<PAGE>
As filed with the Securities and Exchange Commission on June 27, 2000
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>
<CAPTION>
<S> <C> <C>
California 6711 77-0387041
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2860 West Bayshore Road
Palo Alto, California 94303
(650) 813-8200
</TABLE>
(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. David J. Block, Esq.
Manatt, Phelps & Phillips LLP Leland, Parachini, Steinberg,
11355 West Olympic Boulevard Matzger & Melnick LLP
Los Angeles, California 90064 333 Market Street, 27th Floor
Telephone: (310) 312-4210 San Francisco, California 94105
Telephone: (415) 957-1800
</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 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
Title of Each Class of Proposed maximum aggregate
Securities to be Amount to be offering offering price Amount of
Registered registered (2) per unit (3) (3) registration fee
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par
value(1).............. 1,133,045 -- $47,554,771 $12,554
------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
(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 March 21, 2000 by and among
Greater Bay Bancorp, Bank of Petaluma and DKSS Corp. based on an assumed
Conversion Ratio of 0.685.
(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 Bank of Petaluma to be
exchanged for the stock of Greater Bay Bancorp (1,654,079) multiplied by
the average of the bid and asked prices of Bank of Petaluma Common Stock as
reported on the OTC Bulletin Board on June 22, 2000 ($28.75).
---------------
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>
[LOGO OF BANK OF SANTA CLARA]
PROXY STATEMENT/PROSPECTUS
MERGER PROPOSED
YOUR VOTE IS VERY IMPORTANT
Dear Shareholders:
The Board of Directors of Bank of Petaluma has unanimously approved and
recommends an agreement to merge with Greater Bay Bancorp. As a result of the
proposed merger, Bank of Petaluma will become a subsidiary of Greater Bay
Bancorp.
If we complete the merger, shareholders of Bank of Petaluma will receive
approximately 0.685 shares of Greater Bay Bancorp common stock for each share
of Bank of Petaluma common stock plus cash for any fractional shares. The
amount of Greater Bay Bancorp common stock to be received by Bank of Petaluma
shareholders will adjust according to a formula, depending on the average
closing price of Greater Bay Bancorp common stock at the completion of the
merger. We estimate that, upon completion of the merger, current Bank of
Petaluma shareholders will own approximately 4.9% of the outstanding Greater
Bay Bancorp common stock, assuming completion by Greater Bay Bancorp of its
previously announced merger with Bank of Santa Clara.
This document gives you detailed information about the merger and includes a
copy of the merger agreement, and you should read it carefully. It is a proxy
statement that Bank of Petaluma is using to solicit proxies for use at its
special shareholder meeting. It is also a prospectus relating to Greater Bay
Bancorp's issuance of its shares of common stock in connection with the merger.
Before you make a decision on how to vote on the merger, you should consider
the "Risk Factors" on page 19 of the attached proxy statement/prospectus.
We are enthusiastic about the merger and the strength and capabilities we
expect from the combined company. We join all the other members of our Board of
Directors in recommending that you vote in favor of the merger.
Daniel G. Libarle Walter E. Bragdon
/s/ Daniel G. Libarte /s/ Walter E. Bragdon
Chairman of the Board 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 through this document 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 , 2000 and it is first
being mailed to shareholders on or about , 2000.
<PAGE>
Bank of Petaluma
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On , 2000 at .m.
Place:
Purposes:
. To vote on the merger of Bank of Petaluma with DKSS Corp., as a result of
which Bank of Petaluma will become a wholly owned subsidiary of Greater Bay
Bancorp, and related matters. In the merger, you will receive approximately
0.685 shares of Greater Bay Bancorp common stock for each share of Bank of
Petaluma common stock you own before the merger. The amount of Greater Bay
Bancorp common stock to be received by Bank of Petaluma shareholders will
adjust according to a formula, depending on the average closing price of
Greater Bay Bancorp common stock at the completion of the merger.
. To conduct other business if properly raised.
Only shareholders of Bank of Petaluma as of the close of business on ,
2000 may vote at the special meeting.
In connection with the proposed merger, you may exercise dissenters' rights
as provided by the California General Corporation Law. If you meet all the
requirements of this law, and follow all of its required procedures, you may
receive cash in the amount equal to the fair market value, as determined by
Bank of Petaluma, or, if required, by a court of law, of your shares of Bank of
Petaluma common stock as of March 20, 2000, the day immediately preceding the
announcement of the merger. For additional details about dissenters' rights,
please refer to "Dissenting Shareholders' Rights" and Annex C in the
accompanying proxy statement/prospectus.
By Order of the Board of Directors
Patricia A. Wasik
Corporate Secretary
Petaluma, California
, 2000
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 PRIOR TO ITS EXERCISE IN THE MANNER
PROVIDED IN THE ACCOMPANYING DOCUMENT.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will I receive in the merger?
A: For each outstanding share of Bank of Petaluma common stock you own, you
will receive 0.685 shares of Greater Bay common stock if the average
closing price of that stock is between $37.91 and $46.34. This is called
the "conversion ratio." If the average closing price of that stock is
greater than $46.34, the conversion ratio will adjust according to a
formula. If the average closing price of Greater Bay stock is less than
$37.91, Greater Bay may elect a top up option in which the conversion ratio
will adjust according to a formula equivalent to $25.97 per Bank of
Petaluma share. If Greater Bay does not elect the top up option, the
conversion ratio will be 0.685, unless Bank of Petaluma decides to
terminate the merger agreement.
Average closing price means the average closing sale price on The Nasdaq
Stock Market of Greater Bay common stock for the 20 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, Bank of Petaluma's former shareholders will
own approximately 4.9% of Greater Bay's outstanding shares of common stock
and current Greater Bay shareholders will own approximately 95.1% of
Greater Bay's outstanding shares of common stock, assuming completion of
Greater Bay's pending merger with Bank of Santa Clara. See "Summary--
Recent Developments" (page 6).
For example:
. If the average closing price of Greater Bay common stock is $40.00 at the
completion of the merger, and you own 100 shares of Bank of Petaluma
common stock, then after the merger you will receive 68 shares of Greater
Bay common stock and a check in an amount representing the fractional
share, for a value of approximately $27.40 per Bank of Petaluma share.
. If the average closing price of Greater Bay common stock is $48.00 at the
completion of the merger and you own 100 shares of Bank of Petaluma
common stock, then after the merger you will receive 67 shares of Greater
Bay common stock and a check in an amount representing the fractional
share, for an aggregate value of approximately $32.29 per Bank of
Petaluma share.
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 you will receive in
the merger will fluctuate as well and could increase or decrease. You are
urged to obtain current market prices for shares of Greater Bay common
stock and Bank of Petaluma common stock.
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 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
(i)
<PAGE>
and including the day of the meeting by following the directions on pages 20
through 21.
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 on the merger 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 same effect as voting against the merger.
Q: When is the merger expected to be completed?
A: We are working to complete the merger during the fourth quarter of 2000.
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 Bank of Petaluma common stock certificates for Greater Bay
common stock certificates.
Q: What risks should I consider?
A: You should review "Risk Factors" on page 19.
You should also review the factors considered by Bank of Petaluma's Board
of Directors. See "The Merger--Background of and Reasons for the Merger"
(pages 24 through 26).
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:
Patricia A. Wasik
Bank of Petaluma
1360 Redwood Way
Petaluma, California 94954
Telephone (707) 765-2222
(ii)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... i
SUMMARY.................................................................... 1
The Companies............................................................ 1
Greater Bay Bancorp...................................................... 1
Bank of Petaluma......................................................... 1
The Special Meeting...................................................... 1
Record Date; Voting Power................................................ 2
Vote Required............................................................ 2
Share Ownership of Bank of Petaluma Management........................... 2
Recommendation........................................................... 2
Opinion of Hoefer & Arnett, Financial Advisor to Bank of Petaluma........ 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................................ 5
Recent Developments...................................................... 6
Market Price and Dividend Information...................................... 8
Comparative Market Price Data............................................ 8
Historical Market Prices and Dividends................................... 8
Selected Historical and Pro Forma Financial Data........................... 10
Historical and Pro Forma Per Share Data.................................. 11
Greater Bay Historical Selected Financial Data........................... 13
Bank of Petaluma Historical Selected Financial Data...................... 15
Selected Unaudited Pro Forma Combined Financial Data--Greater Bay and
Bank of Petaluma........................................................ 16
Selected Unaudited Pro Forma Combined Financial Data--Greater Bay, Bank
of Petaluma and Bank of Santa Clara .................................... 17
RISK FACTORS............................................................... 19
Since the market price of Greater Bay common stock will vary, Bank of
Petaluma shareholders cannot be sure of the number of shares and value
of the Greater Bay common stock to be received in the merger............ 19
We may not successfully integrate our business operations................ 19
THE BANK OF PETALUMA SPECIAL MEETING....................................... 20
General.................................................................. 20
Record Date; Voting Power................................................ 20
Vote Required............................................................ 20
Share Ownership of Management............................................ 20
Recommendation of the Bank of Petaluma Board............................. 20
Solicitation and Revocation of Proxies................................... 20
Other Matters............................................................ 21
THE MERGER................................................................. 22
Structure of the Merger.................................................. 22
Background of and Reasons for the Merger................................. 24
Opinion of Financial Advisor............................................. 26
Interests of Certain Persons in the Merger............................... 31
Nasdaq Listing........................................................... 32
Material Federal Income Tax Consequences................................. 32
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
Accounting Treatment of the Merger...................................... 33
Exchange of Bank of Petaluma Common Stock for Greater Bay Common Stock.. 33
THE MERGER AGREEMENT...................................................... 35
Conditions to the Merger................................................ 35
Nonsolicitation......................................................... 36
Expenses................................................................ 37
Treatment of Options.................................................... 37
Termination............................................................. 37
Covenants; Conduct of Business Prior to Effective Time.................. 38
Amendment and Waiver.................................................... 41
Agreements with Certain Shareholders.................................... 41
Resales of Greater Bay Common Stock..................................... 41
Regulatory Approvals.................................................... 42
DISSENTING SHAREHOLDERS' RIGHTS........................................... 44
DESCRIPTION OF GREATER BAY COMMON STOCK AND BANK OF PETALUMA COMMON
STOCK.................................................................... 47
Stock Description....................................................... 47
Material Differences Between Holders of Greater Bay Stock and Bank of
Petaluma Stock......................................................... 48
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.............. 52
MANAGEMENT OF GREATER BAY AFTER THE MERGER................................ 60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 61
EXPERTS................................................................... 62
LEGAL MATTERS............................................................. 62
WHERE YOU CAN FIND MORE INFORMATION....................................... 62
A WARNING ABOUT FORWARD-LOOKING INFORMATION............................... 65
Annex A: Agreement and Plan of Reorganization by and among Greater Bay
Bancorp, Bank of Petaluma and DKSS Corp. dated March 21, 2000 A-1
Annex B: Fairness Opinion of Hoefer & Arnett dated , 2000 B-1
Annex C: Selected Provisions of the California General Corporation Law
Regarding Dissenters' Rights C-1
Annex D: Bank of Petaluma Annual Report on Form 10-KSB, as amended by Form
10-KSB/A, for the year ended December 31, 1999 D-1
Annex E: Bank of Petaluma Quarterly Report on Form 10-QSB for the period
ended March 31, 2000 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 62).
The Companies
Greater Bay Bancorp
2860 W. Bayshore Road
Palo Alto, California 94303
(650) 813-8200
Greater Bay is a bank holding company operating Bay Area Bank, Bay Bank of
Commerce, Coast Commercial Bank, Cupertino National Bank, Golden Gate Bank,
Mid-Peninsula Bank, Mt. Diablo National Bank and Peninsula Bank of Commerce.
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 Region, Greater Bay Bank Fremont
Region, 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 Northern California including Silicon Valley, San
Francisco, the San Francisco Peninsula, the Contra Costa Tri Valley Region and
the Coastal Market, with offices located in Aptos, Blackhawk, Capitola,
Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Palo Alto,
Pleasanton, Redwood City, San Francisco, San Leandro, San Mateo, San Ramon,
Santa Clara, Santa Cruz, Scotts Valley, Walnut Creek and Watsonville.
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.
Bank of Petaluma
1360 Redwood Way
Petaluma, California 94954
(707) 765-2222
Bank of Petaluma was organized as a California state banking corporation on
March 17, 1987, and commenced operations on September 21, 1987. Situated in the
growing area of the San Francisco Bay Area's northern market known as the
"Telecom Valley," Bank of Petaluma engages in the general commercial banking
business, with an emphasis on small business and retail banking. Bank of
Petaluma conducts its business through its four banking offices in Petaluma,
Point Reyes Station and Valley Ford.
The Special Meeting (pages 20-21)
The Bank of Petaluma special shareholders' meeting will be held at ,
located at , Petaluma, California at .m., local time, on , , 2000.
At the meeting, you will be asked to consider and vote upon a proposal to
approve and adopt the merger agreement.
1
<PAGE>
Record Date; Voting Power (page 20)
You are entitled to vote at the special meeting if you owned Bank of
Petaluma common stock on , 2000, the record date for the special meeting. As
of that date, there were shares of Bank of Petaluma common stock issued
and outstanding held by approximately holders of record. Each holder of
Bank of Petaluma common stock is entitled to one vote per share on any matter
that may properly come before the meeting.
Vote Required (page 20)
Approval by the Bank of Petaluma shareholders of the proposal to approve and
adopt the merger agreement will require the affirmative vote of a majority of
the outstanding shares of Bank of Petaluma common stock.
Share Ownership of Bank of Petaluma Management (pages 61)
On the record date for the special meeting, the executive officers and
directors of Bank of Petaluma, including their affiliates, had voting power
with respect to an aggregate of shares of Bank of Petaluma common stock,
or approximately % of the shares of the common stock then outstanding.
The directors of Bank of Petaluma have signed contracts agreeing to vote the
shares of Bank of Petaluma common stock owned by them FOR the proposal to
approve and adopt the merger agreement and the transactions contemplated
thereby.
Recommendation (page 20)
The Bank of Petaluma 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 Bank of Petaluma Board considered in determining whether
to approve and adopt the merger agreement on pages 25-26.
Opinion of Hoefer & Arnett, Financial Advisor to Bank of Petaluma (pages 26-31)
Hoefer & Arnett Incorporated, financial advisor to Bank of Petaluma,
rendered an oral fairness opinion on March 21, 2000 to the Bank of Petaluma
Board that as of such date, the merger consideration to be paid was fair to the
Bank of Petaluma shareholders from a financial point of view. Hoefer & Arnett
subsequently confirmed its March 21, 2000 opinion by delivery to the Bank of
Petaluma Board of a written fairness opinion dated as of the date of this
document. A copy of the fairness opinion, setting forth the information
reviewed, assumptions made and matters considered by Hoefer & Arnett, is
attached to this document as Annex B. Bank of Petaluma shareholders should read
the fairness opinion in its entirety.
Terms of the Merger Agreement (pages 35-43)
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 Bank of Petaluma will merge with
DKSS Corp., as a result of which Bank of Petaluma will become a wholly owned
subsidiary of Greater Bay.
Conversion Ratio. For each outstanding share of Bank of Petaluma common
stock, Bank of Petaluma shareholders will receive 0.685 shares of Greater Bay
common stock if the average closing price of that stock is between $37.91 and
$46.34. If the average closing price of that stock is greater than $46.34, the
conversion ratio will adjust according to a set formula. If the average closing
price of Greater Bay stock is less than
2
<PAGE>
$37.91, Greater Bay may elect a top up option in which the conversion ratio
will adjust according to a formula. If Greater Bay does not elect the top up
option, the conversion ratio will be 0.685, unless Bank of Petaluma decides to
terminate the merger agreement. Greater Bay will not issue fractional shares.
Instead, Bank of Petaluma shareholders will receive a check equal to the amount
of any fractional share they would otherwise receive.
Average closing price means the average closing sale price on The Nasdaq
Stock Market of Greater Bay common stock for the 20 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 Bank of Petaluma shareholders;
. receipt of listing approval from The Nasdaq Stock Market for the Greater
Bay common stock to be issued in the merger;
. receipt of all necessary authorizations, orders and consents of
governmental authorities without imposition of any conditions that
Greater Bay deems to be materially adverse or materially burdensome, 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 Bank of Petaluma
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 Richardson & Company of a letter confirming that no
conditions exist with respect to Bank of Petaluma 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;
. confirmation that the adjusted book value of Bank of Petaluma common
stock at the close of business on the last day of the month prior to
completion of the merger is not less than $16,719,000 if the merger
closes in June 2000, $16,860,000 if the merger closes in July 2000,
$17,032,000 if the merger closes in August 2000, $17,197,000 if the
merger closes in September 2000 and $17,359,000 if the merger closes in
October 2000. Adjusted book value means Bank of Petaluma's total
shareholders' equity adjusted to eliminate all amounts paid for the
exercise of Bank of Petaluma stock options since December 31, 1999, to
eliminate amounts related to accumulated other comprehensive income, to
deduct any dividends paid after the date of the merger agreement and to
eliminate amounts paid or accrued for merger-related expenses; and
. confirmation that Bank of Petaluma's allowance for loan losses equals the
greater of 1.33% of Bank of Petaluma's total gross loans or $1,596,000.
Unless prohibited by law, either Greater Bay or Bank of Petaluma could elect
to waive any condition.
3
<PAGE>
Termination. Either Bank of Petaluma or Greater Bay may call off the merger
under a number of circumstances, including if:
. Greater Bay and Bank of Petaluma consent in writing;
. the merger is not completed before October 15, 2000;
. legal restraints prevent the merger;
. the Bank of Petaluma 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.
In addition, Greater Bay may call off the merger if the Bank of Petaluma
Board approves, recommends or causes Bank of Petaluma to enter into any
agreement with a person other than Greater Bay providing for the merger,
consolidation, share exchange, joint venture, business combination or similar
transaction involving Bank of Petaluma or any subsidiary of Bank of Petaluma,
or any purchase of all or any material portion of the assets of Bank of
Petaluma or any subsidiary of Bank of Petaluma. If that occurs, Bank of
Petaluma will have to pay Greater Bay $1,750,000.
Similarly, Bank of Petaluma may call off the merger if Greater Bay announces
a business combination, tender offer or similar transaction which, if
consummated, would result in Greater Bay shareholders owning less than 51% of
the shares of the surviving corporation and the other party requires Greater
Bay to terminate the merger agreement between Greater Bay and Bank of Petaluma.
If that occurs, Greater Bay will have to pay Bank of Petaluma $1,500,000. In
addition, Bank of Petaluma may call off the merger if the average closing price
is less than $37.91, unless Greater Bay elects the top up option as described
under the heading "The Merger--Structure of the Merger--Conversion of Shares"
on page 22.
Interests of Certain Persons in the Merger (pages 31-32)
The directors and executive officers of Bank of Petaluma have interests in
the merger as employees and/or directors that are different from, or in
addition to, the interests of Bank of Petaluma shareholders. The Bank of
Petaluma Board recognized these interests and determined that they did not
affect the benefits of the merger to the Bank of Petaluma shareholders.
Upon completion of the merger, the current members of the Boards of Greater
Bay and Bank of Petaluma will continue as members of their respective Boards.
Also, , a director of Bank of Petaluma, will become a director of
Greater Bay and David L. Kalkbrenner, President and Chief Executive Officer of
Greater Bay, will become a director of Bank of Petaluma.
If the merger takes place, the following will occur:
. outstanding options to purchase Bank of Petaluma common stock held by
directors, officers and employees of Bank of Petaluma will be
automatically converted into options to acquire shares of Greater Bay
common stock adjusted to account for the conversion ratio; and
. certain members of senior management of Bank of Petaluma will remain as
senior management of Bank of Petaluma.
Upon the signing of the merger agreement, there were outstanding options to
purchase an aggregate of 209,282 shares of Bank of Petaluma common stock. Of
the outstanding options, the executive officers
4
<PAGE>
and directors of Bank of Petaluma held options to purchase 146,429 shares of
Bank of Petaluma common stock at a per share weighted average exercise price of
$19.68.
Material Federal Income Tax Consequences (pages 32-33)
Greater Bay and Bank of Petaluma have received a legal opinion stating that
neither Greater Bay nor Bank of Petaluma will recognize gain or loss for
federal income tax purposes as a result of the merger. The opinion also
concludes that Bank of Petaluma shareholders will not recognize gain or loss
upon the exchange of their Bank of Petaluma 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 33)
We expect the merger to be accounted for as a pooling of interests, which
means that we will treat Greater Bay and Bank of Petaluma as if they had always
been combined for accounting and financial reporting purposes.
Resales of Greater Bay Common Stock (page 41)
Shares of Greater Bay common stock that Bank of Petaluma shareholders
receive in the merger will be freely transferable, 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 Bank of Petaluma or Greater Bay. Bank of
Petaluma has provided to Greater Bay the written agreements of its affiliates
that these persons will not dispose of their shares of Bank of Petaluma common
stock and Greater Bay common stock, except in compliance with the Securities
Act of 1933, or Securities Act, and applicable accounting rules governing
pooling of interests.
Regulatory Approvals (pages 41-43)
Greater Bay is required to make filings with or obtain approval from the
Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation and the California Department of Financial Institutions to complete
the merger. We cannot predict whether or when we will obtain these approvals.
Dissenters' Rights (pages 44-46)
Shareholders of Bank of Petaluma will have dissenters' rights under
California law. This means that shareholders who do not vote in favor of the
merger may make a written demand to Bank of Petaluma 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 Bank of Petaluma sends a notice stating that the
shareholders approved the merger. The Bank of Petaluma Board of Directors has
determined that the "fair market value" of one share of Bank of Petaluma for
this purpose is $23.375. That amount represents the final bid price for Bank of
Petaluma common stock on March 20, 2000, the day before the public announcement
of the merger. The procedure for exercising 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.
Differences in the Rights of Shareholders (pages 47-51)
Both Greater Bay and Bank of Petaluma are incorporated under California law.
Upon completion of the merger, Bank of Petaluma shareholders will become
Greater Bay shareholders. Their rights will be governed by Greater Bay's
articles of incorporation and bylaws and will continue to be governed by
California law.
5
<PAGE>
Recent Developments
Merger with Coast Bancorp. On May 18, 2000, Greater Bay completed its merger
with Coast Bancorp, the holding company for Coast Commercial Bank, Santa Cruz,
California. Each Coast Bancorp shareholder received 0.6338 shares of Greater
Bay stock for each share of Coast Bancorp in a tax-free exchange. The merger
was accounted for as a pooling of interests. As a result of the merger, Coast
Commercial Bank operates as a wholly owned subsidiary of Greater Bay. On a pro
forma basis as of March 31, 2000, the combined company, assuming the pending
mergers with Bank of Santa Clara and Bank of Petaluma had occurred as of that
date, would have total assets of approximately $4.2 billion and shareholders'
equity of approximately $280 million. Greater Bay has restated its financial
statements to include the Coast Bancorp merger which was accounted for using
the pooling of interests method of accounting.
Merger with Bank of Santa Clara. On January 27, 2000, Greater Bay announced
the signing of a definitive merger agreement with Bank of Santa Clara. Upon
completion of the merger, Bank of Santa Clara will operate as a wholly owned
subsidiary of Greater Bay Bancorp.
In the merger, Greater Bay will issue shares of its stock in a tax free
exchange for the shares of stock of Bank of Santa Clara for an estimated value
of approximately $90.8 million, depending on the market price of Greater Bay's
stock at the time of the merger closing. The merger, which will be accounted
for as a pooling of interests, is expected to be completed in the third quarter
of 2000, subject to the approval of Bank of Santa Clara's shareholders and
regulatory approval. Bank of Santa Clara has scheduled a special meeting of
shareholders on July 13, 2000 to vote on the merger.
Bank of Santa Clara, founded in 1973, is the oldest independent community
bank in Santa Clara County. With eight offices located in Milpitas, San Jose,
Santa Clara and Sunnyvale, California, Bank of Santa Clara serves the small- to
mid-sized business community and retail banking clients. As of March 31, 2000,
Bank of Santa Clara had total assets of $355 million and deposits of $317
million. For the year ended December 31, 1999, net income was $4.4 million, an
11.3% increase over net income of $4.0 million in 1998. For the first quarter
of 2000, net income was $1.2 million, a 34.8% increase over net income of $906
million in the comparable quarter of 1999.
The terms of the agreement provide for the shareholders of Bank of Santa
Clara to receive shares of Greater Bay. Bank of Santa Clara currently has
approximately 2.33 million shares of common stock outstanding. If the average
closing price of Greater Bay common stock is between $38.3875 and $44.6125,
each share of Bank of Santa Clara stock will be exchanged for 0.87 of a share
of Greater Bay stock. If the average closing price of Greater Bay common stock
is greater than $44.6125, the exchange ratio will decrease by dividing the
average closing price into $38.8129 plus one-third of the amount that the
average closing price exceeds $44.6125. If the average closing price of Greater
Bay stock is between $36.3600 and $38.3875, the exchange ratio will increase by
dividing the average closing price into $33.3971 minus one-third of the
difference between $38.3875 and the average closing price. If the average
closing price of Greater Bay common stock is less than $36.3600, the exchange
ratio will equal 0.9000 but Bank of Santa Clara may decide to terminate the
agreement, unless Greater Bay elects to exercise a top up option. In that case,
the exchange ratio will equal the quotient obtained by dividing $32.7240 by the
average closing price of Greater Bay stock.
Completion of Private Offering. On May 19, 2000, Greater Bay completed a
private offering of $41 million in trust preferred securities. The trust
preferred securities, issued through Greater Bay's trust subsidiary GBB Capital
IV, have a 10.75% distribution rate payable semi-annually. GBB Capital IV used
the proceeds from the sale of the trust preferred securities to purchase junior
subordinated deferrable interest debentures of Greater Bay. Greater Bay intends
to invest a portion of the net proceeds in one or more of the company's
subsidiary banks to increase their capital levels and intends to use the
remaining net proceeds for general corporate purposes. Under applicable
regulatory guidelines, Greater Bay expects that a portion of the trust
preferred securities will qualify as Tier I Capital, and the remainder as Tier
II Capital.
6
<PAGE>
The following table details on a historical and pro forma basis Greater
Bay's capital ratios as of March 31, 2000.
<TABLE>
<CAPTION>
Historical Pro Forma
3/31/00 3/31/00(1)(2)
---------- -------------
<S> <C> <C>
Total Assets (in thousands)........................ $3,607,237 $4,211,331
Capital Ratios:
Equity to Assets................................. 6.45% 6.70%
Leverage......................................... 8.86% 9.85%
Tier 1 Risk Based Capital........................ 10.33% 11.44%
Total Risk Based Capital......................... 11.70% 12.67%
</TABLE>
--------
(1) Includes Bank of Santa Clara and Bank of Petaluma.
(2) Includes $41.0 million of trust preferred securities issued on May 19,
2000.
7
<PAGE>
Market Price And Dividend Information
Comparative Market Price Data
The following table presents trading information for Greater Bay and Bank of
Petaluma common stock on The Nasdaq Stock Market on March 20, 2000 and ,
2000. March 20, 2000 was the last full trading day before our announcement of
the signing of the merger agreement. , 2000 was the last practicable trading
day for which information was available before the date of this document.
<TABLE>
<CAPTION>
GREATER BAY BANCORP BANK OF PETALUMA
-------------------- --------------------
HIGH LOW CLOSE HIGH LOW CLOSE
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
March 20, 2000 ....................... $39.50 $37.50 $38.00 $23.38 $23.38 $23.38
, 2000............................. $ $ $ $ $ $
</TABLE>
We urge you to obtain current market quotations for Greater Bay common stock
and Bank of Petaluma 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 -- Since the market price of Greater Bay common stock will vary,
Bank of Petaluma shareholders cannot be sure of the number of shares and value
of the Greater Bay common stock to be received in the merger." 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 Bancorp. Greater Bay common stock is listed on The Nasdaq Stock
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 quarters indicated, the high and
low sales prices per share of Greater Bay common stock as reported on The
Nasdaq Stock 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>
2000:
Second quarter (through , 2000)...................... $ $ $0.150
First quarter........................................... 42.94 35.19 0.150
1999:
Fourth quarter ......................................... $43.44 $33.81 $0.120
Third quarter........................................... 36.50 31.13 0.120
Second quarter ......................................... 33.25 28.00 0.120
First quarter........................................... 33.75 27.56 0.120
1998:
Fourth quarter.......................................... $35.00 $24.50 $0.095
Third quarter........................................... 39.00 23.38 0.095
Second quarter.......................................... 36.00 28.88 0.095
First quarter........................................... 31.38 24.13 0.095
</TABLE>
8
<PAGE>
Bank of Petaluma. Bank of Petaluma common stock is traded on the OTC
Bulletin Board under the symbol "BPLU." On the record date for the special
meeting, there were approximately holders of record of Bank of Petaluma
common stock.
The following table sets forth for the calendar quarters indicated the range
of high and low bid prices of Bank of Petaluma common stock, based upon
information provided by Hoefer & Arnett, and the dividends per share of Bank of
Petaluma common stock. The table does not include private transactions. 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. The following information has been adjusted to reflect a two-for-
one stock split effective in May 1998.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER HIGH LOW DECLARED
------- ------ ------ ---------
<S> <C> <C> <C>
2000:
Second quarter (through , 2000)..................... $ $ $0.06
First quarter........................................... 22.50 21.00 --
1999:
Fourth quarter ......................................... $23.00 $18.00 $0.06
Third quarter........................................... 18.75 18.38 --
Second quarter.......................................... 21.00 18.38 0.06
First quarter........................................... 21.25 20.25 --
1998:
Fourth quarter.......................................... $21.00 $20.25 $0.06
Third quarter........................................... 18.00 17.50 --
Second quarter.......................................... 24.00 23.25 0.05
First quarter........................................... 19.50 19.25 --
</TABLE>
9
<PAGE>
Selected Historical and Pro Forma Financial Data
We are providing the following information to aid you in your analysis of
the financial effects of the merger. The historical selected financial data in
the following tables shows financial results actually achieved by each of
Greater Bay and Bank of Petaluma for the periods presented. These are the
historical figures. 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 Coast Bancorp, the former
holding company of Coast Commercial Bank, which was completed on May 18, 2000
using the pooling of interests method of accounting. Upon publication of
Greater Bay's financial information for a post-merger period which includes May
18, 2000, these supplemental consolidated financial statements will become the
historical financial statements of Greater Bay. Bank of Petaluma's annual
historical figures are derived from financial statements as of December 31,
1999 and 1998 and for the three years then ended audited by Richardson &
Company, independent certified public accountants of Bank of Petaluma. The
annual historical information presented below should be read together with the
supplemental consolidated audited financial statements of Greater Bay and the
audited financial statements of Bank of Petaluma, attached or incorporated in
this document by reference. To find this information, see "Where You Can Find
More Information" (pages 63-64).
Pro forma combined figures are simply arithmetical combinations of Greater
Bay's and Bank of Petaluma's separate financial results. You should not assume
that the combined company of Greater Bay and Bank of Petaluma would have
achieved the pro forma combined results if they had actually been combined
during the periods presented. These pro forma presentations treat the companies
as if they had always been combined for accounting and financial reporting
purposes, a method known as pooling of interests accounting. When you read this
information, you should also read the information under the heading "Unaudited
Pro Forma Condensed Combined Financial Information" (page 52). For purposes of
illustration, the pro forma combined figures have been calculated using the
conversion ratio of 0.685 for our proposed merger. However the actual
conversion ratio will be determined based on the average closing price of
Greater Bay common stock which is explained further under "The Merger--
Structure of the Merger" (pages 22-24).
The pro forma figures also include information relating to Bank of Santa
Clara. On January 26, 2000, Greater Bay signed a definitive agreement for a
merger with Bank of Santa Clara. See the information under "Recent
Developments" in this Summary.
We expect to incur merger and other non-recurring expenses as a result of
combining the 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.
10
<PAGE>
Historical and Pro Forma Per Share Data
We have summarized below the per share information for our respective
companies on an historical, pro forma combined and pro forma equivalent basis.
We have adjusted Greater Bay's historical per share amounts to reflect a two-
for-one stock split effective April 30, 1998. We have adjusted Bank of
Petaluma's historical per share amounts to reflect a two-for-one stock split
effective in May 1998 and a 5% stock dividend paid in December 1997.
We have calculated the pro forma Greater Bay and Bank of Petaluma combined
per share data for net income using the weighted average number of shares of
Greater Bay's common stock outstanding for the periods presented, increased by
the weighted average number of shares of Bank of Petaluma common stock
outstanding for the period presented multiplied by an assumed conversion ratio
of 0.685 shares of Greater Bay's common stock for each share of Bank of
Petaluma common stock, as if these shares were outstanding for each period
presented. With respect to the pro forma Greater Bay, Bank of Petaluma and Bank
of Santa Clara combined per share data for net income, we have further
increased the weighted average number of shares of Greater Bay's common stock
by the weighted average number of shares of Bank of Santa Clara common stock
outstanding for the periods presented multiplied by an assumed conversion ratio
of 0.870 shares of Greater Bay's common stock for each share of Bank of Santa
Clara common stock, as if these shares were outstanding for each period
presented.
The pro forma Greater Bay and Bank of Petaluma combined per share data for
dividends declared represents the sum of historical dividends for Greater Bay
common stock plus the historical dividends for Bank of Petaluma common stock
divided by the sum of Greater Bay common stock and Bank of Petaluma common
stock, adjusted for the assumed conversion ratio of 0.685. With respect to the
pro forma Greater Bay, Bank of Petaluma and Bank of Santa Clara combined per
share data for dividends declared, we have further added historical dividends
for Bank of Santa Clara common stock divided by the sum of Greater Bay common
stock and Bank of Santa Clara common stock, adjusted for the assumed conversion
ratio of 0.870.
The pro forma Greater Bay and Bank of Petaluma combined book value per share
has been calculated using the shares of outstanding Greater Bay common stock
increased by the shares of outstanding Bank of Petaluma common stock multiplied
by an assumed conversion ratio of 0.685 for each share of Bank of Petaluma
common stock as if these shares were outstanding as of the date presented. With
respect to the Greater Bay, Bank of Petaluma and Bank of Santa Clara combined
book value per share, we have further increased the outstanding shares of
Greater Bay common stock by the shares of outstanding Bank of Santa Clara
common stock multiplied by an assumed conversion ratio of 0.870 for each share
of Bank of Santa Clara common stock as if these shares were outstanding as of
the date presented.
11
<PAGE>
The equivalent pro forma Bank of Petaluma share information shown in the
fourth column in the table below has been calculated by multiplying the pro
forma Greater Bay and Bank of Petaluma combined per share net income, dividends
and book value by an assumed conversion ratio of 0.685. The equivalent pro
forma Bank of Petaluma share information shown in the last column in the table
below has been calculated by multiplying the pro forma Greater Bay, Bank of
Petaluma and Bank of Santa Clara combined per share net income, dividends and
book value by an assumed conversion ratio of 0.685.
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Greater Bay,
Pro Forma Equivalent Bank of Pro Forma
Greater Bay of One Petaluma & Equivalent of
Historical & Bank of Bank of Historical Bank of One Bank of
Historical Bank of Petaluma Petaluma Bank of Santa Clara Petaluma
Per Common Share Greater Bay Petaluma Combined Share Santa Clara Combined Share
---------------- ----------- ---------- ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income:
Three months ended March
31, 2000
Basic................. $ 0.91 $ 0.39 $ 0.89 $0.61 $ 0.53 $ 0.86 $0.59
Diluted............... 0.87 0.38 0.85 0.58 0.50 0.82 0.56
Three months ended March
31, 1999
Basic................. 0.50 0.39 0.50 0.34 0.39 0.50 0.34
Diluted............... 0.47 0.37 0.47 0.32 0.39 0.47 0.32
Year ended December 31,
1999
Basic................. 2.29 1.61 2.30 1.57 1.91 2.29 1.57
Diluted............... 2.17 1.55 2.17 1.49 1.86 2.17 1.49
Year ended December 31,
1998
Basic................. 1.75 1.54 1.78 1.22 1.73 1.80 1.24
Diluted............... 1.63 1.45 1.66 1.14 1.69 1.69 1.16
Year ended December 31,
1997
Basic................. 1.34 1.14 1.35 0.93 1.48 1.39 0.95
Diluted............... 1.25 1.06 1.26 0.87 1.45 1.31 0.89
Cash Dividends Declared:
Three months ended March
31, 2000............... 0.15 -- 0.14 0.09 0.60 0.18 0.12
Year ended December 31,
1999................... 0.46 0.12 0.42 0.29 0.55 0.45 0.31
Year ended December 31,
1998................... 0.35 0.11 0.32 0.22 0.49 0.37 0.25
Year ended December 31,
1997................... 0.38 0.10 0.35 0.24 0.47 0.38 0.26
Book Value:
March 31, 2000.......... 13.29 10.63 13.41 9.19 13.44 13.61 9.19
December 31, 1999....... 12.14 10.31 12.30 8.43 13.53 12.63 8.65
December 31, 1998....... 9.99 9.90 10.24 7.01 12.15 10.63 7.28
</TABLE>
12
<PAGE>
Greater Bay Historical Selected Financial Data
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
---------------------- ----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Interest income......... $ 69,453 $ 46,186 $ 217,599 $ 170,033 $ 134,268 $ 101,547 $ 87,391
Interest expense........ 27,537 17,580 83,830 65,581 48,152 33,853 28,686
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.... 41,916 28,606 133,769 104,452 86,116 67,694 58,705
Provision for loan
losses................. 5,314 1,163 13,064 7,459 7,991 4,110 2,296
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses........... 36,602 27,443 120,705 96,993 78,125 63,584 56,409
---------- ---------- ---------- ---------- ---------- ---------- ----------
Other income............ 7,402 4,590 23,468 16,412 14,144 13,347 9,901
Nonrecurring--warrant
income................. 8,609 4 14,508 945 1,162 92 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other income..... 16,011 4,594 37,976 17,357 15,306 13,439 9,901
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses...... 22,752 18,637 80,424 67,545 57,496 52,511 49,590
Other expenses--
nonrecurring........... -- -- 12,160 1,341 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses.............. 22,752 18,637 92,584 68,887 57,496 52,511 49,590
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income tax
expense & merger and
other related
nonrecurring costs..... 29,861 13,400 66,097 45,463 35,935 24,512 16,720
Income tax expense...... 11,964 5,280 22,046 16,074 13,299 9,044 6,279
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before merger and
other related
nonrecurring costs..... 17,897 8,120 44,051 29,389 22,636 15,468 10,441
Merger and other related
nonrecurring costs, net
of tax................. (2,389) -- (6,486) (1,674) (2,282) (1,991) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary items.... 15,508 8,120 37,565 27,715 20,354 13,477 10,441
Extraordinary items..... -- (88) (88) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 15,508 $ 8,032 $ 37,477 $ 27,715 $ 20,354 $ 13,477 $ 10,441
========== ========== ========== ========== ========== ========== ==========
Per Share Data
Income per share (before
merger, nonrecurring
and extraordinary
items)
Basic.................. $ 0.75 $ 0.50 $ 2.42 $ 1.84 $ 1.39 $ 1.04 $ 0.82
Diluted................ 0.72 0.48 2.28 1.71 1.29 1.00 0.79
Net income per share
Basic.................. $ 0.91 $ 0.50 $ 2.29 $ 1.75 $ 1.34 $ 0.91 $ 0.72
Diluted................ 0.87 0.47 2.17 1.63 1.25 0.87 0.70
Book value per common
share.................. 13.29 9.85 12.14 9.99 8.66 7.69 7.12
Shares outstanding at
period end............. 17,517,905 16,992,905 17,019,474 15,923,322 15,627,493 14,860,819 14,527,324
Average common shares
outstanding............ 17,088,000 16,078,000 16,341,000 15,798,000 15,241,000 14,854,000 14,415,000
Average common and
common equivalent
shares outstanding..... 17,909,000 17,064,000 17,284,000 16,995,000 16,328,000 15,466,000 14,894,000
Performance Ratios
Return on average assets
(before merger,
nonrecurring and
extraordinary items)... 1.50% 1.34% 1.41% 1.37% 1.33% 1.29% 1.28%
Return on average common
shareholders' equity
(before merger,
nonrecurring and
extraordinary items)... 23.23% 20.13% 22.49% 19.90% 16.75% 14.16% 13.18%
Net interest margin..... 5.27% 5.14% 5.15% 5.35% 5.84% 6.18% 7.07%
Balance Sheet Data--At
Period End
Assets.................. $3,607,237 $2,595,020 $3,216,096 $2,373,965 $1,821,758 $1,412,279 $1,097,761
Loans, net.............. 2,247,023 1,613,515 2,085,342 1,453,256 1,103,149 860,059 637,696
Investment securities... 725,526 111,333 607,933 529,525 351,964 243,290 251,211
Deposits................ 3,159,100 2,257,773 2,806,999 2,039,117 1,575,844 1,233,282 951,218
Subordinated debt....... -- -- -- 3,000 3,000 3,000 3,000
Trust Preferred
Securities............. 59,500 50,000 50,000 50,000 20,000 -- --
Common shareholders'
equity................. 232,815 167,313 206,634 159,023 135,370 114,267 103,377
Regulatory Capital
Ratios
Leverage Ratio.......... 8.86% 8.13% 8.02% 8.24% 9.61% 8.63% 11.24%
Tier 1 Capital.......... 10.33% 9.85% 9.56% 10.34% 11.38% 11.07% 13.22%
Total Capital........... 11.70% 11.93% 10.95% 12.38% 12.79% 12.57% 14.82%
</TABLE>
13
<PAGE>
Significant events affecting Greater Bay's historical earnings trends
include the following:
. Amounts indicated have been restated on an historical basis to reflect
the mergers with Cupertino National Bancorp, Peninsula Bank of Commerce,
Pacific Rim Bancorporation, Pacific Business Funding Corporation, Bay
Area Bancshares, Bay Commercial Services, Mt. Diablo Bancshares and Coast
Bancorp, 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 $6.5 million in 1999, $1.7 million in 1998, $2.3
million in 1997 and $2.0 million in 1996, return on average assets would
have been 1.34% for 1999, 1.31% for 1998, 1.28% for 1997 and 1.12% for
1996, and return on average common shareholders' equity would have been
21.34% for 1999, 18.97% for 1998, 16.13% for 1997 and 12.34% for 1996.
. Net interest margin for 1999, 1998 and 1997 includes the lower spread
earned on a special deposit described in Note 7 of Greater Bay's
Supplemental Consolidated Financial Statements. Excluding this special
deposit, net interest margin would have been 5.41% for 1999, 5.65% for
1998 and 6.18% for 1997.
14
<PAGE>
Bank of Petaluma Historical Selected Financial Data
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
---------------------- ----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Interest income......... $ 3,631 $ 3,332 $ 13,673 $ 12,744 $ 10,792 $ 9,336 $ 7,778
Interest expense........ 1,400 1,206 5,045 4,937 4,248 3,599 2,943
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.. 2,231 2,126 8,628 7,807 6,544 5,737 4,835
Provision for loan
losses................. 85 75 300 220 340 334 313
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses......... 2,146 2,051 8,328 7,587 6,204 5,403 4,522
Other income............ 268 317 1,195 1,186 1,047 976 941
Nonrecurring--warrant
income................. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other income... 268 317 1,195 1,186 1,047 976 941
Operating expenses...... 1,606 1,541 6,196 5,645 5,049 4,870 4,194
Other expenses--
nonrecurring........... -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............ 1,606 1,541 6,196 5,645 5,049 4,870 4,194
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income tax
expense & merger and
other related
nonrecurring costs..... 808 827 3,327 3,128 2,202 1,509 1,269
Income tax expense...... 241 282 1,023 1,012 726 434 281
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before merger and
other related
nonrecurring costs..... 567 545 2,304 2,116 1,476 1,075 988
Merger and other related
nonrecurring costs, net
of tax................. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary items.... 567 545 2,304 2,116 1,476 1,075 988
Extraordinary items..... -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........... $ 567 $ 545 $ 2,304 $ 2,116 $ 1,476 $ 1,075 $ 988
========== ========== ========== ========== ========== ========== ==========
Per Share Data
Income per share (before
merger, nonrecurring
and extraordinary
items)
Basic.................. $ 0.39 $ 0.39 $ 1.61 $ 1.54 $ 1.14 $ 0.86 $ 0.80
Diluted................ 0.38 0.37 1.55 1.45 1.06 0.80 0.76
Net income per share
Basic.................. $ 0.39 $ 0.39 $ 1.61 $ 1.54 $ 1.14 $ 0.86 $ 0.80
Diluted................ 0.38 0.37 1.55 1.45 1.06 0.80 0.76
Book value per common
share.................. 10.63 9.98 10.31 9.90 8.39 7.42 6.93
Shares outstanding at
period end............. 1,444,797 1,418,721 1,444,797 1,395,036 1,336,168 1,263,518 1,238,632
Average common shares
outstanding............ 1,445,000 1,403,000 1,428,000 1,370,000 1,296,000 1,254,000 1,238,000
Average common and
common equivalent
shares outstanding..... 1,506,000 1,484,000 1,491,000 1,464,000 1,393,000 1,346,000 1,299,000
Performance Ratios
Return on average assets
(before merger,
nonrecurring and
extraordinary items)... 1.16% 1.20% 1.22% 1.28% 1.06% 0.90% 1.00%
Return on average common
shareholders' equity
(before merger,
nonrecurring and
extraordinary items)... 15.33% 15.70% 15.92% 16.93% 14.62% 12.32% 12.65%
Net interest margin..... 5.02% 5.09% 5.00% 5.19% 5.26% 5.39% 5.49%
Balance Sheet Data-- At
Period End
Assets.................. $ 206,178 $ 190,178 194,699 186,559 151,690 129,441 111,866
Loans, net.............. 119,680 100,569 118,312 99,847 84,107 76,260 56,903
Investment securities... 59,759 65,226 55,565 67,737 49,119 36,252 42,003
Deposits................ 175,613 159,435 162,190 155,901 123,347 110,323 91,138
Subordinated debt....... -- -- -- -- -- -- --
Trust Preferred
Securities............. -- -- -- -- -- -- --
Common shareholders'
equity................. 15,363 14,160 14,893 13,814 11,213 9,376 8,584
Regulatory Capital
Ratios
Leverage Ratio.......... 8.47% 7.66% 8.29% 7.36% 7.29% 6.99% 7.34%
Tier 1 Capital.......... 10.48% 10.33% 10.64% 9.94% 10.10% 9.75% 10.20%
Total Capital........... 11.56% 11.43% 11.70% 11.01% 11.33% 10.91% 11.36%
</TABLE>
. Per share amounts have been adjusted to reflect Bank of Petaluma's two-
for-one stock split effective in May 1998 and 5% stock dividend paid in
December 1997.
