UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File No. 2-76003
BAY AREA BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2779021
(State or other jurisdiction of IRS Employer
incorporation or organization) (Identification No.)
900 Veterans Boulevard, Redwood City, CA 94063
(Address of principal executive office (Zip Code)
(415) 367-1600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. YES X NO
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 15, 1997: $13,939,827.
Number of shares of Common Stock outstanding at March 15, 1997: 844,838
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security
Holders
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related
Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
SIGNATURES
<PAGE>
PART I
Item 1. Business.
Certain statements in this Annual Report on Form 10-K include
forward-looking information within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the "safe harbor" created by those sections.
These forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors: significant increases in competitive pressure
in the banking industry; changes in the interest rate environment which reduce
margins; general economic conditions, either nationally or regionally, less
favorable than expected, resulting in, among other things, a deterioration in
credit quality and an increase in the provision for possible loan losses;
changes in the regulatory environment; changes in business conditions,
particularly in San Mateo County; asset/liability matching risks and liquidity
risks; changes in the laws and regulations regarding ATM fees, which reduce
significantly the Bank's income from ATM service fees; and changes in the
securities markets.
(a) General
Bay Area Bancshares, formerly known as Area Financial Corp (the
"Company"), is a California corporation and bank holding company which was
incorporated on October 22, 1981. Bay Area Bank (the "Bank") was organized as a
California banking corporation in 1979 and, through a reorganization in 1982,
became a wholly owned subsidiary of the Company. The Bank is the only active
entity affiliated with the Company. It is a full service commercial bank
primarily serving Redwood City and San Carlos, California.
(b) Executive Officers of the Registrant.
Mr. Robert R. Haight, 68, has served as the Company's President
and Chief Executive Officer since May, 1991. Mr. Haight is a director of the
Company and the Bank. He is the owner and founder of Woodside Road Insurance
Company in Redwood City. Mr. Haight graduated from the University of California
at Berkeley in 1952.
Mr. John O. Brooks, 56, began his position as President/Chief Executive
Officer and Director of Bay Area Bank and Chief Operating Officer of Bay Area
Bancshares on November 2, 1992. In 1995 he was elected to also serve as a
director of Bay Area Bancshares. He has 33 years of experience in the banking
industry. From 1990 to 1992, he was President and CEO of Heritage Oaks Bank in
Paso Robles. From 1987 to 1990, he was President/CEO at the Bank of Pleasanton
and from 1980 to 1987 he held the same position at Foothill Bank in Mountain
View, Ca. Mr. Brooks is currently involved in local Rotary groups, serves on the
Boards of Directors of the Sequoia YMCA, Peninsula Outreach Programs, IBAA State
Chapter, and is a member of the Community Bankers Association, American Bankers
Association, and the honor society, Beta Gamma Sigma.
Mr. Anthony J. Gould, 35, has been with Bay Area Bank since 1988. He
currently serves as the Chief Financial Officer of the Company and Senior Vice
President and Chief Financial Officer of the Bank. Prior to his employment at
the Bank, Mr. Gould was Controller of Old Stone Bank of California and an
auditor at Deloitte and Touche, Certified Public Accountants, in Minneapolis,
Minnesota. He successfully completed the uniform Certified Public Accountant's
Examination in 1988. Mr. Gould received his MBA in Finance from Cal
State-Hayward in 1992 and a BA in Business Administration from The University of
Wisconsin - Eau Claire in 1984.
1
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Frank M. Bartaldo, Jr., 48, has been with Bay Area Bank since 1986. He
currently serves as Executive Vice President and Senior Banking Officer of the
Bank. In February 1996, Mr. Bartaldo was elected to serve as a director of the
company's sole subsidiary, Bay Area Bank. Before his employment at Bay Area
Bank, Mr. Bartaldo was a partner in a mortgage banking business and prior to
that he was employed for eight years at Wells Fargo Bank. Mr. Bartaldo received
his BS in Business Administration from California State University at Chico in
1971.
Mark V. Schoenstein, 40, has been with Bay Area Bank since May, 1988.
He currently serves as Senior Vice President, Construction Loan Department.
Prior to joining the Bank, Mr. Schoenstein worked two years at Glendale Federal
in its Construction Loan Department and worked in construction management prior
to that. Mr. Schoenstein is a graduate of the Pacific Coast Banking School
(1996), holds a BA in History from San Francisco State University (1982) and is
a licensed California general contractor.
(c) Bay Area Bank - Company Subsidiary.
General Banking Services
The Bank provides a wide range of commercial banking services to
individuals, professionals and small to medium-sized businesses. The services
provided include those typically offered by commercial banks, such as:
interest-bearing and noninterest-bearing checking accounts, savings and time
deposit accounts, business and personal loans, collection services, safe
depository facilities, funds transfers, the issuance of money orders, cashiers
checks, and the sale of travelers' checks. The Bank also operates a network of
off-site Automated Teller Machines (ATMs). The Bank operated Mortgage Department
which was closed in February of 1997.
The Bank does not generally provide international banking or trust
services but has arranged for its correspondent banks to offer those and other
services to its customers.
Individuals and small to medium-sized businesses form the core of the
Bank's customer and deposit base. In order to attract these types of customers,
the Bank offers extensive personalized contact, specialized services and banking
convenience, including extended banking hours.
The Bank is not a member of the Federal Reserve System. However, the
deposits of each of its depositors are insured up to $100,000 by the Bank
Insurance Fund which is managed by the Federal Deposit Insurance Corporation
(the "FDIC").
The Bank's business is not seasonal with the exception of ATM revenues,
which are highest in the summer months.
Existing Locations
The Bank conducts business from its principal office located at 900
Veterans Boulevard, Redwood City, California. One other location in Redwood City
houses the Bank's data processing and accounting activities. See "Item
2-Properties". The Bank also operates 54 (as of December 31, 1996) automated
teller machines (ATMs) at 39 additional locations in California.
Deposits
Most of the Bank's deposits are obtained from individuals,
professionals and small to medium-sized businesses. As of December 31, 1996, the
Bank had a total of approximately 5,631 accounts consisting of 1,516
noninterest-bearing demand deposit (checking) accounts with an
2
<PAGE>
average balance of approximately $23,599 each; 3,057 savings, interest-bearing
demand, and money market accounts with an average balance of approximately
$50,044 each; and 1,058 certificates of deposit, IRAs and Keoghs with an average
balance of approximately $19,325. See "Description of Business - Selected
Statistical Information - Deposits and Time Deposits."
The Bank has a local corporate customer whose total deposit
relationship comprised approximately 8.2% of the Bank's total deposit balances
at 12/31/96. This customer has never borrowed from the Bank and the funds have
historically been held in a money market deposit account. Bank management
believes that the deposit relationship is stable. Given the Bank's ability to
raise cash through taking on additional deposits, using its available credit
facilities, and the sale of liquid assets, the loss of any one or a few
depositors would not, in the opinion of management, have a material adverse
effect on the business of the Bank.
Lending Activities
The Bank concentrates its lending activities primarily in four areas:
1) business loans, 2) short-term real estate loans, with a particular emphasis
on providing loans to small to medium-sized businesses, 3) construction lending
and 4) consumer/installment loans. As of December 31, 1996 these four loan
categories accounted for approximately 29%, 49%, 16% and 6%, respectively, of
the Bank's gross loan portfolio. The interest rates charged for the various
loans made by the Bank vary with the degree of risk and size and maturity of the
loans involved and are generally affected by competition, governmental
regulation and current money market rates. As of December 31, 1996 the Bank had
gross loans outstanding of $68,505,000 and undisbursed loan commitments of
approximately $36,251,000.
For borrowers desiring loans in excess of the Bank's lending limits,
the Bank may make such loans on a participation basis, with its correspondent
banks taking the amount of the loans which are in excess of the Bank's lending
limits. In other cases, the Bank may refer such borrowers to larger banks or
lending institutions.
The Bank's business activity is primarily with customers located within
San Mateo County. Although management of the Bank attempts to keep the loan
portfolio diversified, a significant portion of the loan portfolio is dependent
upon the real estate economic sector. If the local real estate sector were to
experience a substantial economic decline, it could have a material detrimental
effect on the performance of the Bank's loans.
In an effort to dilute the potential effect of such an event, the Bank
has several precautionary measures in place. Generally, the Bank's loans are
secured by real estate, stock or other assets. Loans are based on the borrowers'
established integrity, historical cash flow, and willingness and ability to
perform on commitments. The Bank's policy is to protect the soundness of the
loan and to secure it with collateral where deemed necessary. In the event of
loan default, the Bank's means of recovery is through collection efforts and
judicial procedures. For most loans, the Bank is required by law to obtain an
appraisal of collateral to determine the adequacy of security. Loans secured by
real estate generally do not exceed 80% of appraised market value at the time of
origination.
The Bank does not normally make long-term fixed rate loans to be held
to maturity. Approximately 80% of the loans in the portfolio were originated as
adjustable rate loans. The most frequently used index to determine adjustments
is the prime rate as published in The Wall Street Journal. Other indexes used
are the six month treasury bill rate and an internal bank base rate. Most of
these loans are subject to adjustment on a monthly, quarterly, semi-annual or
annual basis. The Bank typically holds the loans originated, in the normal
lending activities listed above, to maturity.
3
<PAGE>
Mortgage Banking Services
From March of 1993 through February of 1997, the Bank also originated
certain mortgage products through its Mortgage Department with the intent to
sell them in the secondary market. The department was closed in February of 1997
primarily as a result of intense competition which affected the profit margins
for such loans sold in the marketplace. The department never reached its
budgeted performance goals or contributed a satisfactory return given the risk
of operations or the time that was committed by Bank management.
The Board of Directors and management of the Bank also considered the
higher risk profile of the loans originated and the delinquency experience of
these loans in this department in its decision to close the department's
operations. At December 31, 1996 loans generated by the Bank's mortgage
department totaled $2.05 million or approximately 3.0% of the Bank's total
loans. Of the $2.05 million in mortgage department generated loans $1.02 million
or 49% of the department's loans were past due 90 days or more with $800,000
(three loans) of such loans on nonaccrual status. These 90 day and over
delinquent loans made up 61% of the Bank's 90 day and over delinquent loans.
These delinquent loans are secured by real estate and management's analysis of
the collateral indicates that any loss that may occur in the disposition of
these loans will not have a material adverse impact on Bank operations. These
loans were considered in the calculation of the Banks' loan loss reserve at
December 31, 1996.
The Mortgage Department typically originated loans secured by first and
second deeds of trust on one to four family real estate, with loan to collateral
value ratios of up to 90% and up to a 30 year maturity. Loans which do not meet
the Bank's loan portfolio underwriting criteria are typically funded with a
commitment in place to sell the loans.
During 1996, the Mortgage Department funded approximately $27.6 million
in loans, sold approximately $27.8 million in loans and generated $934,000 in
gross revenue. The department contributed (after allocation of intercompany
overhead costs) $58,000 to Bank pretax income in 1996 as compared to $22,700 in
1995 (after elimination of profit on a loan sale to the Bank of $91,900). Due to
the service intensive nature of the mortgage lending industry, the largest
component of the Mortgage Department's expense was salaries and benefits, which
was $469,000 or 54% of total expense of the Department. In addition, $210,000 of
costs were allocated to the department from the Bank. These costs included
$180,000 of internal charges for the use of funds, and $30,000 in administrative
support. At December 31, 1996, there were approximately $723,000 in loans held
for sale that were originated through the Mortgage Department.
Electronic Funds Services
In 1993, the Bank started an Electronic Funds Transfer (EFT) Department
with the goal of increasing service fee income primarily by establishing a
network of off-site automatic teller machines (ATMs). As of December 31, 1996
the Bank had 54 machines in 39 various locations in California, including
tourist centers, horse racing tracks, truck stops and shopping centers. As of
December 31, 1996, the Bank's investment in ATMs and related equipment was
$1,464,000. This equipment had a book value (cost less accumulated depreciation)
of approximately $605,000 at December 31, 1996. The average cash outstanding in
the machines throughout 1996 was $4.0 million. The Bank enters into individual
agreements with the owner of each site to place the machine; the Bank does not
own these premises.
During 1996, the Bank entered into a buyout agreement with a consultant
who assisted in the formation of the EFT Department. The Bank's initial
agreement in 1993 with the consultant was to pay him 16% of the department's
pretax-profits (after any historical departmental accumulated
4
<PAGE>
deficit was refunded) through June 2001. A dispute arose as to how certain items
such as equipment depreciation and the cost allocation for the cash the
department borrowed from the Bank to fund the machines ($4.0 million in 1996)
should be accounted for. The Bank settled the dispute by paying $225,000 to buy
out the consultant's present and future interests in compensation from the
department's operations. The Bank is amortizing this prepaid expense over a 4.2
year period at a cost of approximately $4,500 per month. If the department were
to discontinue operations before the expense is fully amortized, the unamortized
portion would be written off against current income.
The Bank receives revenue from each transaction based on a service
contract negotiated with the management at each site. During 1996, ATM service
fee income was $1.34 million and ATM interchange and other income was $540,000.
Total revenue from the EFT department was $1.88 million, an increase of $370,000
or 24% over total department revenues in 1995. Total expense for the department
was $1.65 million bringing the EFT department's contribution to pretax income
for the year to $226,000 as compared to $139,000 in 1995. The 1996 results
include approximately $206,000 in costs allocated to the department from the
Bank, including $194,000 in internal charges for the use of funds, and $12,000
in administrative support. Another main component of expense was $309,000 in
first line and second line maintenance, which is the cost of servicing these
machines by a third party (i.e. adding money, clearing paper jams, etc.). The
1995 results include approximately $165,000 in costs allocated to the department
from the Bank, including $153,000 in internal charges for the use of funds, and
$12,000 in administrative support. See a further discussion of ATM operations at
"Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Bank expects to continue increasing the number of machines in
service and to generate greater transaction levels in 1997, with the intent to
increase the profitability of the EFT department. Income from the EFT Department
may be reduced or may not increase as expected if state or federal laws are
changed to limit the ability of the Bank to place more ATMs in service, or to
limit the charges the Bank may collect from the use of those ATMs. A recently
introduced bill in the California Assembly will, if adopted as proposed,
prohibit the operator of an ATM completely from charging fees for the use of the
ATM. If this legislation is adopted as proposed by the California Legislature
and signed by the Governor, the Bank's income from its ATM network would be
severely reduced to the amount the Bank receives from interchange fees. The
department could not cover its expenses at that level of revenue.
Correspondent Banks
The Bank's primary correspondent banking relationship is with Wells
Fargo Bank, San Francisco. The Bank also has accounts with Union Bank of
California, Bank of America, The Federal Reserve Bank of San Francisco, Citibank
of Nevada, and First USA Bank. These relationships are a result of the Bank's
efforts to obtain a wide range of services for the Bank and its customers.
The Bank has an unsecured line of credit with Wells Fargo Bank of $5.0
million and an additional unsecured line of credit with Union Bank of California
for $4.0 million.
The Bank is also a member of the Federal Home Loan Bank of San
Francisco (FHLB). The Bank has purchased $294,000 of FHLB stock, which typically
pays quarterly dividends at approximately the 90 day treasury bill yield. The
Bank sought membership to the FHLB primarily to access the intermediate and long
term credit the FHLB offers.
