<PAGE>
As filed with the Securities and Exchange Commission on July 6, 1999
Registration No.: 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
Greater Bay Bancorp
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
California 6711 77-0487041
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2860 West Bayshore Road
Palo Alto, California 94303
(650) 813-8200
(Address including zip code, and telephone number, including area code, of
registrant's principal executive office)
Linda M. Iannone
General Counsel
Greater Bay Bancorp
400 Emerson Street, 3rd Floor
Palo Alto, California 94301
(650) 614-5734
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
William T. Quicksilver, Esq. Steven M. Plevin, Esq.
Manatt, Phelps & Phillips LLP Lillick & Charles LLP
11355 West Olympic Boulevard Two Embarcadero Center
Los Angeles, California 90064 San Francisco, California 94111
Telephone: (310) 312-4210 Telephone: (415) 984-8462
</TABLE>
----------------
Approximate date of commencement of proposed sale to public:
As soon as practicable after this Registration Statement becomes effective.
----------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed maximum
Proposed maximum aggregate
Title of Each Class of Amount to be offering price offering price Amount of
Securities to be Registered registered (2) per unit (3) (3) registration fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value(1)... 972,809 -- $1,194,435 $6,558
- ------------------------------------------------------------------------------------------------------
</TABLE>
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(1) Includes one attached Preferred Share Purchase Right per share.
(2) This amount is based on the maximum number of shares of Greater Bay Common
Stock to be issued upon consummation of the Merger contemplated in the
Agreement and Plan of Reorganization dated April 30, 1999 by and between
Greater Bay Bancorp and Bay Commercial Services based on an assumed
Conversion Ratio of 0.7358.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) and Rule 457(f)(l) of the
Securities Act of 1933, as amended, based on the product of the estimated
maximum number of shares of common stock of Bay Commercial Services to be
exchanged for the stock of the Greater Bay Bancorp multiplied by the
average of the bid and asked prices of Bay Commercial Services Common Stock
as reported on the OTC Bulletin Board on July 2, 1999.
----------------
Greater Bay Bancorp hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until Greater Bay
Bancorp shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated July 6, 1999
[BAY COMMERCIAL SERVICES LOGO]
MERGER PROPOSED
Dear Fellow Shareholders,
We are pleased to enclose a notice of special meeting and a proxy
statement/prospectus relating to the approval of the merger of Bay Commercial
Services with Greater Bay Bancorp. The Board of Directors of Bay Commercial
Services has approved the merger and believes the combined company will be
better positioned to be a strong competitor in the rapidly changing and
consolidating financial services industry.
If you approve the merger, Bay Commercial Services will merge into Greater
Bay and Bay Bank of Commerce will become a wholly owned subsidiary of Greater
Bay. For each outstanding share of Bay Commercial Services stock you will
receive 0.7134 shares of Greater Bay common stock if the average closing price
of that stock is between $27.00 and $31.00 upon completion of the merger. If
the average closing price of that stock is less than $27.00 or greater than
$31.00 upon completion of the merger, the conversion ratio will adjust
according to a formula. We estimate that, upon completion of the merger,
approximately % of the outstanding Greater Bay common stock will be owned
by current Bay Commercial Services shareholders. Greater Bay's common stock is
listed on The Nasdaq National Market under the symbol "GBBK".
After careful consideration, the Board of Directors of Bay Commercial
Services has determined that the merger is in the best interests of its
shareholders, and unanimously recommends voting FOR approval of the merger
agreement and the transactions provided for in the merger agreement.
YOUR VOTE IS VERY IMPORTANT. We cannot complete the merger unless the
shareholders of Bay Commercial Services approve the merger agreement.
We have scheduled a special meeting for our shareholders to vote on the
merger agreement. Whether or not you plan to attend the meeting, please take
the time to vote by completing and mailing the enclosed proxy card to us. If
you sign, date and mail your proxy card without indicating how you want to
vote, your proxy will be counted as a vote in favor of the merger. If you do
not return your card, the effect will be a vote against the merger. If your
shares are held in "street name," you must instruct your broker in order to
vote.
The date, time and place of the special meeting is , , 1999,
m., at the , located at , , California .
This proxy statement/prospectus serves as a prospectus of Greater Bay Bancorp
relating to the issuance of shares of its common stock in connection with the
proposed merger and is a proxy statement for Bay Commercial Services in
connection with the solicitation of proxies by its Board of Directors for use
at its special meeting of shareholders regarding the merger agreement and the
proposed merger. The document accompanying this letter provides you with
detailed information regarding the merger agreement, the proposed merger and
the two companies. We encourage you to read this entire document carefully. You
can also obtain more information about Bay Commercial Services and Greater Bay
Bancorp in documents filed with the Securities and Exchange Commission. See
"Risk Factors" on page 15 for discussion of the material risk factors that you
should consider before voting on the merger proposal.
We strongly support this strategic combination between Bay Commercial
Services and Greater Bay Bancorp and appreciate your prompt attention to this
very important matter.
Richard M. Kahler
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this document. Any representation to the contrary is a
criminal offense. The securities offered hereby are not savings accounts,
deposits or other obligations of a bank or savings association and are not
insured by the Federal Deposit Insurance Corporation or any other government
agency.
The date of this Proxy Statement/Prospectus is , 1999 and it is first
being mailed to shareholders on or about , 1999.
<PAGE>
BAY COMMERCIAL SERVICES
1495 EAST 14TH STREET
SAN LEANDRO, CALIFORNIA 94577
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On , 1999
----------------
A special meeting of shareholders of Bay Commercial Services will be held on
, , 1999, at .m., at the , located at , ,
California , for the following purposes:
(1) To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Reorganization, dated as of April 30, 1999, by and between
Bay Commercial Services and Greater Bay Bancorp, and the transactions
contemplated by the merger agreement, including the merger of Bay
Commercial Services with and into Greater Bay Bancorp; and
(2) To transact such other business as may properly come before the special
meeting or any adjournment or postponement of the meeting.
Your Board of Directors unanimously recommends a vote in favor of the
approval of the merger agreement.
Only holders of record of Bay Commercial Services common stock as of the
close of business on , , 1999, are entitled to notice of and to vote
at the special meeting and any adjournments or postponements of the meeting.
We direct your attention to the documents submitted with this notice.
By Order of the Board of Directors
Randall D. Greenfield
Corporate Secretary
San Leandro, California
, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, WE URGE YOU
TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS EXERCISE IN THE
MANNER PROVIDED IN THE ACCOMPANYING DOCUMENT.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why is Bay Commercial Services merging with Greater Bay Bancorp?
A: The Bay Commercial Services Board of Directors believes the merger is in
the best interests of the company and will provide significant benefits to
its shareholders, customers and employees. The Board believes the merger
will create a company with enhanced financial performance which will be
better positioned to be a strong competitor in the rapidly changing and
consolidating financial services industry. To review the background and
reasons for the merger in greater detail, see pages 21 through 24.
Q: What will I receive in the merger?
A: For each outstanding share of Bay Commercial Services common stock you own,
you will receive 0.7134 shares of Greater Bay common stock if the average
closing price of that stock is between $27.00 and $31.00 (as defined
below). This is called the "conversion ratio." If the average closing price
of that stock is less than $27.00 or greater than $31.00 at the closing,
the Conversion Ratio will adjust according to a formula.
Average closing price means the average closing sale price on The Nasdaq
National Market of Greater Bay common stock for the 15 consecutive trading
days ending at the end of the third trading day immediately before
completion of the merger.
Greater Bay will not issue fractional shares in the merger. Instead, you
will receive a cash payment, without interest, for the value of any
fraction of a share of Greater Bay common stock that you would otherwise
be entitled to receive based upon the market value (as determined in the
merger agreement) of a share of Greater Bay common stock at the time of
the merger.
Each share of Greater Bay common stock held by Greater Bay shareholders
will continue to represent one share of Greater Bay common stock following
the merger. After the merger, Bay Commercial Services' former shareholders
will own approximately 8.8% of Greater Bay's outstanding shares of common
stock and current Greater Bay shareholders will own approximately 91.2% of
Greater Bay's outstanding shares of common stock.
For example:
. If the average closing price of Greater Bay common stock is $30.00 at the
completion of the merger, and you own 100 shares of Bay Commercial
Services common stock, then after the merger you will receive 71 shares
of Greater Bay common stock and a check in an amount representing the
fractional share.
. If the average closing price of Greater Bay common stock is $26.00 at the
completion of the merger and you own 100 shares of Bay Commercial
Services common stock, then after the merger you will receive 72 shares
of Greater Bay common stock and a check in an amount representing the
fractional share.
. If the average closing price of Greater Bay common stock is $32.00 at the
completion of the merger and you own 100 shares of Bay Commercial
Services common stock, then after the merger you will receive 70 shares
of Greater Bay common stock and a check in an amount representing the
fractional share.
Q: What risks should I consider?
A: You should review "Risk Factors" on page 15.
You should also review the factors considered by Bay Commercial Services'
Board of Directors. See "The Merger--Background of and Reasons for the
Merger" (pages 21 through 24).
Q: What happens as the market price of Greater Bay Common Stock fluctuates?
A: The conversion ratio may adjust, depending on the average closing price of
Greater Bay common stock as described above. Since the market value of
Greater Bay common stock will fluctuate before and after the closing of the
merger, the value of the Greater Bay common stock that Bay Commercial
Services shareholders will receive in the merger will fluctuate as well and
could increase or decrease. You are urged to obtain current market prices
(i)
<PAGE>
for shares of Greater Bay common stock and Bay Commercial Services common
stock.
Q: When is the merger expected to be completed?
A: We are working to complete the merger during the third quarter of 1999.
Q: What am I being asked to vote upon?
A: You are being asked to approve the merger agreement which provides for the
merger of Bay Commercial Services into Greater Bay Bancorp, following which
Bay Bank of Commerce will become a wholly owned subsidiary of Greater Bay.
Q: What should I do now?
A: Just indicate on your proxy card how you want to vote, and sign and mail it
in the enclosed envelope as soon as possible, so that your shares will be
represented at the meeting.
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be voted in favor of the proposal to approve and
adopt the merger agreement. If you do not sign and send in your proxy or
you abstain, it will have the effect of a vote against the merger.
You may attend the meeting and vote your shares in person, rather than
voting by proxy. In addition, you may revoke your proxy up to and including
the day of the meeting by following the directions on page 18 and either
change your vote or attend the meeting and vote in person.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares of Bay Commercial Services common stock
only if you provide instructions on how to vote. You should instruct your
broker how to vote your shares, following the directions your broker
provides. If you do not provide instructions to your broker, your shares
will not be voted and this will have the effect of voting against the
merger.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed we will send you written instructions for
exchanging your Bay Commercial Services common stock certificates for
Greater Bay common stock certificates.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:
Richard M. Kahler
President and Chief Executive Officer
Bay Commercial Services
1495 East 14th Street
San Leandro, California 94577
Telephone: (510) 357-2265
(ii)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... i
SUMMARY.................................................................... 1
The Companies............................................................ 2
The Meeting.............................................................. 2
Record Date; Voting Power................................................ 2
Vote Required............................................................ 2
Share Ownership of Management............................................ 2
Recommendation........................................................... 2
Opinion of Financial Advisor............................................. 2
Terms of the Merger Agreement............................................ 2
Interests of Certain Persons in the Merger............................... 4
Material Federal Income Tax Consequences................................. 5
Accounting Treatment..................................................... 5
Resales of Greater Bay Common Stock...................................... 5
Regulatory Approvals..................................................... 5
Dissenters' Rights....................................................... 5
Differences in the Rights of Shareholders................................ 6
Market Price And Dividend Information...................................... 7
Comparative Market Price Data............................................ 7
Historical Market Prices and Dividends................................... 7
Selected Financial Data.................................................... 9
Historical and Pro Forma Per Share Data for Greater Bay and Bay
Commercial Services..................................................... 10
Greater Bay Historical Selected Financial Data........................... 11
Bay Commercial Services Historical Selected Financial Data............... 13
Selected Unaudited Pro Forma Combined Financial Data..................... 14
RISK FACTORS............................................................... 16
The merger consideration you will receive will be affected by potential
changes
in relative stock prices ............................................... 16
There are uncertainties in integrating our business operations and
realizing enhanced earnings............................................. 16
A WARNING ABOUT FORWARD-LOOKING INFORMATION................................ 17
THE MEETING................................................................ 18
General.................................................................. 18
Bay Commercial Services Meeting.......................................... 18
THE MERGER................................................................. 20
Structure of the Merger.................................................. 20
Background of and Reasons for the Merger................................. 22
Opinion of Financial Advisor............................................. 25
Interests of Certain Persons in the Merger............................... 29
Nasdaq Listing........................................................... 30
Material Federal Income Tax Consequences................................. 30
Accounting Treatment of the Merger....................................... 31
Exchange of Bay Commercial Services Common Stock for Greater Bay Common
Stock................................................................... 31
THE MERGER AGREEMENT....................................................... 33
Conditions to the Merger................................................. 33
Nonsolicitation.......................................................... 34
Expenses................................................................. 35
Treatment of Options..................................................... 35
Termination.............................................................. 35
Covenants; Conduct of Business Prior to Effective Time................... 36
Amendment and Waiver..................................................... 38
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
Agreements with Certain Shareholders..................................... 38
Resales of Greater Bay Common Stock...................................... 39
Regulatory Approvals..................................................... 39
DISSENTING SHAREHOLDERS' RIGHTS............................................ 41
DESCRIPTION OF GREATER BAY COMMON STOCK AND BAY COMMERCIAL SERVICES COMMON
STOCK..................................................................... 42
Stock Description........................................................ 43
Material Differences Between Holders of Greater Bay Stock and Bay
Commercial Services Stock............................................... 44
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............... 48
EXPERTS.................................................................... 55
LEGAL MATTERS.............................................................. 55
WHERE YOU CAN FIND MORE INFORMATION........................................ 55
</TABLE>
<TABLE>
<C> <S> <C>
Annex A: Agreement and Plan of Reorganization by and among Greater Bay
Bancorp and Bay Commercial Services dated April 30, 1999........ A-1
Annex B: Fairness Opinion of First Security Van Kasper dated ,
1999............................................................ B-1
Annex C: Selected Provisions of the California General Corporation Law
Regarding Dissenters' Rights.................................... C-1
Annex D: Bay Commercial Services Annual Report on Form 10-KSB and Form
10-KSB/A for the year ended December 31, 1998................... D-1
Annex E: Bay Commercial Services Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1999.................................... E-1
</TABLE>
(iv)
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the merger and for a more complete description of the legal
terms of the merger, you should read this entire document carefully, as well as
the additional documents to which we refer you, including the merger agreement
which we have attached as Annex A. For information about where to obtain these
additional documents read the information under the caption entitled "Where You
Can Find More Information" (page 54).
The Companies
Greater Bay Bancorp
2860 W. Bayshore Road
Palo Alto, California 94303
(650) 813-8200
Greater Bay is a bank holding company operating Cupertino National Bank,
Mid-Peninsula Bank, Peninsula Bank of Commerce, Golden Gate Bank and Bay Area
Bank. These banks and Greater Bay have various operating divisions, including
Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay
Corporate Finance Group, Greater Bay Bank Contra Costa Business Banking Office,
Greater Bay International Banking Division, Greater Bay Trust Company, Pacific
Business Funding and Venture Banking Group.
Through its financial services subsidiaries and operating divisions, Greater
Bay serves clients throughout Silicon Valley, the San Francisco Peninsula and
the Contra Costa Tri Valley Region, with offices located in San Jose,
Cupertino, Santa Clara, Palo Alto, Redwood City, San Mateo, Millbrae, San
Bruno, San Francisco and Walnut Creek.
Greater Bay provides a wide range of commercial banking and financial
services to small and medium-sized businesses, real estate developers and
property managers, business executives, professionals and other individuals.
Bay Commercial Services
1495 East 14th Street
San Leandro, California 94577
(510) 357-2265
Bay Commercial Services is a California corporation and a bank holding
company registered under the Bank Holding Company Act of 1956, as amended. It
was incorporated on June 17, 1981. Bay Bank of Commerce was incorporated as a
California banking corporation on August 11, 1980 and became a wholly-owned
subsidiary of Bay Commercial Services through a reorganization in 1983.
Bay Bank of Commerce is a full service commercial bank serving San Leandro
and Hayward in Alameda County and San Ramon in Contra Costa County and the
surrounding areas in California. Bay Bank of Commerce provides a wide range of
commercial banking services to individuals, professionals and small and medium-
sized businesses. In order to attract these types of customers, Bay Bank of
Commerce offers personalized services and banking convenience. The services
provided include checking, interest checking, savings and interest-bearing
demand, money market and other time deposit accounts; commercial, real estate,
U.S. Small Business Administration and consumer loans; travelers' checks, safe
deposit boxes, collection services, night depository facilities and wire and
telephone transfers.
1
<PAGE>
The Meeting (pages 17 and 18)
The Bay Commercial Services shareholders' meeting will be held at
, located at , City, California , at , local
time, on , , 1999. At the meeting, shareholders will be asked to
consider and vote upon a proposal to approve and adopt the merger agreement.
Record Date; Voting Power (page 17)
You are entitled to vote at the meeting if you owned Bay Commercial Services
common stock on , 1999, the record date for the special meeting. As of
that date, there were shares of Bay Commercial Services common stock
issued and outstanding held by approximately holders of record.
Shareholders are entitled to one vote per share on any matter that may properly
come before the meeting.
Vote Required (page 17)
Approval by the Bay Commercial Services shareholders of the proposal to
approve and adopt the merger agreement will require the affirmative vote of a
majority of the outstanding shares of Bay Commercial Services common stock.
Share Ownership of Management (page 17)
On the record date for the special meeting, the executive officers and
directors of Bay Commercial Services, including their affiliates, had voting
power with respect to an aggregate of shares of Bay Commercial Services
common stock, or approximately % of the shares of the common stock then
outstanding.
We currently expect that these directors and executive officers will vote
the shares of Bay Commercial Services common stock owned by them FOR the
proposal to approve and adopt the merger agreement and the transactions
contemplated thereby.
Recommendation (page 18)
The Bay Commercial Services Board of Directors has unanimously approved and
adopted the merger agreement, and recommends a vote FOR approval of the merger
agreement and the transactions contemplated thereby. You also should refer to
the reasons that the Bay Commercial Services Board considered in determining
whether to approve and adopt the merger agreement on pages 23 and 24.
Opinion of Financial Advisor (pages 24 through 28)
First Security Van Kasper, financial advisor to Bay Commercial Services,
rendered an oral opinion on April 29, 1999 to the Bay Commercial Services Board
that as of that date, the conversion ratio was fair to the Bay Commercial
Services shareholders from a financial point of view. First Security Van Kasper
subsequently confirmed its April 29, 1999 opinion by delivery to the Bay
Commercial Services Board of a written opinion dated , 1999. A copy of
the fairness opinion, setting forth the information reviewed, assumptions made
and matters considered by First Security Van Kasper, is attached to this
document as Annex B. You should read the fairness opinion in its entirety.
Terms of the Merger Agreement (pages 32 through 39)
The merger agreement is attached to this document as Annex A. We encourage
you to read the merger agreement in its entirety. It is the legal document that
governs the merger.
General. The merger agreement provides that Bay Commercial Services will be
merged with and into Greater Bay Bancorp, with Bay Bank of Commerce becoming a
wholly owned subsidiary of Greater Bay.
2
<PAGE>
Conversion Ratio. For each outstanding share of Bay Commercial Services
common stock, you will receive 0.7134 shares of Greater Bay common stock if the
average closing price of that stock is between $27.00 and $31.00 (as defined
below). If the average closing price of that stock is less than $27.00 or
greater than $31.00, the conversion ratio will adjust according to a set
formula. Greater Bay will not issue fractional shares. Instead, you will
receive a check equal to the amount of any fractional share you would otherwise
receive. Average closing price means the average closing sale price on The
Nasdaq National Market of Greater Bay common stock for the 15 consecutive
trading days ending at the end of the third trading day immediately before
completion of the merger.
Completion of the Merger. The merger will become effective when we file an
agreement of merger with the Secretary of State of California. The merger
agreement provides that we will file the agreement of merger as soon as
practicable following the satisfaction or waiver of the conditions to the
merger.
Conditions to the Merger. The completion of the merger depends upon the
satisfaction of a number of conditions, including:
. approval of the merger agreement by the Bay Commercial Services
shareholders;
. receipt of listing approval from The Nasdaq National Market for the
Greater Bay Common Stock to be issued in the merger;
. receipt of all necessary authorizations, orders and consents of
governmental authorities and the expiration of any regulatory waiting
periods;
. effectiveness of the registration statement of Greater Bay relating to
the shares of Greater Bay common stock to be issued to Bay Commercial
Services shareholders in the merger, of which this document forms a part;
. receipt from PricewaterhouseCoopers LLP of a letter confirming that the
merger qualifies for pooling of interests accounting treatment, and
receipt from Deloitte & Touche LLP of a letter confirming that no
conditions exist with respect to either Bay Commercial Services or Bay
Bank of Commerce that would preclude pooling of interests accounting
treatment;
. receipt of an opinion of Greater Bay's counsel that the merger will be
treated for U.S. federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended; and
. confirmation that the fully diluted book value per share of Bay
Commercial Services common stock at the close of business on the last day
of the month prior to completion of the merger is not less than $8.74.
Unless prohibited by law, either Greater Bay or Bay Commercial Services
could elect to waive any condition.
Termination. Either Bay Commercial Services or Greater Bay may call off the
merger under certain circumstances, including if:
. Greater Bay and Bay Commercial Services consent in writing;
. the merger is not completed before December 31, 1999;
. legal restraints prevent the merger;
. the Bay Commercial Services shareholders do not approve the merger
agreement;
. the other party breaches in a material manner any of the representations
or warranties or any covenant or agreement it has under the merger
agreement; or
. any condition to the party's obligations under the merger agreement has
not been met or waived at a time when the condition could no longer be
satisfied.
3
<PAGE>
In addition, Greater Bay may call off the merger if the Bay Commercial
Services Board approves, recommends or causes Bay Commercial Services to enter
into any agreement with a party other than Greater Bay providing for the
merger, consolidation, share exchange, joint venture, business combination or
similar transaction involving Bay Commercial Services or any subsidiary of Bay
Commercial Services, or any purchase of all or any material portion of the
assets of Bay Commercial Services or any subsidiary of Bay Commercial Services.
If that occurs, Bay Commercial Services will have to pay Greater Bay a
competing transaction fee of $1,750,000.
Similarly, Bay Commercial Services may call off the merger if Greater Bay
announces a transaction in which 100% of the outstanding shares of Greater Bay
common stock will be acquired by a third party, that transaction is consummated
and the third party terminates the merger agreement between Greater Bay and Bay
Commercial Services. If that occurs, Greater Bay will have to pay Bay
Commercial Services a fee of $1,500,000. In addition, Bay Commercial Services
may call off the merger if the average closing price is less than $25.50,
unless Greater Bay decides to exercise a top up option as described under the
heading "The Merger--Structure of the Merger--Conversion of Shares" on page 19.
Fees and Expenses. Greater Bay and Bay Commercial Services will pay their
own fees, costs and expenses incurred in connection with the merger agreement
except that they will equally divide printing costs associated with this
document. In addition, each of Bay Commercial Services and Greater Bay have
agreed that if the merger agreement is terminated under specific circumstances,
including the withdrawal by the Bay Commercial Services Board of its
recommendation to the Bay Commercial Services shareholders with respect to the
merger or the failure of the Bay Commercial Services shareholders to approve
the merger agreement, then, depending upon the reason for termination, either
Bay Commercial Services or Greater Bay, as applicable, will reimburse all out-
of-pocket expenses and fees of the other party relating to the transactions
contemplated by the merger agreement. Reimbursement under these circumstances,
however, will be limited to $250,000 in the case of reimbursement to Greater
Bay and $150,000 in the case of reimbursement to Bay Commercial Services.
Interests of Certain Persons in the Merger (pages 28 and 29)
A number of directors and executive officers of Bay Commercial Services have
interests in the merger as employees and/or directors that are different from,
or in addition to, yours as a Bay Commercial Services shareholder. The Bay
Commercial Services Board recognized these interests and determined that they
did not affect the benefits of the merger to the Bay Commercial Services
shareholders.
Upon completion of the merger, the current members of the Boards of Greater
Bay and Bay Bank of Commerce will continue as members of their respective
Boards. Also, David L. Kalkbrenner, President and Chief Executive Officer of
Greater Bay, will become a director of Bay Bank of Commerce.
If the merger takes place, the following will occur:
. outstanding options to purchase Bay Commercial Services common stock held
by directors, officers and employees of Bay Commercial Services and its
subsidiaries will be automatically converted into options to acquire
shares of Greater Bay common stock adjusted to account for the Conversion
Ratio;
. certain members of senior management of Bay Bank of Commerce will remain
as senior management of Bay Bank of Commerce; and
. Richard M. Kahler, Randall D. Greenfield and Robert Perantoni, executive
officers of Bay Bank of Commerce, will be entitled to receive retention
amounts of $520,000, $265,000 and $82,000, respectively, if they remain
in the employ of Bay Bank of Commerce or Greater Bay for one year, six
months and three months, respectively, after completion of the merger.
Upon the signing of the merger agreement, there were outstanding options to
purchase an aggregate of 51,060 shares of Bay Commercial Services Common Stock.
Of the outstanding options, Messrs. Kahler,
4
<PAGE>
Greenfield and Perantoni and the Bay Commercial Services' directors held
options to purchase 3,725 shares of Bay Commercial Services Common Stock at a
per share weighted average exercise price of $4.25.
Material Federal Income Tax Consequences (pages 29 and 30)
Greater Bay and Bay Commercial Services have received a legal opinion
stating that neither Greater Bay nor Bay Commercial Services will recognize
gain or loss for federal income tax purposes as a result of the merger. The
opinion also concludes that you will not recognize gain or loss upon the
exchange of your Bay Commercial Services common stock for Greater Bay common
stock in the merger. If, however, shareholders receive cash instead of
fractional shares or upon exercise of dissenters' rights, that cash would be
taxable.
Accounting Treatment (page 30)
We expect the merger to be accounted for as a pooling of interests, which
means that we will treat our companies as if they had always been combined for
accounting and financial reporting purposes.
Resales of Greater Bay Common Stock (page 38)
Shares of Greater Bay common stock received by you in the merger will be
freely transferable by the holders, except for those shares held by holders who
may be deemed to be "affiliates." Affiliates generally include directors,
specific executive officers and holders of 10% or more of outstanding voting
securities of Bay Commercial Services or Greater Bay, under applicable federal
securities laws. Bay Commercial Services has provided to Greater Bay the
written agreements of its "affiliates" that these "affiliates" will not dispose
of their shares of Bay Commercial Services common stock and Greater Bay common
stock, except in compliance with the Securities Act of 1933 and applicable
accounting rules governing pooling of interests.
Regulatory Approvals (pages 38 and 39)
Greater Bay is required to make filings with or obtain approvals from
regulatory authorities to effect the merger. These consents and approvals
include the approval of the Federal Reserve Board and the California Department
of Financial Institutions.
Greater Bay submitted an application for approval of the merger with the
Federal Reserve Board on , 1999. Greater Bay also submitted an
application for approval of the merger with the California Department of
Financial Institutions on , 1999. All other necessary applications and
notices have been filed.
We cannot predict whether or when we will obtain all required regulatory
approvals.
Dissenters' Rights (pages 40 and 41)
As a shareholder of Bay Commercial Services you will have dissenters' rights
under California law. This means that shareholders who vote against the merger
may disagree with the merger and make a written demand to Bay Commercial
Services for payment in cash of the "fair market value" of their shares. The
demand must be made within 30 days after the date on which Bay Commercial
Services sends a notice stating that the shareholders approved the merger. The
Bay Commercial Services Board of Directors has determined that the "fair market
value" of one share of Bay Commercial Services for this purpose is $17.50. That
amount represents the final bid price for Bay Commercial Services common stock
on April 30, 1999, the business day before the public announcement of the
merger. The procedure for exercising your dissenters' rights is summarized
under the heading "Dissenting Shareholders' Rights." The relevant provisions of
California Law on dissenters' rights are attached to this document as Annex C.
5
<PAGE>
Differences in the Rights of Shareholders (pages 43 through 46)
Both Greater Bay and Bay Commercial Services are incorporated under the laws
of the State of California. Upon completion of the merger, you will become
Greater Bay shareholders, and your rights as such will be governed by Greater
Bay's articles of incorporation and bylaws and will continue to be governed by
California law.
6
<PAGE>
Market Price And Dividend Information
Comparative Market Price Data
The following table presents trading information for Greater Bay common
stock on The Nasdaq National Market and Bay Commercial Services common stock on
the OTC Bulletin Board on April 30, 1999 and , 1999. April 30, 1999 was
the last full trading day before our announcement of the signing of the merger
agreement. , 1999 was the last practicable trading day for which
information was available before the date of this document.
<TABLE>
<CAPTION>
BAY COMMERCIAL
GREATER BAY COMMON SERVICES COMMON
STOCK STOCK (DOLLARS PER
(DOLLARS PER SHARE) SHARE)
----------------------- --------------------
HIGH LOW CLOSE HIGH LOW CLOSE
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
April 30, 1999 .................... $30.250 $30.000 $30.125 $17.50 $17.50 $17.50
, 1999....................... $ $ $ $ $ $
</TABLE>
We urge you to obtain current market quotations for Greater Bay common stock
and Bay Commercial Services common stock. We expect that the market price of
Greater Bay common stock will fluctuate between the date of this document and
the date on which the merger is completed and thereafter. Because the market
price of Greater Bay common stock is subject to fluctuation, the value of the
shares of Greater Bay common stock that you will receive in the merger may
increase or decrease before and after the merger. For more information see the
heading "Risk Factors -- The merger consideration you will receive will be
affected by potential changes in the relative stock prices." In addition, as a
result of this fluctuation, the amount of cash you will receive instead of
Greater Bay's fractional shares will also fluctuate.
Historical Market Prices and Dividends
Greater Bay. Greater Bay common stock is listed on The Nasdaq National
Market under the symbol "GBBK." On the record date for the special meeting,
there were approximately holders of record of Greater Bay common stock. The
following table sets forth for the calendar quarter indicated, the high and low
sales prices per share of Greater Bay common stock as reported on The Nasdaq
National Market, and the dividends per share of Greater Bay common stock. The
prices per share of Greater Bay common stock set forth below have been adjusted
to reflect a two-for-one stock split effective as of April 30, 1998.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------- ------ ------ ---------
<S> <C> <C> <C>
1997:
First quarter........................................... $13.82 $11.63 $0.075
Second quarter.......................................... 15.75 12.44 0.075
Third quarter........................................... 22.44 15.50 0.075
Fourth quarter.......................................... 26.75 21.00 0.075
1998:
First quarter........................................... $31.38 $24.13 $0.095
Second quarter.......................................... 36.00 28.88 0.095
Third quarter........................................... 39.00 23.38 0.095
Fourth quarter.......................................... 35.00 24.50 0.095
1999:
First quarter........................................... $33.75 $27.56 $0.120
Second quarter ......................................... $33.25 $28.25 $0.120
Third quarter (through , 1999)...................... $ $ $
</TABLE>
7
<PAGE>
Bay Commercial Services. Bay Commercial Services common stock is traded on
the OTC Bulletin Board under the symbol "BCSV." On the record date for the
special meeting, there were approximately holders of record of Bay
Commercial Services common stock.
The following table indicates the range of high and low bid prices, not
including broker's commissions, for the calendar quarters indicated, based upon
information provided by Sutro & Company and the dividends per share of the Bay
Commercial Services common stock. The table does not include transactions made
privately by individuals. The prices listed below are inter-dealer prices, and
do not necessarily represent actual transactions and do not include retail
mark-up, mark-downs or commissions.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------- ------- ------- ---------
<S> <C> <C> <C>
1997:
First quarter......................................... $10.875 $10.000 --
Second quarter........................................ 12.000 10.875 --
Third quarter......................................... 13.125 12.000 --
Fourth quarter........................................ 16.250 13.250 $0.30
1998:
First quarter......................................... $16.250 $15.125 --
Second quarter........................................ 17.000 15.750 --
Third quarter......................................... 17.250 13.000 --
Fourth quarter........................................ 15.500 12.250 --
1999:
First quarter......................................... $15.000 $13.000 $0.40
Second quarter........................................ $19.000 $14.750 --
Third quarter (through , 1999).................... $ $ $
</TABLE>
8
<PAGE>
Selected Financial Data
We are providing the following information to aid you in your analysis of
the financial effects of the merger. The following tables show financial
results actually achieved by each of Greater Bay and Bay Commercial Services
(the "historical" figures). The tables also show results as if the companies
had been combined for the periods presented (the "pro forma combined" figures).
Pro forma combined figures are simply arithmetical combinations of Greater
Bay's and Bay Commercial Services' separate financial results; you should not
assume that Greater Bay and Bay Commercial Services would have achieved the pro
forma combined results if they had actually been combined during the periods
presented. These pro forma presentations treat our companies as if they had
always been combined for accounting and financial reporting purposes, a method
known as pooling of interests accounting, which is how we plan to account for
the merger. When you read this information, you should also read the
information under the heading "Unaudited Pro Forma Condensed Combined Financial
Information" (page 47). For purposes of illustration, the pro forma combined
figures have been calculated using the conversion ratio of 0.7134. However the
actual conversion ratio will be determined based on the average closing price
of Greater Bay common stock upon completion of the merger which is explained
further under "The Merger--Structure of the Merger" (pages 19 through 21).
Greater Bay's annual historical figures are derived from supplemental
consolidated financial statements audited by PricewaterhouseCoopers LLP,
independent public accountants of Greater Bay. The supplemental consolidated
financial statements of Greater Bay have been prepared on a basis that accounts
for the merger with Bay Area Bancshares, the former holding company of Bay Area
Bank, which was completed on May 21, 1999 using the pooling of interests method
of accounting. Upon publication of Greater Bay's financial statements for a
period which includes May 21, 1999, these supplemental financial statements
will become the historical financial statements of Greater Bay. Bay Commercial
Services' annual historical figures are derived from consolidated financial
statements as of December 31, 1998 and 1997 and for the three years then ended
audited by Deloitte & Touche LLP, independent auditors of Bay Commercial
Services. The historical figures for the other years presented have been
derived from the audited consolidated financial statements of Bay Commercial
Services. The annual historical information presented below should be read
together with the consolidated audited financial statements of Greater Bay,
incorporated in this document by reference, and of Bay Commercial Services,
incorporated in this document by reference and included in Annex D attached to
this document. To find this information, see "Where You Can Find More
Information" (page 54).
We expect to incur merger and other non-recurring expenses as a result of
combining our companies. We also anticipate that the merger will provide the
combined company with financial benefits such as reduced operating expenses and
the opportunity to earn additional revenue. However, none of these anticipated
expenses or benefits has been factored into the pro forma combined income
statement information. For that reason, the pro forma combined information,
while helpful in illustrating the financial attributes of the combined company
under one set of assumptions, does not attempt to predict or suggest future
results.
9
<PAGE>
Historical and Pro Forma Per Share Data for Greater Bay and Bay Commercial
Services
We have summarized below the per share information for our respective
companies on an historical, pro forma combined and equivalent basis. We have
adjusted Greater Bay's historical per share amounts at and for the years ended
December 31, 1997 and 1996 and for the three months ended March 31, 1998 to
reflect a two-for-one stock split effective April 30, 1998.
We have calculated the pro forma combined per share data for net income
using the weighted average number of shares of Greater Bay's common stock
outstanding for the period presented, increased by the weighted average number
of shares of Bay Commercial Services common stock outstanding for the period
presented multiplied by an assumed conversion ratio of 0.7134 shares of Greater
Bay's common stock for each share of Bay Commercial Services common stock, as
if these shares were outstanding for each period presented. The pro forma
combined per share data for dividends declared represents the sum of historical
dividends for Greater Bay common stock and the historical dividends for Bay
Commercial Services divided by the sum of Greater Bay common stock and Bay
Commercial Services common stock (adjusted for the assumed conversion ratio of
0.7134). The pro forma combined book value per share has been calculated using
shares of outstanding Greater Bay common stock increased by the shares of
outstanding Bay Commercial Services common stock multiplied by an assumed
conversion ratio of 0.7134 for each share of Bay Commercial Services Common
Stock as if these shares were outstanding as of the date presented.
The equivalent pro forma Bay Commercial Services shares information has been
calculated by multiplying the pro forma combined per share information by an
assumed conversion ratio of 0.7134.
<TABLE>
<CAPTION>
Bay Greater Bay & Bay Equivalent of One
Commercial Commercial Bay Commercial
Per Common Share Greater Bay Services Services Combined Services Share
- ---------------- ----------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Income:
Three months ended March
31, 1999
Basic................. $ 0.51 $ 0.24 $ 0.50 $ 0.70
Diluted............... 0.49 0.22 0.47 0.66
Three months ended March
31, 1998
Basic................. 0.43 0.24 0.41 0.57
Diluted............... 0.40 0.20 0.37 0.53
Year ended December 31,
1998
Basic................. 1.74 1.12 1.73 2.43
Diluted............... 1.63 0.95 1.61 2.25
Year ended December 31,
1997
Basic................. 1.29 0.99 1.29 1.81
Diluted............... 1.19 0.84 1.19 1.67
Year ended December 31,
1996
Basic................. 0.78 1.01 0.82 1.15
Diluted............... 0.72 0.89 0.76 1.07
Cash Dividends Declared:
Three months ended March
31, 1999............... $ 0.11 $ 0.40 $ 0.14 $ 0.19
Year ended December 31,
1998................... 0.47 -- 0.44 0.61
Year ended December 31,
1997................... 0.41 0.30 0.42 0.58
Year ended December 31,
1996................... 0.25 0.30 0.26 0.37
Book Value
March 31, 1999.......... $10.17 $10.01 $10.44 $14.64
December 31, 1998....... 9.73 10.54 10.06 14.10
December 31, 1997....... 8.30 9.43 8.64 12.10
</TABLE>
10
<PAGE>
Greater Bay Historical Selected Financial Data
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------------ -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ---------- ----------
(Dollars in thousands, except per share and share
amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Interest income......... $ 34,461 $ 28,175 $ 124,798 $ 98,261 $ 71,284 $ 60,567 $ 46,309
Interest expense........ 13,921 11,255 51,180 37,012 24,918 21,184 13,394
----------- ----------- ----------- ----------- ----------- ---------- ----------
Net interest income.... 20,540 16,920 73,618 61,249 46,366 39,383 32,915
Provision for loan
losses................. 921 1,036 6,235 7,026 3,029 1,429 2,285
----------- ----------- ----------- ----------- ----------- ---------- ----------
Net interest income
after provision for
loan losses........... 19,619 15,884 67,383 54,223 43,337 37,954 30,630
----------- ----------- ----------- ----------- ----------- ---------- ----------
Other income............ 2,553 1,624 8,775 7,896 7,444 5,575 5,953
Nonrecurring--warrant
income................. 4 497 945 1,162 -- -- --
----------- ----------- ----------- ----------- ----------- ---------- ----------
Total other income..... 2,557 2,121 9,720 9,058 7,444 5,575 5,953
----------- ----------- ----------- ----------- ----------- ---------- ----------
Operating expenses...... 12,691 11,325 45,095 40,078 35,292 31,518 27,446
Other expenses--
nonrecurring........... -- -- 1,341 (1,287) -- 2,135 --
----------- ----------- ----------- ----------- ----------- ---------- ----------
Total operating
expenses.............. 12,691 11,325 46,436 38,791 35,292 33,653 27,446
----------- ----------- ----------- ----------- ----------- ---------- ----------
Income before provision
for income taxes &
merger and other
related nonrecurring
costs.................. 9,485 6,680 30,667 24,490 15,489 9,876 9,137
Income tax expense...... 3,695 2,226 10,050 8,784 5,735 3,709 3,431
----------- ----------- ----------- ----------- ----------- ---------- ----------
Income before merger and
other related
nonrecurring costs..... 5,790 4,454 20,617 15,706 9,754 6,167 5,706
Merger and other related
nonrecurring costs, net
of tax................. -- -- 1,674 2,282 1,991 -- 608
Income before
extraordinary items.... 5,790 4,454 18,943 13,424 7,763 6,167 5,098
Extraordinary items..... (88) -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ---------- ----------
Net income............. $ 5,702 $ 4,454 $ 18,943 $ 13,424 $ 7,763 $ 6,167 $ 5,098
=========== =========== =========== =========== =========== ========== ==========
Per Share Data
Income per share (before
merger and other
related nonrecurring
costs and extraordinary
items)
Basic.................. $ 0.53 $ 0.43 $ 1.90 $ 1.51 $ 0.97 $ 0.65 $ 0.63
Diluted................ 0.50 0.40 1.77 1.40 0.91 0.61 0.59
Net income per share
Basic.................. $ 0.51 $ 0.43 $ 1.74 $ 1.29 $ 0.78 $ 0.65 $ 0.56
Diluted................ 0.49 0.40 1.63 1.19 0.72 0.61 0.53
Cash dividends per
share.................. $ 0.12 $ 0.12 $ 0.38 $ 0.30 $ 0.22 $ 0.20 $ 0.11
Book value per common
share.................. 10.17 8.62 9.73 8.30 7.47 7.03 6.53
Shares outstanding at
year end............... 11,135,923 10,758,353 11,004,529 10,659,726 10,185,989 9,752,993 9,147,971
Average common shares
outstanding............ 11,087,000 10,717,000 10,858,000 10,421,000 10,014,000 9,552,000 9,054,000
Average common and
common equivalent
shares outstanding..... 11,718,000 11,655,000 11,637,000 11,254,000 10,747,000 10,087,000 9,685,000
Performance Ratios
Return on average assets
before merger and other
related nonrecurring
costs (annualized for
the three months ended
March 31, 1999 and
1998).................. 1.29% 1.32% 1.32% 1.36% 1.16% 0.89% 1.10%
Return on average common
shareholders' equity
before merger and other
related nonrecurring
costs (annualized for
the three months ended
March 31, 1999 and
1998) ................. 21.25% 20.11% 21.21% 18.70% 13.37% 9.56% 12.28%
Net interest margin..... 4.97% 5.28% 5.10% 5.67% 6.02% 6.22% 6.98%
Balance Sheet Data At
Period End
Assets.................. $ 1,938,452 $ 1,448,969 $ 1,738,189 $ 1,339,750 $ 1,023,111 $ 753,188 $ 631,809
Loans, net.............. 1,234,879 853,883 1,092,603 819,607 631,187 452,587 394,115
Investment securities... 368,233 253,848 357,511 228,715 150,340 154,268 127,603
Deposits................ 1,675,844 1,218,560 1,478,947 1,178,574 914,101 668,082 547,062
Subordinated debt....... -- 3,000 3,000 3,000 3,000 3,000 --
Trust Preferred
Securities............. 50,000 20,000 50,000 20,000 -- -- --
Common shareholders'
equity................. 113,238 92,690 107,041 88,528 76,115 68,572 59,755
Regulatory Capital
Ratios
Leverage Ratio.......... 7.99% 9.04% 8.29% 8.50% 7.95% 9.53% 9.74%
Tier 1 Capital.......... 9.45% 10.79% 10.48% 10.80% 10.09% 12.48% 12.94%
Total Capital........... 11.83% 12.57% 12.90% 12.35% 11.70% 14.25% 14.25%
</TABLE>
11
<PAGE>
Significant events affecting Greater Bay's historical earnings trends
include the following:
. Amounts indicated have been restated on a historical basis to reflect the
mergers with Cupertino National Bancorp, Peninsula Bank of Commerce,
Pacific Rim Bancorporation, Pacific Business Funding Corporation and Bay
Area Bancshares, each of which was accounted for on a pooling of
interests basis.
. Per share amounts have been adjusted to reflect a two-for-one stock split
effective on April 30, 1998.
. If the performance ratios included merger and other related nonrecurring
costs (net of tax) of $1.7 million in 1998, $2.3 million in 1997, $2.0
million in 1996 and $608,000 in 1994, return on average assets would have
been 1.21% for 1998, 1.16% for 1997, 0.93% for 1996 and 0.99% for 1994,
and return on average common shareholders' equity would have been 19.48%
for 1998, 15.98% for 1997, 10.64% for 1996 and 10.97% for 1994.
. Net interest margin for 1998, 1997 and 1996 includes the lower spread
earned on a special deposit described in Note 7 of Greater Bay's
Consolidated Financial Statements. Excluding this special deposit, net
interest margin would have been 5.16%, 5.78% and 6.08% for 1998, 1997 and
1996, respectively.
12
<PAGE>
Bay Commercial Services Historical Selected Financial Data
<TABLE>
<CAPTION>
Three Months
Ended March 31, Years Ended December 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except per share and share
amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data
Interest income......... $ 2,601 $ 2,329 $ 10,200 $ 8,759 $ 7,826 $ 7,456 $ 6,086
Interest expense........ 883 792 3,479 2,956 2,457 2,310 1,766
--------- --------- --------- --------- --------- --------- ---------
Net interest income... 1,718 1,537 6,721 5,803 5,369 5,146 4,320
Provision for loan
losses............... 41 10 134 52 -- (155) (100)
--------- --------- --------- --------- --------- --------- ---------
Net interest income
after provision for
losses............... 1,677 1,527 6,587 5,751 5,369 5,301 4,420
Other income............ 242 248 941 971 1,080 716 1,076
Operating expenses...... 1,483 1,387 5,656 5,072 4,686 4,472 4,518
--------- --------- --------- --------- --------- --------- ---------
Income before provision
for income taxes....... 436 388 1,872 1,650 1,763 1,545 978
Provision for income
taxes.................. 152 134 657 588 680 600 359
--------- --------- --------- --------- --------- --------- ---------
Net income........... $ 284 $ 254 $ 1,215 $ 1,062 $ 1,083 $ 945 $ 619
========= ========= ========= ========= ========= ========= =========
Per Share Data
Net income per share
Basic................. $ 0.24 $ 0.24 $ 1.12 $ 0.99 $ 1.01 $ 0.88 $ 0.57
Diluted............... 0.22 0.20 0.95 0.84 0.89 0.80 0.56
Average common shares
outstanding............ 1,182,427 1,079,653 1,080,362 1,076,774 1,076,720 1,076,720 1,079,985
Average common and
common equivalent
shares outstanding..... 1,292,516 1,279,707 1,277,190 1,257,680 1,217,235 1,174,850 1,105,280
Performance Ratios
Return on average assets
(annualized for the
three months ended
March 31, 1999 and
1998).................. 0.83% 0.90% 1.0% 1.0% 1.1% 1.0% 0.7%
Return on average common
shareholders' equity
(annualized for the
three months ended
March 31, 1999 and
1998).................. 9.86% 9.96% 11.3% 10.7% 11.8% 11.1% 7.9%
Balance Sheet Data -- At
Period End
Assets.................. $ 145,922 $ 123,860 $ 144,202 $ 116,369 $ 96,769 $ 92,819 $ 89,193
Loans, net.............. 93,929 78,710 92,149 73,129 70,391 57,170 50,810
Investment securities... 35,436 19,485 39,901 32,580 16,043 20,410 25,988
Deposits................ 133,151 111,302 123,395 101,135 83,291 80,253 79,258
Common shareholders'
equity................. 11,957 10,450 11,395 10,173 9,418 8,767 7,946
Regulatory Capital
Ratios
Leverage Ratio.......... 8.6% 9.1% 8.2% 8.7% 9.7% 9.5% 9.4%
Tier 1 Capital.......... 9.6% 10.6% 9.0% 10.7% 12.4% 13.6% 12.5%
Total Capital........... 10.4% 11.7% 9.8% 11.8% 13.6% 14.9% 13.6%
</TABLE>
13
<PAGE>
Selected Unaudited Pro Forma Combined Financial Data
<TABLE>
<CAPTION>
Three months ended March 31, Years Ended December 31,
------------------------------ -------------------------------------
1999 1998 1998 1997 1996
-------------- -------------- ----------- ----------- -----------
(Dollars in thousands, except per share and share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Interest income......... $ 37,062 $ 30,504 $ 134,998 $ 107,020 $ 79,110
Interest expense........ 14,804 12,047 54,659 39,968 27,375
-------------- -------------- ----------- ----------- -----------
Net interest income.. 22,258 18,457 80,339 67,052 51,735
Provision for loan
losses................. 962 1,046 6,369 7,078 3,029
-------------- -------------- ----------- ----------- -----------
Net interest income
after provision for
loan losses......... 21,296 17,411 73,970 59,974 48,706
-------------- -------------- ----------- ----------- -----------
Other income............ 2,795 1,872 9,716 8,867 8,524
Nonrecurring warrant
income................. 4 497 945 1,162 --
-------------- -------------- ----------- ----------- -----------
Total other income... 2,799 2,369 10,661 10,029 8,524
-------------- -------------- ----------- ----------- -----------
Operating expenses...... 14,174 12,712 50,751 45,150 39,978
Other expenses
nonrecurring........... -- -- 1,341 (1,287) --
-------------- -------------- ----------- ----------- -----------
Total operating
expenses............ 14,174 12,712 52,092 43,863 39,978
-------------- -------------- ----------- ----------- -----------
Income before provision
for income taxes,
merger and other
related
nonrecurring costs and
extraordinary items.... 9,921 7,068 32,539 26,140 17,252
Provision for income
taxes.................. 3,847 2,360 10,707 9,372 6,415
-------------- -------------- ----------- ----------- -----------
Income before merger and
other related
nonrecurring costs and
extraordinary items.... 6,074 4,708 21,832 16,768 10,837
Merger and other related
nonrecurring costs, net
of tax................. -- -- 1,674 2,282 1,991
-------------- -------------- ----------- ----------- -----------
Income before
extraordinary items.... 6,074 4,708 20,158 14,486 8,846
Extraordinary items..... (88) -- -- -- --
-------------- -------------- ----------- ----------- -----------
Net income.............. $ 5,986 $ 4,708 $ 20,158 $ 14,486 $ 8,846
============== ============== =========== =========== ===========
Per Share Data
Income per share (before
merger and other
related nonrecurring
costs)
Basic.................. $ 0.51 $ 0.41 $ 1.88 $ 1.50 $ 1.01
Diluted................ 0.48 0.37 1.74 1.38 0.93
Net income per share
Basic.................. $ 0.50 $ 0.41 $ 1.73 $ 1.29 $ 0.82
Diluted................ 0.47 0.37 1.61 1.19 0.76
Average common shares
outstanding............ 11,931,000 11,487,000 11,629,000 11,189,000 10,782,000
Average common and
common equivalent
shares outstanding..... 12,640,000 12,568,000 12,548,000 12,151,000 11,615,000
Performance Ratios
Return on average assets
before merger and other
related
nonrecurring costs
(annualized for the
three months ended
March 31, 1999 and
1998).................. 1.26% 1.29% 1.29% 1.33% 1.16%
Return on average common
shareholders' equity
before merger and other
related nonrecurring
costs (annualized for
the three months ended
March 31, 1999 and
1998) ................. 20.16% 19.06% 20.21% 17.85% 13.19%
Balance Sheet Data -- At
Period End
Assets.................. $ 2,084,374 $ 1,572,829 $ 1,738,189 $ 1,456,119 $ 1,119,880
Loans, net.............. 1,328,808 932,593 1,092,603 892,736 701,578
Investment securities... 403,669 273,333 357,511 261,295 166,383
Deposits................ 1,808,995 1,329,862 1,478,947 1,279,709 997,392
Subordinated debt....... -- 3,000 3,000 3,000 3,000
Trust Preferred
Securities............. 50,000 20,000 50,000 20,000 --
Common shareholders'
equity................. 125,195 103,140 107,041 98,701 85,533
Regulatory Capital
Ratios
Leverage Ratio.......... 8.04% 8.29% 9.12% 9.26% 9.18%
Tier 1 Capital.......... 9.47% 10.82% 10.35% 10.79% 10.30%
Total Capital........... 11.73% 12.54% 12.65% 12.30% 11.87%
</TABLE>
14
<PAGE>
Significant events affecting the selected unaudited pro forma combined
financial data include the following:
. Per share amounts have been adjusted to reflect Greater Bay's two-for-one
stock split effective on April 30, 1998.
. If the performance ratios included merger and other related nonrecurring
costs (net of tax) of $1.7 million in 1998, $2.3 million in 1997 and $2.0
million in 1996, return on average assets would have been 1.17% for 1998,
1.11% for 1997 and 0.86% for 1996, and return on average common
shareholders' equity would have been 19.73% for 1998, 15.76% for 1997 and
9.87% for 1996.
15
<PAGE>
RISK FACTORS
In addition to the other information included in this document including the
matters addressed in "A Warning about Forward-looking Information", you should
consider the matters described below carefully in determining whether to
approve the merger agreement and the transactions contemplated by the merger
agreement.
The merger consideration you will receive will be affected by potential changes
in the relative stock prices.
This means that at the time of the special meeting, you will not know the
exact value of the Greater Bay common stock that you will receive when the
merger is completed. The market prices of Bay Commercial Services common stock
and Greater Bay common stock when the merger takes place may vary from their
prices at the date of this document and at the date of the special meeting.
Such variations in the market prices of Greater Bay common stock and Bay
Commercial Services common stock may result from changes in the business,
operations or prospects of Bay Commercial Services, Greater Bay or the combined
company, market assessments of the likelihood that the merger will be
consummated and the timing thereof, regulatory considerations, general market
and economic conditions and other factors.
We urge you to obtain current market quotations for Greater Bay common stock
and Bay Commercial Services common stock.
There are uncertainties in integrating our business operations and realizing
enhanced earnings.
If we are unable to integrate our businesses successfully, this could hurt
our business. The merger involves the integration of two companies that have
previously operated independently. Successful integration of Bay Commercial
Services' operations will depend primarily on Greater Bay's ability to
consolidate operations, systems and procedures and to eliminate redundancies
and costs. No assurance can be given that Greater Bay and Bay Commercial
Services will be able to integrate their operations without encountering
difficulties including, without limitation, the loss of key employees and
customers, the disruption of their respective ongoing businesses or possible
inconsistencies in standards, controls, procedures and policies.
16
<PAGE>
A WARNING ABOUT FORWARD-LOOKING INFORMATION
Greater Bay Bancorp and Bay Commercial Services have each made forward-
looking statements in this document (and in certain documents that we refer to
in this document) that are subject to risks and uncertainties. These statements
are based on the beliefs and assumptions of the respective company's
management, and on information currently available to such management. Forward-
looking statements include the information concerning possible or assumed
future results of operations of Greater Bay and/or Bay Commercial Services set
forth under "Questions and Answers About the Merger," "Summary," "The Merger--
Background of and Reasons for the Merger," and "Unaudited Pro Forma Condensed
Combined Financial Information," and statements preceded by, followed by or
that include the words "believes," "expects," "anticipates," "intends,"
"plans," "estimates" or similar expressions.
In particular, we have made statements in this document regarding expected
cost savings from the merger, the anticipated accretive effect of the merger
and Greater Bay's anticipated performance in future periods. With respect to
estimated cost savings, Greater Bay has made certain assumptions regarding,
among other things, the extent of operational overlap between Greater Bay and
Bay Commercial Services, the amount of general and administrative expense
consolidation, costs relating to converting Bay Commercial Services' bank
operations and data processing to Greater Bay's systems, the size of
anticipated reductions in fixed labor costs, the amount of severance expenses,
the extent of the charges that may be necessary to align the companies'
respective accounting reserve policies and the costs related to the merger. The
realization of the expected cost savings are subject to the risk that the
foregoing assumptions are inaccurate.
Moreover, any statements in this document regarding the anticipated
accretive effect of the merger and Greater Bay's anticipated performance in
future periods are subject to risks relating to, among other things, the
following:
. expected cost savings from the merger may not be fully realized or
realized within the expected time-frame;
. revenues following the merger may be lower than expected, or deposit
attrition, operating costs or customer loss and business disruption
following the merger may be greater than expected;
. competitive pressures among depository and other financial institutions
may increase significantly;
. costs of difficulties related to the integration of the businesses of
Greater Bay and Bay Commercial Services may be greater than expected;
. changes in the interest rate environment may reduce margins;
. general economic or business conditions, either nationally or in
California, may be less favorable than expected, resulting in, among
other things, a deterioration in credit quality or a reduced demand for
credit;
. legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses in which Greater Bay and
Bay Commercial Services are engaged;
. changes may occur in the securities markets; and
. competitors of Greater Bay and Bay Commercial Services may have greater
financial resources to develop products that enable such competitors to
compete more successfully than Greater Bay and Bay Commercial Services.
Management of Greater Bay believes these forward-looking statements are
reasonable; however, undue reliance should not be placed on such forward-
looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder values
of Greater Bay following completion of the merger may differ materially from
those expressed in these forward-looking statements. Many of the factors that
will determine these results and values are beyond Greater Bay's and Bay
Commercial Services' ability to control or predict. For those statements,
Greater Bay and Bay Commercial Services claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
17
<PAGE>
THE MEETING
General
We are furnishing this document to you in connection with the solicitation
of proxies by the Bay Commercial Services Board of Directors for use at the
special meeting of Bay Commercial Services shareholders, including any special
meeting adjournments or postponements, to be held on , , 1999 at the
time and place set forth in the accompanying notice.
The purpose of the meeting is to consider and vote upon the Agreement and
Plan of Reorganization, dated as of April 30, 1999, between Greater Bay and Bay
Commercial Services. The merger agreement is attached to this document as Annex
A and is incorporated in this document by this reference. For a description of
the merger agreement, see "The Merger Agreement."
The merger agreement provides that Bay Commercial Services will merge with
and into Greater Bay, In the merger, for each outstanding share of common
stock, no par value, of Bay Commercial Services, you will receive 0.7134 shares
of common stock, no par value, of Greater Bay if the average closing price of
Greater Bay common stock is between $27.00 and $31.00 (as described below). If
the average closing price of Greater Bay common stock is less than $27.00 or
more than $31.00, the conversion ratio will adjust according to a set formula.
Greater Bay will pay cash in lieu of fractional shares.
Bay Commercial Services Meeting
General. Bay Commercial Services will hold its special meeting on ,
, 1999 at m., local time, at , located at , ,
California . At the special meeting, you will be asked to consider and vote
upon a proposal to approve the merger agreement. You may also be asked to vote
upon a proposal to adjourn or postpone the Bay Commercial Services meeting for
the purpose of, among other things, allowing additional time for the
solicitation of proxies from Bay Commercial Services shareholders to approve
the merger agreement.
Record Date; Voting Power. If you were a holder of record of shares of Bay
Commercial Services common stock at the close of business on , 1999, you
are entitled to notice of and to vote at the special meeting. As of , 1999,
there were issued and outstanding shares of Bay Commercial Services common
stock held by approximately holders of record. These shareholders have one
vote per share on any matter that may properly come before the special meeting.
