to GBB by Hoefer, the range of high and low bid quotations for GBB Stock for
1995 and the first three quarters of 1996 are set forth below. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions. Quotations subsequent to September
30, 1996 reflect the high and low sales prices for GBB Stock as reported by
Nasdaq.
PBC Stock is traded in the over-the-counter market, but is not included for
quotation on the Nasdaq, nor is it listed on any exchange. Trading in PBC Stock
has been infrequent, and such trades cannot be characterized as constituting an
active trading market. PBC is aware of approximately two securities dealers who
make a market in PBC Stock. The following table sets forth, for the periods
indicated, the high and low bid prices of PBC Stock, as reported by Hoefer, one
of the principal market makers for PBC Stock. Such quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
PRICE PER SHARE
---------------------------
GBB STOCK PBC STOCK
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1995
First Quarter..................................... $13.63 $13.00 $15.50 $13.25
Second Quarter.................................... 15.25 13.00 17.00 15.50
Third Quarter..................................... 17.00 15.25 19.50 17.00
Fourth Quarter.................................... 16.88 15.75 20.25 19.00
1996
First Quarter..................................... $18.75 $16.50 $23.25 $23.00
Second Quarter.................................... 22.13 17.75 23.75 22.75
Third Quarter..................................... 21.00 18.00 25.50 23.63
Fourth Quarter.................................... 24.38 21.13 27.75 26.75
1997
First Quarter..................................... $27.63 $23.75 $28.00 $27.00
Second Quarter.................................... 31.50 24.88 33.00 30.25
Third Quarter..................................... 44.50 31.88 41.00 31.50
Fourth Quarter (through October 20, 1997)......... 44.50 42.00 42.50 42.00
</TABLE>
The following table sets forth the high and low sales prices of GBB Stock as
reported on Nasdaq and the high and low bid prices of PBC Stock as reported by
Hoefer on September 5, 1997, the last trading day before the first public
announcement of the Merger, and the equivalent per share prices for PBC Stock
based on the GBB Stock price as of that date, assuming a Conversion Ratio of
1.07 shares of GBB Stock for each share of PBC Stock.
<TABLE>
<CAPTION>
GBB STOCK PBC STOCK
------------- ---------------------------
HISTORICAL HISTORICAL EQUIVALENT
------------- ------------- -------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
September 5, 1997..................... $37.63 $35.00 $39.50 $39.50 $42.27 $42.27
</TABLE>
PBC has historically declared an annual cash dividend of approximately 50% of
net income. In early 1997, PBC expanded its dividend policy to include up to
100% of nonrecurring income in its annual cash dividend. GBB's has historically
declared a quarterly cash dividend of approximately 25% to 33% of net income.
Both the PBC Board and the GBB Board recognize that adequate capital is
essential to maintain the safety and soundness of their respective
institutions. Shareholders of both institutions are entitled to cash dividends
when and as declared by their respective institution's Board of Directors, out
of funds legally available therefor, subject to restrictions under applicable
law. See "DESCRIPTION OF GBB STOCK AND PBC STOCK--Differences between Rights of
Holders of GBB Stock and PBC Stock--Dividend Restrictions."
10
<PAGE>
SELECTED FINANCIAL DATA OF GBB
The following selected consolidated financial data with respect to GBB's
consolidated financial position as of December 31, 1996 and 1995, and its
results of operations for the years ended December 31, 1996, 1995 and 1994 have
been derived from the audited consolidated financial statements of GBB
appearing elsewhere in this Joint Proxy Statement/Prospectus. This information
should be read in conjunction with such consolidated financial statements and
the notes thereto. The summary consolidated financial data with respect to
GBB's consolidated financial position as of December 31, 1994, 1993 and 1992
and its results of operations for the years ended December 31, 1993 and 1992
have been derived from the audited consolidated financial statements of GBB,
which are not presented herein. The summary consolidated financial data with
respect to GBB's consolidated financial position at June 30, 1997 and 1996, and
its results of operations for the six months ended June 30, 1997 and 1996 have
been derived from GBB's unaudited consolidated financial statements appearing
elsewhere herein and should be read in conjunction with such consolidated
financial statements and the notes thereto.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income........ $ 28,468 $ 20,331 $ 45,037 $ 37,233 $ 27,801 $ 23,857 $ 22,736
Interest expense....... 10,902 7,359 16,213 13,892 8,512 6,497 7,506
-------- -------- -------- -------- -------- -------- --------
Net interest income.... 17,566 12,972 28,824 23,341 19,289 17,360 15,230
Provision for loan
losses................ 4,078 685 2,036 956 1,823 1,945 1,132
-------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
loan losses........... 13,488 12,287 26,788 22,385 17,466 15,415 14,098
Other income........... 3,190 1,715 3,530 2,306 3,295 3,578 2,127
Operating expenses..... 10,706 9,763 21,097 17,551 15,623 15,077 11,255
-------- -------- -------- -------- -------- -------- --------
Income before income
tax expense, merger
and nonrecurring
costs................. 5,972 4,239 9,221 7,140 5,138 3,916 4,970
Income tax expense..... 2,282 1,681 3,727 2,771 1,966 1,473 1,825
-------- -------- -------- -------- -------- -------- --------
Net income before
merger and
nonrecurring costs.... 3,690 2,558 5,494 4,369 3,172 2,443 3,145
Merger and nonrecurring
costs, net of tax
(1)................... -- -- 1,991 1,335 608 -- --
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 3,690 $ 2,588 $ 3,503 $ 3,034 $ 2,564 $ 2,443 $ 3,145
======== ======== ======== ======== ======== ======== ========
Net income per common
and common equivalent
share................. $ 1.05 $ 0.78 $ 1.04 $ 0.96 $ 0.85 $ 0.84 $ 1.12
Weighted average shares
outstanding........... 3,526 3,267 3,360 3,146 3,001 2,925 2,802
BALANCE AT PERIOD END:
Total assets........... $719,051 $525,808 $622,044 $477,834 $401,614 $358,576 $325,168
Total loans, net....... 513,846 328,466 441,560 284,579 242,750 231,857 226,334
Total deposits......... 639,737 477,273 559,283 431,789 345,294 323,300 292,110
Other borrowings....... -- -- 12,000 -- 17,256 -- --
Subordinated debt...... 3,000 3,000 3,000 3,000 -- -- --
Trust Preferred
Securities............ 20,000 -- -- -- -- -- --
Total shareholders'
equity................ 48,496 41,681 44,682 40,112 36,040 34,222 31,619
SELECTED STATISTICS:
Return on average total
assets................ 1.12% 1.04% 0.65% 0.70% 0.68% 0.70% 1.08%
Return on average
common shareholders'
equity................ 15.51% 12.32% 8.12% 7.98% 7.31% 7.56% 10.50%
Average equity to
average total assets.. 7.13% 8.45% 7.94% 8.75% 9.31% 9.46% 9.96%
REGULATORY CAPITAL
RATIOS:
Leverage ratio......... 9.74% 8.43% 7.27% 8.69% 9.34% 9.69% 9.43%
Tier 1 risk based
capital ratio......... 11.66% 10.20% 8.75% 11.38% 12.59% 13.05% 11.60%
Total risk based
capital ratio......... 13.42% 12.06% 10.54% 13.43% 13.82% 14.45% 12.80%
</TABLE>
- --------
(1) Please see discussion of merger and nonrecurring costs in the section
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--GBB."
11
<PAGE>
SELECTED FINANCIAL DATA OF PBC
The following selected consolidated financial data with respect to PBC's
consolidated financial position as of December 31, 1996 and 1995, and its
results of operations for the years ended December 31, 1996, 1995 and 1994 have
been derived from the audited consolidated financial statements of PBC
appearing elsewhere in this Joint Proxy Statement/Prospectus. This information
should be read in conjunction with such consolidated financial statements and
the notes thereto. The summary consolidated financial data with respect to
PBC's consolidated financial position as of December 31, 1994, 1993 and 1992
and its results of operations for the years ended December 31, 1993 and 1992
have been derived from the audited consolidated financial statements of PBC,
which are not presented herein. The summary consolidated financial data with
respect to PBC's consolidated financial position at June 30, 1997 and 1996, and
its results of operations for the six months ended June 30, 1997 and 1996 have
been derived from PBC's unaudited consolidated financial statements appearing
elsewhere herein and should be read in conjunction with such consolidated
financial statements and the notes thereto.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------- --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- ------- -------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income....... $ 7,381 $ 4,076 $ 9,061 $ 8,603 $ 7,212 $ 6,388 $ 6,758
Interest expense...... 2,866 1,281 2,912 2,447 1,685 1,786 2,703
-------- ------- -------- ------- ------- ------- -------
Net interest income... 4,515 2,795 6,149 6,156 5,527 4,602 4,055
Provision for loan
losses............... 90 90 120 204 120 160 265
-------- ------- -------- ------- ------- ------- -------
Net interest income
after provision for
loan losses.......... 4,425 2,705 6,029 5,952 5,407 4,442 3,790
Other income.......... 195 202 420 476 460 456 561
Operating expenses.... 1,932 1,744 3,569 3,600 3,676 3,899 3,533
-------- ------- -------- ------- ------- ------- -------
Income before income
tax expense, merger
and nonrecurring
costs................ 2,688 1,163 2,880 2,828 2,191 999 818
Income tax expense.... 1,020 425 1,045 1,046 825 367 283
-------- ------- -------- ------- ------- ------- -------
Net income before
merger and
nonrecurring costs... 1,668 738 1,835 1,782 1,366 632 535
Merger and
nonrecurring costs,
net of tax........... -- -- -- -- -- -- --
-------- ------- -------- ------- ------- ------- -------
Net income(1)......... $ 1,668 $ 738 $ 1,835 $ 1,782 $ 1,366 $ 632 $ 535
======== ======= ======== ======= ======= ======= =======
Net income per common
and common equivalent
share................ $ 2.41 $ 1.11 $ 2.65 $ 2.70 $ 2.14 $ 1.00 $ 0.85
Weighted average
shares outstanding... 692 663 692 660 640 629 629
BALANCE AT PERIOD END:
Total assets.......... 207,215 99,496 204,321 98,754 89,748 94,579 94,246
Total loans, net...... 74,012 59,767 64,185 58,805 60,479 58,263 58,164
Total deposits........ 190,519 85,612 188,535 84,065 77,173 82,857 82,916
Other borrowings...... -- -- -- -- -- -- --
Total shareholders'
equity............... 14,974 12,933 13,273 12,271 10,790 10,316 9,999
SELECTED STATISTICS:
Return on average
total assets......... 1.63% 1.48% 1.62% 1.82% 1.47% 0.70% 0.59%
Return on average
common shareholders'
equity............... 23.75% 11.64% 14.12% 14.94% 12.53% 6.14% 5.39%
Average equity to
average total
assets............... 6.87% 12.72% 11.49% 12.20% 11.73% 11.45% 10.99%
REGULATORY CAPITAL
RATIOS:
Leverage ratio........ 7.20% 13.06% 8.90% 12.22% 12.02% 11.26% 10.62%
Tier 1 risk based
capital ratio........ 14.15% 13.77% 13.52% 17.11% 15.96% 15.21% 14.45%
Total risk based
capital ratio........ 15.40% 14.90% 14.77% 18.36% 16.50% 16.47% 15.70%
</TABLE>
12
<PAGE>
- --------
(1) Net income for the six months ended June 30, 1997 and the year ended
December 31, 1996 includes approximately $535,500 (net of tax) and $117,300
(net of tax), respectively, of net income related to the Special Deposit of
approximately $95.2 million and $94.0 million, respectively. Excluding the
Special Deposit and the nonrecurring income related to such deposit, the
net income, net income per common and common equivalent share, return on
average total assets, and return on average common shareholders' equity for
the six months ended June 30, 1997 and the year ended December 31, 1996 and
total assets and total deposits as of such dates would have been as
follows:
<TABLE>
<CAPTION>
EXCLUDING SPECIAL DEPOSIT
----------------------------------
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Net income........................... $ 1,132 $ 1,718
Net income per common and common
equivalent share.................... $ 1.64 $ 2.48
Return on average total assets....... 2.07% 1.63%
Return on average common
shareholders' equity................ 16.90% 13.23%
Total assets......................... $112,015 $110,321
Total deposits....................... $ 95,319 $ 94,535
</TABLE>
13
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following selected Unaudited Pro Forma Combined Balance Sheet as of June
30, 1997 and 1996 and selected Unaudited Pro Forma Combined Statements of
Operations for the six months ended June 30, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994 have been prepared to reflect the effects of
the Merger on the historical results of GBB. The Unaudited Pro Forma Combined
Balance Sheet has been prepared as if the Merger occurred on June 30, 1997. The
Unaudited Pro Forma Combined Statements of Operations have been prepared as if
the Merger occurred on January 1, 1994. The pro forma financial information set
forth below is unaudited and not necessarily indicative of the results that
will occur in the future.
UNAUDITED PRO FORMA COMBINED FINANCIAL SUMMARY
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income....... $ 35,849 $ 24,407 $ 54,098 $ 45,836 $ 35,013
Interest expense...... 13,768 8,640 19,125 16,339 10,197
--------- --------- --------- --------- ---------
Net interest income... 22,081 15,767 34,973 29,497 24,816
Provision for loan
losses............... 4,168 775 2,156 1,160 1,943
--------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses.......... 17,913 14,992 32,817 28,337 22,873
Other income.......... 3,385 1,917 3,950 2,782 3,755
Operating expenses.... 12,638 11,507 24,666 21,151 19,299
Income before income
tax expense, merger
and nonrecurring
costs................ 8,660 5,402 12,101 9,968 7,329
Income tax expense.... 3,302 2,106 4,772 3,817 2,791
--------- --------- --------- --------- ---------
Net income before
merger and
nonrecurring costs .. 5,358 3,296 7,329 6,151 4,538
Merger and
nonrecurring costs,
net of tax(1)........ -- -- 1,991 1,335 608
--------- --------- --------- --------- ---------
Net income(2)......... $ 5,358 $ 3,296 $ 5,338 $ 4,816 $ 3,930
========= ========= ========= ========= =========
Net income per common
and common equivalent
share(2)............. $ 1.26 $ 0.83 $ 1.30 $ 1.25 $ 1.07
Weighted average
shares
outstanding(3)....... 4,266 3,976 4,100 3,852 3,685
BALANCE AT PERIOD END:
Total assets(4)....... 926,266 625,304 826,365 576,588 491,362
Total loans, net...... 587,858 388,233 505,745 343,384 303,229
Total deposits(4)..... 830,256 562,885 747,818 515,854 422,467
Other borrowings...... -- -- 12,000 -- 17,256
Subordinated debt..... 3,000 3,000 3,000 3,000 --
Trust Preferred
Securities........... 20,000 -- -- -- --
Total shareholders'
equity............... 62,320 54,614 57,955 52,383 46,830
SELECTED STATISTICS:(5)
Return on average
total assets......... 1.23% 1.12% .82% .90% .84%
Return on average
common shareholders'
equity............... 17.39% 12.16% 9.57% 9.64% 8.55%
Average equity to
average total
assets............... 7.07% 9.17% 8.56% 9.39% 9.79%
REGULATORY CAPITAL
RATIOS:
Leverage ratio........ 9.16% 9.43% 7.591% 9.32% 9.85%
Tier 1 risk based
capital ratio........ 12.04% 11.48% 9.52% 12.34% 13.25%
Total risk based
capital ratio........ 13.73% 13.32% 11.22% 14.27% 14.34%
</TABLE>
14
<PAGE>
- --------
(1) For a discussion of merger and nonrecurring costs, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
GBB."
(2) Net income for PBC for the six months ended June 30, 1997 and the year
ended December 31, 1996 included approximately $535,500 (net of tax) and
$117,300 (net of tax), respectively, of net income related to the Special
Deposit. The pro forma combined net income and net income per common and
common equivalent share excluding these amounts for the six months ended
June 30, 1997 would have been $4.8 million and $1.13 and for the year ended
December 31, 1996 would have been $5.2 million and $1.27.
(3) Calculated as the historical GBB weighted average shares outstanding plus
the historical PBC weighted average shares outstanding (adjusted for the
assumed Conversion Ratio of 1.07).
(4) PBC's total assets and total deposits at June 30, 1997 and December 31,
1996 include approximately $95.2 million and $94.0 million related to the
Special Deposit. The pro forma combined total assets and total deposits
excluding the Special Deposit would have been as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Total assets....................................... $831,066 $732,365
Total deposits..................................... $735,056 $653,818
</TABLE>
(5) Excluding the net income related to the Special Deposit of approximately
$535,500 for the six months ended June 30, 1997 and approximately $117,300
for the year ended December 31, 1996, the pro forma combined return on
average total assets, return on average common shareholders' equity and
average equity to average total assets for the six months ended June 30,
1997 (annualized) would have been: 1.24%, 15.82% and 7.85%, respectively,
and for the year ended December 31, 1996 would have been: 0.81%, 9.38% and
8.64%, respectively.
15
<PAGE>
RECENT DEVELOPMENTS
GBB's net income for the three months ended September 30, 1997 increased by
77% to $2.41 million or $0.66 per share, compared to $1.36 million or $0.41 per
share for the third quarter of 1996. The increase in net income for the third
quarter of 1997 was primarily due to increased net interest income, which
resulted from significant growth in average interest-earning assets during the
period.
GBB's total assets increased by 34% to $777.6 million at September 30, 1997
from $579.4 million at September 30, 1996. During the same period, loans
increased by 43% to $553.0 million at September 30, 1997 compared to $386.3
million at September 30, 1996, while deposits increased by 32% to $698.1
million at September 30, 1997 from $529.0 million at September 30, 1996.
For the third quarter of 1997, GBB reported an annualized return on average
shareholders' equity of 19.56% and return on average assets of 1.25%, compared
to 12.35% and 0.98%, for the corresponding period of 1996.
GBB's allowance for loan losses was $11.8 million or 2.13% of total loans at
September 30, 1997, compared to $5.6 million or 1.45% at September 30, 1996.
GBB's nonperforming assets as a percentage of total assets declined to 0.44% of
total assets at September 30, 1997, compared to 0.54% of total assets at
September 30, 1996.
The level of fiduciary assets under management of the Greater Bay Trust
Company increased by 45% to a total of $539.8 million at September 30, 1997,
compared to $371.2 million at September 30, 1996. Trust fee income increased by
47% from $375,000 for the third quarter of 1996 to $550,000 for the third
quarter of 1997.
PBC's net income for the three months ended September 30, 1997 increased by
109% to $905,000 or $1.34 per share, compared to $433,000 or $0.65 per share
for the third quarter of 1996. The increase in net income for the third quarter
of 1997 was primarily due to net income related to the Special Deposit, which
had a balance of $87.7 million as of September 30, 1997, and to growth in
average interest-earning assets, including loans. Excluding net income related
to the Special Deposit, net income for the third quarter of 1997 was
approximately $622,000 or $0.92 per share, an increase of 44% from the third
quarter of 1996.
PBC's total assets at September 30, 1997 were $205.5 million ($117.8 million
excluding assets related to the Special Deposit) compared with $104.2 million
at September 30, 1996. Total loans at September 30, 1997 were $80.2 million
compared to $63.4 million at September 30, 1996, while deposits (excluding the
Special Deposit) increased by 12% to $100.6 million at September 30, 1997 from
$89.6 million at September 30, 1996.
For the third quarter of 1997, PBC reported an annualized return on average
shareholders' equity of 23.75% and annualized return on average assets of
1.66%, compared to 12.62% and 1.61%, respectively, for the corresponding period
of 1996. Excluding the Special Deposit, the investment associated with it and
net income related to it, the third quarter 1997 annualized return on average
shareholders' equity was 16.23% and annualized return on average assets was
2.17%.
PBC's allowance for loan losses was $1,456,000 or 1.8% of total loans at
September 30, 1997, compared to $1,392,000 or 2.2% at September 30, 1996. PBC's
nonperforming assets as a percentage of total assets decreased to 0.2% at
September 30, 1997 from 1.5% at September 30, 1996.
16
<PAGE>
RISK FACTORS
In deciding how to vote their shares at the special meetings, holders of
shares of GBB Stock and holders of shares of PBC Stock should carefully
consider the following factors, in addition to the information and other
matters set forth in this Joint Proxy Statement/Prospectus.
Certain statements contained in this Joint Proxy Statement/Prospectus,
including, without limitation, statements containing the words "believes,"
"anticipates," "intends," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of GBB or PBC
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in those areas in which GBB or PBC operate; demographic changes;
competition; fluctuations in interest rates; changes in business strategy or
development plans; changes in governmental regulation; credit quality; the
availability of capital to fund the expansion of GBB's business; and other
factors referenced in this Joint Proxy Statement/Prospectus, including,
without limitation, under the captions "SUMMARY," "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--GBB," "BUSINESS--GBB," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--PBC" and "BUSINESS--PBC." Given
these uncertainties, shareholders are cautioned not to place undue reliance on
such forward-looking statements. GBB and PBC disclaim any obligation to update
any such factors or to publicly announce the results of any revisions to any
of the forward-looking statements contained herein to reflect future events or
developments.
RISK FACTORS RELATING TO THE MERGER
Prospects of GBB After the Merger and Ability to Integrate Operations. The
earnings, financial condition and prospects of GBB after the Merger will
depend in part on GBB's ability to successfully integrate the operations and
management of PBC as a new wholly-owned subsidiary, and to continue to
implement GBB's Super Community Banking Philosophy. There can be no assurance
that GBB will be able to effectively and profitably integrate the operations
and management of PBC, or that GBB will be able to continue to profitably
implement its Super Community Banking Philosophy. See "BUSINESS--GBB--Super
Community Banking Philosophy." In addition, there can be no assurance that GBB
will be able to fully realize the potential revenue enhancement expected as a
result of the Merger. Further, although the GBB Board and the PBC Board do not
anticipate cost savings as a result of the Merger to be significant (as
compared to potential revenue enhancement as a result of the Merger), there
can be no assurance that GBB will be able to fully realize any of the
potential cost savings expected as a result of the Banks and PBC being able to
share administrative and other resources under a common parent company.
Finally, there can be no assurance that any cost savings which are realized
will not be offset by losses in revenues or other charges to earnings.
Performance of Combined Loan Portfolios. GBB's performance and prospects
after the Merger also will be dependent to a significant extent on the
performance of the combined loan portfolios of the Banks and PBC and
ultimately on the financial condition of the Banks' and PBC's borrowers and
other customers. The existing loan portfolios of the Banks and PBC differ to
some extent in the types of borrowers, industries and credits represented. In
addition, there are differences in the documentation, classifications, credit
ratings and management of the portfolios. As a result, GBB's overall loan
portfolio will have a different risk profile than the loan portfolio of either
PBC or the Banks before the Merger. The performance of the combined loan
portfolio will be adversely affected if any of such factors is worse than
currently anticipated. In addition, to the extent that present customers are
not retained by the combined company or additional expenses are incurred in
retaining them, there could be adverse effects on future results of operations
of GBB following the Merger. Realization of improvement in profitability is
dependent, in part, on the extent to which the revenues of PBC and GBB are
maintained and enhanced.
17
<PAGE>
RISK FACTORS RELATING TO THE INDUSTRY
Interest Rate Risk. Banking companies' earnings depend largely on the
relationship between the cost of funds, primarily deposits, and the yield on
earning assets. This relationship, known as the interest rate spread, is
subject to fluctuation and is affected by economic and competitive factors
which influence interest rates, the volume and mix of interest-earning assets
and interest-bearing liabilities, and the level of nonperforming assets.
Fluctuations in interest rates affect the demand of customers for GBB's and
PBC's products and services. GBB and PBC are subject to interest rate risk to
the degree that their interest-bearing liabilities reprice or mature more
slowly or more rapidly or on a different basis than their interest-earning
assets. Given GBB's and PBC's current volume and mix of interest-bearing
liabilities and interest-earning assets, GBB's and PBC'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. Therefore,
significant fluctuations in interest rates may have an adverse effect on GBB's
and PBC's results of operations.
Economic Conditions and Geographic Concentration. The operations of GBB and
PBC are located in Northern California and concentrated primarily in Santa
Clara, San Mateo and San Francisco Counties, which include the area known as
the "Silicon Valley." As a result of this geographic concentration, GBB's and
PBC's results depend largely upon economic conditions in these areas. A
deterioration in economic conditions in these market areas could have a
material adverse impact on the quality of GBB's and PBC's loan portfolio and
the demand for their products and services and, accordingly, their respective
results of operations. See "BUSINESS--GBB--Market Area" and "BUSINESS--PBC--
Market Area."
Government Regulation and Monetary Policy. The banking industry is subject
to extensive federal and state supervision and regulation. Such regulation
limits the manner in which GBB, the Banks and PBC conduct their respective
businesses, undertake new investments and activities and obtain financing.
This regulation is designed primarily for the protection of the deposit
insurance funds and consumers, and not to benefit holders of GBB's or PBC's
securities. Financial institution regulation has been the subject of
significant legislation in recent years, and may be the subject of further
significant legislation in the future, none of which is in the control of GBB
or PBC. Significant new laws or changes in, or repeals of, existing laws may
cause GBB's or PBC's results to differ materially. Further, federal monetary
policy, particularly as implemented through the Federal Reserve System,
significantly affects credit conditions for financial institutions, primarily
through open market operations in United States government securities, the
discount rate for bank borrowings and bank reserve requirements any material
change in these conditions would be likely to have a material impact on GBB's
and PBC's respective results of operations. See "SUPERVISION AND REGULATION."
Competition. The banking and financial services business in California
generally, and in GBB's and PBC's market areas specifically, is highly
competitive. The increasingly competitive environment is a result primarily of
changes in regulation, changes in technology and product delivery systems and
the accelerating pace of consolidation among financial services providers. The
Banks and PBC compete for loans, deposits and customers for financial services
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 or PBC. There can be no assurance
that the Banks or PBC will be able to compete effectively in their markets,
and the results of operations of the Banks and PBC could be adversely affected
if circumstances affecting the nature or level of competition change. See
"BUSINESS--GBB--Competition" and "BUSINESS--PBC--Competition."
Credit Quality. A significant source of risk for financial institutions such
as the Banks and PBC 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. GBB and PBC have adopted
underwriting and credit monitoring procedures and credit policies, including
the establishment and review of the allowance for credit losses, that each
company's respective management believes are appropriate to minimize this risk
by assessing the likelihood of nonperformance, tracking loan performance and
diversifying the respective credit portfolios. Such policies and procedures,
however, may not prevent unexpected losses that could materially adversely
affect the respective companies' results of operations.
18
<PAGE>
THE GBB MEETING
DATE, TIME AND PLACE
The GBB Meeting will be held on Wednesday, November 19, 1997 at the
principal administrative offices of GBB, located at 2860 West Bayshore Road,
Palo Alto, California 94303, at 5:00 p.m., California time, and any
adjournment or adjournments thereof.
PURPOSE
One purpose of the GBB Meeting is to consider and vote upon a proposal to
approve the principal terms of the Reorganization Agreement. The shareholders
of GBB will also consider and vote upon (i) a proposal to amend the articles
of incorporation of GBB to increase to 12,000,000 the number of shares of GBB
Stock authorized to be issued by GBB; (ii) a proposal to amend, upon
consummation of the Merger, the 1996 Option Plan to increase by 456,326 the
number of shares available for issuance thereunder, and to provide that all of
the shares issuable under such plan may be issued pursuant to the exercise of
incentive or nonqualified stock options granted under such plan; and (iii)
such other matters as may be properly brought before the GBB Meeting.
RECORD DATE
The GBB Board has fixed the close of business on October 21, 1997, as the
record date for the determination of shareholders entitled to notice of, and
to vote at, the GBB Meeting. Accordingly, only holders of record of shares of
GBB Stock at the close of business on the GBB Record Date will be entitled to
vote at the GBB Meeting and any adjournment thereof. As of GBB Record Date,
there were 3,338,083 shares of GBB Stock outstanding, held by approximately
846 shareholders of record.
PROXIES AND REVOCABILITY OF PROXIES
A proxy card for voting at the GBB Meeting is enclosed with the copy of this
Joint Proxy Statement/Prospectus being mailed to GBB shareholders. (A separate
proxy card for PBC shareholders voting at the PBC Meeting is being provided to
PBC shareholders. See "THE PBC MEETING--Proxies and Revocability of
Proxies."). When a proxy card is returned, properly signed and dated, the
shares represented thereby will be voted in accordance with the instructions
on the proxy card. If a shareholder does not attend the GBB Meeting and does
not return the signed proxy card, such holder's shares will not be voted and
this will have the effect of a vote "AGAINST" the matters to be voted on at
the GBB Meeting. Shareholders are urged to mark the box on the proxy card to
indicate how the shares represented by the proxy card are to be voted. If a
shareholder returns a signed proxy card but does not indicate how his or her
shares are to be voted, such shares will be voted "FOR" all proposals. The
proxy card also confers discretionary authority on the individuals appointed
by the GBB Board named on the proxy card to vote the shares represented
thereby on any other matter that is properly presented for action at the GBB
Meeting. A shareholder who has given a proxy may revoke it at any time prior
to its exercise at the GBB Meeting by delivering an instrument of revocation
to the Secretary of GBB, by duly executing and submitting a proxy card bearing
a later date, or by appearing at the GBB Meeting and voting in person. The
mere presence at the GBB Meeting of the person who has given a proxy will not
revoke such proxy. In addition, brokers who hold shares of GBB Stock as
nominees will not have discretionary authorization to vote such shares on any
of the matters to be voted thereon in the absence of instructions from the
beneficial owners.
COSTS OF SOLICITATIONS OF PROXIES
GBB will bear its own costs in connection with this solicitation. It is
contemplated that proxies will be solicited principally through the mails, but
directors, officers and regular employees of GBB may solicit proxies (for no
additional compensation) by personal interview, telephone, telex, telegram,
facsimile or similar means of communication. GBB has engaged Shareholder
Communications Corporation to solicit proxies from brokers, nominees,
fiduciaries and other custodians. The cost of this service is approximately
$4,500 plus out-of-pocket expenses in an anticipated maximum additional amount
of $3,000. Although there is no formal agreement to do so, GBB may reimburse
banks, brokerage houses and other custodians, nominees and fiduciaries for
their reasonable expense in forwarding these proxy materials to their
principals.
19
<PAGE>
OUTSTANDING SECURITIES; QUORUM
As of the GBB Record Date, there were issued and outstanding 3,338,083
shares of GBB Stock. GBB's articles of incorporation also authorize the
issuance of 4,000,000 shares of preferred stock, none of which were issued and
outstanding on the GBB Record Date.
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of GBB Stock is necessary to
constitute a quorum at the GBB Meeting. Abstentions will be counted for
purposes of establishing a quorum.
VOTE REQUIRED
GBB shareholders are entitled to one vote at the GBB Meeting for each share
of GBB Stock held of record by them on the GBB Record Date. The proposals
concerning approval of the Reorganization Agreement and amendment of GBB's
articles of incorporation require the affirmative vote of a majority of the
outstanding shares entitled to vote. The proposal concerning amendment of the
1996 Option Plan requires the affirmative vote of a majority of the shares
represented at the GBB Meeting either in person or by properly executed
proxies.
As of the GBB Record Date, directors and executive officers of GBB
beneficially owned an aggregate of 458,029 shares of GBB Stock (not including
shares issuable upon exercise of stock options), or approximately 13.7% of
those outstanding as of the GBB Record Date. Abstentions and broker non-votes
with respect to the proposals concerning approval of the Reorganization
Agreement and the amendment of GBB's articles of incorporation will have the
same effect as a vote "AGAINST" the proposal. Abstentions will have the same
effect as a vote "AGAINST" the proposal concerning the amendment of the 1996
Option Plan, while broker non-votes will have no effect on the outcome of this
proposal.
THE PBC MEETING
DATE, TIME AND PLACE
The PBC Meeting will be held on Wednesday, November 19, 1997 at the
principal offices of PBC, located at 1001 Broadway, Millbrae, California
94030, at 5:00 p.m., California time, and any adjournment or adjournments
thereof.
PURPOSE
The purpose of the PBC Meeting is to consider and vote upon (i) a proposal
to approve the principal terms of the Reorganization Agreement; and (ii) such
other business as may be properly brought before the PBC Meeting.
RECORD DATE
The PBC Board has fixed the close of business on October 21, 1997 as the
record date for the determination of shareholders entitled to notice of, and
to vote at, the PBC Meeting. Accordingly, only holders of record of shares of
PBC Stock at the close of business on the PBC Record Date will be entitled to
vote at the PBC Meeting. As of the PBC Record Date, there were 673,862 shares
of the PBC Stock outstanding, held by approximately 375 shareholders of
record.
PROXIES AND REVOCABILITY OF PROXIES
A proxy card for voting at the PBC Meeting is enclosed with the copy of this
Joint Proxy Statement/Prospectus being mailed to PBC shareholders. (A separate
proxy card for GBB shareholders voting at the GBB Meeting is being provided to
GBB shareholders. See "THE GBB MEETING--Proxies and Revocability of Proxies.")
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not attend the PBC Meeting and if a
shareholder does not return the signed proxy card, such holder's shares will
not be voted and this will have the effect of a vote against the approval of
the Reorganization Agreement. Shareholders are
20
<PAGE>
urged to mark the box on the proxy card to indicate how their shares are to be
voted. If a shareholder returns a signed proxy card but does not indicate how
the shares represented by the proxy card are to be voted, such shares will be
voted "FOR" approval of the Reorganization Agreement. The proxy card also
confers discretionary authority on the individuals appointed by the PBC Board
named on the proxy card to vote the shares represented thereby on any other
matter that is properly presented for action at the PBC Meeting. A shareholder
who has given a proxy may revoke it at any time prior to its exercise at the
PBC Meeting by delivering an instrument of revocation to the Secretary of PBC,
by duly executing and submitting a proxy card bearing a later date, or by
appearing at the PBC Meeting and voting in person. The mere presence at the
PBC Meeting of the person who has given a proxy will not revoke such proxy. In
addition, brokers who hold shares of PBC Stock as nominees will not have
discretionary authority to vote such shares in connection with the proposal to
approve the principal terms of the Reorganization Agreement in the absence of
instructions from the beneficial owners.
Proxies will be solicited through the use of the mails. In addition, certain
directors, officers and employees of PBC may solicit proxies (for no
additional compensation) by personal interview, telephone, telex, telegram,
facsimile or similar means of communication.
COSTS OF SOLICITATION OF PROXIES
PBC will bear its own costs in connection with this solicitation. It is
contemplated that proxies will be solicited principally through the mails, but
directors, officers and regular employees of PBC may solicit proxies (for no
additional compensation) by personal interview, telephone, telex, telegram,
facsimile or similar means of communication. Although there is no formal
agreement to do so, PBC may reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expense in
forwarding these proxy materials to their principals. In addition, PBC may pay
for and utilize the services of individuals and companies not regularly
employed by PBC in connection with the solicitation of proxies if the PBC
Board determines that this is advisable.
OUTSTANDING SECURITIES; QUORUM
As of the PBC Record Date, there were issued and outstanding 673,862 shares
of PBC Stock. PBC's articles of incorporation also authorize the issuance of
1,000,000 shares of Serial Preferred Stock, none of which were issued and
outstanding on the PBC Record Date.
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of PBC Stock is necessary to
constitute a quorum at the PBC Meeting. Abstentions will be counted for
purposes of establishing a quorum.
VOTE REQUIRED
PBC shareholders are entitled to one vote at the PBC Meeting for each share
of PBC Stock held of record by them on the PBC Record Date. The proposal
concerning the approval of the Reorganization Agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of PBC
Stock.
As of the PBC Record Date, directors and executive officers of PBC
beneficially owned an aggregate of 223,697 shares of PBC Stock (not including
shares issuable upon exercise of stock options), or approximately 33.2% of
those outstanding as of the PBC Record Date. PBC has been advised that all of
its directors and executive officers intend to vote all such shares in favor
of the adoption of the Reorganization Agreement. See "THE MERGER--Agreements
with Certain Shareholders."
Abstentions and broker non-votes with respect to the proposal concerning
approval of the Reorganization Agreement will have the effect of a vote
"AGAINST" the proposal.
21
<PAGE>
BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT--GBB
The following table sets forth information as of September 30, 1997
concerning the beneficial ownership of GBB Stock for the directors and the
executive officers of GBB and as a group. Unless otherwise indicated, each
director and executive officer listed below possesses sole voting power and
sole investment power. All of the shares shown in the following table are
owned both of record and beneficially except as indicated in the notes to the
table. As of September 30, 1997, no person known to GBB owned more than five
percent (5%) of the outstanding shares. No director or executive officer of
PBC holds shares of GBB Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(2)
---------------------------------
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES CLASS(3)
- --------------------------------------- --------------- ----------------
<S> <C> <C>
C. Donald Allen (4)........................ 55,937 1.67%
Murray B. Dey (5).......................... 21,656 0.65
John M. Gatto (6).......................... 26,489 0.79
David R. Hood (7).......................... 21,638 0.65
James E. Jackson (8)....................... 49,299 1.47
David L. Kalkbrenner (9)................... 40,803 1.22
Rex D. Lindsay (10)........................ 51,799 1.55
Duncan L. Matteson (11).................... 42,989 1.29
Glen McLaughlin (12)....................... 33,503 1.00
Hall Palmer (13)........................... 21,156 0.63
Dick J. Randall (14)....................... 107,194 3.21
Donald H. Seiler (15)...................... 36,480 1.09
Steven C. Smith (16)....................... 32,221 0.96
Warren R. Thoits (17)...................... 24,768 0.74
Edwin E. van Bronkhorst (18)............... 26,569 0.80
All directors and executive officers as a
group(15 persons) (19).................... 592,501 17.05
</TABLE>
- --------
(1) The address for each of the beneficial owners is care of Greater Bay
Bancorp, 2860 West Bayshore Road, Palo Alto, California 94303.
(2) Includes shares issuable upon the exercise of stock options exercisable
within 60 days of September 30, 1997.
(3) Shares of GBB Stock issuable upon exercise of stock options exercisable
within 60 days of September 30, 1997 are deemed outstanding for computing
the percentage of the person holding such securities but are not deemed
outstanding for computing the percentage of any other person.
(4) Includes 414 shares held by Mr. Allen's spouse, 3,579 shares held in an
IRA for Mr. Allen, 598 shares held in a 401(k) plan for Mr. Allen and
12,732 shares issuable upon the exercise of stock options exercisable
within 60 days of September 30, 1997.
(5) Includes 14,644 shares held jointly with Mr. Dey's spouse as trustees of
the Murray B. Dey and Wendy H. Dey Trust dated April 23, 1982 and 4,889
shares issuable upon the exercise of stock options exercisable within 60
days of September 30, 1997.
(6) Includes 9,797 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1997.
(7) Includes 5,526 shares held in an IRA for Mr. Hood, 683 shares in a 401(k)
plan for Mr. Hood and 13,883 shares issuable upon the exercise of options
exercisable within 60 days of September 30, 1997.
(8) Includes 32,229 shares held jointly by James E. Jackson and his spouse,
1,491 shares held in an IRA for the benefit of Mr. Jackson's spouse,
7,063 shares held in an IRA for Mr. Jackson, 1,385 shares held in a
401(k) plan for Mr. Jackson, and 7,131 shares issuable upon the exercise
of options exercisable within 60 days of September 30, 1997.
(9) Includes 9,047 shares held in an IRA for Mr. Kalkbrenner, 1,413 shares
held in a 401(k) plan for Mr. Kalkbrenner and 15,254 shares issuable upon
the exercise of stock options exercisable within 60 days of September 30,
1997.
22
<PAGE>
(10) Includes 36,199 shares held by the Rex D. and Leanor L. Lindsay Family
Trust dated February 8, 1977, 1,906 shares held by Mr. Lindsay as
custodian for his minor grandchildren, 1,386 shares held by Mr. Lindsay
for his sister-in-law, Ms. Lochler, and 12,123 shares issuable upon the
exercise of options exercisable within 60 days of September 30, 1997.
(11) Includes 30,000 shares held jointly with Mr. Matteson's spouse as
trustees of the Matteson Family Trust, 9,000 shares held by the Matteson
Realty Services, Inc. Defined Benefit Employees' Retirement Trust and
3,989 shares issuable upon the exercise of stock options exercisable
within 60 days of September 30, 1997.
(12) Includes 16,417 shares issuable upon the exercise of stock options
exercisable within 60 days of September 30, 1997.
(13) Includes 11,129 shares held in the William Palmer Trust, 1,548 shares
held in an IRA for Mr. Palmer, 1,396 shares held in a 401(k) plan for Mr.
Palmer and 7,083 shares issuable upon the exercise of stock options
exercisable within 60 days of September 30, 1997.
(14) Includes 104,991 shares held in by the Dick J. and Carolyn L. Randall
Trust and 2,018 shares issuable upon the exercise of stock options
exercisable within 60 days of September 30, 1997.
(15) Includes 33,491 shares held jointly with Mr. Seiler's spouse as trustees
of the Seiler Family Trust and 2,989 shares issuable upon the exercise of
stock options exercisable within 60 days of September 30, 1997.
(16) Includes 2,506 shares held in a 401(k) Plan for Mr. Smith, 370 shares
held in an IRA for the benefit of Mr. Smith's spouse, 9,323 shares held
jointly by Mr. Smith and his spouse and 20,022 shares issuable upon the
exercise of stock options exercisable within 60 days of September 30,
1997.
(17) Includes 9,832 shares held by Mr. Thoits as trustee of the Warren R.
Thoits Trust dated December 30, 1983, 10,947 shares for which Mr. Thoits
is the record holding trustee and 3,989 shares issuable upon the exercise
of stock options exercisable within 60 days of September 30, 1997.
(18) Includes 22,580 shares held jointly with Mr. van Bronkhorst's spouse as
trustees of the E. E. van Bronkhorst Trust dated July 12, 1997 and 3,989
shares issuable upon the exercise of stock options exercisable within 60
days of September 30, 1997.
(19) Includes 136,305 shares issuable upon the exercise of stock options
exercisable within 60 days of September 30, 1997.
23
<PAGE>
BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT--PBC
The following table sets forth information as of September 30, 1997
concerning the beneficial ownership of PBC Stock for the directors and
executive officers of PBC, and as a group. Unless otherwise indicated, each
director and executive officer listed below possesses sole voting power and
sole investment power. All of the shares shown in the following table are
owned both of record and beneficially except as indicated in the notes to the
table. As of September 30, 1997, no person known to PBC owned more than five
percent (5%) of the outstanding shares, except Mr. Azzopardi, Mr. Corey and
Mr. Welch. No director or executive officer of GBB shares holds shares of PBC
Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)
---------------------------------
NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(2) SHARES OF CLASS(3)
- --------------------------------------- --------------- ---------------
<S> <C> <C>
Francis G. Azzopardi (4)................... 35,801 5.31%
Michael W. Bondy (5)....................... 2,432 *
George R. Corey (6)........................ 34,594 5.13
Mark F. Doiron (7)......................... 21,155 3.14
Robert A. Marshall (8)..................... 23,385 3.47
Thomas T. Pangelinan (9)................... 19,089 2.83
William J. Schneider (10).................. 20,129 2.99
Michael E. Vano (11)....................... 15,367 2.28
Joseph W. Welch (12)....................... 86,214 12.79
All directors and executive officers as a
group (9 persons) (13).................... 258,166 38.31
</TABLE>
- --------
* Less than 1%.
(1) Includes shares beneficially owned, directly and indirectly, together
with associates and includes shares that may be acquired upon the
exercise of stock options that are currently exercisable or exercisable
within 60 days of September 30, 1997. Subject to applicable community
property laws and shared voting and investment power with a spouse, the
persons listed have sole voting and investing power with respect to such
shares unless otherwise noted. As of September 30, 1997, there were
673,862 shares of PBC Stock outstanding.
(2) The address for each of the beneficial owners is care of Peninsula Bank
of Commerce, 1001 Broadway, Millbrae, California 94030.
(3) Shares of PBC Stock issuable upon exercise of stock options exercisable
within 60 days of September 30, 1997 are deemed outstanding for computing
the percentage of the person holding such securities but are not deemed
outstanding for computing the percentage of any other person.
(4) Includes 2,128 shares held jointly by Francis G. Azzopardi and his
spouse, 31,673 shares held by the Azzopardi Family Trust, and 2,000
shares issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of September 30, 1997.
(5) Includes 1,852 shares issuable upon the exercise of stock options that
are currently exercisable or exercisable within 60 days of September 30,
1997.
(6) Includes 2,000 shares issuable upon the exercise of stock options that
are currently exercisable or exercisable within 60 days of September 30,
1997.
(7) Includes 16,728 shares issuable upon the exercise of stock options that
are currently exercisable or exercisable within 60 days of September 30,
1997.
(8) Includes 2,000 shares issuable upon the exercise of stock options that
are currently exercisable or exercisable within 60 days of September 30,
1997.
(9) Includes 15,200 shares held jointly by Thomas T. Pangelinan and his
spouse and 3,889 shares issuable upon the exercise of stock options that
are currently exercisable or exercisable within 60 days of September 30,
1997.
(10) Includes 2,000 shares issuable upon the exercise of stock options that
are currently exercisable or exercisable within 60 days of September 30,
1997.
(11) Includes 13,367 shares held jointly by Michael E. Vano and his spouse, as
trustees of the Michael Vano and Joanne Vano Trust and 2,000 shares
issuable upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of September 30, 1997.
(12) Includes 84,214 shares held by the Joseph W. Welch Revocable Trust II and
2,000 shares issuable upon the exercise of stock options that are
currently exercisable or exercisable within 60 days of September 30,
1997.
(13) Includes 34,469 shares the directors and executive officers have the
right to acquire upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of September 30, 1997.
24
<PAGE>
THE MERGER
The Reorganization Agreement provides for the acquisition of PBC by GBB
through the Merger of Newco with and into PBC, with PBC as the surviving
corporation and with PBC thereafter operating as a banking subsidiary of GBB.
The obligation of the parties to consummate the Merger is subject to the
satisfaction of certain conditions, including the approval of the
Reorganization Agreement by the shareholders of GBB and PBC. See "THE
REORGANIZATION AGREEMENT--Conditions to the Merger" and "THE MERGER--
Regulatory Approvals."
BACKGROUND AND REASONS FOR THE MERGER AND MANAGEMENT'S RECOMMENDATIONS--GBB
The GBB Board began to consider the possibility of a business combination
with PBC during the first quarter of 1997. After various discussions and
negotiations among certain of GBB's and PBC's directors and officers and PBC's
financial advisor, Hoefer, PBC accepted a nonbinding expression of interest
letter of GBB on July 29, 1997 to effect the Merger. Following the acceptance
of the expression of interest letter, each party conducted a due diligence
examination of the other. Upon completion of such due diligence examinations
and after certain additional discussions and negotiations, each of the GBB
Board and the PBC Board held a meeting to discuss and evaluate the proposed
transaction.
At such meeting on August 19, 1997, the GBB Board, among other things, (i)
reviewed and discussed the proposed transaction; (ii) discussed the initial
results of the due diligence examination of PBC; (iii) reviewed preliminary
drafts of the Reorganization Agreement and exhibits thereto; and (iv)
authorized certain representatives of GBB to continue to negotiate the terms
and conditions of the proposed Merger.
In connection with its analysis of the fairness of the transaction, the GBB
Board retained Hovde to advise it as to the fairness to the GBB shareholders
of the consideration to be received in the transaction from a financial point
of view.
On September 5, 1997, the GBB Board met to further consider the proposed
transaction and to review the Reorganization Agreement and related documents.
Representatives of GBB's outside legal counsel, Manatt, Phelps & Phillips,
LLP, Coopers and Hovde attended this meeting and discussed the Merger with the
GBB Board. Hovde reviewed the results of its analysis of the Merger and
delivered to the GBB Board its opinion that the consideration to be received
in the Merger was fair to the GBB shareholders from a financial point of view
(see "--Opinion of GBB Financial Advisor").
Thereafter, the GBB Board approved, and authorized the execution of, the
Reorganization Agreement. In connection with the execution of the
Reorganization Agreement, PBC granted to GBB an option to purchase up to 19.9%
of the outstanding PBC Stock, exercisable only upon the occurrence of certain
specified events. See "THE STOCK OPTION AGREEMENT."
The GBB Board believes the Merger to be in the best interests of GBB, its
shareholders and its banking customers. The GBB Board believes that the Merger
will position GBB, on a consolidated basis, closer to its strategic objective
of becoming the leading independent financial services provider in the San
Francisco Peninsula market area and strengthen GBB, on a consolidated basis,
in terms of management, growth opportunities and profitability.
The GBB Board believes that the combination of GBB and PBC will have a
positive impact on the operations of PBC and GBB on a consolidated basis. PBC,
as a new subsidiary of GBB's multi-bank holding company structure, will have
the advantage of consolidation and centralization of certain management and
operations functions and certain resulting economies of scale and will benefit
from an increased lending limit with respect to loan volume and growth.
Furthermore, it is believed that GBB, as a larger independent financial
institution, will be better able to compete with major banks in the
communities now served by the Banks and PBC and will benefit such communities
by providing increased banking services. The GBB Board also anticipates that
the Merger will present significant revenue enhancement opportunities for the
combined entity.
25
<PAGE>
These opportunities result from, among other factors: (i) an increased ability
to cross-sell a wider variety of banking products and services; (ii) the
ability to generate increased loan and fee income from PBC customers as a
result of the higher lending limits available to the combined entity; (iii)
the potential to increase overall market share in the communities presently
served by GBB and PBC as a result of the wider range of products and services
to be offered through the combined entity; and (iv) the ability to leverage
marketing expense and thereby improve the return on the combined entity's
marketing investment. Accordingly, the GBB Board has approved the Merger and
the transactions contemplated in connection therewith and recommends approval
of the Merger by the shareholders of GBB.
In reaching its conclusion, the GBB Board considered certain information,
including, among other things, (i) information concerning the financial
performance and condition, business operations, capital levels, asset quality,
loan portfolio breakdown and prospects of PBC; (ii) the structure of the
transaction, including the fact that GBB shareholders would retain
approximately 81% of the common equity of GBB on a fully diluted basis; (iii)
the fact that the GBB Board would be comprised of the 10 current directors of
the GBB Board and George R. Corey, current Chairman of the PBC Board, and that
Mark P. Doiron, President and Chief Executive Officer of PBC, would continue
to serve in such capacities and would be appointed to the Executive Management
Committee of GBB as of the Effective Time; (iv) the terms of the
Reorganization Agreement, the Stock Option Agreement and other documents
executed in connection with the Merger and its review of such documents with
its financial and legal advisors; (v) the presentation of Hovde; (vi) the
opinion of Hovde that the consideration to be received in the Merger is fair
to the shareholders of GBB from a financial point of view; (vii) the GBB
Board's review with its legal and financial advisors of other merger targets;
(viii) the compatibility of PBC with GBB and the complementary lines of
business; (ix) the geographic distribution of PBC offices vis-a-vis GBB's
strategic plan; (x) the ability of a larger institution to compete in the
banking environment and to leverage overhead costs; (xi) the effect of the
Merger on existing shareholders, employees, officers and customers of GBB;
(xii) the current and prospective economic environment and regulatory and
competitive burdens and constraints facing commercial banks; (xiii) the impact
of the Merger on the communities served by the Banks and PBC, and the
increased ability to serve the communities through the larger branch network;
(xiv) the results of the due diligence conducted as to the financial condition
of PBC, and the prospects of economic viability of the combined institution;
and (xv) the pro forma financial statements of the combined companies, and the
capitalization of the combined companies in excess of "well capitalized"
requirements of federal regulatory agencies.
In addition, in analyzing the proposed transaction, the GBB Board considered
that PBC possesses an excellent customer and deposit base which complements
GBB's existing customer and deposit base and provides broader geographic
coverage of strategic target markets already identified and initially
penetrated by GBB through the Banks. The GBB Board also considered that the
larger size of the combined company would increase shareholder liquidity, make
future acquisitions more possible and leverage GBB's overall expense
structure. In determining the Conversion Ratio, GBB and Hovde analyzed the
relative contributions of each company relative to: assets (size and quality),
loans, nonperforming assets ("NPAs"), allowance for loan and lease losses
("ALLL"), deposits, equity, tangible equity, loans/deposits, NPAs/assets,
ALLL/NPAs, equity/assets, net interest income, noninterest income, noninterest
expense, provision, taxes, net income, return on assets and return on equity.
The GBB Board did not assign any specific or relative weights to the factors
considered above.
BACKGROUND AND REASONS FOR THE MERGER AND MANAGEMENT'S RECOMMENDATIONS--PBC
The PBC Board first considered a business combination with GBB in the spring
of 1997 when a representative of GBB approached PBC about such a possibility.
The PBC Board authorized its representatives to conduct further discussions to
determine whether a transaction might be structured that would serve the best
interests of the shareholders of PBC. To assist it in its analysis, the PBC
Board engaged Hoefer to provide it with financial advice with respect to any
such transaction.
In determining to consider a possible transaction, the PBC Board took into
account several factors. Because PBC has had relatively strong earnings in
recent years, the PBC Board believed that PBC could continue to
26
<PAGE>
operate successfully as an independent bank. A threshold requirement imposed
by the PBC Board was that any proposal must be fair to the shareholders of PBC
from a financial point of view. Beyond PBC's profitability, the PBC Board
expressed concern about its size and moderate growth in an increasingly
competitive and technologically advanced financial services environment. The
PBC Board took into consideration whether a potential merger partner had
experienced significant growth and had prospects for continued growth as well
as profitability. The PBC Board also took into consideration whether a
proposed business combination could be structured as a pooling transaction and
as a tax-free reorganization, since these factors would provide a benefit to
PBC shareholders if a transaction took the form of a stock-for-stock merger.
Another significant factor that was considered was whether a proposed business
combination would result in the continuation of PBC as an independent,
community-oriented entity, since PBC's articles of incorporation authorize the
PBC Board to take account of a transaction's effect on the community.
During the course of its consideration of a transaction with GBB, PBC was
approached by two other institutions about a possible business combination.
PBC determined that the prospects of a combination with GBB had several
advantages over other possible transactions. The PBC Board concluded that a
proposed combination with GBB under the terms under discussion appeared to be
superior to other tentative proposals in all respects. Factors that were noted
in particular were GBB's growth, its past profitability and its prospective
profitability, its apparent competitive strength in its market, the geographic
proximity of GBB's market area to PBC's market area, the liquidity in GBB
Stock provided by its listing for quotation on Nasdaq, the availability of
pooling accounting, the tax-free nature of the proposed form of transaction
and the proposed continued existence of PBC as a community bank under GBB as a
multi-bank holding company.
In connection with its analysis of the fairness of the transaction, the PBC
Board retained Hoefer to advise it as to the fairness to the PBC shareholders
of the consideration to be received in the transaction from a financial point
of view.
On September 4, 1997, the PBC Board met to consider the transaction and to
review the Reorganization Agreement and related documents. At this meeting,
Hoefer discussed with the PBC Board its analysis of the Merger and delivered
to the PBC Board its verbal opinion, later confirmed with a written opinion,
that the consideration to be received in the Merger was fair to the PBC
shareholders from a financial point of view (see "--Opinion of PBC Financial
Advisor").
Thereafter, the PBC Board approved, and authorized the execution of, the
Reorganization Agreement. In connection with the execution of this agreement,
PBC issued to GBB an option to purchase up to 19.9% of the outstanding PBC
Stock, exercisable only upon the occurrence of certain specified events. See
"THE STOCK OPTION AGREEMENT."
The PBC Board believes that the combination of GBB and PBC will have a
positive impact on the operations of PBC and GBB on a consolidated basis. PBC,
as a new subsidiary in GBB's multi-bank holding company structure, will have
the advantage of consolidation and centralization of certain management and
operations functions and certain resulting economies of scale and will benefit
from an increased lending limit with respect to loan volume and growth.
Furthermore, it is believed that PBC, as part of a larger independent
financial services holding company, will be better able to compete with major
banks in the communities now served by PBC and will benefit such communities
by providing increased banking services. Accordingly, the PBC Board has
approved the Merger and the transactions contemplated in connection therewith
and recommends approval of the Merger by the shareholders of PBC.
In reaching its conclusion, the PBC Board considered information, including,
among other things, (i) information concerning the financial performance and
condition, business operations, capital levels, asset quality, loan portfolio
breakdown and prospects of GBB; (ii) the structure of the transaction; (iii)
the fact that George R. Corey, current Chairman of PBC, would be added to the
GBB Board; (iv) the fact that the PBC Board would be comprised of the six
current members of the PBC Board and David L. Kalkbrenner, President and Chief
Executive Officer of GBB; (v) the fact that Mark F. Doiron, President and
Chief Executive Officer of PBC
27
<PAGE>
would continue to serve in such capacities, and would be appointed to the
Executive Management Committee of GBB, as of the Effective Time; (vi) the
terms of the Reorganization Agreement, the Stock Option Agreement, and other
documents executed in connection with the Merger; (vii) the opinion of Hoefer
that the Merger is fair to the shareholders of PBC from a financial point of
view; (viii) the results of its due diligence examination of GBB; (ix) the PBC
Board's review with its legal and financial advisors of alternatives to the
Merger; (x) the current and prospective economic environment and regulatory
and competitive burdens and constraints facing community banks; (xi) the pro
forma financial statements of the combined companies, and the capitalization
of the combined companies in excess of "well capitalized" requirements of
federal regulatory agencies; and (xii) the more liquid market for GBB Stock.
The PBC Board did not assign any specific or relative weight to the factors
considered above.
OPINION OF GBB FINANCIAL ADVISOR
GBB retained Hovde to render an opinion as to the fairness of the Merger,
from a financial point of view, to the shareholders of GBB. Hovde was selected
to act as GBB's financial advisor based upon its qualifications, expertise and
reputation, as well as its familiarity with GBB's business and market area.
Representatives of Hovde attended a meeting of the GBB Board on September 5,
1997 at which the GBB Board approved the Reorganization Agreement. At such
meeting, Hovde made a presentation to the GBB Board and rendered a written
opinion in the form attached hereto (the "Hovde Opinion") to the GBB Board
that, as of such date, the consideration to PBC pursuant to the Reorganization
Agreement was fair, from a financial point of view, to the holders of GBB
Stock. The Hovde Opinion was reaffirmed as of the date of this Joint Proxy
Statement/Prospectus. Hovde relied upon analyses such as those described below
in connection with rendering the Hovde Opinion and providing its written
opinion as of the date hereof. No limitations were imposed by the GBB Board
upon Hovde with respect to the investigations made or procedures followed by
it in rendering the Hovde Opinion or the written confirmation thereof.
THE FULL TEXT OF THE WRITTEN CONFIRMATION OF THE HOVDE OPINION IS ATTACHED
HERETO AS APPENDIX D. SHAREHOLDERS OF GBB ARE URGED TO READ THE WRITTEN
CONFIRMATION OF THE HOVDE OPINION IN ITS ENTIRETY. THE HOVDE OPINION WAS
DIRECTED TO THE GBB BOARD, ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT
OF VIEW, OF THE CONSIDERATION PURSUANT TO THE REORGANIZATION AGREEMENT, AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF GBB AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE. THE HOVDE OPINION WAS RENDERED TO THE GBB BOARD FOR
ITS CONSIDERATION IN DETERMINING WHETHER TO APPROVE THE REORGANIZATION
AGREEMENT. THE FOLLOWING SUMMARY OF THE HOVDE OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE WRITTEN CONFIRMATION OF THE
HOVDE OPINION.
In arriving at the Hovde Opinion, Hovde reviewed certain publicly available
financial information and other information concerning GBB and PBC and certain
internal financial analyses and other information furnished to it by GBB and
PBC. Hovde also held discussions with members of the senior management of GBB
and PBC regarding the business and prospects of their respective financial
institutions and the joint prospects of the combined company. In addition,
Hovde (i) reviewed the reported price and trading activity of GBB and PBC
Stock; (ii) compared certain financial and stock market information of GBB and
PBC; (iii) reviewed the Reorganization Agreement; (iv) reviewed the financial
terms of certain recent business combinations which Hovde deemed comparable to
the Merger, in the whole or in part; (v) reviewed the potential pro forma
impact of the Merger on GBB's financial condition, operating results and per
share figures; and (vi) performed such other studies and analyses and
considered such other factors as Hovde deemed appropriate.
In conducting its review and arriving at the Hovde Opinion, Hovde assumed
and relied upon, without independent verification, the accuracy, completeness
and fairness of all of the financial and other information reviewed by and
discussed with them for purposes of rendering the Hovde Opinion. With respect
to the financial forecasts and other information reviewed by Hovde in
rendering the Hovde Opinion (including, without limitation, projected cost
savings and revenue enhancements from the Merger), Hovde assumed that such
financial forecasts were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective managements of
GBB and PBC as to the likely future financial performance of GBB
28
<PAGE>
and PBC. Hovde did not make or obtain any independent evaluations or
appraisals of the assets or liabilities of either GBB or PBC or their
respective subsidiaries, nor did it review any individual loan files of GBB or
PBC. Hovde is not an expert in the evaluation of allowances for loan losses,
has not made an independent evaluation of the adequacy of the allowance for
loan losses, and has assumed such allowances were adequate and complied fully
with applicable law, regulatory policy and sound banking practice. Hovde
assumed that the Merger will have the tax, accounting and legal effects
(including, without limitation, that the Merger will be accounted for as a
pooling of interests) described in the Reorganization Agreement. Moreover,
Hovde also assumed that the Merger in all respects is, and will be
consummated, in compliance with all laws and regulations applicable to GBB and
PBC.
In connection with rendering the Hovde Opinion, Hovde performed a variety of
financial analyses, which are summarized below. While the following summary
describes all analyses and factors that Hovde deemed material in its
presentation to the GBB Board, it is not a comprehensive description of all
analyses and factors considered by Hovde. The preparation of a fairness
opinion is a complex process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Accordingly,
notwithstanding the separate factors discussed below, Hovde believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by them, without considering all
analyses and factors, could create an incomplete view of the evaluation
process underlying the Hovde Opinion. No one of the analyses performed by
Hovde was assigned a greater significance than any other. The analyses
performed by Hovde are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty. Additionally, analyses relating to the values of
business do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold. The Hovde Opinion is based on market,
economic and other conditions as they existed and could be evaluated as of the
date of the Hovde Opinion.
Sensitivity Analysis. Hovde analyzed the Conversion Ratio formulas of the
Reorganization Agreement and conducted a sensitivity analysis assuming a GBB
Stock closing price from a low of $30.00 per share and a high of $52.00 per
share and concluded that consideration paid to PBC, at any given GBB Stock
closing price, was fair from a financial point of view to the shareholders of
GBB at all points within those range of values.
Pro Forma Acquisition Analysis. Hovde analyzed the pro forma effects of the
Merger on GBB shareholders by comparing, among other things, the projected
fully diluted earnings per share for 1998, and the book value per share as of
June 30, 1997, for GBB with the pro forma estimates of fully diluted earnings
per share for 1998 and book value per share as of June 30, 1997 for PBC. The
analysis did not include non-recurring transaction expenses and assumed,
unless otherwise stated, that Merger-related cost savings would be fully
realized in 1998, and that revenue enhancements would be realized beginning in
1998 as a result of incremental earning assets and additional trust fee
income. Based on certain assumptions, including those with respect to cost
savings and revenue enhancements from the Merger, and the stand-alone earnings
projections of GBB (based on estimates provided by GBB management) and PBC
(based on estimates provided by PBC management), the analysis showed that the
Merger would be accretive to GBB's estimated earnings per share in 1998.
Additional Considerations. In arriving at its opinion, Hovde also considered
a number of qualitative factors that might result from the Merger, including
enhanced lending capabilities, added market share and deposit gathering
capabilities, improved liquidity for shareholders, and increased acquisition
opportunities for GBB.
Compensation of Financial Advisor. Pursuant to the terms of an engagement
letter dated July 30, 1997, GBB will pay Hovde an aggregate fee of $50,000 for
acting as a financial advisor to GBB in connection with the Merger, including
the rendering of the Hovde Opinion, to be paid upon completion of the
transaction. Whether or not the Merger is consummated, GBB also has agreed to
reimburse Hovde for its reasonable out-of-pocket expenses incurred in
connection with the transaction. GBB has also agreed to indemnify Hovde and
certain related persons against certain liabilities relating to or arising out
of its engagement.
29
<PAGE>
OPINION OF PBC FINANCIAL ADVISOR
PBC retained Hoefer to render financial advisory and investment banking
services in connection with the proposed Merger of PBC with GBB. Hoefer
rendered a written opinion (the "Hoefer Opinion") to the PBC Board to the
effect that the financial terms of the Merger as defined in section 2.3(a) of
the Reorganization Agreement, which terms include certain possible
adjustments, are fair to the holders of PBC Stock from a financial point of
view. No limitations were imposed by the PBC Board upon Hoefer with respect to
the investigations made or procedures followed in rendering the Hoefer
Opinion.
THE TEXT OF THE HOEFER OPINION, DATED AS OF SEPTEMBER 19, 1997 WHICH SETS
FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
UNDERTAKEN BY HOEFER, IS ATTACHED HERETO AS APPENDIX E. PBC SHAREHOLDERS ARE
URGED TO READ THE HOEFER OPINION IN ITS ENTIRETY. IN FURNISHING SUCH OPINION,
HOEFER DOES NOT ADMIT THAT IT IS AN EXPERT WITH RESPECT TO THE REGISTRATION
STATEMENT OF WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS IS PART WITHIN THE
MEANING OF THE TERM "EXPERTS" AS USED IN THE SECURITIES ACT AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER NOR DOES IT ADMIT THAT ITS OPINION
CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE
SECURITIES ACT. THE SUMMARY OF THE PROCEDURES AND ANALYSIS PERFORMED AND
ASSUMPTIONS USED BY HOEFER SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE TEXT OF THE HOEFER OPINION.
THE HOEFER OPINION IS DIRECTED TO THE PBC BOARD AND IS DIRECTED ONLY TO THE
CONSIDERATION TO BE RECEIVED BY PBC'S SHAREHOLDERS IN THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY PBC SHAREHOLDER AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE AT THE PBC MEETING.
In arriving at its opinion, Hoefer has reviewed and analyzed, among other
things, the following: (i) the Reorganization Agreement; (ii) certain publicly
available financial and other data with respect to GBB and PBC, including
consolidated financial statements for recent years and interim periods to June
30, 1997; (iii) certain other publicly available financial and other
information concerning PBC and GBB and the trading markets for the publicly
traded securities of PBC and GBB; (iv) publicly available information
concerning other banks and holding companies, the trading markets for their
securities and the nature and terms of certain other merger transactions
Hoefer believes relevant to its inquiry; and (v) evaluations and analyses
prepared and presented to the PBC Board or a committee thereof in connection
with the Merger. Hoefer has held discussions with senior management of PBC and
of GBB concerning their past and current operations, financial condition and
prospects.
Hoefer reviewed with the senior management of PBC earnings projections for
1997 for PBC as a stand-alone entity, assuming the Merger does not occur.
Hoefer reviewed GBB's five year projection through the year 2001 for GBB as a
stand-alone entity, assuming the Merger does not occur. Hoefer also reviewed
with the senior management of GBB the projected operating cost savings
expected by GBB to be achieved in each such year resulting from the Merger
with PBC. Certain financial projections for the combined companies and for PBC
and GBB as stand-alone entities were derived by Hoefer based partially upon
the projections described above, as well as Hoefer's own assessment of general
economic, market and financial conditions.
Hoefer took into account its assessment of general economic, market and
financial conditions and its experience in other transactions, as well as its
experience in securities valuation and its knowledge of the banking industry
generally. Hoefer considered such financial and other factors as it deemed
appropriate under the circumstances. The Hoefer Opinion was necessarily based
upon conditions as they existed and could only be evaluated on the date
thereof and the information made available to Hoefer through the date thereof.
In conducting its review and in arriving at the Hoefer Opinion, Hoefer
relied upon and assumed the accuracy and completeness of the financial and
other information provided to it or publicly available and did not attempt
independently to verify the same. Hoefer relied upon the managements of PBC
and GBB as to the reasonableness of the financial and operating forecasts,
projections and projected operating cost savings. Hoefer also assumed, without
independent verification, that the aggregate allowances for loan losses for
PBC and GBB were adequate to cover such losses. Hoefer did not make or obtain
any evaluations or appraisals of the property of PBC or GBB, nor did Hoefer
examine any individual loan credit files. The Hoefer Opinion is limited to the
fairness,
30
<PAGE>
from a financial point of view, to the shareholders of PBC of the
consideration to be received by PBC's shareholders in the Merger which was
determined by arm's length negotiations and does not address PBC's underlying
decision to proceed with the Merger.
In connection with rendering its opinion to the PBC Board, Hoefer performed
certain financial analyses, which are summarized below. The summary set forth
below does not purport to be a complete description of the presentation by
Hoefer to the PBC Board or of the analyses performed by Hoefer. Hoefer
believes that its analysis must be considered as a whole and that selecting
portions of such analyses and the factors considered therein, without
considering all factors and analyses, could create an incomplete view of the
analysis and the processes underlying the Hoefer Opinion. The preparation of a
fairness opinion is a complex process involving subjective judgments and is
not necessarily susceptible to partial analysis or summary description. In its
analysis, Hoefer made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of PBC and GBB. Any estimates contained in Hoefer's
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such estimates. Estimates of
values of companies do not purport to be appraisals or necessarily reflect the
prices at which companies or their securities may actually be sold. None of
the financial analyses performed by Hoefer was assigned a greater significance
by Hoefer than any other.
Neither PBC nor GBB publicly discloses internal management financial
forecasts and projections of the type provided to Hoefer in connection with
its review of the proposed Merger. Such forecasts and projections were not
prepared with a view towards public disclosure. The forecasts, projections and
projected operating cost savings prepared by Hoefer were based on numerous
variables and assumptions which are inherently uncertain, including, without
limitation, factors related to general economic and market conditions.
Accordingly, actual results could vary significantly from those set forth in
such forecasts and projections.
Set forth below is a brief summary of the analysis performed by Hoefer in
reaching the Hoefer Opinion. Hoefer assumed for purposes of its opinion that
the Merger will be accounted for as a pooling of interests transaction under
generally accepted accounting principles. The analysis focused on core
financial and operating projections and statistics which are not specifically
adjusted for nonrecurring charges, unless otherwise stated. Unless otherwise
noted in the analysis, Hoefer used a Conversion Ratio of 1.20 shares of GBB
Stock at the time of closing, the level at which PBC Stock would be exchanged
if the Closing Date (as defined in the Reorganization Agreement) were the same
as the day prior to the signing of the Reorganization Agreement. The
Conversion Ratio formula was developed pursuant to extensive negotiations
between PBC and GBB. Hoefer analyzed certain effects of the Merger assuming
Conversion Ratios, among others, of 1.055 and 1.25. The 1.055 value for the
Conversion Ratio does not necessarily reflect the lowest possible Conversion
Ratio under the terms of the Reorganization Agreement, and there can be no
assurance that the Conversion Ratio as finally determined in accordance with
the Reorganization Agreement will not be lower than 1.055. Hoefer concluded
pursuant to the analysis of the range of possible values of the Conversion
Ratio that the financial terms of the Merger remained fair to the holders of
shares of PBC Stock from a financial point of view, taking into account the
possible adjustments to the Conversion Ratio as described in Section 2.3 of
the Reorganization Agreement.
Pro Forma Merger and Contribution Analysis. Hoefer analyzed the changes in
the amount of earnings, book value and indicated dividends attributable to one
share of PBC Stock before the Merger to those attributable to one share of PBC
Stock as a result of the proposed Merger. The following assumptions regarding
earnings and dividends underlie the pro forma results. The analysis further
assumes, unless otherwise stated, Merger-related operating cost savings to be
fully realized during 1998 and assumes the Merger is completed during the
fourth quarter of 1997. The level of projected operating cost savings is
within a range of the level of operating cost savings in previous transactions
reviewed by Hoefer. Hoefer performed pro forma merger analyses assuming the
stated earnings projections and the Merger-related projected operating cost
savings by PBC. In addition, Hoefer analyzed certain pro forma merger
scenarios in order to assess the impact on PBC of some levels of volatility in
GBB's and PBC's projected earnings as well as volatility of the levels of
Merger-related projects operating cost savings. The impact on PBC of
volatility in GBB's earnings was shown by calculating pro forma
31
<PAGE>
results assuming GBB's earnings as projected, as well as earnings growth equal
to 75% and 125%, respectively, of GBB's projected earnings growth. In order to
measure the impact on PBC of volatility of PBC's earnings to the pro forma
results, Hoefer also examined the earnings impact on PBC resulting at those
levels of GBB earnings if PBC achieved earnings growth equal to 75% and 125%,
respectively, of its projected earnings growth. The impact on PBC of
volatility in the level of Merger-related projected operating cost savings was
shown by calculating pro forma results assuming cost savings as projected, as
well as cost savings equal to 125% and 75% of projected cost savings,
respectively. Hoefer analyzed the changes in earnings and book value for the
years 1998, 1999 and 2000 resulting from various combinations of the stand-
alone and pro forma projected earnings and cost savings volatility assumptions
described above. The analyses showed that for the year 1998 the change in
earnings per share ranged from -8.05% to 19.10% and the change in book value
per share ranged from 10.00% to 26.13%. For the year 1999 the increase in
earnings per share ranged from -4.55% to 33.15% and the change in book value
per share ranged from 12.84% to 32.06%. For the year 2000 the change in
earnings per share ranged from -0.93% to 48.86% and the change in book value
per share ranged from 14.90% to 36.38%.
Analysis of Other Merger Transactions. Hoefer analyzed other California bank
merger and acquisition transactions where the purchase price was over $7.5
million and less than $100 million for the periods January 1, 1996 to
September 4, 1997. The transactions analyzed were: Bank of Los Angeles and
Culver National Bank, Santa Barbara Bancorp and Citizens State Bank, City
National Corporation and Harbor Bancorp, BanPonce and Combancorp, Glendale
Federal Bank and One Central Bank, ValliCorp Holdings and Auburn Bancorp,
FirstBanks, Inc. and Sunrise Bancorp, Dartmouth Capital and Commerce Security
Bancorp, Santa Barbara Bancorp and First Valley Bank, Pacific Capital Bancorp
and South Valley Bancorp, Mid-Peninsula Bancorp and Cupertino National
Bancorp, City National Corporation and Riverside National Bank, Home
Interstate Bancorp and CU Bancorp, City National Corporation and Ventura
County National Bank, Monarch Bancorp and California Commercial Bancorp,
Monarch Bancorp and Western Bank, Glendale Federal Bank and Transworld
Bancorp, Dartmouth Capital and Eldorado Bancorp. This analysis showed that the
purchase price represented a multiple of: (i) 1.92x PBC's tangible book value
compared to a high multiple of 2.35x, a median multiple of 1.78x and a low
multiple of 1.03x for the comparable transactions; and (ii) 14.5x PBC's latest
twelve months' earnings per share, compared to a high multiple of 56.16x, a
median multiple of 16.85x, and a low multiple of 11.30x for the comparable
transactions. Hoefer noted that no transaction reviewed was identical to the
Merger and that, accordingly, any analysis of comparable transactions
necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of the parties to the
transactions being compared.
Discounted Cash Flow Analysis. Hoefer examined the results of a discounted
cash flow analysis designed to compare the present value, under certain
assumptions, that would be attained if PBC remained independent through 2001
or was acquired in 2001 by a larger financial institution, with the present
value of the combined institutions at the Conversion Ratio as described in the
Reorganization Agreement. The results produced in the analysis did not purport
to be indicative of actual values or expected values of PBC or the shares of
PBC Stock. All cases were analyzed assuming realization of the operating cost
savings, in the amounts and time periods previously indicated, unless
otherwise stated (see "--Pro Forma Merger and Contribution Analysis").
In calculating the present values through the discounted cash flow analysis,
Hoefer analyzed the effect of possible earnings volatility and potential
Merger-related operating cost savings volatility, among other items, by
assuming varying levels of projected earnings for PBC and GBB. The three cases
examined were: PBC earnings as projected and GBB earnings as projected; PBC
earnings growth equal to 75% of projected earnings growth and GBB earnings
growth equal to 125% of projected earnings growth; and PBC earnings growth
equal to 125% of projected earnings growth and GBB earnings growth equal to
75% of projected earnings growth. Pro forma combined cash flows were
calculated assuming the combinations of the cash flows in each of these cases,
and were compared to the cash flows of PBC on a stand-alone basis as well as
to the cash flows of PBC acquired in 2001 by a larger financial institution.