15
<PAGE>
Selected Unaudited Pro Forma Combined Financial Data
Greater Bay and Bank of Petaluma
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------------ -------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Interest income......... $ 73,084 $ 49,518 $ 231,272 $ 182,777 $ 145,060
Interest expense........ 28,937 18,786 88,875 70,518 52,400
----------- ----------- ----------- ----------- -----------
Net interest income.. 44,147 30,732 142,397 112,259 92,660
Provision for loan
losses................. 5,399 1,238 13,364 7,679 8,331
----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses......... 38,748 29,494 129,033 104,580 84,329
Other income............ 7,670 4,907 24,663 17,598 15,191
Nonrecurring--warrant
income................. 8,609 4 14,508 945 1,162
----------- ----------- ----------- ----------- -----------
Total other income... 16,279 4,911 39,171 18,543 16,353
Operating expenses...... 24,358 20,178 86,620 73,191 62,545
Other expenses--
nonrecurring........... -- -- 12,160 1,341 --
----------- ----------- ----------- ----------- -----------
Total operating
expenses............ 24,358 20,178 98,780 74,532 62,545
----------- ----------- ----------- ----------- -----------
Income before income tax
expense & merger and
other related
nonrecurring costs..... 30,669 14,227 69,424 48,591 38,137
Income tax expense...... 12,205 5,562 23,069 17,086 14,025
----------- ----------- ----------- ----------- -----------
Income before merger and
other related
nonrecurring costs..... 18,464 8,665 46,355 31,505 24,112
Merger and other related
nonrecurring costs, net
of tax................. (2,389) -- (6,486) (1,674) (2,282)
----------- ----------- ----------- ----------- -----------
Income before
extraordinary items.... 16,075 8,665 39,869 29,831 21,830
Extraordinary items..... -- (88) (88) -- --
----------- ----------- ----------- ----------- -----------
Net income........... $ 16,075 $ 8,577 $ 39,781 $ 29,831 $ 21,830
=========== =========== =========== =========== ===========
Per Share Data
Income per share (before merger,
nonrecurring
and extraordinary items)
Basic.................. $ 0.74 $ 0.51 $ 2.41 $ 1.86 $ 1.40
Diluted................ 0.71 0.48 2.28 1.73 1.31
Net income per share
Basic.................. $ 0.89 $ 0.50 $ 2.30 $ 1.78 $ 1.35
Diluted................ 0.85 0.47 2.17 1.66 1.26
Book value per common
share.................. 13.41 10.10 12.30 10.24 8.86
Shares outstanding at
period end............. 18,507,591 17,964,729 18,009,160 16,878,922 16,542,768
Average common shares
outstanding............ 18,078,000 17,039,000 17,319,000 16,736,000 16,129,000
Average common and
common equivalent
shares outstanding..... 18,941,000 18,081,000 18,305,000 17,998,000 17,282,000
Performance Ratios
Return on average assets
(before merger,
nonrecurring and
extraordinary items)... 1.49% 1.33% 1.40% 1.37% 1.31%
Return on average common
shareholders' equity
(before merger,
nonrecurring and
extraordinary items)... 22.74% 19.77% 21.99% 19.67% 16.59%
Net interest margin.... 5.26% 5.14% 5.14% 5.34% 5.80%
Balance Sheet Data--At
Period End
Assets.................. $ 3,813,415 $ 2,785,198 $ 3,410,795 $ 2,560,524 $ 1,973,448
Loans, net.............. 2,366,703 1,714,084 2,203,654 1,553,103 1,187,256
Investment securities... 785,285 176,559 663,498 597,262 401,083
Deposits................ 3,334,713 2,417,208 2,969,189 2,195,018 1,699,191
Subordinated debt....... -- -- -- 3,000 3,000
Trust Preferred
Securities............. 59,500 50,000 50,000 50,000 20,000
Common shareholders'
equity................. 248,178 181,473 221,527 172,837 146,583
Regulatory Capital
Ratios
Leverage Ratio.......... 8.84% 8.10% 8.03% 8.18% 9.41%
Tier 1 Capital.......... 10.33% 9.88% 9.61% 10.31% 11.29%
Total Capital........... 11.69% 11.90% 10.99% 12.29% 12.68%
</TABLE>
16
<PAGE>
Selected Unaudited Pro Forma Combined Financial Data
Greater Bay, Bank of Petaluma and Bank of Santa Clara
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
---------------------- ----------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Interest income......... $ 79,855 $ 55,177 $ 255,447 $ 205,214 $ 165,782
Interest expense........ 30,750 20,235 95,088 76,765 58,309
---------- ---------- ---------- ---------- ----------
Net interest income.. 49,105 34,942 160,359 128,449 107,473
Provision for loan
losses................. 5,624 1,463 14,039 8,279 9,131
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses......... 43,481 33,479 146,320 120,170 98,342
Other income............ 8,627 5,765 28,471 20,996 18,179
Nonrecurring--warrant
income................. 8,609 4 14,508 945 1,162
---------- ---------- ---------- ---------- ----------
Total other income... 17,236 5,769 42,979 21,941 19,341
Operating expenses...... 28,136 23,650 100,914 86,205 74,564
Other expenses--
nonrecurring........... -- -- 12,160 1,341 --
---------- ---------- ---------- ---------- ----------
Total operating
expenses............ 28,136 23,650 113,074 87,546 74,564
---------- ---------- ---------- ---------- ----------
Income before income tax
expense & merger and
other related
nonrecurring costs..... 32,581 15,598 76,225 54,565 43,119
Income tax expense...... 12,896 6,027 25,467 19,104 15,643
---------- ---------- ---------- ---------- ----------
Income before merger and
other related
nonrecurring costs..... 19,685 9,571 50,758 35,461 27,476
Merger and other related
nonrecurring costs, net
of tax................. (2,389) -- (6,486) (1,674) (2,282)
---------- ---------- ---------- ---------- ----------
Income before
extraordinary items.... 17,296 9,571 44,272 33,787 25,194
Extraordinary items..... -- (88) (88) -- --
---------- ---------- ---------- ---------- ----------
Net income........... $ 17,296 $ 9,483 $ 44,184 $ 33,787 $ 25,194
========== ========== ========== ========== ==========
Per Share Data
Income per share (before
merger, nonrecurring
and extraordinary
items)
Basic.................. $ 0.73 $ 0.50 $ 2.39 $ 1.88 $ 1.43
Diluted................ 0.70 0.48 2.27 1.75 1.35
Net income per share
Basic................... $ 0.86 $ 0.50 $ 2.29 $ 1.80 $ 1.39
Diluted................ 0.82 0.47 2.17 1.69 1.31
Book value per common
share................. 13.61 10.48 12.63 10.63 9.31
Shares outstanding at
period end............. 20,531,814 19,973,342 20,025,788 18,873,665 18,415,193
Average common shares
outstanding............ 20,101,000 19,042,000 19,329,000 18,723,000 18,109,000
Average common and
common equivalent
shares outstanding..... 21,050,000 20,090,000 20,366,000 20,030,000 19,301,000
Performance Ratios
Return on average assets
(before merger,
nonrecurring and
extraordinary items)... 1.48% 1.32% 1.39% 1.37% 1.31%
Return on average common
shareholders' equity
(before merger,
nonrecurring and
extraordinary items)... 21.90% 18.91% 21.08% 19.02% 16.24%
Net interest margin..... 5.35% 5.25% 5.24% 5.44% 5.87%
Balance Sheet Data--At
Period End
Assets.................. $4,170,331 $3,093,246 $3,737,729 $2,858,245 $2,235,906
Loans, net.............. 2,603,947 1,896,970 2,416,424 1,740,158 1,358,515
Investment securities... 870,636 258,806 751,515 668,915 465,091
Deposits................ 3,652,198 2,697,496 3,262,887 2,463,483 1,935,405
Subordinated debt....... -- -- -- 3,000 3,000
Trust Preferred
Securities............. 59,500 50,000 50,000 50,000 20,000
Common shareholders'
equity................. 273,243 209,233 252,896 200,697 171,464
Regulatory Capital
Ratios
Leverage Ratio.......... 8.87% 8.27% 8.19% 8.35% 9.44%
Tier 1 Capital.......... 10.32% 9.99% 9.75% 10.41% 11.29%
Total Capital........... 11.63% 11.89% 11.07% 12.25% 12.60%
</TABLE>
17
<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 and Bank of Petaluma's two-for-
one stock split effective in May 1998 and 5% stock dividend paid in
December 1997.
. If the pro forma performance ratios for Greater Bay and Bank of Petaluma
included merger costs, nonrecurring and extraordinary items (net of tax)
of $6.5 million in 1999, $1.7 million in 1998 and $2.3 million in 1997,
return on average assets would have been 1.33% for 1999, 1.31% for 1998
and 1.26% for 1997, and return on average common shareholders' equity
would have been 20.93% for 1999, 18.81% for 1998 and 16.02% for 1997.
. If the pro forma performance ratios for Greater Bay, Bank of Petaluma and
Bank of Santa Clara included merger costs, nonrecurring and extraordinary
items (net of tax) of $6.5 million in 1999, $1.7 million in 1998 and $2.3
million in 1997, return on average assets would have been 1.33% for 1999,
1.32% for 1998 and 1.27% for 1997, and return on average common
shareholders' equity would have been 20.16% for 1999, 18.29% for 1998 and
15.75% for 1997.
18
<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.
Since the market price of Greater Bay common stock will vary, Bank of Petaluma
shareholders cannot be sure of the number of shares and value of the Greater
Bay common stock to be received in the merger.
The conversion ratio is based on the Greater Bay common stock average
closing sale price for the 20 consecutive trading days prior to the third
trading day before the day the merger is completed. This means that at the time
of the special meeting, Bank of Petaluma shareholders will not know the exact
value of the Greater Bay common stock that they will receive when the merger is
completed. The market prices of Bank of Petaluma 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 shareholder meeting. Such variations in
the market prices of Greater Bay common stock and Bank of Petaluma common stock
may result from changes in the business, operations or prospects of Bank of
Petaluma, 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 Bank of Petaluma common stock.
We may not successfully integrate our business operations.
Integrating our business operations after the merger may be difficult and
time consuming. If we are unable to integrate our businesses successfully, this
could hurt our business and operating results. Successful integration of Bank
of Petaluma's operations, as well as those of Coast Commercial Bank and Bank of
Santa Clara, will depend primarily on Greater Bay's ability to consolidate
operations, systems and procedures and to eliminate redundancies and costs.
Greater Bay may encounter difficulties in the integration process, such as the
loss of key employees and customers, the disruption of ongoing businesses or
possible inconsistencies in standards, controls, procedures and policies.
19
<PAGE>
THE BANK OF PETALUMA SPECIAL MEETING
General
Bank of Petaluma will hold its special meeting on , , 2000 at
.m., local time, at , located at , Petaluma, California. At the
special meeting, Bank of Petaluma shareholders will be asked to consider and
vote upon a proposal to approve the merger agreement. Bank of Petaluma
shareholders may also be asked to vote upon a proposal to adjourn or postpone
the meeting for the purpose of, among other things, allowing additional time
for the solicitation of proxies from the shareholders to approve the merger
agreement.
Record Date; Voting Power
If you were a Bank of Petaluma shareholder at the close of business on ,
2000, you may vote at the special meeting. As of , 2000, there were
issued and outstanding shares of Bank of Petaluma 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 Bank of Petaluma 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 Bank of Petaluma 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 Bank of Petaluma common stock outstanding on the record date will
constitute a quorum for the transaction of business at the special meeting.
Bank of Petaluma will count abstentions and broker non-votes for purposes of
establishing the presence of a quorum at the meeting. The proposal to approve
the merger agreement requires the affirmative vote of holders of a majority of
the shares of Bank of Petaluma 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 Bank of
Petaluma, including their affiliates, had voting power with respect to an
aggregate of shares of Bank of Petaluma common stock or approximately %
of the shares of Bank of Petaluma common stock then outstanding. We currently
expect that the directors will vote all of their shares in favor of the
proposal to approve the merger agreement. On the record date, the directors of
Greater Bay did not beneficially own any shares of Bank of Petaluma common
stock.
Recommendation of the Bank of Petaluma Board
The Bank of Petaluma Board of Directors has unanimously approved and adopted
the merger agreement and the transactions contemplated by the merger agreement.
The Bank of Petaluma Board believes that the merger is fair to and in the best
interests of Bank of Petaluma and its shareholders and unanimously recommends a
vote "FOR" approval of the merger agreement and the transactions contemplated
thereby. For more information about the factors the Bank of Petaluma 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 Bank of Petaluma
common stock represented by a properly executed proxy will, unless the proxy
has been previously revoked, be voted at the special
20
<PAGE>
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.
Bank of Petaluma shareholders are requested to vote by completing, dating
and signing the accompanying proxy card and returning it promptly to Bank of
Petaluma in the enclosed, postage-paid envelope. Bank of Petaluma shareholders
should not send their stock certificates with their 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 Bank of Petaluma prior to the special
meeting, at Bank of Petaluma's 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.
Bank of Petaluma is soliciting proxies for use at its special meeting. Bank
of Petaluma will bear the cost of solicitation of proxies from its
shareholders. Bank of Petaluma and Greater Bay will share equally the cost of
printing and mailing this document. In addition to solicitation by mail, Bank
of Petaluma directors, officers and employees may solicit proxies from
shareholders by telephone, in person or through other means. These persons will
not receive additional compensation, but they will be reimbursed for the
reasonable out-of-pocket expenses they incur in connection with this
solicitation. Bank of Petaluma will also make arrangements with brokerage
firms, fiduciaries and other custodians who hold shares of record to forward
solicitation materials to the beneficial owner of these shares. Bank of
Petaluma will reimburse these brokerage firms, fiduciaries and other custodians
for their reasonable out-of-pocket expenses in connection with this
solicitation.
Other Matters
Bank of Petaluma 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. Proxies
that are voted against approval of the merger agreement will not 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.
21
<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 for DKSS Corp., a wholly owned
subsidiary of Greater Bay, to merge with and into Bank of Petaluma. After the
merger, Bank of Petaluma will become 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, along with , a director of Bank of
Petaluma, will be the directors and officers of Greater Bay after the merger.
Conversion of Shares. At the completion of the merger, each issued and
outstanding share of Bank of Petaluma common stock, other than shares as to
which statutory dissenters' rights are perfected, will be converted into the
right to receive:
. if the average closing price is from $37.91 to $46.34, 0.685 shares of
Greater Bay common stock;
. if the average closing price is greater than $46.34, a number of shares
of Greater Bay common stock equal to the quotient obtained by dividing
(1) $31.74 plus the product of 0.3333 times the difference between the
average closing price and $46.34, by (2) the average closing price;
. if the average closing price is less than $37.91, Greater Bay may elect
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 $25.97 by the average closing price. If Greater Bay
does not elect the top up option, the conversion ratio will be 0.685,
unless Bank of Petaluma decides to terminate the merger agreement.
. if, before the completion of the merger, Greater Bay publicly announces a
transaction which if consummated would result in Greater Bay's
shareholders owning 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 $46.34 per share, and the transaction is not
terminated before the completion of the Bank of Petaluma merger, then the
conversion ratio will be 0.685 shares of Greater Bay common stock. If any
Greater Bay acquisition transaction is terminated during the period for
determining the average closing price, Greater Bay can elect either to
set the conversion ratio at 0.685 or delay the completion of the Bank of
Petaluma merger to a date which is 25 trading days after the public
announcement of the termination of the Greater Bay acquisition
transaction.
The term "average closing price" means the average closing sale price on The
Nasdaq Stock Market of Greater Bay common stock for the 20 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 its outstanding
shares 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.
22
<PAGE>
As described above, the conversion ratio and the resulting value of the
Greater Bay common stock to be received by shareholders of Bank of Petaluma
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 Bank of Petaluma common
stock will be converted as a function of the average closing price of Greater
Bay common stock.
<TABLE>
<CAPTION>
Value to be
Assuming a Each Bank of Petaluma received per
Greater Bay share will be converted Bank of Petaluma
Average Closing into this Number of share (payable in
Price of: Greater Bay Shares Greater Bay Stock)
--------------- ------------------------ ------------------
<S> <C> <C>
38.00 0.6850 $26.0300
38.50 0.6850 26.3725
39.00 0.6850 26.7150
39.50 0.6850 27.0575
40.00 0.6850 27.4000
40.50 0.6850 27.7425
41.00 0.6850 28.0850
41.50 0.6850 28.4275
42.00 0.6850 28.7700
42.50 0.6850 29.1125
43.00 0.6850 29.4550
43.50 0.6850 29.7975
44.00 0.6850 30.1400
44.50 0.6850 30.4825
45.00 0.6850 30.8250
45.50 0.6850 31.1675
46.00 0.6850 31.5100
46.50 0.6837 31.7933
47.00 0.6800 31.9600
47.50 0.6764 32.1267
48.00 0.6728 32.2933
48.50 0.6693 32.4600
49.00 0.6659 32.6267
49.50 0.6625 32.7933
50.00 0.6592 32.9600
</TABLE>
For average closing prices of less than $37.91, the following tables show
the conversion ratio and approximate value to be received by Bank of Petaluma
shareholders (1) if Greater Bay elects the top up option, and (2) if Greater
Bay does not elect the top up option and Bank of Petaluma accepts a fixed ratio
of 0.685.
<TABLE>
<CAPTION>
With Top-Up Election Without Top-Up Election
---------------------------------------- ---------------------------------------
Each Bank of Value to be received Each Bank of Value to be received
Assuming a Petaluma share will per Bank of Petaluma Petaluma share per Bank of Petaluma
Greater Bay be converted share (payable in will be converted share (payable in
Average Closing into this number of Greater to this number of Greater
Price of: Greater Bay shares Bay stock) Greater Bay shares Bay stock)
--------------- ------------------- -------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
$36.00 0.7214 $25.97 0.6850 $24.6600
36.50 0.7115 25.97 0.6850 25.0025
37.00 0.7019 25.97 0.6850 25.3450
37.50 0.6925 25.97 0.6850 25.6875
</TABLE>
No assurance can be given as to what will be the average closing price. 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.
23
<PAGE>
You are urged to obtain current market quotations for Greater Bay common
stock and Bank of Petaluma 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--Since the market price of Greater Bay common
stock will vary, Bank of Petaluma shareholders cannot be sure of the number of
shares and value of the Greater Bay common stock to be received in the merger."
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 will pay you an amount in cash equal to the
product obtained by multiplying (1) the closing sale price of Greater Bay
common stock as reported on The Nasdaq Stock Market on the day immediately
preceding the merger closing date times (2) 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. At different times during early 1999, Walter E.
Bragdon, the President and Chief Executive Officer of Bank of Petaluma, had
wide-ranging discussions with the management of other banks about the state of
the industry and the consolidation of the banking industry. While some of these
discussions were quite general, it evolved into an exploration of the
alternatives available to Bank of Petaluma and in certain instances informal
discussions about the possibility of a business combination took place.
Subsequently, Bank of Petaluma began to consult with Hoefer & Arnett on an
informal basis about the strategic alternatives available to them. In May 1999,
at the request of the President and Chief Executive Officer of Bank of
Petaluma, Hoefer & Arnett contacted Greater Bay to set up an initial meeting to
explore the possibility of a business combination. The meeting took place in
June 1999 with David L. Kalkbrenner, President and Chief Executive Officer of
Greater Bay, and C. Donald Allen, then President and Chief Executive Officer of
Greater Bay's subsidiary, Cupertino National Bank. During the next two months,
representatives of the two companies held additional discussions. In September
1999, they executed a confidentiality agreement to enable Greater Bay to have
access to certain non-public information regarding Bank of Petaluma.
At Bank of Petaluma's annual retreat for directors and senior management in
October 1999, they discussed at great length the bank's future, including its
previous position of remaining independent, its ability to grow, the bank's
ability to attract and keep personnel, the potential changes in the manner of
providing and delivering services to its customers and the usage of and
investment in technology to do so, and the ability to continue to increase
shareholder value. As a result of these discussions, the Board of Directors
decided to proceed with pursuing a transaction with Greater Bay.
During the month of November 1999, additional meetings took place between
Bank of Petaluma and Greater Bay, including additional senior officers of both
companies and Hoefer & Arnett, as financial advisors to Bank of Petaluma.
During November, Greater Bay submitted an initial expression of interest letter
to Bank of Petaluma and Bank of Petaluma's Board of Directors, with a
representative of Hoefer & Arnett present, discussed the expression of interest
letter and authorized providing Greater Bay access to perform a full due
diligence review of its books and records. This due diligence review occurred
in December 1999 and discussions continued regarding due diligence and a review
of potential cost savings that could be obtained as a result of a business
combination.
On January 11, 2000, Bank of Petaluma's Board of Directors reviewed the
current status of Greater Bay's proposal. On January 24, 2000, the Board of
Directors of Bank of Petaluma reviewed a revised expression of interest letter
from Greater Bay and after discussion authorized Hoefer & Arnett to present an
alternative proposal to Greater Bay.
24
<PAGE>
On February 3, 2000, Mr. Kalkbrenner and Steven C. Smith, Executive Vice
President, Chief Administrative Officer and Chief Financial Officer of Greater
Bay, made a presentation to the Board of Directors of Bank of Petaluma on the
activities and strategy of Greater Bay. Commencing on February 24, 2000, Bank
of Petaluma and its financial and legal advisors performed a due diligence
review of Greater Bay.
On March 8, 2000, the Bank of Petaluma's Board of Directors met with its
financial and legal advisors and had a detailed discussion of the results of
the due diligence review of Greater Bay and a proposed definitive merger
agreement. Subsequently, Bank of Petaluma and its financial and legal advisors
continued to discuss and negotiate a definitive merger agreement with Greater
Bay. On March 21, 2000, representatives of Hoefer & Arnett presented an
analysis of the proposed merger consideration in relation to other bank merger
transactions and in relation to the potential value of Bank of Petaluma as an
independent entity and orally advised the Board that in Hoefer & Arnett's
opinion the merger consideration offered by Greater Bay was fair from a
financial point of view to the shareholders of Bank of Petaluma. The Board
authorized execution of the merger agreement at the conclusion of that meeting.
Reasons for the Merger. The Bank of Petaluma Board believes the merger is
fair from a financial point of view to its shareholders and is also in the best
interests of its shareholders. Therefore, the Board unanimously approved the
merger and unanimously recommends that its shareholders approve the merger. In
reaching its decision, the Board considered the following factors:
. the business, operations, condition and earnings of Greater Bay on an
historical and prospective basis and of the combined company on a pro
forma basis;
. the potential cost savings, operating efficiencies and opportunities for
revenue enhancement available to the combined company following the
merger;
. the historical and prospective stock price performance of Greater Bay
common stock;
. the compatibility of the respective businesses, operating philosophies
and strategic objectives of Bank of Petaluma and Greater Bay, including
their decentralized management structures;
. the terms of the merger agreement, including the conversion ratio as a
function of Bank of Petaluma's earnings and book value per share;
. the current and prospective economic and competitive environment facing
the financial services industry generally and Bank of Petaluma in
particular, and the probable importance of economies of scale in
enhancing efficiency and profitability;
. Greater Bay's apparent success in completing and implementing previous
mergers of community banks;
. the necessity for Bank of Petaluma to increase its spending on
technology were it to remain independent in the future;
. the presentation of Hoefer & Arnett to the Board on March 8 and March
21, 2000 and its opinion that the merger consideration is fair from a
financial point of view to the shareholders of Bank of Petaluma;
. the expectation that the merger will be tax-free (except as to cash paid
in lieu of fractional interests and for dissenting shares) for federal
income tax purposes to Bank of Petaluma shareholders and will qualify as
a pooling of interests for accounting and financial reporting purposes;
and
. the generally favorable impact that the Board expects the merger to have
on Bank of Petaluma's customers, employees and the communities in its
service area.
The Board did not assign relative weight to any of the foregoing factors,
and different directors may have assigned weights to different factors. The
foregoing discussion of the information and factors considered by the Bank of
Petaluma Board of Directors is not intended to be exhaustive but is believed to
include all material factors that the Board considered.
25
<PAGE>
The Bank of Petaluma Board believes that the merger, including the
conversion ratio, is fair to and in the best interests of Bank of Petaluma and
you as the Bank of Petaluma 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
General. On February 4, 2000, Bank of Petaluma engaged Hoefer & Arnett to
act as its exclusive financial advisor in connection with the merger. Hoefer &
Arnett agreed to assist Bank of Petaluma in analyzing, structuring, negotiating
and effecting a transaction with Greater Bay. Bank of Petaluma selected Hoefer
& Arnett because Hoefer & Arnett is a nationally recognized investment banking
firm with substantial experience in transactions similar to the merger and is
familiar with Bank of Petaluma and its business. As part of its investment
banking business, Hoefer & Arnett is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions.
As part of its engagement, representatives of Hoefer & Arnett attended the
meeting of the Bank of Petaluma Board held on March 21, 2000 during which the
Board considered and approved the agreement. At the March 21, 2000 meeting,
Hoefer & Arnett rendered an oral opinion (subsequently confirmed in writing)
that, as of that date, the merger consideration was fair to the shareholders of
Bank of Petaluma from a financial point of view. That opinion was reconfirmed
in writing as of the date of this document.
The full text of Hoefer & Arnett's updated written opinion is attached as
Annex B to this document and is incorporated herein by reference. You 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 Hoefer & Arnett.
Hoefer & Arnett's opinion is directed to the Bank of Petaluma Board and
addresses only the merger consideration. It does not address the underlying
business decision to proceed with the merger and does not constitute a
recommendation to you as to how you should vote at the special meeting with
respect to the merger or any matter related thereto.
In rendering its opinion, Hoefer & Arnett:
. Reviewed, among other things:
. the merger agreement;
. Annual Reports to Shareholders of Bank of Petaluma and Greater Bay;
. Annual Reports on Form 10-KSB and Form 10-K of Bank of Petaluma and
Greater Bay, respectively;
. FFIEC Consolidated Reports of Bank of Petaluma;
. Quarterly Reports on Form 10-QSB and 10-Q of Bank of Petaluma and
Greater Bay, respectively; and
. certain internal financial analyses and forecasts for Bank of Petaluma
and Greater Bay prepared by management.
. Held discussions with members of senior management of Bank of Petaluma
and Greater Bay regarding:
. past and current business operations;
. regulatory relationships;
. financial condition; and
. future prospects of the respective companies.
. Compared certain financial and stock market information for Bank of
Petaluma and Greater Bay with similar information for certain other
companies with publicly traded securities;
26
<PAGE>
. Reviewed the financial terms of certain recent business combinations in
the banking industry; and
. Performed other studies and analyses that it considered appropriate.
The projections furnished to Hoefer & Arnett and used by it in certain of
its analyses were prepared by the senior management of Bank of Petaluma. Bank
of Petaluma does not publicly disclose internal management projections of the
type provided to Hoefer & Arnett in connection with its review of the merger.
As a result, such 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 that Hoefer &
Arnett presented to the Bank of Petaluma Board on March 21, 2000 in connection
with its March 21, 2000 oral opinion:
Analysis of the Merger Consideration. Hoefer & Arnett calculated the
multiple which the merger consideration represents based on the conversion
ratio as set forth in the merger agreement of each share of Bank of Petaluma
being exchanged for 0.6850 shares of Greater Bay common stock and the closing
price of Greater Bay common stock on March 17, 2000. Based on the $38.50
closing price of Greater Bay on March 17, 2000, the merger consideration
represented a per share value of $26.37 per share for each share of Bank of
Petaluma. The multiples were calculated based on Bank of Petaluma's December
31, 1999 book value per share of $10.31 and its last twelve month earnings per
share of $1.55. The deal price to book value was 2.56 times and the deal price
to last twelve month earnings per share was 17.0 times.
Selected Peer Group Analysis. Hoefer & Arnett compared the financial
performance and market performance of Bank of Petaluma to those of a group of
comparable banks and bank holding companies. The comparisons were based on:
. various financial measures, including:
. earnings performance;
. operating efficiency;
. capital adequacy; and
. asset quality.
. various measures of market performance, including;
. market to book values and
. price to earnings.
To perform this analysis, Hoefer & Arnett used the financial information as
of and for the twelve months and period ended December 31, 1999 and market
price information as of March 17, 2000. The companies in the peer group were
California regional banks that had total assets ranging from approximately
$120.0 million to $600.0 million.
27
<PAGE>
Hoefer & Arnett's analysis showed the following concerning Bank of
Petaluma's financial performance:
<TABLE>
<CAPTION>
Peer
Bank of Group
Performance Measure Petaluma Averages
------------------- -------- --------
<S> <C> <C>
Return on Average Assets, last twelve months............. 1.22% 1.40%
Return on Average Equity, last twelve months............. 15.92% 15.82%
Net Interest Margin, last twelve months.................. 6.05% 5.67%
Efficiency Ratio, last twelve months..................... 62.96% 58.65%
Equity to Assets......................................... 7.65% 9.06%
Non-performing Assets and Past Due Loans to Total
Assets.................................................. 0.03% 0.32%
Loan Loss Reserve to Non-performing Assets and Past Due
Loans................................................... NM 376.53%
Price to Trailing Twelve Months Earnings................. 15.56 x 11.03 x
Price to 2000 Estimated Earnings......................... 14.03 x 9.00 x
Price to Book Value Multiples............................ 2.34 x 1.75 x
</TABLE>
Analysis of Comparable Acquisition Transactions. In rendering its opinion,
Hoefer & Arnett analyzed certain comparable merger and acquisition
transactions of both pending and completed bank deals, comparing the
acquisition price relative to book value, last twelve month earnings, premium
to market price and premium to implied price. The analysis included a
comparison of the low to high of the above ratios for completed and pending
acquisitions from California transactions from January 1, 1999 to March 17,
2000 with announced transaction values less than $150.0 million, and excluding
transactions with the three highest price to last twelve month earnings
multiples paid.
The information in the following table summarizes the material information
analyzed by Hoefer & Arnett with respect to the merger. The summary is not a
complete description of the analysis performed by Hoefer & Arnett and should
not be construed independently of the other information considered by Hoefer &
Arnett in rendering its opinion. Selecting portions of Hoefer & Arnett's
analysis or isolating certain aspects of the comparable transactions without
considering all analysis and factors, could create an incomplete or
potentially misleading view of the evaluation process.
Multiple of Price to Factors
<TABLE>
<CAPTION>
Bank of
Petaluma/
Comparable Comparable Comparable Greater Bay
Group Group Group Bancorp
Factor Considered (1) Low Median High Merger (2)
--------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Trailing Twelve Months Earnings.. 11.6 x 20.5 x 29.1 x 17.0 x
Book Value....................... 1.3 x 2.5 x 4.4 x 2.6 x
Premium to Market Price.......... -26.0% 26.3% 52.6% 9.3%
Premium to Implied Market Price
(3)............................. -26.0% 26.3% 52.6% 52.5%
</TABLE>
--------
(1) Financial data as of December 31, 1999.
(2) Based on a conversion ratio of 0.6850 and Greater Bay price of $38.50 as
of March 17, 2000.
(3) Implied market price is $17.29; the average of the median imputed public
market values as of March 17, 2000.
No company or transaction used as a comparison in the above analysis is
identical to Bank of Petaluma, Greater Bay 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.
28
<PAGE>
Contribution Analysis. Hoefer & Arnett reviewed the relative contribution of
each Bank of Petaluma and Greater Bay to certain pro forma balance sheet and
income statement items of the combined entity. The contribution analysis
showed:
<TABLE>
<S> <C>
Bank of Petaluma Contribution To:
Combined Shareholders' Equity......................................... 8.5%
Combined 1999 Estimated Net Income without Cost Savings............... 7.7%
Combined Total Assets................................................. 6.9%
Bank of Petaluma Estimated Pro Forma Ownership.......................... 6.5%
</TABLE>
Hoefer & Arnett compared the relative contribution of the balance sheet and
income statement items with the estimated pro forma ownership for Bank of
Petaluma shareholders based on a conversion ratio of 0.6850.
Discounted Dividend Analysis. Hoefer & Arnett estimated the present value of
future cash flows that would accrue to a holder of a share of Bank of Petaluma
common stock assuming that the shareholder held the stock of five years and
then sold it. The analysis was based on balance sheet and earnings forecasts
prepared by management on a stand-alone, independent basis beginning December
1999 and ending in December 2004. Annual dividend cash flows were assumed for
Bank of Petaluma based on a minimum required tangible common equity to tangible
assets ratio of 8.0%. Bank of Petaluma's value at the end of 2004 was
determined by using terminal price to earnings multiples from 9.0 times to 12.0
times. The terminal value and the dividends received were discounted at a rate
of 15.0%. This rate was selected because, in Hoefer & Arnett's experience, it
represents the risk-adjusted rates of return that investors in securities such
as the Bank of Petaluma common stock would require. On the basis of these
assumptions, Hoefer & Arnett calculated a range of present values ranging from
$16.42 to $20.23. These values were compared to the $26.37 offer from Greater
Bay.
Selected Peer Group Analysis. Hoefer & Arnett 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, including:
. earnings performance;
. operating efficiency;
. capital adequacy; and
. asset quality.
. various measures of market performance, including;
. market to book values and
. price to earnings.
To perform this analysis, Hoefer & Arnett used the financial information as
of and for the twelve months and period ended December 31, 1999 and market
price information as of March 17, 2000. The companies in the peer group were
California independent banks that had total assets ranging from approximately
$2.0 billion to $7.2 billion.
29
<PAGE>
Hoefer & Arnett's analysis showed the following concerning Greater Bay's
financial performance:
<TABLE>
<CAPTION>
Peer
Greater Bay Group
Performance Measure Bancorp Averages
------------------- ----------- --------
<S> <C> <C>
Return on Average Assets, last twelve months.......... 1.22% 1.58%
Return on Average Equity, last twelve months.......... 21.09% 20.49%
Net Interest Margin, last twelve months............... 4.91% 5.47%
Efficiency Ratio, last twelve months.................. 50.23% 53.10%
Equity to Assets...................................... 6.12% 7.62%
Non-performing Assets and Past Due Loans to Total
Assets............................................... 0.21% 0.41%
Loan Loss Reserve to Non-performing Assets and Past
Due Loans............................................ 739.98% 348.79%
Price to Trailing Twelve Months Earnings.............. 17.74 x 14.22 x
Price to 2000 Estimated Earnings...................... 13.18 x 12.42 x
Price to Book Value Multiples......................... 3.07 x 2.63 x
</TABLE>
Other Analyses. Hoefer & Arnett reviewed the relative financial and market
performance of Bank of Petaluma and Greater Bay to a variety of relevant
industry peer groups and indices. Hoefer & Arnett also reviewed earnings
estimates, balance sheet composition, historical stock performance and other
financial information for Greater Bay.
The summary contained herein provides a summary description of the material
analyses prepared by Hoefer & Arnett in connection with the rendering of its
opinion. The preparation of a fairness opinion is not necessarily susceptible
to partial analysis or summary description. Hoefer & Arnett believes that its
analysis and the summary set forth above must be considered as a whole and that
selecting portions of its analysis, or selecting part of the above summary,
without considering all factors and analyses, would create an incomplete view
of the process underlying the analysis set forth in Hoefer & Arnett's
presentation and opinion. The ranges of valuations resulting from any
particular analysis described above should not be taken to be Hoefer & Arnett's
view of the actual value of Bank of Petaluma or Greater Bay. The fact that any
specific analysis has been referred to in the summary above is not meant to
indicate that such analysis was given greater weight than any other analysis.
In preparing its analysis, Hoefer & Arnett made numerous assumptions with
respect to industry performance, business and economic conditions, and other
matters, many of which are beyond the control of Hoefer & Arnett and Bank of
Petaluma. The analyses performed by Hoefer & Arnett are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable that suggested by such analyses and do not purport to be
appraisals or reflect the prices at which a business may be sold or the prices
at which any securities may trade at the present time or at any time in the
future. In addition, as described above, Hoefer & Arnett's opinion, along with
its presentation to the Bank of Petaluma Board, was just one of the many
factors taken into consideration by the Bank of Petaluma Board in approving the
agreement.
In connection with its opinion dated as of the date of this document, Hoefer
& Arnett performed procedures to update, as necessary, certain of the analyses
described above. Hoefer & Arnett reviewed the assumptions on which the analyses
described above were based and the factors considered in connection therewith.
Hoefer & Arnett did not perform any analysis in addition to those described
above in updating its March 21, 2000 oral opinion.
Hoefer & Arnett has not independently verified the information described
above and for purposes of this opinion has assumed the accuracy, completeness
and fairness thereof. With respect to information relating to the performance
of Bank of Petaluma and Greater Bay, Hoefer & Arnett has assumed that such
information reflects the best currently available estimates and judgments of
the management of Bank of Petaluma and Greater Bay, respectively, as to the
likely future financial performance of Bank of Petaluma and Greater Bay.
30
<PAGE>
Hoefer & Arnett also assumed, without independent verification, that the
aggregate allowances for loan losses for Bank of Petaluma and Greater Bay are
adequate to cover those losses. Hoefer & Arnett did not make or obtain any
evaluations or appraisals of the property of Bank of Petaluma or Greater Bay,
and Hoefer & Arnett did not examine any individual credit files.
The Bank of Petaluma Board has retained Hoefer & Arnett as an independent
contractor to act as financial advisor to Bank of Petaluma regarding the
merger. As part of its investment banking business, Hoefer & Arnett 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. Hoefer & Arnett has experience in, and knowledge of, the valuation of
banking enterprises. In the ordinary course of its business as a broker-dealer,
Hoefer & Arnett may, from time to time, purchase securities from, and sell
securities to, Bank of Petaluma and Greater Bay. As a market maker in
securities Hoefer & Arnett may from time to time have a long or short position
in, and buy or sell, debt or equity securities of Bank of Petaluma and Greater
Bay for Hoefer & Arnett's own account and for the accounts of its customers.
Pursuant to its engagement letter with Bank of Petaluma, Hoefer & Arnett
will receive a fee of $5,000 upon execution of the engagement letter, $35,000
payable on the announcement by Bank of Petaluma of a definitive agreement, and
an additional fee equal to 1.25% of the transaction value payable at the time
of closing. As of the date of this document, Hoefer & Arnett has received
$40,000 of such fee. Bank of Petaluma has also agreed to indemnify Hoefer &
Arnett against certain liabilities, including liabilities under the federal
securities laws, and to reimburse Hoefer & Arnett for certain out-of-pocket
expenses, not to exceed $10,000 without the prior written approval of Bank of
Petaluma.
Interests of Certain Persons in the Merger
After completion of the merger, the Greater Bay Board of Directors will
consist of the current members of that Board and , a director of Bank of
Petaluma. In addition, the Bank of Petaluma Board of Directors will be
comprised of directors, consisting of the current members of the Board and
David L. Kalkbrenner, President and Chief Executive Officer of Greater Bay.
Walter E. Bragdon, President and Chief Executive Officer of Bank of Petaluma,
will continue to serve in those capacities.
The former officers and employees of Bank of Petaluma who become officers or
employees of Greater Bay or who continue as officers or employees of Bank of
Petaluma 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
those plans or programs.
To the extent Greater Bay is not able to add the directors of Bank of
Petaluma to Greater Bay's directors and officers liability insurance policy,
Bank of Petaluma anticipates purchasing continued coverage under its directors'
and officers' liability insurance policy, which insurance will cover persons
serving as directors and officers of Bank of Petaluma before the merger for a
period of three years from the completion of the merger.
As of the record date of the special meeting, the directors and executive
officers of Bank of Petaluma beneficially owned shares of Bank of Petaluma
common stock, not including shares such persons could acquire through the
exercise of options, constituting approximately % of the outstanding shares
of Bank of Petaluma common stock as of the record date. The affirmative vote of
an additional % of the outstanding shares of Bank of Petaluma 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 Bank of Petaluma
common stock held by directors, officers and employees of Bank of Petaluma will
be automatically converted into options to acquire
31
<PAGE>
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 209,282 shares of Bank of Petaluma common
stock.
Upon the signing of the merger agreement, the executive officers and
directors of Bank of Petaluma held options to purchase 146,429 shares of Bank
of Petaluma common stock at a per share weighted average exercise price of
$19.68. 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 Bank of Petaluma 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 Bank of Petaluma common stock held by
all other Bank of Petaluma shareholders.
Nasdaq Listing
Greater Bay submitted an application on June 22, 2000 to list the shares of
Greater Bay common stock to be issued in the merger on The Nasdaq Stock
Market. The stock must be authorized for listing on Nasdaq for the merger to
proceed.
Material Federal Income Tax Consequences
Greater Bay and Bank of Petaluma 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, DKSS Corp. or Bank of
Petaluma. 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 Bank of Petaluma 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, DKSS Corp. and Bank of Petaluma will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Internal
Revenue Code;
. no gain or loss will be recognized by DKSS Corp. on the transfer of its
assets to Bank of Petaluma in the merger;
. no gain or loss will be recognized by Bank of Petaluma upon receipt of
the assets of DKSS Corp. in the merger;
. the basis of Bank of Petaluma's assets in the hands of Bank of Petaluma
immediately after the merger will be the same as the basis of such assets
in the hands of Bank of Petaluma immediately before the merger;
. no gain or loss will be recognized by the shareholders of Bank of
Petaluma upon the transfer of their Bank of Petaluma common stock solely
in exchange for Greater Bay common stock;
. Bank of Petaluma dissenters, if any, will recognize gain or loss in
connection with the merger;
. holders of Bank of Petaluma 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 Bank of Petaluma in the merger will be the same as the basis of their
Bank of Petaluma 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
Bank of Petaluma shareholders in the merger will include the holding
period of the Bank of Petaluma common stock
32
<PAGE>
surrendered in exchange therefor, provided that the Bank of Petaluma
common stock is held as a capital asset;
. the holding period of the assets of Bank of Petaluma immediately after
the merger will include the period during which the assets were held by
Bank of Petaluma prior to the merger;
. provided that any stock options to purchase Bank of Petaluma 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 Bank of Petaluma 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 Bank of Petaluma 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 Bank of Petaluma 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, you are urged to consult with your own
tax advisor concerning the specific tax consequences of the merger to you,
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 Bank of Petaluma 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 Bank of Petaluma 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.
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 Historical and Pro Forma Financial Data" and "Unaudited
Pro Forma Condensed Combined Financial Information."
Exchange of Bank of Petaluma 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 Bank of Petaluma
common stock transmittal materials for use in exchanging certificates
representing shares of Bank of Petaluma common stock for a certificate or
certificates representing shares of Greater Bay common stock and a check for
any fractional share interest. The transmittal materials will contain
information and instructions with respect to the surrender of certificates
representing shares of Bank of Petaluma 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 Bank of Petaluma common stock registered
in the name of a holder of Bank of Petaluma common stock, or a satisfactory
indemnity bond if any of the 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
33
<PAGE>
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 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.
However, 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 Bank of Petaluma 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 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 Bank of Petaluma will be closed and there will be no
transfers on the transfer books of Bank of Petaluma.
34
<PAGE>
THE MERGER AGREEMENT
Conditions to the Merger
The obligation of Greater Bay and Bank of Petaluma 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 of
Bank of Petaluma;
. 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 periods under all laws
will have expired;
. the registration statement 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;
. 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 The Nasdaq Stock Market;
. Greater Bay and Bank of Petaluma received an opinion reasonably
satisfactory to Greater Bay and Bank of Petaluma 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 Bank of Petaluma, nor will the issuance of Greater Bay common
stock result in the recognition of gain or loss by holders of Bank of
Petaluma 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
and Bank of Petaluma that the merger will qualify for pooling of
interests accounting treatment. In addition, Richardson & Company will
have delivered a letter to Bank of Petaluma that no conditions exist with
respect to Bank of Petaluma that would preclude accounting for the merger
as a pooling of interests.
The obligation of Greater Bay to consummate the merger is also subject to
fulfillment of various other conditions, including the following:
. there will not have occurred, between March 21, 2000 and the completion
of the merger, any materially adverse change in the business, financial
condition, results of operations or prospects of Bank of Petaluma on a
consolidated basis;
. the number of dissenting shares will not exceed an amount which would
disqualify the merger from pooling of interests accounting treatment;
. all remediation of environmental contamination or conditions on any Bank
of Petaluma 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, the Bank of Petaluma adjusted book value will
not be less than $16,719,000 if the merger closes in June 2000,
35
<PAGE>
$16,860,000 if the merger closes in July 2000, $17,032,000 if the merger
closes in August 2000, $17,197,000 if the merger closes in September 2000
and $17,359,000 if the merger closes in October 2000. Adjusted book value
means Bank of Petaluma's total shareholders' equity adjusted to eliminate
all amounts paid for the exercise of Bank of Petaluma stock options since
December 31, 1999, to eliminate amounts related to accumulated other
comprehensive income, to deduct any dividends paid after the date of the
merger agreement and to eliminate amounts paid or accrued for merger-
related expenses;
. receipt of a fairness opinion from Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated, financial advisor to Greater Bay;
. at the close of business on the last day of the month prior to completion
of the merger, Bank of Petaluma's allowance for loan and lease losses
will equal the greater of 1.33% of Bank of Petaluma's total gross loans
(less deferred loan fees) or $1,596,000;
. the regulatory approvals for the merger will not impose any conditions
which Greater Bay, in its reasonable opinion, deems materially adverse or
materially burdensome; and
. the Bylaws of Bank of Petaluma will be amended to eliminate Article II,
Section 12 regarding director qualifications.
The obligation of Bank of Petaluma to consummate the merger is also subject
to the fulfillment of other conditions, including the following:
. there will not have occurred, between March 21, 2000 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 Hoefer & Arnett fairness 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, Bank of Petaluma has agreed not to
solicit, initiate or encourage any competing transaction (as defined below). In
addition, Bank of Petaluma 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 Greater Bay. This restriction does not apply, however, if Bank of Petaluma
receives a bona fide offer from a person other than Greater Bay and the Bank of
Petaluma Board responds in accordance with applicable fiduciary obligations.
Bank of Petaluma 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 Bank
of Petaluma: 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 Bank of Petaluma's assets; a
sale of shares of capital stock representing 10% or more of the voting power of
Bank of Petaluma; a tender offer or exchange offer for at least 10% of the
outstanding shares of Bank of Petaluma; a solicitation of proxies in opposition
to approval
36
<PAGE>
of the merger by Bank of Petaluma's shareholders; or a public announcement of
an unsolicited bona fide proposal, plan or intention to do any of the
foregoing.
In the event Greater Bay terminates the merger agreement as the result of
Bank of Petaluma entering into a competing transaction, Bank of Petaluma will
pay Greater Bay $1,750,000.
Similarly, Bank of Petaluma may call off the merger if Greater Bay announces
a Greater Bay acquisition transaction, and the other party requests Greater Bay
to terminate the merger agreement between Greater Bay and Bank of Petaluma. If
that occurs, Greater Bay will have to pay Bank of Petaluma $1,500,000. Greater
Bay would also be required to pay this amount to Bank of Petaluma if Greater
Bay terminates the merger agreement for a reason not permitted by the merger
agreement and then consummates an acquisition transaction within 12 months
following termination.
Expenses
If Bank of Petaluma terminates the merger agreement because Greater Bay
fails to satisfy its obligations under the merger agreement, Greater Bay will
be obligated to pay all of Bank of Petaluma's expenses incurred in connection
with the merger transaction, not to exceed $175,000.
If Greater Bay terminates the merger agreement because Bank of Petaluma's
shareholders fail to approve the merger, or because Bank of Petaluma fails to
satisfy its obligations under the merger agreement, Bank of Petaluma 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 Bank of Petaluma common stock
issued and outstanding immediately before the completion of the merger and all
obligations of Bank of Petaluma under the Bank of Petaluma stock option plan
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
Bank of Petaluma 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
Bank of Petaluma 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 Bank of Petaluma in writing;
. by Bank of Petaluma or Greater Bay immediately on the failure of the
shareholders of Bank of Petaluma to approve the merger agreement;
. by Greater Bay or Bank of Petaluma if any material breach or default by
the other party is not cured within 20 days after notice;
. by Greater Bay or Bank of Petaluma 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 Bank of Petaluma or Greater Bay if any conditions set forth in Article
9 of the merger agreement shall not have been met by October 15, 2000;
37
<PAGE>
. by Bank of Petaluma 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 October 15, 2000, or an earlier time as it becomes apparent that these
conditions shall not be met;
. by Greater Bay if Bank of Petaluma 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 Bank of Petaluma property is in excess
of $100,000 or is not reasonably determinable;
. by Bank of Petaluma if Greater Bay enters into a Greater Bay acquisition
transaction and the third party requires the termination of the merger
agreement; or
. by Bank of Petaluma if the average closing price of Greater Bay common
stock is less than $37.91, 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, Bank of Petaluma 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:
. 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 $500,000 on an unsecured basis or $1,000,000 if secured by
real estate;
. 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
Bank of Petaluma common stock, or any affiliate of such person, if the
credit would exceed $50,000;
. 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;
38
<PAGE>
. 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;
. 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;
. take any action which would or is reasonably likely to
--adversely affect the ability of Greater Bay or Bank of Petaluma to
obtain any necessary regulatory approval of the merger;
--adversely affect Bank of Petaluma's 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 Bank of Petaluma's 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;
. 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, 1999; 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 Bank of Petaluma 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 Bank
of Petaluma;
. use its commercially reasonable efforts to keep in full force and effect
all material licenses and permits;
39
<PAGE>
. 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 upon learning that a person or related group
of persons has acquired 5% or more of Bank of Petaluma's outstanding
common stock;
. 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 Greater Bay with access to information about Bank of Petaluma;
. maintain an allowance for loan and lease losses consistent with past
practices; and
. use its reasonable efforts between the date of the merger agreement and
the completion of the merger to take all actions necessary or desirable
to complete the merger, including the filing of any regulatory
applications.
The merger agreement also provides that Greater Bay will not, without the
prior written consent of Bank of Petaluma:
. 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 Greater Bay acquisition transaction that requires the
termination of the merger agreement, 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 Bank of Petaluma added to Greater Bay's directors' and
officers' liability insurance policy;
. provide Bank of Petaluma with access to information about Greater Bay;
. 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 Bank of
Petaluma 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;
40
<PAGE>
. 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 Bank of Petaluma.
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 and Bank of Petaluma
without action by their shareholders if Greater Bay and Bank of Petaluma
mutually agree in writing to the amendment. In addition, either Greater Bay or
Bank of Petaluma 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 Bank of Petaluma, each of whom is also a director of Bank of
Petaluma, pursuant to which these directors have agreed to vote all shares of
Bank of Petaluma 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 Bank of Petaluma.
Greater Bay has entered into noncompetition agreements with each of the Bank
of Petaluma 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 Bank of Petaluma 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 Bank of Petaluma
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 Bank of Petaluma. 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 Bank of Petaluma 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.
SEC 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.
Bank of Petaluma has delivered to Greater Bay an agreement for each
affiliate of Bank of Petaluma that such person will not dispose of:
. any Greater Bay common stock in violation of the Securities Act; or
. any Bank of Petaluma common stock or Greater Bay common stock during the
pooling restricted period.
41
<PAGE>
Regulatory Approvals
Under the merger agreement, Greater Bay and Bank of Petaluma 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. The approvals of the Federal Reserve
Board under the Bank Holding Company Act of 1956, the Federal Deposit Insurance
Corporation under the Federal Deposit Insurance Act and the California
Department of Financial Institutions are required.
Federal Reserve Bank. The closing of the merger is conditioned on the
receipt of approval from the Federal Reserve Board. If the Federal Reserve
Board imposes any conditions that Greater Bay, in its reasonable opinion, 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. If the condition is not removed, Greater
Bay is not required to complete the merger.
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 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.
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 Bank of Petaluma in
meeting the credit needs of the communities served by such institutions,
including low- and moderate-income neighborhoods.
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.
Greater Bay submitted an acquisition application with the Federal Reserve
Board on , 2000.
Federal Deposit Insurance Corporation. The merger is subject to prior
approval by the Federal Deposit Insurance Corporation under Section 18(c) of
the Federal Deposit Insurance Act. Section 18(c) requires the Federal Deposit
Insurance Corporation, 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
shareholders, and the future prospects of the existing and proposed
institutions and the effect of the transaction on the convenience and needs of
the communities to be served. In considering financial resources and future
prospects, the Federal Deposit Insurance Corporation will, among other things,
evaluate the adequacy of the capital levels of the parties to a proposed
transaction and of the resulting institutions.
42
<PAGE>
The Federal Deposit Insurance Act prohibits the Federal Deposit Insurance
Corporation from approving a merger if it would result in a monopoly or be in
furtherance from any combination or conspiracy to monopolize or to attempt to
monopolize the business of banking in any part of the United States or if its
effect in any section of the country would in any other respect result in a
restraint of trade, unless the Federal Deposit Insurance Corporation 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.
Greater Bay filed an application for approval of the merger with the Federal
Deposit Insurance Corporation on , 2000.
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;
. the competence, experience and integrity of Greater Bay's management; and
. whether the merger is fair, just and equitable to Bank of Petaluma.
Greater Bay submitted an application for approval of the merger with the
California Department of Financial Institutions on , 2000.
43
<PAGE>
DISSENTING SHAREHOLDERS' RIGHTS
You are entitled to dissenters' rights in connection with the merger. The
procedures for you 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 you. This
summary is not a complete discussion of Chapter 13 and is qualified in its
entirety by reference to Chapter 13, which is attached 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, if you elect to exercise your dissenters'
rights and you comply with the procedures set forth in Chapter 13, you 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 March 20,
2000, the day before the public announcement of the merger. Bank of Petaluma
believes the fair market value of its stock is equal to $23.375 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. Shares of Bank of Petaluma
common stock must be purchased by Bank of Petaluma from a dissenting
shareholder if all applicable requirements are complied with. Bank of Petaluma
is required to purchase dissenting shares only if:
. You have shares of Bank of Petaluma common stock outstanding as of the
record date of the shareholders' meeting at which you may vote the
shares;
. You must not vote your shares "FOR" the proposal to approve the merger
. You must make a written demand to have Bank of Petaluma purchase your
shares of Bank of Petaluma for cash at their fair market value. The
demand must include the information specified below; and
. You must surrender your stock certificate 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 Bank of Petaluma shareholders, Bank of
Petaluma will have 10 days after the approval to mail those shareholders who
did not vote in favor of the merger and made a timely demand for purchase,
written notice of the approval along with a copy of Sections 1300 through 1304
of Chapter 13. In the notice of approval, Bank of Petaluma must state the price
it determines represents the fair market value of the dissenting shares. This
price constitutes an offer by Bank of Petaluma to purchase the dissenting
shares at the price stated. Additionally, Bank of Petaluma 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 Bank of Petaluma mails the notice of
approval of the merger, Bank of Petaluma must receive your written demand that
Bank of Petaluma purchase the dissenting shares and pay you the fair market
value in cash. In the written demand, Chapter 13 requires you to specify the
number shares you hold of record which you are demanding Bank of Petaluma to
purchase. In the written demand, you must also include a statement of the
amount you claim to be the fair market value of those shares as of the day
before the terms of the merger were first announced, excluding any appreciation
or depreciation because of the proposed merger. It is Bank of Petaluma's
position that this day is March 20, 2000. You may take the position in the
written demand that a different date is applicable. This price constitutes an
offer by you to sell the dissenting shares at the price stated.
