GREATER BAY BANCORP, 8-K, 1998-09-30

GREATER BAY BANCORP
8-K, 1998-09-30
NATIONAL COMMERCIAL BANKS

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<PAGE>

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 29, 1998

GREATER BAY BANCORP
(Exact name of registrant as specified in its charter)

CALIFORNIA 77-0387041
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)

COMMISSION FILE NUMBER: 0-25034

2860 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices and zip code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 813-8200

================================================================================
<PAGE>

ITEM 5. OTHER ITEMS.

On August 14, 1998, Greater Bay Bancorp (the "Registrant"), reported
interim operating results for the three-month and six-month periods ended June
30, 1998 in its Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998. This was the first financial information to be published
following the business combination with Pacific Rim Bancorporation ("PRB"), and
its wholly owned banking subsidiary, Golden Gate Bank ("GGB"), which was
consummated on May 8, 1998 and accounted for as a pooling of interests.

Consolidated Financial Statements for the years ended December 31, 1997,
1996 and 1995, have been restated on a historical basis to give retroactive
effect to the Registrant's merger with PRB on a pooling-of-interests basis (See
Exhibit 99.1).

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.

Exhibits.
- --------

27.1 Restated Financial Data Schedules for the years ended
December 31, 1997 and 1996 (included in electronic filing through EDGAR)

27.2 Restated Financial Data Schedules for the year ended
December 31, 1995 (included in electronic filing through EDGAR)

99.1 Consolidated Financial Statements and Supplementary Data
(restated to include PRB and GGB)

For the Years Ended December 31, 1997, 1996 and 1995:

Five-Year Selected Data
Management's Discussion and Analysis
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997,1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants

2
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.

GREATER BAY BANCORP
(Registrant)

Dated: September 29, 1998 By: /s/ STEVEN C. SMITH
-----------------------------------
Steven C. Smith
Executive Vice President, Chief
Operating Officer and Chief Financial
Officer

3
<PAGE>

EXHIBIT INDEX
-------------

Exhibits.
- --------

27.1 Restated Financial Data Schedules for the years ended
December 31, 1997 and 1996 (included in electronic filing through EDGAR)

27.2 Restated Financial Data Schedules for the year ended
December 31, 1995 (included in electronic filing through EDGAR)

99.1 Consolidated Financial Statements and Supplementary Data
(restated to include PRB and GGB)

For the Years Ended December 31, 1997, 1996 and 1995:

<PAGE>

<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 53,000 49,959
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 75,000 32,400
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 166,413 70,924
<INVESTMENTS-CARRYING> 44,461 63,176
<INVESTMENTS-MARKET> 45,246 63,535
<LOANS> 718,529 553,603
<ALLOWANCE> (16,903) (9,996)
<TOTAL-ASSETS> 1,200,319 909,092
<DEPOSITS> 1,071,148 821,133
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 10,434 6,233
<LONG-TERM> 23,000 3,000
0 0
0 0
<COMMON> 52,218 50,025
<OTHER-SE> 23,816 16,791
<TOTAL-LIABILITIES-AND-EQUITY> 1,200,319 909,092
<INTEREST-LOAN> 66,907 48,002
<INTEREST-INVEST> 14,541 9,528
<INTEREST-OTHER> 3,951 3,183
<INTEREST-TOTAL> 85,399 60,713
<INTEREST-DEPOSIT> 30,639 21,220
<INTEREST-EXPENSE> 32,872 21,701
<INTEREST-INCOME-NET> 52,527 39,012
<LOAN-LOSSES> 6,492 2,419
<SECURITIES-GAINS> (5) (255)
<EXPENSE-OTHER> 35,144 31,399
<INCOME-PRETAX> 17,475 9,852
<INCOME-PRE-EXTRAORDINARY> 17,475 9,852
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11,011 5,878
<EPS-PRIMARY> 1.24 0.69
<EPS-DILUTED> 1.15 0.64
<YIELD-ACTUAL> 8.85 9.02
<LOANS-NON> 2,971 4,616
<LOANS-PAST> 158 1,237
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 9,996 6,603
<CHARGE-OFFS> (1,805) (471)
<RECOVERIES> 60 645
<ALLOWANCE-CLOSE> 16,093 9,996
<ALLOWANCE-DOMESTIC> 16,093 9,996
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0

</TABLE>

<PAGE>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 38,600
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 55,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 80,236
<INVESTMENTS-CARRYING> 61,275
<INVESTMENTS-MARKET> 61,717
<LOANS> 388,504
<ALLOWANCE> 5,456
<TOTAL-ASSETS> 654,176
<DEPOSITS> 584,355
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,330
<LONG-TERM> 3,000
0
0
<COMMON> 48,108
<OTHER-SE> 13,223
<TOTAL-LIABILITIES-AND-EQUITY> 654,176
<INTEREST-LOAN> 40,843
<INTEREST-INVEST> 8,160
<INTEREST-OTHER> 3,087
<INTEREST-TOTAL> 52,090
<INTEREST-DEPOSIT> 17,743
<INTEREST-EXPENSE> 18,589
<INTEREST-INCOME-NET> 33,501
<LOAN-LOSSES> 1,160
<SECURITIES-GAINS> (106)
<EXPENSE-OTHER> 27,537
<INCOME-PRETAX> 7,879
<INCOME-PRE-EXTRAORDINARY> 7,879
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,010
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 9.41
<LOANS-NON> 4,833
<LOANS-PAST> 830
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,938
<CHARGE-OFFS> (1,846)
<RECOVERIES> 351
<ALLOWANCE-CLOSE> 6,603
<ALLOWANCE-DOMESTIC> 6,603
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>

<PAGE>

EXHIBIT 99.1

FINANCIAL HIGHLIGHTS
The following table presents the selected financial information at and for the
five years ended December 31, 1997.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997* 1996* 1995* 1994* 1993*
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Interest income............................................. $ 85,399 $ 60,713 $ 52,090 $ 39,832 $ 35,365
Interest expense............................................ 32,872 21,701 18,589 11,747 10,313
---------- ---------- ---------- ---------- ----------
Net interest income......................................... 52,527 39,012 33,501 28,085 25,052
Provision for loan losses .................................. 4,043(1) 2,419 1,160 1,963 2,315
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses......... 48,484 36,593 32,341 26,122 22,737
Other income, recurring..................................... 5,423 4,658 3,075 4,124 4,138
Operating expenses, excluding nonrecurring items............ 33,099 28,608 25,402 22,563 21,791
---------- ---------- ---------- ---------- ----------
Income before income tax expense and nonrecurring items..... 20,808 12,643 10,014 7,683 5,084
Income tax expense.......................................... 7,515 4,774 3,669 2,793 1,825
---------- ---------- ---------- ---------- ----------
Income before nonrecurring items............................ 13,293 7,869 6,345 4,890 3,259
Nonrecurring items, net of tax.............................. 2,282 1,991 1,335 608 --
---------- ---------- ---------- ---------- ----------
Net Income.................................................. $ 11,011 $ 5,878 $ 5,010 $ 4,282 $ 3,259
========== ========== ========== ========== ==========
Net Income per share (2)
Basic..................................................... $ 1.24 $ 0.69 $ 0.62 $ 0.57 $ 0.45
Diluted................................................... $ 1.15 $ 0.64 $ 0.59 $ 0.52 $ 0.41
Dividends per share (2)(3).................................. $ 0.30 $ 0.22 $ 0.24 $ 0.17 $ 0.11
Average common and common equivalent shares
outstanding................................................ 9,594,480 9,144,776 8,515,404 8,187,104 8,021,340
OPERATING RATIOS AND OTHER DATA
Return on average assets (4)................................ 1.07% 0.80% 0.83% 0.81% 0.63%
Return on average common shareholders' equity (4)........... 14.94% 9.14% 8.78% 8.47% 7.13%
Net interest margin (5)..................................... 5.45% 5.81% 6.07% 5.81% 5.44%
Net (charge-offs) recoveries to average loans............... (0.27)% 0.04% (0.41)% (0.32)% (0.55)%
FINANCIAL CONDITION DATA (AT PERIOD END)
Assets...................................................... $1,200,319 $ 909,092 $ 654,176 $ 549,871 $ 513,847
Loans, net.................................................. 718,529 553,603 388,504 345,267 335,408
Investment securities (6)................................... 213,127 135,671 141,024 117,738 79,221
Deposits.................................................... 1,071,148 821,133 584,355 475,047 462,654
Subordinated debt........................................... 3,000 3,000 3,000 -- --
Trust Preferred Securities.................................. 20,000 -- -- -- --
Common shareholders' equity................................. 76,257 66,726 60,629 52,776 48,280
Book value per common share................................. 8.47 7.65 7.29 6.81 6.56
FINANCIAL CONDITION RATIOS
Nonperforming assets to total assets........................ 0.46% 1.03% 1.48% 2.24% 1.94%
Allowance for loan losses to total loans.................... 2.18% 1.77% 1.66% 1.99% 1.81%
Allowance for loan losses to non--performing assets........ 292.91% 106.86% 68.33% 56.38% 60.86%
REGULATORY CAPITAL RATIOS
Tier 1 Capital.............................................. 10.90% 9.97% 12.63% 13.19% 13.36%
Total Capital............................................... 12.49% 11.62% 14.48% 14.52% 14.71%
Leverage Ratio.............................................. 8.48% 7.84% 9.61% 9.95% 10.10%
</TABLE>
- --------------
* Restated on a historical basis to reflect the mergers discussed in Note 2 of
the Notes to the Consolidated Financial Statements.

(1) Does not include $2.4 million of non-recurring charges in 1997 to conform
accounting practices for the reserve methodologies as part of the 1997
acquisition of Peninsula Bank of Commerce (PBC) by Greater Bay. Including
these charges the total provision for loan losses was $6.4 million.
(2) Restated to reflect 2-for-1 stock split effective for shareholders of
record as of April 30, 1998.
(3) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by Cupertino National Bank (CNB) prior to the 1996 merger,
PBC prior to the 1997 merger and by Pacific Rim Bancorporation (PRB), the
former holding company of Golden Gate Bank, prior to the 1998 merger. In
1996 CNB declared and paid dividends of $0.10 per share to its
shareholders. PBC declared and paid annual dividends of $3.20 and $1.35 per
share in 1997 and 1996, respectively. In 1997 PRB declared and paid
dividends of $100,000 to its sole shareholder. On a consolidated basis,
Greater Bay has declared dividends of $0.52 and $0.30 per share in 1997 and
1996, respectively.
(4) Excluding nonrecurring items, net of tax, of $2.4 million in 1997, $2.0
million in 1996, $1.3 million in 1995 and $0.6 million in 1994, ROA for
1997, 1996, 1995 and 1994 would have been 1.29%, 1.07%, 1.06% and 0.61%,
respectively, and ROE for 1997, 1996, 1995 and 1994 would have been 18.03%,
12.24%, 11.12% and 6.36%, respectively.
(5) Net interest margin for 1997 and 1996 includes the lower spread earned on
the PBC Special Deposit (see Note 7 of Notes to the Consolidated Financial
Statements for details). Excluding the PBC Special Deposit, net interest
margin would have been 5.78% and 6.08% for 1997 and 1996, respectively.
(6) Includes available-for-sale securities and held-to-maturity securities.
<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 in
November 1996 between Cupertino National Bancorp, the holding company for
Cupertino National Bank ("CNB"), and Mid-Peninsula Bancorp, the holding company
for Mid-Peninsula Bank ("MPB"). In December 1997, the Company completed a merger
with Peninsula Bank of Commerce ("PBC"), whereby PBC joined CNB and MPB as the
third wholly owned banking subsidiary of Greater Bay (collectively, the
"Banks"). Both mergers were accounted for as pooling of interests. On May 8,
1998, the Company consummated the acquisition of Golden Gate Bank, a California
state chartered bank ("GGB") and a wholly owned subsidiary of Pacific Rim
Bancorporation, a California corporation ("PRB"), through the merger of PRB with
and into Greater Bay, with Greater Bay surviving the merger and thereafter
holding GGB as a banking subsidiary. The merger was accounted for as a pooling
of interests.

CNB, MPB, PBC and GGB are referred to collectively herein as the "Banks."
All of the financial information for the Company presented in the following
discussion and analysis for the periods prior to each of the mergers has been
restated to reflect the pooling of interests, as if they 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
"Financial Highlights" and the Company's consolidated financial data included
elsewhere herein. Certain statements under this caption constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which involve risks and uncertainties. The Company's actual results may
differ significantly from the results discussed in such forward-looking
statements. Factors that might cause such a difference include but are not
limited to economic conditions, competition in the geographic and business areas
in which the Company conducts its operations, fluctuation in interest rates,
credit quality and government regulation.

RESULTS OF OPERATIONS

The Company reported net income of $11.0 million in 1997, an 87.0% increase
over 1996 net income of $5.9 million. The net income in 1996 was a 17.0%
increase over 1995 income of $5.0 million. Basic net income per share was $1.24
for 1997, as compared to $0.69 for 1996 and $0.62 for 1995, while diluted net
income per share was $1.15, $0.64 and $0.59 for 1997, 1996 and 1995,
respectively. The return on average assets and return on average shareholders'
equity were 1.07% and 14.94% in 1997, compared with 0.80% and 9.14% in 1996 and
0.83% and 8.78% in 1995, respectively.

The increase in 1997 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 1997 operating results included $3.3 million ($2.3
million net of tax) in merger and other related charges. Excluding these
charges, the Company's net income, basic and diluted net income per share,
return on average shareholders' equity and return on average assets would have
been $13.3 million, $1.49, $1.39, 18.03% and 1.29%, respectively.
<PAGE>

Net income for 1997 included $1.2 million in warrant income resulting from
the exercise of warrants and sale of the underlying shares of common stock of
two clients of the Banks. The Company occasionally receives warrants to acquire
common stock from companies that are in the start-up or development phase. The
timing and amount of income derived from the exercise and sale of client
warrants typically depend upon factors beyond the control of the Company, and
cannot be predicted with any degree of accuracy and are likely to vary
materially from period to period. Net income also included approximately $1.7
million ($1.0 million net of tax) of a recovery through insurance of a
litigation settlement charge incurred in 1995. In addition, during 1997 the
Company increased its loan loss reserve to 2.18% of total loans from 1.77% of
total loan in 1996. The increase in the loan loss reserve as a percentage of
total loans accounted for $3.7 million of the increased loan loss provision in
1997 and was recorded to account for the significant growth in unseasoned loans.

The increase in net income in 1996 over 1995 was due primarily to increased
growth in interest-earning assets, which was partially offset by the growth in
operating expenses. The operating results in 1996 included $2.8 million ($2.0
million net of taxes) in merger and other nonrecurring charges. Excluding these
charges, the Company's net income, basic and diluted net income per share,
return on average shareholders' equity and return on average assets would have
been $7.9 million, $0.92, $0.86, 12.24% and 1.07%, respectively.

Net Interest Income

Net interest income increased 35.0% to $52.5 million in 1997 from $39.0
million in 1996 primarily due to the $291.6 million, or 43.0% increase in
average interest-earning assets which was partially offset by a 41 basis point
decrease in the Company's interest rate spread. The decrease in the 1997
interest rate spread was due primarily to the low spread earned on PBC's Special
Deposit (discussed in Note 7 of the Notes to the Consolidated Financial
Statements). The average investment and deposit balances related to the Special
Deposit during 1997 were $93.4 million and $91.3 million, respectively, on which
the Company earned a spread of 2.25%. Excluding PBC's Special Deposit, the 1997
and 1996 interest rate spread would have been 5.78% and 6.08%, respectively. Net
interest income increased 16.5% in 1996 from $33.5 million in 1995 primarily due
to the combined effects of the $121.4 million, or 21.8% increase in average
interest-earning assets, which was partially offset by the 24 basis point
decrease in the Company's interest rate spread.
<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 average daily
balances.

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------
AVERAGE AVERAGE
-------- --------
Average YIELD/ AVERAGE YIELD/
-------------- -------- ------------ --------
(Dollars in thousands) BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
-------------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS:
Loans(2)............................ $ 650,190 $66,907 10.29% 459,326 $48,002 10.45%
Investment securities, short term
investments and Fed funds
sold(3)............................ 318,729 18,782 5.89% 218,000 13,067 5.99%
---------- ------- -------- -------
Total interest-earning
assets(3)......................... 968,919 85,689 8.85% 677,326 61,069 9.02%
---------- ------- -------- -------
Noninterest-earning assets.......... 63,032 54,697
---------- --------
Total assets...................... $1,031,951 85,689 $732,023 61,069
========== ------- ======== -------
INTEREST-BEARING
LIABILITIES:
Deposits:
MMDA, NOW and Savings.............. $ 575,603 20,652 3.59% $390,996 12,887 3.30%
Time deposits...................... 188,333 9,987 5.30% 153,286 8,333 5.44%
---------- ------- -------- -------
Total deposits.................... 763,936 30,639 4.01% 544,282 21,220 3.90%
Borrowings......................... 24,971 2,233 8.94% 8,191 481 5.87%
---------- ------- -------- -------
Total interest-bearing
liabilities...................... 788,907 32,872 4.17% 552,473 21,701 3.93%
---------- ------- -------- -------
Noninterest-bearing deposits........ 161,684 112,321
Other noninterest-bearing
liabilities........................ 7,648 2,922
Shareholders' equity................ 73,712 64,307
---------- --------
Total liabilities and
shareholders' equity............. $1,031,951 32,872 $732,023 21,701
========== ------- ======== -------
Net interest income................. $52,817 $39,368
======= =======
Interest rate spread................ 4.68% 5.09%
Contribution of interest free
funds.............................. 0.77% 0.72%
Net yield on interest-earnings
assets(4).......................... 5.45% 5.81%

<CAPTION>
--------------------------------
1995
--------------------------------
AVERAGE AVERAGE
------------ --------
RATE YIELD/
------------ --------
(Dollars in thousands) BALANCE(1) INTEREST RATE
------------ -------- --------
<S> <C> <C> <C>
INTEREST-EARNING
ASSETS:
Loans(2)............................ $367,968 $40,843 11.10%
Investment securities, short term
investments and Fed funds
sold(3)............................ 187,975 11,480 6.11%
-------- -------
Total interest-earning
assets(3)......................... 555,943 52,323 9.41%
-------- -------
Noninterest-earning assets.......... 44,463
--------
Total assets...................... $600,406 52,323
======== -------
INTEREST-BEARING
LIABILITIES:
Deposits:
MMDA, NOW and Savings.............. $297,607 10,034 3.37%
Time deposits...................... 144,210 7,709 5.35%
-------- -------
Total deposits.................... 441,817 17,743 4.02%
Borrowings......................... 13,334 846 6.34%
-------- -------
Total interest-bearing
liabilities...................... 455,151 18,589 4.08%
-------- -------
Noninterest-bearing deposits........ 84,094
Other noninterest-bearing
liabilities........................ 4,090
Shareholders' equity................ 57,071
--------
Total liabilities and
shareholders' equity............. $600,406 18,589
======== -------
Net interest income................. $33,734
=======
Interest rate spread................ 5.33%
Contribution of interest free
funds.............................. 0.74%
Net yield on interest-earnings
assets(4).......................... 6.07%
</TABLE>

- --------------
(1) Nonaccrual loans are included in the average balance; however, only
collected interest is included in the interest column.
(2) Loan fees totaling $3.6 million, $2.7 million and $2.0 million are included
in loan interest income for the years 1997, 1996 and 1995, respectively.
(3) Interest income includes $290,000, $356,000 and $233,000 in 1997, 1996 and
1995, 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.