All cases were analyzed assuming realization of the operating cost savings, in
the amounts and time periods previously indicated, unless otherwise stated
(see "--Pro Forma Merger and Contribution Analysis").
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<PAGE>
The discount rates used ranged from 8.00% to 12.00%. For the PBC stand-alone
analyses, the terminal price multiples applied to 2001 estimated earnings per
share ranged from 14.00x to 22.00x. The lower levels of the price-to-earnings
per share multiples range reflected an estimated future trading range of PBC,
while the higher levels of the price-to-earnings per share multiples were more
indicative of a future sale of PBC Stock to a larger financial institution.
For the pro forma combined analyses, the terminal price-to-earnings per share
multiples also ranged from 14.00x to 22.00x.
For the PBC stand-alone analyses, the cash flows were comprised of the
projected stand-alone dividends per share in years 1998 through 2001 plus the
terminal value of PBC Stock at year-end 2001 (calculated by applying each one
of the assumed terminal price-to-earnings per share multiples as stated above
to 2001 projected PBC earnings per share). For the pro forma combined
analyses, the cash flows were comprised of the projected pro forma combined
dividends per share in years 1998 through 2001 plus the terminal value of the
pro forma combined entity's stock at year-end 2001 (calculated by applying
each one of the assumed terminal price-to-earnings per share multiples as
stated above to 2001 projected pro forma combined earnings per share). Hoefer
also calculated the present values that would be attained in each case if 75%
or 125% of projected operating cost savings were realized.
These analyses showed a range of stand-alone present values per share for
PBC from $46.41 to $50.86, as compared to a range of pro forma combined
present values per share of $49.85 to $72.90. These analyses do not purport to
be indicative of actual values or expected values of the shares of PBC Stock.
Discounted present value analysis is a widely used valuation methodology which
relies on numerous assumptions, including asset and earnings growth rates,
dividend payout rates, terminal values and discount rates. The analysis showed
that use of a higher (lower) level of projected GBB earnings raised (lowered)
the resulting present value for a given level of PBC earnings, on a pro forma
combined basis. The analysis also showed that use of a lower (higher) discount
rate or a higher (lower) terminal price-to-earnings per share multiple raised
(lowered) the calculated present values.
Comparable Company Analysis. Hoefer examined recent historical data on PBC
and GBB based upon information from PBC's and GBB's 1996 Annual Report to
Shareholders and subsequent quarterly information. Hoefer analyzed certain
credit and operating statistics for PBC and GBB, comparing these statistics to
data for a peer group of California banks using the publicly available Hoefer
& Arnett Banking Universe, 1997 Second Quarter Statistics (the "Universe").
The Universe includes 63 independent California banking institutions. GBB is
included in the Universe. The comparisons made are as of or for the three-
month period ending June 30, 1997, unless otherwise noted. In this analysis,
for comparison purposes, Hoefer used the closing stock price of GBB and the
final bid price of PBC for September 12, 1997, prices which coincide with
stock prices and comparative pricing data which appear in the Universe. The
analysis necessarily involved complex considerations and judgments concerning
differences in financial and operating characteristics of the comparable
companies.
<TABLE>
<CAPTION>
GBB PBC INDEX MEDIAN
-------- -------- ------------
<S> <C> <C> <C>
Total assets (000's).......................... $719,051 $207,215 $211,869
Market capitalization (000's)(1).............. $129,810 $ 25,460 $ 35,497
Price to tangible equity per share(1)......... 2.68x 1.86x 1.88x
Price to latest twelve months earnings........ 22.16x 14.3x 14.18x
Tangible common equity to tangible assets..... 6.74% 7.22% 8.73%
Nonperforming assets to total assets(2)....... 0.49% 0.75% 0.85%
Loan loss reserve to nonperforming loans...... 343.37% 88.21% 142.47%
Return on assets.............................. 1.11% 1.61% 1.28%
Return on equity.............................. 16.26% 23.85% 13.99%
Efficiency ratio(3)........................... 60.18% 41.02% 66.33%
</TABLE>
- --------
(1) Statistics calculated based on bid prices at September 12, 1997, the
latest available prices prior to publishing the Universe.
(2) Nonperforming assets include loans which are 90 days past due and still
accruing in addition to nonaccrual and restructured loans and other real
estate owned.
(3) Efficiency ratio represents noninterest expense as a percent of the sum of
net interest income and non-interest income.
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<PAGE>
Hoefer is an investment banking firm continually engaged in the valuation of
businesses and securities, including financial institutions and their
securities, in connection with mergers and acquisitions, negotiated
underwritings, private offerings of securities, secondary distributions of
listed and unlisted securities and valuations for estate, corporate and other
purposes. Hoefer is a market maker in the common shares of both PBC and GBB.
Hoefer has not previously provided investment banking services to PBC or GBB.
Financial Advisory Fees. In consideration for the rendering of financial
advice and for the preparation and rendering of the Hoefer Opinion, PBC has
agreed to pay Hoefer the following fees: (i) $25,000 upon the engagement of
Hoefer; (ii) $25,000 on announcement of the Reorganization Agreement; and
(iii) 1.50% of the aggregate consideration paid to the stockholders of PBC,
less the $50,000 previously paid to Hoefer, on the date of closing of the
Merger. PBC will also reimburse Hoefer for all reasonable out of pocket
expenses which may be incurred in connection with the rendering of its
opinion, not to exceed $20,000. No portion of the fee is contingent upon the
conclusions reached in the Hoefer Opinion.
CONVERSION OF SHARES AND CONVERSION RATIO
Pursuant to the terms of the Reorganization Agreement, at the Effective
Time, each share of GBB Stock issued and outstanding immediately prior to the
Effective Time shall remain outstanding as a share of GBB Stock. Each share of
PBC Stock issued and outstanding immediately prior to the Effective Time
(other than shares as to which statutory dissenters' rights are perfected)
will automatically, without any action on the part of the holder thereof, be
canceled and converted into the right to receive a number of shares of GBB
Stock determined by the Conversion Ratio as follows:
(i) If the Average Closing Price (as defined below) is greater than
$36.67, a number of shares of GBB Stock equal to the quotient obtained by
dividing (A) $44.00 plus the product of .3333 times the difference between
the Average Closing Price and $36.67, by (B) the Average Closing Price;
(ii) If the Average Closing Price is between $33.33 and $36.67, 1.2
shares of GBB Stock;
(iii) If the Average Closing Price is $32.01 or more and less than
$33.33, a number of shares of GBB Stock equal to the quotient obtained by
dividing $40.00 by the Average Closing Price; and
(iv) If the Average Closing Price is less than $32.01, 1.25 shares of GBB
Stock; provided, however, if the Average Closing Price is less than $30.00,
GBB may exercise the Top Up Option (as defined below), in which case the
Conversion Ratio will equal that number of shares of GBB Stock equal to the
quotient obtained by dividing $37.50 by the Average Closing Price. If GBB
does not elect to exercise the Top Up Option, PBC may terminate the
Reorganization Agreement or may proceed with the Merger, in which case the
Conversion Ratio will be 1.25 shares of GBB Stock.
"Average Closing Price" means the average of the daily closing price of a
share of GBB Stock reported on Nasdaq during the 15 consecutive trading days
ending at the end of the third trading day immediately preceding the Effective
Time. "Top Up Option" means, in the event that the Average Closing Price is
less than $30.00, the right of GBB to elect to issue that number of shares of
GBB Stock equal to the quotient obtained by dividing $37.50 by the Average
Closing Price.
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<PAGE>
As described above, the Conversion Ratio (and the resulting value of the GBB
Stock to be received by shareholders of PBC upon such conversion) depends upon
the Average Closing Price of GBB Stock. The following table shows the
effective Conversion Ratio and the value of the GBB Stock into which one share
of PBC Stock will be converted as a function of the Average Closing Price of
GBB Stock.
<TABLE>
<CAPTION>
EACH PBC SHARE
WILL BE CONVERTED VALUE TO BE RECEIVED
ASSUMING A GBB INTO THIS NUMBER PER PBC SHARE
AVERAGE CLOSING PRICE OF: OF GBB SHARES (PAYABLE IN GBB STOCK)
------------------------- ------------------ ----------------------
<S> <C> <C>
$50.00 0.9689 $48.44
48.00 0.9953 47.78
46.00 1.0241 47.11
44.00 1.0555 46.44
42.00 1.0899 45.78
40.00 1.1277 45.11
38.00 1.1696 44.44
36.67 1.2000 44.00
35.00 1.2000 42.00
33.33 1.2000 40.00
32.50 1.2300 40.00
32.00 1.2500 40.00
31.00 1.2500 38.75
30.00 1.2500 37.50
29.00 1.2931 37.50 (Top Up Option)
or 1.2500 36.25 (PBC's option)
28.00 1.3393 37.50 (Top Up Option)
or 1.2500 35.00 (PBC's option)
</TABLE>
For example, if the Average Closing Price is $42.25 (which was the closing
price of GBB Stock on October 20, 1997, as reported by Nasdaq), each
outstanding share of PBC Stock would receive consideration of $45.86 in the
Merger, payable in GBB Stock. Similarly, if the Average Closing Price is
$35.00, each outstanding share of PBC Stock would receive consideration in the
Merger of $42.00 per share, payable in GBB Stock. Alternatively, if the
Average Closing Price is $48.00, each outstanding share of PBC Stock would
receive consideration in the Merger of $47.78 per share, payable in GBB Stock.
No assurance can be given as to what the Average Closing Price will be. No
assurance can be given that the market price of GBB Stock on or after
consummation of the Merger will approximate the Average Closing Price.
FRACTIONAL SHARES
No fractional shares of GBB Stock shall be issued in the Merger. In lieu
thereof, each holder of PBC 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.
EFFECTIVE TIME OF MERGER
The Merger will be effective on a date to be designated by the parties and
upon the filing of the Reorganization Agreement with the Secretary of State of
the State of California, which the parties expect to occur during the fourth
quarter of 1997 or the first quarter of 1998.
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<PAGE>
REGULATORY APPROVALS
The consummation of the Merger is subject to the approval of the FRB, the
FDIC and the DFI. Receipt of all requisite regulatory approvals and consents
is a condition precedent to the consummation of the Merger. See "THE
REORGANIZATION AGREEMENT--Conditions to the Merger."
Applications for the prior approval of the Merger were filed with the FRB,
the DFI and the FDIC on or about October 1, 1997. Although neither PBC nor GBB
is aware of any reason why the requisite approvals of the Merger would not be
granted, there can be no assurance such approvals will be obtained, or as to
the timing of such approvals, or that, if obtained, such approvals will not
include conditions which would be of a type that would relieve GBB, Newco or
PBC from their obligation to consummate the Merger. See "THE REORGANIZATION
AGREEMENT--Conditions to the Merger" and "--Termination."
In determining whether to approve the Merger, the FRB will consider factors
such as (i) whether GBB is well managed and well capitalized; (ii) compliance
with convenience and needs criteria, including satisfactory Community
Reinvestment Act ("CRA") records; and (iii) whether there are any anti-
competitive effects of the transaction.
In determining whether to approve the Merger, the DFI will consider factors
such as (i) the effects of the Merger on competition; (ii) the effects of the
Merger on the convenience and needs of the communities to be served; (iii) the
financial condition of GBB; (iv) whether the Merger is fair and reasonable to
the depositors, creditors and shareholders of PBC and GBB; (v) the competence,
experience and integrity of GBB's management; and (vi) whether the Merger is
fair, just and equitable to PBC and GBB.
In determining whether to approve the Merger, the FDIC will consider factors
such as (i) the financial condition, competence, experience and integrity of
GBB's management; and (ii) the effect of the Merger on competition.
AGREEMENTS WITH CERTAIN SHAREHOLDERS
Each of the PBC Directors has entered into a Shareholder's Agreement
pursuant to which each director has agreed (i) to vote the number of shares of
PBC Stock owned by such director to approve the principal terms of the
Reorganization Agreement, the Merger and the transactions contemplated
thereby; (ii) to recommend approval of the Reorganization Agreement to the
shareholders of PBC; (iii) not to sell or otherwise transfer any such shares
or the right to vote or direct the vote of such shares; and (iv) not to sell
any GBB Stock acquired in the Merger, for a minimum period of 30 days
following the date of publication of combined financial statements for GBB and
PBC. The Shareholder's Agreements will terminate immediately upon the earlier
of the Effective Time or termination of the Reorganization Agreement.
Under the Shareholder's Agreements, the PBC Directors have agreed to vote
shares of PBC Stock (approximately 30.2% of the outstanding shares of PBC
Stock entitled to vote at the PBC Meeting) to approve the principal terms of
the Reorganization Agreement, increasing the likelihood that the Merger will
be approved. The affirmative vote of the holders of an additional 19.9% of the
outstanding shares of PBC Stock entitled to vote at the PBC Meeting will be
required in order to approve the Reorganization Agreement.
Each of the PBC Directors has also entered into a Noncompetition Agreement
with GBB pursuant to which each director has agreed, among other things,
without the prior written consent of GBB, not to participate in the ownership,
management, operation, control or financing of, or be connected as an officer,
director, employee, partner, agent, representative, consultant or otherwise
with any business or enterprise engaged in any business which is competitive
with or similar to any of the businesses conducted by GBB or PBC, for a period
of two years after the Effective Time. The Noncompetition Agreements also
prohibit the PBC Directors from (i) soliciting customers or prospective
customers for financial services on behalf of any financial institution; or
(ii) inducing or attempting to induce any person who is a supplier,
distributor, officer or employee of PBC immediately prior to the Effective
Time, to terminate such person's relationship with, or take any action that
36
<PAGE>
would be disadvantageous to GBB. Finally, the Noncompetition Agreements
prohibit the PBC Directors from making use of or disclosing or delivering any
trade secrets of PBC, other than for the benefit of PBC, and after the
Effective Time, other than for the benefit of GBB.
In addition, the directors and executive officers of PBC have entered into
Affiliate Agreements with GBB, pursuant to which they agreed, among other
things, not to (i) purchase, sell, transfer or otherwise dispose of, or reduce
their risk of ownership or investment in, PBC Stock prior to the Merger; or
(ii) sell, transfer or dispose of any shares of GBB Stock which such directors
or officers may acquire in connection with the Merger or any securities which
may be paid as a dividend or otherwise distributed thereon or with respect
thereto or issued or delivered in exchange or substitution therefor (all such
shares and other securities herein sometimes collectively referred to as
"Restricted Securities"), or any option, rights or other interest with respect
to any Restricted Securities, unless such sale, transfer or disposition is
effected (A) pursuant to an exemption from the registration requirements of
the Securities Act as provided in the Affiliate Agreement, or (B) pursuant to
an effective registration statement under, and in compliance with, the
Securities Act (provided that such directors may make bona fide gifts or
distributions without consideration so long as the recipients thereof agree
not to sell, transfer or otherwise dispose of the GBB Stock except as provided
in the Affiliate Agreement.)
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the PBC Record Date, the directors and executive officers of PBC
beneficially owned 223,697 shares of PBC Stock, not including shares such
persons may acquire through the exercise of vested stock options. On such
date, directors and executive officers of PBC held options to acquire 97,268
shares of PBC Stock. Options not exercised prior to the Effective Time will be
converted into options to acquire GBB Stock on substantially the same terms
and conditions as the options to purchase PBC Stock held by such persons prior
to the Merger. See "THE REORGANIZATION AGREEMENT--Treatment of Options."
Immediately after the Effective Time, the current directors and executive
officers of PBC as a group will own less than 5.9% of the outstanding shares
of GBB, assuming a 1.07 Conversion Ratio.
As of the GBB Record Date, the directors and executive officers of GBB
beneficially owned 458,029 shares of GBB Stock not including shares such
persons may acquire through the exercise of vested stock options. On such
date, directors and executive officers of GBB held options to acquire 232,946
shares of GBB Stock, of which 136,305 options are exercisable within 60 days
of the GBB Record Date.
At the Effective Time, the GBB Board will be comprised of 11 directors
consisting of the 10 current members of the GBB Board and George R. Corey,
currently Chairman of the PBC Board. In addition, at the Effective Time, the
PBC Board will be comprised of seven directors, consisting of the six current
members of the PBC Board and David L. Kalkbrenner, President and Chief
Executive Officer of GBB. It is anticipated that Joseph Welch will be
appointed Chairman of the Board of PBC as of the Effective Time.
Mark F. Doiron, President and Chief Executive Officer of PBC, will continue
to serve in such capacities and will be appointed, as of the Effective Time,
to serve on the GBB Executive Management Committee.
The former officers and employees of PBC who become officers or employees of
GBB or any of its subsidiaries, including PBC, will be entitled to participate
in all employee benefits and benefit programs of GBB in accordance with the
terms of such plans or programs.
PBC anticipates purchasing directors' and officers' tail insurance (the "D&O
Tail"), under which the persons serving as officers and directors of PBC
immediately prior to the Effective Time shall be covered for a period of three
years from the Effective Time with respect to acts or omissions occurring
prior to the Effective Time which were taken by such officers and directors in
their capacities as such. The D&O Tail will provide substantially the same
coverage as the directors' and officers' insurance policy currently maintained
by PBC.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GBB and PBC have obtained an opinion of counsel from Manatt, Phelps &
Phillips, LLP, to the effect that, for federal income tax purposes: (i) the
Merger will qualify as a reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code");
(ii) the Merger will not be disqualified by reason of the fact that the GBB
Stock is used in the Merger, pursuant to Section 368(a)(2)(E) of the Code;
(iii) GBB, PBC and Newco will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code; (iv) no gain or loss will be recognized
by Newco on the transfer of its assets to PBC solely in exchange for PBC Stock
and the assumption of Newco's liabilities, pursuant to Sections 361(a) and
357(a) of the Code; (v) no gain or loss will be recognized by PBC upon the
receipt of the assets of Newco in exchange for PBC Stock, pursuant to Section
1032(a) of the Code; (vi) the basis of Newco's assets in the hands of PBC will
be the same as the basis of such assets in the hands of Newco immediately
prior to the Merger, pursuant to Section 362(b) of the Code; (vii) no gain or
loss will be recognized by GBB upon the receipt of PBC Stock solely in
exchange for the stock of Newco pursuant to Section 354(a)(1) of the Code;
(viii) no gain or loss will be recognized by the shareholders of PBC upon the
transfer of their PBC Stock solely in exchange for GBB Stock, pursuant to
Section 354(a) of the Code; (ix) the basis of GBB Stock to be received by the
shareholders of PBC in the transaction will be the same as the basis of PBC
Stock surrendered in exchange therefor, pursuant to Section 358(a)(1) of the
Code; (x) the holding period of GBB Stock to be received by the PBC
shareholders will include the holding period of PBC Stock surrendered in
exchange therefor, provided that PBC Stock is held as a capital asset on the
date of the exchange, pursuant to Section 1223(l) of the Code; (xi) the
holding period of the assets of Newco in the hands of PBC will include the
period during which such assets were held by Newco, pursuant to Section
1223(2) of the Code; (xii) provided that any nonqualified stock options to
purchase PBC Stock and any nonqualified stock options to purchase GBB Stock
into which they will be converted do not have readily ascertainable fair
market values (within the meaning of Section 1.83-7 of the Treasury
Regulations), such conversion of PBC options into GBB options will not result
in income, gain or loss to the holders of such stock options, pursuant to
Section 83(e)(3) of the Code; (xiii) no gain or loss will be recognized by PBC
or GBB upon the issuance of GBB Stock to an optionee pursuant to the
optionee's exercise of a stock option issued by PBC and converted into an
option to acquire GBB Stock, pursuant to Section 1032 of the Code and Section
1.83-6(d) of the Treasury Regulations; (xiv) provided that any incentive
options issued by PBC qualify as incentive stock options under Section 422 of
the Code, the Merger will qualify as a transaction to which Section 424(a)
applies; (xv) the assumption of the PBC Stock Option Plan by GBB will satisfy
the requirements of Section 424(a) of the Code and will not be a modification
under Section 424(h) of the Code; and (xvi) no income, gain or loss will be
recognized by PBC, GBB, or the holders of outstanding options of PBC upon the
substitution, amendment or assumption by GBB of the PBC Stock Option Plan and
options thereunder.
The foregoing discussion is based upon current law and is intended for
general information only. In addition, the foregoing discussion does not
contain any information with respect to tax consequences to GBB or PBC
shareholders who perfect their dissenters' rights in accordance with Chapter
13 of the California Law. Each shareholder is urged to consult his or her own
tax advisor concerning the specific tax consequences of the Merger to the
shareholder, including the applicability and effect of foreign, state, local
or other tax laws and of any proposed changes in the Code.
EXCHANGE PROCEDURES
As soon as practicable after the Effective Time, U.S. Stock Transfer
Corporation (the "Exchange Agent") will mail to each holder of record of
outstanding shares of PBC Stock a letter of transmittal which is to be used by
each PBC shareholder to return to the Exchange Agent the stock certificates
representing the PBC Stock owned by him (the "Old Certificates"), which
certificates should be duly endorsed in blank by such PBC shareholder. As soon
as practicable after receiving such Old Certificates from a PBC shareholder
together with the duly executed letter of transmittal and any other items
specified by the letter of transmittal, the Exchange Agent will deliver to
such PBC shareholder new certificates ("New Certificates") representing the
appropriate number of shares of GBB Stock, together with checks for payment of
cash in lieu of fractional shares. No dividends or other distributions that
are declared on GBB Stock will be paid to persons otherwise entitled to
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receive the same until the Old Certificates have been surrendered in exchange
for New Certificates, but upon such surrender, such dividends or other
distributions, from and after the Effective Time, will be paid to such persons
in accordance with the terms of GBB Stock. No interest will be paid to the PBC
shareholders on the cash or the value of the GBB Stock into which their shares
of PBC Stock will be converted.
If the GBB Stock and/or the cash, or any part thereof, are to be delivered
to a person other than the record holder of the Old Certificates of PBC Stock
surrendered in exchange therefor, (i) the certificate so surrendered must be
properly endorsed or accompanied by appropriate stock powers and otherwise be
in proper form of transfer; (ii) the transfer must otherwise be proper; and
(iii) the person requesting the transfer must pay to the Exchange Agent any
transfer or other taxes payable by reason of the transfer or must establish to
the satisfaction of the Exchange Agent that such taxes have been paid or are
not required to be paid.
POST-MERGER OPERATIONS
Upon consummation of the Merger, PBC will operate as a banking subsidiary of
GBB. GBB will continue to operate as a bank holding company.
At the Effective Time, the GBB Board will be comprised of 11 directors,
consisting of the 10 current members of the GBB Board and George R. Corey,
currently Chairman of the PBC Board. In addition, the GBB Board will be
comprised of seven directors, consisting of the six current members of the PBC
Board and David L. Kalkbrenner, President and Chief Executive Officer of GBB.
It is anticipated that Joseph Welch will be appointed Chairman of the Board of
PBC as of the Effective Time.
Mark F. Doiron, President and Chief Executive Officer of PBC, will continue
to serve in such capacities and will be appointed, as of the Effective Time,
to serve on the GBB Executive Management Committee.
The former officers and employees of PBC who become officers or employees of
GBB or any of its subsidiaries, including PBC, will be entitled to participate
in all employee benefits and benefit programs of GBB in accordance with the
terms of such plans or programs. See "--Interests of Certain Persons in the
Merger."
SALES OF GBB STOCK
The shares of GBB Stock to be issued to shareholders of PBC in the Merger
have been registered under the Securities Act. Such shares will be freely
transferable under the Securities Act, except for shares issued to any person
who may be deemed to be an "affiliate" of PBC within the meaning of Rule 145
under the Securities Act.
NASDAQ LISTING
GBB has made an application to list the shares of GBB Stock to be issued in
the Merger on Nasdaq. A condition to the consummation of the Merger is that
such GBB Stock be authorized for listing, upon notice of issuance, on Nasdaq.
ACCOUNTING TREATMENT
The parties anticipate that the Merger will be treated as a pooling of
interests for accounting and financial reporting purposes. Prior to the
Effective Time and as a condition precedent to the closing, GBB and PBC will
receive from Coopers a letter to the effect that Coopers concurs with the
conclusions of GBB's and PBC's management that no conditions exist with
respect to each company which would preclude accounting for the Merger as a
pooling of interests.
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THE REORGANIZATION AGREEMENT
Certain provisions of the Reorganization Agreement are summarized below.
This summary does not purport to be complete and is qualified in its entirety
by reference to the complete text of the Reorganization Agreement, which is
reprinted as Appendix A to this Joint Proxy Statement/Prospectus and is
incorporated herein by reference. Shareholders of GBB and PBC are urged to
read the Reorganization Agreement in its entirety.
CONDITIONS TO THE MERGER
The obligation of each of the parties to consummate the Merger is subject to
the satisfaction or waiver on or before the Effective Time of, among other
things, the following conditions: (i) the Reorganization Agreement and the
transactions contemplated thereby will have received all requisite approvals
of the shareholders and Boards of Directors of GBB, Newco and PBC; (ii) no
judgment, decree, injunction, order or proceeding will 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 the Reorganization Agreement; (iii)
all approvals or consents of any applicable governmental agency will have been
obtained or granted for the Merger and the transactions contemplated for the
Reorganization Agreement and the applicable waiting period under all laws will
have expired; (iv) the Registration Statement shall have been declared
effective by the Commission and shall not be the subject of any stop order or
proceedings seeking or threatening a stop order; (v) GBB shall have received
all state securities permits and other authorizations necessary to issue the
GBB Stock to consummate the Merger; (vi) the GBB Stock issuable in the Merger
shall have been included for listing on Nasdaq; (vii) GBB and PBC will have
received an opinion reasonably satisfactory to GBB and PBC from Manatt, Phelps
& Phillips, LLP to the effect that the Merger will not result in the
recognition of gain or loss for federal income tax purposes, nor will the
issuance of GBB Stock result in the recognition of gain or loss to holders of
PBC Stock who receive GBB Stock in the Merger; and (viii) Coopers will have
confirmed in writing to GBB that the Merger will qualify for pooling of
interests accounting treatment.
The obligations of GBB and Newco to consummate the Merger are also subject
to fulfillment of certain other conditions, including the following: (i) there
will not have occurred, between September 5, 1997 and the Effective Time, any
materially adverse change in the business, financial condition, results of
operations or prospects of PBC; (ii) GBB will have received satisfactory
evidence that all of PBC's employee benefit plans, programs and arrangements
have been terminated or merged into GBB plans; (iii) holders of 5% or more of
the outstanding shares of PBC Stock or 5% or more of the outstanding shares of
GBB Stock, will not be dissenting shares; (iv) all remediation of
environmental contamination or conditions on any PBC property will have been
completed to the satisfaction of GBB; (v) at the close of business on the last
day of the month prior to the Effective Time, after giving effect to any
dividends paid (excluding certain Merger-related expenses) the PBC fully
diluted book value per share will not be less than $20.25; (vi) receipt of the
Hoefer Opinion; and (vii) all PBC stock option plans will be terminated.
The obligations of PBC to consummate the Merger are also subject to the
fulfillment of certain other conditions, including the following: (i) there
will not have occurred, between September 5, 1997 and the Effective Time, any
material adverse change in the business, financial condition, results of
operations or prospects of GBB on a consolidated basis; (ii) receipt of the
Hoefer Opinion; and (iii) all necessary action will have been taken to have
George R. Corey elected or appointed to serve, from and after the Effective
Time, as a director of GBB.
Additionally, the consummation of the Merger is subject to the performance
of covenants, the execution and delivery of certain ancillary documents, the
accuracy of representations and warranties and the receipt of various legal
opinions, third-party consents, officers' certificates and other documents.
If these and other conditions are not satisfied or waived, the
Reorganization Agreement may be terminated. The Reorganization Agreement may
also be terminated upon the occurrence of certain other events. See "--
Termination."
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NONSOLICITATION
Under the terms of the Reorganization Agreement, PBC has agreed not to
solicit, initiate or encourage any Competing Transaction (as hereinafter
defined). In addition, PBC has agreed (unless it determines, with advice of
counsel, that its fiduciary duty requires otherwise) not to participate in any
negotiations or discussions regarding, or furnish any information with respect
to, or otherwise cooperate in any way in connection with, any effort or
attempt to effect any Competing Transaction with or involving any person other
than the other parties to the Reorganization Agreement, unless such party
receives a bona fide offer from a person other than the parties to the
Reorganization Agreement and subject to the fiduciary obligations of the PBC
Board. PBC has agreed to promptly notify GBB of the terms of any proposal
which it may receive in respect of any Competing Transaction. The term
"Competing Transaction" means any of the following involving PBC: a merger,
consolidation, share exchange or other business combination; a sale; lease,
exchange, mortgage, pledge, transfer or other disposition of assets
representing 10% or more of PBC's assets; 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 PBC; a tender offer or
exchange offer for at least 10% of the outstanding shares of PBC; a
solicitation of proxies in opposition to approval of the Merger by PBC's
shareholders; or a public announcement of an unsolicited bona fide proposal,
plan or intention to do any of the foregoing.
The Reorganization Agreement does not prohibit GBB from entering into a
business combination with another party. However, in the event the
Reorganization Agreement is terminated as a result of GBB entering into an
agreement to acquire, merge or consolidate with another entity, which
agreement by its terms requires that the Merger shall not be completed until
after March 31, 1998, or which transaction would result in the disapproval or
delay of the Merger until after March 31, 1998 by regulatory authorities, if
such transaction is consummated prior to termination of the Reorganization
Agreement or during the 12-month period following termination of the
Reorganization Agreement, GBB will pay (or cause the third party to such
transaction to pay) to PBC $750,000 promptly upon the consummation of such
transaction. Any payment made by GBB to PBC to cover expenses incurred in
connection with the Merger will be credited to such $750,000 amount.
EXPENSES
If the Reorganization Agreement is terminated by PBC because GBB's
shareholders fail to approve the Merger, or because GBB fails to satisfy
certain of its obligations under the Reorganization Agreement, GBB will be
obligated to pay all of PBC's expenses incurred in connection with the Merger
transaction, not to exceed $150,000.
If the Reorganization Agreement is terminated by GBB because PBC's
shareholders fail to approve the Merger, or because PBC fails to satisfy
certain of its obligations under the Reorganization, PBC will be obligated to
pay all of GBB's expenses incurred in connection with the Merger transaction,
not to exceed $200,000.
TREATMENT OF OPTIONS
Each and every option to purchase shares of PBC Stock issued and outstanding
immediately prior to the Effective Time and all obligations of PBC under the
PBC stock option plans will, on and after the Effective Time, be assumed by
and be deemed to be options granted by GBB to purchase that number of shares
of GBB Stock equal to the Conversion Ratio times the number of shares of PBC
Stock subject to the option rounded down to the nearest whole number of GBB
Stock. The per share exercise price for the shares of GBB Stock issuable upon
exercise of such PBC option will be determined by dividing the exercise price
immediately prior to the Effective Time by the Conversion Ratio.
Each option to purchase shares of GBB Stock issued and outstanding
immediately prior to the Effective Time will not be affected by the Merger.
TERMINATION
The Reorganization Agreement may be terminated at any time prior to the
Effective Time (i) by mutual consent of GBB, Newco and PBC in writing; (ii) by
PBC or GBB immediately upon the failure of the
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shareholders of PBC or GBB to approve the Reorganization Agreement; (iii) by
GBB or PBC if any material breach or default by the other party is not cured
within 20 days after notice thereof; (iv) by GBB or PBC if any governmental or
regulatory authority denies or refuses to grant any approval, consent or
authorization required to be obtained to consummate the transactions
contemplated by the Reorganization Agreement unless, within 30 days after such
denial or refusal, all parties agree to resubmit the application to the
regulatory authority that has denied or refused to grant the approval, consent
or qualification requested; (v) by PBC or GBB if any conditions set forth in
Article IX of the Reorganization Agreement shall not have been met by March
31, 1998; (vi) by PBC if any of the conditions of Article X of the
Reorganization Agreement shall not have been met, or by GBB if any of the
conditions of Article XI of the Reorganization Agreement shall not have been
met, by March 31, 1998, or such earlier time as it becomes apparent that such
conditions shall not be met; (vii) by GBB if PBC shall have failed to act or
refrain from doing any Competing Transaction; (viii) by GBB if it is
determined that the estimated cost of any remediation is in excess of $100,000
or is not reasonably determinable; or (ix) by PBC if the Average Closing Price
is less than $30.00 and GBB has not elected to exercise the Top Up Option.
The Reorganization Agreement will be terminated if the Closing Date shall
not have occurred by March 31, 1998 unless extended in writing by the parties.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME
The Reorganization Agreement provides that, during the period from the date
of the Reorganization Agreement to the Effective Time, PBC will conduct its
business only in the normal and customary manner and in accordance with sound
banking practices and will not, without the prior written consent of GBB,
which will not be unreasonably withheld, take any of the following actions,
among others: (i) issue any security except pursuant to the exercise of
options outstanding as of the date of the Reorganization Agreement; (ii)
declare, set aside or pay any dividend (other than its regular cash dividend,
which under the terms of the Reorganization Agreement, will in no event be in
an aggregate amount greater than 65% of net income, which equates to dividends
of 50% of net income from core operations and 100% of net income attributable
to the Special Deposit) or make any other distribution upon, or purchase or
redeem any shares of its stock; (iii) except as may be required to effect the
transactions contemplated by the Reorganization Agreement, amend its articles
of incorporation or its bylaws; (iv) grant any general or uniform increase in
the rate of pay of employees or employee benefits; (v) grant any material
increase in salary, incentive compensation or employee benefits or pay any
bonus to any person except salary increases of not more than 5% in the
ordinary course of business consistent with past practices; (vi) make any
capital expenditure in excess of $25,000, except for ordinary repairs,
renewals and replacements; (vii) compromise, 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 on 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; (viii) grant, renew or commit to grant or renew any
extension of credit or amend the terms of any such credit outstanding on the
date hereof to any executive officer, director or principal shareholder, or to
any corporation, partnership, trust or other entity controlled by any such
person, except consistent with practices and policies in existence as of the
date of the Reorganization Agreement; (ix) close or open any offices at which
business is conducted; (x) adopt or amend any employee benefit or other
benefit plan or arrangement of any such type except such amendments as are
required by law; (xi) change any policies and practices with respect to
liquidity management and cash flow planning, lending, personnel practices,
accounting or any other material aspect of business or operations, except such
changes as may be required in the opinion of management to respond to economic
or market conditions or as may be required by generally accepted accounting
principles or by applicable governmental authorities; (xii) grant any person a
power of attorney or similar authority; (xiii) make any material investment by
purchase of stock or securities, contributions to capital, property transfers
or otherwise in any other person, except for investments made in the ordinary
course of business consistent with past practice; (xiv) amend, modify or
terminate, except in accordance with its terms, any material contract or enter
into any material agreement or contract; (xv) create or incur or suffer to
exist any mortgage, lien, pledge, security interest, charge, encumbrance or
restraint of any kind against or in any property or right of the respective
party; (xvi) sell, lease or otherwise dispose of any assets or release any
claims, except
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in the ordinary course of business consistent with past practice; or (xvii)
except as required by law, knowingly take or cause to be taken any action
which would prevent the transactions contemplated hereby from qualifying as
tax free reorganizations under 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.
The Reorganization Agreement also provides that each party will (i) 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 the Reorganization
Agreement as promptly as practical; (ii) obtain the consent of the other
before it issues any press release or makes any public statement with respect
to the Reorganization Agreement or the transactions contemplated hereby; (iii)
take all necessary action to appoint George R. Corey to the Board of Directors
of GBB and David L. Kalkbrenner to the Board of Directors of PBC; and (iv)
cause to be prepared one or more environmental investigations with respect to
real property owned or leased by PBC.
The Reorganization Agreement also provides that PBC will (i) use its best
efforts to keep in full force and effect all material licenses and permits;
(ii) use its best efforts to maintain insurance coverage substantially the
same as in effect as of the date of the Reorganization Agreement; (iii)
perform its material contractual obligations; (iv) duly and timely file all
required governmental reports; (v) periodically furnish to the other certain
information, loan reports and updates of information previously provided; (vi)
promptly notify the other of certain communications from tax authorities,
material litigation and any event which has had or may reasonably be expected
to have a materially adverse effect on the financial condition, operations,
business or prospects on a consolidated basis; (vii) provide access to the
other of certain information; and (viii) use its reasonable efforts between
the date of the Reorganization Agreement and the Effective Time to take all
actions necessary or desirable, including the filing of any regulatory
applications.
AMENDMENT AND WAIVER
Subject to applicable law: (i) the Reorganization Agreement may be amended
at any time by the action of the Boards of Directors of GBB, Newco or PBC
without action by their shareholders pursuant to a writing signed by all
parties to the Reorganization Agreement; and (ii) the parties, by action of
their respective Boards of Directors, may, at any time prior to the Effective
Time, extend the performance of any obligation or action required by the
Reorganization Agreement, waive inaccuracies in representations and warranties
and waive compliance with any agreements or conditions for their respective
benefit contained in the Reorganization Agreement.
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THE STOCK OPTION AGREEMENT
GENERAL
Concurrently with the execution and delivery of the Reorganization
Agreement, and as a condition and inducement thereto, PBC and GBB entered into
the Stock Option Agreement, pursuant to which PBC granted GBB an option (the
"Option") to purchase up to 134,099 shares of PBC Stock (representing
approximately 19.9% of the outstanding shares of PBC Stock) at a price equal
to $32.00 per share, exercisable only upon the occurrence of certain events
that create the potential by another party to acquire control of PBC. Exercise
of the Option is also subject to DFI approval.
The following is a summary of the material provisions of the Stock Option
Agreement, which is attached as Appendix B to this Joint Proxy
Statement/Prospectus and incorporated herein by reference. The following
summary is qualified in its entirety by reference to the Stock Option
Agreement.
EXERCISE OF STOCK OPTION
The Option may be exercised in whole or in part only after the occurrence of
one of the following events (each a "Purchase Event"):
(i) PBC, without GBB's prior written consent, enters into an agreement
with any person (other than GBB or any affiliate of GBB) to (A) effect a
merger, consolidation or similar transaction involving PBC or (B) acquire
all or substantially all of the assets of PBC, or 10% or more of PBC's
voting power (any of the foregoing is defined as an "Acquisition
Transaction");
(ii) any person or group of persons acting in concert acquires beneficial
ownership (as such term is defined in Rule 13d-3 under the Exchange Act) or
the right to acquire beneficial ownership of 24.99% or more of the
outstanding PBC Stock;
(iii) the PBC shareholders have not approved the Reorganization
Agreement, the PBC Meeting has not been held or has been canceled or the
PBC Board has withdrawn or modified in a manner adverse to GBB its
recommendation with respect to the Reorganization Agreement, in each case
after any person (other than GBB) has (A) publicly announced a proposal, or
publicly disclosed an intention to make a proposal, to engage in an
Acquisition Transaction, (B) commenced a tender offer, or (C) filed an
application (or given a notice) with a bank regulatory authority to engage
in an Acquisition Transaction;
(iv) any person (other than GBB or other than in connection with a
transaction which GBB has given prior written consent), shall have filed an
application (or given a notice) with a bank regulatory authority to engage
in an Acquisition Transaction;
(v) PBC has willfully breached the Reorganization Agreement in
anticipation of engaging in a Purchase Event, and GBB is entitled to
terminate the Reorganization Agreement; or
(vi) a public announcement by PBC of an Acquisition Transaction, exchange
offer or tender offer or a public announcement of an intended Acquisition
Transaction, exchange offer or tender offer.
ADJUSTMENT OF NUMBER OF SHARES SUBJECT TO OPTION
The number and type of securities subject to the Option and the purchase
price of shares will be adjusted for any change in PBC Stock by reason of
stock split, combination, dividend, exchange of shares or similar transaction,
such that GBB will receive (upon exercise of the Option) the same number and
type of securities as if the Option had been exercised immediately prior to
the change in PBC Stock. The number of shares of PBC Stock subject to the
Option will also be adjusted in the event PBC issues additional shares of PBC
Stock, such that the number of shares of PBC Stock subject to the Option
represents 19.9% of issued and outstanding PBC Stock. In the event of a
capital reorganization, merger or consolidation of PBC with or into another
corporation, or the sale of all or substantially all of PBC's assets to any
other person, then, as a part of any such transaction, provision shall be made
so that GBB shall be entitled to receive an option of the succeeding
corporation, any person that controls the succeeding corporation or PBC, at
the election of GBB.
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REPURCHASE OF OPTIONS
During the 12-month period after the occurrence of a Purchase Event, GBB has
the right to require that PBC repurchase the shares of PBC Stock purchased by
GBB pursuant to the Option by GBB. The shares will be repurchased at a price
equal to the highest of (i) 100% of the exercise price; (ii) the highest price
paid or agreed to be paid for shares of PBC Stock by an acquiror in any tender
offer, exchange offer or other transaction or series of related transactions
involving the acquisition of 10% or more of the outstanding shares of PBC
Stock; and (iii) in the event of a sale of all or substantially all of PBC's
assets, (x) the sum of the price paid in such sale and the current market
value of the remaining assets of PBC as determined by a recognized investment
banking firm, divided by (y) the number of shares of PBC Stock then
outstanding; provided, however, that in no event will PBC be required to
repurchase the shares of PBC Stock at a repurchase price that exceeds GBB's
aggregate exercise price for such shares by $1.5 million or more.
RESTRICTIONS ON TRANSFER
Prior to the occurrence of a Purchase Event, GBB shall be prohibited from
selling, assigning or otherwise transferring the Option.
REGISTRATION RIGHTS
GBB has certain rights to require registration of any shares of PBC Stock
purchased pursuant to the Stock Option Agreement under the securities laws if
necessary to enable GBB to sell such shares.
EFFECT OF STOCK OPTION AGREEMENT
The Stock Option Agreement is intended to increase the likelihood that the
Merger will be consummated on the terms set forth in the Reorganization
Agreement. Consequently, certain aspects of the Stock Option Agreement may
have the effect of discouraging persons who might now or prior to the
Effective Time be interested in acquiring all of or a significant interest in
PBC from considering or proposing such an acquisition, even if such persons
were prepared to offer higher consideration per share for PBC Stock than the
consideration set forth in the Reorganization Agreement. The Option granted to
GBB pursuant to the Stock Option Agreement generally terminates upon the
earlier of the Effective Time of the Merger or 12 months following the date of
any Purchase Event.
45
<PAGE>
DISSENTING SHAREHOLDERS' RIGHTS
GBB
Because GBB Stock is traded on Nasdaq, dissenters' rights will be available
to the shareholders of GBB only if the holders of five percent (5%) or more of
GBB Stock make a written demand upon GBB for the purchase of dissenting shares
in accordance with Chapter 13 of the California Law. If this condition is
satisfied and the Merger is consummated, shareholders of GBB who dissent from
the Merger by complying with the procedures set forth in Chapter 13 would be
entitled to receive an amount equal to the fair market value of their shares
as of September 5, 1997, the day before the public announcement of the Merger.
The closing sales price for GBB Stock on September 5, 1997 was $37.50. A copy
of Chapter 13 of the California Law is attached hereto as Appendix C and
should be read for more complete information concerning dissenters' rights.
THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 OF THE CALIFORNIA LAW MUST BE
FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST. The information set
forth below is a general summary of dissenters' rights as they apply to GBB
shareholders and is qualified in its entirety by reference to Appendix C.
In order to be entitled to exercise dissenters' rights, a shareholder of GBB
must vote "AGAINST" the Merger. Thus, any shareholder who wishes to dissent
and executes and returns a proxy in the accompanying form must specify that
his or her shares are to be voted "AGAINST" the proposal to approve the
principal terms of the Reorganization Agreement. If the shareholder returns a
proxy without voting instructions or with instructions to vote "FOR" the
proposal to approve the principal terms of the Reorganization Agreement, his
or her shares will automatically be voted in favor of the Merger and the
shareholder will lose any dissenters' rights. In addition, if the shareholder
abstains from voting his or her shares, the shareholder will lose his or her
dissenters' rights.
Furthermore, in order to preserve his or her dissenters' rights, a
shareholder must make a written demand upon GBB for the purchase of dissenting
shares and payment to such shareholder of their fair market value, specifying
the number of shares held of record by such shareholder and a statement of
what the shareholder claims to be the fair market value of those shares as of
September 5, 1997. Such demand must be addressed to Greater Bay Bancorp, 2860
West Bayshore Road, Palo Alto, California 94303; Attention: Steven C. Smith,
and must be received by GBB not later than the date of the GBB Meeting. A vote
"AGAINST" the Merger does not constitute such written demand.
If the holders of five percent (5%) or more of the outstanding shares of GBB
Stock have submitted a written demand for GBB to purchase their shares, these
demands are received by GBB on or before the date of the GBB Meeting and the
Merger is approved by the shareholders, GBB will have 10 days after such
approval to send to those shareholders who have voted against the approval of
the Merger written notice of such approval accompanied by a copy of Chapter 13
of the California Law, a statement of the price determined by GBB to represent
the fair market value of the dissenting shares as of September 5, 1997, and a
brief description of the procedure to be followed if a shareholder desires to
exercise dissenters' rights. Within 30 days after the date on which the notice
of the approval of the Merger is mailed, the dissenting shareholder must
surrender to GBB, at the office designated in the notice of approval, the
certificates representing the dissenting shares to be stamped or endorsed with
a statement that they are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed. Any shares of
GBB Stock that are transferred prior to their submission for endorsement lose
their status as dissenting shares.
If GBB and the dissenting shareholder agree that the surrendered shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of the agreement. Payment of the fair
market value of the dissenting shares shall be made within 30 days after the
amount thereof has been agreed upon or 30 days after any statutory or
contractual conditions to the Merger have been satisfied, whichever is later,
subject to the surrender of the certificates therefor, unless provided
otherwise by agreement.
46
<PAGE>
If GBB denies that the shares surrendered are dissenting shares, or GBB and
the dissenting shareholder fail to agree upon a fair market value of such
shares of GBB Stock, then the dissenting shareholder of GBB must, within six
months after the notice of approval is mailed, file a complaint at the
Superior Court of the proper county requesting the court to make such
determinations or intervene in any pending action brought by any other
dissenting shareholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenters' rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value.
A dissenting shareholder may not withdraw his or her dissent or demand for
payment unless GBB consents to such withdrawal.
PBC
Each holder of shares of PBC Stock that were outstanding as of the PBC
Record Date and remain outstanding at the Effective Time who does not vote
such shares in favor of the proposal to approve the Merger by complying with
the procedures set forth in Chapter 13 of the California Law will be entitled
to receive an amount equal to the fair market value of his or her shares as of
September 5, 1997, the day before the public announcement of the Merger. The
final bid price for PBC Stock on September 5, 1997 was $39.50. A copy of
Chapter 13 of the California Law is attached hereto as Appendix C and should
be read for more complete information concerning dissenters' rights. THE
REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 OF THE CALIFORNIA LAW MUST BE
FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST. The information set
forth below is a general summary of dissenters' rights as they apply to PBC
shareholders and is qualified in its entirety by reference to Appendix C.
In order to be entitled to exercise dissenters' rights, a shareholder of PBC
must not vote "FOR" the Merger. Thus, any shareholder who wishes to dissent
and executes and returns a proxy in the accompanying form must specify that
his or her shares are to be either voted "AGAINST" or "ABSTAIN" on the
proposal to approve the principal terms of the Reorganization Agreement. If
the shareholder returns a proxy without voting instructions or with
instructions to vote "FOR" the proposal to approve the principal terms of the
Reorganization Agreement, his or her shares will automatically be voted in
favor of the Merger and the shareholder will lose his or her dissenters'
rights.
If the Merger is approved by the shareholders, PBC will have 10 days after
such approval to send to those shareholders who did not vote in favor of the
Merger written notice of such approval accompanied by a copy of Chapter 13 of
the California Law, a statement of the price determined by PBC to represent
the fair market value of the dissenting shares as of September 5, 1997 and a
brief description of the procedure to be followed if a shareholder desires to
exercise dissenters' rights. Within 30 days after the date on which the notice
of the approval of the Merger is mailed, the dissenting shareholder must make
written demand upon PBC for the purchase of dissenting shares and payment to
such shareholder of their fair market value, specifying the number of shares
held of record by such shareholder and a statement of what the shareholder
claims to be the fair market value of those shares as of September 5, 1997,
and must surrender to PBC, at the office designated in the notice of approval,
the certificates representing the dissenting shares to be stamped or endorsed
with a statement that they are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed. Any shares of
PBC Stock that are transferred prior to their submission for endorsement lose
their status as dissenting shares.
If PBC and the dissenting shareholder agree that the surrendered shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of the agreement. Subject to the
restrictions imposed under California law on the ability of PBC to purchase
its outstanding shares, payment of the fair value of the dissenting shares
shall be made within 30 days after the amount thereof has been agreed upon or
30 days after any statutory or contractual conditions to the Merger have been
satisfied, whichever is later, subject to the surrender of the certificates
therefor, unless provided otherwise by agreement.
47
<PAGE>
If PBC denies that the shares surrendered are dissenting shares or PBC and
the dissenting shareholder fail to agree upon a fair market value of such
shares of PBC Stock, then the dissenting shareholder of PBC must, within six
months after the notice of approval is mailed, file a complaint in the
Superior Court of the proper county requesting the court to make such
determinations or intervene in any pending action brought by any other
dissenting shareholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenter's rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value.
A dissenting shareholder may not withdraw his or her dissent or demand for
payment unless PBC consents to such withdrawal.
48
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements are based on
the historical consolidated balance sheet and statements of operations of GBB
and PBC, adjusted to give effect to the Merger, using the pooling method of
accounting for business combinations.
The unaudited pro forma combined balance sheet as of June 30, 1997 assumes
that the Merger occurred as of that date and reflects the combination of the
historical financial position of GBB with the historical financial position of
PBC as of June 30, 1997 after giving effect to the pooling accounting and
other Merger-related adjustments described in the respective Notes herein. The
unaudited pro forma combined statements of operations for the six months ended
June 30, 1997 and for the years ended December 31, 1996, 1995 and 1994 combine
the historical results of operations of GBB for those periods with the
historical results of operations of PBC for the same periods and assume that
the Merger occurred at the beginning of the periods presented.
The following unaudited pro forma combined financial statements have been
prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of GBB and PBC, which are
included in this Joint Proxy Statement/Prospectus. These pro forma financial
statements are presented for illustrative purposes only and are not indicative
of the operating results that would have been achieved or the financial
position that would have existed had the Merger been consummated on the dates
indicated in the preceding paragraphs, nor are they indicative of the future
operating results or financial position of the combined companies. The pro
forma adjustments made in connection with the development of the pro forma
information are preliminary and have been made solely for purposes of
developing such pro forma information as necessary to comply with the
disclosure requirements of the Commission.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
GBB & PBC
GBB PBC ADJUSTMENTS(1) COMBINED
-------- -------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks........ $ 33,428 $ 6,282 $ 39,710
Federal funds sold............. 42,200 4,600 46,800
Cash equivalent securities..... -- 96,119(2) 96,119
Securities held-to-maturity.... 47,111 6,850 53,961
Securities available-for-sale.. 54,169 14,966 69,135
FRB and FHLB stock............. 2,115 -- 2,115
Total loans, net............... 513,846 74,012 587,858
Premises and equipment......... 4,799 1,959 6,758
Other real estate owned........ 325 -- 325
Interest receivable and other
assets........................ 21,058 2,427 23,485
-------- -------- --------
TOTAL ASSETS................. $719,051 $207,215 $926,266
======== ======== ========
LIABILITIES
Total deposits................. $639,737 $190,519(2) $830,256
Subordinated debt.............. 3,000 -- 3,000
Other liabilities.............. 7,818 1,722 $ 1,150 10,690
Trust Preferred Securities..... 20,000 -- -- 20,000
-------- -------- ------- --------
TOTAL LIABILITIES................ 670,555 192,241 1,150 863,946
-------- -------- ------- --------
SHAREHOLDERS' EQUITY............. 48,496 14,974 (1,150) 62,320
-------- -------- ------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........ $719,051 $207,215 $ -- $926,266
======== ======== ======= ========
</TABLE>
- --------
(1) The following table reflects all nonrecurring GBB and PBC estimated
Merger-related costs as of June 30, 1997. These costs are not included on
the unaudited pro forma combined income statement but are included on the
unaudited pro forma combined balance sheet as a reduction to equity
capital. These costs will be charged to expense immediately following the
consummation of the Merger. Such estimated Merger-related costs are
summarized below (in thousands):
<TABLE>
<CAPTION>
MERGER COSTS
------------------
GBB PBC COMBINED
---- ---- --------
<S> <C> <C> <C>
Financial advisory.................................... $ 50 $475 $ 525
Professional fees..................................... 125 125 250
Printing and other.................................... 125 250 375
---- ---- ------
$300 $850 $1,150
==== ==== ======
</TABLE>
(2) Includes approximately $95.2 million related to the Special Deposit. Total
assets and total liabilities excluding the Special Deposit would have been
$112.0 million and $97.0 million, respectively.
49
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GBB & PBC
GBB PBC(1) ADJUSTMENTS COMBINED(1)
------- ------ ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans..................... $24,304 $4,012 $28,316
Interest on investment securities..... 3,099 3,182 6,281
Other interest income................. 1,065 187 1,252
------- ------ -------
TOTAL INTEREST INCOME............. 28,468 7,381 35,849
Interest on deposits.................. 9,846 2,866 12,712
Other interest expense................ 1,056 -- 1,056
------- ------ -------
Net interest income................... 17,566 4,515 22,081
Provision for loan losses............. 4,078 90 4,168
------- ------ -------
Net interest income after provision
for loan losses...................... 13,488 4,425 17,913
Other income.......................... 3,190 195 3,385
Operating expenses.................... 10,706 1,932 12,638
------- ------ -------
Income before income tax expense,
merger and nonrecurring costs ....... 5,972 2,688 8,660
Income tax expense.................... 2,282 1,020 3,302
------- ------ -------
Net income before merger and
nonrecurring costs................... 3,690 1,668 5,358
Merger and nonrecurring costs, net of
tax(3)............................... -- -- --
------- ------ -------
NET INCOME........................ $ 3,690 $1,668 $ 5,358
======= ====== =======
Net income per common and common
equivalent share..................... $ 1.05 $ 2.41 $ 1.26
Weighted average shares outstanding... 3,526 692 4,266(2)
</TABLE>
- --------
(1) Net income for PBC includes approximately $535,500 (net of tax) of net
income related to the Special Deposit. Net income and net income per
common and common equivalent share excluding income related to the Special
Deposit would have been $1.1 million and $1.64, respectively. The
resulting GBB and PBC Combined net income and net income per share would
have been $4.8 million and $1.13, respectively.
(2) Calculated as the historical GBB weighted average shares plus the
historical PBC weighted average shares adjusted for the assumed Conversion
Ratio of 1.07.
(3) For a discussion of merger and nonrecurring costs, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
GBB."
50
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GBB & PBC
GBB PBC(2) ADJUSTMENTS COMBINED(3)
------- ------ ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans..................... $36,278 $6,670 $42,948
Interest on investment securities..... 7,123 1,806 8,929
Other interest income................. 1,636 585 2,221
------- ------ -------
TOTAL INTEREST INCOME............. 45,037 9,061 54,098
Interest on deposits.................. 15,732 2,912 18,644
Other interest expense................ 481 -- 481
------- ------ -------
Net interest income................... 28,824 6,149 34,973
Provision for loan losses............. 2,036 120 2,156
------- ------ -------
Net interest income after provision
for loan losses...................... 26,788 6,029 32,817
Other income.......................... 3,530 420 3,950
Operating expenses.................... 21,097 3,569 24,666
------- ------ -------
Income before income tax expense,
merger and nonrecurring costs ....... 9,221 2,880 12,101
Income tax expense.................... 3,727 1,045 4,772
------- ------ -------
Net income before merger and
nonrecurring costs................... 5,494 1,835 7,329
Merger and nonrecurring costs, net of
tax(1)............................... 1,991 -- 1,991
------- ------ -------
NET INCOME........................ $ 3,503 $1,835 $ 5,338
======= ====== =======
Net income per common and common
equivalent share..................... $ 1.04 $ 2.65 $ 1.30
Weighted average shares outstanding... 3,360 692 4,100(4)
</TABLE>
- --------
(1) For a discussion of merger and nonrecurring costs, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
GBB."
(2) PBC's net income includes approximately $117,300 of net income (net of
tax) related to the Special Deposit. Net income and net income per share
excluding this would have been $1.7 million and $2.48, respectively.
(3) Net income and net income per share for GBB and PBC combined after
excluding the net income related to the Special Deposit noted in footnote
(2) above would have been $5.2 million and $1.27, respectively.
(4) Calculated as the historical GBB weighted average shares plus the
historical PBC weighted average shares adjusted for the assumed Conversion
Ratio of 1.07.
51
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GBB & PBC
GBB PBC ADJUSTMENTS COMBINED(1)
------- ------ ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans..................... $28,397 $7,119 $35,516
Interest on investment securities..... 6,701 1,065 7,766
Other interest income................. 2,135 419 2,554
------- ------ -------
TOTAL INTEREST INCOME............. 37,233 8,603 45,836
Interest on deposits.................. 13,048 2,447 15,495
Other interest expense................ 844 -- 844
------- ------ -------
Net interest income................... 23,341 6,156 29,497
Provision for loan loss............... 956 204 1,160
------- ------ -------
Net interest income after provision
for loan loss........................ 22,385 5,952 28,337
Other income.......................... 2,306 476 2,782
Operating expenses.................... 17,551 3,600 21,151
------- ------ -------
Income before income tax expense,
merger and nonrecurring costs........ 7,140 2,828 9,968
Income tax expense.................... 2,771 1,046 3,817
------- ------ -------
Net income before merger and
nonrecurring costs................... 4,369 1,782 6,151
Merger and nonrecurring costs, net of
tax(1)............................... 1,335 -- 1,335
------- ------ -------
NET INCOME........................ $ 3,034 $1,782 $ 4,816
======= ====== =======
Net income per common and common
equivalent share..................... $ 0.96 $ 2.70 $ 1.25
Weighted average shares outstanding... 3,146 660 3,852(2)
</TABLE>
- --------
(1) For a discussion of merger and nonrecurring costs, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
GBB."
(2) Calculated as the historical GBB weighted average shares plus the
historical PBC weighted average shares adjusted for the assumed Conversion
Ratio of 1.07.
52
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
GBB & PBC
GBB PBC ADJUSTMENTS COMBINED(1)
------- ------ ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans..................... $22,112 $5,982 $28,094
Interest on investment securities..... 4,659 889 5,548
Other interest income................. 1,030 341 1,371
------- ------ -------
TOTAL INTEREST INCOME............. 27,801 7,212 35,013
Interest on deposits.................. 8,130 1,685 9,815
Other interest expense................ 382 -- 382
------- ------ -------
Net interest income................... 19,289 5,527 24,816
Provision for loan loss............... 1,823 120 1,943
------- ------ -------
Net interest income after provision
for loan loss........................ 17,466 5,407 22,873
Other income.......................... 3,295 460 3,755
Operating expenses.................... 15,623 3,676 19,299
------- ------ -------
Income before income tax expense,
merger and nonrecurring costs........ 5,138 2,191 7,329
Income tax expense.................... 1,966 825 2,791
------- ------ -------
Net income before merger and
nonrecurring costs................... 3,172 1,366 4,538
Merger and nonrecurring costs, net of
tax(1)............................... 608 -- 608
------- ------ -------
NET INCOME........................ $ 2,564 $1,366 $ 3,930
======= ====== =======
Net income per common and common
equivalent share..................... $ 0.85 $ 2.14 $ 1.07
Weighted average shares outstanding... 3,001 640 3,685(2)
</TABLE>
- --------
(1) For a discussion of merger and nonrecurring costs, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
GBB."
(2) Calculated as the historical GBB weighted average shares plus the
historical PBC weighted average shares adjusted for the assumed Conversion
Ratio of 1.07.
53
<PAGE>
DESCRIPTION OF GBB STOCK AND PBC STOCK
In the Merger, PBC shareholders will be exchanging their shares of PBC Stock
for GBB Stock. Set forth below is a summary of (i) the material features of
the GBB Stock and the PBC Stock; and (ii) the material differences between the
rights of the holders of these securities. These summaries are qualified in
their entirety by reference to the charter documents and other instruments of
GBB and PBC that create the rights of the security holders.
GBB STOCK
GBB is authorized by its articles of incorporation, as amended, to issue
6,000,000 shares of GBB Stock and 4,000,000 shares of preferred stock, without
par value. At the GBB Meeting, shareholders are being asked to approve a
proposal to increase the authorized shares of GBB stock to 12,000,000. See
"INFORMATION CONCERNING GBB MEETING ONLY." On the GBB Record Date, 3,338,083
shares of GBB Stock were issued and outstanding and no shares of preferred
stock were outstanding. Holders of GBB Stock are entitled to one vote, in
person or by proxy, for each share of GBB Stock held of record in the
shareholder's name on the books of GBB as of the record date on any matter
submitted to the vote of the shareholders. No holder of any class of GBB Stock
is entitled to cumulate votes at any election of directors. Each share of GBB
Stock has the same rights, privileges and preferences as every other share and
will share equally in GBB's net assets upon liquidation or dissolution. GBB
Stock has no preemptive, conversion or redemption rights or sinking fund
provisions, and all the shares offered hereby will, when issued, be fully paid
and nonassessable. See "--Differences Between Rights of Holders of GBB Stock
and PBC Stock--Assessability."
The GBB Board, without shareholder approval, may authorize one or more
classes of serial preferred stock with preferences or voting rights that may
adversely affect the rights of holders of GBB Stock. Although it is not
possible to state the actual effect any issuance of serial preferred stock
might have upon the rights of holders of GBB Stock, the issuance of serial
preferred stock might (i) restrict dividends on GBB Stock if preferred stock
dividends have not been paid; (ii) dilute the voting power and equity interest
of holders of GBB Stock to the extent that any preferred stock series has
voting rights or is convertible into GBB Stock; or (iii) prevent current
holders of GBB Stock from participating in GBB's assets upon liquidation until
any liquidation preferences granted to the holders of the serial preferred
stock are satisfied. In addition, the issuance of serial preferred stock may,
under certain circumstances, have the effect of discouraging an attempt to
change control of GBB by, for example, creating voting impediments to the
approval of the Merger or other similar transactions involving GBB. The GBB
Board does not presently intend to issue any serial preferred stock.
GBB's articles of incorporation provide that the liability of the directors
of GBB for monetary damages shall be eliminated to the fullest extent
permissible under California law and that GBB is authorized to provide for the
indemnification of agents (as defined in Section 317 of the California Law) of
GBB, to the extent not prohibited by applicable sections of California law, in
excess of that expressly permitted by Section 317 for breach of duty to the
corporation and its shareholders.
There is no action or proceeding pending or, to the knowledge of GBB,
threatened which may result in a claim for indemnification by any director,
officer, employee or agent of GBB or its subsidiaries.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of GBB
pursuant to the provisions described above or otherwise, GBB has been advised
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Shareholders are entitled to dividends when, as and if declared by the GBB
Board out of funds legally available therefor (and after satisfaction of the
prior rights of holders of outstanding preferred stock, if any) subject to
certain restrictions on payment of dividends imposed by the California Law.
See "--Differences Between Rights of Holders of GBB Stock and PBC Stock--
Dividend Restrictions."
54
<PAGE>
The Transfer Agent and Registrar for GBB Stock is U.S. Stock Transfer
Corporation.
PBC STOCK
PBC is authorized by its articles of incorporation, as amended, to issue
2,000,000 shares of common stock and 1,000,000 shares of serial preferred
stock, without par value. At the PBC Record Date, 673,862 shares of PBC Stock
were issued and outstanding and no shares of preferred stock were outstanding.
Holders of PBC Stock are entitled to one vote, in person or by proxy, for each
share of PBC Stock held of record in the shareholder's name on the books of
PBC as of the record date on any matter submitted to the vote of the
shareholders, except that in connection with the election of directors, the
shares may be voted cumulatively. Each share of PBC Stock has the same rights,
privileges and preferences as every other share and will share equally in
PBC's net assets upon liquidation or dissolution. The stock has no preemptive,
conversion or redemption rights or sinking fund provisions and all of the
issued and outstanding shares of PBC Stock are fully paid. Shares of PBC Stock
are subject to assessment by PBC upon order of the Commissioner of the DFI
(the "Commissioner") for the purpose of correcting an impairment of
contributed capital in the manner and to the extent provided in Division 1 of
the California Financial Code. See "--Differences Between Rights of Holders of
GBB Stock and PBC Stock--Assessability."
Shareholders are entitled to dividends when, as and if declared by the PBC
Board out of funds legally available therefore (and after satisfaction of the
prior rights of holders of outstanding preferred stock, if any), subject to
certain restrictions on payment of dividends imposed by the California
Financial Code. See "--Differences Between Rights of Holders of GBB Stock and
PBC Stock--Dividend Restrictions."
PBC acts as its own Transfer Agent and Registrar.
DIFFERENCES BETWEEN RIGHTS OF HOLDERS OF GBB STOCK AND PBC STOCK
Assessability. As a California state chartered bank, PBC Stock is subject to
assessment pursuant to the provisions of Division 1 of the California
Financial Code. Section 662 of Division 1 of the California Financial Code
provides that when a bank's contributed capital is "impaired" (when the
retained earnings deficit is in excess of 40% of contributed capital), the
Commissioner shall order the bank to restore its capital impairment within 60
days of the issuance of such an order. If the contributed capital is not
restored by other means, the bank's board is required to levy and collect an
assessment on its outstanding common shares pursuant to Section 423 of the
California Corporations Code. The date that the bank levies the assessment
must be within 60 days after the Commissioner's order, and the resolutions
levying the assessment of the common stock must fix a date not more than 60
days after the date of the adoption of the assessment resolution on which the
assessment is payable (the "Payable Date"); fix a date not less than 30 nor
more than 60 days from the Payable Date on which such assessment becomes
delinquent if not paid (the "Delinquency Date"); fix a date not less than 15
nor more than 60 days from the Delinquency Date for the sale of the delinquent
shares (the "Sale Date"); and fix the hour and place of sale.
If an assessment is levied, the shareholders of PBC are required to pay the
assessment on a pro rata basis determined by the number of shares held by each
shareholder. If a shareholder has not paid the amount of the assessment by the
Delinquency Date, the shareholder may, prior to the Sale Date, redeem his or
her shares by paying the amount of the assessment together with a penalty of
5% of the amount of the assessment on such shares. If a particular shareholder
fails or refuses to pay such shareholder's pro rata portion of the assessment,
the assessed shares may be sold by the bank in satisfaction of the assessment
and penalties thereon. The shareholders are not subject to personal liability
for payment of such an assessment. The bank's only remedy for the collection
of any such assessment is the sale of the shares as described above or, in the
event no such sale can be consummated, forfeiture of such shares.
GBB Stock is not assessable.
Dividend Restrictions. Since PBC is a state chartered bank, its ability to
pay dividends or make distributions to its shareholders is subject to
restrictions set forth in the California Financial Code. The California
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Financial Code provides that neither a bank nor any majority-owned subsidiary
of a bank may make a distribution to shareholders of the bank in an amount
which exceeds the lesser of (i) the bank's retained earnings; or (ii) the
bank's net income for its last three fiscal years, less the amount of any
distributions made by the bank or by any majority-owned subsidiary of the bank
to the shareholders of the bank during such period. However, a bank or a
majority-owned subsidiary of a bank may, with the prior approval of the
Commissioner, make a distribution to the shareholders of the bank in an amount
not exceeding the greatest of (i) its retained earnings; (ii) its net income
for its last fiscal year; or (iii) its net income for its current fiscal year.
In the event that the Commissioner determines that the stockholders' equity of
a bank is inadequate or that the making of a distribution by a bank would be
unsafe or unsound, the Commissioner may order the bank to refrain from making
a proposed distribution.
Under the California Law, which governs GBB's ability to make distributions,
a distribution may be made if the amount of the retained earnings of the
corporation immediately prior thereto equals or exceeds the amount of the
proposed distribution. Alternatively, the distribution may be made if,
immediately after giving effect thereto, the sum of the assets of the
corporation would be at least equal to 1 1/4 times its liabilities and the
current assets of the corporation would be at least equal to its current
liabilities, or, if the average of the earnings of the corporation before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the interest expense for the corporation for
those fiscal years, at least equal to 1 1/4 times it current liabilities.
No distribution may be made by a corporation or its subsidiaries if such
distribution would result or could result in a corporation or its subsidiary
being unable to meet its liabilities, except for those liabilities whose
payment is otherwise adequately provided for, as they mature.
Dissenters' Rights. Shareholders of GBB Stock and PBC Stock are generally
entitled to dissenters' rights in connection with mergers and other
reorganizations, subject to different restrictions. The California Financial
Code provides that shareholders of a bank that is the surviving bank in a
merger between two banks have no dissenters' rights; shareholders of GBB may
be entitled to dissenters' rights in a merger in which GBB is the surviving
company. Because GBB Stock is quoted on Nasdaq, shareholders of GBB Stock have
no dissenters' rights unless at least holders of 5% or more of GBB's
outstanding shares exercise dissenters' rights; holders of PBC Stock are not
subject to this limitation. For a discussion of dissenters' rights available
to shareholders of GBB and PBC in the Merger, see "DISSENTING SHAREHOLDERS'
RIGHTS--GBB" and "DISSENTING SHAREHOLDERS' RIGHTS--PBC."
Cumulative Voting. Shareholders of PBC are entitled to cumulate their votes
for the election of directors. Cumulative voting allows a shareholder to cast
a number of votes equal to the number of directors to be elected multiplied by
the number of shares held in the shareholder's name on the record date. This
total number of votes may be cast for one nominee or may be distributed among
as many candidates as the shareholder desires. The candidates (up to the
number of directors to be elected) receiving the highest number of votes are
elected.
A California corporation that is a "listed corporation" may, by amending its
articles or bylaws, eliminate cumulative voting for directors. Because GBB
Stock is quoted on Nasdaq, it qualifies as a listed corporation. In the second
quarter of 1997, the GBB Board and GBB's shareholders approved a proposal to
eliminate cumulative voting in the election of directors by amendment to GBB's
articles of incorporation.
Classified Board of Directors. At present, the PBC bylaws provide that
directors will be elected for a one-year term at each annual meeting of
shareholders. A California corporation that is a "listed corporation" may, by
amending its articles or bylaws, provide for a staggered or classified Board
of Directors. Because GBB Stock is quoted on Nasdaq, it qualifies as a listed
corporation. In the second quarter of 1997, the GBB Board and GBB's
shareholders approved an amendment to GBB's bylaws to provide for a classified
Board of Directors. GBB's bylaws now provide for the election of directors by
class for a term of three years and until his or her successor is elected and
qualified.
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BUSINESS--GBB
In addition to the historical information contained herein, certain
statements under this caption constitute "forward-looking statements" under
Section 27A of the Securities Act and Section 21E of the Exchange Act which
involve risks and uncertainties. GBB's actual results may differ significantly
from those discussed herein. Factors that might cause such a difference
include, but are not limited to, those discussed under the captions "RISK
FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--GBB" as well as those discussed elsewhere in this Joint
Proxy Statement/Prospectus.
GBB is a bank holding company operating CNB and MPB with seven regional
offices in Cupertino, Palo Alto, San Mateo, San Carlos and San Jose,
California. At June 30, 1997, GBB had total assets of $719.1 million, total
net loans of $513.8 million and total deposits of $639.7 million.
HISTORY
GBB is the result of the merger 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 Mid-Peninsula Bank, a
California state chartered bank organized in 1987, and San Mateo concurrently
changed its name to Mid-Peninsula Bancorp.
Cupertino and Mid-Peninsula undertook the merger with the intention of
achieving five primary goals. These goals included (i) developing a greater
banking presence throughout Santa Clara and San Mateo Counties by increasing
the number of banking offices to seven; (ii) reaching a critical mass in GBB's
market areas in order to better meet competitive challenges inherent in the
banking and financial services industries; (iii) enabling the resulting
company to maximize the utilization of capital by increasing the float and
marketability of its common stock and, by virtue of its larger size, obtaining
access to lower-cost capital; (iv) providing an opportunity to realize
operating efficiencies made available by the combination of Cupertino and Mid-
Peninsula; and (v) enabling CNB and MPB 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 it
refers to as the "Super Community Banking Philosophy." The Super Community
Banking Philosophy is based on management's belief that banking customers
value doing business with locally managed institutions that can provide a full
service commercial banking relationship through an understanding of the
customer's financial needs and the flexibility to customize products and
services to meet those needs. Management further believes that banks are
better able to build successful customer relationships by affiliating with a
holding company that provides cost effective administrative support services
while promoting bank autonomy and flexibility.
To implement this philosophy, GBB operates CNB and MPB as separate
subsidiaries by retaining their independent names along with their individual
Boards of Directors. Both MPB and CNB have established strong reputations and
customer followings in their respective 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, GBB will continue
to market its services under the CNB and MPB names, 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.
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While client service decisions and day-to-day operations are maintained at
the Banks, GBB offers the advantages of affiliation with a multi-bank holding
company by providing improved access to the capital markets and expanded
client support services, such as business cash management, international trade
services and accounting services. In addition, GBB provides centralized
administrative functions, including support in credit policy formulation and
review, investment management, data processing, accounting and other
specialized support functions thereby allowing the Banks to focus on client
service.
CORPORATE GROWTH STRATEGY
GBB's business strategy is to focus on increasing its market share within
the communities it serves through continued internal growth and through the
pursuit of strategic acquisition opportunities that management believes
complement GBB's businesses. GBB believes that the proposed Merger, in which
PBC will be acquired by GBB and thereafter operate as a wholly-owned
subsidiary, will complement GBB's business and allow GBB to expand its
presence in its current market areas of Santa Clara and San Mateo Counties,
and with the acquisition of PBC, penetrate into the San Francisco County
market. GBB will also pursue opportunities to expand its market through
acquisitions in other parts of the South, East and North Bay Areas of San
Francisco.
THE BANKS
CNB
CNB presently has four banking offices. CNB's main office is in Cupertino,
and it has one regional office in San Jose and two regional offices in Palo
Alto. At June 30, 1997, CNB had total assets of $384.3 million, total net
loans of $299.1 million and total deposits of $346.4 million.
MPB
MPB presently has three banking offices. MPB's main office is in Palo Alto.
MPB also has regional offices in San Mateo and in San Carlos. On June 30,
1997, MPB had total assets of $325.3 million, total net loans of $214.8
million and total deposits of $294.4 million.
Banking Services
Through their networks of regional offices, the Banks provide a wide range
of commercial banking services to small and medium-sized businesses, real
estate developers and property managers, business executives, professionals
and other individuals. In addition, the Greater Bay Trust Company provides
trust services to support the trust needs of the Banks' clients.
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 $50.0 million. The Banks' commercial customers 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 for the
financing of commercial or industrial buildings where the properties are
either used by the owner for business purposes or have income derived from
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tenants, which typically range between approximately $750,000 and $3.0
million. Loans to professionals and other individual clients cover a full
range of consumer services, such as automobile, aircraft, home improvement and
home equity loans, and other secured and unsecured lines of credit, including
credit cards.
Through the SBA Department, loans are made to smaller businesses and are
generally 65% to 80% guaranteed by the SBA. In 1994, CNB was named a Preferred
Lender by the SBA. Preferred Lender status is awarded by the SBA to lenders
who have demonstrated superior ability to generate, underwrite and service
loans guaranteed by the SBA, and results in more rapid turnaround of loan
applications submitted to the SBA for approval.
In May 1994, GBB organized the Venture Banking Group to serve the needs of
companies in their start-up and development phase. This unit was developed to
meet the needs of such clients in GBB's service area by 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.
MARKET AREA
The Banks concentrate on marketing their services to small and medium-sized
businesses, professionals and individuals in Santa Clara 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 1,650,000 and its median annual household income
exceeds $77,000. 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 700,000, and its median annual household income is
nearly $78,000.