5
<PAGE>
The Bank may borrow up to 25% of its assets subject to collateral and
additional FHLB stock purchase requirements. Borrowing is limited to seven times
the Bank's FHLB stock holdings ($2.06 million). Borrowings in excess of that
amount require the purchase of FHLB stock at a ratio of one dollar of stock for
every seven dollars of excess borrowing. The additional stock above the original
$294,000 purchase may be retired as the debt is repaid. The Bank borrowed
$500,000 in March of 1996 and repaid this advance in September of 1996.
The Bank does not currently serve, nor does it have plans to serve, as
a correspondent to other banks.
Employees
As of March 15, 1997, the Bank employed 33 full-time employees,
including 13 Bank officers, and 6 part-time employees. As of March 15, 1997, the
Company employed no full-time or part-time employees. The Bank pays a salary to
Mr. Brooks and Mr. Gould and the Bank was reimbursed $12,000 by the Company in
1996 for administrative services rendered by Mr. Brooks, Mr. Gould and the
Bank's accounting staff. Mr. Haight receives remuneration for his services
through Director fees. See "Business - Executive Officers of the Registrant".
(d) Selected Statistical Information
The following tables present certain consolidated statistical
information concerning the business of the Company and its subsidiary (the
Bank). This information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations at Item
7, herein, and the consolidated financial statements and the notes thereto
included in the Company's 1996 Financial Statements, herein, at Item 8.
6
<PAGE>
Distribution of Average Assets, Liabilities and Shareholders' Equity
The following table sets forth the distribution of consolidated average
assets, liabilities and shareholders' equity for the years ended December 31,
1996 and 1995. Average balances have been computed using daily balances.
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/96 12/31/95
Average Average
Balance Percent Balance Percent
(000's) of Total (000's) of Total
<S> <C> <C> <C> <C>
ASSETS
Cash and Due From Banks $10,741 11.0% $9,277 10.9%
Interest-Bearing Deposits With Other Banks 100 0.1 110 0.1
Taxable Investment Securities 12,346 12.6 9,432 11.1
Non-Taxable Investment Securities 1,395 1.4 1,612 1.9
Federal Funds Sold 6,660 6.8 9,460 11.2
Loans, Net 62,850 64.8 50,874 60.0
Loans Held for Sale 1,345 1.4 1,748 2.1
Premises & Equipment, Net 866 0.9 974 1.1
Real Estate Owned 18 0.0 0 0.0
Other Assets & Accrued Int. Receivable 1,524 1.6 1,353 1.6
----- --- ----- ---
Total Assets $97,845 100.0% $84,840 100.0%
======= ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest-Bearing Transaction Accounts 41,993 42.9% $36,567 43.1%
Demand 22,456 23.0 20,613 24.3
Savings 5,432 5.6 4,504 5.3
Time 18,227 18.6 15,049 17.7
------ ---- ------ ----
Total Deposits 88,108 90.0 76,733 90.4
Other Borrowings 284 0.3 0 0.0
Other Liabilities & Accrued Interest 773 0.8 582 0.7
Shareholders' Equity 8,680 8.9 7,525 8.9
Total Liabilities & Shareholders' Equity $97,845 100.0% $84,840 100.0%
====== ====== ====== ======
- --------------------
<FN>
1 Average loans include nonaccrual loans and are net of the allowance for loan losses.
</FN>
</TABLE>
7
<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
net interest spread.
<TABLE>
<CAPTION>
Year Ended December 31, 1996
Interest
Average Income/ Average
Balance Expense Yield/
(000's) (000's) Rate
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-Bearing Deposits With Other Banks $100 $6 5.9%
Taxable Investment Securities 12,345 771 6.3
Non-Taxable Investment Securities1 1,395 61 4.3
Federal Funds Sold 6,660 355 5.3
Loans (Net of loan loss allowance)2,3 62,850 7,035 11.2
Loans Held for Sale 1,345 173 12.9
----- ---
Total Interest-Earning Assets $84,695 $8,401 9.9%
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction Accounts $41,993 1,320 3.1%
Savings 5,432 230 4.2
Time 18,227 974 5.3
Other Borrowings 284 15 5.6%
--- --
Total Interest-Bearing Liabilities $65,936 $2,539 3.9%
======= ====== ====
Net Interest Income and Margin4 $5,862 6.9%
====== ====
Net Interest Spread5 6.0%
====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Interest
Average Income/ Average
Balance Expense Yield/
(000's) (000's) Rate
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-Bearing Deposits With Other Banks $110 $6 5.5%
Taxable Investment Securities 9,432 581 6.2
Non-Taxable Investment Securities1 1,612 70 4.3
Federal Funds Sold 9,460 558 5.9
Loans (Net of loan loss allowance)2,3 50,874 6,088 12.0
Loans Held for Sale 1,748 204 11.7
----- --- ----
Total Interest-Earning Assets $73,236 $7,507 10.3%
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction Accounts $36,567 $1,263 3.5%
Savings 4,504 202 4.5
Time 15,049 758 5.0
------ --- ----
Total Interest-Bearing Liabilities $56,120 $2,223 4.0%
====== ===== ====
Net Interest Income and Margin4 $5,284 7.2%
===== ====
Net Interest Spread5 6.3%
====
- ---------------
<FN>
1 Yields on non-taxable investment securities are not tax adjusted.
2 Average loans include nonaccrual loans and are net of allowances for possible loan losses.
3 Loan interest income includes loan fees of $505,000 and $432,000 in 1996 and 1995, respectively.
4 Net interest margin is computed by dividing net interest income by total average interest-earning assets.
5 Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on
interest-bearing liabilities.
</FN>
</TABLE>
8
<PAGE>
Rate and Volume Variances
The following tables set forth, for the periods indicated, a summary of
the changes in interest earned and interest paid resulting from changes in
average asset and liability balances (volume) and changes in average interest
rates. The change in interest, due to both rate and volume, has been allocated
to change due to volume and rate in proportion to the relationship of absolute
dollar amounts in each.
(Note: Some totals may not foot or agree to financial statements or Management's
Discussion by immaterial amounts due to averaging and rounding.)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
Compared to 1995
Volume Rate Total
(000's) (000's) (000's)
<S> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME
Interest-Bearing Deposits With Other Banks $(1) $0 $(1)
Taxable Investment Securities 179 11 191
Non-Taxable Investment Securities (9) 0 (9)
Federal Funds Sold (165) (38) (203)
Loans 1,433 (486) 947
Loans Held for Sale 17 (48) (31)
-- ---- -----
Total $1,454 $(560) $894
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest-Bearing Transaction Accounts $187 $(131) $57
Savings Deposits 42 (14) 28
Time Deposits 160 56 216
Notes Payable and Debentures 0 16 16
- -- --
Total 389 (73) 316
Change in Net Interest Income $1,065 $(487) $578
===== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Compared to 1994
Volume Rate Total
(000's) (000's) (000's)
<S> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME
Interest-Bearing Deposits With Other Banks $(3) $1 $(2)
Taxable Investment Securities 64 0 64
Non-Taxable Investment Securities (3) 0 (3)
Federal Funds Sold 145 170 315
Loans (98) 775 677
Loans Held for Sale 176 (83) 93
--- ---- --
Total $281 $863 $1,144
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest-Bearing Transaction Accounts $58 $302 $360
Savings Deposits 47 70 117
Time Deposits (46) 212 166
Notes Payable and Debentures (10) 0 (10)
---- - ----
Total $49 $584 $633
Change in Net Interest Income $233 $278 $511
==== ==== ====
</TABLE>
9
<PAGE>
GAP Table
The following table shows the Company's interest sensitive assets and
liabilities based on respective maturity dates or earliest repricing
opportunities (whichever is earliest) as of December 31, 1996 (in thousands of
dollars). Mortgage-backed securities are shown based on expected cash flows
which includes prepayments of principal. Non accrual loans of $1,431,000 are
excluded from the table below. Loans held for sale of $723,000 are included
below at their stated maturity/repricing date. Adjustable rate loans which have
reached an interest rate floor or ceiling are considered fixed rate loans in
accordance with FDIC accounting guidelines.
<TABLE>
<CAPTION>
3 Months 3 to 6 6 Months 1 Year More than
or Less Months to 1 Year to 5 Years 5 Years Total
------- ------ --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Fed Funds Sold $6,850 $0 $0 $0 $0 $6,850
CD Investments 100 0 0 0 0 100
Investments 1,003 525 2,776 6,018 4,347 14,669
Gross Loans 26,325 13,877 9,252 8,716 9,627 67,797
------ ------ ----- ----- ----- ------
Total (A) $34,278 $14,402 $12,028 $14,734 $13,974 $89,416
======= ======= ======= ======= ======= =======
LIABILITIES
Money Market & Savings $50,044 $0 $0 $0 $0 $50,044
Time Deposits 5,837 5,124 5,465 2,899 0 19,325
----- ----- ----- ----- - ------
Total (B) $55,881 $5,124 $5,465 $2,899 $0 $69,369
======= ====== ====== ====== == =======
GAP (A) - (B) ($21,603) $9,278 $6,563 $11,835 $13,974 $20,047
========= ====== ====== ======= ======= =======
GAP / (A) % 63% 64% 55% 80% 100% 22%
=== === === === ==== ===
Cumulative GAP ($21,603) ($12,325) ($5,762) 6,073 $20,047 $20,047
========= ========= ======== ===== ======= =======
Cumulative GAP % -63% -25% -10% 8% 22% 22%
==== ==== ==== == === ===
</TABLE>
The table shows the Company had approximately $60.7 million dollars in
assets and $66.5 million in liabilities which mature or can reprice during 1997.
This indicates a cumulative one year GAP position of approximately $5.8 million
or -10% of one year assets. Because $5.8 million more liabilities than assets
can mature or reprice in 1997, the Company was slightly asset sensitive, on a
simple GAP basis, at December 31, 1996 (i.e., net interest margin will most
likely expand when rates rise and compress if rates fall).
Historically, the Company has maintained a strong net interest margin
as compared to the overall banking industry. The Company manages its net
interest rate margin by using defensive strategies such as extending the
maturity or repricing of new liability fundings or shortening the maturity or
repricing of new assets fundings. In addition, the Company has had success in
recent years in growing demand deposits, which do not pay interest, thus
lowering the cost of funds and exposure to rising rates.
The Company's net interest margin (net interest income divided by
average earning assets, see Item 1 "Business, Interest Rates and Differentials")
was 6.9% in 1996, 7.2% in 1995 and 7.0% in 1994. The Company uses a computer
software program which goes beyond a simple GAP analysis in its asset and
liability management and measurement of interest rate exposure. This software
quantifies and estimates the speed that different indexes and rates move
relative to each other as well as the effect of interest rate "ceilings and
floors." It also estimates the repricing speed that will most likely occur in
the Company's deposit portfolio. This information is used as an
10
<PAGE>
indicator of the Company's real interest rate risk position, and to determine
the pricing of loans and deposits, as well as to make investment decisions.
Management believes that if rates decline in 1997 the Company's net
interest margin may compress, but the effect may be mitigated by use of the
defensive strategies described above.
Investment Portfolio
The investment portfolio is used primarily for investment income and
secondarily to provide a source of liquidity to the Company through the sale and
maturity of securities and through pledging of securities to secure borrowings.
The investments purchased are readily marketable and have a stated or expected
maturity of five years or less so as to reduce the impact on the portfolio's
value when changes in interest rates occur in the marketplace.
The Company held U.S. Treasury and Mortgage-backed Securities with a
carrying value of approximately $2,588,000 at December 31, 1996, as "Available
for Sale" pursuant to Financial Accounting Standard Board Statement No. 115
(SFAS No. 115). Mortgage-backed securities are government issued instruments
whose underlying collateral are generally first deeds of trusts conforming
single family mortgages. The cash flows on these instruments are determined by
the homeowners' whose notes comprise the collateral. The Company's intent is to
hold the remainder of the instruments until maturity and management believes
that the Company has the ability to do so. The FASB allowed companies to revisit
the designations of their "held to maturity" and "available for sale" securities
in the fourth quarter of 1995. In December of 1995, the Company elected to
transfer a security from its held to maturity portfolio to its available for
sale portfolio in anticipation that it may be sold prior to maturity. The
security had an amortized cost of $595,000 and an unrealized loss of $13,000 at
the time of transfer.
During 1995, the Company sold a security with a par value of $500,000
from its "available for sale" portfolio. As a result of this transaction, the
Company realized a loss of $16,000. The Company did not sell any securities in
1996.
The total investment portfolio at December 31, 1996 and 1995 had an
average expected maturity of approximately 2.2 and 2.1 years, respectively.
Expected maturity differs from actual maturity in the case of mortgage-backed
securities due to the possibility of the loans being paid-off or refinanced
before the maturity date.
At December 31, 1995, the Company's total investment portfolio (which
includes both available for sale and held to maturity securities) had a net
unrealized gain of $146,000 (or 1.1% of the total portfolio), while on December
31, 1994 there was a $381,000 net unrealized loss (3.8%of the total portfolio).
The unrealized gain at December 31, 1995 was comprised of a $136,000 net
unrealized gain in the Investment Securities Held to Maturity and a $10,000 gain
in the Investment Securities Available for Sale. The unrealized loss at December
31, 1994 was comprised of a $305,000 net unrealized loss in the Investment
Securities Held to Maturity and a $76,000 loss in the Investment Securities
Available for Sale. The increase in the market value of the portfolio was a
result of declining interest rates in the bond market in 1995, which increased
the relative market value of the Company's fixed rate bond portfolio.
The Company has purchased municipal securities since June 1991 in an
effort to lower the Company's effective tax rate. The Company held municipal
securities with an amortized cost of $1,179,000 at December 31, 1996 and
$1,582,000 at December 31,1995. The Company's effective tax rate was 40.3% in
1996, 40.9% in 1995 and 40.2% in 1994.