The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of interest-earning asset dollars in loans and investments, compared to
the volume of interest-bearing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in the net interest
income between periods. The table below sets forth, for the periods indicated, a
summary of the changes in average asset and liability balances (volume) and
changes in average interest rates (rate).

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------------- -----------------------------------
COMPARED WITH DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995
------------------------------------- -----------------------------------
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
------------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS) (1) (2) VOLUME RATE NET VOLUME RATE NET
----------- ------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON INTEREST--
EARNING ASSETS:
Interest income on loans.......................... $19,650 $ (745) $18,905 $ 9,661 $(2,502) $7,159
Interest income on investment securities, short-
term investments and cash equivalents............ 5,940 (225) 5,715 1,804 (217) 1,587
------- ------- ------- ------- ------- ------
Total interest income........................... 25,590 (970) 24,620 11,465 (2,719) 8,746
------- ------- ------- ------- ------- ------
INTEREST EXPENSE ON INTEREST-
BEARING LIABILITIES:
Interest expense on deposits:
MMDA, NOW and Savings........................... 6,537 1,228 7,765 3,098 (245) 2,853
Time deposits................................... 1,864 (210) 1,654 489 135 624
------- ------- ------- ------- ------- ------
Total interest expense on deposits................ 8,401 1,018 9,419 3,587 (110) 3,477
Interest expense on borrowings.................... 1,396 356 1,752 (306) (59) (365)
------- ------- ------- ------- ------- ------
Total interest expense.......................... 9,797 1,374 11,171 3,281 (169) 3,112
------- ------- ------- ------- ------- ------
Increase (decrease) in net interest income........ $15,793 $(2,344) $13,449 $ 8,184 $(2,550) $5,634
======= ======= ======= ======= ======= ======
</TABLE>

- --------------
(1) Interest income includes $290,000, $356,000 and $233,000 for 1997, 1996 and
1995, respectively, to adjust to a fully taxable equivalent basis using the
federal statutory rate of 34%.
(2) The change in interest income and expense not attributable to specific
volume and rate changes has been reflected as volume variances. Nonaccrual
loans are included in average loans.

Interest income in 1997 increased 40.3% to $85.7 million from $61.1 million in
1996. This was primarily due to the significant increase in loans, the Company's
highest yielding interest-earning asset. Loan volume increases were the result
of the continuing economic improvement in the Company's market areas, as well as
the addition of experienced relationship managers and significant business
development efforts by the Company's relationship managers. The increase was
partially offset by a decline in the yield earned on average interest-earning
assets. While average interest-earning assets increased $291.6 million, or 43.0%
to $968.9 million in 1997, compared to $677.3 million in 1996, average loans
increased $190.9 million, or 41.2% to $650.2 million, or 67.1% of average
interest-earning assets, in 1997 from $459.3 million, or 67.8% of average
interest-earning assets in 1996. Investment securities, Federal funds sold and
other short-term investments, the Company's other interest-earning assets,
increased 46.2% to $318.7 million, or 32.9% of average interest-earning assets
in 1997, from $218.0 million, or 32.2% of average interest-earning assets in
1996.

The average yield on interest-earning assets declined 17 basis points to 8.85%
in 1997 from 9.02% in 1996 primarily due to the decline in the yields on loans
which was caused by increased competition for quality borrowers in the Company's
market area. The average yield on loans declined 16 basis points to 10.29% in
1997 from 10.45% in 1996 primarily due to increased competition as discussed
above. The average yield on other interest-earning assets declined 10 basis
points to 5.89% in 1997, compared to 5.99% in 1996.

Interest expense in 1997 increased 51.6% to $32.9 million from $21.7 million
in 1996. This increase was due to greater volumes of interest-bearing
liabilities coupled with slightly higher interest rates paid on interest-bearing
liabilities. Average interest-bearing liabilities increased 42.8% to $788.9
million in 1997 from $552.5 million in 1996 due primarily to the efforts of the
Banks' relationship managers in generating core deposits from their client
relationships and the deposits derived from the activities of the Greater Bay
Trust Company and the Venture Banking Group.

During 1997, average noninterest-bearing deposits increased to $161.7 million
from $112.3 million in 1996. Due to that increase, noninterest-bearing deposits
comprised 17.5% of total deposits at year end 1997, compared 17.1% at year end
1996.

As a result of the foregoing, the Company's interest rate spread declined to
4.68% in 1997 from 5.09% in 1996 and the net yield on interest-earning assets
declined in 1997 to 5.45% from 5.81% in 1996.

Interest income increased 16.5% to $60.7 million in 1996 from $52.1 million in
1995, as a result of the increase in average interest-earning assets offset by a
decline in the yields earned. Average interest-earning assets increased 21.8% to
$677.3 million in 1996 from $555.9 million in 1995 as a result of almost
proportionate increases in both loans and other interest-
<PAGE>

earning assets. The yield on the higher volume of average interest-earning
assets declined 39 basis points to 9.02% in 1996 from 9.41% in 1995, primarily
as a result of decreases in market rates of interest.

Interest expense in 1996 increased 16.7% to $21.7 million from $18.6 million
in 1995 primarily as a result of the increase in volume of interest-bearing
liabilities offset by a slight decrease in rates paid on interest-bearing
liabilities. As a result of decreases in market rates of interest, the average
rate paid on average interest-bearing liabilities declined 15 basis points to
3.93% in 1996 from 4.08% in 1995. Corresponding to the growth in average
interest-earning assets, average interest-bearing liabilities increased 21.4% to
$552.5 million in 1996 from $455.2 million in 1995.

As a result of the foregoing, the Company's interest rate spread declined to
5.09% in 1996 from 5.33% in 1995 and the net yield on interest-earning assets
declined to 5.81% in 1996 from 6.07% in 1995.

Certain client service expenses were incurred by the Company with respect to
its noninterest-bearing liabilities. These expenses include messenger services,
check supplies and other related items and are included in operating expenses.
Had they been included in interest expense, the impact of these expenses on the
Company's net yield on interest-earning assets would have been as follows for
each of the years presented.

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
(Dollars in thousands) 1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Average noninterest bearing demand deposits......................... $161,684 $112,321 $84,094
Client service expenses............................................. 444 462 389
Client service expense, annualized.................................. 0.27% 0.41% 0.46%

IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS:
Net yield on interest-earning assets................................ 5.45% 5.81% 6.07%
Impact of client service expense.................................... (0.05)% (0.07)% (0.07)%
-------- -------- -------
Adjusted net yield on interest-earning assets (1)................... 5.40% 5.74% 6.00%
======== ======== =======
</TABLE>

- --------------
(1) Noninterest-bearing liabilities are included in cost of funds calculations
to determine adjusted net yield of spread.

The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets. The cost for client service
expense reflects the Company's efforts to manage its client service expenses.

Provision for Loan Losses

The provision for loan losses creates an allowance for future loan losses. The
loan loss provision for each year is dependent on many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in the Company's market area. The Company performs a monthly
assessment of the risk inherent in its loan portfolio, as well as a detailed
review of each asset determined to have identified weaknesses. Based on this
analysis, which includes reviewing historical loss trends, current economic
conditions, industry concentrations and specific reviews of assets classified
with identified weaknesses, the Company makes a provision for 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
fluctuations in the provision for loan losses result from management's
assessment of the adequacy of the allowance for loan losses, and ultimate loan
losses may vary from current estimates.

The provision for loan losses in 1997 was $6.4 million, compared to $2.4
million in 1996 and $1.2 million in 1995. In addition, in connection with the
mergers, the Company made $1.4 million and $800,000 in additional provision for
loan losses in 1997 and 1996, respectively, to conform the Banks' reserve
allocation methodologies, which are included in operating expenses. The
increased provision for loan losses during 1997 reflects the impact of the
$171.4 million increase in gross loans outstanding at December 31,
<PAGE>

1997 from year end 1996. Notwithstanding the substantial increase in loans
outstanding, nonperforming loans, comprised of nonaccrual loans, restructured
loans, and accruing loans past due 90 days or more, declined to $4.2 million or
0.57% of loans outstanding at December 31, 1997, from $7.7 million or 1.36% of
loans outstanding at December 31, 1996. The increased provision for loan losses
during 1996 of $2.4 million, as compared to $1.2 million during 1995, reflected
the higher level of nonperforming loans experienced by the Company. At December
31, 1996, nonperforming loans were $7.7 million, as compared to $7.2 million at
December 31, 1995.

For further information on nonperforming and classified loans and the
allowance for loan losses, see--"Nonperforming and Classified Assets" herein.

Other Income

Total other income increased to $6.6 million in 1997, compared to $4.7 million
in 1996 and $3.1 million in 1995. The following table sets forth information by
category of other income for the years indicated.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Trust fees......................... $2,049 $1,426 $ 710
Depositors' service fees........... 1,620 1,429 1,265
Warrant income..................... 1,162 92 --
Gain on sale of SBA loans.......... 883 537 420
Investment losses.................. (5) (255) (106)
Other.............................. 875 1,429 786
------ ------ ------
Total........................... $6,584 $4,658 $3,075
====== ====== ======
</TABLE>

The increase in other income in 1997 was primarily the result of $1.1 million
increase in warrant income in 1997, a $623,000 increase in trust fees, and a
$346,000 increase in the gain on sale of Small Business Administration ("SBA")
loans. As previously discussed, the warrant income resulted from the sale of
stock acquired from clients in connection with financing activities. The
increase in trust fee was due to significant growth in assets under management
by Greater Bay Trust Company. Trust assets increased to $577.7 million at year
end 1997, compared to $418.0 million at December 31, 1996 and $270.0 million at
December 31, 1995. The increase in the gain on sale of SBA loans was due to an
increase in the origination and subsequent sale of SBA loans.

The increase in other income in 1996 as compared to 1995 was primarily the
result of a $716,000 increase in trust fees and a $164,000 increase in
depositors' service fees. The trust fee increase was due to significant growth
in assets under management by Greater Bay Trust Company as discussed above.
Depositors' service fees increased due to growth in deposits.

Operating Expenses

The following table sets forth the major components of operating expenses for
the years indicated.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Compensation and benefits............................................... $19,777 $16,122 $14,059
Occupancy and equipment................................................. 5,179 4,475 3,701
Mergers and related nonrecurring costs.................................. 3,333 2,791 --
Professional services and legal costs................................... 1,735 1,676 1,785
Client service expenses................................................. 444 462 389
FDIC insurance and regulatory assessments............................... 285 148 749
Expenses on other real estate owned..................................... 177 175 628
Other................................................................... 4,214 5,550 6,226
------- ------- -------
Total operating expenses............................................. $35,144 $31,399 $27,537
Nonrecurring costs...................................................... 2,046 2,791 2,135
======= ======= =======
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total operating expenses excluding nonrecurring costs................ $33,098 $28,608 $25,402
======= ======= =======
Efficiency ratio........................................................ 59.45% 71.90% 75.29%
Efficiency ratio, excluding nonrecurring costs.......................... 55.99% 65.51% 69.45%
Total operating expenses to average assets.............................. 3.41% 4.29% 4.59%
Total operating expenses to average assets, excluding nonrecurring
costs................................................................. 3.21% 3.91% 4.23%
</TABLE>

Operating expenses totaled $35.1 million for 1997, compared to $31.4 million
for 1996 and $27.5 million for 1995. The ratio of operating expenses to average
assets was 3.41% in 1997, 4.29% in 1996, and 4.59% in 1995. Nonrecurring costs
in 1997 included $3.3 million in merger and related nonrecurring costs and were
offset by $1.7 million legal settlement recovery. 1996 nonrecurring costs
included $2.8 million in merger and related nonrecurring costs. 1995
nonrecurring costs included $1.7 million in legal settlement costs and $435,000
related to the closing of CNB's mortgage banking business unit and terminated
merger discussions. Excluding these items, operating expense to average assets
would have been 3.21% in 1997, 3.91% in 1996 and 4.23% in 1995.

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 1997 was 59.45%, compared to
71.90% in 1996 and 75.29% in 1995. Excluding nonrecurring costs, the Company's
efficiency ratios were 55.99%, 65.51% and 69.45% in 1997, 1996 and 1995,
respectively. The improvement in the Company's efficiency ratio in 1997 and 1996
was due to the investment in infrastructure in 1995 and prior, which allowed the
Company to grow its revenue base in 1996 and 1997 without comparable increases
in operating expenses.

Compensation and benefits expenses increased in 1997 to $19.8 million compared
to $16.1 million in 1996 and $14.1 million in 1995. The increase in compensation
and benefits is due primarily to the additions in personnel made in 1997 and
1996 to accommodate the growth of the Company.

The increase in occupancy and equipment expense in 1997 was primarily the
result of the opening of the Company's new administrative offices in Palo Alto
and the relocation of one of MPB's branches from San Carlos to Redwood City. The
increase in occupancy and equipment expense in 1996 was primarily due to the
opening of CNB's Emerson office and the Greater Bay Trust Company office in
downtown Palo Alto.

Federal Deposit Insurance Corporation (''FDIC'') deposit insurance and Office
of the Comptroller of the Currency (''OCC'') regulatory assessments increased to
$285,000 in 1997, compared to $148,000 in 1996, and $749,000 in 1995. Deposit
levels increased 41.0% from 1996 to 1997, resulting in the increase in FDIC
deposit insurance premiums. The decrease from 1995 to 1996 was a result of the
lowering of deposit insurance premiums by the FDIC when the Bank Insurance Fund
was fully funded as of March 1995.

The increase in other operating expenses was related to the growth in the
Company's loans, deposits and trust assets. As indicated by the declining
efficiency ratio and ratio of total operating expenses to average assets from
1996 to 1997, the Company has been able to achieve economies of scale subsequent
to the November 1996 merger between Cupertino National Bancorp and Mid-Peninsula
Bancorp. From 1996 to 1997, average assets increased 41.0%, while operating
expenses excluding nonrecurring costs, increased only 15.7%. From 1995 to 1996
prior to the merger, average assets increased 21.9% and operating expenses,
excluding nonrecurring costs, increased 12.6%.

Income Taxes

The Company's effective income tax rate for 1997 was 36.99%, compared to
40.33% in 1996 and 36.4% in 1995. The effective rate in 1996 was higher than the
statutory rate due to the impact of nondeductible merger and related costs which
were partially offset by tax-exempt income on municipal securities. The
effective rates in 1997 and 1995 were lower than the statutory rate due to tax-
exempt income on municipal securities.

FINANCIAL CONDITION
<PAGE>

Total assets increased 32.0% to $1.2 billion at December 31, 1997, compared to
$909.1 million at December 31, 1996. Total assets increased 39.0% in 1996 from
$654.2 million at December 31, 1995. The increases in 1997 and 1996 were
primarily due to increases in the Company's loan portfolio funded by growth in
deposits. As previously discussed, included in total assets at December 31, 1997
and 1996 were the invested proceeds of a Special Deposit of $88.1 million and
$94.4 million, respectively. This deposit was received in late 1996 and
management anticipates that this deposit will be withdrawn at some point in
1998. Without this deposit, total assets would have grown 36.5% and 24.5% in
1997 and 1996, respectively.

Loans

Total gross loans increased 30.3% to $737.4 million at December 31, 1997,
compared to $566.1 million at December 31, 1996. Total gross loans increased
42.5% in 1996 from $397.3 million at year end 1995. The increases in loan
volumes in 1997 and 1996 were primarily due to an improving economy in the
Company's market areas coupled with the business development efforts by the
Company's relationship managers.

The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the balance
in consumer loans. While no specific industry concentration is considered
significant, the Company's lending operations are located in a market area that
is dependent on the technology and real estate industries and supporting service
companies. Thus, the Company's borrowers could be adversely impacted by a
downturn in these sectors of the economy, which could reduce the demand for
loans and adversely impact the borrowers' abilities to repay their loans, while
also decreasing the Company's net interest margin.

The following table presents the composition of the Company's loan portfolio
at the dates indicated.

