<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-22783
PROSPECTUS
dated March 24, 1997
800,000 Trust Preferred Securities
GBB CAPITAL I
9.75% Cumulative Trust Preferred Securities
(Liquidation Amount $25 per Trust Preferred Security)
Fully and Unconditionally Guaranteed, as Described Herein, by
GREATER BAY BANCORP
The 9.75% Cumulative Trust Preferred Securities (the "Trust Preferred
Securities") offered hereby represent undivided beneficial interests in the
assets of GBB Capital I, a statutory business trust formed under the laws of
the State of Delaware ("GBB Capital"). Greater Bay Bancorp, a California
corporation (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), will be the owner of all of the
beneficial interests represented by common securities of GBB Capital (the
"Common Securities" and, collectively with the Trust Preferred Securities, the
"Trust Securities"). GBB Capital exists for the sole purpose of issuing the
Trust Securities and investing the proceeds thereof in 9.75% Junior
Subordinated Deferrable Interest Debentures (the "Junior Subordinated
Debentures") to be issued by Greater Bay. The Junior Subordinated Debentures
will mature on April 1, 2027, which date may be shortened (such date, as it
may be shortened, the "Stated Maturity") to a date not earlier than April 1,
2002 if certain conditions are met (including Greater Bay having received
prior approval of the Board of Governors of the Federal Reserve System (the
"Federal Reserve") to do so if then required under applicable capital
guidelines or policies of the Federal Reserve). The Trust Preferred Securities
will have a preference under certain circumstances with respect to cash
distributions and amounts payable on liquidation, redemption or otherwise over
the Common Securities, which will be held by Greater Bay. See "Description of
the Trust Preferred Securities--Subordination of Common Securities of GBB
Capital Held by Greater Bay."
(Continued on next page)
SEE "RISK FACTORS" COMMENCING ON PAGE 11 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, BY ANY OTHER GOVERNMENTAL AGENCY,
OR OTHERWISE.
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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO GBB
PUBLIC COMMISSION(1) CAPITAL(2)(3)
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<S> <C> <C> <C>
Per Trust Preferred Security........ $25.00 (2) $25.00
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Total............................... $20,000,000 (2) $20,000,000
</TABLE>
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(1) Greater Bay and GBB Capital have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) In view of the fact that all of the proceeds of the sale of the Trust
Preferred Securities will be used to purchase the Junior Subordinated
Debentures, Greater Bay has agreed to pay the Underwriter as compensation
for arranging the investment therein of such proceeds, $0.97 per Trust
Preferred Security, or $776,000 in the aggregate. See "Underwriting."
(3) Before deducting offering expenses payable by Greater Bay estimated at
$359,000.
The Trust Preferred Securities are being offered by the Underwriter named
herein subject to prior sale and when, as and if delivered to and accepted by
the Underwriter. It is expected that the Trust Preferred Securities will be
ready for delivery in book-entry form only through the facilities of The
Depository Trust Company in New York, New York, on or about March 31, 1997,
against payment therefor in immediately available funds.
Piper Jaffray inc.
<PAGE>
(Continued from previous page)
Holders of the Trust Preferred Securities will be entitled to receive
preferential cumulative cash distributions accruing from the date of original
issuance and payable quarterly in arrears on the 15th day of March, June,
September and December of each year (subject to possible deferral as described
below), commencing June 15, 1997, at the annual rate of 9.75% of the
Liquidation Amount (as defined herein) of $25 per Trust Preferred Security
("Distributions"). The amount of each Distribution due with respect to the
Trust Preferred Securities will include amounts accrued through the date the
Distribution payment is due. Greater Bay will have the right to defer payments
of interest on the Junior Subordinated Debentures at any time or from time to
time for a period not exceeding 20 consecutive quarters with respect to each
deferral period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures. Upon the termination of any such Extension Period and the payment
of all amounts then due, Greater Bay may elect to begin a new Extension Period
subject to the requirements set forth herein. If interest payments on the
Junior Subordinated Debentures are so deferred, Distributions on the Trust
Preferred Securities will also be deferred and Greater Bay will not be
permitted, subject to certain exceptions described herein, to declare or pay
any cash distributions with respect to its capital stock or to make any
payment with respect to its debt securities that rank pari passu with or
junior to the Junior Subordinated Debentures. During an Extension Period,
interest on the Junior Subordinated Debentures will continue to accrue (and
the amount of Distributions to which holders of the Trust Preferred Securities
are entitled will accumulate) at the rate of 9.75% per annum, compounded
quarterly, and holders of the Trust Preferred Securities will be required to
accrue income and will be required to pay United States federal income tax on
that income. See "Description of Junior Subordinated Debentures--Option to
Defer Interest Payment Period" and "Certain Federal Income Tax Consequences--
Interest Income and Original Issue Discount."
Greater Bay has, through the Guarantee, the Guarantee Agreement, the Trust
Agreement, the Junior Subordinated Debentures, the Indenture and the Expense
Agreement (each as defined herein), taken together, fully, irrevocably and
unconditionally guaranteed all of GBB Capital's obligations under the Trust
Preferred Securities. See "Relationship Among the Trust Preferred Securities,
the Junior Subordinated Debentures and the Guarantee--Full and Unconditional
Guarantee." Under the Guarantee, Greater Bay guarantees the payment of
Distributions by GBB Capital and payments on liquidation of or redemption of
the Trust Preferred Securities (subordinate to the right to payment of Senior
and Subordinated Debt of Greater Bay, as defined herein) to the extent of
funds held by GBB Capital. The Guarantee does not cover payment of
Distributions when GBB Capital does not have sufficient funds to pay such
Distributions. See "Description of Guarantee." If Greater Bay does not make
required payments on the Junior Subordinated Debentures held by GBB Capital,
GBB Capital will have insufficient funds to pay Distributions on the Trust
Preferred Securities. In such event, a holder of the Trust Preferred
Securities may institute a legal proceeding directly against Greater Bay
pursuant to terms of the Indenture to enforce payment of such Distributions to
such holder. See "Description of Junior Subordinated Debentures--Enforcement
of Certain Rights by Holders of the Trust Preferred Securities." The
obligations of Greater Bay under the Guarantee and the Junior Subordinated
Debentures are subordinate and junior in right of payment to all Senior and
Subordinated Debt (as defined in "Description of Junior Subordinated
Debentures--Subordination") of Greater Bay.
The Trust Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at the Stated
Maturity or their earlier redemption in each case at a redemption price equal
to the aggregate liquidation preference of the Trust Preferred Securities plus
any accumulated and unpaid Distributions thereon to the date of redemption.
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of Greater Bay, subject to any required prior approval of the Federal
Reserve, (i) on or after April 1, 2002, in whole at any time or in part from
time to time, or (ii) at any time, in whole (but not in part), upon the
occurrence and continuation of a Tax Event, an Investment Company Event or a
Capital Treatment Event (each as defined herein), in each case at a redemption
price equal to the accrued and unpaid interest on the Junior Subordinated
Debentures to the date fixed for redemption, plus 100% of the principal amount
thereof. See "Description of the Trust Preferred Securities--Redemption."
(Continued on next page)
2
<PAGE>
(Continued from previous page)
Greater Bay will have the right at any time to terminate GBB Capital and cause
a Like Amount (as defined herein) of the Junior Subordinated Debentures to be
distributed to the holders of the Trust Securities in liquidation of GBB
Capital, subject to Greater Bay having received prior approval of the Federal
Reserve if then required under applicable capital guidelines or policies of
the Federal Reserve. See "Description of the Trust Preferred Securities--
Liquidation Distribution upon Termination."
The Junior Subordinated Debentures are unsecured and subordinated to all
Senior and Subordinated Debt. As of December 31, 1996, Greater Bay had
approximately $3.0 million aggregate principal amount of Senior and
Subordinated Debt outstanding. The terms of the Junior Subordinated Debentures
place no limitation on the amount of Senior and Subordinated Debt that Greater
Bay can issue. See "Risk Factors--Ranking of Greater Bay's Obligations Under
the Junior Subordinated Debentures and the Guarantee" and "Description of
Junior Subordinated Debentures--Subordination."
In the event of the termination of GBB Capital, after satisfaction of
liabilities to creditors of GBB Capital as required by applicable law, the
holders of Trust Preferred Securities will be entitled to receive a
liquidation amount of $25 per Trust Preferred Security ("Liquidation Amount"),
plus accumulated and unpaid Distributions thereon to the date of payment,
which may be in the form of a Distribution of such Like Amount of Junior
Subordinated Debentures, subject to certain exceptions. See "Description of
the Trust Preferred Securities--Liquidation Distribution Upon Termination."
The Trust Preferred Securities have been approved for listing on the Nasdaq
National Market. Although the Underwriter has indicated an intention to make a
market in the Trust Preferred Securities, the Underwriter is not obligated to
make a market in the Trust Preferred Securities, and any market making may be
discontinued at any time at the sole discretion of the Underwriter. There can
be no assurance that a market will develop for the Trust Preferred Securities.
See "Risk Factors--Absence of Existing Public Market; Market Prices" and
"Underwriting."
The Trust Preferred Securities will be represented by one or more global
certificates registered in the name of The Depository Trust Company (the
"Depositary") or its nominee. Beneficial interests in the Trust Preferred
Securities will be shown on, and transfers thereof will be effected only
through, records maintained by participants in the Depositary. Except as
described herein, the Trust Preferred Securities in certificate form will not
be issued in exchange for global certificates. See "Book-Entry Issuance."
As used herein, (i) the "Indenture" means the Junior Subordinated Indenture
dated as of March 31, 1997, as amended and supplemented from time to time,
between Greater Bay and Wilmington Trust Company, as trustee (the "Indenture
Trustee"), under which the Junior Subordinated Debentures will be issued, (ii)
the "Trust Agreement" means the Amended and Restated Trust Agreement relating
to GBB Capital among Greater Bay, as Depositor, Wilmington Trust Company, as
Property Trustee (the "Property Trustee"), Wilmington Trust Company, as
Delaware Trustee (the "Delaware Trustee"), and the Administrative Trustees
named therein (collectively, with the Property Trustee and Delaware Trustee,
the "Issuer Trustees"), (iii) the "Guarantee Agreement" means the Guarantee
Agreement relating to the Guarantee between Greater Bay and Wilmington Trust
Company, as Guarantee Trustee, and (iv) the "Expense Agreement" means the
Expense Agreement between Greater Bay and GBB Capital.
3
<PAGE>
[MAP OF GREATER BAY BANCORP BANKING LOCATIONS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE TRUST PREFERRED
SECURITIES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE
PURCHASE OF SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
4
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial information appearing elsewhere in this
Prospectus. Unless the context clearly suggests otherwise, references to the
"Company" include Greater Bay Bancorp and its subsidiaries, collectively, and
references to "Greater Bay" include the parent company only. In addition to
the historical information contained herein, certain statements in this
Prospectus constitute "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995 (the "Reform Act") which involve
risks and uncertainties. The Company'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" as well as those discussed elsewhere in this
Prospectus. See "Risk Factors--Forward-Looking Statements."
THE COMPANY
Greater Bay is a bank holding company operating Cupertino National Bank &
Trust ("CNB") and Mid-Peninsula 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. Greater Bay is the result of the merger
(the "Merger"), effective November 27, 1996, of Cupertino National Bancorp
("Cupertino") and Mid-Peninsula Bancorp ("Mid-Peninsula"). At December 31,
1996, the Company had total assets of $622.0 million, total net loans of
$441.6 million and total deposits of $559.3 million.
The Company, 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. Services
include personal and business checking and savings accounts, time deposits and
individual retirement accounts, cash management, international trade services
and accounting services and the making of commercial, consumer and real estate
loans, which generally do not include long-term residential mortgage loans.
Additionally, the Company 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
Lending 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, management has adopted a business philosophy
referred to as the "Super Community Banking Philosophy." The Super Community
Banking Philosophy is based on management's belief that banking 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, Greater Bay 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, the Company 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
5
<PAGE>
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communities in which they serve, so they are able to capitalize on their
efforts through expanded business opportunities for the Banks.
While client service decisions and day-to-day operations are maintained at
the Banks, Greater Bay offers the advantages of affiliation with a multi-bank
holding company by providing improved access to the capital markets and
expanded client support services, such as business cash management,
international trade services and accounting services. In addition, Greater Bay
provides centralized administrative functions, including support in credit
policy formulation and review, investment management, data processing,
accounting and other specialized support functions, thereby allowing the Banks
to focus on client service.
The Company's business strategy is to focus on increasing its market share
within the communities it serves through continued internal growth. As a
result of the Merger, the Company has the opportunity to market the
specialized products and services of the Venture Lending Group, the Greater
Bay Trust Company and the SBA Department to a larger customer base. The
Company believes that these products and services, available prior to the
Merger only to customers of CNB, will be attractive to customers and contacts
of MPB in the venture capital community and the high net worth customers of
MPB. The Company believes that the infrastructure developed by Cupertino to
support the Greater Bay Trust Company, the SBA Department and the Venture
Lending Group will allow the Company to offer the products and services of
these groups without significant additional overhead costs.
The Company also will pursue opportunities to expand its market share
through select acquisitions that management believes complement the Company's
businesses. While management would prefer to make acquisitions which would
expand its presence in its current market areas in Santa Clara and San Mateo
Counties, it 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 Company was incorporated in California in 1984 under the name San Mateo
County Bancorp. See "Business--History." The Company's principal offices are
located at 2860 West Bayshore Road, Palo Alto, California 94303 and its
telephone number is (415) 813-8200.
GBB CAPITAL
GBB Capital is a statutory business trust formed under Delaware law pursuant
to (i) the Trust Agreement and (ii) the filing of a Certificate of Trust with
the Delaware Secretary of State on March 3, 1997. GBB Capital's business and
affairs are conducted by the Property Trustee, Delaware Trustee and three
individual Administrative Trustees who are officers of the Company. GBB
Capital exists for the exclusive purposes of (i) issuing and selling the Trust
Securities, (ii) using the proceeds from the sale of the Trust Securities to
acquire the Junior Subordinated Debentures issued by Greater Bay, and (iii)
engaging in only those other activities necessary, advisable or incidental
thereto (such as registering the transfer of the Trust Securities).
Accordingly, the Junior Subordinated Debentures will be the sole assets of GBB
Capital, and payments by Greater Bay under the Junior Subordinated Debentures
and the Expense Agreement will be the sole revenues of GBB Capital. All of the
Common Securities will be owned by Greater Bay. The Common Securities will
rank pari passu, and payments will be made thereon pro rata, with the Trust
Preferred Securities, except that upon the occurrence and during the
continuance of an event of default under the Trust Agreement resulting from an
event of default under the Indenture, the rights of Greater Bay as holder of
the Common Securities to payment in respect of Distributions and payments upon
liquidation, redemption or otherwise will be subordinated to the rights of the
holders of the Trust Preferred Securities. See "Description of the Trust
Preferred Securities--Subordination of Common Securities of GBB Capital Held
by Greater Bay." Greater Bay will acquire Common Securities in an aggregate
liquidation amount equal to 3.0% of the total capital of GBB Capital. GBB
Capital has a term of 31 years, but may terminate earlier as provided in the
Trust Agreement.
GBB Capital's principal offices are located at 2860 West Bayshore Road, Palo
Alto, California 94303 and its telephone number is (415) 813-8200.
6
<PAGE>
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THE OFFERING
<TABLE>
<C> <S>
Trust Preferred Securities
issuer.......................... GBB Capital
Securities offered............... 800,000 Trust Preferred Securities. The
Trust Preferred Securities represent
undivided beneficial interests in GBB
Capital's assets, which will consist solely
of the Junior Subordinated Debentures and
payments thereunder.
Distributions.................... The Distributions payable on each Trust
Preferred Security will be fixed at a rate
per annum of 9.75% of the Liquidation
Amount of $25 per Trust Preferred Security,
will be cumulative, will accrue from the
date of issuance of the Trust Preferred
Securities, and will be payable quarterly
in arrears on the 15th day of March, June,
September and December of each year,
commencing on June 15, 1997 (subject to
possible deferral as described below). The
amount of each Distribution due with
respect to the Trust Preferred Securities
will include amounts accrued through the
date the Distribution payment is due. See
"Description of the Trust Preferred
Securities--Distributions."
Extension periods................ So long as no Debenture Event of Default
(as defined herein) has occurred and is
continuing, Greater Bay will have the
right, at any time, to defer payments of
interest on the Junior Subordinated
Debentures by extending the interest
payment period thereon for a period not
exceeding 20 consecutive quarters with
respect to each deferral period (each an
"Extension Period"), provided that no
Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated
Debentures. If interest payments are so
deferred, Distributions on the Trust
Preferred Securities will also be deferred
and Greater Bay will not be permitted,
subject to certain exceptions described
herein, to declare or pay any cash
distributions with respect to Greater Bay's
capital stock or debt securities that rank
pari passu with or junior to the Junior
Subordinated Debentures. During an
Extension Period, Distributions will
continue to accumulate with income thereon
compounded quarterly. Because interest
would continue to accrue and compound on
the Junior Subordinated Debentures, to the
extent permitted by applicable law, holders
of the Trust Preferred Securities will be
required to accrue income for United States
federal income tax purposes. See
"Description of Junior Subordinated
Debentures--Option to Defer Interest
Payment Period" and "Certain Federal Income
Tax Consequences--Interest Income and
Original Issue Discount."
Maturity......................... The Junior Subordinated Debentures will
mature on April 1, 2027 which date may be
shortened (such date, as it may be
shortened, the "Stated Maturity") to a date
not earlier than April 1, 2002 if certain
conditions are met (including Greater Bay
having received prior approval of the
Federal Reserve to do so if then required
under applicable capital guidelines or
policies of the Federal Reserve).
</TABLE>
7
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<TABLE>
<C> <S>
Redemption....................... The Trust Preferred Securities are subject
to mandatory redemption upon repayment of
the Junior Subordinated Debentures at their
Stated Maturity or their earlier redemption
in an amount equal to the amount of Junior
Subordinated Debentures maturing on or
being redeemed at a redemption price equal
to the aggregate Liquidation Amount of the
Trust Preferred Securities plus accumulated
and unpaid Distributions thereon to the
date of redemption. Subject to Federal
Reserve approval, if then required under
applicable capital guidelines or policies
of the Federal Reserve, the Junior
Subordinated Debentures are redeemable
prior to maturity at the option of Greater
Bay (i) on or after April 1, 2002 in whole
at any time or in part from time to time,
or (ii) at any time, in whole (but not in
part), upon the occurrence and during the
continuance of a Tax Event, an Investment
Company Event or a Capital Treatment Event,
in each case at a redemption price equal to
100% of the principal amount of the Junior
Subordinated Debentures so redeemed,
together with any accrued but unpaid
interest to the date fixed for redemption.
See "Description of the Trust Preferred
Securities--Redemption" and "Description of
Junior Subordinated Debentures--
Redemption."
Distribution of Junior
Subordinated Debentures......... Greater Bay has the right at any time to
terminate GBB Capital and cause the Junior
Subordinated Debentures to be distributed
to holders of Trust Preferred Securities in
liquidation of GBB Capital, subject to
Greater Bay having received prior approval
of the Federal Reserve to do so if then
required under applicable capital
guidelines or policies of the Federal
Reserve. See "Description of the Trust
Preferred Securities--Distribution of
Junior Subordinated Debentures."
Guarantee........................ Taken together, Greater Bay's obligations
under various documents described herein,
including the Guarantee Agreement, provide
a full guarantee of payments by GBB Capital
of Distributions and other amounts due on
the Trust Preferred Securities. Under the
Guarantee Agreement, Greater Bay guarantees
the payment of Distributions by GBB Capital
and payments on liquidation of or
redemption of the Trust Preferred
Securities (subordinate to the right to
payment of Senior and Subordinated Debt of
Greater Bay, as defined herein) to the
extent of funds held by GBB Capital. If GBB
Capital has insufficient funds to pay
Distributions on the Trust Preferred
Securities (i.e., if Greater Bay has failed
to make required payments under the Junior
Subordinated Debentures), a holder of the
Trust Preferred Securities would have the
right to institute a legal proceeding
directly against Greater Bay to enforce
payment of such Distributions to such
holder. See "Description of Junior
Subordinated Debentures--Enforcement of
Certain Rights by Holders of the Trust
Preferred Securities," "Description of
Junior Subordinated Debentures--Debenture
Events of Default" and "Description of
Guarantee."
</TABLE>
8
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<TABLE>
<C> <S>
Ranking.......................... The Trust Preferred Securities will rank
pari passu, and payments thereon will be
made pro rata, with the Common Securities
of GBB Capital held by Greater Bay, except
as described under "Description of the
Trust Preferred Securities--Subordination
of Common Securities of GBB Capital Held by
Greater Bay." The obligations of Greater
Bay under the Guarantee, the Junior
Subordinated Debentures and other documents
described herein are unsecured and rank
subordinate and junior in right of payment
to all current and future Senior and
Subordinated Debt, the amount of which is
unlimited. At December 31, 1996, the
aggregate outstanding Senior and
Subordinated Debt of Greater Bay was
approximately $3.0 million. In addition,
because Greater Bay is a holding company,
all obligations of Greater Bay relating to
the securities described herein will be
effectively subordinated to all existing
and future liabilities of Greater Bay's
subsidiaries, including the Banks. Greater
Bay may cause additional Trust Preferred
Securities to be issued by trusts similar
to GBB Capital in the future, and there is
no limit on the amount of such securities
that may be issued. In this event, Greater
Bay's obligations under the Junior
Subordinated Debentures to be issued to
such other trusts and Greater Bay's
guarantees of the payments by such trusts
will rank pari passu with Greater Bay's
obligations under the Junior Subordinated
Debentures and the Guarantee, respectively.
Voting rights.................... The holders of the Trust Preferred
Securities will generally have limited
voting rights relating only to the
modification of the Trust Preferred
Securities, the dissolution, winding-up or
termination of GBB Capital and certain
other matters described herein. See
"Description of the Trust Preferred
Securities--Voting Rights; Amendment of the
Trust Agreement."
Nasdaq National Market symbol.... GBBKP
Use of proceeds.................. The proceeds to GBB Capital from the sale
of the Trust Preferred Securities offered
hereby will be invested by GBB Capital in
the Junior Subordinated Debentures of
Greater Bay. Greater Bay intends to invest
approximately $10.0 million of the net
proceeds in the Banks to increase their
capital levels to support future growth.
Greater Bay intends to use the remaining
net proceeds for general corporate
purposes, which may include without
limitation, funding additional investments
in, or extensions of credit to, the Banks
and possible future acquisitions. Greater
Bay expects the Trust Preferred Securities
to qualify as Tier 1 capital under the
capital guidelines of the Federal Reserve.
See "Use of Proceeds."
</TABLE>
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data with respect to the
Company's consolidated financial position as of December 31, 1996 and 1995,
and its results of operations for the fiscal years ended December 31, 1996,
1995 and 1994 have been derived from the audited consolidated financial
statements of the Company appearing elsewhere in this 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 the Company'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 the Company, which are not presented herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income......... $ 45,037 $ 37,233 $ 27,801 $ 23,857 $ 22,736
Interest expense........ 16,213 13,892 8,512 6,497 7,506
--------- --------- --------- --------- ---------
Net interest income..... 28,824 23,341 19,289 17,360 15,230
Provision for loan
losses................. 2,036 956 1,823 1,945 1,132
--------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses............ 26,788 22,385 17,466 15,415 14,098
Other income............ 3,530 2,306 3,295 3,578 2,127
Other expense........... 23,888 19,686 16,231 15,077 11,255
--------- --------- --------- --------- ---------
Income before income
taxes.................. 6,430 5,005 4,530 3,916 4,970
Provision for income
taxes.................. 2,927 1,971 1,966 1,473 1,825
--------- --------- --------- --------- ---------
Net income.............. $ 3,503 $ 3,034 $ 2,564 $ 2,443 $ 3,145
========= ========= ========= ========= =========
Net income per share ... $ 1.04 $ 0.96 $ 0.85 $ 0.84 $ 1.12
Average common shares
outstanding ........... 3,359,700 3,145,550 3,001,211 2,925,284 2,801,963
OPERATING RATIOS AND
OTHER DATA:
Return on average
assets(1).............. 0.65% 0.70 % 0.68 % 0.70 % 1.08 %
Return on average common
shareholders'
equity(1).............. 8.12% 7.98 % 7.31 % 7.56 % 10.50 %
Net interest margin..... 5.85% 5.83 % 5.62 % 5.61 % 5.54 %
Net (charge-offs)
recoveries to average
loans.................. 0.02% (0.35)% (0.49)% (0.61)% (0.31)%
Ratio of earnings to
fixed charges(2).......
Excluding interest on
deposits.............. 14.37x 6.93x 12.86x 392.6x 2,486x
Including interest on
deposits.............. 1.40x 1.36x 1.53x 1.60x 1.66x
FINANCIAL CONDITION DATA
(AT PERIOD END):
Assets.................. $ 622,044 $ 477,834 $ 401,614 $ 358,576 $ 325,168
Loans, net.............. 441,560 284,579 242,750 231,857 226,334
Investment
securities(3).......... 105,520 116,869 93,169 74,398 45,414
Deposits................ 559,283 431,789 345,294 323,300 292,110
Long-term debt.......... 3,000 3,000 -- -- --
Common shareholders'
equity................. 44,682 40,112 36,040 34,222 31,619
Book value per common
share.................. 13.80 13.17 12.90 13.17 13.07
FINANCIAL CONDITION
RATIOS:
Nonperforming assets to
total loans and OREO... 0.74% 1.17 % 2.23 % 1.59 % 2.01 %
Allowance for loan
losses to total loans.. 1.62% 1.52 % 1.79 % 1.58 % 1.37 %
Allowance for loan
losses to non-
performing loans....... 224.02% 131.59 % 80.24 % 98.84 % 66.93 %
REGULATORY CAPITAL
RATIOS:
Tier 1 capital.......... 8.75% 11.38 % 12.59 % 13.05 % 11.60 %
Total capital........... 10.54% 13.43 % 13.82 % 14.45 % 12.80 %
Leverage ratio.......... 7.27% 8.69 % 9.34 % 9.69 % 9.43 %
</TABLE>
- --------
(1) After excluding merger and other related costs of $2.8 million in 1996;
expenses related to a litigation settlement, the closing of the mortgage
banking business unit and terminated merger discussions aggregating $2.1
million in 1995; and merger and other related costs of $608,000 in 1994,
the ROA would have been 1.02%, 0.99% and 0.78% in 1996, 1995 and 1994,
respectively, and the ROE would have been 12.86%, 11.35% and 8.35% in
1996, 1995 and 1994, respectively.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
represent income before income taxes, extraordinary items and fixed
charges. Fixed charges represent interest expense.
(3) Includes available-for-sale securities and held-to-maturity securities.
10
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the following
factors in connection with a decision to purchase the Trust Preferred
Securities.