11
<PAGE>
The amortized cost and market value of the portfolio of investment
securities as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES HELD TO MATURITY
December 31, 1996
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
<S> <C> <C> <C>
U.S. Treasury and Securities of
Other Government Agencies and Corporations $4,297 $4,315 $18
States of the U.S. and Political Subdivisions 1,179 1,181 2
Mortgage Backed Securities 6,605 6,707 102
----- ----- ---
Total $12,081 $12,203 $122
======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
<S> <C> <C> <C>
U.S. Treasury and Securities of
Other Government Agencies and Corporations $4,046 $4,082 $36
States of the U.S. and Political Subdivisions 1,582 1,584 2
Mortgage Backed Securities 4,505 4,603 98
----- ----- --
Total $10,133 $10,269 $136
====== ====== ===
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES AVAILABLE FOR SALE
December 31, 1996
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
<S> <C> <C> <C>
U.S. Treasury Securities $2,001 $2,003 $ 2
Mortgage Backed Securities 595 585 (10)
--- ------ ----
Total $2,596 $2,588 $ (8)
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
<S> <C> <C> <C>
U.S. Treasury Securities $2,507 $2,516 $9
Mortgage Backed Securities 594 595 1
--- --- -
Total $3,101 $3,111 $10
===== ===== ==
</TABLE>
12
<PAGE>
The following table is a summary of the relative maturities and
weighted average yields of investment securities as of December 31, 1996. Yields
on securities have been calculated by dividing interest income, adjusted for
amortization of premium and accretion of discount, by the amortized cost of the
related securities. Yields on mortgage-backed securities have been calculated
using management's estimate of the expected life of the instrument. Yields on
municipal securities are calculated on a tax equivalent basis using a tax rate
of 40%.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Treasury States of
and Securities of the U.S. and Mortgage
Other Government Political Backed
Agencies & Corporations Subdivisions Securities
Maturing in One Year or Less
<S> <C> <C> <C> <C>
Amount (000's) $1,501 $501 $299
Yield 5.80% 6.38% 5.81%
Maturing After One but Within
Five Years
Amount (000's) $2,502 $678 $1,844
Yield 6.13% 6.69% 7.29
Maturing After Five but Within
Ten Years
Amount (000's) $0 $0 $2,374
Yield 7.62%
Maturing After Ten but Within
Thirty Years
Amount (000's) $0 $0 $2,088
Yield 7.32%
</TABLE>
<TABLE>
<CAPTION>
EQUITY SECURITIES*
U.S. Treasury States of
and Securities of the U.S. and Mortgage
Other Government Political Backed
Agencies & Corporations Subdivisions Securities
<S> <C> <C> <C> <C>
Amount (000's) $294 $0 $0
Yield* 5.79%
</TABLE>
* Equity Securities consist of Federal Home Loan Bank stock.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury States of
and Securities of the U.S. and Mortgage
Other Government Political Backed
Agencies & Corporations Subdivisions Securities
<S> <C> <C> <C>
Maturing in One Year or Less
Amount (000's) $2,001 $0 $0
Yield 5.83%
Maturing After One but Within
Five Years $0 $595 $0
Yield 5.89%
</TABLE>
13
<PAGE>
Loan Portfolio
The following table shows the composition of loans by type of loan or
borrower as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
(000's) (000's)
<S> <C> <C>
Commercial and Financial $20,019 $17,390
Real Estate--Construction 10,799 10,849
Real Estate--Mortgage 33,255 27,962
Installment Loans to Individuals 4,432 4,524
----- -----
Total $68,505 $60,725
Less:
Reserve for Possible Loan Losses 1,493 1,516
----- -----
Loans Held to Maturity--Net $67,012 $59,209
====== ======
Loans Held for Sale $723 $772
=== ===
</TABLE>
Total gross loans (including loans held for sale) increased $7.8
million from $60.7 million at December 31, 1995 to $68.5 million at December 31,
1996. The portfolio's loans averaged $66.2 million in 1996, an increase of $11.7
million in comparison to average portfolio loans of $54.5 million in 1995.
The Company's market area is primarily suburban and within commuting
distance of downtown San Francisco and San Jose. Housing prices in the San
Francisco Bay Area escalated rapidly in the late 1980's, creating demand for
more affordable new home construction. The housing market slump beginning in
1990 resulted in decreased demand and decreasing property values that continued
through 1994. Property values began to stabilize in 1995 and appreciate in 1996.
Thus far in 1997 there is a very low inventory of single family homes available
for sale in San Mateo County (approximately 50% less for sale inventory than the
average of the past five years) and the market is continuing to appreciate. The
Bank is located less than ten miles from the corporate headquarters of a number
of large growing companies such as Oracle Corporation, Sun Microsystems,
Electronic Arts, Visa International, DHL Airfreight, Oral B (dental products),
Raychem Corporation, and Silicon Graphics. Bank management expects that
continued growth in these companies will result in continued demand for local
housing, and that continued demand will increase the value of much of the
collateral that secures the Bank's real estate loans.
Commercial and financial lending is typically to professional
corporations and companies with sales from $1 million to $10 million. Commercial
revolving lines of credit are made for short-term working capital purposes and
are normally secured by business assets. The Company evaluates these lines based
upon the borrower's ability to service the debt through its business trade
cycles. Business term loans are granted for expansion or equipment acquisition.
These loans are typically repaid within five years and are granted after
evaluation of the borrowers' ability to service the debt through its business
operations.
The Company's real estate construction loans are primarily for single
family residences and commercial properties under $2 million located within San
Mateo and Santa Clara counties. Loans are made to developers with a successful
history of developing projects in the Company's market area. Loan to value
ratios on construction loans depend upon the nature of the property, whether the
property is residential or commercial and whether or not it is to be owner
occupied. Typically, for residential construction loans, whether built to be
owner-occupied or not, the Company's policy is to require that the loan-to-value
ratio be no more than 70% and that the borrower have no less than
14
<PAGE>
a 50% equity interest in the land. With respect to commercial construction
loans, the Company typically requires that the loan not exceed 65% of the value
of the property based on capitalization of projected net income.
The Company's policy is to maintain an interest reserve for the life of
a construction loan, or verify adequate cash reserves or income sources to
service the loan. Progress payment disbursements are made upon receipt of lien
waivers, or after analysis of the project's progress by a Construction Loan
Officer. The construction lending officers for the loan also make unannounced
visits to the site. Construction loan balances averaged $10.0 million in 1996
compared to $8.5 million in 1995, an increase of 17.6%. There were no loans
transferred to real estate owned from construction loans in 1996 or 1995.
The Company generally does not make first deed of trust, one to four
family real estate loans to be held in portfolio. However, in the event that
such a loan is made, the loan amount will generally not exceed 75% of the
current market value of the collateral on owner occupied properties. For
non-owner occupied first deed of trust, one to four family real estate loans,
the Company typically requires that the loan-to-value ratio be no more than 70%.
Fixed rate loans of this type have a maturity of five years or less. Loans with
annual or more frequent rate adjustment periods have a maximum maturity of
fifteen years. Loan amortizations do not exceed twenty-five years.
The Company originated loans for sale in the secondary market that are
secured by first and second deeds of trust on one to four family real estate,
with loan to collateral value ratios of up to 90% and up to a 30 year maturity,
through its Mortgage Department, which began operations in 1993 and was closed
in February 1997. See discussion of the Mortgage Banking Services at Item 1.c.
Included in installment loans to individuals are home equity lines of
credit which are secured primarily by second trust deeds on single family
residences. The Company typically requires a loan-to-value ratio of no more than
75% for home equity loans. Rates adjust annually and terms do not exceed fifteen
years.
The Company offers new and used direct automobile financing, which are
also categorized as installment loans to individuals. Automobile loan terms do
not exceed five years for new vehicles, with shorter terms for used cars
depending on the age of the vehicle. Loans are made for up to 90% of the
wholesale value for used autos and 80% of the purchase price, including tax and
license, on new vehicles. The Company originates and funds all of its automobile
loans directly and does not engage in indirect automobile financing or the
purchase of loans from auto dealers and other third party sources.
The Company had standby letter of credit commitments aggregating
$327,000 and $101,000 at December 31, 1996 and December 31, 1995, respectively.
In addition, the Company had commitments to grant $15.5 million in real estate
construction loans, $15.9 million in commercial loan and other real estate loans
and $4.5 million in consumer loans (including home equity loans) at December 31,
1996.
Loan Concentrations
The Company held $20.0 million, or 29% of the Company's total loans, in
loans categorized as commercial and financial at December 31, 1996. Since a
majority of these loans are to businesses in the San Mateo County area, a major
economic recession in that area could have a significant and detrimental impact
on the Company.
15
<PAGE>
There were also $33.3 million, or 49% of total loans, in real estate
mortgage loans. These loans are generally secured by first deeds of trust on
commercial properties and are due in five years or less.
At December 31, 1996, approximately $10.8 million or 16% of the
Company's total loans consisted of real estate construction loans. In addition,
as discussed above, undisbursed construction loan commitments totalled $15.5
million.
The Company is subject to the fluctuations of the California housing
market generally and specifically in the San Mateo and Santa Clara County areas.
The Company's construction lending business is subject to, among other things,
the volatility of interest rates, real estate prices in the Company's service
area and market availability of conventional real estate financing to repay such
construction loans since the Company does not usually require take-out
commitments. General economic conditions and, more specifically, changes in real
estate values in California and the San Mateo and Santa Clara County areas could
have an impact on the repayment of construction and conventional real estate
loans. There can be no assurance that builders or developers will find buyers
for the types of properties being constructed at prices which will insure
repayment to the Company. A significant decline in real estate values and/or the
demand for housing in California or in the San Mateo and Santa Clara County
areas could have a material adverse impact on the financial condition of the
Company.
Maturity Distribution and Interest Rate Sensitivity of Loans
The following tables show the estimated maturity distribution (in
thousands of dollars) of the Company's loan portfolio, as of December 31, 1996.
The timing of payments is based on the final maturity of the loans, rather than
amortization schedules. Loans held for sale of approximately $723,000 are
included. Non accrual loans of $1,431,000 are excluded from the table below.
Adjustable rate loans which have reached an interest rate floor or ceiling are
considered fixed rate loans in accordance with FDIC accounting guidelines.
<TABLE>
<CAPTION>
<S> <C>
Commercial Loans:
Loans with a Remaining Maturity of:
One Year or Less $14,114
Over One Year to Five Years 4,070
Over Five Years 1,835
-----
Total $20,019
Construction Loans
Loans with a Remaining Maturity of:
One Year or Less $10,799
Over One Year to Five Years 0
Over Five Years 0
-
Total $10,799
=======
Real Estate, Installment and Other
Loans with a Remaining Maturity of:
One Year or Less $24,541
Over One Year to Five Years 4,658
Over Five Years 7,780
-----
Total $36,979
=======
Grand Total $67,797
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Total Loans Due in One Year or More Fixed Rate Loans with a Remaining Maturity
of:
Over One Year to Five Years $ 7,764
Over Five Years 6,101
-----
Total Fixed Rate loans due in One Year or More $13.865
=======
Variable Rate Loans with a Repricing Frequency Of:
Annually or more frequently, but less frequently than quarterly $19,245
Total Variable Rate Loans due in One Year or More $19,245
Total Loans due in One Year or More $33,110
=======
</TABLE>
Nonaccrual, Past Due and Restructured Loans
The following table shows the amount of loans classified as nonaccrual,
90 days or more past due as to principal and/or interest and restructured (as
defined in Statement of Financial Accounting Standards 15) as of December 31,
1996 and 1995:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
(000's) (000's)
<S> <C> <C>
Nonaccrual Loans $1,431 $470
Accruing Loans Past Due 90
Days or More 234 25
Restructured Loans 0 0
------ -----
Total $1,665 $495
====== ===
</TABLE>
At December 31, 1996 and 1995, the Company carried an unsecured loan
(with a principal balance of $107,000 at December 31, 1996) on nonaccrual
status. The borrower has maintained current interest payments since the loan was
originally made. The Company, however, is not recognizing these payments as
interest income at this time. Despite making principal reductions of $403,000 on
the original loan of $500,000, the borrower has not met the original schedule of
principal reductions, and the Bank is not recognizing the interest payments as
interest income. If the borrower continues to make regular payments the Company
will most likely recognize the deferred interest income (approximately $107,000
at December 31, 1996) after all principal has been retired. This loan is
currently being modified and its risk of default has been considered by
management in determining the year-end loan loss reserve of $1,493,000.
There were nine loans totaling $1.67 million past due 90 days or more
at December 31, 1996. There were seven loans totalling $339,000 past due 90 days
or more at December 31, 1995. There were no loans past due 90 days or more at
December 31, 1994. Loans past due 30 days or more but less than 90 days at
December 31, 1996, 1995 and 1994, totalled $435,000, $509,200 and $636,000,
respectively.
Of the $1.431 million in loans on nonaccrual status at December 31,
1996, $800,000 or 56% were secured by real estate collateral and $548,000 or 38%
were secured by lease contracts.
17
<PAGE>
The $800,000 in nonaccrual loans secured by real estate consist of 3
loans, all of which are secured by residential property. One loan, in the amount
of $499,000 is secured by two residences on the same lot. The Bank foreclosed on
this loan in March of 1997, and is in the process of marketing the property. The
other two loans, one for $155,000 and one for $146,000, are each secured by
single family residences. Both of these borrowers are in bankruptcy proceedings,
and in each case the bankruptcy court has ordered the borrower to make post
petition payments on the loans. In the event either borrower fails to make such
payments, the Bank is prepared to seek bankruptcy court approval to foreclose on
the property. The loan for $155,000 was returned to accrual status in March 1997
based on the borrower's performance and on the Bank's review of the property.
Management of the Bank believes that the Bank will not incur material losses
with respect to these loans, either individually or as a group.
The loans secured by lease contracts, which were originally sold by the
now bankrupt Bennett Funding and Bennett Leasing, had an original principal
balance of $872,000 before a charge-off of $318,000 in 1996. Approximately 75%
of the leases which secure the Bank's loans were current and approximately 15%
were over 90 days delinquent at September 30, 1996, according to recent data
provided by the bankruptcy trustee. The Bank's legal counsel is evaluating a
settlement offer from the bankruptcy trustee which would result in a recovery of
the current $548,000 book value of the loans plus approximately $90,000 of the
amount previously charged-off, with approximately 84% of the cash flow to the
Bank to occur in the first twelve months.
Loans are generally placed on a nonaccrual status and any accrued but
unpaid interest income is typically reversed and charged against income when
payment of interest or principal on the loan is 90 or more days past due. The
interest accrued through 90 days may not be reversed when a loan is placed on
nonaccrual status if, in the opinion of management, the collateral is sufficient
to support the principal, accrued interest and any other liens, and the loan is
in the process of collection. Real estate and consumer loans which are well
secured by residential property or highly marketable collateral and which are in
the process of collection, or if other circumstances exist which would justify
the treatment of the loan as fully collectible, may be excepted for limited
periods. Additionally, loans are placed on nonaccrual if classified doubtful or
if full and timely collection becomes uncertain. Loans in the nonaccrual
category are treated as nonaccrual loans even though the Company may ultimately
recover all or a portion of the interest due. The classification of a loan as a
nonaccrual loan is not necessarily indicative of a potential charge-off.
Restructured loans reflect situations where, due to the inability of
the borrower to comply with the original terms of the loan, the terms have been
modified, usually with an extension in maturity. These loans may reflect accrual
of interest at a reduced rate. The Company's policy is to place restructured
loans on nonaccrual status until such time as management determines the
restructured loan's performance warrants the recognition of interest on an
accrual basis. The Company may also change the terms of a loan in return for
additional consideration from the borrower such as additional collateral,
accelerated payment terms or principal reductions. In such cases if Company
management feels the Company's position has substantially improved from the
terms of the original note, the loan will not be classified as restructured.
Interest income on loans on nonaccrual status during the year ended
December 31, 1996 that would have been recognized in that year if the loans had
been current in accordance with their original terms, totalled $127,000.
There were no loans, other than those discussed above, as of December
31, 1996, where known information about possible credit problems of borrowers
caused management to have serious doubts as to the ability of the borrowers to
comply with the existing loan repayment terms. The Company adopted Financial
Accounting Standards Board Statement No. 114 (SFAS No. 114),
18
<PAGE>
Accounting by Creditors for Impairment of a Loan, effective January 1, 1995. As
a result of applying the new rules, certain impaired loans, generally
non-accrual loans, are reported at the present value of expected future cash
flows using the loan's effective interest rate, or as a practical expedient, at
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. The valuation allowance for impaired loans at
December 31, 1996 under SFAS No. 114 was $258,000 ($185,000 at December 31,
1995) which is included in the Company's allowance for possible loan losses.