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........................... $345,742 48.1% $290,724 52.5% $216,306 55.7% $190,889 55.3%
Real estate construction and land.... 112,514 15.7 92,820 16.8 43,929 11.3 33,930 9.8
Real estate term..................... 196,217 27.3 126,651 22.9 96,704 24.9 87,068 25.2
Consumer and other................... 82,914 11.5 55,893 10.0 40,409 10.4 37,534 10.9
-------- ----- -------- ----- -------- ----- -------- -----
Total loans, gross................. 737,387 102.6 566,088 102.2 397,348 102.3 349,421 101.2
Deferred fees and discounts, net..... (2,765) (0.4) (2,489) (0.4) (2,241) (0.6) (2,600) (0.8)
-------- ----- -------- ----- -------- ----- -------- -----
Total loans, net of deferred
fees.............................. 734,622 102.2 563,599 101.8 395,107 101.7 346,821 100.4
Allowance for loan losses............ (16,093) (2.2) (9,996) (1.8) (6,603) (1.7) (6,938) (2.0)
-------- ----- -------- ----- -------- ----- -------- -----
Net loans.......................... 718,529 100.0 553,603 100.0 388,504 100.0 339,883 98.4
Loans held for sale.................. -- 0.0 -- 0.0 -- 0.0 5,384 1.6
-------- ----- -------- ----- -------- ----- -------- -----
Total loans........................ $718,529 100.0% $553,603 100.0% $388,504 100.0% $345,267 100.0%
======== ===== ======== ===== ======== ===== ======== =====

<CAPTION>
1993
------------------
(DOLLARS IN THOUSANDS) AMOUNT %
---------- ------
<S> <C> <C>
Commercial........................... $177,739 53.0%
Real estate construction and land.... 37,427 11.2
Real estate term..................... 67,198 20.0
Consumer and other................... 53,113 15.8
-------- -----
Total loans, gross................. 335,477 100.0
Deferred fees and discounts, net..... (1,621) (0.5)
-------- -----
Total loans, net of deferred
fees.............................. 333,856 99.5
Allowance for loan losses............ (6,073) (1.8)
-------- -----
Net loans.......................... 327,783 97.7
Loans held for sale.................. 7,625 2.3
-------- -----
Total loans........................ $335,408 100.0%
======== =====
</TABLE>

The following table presents the maturity distribution of the Company's
commercial, real estate construction and land and real estate term portfolios
and the sensitivity of such loans to changes in interest rates at December 31,
1997.

<TABLE>
<CAPTION>
REAL ESTATE
------------
(DOLLARS IN THOUSANDS) CONSTRUCTION REAL ESTATE
------------ -----------
COMMERCIAL AND LAND TERM
---------- ------------ -----------
<S> <C> <C> <C>
Loan maturing in:
One year or less:
Fixed rate.......... $ 17,272 $ 2,180 $ 8,305
Variable rate....... $ 180,913 $ 96,290 $ 22,986
One to five years:
Fixed rate.......... $ 17,864 $ 3,556 $ 11,627
Variable rate....... $ 74,263 $ 6,159 $ 36,309
After five years:
Fixed rate.......... $ 16,895 $ 144 $ 61,734
Variable rate....... $ 38,535 $ 4,215 $ 55,256
---------- ---------- ----------
Total............ $ 345,742 $ 112,514 $ 196,217
</TABLE>
<PAGE>

Nonperforming and Classified Assets

Management generally places loans on nonaccrual status when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued but
not collected is generally reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where the Banks have granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. Other
real estate owned ("OREO") consists of real property acquired through
foreclosure on the related collateral underlying defaulted loans.

The following table sets forth information regarding nonperforming assets at
the dates indicated.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans.............................................. $2,971 $4,616 $4,833 $ 6,601 $5,974
Accruing loans past due 90 days or more....................... 158 1,237 830 1,518 1,922
Restructured loans............................................ 1,062 1,828 1,530 1,972 461
------ ------ ------ ------- ------
Total nonperforming loans.................................. 4,191 7,681 7,193 10,091 8,357
Other real estate owned......................................... 1,303 1,673 2,471 2,214 1,620
------ ------ ------ ------- ------
Total nonperforming assets................................. $5,494 $9,354 $9,664 $12,305 $9,977
====== ====== ====== ======= ======
Nonperforming assets to total loans and other real estate
owned....................................................... 0.75% 1.66% 2.45% 3.55% 2.99%
</TABLE>

At December 31, 1997, the Company had $3.0 million in nonaccrual loans.
Nonaccrual loans included loans with aggregate principal balances ranging from
$7,000 to $1.3 million. Interest income foregone on nonperforming loans
outstanding at year end totaled $479,000, $633,000 and $549,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.

The Company records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings through a provision for
losses on foreclosed property in the period in which they are identified. At
December 31, 1997, OREO consisted of three properties acquired through
foreclosure with a carrying value of $1.3 million.

The Company had $1,061,737 and $1,828,000 of restructured loans as of December
31, 1997 and 1996, respectively. Principal reduction concessions totaling
$386,505 were permitted on restructured loans during the year ended December 31,
1997. There were no principal reduction concessions allowed on restructured
loans during 1996. Interest income from restructured loans totaled $82,014 and
$317,295 for the years ended December 31, 1997 and 1996. Foregone interest
income, which totaled $9,977 and $7,672 for the years ended December 31, 1997
and 1996 would have been recorded as interest income if the loans had accrued
interest in accordance with their original terms prior to the restructures.

The policy of the Company is to review each loan in the portfolio to identify
problem credits. There are three classifications for problem loans:
"substandard," "doubtful" and "loss." Substandard loans have one or more
defined weakness and are characterized by the distinct possibility that the
Banks will sustain some loss if the deficiencies are not corrected. Doubtful
loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable; and there
is a high possibility of loss of some portion of the principal balance. A loan
classified "loss" is considered uncollectible and its continuance as an asset
is not warranted.

The following table sets forth the classified assets at the dates indicated.

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Substandard...................................................... $15,723 $ 8,908 $11,796
Doubtful......................................................... 1,377 1,760 789
Loss............................................................. 49 231 --
Other real estate owned.......................................... 1,303 1,673 2,471
------- ------- -------
Classified assets............................................. $18,452 $12,572 $15,056
======= ======= =======
Classified assets to total loans and other real estate owned..... 2.51% 2.23% 3.81%
Allowance for loan losses to total classified assets............. 87.21% 79.51% 43.86%
</TABLE>
<PAGE>

With the exception of these classified loans, management was not aware of any
loans outstanding as of December 31, 1997 where the known credit problems of the
borrower would cause management to have serious doubts as to the ability of such
borrowers to comply with their present loan repayment terms and which would
result in such loans being included in nonperforming or classified asset tables
at some future date. Management cannot, however, predict the extent to which
economic conditions in the Company's market areas may worsen or the full impact
such an environment may have on the Company's loan portfolio. Accordingly, there
can be no assurance that other loans will not become 90 days or more past due,
be placed on nonaccrual, become restructured loans, or other real estate owned
in the future.

Allowance For Loan Losses

The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in the Company's loan
portfolio 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,
-----------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Period end loans outstanding.......................... $737,387 $566,088 $397,348 $349,421 $335,477
Average loans outstanding............................. $650,190 $459,326 $367,968 $340,339 $340,868
Allowance for loan losses:
Balance at beginning of period........................ $ 9,996 $ 6,603 $ 6,938 $ 6,072 $ 5,641
Charge-offs:
Commercial........................................ (1,122) (119) (973) (800) (1,777)
Real estate construction and land................. (243) (127) (410) (388) (29)
Real estate term.................................. (14) (54) -- -- (50)
Consumer and other................................ (426) (171) (463) (166) (201)
-------- -------- -------- -------- --------
Total charge-offs................................ (1,805) (471) (1,846) (1,354) (2,057)
-------- -------- -------- -------- --------
Recoveries:
Commercial........................................ 51 343 190 191 68
Real estate construction and land................. -- 283 3 1 47
Real estate term.................................. -- -- -- 48 10
Consumer and other................................ 9 19 158 17 48
-------- -------- -------- -------- --------
Total recoveries................................. 60 645 351 257 173
-------- -------- -------- -------- --------
Net charge-offs................................... (1,745) 174 (1,495) (1,097) (1,884)
Provision charged to income(1)........................ 7,842 3,219 1,160 1,963 2,315
-------- -------- -------- -------- --------
Balance at end of period.............................. $ 16,093 $ 9,996 $ 6,603 $ 6,938 $ 6,072
======== ======== ======== ======== ========
Net recoveries (charge-offs) to average loans
outstanding during the period........................ (0.27)% 0.04% (0.41)% (0.32)% (0.55)%
Allowance as a percentage of average loans
outstanding.......................................... 2.48% 2.18% 1.79% 2.04% 1.78%
Allowance as a percentage of period end loans
Outstanding.......................................... 2.18% 1.77% 1.66% 1.99% 1.81%
Allowance as a percentage of non-performing loans..... 383.98% 130.14% 91.80% 68.75% 72.66%
</TABLE>

(1) Includes $1,350,000 and $800,000 in 1997 and 1996, respectively, to conform
practices for the Bank's reserve methodologies, which is included in mergers
and related nonrecurring costs.

Management considers changes in the size and character of the loan
portfolio, changes in nonperforming and past due loans, historical loan loss
experience, and the existing and prospective economic conditions when
determining the adequacy of the allowance for loan losses. Although management
believes that the allowance for loan losses is adequate to provide for both
potential losses and estimated inherent losses in the portfolio, future
provisions will be subject to continuing evaluations of the inherent risk in the
portfolio and if the economy declines or asset quality deteriorates, additional
provisions could be required.
<PAGE>

The table on the following page provides a summary of the allocation of the
allowance for loan losses for specific loan categories at the dates indicated.
The allocation presented should not be interpreted as an indication that charges
to the allowance for loan losses will be incurred in these amounts or
proportions, or that the portion of the allowance allocated to each loan
category represents the total amounts available for future losses that may occur
within these categories. The unallocated portion of the allowance for loan
losses and the total allowance is applicable to the entire loan portfolio.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------ ------------------ ------------------ -------------------
% OF % OF % OF % OF % OF
--------- --------- --------- --------- ---------
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
--------- --------- --------- --------- ---------
TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS
--------- --------- --------- --------- ---------
(DOLLARS IN AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ --------- ------ --------- ------- --------- ------- --------- ------- ---------
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........... $ 5,144 46.89% $3,563 51.35% $2,333 54.44% $3,545 54.63% $2,629 52.98%
Real estate
construction 829 15.26% 1,587 16.40% 851 11.05% 930 9.71% 968 11.16%
and land............
Real estate term..... 1,374 26.61% 969 22.38% 975 24.34% 774 24.92% 1,004 20.03%
Consumer and other... 827 11.24% 1,133 9.87% 802 10.17% 673 10.74% 397 15.83%
Loans held for sale.. -- -- -- 14 27
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allocated...... 8,174 7,252 4,961 5,936 5,025
Unallocated.......... 7,919 2,744 1,642 1,002 1,047
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total.............. $16,093 100.00% $9,996 100.00% $6,603 100.00% $6,938 100.00% $6,072 100.00%
======= ====== ====== ====== ====== ====== ====== ====== ====== ======
</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. The Company does not include federal funds sold and certain other
short term securities as investment securities. These other investments are
included in cash and cash equivalents. Investment securities classified as
available for sale are recorded at fair market value, while investment
securities classified as held to maturity are recorded at cost. Unrealized gains
or losses, net of the deferred tax effect, are reported as increases or
decreases in shareholders' equity for available for sale securities.
<PAGE>

The amortized cost and estimated market value of investment securities at
December 31, 1997 and 1996 is summarized as follows:

GROSS GROSS
----- -----
DECEMBER 31, 1997 Amortized UNREALIZED UNREALIZED MARKET
--------- ---------- ---------- ------
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations................. $ 10,095 $ 52 $ (2) $ 10,145
U.S. agency notes......................... 38,833 52 (63) 38,822
Mortgage-backed securities................ 102,432 357 (185) 102,604
Tax-exempt securities..................... 7,018 199 (5) 7,212
Corporate securities...................... 7,568 62 -- 7,630
-------- ------ ----- --------
Total securities available for sale..... 165,946 722 (255) 166,413
-------- ------ ----- --------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations................. 501 1 -- 502
U.S. agency notes......................... 17,798 182 (12) 17,968
Mortgage-backed securities................ 11,324 177 (2) 11,499
Tax-exempt securities..................... 14,838 492 (53) 15,277
-------- ------ ----- --------
Total securities held to maturity....... 44,461 852 (67) 45,246
-------- ------ ----- --------
Other securities.......................... 2,253 -- -- 2,253
-------- ------ ----- --------
Total investment securities............. $212,660 $1,574 $(322) $213,912
======== ====== ===== ========

<CAPTION>
GROSS GROSS
----- -----
December 31, 1996 AMORTIZED UNREALIZED UNREALIZED MARKET
- ----------------- --------- ---------- ---------- ------
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations.................. $ 22,821 $ 75 $ (6) $ 22,890
U.S. agency notes.......................... 27,087 39 (130) 26,996
Mortgage-backed securities................. 8,116 17 (167) 7,966
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..... 70,998 292 (366) 70,924
-------- -------- -------- ---------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations.................. 1,005 3 -- 1,008
U.S. agency notes.......................... 38,390 78 (100) 38,368
Mortgage-backed securities................. 11,045 141 (9) 11,177
Tax-exempt securities...................... 12,736 260 (14) 12,982
-------- -------- -------- ---------
Total securities held to maturity....... 63,176 482 (123) 63,535
-------- -------- -------- ---------
Other securities............................. 1,571 -- -- 1,571
-------- -------- -------- ---------
Total investment securities............. $135,745 $ 774 $ (489) 136,030
======== ======== ======== =========
</TABLE>

The tax effected net unrealized gain on available for sale securities was
$223,000 for the year ended December 31, 1997. The following table shows the
amortized cost and estimated market value of the Company's investment securities
by maturity at December 31, 1997.

<TABLE>
1999 2003
---- ----
THROUGH THROUGH 2008 AND
------- ------- --------
(DOLLARS IN THOUSANDS) (1) 1998 2002 2007 THEREAFTER TOTAL
------- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations...................... $ 6,802 $ 3,293 $ -- $ -- $ 10,095
U.S. agency notes (2).......................... 9,601 18,486 10,746 -- 38,833
Mortgage-backed securities (3)................. 54 3,351 8,680 90,347 102,432
Tax-exempt securities.......................... 266 1,661 4,711 380 7,018
Corporate securities........................... 2,511 5,057 -- -- 7,568
------- ------- ------- -------- --------
Total securities available for sale.......... 19,234 31,848 24,137 90,727 165,946
------- ------- ------- -------- --------
Market value................................... $19,253 $31,956 $24,358 $ 90,846 $166,413
======= ======= ======= ======== ========
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations...................... 501 -- -- -- 501
U.S. agency notes (2).......................... 5,898 5,985 5,915 -- 17,798
Mortgage-backed securities (3)................. 52 -- 4,585 6,687 11,324
Tax-exempt securities.......................... 951 4,617 1,831 7,439 14,838
------- ------- ------- -------- --------
Total securities held to maturity............ 7,402 10,602 12,331 14,126 44,461
======= ======= ======= ======== ========
Market value................................... 7,472 10,654 12,640 14,480 45,246
======= ======= ======= ======== ========
COMBINED INVESTMENT SECURITIES
PORTFOLIO
Total investment securities.................... $26,636 $42,450 $36,468 $104,853 $210,407
Total market value............................. $26,725 $42,610 $36,998 $105,326 $211,659
Weighted average yield-total portfolio (4)..... 6.16% 6.65% 7.05% 7.61% 7.09%
</TABLE>

(1) Other securities are comprised of equity investments and have no stated
maturity and therefore are excluded from this table.
(2) Certain notes issued by U.S. agencies may be called, without penalty, at
the discretion of the issuer. This may cause the actual maturities to
differ significantly from the contractual maturity dates.
(3) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to
principal prepayments.
<PAGE>

(4) Yields on tax-exempt securities have been computed on a fully tax-
equivalent basis.

For additional information concerning the investments portfolio, see Note 3 of
Notes to Consolidated Financial Statements.

Deposits

The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base. Deposits reached $1,071.1
million at December 31, 1997, an increase of 30.4% compared to deposits of
$821.1 million at December 31, 1996. In 1996, deposits increased 40.5% from
$584.3 million at December 31, 1995.

Total average deposits increased 41.0% to $925.6 million for 1997, compared
to an average of $656.6 million for 1996. In 1996, average deposits increased
24.9% over average deposits of $525.9 million in 1995. The increase in deposits
was primarily due to the continued marketing efforts directed at commercial
business clients in the Company's market areas, coupled with an increase in
deposits related to the new business development activities of the Greater Bay
Trust Company and the Venture Banking Group.

PBC holds $88.1 million in one demand deposit account (the "Special
Deposit"). The deposit account represents the proposed settlement of a class
action lawsuit not involving PBC or the Company. Due to the uncertainty of the
time the Special Deposit will remain with PBC, management has invested the
proceeds from this deposit in agency securities with maturities of less than 90
days. As previously discussed, the interest rate spread on the Special Deposit
was approximately 2.25% in 1997 and 1996, which contributed to the Company's
decrease in overall interest rate spread in 1997 and 1996.

Savings, NOW and money market deposit accounts reached $627.5 million at
year end 1997, an increase of 27.7% from the prior year. Savings, NOW and money
market deposit accounts of $491.3 million at December 31, 1996 were up 56.3%
from $314.4 million at December 31, 1995.

Time certificates of deposit of more than $100,000, and other time deposits
totaled $224.1 million or 20.9% of total deposits at December 31, 1997, compared
to $158.3 million, or 19.3% of total deposits at December 31, 1996 and $146.4
million or 25.1% of total deposits at December 31, 1995. Note 7 of the Notes
to the Consolidated Financial Statements presents the maturity distribution of
time certificates of deposits at December 31, 1997.