Brokers who hold shares of Bay Commercial Services common stock as nominees
will not have discretionary authority to vote such shares in the absence of
instructions from the beneficial owners. Any shares of Bay Commercial Services
common stock for which a broker has submitted an executed proxy but for which
the beneficial owner has not given instructions on voting to such broker are
referred to as "broker non-votes."
Vote Required. The presence in person or by proxy of the holders of a
majority of the shares of Bay Commercial Services common stock outstanding on
the record date will constitute a quorum for the transaction of business at the
special meeting. Bay Commercial Services will count abstentions and broker non-
votes for purposes of establishing the presence of a quorum at the meeting. The
approval of the proposal to approve the merger agreement requires the
affirmative vote of holders of a majority of the shares of Bay Commercial
Services common stock outstanding on the record date. Because broker non-votes
and abstentions are not affirmative votes, they will have the effect of a vote
against the proposal to approve the merger agreement.
Share Ownership of Management. On the record date, the executive officers
and directors of Bay Commercial Services, including their affiliates, had
voting power with respect to an aggregate of shares of Bay Commercial
Services common stock or approximately % of the shares of Bay Commercial
Services common stock then outstanding. We currently expect that these
directors and officers will vote all of
18
<PAGE>
their shares in favor of the proposal to approve the merger agreement. On the
record date, the directors and executive officers of Greater Bay did not
beneficially own any shares of Bay Commercial Services common stock.
Recommendation of the Bay Commercial Services Board. The Bay Commercial
Services Board of Directors has unanimously approved and adopted the merger
agreement and the transactions contemplated by the merger agreement. The Bay
Commercial Services Board believes that the merger is fair to and in the best
interests of Bay Commercial Services and you as the Bay Commercial Services
shareholders and unanimously recommends that you vote "FOR" approval of the
merger agreement and the transactions contemplated thereby. For more
information about the factors the Bay Commercial Services Board considered,
read the information under the heading entitled "The Merger -- Background of
and Reasons for the Merger."
Solicitation and Revocation of Proxies. A form of proxy is enclosed with
this document. Shares of Bay Commercial Services common stock represented by a
properly executed proxy will, unless the proxy has been previously revoked, be
voted at the special meeting as specified in the proxy. If no instructions are
indicated, these shares will be voted FOR approval of the merger agreement and
in the discretion of the proxy holder as to any other matter which may properly
come before the meeting.
You are requested to vote by completing, dating and signing the accompanying
proxy card and returning it promptly to Bay Commercial Services in the
enclosed, postage-paid envelope. You should not send your stock certificates
with your proxy card.
If you have previously delivered a properly executed proxy, you may revoke
it at any time before its exercise. You may revoke a proxy either by
.filing with the Secretary of Bay Commercial Services prior to the special
meeting, at Bay Commercial Services' principal executive offices, either a
written revocation of the proxy or a duly executed proxy bearing a later
date or
.attending the meeting and voting in person. Your presence at the meeting
will not revoke your proxy unless you vote in person.
Other Matters. Bay Commercial Services is unaware of any matter to be
presented at the special meeting other than the proposal to approve the merger
agreement. If other matters are properly presented at the special meeting, the
persons named in the enclosed form of proxy will have authority to vote all
properly executed proxies in accordance with their judgment on any other
matters, including, without limitation, any proposal to adjourn or postpone the
meeting, provided that no proxy that has been designated to vote against
approval of the merger agreement will be voted in favor of any proposal to
adjourn or postpone the meeting for the purpose of soliciting additional
proxies to approve the merger agreement.
19
<PAGE>
THE MERGER
The detailed terms of the merger are contained in the merger agreement
attached as Annex A to this document. The following discussion and the
discussion under "The Merger Agreement" describe the more important aspects of
the merger and all of the material terms of the merger agreement. These
descriptions are qualified in their entirety by reference to the merger
agreement, which is incorporated by reference in this document. We encourage
you to read the merger agreement carefully.
Structure of the Merger
General. The merger agreement provides that, after its approval by the Bay
Commercial Services shareholders and the satisfaction or waiver of the other
conditions to the merger, Bay Commercial Services will merge with and into
Greater Bay. Bay Bank of Commerce, a wholly owned subsidiary of Bay Commercial
Services, will survive the merger as a wholly owned subsidiary of Greater Bay.
The articles of incorporation and bylaws of Greater Bay, as in effect
immediately before the merger, will be the articles of incorporation and bylaws
of Greater Bay after the merger. The directors and officers of Greater Bay
immediately before the merger will be the directors and officers of Greater Bay
after the merger, until the earlier of their resignation or removal or until
their respective successors are duly elected and qualified, as applicable.
Conversion of Shares. At the completion of the merger, each issued and
outstanding share of Bay Commercial Services common stock other than shares as
to which statutory dissenters' rights are perfected, will be converted into the
right to receive:
(a) if the Average Closing Price, as defined below, is from $27.00 to
$31.00, 0.7134 shares of Greater Bay common stock;
(b) if the Average Closing Price is greater than $31.00, a number of shares
of Greater Bay common stock equal to the quotient obtained by dividing (1)
$22.115 plus the product of 0.333 times the difference between the Average
Closing Price and $31.00, by (2) the Average Closing Price;
(c) if the Average Closing Price is less than $27.00, a number of shares of
Greater Bay common stock equal to the quotient obtained by dividing (1) $19.262
minus the product of 0.3333 times the difference between $27.00 and the Average
Closing Price, by (2) the Average Closing Price. However, if the Average
Closing Price is less than $25.50, then Bay Commercial Services may give
written notice to Greater Bay within one business day of the calculation of the
Average Closing Price of its intention to terminate the merger agreement,
unless Greater Bay elects, by written notice to Bay Commercial Services within
one business day from the date of receipt of written notice from Bay Commercial
Services of its intention to terminate the merger agreement, to exercise a top
up option, in which case the conversion ratio will equal that number of shares
of Greater Bay common stock equal to the quotient obtained by dividing $18.763
by the Average Closing Price.
(d) if, before the completion of the merger, Greater Bay publicly announces
a transaction in which 100% of the outstanding shares of Greater Bay common
stock is to be acquired by a third party, either through an exchange offer or
merger in which Greater Bay shareholders would own less than 51% of the
outstanding shares of the surviving corporation which we refer to as a "Greater
Bay acquisition transaction," the price to be paid to Greater Bay shareholders
in the transaction would exceed $31.00 per share, and the transaction is
consummated, then, the conversion ratio will be 0.7134 shares of Greater Bay
common stock. To preserve the rights of holders of shares of Bay Commercial
Services common stock in this event, Greater Bay and Bay Commercial Services
have agreed to coordinate the closing of the Merger with the closing of any
Greater Bay acquisition transaction or to cooperate with the third party in
otherwise accomplishing the purpose described in the preceding sentence. In no
event may Greater Bay close any Greater Bay acquisition transaction that does
not result in the purposes of the provision described in this paragraph being
accomplished.
20
<PAGE>
The term "Average Closing Price" means the average closing sale price on The
Nasdaq National Market of Greater Bay common stock for the 15 consecutive
trading days ending at the end of the third trading day immediately prior to
the completion of the merger. If Greater Bay changes the number of shares of
Greater Bay common stock through any reclassification, recapitalization, split-
up, combination or exchange of shares, or if Greater Bay declares a stock
dividend on the shares of Greater Bay common stock, then the Conversion Ratio
also will be adjusted appropriately.
As described above, the conversion ratio (and the resulting value of the
Greater Bay common stock to be received by shareholders of Bay Commercial
Services upon conversion) depends upon the Average Closing Price of Greater Bay
common stock. The following table shows the effective conversion ratio and the
value of the Greater Bay common stock into which one share of Bay Commercial
Services common stock will be converted as a function of the Average Closing
Price of Greater Bay common stock.
<TABLE>
--------------------------------------------
<CAPTION>
Value to
be
Assuming received
a per Bay
Greater Commercial
Bay Each Bay Commercial Services
Average Services share share
Closing will be converted (payable
Price into this number in Greater
of: of Greater Bay shares Bay Stock)
--------------------------------------------
<S> <C> <C>
$25.50 0.7358 $18.76
--------------------------------------------
$26.00 0.7280 $18.93
--------------------------------------------
$26.50 0.7206 $19.10
--------------------------------------------
$27.00 0.7134 $19.26
--------------------------------------------
$27.50 0.7134 $19.62
--------------------------------------------
$28.00 0.7134 $19.98
--------------------------------------------
$28.50 0.7134 $20.33
--------------------------------------------
$29.00 0.7134 $20.69
--------------------------------------------
$29.50 0.7134 $21.05
--------------------------------------------
$30.00 0.7134 $21.40
--------------------------------------------
$30.50 0.7134 $21.76
--------------------------------------------
$31.00 0.7134 $22.12
--------------------------------------------
$31.50 0.7074 $22.28
--------------------------------------------
$32.00 0.7015 $22.45
--------------------------------------------
$32.50 0.6958 $22.61
--------------------------------------------
$33.00 0.6904 $22.78
--------------------------------------------
$33.50 0.6850 $22.95
--------------------------------------------
$34.00 0.6799 $23.12
--------------------------------------------
$34.50 0.6748 $23.28
--------------------------------------------
$35.00 0.6699 $23.45
--------------------------------------------
</TABLE>
No assurance can be given as to what the Average Closing Price will be. No
assurance can be given that the market price of Greater Bay common stock on or
after consummation of the merger will approximate the Average Closing Price.
21
<PAGE>
You are urged to obtain current market quotations for Greater Bay common
stock and Bay Commercial Services common stock. It is expected that the market
price of Greater Bay common stock will fluctuate between the date of this
document and the date on which the merger is completed and thereafter. Because
the number of shares of Greater Bay common stock to be received by you in the
merger will be determined based on the Average Closing Price and the market
price of Greater Bay common stock is subject to fluctuation, the value of the
shares of Greater Bay common stock that you will receive in the merger may
increase or decrease before and after the merger. This risk is further
explained under "Risk Factors--The merger consideration you will receive will
be effected by potential changes in relative stock prices."
Fractional Shares. No fractional shares of Greater Bay common stock will be
issued in the merger. Instead, if you would otherwise be entitled to receive a
fractional share, Greater Bay shall pay you an amount in cash equal to the
product (calculated to the nearest hundredth) obtained by multiplying (a) the
closing sale price of Greater Bay common stock as reported on the Nasdaq
National Market on the day immediately preceding the merger closing date times
(b) the fraction of the share of Greater Bay common stock to which you would
otherwise be entitled. You will not be entitled to dividends or other rights in
respect of any fractional share.
Background of and Reasons for the Merger
Background of the Merger. Representatives of management of Greater Bay and
Bay Commercial Services first discussed on a preliminary basis the possibility
of a business combination of their respective institutions on September 25,
1998. The Board of Directors of Bay Commercial Services subsequently engaged
First Security Van Kasper as its financial advisor with respect to a possible
business combination with Greater Bay. In the course of discussions with the
Bay Commercial Services Board of Directors, First Security Van Kasper also
provided information regarding other potential merger candidates for
consideration by the Bay Commercial Services Board. Bay Commercial Services and
Greater Bay then entered into a confidentiality agreement on December 21, 1998
which allowed Greater Bay access to non-public information about Bay Commercial
Services. Following execution of the confidentiality agreement, Greater Bay and
Bay Commercial Services conducted a due diligence examination of the other.
Following these preliminary discussions, Greater Bay sent an expression of
interest letter to Bay Commercial Services on February 4, 1999, in which
Greater Bay proposed a business combination of the two companies and proposed a
price per share for the outstanding shares of Bay Commercial Services common
stock of between $19.50 and $21.00. Following receipt of the letter, management
of Bay Commercial Services and its financial advisor met with management of
Greater Bay and its financial advisor to discuss various issues, including
consolidation issues, valuation issues and financial projections. The Board of
Directors of Bay Commercial Services considered the expression of interest
letter at a meeting on February 17, 1999. Bay Commercial Services' legal
counsel and financial advisor participated in the discussions at the meeting.
Following the meeting, further discussions between representatives of
management of the two companies took place.
Greater Bay next sent a supplemental expression of interest letter to Bay
Commercial Services on February 24, 1999, in which Greater Bay provided further
information with respect to pricing terms for a proposed business combination
of the two companies. The supplemental letter proposed a price per share for
the outstanding shares of Bay Commercial Services common stock of approximately
$20.375 and included a provision for adjusting that amount in the event of
changes in the price of Greater Bay common stock from the date of execution of
a definitive agreement until the time of closing.
The Board of Directors of Bay Commercial Services met on February 28, 1999
and appointed a Business Combination Committee, consisting of all non-employee
directors of Bay Commercial Services, to consider the supplemental expression
of interest letter. Bay Commercial Services' legal counsel and financial
advisor participated in the discussions at the meeting. Following the meeting,
at the direction of the Business Combination Committee, management of Bay
Commercial Services proposed certain changes to the price adjustment provisions
set forth in the February 24, 1999 supplemental expression of interest letter
and
22
<PAGE>
requested price protection in the form of a fixed exchange ratio in the event
Greater Bay should be acquired in a transaction in which Greater Bay
shareholders would receive a price per share above $31.00.
The Business Combination Committee met on March 8, March 11, March 17, and
April 21, 1999 for the purpose of reviewing the status of negotiations with
Greater Bay.
At its meeting of March 8, 1999, the Business Combination Committee was
briefed by management on discussions with Greater Bay that had taken place
following communication to Greater Bay of the proposed changes to the February
24, 1999 letter and discussed and evaluated the proposed transaction. Bay
Commercial Services' legal counsel and financial advisor participated in the
discussions at the meeting. The committee concluded that certain requested
changes to the proposal should be communicated to Greater Bay, but that the
discussions were moving in a positive direction and should continue.
At its meeting of March 11, 1999, the Business Combination Committee again
was briefed on additional negotiations that had taken place with Greater Bay
since the March 8 meeting. Bay Commercial Services' legal counsel and financial
advisor participated in the meeting by telephone. The committee was advised
that Greater Bay had modified its proposal in response to a number of the
matters requested by Bay Commercial Services management.
Greater Bay next sent another supplemental expression of interest letter to
Bay Commercial Services on March 12, 1999, in which Greater Bay proposed
specific changes to the price adjustment provisions and confirmed that if
Greater Bay were acquired in a transaction in which Greater Bay shareholders
would receive a price per share above $31.00, then Bay Commercial Services
shareholders would receive a fixed exchange ratio of 0.7134 shares of Greater
Bay common stock for each share of Bay Commercial Services common stock.
At its meeting of March 17, 1999, the Business Combination Committee
reviewed the latest supplemental expression of interest letter from Greater
Bay, requested that various aspects of the price formula provision be discussed
further with Greater Bay and concluded that it would be appropriate for the
parties to begin preparation of a definitive agreement. On April 7, 1999
Greater Bay sent a draft of a proposed merger agreement to Bay Commercial
Services.
The Business Combination Committee met and reviewed the draft agreement on
April 21, 1999 and discussed various issues, including the operations of Bay
Commercial Services pending closing of the transaction, a covenant by Greater
Bay with respect to other business combinations and various liquidated damages
issues. The committee also received additional advice from Bay Commercial
Services' legal counsel and financial advisor. The Business Combination
Committee requested that some provisions of the draft agreement be negotiated
further with Greater Bay.
During the period between April 21, 1999 and April 29, 1999, management of
the companies and legal counsel for the companies negotiated the principal
remaining terms and conditions of the merger agreement.
At the April 29, 1999 meeting, the Bay Commercial Services Board evaluated
the final proposed form of the merger agreement with its legal counsel and
financial advisor. At that meeting, the financial advisor delivered a draft of
the fairness opinion it proposed to deliver to Bay Commercial Services, to the
effect that the proposed merger was fair to Bay Commercial Services'
shareholders from a financial point of view. The financial advisor also
reviewed the financial analyses underlying its fairness opinion and the
financial terms of the merger agreement. The Bay Commercial Services Board then
approved the proposed merger and authorized management to execute and deliver
the merger agreement in substantially the form presented. The next day, April
30, 1999, Bay Commercial Services and Greater Bay executed the merger
agreement. Thereafter, Bay Commercial Services received from its financial
advisor the final written fairness opinion dated , 1999.
23
<PAGE>
Each of the Greater Bay Board and Bay Commercial Services Board believes the
merger to be in the best interests of their respective institutions,
shareholders and banking customers. Each Board believes that the merger will
position Greater Bay, on a consolidated basis, to be well positioned to
penetrate the banking market in the East Bay communities currently served by
Bay Commercial Services and, in doing so, will advance its strategic objective
of becoming the preeminent independent bank holding company in Northern
California and strengthen Greater Bay, on a consolidated basis, in terms of
management, growth opportunities and profitability. Furthermore, each Board
believes that Greater Bay, as a larger independent financial institution, will
be better able to compete with major banks in the communities now served by its
existing banking subsidiaries and Bay Bank of Commerce and will benefit such
communities by providing increased banking services. The parties also
anticipate that the merger will present significant revenue enhancement
opportunities for the combined entity. These opportunities result from, among
other factors:
. an increased ability to cross-sell a wider variety of banking products
and services;
. the ability to generate increased loan and fee income from Bay Bank of
Commerce customers as a result of the higher lending limits available to
the combined entity;
. the potential to increase overall market share in the communities
presently served by Greater Bay and Bay Bank of Commerce as a result of
the wider range of products and services to be offered through the
combined entity;
. the ability to leverage marketing expense and thereby improve the return
on the combined entity's marketing investment; and
. the ability to achieve cost savings, operating efficiencies and other
opportunities for revenue enhancement.
The merger will also provide Bay Commercial Services' shareholders with the
benefit of a more liquid market for their shares.
Reasons for the Merger. The Bay Commercial Services Board believes that the
terms of the merger agreement and the merger are fair from a financial point of
view to, and are in the best interests of, Bay Commercial Services and its
shareholders. Accordingly, the Bay Commercial Services Board has unanimously
approved and adopted the merger agreement and recommends approval of the merger
agreement by the Bay Commercial Services shareholders. In reaching its
decision, the Bay Commercial Services Board consulted with Bay Commercial
Services' management, legal counsel and First Security Van Kasper,
Bay Commercial Services' financial advisor, and considered a number of factors,
to which relative weights were not assigned, including the following:
. The Bay Commercial Services Board's review of--the business, operations,
financial condition and earnings of Greater Bay on an historical and a
prospective basis and of the combined company on a pro forma basis,--the
anticipated cost savings, operating efficiencies and opportunities for
revenue enhancement available to the combined company as a result of the
merger and--the historical and prospective stock price performance of
Greater Bay common stock, including the anticipated impact of the merger
on the price of Greater Bay common stock over the short term and the long
term;
. The compatibility of the respective businesses, operating philosophies
and strategic objectives of Bay Commercial Services and Greater Bay,
including the superior credit quality of their respective loan
portfolios.
. The terms of the merger agreement and the merger, including the
conversion ratio, which, based on the closing price of $30.125 for
Greater Bay common stock on the Nasdaq National Market on April 29, 1999,
reflected purchase price to 1999 estimated earnings per share of $1.13
and purchase price to book value of 2.04 (based on the closing price of
$30.125 for Greater Bay common stock on The Nasdaq National Market on
April 29, 1999) at the time that the Bay Commercial Services Board
approved the merger agreement. The Bay Commercial Services Board gave due
consideration to the fact that the
24
<PAGE>
provision causing the conversion ratio to adjust in the event that the
market price of Greater Bay common stock before the merger is above $31.00
or below $27.00 would allow shareholders to benefit from a portion of any
increase in the market price of Greater Bay common stock before the merger
while also subjecting shareholders to a portion of any declines in such
market price before the merger. For more detailed information about the
conversion ratio please read the information under the heading entitled
"Structure of the Merger--Conversion of Shares."
. The current and prospective economic and competitive environment facing
the financial services industry generally, and Bay Commercial Services in
particular, including the continued pace of consolidation in the industry
and the perceived importance of operational scale in enhancing efficiency
and profitability and remaining competitive over the long term.
. The potential level of earnings of Greater Bay that would be attributable
to the shareholders following the merger as compared to the level Bay
Commercial Services might attain if it continued to operate
independently.
. The preliminary presentation of First Security Van Kasper to the Bay
Commercial Services Board on April 29, 1999, and the opinion of First
Security Van Kasper rendered on June , 1999 that, as of such date, the
Conversion Ratio was fair from a financial point of view to you. First
Security Van Kasper's opinion is further described under " -- Opinion of
Financial Advisor."
. The expectation that the merger will generally be a tax-free transaction
for federal income tax purposes to Bay Commercial Services and Bay
Commercial Services shareholders and will qualify as a pooling of
interests for accounting and financial reporting purposes. For a detailed
discussion about the tax impacts, read " --Accounting Treatment" and "--
Material Federal Income Tax Consequences."
. The generally favorable impact that the merger could be expected to have
on the constituencies served by Bay Commercial Services, including its
customers, employees and communities.
The foregoing discussion of the information and factors considered by the
Bay Commercial Services Board is not intended to be exhaustive but is believed
to include all material factors considered by the Bay Commercial Services
Board. In reaching its determination to approve the merger, the Bay Commercial
Services Board did not assign any relative or specific weights to the foregoing
factors, and individual directors may have given differing weights to different
factors.
The Bay Commercial Services Board believes that the merger, including the
Conversion Ratio, is fair to and in the best interests of Bay Commercial
Services and you as the Bay Commercial Services shareholders and has
unanimously approved and adopted the merger agreement and recommends that you
vote for approval of the merger agreement.
Opinion of Financial Advisor
Bay Commercial Services engaged First Security Van Kasper to act as its
exclusive financial advisor in connection with the merger. First Security Van
Kasper agreed to assist Bay Commercial Services in analyzing, structuring,
negotiating and effecting a transaction with a potential acquirer, which, after
discussions with multiple parties, was Greater Bay. Bay Commercial Services
selected First Security Van Kasper because First Security Van Kasper is a
nationally recognized investment-banking firm with substantial experience in
transactions similar to the merger and is familiar with Bay Commercial Services
and its business. As part of its investment banking business, First Security
Van Kasper is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions.
A representative of First Security Van Kasper attended the meeting of the
Bay Commercial Services Board of Directors held on April 29, 1999 at which the
Board considered and approved the merger agreement. At the April 29, 1999
meeting, First Security Van Kasper rendered an oral opinion that, as of that
date, the Conversion Ratio was fair to Bay Commercial Services and its
shareholders from a financial point of view. That opinion was reconfirmed in
writing as of the date of this proxy statement/prospectus.
25
<PAGE>
The full text of First Security Van Kasper's written opinion dated the date
of this proxy statement/prospectus is attached as Annex B to this proxy
statement/prospectus and is incorporated herein by reference. Bay Commercial
Services shareholders are urged to read the opinion in its entirety for a
description of the procedures followed, assumptions made, matters considered,
and qualifications and limitations on the review undertaken by First Security
Van Kasper.
First Security Van Kasper's opinion is directed to the Bay Commercial
Services Board of Directors and addresses only the conversion ratio. It does
not address the underlying business decision to proceed with the merger and
does not constitute a recommendation to any shareholder as to how the
shareholder should vote at the special meeting with respect to the merger or
any matter related thereto.
In rendering its opinion, First Security Van Kasper reviewed, among other
things:
. the merger agreement;
. Annual Reports to shareholders and Annual Reports on Form 10-K of Greater
Bay;
. Annual Reports on Form 10-KSB of Bay Commercial Services;
. Quarterly Reports on Form 10-Q of Greater Bay;
. Quarterly Reports on Form 10-QSB of Bay Commercial Services; and
. internal financial analyses and forecasts for Bay Commercial Services and
Greater Bay prepared by their respective management teams.
First Security Van Kasper also:
. held discussions with members of senior management of Bay Commercial
Services and Greater Bay regarding their respective
--past and current business operations,
--regulatory relationships,
--financial condition, and
--future prospects of the respective companies;
. compared certain financial and stock market information for Greater Bay
and Bay Commercial Services with similar information for certain other
companies with publicly traded securities;
. reviewed the financial terms of certain recent business combinations in
the banking industry; and
. performed other studies and analyses that it considered appropriate.
In conducting its review and arriving at its opinion, First Security Van
Kasper relied upon and assumed the accuracy and completeness of all of the
financial and other information provided to it or publicly available. First
Security Van Kasper did not attempt to verify such information independently.
First Security Van Kasper relied upon the management of Bay Commercial Services
as to the reasonableness and achievability of the financial and operating
forecasts and projections, and assumptions and bases for the forecasts and
projections, provided to First Security Van Kasper. First Security Van Kasper
assumed that those forecasts and projections reflected the best available
estimates and judgments of Bay Commercial Services management. First Security
Van Kasper also assumed, without independent verification, that the aggregate
allowances for loan losses for Greater Bay and Bay Commercial Services are
adequate to cover those losses. First Security Van Kasper did not make or
obtain any evaluations or appraisals of the property of Greater Bay or Bay
Commercial Services, and First Security Van Kasper did not examine any
individual credit files.
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<PAGE>
The projections furnished to First Security Van Kasper and used by it in
portions of its analyses were prepared by the senior managements of Bay
Commercial Services and Greater Bay. Neither Bay Commercial Services nor
Greater Bay publicly discloses internal management projections of the type
provided to First Security Van Kasper in connection with its review of the
merger. As a result, the projections were not prepared with a view towards
public disclosure. The projections were based on numerous variables and
assumptions which are inherently uncertain, including factors related to
general economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in the projections.
The following is a summary of the material analyses performed by First
Security Van Kasper related to the oral opinion rendered to Bay Commercial
Services' Board on April 29, 1999:
Transaction Summary. First Security Van Kasper calculated the merger
consideration to be paid pursuant to the conversion ratio as a multiple of Bay
Commercial Services' book value, and 1998 actual and 1999 estimated earnings.
This computation was based on Bay Commercial Services' earnings per share of
$0.95 in 1998 and Bay Commercial Services' estimated earnings per share of
$1.13 in 1999, and a conversion ratio of 0.7134 shares of Greater Bay common
stock for each share of Bay Commercial Services common stock. Based on those
assumptions, this analysis indicated that Bay Commercial Services shareholders
would receive shares of Greater Bay common stock worth $21.49 for each share of
Bay Commercial Services common stock held, and that this amount would represent
a multiple of 2.04 times book value per share, and 19.0 times estimated 1999
earnings per share.
Discounted Cash Flow Analysis. First Security Van Kasper estimated the
present value of future cash flows that would accrue to a holder of a share of
Bay Commercial Services common stock assuming that the shareholder held the
stock for five years and then sold it. The analysis was based on earnings
forecasts prepared by management on a stand-alone, independent basis for the
year 1999 and annual net income growth rates from 14.0% to 18.0% for the years
2000 through 2003. A 35% dividend payout ratio was assumed for Bay Commercial
Services through the year 2003. An estimated year 2003 year end stock price was
estimated by multiplying the projected annual earnings by earnings multiples
ranging from 12 to 18 times. The estimated stock price for each year and the
estimated dividends were discounted at rates from 14% to 18%. These rates were
selected because, in First Security Van Kasper's experience, they represent the
risk-adjusted rates of return that investors in securities such as Bay
Commercial Services common stock would require. On the basis of these
assumptions, First Security Van Kasper calculated a range of present values
ranging from $10.87 to $22.40. These values were compared to the $21.49 offer
from Greater Bay.
The discounted cash flow present value analysis is a widely used valuation
methodology that relies on numerous assumptions, including asset and earnings
growth rates, terminal values and discount rates. The analysis did not purport
to be indicative of the actual values or expected values of Bay Commercial
Services Common Stock.
Selected Transaction Analysis. First Security Van Kasper reviewed certain
financial data related to a set of comparable nationwide bank transactions with
announced values between $10 million and $50 million since December 31, 1997.
First Security Van Kasper compared multiples of price to various factors for
the merger to the same multiples for the comparable group's mergers at the
times those mergers were announced. The results were as follows:
<TABLE>
<CAPTION>
Multiple of Price
to Factor
-------------------
Group The
Comparable Factor Considered Average Merger
---------------------------- --------- ---------
<S> <C> <C>
Trailing 12 Months Earnings.............................. 19.0x 19.0x
Estimated Tangible Book Value............................ 2.1x 2.0x
Tangible Book Premium To Core Deposits Value............. 14.7x 14.51x
</TABLE>
27
<PAGE>
No company or transaction used as a comparison in the above analysis is
identical to Greater Bay, Bay Commercial Services or the merger. Accordingly,
an analysis of these results is not mathematical. Rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the
public trading value of the companies to which they are being compared.
Selected Peer Group Analysis. First Security Van Kasper compared the
financial performance and market performance of Greater Bay to those of a
group of comparable banks and bank holding companies. The comparisons were
based on:
. various financial measures,
. earnings performance,
. operating efficiency,
. capital adequacy,
. asset quality,
. various measures of market performance, including market/book values,
price to earnings and dividend yields.
To perform this analysis, First Security Van Kasper used the financial
information as of and for the 12 months ended December 31, 1998 and market
price information as of April 29, 1999. The companies in the peer group were
western regional banks that had total assets ranging from $1.0 billion to
$10.0 billion.
First Security Van Kasper's analysis showed the following concerning
Greater Bay's financial performance:
<TABLE>
<CAPTION>
Greater Peer
Performance Measure Bay Group
------------------- ------- ------
<S> <C> <C>
Return on Equity............................................ 19.73% 15.84%
Return on Assets............................................ 1.17% 1.37%
Net Interest Margin......................................... 4.96% 5.14%
Efficiency Ratio............................................ 53.55% 53.54%
Leverage Ratio.............................................. 7.81% 8.54%
Non-Performing Assets to Total Assets....................... 0.20% 0.42%
Loan Loss Reserve to Nonperforming Assets................... 676.10% 250.65%
</TABLE>
First Security Van Kasper's analysis showed the following concerning
Greater Bay's market performance:
<TABLE>
<CAPTION>
Greater Peer
Performance Measure Bay Group
------------------- ------- -----
<S> <C> <C>
Price to Earnings Multiple, based on 1999 estimated
earnings................................................... 14.35x 13.46x
Price to Earnings Multiple, based on 2000 estimated
earnings................................................... 12.50x 11.79x
Price to Tangible Book Multiples............................ 2.99x 2.49x
Dividend Yield.............................................. 1.35% 1.17%
</TABLE>
For purposes of the above calculations, all earnings estimates are based
upon the First Security Van Kasper estimates for Greater Bay.
Contribution Analysis. First Security Van Kasper analyzed the relative
contribution of each of Greater Bay and Bay Commercial Services to certain pro
forma balance sheet and income statement items of the combined entity. The
contribution analysis showed:
<TABLE>
<S> <C>
Bay Commercial Services Contribution To:
Combined Common Equity................................................ 10.95%
Combined 1999 Estimated Net Income without Cost Savings............... 6.49%
Combined Total Assets................................................. 8.35%
Bay Commercial Services Estimated Pro Forma Ownership................. 9.01%
</TABLE>
28
<PAGE>
First Security Van Kasper compared the relative contribution of the balance
sheet and income statement items with the estimated pro forma ownership for Bay
Commercial Services shareholders based on a conversion ratio of 0.7134.
Other Analyses. First Security Van Kasper reviewed the relative financial
and market performance of Bay Commercial Services and Greater Bay to a variety
of relevant industry peer groups and indices. First Security Van Kasper also
reviewed earnings estimates, balance sheet composition, historical stock
performance and other financial data for Greater Bay.
In connection with its opinion dated as of the date of this proxy
statement/prospectus, First Security Van Kasper performed procedures to update,
as necessary, certain of the analyses described above. First Security Van
Kasper reviewed the assumptions on which the analyses described above were
based and the factors considered in connection therewith. First Security Van
Kasper did not perform any analyses in addition to those described above in
updating its April 29, 1999 oral opinion.
First Security Van Kasper. The Bay Commercial Services Board of Directors
has retained First Security Van Kasper as an independent contractor to act as
financial adviser to Bay Commercial Services regarding the merger. As part of
its investment banking business, First Security Van Kasper is continually
engaged in the valuation of banking businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. First
Security Van Kasper has experience in, and knowledge of, the valuation of
banking enterprises. In the ordinary course of its business as a broker-dealer,
First Security Van Kasper may, from time to time, purchase securities from, and
sell securities to, Bay Commercial Services and Greater Bay. As a market maker
in securities, First Security Van Kasper may, from time to time, have a long or
short position in, and buy or sell, debt or equity securities of Bay Commercial
Services and Greater Bay for First Security Van Kasper's own account and for
the accounts of its customers. First Security Van Kasper has previously
provided investment banking services to Greater Bay.
Bay Commercial Services and First Security Van Kasper have entered into an
agreement relating to the services to be provided by First Security Van Kasper
in connection with the merger. Bay Commercial Services has agreed to pay First
Security Van Kasper, at the time of closing, a cash fee equal to 1.50% of the
market value of the aggregate consideration offered in exchange for the
outstanding shares of Bay Commercial Services common stock in the merger.
Pursuant to the First Security Van Kasper engagement agreement, Bay Commercial
Services also agreed to reimburse First Security Van Kasper for reasonable out-
of-pocket expenses and disbursements incurred in connection with its retention
and to indemnify First Security Van Kasper against certain liabilities,
including liabilities under the federal securities laws.
Interests of Certain Persons in the Merger
Upon completion of the merger, the Bay Bank of Commerce Board will be
comprised of 8 directors, consisting of the current members of the Board and
David L. Kalkbrenner, President and Chief Executive Officer of Greater Bay.
Richard M. Kahler, President and Chief Executive Officer of Bay Bank of
Commerce, will continue to serve in such capacities.
The former officers and employees of Bay Commercial Services who become
officers or employees of Greater Bay will be entitled to participate in all
employee benefits and benefit programs of Greater Bay, as the case may be, in
accordance with the terms of such plans or programs.
To the extent Greater Bay is not able to add the directors of Bay Commercial
Services to Greater Bay's directors and officers liability insurance policy,
Bay Commercial Services anticipates purchasing directors' and officers'
insurance, which insurance will cover persons serving as directors and officers
of Bay Commercial Services before the merger for a period of three years from
the completion of the merger.
29
<PAGE>
As of the record date of the special meeting, the directors and executive
officers of Bay Commercial Services beneficially owned shares of Bay
Commercial Services common stock, not including shares such persons could
acquire through the exercise of options, constituting approximately % of the
outstanding shares of Bay Commercial Services common stock as of the record
date. The affirmative vote of an additional % of the outstanding shares of
Bay Commercial Services common stock entitled to vote at the meeting will be
required in order to approve the merger agreement.
If the merger takes place, outstanding options to purchase Bay Commercial
Services common stock held by directors, officers and employees of Bay
Commercial Services and Bay Bank of Commerce will be automatically converted
into options to acquire shares of Greater Bay common stock adjusted to account
for the Conversion Ratio. Upon the signing of the merger agreement, there were
outstanding options to purchase an aggregate of 51,061 shares of Bay
Commercial Services common stock.
Upon the signing of the merger agreement, Messrs. Kahler, Greenfield and
Perantoni and the Bay Commercial Services directors held options to purchase
3,725 shares of Bay Commercial Services common stock at a per share weighted
average exercise price of $4.25. Upon consummation of the merger, these
options will be assumed by and deemed to be options granted by Greater Bay.
The options will be adjusted appropriately to reflect the Conversion Ratio. If
exercised before the merger, the shares of Bay Commercial Services common
stock acquired will be converted into the right to receive Greater Bay common
stock upon completion of the merger in the same manner as will the shares of
Bay Commercial Services common stock held by all other Bay Commercial Services
shareholders.
In its consideration of the merger, Greater Bay made a determination that
the continued service of the executive officers of Bay Bank of Commerce for a
period of time after completion of the merger was critical to the successful
integration of the two companies. As an inducement to retain Messrs. Kahler as
President and Chief Executive Officer, Greenfield as Senior Vice President and
Chief Administrative Officer and Perantoni as Senior Vice President and Senior
Loan Officer in the employ of Bay Bank of Commerce or Greater Bay, Greater Bay
agreed to pay the following retention amounts at the end of the periods
indicated: Mr. Kahler $520,000 at the end of one year of service; Mr.
Greenfield $265,000 at the end of six months of service, and Mr. Perantoni
$82,000 at the end of three months of service. A portion of these amounts will
be earned monthly and the remaining portion will be earned at the end of the
retention period.
Nasdaq Listing
Greater Bay submitted an application on , 1999 to list the shares of
Greater Bay common stock to be issued in the merger on The Nasdaq National
Market. The stock must be authorized for listing on Nasdaq for the merger to
proceed.
Material Federal Income Tax Consequences
Greater Bay and Bay Commercial Services have obtained an opinion of counsel
from Manatt, Phelps & Phillips, LLP, to the effect that, for federal income
tax purposes, the merger is a tax-deferred reorganization within the meaning
of Section 368(a)(1)(A) of the Internal Revenue Code and shall not result in
gain or loss for federal income tax purposes to Greater Bay or Bay Commercial
Services. In addition, the opinion states that the issuance of Greater Bay
common stock in the merger will not result in the recognition of gain or loss
by the holders of Bay Commercial Services common stock who receive Greater Bay
common stock in connection with the merger, nor shall the substitution of
options result in any income or gain to the option holder or disqualify any
substituted options as incentive stock options in connection with the merger.
Based upon this opinion, the ancillary federal income tax consequences to
the merger include the following:
. Greater Bay and Bay Commercial Services will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Internal
Revenue Code;
30
<PAGE>
. no gain or loss will be recognized by Bay Commercial Services on the
transfer of its assets to Greater Bay solely in exchange for Greater Bay
common stock and the assumption of Bay Commercial Services' liabilities;
. no gain or loss will be recognized by Greater Bay upon receipt of the
assets of Bay Commercial Services in exchange for Greater Bay common
stock;
. the basis of Bay Commercial Services' assets in the hands of Greater Bay
will be the same as the basis of such assets in the hands of Bay
Commercial Services immediately before the merger;
. no gain or loss will be recognized by the shareholders of Bay Commercial
Services upon the transfer of their Bay Commercial Services common stock
solely in exchange for Greater Bay common stock;
. Bay Commercial Services dissenters, if any, will recognize gain or loss
in connection with the merger;
. holders of Bay Commercial Services common stock who receive cash instead
of fractional shares will recognize gain or loss as a result of receipt
of the cash;
. the basis of Greater Bay common stock to be received by the shareholders
of Bay Commercial Services in the merger will be the same as the basis of
their Bay Commercial Services common stock surrendered in exchange for
the Greater Bay common stock;
. the holding period of the Greater Bay common stock to be received by the
Bay Commercial Services shareholders in the merger will include the
holding period of the Bay Commercial Services common stock surrendered in
exchange therefor, provided that the Bay Commercial Services common stock
is held as a capital asset;
. the holding period of the assets of Bay Commercial Services in the hands
of Greater Bay will include the period during which the assets were held
by Bay Commercial Services;
. provided that any stock options to purchase Bay Commercial Services
common stock and options to purchase Greater Bay common stock into which
they will be converted do not have a readily ascertainable fair market
value, the conversion of the Bay Commercial Services options into Greater
Bay options will not result in income, gain or loss to the holders of
stock options; and
. no gain or loss will be recognized by Bay Commercial Services or Greater
Bay upon the issuance of Greater Bay common stock to an optionee
pursuant to the optionee's exercise of a stock option issued by Bay
Commercial Services and converted into an option to acquire Greater Bay
common stock.
The foregoing discussion is based upon current law and is intended for
general information only. In addition, each shareholder is urged to consult
with his or her own tax advisor concerning the specific tax consequences of the
merger to the shareholder, including the applicability and effect of foreign,
state, local or other tax laws and of any future changes in the Internal
Revenue Code, the Treasury Regulations, tax rulings or court decisions or other
laws concerning taxes.
Accounting Treatment of the Merger
The merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. Accordingly, after the merger, the assets,
liabilities and shareholders' equity of Bay Commercial Services will be added
to the corresponding balance sheet categories of Greater Bay at their recorded
book values, subject to any adjustments required to conform the accounting
policies and financial statement classifications of the two companies. In
future financial statements, the results of operations of Greater Bay will
include the results of both Bay Commercial Services and Greater Bay for the
entire fiscal year in which the merger occurs and all preceding fiscal periods
presented therein. Greater Bay must treat various expenses incurred to effect
the merger as current charges against income rather than as adjustments to its
balance sheet.
31
<PAGE>
The unaudited pro forma combined financial information contained in this
document has been prepared using the pooling of interests accounting method to
account for the merger, which is described under the headings entitled "Summary
- -- Selected Unaudited Pro Forma Combined Financial Data" and "Unaudited Pro
Forma Condensed Combined Financial Information."
Exchange of Bay Commercial Services Common Stock for Greater Bay Common Stock
Promptly after the completion of the merger, Greater Bay will cause Norwest
Bank Minnesota, N.A., to send to each holder of record of Bay Commercial
Services common stock transmittal materials for use in exchanging all of their
certificates representing shares of Bay Commercial Services common stock for a
certificate or certificates representing shares of Greater Bay common stock and
a check for any fractional share interest, as applicable. The transmittal
materials will contain information and instructions with respect to the
surrender of certificates of shares of Bay Commercial Services common stock in
exchange for certificates representing shares of Greater Bay common stock.
You should not send in your share certificates until you receive the letter
of transmittal form and instructions.
Following the completion of the merger and upon surrender of all of the
certificates representing shares of Bay Commercial Services common stock
registered in the name of a holder of Bay Commercial Services common stock, or
a satisfactory indemnity if any of certificates are lost, stolen or destroyed,
together with a properly completed letter of transmittal, Norwest Bank
Minnesota, N.A. will mail to you a certificate or certificates representing the
number of shares of Greater Bay common stock to which you are entitled,
together with all undelivered dividends or distributions, less the amount of
any withholding taxes which may be required, in respect of such shares and,
where applicable, a check in the amount of any cash to be paid instead of
fractional shares.
Declaration of dividends by Greater Bay after the completion of the merger
will include dividends on all Greater Bay common stock issued in the merger,
but no dividend or other distribution payable to the holders of record of
Greater Bay common stock at or as of any time after the completion of the
merger will be paid to the holders of Bay Commercial Services common stock
until they physically surrender all certificates as described above. Promptly
after surrender, all undelivered dividends and other distributions, less the
amount of any withholding taxes which may be required and, where applicable, a
check for the amount representing any fractional share interest, will be
delivered to the holder, in each case, without interest. After the completion
of the merger, the stock transfer books of Bay Commercial Services will be
closed and there will be no transfers on the transfer books of Bay Commercial
Services.
32
<PAGE>
THE MERGER AGREEMENT
Conditions to the Merger
The obligation of Greater Bay and Bay Commercial Services to consummate the
merger is subject to the satisfaction or waiver on or before the completion of
the merger of many conditions, including the following:
. the merger agreement and the transactions contemplated by the merger
agreement must receive all requisite approvals of the shareholders Bay
Commercial Services;
. no judgment, decree, injunction, order or proceeding will be outstanding
or threatened by any governmental entity which prohibits or restricts the
effectuation of, or threatens to invalidate or set aside the merger
substantially in the form contemplated by the merger agreement;
. all approvals or consents of any applicable governmental agency will have
been obtained or granted for the merger and the transactions contemplated
by the merger agreement and the applicable waiting period under all laws
will have expired;
. the registration statement shall have been declared effective by the
Securities and Exchange Commission and shall not be the subject of any
stop order or proceedings seeking or threatening a stop order;
. Greater Bay shall have received all state securities permits and other
authorizations necessary to issue the Greater Bay common stock to
consummate the merger;
. the Greater Bay common stock issuable in the merger shall have been
included for listing on Nasdaq;
. Greater Bay and Bay Commercial Services will have received an opinion
reasonably satisfactory to Greater Bay and Bay Commercial Services from
Manatt, Phelps & Phillips, LLP to the effect that the merger will not
result in the recognition of gain or loss for federal income tax purposes
to Greater Bay or Bay Commercial Services, nor will the issuance of
Greater Bay common stock result in the recognition of gain or loss by
holders of Bay Commercial Services common stock who receive Greater Bay
common stock in the merger, nor will the substitution of options result
in any income or gain to the option holder or disqualify any such options
as incentive stock options in connection with the merger; and
. PricewaterhouseCoopers LLP will have confirmed in writing to Greater Bay
that the merger will qualify for pooling of interests accounting
treatment, and Deloitte & Touche LLP will have delivered a letter to Bay
Commercial Services confirming that no conditions exist with respect to
either Bay Commercial Services or Bay Bank of Commerce that would
preclude pooling of interests accounting treatment.
The obligations of Greater Bay to consummate the merger are also subject to
fulfillment of various other conditions, including the following:
. there will not have occurred, between April 30, 1999 and the completion
of the merger, any materially adverse change in the business, financial
condition, results of operations or prospects of Bay Commercial Services
on a consolidated basis;
. holders of 9% or more of the outstanding shares of Bay Commercial
Services common stock will not be dissenting shares;
. all remediation of environmental contamination or conditions on any Bay
Commercial Services property will have been completed to the satisfaction
of Greater Bay;
. at the close of business on the last day of the month prior to the
completion of the merger, after giving effect to any dividends paid,
excluding various merger-related expenses, the Bay Commercial Services
fully diluted book value per share will not be less than $8.74;
. receipt of a fairness opinion from Hovde Financial Inc., financial
advisor to Greater Bay; and
33
<PAGE>
. termination of all Bay Commercial Services stock option plans.
The obligations of Bay Commercial Services to consummate the merger are also
subject to the fulfillment of other conditions, including the following:
. there will not have occurred, between April 30, 1999 and the completion
of the merger, any material adverse change in the business, financial
condition, results of operations or prospects of Greater Bay on a
consolidated basis; and
. receipt of the First Security Van Kasper opinion.
Additionally, the consummation of the merger is subject to the performance
of covenants, the execution and delivery of ancillary documents, the accuracy
of representations and warranties and the receipt of various legal opinions,
third-party consents, officers' certificates and other documents.
If these and other conditions are not satisfied or waived, the merger
agreement may be terminated. The merger agreement may also be terminated upon
the occurrence of certain other events which are more fully described under the
heading entitled "--Termination."
Nonsolicitation
Under the terms of the merger agreement, Bay Commercial Services has agreed
not to solicit, initiate or encourage any competing transaction. In addition,
Bay Commercial Services has agreed, unless it determines, with advice of
counsel, that its fiduciary duty requires otherwise, not to participate in any
negotiations or discussions regarding, or furnish any information with respect
to, or otherwise cooperate in any way in connection with, any effort or
attempts to effect any competing transaction with or involving any person other
than the other parties to the merger agreement. This restriction does not
apply, however, if Bay Commercial Services receives a bona fide offer from a
person other than the parties to the merger agreement and the Bay Commercial
Services Board responds in accordance with applicable fiduciary obligations.
Bay Commercial Services has agreed to promptly notify Greater Bay of the terms
of any proposal which it may receive in respect of any competing transaction.
The term "competing transaction" means any of the following involving Bay
Commercial Services: a merger, consolidation, share exchange or other business
combination; a sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets representing 10% or more of Bay Commercial Services'
assets; a sale of shares of capital stock representing 10% or more of the
voting power of Bay Commercial Services; a tender offer or exchange offer for
at least 10% of the outstanding shares of Bay Commercial Services; a
solicitation of proxies in opposition to approval of the merger by Bay
Commercial Services' shareholders; or a public announcement of an unsolicited
bona fide proposal, plan or intention to do any of the foregoing.
In the event Bay Commercial Services terminates the merger agreement as the
result of entering into a competing transaction, Bay Commercial Services will
pay Greater Bay a termination fee of $1,750,000.
Similarly, Bay Commercial Services may call off the merger if Greater Bay
announces a transaction in which 100% of the outstanding shares of Greater Bay
common stock will be acquired by a third party, that transaction is consummated
and the third party terminates the merger agreement between Greater Bay and Bay
Commercial Services. If that occurs, Greater Bay will have to pay Bay
Commercial Services a fee of $1,500,000. This fee would also be payable by
Greater Bay to Bay Commercial Services if Greater Bay consummates this type of
transaction within 12 months following termination of the merger agreement by
Greater Bay for a reason not permitted by the merger agreement.
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<PAGE>
Expenses
If the merger agreement is terminated by Bay Commercial Services because
Greater Bay fails to satisfy its obligations under the merger agreement,
Greater Bay will be obligated to pay all of Bay Commercial Services' expenses
incurred in connection with the merger transaction, not to exceed $150,000.
If the merger agreement is terminated by Greater Bay because Bay Commercial
Services' shareholders fail to approve the merger, or because Bay Commercial
Services fails to satisfy its obligations under the merger agreement, Bay
Commercial Services will be obligated to pay all of Greater Bay's expenses
incurred in connection with the merger transaction, not to exceed $250,000.
Treatment of Options
Each and every option to purchase shares of Bay Commercial Services common
stock issued and outstanding immediately before the completion of the merger
and all obligations of Bay Commercial Services under the Bay Commercial
Services stock option plans will, on and after the completion of the merger, be
assumed by and be deemed to be options granted by Greater Bay to purchase that
number of shares of Greater Bay common stock equal to the conversion ratio
times the number of shares of Bay Commercial Services common stock subject to
the option rounded down to the nearest whole number of shares of Greater Bay
common stock. The per share exercise price for the shares of Greater Bay common
stock issuable upon exercise of such Bay Commercial Services option will be
determined by dividing the exercise price immediately before the completion of
the merger by the conversion ratio.
Termination
The merger agreement may be terminated at any time before the completion of
the merger:
. by mutual consent of Greater Bay and Bay Commercial Services in writing;
. by Bay Commercial Services or Greater Bay immediately on the failure of
the shareholders of Bay Commercial Services to approve the merger
agreement;
. by Greater Bay or Bay Commercial Services if any material breach or
default by the other party is not cured within 20 days after notice;
. by Greater Bay or Bay Commercial Services if any governmental or
regulatory authority denies or refuses to grant any approval, consent or
authorization required to be obtained to consummate the transactions
contemplated by the merger agreement unless, within 30 days after the
denial or refusal, all parties agree to resubmit the application to the
regulatory authority that has denied or refused to grant the approval,
consent or qualification requested;
. by Bay Commercial Services or Greater Bay if any conditions set forth in
Article 9 of the merger agreement shall not have been met by December 31,
1999;
. by Bay Commercial Services if any of the conditions of Article 10 of the
merger agreement shall not have been met, or by Greater Bay if any of the
conditions of Article 11 of the merger agreement shall not have been met,
by December 31, 1999, or an earlier time as it becomes apparent that
these conditions shall not be met;
. by Greater Bay if Bay Commercial Services shall have failed to comply
with its agreements with respect to any competing transaction;
. by Greater Bay if it is determined that the estimated cost of any
environmental remediation on any Bay Commercial Services property is in
excess of $100,000 or is not reasonably determinable;
. by Bay Commercial Services if Greater Bay enters into a transaction in
which 100% of the outstanding shares of Greater Bay common stock will be
acquired by a third party and the third party requires, as a condition
precedent, the termination of the merger agreement; or
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. by Bay Commercial Services if the Average Closing Price is less than
$25.50, subject to Greater Bay's right to exercise the top up option as
explained under "The Merger--Structure of the Merger, Conversion of
Shares."
Covenants; Conduct of Business Prior to Effective Time
The merger agreement provides that, during the period from the date of the
merger agreement to the completion of the merger, Bay Commercial Services will
conduct its business only in the normal and customary manner and in accordance
with sound banking practices and will not, without the prior written consent of
Greater Bay, which will not be unreasonably withheld, take any of the following
actions, among others:
. issue any security except pursuant to the exercise of options outstanding
as of the date of the merger agreement;
. declare, set aside or pay any dividend, other than its regular cash
dividend, or make any other distribution upon, or purchase or redeem any
shares of its stock;
. amend its articles of incorporation or its bylaws;
. grant any general or uniform increase in the rate of pay of employees or
employee benefits;
. grant any increase in salary, incentive compensation or employee benefits
or pay any bonus to any person or voluntarily accelerate the vesting of
any employee benefits;
. make any capital expenditure in excess of $50,000, except for ordinary
repairs, renewals and replacements;
. compromise, settle or adjust any assertion or claim of a deficiency in
taxes, extend the statute of limitations with any tax authority or file
any pleading in court on any tax litigation or any appeal from an
asserted deficiency, or file or amend any federal, foreign, state or
local tax return, or make any tax election;
. grant, renew or commit to grant or renew any extension of credit or amend
the terms of any credit outstanding on the date hereof to any person that
would exceed $1,000,000;
. change its tax or accounting policies and procedures or any method or
period of accounting unless required by generally accepted accounting
principles or by law or regulation;
. grant or commit to grant any extension of credit or amend the terms of
any credit outstanding as of the date of the merger agreement to any
executive officer, director or holder of 10% or more of the outstanding
Bay Commercial Services common stock, or any affiliate of such person, if
the credit would exceed $25,000;
. close any offices at which business is conducted or open any new office;
. adopt or amend any employment agreement or other employee benefit plan or
arrangement except amendments as are required by law;
. change any policies and practices with respect to liquidity management
and cash flow planning, lending, personnel practices, accounting or any
other material aspect of its business or operations, except those changes
as may be required in the opinion of management to respond to economic or
market conditions or as may be required by generally accepted accounting
principles or by applicable governmental authorities;
. grant any person a power of attorney or similar authority;
. make any investment by purchase of stock or securities, contributions to
capital, property transfers or otherwise in any other person, except for
investments made in the ordinary course of business consistent with past
practice;
. amend, modify or terminate, except in accordance with its terms, any
material contract or enter into any material agreement or contract;
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. sell, transfer, mortgage, encumber or otherwise dispose of any assets or
release any claims, except in the ordinary course of business consistent
with past practice;
. knowingly take any action which would or is reasonably likely to
--adversely affect the ability of Greater Bay or Bay Commercial
Services to obtain any necessary regulatory approval of the merger;
--adversely affect Bay Commercial Services' ability to perform its
covenants and agreements under the merger agreement; or
--result in any of the conditions relating to the performance of
Greater Bay's or Bay Commercial Services' obligations under the
merger agreement not being satisfied;
. make any special or extraordinary payments;
. reclassify any investment security from held-to-maturity or available for
sale to trading;
. sell any security other than in the ordinary course of business, or
engage in gains trading;
. take title to any real property without conducting an environmental
investigation, which shall disclose the absence of any suspected
environmental contamination;
. knowingly take or cause to be taken any action which would prevent the
transactions contemplated by the merger agreement from qualifying as a
tax free reorganization or prevent Greater Bay from accounting for the
business combination to be effected by the merger as a pooling of
interests;
. settle any claim involving any material liability for monetary damages or
enter into any settlement agreement containing material obligations;
. make, acquire, or reacquire any loan that is not in compliance with its
normal credit underwriting standards, policies and procedures as in
effect on December 31, 1998; or renew, extend the maturity of, or alter
any of the material terms of any such loan for a period of greater than
six months; or
. borrow money or become responsible for the obligations of any other
person, except
--in connection with banking transactions with banking customers in the
ordinary course of business or
--short-term borrowings made at prevailing market rates and terms.
The merger agreement also provides that Bay Commercial Services will:
. use its commercially reasonable efforts to preserve its present business
organization and its relationships and goodwill with account holders,
borrowers, employees and others having business relationships with Bay
Commercial Services or Bay Bank of Commerce;
. use its commercially reasonable efforts to keep in full force and effect
all material licenses and permits;
. use its commercially reasonable efforts to maintain insurance coverage
substantially the same as in effect as of the date of the merger
agreement;
. perform its material contractual obligations;
. duly observe and conform in all material respects to all lawful
requirements applicable to its business;
. maintain its assets and properties in good condition and repair, normal
wear and tear excepted;
. periodically furnish to Greater Bay information, loan reports and updates
of information previously provided;
. promptly notify Greater Bay of communications from tax authorities,
material litigation and any event which has had or may reasonably be
expected to have a materially adverse effect on the financial condition,
operations, business or prospects on a consolidated basis;
. provide access to Greater Bay of information; and
. use its reasonable efforts between the date of merger agreement and the
completion of the merger to take all actions necessary or desirable,
including the filing of any regulatory applications.
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The merger agreement also provides that Greater Bay will not, without the
prior written consent of Bay Commercial Services:
. take any action which would or is reasonably likely to adversely affect
the ability of Greater Bay to obtain any necessary regulatory approvals
for the merger, adversely affect Greater Bay's ability to perform its
covenants under the merger agreement or result in any of the conditions
to the performance of its obligations under the merger agreement not
being satisfied;
. take any action which would disqualify the merger as a "reorganization"
within the meaning of Section 368 of the Internal Revenue Code;
. amend its articles of incorporation in any respect which would materially
adversely affect the rights and privileges attendant to Greater Bay
common stock; or
. enter into a transaction in which 100% of the outstanding shares of
Greater Bay common stock is to be acquired by a third party and that
requires the termination of the merger agreement as a condition
precedent, subject to the fiduciary duties of the Board of Directors of
Greater Bay.
The merger agreement also provides that Greater Bay will:
. duly observe and conform in all material respects to all lawful
requirements applicable to its business;
. use its commercially reasonable efforts to have the directors and
officers of Bay Commercial Services and Bay Bank of Commerce added to
Greater Bay's directors' and officers' liability insurance policy;
. provide access to Bay Commercial Services of information;
. file all necessary regulatory applications; and
. reserve for issuance sufficient shares of Greater Bay common stock to
issue in connection with the merger.
The merger agreement also provides that each of Greater Bay and Bay
Commercial Services will:
. use its best efforts to take, or cause to be taken, all actions and to
do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate the transactions
contemplated by the merger agreement as promptly as practical;
. obtain the consent of the other before it issues any press release or
makes any public statement with respect to the merger agreement or the
transactions contemplated by the merger agreement; and
. cause to be prepared, at Greater Bay's discretion, one or more
environmental investigations with respect to real property owned or
leased by Bay Commercial Services.
Amendment and Waiver
Subject to applicable law, the merger agreement may be amended at any time
by the action of the Boards of Directors of Greater Bay or Bay Commercial
Services without action by their shareholders if Greater Bay and Bay Commercial
Services mutually agree in writing to the amendment. In addition, either
Greater Bay or Bay Commercial Services by action of their respective Boards of
Directors, may, at any time before completion of the merger, extend the
performance of any obligation or action required by the merger agreement, waive
inaccuracies in representations and warranties and waive compliance with any
agreements or conditions for their respective benefit contained in the merger
agreement.
Agreements with Certain Shareholders
Greater Bay has entered into shareholder's agreements with various
shareholders of Bay Commercial Services, each of whom is also a director of Bay
Commercial Services, pursuant to which these directors have
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agreed to vote all shares of Bay Commercial Services common stock which they
own or hold in trust in favor of the approval of the merger agreement, thereby
increasing the likelihood that the merger agreement will be approved by the
shareholders of Bay Commercial Services.