RANKING OF GREATER BAY'S OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBENTURES
AND THE GUARANTEE
All obligations of Greater Bay under the Guarantee, the Junior Subordinated
Debentures and other documents described herein are unsecured and rank
subordinate and junior in right of payment to all current and future Senior
and Subordinated Debt, the amount of which is unlimited. At December 31, 1996,
the aggregate outstanding Senior and Subordinated Debt of Greater Bay was
approximately $3.0 million. In addition, because Greater Bay is a holding
company, all obligations of Greater Bay relating to the securities described
herein will be effectively subordinated to all existing and future liabilities
of Greater Bay's subsidiaries, including the Banks. As a holding company, the
right of Greater Bay to participate in any distribution of assets of any
subsidiary upon such subsidiary's liquidation or reorganization or otherwise
(and thus the ability of holders of the Trust Preferred Securities to benefit
indirectly from such distribution) is subject to the prior claims of creditors
of that subsidiary, except to the extent that Greater Bay may itself be
recognized as a creditor of that subsidiary. Accordingly, the Junior
Subordinated Debentures and all obligations of Greater Bay relating to the
Trust Preferred Securities will be effectively subordinated to all existing
and future liabilities of the Banks, and holders of the Trust Preferred
Securities should look only to the assets of Greater Bay, and not of its
subsidiaries, for principal and interest payments on the Junior Subordinated
Debentures. None of the Indenture, the Guarantee, the Guarantee Agreement or
the Trust Agreement places any limitation on the amount of secured or
unsecured debt, including Senior and Subordinated Debt, that may be incurred
by Greater Bay or its subsidiaries. Further, there is no limitation on Greater
Bay's ability to issue additional Junior Subordinated Debentures in connection
with any further offerings of Trust Preferred Securities, and such additional
debentures would rank pari passu with the Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures--Subordination" and
"Description of Guarantee--Status of the Guarantee."
DEPENDENCE ON DIVIDENDS AND INTEREST PAYMENTS FROM THE BANKS
The ability of GBB Capital to pay amounts due on the Trust Preferred
Securities is solely dependent upon Greater Bay making payments on the Junior
Subordinated Debentures as and when required. As a holding company without
significant assets other than its equity interest in the Banks, Greater Bay's
ability to pay interest on the Junior Subordinated Debentures to GBB Capital
(and consequently GBB Capital's ability to pay Distributions on the Trust
Preferred Securities and Greater Bay's ability to pay its obligations under
the Guarantee) depends primarily upon the cash dividends Greater Bay receives
from the Banks. Dividend payments from the Banks are subject to regulatory
limitations, generally based on current and retained earnings, imposed by the
various regulatory agencies with authority over the respective Banks. Payment
of dividends is also subject to regulatory restrictions if such dividends
would impair the capital of the Banks. Payment of dividends by the Banks is
also subject to the respective Bank's profitability, financial condition and
capital expenditures and other cash flow requirements. No assurance can be
given that the Banks will be able to pay dividends at past levels, or at all,
in the future. See "Supervision and Regulation."
OPTION TO DEFER INTEREST PAYMENT PERIOD; TAX CONSEQUENCES OF A DEFERRAL OF
INTEREST PAYMENTS
So long as no Debenture Event of Default (as defined herein) has occurred
and is continuing, Greater Bay has the right under the Indenture to defer
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect
to each Extension Period, provided that no Extension Period may extend beyond
the Stated Maturity of the Junior Subordinated Debentures. As a consequence of
any such deferral, quarterly Distributions on the Trust Preferred Securities
by GBB Capital will be deferred (and the amount of Distributions to which
holders of the Trust Preferred Securities are entitled will accumulate
additional amounts thereon at the rate of 9.75% per annum, compounded
quarterly, from the relevant payment date for such Distributions, to the
extent permitted by applicable law) during any such
11
<PAGE>
Extension Period. During any such Extension Period, Greater Bay will be
prohibited from making certain payments or distributions with respect to
Greater Bay's capital stock (including dividends on or redemptions of common
or preferred stock) and from making certain payments with respect to any debt
securities of Greater Bay that rank pari passu with or junior in interest to
the Junior Subordinated Debentures; however, Greater Bay will not be
restricted from (a) paying dividends or distributions in common stock of
Greater Bay, (b) redeeming rights or taking certain other actions under a
shareholders' rights plan, (c) making payments under the Guarantee or (d)
making purchases of common stock related to the issuance of common stock or
rights under any of Greater Bay's benefit plans for its directors, officers or
employees. Further, during an Extension Period, Greater Bay would have the
ability to continue to make payments on Senior and Subordinated Debt. Prior to
the termination of any Extension Period, Greater Bay may further extend such
Extension Period provided that such extension does not cause such Extension
Period to exceed 20 consecutive quarters or to extend beyond the Stated
Maturity. Upon the termination of any Extension Period and the payment of all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 9.75%, compounded quarterly, to the extent permitted by applicable
law), Greater Bay may elect to begin a new Extension Period subject to the
above requirements. There is no limitation on the number of times that Greater
Bay may elect to begin an Extension Period. See "Description of the Trust
Preferred Securities--Distributions" and "Description of Junior Subordinated
Debentures--Option to Defer Interest Payment Period."
Because Greater Bay believes the likelihood of it exercising its option to
defer payments of interest is remote, the Junior Subordinated Debentures will
be treated as issued without "original issue discount" for United States
federal income tax purposes. As a result, holders of Trust Preferred
Securities will include interest in taxable income under their own methods of
accounting (i.e., cash or accrual). If Greater Bay exercises its right to
defer payments of interest, the holders of Trust Preferred Securities will be
required to include their pro rata share of original issue discount in gross
income as it accrues for United States federal income tax (and possibly other)
purposes in advance of the receipt of cash. See "Certain Federal Income Tax
Consequences-- Interest Income and Original Issue Discount." Greater Bay has
no current intention of exercising its right to defer payments of interest by
extending the interest payment period on the Junior Subordinated Debentures.
However, should Greater Bay elect to exercise its right to defer payments of
interest in the future, the market price of the Trust Preferred Securities is
likely to be adversely affected. A holder that disposes of such holder's Trust
Preferred Securities during an Extension Period, therefore, might not receive
the same return on such holder's investment as a holder that continues to hold
the Trust Preferred Securities.
TAX EVENT REDEMPTION, INVESTMENT COMPANY EVENT REDEMPTION OR CAPITAL TREATMENT
EVENT REDEMPTION
Upon the occurrence and during the continuation of a Tax Event, an
Investment Company Event or a Capital Treatment Event (whether occurring
before or after April 1, 2002), Greater Bay has the right, if certain
conditions are met, to redeem the Junior Subordinated Debentures in whole (but
not in part) at 100% of the principal amount together with accrued but unpaid
interest to the date fixed for redemption within 90 days following the
occurrence of such Tax Event, Investment Company Event or Capital Treatment
Event and therefore cause a mandatory redemption of the Trust Securities. The
exercise of such right is subject to Greater Bay having received prior
approval of the Federal Reserve to do so if then required under applicable
guidelines or policies of the Federal Reserve. See "Description of the Trust
Preferred Securities--Redemption."
A "Tax Event" means the receipt by Greater Bay and GBB Capital of an opinion
of counsel experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such prospective change, pronouncement or decision is announced on or after
the original issuance of the Trust Preferred Securities, there is more than an
insubstantial risk that (i) GBB Capital is, or will be within 90 days of the
date of such opinion, subject to United States federal income tax with respect
to income received or accrued
12
<PAGE>
on the Junior Subordinated Debentures, (ii) interest payable by Greater Bay on
the Junior Subordinated Debentures is not, or within 90 days of such opinion,
will not be, deductible by Greater Bay, in whole or in part, for United States
federal income tax purposes, or (iii) GBB Capital is, or will be within 90
days of the date of the opinion, subject to more than a de minimus amount of
other taxes, duties or other governmental charges. See "--Possible Tax Law
Changes Affecting the Trust Preferred Securities" below for a discussion of
certain legislative proposals that, if adopted, could give rise to a Tax
Event, which may permit Greater Bay to cause a redemption of the Junior
Subordinated Debentures (and therefore the Trust Preferred Securities) prior
to April 1, 2002.
An "Investment Company Event" means the receipt by Greater Bay and GBB
Capital of an opinion of counsel experienced in such matters to the effect
that, as a result of any change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority, GBB Capital is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
which change becomes effective on or after the original issuance of the Trust
Preferred Securities.
A "Capital Treatment Event" means the reasonable determination by Greater
Bay that, as a result of any amendment to, or change (including any announced
prospective change) in, the laws (or any regulations thereunder) of the United
States or any political subdivision thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change
is effective or such prospective change, pronouncement or decision is
announced on or after the date of issuance of the Trust Preferred Securities
under the Trust Agreement, there is more than an insubstantial risk of
impairment of Greater Bay's ability to treat the Trust Preferred Securities
(or any substantial portion thereof) as "Tier 1 Capital" (or the then
equivalent thereof) for purposes of the capital adequacy guidelines of the
Federal Reserve, as then in effect and applicable to Greater Bay.
POSSIBLE TAX LAW CHANGES AFFECTING THE TRUST PREFERRED SECURITIES
Recently the Clinton Administration announced its budget proposals for the
fiscal year 1998. That announcement included a proposal that could affect the
tax characteristics of the Junior Subordinated Debentures. Under the
Administration's proposal, no deduction would be allowed for interest or
original issue discount on an instrument issued by a corporation that has a
maximum term of more than 40 years, or is payable in stock of the issuer or a
related party. The budget announcement also states that no such deduction
would be allowed for certain indebtedness that is reflected as equity on the
issuer's balance sheet. The budget announcement states that the effective date
of the first proposal is for instruments issued "after the date of first
committee action," which is not a legally precise term. The budget
announcement is less clear about the proposed effective date of the second
proposal mentioned above.
Similar proposals were made by the Administration last year. The Revenue
Reconciliation Bill of 1996 (the "1996 Bill") would, among other things, have
denied interest deductions for interest on an instrument, issued by a
corporation, that had a maximum term of more than 20 years and that was not
shown as indebtedness on the separate balance sheet of the issuer or, where
the instrument was issued to a related party (other than a corporation), where
the holder or some other related party issued a related instrument that is not
shown as indebtedness on the issuer's consolidated balance sheet. The 1996
Bill was never enacted, but it is likely that the second proposal in the
budget announcement mentioned above will be similar in some respects to the
proposal in the 1996 Bill. Enactment of this proposal could affect deduction
of interest expenses and original issue discount with respect to the Junior
Subordinated Debentures. This, in turn, could create a Tax Event affecting the
Trust Preferred Securities.
In connection with the 1996 Bill, the Chairmen of the Senate Finance and
House Ways and Means Committees issued a joint statement that it was their
intention that the effective date of the Administration's legislative
proposals, if adopted, would be no earlier than the date of appropriate
Congressional action. Senate
13
<PAGE>
Finance Committee Chairman William Roth has been quoted in the news media
recently as stating that the 1997 tax changes generally should be effective on
a prospective basis.
It is intended that the Trust Preferred Securities and the Junior
Subordinated Debentures will be issued prior to any type of Congressional
committee action with respect to the aforementioned budget proposal. However,
due to business considerations, the unpredictability of when Congress will
begin action with respect to the Administration's proposals, and the
imprecision in the public statements concerning the anticipated effective date
of the legislative proposals, there can be no guarantee that these instruments
will not be affected by the aforementioned legislative proposals, if they are
enacted.
There also can be no assurance that other future legislative proposals or
final legislation will not affect the ability of the Company to deduct
interest on the Junior Subordinated Debentures. Such a change could give rise
to a Tax Event, which may permit Greater Bay, upon approval of the Federal
Reserve, if then required under applicable capital guidelines or policies of
the Federal Reserve, to cause a redemption of the Trust Preferred Securities.
See "Description of the Trust Preferred Securities--Redemption--Tax Event
Redemption" and "Description of Junior Subordinated Debentures--Redemption."
See also "Certain Federal Income Tax Consequences--Possible Tax Law Changes
Affecting the Trust Preferred Securities."
POSSIBLE DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TRUST
PREFERRED SECURITIES
Greater Bay will have the right at any time to terminate GBB Capital and,
after satisfaction of liabilities to creditors of GBB Capital as required by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Preferred Securities in liquidation of GBB Capital.
The exercise of such right is subject to Greater Bay having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. Because holders of the Trust
Preferred Securities may receive Junior Subordinated Debentures in liquidation
of GBB Capital and because Distributions are otherwise limited to payments on
the Junior Subordinated Debentures, prospective purchasers of the Trust
Preferred Securities are also making an investment decision with regard to the
Junior Subordinated Debentures and should carefully review all the information
regarding the Junior Subordinated Debentures contained herein. See
"Description of the Trust Preferred Securities--Liquidation Distribution Upon
Termination" and "Description of Junior Subordinated Debentures."
Under current United States federal income tax law and interpretations and
assuming, as expected, GBB Capital is classified as a grantor trust for such
purposes, a distribution of the Junior Subordinated Debentures upon a
liquidation of GBB Capital should not be a taxable event to holders of the
Trust Preferred Securities. However, if a Tax Event were to occur which would
cause GBB Capital to be subject to United States federal income tax with
respect to income received or accrued on the Junior Subordinated Debentures, a
distribution of the Junior Subordinated Debentures by GBB Capital could be a
taxable event to GBB Capital and the holders of the Trust Preferred
Securities. See "Certain Federal Income Tax Consequences--Distribution of
Junior Subordinated Debentures to Holders of Trust Preferred Securities."
SHORTENING OF STATED MATURITY OF JUNIOR SUBORDINATED DEBENTURES
Greater Bay will have the right at any time to shorten the maturity of the
Junior Subordinated Debentures to a date not earlier than five years from the
date of issuance and thereby cause the Trust Preferred Securities to be
redeemed on such earlier date. The exercise of such right is subject to
Greater Bay having received prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal
Reserve. See "Description of Junior Subordinated Debentures--Redemption."
LIMITATIONS ON DIRECT ACTIONS AGAINST GREATER BAY AND ON RIGHTS UNDER THE
GUARANTEE
The Guarantee guarantees to the holders of the Trust Preferred Securities
the following payments, to the extent not paid by GBB Capital: (i) any
accumulated and unpaid Distributions required to be paid on the Trust
14
<PAGE>
Preferred Securities, to the extent that GBB Capital has funds on hand
available therefor at such time, (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption, to the extent that GBB
Capital has funds on hand available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding-up or liquidation of GBB Capital
(unless the Junior Subordinated Debentures are distributed to holders of the
Trust Preferred Securities), the lesser of (a) the aggregate of the
Liquidation Amount and all accumulated and unpaid Distributions to the date of
payment to the extent that GBB Capital has funds on hand available therefor at
such time (the "Liquidation Distribution") and (b) the amount of assets of GBB
Capital remaining available for distribution to holders of the Trust Preferred
Securities after satisfaction of liabilities to creditors of GBB Capital as
required by applicable law. The holders of not less than a majority in
aggregate liquidation amount of the Trust Preferred Securities have the right
to direct the time, method and place of conducting any proceeding for any
remedy available to the Guarantee Trustee in respect of the Guarantee or to
direct the exercise of any trust power conferred upon the Guarantee Trustee
under the Guarantee Agreement. Any holder of the Trust Preferred Securities
may institute a legal proceeding directly against Greater Bay to enforce its
rights under the Guarantee without first instituting a legal proceeding
against GBB Capital, the Guarantee Trustee or any other person or entity. If
Greater Bay were to default on its obligation to pay amounts payable under the
Junior Subordinated Debentures, GBB Capital would lack funds for the payment
of Distributions or amounts payable on redemption of the Trust Preferred
Securities or otherwise, and, in such event, holders of the Trust Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. Instead, in the event a Debenture Event of Default shall have
occurred and be continuing and such event is attributable to the failure of
Greater Bay to pay interest on or principal of the Junior Subordinated
Debentures on the payment date on which such payment is due and payable, then
a holder of Trust Preferred Securities may institute a legal proceeding
directly against Greater Bay for enforcement of payment to such holder of the
principal of or interest on such Junior Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Trust
Preferred Securities of such holder (a "Direct Action"). In connection with
such Direct Action, Greater Bay will have a right of set-off under the
Indenture to the extent of any payment made by Greater Bay to such holder of
Trust Preferred Securities in the Direct Action. Except as described herein,
holders of Trust Preferred Securities will not be able to exercise directly
any other remedy available to the holders of the Junior Subordinated
Debentures or assert directly any other rights in respect of the Junior
Subordinated Debentures. See "Description of Junior Subordinated Debentures--
Enforcement of Certain Rights by Holders of Trust Preferred Securities" and
"Description of Guarantee." The Trust Agreement provides that each holder of
Trust Preferred Securities by acceptance thereof agrees to the provisions of
the Guarantee Agreement and the Indenture.
UNCERTAINTY OF DEDUCTIBILITY OF INTEREST ON THE JUNIOR SUBORDINATED DEBENTURES
The Company's ability to deduct the interest paid on the Junior Subordinated
Debentures depends upon whether the Junior Subordinated Debentures are
characterized as debt instruments for federal income tax purposes, taking all
the relevant facts and circumstances into account. The Company believes that
the Junior Subordinated Debentures are debt instruments for federal income tax
purposes and that interest on the Junior Subordinated Debentures will,
therefore, be deductible by the Company. There is no clear authority on the
appropriate characterization for federal income tax purposes of instruments
such as the Junior Subordinated Debentures when they are issued in connection
with an offering of securities such as the Trust Preferred Securities. If the
interest on the Junior Subordinated Debentures is not deductible by the
Company, the Company would have significant additional income tax liabilities.
Any such tax liability could adversely affect the ability of Greater Bay to
pay interest on the Junior Subordinated Debentures to GBB Capital (and
consequently GBB Capital's ability to pay Distributions on the Trust Preferred
Securities and Greater Bay's ability to pay its obligations under the
Guarantee).
LIMITED COVENANTS
The covenants in the Indenture are limited, and there are no covenants
relating to Greater Bay in the Trust Agreement. As a result, neither the
Indenture nor the Trust Agreement protects holders of Junior Subordinated
15
<PAGE>
Debentures, or Trust Preferred Securities, respectively, in the event of a
material adverse change in Greater Bay's or the Company's financial condition
or results of operations or limits the ability of Greater Bay or any
subsidiary to incur additional indebtedness. Therefore, the provisions of
these governing instruments should not be considered a significant factor in
evaluating whether Greater Bay will be able to comply with its obligations
under the Junior Subordinated Debentures or the Guarantee.
LIMITED VOTING RIGHTS
Holders of Trust Preferred Securities will generally have limited voting
rights relating only to the modification of the Trust Preferred Securities,
the dissolution, winding-up or liquidation of GBB Capital, and the exercise of
GBB Capital's rights as holder of Junior Subordinated Debentures. Holders of
Trust Preferred Securities will not be entitled to vote to appoint, remove or
replace the Property Trustee or the Delaware Trustee, and such voting rights
are vested exclusively in the holder of the Common Securities except upon the
occurrence of certain events described herein. In no event will the holders of
the Trust Preferred Securities have the right to vote to appoint, remove or
replace the Administrative Trustees; such voting rights are vested exclusively
in the holder of the Common Securities. The Property Trustee, the
Administrative Trustees and Greater Bay may amend the Trust Agreement without
the consent of holders of Trust Preferred Securities to ensure that GBB
Capital will be classified for United States federal income tax purposes as a
grantor trust or to ensure that GBB Capital will not be required to register
as an "investment company," even if such action adversely affects the
interests of such holders. See "Description of Trust Preferred Securities--
Voting Rights; Amendment of the Trust Agreement" and "--Removal of Trustees."
ABSENCE OF EXISTING PUBLIC MARKET; MARKET PRICES
There is no existing market for the Trust Preferred Securities. The Trust
Preferred Securities have been approved for listing on the Nasdaq National
Market. There can be no assurance that an active and liquid trading market for
the Trust Preferred Securities will develop or that a continued listing of the
Trust Preferred Securities will be available on Nasdaq. Although the
Underwriter has informed GBB Capital and the Company that the Underwriter
intends to make a market in the Trust Preferred Securities offered hereby, the
Underwriter is not obligated to do so and any such market making activity may
be terminated at any time without notice to the holders of the Trust Preferred
Securities. Future trading prices of the Trust Preferred Securities will
depend on many factors including, among other things, prevailing interest
rates, the operating results and financial condition of the Company, and the
market for similar securities. As a result of the existence of Greater Bay's
right to defer interest payments on or, subject to prior approval of the
Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve, shorten the Stated Maturity of the Junior
Subordinated Debentures, the market price of the Trust Preferred Securities
may be more volatile than the market prices of debt securities that are not
subject to such optional deferrals or reduction in maturity. There can be no
assurance as to the market prices for the Trust Preferred Securities or the
Junior Subordinated Debentures that may be distributed in exchange for the
Trust Preferred Securities if Greater Bay exercises its right to terminate GBB
Capital. Accordingly, the Trust Preferred Securities that an investor may
purchase, or the Junior Subordinated Debentures that a holder of the Trust
Preferred Securities may receive in liquidation of GBB Capital, may trade at a
discount from the price that the investor paid to purchase the Trust Preferred
Securities offered hereby.
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY
The financial performance of the Company will depend in part on the
Company's ability to successfully integrate the operations and management of
Mid-Peninsula and Cupertino and to implement its Super Community Banking
Philosophy. The Merger was effected in late November 1996, and integration of
such operations and management are in the early stages. There can be no
assurance that the Company will be able to effectively and profitably
integrate the operations and management of Mid-Peninsula and Cupertino, or
that it will be able to profitably implement its Super Community Banking
Philosophy. See "Business--Super Community Banking Philosophy."
16
<PAGE>
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 non-performing assets. Fluctuations in interest
rates affect the demand of customers for the Company's products and services.
The Company is subject to interest rate risk to the degree that its interest-
bearing liabilities reprice or mature more slowly or more rapidly or on a
different basis than its interest-earning assets. Given the Company's current
volume and mix of interest-bearing liabilities and interest-earning assets,
the Company's interest rate spread could be expected to increase during times
of rising interest rates and, conversely, to decline during times of falling
interest rates. Although the Company believes its current level of interest
rate sensitivity is reasonable, significant fluctuations in interest rates may
have an adverse effect on the Company's results of operations.
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION
The Company's operations are located in Northern California and concentrated
primarily in Santa Clara and San Mateo Counties, which include the area known
as the "Silicon Valley." As a result of the geographic concentration, the
Company's results depend largely upon economic conditions in these areas. A
deterioration in economic conditions in the Company's market areas,
particularly in the technology and real estate industries on which these areas
depend, could have a material adverse impact on the quality of the Company's
loan portfolio and the demand for its products and services, and accordingly,
its results of operations. See "Business--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 Greater Bay and the
Banks 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 the Company'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 the Company. Significant new laws or changes in, or repeals of,
existing laws may cause the Company's results to differ materially. Further,
federal monetary policy, particularly as implemented through the Federal
Reserve System, significantly affects credit conditions for the Company,
primarily through open market operations in United States government
securities, the discount rate for bank borrowings and bank reserve
requirements, and a material change in these conditions would be likely to
have a material impact on the Company's results of operations. See
"Supervision and Regulation."
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. There can be no assurance that the Banks will be able
to compete effectively in their markets, and the results of operations of the
Company could be adversely affected if circumstances affecting the nature or
level of competition change. See "Business--Competition."
17
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success depends substantially on certain members of its senior
management, in particular David L. Kalkbrenner, President and Chief Executive
Officer of Greater Bay and MPB, C. Donald Allen, President and Chief Executive
Officer of CNB, Steven C. Smith, Executive Vice President, Chief Operating
Officer and Chief Financial Officer of Greater Bay and Executive Vice
President and Chief Operating Officer of CNB, David R. Hood, Executive Vice
President and Chief Lending Officer of Greater Bay, Murray B. Dey, Executive
Vice President and Chief Credit Officer of MPB, and Hall Palmer, Executive
Vice President and Senior Trust Officer of Greater Bay. The Company's business
and financial condition could be materially adversely affected by the loss of
the services of any such individuals. The Company does not maintain key man
life insurance. See "Management--Board of Directors and Executive Officers."
CREDIT QUALITY
A significant source of risk for the Company arises from the possibility
that losses will be sustained because borrowers, guarantors and related
parties may fail to perform in accordance with the terms of their loans. The
Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying the Company's credit portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could materially adversely
affect the Company's results of operations.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this 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 the Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
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 economics and business
conditions in those areas in which the Company operates; 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 the Company's business; and
other factors referenced in this Prospectus, including, without limitation,
under the captions "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and "Supervision and Regulation." Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims 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.
18
<PAGE>
USE OF PROCEEDS
All of the proceeds from the sale of Trust Preferred Securities will be
invested by GBB Capital in the Junior Subordinated Debentures. The net
proceeds to Greater Bay from the sale of the Junior Subordinated Debentures
are estimated to be $18,865,000 (net of estimated underwriting commission and
other estimated offering expenses). Greater Bay intends to invest
approximately $10.0 million of the net proceeds in the Banks to increase their
capital levels to support future growth. Greater Bay intends to use the
remaining net proceeds for general corporate purposes, which may include,
without limitation, funding additional investments in, or extensions of credit
to, the Banks and possible future acquisitions. The Company is not currently
engaged in negotiations with respect to any acquisitions. Pending their
application, the net proceeds may be invested in short-term investment grade
financial securities.
Greater Bay is required by the Federal Reserve to maintain certain levels of
capital for bank regulatory purposes. On October 21, 1996, the Federal Reserve
announced that certain qualifying amounts of cumulative preferred securities
having the characteristics of the Trust Preferred Securities could be included
as Tier 1 capital for bank holding companies. Such Tier 1 capital treatment,
together with the Company's ability to deduct, for federal income tax
purposes, interest payable on the Junior Subordinated Debentures, will provide
Greater Bay with a cost-effective means of obtaining capital for bank
regulatory purposes.
ACCOUNTING TREATMENT
For financial reporting purposes, GBB Capital will be treated as a
subsidiary of Greater Bay and, accordingly, the accounts of GBB Capital will
be included in the consolidated financial statements of the Company. The Trust
Preferred Securities will be presented as a separate line item in the
consolidated balance sheet of the Company under the caption "Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures," and appropriate disclosures about the Trust
Preferred Securities, the Guarantee and the Junior Subordinated Debentures
will be included in the notes to consolidated financial statements. For
financial reporting purposes, the Company will record Distributions payable on
the Trust Preferred Securities as an expense in the consolidated statements of
operations.
Future reports of Greater Bay filed under the Securities Exchange Act of
1934, as amended ("the Exchange Act"), will include a footnote to the
financial statements stating that (i) GBB Capital is wholly-owned, (ii) the
sole assets of GBB Capital are the Junior Subordinated Debentures (specifying
the principal amount, interest rate and maturity date of such Junior
Subordinated Debentures), and (iii) the back-up obligations, in the aggregate,
constitute a full and unconditional guarantee by Greater Bay of the
obligations of GBB Capital under the Trust Preferred Securities. GBB Capital
will not provide separate reports under the Exchange Act.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 1996 and as adjusted to give effect to the issuance of the Trust Preferred
Securities by GBB Capital offered hereby.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
ACTUAL AS ADJUSTED
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt:
11.5% Subordinated Notes due 2005..................... $ 3,000 $ 3,000
Company obligated mandatorily redeemable trust
preferred securities of subsidiary trust holding
solely junior subordinated debentures(1).............. -- 20,000
Shareholders' equity:
Preferred stock, no par value: 4,000,000 shares
authorized, none issued............................... -- --
Common stock, no par value: 6,000,000 shares
authorized, 3,238,887 outstanding..................... 34,884 34,884
Unrealized gain on securities, available for sale,
net................................................... 71 71
Retained earnings..................................... 9,727 9,727
----------- -----------
Total shareholders' equity......................... $ 44,682 $ 44,682
Total capitalization.................................. $ 47,682 $67,682
</TABLE>
- --------
(1) The subsidiary trust is GBB Capital, which will hold the Junior
Subordinated Debentures as its sole asset. The Trust Preferred Securities
are issued by GBB Capital. The sole assets of GBB Capital consist of the
Junior Subordinated Debentures issued by Greater Bay to GBB Capital. The
Junior Subordinated Debentures will bear interest at the rate of 9.75% per
annum and will mature on April 1, 2027 which date may be shortened to a
date not earlier than April 1, 2002 if certain conditions are met. The
Junior Subordinated Debentures are redeemable prior to maturity at the
option of Greater Bay, subject to any required prior approval of the
Federal Reserve, (i) on or after April 1, 2002, in whole at any time or in
part from time to time, or (ii) at any time, in whole (but not in part),
upon the occurrence and continuation of a Tax Event, an Investment Company
Event or a Capital Treatment Event (each as defined herein). See
"Description of Junior Subordinated Debentures--Redemption." Greater Bay
owns all of the Common Securities of GBB Capital.