As of December 31, 1997 and 1996, the Company had $10.0 and $20.6 million
in brokered deposits outstanding, respectively.

Other Borrowings

Other borrowings consisted of Federal Funds purchased and securities sold
under agreements to repurchase. Note 9 of the Notes to the Consolidated
Financial Statements provides the amounts outstanding, the weighted interest
rate and the general terms of these borrowings.

Liquidity and Cash Flow

The objective of liquidity management is to maintain each Bank's ability to
meet the day-to-day cash flow requirements of its clients who either wish to
withdraw funds or require funds to meet their credit needs. The Company must
manage its liquidity position to allow the Banks to meet the needs of their
clients while maintaining an appropriate balance between assets and liabilities
to meet the return on investment expectations of its shareholders. The Company
monitors the sources and uses of funds on a daily basis to maintain an
acceptable liquidity position. In addition to liquidity from core deposits and
repayments and maturities of loans and investments, the Banks utilize brokered
deposit lines, sell securities under agreements to repurchase and borrow
overnight federal funds. In 1997 the Company issued $20.0 million in Trust
Preferred Securities ("TPS") to enhance its regulatory capital base, while
also providing added liquidity. During 1995 the Company issued $3.0 million of
subordinated notes for similar purposes.

Greater Bay is a company separate and apart from the Banks. It must provide
for its own liquidity. Substantially all of Greater Bay's revenues are obtained
from management fees, interest received and dividends declared and paid by the
Banks. There are statutory and regulatory provisions that could limit the
ability of the Banks to pay dividends to Greater Bay. At December 31, 1997, the
Banks had approximately $7.6 million in the aggregate available to be paid as
dividends to Greater Bay. Management of Greater Bay believes that such
restrictions will not have an impact on the ability of Greater Bay to meet its
ongoing cash obligations. As of December 31, 1997, Greater Bay did not have any
material commitments for capital expenditures. There are statutory and
regulatory provisions that could limit the ability of the Banks to pay dividends
to Greater Bay.

Net cash provided by operating activities, consisting primarily of net
interest income, totaled $11.2 million for 1997, $7.7 million for 1996 and $12.5
million for 1995. Cash used for investing activities totaled $247.1 million in
1997, $163.3 million in 1996 and
<PAGE>

$81.0 million in 1995. The funds used for investing activities primarily
represent increases in loans and investment for each year reported.

For the year ended December 31, 1997, net cash provided by financing
activities was $275.7 million. Historically, the primary financing activity of
the Company has been deposits and short-term borrowings. Deposits increased
$250.0 million for the year ended December 31, 1997 and short-term borrowings
increased $7.5 million for the same period. Proceeds from the issuance of TPS in
the first quarter of 1997 were $20.0 million. For the year ended December 31,
1996, net cash provided by financing activities was $248.1 million. Deposits
increased $236.5 million, while short-term borrowings increased $12.0 million.

Capital Resources

Shareholders' equity at December 31, 1997 increased to $76.3 million from
$66.7 million at December 31, 1996 and from $60.6 million at December 31, 1995.
During 1997, Greater Bay paid aggregate cash dividends of $0.30 per share as
restated for the 2-1 stock split. In 1997, prior to the completion of its
merger with the Company, PBC declared a cash dividend of $3.20 per share. In
1997, prior to the completion of the merger with the Company, PRB paid a cash
dividend of $100,000 to its sole shareholder.

The Company has provided a substantial portion of its capital requirements
through the retention of earnings. In the first quarter of 1997, the Company
increased its capital base by issuing $20.0 million of TPS which, subject to
certain limitations, qualify as Tier 1 capital. Additionally, in the third
quarter of 1995, the Company issued $3.0 million of subordinated notes which
qualify as Tier 2 capital. The private offering was subscribed to 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, trust preferred
securities and minority interests, less goodwill. Supplementary capital includes
the allowance for loan losses (subject to certain limitations), other perpetual
preferred stock, trust preferred securities, certain other capital instruments
and term subordinated debt. The Company's major capital components are
shareholders' equity and trust preferred securities in core capital, and the
allowance for loan losses and subordinated debt in supplementary capital.

At December 31, 1997, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted) for the preceding quarter. The minimum leverage
ratio is 3.0%, although certain banking organizations are expected to exceed
that amount by 1.0% or more, depending on their circumstances.

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting
forth a five-tier system for measuring the capital adequacy of the financial
institutions they supervise. The capital levels of the Company at December 31,
1997 and the two highest levels recognized under these regulations are as
follows.

<TABLE>
<CAPTION>
TIER 1 TOTAL
------ -----
RISK-BASED RISK-BASED LEVERAGE
------------- ------------- --------
CAPITAL RATIO CAPITAL RATIO RATIO
------------- ------------- -----
<S> <C> <C> <C>
Company....................... 10.90% 12.49% 8.48%
Well-capitalized.............. 6.00% 10.00% 5.00%
Adequately capitalized........ 4.00% 8.00% 4.00%
</TABLE>

At December 31, 1997, the Company's risk-based capital ratios were 10.90%
for Tier 1 risk-based capital and 12.49% for total risk-based capital, compared
to 9.97% and 11.62%, respectively, as of December 31, 1996. The Company's
leverage ratio was 8.48% at December 31, 1997, compared to 7.84% at December 31,
1996. These ratios all exceeded the well-capitalized guidelines shown above.

In addition, at December 31, 1997, each of the Banks had levels of capital
that exceeded the well-capitalized guidelines. For additional information on the
capital levels and capital ratios of the Company and each of the Banks, see Note
15 of Notes to Consolidated Financial Statements.
<PAGE>

The Company anticipates that the economic and business conditions in its
market areas will continue to expand in 1998, resulting in continued growth in
earnings and deposits. To support this continuing growth or future acquisition
opportunities, it may be necessary for the Company to raise additional capital
through the sale of either debt or equity securities in order for the Company
and each of the Banks to remain well-capitalized under applicable regulations.

Quantitative and Qualitative Disclosures About Market Risk

The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Company utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and an adequate loan
loss reserve see "--Allowance for Loan Losses" herein.

Interest rate risk is the risk of loss in value due to changes in interest
rates. This risk is addressed by the Company's Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in net portfolio values ("NPV") and net interest income under various
interest rate scenarios. The ALCO attempts to manage the various components of
the Company's balance sheet to minimize the impact of sudden and sustained
changes in interest rates on NPV and net interest income.

The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in NPV in the event of hypothetical changes in interest rates
and interest liabilities. If potential changes to NPV and net interest income
resulting from hypothetical interest rate swings are not within the limits
established by the Board, the Board may direct management to adjust its asset
and liability mix to bring interest rate risk within Board-approved limits.

In order to reduce the exposure to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, lengthen the effective
maturities of certain interest-earning assets, and shorten the effective
maturities of certain interest-bearing liabilities. The Company has focused its
investment activities on securities with generally medium-term (7 years to 10
years) maturities or average lives. The Company has utilized short-term
borrowings and deposit marketing programs to adjust the term to repricing of its
liabilities.

Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in NPV of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market rate sensitive instruments in the
event of sudden and sustained increases and decreases in market interest rates
of 100 basis points. The following table presents the Company's projected change
in NPV for the these rate shock levels as of December 31, 1997. All market rate
sensitive instruments presented in this table are classified as either held to
maturity or available for sale. The Company has no trading securities.

<TABLE>
<CAPTION>
PROJECTED CHANGE
-------------------
CHANGE IN INTEREST RATES NPV DOLLARS PERCENTAGE
------------------------ ------- -------- ----------
<S> <C> <C> <C>
100 basis point rise........... $89,766 $ 10,563 13%
Base scenario.................. 79,204 -- 0%
100 basis point decline........ 68,641 (10,563) (13)%
</TABLE>

The preceding table indicates that at December 31, 1997, in the event of a
sudden and sustained decrease in prevailing market interest rates, the
Company's NPV would be expected to decrease. However, the foregoing analysis
does not attribute additional value to the Company's noninterest-bearing
deposit balances, which have a significantly higher market value during
periods of increasing interest rates.

NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources.
<PAGE>

Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should be not relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.

Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented should market conditions vary from assumptions used in the calculation
of the NPV. Certain assets, such as adjustable-rate loans, which represent one
of the Company's loan products, have features which restrict changes in interest
rate on a short-term basis and over the life of the assets. In addition, the
proportion of adjustable-rate loans in the Company's portfolio could decrease in
future periods if market interest rates remain at or decrease below current
levels due to refinancing activity. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the NPV. Finally, the ability of many
borrowers to repay their adjustable-rate mortgage loans may decrease in the
event of significant interest rate increases.

Interest Rate Risk Management

Interest rate risk management is a function of the repricing
characteristics of the Company's portfolio of assets and liabilities. Interest
rate risk management focuses on the maturity structure of assets and liabilities
and their repricing characteristics during periods of changes in market interest
rates. Effective interest rate risk management seeks to ensure that both assets
and liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in the Company's current portfolio that are
subject to repricing at various time horizons: one day or immediate, two days to
six months, seven to twelve months, one to three years, four to five years, over
five years and on a cumulative basis. The differences are known as interest
sensitivity gaps.
<PAGE>

The following table shows interest sensitivity gaps for different intervals
as of December 31, 1997.

<TABLE>
<CAPTION>
IMMEDIATE 2 DAYS TO 7 MONTHS TO 1 YEAR 4 YEARS MORE THAN TOTAL RATE
----------- ---------- ------------ ----------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS) OR ONE DAY 6 MONTHS 12 MONTHS TO 3 YEARS TO 5 YEARS 5 YEARS SENSITIVE
----------- ---------- ------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks....... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Short term investments........ 88,037 90,512 -- -- -- -- 178,549
Investment securities......... 56 32,528 20,909 53,765 34,551 69,065 210,874
Other securities.............. -- -- -- -- -- --
Loans......................... 599,736 27,483 19,743 48,378 22,402 19,645 737,387
Loan losses/unearned fees..... -- -- -- -- -- -- --
Other assets.................. -- -- -- -- -- -- --
-------- -------- ------- -------- -------- -------- ----------
Total assets................ $687,829 $150,523 $40,652 $102,143 $ 56,953 $ 88,710 $1,126,810
======== ======== ======= ======== ======== ======== ==========
LIABILITIES AND EQUITY
Deposits
DDA.......................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
NOW, MMDA, and savings....... 627,475 -- -- -- -- -- 627,475
Time deposits................ -- 197,446 20,071 5,859 603 199 224,178
Other borrowings.............. -- 19,480 -- -- -- -- 19,480
Subordinated debt............. -- -- -- -- -- 3,000 3,000
Trust preferred securities.... -- -- -- -- -- 20,000 20,000
Other liabilities............. -- -- -- -- -- -- --
Shareholders' equity.......... -- -- -- -- -- -- --
-------- -------- ------- -------- -------- -------- ----------
Total liabilities and
equity..................... $627,475 $216,926 $20,071 $ 5,859 $ 603 $ 23,199 $ 894,133
======== ======== ======= ======== ======== ======== ==========
Gap........................... $ 60,354 $(66,403) $20,581 $ 96,284 $ 56,350 $ 65,511 $ 232,677
Cumulative Gap................ $ 60,354 $ (6,049) $14,532 $110,816 $167,166 $232,677 $ 232,677
Cumulative Gap/total assets... 5.03% (1.66)% 1.21% 9.23% 13.93% 19.38% 19.38%

<CAPTION>
NON-RATE
-----------
(DOLLARS IN THOUSANDS) SENSITIVE TOTAL
----------- ------------
ASSETS
<S> <C> <C>
Cash and due from banks....... $ 53,000 $ 53,000
Short term investments........ -- 178,549
Investment securities......... -- 210,874
Other securities.............. 2,253 2,253
Loans......................... -- 737,387
Loan losses/unearned fees..... (18,858) (18,858)
Other assets.................. 37,114 37,114
--------- ----------
Total assets................ $ 73,509 $1,200,319
========= ==========
LIABILITIES AND EQUITY
Deposits
DDA.......................... $ 219,495 $ 219,495
NOW, MMDA, and savings....... -- 627,475
Time deposits................ -- 224,178
Other borrowings.............. -- 19,480
Subordinated debt............. -- 3,000
Trust preferred securities.... -- 20,000
Other liabilities............. 10,434 10,434
Shareholders' equity.......... 76,257 76,257
--------- ----------
Total liabilities and
equity..................... $ 306,186 $1,200,319
========= ==========
Gap........................... $(232,677) --
Cumulative Gap................ $ -- --
Cumulative Gap/total assets... -- --
</TABLE>

The foregoing table indicates that the Company had a one year gap of $14.5
million, or 1.21% of total assets, at December 31, 1997. In theory, this would
indicate that at December 31, 1997, $14.5 million more in assets than
liabilities would reprice if there was a change in interest rates over the next
360 days. Thus, if interest rates were to increase, the gap would tend to result
in a higher net interest margin. However, changes in the mix of earning assets
or supporting liabilities can either increase or decrease the net interest
margin without affecting interest rate sensitivity. In addition, the interest
rate spread between an asset and its supporting liability can vary significantly
while the timing of repricing of both the asset and its supporting liability can
remain the same, thus impacting net interest income. This characteristic is
referred to as a basis risk and, generally, relates to the repricing
characteristics of short-term funding sources such as certificates of deposit.

The impact of fluctuations in interest rates on the Company's projected
next twelve month net interest income and net income has been evaluated through
an interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing rate
environments. As of December 31, 1997, the analysis indicates that the Company's
net interest income would increase a maximum of 24.4% if rates rose 200 basis
points immediately and would decrease a maximum of 24.4% if rates declined 200
basis points immediately. In addition, the results indicate that notwithstanding
the Company's gap position, which would indicate that the net interest margin
increases when rates rise, the Company's net interest margin increases during
rising rate periods due to the basis risk imbedded in the Company's interest-
bearing liabilities.

In addition, while this analysis indicates the probable impact of interest
rate movements on the Company's net interest income, it does not take into
consideration other factors that would impact this analysis. These factors would
include but not be limited to management and ALCO's actions to mitigate the
impact to the Company and the impact of the Company's credit risk profile during
periods of significant interest rate movements.

Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors and
others, an interest sensitivity gap report may not provide a complete assessment
of the Company's exposure to changes in interest rates.
<PAGE>

YEAR 2000 COMPLIANCE

State of Readiness

Greater Bay is working to resolve the potential impact of the year 2000 on
the ability of Greater Bay's computerized information systems to accurately
process information that may be date-sensitive. Any of Greater Bay's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. Greater Bay utilizes a number of
computer programs across its entire operation.

Specifically, Greater Bay has undertaken a major project to ensure that its
internal operating systems will be fully capable of processing year 2000
transactions. This project is overseen by the Greater Bay Year 2000 Project
Team (the "Year 2000 Project Team), which reports monthly progress to the
Company's Board of Directors.

The initial phase of the project was to assess and identify all internal
business processes requiring modification and to develop comprehensive
renovation plans as needed. This phase was largely completed in mid-1998. The
second phase, expected to be accomplished by the end of 1998, will be to execute
those renovation plans and begin testing systems by simulating year 2000 data
conditions. Testing and implementation is planned to be completed during the
first half of 1999.

Greater Bay has commenced the testing phase of the year 2000 project and is
completing the tasks involving the testing of its essential information
technology ("IT") systems. As part of this phase, Greater Bay is working with
external vendors to test and certify their systems as year 2000 compliant. The
testing phase also includes implementation of a new release of deposit and
lending software by the end of 1998. In addition, Greater Bay plans to test
targeted non-IT systems, such as facilities, vaults, security services and other
building related services, by the end of 1998.

Greater Bay relies upon third-party software vendors and service providers
for substantially all of its electronic data processing and does not operate any
proprietary programs which are critical to the Company's operations. Thus, the
focus of Greater Bay is to monitor the progress of its primary software
providers towards compliance with year 2000 issues and prepare to test actual
data of Greater Bay in simulated processing of future sensitive dates.

As well as evaluating its own internal operating systems, Greater Bay has
also initiated discussions with its major customers and suppliers as to their
ability to meet year 2000 requirements. The Year 2000 Project Team previously
has identified and sought information from significant third party suppliers
regarding their year 2000 compliance. Suppliers providing system
interdependencies also have been identified, and testing with such suppliers
also will occur during this phase of the project. The Year 2000 Project Team
continues to work with all targeted suppliers to determine their year 2000
status. As of this time, the Year 2000 Project Team has not identified any
significant issues with the identified suppliers.

Greater Bay also has identified customers who have a material relationship
with the Company and requested such customers to complete a year 2000 survey,
which will be used by Greater Bay to assess the overall risk to the Company
resulting from such customers' year 2000 compliance.

Costs to Address the Year 2000 Issue

Greater Bay has budgeted anticipated expenditures of $300,000 to $500,000
in 1998 and 1999 to ensure that its systems are ready for processing information
in the year 2000. Greater Bay estimates that it has incurred out-of-pocket
expenses of approximately $40,000 to date this year in connection with year 2000
issues, which expenses may reach approximately $150,000 by the end of 1998. In
addition, the Company has incurred certain costs relating to reallocation of
internal resources to address year 2000 issues. The Company expects that the
cost of remedial action for its noncompliant year 2000 IT systems will not be
material.

Greater Bay has not completed its assessment of the year 2000 issue, but
currently believes that costs of addressing it will not have a material adverse
impact on Greater Bay's financial position. However, if Greater Bay and third
parties upon which it relies are unable to address this issue in a timely
manner, it could result in a material financial risk to Greater Bay. In order
to assure that this does not occur, Greater Bay plans to devote all resources
required to resolve any significant year 2000 issues in a timely manner.

Risks Presented by the Year 2000 Issue

As Greater Bay continues to assess the year 2000 issue, it may identify
systems that present a year 2000 risk. In addition, if any third-party software
vendors and service providers upon who the Company relies fail to appropriately
address their year 2000 issues, such failure could have a material adverse
effect on the Company's business, financial condition and operating results.