Greater Bay has entered into noncompetition agreements with each of the Bay
Commercial Services directors, pursuant to which these directors have agreed,
among other things and with limited exceptions, not to participate or engage in
any business which is competitive with Greater Bay or Bay Bank of Commerce for
a period of two years after the completion of the merger.
Resales of Greater Bay Common Stock
The shares of Greater Bay common stock to be issued to Bay Commercial
Services shareholders in the merger have been registered under the Securities
Act. These shares may be traded freely and without restriction by those
shareholders not deemed to be "affiliates" of Bay Commercial Services. An
affiliate of a corporation, as defined by the Securities Act, is a person who
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, that corporation. Any
subsequent transfer by an affiliate of Bay Commercial Services must be made in
compliance with the resale provisions of Rule 145 promulgated under the
Securities Act or as otherwise permitted under the Securities Act.
Securities and Exchange Commission guidelines regarding qualifying for the
pooling of interests method of accounting also limit sales of shares of the
acquiring company and acquired company by affiliates of either company in a
business combination such as the merger. These guidelines indicate that the
pooling of interests method of accounting will generally not be challenged on
the basis of sales by affiliates if these persons do not dispose of any of the
shares of the corporation they own or any shares of the corporation they
receive in connection with a merger during the period beginning 30 days before
the merger and ending when financial results covering at least 30 days of post-
merger operations of the combined entity have been published.
Bay Commercial Services has delivered to Greater Bay an agreement for each
affiliate of Bay Commercial Services that such person will not dispose of:
. any Greater Bay common stock in violation of the Securities Act; or
. any Bay Commercial Services common stock or Greater Bay common stock
during the pooling restricted period.
Regulatory Approvals
Under the merger agreement, Greater Bay and Bay Commercial Services have
agreed to use their commercially reasonable efforts to obtain all necessary
actions or nonactions, extensions, waivers, consents and approvals from any
governmental authority necessary, proper or advisable to consummate the
transactions contemplated by the merger agreement. These approvals include the
approvals of the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended, and the rules and regulations promulgated thereunder, and the
California Department of Financial Institutions.
The closing of the merger is conditioned on the receipt of all approvals of
regulatory authorities required for the merger. If any regulatory authority
imposes any conditions that Greater Bay deems will materially and adversely
affect Greater Bay or will materially burden Greater Bay, then Greater Bay will
use commercially reasonable efforts to obtain the removal of the condition.
Federal Reserve Board. The merger is subject to prior approval by the
Federal Reserve Board under Section 3 of the Bank Holding Company Act. Section
3 of the Bank Holding Company Act requires the Federal Reserve Board, when
considering a transaction such as the merger, to take into consideration the
financial and managerial resources, including the competence, experience and
integrity of the officers, directors and principal stockholders, and the future
prospects of the existing and proposed institutions and the effect of
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the transaction on the convenience and needs of the communities to be served.
In considering financial resources and future prospects, the Federal Reserve
Board will, among other things, evaluate the adequacy of the capital levels of
the parties to a proposed transaction and of the resulting institutions. In
considering financial and managerial factors, the Federal Reserve Board will
also assess the degree to which Greater Bay and Bay Commercial Services are
taking appropriate steps to assure that electronic data processing systems and
those of their vendors can safely accommodate the upcoming change to the new
millennium and plans for ensuring Year 2000 readiness of the resulting
organization.
The Bank Holding Company Act prohibits the Federal Reserve Board from
approving a merger if it would result in a monopoly or be in furtherance of any
combination or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States or its effect in any
section of the country would be substantially to lessen competition or to tend
to create a monopoly, or if it would in any other respect result in a restraint
of trade, unless the Federal Reserve Board finds that the anti-competitive
effects of the merger are clearly outweighed by the probable effect of the
transaction in meeting the convenience and needs of the communities to be
served.
In addition, under the Community Reinvestment Act of 1977, as amended, the
Federal Reserve Board must take into account the record of performance of the
depository institution subsidiaries of Greater Bay and Bay Commercial Services
in meeting the credit needs of the communities served by such institutions,
including low- and moderate-income neighborhoods.
Greater Bay submitted an application for approval of the merger with the
Federal Reserve Board on , 1999. The merger may not be completed until
the 30th day, or, with the consent of the relevant agencies, the 15th day,
following the date of the Federal Reserve Board approval, during which period
the United States Department of Justice may comment adversely on the merger or
challenge the merger on antitrust grounds. The commencement of an antitrust
action would stay the effectiveness of the Federal Reserve Board approval
unless a court specifically orders otherwise.
California Department of Financial Institutions. In determining whether to
approve the merger, the California Department of Financial Institutions will
consider factors such as
. the effects of the merger on competition;
. the effects of the merger on the convenience and needs of the communities
to be served;
. the financial condition of Greater Bay;
. whether the merger is fair and reasonable to the depositors, creditors
and shareholders of Bay Commercial Services;
. the competence, experience and integrity of Greater Bay's management; and
. whether the merger is fair, just and equitable to Bay Commercial
Services.
Greater Bay submitted an application for approval of the merger with the
Department of Financial Institutions of the State of California on ,
1999.
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DISSENTING SHAREHOLDERS' RIGHTS
Bay Commercial Services shareholders are entitled to dissenters' appraisal
rights in connection with the merger. The procedures for shareholders to obtain
dissenters' rights are set forth in Chapter 13 of the California General
Corporation Law. The information set forth below is a general summary of
Chapter 13 dissenters' rights as they apply to Bay Commercial Services
shareholders, which is qualified in its entirety by reference to Chapter 13.
Sections 1300 through 1304 of Chapter 13 are attached hereto as Annex C. If you
wish to exercise dissenters' rights or wish to preserve the right to do so you
should carefully read Annex C. You must follow exactly the required procedures
set forth in Chapter 13 of the California General Corporation Law or any
dissenters' rights may be lost.
If the merger is consummated, any of you who elect to exercise your
dissenters' rights and comply with the procedures set forth in Chapter 13 will
be entitled to receive an amount equal to the fair market value of your shares.
Chapter 13 provides the fair market value shall be determined as of April 30,
1999, the day before the public announcement of the merger. Bay Commercial
Services believes the fair market value is equal to $17.50 for purposes of your
dissenters' rights.
You must satisfy each of the following requirements for your shares to be
considered dissenting shares under Chapter 13. First, you must have shares of
Bay Commercial Services Common Stock that are outstanding as of the record date
of the special meeting. Second, you must not vote the common stock "FOR" the
proposal to approve the merger agreement. Third, you must demand that Bay
Commercial Services purchase your shares as described below. Lastly, you must
surrender your certificates for endorsement as described below. If you return a
proxy without voting instructions or with instructions to vote "FOR" the
proposal to approve the principal terms of the merger agreement, your shares
will automatically be voted in favor of the merger and you will lose your
dissenters' rights.
If the merger is approved by the shareholders, Bay Commercial Services will
have 10 days after the approval to mail those shareholders who did not vote in
favor of the merger written notice of the approval along with a copy of
Sections 1300 through 1304 of Chapter 13. In the notice of approval, Bay
Commercial Services must state the price it determines represents the fair
market value of the dissenting shares. This price constitutes an offer by Bay
Commercial Services to purchase the dissenting shares at the price stated.
Additionally, Bay Commercial Services must set forth in the approval notice a
brief description of the procedures a shareholder must follow if he or she
desires to exercise dissenters' rights.
Within 30 days after the date on which Bay Commercial Services mails the
notice of the approval of the Merger, Bay Commercial Services must receive the
shareholder's written demand that Bay Commercial Services purchase the
dissenting shares and pay the shareholder their fair market value in cash. In
the written demand, Chapter 13 requires shareholders to specify the number
shares they hold of record which they are demanding Bay Commercial Services to
purchase. In the written demand, shareholders must also include a statement of
the amount they claim to be the fair market value of those shares as of April
30, 1999. This price constitutes an offer by the shareholder to sell the
dissenting shares at the price stated.
Within 30 days after the date on which Bay Commercial Services mails the
notice of the approval of the Merger, dissenting shareholders must also submit
the certificates representing the dissenting shares to Bay Commercial Services
at the office it designates in the notice of approval. Bay Commercial Services
will stamp or endorse the certificates with a statement that the shares are
dissenting shares or Bay Commercial Services will exchange the certificates
with certificates of appropriate denomination that are so stamped or endorsed.
If a shareholder transfers any shares of Bay Commercial Services Common Stock
before submitting the shares for endorsement, then such shares will lose their
status as dissenting shares.
If Bay Commercial Services and the dissenting shareholder agree that the
surrendered shares are dissenting shares and agree upon the price of the
shares, the dissenting shareholder is entitled to receive the agreed price,
together with interest thereon at the legal rate on judgments from the date of
the agreement between Bay
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Commercial Services and the dissenting shareholder. Bay Commercial Services
shall pay the fair value of the dissenting shares within 30 days after Bay
Commercial Services and the shareholder agree upon the price of the shares or
within 30 days after any statutory or contractual conditions to the merger have
been satisfied, whichever is later. Bay Commercial Services' duty to pay is
subject the shareholder surrendering the certificates and is also subject to
the restrictions imposed under California law on the ability of Bay Commercial
Services to purchase its outstanding shares.
If Bay Commercial Services denies that the shares surrendered are dissenting
shares or Bay Commercial Services and the dissenting shareholder fail to agree
upon the fair market value of such shares, then the dissenting shareholder may,
within six months after the notice of approval is mailed, file a complaint in
the Superior Court of the proper county requesting the court to make these
determinations. In the alternative, the shareholder may intervene in any
pending action brought by any other dissenting shareholder. If the shareholder
fails to file a complaint or fails to intervene in a pending action within the
specified six-month period, the dissenter's rights are lost. If the fair market
value of the dissenting shares is at issue, the court will determine, or will
appoint one or more impartial appraisers to determine, the fair market value as
of the day before the announcement of the merger.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing the merger, then the court will
suspend any civil suits filed by shareholders to determine whether shares are
dissenting shares or to determine the fair market value of dissenting shares.
Any Bay Commercial Services shareholder who has appraisal rights under Chapter
13 of the California General Corporation Law may not attack the validity of the
merger or have the merger set aside or rescinded, except in an action to test
whether the number of shares required to authorize or approve the merger have
been legally voted in favor of the merger.
This summary has already described situations where shareholders of Bay
Commercial Services will cease to have dissenters' appraisal rights. In
addition to the situations described above, shareholders of Bay Commercial
Services will cease to have dissenters' appraisal rights if:
. Greater Bay or Bay Commercial Services abandons the merger in which case
Bay Commercial Services will pay any dissenting shareholder who has filed
a complaint, as described above, all necessary expenses and reasonable
attorneys' fees incurred in such proceedings; or
. The dissenting shareholder withdraws his or her demand for the purchase
of the dissenting shares with the consent of Bay Commercial Services.
One condition to the obligation of Greater Bay to consummate the merger is,
however, that less than 9% of Bay Commercial Services shareholders exercise
their dissenters' appraisal rights. In calculating this percentage, Greater Bay
will not include shareholders that either withdraw their demand for Bay
Commercial Services to purchase their shares or that lose their dissenters'
appraisal rights.
DESCRIPTION OF GREATER BAY COMMON STOCK AND BAY COMMERCIAL SERVICES COMMON
STOCK
In the merger, you will exchange your shares of Bay Commercial Services
common stock for shares of Greater Bay common stock. Both Greater Bay and Bay
Commercial Services are California corporations subject to the provisions of
the California General Corporation Law. On consummation of the merger, you will
become Greater Bay shareholders. The articles of incorporation and bylaws of
Greater Bay, in addition to the California General Corporation Law, will govern
your rights as Greater Bay shareholders.
Set forth below is a summary of the material features of the Greater Bay
common stock and the Bay Commercial Services common stock. Also set forth below
is a summary of the material differences between the rights of a holder of
Greater Bay common stock and a holder of Bay Commercial Services common stock.
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Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Greater Bay
and Bay Commercial Services, Greater Bay and Bay Commercial Services have been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Stock Description
Greater Bay. Greater Bay has authority to issue 24,000,000 shares of Greater
Bay common stock and 4,000,000 shares of serial preferred stock, without par
value. On , 1999, there were shares of Greater Bay common stock
outstanding. There are no shares of preferred stock outstanding. On any matter
submitted to a vote of the shareholders, holders of Greater Bay common stock
are entitled to one vote, in person or by proxy, for each share of Greater Bay
common stock held of record in the shareholder's name on the Greater Bay books
as of the record date. Holders of any class of Greater Bay common stock lack
the right to cumulate votes at any election of directors. Each share of Greater
Bay common stock has the same rights, privileges and preferences as every other
share and will share equally in Greater Bay's net assets upon liquidation or
dissolution. Greater Bay common stock has no preemptive, conversion or
redemption rights, or sinking fund provisions.
The Greater Bay Board of Directors, without shareholder approval, may
authorize one or more classes of serial preferred stock with preferences or
voting rights that may adversely affect the rights of holders of Greater Bay
common stock. Although it is not possible to state the actual effect any
issuance of serial preferred stock might have upon the rights of holders of the
Greater Bay common stock, the issuance of serial preferred stock might
. restrict dividends on Greater Bay common stock if preferred stock
dividends have not been paid;
. dilute the voting power and equity interest of holders of Greater Bay
common stock to the extent that any preferred stock series has voting
rights or is convertible into Greater Bay common stock; or
. prevent current holders of Greater Bay common stock from participating in
Greater Bay's assets upon liquidation until any liquidation preferences
granted to the holders of the serial preferred stock are satisfied.
In addition, Greater Bay's issuance of serial preferred stock, may, under
certain circumstances, have the effect of discouraging an attempt to change
control of Greater Bay. The Greater Bay Board of Directors recently adopted a
Shareholder Rights Plan and distributed preferred share purchase rights to
protect Greater Bay from improper takeover tactics and unfair takeover bids. A
detailed description of the Shareholder Rights Plan is set forth below.
Greater Bay's articles of incorporation provide that the liability of
Greater Bay directors for monetary damages shall be eliminated to the fullest
extent permissible under California law. Additionally, Greater Bay has
authority to provide for the indemnification of Greater Bay agents, as defined
in Section 317 of the California General Corporation Law, in excess of that
expressly permitted by Section 317 for breach of duty to the corporation and
its shareholders. Greater Bay is allowed to provide this indemnification to the
extent not prohibited by applicable sections of California law.
Shareholders are entitled to dividends when declared by the Greater Bay
Board of Directors, after satisfaction of the prior rights of holders of
outstanding preferred stock, if any, subject to certain restrictions on payment
of dividends imposed by the California Law. The transfer agent and registrar
for Greater Bay Common Stock is Norwest Bank Minnesota, N.A.
Bay Commercial Services. Bay Commercial Services has authority to issue
20,000,000 shares of Bay Commercial Services common stock and 10,000,000 shares
of serial preferred stock. At the record date, there were shares of
Bay Commercial Services common stock issued and outstanding and no shares of
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Bay Commercial Services preferred stock outstanding. On any matter submitted to
a vote of the shareholders, holders of Bay Commercial Services common stock are
entitled to one vote in person or by proxy, for each share of Bay Commercial
Services common stock held of record in the shareholder's name on the Bay
Commercial Services books as of the record date. In connection with the
election of directors, the shares may be voted cumulatively. Each share of Bay
Commercial Services common stock has the same rights, privileges and
preferences as every other share and will share equally in Bay Commercial
Services net assets upon liquidation or dissolution. The stock has no
preemptive, conversion or redemption rights, or sinking fund provisions. All of
the issued and outstanding shares of Bay Commercial Services common stock are
fully paid and nonassessable.
The Bay Commercial Services Board of Directors, without shareholder
approval, may authorize one or more classes of serial preferred stock with
preferences or voting rights that may adversely affect the rights of holders of
Bay Commercial Services common stock. Although it is not possible to state the
actual effect any issuance of serial preferred stock might have upon the rights
of holders of the Bay Commercial Services common stock, the issuance of serial
preferred stock might
. restrict dividends on Bay Commercial Services common stock if preferred
stock dividends have not been paid;
. dilute the voting power and equity interest of holders of Bay Commercial
Services common stock to the extent that any preferred stock series has
voting rights or is convertible into Bay Commercial Services common
stock; or
. prevent current holders of Bay Commercial Services common stock from
participating in Bay Commercial Services' assets upon liquidation until
any liquidation preferences granted to the holders of the serial
preferred stock are satisfied.
The Bay Commercial Services articles of incorporation provide that the
liability of Bay Commercial Services' directors for monetary damages shall be
eliminated to the fullest extent permissible under California law.
Additionally, Bay Commercial Services has authority to provide for the
indemnification of Bay Commercial Services' agents, as defined in Section 317
of the California General Corporation Law, in excess of that expressly
permitted by Section 317 for breach of duty to the corporation and its
shareholders. Bay Commercial Services is allowed to provide for this
indemnification to the extent not prohibited by applicable sections of
California law.
Shareholders are entitled to dividends when declared by the Bay Commercial
Services board of directors, and after satisfaction of the prior rights of
holders of outstanding preferred stock, if any, subject to certain restrictions
on payment of dividends imposed by California law.
The transfer agent and registrar for Bay Commercial Services common stock is
ChaseMellon Shareholder Services.
Material Differences Between Holders of Greater Bay Stock and Bay Commercial
Services Stock
Cumulative Voting
Greater Bay. Greater Bay shareholders do not have cumulative voting in the
election of directors.
Bay Commercial Services. Shareholders of Bay Commercial Services are
entitled to cumulate their votes for the election of directors. Cumulative
voting allows a shareholder to cast a number of votes equal to the number of
directors to be elected multiplied by the number of shares held in the
shareholder's name on the record date. This total number of votes may be cast
for one nominee or may be distributed among as many candidates as the
shareholder desires. The candidates, up to the number of directors to be
elected, receiving the highest number of votes are elected.
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Classified Board of Directors
Greater Bay. Greater Bay's Board of Directors is divided into three classes
of directors, with each class of directors serving for staggered three-year
terms. Greater Bay's bylaws provide for the election of directors by class for
a term of three years and until his or her successor is elected and qualified.
Bay Commercial Services. The Bay Commercial Services bylaws provide that
directors will be elected for a one-year term at each annual meeting of
shareholders.
Shareholder Rights Plan
Greater Bay. On November 17, 1998, the Greater Bay Board of Directors
declared a dividend distribution of one share purchase right for each
outstanding share of Greater Bay common stock to shareholders of record at the
close of business on November 30, 1998. Each Greater Bay right entitles the
registered holder to purchase from Greater Bay one one-hundredth of a share of
Series A Preferred Stock. The initial purchase price of each right is $145,
subject to adjustment.
These rights will also attach to all shares of Greater Bay common stock
issued after November 30, 1998, but before the distribution date, as discussed
below. The description and terms of the rights are set forth in a rights
agreement.
The rights are attached to all Greater Bay common stock certificates
representing shares currently outstanding and no separate certificates
evidencing these rights have been distributed. Greater Bay has sent a copy of a
Summary of Rights to Purchase Common Shares to its shareholders. The right will
separate from the Greater Bay common stock (this is referred to as the
distribution date) upon the earlier of
. 10 days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership or record ownership
of 10% or more of the outstanding shares of Greater Bay common stock,
. 10 business days following the commencement of, or the public
announcement of an intent to make, a tender offer or exchange offer that
would result in a person or group beneficially owning 10% or more of the
outstanding shares of Greater Bay common stock; or
. the date a person or group becomes the beneficial or record owner of 10%
or more of the outstanding shares of Greater Bay common stock, and the
actions that person proposes to take are likely to have a material
adverse impact on the business or prospects of Greater Bay; that person
intends to cause Greater Bay to repurchase the common stock owned by that
person; that person exercises or attempts to exercise a controlling
influence over Greater Bay; or that person transfers all or a portion of
Greater Bay common stock in a manner that results in a person owning 9.9%
or more of the Greater Bay common stock (an "Adverse Person").
Until the distribution date, the rights will be evidenced by the Greater Bay
common stock certificates together with a copy of the Summary of Rights to
Purchase Common Shares attached to the certificate and will be transferred only
with the Greater Bay common stock certificates. Also, new Greater Bay common
stock certificates issued after November 30, 1998 will contain a notation
incorporating the Rights Agreement by reference. The surrender or transfer of
any certificates for common stock outstanding even without the notation or a
copy of the Summary of Rights to Purchase Common Shares will also constitute
the transfer of the rights represented by the certificates.
45
<PAGE>
The rights are not exercisable until the distribution date and will expire
on November 17, 2008, unless Greater Bay extends this date or the rights are
earlier redeemed by Greater Bay as described below.
While each right initially will provide for the acquisition of one one-
hundredth of a share of Series A Preferred Stock at the purchase price, the
rights agreement provides that the purchase price is subject to adjustment from
time to time to prevent dilution
. in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the preferred stock;
. upon the grant to holders of the preferred stock of rights or warrants to
subscribe for or purchase preferred stock at a price, or securities
convertible into preferred stock with a conversion price, less than the
then current market price of the preferred stock; or
. upon the distribution to holders of the preferred stock of evidences of
indebtedness or asset, excluding regular periodic cash dividends paid out
of earnings or retained earnings or dividends payable in preferred stock,
or of subscription rights or warrants, other than those referred to
above.
If Greater Bay is acquired in a merger or other business combination, or 50%
or more of Greater Bay's consolidated assets or earning power is sold, each
holder of a right will have the right to receive, upon exercise and payment of
the purchase price, common stock of the acquiring company having a value equal
to twice the purchase price.
If any person becomes an Acquiring Person or an Adverse Person, each holder
of a right, other than rights beneficially owned by the Acquiring Person or
Adverse Person (which will become void), will then have the right to receive,
upon exercise and payment of the purchase price, fractions of shares of
Preferred Stock having a value equal to twice the purchase price.
At any time after an Acquiring Person obtains 10% or more of Greater Bay
common stock and before the Acquiring Person obtains 50% of Greater Bay common
stock, Greater Bay may exchange all or part of the rights for shares of Greater
Bay common stock at an exchange ratio of one share per right, subject to
adjustment.
With limited exceptions, the rights agreement does not require adjustment to
the purchase price until cumulative adjustments require an adjustment of at
least 1% in the purchase price. The rights agreement also disallows the
issuance of fractional shares of preferred stock, other than fractions that are
integral multiples of one one-hundredths, and instead of issuing fractional
shares, a cash adjustment will be made based on the market price of the
preferred stock on the last trading day before the date of exercise.
At any time before a person becomes an Acquiring Person or an Adverse
Person, Greater Bay may redeem the rights in whole, but not in part, at a price
of $.001 per right. Immediately upon any redemption of the rights, the right to
exercise the rights will terminate and the only right of the holders of the
rights will be to receive the redemption price.
Greater Bay may amend the terms of the rights without the consent of the
holders of the rights, including an amendment to extend the expiration date
and, provided there is no Acquiring Person or Adverse Person, to extend the
period during which the rights may be redeemed, except that from and after the
time that any person becomes an Acquiring Person or an Adverse Person no
amendment may adversely affect the interests of the holders of the rights.
Until a right is exercised, the holder of a right will have no rights as a
shareholder of Greater Bay, including, without limitation, the right to vote or
to receive dividends.
The rights may have certain anti-takeover effects. The rights agreement is
designed to maximize the long-term value of Greater Bay and protect Greater
Bay's shareholders from improper takeover tactics or from takeover bids that
are not fair to all Greater Bay shareholders.
46
<PAGE>
Bay Commercial Services. Bay Commercial Services does not have a
shareholder rights plan.
Super-majority Voting for Certain Business Combinations
Greater Bay. Greater Bay does not require super-majority shareholder voting
for business combinations.
Bay Commercial Services. Bay Commercial Services' articles of incorporation
require the approval of the holders of at least 66 2/3% of the outstanding
shares of Bay Commercial Services common stock for specified business
combinations between Bay Commercial Services or any subsidiary and an
interested shareholder, as defined below, or its affiliates. These business
combinations include, among others:
. any merger or consolidation with an Interested Shareholder or any other
entity which will be an Interested Shareholder or its affiliate after the
merger or consolidation; or
. the issuance or transfer of securities of Bay Commercial Services or any
subsidiary to an interested shareholder or any other person which will be
an interested shareholder or its affiliate after the transfer, unless the
issuance or transfer is part of a stock split or dividend in which all
shareholders of the class are treated equally.
The foregoing shareholder approval is not required for any business
combination approved by the Bay Commercial Services Board of Directors or if
specified fair market value conditions are met. Because the Bay Commercial
Services Board of Directors approved the merger, these provisions do not apply
to the merger.
An interested shareholder generally includes any individual, corporation or
entity, other than Bay Commercial Services employee benefit plans, which is
the beneficial owner of more than 5% of the combined voting power of Bay
Commercial Services' voting stock or an affiliate of the beneficial owner.
Approval of Certain Purchases of Shares
Greater Bay. Greater Bay does not require shareholder approval to
repurchase Greater Bay shares from Interested Shareholders.
Bay Commercial Services. Bay Commercial Services' articles of incorporation
require the approval of the majority of the outstanding shares of Bay
Commercial Services common stock in order for Bay Commercial Services to
repurchase shares of Bay Commercial Services common stock from an interested
shareholder or an affiliate of an interested shareholder. The foregoing
shareholder approval is not required, however, if the stock repurchase is made
pursuant to:
. a tender offer or exchange offer made available on the same basis to all
holders of Bay Commercial Services' capital stock; or
. an open market purchase program approved by the Bay Commercial Services
Board of Directors provided that the repurchase is effected through the
open market.
Shareholder Action by Written Consent
Greater Bay. Greater Bay's bylaws provide that any action which may be
taken at any annual or special meeting of the shareholders may be taken by
Greater Bay's shareholders without a meeting if a consent in writing is signed
by the holders of outstanding shares having not less than the minimum number
of votes which would be necessary to authorize or take the action at a meeting
in which all shares entitled to vote on the action were present and voted.
Bay Commercial Services. Bay Commercial Services' articles of incorporation
provide for the above described shareholder written consent so long as the Bay
Commercial Services Board of Directors shall have previously approved the
action which is being taken by shareholder written consent. However, Bay
Commercial Services' articles of incorporation do not require the Board's
approval of any action taken by shareholder written consent for any matter
which may be approved by action of the shareholders acting alone.
47
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 1999, combines the historical consolidated balance sheets of Greater
Bay and Bay Commercial Services as if the merger had been effective on March
31, 1999, after giving effect to certain adjustments. These adjustments are
based on estimates. The Unaudited Pro Forma Condensed Combined Statements of
Operations for the three months ended March 31, 1999 and 1998 and for the years
ended December 31, 1998, 1997 and 1996 present the combined results of
operations of Greater Bay and Bay Commercial Services as if the merger had been
effective at the beginning of each period. The Unaudited Pro Forma Condensed
Combined Financial Information has been prepared from, and should be read in
conjunction with, the historical consolidated financial statements and notes
thereto of Greater Bay and Bay Commercial Services.
The Unaudited Pro Forma Condensed Combined Financial Information and
accompanying notes reflect the application of the pooling of interests method
of accounting for the merger. Under this method of accounting, the recorded
assets, liabilities, shareholders' equity, income and expenses of Greater Bay
and Bay Commercial Services are combined and reflected at their historical
amounts.
The pro forma combined figures shown in the Unaudited Pro Forma Condensed
Combined Financial Information are simply arithmetical combinations of Greater
Bay's and Bay Commercial Services' separate financial results; you should not
assume that Greater Bay and Bay Commercial Services would have achieved the pro
forma combined results if they had actually been combined during the periods
presented.
The combined company expects to achieve merger benefits in the form of
operating cost savings. The pro forma earnings, which do not reflect any direct
costs or potential savings which are expected to result from the consolidation
of the operations of Greater Bay and Bay Commercial Services, are not
indicative of the results of future operations. No assurances can be given with
respect to the ultimate level of expense savings. For further explanation about
these risks, read the information under "A Warning About Forward-Looking
Information" and "Risk Factors -- There are uncertainties in integrating our
business operations and realizing enhanced earnings."
48
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 1999
<TABLE>
<CAPTION>
Greater Bay
Bay & Bay Commercial
Greater Commercial Services
Bay Services Adjustments(1) Combined
---------- ---------- -------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Cash and due from
banks................. $ 79,244 $ 8,262 $ 87,506
Federal funds sold..... 106,400 3,500 109,900
Other short-term
securities............ 67,209 1,500 68,709
Securities available-
for-sale.............. 264,640 27,589 292,229
Securities held-to-
maturity and other.... 103,593 7,847 111,440
Total loans, net....... 1,234,879 93,929 1,328,808
Property, premises and
equipment............. 12,994 1,905 14,899
Interest receivable and
other assets.......... 69,493 1,390 70,883
---------- -------- ------ ----------
Total assets......... $1,938,452 $145,922 $ -- $2,084,374
========== ======== ====== ==========
Liabilities
Total deposits......... $1,675,844 $133,151 $1,808,995
Other borrowings....... 72,635 -- 72,635
Subordinated debt...... -- -- --
Other liabilities...... 26,735 814 $2,245 29,794
Trust Preferred
Securities............ 50,000 -- 50,000
---------- -------- ------ ----------
Total liabilities........ 1,825,214 133,965 2,245 1,961,424
---------- -------- ------ ----------
Shareholders' equity..... 113,238 11,957 (2,245) 122,950
---------- -------- ------ ----------
Total liabilities and
shareholders'
equity.............. $1,938,452 $145,922 $ -- $2,084,374
========== ======== ====== ==========
</TABLE>
- --------
(1) The following table reflects all nonrecurring Greater Bay and Bay
Commercial Services estimated merger-related costs as of March 31, 1999.
These costs are not included on the unaudited pro forma condensed combined
statement of operations but are included on the unaudited pro forma
condensed combined balance sheet as a reduction to shareholders' equity,
net of a $1.1 million tax benefit. These costs will be charged to expense
immediately following the consummation of the merger. These estimated
merger-related costs are summarized below, in thousands:
<TABLE>
<CAPTION>
Merger Costs
---------------------------
Bay
Greater Commercial
Bay Services Combined
------- ---------- --------
<S> <C> <C> <C>
Financial advisory............................... $150 $ 450 $ 600
Professional fees................................ 150 100 250
Printing......................................... 15 15 30
Other............................................ 380 2,085 2,465
---- ------ ------
Total......................................... $695 $2,650 $3,345
==== ====== ======
</TABLE>
49
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Greater Bay
& Bay
Bay Commercial
Greater Commercial Services
Bay Services Adjustments Combined
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans................. $27,476 $2,118 $29,594
Interest on investment
securities....................... 5,343 483 5,826
Other interest income............. 1,642 -- 1,642
------- ------ ---- -------
Total interest income............ 34,461 2,601 37,062
Interest on deposits.............. 11,796 866 12,662
Other interest expense............ 2,125 17 2,142
------- ------ ---- -------
Net interest income............... 20,540 1,718 22,258
Provision for loan losses......... 921 41 962
------- ------ ---- -------
Net interest income after
provision for loan losses........ 19,619 1,677 21,296
Other income...................... 2,557 242 2,799
Operating expenses................ 12,691 1,483 14,174
------- ------ ---- -------
Income before provision for income
taxes and extraordinary items.... 9,485 436 9,921
Provision for income taxes........ 3,695 152 3,847
------- ------ ---- -------
Net income before extraordinary
items ........................... 5,790 284 6,074
Extraordinary items............... (88) -- (88)
------- ------ ---- -------
Net income....................... $ 5,702 $ 284 $ 5,986
======= ====== ==== =======
Net income per share -- basic(1).. $ 0.53 $ 0.24 $ 0.51
======= ====== ==== =======
Average common shares
outstanding(2)................... 11,087 1,182 (339) 11,930
======= ====== ==== =======
Net income per share --
diluted(1)....................... $ 0.50 $ 0.22 $ 0.48
======= ====== ==== =======
Average common and common
equivalent shares outstanding(2)
................................. 11,718 1,293 (371) 12,640
======= ====== ==== =======
</TABLE>
- --------
(1) Before extraordinary items.
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bay Commercial Services weighted average shares adjusted for the
assumed conversion ratio of 0.7134.
50
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Greater Bay
& Bay
Bay Commercial
Greater Commercial Services
Bay Services Adjustments Combined
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans................... $21,644 $1,935 $23,579
Interest on investment securities... 3,912 394 4,306
Other interest income............... 2,619 -- 2,619
------- ------ ------ -------
Total interest income.............. 28,175 2,329 30,504
Interest on deposits................ 9,556 774 10,330
Other interest expense.............. 1,699 18 1,717
------- ------ ------ -------
Net interest income................. 16,920 1,537 18,457
Provision for loan losses........... 1,036 10 1,046
------- ------ ------ -------
Net interest income after provision
for loan losses.................... 15,884 1,527 17,411
Other income........................ 2,121 248 2,369
Operating expenses.................. 11,325 1,387 12,712
------- ------ ------ -------
Income before provision for income
taxes and merger and other related
nonrecurring costs................. 6,680 388 7,068
Provision for income taxes.......... 2,226 134 2,360
------- ------ ------ -------
Net income before merger and other
related nonrecurring costs......... 4,454 254 4,708
Merger and other related
nonrecurring costs, net of tax..... -- -- --
------- ------ ------ -------
Net income......................... $ 4,454 $ 254 $ 4,708
======= ====== ====== =======
Net income per share -- basic(1).... $ 0.43 $ 0.24 $ 0.41
======= ====== ====== =======
Average common shares
outstanding(2)..................... 10,717 1,080 (310) 11,487
======= ====== ====== =======
Net income per share -- diluted(1).. $ 0.40 $ 0.20 $ 0.37
======= ====== ====== =======
Average common and common equivalent
shares outstanding(2).............. 11,655 1,280 (367) 12,568
======= ====== ====== =======
</TABLE>
- --------
(1) Before merger and other related nonrecurring costs.
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bay Commercial Services weighted average shares adjusted for the
assumed conversion ratio of 0.7134.
51
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Greater Bay
& Bay
Bay Commercial
Greater Commercial Services
Bay Services Adjustments Combined
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans................... $93,915 $8,177 $102,092
Interest on investment securities... 20,075 2,023 22,098
Other interest income............... 10,808 -- 10,808
------- ------ ---- --------
Total interest income.............. 124,798 10,200 134,998
Interest on deposits................ 43,004 3,406 46,410
Other interest expense.............. 8,176 73 8,249
------- ------ ---- --------
Net interest income................. 73,618 6,721 80,339
Provision for loan losses........... 6,235 134 6,369
------- ------ ---- --------
Net interest income after provision
for loan losses.................... 67,383 6,587 73,970
Other income........................ 9,720 941 10,661
Operating expenses.................. 46,436 5,656 52,092
------- ------ ---- --------
Income before provision for income
taxes and merger and other related
nonrecurring costs................. 30,667 1,872 32,539
Provision for income taxes.......... 10,050 657 10,707
------- ------ ---- --------
Net income before merger and other
related nonrecurring costs......... 20,617 1,215 21,832
Merger and other related
nonrecurring costs, net of tax..... 1,674 -- 1,674
------- ------ ---- --------
Net income......................... $18,943 $1,215 $ 20,158
======= ====== ==== ========
Net income per share -- basic(1).... $ 1.90 $ 1.12 $ 1.88
======= ====== ==== ========
Average common shares
outstanding(2)..................... 10,858 1,080 (299) 11,639
======= ====== ==== ========
Net income per share--diluted(1).... $ 1.77 $ 0.95 $ 1.74
======= ====== ==== ========
Average common and common equivalent
shares outstanding(2).............. 11,637 1,277 (366) 12,548
======= ====== ==== ========
</TABLE>
- --------
(1) Before merger and other related nonrecurring costs.
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bay Commercial Services weighted average shares adjusted for the
assumed conversion ratio of 0.7134.
52
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Greater Bay
& Bay
Bay Commercial
Greater Commercial Services
Bay Services Adjustments Combined
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans................... $78,278 $7,137 $85,415
Interest on investment securities... 10,323 1,622 11,945
Other interest income............... 9,660 -- 9,660
------- ------ ---- -------
Total interest income.............. 98,261 8,759 107,020
Interest on deposits................ 33,565 2,860 36,425
Other interest expense.............. 3,447 96 3,543
------- ------ ---- -------
Net interest income................. 61,249 5,803 67,052
Provision for loan losses........... 7,026 52 7,078
------- ------ ---- -------
Net interest income after provision
for loan losses.................... 54,223 5,751 59,974
Other income........................ 9,058 971 10,029
Operating expenses.................. 38,791 5,072 43,863
------- ------ ---- -------
Income before provision for income
taxes and merger and other related
nonrecurring costs................. 24,490 1,650 26,140
Provision for income taxes.......... 8,784 588 9,372
------- ------ ---- -------
Net income before merger and other
related nonrecurring costs......... 15,706 1,062 16,768
Merger and other related
nonrecurring costs, net of tax..... 2,282 -- 2,282
------- ------ ---- -------
Net income......................... $13,424 $1,062 $14,486
======= ====== ==== =======
Net income per share -- basic(1).... $ 1.51 $ 0.99 $ 1.50
======= ====== ==== =======
Average common shares
outstanding(2)..................... 10,421 1,077 (309) 11,189
======= ====== ==== =======
Net income per share -- diluted(1).. $ 1.40 $ 0.84 $ 1.38
======= ====== ==== =======
Average common and common equivalent
shares outstanding(2).............. 11,254 1,258 (361) 12,151
======= ====== ==== =======
</TABLE>
- --------
(1) Before merger and other related nonrecurring costs.
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bay Commercial Services weighted average shares adjusted for the
assumed conversion ratio of 0.7134.
53
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Greater Bay
& Bay
Bay Commercial
Greater Commercial Services
Bay Services Adjustments Combined
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest on loans................... $57,379 $6,463 $63,842
Interest on investment securities... 9,222 1,363 10,585
Other interest income............... 4,683 -- 4,683
------- ------ ---- -------
Total interest income.............. 71,284 7,826 79,110
Interest on deposits................ 23,744 2,351 26,095
Other interest expense.............. 1,174 106 1,280
------- ------ ---- -------
Net interest income................. 46,366 5,369 51,735
Provision for loan losses........... 3,029 -- 3,029
------- ------ ---- -------
Net interest income after provision
for loan losses.................... 43,337 5,369 48,706
Other income........................ 7,444 1,080 8,524
Operating expenses.................. 35,292 4,686 39,978
------- ------ ---- -------
Income before provision for income
taxes and merger and other related
nonrecurring costs................. 15,489 1,763 17,252
Provision for income taxes.......... 5,735 680 6,415
------- ------ ---- -------
Net income before merger and other
related nonrecurring costs......... 9,754 1,083 10,837
Merger and other related
nonrecurring costs, net of tax..... 1,991 -- 1,991
------- ------ ---- -------
Net income......................... $ 7,763 $1,083 $ 8,846
======= ====== ==== =======
Net income per share -- basic(1).... $ 0.97 $ 1.01 $ 1.01
======= ====== ==== =======
Average common shares
outstanding(2)..................... 10,014 1,077 (309) 10,782
======= ====== ==== =======
Net income per share -- diluted(1).. $ 0.91 $ 0.89 $ 0.93
======= ====== ==== =======
Average common and common equivalent
shares outstanding(2).............. 10,747 1,217 (349) 11,615
======= ====== ==== =======
</TABLE>
- --------
(1) Before merger and other related nonrecurring costs.
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bay Commercial Services weighted average shares adjusted for the
assumed conversion ratio of 0.7134.
54
<PAGE>
EXPERTS
The consolidated balance sheets as of December 31, 1998 and 1997 of Greater
Bay and the consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998, incorporated by reference in this proxy
statement/prospectus, have been incorporated herein in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
The Bay Commercial Services consolidated balance sheets as of December 31,
1998 and 1997 and the consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998 included and incorporated by reference in this proxy
statement/prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is included and incorporated by
reference herein. These statements have been so included and incorporated by
reference in reliance upon the report of Deloitte & Touche LLP given upon their
authority as experts in accounting and auditing.
Representatives of PricewaterhouseCoopers LLP and Deloitte & Touche LLP are
expected to be present at the special meeting. These representatives will have
the opportunity to make a statement if they desire to do so and are expected to
be available to respond to appropriate questions.
LEGAL MATTERS
The validity of the shares of Greater Bay common stock to be issued pursuant
to the terms of the merger agreement will be passed upon for Greater Bay by
Linda M. Iannone, Senior Vice President and General Counsel of Greater Bay. As
of the date of this document, Ms. Iannone held options to purchase 14,900
shares of Greater Bay common stock. Certain legal matters in connection with
the federal income tax consequences of the merger will be passed upon for
Greater Bay by Manatt, Phelps & Phillips, LLP, Los Angeles, California.
WHERE YOU CAN FIND MORE INFORMATION
Greater Bay and Bay Commercial Services file annual, quarterly and current
reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, statements or other
information that the companies submit at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.
Greater Bay and Bay Commercial Services public submissions are also available
to the public from commercial document retrieval services and at the Internet
World Wide Web site maintained by the Commission at "http:// www.sec.gov."
Greater Bay has filed a registration statement to register with the SEC the
shares of Greater Bay common stock to be issued to Bay Commercial Services
shareholders in the merger. This document is a part of the registration
statement and constitutes a prospectus of Greater Bay and a proxy statement of
Bay Commercial Services for the special meeting.
As allowed by SEC rules, this document does not contain all the information
that shareholders can find in the registration statement or the exhibits to the
registration statement.
55
<PAGE>
The SEC allows Greater Bay and Bay Commercial Services to "incorporate by
reference" information into this document, which means that the company can
disclose important information to you by referring you to another document
filed separately with the SEC. The information incorporated by reference is
deemed to be a part of this document, except for any information superseded by
information contained directly in this document. This document incorporates by
reference the documents set forth below that Greater Bay and Bay Commercial
Services have previously filed with the SEC. These documents contain important
business information about Greater Bay and Bay Commercial Services and their
financial condition.
<TABLE>
<CAPTION>
Period
------
<S> <C>
Greater Bay Commission Filings (File No. 0-25034)
Annual Report on Form 10-K (as
amended by Form 10-K/A), except
for Part II, Items 6, 7,
7A and 8.......................... Year ended December 31, 1998
Quarterly Report on Form 10-Q...... Period ended March 31, 1999
Current Reports on Form 8-K........ February 4, 1999, May 6, 1999, June 7, 1999
and July 1, 1999
Bay Commercial Services Commission Filings (File No. 0-12231)
Annual Report on Form 10-KSB (as
amended by Form 10-KSB/A)......... Year ended December 31, 1998. This Annual
Report on Form 10-KSB (as amended by Form
10-KSB/A) is attached to this document as
Annex D.
Quarterly Report on Form 10-QSB.... Period ended March 31, 1999. This Quarterly
Report on Form 10-QSB is attached to this
document as Annex E.
Current Report on Form 8-K......... May 6, 1999
</TABLE>
Greater Bay incorporates by reference additional documents that it may file
with the SEC between the date of this document and the date of the special
meeting. These include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as
proxy statements.
Greater Bay has supplied all information contained or incorporated by
reference in this document relating to Greater Bay, and Bay Commercial Services
has supplied all such information relating to Bay Commercial Services.
56
<PAGE>
Shareholders of Bay Commercial Services may obtain documents incorporated by
reference through Greater Bay or Bay Commercial Services, whichever the case
may be, or through the SEC or the SEC's Internet World Wide Web site described
above. Documents incorporated by reference are available from Greater Bay or
Bay Commercial Services, whichever the case may be, without charge, excluding
all exhibits unless specifically incorporated by reference as an exhibit to
this document. You may obtain documents incorporated by reference in this
document by requesting them in writing or by telephone at the following:
GREATER BAY BANCORP
2860 W. Bayshore Road
Palo Alto, California 94303
Telephone: (650) 614-5733
Attention: Carleen Maniglia
BAY COMMERCIAL SERVICES
1495 East 14th Street
San Leandro, California 94577
Telephone: (510) 357-2265
Attention: Randall D. Greenfield
If you would like to request documents from Greater Bay or Bay Commercial
Services, whichever the case may be, please do so at least five business days
before the date of the special meeting ( , 1999) in order to receive
timely delivery of such documents before the special meeting.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the special meeting. Greater
Bay and Bay Commercial Services have not authorized anyone to provide you with
information that is different from what is contained in this document. This
document is dated , 1999. You should not assume that the information
contained in this document is accurate as of any date other than that date, and
neither the mailing of this document to shareholders nor the issuance of
Greater Bay common stock in the merger creates any implication to the contrary.
57
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
GREATER BAY BANCORP
AND
BAY COMMERCIAL SERVICES
APRIL 30, 1999
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and entered
into as of the 30th day of April, 1999, by and between GREATER BAY BANCORP, a
California corporation ("GBB"), and BAY COMMERCIAL SERVICES, a California
corporation ("BCS").
WHEREAS, the Boards of Directors of GBB and BCS deem advisable and in the
best interests of their respective shareholders the merger of BCS with and into
GBB (the "Merger") upon the terms and conditions set forth herein and in
accordance with the California General Corporation Law (the "CGCL") (GBB,
following the effectiveness of the Merger, being hereinafter sometimes referred
to as the "Surviving Corporation");
WHEREAS, the Boards of Directors of GBB and BCS have approved the Merger
pursuant to this Agreement and the Agreement of Merger by and between GBB and
BCS (the "Agreement of Merger"), in substantially the form of Exhibit A attached
---------
hereto, pursuant to which BCS will merge with and into GBB and each outstanding
share of BCS common stock, no par value ("BCS Stock"), excluding any BCS
Perfected Dissenting Shares (as defined below), will be converted into the right
to receive a specified amount of GBB common stock, no par value ("GBB Stock"),
upon the terms and subject to the conditions set forth herein; and
WHEREAS, the Merger is intended to qualify as a tax-free reorganization
within the meaning of the provisions of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").
NOW, THEREFORE, on the basis of the foregoing recitals and in consideration
of the mutual covenants, agreements, representations and warranties contained
herein, the parties hereto do covenant and agree as follows:
ARTICLE 1.
DEFINITIONS
-----------
Except as otherwise expressly provided for in this Agreement, or unless the
context otherwise requires, as used throughout this Agreement the following
terms shall have the respective meanings specified below:
"Affiliate" of, or a person "Affiliated" with, a specific person(s) is a
person that directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person(s)
specified.
"Affiliated Group" means, with respect to any entity, a group of entities
required or permitted to file consolidated, combined or unitary Tax Returns (as
defined herein).
<PAGE>
"Agreement of Merger" has the meaning set forth in the second recital of
this Agreement.
"Average Closing Price" means the average of the daily closing price of a
share of GBB Stock reported on the Nasdaq National Market System during the 15
consecutive trading days ending at the end of the third trading day immediately
preceding the Effective Time of the Merger (as defined herein).
"BBC" means Bay Bank of Commerce, a California state chartered bank and
wholly owned subsidiary of BCS.
"BCS 401(k) Plan" means the Bay Bank of Commerce 401(k) Plan.
"BCS Conflicts and Consents List" has the meaning set forth in Section 4.6.
"BCS Contract List" has the meaning set forth in Section 4.16.
"BCS Derivatives List" has the meaning set forth in Section 4.32.
"BCS Dissenting Shares" means any shares of BCS Stock held by "dissenting
shareholders" within the meaning of Chapter 13 of the CGCL.
"BCS Employee Plan List" has the meaning set forth in Section 4.20.
"BCS Environmental Compliance List" has the meaning set forth in Section
4.12.2.
"BCS Filings" has the meaning set forth in Section 4.5.
"BCS Filings List" has the meaning set forth in Section 4.5.
"BCS Fully Diluted Book Value Per Share" means the sum of (a) shareholders'
equity as reflected on the consolidated financial statements to be provided by
BCS to GBB pursuant to Section 11.14, plus (b) the consideration to be paid upon
the exercise of any BCS Stock Options (as defined herein) then issued and
outstanding, divided by the sum of (y) the number of shares of BCS Stock then
issued and outstanding, plus (z) such number of shares of BCS Stock issuable
upon the exercise of any BCS Stock Option.
"BCS Indemnification List" has the meaning set forth in Section 4.30.
"BCS Insurance List" has the meaning set forth in Section 4.7.
"BCS Intellectual Property List" has the set forth in Section 4.35.
"BCS Investment Securities List" has the meaning set forth in Section 4.26.
<PAGE>
"BCS List" means any list required to be furnished by BCS to GBB herewith.
"BCS Litigation List" has the meaning set forth in Section 4.10.
"BCS Loan List" has the meaning set forth in Section 4.25.
"BCS Offices List" has the meaning set forth in Section 4.23.
"BCS Operating Losses List" has the meaning set forth in Section 4.24.
"BCS Perfected Dissenting Shares" means BCS Dissenting Shares which the
holders thereof have not withdrawn or caused to lose their status as BCS
Dissenting Shares.
"BCS Personal Property List" has the meaning set forth in Section 4.8.
"BCS Real Property List" has the meaning set forth in Section 4.9.
"BCS Shareholders' Meeting" means the meeting of BCS's shareholders
referred to in Section 6.7.
"BCS Stock" has the meaning set forth in the second recital of this
Agreement.
"BCS Stock Option" means any option issued pursuant to the BCS Stock Option
Plans.
"BCS Stock Option Plans" means the Bay Commercial Services 1982 Amended and
Restated Stock Option Plan and the 1994 Stock Option Plan.
"BCS Supplied Information" has the meaning set forth in Section 4.34.
"BCS Tax List" has the meaning set forth in Section 4.11.
"BCS Undisclosed Liabilities List" has the meaning set forth in Section
4.19.
"Banks" means CNB, GGB, MPB and PBC.
"Benefit Arrangements" has the meaning set forth in Section 4.20.2.
"BHC Act" means the Bank Holding Company Act of 1956, as amended.
"Business Day" means any day other than a Saturday, Sunday or day on which
a bank chartered under the laws of the State of California is closed.
"CFC" means California Financial Code.
"CGCL" has the meaning set forth in the second recital of this Agreement.
<PAGE>
"Certificates" has the meaning set forth in Section 2.5.2.
"Classified Credits" has the meaning set forth in Section 6.8.
"Closing" means the consummation of the Merger provided for in Article 2 of
this Agreement on the Closing Date (as defined herein) at the offices of Greater
Bay Bancorp, 400 Emerson Street, Palo Alto, California, or at such other place
as the parties may agree upon.
"Closing Date" means the date which is the first Friday which follows the
last to occur of (i) the approval of this Agreement and the transactions
contemplated hereby by the shareholders of BCS, (ii) the receipt of all permits,
authorizations, approvals and consents specified in Section 9.3 hereof, (iii)
the expiration of all applicable waiting periods under the law, (iv) the
expiration of the 30 day period following the mailing by BCS to its shareholders
of a notice of approval of the Merger by the outstanding shares pursuant to
Section 1301 of the CGCL, or such other date as the parties may agree upon.
"CNB" means Cupertino National Bank, a national banking association and
wholly owned subsidiary of GBB.
"Code" shall have the meaning set forth in the third recital of this
Agreement.
"Commissioner" means the Commissioner of the Department of Financial
Institutions of the State of California.
"Competing Transaction" has the meaning set forth in Section 6.1.14.
"Conversion Ratio" has the meaning set forth in Section 2.2.1.
"Covered Person" has the meaning set forth in Section 4.30.
"Deloitte & Touche" means Deloitte & Touche LLP, BCS's independent auditors
and accountants.
"DFI" means the Department of Financial Institutions of the State of
California.
"Effective Time of the Merger" means the date upon which the Merger is
consummated and the Agreement of Merger is filed with the Secretary of State of
the State of California.
"Employee Plans" has the meaning set forth in Section 4.20.1.
"Encumbrance" shall mean any option, pledge, security interest, lien,
charge, encumbrance or restriction (whether on voting or disposition or
otherwise), whether imposed by agreement, understanding, law or otherwise.
"Environmental Regulations" has the meaning set forth in Section 4.12.2.
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliates" has the meaning set forth in Section 4.20.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means Norwest Bank Minnesota, N.A.
"Exchange Fund" has the meaning set forth in Section 2.5.1 hereof.
"FDIC" means the Federal Deposit Insurance Corporation.
"Financial Statements of GBB" means the audited consolidated financial
statements of GBB consisting of the consolidated balance sheets as of December
31, 1995, 1996, 1997 and 1998, the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended and the
related notes thereto and related opinions thereon for the years then ended and
GBB's unaudited consolidated balance sheets and consolidated statement of
operations and cash flows as of and for the three month period ended March 31,
1999.
"Financial Statements of BCS" means the consolidated financial statements
of BCS consisting of BCS's consolidated balance sheets as of December 31, 1995,
1996, 1997 and 1998, the related statements of income, shareholders' equity and
cash flows for the years then ended and related reports of Deloitte and Touche
thereon and BCS's unaudited consolidated balance sheet and consolidated
statement of income and cash flows as of and for the three month period ended
March 31, 1999.
"First Security Van Kasper Agreement" means the letter agreement dated
November 30, 1998 between First Security Van Kasper and BCS.
"FRB" means the Board of Governors of the Federal Reserve System.
"GBB 401(k) Plan" means the Greater Bay Bancorp 401(k) Profit Sharing Plan.
"GBB Acquisition Transaction" has the meaning set forth in Section
2.2.1(d).
"GBB Conflicts and Consents List" has the meaning set forth in Section 5.5.
"GBB Filings" has the meaning set forth in Section 5.4.
"GBB Litigation List" has the meaning set forth in Section 5.18.
"GBB Property" has the meaning set forth in Section 5.19.2.
"GBB Stock" has the meaning set forth in the second recital of this
Agreement.
<PAGE>
"GBB Stock Option Plan" means the Greater Bay Bancorp 1996 Stock Option
Plan, as amended.
"GBB Supplied Information" has the meaning set forth in Section 5.14.
"GGB" means Golden Gate Bank, a California state chartered bank and wholly
owned subsidiary of GBB.
"Governmental Entity" shall mean any court or tribunal in any jurisdiction
or any United States federal, state, municipal, domestic, foreign or other
administrative authority or instrumentality.
"Hazardous Materials" has the meaning set forth in Section 4.12.2.
"Immediate Family" means a person's spouse, parents, in-laws, children and
siblings.
"Investment Security" means any equity security or debt security as defined
in Statement of Financial Accounting Standards No. 115.
"IRS" means the Internal Revenue Service.
"MPB" means Mid-Peninsula Bank, a California state chartered bank and
wholly-owned subsidiary of GBB.
"Operating Loss" has the meaning set forth in Section 4.24.
"PBC" means Peninsula Bank of Commerce, a California state chartered bank
and wholly owned subsidiary of GBB.
"Person" means any individual, corporation, association, partnership,
limited liability company, trust, joint venture, other entity, unincorporated
body, government or governmental department or agency.
"Proxy Statement and Prospectus" means the Proxy Statement and Prospectus
that is included as part of the Registration Statement on Form S-4 (as defined
herein) and used to solicit proxies for the BCS Shareholders' Meeting and to
offer and sell the shares of GBB Stock to be issued in connection with the
Merger.
"PwC" means PricewaterhouseCoopers LLP, GBB's independent accountants.
"Related Group of Persons" means Affiliates, members of an Immediate Family
or Persons the obligations of whom would be attributed to another Person
pursuant to the regulations promulgated by the SEC (as defined herein).
"Registration Statement on Form S-4" means the Registration Statement on
Form S-4, and such amendments thereto, that is filed with the SEC to register
the shares of GBB Stock to
<PAGE>
be issued in the Merger under the Securities Act and to clear use of the Proxy
Statement and Prospectus in connection with the BCS Shareholders' Meeting
pursuant to the regulations promulgated under the Exchange Act.
"Scheduled Contracts" has the meaning set forth in Section 4.16.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Surviving Corporation" has the meaning set forth in the first recital of
this Agreement.
"Tanks" has the meaning set forth in Section 4.12.2.
"Tax Returns" means all returns, declarations, reports, estimates,
information returns and statements required to be filed in respect of any Taxes.
"Taxes" means (i) all federal, state, local or foreign taxes, charges,
fees, imposts, levies or other assessments, including, without limitation, all
net income, gross receipts, capital, sales, use, ad valorem, value added,
transfer, franchise, profits, inventory, capital stock, license, withholding,
payroll, employment, social security, unemployment, excise, severance, stamp,
occupation, property, corporation and estimated taxes, custom duties, fees,
assessments and charges of any kind whatsoever; (ii) all interest, penalties,
fines, additions to tax or additional amounts imposed by any taxing authority in
connection with any item described in clause (i); and (iii) any transferred
liability in respect of any items described in clauses (i) and/or (ii).
"Top Up Option" means, in the event that the Average Closing Price is less
than $25.50, the right of GBB to elect to issue that number of shares of GBB
Stock equal to the quotient obtained by dividing $18.763 by the Average Closing
Price.
"Understanding" means any contract, agreement, understanding, commitment or
offer, whether oral or written, which may become a binding obligation if
accepted by another Person.
<PAGE>
ARTICLE 2.
TERMS OF MERGER
---------------
2.1. Effect of Merger and Surviving Corporation. At the Effective Time
------------------------------------------
of the Merger, BCS will be merged with and into GBB pursuant to the terms,
conditions and provisions of the Agreement of Merger and in accordance with the
applicable provisions of the CGCL. By virtue of the Merger, all the rights,
privileges, powers and franchises and all property and assets of every kind and
description of BCS and GBB shall be vested in and be held and enjoyed by the
Surviving Corporation, without further act or deed, and all the interests of
every kind of BCS and GBB, including all debts due to either of them on whatever
account, shall be the property of the Surviving Corporation as they were of BCS
and GBB and the title to any interest in real property and any interest in
personal property vested by deed or otherwise in either BCS or GBB shall not
revert or be in any way impaired by reason of the Merger; and all rights of
creditors and liens upon any property of BCS and GBB shall be preserved
unimpaired and all debts, liabilities and duties of BCS and GBB shall be debts,
liabilities and duties of the Surviving Corporation and may be enforced against
it to the same extent as if said debts, liabilities and duties had been incurred
or contracted by it.
2.2. Stock of BCS. Subject to Section 2.4, each share of BCS Stock
------------
issued and outstanding immediately prior to the Effective Time of the Merger
shall, without any further action on the part of BCS or the holders of such
shares, be treated on the basis set forth herein.
2.2.1. Conversion of BCS Stock . At the Effective Time of the
-----------------------
Merger, pursuant to the Agreement of Merger, each outstanding share of BCS Stock
excluding any BCS Perfected Dissenting Shares or shares of BCS Stock held by GBB
or the Banks (other than those held in a fiduciary capacity or as a result of
debts previously contracted) shall, without any further action on the part of
BCS or the holders of any such shares, be automatically cancelled and cease to
be an issued and outstanding share of BCS Stock and be converted into shares of
GBB Stock (the "Conversion Ratio") as follows:
(a) If the Average Closing Price is greater than $31.00, a number of
shares of GBB Stock equal to the quotient obtained by dividing (1) $22.115 plus
the product of .333 times the difference between the Average Closing Price and
$31.00, by (2) the Average Closing Price.