REGULATORY CAPITAL RATIOS
The following sets forth the consolidated capital ratios of the Company at
December 31, 1996 and as adjusted to give effect to the issuance of the Trust
Preferred Securities by GBB Capital offered hereby.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
ACTUAL AS ADJUSTED(1)
------ --------------
<S> <C> <C>
Tier 1 risk-based capital............................. 8.75% 11.23%
Total risk-based capital.............................. 10.54% 13.91%
Leverage ratio........................................ 7.27% 9.39%
</TABLE>
- --------
(1) Assumes net proceeds are invested in 100% risk weighted assets.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's consolidated financial position as of December 31, 1996 and 1995,
and its results of operations for the fiscal years ended December 31, 1996,
1995 and 1994 have been derived from the audited consolidated financial
statements, and notes thereto, of the Company appearing elsewhere in this
Prospectus. This information should be read in conjunction with such
consolidated financial statements and the notes thereto. The selected
consolidated financial data with respect to the Company'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 the Company, which are
not presented herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income......... $ 45,037 $ 37,233 $ 27,801 $ 23,857 $ 22,736
Interest expense........ 16,213 13,892 8,512 6,497 7,506
--------- --------- --------- --------- ---------
Net interest income..... 28,824 23,341 19,289 17,360 15,230
Provision for loan
losses................. 2,036 956 1,823 1,945 1,132
--------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses............ 26,788 22,385 17,466 15,415 14,098
Other income............ 3,530 2,306 3,295 3,578 2,127
Other expense........... 23,888 19,686 16,231 15,077 11,255
--------- --------- --------- --------- ---------
Income before income
taxes.................. 6,430 5,005 4,530 3,916 4,970
Provision for income
taxes.................. 2,927 1,971 1,966 1,473 1,825
--------- --------- --------- --------- ---------
Net income.............. $ 3,503 $ 3,034 $ 2,564 $ 2,443 $ 3,145
========= ========= ========= ========= =========
Net income per share.... $ 1.04 $ 0.96 $ 0.85 $ 0.84 $ 1.12
Average common shares
outstanding ........... 3,359,700 3,145,550 3,001,211 2,925,284 2,801,963
OPERATING RATIOS AND
OTHER DATA:
Return on average
assets(1).............. 0.65% 0.70 % 0.68 % 0.70 % 1.08 %
Return on average common
shareholders'
equity(1).............. 8.12% 7.98 % 7.31 % 7.56 % 10.50 %
Net interest margin..... 5.85% 5.83 % 5.62 % 5.61 % 5.54 %
Net (charge-offs)
recoveries to average
loans.................. 0.02% (0.35)% (0.49)% (0.61)% (0.31)%
Ratio of earnings to
fixed charges(2).......
Excluding interest on
deposits.............. 14.37x 6.93x 12.86x 392.6x 2,486x
Including interest on
deposits.............. 1.40x 1.36x 1.53x 1.60x 1.66x
FINANCIAL CONDITION DATA
(AT PERIOD END):
Assets.................. $ 622,044 $ 477,834 $ 401,614 $ 358,576 $ 325,168
Loans, net.............. 441,560 284,579 242,750 231,857 226,334
Investment
securities(3).......... 105,520 116,869 93,169 74,398 45,414
Deposits................ 559,283 431,789 345,294 323,300 292,110
Long-term debt.......... 3,000 3,000 -- -- --
Common shareholders'
equity................. 44,682 40,112 36,040 34,222 31,619
Book value per common
share.................. 13.80 13.17 12.90 13.17 13.07
FINANCIAL CONDITION
RATIOS:
Nonperforming assets to
total loans and OREO... 0.74% 1.17 % 2.23 % 1.59 % 2.01 %
Allowance for loan
losses to total loans.. 1.62% 1.52 % 1.79 % 1.58 % 1.37 %
Allowance for loan
losses to non-
performing loans....... 224.02% 131.59 % 80.24 % 98.84 % 66.93 %
REGULATORY CAPITAL
RATIOS:
Tier 1 capital.......... 8.75% 11.38 % 12.59 % 13.05 % 11.60 %
Total capital........... 10.54% 13.43 % 13.82 % 14.45 % 12.80 %
Leverage ratio.......... 7.27% 8.69 % 9.34 % 9.69 % 9.43 %
</TABLE>
- --------
(1) After excluding merger and other related costs of $2.8 million in 1996;
expenses related to a litigation settlement the closing of the mortgage
banking business unit and terminated merger discussions aggregating $2.1
million in 1995; and merger and other related costs of $608,000 in 1994,
the ROA would have been 1.02%, 0.99% and 0.78% in 1996, 1995 and 1994,
respectively, and the ROE would have been 12.86%, 11.35% and 8.35% in
1996, 1995 and 1994, respectively.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
represent income before income taxes, extraordinary items and fixed
charges. Fixed charges represent interest expense.
(3) Includes available-for-sale securities and held-to-maturity securities.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Greater Bay Bancorp ("Greater Bay," on a parent-only basis, and the
"Company," on a consolidated basis) was formed as the result of the Merger
between Cupertino, the holding company for CNB, and Mid-Peninsula, the holding
company for MPB. The Merger, which has been accounted for as a pooling of
interests, was consummated in late November 1996. All of the financial
information for the Company 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.
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
"Selected Consolidated Financial Data" and the Company's consolidated
financial statements and notes thereto and other financial data included
elsewhere in this Prospectus. Certain statements under this caption constitute
"forward-looking statements" under the Reform Act which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include but are not limited to economic conditions,
competition in the geographic and business areas in which the Company conducts
its operations, fluctuations in interest rates, credit quality and government
regulation. For additional information concerning these and other factors, see
"Risk Factors."
RESULTS OF OPERATIONS
The Company reported net income of $3.5 million in 1996, a 15% 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 the Company'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, the Company'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, the Company'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 the
Company'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 the Company's interest rate spread.
22
<PAGE>
The following table presents, for the years indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets and interest expense and
rates paid on average interest-bearing liabilities. Average balances are
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> <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 40,013 30,448 30,532
assets................. -------- ------- -------- ------- -------- -------
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) Non-accrual 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.
23
<PAGE>
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and 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 change in interest attributable to
simultaneous volume and rate changes have been reflected as volume variances.
Non-accrual loans are included in average loans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1995
COMPARED WITH DECEMBER COMPARED WITH DECEMBER
31, 1995 FAVORABLE 31, 1994 FAVORABLE
(UNFAVORABLE) (UNFAVORABLE)
------------------------- -------------------------
VOLUME RATE NET VOLUME RATE NET
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON INTER-
EST-EARNING ASSETS:
Interest income on loans. $ 9,811 $(1,930) $ 7,881 $ 2,932 $ 3,353 $ 6,285
Interest income on in-
vestment 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 EXPENSE ON DE-
POSITS:
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 interest expense on
deposits................ (3,758) 1,074 (2,684) (1,457) (3,461) (4,918)
Interest expense on
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, the
Company's highest yielding asset. Loan volume increases were the result of an
improving economy in the Company's market areas, as well as the addition of
experienced relationship managers and greater business development efforts by
the Company'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
24
<PAGE>
$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 Lending 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.
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, the Company'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, the Company'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.
The Company 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 the Company'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 annualized......... 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 as-
sets....................................... 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 the Company's efforts to manage its
client services expenses.
25
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses creates an allowance for future loan losses.
The loan loss provision for each year is dependent on many factors, including
loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of the quality of the loan
portfolio, the value of the underlying collateral on problem loans and the
general economic conditions in the Company's market area. The Company performs
a monthly assessment of the risk inherent in its loan portfolio, as well as a
detailed review of each asset determined to have identified weaknesses. Based
on this analysis, which includes reviewing historical loss trends, current
economic conditions, industry concentrations and specific reviews of assets
classified with identified weaknesses, the Company makes 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 the Company'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
Merger, the Company 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, non-performing loans, comprised of non-accrual 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 non-performing loans experienced by
the Company during 1994. At December 31, 1994, non-performing loans were
$5.0 million, or 2.07% of loans outstanding at such date.
For further information on non-performing and classified loans and the
allowance for loan losses, see "--Financial Condition--Non-Performing and
Classified Assets" herein.
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, the Company 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.
26
<PAGE>
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 premium than
loans with shorter maturity periods. In 1996 compared to 1995, the Company
originated and sold fewer long-term real estate loans and the pricing on loans
sold declined slightly. During 1995 compared to 1994, the Company 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. The Company's efficiency ratio for 1996 was 73.83%,
compared to 76.76% in 1995 and 71.87% in 1994. Excluding nonrecurring costs,
the Company's efficiency ratios were 65.21%, 68.43% and 69.18% in 1996, 1995
and 1994, respectively. The decline in the Company's efficiency ratio was due
to the investment in infrastructure in 1994 and early 1995 which allowed the
Company 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
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Compensation and benefits........................... $11,773 $10,146 $ 8,505
Occupancy and equipment............................. 3,401 2,679 2,226
Merger/restructuring costs.......................... 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 ex-
penses............................................. 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, exclud-
ing 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.
27
<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 the
Company 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" herein.
Federal Deposit Insurance Corporation ("FDIC") deposit insurance and Office
of the Comptroller of the Currency 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 Bank Insurance Fund ("BIF") was fully
funded as of March 1995.
The increase in other operating expense in 1996 was related to the rapid
growth in the Company'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
The Company'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 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 1996 and
1995 were primarily due to increases in the Company's loan portfolio funded by
growth in deposits.
LOANS
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 1996 and 1995 were due to an improving economy in the Company's
market areas coupled with the business development efforts by the Company's
relationship managers.
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the
balance in consumer loans. While no specific industry concentration is
considered significant, the Company's lending operations are located in the
Company's market areas that are dependent on the technology and real estate
industries and their supporting companies. Thus, the Company'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.
28
<PAGE>
The following table presents the composition of the Company's loan portfolio
at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $257,042 58.2 % $181,617 63.8 % $158,223 65.2 % $145,673 62.8 % $130,561 57.7 %
Real estate construction
& land.................. 78,278 17.7 32,672 11.5 22,725 9.4 23,742 10.2 33,315 14.7
Commercial real estate
term.................... 72,802 16.5 47,322 16.6 31,666 13.0 12,075 5.2 11,225 5.0
Consumer & other........ 42,702 9.7 28,666 10.1 30,361 12.5 47,768 20.6 50,510 22.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, gross..... 450,824 102.1 290,277 102.0 242,975 100.1 229,258 98.9 225,611 99.7
Deferred fees and (1,952) (0.4) (1,299) (0.5) (1,264) (0.5) (1,369) (0.6) (1,019) (0.5)
discounts............... -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, net of $448,872 101.7 % $288,978 101.5 % $241,711 99.6 % $227,889 98.3 % $224,592 99.2 %
deferred fees......... ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Allowance for loan (7,312) (1.7) (4,399) (1.5) (4,344) (1.8) (3,657) (1.6) (3,099) (1.4)
losses.................. -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net loans.............. $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............ $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 the Company'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
December 31, 1996.
<TABLE>
<CAPTION>
COMMERCIAL
REAL ESTATE REAL
CONSTRUCTION ESTATE
COMMERCIAL & LAND TERM
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan due in:
One year or less:
Floating rate........................... $186,260 $62,484 $23,257
Fixed rate.............................. 14,918 1,678 2,226
One to five years:
Floating rate........................... 36,552 3,904 10,813
Fixed rate.............................. 5,701 4,534 6,335
After five years:
Floating rate........................... 21 -- --
Fixed rate.............................. 13,590 5,678 30,171
-------- ------- -------
Total $257,042 $78,278 $72,802
======== ======= =======
</TABLE>
For additional information concerning the Company's loan portfolio and its
underwriting and credit administration policies and procedures, see
"Business--Lending Activities."
NON-PERFORMING AND CLASSIFIED ASSETS
Management generally places loans on non-accrual when they become 90 days
past due, unless they are well secured and in the process of collection. When
a loan is placed on non-accrual 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.
29
<PAGE>
The following table sets forth information regarding non-performing assets
at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing loans
Non-accrual loans.................... $1,875 $2,513 $3,668 $1,179 $ 913
Accruing loans past due 90 days or
more................................ 1,237 830 1,371 1,903 --
Restructured loans................... -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans......... 3,112 3,343 5,039 3,082 913
Other real estate owned................ 152 -- 375 618 3,717
------ ------ ------ ------ ------
Total non-performing assets........ $3,264 $3,343 $5,414 $3,700 $4,630
====== ====== ====== ====== ======
Non-performing assets to total loans
and other real estate owned........... 0.74% 1.17% 2.23% 1.59% 2.01%
</TABLE>
At December 31, 1996, the Company had $1.9 million in non-accrual loans.
Non-accrual loans included 11 loans with aggregate principal balances ranging
from $3,000 to $962,000. Interest income foregone on non-performing loans
outstanding at year end totaled $215,000, $245,000 and $275,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The Company 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. At December 31, 1996, other real estate owned consisted of one
property acquired through foreclosure with a carrying value of $152,000.
The policy of the Company is to review each loan in the portfolio to
identify problem credits. There are three classifications for problem loans:
"substandard," "doubtful" and "loss." Substandard loans have one or more
defined 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.
The following table sets forth classified loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
------ ------ -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Substandard............................................ $7,759 $7,463 $12,676
Doubtful............................................... 1,664 601 1,781
Loss................................................... -- -- --
------ ------ -------
Total................................................ $9,423 $8,064 $14,457
====== ====== =======
Classified loans to total loans........................ 2.13% 2.83% 5.96%
Allowance for loan losses to classified loans.......... 77.60% 54.55% 30.05%
</TABLE>
With the exception of these classified loans, management is not aware of any
loans as of December 31, 1996 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 the Company's market areas may worsen or the full
impact such an environment may have on the Company's loan portfolio.
Accordingly, there can be no assurance that other loans will not become 90
days or more past due, be placed on non-accrual or become restructured loans,
in substance foreclosures or other real estate owned in the future.
30
<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 the Company's market areas. See "--Provision for
Loan Losses" herein. The allowance is increased by provisions charged against
earnings and reduced by net loan charge-offs. Loans are charged off when they
are deemed to be uncollectible; recoveries are generally recorded only when
cash payments are received.
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the years indicated.
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans $350,679 $260,635 $230,126 $226,384 $207,978
outstanding:........... ======== ======== ======== ======== ========
Allowance for loan
losses:
Balance at beginning of
period................. $ 4,399 $ 4,344 $ 3,657 $ 3,099 $ 2,605
Charge-offs:
Commercial............ (119) (973) (798) (1,264) (539)
Real estate
construction & land.. (60) (7) (308) 0 (62)
Commercial real estate
term................. 0 0 0 (50) 0
Consumer & other...... (120) (101) (141) (159) (145)
-------- -------- -------- -------- --------
Total charge-offs... (299) (1,081) (1,247) (1,473) (746)
-------- -------- -------- -------- --------
Recoveries:
Commercial............ 343 178 57 28 9
Real estate
construction & land... 15 0 0 0 95
Commercial real estate
term.................. 0 0 48 10 0
Consumer & other...... 18 2 6 48 4
-------- -------- -------- -------- --------
Total recoveries.... 376 180 111 86 108
-------- -------- -------- -------- --------
Net (charge-offs)
recoveries............ 77 (901) (1,136) (1,387) (638)
Provision charged to
income.................. 2,836 956 1,823 1,945 1,132
-------- -------- -------- -------- --------
Balance at end of
period.................. $ 7,312 $ 4,399 $ 4,344 $ 3,657 $ 3,099
======== ======== ======== ======== ========
Net (charge-offs)
recoveries to average
loans outstanding
during the period...... 0.02 % (0.35)% (0.49)% (0.61)% (0.31)%
Allowance to average
loans outstanding...... 2.08 % 1.69 % 1.89 % 1.62 % 1.49 %
Allowance to non-
performing loans....... 224.02 % 131.59 % 80.24 % 98.84 % 66.93 %
</TABLE>
Management considers changes in the size and character of the loan
portfolio, changes in non-performing 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.
31
<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,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $3,134 57.02% $1,797 62.57% $2,835 63.71% $2,093 61.50% $1,668 56.65%
Real estate--
construction & land.... 1,045 17.36 223 11.26 224 9.15 349 10.02 344 14.46
Commercial real estate--
term................... 532 16.15 696 16.30 132 12.75 391 5.10 56 4.87
Consumer & other........ 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......... 5,094 3,182 3,748 3,130 2,550
Unallocated............. 2,218 1,217 596 527 549
------ ------ ------ ------ ------
Total.................. $7,312 100.00% $4,399 100.00% $4,344 100.00% $3,657 100.00% $3,099 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
INVESTMENT SECURITIES
The Company's investment portfolio is managed to meet the Company's
liquidity needs through proceeds from scheduled maturities and is utilized for
pledging requirements for deposits of state and political subdivisions and
securities sold under repurchase agreements. The portfolio is comprised of
U.S. Treasury securities, U.S. government agency securities, mortgage-backed
securities, obligations of states and political subdivisions and a modest
amount of equity securities including Federal Reserve Bank stock and Federal
Home Loan Bank stock. 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.
32
<PAGE>
The amortized cost and estimated market value of investment securities at
December 31, 1996 is summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <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
Federal Reserve Bank 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>
The tax effected net unrealized gain on available-for-sale securities was
$71,000 for the year ended December 31, 1996.
33
<PAGE>
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 2007
1997 THROUGH 2001 THROUGH 2007 AND 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
Federal Reserve Bank
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
COMBINED INVESTMENT
SECURITIES PORTFOLIO:
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.
For additional information concerning the investment portfolio, see Note 3
of Notes to Consolidated Financial Statements.
DEPOSITS
The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base. Deposits reached $559.3
million at December 31, 1996, an increase of 29.5% compared to deposits of
$431.8 million at December 31, 1995. In 1995, deposits increased 25.1% from
$345.3 million at December 31, 1994.
34
<PAGE>
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 the Company's market areas,
coupled with an increase in deposits related to the activities of the Greater
Bay Trust Company and the Venture Lending Group.
Noninterest-bearing deposits were $139.9 million at December 31, 1996,
compared to $96.1 million at December 31, 1995 and $81.0 million at December
31, 1994. Average noninterest-bearing deposits in 1996 were $102.7 million,
compared to $77.7 million in 1995 and $75.2 million in 1994. As its regional
offices expand, the Company anticipates this funding source to increase.
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 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 December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Three months or less..................................... $54,233
Three to six months...................................... 9,198
Six to twelve months..................................... 4,252
Over twelve months....................................... 487
-------
Total.................................................. $68,170
=======
</TABLE>
As of December 31, 1996, the Company had $20.6 million in brokered deposits
outstanding.
LIQUIDITY AND CASH FLOW
The objective of liquidity management is to maintain each Bank's ability to
meet the day-to-day cash flow requirements of its clients who either wish to
withdraw funds or require funds to meet their credit needs. The Company must
manage its liquidity position to allow the Banks to meet the needs of their
clients, while maintaining an appropriate balance between assets and
liabilities to meet the return on investment requirements of its shareholders.
The Company monitors the sources and uses of funds on a daily basis to
maintain an acceptable liquidity position. In addition to liquidity from core
deposits and repayments and maturities of loans and investments, the Banks
utilize brokered deposit lines, sell securities under agreements to repurchase
and borrow overnight federal funds. In addition, during 1995 the Company
issued $3.0 million of subordinated notes.
Greater Bay is a company separate and apart from the Banks. It must provide
for its own liquidity. Substantially all of Greater Bay's revenues are
obtained from 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 Greater Bay. See "Supervision and Regulation."
At December 31, 1996, the Banks had approximately $6.3 million in the
aggregate available to be paid as dividends to Greater Bay. Management of
Greater Bay believes that such restrictions will not have an impact on the
ability of Greater Bay to meet its ongoing cash obligations, including those
relating to the Junior Subordinated Debentures. As of December 31, 1996, the
Company did not have any material commitments for capital expenditures.
35
<PAGE>
Net cash provided by operating activities, primarily representing net
interest income, totaled $6.2 million for 1996, $10.2 million for 1995 and
$6.4 million for 1994. Cash used for investing activities totaled $150.3
million in 1996, $78.4 million in 1995 and $31.4 million in 1994. The funds
used for investing activities primarily represent increases in loans and
investments for each year reported.
For the year ended December 31, 1996, net cash provided by financing
activities was $139.9 million. Historically, the primary financing activity of
the Company has been deposits and short-term borrowings. Deposits increased
$127.5 million for the year ended December 31, 1996, and short-term borrowings
increased $12.0 million for the same period. For the year ended December 31,
1995, net cash provided by financing activities was $71.4 million. Deposits
increased $85.5 million, while short-term borrowings decreased $17.3 million.
Net proceeds from subordinated notes issued in the third quarter of 1995
provided $3.0 million.
CAPITAL RESOURCES
Shareholders' equity at December 31, 1996 increased to $44.7 million from
$40.1 million at December 31, 1995 and from $36.0 million at December 31,
1994. During 1996, the Company paid aggregate cash dividends of $0.44 per
share.
The Company has provided the majority of its capital requirements through
the retention of earnings. In the third quarter of 1995, the Company increased
its capital base by raising $3.0 million of subordinated notes which qualify
as Tier 2 capital. The private offering was subscribed by the Company's
directors, officers and other accredited investors.
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. The Company's
major capital components are shareholders' equity in core capital, and the
allowance for loan losses and subordinated debt in supplementary capital.
At December 31, 1996, 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 1 capital as defined under the risk-based guidelines by
average total assets (not risk-adjusted) for the preceding quarter. The
minimum leverage ratio is 3.0%, although banking organizations are expected to
exceed that amount by 1.0%, 2.0% or more, depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the Comptroller of the Currency and the FDIC have
adopted regulations setting forth a five-tier system for measuring the capital
adequacy of the financial institutions they supervise. The capital levels of
the Company at December 31, 1996 and the two highest levels recognized under
these regulations are set forth below.
<TABLE>
<CAPTION>
TIER 1 RISK-BASED TOTAL RISK BASED LEVERAGE
CAPITAL RATIO CAPITAL RATIO RATIO
----------------- ---------------- --------
<S> <C> <C> <C>
Company.......................... 8.75% 10.54% 7.27%
Well-capitalized................. 6.0% 10.0% 5.0%
Adequately capitalized........... 4.0% 8.0% 4.0%
</TABLE>
At December 31, 1996, the Company's risk-based capital ratios were 8.75% for
Tier 1 risk-based capital and 10.54% for total risk-based capital, compared to
11.38% and 13.43% as of December 31, 1995, respectively. The Company's
leverage ratio was 7.27% at December 31, 1996, compared to 8.69% at December
31, 1995. These ratios all exceeded the well-capitalized guidelines shown
above.
36
<PAGE>
In addition, at December 31, 1996, each of the Banks had levels of capital
which exceeded the well-capitalized guidelines. However, in order for CNB to
remain well-capitalized during 1997, additional capital will be required. For
additional information on the capital levels and capital ratios of the Company
and each of the Banks, see Note 14 of Notes to the Consolidated Financial
Statements.
The Company anticipates that the economic and business conditions in its
market areas will continue to expand in 1997, resulting in continued growth in
earning assets and deposits. With the proceeds from this offering, the Company
believes that it will have adequate capital to support anticipated growth
while allowing the Company to remain well-capitalized under applicable
regulations. However, should growth exceed expectations or in the event an
acquisition opportunity arises to expand market share, it may be necessary for
the Company to raise additional capital through the sale of either debt or
equity securities. It is anticipated that any such debt securities would
constitute Senior and Subordinated Debt.
INTEREST RATE RISK MANAGEMENT
Interest rate risk management is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities. Interest rate risk
management focuses on the maturity structure of assets and liabilities and
their repricing characteristics during periods of changes in market interest
rates. Effective interest rate risk management seeks to ensure that both
assets and liabilities respond to changes in interest rates within an
acceptable time frame, thereby minimizing the effect of interest rate
movements on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the Company's
current portfolio that are subject to repricing at various time horizons: one
day or immediate, two days to six months, seven to twelve months, one to three
years, 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 December 31, 1996.
<TABLE>
<CAPTION>
2 DAYS >1 YEAR >3 YRS TOTAL TOTAL
IMMEDIATE TO 6 MONTHS TO 3 TO 5 RATE NON-RATE
ONE DAY MONTHS 7-12 YRS 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. -- -- -- -- -- -- -- $ 39,896 $ 39,896
Short term investments.. $ 14,000 -- -- -- -- -- $ 14,000 -- 14,000
Investment securities... 1,948 $ 14,012 $ 8,016 $23,021 $17,620 $ 39,452 104,069 1,451 105,520
Loans................... 347,800 10,798 8,385 15,048 10,636 54,326 446,993 3,831 450,824
Loan loss/unearned fees. -- -- -- -- -- -- -- (9,264) (9,264)
Other assets............ -- -- -- -- -- -- -- 21,068 21,068
-------- -------- -------- ------- ------- -------- -------- --------- --------
Total assets........... $363,748 $ 24,810 $ 16,401 $38,069 $28,256 $ 93,778 $565,082 $ 56,982 $622,044
======== ======== ======== ======= ======= ======== ======== ========= ========
LIABILITIES AND EQUITY:
Deposits
Demand................. -- -- -- -- -- -- -- $ 139,940 $139,940
NOW, MMDA, and savings. $312,284 -- -- -- -- -- $312,284 -- 312,284
Time deposits.......... -- $ 99,081 $ 6,938 $ 791 $ 176 $ 73 107,059 -- 107,059
Other borrowings and
subordinated debt...... 15,000 -- -- -- -- -- 15,000 -- 15,000
Other liabilities....... -- -- -- -- -- -- -- 3,079 3,079
Shareholders' equity.... -- -- -- -- -- -- -- 44,682 44,682
-------- -------- -------- ------- ------- -------- -------- --------- --------
Total liabilities and
equity................ $327,284 $ 99,081 $ 6,938 $ 791 $ 176 $ 73 $434,343 $ 187,701 $622,044
======== ======== ======== ======= ======= ======== ======== ========= ========
Gap..................... $ 36,464 $(74,271) $ 9,463 $37,278 $28,080 $ 93,705 $130,719 $(130,719) --
Cumulative Gap.......... $ 36,464 $(37,807) $(28,344) $ 8,934 $37,014 $130,719 $130,719 -- --
Cumulative Gap/total
assets................. 5.86% (6.08)% (4.56)% 1.44% 5.95% 21.01% 21.01% -- --
</TABLE>
The foregoing table demonstrates that the Company had a negative cumulative
one year gap of $28.3 million, or 4.56% of total assets, at December 31, 1996.
In theory, this would indicate that at December 31, 1996, $28.3 million more
in liabilities than assets would reprice if there was a change in interest
rates over the
37
<PAGE>
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 interest margin without affecting interest rate sensitivity. In addition,
the interest rate spread between an asset and its supporting liability can
vary significantly while the timing of repricing of both the asset and its
supporting liability can remain the same, thus impacting net interest income.
This characteristic is referred to as a basis risk and, generally, relates to
the repricing characteristics of short-term funding sources such as
certificates of deposit.