Should Greater Bay and/or its significant suppliers fail to timely
identify, address and correct material year 2000 issues, such failure could have
a material adverse impact on the Company's ability to operate. The range of
adverse impacts may include the requirement to pay significant overtime to
manually process certain transactions and added costs to process certain banking
activity through a centralized administrative function. In addition, if
corrections made by such suppliers to address year 2000 issues are incompatible
with Greater Bay's systems, the year 2000 issue could have a material adverse
impact on the Company's operations.

Despite Greater Bay's activities in regards to the year 2000 issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Company's business, financial condition, results of operations
and business prospects.

Contingency Plans

The Year 2000 Project Team currently is in the process of developing
contingency plans for year 2000 readiness. The Company has engaged a third
party company, which specializes in developing contingency plans for financial
institutions for year 2000, to assist Greater Bay in analyzing the impact of
year 2000 on its business. This business impact analysis is expected to be
completed by the third quarter of 1998 and Greater Bay's contingency plans for
year 2000 readiness currently are scheduled to be complete by the end of 1998.
There can be no assurance, however, that such contingency plans will be
successful.

Recent Events

On August 31, 1998, Greater Bay consummated its acquisition of Pacific
Business Funding Corporation ("PBFC"), an asset-based specialty finance company.
The acquisition was structured as a merger transaction in which Greater Bay
acquired PBFC as a wholly owned subsidiary, in consideration of the issuance of
approximately 298,000 shares of Greater Bay common stock to the shareholders of
PBFC. PBFC had total assets of approximately $16.0 million as of June 30, 1998.
The transaction was accounted for as a pooling-of-interests.

On August 12, 1998, the Company completed an offering of Floating Rate
Capital Securities, Series A ("Capital Securities") in an aggregate amount of
$30 million through GBB Capital II, a trust affiliate of the Company formed for
the purpose of the offering. The Capital Securities issued in the offering were
sold in a private transaction pursuant to an applicable exemption form
registration under the Securities Act and have not been registered under the
Securities Act. The Capital Securities have an offering price (liquidation
amount) of $1,000 per security and will receive distributions at a variable rate
of interest, initially at 7.1875%. The interest rate will reset quarterly, equal
to 3-month LIBOR plus 150 basis points, will be cumulative and will be payable
quarterly. As part of this transaction, the Company negotiated an interest rate
swap to fix the cost of the offering at 7.55% for 10 years.

The Capital Securities accrue and pay distributions quarterly beginning
December 15, 1998 at a floating rate equal to the 3-month LIBOR plus 150 basis
points on the liquidation amount of $1,000 per share Capital Securities. The
expense for those distributions will be included in interest on long term
borrowings. Greater Bay has fully and unconditionally guaranteed all of the
obligations of the GBB Capital II.

The Capital Securities are mandatorily redeemable, in whole or in part,
upon repayment of the Debentures at their stated maturity of September 15, 2028
or their earlier redemption. The Debentures are redeemable prior to maturity at
the option of the Company, on or after September 15, 2008, in whole at any time
or in part form time to time.

On May 8, 1998, PRB, the former holding company of GGB, merged with and
into the Company. Upon consummation of the merger, the outstanding shares of PRB
were converted into an aggregate of 950,748 shares of the Company's stock. The
stock was issued to former PRB's sole shareholder, the Leo K. W. Lum PRB
Revocable Trust (the "Trust"), in a tax-free exchange accounted for as a
pooling-of-interests.

Recent Accounting Pronouncements

On June 15, 1998, the Financial Accounting Standards Board (the "FASB")
issues Statement of Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes a new
model for accounting for derivatives and hedging activities and supersedes and
amends a number of existing standards. SFAS No. 133 standardizes the accounting
for derivative instruments by requiring that all derivatives be recognized as
assets and liabilities on the balance sheet and be measured at fair market
value. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999,
but earlier application is
<PAGE>

permitted as of the beginning of any fiscal quarter subsequent to June 15, 1998.
Upon the Statement's initial application, all derivatives are required to be
recognized in the balance sheet as either assets or liabilities and measured at
fair market value. The impact on the Company of adopting SFAS No. 133 is not
expected to be material.

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position and will become effective for the Company's 1998 fiscal year, with
reclassification of earlier financial statements for comparative purposes. The
Company is evaluating alternative formats for presenting this information, but
does not expect this pronouncement to materially impact the Company's current
reporting and disclosures.

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This statement establishes standards for
disclosures about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14. "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 will become effective for the
Company's 1999 fiscal year and requires that comparative information from
earlier years be restated to conform to the requirements of this standard. The
Company is evaluating the requirements of SFAS 131 and the effects, if any, on
the Company's current reporting and disclosures.

Common Stock Price and Dividend History

The Company's stock is traded on the Nasdaq National Market ("Nasdaq")
under the symbol "GBBK". Prior to September 9, 1996, the Company's common
stock was not listed on any exchange nor was it quoted by Nasdaq. It was,
however, listed with the National Quotation Service and on the Over The Counter
Bulletin Board. Hoefer & Arnett, Incorporated and Van Kasper & Company acted as
the primary market makers and facilitated trades in the Company's common stock.
The Company's common stock was listed on Nasdaq on September 9, 1996. Based on
information provided to the Company from Hoefer & Arnett, the range of high and
low bid quotations for the Common Stock for the first three quarters of 1996 are
set forth below. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Quotations subsequent to September 30, 1996 reflect the high and low sales
prices for the Company's common stock as reported by Nasdaq. The following
information is restated to reflect 2-1 stock split effective for shareholders of
record at April 30, 1998.

<TABLE>
<CAPTION>
CASH DIVIDENDS
--------------
FOR THE PERIOD INDICATED HIGH LOW DECLARED (1)
- --------------------------------- ------- ------- ------------
<S> <C> <C> <C>
1997
First Quarter............ $13.82 $11.88 $0.075
Second Quarter........... 15.75 12.44 0.075
Third Quarter............ 22.25 15.94 0.075
Fourth Quarter........... 26.75 21.00 0.075
1996
First Quarter............ $ 9.38 $ 8.25 $0.055
Second Quarter........... 11.07 8.88 0.055
Third Quarter............ 10.50 9.00 0.055
Fourth Quarter........... 12.19 10.57 0.055
</TABLE>

- ----------------------------------------------------------------
(1) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by CNB prior to the 1996 merger, PBC prior to the 1997
merger and by PRB, the former holding company of Golden Gate Bank, prior to
the 1998 merger. In 1996, CNB declared dividends of $3.20 and $1.35 per
share, in 1997 and 1996, respectively, to its shareholders. PBC declared
and paid annual dividends of $3.20 and $1.35 per share in 1997 and 1996 ,
respectively. In 1997 PRB declared and paid dividends of $100,000 to its
sole shareholder. On a consolidated basis, the Company has declared
dividends of $0.52 and $0.30 per share in 1997 and 1996, respectively.

The Company estimates there were approximately 2,200 shareholders at
December 31, 1997.
<PAGE>

GREATER BAY BANCORP

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
(DOLLARS IN THOUSANDS) 1997* 1996*
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................................ $ 53,000 $ 49,959
Federal funds sold..................................................................... 75,000 32,400
Other short term securities............................................................ 103,549 109,312
---------- --------
Cash and cash equivalents............................................................ 231,549 191,671
Investment securities:
Available for sale................................................................... 166,413 70,924
Held to maturity (market value $45,246 and $63,535 at December 31, 1997 and
1996, respectively)................................................................ 44,461 63,176
Other securities..................................................................... 2,253 1,571
---------- --------
Investment securities............................................................. 213,127 135,671
Total loans, net....................................................................... 718,529 553,603
Premises and equipment................................................................. 8,477 7,517
Interest receivable and other assets................................................... 28,637 20,630
---------- --------
Total assets...................................................................... $1,200,319 $909,092
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits......................................................................... $1,071,148 $821,133
Other borrowings....................................................................... 19,480 12,000
Subordinated debt...................................................................... 3,000 3,000
Company obligated mandatorily redeemable cumulative trust preferred securities of
subsidiary trust holding solely junior subordinated debentures........................ 20,000 --
Other liabilities...................................................................... 10,434 6,233
---------- --------
Total liabilities................................................................. 1,124,062 842,366
---------- --------
Commitments and contingencies

SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares authorized; none issued.............. -- --
Common stock, no par value: 24,000,000 shares authorized; 9,006,930 and
8,723,738 shares issued and outstanding as of December 31, 1997 and 1996,
respectively....................................................................... 52,218 50,025
Unrealized gain on available for sale securities, net of taxes....................... 223 (90)
Retained earnings.................................................................... 23,816 16,791
---------- --------
Total shareholders' equity........................................................ 76,257 66,726
---------- --------
Total liabilities and shareholders' equity..................................... $1,200,319 $909,092
========== ========
</TABLE>

* Restated on a historical basis to reflect the merger discussed in Note 2.

See notes to consolidated financial statements.
<PAGE>

GREATER BAY BANCORP

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997* 1996* 1995*
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans............................................. $66,907 $48,002 $40,843
Interest on investment securities:
Taxable..................................................... 13,734 8,538 7,431
Tax-exempt.................................................. 807 990 729
------- ------- -------
Total interest on investment securities.................. 14,541 9,528 8,160
Other interest income......................................... 3,951 3,183 3,087
------- ------- -------
Total interest income....................................... 85,399 60,713 52,090
------- ------- -------
INTEREST EXPENSE
Interest on deposits.......................................... 30,639 21,220 17,743
Interest on long term borrowings.............................. 2,137 355 77
Interest on other borrowings.................................. 96 126 769
------- ------- -------
Total interest expense...................................... 32,872 21,701 18,589
------- ------- -------
Net interest income...................................... 52,527 39,012 33,501
Provision for loan losses..................................... 6,492 2,419 1,160
------- ------- -------
Net interest income after provision for loan losses...... 46,035 36,593 32,341
------- ------- -------
OTHER INCOME
Trust fees.................................................... 2,049 1,426 710
Service charges and other fees................................ 1,620 1,429 1,265
Warrant income................................................ 1,162 92 --
Gain on sale of SBA loans..................................... 883 537 420
Loss on investments, net...................................... (5) (255) (106)
Other income.................................................. 875 1,429 786
------- ------- -------
Total other income.......................................... 6,584 4,658 3,075
------- ------- -------
OPERATING EXPENSES
Compensation and benefits..................................... 19,777 16,122 14,059
Occupancy and equipment....................................... 5,179 4,475 3,701
Merger and related nonrecurring costs......................... 3,333 2,791 --
Legal settlement (recovery)................................... (1,700) -- 1,700
Other expenses................................................ 8,555 8,011 8,077
------- ------- -------
Total operating expenses.................................... 35,144 31,399 27,537
------- ------- -------
Net income before provision for income taxes............. 17,475 9,852 7,879
Provision for income taxes.................................... 6,464 3,974 2,869
------- ------- -------
Net income............................................... $11,011 $ 5,878 $ 5,010
======= ======= =======
Net income per share--basic**................................. $ 1.24 $ 0.69 $ 0.62
======= ======= =======
Net income per share--diluted**............................... $ 1.15 $ 0.64 $ 0.59
======= ======= =======
</TABLE>

* Restated on a historical basis to reflect the mergers discussed in Note 2.
** Restated for 2-for-1 stock split effective for shareholders of record at
April 30, 1998.

See notes to consolidated financial statements.
<PAGE>

GREATER BAY BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
TOTAL
--------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 COMMON STOCK EARNINGS SHAREHOLDERS'
----------------------- ----------------------------- --------------
(DOLLARS IN THOUSANDS) EQUITY
--------------
SHARES** AMOUNT UNREALIZED RETAINED
----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Greater Bay Bancorp, prior to pooling..................... 6,804,470 $36,396 $(1,604) $12,038 $46,830
Shares issued to Pacific Rim Bancorporation
shareholders.......................................... 950,748 6,000 __ __ 6,000
Pacific Rim Bancorporation retained earnings prior to
pooling............................................... __ __ (100) 145 45
--------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1994, AS RESTATED TO
REFLECT POOLING....................................... 7,755,218 42,396 (1,704) 12,183 52,875
Stock options exercised, including related tax
benefit.................................................. 261,902 1,402 -- -- 1,402
Stock issued in Employee Stock Purchase Plan.............. 17,074 80 -- -- 80
Capital contribution -- 2,000 -- -- 2,000
401(k) employee stock purchase............................ 13,462 95 -- -- 95
10% stock dividend--fractional shares paid in cash........ 267,784 2,135 -- (2,138) (3)
Cash dividend............................................. -- -- -- (1,832) (1,832)
SFAS No. 115 change in unrealized loss on
available for sale securities............................ -- -- 1,002 -- 1,002
Net income................................................ -- -- -- 5,010 5,010
--------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1995*............................. 8,315,440 48,108 (702) 13,223 60,629
Stock options exercised, including related tax
benefit.................................................. 376,478 1,693 -- -- 1,693
Stock issued in Employee Stock Purchase Plan.............. 21,264 137 -- -- 137
401(k) employee stock purchase............................ 10,556 87 -- -- 87
Cash dividend............................................. -- -- -- (2,310) (2,310)
SFAS No. 115 change in unrealized loss on
available for sale securities............................ -- -- 612 -- 612
Net income................................................ -- -- -- 5,878 5,878
--------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1996*............................. 8,723,738 50,025 (90) 16,791 66,726
Stock options exercised, including related tax
benefit.................................................. 216,720 1,315 -- -- 1,315
Stock issued in Employee Stock Purchase Plan.............. 30,320 347 -- -- 347
401(k) employee stock purchase............................ 36,152 531 -- -- 531
Cash dividend............................................. -- -- -- (3,986) (3,986)
SFAS No. 115 change in unrealized gain on
available for sale securities............................ -- -- 313 -- 313
Net income................................................ -- -- -- 11,011 11,011
--------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1997*............................. 9,006,930 $52,218 $ 223 $23,816 $76,257
========= ======= ======= ======= =======
</TABLE>

* Restated on a historical basis to reflect the mergers discussed in Note 2.
** Restated for 2-1 stock split effective for shareholders of record at April
30, 1998.

See notes to consolidated financial statements.
<PAGE>

GREATER BAY BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
(Dollars in thousands) 1997* 1996* 1995*
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS--OPERATING ACTIVITIES
Net income............................................................. $ 11,011 $ 5,878 $ 5,010
Reconciliation of net income to net cash from operations:
Provision for loan losses............................................ 6,492 2,419 1,160
Depreciation and leasehold amortization.............................. 1,475 1,239 1,653
Proceeds from sale of loans held for sale............................ -- -- 16,364
Origination of loans for resale...................................... -- -- (10,981)
Deferred income taxes................................................ (4,200) (1,382) 224
Changes in:
Accrued interest receivables and other assets..................... (8,007) (927) (1,336)
Accrued interest payable and other liabilities.................... 4,201 293 1,299
Deferred loan fees and discounts, net............................. 276 188 (794)
--------- --------- --------
Operating cash flows, net.............................................. 11,248 7,708 12,599
--------- --------- --------
CASH FLOWS--INVESTING ACTIVITIES
Maturities of investment securities and other short-term investments:
Held to maturity..................................................... 25,899 25,976 29,940
Available for sale................................................... 47,149 33,245 20,268
Purchase of investment securities and other short-term investments:
Held to maturity..................................................... (9,851) (27,254) (57,929)
Available for sale................................................... (150,740) (54,269) (15,168)
Proceeds from sale of available for sale securities.................... 14,598 31,430 --
Loans, net............................................................. (172,366) (170,949) (50,400)
Investment in other real estate owned.................................. (500) 1,266 (476)
Sale of other real estate owned........................................ 1,077 582 1,176
Premises and equipment, net............................................ (2,338) (3,097) (2,392)
Purchase of insurance policies......................................... -- (240) (6,004)
--------- --------- --------
Investing cash flows, net.............................................. (247,072) (163,310) (80,985)
--------- --------- --------
CASH FLOWS--FINANCING ACTIVITIES
Net change in deposits................................................. 250,015 236,526 109,017
Net change in short-term borrowings.................................... 7,480 12,000 (17,256)
Subordinated debt issued............................................... -- -- 3,000
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures issued. 20,000 -- --
Proceeds from the sale of stock........................................ 2,193 1,917 1,677
Fractional shares paid in cash......................................... -- -- (3)
Paid-in capital received form shareholder -- -- 2,000
Cash dividends......................................................... (3,986) (2,310) (1,832)
--------- --------- --------
Financing cash flows, net.............................................. 275,702 248,133 96,603
--------- --------- --------
Net change in cash and cash equivalents................................ 39,878 92,531 28,217
Cash and cash equivalents at beginning of year......................... 191,671 99,140 70,923
--------- --------- --------
Cash and cash equivalents at end of year............................... $ 231,549 $ 191,671 $ 99,140
--------- --------- --------
CASH FLOWS--SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest on deposits and other borrowings............................ $ 32,641 $ 21,742 $ 18,340
--------- --------- --------
Income taxes......................................................... $ 11,183 $ 5,227 $ 3,094
--------- --------- --------
Non-cash transactions:
Additions to other real estate owned................................. $853 $687 $1,285
==== ==== ======
</TABLE>

* Restated on a historical basis to reflect the mergers discussed in Note 2

<PAGE>

See notes to consolidated financial statements.
GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

Greater Bay Bancorp ("Greater Bay," on a parent-only basis, and the "Company,"
on a consolidated basis) is a California corporation and bank holding company
that was incorporated on November 14, 1984 as San Mateo County Bancorp. The name
was changed to Mid-Peninsula Bancorp on October 7, 1994 as a result of the
merger between Mid-Peninsula Bank and San Mateo County Bancorp and its wholly
owned subsidiary, WestCal National Bank. The name was further changed to Greater
Bay Bancorp on November 27, 1996 as a result of the merger between Mid-Peninsula
Bancorp and Cupertino National Bancorp (see Note 2). Upon consummation of the
merger with Cupertino National Bancorp, Greater Bay became a multi-bank holding
company for two wholly owned subsidiaries. On December 23, 1997 the Company
merged with Peninsula Bank of Commerce, adding a third wholly owned banking
subsidiary to the group. On May 8, 1998, the Company merged with Pacific Rim
Bancorporation ("PRB"), the former holding company of Golden Gate Bank ("GGB"),
adding a fourth wholly owned banking subsidiary to the group. The four wholly
owned bank subsidiaries are Mid-Peninsula Bank ("MPB"), Cupertino National Bank
("CNB"), Peninsula Bank of Commerce ("PBC"), and GGB, collectively the "Banks."