The commercial base of Santa Clara and San Mateo Counties is diverse and
includes computer and semiconductor manufacturing, professional services,
printing and publishing, aerospace, defense, and real estate construction, as
well as wholesale and retail trade. As a result of its geographic
concentration, GBB's results depend largely upon economic conditions in these
areas. While the economy in GBB'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 GBB's loan portfolio and the demand for its product
and services, and accordingly its results of operations. See "RISK FACTORS--
Risk Factors Relating to the Industry--Economic Conditions and Geographic
Concentration."
LENDING ACTIVITIES
Underwriting and Credit Administration
The lending activities of each of the Banks are guided by the basic lending
policies established by its Board of Directors. GBB has recently implemented a
new loan policy which governs the lending activities of both Banks. The credit
policy will be managed through periodic reviews and approved each year by the
Boards of Directors of GBB and each of the Banks.
Each loan must meet minimum underwriting criteria established in each 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 GBB Officers' Loan
Committee, which consists of the President and Chief Executive Officer of GBB,
the Executive Vice President and Chief Lending Officer of GBB, the Executive
Vice President and Chief Credit Officer of MPB and the Senior Vice President
and Chief Credit Officer of GBB. Loan requests which exceed the limits of the
GBB Officers' Loan Committee are submitted to the Directors' Loan Committee
for final approval. The Directors' Loan Committee consists of four outside
directors and one inside director. Each of these committees meets on a regular
basis in order to provide timely responses to the Banks' clients.
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GBB's credit administration function includes an internal review and the
regular use of an outside loan review firm. In addition, the GBB Officers'
Loan Committee and Chief Financial Officer meet at least once a month and
review 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 information reviewed by this committee is submitted to the
Boards of Directors of GBB on a monthly basis.
Loan Portfolio
At June 30, 1997, approximately 53.5% of GBB's gross loan portfolio was in
commercial loans and real estate construction and land loans represented
approximately 19.1% of total loans, primarily for residential projects. In
addition, approximately 18.9% of GBB's loans were real estate term loans,
which are primarily secured by commercial properties. The balance of the
portfolio consists of consumer loans.
The interest rates charged for the loans made by the Banks 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 Banks 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.
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. Many of these companies are in the start-up or
development phase and will not generate any revenues for several years. GBB
will often receive warrants from these companies as part of the compensation
for its services. Venture Banking Group loans represented approximately 6.5%
of GBB's gross loan portfolio at June 30, 1997.
GBB 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, GBB 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. GBB 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. GBB'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. GBB 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 has focused on providing short-term (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. During 1992 and 1993, 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
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market for multi-unit, single-family residential projects. During 1995 and
1996 and through the first two quarters of 1997, the Banks continued to expand
their real estate construction portfolio with the help of the improving real
estate market in Northern California.
Residential real estate construction loans are typically secured by first
deeds of trust and require guarantees of the borrower. The economic viability
of the project and the borrower's credit-worthiness are primary considerations
in the loan underwriting decision. Generally, these loans provide an
attractive yield, but may carry a higher than normal risk of loss or
delinquency, particularly if general real estate values decline. The Banks
utilize approved independent local appraisers and loan-to-value ratios which
generally do not exceed 65% to 75% of the appraised value of the property. The
Banks monitor projects during the construction phase through regular
construction inspections and a disbursement program tied to the percentage of
completion of each project.
The Banks also occasionally make land loans to individuals who intend to
construct a single-family residence on the lot, generally within 12 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.
Commercial Real Estate Term Loans. The Banks provide medium-term commercial
real estate loans secured by commercial or industrial buildings where the
properties are either used by the owner for business purposes ("owner-user
properties") or have income derived from tenants ("investment properties").
GBB's loan policies require the principal balance of the loan, generally
between $750,000 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 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' deposits are obtained 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 do not have deposit relationships with any
single depositor or group of affiliated depositors, the loss of which would
have a material adverse effect on the business of GBB or either 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 June 30, 1997, these funds totaled approximately $44.4 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 June 30, 1997, customers of the Venture Banking
Group had approximately $46.8 million in deposits at CNB.
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TRUST SERVICES
The Greater Bay Trust Company, which is a division of CNB, commenced
operations in July 1988. The Greater Bay Trust Company 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 approximately $486.7 million at June 30, 1997, compared to $418.0 million
at December 31, 1996 and $270.0 million at December 31, 1995.
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 services providers. The Banks compete for
loans, deposits and customers for financial services 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 services
providers, the Banks principally rely upon local promotional activities,
personal relationships established by officers, directors and employees with
its customers, and specialized services tailored to meet its customers' 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 seven offices located in the Santa Clara and
San Mateo Counties. Neither the deposits nor loans of the offices of the
respective Banks exceed 1% of those of all financial services companies
located in such counties.
EMPLOYEES
At June 30, 1997, GBB had 182 full-time employees. None of the employees is
covered by a collective bargaining agreement. GBB considers its employee
relations to be satisfactory.
PROPERTIES
GBB occupies its administrative office under a lease which expires in 2002.
MPB occupies its offices under leases expiring at various dates (including
options to renew) through 2009. CNB occupies its offices under leases expiring
at various dates (including options to renew) through 2018.
GBB believes its present facilities are adequate for its present needs and
anticipated future growth. GBB believes that, if necessary, it could secure
suitable alternative facilities on terms which would not materially adversely
affect operations. However, due to the high occupancy rate of commercial
office space in GBB's service area, no assurance can be given that the terms
of a lease for alternative facilities would not be significantly more costly
than GBB's current leases.
LEGAL PROCEEDINGS
There are no material legal proceedings pending other than ordinary routine
litigation incidental to the business of GBB to which GBB or either of the
Banks is a party or of which any of their property is a subject.
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SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain
laws which relate to the regulation of GBB, the Banks and PBC. The description
does not purport to be complete and is qualified in its entirety by reference
to the applicable laws and regulations.
GBB
GBB, as a registered bank holding company, is subject to regulation under
the Bank Holding Company Act. GBB is required to file with the FRB quarterly
and annual reports and such additional information as the FRB may require
pursuant to the Bank Holding Company Act. The FRB may conduct examinations of
GBB and its subsidiaries.
The FRB may require that GBB terminate an activity or terminate control of
or liquidate or divest certain subsidiaries or affiliates when the FRB
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 FRB 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, GBB must file written notice and obtain approval from the FRB
prior to purchasing or redeeming its equity securities. Further, GBB is
required by the FRB to maintain certain levels of capital. See "--Capital
Standards."
GBB is required to obtain the prior approval of the FRB 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 FRB is also required for the merger or consolidation of GBB
and another bank holding company.
GBB is prohibited by the Bank Holding Company Act, 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, GBB, subject to the
prior approval of the FRB, may engage in any, or acquire shares of companies
engaged in, activities that are deemed by the FRB to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
In making any such determination, the FRB is required to consider whether the
performance of such activities by GBB or an affiliate can reasonably be
expected to produce benefits to the public, such as greater convenience,
increased competition or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The FRB is
also empowered to differentiate between activities commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
In 1996, the Economic Growth and Regulatory Paperwork Reduction Act of 1996
(the "Budget Act") eliminated the requirement that bank holding companies seek
FRB approval before engaging de novo in permissible nonbanking activities
listed in Regulation Y, which governs bank holding companies, if the holding
company and its lead depository institution are well-managed and well-
capitalized and certain other criteria specified in the statute are met. For
purposes of determining the capital levels at which a bank holding company
shall be considered "well-capitalized" under this section of the Budget Act
and Regulation Y, the FRB adopted, as a rule, risk-based capital ratios (on a
consolidated basis) that are the same as the levels set for determining that a
state member bank is well-capitalized under the provisions established under
the prompt corrective action provisions of federal law. See "--Prompt
Corrective Action and Other Enforcement Mechanisms."
Under FRB 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 FRB'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
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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 FRB to be an unsafe and unsound banking
practice or a violation of the FRB's regulations or both.
GBB is also a bank holding company within the meaning of Section 3700 of the
California Financial Code. As such, GBB and its subsidiaries are subject to
examination by, and may be required to file reports with, the DFI.
Finally, GBB is subject to the periodic reporting requirements of the
Exchange Act, including, but not limited to, filing annual, quarterly and
other current reports with the Commission.
THE BANKS AND PBC
CNB, as a national banking association, is subject to primary supervision,
examination and regulation by the Office of the Comptroller of the Currency
(the "Comptroller"). MPB, as a California state chartered bank and member of
the Federal Reserve System, is subject to primary supervision, periodic
examination and regulation by the Commissioner and the FRB. PBC, as a
California state chartered bank that is not a member of the Federal Reserve
System, is subject to primary supervision, periodic examination and regulation
by the Commissioner and the FDIC. 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. Neither CNB, MPB nor PBC has been the subject of any such
actions by their respective regulatory agencies.
The deposits of the Banks and PBC are insured by the FDIC in the manner and
to the extent provided by law. For this protection, the Banks and PBC pay a
semiannual statutory assessment. See "--Premiums 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 and PBC.
State and federal statutes and regulations relate to many aspects of the
Banks' and PBC's 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.
RESTRICTIONS ON DIVIDENDS
GBB, a California corporation, is a legal entity separate and distinct from
the Banks. GBB's ability to pay cash dividends is limited by the California
Law. Since PBC is a California state chartered bank, its ability to pay
dividends or make distributions to shareholders is subject to restrictions set
forth in the California Financial Code. See "DESCRIPTION OF GBB STOCK AND PBC
STOCK--Differences Between Rights of Holders of GBB Stock and PBC Stock--
Dividend Restrictions."
There are statutory and regulatory limitations on the amount of dividends
which may be paid to GBB by the Banks. California law restricts the amount
available for cash dividends by state chartered banks, such as MPB and PBC, to
the lesser of retained earnings or the bank's net income for its last three
fiscal years (less any distributions made to shareholders by the bank or by
any majority-owned subsidiary of the bank during such period). Notwithstanding
this restriction, a bank may, with the prior approval of the Commissioner,
make a
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distribution to its shareholders in an amount not exceeding the greater of the
retained earnings of the bank, net income for such bank's last fiscal year or
the net income of the bank for its current year. The prior approval of the
Comptroller is required if the total of all dividends declared by a national
bank, such as CNB, in any calendar year exceeds the bank's net profits (as
defined) for that year combined with its retained net profits (as defined) for
the preceding two years, less any required transfers to surplus or a fund for
the retirement of any preferred stock.
The bank regulatory agencies also have authority to prohibit 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, PBC or GBB may pay. See "--Prompt
Corrective Action and Other Enforcement Mechanisms" and "--Capital Standards"
for a discussion of these additional restrictions on capital distributions.
Substantially all of GBB's revenues, including funds available for the
payment of dividends and other operating expenses, are, and will continue to
be, dividends paid by the Banks. At June 30, 1997, the Banks had $5.2 million
in the aggregate available for the payment of cash dividends. At June 30,
1997, PBC had $2.6 million in the aggregate available for the payment of cash
dividends.
LIMITATIONS ON AFFILIATED TRANSACTIONS
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, their holding companies 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 their holding
companies or other affiliates. Such restrictions prevent affiliates from
borrowing from banks unless the loans are secured by marketable obligations or
other acceptable collateral of designated amounts. Further, such secured loans
and investments by banks to or in any 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 controlling persons of
banks. Additional restrictions on transactions with affiliates may be imposed
on banks under the prompt corrective action provisions of federal law. See "--
Prompt Corrective Action and Other Enforcement Mechanisms."
COMMON LIABILITY
Under federal law, a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with the default of a commonly controlled FDIC-insured
depository institution or any assistance provided by the FDIC to a commonly
controlled FDIC-insured institution in danger of default. These provisions can
have the effect of making one subsidiary bank of GBB responsible for FDIC-
insured losses at another subsidiary bank.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business that depends to a significant degree on rate
differentials. In general, the difference between the interest rate paid by
banks on their deposits and their other borrowings and the interest rate
received by banks on loans extended to their customers and securities held in
banks' portfolios comprises the major portion of banks' earnings. These rates
are highly sensitive to many factors that are beyond the control of banks.
Accordingly, the earnings and growth of banks are subject to the influence of
domestic and foreign economic conditions, including inflation, recession and
unemployment.
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The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
FRB. The FRB implements national monetary policies (with objectives such as
curbing inflation and combating recession) by its open-market operations in
United States Government securities, by adjusting the required level of
reserves for financial institutions subject to its reserve requirements and by
varying the discount rates applicable to borrowings by depository
institutions. The actions of the FRB in these areas influence the growth of
bank loans, investments and deposits and also affect interest rates charged on
loans and paid on deposits. The nature and impact of any future changes in
monetary policies cannot be predicted.
From time to time, legislation is enacted which has 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
services provider are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional
agencies. The likelihood of any major legislative changes and the impact such
changes might have on GBB, the Banks or PBC are impossible to predict.
RECHARTERING LEGISLATION
Legislation enacted in 1996 provides that the BIF and SAIF will merge on
January 1, 1999, if there are no savings associations, as defined, in
existence on that date. Pursuant to that legislation, the Department of
Treasury in May 1997 recommended in a report to Congress that the separate
charters for thrifts and banks be abolished. Various proposals to eliminate
the federal thrift charter, create a uniform financial institutions charter,
conform holding company regulation and abolish the OTS have been introduced in
Congress. The House Committee on Banking and Financial Services has considered
and reported H.R. 10, the Financial Services Competition Act of 1997,
including Title III, the "Thrift Charter Transition Act of 1997" ("Title
III"). Title III will require federal savings associations to convert to
national banks or some type of state charter within two years of enactment or
they would automatically become national banks. On the earlier of January 1,
2000, or two years after the date of enactment, the BIF and SAIF will merge.
Two years after enactment, the HOLA will be repealed and the OTS will be
abolished. Within nine months of enactment, the Secretary of the Treasury
shall adopt a plan for the combination of the OTS and the Office of the
Comptroller of the Currency into a single agency. Converted federal thrifts
generally will be permitted to continue to engage in any activity, including
the holding of any asset, lawfully conducted on the date prior to enactment. A
federal savings association converted to a national bank may retain all
branches established or proposed in a pending application as of enactment and
establish new branches in any state in which it has a branch. Otherwise it may
establish new branches only under national bank rules. In addition, beginning
two years after enactment, national banks will be authorized to exercise all
powers formerly authorized for federal savings associations.
Under H.R. 10, holding companies for converted savings associations
generally will become subject to the same regulation as holding companies that
control commercial banks, with a grandfather provision for former unitary
savings and loan holding companies. Such grandfathered companies will be
permitted to maintain and establish affiliations with any type of company and
to acquire additional depository institutions, as long as any acquired
depository institution is merged into its converted savings association and
such institution continues to comply with both the qualified thrift lender
test and certain asset and investment limitations to which it was subject as a
federal savings association. Such a converted holding company would be subject
to the same capital requirements (if any) applicable under OTS regulation if
it were a savings and loan holding company on June 19, 1997, and for three
years would be subject to substantially similar regulation, reporting and
examination as implemented by the OTS as of January 1, 1997.
Title III provides for the continuation of adjustable rate mortgage indices
used by converted savings associations, including cost-of-funds indices, if
calculation of the index could not be made by the terms of the governing
instrument as a result of changes made by H.R. 10. H.R. 10 also makes
significant changes in the operation of the FHLB System, including the types
of stock that may be issued by FHLBs to members and
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borrowers and FHLB capitalization, management, investments and lending.
Effective January 1, 1999, the FHLB Act will be amended to permit federal
savings associations to be voluntary members and stockholders of an FHLB.
There can be no assurance as to whether H.R. 10 or any other such
legislation will be enacted, what the provisions of any such final legislation
may be, or the extent to which the legislation would restrict, disrupt or
otherwise have a material effect on operations.
CAPITAL STANDARDS
The FRB, 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.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators
measure risk-adjusted assets, which include off-balance sheet items, against
both total qualifying capital (the sum of Tier 1 capital and limited amounts
of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of, among other
things, (i) common shareholders' equity capital (includes common stock and
related surplus, and undivided profits); (ii) noncumulative perpetual
preferred stock (cumulative perpetual preferred stock for bank holding
companies), including any related surplus; and (iii) minority interests in
certain subsidiaries, less most intangible assets. Tier 2 capital may consist
of: (i) a limited amount of the allowance for loan and lease losses ("ALLL");
(ii) cumulative perpetual preferred stock; (iii) perpetual preferred stock
(and any related surplus); and (iv) term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. 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.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. " These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank
with material weaknesses in its risk management process or high levels of
exposure relative to its capital will be directed by the agencies to take
corrective action. Such actions will include recommendations or directions to
raise additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
The federal banking agencies have issued an interagency policy statement on
the ALLL which, among other things, establishes certain benchmark ratios of
loan loss reserves to classified assets. The benchmark set forth by such
policy statement is the sum of (a) assets classified loss; (b) 50 percent of
assets classified doubtful; (c) 15 percent of assets classified substandard;
and (d) estimated credit losses on other assets over the upcoming 12 months.
This amount is neither a "floor" nor a "safe harbor" level for an
institution's ALLL.
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Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies issued final rules governing banks and bank holding
companies, which became effective April 1, 1995 and limit the amount of
deferred tax assets that are allowable in computing an institution's
regulatory capital. Deferred tax assets that can be realized for taxes paid in
prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year
of the quarter-end report date, based on projected taxable income for that
year; or (ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess
of this limit would be excluded from Tier 1 Capital and total assets and
regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Banks to grow and could restrict the amount of
profits, if any, available for the payment of dividends. For information
concerning the capital ratios of GBB and the Banks, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
GBB--Financial Condition--Capital Resources." For information concerning the
capital ratios of PBC, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--PBC--Financial Condition--Capital
Resources."
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency 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. In accordance with federal law, 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. An insured
depository institution will be classified in the following categories based,
in part, on the capital measures indicated below:
<TABLE>
<S> <C>
"Well capitalized" "Adequately capitalized"
Total risk-based capital of at least 10%; Total risk-based capital of at least 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
</TABLE>
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.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the
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appropriate federal banking agency, subject to asset growth restrictions and
required to obtain prior regulatory approval for acquisitions, branching and
engaging in new lines of business. Any undercapitalized depository institution
must submit an acceptable capital restoration plan to the appropriate federal
banking agency 45 days after receiving notice, or is deemed to have notice,
that the institution is undercapitalized. The appropriate federal banking
agency cannot accept a capital plan unless, among other things, it determines
that the plan: (i) specifies: (a) steps the institution will take to become
adequately capitalized; (b) the levels of capital to be attained during each
year in which the plan will be in effect; (c) how the institution will comply
with the applicable restrictions or requirements then in effect of the Federal
Deposit Insurance Act; and (d) the types and levels of activities in which the
institution will engage; (ii) is based on realistic assumptions and is likely
to succeed in restoring the depository institution's capital; and (iii) would
not appreciably increase the risk (including credit risk, interest-rate risk,
and other types of risk) to which the institution is exposed. In addition,
each company controlling an undercapitalized depository institution must
guarantee that the institution will comply with the capital plan until the
depository institution has been adequately capitalized on average during each
of four consecutive calendar quarters and must otherwise provide appropriate
assurances of performance. The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution as of the time the
institution fails to comply with its capital restoration plan. Finally, the
appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment of
a receiver or conservator, a forced merger; (ii) restrictions on transactions
with affiliates; (iii) further limitations on interest rates paid on deposits;
(iv) further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by
the holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by
the appropriate federal banking agency. Although the appropriate federal
banking agency has discretion to determine which of the foregoing restrictions
or sanctions it will seek to impose, it is required to: (i) force a sale of
shares or obligations of the bank, or require the bank to be acquired by or
combine with another institution; (ii) impose restrictions on affiliate
transactions and (iii) impose restrictions on rates paid on deposits, unless
it determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in
which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most
importantly, however, except under limited circumstances, the appropriate
federal banking agency, not later than 90 days after an insured depository
institution becomes critically undercapitalized, is required to appoint a
conservator or receiver for the institution. The board of directors of an
insured depository institution would not be liable to the institution's
shareholders or creditors for consenting in good faith to the appointment of a
receiver or conservator or to an acquisition or merger as required by the
regulator.
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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 Actions."
SAFETY AND SOUNDNESS STANDARDS
Effective July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). These
standards are designed to identify potential safety and soundness concerns and
ensure that action is taken to address those concerns before they pose a risk
to the deposit insurance funds. The standards relate to (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation,
fee and benefits. If a federal banking agency determines that an institution
fails to meet any of these standards, the agency may require the institution
to submit to the agency an acceptable plan to achieve compliance with the
standard. In the event the institution fails to submit an acceptable plan
within the time allowed by the agency or fails in any material respect to
implement an accepted plan, the agency must, by order, require the institution
to correct the deficiency. Effective October 1, 1996, the federal banking
agencies promulgated safety and soundness regulations and accompanying
interagency compliance guidelines on asset quality and earnings standards.
These new guidelines provide six standards for establishing and maintaining a
system to identify problem assets and prevent those assets from deteriorating.
The institution should: (i) conduct periodic asset quality reviews to identify
problem assets; (ii) estimate the inherent losses in those 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 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. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law, which establishes an assessment rate schedule
ranging from 0 cents per $100 of deposits to 27 cents per $100 of deposits
applicable to members of the Bank Insurance Fund ("BIF"). To determine the
risk-based assessment for each institution, the FDIC will categorize an
institution as well capitalized, adequately capitalized or undercapitalized
based on its capital ratios using the same standards used by the FDIC for its
prompt corrective action regulations. A well-capitalized institution is
generally one that has at least a 10% total risk-based capital ratio, a 6%
Tier 1 risk-based capital ratio and a 5% Tier 1 leverage capital ratio. An
adequately capitalized institution will generally have at least an 8% total
risk-based capital ratio, a 4% Tier 1 risk-based capital ratio and a 4% Tier 1
leverage capital ratio. An undercapitalized institution will generally be one
that does not meet either of the above definitions. The FDIC will also assign
each institution to one of three subgroups based upon reviews by the
institution's primary federal or state regulator, statistical analyses of
financial statements and other information relevant to evaluating the risk
posed by the institution. The three supervisory categories are: financially
sound with only a few minor weaknesses (Group A), demonstrates weaknesses that
could result in significant deterioration (Group B), and poses a substantial
probability of loss (Group C).
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The BIF assessment rates are set forth below for institutions based on their
risk-based assessment categorization.
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1996*
<TABLE>
<CAPTION>
GROUP A GROUP B GROUP C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized.................................... 0 3 17
Adequately Capitalized.............................. 3 10 24
Undercapitalized.................................... 10 24 27
</TABLE>
- --------
* Assessment figures are expressed in terms of cents per $100 per deposits.
On September 30, 1996, Congress passed the Budget Act which capitalized the
Savings Association Insurance Fund ("SAIF") through a special assessment on
SAIF-insured deposits and required banks to share in part of the interest
payments on the Financing Corporation ("FICO") bonds which were issued to help
fund the federal government costs associated with the savings and loan crisis
of the late 1980s. The special thrift SAIF assessment has been set at 65.7
cents per $100 of deposits insured by SAIF as of March 31, 1995. Effective
January 1, 1997, for the FICO payments, SAIF-insured institutions pay 3.2
cents per $100 in domestic deposits, and BIF-insured institutions, like the
Banks, pay 0.64 cents per $100 in domestic deposits. Full pro rata sharing of
the FICO interest payments takes effect on January 1, 2000.
The federal banking regulators are also authorized to prohibit depository
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from SAIF to BIF for the purpose of evading thrift
assessment rates. The Budget Act also prohibits the FDIC from setting premiums
under the risk-based schedule above the amount needed to meet the designated
reserve ratio (currently 1.25%).
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act"). Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed
may obtain approval under the Bank Holding Company Act to acquire an existing
bank located in another state without regard to state law. A bank holding
company is not permitted to make such an acquisition if, upon consummation, it
would control (a) more than 10% of the total amount of deposits of insured
depository institutions in the United States or (b) 30% or more of the
deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks or bank holding companies. An out-of-state bank
holding company may not acquire a state bank in existence for less than a
minimum length of time that may be prescribed by state law, except that a
state may not impose more than a five-year age requirement.
The Interstate Act also permits, as of June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state was authorized
to permit such combinations earlier than June 1, 1997, and, prior to June 1,
1997, could adopt legislation to prohibit interstate mergers after that date
in that state or in other states by that state's banks. The same concentration
limits discussed in the preceding paragraph apply. The Interstate Act also
permits a national or state bank to establish branches in a state other than
its home state if permitted by the laws of that state, subject to the same
requirements and conditions as for a merger transaction.
Under the Interstate Act, the extent of a commercial bank's ability to
branch into a new state will depend on the law of the state. In October 1995,
California adopted an early "opt in" statute under the Interstate Act that
permits out-of-state banks to acquire California banks that satisfy a five-
year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets, although entry
through acquisition of individual branches of California institutions and de
novo branching into California are not permitted. The Interstate Act and the
California branching statute may increase competition from out-of-state
71
<PAGE>
banks in the markets in which GBB operates, although it is difficult to assess
the impact that such increased competition may have on GBB's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Banks and PBC are subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and CRA
activities. The CRA generally requires the federal banking agencies to
evaluate the record of a financial institution in meeting the credit needs of
its local communities, including low- and moderate-income neighborhoods. 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.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending, service and
investment performance, rather than the extent to which the institution
conducts needs assessments, documents community outreach activities or
complies with other procedural requirements.
In March 1994, the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination:
overt evidence of discrimination, evidence of disparate treatment and evidence
of disparate impact.
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
during the first quarter of 1996, MPB was rated outstanding. Based on an
examination conducted during the first quarter of 1997, CNB was rated
satisfactory. PBC was examined during the fourth quarter of 1995 and was rated
satisfactory.
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Banks and PBC, and their
institution-affiliated parties, which in the case of banks includes GBB, may
be subject to potential enforcement actions by the FRB, the FDIC, the
Commissioner and/or the Comptroller 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. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of the Banks
and PBC), the imposition of civil money penalties, the issuance of directives
to increase capital, the issuance of formal and informal agreements, the
issuance of removal and prohibition orders against institution affiliated
parties and the imposition of restrictions and sanctions under the prompt
corrective action provisions of FDICIA. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action
against the holding company. Neither GBB, the Banks nor PBC has been subject
to any such enforcement actions.
72
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--GBB
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of GBB. The following
discussion should be read in conjunction with the information under "Selected
Consolidated Financial Data" and GBB's consolidated financial statements and
notes thereto and other financial data included elsewhere in this Joint Proxy
Statement/Prospectus. Certain statements under this caption constitute
"forward-looking statements" under Section 27A of the Securities Act and
Section 21E of the Exchange Act which involve risks and uncertainties. GBB'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 GBB conducts its operations, fluctuations in interest
rates, credit quality and government regulation. For additional information
concerning these and other factors, see "RISK FACTORS" and "BUSINESS--GBB."
GBB was formed as a result of the 1996 Merger between Cupertino, the holding
company for CNB, and Mid-Peninsula, the holding company for MPB. The 1996
Merger, which has been accounted for as a pooling of interests, was
consummated in late November 1996. All of the financial information for GBB
for the periods prior to the merger has been restated to reflect the pooling
of interests as if it occurred at the beginning of the earliest reporting
period presented.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
For the six months ended June 30, 1997, GBB reported net income of $3.7
million, or $1.05 per common and common equivalent share, compared to net
income of $2.6 million, or $0.78 per common and common equivalent share for
the comparable period in 1996. The annualized return on average assets and
return on average equity for the first six months of 1997 were 1.12% and
15.64%, respectively, compared to 1.04% and 12.32% for the same period in
1996.
The earnings for the first six months of 1997 include $1.1 million in
warrant income resulting from the exercise of warrants and sale of the
underlying shares of common stock in two clients of the Banks. GBB
occasionally receives warrants to acquire common stock from companies that are
in the start-up or development phase. The timing and amount of income derived
from the exercise and sale of client warrants typically depend upon factors
beyond the control of GBB, and cannot be predicted with any degree of accuracy
and are likely to vary materially from period to period.
Net income for the six months ended June 30, 1997 also includes
approximately $1.7 million ($1.0 million net of tax) for a recovery through
insurance of a litigation settlement charge incurred in 1995.
Nonperforming assets (including nonaccrual loans, loans 90 days past due and
still accruing and other real estate owned ("OREO")) totaled $3.5 million at
June 30, 1997, an increase of $233,000 from December 31, 1996, and a decrease
of $290,000 from June 30, 1996. The ratio of nonperforming assets to loans
plus foreclosed properties was 0.67% at June 30, 1997, down from 0.73% at
December 31, 1996 and down from 1.14% at June 30, 1996.
The allowance for loan losses was $10.9 million at June 30, 1997, compared
with $7.3 million at December 31, 1996 and $5.0 million at June 30, 1996. The
provision for loan losses was $4.1 million for the first six months of 1997,
compared to $685,000 recorded for the same period in 1996. Net charge-offs
were $495,000 for the first six months of 1997 and $165,000 for the same
period in 1996. The ratio of the allowance for loan losses to nonperforming
assets was 312% at June 30, 1997, compared with 224% at December 31, 1996 and
131% at June 30, 1996. The ratio of the allowance for loan losses to total
loans was 2.08% at June 30, 1997 compared with 1.63% at December 31, 1996 and
1.49% at June 30, 1996.
Shareholders' equity increased $3.8 million to $48.5 million, or 6.74% of
assets, at June 30, 1997, from $44.7 million or 7.18% of assets at December
31, 1996. The increase was primarily due to net earnings and stock purchased
by directors and employees through stock option and stock purchase plans and
was partially offset by the first quarter cash dividend payment of $0.15 per
common share that was declared on March 17,
73
<PAGE>
1997 to shareholders of record as of April 7, 1997, totaling $495,000, and the
second quarter cash dividend of $0.15 per common share that was declared on
June 18, 1997 to shareholders of record as of June 30, 1997, totaling
$499,000.
GBB's Tier 1 and total risk-based capital ratios were 11.69% and 13.46% at
June 30, 1997, respectively, compared with 8.75% and 10.54% at December 31,
1996, respectively. The leverage ratio increased to 9.74% at June 30, 1997,
from 7.27% at December 31, 1996. At June 30, 1997, GBB's risk-based capital
and leverage ratios, as well as those of the Banks, exceeded the ratios for a
well-capitalized financial institution as defined in FDICIA under the prompt
corrective action regulations. GBB will seek to maintain its well capitalized
position to ensure flexibility in its operations.
GBB Stock closed at $30.75 per share on June 30, 1997, representing
approximately 211% of the $14.57 book value per share, compared with $24.38
per share and 177% of the $13.80 book value per share at December 31, 1996.
Net Interest Income
The following tables present GBB's average balance sheet, net interest
income and interest rates for the six-month periods presented, as well as the
analysis of variances due to rate and volume:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE(1) INTEREST YIELD/RATE BALANCE(1) INTEREST YIELD/RATE
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(2)(3)............ $484,615 $24,304 10.11% $311,774 $16,253 10.48%
Investment securities,
short-term investments
and cash
equivalents(3)........ 138,283 4,293 6.21% 140,805 4,229 6.01%
-------- ------- ----- -------- ------- -----
Total interest-earning
assets............... 622,898 28,597 9.26% 452,579 20,482 9.10%
Noninterest-earning
assets................ 44,109 38,913
-------- --------
Total assets.......... $667,007 $491,492
======== ========
INTEREST-BEARING
LIABILITIES:
Deposits:
NOW and MMDA........... $318,909 6,010 3.80% $241,022 4,437 3.70%
Savings deposits....... 27,467 536 3.94% 16,093 280 3.50%
Time deposits.......... 124,480 3,300 5.35% 93,656 2,451 5.26%
-------- ------- ----- -------- ------- -----
Total Deposits........ 470,856 9,846 4.22% 350,771 7,168 4.11%
Borrowings............. 25,685 1,056 8.29% 3,309 191 11.61%
-------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities.......... 496,541 10,902 4.43% 354,080 7,359 4.18%
-------- --------
Noninterest-bearing
deposits.............. 118,656 92,890
Other noninterest-
bearing liabilities... 4,240 3,009
-------- --------
Total noninterest-
bearing liabilities.. 122,896 95,899
Shareholders' equity... 47,570 41,513
-------- --------
Total liabilities and
shareholders'
equity............... $667,007 $491,492
======== ========
Net interest income;
interest rate spread... $17,695 4.83% $13,123 4.92%
======= ===== ======= =====
Net interest-earning
assets; net yield(5)... $126,357 5.73% $ 98,499 5.83%
======== ===== ======== =====
</TABLE>
- --------
(1) Average balances are computed using an average of the daily balances
during the period.
(2) Nonaccrual loans are included in the average balance column; however, only
collected interest is included in the interest column.
(3) Loan fees totaling $1,191,000 and $1,085,000 are included in loan interest
income for the periods ended June 30, 1997 and June 30, 1996,
respectively.
(4) Tax exempt interest income includes $130,000 and $151,000 for the six-
month periods ending June 30, 1997 and June 30, 1996, respectively, to
adjust to a fully taxable equivalent basis using the federal statutory
rate of 34%.
(5) The net yield on interest-earning assets during the period equals net
interest income divided by average interest-earning assets for the period.
74
<PAGE>
The following table presents the dollar amount of certain changes in
interest income and interest expense for each major component of interest-
earning assets and interest-bearing liabilities and the difference
attributable to changes in average rates and volumes for the six-month periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
COMPARED WITH JUNE 30, 1996
INCREASE (DECREASE)
---------------------------------
VOLUME RATE NET
----------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans.................................... $ 8,654 $ (603) $ 8,051
Investment securities, short-term
investments and cash equivalents........ (88) 152 64
---------- --------- ----------
Total interest income.................. 8,566 (451) 8,115
INTEREST-BEARING LIABILITIES:
Deposits:
NOW and MMDA........................... 1,454 119 1,573
Savings deposits....................... 218 38 256
Time deposits.......................... 810 39 849
---------- --------- ----------
Total deposits........................... 2,482 196 2,678
Borrowings............................... 935 (70) 865
---------- --------- ----------
Total interest expense................. 3,417 126 3,543
---------- --------- ----------
Increase (decrease) in net interest
income.................................. $ 5,149 $ (577) $ 4,572
========== ========= ==========
</TABLE>
For the six-month period ended June 30, 1997, GBB experienced an increase in
net interest income of $4.6 million when compared to the first half of 1996.
This increase was mainly due to the increased volume in the loan portfolio,
partially offset by reduced yields on loans, and the increased volume of
interest-bearing deposits. For the first half of 1997, average other
borrowings primarily consisted of $3.0 million of subordinated debt which was
issued at 11.5% in the fall of 1996 and $20.0 million of 9.75% cumulative
preferred securities issued in the first quarter of 1997 by GBB Capital I, a
Delaware statutory business trust and wholly-owned subsidiary of GBB, formed
for the purpose of issuing such securities (the "Trust Preferred Securities").
The Trust Preferred Securities qualify for Tier I capital, and the
subordinated debt qualifies for Tier II capital. For the six months ended June
30, 1997, GBB's net interest spread of 4.83% reflected a decrease from 4.92%
for the same period in 1996.
GBB provides client services to several of its noninterest-bearing demand
deposit customers. The amount of credit available to clients is based on a
calculation of their average noninterest-bearing deposit balance, adjusted for
float and reserves, multiplied by an earnings credit rate, generally the
average of the month's 90-day T-Bill rate. The credit can be utilized to pay
for services including messenger service, account reconciliation and other
similar services. If the cost of the services provided exceeds the available
credit, the customer is charged for the difference.
75
<PAGE>
The impact of this expense on GBB's net interest spread and net yield on
interest-earning assets was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average noninterest-bearing demand deposits....... $ 118,656 $ 92,890
Client service expense............................ 154 215
Client service cost annualized.................... 0.26% 0.47%
Impact on net yield:
Net yield on interest-earning assets............ 5.73% 5.83%
Impact of client services....................... (0.05)% (0.10)%
----------- ----------
Adjusted net yield(1)........................... 5.68% 5.73%
=========== ==========
</TABLE>
- --------
(1) Noninterest-bearing liabilities are included in the cost of funds
calculation to determine adjusted spread.
The negative impact on the net yield on interest earning assets is caused by
off-setting net interest income by the cost of client service expenses, which
reduces the yield on interest-earning assets. The cost for client service
expense has decreased in 1997 due to decreased volume of activity in services
to noninterest-bearing demand deposit clients.
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 GBB's market area. GBB 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, GBB makes provisions for potential loan losses.
Specific allocations are made for loans where the probability of a loss can be
defined and reasonably determined, while the balance of the provisions for
loan losses are based on historical data, delinquency trends, economic
conditions in GBB's market area and industry averages. Annual fluctuation 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 was $4.1 million for the six-month period
ended June 30, 1997, as compared to $685,000 for the same period in 1996.
During the first six months of 1997, GBB has increased the provision and
allowance for loan losses to reflect the emergence of certain risk factors
within its loan portfolio. The principal risk factor is the lack of seasoning
within GBB's loan portfolio due to the dramatic growth in the size of the loan
portfolio. Total gross loans have increased from $290.2 million to $527.0
million, or 81.6% in the 18-month period ended June 30, 1997.
Notwithstanding the substantial increase in loans outstanding, nonperforming
loans, comprised of nonaccrual loans and accruing loans past due 90 days or
more, declined to $3.2 million or 0.60% of loans outstanding at June 30, 1997
from $3.6 million or 1.05% of loans outstanding at June 30, 1996.
For further information on nonperforming and classified loans and the
allowance for loan losses, see "--Financial Condition--Nonperforming and
Classified Assets."
76
<PAGE>
Other Income
The following table provides details of other income for the periods
presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
JUNE 30, JUNE 30,
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Trust fees................................................. $ 935 $ 653
Gain on sale of SBA loans.................................. 339 253
Depositor service fees..................................... 443 506
Loan fees.................................................. 22 49
Investment gains (losses).................................. (49) (97)
Other...................................................... 385 351
------ ------
Sub-total other income..................................... 2,075 1,715
Warrant income............................................. 1,115 --
------ ------
Total other income......................................... $3,190 $1,715
====== ======
</TABLE>
Other income was $3.2 million for the six-month period ended June 30, 1997,
an increase of $1.4 million from the same period in 1996. The increase was
primarily due to warrant income and an increase in trust fee income.
Operating Expenses
The efficiency ratio is computed by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same (or
greater) volume of income while a decrease would indicate a more efficient
allocation of resources. GBB's efficiency ratio for the six months ended June
30, 1997 and 1996 was 59.53% and 66.47%, respectively.
The following table provides details of operating expenses for the periods
presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Compensation and benefits............................... $ 7,329 $ 5,630
Occupancy and equipment................................. 2,102 1,534
Professional services and legal costs................... 712 606
FDIC insurance and regulatory assessments............... 101 54
Other real estate, net.................................. 5 30
Other................................................... 1,953 1,694
-------- -------
Total operating expenses before client services
expenses............................................... 12,202 9,548
Client services expenses................................ 154 215
-------- -------
Total operating expenses.............................. $ 12,356 $ 9,763
======== =======
Nonrecurring costs(1)................................... (1,700) --
-------- -------
Total operating expenses excluding nonrecurring
costs(1)............................................. $ 10,656 $ 9,763
======== =======
Efficiency ratio before client services................. 58.79% 65.01%
Efficiency ratio........................................ 59.53% 66.47%
Efficiency ratio, excluding nonrecurring costs.......... 51.34% 66.47%
Total operating expenses to average assets............ 1.85% 1.99%
Total operating expenses to average assets, excluding
nonrecurring costs................................... 1.60% 1.99%
</TABLE>
- --------
(1)Nonrecurring costs include a legal settlement recovery, charged in 1995.
Operating expenses, exclusive of the legal settlement recovery, were $12.4
million and $9.8 million for the six-month periods ended June 30, 1997 and
1996, respectively.
77
<PAGE>
The increase in operating expenses is mainly attributable to the significant
growth that has occurred between periods and the corresponding increase in
employees and related increase in occupancy expense.
The legal settlement recovery is attributed to the $1.7 million recovery
from GBB's insurance coverage related to the $1.7 million legal settlement
charge that occurred in the second quarter of 1995.
Provision for Income Taxes
The provision for income taxes for the six-month period ended June 30, 1997
was $2.3 million, as compared to $1.7 million for the six-month period ended
June 30, 1996. These provisions reflect effective tax rates of 38% and 40%,
respectively.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
GBB reported net income of $3.5 million in 1996, a 15.5% increase over 1995
net income of $3.0 million. The net income in 1995 was an 18.3% increase over
1994 net income of $2.6 million. Net income per share was $1.04 in 1996,
compared with $0.96 in 1995 and $0.85 in 1994. The return on average assets
and return on average shareholders' equity were 0.65% and 8.12% in 1996,
compared with 0.70% and 7.98% in 1995 and 0.68% and 7.31% in 1994,
respectively.
The increase in 1996 net income was the result of significant loan and
deposit growth, which resulted in increased net interest income, and increases
in trust fees, depositors' service fees and other fee income. Operating
expense increases required to service and support GBB's growth partially
offset the increase in revenues. The 1996 operating results included $2.8
million ($2.0 million net of tax) in merger and other related charges.
Excluding these charges, GBB's net income, net income per share, return on
average assets and return on average shareholders' equity would have been $5.5
million, $1.63, 1.02% and 12.86%, respectively.
The increase in net income in 1995 over 1994 was due primarily to increased
growth in interest-earning assets, which was partially offset by the growth in
operating expenses. The operating results in 1995 included $2.1 million ($1.3
million net of taxes) in charges related to the settlement of litigation, the
closing of CNB's mortgage banking business unit and terminated merger
discussions. Excluding these charges, GBB's net income, net income per share,
return on average assets and return on average shareholders' equity would have
been $4.3 million, $1.37, 1.00% and 11.39%, respectively.
Net Interest Income
Net interest income increased 23.8% to $29.2 million in 1996 from $23.6
million in 1995 primarily due to the $95.5 million, or 23.4%, increase in
average interest-earning assets coupled with an 8 basis point increase in
GBB's interest rate spread. Net interest income increased 21.2% in 1995 from
$19.5 million in 1994 primarily due to the combined effects of the $58.0
million, or 16.8%, increase in average interest-earning assets and the 2 basis
point increase in GBB's interest rate spread.
78
<PAGE>
The following table presents, for the years indicated, condensed average
balance sheet information for GBB, 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 averaged daily
balances.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE (1) INTEREST RATE BALANCE (1) INTEREST RATE BALANCE (1) INTEREST RATE
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(2)............... $350,679 $36,278 10.35% $260,635 $28,397 10.90% $230,126 $22,112 9.61%
Investment securities,
short-term investment
and cash
equivalents(3)........ 148,118 9,115 6.15% 143,665 9,070 6.31% 116,143 5,852 5.04%
-------- -------- --------
Total interest-earning
assets(3)............ 498,797 45,393 9.10% 404,300 37,467 9.27% 346,269 27,964 8.08%
Noninterest-earning
assets................. 40,013 30,448 30,532
-------- ------- -------- ------- -------- -------
Total assets.......... $538,810 45,393 $434,748 37,467 $376,801 27,964
-------- ------- -------- ------- -------- -------
Interest-bearing
liabilities:
Deposits:
NOW and MMDA........... $246,183 8,656 3.52% $204,521 7,868 3.85% $173,619 4,945 2.85%
Savings deposits....... 38,429 1,714 4.46% 9,541 539 5.65% 9,599 466 4.85%
Time deposits.......... 99,635 5,362 5.38% 89,539 4,641 5.18% 73,793 2,719 3.68%
-------- ------- -------- ------- -------- -------
Total deposits........ 384,247 15,732 4.09% 303,601 13,048 4.30% 257,011 8,130 3.16%
Borrowings............. 8,191 481 5.87% 13,334 844 6.33% 7,788 382 4.90%
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.......... 392,438 16,213 4.13% 316,935 13,892 4.38% 264,799 8,512 3.21%
-------- ------- -------- ------- -------- -------
Noninterest-bearing
deposits............... 102,689 77,727 75,244
Other noninterest-
bearing liabilities.... 883 2,038 1,684
Shareholders' equity.... 42,800 38,048 35,074
-------- -------- --------
Total liabilities and
shareholders'
equity............... $538,810 16,213 $434,748 13,892 $376,801 8,512
======== ------- ======== ------- ======== -------
Net interest income..... $29,180 $23,575 $19,452
======= ======= =======
Interest rate spread.... 4.97% 4.89% 4.87%
Contribution of interest
free funds............. 0.88% 0.94% 0.75%
Net yield on interest-
earnings assets(4)..... 5.85% 5.83% 5.62%
</TABLE>
- --------
(1) Nonaccrual loans are included in the average balance; however, only
collected interest is included in the interest column.
(2) Loan fees totaling $2.4 million, $1.5 million and $1.4 million are
included in loan interest income for the years 1996, 1995 and 1994,
respectively.
(3) Interest income includes $356,000, $234,000 and $163,000 in 1996, 1995 and
1994, respectively, to adjust to a fully taxable equivalent basis 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.
79
<PAGE>
The most significant impact on GBB's net interest income between periods is
derived from the interaction of changes in the volume of and rates earned or
paid on interest-earning assets and interest-bearing liabilities. The volume
of earning 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 periods indicated, a summary of
the changes in interest income and interest expense resulting from changes in
average asset and liability balances (volume) and changes in average interest
rates (rate). The changes in interest attributable to simultaneous volume and
rate changes have been reflected as volume variances. Nonaccrual loans are
included in average loans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
COMPARED WITH DECEMBER 31, COMPARED WITH DECEMBER 31,
1995 INCREASE (DECREASE) 1994 INCREASE (DECREASE)
-------------------------------- -------------------------------
VOLUME RATE NET VOLUME RATE NET
--------------------- --------- -------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans.................. $ 9,811 $ (1,930) $ 7,881 $ 2,932 $ 3,353 $ 6,285
Investment securities,
short-term investments
and cash
equivalents(1)........ 281 (236) 45 1,387 1,831 3,218
--------- ---------- --------- --------- --------- ---------
Total interest
income............... 10,092 (2,166) 7,926 4,319 5,184 9,503
--------- ---------- --------- --------- --------- ---------
INTEREST-BEARING
LIABILITIES:
Deposits:
NOW and MMDA........... (1,603) 815 (788) (880) (2,043) (2,923)
Savings deposits....... (1,632) 457 (1,175) 3 (76) (73)
Time deposits.......... (523) (198) (721) (580) (1,342) (1,922)
--------- ---------- --------- --------- --------- ---------
Total deposits......... (3,758) 1,074 (2,684) (1,457) (3,461) (4,918)
Borrowings............. 326 37 363 (272) (190) (462)
--------- ---------- --------- --------- --------- ---------
Total interest
expense.............. (3,432) 1,111 (2,321) (1,729) (3,651) (5,380)
--------- ---------- --------- --------- --------- ---------
Increase (decrease) in
net interest income.... $ 6,660 $ (1,055) $ 5,605 $ 2,590 $ 1,533 $ 4,123
========= ========== ========= ========= ========= =========
</TABLE>
- --------
(1) Interest income includes $356,000, $234,000 and $163,000 for 1996, 1995
and 1994, respectively, to adjust to a fully taxable equivalent basis
using the federal statutory rate of 34%.
Interest income in 1996 increased 21.2% to $45.4 million from $37.5 million
in 1995. This was primarily due to the significant increase in loans, GBB's
highest yielding asset. Loan volume increases were the result of an improving
economy in GBB's market areas, as well as the addition of experienced
relationship managers and greater business development efforts by GBB's
relationship managers. This increase was partially offset by a decline in the
yield earned on average interest-earning assets. While average interest-
earning assets increased $94.5 million, or 23.4%, to $498.8 million in 1996,
compared to $404.3 million in 1995, average loans increased $90.0 million, or
34.5%, to $350.7 million, or 70.3% of average interest-earning assets, in 1996
from $260.6 million, or 64.4% of average interest-earning assets, in 1995.
Conversely, other interest-earning assets, consisting of investment
securities, federal funds sold and other short-term investments, increased
only 3.1% to $148.1 million, or 29.7% of average interest-earning assets, in
1996 from $143.7 million, or 35.6% of average interest-earning assets, in
1995.
The average yield on interest-earning assets declined 17 basis points to
9.10% in 1996 from 9.27% in 1995 primarily due to the decline in yields on
loans. Average yields on loans declined 55 basis points to 10.35% in 1996 from
10.90% in 1995 primarily due to competition. The average yield on other
interest-earning assets declined 16 basis points to 6.15% in 1996, compared to
6.31% in 1995.
Interest expense in 1996 increased 16.7% to $16.2 million from $13.9 million
in 1995. This increase was due to greater volumes of interest-bearing
liabilities which was partially offset by lower interest rates paid on
interest-bearing liabilities. Average interest-bearing liabilities increased
23.8% to $392.4 million in 1996 from $316.9 million in 1995 due to the efforts
of the Banks' relationship managers and deposits derived from the activities
of the Greater Bay Trust Company and the Venture Banking Group. During 1996,
the average rate paid on interest-bearing liabilities declined 25 basis points
to 4.13% from 4.38% in 1995 due to the repricing of deposit accounts.
80
<PAGE>
During 1996, average noninterest-bearing deposits increased to $102.7
million from $77.7 million in 1995. As a result of such increase, noninterest
bearing deposits comprised 25.2% of total deposits at year end 1996, compared
to 22.2% at year end 1995.
As a result of the foregoing, GBB's interest rate spread increased to 4.97%
in 1996 from 4.89% in 1995 and the net yield on interest-earning assets
increased slightly in 1996 to 5.85% from 5.83% in 1995.
Interest income increased 34.0% to $37.7 million in 1995 from $28.0 million
in 1994, as a result of the combined effects of increases in average interest-
earning assets and the yields earned on such assets. Average interest-earning
assets increased 16.8% to $404.3 million in 1995 from $346.3 million in 1994
as a result of almost equivalent increases in both loans and other interest-
earning assets. The average yield on the higher volume of average interest-
earning assets increased 119 basis points to 9.27% in 1995 from 8.08% in 1994,
primarily as a result of increases in market rates of interest.
Interest expense in 1995 increased 63.2% to $13.9 million from $8.5 million
in 1994, primarily as a result of the combined effect of increases in rates
paid on interest-bearing liabilities and the volume of interest-bearing
liabilities. As a result of increases in market rates of interest, the average
rate paid on average interest-bearing liabilities increased 117 basis points
to 4.38% in 1995 from 3.21% in 1994. Corresponding to the growth in average
interest-earning assets, average interest-bearing liabilities increased 19.7%
to $316.9 million in 1995 from $264.8 million in 1994.
As a result of the foregoing, GBB's interest rate spread increased to 4.89%
in 1995 from 4.87% in 1994 and the net yield on interest-earning assets
increased to 5.83% in 1995 from 5.62% in 1994.
GBB has noninterest-bearing liabilities on which it pays for certain client
service expenses. These expenses include messenger services, check supplies
and other related items and are included in operating expenses. If these costs
had been included in interest expense, the impact of these expenses on GBB's
net yield on interest-earning assets would have been as follows for each of
the years presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average noninterest-bearing demand
deposits................................... $102,689 $77,727 $75,244
Client services expenses.................... 411 337 376
Client services expenses as a percentage of
average noninterest-bearing demand
deposits................................... 0.40% 0.43% 0.50%
Impact on net yield on interest-earning
assets:
Net yield on interest-earning assets........ 5.85% 5.83% 5.62%
Impact of client services expenses.......... (0.08)% (0.08)% (0.11)%
-------- ------- -------
Adjusted net yield on interest-earning
assets..................................... 5.77% 5.75% 5.51%
======== ======= =======
</TABLE>
- --------
(1) Noninterest-bearing liabilities are included in cost of funds calculations
to determine adjusted net yield on interest-earning assets.
The impact on the net yield on interest-earning assets is caused by off-
setting net interest income by the cost of client services expenses, which
reduces the yield on interest-earning assets. The cost for client services
expense is trending down and reflects GBB's efforts to manage its client
services expenses.
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 GBB's market area. GBB
81
<PAGE>
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, GBB makes provisions
for potential loan losses. Specific allocations are made for loans where the
probability of a loss can be defined and reasonably determined, while the
balance of the provisions for loan losses are based on historical data,
delinquency trends, economic conditions in GBB's market area and industry
averages. Annual fluctuation 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 1996 was $2.0 million, compared to $0.9
million in 1995 and $1.8 million in 1994. In addition, in connection with the
1996 Merger, GBB made an $800,000 additional provision for loan losses to
conform the Banks' reserve allocation methodologies, which is included in
operating expenses. The increased provision for loan losses during 1996
reflects the $160.5 million increase in gross loans outstanding at December
31, 1996 from year-end 1995. Notwithstanding the substantial increase in loans
outstanding, nonperforming loans, comprised of nonaccrual loans and accruing
loans past due 90 days or more, declined to $3.1 million or 0.69% of loans
outstanding at December 31, 1996 from $3.3 million or 1.15% of loans
outstanding at December 31, 1995. The $1.8 million provision for loan losses
during 1994 reflected the higher level of nonperforming loans experienced by
GBB during 1994. At December 31, 1994, nonperforming loans were $5.0 million,
or 2.07% of loans outstanding at such date.
For further information on nonperforming and classified loans and the
allowance for loan losses, see "--Financial Condition--Nonperforming and
Classified Assets."
Other Income
Total other income increased to $3.5 million in 1996, compared to $2.3
million in 1995 and $3.3 million in 1994. The following table sets forth
information by category of other income in the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Trust fees..................................... $ 1,426 $ 710 $ 593
Depositors' service fees....................... 1,045 671 699
Gain on sale of SBA loans...................... 519 366 685
Gain on sale of mortgage loans................. -- 137 993
Loan documentation fees, net................... (42) 103 276
Investment gains (losses)...................... (263) (113) (266)
Other.......................................... 845 432 315
-------- -------- --------
Total........................................ $ 3,530 $ 2,306 $ 3,295
======== ======== ========
</TABLE>
The increase in other income in 1996 is primarily the result of a $716,000
increase in trust fees and a $374,000 increase in depositors' service fees.
The trust fee increase is due to significant growth in assets under management
in Greater Bay Trust Company. Trust assets increased to $418.0 million at
year-end 1996, compared to $270.0 million at December 31, 1995 and $157.0
million at December 31, 1994. Depositors' service fees increased due to growth
in deposits.
The decrease in other income in 1995 from 1994 is due primarily to the
decline in the activities of the mortgage banking business unit. This unit
generated $137,000 in gains on the sale of mortgage loans in 1995, compared to
$993,000 in 1994. In early 1995, GBB closed the mortgage banking business unit
due to the sharp rise in interest rates during 1994 and the impact the rising
rates had on originations.
The fluctuation in gain on sale of SBA loans is due primarily to the mix of
SBA loans originated for sale combined with the effect of market pricing on
loans sold. SBA loans with longer maturities command a higher
82
<PAGE>
premium than loans with shorter maturity periods. In 1996 compared to 1995,
GBB originated and sold fewer long-term real estate loans and the pricing on
loans sold declined slightly. During 1995 compared to 1994, GBB generated more
long-term commercial real estate loans that were sold in the secondary market,
thus causing the increase in gain on sale of SBA loans. In addition, lower
market interest rates in 1994 provided higher premiums on SBA loan sales.
Operating Expenses
Operating expenses totaled $23.9 million for 1996, compared to $19.7 million
for 1995 and $16.2 million for 1994. The ratio of operating expenses to
average assets was 4.43% in 1996, 4.53% in 1995, and 4.31% in 1994. Operating
expenses in 1996 and 1994 included $2.8 million and $608,000, respectively, in
merger and other related costs, while 1995 operating expenses included $2.2
million related to the settlement of litigation, the closing of CNB's mortgage
banking business unit and terminated merger discussions. Excluding these
costs, operating expenses to average assets would have been 3.92% in 1996,
4.04% in 1995 and 4.15% in 1994.
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. GBB's efficiency ratio for 1996 was 73.83%, compared
to 76.76% in 1995 and 71.87% in 1994. Excluding nonrecurring costs, GBB's
efficiency ratios were 65.21%, 68.43% and 69.18% in 1996, 1995 and 1994,
respectively. The decline in GBB's efficiency ratio was due to the investment
in infrastructure in 1994 and early 1995 which allowed GBB to grow its revenue
base in 1995 and 1996 without significant increases in operating expenses.
The following table represents the major components of operating expenses
for the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and benefits....................... $ 11,773 $ 10,146 $ 8,505
Occupancy and equipment......................... 3,401 2,679 2,226
Prior mergers and related nonrecurring
costs(1)....................................... 2,791 -- 608
Professional services and legal costs........... 1,270 2,968 1,176
FDIC insurance and regulatory assessments....... 102 551 858
Other real estate, net.......................... 35 62 112
Other........................................... 4,105 2,943 2,370
-------- -------- --------
Total operating expenses before client services
expenses....................................... 23,477 19,349 15,855
Client services expenses........................ 411 337 376
-------- -------- --------
Total operating expenses...................... $ 23,888 $ 19,686 $ 16,231
======== ======== ========
Nonrecurring costs(1)........................... 2,791 2,135 608
-------- -------- --------
Total operating expenses excluding
nonrecurring costs(1)........................ $ 21,097 $ 17,551 $ 15,623
======== ======== ========
Efficiency ratio before client services......... 72.56% 75.44% 70.20%
Efficiency ratio................................ 73.83% 76.76% 71.87%
Efficiency ratio, excluding nonrecurring
costs(1)....................................... 65.21% 68.43% 69.18%
Total operating expenses to average assets...... 4.43% 4.53% 4.31%
Total operating expenses to average assets,
excluding nonrecurring costs(1)................ 3.92% 4.04% 4.15%
</TABLE>
- --------
(1) Nonrecurring costs include merger and related costs for 1996 and 1994 and
costs related to the settlement of litigation, the closing of CNB's
mortgage banking business unit and terminated merger discussions in 1995.
83
<PAGE>
Compensation and benefits expenses increased in 1996 to $11.8 million,
compared to $10.1 million in 1995 and $8.5 million in 1994, primarily due to
the addition of personnel at Greater Bay Trust Company and an increase in the
number of relationship managers at the Banks.
The increase in occupancy and equipment expense in 1996 was primarily due to
the opening of CNB's new Emerson office and the Greater Bay Trust Company
office in downtown Palo Alto, California. The increase in occupancy and
equipment expense in 1995 was due to the installation of a larger data
processing system, which included a local and wide area network to connect all
of the CNB office locations.
Expenses for professional services and legal costs, including consulting and
audit services, decreased to $1.3 million in 1996, compared to $3.0 million in
1995 and $1.2 million in 1994. The decrease in 1996 is primarily attributable
to a one-time charge of $1.8 million in 1995 for a legal settlement related to
trust department activities.
Client services expenses increased to $411,000 in 1996, compared to $337,000
in 1995 and $376,000 in 1994 as a result of an increase in the volume of
noninterest-bearing demand deposits from commercial customers for which GBB
provides services. These expenses include messenger services, check supplies
and other related items. For information concerning the impact of these
expenses on net yield on interest-earning assets, see "--Net Interest Income."
FDIC deposit insurance and Comptroller regulatory assessments decreased to
$102,000 in 1996, compared to $551,000 in 1995, and $858,000 in 1994. The
decline in FDIC insurance expense is a result of the lowering of deposit
insurance premiums by the FDIC when the BIF was fully funded as of March 1995.
The increase in other operating expense in 1996 was related to the rapid
growth in GBB's loan and deposit portfolios and trust assets. The principal
expense increases were $570,000 in marketing expenses, $80,000 in trust data
processing charges and $236,000 in supplies and postage expenses. The increase
in 1995 over 1994 was also primarily in marketing, trust and supplies and
postage expenses.
Income Taxes
GBB's income tax rate for 1996 was 45.5%, compared to 39.4% in 1995 and
36.4% in 1994. The effective rate in 1996 was higher than the statutory rate
due to the impact of nondeductible merger expenses.
FINANCIAL CONDITION
Total assets increased 15.6% to $719.0 million at June 30, 1997, compared to
$622.0 million at December 31, 1996. Total assets increased 30.2% to $622.0
million at December 31, 1996, compared to $477.8 million at December 31, 1995.
Total assets increased 19.0% in 1995 from $401.6 million at December 31, 1994.
The increases in each of the periods were primarily due to increases in GBB's
loan portfolio funded by growth in deposits.
Loans
Total gross loans increased 16.9% to $527.0 million at June 30, 1997
compared to $450.8 million at December 31, 1996. Total gross loans increased
55.3% to $450.8 million at December 31, 1996, compared to $290.3 million at
December 31, 1995. Total gross loans increased 19.5% in 1995 from $243.0
million at year-end 1994. The increases in loan volumes in each of the periods
were due to an improving economy in GBB's market areas coupled with the
business development efforts by GBB's relationship managers.
GBB'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,
GBB's lending operations are located in GBB's market areas that are dependent
on the technology and real estate industries and their supporting companies.
Thus, GBB's borrowers could be adversely impacted by a downturn in these
sectors of the economy which could reduce the demand for loans and adversely
impact the borrowers' abilities to repay their loans.
84
<PAGE>
The following table presents the composition of GBB's loan portfolio at the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........... $282,159 54.9% $257,042 58.2% $181,617 63.8% $158,223 65.2% $145,673 62.8% $130,561 57.7%
Real estate
construction and
land................ 100,422 19.5 78,278 17.7 32,672 11.5 22,725 9.4 23,742 10.2 33,315 14.7
Commercial real
estate term......... 99,509 19.4 72,802 16.5 47,322 16.6 31,666 13.0 12,075 5.2 11,225 5.0
Consumer and other... 44,908 8.7 42,702 9.7 28,666 10.1 30,361 12.5 47,768 20.6 50,510 22.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, gross.. 526,998 102.5% 450,824 102.1% 290,277 102.0% 242,975 100.1% 229,258 98.9% 225,611 99.7%
Deferred fees and
discounts........... (2,257) (0.4) (1,952) (0.4) (1,299) (0.5) (1,264) (0.5) (1,369) (0.6) (1,019) (0.5)
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, net of
deferred fees...... $524,841 102.1% $448,872 101.7% $288,978 101.5% $241,711 99.6 $227,889 98.3 $224,592 99.2%
======== ===== ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Allowance for loan
losses.............. (10,895) (2.1) (7,312) (1.7) (4,399) (1.5) (4,344) (1.8) (3,657) (1.6) (3,099) (1.4)
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net loans........... $513,846 100.0% $441,560 100.0% $284,579 100.0% $237,367 97.8% $224,232 96.7% $221,493 97.9%
======== ===== ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Loans held for sale.. -- -- -- -- -- -- 5,383 2.2 7,625 3.3 4,841 2.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans......... $513,846 100.0% $441,560 100.0% $284,579 100.0% $242,750 100.0% $231,857 100.0% $226,334 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table presents the maturity distribution of GBB's commercial,
real estate construction and land and commercial real estate term portfolios
and the sensitivity of such loans to changes and interest rates at June 30,
1997.
<TABLE>
<CAPTION>
REAL ESTATE COMMERCIAL
CONSTRUCTION REAL ESTATE
COMMERCIAL AND LAND TERM
---------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans due in:
One year or less:
Floating rate.......................... $170,315 $ 80,388 $ 9,050
Fixed rate............................. 6,612 176 5,267
One to five years:
Floating rate.......................... 95,430 9,928 28,054
Fixed rate............................. 4,521 -- 9,653
After five years:
Floating rate.......................... -- -- --
Fixed rate............................. 5,281 9,930 47,485
-------- -------- -------
Total................................ $282,159 $100,422 $99,509
======== ======== =======
</TABLE>
For additional information concerning GBB's loan portfolio and its
underwriting and credit administration policies and procedures, see
"BUSINESS--GBB--Lending Activities."
Nonperforming and Classified Assets
Management generally places loans on nonaccrual 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 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 consists of real property acquired through foreclosure on the
related collateral underlying defaulted loans.
85
<PAGE>
The following table sets forth information regarding nonperforming assets at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------
1997 1996 1995 1994 1993 1992
-------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans............. $3,170 $1,875 $2,513 $3,668 $1,179 $ 913
Accruing loans past due 90
days or more................ 3 1,237 830 1,371 1,903 --
Restructured loans........... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total nonperforming loans.... 3,173 3,112 3,343 5,039 3,082 913
Other real estate owned....... 325 152 -- 375 618 3,717
------ ------ ------ ------ ------ ------
Total nonperforming assets... $3,498 $3,264 $3,343 $5,414 $3,700 $4,630
====== ====== ====== ====== ====== ======
Nonperforming assets to total
loans and other real estate
owned........................ 0.66% 0.72% 1.15% 2.22% 1.61% 2.02%
</TABLE>
Total nonperforming assets, which includes nonperforming loans (see below)
and OREO, were $3.5 million at June 30, 1997, compared with $3.3 million at
December 31, 1996, and $3.8 million at June 30, 1996. Nonperforming loans,
which include nonaccrual loans, restructured loans, and accrual loans which
are past due 90 days or more, were $3.2 million at June 30, 1997, compared
with $3.1 million at December 31, 1996, and $3.6 million at June 30, 1996.
Interest income foregone on nonperforming loans outstanding at June 30, 1997,
December 31, 1996, December 31, 1995 and December 31, 1994 totaled $207,000,
$215,000, $245,000 and $275,000, respectively.
Accruing loans past due 90 days or more, which are well secured and in the
process of collection, were $3,000 at June 30, 1997, compared with $1.2
million at December 31, 1996, and $1.4 million at June 30, 1996. It is GBB's
policy to discontinue the accrual of interest when the ability of a borrower
to repay principal or interest is in doubt, or when a loan is past due 90 days
or more, except when, in management's judgment, the loan is well secured and
in the process of collection.
GBB records other real estate 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 with a
provision for losses on foreclosed property in the period in which they are
identified. As of June 30, 1997, GBB had four foreclosed properties recorded
at $325,000 compared with $152,000 at December 31, 1996, and $217,000 at June
30, 1996.
The policy of GBB 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 weaknesses 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. A loan classified loss is considered
uncollectible and its continuance as an asset is not warranted.
Total classified assets increased to $13.8 million at June 30, 1997, from
$9.4 million at December 31, 1996. The $4.4 million increase is primarily due
to an increase in classified technology loans. GBB has focused strategically
on technology loans through the Venture Banking Group, and the volume of this
type of loan has increased significantly.
With the exception of these classified loans, management is not aware of any
loans as of June 30, 1997 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 the nonperforming asset table above at
some future date. Management cannot, however, predict the extent to which
economic conditions in GBB's market areas may worsen or the full impact such
an environment may have on GBB'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 or become restructured loans, in substance foreclosures or other
real estate owned in the future.
86
<PAGE>
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 its loan portfolio
and economic conditions in GBB's market areas. See "--Provision for Loan
Losses." 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 GBB's allowance for
loan losses at the dates and for the periods indicated.
<TABLE>
<CAPTION>
AT AND FOR
THE SIX
MONTHS
ENDED AT AND FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average loans
outstanding:........... $484,615 $350,679 $260,635 $230,126 $226,384 $207,978
======== ======== ======== ======== ======== ========
Allowance for loan
losses:
Balance at beginning of
period................. $ 7,312 $ 4,399 $ 4,344 $ 3,657 $ 3,099 $ 2,605
Charge-offs:
Commercial............. (315) (119) (973) (798) (1,264) (539)
Real estate
construction and
land.................. (142) (60) (7) (308) -- (62)
Commercial real estate
term.................. (2) -- -- -- (50) --
Consumer and other..... (54) (120) (101) (141) (159) (145)
-------- -------- -------- -------- -------- --------
Total charge-offs...... (513) (299) (1,081) (1,247) (1,473) (746)
-------- -------- -------- -------- -------- --------
Recoveries:
Commercial............. 18 343 178 57 28 9
Real estate
construction and
land.................. -- 15 -- -- -- 95
Commercial real estate
term.................. -- -- -- 48 10 --
Consumer and other..... -- 18 2 6 48 4
-------- -------- -------- -------- -------- --------
Total recoveries....... 18 376 180 111 86 108
Net (charge-offs)
recoveries.......... (495) 77 (901) (1,136) (1,387) (638)
Provision charged to
income................. 4,078 2,836 956 1,823 1,945 1,132
-------- -------- -------- -------- -------- --------
Balance at end of
period................. $ 10,895 $ 7,312 $ 4,399 $ 4,344 $ 3,657 $ 3,099
======== ======== ======== ======== ======== ========
Net (charge-offs)
recoveries to average
loans outstanding
during the period...... (0.10)% 0.02% (0.35)% (0.49)% (0.61)% (0.31)%
Allowance to average
loans outstanding...... 2.25% 2.08% 1.69% 1.89% 1.62% 1.49%
Allowance to end-of-
period loans........... 2.08% 1.63% 1.52% 1.80% 1.60% 1.38%
Allowance to
nonperforming loans.... 343.37% 234.96% 131.59% 86.21% 118.66% 339.43%
</TABLE>
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.
87
<PAGE>
The following table provides a summary of the allocation of the allowance
for loan losses for specific loan categories at the dates indicated. The
allocations 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 amount 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.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
---------------- --------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOANS, LOANS, LOANS, LOANS, LOANS, LOANS,
AMOUNT GROSS AMOUNT GROSS AMOUNT GROSS AMOUNT GROSS AMOUNT GROSS AMOUNT GROSS
------- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial......... $ 3,719 53.54% $3,134 57.02% $1,797 62.57% $2,835 63.71% $2,093 61.50% $1,668 56.65%
Real estate
construction and
land.............. 715 19.06 1045 17.36 223 11.26 224 9.15 349 10.02 344 14.46
Commercial real
estate term....... 606 18.88 532 16.15 696 16.3 132 12.75 391 5.10 56 4.87
Consumer and
other............. 848 8.52 383 9.47 466 9.87 543 12.22 270 20.17 459 21.92
Loans held for
sale.............. -- -- -- 14 2.17 27 3.21 23 2.10
------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allocated.... 5,888 5094 3182 3748 3130 2550
Unallocated........ 5,008 2218 1217 596 527 549
------- ------ ------ ------ ------ ------
Total............. $10,896 100.00% $7,312 100.00% $4,399 100.00% $4,344 100.00% $3,657 100.00% $3,099 100.00%
======= ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Investment Securities
GBB's investment portfolio is managed to meet GBB'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 FRB stock and Federal Home Loan Bank stock. Federal funds sold are
additional investments which are not classified as investment securities.
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.
88
<PAGE>
The amortized cost and estimated market value of investment securities at
June 30, 1997 and December 31, 1996 is summarized below:
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury obligations............ $ 6,850 $ 29 $ -- $ 6,879
U.S. agency obligations:
Mortgage-backed obligations......... 3,590 -- (34) 3,556
Fixed and variable rate notes....... 27,014 33 -- 27,047
Tax-exempt securities................ 7,743 124 -- 7,867
Corporate securities................. 8,780 40 -- 8,820
-------- ------ ---- --------
Total securities available-for-
sale............................... 53,977 226 (34) 54,169
HELD-TO-MATURITY SECURITIES:
U.S. Treasury obligations............ 1,002 -- -- 1,002
U.S. agency obligations:
Mortgage-backed obligations......... 11,746 -- -- 11,746
Fixed and variable rate notes....... 26,893 970 -- 27,863
Tax-exempt securities................ 7,470 -- (9) 7,461
FRB stock............................ 1,592 -- -- 1,592
Federal Home Loan Bank stock......... 523 -- -- 523
-------- ------ ---- --------
Total securities held-to-maturity... 49,226 970 (9) 50,187
-------- ------ ---- --------
Total investment securities......... $103,203 $1,196 $(43) $104,356
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury obligations............ $ 19,841 $ 52 $ (6) $ 19,887
U.S. agency obligations:
Mortgage-backed obligations......... 3,604 5 (53) 3,556
Fixed and variable rate notes....... 10,568 34 (13) 10,589
Mutual funds......................... 2,000 -- (52) 1,948
Tax-exempt securities................ 7,758 154 (11) 7,901
Corporate securities................. 3,216 7 -- 3,223
-------- ---- ----- --------
Total securities available-for-
sale............................... 46,987 252 (135) 47,104
-------- ---- ----- --------
HELD-TO-MATURITY SECURITIES:
U.S. Treasury obligations............ 1,005 3 -- 1,008
U.S. agency obligations:
Mortgage-backed obligations......... 7,086 87 (9) 7,164
Fixed and variable rate notes....... 38,390 78 (100) 38,368
Other mortgage-backed obligations.... 3,959 54 -- 4,013
Tax exempt securities................ 6,525 219 (3) 6,741
FRB stock............................ 673 -- -- 673
Federal Home Loan Bank stock......... 778 -- -- 778
-------- ---- ----- --------
Total securities held-to-maturity... 58,416 441 (112) 58,745
-------- ---- ----- --------
Total investment securities......... $105,403 $693 $(247) $105,849
======== ==== ===== ========
</TABLE>
89
<PAGE>
The tax effected net unrealized gain on available-for-sale securities was
$71,000 for the year ended December 31, 1996.
The following table shows amortized cost and estimated market value at June
30, 1997 of GBB's investment securities by year of maturity.
<TABLE>
<CAPTION>
1998 2002 2007
THROUGH THROUGH AND
1997 2001 2007 THEREAFTER TOTAL
------- ------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury obligations...... $ 3,597 $ 3,253 $ -- $ -- $ 6,580
U.S. agency obligations:
Mortgage-backed
obligations(1)............... 586 3,004 -- -- 3,590
Fixed and variable rate
notes(2)..................... 9,500 17,513 -- -- 27,013
Tax-exempt securities.......... 811 1,508 5,044 380 7,743
Corporate securities........... 3,700 5,081 -- -- 8,781
------- ------- ------- ------- --------
Total securities available-
for-sale..................... 18,194 30,359 5,044 380 53,977
Market value.................. 18,512 30,165 5,105 380 54,169
HELD-TO-MATURITY SECURITIES:
U.S. Treasury obligations...... 500 502 -- -- 1,002
U.S. agency obligations:
Mortgage-backed
obligations(1)............... -- 65 5,217 6,464 11,746
Fixed and variable rate
notes(2)..................... 3,000 13,996 8,895 1,000 26,891
Tax-exempt securities.......... -- 1,193 1,533 4,744 7,470
FRB stock...................... -- -- -- 1,592 1,592
Federal Home Loan Bank stock... -- -- -- 523 523
------- ------- ------- ------- --------
Total securities held-to-
maturity..................... 3,500 15,728 15,645 14,327 49,226
Market value.................. 3,500 16,284 16,090 14,312 50,187
COMBINED INVESTMENT SECURITIES
PORTFOLIO:
Total investment securities.... 21,694 46,118 20,690 14,702 103,203
------- ------- ------- ------- --------
Total market value............. $22,012 $46,449 $21,195 $14,700 $104,356
======= ======= ======= ======= ========
Weighted average yield-total
portfolio(3).................. 5.35% 6.12% 7.02% 6.69% 6.22%
</TABLE>
- --------
(1) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to
principal prepayments.
(2) Certain U.S. agency fixed and variable rate note obligations 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) Yields on tax-exempt securities have been computed on a fully tax-
equivalent basis.
Deposits
GBB emphasizes developing total client relationships with its customers in
order to increase its core deposit base. Deposits reached $639.7 million at
June 30, 1997, an increase of 14.3% compared to deposits of $559.3 million at
December 31, 1996. Deposits reached $559.3 million at December 31, 1996, an
increase of 29.5% compared to deposits of $431.8 million at December 31, 1995.
Total average interest-bearing deposits increased 34.2% to $470.9 million
for the six-month period ended June 30, 1997, compared to an average of $350.8
million for the same period in 1996. Total average interest-bearing deposits
increased 21.0% to $384.2 million for 1996, compared to an average of $303.6
million for 1995. In 1995, average interest-bearing deposits increased 18.1%
over average deposits of $257.0 million in 1994. The increase in deposits was
due to the continued marketing efforts directed at commercial business clients
in GBB's market areas, coupled with an increase in deposits related to the
activities of the Greater Bay Trust Company and the Venture Banking Group.
Noninterest-bearing deposits were $135.8 million at June 30, 1997, compared
to $139.9 million at December 31, 1996. Noninterest-bearing deposits were
$139.9 million at December 31, 1996, compared to $96.1 million at December 31,
1995. Average noninterest-bearing deposits in 1996 were $102.7 million,
compared to $77.7 million in 1995. As its regional offices expand, GBB
anticipates this funding source to increase.