(b) If the Average Closing Price is from $27.00 to $31.00, .7134
shares of GBB Stock.
(c) If the Average Closing Price is less than $27.00, a number of
shares of GBB Stock equal to the quotient obtained by dividing (1) $19.262 minus
the product of .3333 times the difference between $27.00 and the Average Closing
Price, by (2) the Average Closing Price; provided, however, if the Average
-------- -------
Closing Price is less than $25.50, BCS may give written notice to GBB within one
Business Day of the calculation of the Average Closing Price of its intention to
terminate the Agreement pursuant to Section 13.1.11, unless GBB elects, by
written notice to BCS within one Business Day from the date of receipt of
written notice from BCS of its intention to terminate the Agreement, to exercise
the Top Up Option, in which case the
<PAGE>
Conversion Ratio will equal that number of shares of GBB Stock equal to the
quotient obtained by dividing $18.763 by the Average Closing Price.
(d) In the event that, prior to the Closing Date, GBB publicly
announces a transaction in which 100% of the outstanding shares of GBB Stock is
to be acquired by a third party, either through an exchange offer or merger in
which GBB shareholders would own less than 51% of the outstanding shares of the
surviving corporation (a "GBB Acquisition Transaction"), the price to be paid to
GBB shareholders in such transaction would exceed $31.00 per share, and such
transaction is consummated, the Conversion Ratio shall be .7134 shares of GBB
Stock. To preserve the rights of holders of shares of BCS Stock pursuant to
this Section 2.2.1(d), GBB and BCS agree to coordinate the Closing with the
closing of any GBB Acquisition Transaction or to cooperate with such third party
in otherwise accomplishing the purpose hereof. In no event shall GBB close any
GBB Acquisition Transaction that does not result in the purposes of this Section
2.2.1(d) being accomplished, subject to the provisions of Section 14.2.2.
2.2.2 BCS Perfected Dissenting Shares. BCS Perfected Dissenting
-------------------------------
Shares shall not be converted into shares of GBB Stock, but shall, after the
Effective Time of the Merger, be entitled only to such rights as are granted
them by Chapter 13 of the CGCL. Each dissenting shareholder who is entitled to
payment for his shares of BCS Stock shall receive such payment in an amount as
determined pursuant to Chapter 13 of the CGCL.
2.2.3 Shares Held by GBB or the Banks. Shares of BCS Stock held by
-------------------------------
GBB or the Banks (other than those held in a fiduciary capacity or as a result
of debts previously contracted) shall be canceled and no consideration shall be
issued in exchange therefor.
2.2.4 Dividends, Etc. If, prior to the Effective Time of the
--------------
Merger, GBB shall declare a stock dividend or distribution upon or subdivide,
split up, reclassify or combine the GBB Stock, or make a distribution on the GBB
Stock in any security convertible into GBB Stock, with a record date prior to
the Effective Time of the Merger, appropriate adjustment or adjustments will be
made to the Conversion Ratio.
2.3. Effect on GBB Stock. At the Effective Time of the Merger, each
-------------------
outstanding share of GBB Stock shall remain an outstanding share of GBB Stock
and shall not be converted or otherwise affected by the Merger.
2.4. Fractional Shares. No fractional shares of GBB Stock shall be
-----------------
issued in the Merger. In lieu thereof, each holder of BCS Stock who would
otherwise be entitled to receive a fractional share shall receive an amount in
cash equal to the product (calculated to the nearest hundredth) obtained by
multiplying (a) the closing price of GBB Stock reported on the Nasdaq National
Market System on the Business Day immediately preceding the Closing Date times
(b) the fraction of the share of GBB Stock to which such holder would otherwise
be entitled. No such holder shall be entitled to dividends or other rights in
respect of any such fraction.
<PAGE>
2.5 Exchange Procedures.
-------------------
2.5.1. As of the Effective Time of the Merger, GBB shall have
deposited with the Exchange Agent for the benefit of the holders of shares of
BCS Stock, for exchange in accordance with this Section 2.5 through the Exchange
Agent, certificates representing the shares of GBB Stock issuable pursuant to
Section 2.2 in exchange for shares of BCS Stock outstanding immediately prior to
the Effective Time of the Merger, and funds in an amount not less than the
amount of cash payable in lieu of fractional shares of GBB Stock which would
otherwise be issuable in connection with Section 2.2 hereof but for the
operation of Section 2.4 of this Agreement (collectively, the "Exchange Fund").
2.5.2. GBB shall direct the Exchange Agent to mail, promptly after
the Effective Time of the Merger, to each holder of record of a certificate or
certificates which immediately prior to the Effective Time of the Merger
represented outstanding shares of BCS Stock (the "Certificates") whose shares
were converted into the right to receive shares of GBB Stock pursuant to Section
2.2 hereof, (i) a letter of transmittal (which shall specify that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to the Exchange Agent and shall be in such
form and have such other provisions as GBB and BCS may reasonably specify), and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of GBB Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by GBB, together with such letter of transmittal,
duly executed, the holder of such Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of GBB
Stock and cash in lieu of fractional shares which such holder has the right to
receive pursuant to Sections 2.2 and 2.4 hereof, and the Certificate so
surrendered shall forthwith be canceled. In the event a certificate is
surrendered representing BCS Stock, the transfer of ownership of which is not
registered in the transfer records of BCS, a certificate representing the proper
number of shares of GBB Stock may be issued to a transferee if the Certificate
representing such BCS Stock is presented to the Exchange Agent, accompanied by
all documents required to evidence and effect such transfer and by evidence that
any applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.5, each Certificate shall be deemed at any time
after the Effective Time of the Merger to represent only the right to receive
upon such surrender the certificate representing shares of GBB Stock and cash in
lieu of any fractional shares of stock as contemplated by this Section 2.5.
Notwithstanding anything to the contrary set forth herein, if any holder of
shares of BCS should be unable to surrender the Certificates for such shares,
because they have been lost or destroyed, such holder may deliver in lieu
thereof a bond in form and substance and with surety reasonably satisfactory to
GBB and shall be entitled to receive the certificate representing the proper
number of shares of GBB Stock and cash in lieu of fractional shares in
accordance with Sections 2.2 and 2.4 hereof.
2.5.3. No dividends or other distributions declared or made with
respect to GBB Stock with a record date after the Effective Time of the Merger
shall be paid to the holder of any unsurrendered Certificate with respect to the
shares of GBB Stock represented thereby and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 2.4 until
the holder of record of such Certificate shall surrender such Certificate.
Subject to the
<PAGE>
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the record holder of the certificates representing whole shares
of GBB Common Stock issued in exchange thereof, without interest, (i) at the
time of such surrender, the amount of any cash payable in lieu of a fractional
share of GBB Stock to which such holder is entitled pursuant to Section 2.4 and
the amount of dividends or other distributions with a record date after the
Effective Time of the Merger theretofore paid with respect to such whole shares
of GBB Stock, and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time of the Merger
but prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of GBB Stock.
2.5.4. All shares of GBB Stock issued upon the surrender for exchange
of BCS Stock in accordance with the terms hereof (including any cash paid
pursuant to Section 2.4) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of BCS Stock, and there
shall be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of BCS Stock which were outstanding
immediately prior to the Effective Time of the Merger. If, after the Effective
Time of the Merger, Certificates are presented to GBB for any reason, they shall
be canceled and exchanged as provided in this Agreement.
2.5.5. Any portion of the Exchange Fund which remains undistributed
to the shareholders of BCS following the passage of six months after the
Effective Time of the Merger shall be delivered to GBB, upon demand, and any
shareholders of BCS who have not theretofore complied with this Section 2.5
shall thereafter look only to GBB for payment of their claim for GBB Stock, any
cash in lieu of fractional shares of GBB Stock and any dividends or
distributions with respect to GBB Stock.
2.5.6. Neither GBB nor BCS shall be liable to any holder of shares of
BCS Stock for such shares (or dividends or distributions with respect thereto)
or cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
2.5.7. The Exchange Agent shall not be entitled to vote or exercise
any rights of ownership with respect to the shares of GBB Stock held by it from
time to time hereunder, except that it shall receive and hold all dividends or
other distributions paid or distributed with respect to such shares of GBB Stock
for the account of the Persons entitled thereto.
2.5.8 Certificates surrendered for exchange by any Person
constituting an "Affiliate" of BCS for purposes of Rule 144(a) under the
Securities Act shall not be exchanged for certificates representing whole shares
of GBB Stock until GBB has received a written agreement from such person as
provided in Section 6.10.
2.6. Directors of Surviving Corporation and BBC. Immediately after the
------------------------------------------
Effective Time of the Merger, the Board of Directors of the Surviving
Corporation shall be comprised of the persons serving as directors of GBB
immediately prior to the Effective Time of the Merger. Such persons shall serve
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified. Immediately after the Effective
Time of the Merger,
<PAGE>
David L. Kalkbrenner, or such other person designated by GBB and reasonably
acceptable to BCS, shall be appointed to the Board of Directors of BBC.
2.7 Executive Officers of Surviving Corporation. Immediately after the
--------------------------------------------
Effective Time of the Merger, the executive officers of the Surviving
Corporation shall be comprised of the persons serving as executive officers of
GBB immediately prior to the Effective Time of the Merger. Such persons shall
serve until the earlier of their resignation or termination.
ARTICLE 3.
THE CLOSING
-----------
3.1. Closing Date. The Closing shall take place on the Closing Date.
------------
3.2. Execution of Agreements. As soon as practicable after execution of
-----------------------
this Agreement, the Agreement of Merger together with all other agreements
necessary to consummate the transactions described herein shall be executed by
the parties thereto. On the Closing Date, the Agreement of Merger, together
with all requisite certificates, shall be duly filed with the Secretary of State
of the State of California as required by applicable law and regulations.
3.3 Further Assurances. At the Closing, the parties hereto shall
------------------
deliver, or cause to be delivered, such documents or certificates as may be
necessary in the reasonable opinion of counsel for any of the parties, to
effectuate the transactions contemplated by this Agreement. From and after the
Effective Time of the Merger, each of the parties hereto covenants and agrees,
without the necessity of any further consideration whatsoever, to execute,
acknowledge and deliver any and all other documents and instruments and take any
and all such other action as may be reasonably necessary or desirable to more
effectively carry out the intent and purpose of this Agreement and the Agreement
of Merger.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF BCS
-------------------------------------
BCS represents and warrants to GBB as follows:
4.1. Incorporation, Standing and Power. BCS has been duly organized, is
---------------------------------
validly existing and in good standing as a corporation under the laws of the
State of California and is registered as a bank holding company under the BHC
Act. BBC is a California state chartered bank duly organized, validly existing
and in good standing under the laws of the State of California and is authorized
by the DFI to conduct a general banking business. BBC's deposits are insured by
the FDIC in the manner and to the fullest extent provided by law. Each of BCS
and BBC has all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as presently
conducted. Neither the scope of the business of BCS or BBC nor the location of
any of their respective properties requires that either BCS or
<PAGE>
BBC be licensed to do business in any jurisdiction other than the State of
California where the failure to be so licensed would, individually or in the
aggregate, have a material adverse effect on the business, financial condition,
results of operations or prospects of BCS on a consolidated basis. BCS has
delivered to GBB true and correct copies of its and BBC's Articles of
Incorporation and Bylaws, as amended, and in effect as of the date hereof.
4.2. Capitalization.
--------------
4.2.1. As of the date of this Agreement, the authorized capital stock
of BCS consists of 20,000,000 shares of BCS Stock, of which 1,322,110 shares are
outstanding, and 1,000,000 shares of preferred stock, none of which are
outstanding. All of the outstanding shares of BCS Stock are duly authorized,
validly issued, fully paid and nonassessable. Except for BCS Options covering
51,061 shares of BCS Stock granted pursuant to the BCS Stock Option Plans, there
are no outstanding options, warrants or other rights in or with respect to the
unissued shares of BCS Stock nor any securities convertible into such stock, and
BCS is not obligated to issue any additional shares of its common stock or any
additional options, warrants or other rights in or with respect to the unissued
shares of such stock or any other securities convertible into such stock. BCS
has furnished GBB a list (the "BCS Option List") setting forth the name of each
holder of a BCS Option, the number of shares of BCS Stock covered by each such
option, the vesting schedule of such option, the exercise price per share and
the expiration date of each such option.
4.2.2. As of the date of this Agreement, the authorized capital stock
of BBC consists of 10,000,000 shares of common stock, of which 50 shares are
outstanding and owned of record and beneficially by BCS, and 1,000,000 shares of
preferred stock, none of which are outstanding. All of the outstanding shares
of such common stock are duly authorized, validly issued, fully paid and
nonassessable. There are no outstanding options, warrants or other rights in or
with respect to the unissued shares of such common stock or any other securities
convertible into such stock, and BBC is not obligated to issue any additional
shares of its common stock or any options, warrants or other rights in or with
respect to the unissued shares of its common stock or any other securities
convertible into such stock.
4.3. Subsidiaries. Other than BBC, BCS does not own, directly or
------------
indirectly (except as a pledgee pursuant to loans or upon acquisition in
satisfaction of debt previously contracted), the outstanding stock or equity or
other voting interest in any Person.
4.4. Financial Statements. BCS has previously furnished to GBB a copy of
--------------------
the Financial Statements of BCS. The Financial Statements of BCS: (a) present
fairly the consolidated financial condition of BCS as of the respective dates
indicated and its consolidated results of operations and changes in cash flows,
for the respective periods then ended, subject, in the case of the unaudited
interim financial statements, to normal recurring adjustments; (b) have been
prepared in accordance with generally accepted accounting principles
consistently applied (except as otherwise indicated therein); (c) set forth as
of the respective dates indicated adequate reserves for loan losses and other
contingencies and (d) are based upon the books and records of BCS and BBC.
<PAGE>
4.5. Reports and Filings. Except as set forth in a list (the "BCS
-------------------
Filings List"), since January 1, 1996, each of BCS and BBC has filed all
reports, returns, registrations and statements (collectively, "BCS Filings"),
together with any amendments required to be made with respect thereto, that were
required to be filed with (a) the FDIC, (b) the DFI, (c) the FRB, (d) the SEC
and (e) any other applicable Governmental Entity, including taxing authorities,
except where the failure to file such reports, returns, registrations or
statements has not had and is not reasonably expected to have a material adverse
effect on the business, financial condition, results of operations or prospects
of BCS on a consolidated basis. No administrative actions have been taken or
orders issued in connection with such BCS Filings. As of their respective
dates, each of such BCS Filings (y) to the best of BCS's knowledge, complied in
all material respects with all laws and regulations enforced or promulgated by
the Governmental Entity with which it was filed (or was amended so as to be in
compliance promptly following discovery of any such noncompliance); and (z) did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. Any
financial statement contained in any of such BCS Filings fairly presented the
financial position of BCS on a consolidated basis, BCS alone or BBC alone, as
the case may be, and was prepared in accordance with generally accepted
accounting principles or banking regulations consistently applied, except as
stated therein, during the periods involved. BCS has furnished or made
available to GBB true and correct copies of all BCS Filings filed by BCS since
January 1, 1996.
4.6. Authority of BCS. The execution and delivery by BCS of this
----------------
Agreement and the Agreement of Merger and, subject to the requisite approval of
the shareholders of BCS of this Agreement and the transactions contemplated
hereby, the consummation of the transactions contemplated hereby and thereby
have been duly and validly authorized by all necessary corporate action on the
part of BCS. This Agreement is, and the Agreement of Merger will be, upon due
execution and delivery by the respective parties thereto, a valid and binding
obligation of BCS enforceable in accordance with their respective terms, except
as the enforceability thereof may be limited by bankruptcy, liquidation,
receivership, conservatorship, insolvency, moratorium or other similar laws
affecting the rights of creditors generally and by general equitable principles.
Except as set forth in a list furnished by BCS to GBB (the "BCS Conflicts and
Consents List"), neither the execution and delivery by BCS of this Agreement and
the Agreement of Merger, the consummation of the transactions contemplated
herein or therein, nor compliance by BCS with any of the provisions hereof or
thereof, will: (a) conflict with or result in a breach of any provision of its
or BBC's Articles of Incorporation, as amended, or Bylaws, as amended; (b)
constitute a breach of or result in a default (or give rise to any rights of
termination, cancellation or acceleration, or any right to acquire any
securities or assets) under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, franchise, license, permit, agreement or other
instrument or obligation to which BCS or BBC is a party, or by which BCS or BBC
or any of their respective properties or assets are bound; (c) result in the
creation or imposition of any Encumbrance on any of the properties or assets of
BCS or BBC; or (d) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to BCS or BBC or any of their respective properties or
assets. Except as set forth in the BCS Conflicts and Consents List, no consent
of, approval of, notice to or filing with any Governmental Entity having
jurisdiction over any aspect of the business or assets of BCS or BBC, and no
consent of, approval of or notice to any other Person, is required in connection
with the execution and delivery by BCS of
<PAGE>
this Agreement and the Agreement of Merger or the consummation by BCS of the
Merger or the transactions contemplated hereby or thereby, except (i) the
approval of this Agreement and the Agreement of Merger and the transactions
contemplated hereby and thereby by the shareholders of BCS; (ii) such approvals
as may be required by the FRB and the DFI; (iii) the filing of the Proxy
Statement and Prospectus and Registration Statement on Form S-4 with the SEC;
and (iv) the filing of the Agreement of Merger with the Secretary of State.
4.7. Insurance. Each of BCS and BBC has policies of insurance and bonds
---------
with respect to its assets and business against such casualties and
contingencies and in such amounts, types and forms as are customarily
appropriate for its business, operations, properties and assets (except that
neither BCS nor BBC maintains directors and officers liability insurance). All
such insurance policies and bonds are in full force and effect. Except as set
forth in a list furnished by BCS to GBB (the "BCS Insurance List"), no insurer
under any such policy or bond has canceled or indicated an intention to cancel
or not to renew any such policy or bond or generally disclaimed liability
thereunder. Except as set forth in the BCS Insurance List, neither BCS nor BBC
is in default under any such policy or bond and all material claims thereunder
have been filed in a timely fashion. Set forth in the BCS Insurance List is a
list of all policies of insurance carried and owned by either BCS or BBC showing
the name of the insurance company, the nature of the coverage, the policy limit,
the annual premiums and the expiration dates. There has been delivered to GBB a
copy of each such policy of insurance.
4.8. Personal Property. Each of BCS and BBC has good and marketable
-----------------
title to all its material properties and assets, other than real property, owned
or stated to be owned by BCS or BBC, free and clear of all Encumbrances except:
(a) as set forth in the Financial Statements of BCS; (b) for Encumbrances for
current taxes not yet due; (c) for Encumbrances incurred in the ordinary course
of business; (d) for Encumbrances that are not substantial in character, amount
or extent and that do not materially detract from the value, or interfere with
present use, of the property subject thereto or affected thereby, or otherwise
materially impair the conduct of business of BCS or BBC; or (e) as set forth in
a list furnished by BCS to GBB (the "BCS Personal Property List.")
4.9. Real Estate. BCS has furnished GBB a list of real property,
-----------
including leaseholds and all other interests in real property (other than
security interests), owned by BCS or BBC (the "BCS Real Property List"). Except
as set forth on the BCS Real Property List, each of BCS and BBC has duly
recorded or caused to be recorded, in the appropriate county, all recordable
interests in the real property described in the BCS Real Property List. Either
BCS or BBC has good and marketable title to the real property, and valid
leasehold interests in the leaseholds, described in the BCS Real Property List,
free and clear of all Encumbrances, except (a) with respect to leasehold
interests of BCS and BBC, for rights of lessors, co-lessees or sublessees in
such matters that are reflected in the lease or Encumbrances not created by BCS
or BBC; (b) for current taxes not yet due and payable; (c) for such
Encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property; and (d) as described
in the BCS Real Property List. BCS has furnished GBB with true and correct
copies of all leases included in the BCS Real Property List, all title insurance
policies and all lot book reports with respect to the real property included in
the BCS Real Property List.
<PAGE>
4.10. Litigation. Except as set forth in a list furnished by BCS to GBB
----------
(the "BCS Litigation List"), there is no private or governmental suit, claim,
action or proceeding pending, nor to BCS's knowledge threatened, against BCS or
BBC or against any of their respective directors, officers or employees
relating to the performance of their duties in such capacities or against or
affecting any properties of BCS or BBC which, if adversely determined, would
have, individually or in the aggregate, a material adverse effect upon the
business, financial condition or results of operations of BCS on a consolidated
basis, or the transactions contemplated hereby, or which may involve a judgment
against BCS or BBC in excess of $25,000. Also, except as disclosed in the BCS
Litigation List, there are no material judgments, decrees, stipulations or
orders against BCS or BBC or enjoining their respective directors, officers or
employees in respect of, or the effect of which is to prohibit, any business
practice or the acquisition of any property or the conduct of business in any
area.
4.11. Taxes.
-----
(a) Except as set forth in a list furnished by BCS to GBB (the "BCS
Tax List"), (A) all material Tax Returns required to be filed by or on behalf of
BCS, BBC or any of their subsidiaries or the Affiliated Group(s) of which any of
them is or was a member, have been duly and timely filed with the appropriate
taxing authorities in all jurisdictions in which such Tax Returns are required
to be filed (after giving effect to any valid extensions of time in which to
make such filings), and all such Tax Returns were true, complete and correct in
all material respects; (B) all Taxes due and payable by or on behalf of BCS, BBC
or any of their subsidiaries, either directly, as part of an Affiliated Group
Tax Return, or otherwise, have been fully and timely paid, except to the extent
adequately reserved therefor in accordance with generally accepted accounting
principles and/or applicable regulatory accounting principles or banking
regulations consistently applied on the BCS balance sheet, and adequate reserves
or accruals for Taxes have been provided in the BCS balance sheet with respect
to any period through the date thereof for which Tax Returns have not yet been
filed or for which Taxes are not yet due and owing; and (C) no agreement, waiver
or other document or arrangement extending or having the effect of extending the
period for assessment or collection of Taxes (including, but not limited to, any
applicable statute of limitation) has been executed or filed with any taxing
authority by or on behalf of BCS, BBC or any of their subsidiaries, or any
Affiliated Group(s) of which any of them is or was a member.
(b) BCS, BBC and any of their subsidiaries have complied in all
material respects with all applicable laws, rules and regulations relating to
the payment and withholding of Taxes and have duly and timely withheld from
employee salaries, wages and other compensation and have paid over to the
appropriate taxing authorities all amounts required to be so withheld and paid
over for all periods under all applicable laws.
(c) GBB has received complete copies of (i) all material income or
franchise Tax Returns of BCS, BBC and any of their subsidiaries relating to the
taxable periods since January 1, 1995 and (ii) any audit report issued within
the last three years relating to any material Taxes due from or with respect to
BCS, BBC or any of their subsidiaries with respect to their respective income,
assets or operations.
<PAGE>
(d) Except as set forth in the BCS Tax List, no written claim has been
made by a taxing authority in a jurisdiction where BCS, BBC or any of their
subsidiaries do not file an income or franchise Tax Return such that BCS, BBC or
any of their subsidiaries are or may be subject to taxation by that
jurisdiction.
(e) Except as set forth in the BCS Tax List: (i) all deficiencies
asserted or assessments made as a result of any examinations by any taxing
authority of the Tax Returns of or covering or including BCS, BBC or any of
their subsidiaries have been fully paid, and, to the best of BCS's knowledge,
there are no other audits or investigations by any taxing authority in progress,
nor have BCS, BBC or any of their subsidiaries received any written notice from
any taxing authority that it intends to conduct such an audit or investigation;
(ii) no requests for a ruling or a determination letter are pending with any
taxing authority; and (iii) no issue has been raised in writing by any taxing
authority in any current or prior examination which, by application of the same
or similar principles, could reasonably be expected to result in a proposed
deficiency against BCS, BBC or any of their subsidiaries for any subsequent
taxable period that could be material.
(f) Except as set forth in the BCS Tax List, neither BCS, BBC or any
of their subsidiaries nor any other Person on behalf of BCS, BBC or any of their
subsidiaries has (i) filed a consent pursuant to Section 341(f) of the Code or
agreed to have Section 341(f)(2) of the Code apply to any disposition of a
subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code)
owned by BCS, BBC or any of their subsidiaries (ii) agreed to or is required to
make any adjustments pursuant to Section 481(a) of the Code or any similar
provision of state, local or foreign law by reason of a change in accounting
method initiated by BCS, BBC or any of their subsidiaries or has any knowledge
that the Internal Revenue Service has proposed in writing any such adjustment or
change in accounting method, or has any application pending with any taxing
authority requesting permission for any changes in accounting methods that
relate to the business or operations of BCS, BBC or any of their subsidiaries or
(iii) executed or entered into a closing agreement pursuant to Section 7121 of
the Code or any predecessor provision thereof or any similar provision of state,
local or foreign law with respect to BCS, BBC or any of their subsidiaries.
(g) Except as set forth in the BCS Tax List, no property owned by BCS,
BBC or any of their subsidiaries is (i) property required to be treated as being
owned by another Person pursuant to provisions of Section 168(f)(8) of the
Internal Revenue Code of 1954, as amended and in effect immediately prior to the
enactment of the Tax Reform Act of 1986, (ii) constitutes "tax exempt use
property" within the meaning of Section 168(h)(1) of the Code or (iii) is "tax-
exempt bond financed property" within the meaning of Section 168(g) of the Code.
(h) Neither BCS (except with BBC) nor BBC (except with BCS) is a party
to any tax sharing agreement or similar agreement or arrangement (whether
written or not written) pursuant to which it will have any obligation to make
any payments after the Closing.
(i) Except as set forth in the BCS Tax List, there is no contract,
agreement, plan or arrangement covering any Person that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible by BCS, BBC or any of their subsidiaries or
<PAGE>
their respective affiliates by reason of Section 280G of the Code, or would
constitute compensation in excess of the limitation set forth in Section 162(m)
of the Code.
(j) There are no liens as a result of any due and unpaid Taxes upon
any of the assets of BCS, BBC or any of their subsidiaries.
(k) Except as set forth in the BCS Tax List, BCS, BBC or any of their
subsidiaries have no elections in effect for federal income tax purposes under
Sections 108, 168, 338, 441, 472, 1017, 1033, or 4977 of the Code.
(l) Except as set forth in the BCS Tax list, none of the members of
BCS's Affiliated Group has any net operating loss carryovers.
(m) BCS agrees, and agrees to cause BBC or any of their subsidiaries,
to cooperate with tax counsel in furnishing reasonable and customary written tax
representations to tax counsel for purposes of supporting tax counsel's opinion
that the Merger qualifies as a tax-deferred reorganization within the meaning of
Section 368(a) of the Code as contemplated in Section 9.6 hereof. Such Persons
acknowledge that their inability or unwillingness to provide such reasonable and
customary written representations could preclude tax counsel from rendering such
opinion, with consequences specified elsewhere herein.
4.12. Compliance with Laws and Regulations.
------------------------------------
4.12.1. Neither BCS nor BBC is in default under or in breach or
violation of (i) any provision its Articles of Incorporation, as amended, or
Bylaws, as amended, or (ii) law, ordinance, rule or regulation promulgated by
any Governmental Entity, except, with respect to this clause (ii), for such
violations as would not have, individually or in the aggregate, a material
adverse effect on the business, financial condition, results of operations or
prospects of BCS on a consolidated basis or BBC, as the case may be.
4.12.2. Except as set forth on a list furnished by BCS to GBB (the
"BCS Environmental Compliance List"), to the best of BCS's knowledge without
further investigation (i) each of BCS and BBC is in compliance with all
Environmental Regulations; (ii) there are no Tanks on or about BCS Property;
(iii) there are no Hazardous Materials on, below or above the surface of, or
migrating to or from BCS Property; (iv) neither BCS nor BBC has loans
outstanding secured by real property that is not in compliance with
Environmental Regulations or which has a leaking Tank or upon which there are
Hazardous Materials on or migrating to or from; and (v) without limiting Section
4.10 or the foregoing representations and warranties contained in clauses (i)
through (iv), as of the date of this Agreement, there is no claim, action, suit,
or proceeding or notice thereof before any Governmental Entity pending against
BCS or BBC or concerning property securing BCS or BBC loans and there is no
outstanding judgment, order, writ, injunction, decree, or award against or
affecting BCS Property or property securing BCS or BBC loans, relating to the
foregoing representations (i) - (iv), in each case the noncompliance with which,
or the presence of which would have a material adverse effect on the business,
financial condition, results of operations or prospects of BCS on a consolidated
basis. For purposes of this Agreement, the term "Environmental Regulations"
shall mean all applicable
<PAGE>
statutes, regulations, rules, ordinances, codes, licenses, permits, orders,
approvals, plans, authorizations, concessions, franchises, and similar items, of
all Governmental Entities and all applicable judicial, administrative, and
regulatory decrees, judgments, and orders relating to the protection of human
health or the environment, including, without limitation: all requirements,
including, but not limited to those pertaining to reporting, licensing,
permitting, investigation, and remediation of emissions, discharges, releases,
or threatened releases of Hazardous Materials, chemical substances, pollutants,
contaminants, or hazardous or toxic substances, materials or wastes whether
solid, liquid, or gaseous in nature, into the air, surface water, groundwater,
or land, or relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of chemical substances,
pollutants, contaminants, or hazardous or toxic substances, materials, or
wastes, whether solid, liquid, or gaseous in nature and all requirements
pertaining to the protection of the health and safety of employees or the
public. "BCS Property" shall mean real estate currently owned, leased, or
otherwise used by BCS or BBC, or in which BCS or BBC has an investment or
security interest (by mortgage, deed of trust, sale and lease-back or
otherwise), including, without limitation, properties under foreclosure and
properties held by BCS or BBC in its capacity as a trustee or otherwise. "Tank"
shall mean treatment or storage tanks, sumps, or water, gas or oil wells and
associated piping transportation devices. "Hazardous Materials" shall mean any
substance the presence of which requires investigation or remediation under any
federal, state or local statute, regulation, ordinance, order, action, policy or
common law; or which is or becomes defined as a hazardous waste, hazardous
substance, hazardous material, used oil, pollutant or contaminant under any
federal, state or local statute, regulation, rule or ordinance or amendments
thereto including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601, et seq.); the Resource
Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.); the Clean Air
Act, as amended (42 U.S.C. Section 7401, et seq.); the Federal Water Pollution
Control Act, as amended (33 U.S.C. Section 1251, et seq.); the Toxic Substances
Control Act, as amended (15 U.S.C. Section 9601, et seq.); the Occupational
Safety and Health Act, as amended (29 U.S.C. Section 651; the Emergency Planning
and Community Right-to-Know Act of 1986 (42 U.S.C. Section 11001, et seq.); the
Mine Safety and Health Act of 1977, as amended (30 U.S.C. Section 801, et seq.);
the Safe Drinking Water Act (42 U.S.C. Section 300f, et seq.); and all
comparable state and local laws, including without limitation, the Carpenter-
Presley-Tanner Hazardous Substance Account Act (State Superfund), the Porter-
Cologne Water Quality Control Act, Section 25140, 25501(j) and (k),
25501.1,25281 and 25250.1 of the California Health and Safety Code and/or
Article I of Title 22 of the California Code of Regulations, Division 4, Chapter
30; laws of other jurisdictions or orders and regulations; or the presence of
which causes or threatens to cause a nuisance, trespass or other common law tort
upon real property or adjacent properties or poses or threatens to pose a hazard
to the health or safety of persons or without limitation, which contains
gasoline, diesel fuel or other petroleum hydrocarbons; polychlorinated biphenyls
(PCBs), asbestos or urea formaldehyde foam insulation.
4.12.3. BCS has provided to GBB phase I environmental assessments
with respect to each interest in real property set forth on the BCS Real
Property List as to which such a phase I environmental investigation has been
prepared by or on behalf of BCS or BBC. The BCS Real Property list shall
disclose each such property as to which such an assessment has not been prepared
on behalf of BCS or BBC.
<PAGE>
4.13. Performance of Obligations. Each of BCS and BBC has performed in
--------------------------
all material respects all of the obligations required to be performed by it to
date and is not in default under or in breach of any term or provision of any
covenant, contract, lease, indenture or any other agreement to which it is a
party, is subject or is otherwise bound, and no event has occurred that, with
the giving of notice or the passage of time or both, would constitute such
default or breach, where such default or breach would have, individually or in
the aggregate, a material adverse effect on the business, financial condition,
results of operations or prospects of BCS on a consolidated basis. Except for
loans and leases made by BCS or BBC in the ordinary course of business, to BCS's
knowledge, no party with whom BCS or BBC has an agreement that is of material
importance to the business of BCS or BBC is in default thereunder.
4.14. Employees. There are no controversies pending or, to the best of
---------
BCS's knowledge, threatened between either BCS or BBC and any of its employees
that are likely to have a material adverse effect on the business, financial
condition, results of operations or prospects of BCS on a consolidated basis.
Neither BCS nor BBC is a party to any collective bargaining agreement with
respect to any of its employees or any labor organization to which its employees
or any of them belong.
4.15. Brokers and Finders. Except for the obligation to First Security
-------------------
Van Kasper set forth in the First Security Van Kasper Agreement, a copy of which
has been delivered to GBB, neither BCS nor BBC is a party to or obligated under
any agreement with any broker or finder relating to the transactions
contemplated hereby, and neither the execution of this Agreement nor the
consummation of the transactions provided for herein will result in any
liability to any broker or finder.
4.16. Material Contracts. Except as set forth in a list furnished by
------------------
BCS to GBB (the "BCS Contract List") hereto (all items listed or required to be
listed in such BCS Contract List being referred to herein as "Scheduled
Contracts"), neither BCS nor BBC is a party or otherwise subject to:
4.16.1. any employment, deferred compensation, bonus or consulting
contract that (i) has a remaining term, as of the date of this Agreement, of
more than one year in length of obligation on the part of BCS or BBC and is not
terminable by BCS or BBC within one year without penalty or (ii) requires
payment by BCS or BBC of $50,000 or more per annum;
4.16.2. any advertising, brokerage, licensing, dealership,
representative or agency relationship or contract requiring payment by BCS or
BBC of $50,000 or more per annum;
4.16.3. any contract or agreement that restricts BCS or BBC (or
would restrict any Affiliate of BCS or BBC or the Surviving Corporation
(including GBB and its subsidiaries) after the Effective Time of the Merger)
from competing in any line of business with any Person or using or employing the
services of any Person;
4.16.4. any lease of real or personal property providing for annual
lease payments by or to BCS or BBC in excess of $50,000 per annum other than (A)
financing leases entered
<PAGE>
into in the ordinary course of business in which BCS or BBC is lessor and (B)
leases of real property presently used by BBC as banking offices;
4.16.5. any mortgage, pledge, conditional sales contract, security
agreement, option, or any other similar agreement with respect to any interest
of BCS or BBC (other than as mortgagor or pledgor in the ordinary course of its
banking business or as mortgagee, secured party or deed of trust beneficiary in
the ordinary course of its business) in personal property having a value of
$50,000 or more;
4.16.6. other than as described in the BCS Filings or as set forth in
the BCS Employee Plan List, any stock purchase, stock option, stock bonus, stock
ownership, profit sharing, group insurance, bonus, deferred compensation,
severance pay, pension, retirement, savings or other incentive, welfare or
employment plan or material agreement providing benefits to any present or
former employees, officers or directors of BCS or BBC;
4.16.7. any agreement to acquire equipment or any commitment to make
capital expenditures of $50,000 or more;
4.16.8. other than agreements entered into in the ordinary course of
business, including sales of other real estate owned, any agreement for the sale
of any property or assets in which BCS or BBC has an ownership interest or for
the grant of any preferential right to purchase any such property or asset;
4.16.9. any agreement for the borrowing of any money (other than
liabilities or interbank borrowings made in the ordinary course of its banking
business and reflected in the financial records of BCS or BBC);
4.16.10. any restrictive covenant contained in any deed to or lease of
real property owned or leased by BCS or BBC (as lessee) that materially
restricts the use, transferability or value of such property;
4.16.11. any guarantee or indemnification which involves the sum of
$50,000 or more, other than letters of credit or loan commitments issued in the
normal course of business;
4.16.12. any supply, maintenance or landscape contracts not terminable
by BCS or BBC without penalty on 30 days' or less notice and which provides for
payments in excess of $25,000 per annum;
4.16.13. other than as disclosed with reference to Section 4.16.11 of
this Section 4.16, any material agreement which would be terminable other than
by BCS or BBC as a result of the consummation of the transactions contemplated
by this Agreement;
4.16.14. any contract of participation with any other bank in any loan
in excess of $25,000 or any sales of assets of BCS or BBC with recourse of any
kind to BCS or BBC except the sale of mortgage loans, servicing rights,
repurchase or reverse repurchase agreements, securities or other financial
transactions in the ordinary course of business;
<PAGE>
4.16.15. any agreement providing for the sale or servicing of any loan
or other asset which constitutes a "recourse arrangement" under applicable
regulation or policy promulgated by a Governmental Entity (except for agreements
for the sale of guaranteed portions of loans guaranteed in part by the U. S.
Small Business Administration and related servicing agreements);
4.16.16. any contract relating to the provision of data processing
services to BCS or BBC; or
4.16.17. any other agreement of any other kind which involves future
payments or receipts or performances of services or delivery of items requiring
payment of $25,000 or more to or by BCS or BBC other than payments made under or
pursuant to loan agreements, participation agreements and other agreements for
the extension of credit in the ordinary course of their business.
True copies of all Scheduled Contracts, including all amendments and
supplements thereto, have been delivered to GBB.
4.17. Certain Material Changes. Except as specifically required,
------------------------
permitted or effected by this Agreement, since December 31, 1998, there has not
been, occurred or arisen any of the following (whether or not in the ordinary
course of business unless otherwise indicated):
4.17.1. Any change in any of the assets, liabilities, permits,
methods of accounting or accounting practices, business, or manner of conducting
business, of BCS or BBC or any other event or development that has had or may
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the assets, liabilities, permits, business, financial
condition, results of operations or prospects of BCS on a consolidated basis;
4.17.2. Any damage, destruction or other casualty loss (whether or
not covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, results of operations or prospects of BCS on a consolidated basis or
that may involve a loss of more than $25,000 in excess of applicable insurance
coverage;
4.17.3. Any amendment, modification or termination of any existing,
or entry into any new, material contract or permit that has had or may
reasonably be expected to have a material adverse effect on the assets,
liabilities, business, financial condition, results of operations or prospects
of BCS on a consolidated basis;
4.17.4. Any disposition by BCS or BBC of an asset the lack of which
has had or may reasonably be expected to have a material adverse effect on the
assets, liabilities, business, financial condition, results of operations or
prospects of BCS on a consolidated basis; or
4.17.5. Any direct or indirect redemption, purchase or other
acquisition by BCS or BBC of any equity securities or any declaration, setting
aside or payment of any dividend (except
<PAGE>
for the payment of a cash dividend of $.40 per share to shareholders of record
as of January 29, 1999) or other distribution on or in respect of BCS Stock
whether consisting of money, other personal property, real property or other
things of value.
4.18. Licenses and Permits. Each of BCS and BBC has all material
--------------------
licenses and permits that are necessary for the conduct of its business, and
such licenses are in full force and effect, except for any failure to be in full
force and effect that would not, individually or in the aggregate, have a
material adverse effect on the business, financial condition, results of
operations or prospects of BCS on a consolidated basis. Except with respect to
properties classified as other real estate owned, the respective properties,
assets, operations and businesses of BCS and BBC are and have been maintained
and conducted, in all material respects, in compliance with all applicable (a)
licenses and permits; and (b) laws and regulations.
4.19. Undisclosed Liabilities. Neither BCS nor BBC has any liabilities
-----------------------
or obligations, either accrued or contingent, that are material to BCS and that
have not been: (a) reflected or disclosed in the Financial Statements of BCS;
(b) incurred subsequent to December 31, 1998 in the ordinary course of business
consistent with past practices; or (c) disclosed in a list furnished by BCS to
GBB (the "Undisclosed Liabilities List") or on any other BCS List. BCS does not
know of any basis for the assertion against it or BBC of any liability,
obligation or claim (including, without limitation, that of any regulatory
authority) that is likely to result in or cause a material adverse change in the
business, financial condition, results of operations or prospects of BCS on a
consolidated basis that is not fairly reflected in the Financial Statements of
BCS or otherwise disclosed in this Agreement.
4.20. Employee Benefit Plans.
----------------------
4.20.1. BCS has previously made available to GBB copies of each
"employee benefit plan," as defined in Section 3(3) of ERISA, of which BCS or
any member of the same controlled group of corporations, trades or businesses as
BCS within the meaning of Section 4001(a)(14) of ERISA ("ERISA Affiliates") is a
sponsor or participating employer or as to which BCS or any of its ERISA
Affiliates makes contributions or is required to make contributions and which
is subject to any provision of ERISA and covers any employee, whether active or
retired, of BCS or any of its ERISA Affiliates, together with all amendments
thereto, all currently effective and related summary plan descriptions (to the
extent one is required by law), the determination letter from the IRS, the
annual reports for the most recent three years (Form 5500 including, if
applicable, Schedule B thereto) and the summary of material modifications and
all material employee communications prepared in connection with any such plan.
Such plans are hereinafter referred to collectively as the "Employee Plans."
BCS does not participate in an employee benefit pension plan that is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA that would
subject BCS or any of its ERISA Affiliates to a material amount of liability
with respect to any such plan. Each Employee Plan which is intended to be
qualified in form and operation under Section 401(a) of the Code is so qualified
and the associated trust for each such Employee Plan is exempt from tax under
Section 501(a) of the Code. To the best of BCS's knowledge, no event has
occurred that will subject such Employee Plans to a material amount of tax under
Section 511 of the Code. To the best of BCS's knowledge, all amendments
required to bring each Employee Plan into conformity with all of the applicable
provisions of
<PAGE>
ERISA, the Code and all other applicable laws which are required to have been
made as of the date hereof have been made. Except as disclosed in a list
furnished by BCS to GBB (the "BCS Employee Plan List"), all Employee Plans were
in effect for substantially all of 1998, and there has been no material
amendment thereof (other than amendments required to comply with applicable law)
or increase in the cost thereof or benefits thereunder on or after January 1,
1998.
4.20.2. BCS has previously made available to GBB copies or
descriptions of each plan or arrangement maintained or otherwise contributed to
by BCS or any of its ERISA Affiliates which is not an Employee Plan and which
(exclusive of base salary and base wages) provides for any form of current or
deferred compensation, bonus, stock option, stock awards, stock-based
compensation or other forms of incentive compensation or post-termination
insurance, profit sharing, benefit, retirement, group health or insurance,
disability, workers' compensation, welfare or similar plan or arrangement for
the benefit of any employee or class of employees, whether active or retired, of
BCS or any of its ERISA Affiliates (such plans and arrangements being
collectively referred to herein as "Benefit Arrangements"). Except as disclosed
in the BCS Employee Plan List hereto, all Benefit Arrangements which are in
effect were in effect for substantially all of 1998. Except as disclosed in the
BCS Employee Plan List, there has been no material amendment thereof or increase
in the cost thereof or benefits payable thereunder since January 1, 1998.
Except as set forth in the BCS Employee Plan List, there has been no material
increase in the compensation of or benefits payable to any senior executive
employee of BCS since December 31, 1998, nor any employment, severance or
similar contract entered into with any such employee, nor any amendment to any
such contract, since December 31, 1998.
4.20.3. With respect to all Employee Plans and Benefit Arrangements,
BCS and its ERISA Affiliates are in material compliance (other than
noncompliance the cost or liability for which is not material) with the
requirements prescribed by any and all statutes, governmental or court orders,
or governmental rules or regulations currently in effect, including but not
limited to ERISA and the Code, applicable to such plans or arrangements. All
material government reports and filings required by law have been properly and
timely filed and all information required to be distributed to participants or
beneficiaries has been distributed with respect to each Employee Plan. BCS and
its ERISA Affiliates have performed all of their obligations under all such
Employee Plans and Benefit Arrangements in all material aspects. There is no
pending or, to the knowledge of BCS, threatened legal action, proceeding or
investigation against or involving any Employee Plan or Benefit Arrangement
which could result in a material amount of liability to such Employee Plan. To
the best of BCS's knowledge, no condition exists that could constitute grounds
for the termination of any Employee Plan under Section 4042 of ERISA; no
"prohibited transaction," as defined in Section 406 of ERISA and Section 4975 of
the Code, has occurred with respect to any Employee Plan, or any other employee
benefit plan maintained by BCS or any of its ERISA Affiliates which is covered
by Title I of ERISA, which could subject any person (other than a person for
whom BCS is not directly or indirectly responsible) to a material amount of
liability under Title I of ERISA or to the imposition of a material amount of
tax under Section 4975 of the Code which could have a material adverse effect on
the business, assets, financial condition, results of operations or prospects of
BCS on a consolidated basis; nor has any Employee Plan subject to Part III of
Subtitle B of Title I of ERISA or Section 412 of the Code, or both, incurred any
"accumulated funding deficiency," as defined in Section 412 of the
<PAGE>
Code, whether or not waived, nor has BCS failed to make any contribution or pay
any amount due and owing as required by the terms of any Employee Plan or
Benefit Arrangement. No "reportable event" as defined in ERISA has occurred with
respect to any of the Employee Plans. Neither BCS nor any of its ERISA
Affiliates has incurred nor expects to incur, directly or indirectly, a material
amount of liability under Title IV or ERISA arising in connection with the
termination of, or a complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA which could constitute a liability of
GBB or of any of its Affiliates (including BCS and BBC) at or after the
Effective Time of the Merger.
4.20.4 None of the Employee Plans nor any trust created thereunder has
incurred any "accumulated deficiency" as such term is defined in Section 412 of
the Code, whether or not waived. Furthermore, neither BCS nor any of its ERISA
Affiliates has provided or is required to provide security to any Employee Plan
pursuant to Section 401(a)(29) of the Code. Each of the Employee Plans which is
intended to be a qualified plan under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service and BCS knows
of no fact which could adversely affect the qualified status of any such
Employee Plan. All contributions required to be made to each of the Employee
Plans under the terms of the Employee Plan, ERISA, the Code or any other
applicable laws have been timely made. The Financial Statements of BCS properly
reflect all amounts required to be accrued as liabilities to date under each of
the Employee Plans.
4.20.5 Except for Scheduled Contracts set forth in the BCS Contract
List or as set forth in the BCS Employee Plan List, as the case may be, each
Employee Plan or Benefit Arrangement and each personal services contract, fringe
benefit, consulting contract or similar arrangement with or for the benefit of
any officer, director, employee or other person can be terminated by BCS within
a period of 30 days following the Effective Time of the Merger, without payment
of any specified amount as a penalty, bonus, premium, severance pay or other
compensation for such termination.
4.20.6 To the best of BCS's knowledge, all group health plans of BCS
have been operated in compliance with the group health plan continuation
coverage requirements of Section 4980B of the Code in all material respects.
4.20.7. Neither BCS nor BBC has used the services of (i) workers who
have been provided by a third party contract labor supplier for more than six
months or who may otherwise be eligible to participate in any of the Employee
Plans or to an extent that would reasonably be expected to result in the
disqualification of any of the Employee Plans or the imposition of penalties or
excise taxes with respect to the IRS, the Department of Labor, the Pension
Benefit Guaranty Corporation or any other Governmental Entity; (ii) temporary
employees who have worked for more than six months or who may otherwise be
eligible to participate in any of the Employee Plans or to an extent that would
reasonably be expected to result in the disqualification of any of the Employee
Plans or the imposition of penalties or excise taxes with respect to the IRS,
the Department of Labor, the Pension Benefit Guaranty Corporation or any other
Governmental Entity; (iii) individuals who have provided services to BCS or BBC
as independent contractors for more than six months or who may otherwise be
eligible to participate in the Employee Plans or to an extent that would
reasonably be expected to result in the
<PAGE>
disqualification of any of the Employee Plans or the imposition of penalties or
excise taxes with respect to the IRS, the Department of Labor, the Pension
Benefit Guaranty Corporation or any other Governmental Entity or (iv) leased
employees, as that term is defined in section 414(n) of the Code.
4.20.8. Except as set forth in the BCS Employee Plan List, with
respect to each Employee Plan that is funded wholly or partially through an
insurance policy, there will be no liability of BCS or BBC, as of the Closing
Date, under any such insurance policy or ancillary agreement with respect to
such insurance policy in the nature of a retroactive rate adjustment, loss
sharing arrangement or other actual or contingent liability arising wholly or
partially out of events occurring prior to the Closing Date.
4.21. Corporate Records. The minute books of each of BCS and BBC
-----------------
accurately reflect all material actions taken through February 17, 1999 by the
respective shareholders, board of directors and committees of each of BCS and
BBC.
4.22. Accounting Records. Each of BCS and BBC maintains accounting
------------------
records which fairly and validly reflect, in all material respects, its
transactions and internal controls exist sufficient to provide reasonable
assurances that such transactions are, in all material respects, (i) executed in
accordance with its management's general or specific authorization, and (ii)
recorded as necessary to permit the preparation of financial statements in
conformity with generally accepted accounting principles. Such records, to the
extent they contain important information pertaining to BCS or BBC which is not
easily and readily available elsewhere, have been duplicated, and such
duplicates are stored safely and securely, or are maintained in locked fireproof
rooms and/or files on BBC premises.
4.23. Offices and ATMs. BCS has furnished to GBB a list (the "BCS
----------------
Offices List") setting forth the headquarters of each of BCS and BBC (identified
as such) and each of the offices and automated teller machines ("ATMs")
maintained and operated by BCS or BBC (including, without limitation,
representative and loan production offices and operations centers) and the
location thereof. Except as set forth on the BCS Offices List, neither BCS nor
BBC maintains any other office or ATM or conducts business at any other
location, and neither BCS nor BBC has applied for or received permission to open
any additional branch or operate at any other location.
4.24. Operating Losses. BCS has furnished to GBB a list (the "BCS
----------------
Operating Losses List") setting forth any Operating Loss (as herein defined)
which has occurred at BCS during the period after December 31, 1998 to the date
of the Agreement. To the best of BCS's knowledge, no action has been taken or
omitted to be taken by any employee of BCS that has resulted in the incurrence
by BCS of an Operating Loss or that might reasonably be expected to result in
the incurrence of any individual Operating Loss which, net of any insurance
proceeds payable in respect thereof, would exceed $25,000 on an individual basis
or in the aggregate. For purposes of this section "Operating Loss" means any
loss resulting from cash shortages, lost or misposted items, disputed clerical
and accounting errors, forged checks, payment of checks over stop payment
orders, counterfeit money, wire transfers made in error, theft, robberies,
defalcations,
<PAGE>
check kiting, fraudulent use of credit cards or ATMs, civil money penalties,
fines, litigation, claims or other similar acts or occurrences.
4.25. Loan Portfolio. BCS has furnished to GBB or its agent a list (the
--------------
"BCS Loan List") that sets forth (a) as of March 15, 1999, a description of, by
type and classification, if any, each loan, lease, other extension of credit or
commitment to extend credit by BCS or BBC; (b) sets forth as of February 28
1999, by type and classification, all loans, leases, other extensions and
commitments to extend credit of BCS or BBC that have been classified by its bank
examiners or auditors (external or internal) as "Watch List," "Substandard,"
"Doubtful," "Loss" or any comparable classification; and (c) all consumer loans
due to BCS or BBC as to which any payment of principal, interest or any other
amount is 90 days or more past due.
4.26. Investment Securities. BCS has furnished to GBB a list (the "BCS
---------------------
Investment Securities List") setting forth a description of each Investment
Security held by BCS or BBC on March 31, 1999. The BCS Investment Securities
List sets forth, with respect to each such Investment Security: (i) the issuer
thereof; (ii) the outstanding balance or number of shares; (iii) the maturity,
if applicable; (iv) the title of issue; and (v) the classification under SFAS
No. 115. Neither BCS nor BBC has any Investment Security classified as trading.
4.27. Power of Attorney. Neither BCS nor BBC has granted any Person a
-----------------
power of attorney or similar authorization that is presently in effect or
outstanding.
4.28. Facts Affecting Regulatory Approvals. To the best knowledge of
------------------------------------
BCS, there is no fact, event or condition applicable to BCS or BBC which will,
or reasonably could be expected to, adversely affect the likelihood of securing
the requisite approvals or consents of any Governmental Entity to the Merger and
the transactions contemplated by this Agreement.
4.29. Accounting and Tax Matters. To the best of BCS's knowledge,
--------------------------
neither BCS nor BBC has through the date hereof taken or agreed to take any
action that would prevent GBB from accounting for the business combination to be
effected by the Merger as a pooling-of-interests or would prevent the Merger
from qualifying as a tax-free reorganization under the Code.
4.30. Indemnification. Other than pursuant to the provisions of their
---------------
respective Articles of Incorporation or Bylaws, and the First Security Van
Kasper Agreement, neither BCS nor BBC is a party to any indemnification
agreement with any of its present officers, directors, employees, agents or
other persons who serve or served in any other capacity with any other
enterprise at the request of BCS or BBC (a "Covered Person"), and to the best
knowledge of BCS, there are no claims for which any Covered Person would be
entitled to indemnification by BCS or BBC if such provisions were deemed in
effect, except as set forth in a list furnished by BCS to GBB (the "BCS
Indemnification List").
4.31. Community Reinvestment Act. BBC has received rating of
--------------------------
"satisfactory" in its most recent examination or interim review with respect to
the Community Reinvestment Act. BBC has not been advised of any supervisory
concerns regarding BCS's compliance with the Community Reinvestment Act.
<PAGE>
4.32. Derivative Transactions. Except as set forth in a list furnished
-----------------------
by BCS to GBB (the "BCS Derivatives List"), neither BCS nor BBC is a party to or
has agreed to enter into an exchange traded or over-the-counter equity, interest
rate, foreign exchange or other swap, forward, future, option, cap, floor or
collar or any other contract that is not included on the balance sheet and is a
derivative contract (including various combinations thereof) or owns securities
that are referred to generically as "structured notes," "high risk mortgage
derivatives," "capped floating rate notes," or "capped floating rate mortgage
derivatives."
4.33. Trust Administration. BCS does not presently exercise trust
--------------------
powers, including, but not limited to, trust administration, and neither it nor
any predecessor has exercised such trust powers for a period of at least three
years prior to the date hereof. The term "trusts" as used in this Section 4.33
includes (i) any and all common law or other trusts between an individual,
corporation or other entities and BBC or a predecessor, as trustee or co-
trustee, including, without limitation, pension or other qualified or
nonqualified employee benefit plans, compensation, testamentary, inter vivos,
and charitable trust indentures; (ii) any and all decedents' estates where BBC
or a predecessor is serving or has served as a co-executor or sole executor,
personal representative or administrator, administrator de bonis non,
administrator de bonis non with will annexed, or in any similar fiduciary
capacity; (iii) any and all guardianships, conservatorships or similar positions
where BBC or a predecessor is serving or has served as a co-grantor or a sole
grantor or a conservator or co-conservator of the estate, or any similar
fiduciary capacity; and (iv) any and all agency and/or custodial accounts and/or
similar arrangements, including plan administrator for employee benefit
accounts, under which BBC or a predecessor is serving or has served as an agent
or custodian for the owner or other party establishing the account with or
without investment authority.
4.34. Disclosure Documents and Applications. None of the information
-------------------------------------
supplied or to be supplied by or on behalf of BCS ("BCS Supplied Information")
for inclusion in (a) the Registration Statement on Form S-4 and the Proxy
Statement and Prospectus and (b) any other documents to be filed with the SEC,
the FRB, the DFI or any other Governmental Entity in connection with the
transactions contemplated in this Agreement, will, at the respective times such
documents are filed or become effective, or with respect to the Proxy Statement
and Prospectus when mailed, contain any untrue statement of a material fact, or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
4.35. Intellectual Property. Except as set forth in a list furnished by
---------------------
BCS to GBB (the "BCS Intellectual Property List"), BCS and BBC own or possess
valid and binding licenses and other rights to use without payment all material
patents, copyrights, trade secrets, trade names, service marks and trademarks
used in their respective businesses; and neither BCS nor BBC has received any
notice with respect thereto that asserts the rights of others. BCS and BBC has
in all material respects performed all the obligations required to be performed
by them, and are not in default in any material respect under any license,
contract, agreement, arrangement or commitment relating to any of the foregoing.
<PAGE>
4.36. Year 2000. The mission critical computer software operated by BCS
---------
and BBC is currently capable of providing, or is being adapted to provide,
uninterrupted millennium functionality to record, store, process and present
calendar dates falling on or after January 1, 2000 in substantially the same
manner and with the same functionality as such mission critical software
records, stores, processes and presents such calendar dates falling on or before
December 31, 1999. The costs of the adaptations referred to in this clause will
not have a material adverse effect on the business, financial condition, results
of operations or prospects of BCS on a consolidated basis. Neither BCS nor BBC
has received, or reasonably expects to receive, a "Year 2000 Deficiency
Notification Letter" (as such term is employed by the FDIC). BCS has disclosed
to GBB a complete and accurate copy of its plan, including an estimate of the
anticipated associated costs, for addressing the issues set forth in all Federal
Financial Institutions Examination Council Interagency Statements as such issues
affect BCS and BBC. Between the date of this Agreement and the Effective Time,
BCS shall use commercially practicable efforts to implement such plan.
4.37. Insider Loans; Other Transactions. BCS has previously provided GBB
---------------------------------
or its agent with a listing, current as of March 22, 1999, of all extensions of
credit made by BCS and BBC to each of its executive officers and directors and
their related interests (all as defined under Federal Reserve Board Regulation
O), all of which have been made in compliance with Regulation O, and Section 23B
under the Federal Reserve Act which listing is true, correct and complete in all
material respects. Neither BCS nor BBC owes any amount to, or has any contract
or lease with or commitment to, any of the present executive officers or
directors of BCS or BBC (other than for compensation for current services not
yet due and payable, reimbursement of expenses arising in the ordinary course of
business, options or awards available under the BCS Stock Option Plans or any
amounts due pursuant to BCS's Employee Plans).
4.38. Registration Obligation. Neither BCS nor BBC is under any
-----------------------
obligation, contingent or otherwise, to register any of their respective
securities under the Securities Act.
4.39. Accuracy and Currentness of Information Furnished. The
-------------------------------------------------
representations and warranties made by BCS hereby or in the BCS Lists or
schedules hereto do not contain any untrue statement of a material fact or omit
to state any material fact which is necessary under the circumstances under
which they were made to prevent the statements contained herein or in such
schedules from being misleading.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF GBB
-------------------------------------
GBB represents and warrants to BCS as follows:
5.1. Incorporation, Standing and Power. GBB has been duly organized, is
---------------------------------
validly existing and in good standing as a corporation under the laws of the
State of California and is registered as a bank holding company under the BHC
Act. GBB has all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as
<PAGE>
presently conducted. GBB is duly qualified and in good standing as a foreign
corporation, and is authorized to do business, in all states or other
jurisdictions in which such qualification or authorization is necessary, except
where the failure to be so qualified or authorized would not, individually or in
the aggregate, have a material adverse effect on the business, financial
condition, results of operations or prospects of GBB on a consolidated basis.