MPB commenced operations in October 1987 and is a state chartered bank
regulated by the Federal Reserve Bank ("FRB") and Department of Financial
Institutions of the State of California ("DFI"). CNB commenced operations in May
1985 and is a national banking association regulated by the Office of the
Comptroller of Currency ("OCC"). PBC commenced operations in September 1981 and
is a state chartered bank regulated by the DFI. GGB commenced operations in 1976
and is a state chartered bank regulated by the FDIC. On March 3, 1997 GBB
Capital I (the "Trust"), a statutory business trust, was formed for the
exclusive purpose of issuing and selling Cumulative Trust Preferred Securities
("TPS") (see Note 8) and using the proceeds from the sale of the TPS to acquire
Junior Subordinated Debentures issued by Greater Bay.

The Company provides a wide range of commercial banking services to small and
medium-sized businesses, real estate developers, property managers, business
executives, professionals and other individuals. The Company operates through
ten regional California offices located in Cupertino, Milbrae, Palo Alto,
Redwood City, San Bruno, San Francisco, San Jose and San Mateo.

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Greater Bay and
its wholly owned subsidiaries, MPB, CNB, PBC, GGB and the Trust. All significant
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the 1997 presentation. The accounting and reporting
policies of the Company conform to generally accepted accounting principles and
the prevailing practices within the banking industry.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets
<PAGE>

liabilities at the date of the financial statements and the reported amounts of
certain revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold and agency securities
with original maturities of less than ninety days. Generally, federal funds are
sold for one-day periods. As discussed in Note 7, PBC holds $88.1 million in one
demand deposit account whose funds are comprised of proceeds from a lawsuit
settlement. Due to the uncertainty of the time this special deposit (the
"Special Deposit") will remain with PBC, management has invested the proceeds
in agency securities with maturities of less than 90 days. Those securities have
been classified as cash and equivalents. MPB, CNB, PBC, and GGB are required by
the Federal Reserve System to maintain noninterest-earning cash reserves against
certain of their deposit accounts. At December 31, 1997, the required combined
reserves totaled approximately $9.8 million.

Investment Securities

Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," requires that
investment securities be classified into three portfolios, and be accounted for
as follows: 1) debt securities for which the Company has the positive intent and
ability to hold to maturity are classified as held to maturity and reported at
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.

Required investments of Federal Reserve Bank and Federal Home Loan Bank stocks
for MPB, CNB, PBC, and GGB are recorded at cost.

Loans

Loans held for investment are carried at amortized cost. The Company's loan
portfolio consists primarily of commercial and real estate loans generally
collateralized by first and second deeds of trust on real estate as well as
business assets and personal property.

Interest income is accrued on the outstanding loan balances using the simple
interest method. Loans are generally placed on nonaccrual status when the
borrowers are past due 90 days and when full payment of principal or interest in
not expected. At the time a loan is placed on nonaccrual status, any interest
income previously accrued but not collected is generally reversed. 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.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the consolidated statements of operations. Other loan fees and
charges representing service costs for the repayment of loans, for delinquent
payments or for miscellaneous loan services are recognized when earned.

Sale and Servicing of Small Business Administration ("SBA") Loans

The Company originates loans to customers under SBA programs that generally
provide for SBA guarantees of 70% to 90% of each loan. The Company generally
sells the guaranteed portion of the majority of the loans to an investor and
retains the unguaranteed portion and servicing rights in its own portfolio.
Funding for the SBA programs depend on annual appropriations by the U.S.
Congress.

Gains on these sales are earned through the sale of the guaranteed portion of
the loan for an amount in excess of the adjusted carrying value of the portion
of the loan sold. The company allocates the carrying value of such loans between
the portion sold, the portion retained and a value assigned to the right to
service the loan. The difference between the adjusted carrying value of the
portion retained and the face amount of the portion retained is amortized to
interest income over the life of the related loan using a method which
approximates the interest method. 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 ("SFAS No. 114 and No. 118"), on January
1, 1995. Under these standards, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Under these standards, any
allowance on impaired loans is generally based on one of three methods. It
requires that impaired loans be measured at either, 1) the present value of
expected cash flows at the loan's effective interest rate, 2) the loan's
observable market price, or 3) the fair market value of the collateral of the
loan. In general, these statements are not applicable to large groups of
smaller-balance loans that are collectively evaluated for impairment such as
credit cards, residential mortgage and/or consumer installment loans. 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.

Other Real Estate Owned

Other real estate owned ("OREO") consists of properties acquired through
foreclosure and is stated at the lower of carrying value or fair value less
estimated costs to sell. Development and improvement costs relating to the OREO
are capitalized. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to current earnings with a provision
for losses on foreclosed property in the period in which they are
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

identified. The resulting allowance for OREO losses is decreased when the
property is sold. Operating expenses of such properties, net of related income,
are included in other expenses. Gains and losses on the disposition of OREO are
included in other income.

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 incomes taxes reflect the estimated future tax effects of temporary
differences between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations.

Per Share Data

Net income per share is stated in accordance with SFAS No. 128 "Earnings per
Share". Basic net income per share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted net income per share is computed by
dividing diluted net income available to common shareholders by the weighted
average number of common shares and common equivalent shares outstanding
including dilutive stock options. The computation of common stock equivalent
shares is based on the weighted average market price of the Company's common
stock throughout the period. All years presented include the effect of stock
dividends declared in 1995 and 1994 and the 2-for-1 stock split effective for
shareholders of record as of April 30, 1998.

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<PAGE>

The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
years ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------
INCOME SHARES PER SHARE
------------- -------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
------------- -------------- ---------
<S> <C> <C> <C>
Net income..................................................... $11,011
Basic net income per share:
Income available to common shareholders...................... 11,011 8,898,094 $1.24
Effect of dilutive securities:
Stock options................................................ -- 696,386 --
------- --------- -----
Diluted net income per share:
Income available to common shareholders and assumed
conversions................................................ $11,011 9,594,480 $1.15
======= ========= =====
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------
INCOME SHARES PER SHARE
------------ ------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income..................................................... $ 5,878
Basic net income per share:
Income available to common shareholders...................... 5,878 8,558,314 $0.69
Effect of dilutive securities:
Stock options................................................ -- 586,462 --
------- --------- -----
Diluted net income per share:
Income available to common shareholders and assumed
conversions................................................ $ 5,878 9,144,776 $0.64
======= ========= =====
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------
INCOME SHARES PER SHARE
------------ ------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income..................................................... $ 5,010
Basic net income per share:
Income available to common shareholders...................... 5,010 8,035,648 $0.62
Effect of dilutive securities:
Stock options................................................ -- 479,756 --
------- --------- -----
Diluted net income per share:
Income available to common shareholders and assumed
conversions................................................ $ 5,010 8,515,404 $0.59
======= ========= =====
</TABLE>

There were no options that were considered anti-dilutive whereby the options'
exercise price was greater than the average market price of the common shares,
during the years ended December 31, 1997, 1996 and 1995.

Weighted average shares outstanding and all per share amounts included in the
consolidated financial statements and notes thereto are based upon the increased
number of shares giving retroactive effect to the 1996 merger with Cupertino
National Bancorp at a 0.81522 conversion ratio, the 1997 merger with PBC at a
0.96550 conversion ratio and the 1998 merger with PRB at a total of 950,748
shares.

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<PAGE>

NOTE 2--MERGERS

On May 8, 1998, PRB, the former holding company of GGB, merged with and into
the Company. Upon consummation of the merger, the outstanding shares of PRB were
converted into an aggregate of 950,748 shares of the Company's stock. The stock
was issued to former PRB's sole shareholder, the Leo K. W. Lum PRB Revocable
Trust (the "Trust"), in a tax-free exchange accounted for as a pooling-of-
interests.

The following table sets forth the combined operations of the Company and
PRB, on a consolidated basis with GGB, for the years ended December 31, 1997,
1996 and 1995, prior to the consumation of the merger on May 8, 1998.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
GBB PRB
Historical Historical Combined
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31,1997:
- ----------------------------------------------------------------------------------------------------------
Net interest income 47,776 4,752 52,528
- ----------------------------------------------------------------------------------------------------------
Provision for loan losses 6,242 250 6,492
- ----------------------------------------------------------------------------------------------------------
Net income 10,013 998 11,011
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Year ended December 31,1996:
- ----------------------------------------------------------------------------------------------------------
Net interest income 34,973 4,039 39,012
- ----------------------------------------------------------------------------------------------------------
Provision for loan losses 2,156 263 2,419
- ----------------------------------------------------------------------------------------------------------
Net income 5,338 540 5,878
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Year ended December 31,1995:
- ----------------------------------------------------------------------------------------------------------
Net interest income 29,499 4,002 33,501
- ----------------------------------------------------------------------------------------------------------
Provision for loan losses 1,160 -- 1,160
- ----------------------------------------------------------------------------------------------------------
Net income 4,817 193 5,010
- ----------------------------------------------------------------------------------------------------------
</TABLE>

On December 23, 1997, the Company consummated a merger with PBC. Pursuant
to terms of the merger agreement, the Company issued approximately 664,000
(approximately 1,328,000 as adjusted to reflect the 2-for-1 stock split) shares
of its common stock in exchange for the outstanding common stock of PBC at an
exchange ratio of 0.9655 of the Company's common stock for each share of PBC's
common stock. The merger 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 PBC.

The following table sets forth the composition of the combined operations
of the Company and PBC for the nine months ended September 30, 1997, prior to
the consummation of the merger on December 23, 1997.

<TABLE>
<CAPTION>
(UNAUDITED)
-----------
NINE MONTHS
-----------
ENDED SEPTEMBER 30,
-------------------
1997
----
(DOLLARS IN THOUSANDS)
- ----------------------------
<S> <C>
Net Interest Income:
Greater Bay Bancorp.................. $27,922
Peninsula Bank of Commerce........... 6,851
-------
Combined.......................... $34,773
-------
Provision for loan losses:
Greater Bay Bancorp.................. $5,287
Peninsula Bank of Commerce........... 105
------
Combined.......................... $5,392
------
Net Income:
Greater Bay Bancorp.................. $6,097
Peninsula Bank of Commerce........... 2,573
------
Combined.......................... $8,670
------
</TABLE>

<PAGE>

On November 27, 1996, the Company consummated a merger with Cupertino
National Bancorp. As discussed in Note 1, concurrent with the consummation of
the merger, the name of the holding company was changed from Mid-Peninsula
Bancorp to Greater Bay Bancorp. Pursuant to terms of the merger agreement, the
Company issued approximately 1,586,000 (approximately 3,172,000 as adjusted for
the 2-for-1 stock split) 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.

The following table sets forth the composition of the combined operations
of Mid-Peninsula Bancorp and Cupertino National Bancorp for the nine months
ended September 30, 1996 prior to the consummation of the merger on November 27,
1996.

<TABLE>
<CAPTION>
(UNAUDITED)
-----------
NINE MONTHS
-----------
ENDED SEPTEMBER 30,
--------------------
1996
----
(DOLLARS IN THOUSANDS)
- ---------------------------
<S> <C>
Net Interest Income:
Mid-Peninsula Bancorp.............. $ 8,878
Cupertino National Bancorp......... 11,487
-------
Combined........................ $20,365
-------
Provision for loan losses:
Mid-Peninsula Bancorp.............. $ 427
Cupertino National Bancorp......... 864
-------
Combined........................ $ 1,291
-------
Net Income:
Mid-Peninsula Bancorp.............. $ 2,373
Cupertino National Bancorp......... 1,548
-------
Combined........................ $ 3,921
-------
</TABLE>

<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

In all mergers, certain reclassifications were made to conform to the Company's
financial presentation. The results of operations previously reported by the
separate enterprises for the 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.

There were no significant transactions between the Company and PRB, the Company
and PBC or between Mid-Peninsula Bancorp and Cupertino National Bancorp prior to
the mergers. All intercompany transactions have been eliminated.

NOTE 3--INVESTMENT SECURITIES

The amortized cost and estimated market value of investment securities is
summarized below:

<TABLE>
<CAPTION>
GROSS GROSS
----- -----
DECEMBER 31, 1997 AMORTIZED UNREALIZED UNREALIZED MARKET
----------------- --------- ---------- --------- ------
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
----------------------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations.................. $ 10,095 $ 52 $ (2) $ 10,145
U.S. agency notes.......................... 38,833 52 (63) 38,822
Mortgage-backed securities................. 102,432 357 (185) 102,604
Tax-exempt securities...................... 7,018 199 (5) 7,212
Corporate securities....................... 7,568 62 -- 7,630
-------- ------- ------- --------
Total securities available for sale..... 165,946 722 (255) 166,413
-------- ------- ------- --------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations.................. 501 1 -- 502
U.S. agency notes.......................... 17,798 182 (12) 17,968
Mortgage-backed securities................. 11,324 177 (2) 11,499
Tax-exempt securities...................... 14,838 492 (53) 15,277
-------- ------- ------- --------
Total securities held to maturity....... 44,461 852 (67) 45,246
-------- ------- ------- --------
Other securities............................. 2,253 -- -- 2,253
-------- ------- ------- --------
Total investment securities............. $212,660 $ 1,574 $ (322) $213,912
======== ======= ======= ========
</TABLE>
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
GROSS GROSS
----- -----
December 31, 1996 AMORTIZED UNREALIZED UNREALIZED MARKET
----------------- --------- ---------- ---------- ------
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
------------------------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations.................. $ 22,821 $ 75 $ (6) $ 22,890
U.S. agency notes.......................... 27,087 39 (130) 26,996
Mortgage-backed securities................. 8,116 17 (167) 7,966
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..... 70,998 292 (366) 70,924
-------- -------- -------- ---------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations.................. 1,005 3 -- 1,008
U.S. agency notes.......................... 38,390 78 (100) 38,368
Mortgage-backed securities................. 11,045 141 (9) 11,177
Tax-exempt securities...................... 12,736 260 (14) 12,982
-------- -------- -------- ---------
Total securities held to maturity....... 63,176 482 (123) 63,535
-------- -------- -------- ---------
Other securities............................. 1,571 -- -- 1,571
-------- -------- -------- ---------
Total investment securities............. $135,745 $ 774 $ (489) 136,030
======== ======== ======== =========
</TABLE>
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

The following table shows amortized cost and estimated market value of the
Company's investment securities by year of maturity as of December 31, 1997.

<TABLE>
<CAPTION>
1999 2003
---- -----
THROUGH THROUGH 2008 AND
------- ------- --------
(DOLLARS IN THOUSANDS)(1) 1998 2002 2007 THEREAFTER TOTAL
- ------------------------- ------- ---- ---- ---------- --------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations...................... $ 6,802 $ 3,293 $ -- $ -- $ 10,095
U.S. agency notes (2).......................... 9,601 18,486 10,746 -- 38,833
Mortgage-backed securities (3)................. 54 3,351 8,680 90,347 102,432
Tax-exempt securities.......................... 266 1,661 4,711 380 7,018
Corporate securities........................... 2,511 5,057 -- -- 7,568
------- ------- ------- -------- --------
Total securities available for sale......... 19,234 31,848 24,137 90,727 165,946
------- ------- ------- -------- --------
Market value................................... $19,253 $31,956 $24,358 $ 90,846 $166,413
------- ------- ------- -------- --------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations...................... 501 -- -- -- 501
U.S. agency notes (2).......................... 5,898 5,985 5,915 -- 17,798
Mortgage-backed securities (3)................. 52 -- 4,585 6,687 11,324
Tax-exempt securities.......................... 951 4,617 1,831 7,439 14,838
------- ------- ------- -------- --------
Total securities held to maturity........... 7,402 10,602 12,331 14,126 44,461
------- ------- ------- -------- --------
Market value................................... 7,472 10,654 12,640 14,480 45,246
------- ------- ------- -------- --------
COMBINED INVESTMENT SECURITIES PORTFOLIO:
Total investment securities.................... $26,636 $42,450 $36,468 $104,853 $210,407
------- ------- ------- -------- --------
Total market value............................. $26,725 $42,610 $36,998 $105,326 $211,659
------- ------- ------- -------- --------
Weighted average yield-total portfolio (4)..... 6.16% 6.65% 7.05% 7.61% 7.09%
</TABLE>
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(1) Other securities are comprised of equity investments and have no stated
maturity and therefore are excluded from this table.
(2) Certain notes issued by U.S. agencies may be called, without penalty, at the
discretion of the issuer. This may cause the actual maturities to differ
significantly from the contractual maturity dates.
(3) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to principal
prepayments.
(4) Yields on tax-exempt securities have been computed on a fully tax-equivalent
basis.

Investment securities with a carrying value of $34.9 million and $34.1
million were pledged to secure deposits, borrowings and for other purposes as
required by law or contract at December 31, 1997 and 1996, respectively.

Investments in the FRB are required in order to maintain membership and
support activity levels.