The impact of fluctuations in interest rates on the Company's projected next
twelve month net interest income and net income has been evaluated through an
interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing
rate environments. As of December 31, 1996, the analysis indicates that the
Company's net interest income would increase a maximum of 8.0% if rates rose
200 basis points immediately and would decrease a maximum of 8.0% if rates
declined 200 basis points immediately. In addition, the results indicate that
notwithstanding the Company's negative gap position, which would indicate that
the net interest margin declines when rates rise, the Company's net interest
margin increases during rising rate periods due to the basis risk imbedded in
the Company's interest-bearing liabilities.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors, an
interest sensitivity gap report may not provide a complete assessment of the
Company's exposure to changes in interest rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. The Company 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
38
<PAGE>
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 the Company'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 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 the Company's financial statements.
CHANGE IN ACCOUNTANT
Prior to the Merger, Cupertino's independent accountants were Coopers &
Lybrand, L.L.P. ("Coopers & Lybrand") and Mid-Peninsula's independent
accountants were KPMG Peat Marwick, LLP ("Peat Marwick"). On consummation of
the Merger, Mid-Peninsula changed its name to Greater Bay Bancorp, and on
December 17, 1996, Greater Bay changed its independent accountant by
terminating its engagement of Peat Marwick and selecting Coopers & Lybrand as
its independent accountant to audit its financial statements for the year
ended December 31, 1996. The decision to terminate Greater Bay's engagement of
Peat Marwick and select Coopers & Lybrand was unanimously recommended by
Greater Bay's Audit Committee and approved by Greater Bay's Board of
Directors. During the two most recent fiscal years of the Company and any
subsequent interim period preceding the aforesaid change, there were no
disagreements between the Company 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 the
Company 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,
the Company 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.
39
<PAGE>
BUSINESS
In addition to the historical information contained herein, certain
statements under this caption constitute "forward-looking statements" under
the Reform Act which involve risks and uncertainties. The Company'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" as well as those discussed
elsewhere in this Prospectus.
GREATER BAY
Greater Bay 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 December 31, 1996, the Company had total assets of
$622.0 million, total net loans of $441.6 million and total deposits of $559.3
million.
HISTORY
Greater Bay is the result of the Merger of Cupertino and 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 the
Company'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 a lower cost of 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
referred 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, Greater Bay 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, the Company 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.
40
<PAGE>
While client service decisions and day-to-day operations are maintained at
the Banks, Greater Bay offers the advantages of affiliation with a multi-bank
holding company by providing improved access to the capital markets and
expanded client support services, such as business cash management,
international trade services and accounting services. In addition, Greater Bay
provides centralized administrative functions, including support in credit
policy formulation and review, investment management, data processing,
accounting and other specialized support functions thereby allowing the Banks
to focus on client service.
CORPORATE GROWTH STRATEGY
The Company's business strategy is to focus on increasing its market share
within the communities it serves through continued internal growth. As a
result of the Merger, the Company has the opportunity to market the
specialized products and services of the Venture Lending Group, the Greater
Bay Trust Company and the SBA Department to a larger customer base. The
Company believes that these products and services, available prior to the
Merger only to customers of CNB, will be attractive to customers and contacts
of MPB in the venture capital community and the high net worth customers of
MPB. The Company believes that the infrastructure developed by Cupertino to
support the Greater Bay Trust Company, the SBA Department and the Venture
Lending Group will allow the Company to offer the products and services of
these groups without significant additional overhead costs.
The Company also will pursue opportunities to expand its market share
through select acquisitions that management believes complement the Company's
businesses. While management would prefer to make acquisitions which would
expand its presence in its current market areas of Santa Clara and San Mateo
Counties, it 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 December 31, 1996, CNB had total assets of $339.7 million, total net
loans of $248.4 million and total deposits of $302.3 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 December 31,
1996, MPB had total assets of $282.3 million, total net loans of $193.1
million and total deposits of $257.5 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
41
<PAGE>
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 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, the Company organized the Venture Lending 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 the Company'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 the Santa Clara and San Mateo
Counties. Santa Clara County, CNB's primary base of operations, encompasses
the geographic area between San Jose to the south and Palo Alto to the north.
Santa Clara County ranks third in California median household income. CNB is
headquartered in Cupertino, California, which is in the center of the
geographical area referred to as the "Silicon Valley." The city of Cupertino
has a population of approximately 44,000, and its median annual household
income exceeds $76,000. MPB's primary market area ranges from Palo Alto to the
south to South San Francisco to the north. MPB is headquartered in Palo Alto,
California. The city of Palo Alto has a population of approximately 60,000,
and its median annual household income exceeds $72,000.
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, the Company's results depend largely upon economic conditions
in these areas. While the economy in the Company's market areas have exhibited
positive economic and employment trends, there is no assurance that such
trends will continue. A deterioration in economic conditions could have
material adverse impact on the quality of the Company's loan portfolio and the
demand for its product and services, and accordingly its results of
operations. See "Risk Factors--Economic Conditions and Geographic
Concentration."
LENDING ACTIVITIES
UNDERWRITING AND CREDIT ADMINISTRATION
The lending activities of each of the Banks is guided by the basic lending
policies established by its Board of Directors. The Company is currently
preparing a new loan policy to govern the lending activities of both Banks.
The new policy is expected to be fully implemented during the second quarter
of 1997. Once implemented, the credit policy will be approved each year by the
Boards of Directors of Greater Bay and each of the Banks and will be managed
through periodic reviews.
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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 Greater Bay Officers'
Loan Committee, which consists of the President and Chief Executive Officer of
Greater Bay, the Executive Vice President and Chief Lending Officer of Greater
Bay, the Executive Vice President and Chief Credit Officer of MPB and the
Senior Vice President and Chief Credit Officer of Greater Bay. Loans requests
which exceed the limits of the Greater Bay Officers' Loan Committee are
submitted to the Directors' Loan Committee for final approval. The Directors'
Loan Committee consists of four outside directors. Each of these committees
meet on a regular basis in order to provide timely responses to the Banks'
clients.
The Company's credit administration function includes an internal review and
the regular use of an outside loan review firm. In addition, the Greater Bay
Officers' Loan Committee and Chief Financial Officer meet at least once a
month and review delinquencies, non-performing 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 the Company on a monthly basis.
LOAN PORTFOLIO
Approximately 57.0% of the Company's gross loan portfolio was in commercial
loans at December 31, 1996, and real estate construction and land loans
represented approximately 17.4% of total loans, primarily for residential
projects. In addition, 16.1% of the Company'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 Bank and the Banks' cost of funds.
Commercial Loans. In their commercial loan portfolio, the Banks provide
personalized financial services to the diverse commercial and professional
businesses in their market areas. Commercial loans, including those made by
the Venture Lending 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 Lending 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 Lending 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. The
Company will often receive warrants from these companies as part of the
compensation for its services.
The Company participates in many SBA programs and, through CNB, is a
"preferred lender." Preferred lender status is granted to a lender which has
made a certain number of SBA loans and which, in the opinion of the SBA has
staff who are qualified and experienced in this area. As a preferred lender,
the Company has the authority to authorize, on behalf of the SBA, the SBA
guaranty on loans under the 7A program. This can represent a substantial
savings in serving a customer's needs. The Company utilizes both the 504
program, which is focused toward longer-term financing of buildings and other
long-term assets, and the 7A program, which is
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primarily used for financing of the equipment, inventory and working capital
needs of eligible businesses, generally over a three- to seven-year term. The
Company's collateral position in the SBA loans is enhanced by the SBA guaranty
in the case of 7A loans, and by lower loan-to-value ratios under the 504
program. The Company generally sells the guaranteed portion of its SBA loans
in the secondary market.
Real Estate Construction and Land Loans. The Banks' real estate construction
loan activity 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 market for multi-unit single family
residential projects. During 1995 and 1996, 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 person who intend to
construct a single family residence on the lot generally within twelve months.
In addition, the Banks have occasionally in the past, and may to a greater
extent in the future, make commercial real estate construction loans to high
net worth clients with adequate liquidity for construction of office and
warehouse properties. Such loans are typically secured by first deeds of trust
and require guarantees of the borrower.
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").
The Company'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 seven to ten years and are amortized over 20 years.
Most of these loans have rates tied to the prime rate, with many adjusting
whenever the prime rate changes; the remaining loans adjust every two or three
years depending on the term of the loan.
Consumer and Other Loans. The Banks' consumer and other loan portfolio is
divided between installment loans secured by automobiles and aircraft, and
home improvement loans and equity lines of credit which are often secured by
residential real estate. Installment loans tend to be fixed rate and longer-
term (one- to five-year maturity), while the equity lines of credit and home
improvement loans are generally floating rate and are reviewed for renewal on
an annual basis. The Banks also have a minimal portfolio of credit card loans,
issued as an additional service to its clients.
DEPOSITS
The Banks' 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' deposits are not received from a single
depositor or group of affiliated depositors, the loss of any one of which
would have a material adverse effect on the business of the Company or 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
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money market demand accounts. At December 31, 1996, these funds totaled
approximately $41.7 million. The Venture Lending Group, which finances
companies in their start-up and development stage, is another source of
deposits as most of the start-up phase companies have significant liquidity
that is deposited in the bank as part of the banking relationship. At December
31, 1996, customers of the Venture Lending Group had approximately $38.1
million in deposits at CNB.
TRUST DEPARTMENT
The Greater Bay Trust Company 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 $418.0 million at December 31,
1996, compared to $270.0 million at December 31, 1995 and $157.0 million at
December 31, 1994.
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 all financial services companies located in such
counties.
EMPLOYEES
At December 31, 1996, the Company had 177 full-time employees. None of the
employees are covered by a collective bargaining agreement. The Company
considers its employee relations to be satisfactory.
PROPERTIES
The Company occupies its administrative office under a lease which expires
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.
The Company believes its present facilities are adequate for its present
needs and anticipated future growth. The Company believes that, if necessary,
it could secure suitable alternative facilities on similar terms without
adversely affecting operations.
LEGAL PROCEEDINGS
There are no material legal proceedings pending other than ordinary routine
litigation incidental to the business of the Company to which Greater Bay or
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 Greater Bay and the Banks. The
description does not purport to be complete and is qualified in its entirety
by reference to the applicable laws and regulations.
GREATER BAY
Greater Bay, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Greater
Bay is required to file with the Federal Reserve quarterly and annual reports
and such additional information as the Federal Reserve may require pursuant to
the BHCA. The Federal Reserve may conduct examinations of Greater Bay and its
subsidiaries.
The Federal Reserve may require that Greater Bay terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, Greater Bay must file
written notice and obtain approval from the Federal Reserve prior to
purchasing or redeeming its equity securities. Further, Greater Bay is
required by the Federal Reserve to maintain certain levels of capital. See "--
Capital Standards" herein.
Greater Bay is required to obtain the prior approval of the Federal Reserve
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve is also required for
the merger or consolidation of Greater Bay and another bank holding company.
Greater Bay is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, Greater Bay, subject to the
prior approval of the Federal Reserve, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve to be
so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
is required to consider whether the performance of such activities by Greater
Bay 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 Federal Reserve 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 Federal Reserve
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 Federal Reserve 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" herein.
Under Federal Reserve regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound
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manner. In addition, it is the Federal Reserve's policy that in serving as a
source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to
its subsidiary banks during periods of financial stress or adversity and
should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve to be
an unsafe and unsound banking practice or a violation of the Federal Reserve's
regulations or both.
Greater Bay is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, Greater Bay and its
subsidiaries are subject to examination by, and may be required to file
reports with, the California State Banking Department.
Finally, Greater Bay 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 Securities and Exchange Commission (the
"Commission").
THE BANKS
CNB, as a national banking association, is subject to primary supervision,
examination and regulation by 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 California
Superintendent of Banks ("Superintendent") and the Federal Reserve. If, as a
result of an examination of a bank, the bank regulatory agencies should
determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of the bank's
operations are unsatisfactory or that the bank or its management is violating
or has violated any law or regulation, various remedies are available to the
bank regulatory agencies. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order
that can be judicially enforced, to direct an increase in capital, to restrict
the growth of the bank, to assess civil monetary penalties, to remove officers
and directors and ultimately to terminate a bank's deposit insurance, which
would result in a revocation of the bank's charter. Neither CNB nor MPB has
been the subject of any such actions by their respective regulatory agencies.
The deposits of the Banks are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Banks 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. State and
federal statutes and regulations relate to many aspects of the Banks'
operations, including levels of capital, reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices and capital requirements.
RESTRICTIONS ON TRANSFERS OF FUNDS TO GREATER BAY BY THE BANKS
Greater Bay is a legal entity separate and distinct from the Banks. Greater
Bay's ability to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to Greater Bay by the Banks. California law restricts the
amount available for cash dividends by state chartered banks, such as MPB, 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 Superintendent,
make a 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
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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 or Greater Bay may pay. See "--Prompt
Corrective Action and Other Enforcement Mechanisms" herein and "--Capital
Standards" herein for a discussion of these additional restrictions on capital
distributions.
Substantially all of Greater Bay'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 December 31, 1996, the Banks had $6.3
million in the aggregate available for the payment of cash dividends.
The Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, Greater Bay or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of Greater Bay or other affiliates. Such
restrictions prevent Greater Bay and such other affiliates from borrowing from
the Banks unless the loans are secured by marketable obligations or other
acceptable collateral of designated amounts. Further, such secured loans and
investments by the Banks to or in Greater Bay or to or in any other affiliate
is limited to 10% of the respective bank's capital stock and surplus (as
defined by federal regulations) and such secured loans and investments are
limited, in the aggregate, to 20% of the respective banks' capital stock and
surplus (as defined by federal regulations). California law also imposes
certain restrictions with respect to transactions involving Greater Bay and
other controlling persons of the Banks. Additional restrictions on
transactions with affiliates may be imposed on the Banks under the prompt
corrective action provisions of federal law. See "--Prompt Corrective Action
and Other Enforcement Mechanisms."
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 Greater Bay responsible for
FDIC-insured losses at another subsidiary bank.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Banks on their deposits and
their other borrowings and the interest rate received by the Banks on loans
extended to their customers and securities held in the Banks' portfolios
comprises the major portion of the Banks' earnings. These rates are highly
sensitive to many factors that are beyond the control of the Banks.
Accordingly, the earnings and growth of the Banks are subject to the influence
of domestic and foreign economic conditions, including inflation, recession
and unemployment.
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
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the Federal Reserve. The Federal Reserve 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 Federal Reserve 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 Greater Bay or the Banks are impossible to predict.
CAPITAL STANDARDS
The Federal Reserve, the Comptroller and the FDIC have adopted risk-based
minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with high credit risk, such as commercial loans.
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 includes 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); (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
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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. This policy statement augments the
August 1995 regulations adopted by the federal banking agencies which
addressed risk-based capital standards for interest rate risk.
In December 1993, the federal banking agencies 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.
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 Greater Bay and the Banks, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
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>
50
<PAGE>
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 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) the 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
51
<PAGE>
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.
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" herein.
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. 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 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
52
<PAGE>
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).
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 1980's. 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 will pay 3.2
cents per $100 in domestic deposits, and BIF-insured institutions, like the
Banks, will 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 BHCA 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, beginning 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 may permit such
combinations earlier than June 1, 1997, and may 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.
53
<PAGE>
The Interstate Act is likely to increase competition in the Company's market
areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Company's operations.
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 will likely increase competition from out-of-
state banks in the markets in which the Company operates, although it is
difficult to assess the impact that such increased competition may have on the
Company's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Banks are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
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. CNB, which was
rated satisfactory in 1995, is currently undergoing a CRA exam.
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Banks, and their institution-
affiliated parties, which include Greater Bay, may be subject to potential
enforcement actions by the Federal Reserve, the FDIC, the Superintendent
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), 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 the FDIC Improvement Act. 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 Greater Bay nor the Banks has been
subject to any such enforcement actions.
54
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information for the directors and certain
executive officers of Greater Bay and where indicated, CNB or MPB, as of
December 31, 1996.
<TABLE>
<CAPTION>
NAME POSITION(S) AGE
---- ----------- ---
<S> <C> <C>
DIRECTORS:
John M. Gatto Co-Chairman of the Board 59
Duncan L. Matteson Co-Chairman of the Board of Greater Bay;
Chairman of the Board of MPB 62
Rex D. Lindsay Vice-Chairman of the Board 71
Edwin E. van Bronkhorst Vice-Chairman of the Board 73
David L. Kalkbrenner Director; Chief Executive Officer and President
of Greater Bay and MPB 57
James E. Jackson Director 62
Glen McLaughlin Director 62
Dick J. Randall Director 65
Donald H. Seiler Director 68
Warren R. Thoits Director 74
EXECUTIVE OFFICERS:
C. Donald Allen Chairman of the Board and Chief Executive
Officer of CNB 62
Murray B. Dey Executive Vice President and Chief Credit
Officer of MPB 54
David R. Hood Executive Vice President and Chief Lending
Officer of Greater Bay and CNB 52
Hall Palmer Executive Vice President and Senior Trust
Officer of Greater Bay Trust Company and CNB 56
Steven C. Smith Executive Vice President, Chief Operating
Officer and Chief Financial Officer of Greater
Bay; Executive Vice President and Chief
Operating Officer of CNB 45
</TABLE>
JOHN M. GATTO, Co-Chairman of Greater Bay since November 1996. He was a
director of Cupertino from 1984 to the date of the Merger and has served as
Chairman of the Board 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 the Board of Directors of Greater Bay
since November 1996. He served as Chairman of the Board of Greater Bay
(formerly Mid-Peninsula) from 1994 until the date of the Merger and has served
as Chairman of the Board of MPB since 1987. He is President of the Matteson
Companies, 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.
55
<PAGE>
REX D. LINDSAY, Vice-Chairman of the Board of Directors of Greater Bay since
November 1996. He served as a director of Cupertino from 1984 to the date of
the 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 the Board of Directors of Greater
Bay (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 Service Company and Nellcor Puritan Bennett, a manufacturer
of medical equipment, and is a Trustee and Treasurer of the David & Lucille
Packard Foundation.
DAVID L. KALKBRENNER, President, Chief Executive Officer and a director of
Greater Bay and MPB. He has held such positions with Greater Bay (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 Greater Bay since November 1996. He served as
a director of Cupertino from 1984 to the date of the 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 Greater Bay since November 1996. He served as a
director of Cupertino from 1984 to the date of the 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 Greater Bay since November 1996. He served as a
director of Cupertino from 1984 to the date of the 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 developer and
construction company.
DONALD H. SEILER, director of Greater Bay (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 Greater Bay (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).
56
<PAGE>
C. DONALD ALLEN, Chairman of the Board and Chief Executive Officer of CNB
since 1990. He served as President and Chief Executive Officer of Cupertino
from 1985 to the date of the 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 Lucille Packard Children's
Hospital at Stanford.
DAVID R. HOOD, Executive Vice President and Chief Lending Officer of Greater
Bay since November 1996. Since April 1995, he has served as Executive Vice
President and Senior Lending Officer of CNB. From April 1985 to 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 Greater Bay 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.
57
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and five other executive officers
of Greater Bay or the Banks as of December 31, 1996 whose total salary and
bonus for the year ended December 31, 1996 exceeded $100,000. In all cases,
payment was for services in all capacities to Greater Bay (and its
predecessors, Mid-Peninsula and Cupertino) and the Banks during the fiscal
years ended December 31, 1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM AWARDS
----------------------- --------------------------
SECURITIES
OTHER UNDERLYING
ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL SALARY(1) BONUS(2) COMPENSATION(3) SARS(4) COMPENSATION(5)
POSITION YEAR ($) ($) ($) (#) ($)
- ------------------ ---- --------- -------- --------------- ---------- ---------------
<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
Greater Bay 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 1995 174,362 7,500 -- -- 14,580
of CNB 1994 146,755 30,000 -- -- 11,153
Steven C. Smith......... 1996 139,020 70,860 6,000 9,131 28,501
Executive Vice
President, 1995 127,250 48,000 6,000 8,968 7,033
COO and CFO of Greater
Bay; 1994 103,416 30,000 6,000 8,968 830
EVP and COO of CNB
David R. Hood........... 1996 124,120 62,490 5,000 7,131 31,354
Executive Vice
President and 1995 85,462 48,000 4,250 13,453 2,153
Chief Lending Officer
of 1994 -- -- -- -- --
Greater Bay and CNB
Murray B. Dey........... 1996 124,425 80,000 6,000 6,000 37,054
Executive Vice
President and 1995 120,000 67,000 6,000 -- 23,891
Chief Credit Officer of
MPB 1994 115,870 42,000 6,000 1,062 10,089
Hall Palmer............. 1996 122,600 62,490 6,000 4,631 33,343
Executive Vice
President and 1995 80,000 48,000 4,000 13,453 2,580
Senior Trust Officer of
Greater Bay 1994 -- -- -- -- --
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 the 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.
(4) Under the Greater Bay Bancorp 1996 Stock Option Plan (the "1996 Option
Plan"), options may be granted to directors and key, full-time salaried
officers and employees of Greater Bay, 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 Greater Bay's
58
<PAGE>
capitalization, including stock splits and stock dividends. All options
granted to the named executive officers were incentive stock options and
have an exercise price equal to the fair market value of Greater Bay's
Common 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 merged with and into MPB and MPB became
a wholly owned subsidiary of the Company, 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 Greater Bay 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 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 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 the Company 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 the Company in May 1995, include
$2,580 to fund his retirement benefits in 1995; $4,750 in 401(k) plan
matching contributions and $28,593 to fund his retirement benefits in 1996.
59
<PAGE>
OPTION/SAR GRANTS TABLE
The following table provides the specified information concerning grants of
options to purchase Greater Bay's Common Stock made during the year ended
December 31, 1996 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS IN FISCAL 1996 FOR OPTION TERM(1)
- -------------------------------------------------------------------- -----------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE(3) EXPIRATION 5% 10%
NAME GRANTED(2) FISCAL YEAR ($/SH) DATE ($) ($)
- ---- ---------- ------------ -------- ---------- -------------- --------------
<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
Common 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 $26.70 per share at 10% appreciation over the same period.
(2) Generally, options granted under the 1996 Option Plan vest at the rate of
25% of the options granted for each full year of the optionee's continuous
employment with the Company and are exercisable to the extent vested. See
also "--Employment Contracts and Termination of Employment and Change in
Control Arrangements" herein.
(3) All options listed were granted at the estimated fair market value on the
date of grant.
60
<PAGE>
The following table provides the specified information concerning exercises
of options to purchase Greater Bay's Common Stock in the fiscal year ended
December 31, 1996, and unexercised options held as of December 31, 1996, by
the persons named in the Summary Compensation Table:
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT 12/31/96(#) 12/31/96($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) 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 Greater Bay's Common Stock on December 31,
1996, the last trading day in 1996, which was $24.375.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Effective March 3, 1992, the Company 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 board of directors;
(b) a discretionary annual bonus based upon the pre-tax net profits of the
Company, (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 the
Company) 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 the Company to
conduct or continue its business, the loss by the Company of its legal
capacity to contract, the Company's breach of the terms of the agreement, or
in the Company'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; or (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 five years immediately preceding the
change in control (or for such shorter time as Mr. Kalkbrenner was employed by
the Company).
The Company 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 and 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
61
<PAGE>
actively employed by the Company at the time; (ii) termination of his
employment by the Company without "cause" (as defined in the agreement); (iii)
termination or constructive termination of his employment by the Company,
after the occurrence of a "change of control" in the Company or the Bank as
defined in the agreement. Although this agreement is intended to provide Mr.
Allen with an additional incentive to remain in the employ of the Company the
agreement states it shall not be deemed to constitute a contract of employment
between Mr. Allen and the Bank 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 the Company.
The Company has entered into an 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 reasons 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 the
Company 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" herein.
1996 STOCK OPTION PLAN
Greater Bay's Board of Directors 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 Greater Bay,
or to increase such interest, by purchasing shares of Common 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 provision pursuant to
which, in the event of a Change in Control (as defined herein) of Greater Bay,
all unexercised options will become exercisable in full prior to such event,
unless the surviving corporation substitutes a substantially equivalent
option. The 1996 Option Plan provides that a "Change of Control" will occur in
the event of (i) a change in the 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 Greater Bay (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 Greater Bay 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 Exchange Act) who is or become the
beneficial owner, directly or indirectly, of securities of Greater Bay
representing 50% or more of the combined voting power of Greater Bay's then
outstanding securities.
RETIREMENT BENEFITS
Pursuant to the employment agreements between the Company 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 the Company 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 the Company. 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
62
<PAGE>
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" herein.
COMPENSATION OF DIRECTORS
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. Non-employee directors of MPB's Loan Committee received $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 the Board 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.
For 1997, the Co-Chairmen of the 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. The estimated total compensation for the Boards of
Directors in 1997 is $189,500.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Committee acts as the Executive Compensation Committee of
Greater Bay. The members of the Executive Committee are Messrs. Gatto,
Matteson, Lindsay and van Bronkhorst. None of these persons serves or has
served as an officer or employee of the Company or the Banks. Mr. Matteson has
an interest in a building leased by MPB. See "--Certain Relationships and
Related Transactions" herein.
During 1996, the Executive Committee of Mid-Peninsula served as the
Compensation Committee for Mid-Peninsula and MNB. The members of the Committee
are Messrs. Kalkbrenner, Matteson, Seiler, Thoits and van Bronkhorst. No
person who served as a member of the Executive Committee during 1996 has ever
been an officer or employee of Mid-Peninsula 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 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than ten percent of a request class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the Commission. Executive offices, directors and greater than
ten-percent shareholders are required by Commission regulation to furnish to
the Company with copies of all Section 16(a) forms they file.
63
<PAGE>
Based solely on review of the copies of such forms furnished to the Company,
or written representation that no Form 5 was required, the Company 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 Merger, a Form 4 reporting the change in
ownership as a result of the consummation of the Merger was filed late for
each of the former directors of Cupertino and executive officers of Cupertino
who became directors and executive officers of Greater Bay after the Merger.
These individuals included Messrs. Allen, Gatto, Hood, Jackson, Lindsay,
McLaughlin, Palmer, Randall and Smith.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, through the Banks, has had, and expects in the future to have,
banking transactions in the ordinary course of its business with the Company'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 the Company 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 Greater Bay, 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.
64
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of December 31, 1996
concerning beneficial ownership of Greater Bay common stock, no par value (the
"Common Stock"), for the directors and the executive officers named in the
Summary Compensation Table 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. Greater Bay has only one class of stock outstanding, Greater Bay Common
Stock. There are no current arrangements known to Greater Bay that may result
in a change in control of Greater Bay. As of December 31, 1996, no person
known to Greater Bay owned more than five percent (5%) of the outstanding
shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(2)
---------------------
NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OF CLASS
- -------------------------------------- ---------- ----------
<S> <C> <C>
C. Donald Allen(3)........................................ 55,482 1.70
Murray B. Dey(4).......................................... 21,575 0.67
John M. Gatto(5).......................................... 29,354 0.90
David R. Hood(6).......................................... 21,272 0.65
James E. Jackson(7)....................................... 49,104 1.51
David L. Kalkbrenner(8)................................... 34,264 1.05
Rex D. Lindsay(9)......................................... 51,141 1.57
Duncan L. Matteson(10).................................... 41,750 1.28
Glen McLaughlin(11)....................................... 45,365 1.39
Hall Palmer(12)........................................... 22,179 0.68
Dick J. Randall(13)....................................... 107,194 3.30
Donald H. Seiler(14)...................................... 26,580 0.82
Steven C. Smith(15)....................................... 30,886 0.95
Warren R. Thoits(16)...................................... 29,065 0.90
Edwin E. van Bronkhorst(17)............................... 25,330 0.78
All Directors and Executive Officers as a Group
(15 Persons)(18)......................................... 590,541 17.37
</TABLE>
- --------
(1) The address for beneficial owners, all of whom are directors or executive
officers of Greater Bay, is the address of Greater Bay, 2860 West Bayshore
Road, Palo Alto, California 94303.