Summary of Loan Loss Experience
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 made and the
credit worthiness of the borrower over the term of the loan. To reflect the
currently perceived risks of loss associated with its loan portfolio, the
Company makes additions to its allowance for possible loan losses. The Company's
allowance has been created by direct charges against operations through the
provision for loan losses.
The allowance for possible loan losses is based upon actual loan losses
incurred, recoveries of previously charged off loans and other factors which, in
management's judgment, deserve recognition in estimating possible loan losses,
including credit risks associated with specific loans as determined by
management and regulatory agencies, the historical relationship between
charge-offs and the level of the allowance, the amount of past due and
non-performing loans and prevailing economic conditions. In determining the
actual allowance for possible loan losses to be maintained and in revising risk
category assignments from time to time, management also considers the comments
of a third party loan review consultant hired by the Company on a quarterly
basis. Thus, the actual calculation of the adequacy of the allowance is
augmented by an analysis of the present and prospective financial condition of
certain borrowers, industry concentrations within the portfolio and general
economic conditions.
The above factors used by management are essentially judgmental. After
reviewing these factors, management has established the allowance at $1,493,000
or 2.16% of total gross loans at December 31, 1996. There can be no assurance
that in any given period the Company might not sustain charge-offs which are
substantial in relation to the size of the allowance. Loans are charged to the
allowance for possible loan losses when a loss is considered probable. It is the
policy of management to make additions from earnings to the allowance in
relation to anticipated loan charge-offs and the inherent risk given the
portfolio's composition. The continuing evaluation of the loan portfolio and
assessment of current economic conditions will dictate future allowance levels.
19
<PAGE>
An analysis of the reserve for loan losses for the fiscal years ending
December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
(000's) (000's)
<S> <C> <C>
Allowance for possible loan losses--January 1 1,516 $1,505
Loans Charged Off:
Commercial and Financial (459) (213)
Real Estate--Construction 0 0
Real Estate--Mortgage (30) 0
Installment Loans to Individuals (21) (20)
---- ----
Total Loans Charged Off (510) (233)
Recoveries:
Commercial and Financial 28 33
Real Estate--Construction 0 0
Real Estate--Mortgage 24 0
Installment Loans to Individuals 0 1
- -
Total Recoveries 52 34
-- --
(Net Charge-Offs) Net Loan Recoveries (458) (199)
Provision for Possible Loan Losses 435 210
--- ---
Allowance for Possible Loan Losses--December 31 $1,493 $1,516
====== =====
(Charge-Offs) Net Recoveries as a Percentage of
Average Outstanding Loans (.69)% (.36)%
Allowance For Possible Loan Losses as a
Percentage of Gross Loans at Year End 2.16% 2.50%
Allowance For Possible Loan Losses as a
Percentage of Non-Performing Loans 96% 323%
Non-Performing Loans as a Percentage of
Gross Loans at Year End 2.07% .76%
Non-Performing Assets as a Percentage of
Total Assets at Year End 1.39% .50%
Loans:
Average Gross Loans Outstanding During Year $66,235 $54,539
Total Gross Loans at End of Year $69,228 $60,725
</TABLE>
As illustrated in the table above, loan charge-offs exceeded recoveries
by $458,000 in 1996 and by $199,000 in 1995.
Management has a reporting system that monitors past due loans and has
adopted policies to pursue its creditor's rights in order to preserve the
Company's position. The primary risk elements considered by management with
respect to each installment and conventional real estate loan is lack of timely
payment and the value of the collateral. The primary risk elements considered by
management with respect to real estate construction loans are fluctuations in
real estate values in the Company's market areas, fluctuations in interest
rates, the availability of conventional financing, the demand for housing in the
Company's market areas, and general economic conditions. (See "Loan Portfolio"
and "Loan Concentrations," above.) The primary risk elements with respect to
commercial loans are the financial condition of the borrower, general economic
conditions in the borrower's market area, the sufficiency of collateral, the
timeliness of payment, and, with respect to adjustable rate loans, interest rate
fluctuations. Management has a policy of requesting and
20
<PAGE>
reviewing annual financial statements from its commercial loan customers and
periodically reviews the existence of collateral and its value. As indicated by
the table above, commercial loans have been the largest category of loans
charged-off in the last two years.
While it is the Company's policy to charge off in the current period
those loans where a loss is considered probable, there also exists the risk of
future losses which cannot be precisely quantified or attributed to particular
loans or classes of loans. Because this risk is continually changing in response
to factors beyond the control of the Company, such as the state of the economy,
management's decisions as to the level of the provision are necessarily
approximate.
At December 31, 1996 commercial loans comprised approximately 29% of
gross loans, real estate mortgage loans were 49%, Real estate construction loans
were 16% and installment and other loans were 6%. At December 31, 1995
commercial loans comprised approximately 29% of gross loans, real estate
mortgage loans were 46%, real estate construction loans were 18% and installment
and other loans were 7%.
The allowance for possible loan losses at December 31, 1996 was
$1,493,000 compared to $1,516,000 at December 31, 1995 and was allocated
approximately as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
<S> <C> <C>
Commercial loans $800,000 $750,000
Real estate mortgage 300,000 300,000
Real estate construction 300,000 350,000
Installment loans 93,000 116,000
</TABLE>
The allowance for possible loan losses is maintained without any
internal allocation to the segments of the loan portfolio. The above information
is being presented in accordance with the Securities and Exchange Commission's
requirements to provide an allocation of the allowance. The allocation is based
on the subjective estimates that take into account historical loss experience
and management's current assessments of the relative risk characteristics of the
portfolio as of the reporting date noted above and as described more fully under
the section "Summary of Loan Loss Experience".
Among other factors, any loans classified for regulatory purposes as
either substandard, doubtful or loss are considered when determining the
adequacy of the allowance for possible loan losses. Management believes that
these loans do not represent or result from trends or uncertainties which are
reasonably expected to materially impact future operating results, liquidity or
capital resources of the Company or the Bank.
In assessing adequacy of the allowance for possible loan losses,
management relies predominantly on its ongoing review of the loan portfolio,
which is undertaken both to ascertain whether there are probable losses which
must be charged off and to assess the risk characteristics of the portfolio in
the aggregate.
Real Estate Owned
At December 31, 1996 and 1995, the Company had no real estate owned
("REO").
21
<PAGE>
Deposits
The following table reflects average balances and the average rates
paid for the major categories of deposits for the years ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 Average 1996 1995 Average 1995
Balance Average Balance Average
(000's) Rate (000's) Rate
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $22,456 --% $20,613 --%
Interest bearing transaction accounts 41,993 3.1% 36,567 3.5%
Savings Deposits 5,432 5.3% 4,504 4.5%
Time Deposits 18,227 5.6% 15,049 5.0%
------ ---- ------
Total Deposits $88,108 2.9% $76,733 2.9%
======= ======
</TABLE>
Time Deposits
The following table sets forth, by time remaining to maturity, the
domestic time deposits in amounts of $100,000 or more at December 31, 1996.
<TABLE>
<CAPTION>
December 31, 1996
<S> <C>
(000's)
Time Deposits Maturing In:
Three months or less $2,418
Over three through six months 2,899
Over six through twelve months 3,222
Over twelve months 1.420
-----
Total $9,959
</TABLE>
Selected Financial Ratios
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using monthly figures):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
<S> <C> <C>
Net income to:
Average total assets 1.45% 1.43%
Average shareholders' equity 16.30% 16.09%
Cash dividend payments to:
Net income 19.57% 19.90%
Average shareholders' equity 3.19% 3.20%
Common Stock Dividend per share to:
Primary earnings per share 22.0% 21.17%
Fully Diluted earnings per share 22.0% 22.14%
Average shareholders' equity to:
Average total assets 8.87% 8.87%
</TABLE>
22
<PAGE>
(e) Competition
The Company's primary market area consists of the entire city of
Redwood City and portions of Menlo Park, Woodside and San Carlos. The banking
business in California generally, and specifically in the Company's primary
market area, is highly competitive with respect to both loans and deposits. The
business is dominated by a relatively small number of major banks 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 Company. By virtue of
their greater total capitalization, such banks have substantially higher lending
limits than the Company and substantial advertising and promotional budgets.
However, smaller independent financial institutions also represent a
competitive force. To illustrate the Company's relative market share, total
deposits in financial institutions in Redwood City, California (the Bank's
primary market place) at December 31, 1996 approximated $2.0 billion. This
market is allocated approximately as follows: Banks 35%, Savings and Loans 23%
and Credit Unions 42%. The Company's deposits at December 31, 1996 represent
approximately 4.4% of total deposits and approximately 12.6% of bank deposits.
To compete with major financial institutions in its service area, the
Company relies upon specialized services, responsive handling of customer needs,
local promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multibranch banks, most of which compete primarily
through interest rates and location of branches. For customers whose loan
demands exceed the Company's lending limits, the Company seeks to arrange for
such loans on a participation basis with its correspondent banks or other
independent commercial banks. The Company also assists customers requiring
services not offered by the Company to obtain such services from its
correspondent banks.
In the past, an independent bank's principal competitors for deposits
and loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, credit card companies,
and even retail establishments have offered new investment vehicles, such as
money market funds, which also compete with banks for deposit business. The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue. While the impact of these changes cannot be predicted with certainty,
it is clear that the business of banking in California will remain highly
competitive.
(f) Supervision and Regulation
Bank Holding Company Regulation
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956 and is subject to the supervision of the Board of Governors
of the Federal Reserve System ("Board"). As a bank holding company, the Company
must obtain the approval of the Board before it may acquire all or substantially
all of the assets of any bank, or ownership or control of the voting shares of
any bank if, after giving effect to such acquisition of shares, the Company
would own or control more than 5% of the voting shares of such bank. With
certain limited exceptions, the Company is prohibited from engaging in or
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company engaged in non-banking activities, unless the Federal
23
<PAGE>
Reserve Board determines that such activities are so closely related to banking
as to be a proper incident thereof.
The Company and any subsidiary which it may acquire or organize in the
future are deemed to be affiliates of the Bank within the meaning set forth in
the Federal Reserve Act and are subject to that Act. This means, for example,
that there are limitations on loans by the Bank to affiliates, on investments by
the Bank in any affiliate's stock and on the Bank's taking any affiliate's stock
as collateral for loans to any borrower. All affiliate transactions must satisfy
certain limitations and otherwise be on terms and conditions that are consistent
with safe and sound banking practices. In this regard, the Bank generally may
not purchase from any affiliate a low-quality asset (as that term is defined in
the Federal Reserve Act). Also, transactions by the Bank with an affiliate must
be on substantially the same terms as would be available for non-affiliates.
The Company and its subsidiary are also subject to certain restrictions
with respect to engaging in the underwriting, public sale and distribution of
securities.
The Company and the Bank are prohibited from engaging in certain tie-in
arrangements in connection with the extension of credit. For example, the Bank
generally may not extend credit on the condition that the customer obtain some
additional service from the Bank or the Company, or refrain from obtaining such
service from a competitor.
Dividends Payable by the Company
Holders of Common Stock of the Company are entitled to receive
dividends as and when declared by the Board of Directors out of funds legally
available therefor under the laws of the State of California. Under California
law, the Company is prohibited from paying dividends unless: (a) the amount of
its retained earnings immediately prior to the dividend payment equals or
exceeds the amount of the dividend; or (b) immediately after giving effect to
the dividend (i) the sum of its assets would be at least equal to 125 percent of
its liabilities and (ii) its current assets would be at least equal to its
current liabilities, or, if the average of its earnings before taxes on income
and before interest expense for the two preceding fiscal years was less than the
average of its interest expense for the two preceding fiscal years, at least
equal to 125 percent of its current liabilities.
The Board of Governors has advised bank holding companies that it
believes that payment of cash dividends in excess of current earnings from
operations is inappropriate and may be cause for supervisory action. As a result
of this policy, banks and their holding companies may find it difficult to pay
dividends out of retained earnings from historical periods prior to the most
recent fiscal year or to take advantage of earnings generated by extraordinary
items such as sales of buildings or other large assets in order to generate
profits to enable payment of future dividends. Further, the Board of Governors'
position that holding companies are expected to provide a source of managerial
and financial strength to their subsidiary banks potentially restricts a bank
holding company's ability to pay dividends.
The Company's ability to pay dividends on its Common Stock is subject
to the rights of senior security holders and lenders, which will include the
holders of preferred stock in the future if preferred stock is again issued. See
Item 1 - "Business--Preferred Stock." Dividend payments will also be dependent
upon its separate liquidity needs. See Item 7 - "Management's Discussion and
Analysis of Financial Condition." In that regard, Federal and state statutes,
regulations and policies impose restrictions on the payment of management fees
and cash dividends by the Bank to the Company. Information regarding the
Company's cash dividend payment history can be found at Part II, Item 5 "Market
for Registrant's Common Stock and Related Stockholder Matters."
24
<PAGE>
Bank Regulation
The Bank is subject to regulation, supervision and regular examination
by the California Superintendent of Banks (the "Superintendent"). The deposits
of the Bank are insured up to the maximum legal limits by the Bank Insurance
Fund ("BIF"), which is managed by the Federal Deposit Insurance Corporation
("FDIC"), and the Bank is therefore subject to applicable provisions of the
Federal Deposit Insurance Act, and is also subject to regulation, supervision
and regular examination by the FDIC. The regulations of these agencies affect
most aspects of the Bank's business and prescribe permissible types of loans and
investments, the amount of required reserves, requirements for branch offices,
the permissible scope of the Bank's activities and various other requirements.
While the Bank is not a member of the Federal Reserve System, it is nevertheless
also subject to certain regulations of the Board of Governors dealing primarily
with check clearing activities, establishment of banking reserves, Truth in
Lending (Regulation Z), Equal Credit Opportunity (Regulation B) and Truth in
Savings (Regulation DD).
Supervision and Examinations
Federal law mandates frequent examinations of all banks, with the costs
of examinations to be assessed against the bank being examined. In the case of
the Bank, its primary Federal regulator is the FDIC. The Federal banking
regulatory agencies have substantial enforcement powers over the depository
institutions that they regulate. Civil and criminal penalties may be imposed on
such institutions and persons associated with those institutions for violations
of any law or regulation. The penalties can be up to $5,000 per day that a
violation continues when the violation is unintentional, or up to $1 million per
day that a violation continues when the violation is willful. The amount of the
penalty also depends on whether the violation is part of a pattern or causes a
loss to the financial institution.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") places limits on brokered deposits and extends the limits to any bank
that is not "well capitalized" or is notified that it is in "troubled
condition." Previously, the limitations applied only to troubled banks. A
well-capitalized institution (which generally includes an institution that is
considered well capitalized for purposes of the prompt corrective action
regulations discussed below) may still accept brokered deposits without
restriction, unless it has been informed by its appropriate Federal regulatory
agency that it is in "troubled condition." All other insured depository
institutions are prohibited from accepting brokered deposits unless a waiver is
obtained from the FDIC. If a waiver is obtained, the interest paid on such
deposits may not exceed the rate paid for deposits in its normal market area, or
the national rate as determined in the FDIC's regulation.
If a depository institution solicits deposits by offering interest
rates significantly higher than rates being offered in its market area, it is
deemed under FDICIA to be a deposit broker. Therefore, depending on its capital
category, it may be prohibited from such practice, or need a prior waiver from
the FDIC in order to offer such rates. The FDIC's regulations specify that an
institution that is not well capitalized may offer rates that exceed the
prevailing effective rates offered in the normal market area only if the
institution obtains a waiver, but the institution may not offer rates more than
75 basis points above such prevailing rates.