True and correct copies of the Articles of Incorporation and Bylaws of GBB have
been delivered to BCS. Such Articles of Incorporation and Bylaws are in full
force and effect as of the date hereof.
5.2. Capitalization. As of the date of this Agreement, the authorized
--------------
capital stock of GBB consists of 24,000,000 shares of common stock, of which
9,685,721 shares are outstanding and 4,000,000 shares of preferred stock, no par
value, of which no shares are outstanding. All of the outstanding shares of GBB
Stock are duly authorized, validly issued, fully paid and nonassessable. The
GBB Stock to be used in the Merger will be duly authorized, validly issued,
fully paid and nonassessable.
5.3. Financial Statements. GBB has previously furnished to BCS a copy of
--------------------
the Financial Statements of GBB. The Financial Statements of GBB: (a) present
fairly the consolidated financial condition of GBB as of the respective dates
indicated and its consolidated results of operations and changes in cash flows,
as applicable, for the respective periods then ended, subject, in the case of
the unaudited consolidated interim financial statements, to normal recurring
adjustments; (b) have been prepared in accordance with generally accepted
accounting principles consistently applied (except as otherwise indicated
therein); (c) set forth as of the respective dates indicated adequate reserves
for loan losses and other contingencies; and (d) are based upon the books and
records of GBB and its subsidiaries.
5.4. Reports and Filings. Since January 1, 1996, GBB and each of its
-------------------
subsidiaries have filed all reports, returns, registrations and statements
(collectively, "GBB Filings"), together with any amendments required to be made
with respect thereto, that were required to be filed with (a) the SEC, (b) the
FRB, (c) the DFI, and (d) any other applicable Governmental Entity, including
taxing authorities, except where the failure to file such reports, returns,
registrations or statements has not had and is not reasonably expected to have a
material adverse effect on the business, financial condition, results of
operations or prospects of GBB on a consolidated basis. No administrative
actions have been taken or orders issued in connection with such GBB Filings.
As of their respective dates, each of such GBB Filings (y) to the best of GBB's
knowledge, complied in all material respects with all laws and regulations
enforced or promulgated by the Governmental Entity with which it was filed (or
was amended so as to be in such compliance promptly following discovery of any
such noncompliance); and (z) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Any financial statement contained in any of such GBB
Filings that was intended to present the financial position of GBB on a
consolidated basis fairly presented the financial position of GBB on a
consolidated basis and was prepared in accordance with generally accepted
accounting principles or banking regulations consistently applied, except as
stated therein, during the periods involved.
<PAGE>
5.5. Authority. The execution and delivery by GBB of this Agreement and
---------
the Agreement of Merger, and the consummation of the transactions contemplated
hereby and thereby, have been duly and validly authorized by all necessary
corporate action on the part of GBB. This Agreement is, and the Agreement of
Merger will be, upon due execution and delivery by the respective parties
hereto, valid and binding obligations of GBB enforceable in accordance with
their respective terms, except as the enforceability thereof may be limited by
bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium
or other similar laws affecting the rights of creditors generally and by general
equitable principles. Except as set forth in a list furnished by GBB to BCS
(the "GBB Conflicts and Consents List"), neither the execution and delivery by
GBB of this Agreement or the Agreement of Merger, the consummation of the
transactions contemplated herein or therein, nor compliance by GBB with any of
the provisions hereof or thereof, will: (a) conflict with or result in a breach
of any provision of its Articles of Incorporation, as amended, or Bylaws, as
amended; (b) constitute a breach of or result in a default (or give rise to any
rights of termination, cancellation or acceleration, or any right to acquire any
securities or assets) under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, franchise, license, permit, agreement or other
instrument or obligation to which GBB or any subsidiary of GBB is a party, or by
which GBB or any subsidiary of GBB or any of its properties or assets is bound;
(c) result in the creation or imposition of any Encumbrance on any of the
respective properties or assets of GBB or any subsidiary; or (d) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to GBB
or any subsidiary of GBB or any of its respective properties or assets. Except
as set forth in the GBB Conflicts and Consents List, no consent of, approval of,
notice to or filing with any Governmental Entity having jurisdiction over any
aspect of the business or assets of GBB or any of its subsidiaries, and no
consent of, approval of or notice to any other Person, is required in connection
with the execution and delivery by GBB of this Agreement or the Agreement of
Merger, or the consummation by GBB of the Merger or the transactions
contemplated hereby or thereby, except (i) such approvals as may be required by
the SEC, the FRB and the DFI; (ii) filing of the Agreement of Merger with the
Secretary of State of the State of California; and (iii) such approvals as may
be required to approve for inclusion on the Nasdaq National Market System of the
GBB Stock to be issued in the Merger.
5.6. Subsidiaries. As of the date of this Agreement, GBB owns 100% of
------------
the outstanding stock of each of CNB, GGB, MPB, PBC, Pacific Business Funding
Corporation and Peninsula Real Estate Corporation. As of the date of this
Agreement, and except for its investments in the Banks, Pacific Business Funding
Corporation, Peninsula Real Estate Corporation, GBB Capital I and GBB Capital
II, GBB does not own, directly or indirectly (except as a pledgee pursuant to
loans or upon acquisition in satisfaction of debt previously contracted), the
outstanding stock or equity or other voting interest in any other Person. GBB
and Bay Area Bancshares entered into an Agreement and Plan of Reorganization,
dated as of January 26, 1999, pursuant to which Bay Area Bancshares will merge
with and into GBB and Bay Area Bank, a wholly owned subsidiary of Bay Area
Bancshares, will become a wholly owned subsidiary of GBB.
5.7. Brokers and Finders. Except for the obligation to Hoefer & Arnett
-------------------
Incorporated, as set forth in a letter agreement dated June 22, 1998, as
supplemented on April 1, 1999, and Hovde Financial Inc. as set forth in a letter
agreement dated April 1, 1999, GBB is not a party to
<PAGE>
or obligated under any agreement with any broker or finder relating to the
transactions contemplated hereby, and neither the execution of this Agreement
nor the consummation of the transactions provided for herein will result in any
liability to any broker or finder.
5.8. Certain Material Changes. Except as specifically required,
------------------------
permitted or effected by this Agreement or as disclosed in any GBB Filings,
since December 31, 1998, there has not been, occurred or arisen any of the
following (whether or not in the ordinary course of business unless otherwise
indicated):
5.8.1. Any change in any of the assets, liabilities, permits, methods
of accounting or accounting practices, business, or manner or conducting
business, of GBB or its subsidiaries or any other event or development that has
had or may reasonably be expected to have a material adverse effect on the
assets, liabilities, permits, business, financial condition, results of
operations or prospects of GBB on a consolidated basis;
5.8.2. Any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, permits, business, financial
condition, results of operations or prospects of GBB on a consolidated basis;
5.8.3. Any amendment, modification or termination of any existing, or
entry into any new, material contract or permit that has had or may reasonably
be expected to have a material adverse effect on the assets, liabilities,
permits, business, financial condition, results of operations or prospects of
GBB on a consolidated basis; or
5.8.4. Any disposition by GBB or any of its subsidiaries of an asset
the lack of which has had or may reasonably be expected to have a material
adverse effect on the assets, liabilities, permits, business, financial
condition, results of operations or prospects of GBB on a consolidated basis.
5.9. Licenses and Permits. GBB and each subsidiary of GBB have all
--------------------
material licenses and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a material adverse effect on the business, financial
condition, results of operations or prospects of GBB on a consolidated basis.
The properties, assets, operations and businesses of GBB and each subsidiary of
GBB are and have been maintained and conducted, in all material respects, in
compliance with all applicable licenses and permits. The properties and
operations of GBB and each subsidiary of GBB are and have been maintained and
conducted, in all material respects, in compliance with all applicable laws and
regulations.
5.10 Corporate Records. The minute books of GBB and each of its
-----------------
subsidiaries reflect all material actions taken to this date by its
shareholders, boards of directors and committees.
5.11. Accounting Records. GBB and its subsidiaries maintain accounting
------------------
records which fairly and validly reflect, in all material respects, their
transactions and accounting
<PAGE>
controls exist sufficient to provide reasonable assurances that such
transactions are, in all material respects, (i) executed in accordance with
their management's general or specific authorization, and (ii) recorded as
necessary to permit the preparation of financial statements in conformity with
generally accepted accounting principles. Such records, to the extent they
contain important information pertaining to GBB and its subsidiaries which is
not easily and readily available elsewhere, have been duplicated, and such
duplicates are stored safely and securely.
5.12. Facts Affecting Regulatory Approvals. To the best knowledge of
------------------------------------
GBB, there is no fact, event or condition applicable to GBB or any of its
subsidiaries which will, or reasonably could be expected to, adversely affect
the likelihood of securing the requisite approvals or consents of any
Governmental Entity to the Merger and the transactions contemplated by this
Agreement.
5.13. Accounting and Tax Matters. To the best knowledge of GBB, GBB has
--------------------------
not through the date hereof taken or agreed to take any action that would
prevent it from accounting for the business combination to be effected by the
Merger as a pooling-of-interests or would prevent the Merger from qualifying as
a tax-free reorganization under the Code.
5.14. Disclosure Documents and Applications. None of the information
-------------------------------------
supplied or to be supplied by or on behalf of GBB or any of its subsidiaries
("GBB Supplied Information") for inclusion in (a) the Registration Statement on
Form S-4 and the Proxy Statement and Prospectus to be mailed to the shareholders
of BCS in connection with obtaining the approval of the shareholders of BCS of
this Agreement, the Merger and the other transactions contemplated hereby, and
(b) any other documents to be filed with the SEC, the FRB, the DFI or any other
Governmental Entity in connection with the transactions contemplated in this
Agreement, will, at the respective times such documents are filed or become
effective, or with respect to the Proxy Statement and Prospectus when mailed,
contain any untrue statement of a material fact, or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
5.15. Nasdaq Listing. As of the date hereof, GBB Stock is listed on the
--------------
Nasdaq National Market System.
5.16. Accuracy and Currentness of Information Furnished. The
-------------------------------------------------
representations and warranties made by GBB hereby or in the GBB Lists or
Schedules hereto do not contain any untrue statement of material fact or omit to
state any material fact which is necessary under the circumstances under which
they were made to prevent the statements contained herein or in such schedules
from being misleading.
5.17. Year 2000. The mission critical computer software operated by GBB
---------
and its subsidiaries is currently capable of providing, or is being adapted to
provide, uninterrupted millennium functionality to record, store, process and
present calendar dates falling on or after January 1, 2000 in substantially the
same manner and with the same functionality as such mission critical software
records, stores, processes and presents such calendar dates falling on or before
December 31, 1999. The costs of the adaptations referred to in this clause will
not have a
<PAGE>
material adverse effect on the business, financial condition, results of
operations or prospects of GBB on a consolidated basis. Neither GBB nor any of
its subsidiaries has received, or reasonably expects to receive, a "Year 2000
Deficiency Notification Letter" (as such term is employed by the FDIC).
5.18. Litigation. Except as disclosed in a list furnished by GBB to BCS
----------
(the "GBB Litigation List"), there is no private or governmental suit, claim,
action or proceeding pending, nor to GBB's knowledge threatened, against GBB or
any of its subsidiaries or against any of their respective directors, officers
or employees relating to the performance of their duties in such capacities or
against or affecting any properties of GBB or any of its subsidiaries which, if
adversely determined, would have, individually or in the aggregate, a material
adverse effect upon the business, financial condition or results of operations
of GBB on a consolidated basis, or the transactions contemplated hereby. Also,
there are no material judgments, decrees, stipulations or orders against GBB or
any of its subsidiaries or enjoining their respective directors, officers or
employees in respect of, or the effect of which is to prohibit, any business
practice or the acquisition of any property or the conduct of business in any
area.
5.19. Compliance with Laws and Regulations.
------------------------------------
5.19.1 Neither GBB nor any of its subsidiaries is in default under or
in breach or violation of (i) any provision its Articles of Incorporation, as
amended, or Bylaws, as amended, or (ii) law, ordinance, rule or regulation
promulgated by any Governmental Entity, except, with respect to this clause
(ii), for such violations as would not have, individually or in the aggregate, a
material adverse effect on the business, financial condition, results of
operations or prospects of GBB on a consolidated basis.
5.19.2 To the best of GBB's knowledge without further investigation
(i) each of GBB and its subsidiaries is in compliance with all Environmental
Regulations; (ii) there are no Tanks on or about GBB Property; (iii) there are
no Hazardous Materials on, below or above the surface of, or migrating to or
from GBB Property; (iv) neither GBB nor any of its subsidiaries has loans
outstanding secured by real property that is not in compliance with
Environmental Regulations or which has a leaking Tank or upon which there are
Hazardous Materials on or migrating to or from; and (v) without limiting Section
5.18 or the foregoing representations and warranties contained in clauses (i)
through (iv), as of the date of this Agreement, there is no claim, action, suit,
or proceeding or notice thereof before any Governmental Entity pending against
GBB or any of its subsidiaries or concerning property securing GBB's or its
subsidiaries' loans and there is no outstanding judgment, order, writ,
injunction, decree, or award against or affecting GBB Property or property
securing GBB's or its subsidiaries' loans, relating to the foregoing
representations (i) - (iv), in each case the noncompliance with which, or the
presence of which would have a material adverse effect on the business,
financial condition, results of operations or prospects of GBB on a consolidated
basis. "GBB Property" shall mean real estate currently owned, leased, or
otherwise used by GBB or its subsidiaries, or in which GBB or its subsidiaries
has an investment or security interest (by mortgage, deed of trust, sale and
lease-back or otherwise), including, without limitation, properties under
foreclosure and properties held by GBB or its subsidiaries in its capacity as a
trustee or otherwise.
<PAGE>
5.20 Performance of Obligations. Each of GBB and its subsidiaries have
--------------------------
performed in all material respects all of the obligations required to be
performed by them to date and are not in default under or in breach of any term
or provision of any covenant, contract, lease, indenture or any other agreement
to which any of them is a party, is subject or is otherwise bound, and no event
has occurred that, with the giving of notice or the passage of time or both,
would constitute such default or breach, where such default or breach would
have, individually or in the aggregate, a material adverse effect on the
business, financial condition, results of operations or prospects of GBB on a
consolidated basis. Except for loans and leases made by GBB or any of its
subsidiaries in the ordinary course of business, to GBB's knowledge, no party
with whom GBB or any of its subsidiaries has an agreement that is of material
importance to the business of GBB or any of its subsidiaries is in default
thereunder.
5.21 Employees. There are no controversies pending or, to the best of
---------
GBB's knowledge, threatened between GBB or any of its subsidiaries and any of
their respective employees that are likely to have a material adverse effect on
the business, financial condition, results of operations or prospects of GBB on
a consolidated basis.
5.22 Undisclosed Liabilities. GBB has no liabilities or obligations,
-----------------------
either accrued or contingent, that are material to GBB on a consolidated basis
and that have not been: (a) reflected or disclosed in the Financial Statements
of GBB; (b) incurred subsequent to December 31, 1998 in the ordinary course of
business consistent with past practices; or (c) disclosed in a list furnished by
GBB to BCS (the "Undisclosed Liabilities List") or on any other GBB List. GBB
does not know of any basis for the assertion against it or any of its
subsidiaries of any liability, obligation or claim (including, without
limitation, that of any regulatory authority) that is likely to result in or
cause a material adverse change in the business, financial condition, results of
operations or prospects of GBB on a consolidated basis that is not fairly
reflected in the Financial Statements of GBB or otherwise disclosed in this
Agreement.
ARTICLE 6.
COVENANTS OF BCS
----------------
PENDING EFFECTIVE TIME OF THE MERGER
------------------------------------
BCS covenants and agrees with GBB as follows:
6.1. Limitation on Conduct Prior to Effective Time of the Merger.
-----------------------------------------------------------
Between the date hereof and the Effective Time of the Merger, except as
contemplated by this Agreement and subject to requirements of law and
regulation, BCS agrees to conduct its business (and to cause BBC to conduct its
business) in the ordinary course in substantially the manner heretofore
conducted and in accordance with sound banking practices, and BCS and BBC shall
not, without the prior written consent of GBB, which consent shall not be
unreasonably withheld:
6.1.1. issue, sell or grant any BCS Stock (except pursuant to the
exercise of BCS Options outstanding as of the date hereof), any other securities
(including long term debt) of BCS or BBC, or any rights, stock appreciation
rights, options or securities to acquire any BCS Stock, or any other securities
(including long term debt) of BCS or BBC;
<PAGE>
6.1.2. declare, set aside or pay any dividend or make any other
distribution upon or split, combine or reclassify any shares of capital stock or
other securities of BCS or BBC, provided, however, that subject to Section 6.11,
BCS may pay to its shareholders its regular cash dividend in amounts and in a
manner consistent with past practices;
6.1.3. purchase, redeem or otherwise acquire any capital stock or
other securities of BCS or BBC or any rights, options, or securities to acquire
any capital stock or other securities of BCS or BBC;
6.1.4. except as may be required to effect the transactions
contemplated herein, amend its Articles of Incorporation or Bylaws;
6.1.5. grant any general or uniform increase in the rate of pay of
employees or employee benefits;
6.1.6. grant any increase in salary, incentive compensation or
employee benefits or pay any bonus to any Person or voluntarily accelerate the
vesting of any employee benefits;
6.1.7. make any capital expenditure or commitments with respect
thereto in excess of $50,000 in the aggregate, except for ordinary repairs,
renewals and replacements;
6.1.8. compromise or otherwise settle or adjust any assertion or
claim of a deficiency in taxes (or interest thereon or penalties in connection
therewith), extend the statute of limitations with any tax authority or file any
pleading in court in any tax litigation or any appeal from an asserted
deficiency, or file or amend any federal, foreign, state or local tax return, or
make any tax election;
6.1.9. grant, renew or commit to grant or renew any extension of
credit if such extension of credit, together with all other credit then
outstanding to the same Person and all Affiliated Persons, would exceed $200,000
on an unsecured basis, or $500,000 if secured by a lien on real estate or cash
(consent shall be deemed granted if within one Business Day of written notice
delivered to GBB's Chief Credit Officer, written notice of objection is not
received by BCS);
6.1.10. change its tax or accounting policies and procedures or any
method or period of accounting unless required by generally accepted accounting
principles or a Governmental Entity;
6.1.11. grant or commit to grant any extension of credit or amend the
terms of any such credit outstanding on the date hereof to any executive
officer, director or holder of 10% or more of the outstanding BCS Stock, or any
Affiliate of such Person, if such credit would exceed $25,000;
6.1.12. close any offices at which business is conducted or open any
new offices;
<PAGE>
6.1.13. adopt or enter into any new employment agreement or other
employee benefit plan or arrangement or amend or modify any employment agreement
or employee benefit plan or arrangement of any such type except for such
amendments as are required by law;
6.1.14. initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal which constitutes, or may reasonably
be expected to lead to, any Competing Transaction (as such term is defined
below), or negotiate with any person in furtherance of such inquiries or to
obtain a Competing Transaction, or agree to or endorse any Competing
Transaction, or authorize or permit any of its or BBC's officers, directors or
employees or any investment banker, financial advisor, attorney, accountant or
any other representative retained by it or any of its Affiliates to take any
such action, and BCS shall promptly notify GBB (orally and in writing) of all of
the relevant details relating to all inquiries and proposals which it may
receive relating to any of such matters. For purposes of this Agreement,
"Competing Transaction" shall mean any of the following involving BCS or BBC:
any merger, consolidation, share exchange or other business combination; a sale,
lease, exchange, mortgage, pledge, transfer or other disposition of assets of
BCS or BBC representing 10% or more of the consolidated assets of BCS; a sale of
shares of capital stock (or securities convertible or exchangeable into or
otherwise evidencing, or any agreement or instrument evidencing, the right to
acquire capital stock), representing 10% or more of the voting power of BCS or
BBC; a tender offer or exchange offer for at least 10% of the outstanding shares
of BCS; a solicitation of proxies in opposition to approval of the Merger by
BCS's shareholders; or a public announcement of an unsolicited bona fide
proposal, plan, or intention to do any of the foregoing. Notwithstanding any
other provision in this Section 6.1.14 or elsewhere in this Agreement, the
obligations of BCS in this Agreement are subject to, upon advice of counsel, the
continuing fiduciary duties of the Board of Directors of BCS to the shareholders
of BCS; provided, however, that nothing herein shall prohibit GBB from
terminating this Agreement pursuant to Section 13.1.8 hereof.
6.1.15. change any basic policies and practices with respect to
liquidity management and cash flow planning, marketing, deposit origination,
lending, budgeting, profit and tax planning, personnel practices or any other
material aspect of BCS's or BBC's business or operations, except such changes as
may be required in the opinion of BCS's or BBC's management to respond to
economic or market conditions or as may be required by any Governmental Entity;
6.1.16. grant any Person a power of attorney or similar authority;
6.1.17. make any investment by purchase of stock or securities
(including an Investment Security), contributions to capital, property transfers
or otherwise in any other Person, except for federal funds, obligations of the
United States Treasury or an agency of the United States Government the
obligations of which are entitled to or implied to have the full faith and
credit of the United States government and which have an original maturity not
in excess of one year, bank qualified investment grade municipal bonds,
mortgage-backed securities that are investment grade and meet regulatory stress
test requirements, investment grade commercial paper with maturities of 90 days
or less or reverse repurchase agreements secured by Treasury or agency
securities with correspondents reasonably acceptable to GBB, in any case, in
<PAGE>
the ordinary course of business consistent with past practices and which are not
designated as trading (consent shall be deemed granted if within one Business
Day of written notice delivered to GBB's Chief Financial Officer or Controller,
written notice of objection is not received by BCS);
6.1.18. amend or modify any Scheduled Contract or enter into any
agreement or contract that would be a Scheduled Contract under Section 4.16;
6.1.19. sell, transfer, mortgage, encumber or otherwise dispose of
any assets or release or waive any claim, except in the ordinary course of
business and consistent with past practices;
6.1.20. knowingly take any action which would or is reasonably likely
to (i) adversely affect the ability of GBB or BCS to obtain any necessary
approval of any Governmental Entity required for the transactions contemplated
hereby; (ii) adversely affect BCS's ability to perform its covenants and
agreements under this Agreement; or (iii) result in any of the conditions to the
performance of GBB's or BCS's obligations hereunder, as set forth in Articles 9
or 10 herein not being satisfied;
6.1.21. make any special or extraordinary payments to any Person;
6.1.22. reclassify any Investment Security from held-to-maturity or
available for sale to trading;
6.1.23. sell any security other than in the ordinary course of
business, or engage in gains trading;
6.1.24. take title to any real property without conducting prior
thereto an environmental investigation, which investigation shall disclose the
absence of any suspected environmental contamination;
6.1.25. knowingly take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section 368 of
the Code or prevent GBB from accounting for the business combination to be
effected by the Merger as a pooling-of-interests;
6.1.26. settle any claim, action or proceeding involving any material
liability for monetary damages or enter into any settlement agreement containing
material obligations;
6.1.27. make, acquire a participation in, or voluntarily reacquire an
interest in a participation sold of, any loan that is not in compliance with its
normal credit underwriting standards, policies and procedures as in effect on
December 31, 1998; or renew, extend the maturity of, or alter any of the
material terms of any such loan for a period of greater than six months;
<PAGE>
6.1.28. incur any indebtedness for borrowed money or assume,
guaranty, endorse or otherwise as an accommodation become responsible for the
obligations of any other person, except for (i) in connection with banking
transactions with banking customers in the ordinary course of business, or (ii)
short-term borrowings made at prevailing market rates and terms; or
6.1.29. agree or make any commitment to take any actions prohibited
by this Section 6.1.
6.2 Affirmative Conduct Prior to Effective Time of the Merger. Between
---------------------------------------------------------
the date hereof and the Effective Time of the Merger, BCS shall (and shall cause
BBC to):
6.2.1 use its commercially reasonable efforts consistent with this
Agreement to maintain and preserve intact its present business organization and
to maintain and preserve its relationships and goodwill with account holders,
borrowers, employees and others having business relationships with BCS or BBC;
6.2.2 use its commercially reasonable efforts to keep in full force
and effect all of the existing material permits and licenses of BCS and BBC;
6.2.3 use its commercially reasonable efforts to maintain insurance
coverage at least equal to that now in effect on all properties for which it is
responsible and on its business operations;
6.2.4 perform its material contractual obligations and not become in
material default on any such obligations;
6.2.5 duly observe and conform in all material respects to all lawful
requirements applicable to its business;
6.2.6 maintain its assets and properties in good condition and
repair, normal wear and tear excepted;
6.2.7 promptly upon learning of such information, advise GBB in
writing of any event or any other transaction within its knowledge whereby any
Person or Related Group of Persons acquires, directly or indirectly, record or
beneficial ownership or control (as defined in Rule 13d-3 promulgated by the SEC
under the Exchange Act) of 5% or more of the outstanding BCS Stock prior to the
record date fixed for the BCS Shareholders' Meeting or any adjourned meeting
thereof to approve this Agreement and the transactions contemplated herein;
6.2.8 promptly notify GBB regarding receipt from any tax authority of
any notification of the commencement of an audit, any request to extend the
statute of limitations, any statutory notice of deficiency, any revenue agent's
report, any notice of proposed assessment, or any other similar notification of
potential adjustments to the tax liabilities of BCS, or any actual or threatened
collection enforcement activity by any tax authority with respect to tax
liabilities of BCS;
<PAGE>
6.2.9 make available to GBB monthly unaudited balance sheets and
income statements of BCS within 25 days after the close of each calendar month;
6.2.10 not later than the 30th day of each calendar month, amend or
supplement the BCS Lists prepared and delivered pursuant to Article 4 to ensure
that the information set forth in the BCS Lists accurately reflects the then-
current status of BCS and BBC. BCS shall further amend or supplement the BCS
Lists as of the Closing Date if necessary to reflect any additional information
that needs to be included in the BCS Lists;
6.2.11 use its commercially reasonable efforts to obtain any third
party consent with respect to any contract, agreement, lease, license,
arrangement, permit or release that is material to the business of BCS or BBC or
that is contemplated in this Agreement as required in connection with the
Merger;
6.2.12 maintain an allowance for loan and lease losses consistent
with practices and methodology as in effect on the date of the execution of
this Agreement;
6.2.13 furnish to Manatt, Phelps & Phillips, LLP promptly upon its
written request written representations and certificates as deemed reasonably
necessary or appropriate for purposes of enabling Manatt, Phelps & Phillips, LLP
to render the tax opinion referred to in Section 9.6 hereof.
6.3 Access to Information.
---------------------
6.3.1 BCS will afford, upon reasonable notice, to GBB and its
representatives, counsel, accountants, agents and employees reasonable access
during normal business hours to all of their business, operations, properties,
books, files and records and will do everything reasonably necessary to enable
GBB and its representatives, counsel, accountants, agents and employees to make
a complete examination of the financial statements, business, assets and
properties of BCS and BBC and the condition thereof and to update such
examination at such intervals as GBB shall deem appropriate. Such examination
shall be conducted in cooperation with the officers of BCS and BBC and in such a
manner as to minimize any disruption of, or interference with, the normal
business operations of BCS and BBC. Upon the request of GBB, BCS will request
Deloitte & Touche to provide reasonable access to representatives of PwC working
on behalf of GBB to auditors' work papers with respect to the business and
properties of BCS and BBC, including tax accrual work papers prepared for BCS
and BBC during the preceding three years, other than (a) books, records and
documents covered by the attorney-client privilege, or that are attorneys' work
product, and (b) books, records and documents that BCS or BBC is legally
obligated to keep confidential. No examination or review conducted under this
section shall constitute a waiver or relinquishment on the part of GBB of the
right to rely upon the representations and warranties made by BCS herein;
provided, that GBB shall disclose to BCS any fact or circumstance it may
discover which GBB believes renders any representation or warranty made by BCS
hereunder incorrect in any respect. GBB covenants and agrees that it, its
subsidiaries, and their respective representatives, counsel, accountants, agents
and employees will hold in strict confidence all documents and information
concerning BCS and BBC so obtained from any of them (except to the extent that
such documents or information are a matter
<PAGE>
of public record or require disclosure in the Proxy Statement and Prospectus or
any of the public information of any applications required to be filed with any
Governmental Entity to obtain the approvals and consents required to effect the
transactions contemplated hereby), and if the transactions contemplated herein
are not consummated, such confidence shall be maintained and all such documents
shall be returned to BCS.
6.3.2 A representative of GBB, selected by GBB in its sole
discretion, shall be authorized and permitted to review each loan, lease, or
other credit funded or renewed by BCS or BBC after the date hereof, and all
information associated with such loan, lease or other credit within three
Business Days of such funding or renewal, such review to take place, if
possible, on BCS's premises.
6.3.3 A representative of GBB, selected by GBB in its sole
discretion, shall be permitted by BCS and BBC to attend all regular and special
Board of Directors' and committee meetings of BCS and BBC from the date hereof
until the Effective Time of the Merger; provided, however, that the attendance
of such representative shall not be permitted at any meeting, or portion
thereof, for the sole purpose of discussing the transactions contemplated by
this Agreement or the obligations of BCS under this Agreement.
6.4 [Reserved.]
6.5 Filings. BCS agrees that through the Effective Time of the Merger,
-------
each of BCS's or BBC's reports, registrations, statements and other filings
required to be filed with any applicable Governmental Entity will comply in all
material respects with all the applicable statutes, rules and regulations
enforced or promulgated by the Governmental Entity with which it will be filed
and none will contain any untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Any financial statement contained in any such report, registration,
statement or other filing that is intended to present the financial position of
the entity to which it relates will fairly present the financial position of
such entity and will be prepared in accordance with generally accepted
accounting principles or applicable banking regulations consistently applied
during the periods involved.
6.6 Notices; Reports. BCS will promptly notify GBB of any event of
----------------
which BCS obtains knowledge which has had or may have a materially adverse
effect on the financial condition, operations, business or prospects of BCS on a
consolidated basis, or in the event that BCS determines that it is unable to
fulfill any of the conditions to the performance of GBB's obligations hereunder,
as set forth in Articles 9 or 11 herein, and BCS will furnish GBB (i) as soon as
available, and in any event within one Business Day after it is mailed or
delivered to the Board of Directors of BCS or BBC or committees thereof, any
report by BCS or BBC for submission to the Board of Directors of BCS or BBC or
committees thereof, provided, however, that BCS need not furnish to GBB
communications of BCS's legal counsel regarding BCS's rights and obligations
under this Agreement or the transactions contemplated hereby, or books, records
and documents covered by confidentiality agreements or the attorney-client
privilege, or which are attorneys' work product, (ii) as soon as available, all
proxy statements, information statements, financial statements, reports, letters
and communications sent by BCS to its
<PAGE>
shareholders or other security holders, and all reports filed by BCS or BBC with
the FRB, the FDIC or the DFI, and (iii) such other existing reports as GBB may
reasonably request relating to BCS or BBC.
6.7 BCS Shareholders' Meeting. Promptly after the execution of this
-------------------------
Agreement, BCS will take action necessary in accordance with applicable law and
its Articles of Incorporation and Bylaws to convene a meeting of its
shareholders to consider and vote upon this Agreement and the transactions
contemplated hereby so as to permit the consummation of the transactions
contemplated hereby. The Board of Directors of BCS shall, subject to its
fiduciary duties, recommend that its shareholders approve this Agreement and the
transactions contemplated hereby, and the Board of Directors of BCS shall,
subject to its fiduciary duties, use its best efforts to obtain the affirmative
vote of the holders of the largest possible percentage of the outstanding BCS
Stock to approve this Agreement and the transactions contemplated hereby.
6.8 Certain Loans and Other Extensions of Credit. BCS will promptly
--------------------------------------------
inform GBB of the amounts and categories of any loans, leases or other
extensions of credit that have been classified by any bank regulatory authority
or by any unit of BCS or BBC or by any other Person as "Criticized," "Specially
Mentioned," "Substandard," "Doubtful," "Loss" or any comparable classification
("Classified Credits"). BCS will furnish GBB, as soon as practicable, and in
any event within 20 days after the end of each calendar month, schedules
including the following: (a) Classified Credits (including with respect to each
credit its classification category and the originating unit); (b) nonaccrual
credits (including the originating unit); (c) accrual exception credits that are
delinquent 90 or more days and have not been placed on nonaccrual status
(including its originating unit); (d) credits delinquent as to payment of
principal or interest (including its originating unit), including an aging into
current-to-29, 30-59, 60-89, and 90+ day categories; (e) participating loans and
leases, stating, with respect to each, whether it is purchased or sold and the
originating unit; (f) loans or leases (including any commitments) by BCS or BBC
to any BCS or BBC director, officer at or above the senior vice president level,
or shareholder holding 10% or more of the capital stock of BCS, including with
respect to each such loan or lease the identity and, to the knowledge of BCS,
the relation of the borrower to BCS or BBC, and the outstanding and undrawn
amounts; (g) letters of credit (including the originating unit); (h) loans or
leases wholly or partially charged off during the previous month (including with
respect to each loan or lease, the originating amount, the write-off amount and
its originating unit); and (i) other real estate or assets acquired in
satisfaction of debt.
6.9 Applications. Subject to Section 7.5, BCS will promptly prepare or
------------
cause to be prepared the portions of the Proxy Statement and Prospectus as it
pertains to BCS or BBC and any other applications necessary to consummate the
transactions contemplated hereby, and further agrees to provide any information
requested by GBB for the preparation of any applications necessary to consummate
the transactions contemplated hereby. BCS shall afford GBB a reasonable
opportunity to review the portions of the Proxy Statement and Prospectus
pertaining to BCS or BBC and all such applications and all amendments and
supplements thereto before the filing thereof. BCS covenants and agrees that,
with respect to the information relating to BCS or BBC, the Proxy Statement and
Prospectus will comply in all material respects with the provisions of
applicable law, and will not contain any untrue statement of material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements
<PAGE>
contained therein, in light of the circumstances under which they were made, not
misleading. BCS will use its commercially reasonable efforts to obtain all
regulatory approvals or consents necessary to effect the Merger and the
transactions contemplated herein.
6.10 Affiliate Agreements. Concurrently with the execution of this
--------------------
Agreement, (a) BCS shall deliver to GBB a letter identifying all persons who are
then "affiliates" of BCS for purposes of ASR 130 and 135 and Rule 145 under the
Securities Act and (b) BCS shall advise the persons identified in such letter of
the resale restrictions imposed by applicable securities laws and shall use
reasonable efforts to obtain from each person identified in such letter a
written agreement substantially in the form attached hereto as Exhibit B. BCS
---------
shall use reasonable efforts to obtain from any person who becomes an affiliate
of BCS after BCS's delivery of the letter referred to above, and on or prior to
the date of the BCS Shareholders' Meeting to approve this Agreement, a written
agreement substantially in the form attached as Exhibit B hereto as soon as
---------
practicable after obtaining such status.
6.11 Coordination of Dividends. BCS shall coordinate with GBB the
-------------------------
declaration of any dividends that may be allowed pursuant to Section 6.1.2
hereof, and the record date and the payment dates relating thereto, it being the
intention of the parties that holders of BCS Stock shall not receive two
dividends, or fail to receive one dividend, for any applicable dividend period
with respect to their shares of BCS Stock and any shares of GBB Stock any such
holder will receive in exchange therefor in the Merger.
6.12 D&O Coverage. In the event that GBB is unable to have BCS's and
------------
BBC's directors and officers added to GBB's directors' and officers' liability
insurance policy pursuant to Section 7.2.4 hereof and upon GBB's request, BCS
shall use commercially reasonable efforts to obtain (i) coverage for a period of
at least 36 months following the Effective Time of the Merger for the directors
and officers of BCS and BBC under a directors' and officers' liability insurance
policy which is no less protective in terms of coverage or limitations than now
possessed by GBB covering acts or omissions occurring prior to the Effective
Time of the Merger and actions related to this Agreement, and (ii) coverage for
a period of at least 36 months following the Effective Time of the Merger under
a bankers' blanket bond which is no less protective in terms of coverage or
limitations than now possessed by BCS and BBC covering acts or omissions
occurring prior to the Effective Time of the Merger and actions related to this
Agreement.
ARTICLE 7.
COVENANTS OF GBB
----------------
PENDING EFFECTIVE TIME OF THE MERGER
------------------------------------
GBB covenants and agrees with BCS as follows:
7.1. Limitation on Conduct Prior to Effective Time of the Merger.
-----------------------------------------------------------
Between the date hereof and the Effective Time of the Merger, except as
contemplated by this Agreement and subject to requirements of law and regulation
generally applicable to bank holding companies and banks, each of GBB and its
subsidiaries shall not, without the prior written consent of BCS:
<PAGE>
7.1.1. take any action which would or is reasonably likely to (i)
adversely affect the ability of GBB to obtain any necessary approvals of any
Governmental Entity required for the transactions contemplated hereby; (ii)
adversely affect GBB's ability to perform its covenants and agreements under
this Agreement; or (iii) result in any of the conditions to the performance of
GBB's obligations hereunder, as set forth in Articles 9 or 11 herein not being
satisfied;
7.1.2. take or cause to be taken any action which would disqualify
the Merger as a "reorganization" within the meaning of Section 368 of the Code
or prevent GBB from accounting for the business combination to be effected by
the Merger as a pooling-of-interests;
7.1.3. amend its articles of incorporation in any respect which would
materially and adversely affect the rights and privileges attendant to the GBB
Stock;
7.1.4. subject to, upon advice of counsel, the continuing fiduciary
duties of the Board of Directors of GBB to the shareholders of GBB, enter into a
GBB Acquisition Transaction that includes, as a condition precedent to such GBB
Acquisition Transaction, the termination of this Agreement; provided, however,
that nothing herein shall prohibit BCS from terminating this Agreement pursuant
to Section 13.1.10; or
7.1.5. agree or make any commitment to take any actions prohibited by
this Section 7.1.
7.2. Affirmative Conduct of GBB and Subsidiaries Prior to Effective Time of
----------------------------------------------------------------------
the Merger. Between the date hereof and the Effective Time of the Merger, GBB
- ----------
shall:
7.2.1. duly observe and conform in all material respects to all
lawful requirements applicable to the business of GBB or any subsidiary of GBB;
7.2.2. use its commercially reasonable efforts to obtain any third
party consent with respect to any contract, agreement, lease, license,
arrangement, permit or release that is material to the business of GBB on a
consolidated basis and that is contemplated in this Agreement as required in
connection with the Merger;
7.2.3. not later than the 20th day of each calendar month, amend or
supplement the GBB Lists prepared and delivered pursuant to Article 5 to ensure
that the information set forth in the GBB Lists accurately reflects the then-
current status of GBB and its subsidiaries. GBB shall further amend or
supplement the GBB Lists as of the Closing Date if necessary to reflect any
additional information that needs to be included in the GBB Lists; and
7.2.4. use its commercially reasonable efforts to have BCS's and
BBC's directors and officers added to GBB's directors' and officers' liability
insurance policy, providing for coverage for a period of at least 36 months
following the Effective Time of the Merger and covering acts or omissions
occurring prior to the Effective Time of the Merger and actions related to this
Agreement.
<PAGE>
7.3. Access to Information. Upon reasonable request by BCS, GBB shall
---------------------
(i) make its Chief Operating Officer/Chief Financial Officer and Controller
available to discuss with BCS and its representatives GBB's operations; and (ii)
shall provide BCS with written information which is (a) similar to the written
information that BCS reviewed in connection with this Agreement, and (b) related
to GBB's business condition, operations and prospects on a consolidated basis.
No examination or review conducted under this section shall constitute a waiver
or relinquishment on the part of BCS of the right to rely upon the
representations and warranties made by GBB herein; provided, that BCS shall
disclose to GBB any fact or circumstance it may discover which BCS believes
renders any representation or warranty made by GBB hereunder incorrect in any
respect. BCS covenants and agrees that it and its representatives, counsel,
accountants, agents and employees will hold in strict confidence all documents
and information concerning GBB so obtained (except to the extent that such
documents or information are a matter of public record or require disclosure in
the Proxy Statement and Prospectus or any of the public information of any
applications required to be filed with any Governmental Entity to obtain the
approvals and consents required to effect the transactions contemplated hereby),
and if the transactions contemplated herein are not consummated, such confidence
shall be maintained and all such documents shall be returned to GBB.
7.4. Filings. GBB agrees that through the Effective Time of the Merger,
-------
each of its reports, registrations, statements and other filings required to be
filed with any applicable Governmental Entity will comply in all material
respects with all the applicable statutes, rules and regulations enforced or
promulgated by the Governmental Entity with which it will be filed and none will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Any
financial statement contained in any such report, registration, statement or
other filing that is intended to present the financial position of the entities
or entity to which it relates will fairly present the financial position of such
entities or entity and will be prepared in accordance with generally accepted
accounting principles or applicable banking regulations consistently applied
during the periods involved.
7.5. Applications. GBB will promptly prepare and file or cause to be
------------
prepared and filed (i) an application for approval of the Merger with the FRB;
(ii) an application for approval of the Merger with the DFI; (iii) in
conjunction with BCS, the Registration Statement on Form S-4 and the Proxy
Statement and Prospectus as it pertains to GBB; and (iv) any other applications
necessary to consummate the transactions contemplated hereby. GBB shall afford
BCS a reasonable opportunity to review the Proxy Statement and Prospectus and
all such applications and all amendments and supplements thereto before the
filing thereof. GBB covenants and agrees that the Registration Statement on
Form S-4 and the Proxy Statement and Prospectus and all applications to the
appropriate regulatory agencies for approval or consent to the Merger will
comply in all material respects with the provisions of applicable law, and with
respect to information relating to GBB or its subsidiaries, will not contain any
untrue statement of material fact or omit to state any material fact required to
be stated therein or necessary to make the statements contained therein, in
light of the circumstances under which they were made, not misleading. GBB will
use its commercially reasonable efforts to obtain all regulatory approvals or
consents necessary to effect the Merger.
<PAGE>
7.6. Blue Sky. GBB agrees to use commercially reasonable efforts to have
--------
the shares of GBB Stock to be issued in connection with the Merger qualified or
registered for offer and sale, to the extent required, under the securities laws
of each jurisdiction in which shareholders of BCS reside.
7.7. Notices; Reports. GBB will promptly notify BCS of any event of
----------------
which GBB obtains knowledge which has had or may have a material adverse affect
on the financial condition, operations, business or prospects of GBB on a
consolidated basis or in the event that GBB determines that it is unable to
fulfill any of the conditions to the performance of BCS's obligations hereunder,
as set forth in Articles 9 or 10 herein.
7.8. Removal of Conditions. In the event of the imposition of a
---------------------
condition to any regulatory approvals which GBB deems to materially adversely
affect it or to be materially burdensome, GBB shall use its commercially
reasonable efforts for purposes of obtaining the removal of such condition.
7.9. Stock Options.
-------------
7.9.1. At and as of the Effective Time of the Merger, GBB shall
assume each and every outstanding option to purchase shares of BCS Stock ("BCS
Stock Option") and all obligations of BCS under the BCS Stock Option Plans.
Each and every BCS Stock Option so assumed by GBB under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the BCS Stock Option Plans and in the other documents governing such BCS Stock
Option immediately prior to the Effective Time of the Merger, except that: (i)
such BCS Stock Option shall be exercisable for that number of whole shares of
GBB Stock equal to the product of (A) the number of shares of BCS Stock that
were purchasable under such BCS Stock Option immediately prior to the Effective
Time of the Merger multiplied by (B) the Conversion Ratio, rounded down to the
nearest whole number of shares of GBB Stock; and (ii) the per share exercise
price for the shares of GBB Stock issuable upon exercise of such BCS Stock
Option shall be equal to the quotient determined by dividing (A) the exercise
price per share of BCS Stock at which such BCS Stock Option was exercisable
immediately prior to the Effective Time of the Merger by (B) the Conversion
Ratio. Prior to the Effective Time of the Merger, GBB shall issue to each
holder of an outstanding BCS Stock Option a document evidencing the assumption
of such BCS Stock Option by GBB pursuant to this Section 7.9.
7.9.2. GBB shall comply with the terms of the BCS Stock Option Plans
and insure, to the extent required by, and subject to the provisions of, such
Plans, that BCS Stock Options which qualify as incentive stock options prior to
the Effective Time of the Merger qualify as incentive stock options of GBB after
the Effective Time of the Merger.
7.9.3. At or prior to the Effective Time of the Merger, GBB shall
take all corporate action necessary to reserve for issuance a sufficient number
of shares of GBB Stock for delivery upon exercise of GBB Stock Options assumed
by it in accordance with this Section 7.9.
<PAGE>
7.10 Reservation, Issuance and Registration of GBB Stock. GBB shall
---------------------------------------------------
reserve and make available for issuance in connection with the Merger and in
accordance with the terms and conditions of this Agreement such number of shares
of GBB Stock to be issued to the shareholders of BCS in the Merger pursuant to
Article 2 hereof.
7.11 Nasdaq Listing. GBB shall use its commercially reasonable efforts to
--------------
cause the shares of GBB Stock to be issued in the Merger to be approved for
listing on the Nasdaq National Market System, subject to official notice of
issuance, prior to the Effective Time of the Merger.
ARTICLE 8.
ADDITIONAL COVENANTS
--------------------
The parties hereto hereby mutually covenant and agree with each other as
follows:
8.1. Best Efforts. Subject to the terms and conditions of this
------------
Agreement, each party will use its best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement as promptly as practical.
8.2. Public Announcements. No press release or other public disclosure
--------------------
of matters related to this Agreement or any of the transactions contemplated
hereby shall be made by GBB or BCS unless the other party shall have provided
its prior consent to the form and substance thereof; provided, however, that
nothing herein shall be deemed to prohibit any party hereto from making any
disclosure which its counsel deems necessary or advisable in order to fulfill
such party's disclosure obligations imposed by law.
8.3. Environmental Assessment and Remediation. GBB may cause to be
----------------------------------------
prepared at GBB's sole cost and expense within 45 days of the date of this
Agreement one or more phase I environmental investigations with respect to the
Real Property set forth on the BCS Real Property List. In the event any such
phase I environmental investigation report, or any such report which BCS or BBC
has already obtained on any of the Real Property set forth on BCS's Real
Property List, discloses facts which, in the sole discretion of GBB, warrant
further investigation, GBB shall provide written notice to BCS, and BCS shall be
required to cause to be completed within 60 days of such written notice, at the
sole cost and expense of GBB, a phase II environmental investigation and report
with respect to such property. The consultant engaged by BCS to conduct such
investigation and provide such report shall be reasonably acceptable to GBB.
GBB shall have 10 days from the receipt of such investigation report to
reasonably object thereto, which objection shall be by written notice. In the
event of any such objection, GBB shall engage an environmental consultant
reasonably satisfactory to BCS who shall provide an estimate of the cost of
taking any remedial action recommended or suggested in such phase II
environmental investigation report, or which is required by law, or which is
determined to be prudent by GBB, in its sole discretion, and, unless the
estimated cost of such Remediation is in excess of $100,000 or is not reasonably
determinable by such consultant (and written notice thereof provided by BCS to
GBB) BCS shall immediately commence such Remediation, all at the sole cost and
expense of BCS. In the event such environmental consultant determines that
<PAGE>
the estimated cost of such remediation is in excess of $100,000 or is not
reasonably determinable, GBB shall have the right to terminate the Agreement
pursuant to Section 13.1.9 hereof before the expiration of 21 days from the date
of such written notice.
GBB agrees to keep confidential and not to disclose any nonpublic
information obtained in the course of such environmental investigation relating
to environmental contamination or suspected contamination of any property on the
BCS Real Property List, except as required by law.
ARTICLE 9.
CONDITIONS PRECEDENT TO THE MERGER
----------------------------------
The obligations of each of the parties hereto to consummate the
transactions contemplated herein are subject to the satisfaction, on or before
the Closing Date, of the following conditions:
9.1. Shareholder Approval. The Agreement and the transactions
--------------------
contemplated hereby shall have received all requisite approvals of the
shareholders of BCS.
9.2. No Judgments or Orders. No judgment, decree, injunction, order or
----------------------
proceeding shall be outstanding or threatened by any Governmental Entity which
prohibits or restricts the effectuation of, or threatens to invalidate or set
aside, the Merger substantially in the form contemplated by this Agreement,
unless counsel to the party against whom such action or proceeding was
instituted or threatened renders to the other parties hereto a favorable opinion
that such judgment, decree, injunction, order or proceeding is without merit.
9.3. Regulatory Approvals. To the extent required by applicable law or
--------------------
regulation, all approvals or consents of any Governmental Entity, including,
without limitation, those of the FRB and the DFI shall have been obtained or
granted for the Merger and the transactions contemplated hereby and the
applicable waiting period under all laws shall have expired. All other
statutory or regulatory requirements for the valid completion of the
transactions contemplated hereby shall have been satisfied.
9.4. Securities Laws. The Registration Statement on Form S-4 shall have
---------------
been declared effective by the SEC and shall not be the subject of any stop
order or proceedings seeking or threatening a stop order. GBB shall have
received all state securities or "Blue Sky" permits and other authorizations
necessary to issue the GBB Stock to consummate the Merger.
9.5. Listing. The GBB Stock issuable in the Merger shall have been
-------
included for listing on the Nasdaq National Market System.
9.6. Tax Opinions. GBB and BCS shall have received from Manatt, Phelps &
------------
Phillips, LLP an opinion reasonably satisfactory to GBB and BCS to the effect
that the Merger shall not result in the recognition of gain or loss for federal
income tax purposes to GBB or BCS, nor shall the issuance of the GBB Stock
result in the recognition of gain or loss by the holders of
<PAGE>
BCS Stock who receive such stock nor shall the substitution of options under
Section 7.9 result in any income or gain to the option holder or disqualify any
such options as incentive stock options in connection with the Merger, dated
prior to the date the Proxy Statement and Prospectus is first mailed to the
shareholders of BCS and GBB and such opinions shall not have been withdrawn or
modified in any material respect.
9.7. Pooling of Interests. Prior to the Effective Time of the Merger,
--------------------
GBB shall have received from PwC a written confirmation that the Merger will
qualify for pooling-of-interests accounting treatment. Additionally, prior to
the Effective Time of the Merger, Deloitte & Touche LLP shall have delivered a
letter to GBB to the effect that, as of the Effective Time of the Merger, no
conditions exist with respect to either BCS or BBC that would preclude
accounting for the Merger as a pooling-of-interests. In making their
determinations that the Merger will qualify for such treatment, PwC and Deloitte
& Touche LLP shall be entitled to assume that cash will be paid with respect to
all shares held of record by any holder of Dissenting Shares.
ARTICLE 10.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BCS
----------------------------------------------
All of the obligations of BCS to effect the transactions contemplated
hereby shall be subject to the satisfaction, on or before the Closing Date, of
the following conditions, any of which may be waived in writing by BCS:
10.1. Legal Opinion. BCS shall have received the opinion of Linda M.
-------------
Iannone, General Counsel of GBB, dated as of the Closing Date, and in form and
substance satisfactory to the counsel of BCS and BBC, to the effect that: (i)
GBB is a corporation validly existing under the laws of the State of California
with full corporate power and authority to enter into this Agreement and the
Agreement of Merger and to consummate the transactions contemplated hereby and
thereby; (ii) all corporate proceedings on the part of GBB necessary to be taken
in connection with the Merger in order to make the same effective have been duly
and validly taken; (iv) this Agreement and the Agreement of Merger have been
duly and validly authorized, executed and delivered on behalf of GBB and
constitute (subject to standard exceptions of enforceability arising from the
bankruptcy laws and rules of equity) valid and binding agreements of GBB; and
(v) the shares of GBB Stock to be issued in the Merger will, when issued, be
duly authorized, validly issued, fully paid and nonassessable.
10.2. Representations and Warranties; Performance of Covenants. All the
--------------------------------------------------------
covenants, terms and conditions of this Agreement to be complied with and
performed by GBB on or before the Closing Date shall have been complied with and
performed in all material respects. Each of the representations and warranties
of GBB contained in Article 5 hereof shall have been true and correct in all
material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects) on and as of the date of this Agreement and
(except to the extent such representations and warranties speak as of an earlier
date or for changes expressly contemplated by this
<PAGE>
Agreement) on and as of the Closing Date, with the same effect as though such
representations and warranties had been made on and as of the Closing Date. It
is understood and acknowledged that the representations being made on and as of
the Closing Date shall be made without giving effect to any update with respect
to the GBB Lists in accordance with Section 7.2.3.
10.3. Authorization of Merger. All actions necessary to authorize the
-----------------------
execution, delivery and performance of this Agreement and the Agreement of
Merger by GBB and the consummation of the transactions contemplated hereby and
thereby shall have been duly and validly taken by the Board of Directors of GBB,
as required by applicable law, and GBB shall have full power and right to merge
pursuant to the Agreement of Merger.
10.4. Absence of Certain Changes. Between the date of this Agreement
--------------------------
and the Effective Time of the Merger, there shall not have occurred any event
that has had or could reasonably be expected to have a material adverse effect
on the business, financial condition, results of operations or prospects of GBB
on a consolidated basis, whether or not such event, change or effect is
reflected in the GBB Lists as amended or supplemented after the date of this
Agreement.
10.5 Third Party Consents. GBB shall have obtained all consents of other
--------------------
parties to their respective mortgages, notes, leases, franchises, agreements,
licenses and permits as may be necessary to permit the Merger and the
transactions contemplated herein to be consummated without a material default,
acceleration, breach or loss of rights or benefits thereunder.
10.6 Officers' Certificate. There shall have been delivered to BCS on
---------------------
the Closing Date a certificate executed by the Chief Executive Officer and the
Chief Financial Officer of GBB certifying, to the best of their knowledge,
compliance with all of the provisions of Sections 10.2, 10.3, 10.4 and 10.5.
10.7 Fairness Opinion. BCS shall have received a letter from First
----------------
Security Van Kasper dated as of a date within five Business Days of the mailing
of the Proxy Statement and Prospectus to the shareholders of BCS, to the effect
that the consideration to be received in the Merger is fair from a financial
point of view to the shareholders of BCS.
ARTICLE 11.
CONDITIONS PRECEDENT TO
-----------------------
OBLIGATIONS OF GBB
------------------
All of the obligations of GBB to effect the transactions contemplated
hereby shall be subject to the satisfaction, on or before the Closing Date, of
the following conditions, any of which may be waived in writing by GBB:
11.1. Legal Opinion. GBB shall have received the opinion of Lillick &
-------------
Charles LLP, attorneys for BCS, and in form and substance satisfactory to the
counsel of GBB, to the effect that: (i) BCS is a corporation validly existing
under the laws of the State of California with full corporate power and
authority to enter into this Agreement and the Agreement of Merger and to
<PAGE>
consummate the transactions contemplated hereby and thereby; (ii) all corporate
proceedings on the part of BCS necessary to be taken in connection with the
Merger in order to make the same effective have been duly and validly taken; and
(iii) this Agreement and the Agreement of Merger have been duly and validly
authorized, executed and delivered on behalf of BCS, and constitute (subject to
standard exceptions of enforceability arising from the bankruptcy laws and rules
of equity) valid and binding agreements of BCS.
11.2. Representations and Warranties; Performance of Covenants. All the
--------------------------------------------------------
covenants, terms and conditions of this Agreement to be complied with and
performed by BCS at or before the Closing Date shall have been complied with and
performed in all material respects. Each of the representations and warranties
of BCS contained in Article 4 hereof shall have been true and correct in all
material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects) on and as of the date of this Agreement and
(except to the extent such representations and warranties speak as of an earlier
date or for changes expressly contemplated by this Agreement) on and as of the
Closing Date, with the same effect as though such representations and warranties
had been made on and as of the Closing Date. It is understood and acknowledged
that the representations being made on and as of the Closing Date shall be made
without giving effect to any update with respect to the BCS Lists in accordance
with Section 6.2.10.
11.3. Authorization of Merger. All actions necessary to authorize the
-----------------------
execution, delivery and performance of this Agreement and the Agreement of
Merger by BCS and the consummation of the transactions contemplated hereby and
thereby shall have been duly and validly taken by the Board of Directors and
shareholders of BCS, and BCS shall have full power and right to merge pursuant
to the Agreement of Merger.
11.4. Third Party Consents. BCS shall have obtained all consents of
--------------------
other parties to their respective mortgages, notes, leases, franchises,
agreements, licenses and permits as may be necessary to permit the Merger and
the transactions contemplated herein to be consummated without a material
default, acceleration, breach or loss of rights or benefits thereunder.
11.5. Absence of Certain Changes. Between the date of this Agreement
--------------------------
and the Effective Time of the Merger, there shall not have occurred any event
that has had or could reasonably be expected to have a material adverse effect
on the business, financial condition, results of operations or prospects of BCS
on a consolidated basis whether or not such event, change or effect is reflected
in the BCS Lists as amended or supplemented after the date of this Agreement.
11.6. Officers' Certificate. There shall have been delivered to GBB on
---------------------
the Closing Date a certificate executed by the Chief Executive Officer and the
Chief Financial Officer of BCS certifying, to the best of their knowledge,
compliance with all of the provisions of Sections 11.2, 11.3, 11.4 and 11.5.
11.7. Fairness Opinion. GBB shall have received a letter from Hovde
----------------
Financial Inc. dated as of a date within five Business Days of the mailing of
the Proxy Statement and
<PAGE>
Prospectus to the shareholders of BCS, to the effect that the transactions
contemplated by this Agreement are fair from a financial point of view to the
shareholders of GBB.
11.8. Shareholder's Agreements. Concurrently with the execution of this
------------------------
Agreement, each director of BCS and BBC shall have executed and delivered to GBB
agreements substantially in the form of Exhibit D hereto.
---------
11.9. Agreements Not to Compete. Concurrently with the execution of
-------------------------
this Agreement, the directors of BCS and BBC shall have executed and delivered
to GBB agreements substantially in the form of Exhibit C hereto.
---------
11.10. Affiliates Agreements. Concurrently with the execution of this
---------------------
Agreement, GBB shall have received from each person named in the letter or
otherwise referred to in Section 6.10 an executed copy of an agreement
substantially in the form on Exhibit B hereto.
---------
11.11. Employee Benefit Plans. GBB shall have received satisfactory
----------------------
evidence that all of BCS's employee benefit plans, programs and arrangements,
including, without limitation, the BCS 401(k) Plan, have been treated as
provided in Article 12 of this Agreement.
11.12. Dissenting Shares. BCS Perfected Dissenting Shares shall
-----------------
constitute less than 9% of the outstanding shares of BCS Stock.
11.13. Remediation. All remediation of environmental contamination or
-----------
conditions on any BCS Property shall have been completed to the satisfaction of
GBB.