44
<PAGE>
In addition, it is recommended that you comply with the following conditions
to ensure that the demand is properly executed and delivered:
. The demand should be sent by registered or certified mail, return receipt
requested;
. The demand should be signed by the shareholder of record, or his or her
duly authorized representative, exactly as his or her name appears on the
stock certificates evidencing the shares.
. A demand for the purchase of the shares jointly owned by more than one
person should identify and be signed by all such holders.
. Any person signing a demand for purchase in any representative capacity,
such as attorney-in-fact, executor, administrator, trustee or guardian,
should indicate his or her title, and, if Bank of Petaluma so requests,
furnish written proof of his or her capacity and authority to sign the
demand.
. A shareholder may not withdraw a demand for payment without the consent
of Bank of Petaluma.
Within 30 days after the date on which Bank of Petaluma mails the notice of
the approval of the merger, dissenting shareholders must also submit the
certificates representing the dissenting shares to Bank of Petaluma at the
office it designates in the notice of approval. Bank of Petaluma will stamp or
endorse the certificates with a statement that the shares are dissenting shares
or Bank of Petaluma will exchange the certificates with certificates of
appropriate denomination that are so stamped or endorsed. If a shareholder
transfers any shares of Bank of Petaluma common stock before submitting the
shares for endorsement, then such shares will lose their status as dissenting
shares.
If Bank of Petaluma and you agree that the surrendered shares are dissenting
shares and agree upon the price of the shares, you are entitled to receive the
agreed price together with interest thereon at the legal rate on judgments from
the date of the agreement between Bank of Petaluma and the dissenting
shareholder. Bank of Petaluma will pay the fair value of the dissenting shares
within 30 days after Bank of Petaluma and you 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. Bank of Petaluma's duty to pay
is subject to you surrendering the certificates and is also subject to the
restrictions imposed under California law on the ability of Bank of Petaluma to
purchase its outstanding shares.
If Bank of Petaluma denies that the shares surrendered are dissenting shares
or Bank of Petaluma and you fail to agree upon the fair market value of such
shares, then you 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 such determinations. In the alternative, you may intervene in any
pending action brought by any other dissenting shareholder. If you fail to file
such a complaint or fail to intervene in a pending action within the specified
six-month period, your dissenting rights are lost. If the fair market value of
the dissenting shares is at issue, the court will determine, or will appoint
one or more impartial appraisers to determine, such fair market value. The
costs of the action will be assessed or apportioned as the court considers
equitable, but if the fair market value is determined to exceed 125% of the
price offered to the shareholder, Bank of Petaluma will be required to pay such
costs.
This summary has already described certain situations where shareholders of
Bank of Petaluma will cease to have dissenters' appraisal rights. In addition
to the situations described above, you will cease to have dissenters' appraisal
rights if:
. Greater Bay or Bank of Petaluma abandons the merger, in which case Bank
of Petaluma 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
. you withdraw your demand for the purchase of the dissenting shares with
the consent of Bank of Petaluma.
45
<PAGE>
In addition, one condition to Greater Bay and Bank of Petaluma completing
the merger is that the total cash payable to Bank of Petaluma dissenting
shareholders, when combined with all other cash payable in the merger, should
not disqualify the merger from pooling of interests accounting treatment.
Any demands, notices, certificates or other documents required to be
delivered to Bank of Petaluma may be sent to:
Corporate Secretary
Bank of Petaluma
1360 Redwood Way
Petaluma, California 94954
46
<PAGE>
DESCRIPTION OF GREATER BAY COMMON STOCK AND BANK OF PETALUMA COMMON STOCK
In the merger, you will exchange your shares of Bank of Petaluma common
stock for shares of Greater Bay common stock. Both Greater Bay and Bank of
Petaluma 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 Bank of Petaluma 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 Bank of Petaluma common stock.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Greater Bay
and Bank of Petaluma, Greater Bay and Bank of Petaluma have been advised that
in the opinion of the SEC, 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 40,000,000 shares of Greater
Bay common stock and 4,000,000 shares of serial preferred stock, without par
value.
On the record date, there were shares of Greater Bay common stock
outstanding. There are no shares of preferred stock outstanding, except that
preferred share purchase rights are outstanding under Greater Bay's shareholder
rights plan discussed below. 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 has 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
47
<PAGE>
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 California law. The transfer agent and registrar for
Greater Bay common stock is Norwest Bank Minnesota, N.A.
Bank of Petaluma. Bank of Petaluma is authorized to issue 20,000,000 shares
of common stock, no par value, of which shares are issued and outstanding
as of the record date. In addition, shares of Bank of Petaluma common
stock are reserved for issuance pursuant to the Bank of Petaluma 1997 Stock
Option Plan, of which options to purchase a total of shares had been granted
and were outstanding and options to purchase shares remained available for
grant thereunder as of the record date. Subject to the terms of the merger
agreement, Bank of Petaluma Board of Directors may issue additional shares of
common stock without shareholder approval. Issuance of these additional shares
could cause a dilution of the book value of the stock and the voting power of
present shareholders. The holders are entitled to one vote per share on all
matters presented to them except that, on prior notice, they have the right to
cumulate votes in the election of directors.
The common stock of Bank of Petaluma has no preemptive, subscription or
conversion rights, or redemption or repurchase provisions. These shares are
non-assessable and require no sinking fund. Each shareholder is entitled to
receive dividends that may be declared by the Board of Directors and to share
pro rata in the event of dissolution or liquidation.
Shareholders of Bank of Petaluma are entitled to dividends when declared by
the Bank of Petaluma Board of Directors, subject to certain restrictions on
payment of dividends imposed by California law. U.S. Stock Transfer Corporation
is the transfer agent for Bank of Petaluma's common stock.
Material Differences Between Holders of Greater Bay Stock and Bank of Petaluma
Stock
Cumulative Voting
Greater Bay. Greater Bay shareholders do not have cumulative voting in the
election of directors.
Bank of Petaluma. Shareholders of Bank of Petaluma 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.
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.
Bank of Petaluma. The Bank of Petaluma bylaws provide that directors will be
elected at each annual meeting of shareholders. Bank of Petaluma's bylaws
provide that each director will hold office until the next annual meeting and
until a successor has been elected and qualified.
Director Qualifications
Greater Bay. Greater Bay's Bylaws do not contain any provisions requiring
that Board members and nominees for election as directors meet certain
qualifications.
48
<PAGE>
Bank of Petaluma. The Bylaws of Bank of Petaluma require that nominees for
election as directors meet the following qualifications:
. They must be a resident of Sonoma or Marin County, California for at
least two years prior to their election as a director;
. They must not be a director, officer, employee, agent, nominee, attorney
or other professional service provider of or for any other federally
insured depository institution, affiliate or subsidiary thereof which is
engaged in business in California, Oregon, Washington or Nevada;
. They must not have any contract, arrangement or understanding with anyone
described in the second bullet point above to attempt to effect or
encourage any action of Bank of Petaluma;
. They must have owned Bank of Petaluma common stock with a fair market
value of at least $10,000 for two years or more prior to the date of any
notice of nomination; and
. The nominee's competence, experience, character and integrity do not make
them unsuitable to be a director of Bank of Petaluma.
The merger agreement with Greater Bay requires that these qualifications be
eliminated from the Bank of Petaluma Bylaws before the merger closes.
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, called 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, called 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
49
<PAGE>
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.
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 assets, 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 earnings 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 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.
50
<PAGE>
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.
Bank of Petaluma. Bank of Petaluma does not have a shareholder rights plan.
Super-majority Voting for Certain Transactions
Greater Bay. The Greater Bay articles of incorporation provide that the vote
of not less than two-thirds of all members of the Greater Bay Board of
Directors is required to approve the following types of transactions:
. any merger, sale of control or sale of material assets of Greater Bay;
. the creation of any new business unit of Greater Bay or any subsidiary;
. any operating budget, or any material change therein of Greater Bay or
any subsidiary; or
. any material change in the business organization or organizational
structure of Greater Bay or any subsidiary.
Bank of Petaluma. Bank of Petaluma's articles of incorporation and bylaws do
not require super-majority voting by its directors for these types of
transactions.
51
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 2000, combines the historical consolidated balance sheets of Greater
Bay, Bank of Petaluma and Bank of Santa Clara as if the mergers between these
entities had been effective on March 31, 2000, 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, 2000 and 1999 and for the years ended December 31, 1999, 1998 and 1997
present the combined results of operations of Greater Bay, Bank of Petaluma and
Bank of Santa Clara as if the mergers had been effective at the earliest period
presented. The Unaudited Pro Forma Condensed Combined Financial Information has
been prepared from, and should be read in conjunction with, the supplemental
consolidated financial statements and notes thereto of Greater Bay and the
historical financial statements and notes thereto of Bank of Petaluma.
The Unaudited Pro Forma Condensed Combined Financial Information and
accompanying notes reflect the application of the pooling of interests method
of accounting for the mergers. Under this method of accounting, the recorded
assets, liabilities, shareholders' equity, income and expenses of Greater Bay,
Bank of Petaluma and Bank of Santa Clara 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, Bank of Petaluma's and Bank of Santa Clara's separate financial results;
you should not assume that Greater Bay, Bank of Petaluma or Bank of Santa Clara
would have achieved the pro forma combined results if they had actually been
combined during the periods presented.
Information about the proposed Bank of Santa Clara merger with Greater Bay
is set forth in the Summary under "Recent Developments."
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, Bank of Petaluma and Bank of Santa Clara, 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--We may not successfully integrate our business
operations."
52
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 2000
(In thousands)
<TABLE>
<CAPTION>
Greater Bay,
Bank of
Greater Bay & Petaluma &
Bank of Bank of Bank of
Greater Bank of Petaluma Santa Santa Clara
Bay Petaluma Adjustments(1) Combined Clara Adjustments(2) Combined
---------- -------- -------------- ------------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from
banks................ $ 154,301 $ 10,989 $ -- $ 165,290 $ 17,352 $ -- $ 182,642
Federal funds sold.... 308,700 8,100 -- 316,800 -- -- 316,800
Other short-term
securities........... 805 -- -- 805 -- -- 805
Securities available-
for-sale............. 479,817 53,102 -- 532,919 -- -- 532,919
Securities held-to-
maturity and other... 245,709 6,657 -- 252,366 85,351 -- 337,717
Total loans, net...... 2,247,023 119,680 -- 2,366,703 237,244 -- 2,603,947
Property, premises and
equipment............ 23,285 1,573 -- 24,858 9,815 -- 34,673
Interest receivable
and other assets..... 147,597 6,077 500 154,174 5,654 1,000 160,828
---------- -------- ------ ---------- -------- ------ ----------
Total assets........ $3,607,237 $206,178 $ 500 $3,813,915 $355,416 $1,000 $4,170,331
========== ======== ====== ========== ======== ====== ==========
Liabilities
Total Deposits........ $3,159,100 $175,613 $ -- $3,334,713 $317,485 $ -- $3,652,198
Other borrowings...... 97,124 14,048 -- 111,172 4,920 -- 116,092
Other liabilities..... 58,698 1,154 3,300 63,152 1,746 4,400 69,298
Trust Preferred
Securities........... 59,500 -- -- 59,500 -- -- 59,500
---------- -------- ------ ---------- -------- ------ ----------
Total liabilities....... 3,374,422 190,815 3,300 3,568,537 324,151 4,400 3,897,088
---------- -------- ------ ---------- -------- ------ ----------
Shareholders' equity.... 232,815 15,363 (2,800) 245,378 31,265 (3,400) 273,243
---------- -------- ------ ---------- -------- ------ ----------
Total liabilities
and shareholders'
equity............. $3,607,237 $206,178 $ 500 $3,813,915 $355,416 $1,000 $4,170,331
========== ======== ====== ========== ======== ====== ==========
</TABLE>
-------
(1) The table above reflects all nonrecurring Greater Bay and Bank of Petaluma
estimated merger-related costs as of March 31, 2000. The nonrecurring
Greater Bay and Bank of Petaluma estimated merger-related 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 $1.7 million
tax benefit. These costs will be changed to expense immediately following
the consummation of the merger. These estimated merger-related costs are
summarized below, in thousands:
<TABLE>
<CAPTION>
Merger Costs
-------------------------
Greater Bank of
Bay Petaluma Combined
------- -------- --------
<S> <C> <C> <C>
Financial advisory................................. $ 50 $ 500 $ 550
Professional fees.................................. 200 250 450
Printing........................................... 50 100 150
Other.............................................. 850 2,500 3,350
------ ------ ------
Total............................................ $1,150 $3,350 $4,500
====== ====== ======
</TABLE>
53
<PAGE>
(2) The table above reflects all nonrecurring Greater Bay and Bank of Santa
Clara estimated merger-related costs as of March 31, 2000. The nonrecurring
Greater Bay and Bank of Santa Clara estimated merger-related 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 $2.1 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
----------------------------
Greater Bank of
Bay Santa Clara Combined
------- ----------- --------
<S> <C> <C> <C>
Financial advisory.............................. $ 50 $ 500 $ 550
Professional fees............................... 200 250 450
Printing........................................ 50 100 150
Other........................................... 850 3,450 4,300
------ ------ ------
Total......................................... $1,150 $4,300 $5,450
====== ====== ======
</TABLE>
54
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 2000
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Greater Bay,
Bank of
Greater Bay Petaluma &
& Bank of Bank of Bank of
Bank of Petaluma Santa Santa Clara
Greater Bay Petaluma Adjustments(2) Combined Clara Adjustments(3) Combined
----------- ---------- ------------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest on loans....... $ 53,380 $ 2,745 $ 56,125 $ 5,452 $ 61,577
Interest on investment
securities............. 11,552 821 12,373 1,319 13,692
Other interest income... 4,521 65 4,586 -- 4,586
----------- ---------- -------- ----------- ---------- -------- -----------
Total interest
income.............. 69,453 3,631 73,084 6,771 79,855
Interest on deposits.... 24,803 1,244 26,047 1,697 27,744
Other interest expense.. 2,734 156 2,890 116 3,006
----------- ---------- -------- ----------- ---------- -------- -----------
Net interest income..... 41,916 2,231 44,147 4,958 49,105
Provision for loans
losses................. 5,314 85 5,399 225 5,624
----------- ---------- -------- ----------- ---------- -------- -----------
Net interest income
after provision for
loan losses............ 36,602 2,146 38,748 4,733 43,481
Other income............ 16,011 268 16,279 957 17,236
Operating expenses...... 22,752 1,606 24,358 3,778 28,136
----------- ---------- -------- ----------- ---------- -------- -----------
Income before provision
for income taxes and
merger and other
related nonrecurring
costs and extraordinary
items.................. 29,861 808 30,669 1,912 32,581
Provision for income
taxes.................. 11,964 241 12,205 691 12,896
----------- ---------- -------- ----------- ---------- -------- -----------
Income before merger and
other related
nonrecurring costs, net
of tax................. 17,897 567 18,464 1,221 19,685
Merger and other related
nonrecurring costs, net
of tax................. (2,389) -- (2,389) -- (2,389)
----------- ---------- -------- ----------- ---------- -------- -----------
Net income........... $ 15,508 $ 567 $ 16,075 $ 1,221 $ 17,296
=========== ========== =========== ========== ===========
Net income per share--
basic(1)............... $ 0.75 $ 0.39 $ 0.74 $ 0.53 $ 0.73
=========== ========== =========== ========== ===========
Average common shares
outstanding............ 17,088,000 1,445,000 (455,000) 18,078,000 2,325,000 (302,000) 20,101,000
=========== ========== ======== =========== ========== ======== ===========
Net income per share--
diluted(1)............. $ 0.72 $ 0.38 $ 0.71 $ 0.50 $ 0.70
=========== ========== =========== ========== ===========
Average common and
common equivalent
shares outstanding..... 17,909,000 1,506,000 (474,000) 18,941,000 2,424,000 (315,000) 21,050,000
=========== ========== ======== =========== ========== ======== ===========
</TABLE>
-------
(1) Before merger and other related nonrecurring costs and extraordinary items.
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Petaluma weighted average shares adjusted for the
assumed conversion ratio of 0.685.
(3) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Santa Clara weighted average shares adjusted for the
assumed conversion ratio of 0.870.
55
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 1999
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Greater Bay Greater Bay,
& Bank of Bank of Petaluma
Greater Bank of Petaluma Bank of & Bank of Santa
Bay Petaluma Adjustments(2) Combined Santa Clara Adjustments(3) Clara Combined
---------- --------- -------------- ----------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest on loans....... $ 36,370 $ 2,289 $ 38,659 $ 4,374 $ 43,033
Interest on investment
securities............. 7,466 998 8,464 1,122 9,586
Other interest income... 2,350 45 2,395 163 2,558
---------- --------- -------- ----------- --------- -------- ----------
Total interest income.. 46,186 3,332 49,518 5,659 55,177
Interest on deposits.... 15,299 1,067 16,366 1,449 17,815
Other interest expense.. 2,281 139 2,420 -- 2,420
---------- --------- -------- ----------- --------- -------- ----------
Net interest income..... 28,606 2,126 30,732 4,210 34,942
Provision for loans
losses................. 1,163 75 1,238 225 1,463
---------- --------- -------- ----------- --------- -------- ----------
Net interest income
after provision for
loan losses............ 27,443 2,051 29,494 3,985 33,479
Other income............ 4,594 317 4,911 858 5,769
Operating expenses...... 18,637 1,541 20,178 3,472 23,650
---------- --------- -------- ----------- --------- -------- ----------
Income before provision
for income taxes and
merger and other
related nonrecurring
costs and extraordinary
item................... 13,400 827 14,227 1,371 15,598
Provision for income
taxes.................. 5,280 282 5,562 465 6,027
---------- --------- -------- ----------- --------- -------- ----------
Income before merger and
other related
nonrecurring costs, net
of tax................. 8,120 545 8,665 906 9,571
Merger and other related
nonrecurring costs, net
of tax................. 0 -- -- -- --
---------- --------- -------- ----------- --------- -------- ----------
Income before
extraordinary items.... 8,120 545 8,665 906 9,571
Extraordinary item...... (88) -- (88) -- (88)
---------- --------- -------- ----------- --------- -------- ----------
Net income............. 8,032 $ 545 $ 8,577 $ 906 $ 9,483
========== ========= =========== ========= ==========
Net income per share--
basic (1).............. $ 0.50 $ 0.39 $ 0.51 $ 0.39 $ 0.50
========== ========= =========== ========= ==========
Average common shares
outstanding............ 16,078,000 1,403,000 (442,000) 17,039,000 2,302,000 (299,000) 19,042,000
========== ========= ======== =========== ========= ======== ==========
Net income per share--
diluted (1)............ $ 0.48 $ 0.37 $ 0.48 $ 0.39 $ 0.48
========== ========= =========== ========= ==========
Average common and
common equivalent
shares outstanding..... 17,064,000 1,484,000 (467,000) 18,081,000 2,309,000 (300,000) 20,090,000
========== ========= ======== =========== ========= ======== ==========
</TABLE>
-------
(1) Before merger and other related nonrecurring costs and extraordinary items
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Petaluma weighted average shares adjusted for the
assumed conversion ratio of 0.685.
(3) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Santa Clara weighted average shares adjusted for the
assumed conversion ratio of 0.870.
56
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1999
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Greater Bay Greater Bay,
& Bank of Bank of Petaluma
Greater Bank of Petaluma Bank of & Bank of Santa
Bay Petaluma Adjustments(2) Combined Santa Clara Adjustments(3) Clara Combined
---------- --------- -------------- ----------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest on loans....... $ 169,286 $ 9,810 $ 179,096 $ 18,384 $ 197,480
Interest on investment
securities............. 34,688 3,746 38,434 5,200 43,634
Other interest income... 13,625 117 13,742 591 14,333
---------- --------- -------- ---------- --------- -------- ----------
Total interest
income.............. 217,599 13,673 231,272 24,175 255,447
Interest on deposits.... 74,228 4,404 78,632 6,213 84,845
Other interest expense.. 9,602 641 10,243 -- 10,243
---------- --------- -------- ---------- --------- -------- ----------
Net interest income..... 133,769 8,628 142,397 17,962 160,359
Provision for loans
losses................. 13,064 300 13,364 675 14,039
---------- --------- -------- ---------- --------- -------- ----------
Net interest income
after provision for
loan losses............ 120,705 8,328 129,033 17,287 146,320
Other income............ 37,976 1,195 39,171 3,808 42,979
Operating expenses...... 92,584 6,196 98,780 14,294 113,074
---------- --------- -------- ---------- --------- -------- ----------
Income before provision
for income taxes and
merger and other
related nonrecurring
costs and extraordinary
items.................. 66,097 3,327 69,424 6,801 76,225
Provision for income
taxes.................. 22,046 1,023 23,069 2,398 25,467
---------- --------- -------- ---------- --------- -------- ----------
Income before merger and
other related
nonrecurring costs, net
of tax................. 44,051 2,304 46,355 4,403 50,758
Merger and other related
nonrecurring costs, net
of tax................. (6,486) -- (6,486) -- (6,486)
---------- --------- -------- ---------- --------- -------- ----------
Income before
extraordinary items.... 37,565 2,304 39,869 4,403 44,272
Extraordinary item...... (88) -- (88) -- (88)
---------- --------- -------- ---------- --------- -------- ----------
Net income.............. 37,477 $ 2,304 $ 39,781 $ 4,403 $ 44,184
========== ========= ========== ========= ==========
Net income per share--
basic(1)............... $ 2.42 $ 1.61 $ 2.41 $ 1.91 $ 2.39
========== ========= ========== ========= ==========
Average common shares
outstanding............ 16,341,000 1,428,000 (450,000) 17,319,000 2,310,000 (300,000) 19,329,000
========== ========= ======== ========== ========= ======== ==========
Net income per share--
diluted(1)............. $ 2.28 $ 1.55 $ 2.28 $ 1.86 $ 2.27
========== ========= ========== ========= ==========
Average common and
common equivalent
shares outstanding..... 17,284,000 1,491,000 (470,000) 18,305,000 2,369,000 (308,000) 20,366,000
========== ========= ======== ========== ========= ======== ==========
</TABLE>
-------
(1) Before merger and other related nonrecurring costs and extraordinary items.
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Petaluma weighted average shares adjusted for the
assumed conversion ratio of 0.685.
(3) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Santa Clara weighted average shares adjusted for the
assumed conversion ratio of 0.870.
57
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1998
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Greater Bay Greater Bay,
& Bank of Bank of Petaluma
Greater Bank of Petaluma Bank of & Bank of Santa
Bay Petaluma Adjustments(2) Combined Santa Clara Adjustments(3) Clara Combined
---------- --------- -------------- ----------- ----------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest on loans....... $ 128,252 $ 9,145 $ 137,397 $ 18,145 $ 155,542
Interest on investment
securities............. 28,588 3,426 32,014 3,836 35,850
Other interest income... 13,193 173 13,366 456 13,822
---------- --------- -------- ----------- --------- -------- ----------
Total interest income.. 170,033 12,744 182,777 22,437 205,214
Interest on deposits.... 56,152 4,373 60,525 6,247 66,772
Other interest expense.. 9,429 564 9,993 -- 9,993
---------- --------- -------- ----------- --------- -------- ----------
Net interest income..... 104,452 7,807 112,259 16,190 128,449
Provision for loan
losses................. 7,459 220 7,679 600 8,279
---------- --------- -------- ----------- --------- -------- ----------
Net interest income
after provision for
loan losses............ 96,993 7,587 104,580 15,590 120,170
Other income............ 17,357 1,186 18,543 3,398 21,941
Operating expenses...... 68,887 5,645 74,532 13,014 87,546
---------- --------- -------- ----------- --------- -------- ----------
Income before provision
for income taxes and
merger and other
related nonrecurring
costs and extraordinary
items.................. 45,463 3,128 48,591 5,974 54,565
Provision for income
taxes.................. 16,074 1,012 17,086 2,018 19,104
---------- --------- -------- ----------- --------- -------- ----------
Income before merger and
other related
nonrecurring costs, net
of tax................. 29,389 2,116 31,505 3,956 35,461
Merger and other related
nonrecurring costs, net
of tax................. (1,674) -- (1,674) -- (1,674)
---------- --------- -------- ----------- --------- -------- ----------
Net income............. $ 27,715 $ 2,116 $ 29,831 $ 3,956 $ 33,787
========== ========= =========== ========= ==========
Net income per share--
basic(1)............... $ 1.84 $ 1.54 $ 1.86 $ 1.73 $ 1.88
========== ========= =========== ========= ==========
Average common shares
outstanding............ 15,798,000 1,370,000 (432,000) 16,736,000 2,284,000 (297,000) 18,723,000
========== ========= ======== =========== ========= ======== ==========
Net income per share--
diluted(1)............. $ 1.71 $ 1.45 $ 1.73 $ 1.69 $ 1.75
========== ========= =========== ========= ==========
Average common and
common equivalent
shares outstanding..... 16,995,000 1,464,000 (461,000) 17,998,000 2,336,000 (304,000) 20,030,000
========== ========= ======== =========== ========= ======== ==========
</TABLE>
-------
(1) Before merger and other related nonrecurring costs and extraordinary items
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Petaluma weighted average shares adjusted for the
assumed conversion ratio of 0.685.
(3) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Santa Clara weighted average shares adjusted for the
assumed conversion ratio of 0.870.
58
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1997
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Greater Bay,
Bank of
Greater Bay Petaluma &
& Bank of Bank of
Greater Bank of Petaluma Bank of Santa Clara
Bay Petaluma Adjustments(2) Combined Santa Clara Adjustments(3) Combined
---------- --------- -------------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest on loans....... $ 105,652 $ 7,696 $ 113,348 $ 16,463 $ 129,811
Interest on investment
securities............. 17,080 3,019 20,099 3,953 24,052
Other interest income... 11,536 77 11,613 306 11,919
---------- --------- -------- ---------- --------- -------- ----------
Total interest income.. 134,268 10,792 145,060 20,722 165,782
Interest on deposits.... 43,097 3,681 46,778 5,909 52,687
Other interest expense.. 5,055 567 5,662 -- 5,622
---------- --------- -------- ---------- --------- -------- ----------
Net interest income..... 86,116 6,544 92,660 14,813 107,473
Provision for loans
losses................. 7,991 340 8,331 800 9,131
---------- --------- -------- ---------- --------- -------- ----------
Net interest income
after provision for
loan losses............ 78,125 6,204 84,329 14,013 98,342
Other income............ 15,306 1,047 16,353 2,988 19,341
Operating expenses...... 57,496 5,049 62,545 12,019 74,564
---------- --------- -------- ---------- --------- -------- ----------
Income before provision
for income taxes and
merger and other
related nonrecurring
costs and extraordinary
items.................. 35,935 2,202 38,137 4,982 43,119
Provision for income
taxes.................. 13,299 726 14,025 1,618 15,643
---------- --------- -------- ---------- --------- -------- ----------
Net income before merger
and other related
nonrecurring costs, net
of tax................. 22,636 1,476 24,112 3,364 27,476
Merger and other related
nonrecurring costs, net
of tax................. (2,282) -- (2,282) -- (2,282)
---------- --------- -------- ---------- --------- -------- ----------
Net income............. $ 20,354 $ 1,476 $ 21,830 $ 3,364 $ 25,194
========== ========= ========== ========= ==========
Net income per share--
basic(1)............... $ 1.39 $ 1.14 $ 1.40 $ 1.48 $ 1.43
========== ========= ========== ========= ==========
Average common shares
outstanding............ 15,241,000 1,296,000 (408,000) 16,129,000 2,276,000 (296,000) 18,109,000
========== ========= ======== ========== ========= ======== ==========
Net income per share--
diluted(1)............. $ 1.29 $ 1.06 $ 1.31 $ 1.45 $ 1.35
========== ========= ========== ========= ==========
Average common and
common equivalent
shares outstanding..... 16,328,000 1,393,000 (439,000) 17,282,000 2,321,000 (301,000) 19,301,000
========== ========= ======== ========== ========= ======== ==========
</TABLE>
-------
(1) Before merger and other related nonrecurring costs and extraordinary items.
(2) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Petaluma weighted average shares adjusted for the
assumed conversion ratio of 0.685.
(3) Calculated as the historical Greater Bay weighted average shares plus the
historical Bank of Santa Clara weighted average shares adjusted for the
assumed conversion ratio of 0.870.
59
<PAGE>
MANAGEMENT OF GREATER BAY AFTER THE MERGER
After completion of the merger, , a director of Bank of Petaluma,
will be appointed to the Board of Directors of Greater Bay. has served as
a director of Bank of Petaluma since 19 . [INCLUDE BIOGRAPHY]
Information concerning the directors and executive officers of Greater Bay
is contained in Greater Bay's Annual Report on Form 10-K for the year ended
December 31, 1999, which is incorporated by reference in this document.
60
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Bank of Petaluma common stock as of June 6, 2000 by: (i) each
person known by Bank of Petaluma to beneficially own more than 5% of the
outstanding shares of Bank of Petaluma, (ii) each of its directors, (iii) each
of its executive officers; and (iv) all directors and executive officers as a
group. Unless otherwise indicated, each person or entity named below has an
address c/o Bank of Petaluma's principal executive offices and has sole voting
and investment power with respect to all shares of Bank of Petaluma common
stock shown as beneficially owned by such person or entity, except to the
extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
---------------------------------
Number Percent
of Shares of Class
--------------- -------------
<S> <C> <C>
Walter E. Bragdon................... 59,374(2) 4.08%
Max F. Cerini....................... 40,146(3) 2.76
John H. Dado........................ 22,000(3) 1.51
Robert W. Giacomini................. 47,243(4) 3.25
Henry C. Hansel..................... 48,154(5) 3.31
Max K. Herzog....................... 48,312(6) 3.32
John J. King, Jr.................... 44,618(3) 3.07
Daniel G. Libarle................... 54,814(3) 3.77
James E. McCaffrey.................. 35,423(3) 2.43
William H. McDevitt, Jr............. 33,976(7) 2.34
William J. McDowell................. 16,502(3) 1.13
Arlene A. Brians.................... 15,716(8) 1.08
Dennis Kelley....................... -0- -0-
David E. Schmidt.................... 33,452(8) 2.30
--------------- -------------
All directors and executive officers
of Bank of Petaluma as a group (14
persons)........................... 499,730(9) 31.61%
</TABLE>
--------
(1) This table is based upon information supplied by officers, directors and
principal shareholders. Unless otherwise indicated, each person named in
the table has sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by such person, subject to
community property laws where applicable.
(2) Includes 11,574 shares subject to options exercisable within 60 days; 7,892
shares held by Mr. Bragdon's Individual Retirement Account over which Mr.
Bragdon has sole voting and investment power; and 560 shares held as
trustee.
(3) Includes 10,000 shares subject to options exercisable within 60 days.
(4) Includes 10,000 shares subject to options exercisable within 60 days;
24,440 shares owned by the Robert Giacomini Dairy, Inc., Profit Sharing
Plan over which Mr. Giacomini has voting and investment power; 3,212 shares
owned by Mr. Giacomini's wife; and 15 shares held by Mr. Giacomini as
trustee.
(5) Includes 10,000 shares subject to options exercisable within 60 days and
3,468 shares held by Mr. Hansel as trustee for his two children.
(6) Includes 10,000 shares subject to options exercisable within 60 days and
13,730 shares held by Mr. Herzog as trustee.
(7) Includes 10,000 shares subject to options exercisable within 60 days;
19,910 shares owned by the McDevitt & McDevitt Profit Sharing Trust, of
which Mr. McDevitt is trustee and beneficiary; 3,562 shares held by Mr.
McDevitt's Individual Retirement Account over which Mr. McDevitt has sole
voting and investment power; and 504 shares held by Mr. McDevitt as trustee
for his daughters.
(8) Includes 15,666 shares subject to options exercisable within 60 days.
(9) Includes 135,962 shares subject to options exercisable within 60 days.
61
<PAGE>
EXPERTS
The supplemental consolidated balance sheets as of December 31, 1999 and
1998 of Greater Bay and the supplemental consolidated statements of operations,
comprehensive income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999, included in Greater Bay's Current
Report on Form 8-K filed with the SEC on May 18, 2000, 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 balance sheets as of December 31, 1999 and 1998 of Bank of Petaluma and
the statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999 attached to this document
have been audited by Richardson & Company, independent certified public
accountants, as stated in their report, which is included herein. These
statements have been included in reliance upon the report of Richardson &
Company given upon their authority as experts in accounting and auditing.
Representatives of Richardson & Company 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 owned 429 shares of Greater Bay
common stock and held options to purchase 23,900 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 files annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. Bank of
Petaluma files similar reports with the FDIC.
You may read and copy any reports, statements or other information that
Greater Bay files 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's 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."
You may read and copy any reports, statements or other information that Bank
of Petaluma files at the FDIC's public reference room in Washington D.C.
Please call the FDIC at (202) 393-8400 for further information on the public
reference room. Bank of Petaluma public filings are also available by calling
Patricia A. Wasik, Corporate Secretary, at (707) 769-7610.
Greater Bay has filed a registration statement to register with the SEC the
shares of Greater Bay common stock to be issued to Bank of Petaluma
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
Bank of Petaluma for its 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.
The SEC allows Greater Bay and Bank of Petaluma to "incorporate by
reference" information into this document, which means that the companies can
disclose important information to you by referring you to
62
<PAGE>
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
Bank of Petaluma previously filed with the SEC or the FDIC, respectively. These
documents contain important business information about Greater Bay and Bank of
Petaluma and their respective financial condition that is not included or
delivered with this document.
Each of the documents previously filed by Bank of Petaluma with the FDIC
that is incorporated by reference is included as an Annex to this proxy
statement/prospectus or as an exhibit to the registration statement. This proxy
statement/prospectus is accompanied by a copy of Bank of Petaluma's Annual
Report on Form 10-KSB, as amended by Form 10-KSB/A filed with the FDIC on June
23, 2000, for the year ended December 31, 1999 which is attached hereto as
Annex D and Quarterly Report on Form 10-QSB for the period ended March 31, 2000
which is attached hereto as Annex E.
<TABLE>
<CAPTION>
Period
------
<S> <C>
Greater Bay Commission Filings (File No. 0-
25034)
Annual Report on Form 10-K, except for Part II,
Items 6, 7, 7A and 8 .......................... Year ended December 31, 1999
Quarterly Report on Form 10-Q, except for Part
I, Items 1, 2 and 3............................ Period ended March 31, 2000
Current Reports on Form 8-K..................... February 1, 2000, February 3, 2000,
February 4, 2000, March 22, 2000,
March 24, 2000, March 31, 2000,
April 6, 2000, April 20, 2000 and
May 18, 2000
<CAPTION>
Period
------
<S> <C>
Bank of Petaluma FDIC Filings
Annual Report on Form 10-KSB, as amended by
Form 10-KSB/A.................................. Year ended December 31, 1999
Quarterly Report on Form 10-QSB................. Period ended March 31, 2000
Current Report on Form 8-K...................... , 2000
</TABLE>
All documents which Greater Bay files with the SEC between the date of this
proxy statement/prospectus and the date of the special shareholders' meeting
are incorporated into this proxy statement/prospectus by reference and made a
part of this document from the date of the filing of such documents. These
additional documents include periodic reports, such as Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K.
Greater Bay has supplied all information contained or incorporated by
reference in this document relating to Greater Bay, and Bank of Petaluma has
supplied all such information relating to Bank of Petaluma.
Shareholders may obtain documents incorporated by reference through Greater
Bay or Bank of Petaluma or, with respect to Greater Bay, through the SEC or the
SEC's Internet World Wide Web site described above, or with respect to Bank of
Petaluma, the FDIC. Documents incorporated by reference are available 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:
<TABLE>
<S> <C>
GREATER BAY BANCORP BANK OF PETALUMA
2860 W. Bayshore Road 1360 Redwood Way
Palo Alto, California 94303 Petaluma, California 94954
Telephone: (650) 614-5733 Telephone: (707) 769-7610
Attention: Carleen Maniglia Attention: Patricia A. Wasik
</TABLE>
63
<PAGE>
If you would like to request documents, please do so at least five business
days before the date of the Bank of Petaluma special meeting (by , 2000) in
order to receive timely delivery of such documents before the meeting.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. Greater Bay and
Bank of Petaluma have not authorized anyone to provide you with information
that is different from what is contained in this document. This document is
dated , 2000. 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.
64
<PAGE>
A WARNING ABOUT FORWARD-LOOKING INFORMATION
Greater Bay Bancorp and Bank of Petaluma 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 Bank of Petaluma set forth under
"Questions and Answers About the Merger," "Summary," "The Merger--Background of
and Reasons for the Merger," "The Merger--Opinion of Financial Advisor," 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 assumptions regarding the extent
of operational overlap between Greater Bay and Bank of Petaluma, the amount of
general and administrative expense consolidation, costs relating to converting
Bank of Petaluma's 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 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 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 Bank of Petaluma 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
Bank of Petaluma are engaged;
. changes may occur in the securities markets; and
. competitors of Greater Bay and Bank of Petaluma may have greater
financial resources to develop products that enable such competitors to
compete more successfully than Greater Bay and Bank of Petaluma.
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 Bank of
Petaluma's ability to control or predict. For those statements, Greater Bay and
Bank of Petaluma claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
65
<PAGE>
ANNEX A
Agreement and Plan of Reorganization
by and among
Greater Bay Bancorp, Bank of Petaluma and DKSS Corp.
Dated March 21, 2000
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and entered
into as of the 21st day of March, 2000, by and among GREATER BAY BANCORP, a
California corporation ("GBB"), DKSS CORP., a California corporation and wholly
owned subsidiary of GBB ("Newco") and Bank of Petaluma, a California corporation
("BOP").
WHEREAS, the Boards of Directors of GBB, Newco and BOP deem advisable and
in the best interests of their respective shareholders the merger of Newco with
and into BOP (the "Merger") upon the terms and conditions set forth herein and
in accordance with the California General Corporation Law (the "CGCL") (BOP,
following the effectiveness of the Merger, being hereinafter sometimes referred
to as the "Surviving Corporation");
WHEREAS, the Boards of Directors of GBB, Newco and BOP have approved the
Merger pursuant to this Agreement and the Agreement of Merger by and between
Newco and BOP (the "Agreement of Merger"), in substantially the form of Exhibit
-------
A attached hereto, pursuant to which Newco will merge with and into BOP and each
-
outstanding share of BOP common stock, no par value ("BOP Stock"), excluding any
BOP 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).
"Agreement of Merger" has the meaning set forth in the second recital of
this Agreement.
<PAGE>
"Average Closing Price" means the average of the daily closing price of a
share of GBB Stock reported on the Nasdaq National Market System during the 20
consecutive trading days ending at the end of the third trading day immediately
preceding the Effective Time of the Merger (as defined herein).
"BAB" means Bay Area Bank, a California state chartered bank and wholly
owned subsidiary of GBB.
"BBC" means Bay Bank of Commerce, a California state chartered bank and
wholly owned subsidiary of GBB.
"Banks" means BAB, BBC, CNB, GGB, MDNB, MPB and PBC.
"Benefit Arrangements" has the meaning set forth in Section 4.20(b).
"BHC Act" means the Bank Holding Company Act of 1956, as amended.
"BOP 401(k) Plan" means the BOP Profit Sharing and Salary Deferral 401(k)
Plan.
"BOP Conflicts and Consents List" has the meaning set forth in Section 4.6.
"BOP Contract List" has the meaning set forth in Section 4.16.
"BOP Derivatives List" has the meaning set forth in Section 4.32.
"BOP Dissenting Shares" means any shares of BOP Stock held by "dissenting
shareholders" within the meaning of Chapter 13 of the CGCL.
"BOP Employee Plan List" has the meaning set forth in Section 4.20.
"BOP Environmental Compliance List" has the meaning set forth in Section
4.12(b).
"BOP Filings" has the meaning set forth in Section 4.5.
"BOP Filings List" has the meaning set forth in Section 4.5.
"BOP Fully Diluted Book Value" means the total stockholders' equity of BOP
as reflected on the financial statements to be provided by BOP to GBB pursuant
to Section 11.14, as adjusted (a) to eliminate all amounts paid in connection
with the exercise of any BOP Stock Options (as defined herein) since December
31, 1999, (b) to eliminate any amount related to accumulated other comprehensive
income, (c) to deduct any dividends to be paid pursuant to Section 6.1(b) hereof
after the date of such financial statements and (d) to eliminate amounts paid or
accrued for Merger-related expenses, including but not limited to, legal,
accounting and financial advisory fees.
"BOP Indemnification List" has the meaning set forth in Section 4.30.
3
<PAGE>
"BOP Insurance List" has the meaning set forth in Section 4.7.
"BOP Intellectual Property List" has the set forth in Section 4.35.
"BOP Investment Securities List" has the meaning set forth in Section 4.26.
"BOP List" means any list required to be furnished by BOP to GBB herewith.
"BOP Litigation List" has the meaning set forth in Section 4.10.
"BOP Loan List" has the meaning set forth in Section 4.25.
"BOP Offices List" has the meaning set forth in Section 4.23.
"BOP Operating Losses List" has the meaning set forth in Section 4.24.
"BOP Perfected Dissenting Shares" means BOP Dissenting Shares which the
holders thereof have not withdrawn or caused to lose their status as BOP
Dissenting Shares.
"BOP Personal Property List" has the meaning set forth in Section 4.8.
"BOP Real Property List" has the meaning set forth in Section 4.9.
"BOP Shareholders' Meeting" means the meeting of BOP's shareholders
referred to in Section 6.6.
"BOP Stock" has the meaning set forth in the second recital of this
Agreement.
"BOP Stock Option" means any option issued pursuant to the BOP Stock Option
Plan.
"BOP Stock Option Plan" means the BOP 1997 Stock Option Plan.
"BOP Supplied Information" has the meaning set forth in Section 4.34.
"BOP Tax List" has the meaning set forth in Section 4.11.
"BOP Undisclosed Liabilities List" has the meaning set forth in Section
4.19.
"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.
"Certificates" has the meaning set forth in Section 2.5(b).
"CFC" means the California Financial Code.
4
<PAGE>
"CGCL" has the meaning set forth in the first recital of this Agreement.
"Classified Credits" has the meaning set forth in Section 6.7.
"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 BOP, (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 BOP 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.
Notwithstanding the foregoing, if in the good faith judgment of GBB the Closing
would (a) interfere with or affect any financing, acquisition or other
significant transaction being contemplated by GBB, whether or not a final
determination has been made to undertake such transaction, or (b) GBB has a
bona fide business purpose for delaying the Closing, GBB will have the right to
delay the Closing for a period of not more than 60 Business Days from the date
which would otherwise be the Closing Date as determined by the first sentence of
this paragraph, except that in no event shall the Closing Date occur after
October 15, 2000, unless the parties hereto shall otherwise mutually agree.
"CNB" means Cupertino National Bank, a national banking association and
wholly owned subsidiary of GBB.
"Code" has the meaning set forth in the fourth 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(n).
"Conversion Ratio" has the meaning set forth in Section 2.2(a).
"Covered Person" has the meaning set forth in Section 4.30.
"Dain Rauscher Agreement" means the letter agreement between GBB and Dain
Rauscher Wessels Equity Capital Markets, a division of Dain Rauscher
Incorporated, dated March 20, 2000.
"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.
5
<PAGE>
"Employee Plans" has the meaning set forth in Section 4.20(a).
"Encumbrance" shall mean any option, pledge, security interest, lien,
charge, encumbrance or restriction (whether on voting or disposition or
otherwise), whether imposed by agreement, understanding, law or otherwise.
"Environmental Regulations" has the meaning set forth in Section 4.12(b).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliates" has the meaning set forth in Section 4.20(a).
"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(a) hereof.
"FDIC" means the Federal Deposit Insurance Corporation.
"Financial Statements of BOP" means the audited financial statements of BOP
consisting of the balance sheets as of December 31, 1997, 1998 and 1999, the
related statements of income, stockholders' equity and cash flows for the years
then ended and related notes thereto and related opinions thereon for the years
then ended.
"Financial Statements of GBB" means the audited consolidated financial
statements of GBB consisting of the consolidated balance sheets as of December
31, 1997, 1998 and 1999, 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.
"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(a)(v).
"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 Stock" has the meaning set forth in the second recital of this
Agreement.
"GBB Stock Option Plan" means the Greater Bay Bancorp 1996 Stock Option
Plan, as amended.
6
<PAGE>
"GBB Subsidiaries" means Newco, the Banks, GBB Merger Corp., Pacific
Business Funding Corporation and Peninsula Real Estate Corporation.
"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(b).
"Hoefer Agreement" means the letter agreement between BOP and Hoefer &
Arnett Incorporated dated February 4, 2000.
"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.
"MDNB" means Mt. Diablo National Bank, a national banking association and
wholly-owned subsidiary of GBB.
"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 BOP 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 public
accountants.
7
<PAGE>
"Related Group of Persons" means Affiliates, members of an Immediate Family
or Persons the obligations of whom would be attributed to another Person
pursuant to the regulations promulgated by the SEC (as defined herein).
"Registration Statement on Form S-4" means the Registration Statement on
Form S-4, and such amendments thereto, that is filed with the SEC to register
the shares of GBB Stock to be issued in the Merger under the Securities Act and
to clear use of the Proxy Statement and Prospectus in connection with the BOP
Shareholders' Meeting pursuant to the regulations promulgated under the Exchange
Act.
"Richardson" means Richardson & Company, BOP's independent public
accountants.
"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(b).
"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 $38.97, the right of GBB to elect to issue that number of shares of GBB
Stock equal to the quotient obtained by dividing $25.97 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.
8
<PAGE>
ARTICLE 2.
TERMS OF MERGER
---------------
2.1. Effect of Merger and Surviving Corporation. At the Effective Time of
------------------------------------------
the Merger, Newco will be merged with and into BOP 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 Newco and BOP shall be vested in and be held and enjoyed by the
Surviving Corporation, without further act or deed, and all the interests of
every kind of Newco and BOP, including all debts due to either of them on
whatever account, shall be the property of the Surviving Corporation as they
were of Newco and BOP and the title to any interest in real property and any
interest in personal property vested by deed or otherwise in either Newco or BOP
shall not revert or be in any way impaired by reason of the Merger; and all
rights of creditors and liens upon any property of Newco and BOP shall be
preserved unimpaired and all debts, liabilities and duties of Newco and BOP
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 BOP. Subject to Section 2.4, each share of BOP Stock issued
------------
and outstanding immediately prior to the Effective Time of the Merger shall,
without any further action on the part of BOP or the holders of such shares, be
treated on the basis set forth herein.
(a) Conversion of BOP Stock. At the Effective Time of the Merger,
-----------------------
pursuant to the Agreement of Merger, each outstanding share of BOP Stock
excluding any BOP Perfected Dissenting Shares shall, without any further action
on the part of BOP or the holders of any such shares, be automatically canceled
and cease to be an issued and outstanding share of BOP Stock and be converted
into shares of GBB Stock (the "Conversion Ratio") as follows:
(i) If the Average Closing Price is greater than or equal to $37.91
or less than or equal to $46.34, 0.6850 shares of GBB Stock;
(ii) If the Average Closing Price is greater than $46.34, a number
of shares of GBB Stock equal to the quotient obtained by dividing (x) $31.74
plus the product of .3333 times the difference between the Average Closing Price
and $46.34, by (y) the Average Closing Price; or
(iii) If the Average Closing Price is less than $37.91, GBB may, but
shall not be required to, elect the Top Up Option. GBB shall notify BOP in
writing, within one Business Day from the date of calculation of the Average
Closing Price, whether GBB will elect the Top Up Option. If GBB does not elect
the Top Up Option, BOP may terminate the Agreement pursuant to Section 13.1(l)
within one Business Day from the date of receipt of written notice from GBB of
its decision not to elect the Top Up Option. If BOP does not give GBB written
notice of its decision to so terminate the Agreement within such one Business
Day period, the Conversion Ratio will be 0.6850 shares of GBB Stock. If GBB
elects the Top Up Option, the
9
<PAGE>
Conversion Ratio will equal that number of shares of GBB Stock equal to the
quotient obtained by dividing $25.97 by the Average Closing Price.
(iv) In the event that, prior to the Closing Date, GBB publicly
announces the signing of a definitive agreement with a third party with respect
to a business combination, tender offer or similar transaction which if
consummated would result in the GBB shareholders as of the date of such
announcement owning less than 51% of the outstanding shares of common stock of
the surviving corporation, the price to be paid to GBB shareholders in such
transaction would exceed $46.34 and such transaction is not terminated or
abandoned prior to the Closing Date (a "GBB Acquisition Transaction"), the
Conversion Ratio shall be 0.6850 shares of GBB Stock. If such GBB Acquisition
Transaction is terminated or abandoned during the period for determining the
Average Closing Price, GBB can elect to either set the Conversion Ratio at
0.6850 shares of GBB Stock or unilaterally delay the Closing Date to a date
which is 25 trading days after the date of the public announcement of the
termination or abandonment of such GBB Acquisition Transaction. To preserve the
rights of holders of shares of BOP Stock pursuant to this Section 2.2(a)(iv),
GBB and BOP agree to coordinate the closing of any GBB Acquisition Transaction
with the Closing and to cooperate with such third party in otherwise
accomplishing the purpose hereof.
(b) BOP Perfected Dissenting Shares. BOP 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 BOP Stock shall receive such payment in an amount as
determined pursuant to Chapter 13 of the CGCL.
(c) 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 BOP 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 cent) 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.
10
<PAGE>
2.5 Exchange Procedures.
-------------------
(a) As of the Effective Time of the Merger, GBB shall have deposited
with the Exchange Agent for the benefit of the holders of shares of BOP 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 BOP 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").
(b) GBB shall direct the Exchange Agent to mail, promptly after the
Effective Time of the Merger, to each holder of record of a certificate or
certificates which immediately prior to the Effective Time of the Merger
represented outstanding shares of BOP 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 BOP 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 BOP Stock, the transfer of ownership of which is not
registered in the transfer records of BOP, a certificate representing the proper
number of shares of GBB Stock may be issued to a transferee if the Certificate
representing such BOP 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 BOP 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.