90
<PAGE>
Money market and other interest-bearing demand accounts reached $503.9
million at June 30, 1997, an increase of 20.2% from December 31, 1996. Money
market and other interest-bearing demand accounts reached $419.3 million at
year-end 1996, an increase of 24.9% from the prior year. Money market and
other interest-bearing demand deposits of $335.7 million at December 31, 1995
were up 26.5% from $265.3 million at December 31, 1994.
Time certificates of more than $100,000 totaled $102.1 million, or 16.0% of
total deposits, at June 30, 1997, compared with $68.2 million, or 12.2% of
total deposits at December 31, 1996. Time certificates of deposit of more than
$100,000, savings and other time deposits totaled $68.2 million, or 12.2% of
total deposits, at December 31, 1996, compared to $63.8 million, or 14.8% of
total deposits, at December 31, 1995 and $54.5 million, or 15.7%, of total
deposits at December 31, 1994.
The following table sets forth the maturing distribution of time
certificates of deposit of $100,000 or more at June 30, 1997 and December 31,
1996:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Three months or less......................... $ 81,512 $54,233
Three to six months.......................... 10,708 9,198
Six to twelve months......................... 9,620 4,252
Over twelve months........................... 294 487
-------- -------
Total...................................... $102,134 $68,170
======== =======
</TABLE>
As of June 30, 1997, GBB had $17.1 million in brokered deposits outstanding,
as compared to $20.6 million at December 31, 1996.
Interest Rate Risk Management
Interest rate risk sensitivity is a function of the repricing
characteristics of GBB'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 GBB's current
portfolio that are subject to repricing at various time horizons: one day or
immediate, two days to six months, six to twelve months, one to three years,
three to five years, over five years and on a cumulative basis. The
differences are known as interest sensitivity gaps.
91
<PAGE>
The following table shows interest sensitivity gaps for different intervals
as of June 30, 1997:
<TABLE>
<CAPTION>
TOTAL
IMMEDIATE 2 DAYS TO >6 MONTHS >1 YEAR >3 YRS TOTAL RATE NON-RATE
ONE DAY 6 MONTHS TO 1 YEAR TO 3 YRS TO 5 YRS >5 YRS SENSITIVE SENSITIVE TOTAL
---------- ---------- ---------- -------- -------- -------- ----------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from
banks.................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 33,428 $ 33,428
Short-term investments.. 42,200 -- -- -- -- -- 42,200 -- 42,200
Investment securities... -- 14,574 8,296 8,558 36,334 33,515 101,277 2,118 103,395
Loans................... 421,667 9,397 7,414 12,843 12,291 57,909 521,521 5,477 526,998
Loan losses and unearned
fees................... -- -- -- -- -- -- -- (13,152) (13,152)
Other assets............ -- -- -- -- -- -- -- 26,182 26,182
-------- -------- ------- ------- ------- -------- -------- --------- --------
Total assets............ $463,867 $ 23,971 $15,710 $21,401 $48,625 $ 91,424 $664,998 $ 54,053 $719,051
======== ======== ======= ======= ======= ======== ======== ========= ========
LIABILITIES AND EQUITY:
Deposits
Demand................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 135,795 $135,795
NOW, MMDA and savings.. 365,696 -- -- -- -- -- 365,696 -- 365,696
Time deposits.......... -- 123,043 13,885 971 165 182 138,246 -- 138,246
Subordinated debt(1).... -- -- -- -- -- -- -- 3,000 3,000
Trust Preferred
Securities(2).......... -- -- -- -- -- -- -- 20,000 20,000
Other liabilities....... 2,969 -- -- -- -- -- 2,969 4,849 7,818
Shareholders' equity.... -- -- -- -- -- -- -- 48,496 48,496
-------- -------- ------- ------- ------- -------- -------- --------- --------
Total liabilities and
equity................. $368,665 $123,043 $13,885 $ 971 $ 165 $ 182 $506,911 $ 212,140 $719,051
======== ======== ======= ======= ======= ======== ======== ========= ========
Gap..................... $ 95,202 $(99,072) $ 1,825 $20,430 $48,460 $ 91,242 $158,087 $(158,087) $ --
Cumulative gap.......... $ 95,202 $ (3,870) $(2,045) $18,385 $66,845 $158,087 $158,087 $ -- $ --
Cumulative gap/total
assets................. 13.24% (0.54)% (0.28)% 2.56% 9.30% 21.99% 21.99% -- --
</TABLE>
- --------
(1) On or after October 1, 1998, GBB, at its option, may redeem any or all of
the subordinated debt in whole or in part.
(2) On or after April 1, 2002, GBB, at its option, may redeem any or all of
the Trust Preferred Securities, in whole or in part.
The foregoing table demonstrates that GBB had a negative cumulative one year
gap of $2.0 million of total assets or .28%, at June 30, 1997. In theory, this
would indicate that at June 30, 1997, $2.0 million more in liabilities than
assets would reprice if there was a change in interest rates over the next 360
days. If interest rates were to increase, the negative gap would tend to
result in a lower net interest margin. However, changes in the mix of earning
assets or supporting liabilities can either increase or decrease the net
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.
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 GBB's net interest margin. Because of these factors, an interest
sensitivity gap report may not provide a complete assessment of GBB's exposure
to changes in interest rates.
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. GBB 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 requirements of its shareholders. GBB 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. GBB maintains $50 million in inter-bank federal fund purchase
lines, as well as $233 million in institutional deposit or brokered deposit
lines, and $40 million in reverse repurchase lines. As of June 30, 1997, GBB
had $17.1 million in institutional deposits outstanding and no outstanding
federal funds purchased.
92
<PAGE>
GBB is a company separate and apart from the Banks. It must provide for its
own liquidity. Substantially all of GBB's revenues are obtained from interest
received 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 GBB. See "SUPERVISION AND REGULATION--Restrictions on Dividends."
Management believes that such restrictions will not have an impact on the
ability of GBB to meet its ongoing cash obligations. As of June 30, 1997, GBB
did not have any material commitments for capital expenditures.
Net cash provided by operating activities, primarily representing net
interest income, totaled $8.4 million for the six months ended June 30, 1997,
as compared to $2.0 million for the same period in 1996. Cash used for
investing activities totaled $75.0 million for the six months ended June 30,
1997, as compared to $30.6 million for the same period in 1996. The funds used
for investing activities primarily represent increases in loans and investment
for each year reported.
For the period ended June 30, 1997 net cash provided by financing activities
was $88.5 million. Historically, the primary financing activity of GBB has
been deposits and short-term borrowings. Deposits increased $80.4 million for
the period ended June 30, 1997 and short-term borrowings decreased $12.0
million for the same period. Net proceeds from the Trust Preferred Securities
issued in 1997 provided an additional $20.0 million in cash. For the period
ended June 30, 1996, net cash provided by financing activities was $46.3
million. Deposits increased $45.6 million, while short-term borrowings were
unchanged.
Capital Resources
Shareholders' equity at June 30, 1997 increased to $48.5 million from $44.7
million at December 31, 1996, from $40.1 million at December 31, 1995 and from
$36.0 million at December 31, 1994. During 1996, GBB paid aggregate cash
dividends of $0.44 per share and during the first six months of 1997 paid
aggregate cash dividends of $0.30 per share.
A banking organization's total qualifying capital includes two components,
core capital (Tier I capital) and supplementary capital (Tier II capital).
Core capital, which must comprise at least half of total capital, includes
common shareholders' equity, qualifying perpetual preferred stock, and
minority interests, less goodwill. Supplementary capital includes the
allowance for loan losses (subject to certain limitations), other perpetual
preferred stock, certain other capital instruments, and term subordinated
debt. GBB's major capital components are shareholders' equity in core capital,
and the allowance for loan losses and subordinated debt in supplementary
capital.
At June 30, 1997, the minimum risk-based capital requirements to be
considered adequately capitalized are 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 I 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 banking organizations are expected to
exceed that amount by 1.0%, 2.0% or more, depending on their circumstances.
GBB has provided the majority of its capital requirements through the
retention of earnings. In the third quarter of 1995, GBB increased its capital
base by raising $3.0 million of subordinated notes which qualify as Tier II
capital. The private offering was subscribed by GBB's directors, officers and
other accredited investors. On October 21, 1996, the FRB announced that
certain qualifying amounts of cumulative preferred securities having certain
characteristics could be included as Tier I and leverage capital. In the first
quarter of 1997, GBB completed a transaction in which it formed a Delaware
statutory business trust for the purpose of having the trust issue $20.0
million of such qualifying cumulative preferred securities (the "Trust
Preferred Securities"). Accordingly, GBB's Tier I and total risk-based capital
ratios include the $20.0 million of Trust Preferred Securities.
93
<PAGE>
GBB's and the Banks' total risk-based capital and leverage ratios were as
follows at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------------
TIER 1 CAPITAL TO TIER 1 CAPITAL TO TOTAL CAPITAL TO
AVERAGE QUARTERLY RISK-WEIGHTED RISK-WEIGHTED
ASSETS ASSETS ASSETS
------------------- ------------------ ------------------
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
---------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GBB..................... $ 68,384 9.74% $68,384 11.66% $78,740 13.42%
Well capitalized
requirements............ 35,119 5.00% 35,202 6.00% 58,670 10.00%
---------- ------- --------- ------- --------- -------
Excess capital.......... $ 33,265 4.74% $ 33,182 5.66% $ 20,070 3.42%
========== ======= ========= ======= ========= =======
MPB..................... 29,140 8.98% 29,140 11.59% 32,285 12.84%
Well capitalized
requirements............ 16,228 5.00% 15,089 6.00% 25,149 10.00%
---------- ------- --------- ------- --------- -------
Excess capital.......... $ 12,912 3.98% $ 14,051 5.59% $ 7,136 2.84%
========== ======= ========= ======= ========= =======
CNB..................... 29,660 7.93% 29,660 8.90% 36,872 11.06%
Well capitalized
requirements............ 18,709 5.00% 20,010 6.00% 33,350 10.00%
---------- ------- --------- ------- --------- -------
Excess capital.......... $ 10,951 2.93% $ 9,650 2.90% $ 3,522 1.06%
========== ======= ========= ======= ========= =======
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------
TIER 1 CAPITAL TO TIER 1 CAPITAL TO TOTAL CAPITAL TO
AVERAGE QUARTERLY RISK-WEIGHTED RISK-WEIGHTED
ASSETS ASSETS ASSETS
------------------- ------------------ ------------------
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
---------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GBB..................... $44,530 7.27% $44,530 8.75% $53,638 10.54%
Well capitalized
requirements............ 30,620 5.00% 30,540 6.00% 50,901 10.00%
---------- ------- --------- ------- --------- -------
Excess capital.......... $ 13,910 2.27% $ 13,990 2.75% $ 2,738 0.54%
========== ======= ========= ======= ========= =======
MPB..................... 22,810 8.23% 22,810 9.94% 25,415 11.07%
Well capitalized
requirements............ 13,853 5.00% 13,769 6.00% 22,949 10.00%
---------- ------- --------- ------- --------- -------
Excess capital.......... $ 8,957 3.23% $ 9,041 3.94% $ 2,466 1.07%
========== ======= ========= ======= ========= =======
CNB..................... 21,515 6.42% 21,515 7.70% 28,022 10.03%
Well capitalized
requirements............ 16,765 5.00% 16,759 6.00% 27,932 10.00%
---------- ------- --------- ------- --------- -------
Excess capital.......... $ 4,750 1.42% $ 4,756 1.70% $ 90 0.03%
========== ======= ========= ======= ========= =======
</TABLE>
GBB and the Banks seek to maintain capital ratios at levels that will
maintain their status as well-capitalized financial institutions.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share" which specified the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. The objective of SFAS No. 128 is to
simplify the computation of EPS and to make the U.S. standard for computing
EPS more compatible with the standards of other countries. SFAS No. 128
eliminated both the "primary" and "fully diluted" EPS and required the
computation and disclosures of "basic" EPS and "diluted" EPS. SFAS No. 128
should be effective for financial statements for both interim and annual
periods ending after December 15, 1997, and earlier application is not
permitted. GBB's analysis of SFAS No.128 concluded that it would have an
immaterial impact on the EPS disclosures contained herein.
94
<PAGE>
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This statement establishes standards for disclosing
information about an entity's capital structure. GBB intends to comply with
the disclosure requirements of this statement which is effective for periods
ending after December 15, 1997.
On June 30, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position, and is effective for financial statements issued for
fiscal years beginning after December 15, 1997. The impact of adopting SFAS
No. 130 has not yet been determined.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement establishes a new fair value based accounting
method for stock-based compensation plans and encourages (but does not
require) employers to adopt the new method in place of the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. Companies may continue to apply the accounting
provisions of APB 25 in determining net income; however, they must apply the
disclosure requirements of SFAS 123. The recognition provisions and disclosure
requirements of SFAS No. 123 were effective January 1, 1996. GBB has not
adopted the recognition provisions of SFAS No. 123 but has adopted the
disclosure requirements. For further information on SFAS No. 123, see Note 11
of the Notes to Consolidated Financial Statements.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
This statement also requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair value at the date of
the transfer. Furthermore, this statement requires that debtors reclassify
financial assets pledged as collateral, and that secured parties recognize
those assets and their obligation to return them in certain circumstances in
which the secured party has taken control of those assets. In addition, the
statement requires that a liability be derecognized if and only if either (a)
the debtor pays the creditor and is relieved of its obligation for the
liability or (b) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor. Accordingly, a
liability is not considered extinguished by an in-substance defeasance. SFAS
125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Management does not believe that the application of
this statement will have a material impact on GBB's financial statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS 122 amends certain provisions of SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. A
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair value, if it is
practicable to estimate those fair values. If it is not practicable to
estimate those fair values, the entire cost of the acquisition should be
allocated to the mortgage loans only. SFAS 122 is effective for years
occurring after December 31, 1995. Adoption of this pronouncement did not have
a material impact on GBB's financial statements.
95
<PAGE>
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. An impairment loss is measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
After an impairment is recognized, the reduced carrying amount of the asset
shall be accounted for as its new cost. SFAS No. 121 is effective for years
occurring after December 31, 1995. Adoption of this pronouncement did not have
a material impact on GBB's financial statements.
CHANGE IN ACCOUNTANT
Prior to the 1996 Merger, Cupertino's independent accountants were Coopers
and Mid-Peninsula's independent accountants were KPMG Peat Marwick LLP ("Peat
Marwick"). On consummation of the 1996 Merger, Mid-Peninsula changed its name
to GBB, and on December 17, 1996, GBB changed its independent accountant by
terminating its engagement of Peat Marwick and selecting Coopers as its
independent accountant to audit its financial statements for the year ended
December 31, 1996. The decision to terminate GBB's engagement of Peat Marwick
and select Coopers was unanimously recommended by GBB's Audit Committee and
approved by the GBB Board. During the two most recent fiscal years of GBB and
any subsequent interim period preceding the aforesaid change, there were no
disagreements between GBB and Peat Marwick on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which if not resolved to the satisfaction of Peat Marwick would have
caused them to make reference to the subject matter of the disagreement in
their report. All descriptions contained herein of communications between GBB
and third parties and reports of third parties are qualified in their entirety
by the text of the communications and reports referred to herein.
Peat Marwick's report on the financial statements for 1994 and 1995
contained no adverse opinion or disclaimer of opinion nor was it qualified or
modified as to uncertainty, audit scope, or accounting principles, except
their report dated January 22, 1996, relating to the consolidated balance
sheets of Mid-Peninsula Bancorp and subsidiary as of December 31, 1995 and
1994, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995, referenced other auditors. On October 7, 1994,
GBB acquired San Mateo County Bancorp on a pooling of interests basis. Peat
Marwick did not audit the consolidated financial statements of San Mateo
County Bancorp as of and for the year ended December 31, 1993. These
statements, which were included in the 1993 restated consolidated financial
statements, were audited by other auditors, whose report contained an
explanatory paragraph regarding the adoption SFAS No. 109, "Accounting for
Income Taxes," and SFAS No. 115, "Accounting for Certain Investments, Debt and
Equity Securities." Peat Marwick's report, insofar as it relates to the
amounts included for San Mateo County Bancorp, is based solely on the report
of other auditors.
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GBB MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information, as of the GBB Record
Date, with respect to the members of the GBB Board and all executive officers.
<TABLE>
<CAPTION>
NAME POSITION(S) AGE
---- ----------- ---
<C> <S> <C>
DIRECTORS
John M. Gatto Co-Chairman of GBB 60
Duncan L. Matteson Co-Chairman of GBB; Chairman of MPB 63
Rex D. Lindsay Vice-Chairman of GBB 72
Edwin E. van Bronkhorst Vice-Chairman of GBB 73
David L. Kalkbrenner Director; Chief Executive Officer and President 58
of GBB and MPB
James E. Jackson Director 62
Glen McLaughlin Director 62
Dick J. Randall Director 66
Donald H. Seiler Director 68
Warren R. Thoits Director 75
EXECUTIVE OFFICERS
C. Donald Allen Chairman and Chief Executive Officer of CNB 62
Murray B. Dey Executive Vice President and Chief Credit 55
Officer of MPB
David R. Hood Executive Vice President and Chief Lending 52
Officer of GBB and CNB
Hall Palmer Executive Vice President and Senior Trust 57
Officer of the Greater Bay Trust Company and CNB
Steven C. Smith Executive Vice President, Chief Operating 46
Officer and Chief Financial Officer of GBB;
Executive Vice President and Chief Operating
Officer of CNB
</TABLE>
JOHN M. GATTO, Co-Chairman of GBB since November 1996. He was a director of
Cupertino from 1984 to the date of the 1996 Merger and has served as a
director of CNB since 1984. Mr. Gatto has been the sole proprietor of Maria
Enterprises, a development consultant company, since December 1993. From 1984
to 1993, Mr. Gatto was an architect for Cypress Properties, a real estate
development company.
DUNCAN L. MATTESON, Co-Chairman of GBB since November 1996. He served as
Chairman of GBB (formerly Mid-Peninsula) from 1994 until the 1996 Merger and
has served as Chairman of MPB since 1987. He is Chairman of Matteson Realty
Services, Inc., a diversified group of real estate investment and property
management corporations located in Menlo Park. He has been actively involved
in the real estate investment and securities industries in the Palo Alto/Menlo
Park Area since 1959. He is a member of the Executive Committee of the
Stanford Heart Council, and serves as a trustee of the Palo Alto Medical
Foundation. As an appointee of the Governor, Mr. Matteson is Vice President of
the board of directors of the Cow Palace. He is the Immediate Past-Chairman of
the National Multi-Housing Council, a group of the leading apartment owners
and managers throughout the United States.
REX D. LINDSAY, Vice-Chairman of GBB since November 1996. He served as a
director of Cupertino from 1984 to the date of the 1996 Merger and has served
as a director of CNB since 1984. For approximately the past five years, Mr.
Lindsay has been a rancher and a private investor.
EDWIN E. VAN BRONKHORST, Vice-Chairman of GBB (formerly Mid-Peninsula) since
1994 and a director of MPB since 1987. Mr. van Bronkhorst retired from the
Hewlett-Packard Company in 1984 and was, prior to his retirement, Senior Vice
President, Chief Financial Officer and Treasurer of that company and served on
its board of directors from 1962 to 1984. He currently serves as a member of
the board of directors of the California Water
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Service Company and Nellcor Puritan Bennett, a manufacturer of medical
equipment, and is a Trustee and Treasurer of the David & Lucile Packard
Foundation.
DAVID L. KALKBRENNER, President, Chief Executive Officer and a director of
GBB and MPB. He has held such positions with GBB (formerly Mid-Peninsula)
since 1994 and with MPB since 1987. He was employed by Crocker National Bank
from 1963 to 1986. From 1981 to 1986, he served as First Vice President and
Regional Manager of the Mid-Peninsula region, with administrative offices
located in Palo Alto. He was responsible for the administration of 14 full-
service branches from San Carlos to Sunnyvale, a business banking center in
Palo Alto and the private banking office, also located in Palo Alto. From 1977
to 1981, he was Vice President and Manager of the main office of Crocker
National Bank in Palo Alto. He is a member of the board of directors of the
College of Notre Dame and is a former director of the Palo Alto Chamber of
Commerce and the Community Association for the Retarded.
JAMES E. JACKSON, director of GBB since November 1996. He served as a
director of Cupertino from 1984 to the date of the 1996 Merger and has served
as a director of CNB since 1984. Mr. Jackson has been an attorney-at-law at
the law firm Jackson & Abdalah, a Professional Corporation, since 1976.
GLEN MCLAUGHLIN, director of GBB since November 1996. He served as a
director of Cupertino from 1984 to the date of the 1996 Merger and has served
as a director of CNB since 1984. Mr. McLaughlin has also served as the
Chairman of Venture Leasing Associates, an equipment leasing company, since
December 1986.
DICK J. RANDALL, director of GBB since November 1996. He served as a
director of Cupertino from 1984 to the date of the 1996 Merger and has served
as a director of CNB since 1984. Mr. Randall has been a private investor and
rancher since 1993. From 1962 until his retirement in 1993, Mr. Randall served
as the president of The William Lyon Co., a real estate development and
construction company.
DONALD H. SEILER, director of GBB (formerly Mid-Peninsula) since 1994 and of
MPB since 1987. He is the founder and managing partner of Seiler & Company,
Certified Public Accountants, in Redwood City and San Francisco. He has been a
certified public accountant in San Francisco and the Peninsula area since
1952. He is presently a director of Ross Stores, Inc., serves on the audit
committee of Stanford Health Services, is a past-president of the Jewish
Community Federation of San Francisco, the Peninsula and Marin and Sonoma
Counties. He is on the board of directors of the Peninsula Community
Foundation.
WARREN R. THOITS, director of GBB (formerly Mid-Peninsula) since 1994 and of
MPB since 1987. He is a partner with the Palo Alto law firm of Thoits, Love,
Hershberger & McLean. He is a native of Palo Alto and a graduate of Stanford
University and its School of Law. Mr. Thoits has been very active in community
and charitable organizations, having served as President of the Palo Alto
Chamber of Commerce, the Palo Alto Rotary Club and as Chairman of the Palo
Alto Area Chapter of the American Red Cross. He was formerly a member of the
board of directors of Northern California Savings and Loan Association (now
Great Western Bank).
C. DONALD ALLEN, Chairman of CNB and Chief Executive Officer of CNB since
1990. He served as President and Chief Executive Officer and a director of
Cupertino from 1984 to the date of the 1996 Merger. Mr. Allen was a founding
director and President of CNB.
MURRAY B. DEY, Executive Vice President and Chief Credit Officer of MPB
since 1987. From 1964 to 1986 he worked for Crocker National Bank. From 1975
to 1982, he was the Vice President and Assistant Manager of the main office of
Crocker National Bank in Palo Alto. He became the Manager of that office in
1982 and held that position until 1984. From 1984 to 1986 he was the Area
Market Manager in the Palo Alto/Menlo Park area. He currently serves as
President and Treasurer of the Home Equity Loan Program for Seniors, Inc., and
is a member of the Community Cabinet of the Lucile Packard Children's Hospital
at Stanford.
DAVID R. HOOD, Executive Vice President and Chief Lending Officer of GBB
since November 1996. Since April 1995, he has served as Executive Vice
President and Chief Lending Officer of CNB. From April 1985 to
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<PAGE>
March 1995, he held positions of Vice President, Senior Vice President and
Senior Loan Officer, Executive Vice President and Senior Lending Officer, and
President of University Bank & Trust. From 1967 to 1985 Mr. Hood held various
positions, the most recent of which was Vice President and Manager of the San
Mateo Business Loan Center for Wells Fargo Bank, N.A.
HALL PALMER, Executive Vice President and Senior Trust Officer of the
Greater Bay Trust Company since November 1996. Mr. Palmer joined CNB in May
1995 as Executive Vice President and Senior Trust Officer. Prior to that time,
from May 1987 to May 1995, Mr. Palmer served as Executive Vice President and
Senior Trust Officer for University Bank & Trust. From 1984 to 1987, Mr.
Palmer was Senior Vice President and Executive Trust Officer for Key Bank of
Oregon. From 1968 to 1984, Mr. Palmer was Manager and Trust Officer for Wells
Fargo Bank, N.A.
STEVEN C. SMITH, Executive Vice President, Chief Operating Officer and Chief
Financial Officer of GBB since November 1996 and Executive Vice President and
Chief Operating Officer of CNB since 1995. He is a certified public accountant
who joined Cupertino and CNB in December 1993 as Senior Vice President and
Chief Financial Officer, and in 1995 was named Executive Vice President and
Chief Operating Officer of Cupertino and CNB. From July 1993 to December 1993,
Mr. Smith served as Executive Vice President and Chief Financial Officer of
Commercial Pacific Bank. From 1992 to July 1993, Mr. Smith served as Executive
Vice President and Chief Financial Officer of First Charter Bank. From 1984 to
1991, Mr. Smith served as Senior Vice President of Finance and Treasurer of
Fidelity Federal Bank, a federal savings bank.
THE GBB BOARD AND COMMITTEES
GBB has five standing committees including an Audit Committee, an Executive
Committee, a Loan Committee, a Trust Oversight Committee and an
Investment/ALCO Committee.
The Audit Committee of GBB, which held three meetings in 1996, is chaired by
Mr. Seiler, and Messrs. McLaughlin, Randall and Thoits are members. The
purpose of the Audit Committee, among other things, is to direct the
activities of the external auditors of GBB in order to fulfill the legal and
technical requirements necessary to adequately protect the directors,
shareholders and employees of GBB. It is also the responsibility of this
committee to recommend to the Board of Directors the appointment of
independent accountants and to make certain that the external auditors have
the necessary freedom and independence to freely examine all GBB records.
The Executive Committee of GBB, which also acts as the Executive
Compensation Committee and the Nominating Committee, held nine meetings during
1996 and is chaired by Mr. Matteson, and Messrs. Gatto, Kalkbrenner, Lindsay
and van Bronkhorst are members. The purpose of the Executive Compensation
Committee is to determine the salary and bonus structure for GBB's executive
officers and supervise the compensation scheme for GBB's other officers. In
addition, the Executive Compensation Committee determines appropriate awards
under the 1996 Option Plan and administers GBB's retirement plan. In
performing its duties as the Nominating Committee, the Executive Committee
selects management's nominees for election as directors and considers
recommendations for nominees submitted by shareholders, if such
recommendations are made in writing and in accordance with the procedures for
shareholder nominations described in GBB's Bylaws and in the Notice of Annual
Meeting of Shareholders.
During the year ended December 31, 1996, the GBB Board held a total of eight
meetings. All of the persons who were directors of GBB during 1996 attended at
least 75% of the aggregate of (i) the total number of such GBB Board meetings;
and (ii) the total number of meetings held by all committees of the GBB Board
on which he served during such year.
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COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Summary of Cash and Certain Other Compensation
The following table sets forth certain summary information concerning
compensation paid or accrued by GBB to or on behalf of GBB's Chief Executive
Officer and each of the five most highly compensated executive officers of GBB
(determined as of the end of the last fiscal year) whose total annual salary
and bonus exceeded $100,000 for the fiscal year ended December 31, 1996. In
all cases, payment was for services in all capacities to GBB (and its
predecessors, Mid-Peninsula and Cupertino), and its subsidiaries, MPB and CNB
during the years ended December 31, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY(1) BONUS(2) COMPENSATION(3) OPTIONS/SARS COMPENSATION(5)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (4)(#) ($)
- --------------------------- ---- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David L. Kalkbrenner.... 1996 182,083 124,000 8,400 20,000 71,054
President and CEO of 1995 150,000 97,000 8,400 15,000 45,033
GBB and
MPB 1994 142,110 74,000 8,400 1,062 13,142
C. Donald Allen......... 1996 185,858 7,500 -- 3,816 69,123
Chairman and CEO of CNB 1995 161,177 7,500 -- -- 14,580
1994 150,000 -- -- -- 11,153
Steven C. Smith......... 1996 139,020 70,860 6,000 9,131 28,501
Executive Vice 1995 127,250 48,000 6,000 8,968 7,033
President, COO
and CFO of GBB; EVP and 1994 103,416 30,000 6,000 8,968 830
COO of CNB
David R. Hood........... 1996 124,120 62,490 6,000 7,131 31,354
Executive Vice 1995 85,462 48,000 4,250 13,453 2,153
President and
Chief Lending Officer 1994 -- -- -- -- --
of GBB and CNB
Murray B. Dey........... 1996 124,425 80,000 6,000 6,000 37,054
Executive Vice 1995 120,000 67,000 6,000 -- 23,891
President and
Chief Credit Officer of 1994 -- -- -- -- --
MPB
Hall Palmer............. 1996 122,600 62,490 6,000 4,631 33,343
Executive Vice 1995 80,000 48,000 4,000 13,453 2,580
President and
Senior Trust Officer of 1994 -- -- -- -- --
Greater Bay Trust
Company and CNB
</TABLE>
- --------
(1) Annual salary includes cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers under GBB's 401(k) Plan.
(2) Amounts indicated as bonus payments were earned for performance during
1996, 1995, and 1994 but paid in the first quarters of 1997, 1996, and
1995, respectively.
(3) No executive officer received perquisites or other personal benefits in
excess of the lesser of $50,000 or 10% of each such officer's total annual
salary and bonus during 1996, 1995, or 1994. Amounts shown are for
automobile allowances.
(4) Under the 1996 Option Plan, options may be granted to directors and key,
full-time salaried officers and employees of GBB, MPB and CNB. Options
granted under the 1996 Option Plan are either incentive options or non-
statutory options. Options granted under the 1996 Option Plan become
exercisable in accordance with a vesting schedule established at the time
of grant. Vesting may not extend beyond ten years from the date of grant.
Options granted under the 1996 Option Plan are adjusted to protect against
dilution in the event of certain changes in GBB's capitalization,
including stock splits and stock dividends.
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<PAGE>
All options granted to the named executive officers were incentive stock
options and have an exercise price equal to the fair market value of the
GBB Stock on the date of grant. For David L. Kalkbrenner and Murray B. Dey,
the amounts shown have been adjusted to give effect to a five percent stock
dividend in December 1993, and the conversion ratio pertaining to the
merger transaction whereby WestCal National Bank merged with and into MPB
and MPB became a wholly owned subsidiary of GBB, which transaction was
consummated on October 7, 1994. For C. Donald Allen, Steven C. Smith, David
R. Hood and Hall Palmer, the amounts shown give effect to the conversion
ratio pertaining to the merger between GBB and Cupertino which became
effective on November 27, 1996.
(5) Amounts shown for David L. Kalkbrenner include $2,600 in directors' fees,
$3,612 in term life insurance premiums and $6,930 in 401(k) plan matching
contributions in 1994; $2,400 in directors' fees, $3,903 in term life
insurance premiums, $31,800 accrued under his Executive Salary
Continuation Agreement and $6,930 in 401(k) plan matching contributions in
1995; and $2,400 in directors' fees, $11,000 in term life insurance
premiums, $50,529 accrued under his Executive Salary Continuation
Agreement and $7,125 in 401(k) plan matching contributions in 1996.
Amounts shown for C. Donald Allen include $8,400 in directors' fees and
$2,753 in 401(k) plan matching contributions in 1994; $8,150 in directors'
fees, $4,500 in 401(k) plan matching contributions and $1,930 to fund
retirement benefits in 1995; and $9,734 in directors' fees, $4,750 in
401(k) plan matching contributions and $54,639 to fund retirement benefits
in 1996. Amounts shown for Steven C. Smith include $830 in 401(k) plan
matching contributions in 1994; $4,500 in 401(k) plan matching
contributions and $2,513 to fund retirement benefits in 1995; and $4,750
in 401(k) plan matching contributions and $23,751 to fund retirement
benefits in 1996. Amounts shown for David R. Hood, who joined GBB in April
1995, include $2,153 in payments to fund his retirement benefits in 1995;
$4,750 in 401(k) plan matching contributions and $26,604 to fund his
retirement benefits in 1996. Amounts shown for Murray B. Dey include
$3,159 in term life insurance premiums and $6,930 in 401(k) plan matching
contributions in 1994; $2,060 in term life insurance premiums, $14,901
accrued under his Salary Continuation Agreement and $6,930 in 401(k) plan
matching contributions in 1995; and $6,250 in term life insurance
premiums, $23,679 accrued under his Salary Continuation Agreement and
$7,125 in 401(k) plan matching contributions in 1996. Amounts shown for
Hall Palmer, who joined GBB in May 1995, include $2,580 to fund his
retirement benefits in 1995; $4,750 in 401(k) plan matching contributions
and $28,593 to fund his retirement benefits in 1996.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Effective March 3, 1992, GBB entered into a two-year employment agreement
with David L. Kalkbrenner which provides for automatic one-year extensions
until the agreement is terminated as described below. The agreement, as
amended, provides for, among other things: (a) a base salary of $135,000 per
year, as adjusted at the discretion of the GBB Board; (b) a discretionary
annual bonus based upon the pre-tax net profits of GBB, (c) payment to Mr.
Kalkbrenner of his base salary (reduced by the amount received by him from
state disability insurance or workers' compensation or other similar insurance
through policies provided by GBB) for a period of six-months if he becomes
disabled so that he is unable to perform his duties; (d) four weeks annual
vacation leave; (e) a $500,000 life insurance policy; (f) an automobile
allowance; and (g) reimbursement for ordinary and necessary expenses incurred
by Mr. Kalkbrenner in connection with his employment. The agreement may be
terminated with or without cause, but if the agreement is terminated due to
the occurrence of circumstances that make it impossible or impractical for GBB
to conduct or continue its business, the loss by GBB of its legal capacity to
contract, GBB's breach of the terms of the agreement, or in GBB's discretion
by giving not less than 30 days' prior written notice of termination, Mr.
Kalkbrenner will be entitled to receive severance compensation equal to 24
months of Mr. Kalkbrenner's then existing base salary. The agreement further
provides that in the event of a "change in control" as defined therein and
within a period of two years following consummation of such change in control:
(a) Mr. Kalkbrenner's employment is terminated; (b) any adverse change occurs
in the nature and scope of Mr. Kalkbrenner's position, responsibilities,
duties, salary, benefits or location of employment; or (c) any event occurs
which reasonably constitutes a demotion, significant diminution or
constructive termination of Mr. Kalkbrenner's employment, Mr. Kalkbrenner will
be entitled to receive severance compensation in an amount equal to two and
one-half times his average annual compensation for the
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five years immediately preceding the change in control (or for such shorter
time as Mr. Kalkbrenner was employed by GBB).
GBB has entered into an Executive Salary Continuation Agreement with C.
Donald Allen effective as of August 1, 1993. The agreement provides for an
annual benefit of up to $100,000 to be paid to Mr. Allen or his designated
beneficiary over a period of one hundred eighty (180) months. The benefit is
effective upon: (i) Mr. Allen's attainment of sixty-five (65) years of age or
his death or disability prior to such time if he were actively employed by GBB
at the time; (ii) termination of his employment by GBB without "cause" (as
defined in the agreement); (iii) termination or constructive termination of
his employment by GBB, after the occurrence of a "change of control" in GBB or
CNB as defined in the agreement. Although this agreement is intended to
provide Mr. Allen with an additional incentive to remain in the employ of GBB,
the agreement states it shall not be deemed to constitute a contract of
employment between Mr. Allen and CNB nor shall any provision of this agreement
restrict the right of Mr. Allen to terminate his employment. The agreement
shall have no impact or effect upon any separate written employment agreement
which Mr. Allen may have with GBB.
MPB has entered into Executive Salary Continuation Agreements with David L.
Kalkbrenner and Murray B. Dey effective as of April 26, 1995. The agreements
provide for an annual benefit of up to $85,000 to be paid to Mr. Kalkbrenner
and up to $60,000 to be paid to Mr.Dey or his designated beneficiary over a
period of one hundred and eighty (180) months. The benefit is effective upon:
(i) Mr. Kalkbrenner's or Mr. Dey's attainment of sixty-five (65) years of age
or his death or disability prior to such time if he were actively employed by
MPB at the time; (ii) termination of his employment by MPB without "cause" (as
defined in the agreements); (iii) termination or constructive termination of
his employment by MPB, after the occurrence of a "change of control" in MPB or
GBB as defined in the agreements. In the event Mr. Kalkbrenner or Mr. Dey
elects early retirement (as defined in the agreements) or otherwise
voluntarily terminates his employment with MPB prior to retirement, the
agreements provide for payment of an annuity in an amount to be determined
according to a schedule set forth in the agreements. Although the agreements
are intended to provide Mr. Kalkbrenner and Mr. Dey with an additional
incentive to remain in the employ of MPB, the agreements state that they shall
not be deemed to constitute a contract of employment between Mr. Kalkbrenner
or Mr. Dey and MPB nor shall any provision of the agreements restrict or
expand the right of Mr. Kalkbrenner or Mr. Dey to terminate his employment.
The agreements have no impact or effect upon any separate written employment
agreement which Mr. Kalkbrenner or Mr. Dey may have with MPB.
GBB has entered into Employment, Severance and Retirement Benefits
Agreements with Steven C. Smith effective as of September 1, 1994, David R.
Hood, effective as of April 14, 1994 and Hall Palmer effective as of May 1,
1995. Each employment agreement sets the officer's beginning annual salary,
subject to annual cost of living adjustments, with the initial salary payable
to Mr. Smith being set at $135,000 and the initial salary payable to Mr. Hood
and Mr. Palmer being set at $120,000. Each of these employment agreements
entitles the officer to severance benefits equal to 12 months' salary in the
event that such officer's employment is terminated for any reason other than
death, disability, retirement or certain acts of misconduct, or in the event
that such officer resigns within one year after a change in control of GBB
upon a reduction in responsibilities or compensation or certain other events
deemed to be unfavorable to the officer. In addition, the agreements entitle
each officer to certain retirement benefits. See "--Retirement Benefits."
1996 Option Plan
The GBB Board has adopted the 1996 Option Plan for the purpose of offering
selected employees, directors and consultants an opportunity to acquire a
proprietary interest in the success of GBB, or to increase such interest, by
purchasing shares of GBB Stock. The 1996 Option Plan provides both for the
grant of nonstatutory options as well as incentive stock options intended to
qualify under Section 422 of the Code.
Options granted under the 1996 Option Plan contain provisions pursuant to
which, in the event of a Change in Control (as defined below) of GBB, all
unexercised options will become exercisable in full prior to such event. The
1996 Option Plan provides that a "Change of Control" will occur in the event
of (i) a change in the
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composition of the Board of Directors, as a result of which fewer than half of
the incumbent directors are directors who either (a) had been directors of GBB
(including prior service as a director of either CNB or MPB) 24 months prior
to such change or (b) were elected, or nominated for election, to the Board of
Directors with the affirmative votes of at least a majority of the directors
who had been directors of GBB at the effective time of the Merger or 24 months
prior to such change (whichever is later) and who were still in office at the
time of the election or nomination or (ii) any "person" (as such term is
defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) who is or became the beneficial owner, directly or indirectly, of
securities of GBB representing 50% or more of the combined voting power of
GBB's then outstanding securities.
Retirement Benefits
Pursuant to agreements between GBB and Messrs. Smith, Hood and Palmer, each
such officer or his spouse (should she survive him) is entitled to retirement
benefits based upon the proceeds of a split-dollar life insurance policy
maintained by GBB for each officer's benefit. Each officer may begin receiving
benefits upon reaching "retirement age" (as defined in each agreement) or upon
termination of employment, whichever occurs later. Benefits are payable in the
form of draws against the annual increase in the cash surrender value of the
officer's insurance policy from the time benefits commence, up to a maximum
annual draw of $55,000 for Mr. Hood, $44,000 for Mr. Palmer and $60,000 for
Mr. Smith (or such lesser amount as shall have vested, as described below)
with the increase in value in excess of such amount becoming the property of
GBB. The right to make such draws continues during the lifetime of the officer
and his surviving spouse, but in no case longer than 40 years. The right to
this retirement benefit vests at 1/84 of such amount monthly following the
effective date of such employment agreement, provided that vesting is subject
to acceleration upon the occurrence of certain events following a Change in
Control, as such term is defined in each employment agreement. See "--
Employment Contracts and Termination of Employment and Change in Control
Arrangements."
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Stock Options
The following table provides the specified information concerning grants of
options to purchase GBB Stock made during the year ended December 31, 1996 to
the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS IN FISCAL 1996 OPTION TERM(1)
- ------------------------------------------------------------------------- -----------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE(3) EXPIRATION
NAME GRANTED(2) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ---------- ------------ ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David L. Kalkbrenner.... 10,000 16.75 01/17/06 105,340 266,952
10,000 21.75 12/17/06 136,785 346,639
------
20,000 16.12
C. Donald Allen......... 816 15.94 05/16/02 4,424 10,036
3,000 21.75 12/17/06 41,035 103,992
------
3,816 3.08
Steven C. Smith......... 1,631 15.94 05/16/02 8,842 20,059
7,500 21.75 12/17/06 102,588 259,979
------
9,131 7.36
David R. Hood........... 1,631 15.94 05/16/02 8,842 20,059
5,500 21.75 12/17/06 75,232 190,651
------
7,131 5.75
Murray B. Dey........... 3,000 16.75 01/17/06 31,602 80,086
3,000 21.75 12/17/06 41,035 103,992
------
6,000 4.84
Hall Palmer............. 1,631 15.94 05/16/02 8,842 20,059
3,000 21.75 12/17/06 41,036 103,992
------
4,631 3.74
</TABLE>
- --------
(1) Potential gains are net of exercise price, but before taxes associated
with exercise. These amounts represent certain assumed rates of
appreciation only, based on Commission rules. Actual gains, if any, on
stock option exercises are dependent on the future performance of the GBB
Stock, overall market conditions and the optionholders' continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved. One share of stock purchased in 1996 at
$15.94 would yield profits of $10.02 per share at 5% appreciation over ten
years, or $25.40 per share at 10% appreciation over the same period. One
share of stock purchased in 1996 at $21.75 would yield profits of $13.68
per share at 5% appreciation over ten years, or $34.66 per share at 10%
appreciation over the same period. One share of stock purchased in 1996 at
$16.75 would yield profits of $10.53 per share at 5% appreciation over ten
years, or $26.70 per share at 10% appreciation over the same period.
(2) Generally, options granted under the 1996 Option Plan vest at the rate of
25% of the options granted for each full year of the optionee's continuous
employment with GBB and are exercisable to the extent vested. See also "--
Employment Contracts and Termination of Employment and Change in Control
Arrangements."
(3) All options listed were granted at the estimated fair market value on the
date of grant.
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Option Exercises and Holdings
The following table provides the specified information concerning exercises
of options to purchase GBB Stock in the fiscal year ended December 31, 1996,
and unexercised options held as of December 31, 1996, by the persons named in
the Summary Compensation Table:
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES VALUE OPTIONS AT 12/31/96 (#) 12/31/96 ($)(1)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David L. Kalkbrenner.... 4,917 27,068 12,307 32,894 161,550 255,302
C. Donald Allen......... -- -- 22,291 3,000 375,135 7,875
Steven C. Smith......... -- -- 20,022 10,489 274,109 61,728
David R. Hood........... -- -- 15,083 5,500 210,358 14,438
Murray B. Dey........... 1,203 6,623 6,550 7,366 89,916 47,554
Hall Palmer............. -- -- 15,083 3,000 210,358 7,875
</TABLE>
- --------
(1) Based on the closing price of GBB Stock on December 31, 1996, the last
trading day in 1996, which was $24.375.
Compensation Committee Interlocks and Insider Participation
The Executive Committee acts as the Executive Compensation Committee of GBB.
The members of the Executive Committee are Messrs. Gatto, Matteson,
Kalkbrenner, Lindsay and van Bronkhorst. None of these persons serves or has
served as an officer or employee of GBB, MPB or CNB, except for Mr.
Kalkbrenner, who serves as the Chief Executive Officer and President of GBB
and MPB. Mr. Matteson has an interest in a building leased by MPB. See "--
Certain Relationships and Related Transactions."
During 1996, the Executive Committee of Mid-Peninsula served as the
Compensation Committee for Mid-Peninsula Bancorp and MPB. The members of the
Executive Committee were Messrs. Kalkbrenner, Matteson, Seiler, Thoits and van
Bronkhorst. No person who served as a member of the Executive Committee of
Mid-Peninsula during 1996 has ever been an officer or employee of Mid-
Peninsula Bancorp or MPB, except Mr. Kalkbrenner.
During 1996, the Executive Committee of Cupertino served as the Compensation
Committee of Cupertino and CNB. The members of the Executive Committee were
Messrs. Gatto, Lindsay, McLaughlin and Randall. No person who served as a
member of the Executive Committee of Cupertino during 1996 has ever been an
officer or employee of Cupertino or CNB.
Director Compensation
Directors of MPB received $200 for each board meeting attended during 1996.
Non-employee directors of MPB received $150 for each committee meeting
attended in 1996. Each director of MPB was granted options to purchase 1,956
shares of stock in 1996. Non-employee directors of MPB's Loan Committee
received a $500 per month retainer as well as $150 for each meeting attended
during 1996. Total compensation for MPB directors in 1996 was $63,590.
For 1996, the Chairman and Vice-Chairman of CNB received annual retainers of
$15,000 and $12,500, respectively. All other directors received an annual
retainer of $10,000. In addition, the Chairman and Vice-Chairman of the
Directors' Loan Committee received annual retainers of $4,500, and other
members received annual retainers of $4,000. The Chairman of the Audit
Committee received an annual retainer of $2,000, and Audit Committee members
each received an annual retainer of $1,500. The Trust Committee Chairman
received an annual retainer of $2,000 and Trust Committee members each
received $1,500. The Compensation Committee members each received an annual
retainer of $1,000. Total compensation for CNB directors in 1996 was $158,374.
105
<PAGE>
For 1997, the Co-Chairmen of the GBB Board will receive annual retainers of
$14,000. All other non-officer directors will receive annual retainers of
$9,000. Loan Committee members will receive retainers of $6,000, Trust
Oversight Committee members will receive retainers of $3,000, and Audit
Committee and Investment/ALCO Committee members will receive retainers of
$1,000. Members of the Boards of Directors of CNB and MPB will receive
retainers of $1,800 each. Each nonofficer director of GBB was granted options
to purchase 2,000 shares of GBB stock in 1996 with members of the Executive
Committee receiving an additional 1,000 shares. The estimated total
compensation for the GBB Board in 1997 is $189,500.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GBB, through MPB and CNB, has had, and expects in the future to have,
banking transactions in the ordinary course of its business with GBB's
directors and officers and their associates, including transactions with
corporations of which such persons are directors, officers or controlling
shareholders, on substantially the same terms (including interest rates and
collateral) as those prevailing for comparable transactions with others.
Management believes that such transactions comprising loans did not involve
more than the normal risk of collectibility or present other unfavorable
features. Loans to executive officers of GBB are subject to limitations as to
amount and purposes prescribed in part by the Federal Reserve Act, as amended.
MPB leases its offices at 420 Cowper Street, Palo Alto, California 94301
from MPB Associates, a tenant-in-common arrangement in which three directors
of GBB, Messrs. Matteson, Seiler and Thoits, and four other directors of MPB
hold an approximate 51% interest. The acquisition of MPB's leased premises by
MPB Associates in 1990 did not result in a change in the terms of MPB's lease.
The lease, which originally expired in May 1993, has been extended through
January 2000. MPB pays an annual rental of $560,000 for the entire leased
space. Additionally, MPB pays real property taxes, utilities, and building
insurance, to the extent they exceed, on an annual basis, $1.40 per rentable
square foot, $1.60 per rentable square foot, and $0.17 per rentable square
foot, respectively. The rent will be adjusted every twelve months beginning
June 1, 1997 in accordance with the change in the immediately preceding year
over 1992 in the Consumer Price Index for All Urban Consumers, San
Francisco/Oakland Metropolitan Area, All-Items (1967 = 100) as published by
the U.S. Department of Labor, Bureau of Labor Statistics. The lease also
contains a provision granting MPB a right of first refusal to purchase the
building during the term of the lease upon the same terms and conditions that
the landlord is willing to accept from a third party.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires GBB's executive officers and
directors, and persons who own more than ten percent of a registered class of
GBB's equity securities, to file reports of ownership and changes in ownership
with the Commission. Executive officers, directors and greater than ten
percent shareholders are required by Commission regulations to furnish to GBB
copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to GBB, or
written representation that no Form 5 was required, GBB believes that during
the fiscal year ended December 31, 1996 all executive officers, directors and
greater than ten-percent beneficial owners complied with all Section 16(a)
filing requirements applicable to them, except as follows: Following the
consummation of the 1996 Merger, a Form 4 reporting the change in ownership as
a result of the consummation of the 1996 Merger was filed late for each of the
former directors of Cupertino and executive officers of Cupertino who became
directors and executive officers of GBB after the 1996 Merger. These
individuals included Messrs. Allen, Gatto, Hood, Jackson, Lindsay, McLaughlin,
Palmer, Randall and Smith.
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<PAGE>
BUSINESS--PBC
In addition to the historical information contained herein, certain
statements under this caption constitute "forward-looking statements" under
Section 27A of the Securities Act and Section 21E of the Exchange Act which
involve risks and uncertainties. PBC's actual results may differ significantly
from those discussed herein. Factors that might cause such a difference
include, but are not limited to, those discussed under the captions "RISK
FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--PBC" as well as those discussed elsewhere in this Joint
Proxy Statement/ Prospectus.
GENERAL
PBC is a full service commercial bank formed in 1979 by a group of local
business people to provide personalized commercial banking services to the San
Francisco Bay Area's northern peninsula. PBC's main office is located in the
central business district of Millbrae, California, approximately 25 miles
south of San Francisco. It also maintains a branch office at #1 Bayhill
Shopping Center, San Bruno, California. Its deposits are insured by the FDIC
in accordance with applicable law. At June 30, 1997, it had total assets of
$207.3 million, total loans of $74.4 million, total deposits of $190.5 million
and shareholders' equity of $15.0 million.
The address of PBC's headquarters and principal office is 1001 Broadway,
Millbrae, California 94030, and its telephone number is (650) 687-4333.
MARKET AREA
PBC concentrates on marketing services to small and medium-sized businesses,
professionals and individuals in San Mateo and San Francisco Counties. San
Mateo County encompasses the geographic area between Menlo Park to the south,
South San Francisco to the north, the Pacific Ocean to the west and San
Francisco Bay to the east, while San Francisco County encompasses the entire
city of San Francisco.
San Mateo County has a population of approximately 700,000, with a mean
household income exceeding $78,000 and total bank deposits of approximately
$1.6 billion. San Francisco County has a population in excess of 760,000, with
a mean household income exceeding $59,000 and total bank deposits of
approximately $32.5 billion.
The commercial base of San Mateo and San Francisco Counties is diverse and
includes hardware and software technology companies, biotech companies, the
San Francisco International Airport and related service industries,
professional services, printing, real estate construction and wholesale and
retail trade. As a result of its geographic concentration, PBC's results
depend largely upon economic conditions in these areas. While the economy in
PBC's market areas has exhibited positive economic and employment trends,
there is no assurance that such trends will continue. A deterioration in
economic conditions could have material adverse impact on the quality of PBC's
loan portfolio and the demand for its products and services, and accordingly
its results of operations.
PRODUCTS AND SERVICES
PBC strives to provide the highest-quality service available from a
financial institution. Through such service, PBC attempts to create long-
lasting customer relationships. Because of competition from brokerage firms,
insurance companies and other nonbanks, PBC attempts to offer a variety of
products that customers are seeking from their financial services providers
rather than only those products and services that have traditionally been
provided by banks. Its customers include the area's small businesses and
professionals, the owners and employees of those businesses and individuals
residing in the community. PBC provides a full range of banking services and
flexible credit solutions, on a personalized basis, to business, professionals
and individuals in the local community. It offers business loans and lines of
credit, SBA loans, commercial real estate loans and standby
107
<PAGE>
letters of credit. Real estate loans include equity lines of credit, bridge
loans, land development and construction loans and reverse mortgage loans. PBC
does not make residential mortgage loans. Consumer loans to individuals
include automobile loan and personal loans or lines of credit. PBC makes
available a variety of checking, savings and money market accounts,
certificates of deposit, and other banking services. PBC also provides courier
service to many businesses. PBC officers often call on customers at their
place of business.
LENDING ACTIVITIES
Underwriting and Credit Administration
The lending activities of PBC are guided by the basic lending policies
established by PBC's Board of Directors. The credit policy is approved each
year by the Board of Directors, and is managed through periodic reviews. Each
loan must meet minimum underwriting criteria established in PBC's lending
policy. Lending authority is granted to officers of PBC on a limited basis.
Loan requests exceeding individual officer approval limits are approved by the
Senior Vice President/Senior Lending Officer or the President/Chief Executive
Officer. Loan requests exceeding these limits are submitted to the PBC Loan
Committee, which consists of the President/Chief Executive Officer and the
entire PBC Board.
PBC's credit administration function includes the regular use of an outside
loan review firm. In addition, the President/CEO, the Senior Vice
President/Senior Lending Officer meet at least once a month and review
delinquencies, nonperforming assets, classified assets and other pertinent
information to evaluate credit risk within PBC's loan portfolio and to
recommend general reserve percentages and specific reserve allocations. The
information reviewed by this committee is submitted to the PBC Board on a
monthly basis.
Loan Portfolio
Approximately 29.1% of PBC's gross loan portfolio was in commercial loans at
December 31, 1996, and real estate construction and land loans represented
approximately 17.9% of total loans, primarily for multi-family residential
projects. In addition, 44.5% of PBC's loans were real estate term loans, which
are primarily secured by commercial properties. The balance of the portfolio
consists of consumer loans.
The interest rates charged for the loans made by PBC 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 PBC and PBC's cost of funds.
Commercial Loans. In its commercial loan portfolio, PBC provides
personalized financial services to the diverse commercial and professional
businesses in its market areas. Commercial loans consist primarily of short-
term loans (normally with a maturity of under one year) for working capital
and business expansion. 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 guaranties
or liquid collateral (such as time deposits and investment securities).
Commercial loan pricing is generally at a rate tied to PBC's reference rates
or the prime rate (as quoted in the Wall Street Journal).
Real Estate Construction and Land Loans. PBC's real estate construction loan
activity has focused on providing short-term (less than one year maturity)
loans to individuals and developers with whom PBC has an established
relationship for the construction primarily of multifamily residences in PBC's
market areas. Residential real estate construction loans are typically secured
by first deeds of trust and require guaranties of one or more third parties.
The economic viability of the project and the borrower's creditworthiness 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. PBC
utilizes approved independent local appraisers and originates loans with loan-
to-value ratios which generally do not exceed 65% to 75% of the appraised
value of the property. PBC monitors projects during the construction phase
through regular construction inspections and a disbursement program tied to
the percentage of completion of each project.
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<PAGE>
PBC also occasionally makes land loans to persons who intend to construct a
single-family residence or multi-family residence project on the lot generally
within 12 months. In addition, PBC has occasionally made 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 guaranties.
Commercial Real Estate Term Loans. PBC provides medium-term commercial real
estate loans secured by commercial or industrial buildings where the
properties are either used by the owner for business purposes ("owner-user
properties") or have income derived from tenants ("investment properties").
PBC'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 ten years and are amortized over 20 to 30 years. Most of these loans
have rates tied to the prime rate, with many adjusting whenever the prime rate
changes.
Consumer and Other Loans. PBC's consumer and other loan portfolio is divided
between installment loans secured by automobiles 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 every five to ten
years. PBC also has a minimal portfolio of overdraft lines of credit, provided
as an additional service to its clients.
DEPOSITS
PBC's deposits are obtained primarily from small and medium-sized
businesses, business executives, professionals and other individuals. PBC
offers the usual and customary range of depository products provided by
commercial banks. PBC's core deposits are not received from a single depositor
or group of affiliated depositors, the loss of any one of which would have a
material adverse effect on PBC's core business. 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.
In late 1996, PBC received the Special Deposit, representing a proposed
settlement of a class action lawsuit not involving PBC. PBC expects this
deposit to be withdrawn in late 1997 or early 1998.
COMPETITION
The banking and financial services business in California generally, and in
PBC's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
changes in technology and product delivery systems, and the accelerating pace
of consolidation among financial services providers. PBC competes for loans,
deposits and customers for financial services with other commercial banks,
savings 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 PBC. In order to
compete with the other financial services providers, PBC principally relies
upon local promotional activities, personal relationships with its customers
established by officers, directors and employees and specialized services
tailored to meet PBC's customers' needs. In those instances where PBC is
unable to accommodate a customer's needs, PBC arranges for those services to
be provided by its correspondents. PBC has two offices located in San Mateo
County. Neither the deposits nor loans of such offices exceed 1% of all
financial services companies located in PBC's market areas.
EMPLOYEES
At June 30, 1997 PBC had 51 full-time employees. None of the employees are
covered by a collective bargaining agreement. PBC considers its employee
relations to be satisfactory.
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PROPERTIES
PBC owns its main office and occupies its San Bruno office under a lease
expiring (including options to renew) in 2019. PBC believes its present
facilities are adequate for its present needs and anticipated future growth.
PBC believes that, if necessary, it could secure suitable alternative
facilities without adversely affecting operations.
LEGAL PROCEEDINGS
There are no material legal proceedings pending other than ordinary routine
litigation incidental to the business of PBC to which PBC is a party or of
which any of its property is a subject.
110
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--PBC
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of PBC. The following
discussion should be read in conjunction with the information under "Selected
Consolidated Financial Data" and PBC's consolidated financial statements and
notes thereto and other financial data included elsewhere in this Joint Proxy
Statement/Prospectus. Certain statements under this caption constitute
"forward-looking statements" under Section 27A of the Securities Act and
Section 21E of the Exchange Act which involve risks and uncertainties. PBC'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 PBC conducts its operations, fluctuations in interest
rates, credit quality and government regulation and the timing of the
withdrawal of the Special Deposit. For additional information concerning these
and other factors, see "RISK FACTORS" and "BUSINESS--PBC."
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
PBC reported net income for the six months ended June 30, 1997 of $1.7
million, or $2.41 per share, compared to net income of $738,000, or $1.11 per
share for the comparable period in 1996. Return on average assets annualized
for the six months ended June 30, 1997 and 1996 was 1.63% and 1.48%,
respectively, while the annualized return on average shareholders' equity was
23.75% for the first six months of 1997, compared with 11.65% for the first
six months of 1996. Excluding the effect of the Special Deposit, net income
for the six months ended June 30, 1997 would have been $1.1 million ($1.64 per
share) and return on average assets and average shareholders' equity would
have been 2.07% and 16.12%, respectively.
Nonperforming assets, including nonaccrual loans, loans 90 days past due and
still accruing and OREO, totaled $244,000 at June 30, 1997, a decrease of 1.4
million from June 30, 1996. The ratio of nonperforming assets to loans plus
foreclosed properties was 0.32% at June 30, 1997, down from 4.19% at June 30,
1996. Classified assets totaled $2.6 million, or 1.28% of total assets, at
June 30, 1997 compared to $3.7 million, or 3.71% of total assets, at June 30,
1996.
The allowance for loan losses was $1.4 million at June 30, 1997 compared
with $1.1 million at June 30, 1996. The provision for loan losses was $90,000
for each of the six month periods ended June 30, 1997 and June 30, 1996. Net
charge-offs were $22,000 for the six months ended June 30, 1997 and $66,000
for the six months ended June 30, 1996. The ratio of the allowance for loan
losses to nonperforming assets was 592.21% at June 30, 1997 compared with
41.59% at June 30, 1996.
Shareholders' equity increased $1.7 million to $15.0 million, or 7.23% of
assets, at June 30, 1997, from $13.3 million or 6.50% of assets at December
31, 1996. The increase was primarily due to net earnings and stock purchased
by directors and employees through stock option plans.
PBC's Tier 1 and total risk-based capital ratios were 14.15% and 15.40% at
June 30, 1997, respectively, compared with 13.50% and 14.75% at December 31,
1996, respectively. The leverage ratio decreased to 7.20% at June 30, 1997
from 8.90% at December 31, 1996. At June 30, 1997, the PBC's risk-based
capital and leverage ratios exceeded the ratios for a well capitalized
financial institution as defined in FDICIA under the regulatory framework for
prompt corrective action.
PBC's book value per common share at June 30, 1997 was $22.22 compared with
$19.78 at December 31, 1996.
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Net Interest Income
The following tables present PBC's average balance sheet, interest income
and expense and interest rates earned and paid for the six-month periods
presented, as well as the analysis of variances due to rate and volume:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
--------------------------- ---------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(2)............... $ 71,904 $4,011 11.16% $58,352 $3,183 10.91%
Investment securities,
short-term investment
and cash equivalents.. 124,959 3,370 5.39% 32,504 893 5.49%
-------- ------ ----- ------- ------ -----
Total interest-earning
assets............... 196,863 7,381 7.50% 90,856 4,076 8.97%
Noninterest-earning
assets................. 7,743 -- 8,820 --
-------- ------ ------- ------
Total assets.......... $204,606 7,381 $99,676 4,076
======== ------ ======= ------
Interest-bearing
liabilities:
Deposits:
NOW and MMDA........... $140,834 $1,988 2.82% $31,496 $ 467 2.97%
Savings deposits....... 17,165 54 0.63% 26,379 57 0.43%
Time deposits.......... 30,291 824 5.44% 27,493 757 5.51%
-------- ------ ----- ------- ------ -----
Total deposits........ 188,290 2,866 3.04% 85,368 1,281 3.00%
Borrowings............. -- -- -- -- -- --
-------- ------ ------- ------
Total interest-bearing
liabilities.......... 188,290 2,866 3.04% 85,368 1,281 3.00%
-------- ------ ------- ------
Noninterest-bearing
deposits............... 686 577
Other noninterest-
bearing liabilities.... 1,583 1,054
Shareholders' equity.... 14,047 12,677
-------- -------
Total liabilities and
shareholders'
equity............... $204,606 2,866 $99,676 1,281
======== ------ ======= ------
Net interest income..... $4,515 $2,795
====== ======
Interest rate spread.... 4.65% 5.97%
Net yield on interest-
earnings assets(3)(4).. 4.59% 6.15%
</TABLE>
- --------
(1) Nonaccrual loans are included in the average balance; however, only
collected interest is included in the interest column.
(2) Loan fees totaling $296,000 and $219,000 are included in loan interest
income for the six months ending June 30, 1997 and June 30, 1996,
respectively.
(3) 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 (annualized), divided by
(b) average interest-earning assets for the period.
(4) Net yield on interest-earning assets during the six months ended June 30,
1997 excluding $535,500 of net interest income related to the Special
Deposit and excluding the $95.2 million of the Special Deposit from the
average interest-earning assets for the period, annualized, would have
been 7.83%.
112
<PAGE>
The following table presents the dollar amount of certain changes in
interest income and interest expense for each major component of interest-
earning assets and interest-bearing liabilities and the differences
attributable to changes in average rates and volumes for the six-month periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
COMPARED WITH JUNE 30, 1996
INCREASE (DECREASE)
--------------------------------
VOLUME RATE TOTAL
----------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1)(2).............................. $ 739 $ 89 $ 828
Investment securities, short-term
investments and cash equivalents........ 2,540 (63) 2,477
---------- -------- ----------
Change in total interest income...... 3,279 26 3,305
---------- -------- ----------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW and MMDA........................... 1,621 (100) 1,521
Savings deposits....................... (20) 17 (3)
Time deposits.......................... 77 (10) 67
---------- -------- ----------
Total deposits........................... 1,678 (93) 1,585
Borrowings............................... -- -- --
---------- -------- ----------
Change in total interest expense......... 1,678 (93) 1,585
---------- -------- ----------
Increase (decrease) in net interest
income.................................. $ 1,601 $ 119 $ 1,720
========== ======== ==========
</TABLE>
- --------
(1) Nonaccrual loans are included in the average balance; however, only
collected interest is included in the interest income.
(2) Loan fees totaling $296,000 and $219,000 are included in loan interest
income for the six months ended June 30, 1997 and June 30, 1996,
respectively.
For the six-month period ended June 30, 1997, PBC experienced an increase in
net interest income of $1.7 million when compared to the first half of 1996.
This increase was mainly due to the increased volume in short-term investment
securities classified as cash equivalents, partially offset by the increased
volume of interest-bearing deposits. For the six months ended June 30, 1997,
the PBC's net interest spread of 4.46% reflected a decrease from 5.97% for the
same period in 1996.
In late 1996, PBC received the $94.0 million Special Deposit representing a
proposed settlement of a class action lawsuit not involving PBC. PBC invested
the funds in short-term government securities. For the six months ended June
30, 1997, PBC paid an average rate of approximately 3.25% on this deposit and
earned an average rate of approximately 5.35% on the corresponding
investments. Net interest income attributable to this deposit in the six
months ended June 30, 1997 was approximately $535,500 net of tax effect. PBC
expects this deposit to be withdrawn during the fourth quarter of 1997 or the
first quarter of 1998.
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, charge-offs, recoveries, 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 PBC's market area. PBC performs a monthly
assessment of the risks 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, PBC makes provisions for potential loan losses.
Specific allocations are made for loans where the probability of a loss can be
defined and reasonably determined, while the balance of the provisions for
loan losses
113
<PAGE>
are based on historical data, delinquency trends, economic conditions in PBC'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 the ultimate loan losses may vary from current
estimates.
The provision for loan losses was $90,000 for each of the six-month periods
ended June 30, 1997 and 1996.
For further information on nonperforming and classified loans and the
allowance for loan losses, see "Financial Condition--Nonperforming and
Classified Assets."
Operating Expenses
Operating expenses totaled $1.9 million and $1.7 million for six-month
periods ended June 30, 1997 and June 30, 1996, respectively. The ratio of
operating expenses to average assets was 1.86% for the six months ended June
30, 1997 and 3.49% for the six months ended June 30, 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. PBC's efficiency ratio for the six-month period ended
June 30, 1997 was 41.02%, compared to 58.17% for the six-month period ended
June 30, 1996.
The following table provides details of operating expense for the periods
presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Compensation and benefits.......................... $ 1,254 $ 1,094
Occupancy and equipment............................ 218 225
Professional services and legal costs.............. 61 69
FDIC insurance and regulatory assessments.......... 26 11
Other real estate, net............................. 0 (2)
Other.............................................. 373 347
----------- -----------
Total operating expenses......................... $ 1,932 $ 1,744
=========== ===========
Efficiency ratio................................... 41.02% 58.17%
Total operating expenses to average assets......... 1.86% 3.49%
</TABLE>
The decrease in the efficiency ratio and in the ratio of total operating
expenses to average assets were attributable to the Special Deposit, which
resulted in the substantial increase in earning assets without any significant
increase in operating expenses. Excluding the effect of the Special Deposit,
the efficiency ratio for the six months ended June 30, 1997 and June 30, 1996
would have been 42.06% and 58.17%, respectively.
Provision for Income Taxes
The provision for income taxes for the first six months of 1997 of $1.0
million reflects an effective tax rate of approximately 38%, compared to a tax
provision recorded for the first six months of 1996 of $425,000 with an
effective tax rate of 37%.
114
<PAGE>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
PBC reported net income of $1.8 million in 1996, unchanged from 1995 net
income of $1.8. Net income in 1995 increased 30.40% over 1994 net income of
$1.4 million. Net income per share was $2.65 in 1996, compared with $2.70 in
1995 and $2.14 in 1994. The return on average assets and return on average
shareholders' equity were 1.62% and 14.12% in 1996, compared with 1.82% and
14.94% in 1995 and 1.47% and 12.54% in 1994, respectively.
Net income for 1996 reflected a decrease in the provision for loan losses
and an increase in interest earned on investments. These increases in income
were offset by a decrease in loan interest income due to a decrease in the
balance and the average yield on the loan portfolio.
The increase in net income in 1995 over 1994 was the result of loan and
deposit growth as well as an increase in the net interest margin which
resulted in increased net interest income. An increase in the provision for
loan losses partially offset the increase in net interest income.
Net Interest Income
Net interest income decreased slightly to $6.1 million in 1996 from $6.2
million in 1995 primarily due to the 103 basis point decrease in PBC's
interest rate spread, which was partially offset by a $15.3 million or 17.19%
increase in the volume of average interest-earning assets. Net interest income
increased 11.40% in 1995 from $5.5 million in 1994 primarily due to the
combined effects of the $4.8 million, or 5.15%, increase in average interest-
earning assets and the 28 basis point increase in PBC's interest rate spread.
115
<PAGE>
The following table presents PBC's average balance sheet, interest income
and expense and interest rates earned and paid for the periods presented, as
well as the analysis of variances due to rate and volume.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
YIELD/ YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE(1) INTEREST AVERAGE BALANCE(1) INTEREST AVERAGE BALANCE(1) INTEREST AVERAGE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(2)............... $ 60,932 $6,670 10.95% $62,507 $7,120 11.39% $58,539 $5,982 10.22%
Investment securities,
short-term investment
and cash equivalents.. 43,682 2,391 5.47% 26,761 1,484 5.55% 25,739 1,230 4.78%
-------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-earning
assets............... 104,614 9,061 8.66% 89,268 8,604 9.64% 84,278 7,212 8.56%
Noninterest-earning
assets................ 8,567 -- 8,466 -- 8,673 --
-------- ------ ------- ------ ------- ------
Total assets.......... $113,181 $9,061 $97,734 $8,604 $92,951 $7,212
======== ------ ======= ------ ======= ------
Interest-bearing
liabilities:
Deposits:
NOW and MMDA........... $ 33,221 $1,264 3.80% $32,499 $ 914 2.81% $34,395 $ 853 2.48%
Savings deposits....... 37,046 113 0.31% 25,297 115 0.45% 26,788 129 0.48%
Time deposits.......... 28,020 1,535 5.48% 26,315 1,418 5.39% 18,856 703 3.73%
-------- ------ ------- ------ ------- ------
Total deposits........ 98,287 2,912 2.96% 84,111 2,447 2.91% 80,039 1,685 2.11%
Borrowings............. -- -- -- -- -- --
-------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities.......... 98,287 2,912 2.96% 84,111 2,447 2.91% 80,039 1,685 2.11%
-------- ------ ------- ------ ------- ------
Noninterest-bearing
deposits............... 598 557 576
Other noninterest-
bearing liabilities.... 1,297 1,139 1,437
Shareholders' equity.... 12,999 11,927 10,899
-------- ------- -------
Total liabilities and
shareholders'
equity............... $113,181 $2,912 $97,734 $2,447 $92,951 $1,685
======== ------ ======= ------ ======= ------
Net interest income..... $6,149 $6,157 $5,527
====== ====== ======
Interest rate spread.... 5.70% 6.73% 6.45%
Net yield on interest-
earnings assets(3)(4).. 5.88% 6.90% 6.56%
</TABLE>
- --------
(1) Nonaccrual loans are included in the average balance; however, only
collected interest is included in the interest column.
(2) Loan fees totaling $474,000, $352,000 and $449,000 are included in loan
interest income for the years 1996, 1995 and 1994, respectively.
(3) 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.
(4) Net yield on interest-earning assets during the year ended December 31,
1996 excluding $117,300 of net interest income related to the Special
Deposit and excluding the $94.0 million of the Special Deposit from the
average interest-earning assets for the period would have been 6.23%.
116
<PAGE>
The most significant impact on PBC's net interest income between periods is
derived from the interaction of changes in the volume of and rates earned or
paid on interest-earning assets and interest-bearing liabilities. The volume
of earning 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 following table sets forth, for the periods indicated, a summary
of the changes in interest income and interest expense resulting from changes
in average asset and liability balances (volume) and changes in average
interest rate (rate). The changes in interest attributable to simultaneous
volume and rate changes have been reflected as volume variances. Nonaccrual
loans are included in average loans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
COMPARED WITH DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1994
INCREASE (DECREASE) INCREASE (DECREASE)
----------------------------------- ----------------------------------
VOLUME RATE NET VOLUME RATE NET
------------ ---------- ---------- ---------------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1)(2)............ $ (179) $ (271) $ (450) $ 405 $ 733 $ 1,138
Investment securities,
short-term investments
and cash equivalents.. 938 (31) 907 49 205 254
---------- ---------- ---------- --------- --------- -----------
Total interest
income............... 759 (302) 457 454 938 1,392
---------- ---------- ---------- --------- --------- -----------
Interest-bearing
liabilities:
Deposits:
NOW and MMDA........... 20 330 350 (47) 108 61
Savings deposits....... 53 (55) (2) (7) (7) (14)
Time deposits.......... 92 25 117 278 437 715
---------- ---------- ---------- --------- --------- -----------
Total deposits........ 165 300 465 224 538 762
Borrowings............. -- -- -- -- -- --
---------- ---------- ---------- --------- --------- -----------
Total interest
expense.............. 165 300 465 224 538 762
---------- ---------- ---------- --------- --------- -----------
Increase (decrease) in
net interest income.... $ 594 $ (602) $ (8) $ 230 $ 400 $ 630
========== ========== ========== ========= ========= ===========
</TABLE>
- --------
(1) Nonaccrual loans are included in the average balance; however, only
collected interest is included in the interest income.
(2) Loan fees totaling $474,000, $352,000 and $449,000 are included in loan
interest income for the years 1996, 1995 and 1994, respectively.
Interest income in 1996 increased 5.31% to $9.1 million from $8.6 million in
1995. This was primarily due to an increase in short-term investment
securities classified as cash equivalents. The increase in short-term
securities volume was the result of the receipt of the Special Deposit ($94.0
million as of December 31, 1996), which was in turn invested in short-term
securities. While average interest-earning assets increased $15.3 million, or
17.19% to $104.6 million in 1996, compared to $89.3 million in 1995, average
investment securities, short-term investments and cash equivalents increased
$16.9 million, or 63.23%, to $43.7 million, or 41.76% of average interest-
earning assets, in 1996 from $26.8 million or 29.98% of average interest-
earning assets, in 1995. Conversely, average loans decreased 2.52% to $60.9
million, or 58.24% of average interest-earning assets, in 1996 from $62.5
million, or 70.02% of average interest-earning assets, in 1995.
The average yield on interest-earning assets declined 98 basis points to
8.66% in 1996 from 9.64% in 1995 primarily due to a change in the interest-
earning assets portfolio mix from higher yielding loans to lower yielding
short-term investments. The interest-earning assets portfolio mix was 58.24%
loans and 41.76% investments in 1996, compared to 70.02% loans and 29.98%
investments in 1995.
Interest expense in 1996 increased 19.00% to $2.9 million from $2.4 million
in 1995. This increase was due to greater volume and higher yielding interest-
bearing liabilities. Average interest-bearing liabilities increased 16.85% to
$98.3 million in 1996 from $84.1 million in 1995 due to the receipt of a
short-term deposit of $96.0 million in fourth quarter 1996. During 1996, the
average rate paid on interest-bearing liabilities increased 5 basis points to
2.96% from 2.91% in 1995 due to the repricing of deposit accounts.
As a result of the foregoing, PBC's interest rate spread decreased to 5.70%
in 1996 from 6.73% in 1995 and the net yield on interest-earning assets
decreased in 1996 to 5.88% from 6.90% in 1995.
117
<PAGE>
Interest income increased 19.30% to $8.6 million in 1995 from $7.2 million
in 1994, as a result of the combined effects of increases in average interest-
earning assets and the yields earned on such assets. Average interest-earning
assets increased 5.92% to $89.3 million in 1995 from $84.2 million as a result
of increases in both loans and other interest-earning assets. The average
yield on the higher volume of average interest-earning assets increased 108
basis points to 9.64% in 1995 from 8.56% in 1994, primarily as a result of
increases in market rates of interest.
Interest expense in 1995 increased 45.22% to $2.4 million from $1.7 million
in 1994, primarily as a result of the combination of increases in rates paid
on interest-bearing liabilities and the volume of interest-bearing
liabilities. As a result of increases in market rates of interest, the average
rate paid on average interest-bearing liabilities increased 80 basis points to
2.91% in 1995 from 2.11% in 1994. Corresponding to the growth in average
interest-earning assets, average interest-bearing liabilities increased 5.09%
to $84.1 million in 1995 from $80.0 in 1994.
As a result of the foregoing, PBC's interest rate spread increased to 6.73%
in 1995 from 6.45% in 1994 and the net yield on interest-earning assets
increased to 6.90% in 1995 from 6.56% in 1994.