11.14. BCS Fully Diluted Book Value Per Share. At least five Business
--------------------------------------
Days prior to the Effective Time of the Merger, BCS shall provide GBB with BCS's
consolidated financial statements as of the close of business on the last day of
the month prior to the Effective Time of the Merger. Such financial statements
shall have been prepared in all material respects in accordance with generally
accepted accounting principles and other applicable legal and accounting
requirements, and reflect all period-end accruals and other adjustments. At the
close of business on the last day of the month preceding the Effective Time of
the Merger, after giving effect to any dividends paid pursuant to Section 6.1.2
hereof, the BCS Fully Diluted Book Value Per Share, as determined in accordance
with such financial statements, shall be not less than $8.74.
11.15. Termination of BCS Stock Option Plans. GBB shall have received
-------------------------------------
satisfactory evidence that the BCS Stock Option Plans have been terminated prior
to the Effective Time of the Merger.
<PAGE>
ARTICLE 12.
EMPLOYEE BENEFITS
-----------------
12.1 Employee Benefits. GBB intends to merge the BCS 401(k) Plan with
-----------------
and into the GBB 401(k) Plan as soon as administratively feasible after the
Effective Time of the Merger. In no event shall the BCS 401(k) Plan be merged
with and into the GBB 401(k) Plan, however, unless GBB determines, in its sole
discretion, that: (i) the BCS 401(k) Plan is a qualified plan under Section
401(a) of the Code, both as to the form of the BCS 401(k) Plan and as to its
operation; and (ii) there are no facts in existence that would be reasonably
likely to adversely affect the qualified status of the BCS 401(k) Plan. This
analysis shall be made prior to the Effective Time of the Merger and, if the
above determinations are made, the BCS 401(k) Plan shall be merged with and into
the GBB 401(k) Plan as soon as administratively feasible after the Effective
Time of the Merger. If GBB determines in its sole discretion not to merge the
BCS 401(k) Plan into the GBB 401(k) Plan, BCS agrees to use its best efforts to
have the BCS 401(k) Plan qualified prior to the Effective Time of the Merger.
As soon as practicable after the Effective Time of the Merger, all other
Employee Plans will be discontinued or merged into GBB plans, in the discretion
of GBB, and employees of BCS and BBC shall become eligible for the employee
benefit plans of GBB on the same terms as such plans and benefits are generally
offered from time to time to employees of GBB and its subsidiaries in comparable
positions with GBB or its subsidiaries. For purposes of determining such
employment eligibility and vesting under the employee benefit plans of GBB, GBB
shall recognize such employees' years of service with BCS or BBC beginning on
the date such employees commenced employment with BCS or BBC through the
Effective Time of the Merger.
ARTICLE 13.
TERMINATION
-----------
13.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Effective Time of the Merger upon the occurrence of any of the following:
13.1.1. By mutual agreement of the parties, in writing;
13.1.2. By BCS (unless BCS's Board of Directors shall have withdrawn
or modified in a manner adverse to GBB in any respect its recommendation of the
Merger to the holders of BCS Stock) or GBB immediately upon the failure of the
shareholders of BCS to give the requisite approval of this Agreement;
13.1.3. By BCS immediately upon expiration of 20 days from delivery
of written notice by BCS to GBB of GBB's breach of or failure to satisfy any
covenant or agreement contained herein resulting in a material impairment of the
benefit reasonably expected to be derived by BCS from the performance or
satisfaction of such covenant or agreement (provided that such breach has not
been waived by BCS or cured by GBB prior to expiration of such 20 day period);
<PAGE>
13.1.4. By GBB immediately upon expiration of 20 days from delivery
of written notice by GBB to BCS of BCS's breach of or failure to satisfy any
covenant or agreement contained herein resulting in a material impairment of the
benefit reasonably expected to be derived by GBB from the performance or
satisfaction of such covenant or agreement (provided that such breach has not
been waived by GBB or cured by BCS prior to expiration of such 20 day period);
13.1.5. By BCS or GBB upon the expiration of 30 days after any
Governmental Entity denies or refuses to grant any approval, consent or
authorization required to be obtained in order to consummate the transactions
contemplated by this Agreement unless, within said 30 day period after such
denial or refusal, all parties hereto agree to resubmit the application or
appeal the decision to the regulatory authority that has denied, or refused to
grant the approval, consent or qualification requested;
13.1.6. By BCS or GBB if any conditions set forth in Article 9 shall
not have been met by December 31, 1999; provided, however, that this Agreement
shall not be terminated pursuant to this Section 13.1.6 if the relevant
condition shall have failed to occur as a result of any act or omission of the
party seeking to terminate;
13.1.7. By BCS if any of the conditions set forth in Article 10 shall
not have been met, or by GBB if any of the conditions set forth in Article 11
shall not have been met, by December 31, 1999, or such earlier time as it
becomes apparent that such condition shall not be met, provided, however, that
this Agreement shall not be terminated pursuant to this Section 13.1.7 if the
relevant condition shall have failed to occur as a result of any act or omission
of the party seeking to terminate;
13.1.8. By GBB if BCS shall have failed to act or refrained from
doing any act pursuant to Section 6.1.14;
13.1.9. By GBB under the circumstances set forth in Section 8.3;
13.1.10. By BCS if GBB shall have taken any act or refrained from
taking any act pursuant to Section 7.1.4; or
13.1.11. By BCS if the Average Closing Price is less than $25.50,
subject to GBB's right to elect to exercise the Top Up Option as provided in
Section 2.2.1(c).
13.2. Effect of Termination. In the event of termination of this
---------------------
Agreement by either BCS or GBB as provided in Section 13.1, neither BCS nor GBB
shall have any further obligation or liability to the other party except (a)
with respect to the last sentences of each of Section 6.3.1, Section 7.3 and
Section 8.3, (b) with respect to Sections 14.1 and 14.2, and (c) to the extent
such termination results from a party's willful and material breach of the
warranties and representations made by it, or willful and material failure in
performance of any of its covenants, agreements or obligations hereunder.
<PAGE>
13.3. Force Majeure. BCS and GBB agree that, notwithstanding anything
-------------
to the contrary in this Agreement, in the event this Agreement is terminated as
a result of a failure of a condition, which failure is due to a natural disaster
or other act of God, or an act of war, and provided neither party has materially
failed to observe the obligations of such party under this Agreement, neither
party shall be obligated to pay to the other party to this Agreement any
expenses or otherwise be liable hereunder.
ARTICLE 14.
MISCELLANEOUS
-------------
14.1. Expenses.
--------
14.1.1. GBB hereby agrees that if this Agreement is terminated by BCS
pursuant to Section 13.1.3, GBB shall promptly and in any event within 10 days
after such termination pay BCS all Expenses (as defined in Section 14.1.4 below)
of BCS, but not to exceed $150,000.
14.1.2. BCS hereby agrees that if the Agreement is terminated by GBB
or BCS pursuant to Section 13.1.2 with respect to the failure of BCS
shareholders to approve the Agreement and the transactions contemplated hereby,
or by GBB pursuant to Section 13.1.4 or Section 13.1.8, BCS shall promptly and
in any event within 10 days after such termination pay GBB all Expenses of GBB,
but not to exceed $250,000.
14.1.3. Except as otherwise provided herein, all Expenses incurred by
GBB and BCS in connection with or related to the authorization, preparation and
execution of this Agreement, the solicitation of shareholder approvals and all
other matters related to the closing of the transactions contemplated hereby,
including, without limitation of the generality of the foregoing, all fees and
expenses of agents, representatives, counsel and accountants employed by either
such party or its affiliates, shall be borne solely and entirely by the party
which has incurred the same. Notwithstanding the foregoing, GBB and BCS shall
share equally the cost of printing the Proxy Statement and Prospectus.
14.1.4 "Expenses" as used in this Agreement shall include all
reasonable out-of-pocket expenses (including all fees and expenses of attorneys,
accountants, investment bankers, experts and consultants to the party and its
affiliates) incurred by the party or on its behalf in connection with the
consummation of the transactions contemplated by this Agreement.
14.2. Transaction Fees.
----------------
14.2.1 As an inducement to GBB to enter into this Agreement, in the
event this Agreement is terminated by GBB because of a failure by BCS to comply
with its obligations under Section 6.1.14, or if BCS or BBC otherwise
consummates a Competing Transaction prior to termination of this Agreement or
during the 12-month period following termination of this Agreement, in addition
to the Expenses payable to GBB under Section 14.1.2, BCS shall wire to GBB
within three Business Days of demand, or shall cause the third party to such a
Competing
<PAGE>
Transaction to wire to GBB within three Business Days of demand, the sum of
$1,750,000, which sum the parties acknowledge as representing (i) GBB's direct
costs and expenses (including, but not limited to, fees and expenses of
financial or other consultants, printing costs, accountants, and counsel)
incurred in negotiating and undertaking to carry out the transactions
contemplated by this Agreement, including GBB's management time devoted to
negotiation and preparation for the transactions contemplated by this Agreement;
(ii) GBB's indirect costs and expenses incurred in connection with the
transactions contemplated by this Agreement; and (iii) GBB's loss as a result of
the transactions contemplated by this Agreement not being consummated. Any
payment previously made by BCS pursuant to Section 14.1.2 hereof shall be
credited against any amount due under this Section.
14.2.2. As an inducement to BCS to enter into this Agreement, in the
event this Agreement is terminated by BCS because of a failure by GBB to comply
with its obligations under Section 7.1.4, or if GBB consummates a GBB
Acquisition Transaction within 12 months following the termination by GBB of
this Agreement other than pursuant to Section 13.1, in addition to the Expenses
payable to BCS under Section 14.1.1, GBB shall wire to BCS within three Business
Days of demand, or shall cause the third party to a GBB Acquisition Transaction
as described in Section 7.1.4, to wire to BCS within three Business Days of
demand, the sum of $1,500,000, which sum the parties acknowledge as representing
(i) BCS's direct costs and expenses (including, but not limited to, fees and
expenses of financial or other consultants, printing costs, accountants, and
counsel) incurred in negotiating and undertaking to carry out the transactions
contemplated by this Agreement, including BCS's management time devoted to
negotiation and preparation for the transactions contemplated by this Agreement;
(ii) BCS's indirect costs and expenses incurred in connection with the
transactions contemplated by this Agreement; and (iii) BCS's loss as a result
of the transactions contemplated by this Agreement not being consummated. Any
payment previously made by GBB pursuant to Section 14.1.1 hereof shall be
credited against any amount due under this Section.
14.3 Notices. Any notice, request, instruction or other document to be
-------
given hereunder by any party hereto to another shall be in writing and delivered
personally or by confirmed facsimile transmission or sent by registered or
certified mail, postage prepaid, with return receipt requested, addressed as
follows:
To GBB: Greater Bay Bancorp
2860 West Bayshore Road
Palo Alto, California 94303
Attention: Steven C. Smith
Facsimile Number: (415) 494-9220
With a copy to: Greater Bay Bancorp
400 Emerson Street, 3rd Floor
Palo Alto, California 94301
Attention: Linda M. Iannone, Esq.
Facsimile Number: (650) 473-9419
<PAGE>
To BCS: Bay Commercial Services
1495 East 14th Street
San Leandro, California 94577
Attention: Richard M. Kahler
Facsimile Number: (510) 357-1677
With a copy to: Lillick & Charles LLP
Two Embarcadero Center, Suite 2700
San Francisco, California 94111
Attention: Steven M. Plevin, Esq.
Facsimile Number: (415) 984-8300
Any such notice, request, instruction or other document shall be deemed
received (i) on the date delivered personally or delivered by confirmed
facsimile transmission, (ii) on the next Business Day after it was sent by
overnight courier, postage prepaid; or (iii) on the third Business Day after it
was sent by registered or certified mail, postage prepaid. Any of the persons
shown above may change its address for purposes of this section by giving notice
in accordance herewith.
14.4. Successors and Assigns. All terms and conditions of this
----------------------
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective transferees, successors and assigns; provided,
however, that this Agreement and all rights, privileges, duties and obligations
of the parties hereto may not be assigned or delegated by any party hereto and
any such attempted assignment or delegation shall be null and void.
14.5. Counterparts. This Agreement and any exhibit hereto may be
------------
executed in one or more counterparts, all of which, taken together, shall
constitute one original document and shall become effective when one or more
counterparts have been signed by the appropriate parties and delivered to each
party hereto.
14.6. Effect of Representations and Warranties. The representations and
----------------------------------------
warranties contained in this Agreement or in any List shall terminate
immediately after the Effective Time of the Merger.
14.7. Third Parties. Each party hereto intends that this Agreement
-------------
shall not benefit or create any right or cause of action to any person other
than parties hereto. As used in this Agreement the term "parties" shall refer
only to GBB and BCS as the context may require.
14.8. Lists; Exhibits; Integration. Each List, exhibit and letter
----------------------------
delivered pursuant to this Agreement shall be in writing and shall constitute a
part of the Agreement, although Lists and letters need not be attached to each
copy of this Agreement. This Agreement, together with such Lists, exhibits and
letters, constitutes the entire agreement between the parties pertaining to the
subject matter hereof and supersedes all prior agreements and understandings of
the parties in connection therewith.
<PAGE>
14.9. Knowledge. Whenever any statement herein or in any list,
---------
certificate or other document delivered to any party pursuant to this Agreement
is made "to the knowledge" or "to the best knowledge" of any party or another
Person, such party or other Person shall make such statement only after
conducting an investigation reasonable under the circumstances of the subject
matter thereof, and each such statement shall constitute a representation that
such investigation has been conducted.
14.10 Governing Law. This Agreement is made and entered into in the
-------------
State of California, except to the extent that the provisions of federal law are
mandatorily applicable, and the laws of the State of California shall govern the
validity and interpretation hereof and the performance of the parties hereto of
their respective duties and obligations hereunder.
14.11. Captions. The captions contained in this Agreement are for
--------
convenience of reference only and do not form a part of this Agreement and shall
not affect the interpretation hereof.
14.12. Severability. If any portion of this Agreement shall be deemed
------------
by a court of competent jurisdiction to be unenforceable, the remaining portions
shall be valid and enforceable only if, after excluding the portion deemed to be
unenforceable, the remaining terms hereof shall provide for the consummation of
the transactions contemplated herein in substantially the same manner as
originally set forth at the date this Agreement was executed.
14.13. Waiver and Modification; Amendment. No waiver of any term,
----------------------------------
provision or condition of this Agreement, whether by conduct or otherwise, in
any one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such term, provision or condition of this Agreement.
Except as otherwise required by law, this Agreement and the Agreement of Merger,
when executed and delivered, may be modified or amended by action of the Boards
of Directors of GBB and BCS without action by their respective shareholders.
This Agreement may be modified or amended only by an instrument of equal
formality signed by the parties or their duly authorized agents.
14.14 Attorneys' Fees. If any legal action or any arbitration upon
---------------
mutual agreement is brought for the enforcement of this Agreement or because of
an alleged dispute, controversy, breach, or default in connection with this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs and expenses incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have duly executed this
Agreement as of the day and year first above written.
ATTEST: GREATER BAY BANCORP
/s/ Linda M. Iannone By: /s/ David L. Kalkbrenner
- -------------------- ------------------------
Secretary David L. Kalkbrenner
President and Chief Executive Officer
ATTEST: BAY COMMERCIAL SERVICES
/s/ Randall D. Greenfield By: /s/ Richard M. Kahler
- ------------------------- ---------------------
Secretary Richard M. Kahler
President and Chief Executive Officer
<PAGE>
ANNEX B
Fairness Opinion of First Security Van Kasper
Dated July , 1999
<PAGE>
Annex B
July __, 1999
Members of the Board of Directors
Bay Commercial Services
1495 East 14th Street
San Leandro, CA 94577
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the shareholders of Bay Commercial Services ("Bay
Commercial") of the Conversion Ratio as defined in Section 2.2.1 of the
Agreement and Plan of Reorganization dated as of April 30, 1999 (the
"Agreement"), in the proposed merger (the "Merger") of Greater Bay Bancorp
("Greater Bay") and Bay Commercial. On the Effective Date (as such term is
defined in the Agreement), each share of Bay Commercial Common Stock will be
converted into the right to receive 0.7134 shares of Greater Bay Common Stock
subject to adjustment as defined in the Agreement.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) certain publicly available financial and
other data with respect to Greater Bay and Bay Commercial, including
consolidated financial statements for recent years and interim periods to
December 31, 1998; (iii) certain other publicly available financial and other
information concerning Greater Bay and Bay Commercial and the trading markets
for the publicly traded securities of Greater Bay and Bay Commercial; (iv)
publicly available information concerning other banks and bank holding
companies, the trading markets for their securities and the nature and terms of
certain other merger transactions we believed relevant to our inquiry; and (v)
evaluations and analyses prepared and presented to the Board of Directors of Bay
Commercial or a committee thereof in connection with the Merger. We have held
discussions with senior management of Greater Bay and Bay Commercial concerning
the companies' past and current operations, financial condition and prospects.
We have reviewed with the senior management of Bay Commercial earnings
projections for Bay Commercial as a stand-alone entity, assuming the Merger does
not occur. We have also reviewed earnings projections for Greater Bay as a
stand-alone entity, assuming the Merger does not occur as well as securities
industry consensus estimates of projected earnings per share from published
sources for Greater Bay as a stand-alone entity. Certain financial projections
for the combined companies and for Bay Commercial and Greater Bay as stand-alone
entities were derived by us based partially upon the projections and information
described above, as well as our own assessment of general economic, market and
financial conditions.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied on advice of counsel
and independent accountants as to all legal and financial reporting matters with
respect to Greater Bay, Bay Commercial, the Merger and the Agreement. We have
relied upon the
<PAGE>
Bay Commercial Services
July __, 1999
Page 2
managements of Bay Commercial and Greater Bay as to the reasonableness of the
financial and operating forecasts, projections and projected operating cost
savings (and the assumptions and bases therefor) provided to us, and we have
assumed that such forecasts, projections and projected operating cost savings
reflect the best currently available estimates and judgments of the applicable
managements. We have also assumed, without assuming any responsibility for the
independent verification of same, that the aggregate allowances for loan
losses for Bay Commercial and Greater Bay are adequate to cover such losses.
We have not made or obtained any evaluations or appraisals of the property of
Bay Commercial or Greater Bay, nor have we examined any individual loan credit
files. For purposes of this opinion, we have assumed that the Merger will have
the tax, accounting and legal effects (including, without limitation, that the
Merger will be accounted for as a pooling of interests) described in the
Merger Agreement. Our opinion as expressed herein is limited to the fairness,
from a financial point of view, to the holders of the Common Stock of Bay
Commercial of the Conversion Ratio in the Merger and does not address Bay
Commercial's underlying business decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of Bay
Commercial and Greater Bay, including interest income, interest expense, net
interest income, net interest margin, provision for loan losses, non-interest
income, non-interest expense, earnings, dividends, internal capital generation,
book value, intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
Bay Commercial and for Greater Bay; (ii) the assets and liabilities of Bay
Commercial and Greater Bay, including the loan, investment and mortgage
portfolios, deposits, other liabilities, historical and current liability
sources and costs and liquidity; and (iii) the nature and terms of certain other
merger transactions involving banks and bank holding companies. We have also
taken into account our assessment of general economic, market and financial
conditions and our experience in other transactions, as well as our experience
in securities valuation and our knowledge of the banking industry generally. Our
opinion is necessarily based upon conditions as they exist and can be evaluated
on the date hereof and the information made available to us through the date
hereof.
It is understood that this letter is for the information of the Board of
Directors of Bay Commercial. This letter does not constitute a recommendation to
the Board of Directors or to any shareholder of Bay Commercial with respect to
any approval of the Merger.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Conversion Ratio in the Merger is fair,
from a financial point of view, to the holders of the Common Stock of Bay
Commercial.
Very truly yours,
First Security Van Kasper
<PAGE>
ANNEX C
Selected Provisions of the California General Corporation Law
Regarding Dissenters' Rights
<PAGE>
CALIFORNIA CORPORATIONS CODE, SECTIONS 1300--1304
Section 1300. Right to Require Purchase--"Dissenting Shares" and "Dissenting
Shareholder" Defined.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are
dissenting shares as defined in subdivision (b). The fair market value shall be
determined as of the day before the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-
form merger either (A) listed on any national securities exchange certified
by the Commissioner of Corporations under subdivision (o) of Section 25100
or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
Section 1301. Demand for Purchase.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any
C-1
<PAGE>
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be
the fair market value of those shares as of the day before the announcement of
the proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
Section 1302. Endorsement of Shares.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
Section 1303. Agreed Price--Time for Payment.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
Section 1304. Dissenter's Action to Enforce Payment.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
C-2
<PAGE>
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting shares
is in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
C-3
<PAGE>
ANNEX D
Bay Commercial Services Annual Report
on Form 10-KSB, as amended by Form 10-KSB/A
For the Year Ended December 31, 1998
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________
Commission File Number: 0-12231
BAY COMMERCIAL SERVICES
-----------------------
(Name of small business issuer in its charter)
California 77-2760444
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1495 East 14th Street, San Leandro, California 94577
- ---------------------------------------------- ---------
(Address of principal executive offices) (Zip code)
--------
Issuer's telephone number (510) 357-2265
--------------
Securities registered under Section 12(b) of the Exchange Act: NONE
----
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
--------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $ 11,141,000
------------
State the aggregate market value of the voting and nonvoting common equity
held by nonaffiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of March 10, 1999: $ 12,851,181
------------
State the number of shares of Common Stock outstanding as of March 10, 1999:
1,194,435
- ---------
<TABLE>
<CAPTION>
Documents Incorporated by Reference: Part of Form 10-KSB
- ----------------------------------- -------------------
<S> <C>
1998 Annual Report to Shareholders for Part II, Items 5, 6 and 7
fiscal year ended December 31, 1998
Proxy Statement for 1999 Annual Meeting of Part III, Items 9, 10, 11
Shareholders to be filed pursuant to and 12
Regulation 14A.
</TABLE>
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ITEM 1 - DESCRIPTION OF BUSINESS .................................... 1
ITEM 2 - DESCRIPTION OF PROPERTY ..................................... 29
ITEM 3 - LEGAL PROCEEDINGS ........................................... 30
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 30
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .... 30
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ... 30
ITEM 7 - FINANCIAL STATEMENTS ........................................ 30
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ......................... 30
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
ITEM 10 - EXECUTIVE COMPENSATION ...................................... 31
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 31
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 31
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K ............................ 32
</TABLE>
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
General
Bay Commercial Services (the "Company") is a California corporation and a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on June 7, 1981. Bay Bank of Commerce (the
"Bank"), was incorporated as a California banking corporation on August 11, 1980
and became a wholly-owned subsidiary of the Company through a reorganization in
1983.
Certain matters discussed or incorporated by reference in this Annual
Report on Form 10-KSB including, but not limited to, those described in "ITEM 6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among others, (1) significant
increases in competitive pressure in the banking industry; (2) changes in the
interest rate environment reduce margins; (3) general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality; (4) changes in the
regulatory environment; (5) changes in business conditions and inflation; (6)
changes in securities markets; and (7) the effect of the Year 2000 phenomenon on
the Company and the Bank and their providers, vendors and customers. Therefore,
the information set forth in such forward-looking statements should be carefully
considered when evaluating the business prospects of the Company and the Bank.
At present, the Company's principal business is conducted through the Bank.
At December 31, 1998, the Company had total consolidated assets of $144,202,000.
The Bank accounted for $144,086,000, or virtually all, of the total assets of
the Company. The Company's primary source of income, other than its equity in
the undistributed earnings of the Bank, is the receipt of dividends and rent
from the Bank. The Bank is a full service commercial bank serving the cities of
San Leandro and Hayward, in Alameda County, and the city of San Ramon, in Contra
Costa County, and the surrounding areas in California. The Company itself does
not engage in any business activities other than the ownership of the Bank, nor
does it own any other subsidiaries. The Company regularly reviews options to
expand the operations of the Bank and may seek opportunities for acquiring or
forming other banks and non-banking subsidiaries.
The Company is regulated by the Federal Reserve Board (the "FRB") and,
pursuant to that authority, is examined periodically by the Federal Reserve Bank
of San Francisco.
BAY BANK OF COMMERCE - GENERAL BANKING SERVICES
At December 31, 1998, the Bank had total assets of $144,086,000, total
loans of $93,129,000 (including loans held for sale) and total deposits of
$123,678,000. The Bank provides a wide range of commercial banking services to
individuals, professionals, and small and medium-sized businesses through its
principal office in San Leandro, California and its branch offices in Hayward
and San Ramon, California. In order to attract these types of customers, the
Bank offers personalized services and banking convenience. The services provided
include checking, interest checking, savings and interest-bearing demand, money
market and other time deposit accounts; commercial, real estate and consumer
loans; travelers' checks; safe deposit boxes, collection services, night
depository facilities and wire and telephone transfers. The Bank is a member of
the Federal Deposit Insurance Corporation (the "FDIC") and the deposits of each
depositor are insured up to $100,000. The Bank is not a member of the Federal
Reserve System. Professional firms and individuals and businesses form the core
of the Bank's customer and deposit base.
The Bank is a PLP lender under the Small Business Administration ("SBA")
and has offered SBA loans since 1985. Total SBA loan fundings in 1998 were
$1,157,000.
1
<PAGE>
EXISTING LOCATIONS
The Bank's headquarters are located at 1495 East 14th Street, San Leandro,
California and the Bank operates two branch offices located at 1030 La Playa
Drive, Hayward, California and at 2821 Crow Canyon Road, San Ramon, California.
The Bank also has an extension office located at 1500 Washington Avenue, San
Leandro, California, which houses its SBA and construction loan divisions. The
Bank currently has no branch applications pending or any plans to open
additional branch offices.
DEPOSITS
Most of the Bank's deposits are obtained from individuals, professionals
and small and medium-sized businesses. As of December 31, 1998, the Bank had a
total of 4,522 accounts representing 1,924 noninterest-bearing demand deposit
(checking) accounts with an average balance of approximately $18,000 each; 1,697
savings, interest-bearing demand, and money market accounts with an average
balance of approximately $22,000 each; and 901 time accounts with an average
balance of approximately $58,000 each.
LENDING ACTIVITIES
The Bank concentrates its lending activities in the areas of commercial
real estate mortgage loans, commercial loans to businesses and individuals and
real estate construction loans. At December 31, 1998, commercial real estate
mortgage loans accounted for 47%, commercial loans accounted for 26%, real
estate construction loans accounted for 17%, real estate equity loans accounted
for 6%, consumer installment and other loans accounted for 3% and SBA loans held
for sale accounted for 1% of the Bank's loan portfolio. See "Selected
Statistical Information -- Loan Portfolio" herein for information concerning the
composition of the Bank's loan portfolio, maturities and sensitivity to changes
in interest rates in the loan portfolio and non-performing assets. The interest
rates charged by the Bank vary with the degree of risk and the size and maturity
of the loans involved and are generally affected by competition, governmental
regulation and current market interest rates.
Except as described in the discussion which accompanies TABLE F, SUMMARY OF
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS, the Bank's loan portfolio is not
concentrated in any one category and includes loans to individuals, partnerships
and corporations for diverse purposes.
At December 31, 1998, the Bank had total loans outstanding of $93,129,000,
net of deferred loan fees. Inherent in the lending function is the fact that
loan losses will be experienced and that the risk of loss will vary with the
type of loan being made and the creditworthiness of the borrower over the term
of the loan. To reflect currently perceived risks of loss associated with its
loan portfolio, adjustments are made to the Bank's allowance for loan losses. At
December 31, 1998, the Bank's allowance for loan losses was $980,000 or 1.1% of
total loans. See "Selected Statistical Information -- Summary of Loan Loss
Experience" herein for a discussion of management's policy for establishing and
maintaining the allowance for loan losses.
CORRESPONDENT BANKS
The Bank has correspondent relationships with Union Bank of California and
Bank of America, N.T.& S.A, Chase Manhattan Bank, Pacific Coast Bankers Bank,
and the Federal Home Loan Bank of San Francisco. These relationships are a
result of the Bank's efforts to obtain a wide range of services for the Bank and
its customers, including arranging loan participations, investment services,
sale and purchase of federal funds (overnight interbank loans), collateralized
borrowing lines, and obtaining lines for letters of credit. As a net seller of
funds, the Bank also maintains such correspondent relationships to minimize the
risk of undue concentration of its resources with a few institutions. The Bank
does not currently serve, nor does it have plans to serve, as a correspondent to
other banks.
2
<PAGE>
EMPLOYEES
At December 31, 1998, the Company employed forty-five (45) full-time
employees and fifteen (15) part-time employees.
SELECTED STATISTICAL INFORMATION
The following tables present certain consolidated statistical information
concerning the business of the Company and the Bank. This information should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1998 Annual Report to Shareholders (the
"Annual Report"), which have been incorporated herein by reference.
DISTRIBUTION OF ASSETS, LIABILITIES AND
STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
TABLE A sets forth the Company's consolidated average balance sheets for
the years ended December 31, 1998 and 1997 and an analysis of interest rates and
the interest rate differential.
TABLE B sets forth the changes in interest income and interest expense in
1998 and 1997 resulting from changes in volume and changes in rates.
SECURITIES PORTFOLIO
TABLE C sets forth the carrying value of securities available for sale
(fair value) and of securities held to maturity (amortized cost) at December 31,
1998 and 1997 and the maturities and weighted average yield of securities based
on amortized cost at December 31, 1998.
LOAN PORTFOLIO
TABLE D sets forth the composition of the loan portfolio at December 31,
1998 and 1997.
TABLE E sets forth maturities and sensitivity to changes in interest rates
in the loan portfolio, excluding real estate mortgage loans, installment loans
and lease financing, at December 31, 1998.
TABLE F shows the composition of nonaccrual, past due and restructured
loans at December 31, 1998 and 1997. Accompanying TABLE F is a discussion of the
Company's policy for placing loans on nonaccrual status.
SUMMARY OF LOAN LOSS EXPERIENCE
TABLE G sets forth an analysis of loan loss experience as of and for the
years ended December 31, 1998 and 1997.
Accompanying TABLE G is a description of the factors which influenced
management's judgment in determining the amount of the additions to the
allowance charged to operating expense in each fiscal year, a table showing the
allocation of the allowance for loans losses, as well as a discussion of
management's policy for establishing and maintaining the allowance for loan
losses.
DEPOSITS
TABLE H sets forth the average amount of and the average rate paid on major
deposit categories for the years ended December 31, 1998 and 1997.
3
<PAGE>
TABLE I sets forth the maturity of time certificates of deposit of $100,000
or more and other time deposits of $100,000 or more at December 31, 1998.
RETURN ON EQUITY AND ASSETS
TABLE J sets forth certain financial ratios for the years ended December
31, 1998 and 1997.
4
<PAGE>
TABLE A
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
-------------------------------------------------------------
The following table sets forth the Company's consolidated average assets,
liabilities and shareholders' equity; interest income earned and interest
expense paid; and the average yields earned or rates paid thereon for the years
ended December 31, 1998 and 1997. The average balances are averages of daily
balances.
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balances Expense Rate Balances Expense Rate
-------- ------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities (amortized cost):
Taxable $23,750 $1,392 5.86% $ 18,396 $1,131 6.15%
Tax-exempt(l) 5,395 403 7.47 3,874 297 7.67
------- ----- ----- -------- ------ -----
Total securities 29,145 1,795 6.16 22,270 1,428 6.41
Federal funds sold and securities
purchased under repurchase agreements 6,438 355 5.51 5,338 288 5.40
Loans(2)(3) 81,091 8,177 10.08 69,824 7,137 10.22
------- ----- ----- -------- ------ -----
Total interest-earning assets(l) 116,674 10,327 8.85 97,432 8,853 9.09
Less allowance for loan losses (938) (977)
Nonaccrual loans 263 393
Cash and due from banks 7,712 6,963
Premises and equipment 2,022 2,205
Other assets 977 1,072
-------- --------
TOTAL ASSETS $126,710 $107,088
======== ========
Average earning loans/average
earning assets 69.5% 71.7%
===== =====
</TABLE>
5
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
-------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balances Expense Rate Balances Expense Rate
-------- ------- ---- -------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Savings and interest-bearing demand $ 34,876 $1,045 3.00% $ 25,893 $ 708 2.73%
Time 30,027 1,495 4.98 30,626 1,588 5.19
Certificates of deposit, $100
and over 16,185 866 5.35 9,974 564 5.65
Other borrowed funds 1,478 73 4.94 1,894 96 5.07
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 82,566 3,479 4.21 68,387 2,956 4.32
Demand deposits 32,374 27,744
Other liabilities 1,000 1,006
Shareholders' equity 10,770 9,951
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $126,710 $107,088
======== ========
Interest income and average yield
on earning assets(1) 10,327 8.85 8,853 9.09
Interest expense and average interest
cost related to earning assets 3,479 2.98 2,956 3.03
------ ---- ------ ----
Net interest income and margin(1) (4) $6,848 5.87% $5,897 6.06%
====== ==== ====== ====
</TABLE>
(1) Interest on tax-exempt securities, total interest income and net interest
income include the effect of taxable equivalent adjustments using the expected
federal corporate income tax rate of 34% in 1998 and 1997 in adjusting interest
on tax-exempt investment securities to a fully taxable basis. The amount of the
taxable equivalent adjustment was $127,000 and $94,000 in 1998 and 1997,
respectively.
(2) Loan interest income includes amortization of loan fees of $478,000 in 1998
and $334,000 in 1997.
(3) Average loans do not include nonaccrual loans.
(4) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
6
<PAGE>
TABLE B
RATE AND VOLUME ANALYSIS
------------------------
The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in asset and
liability volumes and changes in rates. The change in interest due to both rate
and volume has been allocated to changes due to volume and rate in proportion to
the relationship of absolute dollar amounts of change in each.
<TABLE>
<CAPTION>
Period Ended December 31,
---------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
Increase (decrease) in: Increase (decrease) in:
(in thousands) -------------------------- -----------------------
Volume Rate Total Volume Rate Total
------ ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Changes in interest income:
Securities (amortized cost):C $ 316 $(55) $ 261 $193 $ (9) $184
Tax-exempt(l) 114 (8) 106 52 1 53
------ ----- ------ ------ ----- -----
Total securities 430 (63) 367 245 (8) 237
Federal funds sold and securities
purchased under repurchase agreements 60 7 67 25 13 38
Loans 1,138 (98) 1,040 717 (43) 674
------ ----- ------ ------ ----- -----
Total(l) 1,628 (154) 1,474 987 (38) 949
------ ----- ------ ------ ----- -----
Changes in interest expense:
Total interest-bearing liabilities:
Savings and interest-bearing demand 264 73 337 22 35 57
Time (31) (62) (93) 176 5 181
Certificates of deposit, $100 and over 334 (32) 302 270 1 271
Other borrowed funds (21) (2) (23) (16) 6 (10)
------ ----- ------ ------ ----- -----
Total 546 (23) 523 452 47 499
------ ----- ------ ------ ----- -----
Changes in net interest income(l) $1,082 $(131) $ 951 $535 $(85) $450
====== ====== ====== ====== ===== ====
</TABLE>
- ------------------
(1) Taxable equivalent basis. See Note 1 to TABLE A.
7
<PAGE>
TABLE C
SECURITIES PORTFOLIO
--------------------
The following tables set forth the carrying value of debt securities
available for sale (fair value) and of debt securities held to maturity
(amortized cost) at December 31, 1998 and 1997 and the maturities and weighted
average yield of debt securities based on amortized cost at December 31, 1998.
<TABLE>
<CAPTION>
Estimated
Fair Value
(in thousands) At December 31,
------------------
SECURITIES AVAILABLE FOR SALE 1998 1997
- ----------------------------- ------- -------
<S> <C> <C>
U. S. Treasury and agency securities $ 1,994 $ 4,002
Corporate securities 19,644 14,401
Mortgage-backed securities 10,395 6,248
------- -------
$32,033 $24,651
======= =======
</TABLE>
<TABLE>
<CAPTION>
Amortized cost
(in thousands) At December 31,
------------------
SECURITIES HELD TO MATURITY 1998 1997
- --------------------------- ------ ------
<S> <C> <C>
U. S. Treasury and agency securities $ --- $3,197
Obligations of states and political subdivisions 6,123 4,661
Mortgage-backed securities 1,386 71
------ ------
$7,509 $7,929
====== ======
</TABLE>
8
<PAGE>
TABLE C
SECURITIES PORTFOLIO (continued)
--------------------------------
<TABLE>
<CAPTION>
Maturing
----------------------------------------------------------------------------
After One After Five
In One Year Through Through After
(Dollars in thousands) Or Less Five Years Ten Years Ten Years Total
---------------- --------------- --------------- --------------- ----------------
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
------- ----- ------ ----- ------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and agency
securities --- --- $2,000 5.21% --- --- --- --- $ 2,000 5.21%
Corporate securities $19,651 5.51% --- --- --- --- --- --- 19,651 5.51
Mortgage-backed securities 64 6.24 5,680 5.89 $4,574 6.12% --- --- 10,318 5.99
------- ----- ------ ----- ------ ----- ------ ----- ------- -----
Total amortized cost $19,715 5.51% $7,680 5.71% $4,574 6.12% --- --- $31,969 5.83%
======= ===== ====== ===== ====== ===== ====== ===== ======= =====
Estimated fair value $19,708 $7,693 $4,632 --- --- $32,033
======= ====== ====== ====== ===== =======
HELD TO MATURITY:
Obligations of states and
political subdivisions (1) $ 519 8.92% $1,307 7.24% $2,208 7.00% $2,089 7.07% $ 6,123 7.19%
Mortgage-backed securities --- --- 1,386 5.63 --- --- --- --- 1,386 5.63
------- ----- ------ ----- ------ ----- ------ ----- ------- -----
Total amortized cost $ 519 8.92% $2,693 6.41% $2,208 7.00% $2,089 7.07% $ 7,509 6.89%
======= ===== ====== ===== ====== ===== ====== ===== ======= =====
Estimated fair value $ 530 $2,738 $2,306 $2,174 $ 7,748
======= ====== ====== ====== =======
</TABLE>
(1) Interest on tax-exempt securities, total interest income and net interest
income include the effect of taxable equivalent adjustments using the expected
federal corporate income tax rate of 34% in 1998 in adjusting interest on tax-
exempt securities to a fully taxable basis.
9
<PAGE>
TABLE C
SECURITIES PORTFOLIO (continued)
--------------------------------
At December 31, 1998, debt securities from the following issuers each
totaled over ten percent (10%) of shareholders' equity of the Company:
<TABLE>
<CAPTION>
Amortized Fair
(in thousands): Cost Value
--------- ------
<S> <C> <C>
Federal Home Loan Mortgage Corporation $7,199 $7,235
Federal National Mortgage Association $4,504 $4,541
Federal Home Loan Bank $2,000 $1,993
Tyson Foods $1,499 $1,498
Baxter International $1,498 $1,497
Textron Inc. $1,497 $1,497
Zions Bancorp $1,497 $1,496
Praxair $1,496 $1,495
Safeway Inc. $1,495 $1,494
Rite Aid Corporation $1,494 $1,493
Crown Cork and Screw $1,491 $1,491
Comdisco $1,490 $1,490
MCI Worldcom $1,488 $1,488
Fedex FDX Corporation $1,486 $1,486
</TABLE>
TABLE D
LOAN PORTFOLIO
--------------
The composition of the loan portfolio at December 31, 1998 and 1997 is
summarized in the table below.
<TABLE>
<CAPTION>
(in thousands): 1998 1997
------- -------
<S> <C> <C>
Commercial $24,250 $18,980
Commercial held for sale 473 721
Real estate:
Construction 16,049 7,436
Mortgage 43,815 41,181
Equity 5,297 2,718
Held for sale 466 780
Installment 2,299 1,895
Other 979 947
------- -------
93,628 74,658
Deferred loan fees (499) (529)
------- -------
$93,129 $74,129
======= =======
</TABLE>
10
<PAGE>
TABLE E
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
------------------------------------------------------------
The following table presents information concerning loan maturities and
sensitivity to changes in interest rates in the loan portfolio, as well as loans
that have fixed or variable interest rates at December 31, 1998.
<TABLE>
<CAPTION>
(in thousands):
One After One After
Maturity Distribution of Year Through Five
Selected Loans: Or Less Five Years Years Total
------- ---------- ------- -------
<S> <C> <C> <C> <C>
Commercial $12,965 $ 6,689 $ 4,596 $24,250
Commercial - held for sale --- --- 473 473
Real estate-construction 13,516 2,337 196 16,049
Real estate - mortgage 3,459 9,317 31,039 43,815
Real estate - held for sale --- --- 466 466
Equity --- --- 5,297 5,297
Installment 102 2,135 62 2,299
Other 617 362 --- 979
------- ------- ------- -------
$30,659 $20,840 $42,129 $93,628
======= ======= ======= =======
Sensitivity to Changes in Interest Rates:
Loans with fixed interest rates 1,463 6,905 13,903 22,271
Loans with variable interest rates 65,830 5,527 --- 71,357
------- ------- ------- -------
$67,293 $12,432 $13,903 $93,628
======= ======= ======= =======
</TABLE>
TABLE F
SUMMARY OF NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
------------------------------------------------------
A summary of nonaccrual, past due and restructured loans at December 31,
1998 and 1997 is set forth below:
<TABLE>
<CAPTION>
(in thousands): 1998 1997
---- ----
<S> <C> <C>
Nonaccrual $ 30 $440
Accruing loans past due 90 days or more --- ---
Restructured loans 469 471
---- ----
$499 $911
==== ====
</TABLE>
The Company's consolidated financial statements are prepared on the accrual
basis of accounting, including the recognition of interest income on the loan
portfolio. Interest income from nonaccrual loans is not accrued on the books,
but rather is recorded only when and if received and the principal is deemed to
be collectible.
Loans are placed on a nonaccrual basis and any accrued but unpaid interest
is reversed and charged against income when the payment of interest or principal
is ninety days or more past due, except when the loan is well secured and in the
process of collection. Nonaccrual loans constituted approximately 0.6% of total
gross loans at December 31, 1997 and less than 0.1% at December 31, 1998. Loans
in the nonaccrual category are treated as nonaccrual loans even though the Bank
may ultimately recover all or a portion of the interest due. The classification
of a loan as a nonaccrual loan is not necessarily indicative of a potential
charge-off. The Senior Loan Officer
11
<PAGE>
assesses the loan portfolio monthly to determine which loans are specifically
identifiable problem credits in order to update the Bank's internal watch list,
which tracks all such credits. The Bank's internal Loan Review Examiner grades
all new commercial loans and all credits where the total liability equals or
exceeds certain thresholds established by management. If either the Senior Loan
Officer or the Loan Review Examiner identifies a serious deficiency, the loan is
placed on the next quarterly watch list.
Once a loan is on the watch list, the Loan Officers are required to
complete a "Report of Collection Activity" and to make at least monthly status
reports. While the loan is on the watch list, the Senior Loan Officer oversees
and coordinates the Loan Officer's efforts to either rehabilitate the loan or
effect collection in an expeditious manner.
Restructured loans reflect situations in which, due to the inability of the
borrower to comply with the original terms of the loan, the terms have been
modified, usually with the accrual of interest at a reduced rate. As of December
31, 1998, the Bank had $469,000 in restructured loans.
Interest income on nonaccrual loans that would have been recognized for the
year ended December 31, 1998, if the loans had been current in accordance with
their original terms totaled $2,000. The Company recognized $15,000 in interest
income on nonaccrual loans which paid off or were charged off during the year
ended December 31, 1998.
There are no loans, which were current at December 31, 1998, where known
information about possible credit problems of borrowers causes management of the
Company to have serious doubt as to the ability of such borrowers to comply with
the present loan repayment terms.
Outstanding loans to contractors engaged in construction and land
development constituted $11,497,000, or 12% of total loans, at December 31,
1998. The loans are a cross-section of types, from commercial to real estate
construction and are not all secured by real estate. The borrowers as a group,
however, are engaged in business activities which could be affected by changing
conditions in the real estate market. There were no other categories of loans
representing a concentration of 10% or more of total loans at December 31, 1998,
except as set forth in TABLE D above.
12
<PAGE>
TABLE G
SUMMARY OF LOAN LOSS EXPERIENCE
-------------------------------
The following table summarizes loan loss experience as of and for the years
ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands): 1998 1997
------- -------
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of year: $ 1,000 $ 971
Charge-offs:
Commercial 122 5
Real estate - mortgage 48 ---
Installment --- ---
Other 2 26
------- -------
Total loans charged off 172 31
------- -------
Recoveries:
Commercial 6 6
Real estate - mortgage 11 ---
Other 1 2
------- -------
Total recoveries 18 8
------- -------
Net charge-offs (154) (23)
Provision for loan losses 134 52
------- -------
Balance at end of year $ 980 $ 1,000
======= =======
Loans outstanding at December 31 $93,129 $74,129
======= =======
Average loans outstanding during period $81,354 $70,217
======= =======
Allowance for loan losses as a percentage
of outstanding loan balance 1.1% 1.3%
======= =======
Net charge-offs to average loans outstanding 0.2% ---
======= =======
</TABLE>
The Bank provides for possible loan losses by a charge to operating income
based upon the composition of the loan portfolio, past loan loss experience,
current economic conditions and other factors which, in management's judgment,
deserve recognition in estimating loan losses. Management will charge off loans
when it determines there has been a permanent impairment of the related carrying
values. Management attributes general reserves to different types of loans using
percentages which are based upon perceived risk associated with the portfolio
and underlying collateral, historical loss experience, and vulnerability to
changing economic conditions which may affect the collectibility of the loans.
Specific reserves are allocated for impaired loans, for loans which have
experienced a decline in internal loan grading, and when management believes
additional loss exposure exists. Although the allowance for loan losses is
allocated to various portfolio segments, it is general in nature and is
available for the loan portfolio in its entirety. Management believes that the
allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for losses on loans. Such agencies
may require the Company to recognize additions to the allowance based on their
analysis of information available to them at the time of their examination.
A loan is considered impaired when management determines that it is
probable that the Company will be unable to collect all amounts due according to
the original contractual terms of the loan agreement, including interest
payments. Impaired loans are those loans identified under the Bank's internal
rating system as "doubtful" or "loss" or those "substandard" loans which have
been placed on nonaccrual. Restructured loans are always classified as impaired.
The Bank applies its normal loan review procedures when determining whether a
loan is impaired. The amount of impairment is measured using discounted cash
flows or the fair value of the collateral, if the loan is collateral dependent.
Excluded from the impairment analysis are large groups of smaller balance
13
<PAGE>
homogeneous loans such as installment and residential mortgage loans. Impaired
loans are carried at the estimated present value of the future cash flows,
discounted at the loan's effective interest rate, or at the fair value of the
collateral if less than the recorded investment in the loan (including accrued
interest and net deferred loan fees or costs). Specific reserves for impaired
loans are recognized by adjusting the allocation of the existing allowance for
loan losses.
Although the Bank does not specifically allocate its allowance for loan
losses on the basis of type of loan, using these criteria the allocation of the
allowance for loan losses would be as set forth below:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES BY LOAN TYPE
1998 1997
---------------------- ------------------------
Percent of Percent of
Loans Loans
in Each in Each
Category to Category to
(Dollars in thousands): Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Commercial $439 26% $431 25%
Commercial held for sale 1 1 1 1
Real Estate
Construction 118 17 54 10
Mortgage 291 47 201 55
Held for sale 1 1 1 1
Equity 77 5 14 4
Installment 28 2 23 3
Other 15 1 33 1
Unallocated 10 N/A 242 N/A
---- ----- ------ -----
$980 100% $1,000 100%
==== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
TABLE H
DEPOSITS
--------
The following table sets forth the average amount of and the average rate
paid on certain deposit categories which were in excess of 10% of average total
deposits for the years ended December 31, 1998 and 1997.
(Dollars in thousands): 1998 1997
--------------- --------------
Balance Rate Balance Rate
-------- ----- ------- -----
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 32,374 N/A $27,744 N/A
Savings and interest-bearing demand 34,876 3.00% 25,893 2.73%
Time 46,212 5.11% 40,600 5.30%
-------- -------
$113,462 $94,237
======== =======
</TABLE>
14
<PAGE>
TABLE I
TIME DEPOSITS
-------------
The following table sets forth the maturity of time certificates of deposit
of $100,000 or more and other time deposits of $100,000 or more at December 31,
1998.
<TABLE>
<CAPTION>
Time Certificates Other Time
of Deposit of Deposits of
(in thousands): $100 or More $100 or More
------------ ------------
<S> <C> <C>
Three months or less $15,026 $11,335
Over 3 through 6 months 3,551 =======
Over 6 through 12 months 2,324
Over 12 months 710
-------
$21,611
=======
</TABLE>
TABLE J
RETURN ON EQUITY AND ASSETS
---------------------------
The following table sets forth certain financial ratios for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands): 1998 1997
------ ---------
<S> <C> <C>
Net income $1,215 $1,062
Net income to average assets 1.0% 1.0%
Net income to average shareholders' equity 11.3% 10.7%
Dividends declared per share to diluted net income
per share --- 0.36 to 1
Average shareholders' equity to average assets 8.5% 9.3%
</TABLE>
COMPETITION
In California and in the Bank's primary service area, major banks dominate
the commercial banking industry. Among the advantages these banks have over the
Bank are their ability to finance wide-ranging advertising campaigns and to
allocate their investment assets, including loans, to regions of higher yield
and demand. By virtue of their larger amounts of capital, such institutions have
substantially greater lending limits than the Bank and perform certain
functions, including trust services and international banking, which are not
presently offered directly by the Bank but are offered indirectly by the Bank
through correspondent institutions. The Bank also competes for loans and
deposits with savings and loan associations, finance companies, money market
funds, brokerage houses, credit unions, and other nonfinancial institutions.
The Bank's primary service area consists principally of the cities of
Oakland, San Leandro, Hayward and San Ramon and the unincorporated areas of
Castro Valley and San Lorenzo which at June 30, 1998, contained ninety-eight
(98) competing banking offices, which includes the Bank and twenty-five (25)
branch offices of other independent banks. At June 30, 1998, the Bank's primary
service area also contained fifty-five (55) offices of savings and loan
associations.
From time to time, legislation is proposed or enacted which has the effect
of increasing the cost of doing business, limiting permissible activities or
affecting the competitive balance between banks and other financial
institutions. It is impossible to predict the competitive impact these and other
changes in legislation will have on
15
<PAGE>
commercial banking in general or on the business of the Bank in particular. See
"SUPERVISION AND REGULATION - Recent and Proposed Legislation".
SUPERVISION AND REGULATION
THE COMPANY
The Company, as a bank holding company, is subject to regulation under the
Bank Holding Company Act of 1956, as amended (the "BHC Act") and is registered
with and subject to the supervision of the Board of Governors of the Federal
Reserve System ("Federal Reserve"). It is the policy of the Federal Reserve that
each bank holding company serve as a source of financial and managerial strength
to its subsidiary banks. The Federal Reserve has the authority to examine the
Company and the Bank.
The BHC Act requires the Company to obtain the prior approval of the
Federal Reserve before acquisition of all or substantially all of the assets of
any bank or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition, the Company would own or control, directly or
indirectly, more than 5% of the voting shares of such bank. However, amendments
to the BHC Act effected by the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Riegle-Neal"), which is discussed further below, expand
the circumstances under which a bank holding company may acquire control of or
all or substantially all of the assets of a bank located outside the State of
California.
The Company may not engage in any business other than managing or
controlling banks or furnishing services to its subsidiaries, with the exception
of certain activities which, in the opinion of the Federal Reserve, are so
closely related to banking or to managing or controlling banks as to be
incidental to banking. The Company is also generally prohibited from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company unless that company is engaged in such activities and unless the
Federal Reserve approves the acquisition.
The Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or provision of services. For example, with certain exceptions, the
Bank may not condition an extension of credit on a customer obtaining other
services provided by it, the Company or any other subsidiary, or on a promise by
the customer not to obtain other services from a competitor. In addition,
federal law imposes certain restrictions on transactions between the Bank and
its affiliates. As affiliates, the Bank and the Company are subject, with
certain exceptions, to the provisions of federal law imposing limitations on and
requiring collateral for loans by the Bank to any affiliate.
THE BANK
As a California state-licensed bank, the Bank is subject to regulation,
supervision and periodic examination by the California Department of Financial
Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is not a member of the Federal Reserve System, but is nevertheless subject
to certain regulations of the Federal Reserve. The Bank's deposits are insured
by the FDIC to the maximum amount permitted by law, which is currently $100,000
per depositor in most cases.
The regulations of these state and federal bank regulatory agencies govern
most aspects of the Bank's business and operations, including but not limited
to, the scope of its business, its investments, its reserves against deposits,
the nature and amount of any collateral for loans, the timing of availability of
deposited funds, the issuance of securities, the payment of dividends, bank
expansion and bank activities, including real estate development and insurance
activities, and the maximum rates of interest allowed on certain deposits. The
Bank is also subject to the requirements and restrictions of various consumer
laws and regulations.
The following description of certain statutory and regulatory provisions
and proposals is not intended to be a complete description of these provisions
or of the many laws and regulations to which the Company and the Bank are
subject, and is qualified in its entirety by reference to the particular
statutory or regulatory provisions discussed.
16
<PAGE>
CHANGE IN CONTROL
The BHC Act and the Change in Bank Control Act of 1978, as amended (the
"Change in Control Act"), together with regulations of the Federal Reserve,
require that, depending on the particular circumstances, either Federal Reserve
approval must be obtained or notice must be furnished to the Federal Reserve and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has securities registered under Section 12 of the Exchange Act or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The Financial Code also contains approval
requirements for the acquisition of 10% or more of the securities of a person or
entity which controls a California licensed bank.
CAPITAL ADEQUACY REQUIREMENTS
The Company is subject to the Federal Reserve's capital guidelines for bank
holding companies and the Bank is subject to the FDIC's regulations governing
capital adequacy for nonmember banks. Additional capital requirements may be
imposed on banks based on market risk.
THE FEDERAL RESERVE AND FDIC
The Federal Reserve has established risk-based and leverage capital
guidelines for bank holding companies which are similar to the FDIC's capital
adequacy regulations for nonmember banks. The Federal Reserve guidelines apply
on a consolidated basis to bank holding companies with consolidated assets of
$150 million or more.
The Federal Reserve capital guidelines for bank holding companies and the
FDIC's regulations for nonmember banks set total capital requirements and define
capital in terms of "core capital elements," or Tier 1 capital(1) and
"supplemental capital elements," or Tier 2 capital(2). At least fifty percent
(50%) of the qualifying total capital base must consist of Tier 1 capital. The
maximum amount of Tier 2 capital that may be recognized for risk-based capital
purposes is limited to one-hundred percent (100%) of Tier 1 capital, net of
goodwill.
Both bank holding companies and nonmember banks are required to maintain a
minimum ratio of qualifying total capital to risk-weighted assets of eight
percent (8%), at least one-half of which must be in the form of Tier 1 capital.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Federal Reserve and the FDIC to those
assets.
The Federal Reserve and the FDIC have established a minimum leverage ratio
of three percent (3%) Tier 1 capital to total assets for bank holding companies
and nonmember banks that have received the highest composite regulatory rating
and are not anticipating or experiencing any significant growth. All other
institutions are required
- --------------------
(1) Tier 1 capital is generally defined as the sum of the core capital elements
less goodwill and certain intangibles. The following items are defined as core
capital elements: (i) common stockholders' equity; (ii) qualifying noncumulative
perpetual preferred stock and related surplus; and (iii) minority interests in
the equity accounts of consolidated subsidiaries.
(2) Supplementary capital elements include: (i) allowance for loan and lease
losses (which cannot exceed 1.25% of an institution's risk-weighted assets);
(ii) perpetual preferred stock and related surplus not qualifying as core
capital; (iii) hybrid capital instruments, perpetual debt and mandatory
convertible debt securities; (iv) term subordinated debt and intermediate-term
preferred stock and related surplus; and (v) 45% of the unrealized gain, net of
taxes, on securities available for sale.
17
<PAGE>
to maintain a leverage ratio of at least 100 to 200 basis points above the 3%
minimum for a minimum of four percent (4%) or five percent (5%).
Set forth below are the Company's and the Bank's risk based and leverage
capital ratios as of December 31, 1998:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
Company Bank
------------------ ------------------
(Dollars in thousands): Amount Ratio Amount Ratio
------- ----- ------- -----
<S> <C> <C> <C> <C>
Tier 1 capital $11,277 9.0% $10,837 8.7%
Tier 1 capital regulatory minimum requirement 4,993 4.0 4,988 4.0
------- ---- ------- ----
Capital held in excess of regulatory minimum $ 6,284 5.0% $ 5,849 4.7%
======= ==== ======= ====
Total capital $12,257 9.8% $11,817 9.5%
Total capital regulatory minimum requirement 9,985 8.0 9,976 8.0
------- ---- ------- ----
Capital held in excess of regulatory minimum $ 2,272 1.8% $ 1,841 1.5%
======= ==== ======= ====
Risk-weighted assets $124,814 $124,698
======== ========
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
Company Bank
------------------ -----------------
(Dollars in thousands): Amount Ratio Amount Ratio
------- ----- ------- -----
<S> <C> <C> <C> <C>
Tier 1 capital to average total assets $11,277 8.2% $10,837 7.9%
Range of regulatory minimum leverage 4,144- 3.0- 4,140- 3.0-
requirement 6,906 5.0% 6,901 5.0%
------- ---- ------- ----
Range of regulatory excess 4,371- 3.2- 3,936- 2.9-
$ 7,133 5.2% $ 6,697 4.9%
======= === ======= ====
Average total assets for fourth quarter $138,129 $138,013
======== ========
</TABLE>
The risk-based capital ratio discussed above focuses principally on broad
categories of credit risk, and may not take into account many other factors that
can affect a bank's financial condition. These factors include overall interest
rate risk exposure; liquidity, funding and market risks; the quality and level
of earnings; concentrations of credit risk; certain risks arising from
nontraditional activities; the quality of loans and investments; the
effectiveness of loan and investment policies; and management's overall ability
to monitor and control financial and operating risks, including the risk
presented by concentrations of credit and nontraditional activities. The FDIC
has addressed many of these areas in related rules and regulations, some of
which are discussed herein. In addition to evaluating capital ratios, an overall
assessment of capital adequacy must take account of each of these other factors
including, in particular, the level and severity of problem and adversely
classified assets. For this reason, the final supervisory judgment on a bank's
capital adequacy may differ significantly from the conclusions that might be
drawn solely from the absolute level of the bank's risk-based capital ratio. In
light of the foregoing, the FDIC has stated that banks generally are expected to
operate above the minimum risk-based capital ratio. Banks contemplating
significant expansion plans, as well as those institutions with high or
inordinate levels of risk, should hold capital commensurate with the level and
nature of the risks to which they are exposed.
Further, the banking agencies have adopted modifications to the risk-based
capital regulations to include standards for interest rate risk exposures.