(c) 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
11
<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 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.
(d) All shares of GBB Stock issued upon the surrender for exchange of
BOP 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 BOP Stock, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of BOP Stock which were outstanding immediately prior
to the Effective Time of the Merger. If, after the Effective Time of the
Merger, Certificates are presented to GBB for any reason, they shall be canceled
and exchanged as provided in this Agreement.
(e) Any portion of the Exchange Fund which remains undistributed to
the shareholders of BOP following the passage of six months after the Effective
Time of the Merger shall be delivered to GBB, upon demand, and any shareholders
of BOP 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.
(f) Neither GBB, Newco nor BOP shall be liable to any holder of shares
of BOP Stock for such shares (or dividends or distributions with respect
thereto) or cash from the Exchange Fund delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law.
(g) The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to the shares of GBB Stock held by it from time
to time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares of GBB Stock for
the account of the Persons entitled thereto.
(h) Certificates surrendered for exchange by any Person constituting
an "Affiliate" of BOP for purposes of Rule 145(c) 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
6.9.
2.6. Directors of Surviving Corporation. 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 BOP immediately prior to the
Effective Time of the Merger and David L. Kalkbrenner, or such other person
designated by GBB and reasonably acceptable to BOP. Immediately after the
Effective Time of the Merger, the Board of Directors of GBB shall be
12
<PAGE>
comprised of the persons serving as directors of GBB immediately prior to the
Effective Time of the Merger and one member of BOP's Board of Directors
designated by BOP and reasonably acceptable to GBB (to be designated as a Class
II director with a term expiring in 2002). Such persons shall serve until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified. During the six month period following the Effective
Time of the Merger, the BOP Board of Directors shall continue to meet on a
monthly basis and receive its current director fees of $600.00 per monthly
meeting attended and $125.00 per committee meeting attended. Commencing with the
first calendar quarter after such six month period, the BOP Board of Directors
will meet on a quarterly basis and the BOP director fees will be revised to
equal the amount of director fees paid to members of the Boards of Directors of
the Banks.
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
BOP 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.
13
<PAGE>
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF BOP
-------------------------------------
BOP represents and warrants to GBB as follows:
4.1. Incorporation, Standing and Power. BOP 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. BOP's deposits are insured by the FDIC in the manner
and to the fullest extent provided by law. BOP 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 BOP
nor the location of any of its properties requires that BOP 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 BOP. BOP has delivered to GBB true and correct copies
of its Articles of Incorporation and Bylaws, as amended, and in effect as of the
date hereof.
4.2. Capitalization. As of the date of this Agreement, the authorized
--------------
capital stock of BOP consists of 20,000,000 shares of BOP Stock, of which
1,444,797 shares are outstanding as of March 10, 2000, and 5,000,000 shares of
preferred stock, none of which is outstanding. All of the outstanding shares of
BOP Stock are duly authorized, validly issued, fully paid and nonassessable.
Except for BOP Options covering 209,282 shares of BOP Stock granted pursuant to
the BOP Stock Option Plan, there are no outstanding options, warrants or other
rights in or with respect to the unissued shares of BOP Stock nor any securities
convertible into such stock, and BOP 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. BOP has furnished GBB a list (the "BOP Option
List") setting forth the name of each holder of a BOP Option, the number of
shares of BOP 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.
4.3. Subsidiaries. BOP 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. BOP has previously furnished to GBB a copy of
--------------------
the Financial Statements of BOP. The Financial Statements of BOP: (a) present
fairly the financial condition of BOP as of the respective dates indicated and
its 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 BOP.
14
<PAGE>
4.5. Reports and Filings. Except as set forth in a list (the "BOP Filings
-------------------
List"), since January 1, 1997, BOP has filed all reports, returns, registrations
and statements (collectively, "BOP 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 SEC 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 BOP. No administrative actions have been
taken or orders issued in connection with such BOP Filings. As of their
respective dates, each of such BOP Filings (y) complied in all material respects
with all laws and regulations enforced or promulgated by the Governmental Entity
with which it was filed (or was amended so as to be in compliance promptly
following discovery of any such noncompliance); and (z) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any financial
statement contained in any of such BOP Filings fairly presented the financial
position of BOP, and was prepared in accordance with generally accepted
accounting principles or banking regulations consistently applied, except as
stated therein, during the periods involved. BOP has furnished or made
available to GBB true and correct copies of all BOP Filings filed by BOP since
January 1, 1997.
4.6. Authority of BOP. The execution and delivery by BOP of this Agreement
----------------
and the Agreement of Merger and, subject to the requisite approval of the
shareholders of BOP 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
BOP. 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 BOP 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 BOP to GBB (the "BOP Conflicts and
Consents List"), neither the execution and delivery by BOP of this Agreement and
the Agreement of Merger, the consummation of the transactions contemplated
herein or therein, nor compliance by BOP 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 BOP is a party, or by which BOP any of its properties or
assets are bound; (c) result in the creation or imposition of any Encumbrance on
any of the properties or assets of BOP; or (d) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to BOP or any of its
properties or assets. Except as set forth in the BOP 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 BOP, and
no consent of, approval of or notice to any other Person, is required in
connection with the execution and delivery by BOP of this Agreement and the
Agreement of Merger or the consummation by BOP of the Merger or the transactions
contemplated hereby or thereby, except (i) the approval of
15
<PAGE>
this Agreement and the Agreement of Merger and the transactions contemplated
hereby and thereby by the shareholders of BOP; (ii) such approvals as may be
required by the FRB, the FDIC and the DFI; (iii) the filing of the Proxy
Statement and Prospectus and Registration Statement on Form S-4 with the SEC and
the FDIC; and (iv) the filing of the Agreement of Merger with the Secretary of
State.
4.7. Insurance. BOP has policies of insurance and bonds with respect to
---------
its assets and business against such casualties and contingencies and in such
amounts, types and forms as are customarily appropriate for its business,
operations, properties and assets. All such insurance policies and bonds are in
full force and effect. Except as set forth in a list furnished by BOP to GBB
(the "BOP 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
BOP Insurance List, BOP is not in default under any such policy or bond and all
material claims thereunder have been filed in a timely fashion. Set forth in
the BOP Insurance List is a list of all policies of insurance carried and owned
by BOP 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. BOP has good and marketable title to all its
-----------------
properties and assets, other than real property, owned or stated to be owned by
BOP, free and clear of all Encumbrances except: (a) as set forth in the
Financial Statements of BOP; (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 BOP; or (e) as set forth in a list furnished by BOP to
GBB (the "BOP Personal Property List.")
4.9. Real Estate. BOP has furnished GBB a list of real property,
-----------
including leaseholds and all other interests in real property (other than
security interests), owned by BOP (the "BOP Real Property List"). Except as set
forth on the BOP Real Property List, BOP has duly recorded or caused to be
recorded, in the appropriate county, all recordable interests in the real
property described in the BOP Real Property List. BOP has good and marketable
title to the real property, and valid leasehold interests in the leaseholds,
described in the BOP Real Property List, free and clear of all Encumbrances,
except (a) for rights of lessors, co-lessees or sublessees in such matters that
are reflected in the lease; (b) for current taxes not yet due and payable; (c)
for such Encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property; and (d) as described
in the BOP Real Property List. BOP has furnished GBB with true and correct
copies of all leases included in the BOP Real Property List, all title insurance
policies and all documents evidencing recordation of all recordable interests in
real property included in the BOP Real Property List.
4.10. Litigation. Except as set forth in a list furnished by BOP to GBB
----------
(the "BOP Litigation List"), there is no private or governmental suit, claim,
action or proceeding pending, nor to BOP's knowledge threatened, against BOP or
any of its subsidiaries or against any of their respective directors, officers
or employees relating to the performance of their duties in such
16
<PAGE>
capacities or against or affecting any properties of BOP 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 BOP, or the transactions contemplated hereby, or which
may involve a judgment against BOP in excess of $50,000. Also, except as
disclosed in the BOP Litigation List, there are no material judgments, decrees,
stipulations or orders against BOP 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.
4.11. Taxes.
-----
(a) Except as set forth in a list furnished by BOP to GBB (the "BOP
Tax List"), (i) all Tax Returns required to be filed by or on behalf of BOP or
any of its 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; (ii) all Taxes due and payable by or on behalf of BOP or any
of its 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 BOP balance sheet, and adequate reserves or accruals
for Taxes have been provided in the BOP 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 (iii) 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 BOP or any of its subsidiaries, or any Affiliated
Group(s) of which any of them is or was a member.
(b) BOP and its 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 income or franchise
Tax Returns of BOP and any of its subsidiaries relating to the taxable periods
since January 1, 1996 and (ii) any audit report issued within the last three
years relating to any Taxes due from or with respect to BOP or any of its
subsidiaries with respect to their respective income, assets or operations.
(d) Except as set forth in the BOP Tax List, no written claim has been
made by a taxing authority in a jurisdiction where BOP or any of its
subsidiaries do not file an income or franchise Tax Return such that BOP or any
of its subsidiaries are or may be subject to taxation by that jurisdiction.
17
<PAGE>
(e) Except as set forth in the BOP 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 BOP or any of its
subsidiaries have been fully paid, and, to the best of BOP's knowledge, there
are no other audits or investigations by any taxing authority in progress, nor
has BOP or any of its 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 BOP or any of its subsidiaries for any subsequent taxable period that
could be material.
(f) Except as set forth in the BOP Tax List, neither BOP, any of its
subsidiaries nor any other Person on behalf of BOP or any of its 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 BOP or any
of its 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 BOP or
any of its 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
BOP or any of its 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
BOP or any of its subsidiaries.
(g) Except as set forth in the BOP Tax List, no property owned by BOP
or any of its 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) BOP is not 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 BOP 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 BOP or any of its subsidiaries or their respective affiliates by
reason of Section 280G of the Code, or would constitute compensation in excess
of the limitation set forth in Section 162(m) of the Code.
(j) There are no liens as a result of any due and unpaid Taxes upon
any of the assets of BOP or any of its subsidiaries.
18
<PAGE>
(k) Except as set forth in the BOP Tax List, BOP or any of its
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 BOP Tax list, none of the members of
BOP's Affiliated Group has any net operating loss carryovers.
(m) BOP agrees, and agrees to cause its 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. BOP
acknowledges that its or any of its subsidiaries' 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.
------------------------------------
(a) BOP is not 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 BOP.
(b) Except as set forth on a list furnished by BOP to GBB (the "BOP
Environmental Compliance List"), to the best of BOP's knowledge, (i) BOP is in
compliance with all Environmental Regulations; (ii) there are no Tanks on or
about BOP Property; (iii) there are no Hazardous Materials on, below or above
the surface of, or migrating to or from BOP Property; (iv) BOP has no 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
BOP or concerning property securing BOP loans and there is no outstanding
judgment, order, writ, injunction, decree, or award against or affecting BOP
Property or property securing BOP 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 BOP. For purposes of
this Agreement, the term "Environmental Regulations" shall mean all applicable
statutes, regulations, rules, ordinances, codes, licenses, permits, orders,
approvals, plans, authorizations, concessions, franchises, and similar items, of
all Governmental Entities and all applicable judicial, administrative, and
regulatory decrees, judgments, and orders relating to the protection of human
health or the environment, including, without limitation: all requirements,
including, but not limited to those pertaining to reporting, licensing,
permitting, investigation, and remediation of emissions, discharges, releases,
or threatened releases of Hazardous Materials, chemical substances, pollutants,
contaminants, or hazardous or toxic substances, materials or wastes whether
solid, liquid, or gaseous in nature, into the air, surface water,
19
<PAGE>
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. "BOP Property" shall mean real estate currently owned, leased, or
otherwise used by BOP, or in which BOP 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 BOP 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.
(c) BOP has provided to GBB phase I environmental assessments with
respect to each interest in real property set forth on the BOP Real Property
List as to which such a phase I environmental investigation has been prepared by
or on behalf of BOP. The BOP Real Property List shall disclose each such
property as to which such an assessment has not been prepared on behalf of BOP.
4.13. Performance of Obligations. BOP 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 BOP. Except for loans and leases made by
BOP in the ordinary course of business, to the best of BOP's knowledge, no party
with whom
20
<PAGE>
BOP has an agreement that is of material importance to the business of BOP is in
default thereunder.
4.14. Employees. There are no controversies pending or, to the best of
---------
BOP's knowledge, threatened between BOP 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 BOP. BOP is not a party to any collective
bargaining agreement with respect to any of its employees or any labor
organization to which its employees or any of them belong.
4.15. Brokers and Finders. Except for the obligation to Hoefer & Arnett
-------------------
Incorporated set forth in the Hoefer Agreement, a copy of which has been
delivered to GBB, BOP is not a party to or obligated under any agreement with
any broker or finder relating to the transactions contemplated hereby, and
neither the execution of this Agreement nor the consummation of the transactions
provided for herein will result in any liability to any broker or finder.
4.16. Material Contracts. Except as set forth in a list furnished by BOP
------------------
to GBB (the "BOP Contract List") hereto (all items listed or required to be
listed in such BOP Contract List being referred to herein as "Scheduled
Contracts"), BOP is not a party or otherwise subject to:
(a) any employment, deferred compensation, bonus or consulting
contract that (i) has a remaining term, as of the date of this Agreement, of
more than one year in length of obligation on the part of BOP and is not
terminable by BOP within one year without penalty or (ii) requires payment by
BOP of $50,000 or more per annum;
(b) any advertising, brokerage, licensing, dealership,
representative or agency relationship or contract requiring payment by BOP of
$50,000 or more per annum;
(c) any contract or agreement that restricts BOP (or would restrict
any Affiliate of BOP or the Surviving Corporation (including GBB and its
subsidiaries) after the Effective Time of the Merger) from competing in any line
of business with any Person or using or employing the services of any Person;
(d) any lease of real or personal property providing for annual
lease payments by or to BOP in excess of $50,000 per annum other than (A)
financing leases entered into in the ordinary course of business in which BOP is
lessor and (B) leases of real property presently used by BOP as banking offices;
(e) any mortgage, pledge, conditional sales contract, security
agreement, option, or any other similar agreement with respect to any interest
of BOP (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;
(f) other than as described in the BOP Filings or as set forth in
the BOP Employee Plan List, any stock purchase, stock option, stock bonus, stock
ownership, profit sharing, group insurance, bonus, deferred compensation,
severance pay, pension, retirement,
21
<PAGE>
savings or other incentive, welfare or employment plan or material agreement
providing benefits to any present or former employees, officers or directors of
BOP;
(g) any agreement to acquire equipment or any commitment to make
capital expenditures of $50,000 or more;
(h) other than agreements entered into in the ordinary course of
business, including sales of other real estate owned, any agreement for the sale
of any property or assets in which BOP has an ownership interest or for the
grant of any preferential right to purchase any such property or asset;
(i) any agreement for the borrowing of any money (other than
liabilities or interbank borrowings made in the ordinary course of its banking
business and reflected in the financial records of BOP);
(j) any restrictive covenant contained in any deed to or lease of
real property owned or leased by BOP (as lessee) that materially restricts the
use, transferability or value of such property;
(k) 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;
(l) any supply, maintenance or landscape contracts not terminable by
BOP without penalty on 30 days' or less notice and which provides for payments
in excess of $50,000 per annum;
(m) any material agreement which would be terminable other than by
BOP as a result of the consummation of the transactions contemplated by this
Agreement;
(n) any contract of participation with any other bank in any loan in
excess of $50,000 or any sales of assets of BOP with recourse of any kind to BOP
except the sale of mortgage loans, servicing rights, repurchase or reverse
repurchase agreements, securities or other financial transactions in the
ordinary course of business;
(o) any agreement providing for the sale or servicing of any loan
or other asset which constitutes a "recourse arrangement" under applicable
regulation or policy promulgated by a Governmental Entity (except for agreements
for the sale of guaranteed portions of loans guaranteed in part by the U. S.
Small Business Administration and related servicing agreements);
(p) any contract relating to the provision of data processing
services to BOP; or
(q) any other agreement of any other kind which involves future
payments or receipts or performances of services or delivery of items requiring
payment of $50,000 or more to or by BOP 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.
22
<PAGE>
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, 1999, there has not
been, occurred or arisen any of the following (whether or not in the ordinary
course of business unless otherwise indicated):
(a) any change in any of the assets, liabilities, permits, methods
of accounting or accounting practices, business, or manner of conducting
business, of BOP 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 BOP;
(b) any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, results of operations or prospects of BOP or that may involve a loss
of more than $50,000 in excess of applicable insurance coverage;
(c) any amendment, modification or termination of any existing, or
entry into any new, material contract or permit that has had or may reasonably
be expected to have a material adverse effect on the assets, liabilities,
business, financial condition, results of operations or prospects of BOP;
(d) any disposition by BOP 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 BOP; or
(e) any direct or indirect redemption, purchase or other acquisition
by BOP of any equity securities or any declaration, setting aside or payment of
any dividend or other distribution on or in respect of BOP Stock whether
consisting of money, other personal property, real property or other things of
value.
4.18. Licenses and Permits. BOP 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 BOP.
The properties, assets, operations and businesses of BOP 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. BOP does not have any liabilities or
-----------------------
obligations, either accrued or contingent, that are material to BOP and that
have not been: (a) reflected or disclosed in the Financial Statements of BOP;
(b) incurred subsequent to December 31, 1999 in the ordinary course of business
consistent with past practices; or (c) disclosed in a list furnished by BOP to
GBB (the "Undisclosed Liabilities List") or on any other BOP List. BOP does not
know
23
<PAGE>
of any basis for the assertion against it of any liability, obligation or claim
(including, without limitation, that of any regulatory authority) that is likely
to result in or cause a material adverse change in the business, financial
condition, results of operations or prospects of BOP that is not fairly
reflected in the Financial Statements of BOP or otherwise disclosed in this
Agreement.
4.20. Employee Benefit Plans.
----------------------
(a) BOP has previously made available to GBB copies of each
"employee benefit plan," as defined in Section 3(3) of ERISA, of which BOP or
any member of the same controlled group of corporations, trades or businesses as
BOP within the meaning of Section 4001(a)(14) of ERISA ("ERISA Affiliates") is a
sponsor or participating employer or as to which BOP 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 BOP or any of its ERISA Affiliates, together with all amendments
thereto, all currently effective and related summary plan descriptions, the
determination letter from the IRS, the annual reports for the most recent three
years (Form 5500 including, if applicable, Schedule B thereto) and a 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." BOP does not participate in an employee
benefit pension plan that is a "multiemployer plan" within the meaning of
Section 3(37) of ERISA. Each Employee Plan which is intended to be qualified in
form and operation under Section 401(a) of the Code is so qualified and the
associated trust for each such Employee Plan is exempt from tax under Section
501(a) of the Code. No event has occurred that will subject such Employee Plans
to a material amount of tax under Section 511 of the Code. All amendments
required to bring each Employee Plan into conformity with all of the applicable
provisions of ERISA, the Code and all other applicable laws have been made.
Except as disclosed in a list furnished by BOP to GBB (the "BOP Employee Plan
List"), all Employee Plans were in effect for substantially all of 1999, 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, 1999.
(b) BOP has previously made available to GBB copies or descriptions
of each plan or arrangement maintained or otherwise contributed to by BOP 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 BOP or any of its
ERISA Affiliates (such plans and arrangements being collectively referred to
herein as "Benefit Arrangements"). Except as disclosed in the BOP Employee Plan
List hereto, all Benefit Arrangements which are in effect were in effect for
substantially all of 1999 and to date. Except as disclosed in the BOP 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 BOP Employee Plan List, there has been no material increase in the
compensation of or benefits payable to any senior executive employee of BOP
since December 31, 1998, nor any employment, severance or
24
<PAGE>
similar contract entered into with any such employee, nor any amendment to any
such contract, since December 31, 1998.
(c) With respect to all Employee Plans and Benefit Arrangements, BOP
and its ERISA Affiliates are in 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 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. BOP 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 best of BOP's knowledge,
threatened legal action, proceeding or investigation against or involving any
Employee Plan or Benefit Arrangement. 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 BOP 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 BOP is not directly or indirectly responsible) to liability under
Title I of ERISA or to the imposition of tax under Section 4975 of the Code. No
Employee Plan subject to Part III of Subtitle B of Title I of ERISA or Section
412 of the Code, or both, has incurred any "accumulated funding deficiency," as
defined in Section 412 of the Code, whether or not waived, nor has BOP 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 BOP
nor any of its ERISA Affiliates has incurred nor expects to incur, directly or
indirectly, any 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 BOP) at or after the Effective Time
of the Merger.
(d) Neither BOP 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 BOP does not know of any fact which
could adversely affect the qualified status of any such Employee Plan. All
contributions required to be made to each of the Employee Plans under the terms
of the Employee Plan, ERISA, the Code or any other applicable laws have been
timely made. The Financial Statements of BOP properly reflect all amounts
required to be accrued as liabilities to date under each of the Employee Plans.
The fair market value of the assets of each Employee Plan and Benefit
Arrangement that is funded, or required to be funded under the terms of the
Employee Plan or Benefit Arrangement, ERISA, the Code or any other applicable
law, equals or exceeds the liabilities, including the present value of benefit
obligations, of such Employee Plan or Benefit Arrangement.
25
<PAGE>
(e) Except for Scheduled Contracts set forth in the BOP Contract
List or as set forth in the BOP 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 BOP 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.
(f) All group health plans of BOP have been operated in compliance
with the group health plan continuation coverage requirements of Section 4980B
of the Code and with the group health plan portability, access and renewability
requirements of Sections 9801 through 9833 of the Code, and corresponding
provisions of ERISA, in all material respects.
(g) BOP has not 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 BOP as independent contractors for
more than six months or who may otherwise be eligible to participate in the
Employee Plans or to an extent that would reasonably be expected to result in
the disqualification of any of the Employee Plans or the imposition of penalties
or excise taxes with respect to the IRS, the Department of Labor, the Pension
Benefit Guaranty Corporation or any other Governmental Entity or (iv) leased
employees, as that term is defined in section 414(n) of the Code.
(h) Except as set forth in the BOP 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 BOP, 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 BOP accurately reflect all
-----------------
material actions taken to this date by the respective shareholders, board of
directors and committees of BOP.
4.22. Accounting Records. BOP maintains accounting records which fairly
------------------
and accurately reflect, in all material respects, its transactions and
accounting controls exist sufficient to provide reasonable assurances that such
transactions are, in all material respects, (i) executed in accordance with its
management's general or specific authorization, and (ii) recorded as necessary
to permit the preparation of financial statements in conformity with generally
accepted
26
<PAGE>
accounting principles. Such records, to the extent they contain important
information pertaining to BOP which is not easily and readily available
elsewhere, have been duplicated, and such duplicates are stored safely and
securely.
4.23. Offices and ATMs. BOP has furnished to GBB a list (the "BOP Offices
----------------
List") setting forth the headquarters of BOP (identified as such) and each of
the offices and automated teller machines ("ATMs") maintained and operated by
BOP (including, without limitation, representative and loan production offices
and operations centers) and the location thereof. Except as set forth on the
BOP Offices List, BOP does not maintain any other office or ATM or conducts
business at any other location, and BOP has not applied for or received
permission to open any additional branch or operate at any other location.
4.24. Operating Losses. BOP has furnished to GBB a list (the "BOP
----------------
Operating Losses List") setting forth any Operating Loss (as herein defined)
which has occurred at BOP during the period after December 31, 1998 to the date
of the Agreement. To the best of BOP's knowledge, no action has been taken or
omitted to be taken by any employee of BOP that has resulted in the incurrence
by BOP of an Operating Loss or that might reasonably be expected to result in
the incurrence of any individual Operating Loss which, net of any insurance
proceeds payable in respect thereof, would exceed $50,000 on an individual basis
or in the aggregate. For purposes of this section "Operating Loss" means any
loss resulting from cash shortages, lost or misposted items, disputed clerical
and accounting errors, forged checks, payment of checks over stop payment
orders, counterfeit money, wire transfers made in error, theft, robberies,
defalcations, check kiting, fraudulent use of credit cards or ATMs, civil money
penalties, fines, litigation, claims or other similar acts or occurrences.
4.25. Loan Portfolio. BOP has furnished to GBB a list (the "BOP Loan
--------------
List") that sets forth (a) as of January 31, 2000, a description of, by type and
classification, if any, each loan, lease, other extension of credit or
commitment to extend credit by BOP; (b) sets forth as of January 31, 2000, by
type and classification, all loans, leases, other extensions and commitments to
extend credit of BOP 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 BOP as to which any
payment of principal, interest or any other amount is 90 days or more past due.
4.26. Investment Securities. BOP has furnished to GBB a list (the "BOP
---------------------
Investment Securities List") setting forth a description of each Investment
Security held by BOP on January 31, 2000. The BOP 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. BOP has no Investment Security classified as trading.
4.27. Power of Attorney. BOP has not 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 BOP,
------------------------------------
there is no fact, event or condition applicable to BOP which will, or reasonably
could be expected to,
27
<PAGE>
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 BOP's knowledge, BOP has
--------------------------
not through the date hereof taken or agreed to take any action that would
prevent GBB from accounting for the business combination to be effected by the
Merger as a pooling-of-interests or would prevent the Merger from qualifying as
a tax-free reorganization under the Code.
4.30. Indemnification. Other than pursuant to the provisions of their
---------------
respective Articles of Incorporation or Bylaws, and the Hoefer Agreement, BOP is
not 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 BOP (a "Covered Person"),
and to the best knowledge of BOP, there are no claims for which any Covered
Person would be entitled to indemnification by BOP if such provisions were
deemed in effect, except as set forth in a list furnished by BOP to GBB (the
"BOP Indemnification List").
4.31. Community Reinvestment Act. BOP has received rating of
--------------------------
"outstanding" in its most recent examination or interim review with respect to
the Community Reinvestment Act. BOP has not been advised of any supervisory
concerns regarding BOP's compliance with the Community Reinvestment Act.
4.32. Derivative Transactions. Except as set forth in a list furnished
-----------------------
by BOP to GBB (the "BOP Derivatives List"), BOP is not 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. Except for acting as a custodian or trustee
--------------------
under individual retirement accounts, BOP does not presently maintain trusts or
exercises trust powers, including, but not limited to, trust administration, and
neither of them nor any predecessor has maintained any trusts or 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 BOP or
any of its predecessors, 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 BOP or any of its predecessors 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 BOP or any of its predecessors 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 BOP or any of its
predecessors is serving or has served
28
<PAGE>
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 BOP ("BOP Supplied Information")
for inclusion in (a) the Registration Statement on Form S-4 and the Proxy
Statement and Prospectus and (b) any other documents to be filed with the SEC,
the FRB, the FDIC, the DFI or any other Governmental Entity in connection with
the transactions contemplated in this Agreement, will, at the respective times
such documents are filed or become effective, or with respect to the Proxy
Statement and Prospectus when mailed, contain any untrue statement of a material
fact, or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
4.35. Intellectual Property. Except as set forth in a list furnished by
---------------------
BOP to GBB (the "BOP Intellectual Property List"), BOP owns or possesses 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 BOP has not received any notice with
respect thereto that asserts the rights of others. BOP has in all material
respects performed all the obligations required to be performed by them, and are
not in default in any material respect under any license, contract, agreement,
arrangement or commitment relating to any of the foregoing.
4.36. Insider Loans; Other Transactions. BOP has previously provided GBB
---------------------------------
or its agent with a listing, current as of January 31, 2000, of all extensions
of credit made by BOP 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. BOP does not owe any amount to, or has any contract or lease
with or commitment to, any of the present executive officers or directors of BOP
(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 BOP Stock Option Plans or any amounts due pursuant to
BOP's Employee Plans).
4.37. Registration Obligation. BOP is not under any obligation,
-----------------------
contingent or otherwise, to register any of their respective securities under
the Securities Act.
4.38. Accuracy and Currentness of Information Furnished. The
-------------------------------------------------
representations and warranties made by BOP hereby or in the BOP 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.
29
<PAGE>
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF GBB
-------------------------------------
GBB represents and warrants to BOP as follows:
5.1. Incorporation, Standing and Power. GBB has been duly organized, is
---------------------------------
validly existing and in good standing as a corporation under the laws of the
State of California and is registered as a bank holding company under the BHC
Act. Newco has been duly organized, is validly existing and in good standing as
corporation under the laws of the State of California. GBB and Newco each 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. Each
of GBB and Newco 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 and
Newco have been delivered to BOP. Such Articles of Incorporation and Bylaws are
in full force and effect as of the date hereof.
5.2. Capitalization.
--------------
(a) As of the date of this Agreement, the authorized capital stock of
GBB consists of 24,000,000 shares of common stock, no par value, of which
14,376,768 shares are outstanding as of March 20, 2000, and 4,000,000 shares of
preferred stock, no par value, of which no shares are outstanding. All of the
outstanding shares of GBB Stock are duly authorized, validly issued, fully paid
and nonassessable. The GBB Stock to be used in the Merger will be duly
authorized, validly issued, fully paid and nonassessable.
(b) As of the date of this Agreement, the authorized capital stock of
Newco consists of 10,000 shares of common stock, no par value of which 1000
shares are outstanding and owned of record and beneficially by GBB. All the
outstanding shares of such common stock are duly authorized, validly issued,
fully paid and nonassessable. There are no outstanding options, warrants or
other rights in or with respect to the unissued shares of such common stock or
any other securities convertible into such stock, and Newco is not obligated to
issue any additional shares of its common stock or any options, warrants or
other rights in or with respect to the unissued shares of its common stock or
any other securities convertible into such stock.
5.3. Financial Statements. GBB has previously furnished to BOP a copy of
--------------------
the Financial Statements of GBB. The Financial Statements of GBB: (a) present
fairly and accurately 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)
30
<PAGE>
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, 1997, GBB has 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, and (c) any other applicable
Governmental Entity, including taxing authorities, except where the failure to
file such reports, returns, registrations or statements has not had and is not
reasonably expected to have a material adverse effect on the business, financial
condition, results of operations or prospects of GBB on a consolidated basis.
No administrative actions have been taken or orders issued in connection with
such GBB Filings. As of their respective dates, each of such GBB Filings (y)
complied in all material respects with all laws and regulations enforced or
promulgated by the Governmental Entity with which it was filed (or was amended
so as to be in such compliance promptly following discovery of any such
noncompliance); and (z) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Any financial statement contained in any of such GBB
Filings that was intended to present the financial position of GBB on a
consolidated basis fairly presented the financial position of GBB on a
consolidated basis and was prepared in accordance with generally accepted
accounting principles or banking regulations consistently applied, except as
stated therein, during the periods involved.
5.5. Authority.
---------
(a) Of GBB. The execution and delivery by GBB of this Agreement and
------
the consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part of GBB. This
Agreement is a valid and binding obligation of GBB enforceable in accordance
with its terms, except as the enforceability thereof may be limited by
bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium
or other similar laws affecting the rights of creditors generally and by general
equitable principles. Except as set forth in a list furnished by GBB to BOP
(the "GBB Conflicts and Consents List"), neither the execution and delivery by
GBB of this Agreement, the consummation of the transactions contemplated herein,
nor compliance by GBB with any of the provisions hereof, 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 GBB Subsidiary is a party, or by which GBB or any GBB Subsidiary 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 GBB Subsidiary; or (d) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to GBB or any GBB Subsidiary 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
31
<PAGE>
connection with the execution and delivery by GBB of this Agreement or the
consummation by GBB of the Merger or the transactions contemplated hereby,
except (i) such approvals as may be required by the FRB, the FDIC and the DFI;
(ii) the filing of the Proxy Statement and Prospectus and Registration Statement
on Form S-4 with the SEC and the FDIC and the issuance by the SEC of an order
declaring the Registration Statement on Form S-4 effective; (iii) the filing of
the Agreement of Merger with the Secretary of State of the State of California;
and (iv) 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.
(b) Of Newco. The execution and delivery by Newco of this Agreement
--------
and the Agreement of Merger and, subject to the requisite approval of the
shareholder of Newco, the consummation of the transactions contemplated hereby
and thereby, have been duly and validly authorized by all necessary corporate
action on the part of Newco, and this Agreement and the Agreement of Merger will
be, upon due execution and delivery by the respective parties, a valid and
binding obligation of Newco enforceable in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, liquidation,
receivership, conservatorship, insolvency, moratorium or other similar laws
affecting the rights of creditors generally and by general equitable principles.
Neither the consummation of the transactions contemplated by this Agreement and
the Agreement of Merger, nor compliance by Newco with any of the provisions
hereof or thereof, will: (a) conflict with or result in a breach of any
provision of its Articles of Incorporation or Bylaws; (b) constitute a breach of
or result in a default (or give rise to any rights of termination, cancellation
or acceleration, or any right to acquire any securities or assets) under any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
franchise, license, permit, agreement or other instrument or obligation to which
Newco is a party, or by which Newco or any of its properties or assets is bound:
(c) result in the creation or imposition of any Encumbrance on any of the
properties or assets of Newco; or (d) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Newco or any of its properties
or assets. No consent of, approval of, notice to or filing with any
Governmental Entity having jurisdiction over any aspect of the business or
assets of Newco, and no consent of, approval of or notice to any other Person,
is required in connection with the execution and delivery by Newco of this
Agreement or the Agreement of Merger or the consummation by Newco of the
transactions contemplated hereby or thereby, except (i) the approval of the
Agreement of Merger and the transactions contemplated hereby by the shareholder
of Newco, (ii) such approvals as may be required by the SEC, the FRB, the DFI,
the FDIC or any other Governmental Authority; and (iii) filing of the Agreement
of Merger with the Secretary of State of the State of California.
5.6. Subsidiaries. As of the date of this Agreement, GBB owns, directly or
------------
indirectly, 100% of the outstanding stock of each of the GBB Subsidiaries. As
of the date of this Agreement, and except for its investments in the GBB
Subsidiaries, 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 Coast Bancorp entered into
an Agreement and Plan of Reorganization, dated as of December 14, 1999, pursuant
to which Coast Bancorp will merge with and into GBB and Coast Commercial Bank, a
wholly owned subsidiary of Coast Bancorp, will become a wholly owned subsidiary
of GBB. GBB, GBB Merger Corp. and Bank of Santa Clara entered into an Agreement
and Plan of Reorganization, dated as of January 26,
32
<PAGE>
2000, pursuant to which GBB Merger Corp. will merge with and into Bank of Santa
Clara, as a result of which Bank of Santa Clara will become a wholly owned
subsidiary of GBB.
5.7. Brokers and Finders. Except for the obligation to Dain Rauscher
-------------------
Wessels Equity Capital Markets, a division of Dain Rauscher Incorporated, as set
forth in Dain Rauscher Agreement, GBB is not a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of this Agreement nor the consummation of the
transactions provided for herein will result in any liability to any broker or
finder.
5.8. Certain Material Changes. Except as specifically required, permitted
------------------------
or effected by this Agreement or as disclosed in any GBB Filings, since December
31, 1999, there has not been, occurred or arisen any of the following (whether
or not in the ordinary course of business unless otherwise indicated):
(a) any change in any of the assets, liabilities, permits, methods of
accounting or accounting practices, business, or manner or conducting business,
of GBB or the GBB Subsidiaries or any other event or development that has had or
may reasonably be expected to have a material adverse effect on the assets,
liabilities, permits, business, financial condition, results of operations or
prospects of GBB on a consolidated basis;
(b) any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, permits, business, financial
condition, results of operations or prospects of GBB on a consolidated basis;
(c) any amendment, modification or termination of any existing, or
entry into any new, material contract or permit that has had or may reasonably
be expected to have a material adverse effect on the assets, liabilities,
permits, business, financial condition, results of operations or prospects of
GBB on a consolidated basis; or
(d) any disposition by GBB or any of the GBB 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 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 GBB on
a consolidated basis. The properties, assets, operations and businesses 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 are and have been maintained and conducted, in all material
respects, in compliance with all applicable laws and regulations.
33
<PAGE>
5.10 Corporate Records. The minute books of GBB reflect all material
-----------------
actions taken to this date by its shareholders, boards of directors and
committees.
5.11. Accounting Records. GBB maintains accounting records which fairly
------------------
and accurately reflect, in all material respects, its transactions and
accounting controls exist sufficient to provide reasonable assurances that such
transactions are, in all material respects, (i) executed in accordance with
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 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 the GBB
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 ("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 BOP in connection
with obtaining the approval of the shareholders of BOP of this Agreement, the
Merger and the other transactions contemplated hereby, and (b) any other
documents to be filed with the SEC, the FRB, the FDIC, the DFI or any other
Governmental Entity in connection with the transactions contemplated in this
Agreement, will, at the respective times such documents are filed or become
effective, or with respect to the 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.
34
<PAGE>
ARTICLE 6.
COVENANTS OF BOP
----------------
PENDING EFFECTIVE TIME OF THE MERGER
------------------------------------
BOP 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, BOP agrees to
conduct its business in the ordinary course in substantially the manner
heretofore conducted and in accordance with sound banking practices, and BOP
shall not, without the prior written consent of GBB, which consent GBB shall not
unreasonably withhold or delay:
(a) issue, sell or grant any BOP Stock (except pursuant to the
exercise of BOP Options outstanding as of the date hereof), any other securities
(including long term debt) of BOP, or any rights, stock appreciation rights,
options or securities to acquire any BOP Stock, or any other securities
(including long term debt) of BOP;
(b) declare, set aside or pay any dividend or make any other
distribution upon or split, combine or reclassify any shares of capital stock or
other securities of BOP, provided, however, that subject to Section 6.10, BOP
may pay to its shareholders its regular cash dividend in amounts and in a manner
consistent with past practices;
(c) purchase, redeem or otherwise acquire any capital stock or other
securities of BOP or any rights, options, or securities to acquire any capital
stock or other securities of BOP;
(d) except as may be required to effect the transactions contemplated
herein, amend its Articles of Incorporation or Bylaws;
(e) grant any general or uniform increase in the rate of pay of
employees or employee benefits;
(f) grant any increase in salary, incentive compensation or employee
benefits or pay any bonus to any Person or voluntarily accelerate the vesting of
any employee benefits;
(g) make any capital expenditure or commitments with respect thereto
in excess of $50,000 in the aggregate, except for ordinary repairs, renewals and
replacements;
(h) compromise or otherwise settle or adjust any assertion or claim of
a deficiency in taxes (or interest thereon or penalties in connection
therewith), extend the statute of limitations with any tax authority or file any
pleading in court in any tax litigation or any appeal from an asserted
deficiency, or file or amend any federal, foreign, state or local tax return, or
make any tax election;
35
<PAGE>
(i) grant, renew or commit to grant or renew any extension of credit
if such extension of credit, together with all other credit then outstanding to
the same Person and all Affiliated Persons, would exceed $500,000 on an
unsecured basis, or $1,000,000 if secured by a lien on real estate or cash
(consent shall be deemed granted if within two Business Days of written notice,
together with all relevant documents, delivered to GBB's Chief Credit Officer,
written notice of objection is not received by BOP);
(j) change its tax or accounting policies and procedures or any method
or period of accounting unless required by generally accepted accounting
principles or a Governmental Entity;
(k) 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 BOP Stock, or any
Affiliate of such Person, if such credit would exceed $50,000;
(l) close any offices at which business is conducted or open any new
offices;
(m) adopt or enter into any new employment agreement or other employee
benefit plan or arrangement or amend or modify any employment agreement or
employee benefit plan or arrangement of any such type except for such amendments
as are required by law;
(n) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal which constitutes, or may reasonably be
expected to lead to, any Competing Transaction (as such term is defined below),
or negotiate with any person in furtherance of such inquiries or to obtain a
Competing Transaction, or agree to or endorse any Competing Transaction, or
authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or any other
representative retained by it or any of its Affiliates to take any such action,
and BOP 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 BOP: any merger, consolidation, share
exchange or other business combination; a sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets of BOP representing 10% or more
of the assets of BOP; 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 BOP; a tender offer or exchange offer for at least
10% of the outstanding shares of BOP; a solicitation of proxies in opposition to
approval of the Merger by BOP's shareholders; or a public announcement of an
unsolicited bona fide proposal, plan, or intention to do any of the foregoing.
BOP will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties (other than GBB) conducted
heretofore with respect to any of the foregoing. BOP shall take the necessary
steps to inform promptly the appropriate individuals or entities referred to
above of the obligations undertaken in this Section. BOP agrees that it shall
notify GBB immediately if any such inquiries, proposals or offers are received
by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated
36
<PAGE>
or continued with BOP. BOP also agrees that it shall promptly request each other
person, other than GBB, that has heretofore executed a confidentiality agreement
in connection with its consideration of acquiring BOP to return all confidential
information heretofore furnished to such person by or on behalf of BOP and
enforce any such confidentiality agreements. Notwithstanding any other provision
in this Section 6.1(n), nothing in this Agreement shall prevent BOP from (i)
engaging in any discussions or negotiations with, or providing any information
to, any Person in response to an unsolicited bona fide written proposal
concerning a Competing Transaction by any such Person or (ii) recommending such
an unsolicited bona fide written proposal concerning a Competing Transaction to
the holders of BOP Stock if and only if, prior to participating in any of the
foregoing, (A) the Board of Directors of BOP concludes in good faith that the
Competing Transaction, if consummated, would result in a transaction more
favorable to holders of BOP Stock than the transaction contemplated by this
Agreement (any such more favorable Competing Transaction being referred to in
this Agreement as a "Superior Proposal"); (B) the Board of Directors of BOP
determines in good faith based upon the advice of outside counsel that
participating in any such action is necessary for it to act in a manner not
inconsistent with its fiduciary duties under applicable law; and (C) at least
forty-eight (48) hours prior to providing any information or data to any person
or entering into discussions or negotiations with any Person, the Board of
Directors of BOP notifies GBB of such inquiries, proposals or offers received
by, any such information requested from, or any such discussions or negotiations
sought to be initiated or continued with BOP;
(o) 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 BOP's business or operations, except such changes as may be required
in the opinion of BOP's management to respond to economic or market conditions
or as may be required by any Governmental Entity;
(p) grant any Person a power of attorney or similar authority;
(q) make any investment by purchase of stock or securities (including
an Investment Security), contributions to capital, property transfers or
otherwise in any other Person, except for federal funds, 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, in any
case, in the ordinary course of business consistent with past practices and
which are not designated as trading (consent shall be deemed granted if within
three Business Days of written notice together with all relevant documents
delivered to GBB's Chief Financial Officer or Controller, written notice of
objection is not received by BOP);
(r) amend or modify any Scheduled Contract or enter into any agreement
or contract that would be a Scheduled Contract under Section 4.16;
(s) sell, transfer, mortgage, encumber or otherwise dispose of any
assets or release or waive any claim, except in the ordinary course of business
and consistent with past practices;
37
<PAGE>
(t) take any action which would or is reasonably likely to (i)
adversely affect the ability of GBB or BOP to obtain any necessary approval of
any Governmental Entity required for the transactions contemplated hereby; (ii)
adversely affect BOP'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 BOP's obligations hereunder, as set forth in Articles 9, 10 or 11
herein not being satisfied;
(u) make any special or extraordinary payments to any Person;
(v) reclassify any Investment Security from held-to-maturity or
available for sale to trading;
(w) sell any security other than in the ordinary course of business,
or engage in gains trading;
(x) take title to any real property without conducting prior thereto
an environmental investigation, which investigation shall disclose the absence
of any suspected environmental contamination;
(y) take or cause to be taken any action which would disqualify the
Merger as a "reorganization" within the meaning of Section 368(a)(2)(e) of the
Code or prevent GBB from accounting for the business combination to be effected
by the Merger as a pooling-of-interests;
(z) settle any claim, action or proceeding involving any material
liability for monetary damages or enter into any settlement agreement containing
material obligations;
(aa) make, acquire a participation in, or reacquire an interest in a
participation sold of, any loan that is not in compliance with its normal credit
underwriting standards, policies and procedures as in effect on December 31,
1999; 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;
(bb) 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
(cc) 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, BOP shall:
(a) use its commercially reasonable efforts consistent with this
Agreement to maintain and preserve intact its present business organization and
to maintain and preserve its
38
<PAGE>
relationships and goodwill with account holders, borrowers, employees and others
having business relationships with BOP;
(b) use its commercially reasonable efforts to keep in full force and
effect all of the existing material permits and licenses of BOP;
(c) use its commercially reasonable efforts to maintain insurance
coverage at least equal to that now in effect on all properties which it owns or
leases and on its business operations;
(d) perform its material contractual obligations and not become in
material default on any such obligations;
(e) duly observe and conform in all material respects to all lawful
requirements applicable to its business;
(f) maintain its assets and properties in good condition and repair,
normal wear and tear excepted;
(g) promptly upon learning of such information, advise GBB in writing
of any event or any other transaction 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 BOP Stock prior to the record date fixed for
the BOP Shareholders' Meeting or any adjourned meeting thereof to approve this
Agreement and the transactions contemplated herein;
(h) promptly notify GBB regarding receipt from any tax authority of
any notification of the commencement of an audit, any request to extend the
statute of limitations, any statutory notice of deficiency, any revenue agent's
report, any notice of proposed assessment, or any other similar notification of
potential adjustments to the tax liabilities of BOP, or any actual or threatened
collection enforcement activity by any tax authority with respect to tax
liabilities of BOP;
(i) make available to GBB monthly unaudited balance sheets and income
statements of BOP within 25 days after the close of each calendar month;
(j) not later than the 30th day of each calendar month, amend or
supplement the BOP Lists prepared and delivered pursuant to Article 4 to ensure
that the information set forth in the BOP Lists accurately reflects the then-
current status of BOP in all material respects;
(k) use its commercially reasonable efforts to obtain any third party
consent with respect to any contract, agreement, lease, license, arrangement,
permit or release that is material to the business of BOP or that is
contemplated in this Agreement as required in connection with the Merger;
39
<PAGE>
(l) maintain an allowance for loan and lease losses consistent with
practices and methodology as in effect on the date of the execution of this
Agreement; and
(m) furnish to 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.
---------------------
(a) BOP 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 BOP 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 BOP and in such a manner as to
minimize any disruption of, or interference with, the normal business operations
of BOP. Upon the request of GBB, BOP will request Richardson 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 BOP,
including tax accrual work papers prepared for BOP during the preceding 60
months, other than (a) books, records and documents covered by the attorney-
client privilege, or that are attorneys' work product, and (b) books, records
and documents that BOP 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 BOP herein; provided, that GBB shall disclose to BOP any
fact or circumstance it may discover which GBB believes renders any
representation or warranty made by BOP 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 BOP so obtained from any of
them (except to the extent that such documents or information are a matter of
public record or require disclosure in the Proxy Statement and Prospectus or any
of the public information of any applications required to be filed with any
Governmental Entity to obtain the approvals and consents required to effect the
transactions contemplated hereby), and if the transactions contemplated herein
are not consummated, such confidence shall be maintained and all such documents
shall be returned to BOP.
(b) A representative of GBB, selected by GBB in its sole discretion,
shall be authorized and permitted to review each loan, lease, or other credit
funded or renewed by BOP after the date hereof, and all information associated
with such loan, lease or other credit, such review to take place, if possible,
on BOP's premises.
(c) A representative of GBB, selected by GBB in its sole discretion,
shall be permitted by BOP to attend, but not otherwise participate in, all
regular and special Board of Directors' and committee meetings of BOP from the
date hereof until the Effective Time of the Merger; provided, however, that the
attendance of such representative shall not be permitted at
40
<PAGE>
any meeting, or portion thereof, for the sole purpose of discussing the
transactions contemplated by this Agreement or the obligations of BOP under this
Agreement.
6.4 Filings. BOP agrees that through the Effective Time of the Merger,
-------
each of BOP'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.
6.5 Notices; Reports. BOP will promptly notify GBB of any event of which
----------------
BOP obtains knowledge which has had or may have a materially adverse effect on
the financial condition, operations, business or prospects of BOP, or in the
event that BOP 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 BOP 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 BOP or committees thereof, any report by BOP for submission to the
Board of Directors of BOP or committees thereof, provided, however, that BOP
need not furnish to GBB communications of BOP's legal counsel regarding BOP'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 BOP to its shareholders
or other security holders, and all reports filed by BOP with the FDIC or the
DFI, and (iii) such other existing reports as GBB may reasonably request
relating to BOP.
6.6 BOP Shareholders' Meeting. Promptly after the execution of this
-------------------------
Agreement, BOP 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 BOP shall, subject to its
fiduciary duties, recommend that its shareholders approve this Agreement and the
transactions contemplated hereby, and the Board of Directors of BOP 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 BOP
Stock to approve this Agreement and the transactions contemplated hereby.
6.7 Certain Loans and Other Extensions of Credit. BOP will promptly
--------------------------------------------
inform GBB of the amounts and categories of any loans, leases or other
extensions of credit that have been classified by any unit of BOP or by any
other Person as "Criticized," "Specially Mentioned," "Substandard," "Doubtful,"
"Loss" or any comparable classification ("Classified Credits"). BOP will
furnish GBB, as soon as practicable, and in any event within 20 days after the
end of each
41
<PAGE>
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 BOP to any BOP director, officer at or above the
senior vice president level, or shareholder holding 10% or more of the capital
stock of BOP, including with respect to each such loan or lease the identity
and, to the knowledge of BOP, the relation of the borrower to BOP, 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.
6.8 Applications. Subject to Section 7.5, BOP will promptly prepare or
------------
cause to be prepared the portions of the Proxy Statement and Prospectus as it
pertains to BOP and any other applications necessary, including applications to
the FDIC and the DFI, 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. BOP shall afford GBB a reasonable opportunity to review the portions of
the Proxy Statement and Prospectus pertaining to BOP and all such applications
and all amendments and supplements thereto before the filing thereof. BOP
covenants and agrees that, with respect to the information relating to BOP, the
Proxy Statement and Prospectus will comply in all material respects with the
provisions of applicable law, and will not contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading. BOP will use its
commercially reasonable efforts to obtain all regulatory approvals or consents
necessary to effect the Merger and the transactions contemplated herein.
6.9 Affiliate Agreements. Concurrently with the execution of this
--------------------
Agreement, (a) BOP shall deliver to GBB a letter identifying all persons who are
then "affiliates" of BOP for purposes of ASR 130 and 135 and Rule 145 under the
Securities Act and (b) BOP 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. BOP
---------
shall use reasonable efforts to obtain from any person who becomes an affiliate
of BOP after BOP's delivery of the letter referred to above, and on or prior to
the date of the BOP 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.