Proceeds and realized losses and gains on sales of investment securities for
the years ended December 31, 1997, 1996 and 1995 are presented below:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- ---------- ----------- ---------
<S> <C> <C> <C>
Proceeds from sale of available for sale securities..... $14,598 $31,430 $ --
Available for sale securities--losses(1)................ $ (5) $ (255) $(106)
</TABLE>

(1) Includes $466,000 of charges in 1996 to conform accounting practices, which
is included in merger and related nonrecurring costs.

NOTE 4--LOANS

The following is a summary of loans by category as of December 31, 1997 and
1996:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
- ---------------------- ---- ----
<S> <C> <C>
Commercial.............................. $345,742 $290,724
Real estate construction and land....... 112,514 92,820
Real estate term........................ 196,217 126,651
Consumer and other...................... 82,914 55,893
-------- --------
Total loans, gross...................... 737,387 566,088
Deferred loan fees and discounts...... (2,765) (2,489)
-------- --------
Total loans, net of deferred fees....... 734,622 563,599
Allowance for loan losses............. (16,093) (9,996)
-------- --------
Total loans, net...................... $718,529 $553,603
======== ========
</TABLE>
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

The following summarizes the activity in the allowance for loan losses for
the years ended December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- -------- -------- ---------
<S> <C> <C> <C>
Balance, January 1................. $ 9,996 $6,603 $ 6,938
Provision for loan losses(1)..... 7,842 3,219 1,160
Loan charge-off.................. (1,805) (471) (1,846)
Recoveries....................... 60 645 351
------- ------ -------
Balance, December 31............... $16,093 $9,996 $ 6,603
======= ====== =======
</TABLE>

(1) Includes $1.4 million and $800,000 of charges in 1997 and 1996 to conform
accounting practices for the banks' reserve methodologies and is included in
merger and related nonrecurring costs in the statements of operations.

The following table sets forth nonperforming loans as of December 31, 1997,
1996 and 1995. Nonperforming loans are defined as loans which are on nonaccrual
status, loans which have been restructured, and loans which are 90 days past due
but are still accruing interest. Interest income foregone on nonperforming loans
outstanding at year end totaled $479,000, $633,000, and $549,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Interest income recognized
on the nonperforming loans approximated $206,000, $508,000, and $353,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- ------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans............................ $2,971 $4,616 $4,833
Accruing loans past due 90 days or more..... 158 1,237 830
Restructured loans 1,062 1,828 1,530
------ ------ ------
Total nonperforming loans................... $4,191 $7,681 $7,193
====== ====== ======
</TABLE>

At December 31, 1997 and 1996, the recorded investment in loans, for which
impairment has been recognized in accordance with SFAS No. 114 and No. 118, was
approximately $2.8 million and $4.7 million, respectively, with corresponding
valuation allowances of $567,750 and $1.8 million, respectively. For the years
ended December 31, 1997 and 1996, the average recorded investment in impaired
loans was approximately $4.4 million and $4.7 million, respectively. The Company
did not recognize interest income on impaired loans during the twelve months
ended December 31, 1997 and 1996.

The Company had $1,061,737 and $1,828,000 of restructured loans as of
December 31, 1997 and 1996, respectively. Principal reduction concessions
totaling $386,505 were permitted on restructured loans during the year ended
December 31, 1997. There were no principal reduction concessions allowed on
restructured loans during 1996. Interest income from restructured loans totaled
$82,014 and $317,295 for the years ended December 31, 1997 and 1996. Foregone
interest income, which totaled $9,977 and $7,672 for the years ended December
31, 1997 and 1996 would have been recorded as interest income if the loans had
accrued interest in accordance with their original terms prior to the
restructures.

NOTE 5--OTHER REAL ESTATE OWNED

At December 31, 1997 and 1996, other real estate owned consisted of
properties acquired through foreclosure with a carrying value of $1.3 million
and $1.7 million, respectively. These balances are included in interest
receivable and other assets in the accompanying consolidated balance sheets.
There was no allowance for estimated losses.

The following summarizes other real estate operations, which are included in
operating expenses, for the years ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- ------ ------ -------
<S> <C> <C> <C>
Income (loss) from:
Real estate operations, net................. $(177) $(175) $ (628)
Provision for estimated losses.............. (54) -- (385)
----- ----- -------
Net loss from other real estate operations.. $(231) $(175) $(1,013)
===== ===== =======
</TABLE>

<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

NOTE 6--PREMISES AND EQUIPMENT

Premises and equipment at December 31, 1997 and 1996 are composed of the
following:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
- ---------------------- -------- --------
<S> <C> <C>
Land.......................................... $ 417 $ 417
Building and premises......................... 1,377 1,377
Leasehold improvements........................ 4,735 4,021
Furniture and equipment....................... 7,924 8,704
Automobiles................................... 123 134
------- -------
Total....................................... 14,576 14,653
Accumulated depreciation and amortization..... (6,099) (7,136)
------- -------
Premises and equipment, net................. $ 8,477 $ 7,517
======= =======
</TABLE>

Depreciation and amortization amounted to $1.3 million, $1.5 million and
$1.3 million for the years ended December 31, 1997, 1996 and 1995, 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, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
- ---------------------- -------- --------
<S> <C> <C>
Demand, noninterest-bearing............. $ 219,495 $171,497
MMDA, NOW and Savings................... 627,475 491,313
Time certificates, $100,000 and over.... 183,147 91,504
Other time certificates................. 41,031 66,819
---------- --------
Total deposits.......................... $1,071,148 $821,133
========== ========
</TABLE>

The following table sets forth the maturity distribution of time
certificates of deposit at December 31, 1997.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------
SEVEN TO ONE TO MORE THAN
-------- ------ ---------
THREE MONTHS FOUR TO TWELVE THREE THREE
------------ ------- ------ ----- -----
(DOLLARS IN THOUSANDS) OR LESS SIX MONTHS MONTHS YEARS YEARS TOTAL
- --------------------- ------- ---------- ------ ----- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Time deposits, $100,000 and over..... $154,862 $15,493 $10,065 $2,625 $ 102 $183,147
Other time deposits.................. 16,897 10,166 10,053 3,201 714 41,031
-------- ------- ------- ------ ------- --------
Total.............................. $171,759 $25,659 $20,118 $5,826 $ 816 $224,178
======== ======= ======= ====== ======= ========
</TABLE>

At December 31, 1997 and 1996, the balance of the PBC Special Deposit was
$88.1 million and $94.4 million, respectively. Management anticipates that these
funds will be withdrawn in 1998.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

NOTE 8--COMPANY OBLIGATED MANDATORY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES

On March 30, 1997, the Trust, a Delaware business trust wholly-owned by
Greater Bay completed a public offering of 800,000 shares of 9.75% TPS. The
Trust used the proceeds from the offering to purchase a like amount of 9.75%
Junior Subordinated Deferrable Interest Debentures (the ''Debentures'') of
Greater Bay. The Debentures are the sole assets of the Trust and are eliminated,
along with the related income statement effects, in the consolidated financial
statements.

The TPS accrue and pay distributions quarterly at an annual rate of 9.75% of
the liquidation amount of $25 per TPS share. The expense for those distributions
is included in interest on long term borrowings. Greater Bay has fully and
unconditionally guaranteed all of the obligations of the Trust.

The TPS are mandatorily redeemable, in whole or in part, upon repayment of
the Debentures at their stated maturity of April 1, 2027 or their earlier
redemption. The Debentures are redeemable prior to maturity at the option of the
Company, on or after April 1, 2002, in whole at any time or in part from time to
time.

NOTE 9--BORROWINGS

Short-term borrowings are detailed as follows:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Federal funds purchased:
Balance at December 31................................ $ -- $12,000 $ --
Average balance....................................... 1,523 669 1,120
Maximum amount outstanding at any month-end........... 9,161 12,000 5,600
Average interest rate:
During the year.................................... 5.32% 5.42% 5.69%
At December 31..................................... -- 6.63% --
Securities sold under agreements to repurchase:
Balance at December 31................................ $19,480 $ -- $ --
Average balance....................................... 5,278 1,556 11,486
Maximum amount outstanding at any month-end........... 19,480 14,994 26,994
Average interest rate:
During the year.................................... 5.71% 5.74% 6.12%
At December 31..................................... 6.15% -- --
</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 purchase.

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 notes are redeemable by the Company any time after September 30,
1998 at a premium ranging from 0% to 5%. The notes qualify as Tier 2 capital of
the Company.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

NOTE 10--INCOME TAXES

Income tax expense was comprised of the following for the years ended
December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Current:
Federal................ $ 8,248 $ 4,276 $ 2,029
State.................. 2,416 1,080 766
------- ------- -------
Total current.......... 10,664 5,356 2,795
Deferred:
Federal................ (3,243) (1,244) 106
State.................. (957) (138) (32)
------- ------- -------
Total deferred......... (4,200) (1,382) 74
------- ------- -------
Total expense............ $ 6,464 $ 3,974 $ 2,869
======= ======= =======
</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. The tax effects of
temporary differences that gave rise to significant portions of the deferred tax
assets and liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
----------------
DECEMBER 31,
----------------
(DOLLARS IN THOUSANDS) 1997 1996
- ---------------------- ------ ------
<S> <C> <C>
Loan loss reserves............... $5,061 $2,905
Accumulated depreciation......... 61 96
Deferred compensation............ 997 260
State income taxes............... 1,943 888
Net operating losses............. 336 181
Unrealized gains................. (247) (65)
Purchase accounting adjustments.. 72 126
Other............................ (445) (813)
------ ------
Net deferred tax asset........... $7,778 $3,578
====== ======
</TABLE>

Management believes that the Company will fully realize its total deferred
income tax assets as of December 31, 1997 based upon the Company's recoverable
taxes from prior carryback years, its total deferred income tax liabilities and
its current level of operating income.

At December 31, 1997, the Company had a federal tax net operating loss
carryforward of approximately $913,000 expiring in years 2010, 2011 and 2012 and
a California net operating loss carryforward of approximately $353,000 expiring
in 2001 and 2002.

Under provisions of the United States income tax laws these loss carryovers
are subject to limitation due to the acquisition of Pacific Rim Bancorporation
in 1998. Management does not believe that these limitations will prevent the
realization of the benefit of the loss carryovers during the carryover periods.

A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31 ,1997, 1996
and 1995:

<TABLE>
<CAPTION>
YEARS ENDED
-----------
DECEMBER 31,
------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- --------- --------- ---------
<S> <C> <C> <C>
Statutory federal tax rate.......................................... 35.00 % 35.00 % 35.00 %
California franchise tax expense, net of federal income tax benefit. 6.20 % 7.14 % 6.50 %
Tax exempt income................................................... (2.00)% (4.16)% (3.00)%
Nondeductible merger costs.......................................... 0.00 % 2.55 % 0.00 %
Other, net.......................................................... (2.21)% (0.20)% (2.10)%
--------- --------- ---------
Effective income tax rate........................................... 36.99 % 40.33 % 36.40 %
========= ========= =========
</TABLE>
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

NOTE 11--OPERATING EXPENSES

Other operating expenses were comprised of the following:

<TABLE>
<CAPTION>
YEARS ENDED
-----------
DECEMBER 31,
------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Legal and other professional fees............. $1,735 $1,676 $1,785
Telephone, postage and supplies............... 1,348 1,121 881
Marketing and promotion....................... 1,209 979 457
Directors fees................................ 657 515 554
Client services............................... 444 462 389
FDIC insurance and regulatory assessments..... 285 148 749
Insurance..................................... 313 225 327
Other real estate owned....................... 177 175 628
Other......................................... 2,387 2,710 2,307
------ ------ ------
Total....................................... $8,555 $8,011 $8,077
====== ====== ======
</TABLE>

Merger and other related nonrecurring costs incurred in connection with the
merger consummated in December 1997 (see Note 2) totaling $3.3 million include
$1.1 million of professional fees related to the transaction, $1.4 million of
charges to conform accounting practices of the two merged entities, with the
balance related to severance and compensation costs.

Merger and other related nonrecurring 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 12--EMPLOYEE BENEFIT PLANS

Stock Option Plan

On November 19, 1997, the Company's shareholders approved an amendment of the
Greater Bay Bancorp 1996 Stock Option Plan (the ''Bancorp Plan''), to increase
by 456,326 (912,652 stock split adjusted) the number of shares of Greater Bay
stock issuable under the Bancorp Plan. This was done to accommodate the
increased number of eligible employees as a result of the merger with PBC.

Effective November 27, 1996, the Company's shareholders approved the original
Bancorp Plan and authorized an increase in the number of shares previously
available for issuance under the Mid-Peninsula Bancorp Plan from 457,037
(914,074 stock split adjusted) to 751,564 (1,503,128 stock split adjusted)
shares to accommodate the merger of Mid-Peninsula Bancorp and Cupertino National
Bancorp. Under the terms of the merger, all stock option plans of Cupertino
National Bancorp and Mid-Peninsula Bancorp were terminated at the time of the
merger and all outstanding options from these plans were assumed by the Bancorp
Plan. Outstanding options from the Mid-Peninsula Bancorp plan of 216,326
(432,652 stock split adjusted) and outstanding options from the Cupertino
National Bancorp plan of 251,073 (502,146 stock split adjusted) (converted at a
ratio of 0.81522) were assumed by the Bancorp Plan.

Options issued under the Bancorp Plan may be granted to employees and
nonemployee directors and may be either incentive or nonqualified stock options
as defined under current tax laws. The exercise price of each
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

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.

At December 31, 1997 the total authorized shares issuable under the Bancorp
Plan was approximately 1,207,890 shares and the number of shares available for
future grants was 700,000 shares.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board (''FASB'') issued
SFAS No. 123 ''Accounting for Stock-Based Compensation'' (''SFAS No. 123'').
Under the provisions of SFAS No. 123, the Company is encouraged, but not
required, to measure compensation costs related to its employee stock
compensation plans under the fair market value method. If the Company elects not
to recognized 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.

At December 31, 1996, the Company had one stock option plan, which is
described above. The Company applies Accounting Principles Board (APB) Opinion
No. 25 and related interpretations in accounting 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 per share would have been reduced to the
pro forma amounts indicated below (the following reflects the impact of the
2-for-1 stock split):

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT DECEMBER 31,
- ----------------------------- ------------
PER SHARE AMOUNTS) 1997 1996 1995
- ------------------ ------- ------ ------
<S> <C> <C> <C>
Net Income:
As reported.......................... $11,011 $5,878 $5,010
Pro forma............................ $10,602 $5,637 $4,940
Basic net income per share
As reported.......................... $ 1.24 $ 0.69 $ 0.62
Pro forma............................ $ 1.19 $ 0.66 $ 0.61
Diluted net income per share
As reported.......................... $ 1.15 $ 0.64 $ 0.59
Pro forma............................ $ 1.11 $ 0.62 $ 0.58
</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 1997, 1996 and 1995, respectively; dividend yield of
1.8%, 2.0% and 2.0%; expected volatility of 22.9%, 19.3% and 19.3%; risk free
rates of 6.3%, 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.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

A summary of the Company's fixed stock option plan as of December 31, 1997,
1996, and 1995 and changes during the years ended on those dates is presented
below (as adjusted for the 2 for 1 stock split):

<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
-------- -------- --------
AVERAGE AVERAGE AVERAGE
-------- ------- -------
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
------ ------- ------ -------- ------ --------
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.................. 1,316 $ 7.62 1,242 $ 5.46 1,290 $ 4.93
Granted........................................... 312 24.11 482 10.12 358 6.40
Exercised......................................... (198) 4.92 (384) 3.95 (290) 4.38
Forfeited......................................... (40) 5.27 (24) 6.03 (116) 5.16
--- ------ ----- ------ ----- ------
Outstanding at end of year........................ 1,390 11.27 1,316 7.62 1,242 5.46
--- ------ ----- ------ ----- ------
Options exercisable at year-end................... 750 6.97 624 6.32 772 4.67
--- ------ ----- ------ ----- ------
Weighted average fair value of options granted
during the year.................................. $ 6.31 $ 2.87 1.59
------ ------ ------
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1997 (as adjusted for the 2-for-1 stock split).

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
--------- -------- --------
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
------ --------- ------- ------ -------
EXERCISE OUTSTANDING EXERCISE REMAINING LIFE OUTSTANDING EXERCISE
-------- ----------- --------- -------------- ----------- --------
PRICE RANGE (000'S) PRICE (YEARS) (000'S) PRICE
----------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
$ 2.50--$ 5.63 314 $ 4.54 3.1 314 $ 4.54
$ 5.75--$ 8.63 434 7.04 6.1 274 4.42
$ 9.25--$10.88 214 10.54 8.8 46 10.45
$12.00--$17.50 138 12.64 8.5 116 12.04
$24.50--$25.00 290 24.50 10.0 -- --
</TABLE>

401(K) Savings Plan

As a result of the merger with PBC, the Company will be merging the PBC
401(k) Plan with and into the Company's 401(k) Plan. A description of the
Company's 401(k) plan is presented below:

The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary (up to 15%) as a
contribution to the plan. The Company matches the employees contributions at a
rate set by the Board of Directors (currently 62.5% of the first 8% of deferral
of an individual's total compensation). The matching contribution vests ratably
over the first four years of employment.

For the years ended December 31, 1997, 1996 and 1995, the Company contributed
$672,000, $379,000 and $284,000, respectively to the 401(k) plans.

Employee Stock Purchase Plan

The Company has established an Employee Stock Purchase Plan, as amended,
under section 423(b) of the Internal Revenue Code which allows eligible
employees to set aside up to 15% of their compensation toward the purchase of
the Company's stock for an aggregate total of 133,934 shares (267,868 shares
stock split adjusted). Under the plan the purchase price.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

is 85% of the lower of the fair market value at the beginning or end of each
three month offering period. During 1997, employees purchased 15,160 shares
(30,320 shares stock split adjusted) of common stock for an aggregate purchase
price of $347,000 compared to the purchase of 10,632 shares (21,264 shares stock
split adjusted) of common stock for an aggregate purchase price of $137,000 in
1996 and 8,537 (17,074 shares stock split adjusted) shares of common stock for
an aggregate purchase price of $80,000 in 1995. There were 67,158 shares
(134,316 shares stock split adjusted) remaining in the plan available for
purchase by employees at December 31, 1997.