Provision for Loan Losses
The provision for loan losses in 1996 was $120,000 compared to $204,000 in
1995 and $120,000 in 1994. Nonperforming loans increased to $1.56 million or
2.37% of gross loans outstanding at December 31, 1996 from $592,000 or 0.99%
of gross loans outstanding at December 31, 1995. The $204,000 provision for
loan losses during 1995 reflected the higher level of nonperforming loans at
the end of 1994. At December 31, 1994 nonperforming loans were $1.65 million
or 2.66% of loans outstanding at such date.
For further information on nonperforming and classified loans and the
allowance for loan losses, see "Financial Condition--Nonperforming and
Classified Assets."
Other Income
Total other income decreased to $420,000 in 1996, compared to $476,000 in
1995 and $460,000 in 1994. The decrease in 1996 was due primarily to a
decrease in demand deposit services fees and a decrease in SBA loan sales. The
increase in 1995 was due primarily to an increase in SBA loan sales from 1994
to 1995.
Operating Expenses
Operating expenses totaled $3.57 million for 1996, compared to $3.60 million
for 1995 and $3.68 million for 1994. The ratio of operating expenses to
average assets was 3.15% in 1996, 3.68% in 1995, and 3.95% in 1994.
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. PBC's efficiency ratio for 1996 was 56.91%, compared
to 54.27% in 1995 and 61.39% in 1994. The decline in PBC's efficiency ratio
was due, in part, to a reduction in FDIC insurance and regulatory assessments
from 1994 to 1995 and from 1995 to 1996. In addition, PBC management has
implemented a cost-cutting strategy in an effort to lower the general and
administrative costs of PBC in order to increase net income.
118
<PAGE>
The following table represents the major components of operating expenses
for the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Compensation and benefits..................... $ 2,254 $ 2,180 $ 2,039
Occupancy and equipment....................... 474 489 573
Professional services and legal costs......... 120 96 145
FDIC insurance and regulatory assessments..... 21 108 209
Other real estate, net........................ 0 9 8
Other......................................... 699 718 702
-------- -------- --------
Total operating expenses.................... $ 3,568 $ 3,600 $ 3,676
======== ======== ========
Efficiency ratio.............................. 56.91% 54.27% 61.39%
Total operating expenses to average assets.... 3.15% 3.68% 3.95%
</TABLE>
Compensation and benefits expenses increased in 1996 to $2.25 million,
compared to $2.18 million in 1995 and $2.04 million in 1994, due to cost of
living and merit increases in salaries for PBC employees.
The decreases in occupancy and equipment expense in 1996 and 1995 were
primarily due to the renegotiation of service contracts for PBC equipment.
Expenses for professional services and legal costs, including audit
services, increased to $120,000 in 1996, compared to $96,000 in 1995 and
$145,000 in 1994. The increase in 1996 was due to increased legal fees due to
loan collection effort in 1996. The decrease in 1995 was a combination of
decreased legal fees due to loan collection effort and decreased audit fees
resulting from PBC's change in independent accountants.
FDIC deposit insurance and the DFI regulatory assessments decreased to
$21,000 in 1996, compared to $108,000 in 1995, and $209,000 in 1994. The
decline in FDIC insurance expense is a result of the lowering of deposit
insurance premiums by the FDIC when the BIF was fully funded as of March 1995.
Income Taxes
PBC's marginal income tax rate for 1996 was 36.30%, compared to 37.00% in
1995 and 37.64% in 1994. The effective rate in 1996 and 1995 was lower due to
an increase in PBC's net interest income deduction for enterprise zone loans
for California Franchise Tax Board purposes.
FINANCIAL CONDITION
Total assets increased 1.42% to $207.2 million at June 30, 1997 compared to
$204.3 million at December 31, 1996. Total assets increased 106.90% to $204.3
million at December 31, 1996, compared to $98.75 million at December 31, 1995.
Total assets increased 10.03% at December 31, 1995 from $89.75 million at
December 31, 1994. The increase in 1996 was primarily a result of the receipt
of the $94.0 million Special Deposit, which was invested in short-term
investments. The increases in all other periods were primarily due to
increases in PBC's loan portfolio funded by growth in deposits.
Loans
Total gross loans increased 15.05% to $76.0 million at June 30, 1997
compared to $65.8 million at December 31, 1996. Total gross loans at December
31, 1996 increased 9.60%, compared to $60.0 million at December 31, 1995.
Total gross loans decreased 3.06% at December 31, 1995 from $61.9 million at
December 31, 1994. The increase in loan volume in 1997 and 1996 was due to a
lowering of loan rates by PBC in late 1996. The decrease in 1995 was due to
the decrease in market loan rates which was not reflected in PBC's loan rates
until 1996.
119
<PAGE>
PBC's loan portfolio is concentrated in real estate and commercial lending,
with the balance in consumer loans. While no specific industry concentration
is considered significant, PBC's lending operations are located in PBC's
market areas that are fairly well diversified. However, PBC's borrowers could
be adversely impacted by a downturn in certain sectors of the economy. A
downturn could reduce the demand for loans and adversely impact borrowers'
ability to repay their loans and the value of the collateral for such loans.
The following table presents PBC's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- -------------- --------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- ------ ------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $16,713 22.6% $15,950 24.9% $17,537 29.8% $15,433 25.5% $14,818 25.4% $14,698 25.3%
Real estate construction
and land............... 12,868 17.4% 11,732 18.3% 8,663 14.7% 8,314 13.7% 9,948 17.1% 10,178 17.5%
Commercial real estate
term................... 45,029 60.8% 36,891 57.5% 32,518 55.3% 36,759 60.8% 33,902 58.2% 33,467 57.5%
Consumer and other...... 1,056 1.4% 1,194 1.9% 1,288 2.2% 1,394 2.3% 866 1.5% 1,012 1.7%
------- ----- ------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Total loans, gross...... 75,666 102.2% 65,767 102.5% 60,006 102.0% 61,900 102.4% 59,534 102.2% 59,355 102.0%
Deferred fees and
discounts.............. (208) (0.3)% (204) (0.4)% (144) (0.2)% (176) (0.3)% (199) (0.4)% (208) (0.3)%
------- ----- ------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Total loans, net of
deferred fees.......... $75,458 102.0% $65,563 102.1% $59,862 101.8% $61,724 102.1% $59,335 101.8% $59,147 101.7%
======= ===== ======= ===== ======= ====== ======= ===== ======= ===== ======= =====
Allowance for loan
losses................. (1,446) (2.0)% (1,378) (2.1)% (1,057) (1.8)% (1,246) (2.1)% (1,072) (1.8)% (984) (1.7)%
------- ----- ------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Net loans............... $74,012 100.0% $64,185 100.0% $58,805 100.00% $60,478 100.0% $58,263 100.0% $58,163 100.0%
======= ===== ======= ===== ======= ====== ======= ===== ======= ===== ======= =====
Loans held for sale..... 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
------- ----- ------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Total loans............. $74,012 100.0% $64,185 100.0% $58,805 100.0% $60,478 100.0% $58,263 100.0% $58,163 100.0%
======= ===== ======= ===== ======= ====== ======= ===== ======= ===== ======= =====
</TABLE>
The following table presents the maturity distribution of PBC's loan
portfolio and the sensitivity of such loans to changes in interest rates at
June 30, 1997.
<TABLE>
<CAPTION>
TOTAL
LOANS
-------
<S> <C>
Loan due in:
One year or less:
Floating rate................................................... $20,925
Fixed rate...................................................... 1,218
One to five years:
Floating rate................................................... 21,631
Fixed rate...................................................... 3,768
After five years:
Floating rate................................................... 26,398
Fixed rate...................................................... 1,726
-------
Total loans....................................................... $75,666
</TABLE>
Nonperforming and Classified Assets
Management generally places loans on nonaccrual 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 reversed from income. Loans are charged off when management
determines that collection has become unlikely. Restructured loans are those
where PBC has granted a concession on the interest paid or original repayment
terms due to financial difficulties of the borrower. Other real estate owned
consists of property acquired through foreclosure on the related collateral
underlying defaulted loans.
120
<PAGE>
The following table sets forth information regarding nonperforming assets at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30 --------------------------------------
1997 1996 1995 1994 1993 1992
------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans......... $244 $1,561 $ 592 $1,648 $2,583 $1,634
Accruing loans past due
90 days or more......... 0 0 0 0 0 0
Restructured loans....... 0 0 0 0 0 0
---- ------ ------ ------ ------ ------
Total nonperforming
loans................. 244 1,561 592 1,648 2,583 1,634
Other real estate owned.... 0 0 1,000 0 40 1,695
---- ------ ------ ------ ------ ------
Total nonperforming
assets................ $244 $1,561 $1,592 $1,648 $2,623 $3,329
==== ====== ====== ====== ====== ======
Ratio of nonperforming
assets to total loans and
other real estate owned... 0.32% 2.37% 2.61% 2.66% 4.40% 5.45%
</TABLE>
The decrease in nonperforming loans at June 30, 1997 was due primarily to
one loan with a balance of $1.4 million at December 31, 1996 that was
delinquent on that date but has been current since January 1997. Interest
income foregone on nonaccrual loans outstanding at June 30, 1997, December 31,
1996, 1995 and 1994 totaled $21,000, $185,000, $37,000 and $46,000,
respectively in the period and years ending on those dates.
PBC records other real estate owned at the lower of carrying value or fair
value less estimated costs to sell. Estimated losses that result from ongoing
periodic valuation of these properties are charged to earnings with a
provision for losses on foreclosed property in the period in which they are
identified. At June 30, 1997 PBC held no properties as other real estate
owned.
The policy of PBC 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 weaknesses and are characterized by the distinct possibility that PBC
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. A loan classified loss is considered uncollectible
and its continuance as an asset is not warranted.
Total classified assets decreased to $2.6 million as of June 30, 1997 from
$2.7 million at December 31, 1996.
With the exception of these classified loans, management is not aware of any
loans as of June 30, 1997 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 the non-performing asset table above at
some future date. Management cannot, however, predict the extent to which
economic conditions in PBC's market areas may worsen or the full impact such
an environment would have on PBC's loan portfolio. Accordingly, there can be
no assurance that other loans will not become 90 days or more past due, be
placed on non-accrual or become restructured loans, in substance foreclosures
or real estate owned in the future.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risks inherent in its loan
portfolio and economic conditions in or affecting PBC's market areas. See "--
Provision for Loan Losses." The allowance is increased by provisions charged
against earnings and recoveries and reduced by charge-offs. Loans are charged
off when they are deemed to be uncollectible; recoveries are generally
recorded only when cash payments are received.
121
<PAGE>
The following table sets forth information concerning PBC's allowance for
loan losses at the dates and for the years indicated.
<TABLE>
<CAPTION>
AT AND FOR THE
SIX MONTHS AT AND FOR THE YEARS ENDED DECEMBER 31,
ENDED JUNE 30, ---------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVERAGE LOANS
OUTSTANDING............ $70,492 $60,932 $62,507 $58,539 $58,888 $61,418
ALLOWANCE FOR LOAN
LOSSES:
Balance at beginning of
period................. $ 1,377 $ 1,057 $ 1,246 $ 1,072 $ 984 $ 1,023
Charge-offs:
Commercial............ (39) 0 0 0 (93) (174)
Real estate
construction and
land................. 0 (67) (403) (80) (29) (131)
Commercial real estate
term................. 0 0 0 0 0 0
Consumer and other.... (8) (2) (5) 0 (3) 0
------- ------- ------- ------- ------- -------
Total charge-offs... (47) (69) (408) (80) (125) (305)
------- ------- ------- ------- ------- -------
RECOVERIES:
Commercial............ 0 0 12 132 6 0
Real estate
construction and
land................. 2 268 3 1 47 1
Commercial real estate
term................. 22 0 0 0 0 0
Consumer and other.... 1 1 0 1 0 0
------- ------- ------- ------- ------- -------
Total recoveries.... 25 269 15 134 53 1
------- ------- ------- ------- ------- -------
Net (charge-offs)
recoveries........... (22) 200 (393) 54 (72) (304)
Provision charged to
income................. 90 120 204 120 160 265
------- ------- ------- ------- ------- -------
Balance at end of
period................. $ 1,445 $ 1,377 $ 1,057 $ 1,246 $ 1,072 $ 984
======= ======= ======= ======= ======= =======
Net (charge-offs)
recoveries to average
loans outstanding
during the period...... (0.03%) 0.33% (0.64%) 0.09% (0.12%) (0.50%)
Allowance as a
percentage of average
loans outstanding...... 2.05% 2.26% 1.69% 2.13% 1.82% 1.60%
Allowance as a
percentage of end of
period loans........... 1.91% 2.09% 1.76% 2.01% 1.80% 1.66%
Allowance as a
percentage of
nonperforming loans.... 592.21% 88.21% 178.51% 75.61% 41.48% 60.22%
</TABLE>
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,
declines in the economy and asset quality deterioration.
122
<PAGE>
The following table provides a summary of the allocation of the allowance
for loan losses for specific loan categories and the amount of the allocation
in each loan category as a percentage of the amount of loans in each category
at the dates indicated. The allocations presented should not be interpreted as
an indication that loans charged 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 amount 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 portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
JUNE 30, 1997 1996 1995
------------------- ------------------- -------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL LOANS, TOTAL LOANS, TOTAL LOANS,
AMOUNT GROSS AMOUNT GROSS AMOUNT GROSS
------ ------------ ------ ------------ ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 202 22.09% $ 192 24.25% $ 161 29.23%
Real estate construction
and land............... 439 17.01% 418 17.84% 349 14.44%
Commercial real estate
term................... 344 59.51% 327 56.09% 198 54.19%
Consumer and other...... 172 1.39% 165 1.82% 138 2.14%
------ ------ ------
Total allocated......... 1,157 1,102 846
Unallocated............. 289 276 211
------ ------ ------
Total................. $1,446 $1,378 $1,057
====== ====== ======
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1994 1993 1992
------------------- ------------------- -------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL LOANS, TOTAL LOANS, TOTAL LOANS,
AMOUNT GROSS AMOUNT GROSS AMOUNT GROSS
------ ------------ ------ ------------ ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 221 24.93% $ 198 24.89% $ 114 24.76%
Real estate construction
and land............... 482 13.43% 396 16.71% 432 17.15%
Commercial real estate
term................... 273 59.38% 245 56.95% 205 56.38%
Consumer and other...... 21 2.26% 19 1.45% 36 1.71%
------ ------ ------
Total allocated......... 997 858 787
Unallocated............. 249 214 197
------ ------ ------
Total................. $1,246 $1,072 $ 984
====== ====== ======
</TABLE>
Investment Securities
PBC's investment portfolio is managed to meet PBC's liquidity needs through
proceeds from scheduled maturities. The portfolio is comprised of U.S.
Treasury securities, U.S. government agencies securities, and obligations of
states and political subdivisions. Federal funds sold are additional
investments which are not classified as investment securities. 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.
123
<PAGE>
The amortized cost and estimated market value of investment securities at
June 30, 1997 and December 31, 1996 is summarized below.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury obligations............... $ 2,989 $12 $ 0 $ 3,001
U.S. agency obligations:
Fixed and variable rate notes......... 12,000 3 (38) 11,965
------- --- ---- -------
Total securities available-for-sale... 14,989 15 (38) 14,966
HELD-TO-MATURITY SECURITIES:
Tax exempt securities................... 6,850 72 (32) 6,890
------- --- ---- -------
Total securities held-to-maturity..... 6,850 72 (32) 6,890
------- --- ---- -------
Total investment securities........... $21,839 $87 $(70) $21,856
======= === ==== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury obligations............... $ 2,980 $23 $ 0 $ 3,003
U.S. agency obligations:
Fixed and variable rate notes......... 12,405 5 (111) 12,299
------- --- ----- -------
Total securities available-for-sale... 15,385 28 (111) 15,302
HELD-TO-MATURITY SECURITIES:
Tax exempt securities................... 6,211 41 (12) 6,240
------- --- ----- -------
Total securities held-to-maturity..... 6,211 41 (12) 6,240
------- --- ----- -------
Total investment securities........... $21,596 $69 $(123) $21,542
======= === ===== =======
</TABLE>
124
<PAGE>
The following table shows amortized cost and estimated market value of PBC's
investment securities by year of maturity at June 30, 1997.
<TABLE>
<CAPTION>
1998 2002 2008
1997 THROUGH 2001 THROUGH 2007 AND THEREAFTER TOTAL
----- ------------ ------------ -------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECU-
RITIES:
U.S. Treasury obliga-
tions.................. $ 996 $ 1,993 $ 0 $ 0 $ 2,989
U.S. agency obligations:
Fixed and variable rate
notes(1)/(2)........... 0 11,000 1,000 0 12,000
----- ------- ------ ------ -------
Total securities
available-for-sale... 996 12,993 1,000 0 14,989
Market value........ 999 12,966 1,001 0 14,966
HELD-TO-MATURITY SECURI-
TIES:
Tax exempt securities... 900 3,426 1,144 1,380 6,850
----- ------- ------ ------ -------
Total securities
held-to-maturity... 900 3,426 1,144 1,380 6,850
Market value............ 902 3,448 1,174 1,366 6,890
Combined investment se-
curities portfolio:
Total investment securi-
ties................... 1,896 16,919 2,144 1,380 21,839
Total market value...... 1,701 16,414 2,175 1,366 21,856
Weighted average yield-
total portfolio(3)..... 5.58% 5.82% 6.06% 5.12% 5.78%
</TABLE>
- --------
(1) Excludes $96.0 million of U.S. agency fixed and variable rate note
obligations with remaining term to original maturities of less than 90
days from the date of purchase.
(2) Certain U.S. agency fixed and variable rate note obligations 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) Yields on tax exempt securities have been computed on a fully tax-
equivalent basis.
Deposits
PBC emphasizes developing total client relationships with its customers in
order to increase its core deposit base. Deposits reached $190.5 at June 30,
1997, an increase of 1.05% compared to deposits of $188.5 million at December
31, 1996. Deposits increased 124.27% at December 31, 1996 from $84.1 million
at December 31, 1995.
Total average interest-bearing deposits increased 120.56% to $188.3 million
for the six month period ended June 30, 1997, compared to an average of $85.4
for the same period in 1996. Total average interest-bearing deposits increased
16.85% to $98.3 million for 1996, compared to an average of $84.1 million for
1995. In 1995, average interest-bearing deposits increased 5.09% over average
interest-bearing deposits of $80.04 million in 1994. The increase in deposits
in 1997 and 1996 was due primarily to the receipt of the $94.0 million Special
Deposit in fourth quarter 1996. The increase in 1995 was due to continued
marketing efforts directed at commercial business clients in PBC's market
areas.
The following table sets forth the maturity distribution of time
certificates of deposit of $100,000 or more at June 30, 1997 and December 31,
1996:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Three months or less................................. $ 6,032 $ 6,516
Three to six months.................................. 1,566 3,525
Six to twelve months................................. 2,807 1,027
Over twelve months................................... 910 1,007
------- -------
Total.............................................. $11,315 $12,075
======= =======
</TABLE>
125
<PAGE>
Interest Rate Risk Management
Interest rate risk sensitivity is a function of the repricing
characteristics of PBC'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 PBC'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,
three to five years, over five years and on a cumulative basis. The
differences are known as interest sensitivity gaps. The following table shows
interest sensitivity gaps for different intervals as of June 30, 1997.
<TABLE>
<CAPTION>
1 3 TOTAL TOTAL
IMMEDIATE 2 DAYS TO MONTHS YEAR TO YEARS TO RATE NON-RATE
ONE-DAY 6 MONTHS 7-12 3 YEARS 5 YEARS 5 YEARS SENSITIVE SENSITIVE TOTAL
--------- --------- ------- ------- -------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from
banks.................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 6,282 $ 6,282
Short term investments.. 4,600 96,119 -- -- -- -- 100,719 -- 100,719
Investment securities... -- 1,896 3,713 3,210 2,145 10,852 21,816 -- 21,816
Loans................... 3,580 17,345 10,263 7,205 4,164 33,110 75,667 -- 75,667
Loan loss/unearned
fees................... -- -- -- -- -- -- -- (1,654) (1,654)
Other assets............ -- -- -- -- -- -- -- 4,385 4,385
-------- -------- ------- ------- ------- -------- -------- ------- --------
Total assets.......... $ 8,180 $115,360 $13,976 $10,415 $ 6,309 $ 43,962 $198,202 $ 9,013 $207,215
======== ======== ======= ======= ======= ======== ======== ======= ========
LIABILITIES AND EQUITY:
Deposits...............
Demand................. $ 2,286 $ -- $ -- $ -- $ -- $ 20,600 $ 22,886 $ -- $ 22,886
NOW, MMDA, and
Savings............... 11,576 88,000 -- -- -- 38,231 137,807 -- 137,807
Time deposits.......... 6,167 11,647 8,367 1,439 1,171 1,035 29,826 -- 29,826
Other liabilities...... -- -- -- -- -- -- -- 1,722 1,722
Shareholders' equity... -- -- -- -- -- -- -- 14,974 14,974
-------- -------- ------- ------- ------- -------- -------- ------- --------
Total liabilities and
equity............... $ 20,029 $ 99,647 $ 8,367 $ 1,439 $ 1,171 $ 59,866 $190,519 $16,696 $207,215
======== ======== ======= ======= ======= ======== ======== ======= ========
Gap..................... (11,849) 15,713 5,609 8,976 5,138 (15,904) 7,683 (7,683) --
Cumulative Gap.......... (11,849) 3,864 9,473 18,449 23,587 7,683 7,683 -- --
Cumulative Gap/ Total
assets................. (5.72%) 1.86% 4.57% 8.90% 11.38% 3.71% 3.71% -- --
</TABLE>
The foregoing table demonstrates that PBC had a positive cumulative one year
gap of $9.5 million, or 4.57% of total assets, at June 30, 1997. In theory,
this would indicate that at June 30, 1997, $9.5 million less in liabilities
than assets would reprice if there was a change in interest rates over the
next 360 days. If interest rates were to increase, the positive 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.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest rate sensitivity analysis table. These prepayments may have
significant effects on PBC's net interest margin. Because of these factors, an
interest sensitivity gap report may not provide a complete assessment of PBC's
exposure to changes in interest rates.
Liquidity and Cash Flow
The objective of liquidity management is to maintain PBC'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. PBC must mange its
liquidity position to meet the needs of its clients, while maintaining an
appropriate balance
126
<PAGE>
between assets and liabilities to meet the return on investment requirements
of its shareholders. PBC monitors the sources and uses of funds on a daily
basis to maintain an acceptable liquidity position. In addition to liquidity
from core deposit growth and repayments and maturities of loans and
investments. PBC maintained $5.5 million inter-bank federal funds purchase
lines. As of June 30, 1997 PBC had no outstanding federal funds purchased.
Net cash used by operating activities, primarily representing a change in
asset and liability accruals, totaled $698,000 million for six months ended
June 30, 1997 as compared to $803,000 for the same period in 1996. Cash used
in investing activities totaled $9.3 million for the six month period ended
June 30, 1997, as compared to $6.0 million for the same period in 1996. These
funds used in investing activities primarily represent the change in loans and
investments for each period reported. Net cash provided by financing
activities was $107.1 for the six month period ended June 30, 1997, compared
to $10.4 million for the same period in 1996. The funds provided by financing
activities represents the increase in deposits during each of the periods
presented.
Capital Resources
Shareholders' equity at June 30, 1997 increased to $15.0 million from $13.3
million at December 31, 1996, from $12.3 million at December 31, 1995 and from
$10.8 million at December 31, 1994. During 1996, PBC paid aggregate cash
dividends of $1.35 per share and has paid no dividends during the first six
months of 1997.
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, and minority
interests, less goodwill. Supplementary capital includes the allowance for
loan losses (subject to certain limitations), other perpetual preferred stock,
certain other capital instruments, and term subordinated debt. PBC's major
capital components are shareholders' equity in core capital, and the allowance
for loan loses in supplementary capital.
At June 30, 1997, the minimum risk-based capital requirements to be
considered adequately capitalized are 4.00% for core capital and 8.00% 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 3.00%, although banking organizations are expected
to exceed that amount by 1.00%--2.00% or more, depending on the circumstances.
The following table shows PBC's Tier I capital ratios (Tier I capital
divided by risk-weighted assets), total capital ratios (total capital divided
by risk-weighted assets), and leverage ratios (Tier I capital divided by
average assets) for the periods presented.
<TABLE>
<CAPTION>
TO BE
WELL-
CAPITALIZED
UNDER PROMPT
CORRECTIVE
ACTION
ACTUAL PROVISIONS
------------- -------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
As of June 30, 1997
Tier I Capital.................................. $15,025 14.15% $ 6,372 6.00%
Total Capital................................... 16,354 15.40% 10,620 10.00%
Tier I Capital--Leverage Ratio.................. 15,025 7.20% 10,430 5.00%
As of December 31, 1996
Tier 1 Capital.................................. $13,325 13.50% $ 5,913 6.00%
Total Capital................................... 14,559 14.75% 9,855 10.00%
Tier 1 Capital-Leverage Ratio................... 13,325 8.90% 7,490 5.00%
</TABLE>
PBC seeks to maintain capital ratios at levels that will maintain its status
as a well-capitalized financial institution.
127
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. This statement establishes a new fair value based accounting
method for stock-based compensation plans and encourages (but does not
require) employers to adopt the new method in place of the provisions of APB
25 Accounting for Stock Issued to Employees. Under the fair value based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period. Companies may continue to
apply the accounting provisions of APB 25 in determining net income; however,
they must apply the disclosure requirements of SFAS 123. The recognition
provisions and disclosure requirements of SFAS No. 123 were effective January
1, 1996. This statement did not have a material impact on PBC's financial
statements at December 31, 1996 and was not disclosed.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
This statement also requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair value at the date of
the transfer. Furthermore, this statement requires that debtors reclassify
financial assets pledged as collateral, and that secured parties recognize
those assets and their obligation to return them in certain circumstances in
which the secured party has taken control of those assets. In addition, the
statement requires that a liability be derecognized if and only if either (a)
the debtor pays the creditor and is relieved of its obligation for the
liability or (b) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor. Accordingly, a
liability is not considered extinguished by an in-substance defeasance. SFAS
125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Management does not believe that the application of
this statement will have a material impact on PBC's financial statements.
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing
Rights. SFAS 122 amends certain provisions of SFAS No. 65, Accounting for
Certain Mortgage Banking Activities, to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage banking
enterprise that acquires mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair value, if it is practicable to estimate
those fair values. If it is not practicable to estimate those fair values, the
entire cost of the acquisition should be allocated to the mortgage loans only.
SFAS 122 is effective for years occurring after December 31, 1995. Adoption of
this pronouncement did not have a material impact on the Company's financial
statements.
In March 1995, the FASB issued SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used for long-lived assets and certain identifiable intangibles to be
disposed of. An impairment loss is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. After an
impairment is recognized, the reduced carrying amount of the asset shall be
accounted for as its new cost. SFAS No. 121 is effective for years occurring
after December 31, 1995. Adoption of this pronouncement did not have a
material impact on PBC's financial statements.
128
<PAGE>
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 is designed to
improve the earnings per share ("EPS") information provided in the financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. PBC will
implement SFAS 128 in its December 31, 1997 financial statements. The
implementation of SFAS 128 is not expected to have a material impact on PBC's
financial statements.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This statement establishes standards for disclosing
information about an entity's capital structure. PBC intends to comply with
the disclosure requirements of this statement which is effective for periods
ending after December 15, 1997.
On June 30, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position, and is effective for financial statements issued for
fiscal years beginning after December 15, 1997. The impact of adopting SFAS
No. 130 has not yet been determined.
CHANGE IN ACCOUNTANT
Prior to December 31, 1995 PBC's independent accountants were Arthur
Andersen LLP. Arthur Andersen's report on the financial statements for 1994
and 1993 contained no adverse opinion or disclaimer of opinion nor was it
qualified or modified as to uncertainty, audit scope, or accounting
principles.
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PBC MANAGEMENT
The following information concerns certain of PBC's directors and executive
officers who will have director or officer positions with GBB.
GEORGE R. COREY, 64, is Chairman of the PBC Board and has served as a
director since 1981. He is an attorney and a partner in the law firm of Corey,
Luzaich, Manos & Pliska of Millbrae, California. Mr. Corey is also a former
mayor of Millbrae.
MARK F. DOIRON, 39, has been President and Chief Executive Officer of PBC
since January 1994. From December 1992 to December 1993, he served as
Executive Vice President and Chief Operating Officer for PBC. He started his
career with PBC in 1982 and has been employed by it in various capacities
since then.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Summary of Cash and Certain Other Compensation
The following table sets forth certain summary information concerning
compensation paid or accrued by PBC to or on behalf of PBC's Chief Executive
Officer (determined as of the end of the last fiscal year). In all cases,
payment was for services in all capacities to PBC during the years ended
December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION
------------------------------ RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SAR'S PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($) (#) ($) ($)
- --------------------------- ---- -------- -------- ------------ ---------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark F. Doiron,......... 1996 $115,000 $100,919 -- -- -- -- $6,250
President and Chief 1995 100,000 98,006 -- -- -- -- 6,250
Executive Officer 1994 90,000 68,324 -- -- 20,000 -- 3,370
</TABLE>
- --------
(1) Represents amounts contributed by PBC under its tax-deferred savings plan
on behalf of such individual. Perquisites and other benefits provided to
the named executive officers in each of the years indicated did not exceed
the lesser of $50,000 or 10% of the officer's annual salary and bonus.
(2) Bonus compensation to executives is awarded at the discretion of the PBC
Board. The PBC Board bases bonus awards on PBC's net income after taxes.
In each of the years indicated, the PBC Board awarded to Mr. Doiron a
bonus equal to 5.5% of PBC's net income after taxes.
DIRECTORS' FEES AND 1996 DIRECTORS' STOCK OPTION PLAN
During 1996, nonemployee directors, including Mr. Corey, received $400 per
meeting for their attendance at regular Board meetings and $300 per Loan and
Discount Committee meeting. As Chairman, Mr. Corey received an additional $825
per month. PBC also provided medical, dental and vision care coverage to
directors or a cash payment of $400 per month in lieu of such benefits. Total
director's fees and benefits received by Mr. Corey in 1996 were $26,446.
In May 1996, the PBC Board adopted, and the shareholders of PBC approved,
the 1996 Directors' Stock Option Plan. Under this Plan, PBC granted to each
director (including Mr. Corey) options to acquire 10,000 shares of PBC Stock.
Twenty percent (20%) of such options were exercisable after May 10, 1997, and
20% were to vest each year on May 10 over the following four years. The
exercise price for all options granted was the fair market value of PBC Stock
at the time of the grant, or $23.25 per share. All such options expire on May
10, 2006.
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1992 STOCK OPTION PLAN
The Peninsula Bank of Commerce 1992 Stock Option Plan (the "1992 Plan") is
intended to advance the interests of PBC by encouraging stock ownership on the
part of key employees. The 1992 Plan provides for the issuance of both
incentive stock options and nonstatutory stock options to full-time salaried
officers and employees of PBC. All options must be granted at an exercise
price of not less than 100% of the fair market value of the stock on the date
of grant. Generally, the right to exercise options vests in installments as
provided in individual stock option agreements. Each option granted under the
1992 Plan expires not later than 10 years from the date the option was
granted.
As of December 31, 1996, PBC had options outstanding to purchase a total of
50,865 shares of PBC Stock under the 1992 Plan, with an average exercise price
of $12.12 per share with respect to all such options. No stock options were
granted in 1996.
The following table shows options exercised in 1996 and the value of
unexercised options held by persons included in the Summary Compensation
Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FYE AT FYE
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ----------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Mark F. Doiron.......... 3,301 $46,360 14,322/12,705 $211,946/182,513
</TABLE>
DEFERRED COMPENSATION PLAN
PBC has a deferred compensation plan that allows any employee or director to
defer payment of a portion of his or her salary, bonus or director's fees and
earn interest on the amount deferred as determined by the PBC Board. Interest
paid in 1996 on deferred amounts averaged 6.59%. The amount of Mr. Doiron's
deferred compensation under this plan during 1996 was $25,000 and interest in
1996 on his cumulative deferred amounts in the plan was $1,698. The amount
deferred by Mr. Doiron for 1996 are included as salary in the Summary
Compensation Table above.
SALARY CONTINUATION AGREEMENT
Effective May 1, 1996, PBC entered into a Salary Continuation Agreement with
Mr. Doiron as PBC's President and Chief Executive Officer. Under the
agreement, PBC has agreed to pay supplemental retirement benefits to Mr.
Doiron or to his designated beneficiary if he dies while employed by PBC. The
agreement further provides for payment of supplemental retirement benefits
upon his normal retirement at age 65, his disability or a change in control
that adversely affects Mr. Doiron. Partial retirement benefits will be paid to
Mr. Doiron upon his early retirement (not earlier than age 55) based on an
adjusted scale. Finally, the agreement prohibits any such payments that would
be deemed an "excess parachute payment" under the Code or that would be made
following a termination for cause, a suicide or a termination before Mr.
Doiron reaches age 55.
CERTAIN TRANSACTIONS
Some of the executive officers and directors of PBC and the companies with
which they are associated have been customers of and have had banking
transactions with PBC in the ordinary course of PBC's business since January
1, 1996, and PBC expects to continue to have such banking transactions in the
future. All loans and commitments to lend included in such transactions have
been made on substantially the same terms, including
131
<PAGE>
interest rates and collateral, as those prevailing at the time for comparable
transactions with persons of similar creditworthiness and, in the opinion of
management of PBC, have not involved more than the normal risk of repayment or
presented any other unfavorable features.
There are no other existing or proposed material transactions between PBC
and any of its directors, executive officers or members of the immediate
family or associates of any of the foregoing persons.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Members of the PBC Board will continue as the directors of PBC upon
completion of the Merger and will continue to receive directors' fees and
other benefits in accordance with the existing practices of PBC through
December 31, 1998. See "--Directors' Fees and 1996 Directors' Stock Option
Plan." GBB has agreed to appoint Mr. Corey to the GBB Board upon the Effective
Time. As a director of GBB, Mr. Corey will be entitled to fees and other
benefits in accordance with GBB's existing practices.
GBB has agreed to retain Mr. Doiron as President and Chief Executive Officer
of PBC. GBB has also agreed to appoint Mr. Doiron to its executive management
committee upon the Effective Time.
Directors and officers of PBC own in the aggregate 258,166 shares of PBC
Stock, including shares that may be acquired upon options currently
exercisable or exercisable within 60 days of September 30, 1997. The aggregate
number of shares of GBB Stock that will be exchanged for such shares of PBC
Stock upon consummation of the Merger is approximately 276,238, based on a
Conversion Ratio of 1.07. Directors and officers of PBC hold options not
exercisable currently or within 60 days of September 30, 1997 to acquire an
additional 64,651 shares of PBC Stock. Under the Reorganization Agreement,
these options will be converted into options to acquire approximately 69,177
shares of GBB Stock. Based on the market price of GBB Stock on September 30,
1997, the realizable value of these options on such date is $2,966,310, less
the aggregate exercise price of such options.
INFORMATION CONCERNING GBB MEETING ONLY
AMENDMENT TO GBB'S ARTICLES OF INCORPORATION
GBB's shareholders will consider and act upon a proposal to amend GBB's
articles of incorporation to increase the authorized shares of GBB Stock from
6,000,000 to 12,000,000 shares.
The amendment to GBB's articles of incorporation would increase to
12,000,000 the number of shares of GBB Stock which GBB is authorized to issue.
GBB is currently authorized to issue 6,000,000 shares of GBB Stock and
4,000,000 shares of preferred stock. (GBB does not currently have any plans to
issue preferred stock.) As of October 20, 1997, there were 3,338,038 shares of
GBB Stock issued and outstanding and no shares of preferred stock issued and
outstanding. In addition, if the Merger is consummated, 721,032 additional
shares of GBB stock will be issued to PBC's shareholders at the Effective
Time, assuming a Conversion Ratio of 1.07 and that Substitute Options are
granted to replace all currently outstanding PBC options. Furthermore, as of
September 30, 1997, 678,242 shares of GBB Stock were reserved for issuance
under the 1996 Option Plan, 420,697 shares were reserved for issuance under
the Greater Bay Bancorp 401(k) Profit Sharing Plan, and 167,233 shares were
reserved for issuance under the Greater Bay Bancorp Employee Stock Purchase
Plan. Accordingly, upon consummation of the Merger, GBB will have in excess of
5,300,000 shares of stock issued or reserved for issuance, with the
possibility that additional shares would be issued if the Conversion Ratio
increases or if PBC options are exercised prior to the Effective Time.
GBB presently has no commitments or specific plans to issue additional
shares of GBB Stock except as described above to the PBC shareholders upon
consummation of the Merger. However, the additional shares of GBB Stock to be
authorized, other than those to be issued pursuant to the Merger, would be
available for possible future financing and acquisition transactions, stock
dividends or splits and other corporate purposes. Having such shares available
for issuance in the future would give GBB greater flexibility and allow shares
of GBB Stock to be issued without the expense and delay of a special
shareholders' meeting. The additional shares of GBB Stock would be available
for issuance without further action by the shareholders unless shareholder
approval is required
132
<PAGE>
by applicable law or the rules of any stock exchange on which GBB securities
may be listed. Nasdaq, on which the issued shares of GBB Stock are listed,
currently requires shareholder approval in certain instances, including in
connection with acquisition transactions where the present or potential
issuance of shares could result in an increase in the number of shares of GBB
Stock outstanding by 20% or more.
The shareholders of GBB do not have preemptive rights under GBB's articles
of incorporation, and the shareholders of GBB will not have such rights with
respect to the additional authorized shares of GBB Stock.
The increase in the number of authorized shares of GBB Stock is not designed
to deter or to prevent a change in control, nor is this proposal part of a
plan by management to adopt a series of anti-takeover amendments; however,
under certain circumstances, GBB could use additional shares to create voting
impediments or to frustrate persons seeking to affect a takeover or otherwise
gain control of GBB. GBB could also privately place such shares with
purchasers who might side with the Board of Directors in opposing a hostile
takeover bid, although management is not aware of any such bid being proposed
or contemplated. Although the GBB Board is required to make any determination
to issue shares of GBB Stock based on its judgment as to the best interests of
shareholders, the GBB Board could act in a manner that could discourage an
acquisition attempt or other transaction that some, or a majority, of the
shareholders might believe to be in their best interests or in which the
shareholders might receive a premium for their stock above the then market
price of such stock.
The text of the proposed amendment to GBB's articles of incorporation is as
follows:
"RESOLVED THAT, the first paragraph of ARTICLE FOUR of the articles of
incorporation of Greater Bay Bancorp be, and it hereby is, amended in full
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 to 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.' "
The GBB Board recommends to its shareholders that they approve the proposal
to amend the articles of incorporation to increase from 6,000,000 to
12,000,000 the authorized number of shares of GBB Stock which may be issued by
GBB. The affirmative vote of a majority of the outstanding shares of GBB Stock
will be required to approve the amendment to the articles of incorporation.
THE GBB BOARD RECOMMENDS A VOTE "FOR" THE
PROPOSAL TO AMEND GBB'S ARTICLES OF INCORPORATION
AMENDMENT TO 1996 OPTION PLAN
In 1996, the GBB Board adopted and GBB's shareholders approved the 1996
Option Plan. The 1996 Option Plan provides for the granting of options to
purchase shares of GBB Stock to directors, officers, key employees and
consultants of GBB and its subsidiaries. The GBB Board proposes that the 1996
Option Plan be amended (the "Plan Amendment") upon consummation of the Merger,
to increase by 456,326 the number of shares allocated and reserved for
issuance thereunder, and to provide that all of the shares issuable under such
plan may be issued pursuant to the exercise of either nonqualified stock
options or incentive stock options granted under the 1996 Option Plan. The
Plan Amendment requires approval of GBB shareholders. Even if approved by the
shareholders, however, the Plan Amendment will not be effected unless the
Merger is consummated.
The Reorganization Agreement requires that GBB issue, at the Effective Time,
substitute options ("Substitute Options") to purchase GBB Stock to the
individuals who own options of PBC that will be canceled as of the Effective
Time. The number of Substitute Options issued in substitution of each
outstanding PBC option will be adjusted appropriately to reflect the
Conversion Ratio.
As of September 30, 1997, there were options outstanding to purchase a total
of 48,227 shares of PBC Stock under the 1992 Plan, at an average exercise
price of $12.12 per share. Additionally, as of September 30, 1997,
133
<PAGE>
there were options outstanding to purchase a total of 60,000 shares of PBC
Stock under the 1996 Directors' Stock Option Plan at an exercise price of
$23.25 per share. The aggregate value of the Substitute Options to be granted
in substitution of all the outstanding PBC options depends upon the effective
Conversion Ratio used in the Merger, which is, in turn, dependent on the
Average Closing Price. Assuming a Conversion Ratio of 1.07 (which is based on
the $42.88 closing price per share of GBB Stock on September 30, 1997), the
value of the Substitute Options to be issued in the Merger would be
approximately $3.0 million (i.e., the difference between the value of the GBB
Stock issuable upon exercise of the Substitute Options and the aggregate
exercise price of the Substitute Options).
Currently, the 1996 Option Plan permits the granting of options for a total
amount of 751,564 shares of GBB Stock and provides that only 519,896 shares
may be issued pursuant to the exercise of incentive stock options granted
under the plan. As of September 30, 1997, options for a total of 466,217
shares were outstanding and a total of 212,025 shares of GBB Stock were
available for the granting of additional options. Assuming that Substitute
Options are granted to replace all 108,227 options currently outstanding under
PBC stock option plans, and assuming a Conversion Ratio of 1.07, a total of
approximately 115,803 Substitute Options will be granted upon consummation of
the Merger. Based on such calculation, only approximately 96,222 shares of GBB
Stock will be available under the 1996 Option Plan for the granting of
additional options in the future.
Following the Merger, GBB will have approximately 4,059,115 shares
outstanding (assuming a 1.07 Conversion Ratio and that Substitute Options are
granted to replace all currently outstanding PBC options), which represents an
increase of 21.60% in outstanding shares. The GBB Board believes that it is
prudent to be able to provide incentives and rewards to the larger employee
base of GBB and its new subsidiary, PBC, by increasing the number of shares
available for options under the 1996 Option Plan by a sufficient number to be
able to provide for the future grant of options beyond the immediate
obligation to grant Substitute Options. The GBB Board also believes that the
determination of the type of option granted under the 1996 Option Plan should
be left to the discretion of the committee administering such plan and that
the 1996 Option Plan should provide for maximum flexibility in this respect.
If the Plan Amendment is effected, options to purchase additional shares will
be subject to the same terms and provisions as provided in the 1996 Option
Plan. The GBB Board believes that given the expected number of shares of GBB
Stock to be outstanding after the Merger, an increase of 456,326 shares
issuable under the 1996 Option Plan is appropriate, and that the provision for
greater flexibility with respect to the type of option granted under such plan
is in the best interests of GBB and its shareholders.
Federal Income Tax Consequences
The following discussion is only a summary of the principal federal income
tax consequences of the options to be granted under the 1996 Option Plan, and
is based on existing federal law (including administrative regulations and
rulings) which is subject to change, in some cases retroactively. This
discussion is also qualified by the particular circumstances of individual
optionees, which may substantially alter or modify the federal income tax
consequences herein discussed.
Generally under present law, when an option qualifies as an Incentive Stock
Option under Section 422 of the Code: (a) an optionee will not realize taxable
income either upon the grant or the exercise of the option, (b) any gain or
loss upon a qualifying disposition of the shares acquired by the exercise of
the option will be treated as capital gain or loss, and (c) no deduction will
be allowed to the company for federal income tax purposes in connection with
the grant or exercise of an Incentive Stock Option or a qualifying disposition
of the shares. A disposition by an optionee of stock acquired upon exercise of
an Incentive Stock Option will constitute a qualifying disposition if it
occurs more than two years after the grant of the option, and more than one
year after the transfer of the shares to the optionee. If such stock is
disposed of by the optionee before the expiration of those time limits, the
transfer would be a "disqualifying disposition" and the optionee, in general,
will recognize ordinary income equal to the lesser of (a) the aggregate fair
market value of the shares as of the date of exercise less the option price,
or (b) the amount realized on the disqualifying disposition less the option
price. Ordinary income from a disqualifying disposition will constitute
compensation for which withholding may be required under federal and state
law. Any gain in addition to the amount reportable as ordinary income from a
"disqualifying disposition" generally will be capital gain.
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<PAGE>
Upon the exercise of an Incentive Stock Option, the difference between the
fair market value of the stock on the date of exercise and the option price is
treated as an adjustment to taxable income for alternative minimum tax
purposes. There are several other such adjustments potentially applicable to a
particular taxpayer which, together with "tax preference items," are taken
into account for purposes of computing alternative minimum taxable income. In
the case of noncorporate taxpayers, the alternative minimum tax is imposed on
alternative minimum taxable income (less the applicable exemption amount) at
graduated rates with a top rate of 28%. In effect, the taxpayer pays the
greater of the regular tax or the alternative minimum tax. Under certain
circumstances, the amount of alternative minimum tax is allowed as a
carryforward credit against regular tax liability in subsequent years.
In the case of stock options which do not qualify as Incentive Stock Options
("Non-Qualified Stock Options"), no income generally is recognized by the
optionee at the time of the grant of the option. Under present law the
optionee generally will recognize ordinary income at the time the Non-
Qualified Stock Option is exercised equal to the aggregate fair market value
of the shares acquired less the option price. However, if the shares received
upon exercise of a Non-Qualified Stock Option are subject to certain
restrictions, the taxable event is postponed until the restrictions lapse. For
example, if a sale of the shares at a profit would subject an optionee to
liability under Section 16(b) of the Exchange Act, the optionee generally will
recognize taxable income on the date that the optionee is no longer subject to
such liability in an amount equal to the fair market value of the shares on
such date less the option price. Notwithstanding the foregoing, the optionee
may make a special election within thirty days of receiving restricted shares
to recognize taxable income as of the date of exercise. Income from the
exercise of a Non-Qualified Stock Option will constitute compensation for
which withholding may be required under federal and state law.
Subject to special rules applicable when an optionee uses GBB Stock to
exercise an option, shares acquired upon exercise of a Non-Qualified Stock
Option will have a tax basis equal to their fair market value on the exercise
date or other relevant date on which ordinary income is recognized and the
holding period for the shares generally will begin on the date of exercise or
such other relevant date. Upon subsequent disposition of the shares, the
optionee generally will recognize capital gain or loss. Under recent
legislation, the maximum rate of tax on net long term capital gain of an
individual is 20% for assets held for more than 18 months. The maximum rate is
28% for assets held for more than a year but not more than 18 months. For
taxable years beginning after December 31, 2000, the maximum rate will be 18%
for the sale or exchange of certain assets held more than five years.
GBB will generally be entitled to a deduction equal to the ordinary income
(i.e., compensation) recognized by the optionee in the case of a
"disqualifying disposition" of an Incentive Stock Option or upon the exercise
of a Non-Qualified Stock Option provided the Company complies with withholding
requirements of federal and state law.
Approval requires the affirmative vote of a majority of the shares of GBB
Stock present, or represented at the GBB Meeting (providing a quorum is
present). Under applicable California law, an abstention will be counted in
determining the presence of a quorum and will have the same effect as a vote
"AGAINST" the proposal and a broker non-vote will not be counted in
determining the presence of a quorum and will have no effect on the outcome of
the proposal.
THE GBB BOARD RECOMMENDS A VOTE "FOR" THE
PROPOSAL TO AMEND THE 1996 OPTION PLAN
ACCOUNTANTS
The GBB Board has appointed Coopers as its independent accountants for the
fiscal year ending December 31, 1997. Representatives of Coopers will be
present at the GBB Meeting, will have the opportunity to make a statement if
they desire to do so, and will be available to respond to appropriate
questions from shareholders.
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SHAREHOLDER PROPOSALS
Under certain circumstances, shareholders are entitled to present proposals
at shareholder meetings. Any such proposal to be included in the Proxy
Statement for the GBB's 1998 Annual Meeting of Shareholders must be submitted
by a shareholder prior to January 13, 1998, in a form that complies with
applicable regulations.
GBB WILL SUPPLY TO SHAREHOLDERS WITHOUT COST, UPON WRITTEN REQUEST, A COPY
OF GBB'S MOST RECENT ANNUAL REPORT ON FORM 10-K AS AMENDED ON FORM 10-K/A
INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. EXHIBITS TO
THE FORM 10-K WILL BE FURNISHED UPON PAYMENT OF REASONABLE CHARGES. WRITTEN
REQUESTS SHOULD BE DIRECTED TO STEVEN C. SMITH, CHIEF FINANCIAL OFFICER,
GREATER BAY BANCORP, 2860 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA 94303.
INFORMATION CONCERNING PBC MEETING ONLY
ACCOUNTANTS
The PBC Board has appointed, and the shareholders of PBC have ratified,
Coopers as its independent accountants for the fiscal year ending December 31,
1997. Representatives of Coopers will be present at the PBC Meeting, will have
the opportunity to make a statement if they desire to do so, and will be
available to respond to appropriate questions from shareholders.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the GBB Stock in
accordance with the terms of the Merger will be passed upon for GBB by Manatt,
Phelps & Phillips, LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of GBB as of December 31, 1996, 1995
and 1994 and for the years then ended appearing in this Joint Proxy
Statement/Prospectus have been audited by Coopers & Lybrand L.L.P., as
indicated in their report with respect thereto. Such consolidated financial
statements are included herein in reliance upon the authority of said firm as
independent auditors.
The consolidated financial statements of PBC as of December 31, 1996, 1995
and 1994 and for the years then ended appearing in this Joint Proxy
Statement/Prospectus have been audited by Coopers & Lybrand L.L.P., as
indicated in their report with respect thereto. Such consolidated financial
statements are included herein in reliance upon the authority said firm as
independent auditors.
OTHER MATTERS
GBB and PBC do not know of any business other than that described in this
Joint Proxy Statement/Prospectus which will be presented for consideration at
the respective Meetings. If any other business properly comes before the
respective Meetings or at any and all adjournments or postponements thereof,
the Proxy holders named in the accompanying Proxies will vote their respective
shares represented by such Proxies in accordance with their best judgment and,
as applicable, in accordance with said Proxies.
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INDEX TO FINANCIAL STATEMENTS
GBB'S CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL FINANCIAL DATA
<TABLE>
<S> <C>
Report of Coopers & Lybrand L.L.P......................................... F-1
Consolidated Balance Sheets at December 31, 1996 and 1995................. F-2
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994...................................................... F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994......................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994...................................................... F-5
Notes to Consolidated Financial Statements................................ F-6
INTERIM FINANCIAL DATA
Consolidated Balance Sheet at June 30, 1997 (Unaudited)................... F-29
Consolidated Statements of Operations for the Three Months Ended June 30,
1997 and 1996 (Unaudited) and for the Six Months Ended June 30, 1997 and
1996 (Unaudited)......................................................... F-30
Consolidated Statement of Cash Flows for the Six Months Ended June 30,
1997 and 1996 (Unaudited)................................................ F-31
Notes to Consolidated Condensed Financial Statements for the Period Ended
June 30, 1997 and 1996 (Unaudited)....................................... F-32
PBC'S CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL FINANCIAL DATA
Report of Coopers & Lybrand L.L.P......................................... F-34
Consolidated Statements of Condition at December 31, 1996 and 1995........ F-35
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994...................................................... F-36
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994......................................... F-37
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994...................................................... F-38
Notes to Consolidated Financial Statements................................ F-39
INTERIM FINANCIAL DATA
Consolidated Statements of Condition for the Six Months Ended June 30,
1997 (Unaudited)......................................................... F-49
Consolidated Statements of Operations for the Six Months Ended June 30,
1997 and 1996 (Unaudited)................................................ F-50
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1997 and 1996 (Unaudited)................................................ F-51
Notes to Consolidated Financial Statements for the Period Ended June 30,
1997 and 1996 (Unaudited)................................................ F-52
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Greater Bay Bancorp:
We have audited the accompanying consolidated balance sheets of Greater Bay
Bancorp (formerly Mid-Peninsula Bancorp) and subsidiaries (the Company) as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
San Francisco, California
February 27, 1997
F-1
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995*
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks............................... $ 39,896 $ 29,511
Federal funds sold.................................... 14,000 28,600
----------- -----------
Cash and cash equivalents........................... 53,896 58,111
Investment securities................................. 105,520 116,869
Total loans, net...................................... 441,560 284,579
Premises and equipment, net........................... 4,688 2,912
Interest receivable and other assets.................. 16,380 15,363
----------- -----------
Total assets...................................... $ 622,044 $ 477,834
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits........................................ $ 559,283 $ 431,789
Other borrowings...................................... 12,000
Subordinated debt..................................... 3,000 3,000
Other liabilities..................................... 3,079 2,933
----------- -----------
Total liabilities................................. 577,362 437,722
Commitments (Note 13)
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares
authorized; none issued
Common stock, no par value: 6,000,000 shares
authorized; shares outstanding: 3,238,887 in 1996 and
3,046,320 in 1995.................................... 34,884 33,105
Unrealized gain (loss) on available-for-sale
securities, net of taxes............................. 71 (621)
Retained earnings..................................... 9,727 7,628
----------- -----------
Total shareholders' equity........................ 44,682 40,112
----------- -----------
Total liabilities and shareholders' equity........ $ 622,044 $ 477,834
=========== ===========
</TABLE>
- --------
* Restated on an historical basis to reflect the merger with Cupertino National
Bancorp on a pooling of interests basis.
See notes to consolidated financial statements.
F-2
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995* 1994*
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans............................... $ 36,278 $ 28,397 $ 22,112
Interest on investment securities:
Taxable....................................... 6,433 6,204 4,248
Tax-exempt.................................... 690 497 411
-------- -------- --------
Total interest on investment securities..... 7,123 6,701 4,659
Other interest income........................... 1,636 2,135 1,030
-------- -------- --------
Total interest income....................... 45,037 37,233 27,801
-------- -------- --------
INTEREST EXPENSE:
Interest on deposits............................ 15,732 13,048 8,130
Interest on short-term borrowings............... 126 769 382
Interest on subordinated debt................... 355 75
-------- -------- --------
Total interest expense........................ 16,213 13,892 8,512
-------- -------- --------
Net interest income......................... 28,824 23,341 19,289
Provision for loan losses....................... 2,036 956 1,823
-------- -------- --------
Net interest income after provision for loan
losses......................................... 26,788 22,385 17,466
-------- -------- --------
OTHER INCOME:
Service charges and other fees.................. 1,848 1,206 1,290
Trust fees...................................... 1,426 710 593
Gain on sale of SBA loans....................... 519 366 685
Gain on sale of mortgage loans.................. 137 993
Gains (losses) on investments, net.............. (263) (113) (266)
-------- -------- --------
Total other income............................ 3,530 2,306 3,295
-------- -------- --------
OPERATING EXPENSES:
Compensation and benefits....................... 11,773 10,146 8,505
Occupancy and equipment......................... 3,401 2,679 2,266
Merger and related non-recurring costs.......... 2,791 608
Other........................................... 5,923 6,861 4,852
-------- -------- --------
Total operating expenses...................... 23,888 19,686 16,231
-------- -------- --------
Income before income tax expense............ 6,430 5,005 4,530
Income tax expense............................ 2,927 1,971 1,966
-------- -------- --------
Net Income...................................... $ 3,503 $ 3,034 $ 2,564
======== ======== ========
Net income per common and common equivalent
share.......................................... $ 1.04 $ 0.96 $ 0.85
======== ======== ========
</TABLE>
- --------
* Restated on an historical basis to reflect the merger with Cupertino National
Bancorp on a pooling of interests basis.
See notes to consolidated financial statements.
F-3
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
-----------------------------------------------------------------
COMMON STOCK TOTAL
----------------------- UNREALIZED RETAINED SHAREHOLDERS'
SHARES AMOUNT GAIN (LOSS) EARNINGS EQUITY
------------ ---------- ------------ ---------- --------------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balances as of December
31, 1993:
Mid-Peninsula Bancorp
prior to pooling..... 1,455,665 $ 14,216 $ (48) $ 3,672 $ 17,840
Shares issued to
Cupertino National
Bancorp
shareholders......... 1,142,797 13,582 13,582
Cupertino National
Bancorp retained
earnings prior to
pooling.............. 2,637 2,637
------------ ---------- ---------- ---------- ----------
Balance, December
31, 1993, as
restated to reflect
pooling............ 2,598,462 27,798 (48) 6,309 34,059
Stock options
exercised............ 128,614 1,114 1,114
Stock issued in
Employee Stock
Purchase Plan........ 6,716 69 69
Adoption of SFAS No.
115 unrealized loss
on available-for-sale
securities........... (1,272) (1,272)
Two 5% stock dividends
fractional shares
paid in cash......... 58,914 705 (708) (3)
Cash dividend $0.18
per share............ (491) (491)
Net Income............ 2,564 2,564
------------ ---------- ---------- ---------- ----------
Balance, December
31, 1994*.......... 2,792,706 29,686 (1,320) 7,674 36,040
Stock options
exercised, including
related tax benefit.. 104,454 1,109 1,109
Stock issued in
Employee Stock
Purchase Plan........ 8,537 80 80
401K Employee Stock
Purchase............. 6,731 95 95
Cash dividends of
$0.30 per share...... (942) (942)
10% stock dividend
fractional shares
paid in cash......... 133,892 2,135 (2,138) (3)
SFAS No. 115 change in
unrealized loss on
available-for-sale
securities........... 699 699
Net Income............ 3,034 3,034
------------ ---------- ---------- ---------- ----------
Balance, December
31, 1995*.......... 3,046,320 33,105 (621) 7,628 $ 40,112
Stock options
exercised, including
related tax benefit.. 176,657 1,555 1,555
Stock issued in
Employee Stock
Purchase Plan........ 10,632 137 137
401K Employee Stock
Purchase............. 5,278 87 87
Cash dividends of
$0.44 per share...... (1,404) (1,404)
SFAS No. 115 change in
unrealized loss on
available-for-sale
securities........... 692 692
Net Income............ 3,503 3,503
------------ ---------- ---------- ---------- ----------
Balance, December
31, 1996........... 3,238,887 $ 34,884 $ 71 $ 9,727 $ 44,682
============ ========== ========== ========== ==========
</TABLE>
- --------
* Restated on an historical basis to reflect the merger with Cupertino National
Bancorp on a pooling of interests basis.
See notes to consolidated financial statements.
F-4
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995* 1994*
--------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows Operating Activities:
Net Income.................................... $ 3,503 $ 3,034 $ 2,564
Reconciliation of net income to net cash from
operations:
Provision for loan losses.................... 2,036 956 1,823
Depreciation and leasehold amortization...... 1,125 899 777
Deferred income taxes........................ (1,145) 181 75
Accrued interest receivables and other as-
sets........................................ (128) (1,234) (1,828)
Accrued interest payable and other liabili-
ties........................................ 146 909 807
Deferred loan fees and discounts, net........ 653 27 (105)
Proceeds from sale of loans held for sale.... 16,364 125,342
Origination of loans for resale.............. (10,981) (123,100)
Operating cash flows, net...................... 6,190 10,155 6,355
--------- -------- ---------
Cash Flows Investing Activities:
Maturities of investment securities and other
short-term investments:
Held-to-maturity............................. 24,956 29,130 13,048
Available-for-sale........................... 28,737 10,441 1,510
Purchase of investment securities and other
short-term investments
Held-to-maturity............................. (26,439) (54,561) (36,504)
Available-for-sale........................... (39,389) (8,388) (2,000)
Proceeds from sale of available-for-sale secu-
rities....................................... 26,635 6,734
Loans, net.................................... (161,845) (48,195) (14,556)
Investment in other real estate owned......... (476) (485)
Sale of other real estate owned............... 217 1,054 1,733
Premises and equipment........................ (2,906) (1,388) (1,000)
Purchase of insurance policies................ (240) (6,004)
Other, net.................................... 84
--------- -------- ---------
Cashflows, net................................. (150,274) (78,387) (31,436)
--------- -------- ---------
Cash Flows Financing Activities:
Net change in deposits........................ 127,494 85,495 22,994
Net change in short-term borrowings........... 12,000 (17,256) 17,256
Subordinated debt issued...................... 3,000
Proceeds from the sale of stock............... 1,779 1,127 1,028
Fractional shares paid in cash................ (3) (3)
Cash dividends................................ (1,404) (942) (491)
--------- -------- ---------
Financing cash flows, net...................... 139,869 71,421 40,784
--------- -------- ---------
Net increase in cash and cash equivalents...... (4,215) 3,189 15,703
Cash and cash equivalents at beginning of
year.......................................... 58,111 54,922 39,219
--------- -------- ---------
Cash and cash equivalents at end of year....... $ 53,896 $ 58,111 $ 54,922
--------- -------- ---------
Cash flows supplemental disclosures:
Cash paid during the period for:
Interest on deposits and other borrowings.... $ 16,228 $ 13,827 $ 8,278
--------- -------- ---------
Income taxes................................. $ 3,970 $ 2,105 $ 1,878
--------- -------- ---------
Non-cash transactions:
Additions to other real estate owned.......... $ 152 $ 130 $ 1,047
========= ======== =========
</TABLE>
- --------
* Restated on an historical basis to reflect the merger with Cupertino National
Bancorp on a pooling of interests basis.
See notes to consolidated financial statements.
F-5
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Greater Bay Bancorp ("GBB" or the "Company") 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, GBB
became a multi-bank holding company of two wholly owned bank subsidiaries,
Mid-Peninsula Bank ("MPB") and Cupertino National Bank & Trust ("CNB"),
collectively the "Banks." MPB commenced operations in October 1987 and is a
state chartered bank regulated by the Federal Reserve Bank (FRB) and the
California State Banking Department. CNB commenced operations in May 1985 and
is a national banking association regulated by the Office of the Comptroller
of Currency (OCC).
The Company provides a wide range of commercial banking services to small
and medium-sized businesses, real estate developers and property managers,
business executives, professionals and other individuals. The Company operates
through seven regional offices in Cupertino, Palo Alto, San Mateo, San Carlos
and San Jose, California.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of GBB and its
wholly-owned subsidiaries, CNB and MPB. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior years' consolidated financial statements to conform to the
1996 presentation. The accounting and reporting policies of the Company
conform to generally accepted accounting principles and to prevailing
practices within the banking industry.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of certain revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods. CNB and MPB are required by the Federal
Reserve System to maintain noninterest earning cash reserves against certain
of their deposit accounts. At December 31, 1996, the required combined
reserves totaled approximately $2.9 million.
INVESTMENT SECURITIES
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," which was adopted by
the Company in 1994, requires that investment securities be classified into
three portfolios, and be accounted for as follows: 1) debt and equity
securities for which the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at
F-6
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amortized cost; 2) debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
trading securities and reported at fair value, with unrealized gains and
losses included in earnings; and 3) debt and equity securities not classified
as either held-to-maturity or trading securities are classified as available-
for-sale securities and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity.
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.
The required investment of 3% of capital stock and surplus in FRB stock, for
both MPB and CNB, is 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
is not expected. At the time a loan is placed on nonaccrual status, any
interest income previously accrued but not collected is reversed. Interest
accruals are resumed on such loans only when they are brought fully current
with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both
principal and interest.
The Company charges loan origination and commitment fees. Net loan
origination fees and costs are deferred and amortized to interest income over
the life of the loan, using the effective interest method. Loan commitment
fees are amortized to interest income over the commitment period.
SALES 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 each loan 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. The value assigned to the right to
service is also amortized over the estimated life of the loan.
F-7
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS 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. Adoption of SFAS No.
114 and No. 118 did not have a material effect on the financial statements of
the Company in 1995. 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 and unidentified 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.
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.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of properties acquired through
foreclosure and is stated at the lower of cost or fair value less estimated
costs to sell. Development and improvement costs relating to the property are
capitalized. Estimated losses that result from the ongoing periodic valuation
of these properties are charged to current earnings with a provision for
losses on foreclosed property in the period in which they are identified. The
resulting allowance for OREO losses is decreased when the property is sold.
Operating expenses of such properties, net of related income, are included in
other expenses. Gains and losses on disposition of OREO are included in other
income.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
basis over the shorter of the lease terms or estimated useful lives of the
assets, which are generally 3 to 10 years.
INCOME TAXES
Deferred income 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.
F-8
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PER SHARE DATA
Net income per common and common equivalent share is based on the weighted
average number of shares of common stock outstanding during the year plus the
effect of dilutive stock options. All years presented include the effect of
stock dividends declared in 1995 and 1994. The weighted average common and
common equivalent shares outstanding for 1996, 1995 and 1994 were 3,359,700,
3,144,550 and 3,001,211, respectively.
Fully diluted earnings per share were approximately equal to primary
earnings per share in each of the years in the three-year period ended
December 31, 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 1994 merger with
San Mateo County Bancorp at a 1.0617 conversion ratio, and the 1996 merger
with Cupertino National Bancorp at a 0.81522 conversion ratio.
NOTE 2 MERGERS
On November 27, 1996, the Company consummated a merger between Mid-Peninsula
Bancorp and Cupertino National Bancorp. As discussed in Note 1, concurrently
with the merger the name of the holding company was changed to Greater Bay
Bancorp. Following the terms of the merger agreement, the Company issued
approximately 1,586,000 shares 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 has been accounted for as a pooling of
interests business combination and, accordingly, the consolidated financial
statements and the financial data for the periods prior to the merger have
been restated to include the accounts and results of operations of Cupertino
National Bancorp.
On October 7, 1994, San Mateo County Bancorp's wholly owned subsidiary,
WestCal National Bank, was merged with and into Mid-Peninsula Bank, and San
Mateo County Bancorp concurrently changed its name to Mid-Peninsula Bancorp.
The merger was accounted for as a pooling of interests. All periods have been
restated to reflect the results of the combination. The accompanying
consolidated financial statements reflect the issuance of the Company's common
stock in exchange for all of MPB's common stock outstanding as of October 7,
1994, based upon the exchange ratio of 1.0617 shares of the Company's common
stock for each share of MPB's common stock.
F-9
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In both mergers, certain reclassifications have been made to conform to the
Company's presentation. The results of operations previously reported by the
separate enterprises for the period before the merger was consummated and that
are included in the current combined amounts presented in the accompanying
consolidated financial statements are summarized below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 (UNAUDITED) 1995 1994
----------------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Interest Income:
Mid-Peninsula Bancorp...................... $ 8,878 $10,402 $ 8,207
Cupertino National Bancorp................. 11,487 12,939 11,082
------- ------- -------
Combined................................... $20,365 $23,341 $19,289
------- ------- -------
Provision for Loan Losses:
Mid-Peninsula Bancorp...................... $ 427 $ 275 $ 203
Cupertino National Bancorp................. 864 681 1,620
------- ------- -------
Combined................................... $ 1,291 $ 956 $ 1,823
------- ------- -------
Net Income:
Mid-Peninsula Bancorp...................... $ 2,373 $ 2,721 $ 1,201
Cupertino National Bancorp................. 1,548 313 1,363
------- ------- -------
Combined................................... $ 3,921 $ 3,034 $ 2,564
------- ------- -------
</TABLE>
The following table sets forth the composition of the combined operations of
San Mateo County Bancorp and its wholly-owned subsidiary, WestCal National
Bank, and MPB for the nine months ended September 30, 1994 prior to the
consummation of the merger on October 7, 1994.
<TABLE>
<CAPTION>
NET INTEREST PROVISION FOR NET
INCOME LOAN LOSSES INCOME
------------ ------------- ------
(DOLLARS IN THOUSANDS) UNAUDITED
<S> <C> <C> <C>
Mid-Peninsula Bank........................... $4,657 $235 $ 867
San Mateo County Bancorp..................... 1,293 (32) 217
------ ---- ------
$5,950 $203 $1,084
====== ==== ======
</TABLE>
There were no significant transactions between Mid-Peninsula Bancorp and
Cupertino National Bancorp, and between San Mateo County Bancorp and Mid-
Peninsula Bank prior to the mergers. All intercompany transactions have been
eliminated.
F-10
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities is
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury obligations........... $ 19,841 $ 52 $ (6) $ 19,887
U.S. Agency obligations:
Mortgage-backed obligations....... 3,604 5 (53) 3,556
Fixed and variable rate notes..... 10,568 34 (13) 10,589
Mutual funds.......................... 2,000 (52) 1,948
Tax exempt securities................. 7,758 154 (11) 7,901
Corporate securities.................. 3,216 7 3,223
-------- ---- ----- --------
Total securities available-for-
sale............................. 46,987 252 (135) 47,104
-------- ---- ----- --------
Held-to-maturity securities:
U.S. Treasury obligations........... 1,005 3 1,008
U.S. Agency obligations:
Mortgage-backed obligations....... 7,086 87 (9) 7,164
Fixed and variable rate notes..... 38,390 78 (100) 38,368
Other mortgage-backed obligations..... 3,959 54 4,013
Tax exempt securities................. 6,525 219 (3) 6,741
FRB stock............................. 673 673
Federal Home Loan Bank stock.......... 778 778
-------- ---- ----- --------
Total securities held-to-
maturity......................... 58,416 441 (112) 58,745
-------- ---- ----- --------
Total investment securities....... $105,403 $693 $(247) $105,849
======== ==== ===== ========
</TABLE>
F-11
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effected net unrealized gain on available-for-sale securities was
$71,000 for the year ended December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury obligations........... $ 7,778 $ 62 $ (3) $ 7,837
U.S. Agency obligations:
Mortgage-backed obligations....... 4,131 22 (58) 4,095
Fixed and variable rate notes..... 19,431 54 (18) 19,467
Mutual funds.......................... 16,458 (929) 15,529
Tax exempt securities................. 11,662 462 (20) 12,104
Corporate securities.................. 2,990 20 3,010
-------- ------ ------- --------
Total securities available-for-
sale............................. 62,450 620 (1,028) 62,042
-------- ------ ------- --------
Held-to-maturity securities:
U.S. Treasury obligations........... 5,987 24 6,011
U.S. Agency obligations:
Mortgage-backed obligations....... 8,190 159 8,349
Fixed and variable rate notes..... 35,056 145 (19) 35,182
Other mortgage-backed obligations..... 4,195 102 4,297
FRB stock............................. 660 660
Federal Home Loan Bank stock.......... 739 739
-------- ------ ------- --------
Total securities held-to-
maturity......................... 54,827 430 (19) 55,238
-------- ------ ------- --------
Total investment securities....... $117,277 $1,050 $(1,047) $117,280
======== ====== ======= ========
</TABLE>
In November 1995, the FASB issued a special report, "A Guide to
Implementation of Statement No. 115, on Accounting for Certain Investments in
Debt and Equity Securities Questions and Answers" (the "Special Report"). The
Special Report allowed companies to reassess the appropriateness of the
classifications of all securities held and account for any resulting
reclassifications at fair value. Reclassifications from this one-time
reassessment will not call into question the intent of an enterprise to hold
other debt securities to maturity in the future, provided that
reclassification was performed by December 31, 1995. The Company adopted the
reclassification provision of the Special Report prior to December 31, 1995
and transferred $36.4 million of held-to-maturity securities into the
available-for-sale category. The unrealized pretax gain upon transfer was
$512,000 as of December 31, 1995.
F-12
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows amortized cost and estimated market value of the
Company's investment securities by year of maturity at December 31, 1996.
<TABLE>
<CAPTION>
1998 2002
THROUGH THROUGH 2007 AND
1997 2001 2007 THEREAFTER TOTAL
------- ------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury obligations... $15,003 $ 4,838 $ 19,841
U.S. Agency obligations:
Mortgage-backed
obligations(1)........... 599 3,005 3,604
Fixed and variable rate
notes(2)................. 1,500 9,068 10,568
Mutual funds(3)............... 2,000 2,000
Tax exempt securities......... 453 1,567 3,623 2,115 7,758
Corporate securities.......... 1,178 2,038 3,216
------- ------- ------ ------ --------
Total securities
available-for-sale....... 20,733 20,516 3,623 2,115 46,987
------- ------- ------ ------ --------
Market value.................. 20,708 20,524 3,672 2,200 47,104
------- ------- ------ ------ --------
Held-to-maturity securities:
U.S. Treasury obligations... 503 502 1,005
U.S. Agency obligations:
Mortgage-backed
obligations(1)........... 69 2,595 4,422 7,086
Fixed and variable rate
notes(2)................. 3,000 17,999 15,391 2,000 38,390
Other mortgage-backed
obligations(1)............... 3,959 3,959
Tax exempt securities......... 1,040 256 5,229 6,525
FRB stock..................... 673 673
Federal Home Loan Bank stock.. 778 778
------- ------- ------ ------ --------
Total securities held-to-
maturity................. 3,503 19,610 18,242 17,061 58,416
------- ------- ------ ------ --------
Market value.................. 3,493 19,549 18,369 17,334 58,745
------- ------- ------ ------ --------
Total investment securities... 24,236 40,126 21,865 19,176 105,403
------- ------- ------ ------ --------
Total market value............ 24,201 40,073 22,041 19,534 105,849
------- ------- ------ ------ --------
Weighted average yield-total
portfolio(4)................. 5.32% 6.19% 7.04% 6.77% 6.29%
======= ======= ====== ====== ========
</TABLE>
- --------
(1) Mortgage-backed securities are shown at contractual maturity; however,
the average life of these mortgage-backed securities may differ due to
principal prepayments.
(2) Certain U.S. Agency fixed and variable rate note obligations 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) Mutual funds with no stated maturity total $2.0 million ($1.9 million
market value).
(4) Yields on tax exempt securities have been computed on a fully tax-
equivalent basis.
Investment securities with a carrying value of $23.5 million and $16.5
million as of December 31, 1996 and 1995, respectively, were pledged to secure
deposits and for other purposes as required by law or contract.
The Company does not hold any investments of any one issuer where the
aggregate with that issuer exceeds 10% of stockholders' equity. Investments in
the FRB and the Federal Home Loan Bank are required in order to maintain
membership and support activity levels.
F-13
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proceeds and realized losses and gains on sales of investment securities for
the years ended December 31, 1996, 1995, and 1994 are presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sale of available-for-sale
securities.................................... $ 26,635 $ 6,734
Available-for-sale securities losses(1)........ $ (729) $ (113) $ (266)
</TABLE>
- --------
(1) Includes $466,000 of charges in 1996 to conform accounting practices,
which is included in merger and related non-recurring costs.
NOTE 4 LOANS
The following is a summary of loans by category as of December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial......................................... $ 257,042 $ 181,617
Real estate construction and land.................. 78,278 32,672
Commercial real estate term and other.............. 72,802 47,322
Consumer and other................................. 42,702 28,666
Total loans, gross................................. 450,824 290,277
Deferred loan fees and discounts................. (1,952) (1,299)
Total loans, net of deferred fees.................. 448,872 288,978
Allowance for loan losses........................ (7,312) (4,399)
Total loans, net................................. $ 441,560 $ 284,579
</TABLE>
The following summarizes the activity in the allowance for loan losses for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1................................. $4,399 $ 4,344 $ 3,657
Provision for loan losses(1)..................... 2,836 956 1,823
Loans charged off................................ (299) (1,081) (1,247)
Recoveries....................................... 376 180 111
Balance, December 31............................... $7,312 $ 4,399 $ 4,344
</TABLE>
- --------
(1) Includes $800,000 of charges in 1996 to conform accounting practices for
the Banks' reserve methodologies which is included in merger and related
costs.
The following table sets forth nonperforming loans as of December 31, 1996,
1995 and 1994. Non-performing 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 $215,000, $245,000 and
$275,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Interest income recognized on the nonperforming loans approximated $95,000,
$63,000 and $50,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. There were no restructured loans at December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans.................................... $ 1,875 $ 2,513 $ 3,668
Accruing loans past due 90 days or more............. 1,237 830 1,371
------- ------- -------
Total nonperforming loans........................... $ 3,112 $ 3,343 $ 5,039
======= ======= =======
</TABLE>
F-14
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and 1995, 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 $2.5 million, respectively, with
corresponding valuation allowances of $1.0 million and $0.5 million,
respectively. For the years ended December 31, 1996 and 1995, the average
recorded investment in impaired loans was approximately $2.2 million and $2.6
million, respectively. The Company did not recognize interest income on
impaired loans during the twelve months ended December 31, 1996 and 1995.