6.10 Coordination of Dividends. BOP shall coordinate with GBB the
-------------------------
declaration of any dividends that may be allowed pursuant to Section 6.1(b)
hereof, and the record date and the payment dates relating thereto, it being the
intention of the parties that holders of BOP Stock shall not receive two
dividends, or fail to receive one dividend, for any applicable dividend
42
<PAGE>
period with respect to their shares of BOP Stock and any shares of GBB Stock any
such holder will receive in exchange therefor in the Merger.
6.11 D&O Coverage. In the event that GBB is unable to have BOP's directors
------------
and officers added to GBB's directors' and officers' liability insurance policy
pursuant to Section 7.2(d) hereof and upon GBB's request, BOP 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 BOP under a directors' and officers' liability insurance policy
which is no less protective in terms of coverage or limitations than now
possessed by BOP 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 BOP 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 BOP 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, GBB shall not, without the prior
written consent of BOP, which consent BOP shall not unreasonably withhold or
delay:
(a) 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;
(b) take or cause to be taken any action which would disqualify the
Merger as a "reorganization" within the meaning of Section 368 of the Code or
prevent GBB from accounting for the business combination to be effected by the
Merger as a pooling-of-interests;
(c) amend its articles of incorporation in any respect which would
materially and adversely affect the rights and privileges attendant to the GBB
Stock; or
(d) enter into a GBB Acquisition Transaction that includes as a
condition precedent to such GBB Acquisition Transaction that GBB terminate this
Agreement; provided, however, notwithstanding the foregoing, nothing in this
Agreement shall prevent GBB from entering into such a GBB Acquisition
Transaction if the Board of Directors of GBB determines in good faith based upon
the advice of counsel that taking such action is necessary for it to act in
43
<PAGE>
a manner not inconsistent with its fiduciary duties under applicable law;
provided, however, that nothing herein shall prohibit BOP from terminating this
Agreement pursuant to Section 13.1(l); or
(e) agree or make any commitment to take any actions prohibited by
this Section 7.1.
7.2. Affirmative Conduct of GBB and Subsidiaries Prior to Effective Time of
----------------------------------------------------------------------
the Merger. Between the date hereof and the Effective Time of the Merger, GBB
----------
shall:
(a) duly observe and conform in all material respects to all lawful
requirements applicable to the business of GBB;
(b) 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;
(c) 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. 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
(d) use its commercially reasonable efforts to purchase, or permit BOP
to purchase, tail coverage for BOP pursuant to BOP's directors' and officers'
liability insurance policy, providing for coverage for a period of at least 36
months following the Effective Time of the Merger and covering acts or omissions
occurring prior to the Effective Time of the Merger and actions related to this
Agreement.
7.3. Access to Information. Upon reasonable request by BOP, GBB shall (i)
---------------------
make its Chief Executive Officer, Chief Administrative Officer/Chief Financial
Officer, Chief Credit Officer and Controller available to discuss with BOP and
its representatives GBB's operations; and (ii) shall provide BOP with written
information which is (a) similar to the written information that BOP 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 BOP of the right to rely upon the representations and warranties made by
GBB herein; provided, that BOP shall disclose to GBB any fact or circumstance it
may discover which BOP believes renders any representation or warranty made by
GBB hereunder incorrect in any respect. BOP 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
44
<PAGE>
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 and the FDIC; (iii)
in conjunction with BOP, 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
BOP a reasonable opportunity to review the Proxy Statement and Prospectus and
all such applications and all amendments and supplements thereto before the
filing thereof. GBB covenants and agrees that the Registration Statement on
Form S-4 and the Proxy Statement and Prospectus and all applications to the
appropriate regulatory agencies for approval or consent to the Merger, with
respect to information relating to GBB or its subsidiaries, will comply in all
material respects with the provisions of applicable law, and will not contain
any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading. GBB will use its commercially reasonable efforts to obtain all
regulatory approvals or consents necessary to effect the Merger.
7.6. Blue Sky. GBB agrees to use commercially reasonable efforts to have
--------
the shares of GBB Stock to be issued in connection with the Merger qualified or
registered for offer and sale, to the extent required, under the securities laws
of each jurisdiction in which shareholders of BOP reside.
7.7. Notices; Reports. GBB will promptly notify BOP 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 BOP'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.
45
<PAGE>
7.9. Stock Options.
-------------
(a) At and as of the Effective Time of the Merger, GBB shall assume
each and every outstanding option to purchase shares of BOP Stock ("BOP Stock
Option") under the BOP Stock Option Plan. Subject to Section 7.9(d), each and
every BOP Stock Option so assumed by GBB under this Agreement shall be exchanged
for a substitute option under the GBB Stock Option Plan with the following
terms: (i) such BOP 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 BOP
Stock that were granted under such BOP Stock Option immediately prior to the
Effective Time of the Merger (the vesting of which will be accelerated in
accordance with the terms of the BOP Stock Option Plan and the agreements
pursuant thereto) multiplied by (B) the Conversion Ratio, with such product
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 BOP Stock Option shall be equal to the quotient determined by dividing (A)
the exercise price per share of BOP Stock at which such BOP Stock Option was
exercisable immediately prior to the Effective Time of the Merger by (B) the
Conversion Ratio. After the Effective Time of the Merger, GBB shall issue to
each holder of an outstanding BOP Stock Option a document evidencing the
substitute option pursuant to this Section 7.9.
(b) The terms of the substitute options shall correspond in all
material respects to the terms of the BOP Stock Options and, subject to the
requirements of law, the BOP Stock Options which qualify as incentive stock
options prior to the Effective Time of the Merger qualify as incentive stock
options of GBB after the Effective Time of the Merger.
(c) At or prior to the Effective Time of the Merger, GBB shall take
all corporate action necessary to reserve for issuance a sufficient number of
shares of GBB Stock for delivery upon exercise of GBB Stock Options assumed by
it in accordance with this Section 7.9. At the Effective Time of the Merger, or
as soon as practicable thereafter, GBB shall, if necessary, file a registration
statement on Form S-8 (or any successor or other appropriate form) with respect
to the shares of GBB Stock subject to such options and shall use all reasonable
efforts to maintain the effectiveness of such registration statement (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as such options remain outstanding.
(d) In the event the shareholders of GBB fail to approve an increase
in the number of shares reserved for issuance under the GBB Stock Option Plan at
the shareholders' meeting to be held in connection with the merger of GBB and
Coast Bancorp, GBB will assume the BOP Stock Option Plan and each BOP Stock
Option granted thereunder. Each such BOP 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 BOP Stock Option Plan and in the other documents
governing such BOP Stock Option immediately prior to the Effective Time of the
Merger; provided, however, that such BOP Stock Options will be exercisable for
that number of shares of GBB Stock computed in accordance with Section 7.9(a)(i)
and (ii). In such event, the BOP Stock Option Plan (as amended, if necessary,
to provide for the exchange of GBB Stock for BOP Stock upon the exercise of BOP
Stock Options) will continue in effect for the BOP Stock Options so assumed.
46
<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 BOP 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. Commercially Reasonable Efforts. Subject to the terms and conditions
-------------------------------
of this Agreement, each party will use its commercially reasonable 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 BOP 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 BOP Real Property List. In the event any such
phase I environmental investigation report, or any such report which BOP has
already obtained on any of the Real Property set forth on BOP's Real Property
List, discloses facts which, in the sole discretion of GBB, warrant further
investigation, GBB shall provide written notice to BOP, and BOP 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 BOP 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 BOP 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 BOP to
GBB) BOP shall immediately commence such remediation, all at the
47
<PAGE>
sole cost and expense of BOP. In the event such environmental consultant
determines that the estimated cost of such remediation is in excess of $100,000
or is not reasonably determinable, GBB shall have the right to terminate the
Agreement pursuant to Section 13.1(k) 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
BOP Real Property List, except as required by law.
8.4 Appointment of Director. GBB agrees to take all necessary action,
-----------------------
including, if necessary, increasing the authorized number of it directors, to
appoint as contemplated by Section 2.6 hereof one member of BOP's Board of
Directors to the Board of Directors of GBB effective at Effective Time of the
Merger, or as soon thereafter as practicable.
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 BOP.
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, the FDIC 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 cleared for release by the FDIC) 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.
48
<PAGE>
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 Opinion. GBB and BOP shall have received from Manatt, Phelps &
-----------
Phillips, LLP an opinion reasonably satisfactory to GBB and BOP to the effect
that the Merger shall not result in the recognition of gain or loss for federal
or California income tax purposes to GBB or BOP, nor shall the issuance of the
GBB Stock result in the recognition of gain or loss for federal or California
income tax purposes by the holders of BOP Stock who receive such stock, nor
shall the substitution or assumption of options under Section 7.9 result in any
income or gain to the option holder for federal or California income tax
purposes 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 BOP 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, Richardson shall have delivered a letter to BOP to
the effect that, as of the Effective Time of the Merger, no conditions exist
with respect to BOP 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 Richardson shall be entitled to assume that cash will be
paid with respect to all shares held of record by any holder of GBB Dissenting
Shares or BOP Dissenting Shares.
ARTICLE 10.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BOP
----------------------------------------------
All of the obligations of BOP 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 BOP:
10.1. Legal Opinion. BOP 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 BOP, to the effect that: (a) GBB and
Newco are corporations 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, as applicable, and to consummate the transactions
contemplated hereby and thereby; (b) all corporate proceedings on the part of
GBB and Newco necessary to be taken in connection with the Merger in order to
make the same effective have been duly and validly taken; (c) this Agreement and
the Agreement of Merger have been duly and validly authorized, executed and
delivered on behalf of GBB and Newco and constitute (subject to standard
exceptions of enforceability arising from the bankruptcy laws and rules of
equity) valid and binding agreements of GBB Newco; and (d) the shares of GBB
Stock to be issued in the Merger will, when issued, be duly authorized, validly
issued, fully paid and nonassessable.
49
<PAGE>
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 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(c).
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 Newco and the consummation of the transactions contemplated
hereby and thereby shall have been duly and validly taken by the Boards of
Directors of GBB and Newco, as required by applicable law, and Newco shall have
full power and right to merge pursuant to the Agreement of Merger.
10.4. Absence of Certain Changes. Between the date of this Agreement and
--------------------------
the Effective Time of the Merger, there shall not have occurred any event that
has had or could reasonably be expected to have a material adverse effect on the
business, financial condition, results of operations or prospects of GBB on a
consolidated basis, whether or not such event, change or effect is reflected in
the GBB Lists as amended or supplemented after the date of this Agreement.
10.5 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 BOP 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. BOP shall have received a letter from Hoefer &
----------------
Arnett, Incorporated, dated as of a date within five Business Days of the
mailing of the Proxy Statement and Prospectus to the shareholders of BOP, to the
effect that the transactions contemplated by this Agreement are fair from a
financial point of view to the shareholders of BOP.
50
<PAGE>
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 Leland,
-------------
Parachini, Steinberg, Matzger & Melnick, LLP, attorneys for BOP, and in form and
substance satisfactory to the counsel of GBB, to the effect that: (a) BOP 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; (b)
all corporate proceedings on the part of BOP necessary to be taken in connection
with the Merger in order to make the same effective have been duly and validly
taken; and (c) this Agreement and the Agreement of Merger have been duly and
validly authorized, executed and delivered on behalf of BOP, and constitute
(subject to standard exceptions of enforceability arising from the bankruptcy
laws and rules of equity) valid and binding agreements of BOP.
11.2. Representations and Warranties; Performance of Covenants. All the
--------------------------------------------------------
covenants, terms and conditions of this Agreement to be complied with and
performed by BOP at or before the Closing Date shall have been complied with and
performed in all material respects. Each of the representations and warranties
of BOP 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 BOP Lists in accordance
with Section 6.2(j).
11.3. Authorization of Merger. All actions necessary to authorize the
-----------------------
execution, delivery and performance of this Agreement and the Agreement of
Merger by BOP 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 BOP, and BOP shall have full power and right to merge pursuant
to the Agreement of Merger.
11.4. Third Party Consents. BOP 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
51
<PAGE>
reasonably be expected to have a material adverse effect on the business,
financial condition, results of operations or prospects of BOP whether or not
such event, change or effect is reflected in the BOP 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 BOP 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 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 GBB, 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 BOP 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 BOP shall have executed and delivered to GBB
agreements substantially in the form of Exhibit C hereto.
---------
11.10. Affiliates Agreements. GBB shall have received from each person
---------------------
named in the letter or otherwise referred to in Section 6.9 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 BOP's employee benefit plans, programs and arrangements,
including, without limitation, the BOP 401(k) Plan, have been treated as
provided in Article 12 of this Agreement.
11.12. Dissenting Shares. The number of shares of BOP Stock for which
-----------------
demand is made to be BOP Perfected Dissenting Shares shall not exceed an amount
which, when combined with other amounts payable in connection with the Merger,
would result in the Merger being disqualified from pooling of interest
accounting treatment.
11.13. Remediation. All remediation of environmental contamination or
-----------
conditions on any BOP Property shall have been completed to the satisfaction of
GBB.
11.14. BOP Adjusted Book Value. At least five Business Days prior to the
-----------------------
Effective Time of the Merger, BOP shall provide GBB with BOP's financial
statements as of the close of business on the last day of the month prior to the
Effective Time of the Merger. Such financial statements shall have been
prepared in all material respects in accordance with generally accepted
accounting principles and other applicable legal and accounting requirements,
and reflect all period-end accruals and other adjustments. At the close of
business on the last day of the month preceding the Effective Time of the
Merger, the BOP Adjusted Book Value, as determined in accordance with such
financial statements, shall be:
52
<PAGE>
(a) not less than $16,719,000 if the Effective Time of the Merger
occurs in June 2000;
(b) not less than $16,860,000 if the Effective Time of the Merger
occurs in July 2000;
(c) not less than $17,032,000 if the Effective Time of the Merger
occurs in August 2000;
(d) not less than $17,197,000 if the Effective Time of the Merger
occurs in September 2000; and
(e) not less than $17,359,000 if the Effective Time of the Merger
occurs in October 2000.
11.15. Termination of BOP Stock Option Plan. Subject to the provisions
------------------------------------
of Section 7.9(d), GBB shall have received satisfactory evidence that the BOP
Stock Option Plan has been terminated prior to the Effective Time of the Merger.
11.16 Allowance for Loan Losses. BOP's allowance for loan and lease
-------------------------
losses, as reflected on the financial statements referred to in Section 11.14,
shall equal the greater of 1.33% of BOP's total gross loans (less deferred loan
fees) or $1,596,000.
11.17 Regulatory Approvals. Any and all approvals or consents of any
--------------------
Governmental Entity which are necessary to consummate the Merger and the
transactions contemplated hereby shall have been granted without the imposition
of any conditions which GBB deems, in its sole and absolute opinion, to
materially adversely affect it or be materially burdensome.
11.18 Bylaws Amendment. The Board of Directors of BOP shall have
----------------
amended BOP's Bylaws to eliminate Article II, Section 12 regarding director
qualifications.
ARTICLE 12.
EMPLOYEE BENEFITS
-----------------
12.1 Employee Benefits. GBB in its sole discretion, may elect to
-----------------
terminate the BOP 401(k) or to discontinue contributions to the BOP 401(k) Plan
following the Effective Time of the Merger, to cause BOP to terminate the BOP
401(k) Plan or to discontinue contributions to the BOP 401(k) Plan prior to the
Effective Time of the Merger, or to merge the BOP 401(k) Plan with and into the
GBB 401(k) Plan after the Effective Time of the Merger. In no event shall the
BOP 401(k) Plan be merged with and into the GBB 401(k) Plan, however, unless GBB
determines, in its sole discretion, that: (i) the BOP 401(k) Plan is a qualified
plan under Section 401(a) of the Code, both as to the form of the BOP 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
53
<PAGE>
status of the BOP 401(k) Plan. If GBB determines in its sole discretion not to
merge the BOP 401(k) Plan into the GBB 401(k) Plan and that the BOP 401(k) Plan
should be terminated immediately prior to the Effective Time of the Merger, BOP
agrees to use its best efforts to have the BOP 401(k) Plan terminated prior to
the Effective Time of the Merger and to obtain an IRS determination that the BOP
401(k) Plan continues to be qualified upon termination.
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 BOP 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 BOP beginning on the date
such employees commenced employment with BOP 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:
(a) By mutual agreement of the parties, in writing;
(b) By BOP (unless BOP'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 BOP Stock) or GBB upon the failure of the shareholders
of BOP to give the requisite approval of this Agreement;
(c) By BOP promptly following the expiration of 20 days from delivery
of written notice by BOP 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 BOP from the performance or
satisfaction of such covenant or agreement (provided that such breach has not
been waived by BOP or cured by GBB prior to expiration of such 20 day period);
(d) By GBB promptly following the expiration of 20 days from delivery
of written notice by GBB to BOP of BOP'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 BOP prior to expiration of such 20 day period);
(e) By BOP 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
54
<PAGE>
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;
(f) By BOP or GBB if any conditions set forth in Article 9 shall not
have been met by October 15, 2000; provided, however, that this Agreement shall
not be terminated pursuant to this Section 13.1(f) if the relevant condition
shall have failed to occur as a result of any act or omission of the party
seeking to terminate;
(g) By BOP if any of the conditions set forth in Article 10 shall
not have been met by October 15, 2000, 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(g) if the
relevant condition shall have failed to occur as a result of any act or omission
of BOP;
(h) By GBB if any of the conditions set forth in Article 11 shall
not have been met by October 15, 2000, 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(h) if the
relevant condition shall have failed to occur as a result of any act or omission
of GBB;
(i) By GBB if BOP shall have breached any of the obligations
contained in Section 6.1(n);
(j) By GBB if (i) BOP shall have exercised a right specified in the
last sentence of Section 6.1(n) with respect to any Superior Proposal and shall,
directly or through agents or representatives, continue any discussions with any
third party concerning such Superior Proposal for more than ten (10) Business
Days after the date of receipt of such Superior Proposal; or (ii) a Superior
Proposal that is publicly disclosed shall have been commenced, publicly proposed
or communicated to BOP which contains a proposal as to price (without regard to
the specificity of such price proposal) and BOP shall not have rejected such
proposal within ten (10) Business Days of receipt of such Superior Proposal or
the date its existence first becomes publicly disclosed, if earlier;
(k) By GBB under the circumstances set forth in Section 8.3;
(l) By BOP if GBB shall have entered into a GBB Acquisition
Transaction that includes as a condition precedent to such GBB Acquisition
Transaction that GBB terminate this Agreement; or
(m) By BOP if the Average Closing Price is less than $37.91, subject
to GBB's right to elect to exercise the Top Up Option as provided in Section
2.2(a)(iii).
13.2. Effect of Termination. In the event of termination of this
---------------------
Agreement by either BOP or GBB as provided in Section 13.1, neither BOP nor GBB
shall have any further obligation or liability to the other party except (a)
with respect to the last sentences of each of
55
<PAGE>
Section 6.3(a), Section 7.3 and Section 8.3, (b) with respect to Section 14.1;
and (c) to the extent such termination results from a party's willful and
material breach of the warranties and representations made by it, or willful and
material failure in performance of any of its covenants, agreements or
obligations hereunder.
13.3. Force Majeure. BOP 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.
--------
(a) GBB hereby agrees that if this Agreement is terminated by BOP
pursuant to Section 13.1(c), GBB shall promptly and in any event within 10 days
after such termination pay BOP all Expenses (as defined in Section 14.1(d)
below) of BOP, but not to exceed $175,000.
(b) BOP hereby agrees that if the Agreement is terminated by GBB or
BOP pursuant to Section 13.1(b) with respect to the failure of BOP shareholders
to approve the Agreement and the transactions contemplated hereby, or by GBB
pursuant to Section 13.1(d), 13.1(i) 13.1(j), BOP shall promptly and in any
event within 10 days after such termination pay GBB all Expenses of GBB, but not
to exceed $250,000.
(c) Except as otherwise provided herein, all Expenses incurred by
GBB and BOP 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 BOP shall
share equally the cost of printing the Proxy Statement and Prospectus.
(d) "Expenses" as used in this Agreement shall include all
reasonable out-of-pocket expenses (including all fees and expenses of attorneys,
accountants, investment bankers, experts and consultants to the party and its
affiliates) incurred by the party or on its behalf in connection with the
consummation of the transactions contemplated by this Agreement.
14.2 Competing Transaction Fee. As an inducement to GBB to enter into
-------------------------
this Agreement, (a) in the event this Agreement is terminated by GBB pursuant to
Sections 13.1(i) or 13.1(j), or (b) if BOP otherwise consummates a Competing
Transaction during the 12-
56
<PAGE>
month period following termination of this Agreement pursuant to Sections
13.1(b) or 13.1(d), BOP shall wire to GBB within three Business Days of the date
of termination in the case of clause (a) and concurrent with the consummation of
the Competing Transaction in the case of clause (b), the amount of $1,750,000,
which amount 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 BOP
pursuant to Section 14.1(b) hereof shall be credited against any amount due
under this Section.
14.3 GBB Acquisition Transaction Fee. As an inducement to BOP to enter
-------------------------------
into this Agreement, (i) in the event this Agreement is terminated by BOP
pursuant to Section 13.1(l) or (ii) if GBB consummates a GBB Acquisition
Transaction within 12 months following termination by BOP of this Agreement
pursuant to Section 13.1(c), (g) (except with respect to a failure of the
condition set forth in Section 10.7) or (m), GBB shall wire to BOP within three
Business Days of the date of termination in the case of clause (i) and
concurrent with the consummation of the GBB Acquisition Transaction in the case
of clause (ii), the amount of $1,500,000, which amount the parties acknowledge
as representing (x) BOP's Expenses incurred in negotiating and undertaking to
carry out the transactions contemplated by this Agreement, including BOP's
management time devoted to negotiation and preparation for the transactions
contemplated by this Agreement; (y) BOP's indirect expenses incurred in
connection with the transactions contemplated by this Agreement; and (z) BOP's
loss as a result of the transactions contemplated by this Agreement not being
consummated. Any payment previously made by GBB pursuant to Section 14.1(a)
hereof shall be credited against any amount due under this Section 14.3. Any
payment previously made by GBB pursuant to Section 14.1(a) hereof shall be
credited against any amount due under this Section.
14.4 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
57
<PAGE>
With a copy to: Greater Bay Bancorp
400 Emerson Street, 3/rd/ Floor
Palo Alto, California 94301
Attention: Linda M. Iannone, Esq.
Facsimile Number: (650) 473-9419
To BOP: Bank of Petaluma
1360 Redwood Way - Suite A
Petaluma, California 94954
Attention: Walter E. Bragdon
Facsimile Number: (707) 793-8100
With a copy to: Leland, Parachini, Steinberg, Matzger & Melnick, LLP
333 Market Street, 27/th/ Floor
San Francisco, California 94105
Attention: David Block, Esq.
Facsimile Number: (415) 974-1520
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.
14.5. 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.
14.6. 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.
14.7. 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.
14.8. 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 BOP as the context may require.
14.9. 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. This Agreement,
58
<PAGE>
together with such Lists, exhibits and letters, constitutes the entire agreement
between the parties pertaining to the subject matter hereof and supersedes all
prior agreements and understandings of the parties in connection therewith.
14.10. 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.
14.11 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.
14.12. 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.
14.13. 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.
14.14. 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 BOP 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.
14.15 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.
59
<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: DKSS CORP.
/s/ Linda M. Iannone By: /s/ David L. Kalkbrenner
-------------------- ------------------------
Secretary David L. Kalkbrenner
President and Chief Executive Officer
ATTEST: BANK OF PETALUMA
/s/ Patricia A. Wasik By: /s/ Walter E. Bragdon
--------------------- ---------------------
Secretary Walter E. Bragdon
President and Chief Executive Officer
60
<PAGE>
ANNEX B
Fairness Opinion of Hoefer & Arnett
Dated , 2000
<PAGE>
[LETTERHEAD OF HOEFER & ARNETT]
__________, 2000
Members of the Board of Directors
Bank of Petaluma
1360 Redwood Way
Petaluma, California 94975-0488
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the holders of the outstanding shares of Common
Stock, no par value, of Bank of Petaluma ("BPLU") of the Conversion Ratio, as
defined in Section 2.2(a) of the Agreement and Plan of Reorganization dated as
of March 21, 2000 (the "Agreement"), in the proposed merger (the "Merger") of
BPLU and Greater Bay Bancorp ("GBBK").
Hoefer & Arnett Incorporated, as part of its investment banking business, is
continually engaged in the valuation of 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. Hoefer &
Arnett Incorporated provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold securities, of BPLU or GBBK for its own
account and for the accounts of customers. We are familiar with BPLU having
acted as its financial advisor in connection with the Merger.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Annual Report to Shareholders of BPLU and GBBK for the years
ended December 31, 1997 and 1998; Annual Report on Form 10-K of GBBK for the
year ended December 31, 1999; Annual Report on Form 10-KSB of BPLU for the year
ended December 31, 1999; FFIEC Consolidated Reports of BPLU for the year ended
December 31, 1999; certain interim reports to shareholders and Quarterly Report
on Form 10-Q of GBBK; certain interim reports to shareholders and Quarterly
Report on Form 10-QSB of BPLU; certain other communications from BPLU and GBBK
to the their respective shareholders; and certain internal financial analyses
and forecasts for BPLU and GBBK prepared by their respective managements
including forecasts for certain costs savings and revenue opportunities (the
"Synergies") expected to be achieved as a result of the Merger. We also have
held discussions with members of the senior management of BPLU and GBBK
regarding the strategic rationale for, and the potential benefits of, the Merger
and the past and current business operations, regulatory relationships,
financial condition and future prospects of their respective companies. In
addition, we have reviewed the reported price and trading activity for the
shares of BPLU and GBBK, compared certain financial and stock market information
for BPLU and GBBK with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of certain
recent business combinations in the commercial banking industry and performed
such other studies and analyses as we considered appropriate.
<PAGE>
We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed such accuracy and completeness
for purposes of rendering this opinion. In that regard, we have assumed, with
your consent, that the financial forecasts, including, without limitation, the
Synergies and projections regarding under-performing and non-performing assets
and net charge-offs have been reasonably prepared on a basis reflecting the best
currently available judgments and estimates of BPLU and GBBK and that such
forecasts will be realized in the amounts and at the times contemplated thereby.
We are not experts in the evaluation of loan and lease portfolios for purposes
of assessing the adequacy of the allowances for losses with respect thereto and
have assumed, with your consent, that such allowances for each of BPLU and GBBK
are in the aggregate adequate to cover all such losses. In addition, we have not
reviewed individual credit files nor have we made an independent evaluation or
appraisal of the assets and liabilities of BPLU, GBBK or any of their
subsidiaries and we have not been furnished with any such evaluation or
appraisal. We also have assumed, with your consent, that the Merger will be
accounted for as a pooling of interests under generally accepted accounting
principles and that obtaining any necessary regulatory approvals and third party
consents for the Merger or otherwise will not have a material adverse effect on
BPLU, GBBK or the combined company pursuant to the Merger. In addition, our
opinion does not address the relative merits of the Merger as compared to any
alternative business transaction that might be available to BPLU.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of BPLU in connection with
its consideration of the Merger and such opinion does not constitute a
recommendation as to how any holder of shares of BPLU should vote with respect
to such transaction.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Conversion
Ratio pursuant to the Agreement is fair from a financial point of view to the
holders of the outstanding shares of Common Stock of Bank of Petaluma.
Very truly yours,
HOEFER & ARNETT INCORPORATED
<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 National Market System of the NASDAQ Stock Market, 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 dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
C-1
<PAGE>
(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
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.
C-2
<PAGE>
(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
Bank of Petaluma
Annual Report on Form 10-KSB, as amended by Form 10-KSB/A,
For the Year Ended December 31, 1999
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20459
FORM 10-KSB
As amended by Form 10-KSB/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from ________ to ________
FDIC Certificate No. 27064-4
------------------------------
Bank of Petaluma
--------------------------------------------------------------------------------
(Name of small business as specified in its charter)
CALIFORNIA 68-0127077
------------------------------------ -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1360 Redwood Way, Petaluma, California 94954
--------------------------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number: (707) 765-2222
--------------
Securities registered under Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
None None
------------------------------------ ---------------------------------------------
</TABLE>
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 there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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 of this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year. $14,867,700
-----------
Aggregate market value of the voting and non-voting common equity held by non-
affiliates as of March 1, 2000: $36,119,925
Number of shares outstanding of issuer's Common Stock, no par value as of March
1, 2000. 1,444,797
---------
DOCUMENTS INCORPORATED BY REFERENCE:
-----------------------------------
Transitional Small Business Disclosure Format (Check one): Yes ____ No X
-----
THIS REPORT INCLUDES ___ SEQUENTIALLY NUMBERED PAGES.
EXHIBIT INDEX IS LOCATED ON SEQUENTIALLY NUMBERED PAGE _____.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS................................ 1
ITEM 2. DESCRIPTION OF PROPERTY................................ 9
ITEM 3. LEGAL PROCEEDINGS...................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 10
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................ 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.............................................. 12
ITEM 7. FINANCIAL STATEMENTS................................... 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 26
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT........................................... 26
ITEM 10. EXECUTIVE COMPENSATION................................. 29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................... 33
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 34
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................... 34
</TABLE>
i
<PAGE>
PART I
------
ITEM 1. -- DESCRIPTION OF BUSINESS
-----------------------
A. Bank of Petaluma (the "Bank") was organized as a California state
banking corporation on March 3, 1987, and commenced operations on September 21,
1987.
The Bank is a locally owned and operated bank serving the banking needs in
the Northern California communities of Petaluma and Valley Ford, and Point Reyes
Station in Western Marin County. The Bank's primary customers are local
individuals and businesses including retail, professional, real estate and dairy
farm activities. The Bank's main branch is located at 100 Petaluma Boulevard
South, Petaluma, California. The Bank's other branches are located at 800 North
McDowell Boulevard, Petaluma, California (the "Petaluma Valley Office"), 11400
State Route 1, in Point Reyes Station, California and 14435 Coast Highway 1, in
Valley Ford, California. The Bank's administrative office and its operations
office are located at 1360 Redwood Way, Petaluma, California and for regulatory
purposes is considered to be a branch in view of the activities conducted there
by the Bank.
On March 21, 2000, the Bank announced the signing of a definitive merger
agreement with Greater Bay Bancorp, Palo Alto, California ("Greater Bay"). The
shareholders of the Bank will receive 0.685 shares of Greater Bay Common Stock
for each share of the Bank's Common Stock, subject to certain adjustments, in a
tax-free exchange. After the merger, the Bank will continue to operate as a
separate wholly-owned subsidiary of Greater Bay. It is anticipated that the
transaction will be consummated in the third quarter of 2000.
B. Business of the Bank.
--------------------
Since commencing operations in 1987, the Bank has emphasized providing
banking services to small businesses and retail customers. Its primary economic
base is real estate and agricultural related lending, and the manufacturing and
distribution industries in the greater Petaluma area. The Bank emphasizes
service for local businesses including retail, professional and small-to medium-
sized businesses enterprises. The Bank attracts most of its deposits from local
businesses and individuals.
The Bank conducts a commercial banking business, including accepting
demand, savings and time deposits and making commercial, real estate,
residential and consumer loans. It also offers installment note collection,
issues money orders and cashier's checks, sells traveler's checks, issues VISA
and MasterCard credit cards, provides safe deposit boxes, and other customary
banking services. The Bank does not currently offer trust services and does not
plan to do so in the near future.
In June 1996, the Bank entered into an agreement with PrimeVest Financial
Services, Inc. ("PrimeVest"). PrimeVest is a full service securities broker,
selling mutual funds and life insurance products, and offers the buying and
selling of stock and bonds upon customer's instructions. PrimeVest and the Bank
have retained a dual employee wherein the Bank pays the employee a
1
<PAGE>
monthly salary and provides office space in the lobby of one of its branches,
and shares in the commissions.
As of December 31, 1999, approximately 71.2. % of the Bank's loans are
secured by real estate. The real estate loan portfolio is comprised of interim
construction, commercial real estate, conventional mortgages, property
development for both commercial and residential construction, factoring
(purchase of accounts receivable with recourse), and home equity loans. To
maintain a quality loan portfolio, management is selective in granting loans and
has established policies and controls relating to appraisals, maturities, and
types of loans. Appraisals by qualified, bank-approved appraisers are required.
In certain instances, the Bank refers mortgage borrowers to other lenders,
receives a referral fee and avoids the interest rate risk.
The Bank's loans are direct loans made to individuals and small businesses
in the Bank's primary service area. As of December 31, 1999, the Bank's total
Commercial and Agricultural; Real Estate-Mortgage; Real Estate-Construction; and
installment loans outstanding amounted to $25,663,000; $72,950,000; $11,778,000;
and $9,518,000, respectively. In making secured loans, the Bank requires as
collateral real estate, listed and unlisted securities, accounts receivable,
savings and time deposits, automobiles, machinery, inventory or equipment.
The Bank's service area presently consists of portions of Petaluma and the
surrounding area. The banking business in California, generally, and,
specifically, in the Bank's service area, is highly competitive with respect to
both loans and deposits. The business is dominated by a relatively small number
of major banks, most of which have many offices operating over wide geographic
areas. Many of the major commercial banks offer certain services (such as
international, trust and securities brokerage services) which are not offered
directly by the Bank. By virtue of their greater total capitalization, such
banks have substantially higher lending limits than the Bank and substantial
advertising and promotional budgets.
However, smaller independent financial institutions also represent a
competitive force. To illustrate the Bank's relative market share, according to
market data prepared by Federal Deposit Insurance Corporation, total deposits in
banks in Sonoma County, California at June 30, 1999, approximated $5.9 billion.
The Bank's deposits at June 30, 1999 represented approximately 2.2% of such
figure. As of June 30, 1999, there were 14 operating commercial banks and 5
operating savings and loans located in the Bank's service area.
To compete with major financial institutions in its service area, the Bank
relies upon specialized services, responsive handling of customer needs, local
promotional activities, and personal contacts by its officers, directors and
staff, as opposed to large multi-branch banks, most of which compete primarily
by interest rates and location of branches. For customers whose loan demands
exceed the Bank's lending limits, the Bank seeks to arrange for such loans on a
participation basis with its correspondent banks or other independent commercial
banks. The Bank also assists customers requiring services not offered by the
Bank to obtain such services from its correspondent banks.
2
<PAGE>
SUPERVISION AND REGULATION
The Effect of Governmental Policy on Banking
The earnings and growth of the Bank is affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the Board of Governors of the Federal Reserve
System (the "FRB") influences the supply of money through its open market
operations in U.S. Government securities, and adjustments to the discount rates
applicable to borrowings by depository institutions and others. Such actions
influence the growth of loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and impact of future
changes in such policies on the business and earnings of the Bank cannot be
predicted.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Bank is particularly
susceptible to being affected by enactment of federal and state legislation
which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities, or enhancing the competitive
position of other financial institutions. Any change in applicable laws or
regulations may have a material adverse effect on the business and prospects of
the Bank. In December 1991, Congress enacted and the President signed into law
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
FDICIA substantially revises the bank regulatory framework and deposit insurance
funding provisions of the Federal Deposit Insurance Act and makes revisions to
several other federal banking statutes.
Bank Regulation and Supervision
As a California state-chartered bank, the Bank is regulated, supervised and
regularly examined by the California Department of Financial Institutions
("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). Deposit accounts
at the Bank are insured by the Bank Insurance Fund ("BIF"), as administered by
the FDIC, to the maximum amount permitted by law.
Capital Standards
The FDIC and other federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets and transactions,
such as letters of credit and recourse arrangements, which are reported as off-
balance sheet items. Under these guidelines, nominal dollar amounts of assets
and credit equivalent amounts of off balance-sheet items are multiplied by one
of several risk-adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
A bank's risk based capital ratios are obtained by dividing its qualifying
capital by its total risk-adjusted assets and off-balance sheet items. The
regulators measure risk-adjusted assets and off-balance sheet items against both
total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier
2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained
earnings,
3
<PAGE>
noncumulative perpetual preferred stock and minority interests in certain
subsidiaries, less most other intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses and certain
other instruments with some characteristics of equity. The inclusion of elements
of Tier 2 capital are subject to certain other requirements and limitations of
the federal banking agencies. Since December 31, 1992, the federal banking
agencies have required a minimum ratio of qualifying total capital to risk-
adjusted assets and off-balance sheet items of 8%, and a minimum ratio of Tier 1
capital to risk-adjusted assets and off-balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banks to maintain a minimum amount of Tier 1 capital to total average
assets, referred to as the leverage ratio. For a bank rated in the highest of
the five categories used by regulators to rate banks, the minimum leverage ratio
of Tier 1 capital to total average assets is 3%. It is improbable, however, that
a bank with a 3% leverage ratio would receive the highest rating by the
regulators since a strong capital position is a significant part of the
regulators' rating. For all banks not rated in the highest category, the minimum
leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus,
the effective minimum leverage ratio, for all practical purposes, is at least 4%
or 5%. In addition to these uniform risk-based capital guidelines and leverage
ratios that apply across the industry, the regulators have the discretion to set
individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
The following tables present the capital ratios for the Bank as of December
31, 1999.
Amount Ratio
------ -----
(000's)
Risk-Based Capital Ratios:
Tier 1 Capital........................ $ 15,941 10.64%
Minimum Requirements.................. 5,995 4.00%
--------
Excess................................ $ 9,946 6.64%
======== =====
Total Capital......................... $ 17,537 11.70%
Minimum Requirement................... $ 11,989 8.00%
-------- -----
Excess................................ $ 5,548 3.70%
======== -----
Risk-Adjusted Assets.................. $149,867
--------
Leverage Ratio:
Tier 1 Capital........................ $ 15,941 8.29%
Minimum Requirement................... 5,766 3.00%
-----
Excess................................ $ 10,175 5.29%
======== =====
Total Adjusted Assets................. $192,253
--------
4
<PAGE>
Community Reinvestment Act
Banks are subject to the Community Reinvestment Act ("CRA"), which was
enacted in 1977 to promote lending by financial institutions to individuals and
businesses located in low and moderate income areas. New CRA regulations went
into effect as of July 1, 1997. Under the former CRA regulations, compliance was
evaluated by an assessment of the institution's methods for determining, and
efforts to meet, the credit needs of such borrowers. This system was highly
criticized by depository institutions and their trade groups as subjective,
inconsistent and burdensome, and by consumer representatives for its alleged
failure to aggressively penalize poor CRA performance by financial institutions.
The revised CRA regulations emphasize an assessment of actual performance rather
than of the procedures followed by a bank, to evaluate compliance with the CRA.
Overall CRA compliance continues to be rated across a four-point scale from
"outstanding" to "substantial noncompliance," and continues to be a factor in
review of applications to merge, establish new branches or form bank holding
companies. In addition, any bank rated in "substantial noncompliance" with the
revised CRA regulations may be subject to enforcement proceedings.
The regulations provide that "small banks", which are defined to include
any independent bank with total assets of less than $50 million, are to be
evaluated by means of a so-called "streamlined assessment method" unless such a
bank elects to be evaluated by one of the other methods provided in the
regulations. The differences between the evaluation methods may be summarized as
follows:
(1) The "streamlined assessment method" applicable to small banks requires
that a bank's CRA compliance be evaluated pursuant to five "assessment
criteria," including its (i) loan-to-deposit ratio (as adjusted for seasonal
variations and other lending-related activities, such as sales to the secondary
market or community development lending); (ii) percentage of loans and other
lending-related activities in the bank's service area(s); (iii) distribution of
loans and other lending-related activities among borrowers of different income
levels, given the demographic characteristics of its service area(s); (iv)
geographic distribution of loans and other lending-related activities within its
service area(s); and (v) record of response to written complaints, if any, about
its CRA performance.
(2) The "lending, investments and service tests method" is applicable to
all banks larger than $250 million which are not wholesale or limited purpose
banks and do not elect to be evaluated by the "strategic plan assessment
method." Central to this method is the requirement that such banks collect and
report to their primary federal banking regulators detailed information
regarding home mortgage, small business and farm and community development loans
which is then used to evaluate CRA compliance. At the bank's option, data
regarding consumer loans and any other loan distribution it may choose to
provide also may be collected and reported.
Using such data, a bank will be evaluated regarding its (i) lending
performance according to the geographic distribution of its loans, the
characteristics of its borrowers, the number and complexity of its community
development loans, the innovativeness or flexibility of its lending practices to
meet low and moderate income credit needs and, at the bank's election, lending
by affiliates or through consortia or third-parties in which the bank has an
investment interest; (ii) investment performance by measure of the bank's
"qualified investments," that is, the extent to which the bank's investments,
deposits, membership shares in a credit union, or grants primarily to benefit
low or moderate income individuals
5
<PAGE>
and small businesses and farms, address affordable housing or other needs not
met by the private market, or assist any minority or women-owned depository
institution by donating, selling on favorable terms or provisioning on a rent-
free basis any branch of the bank located in a predominately minority
neighborhood; and (iii) service performance by evaluating the demographic
distribution of the bank's branches and ATMs, its record of opening and closing
them, the availability of alternative retail delivery systems (such as telephone
banking, banking by mail or at work, and mobile facilities) in low and moderate
income geographies and to low and moderate income individuals, and (given the
characteristics of the bank's service area(s) and its capacity and constraints)
the extent to which the bank provides "community development services" (services
which primarily benefit low and moderate income individuals or small farms and
businesses or address affordable housing needs not met by the private market)
and their innovativeness and responsiveness.
(3) Wholesale or limited purpose banks which do not make home mortgage,
small farm or business or consumer loans to retail customers may elect, subject
to agency approval of their status, to be evaluated by the "community
development test method," which assesses the number and amount of the bank's
community development loans, qualified investments and community development
services and their innovativeness and complexity.
(4) Any bank may request to be evaluated by the "strategic plan assessment
method" by submitting a strategic plan for review and approval. Such a plan must
involve public participation in its preparation, and contain measurable goals
for meeting low and moderate income credit needs through lending, investments
and provision of services. Such plans generally will be evaluated by measuring
strategic plan goals against standards similar to those which will be applied in
evaluating a bank according to the "lending, investments and service test
method."
Recent Legislation
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act of 1999 (the "Financial Services Modernization Act"). The Financial
Services Modernization Act repeals the two affiliation provisions of the Glass-
Steagall Act: Section 20, which restricted the affiliation of Federal Reserve
Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the framework the Bank Holding Company Act of 1956, as amended
("BHCA") to permit a holding company system to engage in a full range of
financial activities through a new entity known as a Financial Holding Company.
"Financial activities" is a new entity known as a Financial Holding Company.
"Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities that the Federal Reserve, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally.
6
<PAGE>
Generally, the Financial Services Modernization Act:
. Repeals historical restrictions on, and eliminates many
federal and state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
. Provides a uniform framework for the functional regulation
of the activities of banks, savings institutions, and their holding companies;
. Broadens the activities that may be conducted by national
banks, banking subsidiaries of bank holding companies, and their financial
subsidiaries;
. Provides an enhanced framework for protecting the privacy of
consumer information;
. Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system;
. Modifies the laws governing the implementation of the
Community Reinvestment Act ("CRA"); and
. Addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of financial
institutions.
In order for a bank holding company to take advantage of the ability to
affiliate with other financial services providers, a bank holding company must
become a "Financial Holding Company" as permitted under an amendment to the
BHCA. However, the Bank is not a bank holding company though it has announced
the execution of a definitive merger agreement with Greater Bay, which is a bank
holding company. See "Business" above. To become a Financial Holding Company, a
bank holding company would file a declaration with the Federal Reserve, electing
to engage in activities permissible for Financial Holding Companies and
certifying that it is eligible to do so because all of its insured depository
institution subsidiaries are well-capitalized and well-managed. In addition, the
Federal Reserve must also determine that each insured depository institution
subsidiary of a bank holding company has at least a "satisfactory" CRA rating.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and "well-
managed." The total assets of all financial subsidiaries
7
<PAGE>
may not exceed the lesser of 45% of a bank's total assets, or $50 billion. A
national bank must exclude from its assets and equity all equity investments,
including retained earnings, in a financial subsidiary. The assets of the
subsidiary may not be consolidated with the bank's assets. The bank must also
have policies and procedures to assess financial subsidiary risk and protect the
bank from such risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the
Federal Deposit Insurance Act governing subsidiaries of state banks that engage
in "activities as principal that would only be permissible" for a national bank
to conduct in a financial subsidiary. It expressly preserves the ability of a
state bank to retain all existing subsidiaries. Because California permits
commercial banks chartered by the state to engage in any activity permissible
for national banks, the Bank will be permitted to form subsidiaries to engage in
the activities authorized by the Financial Services Modernization Act, to the
same extent as a national bank. In order to form a financial subsidiary, the
bank must be well-capitalized, and the bank would be subject to the same capital
deduction, risk management and affiliate transactions rules as applicable to
national banks.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
will require the Bank to recognize all derivatives on the balance sheet at fair
value. SFAS No. 133 requires that derivative instruments used to hedge be
identified specifically when hedging changes in fair value or cash flows.
Derivative instruments that do not qualify as either a fair value or cash flow
hedge will be valued at fair value with the resultant gain or loss recognized in
current earnings. Changes in the effective portion of fair value hedges will be
recognized in current earnings along with the change in fair value of the hedged
item. Changes in the effective portion of cash flow hedges will be recognized in
other comprehensive income until realization of the cash flows of the hedged
item through current earnings. Any ineffective portion of hedges will be
recognized in current earnings. The Company has no derivative instruments
outstanding as of December 31, 1998 and management believes adoption of SFAS No.
133 will not have a material impact on the Bank's financial position or results
of operations. At the date of adoption, the impact on the Bank's financial
position and results of operation will depend upon the accumulated net gain or
loss, if any, of the effective portion of cash flow hedges and the ineffective
portion of cash flow or any other hedges. SFAS No. 137, issued June 1999, defers
the effective date of SFAS No. 133 to January 1, 2001.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." This Statement amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," which established
accounting and reporting standards for certain activities of mortgage banking
and other similar enterprises. After securitization of mortgage loans held for
sale, SFAS No. 134 requires an entity to classify the resulting mortgage-backed
securities or other retained interests based on its ability or intent to sell or
hold those investments. Management believes the adoption of SFAS No. 134 will
have no impact on our financial position or results of operations. This
Statement is effective for fiscal years beginning after December 15, 1998 and
had no effect on the Bank.
8
<PAGE>
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1," Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires the
capitalization of eligible costs of specified activities related to computer
software developed or obtained for internal use. Management believes that the
adoption of SOP 98-1 will not have a material effect on our financial position
or the results of operations. The statement is effective for fiscal years
beginning after December 15, 1998, with earlier application encouraged. This SOP
had no impact on the Bank.
In June 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-up
Activities". SOP 98-5 requires that entities expense start-up costs and
organization costs as they are incurred. Management believes that the adoption
of SOP 98-5 will not have a material effect on our financial position or results
of operations. The statement is effective for fiscal years beginning after
December 15, 1998, with earlier application encouraged. This SOP had no impact
on the Bank.
Banking Services
The Bank attracts most of its deposits from local businesses and
individuals. No single person or group of persons (including federal, state and
local governments and agencies thereunder) account for a material portion of the
Bank's deposits, the loss of any one or more of which would have a materially
adverse effect on the business of the Bank. Approximately 71% of the Bank's
loans are secured by real estate. The portfolio is comprised of interim
construction, commercial real estate, conventional, agricultural, land and home
equity loans. To maintain a quality loan portfolio, management is selective in
granting loans and has established policies and controls relating to appraisals,
maturities, and types of loans. Appraisals by qualified, bank-approved
appraisers are required. See "Selected Statistical Information," under Item 7
for a more detailed discussion of the Bank's deposit mix and its loan portfolio.
On December 31, 1999, the Bank employed 71 persons including 3 principal
officers, 46 other full-time employees, and 22 part-time employees. No unions
represent any of the Bank's employees and no collective bargaining agreement
currently exists between the Bank and any of its employees. Management believes
that employee relations are excellent.
ITEM 2. -- DESCRIPTION OF PROPERTY
-----------------------
The Bank's main branch is located at 100 Petaluma Boulevard South,
Petaluma, California. The building is just south of the central business
district of Petaluma. The Bank leases 3,580 square feet of office space under a
five-year lease with a five-year renewal option. The Bank amended its building
lease effective February 1, 1990 to include approximately 800 additional square
feet of space. During 1999, the Bank paid a total of $99,778 in rent. In January
1997, the Bank exercised its five (5) year option to renew this lease. In
connection with the renewal of the option, the Bank and the lessor agreed to an
increase in the rent of $100 per month every July beginning in 1997 and to an
additional five (5) year option to renew after the expiration of the present
five-year term in 2002. This rental payment includes insurance on the building,
real property taxes and exterior maintenance costs.
The Bank's Petaluma Valley Office is located at 800 North McDowell
Boulevard, Petaluma, California and opened in August 1993. The Bank purchased a
parcel of land of approximately 1.25
9
<PAGE>
acres, for this facility for $263,800. The Bank leases a temporary modular unit
which serves as the branch office for approximately $1,816 per month until
April, 1998 and beginning in May, 1998, paid rent of $1880 per month for 24
months until April 2000. The Bank intends to construct a permanent building at
this location some time in the future.
In August 1996, the Bank's administrative offices were relocated to 1360
Redwood Way, Petaluma where the Bank sub-leases 11,431 square feet at cost of
$6,344 per month plus operating expenses. This rent is equal to 50% of the base
rent due under the master lease for the first 34 months of the sub-lease.
Beginning in March 1999, the monthly rent increased to $9,516 which represents
75% of the base rent thereafter until the expiration of the master lease on
February 28, 2003.
As part of the acquisition of the Branches from Bank of America, the Bank
purchased the land and buildings for the Point Reyes Station and Valley Ford
offices.
The Point Reyes station branch is a free-standing building located at 11400
State Route One, Point Reyes Station, California consisting of 3,422 square
feet. This branch also has an automated teller machine, a night depository and
ample free parking.
The Valley Ford branch is a free-standing building located at 14435 Coast
Highway One, Valley Ford, California, consisting of 1,820 square feet. This
branch also has an automated teller machine and free parking. Due to the limited
number of accounts at this office, business hours have been reduced to 9 a.m. to
12:30 p.m. on Mondays, Wednesdays and Fridays. However, the reduction in hours
has not resulted in a material change in the amount of deposits at this branch.
ITEM 3. -- LEGAL PROCEEDINGS
-----------------
The Bank is a party to routine litigation which is incidental to its
business. There are no pending legal proceedings to which the Bank is a party
which may have a materially adverse effect upon the Bank's business.
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AND MANAGEMENT
------------------------------------------------------------------
Not applicable.