The Bank is at this time considered well capitalized and not in a
"troubled condition," and it is not, therefore, subject to the brokered-deposit
limitations. If the Bank's status changes in the future, these regulations could
restrict the ability to attract such deposits.
25
<PAGE>
Risk-Based Deposit Insurance Assessments
In addition, FDICIA required the FDIC to develop and implement a system
to account for risks attributable to different categories and concentrations of
assets and liabilities in assessing deposit insurance premiums. The FDIC adopted
a risk-assessment system effective January 1, 1994. Under this system, each
bank's deposit insurance premium assessment is calculated based on the level of
risk that the Bank Insurance Fund will incur a loss if that bank fails and the
amount of the loss if such failure occurs. This requirement, along with the
increased emphasis on exceeding capital measures, may cause banks to adjust
their asset mix in order to affect their deposit insurance premium and their
ability to engage in activities.
Dividends Payable by the Bank to the Company
The Bank is a legal entity which is separate and distinct from the
Company. Aside from raising capital on its own or borrowing funds for operating
capital, it is anticipated that the Company may receive additional income
through dividends paid by, and management fees charged to, the Bank. Subject to
the regulatory restrictions described below, future cash dividends by the Bank
will depend upon management's assessment of future capital requirements,
contractual restrictions and other factors.
The power of the Board of Directors of a California chartered
commercial bank to declare a cash dividend is subject to California law, which
restricts the amount available for cash dividends to the lesser of the retained
earnings or the bank's net income for its last three fiscal years (less any
distributions to shareholders made during such period). Where the above test is
not met, cash dividends may still be paid, with the prior approval of the
Superintendent, in an amount not exceeding the greatest of (1) the retained
earnings of the bank; (2) the net income of the bank for its last fiscal year;
or (3) the net income of the bank for its current fiscal year. On December 31,
1996, the Bank was legally able to pay dividends.
Under the Federal Deposit Insurance Act, bank regulators also have
authority to prohibit a bank from engaging in business practices which are
considered to be unsafe or unsound. It is possible, depending upon the financial
condition of the bank in question and other factors, that such regulators could
assert that the payment of dividends or other payments might under certain
circumstances be an unsafe or unsound practice, even if technically permissible.
California Law
The activities of the Bank are also regulated by state law. State law,
for example, regulates certain loans to any officer of the Bank, directly or
indirectly, or to any related corporation in which such officer is a
stockholder, director, officer or employee.
California law permits California state-chartered banks to invest in
the stock and equity securities of other corporations, to engage directly in or
invest directly in subsidiaries which conduct real estate related activities
(including property management and real estate appraisal), and to participate in
management consulting and data processing services for third parties. FDICIA
limits the powers, including investment authority and subsidiaries, of state
banks to those activities that are either permitted to national banks, or
activities that the FDIC finds do not pose a significant risk to the deposit
insurance fund. As a result, state chartered banks in California may no longer
engage in certain activities, such as real estate investment, that might
otherwise be permitted under California law.
26
<PAGE>
In 1996, the primary regulator of national banks, the Comptroller of
the Currency, adopted regulations giving national banks the authority to engage
in, directly or through subsidiaries, a wider range of activities outside of
banking, and revised its application procedures to make obtaining permission
easier for well-managed and strongly capitalized national banks. This created a
potential disadvantage for California state-chartered banks in that such banks
cannot engage on an expedited basis in an expanded national bank activity if it
is not authorized under state laws and, under FDICIA, cannot engage in an
activity expanded under state law if it is not authorized for national banks.
The California Superintendent of Banks has the authority to give
state-chartered banks the powers and rights that national banks have, even if
those powers and rights are inconsistent with state law, but this authority was
amended in 1996, effective January 1, 1997, to provide that any regulation
adopted by the Superintendent under this authority will expire at the end of the
year after adoption, and cannot be reinstated. Therefore, state-chartered banks
are still subject to a competitive disadvantage as compared to national banks,
but the extent depends on whether the Superintendent adopts regulations to give
to state-chartered banks the powers and rights that national banks have and
whether those rights are granted by California legislation before regulatory
authority expires.
Capital Regulations
The Federal Reserve Board requires bank holding companies to maintain
adequate capital and has adopted capital leverage guidelines for evaluating the
capital adequacy of bank holding companies. The FDIC has also adopted a similar
minimum leverage regulation, requiring insured banks to maintain at least a
minimum capital to asset ratio. The Board's guidelines and the FDIC's
regulations require the banks and bank holding companies subject to them to
achieve and maintain a Tier 1 capital to total asset ratio of at least three
percent (3.0%) to five percent (5.0%), depending on the condition and rate of
growth of the bank or holding company. Tier 1 or core capital is defined to
consist primarily of common equity, retained earnings, and certain qualified
perpetual preferred stock. These minimum leverage ratio requirements limit the
ability of the banking industry, including the Bank, to leverage assets.
The Board also uses risk-based capital guidelines to evaluate the
capital adequacy of member banks and bank holding companies. Under these
guidelines, assets are categorized according to risk and the various categories
are assigned risk weightings. Assets considered to present less risk than others
require allocation of less capital. In addition, off-balance sheet and
contingent liabilities and commitments must be categorized and included as
assets for this purpose. Under these guidelines, when the Company's total assets
equal or exceed $150 million it will be required to maintain total capital of at
least 8.00% of risk-adjusted assets, and half of that minimum total capital must
consist of Tier 1 capital as defined above. For bank holding companies with less
than $150 million in total assets, the Board reviews the capital adequacy of the
subsidiary bank of the holding company, instead of the consolidated entity.
The FDIC requires insured banks to maintain capital in proportion to
risk-adjusted assets under capital guidelines that are similar to the Federal
Reserve's risk-based capital guidelines. At this time, the Bank is required to
maintain total capital of at least 8.00% of risk-adjusted assets.
The capital totals of the Bank as of December 31, 1996 and 1995
exceeded the amounts of capital required under the regulatory guidelines at
those times. The following table shows the capital of the Bank, as a percentage
of assets, and the capital that it is required to maintain under the capital
regulations, as of December 31, 1996 and 1995:
27
<PAGE>
RISK BASED CAPITAL COMPUTATION
(Note: Some totals may not foot or agree to financial statements or Management's
Discussion by immaterial amounts due to averaging calculations and rounding)
<TABLE>
<CAPTION>
Risk Weighted Weighted
Weighting Assets Assets
Adjustment 12/31/96 12/31/95
<S> <C> <C> <C>
Beginning Unadjusted Assets $103,187 $93,815
Less:
Fed. Reserve Balances 100% (777) (310)
Currency and Coin 100% (4,907) (3,000)
US Treasury Securities 100% (6,006) (6,291)
Time Deposits with Other Banks 80% (80) (82)
Agency and Municipals 80% (6,930) (5,562)
Federal Funds Sold 80% (5,480) (7,840)
Balances at U.S. Banks 80% (4,051) (3,973)
Loans Secured by Deposits 80% (590) (344)
1-4 Family 1st Deeds 50% (2,358) (3,885)
Plus Off Balance Sheet Items:
Letters of Credit 20% 65 20
Home Equity Lines 50% 1,535 1,158
Original Commitments Over 1 Year 50% 274 207
--- ---
Total Risk Weighted Assets $73,882 $63,913
======= ======
Tier 1 Capital
Common Stock $3,620 $3,620
Retained Earnings 5,666 4,425
Unrealized Loss on Securities Held For Sale (5) 10
--
Total Tier 1 Capital $9,281 $8,055
====== =====
Tier 1 Capital/Risk Weighted Assets 12.56% 12.60%
====== ======
Tier 2 Capital
Tier 1 Capital $9,281 $8,055
Loan Allowances up to 1.25% of Risk
Weighted Assets 924 799
--- ---
Total Tier 2 Capital $10,205 $8,854
======= =====
Tier 2 Capital/Risk Weighted Assets 13.81% 13.85%
====== ======
Leverage capital ratio 8.99% 8.59%
Required leverage capital ratio1 4.00% 4.00%
Total risk-based capital ratio 13.81% 13.85%
Required total risk-based capital ratio 8.00% 8.00%
Tier 1 risk-based capital ratio 12.56% 12.60%
Required tier 1 risk-based capital ratio 4.00% 4.00%
- -------------------
<FN>
1 Depending upon the FDIC's determination with respect to the Bank.
</FN>
</TABLE>
28
<PAGE>
The risk-based guidelines and the leverage ratio do not have a
significant effect on the Company and the Bank at this time because the Bank
meets its required ratios. The effect the requirements may have in the future is
uncertain, but management does not believe they will have an adverse effect on
the Company or the Bank. The risk-based capital guidelines may affect the
allocation of the Bank's assets between various types of loans and investments.
If the Bank continues to grow it may be required to raise additional capital.
As required by FDICIA, the Federal banking agencies now take credit
risk concentrations and an individual institution's ability to manage such
concentrations into account when they assess a bank's capital adequacy.
Non-traditional investments and activities, such as the use of derivatives, are
also taken into account in assessing capital requirements. The agencies can
adjust the standards for risk-based capital on a case by case basis to take such
risks into account, but there is no formula that a bank can use prior to
evaluation by the agency to determine how credit concentration or nontraditional
activities will affect its capital requirements.
The banking agencies adopted amendments to the risk-based capital rules
in 1995 to take interest rate risk into account. Now, when the agencies assess
the capital adequacy of a bank, they must take into account the effect on that
bank's capital that would occur if interest rates moved up or down. The purpose
of the amendment is to ensure that banks with high levels of interest rate risk
have enough capital to cover the loss exposure.
Prompt Corrective Action
FDICIA requires the banking agencies to take corrective action against
certain financial institutions, based upon the financial institutions'
compliance with the various capital measurements. A financial institution is
subject to corrective action if its total risk-based capital is less than 8%, or
its Tier 1 risk-based capital ratio or leverage ratio is less than 4%. In
addition, an institution having a total risk-based capital to assets ratio of
less than 10%, a Tier 1 risk-based ratio of less than 6%, or a leverage ratio of
less than 5% may be subject to corrective action if it receives a less-than-
satisfactory rating for assets, management, earnings or liquidity in an
examination or if such ratios fall significantly below such standards. These
corrective actions become increasingly more severe as an institution becomes
more and more undercapitalized. Ultimately, the federal regulator is required to
seize an institution within 90 days of its becoming "critically
undercapitalized," unless the regulator can document that another course of
action will better achieve the purposes of this section of the law.
As discussed above, the Bank has capital ratios in excess of all such
capital measurements, and is not subject to any corrective actions.
Impact of Monetary Policies
Banking is a business in which profitability depends on rate
differentials. In general, the difference between the interest rate received by
the Bank on loans extended to its customers and securities held in the Bank's
investment portfolio and the interest rate paid by the Bank on its deposits and
its other borrowings comprise the major portion of the Bank's earnings. To the
extent that the Bank is not able to compensate for increases in the cost of
deposits and other borrowings with greater income from loans, securities and
fees, the net earnings of the Bank will be reduced. The interest rates paid and
received by the Bank are highly sensitive to many factors which are beyond the
control of the Bank, including the influence of domestic and foreign economic
conditions.
The business of the Bank is also affected by the Board's regulations,
which require the Bank to maintain cash reserve balances on transaction accounts
and non-personal time deposits at the
29
<PAGE>
Federal Reserve Bank. The average reserve requirement for the Bank for the year
ended December 31, 1996 was approximately $578,000.
The earnings and growth of the Bank are also affected by the monetary
and fiscal policy of the United States and its agencies, particularly the Board.
These agencies can and do implement national monetary policy, which is used in
part to curb inflation and combat recession. Among the instruments of monetary
policy used by these agencies are open market transactions in United States
Government securities, changes in the discount rates of member bank borrowings
and changes in reserve requirements. The actions of the Board have had a
significant effect on lending by banks, investments and deposits, and such
actions are expected to continue to have a substantial effect in the future. The
nature and timing of any further changes in such polices and their impact on the
Bank cannot be predicted.
Environmental Regulation
Federal, state and local regulations regarding the discharge of
materials into the environment may have an impact on the Company and the Bank.
Under Federal law, liability for environmental damage and the cost of cleanup
may be imposed upon any person or entity who is an owner or operator of
contaminated property. State law provisions, which were modeled after Federal
law, impose substantially similar requirements. Both Federal and state laws were
amended in 1996 to provide generally that a lender who is not actively involved
in operating the contaminated property will not be liable to clean up the
property, even if the lender has a security interest in the property or becomes
an owner of the property through foreclosure.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Economic Growth Act"), discussed in more detail below, includes protection for
lenders from liability under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"). The Economic Growth Act adds
a new section to CERCLA to specify the actions a lender may take with respect to
lending and foreclosure without incurring environmental clean-up liability or
responsibility. Typical contractual provisions regarding environmental issues in
the loan documentation and due diligence inspections will not lead to lender
liability for clean-up, and a lender may foreclose on contaminated property, so
long as it merely maintains the property and moves to divest it at the earliest
possible time.
Under California law, a lender generally will not be liable to the
State Attorney General for the cost associated with cleaning up contaminated
property unless the lender realized some benefit from the property, failed to
divest the property promptly, caused or contributed to the release of the
hazardous materials or made the loan primarily for investment purposes. This
amendment to California law became effective with respect to judicial
proceedings filed and orders issued after January 1, 1997.
The extent of the protection provided by both the Federal and state
lender protection statutes will depend on their interpretation by the
administrative agencies and courts, and the Bank cannot predict whether it will
be adequately protected for the types of loans it makes.
In addition, the Company and the Bank are still subject to the risks
that a borrower's financial position will be impaired by liability under the
environmental laws and that property securing a loan made by the Bank may be
environmentally impaired and not provide adequate security for the Bank.
California law provides some protection against the second risk, by establishing
certain additional, alternative remedies for a lender in the situation where the
property securing a loan is later found to be environmentally impaired.
Primarily, the law permits the lender in such a case to pursue remedies against
the borrower other than foreclosure under the deed of trust. To address the risk
30
<PAGE>
that the borrower will be adversely affected by environmental liability, the
Bank's Loan Policy calls for the Bank to study the history of the property and
the uses of the property. When the Bank's review of the history of the property
and the surrounding property indicates that there may be environmental issues, a
Phase I environmental report is obtained for the property, and a Phase II report
is obtained where its usefulness is indicated by the results of the Phase I
environmental report.
Americans With Disabilities Act
The Americans With Disabilities Act ("ADA") enacted by Congress, in
conjunction with similar California legislation, is having an impact on banks
and their cost of doing business. The legislation requires employers with 15 of
more employees and all businesses operating "commercial facilities" or "public
accommodations" to accommodate disabled employees and customers. The ADA has two
major objectives (1) to prevent discrimination against disabled job applicants,
job candidates and employees and (2) to provide disabled persons with ready
access to commercial facilities and public accommodations. Commercial
facilities, such as the Bank, must ensure all new facilities are accessible to
disabled persons, and in some instances may be required to adapt existing
facilities to make them accessible, such as ATM's and bank premises.