NOTE 5 OTHER REAL ESTATE OWNED
At December 31, 1996, other real estate owned consisted of one property
acquired through foreclosure with a carrying value of $152,000 and is included
in interest receivable and other assets in the accompanying consolidated
balance sheets. There was no allowance for estimated losses. The Company had
no other real estate owned at December 31, 1995.
The following summarizes other real estate operations, which are included in
operating expenses, for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) from:
Real estate operations, net................... $ (35) $ (45) $ (70)
Provision for estimated losses................ (17) (42)
Net loss from other real estate operations.... $ (35) $ (62) $ (112)
</TABLE>
NOTE 6 PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995 are comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Leasehold improvements............................. $ 2,774 $ 1,613
Furniture and equipment............................ 6,510 4,988
Automobiles........................................ 134 157
----------- -----------
Total............................................ 9,418 6,758
----------- -----------
Accumulated depreciation and amortization.......... (4,730) (3,846)
----------- -----------
Premises and equipment, net...................... $ 4,688 $ 2,912
=========== ===========
</TABLE>
Depreciation and amortization amounted to $1,125,000, $899,000 and $777,000
for the years ended December 31, 1996, 1995 and 1994, respectively, and have
been included in occupancy and equipment expense in the accompanying
consolidated statements of operations.
F-15
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7 DEPOSITS
Deposits as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Demand, noninterest-bearing............................... $139,940 $ 96,063
NOW....................................................... 26,936 22,084
Money market demand accounts.............................. 271,749 211,654
Savings................................................... 13,599 12,486
Other time certificates................................... 38,889 25,716
Time certificates, $100 and over.......................... 68,170 63,786
-------- --------
Total Deposits.......................................... $559,283 $431,789
======== ========
</TABLE>
NOTE 8 OTHER BORROWINGS
Short-term borrowings are detailed as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased
Balance at December 31......................... $12,000 $ $ 7,000
Average balance................................ 669 1,120 1,800
Maximum amount outstanding at any month-end.... 12,000 5,600 12,000
Average interest rate:
During the year.............................. 5.42% 5.96% 4.18%
At December 31............................... 6.63% 6.50%
Securities sold under agreements to repurchase
Balance at December 31......................... $ $ $10,256
Average balance................................ 1,556 11,486 5,908
Maximum amount outstanding at any month-end.... 14,994 26,994 24,153
Average interest rate:
During the year.............................. 5.74% 6.12% 5.13%
At December 31............................... 6.29%
</TABLE>
Federal funds purchased generally mature the following day after the
purchase while securities sold under agreements to repurchase generally mature
within 30 days from the various dates of sale.
In 1995, the Company consummated a private offering of $3.0 million of 11.5%
subordinated notes. The notes, which will mature on September 15, 2005, were
offered to members of the Board of Directors, bank officers and other
accredited investors within the definition of Rule 501 under the Securities
Act of 1933, as amended. The debentures 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 of the Company.
F-16
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9 INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal......................................... $ 3,308 $ 1,227 $ 1,425
State........................................... 764 563 466
Total current expense (benefit)................. 4,072 1,790 1,891
------- ------- -------
Deferred:
Federal......................................... (966) 221 71
State........................................... (179) (40) 4
Total deferred expense (benefit)................ (1,145) 181 75
------- ------- -------
Total expense..................................... $ 2,927 $ 1,971 $ 1,966
======= ======= =======
</TABLE>
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. Significant components
of the Company's deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loan loss reserves................................ $ 2,145 $ 1,278
Deferred compensation............................. 102 92
State income taxes................................ 653 339
Unrealized gains.................................. (35) (214)
Other............................................. (118) (72)
Net deferred tax asset............................ $ 2,747 $ 1,423
</TABLE>
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31, 1996, 1995
and 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal tax rate................... 35.0% 35.0% 35.0%
California franchise tax expense, net of
federal income tax benefit.................. 7.6 6.9 5.7
Tax exempt income............................ (4.9) (3.2) (3.3)
Non-deductible merger and restructuring
costs....................................... 3.9 0 3.8
Other, net................................... 3.9 0.7 (4.8)
-------- -------- --------
Effective income tax rate.................... 45.5% 39.4% 36.4%
======== ======== ========
</TABLE>
F-17
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10 OPERATING EXPENSES
Other operating expenses were comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Professional and legal fees...................... $ 1,270 $ 2,968 $ 1,176
FDIC insurance and regulatory assessments........ 102 551 858
Other real estate, net........................... 35 62 112
Supplies and postage............................. 592 356 269
Telephone........................................ 232 213 198
Director fees.................................... 227 207 236
Insurance........................................ 105 205 194
Correspondent bank charges....................... 43 158 118
Marketing........................................ 859 289 118
Client services.................................. 411 337 376
Other............................................ 2,047 1,515 1,197
-------- -------- --------
Total............................................ $ 5,923 $ 6,861 $ 4,852
======== ======== ========
</TABLE>
Merger and other related non-recurring costs incurred in connection with the
merger consummated in November 1996 (see Note 2) totaling $2.8 million include
$1.1 million of professional fees related to the transaction, $1.2 million of
charges to conform accounting practices of the two merged entities, with the
balance related to severance and compensation costs.
NOTE 11 EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
Effective November 27, 1996, the Company's shareholders approved the Greater
Bay Bancorp 1996 Stock Option Plan (the "Bancorp Plan") and authorized an
increase in the number of shares available for issuance from 457,037 to
967,890 shares. 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 216,326 and outstanding options from the Cupertino National Bancorp plan of
251,073 (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 stock options 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.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123. "Accounting for Stock-Based Compensation." 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 earnings per share effects based on the SFAS No. 123 fair value
F-18
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
methodology. The Company implemented the requirements of SFAS No. 123 in 1996
and has elected to adopt the disclosure provisions of this statement.
At December 31, 1996, the Company had one stock option plan, which is
described above. The Company applies Accounting Pronouncements Bulletin (APB)
Opinion No. 25 and related interpretations in accounting for its 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 and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net Income:
As reported....................................... $ 3,503 $ 3,034
Pro Forma......................................... $ 3,351 $ 2,979
Primary earnings per share
As reported....................................... $ 1.04 $ 0.96
Pro Forma......................................... $ 1.00 $ 0.94
</TABLE>
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 1996 and 1995, respectively; dividend yield
of 2.0% for all years; expected volatility of 19.3% for both years; risk free
rates of 6.0% and 6.9%. 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 fixed stock option plan as of December 31, 1996,
1995, and 1994 and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
SHARES EXERCISE SHARES EXERCISE SHARES AVERAGE
(000) PRICE (000) PRICE (000) EXERCISE PRICE
------ -------- ------ -------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 558 $10.78 542 $ 9.55 463 $ 8.04
Granted................. 183 19.27 175 12.65 252 13.03
Exercised............... (184) 7.78 (124) 8.49 (133) 8.14
Forfeited............... (8) 8.58 (35) 10.30 (40) 8.98
---- ------ ---- ------ ---- ------
Outstanding at end of
year................... 549 $13.14 558 $10.78 542 $ 9.55
Options exercisable at
year-end............... 284 $12.90 365 $ 9.30 378 $ 9.94
---- ------ ---- ------ ---- ------
Weighted average fair
value of options
granted during the
year................... $ 4.20 $ 2.48 NA
====== ====== ======
</TABLE>
All stock option information has been adjusted for stock dividends in 1995
and 1994.
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 employee contributions at a
rate set by the Board of Directors (currently 62.5% of the first 8% of
deferral of an individual's
F-19
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
total compensation). The matching contribution vests ratably over the first
four years of employment. The Company contributed $282,000 to the plan in
1996, $212,000 in 1995, and $153,200 in 1994.
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 133,934 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 1996, employees
purchased 10,633 shares of common stock for an aggregate purchase price of
$136,500 compared to the purchase of 8,536 shares of common stock for an
aggregate purchase price of $80,400 in 1995. There are 82,318 shares remaining
in the plan available for purchase by employees at December 31, 1996.
SALARY COMPENSATION PLAN
During 1993 and 1995, the Company entered into salary continuation
agreements with certain executive officers. Under these agreements, the
Company is generally obligated to provide for each such employee or their
beneficiaries, during a period of up to 40 years after the employee's death,
disability or retirement, annual benefits ranging from $36,000 to $85,000. 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, 1996, 1995 and 1994 totaled $310,000, $173,000, and
$72,000, respectively. Depending on the agreement, the Company and the
employees are the beneficiaries of life insurance policies that have been
purchased as a method of financing the benefits under the agreements. At
December 31, 1996 and 1995, the Company's cash surrender value of these
policies was $8.9 million and $8.3 million, respectively, and is included in
other assets.
NOTE 12 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, 1996 and 1995 is shown as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, January 1................................. $ 9,873 $ 7,788
Additions.......................................... 1,346 4,694
Repayments......................................... (3,671) (2,609)
Balance, December 31............................... $ 7,548 $ 9,873
=========== ===========
Undisbursed commitments, at year end............... $ 1,866 $ 432
=========== ===========
</TABLE>
F-20
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13 COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS
The Company leases the facilities from which it operates all of its
activities. The main headquarters of MPB in Palo Alto is leased from a group
of investors, which includes three of the Company's directors. Future minimum
lease commitments under all non-cancelable operating leases as of December 31,
1996 are below:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1997............................................. $ 2,146
1998............................................. 2,154
1999............................................. 2,068
2000............................................. 1,482
2001............................................. 1,457
Thereafter....................................... 2,505
-------
Total............................................ $11,812
=======
</TABLE>
The Company subleases that portion of the available space that is not
utilized. Sublease rental income for the years ended December 31, 1996, 1995,
and 1994 was $309,000, $398,000, and $447,000, respectively. Gross rental
expense for the years ended December 31, 1996, 1995, and 1994 was $1.69
million, $1.43 million, and $1.26 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. At December 31, 1996, commitments to fund loans and outstanding
standby letters of credit were approximately $202.8 million and $16.9 million,
respectively. The Company's exposure to credit loss is limited to amounts
funded or drawn; however, at December 31, 1996, 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 $60.0 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 relate 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. Cupertino National Bank and
Mid-Peninsula Bank 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 relating 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. Virtually all such commitments are collateralized.
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.
F-21
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In July 1995, the Company settled a lawsuit for $1.1 million (net of tax)
which alleged that the Company did not perform its fiduciary duties and, as a
result, the plaintiff incurred losses on real estate investments that were
purchased. The Company believes that insurance coverage for this settlement is
available to the Company under various insurance policies and the Company is
currently in the process of pursuing recovery under these policies. However,
due to the uncertainty associated with the recovery, the Company reflected the
settlement expense in 1995 earnings.
NOTE 14 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 Bank to maintain minimum capital amounts and ratios (as defined in
the regulations) and are set forth in the table below. At December 31, 1996,
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from all of the
Company's and the Banks' 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 Banks' actual 1996 and 1995 capital amounts and
ratios are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk
Weighted Assets):
Greater Bay Bancorp.... $53,638 10.54% > $40,720 > 8.00% N/A
Mid-Peninsula Bank..... 25,415 11.07 > 18,359 > 8.00 > $22,949 > 10.00%
Cupertino National Bank
and Trust............. 28,022 10.03 > 22,346 > 8.00 > 27,932 > 10.00
Tier 1 Capital (To Risk
Weighted Assets):
Greater Bay Bancorp.... $44,530 8.75% > $20,360 > 4.00% N/A
Mid-Peninsula Bank..... 22,810 9.94 > 9,179 > 4.00 > $13,769 > 6.00%
Cupertino National Bank
and Trust............. 21,515 7.70 > 11,173 > 4.00 > 16,759 > 6.00
Tier 1 Capital (To
Average Assets):
Greater Bay Bancorp.... $44,530 7.27% > $24,496 > 4.00% N/A
Mid-Peninsula Bank..... 22,810 8.23 > 8,312 > 3.00 > $13,853 > 5.00%
Cupertino National Bank
and Trust............. 21,515 6.42 > 13,412 > 4.00 > 16,765 > 5.00
</TABLE>
>= Greater than or equal to.
- -
F-22
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
----------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk
Weighted Assets):
Greater Bay Bancorp.... $47,369 13.43% > 28,208 > 8.00% N/A
Mid-Peninsula Bank..... 22,280 14.90 > 11,959 > 8.00 > $14,949 > 10.00%
Cupertino National Bank
and Trust............. 23,088 11.35 > 16,267 > 8.00 > 20,334 > 10.00
Tier 1 Capital (To Risk
Weighted Assets):
Greater Bay Bancorp.... $40,112 11.38% > $14,104 > 4.00% N/A
Mid-Peninsula Bank..... 20,564 13.76 > 5,979 > 4.00 > $8,969 > 6.00%
Cupertino National Bank
and Trust............. 17,546 8.62 > 8,134 > 4.00 > 12,201 > 6.00
Tier 1 Capital (To
Average Assets):
Greater Bay Bancorp.... $40,112 8.69% > $18,464 > 4.00% N/A
Mid-Peninsula Bank..... 20,564 9.31 > 6,628 > 3.00 > 11,046 > 5.00%
Cupertino National Bank
and Trust............. 17,546 7.32 > 9,591 > 4.00 > 11,989 > 5.00
</TABLE>
>= Greater than or equal to.
_
NOTE 15 RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
One of the principal sources of cash for the Company is dividends from its
subsidiary Banks. 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.
Under these restrictions and considering minimum regulatory capital
requirements, the Banks are able to declare combined dividends of up to
approximately $6.3 million as of December 31, 1996.
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 the Company unless the
loans are secured by specified types of collateral. Such secured loans and
other advances from the Banks are limited to 10% of the Banks' shareholders'
equity, or a maximum of $4.4 million at December 31, 1996. No such advances
were made during 1996 or exist as of December 31, 1996.
F-23
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16 PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The financial statements of Greater Bay Bancorp (parent company only) follow:
PARENT COMPANY ONLY BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash
equivalents.............................. $ 567 $ 1,848
Investment in
subsidiaries............................. 44,475 38,214
Subordinated debentures
purchased by
subsidiary............................... 3,000 3,000
Other assets.............................. 69 209
----------- -----------
Total assets................................ $ 48,111 $ 43,271
=========== ===========
Liabilities and
shareholders' equity:
Subordinated debt......................... 3,000 3,000
Other liabilities......................... 429 159
----------- -----------
Total liabilities........................... 3,429 3,159
Shareholders' equity
Common stock.............................. 34,884 33,105
Unrealized gain (loss).................... 71 (621)
Retained earnings......................... 9,727 7,628
----------- -----------
Total shareholders'
equity..................................... 44,682 40,112
----------- -----------
Total liabilities and
shareholders' equity....................... $ 48,111 $ 43,271
=========== ===========
</TABLE>
PARENT COMPANY ONLY STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income:
Interest income............................ $ 531 $ 61 $ 24
Other income............................... 142 631 949
-------- -------- --------
Total........................................ 673 692 973
-------- -------- --------
Expenses:
Occupancy and equipment.................... 460 441 410
Less rentals received from the Banks....... (460) (441) (409)
Other expenses............................... 1,436 75 689
-------- -------- --------
Total........................................ 1,436 75 690
-------- -------- --------
Income before taxes and equity in
undistributed net income of subsidiaries.... (763) 617 283
Income tax expense........................... 20
-------- -------- --------
Income (loss) before equity in undistributed
net income of subsidiaries.................. (783) 617 283
Equity in undistributed net income of
subsidiaries................................ 4,286 2,417 2,281
-------- -------- --------
Net income................................... $ 3,503 $ 3,034 $ 2,564
======== ======== ========
</TABLE>
F-24
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows operating activities:
Net income.................................. $ 3,503 $ 3,034 $ 2,564
Reconciliation of net income to net cash
from operations:
Equity in undistributed net income of
subsidiaries.............................. (4,286) (2,417) (2,281)
Net change in other assets................. (140) 28 (205)
Net change in other liabilities............ 270 25 91
-------- -------- --------
Operating cash flows, net.................... (653) 670 169
-------- -------- --------
Cash flows investing activities:
Principal repayment of loans receivable..... 150
Purchase of subordinated debentures from
CNB........................................ (3,000)
Capital contribution to the subsidiaries.... (1,003) (402) (415)
-------- -------- --------
Investing cash flows, net.................... (1,003) (3,252) (415)
-------- -------- --------
Cash flows financing activities:
Proceeds from issuance of subordinated
debt....................................... 3,000
Proceeds from exercise of stock options and
employee stock purchases................... 1,779 1,127 1,028
Cash paid in lieu of fractional shares on
stock dividends............................ (3) (4)
Payment of cash dividends.................... (1,404) (942) (491)
-------- -------- --------
Financing cash flows, net.................... 375 3,182 533
-------- -------- --------
Net increase in cash and cash equivalents.... (1,281) 600 287
Cash and cash equivalents at the beginning of
the year.................................... 1,848 1,248 961
-------- -------- --------
Cash and cash equivalents at the end of the
year........................................ $ 567 $ 1,848 $ 1,248
======== ======== ========
</TABLE>
F-25
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............. $ 53,896 $ 53,896 $ 58,111 $ 58,111
Investment securities................. 105,520 105,849 116,869 117,280
Loans, net............................ 441,560 445,718 284,579 286,090
Financial liabilities:
Deposits:
Demand, noninterest-bearing........... $139,940 $139,940 $ 96,063 $ 96,063
NOW................................... 26,936 26,936 22,084 22,084
Money market demand accounts.......... 271,749 271,749 211,654 211,654
Savings............................... 13,599 13,599 12,486 12,486
Other time certificates............... 38,889 39,104 25,716 25,789
Time certificates, $100 and over...... 68,170 68,227 63,786 64,032
-------- -------- -------- --------
Total deposits........................ $559,283 $559,555 $431,789 $432,108
-------- -------- -------- --------
Subordinated debt....................... $ 3,000 $ 3,000 $ 3,000 $ 3,000
Short term borrowings................... $ 12,000 $ 12,000
</TABLE>
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
F-26
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the loan. The estimate of maturity is based on the Company's historical
experience with repayments for each loan classifications, 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.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTER OF CREDIT
The majority of the Company's commitments to extend credit carry current
market interest rates 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 conditions, 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 a significant
effect on fair value estimates and have not been considered in many of the
estimates.
F-27
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31
------------- -------------- -------------- ---------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------- ------ ------- ------ ------- ------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $9,964 $8,657 $10,367 $9,312 $11,577 $9,448 $13,129 $9,816
Net interest income..... 6,292 5,452 6,680 5,768 7,393 5,926 8,459 6,195
Provision for loan
losses................. 320 506 365 165 606 145 745 140
Noninterest income...... 811 587 904 554 872 602 943 563
Noninterest expense..... 4,691 4,349 5,072 6,151 5,328 4,544 8,797 4,642
Income before taxes..... 2,092 1,184 2,147 6 2,331 1,839 (140) 1,976
Net income.............. 1,250 730 1,308 23 1,363 1,098 (418) 1,183
Net income per share.... $ 0.35 $ 0.22 $ 0.36 $ 0.01 $ 0.37 $ 0.32 $ (0.13) $ 0.37
</TABLE>
----------------
F-28
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks............................... $ 33,428 $ 39,896
Federal funds sold.................................... 42,200 14,000
-------- --------
Cash and cash equivalents........................... 75,628 53,896
Investment securities:
Held to maturity (Market value $48,072 at June 30,
1997; $57,294 at December 31, 1996)................ 47,111 56,965
Available for sale (Amortized cost $53,977 at June
30, 1997; $46,987 at December 31, 1996)............ 54,169 47,104
Other securities.................................... 2,115 1,451
-------- --------
Total investment securities....................... 103,395 105,520
Loans:
Commercial.......................................... 282,159 257,042
Real estate-construction............................ 100,422 78,278
Real estate-other................................... 99,509 72,802
Consumer and other.................................. 44,908 42,702
Deferred loan fees and discounts.................... (2,257) (1,952)
-------- --------
Total Loans......................................... 524,741 448,872
Allowance for loan losses........................... (10,895) (7,312)
-------- --------
Net Loans........................................... 513,846 441,560
Premises and equipment, net........................... 4,799 4,688
Accrued interest receivable and other assets.......... 21,383 16,380
-------- --------
TOTAL ASSETS.......................................... $719,051 $622,044
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, non interest-bearing........................ $135,797 $139,940
NOW................................................. 31,272 26,936
Money Market Demand Accounts........................ 287,427 271,749
Savings............................................. 46,997 13,599
Other time certificates............................. 36,110 38,889
Time certificates, $100 and over.................... 102,134 68,170
-------- --------
Total deposits.................................... 639,737 559,283
Accrued interest payable and other liabilities........ 7,818 15,079
Subordinated debentures............................... 3,000 3,000
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures.............................. 20,000 --
-------- --------
TOTAL LIABILITIES..................................... 670,555 577,362
Shareholders' equity:
Preferred stock, no par value: 4,000,000 shares
authorized; none issued............................ -- --
Common stock, no par value: 6,000,000 shares
authorized; shares outstanding: 3,328,450 at June
30, 1997 and 3,238,887 at December 31, 1996........ 35,957 34,884
Unrealized gain on available-for-sale securities,
net of taxes....................................... 112 71
Retained earnings................................... 12,427 9,727
-------- --------
Total shareholders' equity............................ 48,496 44,682
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $719,051 $622,044
======== ========
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans........... $13,051 $8,318 $24,304 $16,253
Interest on investment
securities:
Taxable..................... 1,425 1,336 2,709 2,836
Non-taxable................. 197 138 385 294
------- ------ ------- -------
Total investment
securities................. 1,622 1,474 3,094 3,130
Other interest income....... 714 575 1,070 948
------- ------ ------- -------
Total interest income..... 15,387 10,367 28,468 20,331
INTEREST EXPENSE:
Interest on deposits........ 5,322 3,600 9,846 7,168
Other interest expense...... 764 87 1,056 191
------- ------ ------- -------
Total interest expense.... 6,086 3,687 10,902 7,359
------- ------ ------- -------
Net interest income....... 9,301 6,680 17,566 12,972
Provision for loan losses..... 2,130 365 4,078 685
------- ------ ------- -------
Net interest income after
provision for loan losses.... 7,171 6,315 13,488 12,287
OTHER INCOME:
Trust fees.................. 481 344 935 653
Gain on sale of SBA loans... 181 123 339 253
Depositor service fees...... 180 277 443 506
Other loan fees............. 16 34 22 49
Investment gains (losses)... 2 (110) (49) (97)
Other....................... 254 236 385 351
------- ------ ------- -------
Sub-total other income.... 1,114 904 2,075 1,715
Warrant income................ 1,115 -- 1,115 --
------- ------ ------- -------
Total other income........ 2,229 904 3,190 1,715
OPERATING EXPENSES:
Compensation and benefits... 3,632 2,976 7,329 5,630
Occupancy and equipment..... 1,040 777 2,102 1,534
Professional services....... 362 334 712 606
Marketing................... 232 187 464 349
Client services............. 72 95 154 215
FDIC insurance and
regulatory assessments..... 60 27 101 54
Data Processing............. 53 65 118 146
Other real estate, net...... 3 6 5 30
Other....................... 815 605 1,421 1,199
------- ------ ------- -------
Sub-total operating
expenses................. 6,269 5,072 12,406 9,763
Legal settlement recovery..... -- -- (1,700)
------- ------ ------- -------
Total operating expenses.. 6,269 5,072 10,706 9,763
------- ------ ------- -------
Income before income tax
expense...................... 3,131 2,147 5,972 4,239
Income tax expense.......... 1,180 839 2,282 1,681
------- ------ ------- -------
Net income.................... $ 1,951 $1,308 $ 3,690 $ 2,558
======= ====== ======= =======
Net income per common and
common equivalent share...... $ 0.55 $ 0.40 $ 1.05 $ 0.78
======= ====== ======= =======
</TABLE>
See notes to consolidated financial statement.
F-30
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
----------- -----------
UNAUDITED UNAUDITED
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................... $ 3,690 $ 2,558
Reconciliation of net income to net cash from
operations:
Provision for loan losses........................ 4,078 685
Depreciation and amortization.................... 429 416
Accrued interest receivable and other assets..... (3,224) (1,462)
Accrued interest payable and other liabilities... 4,739 (180)
Net change in deferred loan fees................. 350 70
Stock dividends on other securities.............. (24) (48)
Accrued deferred income taxes.................... (1,639) (148)
Loss on sale of securities....................... 49 97
----------- -----------
Cash provided by operating activities.......... 8,448 1,988
INVESTING ACTIVITIES:
Maturities and principle reductions on investment
securities:
Held-to-maturity................................. 12,379 8,293
Available-for-sale............................... 25,009 18,570
Purchase of investment securities:
Held-to-maturity................................. (2,472) (4,534)
Available-for-sale............................... (34,554) (11,366)
Net change in loans................................ (76,887) (44,858)
Sale of available-for-sale securities.............. 1,948 5,490
Purchase of life insurance policies................ -- (297)
Purchase of premises and equipment, net............ (676) (1,894)
----------- -----------
Cash used in investing activities................ (75,253) (30,596)
FINANCING ACTIVITIES:
Net change in deposits............................. 80,454 45,571
Net change in short-term borrowings................ (12,000) --
Proceeds from issuance of Trust Preferred
Securities........................................ 20,000 --
Stock purchased by employees and stock options
exercised......................................... 1,077 1,596
Cash dividends..................................... (994) (827)
----------- -----------
Cash provided by financing activities............ 88,537 46,340
----------- -----------
Net increase in cash and cash equivalents............ 21,732 17,732
Cash and cash equivalents at beginning of period..... 53,896 58,111
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 75,628 $ 75,843
=========== ===========
CASH FLOWS--SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest on deposits and other borrowings........ $ 5,621 $ 7,612
Income taxes..................................... 3,300 1,630
Non-cash transactions:
Additions to other real estate owned............. 173 217
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
GREATER BAY BANCORP SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
Greater Bay Bancorp (referred to as the "Company" when such reference
includes Greater Bay Bancorp and its subsidiaries, collectively, or "Greater
Bay" when referring only to the parent company) 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 San Mateo County Bancorp and Mid-
Peninsula Bancorp. Subsequently, the name was changed to Greater Bay Bancorp
on November 27, 1996, as a result of the merger between Mid-Peninsula Bancorp
and Cupertino National Bancorp. Upon consummation of the merger with Cupertino
National Bancorp, the Company became a multi-bank holding company with wholly
owned bank subsidiaries, Mid-Peninsula Bank ("MPB") and Cupertino National
Bank & Trust ("CNB"), collectively the "Banks". MPB commenced operations in
October 1987 and is a state chartered bank regulated by the Federal Reserve
Bank (FRB) and the California State Banking Department. CNB commenced
operations in May 1985 and is a national banking association regulated by the
Office of the Comptroller of Currency (OCC). The mergers were accounted for as
a pooling of interests. Accordingly, all of the financial information for the
Company for the periods prior to the merger have been restated to reflect the
pooling of interests as if it occurred at the beginning of the earliest
reporting period presented. The accompanying unaudited consolidated financial
statements include the accounts of the Company. These financial statements
reflect, in management's opinion, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position and the results of its operations and cash flows for the
periods presented. Certain amounts for prior periods have been reclassified to
conform to current period presentation. The results of operations for the
quarter and year-to-date periods ended June 30, 1997 are not necessarily
indicative of the results expected for any subsequent quarter or for the
entire year ending December 31, 1997. These financial statements should be
read in conjunction with the financial statements included in the 1996 Annual
Report to Shareholders.
2. CONSOLIDATION AND BASIS OF PRESENTATION
The consolidation financial statements include the accounts of GBB and its
wholly-owned subsidiaries, CNB and MPB. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior years' consolidation financial statements to conform to the
1996 presentation. The accounting and reporting policies of the Company
conform to generally accepted accounting principles and to prevailing
practices within the banking industry.
3. 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
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.
4. COMPANY OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF GBB CAPITAL
I
On March 30, 1997, GBB Capital I (the "Trust"), a Delaware business trust
wholly-owned by Greater Bay completed a public offering of 800,000 shares of
9.75% cumulative trust preferred securities ("TPS"). The Trust used the
proceeds from the offering to purchase a like amount of 9.75% Junior
Subordinated Deferrable Interest Debentures (the "Debentures") of Greater Bay.
The Debentures are the sole assets of the Trust and are eliminated along with
the related income statement effects, in the consolidated financial
statements. Greater Bay
F-32
<PAGE>
GREATER BAY BANCORP SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
invested approximately 58.5% of the proceeds in CNB and MPB to increase their
capital levels to support future growth. The remaining proceeds will be used
for general corporate purposes.
The TPS accrue and pay distributions quarterly at an annual rate of 9.75% of
the liquidation amount of $25 per TPS share. Greater Bay has fully and
unconditionally guaranteed all of the obligations of the Trust.
The TPS are mandatory redeemable, in whole or in part, upon repayment of the
Debentures at the stated maturity or their earlier redemption. The Debentures
are redeemable prior to maturity (April 1, 2027) at the option of Greater Bay,
on or after April, 2002, in whole at any time or in part from time to time.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations-Capital Resources" for discussion of Tier I Capital.
5. SHARE AND PER SHARE AMOUNTS
Earnings per common and common equivalent shares are calculated based upon
the weighted average number of shares outstanding during the period, plus
equivalent shares representing the effect of dilutive stock options. The
number of shares used to compute earnings per share were 3,555,992 and
3,262,295 for the three months ended June 30, 1997 and 1996, respectively. The
number of shares used to compute earnings per share were 3,526,140 and
3,267,000 for the six months ended June 30, 1997 and 1996, respectively.
Earnings per share are based on the weighted average shares of common stock
outstanding plus common equivalent shares using the treasury stock method. The
treasury stock method calculation assumes all dilutive common stock equivalent
are exercised and the funds generated by the exercise are used to buy back
outstanding common stock at the average market price during the reporting
period, for primary earnings per share, or at the end of period market price
if higher, for fully diluted earnings per share.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earning Per Share" ("SFAS 128").
SFAS 128 is designed to improve the earnings per share ("EPS") information
provided in the financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing the
comparability of EPS data on an international basis. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Earlier application is not permitted. The Company
will implement SFAS 128 in its December 31, 1997 financial statements. The
Company believes the impact of SFAS 128 will not have a material effect on its
earnings per share calculation.
6. CASH DIVIDEND
The Company paid a quarterly cash dividend of $.15 per share on April 21,
1997 to shareholders of record on April 7, 1997 and a quarterly cash dividend
of $.15 per share on July 15, 1997 to shareholders of record on June 30, 1997.
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS--PBC
To the Shareholders and the Board of Directors of Peninsula Bank of Commerce
and Subsidiary:
We have audited the accompanying consolidated statements of condition of
Peninsula Bank of Commerce (the Bank) and Subsidiary as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. These financial statements are the responsibility of the
Peninsula Bank of Commerce management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Peninsula Bank of Commerce
and Subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
San Francisco, California
October 2, 1997
F-34
<PAGE>
PENINSULA BANK OF COMMERCE
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks.............................. $ 5,552,006 $ 5,771,860
Federal funds sold................................... 13,100,000 9,800,000
Short term agency securities......................... 96,332,635 --
------------ -----------
Cash and cash equivalents.......................... 114,984,641 15,571,860
------------ -----------
Investment securities:
Held-to-maturity..................................... 6,210,549 6,447,892
Available-for-sale................................... 15,301,858 13,291,712
------------ -----------
Total investment securities........................ 21,512,407 19,739,604
------------ -----------
Loans, net........................................... 64,185,198 58,805,088
Premises and equipment, net.......................... 1,801,004 1,943,657
Other real estate owned.............................. -- 1,000,000
Interest receivable and other assets................. 1,837,380 1,694,282
------------ -----------
Total assets....................................... $204,320,630 $98,754,491
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand............................................. $ 21,543,048 $19,207,186
Interest-bearing demand............................ 131,939,061 31,761,303
Savings............................................ 5,492,003 5,735,258
Time............................................... 29,560,431 27,360,758
------------ -----------
Total deposits..................................... 188,534,543 84,064,505
------------ -----------
Interest payable and other liabilities............... 2,512,919 2,418,614
------------ -----------
Total liabilities.................................. 191,047,462 86,483,119
------------ -----------
Common stock, no par value; 2,000,000 shares
authorized; 670,924 and 658,928 shares issued and
outstanding in 1996 and 1995, respectively.......... 7,141,148 7,003,592
Net unrealized gain (loss) on available-for-sale
securities.......................................... (53,078) 11,836
Retained earnings.................................... 6,185,098 5,255,944
------------ -----------
Total shareholders' equity......................... 13,273,168 12,271,372
------------ -----------
Total liabilities and shareholders' equity....... $204,320,630 $98,754,491
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
PENINSULA BANK OF COMMERCE
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans.................. $6,669,950 $7,119,654 $5,981,985
Interest on federal funds sold.............. 585,020 418,668 341,091
Interest on investment securities:
U.S. Treasury securities.................. 150,676 258,985 351,622
U.S. government and agency securities..... 1,355,464 574,812 358,757
Obligations of states and political
subdivisions............................. 299,745 231,553 178,892
---------- ---------- ----------
Total interest income................... 9,060,855 8,603,672 7,212,347
---------- ---------- ----------
Interest expense:
Interest on interest-bearing transaction
accounts................................... 1,264,285 913,808 853,415
Interest on savings deposits................ 113,013 114,899 128,655
Interest on time deposits................... 1,534,869 1,418,310 702,623
---------- ---------- ----------
Total interest expense.................. 2,912,167 2,447,017 1,684,693
---------- ---------- ----------
Net interest income..................... 6,148,688 6,156,655 5,527,654
Provision for loan losses..................... 120,000 204,000 120,000
---------- ---------- ----------
Net interest income after provision for
loan losses............................ 6,028,688 5,952,655 5,407,654
---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts......... 248,217 253,126 287,013
Rental income and other..................... 171,909 222,897 172,773
---------- ---------- ----------
Total noninterest income................ 420,126 476,023 459,786
---------- ---------- ----------
Noninterest expense:
Salaries and related benefits............... 2,254,146 2,180,534 2,039,462
Occupancy and equipment..................... 473,563 489,310 573,191
Other....................................... 840,754 930,531 1,063,550
---------- ---------- ----------
Total noninterest expense................. 3,568,463 3,600,375 3,676,203
---------- ---------- ----------
Income before income taxes................ 2,880,351 2,828,303 2,191,237
Provision for income taxes.................... 1,045,450 1,046,379 824,750
---------- ---------- ----------
Net income................................ $1,834,901 $1,781,924 $1,366,487
========== ========== ==========
Earnings per share............................ $ 2.65 $ 2.70 $ 2.14
========== ========== ==========
Weighted-average shares outstanding........... 692,091 659,532 639,535
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
PENINSULA BANK OF COMMERCE
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK GAIN (LOSS) ON
------------------ AVAILABLE-FOR- RETAINED
SHARES AMOUNT SALE SECURITIES EARNINGS TOTAL
------- ---------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1994................... 629,197 $6,687,553 $3,628,470 $10,316,023
Net income.............. 1,366,487 1,366,487
Effect of change in
accounting for
investment securities.. $ 72,190 72,190
Cash dividends
declared............... (631,384) (631,384)
Stock options
exercised.............. 2,287 22,870 22,870
Change in unrealized,
net of tax............. (356,125) (356,125)
------- ---------- --------- ---------- -----------
Balance, December 31,
1994................... 631,484 6,710,423 (283,935) 4,363,573 10,790,061
Change in unrealized
gain (loss), net of
tax.................... 295,771 295,771
Net income.............. 1,781,924 1,781,924
Cash dividends
declared............... (889,553) (889,553)
Stock options
exercised.............. 27,444 293,169 293,169
------- ---------- --------- ---------- -----------
Balance, December 31,
1995................... 658,928 7,003,592 11,836 5,255,944 12,271,372
Change in unrealized
gain (loss), net of
tax.................... (64,914) (64,914)
Net income.............. 1,834,901 1,834,901
Cash dividends
declared............... (905,747) (905,747)
Stock options
exercised.............. 11,996 137,556 137,556
------- ---------- --------- ---------- -----------
Balance, December 31,
1996................... 670,924 $7,141,148 $ (53,078) $6,185,098 $13,273,168
======= ========== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
PENINSULA BANK OF COMMERCE
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................... $ 1,834,901 $ 1,781,924 $ 1,366,487
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred income taxes............... (237,000) 96,287 (180,010)
Loss on sale of other real estate
owned.............................. -- -- 8,100
Depreciation and amortization....... 214,554 218,699 249,891
Provision for loan losses........... 120,000 204,000 120,000
Accretion and amortization of (dis-
counts) premiums, net.............. (509,847) 12,106 --
Change in assets and liabilities:
Net change in interest payable and
other liabilities................ 94,902 175,475 239,700
Net change in interest receivable
and other assets................. 78,111 (207,054) (126,485)
------------ ----------- ------------
Net cash provided by operating
activities..................... 1,595,621 2,281,437 1,677,683
------------ ----------- ------------
Cash flows from investing activities:
Net change in loans................. (5,766,319) 469,503 (2,512,258)
Purchase of investment securities--
available-for-sale................. (6,033,563 (6,779,688) (10,248,652)
Proceeds from maturities of
investment securities--available-
for-sale........................... 4,500,000 9,800,000 6,500,000
Purchase of investment securities--
held-to-maturity................... (815,307) (3,368,301) (1,634,088)
Proceeds from maturities of
investment securities--held-to-
maturity........................... 1,020,000 810,000 686,092
Purchase of premises and equipment.. (71,901) (188,521) (89,976)
Proceeds from sales of other real
estate owned....................... 1,266,209 -- 32,054
------------ ----------- ------------
Net cash (used in) provided by
investing activities............. (5,900,881) 742,993 (7,266,828)
------------ ----------- ------------
Cash flows from financing activities:
Net change in deposits.............. 104,470,038 6,891,553 (5,684,505)
Payment of dividends................ (889,553) (631,384) (314,599)
Exercise of stock options........... 137,556 293,169 22,870
------------ ----------- ------------
Net cash provided by financing ac-
tivities......................... 103,718,041 6,553,338 (5,976,234)
------------ ----------- ------------
Net change in cash and cash equiv-
alents........................... 99,412,781 9,577,768 (11,565,379)
Cash and cash equivalents at beginning
of year.............................. 15,571,860 5,994,092 17,559,491
------------ ----------- ------------
Cash and cash equivalents at end of
year................................. $114,984,641 $15,571,860 $ 5,994,092
============ =========== ============
Supplemental schedule of cash flow in-
formation:
Interest paid....................... $ 2,882,441 $ 2,278,647 $ 1,667,289
============ =========== ============
Income taxes paid, net of refunds... $ 1,216,644 $ 933,510 $ 1,004,760
============ =========== ============
Loans converted to other real estate
owned.............................. -- $ 1,000,000 --
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements include the accounts of
Peninsula Bank of Commerce (the Bank) and its wholly owned subsidiary,
Peninsula Real Estate Corporation (PREC). The accounting and reporting
policies of the Bank conform to generally accepted accounting principles and
to general practices within the banking industry.
Significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of the Bank include the accounts of
its wholly owned subsidiary, PREC. All material intercompany accounts and
transactions have been eliminated in consolidation.
NATURE OF OPERATIONS:
The Bank primarily operates two branches in suburban communities in
Northern and Central San Mateo County. The Bank's primary source of revenue
is providing commercial and real estate loans to customers, who are
predominantly small and middle-market businesses.
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, certificates of deposit, and agency
securities with original maturities of less than ninety days, and any
federal funds sold. Substantially all due from banks and federal funds are
held at five banks and exceed existing deposit insurance coverage.
As discussed in Note 5, the Bank holds $94,437,180 from one demand
deposit account. The depositor's account is comprised of proceeds from a
lawsuit settlement. Due to the uncertainty of the time this deposit will
remain with the Bank, management invested the proceeds from this deposit
account in agency securities with maturities of less than ninety days.
INVESTMENT SECURITIES:
The Bank designates all investment securities at time of purchase as
follows:
(P) HELD-TO-MATURITY. Debt securities that management has the positive
intent and ability to hold until maturity are classified as held-to-
maturity and are carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts.
(P) TRADING SECURITIES. Debt and equity securities that are bought and
held principally for the purposes of selling them in the near term
are classified as trading securities and reported at market value,
with unrealized gains and losses included in earnings.
(P) = diamond
F-39
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(P) AVAILABLE-FOR-SALE. Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs
for liquidity and changes in the availability of and the yield of
alternative investments are classified as available-for-sale. These
assets are carried at market value. Market value is determined using
published quotes as of the close of business. Unrealized gains and
losses are excluded from earnings and reported net of tax as a
separate component of stockholders' equity until realized.
(P) = diamond
The amortized cost of investment securities is adjusted for amortization
of premiums and accretion of discount to maturity or, in the case of
mortgage-backed securities, over the estimated life of the security using a
method which approximates the interest method. Such amortization and
interest are included in interest income. Realized gains and losses are
recognized using the specific identification method and are included in
other income or expenses in the accompanying statements of income.
LOANS:
Loans are carried at cost, less payments collected and the allowance for
loan losses. Interest income is accrued daily using the simple interest
method, which approximates the effective rate method. Loans are placed on
nonaccrual status when management believes that there is serious doubt as
to the collection of principal or interest or when they become 90 days
past-due as to interest or principal payments, unless the loan is both
well-secured and in the process of collection. At that time, any accrued
but uncollected interest is generally reversed, and additional income is
recorded only as payments are received.
Loan origination fees and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of
the loan as a yield adjustment.
ALLOWANCE FOR LOAN LOSSES:
The Bank adopted SFAS 114, Accounting for Creditors for Impairment of a
Loan, as amended by SFAS 118, on January 1, 1995. Under the standard, a
loan is considered impaired, based on current information and events, if it
is probable that the Bank will be unable to collect the schedule payments
of interest when due according to the contractual terms of the loan
agreement. Since most of the Bank's loans are collateral dependent, the
calculation of the impaired loans is generally based on fair value of the
collateral.
These estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the periods in which they
become known. When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.
Income recognition on SFAS 114, impaired loans, conforms to the method the
Bank uses for income recognition on nonaccrual loans.
The allowance for loan losses is based on estimates and is maintained at
a level considered adequate to provide for losses that can be reasonably
anticipated. The allowance is increased by provisions charged to income and
reduced by net charge-offs. In evaluating the adequacy of the allowance,
the Bank performs credit reviews of the loan portfolio which consider the
borrower's ability to repay, the value of any underlying collateral, the
seriousness of the loan's delinquency status and other factors which affect
the collectibility of the loan. A specific amount of loss is then
determined as a result of this evaluation process. The aggregate of these
specific allocations comprises the majority of the required allowance for
loan losses. In addition, management may from time to time set aside
additional allowances for the inherent risk in the portfolio based on
general risk characteristics of the loan portfolio.
F-40
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful life of each asset--generally from 5 to 40 years. Leasehold
improvements are amortized over the remaining term of the lease or their
useful lives, whichever is shorter. Maintenance and repair costs are
expensed as incurred.
OTHER REAL ESTATE OWNED:
Other real estate owned (OREO) consists of properties acquired through
foreclosure. Properties acquired by foreclosure are stated at the lower of
cost or fair market value including estimated selling costs at the time of
foreclosure. Subsequent to foreclosure, the Bank charges current earnings
with a provision for estimated losses on real estate acquired in settlement
of loans when the carrying value of the property exceeds its fair value.
All estimated selling costs to the anticipated date of disposition of the
real estate are considered in the determination of estimated fair market
value. Operating expenses of such properties, net of related income, are
included in other expenses.
INCOME TAXES:
Deferred income 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.
NET INCOME PER COMMON SHARE:
Net income per common share was computed using the daily average number
of shares of common stock outstanding and common stock equivalents
outstanding during the year. The number of shares outstanding was increased
by the number of shares issuable on the exercise of outstanding options.
This increase in the number of common shares was reduced by the number of
common shares which are assumed to have been purchased by the Bank using
the proceeds from the exercise of these options. These treasury stock
purchases were assumed to have been made at the average price of the common
stock during the year. The amount of shares which will be assumed to be
purchased from the proceeds of exercised options will vary up or down,
depending on the current market value of the Bank's stock as compared to
the exercise price of the outstanding options.
RECLASSIFICATIONS:
Certain amounts previously reported in the 1995 financial statements have
been reclassified to conform to the 1996 presentation. These
reclassifications do not affect previously reported net income or
shareholders' equity.
F-41
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT SECURITIES:
At December 31, 1996 and 1995, the cost and estimated fair values of
investment securities by type are shown below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AGGREGATE FAIR
COST GAIN GAIN VALUE
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-
FOR-SALE:
U.S. Treasuries......... $ 2,980,139 $23,141 -- $ 3,003,280
Agency securities....... 12,405,044 4,809 111,275 12,298,578
----------- ------- -------- -----------
$15,385,183 $27,950 $111,275 $15,301,858
=========== ======= ======== ===========
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AGGREGATE FAIR
COST GAIN GAIN VALUE
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-
MATURITY:
Municipal bonds......... $ 6,210,549 $41,496 $ 11,519 $ 6,240,526
=========== ======= ======== ===========
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AGGREGATE FAIR
COST GAIN GAIN VALUE
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
U.S. Treasuries......... $ 2,998,756 $ 309 -- $ 2,999,065
Agency securities....... $10,278,864 $13,783 -- $10,292,647
----------- ------- -------- -----------
$13,277,620 $14,092 -- $13,291,712
=========== ======= ======== ===========
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED AGGREGATE FAIR
COST GAIN GAIN VALUE
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-
MATURITY:
Municipal bonds......... $ 6,447,892 $48,571 $ 17,669 $ 6,478,794
=========== ======= ======== ===========
</TABLE>
The amortized cost and aggregate fair value of investment securities at
December 31, 1996 by type and contractual maturity are shown below:
CONTRACTUAL MATURITIES:
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
--------------------- -----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due within one year............. $1,175,851 $1,177,945 $ 1,396,093 $ 1,381,708
Due one through five years...... 3,437,149 3,448,213 13,989,090 13,920,150
Due after five years through ten
years.......................... 1,027,103 1,041,121 -- --
Due after ten years............. 570,446 573,247 -- --
---------- ---------- ----------- -----------
$6,210,549 $6,240,526 $15,385,183 $15,301,858
========== ========== =========== ===========
</TABLE>
At December 31, 1996 and 1995, the Bank had $2,000,000 of investment
securities pledged to secure government deposits.
F-42
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
At December 31, 1996 and 1995, loans consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Commercial......................................... $15,950,479 $17,537,125
Real estate........................................ 36,687,173 32,373,311
Construction....................................... 11,731,854 8,663,444
Installment........................................ 854,640 877,155
Leases............................................. 338,920 411,071
----------- -----------
65,563,066 59,862,106
Less allowance for loan losses..................... (1,377,868) (1,057,018)
----------- -----------
$64,185,198 $58,805,088
=========== ===========
</TABLE>
The Bank's lending activities are concentrated primarily in Northern
California.
In 1996, 1995, and 1994, the changes in the allowance for loan losses were
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1: $1,057,018 $1,245,750 $1,072,086
Provision for loan losses.............. 120,000 204,000 120,000
Loans charged off...................... (68,538) (408,229) (79,836)
Recoveries............................. 269,388 15,497 133,500
---------- ---------- ----------
Balance at December 31................... $1,377,868 $1,057,018 $1,245,750
========== ========== ==========
</TABLE>
At December 31, 1996 and 1995, the recorded investments in loans for which
impairment has been recognized in accordance with SFAS 114 totaled $1,611,812
and $779,985, respectively, with a corresponding valuation allowance of
$282,815 and $199,518, respectively. For the years ended December 31, 1996 and
1995, the average recorded investment in impaired loans was $1,195,899 and
$766,703, respectively. During 1996 and 1995, the Bank recognized interest on
impaired loans during the portion of the year that they were impaired of
$95,878 and $16,395, respectively.
As of December 31, 1996, 1995 and 1994, loans on a nonaccrual status totaled
$1,560,625, $591,712 and $1,647,741, respectively. Foregone interest on
nonaccrual loans for the years 1996, 1995, and 1994 was approximately
$184,804, $37,080, and $46,157, respectively.
4. BANK PREMISES AND EQUIPMENT:
At December 31, 1996 and 1995, bank premises and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land............................................ $ 416,667 $ 416,667
Premises........................................ 1,377,241 1,377,241
Furniture and equipment......................... 1,494,668 1,532,645
Building improvement............................ 542,171 542,171
----------- -----------
3,830,747 3,868,724
Less accumulated depreciation and amortization.... (2,029,743) (1,925,067)
----------- -----------
$ 1,801,004 $ 1,943,657
=========== ===========
</TABLE>
Depreciation expense was $214,554, $218,699 and $249,891 in 1996, 1995 and
1994, respectively.
F-43
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEPOSITS:
Time deposits in denominations of $100,000 or more were $13,332,902 and
$11,056,065 at December 31, 1996 and 1995, respectively. Interest paid on
these deposits was $548,091, $555,078 and $175,067 for the years ended
December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, total time deposits of approximately $29,560,000
mature $25,243,000 in the next 12 months and the remaining $4,317,000 mature
over 1 year through 5 years.
At December 31, 1996, the Bank held $94,437,180 from one interest-bearing
demand deposit account. Management anticipates these funds will be withdrawn
in the next three to six months, and has invested the proceeds in agency
securities with maturities of less than 90 days.
6. COMMITMENTS AND CONTINGENCIES:
The Bank is required by federal regulations to maintain certain minimum
average cash balances with the Federal Reserve Bank equal to a percentage of
reservable deposits.
At December 31, 1996, the Bank maintained a federal funds credit line with
Community Bank in the amount of $3,000,000 which expires April 30, 1997. The
Bank did not borrow from this line of credit in 1996 or 1995.
At December 31, 1996, minimum fixed lease commitments under noncancelable
operating leases having an original term of more than one year are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- --------
<S> <C>
1997.............................. $ 46,872
1998.............................. 46,872
1999.............................. 23,436
--------
$117,180
========
</TABLE>
Rental expense was $46,872 in 1996, 1995 and 1994.
7. INCOME TAXES:
The components of the provision for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable......................... $1,282,450 $1,003,168 $1,004,760
Deferred.................................. (237,000) 43,211 (180,010)
---------- ---------- ----------
$1,045,450 $1,046,379 $ 824,750
========== ========== ==========
</TABLE>
A reconciliation of the statutory tax rates to the effective tax rates is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax
rate................... 34.0 % 34.0 % 34.0 %
State tax, net of fed-
eral income tax ef-
fect................... 5.8 % 5.8 % 6.3 %
Tax-exempt interest in-
come................... (3.2)% (2.8)% (2.6)%
Other, net.............. (0.3)% -- (0.1)%
---- ---- ----
36.3 % 37.0 % 37.6 %
==== ==== ====
</TABLE>
F-44
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS/
LIABILITIES
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Allowance for loan losses............................ $ 364,000 $ 272,000
Depreciation......................................... (188,000) (156,000)
Deferred compensation................................ 346,000 271,000
State taxes, net of federal effect................... 235,000 26,000
Unrealized (gains) losses on investments............. (30,000) (2,000)
All others........................................... (46,000) 61,000
---------- ----------
$ 681,000 $ 472,000
========== ==========
</TABLE>
8. TRANSACTIONS WITH RELATED PARTIES:
The Bank has, and expects to have in the future, banking transactions in the
ordinary course of its business with directors, officers, principal
shareholders, and their associates. These transactions, including loans and
deposits, are granted on substantially the same terms, including interest
rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others and do not involve more than the normal
risk of collectibility or present other unfavorable features. Such loans
amounted to $2,826,191 and $3,299,002 at December 31, 1996 and 1995,
respectively.
One of the directors of the Bank occupies a small amount of office space in
the San Bruno Branch for nonbanking business at an annual rent of
approximately $10,100, $16,200 and $16,200 in 1996, 1995 and 1994,
respectively.
9. PROFIT SHARING PLAN:
The Bank offers a 401(k) tax-deferred savings plan (the Plan) under which
eligible employees may elect to have a portion of their salary deferred and
contributed to the Plan. Employees become eligible to participate in the Plan
after one full year of service. The amount of salary deferred is not subject
to federal income tax at the time of deferral. The Bank matches up to 100% of
the employees' contributions up to 3.5% of their annual salary. The Bank
contributed $96,655, $72,063 and $41,492 to the Plan in 1996, 1995 and 1994,
respectively. Included in the current year contribution is $39,000 of
discretionary profit sharing contribution.
The Bank has a deferred compensation plan that allows eligible employees to
defer a portion of their salaries and bonus and earn interest calculated
annually based on short-term interest rates. As of December 31, 1996 and 1995,
deferred compensation of approximately $1,005,248 and $873,813, respectively,
is included in interest payable and other liabilities.
10. REGULATORY CAPITAL REQUIREMENTS:
The Bank is 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 affect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
F-45
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL-CAPITALIZED
ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------------- -------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- ----- -------------- ----- ---------------- ----------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital (to Risk
Weighted Assets)....... $14,559 14.8% >$7,884 >8.0% >$ 9,855 >10.0%
Tier 1 Capital (to Risk
Weighted Assets)....... $13,325 13.5% >$3,942 >4.0% >$ 5,913 >6.0%
Tier 1 Capital (to
Average Assets)........ $13,325 8.9% >$5,992 >4.0% >$ 7,490 >5.0%
</TABLE>
> = greater than or equal to
_
As of December 31, 1996, the Bank was categorized as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratio as set forth in the table, and not subject
to a capital directive.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, regular and
standby letters of credit. These instruments involve elements of credit risk
in excess of the amount recognized in the statement of condition. The contract
amounts of these instruments reflect the Bank's maximum exposure to accounting
loss to particular classes of financial instruments. The Bank uses the same
credit standards and credit monitoring procedures for these contracts as it
uses in its lending process.
At December 31, 1996 and 1995, the contractual amount of each significant
class of off-balance sheet financial instrument or contract outstanding
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Construction loan commitments....................... $ 6,603,155 $ 5,110,098
Real estate loan commitments........................ 5,566,559 6,798,496
Commercial loan commitments......................... 10,454,074 9,812,893
Home equity lines................................... 4,271,966 3,564,221
Letters of credit................................... 395,000 538,600
Loan guarantees..................................... 378,349 196,500
----------- -----------
Total off-balance sheet commitments............... $27,699,103 $26,020,808
=========== ===========
</TABLE>
COMMITMENTS TO EXTEND CREDIT:
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon commitments to extend credit,
is based on management's credit evaluation of the counter-party. Collateral
held varies but usually consists of residential and commercial property, and
business assets.
F-46
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STANDBY LETTERS OF CREDIT:
Standby letters of credit are performance assurances made on behalf of
customers who have a contractual obligation to produce or deliver goods or
services or otherwise perform. Credit risk arises in these transactions from
the possibility that a customer may not be able to repay the Bank if the
letter of credit is drawn upon. As with commitments to extend credit, the Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if any, is based on management's credit evaluation of
the counter-party.
COMMERCIAL LETTERS OF CREDIT:
Through commercial letters of credit, the Bank guarantees a customer's
foreign or domestic trade transaction to a third party, generally to finance a
commercial contract for the purchase of goods. The Bank's credit risk in these
transactions is limited since the contracts are supported and collateralized
by the merchandise being purchased and are generally of short duration.
The Bank does not anticipate that any significant losses will result from
any of the above off-balance sheet commitments.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Fair value estimates are determined as of a specific date in time utilizing
quoted market prices, where available, or various assumptions and estimates.
As the assumptions underlying these estimates change, the fair value of the
financial instruments will change. The use of assumptions and various
valuation techniques, as well as the absence of secondary markets for certain
financial instruments, will likely reduce the comparability of fair value
disclosures between financial institutions. Additionally, the Bank has not
disclosed highly subjective values of other nonfinancial instruments.
Accordingly, the aggregate fair value amounts presented do not represent and
should not be construed to represent the full underlying value of the Bank.
The methods and assumptions used to estimate the fair value of each class of
financial instruments are as follows:
CASH AND CASH EQUIVALENTS:
The carrying value of cash and cash equivalents approximates fair value
due to the relatively short-term nature of these instruments.
INVESTMENT SECURITIES:
Fair value of securities and investments is based on quoted market
prices. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
LOANS RECEIVABLE:
In order to determine the fair values for loans, the loan portfolio was
segmented based on loan type, credit quality, and repricing
characteristics. For certain variable rate loans with no significant credit
concerns and frequent repricings, estimated fair values are based on the
carrying values. The fair values of other loans are estimated using
discounted cash flow analyses. The discount rates used in these analyses
are generally based on origination rates for similar loans of comparable
credit quality.
DEPOSITS:
The fair values for deposits, subject to immediate withdrawal such as
interest and noninterest-bearing and savings deposit accounts, are equal to
the amount payable on demand at the reporting date (i.e., their carrying
amount on the balance sheet). Fair values for fixed rate certificates of
deposits are estimated by
F-47
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
discounting future cash flows using interest rates currently offered on
time deposits with similar remaining maturities.
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents..................... $114,984,641 $114,984,641
Investments securities
Available-for-Sale.......................... 15,301,858 15,301,858
Held-to-Maturity............................ 6,210,549 6,240,526
Loans receivable, net......................... 64,185,198 63,794,407
Accrued interest receivable................... 658,158 658,158
Financial liabilities:
Time deposits................................. 29,560,431 29,637,802
Other deposits................................ 158,974,112 158,974,112
Accrued interest payable...................... 345,639 345,639
</TABLE>
13. SHAREHOLDERS' EQUITY:
The Bank adopted the disclosure only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," on January 1, 1996. Under this new standard,
stock compensation costs are measured at the grant date based on the fair
value of the award and disclosed on a pro forma basis in the footnote to the
financial statements. Since the Bank is not an SEC registrant, the Bank
elected to calculate option compensation expense using the minimum pricing
model. The calculated compensation expense using the minimum pricing model was
not material to reported net income.
The Bank has stock option plans for directors, full-time salaried officers
and employees who have substantial responsibility for the successful operation
of the Bank. Options are issued at the fair market value of the stock at the
date of the grant. The options may be granted in accordance with terms
determined by the Board of Directors until expiration of the Plan.
Options for 229,108 shares have been granted through December 31, 1996,
including 60,000 options granted in 1996 and 3,500 options granted in 1995.
Options for 111,265 shares at prices ranging from $10.00 to $23.25 are
outstanding as of December 31, 1996, of which options for 28,048 shares are
exercisable. Options for 6,897, 22,093 and 2,287 shares at $10.00 and 2,149,
5,351 and 0 shares at $13.50 and 1,000, 0, and 0 shares at $13.25 were
exercised during 1996, 1995, and 1994, respectively. Options for 3,745, 23,965
and 10,370 shares were canceled during 1996, 1995, and 1994, respectively.
Under California state banking laws, payment of dividends is restricted to
the lesser of retained earnings or the amount of undistributed net profits for
the three most recent years. At December 31, 1996, approximately $2,556,628
was available for dividends.
14. SUBSEQUENT EVENTS:
The Bank signed an Agreement and Plan of Reorganization (the Plan) with
Greater Bay Bancorp (GBB) dated September 5, 1997, whereby the Bank will be
acquired by GBB. The Bank will thereafter operate as a wholly-owned banking
subsidiary of GBB. As a result of the proposed transaction, each share of the
Bank's common stock issued and outstanding immediately prior to the effective
time of the merger will be converted into the right to receive shares of GBB
stock based on a conversion ratio as defined in the Plan. This merger is
expected to be completed by the end of the fourth quarter of 1997 or early in
the first quarter of 1998 after shareholder and regulatory approval.
F-48
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks............................ $ 6,281,962 $ 5,552,006
Federal funds sold................................. 4,600,000 13,100,000
Agency securities.................................. 96,119,438 96,332,635
------------ ------------
Cash and cash equivalents........................ 107,001,400 114,984,641
Investment securities:
Held-to-maturity................................. 6,849,597 6,210,549
Available-for-sale............................... 14,966,050 15,301,858
------------ ------------
Total investment securities.................... 21,815,647 21,512,407
Loans, net......................................... 74,012,421 64,185,198
Premises and equipment, net........................ 1,959,030 1,801,004
Interest receivable and other assets............... 2,426,038 1,837,380
------------ ------------
Total assets................................... $207,214,536 $204,320,630
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand........................................... $ 22,885,870 $ 21,543,048
Interest-bearing demand.......................... 132,392,299 131,939,061
Savings.......................................... 5,414,685 5,492,003
Time............................................. 29,826,167 29,560,431
------------ ------------
Total deposits................................. 190,519,021 188,534,543
------------ ------------
Interest payable and other liabilities........... 1,721,570 2,512,919
------------ ------------
Total liabilities.................................. 192,240,591 191,047,462
------------ ------------
Common stock, no par value; 2,000,000 shares
authorized; 670,924 and 666,707 shares issued and
outstanding in 1997 and 1996, respectively........ 7,361,458 7,141,148
Net unrealized gain (loss) on available-for-sale
securities........................................ (51,185) (53,078)
Retained earnings.................................. 7,663,672 6,185,098
------------ ------------
Total shareholders' equity....................... 14,973,945 13,273,168
------------ ------------
Total liabilities and shareholders' equity....... $207,214,536 $204,320,630
============ ============
</TABLE>
F-49
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest income:
Interest and fees on loans......................... $ 4,011,420 $ 3,183,417
Interest on federal funds sold..................... 187,255 289,989
Interest on investment securities:
U.S. Treasury securities......................... 91,730 55,258
Securities of U.S. government agencies........... 2,938,050 396,976
Obligations of states and political subdivi-
sions........................................... 152,333 150,255
------------ ------------
Total interest income.......................... 7,380,788 4,075,895
------------ ------------
Interest expense:
Interest on interest-bearing transaction accounts.. 1,987,728 466,710
Interest on savings deposits....................... 54,073 56,817
Interest on time deposits.......................... 824,456 757,649
------------ ------------
Total interest expense......................... 2,866,257 1,281,176
------------ ------------
Net interest income............................ 4,514,531 2,794,719
Provision for loan losses............................ 90,000 90,000
------------ ------------
Net interest income after provision for loan
losses........................................ 4,424,531 2,704,719
------------ ------------
Noninterest income:
Service charges on deposit accounts................ 120,872 115,498
Rental income and other............................ 74,567 87,275
------------ ------------
Total noninterest income....................... 195,439 202,773
------------ ------------
Noninterest expense:
Salaries and related benefits...................... 1,253,538 1,094,129
Occupancy and equipment............................ 218,337 225,143
Other.............................................. 460,206 424,938
------------ ------------
Total noninterest expense...................... 1,932,081 1,744,210
------------ ------------
Income before income taxes..................... 2,687,889 1,163,282
Provision for income taxes........................... 1,019,680 424,950
------------ ------------
Net income..................................... 1,668,209 738,332
============ ============
Earnings per share................................... $ 2.41 $ 1.11
============ ============
Weighted-average shares outstanding.................. 692,379 662,811
============ ============
</TABLE>
F-50
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1996
------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 1,668,209 $ 738,332
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization................... 90,887 111,197
Provision for loan losses....................... 90,000 90,000
Amortization of discount on investments......... (1,121,780) (17,409)
Change in assets and liabilities:
Net change in interest payable and other lia-
bilities...................................... (832,295) (1,087,049)
Net change in interest receivable and other as-
sets.......................................... (588,658) (589,170)
Net change in deferred loan fees............... (4,099) (48,943)
------------- ------------
Net cash used in operating activities......... (697,736) (803,042)
------------- ------------
Cash flows from investing activities:
Net change in loans.............................. (9,913,124) (1,002,918)
Purchase of investment securities--available-for-
sale............................................ (1,000,000) (8,844,975)
Proceeds from maturities of investment securi-
ties--available-for-sale........................ 2,500,000 4,000,000
Purchase of investment securities--held-to-matu-
rity............................................ (1,188,626) (348,239)
Proceeds from maturities of investment securi-
ties--held-to-maturity.......................... 550,000 295,000
Purchase of premises and equipment............... (248,913) (68,173)
Retirement of premises and equipment............. 5,891
------------- ------------
Net cash used in investing activities......... (9,300,663) (5,963,414)
------------- ------------
Cash flows from financing activities:
Net change in deposits........................... 1,984,478 1,547,981
Exercise of stock options........................ 30,680 89,345
------------- ------------
Net cash provided by financing activities..... 2,015,158 1,637,326
------------- ------------
Net change in cash and cash equivalents...... (7,983,241) (5,129,130)
Cash and cash equivalents at beginning of period.. 114,984,641 15,571,860
------------- ------------
Cash and cash equivalents at end of period........ $ 107,001,400 $ 10,442,730
============= ============
Supplemental cash flow information:
Interest paid.................................... $ 2,889,108 $ 1,345,905
============= ============
Income taxes paid, net of refunds................ $ 879,360 $ 660,644
============= ============
</TABLE>
F-51
<PAGE>
PENINSULA BANK OF COMMERCE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements include the amounts of
Peninsula Bank of Commerce and Subsidiary (the Bank). The accounting and
reporting policies of the Bank conform to generally accepted accounting
principles and to general practices within the banking industry.
Significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of the Bank include the accounts of
its wholly owned subsidiary, PREC. All material intercompany accounts and
transactions have been eliminated in consolidation.
NATURE OF OPERATIONS:
The Bank primarily operates two branches in suburban communities in
Northern and Central San Mateo County. The Bank's primary source of revenue
is providing commercial and real estate loans to customers, who are
predominantly small and middle-market businesses.
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, certificates of deposit with original
maturities of less than ninety days, and any federal funds sold.
Substantially all cash and cash equivalents held in other financial
institutions are held at five banks and exceed existing deposit insurance
coverage.
NET INCOME PER COMMON SHARE:
Net income per common share was computed on the basis of the daily
average number of shares of common stock outstanding during the year.
F-52
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
GREATER BAY BANCORP,
GBB ACQUISITION CORP.
AND
PENINSULA BANK OF COMMERCE
September 5, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AGREEMENT AND PLAN OF REORGANIZATION....................................... 1
ARTICLE I DEFINITIONS...................................................... 1
"Affiliate" of, or a person "Affiliated"................................. 1
"Agreement of Merger".................................................... 1
"Average Closing Price".................................................. 1
"Banks".................................................................. 1
"Benefit Arrangements"................................................... 1
"BHC Act"................................................................ 1
"Business Day"........................................................... 1
"C&L".................................................................... 1
"CFC".................................................................... 1
"CGCL"................................................................... 1
"Certificates"........................................................... 2
"Classified Credits"..................................................... 2
"Closing"................................................................ 2
"Closing Date"........................................................... 2
"CNB".................................................................... 2
"Code"................................................................... 2
"Commissioner"........................................................... 2
"Competing Transaction".................................................. 2
"Comptroller"............................................................ 2
"Conversion Ratio"....................................................... 2
"Covered Person"......................................................... 2
"DFI".................................................................... 2
"Effective Time of the Merger"........................................... 2
"Employee Plans"......................................................... 2
"Encumbrance"............................................................ 2
"Environmental Regulations".............................................. 2
"ERISA".................................................................. 2
"Exchange Act"........................................................... 2
"Exchange Agent"......................................................... 2
"Exchange Fund".......................................................... 2
"FDIC"................................................................... 2
"Financial Statements of GBB"............................................ 2
"Financial Statements of PBC"............................................ 3
"FRB".................................................................... 3
"GBB 401(k) Plan"........................................................ 3
"GBB Conflicts and Consents List"........................................ 3
"GBB Dissenting Shares".................................................. 3
"GBB Filings"............................................................ 3
"GBB Perfected Dissenting Shares"........................................ 3
"GBB Shareholders' Meeting".............................................. 3
"GBB Stock".............................................................. 3
"GBB Stock Option Plan".................................................. 3
"GBB Supplied Information"............................................... 3
"Governmental Entity".................................................... 3
"Hazardous Materials".................................................... 3
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"Hoefer Agreement"....................................................... 3
"Immediate Family"....................................................... 3
"Investment Security".................................................... 3
"IRS".................................................................... 3
"Joint Proxy Statement and Prospectus"................................... 3
"Merger"................................................................. 3
"MPB".................................................................... 4
"Newco".................................................................. 4
"Operating Loss"......................................................... 4
"PBC 401(k) Plan"........................................................ 4
"PBC Conflicts and Consents List"........................................ 4
"PBC Contract List"...................................................... 4
"PBC Dissenting Shares".................................................. 4
"PBC Employee Plan List"................................................. 4
"PBC Environmental Compliance List"...................................... 4
"PBC Filings"............................................................ 4
"PBC Filings List"....................................................... 4
"PBC Fully Diluted Book Value Per Share"................................. 4
"PBC Indemnification List"............................................... 4
"PBC Insurance List"..................................................... 4
"PBC Investment Securities List"......................................... 4
"PBC List"............................................................... 4
"PBC Litigation List".................................................... 4
"PBC Loan List".......................................................... 4
"PBC Offices List"....................................................... 4
"PBC Option List"........................................................ 4
"PBC Operating Losses List".............................................. 4
"PBC Perfected Dissenting Shares"........................................ 4
"PBC Personal Property List"............................................. 4
"PBC Real Property List"................................................. 4
"PBC Shareholders' Meeting".............................................. 5
"PBC Stock".............................................................. 5
"PBC Stock Option"....................................................... 5
"PBC Stock Option Plans"................................................. 5
"PBC Supplied Information"............................................... 5
"PBC Tax List"........................................................... 5
"Person"................................................................. 5
"PREC"................................................................... 5
"Related Group of Persons"............................................... 5
"Registration Statement on Form S-4"..................................... 5
"Scheduled Contracts".................................................... 5
"SEC".................................................................... 5
"Securities Act"......................................................... 5
"Surviving Corporation".................................................. 5
"Tanks".................................................................. 5
"Top Up Option".......................................................... 5
"Transaction Expenses"................................................... 5
"Understanding".......................................................... 5
ARTICLE II TERMS OF MERGER................................................ 5
2.1 Effect of Merger and Surviving Corporation........................... 5
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2.2 Stock of Newco...................................................... 6
2.3 Conversion of PBC Stock............................................. 6
2.4 Effect on GBB Stock................................................. 6
2.5 Fractional Shares................................................... 7
2.6 Exchange Procedures................................................. 7
2.7 Directors of Surviving Corporation and GBB.......................... 8
2.8 Executive Officers of Surviving Corporation and GBB................. 8
ARTICLE III THE CLOSING.................................................... 9
3.1 Closing Date........................................................ 9
3.2 Execution of Agreements............................................. 9
3.3 Further Assurances.................................................. 9
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PBC........................... 9
4.1 Incorporation, Standing and Power................................... 9
4.2 Capitalization...................................................... 10
4.3 Subsidiaries........................................................ 10
4.4 Financial Statements................................................ 10
4.5 Reports and Filings................................................. 10
4.6 Authority of PBC.................................................... 11
4.7 Insurance........................................................... 11
4.8 Personal Property................................................... 11
4.9 Real Estate......................................................... 11
4.10 Litigation.......................................................... 11
4.11 Taxes............................................................... 12
4.12 Compliance with Laws and Regulations................................ 13
4.13 Performance of Obligations.......................................... 14
4.14 Employees........................................................... 14
4.15 Brokers and Finders................................................. 14
4.16 Material Contracts.................................................. 14
4.17 Certain Material Changes............................................ 16
4.18 Licenses and Permits................................................ 16
4.19 Undisclosed Liabilities............................................. 16
4.20 Employee Benefit Plans.............................................. 17
4.21 Corporate Records................................................... 18
4.22 Accounting Records.................................................. 18
4.23 Offices and ATMs.................................................... 18
4.24 Operating Losses.................................................... 18
4.25 Loan Portfolio...................................................... 18
4.26 Investment Securities............................................... 19
4.27 Power of Attorney................................................... 19
4.28 Facts Affecting Regulatory Approvals................................ 19
4.29 Accounting and Tax Matters.......................................... 19
4.30 Indemnification..................................................... 19
4.31 Community Reinvestment Act.......................................... 19
4.32 Derivative Transactions............................................. 19
4.33 Trust Administration................................................ 19
4.34 Disclosure Documents and Applications............................... 20
4.35 Accuracy and Currentness of Information Furnished................... 20
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ARTICLE VREPRESENTATIONS AND WARRANTIES OF GBB............................ 20
5.1 Incorporation, Standing and Power................................. 20
5.2 Capitalization.................................................... 20
5.3 Financial Statements.............................................. 21
5.4 Reports and Filings............................................... 21
5.5 Authority......................................................... 21
5.6 Subsidiaries...................................................... 22
5.7 Brokers and Finders............................................... 22
5.8 Certain Material Changes.......................................... 22
5.9 Licenses and Permits.............................................. 23
5.10 Corporate Records................................................. 23
5.11 Accounting Records................................................ 23
5.12 Facts Affecting Regulatory Approvals.............................. 23
5.13 Accounting and Tax Matters........................................ 23
5.14 Disclosure Documents and Applications............................. 23
5.15 Nasdaq Listing.................................................... 23
5.16 Accuracy and Currentness of Information Furnished................. 26
ARTICLE VI COVENANTS OF PBC PENDING EFFECTIVE TIME OF THE MERGER.......... 24
6.1 Limitation on PBC's Conduct Prior to Effective Time of the Merger. 24
6.2 Affirmative Conduct of PBC Prior to Effective Time of the Merger.. 26
6.3 Access to Information............................................. 27
6.4 Review by Accountants............................................. 28
6.5 Filings........................................................... 28
6.6 Notices; Reports.................................................. 28
6.7 PBC Shareholders' Meeting......................................... 28
6.8 Certain Loans and Other Extensions of Credit...................... 29
6.9 Applications...................................................... 29
6.10 Affiliates and Five Percent Shareholder Agreements................ 29
6.11 Coordination of Dividends......................................... 29
6.12 D&O Coverage...................................................... 30
ARTICLE VII COVENANTS OF GBB PENDING EFFECTIVE TIME OF THE MERGER......... 30
7.1 Limitation on GBB's Conduct Prior to Effective Time of the Merger. 30
7.2 Affirmative Conduct of GBB and Subsidiaries Prior to Effective
Time of the Merger................................................ 30
7.3 Access to Information............................................. 31
7.4 Filings........................................................... 31
7.5 Applications...................................................... 31
7.6 Blue Sky.......................................................... 32
7.7 GBB Shareholders' Meeting......................................... 32
7.8 Notices; Reports.................................................. 32
7.9 Removal of Conditions............................................. 32
7.10 Stock Options..................................................... 32
ARTICLE VIII ADDITIONAL COVENANTS......................................... 33
8.1 Best Efforts...................................................... 33
8.2 Public Announcements.............................................. 33
8.3 Appointment of Directors.......................................... 33
8.4 Environmental Assessment and Remediation.......................... 33
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ARTICLE IX CONDITIONS PRECEDENT TO THE MERGER.............................. 34
9.1 Shareholder Approval............................................... 34
9.2 No Judgments or Orders............................................. 34
9.3 Regulatory Approvals............................................... 34
9.4 Securities Laws.................................................... 34
9.5 Listing............................................................ 34
9.6 Tax Opinions....................................................... 34
9.7 Pooling of Interests............................................... 34
ARTICLE X CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PBC................... 34
10.1 Legal Opinion...................................................... 34
10.2 Representations and Warranties; Performance of Covenants........... 35
10.3 Authorization of Merger............................................ 35
10.4 Absence of Certain Changes......................................... 35
10.5 Officers' Certificate.............................................. 35
10.6 Fairness Opinion................................................... 35
10.7 Appointment of Directors........................................... 35
ARTICLE XI CONDITIONS PRECEDENT TO OBLIGATIONS OF GBB AND NEWCO............ 36
11.1 Legal Opinion...................................................... 36
11.2 Representations and Warranties; Performance of Covenants........... 36
11.3 Authorization of Merger............................................ 36
11.4 Third Party Consents............................................... 36
11.5 Absence of Certain Changes......................................... 36
11.6 Officers' Certificate.............................................. 36
11.7 Fairness Opinion................................................... 36
11.8 Shareholder's Agreements........................................... 37
11.9 Agreements Not to Compete.......................................... 37
11.10 Affiliates Agreements.............................................. 37
11.11 Employee Benefit Plans............................................. 37
11.12 Dissenting Shares.................................................. 37
11.13 Remediation........................................................ 37
11.14 Execution of Stock Option Agreement................................ 37
11.15 PBC Fully Diluted Book Value Per Share............................. 37
11.16 Termination of PBC Stock Option Plans.............................. 37
ARTICLE XII EMPLOYEE BENEFITS.............................................. 38
12.1 Employee Benefits.................................................. 38
ARTICLE XIII TERMINATION................................................... 38
13.1 Termination........................................................ 39
13.2 Termination Date................................................... 39
13.3 Effect of Termination.............................................. 39
13.4 Force Majeure...................................................... 39
ARTICLE XIV MISCELLANEOUS.................................................. 39
14.1 Expenses........................................................... 39
14.2 Competing Transaction Fee.......................................... 40
14.3 Notices............................................................ 41
14.4 Successors and Assigns............................................. 41
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14.5 Counterparts...................................................... 41
14.6 Effect of Representations and Warranties.......................... 41
14.7 Third Parties..................................................... 41
14.8 Lists; Exhibits; Integration...................................... 41
14.9 Knowledge......................................................... 41
14.10 Governing Law..................................................... 41
14.11 Captions.......................................................... 41
14.12 Severability...................................................... 41
14.13 Waiver and Modification; Amendment................................ 41
14.14 Attorneys' Fees................................................... 41
EXHIBIT LIST............................................................... 44
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and entered
into as of the 5th day of September, 1997, by and among GREATER BAY BANCORP, a
California corporation ("GBB"), GBB ACQUISITION CORP., a California
corporation and wholly-owned subsidiary of GBB ("Newco"), and PENINSULA BANK
OF COMMERCE, a California state chartered bank ("PBC").