(2) Includes shares subject to stock options exercisable within 60 days of
December 31, 1996.
(3) Includes 414 shares held by Mr. Allen's wife, 3,579 shares held in an IRA
for Mr. Allen, 598 shares held in a 401(k) plan for Mr. Allen and 22,291
shares issuable upon the exercise of options which are exercisable within
60 days of December 31, 1996.
(4) Includes 14,563 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 8,401
shares subject to stock options exercisable within 60 days of December 31,
1996.
(5) Includes 12,662 shares issuable upon the exercise of options which are
exercisable within 60 days of December 31, 1996.
(6) Includes 5,526 shares held in Mr. Hood's IRA, 276 shares held jointly by
Mr. Hood and his spouse, 387 shares in his 401(k) plan and 15,083 shares
issuable upon the exercise of options which are exercisable within 60 days
of December 31, 1996.
(7) Includes 32,109 shares held jointly by James E. Jackson and his spouse,
1,466 shares held in an IRA for the benefit of Mr. Jackson's spouse, 7,015
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
which are exercisable within 60 days of December 31, 1996.
65
<PAGE>
(8) Includes 9,047 shares held in Mr. Kalkbrenner's IRA account and 19,936
shares subject to stock options exercisable within 60 days of December
31, 1996.
(9) Includes 36,927 shares held by the Rex D. and Leanor L. Lindsay Family
Trust, 1,906 shares held by Mr. Lindsay as custodian for his minor
grandchildren and 12,123 shares issuable upon the exercise of options
which are exercisable within 60 days of December 31, 1996.
(10) Includes 30,000 shares 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 2,750
shares subject to stock options exercisable within 60 days of December
31, 1996.
(11) Includes 4,861 shares in Mr. McLaughlin's Keogh account, and 16,418
shares issuable upon the exercise of options which are exercisable within
60 days of December 31, 1996.
(12) Includes 1,548 shares held in Mr. Palmer's IRA and 15,083 shares subject
to stock options exercisable within 60 days of December 31, 1996.
(13) Includes 98,334 shares held by the Dick J. and Carolyn L. Randall Trust
and 8,675 shares issuable upon the exercise of options which are
exercisable within 60 days of December 31, 1996.
(14) Includes 24,580 shares held jointly with Mr. Seiler's spouse as trustees
of the Seiler Family Trust and 2,000 shares subject to stock options
exercisable within 60 days of December 31, 1996.
(15) Includes 2,121 shares held in Mr. Smith's 401(k) plan, 8,743 shares held
jointly by Mr. Smith and his spouse and 20,022 shares issuable upon the
exercise of options which are exercisable within 60 days of December 31,
1996.
(16) Includes 9,832 shares held by Mr. Thoits as Trustee of the Warren R.
Thoits Trust dated December 30, 1983, 5,836 shares held by Thoits
Brothers, Inc., 10,647 shares for which Mr. Thoits is the record holding
trustee and 2,750 shares subject to stock options exercisable within 60
days of December 31, 1996.
(17) Includes 22,580 shares held jointly with Mr. van Bronkhorst's spouse as
Trustees of the E. E. van Bronkhorst Trust dated July 12, 1977 and 2,750
shares subject to stock options exercisable within 60 days of December
31, 1996.
(18) Includes 168,075 options exercisable within 60 days of December 31, 1996.
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities and the Common Securities will be issued
pursuant to the terms of the Trust Agreement. The Trust Agreement will be
qualified as an indenture under the Trust Indenture Act. Initially, Wilmington
Trust Company will be the Delaware Trustee and the Property Trustee and will
act as trustee for the purpose of complying with the Trust Indenture Act. The
terms of the Trust Preferred Securities will include those stated in the Trust
Agreement and those made part of the Trust Agreement by the Trust Indenture
Act. This summary of certain terms and provisions of the Trust Preferred
Securities and the Trust Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the
provisions of the Trust Agreement, including the definitions therein of
certain terms, and the Trust Indenture Act. Wherever particular defined terms
of the Trust Agreement (as amended or supplemented from time to time) are
referred to herein, such defined terms are incorporated herein. The form of
the Trust Agreement has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Administrative Trustees on
behalf of GBB Capital will issue the Trust Preferred Securities and the Common
Securities (collectively, the "Trust Securities"). The Trust Preferred
Securities will represent preferred undivided beneficial interests in the
assets of GBB Capital and the holders thereof will be entitled to a preference
in certain circumstances with respect to Distributions and amounts payable on
redemption or liquidation over the Common Securities of GBB Capital (which
will be held by Greater Bay), as well as other benefits as described in the
Trust Agreement.
66
<PAGE>
The Trust Preferred Securities will represent undivided beneficial ownership
interests in GBB Capital and the holders thereof will be entitled to a
preference in certain circumstances with respect to Distributions and amounts
payable on redemption or liquidation over Common Securities, as well as other
benefits enumerated in the Guarantee Agreement. The Trust Preferred Securities
will rank pari passu, and payments will be made thereon pro rata, with the
Common Securities of GBB Capital except as described under "Subordination of
Common Securities of GBB Capital Held by Greater Bay" below.
Legal title to the Junior Subordinated Debentures will be held by the
Property Trustee in trust for the benefit of the holders of the Trust
Securities. The Guarantee executed by Greater Bay for the benefit of the
holders of the Trust Preferred Securities (the "Guarantee") will be a
guarantee on a subordinated basis and will not guarantee payment of
Distributions or amounts payable on redemption of the Trust Preferred
Securities or on liquidation of the Trust Preferred Securities if GBB Capital
does not have funds on hand available to make such payments. See "Description
of Guarantee."
DISTRIBUTIONS
Payment of Distributions. Distributions on the Trust Preferred Securities
will be payable at the annual rate of 9.75% of the stated Liquidation Amount
of $25, payable quarterly in arrears on the 15th day of March, June, September
and December in each year, commencing June 15, 1997 to the holders of the
Trust Preferred Securities on the relevant record dates (each date on which
Distributions are payable in accordance with the foregoing, a "Distribution
Date"). The amount of each Distribution due with respect to the Trust
Preferred Securities will include amounts accrued through the date the
Distribution payment is due. Distributions on the Trust Preferred Securities
will be payable to the holders thereof as they appear on the register of GBB
Capital on the relevant record date which, for so long as the Trust Preferred
Securities remain in book-entry form, will be one Business Day (as defined
below) prior to the relevant Distribution Date and, in the event the Trust
Preferred Securities are not in book-entry form, will be the first day of the
month in which the relevant Distribution Date occurs. Distributions will
accumulate from the date of original issuance. The first Distribution Date for
the Trust Preferred Securities will be June 15, 1997.
The amount of Distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any date on
which Distributions are payable on the Trust Preferred Securities is not a
Business Day, payment of the Distribution payable on such date will be made on
the next Business Day (and without any interest or other payment in respect to
any such delay) except that, if such Business Day is in the next succeeding
calendar year, payment of such Distribution shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on the date such payment was originally payable. As used in this Prospectus, a
"Business Day" shall mean any day other than a Saturday or a Sunday, or a day
on which banking institutions in the State of California are authorized or
required by law or executive order to remain closed or a day on which the
corporate trust office of the Property Trustee or the Indenture Trustee is
closed for business.
The funds of GBB Capital available for distribution to holders of its Trust
Preferred Securities will be limited to payments by Greater Bay under the
Junior Subordinated Debentures in which GBB Capital will invest the proceeds
from the issuance and sale of its Trust Preferred Securities. See "Description
of Junior Subordinated Debentures." If Greater Bay does not make interest
payments on the Junior Subordinated Debentures, the Property Trustee will not
have funds available to pay Distributions on the Trust Preferred Securities.
The payment of Distributions (if and to the extent GBB Capital has funds
legally available for the payment of such Distributions and cash sufficient to
make such payments) is guaranteed by Greater Bay. See "Description of
Guarantee."
Extension Period. So long as no Debenture Event of Default has occurred and
is continuing, Greater Bay has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect
to each such period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the
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Junior Subordinated Debentures. As a consequence of any such election,
quarterly Distributions on the Trust Preferred Securities will be deferred by
GBB Capital during any such Extension Period. Distributions to which holders
of Trust Preferred Securities are entitled will accumulate additional amounts
thereon at the rate per annum of 9.75% thereof, compounded quarterly from the
relevant Distribution Date, to the extent permitted under applicable law. The
term "Distributions" as used herein shall include any such additional
accumulated amounts. During any such Extension Period, Greater Bay may not (i)
declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of Greater Bay's
capital stock (which includes common and preferred stock) or (ii) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities of Greater Bay that rank pari passu with or junior
in interest to the Junior Subordinated Debentures or make any guarantee
payments with respect to any guarantee by Greater Bay of the debt securities
of any subsidiary of Greater Bay if such guarantee ranks pari passu with or
junior in interest to the Junior Subordinated Debentures (other than (a)
dividends or distributions in common stock of Greater Bay, (b) any declaration
of a dividend in connection with the implementation of a stockholders' rights
plan, or the issuance of stock under any such plan in the future, or the
redemption or repurchase of any such rights pursuant thereto, (c) payments
under the Guarantee and (d) purchases of common stock for issuance of common
stock or rights under any of Greater Bay's benefit plans for its directors,
officers or employees). Prior to the termination of any such Extension Period,
Greater Bay may further extend such Extension Period, provided that such
extension does not cause such Extension Period to exceed 20 consecutive
quarters or extend beyond the Stated Maturity. Upon the termination of any
such Extension Period and the payment of all amounts then due, and subject to
the foregoing limitations, Greater Bay may elect to begin a new Extension
Period. Subject to the foregoing, there is no limitation on the number of
times that Greater Bay may elect to begin an Extension Period. Greater Bay has
no current intention of exercising its right to defer payments of interest by
extending the interest payment period on the Junior Subordinated Debentures.
REDEMPTION
Mandatory Redemption. Upon the repayment or redemption at any time, in whole
or in part, of any Junior Subordinated Debentures, the proceeds from such
repayment or redemption shall be applied by the Property Trustee to redeem a
Like Amount (as defined below) of the Trust Securities, upon not less than 30
nor more than 60 days' notice of a date of redemption (the "Redemption Date"),
at the Redemption Price (as defined below). See "Description of Junior
Subordinated Debentures--Redemption." If less than all of the Junior
Subordinated Debentures are to be repaid or redeemed on a Redemption Date,
then the proceeds from such repayment or redemption shall be allocated to the
redemption of the Trust Securities pro rata. The amount of premium, if any,
paid by Greater Bay upon the redemption of all or any part of the Junior
Subordinated Debentures to be repaid or redeemed on a Redemption Date shall be
allocated to the redemption pro rata of the Trust Securities.
Optional Redemption. Greater Bay will have the right to redeem the Junior
Subordinated Debentures (i) on or after April 1, 2002, in whole at any time or
in part from time to time at a redemption price equal to the accrued and
unpaid interest on the Junior Subordinated Debentures so redeemed to the date
fixed for redemption, plus 100% of the principal amount thereof, or (ii) at
any time, in whole (but not in part), upon the occurrence of a Tax Event, an
Investment Company Event or a Capital Treatment Event at a redemption price
equal to the accrued and unpaid interest on the Junior Subordinated Debentures
so redeemed to the date fixed for redemption, plus 100% of the principal
amount thereof, in each case subject to receipt of prior approval by the
Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. See "Description of Junior Subordinated
Debentures--Redemption."
Tax Event Redemption, Investment Company Event Redemption, Capital Treatment
Event Redemption or Distribution of Junior Subordinated Debentures. If a Tax
Event, an Investment Company Event or a Capital Treatment Event shall occur
and be continuing, Greater Bay has the right to redeem the Junior Subordinated
Debentures in whole (but not in part) and thereby cause a mandatory redemption
of the Trust Securities in whole
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(but not in part) at the Redemption Price (as defined below) within 90 days
following the occurrence of such Tax Event, Investment Company Event or
Capital Treatment Event, in each case subject to receipt of prior approval by
the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. In the event a Tax Event, an Investment
Company Event or Capital Treatment Event has occurred and is continuing and
Greater Bay does not elect to redeem the Junior Subordinated Debentures and
thereby cause a mandatory redemption of the Trust Securities or to liquidate
GBB Capital and cause the Junior Subordinated Debentures to be distributed to
holders of the Trust Securities in liquidation of GBB Capital as described
below, such Trust Securities will remain outstanding and Additional Sums (as
defined below) may be payable on the Junior Subordinated Debentures.
DEFINITIONS
"Additional Sums" means the additional amounts as may be necessary to be
paid by Greater Bay with respect to the Junior Subordinated Debentures in
order that the amount of Distributions then due and payable by GBB Capital on
the outstanding Trust Securities of GBB Capital shall not be reduced as a
result of any additional taxes, duties and other governmental charges to which
GBB Capital has become subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Trust Preferred Securities based upon the
relative Liquidation Amounts of such classes and the proceeds of which will be
used to pay the Redemption Price of such Trust Securities, and (ii) with
respect to a distribution of Junior Subordinated Debentures to holders of
Trust Securities in connection with a dissolution or liquidation of GBB
Capital, Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Trust Securities of the holder to whom such Junior
Subordinated Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions to the Redemption Date, allocated on a pro rata basis (based on
Liquidation Amounts) among the Trust Securities.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
Subject to Greater Bay and GBB Capital having received an opinion of counsel
to the effect that such distribution will not be a taxable event to the
holders of the Trust Preferred Securities and prior approval of the Federal
Reserve if so required under applicable capital guidelines or policies of the
Federal Reserve, Greater Bay will have the right at any time to liquidate GBB
Capital and, after satisfaction of the liabilities of creditors of GBB Capital
as provided by applicable law, cause the Junior Subordinated Debentures to be
distributed to the holders of Trust Securities in liquidation of GBB Capital.
After the liquidation date fixed for any distribution of Junior Subordinated
Debentures for Trust Preferred Securities (i) such Trust Preferred Securities
will no longer be deemed to be outstanding, (ii) the Depositary or its
nominee, as the record holder of the Trust Preferred Securities, will receive
a registered global certificate or certificates representing the Junior
Subordinated Debentures to be delivered upon such distribution and (iii) any
certificates representing Trust Preferred Securities not held by the
Depositary or its nominee will be deemed to represent the Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of such
Trust Preferred Securities, and bearing accrued and unpaid interest in an
amount equal to the accrued and unpaid Distributions on the Trust Preferred
Securities until such certificates are presented to the Administrative
Trustees or their agent for transfer or reissuance.
There can be no assurance as to the market prices for the Trust Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Trust Preferred Securities if a dissolution
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and liquidation of GBB Capital were to occur. Accordingly, the Trust Preferred
Securities that an investor may purchase, or the Junior Subordinated
Debentures that the investor may receive on dissolution and liquidation of GBB
Capital, may trade at a discount to the price that the investor paid to
purchase the Trust Preferred Securities offered hereby.
REDEMPTION PROCEDURES
Trust Preferred Securities redeemed on each Redemption Date shall be
redeemed at the Redemption Price with the applicable proceeds from the
contemporaneous redemption of the Junior Subordinated Debentures. Redemptions
of the Trust Preferred Securities shall be made and the Redemption Price shall
be payable on each Redemption Date only to the extent that GBB Capital has
funds on hand available for the payment of such Redemption Price. See "--
Subordination of Common Securities of GBB Capital Held by Greater Bay" herein
and "Description of Guarantee."
If GBB Capital gives a notice of redemption in respect of the Trust
Preferred Securities, then, by 12:00 noon, California time on the Redemption
Date, to the extent funds are available, the Property Trustee will deposit
with the Depositary funds sufficient to pay the aggregate Redemption Price and
will give the Depositary irrevocable instructions and authority to pay the
Redemption Price to the holders of such Trust Preferred Securities. See "Book-
Entry Issuance." If such Trust Preferred Securities are no longer in book-
entry form, the Property Trustee, to the extent funds are available, will
deposit with the paying agent for such Trust Preferred Securities funds
sufficient to pay the aggregate Redemption Price and will give such paying
agent irrevocable instructions and authority to pay the Redemption Price to
the holders thereof upon surrender of their certificates evidencing such Trust
Preferred Securities. Notwithstanding the foregoing, Distributions payable on
or prior to the Redemption Date shall be payable to the holders of such Trust
Preferred Securities on the relevant record dates for the related Distribution
Dates. If notice of redemption shall have been given and funds deposited as
required, then upon the date of such deposit, all rights of the holders of the
Trust Preferred Securities will cease, except the right of the holders of the
Trust Preferred Securities to receive the applicable Redemption Price, but
without interest on such Redemption Price, and such Trust Preferred Securities
will cease to be outstanding. In the event that any date fixed for redemption
of such Trust Preferred Securities is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding
Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day falls in the next calendar year,
such payment will be made on the immediately preceding Business Day. In the
event that payment of the Redemption Price in respect of Trust Preferred
Securities called for redemption is improperly withheld or refused and not
paid either by GBB Capital or by Greater Bay pursuant to the Guarantee,
Distributions on such Trust Preferred Securities will continue to accrue at
the then applicable rate, from the Redemption Date originally established by
GBB Capital for such Trust Preferred Securities to the date such Redemption
Price is actually paid, in which case the actual payment date will be the date
fixed for redemption for purposes of calculating the Redemption Price. See
"Description of Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), Greater Bay may at any time and from time to time
purchase outstanding Trust Preferred Securities by tender, in the open market
or by private agreement.
Payment of the Redemption Price on the Trust Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Trust Preferred
Securities shall be made to the applicable recordholders thereof as they
appear on the register of such Trust Preferred Securities on the relevant
record date, which date shall be one Business Day prior to the relevant
Redemption Date or Liquidation Date, as applicable; provided, however, that in
the event that any Trust Preferred Securities are not in book-entry form, the
relevant record date for such Trust Preferred Securities shall be a date at
least 15 days prior to the Redemption Date or Liquidation Date, as applicable.
In the case of a liquidation, the record date shall be no more than 45 days
before the Liquidation Date.
If less than all of the Trust Securities issued by GBB Capital are to be
redeemed on a Redemption Date, then the aggregate Redemption Price for such
Trust Securities to be redeemed shall be allocated pro rata to the
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Trust Preferred Securities and Common Securities based upon the relative
Liquidation Amounts of such classes. The particular Trust Preferred Securities
to be redeemed shall be selected by the Property Trustee from the outstanding
Trust Preferred Securities not previously called for redemption, by such
method as the Property Trustee shall deem fair and appropriate and which may
provide for the selection for redemption of portions (equal to $25 or an
integral multiple thereof) of the Liquidation Amount of Trust Preferred
Securities. The Property Trustee shall promptly notify the security registrar
in writing of the Trust Preferred Securities selected for redemption and, in
the case of any Trust Preferred Securities selected for partial redemption,
the Liquidation Amount thereof to be redeemed. For all purposes of the Trust
Agreement, unless the context otherwise requires, all provisions relating to
the redemption of Trust Preferred Securities shall relate to the portion of
the aggregate Liquidation Amount of Trust Preferred Securities which has been
or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities at such
holder's registered address. Unless GBB Capital defaults in payment of the
applicable Redemption Price, on and after the Redemption Date, Distributions
will cease to accrue on such Trust Preferred Securities called for redemption.
SUBORDINATION OF COMMON SECURITIES OF GBB CAPITAL HELD BY GREATER BAY
Payment of Distributions on, and the Redemption Price of, the Trust
Preferred Securities and Common Securities, as applicable, shall be made pro
rata based on the Liquidation Amounts of the Trust Preferred Securities and
Common Securities; provided, however, that if on any Distribution Date or
Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall
be made unless payment in full in cash of all accumulated and unpaid
Distributions on all of the outstanding Trust Preferred Securities for all
Distribution periods terminating on or prior thereto, or in the case of
payment of the applicable Redemption Price the full amount of such Redemption
Price on all of the outstanding Trust Preferred Securities then called for
redemption, shall have been made or provided for, and all funds available to
the Property Trustee shall first be applied to the payment in full in cash of
all Distributions on, or Redemption Price of, the Trust Preferred Securities
then due and payable.
In the case of any Event of Default under the Trust Agreement resulting from
a Debenture Event of Default, Greater Bay as holder of the Common Securities
will be deemed to have waived any right to act with respect to any such Event
of Default until the effect of all such Events of Default have been cured,
waived or otherwise eliminated. Until any such Events of Default have been so
cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the Trust Preferred Securities and not on behalf
of Greater Bay as holder of the Common Securities, and only the holders of the
Trust Preferred Securities will have the right to direct the Property Trustee
to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
Greater Bay will have the right at any time to terminate GBB Capital and
cause the Junior Subordinated Debentures to be distributed to the holders of
the Trust Preferred Securities. Such right is subject to Greater Bay having
received prior approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve. See "--
Distribution of Junior Subordinated Debentures" below.
In addition, pursuant to the Trust Agreement, GBB Capital shall
automatically terminate upon expiration of its term and shall earlier
terminate on the first to occur of: (i) certain events of bankruptcy,
dissolution or liquidation of Greater Bay; (ii) the distribution of a Like
Amount of the Junior Subordinated Debentures to the holder of its Trust
Securities, if Greater Bay, as Depositor, has delivered written direction to
the Property Trustee to terminate GBB Capital (which direction is optional
and, except as described above, wholly within the discretion of Greater Bay,
as Depositor); (iii) redemption of all of the Trust Preferred Securities as
described under "--Redemption--Mandatory Redemption;" (iv) expiration of the
term of GBB Capital; and (v) the entry of an order for the dissolution of GBB
Capital by a court of competent jurisdiction.
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If an early termination occurs as described in clause (i), (ii), (iv) or (v)
above, GBB Capital shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of GBB Capital as provided by applicable law, to the
holders of such Trust Securities a Like Amount of the Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to receive out
of the assets of GBB Capital available for distribution to holders, after
satisfaction of liabilities to creditors of GBB Capital as provided by
applicable law, an amount equal to, in the case of holders of Trust Preferred
Securities, the aggregate of the Liquidation Amount plus accrued and unpaid
Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If such Liquidation Distribution can be paid only
in part because GBB Capital has insufficient assets available to pay in full
the aggregate Liquidation Distribution, then the amounts payable directly by
GBB Capital on the Trust Preferred Securities shall be paid on a pro rata
basis. The holder(s) of the Common Securities will be entitled to receive
distributions upon any such liquidation pro rata with the holders of the Trust
Preferred Securities, except that if a Debenture Event of Default has occurred
and is continuing, the Trust Preferred Securities shall have a priority over
the Common Securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, GBB Capital is treated as a grantor trust, a
distribution of the Junior Subordinated Debentures should not be a taxable
event to holders of the Trust Preferred Securities. Should there be a change
in law, a change in legal interpretation, a Tax Event or other circumstances,
however, the distribution could be a taxable event to holders of the Trust
Preferred Securities. See "Certain Federal Income Tax Consequences." If
Greater Bay elects neither to redeem the Junior Subordinated Debentures prior
to maturity nor to liquidate GBB Capital and distribute the Junior
Subordinated Debentures to holders of the Trust Preferred Securities, the
Trust Preferred Securities will remain outstanding until the repayment of the
Junior Subordinated Debentures.
If Greater Bay elects to liquidate GBB Capital and thereby causes the Junior
Subordinated Debentures to be distributed to holders of the Trust Preferred
Securities in liquidation of GBB Capital, Greater Bay shall continue to have
the right to shorten the maturity of such Junior Subordinated Debentures,
subject to certain conditions. See "Description of Junior Subordinated
Debentures--General."
EVENTS OF DEFAULT; NOTICE
Any one of the following events that has occurred and is continuing
constitutes an "Event of Default" under the Trust Agreement (an "Event of
Default") with respect to the Trust Preferred Securities (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or
be effected by operation of law or pursuant to any judgment, decree or order
of any court or any order, rule or regulation of any administrative or
governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures--Debenture Events of Default"); or
(ii) default by the Property Trustee in the payment of any Distribution
when it becomes due and payable, and continuation of such default for a
period of 30 days; or
(iii) default by the Property Trustee in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Trustees in the Trust Agreement (other than
a default or breach in the performance of a covenant or warranty which is
addressed in clause (ii) or (iii) above), and continuation of such default
or breach, for a period of 60 days after there has been given, by
registered or certified mail, to the defaulting Issuer Trustee or Trustees
by the holders of at least 25% in aggregate Liquidation Amount of the
outstanding Trust Preferred Securities, a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by Greater Bay to appoint a
successor Property Trustee within 60 days thereof.
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Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Trust Preferred
Securities, the Administrative Trustees and Greater Bay, as Depositor, unless
such Event of Default shall have been cured or waived. Greater Bay as
Depositor, and the Administrative Trustees are required to file annually with
the Property Trustee a certificate as to whether or not they are in compliance
with all the conditions and covenants applicable to them under the Trust
Agreement.
If a Debenture Event of Default has occurred and is continuing, the Trust
Preferred Securities shall have a preference over the Common Securities upon
termination of GBB Capital as described above. See "--Liquidation Distribution
upon Termination" herein. Upon a Debenture Event of Default, unless the
principal of all the Junior Subordinated Debentures has already become due and
payable, either the Property Trustee or the holders of not less than 25% in
aggregate principal amount of the Junior Subordinated Debentures then
outstanding may declare all of the Junior Subordinated Debentures to be due
and payable immediately by giving notice in writing to Greater Bay (and to the
Property Trustee, if notice is given by holders of the Junior Subordinated
Debentures). If the Property Trustee or the holders of the Junior Subordinated
Debentures fail to declare the principal of all of the Junior Subordinated
Debentures due and payable upon a Debenture Event of Default, the holders of
at least 25% in Liquidation Amount of the Trust Preferred Securities then
outstanding shall have the right to declare the Junior Subordinated Debentures
immediately due and payable. In either event, payment of principal and
interest on the Junior Subordinated Debentures shall remain subordinated to
the extent provided in the Indenture. In addition, holders of the Trust
Preferred Securities have the right in certain circumstances to bring a Direct
Action (as hereinafter defined). See "Description of Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of Trust Preferred
Securities."
REMOVAL OF TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
any of the Property Trustee, the Depositary Trustee or the Administrative
Trustees may be removed at any time by the holder of the Common Securities. If
a Debenture Event of Default has occurred and is continuing, the Property
Trustee and the Delaware Trustee may be removed at such time by the holders of
a majority in Liquidation Amount of the outstanding Trust Preferred
Securities. In no event will the holders of the Trust Preferred Securities
have the right to vote to appoint, remove or replace the Administrative
Trustees, which voting rights are vested exclusively in Greater Bay as the
holder of the Common Securities. No resignation or removal of a Trustee and no
appointment of a successor trustee shall be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of Trust Property may
at the time be located, Greater Bay, as the holder of the Common Securities,
and the Administrative Trustees shall have power to appoint one or more
persons either to act as a co-trustee, jointly with the Property Trustee, of
all or any part of such Trust Property, or to act as separate trustee of any
such property, in either case with such powers as may be provided in the
instrument of appointment, and to vest in such person or persons in such
capacity any property, title, right or power deemed necessary or desirable,
subject to the provisions of the Trust Agreement. In case a Debenture Event of
Default has occurred and is continuing, the Property Trustee alone shall have
power to make such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person (as defined in the Trust Agreement) into which the Property
Trustee, the Delaware Trustee or any Administrative Trustee that is not a
natural person may be merged or converted or with which it may be
consolidated, or any Person resulting from any merger, conversion or
consolidation to which such Issuer Trustee shall be a party, or any person
succeeding to all or substantially all the corporate trust business of such
Issuer Trustee, shall be the successor of such Issuer Trustee under the Trust
Agreement, provided such corporation shall be otherwise qualified and
eligible.