New and Pending Legislation
Economic Growth and Regulatory Paperwork Reduction Act of 1996
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Economic Growth Act"), enacted on September 30, 1996, addresses the problems
that arose from the disparity between the deposit insurance premiums payable by
banks and savings associations, and includes a wide variety of regulatory relief
measures for banks.
The crisis in the savings and loan industry during the late 1980's
resulted in the dissolution of the Federal Savings and Loan Insurance
Corporation and the insurance of thrift deposits through a separate fund of the
FDIC called the Saving Association Insurance Fund ("SAIF") and the issuance of
bonds by the Financing Corporation ("FICO") to cover some of the losses incurred
by the failed savings association. As the banking industry in general has become
more healthy since 1990, deposit insurance premiums for well-managed and
strongly-capitalized BIF insured institutions have decreased to very low levels.
However, because of the cost of carrying the FICO bonds and because the SAIF
still needed to build reserves, deposit insurance premiums for SAIF insured
institutions have not decreased. This created a large disparity between the cost
of deposit insurance for healthy banks and similarly situated thrifts over the
last several years. Many healthy thrifts have sought ways either to convert to
BIF insurance or to obtain BIF insurance for some portions of their deposits, in
order to remain competitive with banks. The migration of deposits increased the
pressure on the remaining thrifts to build up reserves at the SAIF and pay the
cost of servicing the FICO bonds.
Subtitle G of the Economic Growth Act required all remaining SAIF
institutions (subject to certain exceptions) to pay a one-time deposit
assessment of $.657 per $100 of insured deposits in 1996, in order to
recapitalize the SAIF fund. The banking agencies are now required by law to take
actions to prevent the migration of deposits from the SAIF to the BIF funds,
until the year 2000. In addition, the cost of carrying the FICO bonds will now
be allocated between BIF insurance institutions and SAIF insured institutions,
with BIF insured institutions paying 1/5 the amount paid by SAIF insured
institutions. The FDIC recently estimated that BIF institutions will pay an
assessment of approximately $.0128 annually per $100 of insured deposits and
SAIF institutions will pay approximately $.0644 annually per $100 of insured
deposits. Starting in the year 2000, BIF and
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<PAGE>
SAIF institutions will share the FICO bond costs equally, with an estimated
assessment of $.0243 annually per $100 of insured deposits.
This legislation will increase the Bank's premiums, as it will now be
required to share in the cost of carrying the FICO bonds. The increase will be
slight until the year 2000, at which time it will increase further.
The Economic Growth Act also included many regulatory relief provisions
applicable to the Company and the Bank. The lending restrictions on directors
and officers have been relaxed to permit loans having favorable terms under
employee benefit plans. The Federal Reserve Board and the Department of Housing
and Urban Development ("HUD") are required to simplify and improve their
regulations with respect to disclosures relating to certain mortgage loans, and
certain new exemptions from the disclosure requirements were added.
The Economic Growth Act also provides protection for lenders who
self-test for compliance with the Equal Credit Opportunity Act (the "ECOA") and
the Fair Housing Act ("FHA"). The ECOA and the FHA now provide that the results
or reports generated or obtained by a bank from a self-test may not be obtained
by an agency, department or applicant to be used with respect to any proceeding
or civil action alleging a violation of the ECOA or the FHA, unless the bank
releases the results of the test or otherwise waives the privilege. This change
in the law protects the Bank against liability based on the results of internal
tests done to enhance compliance with the law and encourages the Bank to use
self-testing to evaluate its compliance with the ECOA and the FHA.
Section 2208 of the Economic Growth Act permits certain
well-capitalized bank holding companies to engage (de novo or by acquisition) in
activities previously approved by regulation without submitting an application.
The Federal Reserve adopted interim regulations on November 1, 1996 to implement
Section 2208. Under the new procedures, a bank holding company that qualifies
may engage in new permitted new activities after providing advance notice to the
Federal Reserve at least 12 business days in advance of engaging in the
activity. In order to qualify, a bank holding company must be well-capitalized
and have received a sufficiently high composite rating and management rating at
its last examination.
Since the Federal Reserve did not have a regulatory definition of
"well-capitalized," as applicable to a bank holding company, the interim rule
defines well-capitalized for purposes of the new procedures. In general, in
order for a bank holding company to be considered well capitalized, it must (1)
have a total risk-based capital ratio of 10% or more, (2) have a Tier 1
risk-based capital ratio of 6% or more, (3) have either i) a Tier 1 leverage
ratio of 4% or more or ii) a composite rating of 1 or uses a market risk
adjustment to its risk-based capital ratio, and has a Tier 1 leverage ratio of
3% or more, and (4) not be subject to any written agreement, order or capital
directive, issued by the Federal Reserve. This change in the law provides an
advantage to a well-capitalized bank holding company, since such a bank holding
company can engage in new activities more freely and quickly. The Company is
considered well capitalized under the above definition.
State Regulatory Relief and Regulatory Agency Consolidation
Effective July 1, 1997, the California State Banking Department and the
Department of Savings and Loan will be consolidated, and the new agency will be
the Department of Financial Institutions (the "Department"). The Department will
also have jurisdiction over credit unions and industrial loan companies, also
known as thrift and loan companies. The legislation combining the agencies was
sponsored by the State Banking Department, with the expectation that the effect
of the legislation would be to reduce the cost of regulating the financial
services industry, to promote reform of the regulatory climate for financial
institutions and to encourage innovation. The various
32
<PAGE>
types of financial institutions will continue to have separate charters and
regulation, and the Bank, therefore, does not expect the consolidation to have a
significant initial effect on the Bank. Over time, however, the Department may
create more uniformity between the regulations governing banks and other types
of financial institutions. This could create more competition between commercial
banks and the other types of financial institutions. Also, the consolidation of
the regulatory agencies may change the amount of the assessment the Bank pays
each year to support the Department.
In addition to regulatory consolidation, the California legislature
enacted regulatory relief applicable to state chartered banks. Specifically,
applications are no longer required in order for a bank to establish a new ATM,
a state-chartered bank no longer needs the prior approval of the Department to
amend its bylaws, and only a notice is now required (instead of an application)
to close a branch. These changes will reduce the Bank's cost of establishing new
ATMs, and may reduce its other costs of doing business, in the event it
determines to make any of the other changes affected by the new legislation.
New OCC Corporate Activities and Transaction Regulations
On November 26, 1996, the OCC completely revised its rules to simplify
and streamline corporate applications and notices by national banks, including
such diverse issues as branch applications, fiduciary powers applications,
change in bank control, and changes in capital. The amendments became effective
on December 31, 1996. The OCC also amended its rules during 1996 with respect to
the types of activities in which a national bank can engage, to expand those
activities and simply the application process for national banks that are
well-capitalized and have strong management. See, Bank Regulation, California
Law, above.
Although the Bank is not currently intending to enter into any new type
of business, either relating to banking or that is not currently permitted for a
bank, this regulation could affect the Bank if any of its national bank
competitors to expand their operations in the future. The extent of this depends
on the extent to which the OCC permits banks to engage in new lines of business,
whether the State Banking Department or the new Department of Financial
Institutions adopts parity regulations for state-chartered banks, and whether
the Bank qualifies to expand its business at such time as it might decide to
expand.
ATM Fee Legislation
In April of 1996, two of the larger ATM networks lifted their prior
restriction prohibiting ATM operators from directly surcharging the users of the
ATMs, which triggered a series of legislative proposals and hearings with
respect to whether the fees charged by the operators of ATM machines should be
regulated. The lifting of the prior restriction on surcharges was controversial
in part because customer may be required to pay two charges for a single
transaction, one to the bank issuing the ATM card and another to the operator of
the ATM being used. See, Proposed Legislation and Regulation, below.
Currently, Federal law requires a bank at which a depositor has an
account to disclose to its own customers the amount of fees it charges, and
California law requires an ATM operator to disclose to users of the ATM machine
who are using an ATM card issued by someone other than the ATM operator that a
fee will be charged. California law was amended in 1996, effective July 1, 1997,
to require the operators of ATMs in California to disclose to all users of its
ATMs any surcharge or fee that the operator of the machine will charge,
including charges for mini-statements and other services. The disclosure must be
displayed on the machine itself or shown electronically, on the ATM screen. The
Bank has taken action, both in signs and electronic display, to be in the
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<PAGE>
opinion of management to be in early compliance with the pending legislation.
The cost of such compliance is not material.
Interstate Banking and Branching
The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995 ("Interstate Banking Act") became effective October 2,
1995. The Interstate Banking Act implements in California a limited form of
interstate branching. A bank from outside of California may now acquire a whole
bank in California and merge the California bank into the out-of-state bank. The
effect of such merger is that the out-of-state bank will have full branch
offices in California. Federal law authorizing these mergers was passed in 1994
and became effective September 30, 1995.
Out-of-state banks may not establish branch offices in California by
opening a new branch or acquiring one or more (but less than all) of the
branches of a California bank. They may only acquire a whole bank that has been
in existence for at least five years. As a result of the Interstate Banking Act,
California banks may now be permitted to branch into other states that have also
adopted early opt-in legislation. Although the Bank has not experienced a
significant impact to date, there may be increased competition from large
interstate banks.
The Interstate Banking Act also authorizes California state-chartered
banks to appoint unaffiliated banks in other states to act as an agent of the
California state-chartered bank. The agent can accept deposits and evaluate loan
applications on behalf of the principal bank. National banks may establish
agency relationships only with affiliated banks. This expanded authority for
state-chartered banks may place national banks in California at a disadvantage
if many state-chartered bank use agency relationships with unaffiliated entities
to increase their business.
New Community Reinvestment Act Regulations.
The Federal banking agencies amended substantially their Community
Reinvestment Act ("CRA") regulations in 1995, and issued guidelines and
explanations of the new regulations in 1996. CRA requires banks to help meet the
credit needs of their entire communities, including minorities and low and
moderate income groups.
Under the revised CRA regulations, the agencies determine a bank's
rating under the CRA by evaluating its performance on lending, service and
investment tests, with the lending test as the most important. The tests are to
be applied in an "assessment context" that is developed by the agency for the
particular institution. The assessment context takes into account demographic
data about the community, the community's characteristics and needs, the
institution's capacities and constraints, the institution's product offerings
and business strategy, the institution's prior performance, and data on
similarly situated lenders. Since the assessment context is developed by the
regulatory agencies, a particular bank will not know until it is examined
whether its CRA programs and efforts have been sufficient.
Larger institutions are required under the revised regulations to
compile and report certain data on their lending activities in order to measure
performance. Some of this data is already required under other laws, such as the
Equal Credit Opportunity Act.
Small institutions (with less than $250 million in assets) are now
being examined on a "streamlined assessment method." The streamlined method
focuses on the institution's loan to deposit ratio, degree of local lending,
record of lending to borrowers and neighborhoods of differing income levels, and
record of responding to complaints. The Federal regulators who are
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<PAGE>
implementing the new regulations have reported that the time spent at the banks
during CRA examination is reduced under the new regulations, and the banks spend
less time on paperwork evidencing compliance.
On March 8, 1996, the Federal banking agencies issued joint examination
procedures applicable to compliance examination under the new CRA regulations.
On October 21, 1996, the Consumer Compliance Task Force of the Federal Financial
Institutions Examination Council issued additional guidelines about for CRA
compliance. Starting on July 1, 1997, the new procedures and guidelines will
apply to larger institutions.
Large and small institutions have the option of being evaluated for CRA
purposes in relation to their own pre-approved strategic plan. Such a strategic
plan must be submitted to the institution's regulator three months before its
effective date and be published for public comment.
The Bank is currently considered a small institution under the CRA
regulations and it will be a small institution until it has assets of greater
than $250 million at the ends of two years in a row. The initial impact of this
amendment on the business of the Bank will be less than the impact when the Bank
no longer qualifies as a small institution. At that time, the new regulations
will increase the amount of reports the Bank is required to prepare and submit,
and it could cause the Bank to change its asset mix, in order to meet the
performance standards. At this time, the new regulations have increased the
uncertainty of the Bank's business, both as the rating and examination
procedures changes and as the Bank grows and may no longer qualify as a small
institution.
Safety and Soundness Guidelines.
The Federal banking agencies issued final safety and soundness
guidelines in 1995, as required by FDICIA. The guidelines contain operational
and managerial standards and prohibit certain compensation practices. In 1996,
the agencies adopted guidelines for asset quality and earnings. The effect of
the guidelines is to require general standards of safe and sound business and
banking practices with respect to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, compensation, asset quality and earnings. The banking agencies have
indicated that the standards are the same as the agencies previously applied in
their examinations of institutions, so the adoption should not affect individual
institutions that comply with the regulations. If an agency determines that an
institution is not in compliance with the guidelines, the institution must
submit a plan to come into compliance to the regulator within 30 days of
notification.
The effect of these guidelines on the Bank depends on how they are
implemented by the Bank's primary regulator, the FDIC. The Bank expects that the
guidelines may increase the Bank's cost of doing business, since it now must
document its compliance with all the requirements in the guidelines. The new
guidelines, in the areas of monitoring asset quality and the quality and
quantity of earnings, require the Bank to document that certain reports have
been made, and that it is monitoring the required items at the required times.
Proposed Legislation and Regulation.
Certain legislative and regulatory proposals that could affect the
Company, the Bank and the banking business in general are pending or may be
introduced, before the United States Congress, the California State Legislature,
and Federal and state government agencies. Bills have been introduced in the
Congress and the California legislature to regulate the amount of ATM fees that
operators of ATMs may charge, and to further regulate the disclosure of such
fees. A recently introduced bill in the California Assembly will, of adopted as
proposed, prohibit the operator of an
35
<PAGE>
ATM completely from charging fees for the use of the ATM. If this legislation is
adopted as proposed by the California Legislature and signed by the Governor,
the Bank's income from its ATM network would be severely reduced to the amount
the Bank receives from interchange fees. The department could not cover its
expenses at that level of revenue.
Other proposals to permit banks to engage in related financial
services, and to permit other financial services companies to offer
banking-related services are pending and, if adopted, would increase competition
to the Bank. For example, the Economic Growth Act anticipates that the types of
financial institution charters may be consolidated before the year 2000,
especially that the charters of national banks and federal savings associations
may be combined. This would also increase competition for the Bank, if federal
savings associations' charters are modified to include the powers of national
banks.
It is not known to what extent, if any, these proposals will be enacted
and what effect such legislation would have on the structure, regulation and
competitive relationship of financial institutions. It is likely, however, that
many of these proposals would subject the Company and the Bank to increased
regulation, disclosure and reporting requirements and would increase competition
to the Bank and its cost of doing business.
In addition to pending legislative changes, the various banking
regulatory agencies frequently propose rules and regulations to implement and
enforce already existing legislation. It cannot be predicted whether or in what
form any such legislation or regulations will be enacted or the effect that such
legislation may have on the Bank's business.
Item 2. Properties
The Company's and the Bank's principal offices are located in a modern,
six-story building at 900 Veterans Boulevard, Redwood City, which provides
approximately 8,300 square feet of ground floor interior space. In June of 1995
the Bank executed a lease for 7.5 years (90 months) with a seven year option to
renew. The new lease was made at essentially the same terms as the previous
lease. The current monthly cost for this space (which includes an allocation of
certain operating expenses) is approximately $20,700 per month or approximately
$2.49 per square foot. The rental amounts are subject to further adjustments
annually based on the Consumer Price Index and the allocation of property taxes
and operating expenses. This building was acquired in September of 1992 by
Nine-C Corporation, which is owned by Mr. James Burney, a major shareholder of
the Company and a Director Emeritus of the Company and the Bank.