Interest rate risk is the exposure of a bank's current and future earnings and
equity capital arising from movements in interest rates. While interest rate
risk is inherent in a bank's role as financial intermediary, it introduces
volatility to bank earnings and to the economic value of the bank. The banking
agencies have addressed this problem by implementing changes to the capital
standards to include a bank's
18
<PAGE>
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor that the banking agencies consider in evaluating an
institution's capital adequacy. Bank examiners consider a bank's historical
financial performance and its earnings exposure to interest rate movements as
well as qualitative factors such as the adequacy of a bank's internal interest
rate risk management.
Finally, institutions with significant trading activities must measure and
hold capital for exposure to general market risk arising from fluctuations in
interest rates, equity prices, foreign exchange rates and commodity prices and
exposure to specific risk associated with debt and equity positions in the
trading portfolio. General market risk refers to changes in the market value of
on-balance-sheet assets and off-balance-sheet items resulting from broad market
movements. Specific market risk refers to changes in the market value of
individual positions due to factors other than broad market movements and
includes such risks as the credit risk of an instrument's issuer. The additional
capital requirements apply effective January 1, 1998 to institutions with
trading assets and liabilities equal to 10% or more of total assets or trading
activity of $1 billion or more. The federal banking agencies may apply the
market risk regulations on a case by case basis to institutions not meeting the
eligibility criteria if necessary for safety and soundness reasons.
In connection with the recent regulatory attention to market risk and
interest rate risk, the federal banking agencies will evaluate an institution in
its periodic examination on the degree to which changes in interest rates,
foreign exchange rates, commodity prices or equity prices can affect a financial
institution's earnings or capital. In addition, the agencies focus in the
examination on an institution's ability to monitor and manage its market risk,
and will provide management with a clearer and more focused indication of
supervisory concerns in this area.
In certain circumstances, the FDIC or the Federal Reserve may determine
that the capital ratios for an FDIC-insured bank or a bank holding company must
be maintained at levels which are higher than the minimum levels required by the
guidelines or the regulations. A bank or bank holding company which does not
achieve and maintain the required capital levels may be issued a capital
directive by the FDIC or the Federal Reserve to ensure the maintenance of
required capital levels.
PAYMENT OF DIVIDENDS
The shareholders of the Company are entitled to receive dividends when and
as declared by its Board of Directors, out of funds legally available, subject
to the dividends preference, if any, on preferred shares that may be outstanding
and also subject to the restrictions of the California Corporations Code. At
December 31, 1998, the Company had no outstanding shares of preferred stock.
The principal sources of cash revenue to the Company have been dividends
received from the Bank. The Bank's ability to make dividend payments to the
Company is subject to state and federal regulatory restrictions.
Dividends payable by the Bank to the Company are restricted under
California law to the lesser of the Bank's retained earnings, or the Bank's net
income for the latest three fiscal years, less dividends previously declared
during that period, or, with the approval of the DFI, to the greater of the
retained earnings of the Bank, the net income of the Bank for its last fiscal
year or the net income of the Bank for its current fiscal year.
The FDIC has broad authority to prohibit a bank from engaging in banking
practices which it considers to be unsafe or unsound. It is possible, depending
upon the financial condition of the bank in question and other factors, that the
FDIC may assert that the payment of dividends or other payments by the bank is
considered an unsafe or unsound banking practice and therefore, implement
corrective action to address such a practice.
In addition to the regulations concerning minimum uniform capital adequacy
requirements discussed above, the FDIC has established guidelines regarding the
maintenance of an adequate allowance for loan and lease losses. Therefore, the
future payment of cash dividends by the Bank to the Company will generally
depend, in addition to regulatory constraints, upon the Bank's earnings during
any fiscal period, the assessment of the respective Boards of Directors of the
capital requirements of such institutions and other factors, including the
maintenance of an adequate allowance for loan and lease losses.
19
<PAGE>
IMPACT OF FEDERAL AND CALIFORNIA TAX LAWS
The following are the more significant federal and California income tax
provisions affecting commercial banks.
FEDERAL TAX LAWS
CORPORATE TAX RATES
The federal corporate tax rate is 34% for up to $10 million of taxable
income, and 35% for taxable income over $10 million. The 1% differential is
phased out between $15 million and approximately $18.3 million so that
corporations with over approximately $18.3 million of taxable income are taxed
at a flat rate of 35%.
CORPORATE ALTERNATIVE MINIMUM TAX
Generally, a corporation will be subject to an alternative minimum tax
("AMT") to the extent the tentative minimum tax exceeds the corporation's
regular tax liability. The tentative minimum tax is equal to (a) 20% of the
excess of a corporation's "alternative minimum taxable income" ("AMTI") over an
exemption amount, less (b) the alternative minimum foreign tax credit. AMTI is
defined as taxable income computed with special adjustments and increased by the
amount of tax preference items for a tax year. An important adjustment is made
for "adjusted current earnings," which generally measures the difference between
corporate earnings and profits (as adjusted) and taxable income. Finally, a
corporation's net operating loss computed for AMT purposes (if any) only can be
utilized to offset up to 90% of AMTI, with the result that a corporation with
current year taxable income will pay some tax.
BAD DEBT DEDUCTION
A bank with average adjusted bases of all assets exceeding $500 million (a
"large bank") must compute its bad debt deduction using the specific charge-off
method. Under that method, a deduction is taken at the time the debt becomes
partially or wholly worthless. A bank not meeting the definition of a large bank
may use either the specific charge-off method or the "experience" reserve
method, under which the addition to bad debt reserve is based on the bank's
actual loss experience for the current year and five preceding years. The U.S.
Treasury has promulgated regulations which permit a bank to elect to establish a
conclusive presumption that a debt is worthless, based on applying a single set
of standards for both regulatory and tax accounting purposes.
INTEREST INCURRED FOR TAX-EXEMPT OBLIGATIONS
Generally, taxpayers are not allowed to deduct interest on indebtedness
incurred to purchase or carry tax-exempt obligations. This rule applies to a
bank, to the extent of its interest expense that is allocable to tax-exempt
obligations acquired after August 7, 1986. The Taxpayer Relief Act of 1997 (the
"1997 Act") made a technical change which expands the interest potentially
disallowed. A special exception applies, however, to a "qualified tax-exempt
obligation," which includes any tax-exempt obligation that (a) is not a private
activity bond and (b) is issued after August 7, 1986 by an issuer that
reasonably anticipates it will issue not more than $10 million of tax-exempt
obligations (other than certain private activity bonds) during the calendar
year. Interest expense on qualified tax-exempt obligations is deductible,
although it is subject to a 20% disallowance under special rules applicable to
financial institutions.
NET OPERATING LOSSES
The 1997 Act changed the tax treatment of net operating losses (an "NOL").
Effective for tax years beginning after August 5, 1997, a bank generally is
permitted to carry a NOL back to the prior two tax years and forward to the
succeeding twenty tax years. For tax years beginning on or before August 5,
1997, the NOL may be carried back three years and forward fifteen years.
20
<PAGE>
AMORTIZATION OF INTANGIBLE ASSETS INCLUDING BANK DEPOSIT BASE
Certain intangible property acquired by a taxpayer must be amortized over a
15-year period. For this purpose, acquired assets required to be amortized
include goodwill and the deposit base or any similar asset acquired by a
financial institution (such as checking and savings accounts, escrow accounts
and similar items).
MARK-TO-MARKET RULES
The Revenue Reconciliation Act of 1993 introduced certain "mark-to-market"
tax accounting rules for "dealers in securities." Under these rules, certain
"securities" held at the close of a taxable year must be marked to fair market
value, and the unrealized gain or loss inherent in the security must be
recognized in that year for federal income tax purposes. Under the definition of
a "dealer," a bank or financial institution that regularly purchases or sells
loans may be subject to the new rules.
Certain securities are excepted from the mark-to-market rules provided the
taxpayer timely complies with specified identification rules. The principal
exceptions affecting banks are for (1) any security held for investment and (2)
any note, bond, or other evidence of indebtedness acquired or originated in the
ordinary course of business and which is not held for sale. If a taxpayer timely
and properly identifies loans and securities as being excepted from the mark-to-
market rules, these loans and securities will not be subject to these rules.
Generally, a financial institution may make the identification of an excepted
debt obligation in accordance with normal accounting practices, but no later
than 30 days after acquisition.
CALIFORNIA TAX LAWS
A commercial bank is subject to the California franchise tax at a special
bank tax rate based on the general corporate (non financial) rate plus 2%. For
calendar income year 1999, the bank tax rate is 10.84% (which reflects the
general corporate tax rate of 8.84%). The applicable tax rate is higher than
that applied to general corporations because it includes an amount "in lieu" of
many other state and local taxes and license fees payable by such corporations
but generally not payable by banks and financial corporations.
California has adopted substantially the federal AMT, subject to certain
modifications. Generally, a bank is subject to California AMT in an amount equal
to the sum of (a) 6.65% of AMTI (computed for California purposes) over an
exemption amount and (b) the excess of the bank tax rate over the general
corporation tax rate applied against net income for the taxable year, unless the
bank's regular tax liability is greater.
California permits a bank to compute its deduction for bad debt losses
under either the specific charge-off method or according to the amount of a
reasonable addition to a bad debt reserve.
California has incorporated the federal NOL provisions, subject to
significant modifications for most corporations. First, NOLs arising in income
years beginning before 1987 are disregarded. Second, no carryback is permitted,
and for most corporations NOLs may be carried forward only five years. Third, in
most cases, only 50% of the NOL for any income year may be carried forward.
Fourth, the special federal NOL rules regarding bad debt losses of commercial
banks do not apply for California purposes.
Finally, in 1994, California enacted legislation conforming to the federal
tax treatment of amortization of intangibles and goodwill, with certain
modifications.
The various tax laws discussed herein contain other changes that could have
a significant impact on the banking industry. The effect of these changes is
uncertain and varied, and it is unclear to what extent any of these changes may
influence the Bank's operations or the banking industry generally.
In addition, the President's Fiscal Year 2000 Budget proposal contains
several provisions which could have a significant impact on the banking
industry. It is uncertain whether these provisions will be enacted into law and
what impact these provisions will have on the Bank.
21
<PAGE>
IMPACT OF MONETARY POLICIES
The earnings and growth of the Bank and the Company are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment. The earnings of the Bank and, therefore, the
Company, are affected not only by general economic conditions but also by the
monetary and fiscal policies of the United States and federal agencies,
particularly the Federal Reserve. The Federal Reserve can and does implement
national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States Government securities
and by its control of the discount rates applicable to borrowings by banks from
the Federal Reserve System. The actions of the Federal Reserve in these areas
influence the growth of bank loans, investments and deposits and affect the
interest rates charged on loans and paid on deposits. As demonstrated over the
past several years by the Federal Reserve's actions regarding interest rates,
its policies have had a significant effect on the operating results of
commercial banks and are expected to continue to do so in the future. The nature
and timing of any future changes in monetary policies are not predictable.
RECENT AND PROPOSED LEGISLATION
Federal and state laws applicable to financial institutions have undergone
significant changes in recent years. The most significant recent federal
legislative enactments are the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Riegle-Neal") and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA").
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994
In September 1994, President Clinton signed Riegle-Neal, which amends the
BHC Act and the Federal Deposit Insurance Act ("FDIA") to provide for interstate
banking, branching and mergers. Subject to the provisions of certain state laws
and other requirements, Riegle-Neal allows a bank holding company that is
adequately capitalized and adequately managed to acquire a bank located in a
state other than the holding company's home state regardless of whether or not
the acquisition is expressly authorized by state law. Similarly, beginning on
June 1, 1997, the federal banking agencies were permitted to approve interstate
merger transactions, subject to applicable restrictions and state laws. Further,
a state may elect to allow out of state banks to open de novo branches in that
state. However, recently adopted regulations of the federal banking agencies
prohibit interstate branching primarily for the purpose of deposit production
and provide guidelines to ensure that banks operating interstate branches are
reasonably helping to meet the credit needs of the communities served by the
branches.
Riegle-Neal includes several other provisions which may have an impact on
the Company's and the Bank's business. The provisions include, among other
things, a mandate for review of regulations to equalize competitive
opportunities between U.S. and foreign banks, evaluation on a bank-wide, state-
wide and, if applicable, metropolitan area basis, of the Community Reinvestment
Act compliance of banks with interstate branches, and, in the event the FDIC is
appointed as conservator or receiver of a financial institution, the revival of
otherwise expired causes of action for fraud and intentional misconduct
resulting in unjust enrichment or substantial loss to an institution.
California has adopted the Caldera, Weggeland, and Killea California
Interstate Banking and Branching Act of 1995 ("IBBA"), which became effective on
October 2, 1995. The IBBA addresses the supervision of state chartered banks
which operate across state lines, and covers such areas as branching,
applications for new facilities and mergers, consolidations and conversions,
among other things. The IBBA allows a California state bank to have agency
relationships with affiliated and unaffiliated insured depository institutions
and allows a bank subsidiary of a bank holding company to act as an agent to
receive deposits, renew time deposits, service loans and receive payments for a
depository institution affiliate. In addition, pursuant to the IBBA, California
"opted in early" to the Riegle-Neal provisions regarding interstate branching,
allowing a state bank chartered in a state other than California to acquire by
merger or purchase, a California bank or industrial loan company which is at
least five (5) years old and thereby establish one or more California branch
offices. However, the IBBA prohibits a state bank chartered in a state other
than California from entering California by purchasing a California branch
office of a
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California bank or industrial loan company without purchasing the entire entity
or establishing a de novo California branch office.
The changes effected by Riegle-Neal and the IBBA have increased the
competitive environment in which the Company and the Bank operate as out of
state financial institutions directly or indirectly enter the Bank's market
area. It is expected that Riegle-Neal will accelerate the consolidation of the
banking industry as a number of the largest bank holding companies expand into
different parts of the country that were previously restricted. However, at this
time, it is not possible to predict what specific impact, if any, Riegle-Neal
and the IBBA will have on the Company and the Bank, the competitive environment
in which the Bank operates, or the impact on the Company or the Bank of any
regulations adopted or proposed under Riegle-Neal and the IBBA.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA")
GENERAL
FDICIA primarily addresses the safety and soundness of the deposit
insurance funds, supervision of and accounting by insured depository
institutions and prompt corrective action by the federal bank regulatory
agencies with respect to troubled institutions. FDICIA gives the FDIC, in its
capacity as federal insurer of deposits, broad authority to promulgate
regulations to assure the viability of the deposit insurance funds, including
regulations concerning safety and soundness standards. FDICIA also places
restrictions on the activities of state-chartered institutions and on
institutions failing to meet minimum capital standards and provides enhanced
enforcement authority for the federal banking agencies. FDICIA also strengthened
Federal Reserve Act regulations regarding insider transactions.
PROMPT CORRECTIVE ACTION
FDICIA amended the FDIA to establish a format for closer monitoring of
insured depository institutions and to enable prompt corrective action by
regulators when an institution begins to experience difficulty. The general
thrust of these provisions is to impose greater scrutiny and more restrictions
on institutions as they descend the capitalization ladder.
FDICIA establishes five capital categories for insured depository
institutions: (a) Well Capitalized(3); (b) Adequately Capitalized(4); (c)
Undercapitalized(5); (d) Significantly Undercapitalized(6); and (e) Critically
Undercapitalized(7). All insured institutions (e.g., the Bank) are barred from
making capital distributions or paying management fees to a controlling person
(e.g., the Company) if to do so would cause the institution to fall into any of
the three undercapitalized categories.
- -----------------------------
(3) Well Capitalized means a financial institution with a total risk-based
ratio of 10% or more, a Tier 1 risk-based ratio of 6% or more and a leverage
ratio of 5% or more, so long as the institution is not subject to any written
agreement or order issued by the FDIC.
(4) Adequately Capitalized means a total risk-based ratio of 8% or more, a Tier
1 risk-based ratio of 4% or more and a leverage ratio of 4% or more (3% or more
if the institution has received the highest composite rating in its most recent
report of examination) and does not meet the definition of a Well Capitalized
institution.
(5) Undercapitalized means a total risk-based capital ratio of less than 8%, a
Tier 1 risk-based capital ratio of less than 4% or a leverage ratio of less than
4%.
(6) Significantly Undercapitalized means a financial institution with a total
risk-based ratio of less than 6%, a Tier 1 risk-based ratio of less than 3% or a
leverage ratio of less than 3%.
(7) Critically Undercapitalized means a financial institution with a ratio of
tangible equity to total assets that is equal to or less than 2%.
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An institution which is undercapitalized, significantly undercapitalized or
critically undercapitalized becomes subject to mandatory supervisory actions,
including: (1) restrictions on payment of capital distributions, such as
dividends; (2) restrictions on payment of management fees to any person having
control of the institution; (3) close monitoring by the FDIC of the condition of
the institution, compliance with capital restoration plans, restrictions, and
requirements imposed under Section 38 of the FDIA, and periodic review of the
institution's efforts to restore its capital and comply with restrictions; (4)
submission to the FDIC of a capital restoration plan; (5) requirement that any
company which controls an undercapitalized institution must guarantee, in an
amount equal to the lesser of 5% of the institution's total assets or the amount
needed to bring the institution into full capital compliance, that the
institution will comply with the capital restoration plan until the institution
has been adequately capitalized, on the average, for four consecutive quarters;
(6) restrictions on the institution's asset growth; and (7) limitations on the
institution's ability to make any acquisition, open any new branch offices or
engage in any new line of business.
Significantly undercapitalized and undercapitalized institutions that fail
to submit and implement adequate capital restoration plans are subject to the
mandatory provisions set forth above and, in addition, to increasingly stringent
operating restrictions, including an immediate requirement to raise capital.
Finally, a critically undercapitalized institution must be placed in
conservatorship or receivership within 90 days of becoming critically
undercapitalized, unless the FDIC determines that other action would better
achieve the purposes of the FDIA. Critically undercapitalized institutions which
are not placed in conservatorship or receivership may be subject to additional
stringent operating restrictions.
SAFETY AND SOUNDNESS; OTHER PROVISIONS OF FDICIA
FDICIA required the federal banking agencies to adopt regulations or
guidelines with respect to safety and soundness standards. The agencies have
adopted uniform guidelines which are used, primarily in connection with
examinations, to identify and address problems at insured depository
institutions before capital becomes impaired. The federal bank regulatory
agencies have adopted asset quality and earnings standards as part of the safety
and soundness guidelines. The asset quality standards require a depository
institution to establish and maintain a system appropriate to the institution's
size and operations to identify and prevent deterioration in problem assets.
With respect to earnings, the institution should adopt and maintain a system to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves.
The federal banking agencies have published a "Policy Statement on the
Internal Audit Function and its Outsourcing," which provides guidance on the
elements of an effective internal audit function, including director and senior
management responsibilities, the structure of the internal audit department and
procedures for resolving internal control weaknesses. The Policy Statement also
provides guidance on how outsourcing arrangements may affect an examiner's
internal control assessment, as well as the independence of an external auditor
who is also providing internal audit services to an institution.
In response to the increasing number of financial institutions using the
Internet, the FDIC has issued a paper identifying many of the risks to an
institution's information system security associated with Internet use, together
with several security and risk control measures. The paper is designed to
complement the FDIC's safety and soundness examination procedures for electronic
banking activities. The Bank does not offer any internet banking services.
FDICIA restricts the acceptance of brokered deposits by insured depository
institutions that are not well capitalized. It also places restrictions on the
interest rate payable on brokered deposits and the solicitation of such deposits
by such institutions. An undercapitalized institution will not be allowed to
solicit brokered deposits by offering rates of interest that are significantly
higher than the prevailing rates of interest on insured deposits in the
particular institution's normal market areas or in the market area in which such
deposits would otherwise be accepted. In addition to these restrictions on
acceptance of brokered deposits, FDICIA provides that no
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pass-through deposit insurance will be provided to employee benefit plan
deposits accepted by an institution which is ineligible to accept brokered
deposits under applicable law and regulations.
Pursuant to FDICIA, the FDIC has established a risk-based assessment system
for depository institutions. This risk-based system is used to calculate a
depository institution's semiannual deposit insurance assessment based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution. To arrive at a risk-based assessment for each depository
institution, the FDIC has constructed a matrix of nine risk categories based on
capital ratios and relevant supervisory information. Each institution is
assigned to one of three capital categories: "well capitalized," "adequately
capitalized" or "undercapitalized." Each institution also is assigned to one of
three supervisory groups based on levels of risk. Risk assessment premiums are
based on an institution's assignment within the matrix and for 1998 ranged from
$0.0 to $0.27 per $100 of deposits. The FDIC has stated that the foregoing risk
assessment premiums will be in effect indefinately.
FDICIA also places restrictions on insured state bank activities and equity
investments, interbank liabilities and extensions of credit to insiders and
transactions with affiliates.
OTHER RECENT LEGISLATION
On September 23, 1994, President Clinton signed into law the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Regulatory
Improvement Act"). The Regulatory Improvement Act provides regulatory relief for
both large and small banks by, among other things, reducing the burden of
regulatory examinations, streamlining bank holding company procedures and
establishing a formal regulatory appeals process. The Regulatory Improvement Act
also addresses a variety of other topics, including, but not limited to,
mortgage loan settlement procedures, call reports, insider lending, money
laundering, currency transaction reports, management interlocks, foreign
accounts, mortgage servicing and credit card receivables. Although the
Regulatory Improvement Act has generally reduced the regulatory burden currently
imposed on banks, it is not possible to ascertain the precise effect its various
provisions will have on the Company or the Bank.
YEAR 2000 COMPLIANCE
During 1997 and several times during 1998, the Federal Financial
Institutions Examination Council ("FFIEC") issued statements and guidance to
financial institutions addressing critical issues for Year 2000 ("Y2K")
readiness. These statements address key phases of the Y2K project management
process and the specific responsibilities of senior management and the board of
directors to address business risks associated with the Y2K problem.
Additionally, in October 1998, the federal banking agencies jointly issued
"Interagency Guidelines Establishing Year 2000 Standards for Safety and
Soundness" (the "Guidelines"). The Guidelines, which are intended to be
consistent with FFIEC pronouncements, establish standards for management and
boards of directors in developing and managing Y2K projects plans, assessing and
testing mission-critical systems for Y2K readiness(8), validating remediation
efforts and planning for contingencies.
Year 2000 issues exist because most computer programs use only two digits
to identify a year in the date field (e.g., "98" for "1998"). Bank information
processing systems must be made Y2K compliant well in advance of December 31,
1999. The Guidelines and FFIEC pronouncements describe certain essential steps
that insured depository institutions must take at the awareness, assessment,
renovation, validation, testing and implementation phases of their efforts to
achieve Y2K readiness.
In addition, banks face risks from vendors whose programs are not Y2K
compliant and must begin testing of programming changes no later than December
31, 1998. The computer programs of banks' corporate customers also may pose Y2K
risks. Failure to address Y2K issues could affect a borrower's creditworthiness
and may result
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(8) An application or system is "mission-critical" if it is vital to the
successful continuance of a core business activity. An application also may be
mission-critical if it interfaces with a designated mission-critical system.
Products of software vendors also may be mission-critical.
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from the failure of the customer to properly remediate its own systems or from
Y2K problems that are not addressed by the customer's suppliers and clients.
Accordingly, the FFIEC and interagency Guidelines require senior management
to provide the board of directors with quarterly or more frequent reports on
efforts to reach Y2K goals both internally and by the institution's major
vendors. Continued monitoring of the Y2K efforts of vendors and customers is
required.
The Guidelines specify that an insured depository institution's initial
review of mission-critical systems for Y2K readiness should provide the basis
for establishing priorities and deadlines and for identifying and allocating
available resources. The development and adoption of a written project plan that
addressees each phase of the planning process also is required.
The banking agencies consider testing to be a critical process in achieving
Y2K readiness. Failure of an insured depository institution to perform adequate
testing of mission-critical systems may mask serious remediation problems, thus
posing a risk to the safe and sound operation of the institution. Failure to
properly identify or correct problems could further threaten the safety and
soundness of the institution.
The Guidelines and the FFIEC's statement on Y2K readiness testing of an
institution's mission-critical systems set forth the following milestones which
should be met by each institution:
June 30, 1998: Institutions should compLete the development of
their written testing strategies and plans.
September 1, 1998 Institutions processing in-house and service
providers should have commenced testing of internal
mission-critical systems, including those programmed
in-house and those purchased from software vendors.
December 31, 1998 Testing of internal mission-critical systems
should be substantially complete. Service providers
should be ready to test with customers.
March 31, 1999 Testing by institutions relying on service
providers for mission-critical systems should be
substantially complete. External testing with
material other third parties (customers, other
financial institutions, business partners, payment
system providers, etc.) should have begun.
June 30, 1999 Testing of mission-critical systems should be
complete and implementation should be substantially
complete.
Additional FFIEC interagency statements cover contingency planning and
steps that can be taken to establish a customer awareness program. At a minimum,
financial institutions must develop remediation contingency plans that (1)
outline the alternatives available if remediation efforts are not successful,
(2) consider the availability of alternative service providers or software
vendors and (3) establish trigger dates for activating the remediation
contingency plan, taking into account the time necessary to convert to alternate
service providers or software vendors.
In appropriate circumstances, a federal banking agency may require an
insured depository institution that fails to comply with the Guidelines to
prepare and submit an acceptable compliance plan. An insured depository
institution that fails to submit an acceptable compliance plan within the time
allowed or fails in any material respect to implement an accepted compliance
plan will be subject to an agency order directing the institution to correct the
deficiency. The Guidelines do not limit the authority of a banking agency to
address unsafe or unsound practices or conditions, violations of law, or other
practices, or to adopt appropriate remedies to achieve compliance with the
Guidelines. Further, remedies provided by Section 39 of the FDIA allow the
banking agencies to move promptly in situations where immediate supervisory
action is essential for safety and soundness reasons. Actions under FDIA Section
39 and the Guidelines may be taken independently of, in conjunction with, or in
addition to, other appropriate enforcement actions.
The FDIC and state banking authorities will continue to review the efforts
of all FDIC-supervised banks to achieve Y2K readiness. An institution's failure
to appropriately address Y2K readiness problems may result in
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supervisory actions, including formal and informal enforcement actions, denials
of applications filed pursuant to the FDIA, civil money penalties, and
reductions in the institution's management component or composite ratings.
For a description of the Company's Y2K readiness efforts, see Item 6,
herein.
CONSUMER PROTECTION LAWS AND REGULATIONS
The bank regulatory agencies are focusing greater attention on compliance
with consumer protection laws and their implementing regulations. Examination
and enforcement have become more intense in nature, and insured institutions
have been advised to monitor carefully compliance with such laws and
regulations. The Bank is subject to many federal consumer protection statutes
and regulations, some of which are discussed below.
The Community Reinvestment Act ("CRA") is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. The CRA specifically directs the federal
regulatory agencies, in examining insured depository institutions, to assess a
bank's record of helping meet the credit needs of its entire community,
including low- and moderate-income neighborhoods, consistent with safe and sound
banking practices. The CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when
evaluating applications for, among other things, domestic branches, mergers or
acquisitions, or holding company formations. The agencies use the CRA assessment
factors in order to provide a rating to the financial institution. The ratings
range from a high of "outstanding" to a low of "substantial noncompliance." The
Bank was examined for CRA compliance by its primary regulator in 1997 and
received a "satisfactory" CRA Assessment Rating.
The Equal Credit Opportunity Act ("ECOA") generally prohibits
discrimination in any credit transaction, whether for consumer or business
purposes, on the basis of race, color, religion, national origin, sex, marital
status, age (except in limited circumstances), receipt of income from public
assistance programs, or good faith exercise of any rights under the Consumer
Credit Protection Act. The Truth in Lending Act ("TILA") is designed to ensure
that credit terms are disclosed in a meaningful way so that consumers may
compare credit terms more readily and knowledgeably. As a result of the TILA,
all creditors must use the same credit terminology to express rates and
payments, including the annual percentage rate, the finance charge, the amount
financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act ("FH Act") regulates many practices, including making
it unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap or familial status. A number of lending practices have been found
by the courts to be, or may be considered, illegal under the FH Act, including
some that are not specifically mentioned in the FH Act itself. The Home Mortgage
Disclosure Act ("HMDA") grew out of public concern over credit shortages in
certain urban neighborhoods and provides public information that will help show
whether financial institutions are serving the housing credit needs of the
neighborhoods and communities in which they are located. The HMDA also includes
a "fair lending" aspect that requires the collection and disclosure of data
about applicant and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act ("RESPA") requires
lenders to provide borrowers with disclosures regarding the nature and cost of
real estate settlements. Also, RESPA prohibits certain abusive practices, such
as kickbacks, and places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursements and other
penalties. Due to heightened regulatory concern related to compliance with the
CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may incur additional
compliance costs or be required to expend additional funds for investments in
its local community.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS No. 130"), which establishes standards for the reporting and
display of comprehensive income and its components in financial statements. The
Company has retroactively adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the period
from nonowner sources. The adoption of this Statement resulted in a change in
the financial statement presentation but did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
In applying the "management approach" established by the Statement, management
determined that since all of the commercial banking products and services of the
Bank are available in each branch of the Bank, all branches are located within
the same economic environment and management does not allocate resources based
on the performance of different lending or transaction activities, the financial
disclosures of this statement related to operating performance of reportable
segments does not apply.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. The statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is in the process of
determining the impact of adopting SFAS 133, however, the Company currently does
not have any derivative instruments and is not involved in any hedging
activities.
OTHER
Other legislation which has been or may be proposed to the United States
Congress and the California Legislature and regulations which may be proposed by
the Federal Reserve, the FDIC and the DFI may affect the business of the Company
or the Bank. It cannot be predicted whether any pending or proposed legislation
or regulations will be adopted or the effect such legislation or regulations may
have upon the business of the Company or the Bank.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company and the Bank have their principal offices in a modern facility
located at 1495 East 14th Street, San Leandro, California 94577, which serves as
the Bank's headquarters office. The headquarters office consists of 11,000
square feet of interior space and includes eight (8) teller stations, a night
depository and an automated teller machine.
The Bank entered into a lease for the premises which commenced on April 1,
1981, extends for a term of twenty-five years and provided for rental payments
of $4,000 per month for the first ten years of the lease term. On the tenth
anniversary (April 1, 1991). the monthly rental payment obligation of the Bank
was raised to $10,310. As of the fifteenth anniversary (April 1, 1996) and for
the five year period ending March 31, 2001, the monthly rental payment
obligation of the Bank will remain at $10,310. Each fifth anniversary
thereafter, the monthly rental amount is to be adjusted as negotiated by the
Bank and the lessor or, if the parties are unable to agree on such adjustment,
by arbitration. The lease also grants to the Bank a right of first refusal in
the event of a proposed sale of the leased premises.
The Bank entered into an 18-year lease which commenced on October 1, 1987,
pursuant to which the Bank acquired an additional 3,000 square feet of office
space at 1475 East 14th Street adjacent to its original headquarters office. The
lease provided for monthly rental payments of $1,800 for the first three years,
and $2,200, $2,680, and $3,270, respectively, for each subsequent five-year
period. The area accommodates the accounting department, computer operations,
storage facilities and certain operations functions.
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The Bank has invested approximately $2,857,000 through December 31, 1998 in
leasehold improvements and furniture, fixtures and equipment in its headquarters
office, which includes 1495 and 1475 East 14th Street, San Leandro.
The Bank's SBA and construction divisions are located in the Bank's
extension office at 1500 Washington Avenue, San Leandro, California 94577. The
premises consists of a one-story wood frame structure which has a floor area of
2,072 square feet. There is a parking lot adjacent to the building. The property
was purchased by the Company at a cost of $196,512 in 1985, and the premises are
leased from the Company by the Bank for the SBA and construction divisions at a
monthly rental of $2,000. The Bank invested approximately $255,000 in leasehold
improvements and furniture, fixtures and equipment in its extension office
through December 31, 1998.
The Bank's Hayward branch office is located in a modern facility at 1030 La
Playa Drive, Hayward, California. The Hayward branch office consists of 4,285
square feet of interior space and includes four (4) teller stations, a night
depository and an automated teller machine.
The Bank purchased the Hayward branch premises in February, 1993 at a total
cost of $700,000. The Bank invested approximately $707,000 in improvements and
furniture, fixtures and equipment in its Hayward branch office through December
31, 1998.
The Bank's San Ramon branch office is located in a modern facility at 2821
Crow Canyon Road, San Ramon, California. The San Ramon branch office consists of
approximately 5,526 square feet of space and includes five teller stations, a
night depository and an automated teller machine. The Bank invested
approximately $352,000 in leasehold improvements and furniture, fixtures and
equipment in its San Ramon office through December 31, 1998.
The Bank entered into a lease for the San Ramon branch office premises
which commenced on November 1, 1996, extends for a term of sixty months and
provides for rental payments of $7,500 per month for the first twelve months of
the lease term, increasing to $8,000 per month for the next twelve months of the
lease term. On each subsequent anniversary of the lease commencement date, the
rental payments will be adjusted to reflect changes in the Consumer Price Index,
subject to a cap on each such adjustment of five percent. The lease also grants
to the Bank options to extend the lease term for three additional five year
periods with the rental payments for such extension periods to be determined by
mutual agreement of the Bank and the lessor or by appraisal.
ITEM 3 - LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings other than
ordinary routine litigation incidental to their respective businesses nor are
any such proceedings known to be contemplated by governmental authorities.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
For information concerning the Company's Common Stock and related
shareholder matters, see "Stock Prices and Dividend Information" on the inside
back cover of the Annual Report, which is incorporated herein by reference and
"SUPERVISION AND REGULATION" under the heading "ITEM 1 - BUSINESS" above.
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As of March 10, 1999, there were 409 holders of record of the Company's
Common Stock.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
For Management's Discussion and Analysis, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at Pages 17 through
23 of the Annual Report, which are incorporated herein by reference.
Certain matters discussed or incorporated by reference in this Annual
Report on Form 10-KSB are forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from
those projected in the forward-looking statements. Such risks and uncertainties
include, but are not limited to, those described in Management's Discussion and
Analysis or Plan of Operation. Therefore, the information set forth therein
should be carefully considered when evaluating the business prospects of the
Company and the Bank.
ITEM 7 - FINANCIAL STATEMENTS
For consolidated financial statements of the Company, see consolidated
balance sheets at December 31, 1998 and 1997, and consolidated income
statements, consolidated statements of cash flows and consolidated statements of
changes in shareholders' equity for the years ended December 31, 1998, 1997 and
1996, and notes to consolidated financial statements for the years ended
December 31, 1998, 1997 and 1996 and the "Independent Auditors' Report" thereon
at Pages 2 through 15 of the Annual Report, which are incorporated herein by
reference.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
For information concerning directors and executive officers of the Company,
see "ELECTION OF DIRECTORS OF THE COMPANY" in the definitive Proxy Statement for
the Company's 1999 Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A (the "Proxy Statement"), which is incorporated herein by
reference.
Section 16(a) Beneficial Ownership Reporting Compliance
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Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. To the best knowledge of the Company, there are no greater than
ten-percent holders of the Company's Common Stock other than Richard M. Kahler,
President and Chief Executive Officer of the Company and the Company's Employee
Stock Ownership Plan.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons the Company believes that, for fiscal year 1998, the
officers and directors of the Company complied with all applicable filing
requirements, except that
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executive officer Randall D. Greenfield and director Dimitri Koroslev each
failed to file on a timely basis one Report of Changes in Beneficial Ownership
on Form 4 to report one transaction in securities. These transactions were
subsequently reported during 1998.
ITEM 10 - EXECUTIVE COMPENSATION
For information concerning executive compensation, see "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial owners
and Management, see "PRINCIPAL SHAREHOLDERS" and "ELECTION OF DIRECTORS OF THE
COMPANY" in the Proxy Statement, which is incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions,
see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "INDEBTEDNESS OF
MANAGEMENT" in the Proxy Statement, which is incorporated herein by reference.
31
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS Reference Page
-------------------- --------------
1998 Annual Report
1. Consolidated Financial Statements:
---------------------------------
Balance Sheets at December 31, 1998 and 1997 2
Income Statements for the years ended December 31,
1998, 1997 and 1996 3
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 4
Statements of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996 5
Notes to Consolidated Financial Statements for the
years ended December 31, 1998, 1997 and 1996 6-15
Independent Auditors' Report 15
2. Financial Statement Schedules:
-----------------------------
In accordance with Regulation S-X, the financial statement schedules
have been omitted because (a) they are not applicable to or required of the
Company or (b) the information required is included in the consolidated
financial statements or notes thereto.
EXHIBITS
- --------
See Index to Exhibits at pages 34 and 35 of this Form 10-KSB.
(b) REPORTS ON FORM 8-K
-------------------
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1998.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into registrant's Registration Statements on Form
S-8 No. 2-97378, 33-24302 and 33-75330.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 17, 1999 BAY COMMERCIAL SERVICES
By: /s/Richard M. Kahler
Richard M. Kahler,
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/Richard M. Kahler DATE: March 17, 1999
- --------------------
Richard M. Kahler,
President and Chief Executive Officer
(Principal Executive Officer) and Director
Randall D. Greenfield* DATE: March 17, 1999
- ----------------------
Randall D. Greenfield,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and
Secretary
Joshua Fong, O.D.* DATE: March 17, 1999
- ------------------
Joshua Fong, O.D.,
Chairman of the Board of Directors and Director
William R. Henson* DATE: March 17, 1999
- ------------------
William R. Henson, Director
Dimitri V. Koroslev* DATE: March 17, 1999
- --------------------
Dimitri V. Koroslev, Director
William E. Peluso* DATE: March 17, 1999
- ------------------
William E. Peluso, Director
Oswald A. Rugaard* DATE: March 17, 1999
- ------------------
Oswald A. Rugaard, Director
Mark A. Wilton* DATE: March 17, 1999
- -----------------
Mark A. Wilton, Director
*By /s/Richard M. Kahler DATE: March 17, 1999
---------------------
(Richard M. Kahler, as Attorney-in-Fact)
33
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-KSB/A
(Mark One)
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-12231
BAY COMMERCIAL SERVICES
(Name of small business issuer in its charter)
California 94-2760444
(State or other jurisdiction of incorporation (IRS Employer
or organization Identification No.)
1495 East 14th Street, San Leandro, California 94577
(Address of principal executive offices) (Zip code)
Issuer's telephone number (510) 357-2265
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: Common Stock, No
Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES[X] NO[_]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year: $11,141,000
State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of April 28, 1999: $15,631,715.
State the number of shares of Common Stock outstanding as of April 28,
1999: 1,322,110
Documents Incorporated by Reference: Part of Form 10-KSB
1998 Annual Report to Shareholders for fiscal year Part II, Items 5, 6,
ended December 31, 1998. 7 and 8
Transitional Small Business Disclosure Format (Check one): Yes[_] No[X]
<PAGE>
PART III
ITEM 9- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The following table sets forth certain information as of April 28,
1999 with respect to the directors of the Company, as well as all directors and
officers of the Company as a group. All of the shares shown in the following
table are owned both of record and beneficially and the person named possesses
sole voting power, except as otherwise indicated in the notes to the table.
<TABLE>
<CAPTION>
Shares Beneficially Owned as of
April 28, 1999
-------------------------------
Directors and Nominees Age Positions and Offices Director Amount Percent of Class
Held With the Company Since
- -------------------------- --- --------------------- -------- --------- ----------------
<S> <C> <C> <C> <C>
Joshua Fong, O.D 75 Chairman of the Board 1983 67,164(1) 5.08%
and Director
William R. Henson 74 Director 1983 20,000 1.51%
Richard M. Kahler 63 President, Chief 1983 148,029(2) 11.20%
Executive Officer and
Director
Dimitri V. Koroslev 53 Director 1985 39,646(3) 2.99%
William E. Peluso 85 Director 1986 99,044(4) 7.49%
Oswald (Ozzie) A. Rugaard 68 Director 1987 24,207 1.83%
Mark A. Wilton 52 Director 1998 8,949 0.68%
All directors and officers of the Company as a group (8 in number). 463,633(5) 34.97%
</TABLE>
- ----------------------
(1) Includes 4,005 shares in an Individual Retirement Account.
(2) Includes 2,292 shares held in Individual Retirement Accounts
belonging to Mr. Kahler, 1,079 shares held in an Individual Retirement
Account belonging to Mr. Kahler's wife and 26,343 shares allocated as
of December 31, 1998 to Mr. Kahler's account pursuant to the Bay
Commercial Services Employee Stock Ownership Plan (the "ESOP").
(3) Includes 13,485 shares held in an Individual Retirement Account
belonging to Mr. Koroslev, 3,235 shares held in an Individual
Retirement Account belonging to Denise N. Koroslev, 223 shares held by
Denise Koroslev, 80 shares held by Dimitri V. and Denise N. Koroslev
as custodians for Heather J. and Vasily D. Koroslev, and 2,400 shares
subject to exercisable options under the 1994 Stock Option Plan.
(4) Includes 42,997 shares held in an Individual Retirement Account
belonging to Mr. Peluso's wife.
<PAGE>
(5) Includes 46,737 shares allocated as of December 31, 1998 pursuant
to the ESOP.
The following table sets forth certain information with respect to the
executive officers(1) of the Company:
<TABLE>
<CAPTION>
Positions Held With Officer of the
Name Age the Company and the Bank Company Since
- ---------------------- --- -------------------------------------
<S> <C> <C> <C>
Richard M. Kahler 63 President and Chief Executive Officer 1983
of the Company and the Bank
Randall D. Greenfield 50 Vice President, Chief Financial 1983
Officer and Secretary of the Company;
Senior Vice President, Chief Administrative
Officer and Secretary of the Bank
Robert A. Perantoni 65 Senior Vice President and Senior 1993
Loan Officer of the Bank
</TABLE>
- ------------------------
(1) As used throughout this 10KSB/A, the term "executive officer"
means the president, any senior vice president in charge of a
principal business unit or function, any other officer or person who
performs a policy making function for the Company, and any executive
officer of the Company's subsidiaries who performs policy making
functions for the Company.
Each executive officer serves on an annual basis and must be selected by
the Board of Directors annually pursuant to the Bylaws of the Company or the
Bank.
The following information with respect to the principal occupation and
employment of each director and executive officer, the principal business of the
corporation or other organization in which such occupation and employment is
carried on, and in regard to other affiliations and business experience during
the past five (5) years, has been furnished to the Company by the respective
directors and executive officers. Except for the Bank, none of the corporations
or organizations discussed below is an affiliate of the Company.
JOSHUA FONG, O.D. is the Chairman of the Board of Directors of the Company
and a retired optometrist. Dr. Fong is a member of the Personnel Relations Board
of the City of San Leandro. He was a partner in the Castro Valley Optometry
Group from 1989 to 1998. Dr. Fong has been a Director of the San Leandro Chamber
of Commerce, a trustee of Humana Hospital of San Leandro and of the Oakland
Chinese Presbyterian Church. Dr. Fong has been the President of the San Leandro
Breakfast Club, Kiwanis Club of East Oakland and the Wa-Sung Service Club. Dr.
Fong is one of the founders of the New Life Christian Fellowship American
Baptist Church in Castro Valley.
RANDALL D. GREENFIELD is Vice President, Chief Financial Officer and
Secretary of the Company and Senior Vice President, Chief Administrative Officer
and Secretary of the Bank. Prior to joining the Bank in 1981, he served as
Cashier-Treasurer of Centennial Bank in Hayward, California after joining that
Bank as Controller in 1977. Mr. Greenfield worked with the First State Bank of
Northern California in San Leandro in 1974 and 1975 in Bank Operations and as
the Assistant Auditor. Mr. Greenfield is a graduate of the University of
Washington in Seattle. He is a past Director and Treasurer of the San Leandro
Boys and Girls Club and past President of the Golden Gate Chapter of the Bank
Administration Institute.
WILLIAM R. HENSON is and has been since 1963 the President of Superior Home
Loans, a California loan brokerage firm, and of Superior Financial Services, a
personal property brokerage firm. Mr. Henson is a former Director and past
President of the Southern Alameda County Board of Realtors, a past Director of
the California Association of Realtors and a past President of the California
Independent Mortgage Brokers Association.
RICHARD M. KAHLER is the President and Chief Executive Officer of the
Company and the Bank. Previously, Mr. Kahler served as President and Chief
Executive Officer of Centennial Bank from 1976 to 1979, when he left to organize
Bay Bank of Commerce. Prior to 1976, Mr. Kahler was a Regional Vice President of
<PAGE>
Camino California Bank in San Francisco, and a Vice President in Lloyds Bank-
Commercial Division, in charge of Southern Alameda County. He is a member of the
San Leandro Chamber of Commerce and has served as President of the Pinole
Chamber and as a Director of the Hayward and Castro Valley Chambers. He has also
been a Vice President of the Fruitvale and Pinole Lions Clubs.
DIMITRI V. KOROSLEV is Chairman of the Board of Directors of the Bank. He
has engaged in asset based lending since 1971. Mr. Koroslev is President and
director of Bay Business Credit, an asset based lender in Walnut Creek. From
1982 until 1988 Mr. Koroslev served as Senior Vice President/Manager of
Commonwealth Financial Corporation, an asset based lender in Walnut Creek,
California. From 1980 to 1982, he was Vice President/Manager of Foothill Capital
Corp., an asset based lender.
WILLIAM E. PELUSO is an East Bay restaurant consultant who has owned
numerous establishments since 1946. In 1965 he developed the Blue Dolphin
restaurant at the San Leandro Marina, as part of the San Leandro Shoreline
redevelopment project. The Blue Dolphin and the San Leandro Marina became a
focal point of community activity. The Blue Dolphin closed in 1998. Mr. Peluso
is past President of the Shoreline Business Association (1965-73) and the
Southern Alameda County Restaurant Association (1975-83). He is a Director of
the San Leandro Boys Club and has served as a Director of the San Leandro
Chamber of Commerce. Mr. Peluso currently serves on the Oakland Coliseum Task
Force. He is a member of the Elks and the Native Sons of California.
ROBERT A. PERANTONI is the Senior Vice President and Senior Lending Officer
of the Bank. Previously, Mr. Perantoni was a Vice President at Sanwa Bank, from
1963 to 1993.
OSWALD (OZZIE) A. RUGAARD is an independent sales consultant since 1995 and
serves in such capacity for Bay Airgas. He also serves on the Welding Advisory
Board of Chabot College, Las Positas College, and Hayward Area Eden ROP. He was
a Sales Manager for Middleton Bay Airgas in 1994 and was the President and Sales
Manager of Middleton Welder's Supply Company in San Leandro from 1948 to 1993.
He was President of the San Leandro Chamber of Commerce in 1984, President of
San Leandro Manufacturer's Association in 1970 and 1976, past Director of San
Leandro Rotary Club, a trustee of Humana Hospital of San Leandro and past
President of the Independent Welder's Association.
MARK A. WILTON is the owner of MarWil Investments. He has been involved in
HUD negotiations and the building of HUD properties since 1976. He was the
president of Marlind Inc. from 1979 to 1986. Marlind Inc. is a builder of homes
and condominiums.
No director or executive officer of the Company has any family relationship
with any other director or executive officer of the Company.
No director of the Company is a director of any other company with a class
of securities registered pursuant to section 12 or subject to the requirements
of section 15(d) of the Securities Exchange Act of 1934, as amended, or of any
company registered as an investment company under the Investment Company Act of
1940, as amended.
Committees of the Board of Directors
- ------------------------------------
The Board of Directors of the Company has established a standing Audit
Committee, with Dimitri V. Koroslev as Chairman, Joshua Fong, Oswald Rugaard,
William R. Henson and William E. Peluso as members.
The Audit Committee met once during 1998. The functions of the Audit
Committee are: (1) to recommend the appointment of and to oversee a firm of
independent certified public accountants whose duty is to audit the books and
records of the Company and the Bank for the fiscal year for which they are
appointed; (2) to monitor and recommend accounting policies to the Boards of
Directors; (3) to monitor and analyze the results of internal and regulatory
examinations; (4) to monitor the Company's and the Bank's financial and
accounting procedures and financial reporting; and (5) to assure compliance with
applicable legal and regulatory requirements with respect to audit committee
functions, internal controls, management and auditor reporting.
The Company does not have a nominating or compensation committee. The Board
of Directors of the Company performs the functions of these committees.
The Board of Directors of the Company met eighteen (18) times during 1998.
All directors of the Company attended at least 75% of the meetings of the Board
of Directors and the meetings of committees on which each director served.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
<PAGE>
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. To the best knowledge of the Company, there are no greater than ten-
percent holders of the Company's Common Stock other than Richard M. Kahler,
President and Chief Executive Officer of the Company and the Company's Employee
Stock Ownership Plan.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, for fiscal year 1998, the
officers and directors of the Company complied with all applicable filing
requirements, except that executive officer Randall D. Greenfield and director
Dimitri Koroslev each failed to file on a timely basis one Report of Changes in
Beneficial Ownership on Form 4 to report one transaction in securities. These
transactions were subsequently reported during 1998.
ITEM 10- EXECUTIVE COMPENSATION
Summary of Compensation
- -----------------------
The following table sets forth a summary of the compensation paid during
the Company's past three fiscal years for services rendered in all capacities to
Richard M. Kahler, President and Chief Executive Officer of the Company, Randall
D. Greenfield, Vice President and Chief Financial Officer of the Company and
Robert A. Perantoni, Senior Vice President and Senior Lending Officer of the
Bank, the only executive officers of the Company whose annual base compensation
and bonus exceeded $100,000 during the Company's 1998 fiscal year.
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
- ---------------------------------------------------------------------------------------------------------------------
Annual compensation
--------------------------------
Name and principal position ... Year Salary($) Bonus($) Other annual Long term All other
compensation compensation compensation
($)(1) Awards/Securities ($)
Underlying
Options (#)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Kahler, 1998 $167,045 $ 71,462 $2,232 0 $39,146(2)
President and CEO 1997 $167,045 $ 62,425 $2,270 0 $46,663
1996 $152,295 $ 63,915 $1,141 0 $40,915
Randall D. Greenfield, 1998 $109,600 $ 35,731 $7,768 0 $10,825(3)
Vice President and CFO 1997 $104,600 $ 31,212 $7,421 0 $16,085
1996 $ 95,430 $ 31,958 $6,600 0 $17,425
Robert A. Perantoni, 1998 $110,250 $ 35,731 $7,086 0 $ 8,949(4)
Senior Vice President and 1997 $105,000 $ 31,212 $7,256 0 $11,960
Senior Lending Officer 1996 $ 99,250 $ 31,958 $5,480 0 $ 8,178
</TABLE>
- --------------------------------
(1) Consisting of the dollar value of the use of a Company
automobile or paid auto allowance.
(2) Includes (for 1998) the cash value of shares allocated to
Mr. Kahler's account in the ESOP ($9,347), $5,000 contributed by
the Company to Mr. Kahler's account in the Company's 401(k) Plan,
$21,200 in directors' fees paid by the Bank and the Company and
$3,599 in term life insurance payments made by the Company on
behalf of Mr. Kahler.
(3) Includes (for 1998) the cash value of shares allocated to
Mr. Greenfield's account in the ESOP ($6,929), $3,520 contributed
by the Company to Mr. Greenfield's account in the Company's
401(k) Plan and $376 in life insurance premium payments made by
the Company on behalf of Mr. Greenfield.
(4) Includes (for 1998) the cash value of shares allocated to
Mr. Perantoni's account in the ESOP ($3,783), $3,537 contributed
by the Company to Mr. Perantoni's account in the Company's 401(k)
Plan and $1,629 in life insurance premium payments made by the
Company on behalf of Mr. Perantoni.
Option Grants and Exercises
- ---------------------------
Stock Option Grants
-------------------
The Company has established the 1994 Stock Option Plan, which was approved
by the Company's shareholders at the 1994 Annual Meeting of Shareholders. No
grants of options were made to the executive officers or the employees of the
Company and the Bank during fiscal year 1998.
Stock Option Exercises
----------------------
No stock options outstanding under the 1982 Stock Option Plan or the 1994
Stock Option Plan were exercised by any executive officer of the Company during
the Company's 1998 fiscal year. On January 14, 1999, Mr. Perantoni exercised an
option to purchase 15,000 shares of Common Stock. On April 28, 1999, Mr. Kahler
exercised an option to purchase 94,500 shares and Mr. Greenfield exercised an
option to purchase 18,675 shares of the Common Stock.
The following table shows the value at December 31, 1998 of unexercised
options held by the named executive officers of the Company under the 1982 Stock
Option Plan and the 1994 Stock Option Plan:
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
- ----------------------------------------------------------------------------------------------------------------
Number of
securities Value of
underlying unexercised in-the-
unexercised options money options at
at fiscal year-end fiscal year-end
(#) ($)
Name Shares acquired on Value Realized Exercisable/ Exercisable/
exercise (#) ($) unexercisable unexercisable(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard M. Kahler -0- -0- 94,500/0(2) $720,563/$0
Randall D. Greenfield -0- -0- 19,735/265(2) $151,672/$2,319
Robert A. Perantoni -0- -0- 15,000/0(2) $131,250/$0
</TABLE>
- ------------------------------
(1) Based on a bid price per share at December 31, 1998 of
$13.00.
(2) On January 14, 1999, Mr. Perantoni exercised his option to
purchase 15,000 shares of Common Stock. On April 28, 1999, Mr.
Kahler exercised his option to purchase 94,500 shares and Mr.
Greenfield exercised his option to purchase 18,675 shares of the
Common Stock.
Director Compensation
- ---------------------
During the 1998 fiscal year, directors of the Bank were paid an annual
retainer of $20,000, while directors of the Company were paid an annual retainer
of $1,200 for service as a director. Dr. Fong also received a community liaison
fee of $275 per month. Accordingly, aggregate directors' fees in the amount of
$10,000 and $135,700 were paid by the Company and the Bank, respectively, during
1998.
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders
- ----------------------
As of the April 28, 1999, no person or group known to the Company owned
beneficially more than five percent (5%) of the outstanding shares of its Common
Stock except as described below.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage of Outstanding
Beneficial Owner Beneficial Ownership Shares Beneficially Owned
- -----------------------------------------------------------------------------
<S> <C> <C>
Joshua Fong, O.D. 67,164(1) 5.62%(1)
1495 E. 14th Street
San Leandro, CA 94577
Patrick Hopper 81,000(2) 6.78%
350 East Desert Inn Road
Las Vegas, NV 89109
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage of Outstanding
Beneficial Owner Beneficial Ownership Shares Beneficially Owned
- -----------------------------------------------------------------------------
<S> <C> <C>
Richard M. Kahler 148,029(3) 12.39%(3)
1495 East 14th Street
San Leandro, CA 94577
William E. Peluso 99,044(4) 8.29%(4)
1495 E. 14th Street
San Leandro, CA 94577
Bay Commercial Services 155,096(5) 12.98%(5)
Employee Stock Ownership Plan
</TABLE>
---------------------------
(1) See note (1) to beneficial ownership of management table at
Item 9, above.
(2) Based on information available to the Company and not
independently confirmed by the shareholder.
(3) See note (3) to beneficial ownership of management table at
Item 9, above.
(4) See note (5) to beneficial ownership of management table at
Item 9, above.
(5) Shares allocated to a participant's account in the ESOP are
voted by the participant. The ESOP Administrative Committee is
authorized pursuant to the ESOP to vote any unallocated shares of
Company Common Stock held by the ESOP. The ESOP Administrative
Committee is composed of Mr. Kahler, President and Chief
Executive Officer of the Bank, Dimitri V. Koroslev, Chairman of
the Board of the Bank, and a non-officer employee of the Bank. As
of December 31, 1998, there were no unallocated shares of Company
Common Stock held by the ESOP.
Ownership of Management
- -----------------------
Information concerning ownership of the Bank's Common Stock by directors
and officers of the Bank is set forth in Item 9.
ITEM 12- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions
There have been no material transactions since January 1, 1998, nor are
there any currently proposed transactions, to which the Company or any of its
subsidiaries was or is to be a party, in which the amount involved exceeds
$60,000 and in which any director, executive officer, five-percent shareholder
or any member of the immediate family of any of the foregoing persons had, or
will have, a direct or indirect material interest.