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MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF GBB CAPITAL
GBB Capital may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except as
described below. GBB Capital may, at the request of Greater Bay, with the
consent of the Administrative Trustees and without the consent of the holders
of the Trust Preferred Securities, merge with or into, consolidate,
amalgamate, or be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to a trust organized as such under the
laws of any State; provided, that (i) such successor entity either (a)
expressly assumes all of the obligations of GBB Capital with respect to the
Trust Preferred Securities or (b) substitutes for the Trust Preferred
Securities other securities having substantially the same terms as the Trust
Preferred Securities (the "Successor Securities") so long as the Successor
Securities rank the same as the Trust Preferred Securities rank in priority
with respect to distributions and payments upon liquidation, redemption and
otherwise, (ii) Greater Bay expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Junior Subordinated Debentures, (iii) the Successor Securities
are listed, or any Successor Securities will be listed upon notification of
issuance, on any national securities exchange or other organization on which
the Trust Preferred Securities are then listed, if any, (iv) such merger,
consolidation, amalgamation, conveyance, transfer or lease does not cause the
Trust Preferred Securities to be downgraded by any nationally recognized
statistical rating organization which gives ratings to the Trust Preferred
Securities; (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Trust Preferred Securities
(including any Successor Securities) in any material respect, (vi) such
successor entity has a purpose identical to that of GBB Capital, (vii) the
Successor Securities will be listed or traded on any national securities
exchange or other organization on which the Trust Preferred Securities may
then be listed, (viii) prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, Greater Bay has received an
opinion from independent counsel to GBB Capital experienced in such matters to
the effect that (a) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Trust Preferred Securities
(including any Successor Securities) in any material respect, and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither GBB Capital nor such successor entity will be
required to register as an investment company under the Investment Company Act
and (ix) Greater Bay or any permitted successor or designee owns all of the
common securities of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee. Notwithstanding the foregoing, GBB Capital shall
not, except with the consent of holders of 100% in Liquidation Amount of the
Trust Preferred Securities, consolidate, amalgamate, merge with or into, or be
replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or
lease would cause GBB Capital or the successor entity to be classified as
other than a grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Trust Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by Greater Bay, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities, (i) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters
or questions arising under the Trust Agreement, which shall not be
inconsistent with the other provisions of the Trust Agreement, or (ii) to
modify, eliminate or add to any provisions of the Trust Agreement to such
extent as shall be necessary to ensure that GBB Capital will be classified for
United States federal income tax purposes as a grantor trust at all times that
any Trust Securities are outstanding or to ensure that GBB Capital will not be
required to register as an "investment company" under
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the Investment Company Act; provided, however, that in the case of clause (i),
such action shall not adversely affect in any material respect the interests
of any holder of Trust Securities, and any amendments of the Trust Agreement
shall become effective when notice thereof is given to the holders of the
Trust Securities. The Trust Agreement may be amended by the Issuer Trustees
and the Company with (i) the consent of holders representing not less than a
majority of the aggregate Liquidation Amount of the outstanding Trust
Securities, and (ii) receipt by the Issuer Trustees of an opinion of counsel
to the effect that such amendment or the exercise of any power granted to the
Issuer Trustees in accordance with such amendment will not affect GBB
Capital's status as a grantor trust for United States federal income tax
purposes or GBB Capital's exemption from status as an "investment company"
under the Investment Company Act, provided that without the consent of each
holder of Trust Securities, the Trust Agreement may not be amended to (i)
change the amount or timing of any Distribution on the Trust Securities or
otherwise adversely affect the amount of any Distribution required to be made
in respect of the Trust Securities as of a specified date or (ii) restrict the
right of a holder of Trust Securities to institute suit for the enforcement of
any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place
of conducting any proceeding for any remedy available to the Indenture
Trustee, or executing any trust or power conferred on the Property Trustee
with respect to the Junior Subordinated Debentures, (ii) waive any past
default that is waivable under the Indenture, (iii) exercise any right to
rescind or annul a declaration that the principal of all the Junior
Subordinated Debentures shall be due and payable or (iv) consent to any
amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures, where such consent shall be required, without, in
each case, obtaining the prior approval of the holders of a majority in
aggregate Liquidation Amount of all outstanding the Trust Preferred
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of Junior Subordinated Debentures affected
thereby, no such consent shall be given by the Property Trustee without the
prior consent of each holder of the Trust Preferred Securities. The Issuer
Trustees shall not revoke any action previously authorized or approved by a
vote of the holders of the Trust Preferred Securities except by subsequent
vote of the holders of the Trust Preferred Securities. The Property Trustee
shall notify each holder of the Trust Preferred Securities of any notice of
default with respect to the Junior Subordinated Debentures. In addition to
obtaining the foregoing approvals of such holders of the Trust Preferred
Securities, prior to taking any of the foregoing actions, the Issuer Trustees
shall obtain an opinion of counsel experienced in such matters to the effect
that GBB Capital will not be classified as other than a grantor trust for
United States federal income tax purposes.
Any required approval of holders of the Trust Preferred Securities may be
given at a meeting of holders of Trust Preferred Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a
notice of any meeting at which holders of the Trust Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of
such holders is to be taken, to be given to each holder of record of the Trust
Preferred Securities in the manner set forth in the Trust Agreement.
No vote or consent of the holders of the Trust Preferred Securities will be
required for GBB Capital to redeem and cancel the Trust Preferred Securities
in accordance with the Trust Agreement.
Notwithstanding that holders of the Trust Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Trust Preferred Securities that are owned by Greater Bay, the Trustees or any
affiliate of Greater Bay or any Trustees, shall, for purposes of such vote or
consent, be treated as if they were not outstanding.
GLOBAL TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be represented by one or more global
certificates registered in the name of the Depositary or its nominee ("Global
Trust Preferred Security"). Beneficial interests in the Trust Preferred
Securities will be shown on, and transfers thereof will be effected only
through, records maintained by
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participants in the Depositary. Except as described below, Trust Preferred
Securities in certificated form will not be issued in exchange for the global
certificates. See "Book-Entry Issuance."
A global security shall be exchangeable for Trust Preferred Securities
registered in the names of persons other than the Depositary or its nominee
only if (i) the Depositary notifies Greater Bay that it is unwilling or unable
to continue as a depositary for such global security and no successor
depositary shall have been appointed, or if at any time the Depositary ceases
to be a clearing agency registered under the Exchange Act, at a time when the
Depositary is required to be so registered to act as such depositary, (ii)
Greater Bay in its sole discretion determines that such global security shall
be so exchangeable, or (iii) there shall have occurred and be continuing an
Event of Default under the Indenture. Any global security that is exchangeable
pursuant to the preceding sentence shall be exchangeable for definitive
certificates registered in such names as the Depositary shall direct. It is
expected that such instructions will be based upon directions received by the
Depositary with respect to ownership of beneficial interests in such global
security. In the event that Trust Preferred Securities are issued in
definitive form, such Trust Preferred Securities will be in denominations of
$25 and integral multiples thereof and may be transferred or exchanged at the
offices described below.
Unless and until it is exchanged in whole or in part for the individual
Trust Preferred Securities represented thereby, a Global Trust Preferred
Security may not be transferred except as a whole by the Depositary to a
nominee of such the Depositary or by a nominee of such the Depositary to such
Depositary or another nominee of such Depositary or by the Depositary or any
nominee to a successor Depositary or any nominee of such successor.
Payments on Trust Preferred Securities represented by a global security will
be made to the Depositary, as the depositary for the Trust Preferred
Securities. In the event the Trust Preferred Securities are issued in
definitive form, Distributions will be payable, the transfer of the Trust
Preferred Securities will be registrable, and Trust Preferred Securities will
be exchangeable for Trust Preferred Securities of other denominations of a
like aggregate Liquidation Amount, at the corporate office of the Property
Trustee, or at the offices of any paying agent or transfer agent appointed by
the Administrative Trustees, provided that payment of any Distribution may be
made at the option of the Administrative Trustees by check mailed to the
address of the persons entitled thereto or by wire transfer. In addition, if
the Trust Preferred Securities are issued in certificated form, the record
dates for payment of Distributions will be the first day of the month in which
the relevant Distribution Date occurs. For a description of the terms of the
depositary arrangements relating to payments, transfers, voting rights,
redemptions and other notices and other matters, see "Book-Entry Issuance."
Upon the issuance of a Global Trust Preferred Security, and the deposit of
such Global Trust Preferred Security with or on behalf of the Depositary, the
Depositary for such Global Trust Preferred Security or its nominee will
credit, on its book-entry registration and transfer system, the respective
aggregate Liquidation Amounts of the individual Trust Preferred Securities
represented by such Global Trust Preferred Securities to the accounts of
Participants. Such accounts shall be designated by the dealers, underwriters
or agents with respect to such Trust Preferred Securities. Ownership of
beneficial interests in a Global Trust Preferred Security will be limited to
Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in such Global Trust Preferred Security will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by the applicable Depositary or its nominee (with respect
to interests of Participants) and the records of Participants (with respect to
interests of persons who hold through Participants). The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the
ability to transfer beneficial interests in a Global Trust Preferred Security.
So long as the Depositary for a Global Trust Preferred Security, or its
nominee, is the registered owners of such Global Trust Preferred Security,
such Depositary or such nominee, as the case may be, will be considered the
sole owner or holder of the Trust Preferred Securities represented by such
Global Trust Preferred Security for all purposes under the Trust Agreement
governing such Trust Preferred Securities. Except as provided below, owners of
beneficial interests in a Global Trust Preferred Security will not be entitled
to have any of the
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individual Trust Preferred Securities represented by such Global Trust
Preferred Security registered in their names, will not receive or be entitled
to receive physical delivery of any such Trust Preferred Securities in
definitive form and will not be considered the owners or holders thereof under
the Trust Agreement.
None of Greater Bay, the Property Trustee, any Paying Agent, or the
Securities Registrar (defined below) for such Trust Preferred Securities will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Global
Trust Preferred Security representing such Trust Preferred Securities or for
maintaining supervising or reviewing any records relating to such beneficial
ownership interests.
Greater Bay expects that the Depositary for Trust Preferred Securities or
its nominee, upon receipt of any payment of the Liquidation Amount or
Distributions in respect of a permanent Global Trust Preferred Security
immediately will credit Participants' accounts with payments in amounts
proportionate to their respective beneficial interest in the aggregate
Liquidation Amount of such Global Trust Preferred Security as shown on the
records of such Depositary or its nominee. Greater Bay also expects that
payments by Participants to owners of beneficial interests in such Global
Trust Preferred Security held through such Participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name." Such payments will be the responsibility of such Participants.
If the Depositary for the Trust Preferred Securities is at any time
unwilling, unable or ineligible to continue as depositary and a successor
depositary is not appointed by Greater Bay within 90 days, GBB Capital will
issue individual Trust Preferred Securities in exchange for the Global Trust
Preferred Security. In addition, GBB Capital may at any time and in its sole
discretion, subject to any limitations described herein relating to such Trust
Preferred Securities, determine not to have any Trust Preferred Securities
represented by one or more Global Trust Preferred Securities and, in such
event, will issue individual Trust Preferred Securities in exchange for the
Global Trust Preferred Security or Securities representing the Trust Preferred
Securities. Further, if GBB Capital so specifies with respect to the Trust
Preferred Securities, an owner of a beneficial interest in a Global Trust
Preferred Security representing Trust Preferred Securities may, on terms
acceptable to Greater Bay, the Property Trustee and the Depositary for such
Global Trust Preferred Security, receive individual Trust Preferred Securities
in exchange for such beneficial interests, subject to any limitations
described herein. In any such instance, an owner of a beneficial interest in a
Global Trust Preferred Security will be entitled to physical delivery of
individual Trust Preferred Securities represented by such Global Trust
Preferred Security equal in Liquidation Amount to such beneficial interest and
to have such Trust Preferred Securities registered in its name. Individual
Trust Preferred Securities so issued will be issued in denominations, unless
otherwise specified by GBB Capital, of $25 and integral multiples thereof.
PAYMENT AND PAYING AGENCY
Payments in respect of the Trust Preferred Securities shall be made to the
Depositary, which shall credit the relevant accounts at the Depositary on the
applicable Distribution Dates or, if any of the Trust Preferred Securities are
not held by the Depositary, such payments shall be made by check mailed to the
address of the holder entitled thereto as such address shall appear on the
Register. The paying agent (the "Paying Agent") shall initially be the
Property Trustee and any co-paying agent chosen by the Property Trustee and
acceptable to the Administrative Trustees and Greater Bay. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to
the Property Trustee and Trust Preferred. In the event that the Property
Trustee shall no longer be the Paying Agent, the Administrative Trustees shall
appoint a successor (which shall be a bank or trust company acceptable to the
Administrative Trustees and Greater Bay) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the Trust
Preferred Securities. Registration of transfers of the Trust Preferred
Securities will be effected without charge by or on behalf of GBB Capital, but
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upon payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. GBB Capital will not be required to
register or cause to be registered the transfer of the Trust Preferred
Securities after such Trust Preferred Securities have been called for
redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to
this provision, the Property Trustee is under no obligation to exercise any of
the powers vested in it by the Trust Agreement at the request of any holder of
Trust Preferred Securities unless it is offered reasonable indemnity against
the costs, expenses and liabilities that might be incurred thereby. If no
Event of Default has occurred and is continuing and the Property Trustee is
required to decide between alternative causes of action, construe ambiguous
provisions in the Trust Agreement or is unsure of the application of any
provision of the Trust Agreement, and the matter is not one on which holders
of the Trust Preferred Securities are entitled under the Trust Agreement to
vote, then the Property Trustee shall take such action as is directed by
Greater Bay and if not so directed, shall take such action as it deems
advisable and in the best interests of the holders of the Trust Securities and
will have no liability except for its own bad faith, negligence or willful
misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate GBB Capital in such a way that GBB Capital will not
be deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a
corporation for United States federal income tax purposes and so that the
Junior Subordinated Debentures will be treated as indebtedness of Greater Bay
for United States federal income tax purposes. In this connection, Greater Bay
and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust of GBB Capital or
the Trust Agreement, that Greater Bay and the Administrative Trustees
determine in their discretion to be necessary or desirable for such purposes,
as long as such action does not materially adversely affect the interests of
the holders of the Trust Preferred Securities. Holders of the Trust Preferred
Securities have no preemptive or similar rights.
GBB Capital may not borrow money or issue debt or mortgage or pledge any of
its assets.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures will be issued under the Junior
Subordinated Indenture, dated as of March 31, 1997 (the "Indenture"), between
Greater Bay and the Indenture Trustee. The following summary of the terms and
provisions of the Junior Subordinated Debentures and the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Indenture, which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, and to the Trust
Indenture Act. The Indenture is qualified under the Trust Indenture Act.
Whenever particular defined terms of the Indenture are referred to herein,
such defined terms are incorporated herein or therein by reference.
Concurrently with the issuance of the Trust Preferred Securities, GBB
Capital will invest the proceeds thereof, together with the consideration paid
by Greater Bay for the Common Securities, in Junior Subordinated Debentures
issued by Greater Bay. The Junior Subordinated Debentures will be issued as
unsecured debt under the Indenture.
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GENERAL
The Junior Subordinated Debentures will bear interest at the annual rate of
9.75% of the principal amount thereof, payable quarterly in arrears on the
15th day of March, June, September and December of each year (each, an
"Interest Payment Date"), commencing June 15, 1997, to the person in whose
name each Junior Subordinated Debenture is registered, subject to certain
exceptions, at the close of business on the Business Day next preceding such
Interest Payment Date. Notwithstanding the above, in the event that either the
(i) Junior Subordinated Debentures are held by the Property Trustee and the
Trust Preferred Securities are no longer in book-entry only form or (ii) the
Junior Subordinated Debentures are not represented by a Global Subordinated
Debenture (as defined herein), the record date for such payment shall be the
first day of the month in which such payment is made. The amount of each
interest payment due with respect to the Junior Subordinated Debentures will
include amounts accrued through the date the interest payment is due. It is
anticipated that, until the liquidation, if any, of GBB Capital, each Junior
Subordinated Debenture will be held in the name of the Property Trustee in
trust for the benefit of the holders of the Trust Preferred Securities. The
amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Junior Subordinated Debentures is not a Business
Day, then payment of the interest payable on such date will be made on the
next Business Day (and without any interest or other payment in respect of any
such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on the
date such payment was originally payable. Accrued interest that is not paid on
the applicable Interest Payment Date will bear additional interest on the
amount thereof (to the extent permitted by law) at the rate per annum of 9.75%
thereof, compounded quarterly. The term "interest" as used herein shall
include quarterly interest payments, interest on quarterly interest payments
not paid on the applicable Interest Payment Date and Additional Sums (as
defined below), as applicable.
The Junior Subordinated Debentures will mature on April 1, 2027 (such date,
as it may be shortened as hereinafter described, the "Stated Maturity"). Such
date may be shortened once at any time by Greater Bay to any date not earlier
than April 1, 2002 subject to Greater Bay having received prior approval of
the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. In the event that Greater Bay elects to
shorten the Stated Maturity of the Junior Subordinated Debentures, it shall
give notice to the Indenture Trustee, and the Indenture Trustee shall give
notice of such shortening to the holders of the Junior Subordinated Debentures
no less than 90 days prior to the effectiveness thereof.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior and Subordinated Debt of
Greater Bay. Because Greater Bay is a holding company, the right of Greater
Bay to participate in any distribution of assets of any subsidiaries,
including Greater Bay's Banks, upon any such subsidiaries' liquidation or
reorganization or otherwise (and thus the ability of holders of the Trust
Preferred Securities to benefit indirectly from such distribution), is subject
to the prior claims of creditors of that subsidiary, except to the extent that
Greater Bay may itself be recognized as a creditor of that subsidiary.
Accordingly, the Junior Subordinated Debentures will be effectively
subordinated to all existing and future liabilities of the Banks, and holders
of Junior Subordinated Debentures should look only to the assets of Greater
Bay for payments on the Junior Subordinated Debentures. The Indenture does not
limit the incurrence or issuance of other secured or unsecured debt of Greater
Bay, including Senior and Subordinated Debt, whether under the Indenture or
any existing or other indenture that Greater Bay may enter into in the future
or otherwise. See "--Subordination" below.
OPTION TO DEFER INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
Greater Bay has the right under the Indenture at any time during the term of
the Junior Subordinated Debentures to defer the payment of interest at any
time or from time to time for a period not exceeding 20 consecutive quarters
(each such period an "Extension Period"), provided that no Extension Period
may extend beyond the Stated Maturity. At the end of such Extension Period,
Greater Bay must pay all interest then accrued and unpaid (together with
interest thereon
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at the annual rate of 9.75%, compounded quarterly, to the extent permitted by
applicable law). During an Extension Period, interest will continue to accrue
and holders of Junior Subordinated Debentures will be required to accrue
interest income for United States federal income tax purposes. See "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
During any such Extension Period, Greater Bay may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of Greater Bay's capital stock or
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of Greater Bay (including other
Junior Subordinated Debentures) that rank pari passu with or junior in
interest to the Junior Subordinated Debentures or (iii) make any guarantee
payments with respect to any guarantee by Greater Bay of the debt securities
of any subsidiary of Greater Bay if such guarantee ranks pari passu with or
junior in interest to the Junior Subordinated Debentures (other than (a)
dividends or distributions in common stock of Greater Bay, (b) any declaration
of a dividend in connection with the implementation of a stockholders' rights
plan, or the issuance of stock under any such plan in the future, or the
redemption or repurchase of any such rights pursuant thereto, (c) payments
under the Guarantee, and (d) purchases of common stock related to the issuance
of common stock or rights under any of Greater Bay's benefit plans for its
directors, officers or employees). Prior to the termination of any such
Extension Period, Greater Bay may further extend such Extension Period,
provided that such extension does not cause such Extension Period to exceed 20
consecutive quarters or extend beyond the Stated Maturity. Upon the
termination of any such Extension Period and the payment of all amounts then
due on any Interest Payment Date, Greater Bay may elect to begin a new
Extension Period subject to the above requirements. No interest shall be due
and payable during an Extension Period, except at the end thereof. Greater Bay
must give the Property Trustee, the Administrative Trustees and the Indenture
Trustee notice of its election of any Extension Period at least one Business
Day prior to the earlier of (i) the date the Distributions on the Trust
Preferred Securities would have been payable except for the election to begin
or extend such Extension Period or (ii) the date the Administrative Trustees
are required to give notice to the New York Stock Exchange, the Nasdaq
National Market or any applicable stock exchange or automated quotation system
on which the Trust Preferred Securities are then listed or quoted or to the
holders of the Trust Preferred Securities of the record date or the date such
Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Indenture Trustee shall give notice of Greater
Bay's election to begin or extend a new Extension Period the holders of the
Trust Preferred Securities. There is no limitation on the number of times that
Greater Bay may elect to begin an Extension Period.
Distributions on the Trust Preferred Securities will be deferred by GBB
Capital during any such Extension Period. See "Description of the Trust
Preferred Securities--Distributions." For a description of certain federal
income tax consequences and special considerations applicable to any such
Junior Subordinated Debentures, see "Certain Federal Income Tax Consequences."
ADDITIONAL SUMS
If GBB Capital is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, Greater Bay will pay as
additional amounts on the Junior Subordinated Debentures such amounts
("Additional Sums") as shall be required so that the Distributions payable by
GBB Capital shall not be reduced as a result of any such additional taxes,
duties or other governmental charges.
REDEMPTION
Subject to Greater Bay having received prior approval of the Federal
Reserve, if then required under applicable capital guidelines or policies of
the Federal Reserve, the Junior Subordinated Debentures are redeemable prior
to maturity at the option of Greater Bay (i) on or after April 1, 2002, in
whole at any time or in part from time to time, or (ii) at any time in whole
(but not in part), upon the occurrence and during the continuance of a Tax
Event, an Investment Company Event or a Capital Treatment Event, in each case
at a
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redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus
100% of the principal amount thereof.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be redeemed at such holder's registered address. Unless Greater
Bay defaults in payment of the redemption price, on and after the redemption
date interest ceases to accrue on such Junior Subordinated Debentures or
portions thereof called for redemption.
If GBB Capital is required to pay additional taxes, duties or other
governmental charges as a result of a Tax Event, Greater Bay will pay as
additional amounts on the Junior Subordinated Debentures the Additional Sums
(as defined herein).
The Junior Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Trust Preferred Securities--
Liquidation Distribution Upon Termination," under certain circumstances
involving the termination of GBB Capital, the Junior Subordinated Debentures
may be distributed to the holders of the Trust Preferred Securities in
liquidation of GBB Capital after satisfaction of liabilities to creditors of
GBB Capital as provided by applicable law. If distributed to holders of the
Trust Preferred Securities in liquidation, the Junior Subordinated Debentures
will initially be issued in the form of one or more global securities and the
Depositary, or any successor depositary for the Trust Preferred Securities,
will act as depositary for the Junior Subordinated Debentures. It is
anticipated that the depositary arrangements for the Junior Subordinated
Debentures would be substantially identical to those in effect for the Trust
Preferred Securities. If the Junior Subordinated Debentures are distributed to
the holders of Trust Preferred Securities upon the liquidation of GBB Capital.
Greater Bay will use its best efforts to list the Junior Subordinated
Debentures on the Nasdaq National Market or such other stock exchanges or
automated quotation system, if any, on which the Trust Preferred Securities
are then listed or quoted. There can be no assurance as to the market price of
any Junior Subordinated Debentures that may be distributed to the holders of
Trust Preferred Securities.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there shall have occurred any event of which Greater Bay
has actual knowledge that (a) with the giving of notice or the lapse of time,
or both, would constitute a Debenture Event of Default and (b) in respect of
which Greater Bay shall not have taken reasonable steps to cure, or (ii)
Greater Bay shall have given notice of its election of an Extension Period as
provided in the Indenture with respect to the Junior Subordinated Debentures
and shall not have rescinded such notice, or such Extension Period, or any
extension thereof, shall be continuing, or (iii) while the Junior Subordinated
Debentures are held by GBB Capital, Greater Bay shall be in default with
respect to its payment of any obligation under the Guarantee, then Greater Bay
will not (1) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of
Greater Bay's capital stock or (2) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities of
Greater Bay (including other Junior Subordinated Debt) that rank pari passu
with or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by Greater Bay of the debt
securities of any subsidiary of Greater Bay if such guarantee ranks pari passu
with or junior in interest to the Junior Subordinated Debentures (other than
(a) dividends or distributions in common stock, (b) any declaration of a
dividend in connection with the implementation of a shareholder's rights plan,
or the issuance of stock under any such plan in the future or the redemption
or repurchase of any such rights pursuant thereto, (c) payments under the
Guarantee and (d) purchases of Common Stock related to issuance of Common
Stock or rights under any of Greater Bay's benefit plans for its directors,
officers or employees).
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SUBORDINATION
In the Indenture, Greater Bay has covenanted and agreed that any Junior
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior and Subordinated Debt to the extent provided in
the Indenture. Upon any payment or distribution of assets to creditors upon
any liquidation, dissolution, winding up, reorganization, assignment for the
benefit of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of Greater Bay, the holders of Senior and Subordinated
Debt will first be entitled to receive payment in full of principal of all
Allocable Amounts (as defined below) on such Senior and Subordinated Debt
before the holders of Junior Subordinated Debentures will be entitled to
receive or retain any payment in respect thereof.
In the event of the acceleration of the maturity of any Junior Subordinated
Debentures, the holders of all Senior and Subordinated Debt outstanding at the
time of such acceleration will first be entitled to receive payment in full of
all amounts due thereon (including any amounts due upon acceleration) before
the holders of Junior Subordinated Debentures will be entitled to receive or
retain any payment in respect of the Junior Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of the
Junior Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior and Subordinated
Debt or an event of default with respect to any Senior and Subordinated Debt
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding shall be pending with respect to any such default.
"Allocable Amounts," when used with respect to any Senior and Subordinated
Debt, means all amounts due or to become due on such Senior and Subordinated
Debt less, if applicable, any amount which would have been paid to, and
retained by, the holders of such Senior and Subordinated Debt (whether as a
result of the receipt of payments by the holders of such Senior and
Subordinated Debt from Greater Bay or any other obligor thereon or from any
holders of, or trustee in respect of, other indebtedness that is subordinate
and junior in right of payment to such Senior and Subordinated Debt pursuant
to any provision of such indebtedness for the payment over of amounts received
on account of such indebtedness to the holders of such Senior and Subordinated
Debt or otherwise) but for the fact that such Senior and Subordinated Debt is
subordinated or junior in right of payment to (or subject to a requirement
that amounts received on such Senior and Subordinated Debt be paid over to
obligees on) trade accounts payable or accrued liabilities arising in the
ordinary course of business.
"Debt" means with respect to any person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent: (i) every
obligation of such person for money borrowed; (ii) every obligation of such
person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such person; (iv) every obligation of such person
issued or assumed as the deferred purchase price of property or services (but
excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business); (v) every capital lease obligation of such
person; (vi) all indebtedness of such person whether incurred on or prior to
the date of the Indenture or thereafter incurred, for claims in respect of
derivative products including interest rate, foreign exchange rate and
commodity forward contracts, options and swaps and similar arrangements; and
(vii) every obligation of the type referred to in clauses (i) through (vi) of
another person and all dividends of another person the payment of which, in
either case, such person has guaranteed or is responsible or liable, directly
or indirectly, as obligor or otherwise.