In addition to the 8,300 square feet the Company leases for its primary
operations, an additional 2,100 square feet was leased in the same building in
1993 for the Bank's Mortgage and Construction Lending Department. With the
closing of the Mortgage department in February of 1997, the Bank expects to
utilize the portion of the space vacated for other purposes. The current cost
for this additional space (which includes an allocation of certain operating
expenses) is approximately $3,900 per month or $1.86 per square foot. The lease
expired in December 1995 and was renewed for a three year period with a three
year option to renew. This lease is also subject to adjustment annually based on
the Consumer Price Index and the allocation of property taxes and operating
expenses.
The Company leases additional premises for its data processing,
accounting and centralized operations departments in Redwood City. These
premises are located in a building owned by Mr. Alan Miller, a major shareholder
and Director Emeritus of the Company and the Bank. The lease covers total space
of approximately 5,200 square feet. On May of 1991, the Company executed a three
year lease with Mr. Alan Miller. This lease has been extended to March 31, 1999
with an
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<PAGE>
additional three year option to renew. The current monthly cost under the lease
(which includes an allocation and adjustments for certain operating expenses) is
approximately $4,750 per month, or $.91 per square foot. The monthly rent
payment is subject to annual adjustment based on the cost of living index as
published by the U.S. Department of Labor, Bureau of Labor Statistics. In
addition to monthly rent payments, the Company is also responsible for its pro
rata share of the building's operating expenses (i.e., taxes, utilities,
insurance, landscaping, security).
The Company's leases were reviewed by management and the Board of
Directors and found to be equitable and competitive with other leases within the
immediate market area.
The Company owns leasehold improvements and furniture, fixtures and
equipment located at the above locations, all of which are used in the banking
business.
Item 3. Legal Proceedings.
As of December 31, 1996, neither the Company nor the Bank was a party
to, nor is any of their property the subject of any material pending legal
proceedings, nor are any such proceedings known to be contemplated by
governmental authorities. At the same date, the Bank was involved as a party in
employment litigation with two former employees of the Bank as described below.
This litigation is considered by the Bank to be ordinary routine litigation
incidental to the Bank's business and is not considered to be financially
material.
In December 1996, a former employee, Harry Clancy, filed two lawsuits,
one in the San Mateo Superior Court and another in Federal District Court for
the Northern District of California. The Superior Court action has been removed
to the Federal district Court for the Northern District of California and
coordinated with the other action pending there. The suits seek damages claiming
that Mr. Clancy was wrongfully terminated and that he was wrongfully excluded
from the Bank's 401(k) program.
In March 1996, a former employee, Sandra Smith, filed a lawsuit in
Federal District Court for the Northern District of California. The suit seeks
damages for back pay, claiming alleged violations of the Americans With
Disabilities Act.
In response to the foregoing lawsuits, the Bank denies the claims in
their entirety and intends to vigorously defend them. The Bank's counsel
believes that an award of damages is unlikely and any unexpected award would not
have a material impact on the financial condition of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted, through the solicitation of proxies or
otherwise, to a vote of security holders during the fourth quarter of the fiscal
year covered by this Form 10-K.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Company's Common Stock is not listed on any exchange nor is it
listed on the NASDAQ system. U.S. Stock Transfer Corporation acts as transfer
agent and registrar for trades. Hoeffer & Arnett, Inc., Sutro & Company, and Van
Kasper and Company handle transactions in the Company's stock. At March 15, 1997
the Company had approximately 380 shareholders of common stock.
The following table indicates the range of high and low bid prices, not
including broker's commissions, for the periods shown, based upon information
provided by Hoeffer & Arnett, Inc., Van Kasper and Company, and Sutro & Company.
The table does not include transactions made privately by individuals. The
prices listed below are inter-dealer prices, and do not necessarily represent
actual transactions and do not include retail mark-up, mark-downs or
commissions.
<TABLE>
<CAPTION>
Bid Prices of the Company's Common Stock
<S> <C> <C> <C>
Approximate
Quarter Ended High Low Trading Volume
- ------------- ---- --- --------------
March 31, 1995 $7.50 $6.75 80,400
June 30, 1995 7.75 7.25 33,200
September 30, 1995 11.50 9.75 9,300
December 31, 1995 12.37 10.88 11,200
March 31, 1996 $11.88 $12.75 20,300
June 30, 1996 12.75 14.13 42,700
September 30, 1996 13.25 14.50 14,300
December 31, 1996 14.50 15.75 17,800
</TABLE>
The following table sets forth the Company's cash dividend history from
1991 to the date this report is filed.
<TABLE>
<CAPTION>
Cash Dividends on the Company's Common Stock
<S> <C> <C> <C>
Date Declared Date Paid Amount/Share
November 19, 1991 December 11, 1991 $.05
March 17, 1992 April 8, 1992 $.05
June 16, 1992 July 8, 1992 $.05
September 15, 1992 October 7, 1992 $.05
December 15, 1992 December 23, 1992 $.05
March 16, 1993 April 9, 1993 $.05
June 15, 1993 July 9, 1993 $.05
September 21, 1993 October 15, 1993 $.05
November 16, 1993 December 17, 1993 $.05
March 15, 1994 April 8, 1994 $.05
June 21, 1994 July 15, 1994 $.06
September 20, 1994 October 14, 1994 $.06
November 15, 1994 December 16, 1994 $.06
March 21, 1995 April 7, 1995 $.07
June 20, 1995 July 7, 1995 $.07
September 9, 1995 October 13, 1995 $.07
December 18, 1995 January 5, 1996 $.08
March 19, 1996 April 5, 1996 $.08
June 18, 1996 July 5, 1996 $.08
September 17, 1996 October 4, 1996 $.08
December 16, 1996 January 3, 1997 $.09
March 25, 1997 April 8, 1997* $.09
* Expected payment date.
</TABLE>
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Continuation of future cash dividend payments by the Company is
contingent upon the Board of Directors' assessment of the Company's current
financial position as well as their expectation of future results. The Board
also considers, among other factors, the current capital position of both the
Company and the Bank as well as the need for cash and capital in the future.
For a discussion of the legal and other restrictions on the Company's
ability to pay dividends, see "(f) Supervision and Regulation --Bank Holding
Company Regulation-Dividends Payable by the Company" and "Bank Regulation" under
the heading "Item 1. Business" above.
Item 6. Selected Financial Data.
The selected consolidated financial information for the Company and
its subsidiaries presented below for the five years ended December 31, 1996
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto which are included in the Annual Report on this
Form 10-K. All are amounts are in thousands except per share data.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income $8,401 $7,507 $6,363 $5,983 $6,310
Interest Expense 2,539 2,223 1,590 1,434 2,015
----- ----- ----- ----- -----
Net Interest Income 5,862 5,284 4,773 4,549 4,295
Provision for Loan Losses 435 210 300 420 450
Other Income 2,821 2,532 1,833 692 312
Other Expenses 5,876 5,555 4,722 3,376 2,984
Provision for Income Taxes 957 839 637 586 472
--- --- --- --- ---
Net Income $1,415 $1,211 $947 $860 $701
====== ===== === === ===
Primary Net Income per share $1.50 $1.37 $1.09 $1.02 $.91
Fully Diluted Net Income per share $1.50 $1.31 $1.09 $1.02 $.91
Dividends per Common Share $.33 $.29 $.23 $.20 $.20
Net Loans $ 67,735 $59,981 $52,344 $55,389 $52,431
Total Assets $103,187 $93,815 $79,537 $78,719 $73,652
Total Deposits $ 92,968 $83,979 $72,014 $71,982 $67,728
Shareholders' Equity $ 9,281 $ 8,078 $ 6,971 $ 6,204 $ 5,410
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included as part of Item 8
herein, and selected statistical data included in Item 1, herein. Since the
Company is a holding company whose only asset (with the exception of average
cash and prepaid assets, which averaged less than $100,000 in 1996) is its
investment in the Bank, the following relates almost entirely to the financial
condition and results of operations of the Bank.
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<PAGE>
Because the Company's primary operations are concentrated in a
relatively small geographic market place (San Mateo County), there are certain
inherent risks that the Company's financial operations may be adversely affected
if the local economy were to sustain a severe or prolonged economic decline.
Housing prices in the San Francisco Bay Area escalated rapidly in the late
1980's, creating demand for more affordable new home construction. The housing
market slump beginning in 1990 resulted in decreased demand and decreasing
property values that continued through 1994. Property values began to stabilize
in 1995 and appreciated in 1996.
The San Mateo region has consistently outperformed the State of
California as a whole in employment since the most recent recession began in
1988. While the national unemployment rate averaged approximately 7% over the
past five years and the state unemployment rate averaged 9% over the same
period, San Mateo County averaged just 5%. Economic growth in the Company's
local area has continued to be strong, bolstered by the residential and
commercial development of the Redwood Shores area which is within five miles of
the Company.
More recently the Bank has had increasing difficulty in securing
qualified candidates for employment positions at the Bank. The Bank is located
less than ten miles from the corporate headquarters of a number of large growing
companies such as Oracle Corporation, Sun Microsystems, Electronic Arts, Visa
International, DHL Airfreight, Oral B (dental products), Raychem Corporation,
and Silicon Graphics. This has made it increasingly difficult to attract new
employees. Bank management expects that continued growth in these companies will
result in continues demand for local housing and by increasing the value of much
of the collateral that secures the Bank's real estate loans.
Liquidity
Liquidity is the ability of the Company and the Bank to meet their
present and future obligations. The Company's liquidity requirements on a parent
company-only basis are centered primarily around debt obligations that it may
incur and costs associated with managing corporate affairs.
The Company's (parent only) principal sources of liquidity consist of
dividends from the Bank, borrowings and infusion of additional capital. During
1996, the Bank paid $225,000 in dividends to the parent as compared to $275,000
paid in 1995. Stock options exercised in 1996 generated $80,000 as compared to
$51,000 generated in 1995. Management believes liquidity will be adequate to
meet the Company's obligations in 1997, which include approximately $60,000 in
operational expenses. The Company had no borrowings at December 31, 1996, and
does not anticipate needing debt in 1997. Any excess liquidity of the Company
may be used continue to pay cash dividends to shareholders and/or to reduce the
Company's reliance on dividends from the Bank.
The Bank's need for liquidity arises from potential withdrawals of
maturing time deposits, savings accounts and demand deposit accounts. The Bank's
ability to maintain adequate levels of liquidity is also significant in
providing for funding of loans to new and existing borrowers as well as to fund
the activities of the Bank's Mortgage Department. Both assets and liabilities
contribute to the Bank's liquidity ratio. Assets such as investment securities,
cash and due from banks, time deposits with other banks, federal funds sold and
loan repayments contribute to liquidity. The Bank's funding sources include
corporate borrowings, demand deposits, interest-bearing transaction accounts,
savings and time deposits.
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<PAGE>
There was an increase in Bank liquidity in comparing year-end balances
in 1996 with 1995. As of December 31, 1996, cash and due from banks, investment
securities, time deposits with other banks and federal funds sold amounted to
$32.6, million, which represents a $1.2 million or 3.8% increase over the $31.4
million at year end 1995. The Bank's year-end deposits increased $8.9 million or
10.7% and ended 1996 at $93.0 million. Liquid assets as a percentage of total
year-end deposits decreased from 37.4% at year-end 1995 to 35.1% at the end of
1996. During 1996, liquid assets averaged $31.2 million or 35.5% as compared to
1995 when average liquid assets totalled $30.0 million or 39.0% of average
deposits.
Average deposits were $88.1 million in 1996, which constitutes a $11.4
million (14.8%) increase over average deposits in 1995. During 1996 total net
loans (including loans held for sale) averaged $64.2 million, a $11.6 million or
22.0% increase from average net loans in 1995. In comparing the change in cash
flows during 1996 with 1995, the Company increased cash and cash equivalents by
$215,000 to $17.9 million.
As of March 15, 1997, the Company has in place $9,000,000 in unsecured
liquidity lines of credit through its correspondent banks and maintains
additional secured liquidity lines through the Federal Reserve Bank. The Company
may borrow up to 25% of its assets from The Federal Home Loan Bank (FHLB)
subject to collateral and additional FHLB stock purchase requirements. See Item
1," Business", at "(c) Bay Area Bank -- Company Subsidiary, Correspondent
Banks."
Capital Resources
The Company is subject to Federal Reserve Board ("FRB") guidelines and
the Bank is subject to Federal Deposit Insurance Corporation ("FDIC")
regulations governing capital adequacy. The Company and the Bank exceed the
minimum capital levels as required by the FRB and FDIC as of December 31, 1996.
See "Item 1 Business at " (e) Supervision and Regulation, Capital Guidelines".
The Bank is required to be in compliance with the "Risk Based Capital"
regulations as required by the FDIC. As of December 31, 1996 the Bank had Tier 1
risk based capital of 12.56% and Tier II risk based capital of 13.81%, both of
which exceed the risk based capital requirements of the FDIC.
Total Bank capital plus allowances for possible loan losses at year end
1996 of $10.8 million represents an increase of $1.2 million, or 12.6% growth
over the 1995 year end balance of $9.6 million.
Results of Operations
The Company posted after-tax earnings of $1,415,000 in 1996, a 16.9%
increase over 1995 in which net income was $1,211,000 and a 49.4% increase over
1994 in which net income was $947,000. Pretax earnings were $2,372,000 in 1996,
a 15.7% increase over 1995 and a 49.7% increase over 1994. Improvement in 1996
over 1995 was primarily a result of a $578,000 increase in net interest income
and a $289,000 increase in noninterest income, offset in part by a $225,000
increase in loan loss provisions and a $320,000 increase in noninterest expense.
Primary earnings per share were $1.50 in 1996 as compared to $1.37 in
1995 and $1.09 in 1994. The increase in earnings per share of 9.5% in 1996
compared with 25.7% in 1995 was a result of the 16.9% increase in earnings being
offset in part by a 7.6% increase in the number of shares of common stock and
equivalents used to compute primary earnings per share. Fully diluted earnings
per share were $1.50 in 1996 as compared to $1.31 in 1995 and $1.09 in 1994.
41
<PAGE>
The increase in earnings per share of 14.5% in 1996 compared with 20.2% in 1995
was a result of the 16.9% increase in earnings being offset in part by a 3.0%
increase in number of shares of common stock and equivalents used to compute
fully diluted earnings per share.
Consolidated net income was comprised of Bank-only profits of
$1,471,000 in 1996 as compared to $1,270,000 in 1995 and $1,033,000 in 1994. The
parent Company (without consideration of inter-company dividends) recorded a
loss of $56,000 in 1996 as compared to losses of $59,000 in 1995 and $86,000 in
1994. The Company's (parent only) loss in 1996 was primarily comprised of legal
costs, director fees, fees paid to the Bank for administrative services, annual
report costs and other miscellaneous costs.
The Company recorded consolidated net interest income of $5.9 million
in 1996, $5.3 million in 1995, and $4.8 million in 1994. The Company's net
interest margin (net interest income divided by average earning assets) was 6.9%
in 1996, 7.2% in 1995, and 7.0% in 1994. During 1996, the yield the Company
earned on its earning assets declined .4% and the cost of funding sources
(primarily deposits) for these assets declined .1% resulting in the reduction in
net interest margin from 7.2% to 6.9%. The average yield on the Company's
earning assets was 9.9% in 1996 as compared to 10.3% in 1995 and 9.3% in 1994.