Indebtedness of Management
- --------------------------
Some of the directors and executive officers of the Company and members of
their immediate families and the companies with which they have been associated
have been customers of, and have had banking transactions with, the Bank in the
ordinary course of the Bank's business since January 1, 1998, and the Bank
expects to have such banking transactions in the future. All loans and
commitments to lend included in such transactions were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and, in the opinion of the
Bank, did not involve more than the normal risk of collectability or present
other unfavorable features.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 29, 1999 BAY COMMERCIAL SERVICES
By:/s/ R. M. Kahler
Richard M. Kahler,
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ R. M. Kahler DATE: April 29, 1999
----------------------------------------------
Richard M. Kahler,
President and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ R. D. Greenfield DATE: April 29, 1999
----------------------------------------------
Randall D. Greenfield,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
and Secretary
Joshua Fong, O.D.* DATE: April 29, 1999
----------------------------------------------
Joshua Fong, O.D.,
Chairman of the Board of Directors and Director
William R. Henson* DATE: April 29, 1999
----------------------------------------------
William R. Henson, Director
Dimitri V. Koroslev* DATE: April 29, 1999
----------------------------------------------
Dimitri V. Koroslev, Director
William E. Peluso* DATE: April 29, 1999
----------------------------------------------
William E. Peluso, Director
Oswald A. Rugaard* DATE: April 29, 1999
----------------------------------------------
Oswald A. Rugaard, Director
Mark A. Wilton* DATE: April 29, 1999
----------------------------------------------
Mark A. Wilton, Director
*By /s/ R. M. Kahler DATE: April 29, 1999
--------------------------------------------------
(Richard M. Kahler, as Attorney-in-Fact)
</TABLE>
<PAGE>
ANNEX E
Bay Commercial Services
Quarterly Report on Form 10-QSB
For the Quarter Ended March 31, 1999
<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to____________
Commission File Number: 0-12231
BAY COMMERCIAL SERVICES
(Exact name of small business issuer as specified in its charter)
California 94-2760444
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1495 EAST 14TH STREET
SAN LEANDRO, CALIFORNIA 94577
(Address of principal executive offices)
(510) 357-2265
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at April 30, 1999
Common stock, no par value 1,322,110 shares
Transitional Small Business Disclosure Format
YES NO X
----
This report contains a total of 29 pages.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
(DOLLARS IN THOUSANDS): (UNAUDITED)
----------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 8,262 $ 9,077
Federal funds sold and reverse repurchase agreements 5,000 ---
----------------------------------------------------------------------------------------
Cash and cash equivalents 13,262 9,077
----------------------------------------------------------------------------------------
Securities available for sale, stated at fair value
(amortized cost of $27,669 for 1999; $31,969 for 1998) 27,589 32,033
Securities held to maturity (fair values of $7,669 for 1999;
$7,748 for 1998) 7,483 7,509
Federal Home Loan Bank stock 364 359
Loans held for sale 661 939
Loans held for investment 94,288 92,190
Allowance for loan losses (1,020) (980)
----------------------------------------------------------------------------------------
Net loans 93,929 92,149
</TABLE>
<PAGE>
<TABLE>
----------------------------------------------------------------------------------------
<S> <C> <C>
Premises and equipment, net 1,905 1,949
Interest and fees receivable 630 635
Other assets 760 491
----------------------------------------------------------------------------------------
TOTAL ASSETS $145,922 $144,202
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 38,163 $ 33,904
Savings and interest-bearing demand 42,328 37,571
Time 30,404 30,309
Certificates of deposit, $100 and over 22,256 21,611
----------------------------------------------------------------------------------------
Total deposits 133,151 123,395
----------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 100 1,344
Other short-term borrowing --- 7,000
Interest payable and other liabilities 714 1,068
----------------------------------------------------------------------------------------
Total liabilities 133,965 132,807
----------------------------------------------------------------------------------------
Commitments and contingent liabilities --- ---
Shareholders' equity:
Common stock - no par value: authorized 20,000,000 shares;
issued and outstanding 1,194,435 in 1999; 1,080,670 in 1998 4,121 3,622
Retained earnings 7,885 7,734
Accumulated other comprehensive income (loss), net of tax (49) 39
----------------------------------------------------------------------------------------
Total shareholders' equity 11,957 11,395
----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $145,922 $144,202
========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
<PAGE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS): 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans, including fees $ 2,118 $ 1,935
Federal funds sold and reverse repurchase agreements 26 55
Securities:
Taxable 380 279
Tax exempt 77 60
-------------------------------------------------------------------------------
Total interest income 2,601 2,329
-------------------------------------------------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing demand 275 204
Time 342 386
Certificates of deposit, $100 and over 249 184
Other borrowed funds 17 18
-------------------------------------------------------------------------------
Total interest expense 883 792
-------------------------------------------------------------------------------
Net interest income 1,718 1,537
Provision for loan losses 41 10
-------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,677 1,527
-------------------------------------------------------------------------------
Noninterest income:
Bankcard income 108 96
Service charges and fees 78 68
Gain on sale of loans 24 33
Loan servicing 22 24
Other 10 27
-------------------------------------------------------------------------------
Total noninterest income 242 248
-------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 828 793
Occupancy 174 170
Data processing 100 85
Bankcard processing expense 89 79
Professional services 50 28
Other 242 232
-------------------------------------------------------------------------------
Total noninterest expenses 1,483 1,387
-------------------------------------------------------------------------------
Income before income tax expense 436 388
Income tax expense 152 134
-------------------------------------------------------------------------------
NET INCOME $ 284 $ 254
===============================================================================
NET INCOME PER COMMON SHARE - BASIC $ 0.24 $ 0.24
Weighted average common shares - basic 1,182,427 1,079,653
NET INCOME PER COMMON SHARE - DILUTED $ 0.22 $ 0.20
Weighted average common shares - diluted 1,292,516 1,279,707
===============================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
<PAGE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(DOLLARS IN THOUSANDS): 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 284 $ 254
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization (124) (4)
Provision for loan losses 41 10
Unamortized deferred loan fees, net (7) (62)
Originations of SBA loans held for sale (458) (158)
Proceeds from the sale of SBA loans held for sale 622 734
Change in interest and fees receivable and other assets (52) (48)
Change in interest payable and other liabilities (159) (37)
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 147 689
- ---------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 40,920 17,244
Proceeds from maturities of securities held to maturity 30 71
Purchase of securities available for sale (36,433) (3,975)
Purchase of securities held to maturity --- (144)
Purchase of Federal Home Loan Bank stock (5) ---
Net change in loans (1,984) (6,113)
Purchases of premises and equipment (23) (24)
- ----------------------------------------------------------------------------------------
Net cash provided by investing activities 2,505 7,059
- ---------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 9,756 10,167
Net change in securities sold under agreements to repurchase (1,244) (98)
Net change in other short-term borrowing (7,000) (2,500)
Exercise of stock options 499 9
Cash dividends paid (478) (324)
- ----------------------------------------------------------------------------------------
Net cash provided by financing activities 1,533 7,254
- ---------------------------------------------------------------------------------------
Net change in cash and cash equivalents 4,185 15,002
Cash and cash equivalents at beginning of period 9,077 7,548
- ---------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,262 $ 22,550
=======================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 864 $ 676
Income taxes 76 ---
Noncash investing and financing activities during the period:
Tax benefit from exercise of nonqualified stock options $ 345 ---
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
<PAGE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998 AND
FOR THE MONTHS ENDED MARCH 31, 1999 AND 1998
1) All adjustments (consisting only of normal recurring accruals) which,
in the opinion of Management, are necessary for a fair presentation of
the Company's financial position at March 31, 1999 and December 31,
1998 and the results of its operations and its cash flows for the
three month periods ended March 31, 1999 and 1998 have been included.
The results of operations and cash flows for the periods presented are
not necessarily indicative of the results that may be expected for a
full year. These unaudited consolidated condensed financial statements
should be read in conjunction with the consolidated financial
statements, and notes thereto, included in the Company's Annual Report
on SEC Form 10KSB for the year ended December 31, 1998.
2) Net income per common share - basic for the three month periods ended
March 31, 1999 and 1998 was computed by dividing net income by the
weighted average number of outstanding common shares. Net income per
common share - diluted for the three month periods ended March 31,
1999 and 1998 is computed by dividing net income by the weighted
average number of outstanding common shares including the dilutive
effect of stock options. The weighted average number of outstanding
common shares for the three month periods ended March 31, 1999 and
1998 was 1,182,427 and 1,079,653, respectively. The weighted average
number of outstanding common shares including the dilutive effect of
stock options for the three months periods ended March 31, 1999 and
1998 was 1,292,516 and 1,279,707, respectively.
3) The provision for income taxes for the periods presented is based on a
projected tax rate for the entire year. The Company's effective tax
rate was 35% for the three month periods ended March 31, 1999 and
1998.
4) Comprehensive income includes net income and other comprehensive
income. The Company's only source of other comprehensive income is
derived from unrealized gains and losses on investment securities
available for sale. Reclassification adjustments resulting from gains
or losses on investment securities that were realized and included in
net income of the current period that also had been included in other
comprehensive income as unrealized holding gains or losses in the
period in which they arose are excluded from comprehensive income of
the current period. The Company's total comprehensive income was
$196,000 and $268,000 for the three months ended March 31, 1999 and
1998, respectively.
5) Subsequent Event. On April 30, 1999, the Company entered into an
Agreement and Plan of Reorganization ("Agreement") with Greater Bay
Bancorp ("GBB"). Under the terms of the Agreement, GBB will acquire
all the outstanding common stock of the Company in exchange for 0.7134
shares of GBB common stock for each share of common stock of the
Company, subject to adjustment as provided in the Agreement. The
merger, which is expected to close in the third quarter of 1999, is
subject to the approval of the Company's shareholders, various
regulatory agencies and certain other conditions.
<PAGE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
The Table Below Illustrates Changes in
Major Categories of the Average Balance Sheets and Statements of Income and in
Certain Performance Ratios (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE
MARCH 31, (DECREASE)
(DOLLARS IN THOUSANDS): 1999 1998 $ %
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Balances:
Assets (1) $139,119 $114,300 $24,819 21.7 %
Securities - taxable (1) 27,852 18,359 9,493 51.7
Securities - tax exempt 6,125 4,671 1,454 31.1
Federal funds sold and reverse repurchase agreements 2,203 4,013 (1,810) (45.1)
Total loans 92,967 77,355 15,612 20.2
Nonaccrual loans 29 433 (404) (93.3)
Deposits 124,876 101,547 23,329 23.0
Shareholders' equity (1) 11,683 10,340 1,343 13.0
Interest-earning assets (1) 129,118 103,965 25,153 24.2
Interest-bearing liabilities 91,349 74,057 17,292 23.3
Income Statements:
Interest income (2) $ 2,637 $ 2,357 $ 280 11.9 %
Interest expense 883 792 91 11.5
- ---------------------------------------------------------------------------------------------
Net interest income (2) 1,754 1,565 189 12.1
Taxable equivalent adjustment 36 28 8 28.6
- ---------------------------------------------------------------------------------------------
Net interest income 1,718 1,537 181 11.8
Provision for loan losses 41 10 31 310.0
- ---------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,677 1,527 150 9.8
- ---------------------------------------------------------------------------------------------
Noninterest income 242 248 (6) (2.4)
Noninterest expenses 1,483 1,387 96 6.9
Income tax expense 152 134 18 13.4
- ---------------------------------------------------------------------------------------------
NET INCOME $ 284 $ 254 $ 30 11.8 %
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Performance Ratios: (3) Change
------
<S> <C> <C> <C>
Yield on average interest-earning assets 8.17% 9.09% (0.92)%
Yield on average interest-earning assets (2) 8.28% 9.19% (0.91)%
Interest rate on average interest-bearing
liabilities 3.92% 4.34% (0.42)%
Interest expense as a percent of average
interest-earning assets 2.77% 3.09% (0.32)%
Net yield on average interest-earning assets 5.40% 6.00% (0.60)%
Net yield on average interest-earning assets (2) 5.51% 6.10% (0.59)%
(1) Before unrealized gain or loss on securities available for sale
(2) Federal taxable equivalent basis.
(3) Ratios have been annualized and are not necessarily indicative of results
that may be expected for a full year.
</TABLE>
<PAGE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1998
OVERVIEW
Certain matters discussed in this Management's Discussion and Analysis are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties include, among others,
(1) significant increases in competitive pressure in the banking industry; (2)
changes in the interest rate environment which could reduce margins; (3) general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality;
(4) changes in the regulatory environment; (5) changes in business conditions
and inflation; and (6) changes in securities markets. Therefore, the information
set forth in such forward-looking statements should be carefully considered when
evaluating the business prospects of Bay Commercial Services (the "Company") and
Bay Bank of Commerce (the "Bank").
Net income of the Company was $284,000 for the first quarter of 1999 compared to
$254,000 for the first quarter of 1998. Net income per common share - basic was
$0.24 for the first quarter of 1999 and 1998. Net income per common share -
diluted was $0.22 and $0.20 for the first quarter of 1999 and 1998,
respectively.
The $30,000 or 12% growth in net income for the first quarter of 1999 compared
to the first quarter of 1998 reflected higher net interest income for the 1999
quarter, which was partially offset by increases in noninterest expenses, income
tax expense and the provision for loan losses as well as reduced noninterest
income compared to the 1998 quarter. Net interest income for the 1999 quarter
increased $181,000 or 12% compared to the 1998 quarter due to strong growth in
average interest-earning assets which more than offset a drop in the net yield
on average interest-earning assets. A $96,000 or 7% increase in noninterest
expenses in the 1999 quarter largely reflected higher salaries and employee
expenses and increased consulting expenses related to Year 2000 compliance.
Income tax expense increased $18,000 or 13% and the provision for loan losses
increased $31,000 or 310% in the 1999 quarter. Noninterest income declined
$6,000 or 2% in the 1999 quarter as increases in bankcard income and services
charges and fees were more than offset by decreases in gain on sale of loans
guaranteed by the Small Business Administration ("SBA loans") and other
noninterest income.
Total assets were $145,922,000 at March 31, 1999, representing a $1,720,000 or
1% increase from December 31, 1998. Total deposits of $133,151,000 at March 31,
1999 grew $9,756,000 or 8% from year-end 1998 while securities sold under
agreements to repurchase declined $1,244,000 or 93% and other short-term
borrowing decreased $7,000,000 or 100%. Funds from the deposit growth net of the
reductions in repurchase agreements and short-term borrowing combined with the
$4,470,000 received in cash as securities matured during the quarter were
principally invested in federal funds sold and repurchase agreements and in
loans. Cash and cash equivalents increased $4,185,000 or 46% and loans increased
$1,820,000 or 2% during the first quarter of 1999.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the principal source of the Company's earnings, is the
amount by which interest and fees generated by interest earning assets, loans
and investments, exceed the interest cost of deposits and other interest-bearing
liabilities. Net interest income is affected by changes in interest rates as
well as the composition and volume of interest-earning assets and interest-
bearing liabilities.
Net interest income of $1,718,000 for the first quarter of 1999 increased
$181,000 or 12% compared to the first quarter of 1998. The increase reflected a
$25,153,000 or 24% growth in average interest-earning assets. The net yield on
average earning assets declined to 5.40% for the 1999 quarter from 6.00% for the
1998 quarter.
The increase in average interest-earning assets between the 1999 and 1998
quarters was principally due to growth of $16,016,000 or 21% in average earning
loans and $10,947,000 or 48% in average total securities. The average yield on
interest-earning assets for the first quarter of 1999 declined to 8.17% compared
to 9.09% for the 1998 quarter reflecting the lower level of money market and
<PAGE>
lending rates in the first quarter of 1999 compared to the first quarter of 1998
as well as an increase in the percentage of the earning asset portfolio invested
in lower yielding short-term securities. The average yield on earning loans for
the 1999 quarter declined to 9.24% from 10.20% for the 1998 quarter and the
ratio of loans to interest-earning assets for the 1999 quarter dropped to 72%
from 74% for the 1998 quarter.
Average interest-bearing liabilities increased $17,292,000 or 23% between the
1999 and 1998 quarters. The average rate paid for interest-bearing liabilities
declined to 3.92% for the 1999 quarter compared to 4.34% for the 1998 quarter,
reflecting a decrease in overall money market and deposit rates between the
quarters and a shift in the deposit portfolio. The ratio of time deposits to
average total interest-bearing liabilities fell to 56% for the 1999 quarter
compared to 59% for the 1998 quarter.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. If more assets than liabilities reprice in a given period (an asset
sensitive position), interest rate changes will have a greater effect on earning
assets. If interest rates decline, an asset sensitive position could adversely
affect net interest income. Alternatively, when more liabilities than assets
reprice in a given period (a liability sensitive position) a decline in interest
rates could benefit net interest income. The results would reverse if interest
rates were to increase.
The following table presents the Company's interest rate sensitivity gap
position at March 31, 1999. For any given period, the repricing is matched when
an equal amount of assets and liabilities reprice. The repricing of a fixed rate
asset or liability is considered to occur at its contractual maturity or, for
those assets which are held for sale, within the time period during which sale
may reasonably be expected to be accomplished. Floating rate assets or
liabilities are considered to reprice in the period during which the rate can
contractually change. Any excess of either assets or liabilities in a period
results in a gap, or mismatch, shown in the table. A positive gap indicates
asset sensitivity and a negative gap indicates liability sensitivity.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIOD
3 OVER OVER 1
AS OF MARCH 31, 1999: MONTHS 3 MONTHS YEAR TO OVER 5
(DOLLARS IN THOUSANDS) OR LESS TO 1 YEAR 5 YEARS YEARS TOTAL
- ------------------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C>
Interest rate sensitive assets:
Loans (excluding nonaccrual and
deferred fees) $59,060 $ 7,395 $14,155 $14,829 $ 95,439
Securities (before unrealized
loss on securities available for sale) 16,265 665 10,849 7,373 35,152
Federal funds sold and reverse
repurchase agreements 5,000 --- --- --- 5,000
- ------------------------------------------------------------------------- -------------------
Total 80,325 8,060 25,004 22,202 135,591
- ------------------------------------------------------------------------- -------------------
Interest rate sensitive liabilities:
Interest-bearing transaction accounts 35,016 --- --- --- 35,016
Savings deposits 7,312 --- --- --- 7,312
Time deposits, $100 and over 27,816 4,712 1,137 --- 33,665
Other time deposits 12,213 5,512 1,269 1 18,995
Other borrowed funds 100 --- --- --- 100
- ------------------------------------------------------------------------- -------------------
Total 82,457 10,224 2,406 1 95,088
- ------------------------------------------------------------------------- -------------------
Interest rate sensitivity gap (2,132) (2,164) 22,598 22,201 $ 40,503
- ------------------------------------------------------------------------- -------------------
Cumulative interest rate
sensitivity gap $(2,132) $(4,296) $18,302 $40,503
- ------------------------------------------------------------------------- -------------------
Cumulative interest rate
sensitivity gap to total assets (1.5)% (3.0)% 12.5% 27.8%
</TABLE>
This table presents a static gap, which is a position at a point in time. It
does not address the interest rate sensitivity of assets or liabilities which
would be added through growth, nor does it anticipate the future interest rate
sensitivity of assets and liabilities once they have repriced, and it assumes
equivalent elasticity of assets and liabilities. The interest rate sensitivity
analysis at March 31, 1999, indicates that the Company, on a cumulative gap
basis, is liability sensitive in the periods "3 months or less" and "Over 3
months to 1 year" and asset sensitive over the remaining time periods.
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Bank provides for possible loan losses by a charge to operating income based
upon the composition of the loan portfolio, past loan loss experience, current
economic conditions and other factors which, in management's judgment, deserve
recognition in estimating loan losses. Management will charge off loans when it
determines there has been a permanent impairment of the related carrying values.
The allowance for loan losses is reviewed by management monthly and approved by
the Board of Directors at least quarterly. Management attributes general
reserves to different types of loans using percentages which are based upon
perceived risk associated with the portfolio and underlying collateral,
historical loss experience, and vulnerability to changing economic conditions
which may affect the collectibility of the loans. Specific allowances are
allocated for impaired loans, for loans which have experienced a decline in
internal loan grading, and when management believes additional loss exposure
exists. Although the allowance for loan losses is allocated to various portfolio
segments, it is general in nature and is available for the loan portfolio in its
entirety. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for losses on loans. Such agencies may require the Company to recognize
additions to the allowance based on their analysis of information available to
them at the time of their examination.
The Senior Loan Officer assesses the loan portfolio monthly to determine which
loans are specifically identifiable problem credits in order to update the
Bank's internal watch list, which tracks all such credits. The Bank's internal
Loan Review Examiner grades all new commercial loans and all credits where the
total liability equals or exceeds certain thresholds established by management.
If either the Senior Loan Officer or the Loan Review Examiner identifies a
serious deficiency, the loan is placed on the next quarterly watch list.
Management provides a specific reserve allowance for the effects of the problem
applicable to each watchlisted credit. When management identifies a generalized
risk not evidenced by a specially identifiable loan or portfolio segment as of
the evaluation date, management's evaluation of the probable loss exposure
concerning this condition will be provided for by adjusting the level of general
reserve for this exposure.
The provision for loan losses reflects an amount necessary to adjust the
allowance for loan losses to a level which, in management's opinion, is adequate
to absorb potential credit losses inherent in loans, outstanding loan
commitments and standby letters of credit. As of March 31, 1999, the allowance
for loan losses was $1,020,000 compared to $980,000 at December 31, 1998. The
increased allowance is a result of the $41,000 provision for loan losses. The
provision for loan losses was $10,000 in the first quarter of 1998. Although
nonperforming loans dropped slightly from March 31, 1998, additional credit risk
inherent in the strong loan growth was reflected in the provision. The ratio of
the allowance for loan losses to total loans was 1.1% at March 31, 1999 and at
December 31, 1998. Based upon information currently available, management
believes that the allowance for loan losses at March 31, 1999, is adequate to
absorb future possible losses. However, no assurance can be given that the
Company may not sustain charge-offs which are in excess of the size of the
allowance in any given period.
At March 31, 1999 and December 31, 1998, the Bank also held California Capital
Access Program ("CalCAP") deposits of $208,000 and $203,000, respectively, which
CalCAP has pledged to offset any losses on any loans in the Bank's CalCAP
portfolio. The Bank had a total of $1,486,000 and $1,584,000 in CalCAP loans as
of March 31, 1999 and December 31, 1998, respectively. CalCAP is a program
authorized by the California Legislature to encourage California financial
institutions to make loans to small businesses whose operations affect the
state's environment and which may not meet the normal underwriting standards of
the financial institution.
Information on nonperforming loans for the quarters ended March 31, 1999 and
1998 and the year ended December 31, 1998 is summarized in the following table.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
(DOLLARS IN THOUSANDS) 1999 1998 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loan charge-offs $ (1) $(154) $ (5)
Ratio of net loan charge-offs to average loans --- (0.2)% ---
Nonperforming loans:
Nonaccrual $ 27 $ 30 $ 395
Accruing loans past due 90 days or more --- 299
Restructured 469 469 469
</TABLE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total nonperforming loans $ 496 $ 499 $1,163
- --------------------------------------------------------------------------------------------
Ratio of nonperforming loans to total loans 0.5% 0.5% 1.5%
Ratio of allowance for loan losses to nonperforming loans 205.6% 196.4% 86%
</TABLE>
The nonaccrual balance represents one loan which is guaranteed by the Small
Business Administration. The restructured balance represents one loan which is
paying as agreed according to the terms of the renegotiated loan agreement.
NONINTEREST INCOME
Comparing the first quarters of 1999 and 1998, noninterest income was nearly
unchanged. Reductions of $17,000 or 63% in other noninterest income, $9,000 or
27% in gain on sale of SBA loans and $2,000 or 8% in loan servicing income were
slightly in excess of increases of $12,000 or 13% in bankcard income and $10,000
or 15% in servicing charges and fees. The increases in bankcard income and
servicing charges and fees reflected increased merchant activity and deposit
growth. The decline in other noninterest income was attributable to the recovery
during the 1998 quarter of income and expenses related to previously charged-off
or paid-off loans, which was not repeated in the first quarter of 1999.
NONINTEREST EXPENSES
Total noninterest expenses of $1,483,000 for the first quarter of 1999 increased
$96,000 or 7% compared to the first quarter of 1998. Salaries and employee
benefits rose $35,000 or 4%, principally due to salary increases and higher
bonuses associated with loan growth. Professional services expense for the first
quarter of 1999 were $22,000 or 79% above the 1998 quarter, reflecting increased
accounting firm fees and legal services expense. Data processing expense
increased $15,000 or 18% principally due to asset growth and costs associated
with Year 2000 remediation.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $152,000 for the first quarter of 1999
compared to $134,000 for the first quarter of 1998. The $18,000 or 13% increase
in income tax expense reflected higher taxable income for the 1999 quarter. The
effective income tax rate was 35% for both the 1999 and 1998 quarters.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS, INVESTMENTS AND LOANS
Cash and cash equivalents of $13,262,000 at March 31, 1999 increased $4,185,000
or 46% from year-end 1998, reflecting both the deposit growth and a $4,470,000
or 11% decline in securities outstanding as of March 31, 1999. Total loans of
$94,949,000 at March 31, 1999 increased $1,820,000 or 2% from December 31, 1998.
DEPOSITS AND OTHER BORROWED FUNDS
Reflecting a continuation of the Bank's strong growth trend, total deposits of
$133,151,000 at March 31, 1999 increased $9,756,000 or 8% compared to December
31, 1998. Noninterest-bearing demand deposits grew $4,259,000 or 13% and savings
and interest-bearing demand increased $4,757,000 or 13% from December 31, 1998.
Part of the deposit growth was used to reduce by $7,000,000 other short-term
borrowing as of March 31, 1999. Securities sold under agreements to repurchase
declined $1,244,000 or 93% during the first three months of 1999.
OTHER ASSETS AND OTHER LIABILITIES
While interest and fees receivable at March 31, 1999 were relatively unchanged
from year-end 1998, other assets increased $269,000 or 55%. The increase in
other assets was principally due to the exercise during the first quarter of
1999 of nonqualified stock options, resulting in a $186,000 increase in deferred
tax assets, and an increase of approximately $100,000 in prepaid expenses.
Interest payable and other liabilities at March 31, 1999, declined $354,000 or
33% from year-end 1998 principally due to the payment of income taxes and
$159,000 in tax benefits related to the exercise of nonqualified stock options
during the first quarter of 1999.
LIQUIDITY
Liquidity is defined as the ability of the Company to meet present and future
obligations either through the sale or maturity of existing assets, or by the
acquisition of funds through liability management. The Company manages its
liquidity to provide adequate funds to support both the borrowing needs of its
customers and fluctuations in deposit flows. The Company defines liquid assets
to include cash and cash equivalents, all marketable securities with maturities
of one year or less, securities available for sale with maturities beyond one
year, and loans held for sale, less any reserve requirements being met by any of
the above. Net deposits and short-term liabilities include all deposits, federal
funds purchased, repurchase agreements and other borrowings and debt due in one
year or less. The liquidity ratio is calculated by dividing total liquid assets
by net deposits and short term liabilities. The Company's liquidity ratio by
this measure was 30% at March 31, 1999 and December 31, 1998. It is the opinion
<PAGE>
of management that the Company's and the Bank's liquidity positions are
sufficient to meet their respective needs.
In addition, to meet unforeseen outflows, the Bank has informal, non-binding
borrowing arrangements with two correspondent banks, which include federal funds
borrowing lines totaling $8,500,000 and a repurchase facility, as well as access
to a collaterized credit line with an available borrowing capacity of
approximately $12,000,000 with the Federal Home Loan Bank of San Francisco. As
of March 31, 1999, no borrowed funds were outstanding from these credit
facilities.
CAPITAL
The following tables present the Company's and the Bank's regulatory capital
positions and risk-weighted assets at March 31, 1999, and average assets over
the three month period ended March 31, 1999:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
COMPANY BANK
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 12,006 9.6% $ 11,774 9.5%
Tier 1 Capital regulatory minimum requirement 4,988 4.0 4,983 4.0
- ---------------------------------------------------------------------------------------------
Capital held in excess of regulatory minimum $ 7,018 5.6% $ 6,791 5.5%
Total Capital $ 13,026 10.4% $ 12,794 10.3%
Total Capital regulatory minimum requirement 9,976 8.0 9,966 8.0
- ---------------------------------------------------------------------------------------------
Capital held in excess of regulatory minimum $ 3,050 2.4% $ 2,828 2.3%
Risk weighted assets $124,702 $124,580
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
COMPANY BANK
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital to average total assets $ 12,006 8.6% $ 11,774 8.5%
Range of regulatory minimum leverage 4,174- 3.0- 4,170- 3.0-
requirement 6,956 5.0% 6,950 5.0%
- ----------------------------------------------------------------- ---------- ----------------
Range of regulatory excess 5,050- 3.6- 4,824- 3.5-
$ 7,832 5.6% $ 7,604 5.5%
Average total assets for first quarter* $139,119 $139,005
</TABLE>
(* Average total assets do not include unrealized gains/losses on securities
available for sale.)
The Company currently does not have any material commitments for capital
expenditures, and in the opinion of management, the Company's and the Bank's
capital positions are sufficient to meet their respective needs.
INFLATION
It is management's opinion that the effects of inflation on the consolidated
financial statements for the periods ended March 31, 1999 and 1998 have not been
material.
YEAR 2000 READINESS DISCLOSURE
The following discussion of the implications of the Year 2000 problem for the
Company contains numerous forward-looking statements based on inherently
uncertain information. The cost of the project and the date on which the Company
plans to complete the internal Year 2000 modifications are based on management's
best estimates, which were derived utilizing a number of assumptions of future
events including the continued availability of internal and external resources,
third party modifications and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse affect on the Company.
In addition, the Company places a high degree of reliance on computer systems of
third parties, such as customers, suppliers, and other financial and
governmental institutions. Although the Company continues to assess the
readiness of these third parties and is preparing contingency plans, there can
be no guarantees that the failure of any one of these third parties to modify
their systems in advance of December 31, 1999 would not have a material adverse
<PAGE>
affect on the Company.
Many computer hardware systems and software programs in use today were developed
using a two digit date code to specify the year. As a result many systems and
programs that are date sensitive will treat "00" as the year 1900, and not
properly recognize the date transition at the year 2000. An additional issue is
that 1900 was not a leap year, whereas the year 2000 is. Therefore, some
programs may not properly provide for February 29, 2000.
The Company initiated its Year 2000 planning in 1997 and has prepared a
comprehensive written plan which addresses both internal and external Year 2000
exposure and includes the following phases - Inventory and Assessment,
Renovation, Testing and Implementation, and Contingency Planning.
INVENTORY & ASSESSMENT
The Company completed its inventory and assessment phase during 1997. During
this process the Company made a physical inventory of information technology
("IT") systems and non-IT systems at each office location. Additionally, all
vendor supplied services were reviewed to identify IT and non-IT Year 2000
issues. The systems examined included hardware and software platforms associated
with customer account processing, computer networks and workstations, and
telecommunications systems.
Although the assessment determined that there was no significant reliance on
non-IT technology (that is, equipment with embedded microprocessor controls such
as elevators, climate control systems, etc.), it did identify mission critical
IT systems, both internal and external that were not Year 2000 compliant.
These noncompliant systems included data processing applications provided by
third party suppliers, the teller platform at two branch offices of the Bank,
and some of the hardware and software elements of the Bank's Wide Area Network
("WAN") computer network. The WAN is a centralized, server based, system that
interconnects employees' desktop PC workstations at each location.
One additional element of Year 2000 concern has been the Bank's customers. The
Bank is reliant on its customers to make the necessary preparations for the Year
2000 so that their business operations will not be interrupted, thus threatening
their ability to honor financial commitments.
In an ongoing effort to ensure that its customer base is aware of the Year 2000
issue, during the second quarter of 1998 the Bank mailed to each commercial
account, and included in each commercial account loan and deposit account
statement, a letter addressing Year 2000 issues and encouraging the assessment
of Year 2000 risk. Year 2000 reference resources for businesses were also
provided.
As part of its customer Year 2000 assessment, the Bank identified all commercial
account borrowing relationships in excess of $100,000. These represented over
200 relationships and approximately 95% of the total borrowings outstanding as
of June 30, 1998. Each of these business relationships was analyzed as to its
potential for Year 2000 risk and approximately 20% were selected to receive a
detailed Year 2000 questionnaire. The questionnaire, requesting additional
information on Year 2000 status, was delivered to these selected customers
during the third quarter of 1998. The completed questionnaires were analyzed for
risk and each borrower was assigned a Year 2000 risk rating. As a result of this
analysis, the Bank modified its credit review process and its underwriting
criteria to include consideration of Year 2000 issues.
RENOVATION, TESTING & IMPLEMENTATION
The correction and testing phase of the Company's Year 2000 Plan includes the
renovation and/or replacement of all mission critical IT hardware, software and
equipment identified as not compliant with the Year 2000. The majority of the
internal mission critical renovation centered around the upgrade to the Bank's
WAN and teller systems. The installation of the Year 2000 compliant teller
system was completed by December 31, 1998.
To ensure Year 2000 compliance of its WAN and reduce the administrative overhead
of its IT systems, management determined that a complete renovation of the WAN
would provide the most cost effective solution. Most of the elements of the
Bank's WAN upgrade were completed by December 31, 1998. Due to the overall
complexity of this project, however, only a few of the desktop workstations were
operational on the new system at that time. Current projections are for all
users to be converted over to the new Year 2000 compliant system during the
second quarter of 1999.
The Bank relies on two primary off-site data processing vendors for the mission
critical processing of the Bank's customer accounting system and general ledger
applications. These vendors identified certain Year 2000 compliance issues and
the renovations to these systems were completed by December 31, 1998. Testing of
these systems was completed during the first quarter of 1999.
<PAGE>
Although no vendors were identified where the inability to be Year 2000
compliant would cause the Company to seek alternative suppliers, the Company has
no viable alternatives for some vendors, such as power distribution and local
telephone companies. The Year 2000 efforts of these companies continue to be
monitored and are part of the Company's contingency plan. As with all financial
institutions, the Company places a high degree of reliance on systems of other
institutions, including governmental agencies, to settle transactions.
In compliance with FFIEC guidelines, the Company has met all testing
requirements at or prior to the time such requirements were required to have
been met and the present schedule reflects completion of all remaining testing
by June 30, 1999. The remaining scheduled testing includes only non-critical
applications or is a result of software upgrades.
The Company will perform additional testing through the remainder of 1999 when
appropriate or when changes are made in hardware or software, however, few
changes are anticipated.
COSTS
The majority of the costs associated with the Company's Year 2000 project are
for the installation and testing of the components to upgrade the Bank's teller
systems and WAN. Included in this project were improved communication
connections between offices, higher capacity computer file servers, and
operating system upgrades for the entire network. While these investments were
not specifically accelerated due to the Company's Year 2000 project, these costs
have been included.
The Company invested approximately $78,000 in the first quarter of 1999 for
capital improvements to the WAN. As of March 31, 1999, total investment in this
project was $ 153,000 with an estimated additional $82,000 remaining to be
incurred.. The capital cost to upgrade the Bank's teller system for Year 2000
compliance, which was completed in the first quarter of 1999, was $60,000 of
which $42,000 was paid in the first quarter of 1999. Other costs incurred by the
Company as of March 31, 1999 include staff time devoted to the issue at a cost
of approximately $6,000 and outside consulting of $28,000 for the first quarter
of 1999. Costs to-date at March 31, 1999 for staff time and outside consulting
were $21,000 and $35,000, respectively. Current estimates of additional costs
for staff and outside consultants in 1999 and the year 2000 are $29,000.
While management believes it has identified and planned for the resolution of
the mission critical issues relevant to the Year 2000, no assurance can be given
that the Company may not be required to expend significant additional amounts
related to the Year 2000 issue.
RISKS
The principal risks associated with the Year 2000 problem primarily fall into
three categories. The first risk is that the Company is unable to successfully
renovate and/or migrate to Year 2000 compliant systems. The second risk is the
disruption of operations due to the failure of third parties. The third is the
risk of business interruption among fund providers and fund users which affects
their ability to contractually perform.
The only risk largely under the Company's control for the Year 2000 project is
the identification, renovation and implementation of its internal operations.
The Company, like other financial institutions, is heavily dependent upon its
computer systems. Reliance on readily available PC-based systems and technology
for WAN and desktop workstations has simplified this process to some extent, and
management believes it will be able to make the necessary renovations of its
internal systems for Year 2000 compliance.
Because of the reliance on outside vendors for processing mission critical
customer accounting systems, a computer failure of a third party may jeopardize
Company operations. How serious this would be depends on the nature and duration
of such failures. Because of the complexity, integration and dependence of these
outside systems to the Company's operations, switching to another vendor on
short notice does not represent a viable option. At this time, management
believes that the necessary renovations to these third party systems will be
completed on schedule.
Another serious impact to Company operations would occur if basic services such
as telecommunications, electric power supplies and services provided by other
governmental agencies were disrupted. To date definitive public disclosure of
the state of readiness among basic infrastructure suppliers has not been
generally available. Although inquiries continue, the Company does not yet have
the information to estimate the likelihood of significant disruptions among
these suppliers.
CONTINGENCY PLANNING
The Company has developed contingency plans for the Year 2000 in the event that
remediation is not completed in time, or if systems fail for reasons that are
<PAGE>
not presently foreseen. In the event of a failure, these plans outline the steps
that will be taken to deal with the situation to minimize the effect on
customers and losses to the Company. As the Company's identified Year 2000 risks
are largely concentrated with the ability of third parties to provide services
after the year 2000, contingency plans being developed will primarily
concentrate on the inability of these suppliers to complete their Year 2000
projects. Based upon currently known information, management believes that its
primary vendors have the resources to complete their Year 2000 projects
successfully and on time.
Apart from the Company's Year 2000 project, federal banking regulators are
conducting special examinations of FDIC-insured financial institutions and third
party data processors, including suppliers to the Company, to determine whether
they are taking necessary steps to prepare for the Year 2000. They are closely
monitoring the progress made by these institutions in completing key steps
required by their individual Year 2000 plans.
The Company's disclosure and announcement herein concerning its Year 2000
planning and programs are intended to constitute "year 2000 readiness
disclosures" as defined in the recently-enacted Year 2000 Information and
Readiness Disclosure Act (the "Act"). The Act provided certain protection from
liability for certain public and private statements concerning an entity's Year
2000 readiness and the Year 2000 readiness of its products and services.
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 10.2.1 Amendment to Employee Stock Ownership Plan, dated
January 22, 1997;
Exhibit 10.9.1 Amendments to 401(k) Profit Sharing Plan, dated
December 12, 1994, and December 30, 1993.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company for the quarter
ended March 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAY COMMERCIAL SERVICES
(Registrant)
Date: May 13, 1999 /s/ R. M. Kahler
--------------------
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1999 /s/ R. D. Greenfield
---------------------
R. D. Greenfield
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article Five of Greater Bay's articles of incorporation provides that
Greater Bay shall eliminate the liability of its directors for monetary damages
to the fullest extent permissible under California law. Article Five also
provides for the indemnification of agents (as defined in Section 317 of the
California General Corporation Law) of Greater Bay. If agents of Greater Bay
breach a duty to Greater Bay and its shareholders, then Article Five authorizes
Greater Bay, to the extent permissible under California Law, to indemnify such
agents in excess of the indemnification expressly permitted by such Section
317.
Section 317 sets forth the provisions pertaining to the indemnification of
corporate "agents." For purposes of this law, an agent is any person who is or
was a director, officer, employee or other agent of a corporation, or is or was
serving at the request of Greater Bay in such capacity with respect to any
other corporation, partnership, join venture, trust or other enterprise.
Section 317 mandates Greater Bay's indemnification of agents where the agent's
defense is successful on the merits. In other cases, Section 317 allows Greater
Bay to indemnify agents for expenses (including amounts paid to defend, settle
or otherwise dispose of a threatened or pending action) if the indemnification
is authorized by (1) a majority vote of a quorum of Greater Bay's Board of
Directors consisting of directors who are not party to the proceedings; (2)
approval of the shareholders, with the shares owned by the person to be
indemnified not being entitled to vote thereon; or (3) the court in which the
proceeding is or was pending upon application by certain designated parties.
Under certain circumstances, Greater Bay can indemnify an agent even when the
agent is found liable. Section 317 also allows Greater Bay to advance expenses
to its agents for certain actions upon receiving an undertaking by the agent
that he or she will reimburse Greater Bay if the agent is found liable. Greater
Bay has entered into indemnification agreements with its directors and certain
of its officers substantially to the foregoing effect. Greater Bay also
maintains directors and officers liability insurance.
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
Greater Bay, pursuant to the foregoing provisions or otherwise, Greater Bay
understands that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. If a claim for indemnification against such liabilities (other
than the payment by Greater Bay of expenses incurred or paid by a director,
officer or controlling person of Greater Bay in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, Greater
Bay will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against a public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Item 21. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
2.1 Agreement and Plan of Reorganization by and between Greater Bay
Bancorp and Bay Commercial Services dated April 30, 1999./1/
4.1 Rights Agreement./2/
4.2 Junior Subordinated Indenture dated as of March 31, 1997 between
Greater Bay Bancorp and Wilmington Trust Company, as Trustee./3/
4.3 Officers' Certificate and Company Order, dated March 31, 1997./3/
4.4 Certificate of Trust of GBB Capital I./4/
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997./4/
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
4.6.1 Amended and Restated Trust Agreement of GBB Capital I, among
Greater Bay Bancorp, Wilmington Trust Company and the
Administrative Trustees named therein dated as of March 31,
1997./3/
4.6.2 Appointment of Successor Administrative Trustee and First
Amendment to Amended and Restated Agreement./1/
4.7 Trust Preferred Certificate of GBB Capital I./3/
4.8 Common Securities Certificate of GBB Capital I./3/
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington
Trust Company, dated as of March 31, 1997./3/
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997./3/
4.11 Form of Subordinated Debentures./5/
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp
dated as of November 22, 1996./4/
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp./4/
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997./3/
4.15 Indenture between Greater Bay Bancorp and Wilmington Trust
Company, as Debenture Trustee, dated as of August 12, 1998./6/
4.16 Form of Exchange Junior Subordinated Debentures (filed as Exhibit
A to Exhibit 4.15 hereto).
4.17 Certificate of Trust of GBB Capital II, dated as of May 18,
1998./6/
4.18 Amended and Restated Trust Agreement of GBB Capital II, among
Greater Bay Bancorp, Wilmington Trust Company and the
Administrative Trustees named therein dated as of August 12,
1998./6/
4.19 Form of Exchange Capital Security Certificate (filed as Exhibit A-
1 to Exhibit 4.18 hereto).
4.20 Common Securities Guarantee Agreement of Greater Bay Bancorp,
dated as of August 12, 1998./6/
4.21 Liquidated Damages Agreement among Greater Bay Bancorp, GBB
Capital II, and Sandler O'Neill and Partners, L.P., dated as of
August 7, 1998./6/
4.22 Series B Capital Securities Guarantee Agreement between Greater
Bay Bancorp and Wilmington Trust Company, dated as of November 27,
1998./1/
4.23 Registration Rights Agreement between Greater Bay Bancorp and The
Leo K. W. Lum PRB Revocable Trust dated May 8, 1998./7/
5.1 Opinion of Linda M. Iannone, General Counsel of Greater Bay
Bancorp.
8.1 Opinion of Manatt, Phelps & Phillips, LLP as to certain federal
income tax matters (including the consent of that firm).
23.1 Consent of PricewaterhouseCoopers LLP for Greater Bay Bancorp.
23.2 Consent of Deloitte & Touche LLP for Bay Commercial Services.
23.3 Consent of Linda M. Iannone (included in Exhibit 5.1).
24.1 A power of attorney is set forth on the signature page of the
Registration Statement.
99.1 Bay Commercial Services Proxy.
</TABLE>
II-2
<PAGE>
- --------
1. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on May 6, 1999.
2. Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed with
the SEC on November 25, 1998.
3. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K dated June 5, 1997.
4. Incorporated by reference from Greater Bay Bancorp's Registration Statement
on Form S-1 (File No. 333-22783) dated March 5, 1997.
5. Incorporated herein by reference from Exhibit 1 of Cupertino National
Bancorp's Form 8-K filed with the SEC on October 25, 1995.
6. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on August 28, 1998.
7. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on May 20, 1998.
Item 22. Undertakings
The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933, as amended (the "Securities Act");
(b) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the Calculation of Registration Fee table in the
effective registration statement; and
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a) (3) of the Securities Act and is used in connection with an
II-3
<PAGE>
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions of this Item 22, or otherwise,
each of the registrants has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of
such registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, each registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(7) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, California,
on July 2, 1999.
Greater Bay Bancorp
/s/ David L. Kalkbrenner
By: _________________________________
David L. Kalkbrenner
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints David L.
Kalkbrenner and Steven C. Smith his or her true and lawful attorneys-in-fact
and agents, each acting alone, with full powers of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all Amendments (including Post-Effective
Amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting along, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ David L. Kalkbrenner President and Chief July 2, 1999
____________________________________ Executive Officer
David L. Kalkbrenner (Principal Executive
Officer)
/s/ Steven C. Smith Executive Vice President, July 2, 1999
____________________________________ Chief Administrative
Steven C. Smith Officer and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
/s/ George R. Corey Director July 2, 1999
____________________________________
George R. Corey
/s/ John M. Gatto Director July 2, 1999
____________________________________
John M. Gatto
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James E. Jackson Director July 2, 1999
____________________________________
James E. Jackson
/s/ Stanley A. Kangas Director July 2, 1999
____________________________________
Stanley A. Kangas
/s/ Rex D. Lindsay Director July 2, 1999
____________________________________
Rex D. Lindsay
Director July 2, 1999
____________________________________
Leo K. W. Lum
Director July 2, 1999
____________________________________
George M. Marcus
/s/ Duncan L. Matteson Director July 2, 1999
____________________________________
Duncan L. Matteson
Director July 2, 1999
____________________________________
Rebecca Q. Morgan
/s/ Glen McLaughlin Director July 2, 1999
____________________________________
Glen McLaughlin
/s/ Dick J. Randall Director July 2, 1999
____________________________________
Dick J. Randall
/s/ Donald H. Seiler Director July 2, 1999
____________________________________
Donald H. Seiler
/s/ Warren R. Thoits Director July 2, 1999
____________________________________
Warren R. Thoits
</TABLE>
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
2.1 Agreement and Plan of Reorganization by and between Greater Bay
Bancorp and Bay Commercial Services dated April 30, 1999./1/
4.1 Rights Agreement./2/
4.2 Junior Subordinated Indenture dated as of March 31, 1997 between
Greater Bay Bancorp and Wilmington Trust Company, as Trustee./3/
4.3 Officers' Certificate and Company Order, dated March 31, 1997./3/
4.4 Certificate of Trust of GBB Capital I./4/
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997./4/
4.6.1 Amended and Restated Trust Agreement of GBB Capital I, among
Greater Bay Bancorp, Wilmington Trust Company and the
Administrative Trustees named therein dated as of March 31,
1997./3/
4.6.2 Appointment of Successor Administrative Trustee and First
Amendment to Amended and Restated Agreement./1/
4.7 Trust Preferred Certificate of GBB Capital I./3/
4.8 Common Securities Certificate of GBB Capital I./3/
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington
Trust Company, dated as of March 31, 1997./3/
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997./3/
4.11 Form of Subordinated Debentures./5/
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp
dated as of November 22, 1996./4/
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp./4/
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997./3/
4.15 Indenture between Greater Bay Bancorp and Wilmington Trust
Company, as Debenture Trustee, dated as of August 12, 1998./6/
4.16 Form of Exchange Junior Subordinated Debentures (filed as Exhibit
A to Exhibit 4.15 hereto).
4.17 Certificate of Trust of GBB Capital II, dated as of May 18,
1998./6/
4.18 Amended and Restated Trust Agreement of GBB Capital II, among
Greater Bay Bancorp, Wilmington Trust Company and the
Administrative Trustees named therein dated as of August 12,
1998./6/
4.19 Form of Exchange Capital Security Certificate (filed as Exhibit A-
1 to Exhibit 4.18 hereto).
4.20 Common Securities Guarantee Agreement of Greater Bay Bancorp,
dated as of August 12, 1998./6/
4.21 Liquidated Damages Agreement among Greater Bay Bancorp, GBB
Capital II, and Sandler O'Neill and Partners, L.P., dated as of
August 7, 1998./6/
4.22 Series B Capital Securities Guarantee Agreement between Greater
Bay Bancorp and Wilmington Trust Company, dated as of November 27,
1998./1/
4.23 Registration Rights Agreement between Greater Bay Bancorp and The
Leo K. W. Lum PRB Revocable Trust dated May 8, 1998./7/
5.1 Opinion of Linda M. Iannone, General Counsel of Greater Bay
Bancorp.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
8.1 Opinion of Manatt, Phelps & Phillips, LLP as to certain federal
income tax matters (including the consent of that firm).
23.1 Consent of PricewaterhouseCoopers LLP for Greater Bay Bancorp.
23.2 Consent of Deloitte & Touche LLP for Bay Commercial Services.
23.3 Consent of Linda M. Iannone (included in Exhibit 5.1).
24.1 A power of attorney is set forth on the signature page of the
Registration Statement.
99.1 Bay Commercial Services Proxy.
</TABLE>
- --------
1. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on May 6, 1999.
2. Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed with
the SEC on November 25, 1998.
3. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K dated June 5, 1997.
4. Incorporated by reference from Greater Bay Bancorp's Registration Statement
on Form S-1 (File No. 333-22783) dated March 5, 1997.
5. Incorporated herein by reference from Exhibit 1 of Cupertino National
Bancorp's Form 8-K, filed with the SEC on October 25, 1995.
6. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on August 28, 1998.
7. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on May 20, 1998.
<PAGE>
Exhibit 5.1
July 6, 1999
Greater Bay Bancorp
2860 West Bayshore Road
Palo Alto, CA 94303
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
As General Counsel of Greater Bay Bancorp (the "Company"), at your
request, I have examined the Registration Statement on Form S-4 (the
"Registration Statement") being filed by the Company with the Securities and
Exchange Commission (the "SEC") in connection with the registration under the
Securities Act of 1933, as amended (the "Securities Act"), of up to 972,809
shares of common stock, no par value, of the Company (the "Shares") issuable
in connection with the Agreement and Plan of Reorganization, dated as of April
30, 1999, between the Company and Bay Commercial Services (the "Agreement").
I have examined such instruments, documents and records which I deemed
relevant and necessary for the basis of my opinion hereinafter expressed. In
such examination, I have assumed the genuineness of all signatures and the
authenticity of all documents submitted to me as originals and the conformity
to the originals of all documents submitted to me as copies.
Based upon the foregoing and the other assumptions contained herein, it
is the opinion of the undersigned that the Shares issuable by the Company
pursuant to the Agreement will be, when issued and delivered in accordance
with the Agreement and the Registration Statement, duly authorized, validly
issued, fully paid and non-assessable.
This opinion is further subject to the following assumptions: (i) the
consideration for the Shares to be issued pursuant to the Agreement will be
received prior to the issuance thereof, (ii) the Shares to be issued pursuant
to the Agreement will be issued in accordance with the terms of the Agreement,
(iii) the Registration Statement will become effective under the Securities
Act prior to the issuance of the Shares under the Agreement and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or be
pending before the SEC, and (iv) the issuance of the Shares pursuant to the
Agreement will comply with the securities laws of each state or jurisdiction
applicable thereto (other than the Securities Act).
<PAGE>
This opinion is issued to you solely for use in connection with the
Registration Statement and is not to be quoted or otherwise referred to in any
financial statements of the Company or related document, nor is it to be filed
with or furnished to any government agency or other person, without my prior
written consent.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement which is being filed by the Company in connection with
the registration of the Shares under the Securities Act.
Very truly yours,
/s/ Linda M. Iannone
Linda M. Iannone
Senior Vice President, General Counsel and Secretary
of Greater Bay Bancorp
2
<PAGE>
EXHIBIT 8.1
- ---------------------
MANATT
- ---------------------
PHELPS
- ---------------------
PHILLIPS Donald J. Fitzgerald
- --------------------- Direct Dial: (310) 312-4000, Ext. 4125
ATTORNEYS AT LAW Internet: [email protected]
July 6, 1999 File No: 14359-047
Board of Directors
Greater Bay Bancorp
2860 West Bayshore Road
Palo Alto, California 94303
Board of Directors
Bay Commercial Services
1495 East 14/th/ Street
San Leandro, California 94577
Re: Material Federal and California Income Tax Consequences of the Merger
of Bay Commercial Services with and into Greater Bay Bancorp
Ladies and Gentlemen:
In accordance with your request, we provide the following analysis and
opinions relating to certain federal and California income tax consequences of
the transaction (the "Merger") whereby Bay Commercial Services ("BCS") will
merge with and into Greater Bay Bancorp ("GBB"), pursuant to that certain
Agreement and Plan of Reorganization dated as of April 30, 1999 (the
"Agreement"). Immediately after and as a result of the Merger, Bay Bank of
Commerce ("BBC"), a wholly-owned subsidiary of BCS, shall become a wholly-owned
subsidiary of GBB. Terms used herein have the same meaning as in the Agreement.
In the Merger, BCS shall be merged with and into GBB in a statutory
merger in accordance with the California General Corporation Law and the
separate corporate existence of BCS shall cease. GBB shall be the surviving
entity. GBB shall succeed, without other transfer, to all the rights and
property of BCS (including 100% of the issued and outstanding shares of BBC) and
shall be subject to all the debts and liabilities of BCS in the same manner as
if GBB had itself incurred them. Each share of GBB Stock issued and outstanding
immediately prior to the Effective Time of the Merger shall remain an issued and
outstanding share of common stock of GBB and shall not be converted or otherwise
affected by the Merger.
Manatt Phelps & Phillips, LLP
11355 West Olympic Boulevard, Los Angeles, California 90064 - 1614
310-312-4000 FAX 310-312-4224
Los Angeles Menlo Park Nashville Washington, D.C.
<PAGE>
Board of Directors
July 6, 1999
Page 2
Subject to the provisions of the Agreement, each share of BCS Stock
issued and outstanding immediately prior to the Effective Time of the Merger,
other than BCS Perfected Dissenting Shares (if any), shall, on and after the
Effective Time of the Merger, be automatically canceled and cease to be an
issued and outstanding share of BCS Stock and shall be converted into the right
to receive shares of GBB Stock in a ratio specified in the Agreement.
No fractional shares of GBB Stock shall be issued in the Merger. In
lieu thereof, each holder of BCS Stock who would otherwise be entitled to
receive a fractional share shall receive an amount in cash, rounded to the
nearest hundredth, equal to the product obtained by multiplying (a) the closing
price of GBB Stock reported on the Nasdaq National Market System on the Business
Day immediately preceding the Closing Date times (b) the fraction of the share
of GBB Stock to which such holder would otherwise be entitled. No such holder
shall be entitled to dividends or other rights in respect to any such fraction.
Perfected Dissenting Shares of BCS Stock (if any) which have not
effectively withdrawn or lost their rights under the California General
Corporation Law shall not be converted as described in the foregoing paragraphs,
but shall be entitled to receive such consideration as shall be determined
pursuant to the California General Corporation Law.
Our analysis and the opinions set forth below are based upon the
existence of the facts and conclusions of law above and the facts set forth in
that certain Agreement referred to above, including the exhibits thereto. Our
analysis and opinions are also based on certain representations in the Agreement
and certain written representations to us from GBB and BCS in letters of even
date herewith (each a "Representations Letter"). Our analysis and opinions are
further based on that certain Form S-4 Registration Statement filed with the
Securities and Exchange Commission in connection with the Merger (the "Form S-
4"). The facts and representations contained in the above-referenced documents
are incorporated herein by reference as the operative facts underlying the tax
opinions set forth herein. One of our key assumptions for purposes of this
letter is that the facts and representations set forth in those documents are
accurate on the date of this analysis and remain accurate to the date of the
closing of the Merger and are otherwise true, complete, and correct. Any change
or inaccuracy in such facts or representations may adversely affect our
opinions.
We have acted as special counsel to GBB in connection with the Merger
and are rendering these opinions to GBB and BCS at their request. In rendering
these opinions, we have examined such documents, laws, regulations and other
legal matters as we have considered necessary or appropriate for purposes of the
opinions expressed herein. We have not made any independent investigation in
rendering these opinions other than as described herein. Moreover, we have never
represented BCS, either in the Merger or otherwise, and consequently the
opinions expressed herein which relate to BCS and its shareholders are based
solely on the Form S-4 and on BCS's representations made in the Agreements and
in BCS's Representations Letter.
<PAGE>
Board of Directors
July 6, 1999
Page 3
Our opinions are based upon the Internal Revenue Code and the
California Revenue and Taxation Code as of the date hereof and currently
applicable regulations promulgated thereunder (including proposed regulations),
published administrative positions of the California Franchise Tax Board and of
the Internal Revenue Service in revenue rulings and revenue procedures, and
judicial decisions. Such legal authorities are all subject to change, either
prospectively or retroactively. No assurance can be provided as to the effect of
any such change upon our opinions. We have undertaken no obligation to update
this letter.
The opinions set forth herein have no binding effect on the Internal
Revenue Service, the California Franchise Tax Board, or the courts. No assurance
can be given that, if contested, a court would agree with the opinions set forth
herein. The opinions set forth herein represent rather our best legal judgment
as to the likely outcome of the issues addressed herein if such issues were
litigated and all appeals exhausted.
In the case of transactions as complex as the Merger, many federal,
state and local income and other tax consequences arise. We have been asked only
to address the issues specifically set forth below. No opinion is expressed
regarding any other issues.
This letter is being issued solely for the benefit of GBB and BCS and
for the benefit of the GBB and BCS shareholders as of the date of the Merger. It
may not be relied upon by any other person without our prior written consent.
Subject to the foregoing, it is our opinion that the Merger is a tax-
deferred reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended, and for purposes of Section 24451 of
the California Revenue and Taxation Code and shall not result in the recognition
of gain or loss for federal or California income tax purposes to GBB or BCS, nor
shall the issuance of the GBB Stock in the Merger result in the recognition of
gain or loss by the holders of BCS Stock who receive such stock in connection
with the Merger. Income or loss shall be recognized by the holders of BCS Stock
on the receipt of cash as dissenters (if any) or in lieu of fractional shares
(if any), however. The substitution of GBB Stock Options for BCS Stock Options
pursuant to the Agreement shall not result in the recognition of any income or
gain to the option holder and shall not disqualify any such options that
qualified as incentive stock options immediately prior to the Merger as
incentive stock options immediately after the Merger. The section titled
"Material Federal Income Tax Consequences" in the Form S-4 accurately summarizes
the material federal income tax consequences of the Merger.
<PAGE>
Board of Directors
July 6, 1999
Page 4
We hereby consent to the filing of this opinion with the applicable
federal and California regulatory agencies with whom such opinion is required to
be filed in connection with the Merger.
Very truly yours,
/s/ Manatt Phelps & Phillips LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-4 of Greater Bay Bancorp and Subsidiaries (the Company) of our report
dated February 8, 1999, on our audits of the consolidated financial statements
at December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, which report is included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, and of our report
dated July 1, 1999, on our audit of the combination of the historical
consolidated financial statements of Greater Bay Bancorp and Subsidiaries and
Bay Area Bancshares after restatement for the pooling of interests as described
in Note 1 to the supplemental consolidated financial statements, which report
is included in the Company's Current Report on Form 8-K filed July 1, 1999. We
also consent to the reference to our firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
San Francisco, California
July 6, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion and incorporation by reference in this
Registration Statement of Greater Bay Bancorp on Form S-4 of our report dated
January 29, 1999, appearing in and incorporated by reference in the Annual
Report on Form 10-KSB of Bay Commercial Services for the year ended December
31, 1998, and to the reference to us under the headings "Selected Financial
Data" and "Experts" in the Prospectus, which is part of this Registration
Statement.
/s/ Deloitte & Touche LLP
San Francisco, California
July 6, 1999
<PAGE>
EXHIBIT 99.1
PROXY
BAY COMMERCIAL SERVICES
SOLICITED BY THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF SHAREHOLDERS
The undersigned shareholder of Bay Commercial Services (the "Company") hereby
appoints _______________, ______________ and ______________ and each of them,
the attorney, agent and proxy of the undersigned, with full power of
substitution, to vote all stock of the Company which the undersigned is
entitled to vote at the Special Meeting of Shareholders of the Company to be
held on __________________ ____, 1999 at ____ A.M. and any adjournments thereof,
as fully and with the same force and effect as the undersigned might or could do
if present, as follows:
1. To approve and adopt the Agreement and Plan of Reorganization dated as of
April 30, 1999 by and between Bay Commercial Services and Greater Bay Bancorp,
and the transactions contemplated thereby, including the merger of Bay
Commerical Services with and into Greater Bay Bancorp.
[_] FOR [_] AGAINST [_] ABSTAIN
2. To transact such other business as may properly come before the meeting.
(This proxy will be voted as directed by the shareholder or, if no
instructions are given by the shareholder, the proxy holders will vote "FOR"
the above proposal.)
(Continued and to be signed on other side)
<PAGE>
(Continued from other side)
THE PROXY HOLDERS DESIGNATED BY THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE LISTED PROPOSAL. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
- -------------------------------- __________________________ , 1999
Number of Shares Dated
----------------------
Signature of Shareholder
----------------------
Print Name
----------------------
Signature of Shareholder
----------------------
Print Name
When signing as attorney, executor, officer, administrator, trustee
or guardian, please give full title. If more than one trustee, all
should sign. All joint owners must sign.
I/we do [_] do not [_] expect to attend this meeting.