PART II
-------
ITEM 5. -- MARKET FOR COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
---------------------------------------------------------
a. The Bank's Common Stock is not listed on any exchange nor is it listed
with NASDAQ, although the stock has been traded to an extremely limited extent
pursuant to private negotiations between the buyer and seller through a broker-
dealer as intermediary.
The following table indicates the range of high and low sales prices,
reflecting inter-dealer prices, without retail mark-up, mark-down or commissions
for the periods shown. This information is
10
<PAGE>
based upon data provided by Mutual Securities, A.G. Edwards & Sons, Inc., Hoefer
& Arnett, Incorporated, and Pacific Crest Securities, which handle trades in the
Bank's Common Stock. The following information has been adjusted to reflect the
2-for-1 stock split in May 1998 and a 5% stock dividend paid in December 1997.
Quarter Ended 1999 Low High
------------------ --- ----
March 31 $20.25 $21.25
June 30 18.38 21.00
September 30 18.38 18.75
December 31 18.00 23.00
Quarter Ended 1998
------------------
March 31 $19.25 $19.50
June 30 23.25 24.00
September 30 17.50 18.00
December 31 20.25 21.00
The above information does not include information on shares traded
directly by shareholders or through dealers other than those mentioned above.
In 1997, 1998, and 1999, the Bank paid cash dividends of $0.10, $0.11 and
$0.12 per share, respectively, and paid 5% stock dividends in 1997.
B. As of March 1, 2000, the approximate number of holders of record of
the Bank's Common Stock was 632. The Bank's transfer agent is U.S. Stock
Transfer Corporation.
C. Under Section 642 of the California Financial Code, funds available
for cash dividend payments by a bank are restricted to the lesser of (i)
retained earnings; or (ii) the Bank's net income for its last three fiscal years
(less any distributions to shareholders made during such period). However, under
Section 643 of the California Financial Code, with the prior approval of the
DFI, a bank may pay cash dividends in an amount not to exceed the greater of the
(1) retained earnings of the bank; (2) net income of the bank for its last
fiscal year or; (3) net income of the bank for its current fiscal year. However,
if the DFI finds that the shareholders' equity of the bank is not adequate or
that the payment of a dividend would be unsafe or unsound, the DFI may order
such bank not to pay a dividend to shareholders. Currently, it is permissible
for the Bank to pay cash dividends without the DFI's prior approval.
Additionally, under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), a bank may not make any capital distribution, including
the payment of dividends, if after making such distribution the bank would be in
any of the "under-capitalized" categories under the FDIC's Prompt Corrective
Action regulations.
11
<PAGE>
Also, under the Financial Institution's Supervisory Act, the FDIC also has
the authority to prohibit a bank from engaging in business practices which the
FDIC considers to be unsafe or unsound. It is possible, depending upon the
financial condition of the Bank and other factors, that the FDIC could assert
that the payment of dividends or other payments in some circumstances might be
such an unsafe or unsound practice and thereby prohibit such payment.
There can be no assurance that dividends will be paid in the future. The
Bank's Board of Directors intends to follow a policy of retaining most of the
Bank's earnings, if any, for the purpose of increasing capital and to support
the anticipated growth of the Bank.
ITEM 6. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
----------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Bank
--------
Bank of Petaluma (the "Bank") engages in providing a full range of financial
services through its four offices located in Petaluma and Valley Ford in Sonoma
County and in Point Reyes Station in Western Marin County.
Overview
--------
For 1999, the Bank's net income increased to a record $2,304,000, an increase of
8.9% as compared to income of $2,115,900 in 1998, which was an increase of 43.3%
from the previous year. The increase in 1999 was primarily due to an increase
in average earning assets of $22,174,000 or 14.8%. In 1999, the Bank's total
assets were $194,699,000 versus $186,559,000 in 1998 and $151,690,400 in 1997,
representing increases of 4.4% and 23.0%, respectively.
The Bank paid cash dividends of $0.20 per share in 1997, $0.11 per share in
1998, and $0.12 per share in 1999 as well as a 5% stock dividend in 1997. A
two-for-one stock split was issued on May 6, 1998 and is reflected in cash
dividend payments for 1998, which shows cash paid on approximately twice the
number of shares as paid in 1997. Outstanding stock and earnings per share have
been adjusted retroactively to reflect the stock dividends and stock split.
Distribution of Assets, Liabilities and Shareholders' Equity
Information concerning the Bank's average balances and distribution of assets,
liabilities and shareholders' equity for the years ended December 31, 1999, 1998
and 1997 is set forth in the table that follows. Average balances have been
computed using daily adjusted balances. Tax exempt income is not shown on a tax
equivalent basis.
12
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------
Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Cash and Due From Banks $ 9,238 4.9% $ 8,984 5.4% $ 8,199 5.9%
Taxable Investment Securities 50,383 26.7% 45,254 27.3% 42,333 30.4%
Non-taxable Investment Securities 13,588 7.2% 8,896 5.4% 2,702 1.9%
Federal Funds Sold 2,430 1.3% 3,194 1.9% 1,466 1.1%
Loans, Net 106,102 56.2% 92,985 56.2% 77,899 56.1%
Premises & Equipment, Net 1,757 0.9% 1,878 1.1% 2,088 1.5%
Other Assets & Accrued Interest 5,155 2.8% 4,436 2.7% 4,375 3.1%
-------- ----- -------- ----- -------- -----
Total Assets $188,653 100.0% $165,627 100.0% $139,062 100.0%
======== ===== ======== ===== ======== =====
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Deposits:
Demand $ 33,644 17.8% $ 28,309 17.1% $ 25,077 18.0%
Interest-bearing Transaction Accounts 19,445 10.3% 17,386 10.5% 17,597 12.7%
Savings 82,157 43.5% 73,325 44.2% 52,255 37.6%
Time 21,400 11.3% 19,033 11.5% 19,324 13.9%
-------- ----- -------- ----- -------- -----
Total Deposits 156,646 82.9% $138,053 83.3% $114,253 82.2%
-------- ----- -------- ----- -------- -----
Repurchase Agreements 11,655 6.2% 10,560 6.4% 11,450 8.2%
Federal Funds Purchased 1,245 0.7% 274 0.2% 880 0.6%
Other Borrowings 3,230 1.7% 3,081 1.9% 1,455 1.0%
Other Liabilities & Accrued Interest 1,408 0.8% 1,163 0.7% 926 0.7%
Shareholders' Equity 14,469 7.7% 12,496 7.5% 10,098 7.3%
-------- ----- -------- ----- -------- -----
Total Liabilities & Shareholders'
Equity $188,653 100.0% $165,627 100.0% $139,062 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Interest Rates and Differentials
--------------------------------
The following table sets forth information concerning interest-earning assets
and interest-bearing liabilities, and respective average yields or rates, the
amount of interest income or interest expense, the net interest margin and the
net interest spread for the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ --------------------------------- -------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Amount Yield Balance Amount Yield Balance Amount Yield
------- ------ ----- ------- ------ ----- ------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
-----------------------
Taxable Investment
Securities $ 50,383 $ 3,063 6.08% $ 45,254 $ 2,980 6.59% $ 42,333 $ 2,883 6.81%
Non-taxable Municipal
Securities 13,588 683 5.02% 8,896 447 5.02% 2,702 137 5.07%
Federal Funds Sold 2,430 117 4.81% 3,194 173 5.42% 1,466 77 5.25%
Loans, Net 106,102 9,810 9.25% 92,985 9,145 9.83% 77,899 7,696 9.88%
-------- ------- -------- ------- -------- -------
Total $172,503 $13,673 7.93% $150,329 $12,745 8.48% $124,400 $10,793 8.68%
======== ======= ==== ======== ======= ==== ======== ======= ====
INTEREST-BEARING LIABILITIES
----------------------------
Deposits:
Interest-bearing
Transaction $ 19,445 $ 338 1.73% $ 17,386 $ 300 1.73% $ 17,597 $ 328 1.86%
Savings 82,157 3,093 3.76% 73,325 3,096 4.22% 52,255 2,328 4.46%
Time 21,400 973 4.54% 19,033 978 5.14% 19,324 1,026 5.31%
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Repurchase Agreements 11,654 374 3.21% 10,560 351 3.32% 11,450 421 3.68%
Federal Funds Purchased 1,245 65 5.23% 274 15 5.47% 880 51 5.80%
Other Borrowings 3,230 202 6.24% 3,081 198 6.43% 1,455 94 6.46%
-------- ------- -------- ------- -------- -------
Total $139,131 5,045 3.63% $123,659 $ 4,938 3.99% $102,961 $ 4,248 4.13%
======== ======= ==== ======== ======= ==== ======== ======= ====
Net Interest Income &
Margin $ 8,628 5.00% $ 7,807 5.19% $ 6,545 5.26%
======= ==== ======= ==== ======= ====
Net Interest Spread 4.30% 4.49% 4.55%
==== ==== ====
</TABLE>
The Bank's average interest-earning assets increased to $172,503,000 in 1999
from $150,329,000 in 1998 and $124,400,000 in 1997 while the average yield on
these assets was 7.93% in 1999, 8.48% in 1998 and 8.68% in 1997, primarily as a
result of a decline in interest rates. Average interest-bearing liabilities,
consisting of interest-bearing deposits, repurchase agreements, Federal funds
purchased and other borrowings, were $139,131,000 in 1999, $123,659,000 in 1998,
and $102,961,000 in 1997, while the average rate paid on these funds was 3.63%
in 1999, 3.99% in 1998, and 4.13% in 1997.
Net Interest Income
-------------------
Net interest income, the difference between interest earned on loans and
investments and interest paid on deposits and other sources of funds, is the
principal component of the Bank's earnings. Interest income increased to
$13,672,500 in 1999 from $12,745,300 in 1998 and $10,792,600 in 1997
representing increases of 7.3% in 1999 and 18.1% in 1998. The increase in
interest income was largely due to the increase in the dollar amount of loans
outstanding.
The average interest rate earned on interest-earning assets was 7.93% in 1999
versus 8.48% in 1998 and 8.68% in 1997. The Bank's net interest spread, the
difference between the average yield earned on interest-earning assets minus the
average rate paid on interest-bearing liabilities was 4.30% in 1999, 4.49% in
1998, and 4.55% in 1997. The decrease in the net interest spread is due to
decreased interest rates in general on deposits, loans and investments.
Total interest expense was $5,045,400 in 1999, $4,937,800 in 1998, and
$4,248,400 in 1997, or an increase of 2.2% in 1999 and 16.2% in 1998. The
increases reflect the greater dollar amount of deposits outstanding during the
respective years. The Bank does not have brokered deposits.
The Bank's net yield on interest-earning assets is affected by changes in the
rates earned and paid, and in the volume of interest-earning assets and
interest-bearing liabilities. The impact of changes in volume and rate on net
interest income is shown in the following table. Changes attributable to both
volume and rates have been allocated to rate.
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31 Year Ended December 31
1999 Compared to 1998 1998 Compared to 1997
----------------------------------------- -------------------------------------
Average Average Net Average Average Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME
Taxable Investment Securities $ 255 (172) $ 83 $ 183 $ (86) $ 97
Non-taxable Municipal Securities 236 0 236 310 0 310
Federal Funds Sold (37) (19) (56) 94 2 96
Loans, Net 1,204 (539) 665 1,482 (33) 1,449
------ ----- ------ ------ ------- ------
Total Interest Income 1,658 (730) $ 928 $2,069 $ (117) $1,952
====== ===== ====== ====== ======= ======
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest-bearing Transaction Accounts $ 38 $ 0 $ 38 $ (5) $ (23) $ (28)
Savings Deposits 334 (337) (3) 862 (94) 768
Time Deposits 109 (114) (5) (14) (34) (48)
Repurchase Agreements 35 (12) 23 (31) (39) (70)
Federal Funds Purchased 51 (1) 50 (35) (1) (36)
Other Borrowings 10 (6) 4 104 0 104
------ ----- ------ ------ ------- ------
Total Interest Expense $ 577 $(470) $ 107 $ 881 $ (191) $ 690
====== ===== ====== ====== ======= ======
Increase (Decrease) in Net Interest Income $1,081 $(260) $ 821 $1,188 $ 74 $1,262
====== ===== ====== ====== ======= ======
</TABLE>
Loans
-----
The Bank's loan customers are located primarily in Sonoma and Marin Counties.
Sonoma County is one of the fastest growing areas in Northern California.
The Bank's loan portfolio consists of commercial and agricultural loans,
consumer loans (loans to individuals for household, family and other personal
expenditures), and real estate loans. These categories accounted for
approximately 20.9%, 6.3%, and 72.7%, respectively, of the Bank's total loan
portfolio at December 31, 1999. The high percentage of real estate loans is due
to the fact that real estate loans, both residential and commercial real estate,
tend to be for larger dollar amounts than the average consumer or commercial
loan and the Bank often takes real estate collateral for loans despite the
purpose of the loan. The Bank's loans are generally made to persons or
businesses with which it has an existing banking relationship or anticipates
developing such a relationship.
15
<PAGE>
Outstanding total loans, net of allowance for loan losses, averaged $106,102,000
in 1999, $92,985,000 in 1998, and $77,899,000 in 1997, representing increases of
$13,117,000 or 14.1% in 1999 and $15,086,000 or 19.4% in 1998. The increase in
total average loans outstanding is due to natural growth and an increase in
economic activity in the Bank's market areas.
The following table summarizes the composition of the loan portfolio as of
December 31 for the years indicated.
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------
1999 1998 1997
------------------ ----------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Commercial, Financial & Agricultural $ 25,133 $ 27,041 $ 30,449
Real Estate-Construction & Land Development 12,586 10,472 6,843
Real Estate-Mortgage 74,923 57,025 40,554
Installment Loans to Individuals 7,578 7,103 7,835
------------------ ----------------- ---------------
Total 120,220 $ 101,641 $ 85,681
------------------ ----------------- ---------------
Less:
Allowance for Loan Losses $ 1,596 $ 1,426 $ 1,309
Deferred Loan Fees 312 368 265
------------------ ----------------- ---------------
Total Loans, Net 118,312 $ 99,847 $ 84,107
================== ================= ===============
</TABLE>
Commercial loans have decreased by $1,908,000 or 7.0% in 1999, while real
estate, including construction and mortgage loans, increased by $20,012,000 or
29.6% during the same period. Installment loans increased by $475,000 or 6.6% in
1999. The change in loan composition is a function of market conditions and
opportunity. Competition in the loan market has increased substantially as
customers seek the best terms on their borrowings. This has balances have
decreased over the past resulted in more fixed rate loans while variable rate
loan two years.
The Bank attempts to maximize the loan-to-deposit ratio to increase earnings, as
loans are the Bank's highest yielding assets. The Bank's asset/liability
management policy sets a general standard to maintain the loan-to-deposit ratio
at a maximum of 75% to prudently manage its liquidity and to maximize
profitability. At December 31, 1999 and December 31, 1998, the Bank's loan-to-
deposit ratio was 72.9% and 64.0%, respectively.
The Bank's commercial loans are made for the purpose of providing working
capital, financing the purchase of equipment or inventory, carrying accounts
receivable, and for other purposes. Such loans include loans with maturities
ranging from thirty days to twelve months, and term loans, which are loans with
maturities normally ranging from one to five years. Short-term business loans
are generally used to finance current transactions and typically provide for
periodic interest payments, with principal paid monthly, quarterly or at
maturity. Term loans normally provide for floating interest rates, with monthly
payments of both principal and interest.
Consumer installment loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvements, and other personal expenses.
These loans generally provide for
16
<PAGE>
the monthly payment of principal and interest. Most of the Bank's consumer
installment loans are secured by the personal property being purchased.
The Bank's real estate loans consist primarily of loans secured by commercial
real property and by first liens on single-family residential properties. Real
estate construction loans are made by the Bank to finance the construction of
commercial and single-family residential property and, typically, have short
maturities. Construction lending involves certain risks not inherent in other
forms of real estate financing. One significant risk of such loans is that
collateral values during the earlier stages of construction may, at times, be
less than the amount disbursed. Accordingly, if a developer is unable to
complete a project on time or within budget, the Bank's risk of loss increases.
The Bank's policy is to conduct inspections on construction loans to monitor
loan disbursements against construction progress. The Bank does not require
construction loan borrowers to obtain commitments for permanent take-out
financing from other lenders. As a result, the Bank may be required to grant
permanent financing or extend its construction loans beyond anticipated periods
in times of rising interest rates or reduced availability of permanent financing
from other lenders.
California commercial banks are permitted, depending on the type and maturity of
the loan, to loan up to 90% of the appraised value of real property (or more
than 90% if the loan is insured either by private mortgage insurers or
governmental agencies). The Bank's policy, however, is to restrict real estate
loans to 80% or less of the appraised value on residential properties and 75% of
appraised value on commercial properties. The Bank offers both fixed and
adjustable rate mortgage loans on commercial real property. Maturities on such
loans are generally restricted to ten years (on twenty-five year amortization),
with a balloon payment due on maturity. Real estate mortgage loans, mainly
commercial real estate, increased by $17,898,000 or 31.3% in 1999, an increase
due to new and refinancing loan opportunities attributable to lower interest
rates and an increase of real estate activity in Petaluma.
Liens on real estate (including junior liens) are also taken by the Bank to
provide additional securities on loans not classified as real estate mortgages,
including home improvement loans, swing loans to assist buyers of single-family
residences to make down payments pending the sale of their existing residences,
and homeowners' equity loans.
Agricultural loans are provided to fund farms and dairies with lines of credit
to purchase feed, herds, or equipment. Loans are also provided for the purchase
of farms.
Total participation loans outstanding were $5,581,000 in 1999 compared to
$5,315,800 in 1998. Real estate term loans, SBA loans and construction loans
accounted for 83%, 1% and 16%, respectively, of all participations outstanding
in 1999. The Bank sold loan participations totaling $3,526,000 during 1999 for
which it retained servicing, i.e., the Bank receives a fee for collecting the
payments and taking other actions to enforce the terms of the loan. Loans are
sold at their principal value and no gain on sale occurs. Servicing income is
recognized in the year received.
The Bank had standby letters of credit outstanding totaling $546,000 at December
31, 1999 and 1998. In addition, the Bank had commitments to grant loans of
$34,009,000 and $35,533,000 at December 31, 1999 and 1998, respectively.
17
<PAGE>
In 1999, $12,586,000 or 10.4% of the Bank's total loans consisted of real estate
construction loans and $74,923,000 or 62.3% of the Bank's total loans consisted
of conventional real estate loans. In addition, undisbursed construction loan
commitments totaled $6.2 million as of December 31, 1999. The Bank is subject
to the fluctuations of the California housing market generally and specifically
in the Petaluma area. The Bank's construction lending business also is subject
to, among other things, the volatility of interest rates, real estate prices
generally, housing market conditions in the Bank's service area and market
availability of conventional real estate financing to repay such construction
loans since the Bank does not generally require take-out commitments. A decline
in real estate values and/or the demand for housing in the Sonoma County area
could have a material adverse impact on the financial condition of the Bank.
Management, however, presently believes real estate values in Sonoma County are
either holding their value or increasing.
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 liabilities than assets reprice in a given period (a
liability sensitive position), market interest rate changes will be reflected
more quickly in liability rates. If interest rates decline, a liability
sensitive position will benefit net income. Alternatively, where assets reprice
more quickly than liabilities in a given period (an asset sensitive position), a
decline in market rates will have an adverse effect on net income.
Management's objective is to maintain the stability of the net interest margin
in times of fluctuating interest rates by maintaining an appropriate mix of
interest rate sensitive assets and liabilities.
The following table shows the maturities and repricing frequencies by category.
Investments are shown at fair value and exclude equity securities. Loans are
shown excluding non-accrual loans and deferred fees.
<TABLE>
<CAPTION>
Maturities and Repricing Frequencies
-----------------------------------------------------------------------------------------------------------------
Three Months Three to Twelve One to Five Over Five
or Less Months Years Years Total
-------------------- -------------------- -------------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
Interest-earning Assets
-----------------------
Investments $ 0 $ 506,000 $31,973,900 $22,038,300 $ 54,518,200
Loans 32,655,600 26,528,800 46,515,000 14,458,800 120,158,200
------------ ----------- ----------- ----------- ------------
Total $ 32,655,600 $27,034,800 $78,488,900 $36,497,100 $174,676,400
============ =========== =========== =========== ============
Interest-bearing Liabilities
----------------------------
Deposits $112,782,900 $10,210,000 $ 2,444,400 $ 0 $125,437,300
Borrowings 13,451,900 3,000,000 0 0 16,451,900
------------ ----------- ----------- ----------- ------------
Total $126,234,800 $13,210,000 $ 2,444,400 $ 0 $141,889,200
============ =========== =========== =========== ============
</TABLE>
Management does not manage its gap to maximize income based on its prediction of
interest rates, but to minimize interest rate risk to the Bank by stabilizing
the Bank's net interest margin in all interest rate environments. Additionally,
the Bank is subject to competitive pressures in generating deposits and loans at
rates and terms prevailing in the Bank's market areas.
The Bank's gap is determined by adding the assets which will mature or reprice
in the next twelve months and subtracting the liabilities which will mature or
reprice during the same period. Gap management assumes that all assets and
liabilities will reprice by the same amount at the same time,
18
<PAGE>
but this is not true, as all rates do not move by the same amount or at the same
time. Rather than use gap for asset/liability management, Management uses an
interest rate risk scenario wherein a change of 1% in interest rates occurs over
a three month period and then remains flat for the remaining nine months. Each
category of interest-earning assets or interest-bearing liabilities is assigned
a repricing multiplier and timing factor to more closely approximate the
interest rate environment. Management believes this is a better indicator of
interest rate risk than simple gap analysis.
Quality of Loans
----------------
Inherent in the lending function is the fact that loan losses will be
experienced and the risk of loss will vary with each type of loan extended and
the creditworthiness of the borrower. To reflect the estimated risk of loss
associated with its loan portfolio, provisions are made to the Bank's allowance
for loan losses. As an integral part of this process, the allowance for loan
losses is subject to review and possible adjustment as a result of regulatory
examinations conducted by governmental agencies and through Management's
assessment of risk.
The allowance for loan losses at December 31, 1999 was $1,596,500 or 1.30% of
total loans outstanding as compared to $1,426,200 or 1.40% of total loans
outstanding at December 31, 1998. Although the allowance for loan losses
increased in dollar amount, the allowance decreased as a percentage of loans in
1999 due to management's estimation of risk of loss. Management closely
monitors the allowance for loan losses and believes the balance at December 31,
1999 was adequate to provide for losses that can be reasonably anticipated.
Additions to the allowance for loan losses are made by provision. The provision
for loan losses is charged to operating expense and is based upon past loan loss
experience and estimates of potential losses which in Management's judgment,
deserve current recognition. Other factors considered by Management include
growth, composition and overall quality of the loan portfolio, review of
specific problem loans, and economic conditions that may vary from current
estimates. The estimates are reviewed periodically and adjustments, if
necessary, are charged to operations in the period in which they became known.
The Bank had loan charge-offs of $145,800 in 1999 and $117,800 in 1998. Net
loan charge-offs (which include recoveries) were $129,700 in 1999 and $102,700
in 1998. Loans of $129,000 or 88.3% of all charge-offs in 1999 were commercial
loans, as compared to $94,000 or 79.7% in 1998. Consumer loans, including
installment and credit card related loans, were $5,000 or 3.4% of all charge-
offs in 1999, compared to $21,000 or 17.8% for 1998. The remaining loan charge-
off come under the real estate category, accounting for $12,000 or 8.2% of total
charge-offs in 1999 and $3,000 or 2.5% in 1998.
The following table summarizes the activity in the allowance for loan losses as
of December 31, 1999 and December 31, 1998.
19
<PAGE>
<TABLE>
<CAPTION>
December 31
---------------------------
1999 1998
--------- -------
(Dollars in Thousands)
<S> <C> <C>
Balance at Beginning of Period $ 1,426 $ 1,309
-------- -------
Charge-offs:
Commercial, Financial, and Agricultural 129 94
Real Estate--Construction and Land Development 0 0
Real Estate--Mortgage 12 3
Installment Loans to Individuals 5 21
-------- -------
Total Loans Charged-off $ 146 $ 118
-------- -------
Recoveries:
Commercial, Financial, and Agricultural 13 14
Real Estate--Construction and Land Development 0 0
Real Estate--Mortgage 0 0
Installment Loans to Individuals 3 1
-------- -------
Total Recoveries 16 15
-------- -------
Net Loans Charged-off 130 103
-------- -------
Provision for Loan Losses 300 220
-------- -------
Allowance for Loan Losses--End of Period $ 1,596 $ 1,426
======== =======
Loans:
------
Average Loans Outstanding During Period, Net $106,102 $92,985
Total Loans at End of Period, Net $118,312 $99,847
Ratios:
-------
Net Loans Charged-Off to Average Net Loans 0.12% 0.11%
Net Loans Charged-Off to Total Loans at End of Period 0.11% 0.10%
Allowance for Loan Losses to Average Net Loans 1.50% 1.53%
Allowance for Loan Losses to Total Loans at End of Period 1.35% 1.43%
Net Loans Charged-off to Allowance for Loan Losses 8.15% 7.22%
Net Loans Charged-Off to Provision for Loan Losses 43.33% 46.82%
</TABLE>
20
<PAGE>
Non-Performing Loans
--------------------
Loans are generally placed on non-accrual status when they are 90 days past due
as to either interest or principal. At any time, any accrued but uncollected
interest is reversed, and additional income is recorded on a cash basis as
payments are received. Loans that are in the process of renewal in the normal
course of business or are well secured and in the process of collection may not
be placed on non-accrual status, at the discretion of Management. A non-accrual
loan may be restored to an accrual basis when interest and principal payments
are current and the prospects for future payments are no longer in doubt. At
December 31, 1999, non-accrual loans were $62,000 or 0.05% of total loans and
$192,000 or 0.19% of total loans at December 31, 1998.
Investments
-----------
The Bank's investment portfolio is used primarily for income and secondarily
provides a source of liquidity for the Bank, as the Bank can sell its
"available-for-sale" securities in the event of a need for cash. At December
31, 1999, the Bank's investment portfolio had an average life of 6.3 years.
At December 31, 1999, the Bank's investment portfolio was $55,565,100 or 28.5%
of total assets, a decrease from $67,737,200 or 36.3% of total assets in 1998.
The decrease is attributable to the fact that loans grew faster than deposits
and other borrowings. The Bank purchased tax-exempt municipal securities in
1998 and 1999 in order to lower its effective tax rate and thereby increase net
income.
Under Statement of Financial Accounting Standard No. 115 ("SFAS 115"), the
investments of a bank in debt and equity securities must be classified in three
categories: "trading", "available-for-sale", or "held-to-maturity", and there
are different accounting methods for each category. SFAS 115 requires that any
unrealized gain or loss in the "available-for-sale" category be reported as an
adjustment to the Bank's equity capital, even though the gain or loss would only
be realized if the investment was actually called or sold. If the investment is
in the "held-to-maturity" category, no unrealized gain or loss needs to be
reported.
In 1998 the Bank borrowed $3,000,000 from the Federal Home Loan Bank of San
Francisco at a fixed rate and purchased $3,000,000 of long-term collateralized
mortgage obligations, of which $2,000,000 are fixed rate and $1,000,000 are
variable rate. By funding the purchase of collateralized mortgage obligations
with borrowings, the Bank is better able to utilize its capital and increase net
interest income. The $3,000,000 borrowing matures in July 2000.
The following table sets forth the fair value of the Bank's investment portfolio
as of December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
U.S. Treasury Securities and Securities of other U.S. Government
Agencies and Corporations - Available for Sale $30,661 $39,733 $38,373
U.S. Treasury Securities and Securities of other U.S. Government
Agencies and Corporations - Held to Maturity 1,450 5,111 0
States of the U.S. and Political Subdivisions - Available for Sale 13,038 12,049 9,841
States of the U.S. and Political Subdivisions - Held to Maturity 4,910 5,323 0
Other Securities - Available for Sale 5,141 5,643 905
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C>
Other Securities - Held to Maturity 0 0 0
--------------- --------------- ---------------
Total $55,200 $67,859 $49,119
=============== =============== ===============
</TABLE>
As of December 31, 1999, the Bank's "available-for-sale" securities reflect an
adjustment of an unrealized loss of $1,873,900 net of unrealized gains and a
fair value of $48,839,600. "Held-to-maturity" securities, had a fair market
value of $6,360,600 at December 31, 1999.
As of December 31, 1999 and 1998, the Bank had total pledged securities with a
fair value of $30,335,700 and $25,405,400, respectively. Pledged securities
with a fair value of $6,594,300 in 1999 and $3,734,400 in 1998 secured public
deposits. Pledged securities with a fair value of $17,139,200 in 1999 and
$18,149,100 in 1998 collateralized repurchase agreements with customers.
Pledged securities with a fair value of $3,712,000 in 1999 and $511,300 in 1998
collateralized requirements of the Federal Reserve and U.S. Department of
Justice, and pledged securities with a fair value of $2,890,200 in 1999 and
$3,010,600 in 1998 collateralized borrowings from the Federal Home Loan Bank.
Pledged securities are not available for the Bank's liquidity needs.
The following table is a summary of the relative maturities and weighted average
yields of investment securities as of December 31, 1999. Yields on securities
have been calculated by dividing interest income, adjusted for amortization of
any premium and accretion of any discount, by the book value of the related
securities. Yields on tax-exempt securities have not been calculated on a tax-
equivalent basis.
<TABLE>
<CAPTION>
U.S. Treasury and other
U.S. Agencies & State and Political
Corporations Subdivisions Corporate Bonds
----------------------- ----------------------- ----------------------
Amount Yield Amount Yield Amount Yield
------ ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Maturing in One Year or Less $ 2,667 5.95% $ 0 0% $ 0 0.00%
Maturing After One but within Five Years 26,975 5.91% 4,058 5.86% 3,650 5.58%
Maturing After Five but within Ten Years 3,498 6.12% 4,070 5.10% 1,012 5.98%
Maturing After Ten Years 0 0.00% 10,827 4.91% 0 0.00%
</TABLE>
Funding
-------
Total deposits at December 31, 1999 and 1998 were $162,190,400 and $155,901,100,
respectively, representing increases of 4.0% in 1999 and 26.8% in 1998. The
increase in deposits in 1999 and 1998 is due to growth, especially in the
savings category. Savings and interest-bearing transaction accounts increased
by 12.0% in 1999 and 29.9% in 1998. As a result of the growth in savings,
certificate of deposit growth has been slower, with increases of 9.8% in 1999
and 12.1% in 1998. Average total deposits were $156,646,000 in 1999 and
$138,053,000 in 1998.
The table below sets forth information for the last three years regarding the
Bank's average deposits and the average rate paid on each of the deposit
categories.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing Demand Deposits $ 33,644 0.00% $ 28,309 0.00% $ 25,077 0.00%
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing Transaction Accounts 19,445 1.73% 17,386 1.73% 17,597 1.87%
Savings 82,157 3.76% 73,325 4.22% 52,255 4.45%
Time Certificates under $100,000 14,649 4.82% 13,706 5.01% 13,987 5.13%
Time Certificates over $100,000 6,751 3.94% 5,327 5.44% 5,337 5.78%
-------- -------- --------
Total Deposits $156,646 2.81% $138,053 3.17% $114,253 3.22%
======== ==== ======== ==== ======== ====
</TABLE>
The remaining maturities of the Bank's certificates of deposit of $100,000 or
more, including public time deposits, at December 31, 1999 and 1998 are
indicated in the table below. Interest expense on these certificates of deposit
totaled $266,000 in 1999 and $258,600 in 1998.
Year Ended December 31
------------------------------
1999 1998
-------- -----------
(Dollars in Thousands)
Time Deposits Maturing in:
Three Months or Less $4,611 $4,823
Three through Twelve Months 1,744 2,565
Over Twelve Months 541 545
------ ------
Total Time Deposits Over $100,000 $6,896 $7,933
====== ======
Non-interest Income
-------------------
Non-interest income for 1999 was $1,195,200 or an increase of 0.7% as compared
to $1,186,100 in 1998, which was an increase of 13.3% from 1997.
The following table sets forth non-interest income categories for the years
1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ---------------------
<S> <C> <C> <C>
Service Charges $ 695,800 $ 707,400 $ 642,100
Credit Card and Other Fee Income 259,900 273,200 220,900
Net Investment Securities gains (losses) 37,900 51,700 (73,900)
Life Insurance Income 84,900 83,300 81,300
Other Income 116,700 70,500 176,800
---------- ---------- ----------
Total Non-interest Income 1,195,200 $1,186,100 $1,047,200
========== ========== ==========
</TABLE>
Service charges on deposit accounts, the largest portion of non-interest income,
declined to $695,800 in 1999 or 1.6%.
Non-interest Expense
--------------------
Non-interest expense for 1999 was $6,195,700, an increase of 9.8% as compared to
$5,645,200 or 11.8% for 1998. Salary expense increased to $3,193,300 or 7.4% in
1999 compared to $2,972,100 or 16.2% for 1998. The increase in salary expense
is attributable to the Bank's growth during 1999. Occupancy and equipment
expense totaled $1,022,000 in 1999 and $917,400 in 1998, due to the Bank's
growth and lease expense increase. Other expenses were $1,980,400 in 1999, an
increase of 12.8%, and $1,755,700 in 1998, an increase of 11.3%. The increase
in 1999 is attributable to increased spending on marketing and professional
services, and expenses related to Year 2000 issues and consulting.
23
<PAGE>
Income Taxes
------------
The Bank's provision for income taxes was $1,022,600 in 1999 and $1,012,500 in
1998. The Bank's effective tax rate was 30.7% in 1999 and 32.4% in 1998.
Capital
-------
The Bank had sustained its growth in capital through retained earnings, net of
cash dividends paid out to shareholders. Shareholders' equity increased to
$14,892,900, or 7.8% as compared to $13,813,800 in 1998 after paying cash
dividends of $0.12 per share. Shareholders' equity increased by $376,000 in
1999 through the exercise of stock options and declined by $1,427,900 as a
result of unrealized holding losses, net of taxes, and investments classified as
available for sale.
The Bank is subject to regulations of the Federal Deposit Insurance Corporation
("FDIC") governing capital adequacy. These guidelines are intended to reflect
the degree of risk associated with both on- and off-balance sheet items.
Financial institutions are expected to comply with a minimum ratio of qualifying
total capital to risk-weighted assets of 8%, at least half of which must be Tier
1 Capital.
Federal regulatory agencies have also adopted a minimum leverage ratio of 4%
which is intended to supplement the risk-based capital requirements and to
ensure that all financial institutions continue to maintain a minimum level of
core capital.
The risk-based and leverage capital ratios for the Bank at December 31, 1999 is
set forth below. The Bank exceeded the minimum capital requirements in 1999.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------
Amount Ratio
------ -----
<S> <C> <C>
(Dollars in Thousands)
Risk-based Capital Ratios:
--------------------------
Tier 1 Capital $ 15,941 10.64%
Minimum Requirement 5,995 4.00%
-------- -----
Excess $ 9,946 6.64%
======== =====
Total Capital $ 17,537 11.70%
Minimum Requirement 11,989 8.00%
-------- -----
Excess $ 5,548 3.70%
======== =====
Risk-adjusted Assets $149,867
========
Leverage Ratio:
---------------
Tier 1 Capital $ 15,941 8.29%
Minimum Requirement 5,766 4.00%
-------- -----
Excess $ 10,175 5.29%
======== =====
Total Adjusted Assets $192,253
========
</TABLE>
24
<PAGE>
Inflation
---------
It is Management's opinion that the effects of inflation on the Bank's financial
statements for the years ended December 31, 1999, 1998, and 1997 are not
material.
SELECTED FINANCIAL INFORMATION
The selected consolidated financial information set forth below should be read
in conjunction with the Bank's audited financial statements and notes thereto
which are included herein.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- --------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
---------------------
Interest and Fee Income $ 13,672,500 $ 12,745,300 $ 10,792,600 $ 9,336,300 $ 7,777,700
Interest Expense 5,045,400 4,937,800 4,248,400 3,599,300 2,943,000
------------ ------------ ------------ ------------ ------------
Net Interest and Fee Income 8,627,100 7,807,500 6,544,200 5,737,000 4,834,700
Provision for Loan Losses 300,000 220,000 340,000 334,500 312,900
------------ ------------ ------------ ------------ ------------
Net Interest and Fee Income after
Provision for Loan Losses 8,327,100 7,587,500 6,204,200 5,402,500 4,521,800
Non-Interest Income 1,195,200 1,186,100 1,047,200 976,400 941,400
Non-Interest Expense 6,195,700 5,645,200 5,049,000 4,870,200 4,194,400
------------ ------------ ------------ ------------ ------------
Income before Income Taxes 3,326,600 3,128,400 2,202,400 1,508,700 1,268,800
Provision for Income Taxes 1,022,600 1,012,500 726,100 434,000 281,000
------------ ------------ ------------ ------------ ------------
Net Income $ 2,304,000 $ 2,115,900 $ 1,476,300 $ 1,074,700 $ 987,800
============ ============ ============ ============ ============
Per Share:
Weighted Average number of shares
outstanding (adjusted for 5%
stock dividends paid in December
1995, 1996 and 1997 and 2-for-1
Stock Split in 1998) 1,428,098 1,369,532 1,295,716 1,254,396 1,237,546
Net Income Per Share $ 1.61 $ 1.54 $ 1.14 $ .86 $ .80
Net Income Per Share Assuming $ 1.55 $ 1.45 $ 1.06 $ .80 $ .76
Shareholders' Equity (Book Value) $ 10.31 $ 9.90 $ 8.39 $ 7.42 $ 6.94
Total Assets $194,699,000 $186,559,000 $151,690,400 $129,441,400 $111,866,400
</TABLE>
25
<PAGE>
SELECTED FINANCIAL RATIOS
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using actual daily figures):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Earnings to:
Average earning assets 1.34% 1.41% 1.19%
Average total assets 1.22 1.28 1.06
Average shareholders' equity 15.92 16.93 14.62
Average shareholders' equity to:
Average total assets 7.67% 7.54% 7.26%
Average net loans 13.64 13.44 12.96
Average total deposits 9.24 9.05 8.84
</TABLE>
ITEM 7. -- FINANCIAL STATEMENTS
--------------------
Balance sheets as of the close of the most recent fiscal year, statements
of operations, statements of changes in shareholders' equity, statements of cash
flows for each of the two (2) fiscal years preceding the date of the balance
sheet and notes to the financial statements for the Bank are attached hereto
beginning at page F-2.
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
-----------------------------------------------------------
26
<PAGE>
The following information is supplied with respect to each person who is
currently a director of the Bank and is based upon the records of the Bank and
information furnished to it by the directors.
<TABLE>
<CAPTION>
Position and Director
Offices with Of Bank
Name Age The Bank Since
---- --- -------- -----
<S> <C> <C> <C>
Walter E. Bragdon 67 President, Chief 1987
Executive Officer and
Director
Max F. Cerini 62 Director 1987
John H. Dado 65 Director 1987
Robert W. Giacomini 62 Director 1987
Henry C. Hansel 52 Director 1987
Max K. Herzog 63 Director 1987
John J. King, Jr. 64 Director 1987
Daniel G. Libarle 58 Chairman of the Board 1987
James E. McCaffrey 74 Director 1987
William H. McDevitt, Jr. 47 Director 1987
William J. McDowell 63 Director 1987
All directors and executive
officers as a group (13 in
number)
</TABLE>
None of the directors of the Bank were selected pursuant to any arrangement
or understanding other than with the directors and officers of the Bank acting
in their capacities as such. There are no family relationships between any two
or more of the directors, officers or persons nominated or chosen by the Board
of Directors to become a director or officer except, John J. King, Jr. is the
first cousin of Daniel G. Libarle. No director serves as a director of any
company required to report under the Securities Exchange Act of 1934 or any
investment company registered under the Investment Company Act of 1940.
Set forth below are brief summaries of the background and business
experience of all of the directors and persons nominated to become a director of
the Bank. Unless otherwise indicated, each person has been engaged in the noted
occupation with the same entity for more than five years.
WALTER E. BRAGDON is President and Chief Executive Officer of the Bank.
MAX F. CERINI is Vice Chairman of Shamrock Materials, Inc., a ready-mix
concrete and building material company. Prior to 1992, Mr. Cerini was President
of the company.
JOHN H. DADO was a partner in Pisenti & Brinker, CPA's from 1991 to 1995.
He is presently retired.
ROBERT W. GIACOMINI is President of Robert Giacomini Dairy, Inc.
HENRY C. HANSEL is President of Hansel Enterprises, an automobile
dealership, and automobile and equipment leasing company.
MAX K. HERZOG is owner and manager of Sleepy Hollow Dairy.
27
<PAGE>
JOHN J. KING, JR. is of counsel to the law firm of Anderson, Zeigler,
Disharoon, Gallagher & Gray, since 1992.
DANIEL G. LIBARLE is President of Lace House Linen, Inc., a linen rental
company.
JAMES E. McCAFFREY is a self-employed business consultant. He was Vice
President and Chairman of the Board of Geyser Energy Company, a Union Oil
distributor from 1994 to 1996. Prior to 1994, he was President and Chief
Executive Officer of both Geyser Energy Company and JEMCO.
WILLIAM H. McDEVITT, Jr. is President of McDevitt and McDevitt
Construction, a general contractor.
WILLIAM J. McDOWELL is owner of McDowell Dairy.
Executive Officers
------------------
Set forth below is certain information as of March 1, 2000 with respect to
each executive officer of the Bank, except as previously discussed.
<TABLE>
<CAPTION>
Positions and Offices Officer
Name Age With the Bank Since
---- --- ------------- -----
<S> <C> <C> <C>
David E. Schmidt 49 Senior Vice President and Senior Loan 1987
Officer
Arlene A. Brians 51 Senior Vice President and Chief 1987
Administrative Officer
Dennis E. Kelley 45 Senior Vice President and Chief 2000
Financial Officer
</TABLE>
Set forth below are brief summaries of the background and business
experience of the executive officers of the Bank who have not previously been
discussed herein.
ARLENE A. BRIANS became the Bank's Senior Vice President and Operations
Administrator in August 1994 and in February 1999 became the Bank's Chief
Administrative Officer
DAVID E. SCHMIDT is the Bank's Senior Vice President and Senior Loan
Officer.
DENNIS E. KELLEY joined the Bank in January 2000 as the Senior Vice
President and Chief Financial Officer. Formerly he was a Certified Public
Accountant in private practice. From 1986 through January 1999, he was employed
by Redwood Empire Bancorp and its subsidiary National Bank of the Redwoods where
he served in various capacities including Chief Operating Officer and Chief
Financial Officer.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
--------------------------------------------------------------------
28
<PAGE>
Section 16(a) of the Securities Exchange Act of 1934 requires the Bank's
officers and directors, and persons who own more than ten percent of a
registered class of the Bank's equity securities, to file reports of ownership
and changes in ownership with the Federal Deposit Insurance Corporation
("FDIC"). Officers, directors and greater than ten-percent shareholders are
required by FDIC regulations to furnish the Bank with copies of all Section
16(a) forms they file. To the best knowledge of the Bank, there are no greater
than ten-percent holders of the Bank's Common Stock.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms F-7, F-8,
and F-8A were required for those persons, the Bank believes that for the period
from January 1, 1998 through December 31, 1999 its officers and directors
complied with all applicable filing requirements.
ITEM 10. -- EXECUTIVE COMPENSATION
----------------------
Summary of Compensation
-----------------------
The following table sets forth a summary of the compensation paid (for
services rendered in all capacities) during the Bank's past three fiscal years
to those executive officer's of the Bank whose annual compensation for 1999
exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term
Compensation
Other Annual Awards All Other
Name Position Year Salary Bonus Compensation/1/ Options Compensation/2/
---- -------- ---- ------ ----- --------------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Walter E. Bragdon President and 1999 $145,000 58,464 -0- -0- $18,537
Chief Executive 1998 $138,184 $33,945 -0- -0- $16,780
Officer 1997 $130,962 $27,500 -0- -0- $15,190
David E. Schmidt Senior Vice and 1999 $ 97,440 $29,386 -0- -0- $ 3,120
Senior Loan 1998 $ 99,169 $18,469 -0- -0- $ 2,824
Officer 1997 $ 83,944 $12,974 -0- -0- $ 2,557
Arlene A. Brians Senior Vice 1999 $ 86,077 $25,504 -0- -0- -0-
President and 1998 $ 76,973 $15,095 -0- -0- -0-
Chief 1997 $ 65,474 $10,877 -0- -0- -0-
Administrative
Officer
</TABLE>
The directors of the Bank receive $600 for each meeting of the Board of
Directors, and $125 for all other committee meetings attended. The Bank paid a
total of $116,875 in directors' fees during 1999.
_____________________
/1/ No perquisites are reported as Other Annual compensation as they did not
exceed the lesser of $50,000 or 10% of the total of the annual salary and bonus
reported for the named executive officer.
/2/ Includes amounts accrued under a Salary Continuation Agreement.
29
<PAGE>
Bank of Petaluma 1989 Amended Stock Option Plan
-----------------------------------------------
The Bank adopted the Bank of Petaluma 1989 Amended Stock Option Plan (the
"1989 Plan") on May 3, 1989 and set aside 305,608 shares of no par value Common
Stock of the Bank for which options may be granted to key, full-time salaried
employees and officers of the Bank, as well as non-employee directors of the
Bank. Of the shares reserved for issuance, 127,336 shares were made available
for grant solely to directors and the remaining 178,272 shares are available for
grant solely to key full-time officers and employees of the Bank.
The exercise price of all options to be granted under the 1989 Plan must be
at least 100% of the fair market value of the Bank's Common Stock on the
granting date and be paid in full in cash at the time the option is exercised.
Under the 1989 Plan, all options expire no more than ten years after the date of
grant.
In the case of termination of employment or status as a director, no
additional options become exercisable, and exercise rights cease in three (3)
months unless employment or status as a director is terminated because of death
or disability, in which case the option may be exercised for not more than one
year following termination. In case of termination of employment for cause, or
cessation of status as a director as a result of being removed from office by a
bank regulatory authority, exercise rights cease immediately.
No stock options were granted to executive officers of the Bank during 1999
which are required to be disclosed.
The following table shows information regarding options exercised and the
value at December 31, 1999 of unexercised options held by the executive officers
of the Bank which are required to be disclosed.
Aggregated Option Exercises in Last Year and FY-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of unexercised in-the-
unexercised options at fiscal money options at fiscal
year-end(#) year-end ($)
Shares acquired ------------------------------- ----------------------------
Name on exercise (#) Value Realized ($) Exercisable/Unexercisable Exercisable/unexercisable
--------------- ------------------ ----------------------------
<S> <C> <C> <C> <C>
Walter E. Bragdon 12,732 $191,998 11,574/-0- $ 206,248/-0-
David E. Schmidt 7,638 $122,819 12,194/5,250 $243,564/$119,822
Arlene A. Brians 2,544 $ 40,576 12,194/5,250 $243,564/$119,822
</TABLE>
Bank of Petaluma 1997 Stock Option Plan
---------------------------------------
On December 23, 1997, the Bank adopted the Bank of Petaluma 1997 Stock
Option Plan ("1997 Plan") which sets aside 199,600 shares of no par value Common
Stock of the Bank for which options may be granted to key, full-time salaried
employees and officers of the Bank, as well as non-employee directors of the
Bank.
30
<PAGE>
The exercise price of all options to be granted under the 1997 Plan must be
at least 100% of the fair market value of the Bank's Common Stock on the
granting date and be paid in full at the time the option is exercised either in
cash, shares of the Bank's Common Stock with a fair market value equal to the
purchase price or a combination thereof. Under the 1997 Plan, all options expire
no more than ten years after the date of grant.
In the case of termination of employment or status as a director, no
additional options become exercisable, and exercise rights cease after six (6)
months unless employment or status as a director is terminated because of death
or disability, in which case the option may be exercised for not more than one
year following termination. In case of termination of employment for cause, or
cessation of status as a director as a result of being removed from office by a
bank regulatory authority or by judicial process, exercise rights cease
immediately.
Incentive Compensation Plan
---------------------------
The Bank's Incentive Compensation Plan ("Incentive Plan") became effective
on January 1, 1991. The purpose of the Incentive Plan is to achieve and sustain
targeted income levels for the Bank by providing an opportunity for participants
to earn extra compensation in the form of cash or deferred income. The Incentive
Plan is administered by a committee, composed of members of the Board of
Directors ("Committee"), that has sole discretion in administering and
interpreting the Incentive Plan.
Participation in the Incentive Plan is limited to designated staff members
of the Bank who are employed as of January 1st of each plan year, and those
officers of the Bank nominated by the President and Chief Executive Officer who
perform essential managerial services for the Bank during the plan year.
Participants who terminate employment for reasons other than death,
disability, retirement or redeployment prior to the end of the calendar year are
not eligible to receive an award for the year they terminate. Participants who
terminate employment after the end of the calendar year for which the award
relates but prior to the time the award is paid are not entitled to receive an
award, unless the President and Chief Executive Officer determines that the
participant should be eligible for an award. Participants who terminate
employment because of death, disability, retirement or redeployment, or who are
hired, promoted or transferred may, in the sole discretion of the Committee, be
considered for an award.
Each plan year an Incentive Compensation Fund to pay awards will be
established based on specific goals expressed as Return on Average Assets
("ROA"), Return on Beginning Equity ("ROE") and individual performance. The
amount in the fund will be based on the percent of the targeted ROA and ROE the
Bank actually achieves multiplied by a funding factor, and on the amount of the
individual performance goals. The total funding for the staff awards is based
on the ROA the Bank actually achieves compared with the targeted ROA.
Individual performance goals for all officers and staff are established by
the President and Chief Executive Officer. The Chief Executive Officer's goals
are established by the Chairman of the Board of Directors. Individual
performance goals are based on the ROA and ROE goals and
31
<PAGE>
individual performance goals established for each individual, multiplied by a
weighted percentage established by the Committee.
Individual awards to officers depend on the level of achievement of the
targeted goals, and on individual performance which may include success in
achieving their performance plan, loyalty, general attitude towards group
problems and goals, ingenuity in solving problems, initiative and achievements
of their participating units. Individual awards to staff depend on the Bank's
ROA performance compared with the targeted ROA. Individual staff members share
in the total award based on their salary expressed as a percent of the total
salary of all staff participating in the Incentive Plan. Individual awards to
staff may also be adjusted to reflect loyalty, general attitudes toward group
problems and goals, ingenuity in solving problems, initiative and the
achievement of individual and group projects and responsibilities. Awards may
be paid in cash, deferred cash or other types of compensation.