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
presented 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, 1997, 1996 and 1995 totaled $503,000, $310,000, and $173,000,
respectively. Depending on the agreement, the Company and the employees are
beneficiaries of life insurance policies that have been purchased as a method of
financing the benefits under the agreements. At December 31, 1997 and 1996, the
Company's cash surrender value of these policies was approximately $9.4 million
and $8.9 million, respectively, and is included in other assets.

Deferred Compensation Plan

Effective November 19, 1997, the Company adopted the Greater Bay Bancorp 1997
Elective Deferral Compensation Plan (the ''Deferred Plan'') that allows eligible
officers and directors of the Company to defer a portion of their bonuses,
director fees and other compensation. The deferred compensation will earn
interest calculated annually based on a short-term interest reference rate. All
participants are fully vested at all times in their contributions to the
Deferred Plan. At December 31, 1997, $628,000 of deferred compensation under
this plan is included in other liabilities.

Additionally, under a deferred compensation plan that was established at PBC
prior to its merger with the Company, there was approximately $1.1 million of
deferral compensation which is included in other liabilities.

NOTE 13--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,
1997 and 1996 is shown below:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
- ---------------------- ------- -------
<S> <C> <C>
Balance, January 1....................... $10,374 $13,172
Additions................................. 15,658 1,543
Repayments................................ (9,723) (4,341)
------- -------
Balance, December 31...................... $16,309 $10,374
======= =======
Undisbursed commitments, at year end...... $ 8,296 $ 6,866
======= =======
</TABLE>

<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

NOTE 14--COMMITMENTS AND CONTINGENT LIABILITIES

Lease Commitments

The Company leases certain facilities at which it conducts its operations.
Future minimum lease commitments under all noncancelable operating leases as of
December 31, 1997 are below:

<TABLE>
<CAPTION>
(Dollars in
-----------
YEARS ENDED DECEMBER 31, THOUSANDS)
- ------------------------ ----------
<S> <C>
1998........................ $ 2,486
1999........................ 2,477
2000........................ 2,455
2001........................ 1,867
2002........................ 1,518
Thereafter.................. 1,460
-------
Total....................... $12,263
=======
</TABLE>

The Company subleases that portion of the available space that is not
utilized. Sublease rental income for the years ended December 31, 1997, 1996,
and 1995 was $882,000, $309,000, and $398,000, respectively. Gross rental
expense for the years ended December 31, 1997, 1996, and 1995 was $2.8 million,
$2.0 million, and $1.8 million, respectively.

Other Commitments and Contingent Liabilities

In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, that are not reflected in the accompanying consolidated financial
statements. Commitments to fund loans were $332.9 million and $225.3 million and
standby letters of credit were $15.1 million and $18.6 million, at December 31,
1997 and 1996, respectively. The Company's exposure to credit loss is limited to
amounts funded or drawn; however, at December 31, 1997, 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 relates primarily to revolving lines of credit or
other commercial loans, and many of these commitments are expected to expire
without being drawn upon, therefore the total commitments do not necessarily
represent future cash requirements. The Banks evaluate each potential borrower
and the necessary collateral on an individual basis. Collateral varies, but may
include real property, bank deposits, debt or equity securities, or business
assets.

Stand-by letters of credit are conditional commitments written by the Banks
to guarantee the performance of a client to a third party. These guarantees are
issued primarily related to purchases of inventory by the Banks' commercial
clients, and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to clients, and the Banks accordingly use
evaluation and collateral requirements similar to those for loan commitments.

In the ordinary course of business there are various assertions, claims and
legal proceedings pending against the Company. Management is of the opinion that
the ultimate resolution of these proceedings will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

In July 1995, the Company settled a lawsuit of $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 recovered those losses through insurance coverage for this
settlement in 1997. However, due to the uncertainty associated with the
recovery, the Company reflected the settlement expense as a charge to 1995
earnings, and the associated recovery in 1997 as a recovery to earnings.

NOTE 15--REGULATORY MATTERS

The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and regulatory framework for prompt corrective
action, the Banks must meet specific capital guidelines that involve
quantitative measures of the Banks' assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Banks'
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum capital amounts and ratios (as defined in
the regulations) and are set forth in the table below. At December 31, 1997 and
1996 the Company and the Banks met all capital adequacy requirements to which
they are subject.

As of December 31, 1997, the most recent notification from the regulators
categorized the Company and the Banks as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
the Company and the Banks must maintain minimum total risk-based, Tier 1 risk-
based and Tier 1 leverage ratios as set forth in the following table. There are
no conditions or events since that determination that management believes have
changed the institution's category. The Company and the Bank's actual 1997 and
1996 capital amounts and ratios are as follows:

<TABLE>
<CAPTION>
TO BE WELL
----------
CAPITALIZED UNDER
------------------
FOR CAPITAL PROMPT CORRECTIVE
----------- ------------------
AS OF DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------------------------------------- ------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
GREATER BAY BANCORP $110,095 12.49% $70,490 8.00% N/A
Cupertino National Bank 40,201 10.03 32,118 8.00 $40,147 10.00%
Golden Gate Bank 9,408 12.80 5,878 8.00 7,347 10.00
Mid-Peninsula Bank 34,727 11.88 23,416 8.00 29,269 10.00
Peninsula Bank of Commerce 15,252 14.33 8,525 8.00 10,657 10.00
Tier 1 Capital (To Risk Weighted Assets):
GREATER BAY BANCORP $ 96,034 10.90% $35,245 4.00% N/A
Cupertino National Bank 32,126 8.02 16,059 4.00 $24,088 6.00%
Golden Gate Bank 8,523 11.60 2,939 4.00 4,408 6.00
Mid-Peninsula Bank 31,064 10.63 11,708 4.00 17,562 6.00
Peninsula Bank of Commerce 13,917 13.08 4,263 4.00 6,394 6.00
Tier 1 Capital (To Average Assets):
GREATER BAY BANCORP $ 96,034 8.48% $45,309 4.00% N/A
Cupertino National Bank 32,126 7.08 18,189 4.00 $22,737 5.00%
Golden Gate Bank 8,523 9.30 3,666 4.00 4,582 5.00
Mid-Peninsula Bank 31,064 8.54 10,935 3.00 18,225 5.00
Peninsula Bank of Commerce 13,917 6.65 8,401 4.00 10,501 5.00
</TABLE>
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
TO BE WELL
------------------
CAPITALIZED UNDER
------------------
FOR CAPITAL PROMPT CORRECTIVE
----------- ------------------
AS OF DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------------------------------------- ------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
GREATER BAY BANCORP $77,852 11.62% $53,606 8.00% N/A
Cupertino National Bank 28,022 10.03 22,364 8.00 $27,932 10.00%
Golden Gate Bank 8,230 13.60 4,819 8.00 6,023 10.00
Mid-Peninsula Bank 25,415 11.07 18,359 8.00 22,949 10.00
Peninsula Bank of Commerce 14,559 14.80 7,884 8.00 9,855 10.00
Tier 1 Capital (To Risk Weighted Assets):
GREATER BAY BANCORP $66,816 9.97% $26,803 4.00% N/A
Cupertino National Bank 21,515 7.70 11,173 4.00 $16,759 6.00%
Golden Gate Bank 7,469 12.40 2,409 4.00 3,614 6.00
Mid-Peninsula Bank 22,810 9.94 9,179 4.00 13,769 6.00
Peninsula Bank of Commerce 13,325 13.50 3,942 4.00 5,913 6.00
Tier 1 Capital (To Average Assets):
GREATER BAY BANCORP $66,816 7.84% $34,085 4.00% N/A
Cupertino National Bank 21,515 6.42 13,412 4.00 $16,765 5.00%
Golden Gate Bank 7,469 8.50 3,515 4.00 4.394 5.00
Mid-Peninsula Bank 22,810 8.23 8,312 3.00 13,853 5.00
Peninsula Bank of Commerce 13,325 8.90 5,992 4.00 7,490 5.00
</TABLE>

NOTE 16--RESTRICTIONS ON SUBSIDIARY TRANSACTIONS

One of the principal sources of cash for Greater Bay 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.

The Banks are subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In particular,
the Banks are prohibited from lending to Greater Bay unless the loans are
secured by specified types of collateral. Such secured loans and other advances
from the Banks are limited to 10% of the Bank's shareholders' equity, or a
maximum of $7.6 million at December 31, 1997. No such advances were made during
1997 or exist as of December 31, 1997.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

NOTE 17--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS

The financial statements of Greater Bay Bancorp (parent company only) follow:

PARENT COMPANY ONLY--BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------ -
(DOLLARS IN THOUSANDS) 1997 1996*
- ---------------------- --------- ---------
<S> <C> <C>
Assets:
Cash and cash equivalents....................... $ 4,804 $ 650
Investment in subsidiaries...................... 86,310 65,109
Other investments............................... 5,717 --
Subordinated debentures issued by subsidiary.... 3,000 3,000
Other assets.................................... 3,198 1,597
-------- -------
Total assets.................................... $103,029 $70,356
======== =======
Liabilities and shareholders' equity:
Subordinated debt............................. 23,618 3,000
Other liabilities............................. 3,154 630
-------- -------
Total liabilities............................... 26,772 3, 630
Shareholders' equity
Common stock.................................. 52,218 50,025
Unrealized gain (loss)........................ 223 (90)
Retained earnings............................. 23,816 16,791
-------- -------
Total shareholders' equity...................... 76,257 66,726
-------- -------
Total liabilities and shareholders' equity...... $103,029 $70,356
======== =======
</TABLE>

PARENT COMPANY ONLY--INCOME STATEMENTS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996* 1995*
- ---------------------- ---------- ----------- ----------
<S> <C> <C> <C>
Income:
Interest income............................................................ $ 389 $ 531 $ 80
Other income............................................................... 27 142 638
-------- ------- ------
Total........................................................................ 416 673 718
-------- ------- ------
Provision for loan losses - 113 -
Expenses:
Interest expense........................................................... 1,458 -- --
Salaries................................................................... 5,978 135 108
Occupancy and equipment.................................................... 1,154 461 448
Other expenses............................................................. 2,532 1,651 696
Less rentals and fees received from Banks.................................. (10,201) (460) (441)
-------- ------- ------
Total........................................................................ 921 1,787 811
-------- ------- ------
Loss before taxes and equity in undistributed net income of subsidiaries..... (505) (1,227) (93)
Income tax expense (benefits)................................................ (249) (149)
-------- ------- ------
21
-------
Income (loss) before equity in undistributed net income of subsidiaries...... (256) (1,248)
-------- ------- 56
------
Equity in undistributed net income of subsidiaries........................... 11,267 7,126 4,954
-------- ------- ------
Net income................................................................... $ 11,011 $ 5,878 $5,010
======== ======= ======
</TABLE>

* Restated on a historical basis to reflect the mergers discussed in Note 2.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996* 1995*
------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Cash flows--operating activities:
Net income........................................................ $ 11,011 $ 5,878 $ 5,010
Reconciliation of net income to net cash from operations:
Equity in undistributed net income of subsidiaries............. (11,267) (7,126) (4,954)
Provision for loan losses -- 113 --
Net change in other assets..................................... (1,601) 271 (920)
Net change in other liabilities................................ 2,524 142 309
-------- ------- -------
Operating cash flow, net............................................ 667 (722) (555)
-------- ------- -------
Cash flows--investing activities:
Purchases of available for sale securities........................ (8,293) -- --
Proceeds from sale of available for sale securities............... 3,156 -- --
Principal repayment of loans receivable........................... -- 113 187
Purchase of subordinated debentures from CNB...................... -- -- (3,000)
Dividends from subsidiaries....................................... 3,617 769 440

Capital contribution to the subsidiaries............................ (13,818) (1,003) (1,352)
-------- ------- -------
Investing cash flows, net........................................... (15,338) (121) (3,725)
-------- ------- -------
Cash flows--financing activities:
Capital contribution -- -- 2,000
Proceeds from the sale of stock -- -- 100
Proceeds from issuance of subordinated debt....................... 20,618 -- 3,000
Proceeds from exercise of stock options and employees stock
purchases....................................................... 2,193 1,954 1,577
Cash paid in lieu of fractional shares on stock dividends......... -- -- (3)
Payment of cash dividends......................................... (3,986) (2,311) (1,832)
-------- ------- -------
Financing cash flows, net........................................... 18,825 (357) 4,842
-------- ------- -------
Net increase in cash and cash equivalents........................... 4,154 (1,200) 562
Cash and cash equivalents at the beginning of the year.............. 650 1,850 1,288
-------- ------- -------
Cash and cash equivalents at end of the year........................ $ 4,804 $ 650 $ 1,850
======== ======= =======
</TABLE>

* Restated on a historical basis to reflect the mergers discussed in Note 2.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

NOTE 18--SUBSEQUENT EVENTS

On August 31, 1998, the Company completed a merger with Pacific Business
Funding Corporation ("PBFC"), an asset-based specialty finance company. The
following table sets forth the composition of the combined operations of the
Company and PBFC for the six-month period ended June 30, 1998 prior to the
consummation of the merger on August 31, 1998. At June 30, 1998, PBFC had total
assets of $17.1 million, total liabilities of $17.0 million and total equity of
$0.1 million. As this merger was not materially significant, no supplemental
financial statements reflecting this merger have been prepared.

<TABLE>
<CAPTION>
(UNAUDITED)
-----------
SIX MONTHS
----------
ENDED JUNE 30,
--------------
1998
----
(DOLLARS IN THOUSANDS)
- ----------------------------
<S> <C>
Net Interest Income:
Greater Bay Bancorp............. $ 30,077
PBFC 1,164
--------
Combined....................... $ 31,241
--------
Provision for loan losses:
Greater Bay Bancorp............. $ 2,243
PBFC............................ 100
--------
Combined....................... $ 2,343
--------
Net Income:
Greater Bay Bancorp............. $ 6,628
PBFC............................ 574
--------
Combined....................... $ 7,202
--------
</TABLE>

NOTE 19--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, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
CARRYING CARRYING
--------- ---------
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks............................................ $ 53,000 $ 53,000 $ 49,959 $ 49,959
Short term investments............................................. 178,549 178,549 141,712 141,712
Investment securities.............................................. 213,127 215,912 135,671 136,030
Loans, net......................................................... 718,529 718,670 553,603 557,244

Financial liabilities:
Deposits:
Demand, noninterest-bearing..................................... 219,495 219,495 171,497 171,498
MMDA, NOW and Savings........................................... 627,475 627,476 491,313 491,313
Time certificates, $100,000 and over............................ 183,147 183,103 91,504 91,629
Other time certificates......................................... 41,031 41,013 66,819 67,078
Other borrowings................................................... 19,480 19,480 12,000 12,000
Subordinated debt.................................................. 3,000 3,337 3,000 3,000
Company obligated mandatory redeemable preferred securities
of subsidiary trust holding solely junior subordinated
debentures....................................................... 20,000 21,210 -- --
</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.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

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 loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions. The fair
value of performing variable rate loans is judged to approximate book value for
those loans whose rates reprice in less than 90 days. Rate floors and rate
ceilings are not considered for fair value purposes as the number of loans with
such limitations is not significant.

Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.

Deposit Liabilities and Borrowings

The fair value for all deposits without fixed maturities and short term
borrowings is considered to be equal to the carrying value. The fair value for
fixed rate time deposits and subordinated debt are estimated by discounting
future cash flows using interest rates currently offered on time deposits or
subordinated debt with similar remaining maturities.

Commitments to Extend Credit and Standby Letters of Credit

The majority of the Company's commitments to extend credit carry current
market interest rate if converted to loans. Because these commitments are
generally unassignable by either the Company or the borrower, they only have
value to the Company and the borrower. The estimated fair value approximates the
recorded deferred fee amounts and is excluded from the table.

Limitations

Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale, at one time, the Company's entire holdings of a particular financial
instrument. Fair value estimates are based on judgments regarding future
expected loss experience, current economic condition, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
<PAGE>

GREATER BAY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have significant effect on
fair value estimates and have been considered in many of the estimates.

NOTE 20--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
(DOLLARS IN THOUSANDS, ---------------------- ---------------------- ---------------------- ----------------------
----------------------
EXCEPT PER SHARE DATA) (1) 1997 1996 1997 1996 1997 1996 1997 1996
-------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income.............. $23,904 $17,977 $22,304 $14,996 $20,910 $14,163 $18,281 $13,577
Net interest income.......... 14,692 11,617 13,780 9,531 12,629 9,242 11,426 8,622
Provision for loan losses.... 1,000 806 1,224 838 2,275 410 1,993 365
Other income................. 1,512 1,087 1,478 1,468 2,480 994 1,114 1,109
Other expenses............... 12,636 10,952 8,245 7,170 8,109 6,853 6,154 6,424
Income before taxes.......... 2,568 946 5,789 2,991 4,725 2,973 4,393 2,942
Net income................... 1,553 298 3,643 1,773 3,011 2,006 2,804 1,801
Earnings per share:
Basic....................... $ 0.18 $ 0.03 $ 0.41 $ 0.21 $ 0.34 $ 0.24 $ 0.31 $ 0.21
Diluted..................... $ 0.16 $ 0.03 $ 0.38 $ 0.20 $ 0.32 $ 0.29 $ 0.29 $ 0.20
</TABLE>

____________
(1) Quarterly amounts have been restated on a historical basis to reflect the
mergers discussed in Note 2.
<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 and Subsidiaries (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997,
restated for all periods presented to give effect to the business combination
with Pacific Rim Bancorporation, the former holding company of Golden Gate Bank,
on May 8, 1998, accounted for as a pooling-of-interests. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
September 2, 1998