WHEREAS, the Boards of Directors of GBB, Newco and PBC deem advisable and in
the best interests of their respective shareholders the merger of Newco with
and into PBC (the "Merger") upon the terms and conditions set forth herein and
in accordance with the California General Corporation Law (the "CGCL") (PBC,
following the effectiveness of the Merger, being hereinafter sometimes
referred to as the "Surviving Corporation"); and
WHEREAS, the Boards of Directors of GBB, Newco and PBC have approved the
Merger pursuant to this Agreement and pursuant to the Agreement of Merger by
and between Newco and PBC (the "Agreement of Merger"), in substantially the
form of Exhibit A attached hereto, pursuant to which Newco will merge with and
into PBC and each outstanding share of PBC common stock, no par value ("PBC
Stock"), excluding any PBC 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.
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 I
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"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.
"Agreement of Merger" means the Agreement of Merger substantially in the
form attached hereto as "Exhibit A."
"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 15
consecutive trading days ending at the end of the third trading day
immediately preceding the Effective Time of the Merger.
"Banks" means CNB and MPB.
"Benefit Arrangements" has the meaning set forth in Section 4.20(b).
"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.
"C&L" means Coopers & Lybrand LLP, GBB's and PBC's independent accountants.
"CFC" means California Financial Code.
"CGCL" means California General Corporation Law.
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"Certificates" has the meaning set forth in Section 2.5(b).
"Classified Credits" has the meaning set forth in Section 6.8.
"Closing" means the consummation of the Merger provided for in Article II 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 GBB and PBC, (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 periods following the mailing by PBC and GBB
to their respective shareholders of a notice of approval of the Merger by the
outstanding shares pursuant to Section 1301 of the CGCL; provided, however,
that the Closing Date shall not be prior to January 10, 1998, unless otherwise
agreed to by a majority of the Boards of Directors of each of the parties
hereto.
"CNB" means Cupertino National Bank & Trust, a national banking association
and wholly-owned subsidiary of GBB.
"Code" means the Internal Revenue Code of 1986, as amended.
"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(n).
"Comptroller" means the Comptroller of the Currency.
"Conversion Ratio" has the meaning set forth in Section 2.3(a).
"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(a).
"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(b).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means U.S. Stock Transfer Corporation.
"Exchange Fund" has the meaning set forth in Section 2.5(a) hereof.
"FDIC" means the Federal Deposit Insurance Corporation
"Financial Statements of GBB" means the audited consolidated financial
statements of GBB consisting of the consolidated statements of condition as of
December 31, 1992, 1993, 1994, 1995 and 1996, the related
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consolidated statements of income, 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 GBB's unaudited consolidated statements of
financial condition and consolidated statement of income and cash flows as of
and for the six month period ended June 30, 1997.
"Financial Statements of PBC" means the audited consolidated financial
statements of PBC consisting of the consolidated statements of condition as of
December 31, 1992, 1993, 1994, 1995 and 1996, 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 PBC's unaudited consolidated statements of financial conditions and
statements of operations and cash flows as of and for the six month period
ended June 30, 1997.
"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 Dissenting Shares" means shares of GBB Stock held by "dissenting
shareholders" within the meaning of Chapter 13 of the CGCL.
"GBB Filings" has the meaning set forth in Section 5.4.
"GBB Perfected Dissenting Shares" means Dissenting Shares which the holders
thereof have not withdrawn or caused to lose their status as GBB Dissenting
Shares.
"GBB Shareholders' Meeting" means the meeting of GBB's shareholders referred
to in Section 7.7.
"GBB Stock" means the common stock, no par value, of GBB.
"GBB Stock Option Plan" means the Greater Bay Bancorp 1996 Stock Option
Plan.
"GBB Supplied Information" has the meaning set forth in Section 5.26.
"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(b).
"Hoefer Agreement" means the letter agreement dated April 15, 1997 between
Hoefer & Arnett Incorporated and PBC.
"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.
"Joint Proxy Statement and Prospectus" means the Joint 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 GBB Shareholders'
Meeting and the PBC Shareholders' Meeting (as defined herein) and to offer and
sell the shares of GBB Stock to be issued in connection with the Merger.
"Merger" means the merger of Newco with and into PBC pursuant to this
Agreement and the Agreement of Merger.
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"MPB" means Mid-Peninsula Bank, a California state chartered bank and
wholly-owned subsidiary of GBB.
"Newco" means GBB Acquisition Corp., the California corporate subsidiary of
GBB formed for the sole purpose of facilitating the acquisition of PBC by GBB
by means of the Merger.
"Operating Loss" has the meaning set forth in Section 4.24.
"PBC 401(k) Plan" means the Peninsula Bank of Commerce 401(k) Plan.
"PBC Conflicts and Consents List" has the meaning set forth in Section 4.6.
"PBC Contract List" has the meaning set forth in Section 4.16.
"PBC Dissenting Shares" means any shares of PBC Stock held by "dissenting
shareholders" within the meaning of Chapter 13 of the CGCL.
"PBC Employee Plan List" has the meaning set forth in Section 4.20.
"PBC Environmental Compliance List" has the meaning set forth in Section
4.12.
"PBC Filings" has the meaning set forth in Section 4.5.
"PBC Filings List" has the meaning set forth in Section 4.5.
"PBC Fully Diluted Book Value Per Share" means the sum of (a) shareholders'
equity as reflected on the financial statements to be provided by PBC to GBB
pursuant to Section 11.15, plus (b) the consideration to be paid upon the
exercise of any PBC Stock Option then issued and outstanding, divided by the
sum of (y) the number of shares of PBC Stock then issued and outstanding, plus
(z) such number of shares of PBC Stock issuable upon the exercise of any PBC
Stock Option.
"PBC Indemnification List" has the meaning set forth in Section 4.30.
"PBC Insurance List" has the meaning set forth in Section 4.7.
"PBC Investment Securities List" has the meaning set forth in Section 4.26.
"PBC List" means any list required to be furnished by PBC to GBB herewith.
"PBC Litigation List" has the meaning set forth in Section 4.10.
"PBC Loan List" has the meaning set forth in Section 4.25.
"PBC Offices List" has the meaning set forth in Section 4.23.
"PBC Option List" has the meaning set forth in Section 4.2.
"PBC Operating Losses List" has the meaning set forth in Section 4.24.
"PBC Perfected Dissenting Shares" means PBC Dissenting Shares which the
holders thereof have not withdrawn or caused to lose their status as PBC
Dissenting Shares.
"PBC Personal Property List" has the meaning set forth in Section 4.8.
"PBC Real Property List" has the meaning set forth in Section 4.9.
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"PBC Shareholders' Meeting" means the meeting of PBC's shareholders referred
to in Section 6.7.
"PBC Stock" means the common stock, no par value, of PBC.
"PBC Stock Option" means any option issued pursuant to the PBC Stock Option
Plan.
"PBC Stock Option Plans" means the Peninsula Bank of Commerce 1992 Stock
Option Plan and the Peninsula Bank of Commerce 1996 Directors Stock Option
Plan.
"PBC Supplied Information" has the meaning set forth in Section 4.30.
"PBC Tax List" has the meaning set forth in Section 4.11.
"Person" means any individual, corporation, association, partnership, trust,
joint venture, other entity, unincorporated body, government or governmental
department or agency.
"PREC" means Peninsula Real Estate Corporation, a wholly-owned subsidiary of
PBC.
"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 Joint Proxy Statement and Prospectus in connection
with the GBB Shareholders' Meeting and PBC 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" means the California state chartered bank created by
the Merger of Newco with and into PBC.
"Tanks" has the meaning set forth in Section 4.12(b).
"Top Up Option" means, in the event that the Average Closing Price is less
than $30.00, the right of GBB to elect to issue that number of shares of GBB
Stock equal to the quotient obtained by dividing $37.50 by the Average Closing
Price.
"Transaction Expenses" means expenses incurred by PBC in connection with the
Merger consisting of PBC's (i) legal fees up to $90,000; (ii) investment
banking fees payable pursuant to the Hoefer Agreement; and (iii) normal and
customary accounting and printing expenses.
"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 II
TERMS OF MERGER
2.1 Effect of Merger and Surviving Corporation. At the Effective Time of the
Merger, Newco will be merged with and into PBC under the charter of PBC
pursuant to the terms, conditions and provisions of the
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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 Newco
and PBC 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 Newco and PBC, including all debts due to either of them on whatever
account, shall be the property of the Surviving Corporation as they were of
Newco and PBC and the title to any interest in real property and any interest
in personal property vested by deed or otherwise in either Newco or PBC 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 Newco and PBC shall be preserved
unimpaired and all debts, liabilities and duties of Newco and PBC 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 Newco. Each share of common stock, no par value, of Newco
issued and outstanding immediately prior to the Effective Time of the Merger
shall, without any further action on the part of Newco or the holder of such
shares, be converted pursuant to the terms of the Agreement of Merger. From
and after the Effective Time of the Merger, each certificate that, prior to
the Effective Time of the Merger, represented shares of Newco shall evidence
ownership of shares of the Surviving Corporation on the basis set forth above.
2.3 Conversion of PBC Stock. (a) On the Effective Time of the Merger,
pursuant to the Agreement of Merger, each outstanding share of PBC Stock
excluding any PBC Perfected Dissenting Shares or shares of PBC 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 PBC or the holders of any such shares, be converted into shares of GBB
Stock (the "Conversion Ratio") as follows:
(i)If the Average Closing Price is greater than $36.67, a number of
shares of GBB Stock equal to the quotient obtained by dividing (A)
$44.00 plus the product of .3333 times the difference between the
Average Closing Price and $36.67, by (B) the Average Closing Price.
(ii)If the Average Closing Price is between $33.33 and $36.67, 1.2
shares of GBB Stock.
(iii)If the Average Closing Price is $32.01 or more and less than
$33.33, a number of shares of GBB Stock equal to the quotient obtained
by dividing $40.00 by the Average Closing Price.
(iv)If the Average Closing Price is less than $32.01, 1.25 shares of
GBB Stock; provided, however, if the Average Closing Price is less than
$30.00, GBB may exercise the Top Up Option, in which case the
Conversion Ratio will equal that number of shares of GBB Stock equal to
the quotient obtained by dividing $37.50 by the Average Closing Price.
If GBB does not elect to exercise the Top Up Option, PBC may terminate
the Agreement pursuant to Section 13.1(j) or may proceed with the
Merger, in which case the Conversion Ratio will be 1.25 shares of GBB
Stock.
(b) PBC 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 PBC
Stock shall receive such payment in an amount as determined pursuant to
Chapter 13 of the CGCL.
(c) Each outstanding share of PBC 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.
(d) 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, as of a record date prior to the
Effective Time of the Merger, appropriate adjustment or adjustments
(rounded to four digits to the right of the decimal point) will be made to
the Conversion Ratio.
2.4 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, except that
any GBB Perfected Dissenting Shares shall remain outstanding subject to the
right of the holder of such shares to receive payment for such shares in an
amount as determined pursuant to Chapter 13 of the CGCL.
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2.5 Fractional Shares. No fractional shares of GBB Stock shall be issued in
the Merger. In lieu thereof, each holder of PBC 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.
2.6 Exchange Procedures.
(a) 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 PBC Stock,
for exchange in accordance with this Section 2.6 through the Exchange
Agent, certificates representing the shares of GBB Stock issuable pursuant
to Section 2.3 in exchange for shares of PBC 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 payable in connection with Section 2.3 hereof but
for the operation of Section 2.5 of this Agreement (collectively, the
"Exchange Fund").
(b) 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 PBC Stock (the "Certificates") whose
shares were converted into the right to receive shares of GBB Stock
pursuant to Section 2.3 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 PBC 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 that amount of cash and a certificate representing that
number of whole shares of GBB Stock which such holder has the right to
receive pursuant to the provisions of Sections 2.3 and 2.4 hereof, and the
Certificate so surrendered shall forthwith be canceled. In the event a
certificate is surrendered representing PBC Stock, the transfer of
ownership which is not registered in the transfer records of PBC, a
certificate representing the proper number of shares of GBB Stock may be
issued to a transferee if the Certificate representing such PBC 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 2.6, 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 PBC 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 2.3 and 2.5 hereof.
(c) No dividends or other distributions declared or made after the
Effective Time of the Merger 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 2.5 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 2.5 and the amount of dividends or other distributions
with a record date after the Effective Time of the Merger theretofore paid
with respect to such whole shares of
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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.
(d) All shares of GBB Stock issued upon the surrender for exchange of PBC
Stock in accordance with the terms hereof (including any cash paid pursuant
to Section 2.5) shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of PBC Stock, and there shall be no
further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of PBC 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.
(e) Any portion of the Exchange Fund which remains undistributed to the
shareholders of PBC following the passage of six months after the Effective
Time of the Merger shall be delivered to GBB, upon demand, and any
shareholders of PBC who have not theretofore complied with this Section 2.6
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.
(f) Neither GBB nor PBC shall be liable to any holder of shares of PBC
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.
(g) 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.
2.7 Directors of Surviving Corporation and GBB. 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 PBC
immediately prior to the Effective Time of the Merger and David L.
Kalkbrenner, or, if unable to serve, such other person designated by GBB and
reasonably acceptable to PBC. 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 GBB shall be comprised of the persons serving as
directors of GBB immediately prior to the Effective Time of the Merger and
George R. Corey, or, if unable to serve, such other person designated by PBC
and reasonably acceptable to GBB. Such persons shall serve until the earlier
of their resignation or removal or until their respective successors are duly
elected and qualified.
2.8 Executive Officers of Surviving Corporation and GBB. Immediately after
the Effective Time of the Merger, the executive officers of GBB shall be
comprised of the persons serving as executive officers of GBB immediately
prior to the Effective Time of the Merger. Such persons shall serve until the
earlier of their resignation or removal. 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 PBC immediately
prior to the Effective Time of the Merger.
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ARTICLE III
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, Newco and PBC. 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 IV
REPRESENTATIONS AND WARRANTIES OF PBC
PBC represents and warrants to GBB as follows:
4.1 Incorporation, Standing and Power. PBC is a California state chartered
bank duly organized, validly existing and in good standing and is authorized
by the DFI to conduct a general banking business. PREC has been duly
organized, is validly existing and in good standing as a corporation under the
laws of the State of California. PBC's deposits are insured by the FDIC in the
manner and to the extent provided by law. Each of PBC and PREC 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 PBC or PREC nor the location of any of
their respective properties requires that either PBC or PREC 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 PBC. PBC has delivered to GBB true and correct
copies of its and PREC's Articles of Incorporation and Bylaws, as amended, and
in effect as of the date hereof.
4.2 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of PBC
consists of 2,000,000 shares of PBC Stock, of which 673,862 shares are
outstanding and 1,000,000 shares of preferred stock, no par value, none of
which are outstanding. All of the outstanding shares of PBC Stock are duly
authorized, validly issued, fully paid and nonassessable (except for
assessments that may be ordered by the Commissioner under the authority of
Section 662 of the CFC). Except for PBC Options covering 108,427 shares of
PBC Stock granted pursuant to the PBC Stock Option Plans, there are no
outstanding options, warrants or other rights in or with respect to the
unissued shares of PBC Stock nor any securities convertible into such
stock, and PBC 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. PBC has furnished GBB a list (the "PBC Option
List") setting forth the name of each holder of a PBC Option, the number of
shares of PBC Stock covered by each such option, the vesting schedule of
such option, the exercise price per share and the expiration date of each
such PBC Option.
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(b) As of the date of this Agreement, the authorized capital stock of
PREC consists of 2,000,000 shares of common stock, of which 500 shares are
outstanding and owned of record and beneficially by PBC. All of the
outstanding shares of such common stock are duly authorized, validly
issued, fully paid and nonassessable. 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 PREC
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.
4.3 Subsidiaries. Other than PREC, PBC does not own, directly or indirectly
(except as pledgee pursuant to loans or upon acquisition in satisfaction of
debt previously contracted), the outstanding stock or equity or other voting
interest in any corporation, partnership, joint venture or other entity. Other
than serving as trustee on deeds of trust, PREC has conducted no business or
activities subsequent to December 31, 1992 and, as of the date hereof, has no
material assets or liabilities.
4.4 Financial Statements. PBC has previously furnished to GBB a copy of the
Financial Statements of PBC. The Financial Statements of PBC: (a) present
fairly the consolidated financial condition of PBC 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 for loan losses and other
contingencies and (d) are based upon the books and records of PBC.
4.5 Reports and Filings. Except as set forth in a list (the "PBC Filings
List"), since January 1, 1994, each of PBC and PREC has filed all reports,
returns, registrations and statements (such reports and filings referred to as
"PBC 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 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
PBC. No administrative actions have been taken or orders issued in connection
with such PBC Filings. As of their respective dates, each of such PBC 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 PBC Filings fairly presented the financial position of PBC 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. PBC has furnished GBB with true
and correct copies of all PBC Filings filed by PBC since January 1, 1994.
4.6 Authority of PBC. The execution and delivery by PBC of this Agreement
and of the Agreement of Merger and, subject to the requisite approval of the
shareholders of PBC 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 PBC, and 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 PBC enforceable in accordance with their respective
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 PBC to GBB
(the "PBC Conflicts and Consents List"), neither the execution and delivery by
PBC of this Agreement or the Agreement of Merger, the consummation of the
transactions contemplated herein or therein, nor compliance by PBC with any of
the provisions hereof or thereof, will: (a) conflict with or result in a
breach of any provision of its or PREC'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,
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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 PBC or
PREC is a party, or by which PBC or PREC 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 PBC or PREC; or (d) violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
PBC or PREC or any of their respective properties or assets. Except as set
forth in the PBC 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 PBC or PREC, and no consent of, approval
of or notice to any other Person, is required in connection with the execution
and delivery by PBC of this Agreement, the Agreement of Merger or the
consummation by PBC 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
PBC; (ii) such approvals as may be required by the FDIC, the FRB and the DFI;
(iii) the filing of the Joint 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 PBC and PREC 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
PBC to GBB (the "PBC 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 PBC Insurance List, neither PBC nor PREC 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 PBC Insurance List is a list of all policies
of insurance carried and owned by either PBC or PREC 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 PBC and PREC has good and marketable title to
all its material properties and assets, other than real property, owned or
stated to be owned by PBC or PREC, free and clear of all Encumbrances except:
(a) as set forth in the Financial Statements of PBC; (b) for Encumbrances for
current taxes not yet due; (c) for Encumbrances 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 PBC; or (e)
as set forth in a list furnished by PBC to GBB (the "PBC Personal Property
List.")
4.9 Real Estate. PBC has furnished GBB a list of real property, including
leaseholds and all other interests in real property (other than security
interests), owned by PBC or PREC (the "PBC Real Property List"). Each of PBC
and PREC has duly recorded or caused to be recorded, in the appropriate
county, all recordable interests in such real property. Either PBC or PREC has
good and marketable title to the real property, and valid leasehold interests
in the leaseholds, described in the PBC 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 Encumbrances of public record; (d) 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 (e) as
described in the PBC Real Property List. PBC has furnished GBB with true and
correct copies of all leases included in the PBC Real Property List, all title
insurance policies and all documents evidencing recordation of all recordable
interests in real property included in the PBC Real Property List.
4.10 Litigation. Except as set forth in the PBC Filings or in a list
furnished by PBC to GBB (the "PBC Litigation List"), there is no private or
governmental suit, claim, action or proceeding pending, nor to PBC's knowledge
threatened, against PBC or PREC 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 PBC or PREC which, if
adversely determined, would have a material adverse effect upon the business,
financial condition or results of operations of PBC or the transactions
contemplated hereby, or which may involve a
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judgment against PBC or PREC in excess of $25,000. Also, except as disclosed
in the PBC Filings or in the PBC Litigation List, there are no material
judgments, decrees, stipulations or orders against PBC or PREC 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 the PBC Tax List: (i) all Tax Returns required
to be filed by or on behalf of PBC or any of its subsidiaries have been
timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material aspects; (ii) PBC and its
subsidiaries have paid all Taxes (whether or not shown on any Tax Return)
for any period ending on or before the Effective Time of the Merger or
adequate provision has been made for any such Taxes in the financial
statements of PBC and its subsidiaries (in accordance with generally
accepted accounting principles); (iii) there is no audit examination,
deficiency assessment, or refund litigation currently pending with respect
to any Taxes of PBC or any of its subsidiaries; (iv) all Taxes due with
respect to completed and settled examinations or concluded litigation
relating to PBC or any of its subsidiaries have been paid in full or
adequate provision has been made for any such amounts in the financial
statements of PBC and its subsidiaries (in accordance with generally
accepted accounting principles); (v) no extensions or waivers of statutes
of limitations have been given by or requested with respect to any Taxes of
PBC or any of its subsidiaries; and (vi) there are no liens for Taxes upon
the assets or property of any of PBC or its subsidiaries except for
statutory liens for current Taxes not yet due.
(b) Except for the affiliated group among PBC and its subsidiaries, PBC
has never been a member of an affiliated group of corporations, within the
meaning of Section 1504 of the Code, or a member of combined, consolidated
or unitary group for state, local or foreign Tax purposes. PBC has not
filed a consent pursuant to the collapsible corporation provisions of
Section 341(f) of the Code (or any corresponding provision of state, local
or foreign income Tax law) or agreed to have Section 341(f)(2) of the Code
(or any corresponding provision of state, local or foreign income Tax law)
apply to any disposition of any asset owned by it. PBC has not made or will
not make a consent dividend election under Section 565 of the Code.
(c) Except as set forth in the PBC Tax List, PBC has not agreed to make,
nor is it required to make, any adjustment under Sections 481(a) or 263A of
the Code or any comparable provision of state or foreign tax laws by reason
of a change in accounting method or otherwise. PBC has taken no action that
is not in accordance with prudent banking practice that could defer a
liability for Taxes of PBC from any taxable period ending on or before the
Effective Time of the Merger to any taxable period ending after such date.
(d) PBC is not a party to any agreement, contract, arrangement or plan
that has resulted or would result, separately or in the aggregate, in
connection with the Merger, any change of control of PBC or any other
transaction contemplated by this Agreement, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code.
(e) PBC is not, and has not been, a United States real property holding
corporation (as defined in Section 897(C)(2) of the Code) during the
applicable period specified in Section 897(C)(1)(A)(ii) of the Code.
(f) Except as set forth in the PBC Tax List, to the knowledge of PBC, as
of the date hereof, no shareholder of PBC is other than a United States
person within the meaning of the Code.
(g) PBC does not have and has not had a permanent establishment in any
foreign country, as defined in any applicable Tax treaty or convention
between the United States and such foreign country, and, except as set
forth in the PBC Tax List, PBC has not engaged in a trade or business
within any foreign country.
(h) PBC is not party to any joint venture, partnership, or other
arrangement or contract which could reasonably be expected to be treated as
a partnership for federal income tax purposes.
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(i) All outstanding options to acquire equity of PBC that purport to be
or were otherwise intended (when issued) to be treated as "incentive stock
options"("ISOs") within the meaning of Section 422 of the Code (and any
predecessor provision and any similar provision applicable state, local or
other Tax law) were issued in compliance with such section. All such
outstanding options currently qualify for treatment as ISOs, and are held
by persons who are employees of PBC.
(j) As used in this Agreement, (i) the term "Tax" or "Taxes" means taxes
and other impost, levies, assessments, duties, fees or charges imposed or
required to be collected by any federal, state, county, local, municipal,
territorial or foreign governmental authority or subdivision thereof,
including, without limitation, income, excise, gross receipts, ad valorem,
profits, gains, property, sales, transfer, use, payroll, employment,
severance, withholding, duties, intangible, franchise, personal property,
and other taxes, charges, levies or like assessments, together with all
penalties and additions to tax and interest thereon, and (ii) the term "Tax
Return" shall mean any return, report, information return or other document
(including elections, declarations, disclosures, schedules, estimates. and
other returns or supporting documents) with respect to Taxes.
4.12 Compliance with Laws and Regulations.
(a) Neither PBC nor PREC is in default under or in breach of any
provision its Articles of Incorporation, as amended, or Bylaws, as amended,
or law, ordinance, rule or regulation promulgated by any Governmental
Entity, where such default or breach would have a material adverse effect
on the business, financial condition, results of operations or prospects of
PBC.
(b) Without limiting Section 4.12(a), to the best of PBC's knowledge and
except as set forth on a list furnished by PBC to GBB (the "PBC
Environmental Compliance List") (i) each of PBC and PREC is in compliance
with all Environmental Regulations; (ii) there are no Tanks on or about PBC
Property; (iii) there are no Hazardous Materials on, below or above the
surface of, or migrating to or from PBC Property; (iv) neither PBC nor PREC
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 PBC or PREC or concerning property
securing PBC loans and there is no outstanding judgment, order, writ,
injunction, decree, or award against or affecting PBC Property or property
securing PBC or PREC 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 PBC. For purposes of this Section
4.12(b), 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. "PBC Property" shall mean real estate currently owned, leased, or
otherwise used by PBC, or in which PBC has an investment or security
interest (by mortgage, deed of trust, sale and lease-back or otherwise),
including, without limitation, properties under foreclosure and properties
held by PBC 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
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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.
(c) PBC has provided to GBB phase I environmental assessments with
respect to each interest in real property set forth on the PBC Real
Property List as to which such a phase I environmental investigation has
been prepared by or on behalf of PBC or PREC. The PBC Real Property list
shall disclose each such property as to which such an assessment has not
been prepared on behalf of PBC or PREC.
4.13 Performance of Obligations. Each of PBC and PREC 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 a material adverse
effect on the business, financial condition, results of operations or
prospects of PBC. Except for loans and leases made by PBC or PREC in the
ordinary course of business, to PBC's knowledge, no party with whom PBC or
PREC has an agreement that is of material importance to the business of PBC is
in default thereunder.
4.14 Employees. There are no controversies pending or threatened between
either PBC or PREC 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 PBC. Neither PBC nor PREC 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 Hoefer & Arnett
Incorporated as set forth in the Hoefer Agreement, a copy of which has been
delivered to GBB, PBC 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.
4.16 Material Contracts. Except as set forth in a list furnished by PBC to
GBB (the "PBC Contract List") hereto (all items listed or required to be
listed in such PBC Contract List being referred to herein as "Scheduled
Contracts"), neither PBC nor PREC is a party or otherwise subject to:
(a) 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 PBC or PREC and is not
terminable by PBC or PREC within one year without penalty or (ii) requires
payment by PBC or PREC of $25,000 or more per annum;
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(b) any advertising, brokerage, licensing, dealership, representative or
agency relationship or contract requiring payment by PBC or PREC of $25,000
or more per annum;
(c) any contract or agreement that restricts PBC or PREC (or would
restrict any Affiliate of PBC or PREC 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;
(d) any lease of real or personal property providing for annual lease
payments by or to PBC or PREC in excess of $25,000 per annum other than (A)
financing leases entered into in the ordinary course of business in which
PBC or PREC is lessor and (B) leases of real property presently used by PBC
as banking offices;
(e) any mortgage, pledge, conditional sales contract, security agreement,
option, or any other similar agreement with respect to any interest of PBC
or PREC (other than as mortgagor or pledgor in the ordinary course of its
banking business or as mortgagee, secured party or deed of trust
beneficiary in the ordinary course of its business) in personal property
having a value of $25,000 or more;
(f) other than as described in the PBC Filings or as set forth in the PBC
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 PBC or PREC;
(g) any agreement to acquire equipment or any commitment to make capital
expenditures of $25,000 or more;
(h) 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 PBC or PREC has an ownership
interest or for the grant of any preferential right to purchase any such
property or asset;
(i) 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 PBC or PREC);
(j) any restrictive covenant contained in any deed to or lease of real
property owned or leased by PBC or PREC (as lessee) that materially
restricts the use, transferability or value of such property;
(k) 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;
(l) any supply, maintenance or landscape contracts not terminable by PBC
or PREC without penalty on 30 days' or less notice and which provides for
payments in excess of $25,000 per annum;
(m) other than as disclosed with reference to subparagraph (k) of this
Section 4.16, any material agreement which would be terminable other than
by PBC or PREC as a result of the consummation of the transactions
contemplated by this Agreement;
(n) any contract of participation with any other bank in any loan in
excess of $25,000 or any sales of assets of PBC or PREC with recourse of
any kind to PBC or PREC except the sale of mortgage loans, servicing
rights, repurchase or reverse repurchase agreements, securities or other
financial transactions in the ordinary course of business;
(o) 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);
(p) any contract relating to the provision of data processing services to
PBC or PREC; or
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(q) 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 PBC or PREC 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 December 31, 1996, there has not been,
occurred or arisen any of the following (whether or not in the ordinary course
of business unless otherwise indicated):
(a) Any change in any of the assets, liabilities, permits, methods of
accounting or accounting practices, business, or manner of conducting
business, of PBC or PREC or any other event or development 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 PBC;
(b) 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 PBC or that may involve a
loss of more than $25,000 in excess of applicable insurance coverage;
(c) 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 PBC;
(d) Any disposition by PBC or PREC 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 PBC; or
(e) Any direct or indirect redemption, purchase or other acquisition by
PBC or PREC of any equity securities 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 PBC) or other distribution on or in respect of PBC Stock
whether consisting of money, other personal property, real property or
other things of value.
4.18 Licenses and Permits. Each of PBC and PREC 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 PBC. The respective properties, assets, operations
and businesses of PBC and PREC 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 PBC and PREC are and have been
maintained and conducted, in all material respects, in compliance with all
applicable laws and regulations.
4.19 Undisclosed Liabilities. Neither PBC nor PREC has any liabilities or
obligations, either accrued or contingent, that are material to PBC and that
have not been: (a) reflected or disclosed in the Financial Statements of PBC;
(b) incurred subsequent to December 31, 1996 in the ordinary course of
business; or (c) disclosed in a list furnished by PBC to GBB (the "Undisclosed
Liabilities List") or on any other PBC List. PBC does not know of any basis
for the assertion against it 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 PBC that is not fairly reflected in the
Financial Statements of PBC or otherwise disclosed in this Agreement.
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4.20 Employee Benefit Plans.
(a) PBC has previously made available to GBB copies of each "employee
benefit plan," as defined in Section 3(3) of ERISA, which is subject to any
provision of ERISA and covers any employee, whether active or retired, of
PBC, together with all amendments thereto, all related summary plan
descriptions (to the extent one is required by law), the determination
letter from the IRS, and the annual reports for the most recent three years
(Form 5500 including, if applicable, Schedule B thereto) prepared in
connection with any such plan. Such plans are hereinafter referred to
collectively as the "Employee Plans." PBC 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 PBC 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 PBC to GBB (the "PBC Employee Plan List"),
all Employee Plans were in effect for substantially all of 1996, 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, 1997.
(b) PBC has previously made available to GBB copies or descriptions of
each plan or arrangement maintained or otherwise contributed to by PBC
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, profit sharing, benefit, retirement, incentive, group health
or insurance, welfare or similar plan or arrangement for the benefit of any
employee or class of employees, whether active or retired, of PBC (such
plans and arrangements being collectively referred to herein as "Benefit
Arrangements"). Except as disclosed in the PBC Employee Plan List hereto,
all Benefit Arrangements which are in effect were in effect for
substantially all of 1996. There has been no material amendment thereof or
increase in the cost thereof or benefits payable thereunder since January
1, 1997. Except as set forth in the PBC Employee Plan List, there has been
no material increase in the compensation of or benefits payable to any
senior executive employee of PBC since December 31, 1996, nor any
employment, severance or similar contract entered into with any such
employee, nor any amendment to any such contract, since December 31, 1996.
There is no contract, agreement or benefit arrangement covering any
employee of PBC 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.
(c) With respect to all Employee Plans and Benefit Arrangements, PBC is
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. PBC has performed
all of its obligations under all such Employee Plans and Benefit
Arrangements in all material aspects. There is no pending or, to the
knowledge of PBC, 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 PBC, 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 PBC which is covered by Title I
of ERISA, which could subject any person (other than a person for whom PBC
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 PBC; nor has any
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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 PBC 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. To the knowledge of PBC, PBC has not 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 PBC) at or after the Effective Time of the
Merger.
(d) Except for Scheduled Contracts set forth in the PBC Contract List or
as set forth in the PBC 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 PBC 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.
(e) All group health plans of PBC have been operated in compliance with
the group health plan continuation coverage requirements of Section 4980B
of the Code in all material respects.
4.21 Corporate Records. The minute books of each of PBC and PREC accurately
reflect all material actions taken to this date by the respective
shareholders, board of directors and committees of each of PBC and PREC and
contain true and complete copies of their respective Articles of
Incorporation, Bylaws and other charter documents, and all amendments thereto.
4.22 Accounting Records. Each of PBC and PREC 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 PBC or PREC which is not easily
and readily available elsewhere, have been duplicated, and such duplicates are
stored safely and securely.
4.23 Offices and ATMs. PBC has furnished to GBB a list (the "PBC Offices
List") setting forth the headquarters of each of PBC and PREC (identified as
such) and each of the offices and automated teller machines ("ATMs")
maintained and operated by PBC or PREC (including, without limitation,
representative and loan production offices and operations centers) and the
location thereof. Except as set forth on the PBC Offices List, neither PBC nor
PREC maintains any other office or ATM or conducts business at any other
location, and neither PBC nor PREC has applied for or received permission to
open any additional branch or operate at any other location.
4.24 Operating Losses. PBC has furnished to GBB a list (the "PBC Operating
Losses List") setting forth any Operating Loss (as herein defined) which has
occurred at PBC during the period after December 31, 1996 to the date of the
Agreement. To the knowledge of PBC, no action has been taken or omitted to be
taken by any employee of PBC that has resulted in the incurrence by PBC 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 $50,000 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. PBC has furnished to GBB a list (the "PBC Loan List")
that sets forth (a) as of April 30, 1997, a description of, by type and
classification, if any, each loan, lease, other extension of credit or
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commitment to extend credit by PBC; (b) sets forth as of July 31, 1997, by
type and classification, all loans, leases, other extensions and commitments
to extend credit of PBC that have been 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 PBC
as to which any payment of principal, interest or any other amount is 90 days
or more past due.
4.26 Investment Securities. PBC has furnished to GBB a list (the "PBC
Investment Securities List") setting forth a description of each Investment
Security held by PBC or PREC on July 31, 1997. The PBC 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 PBC nor PREC has any Investment Security classified as
trading.
4.27 Power of Attorney. Neither PBC nor PREC has granted any Person a power
of attorney or similar authorization that is presently in effect or
outstanding.
4.28 Facts Affecting Regulatory Approvals. To the best knowledge of PBC,
there is no fact, event or condition applicable to PBC or PREC 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 PBC, neither PBC
nor PREC 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, and the Hoefer Agreement,
neither PBC nor PREC 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
PBC or PREC (a "Covered Person"), and to the best knowledge of PBC, there are
no claims for which any Covered Person would be entitled to indemnification by
PBC or PREC if such provisions were deemed in effect, except as set forth in a
list furnished by PBC to GBB (the "PBC Indemnification List").
4.31 Community Reinvestment Act. PBC has received rating of "satisfactory"
in its most recent examination or interim review with respect to the Community
Reinvestment Act. PBC has not been advised of any supervisory concerns
regarding PBC's compliance with the Community Reinvestment Act.
4.32 Derivative Transactions. Neither PBC nor PREC is a party to a
transaction in or involving forwards, futures, options on futures, swaps or
other derivative instruments.
4.33 Trust Administration. PBC 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 3 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 PBC 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 PBC
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 similar
positions where PBC 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 PBC 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.
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4.34 Disclosure Documents and Applications. None of the information supplied
or to be supplied by or on behalf of PBC ("PBC Supplied Information") for
inclusion in (a) the Registration Statement on Form S-4 and the Joint 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 Joint
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 Accuracy and Currentness of Information Furnished. The representations
and warranties made by PBC hereby or in the PBC 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 V
REPRESENTATIONS AND WARRANTIES OF GBB
GBB represents and warrants to PBC 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. Newco has been duly organized, is validly existing and in good standing
as corporation under the laws of the State of California. GBB and Newco have
all requisite corporate power and authority to own, lease and operate their
respective properties and assets and to carry on their respective businesses
as presently conducted. GBB and Newco are duly qualified and in good standing
as foreign corporations, and are 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 each of GBB and Newco have been delivered to PBC. Such Articles
of Incorporation and Bylaws are in full force and effect as of the date
hereof. Newco has not engaged in any business nor has it incurred any
liabilities or obligations since it was incorporated other than relating to
this Agreement and the transactions contemplated hereby.
5.2 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of GBB
consists of 6,000,000 shares of common stock, of which 3,335,284 shares are
outstanding 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 issued, fully paid and nonassessable. The GBB
Stock to be used in the Merger will be duly authorized, validly issued,
fully paid and nonassessable.
(b) As of the date of this Agreement, the authorized capital stock of
Newco consists of 10,000 shares of common stock, of which 100 shares are
outstanding and owned of record and beneficially by GBB. All the
outstanding shares of such common stock are duly authorized, validly
issued, fully paid and nonassessable. 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 Newco
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.
5.3 Financial Statements. GBB has previously furnished to PBC 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,
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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.
5.4 Reports and Filings. Since January 1, 1994, 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. GBB has furnished or made available to PBC true and correct copies
of all GBB Filings filed by GBB since January 1, 1994.
5.5 Authority.
(a) Of GBB. The execution and delivery by GBB of this Agreement, and
subject to the requisite approval of the shareholders of GBB of this
Agreement and the transactions contemplated hereby, the consummation of the
transactions contemplated hereby, have been duly and validly authorized by
all necessary corporate action on the part of GBB, and this Agreement will
be upon 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 PBC
(the "GBB Conflicts and Consents List"), neither the execution and delivery
by GBB of this Agreement, the consummation of the transactions contemplated
herein, nor compliance by GBB with any of the provisions hereof or 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) the approval of this Agreement and the transactions contemplated
hereby by the shareholders of GBB; (ii) such approvals as may be required
by the SEC, the FRB, the FDIC and the DFI; (iii) filing of the Agreement of
Merger with the Secretary of State of the State of California; and (iv)
such approvals as may be required by NASD to approve for inclusion on the
Nasdaq National Market System the GBB Stock to be issued in the Merger.
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(b) Of Newco. The execution and delivery by Newco of this Agreement and
the Agreement of Merger and, subject to the requisite approval of the
shareholder of Newco, the consummation of the transactions contemplated
thereby, will be duly and validly authorized by all necessary corporate
action on the part of Newco, and this Agreement and the Agreement of Merger
will be, upon due execution and delivery by the respective parties, a valid
and binding obligation of Newco 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. Neither the consummation of the transactions
contemplated by this Agreement and the Agreement of Merger, nor compliance
by Newco with any of the provisions hereof or thereof, will: (a) conflict
with or result in a breach of any provision of its Articles of
Incorporation, or Bylaws; (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 Newco
is a party, or by which Newco or any of its properties or assets is bound:
(c) result in the creation or imposition of any Encumbrance on any of the
properties or assets of Newco; or (d) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Newco or any of its
properties or assets. No consent of, approval of, notice to or filing with
any Governmental Entity having jurisdiction over any aspect of the business
or assets of Newco, and no consent of, approval of or notice to any other
Person, is required in connection with the execution and delivery by Newco
of this Agreement or the Agreement of Merger or the consummation by Newco
of the transactions contemplated hereby or thereby, except (i) the approval
of the Agreement of Merger and the transactions contemplated hereby by the
shareholder and directors of Newco, (ii) such approvals as may be required
by the SEC, the FRB, the FDIC, the DFI or any other Governmental Authority;
and (iii) filing of the Agreement of Merger with the Secretary of State of
the State of California.
5.6 Subsidiaries. As of the date of this Agreement, GBB owns 100% of the
outstanding stock of each of CNB, MPB and Newco. As of the date of this
Agreement, and except for its investments in the Banks, GBB Capital I and
Newco, 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
corporation, partnership, joint venture or other entity.
5.7 Brokers and Finders. Except for the obligation to Hovde Financial, Inc.,
as set forth in a letter agreement dated July 30, 1997, a copy of which has
been delivered to PBC, 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 June 30,
1997, there has not been, occurred or arisen any of the following (whether or
not in the ordinary course of business unless otherwise indicated):
(a) 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 material adverse effect on
the assets, liabilities, permits, business, financial condition, results of
operations or prospects of GBB on a consolidated basis;
(b) 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;
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(c) 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
(d) 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.
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 and its subsidiaries
accurately reflect all material actions taken to this date by the respective
shareholders, boards of directors and committees of GBB and its subsidiaries
and contain true and complete copies of their respective Articles of
Incorporation, Bylaws and other charter documents, and all amendments thereto.
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 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 Joint Proxy Statement and Prospectus to be mailed to the
shareholders of PBC and GBB in connection with obtaining the approval of the
shareholders of PBC and GBB 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 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 Joint 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.
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5.16 Accuracy and Currentness of Information Furnished. The representations
and warranties made by GBB and Newco 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.
ARTICLE VI
COVENANTS OF PBC
PENDING EFFECTIVE TIME OF THE MERGER
PBC covenants and agrees with GBB and Newco as follows:
6.1 Limitation on PBC'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 California state chartered banks, PBC
agrees to conduct its business in the ordinary course in substantially the
manner heretofore conducted and in accordance with sound banking practices,
and PBC shall not, without the prior written consent of GBB:
(a) issue, sell or grant any PBC Stock (except pursuant to the exercise
of PBC Options outstanding as of the date hereof), any other securities
(including long term debt) of PBC, or any rights, options or securities to
acquire any PBC Stock, or any other securities (including long term debt)
of PBC;
(b) 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 PBC, provided, however, that subject to Section 6.11, PBC may
pay to its shareholders its regular cash dividend in amounts consistent
with past practices but in no event in an aggregate amount greater than 65%
of net income, exclusive of Transaction Expenses, for the period beginning
January 1, 1997 through the earlier of (i) the last day of the month of the
month prior to Closing, or (ii) December 31, 1997;
(c) purchase, redeem or otherwise acquire any capital stock or other
securities of PBC or any rights, options, or securities to acquire any
capital stock or other securities of PBC;
(d) except as may be required to effect the transactions contemplated
herein, amend its Articles of Incorporation or Bylaws;
(e) grant any general or uniform increase in the rate of pay of employees
or employee benefits;
(f) grant any increase in salary, incentive compensation or employee
benefits or pay any bonus to any Person or voluntarily accelerate the
vesting of any employee benefits, except for salary increases of not more
than 5% granted in the ordinary course of business and consistent with past
practices or as required by an existing written employment agreement or
pursuant to the 1997 PBC Bonus Plan as approved by the C Board of
Directors; provided, however, that payment of the Transaction Expenses
shall not be considered in the determination of bonus payments pursuant to
the 1997 PBC Bonus Plan;
(g) make any capital expenditure or commitments with respect thereto in
excess of $25,000 in the aggregate, except for ordinary repairs, renewals
and replacements;
(h) 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;
(i) 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 $100,000 on an
unsecured basis, or $750,000 if secured by a lien on real estate or cash
(consent shall be deemed granted if within two Business Days of written
notice delivered to GBB's Chief Credit Officer, written notice of objection
is not received by PBC);
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(j) change 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;
(k) [reserved];
(l) close any offices at which business is conducted or open any new
offices;
(m) 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;
(n) 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 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 PBC 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 PBC: any merger, consolidation, share
exchange or other business combination; a sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets of PBC representing ten
percent (10%) or more of the assets of PBC; 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 ten percent (10%) or more of the voting power
of PBC; a tender offer or exchange offer for at least ten percent (10%) of
the outstanding shares; a solicitation of proxies in opposition to approval
of the Merger by PBC'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(n) or
elsewhere in this Agreement, the obligations of PBC in this Agreement are
subject to the continuing fiduciary duties of the Board of Directors of PBC
to the shareholders of PBC. In the event the Board of Directors of PBC
receives a bona fide offer for a Competing Transaction with another entity,
and reasonably determines, upon advice of counsel, that as a result of such
offer, any duty to act or to refrain from doing any act pursuant to this
Agreement is inconsistent with the continuing fiduciary duties of said
Board of Directors to the shareholders of PBC, such failure to act or
refrain from doing any act shall not constitute the failure of any
condition, breach of any covenant or otherwise constitute any breach of
this Agreement, except that any such failure to act or refrain from doing
any act shall entitle GBB to terminate this Agreement pursuant to Section
13.1(h) hereof, but in no event shall this sentence or the previous
sentence operate to excuse or modify the obligations of PBC under Section
14.1 hereof;
(o) change any of PBC's 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 PBC's business or operations,
except such changes as may be required in the opinion of PBC's management
to respond to economic or market conditions or as may be required by any
Governmental Entity;
(p) grant any Person a power of attorney or similar authority;
(q) 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 the
obligations of which are entitled to or implied to have the full faith and
credit of the United States government and which have an original maturity
not in excess of one year, 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;
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(r) amend or modify any Scheduled Contract or enter into any agreement or
contract that would be a Scheduled Contract under Section 4.16 (consent
shall be deemed granted if within two Business Days of written notice
delivered to GBB's designee, written notice of objection is not received by
PBC);
(s) 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;
(t) knowingly take any action which would or is reasonably likely to (i)
adversely affect the ability of GBB or PBC to obtain any necessary approval
of any Governmental Entity required for the transactions contemplated
hereby; (ii) adversely affect PBC'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 PBC's obligations hereunder, as set forth in
Articles IX or X herein not being satisfied;
(u) [reserved];
(v) reclassify any Investment Security from hold-to-maturity or available
for sale to trading;
(w) sell any security other than in the ordinary course of business, or
engage in gains trading;
(x) take title to any real property without conducting prior thereto an
environmental investigation, which investigation shall disclose the absence
of any suspected environmental contamination;
(y) agree or make any commitment to take any actions prohibited by this
Section 6.1;
(z) 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;
(aa) notwithstanding any recoveries received with respect to loans
previously charged off, reduce the allowance for loan and lease losses,
except as a result of chargeoffs;
(bb) settle any claim, action or proceeding involving any material
liability for monetary damages or enter into any settlement agreement
containing material obligations;
(cc) 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 June
30, 1997; 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;
(dd) 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
(ee) permit PREC to conduct any business or activities, other than
serving as trustee under deeds of trust for loans originated by PBC.
6.2 Affirmative Conduct of PBC Prior to Effective Time of the
Merger. Between the date hereof and the Effective Time of the Merger, PBC
shall:
(a) 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
PBC;
(b) use its commercially reasonable efforts to keep in full force and
effect all of the existing material permits and licenses of PBC;
(c) 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;
(d) perform its material contractual obligations and not become in
material default on any such obligations;
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(e) duly observe and conform in all material respects to all lawful
requirements applicable to its business;
(f) maintain its assets and properties in good condition and repair,
normal wear and tear excepted;
(g) 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 five percent (5%) or more of the
outstanding PBC Stock prior to the record date fixed for the PBC
Shareholders' Meeting or any adjourned meeting thereof to approve this
Agreement and the transactions contemplated herein;
(h) 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 PBC, or any
actual or threatened collection enforcement activity by any tax authority
with respect to tax liabilities of PBC;
(i) make available to GBB monthly unaudited balance sheets and income
statements of PBC within twenty-five (25) days after the close of each
calendar month;
(j) not later than the 30th day of each calendar month, amend or
supplement the PBC Lists prepared and delivered pursuant to Article IV to
ensure that the information set forth in the PBC Lists accurately reflects
the then-current status of PBC. PBC shall further amend or supplement the
PBC Lists as of the Closing Date if necessary to reflect any additional
information that needs to be included in the PBC Lists;
(k) 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 PBC or
that is contemplated in this Agreement as required in connection with the
Merger;
(l) 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
(m) furnish to GBB, as soon as practicable, and in any event within 15
days after it is prepared, a copy of any report submitted to the PBC Board
of Directors or any committee thereof, provided, however, that PBC need not
furnish to GBB communications of PBC's legal counsel regarding PBC'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.
6.3 Access to Information.
(a) PBC 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 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 PBC 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 PBC and in such a manner as to minimize any disruption of, or
interference with, the normal business operations of PBC. Upon the request
of GBB, PBC will request C&L to provide reasonable access to
representatives of C&L working on behalf of GBB to auditors' work papers
with respect to the business and properties of PBC, including tax accrual
work papers prepared for PBC during the preceding sixty (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 PBC 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 PBC herein; provided, that GBB shall
disclose to PBC any fact or circumstance it may discover which GBB
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believes renders any representation or warranty made by PBC 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 PBC so obtained from any of them so obtained (except
to the extent that such documents or information are a matter of public
record or require disclosure in the Joint 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 PBC.
(b) 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 PBC after the date hereof, and all information
associated with such loan, lease or other credit within three Business Days
of such funding or renewal, such review to take place, if possible, on
PBC's premises.
(c) A representative of GBB, selected by GBB in its sole discretion,
shall be permitted by PBC to attend all regular and special Board of
Directors' and committee meetings of PBC 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 PBC under this Agreement.
6.4 Review by Accountants. Promptly upon request of GBB, PBC will request
C&L to permit representatives of C&L working on behalf of GBB to review and
examine the work papers of C&L relating to PBC and the Financial Statements of
PBC and to review and examine the work papers of C&L relating to any future
completed audits or completed reviews of PBC.
6.5 Filings. PBC 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 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. PBC will promptly notify GBB of any event of which PBC
obtains knowledge which has had or may have a materially adverse effect on the
financial condition, operations, business or prospects of PBC or in the event
that PBC determines that it is unable to fulfill any of the conditions to the
performance of GBB's and Newco's obligations hereunder, as set forth in
Articles IX or XI herein, and PBC will furnish GBB (i) as soon as available,
and in any event within one (1) Business Day after it is mailed or delivered
to the Board of Directors of PBC or committees thereof, any report by PBC for
submission to the Board of Directors of PBC or committees thereof, (ii) as
soon as available, all proxy statements, information statements, financial
statements, reports, letters and communications sent by PBC to its
shareholders or other security holders, and all reports filed by PBC with the
FRB, the FDIC or the DFI, and (iii) such other existing reports as GBB may
reasonably request relating to PBC.
6.7 PBC Shareholders' Meeting. Promptly after the execution of this
Agreement, PBC 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 PBC shall, subject to its
fiduciary duties, recommend that its shareholders approve this Agreement and
the transactions contemplated
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hereby, and the Board of Directors of PBC 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 PBC Stock to approve this
Agreement and the transactions contemplated hereby.
6.8 Certain Loans and Other Extensions of Credit. PBC 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 PBC or by any other Person as "Criticized," "Specially Mentioned,"
"Substandard," "Doubtful," "Loss" or any comparable classification
("Classified Credits"). PBC 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 PBC to any PBC director, officer at or above the senior
vice president level, or shareholder holding ten percent (10%) or more of the
capital stock of PBC, including with respect to each such loan or lease the
identity and, to the knowledge of PBC, the relation of the borrower to PBC,
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, PBC will promptly prepare or cause
to be prepared the portions of the Joint Proxy Statement and Prospectus as it
pertains to PBC 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. PBC shall afford GBB a
reasonable opportunity to review the portions of the Joint Proxy Statement and
Prospectus pertaining to PBC and all such applications and all amendments and
supplements thereto before the filing thereof. PBC covenants and agrees that,
with respect to the information relating to PBC, the Joint 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. PBC 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 and Five Percent Shareholder Agreements. Concurrently with
the execution of this Agreement, (a) PBC shall deliver to GBB a letter
identifying all persons who are then "affiliates" of PBC for purposes of Rule
145 under the Securities Act and (b) PBC 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. PBC shall use reasonable efforts to obtain from any person who
becomes an affiliate of PBC after PBC's delivery of the letter referred to
above, and on or prior to the date of the PBC 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. At least
10 Business Days prior to the issuance of the opinion to be provided for in
Section 9.6, PBC shall use its commercially reasonable efforts to cause each
person or group of persons who holds more than five percent (5%) of the PBC
Stock (regardless of whether such person is an "affiliate" under Rule 145) to
deliver to Manatt, Phelps & Phillips, LLP a letter stating that such
shareholder(s) has no present plan or intention to dispose of GBB Stock that
the shareholder(s) will receive in the Merger, and committing that such
shareholder(s) will not dispose of such GBB Stock in a manner as to cause a
violation of the "continuity of shareholder interest" requirements of Treasury
Regulation 1.368-1.
6.11 Coordination of Dividends. PBC shall coordinate with GBB the
declaration of any dividends that may be allowed pursuant to Section 6.1(b)
hereof, and the record date and the payment dates relating thereto, it
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being the intention of the parties that holders of PBC Stock shall not receive
two dividends, or fail to receive one dividend, for any applicable dividend
period with respect to their shares of PBC 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 PBC's directors
and officers added to GBB's directors' and officers' liability insurance
policy pursuant to Section 7.2(f) hereof and upon GBB's request, PBC 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 PBC under a directors' and officers' liability insurance
policy which is no less protective in terms of coverage or limitations then
now possessed by PBC 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 then now possessed by PBC covering acts or
omissions occurring prior to the Effective Time of the Merger and actions
related to this Agreement.
ARTICLE VII
COVENANTS OF GBB
PENDING EFFECTIVE TIME OF THE MERGER
GBB covenants and agrees with PBC 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, and each
of GBB and its subsidiaries shall not, without prior written consent of PBC
(which consent shall not be unreasonably withheld and which consent (except
with respect to subparagraphs (f) of this Section 7.1) shall be deemed granted
if within five (5) Business Days of PBC's receipt of written notice of a
request for prior written consent, written notice of objection is not received
by GBB):
(a) take any action which would or is reasonably likely to (i) adversely
affect the ability of GBB or Newco to obtain any necessary approvals of any
Governmental Entity required for the transactions contemplated hereby; (ii)
adversely affect GBB's or Newco'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 Newco's obligations hereunder, as set forth
in Articles IX or XI herein not being satisfied;
(b) 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;
(c) amend its articles of incorporation in any respect which would
materially and adversely affect the rights and privileges attendant to the
GBB Stock; or
(d) 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:
(a) use commercially reasonable efforts consistent with this Agreement,
and cause each of its subsidiaries to use its commercially reasonable
efforts consistent with this Agreement, to maintain and preserve intact
their respective present business organizations and to maintain and
preserve the relationships and goodwill with account holders, borrowers,
employees and others having business relationships with GBB or any
subsidiary of GBB;
(b) duly observe and conform in all material respects to all lawful
requirements applicable to the business of GBB or any subsidiary of GBB;
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(c) make available to PBC monthly unaudited consolidated balance sheets
and consolidated income statements of GBB within twenty-five (25) days
after the close of each calendar month;
(d) 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 or that is contemplated in this Agreement as required in
connection with the Merger;
(e) not later than the 20th day of each calendar month, amend or
supplement the GBB Lists prepared and delivered pursuant to Article V to
ensure that the 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
(f) use its commercially reasonable efforts to have PBC'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 PBC, GBB shall (i)
make its Chief Operating Officer/Chief Financial Officer and Controller
available to discuss with PBC and its representatives GBB's operations, (ii)
shall provide PBC with written information which is (a) similar to the written
information that PBC reviewed in connection with this Agreement, and (b)
related to GBB's business condition, operations and prospects; and (iii) make
available to PBC the minutes of meetings of the Board of Directors of GBB
(except to the extent that such minutes contain communications of GBB's legal
counsel regarding GBB's rights and obligations under this Agreement or the
transactions contemplated hereby, or matters covered by confidentiality
agreements or the attorney-client privilege or which contain attorney's work
product). No examination or review conducted under this section shall
constitute a waiver or relinquishment on the part of PBC of the right to rely
upon the representations and warranties made by GBB herein; provided, that PBC
shall disclose to GBB any fact or circumstance it may discover which PBC
believes renders any representation or warranty made by GBB hereunder
incorrect in any respect. PBC 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 Joint 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 FDIC; (iii) an application for
approval of the Merger with the DFI; (iv) in conjunction with PBC, the
Registration Statement on Form S-4 and the Joint Proxy Statement and
Prospectus as it pertains to GBB; and (v) any other applications necessary to
consummate the transactions contemplated hereby. GBB shall afford PBC a
reasonable opportunity to review the Joint Proxy Statement and Prospectus and
all such applications and all amendments
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and supplements thereto before the filing thereof. GBB covenants and agrees
that the Registration Statement on Form S-4 and the Joint 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 PBC reside.
7.7 GBB Shareholders' Meeting. Promptly after the execution of this
Agreement, GBB 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 GBB shall, subject to its
fiduciary duties, recommend that its shareholders approve this Agreement and
the transactions contemplated hereby, and the Board of Directors of GBB 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 GBB Stock to approve this Agreement and the transactions
contemplated hereby.
7.8 Notices; Reports. GBB will promptly notify PBC 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 PBC's obligations
hereunder, as set forth in Articles IX or X herein, and GBB will furnish PBC
(i) as soon as available, and in any event within ten (10) days after it is
prepared, any report by GBB for submission to the Board of Directors of GBB or
committees thereof, (ii) as soon as available, all proxy statements,
information statements, financial statements, reports, letters and
communications sent by GBB to its shareholders or other security holders, and
all reports filed by GBB with the SEC, the FRB, the FDIC, the DFI, the O.C.,
and (iii) such other existing reports as PBC may reasonably request relating
to GBB.
7.9 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 as provided in Section 11.4 hereof, GBB shall use
its commercially reasonable efforts for purposes of obtaining the removal of
such condition.
7.10 Stock Options.
(a) At and as of the Effective Time of the Merger, GBB shall assume each
and every outstanding option to purchase shares of PBC Stock ("PBC Stock
Option") and all obligations of PBC under the PBC Stock Option Plans. Each
and every PBC 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 PBC Stock Option Plans and in the other documents governing
such PBC Stock Option immediately prior to the Effective Time of the
Merger, except that: (i) such PBC 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 PBC Stock that were purchasable under such PBC 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 PBC Stock Option shall be equal
to the quotient determined by dividing (A) the exercise price per share of
PBC Stock at which such PBC 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 PBC Stock Option a document evidencing the assumption of such
PBC Stock Option by GBB pursuant to this Section 7.10.
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(b) GBB shall comply with the terms of the PBC Stock Option Plans and
insure, to the extent required by, and subject to the provisions of, such
Plans, that PBC 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.
(c) 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 7.10.
ARTICLE VIII
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 PBC 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 George R. Corey to the Board of Directors of GBB effective at and
after the Effective Time of the Merger.
PBC agrees to take all necessary action including, if necessary, increasing
the authorized number of its directors, to appoint David L. Kalkbrenner to the
Board of Directors of PBC, 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 PBC Real Property List. In the event any such phase
I environmental investigation report, or any such report which PBC has already
obtained on any of the Real Property set forth on PBC's Real Property List,
discloses facts which, in the sole discretion of GBB, warrant further
investigation, GBB shall provide written notice to PBC, and PBC 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 PBC to conduct
such investigation and provide such report shall be acceptable to GBB. GBB
shall have ten 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 PBC
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 such consultant (and
written notice thereof provided by PBC to GBB) PBC shall immediately commence
such Remediation, all at the sole cost and expense of PBC. 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(i)
hereof before the expiration of 21 days from the date of such written notice.
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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 PBC Real Property List, except as required by law.
ARTICLE IX
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 GBB
and PBC.
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 FDIC, 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.
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 PBC shall have received from Manatt, Phelps &
Phillips, LLP an opinion reasonably satisfactory to GBB and PBC to the effect
that the Merger shall not result in the recognition of gain or loss for
federal income tax purposes to GBB or PBC, nor shall the issuance of the GBB
Stock result in the recognition of gain or loss by the holders of PBC Stock
who receive such stock in connection with the Merger, dated prior to the date
the Joint Proxy Statement and Prospectus is first mailed to the shareholders
of PBC 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, C&L
shall have delivered a written opinion to GBB that the Merger will qualify for
pooling-of-interests accounting treatment. In making its determination that
the Merger will qualify for such treatment, C&L 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 X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PBC
All of the obligations of PBC 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 PBC:
10.1 Legal Opinion. PBC shall have received the opinion of Manatt, Phelps &
Phillips, LLP, attorneys for GBB and Newco, dated as of the Closing Date, and
in form and substance satisfactory to the counsel of
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PBC, to the effect that: (i) each of GBB and Newco is a corporation validly
existing under the laws of its jurisdiction of incorporation 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 and Newco necessary to be taken in connection with the Merger in
order to make the same effective have been duly and validly taken; (iv) this
Agreement has been duly and validly authorized, executed and delivered on
behalf of GBB and Newco and constitutes (subject to standard exceptions of
enforceability arising from the bankruptcy laws and rules of equity) a valid
and binding agreement of each of GBB and Newco; and (v) 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 and Newco 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 V 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 GBB Lists in accordance with
Section 7.2(e).
10.3 Authorization of Merger. All actions necessary to authorize the
execution, delivery and performance of this Agreement by GBB and Newco and the
Agreement of Merger by Newco and the consummation of the transactions
contemplated hereby and thereby shall have been duly and validly taken by the
respective Boards of Directors and shareholders of GBB and Newco, as required
by applicable law, and Newco 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 PBC 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. PBC shall have received a letter from Hoefer & Arnett
Incorporated dated as of a date within five (5) Business Days of the mailing
of the Joint Proxy Statement and Prospectus to the shareholders of PBC, to the
effect that the transactions contemplated by this Agreement are fair from a
financial point of view to the shareholders of PBC.
10.7 Appointment of Directors. All necessary action shall have been taken to
have George R. Corey elected or appointed to serve, from and after the
Effective Time of the Merger, as a director of GBB.
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ARTICLE XI
CONDITIONS PRECEDENT TO
OBLIGATIONS OF GBB AND NEWCO
All of the obligations of GBB and Newco 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 McCutchen, Doyle,
Brown & Enersen, LLP, attorneys for PBC, and in form and substance
satisfactory to the counsel of GBB, to the aggregate effect that: (i) PBC is a
corporation validly existing under the laws of its jurisdiction of
incorporation with full 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
PBC 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 has been
duly and validly authorized, executed and delivered on behalf of PBC and
constitutes (subject to standard exceptions of enforceability arising from the
bankruptcy laws and rules of equity) a valid and binding agreement of PBC; and
(iv) the execution of the Agreement of Merger by PBC has been duly and validly
authorized.
11.2 Representations and Warranties; Performance of Covenants. All the
covenants, terms and conditions of this Agreement to be complied with and
performed by PBC at or before the Closing Date shall have been complied with
and performed in all material respects. Each of the representations and
warranties of PBC contained in Article IV 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 PBC Lists in accordance with Section 6.2(k).
11.3 Authorization of Merger. All actions necessary to authorize the
execution, delivery and performance of this Agreement and the Agreement of
Merger by PBC 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 PBC, and PBC shall have full power and right to merge pursuant
to the Agreement of Merger.
11.4 Third Party Consents. PBC shall have obtained all consents of other
parties to its 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 PBC,
whether or not such event, change or effect is reflected in the PBC 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 PBC certifying, to the best of their knowledge,
compliance with all of the provisions of Sections 11.2, 11.3, 11.4, 11.5 and
11.16.
11.7 Fairness Opinion. GBB shall have received a letter from Hovde
Financial, Inc. dated as of a date within five (5) Business Days of the
mailing of the Joint Proxy Statement and Prospectus to the shareholders of
GBB, to the effect that the transactions contemplated by this Agreement are
fair from a financial point of view to the shareholders of GBB.
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11.8 Shareholder's Agreements. Concurrently with the execution of this
Agreement, each director of PBC 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 PBC 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 PBC's employee benefit plans, programs and arrangements,
including, without limitation, the PBC 401(k) Plan, have been treated as
provided in Article XII of this Agreement.
11.12 Dissenting Shares. Holders of five percent (5%) or more of the
outstanding shares of PBC Stock shall not be PBC Perfected Dissenting Shares.
In addition, holders of five percent (5%) or more of the outstanding shares of
GBB Stock shall not be GBB Perfected Dissenting Shares have made demand for
payment of the fair market value thereof in accordance with Section 1301 of
the CGCL in connection with the Merger.
11.13 Remediation. All remediation of environmental contamination or
conditions on any PBC Property shall have been completed to the satisfaction
of GBB.
11.14 Execution of Stock Option Agreement. Concurrently with the execution
of this Agreement and as a condition thereto, PBC shall have executed and
delivered a stock option agreement (the "PBC Stock Option Agreement") which
grants to GBB an option to acquire up to 19.9% of the issued and outstanding
shares of PBC Stock upon the occurrence of certain circumstances,
substantially in the form of Exhibit E hereto.
11.15 PBC Fully Diluted Book Value Per Share. At least five Business Days
prior to the Effective Time of the Merger, PBC shall provide GBB with PBC's
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(b) hereof, the PBC Fully Diluted Book Value Per Share, as
determined in accordance with such financial statements, shall be not less
than $20.25.
11.16 Termination of PBC Stock Option Plans. GBB shall have received
satisfactory evidence that the PBC Stock Option Plans have been terminated
prior to the Effective Time of the Merger.
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ARTICLE XII
EMPLOYEE BENEFITS
12.1 Employee Benefits. GBB intends to merge the PBC 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 PBC 401(k) Plan be merged
with and into the GBB 401(k) Plan, however, unless GBB determines, in its sole
discretion, that: (i) the PBC 401(k) Plan is a qualified plan under Section
401(a) of the Code, both as to the form of the PBC 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 PBC 401(k) Plan. This
analysis shall be made prior to the Effective Time of the Merger and, if the
above determinations are made, the PBC 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 it is determined that the PBC 401(k) Plan is
not a qualified plan as described above, PBC agrees to use its best efforts to
have the PBC 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 PBC
employee benefit plans will be discontinued or merged into GBB plans, in the
discretion of GBB, and employees of PBC 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 PBC
beginning on the date such employees commenced employment with PBC through the
Effective Time of the Merger.
ARTICLE XIII
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:
(a) By mutual agreement of the parties, in writing;
(b) By PBC or GBB immediately upon the failure of the shareholders of PBC
or GBB to give the requisite approval of this Agreement;
(c) By PBC immediately upon expiration of twenty (20) days from delivery
of written notice by PBC 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 PBC from the
performance or satisfaction of such covenant or agreement (provided that
such breach has not been waived by PBC or cured by GBB, as the case may be,
prior to expiration of such twenty (20) day period);
(d) By GBB immediately upon expiration of twenty (20) days from delivery
of written notice by GBB to PBC of PBC'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 PBC, as the case may be,
prior to expiration of such twenty (20) day period);
(e) By PBC or GBB upon the expiration of thirty (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 thirty (30)
day period after such denial or refusal, all parties hereto agree to submit
the application to the regulatory authority that has denied, or refused to
grant the approval, consent or qualification requested;
(f) By PBC or GBB if any conditions set forth in Article IX shall not
have been met by March 31, 1998;
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(g) By PBC if any of the conditions set forth in Article X shall not have
been met, or by GBB if any of the conditions set forth in Article XI shall
not have been met, by March 31, 1998, or such earlier time as it becomes
apparent that such condition shall not be met;
(h) By GBB if PBC shall have failed to act or refrain from doing any act
pursuant to Section 6.1(n); or
(i) By GBB under the circumstances set forth in Section 8.4.
(j) By PBC if the Average Closing Price is less than $30.00 and GBB has
not, within two Business Days from the date of calculation of the Average
Closing Price, provided written notice to PBC of GBB's election to exercise
the Top Up Option.
13.2 Termination Date. This Agreement shall be terminated if the Closing
Date shall not have occurred by March 31, 1998 unless extended in writing by
the parties.
13.3 Effect of Termination. In the event of termination of this Agreement by
either PBC or GBB as provided in Section 13.1 or pursuant to Section 13.2,
neither PBC, GBB nor Newco 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(a), 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.
13.4 Force Majeure. PBC, GBB and Newco 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 XIV
MISCELLANEOUS
14.1 Expenses.
(a) GBB hereby agrees that if this Agreement is terminated by PBC
pursuant to Section 13.1(b) with respect to the failure of GBB shareholders
to approve the Agreement and the transactions contemplated hereby, or
pursuant to Section 13.1(c), GBB shall promptly and in any event within 10
days after such termination pay PBC all Expenses (as defined in Section
14.1(d) below) of PBC, but not to exceed $150,000.
(b) PBC hereby agrees that if the Agreement is terminated by GBB pursuant
to Section 13.1(b) with respect to the failure of PBC shareholders to
approve the Agreement and the transactions contemplated hereby, or pursuant
to Section 13.1(d) or Section 13.1(h), PBC shall promptly and in any event
within 10 days after such termination pay GBB all Expenses of GBB, but not
to exceed $200,000.
(c) Except as otherwise provided herein, all Expenses incurred by GBB or
PBC 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 PBC shall share the cost of printing the Joint Proxy
Statement and Prospectus on a basis proportionate to the number of
shareholders of each corporation.
(d) "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.
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<PAGE>
14.2 Competing Transaction Fee. As an inducement to PBC to enter into this
Agreement, in the event this Agreement is terminated by PBC because of a
failure by GBB to comply with its obligations under Section 7.1(a) because GBB
entered into an agreement to acquire, merge or consolidate with another
entity, which by its terms requires that the transactions contemplated by this
Agreement shall not be completed or shall be delayed until after March 31,
1998, or which transaction any Governmental Entity advised GBB in writing
would result in the disapproval of the transactions contemplated in this
Agreement or the delay thereof until after March 31, 1998, if such transaction
is consummated prior to termination of this Agreement or during the twelve-
month period following termination of this Agreement, GBB shall pay or cause
the third party to such a transaction to pay to PBC the sum of $750,000
promptly upon the consummation of a such a transaction, which sum represents
(i) PBC'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 PBC's management time devoted to
negotiation and preparation for the transactions contemplated by this
Agreement; (ii) PBC's indirect costs and expenses incurred in connection with
the transactions contemplated by this Agreement; and (iii) PBC's loss as a
result of the transactions contemplated by this Agreement not being
consummated. Any payment previously made by GBB pursuant to Section 14.1(a)
hereof shall be credited against any amount due under this Section.
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 confirmed facsimile transmission or sent by registered or
certified mail, postage prepaid, with return receipt requested, addressed as
follows:
To GBB or Newco:
Greater Bay Bancorp
2860 West Bayshore Road
Palo Alto, California 94303
Attention: Steven C. Smith
Facsimile Number: (415) 494-9220
With a copy to:
Manatt, Phelps & Phillips, LLP
11355 West Olympic Boulevard
Los Angeles, California 90064
Attention: T. Hale Boggs, Esq.
Facsimile Number: (310) 312-4224
To PBC:
Peninsula Bank of Commerce
1001 Broadway
Millbrae, California 94030
Attention: Mark F. Doiron
Facsimile Number: (415) 697-4032
With a copy to:
McCutchen, Doyle, Brown & Enersen, LLP
3 Embarcadero Center, #1800
San Francisco, California 94111
Attention: Thomas G. Reddy, Esq.
Facsimile Number: (415) 393-2286
Any such notice, request, instruction or other document shall be deemed
received on the date delivered personally or delivered by confirmed facsimile
transmission, 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.
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<PAGE>
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, Newco or PBC 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.
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, Newco or PBC 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.
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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
/s/ David L. Kalkbrenner
By:__________________________________
David L. Kalkbrenner
President and Chief Executive
Officer
ATTEST:
/s/ Steven C. Smith
_____________________________________
Steven C. Smith
Assistant Secretary
GBB Acquisition Corp.
/s/ David L. Kalkbrenner
By:__________________________________
David L. Kalkbrenner
President
ATTEST:
/s/ Steven C. Smith
_____________________________________
Steven C. Smith
Assistant Secretary
Peninsula Bank of Commerce
/s/ George R. Corey
By:__________________________________
George R. Corey
Chairman of the Board
/s/ Mark F. Doiron
By:__________________________________
Mark F. Doiron
President and Chief Executive
Officer
ATTEST:
/s/ Michael Vano
_____________________________________
Secretary
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<PAGE>
APPENDIX B
STOCK OPTION AGREEMENT
This AGREEMENT is dated as of September 5, 1997, between Greater Bay Bancorp
("GBB"), a California corporation, and Peninsula Bank of Commerce, a
California corporation ("PBC").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of GBB and PBC have approved an Agreement
and Plan of Reorganization (the "Reorganization Agreement") dated as of the
date hereof which contemplates the acquisition by GBB of PBC by means of the
merger of GBB Acquisition Corp., a California corporation and wholly-owned
subsidiary of GBB ("GAC"), with and into PBC, with PBC as the entity surviving
the merger;
WHEREAS, as a condition to GBB 's entry into the Reorganization Agreement
and to induce such entry, PBC has agreed to grant to GBB the option set forth
herein to purchase shares of PBC's authorized but unissued common stock, no
par value per share ("Common Stock");
Unless otherwise provided in this Agreement, capitalized terms shall have
the meanings ascribed to such terms in the Reorganization Agreement.
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth herein,
PBC hereby grants to GBB an option (the "Option") to purchase up to 134,099
shares of Common Stock (the "Option Shares"), at a price of $32.00 per share
(the "Exercise Price"); provided, however, that in the event PBC issues or
agrees to issue any shares of Common Stock to an Acquiring Person (as that
term is defined in Section 6 herein) at a price less than $32.00 per share,
the Exercise Price shall be equal to such lesser price.
2. Exercise of Option.
(a) GBB may exercise the Option, in whole or in part, in accordance with
and to the extent permitted by applicable law at any time or from time to
time but only upon or after the occurrence of a Purchase Event (as that
term is defined in Paragraph (b) below of this section); provided, that to
the extent the Option shall not have been exercised, it shall terminate and
be of no further force and effect upon the earliest to occur (such earliest
date, the "Expiration Date") of (i) the termination of the Reorganization
Agreement pursuant to Section 13.1 (a) or (j) thereof; (ii) the date of
termination pursuant to Section 13.1 (b), (c), (e), (f) or (i) thereof if
such date is prior to a Purchase Event; (iii) the effective time of the
acquisition of PBC by GBB pursuant to the Reorganization Agreement, or (iv)
twelve months following the occurrence of the earliest to occur of (A) the
date of any termination of the Reorganization Agreement other than as
described in (i) or (ii) above or (B) the date of first occurrence of a
Purchase Event. Notwithstanding the foregoing, PBC shall not be obligated
to issue the Option Shares upon exercise of the Option (i) in the absence
of any required governmental or regulatory waiver, consent or approval
necessary for PBC to issue such Option Shares or for GBB or any transferee
to exercise the Option or prior to the expiration or termination of any
waiting period required by law, or (ii) so long as any injunction or other
order, decree or ruling issued by any federal or state court of competent
jurisdiction is in effect which prohibits the sale or delivery of the
Option Shares.