If the sum of the actual awards is equal to or less than the funded amount
then the full amount of the awards is paid. If the amount of the awards granted
exceeds the funded amount then the awards will be reduced by multiplying each
award by a ratio that is equal to the total funds available divided by the total
of all the awards granted for the plan year.
Amounts accrued during 1999 pursuant to the Incentive Plan are $47,200 for
Walter E. Bragdon, $28,900, for David E. Schmidt and $26,600 for Arlene A.
Brians.
Profit Sharing and Salary Deferral 401(k) Plan
----------------------------------------------
The Bank adopted a Profit Sharing and Salary Deferral 401(k) Plan ("401(k)
Plan") effective as of January 1, 1993 and amended January 1, 1999 for all
employees. Under the 401(k) Plan employees can defer up to 15% of their salary
in a year. Beginning in 1997, the Bank matches 50% of the employee's
contribution. An employee is vested immediately as to the amount which they
have deferred and will vest equally over a four year period as to the Bank's
matching contributions. Normal retirement age pursuant to the 401(k) Plan is
age 65.
Deferred Compensation
---------------------
Effective as of December 31, 1992, the Bank entered into deferred
compensation agreements with Walter E. Bragdon and Donald J. Morris,
respectively.
Under these deferred compensation agreements each officer is entitled to
defer receipt of a portion of current compensation until reaching a specified
retirement age. Each deferred compensation agreement is revocable by the Bank or
the employee upon written notice. Amounts deferred by each officer under his
deferred compensation agreement with the Bank are reported in the Cash
Compensation Table above, as salary. These arrangements do not confer
preferential earnings or above-market earnings on deferred compensation.
Salary Continuation and Retirement Plan
---------------------------------------
32
<PAGE>
The Bank adopted a Salary Continuation and Retirement Plan ("Salary
Continuation Plan"), effective as of December 31, 1992, for Messrs. Bragdon,
Morris and Schmidt. The Salary Continuation Plan is an unfunded retirement
benefit plan as defined in the Employee Retirement Income Security Act of 1974
("ERISA"). Benefits are payable to the respective officers in monthly
installments for a period of 180 months after retirement upon reaching a
specified retirement age. The specified retirement ages are age 70 for Mr.
Bragdon, age 70 for Donald J. Morris, the Bank's former Chief Financial Officer
and age 65 for Mr. Schmidt. In the event that the respective officers are
employed by the Bank when they attain their specified retirement age, it is
anticipated that Mr. Bragdon will be entitled to $25,000 per year, and Mr.
Schmidt will be entitled to $18,000 per year. In 1999, the Bank granted Mr.
Morris full retirement at age 66 and is presently paying $17,500 per year as
described above.
The Bank has the option of setting aside or designating funds for the
payment of the obligations under the Salary Continuation Plan. However, the
rights of the participants under the Salary Continuation Plan are those of an
unsecured general creditor of the Bank. The Bank has purchased life insurance
contracts on the lives of each officer to provide funds to the Bank to meet its
obligations under the Salary Continuation Plan. The Salary Continuation Plan may
also pay a vested lump sum benefit to each officer in the event of death or
disability prior to reaching the retirement age specified in the Salary
Continuation Plan. The vested lump sum benefit will accrue to each officer based
upon years of service. Such benefit is calculated based upon the amount
permitted to be accrued for financial statement reporting purposes under
Generally Accepted Accounting Principles ("GAAP"). The annual GAAP accrual is
equal to the present value in a given year of the retirement benefit payable to
retirement age. The amount of the retirement benefit was established by the
Bank's Compensation Committee and Board of Directors. Participants are credited
for years of service towards vesting in such lump sum benefits based upon
consecutive years of service measured from their anniversary of date of birth in
1992. The Salary Continuation Plan also provides that a payment will be made to
each officer if their employment is involuntarily terminated as a result of a
change of control of the Bank. The amount payable to the officer shall be the
maximum vested lump sum benefit payable to the officer under the Salary
Continuation Plan.
ITEM 11. -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following information is supplied regarding stock ownership by the Bank's
directors and executive officers.
33
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned
As of March 1, 2000/3/
----------------------
Name Amount Percentage
---- ------ ----------
<S> <C> <C>
Walter E. Bragdon 59,374/4/ 4.08%
Max F. Cerini 40,146/2/ 2.76%
John H. Dado 22,000/2/ 1.51%
Robert W. Giacomini 47,243/5/ 3.25%
Henry C. Hansel 48,154/6/ 3.31%
Max K. Herzog 48,312/7/ 3.32%
John J. King, Jr. 44,618/2/ 3.07%
Daniel G. Libarle 54,814/2/ 3.77%
James E. McCaffrey 35,423/2/ 2.43%
William H. McDevitt, Jr. 33,976/8/ 2.34%
William J. McDowell 16,502/2/ 1.13%
All directors and executive officers
as a group (14 in number) 499,730/9/ 31.61%
</TABLE>
ITEM 12. -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Other Transactions with Management
----------------------------------
The Bank has had and expects to have in the future banking transactions in
the ordinary course of its business with directors, executive officers,
principal shareholders, and their associates, on substantially the same terms,
including interest rates and collateral on loans, as those prevailing at the
same time for comparable transactions with others and such transactions did not
involve more than the normal risk of collectibility or present other unfavorable
features, except as described below.
ITEM 13. -- EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
___________________
/3/ Unless otherwise indicated, the beneficial owner of these shares are sole or
joint voting and investment power.
/4/ Includes an option to purchase 11,574 shares of the Bank's Common Stock
which is presently exercisable. Also includes 7,892 shares held by Mr. Bragdon's
Individual Retirement Account over which Mr. Bragdon has sole voting and
investment power and 560 shares held as trustee.
/5/ Includes an option to purchase 10,000 shares of the Bank's Common Stock
which is presently exercisable; 24,440 shares owned by the Robert Giacomini
Dairy, Inc., Profit Sharing Plan over which Mr. Giacomini has voting and
investment power; 3,212 shares owned by Mr. Giacomini's wife; and 15 shares
held by Mr. Giacomini as trustee.
/6/ Includes an option to purchase 10,000 shares of the Bank's Common Stock
which is presently exercisable and 3,468 shares held by Mr. Hansel as trustee
for his two children.
/7/ Includes an option to purchase 10,000 shares of the Bank's Common Stock
which is presently exercisable and 13,730 shares held by Mr. Herzog as trustee.
/8/ Includes an option to purchase 10,000 shares of the Bank's Common Stock
which is presently exercisable; 19,910 shares owned by the McDevitt & McDevitt
Profit Sharing Trust, of which Mr. McDevitt is trustee and beneficiary; 3,562
shares held by Mr. McDevitt's Individual Retirement Account, over which Mr.
McDevitt has sole voting and investment power; and 504 shares held by Mr.
McDevitt as trustee for his daughters.
/9/ Includes options to purchase 135,962 shares of the Bank's Common Stock which
are presently exercisable.
34
<PAGE>
A. An index of all financial statements and schedules filed as
part of this Form 10-KSB appears on page F-1 and is incorporated by reference.
B. No Forms 8-K were required to be filed.
C. The following is a list of all exhibits filed as part of this Form
10-KSB.
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Exhibits Page
---- -------- ----
<C> <S> <C>
3.1 Articles of Incorporation from the Bank's Registration *
Statement on Form F-1 filed on April 29, 1989.
3.2 By-laws from the Bank's Registration Statement on Form F-1 *
filed on April 29, 1989.
10.1 Lease Agreement by and between Bank of Petaluma and Donald P. *
Ramatici and Janice M. Ramatici, dated June 9, 1987.
10.2 First Amendment effective February 1, 1990, to Lease Agreement *
by and between Bank of Petaluma and Donald P. Ramatici and
Janice M. Ramatici, dated January, 1990.
10.3 Employment Agreement between the Bank and Walter E. Bragdon *
dated July 11, 1988, from the Bank's 1989 Annual Report on Form
10-KSB filed with the FDIC on March 30, 1990.
10.4 Stock Option Plan adopted in 1988 from the Bank's Registration *
Statement on Form F-1 filed with the FDIC on April 29, 1990.
10.5 Bank of Petaluma Incentive Compensation Plan. *
10.6 Bank of Petaluma Salary Continuation and Retirement Plan. *
10.7 Bank of Petaluma Deferred Compensation Agreement. *
10.8 Second Amendment effective February 1, 1992 to Lease Agreement *
for 100 Petaluma Boulevard South by and between Bank of
Petaluma and Donald P. Ramatici and Janice M. Ramatici dated
February 27, 1992.
10.9 Lease dated February 6, 1993 for 1321 Commerce Street, Suite D, *
by and between Bank of Petaluma and Petaluma Oakwood Associates.
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C>
10.10 Lease dated April 20, 1993 for 1321 Commerce Street, Suite G, *
by and between Bank of Petaluma and Petaluma Oakwood Associates.
10.11 Lease dated May 3, 1993 for modular branch to be located at 800 *
North McDowell Boulevard by and between Bank of Petaluma and
Gelco Space.
10.12 Branch Purchase and Assumption Agreement dated as of April 23, *
1993 between Bank of America, NT&SA and Bank of Petaluma.
10.13 Real Estate Purchase Agreement for land located at 800 North *
McDowell Boulevard, Petaluma, California, dated August 18, 1993
by and between Bank of Petaluma and McBail Company.
10.14 Bank of Petaluma Profit Sharing and Salary Deferral 401(k) Plan. *
10.15 Consolidated Agreement for purchase of computer equipment dated *
December 21, 1995 by and between Bank of Petaluma and Unisys
Corporation.
10.16 Conversion Assistance Agreement dated January 11, 1996 by and *
between Bank of Petaluma and Information Technology, Inc.
10.17 Undated Sublease by and between Bank of the West and Bank of *
Petaluma for the premises located at 1360 Redwood Way, and
related master Lease.
10.18 Nondiscretionary Full Service Brokerage Agreement by and *
between PrimeVest Financial Services, Inc. and Bank of Petaluma
dated April 30, 1996.
10.19 Administrative Services and Facilities Agreement by and between *
Bank of Petaluma and PrimeVest Financial Services, Inc. dated
April 29, 1996.
10.20 Exercise of Option and Third Amendment of Lease by and between *
Donald P. and Janice M. Ramatici and the Bank dated January 28,
1997.
10.21 Letter agreement dated January 25, 1998 from General Electric *
Capital Corporation to the Bank regarding the rent for a
modular unit located for the Bank's Petaluma Valley office.
10.22 Bank of Petaluma 1997 Stock Option Plan and Related Stock
Option Agreements.
</TABLE>
36
<PAGE>
10.23 Bank of Petaluma 401(k) Plan Summary Plan Description.
21. The Bank does not have any subsidiaries.
* Denotes documents which are incorporated by reference.
37
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, as amended, the Bank has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 8, 2000
BANK OF PETALUMA
By: /s/ Walter E. Bragdon
----------------------
WALTER E. BRAGDON
President and Chief
Executive Officer
By: /s/Dennis E. Kelley
--------------------
DENNIS E. KELLEY
Senior Vice President and Chief Financial Officer
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ Walter E. Bragdon President, Chief Executive March 8, 2000
------------------------------
WALTER E. BRAGDON Officer and Director
/s/ Max F. Cerini Director March 8, 2000
------------------------------
MAX F. CERINI
/s/ John H. Dado Director March 8, 2000
------------------------------
JOHN H. DADO
/s/ Robert W. Giacomini Director March 8, 2000
------------------------------
ROBERT W. GIACOMINI
Director March 8, 2000
/s/ Henry C. Hansel
------------------------------
HENRY C. HANSEL
/s/ Max K. Herzog Director March 8, 2000
------------------------------
MAX K. HERZOG
/s/ John J. King, Jr. Director March 8, 2000
------------------------------
JOHN J. KING, JR.
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
/s/ Daniel G. Libarle Chairman of the Board March 8, 2000
------------------------------
DANIEL G. LIBARLE
/s/ James E. McCaffrey Director March 8, 2000
------------------------------
JAMES E. McCAFFREY
/s/ William H. McDevitt Director March 8, 2000
------------------------------
WILLIAM H. McDEVITT
/s/ William J. McDowell Director March 8, 2000
------------------------------
WILLIAM J. McDOWELL
</TABLE>
39
<PAGE>
BANK OF PETALUMA
INDEX TO FINANCIAL STATEMENTS AND SUPPORTING SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report:
Richardson & Company....................................... F-2
Financial Statements:
Balance Sheet as of December 31, 1999................. F-3
Statements of Operations for the two years ended
December 31, 1999................................ F-4
Statements of Changes in Shareholders' Equity for
the two years ended December 31, 1999............ F-5
Statements of Cash Flows for the two years ended
December 31, 1999................................ F-7
Notes to Financial Statements.............................. F-9
Supporting Schedules:
Schedule I - Securities............................... F-29
Schedule III - Loans and Lease Financing Receivable... F-31
Schedule IV - Bank Premises and Equipment............. F-32
Schedule VI - Allowance for Loan Losses............... F-33
</TABLE>
All other supporting schedules are omitted because they are not applicable, not
required, or the information is included in the financial statements or notes
thereto.
-----------------------
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Bank of Petaluma
Petaluma, California
We have audited the accompanying balance sheets of the Bank of Petaluma as of
December 31, 1999 and 1998, and the related statements of operations, changes in
shareholders' equity and cash flows for the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Bank of Petaluma at
December 31, 1999 and 1998, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ Richardson & Company
February 3, 2000, except for Note S, as to
which the date is March 22, 2000
F-2
<PAGE>
BANK OF PETALUMA
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,795,200 $11,492,400
Interest bearing deposits in other banks 296,500 775,300
Federal funds sold 3,300,000
Investment securities available-for-sale, at fair value 48,839,600 57,425,800
Investment securities held-to-maturity (fair value of $ 6,360,600
and $10,433,200, respectively) 6,725,500 10,311,400
Loans, net 118,312,100 99,847,200
Premises and equipment, net 1,639,900 1,803,000
Cash surrender value of life insurance policies 1,555,700 1,486,500
Accrued interest receivable and other assets 4,234,500 3,417,400
------------ ------------
$194,699,000 $186,559,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand $ 36,753,100 $36,707,500
Savings and interest-bearing transaction 101,866,100 97,733,300
Time, $100,000 and over 6,895,600 7,933,600
Other time 16,675,600 13,526,700
------------ -----------
162,190,400 155,901,100
Federal funds purchased 1,200,000
Repurchase agreements 13,451,900 11,378,000
Short-term debt 3,000,000 3,000,000
Accrued interest payable and other liabilities 1,163,800 1,266,100
------------ -----------
179,806,100 172,745,200
Shareholders' equity
Preferred stock, no par value; 5,000,000 shares
authorized, none issued
Common stock, no par value; 20,000,000 shares
authorized, 1,444,797 shares in 1999 and 1,395,036
shares in 1998 issued and outstanding 8,856,500 8,480,500
Retained earnings 7,139,200 5,008,200
Accumulated other comprehensive income (1,102,800) 325,100
------------ -----------
14,892,900 13,813,800
Commitments and contingencies (see accompanying notes)
------------ ------------
$194,699,000 $186,559,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
BANK OF PETALUMA
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 9,810,000 $ 9,145,200 $ 7,696,100
Interest and dividends on investment securities:
Taxable 3,035,000 2,954,100 2,859,700
Exempt from federal income tax 683,000 447,200 136,400
Dividends 27,600 25,400 23,100
Interest on federal funds sold 116,900 173,400 77,300
----------- ----------- -----------
Total interest income 13,672,500 12,745,300 10,792,600
INTEREST EXPENSE
Interest on savings and interest-bearing transaction deposits 3,430,800 3,396,100 2,656,200
Interest on time deposits, $100,000 and over 266,000 258,600 308,300
Interest on other time deposits 707,300 718,800 717,400
Interest on repurchase agreements, long-term debt and
other borrowings 641,300 564,300 566,500
----------- ----------- -----------
Total interest expense 5,045,400 4,937,800 4,248,400
----------- ----------- -----------
NET INTEREST INCOME 8,627,100 7,807,500 6,544,200
Provision for loan losses 300,000 220,000 340,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,327,100 7,587,500 6,204,200
OTHER INCOME
Service charges 695,800 707,400 642,100
Credit card and other fee income 259,900 264,500 212,100
Net investment securities gains (losses) 37,900 51,700 (73,900)
Life insurance income 84,900 83,300 81,300
Other 116,700 79,200 185,600
----------- ----------- -----------
Total other income 1,195,200 1,186,100 1,047,200
OTHER EXPENSES
Salaries and employee benefits 3,193,300 2,972,100 2,557,800
Occupancy 451,600 409,400 410,800
Equipment 570,400 508,000 503,400
Other 1,980,400 1,755,700 1,577,000
----------- ----------- -----------
Total other expenses 6,195,700 5,645,200 5,049,000
----------- ----------- -----------
Income before income taxes 3,326,600 3,128,400 2,202,400
Provision for income taxes 1,022,600 1,012,500 726,100
----------- ----------- -----------
NET INCOME $ 2,304,000 $ 2,115,900 $ 1,476,300
=========== =========== ===========
NET INCOME PER SHARE $1.61 $1.54 $1.14
=========== =========== ===========
NET INCOME PER SHARE--ASSUMING DILUTION $1.55 $1.45 $1.06
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
BANK OF PETALUMA
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- ---------- -------------- --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 601,675 $6,531,700 $2,647,900 $196,200 $ 9,375,800
Stock options exercised and
related tax benefit 34,765 372,600 372,600
Cash dividends of $0.10 per
share (125,100) (125,100)
5% stock dividend 31,644 949,300 (949,300)
Fractional shares purchased (5,400) (5,400)
Net income $1,476,300 1,476,300 1,476,300
Other comprehensive income,
net of tax:
Unrealized holding gains on
securities available-for-sale
arising during the year, net
of taxes of $81,900 118,500
----------
Other comprehensive income,
net of taxes 118,500 118,500 118,500
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income $1,594,800
==========
BALANCE AT
DECEMBER 31, 1997 668,084 7,853,600 3,044,400 314,700 11,212,700
Stock options exercised and
related tax benefit 45,685 626,900 626,900
2 for 1 stock split 681,267
Cash dividends of $0.11 per
share (152,100) (152,100)
Net income $2,115,900 2,115,900 2,115,900
Other comprehensive income,
net of tax:
Unrealized holding gains on
securities available-for-sale:
Unrealized holding gains
arising during the year, net
of taxes of $30,500 43,700
Less: reclassification
adjustment, net of taxes
of $23,300 ( 33,300)
----------
Other comprehensive income,
net of taxes 10,400 10,400 10,400
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income $2,126,300
==========
BALANCE AT
DECEMBER 31, 1998 1,395,036 8,480,500 5,008,200 325,100 13,813,800
</TABLE>
(Continued)
F-5
<PAGE>
BANK OF PETALUMA
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- ------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Stock options exercised and
related tax benefit 49,761 $ 376,000 $ 376,000
Cash dividends of $0.12 per
share $ (173,000) (173,000)
Net income $ 2,304,000 2,304,000 2,304,000
Other comprehensive income,
net of tax:
Unrealized holding losses on
securities available-for-sale:
Unrealized holding losses
arising during the year, net
of taxes of $884,800 (1,265,300)
Less: reclassification
adjustment, net of taxes
of $113,700 (162,600)
-----------
Other comprehensive income,
net of taxes (1,427,900) (1,427,900) (1,427,900)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income $ 876,100
===========
BALANCE AT
DECEMBER 31, 1999 1,444,797 $ 8,856,500 $7,139,200 $(1,102,800) $14,892,900
=========== =========== ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
BANK OF PETALUMA
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,304,000 $ 2,115,900 $ 1,476,300
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 364,100 328,400 367,400
Provision for loan losses 300,000 220,000 340,000
(Gain) loss on investments (37,800) (51,700) 73,900
Amortization of premiums and accretion of
discounts on investments 131,000 58,700 (4,500)
Loss on sale of equipment 1,500 4,100
Net change in cash surrender value of life
insurance policies (69,200) (68,700) (67,600)
Net change in interest receivable and other assets 293,000 (376,700) (184,400)
Net change in interest payable and other liabilities (102,300) 844,100 211,000
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,184,300 3,074,100 2,212,100
INVESTING ACTIVITIES
Net change in interest-bearing deposits in other banks 478,800 77,300 (322,800)
Net change in federal funds sold (3,300,000) 450,000 (450,000)
Proceeds from maturity and call of available-for-sale securities 11,234,700 2,885,700 167,800
Proceeds from maturity and call of held-to-maturity securities 3,594,300
Proceeds from sale of available-for-sale securities 15,506,700 17,511,300 19,055,100
Purchases of available-for-sale securities (20,683,200) (28,682,600) (31,959,300)
Purchases of held-to-maturity securities (10,321,600)
Net increase in loans (18,764,900) (15,960,200) (8,187,100)
Purchases of premises and equipment (208,200) (185,200) ( 153,500)
Proceeds from sale of equipment 5,700 8,500
------------ ------------ ------------
NET CASH USED FOR
INVESTING ACTIVITIES (12,136,100) (34,216,800) (21,849,800)
FINANCING ACTIVITIES
Net increase in deposits 6,289,300 32,553,800 13,024,400
Net change in federal funds purchased (1,200,000) 1,200,000
Net change in repurchase agreements 2,073,900 (1,943,000) 4,181,200
Proceeds from short term debt 3,072,500
Payments on short-term debt (72,500)
Cash dividends (173,000) (152,100) (130,500)
Stock options exercised 264,400 312,000 295,600
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 7,254,600 31,898,200 20,443,200
------------ ------------ ------------
NET CHANGE IN CASH AND DUE FROM BANKS (1,697,200) 755,500 805,500
Cash and due from banks at beginning of year 11,492,400 10,736,900 9,931,400
------------ ------------ ------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 9,795,200 $ 11,492,400 $10,736,900
============ ============ ============
</TABLE>
(Continued)
<PAGE>
BANK OF PETALUMA
STATEMENTS OF CASH FLOWS (Continued)
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 5,039,565 $4,940,400 $4,160,700
Income taxes $ 1,135,000 $ 696,000 $ 697,200
SUPPLEMENTAL DISCLOSURES
OF NONCASH ACTIVITIES:
Change in unrealized gains and losses on securities
available-for-sale $(2,426,400) $ 17,600 $ 200,400
Change in deferred income taxes on unrealized gains
and losses on securities available-for-sale $ 998,500 $ (7,200) $ (81,900)
Stock dividend $ 949,300
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Bank of Petaluma (the Bank) commenced business as a state-chartered commercial
bank on September 21, 1987. The Bank is subject to regulation, supervision and
regular examination by the State Department of Financial Institutions and
Federal Deposit Insurance Corporation. The regulations of these agencies govern
most aspects of the Bank's business. The following is a summary of the
significant accounting and reporting policies used in preparing the financial
statements.
Nature of Operations: The Bank is a locally owned and operated bank servicing
--------------------
the banking needs in the Northern California community of Petaluma and
surrounding areas. Its primary economic bases are real estate related lendings
and the manufacturing and distribution industries in the greater Petaluma area.
The Bank emphasizes service for local businesses including retail, professional,
real estate-related, dairy-related and other small-to-medium-sized business
enterprises. The Bank attracts most of its deposits from local businesses and
individuals. The Bank conducts a commercial banking business, including
accepting demand, savings and time deposits and making commercial, real estate,
residential and consumer loans. It also offers installment note collection,
issues money orders and cashier's checks, sells traveler's checks, issues VISA
and MasterCard credit cards, provides safe deposit boxes, and offers full
service stock and bond brokerage and life insurance products through its
association with Primevest in addition to other customary banking services.
Use of Estimates: The preparation of financial statements in conformity with
----------------
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Securities: Securities are classified as held-to-maturity if the
---------------------
Bank has both the intent and ability to hold those debt securities to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over their contractual lives.
Securities are classified as available-for-sale if the Bank intends to hold
those debt securities for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale
would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Bank's assets and liabilities,
liquidity needs, regulatory capital considerations and other similar factors.
Securities available-for-sale are carried at fair value. Unrealized holding
gains or losses are reported as increases or decreases in shareholders' equity,
net of the related deferred tax effect. Realized gains or losses, determined on
the basis of the cost of specific securities sold, are included in earnings.
The Bank's investments in mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and serviced by
issuers of the securities. Mortgage-backed securities are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using methods approximating the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Loans: Loans are stated at the amount of unpaid principal, reduced by deferred
-----
loan fees and costs and unearned income. Interest on loans is accrued and
credited to income based on the principal amount outstanding. Loan origination
fees and certain direct origination costs are capitalized and recognized as an
adjustment of the yield on the related loan. Amortization of net deferred loan
fees is discontinued when the loan is placed on non-accrual status. Unearned
income on installment loans is recognized as income over the term of the loans
using a method that approximates the interest method.
F-9
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Bank sells loan participations (with servicing retained ) for cash proceeds
equal to the principal amount of the loans. Statement of Financial Accounting
Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, which became effective January 1,
1997, requires that, in relation to the sale of these loan participations for
which servicing is retained, the Bank recognize either a servicing asset or a
servicing liability for the servicing contract. Upon the sale of the loans, the
Bank would be required to allocate the previous carrying amount of the
transferred assets between the loans sold and the servicing asset or liability
based on their relative fair values at the date of transfer. The Bank
determined that the value of its servicing assets and liabilities are immaterial
and, therefore, recorded 1998 and 1999 sales based on the carrying amount of the
loan.
Allowance for Loan Losses: The allowance is maintained at a level which, in the
-------------------------
opinion of management, is adequate to absorb probable losses inherent in the
loan portfolio. Credit losses related to off-balance-sheet instruments are
included in the allowance for loan losses except if the loss meets the criteria
for accrual under Statement of Financial Accounting Standards No. 5, in which
case the amount is accrued and reported separately as a liability. Management
determines the adequacy of the allowance based upon reviews of individual loans,
recent loss experience, current economic conditions, the risk characteristics of
the various categories of loans and other pertinent factors. The allowance is
based on estimates, and ultimate losses may vary from the current estimates.
These estimates are reviewed quarterly and, as adjustments become necessary,
they are reported in earnings in the periods in which they become known. Loans
deemed uncorrectable are charged to the allowance. Provisions for losses and
recoveries on loans previously charged off are added to the allowance.
Commercial loans are considered impaired, based on current information and
events, if it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Allowances on impaired loans are established based on the
present value of expected future cash flows discounted at the loan's historical
effective interest rate or, for collateral-dependent loans, on the fair value of
the collateral. Cash receipts on impaired loans are used to reduce principal.
Income Recognition on Impaired and Nonaccrual Loans: Loans, including impaired
---------------------------------------------------
loans, are generally classified as nonaccrual if they are past due as to
maturity or payment of principal or interest for a period of more than 90 days,
unless such loans are well-secured and in the process of collection. If a loan
or a portion of a loan is classified as doubtful or is partially charged off,
the loan is classified as nonaccrual. Loans that are on a current payment
status or past due less than 90 days may also be classified as nonaccrual if
repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance by the borrower, in accordance with the contractual terms
of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of the
recorded balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded balance at the contractual
interest rate. Cash interest receipts in excess of that amount are recorded as
recoveries to the allowance for loan losses until prior charge-offs have been
fully recovered.
Premises and Equipment: Premises and equipment are stated at cost, less
----------------------
accumulated depreciation and amortization. Depreciation and amortization
expenses are computed on a straight-line basis over the shorter of the estimated
useful lives of the assets or the lease terms.
F-10
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments in Limited Partnerships: The Bank owns approximately 20% and 30%
-----------------------------------
interests in two limited partnerships that own and operate affordable housing
projects. Investment in these projects serves as an element of the Bank's
compliance with the Community Reinvestment Act and the Bank receives tax
benefits in the form of deductions for operating losses and tax credits. The
tax credits may be used to reduce taxes currently payable or may be carried back
one year or forward twenty years to recapture or reduce taxes. The Bank uses
the equity method of accounting for the partnerships' operating results and tax
credits are recorded in the years they became available to reduce income taxes.
Intangible Asset: The premium paid to acquire the deposits of the Point Reyes
----------------
Station and Valley Ford branch offices of Bank of America was allocated to core
deposit intangible, which is being amortized over the estimated remaining life
of the related deposits.
Repurchase Agreements: The Bank enters into open-end repurchase agreements with
---------------------
certain customers that maintain substantial deposit account balances whereby the
customer can invest funds daily and the Bank agrees to repay those funds with
interest. The customer acquires a security interest in an individual fractional
portion of a pool of investment securities composed of U.S. Government or agency
obligations. The balances in these repurchase agreements are reflected as
short-term borrowings in the balance sheet.
Income Taxes: Provisions for income taxes are based on amounts reported in the
------------
statements of operations (after exclusion of non-taxable income such as interest
on state and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred taxes are computed using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are recognized for
deductible temporary differences and tax credit carryforwards, and then a
valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
Advertising: Advertising costs are charged to operations in the year incurred.
-----------
Net Income Per Share: Net income per share is computed by dividing net income by
--------------------
the weighted average number of common shares outstanding during the period,
after giving retroactive effects to stock dividends and stock splits. Net
income per share-assuming dilution is computed similar to net income per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. Included in the denominator is the dilutive effect of
stock options computed under the treasury method.
Comprehensive Income: Certain changes in assets and liabilities, such as
--------------------
unrealized gains and losses on available-for-sale securities, are reported as a
separate component of the equity section of the balance sheet, such items, along
with net income, are components of comprehensive income.
Off-Balance-Sheet Financial Instruments: In the ordinary course of business the
---------------------------------------
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
F-11
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statement of Cash Flows: For the purpose of presentation in the statement of
-----------------------
cash flows, cash and cash equivalents are defined as those amounts included in
the balance sheet caption "Cash and due from banks."
Operating Segments: The Bank adopted Financial Accounting Standards Board
------------------
Statement No. 131, Disclosures About Segments of an Enterprise and Related
Information, (SFAS No. 131) effective January 1, 1998. This statement
establishes standards for reporting information about segments in annual and
interim financial statements. SFAS No. 131 introduces a new model for segment
reporting called "Management approach". The management approach is based on the
way the chief operating decision maker organizes segments with a company for
making operating decisions and assessing performance. Reportable segments are
based on products and services, geography, legal structure, management structure
and any other manner in which management desegregates a company. Based on the
"management approach" model, the Bank has determined that its business is
comprised of a single operating segment and that SFAS No. 131, therefore, has no
impact on its financial statements.
Reclassification: Certain reclassifications have been made to the 1998
----------------
financial statements to conform to classifications used in 1999.
Recently Issued Accounting Standards: In June 1998, Statement of Financial
------------------------------------
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement No. 133), was issued. Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. Statement No. 137, issued June 1999,
defers the effective date of Statement No. 133 to January 1, 2001. The Bank
will adopt this Statement as of January 1, 2001 and has made no assessment of
the potential impact of adopting the Statement at this time.
NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash and due from banks include amounts the Bank is required to maintain to meet
certain average reserve and compensating balance requirements of the Federal
Reserve. The total requirement at December 31, 1999 and 1998 was $1,118,000 and
$1,008,000, respectively.
F-12
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE C--INVESTMENT SECURITIES
The amortized costs and approximate fair values of investment securities as of
December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1999:
Available-for-Sale
U.S. Treasury securities $ 152,900 $ 4,400 $ 148,500
U.S. Government agencies 29,691,500 $ 3,700 921,800 28,773,400
Municipal securities 13,709,800 2,600 674,500 13,037,900
Collateralized mortgage obligations 156,800 800 156,000
Mortgage-backed securities 1,658,400 75,400 1,583,000
Corporate securities 4,662,100 203,300 4,458,800
Federal Home Loan Bank stock 682,000 682,000
----------- -------- ---------- -----------
Total available-for-sale $50,713,500 $ 6,300 $1,880,200 $48,839,600
=========== ======== ========== ===========
Held-to-Maturity
Municipal securities $ 5,244,600 $ 3,200 $ 337,400 4,910,400
Mortgage-backed securities 1,480,900 30,700 1,450,200
----------- -------- ---------- -----------
Total held-to-maturity $ 6,725,500 $ 3,200 $ 368,100 $ 6,360,600
=========== ======== ========== ===========
December 31, 1998:
Available-for-Sale
U.S. Treasury securities $ 4,496,000 $ 56,500 $ 4,552,500
U.S. Government agencies 31,137,000 191,200 $ 41,000 31,287,200
Municipal securities 11,662,300 399,800 12,800 12,049,300
Collateralized mortgage obligations 1,923,600 7,200 1,916,400
Mortgage-backed securities 1,973,700 5,900 2,500 1,977,100
Corporate securities 5,206,300 5,800 43,200 5,168,900
Federal Home Loan Bank stock 474,400 474,400
----------- -------- ---------- -----------
Total available-for-sale $56,873,300 $659,200 $ 106,700 $57,425,800
=========== ======== ========== ===========
Held-to-Maturity
U.S. Government agencies $ 2,992,800 $ 14,100 $ 3,006,900
Municipal securities 5,230,000 92,700 5,322,700
Mortgage-backed securities 2,088,600 15,000 2,103,600
----------- -------- ---------- -----------
Total held-to-maturity $10,311,400 $121,800 $ $10,433,200
=========== ======== ========== ===========
</TABLE>
F-13
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE C--INVESTMENT SECURITIES (Continued)
The maturities of investment securities at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Securities Available-for-Sale Securities Held-to-Maturity
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Due within one year $ 502,300 $ 506,000
Due after one year through five years 32,989,500 31,973,900
Due after five years through ten years 7,751,400 7,456,700
Due after ten years 8,788,300 8,221,000 $6,725,500 $6,360,600
Equity securities 682,000 682,000
----------- ----------- ---------- ----------
$50,713,500 $48,839,600 $6,725,500 $6,360,600
=========== =========== ========== ==========
</TABLE>
The amortized cost and fair value of collateralized mortgage obligations and
mortgage-backed securities are presented by expected maturity and contractual
maturity, respectively, in the preceding table. Expected maturities differ from
contractual maturities because borrowers may have the right to call or repay
obligations without call or prepayment penalties.
Securities with an amortized cost of $6,752,200 and fair value of $6,594,300 at
December 31, 1999 and amortized cost of $3,660,700 and fair value of $3,734,400
at December 31, 1998 were pledged under state regulation to secure certain
public deposits. Total securities with an amortized cost of approximately
$3,837,400 and a fair value of $3,712,000 at December 31, 1999 and an amortized
cost of $499,000 and fair value of $511,300 at December 31, 1998 were pledged to
meet the requirements of the Federal Reserve and the U.S. Department of Justice.
Total securities collateralizing repurchase agreements with Bank customers had
an amortized cost of $17,710,400 and fair value of $17,139,200 at December 31,
1999 and amortized cost of $18,011,400 and fair value of $18,149,100 at December
31, 1998. Securities with an amortized cost of $2,999,100 and fair value of
$2,890,200 at December 31, 1999 and an amortized cost of $2,998,800 and a fair
value of $3,010,600 at December 31, 1998 were pledged as collateral for advances
from the Federal Home Loan Bank.
Proceeds from sales of investment securities available-for-sale during 1999,
1998 and 1997 were $15,506,700, $17,511,300 and $19,055,100, respectively.
Gross gains and losses on those sales were $85,600 and $47,700, respectively,
during 1999, gross gains were $51,700 during 1998 and gross gains and losses
were $34,700 and $108,600, respectively, during 1997.
F-14
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE D--LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Commercial $ 25,133,100 $27,040,800
Real estate--mortgage, including unamortized
purchase premiums of $172,500 and $67,900
in 1999 and 1998 74,923,000 57,024,900
Real estate--construction 12,585,900 10,472,200
Installment, net of unearned income of
$ 60,800 and $136,800 in 1999 and 1998 6,572,200 6,148,600
Other 1,005,900 954,500
------------ -----------
120,220,100 101,641,000
Less: Deferred loan fees and costs, net (311,500) (367,600)
Allowance for loan losses (1,596,500) (1,426,200)
------------ -----------
$118,312,100 $ 99,847,200
============ ============
</TABLE>
At December 31, 1999 and 1998, the amounts of impaired and nonaccrual loans were
immaterial. In addition, the Bank has no commitments to loan additional funds
to the borrowers of impaired or nonaccrual loans.
The maturity and repricing distribution of the loan portfolio at December 31,
1999 and 1998, follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Fixed rate loan maturities
Three months or less $ 940,200 $ 3,270,200
Over three months to twelve months 2,247,400 915,300
Over one year to five years 17,199,000 17,570,200
Over five years 10,544,900 6,615,200
Floating rate loans repricing
Quarterly or more frequently 31,715,400 30,233,300
Quarterly to annual frequency 24,281,400 25,046,900
Annually to every five years 29,316,000 14,741,400
Over five years 3,913,900 3,056,500
------------ -----------
120,158,200 101,449,000
Nonaccrual loans 61,900 192,000
------------ -----------
$120,220,100 $101,641,000
============ ============
</TABLE>
The activity in the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Beginning balance $1,426,200 $1,308,900 $1,068,400
Provision for loan losses 300,000 220,000 340,000
Loans charged off (145,800) (117,800) (114,400)
Recoveries 16,100 15,100 14,900
---------- ---------- ----------
Ending balance $1,596,500 $1,426,200 $1,308,900
========== ========== ==========
</TABLE>
F-15
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE E--PREMISES AND EQUIPMENT
Components of premises and equipment included the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 521,200 $ 521,200
Buildings 292,600 292,600
Leasehold and land improvements 686,400 686,400
Furniture, fixtures and equipment 2,079,200 1,900,300
---------- -----------
3,579,400 3,400,500
Less: accumulated depreciation (1,939,500) (1,597,500)
----------- -----------
$1,639,900 $1,803,000
========== ==========
NOTE F--TIME DEPOSITS
The maturities of time deposits at December 31, 1999 are as follows:
Maturing within one year $21,126,800
Maturing in one year to three years 2,328,400
Maturing in three to five years 116,000
-----------
$23,571,200
===========
</TABLE>
NOTE G--FEDERAL FUNDS CREDIT LINES
The Bank has uncommitted federal funds lines of credit agreements with other
banks. The maximum borrowings available under these lines amounted to
$14,600,000 and $10,600,000 at December 31, 1999 and 1998, respectively. The
Bank also has an uncommitted line of credit agreement with the Federal Home Loan
Bank of San Francisco for up to 25% of the Bank's assets. At December 31, 1999,
there were no borrowings outstanding under the agreements. At December 31, 1998,
$1,200,000 was outstanding under a federal funds line of credit.
NOTE H--LONG-TERM DEBT
The Bank has advances totaling $3,000,000 from the Federal Home Loan Bank at
December 31, 1999 and 1998. The advance of $3,000,000 is due at maturity on
July 10, 2000 and interest is due semi-annually at 6.14%. Investment securities
with an amortized cost of $2,999,100 and $2,998,800 and approximate fair value
of $2,890,200 and $3,010,600 at December 31, 1999 and 1998, respectively, were
pledged as collateral for advances. Specific commercial and mortgage loans,
with balances of approximately $15,583,300 and $14,009,400 at December 31, 1999
and 1998, respectively, were also pledged as collateral for advances.
F-16
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE I--OTHER INCOME AND EXPENSES
All other income accounts with balances exceeding 1% of revenues have been
disclosed in the Statement of Operations. Other expenses consisted of the
following for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Data processing $ 271,200 $ 235,100 $ 189,800
Professional services 238,500 204,700 140,800
Communications 236,800 204,600 196,200
Advertising 144,200 170,100 107,700
Stationery and supplies 158,500 142,000 176,700
Directors 129,600 113,700 121,600
Promotional expense 91,600 94,200 67,000
Life insurance 95,900 62,300 54,500
Insurance 45,000 47,500 43,200
Other (none exceeding 1% of revenues) 569,100 481,500 479,500
---------- ---------- --------
$1,980,400 $1,755,700 $1,577,000
========== ========== ==========
</TABLE>
NOTE J--INCOME TAXES
The components of income tax expense included in the statements of operations
were as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 805,100 $ 663,000 $ 612,900
State 351,500 281,800 233,900
Federal tax benefit realized from low-income
housing credits (120,300) (120,300) (120,200)
---------- --------- ---------
1,036,300 824,500 726,600
Deferred:
Federal (100,100) (97,400) (60,800)
State (25,200) (34,700) (11,500)
---------- --------- ---------
(125,300) (132,100) (72,300)
Tax benefit from exercised stock options recorded
as additional capital 111,600 320,100 71,800
---------- --------- ---------
$1,022,600 $1,012,500 $ 726,100
========== ========== =========
</TABLE>
F-17
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE J--INCOME TAXES (Continued)
A reconciliation of income taxes computed at the federal statutory rate of 34%
and the provision for income taxes for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Income tax at Federal statutory income tax rate $1,131,000 $1,063,700 $ 748,800
State franchise tax rate, less Federal income
tax effect 238,000 223,800 157,600
Tax exempt income on municipal obligations (207,400) (134,200) (40,700)
Partnership low-income housing credits (120,300) (120,300) (120,200)
Life insurance and nonqualified benefit plans, net (28,500) (28,800) (27,800)
Valuation allowance change 200 1,800 (2,900)
Other differences 9,600 6,500 11,300
---------- ---------- ---------
Provision for income taxes $1,022,600 $1,012,500 $ 726,100
========== ========== =========
The tax effects of temporary differences that give rise to the components of the
net deferred tax asset recorded as an other asset as of December 31 were as
follows:
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Deferred tax assets:
Unrealized losses on securities available-for-sale $771,100
Allowance for loan losses 581,900 $506,100 $470,000
Nonqualified benefit plans 195,500 156,900 123,900
Deferred loan fees 128,200 151,300 109,100
State franchise taxes 119,500 95,800 79,500
Interest on nonaccrual loans 6,500 10,700 6,200
Accrued expenses 18,500
Other 70,600 89,900 36,900
---------- ---------- --------
Total deferred tax assets 1,873,300 1,029,200 825,600
Valuation allowance for deferred tax assets (10,300) (10,100) (8,500)
---------- ---------- --------
Deferred tax assets recognized 1,863,000 1,019,100 817,100
Deferred tax liabilities:
FHLB dividends 31,200 20,000 9,500
Unrealized gains on securities available-for-sale 227,300 220,100
Branch acquisition costs 1,500 3,800
Other 19,000 36,100 27,200
---------- ---------- --------
Total deferred tax liabilities 50,200 284,900 260,600
---------- ---------- --------
Net deferred tax asset $1,812,800 $ 734,200 $556,500
========== ========== ========
</TABLE>
Amounts presented for the tax effects of temporary differences are based upon
estimates and assumptions and could vary from amounts ultimately reflected on
the Bank's tax returns. Accordingly, the variances from amounts reported for
prior years are primarily the result of adjustments to conform to the tax
returns as filed. A valuation allowance has been established to reduce deferred
tax assets to the amount that is more likely than not to be realized.
F-18
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE J--INCOME TAXES (Continued)
Income taxes payable were $59,000 and $202,900 at December 31, 1999 and 1998,
respectively. The income tax expense related to net investment gains incurred
in 1999 and 1998 was $15,600 and $21,300, respectively. The income tax benefit
associated with investment losses incurred in 1997 was $30,400.
NOTE K--EARNINGS PER SHARE
The following is the computation of basic and diluted earnings per share for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Net income $2,304,000 $2,115,900 $1,476,300
========== ========== ==========
Weighted-average common shares outstanding 1,428,098 1,369,532 1,295,716
========== ========== ==========
Earnings per share $ 1.61 $ 1.54 $ 1.14
========== ========== ==========
Diluted:
Net income $2,304,000 $2,115,900 $1,476,300
========== ========== ==========
Weighted-average common shares outstanding 1,428,098 1,369,532 1,295,716
Net effect of dilutive stock options - based on the
treasury stock method using average market price 62,851 94,354 97,468
---------- ---------- ----------
Weighted average common shares outstanding and
common stock equivalents 1,490,949 1,463,886 1,393,184
========== ========== ==========
Earnings per share - assuming dilution $1.55 $1.45 $1.06
===== ===== =====
</TABLE>
Options to purchase 2,800 shares of common stock at $22.50 per share and 110,000
at $25.13 were outstanding at December 31, 1999 and 1998 but were not included
in the computation of diluted EPS because the options exercise price was greater
than the average market price of the common shares. All options outstanding at
December 31, 1997 were included in the computation of diluted EPS.
NOTE L--EMPLOYEE BENEFIT PLAN
The Bank has a defined contribution retirement plan covering substantially all
of the Bank's employees. Bank contributions to the plan are made at the
discretion of the Board of Directors in an amount not to exceed the maximum
amount deductible under the profit sharing plan rules of the Internal Revenue
Service. Bank contributions vest over a four year period beginning after one
year of service. All employees, as defined by the plan, may elect to have a
portion of their compensation contributed to the plan in conformity with the
requirements of Section 401(k) of the Internal Revenue Code. The Bank made
contributions totaling $82,800, $66,400 and $62,200 in 1999, 1998 and 1997,
respectively.
F-19
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE M--COMMITMENTS AND CONTINGENT LIABILITIES
Postemployment Benefit Plans and Life Insurance Policies: During 1993, the Bank
--------------------------------------------------------
purchased single premium life insurance policies in connection with the
implementation of salary continuation and deferred compensation plans for three
key officers. The policies provide protection against the adverse financial
effects from the death of a key officer and provide income to offset expenses
associated with the plans. The officers are insured under the policies, but the
Bank is the owner and beneficiary. At December 31, 1999 and 1998, the cash
surrender value of these policies totaled approximately $1,555,700 and
$1,486,500, respectively.
The plans are unfunded and provide for the Bank to pay the officers specified
amounts for specified periods after retirement and allow the officers to defer a
portion of current compensation in exchange for the Bank's commitment to pay a
deferred benefit at retirement. If death occurs prior to or during retirement,
the Bank will pay the officer's beneficiary or estate the benefits set forth in
the plans.
At December 31, 1999 and 1998, liabilities recorded for the estimated present
value of future salary continuation and deferred compensation benefits totaled
approximately $475,900 and $380,100. Salary continuation benefits are paid if
the officers terminate employment prior to retirement. Deferred compensation is
vested as to the amounts deferred. In the event of death or under certain other
circumstances, the Bank is contingently liable to make future payments greater
than the amounts recorded as liabilities. Based on present circumstances, the
Bank does not consider it probable that such a contingent liability will be
incurred or that in the event of death, such a liability would be material after
consideration of life insurance benefits.
Lease Commitments: The Bank leases its premises under noncancelable operating
-----------------
leases. The lease for the Petaluma Main Office contains a five-year renewal
option requiring adjustments to the base rent for changing price indices. The
lease for the Administration Building requires the adjustment of the base rent
beginning in March 2000 for changing price indices, with a minimum annual
increase of 4 percent. The Bank also leases equipment under a noncancelable
operating lease. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Bank
Premises Equipment Total
-------- --------- ---------
<S> <C> <C> <C>
Year ended December 31:
2000 $239,900 $ 7,200 $247,100
2001 238,300 7,200 245,500
2002 192,400 3,600 196,000
2003 23,600 23,600
-------- --------
$694,200 $18,000 $712,200
======== ======= ========
</TABLE>
Lease costs included in occupancy expense totaled $286,400, $238,500, and
$231,200 for the years ended December 31, 1999, 1998 and 1997, respectively.
F-20
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE M--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Financial Instruments with Off-Balance-Sheet Risk: The Bank's financial
-------------------------------------------------
statements do not reflect various commitments and contingent liabilities which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments and contingent
liabilities are commitments to extend credit, credit card arrangements and
standby letters of credit. A summary of the Bank's commitments and contingent
liabilities at December 31, is as follows:
<TABLE>
<CAPTION>
Contractual Amounts
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Commitments to extend credit $31,421,900 $33,250,100
Credit card arrangements 2,587,200 2,283,200
Standby letters of credit 545,800 545,800
</TABLE>
Commitments to extend credit, credit card arrangements and standby letters of
credit all include exposure to some credit loss in the event of nonperformance
of the customer. The Bank's credit policies and procedures for credit
commitments and financial guarantees are the same as those for extension of
credit that are recorded on the balance sheet. Because these instruments have
fixed maturity dates, and because many of them expire without being drawn upon,
they do not generally present any significant liquidity risk to the Bank.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit evaluation
of the customer. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, certificates of deposits and income-
producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. All
letters of credit are for short-term guarantees with no guarantees extending for
more than one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending facilities to customers.
The Bank has not incurred any losses on its commitments in 1999, 1998 or 1997.
NOTE N--CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located in Petaluma and
its surrounding communities. All of the Bank's loans have been granted to
customers in the Bank's market area. General economic conditions or natural
disasters affecting the primary market area could affect the ability of
customers to repay loans and the value of real property used as collateral.
The concentrations of credit by type of loan are set forth in Note D. In
addition, the Bank has concentrations of real estate loans, which represented
33% of total loans as of December 31, 1999. The Bank, as a matter of policy,
does not extend credit to any single borrower or group of related borrowers on a
secured basis in excess of 25% of its unimpaired capital (shareholders' equity
plus the allowance for credit losses) and on an unsecured basis in excess of 15%
of its unimpaired capital. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank, upon extension of credit is based on management's
credit evaluation of the customer. Collateral held varies but may include
residential and commercial real property, marketable securities, accounts
receivable, inventory, property, plant and equipment and savings accounts.
F-21
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE N--CONCENTRATIONS OF CREDIT RISK (Continued)
The Bank places its cash investments primarily in debt securities backed by the
U.S. Government and its agencies and financial institutions. The Bank has
significant funds deposited with correspondent banks. At December 31, 1999 and
1998, the Bank had deposits in federally insured banks in excess of federally
insured limits by $8,688,700 and $3,116,900, respectively. While management
recognizes the inherent risks involved in such concentrations, these
concentrations provide the Bank with an effective and cost efficient means of
managing its liquidity position and item processing needs. Management closely
monitors the financial condition of their correspondent bank on a continuous
basis and believes the Bank's risk is negligible. The Bank also maintains
additional deposit accounts with other correspondent banks should management
determine that a change in its correspondent banking relationship would be
appropriate.
NOTE O--STOCK OPTION PLAN
At December 31, 1999, the Bank has a stock-based compensation plan consisting of
a fixed stock option plan which is described below. The Bank applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plan. Accordingly, no compensation cost has been recognized for its stock
option plan. Had compensation cost for the Bank's stock option plan been
determined based on the fair value at the grant dates for awards under this plan
consistent with the method of Statement of Financial Accounting Standards No.