"Senior and Subordinated Debt" means the principal of (and premium, if any)
and interest, if any (including interest accruing on or after the filing of
any petition in bankruptcy or for reorganization relating to Greater Bay
whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt of Greater Bay whether incurred on or prior to the date
of the Indenture or thereafter incurred, unless, in the
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instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are not superior in right of
payment to the Junior Subordinated Debentures or to other Debt which is pari
passu with, or subordinated to, the Junior Subordinated Debentures; provided,
however, that Senior and Subordinated Debt shall be deemed to include the
11.5% Subordinated Debentures Due 2005 of Greater Bay and provided further
that Senior and Subordinated Debt shall not be deemed to include (i) any Debt
of Greater Bay which when incurred and without respect to any election under
section 1111(b) of the United States Bankruptcy Code of 1978, as amended, was
without recourse to Greater Bay, (ii) any Debt of Greater Bay to any of its
subsidiaries, (iii) Debt to any employee of Greater Bay, and (iv) any other
debt securities issued pursuant to the Indenture.
The Indenture places no limitation on the amount of additional Senior and
Subordinated Debt that may be incurred by Greater Bay. Greater Bay expects
from time to time to incur additional indebtedness constituting Senior and
Subordinated Debt.
DENOMINATIONS, REGISTRATION AND TRANSFER
The Junior Subordinated Debentures will be represented by global
certificates registered in the name of the Depositary or its nominee ("Global
Subordinated Debenture"). Beneficial interests in the Junior Subordinated
Debentures will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary. Except as described below,
Junior Subordinated Debentures in certificated form will not be issued in
exchange for the global certificates. See "Book-Entry Issuance."
Unless and until a Global Subordinated Debenture is exchanged in whole or in
part for the individual Junior Subordinated Debentures represented thereby, it
may not be transferred except as a whole by the Depositary for such Global
Subordinated Debenture to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by the
Depositary or any nominee to a successor Depositary or any nominee of such
successor.
A global security shall be exchangeable for Junior Subordinated Debentures
registered in the names of persons other than the Depositary or its nominee
only if (i) the Depositary notifies Greater Bay that it is unwilling or unable
to continue as a depositary for such global security and no successor
depositary shall have been appointed, or if at any time the Depositary ceases
to be a clearing agency registered under the Securities Exchange Act, at a
time when the Depositary is required to be so registered to act as such
depositary, (ii) Greater Bay in its sole discretion determines that such
global security shall be so exchangeable or (iii) there shall have occurred
and be continuing a Debenture Event of Default with respect to such global
security. Any global security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for definitive certificates registered in such
names as the Depositary shall direct. It is expected that such instructions
will be based upon directions received by the Depositary from its Participants
with respect to ownership of beneficial interests in such global security. In
the event that Junior Subordinated Debentures are issued in definitive form,
such Junior Subordinated Debentures will be in denominations of $25 and
integral multiples thereof and may be transferred or exchanged at the offices
described below.
Payments on Junior Subordinated Debentures represented by a global security
will be made to the Depositary, as the depositary for the Junior Subordinated
Debentures. In the event Junior Subordinated Debentures are issued in
definitive form, principal and interest will be payable, the transfer of the
Junior Subordinated Debentures will be registrable, and Junior Subordinated
Debentures will be exchangeable for Junior Subordinated Debentures of other
denominations of a like aggregate principal amount, at the corporate office of
the Indenture Trustee, or at the offices of any paying agent or transfer agent
appointed by Greater Bay, provided that payment of interest may be made at the
option of Greater Bay by check mailed to the address of the persons entitled
thereto or by wire transfer. In addition, if the Junior Subordinated
Debentures are issued in certificated form, the record dates for payment of
interest will be the first day of the month in which such payment is to be
made. For a description of the Depositary and the terms of the depositary
arrangements relating to payments, transfers, voting rights, redemptions and
other notices and other matters, see "Book-Entry Issuance."
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Greater Bay will appoint the Indenture Trustee as securities registrar under
the Indenture (the "Securities Registrar"). Junior Subordinated Debentures may
be presented for exchange as provided above, and may be presented for
registration of transfer (with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed), at the office of
the Securities Registrar. Greater Bay may at any time rescind the designation
of any such transfer agent or approve a change in the location through which
any such transfer agent acts, provided that Greater Bay maintains a transfer
agent in the place of payment. Greater Bay may at any time designate
additional transfer agents with respect to the Junior Subordinated Debentures.
In the event of any redemption, neither Greater Bay nor the Indenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Junior
Subordinated Debentures and ending at the close of business on the day of
mailing of the relevant notice of redemption or (ii) transfer or exchange any
Junior Subordinated Debentures so selected for redemption, except, in the case
of any Junior Subordinated Debentures being redeemed in part, any portion
thereof not to be redeemed.
GLOBAL SUBORDINATED DEBENTURES
Upon the issuance of the Global Subordinated Debenture, and the deposit of
such Global Subordinated Debenture with or on behalf of the Depositary, the
Depositary for such Global Subordinated Debenture or its nominee will credit,
on its book-entry registration and transfer system, the respective principal
amounts of the individual Junior Subordinated Debentures represented by such
Global Subordinated Debenture to the accounts of persons that have accounts
with such Depositary ("Participants"). Ownership of beneficial interests in a
Global Subordinated Debenture will be limited to Participants or persons that
may hold interests through Participants. Ownership of beneficial interests in
such Global Subordinated Debenture will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the applicable
Depositary or its nominee (with respect to interests of Participants) and the
records of Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests
in a Global Subordinated Debenture.
So long as the Depositary for a Global Subordinated Debenture, or its
nominee, is the registered owner of such Global Subordinated Debenture, such
Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Junior Subordinated Debentures represented by such
Global Subordinated Debenture for all purposes under the Indenture governing
such Junior Subordinated Debentures. Except as provided below, owners of
beneficial interests in a Global Subordinated Debenture will not be entitled
to have any of the individual Junior Subordinated Debentures represented by
such Global Subordinated Debenture registered in their names, will not receive
or be entitled to receive physical delivery of any such Junior Subordinated
Debentures in definitive form and will not be considered the owners or holders
thereof under the Indenture.
Payments of principal of and interest on individual Junior Subordinated
Debentures represented by a Global Subordinated Debenture registered in the
name of the Depositary or its nominee will be made to the Depositary or its
nominee, as the case may be, as the registered owner of the Global
Subordinated Debenture representing such Junior Subordinated Debentures. None
of Greater Bay, the Indenture Trustee, any Paying Agent, or the Securities
Registrar for such Junior Subordinated Debentures will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Global Subordinated Debenture
representing such Junior Subordinated Debentures or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Greater Bay expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of a permanent Global Subordinated
Debenture representing the Junior Subordinated Debentures, immediately will
credit Participants' accounts with payments in amounts proportionate to their
respective beneficial interest in the principal amount of the Global
Subordinated Debenture as shown on the records of such
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Depositary or its nominee. Greater Bay also expects that payments by
Participants to owners of beneficial interests in such Global Subordinated
Debenture held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name."
Such payments will be the responsibility of such Participants.
If the Depositary is at any time unwilling, unable or ineligible to continue
as depositary and a successor depositary is not appointed by Greater Bay
within 90 days, Greater Bay will issue individual Junior Subordinated
Debentures in exchange for the Global Subordinated Debenture. In addition,
Greater Bay may at any time and in its sole discretion, determine not to have
the Junior Subordinated Debentures represented by one or more Global Junior
Subordinated Debentures and, in such event, will issue individual Junior
Subordinated Debentures in exchange for the Global Subordinated Debenture.
Further, if Greater Bay so specifies with respect to the Junior Subordinated
Debentures, an owner of a beneficial interest in a Global Subordinated
Debenture representing Junior Subordinated Debentures may, on terms acceptable
to Greater Bay, the Indenture Trustee and the Depositary for such Global
Subordinated Debenture, receive individual Junior Subordinated Debentures in
exchange for such beneficial interests. In any such instance, an owner of a
beneficial interest in a Global Subordinated Debenture will be entitled to
physical delivery of individual Junior Subordinated Debentures equal in
principal amount to such beneficial interest and to have such Junior
Subordinated Debentures registered in its name. Individual Junior Subordinated
Debentures so issued will be issued in denominations, unless otherwise
specified by Greater Bay, of $25 and integral multiples thereof.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the office of the Indenture Trustee, except that at
the option of Greater Bay payment of any interest may be made (i) except in
the case of Global Junior Subordinated Debentures, by check mailed to the
address of the person entitled thereto as such address shall appear in the
securities register or (ii) by transfer to an account maintained by the person
entitled thereto as specified in the securities register, provided that proper
transfer instructions have been received by the regular record date. Payment
of any interest on Junior Subordinated Debentures will be made to the person
in whose name such Junior Subordinated Debenture is registered at the close of
business on the regular record date for such interest. Greater Bay may at any
time designate additional Paying Agents or rescind the designation of any
Paying Agent; however Greater Bay will at all times be required to maintain a
Paying Agent in each place of payment for the Junior Subordinated Debentures.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or then
held by Greater Bay in trust, for the payment of the principal of or interest
on the Junior Subordinated Debentures and remaining unclaimed for two years
after such principal or interest has become due and payable shall, at the
request of Greater Bay, be repaid to Greater Bay and the holder of such Junior
Subordinated Debenture shall thereafter look, as a general unsecured creditor,
only to Greater Bay for payment thereof.
MODIFICATION OF INDENTURE
From time to time Greater Bay and the Indenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies (provided that any such
action does not materially adversely affect the interests of the holders of
the Junior Subordinated Debentures or the Trust Preferred Securities so long
as they remain outstanding) and qualifying, or maintaining the qualification
of, the Indenture under the Trust Indenture Act. The Indenture contains
provisions permitting Greater Bay and the Indenture Trustee, with the consent
of the holders of not less than a majority in principal amount of the
outstanding Junior Subordinated Debentures, to modify the Indenture in a
manner affecting the rights of the holders of the Junior Subordinated
Debentures; provided, that no such modification may, without the consent of
the holder of each outstanding Subordinated Debenture, (i) change the Stated
Maturity of the Junior Subordinated Debentures, or reduce the principal amount
thereof, or reduce the rate or extend the time of payment of interest thereon
or (ii) reduce the percentage of principal amount of Junior Subordinated
Debentures, the holders of which
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are required to consent to any such modification of the Indenture, provided
that so long as any of the Trust Preferred Securities remain outstanding, no
such modification may be made that adversely affects the holders of such Trust
Preferred Securities in any material respect, and no termination of the
Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture may be effective, without the
prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of the Trust Preferred Securities unless and until the
principal of the Junior Subordinated Debentures and all accrued and unpaid
interest thereon have been paid in full and certain other conditions are
satisfied. Where a consent under the Indenture would require the consent of
each holder of Junior Subordinated Debentures, no such consent shall be given
by the Property Trustee without the prior consent of each holder of Trust
Preferred Securities. In addition, Greater Bay and the Indenture Trustee may
execute, without the consent of any holder of Junior Subordinated Debentures,
any supplemental Indenture for the purpose of creating any new series of
Junior Subordinated Debentures.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred
and is continuing constitutes a "Debenture Event of Default" with respect to
the Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (subject to the deferral of any due date in the case
of an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated Debentures
when due whether at maturity, upon redemption by declaration or otherwise;
or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to
Greater Bay from the Indenture Trustee or to Greater Bay and the Indenture
Trustee by the holders of at least 25% in aggregate outstanding principal
amount of the Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of
Greater Bay.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in
aggregate outstanding principal amount of the Junior Subordinated Debentures
may declare the principal due and payable immediately upon a Debenture Event
of Default. If the Indenture Trustee or such holders of such Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate Liquidation Amount of the Trust Preferred Securities shall
have such right. The holders of a majority in aggregate outstanding principal
amount of the Junior Subordinated Debentures may annul such declaration and
waive the default if the default (other than the non-payment of the principal
of the Junior Subordinated Debentures which has become due solely by such
acceleration) has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Indenture Trustee. Should the holders of the Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the Trust
Preferred Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of
Junior Subordinated Debentures affected thereby may, on behalf of the holders
of all the Junior Subordinated Debentures, waive any past default, except a
default in the payment of principal or interest (unless such default has been
cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Indenture Trustee) or a default in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Junior Subordinated Debenture.
In case a Debenture Event of Default shall occur and be continuing as to the
Junior Subordinated Debentures, the Property Trustee will have the right to
declare the principal of and the interest on such Junior
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Subordinated Debentures, and any other amounts payable under the Indenture, to
be forthwith due and payable and to enforce its other rights as a creditor
with respect to such Junior Subordinated Debentures.
Greater Bay is required to file annually with the Indenture Trustee a
certificate as to whether or not Greater Bay is in compliance with all the
conditions and covenants applicable to it under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of Greater Bay to pay interest or
principal on the Junior Subordinated Debentures on the date such interest or
principal is otherwise payable, a holder of Trust Preferred Securities may
institute a legal proceeding directly against Greater Bay for enforcement of
payment to such holder of the principal of or interest on such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Trust Preferred Securities of such holder ("Direct
Action"). Greater Bay may not amend the Indenture to remove the foregoing
right to bring a Direct Action without the prior written consent of the
holders of all of the Trust Preferred Securities outstanding. If the right to
bring a Direct Action is removed, GBB Capital may become subject to the
reporting obligations under the Exchange Act. Greater Bay shall have the right
under the Indenture to set-off any payment made to such holder of Trust
Preferred Securities by Greater Bay in connection with a Direct Action.
The holders of the Trust Preferred Securities would not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been an Event of Default under the Trust Agreement. See
"Description of the Trust Preferred Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that Greater Bay shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, and no Person shall consolidate
with or merge into Greater Bay or convey, transfer or lease its properties and
assets substantially as an entirety to Greater Bay, unless (i) in case Greater
Bay consolidates with or merges into another Person or conveys or transfers
its properties and assets substantially as an entirety to any Person, the
successor Person is organized under the laws of the United States or any state
or the District of Columbia, and such successor Person expressly assumes
Greater Bay's obligations on the Junior Subordinated Debentures issued under
the Indenture; (ii) immediately after giving effect thereto, no Debenture
Event of Default, and no event which, after notice or lapse of time or both,
would become a Debenture Event of Default, shall have occurred and be
continuing; (iii) such transaction is permitted under the Trust Agreement and
the Guarantee Agreement; and does not give rise to any breach or violation of
the Trust Agreement or Guarantee Agreement; and (iv) certain other conditions
as prescribed in the Indenture are met.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving Greater Bay that may adversely affect holders of the
Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Indenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and
payable at their Stated Maturity within one year, and Greater Bay deposits or
causes to be deposited with the Indenture Trustee trust funds, in trust, for
the purpose and in an amount in the currency or currencies in which the Junior
Subordinated Debentures are payable sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Indenture Trustee for cancellation, for the principal and interest to the
date of the deposit or to the Stated Maturity, as the case may be, then the
Indenture will cease to be of further effect (except as to Greater Bay's
obligations to pay all other sums due pursuant to the Indenture and to provide
the officers' certificates and opinions of counsel described therein), and
Greater Bay will be deemed to have satisfied and discharged the Indenture.
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COVENANTS OF GREATER BAY
Greater Bay will covenant in the Indenture, as to the Junior Subordinated
Debentures, that if and so long as (i) GBB Capital is the holder of all such
Junior Subordinated Debentures, (ii) a Tax Event in respect of GBB Capital has
occurred and is continuing and (iii) Greater Bay has elected, and has not
revoked such election, to pay Additional Sums (as defined under "Description
of the Trust Preferred Securities--Redemption") in respect of the Trust
Preferred Securities, Greater Bay will pay to GBB Capital such Additional
Sums. Greater Bay will also covenant, as to the Junior Subordinated
Debentures, (i) to maintain directly or indirectly 100% ownership of the
Common Securities of GBB Capital to which Junior Subordinated Debentures have
been issued, provided that certain successors which are permitted pursuant to
the Indenture may succeed to Greater Bay's ownership of the Common Securities,
(ii) not to voluntarily terminate, wind up or liquidate GBB Capital, except
upon prior approval of the Federal Reserve if then so required under
applicable capital guidelines or policies of the Federal Reserve, and except
(a) in connection with a distribution of Junior Subordinated Debentures to the
holders of the Trust Preferred Securities in liquidation of GBB Capital or (b)
in connection with certain mergers, consolidations, or amalgamations permitted
by the Trust Agreement and (iii) to use its reasonable efforts, consistent
with the terms and provisions of the Trust Agreement, to cause GBB Capital to
remain classified as a grantor trust and not as an association taxable as a
corporation for United States federal income tax purposes.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of California.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the
Trust Indenture Act. Subject to such provisions, the Indenture Trustee is
under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Junior Subordinated Debentures,
unless offered reasonable indemnity by such holder against the costs, expenses
and liabilities which might be incurred thereby. The Indenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Indenture Trustee reasonably
believes that repayment or adequate indemnity is not reasonably assured to it.
BOOK-ENTRY ISSUANCE
The Depositary will act as securities depositary for all of the Trust
Preferred Securities and the Junior Subordinated Debentures. The Trust
Preferred Securities and the Junior Subordinated Debentures will be issued
only as fully-registered securities registered in the name of Cede & Co. (the
Depositary's nominee). One or more fully-registered global certificates will
be issued for the Trust Preferred Securities and the Junior Subordinated
Debentures and will be deposited with the Depositary.
The Depositary is a limited purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its Participants deposit with the
Depositary. The Depositary also facilitates the settlement among Participants
of securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. "Direct Participants" include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations.
The Depositary is owned by a number of its Direct Participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
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National Association of Securities Dealers, Inc. Access to the Depositary
system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain custodial
relationships with Direct Participants, either directly or indirectly
("Indirect Participants"). The rules applicable to the Depositary and its
Participants are on file with the Commission.
Purchases of Trust Preferred Securities or Junior Subordinated Debentures
within the Depositary system must be made by or through Direct Participants,
which will receive a credit for the Trust Preferred Securities or Junior
Subordinated Debentures on the Depositary's records. The ownership interest of
each actual purchaser of each Trust Preferred Securities and each Subordinated
Debenture ("Beneficial Owner") is in turn to be recorded on the Direct and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from the Depositary of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the
Direct or Indirect Participants through which the Beneficial Owners purchased
Trust Preferred Securities or Junior Subordinated Debentures. Transfers of
ownership interests in the Trust Preferred Securities or Junior Subordinated
Debentures are to be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in Trust Preferred
Securities or Junior Subordinated Debentures, except in the event that use of
the book-entry system for the or Junior Subordinated Debentures is
discontinued.
The Depositary has no knowledge of the actual Beneficial Owners of the Trust
Preferred Securities or Junior Subordinated Debentures; the Depositary's
records reflect only the identity of the Direct Participants to whose accounts
such Trust Preferred Securities or Junior Subordinated Debentures are
credited, which may or may not be the Beneficial Owners. The Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the Trust Preferred Securities or Junior Subordinated Debentures. If less than
all of the Trust Preferred Securities or the Junior Subordinated Debentures
are being redeemed, the Depositary will determine by lot or pro rata the
amount of the Trust Preferred Securities of each Direct Participant to be
redeemed.
Although voting with respect to the Trust Preferred Securities or the Junior
Subordinated Debentures is limited to the holders of record of the Trust
Preferred Securities or Junior Subordinated Debentures, as applicable, in
those instances in which a vote is required, neither the Depositary nor Cede &
Co. will itself consent or vote with respect to Trust Preferred Securities or
Junior Subordinated Debentures. Under its usual procedures, the Depositary
would mail an omnibus proxy (the "Omnibus Proxy") to the relevant Trustee as
soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts
such Trust Preferred Securities or Junior Subordinated Debentures are credited
on the record date (identified in a listing attached to the Omnibus Proxy).
Distribution payments on the Trust Preferred Securities or the Junior
Subordinated Debentures will be made by the relevant Trustee to the
Depositary. The Depositary's practice is to credit Direct Participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on the Depositary's records unless the Depositary has reason to
believe that it will not receive payments on such payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions
and customary practices and will be the responsibility of such Participant and
not of the Depositary, the relevant Trustee, GBB Capital or Greater Bay,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of Distributions to the Depositary is the responsibility
of the relevant Trustee, disbursement of such payments to
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Direct Participants is the responsibility of the Depositary, and disbursements
of such payments to the Beneficial Owners is the responsibility of Direct and
Indirect Participants.
The Depositary may discontinue providing its services as securities
depositary with respect to any of the Trust Preferred Securities or the Junior
Subordinated Debentures at any time by giving reasonable notice to the
relevant Trustee and Greater Bay. In the event that a successor securities
depositary is not obtained, definitive Trust Preferred Securities or
Subordinated Debenture certificates representing such Trust Preferred
Securities or Junior Subordinated Debentures are required to be printed and
delivered. Greater Bay, at its option, may decide to discontinue use of the
system of book-entry transfers through the Depositary (or a successor
depositary). After a Debenture Event of Default, the holders of a majority in
liquidation preference of Trust Preferred Securities or aggregate principal
amount of Junior Subordinated Debentures may determine to discontinue the
system of book-entry transfers through the Depositary. In any such event,
definitive certificates for such Trust Preferred Securities or Junior
Subordinated Debentures will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that GBB Capital
and Greater Bay believe to be accurate, but GBB Capital and Greater Bay assume
no responsibility for the accuracy thereof. Neither GBB Capital nor Greater
Bay has any responsibility for the performance by the Depositary or its
Participants of their respective obligations as described herein or under the
rules and procedures governing their respective operations.
DESCRIPTION OF GUARANTEE
The Guarantee Agreement will be executed and delivered by Greater Bay
concurrently with the issuance of the Trust Preferred Securities for the
benefit of the holders of the Trust Preferred Securities. Wilmington Trust
Company will act as Guarantee Trustee under the Guarantee Agreement for the
purposes of compliance with the Trust Indenture Act, and the Guarantee will be
qualified as an Indenture under the Trust Indenture Act. The following summary
of certain provisions of the Guarantee does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the
provisions of the Guarantee Agreement, including the definitions therein of
certain terms, and the Trust Indenture Act. The form of the Guarantee has been
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. The Guarantee Trustee will hold the Guarantee for the benefit of
the holders of the Trust Preferred Securities.
GENERAL
The Guarantee will be an irrevocable guarantee on a subordinated basis of
GBB Capital's obligations under the Trust Preferred Securities, but will apply
only to the extent that GBB Capital has funds sufficient to make such
payments, and is not a guarantee of collection.
Greater Bay will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to
the holders of the Trust Preferred Securities, as and when due, regardless of
any defense, right of set-off or counterclaim that GBB Capital may have or
assert other than the defense of payment. The following payments with respect
to the Trust Preferred Securities, to the extent not paid by or on behalf of
GBB Capital (the "Guarantee Payments"), will be subject to the Guarantee: (i)
any accumulated and unpaid Distributions required to be paid on the Trust
Preferred Securities, to the extent that GBB Capital has funds on hand
available therefor at such time, (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption, to the extent that GBB
Capital has funds on hand available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding up or liquidation of GBB Capital
(unless the Junior Subordinated Debentures are distributed to holders of the
Trust Preferred Securities), the lesser of (a) the Liquidation Distribution
and (b) the amount of assets of GBB Capital remaining available for
distribution to holders of Trust Preferred Securities after satisfaction of
liabilities to creditors of GBB Capital as required by law. Greater Bay's
obligation to make a Guarantee Payment may be satisfied by direct payment of
the required amounts by Greater Bay to the holders of the Trust Preferred
Securities or by causing GBB Capital to pay such amounts to such holders.
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If Greater Bay does not make interest payments on the Junior Subordinated
Debentures held by GBB Capital, GBB Capital will not be able to pay
Distributions on the Trust Preferred Securities and will not have funds
legally available therefor. The Guarantee will rank subordinate and junior in
right of payment to all Senior and Subordinated Debt of Greater Bay. See
"Status of the Guarantee" below. Because Greater Bay is a holding company, the
right of Greater Bay to participate in any distribution of assets of any
subsidiary upon such subsidiary's liquidation or reorganization or otherwise,
is subject to the prior claims of creditors of that subsidiary, except to the
extent Greater Bay may itself be recognized as a creditor of that subsidiary.
Accordingly, Greater Bay's obligations under the Guarantee will be effectively
subordinated to all existing and future liabilities of Greater Bay's
subsidiaries, and claimants should look only to the assets of Greater Bay for
payments thereunder. Except as otherwise described herein, the Guarantee does
not limit the incurrence or issuance of other secured or unsecured debt of
Greater Bay, including Senior and Subordinated Debt whether under the
Indenture, any other indenture that Greater Bay may enter into in the future,
or otherwise.
Greater Bay has, through the Guarantee, the Guarantee Agreement, the Trust
Agreement, the Junior Subordinated Debentures, the Indenture and the Expense
Agreement, taken together, fully, irrevocably and unconditionally guaranteed
all of GBB Capital's obligations under the Trust Preferred Securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of GBB Capital's obligations under the
Trust Preferred Securities. See "Relationship Among the Trust Preferred
Securities, the Junior Subordinated Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of Greater Bay and
will rank subordinate and junior in right of payment to all Senior and
Subordinated Debt in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection.
For example, the guaranteed party may institute a legal proceeding directly
against Greater Bay to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity. The
Guarantee will be held for the benefit of the holders of the Trust Preferred
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by GBB Capital or upon
distribution to the holders of the Trust Preferred Securities of the Junior
Subordinated Debentures to the holders of the Trust Preferred Securities. The
Guarantee does not place a limitation on the amount of additional Senior and
Subordinated Debt that may be incurred by Greater Bay. Greater Bay expects
from time to time to incur additional indebtedness constituting Senior and
Subordinated Debt.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Trust Preferred Securities (in which case no vote
will be required), the Guarantee Agreement may not be amended without the
prior approval of the holders of not less than a majority of the aggregate
Liquidation Amount of such outstanding Trust Preferred Securities. See
"Description of the Trust Preferred Securities--Voting Rights; Amendment of
the Trust Agreement." All guarantees and agreements contained in the Guarantee
Agreement shall bind the successors, assigns, receivers, trustees and
representatives of Greater Bay and shall inure to the benefit of the holders
of the Trust Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee Agreement will occur upon the
failure of Greater Bay to perform any of its payment or other obligations
thereunder. The holders of not less than a majority in aggregate Liquidation
Amount of the Trust Preferred Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to
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direct the exercise of any trust or power conferred upon the Guarantee Trustee
under the Guarantee Agreement. Any holder of the Trust Preferred Securities
may institute a legal proceeding directly against Greater Bay to enforce its
rights under the Guarantee without first instituting a legal proceeding
against GBB Capital, the Guarantee Trustee or any other person or entity.
Greater Bay, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not Greater Bay is in compliance with
all the conditions and covenants applicable to it under the Guarantee
Agreement.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by Greater Bay in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee Agreement and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Guarantee Trustee is under
no obligation to exercise any of the powers vested in it by the Guarantee
Agreement at the request of any holder of the Trust Preferred Securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price of the Trust Preferred Securities, upon full
payment of the amounts payable upon liquidation of GBB Capital or upon
distribution of Junior Subordinated Debentures to the holders of the Trust
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Trust
Preferred Securities must restore payment of any sums paid under the Trust
Preferred Securities or the Guarantee.
GOVERNING LAW
The Guarantee Agreement will be governed by and construed in accordance with
the laws of the State of California.
THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by Greater Bay under the
Trust Agreement, Greater Bay will irrevocably and unconditionally guarantee to
each person or entity to whom GBB Capital becomes indebted or liable, the full
payment of any costs, expenses or liabilities of GBB Capital, other than
obligations of GBB Capital to pay to the holders of the Trust Preferred
Securities or other similar interests in GBB Capital of the amounts due such
holders pursuant to the terms of the Trust Preferred Securities or such other
similar interests, as the case may be.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Trust Preferred
Securities (to the extent GBB Capital has funds available for the payment of
such Distributions) are irrevocably guaranteed by Greater Bay as and to the
extent set forth under "Description of Guarantee." Taken together, Greater
Bay's obligations under the Junior Subordinated Debentures, the Indenture, the
Trust Agreement, the Expense Agreement, the Guarantee Agreement and the
Guarantee provide, in the aggregate, a full, irrevocable and unconditional
guarantee of payments of distributions and other amounts due on the Trust
Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is
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only the combined operation of those documents that has the effect of
providing a full, irrevocable and unconditional guarantee of GBB Capital's
obligations under the Trust Preferred Securities. If and to the extent that
Greater Bay does not make payments on the Junior Subordinated Debentures, GBB
Capital will not pay Distributions or other amounts due on the Trust Preferred
Securities. The Guarantee does not cover payment of Distributions when GBB
Capital does not have sufficient funds to pay such Distributions. In such
event, the remedy of a holder of the Trust Preferred Securities is to
institute a legal proceeding directly against Greater Bay for enforcement of
payment of such Distributions to such holder. The obligations of Greater Bay
under the Guarantee are subordinate and junior in right of payment to all
Senior and Subordinated Debt.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Trust Preferred Securities,
primarily because: (i) the aggregate principal amount of the Junior
Subordinated Debentures will be equal to the sum of the aggregate Liquidation
Amount of the Trust Preferred Securities and Common Securities; (ii) the
interest rate and interest and other payment dates on the Junior Subordinated
Debentures will match the Distribution rate and Distribution and other payment
dates for the Trust Preferred Securities; (iii) Greater Bay shall pay for all
and any costs, expenses and liabilities of GBB Capital except GBB Capital's
obligations to holders of Trust Preferred Securities; and (iv) the Trust
Agreement further provides that GBB Capital will not engage in any activity
that is not consistent with its limited purposes.
Notwithstanding anything to the contrary in the Indenture, Greater Bay has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent Greater Bay has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE TRUST PREFERRED SECURITIES UNDER THE
GUARANTEE
A holder of any the Trust Preferred Securities may institute a legal
proceeding directly against Greater Bay to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee, GBB Capital or any other person or entity.
A default or event of default under any Senior and Subordinated Debt would
not constitute a default or Event of Default. However, in the event of payment
defaults under, or acceleration of, Senior and Subordinated Debt, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the Junior Subordinated Debentures until such Senior and
Subordinated Debt has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on Junior Subordinated
Debentures would constitute an Event of Default.
LIMITED PURPOSE OF GBB CAPITAL
The Trust Preferred Securities evidence a beneficial interest in GBB
Capital, and GBB Capital exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in Junior Subordinated
Debentures. A principal difference between the rights of a holder of the Trust
Preferred Securities and a holder of a Junior Subordinated Debenture is that a
holder of a Junior Subordinated Debenture is entitled to receive from Greater
Bay the principal amount of and interest accrued on Junior Subordinated
Debentures held, while a holder of the Trust Preferred Securities is entitled
to receive Distributions from GBB Capital (or from Greater Bay under the
Guarantee) if and to the extent GBB Capital has funds available for the
payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
GBB Capital involving the liquidation of the Junior Subordinated Debentures,
the holders of Trust Preferred Securities will be entitled to receive, out of
assets held by GBB Capital, the Liquidation Distribution in cash. See
"Description of the Trust Preferred Securities--Liquidation Distribution Upon
Termination." Upon any voluntary or involuntary
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liquidation or bankruptcy of Greater Bay, the Property Trustee, as holder of
the Junior Subordinated Debentures, would be a subordinated creditor of
Greater Bay, subordinated in right of payment to all Senior and Subordinated
Debt as set forth in the Indenture, but entitled to receive payment in full of
principal and interest, before any stockholders of Greater Bay receive
payments or distributions. Since Greater Bay is the guarantor under the
Guarantee and has agreed to pay for all costs, expenses and liabilities of GBB
Capital (other than GBB Capital's obligations to the holders of its Trust
Preferred Securities), the positions of a holder of the Trust Preferred
Securities and a holder of Junior Subordinated Debentures relative to other
creditors and to stockholders of Greater Bay in the event of liquidation or
bankruptcy of Greater Bay are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Manatt, Phelps & Phillips, LLP, counsel to the Company
("Counsel"), the following summary accurately describes the material United
States federal income tax consequences that may be relevant to the purchase,
ownership and disposition of Trust Preferred Securities. Unless otherwise
stated, this summary deals only with Trust Preferred Securities held as
capital assets by United States Persons (defined below) who purchase the Trust
Preferred Securities upon original issuance at their original offering price.
As used herein, a "United States Person" means a person that is (i) a citizen
or resident of the United States, (ii) a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, (iii) an estate the income of which is subject
to United States federal income taxation regardless of its source, or (iv) a
trust the income of which is subject to United States federal income taxation
regardless of its source; provided, however, that for taxable years beginning
after December 31, 1996 (or, if a trustee so elects, for taxable years ending
after August 20, 1996), a "United States Person" shall include any trust if a
court is able to exercise primary supervision over the administration of such
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of such trust. The tax treatment of holders may vary
depending on their particular situation. This summary does not address all the
tax consequences that may be relevant to a particular holder or to holders who
may be subject to special tax treatment, such as banks, real estate investment
trusts, regulated investment companies, insurance companies, dealers in
securities or currencies, tax-exempt investors, or foreign investors. In
addition, this summary does not include any description of any alternative
minimum tax consequences or the tax laws of any state, local or foreign
government that may be applicable to a holder of Trust Preferred Securities.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury regulations promulgated thereunder and administrative
and judicial interpretations thereof, as of the date hereof, all of which are
subject to change, possibly on a retroactive basis.
The following discussion does not discuss the tax consequences that might be
relevant to persons that are not United States Persons ("non-United States
Persons"). Non-United States Persons should consult their own tax advisors as
to the specific United States federal income tax consequences of the purchase,
ownership and disposition of Trust Preferred Securities.
The authorities on which this summary is based are subject to various
interpretations and the opinions of Counsel are not binding on the Internal
Revenue Service ("Service") or the courts, either of which could take a
contrary position. Moreover, no rulings have been or will be sought from the
Service with respect to the transactions described herein. Accordingly, there
can be no assurance that the Service will not challenge the opinions expressed
herein or that a court would not sustain such a challenge. Nevertheless,
Counsel has advised that it is of the view that, if challenged, the opinions
expressed herein would be sustained by a court with jurisdiction in a properly
presented case.
Holders should consult their own tax advisors with respect to the tax
consequences to them of the purchase, ownership and disposition of the Trust
Preferred Securities, including the tax consequences under state, local,
foreign, and other tax laws and the possible effects of changes in united
states federal or other tax laws. For a discussion of the possible redemption
of the Trust Preferred Securities upon the occurrence of certain tax events,
see "Description of the Trust Preferred Securities--Redemption."
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CLASSIFICATION OF GBB CAPITAL
In connection with the issuance of the Trust Preferred Securities, Counsel
is of the opinion that, under current law and assuming compliance with the
terms of the Trust Agreement, and based on certain facts and assumptions
contained in such opinion, GBB Capital will be classified as a grantor trust
and not as an association taxable as a corporation for United States federal
income tax purposes. As a result, each beneficial owner of the Trust Preferred
Securities (a "Securityholder") will be treated as owning an undivided
beneficial interest in the Junior Subordinated Debentures. Accordingly, each
Securityholder will be required to include in its gross income its pro rata
share of the interest income or original issue discount that is paid or
accrued on the Junior Subordinated Debentures. See "--Interest Income and
Original Issue Discount" herein. No amount included in income with respect to
the Trust Preferred Securities will be eligible for the dividends received
deduction.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company intends to take the position that the Junior Subordinated
Debentures will be classified for United States federal income tax purposes as
indebtedness of the Company under current law, and, by acceptance of a Trust
Preferred Security, each holder covenants to treat the Junior Subordinated
Debentures as indebtedness and the Trust Preferred Securities as evidence of
an indirect beneficial ownership interest in the Junior Subordinated
Debentures. No assurance can be given, however, that such position of the
Company will not be challenged by the Internal Revenue Service or, if
challenged, that such a challenge will not be successful. The remainder of
this discussion assumes that the Junior Subordinated Debentures will be
classified for United States federal income tax purposes as indebtedness of
the Company. See "Risk Factors--Uncertainty of Deductibility of Interest on
the Junior Subordinated Debentures."
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Except as set forth below, stated interest on the Junior Subordinated
Debentures generally will be included in income by a Securityholder at the
time such interest income is paid or accrued in accordance with such
Securityholder's regular method of tax accounting.
Greater Bay believes that, under the applicable Treasury regulations, the
Junior Subordinated Debentures will not be considered to have been issued with
"original issue discount" ("OID") within the meaning of Section 1273(a) of the
Code. If, however, Greater Bay exercises its right to defer Payments of
interest on the Junior Subordinated Debentures, the Junior Subordinated
Debentures will become OID instruments at such time and all Securityholders
will be required to accrue the stated interest on the Junior Subordinated
Debentures on a daily basis during the Extension Period, even though Greater
Bay will not pay such interest until the end of the Extension Period, and even
though some Securityholders may use the cash method of tax accounting.
Moreover, thereafter the Junior Subordinated Debentures will be taxed as OID
instruments for as long as they remain outstanding. Thus, even after the end
of the Extension Period, all Securityholders would be required to continue to
include the stated interest on the Junior Subordinated Debentures in income on
a daily economic accrual basis, regardless of their method of tax accounting
and in advance of receipt of the cash attributable to such interest income.
Under the OID economic accrual rules, a Securityholder would accrue an amount
of interest income each year that approximates the stated interest payments
called for under the Junior Subordinated Debentures, and actual cash payments
of interest on the Junior Subordinated Debentures would not be reported
separately as taxable income.
The Treasury regulations described above have not yet been addressed in any
rulings or other interpretations by the Service, and it is possible that the
Service could take a contrary position. If the Service were to assert
successfully that the stated interest on the Junior Subordinated Debentures
was OID regardless of whether Greater Bay exercises its right to defer
payments of interest on such debentures, all Securityholders would be required
to include such stated interest in income on a daily economic accrual basis as
described above.
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DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TRUST PREFERRED
SECURITIES
Under current law, a distribution by GBB Capital of the Junior Subordinated
Debentures as described under the caption "Description of the Trust Preferred
Securities--Liquidation Distribution Upon Termination" will be non-taxable and
will result in the Securityholder receiving directly its pro rata share of the
Junior Subordinated Debentures previously held indirectly through GBB Capital,
with a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such Securityholder had in its Trust Preferred Securities
before such distribution. If, however, the liquidation of GBB Capital were to
occur because GBB Capital is subject to United States federal income tax with
respect to income accrued or received on the Junior Subordinated Debentures as
a result of a Tax Event or otherwise, the distribution of Junior Subordinated
Debentures to Securityholders by GBB Capital could be a taxable event to GBB
Capital and each Securityholder, and a Securityholder would recognize gain or
loss as if the Securityholder had exchanged its Trust Preferred Securities for
the Junior Subordinated Debentures it received upon the liquidation of GBB
Capital. A Securityholder would recognize interest income in respect of Junior
Subordinated Debentures received from GBB Capital in the manner described
above under "--Interest Income and Original Issue Discount" herein.
SALES OR REDEMPTION OF TRUST PREFERRED SECURITIES
Gain or loss will be recognized by a Securityholder on a sale of Trust
Preferred Securities (including a redemption for cash) in an amount equal to
the difference between the amount realized (which for this purpose, will
exclude amounts attributable to accrued interest or OID not previously
included in income) and the Securityholder's adjusted tax basis in the Trust
Preferred Securities sold or so redeemed. Gain or loss recognized by a
Securityholder on Trust Preferred Securities held for more than one year will
generally be taxable as long-term capital gain or loss. Amounts attributable
to accrued interest with respect to a Securityholder's pro rata share of the
Junior Subordinated Debentures not previously included in income will be
taxable as ordinary income.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of OID accrued on the Trust Preferred Securities held of record
by United States Persons (other than corporations and other exempt
Securityholders), if any, will be reported to the Service. "Backup"
withholding at a rate of 31% will apply to payments of interest to non-exempt
United States Persons unless the Securityholder furnishes its taxpayer
identification number in the manner prescribed in applicable Treasury
Regulations, certifies that such number is correct, certifies as to no loss of
exemption from backup withholding and meets certain other conditions. Any
amounts withheld from a Securityholder under the backup withholding rules will
be allowed as a refund or a credit against such Securityholder's United States
federal income tax liability, provided the required information is furnished
to the Service.
POSSIBLE TAX LAW CHANGES AFFECTING THE TRUST PREFERRED SECURITIES
Recently the Clinton Administration announced its budget proposals for the
fiscal year 1998. That announcement included a proposal that could affect the
tax characteristics of the Junior Subordinated Debentures. Under the
Administration's proposal, no deduction would be allowed for interest or
original issue discount on an instrument issued by a corporation that has a
maximum term of more than 40 years, or is payable in stock of the issuer or a
related party. The budget announcement also states that no such deduction
would be allowed for certain indebtedness that is reflected as equity on the
issuer's balance sheet. The budget announcement states that the effective date
of the first proposal is for instruments issued "after the date of first
committee action," which is not a legally precise term. The budget
announcement is less clear about the proposed effective date of the second
proposal mentioned above.
Similar proposals were made by the Administration last year. The Revenue
Reconciliation Bill of 1996 (the "1996 Bill") would, among other things, have
denied interest deductions for interest on an instrument, issued by a
corporation, that had a maximum term of more than 20 years and that was not
shown as indebtedness on the separate balance sheet of the issuer or, where
the instrument was issued to a related party (other than a
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corporation), where the holder or some other related party issued a related
instrument that is not shown as indebtedness on the issuer's consolidated
balance sheet. The 1996 Bill was never enacted, but it is likely that the
second proposal in the budget announcement mentioned above will be similar in
some respects to the proposal in the 1996 Bill. Enactment of this proposal
could affect deduction of interest expenses and original issue discount with
respect to the Junior Subordinated Debentures. This, in turn, could create a
Tax Event affecting the Trust Preferred Securities.
In connection with the 1996 Bill, the Chairmen of the Senate Finance and
House Ways and Means Committees issued a joint statement that it was their
intention that the effective date of the Administration's legislative
proposals, if adopted, would be no earlier than the date of appropriate
Congressional action. Senate Finance Committee Chairman William Roth has been
quoted in the news media recently as stating that the 1997 tax changes
generally should be effective on a prospective basis.
It is intended that the Trust Preferred Securities and the Junior
Subordinated Debentures will be issued prior to any type of Congressional
committee action with respect to the aforementioned budget proposal. However,
due to business considerations, the unpredictability of when Congress will
begin action with respect to the Administration's proposals, and the
imprecision in the public statements concerning the anticipated effective date
of the legislative proposals, there can be no guarantee that these instruments
will not be affected by the aforementioned legislative proposals, if they are
enacted.
There also can be no assurance that other future legislative proposals or
final legislation will not affect the ability of the Company to deduct
interest on the Junior Subordinated Debentures. Such a change could give rise
to a Tax Event, which may permit Greater Bay, upon approval of the Federal
Reserve, if then required under applicable capital guidelines or policies of
the Federal Reserve, to cause a redemption of the Trust Preferred Securities.
See "Description of the Trust Preferred Securities--Redemption--Tax Event
Redemption" and "Description of Junior Subordinated Debentures--Redemption."
DESCRIPTION OF GREATER BAY BANCORP CAPITAL STOCK
The authorized capital stock of Greater Bay consists of 6,000,000 shares of
common stock, no par value ("Common Stock"), and 4,000,000 shares of preferred
stock, no par value ("Preferred Stock"). As of December 31, 1996, 3,238,887
shares of Common Stock were outstanding. No shares of Preferred Stock are
outstanding.
COMMON STOCK
Each share of Common Stock is entitled to participate pro rata in
distributions upon liquidation. Holders of Common Stock may receive dividends
as declared by the Board of Directors out of funds legally available therefor.
Holders of Common Stock have no preemptive, subscription, conversion,
redemption or similar rights. All outstanding shares of Common Stock have
voting power to approve mergers, sales of substantially all of Greater Bay's
assets and similar material corporate transactions. Holders of Common Stock
are entitled to one vote for each share of Common Stock they hold on all
matters submitted to a vote of shareholders, except that for the election of
directors each shareholder has cumulative voting rights and is entitled to as
many votes as shall equal the number of shares held by such shareholder
multiplied by the number of directors to be elected, and such shareholder may
cast all his or her votes for a single candidate or distribute such votes
among any or all of the candidates (that is, to cast for any candidate a
number of votes greater than the number of shares of stock held by such
shareholder) unless such candidate's name has been placed in nomination prior
to the voting and the shareholder has given notice at the meeting prior to the
voting of the shareholder's intention to cumulate votes. The rights,
privileges and preferences of the holders of Common Stock are subject to the
rights of the holders of any Preferred Stock that may be designated and issued
by Greater Bay in the future.
97
<PAGE>
PREFERRED STOCK
The Greater Bay Board of Directors has the authority, without further
shareholder action, to issue from time to time a maximum of 4,000,000 shares
of Preferred Stock in one or more series and with such terms and at such times
and for such consideration as the Board of Directors may determine. The
authority of the Board of Directors includes the determination or fixing of
the following with respect to shares of such class or any series thereof: (i)
the number of shares and designation or title thereof; (ii) rights as to
dividends; (iii) whether and upon what terms, including sinking funds, the
shares are to be redeemable; (iv) whether and upon what terms, the shares are
convertible; (v) the voting rights, if any, which shall apply; provided,
however, that in no event shall any holder of any series of the Preferred
Stock be entitled to more than one vote for each share of Preferred Stock held
by such holder; and (vi) the rights of the holders upon the dissolution, or
upon the distribution of assets, of Greater Bay. Any shares of Preferred Stock
which may be issued may rank prior to the Common Stock as to payment of
dividends and upon liquidation. No Preferred Stock is currently outstanding.
98
<PAGE>
UNDERWRITING
Piper Jaffray Inc. (the "Underwriter"), has agreed, subject to the terms and
conditions of a Purchase Agreement to be entered into by the Underwriter,
Greater Bay and GBB Capital to purchase from GBB Capital 800,000 Trust
Preferred Securities. The Underwriter is committed to purchase and pay for all
such Trust Preferred Securities if any are purchased.
The Underwriter has advised Greater Bay and GBB Capital that it proposes to
offer the Trust Preferred Securities directly to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $0.50 per
Trust Preferred Security. The Underwriter may allow and such dealers may
reallow a concession not in excess of $0.25 per Trust Preferred Security to
certain other brokers and dealers. After the public offering, the public
offering price, concession and reallowance, and other selling terms may be
changed by the Underwriter.
In view of the fact that the proceeds from the sale of the Trust Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued
by Greater Bay, the Purchase Agreement provides that Greater Bay will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $0.97 per Trust Preferred Security.
Each of Greater Bay and GBB Capital has agreed to indemnify the Underwriter
and its controlling persons against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
Underwriter may be required to make in respect thereof.
The Underwriter has advised GBB that it does not intend to confirm sales to
any account over which it exercises discretionary authority in excess of 5% of
the number of Trust Preferred Securities offered hereby.
In connection with this offering, the Underwriter may engage in transactions
that stabilize, maintain or otherwise affect the price of the Trust Preferred
Securities. Specifically, the Underwriter may overallot the offering, creating
a syndicate short position. The Underwriter may bid for and purchase Trust
Preferred Securities in the open market to cover syndicate short positions. In
addition, the Underwriter may bid for and purchase Trust Preferred Securities
in the open market to stabilize the price of the Trust Preferred Securities.
These activities may stabilize or maintain the market price of the Trust
Preferred Securities above independent market levels. The Underwriter is not
required to engage in these activities, and may end these activities at any
time.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Trust
Preferred Securities, the enforceability of the Trust Agreement and the
formation of GBB Capital will be passed upon by Richards, Layton & Finger,
P.A., Wilmington, Delaware, special counsel to Greater Bay and GBB Capital.
The validity of the Guarantee and the Junior Subordinated Debentures will be
passed upon for the Company by Manatt, Phelps & Phillips, LLP, Los Angeles,
California, counsel to the Company. Certain legal matters in connection with
this Offering will be passed upon for the Underwriter by Dorsey & Whitney LLP,
Minneapolis, Minnesota. Manatt, Phelps & Phillips, LLP and Dorsey & Whitney
LLP will rely on the opinions of Richards, Layton & Finger, P.A. as to matters
of Delaware law. Certain matters relating to United States federal income tax
considerations will be passed upon for the Company by Manatt, Phelps &
Phillips, LLP.
EXPERTS
The consolidated balance sheets as of December 31, 1996 and 1995 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996, included in
this Prospectus and Registration Statement have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
99
<PAGE>
AVAILABLE INFORMATION
Greater Bay and GBB Capital have jointly filed with the Commission a
Registration Statement on Form S-1 (together with all amendments and exhibits
thereto the "Registration Statement") under the Securities Act, with respect
to the offering of the securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company, GBB Capital 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 or incorporated by reference
therein, which may be inspected at the public reference facilities of the
Commission, at the addresses set forth below. Statements made in this
Prospectus concerning the contents of any documents referred to herein 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.
Greater Bay is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other
information filed by Greater Bay (and its predecessors, Mid-Peninsula Bancorp
and Cupertino National Bancorp) can be inspected and copies of such material
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 Greater Bay (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.
No separate financial statements of GBB Capital have been included herein.
Greater Bay and GBB Capital do not consider that such financial statements
would be material to holders of the Trust Preferred Securities because GBB
Capital is a newly formed special purpose entity, has no operating history or
independent operations and is not engaged in and does not propose to engage in
any activity other than holding as trust assets the Junior Subordinated
Debentures of Greater Bay and issuing the Trust Securities. See "Prospectus
Summary--GBB Capital," "Description of the Trust Preferred Securities,"
"Description of Junior Subordinated Debentures" and "Description of
Guarantee."
100
<PAGE>
GREATER BAY BANCORP
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS......................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1995 and 1996............... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994.................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
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-2
<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-3
<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-4
<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 EARNINGS TOTAL
----------------- ------------------- SHAREHOLDERS'
SHARES AMOUNT UNREALIZED RETAINED 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-5
<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
assets.................................... (128) (1,234) (1,828)
Accrued interest payable and other
liabilities............................... 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
securities.................................. 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
--------- -------- ---------
Cash flows, 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-6
<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 non-interest 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-7
<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 Federal
Reserve Bank 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.
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
F-8
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-9
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-10
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
--------- ---------- ---------- --------
(DOLLARS 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
Federal Reserve Bank 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>
The tax effected net unrealized gain on available-for-sale securities was
$71,000 for the year ended December 31, 1996.
F-11
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<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
Federal Reserve Bank 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
Federal Reserve Bank 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 Federal Reserve Bank 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.
F-14
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth non-performing loans as of December 31, 1996,
1995 and 1994. Non-performing loans are defined as loans which are on non-
accrual status, loans which have been restructured, and loans which are 90
days past due but are still accruing interest. Interest income foregone on
non-performing 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 non-performing 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>
Non-accrual loans...................................... $1,875 $2,513 $3,668
Accruing loans past due 90 days or more................ 1,237 830 1,371
------ ------ ------
Total non-performing loans............................. $3,112 $3,343 $5,039
====== ====== ======
</TABLE>
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>
F-15
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE 7--DEPOSITS
Deposits as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<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 0.0 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
methodology. The Company implemented the requirements of SFAS No. 123 in 1996
and has elected to adopt the disclosure provisions of this statement.
F-18
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(000) EXERCISE PRICE (000) EXERCISE 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 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.
F-19
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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>
F-20
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-21
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES 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% 1$40,720 18.00% N/A
Mid-Peninsula Bank........... 25,415 11.07 1 18,359 18.00 1$22,949 110.00%
Cupertino National Bank and
Trust....................... 28,022 10.03 1 22,346 18.00 1 27,932 110.00
Tier 1 Capital (To Risk
Weighted Assets):
GREATER BAY BANCORP.......... $44,530 8.75% 1$20,360 14.00% N/A
Mid-Peninsula Bank........... 22,810 9.94 1 9,179 14.00 1$13,769 1 6.00%
Cupertino National Bank and
Trust....................... 21,515 7.70 1 11,173 14.00 1 16,759 1 6.00
Tier 1 Capital (To Average
Assets):
GREATER BAY BANCORP.......... $44,530 7.27% 1$24,496 14.00% N/A
Mid-Peninsula Bank........... 22,810 8.23 1 8,312 13.00 1$13,853 1 5.00%
Cupertino National Bank and
Trust....................... 21,515 6.42 1 13,412 14.00 1 16,765 1 5.00
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
----------------------------------------------
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES 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% 1$28,208 18.00% N/A
Mid-Peninsula Bank........... 22,280 14.90 1 11,959 18.00 1$14,949 110.00%
Cupertino National Bank and
Trust....................... 23,088 11.35 1 16,267 18.00 1 20,334 110.00
Tier 1 Capital (To Risk
Weighted Assets):
GREATER BAY BANCORP.......... $40,112 11.38% 1$14,104 14.00% N/A
Mid-Peninsula Bank........... 20,564 13.76 1 5,979 14.00 1$ 8,969 1 6.00%
Cupertino National Bank and
Trust....................... 17,546 8.62 1 8,134 14.00 1 12,201 1 6.00
Tier 1 Capital (To Average
Assets):
GREATER BAY BANCORP.......... $40,112 8.69% 1$18,464 14.00% N/A
Mid-Peninsula Bank........... 20,564 9.31 1 6,628 13.00 1$11,046 1 5.00%
Cupertino National Bank and
Trust....................... 17,546 7.32 1 9,591 14.00 1 11,989 1 5.00
</TABLE>
F-22
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-23
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 the
loan. The estimate of maturity is based on the Company's historical experience
with repayments for each
F-26
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
Non-interest income..... 811 587 904 554 872 602 943 563
Non-interest 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-27
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE
CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 19
Accounting Treatment...................................................... 19
Capitalization............................................................ 20
Regulatory Capital Ratios................................................. 20
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 40
Supervision and Regulation................................................ 46
Management................................................................ 55
Certain Relationships and Related Transactions............................ 64
Security Ownership of Certain Beneficial Owners and Management............ 65
Description of the Trust Preferred Securities............................. 66
Description of Junior Subordinated Debentures............................. 78
Book-Entry Issuance....................................................... 88
Description of Guarantee.................................................. 90
Relationship among the Trust Preferred Securities, the Junior Subordinated
Debentures and the Guarantee............................................. 92
Certain Federal Income Tax Consequences................................... 94
Description of Greater Bay Bancorp Capital Stock.......................... 97
Underwriting.............................................................. 99
Legal Matters............................................................. 99
Experts................................................................... 99
Available Information..................................................... 100
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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Until April 18, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
800,000 TRUST PREFERRED SECURITIES
GBB Capital I
9.75% Cumulative Trust Preferred Securities
(Liquidation Amount $25 per Trust Preferred Security)
Fully and Unconditionally Guaranteed,
as Described Herein, by
GREATER BAY BANCORP
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P R O S P E C T U S
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Piper Jaffray inc.
MARCH 24, 1997