(b) As used herein, a "Purchase Event" shall have occurred when: (i) PBC
or any subsidiary of PBC, (without the prior written consent of GBB) enters
into an agreement with any person (other than GBB or any of its
subsidiaries) pursuant to which such person would: (x) merge or consolidate
with, or enter into any similar transaction with PBC or any subsidiary of
PBC, (y) purchase, lease or otherwise acquire all or substantially all of
the assets of PBC or (z) purchase or otherwise acquire (by merger,
consolidation, share exchange or any similar transaction) securities
representing 10 percent or more of the voting shares of PBC (the
transactions referred to in subparagraph (x), (y) and (z) are referred to
as an "Acquisition
B-1
<PAGE>
Transaction"); (ii) any person or group of persons acting in concert (other
than GBB or any of its subsidiaries) acquires the beneficial ownership or
the right to acquire beneficial ownership of securities representing 24.99
percent or more of the voting shares of PBC (the term "beneficial
ownership" for purposes of this Agreement shall have the meaning set forth
in Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the regulations promulgated thereunder); (iii) the
shareholders of PBC fail to approve the business combination between PBC
and GBB contemplated by the Reorganization Agreement at any meeting of such
shareholders which has been held for that purpose or any adjournment or
postponement thereof, the failure of such a shareholder meeting to occur
prior to termination of the Reorganization Agreement, or the withdrawal or
modification (in a manner adverse to GBB) of the recommendation of PBC's
Board of Directors of the Merger and Reorganization Agreement that the
shareholders of PBC approve the Merger and the Reorganization Agreement, in
each case, after there shall have been a public announcement that any
person (other than GBB or any of its subsidiaries), shall have (A) made, or
publicly disclosed an intention to make, a proposal to engage in an
Acquisition Transaction, (B) commenced a tender offer, as defined herein,
or filed a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to an exchange offer, as
defined herein, or (C) filed an application (or given a notice), whether in
draft or final form, with the Department of Financial Institutions of the
State of California or other federal or state bank regulatory authority,
which application or notice has been accepted for processing, for approval
to engage in an Acquisition Transaction; (iv) any person (other than GBB or
other than in connection with a transaction which GBB has given its prior
written consent), shall have filed an application or notice with the
Department of Financial Institutions of the State of California or other
federal or state bank regulatory authority, which application or notice has
been accepted for processing, for approval to engage in an Acquisition
Transaction, exchange offer or tender offer; (v) PBC shall have willfully
breached any covenant or obligation contained in the Reorganization
Agreement in anticipation of engaging in a Purchase Event, and following
such breach GBB would be entitled to terminate the Reorganization Agreement
(whether immediately or after the giving of notice or passage of time or
both); or (vi) a public announcement by PBC of the authorization,
recommendation or endorsement by PBC of an Acquisition Transaction,
exchange offer or tender offer or a public announcement by PBC of an
intention to authorize, recommend or announce an Acquisition Transaction,
exchange offer or tender offer. If a Purchase Event has occurred, the
Option shall continue to be exercisable until its termination in accordance
with Section 2(a) hereof. PBC shall notify GBB promptly in writing upon
learning of the occurrence of a Purchase Event, it being understood that
the giving of such notice by PBC shall not be a condition to the right of
GBB to transfer or exercise the Option. As used in this Agreement, "person"
shall have the same meaning set forth in the Reorganization Agreement. As
used in this paragraph "tender offer" or "exchange offer" shall mean,
respectively, the commencement (as such term is defined in Rule 14d-2
promulgated under the Exchange Act) by any person (other than GBB or any
subsidiary of GBB) of, or the filing by any person (other than GBB or any
subsidiary of GBB) of a registration statement under the Securities Act
with respect to, a tender offer or exchange offer, respectively, to
purchase shares of PBC Stock such that, upon consummation of such offer,
such person would own or control 10 percent or more of the then-outstanding
shares of PBC Stock.
(c) In the event a Purchase Event occurs, GBB may elect to exercise the
Option. If GBB wishes to exercise the Option, it shall send to PBC a
written notice (the date of which shall be referred to herein as the
"Notice Date") which specifies (i) the total number of Option Shares to be
purchased, and (ii) a place and date not earlier than two business days nor
later than ten business days from the Notice Date for the closing (the
"Closing") of such purchase (the "Closing Date"); provided, however, that
if prior notification to or approval of the Department of Financial
Institutions of the State of California or any other regulatory agency is
required in connection with such purchase, the Holder, as defined below,
shall promptly file the required notice or application for approval, shall
promptly notify PBC of such filing, and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this
sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been
obtained and any requisite waiting period or periods shall have passed. Any
exercise of the Option shall be deemed to occur on the Notice Date relating
thereto.
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<PAGE>
3. Payment and Delivery of Certificates; GBB Representation.
(a) If GBB elects to exercise the Option, then at the Closing, GBB shall
pay to PBC the aggregate purchase price for the Option Shares purchased
pursuant to the exercise of the Option in immediately available funds by a
wire transfer to a bank designated by PBC.
(b) At such Closing, simultaneously with the delivery of the purchase
price for the Option Shares as provided in Paragraph (a) hereof, PBC shall
deliver to GBB a certificate or certificates, registered in the name of GBB
or its designee, representing the number of Option Shares purchased by GBB.
Such certificates may be endorsed with any legend required pursuant to any
permit or exemption granted by the Department of Financial Institutions of
the State of California or any other regulatory agency, as well as the
following legend:
THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT
TO CERTAIN PROVISIONS OF AN AGREEMENT BETWEEN THE REGISTERED HOLDER
HEREOF AND THE ISSUER, A COPY OF WHICH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE ISSUER. A COPY OF SUCH AGREEMENT WILL BE
PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER
OF A REQUEST THEREFOR.
Any such legend shall be removed by delivery of a substitute certificate
without such legend if GBB shall have delivered to PBC an opinion of
counsel, in form and substance satisfactory to PBC, that such legend is not
required for purposes of assuring compliance with applicable securities or
other law or with this Agreement.
(c) Except as otherwise provided herein, GBB hereby represents and
warrants to PBC that the Option is being, and any Option Shares issued upon
exercise of the Option will be, acquired by GBB for its own account and not
with a view to any distribution thereof, and GBB will not sell any Option
Shares purchased pursuant to exercise of the Option except in compliance
with applicable securities and other laws.
4. Representations. PBC hereby represents and warrants to GBB as follows:
(a) PBC has all requisite corporate power and authority to enter into and
perform all of its obligations under this Agreement. The execution,
delivery and performance of this Agreement and all of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of PBC. This Agreement has been duly executed and
delivered by PBC and constitutes a valid and binding agreement of PBC,
enforceable against PBC in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency, moratorium
or other similar laws affecting the rights of creditors generally or by
equitable principles, whether such enforcement is sought in law or equity.
(b) The execution and delivery by PBC of this Agreement and the
consummation of the transactions herein contemplated do not and will not
violate or conflict with PBC's Articles of Incorporation or Bylaws, any
statute, regulation, judgment, order, writ, decree or injunction applicable
to PBC (other than as may be effected by GBB's ownership of PBC Common
Stock exceeding certain limits set forth by statute or regulation) or its
properties or assets and do not and will not violate, conflict with, result
in a breach of, constitute a default (or an event which with due notice
and/or lapse of time would constitute a default) under, result in a
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the properties or assets of PBC under the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, or loan agreement or other agreement, instrument or obligation to
which PBC is a party, or by which PBC or any of its properties or assets
may be bound or affected.
(c) PBC has taken all necessary corporate action to authorize and reserve
and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms, will have
reserved for issuance upon the exercise of the Option a number of shares of
Common Stock
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<PAGE>
sufficient to satisfy the exercise of the Option in full, all of which
Common Stock, upon issuance pursuant hereto, shall be duly authorized,
validly issued, fully paid and nonassessable (except for assessments that
may be ordered by the Commissioner under the authority of Section 662 of
the CFC), and shall be delivered free and clear of all claims, liens,
encumbrances, security interests and preemptive rights.
5. Adjustment Upon Changes in Capitalization.
(a) In the event of any dividend, stock split, split-up,
recapitalization, reclassification, combination, exchange of shares or
similar transaction or event with respect to Common Stock, the type and
number of shares or securities subject to the Option and the Exercise Price
therefor, shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction so that GBB shall
receive, upon exercise of the Option, the number and class of shares or
other securities or property that GBB would have received in respect of
Common Stock if the Option had been exercised immediately prior to such
event, or the record date thereof, as applicable. If any shares of Common
Stock are issued after the date of this Agreement (other than pursuant to
an event described in the first sentence of this Section 5(a)), the number
of shares of Common Stock subject to the Option shall be adjusted so that,
after such issuance, it, together with any shares of Common Stock
previously issued to GBB pursuant hereto, equals 19.9 percent of the number
of shares of Common Stock then issued and outstanding, without giving
effect to any shares subject to or issued pursuant to this Option.
(b) In the event that PBC, shall, prior to the Expiration Date, enter in
an agreement: (i) to consolidate with or merge into any person, other than
GBB or one of its subsidiaries, and shall not be the continuing or
surviving corporation of such consolidation or merger, (ii) to permit any
person, other than GBB or one of its subsidiaries, to merge into PBC and
PBC shall be the continuing or surviving corporation, but, in connection
with such merger, the then outstanding shares of Common Stock shall be
changed into or exchanged for stock or other securities of PBC or any other
person or cash or any other property or the outstanding shares of Common
Stock immediately prior to such merger shall after such merger represent
less than 50 percent of the outstanding shares and share equivalents of the
merged company; or (iii) to sell or otherwise transfer all or substantially
all of its assets to any person, other than GBB or one of its subsidiaries,
then, and in each such case, the agreement governing such transaction shall
make proper provisions so that the Option shall, upon the consummation of
any such transaction and upon the terms and conditions set forth herein, be
converted into, or exchanged for, an option (the "Substitute Option"), at
the election of GBB, of either (x) the Succeeding Corporation (as defined
below), (y) any person that controls the Succeeding Corporation, or (z) in
the case of a merger described in clause (ii), PBC (in each case, such
person being referred to as the "Substitute Option Issuer.")
(c) The Substitute Option shall have the same terms as the Option,
provided, that, if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as
possible and in no event less advantageous to GBB. The Substitute Option
Issuer shall also enter into an agreement with the then-holder or holders
of the Substitute Option in substantially the form as this Agreement, which
shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares
of the Substitute Common Stock (as hereinafter defined) as is equal to the
Assigned Value (as hereinafter defined) multiplied by the number of shares
of Common Stock for which the Option was theretofore exercisable, divided
by the Average Price (as hereinafter defined). The exercise price of the
Substitute Option per share of the Substitute Common Stock (the "Substitute
Option Price") shall then be equal to the Exercise Price multiplied by a
fraction in which the numerator is the number of shares of the Common Stock
for which the Option was theretofore exercisable and the denominator is the
number of shares for which the Substitute Option is exercisable.
(e) The following terms have the meanings indicated:
(i) "Succeeding Corporation" shall mean (x) the continuing or
surviving corporation of a consolidation or merger with PBC (if other
than PBC), (y) PBC in a merger in which PBC is the
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continuing or surviving person, and (z) the transferee of all or any
substantial part of PBC assets (or the assets of its subsidiaries).
(ii) "Substitute Common Stock" shall mean the common stock issued by
the Substitute Option Issuer upon exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the highest of (x) the price per
share of Common Stock at which a tender offer or exchange offer
therefor has been made by any person (other than GBB or its
subsidiaries) (y) the price per share of Common Stock to be paid by any
person (other than GBB or any of its subsidiaries) pursuant to an
agreement with PBC, and (z) the highest closing sales price per share
of Common Stock as quoted on the Nasdaq National Market (or if Common
Stock is not quoted on the Nasdaq National Market, the highest bid
price per share on any day as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a
recognized source chosen by GBB) within the six-month period
immediately preceding the agreement referred to in (y); provided, that
in the event of a sale of less than all of PBC's assets, the Assigned
Value shall be the sum of the price paid in such sale for such assets
and the current market value of the remaining assets of PBC as
determined by a nationally recognized investment banking firm selected
by GBB and reasonably acceptable to PBC, divided by the number of
shares of Common Stock outstanding at the time of such sale. In the
event that an exchange offer is made for Common Stock or an agreement
is entered into for a merger or consolidation involving consideration
other than cash, the value of the securities or other property issuable
or deliverable in exchange for the Common Stock shall be determined by
a nationally recognized investment banking firm mutually selected by
GBB and PBC (or if applicable, the Succeeding Corporation), provided
that if a mutual selection cannot be made as to such investment banking
firm, it shall be selected by GBB.
(iv) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher
than the closing price of the shares of the Substitute Common Stock on
the day preceding such consolidation, merger or sale, provided that if
PBC is the issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of common stock issued by PBC, the
person merging into PBC or by any company which controls or is
controlled by such merging person, as GBB may elect.
(f) In no event pursuant to any of foregoing paragraphs shall the
Substitute Option be exercisable for more than 19.9 percent of the
aggregate of the shares of the Substitute Common Stock outstanding
immediately prior to exercise of the Substitute Option. In the event that
the Substitute Option would be exercisable for more than 19.9 percent of
the aggregate of the shares of Substitute Common Stock but for this clause
(f), the Substitute Option Issuer shall make a cash payment to GBB equal to
the excess of (i) the value of the Substitute Option without giving effect
to the limitation in this clause (f) over (ii) the value of the Substitute
Option after giving effect to the limitation in this clause (f). This
difference in value shall be determined by a nationally recognized
investment banking firm selected by GBB and the Substitute Option Issuer.
(g) PBC shall not enter into any transaction described in subsection (b)
of this Section 5 unless the Succeeding Corporation and any person that
controls the Succeeding Corporation assume in writing all the obligations
of PBC hereunder and take all other actions that may be necessary so that
the provisions of this Agreement, including but not limited to this Section
5, are given full force and effect (including, without limitation, any
action that may be necessary so that the shares of Substitute Common Stock
are in no way distinguishable from or have lesser economic value than other
shares of common stock issued by the Substitute Option Issuer).
6. Purchase of Option Shares and Options by PBC.
(a) From and after the first date a transaction specified in Section 5(b)
herein is consummated (the "Repurchase Event"), and subject to applicable
regulatory restrictions, GBB or a holder or former holder of any Options (a
"Holder") who has exercised the Options in whole or in part shall have the
right to
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require PBC to purchase some or all of the Option Shares at a purchase
price per share (the "Purchase Price") equal to the highest of (i) 100
percent of the Exercise Price, (ii) the highest price paid or agreed to be
paid for shares of Common Stock by an Acquiring Person (as defined in
Paragraph (b) of this Section) in any tender offer, exchange offer or other
transaction or series of related transactions involving the acquisition of
10 percent or more of the outstanding shares of Common Stock during the
one-year period immediately preceding the Purchase Date (as defined in
Paragraph (d) of this Section) and (iii) in the event of a sale of all or
substantially all of PBC's assets, (x) the sum of the price paid in such
sale for such assets and the current market value of the remaining assets
of PBC as determined by a recognized investment banking firm jointly
selected by such Holder and PBC, each acting in good faith, divided by (y)
the number of shares of Common Stock then outstanding, provided, however,
that the amount calculated pursuant to clauses (ii) and (iii) of this
Section 6(a) shall not exceed $1.5 million. In the event that any of the
consideration paid or agreed to be paid by an Acquiring Person for any
shares of Common Stock or for any of PBC's assets consists in whole or in
part of securities, the value of such securities for purposes of
determining the Purchase Price shall be determined (i) if there is an
existing public trading market therefor, by the average of the last sales
prices for such securities on the ten trading days ending three trading
days prior to the payment of such consideration (if such consideration has
been paid) or prior to the date of determination (if such consideration has
not yet been paid) and (ii) if there is no existing public trading market
for such securities, by a recognized investment banking firm jointly
selected by the Holder and PBC, each acting in good faith. The Holder's
right to require PBC to purchase some or all of the Option Shares under
this Section shall expire on the day which is one year following the
Repurchase Event; provided, that if PBC is prohibited under applicable
regulations from purchasing Common Stock as to which a Holder has given
notice hereunder, then the Holder's right to require PBC to purchase such
shares shall expire on the date which is one year following the date on
which PBC no longer is prohibited from purchasing such shares: provided
further, that PBC shall use its best efforts to obtain any consent or
approval and make any filing required for PBC to consummate as quickly as
possible the purchase of the Common Stock contemplated hereunder.
(b) For purposes of this Agreement, "Acquiring Person" shall mean a
person or group (as such terms are defined in the Exchange Act and the
rules and regulations thereunder) other than GBB or a subsidiary of GBB who
on or after the date of this Agreement engages in a transaction which gives
rise to a Purchase Event.
(c) Subject to applicable regulatory restrictions, from and after a
Repurchase Event or after GBB receives official notice that an approval of
the Department of Financial Institutions of the State of California, or any
other regulatory authority, required for the exercise of the Option and
purchase of the Option Shares will not be issued or granted, a Holder shall
have the right to require PBC to purchase some or all of the Options held
by such Holder at a price equal to the Purchase Price minus the Exercise
Price on the Purchase Date (as defined in Paragraph (d) of this Section)
multiplied by the number of shares of Common Stock that may be purchased on
the Purchase Date upon the exercise of the Options elected to be purchased,
provided, however, that the amount calculated pursuant to this Section 6(c)
shall not exceed $1.5 million. Notwithstanding the termination date of the
Options, the Holder's right to require PBC to purchase some or all of the
Options under this Section shall expire on the day which is one year
following the Repurchase Event; provided, that if PBC is prohibited under
applicable regulations from purchasing the Options as to which an Holder
has given notice hereunder, then the Holder's right to require PBC to
purchase such Options shall expire on the day which is one year following
the date on which PBC no longer is prohibited from purchasing such Options;
provided further, that PBC shall use its best efforts to obtain any consent
or approval and make any filing required for PBC to consummate as quickly
as possible the purchase of the Options contemplated hereunder.
(d) A Holder may exercise its right to require PBC to purchase the Common
Stock or Options (collectively, "Securities") pursuant to this Section by
surrendering for such purpose to PBC, at its principal office or at such
other office or agency maintained by PBC for that purpose, within the
period specified above, the certificates or other instruments representing
the Securities to be purchased
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accompanied by a written notice stating that it elects to require PBC to
purchase all or a specified number of such Securities. Within five business
days after the surrender of such certificates or instruments and the
receipt of such notice relating thereto, to the extent it is legally
permitted to do so, PBC shall deliver or cause to be delivered to the
Securities Holder (i) a bank cashier's or certified check payable to the
Securities Holder in an amount equal to the applicable purchase price
therefor, and (ii) if less than the full number of Securities evidenced by
the surrendered instruments are being purchased, a new certificate or
instrument, for the number of Securities evidenced by such surrendered
certificates or other instruments less the number of Securities purchased.
Such purchases shall be deemed to have been made at the close of business
on the date (the "Purchase Date") of the receipt of such notice and of such
surrender of the certificates or other instruments representing the
Securities to be purchased and the rights of the Securities Holder, except
for the right to receive the applicable purchase price therefor in
accordance herewith, shall cease on the Purchase Date.
7. Demand Registration Rights. As promptly as practicable upon GBB's request
after a Purchase Event, PBC agrees to prepare and file not more than two
registration statements, prospectuses or permit or exemption applications
("Registration Event") as appropriate, under federal and any applicable state
securities laws, with respect to any proposed sale of any warrants, options or
other securities representing any of GBB's rights under this Agreement or
proposed dispositions by GBB of any or all of the Option Shares, if such
registrations or filings are required by law or regulation, and to use its
best efforts to cause any such registration statements or prospectuses to
become effective, or to have any permit or exemption granted, as expeditiously
as possible and to keep such registration statement, prospectus, permit or
exemption effective for a period of not less than 180 days unless, in the
written opinion of counsel to PBC, addressed to GBB and satisfactory in form
and substance to GBB and its counsel, registration (or filing of a prospectus,
or grant of a permit or exemption) is not required for such proposed
transactions. All fees, expenses and charges of any kind or nature whatsoever
incurred in connection with any registration of, or the preparation of any
registration statement, prospectus or permit or exemption application relating
to, the Options or the Option Shares pursuant to this Section 7 shall be borne
and paid by PBC; provided, however, that in no event shall this Section 7 be
construed to require PBC to bear the expense of any change of control notice
or similar regulatory filing made by any purchaser or acquiror of Option
Shares issued to GBB pursuant to this Agreement. In the event GBB exercises
its registration rights under this Section 7, PBC shall provide GBB, its
affiliates, each of their respective officers and directors and any
underwriters used by GBB, with indemnifications, representations and
warranties and shall cause its attorneys and accountants to deliver to GBB and
any such underwriters attorneys' opinions and "comfort letters", all of a type
customarily provided or delivered in connection with public underwritten
offerings of securities. In the event PBC effects a registration of Common
Stock for its own account or for any other shareholder of PBC, it shall allow
GBB to participate in such registration. Notwithstanding the foregoing, PBC
shall have the right to delay (a "Delay Right") a Registration Event for a
period of up to thirty (30) days, in the event it receives a request from GBB
to effect a Registration Event, if PBC (i) is involved in a material
transaction, or (ii) determines, in the good faith exercise of its reasonable
business judgment, that such registration and offering could adversely effect
or interfere with bona fide material financing plans of PBC or would require
disclosure of information, the premature disclosure of which could materially
adversely affect PBC or any transaction under active consideration by PBC. For
purposes of this Agreement, the term "material transaction" shall mean a
transaction which, if PBC were subject to the reporting requirements under the
Exchange Act, would require PBC to file a current report on Form 8-K with the
Securities Exchange Commission. PBC shall have the right to exercise two Delay
Rights in any eighteen (18) month period.
8. Listing
If Common Stock or any other securities to be acquired upon exercise of the
Option are then authorized for quotation or trading or listing on the Nasdaq
National Market or any other securities exchange or automated quotation
system, PBC, or any successor thereto, upon the request of the holder of the
Option, will promptly file an application, if required, to authorize for
listing or trading or quotation the shares of Common Stock or other securities
to be acquired upon exercise of the Option on the Nasdaq National Market or
any other securities
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exchange or automated quotation system and will use its best efforts to obtain
approval, if required, of such listing or quotation as soon as possible.
9. Total Profit
Notwithstanding any other provision of this Agreement to the contrary, in no
event shall GBB purchase under the terms of this Agreement that number of
Option Shares which have a Spread Value, as defined below, in excess of $1.5
million. In the event the Spread Value exceeds $1.5 million, the number of
Option Shares which GBB is entitled to purchase at the Closing Date shall be
reduced to the extent required such that the Spread Value following such
reduction is equal to or less than $1.5 million. "Spread Value" shall mean the
difference between (i) the product of (1) the sum of the total number of
Option Shares GBB (x) intends to purchase at a Closing pursuant to the
exercise of the Option and (y) previously purchased pursuant to the prior
exercise of the Option, and (2) the closing price of PBC Common Stock as
quoted on the Nasdaq National Market on the last trading day immediately
preceding the Closing Date, and (ii) the product of (1) the total number of
Option Shares GBB (x) intends to purchase at the Closing Date pursuant to the
exercise of the Option and (y) previously purchased pursuant to the prior
exercise of the Option and (2) the applicable Option Price of such Option
Shares.
10. Miscellaneous.
(a) Expenses. Each of the parties hereto shall bear and pay all costs and
expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder, including fees and expenses of its own
financial consultants, investment bankers, accountants and counsel.
(b) Entire Agreement. Except as otherwise expressly provided herein, this
Agreement contains the entire agreement between the parties with respect to
the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereto, written or oral. The
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and
assigns. Nothing in this Agreement, expressed or implied, is intended to
confer upon any party, other than the parties hereto, and their respective
successors and assigns, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided herein.
(c) Assignment. At any time after a Purchase Event occurs, GBB may sell,
assign or otherwise transfer its rights and obligations hereunder, in whole
or in part, by issuing Options or otherwise, to any person or group of
persons, subject to applicable law, rule or regulation. In order to
effectuate the foregoing, GBB (or any direct or indirect assignee or
transferee of GBB) shall be entitled to surrender this Agreement to PBC in
exchange for two or more Agreements entitling the holders thereof to
purchase in the aggregate the same number of shares of Common Stock as may
be purchasable hereunder.
(d) Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered
personally or by confirmed facsimile transmission or sent by registered or
certified mail or overnight courier, postage prepaid, with return receipt
requested, addressed as follows:
If 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:
Manatt, Phelps & Phillips, LLP
11355 West Olympic Boulevard
Los Angeles, California 90064
Attention: T. Hale Boggs, Esq.
Facsimile Number: (310) 312-4224
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If to PBC:
Peninsula Bank of Commerce
1001 Broadway
Millbrae, California 94030
Attention: Mark F. Doiron
Facsimile Number: (415) 697-4032
With a copy to:
McCutchen, Doyle, Brown & Enersen, LLP
3 Embarcadero Center, #1800
San Francisco, California 94111
Attention: Thomas G. Reddy, Esq.
Facsimile Number: (415) 393-2286
A party may change its address for notice purposes by written notice to the
other party hereto.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties hereto agree that irreparable harm
would occur in the event that any of the provisions of this Agreement were
not performed by them in accordance with their specific terms or conditions
or were otherwise breached and that money damages are an inadequate remedy
for breach of this Agreement because of the difficulty of ascertaining the
amount of damage that will be suffered by the parties in the event that
this Agreement is not performed in accordance with its terms or conditions
or otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this
Agreement by the parties and to enforce specifically the terms and
provisions hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which it is
entitled at law or in equity.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(h) Best Efforts. Each of GBB and PBC will use its best efforts to make
all filings with, and to obtain consents of, all third parties and
governmental authorities necessary to the consummation of the transactions
contemplated by this Agreement, including without limitation applying to
the Department of Financial Institutions of the State of California for
approval to acquire or issue the shares issuable hereunder.
(i) Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement,
as of the day and year first written above.
Greater Bay Bancorp
/s/ David L. Kalkbrenner
By___________________________________
David L. Kalkbrenner,
President and Chief Executive
Officer
Peninsula Bank Of Commerce
/s/ George R. Corey
By___________________________________
George R. Corey,
Chairman of the Board
/s/ Mark F. Doiron
By___________________________________
Mark F. Doiron,
President and Chief Executive
Officer
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APPENDIX C
CALIFORNIA CORPORATIONS CODE
CHAPTER 13
DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b)
or subdivision (e) or (f) of Section 1201, each shareholder of the
corporation entitled to vote on the transaction and each shareholder of a
subsidiary corporation in a short-term merger may, by complying with this
chapter, require the corporation in which the shareholder holds shares to
purchase for cash at their fair market value the shares owned by the
shareholder which are dissenting shares as defined in subdivision (b). The
fair market value shall be determined as of the day before the first
announcement of the terms of the proposed reorganization or short-term
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stocks or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-
form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o)
of Section 25100 or (B) listed on the list of OTC margin stocks
issued by the Board of Governors of the Federal Reserve System, and
the notice of meeting of shareholders to act upon the
reorganization summarizes this section and Sections 1301, 1302,
1303 and 1304; provided, however, that this provision does apply to
any shares with respect to which there exists any restriction on
transfer imposed by the corporation or by any law or regulation;
and provided, further, that this provision does not apply to any
class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were
not voted in favor of the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph
(A) or (B) of paragraph (1) (without regard to the provisos in that
paragraph), were voted against the reorganization, or which were
held of record on the effective date of a short-form merger;
provided, however, that subparagraph (A) rather than subparagraph
(B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than
at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section
1301.
(4) Which the dissenting shareholder has submitted the endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of
record.
SECTION 1301. DEMAND FOR PURCHASE
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined
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by the corporation to represent the fair market value of the dissenting
shares, and a brief description of the procedure to be followed if the
shareholder desires to exercise the shareholder's rights under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of
Section 1300, unless they lose their status as dissenting shares under Section
1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what shareholder claims to be the fair market
value of those shares as of the day before the announcement of the proposed
reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
SECTION 1303. AGREED PRICE--TIME FOR PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with he secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after the amount thereof has been
agreed or within 30 days after any statutory or contractual conditions to the
reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
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shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determined, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT--PAYMENT--COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and the
interest at the legal rate on judgments from the date of compliance with
Sections 1300, 1301 and 1302 if the value awarded by the court for the shares
is more than 125 percent of the price offered by the corporation under
subdivision (a) of Section 1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
C-3
<PAGE>
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this
chapter all necessary expenses incurred in such proceedings and
reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price
for the shares, and neither files a complaint or intervenes in a
pending action as provided in Section 1304, within six months after the
date on which notice of the approval by the outstanding shares or
notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting
shares.
C-4
<PAGE>
APPENDIX D
HOVDE FINANCIAL, INC.
INVESTMENT BANKERS & FINANCIAL ADVISORS
September 5, 1997
Board of Directors
Greater Bay Bancorp
2860 West Bayshore Road
Palo Alto, California 94303
Members of the Board:
Greater Bay Bancorp ("Greater Bay") has proposed to enter into an Agreement
and Plan of Reorganization ("Agreement"), by and among Greater Bay and
Peninsula Bank of Commerce ("Peninsula Bank"). Pursuant to the Agreement,
shareholders of Peninsula Bank shall be entitled to receive consideration, in
the form of Greater Bay stock, as outlined in the Agreement. Greater Bay has
requested our opinion as to the fairness to Greater Bay's shareholders, from a
financial point of view, of the terms of the transaction.
Hovde Financial, Inc. ("Hovde") specializes in providing investment banking
and financial advisory services to commercial banks and thrift institutions.
Our principals are experienced in the independent valuation of securities in
connection with negotiated underwritings, subscription and community offerings,
private placements, merger and acquisition transactions and recapitalizations.
Pursuant to the Agreement dated July 30, 1997, between Greater Bay and Hovde,
Hovde was engaged to assist Greater Bay in evaluating the definitive agreement
and rendering a fairness opinion for presentation to Greater Bay's board of
directors, and for inclusion in various materials to be presented to the
shareholders of Greater Bay.
As part of our engagement, we reviewed and analyzed material bearing upon the
financial and operating conditions of Greater Bay and Peninsula Bank, and
material prepared in connection with the transaction, including: (i) the
Agreement and Plan of Reorganization; (ii) certain publicly available
information concerning Greater Bay and Peninsula Bank; (iii) internal reports
and financial projections for each of the companies; (iv) the nature and terms
of recent sale and merger transactions involving banks and bank holding
companies that we consider relevant; and (v) financial and other confidential
information provided to us by the management of Greater Bay.
Furthermore, we conducted due diligence with respect to Peninsula Bank for
the purpose of reviewing the current condition and future prospects of
Peninsula Bank. We have also taken into account our assessment of general
economic, market and financial conditions, and our experience in other similar
transactions, as well as our overall knowledge of the banking industry and our
general experience in securities valuations.
In rendering this opinion, we have assumed, without independent verification,
the accuracy and completeness of the financial and other information and
representations contained in the materials provided to us by Greater Bay and in
the discussions with Greater Bay's management.
As part of our review, we completed a sensitively analysis on the pricing
matrix and conversion ratios presented in the Agreement. We also evaluated the
impact of potential changes of the price per share of D-1
1826 Jefferson Place, N.W. . Washington, DC 20036 . Telephone (202) 775-
8109 . Facsimile (202) 775-8365
1629 Colonial Parkway . Inverness, IL 60067 . Telephone (847) 991-
6622 . Facsimile (847) 991-5928
1801 Oakland Boulevard . Suite 250 . Walnut Creek, CA 94596 . Telephone (510)
256-4008 . Facsimile (510) 256-4017
<PAGE>
Greater Bay's stock, from a low of $30.00 per share to a potential high of
$52.00 per share, on the conversion ratios and effective price to shareholders
of Peninsula Bank. Based upon our review of these values in comparison to
pricing levels offered for community banks with comparable characteristics
located in California and the remainder of the United States, we concluded
that the expected price to book, price to tangible book price to earnings
ratios contemplated in this transaction were reasonable and supportable.
Based on the foregoing and our experience as investment bankers, we are of
the opinion that, as of the date hereof, the transaction is fair, from a
financial point of view, to the shareholders of Greater Bay Bancorp.
Very truly yours,
/s/ Hovde Financial, Inc.
HOVDE FINANCIAL, INC.
D-2
<PAGE>
APPENDIX E
HOEFER & ARNETT
INCORPORATED
383 SACRAMENTO STREET
TENTH FLOOR
SAN FRANCISCO, CALIFORNIA 94111
(415) 362-7111
September 19, 1997
Members of the Board of Directors
Peninsula Bank of Commerce
1001 Broadway
Milbrae, CA 94303
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from
a financial point of view, to the holders of common shares of Peninsula Bank
of Commerce ("Peninsula") of the consideration to be paid by Greater Bay
Bancorp ("Greater Bay"), in the proposed merger (the "Merger") of Peninsula
with and into Greater Bay. Pursuant to the Agreement and Plan of
Reorganization (the "Agreement") and subject to the terms and conditions
therein, each holder of common shares of Peninsula will receive, in exchange
for common shares of Peninsula, the right to receive the number of Greater Bay
shares determined by the Conversion Ratio as defined in Section 2.3(a) of the
Agreement, which definition includes certain possible adjustments as described
in the Agreement.
We have acted for Peninsula and for the Board of Directors as financial
advisor in connection with this transaction and will receive a fee for our
services. We have not previously provided investment banking or financial
services to Greater Bay or Peninsula. We currently are a maker in both Greater
Bay and Peninsula common shares.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) certain publicly available financial
and other data with respect to Peninsula and Greater Bay, including
consolidated financial statements for recent years and interim periods to June
30, 1997; (iv) certain other publicly available financial and other
information concerning Greater Bay and Peninsula and the trading markets for
the publicly traded securities of Greater Bay and Peninsula; (v) publicly
available information concerning other banks and holding companies, the
trading markets for their securities and the nature and terms of certain other
merger transactions we believed relevant to our inquiry; and (vi) evaluations
and analyses prepared and presented to the Board of Directors of Peninsula or
a committee thereof in connection with the Merger. We have held discussions
with senior management of Greater Bay and of Peninsula concerning their past
and current operations, financial condition and prospects.
We have reviewed with the senior management of Peninsula earnings projections
for 1997 for Peninsula as a stand-alone entity, assuming the Merger does not
occur and Greater Bay's five year projection through the year 2001 for Greater
Bay as a stand-alone entity, assuming the Merger does not occur. We have also
reviewed with the senior management of Greater Bay the projected operating
cost savings expected by Greater Bay to be achieved in each such year
resulting from the Merger with Peninsula. Certain financial projections for
the combined companies and for Peninsula and Greater Bay as stand-alone
entities were derived by us based partially upon the projections described
above, as well as our own assessment of general economic, market and financial
conditions.
E-1
<PAGE>
HOEFER & ARNETT
INCORPORATED
Peninsula Bank of Commerce
September 19, 1997
Page 2
In conducting our review and in arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independent verification of the same. We have relied upon
the managements of Greater Bay and Peninsula as to the reasonableness of the
financial and operating forecasts, projections and projected operating cost
savings (and the assumptions and bases therefore) provided to us, and we have
assumed that such forecasts, projections and projected operating cost savings
reflect the best currently available estimates and judgments of the applicable
managements. We have also assumed, without assuming any responsibility for the
independent verification of same, that the aggregate allowances for loan
losses for Greater Bay and Peninsula are adequate to cover such losses. We
have not made or obtained any evaluations or appraisals of the property of
Greater Bay or Peninsula, nor have we examined any individual loan credit
files. For purposes of this opinion, we have assumed that the Merger will have
the tax, accounting and legal effects (including, without limitation, that the
Merger will be accounted for as a pooling-of-interests) described in the
Agreement and assumed the accuracy of the disclosures set forth in the
Agreement. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, to the holders of common shares of Peninsula of the
consideration to be paid by Greater Bay in the Merger and does not address
Peninsula's underlying business decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
Greater Bay and Peninsula, including interest income, interest expense, net
interest income, net interest margin, provision for loan losses, non-interest
income, non-interest expense, earnings, dividends, internal capital
generation, book value, intangible assets, return on assets, return on
shareholders' equity, capitalization, the amount and type of non-performing
assets, loan losses and the reserve for loan losses, all as set forth in the
financial statements for Greater Bay and for Peninsula; (ii) the assets and
liabilities of Greater Bay and Peninsula, including the loan, investment and
mortgage portfolios, deposits, other liabilities, historical and current
liability sources and costs and liquidity; and (iii) the nature and terms of
certain other merger transactions involving banks and bank holding companies.
We have also taken into account our assessment of general economic, market and
financial conditions and our experience in other transactions, as well as our
experience in securities valuation and our knowledge of the banking industry
generally. Our opinion is necessarily based only upon conditions as they exist
and can be evaluated on the date hereof and the information made available to
us through the date hereof.
E-2
<PAGE>
HOEFER & ARNETT
INCORPORATED
Peninsula Bank of Commerce
September 19, 1997
Page 3
It is understood that this letter is for the information of the Board of
Directors of Greater Bay and may not be relied upon by any other person or
used for any other purpose without our prior written consent. This letter does
not constitute a recommendation to the Board of Directors or to any
shareholder of Greater Bay with respect to any approval of the Merger.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the number of Greater Bay shares
determined by the Conversion Ratio to be paid by Greater Bay in the Merger is
fair, from a financial point of view, to the holders of the common shares of
Peninsula.
Very truly yours,
/s/ HOEFER & ARNETT INCORPORATED
HOEFER & ARNETT INCORPORATED
E-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
GBB's articles of incorporation provide that the liability of the directors
of GBB for monetary damages shall be eliminated to the fullest extent
permissible under California law and that GBB is authorized to provide for the
indemnification of agents (as defined in Section 317 of the California General
Corporation Law) of the corporation in excess of that expressly permitted by
such Section 317 for breach of duty to the corporation and its shareholders to
the fullest extent permissible under California law.
Section 317 sets forth the provisions pertaining to the indemnification of
corporate "agents." For purposes of this law, an agent is any person who is or
was a director, officer, employee or other agent of a corporation, or is or
was serving at the request of the corporation in such capacity with respect to
any other corporation, partnership, joint venture, trust or other enterprise.
Indemnification for expenses, including amounts paid on settling or otherwise
disposing of a threatened or pending action or defending against the same can
be made in certain circumstances by action of GBB through: (1) a majority vote
of a quorum of GBB's Board of Directors consisting of directors who are not
party to the proceedings; (2) approval of the shareholders, with the shares
owned by the person to be indemnified not being entitled to vote thereon; or
(3) such court in which the proceeding is or was pending upon application by
designated parties. Under certain circumstances, an agent can be indemnified,
even when found liable. Indemnification is mandatory where the agent's defense
is successful on the merits. The law allows GBB to make advances of expenses
for certain actions upon the receipt of an undertaking that the agent will
reimburse the corporation if the agent is found liable.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling GBB, pursuant
to the foregoing provisions or otherwise, GBB understands that in the opinion
of the Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
GBB of expenses incurred or paid by a director, officer or controlling person
of GBB in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, GBB will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against a public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Provisions regarding indemnification of officers and directors of GBB are
contained in GBB's Bylaws (Exhibit 3.2 to this Registration Statement).
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
2.0 Agreement and Plan of Reorganization by and among Greater Bay Bancorp,
GBB Acquisition Corp., and Peninsula Bank of Commerce, dated September
5, 1997, and exhibits thereto.+
3.1 Articles of Incorporation of Greater Bay Bancorp, as amended.++
3.2 Bylaws of Greater Bay Bancorp, as amended.++
4.1 Junior Subordinated Indenture dated as of March 31, 1997 between
Greater Bay Bancorp and Wilmington Trust Company, as Trustee.++
4.2 Officers' Certificate and Company Order, dated March 31, 1997.++
4.3 (Reserved.)
4.4 Certificate of Trust of GBB Capital I.+++
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997.+++
4.6 Amended and Restated Trust Agreement of GBB Capital I, among Greater
Bay Bancorp, Wilmington Trust Company and the Administrative Trustees
named therein dated as of March 31, 1997.++
4.7 Trust Preferred Certificate of GBB Capital I.++
4.8 Common Securities Certificate of GBB Capital I.++
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington Trust
Company, dated as of March 31, 1997.++
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997.++
4.11 Form of Subordinated Debentures; incorporated herein by reference from
Exhibit 1 of Cupertino National Bancorp's Form 8-K (File No. 0-18015),
filed with the Commission on October 25, 1995.
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp dated
as of November 22, 1996.+++
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp.+++
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997.++
5.1 Opinion and Consent of Manatt, Phelps & Phillips, LLP.
8.1 Opinion and Consent of Manatt, Phelps & Phillips, LLP, as to certain
federal income tax matters.
10.0 Stock Option Agreement dated September 5, 1997 between Greater Bay
Bancorp and Peninsula Bank of Commerce.+
10.1 David L. Kalkbrenner Employment Agreement, dated March 3, 1992;
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 Commission on March 30,
1995.**
10.2 Form of Mid-Peninsula Bank Indemnification Agreement for directors and
executive officers; incorporated herein by reference from Exhibit
10.16 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
Commission on March 30, 1995.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.3 Salary Continuation Agreement entered into with David L. Kalkbrenner
dated April 26, 1995; incorporated herein by reference from Exhibit
10.20 to Mid-Peninsula Bancorp's Annual Report on Form 10-K for the
year ended December 31, 1995, filed with the Commission on March 29,
1996.**
10.4 Salary Continuation Agreement entered into with Murray B. Dey dated
April 26, 1995; incorporated herein by reference from Exhibit 10.21 to
Mid-Peninsula Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1995, filed with the Commission on March 29, 1996.**
10.5 Greater Bay Bancorp 1996 Stock Option Plan.**
10.6 Employment Agreement with C. Donald Allen dated July 1, 1990;
incorporated herein by reference from Exhibit 10.9 to Cupertino
National Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1990 (File No. 0-18015), filed with the Commission on
March 30, 1991.**
10.7 Salary Continuation Agreement with C. Donald Allen dated August 1,
1993; incorporated herein by reference from Exhibit 10.10 to Cupertino
National Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 0-18015), filed with the Commission on
March 25, 1994.**
10.8 Cupertino National Bancorp 401(k) Profit Sharing Plan; incorporated
herein by reference from Exhibit 10.15 to Cupertino National Bancorp's
Registration Statement on Form S-8 (Registration No. 33-62429), filed
with the Commission on September 8, 1995.**
10.9 Amendment to the Cupertino National Bancorp 401(k) Profit Sharing
Plan.**+++
10.10 Amendment Number 2 to the Cupertino National Bancorp 401(k) Profit
Sharing Plan.**+++
10.11 Greater Bay Bancorp Employee Stock Purchase Plan; incorporated herein
by reference from Greater Bay Bancorp's Proxy Statement for Annual
Meeting of Shareholders (File No. 000-25034), filed with the
Commission on May 13, 1996.**
10.12 Salary Continuation Agreement with David Hood dated July 31, 1995.**+
10.13 Salary Continuation Agreement with Hall Palmer dated July 31, 1995.**+
10.14 Salary Continuation Agreement with Steven C. Smith dated July 31,
1995.**+
10.15 Form of Indemnification Agreement between Greater Bay Bancorp and with
directors and certain executive officers.+++
21.1 Subsidiaries of the registrant.*
23.1 Consent of Coopers & Lybrand L.L.P.--GBB
23.2 Consent of Coopers & Lybrand L.L.P.--PBC
23.3 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1
above).
23.4 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 8.1
above).
99.1 Greater Bay Bancorp Proxy.
99.2 Peninsula Bank of Commerce Proxy.
</TABLE>
- --------
* Previously filed.
** Represents executive compensation plans and arrangements of Greater Bay
Bancorp.
+ Incorporated by reference from Greater Bay Bancorp's current report on
Form 8-K (File No. 000-25034) dated September 12, 1997.
++ Incorporated by reference from Greater Bay Bancorp's current report on
Form 8-K (File No. 000-25034) dated June 5, 1997.
+++ Incorporated by reference from Greater Bay Bancorp's Registration
Statement on Form S-1 (Registration No. 333-22783) dated March 5, 1997.
II-3
<PAGE>
(b) Financial Statement Schedules.
All schedules are omitted because the required information is not applicable
or is included in the Financial Statements of the Registrant and the related
notes.
(c) Not applicable.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act"), unless the
information required to be included in such post-effective amendment is
contained in a periodic report filed by the Registrant or plan pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") that is incorporated herein by reference;
(b) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement, unless the information required to be included in
such post-effective amendment is contained in a periodic report filed by
the Registrant or plan pursuant to Section 13 or 15(d) of the Exchange Act
that is incorporated herein by reference;
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a) (3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of
II-4
<PAGE>
expenses incurred or paid by a director, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(7) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of Form S-4, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when it
became effective.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PALO ALTO, STATE OF
CALIFORNIA, ON OCTOBER 22, 1997.
Greater Bay Bancorp
By: /s/ David L. Kalkbrenner
----------------------------------
DAVID L. KALKBRENNER
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW ON THE 22ND DAY OF OCTOBER, 1997, BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ David L. Kalkbrenner President and Chief Executive
- ------------------------------------- Officer and Director (Principal
DAVID L. KALKBRENNER Executive Officer)
/s/ Steven C. Smith Executive Vice President Operating
- ------------------------------------- Officer and Chief Financial
STEVEN C. SMITH Officer (Principal Financial and
Accounting Officer)
Director
- -------------------------------------
JOHN M. GATTO
/s/ James E. Jackson Director
- -------------------------------------
JAMES E. JACKSON
/s/ Rex D. Lindsay Director
- -------------------------------------
REX D. LINDSAY
/s/ Duncan L. Matteson Director
- -------------------------------------
DUNCAN L. MATTESON
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Glen McLaughlin Director
- -------------------------------------
GLEN MCLAUGHLIN
/s/ Dick J. Randall Director
- -------------------------------------
DICK J. RANDALL
/s/ Donald H. Seiler Director
- -------------------------------------
DONALD H. SEILER
/s/ Warren R. Thoits Director
- -------------------------------------
WARREN R. THOITS
Director
- -------------------------------------
EDWIN E. VAN BRONKHORST
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
2.0 Agreement and Plan of Reorganization by and among Greater Bay Bancorp,
GBB Acquisition Corp., and Peninsula Bank of Commerce, dated September
5, 1997, and exhibits thereto.+
3.1 Articles of Incorporation of Greater Bay Bancorp, as amended.++
3.2 Bylaws of Greater Bay Bancorp, as amended.++
4.1 Subordinated Indenture dated as of March 31, 1997 between Greater Bay
Bancorp and Wilmington Trust Company, as Trustee.++
4.2 Officers' Certificate and Company Order, dated March 31, 1997.++
4.3 (Reserved.)
4.4 Certificate of Trust of GBB Capital I.+++
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997.+++
4.6 Amended and Restated Trust Agreement of GBB Capital I, among Greater
Bay Bancorp, Wilmington Trust Company and the Administrative Trustees
named therein dated as of March 31, 1997.++
4.7 Trust Preferred Certificate of GBB Capital I.++
4.8 Common Securities Certificate of GBB Capital I.++
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington Trust
Company, dated as of March 31, 1997.++
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997.++
4.11 Form of Subordinated Debentures; incorporated herein by reference from
Exhibit 1 of Cupertino National Bancorp's Form 8-K (File No. 0-18015),
filed with the Commission on October 25, 1995.
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp dated
as of November 22, 1996.+++
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp.+++
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997.++
5.1 Opinion and Consent of Manatt, Phelps & Phillips, LLP.
8.1 Opinion and Consent of Manatt, Phelps & Phillips, LLP, as to certain
federal income tax matters.
10.0 Stock Option Agreement dated September 5, 1997 between Greater Bay
Bancorp and Peninsula Bank of Commerce.+
10.1 David L. Kalkbrenner Employment Agreement, dated March 3, 1992;
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 Commission on March 30,
1995.**
10.2 Form of Mid-Peninsula Bank Indemnification Agreement for directors and
executive officers; incorporated herein by reference from Exhibit
10.16 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
Commission on March 30, 1995.
10.3 Salary Continuation Agreement entered into with David L. Kalkbrenner
dated April 26, 1995; incorporated herein by reference from Exhibit
10.20 to Mid-Peninsula Bancorp's Annual Report on Form 10-K for the
year ended December 31, 1995, filed with the Commission on March 29,
1996.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.4 Salary Continuation Agreement entered into with Murray B. Dey dated
April 26, 1995; incorporated herein by reference from Exhibit 10.21 to
Mid-Peninsula Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1995, filed with the Commission on March 29, 1996.**
10.5 Greater Bay Bancorp 1996 Stock Option Plan.**
10.6 Employment Agreement with C. Donald Allen dated July 1, 1990;
incorporated herein by reference from Exhibit 10.9 to Cupertino
National Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1990 (File No. 0-18015), filed with the Commission on
March 30, 1991.**
10.7 Salary Continuation Agreement with C. Donald Allen dated August 1,
1993; incorporated herein by reference from Exhibit 10.10 to Cupertino
National Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 0-18015), filed with the Commission on
March 25, 1994.**
10.8 Cupertino National Bancorp 401(k) Profit Sharing Plan; incorporated
herein by reference from Exhibit 10.15 to Cupertino National Bancorp's
Registration Statement on Form S-8 (Registration No. 33-62429), filed
with the Commission on September 8, 1995.**
10.9 Amendment to the Cupertino National Bancorp 401(k) Profit Sharing
Plan.**+++
10.10 Amendment Number 2 to the Cupertino National Bancorp 401(k) Profit
Sharing Plan.**+++
10.11 Greater Bay Bancorp Employee Stock Purchase Plan; incorporated herein
by reference from Greater Bay Bancorp's Proxy Statement for Annual
Meeting of Shareholders (File No. 000-25034), filed with the
Commission on May 13, 1996.**
10.12 Salary Continuation Agreement with David Hood dated July 31, 1995.**+
10.13 Salary Continuation Agreement with Hall Palmer dated July 31, 1995.**+
10.14 Salary Continuation Agreement with Steven C. Smith dated July 31,
1995.**+
10.15 Form of Indemnification Agreement between Greater Bay Bancorp and with
directors and certain executive officers.+++
21.1 Subsidiaries of the registrant.*
23.1 Consent of Coopers & Lybrand L.L.P.--GBB
23.2 Consent of Coopers & Lybrand L.L.P.--PBC
23.3 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1
above).
23.4 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 8.1
above).
99.1 Greater Bay Bancorp Proxy.
99.2 Peninsula Bank of Commerce Proxy.
</TABLE>
- --------
* Previously filed.
** Represents executive compensation plans and arrangements of Greater Bay
Bancorp.
+ Incorporated by reference from Greater Bay Bancorp's current report on
Form 8-K (File No. 000-25034) dated September 12, 1997.
++ Incorporated by reference from Greater Bay Bancorp's current report on
Form 8-K (File No. 000-25034) dated June 5, 1997.
+++ Incorporated by reference from Greater Bay Bancorp's Registration
Statement on Form S-1 (Registration No. 333-22783) dated March 5, 1997.
<PAGE>
Exhibit 5.1
[MANATT PHELPS PHILLIPS LETTERHEAD]
October 22, 1997
Greater Bay Bancorp
2860 West Bayshore Road
Palo Alto, California 94303
RE: GREATER BAY BANCORP
Ladies and Gentlemen:
As special counsel for Greater Bay Bancorp, a California corporation
("GBB"), in connection with GBB's Registration Statement on Form S-4, No.
333-37169 ("Registration Statement"), registering a maximum of 1,000,000 shares
of GBB's common stock, no par value ("GBB Stock"), to be issued in connection
with GBB's acquisition of Peninsula Bank of Commerce, a California state
chartered bank ("PBC"), through merger of GBB Acquisition Corp., a California
corporation and wholly-owned subsidiary of GBB, into PBC (the "Merger"), we have
been requested to render this opinion.
We have examined and reviewed only such questions of law as we have
deemed necessary or appropriate for the purpose of rendering the opinion set
forth herein.
For the purpose of rendering the opinion set forth herein, we have
been furnished with and examined only the following documents:
1. The Articles of Incorporation of GBB, as amended and presently in
effect;
2. The Bylaws of GBB, as amended and presently in effect;
3. The Registration Statement;
4. Records of the meetings of the Board of Directors of GBB
pertaining to the Merger; and
5. Such other agreements, instruments, documents and records as we
have deemed to be necessary in connection with furnishing the opinion expressed
below.
<PAGE>
[MANATT, PHELPS & PHILLIPS, LLP LETTERHEAD]
Peninsula Bank of Commerce
October 22, 1997
Page 2
With respect to all of the foregoing documents, we have assumed,
without investigation, the genuineness of all signatures, the authenticity of
all documents submitted to us as originals and the conformity to originals of
all documents submitted to us as certified or reproduced copies. We also have
obtained from the officers of GBB such advice as to such factual matters as we
consider necessary for the purpose of this opinion, and insofar as this opinion
is based on such matters of fact, we have relied on such advice.
Based on the foregoing, we are of the opinion that the shares of GBB
Stock to be issued in the Merger, when issued and delivered in the manner and on
the terms described in the Registration Statement (after and while the
Registration Statement is declared effective), will be duly authorized, validly
issued, fully paid and nonassessable.
Our opinion expressed herein is limited to those matters expressly set
forth herein, and no opinion may be implied or inferred beyond the matters
expressly stated herein. We hereby disclaim any obligation to notify any person
or entity after the date hereof if any change in fact or law should change our
opinion with respect to any matter set forth in this letter.
This opinion is limited to the current laws of the State of California
and the United States of America, to present judicial interpretations thereof
and to facts as they presently exist. In rendering this opinion, we have no
obligation to revise or supplement it should the current laws of the State of
California or the United States of America be changed by legislative action,
judicial decision or otherwise.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus which is part of the Registration Statement.
Very truly yours,
/s/ Manatt, Phelps & Phillips, LLP
Manatt, Phelps & Phillips, LLP
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF MANATT PHELPS PHILLIPS]
____________, 1997
Board of Directors
Peninsula Bank of Commerce
1001 Broadway
Millbrae, California 94030
Board of Directors
Greater Bay Bancorp
2860 West Bayshore Road
Palo Alto, California 94303
Board of Directors
GBB Acquisition Corp.
2860 West Bayshore Road
Palo Alto, California 94303
RE: CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER OF
GBB ACQUISITION CORP. WITH AND INTO PENINSULA BANK OF COMMERCE
--------------------------------------------------------------
Ladies and Gentlemen:
In accordance with your request, we provide the following analysis and
opinions relating to certain federal income tax consequences of the proposed
transaction whereby Peninsula Bank of Commerce, a California state chartered
bank ("PBC"), will become a wholly-owned subsidiary of Greater Bay Bancorp, a
California corporation ("GBB"), through a merger of GBB Acquisition Corp., a
California corporation ("Newco"), with and into PBC (the "Merger").
In the Merger, Newco (which is a first tier wholly-owned subsidiary of GBB)
will merge with and into PBC, with PBC being the resulting institution. Newco
is a special purpose corporation formed solely for purposes of the Merger and
Newco's only asset will be a nominal amount of cash. Pursuant to the Merger,
all the rights, privileges, powers and franchises and all property and assets of
every kind and description of Newco and PBC 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 Newco and PBC, including all debts due to either of
them on whatever account, shall be the property of the Surviving Corporation as
they were of Newco and PBC and the title to any interest in real property and
any interest in personal property vested by deed or otherwise in either Newco or
PBC shall not revert or be in any way impaired by reason of
<PAGE>
Boards of Directors
____________, 1997
Page 2
the Merger; and all rights of creditors and liens upon any property of Newco and
PBC 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.
Each share of common stock, no par value, of Newco issued and outstanding
immediately prior to the Effective Time of the Merger shall, without any further
action on the part of Newco or the holder of such shares, be converted pursuant
to the terms of the Agreement of Merger. From and after the Effective Time of
the Merger, each certificate that, prior to the Effective Time of the Merger,
represented shares of Newco shall evidence ownership of shares of the Surviving
Corporation on the basis set forth above.
On the Effective Time of the Merger, pursuant to the Agreement of Merger,
each outstanding share of PBC Stock excluding any PBC Perfected Dissenting
Shares or shares (if any) of PBC Stock held by GBB or subsidiaries of GBB (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 PBC or the holders
of any such shares, be converted into shares of GBB Stock pursuant to the
Conversion Ratio specified in the Agreement and Plan of Reorganization dated as
of September 5, 1997 (the "Agreement").
At and as of the Effective Time of the Merger, GBB shall assume each and
every outstanding option to purchase shares of PBC Stock ("PBC Stock Option")
and all obligations of PBC under the PBC Stock Option Plan. Each and every PBC
Stock Option so assumed by GBB shall continue to have, and be subject to, the
same terms and conditions set forth in the PBC Stock Option Plan and in the
other documents governing such PBC Stock Option immediately prior to the
Effective Time of the Merger, except that GBB Stock instead of PBC Stock shall
be issued upon exercise of the option and the option exercise price and number
of shares to be issued shall be adjusted as provided in the Agreement.
Our analysis and the opinions set forth herein are based upon facts set
forth in the Agreement. Our analysis and opinions assume that, when the Merger
is consummated, the Merger will conform in all material respects with the
provisions in the Agreement. Our opinions are also based on the facts set forth
in the Registration Statement on Form S-4 that is being filed with the
Securities and Exchange Commission ("SEC") contemporaneously herewith and on
certain written representations to us from PBC, GBB, Newco and certain PBC
shareholders in letters of even date herewith. The terms herein have the same
meanings as the terms used in such documents. The facts contained in the
above-referenced documents are incorporated herein by reference as the operative
facts underlying the tax opinions set forth herein. One of our key assumptions
for purposes of this letter is that the facts set forth in those documents are
accurate on the date of this analysis and will remain accurate to the date of
the closing of the Merger, and
<PAGE>
Board of Directors
___________, 1997
Page 3
are otherwise true, complete, and correct. Any change or inaccuracy in such
facts may adversely affect our opinions.
Our opinions are based upon the Internal Revenue Code of 1986, as amended
(the "Code"), as of the date hereof and currently applicable Treasury
Regulations promulgated under the Code (including proposed Treasury
Regulations), published administrative positions of the Internal Revenue Service
in revenue rulings and revenue procedures, and judicial decisions. Such legal
authorities are all subject to change, either prospectively or retroactively.
No assurance can be provided as to the effect of any such change upon our
opinions. We undertake no duty to update this opinion letter in the future.
The opinions set forth herein have no binding effect on the Internal
Revenue Service or the courts. No assurance can be given that, if contested, a
court would agree with the opinions set forth herein. The opinions set forth
herein represent rather our best legal judgment as to the likely outcome of the
issues addressed herein if such issues were litigated.
In the case of a transaction as complex as the Merger, many federal, state
and local income and other tax consequences arise. We have been asked only to
address the issues specifically set forth below. No opinion is expressed
regarding any other issues.
This letter is being issued solely for your benefit and for the benefit of
the PBC shareholders as of the date of the Merger. It may not be relied upon by
any other person without our prior written consent. However, we do consent to
the filing of this letter with the SEC in connection with the Merger and
reference to this letter in such regulatory filing and in the proxy materials
included with the Form S-4.
Our opinions regarding the Merger are as follows:
(1) The Merger will qualify as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code. The Merger will not be
disqualified by reason of the fact that the stock of GBB is used
in the Merger, pursuant to Section 368(a)(2)(E) of the Code. GBB,
PBC and Newco will each be "a party to a reorganization" within
the meaning of Section 368(b) of the Code.
(2) No gain or loss will be recognized by Newco on the transfer of
its assets to PBC solely in constructive exchange for the common
stock of PBC and the assumption of Newco's liabilities, pursuant
to Sections 361(a) and 357(a) of the Code.
<PAGE>
Board of Directors
___________, 1997
Page 4
(3) No gain or loss will be recognized by PBC upon the receipt of the
assets of Newco in constructive exchange for PBC common stock,
pursuant to Section 1032(a) of the Code.
(4) The basis of Newco's assets in the hands of PBC will be the same
as the basis of such assets in the hands of Newco immediately
prior to the Merger, pursuant to Section 362(b) of the Code.
(5) No gain or loss will be recognized by GBB upon the receipt of PBC
common stock solely in exchange for the stock of Newco, pursuant
to Section 354(a)(1) of the Code.
(6) No gain or loss will be recognized by the shareholders of PBC
upon the transfer of their common stock of PBC solely in exchange
for GBB Stock, pursuant to Section 354(a) of the Code.
(7) The basis of the GBB Stock to be received by the shareholders of
PBC in the Merger will be the same as the basis of the PBC common
stock surrendered in exchange therefor, pursuant to Section
358(a)(1) of the Code.
(8) The holding period of GBB Stock to be received by the PBC
shareholders will include the holding period of the PBC common
stock surrendered in exchange therefor, provided that the PBC
common stock is held as a capital asset on the date of the
exchange, pursuant to Section 1223(1) of the Code.
(9) The holding period of the assets of Newco in the hands of PBC
will include the period during which such assets were held by
Newco, pursuant to Section 1223(2) of the Code.
(10) Provided that any nonqualified stock options to purchase the
common stock of PBC and any nonqualified stock options to
purchase the GBB Stock into which they will be converted do not
have readily ascertainable fair market values (within the meaning
of Section 1.83-7 of the Treasury Regulations), such conversion
of the PBC options into GBB options will not result in income,
gain, or loss to the holders of such stock options, pursuant to
Section 83(e)(3) of the Code.
<PAGE>
Board of Directors
___________, 1997
Page 5
(11) No gain or loss will be recognized by PBC or GBB upon the
issuance of GBB Stock to an optionee pursuant to the optionee's
exercise of a stock option issued by PBC and converted into an
option to acquire GBB Stock, pursuant to Section 1032 of the
Code and Section 1.83-6(d) of the Treasury Regulations.
(12) Provided that any incentive options issued by PBC qualify as
incentive stock options under Section 422 of the Code, the Merger
will qualify as a transaction to which Code Section 424(a)
applies. The assumption of the PBC Stock Option Plan by GBB will
satisfy the requirements of Section 424(a) of the Code and will
not be a modification under Section 424(h) of the Code.
Accordingly, no income, gain or loss will be recognized by PBC,
GBB or the holders of outstanding options of PBC upon the
substitution, amendment or assumption by GBB of the PBC Stock
Option Plan and options thereunder.
Very truly yours,
<PAGE>
EXHIBIT 10.5
GREATER BAY BANCORP 1996 STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
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................................................ 1
(g) Exchange Act............................................ 2
(h) Exercise Price.......................................... 2
(i) Fair Market Value....................................... 2
(j) ISO..................................................... 2
(k) Nonstatutory Option..................................... 2
(l) Option.................................................. 2
(m) Optionee................................................ 2
(n) Plan.................................................... 3
(o) Service................................................. 3
(p) Share................................................... 3
(q) Stock................................................... 3
(r) Stock Option Agreement.................................. 3
(s) Subsidiary.............................................. 3
(t) Substitute Option....................................... 3
(u) Total and Permanent Disability.......................... 3
3. ADMINISTRATION.................................................. 3
(a) Committee Membership.................................... 3
(b) Committee Procedures.................................... 3
(c) Committee Responsibilities.............................. 4
4. ELIGIBILITY..................................................... 4
(a) General Rules........................................... 4
(b) Ten-Percent Stockholders................................ 4
(c) Attribution Rules....................................... 5
(d) Outstanding Stock....................................... 5
5. STOCK SUBJECT TO PLAN........................................... 5
(a) Basic Limitation........................................ 5
(b) Additional Shares....................................... 5
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6. TERMS AND CONDITIONS OF OPTIONS.................................5
-------------------------------
(a) Stock Option Agreement....................................5
(b) Number of Shares..........................................6
(c) Exercise Price............................................6
(d) Withholding Taxes.........................................6
(e) Exercisability............................................6
(f) Term......................................................6
(g) Transferability...........................................7
(h) No Rights as a Stockholder................................7
(i) Modification, Extension and Renewal Options...............7
(j) Substitute Options........................................7
7. PAYMENT FOR SHARES..............................................8
(a) General Rule..............................................8
(b) Surrender of Stock........................................8
(c) Exercise/Sale.............................................8
(d) Exercise/Pledge...........................................8
8. ADJUSTMENT OF SHARES............................................8
(a) General...................................................8
(b) Reorganizations...........................................9
(c) Reservation of Rights.....................................9
9. SECURITIES LAWS.................................................9
10. NO RETENTION RIGHTS.............................................9
11. DURATION AND AMENDMENTS.........................................9
(a) Term of the Plan..........................................9
(b) Right to Amend or Terminate the Plan......................9
(c) Effect of Amendment or Termination.......................10
</TABLE>
<PAGE>
GREATER BAY BANCORP 1996 STOCK OPTION PLAN
------------------------------------------
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 both for the grant of Nonstatutory Options as
well as ISOs intended to qualify under section 422 of the Code.
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 (including prior service
as a director of either Mid-Peninsula Bancorp or Cupertino National
Bancorp) 24 months prior to such change; or
(B) Were elected, or nominated for election, to the Board of
Directors with the affirmative votes of at least a majority of the
directors who had been directors of the Company at the Effective Time
of the Merger of Mid-Peninsula Bancorp and Cupertino National Bancorp
or 24 months prior to such change (whichever is later) 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 purpose 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;
<PAGE>
(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 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 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.
(j) "ISO" shall mean an employee incentive stock option described in
---
Section 422(b) of the Code.
(k) "Nonstatutory Option" shall mean a stock option not described in
-------------------
Section 422(b) or 423(b) of the Code.
(l) "Option" shall mean an ISO or Nonstatutory Option granted under the
------
Plan and entitling the holder to purchase Shares.
(m) "Optionee" shall mean an individual who holds an Option.
--------
<PAGE>
(n) "Plan" shall mean this Greater Bay Bancorp 1996 Stock Option Plan, as
----
it may be amended from time to time.
(o) "Service" shall mean service as an Employee.
-------
(p) "Share" shall mean one share of Stock, as adjusted in accordance with
-----
Section 8 (if applicable).
(q) "Stock" shall mean the Common Stock of the Company.
-----
(r) "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.
(s) "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.
(t) "Substitute Option" shall mean an option described in Section 6(j).
-----------------
(u) "Total and Permanent Disability" shall mean that the Optionee 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. With respect to the participation of Employees who may be
considered "covered employees" under Section 162(m) of the Code, 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 plans intended to qualify for an exemption under Section
162(m)(4)(C) of the Code. If the committee members meet both such
qualifications, then one committee may administer the Plan both with respect to
Employees who are subject to Section 16 of the Exchange Act or who are
considered to be "covered employees" under Section 162(m) of the Code.
The Board of Directors may appoint a separate committee, consisting of one
or more members of the Board of Directors who do not meet such qualifications.
Such committee may administer the Plan with respect to Employees who are not
officers of the Company or members of the Board of Directors, may grant Options
under the Plan to such Employees and may determine the timing, number of Shares
and other terms of such grants.
(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
<PAGE>
at meetings at which 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 required to carry out the purposes of the Plan;
(iv) To determine when Options are to be granted under the Plan;
(v) To select the Optionees;
(vi) To determine the number of Shares to be made subject to each
Option;
(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 amend any outstanding Stock Option Agreement, subject to
applicable legal restrictions and to the consent of the Optionee who
entered into such agreement;
(ix) To prescribe the consideration for the grant of each Option
under the Plan and to determine the sufficiency of such consideration; and
(x) 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 all persons deriving their rights from an
Optionee. 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.
4. ELIGIBILITY.
-----------
(a) General Rules. Only Employees shall be eligible for designation as
-------------
Optionees 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:
(i) The Exercise Price is at least 110 percent of the Fair Market
Value of a Share on the date of grant; and
<PAGE>
(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, an Employee shall be deemed to own the stock owned,
directly or indirectly, by or for such Employee's brothers, sisters, spouse,
ancestors and lineal descendants. Stock owned, directly or indirectly, by or for
a corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which such Employee holds an option shall not be counted.
(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 offered under the plan shall be authorized
----------------
but unissued Shares. The aggregate number of Shares which is issued under the
Plan upon exercise of Options shall not exceed 967,890 Shares less the number of
Shares required for issuance pursuant to exercise of options outstanding under
the Company's 1994 Mid-Peninsula Bancorp Stock Option Plan (the "Prior Plan") as
of the effective date of the merger of Cupertino National Bancorp with and into
Mid-Peninsula Bancorp by wich Mid-Peninsula Bancorp will also change its name to
Greater Bay Bancorp (the "Effective Date"). (No additional grants shall be made
under the Prior Plan after the Effective Date, although the Prior Plan will
continue to govern outstanding options previously granted under the Prior Plan.)
Notwithstanding the foregoing sentence, the aggregate number of Shares which may
be issued pursuant to the exercise of ISOs granted under the Plan shall not
exceed 519,896. The number of Shares which are subject to Options 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 cancelled or otherwise terminated, the Shares allocable to the
unexercised portion of such option 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 under the Plan need not be identical.
<PAGE>
(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 8. 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 8. 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 7.
(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 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,
<PAGE>
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 8.
(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 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 the Amended and Restated Agreement and Plan of
Reorganization by and between Mid-Peninsula Bancorp and Cupertino National
Bancorp dated June 26, 1996. 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.
<PAGE>
7. PAYMENT FOR SHARES.
------------------
(a) General Rule. The entire Exercise Price of 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.
(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 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 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 and any
withholding taxes.
8. 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);
(iii) The number of Shares covered by each outstanding Option; or
(iv) The Exercise Price under each outstanding Option.
<PAGE>
(b) Reorganizations. In the event that the Company is a party to a merger
---------------
or other reorganization, outstanding Options shall be subject to the agreement
of merger or reorganization. Subject to the provisions of Section 6(e)(i), such
agreement may provide, without limitation, for the assumption of outstanding
Options 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 Exercise Price, or for the acceleration of their
exercisability followed by the cancellation of Options not exercised, in all
cases without the Optionees' consent. Any cancellation 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 8, an
---------------------
Optionee or Offeree 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. The grant of an Option 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.
9. 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.
10. NO RETENTION RIGHTS.
-------------------
Neither the Plan nor any Option 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).
11. 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.
<PAGE>
(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 previously
granted under the Plan.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to Registration
Statement on Form S-4 (Registration No. 333-37169) of our report dated
February 27, 1997, on our audits of the consolidated financial statements of
Greater Bay Bancorp and Subsidiaries. We also consent to the reference to our
firm under the heading "Experts."
Coopers & Lybrand L.L.P.
San Francisco, California
October 21, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to Registration
Statement on Form S-4 (Registration No. 333-37169) of our report dated October
2, 1997, on our audits of the consolidated financial statements of Peninsula
Bank of Commerce and Subsidiary. We also consent to the reference to our firm
under the heading "Experts."
Coopers & Lybrand L.L.P.
San Francisco, California
October 21, 1997
<PAGE>
EXHIBIT 99.1
GREATER BAY BANCORP
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 19, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder(s) hereby nominates(s), constitute(s) and
appoint(s) David L. Kalkbrenner, Steven C. Smith and Warren R. Thoits, and each
of them, the attorneys, agents and proxies of the undersigned, with full powers
of substitution to each, to attend and act as proxy or proxies of the
undersigned at the Special Meeting of Shareholders (the "Special Meeting") of
GREATER BAY BANCORP ("GBB") to be held at the principal administrative offices
of GBB, 2860 West Bayshore Road, Palo Alto, California 94303, on Wednesday,
November 19, 1997, at 5:00 p.m., and at any and all adjournments thereof, and
to vote as specified herein the number of shares which the undersigned, if
personally present, would be entitled to vote.
1. To approve the principal terms of the Agreement and Plan of Reorganization
dated as of September 5, 1997, by and among GBB, GBB Acquisition Corp.
("Newco") and Peninsula Bank of Commerce ("PBC"), pursuant to which Newco will
merge with and into PBC (the "Merger") with PBC surviving the Merger.
[_] FOR [_] AGAINST [_] ABSTAIN
2. To amend the articles of incorporation of GBB to increase to 12 million
the number of shares of common stock of GBB authorized to be issued by GBB.
[_] FOR [_] AGAINST [_] ABSTAIN
3. To amend, upon consummation of the Merger, the Greater Bay Bancorp 1996
Stock Option Plan to increase by 456,326 the number of shares of common stock
of GBB issuable thereunder, and to provide that all of the shares issuable
under such plan may be issued pursuant to the exercise of incentive or
nonqualified stock options.
[_] FOR [_] AGAINST [_] ABSTAIN
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting and at any and all
adjournments thereof. The Board of Directors at present knows of no other
business to be presented by or on behalf of GBB or the Board of Directors at
the Special Meeting.
PLEASE SIGN AND DATE ON REVERSE SIDE
<PAGE>
PLEASE SIGN AND DATE BELOW
The undersigned hereby ratifies and confirms all that said attorneys and
proxies, or any of them, or their substitutes, shall lawfully do or cause to be
done by virtue hereof, and hereby revokes any and all proxies heretofore given
by the undersigned to vote at the Special Meeting. The undersigned acknowledges
receipt of the notice of the Special Meeting and the Joint Proxy
Statement/Prospectus accompanying such notice.
Dated: , 1997
Signed: ____________________
Signed: ____________________
Please date this Proxy and
sign above exactly as your
name(s) appear(s) on this
card. Joint owners should
each sign personally.
Corporate proxies should be
signed by an authorized
officer. Executors, adminis-
trators, trustees, etc.,
should give their full
titles.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PRINCIPAL
TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION, "FOR" AMENDMENT OF GBB'S
ARTICLES OF INCORPORATION AND "FOR" AMENDMENT OF THE GREATER BAY BANCORP 1996
STOCK OPTION PLAN. THE PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS
DIRECTED. IF NO DIRECTION IS MADE, IT WILL BE VOTED "FOR" EACH OF THE
PROPOSALS.
I (WE) WILL ___ WILL NOT ___ ATTEND THE SPECIAL MEETING IN PERSON.
<PAGE>
EXHIBIT 99.2
PENINSULA BANK OF COMMERCE
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 19, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder(s) hereby nominate(s), constitute(s) and
appoint(s) George R. Corey and Mark F. Doiron, and each of them, the
attorneys, agents and proxies of the undersigned, with full powers of
substitution to each, to attend and act as proxy or proxies of the undersigned
at the Special Meeting of Shareholders (the "Meeting") of PENINSULA BANK OF
COMMERCE ("PBC") to be held at the principal administrative offices of PBC,
1001 Broadway, Millbrae, California 94030, on Wednesday, November 19, 1997, at
5:00 p.m., and at any and all adjournments thereof, and to vote as specified
herein the number of shares which the undersigned, if personally present,
would be entitled to vote.
1. To approve the principal terms of the Reorganization Agreement, dated as
of September 5, 1997, by and among Greater Bay Bancorp, GBB Acquisition Corp.
("NEWCO") and PBC, pursuant to which NEWCO will merge with and into PBC (the
"Merger") with PBC surviving the Merger.
[_] FOR [_] AGAINST [_] ABSTAIN
2. OTHER BUSINESS. In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before the Meeting and at any
and all adjournments thereof. The Board of Directors at present knows of no
other business to be presented by or on behalf of PBC or the Board of
Directors at the Meeting.
PLEASE SIGN AND DATE ON REVERSE SIDE
<PAGE>
PLEASE SIGN AND DATE BELOW
The undersigned hereby ratifies and confirms all that said attorneys and
proxies, or any of them, or their substitutes, shall lawfully do or cause to
be done by virtue hereof, and hereby revokes any and all proxies heretofore
given by the undersigned to vote at said Meeting. The undersigned acknowledges
receipt of the notice of said Special Meeting and the Joint Proxy
Statement/Prospectus accompanying said notice.
NUMBER OF SHARES: _______
_________________________
Signature of
Shareholder(s)
Dated: ____________, 1997
Please date this Proxy and
sign above exactly as your
name(s) appear(s) on this
card. Joint owners should each
sign personally. Corporate
proxies should be signed by an
authorized officer. Executors,
administrators, trustees,
etc., should give their full
titles.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PRINCIPAL
TERMS OF THE REORGANIZATION AGREEMENT. THE PROXY, WHEN PROPERLY EXECUTED, WILL
BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT WILL BE VOTED "FOR" THE
SPECIFIED PROPOSAL AT THE SPECIAL MEETING OF SHAREHOLDERS.
I (WE) WILL WILL NOT ATTEND THE MEETING IN PERSON.