123, the Bank's net income and earnings per share would have been reduced by an
immaterial amount in 1997. The Bank's net income and net income per share would
have been adjusted to the pro-forma amounts indicated below for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net income
As reported $2,304,000 $2,115,900
Pro forma 2,290,600 1,856,700
Net income
As reported 1.61 1.54
Pro forma 1.60 1.36
Net income per share--assuming dilution
As reported 1.55 1.45
Pro forma 1.54 1.27
</TABLE>
The Bank has a stock option plan under which incentive and nonstatutory stock
options, as defined under the Internal Revenue Code, may be granted. Options
representing 505,212 shares of the Bank's issued and outstanding no par value
common stock may be granted under the plan by the Board of Directors to
directors, officers and key, full-time employees at an exercise price not less
than the fair market value of the shares on the date of grant. Options may have
an exercise period of not longer than 10 years. Recently granted nonstatutory
stock options vested immediately.
F-22
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE O--STOCK OPTION PLAN (Continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Dividend yields 7.45% 7% 6%
Expected volatility 28.33% 29.02% 20.56%
Risk-free interest rates:
Incentive 5.94% 5.56% 6%
Nonstatutory 5.45%
Expected lives 10 years 10 years 10 years
A summary of stock option activity, adjusted to give effect
to stock dividends and splits follows:
Incentive Stock Option
-----------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Exercise Price Exercise Price
Per Share Shares Per Share Shares Per Share Shares
-------------- -------- -------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year $ 8.08 126,346 $ 7.61 131,184 $ 4.70 133,920
Options granted 18.50 5,000 22.50 2,800 11.31 51,450
Options exercised 5.32 (30,987) 3.50 (7,638) 3.93 (54,186)
Options canceled 9.67 (1,077)
------- ------- -------
Shares under option at
end of year 9.45 99,282 8.08 126,346 7.61 131,184
======= ========= =======
Options exercisable at
end of year 66,282 72,664 55,144
Weighted-average fair value
of options granted during
the year 2.63 3.46 3.32
</TABLE>
F-23
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE O--STOCK OPTION PLAN (Continued)
<TABLE>
<CAPTION>
Nonstatutory Stock Option
----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Exercise Price Exercise Price
Per Share Shares Per Share Shares Per Share Shares
-------------- --------------- ---------------- ----------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year $ 22.24 128,774 $ 5.30 70,004 $5.14 91,370
Options granted 25.13 110,000
Options exercised 5.30 (18,774) 5.30 (51,230) 4.39 (18,822)
Options cancelled 6.09 (2,544)
------- ------- -------
Shares under option at
end of year 25.13 110,000 22.24 128,774 5.30 70,004
======= ======= ======
Options exercisable at
end of year 110,000 128,774 70,004
Weighted-average fair
value of options granted
during the year 3.82
The following table summarizes
information about fixed stock
options outstanding at December
31, 1999:
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------
Weighted-Average Weighted-Average
Range of Number Remaining Exercise Price
Exercise Prices Outstanding Contractual Life Per Share
------------------ -------------- ---------------- ----------------
<S> <C> <C> <C>
$5.18 41,082 5.75 years $5.18
$11.31 to $18.50 55,400 8.03 years 11.96
$22.50 to $25.13 112,800 8.50 years 25.06
-------
$5.18 to $25.13 209,282 8.26 years 17.69
========
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-----------------------------------
Weighted-Average
Range of Number Exercise Price
Exercise Prices Exercisable Per Share
--------------- -------------- ----------------
<S> <C> <C>
$5.18 41,082 $5.18
$11.31 25,200 11.31
$22.50 to $25.13 110,000 25.13
-------
$5.18 to $25.13 176,282 18.51
========
</TABLE>
F-24
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE P--RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, executive officers,
significant shareholders and their affiliates (related parties). The following
is a summary of the aggregate activity involving related party borrowers at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Loans outstanding at beginning of year $ 2,163,100 $ 973,300
Loan disbursements 844,800 2,257,700
Loan repayments (1,299,400) (1,067,900)
----------- -----------
Loans outstanding at end of year $ 1,708,500 $ 2,163,100
=========== ===========
</TABLE>
At December 31, 1999 and 1998, commitments to related parties of approximately
$1,983,500 and $1,127,800, respectively, were undisbursed.
Deposits received from directors and officers totaled $1,669,900 and $2,834,800
at December 31, 1999 and 1998, respectively.
NOTE Q--REGULATORY MATTERS
Banking regulations limit the amount of cash dividends that may be paid without
prior approval of the Bank's regulatory agency. Cash dividends are limited to
the lesser of retained earnings, if any, or net income for the last three years,
net of the amount of any other distributions made to shareholders during such
periods. As of December 31, 1999, $4,491,300 is available for dividends.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory---and possible additional discretionary---actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Banks
category. The Banks actual capital amounts and ratios are also presented in the
table.
F-25
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE Q--REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------------------- -----------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- --------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $17,537 11.70% $11,991 greater than 8.0% greater than $14,989 greater than 10.0% greater than
Tier I Capital
(to Risk Weighted Assets) $15,941 10.64% $ 5,995 greater than 4.0% greater than $ 8,993 greater than 6.0% greater than
Tier I Capital
(to Risk Weighted Assets) $15,941 8.29% $ 7,690 greater than 4.0% greater than $ 9,613 greater than 5.0% greater than
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $14,723 11.01% $10,698 greater than 8.0% greater than $13,372 greater than 10.0% greater than
Tier I Capital
(to Risk Weighted Assets) $13,297 9.94% $ 5,349 greater than 4.0% greater than $ 8,023 greater than 6.0% greater than
Tier I Capital
(to Average Assets) $13,297 7.36% $ 7,223 greater than 4.0% greater than $ 9,029 greater than 5.0% greater than
</TABLE>
NOTE R--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet.
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bank as a
whole.
F-26
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE R--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bank's financial instruments are as follows at
December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 9,795,200 $ 9,795,200 $ 11,492,400 $ 11,492,400
Interest-bearing deposits
in other banks 296,500 296,500 775,300 775,300
Federal funds sold 3,300,000 3,300,000
Investment securities available-
for-sale 48,839,600 48,839,600 57,425,800 57,425,800
Investment securities held-
to-maturity 6,725,500 6,360,600 10,311,400 10,433,200
Loans, net 118,312,100 113,840,100 99,847,200 94,747,200
Cash surrender value of
life insurance policies 1,555,700 1,555,700 1,486,500 1,486,500
Accrued interest receivable 1,387,800 1,387,800 1,575,900 1,575,900
Financial liabilities:
Deposits 162,190,400 162,228,100 155,901,100 156,040,500
Federal funds purchased 1,200,000 1,200,000
Repurchase agreements 13,451,900 13,451,900 11,378,000 11,378,000
Short-term debt 3,000,000 3,000,000 3,000,000 3,000,000
Accrued interest payable 177,700 177,700 171,900 171,900
</TABLE>
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash, due from banks, interest-bearing deposits in other banks and federal
funds sold: The carrying amount is a reasonable estimate of fair value.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying amount of accrued interest receivable approximates
its fair value.
Loans, net: For variable-rate loans that reprice frequently and fixed rate
loans that mature in the near future, with no significant change in credit
risk, fair values are based on carrying amounts. The fair values for other
fixed rate loans are estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics
and are adjusted for the allowance for loan losses. The carrying amount of
accrued interest receivable approximates its fair value.
Cash surrender value of life insurance policies: The carrying amount
approximates its fair value.
F-27
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE R--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Deposits and repurchase agreements: The fair values disclosed for demand
deposits (for example, interest-bearing checking accounts and passbook
accounts) and repurchase agreements are, by definition, equal to the amount
payable on demand at the reporting date (that is, their carrying amounts). The
fair values for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.
Federal funds purchased and short-term debt: The carrying amount approximates
its fair value.
Off-balance sheet instruments: Off-balance sheet commitments consist of
commitments to extend credit, credit card arrangements and standby letters of
credit. The contract or notional amounts of the Bank's financial instruments
with off-balance-sheet risk are disclosed in Note M. Estimating the fair value
of these financial instruments is not considered practicable due to the
immateriality of the amounts of fees collected, which are used as a basis for
calculating the fair value, on such instruments.
NOTE S--AGREEMENT WITH GREATER BAY BANCORP
On March 21, 2000, the Bank announced that it had entered into a definitive
merger agreement with Greater Bay Bancorp (Bancorp). The agreement provides for
the Bancorp to acquire all of the issued and outstanding shares of common stock
of the Bank in exchange for shares of Bancorp common stock. The proposed merger
would result in the Bank becoming the wholly owned subsidiary of the Bancorp and
would be accounted for as a pooling of interests (i.e., the historical cost
basis of the Bank would be carried forward). The merger is subject to certain
conditions, including approval by the Bank's shareholders and regulatory
agencies. It is currently anticipated that the proposed merger will be
completed in the third quarter of 2000.
F-28
<PAGE>
BANK OF PETALUMA
SCHEDULE I
Securities
As of December 31, 1998
-----------------------
<TABLE>
<CAPTION>
Amortized Market
Cost Value
------------ ------------
<S> <C> <C>
U. S. Treasury Securities $ 4,496,000 $ 4,552,500
U. S. Agencies and Corporations Securities 40,115,700 40,291,200
Issued by States and Political Subdivisions 16,892,300 17,372,000
Other Securities 5,680,700 5,643,300
----------- -----------
Total Securities $67,184,700 $67,859,000
=========== ===========
Pledged Securities $25,169,900 $25,405,400
=========== ===========
NOTES:
1) The Bank does not have any securities in trading
accounts.
2) Amortized cost amounts are determined to be cost adjusted for
amortization of premiums or discounts.
3) Market value of securities is obtained from the
custodians of securities.
</TABLE>
F-29
<PAGE>
BANK OF PETALUMA
SCHEDULE I
Securities
As of December 31, 1999
-----------------------
<TABLE>
<CAPTION>
Amortized Market
Cost Value
------------- -------------
<S> <C> <C>
U. S. Treasury Securities $ 152,900 $ 148,500
U. S. Agencies and Corporations Securities 32,987,600 31,962,600
Issued by States and Political Subdivisions 18,954,400 17,948,300
Other Securities 5,344,100 5,140,800
----------- -----------
Total Securities $57,439,000 $55,200,200
=========== ===========
Pledged Securities $31,299,100 $30,335,700
=========== ===========
NOTES:
1) The Bank does not have any securities in trading
accounts.
2) Amortized cost amounts are determined to be cost adjusted for
amortization of premiums or discounts.
3) Market value of securities is obtained from the
custodians of securities.
</TABLE>
F-30
<PAGE>
BANK OF PETALUMA
SCHEDULE III
Loans & Lease Financing Receivables
Book Value (In thousands)
<TABLE>
<CAPTION>
12/31/99 12/31/98
--------- ---------
<S> <C> <C>
Loans secured by real estate:
Construction & Land Development $ 11,778 $ 9,874
Farmland 1,807 1,731
1-4 Family Residential Properties 3,326 3,036
Multi-family Residential Properties 642 657
Non-farm Non-residential Properties 67,327 46,703
Loans to Depository Institutions 0 0
Loans to Finance Agricultural Production 4,542 4,252
Commercial & Industrial Loans (all to US addresses) 21,166 27,425
Acceptances of Other Banks 0 0
Loans to Individuals:
Credit Cards & Related Plans 3,937 3,295
All Other Loans to Individuals 5,417 4,240
All Other Loans 166 496
LESS: Unearned Income (199) (436)
Total Loans & Lease, net of Unearned Income $ 119,909 $ 101,273
--------- ---------
NOTES:
1) Commercial Paper is included in Call Report Schedule RC-C
2) The Bank does not have any loans in trading accounts.
3) Loan totals are net before adjustment for Allowance for Loan Losses.
</TABLE>
F-31
<PAGE>
BANK OF PETALUMA
SCHEDULE IV
BANK PREMISES & EQUIPMENT
<TABLE>
<CAPTION>
Gross Accumulated Net
Book Value Depreciation Book Value
--------------------- ---------------------- ---------------------
<S> <C> <C> <C>
December 31, 1999:
-----------------
Land $ 521,200 $ 0 $ 521,200
Buildings 292,600 52,017 240,583
Furniture & Equipment 2,079,200 1,406,297 672,903
Leasehold & Land Improvements 686,400 481,186 205,214
--------------------- ---------------------- ---------------------
TOTAL $3,579,400 $1,939,500 $1,639,900
===================== ====================== =====================
December 31, 1998:
-----------------
Land $ 521,200 $ 0 $ 521,200
Buildings 292,600 42,300 250,300
Furniture & Equipment 1,900,300 1,114,900 785,400
Leasehold & Land Improvements 686,400 440,300 246,100
--------------------- ---------------------- ---------------------
TOTAL $3,400,500 $1,597,500 $1,803,000
===================== ====================== =====================
December 31, 1997:
-----------------
Land $ 521,200 $ 0 $ 521,200
Buildings 292,600 32,500 260,100
Furniture & Equipment 1,781,800 879,900 901,900
Leasehold & Land Improvements 674,000 398,400 275,600
--------------------- ---------------------- ---------------------
TOTAL $3,269,600 $1,310,800 $1,958,800
===================== ====================== =====================
</TABLE>
NOTES:
1) Gross book value is determined to be cost of item at acquisition date.
2) See Note A of Notes to Financial Statements --- Significant Accounting
Policies-
Premises & Equipment --- for a description of the Bank's depreciation
policies.
F-32
<PAGE>
BANK OF PETALUMA
SCHEDULE VI
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
12/31/99 12/31/98 12/31/97
---------- ---------- ----------
<S> <C> <C> <C>
Balance at end of previous period $1,426,200 $1,308,900 $1,068,400
Recoveries credited to allowance 16,100 15,100 14,900
Charges incident to mergers and acquisitions 0 0 0
Provision for loan losses 300,000 220,000 340,000
Loans charged off (145,800) (117,800) (114,400)
---------- ---------- ----------
Balance at end of period $1,596,500 $1,426,200 $1,308,900
Amount deducted for Federal income tax purposes $ 113,000 $ 136,000 $ 134,000
Maximum amount that could have been deducted
for Federal income tax purposes 113,000 136,000 134,000
Balance of allowance at end of period as reported
for Federal income tax purposes 182,000 198,000 167,000
</TABLE>
F-33
<PAGE>
ANNEX E
Bank of Petaluma
Quarterly Report on Form 10-QSB
For the Period Ended March 31, 2000
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
FDIC INSURANCE CERTIFICATE NUMBER 27064-4
BANK OF PETALUMA
----------------
(Exact Name of Bank as Specified in its Charter)
Incorporated Under the Laws of the State of California
------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)
68-0127077
----------
(IRS Employer Identification Number)
1360 Redwood Way, Petaluma, CA 94954
-------------------------------------
(Address of Principal Office)
(707) 765-2222
--------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 of the Exchange Act during the preceding 12 months, and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
April 28, 2000: 1,444,797 shares of Common Stock, no par value.
<PAGE>
BANK OF PETALUMA
BALANCE SHEETS
(In Thousands, except Share Amounts)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
------
Cash and due from banks $ 10,989 $ 10,092
Federal funds sold 8,100 3,300
Investment securities:
Held-to-maturity at amortized cost 6,657 6,726
Available-for-sale at fair value 53,102 48,840
Loans (held at cost which approximates market)
Commercial 26,292 25,133
Real estate-mortgage 75,822 74,923
Real estate-construction 9,881 12,586
Other 9,564 7,578
Less deferred loan fees (175) (311)
------------- ----------------
Total loans 121,384 119,909
Less allowance for possible loan losses (1,704) (1,597)
------------- ----------------
Net loans 119,680 118,312
Premises and equipment, net 1,573 1,640
Accrued interest receivable & other assets 6,077 5,789
------------- ----------------
TOTAL ASSETS $206,178 $194,699
============= ================
Liabilities & Shareholders' Equity
----------------------------------
Deposits:
Non-interest-bearing demand $ 37,814 $ 36,753
Savings and Interest-bearing demand 112,231 101,866
Time, $100,000 and over 9,784 6,896
Other time 15,784 16,675
------------- ----------------
Total deposits 175,613 162,190
Federal funds purchased & repurchase agreements 11,048 13,452
Other borrowings 3,000 3,000
Accrued interest payable and other liabilities 1,154 1,164
------------- ----------------
Total Liabilities 190,815 179,806
------------- ----------------
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized, none outstanding
Common Stock, no par value, 20,000,000 shares
authorized; 1,444,797 shares
issued and outstanding at March 31, 2000
and December 31, 1999, respectively 8,857 8,857
Retained Earnings 7,706 7,139
Accumulated other comprehensive income (1,200) (1,103)
------------- ----------------
Total shareholders' equity 15,363 14,893
------------- ----------------
TOTAL LIABILITIES & EQUITY $206,178 $194,699
============= ================
</TABLE>
2
<PAGE>
BANK OF PETALUMA
STATEMENTS OF OPERATIONS
(In thousands, except per share amount)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
--------------------- -----------------------
<S> <C> <C>
Interest income
---------------
Loans $ 2,745 $ 2,289
Investment securities 821 998
Federal funds sold & other 65 45
--------------------- -----------------------
Total interest income 3,631 3,332
Interest expense
----------------
Interest-bearing demand 42 38
Savings & money market 896 789
Time certificates of deposit 306 240
Federal funds purchased & repurchase agreements 156 139
--------------------- -----------------------
Total interest expense 1,400 1,206
--------------------- -----------------------
Net interest income 2,231 2,126
Provision for possible loan losses 85 75
--------------------- -----------------------
Net interest income after 2,146 2,051
provision
Other income
------------
Service charges 174 168
Other fee income 67 71
Net gain on securities 53
All other income 27 25
--------------------- -----------------------
Total other income 268 317
--------------------- -----------------------
Other expenses
--------------
Salaries and benefits 862 802
Occupancy & equipment 254 246
All other expense 490 493
--------------------- -----------------------
Total other expenses 1,606 1,541
--------------------- -----------------------
Pre-tax income 808 827
Income taxes 241 282
--------------------- -----------------------
Net income $ 567 $ 545
===================== =======================
Net income per share $0.39 $0.39
===================== =======================
Net income per share - assuming dilution $0.38 $0.37
===================== =======================
Weighted average shares outstanding 1,444,797 1,403,165
===================== =======================
Weighted average shares outstanding- assuming
dilution 1,506,012 1,483,918
===================== =======================
</TABLE>
3
<PAGE>
BANK OF PETALUMA
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Quarters ended March 31, 2000 & 1999 and years ended December 31, 1999 & 1998
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Gain/<Loss>
Comprehensive Common Stock Retained on AFS
Income Shares Amount Earnings Securities Total
--------------------------- --------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 1,395 $8,481 $5,008 $ 325 $13,814
Net income $2,304 2,304 2,304
Cash dividends of $0.12 per share (173) (173)
Stock options exercised 50 376 376
Changes in unrealized gain/<loss> (1428) (1,428) (1,428)
------------------- --------- ---------- ------------ ---------
Total comprehensive income $ 876
======
Balance, December 31, 1999 1,445 $8,857 $7,139 ($1,103) $14,893
Net income Jan 1 to Mar 31, 2000 $ 567 567 567
Changes in unrealized gain/<loss> (97) (97) (97)
Total comprehensive income (unaudited) $ 470
------------------- ------ -------- --------- ---------
Balance, March 31, 2000 (unaudited) 1,445 $8,857 $7,706 ($1,200) $15,363
======= ====== ======== ========= =========
</TABLE>
4
<PAGE>
BANK OF PETALUMA
STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 March 31, 1999
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net income $ 567 $ 545
Adjustments to reconcile net income to net
cash provided by operating activities:
Premium & discount on securities 15 72
Depreciation & amortization 93 87
Deferred loan fees (136) (96)
Provision for loan losses 85 75
Net change in Accrued interest receivable & other assets (209) 394
Net change in Cash surrender value of life insurance (17) (17)
Net change in Deferred taxes 0 (161)
Net change in Accrued interest payable & other liabilities (10) (98)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: 388 801
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
---------------------------------------
Net change in Federal Funds sold (4,800) (4,358)
Net change in Loans (1,317) (702)
Purchase of securities (4,501) (16,883)
Sale/maturity/call of securities 134 18,862
Purchases of equipment (26) (52)
Disposal of equipment 0 0
-------- --------
NET CASH USED IN INVESTING ACTIVITIES: (10,510) (3,133)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Issuance of common stock 0 73
Cash dividend on common stock 0 0
Net change in Deposits 13,423 3,534
Net change in Repurchase agreements (2,404) 1,037
Net change in Federal funds purchased 0 (1,200)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES: 11,019 3,444
-------- --------
CHANGE IN CASH & CASH EQUIVALENTS $ 897 $ 1,112
CASH & CASH EQUIVALENTS AT START OF YEAR $ 10,092 $ 12,268
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 10,989 $ 13,380
======== ========
OTHER CASH FLOW INFORMATION
---------------------------
Cash paid for interest $ 1,431 $ 1,206
Cash paid for income taxes 120 282
</TABLE>
5
<PAGE>
BANK OF PETALUMA
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
------------------------------
In the opinion of the Bank, the unaudited financial statements, prepared on the
accrual basis of accounting, contain all adjustments (consisting of only normal
recurring adjustments) which are necessary to present fairly the financial
position of the Company at March 31, 2000 and December 31, 1999 and the results
of operations for the three-month periods ended March 31, 2000 and March 31,
1999.
Certain information and footnote disclosures normally presented in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. The results of operations for the three-month period ended
March 31, 2000 are not necessarily indicative of the operating results for the
full year ending December 31, 2000.
Note 2 - Loans to Directors
---------------------------
In the ordinary course of business, the Bank has made loans to directors of the
Bank, which at March 31, 2000 amounted to approximately $1,640,000 and at
December 31, 1999 amounted to $1,709,000.
Note 3 - Commitments
--------------------
The Bank had outstanding standby letters of credit of approximately $608,000 as
of March 31, 2000 and $546,000 at December 31, 1999.
Note 4 - Earnings per Share and Dividends
-----------------------------------------
Net income per common share is computed using the weighted average number of
common shares outstanding during the period, after giving retroactive effects to
stock dividends and splits. Net income per share - assuming dilution is
computed similar to net income per share except that the denominator is
increased to include the number of additional shares that would have been
outstanding if the dilutive potential common shares had been issued. No
dividends were paid during the quarter ended March 31, 2000 or 1999.
Note 5 - Agreement With Greater Bay Bancorp
-------------------------------------------
On March 21, 2000, the Bank announced that it had entered into a definitive
merger agreement with Greater Bay Bancorp (Bancorp). The agreement provides for
the Bancorp to acquire all of the issued and outstanding shares of common stock
of the Bank in exchange for shares of Bancorp common stock. The proposed merger
would result in the Bank becoming the wholly owned subsidiary of the Bancorp and
would be accounted for as a pooling of interests (i.e., the historical cost
basis of the Bank would be carried forward). The merger is subject to certain
conditions, including approval by the Bank's shareholders and regulatory
agencies.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Management's discussion and analysis of the financial condition and results of
operations is designed to provide a better understanding of the significant
changes and trends related to the Bank's financial condition, liquidity and
capital resources. The following discussion should be read in conjunction with
the Financial Statements of the Bank and the Notes thereto included.
Overview of Changes in the Financial Statements
-----------------------------------------------
At March 31, 2000, the Bank's assets were $206,178,000, an increase of 5.9% from
$194,699,000 as of December 31, 1999. The Bank's net income for the three months
ended March 31, 2000 increased to $567,000 or $0.38 per diluted share as
compared to $545,000 or $0.36 per diluted share during the same period of 1999.
First quarter income for 2000 increased by 4.0% because of an increase in
interest income due to higher volume of loans and investments. Comprehensive
income for the first quarter of 2000, which includes unrealized holding losses
on securities classified as available for sale was $470,000.
Loans
-----
Outstanding total net loans averaged $119,610,000 for the period ended March 31,
2000 compared to $100,669,000 for the period ended March 31, 1999, an increase
of 18.8%. The Bank lends primarily to small and medium size businesses within
its markets, which are comprised of Sonoma and Marin Counties. A majority of
the Bank's loan portfolio consists of loans secured by commercial, industrial
and residential real estate.
Quality of Loans
----------------
Management has in place controls to maintain loan quality, including an ongoing
review of loans by an outside independent consultant. The Bank follows the
policy of discontinuing the accrual of interest income and reversing any accrued
and unpaid interest when the payment of principal is 90 days past due unless the
loan is both well-secured and in the process of collection.
The following table shows the amount of loans classified as non-accruing and
accruing interest but past due 90 days or more as to principal or interest as of
March 31, 2000 and March 31, 1999.
<TABLE>
<CAPTION>
March 31
----------------------
2000 1999
----- -----
(In thousands)
<S> <C> <C>
Non-accrual Loans $ 61 $ 98
Accruing Loans Past Due 90 Days or More 4 3
----- -----
Total $ 65 $ 101
===== =====
</TABLE>
7
<PAGE>
The Bank does not expect to sustain losses from any non-performing loans in
excess of that specifically provided for in the allowance for possible loan
losses.
Inherent in the lending function is the fact that loan losses will be
experienced and the risk of loss will vary with the type of loan extended and
the credit worthiness of the borrower. To reflect the estimated risk of loss
associated with its loan portfolio, additions are made to the Bank's allowance
for loan losses. As an integral part of this process, the allowance for possible
loan losses is subject to review and possible adjustment as a result of
regulatory examinations conducted by governmental agencies and through
management's assessment of risk. The Bank's entire allowance is a valuation
allocation: that is, it has been created by direct charges against operations
through the provision for possible loan losses.
The provision for possible loan losses charged against operations is based upon
actual net losses incurred plus the amount for other factors which, in
management's judgment, deserve recognition in estimating possible loan losses on
a quarterly basis. For the last several years, the Bank has contracted with an
independent loan review firm to evaluate overall credit quality and the adequacy
of the allowance for possible loan losses. Both internal and external
evaluations take into account the following: specific loan conditions as
determined by management: the historical relationship between charge-offs and
the level of the allowance; the estimated future loss in all significant loans;
known deterioration in concentrations of credit, certain classes of loans or
pledged collateral; historical loss experience based on volume and types of
loans; the results of the independent review of evaluation of the loan portfolio
quality conducted by or at the direction of Bank management or bank regulatory
agencies; trends in portfolio volume, maturity and composition; off-balance
sheet credit risk; volume and trends in delinquencies and non-accruals; lending
policies and procedures including those for charge-off, collection and recovery;
national and local economic conditions and their effects on specific local
industries; and the experience, ability and depth of lending management and
staff. These factors are essentially judgmental and may not be reduced to a
mathematical formula.
The table set forth below summarizes the changes in the allowance for loan
losses for the quarters ended March 31, 2000 and March 31, 1999.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(In thousands)
<S> <C> <C>
Allowance for loan losses at $1,597 $1, 426
beginning of period ------ -------
Charged-off loans:
Commercial 0 0
Real Estate-Construction 0 0
Real Estate-Mortgage 5 0
Installment 4 1
------ -------
Total Charge-offs $ 9 $ 1
------ -------
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
Recoveries:
Commercial $ 31 $ 0
Real Estate-Construction 0 0
Real Estate-Mortgage 0 13
Installment 0 0
------- -------
Total Recoveries 31 13
------- -------
Net Charged-off Loans $ (22) $ (12)
------- -------
Provision for Loan Losses 85 75
------- -------
Allowance at end of period $ 1,704 $ 1,513
======= =======
Loan Totals:
------------
Average Loans outstanding during
period, net $1l9,610 $100,669
Total Loans at end of period, net $119,680 $100,569
Loan Ratios:
-----------
Net Charge-offs to Average Loans, (0.02%) (0.01%)
net
Net Charge-offs to Total Loans,
net at end of period (0.02%) (0.01%)
Allowance for loan losses to
average net loans 1.42% 1.50%
Allowance for loan losses to Total
loans at end of period 1.42% 1.50%
Net Charge-offs to Allowance for
Loan Losses (1.29%) (0.79%)
Net Charge-offs to provision (25.88%) (16.00%)
</TABLE>
The Bank evaluates the allowance for possible loan losses based upon the
analysis of specific categories of loans. The adequacy of the allowance is
determinable only on an approximate basis, since estimates as to the magnitude
and timing of loan losses are not predictable because of the impact of external
events. Management then considers the adequacy of the allowance for possible
loan losses in relation to the total loan portfolio. It is management's view
that the allowance for possible loan losses of $1,704,000 or 1.42% of total
loans was adequate as of March 31, 2000.
9
<PAGE>
Liquidity Management
--------------------
Liquidity represents the ability of the Bank to meet the requirement of customer
borrowing needs as well as fluctuations in deposit flows.
Core deposits which include demand, savings and interest bearing demand
accounts, money market accounts and time deposits of less than $100,000, provide
a relatively stable funding base. Core deposits averaged $154,638,000 or 79.24%
of average assets for the three-month period ended March 31, 2000, as compared
to $149,895,000 or 79.45% of average total assets for the fiscal year ended
December 31, 1999. At March 31, 2000 core deposits were $165,829,000 or 80.43%
of total assets, compared to $155,294,000 or 79.76% of total assets at year-end
1999.
The Bank's principal sources of asset liquidity are cash and due from banks,
Federal Funds sold, short-term investments and securities classified as
available for sale. At March 31, 2000 these sources represented $72,191,000 or
41.11% of total deposits as compared to $62,232,000 or 38.37% at December 31,
1999. Additionally, the Bank has several unsecured lines of credit available
through correspondent banks totaling $14,600,000.
In the opinion of management, there are sufficient resources to meet liquidity
needs of the Bank at present and projected future levels.
Capital Resources
-----------------
Capital management is a continuous process of providing adequate capital for
current needs and anticipated future growth. Capital serves as a source of
funds for the acquisition of fixed and other assets and protects depositors
against potential losses. As the Bank's assets increase, so do its capital
requirements.
The FDIC and other federal banking agencies have risk-based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse agreements, which are reported as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and
credit equivalent amount of off-balance sheet items are multiplied by one of
several risk-adjusted percentages, which range from 0% for assets with low
credit risk, such as U.S. government securities, to 100% for assets with
relatively high credit risk, such as business loans.
A bank's risk-based capital ratios are obtained by dividing its qualifying
capital by its total risk-adjusted assets and off-balance sheet items. The
regulators measure risk-adjusted assets and off-balance sheet items against both
qualifying capital (the sum of Tier 1 capital and a limited amount of Tier 2
capital). Tier 1 capital consists of common stock, retained earnings, non-
cumulative perpetual preferred stock and minority interests in certain
subsidiaries, less most other intangible assets. Tier 2 capital may consist of
a limited amount of the allowance for possible loan and lease losses and certain
other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital are subject to certain other requirements and
limitations of federal banking agencies. Since December 31, 1992, the federal
banking agencies have required a minimum ratio of qualifying total capital to
risk adjusted assets and off-balance sheet items to 8%, and a minimum ratio of
Tier 1 capital to risk-adjusted assets and off-balance sheet items of 4%.
10
<PAGE>
In addition to the risk-based guideline, federal banking regulators require
banks to maintain a minimum amount of Tier 1 capital to total average assets of
3%. It is improbable that a bank with a 3% leverage ratio would receive the
highest rating by the regulators since a strong capital position is a
significant part of the regulators' rating. For all banks not rated in the
highest category, the minimum leverage ratio is at least 100 to 200 basis points
above the 3% minimum. Thus, the effective minimum leverage ratio, for all
practical purposes, is at least 4% or 5%. In addition to these uniform risk-
based capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
The following tables present the capital ratios for the bank as of March 31,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
(In Thousands) March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Equity Capital $15,363 $14,893
Allowance for Loan Losses 1,704 1,597
------- -------
Total $17,067 $16,490
======= =======
</TABLE>
<TABLE>
<CAPTION>
(In Thousands) March 31, 2000 December 31, 1999
-------------------------------- ---------------------------------
Amount Ratio Amount Ratio
----------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 16,516 10.48% $ 15,941 10.64%
Minimum Requirement 6,304 4.00% 5,995 4.00%
-------- ----- -------- -----
Excess $ 10,212 6.48% $ 9,946 6.64%
======== ===== ======== =====
Total Capital $ 18,220 11.56% $ 17,537 11.70%
Minimum Requirement 12,608 8.00% 11,989 8.00%
-------- ----- -------- -----
Excess $ 5,612 3.56% $ 5,548 3.70%
======== ===== ======== =====
Risk-adjusted Assets $157,596 $149,867
</TABLE>
In addition, FDICIA requires the regulators to improve capital standards to take
into account the risks other than credit risk. On September 14, 1993 the
federal banking agencies issued a proposed rule to take account of interest rate
risk in calculating risk-based capital. Although the joint agency promulgation
did not include any proposals relating to concentration of credit risk and risks
on nontraditional activities, the proposed rule included a supervisory model for
taking account of interest rate risk. Under that supervisory model,
institutions would report their assets, liabilities and off-balance sheet
positions in time bands based upon their remaining maturities. The banking
agencies would then calculate a net risk weighted interest rate exposure. If
the interest rate risk exposure was in excess of a certain threshold (1% of
assets), the institution
11
<PAGE>
could be required to hold additional capital proportionate to that excess risk.
Alternately, the agencies have proposed making interest rate risk exposure a
subjective factor in considering capital adequacy. Exposures would be measured
in terms of change in the present value of an institution's assets minus the
change in the present value of the liabilities and off-balance sheet positions
for and assumed 100 basis point parallel shift in market interest rates.
However, the banking agencies have proposed to let banks use their own internal
measurement of interest rate risk if it is declared adequate by examiners.
Results of Operations
---------------------
Three Months Ended March 31, 2000
---------------------------------
Compared with
-------------
Three Months Ended March 31, 1999
---------------------------------
Net income of $567,000 for the three months ended March 31, 2000, increased by
$22,000 or 4.0% as compared to $545,000 for the first quarter of 1999. Diluted
earnings per share was $0.38 for first quarter 1999 compared to $0.36 for first
quarter of 1999.
The average balance of interest earning assets during the three months ended
March 31, 2000, was $178,234,000, a 5.2% increase compared to the period ended
March 31, 1999. This is primarily due to increases in loan and investment
volume. The Bank's average yield on earning assets was 8.17% compared to 7.98%
during the comparable period of 1999, attributable to increases in the prime
rate during 1999 and 2000. Interest income increased $299,000 or 9.0% for the
three months ended March 31, 2000 compared to the same 1999 period due to
overall growth of the Bank.
Average deposits for the Bank for the three months ended March 31, 2000 were
$164,109,000, a $9,656,000 or 6.3% increase compared to the period ended March
31, 1999. The average cost of funds for the three months ended March 31, 2000
was 3.94% as compared to 3.48% for the same period ended 1999. This increase is
a result of the rise in market interest rates. Interest expense for the period
ended March 31, 2000 was $1,400,000 as compared to $1,206,000 for the same
period of 1999. This $194,000 increase or 16.09% is due to increased volume and
an increase in interest rates. Net interest income for the period ended March
31, 2000 was $2,231,000 as compared to $2,126,000 for the same period of 1999,
an increase of $105,000 or 4.94%. The net interest margin as a percent of
average earning assets was 5.02% for the first quarter of 2000 compared to 5.09%
in the same period of 1999.
Net loan recoveries for the three months ended March 31, 2000 amounted to
$22,000 compared to $12,000 for the same period of 1999. The Bank provided
$85,000 to the allowance for loan losses during the three months ended March 31,
2000, an increase of $10,000 or 13.3% over the same period in 1999. The
allowance for loan losses to total loans was 1.42% at March 31, 2000 compared to
1.50% at March 31, 1999.
Total other income, excluding gains on sale of investments, was $268,000 for the
period ended March 31, 2000 as compared to $264,000 for the same period of 1999,
an increase of $4,000 or 1.5%. Income from service charges in first quarter of
2000 increased by $6,000 from 1999. Gains on securities sold or called in the
first quarter of 1999 totaled $53,000 and no gains or losses were recorded in
2000.
Salaries and benefits expense for the three months ended March 31, 2000 was
$862,000, an increase of $60,000 or 7.5% increase over the same 1999 period.
The Bank's full-time
12
<PAGE>
equivalent employees at March 31, 2000 were 78, compared with 68 at March 31,
1999, an increase of 14.7%. This increase was due to the overall growth of the
bank. Total other expenses, excluding salaries and benefits, for the three
months ended March 31, 2000 was $744,000, a $5,000 or 0.7% increase from the
comparable 1999 period.
Applicable income taxes were $241,000 for the three months ended March 31, 2000
as compared to $282,000 for the same period of 1999. This $41,000 decrease is a
result of the increased investment in non-taxable municipal securities during
1999.
Return on Assets and Return on Equity
-------------------------------------
The following table compares the Bank's Return on Average Assets ("ROA") and
Return on Average Equity ("ROE") for the quarter ended March 31, 2000 and March
31, 1999:
<TABLE>
<CAPTION>
(Post-tax) March 31, 2000 March 31, 1999
--------------- --------------
<S> <C> <C>
ROA 1.16% 1.20%
ROE 15.33% 15.70%
</TABLE>
Inflation
---------
It is Management's opinion that the effects of inflation on the Bank for the
quarters ended March 31, 2000 and March 31, 1999 are not material.
Proposed Merger With Greater Bay Bancorp
----------------------------------------
The Bank of Petaluma has entered into a definitive agreement to merge with
Greater Bay Bancorp.
The terms of the agreement provide for the shareholders of Bank of Petaluma to
receive shares of Greater Bay Bancorp stock. Bank of Petaluma currently has
approximately 1.4 million shares of common stock outstanding. If the average
closing price of Greater Bay Bancorp common stock is between $37.91 and $46.34,
each share of Bank of Petaluma stock will be exchanged for 0.685 shares of
Greater Bay Bancorp stock.
If the average closing price of Greater Bay Bancorp common stock is greater than
$46.34, the exchange ratio will decrease by dividing the average closing price
into $31.74 plus one-third of the amount by which the average closing price
exceeds $46.34.
If the average closing price of Greater Bay Bancorp common stock is less than
$37.91, Greater Bay Bancorp may elect to exercise a top up option. In that
case, the exchange ratio will equal the quotient obtained by dividing $25.97 by
the average closing price of Greater Bay Bancorp stock. If Greater Bay Bancorp
does not elect the top up option, Bank of Petaluma may either terminate the
merger agreement or accept an exchange ratio of 0.685.
The merger is subject to certain conditions, including the approval of the
shareholders of Bank of Petaluma and regulatory approval. Upon consummation of
the merger, former Bank of Petaluma shareholders will own approximately 4.7% of
Greater Bay Bancorp's outstanding shares, assuming completion of the previously
announced Greater Bay Bancorp mergers with Coast Bancorp and Bank of Santa
Clara.
13
<PAGE>
Interest Rates and Differentials
The following table sets forth information concerning interest-earning assets
and interest-bearing liabilities and respective average yields or rates, the
amount of interest income or interest expense, the net interest margin and the
net interest spread for the years indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
(In Thousands)
--------------------------------------------------------------------------------------
2000 1999
------------------------------------------ --------------------------------------
Average Interest Average Average Interest Average
Balance Amount Yield Balance Amount Yield
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Taxable investment securities $ 41,308 $ 632 6.14% $ 56,028 $ 860 6.23%
Non-taxable Municipal securities 14,642 189 5.18% 10,995 138 5.09%
Federal Funds sold 4,447 65 5.86% 3,441 45 5.30%
Loans, net 117,837 2,745 9.34% 98,944 2,289 9.38%
---------------------------- ---------------------------
Total earning assets $ 178,234 $ 3,631 8.17% $ 169,408 $ 3,332 7.98%
============================ ===========================
Interest-bearing liabilities
Deposits:
Interest-bearing transaction $ 13,790 $ 42 1.22% $ 12,246 $ 38 1.24%
Savings 88,481 896 4.06% 91,126 789 3.47%
Time 25,476 306 4.82% 20,701 240 4.65%
Repurchase agreements 11,872 110 3.72% 11,314 85 3.01%
Federal Funds purchased - - 500 6 4.81%
Other borrowings 3,000 46 6.15% 3,000 48 6.42%
---------------------------- ---------------------------
Total interest-bearing
liabilities $ 142,619 $ 1,400 3.94% $ 138,887 $ 1,206 3.48%
============================ ===========================
Net interest income & Margin $ 2,231 5.02% $ 2,126 5.09%
Net interest spread 4.23% 4.49%
</TABLE>
14
<PAGE>
The Bank's net yield on interest-earning assets and interest-bearing liabilities
are affected by changes in the rates earned or paid, and in the volume of the
interest-earning assets or interest-bearing liabilities. The impact of changes
in volume and rates have been allocated to rate.
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
Compared to Three Months Ended
March 31, 1999
(In Thousands)
------------------------------------------
Volume Rate Net Change
------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in interest income
Taxable investment securities $ (229) $ 1 $ (228)
Non-taxable municipal securities 46 5 51
Federal Funds sold 13 7 20
Loans, net 443 13 456
------------------------------------------
Total interest income $ 274 $ 25 $ 299
==========================================
Increase (decrease) in interest expense
Interest-bearing transaction accounts 5 (1) 4
Savings deposits (23) 130 107
Time deposits 56 10 66
Repurchase agreements 4 21 25
Federal Funds purchased (6) 0 (6)
Other borrowings 0 (2) (2)
------------------------------------------
Total interest expense $ 36 $ 158 $ 194
==========================================
Increase (decrease) in net interest income $ 238 $ (133) $ 105
==========================================
</TABLE>
15
<PAGE>
Signatures
----------
Under the requirements of the Securities Exchange Act of 1934, the Bank has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Bank of Petaluma
/s/ Walter E. Bragdon May 5, 2000
--------------------- -----------
Walter E. Bragdon Date
President & Chief Executive Officer
/s/ Dennis E. Kelley May 4, 2000
-------------------- -----------
Dennis E. Kelley Date
Senior Vice President and Chief Financial Officer
16
<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, joint 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 among Greater Bay
Bancorp, GBB Merger Corp. and Bank of Santa Clara dated January
26, 2000./1/
2.2 Agreement and Plan of Reorganization by and among Greater Bay
Bancorp, DKSS Corp. and Bank of Petaluma dated March 21, 2000./11/
4.1 Rights Agreement./3/
4.2 Junior Subordinated Indenture dated as of March 31, 1997 between
Greater Bay Bancorp and Wilmington Trust Company, as Trustee./4/
4.3 Officers' Certificate and Company Order, dated March 31, 1997./4/
4.4 Certificate of Trust of GBB Capital I./5/
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997./5/
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./4/
4.6.2 Appointment of Successor Administrative Trustee and First
Amendment to Amended and Restated Agreement./6/
4.7 Trust Preferred Certificate of GBB Capital I./4/
4.8 Common Securities Certificate of GBB Capital I./4/
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington
Trust Company, dated as of March 31, 1997./4/
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997./4/
4.11 Form of Subordinated Debentures./7/
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp
dated as of November 22, 1996./5/
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp./5/
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997./4/
4.15 Indenture between Greater Bay Bancorp and Wilmington Trust
Company, as Debenture Trustee, dated as of August 12, 1998./8/
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./8/
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./8/
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./8/
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./8/
4.22 Series B Capital Securities Guarantee Agreement between Greater
Bay Bancorp and Wilmington Trust Company, dated as of November 27,
1998./6/
4.23 Registration Rights Agreement between Greater Bay Bancorp and The
Leo K. W. Lum PRB Revocable Trust dated May 8, 1998./9/
4.24 Securities Purchase Agreement, dated December 21, 1999, between
Greater Bay Bancorp and the investors identified therein./10/
4.25 Registration Rights Agreement, dated December 22, 1999, between
Greater Bay Bancorp and the investors identified therein./10/
4.26 Securities Purchase Agreement, dated March 22, 2000 between
Greater Bay Bancorp and the investors identified therein./12/
4.27 Registration Rights Agreement, dated March 23, 2000, between
Greater Bay Bancorp and the investors identified therein./12/
4.28 Amended and Restated Declaration of Trust of GBB Capital III,
dated as of March 23, 2000./2/
4.29 Indenture, dated as of March 23, 2000, between Greater Bay Bancorp
and The Bank of New York, as trustee./2/
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
4.30 Guarantee Agreement, dated as of March 23, 2000, by and between
Greater Bay Bancorp and The Bank of New York, as trustee./2/
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.
23.1 Consent of PricewaterhouseCoopers LLP for Greater Bay Bancorp.
23.2 Consent of Richardson & Company for Bank of Petaluma.
23.3 Consent of Linda M. Iannone (included in Exhibit 5.1).
23.4 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit
8.1).
24.1 A power of attorney is set forth on the signature page of the
Registration Statement.
99.1 Form of Bank of Petaluma Proxy.
</TABLE>
--------
1. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on February 3, 2000.
2. Incorporated by reference from Greater Bay Bancorp's Quarterly Report on
Form 10-Q filed with the SEC on May 12, 2000.
3. Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed with
the SEC on November 25, 1998.
4. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K dated June 5, 1997.
5. Incorporated by reference from Greater Bay Bancorp's Registration Statement
on Form S-1 (File No. 333-22783) dated March 5, 1997.
6. Incorporated by reference from Greater Bay Bancorp's Annual Report on Form
10-K filed with the SEC on February 17, 1999.
7. Incorporated herein by reference from Exhibit 1 of Cupertino National
Bancorp's Form 8-K filed with the SEC on October 25, 1995.
8. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on August 28, 1998.
9. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on May 20, 1998.
10. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on December 28, 1999.
11. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on March 22, 2000.
12. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on March 24, 2000.
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
II-3
<PAGE>
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
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.
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 June 26, 2000.
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 alone, 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 June 26, 2000
____________________________________ Executive Officer
David L. Kalkbrenner (Principal Executive
Officer)
/s/ Steven C. Smith Executive Vice President, June 26, 2000
____________________________________ Chief Administrative
Steven C. Smith Officer and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
/s/ George R. Corey Director June 26, 2000
____________________________________
George R. Corey
/s/ John M. Gatto Director June 26, 2000
____________________________________
John M. Gatto
/s/ John J. Hounslow Director June 26, 2000
____________________________________
John J. Hounslow
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James E. Jackson Director June 26, 2000
____________________________________
James E. Jackson
/s/ Stanley A. Kangas Director June 26, 2000
____________________________________
Stanley A. Kangas
/s/ Rex D. Lindsay Director June 26, 2000
____________________________________
Rex D. Lindsay
Director
____________________________________
George M. Marcus
/s/ Duncan L. Matteson Director June 26, 2000
____________________________________
Duncan L. Matteson
/s/ Rebecca Q. Morgan Director June 26, 2000
____________________________________
Rebecca Q. Morgan
/s/ Glen McLaughlin Director June 26, 2000
____________________________________
Glen McLaughlin
/s/ Dick J. Randall Director June 26, 2000
____________________________________
Dick J. Randall
Director
____________________________________
Donald H. Seiler
/s/ Warren R. Thoits Director June 26, 2000
____________________________________
Warren R. Thoits
/s/ James C. Thompson Director June 26, 2000
____________________________________
James C. Thompson
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
2.1 Agreement and Plan of Reorganization by and among Greater Bay
Bancorp, GBB Merger Corp. and Bank of Santa Clara dated January
26, 2000./1/
2.2 Agreement and Plan of Reorganization by and among Greater Bay
Bancorp, DKSS Corp. and Bank of Petaluma dated March 21, 2000./11/
4.1 Rights Agreement./3/
4.2 Junior Subordinated Indenture dated as of March 31, 1997 between
Greater Bay Bancorp and Wilmington Trust Company, as Trustee./4/
4.3 Officers' Certificate and Company Order, dated March 31, 1997./4/
4.4 Certificate of Trust of GBB Capital I./5/
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997./5/
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./4/
4.6.2 Appointment of Successor Administrative Trustee and First
Amendment to Amended and Restated Agreement./6/
4.7 Trust Preferred Certificate of GBB Capital I./4/
4.8 Common Securities Certificate of GBB Capital I./4/
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington
Trust Company, dated as of March 31, 1997./4/
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997./4/
4.11 Form of Subordinated Debentures./7/
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp
dated as of November 22, 1996./5/
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp./5/
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997./4/
4.15 Indenture between Greater Bay Bancorp and Wilmington Trust
Company, as Debenture Trustee, dated as of August 12, 1998./8/
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./8/
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./8/
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./8/
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./8/
4.22 Series B Capital Securities Guarantee Agreement between Greater
Bay Bancorp and Wilmington Trust Company, dated as of November 27,
1998./6/
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
4.23 Registration Rights Agreement between Greater Bay Bancorp and The
Leo K. W. Lum PRB Revocable Trust dated May 8, 1998./9/
4.24 Securities Purchase Agreement, dated December 21, 1999, between
Greater Bay Bancorp and the investors identified therein./10/
4.25 Registration Rights Agreement, dated December 22, 1999, between
Greater Bay Bancorp and the investors identified therein./10/
4.26 Securities Purchase Agreement, dated March 22, 2000 between
Greater Bay Bancorp and the investors identified therein./12/
4.27 Registration Rights Agreement, dated March 23, 2000, between
Greater Bay Bancorp and the investors identified therein./12/
4.28 Amended and Restated Declaration of Trust of GBB Capital III,
dated as of March 23, 2000./2/
4.29 Indenture, dated as of March 23, 2000, between Greater Bay Bancorp
and The Bank of New York, as trustee./2/
4.30 Guarantee Agreement, dated as of March 23, 2000, by and between
Greater Bay Bancorp and The Bank of New York, as trustee./2/
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.
23.1 Consent of PricewaterhouseCoopers LLP for Greater Bay Bancorp.
23.2 Consent of Richardson & Company for Bank of Petaluma.
23.3 Consent of Linda M. Iannone (included in Exhibit 5.1).
23.4 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit
8.1).
24.1 A power of attorney is set forth on the signature page of the
Registration Statement.
99.1 Form of Bank of Petaluma Proxy.
</TABLE>
--------
1. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on February 3, 2000.
2. Incorporated by reference from Greater Bay Bancorp's Quarterly Report on
Form 10-Q filed with the SEC on May 12, 2000.
3. Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed with
the SEC on November 25, 1998.
4. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K dated June 5, 1997.
5. Incorporated by reference from Greater Bay Bancorp's Registration Statement
on Form S-1 (File No. 333-22783) dated March 5, 1997.
6. Incorporated by reference from Greater Bay Bancorp's Annual Report on Form
10-K filed with the SEC on February 17, 1999.
7. Incorporated herein by reference from Exhibit 1 of Cupertino National
Bancorp's Form 8-K filed with the SEC on October 25, 1995.
8. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on August 28, 1998.
9. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on May 20, 1998.
10. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on December 28, 1999.
11. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on March 22, 2000.
12. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on March 24, 2000.