Interest paid on deposits and other liabilities was 3.9% in 1996, 4.0% in 1995
and 3.0% in 1994. The $578,000 increase in net interest income in 1996 was a
result of an increase in interest income of $894,000 offset in part by an
increase in interest expense of $316,000. The $511,000 increase in net interest
income in 1995 over 1994 interest income was a result of an increase in interest
income of $1,144,000, partially offset by an increase in interest expense of
$633,000. (See "Item 1 - Business, (d) Selected
Statistics/Information-Distribution of Average Assets; Interest Rates and
Differentials, and Rate and Volume Variances.")
Loan loss provisions were $435,000 in 1996, as compared to $210,000 in
1995 and $300,000 in 1994. The increased provision resulted primarily from a
larger net loan charge-off in 1996. Loan charge-offs in 1996 were $510,000,
$233,000 in 1995 and $3,000 in 1994. Total 1996 charge-offs represent a 119%
increase as compared to 1995. Charge-offs of certain lease contracts discussed
below comprised 62% of 1996 charge-offs. Loan loss recoveries were $52,000 in
1996, $34,000 in 1995, and $202,000 in 1994 resulting in net loan charge-offs
(charge-offs less recoveries) of $458,000 in 1996 and $199,000 in 1995. In 1994
net loan recoveries (recoveries less charge-offs) were $199,000. Net loan
charge-offs as a percentage of average loans were .69% in 1996 and .36% in 1995,
the Company had a net loan recovery of .38% in 1994.
The Company's allowance for possible loan losses ratios and asset
performance ratios were less favorable at December 31, 1996 than December 31,
1995. (See Item 1d "Business, Selected Statistical Information, Summary of Loan
Loss Experience"). Of the Company's gross loans, $1,431,000 or 2.07% were not
performing at December 31, 1996, .76% or $470,000 were not performing at year
end 1995, and .37% or $200,000 were not performing at year end 1994.
Of the $1.431 million in loans on nonaccrual status at December 31,
1996, $800,000 or 56% were secured by real estate collateral and $548,000 or 38%
were secured by lease contracts.
The $800,000 in nonaccrual loans secured by real estate consist of 3
loans, all of which are secured by residential property. One loan, in the amount
of $499,000 is secured by two residences on the same lot. The Bank foreclosed on
this loan in March of 1997, and is in the process of marketing the property. The
other two loans, one for $155,000 and one for $146,000 are each secured by
single family residences. Both of these borrowers are in bankruptcy proceedings,
and in each case the bankruptcy court has ordered the borrower to make post
petition payments on the loans. In the event either borrower fails to make such
payments, the Bank is prepared to seek bankruptcy court approval to foreclose on
the property. The loan for $155,000 was returned to
42
<PAGE>
accrual status in March 1997 based on the borrower's performance and on the
Bank's review of the property. Management of the Bank believes that the Bank
will not incur material losses with respect to these loans, either individually
or as a group.
The loans secured by lease contracts, which were originally sold by the
now bankrupt Bennett Funding and Bennett Leasing, had an original principal
balance of $872,000 before a charge-off of $318,000 in 1996. Approximately 75%
of the leases which secure the Bank's loans were current and approximately 15%
were over 90 days delinquent at September 30, 1996, according to recent data
provided by the bankruptcy trustee. The Bank's legal counsel is evaluating a
settlement offer from the bankruptcy trustee which would result in a recovery of
the current $548,000 book value of the loans plus approximately $90,000 of the
amount previously charged-off, with approximately 84% of the cash flow to the
Bank to occur in the first twelve months.
The Company's ratio of nonperforming assets to total assets was 1.39%
at year end 1996, .50% at year end 1995 and .25% at year end 1994. The Company's
allowance for possible loan losses as a percentage of nonperforming loans was
.96% at year end 1996, as compared to 323% at December 31, 1995 and 753% at
December 31, 1994. Nonperforming assets are discussed at "Item 1-Business at
"(d) Selected Statistical Information, Nonaccrual, Past Due and Restructured
Loans."
Management evaluates the size, quality, composition and growth of the
portfolio as well the historical experience of losses in various loan categories
when determining the amount of the allowance for possible loan losses. Potential
adverse economic conditions and threats to the local real estate market are
considered as well as their effect on a borrower's ability to repay the debt.
The Board continues to employ a former regulator as an outside loan consultant
to review specific loans as well as the adequacy of the entire loan loss
allowance. Management has established a 1996 year end allowance for possible
loan losses of $1,493 or 2.16% of year end gross loans.
The Company's concentration of real estate secured loans was
approximately 64% at year end 1996, 64% at year end 1995 and 62% in 1994. The
Company's concentration in real estate in the San Mateo region represents an
inherent and continued risk to operations. There is no guarantee that a severe
decline in local real estate values would not materially affect the Company's
earnings and capital position. There was no real estate owned at December 31,
1996 or December 31, 1995.
Noninterest income increased $289,000 or 11.4% to $2.82 million in 1996
as EFT revenues increased $344,000 from $1,494,000 in 1995 to $1,839,000 in
1996. The increases in both noninterest income and noninterest expense over the
past three years can be directly attributed to the Bank's Mortgage and
Electronic Funds Transfer (EFT) Departments, which both began operations in
1993. The Mortgage Department was closed in February of 1997. The EFT Department
contributed $226,000 to consolidated pretax income (after allocation of certain
inter-company cost allocations) as compared to $139,000 in 1995. There can be no
assurance of the continued profitability of the EFT Department. Income from the
EFT Department may be reduced or may not increase as expected if state or
federal laws are changed to limit the ability of the Bank to place more ATMs in
service, or to limit the charges the Bank may collect from the use of those
ATMs. Proposed legislation in the California State Assembly may have a material
impact on the future operations of the EFT Department. See, Item 1.f
"Supervision and Regulation, New and pending Legislation, ATM Fee Legislation"
and "Proposed Legislation and Regulations." For a further discussion of the
Mortgage and EFT Department's operating results, see Item 1.c "Business, Bay
Area Bank- Company Subsidiary, Mortgage Banking Services and Electronic Funds
Services."
43
<PAGE>
Noninterest expense increased $320,000 or 5.8% in 1996 as compared to
an increase of $834,000 or 17.6% in 1995 and $1.35 million or 39.9% in 1994. The
primary components of the increase in noninterest expense in 1996 were salaries
and benefits and ATM network expenses. Salaries and benefits were up $142,000 or
5.5% and ATM network expenses increased $124,000 or 24.6%.
The Company's tax expense increased from $637,000 in 1994 to $839,000
in 1995 and to $957,000 in 1996. The 1996 tax amount represents a $118,000 or
14.1% increase over the prior year. This is a result of a 15.7% increase in
pretax income during 1996 which resulted in an effective tax rate of 40.3% for
1996 (as compared to 40.9% for 1995 and 40.2% in 1994).
Impact of Inflation
The low proportion of the Company's fixed assets to total assets (less
than 1% at year end 1996) reduces the potential for inflated earnings resulting
from understated depreciation and the potential understatement of absolute asset
values. The effect of higher interest rates in the bond and credit markets would
be to increase the net interest margin in the short term as a result of the
Company's loan portfolio's sensitivity to interest rates. Offsetting this
increase would be a loss in the Company's bond portfolio and an increase in the
Company's cost of funds.
Item 8. Financial Statements and Supplementary Data.
Audited consolidated balance sheets as of the last two fiscal years and
audited consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the last three fiscal years, appear commencing on
page 56 of this Annual Report on Form 10-K and are incorporated by reference.
Supplementary data are not required.
Item 9. Changes In and Disagreements With Accountants on Accounting
and
Financial Disclosure.
This information is provided in the Company's Current Report on Form
8-K filed with the SEC on September 19, 1996.
44
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table provides certain information regarding the Board of
Directors of the Company and the Bank.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Director of
Position Position the Company
Name Age with Company with Bank Since
Frank M. Bartaldo Jr. 48 N/A Director, N/A
Executive Vice
President
Mario A. Biagi 68 Director Chairman of 1981
the Board
John O. Brooks 56 Director Director, 1995
Executive Vice President,
President, Chief Executive
Chief Operating Officer
Officer
Gary S. Goss 61 Director, Director, 1981
Secretary Secretary
Robert R. Haight 68 Chairman of Director 1981
the Board,
President,
Chief Executive
Officer
Stanley A. Kangas 59 Director Director 1996
David J. Macdonald 57 Director Director 1981
Thorwald A. Madsen 80 Director Director 1981
Dennis Royer 54 Director Director 1995
</TABLE>
None of the directors of the Company or the Bank were selected pursuant
to any arrangement or understanding other than the directors and officers of the
Company and the Bank acting in their capacities as such. There are no family
relationships between any two or more of the directors or officers.
Set forth below are brief summaries of the background and business
experience, including the principal occupation, of the Company's and Bank's
directors. Except for the Bank, no corporation or organization discussed below
is an affiliate or a subsidiary of the Company.
45
<PAGE>
FRANK M. BARTALDO, JR. Mr. Bartaldo has been with Bay Area Bank since 1986. He
currently serves as Executive Vice President and Senior Banking Officer of the
Bank. In February 1996, Mr. Bartaldo was elected to serve as a director of the
company's sole subsidiary, Bay Area Bank. Before his employment at Bay Area
Bank, Mr. Bartaldo was a partner in a mortgage banking business and prior to
that he was employed for eight years at Wells Fargo Bank. Mr. Bartaldo received
his BS in Business Administration from California State University at Chico in
1971. Mr. Bartaldo is President of the Redwood City-San Mateo County Chamber of
Commerce.
MARIO BIAGI: Presently a rancher/consultant, Mr. Biagi owned and operated Ethan
Allen Furniture Store in Belmont for 15 years and Biagi Interiors in Redwood
City for 10 years. From 1976 to 1984, Mr. Biagi served as a councilman for
Redwood City and from 1980 to 1982, as the City's mayor. He currently serves on
the Advisory Board of Kainos having served as a board member for 8 years. In
addition to other active involvement in the community, he acted as Interim
President of the Bank from December 1984 to May 1985, and as the Chairman of the
Board from 1981 to 1991. In May 1995 Mr. Biagi was once again elected to the
position of Chairman of the Board of Bay Area Bank.
JOHN O. BROOKS: Mr. Brooks began his position as President/Chief Executive
Officer and Director of Bay Area Bank and Chief Operating Officer of Bay Area
Bancshares on November 2, 1992. On June 27, 1995 Mr. Brooks was appointed a
Director of Bay Area Bancshares. He has more than 30 years of experience in the
banking industry. From 1990 to 1992, he was President/CEO of Heritage Oaks Bank
in Paso Robles. From 1987 to 1990, he was President/CEO at the Bank of
Pleasanton and from 1980 to 1987, he held the same position at Foothill Bank in
Mountain View, Ca. Mr. Brooks is currently involved in local Rotary groups, the
San Carlos Youth Center Foundation, serves on the Board of Directors of the
Mid-Peninsula YMCA and the Peninsula Outreach Program and is a member of the
honor society, Beta Gamma Sigma.
GARY S. GOSS: A Certified Public Accountant since 1961, Mr. Goss is the
principal in the accounting firm of Gary S. Goss, San Carlos, California.
Currently a member of the Redwood City, San Carlos and Foster City Chambers of
Commerce and the San Carlos Rotary. Mr. Goss has been president of the San
Carlos Chamber and served on the Board of Directors of the Half Moon Bay Chamber
of Commerce. He also served as president of the YMCA.
ROBERT R. HAIGHT: Mr. Haight is the owner and founder of Woodside Road Insurance
Agency in Redwood City. He is also a licensed insurance broker and agent. Mr.
Haight graduated from Redwood City's Sequoia High School, having lived in
Redwood City since 1942. He is a past president and director of the Redwood City
Chamber of Commerce, the Redwood City Independent Insurance Agents Association,
and San Mateo County Independent Agents Association. Currently, Mr. Haight is
Director of the Redwood City Independent Insurance Agents Association and a
member of the Sequoia Club. Mr. Haight was elected Chairman of the Board,
President and Chief Executive Officer of Bay Area Bancshares in 1991.
STANLEY A. KANGAS: Mr. Kangas recently retired as chairman of the Board of Brian
Kangas Foulk (BKF), a civil engineering firm in Redwood City. Mr. Kangas was
President of BKF from 1975 to 1995. He has over 35 years of experience in all
aspects of civil engineering and land surveying. Mr. Kangas has provided
engineering consulting services to Stanford University, its Medical Center and
Research/Industrial Park and the Stanford Shopping Center. He served as
Principal-In-Charge for many of BKF's large scale projects including the 1,200
acre Redwood Shores community in Redwood City. He also serves as District
Engineer for the Belmont County Water District. Professional affiliations
include the American Society of Civil Engineers, American Water Works
Association, Bay Counties Civil Engineers and Land Surveyors Association,
Consulting Engineers and Land Surveyors of California, Peninsula Association of
Contractors and Engineers, Peninsula Chapter of Civil Engineers and Land
Surveyors, San Mateo County Economic Development
46
<PAGE>
Association, Northern California Surveyors Joint Apprenticeship Committee and
the Northern California Surveyors Trust. Mr. Kangas is currently involved in
many local community programs and non-profit groups including the Redwood
City-San Mateo County Chamber of Commerce, Kainos, the Sequoia Hospital
Foundation, San Carlos Youth Center Foundation and the Boys and Girls Club of
the Peninsula. Mr. Kangas and BKF were recently honored with the Sequoia Award
for civic service by a Redwood City business. Mr. Kangas was appointed to the
Board of Directors of Bay Area Bank and Bay Area Bancshares on February 20,
1996.
DAVID J. MACDONALD: A real estate developer and syndicator, Mr. Macdonald is
owner and broker of David J. Macdonald Real Estate Company in San Carlos. Mr.
Macdonald is a member of the San Mateo County Sheriff's Air Squadron and Search
and Rescue.
THORWALD A. MADSEN: Retired since 1989, Mr. Madsen was Manager of Bay Counties
Builders Escrow from 1972 to 1989, and Executive Director of the Peninsula
Builder's Exchange from 1972 to 1984. Prior to assuming dual responsibilities at
PBE, he ran his own company, Thor Madsen Plumbing and Heating from 1944 to 1970.
Always an active member of the community, Mr. Madsen served as Mayor of San
Carlos in 1974 and served on the city council from 1972 to 1976. He was on the
San Carlos Park & Recreation Commission for 12 years, serving as Chairman five
times. Currently Mr. Madsen is an active participant in the San Carlos Lions
Club, PACE Engineers Club, San Mateo Men's Garden Club, and served as President
of the San Carlos Branch of Sons in Retirement in 1990.
DENNIS W. ROYER. Mr. Royer is a partner in his family-owned and operated
business, Royer Realty in Redwood City, which his father began in 1954. Upon
receiving his MBA from the University of Santa Clara in 1967, Mr. Royer began
his career as a residential real estate broker. He is a former board member of
the Redwood City/San Carlos Association of Realtors and the Peninsula Golf and
Country Club. Mr. Royer was appointed to the Board of Directors of Bay Area Bank
and Bay Area Bancshares on June 6, 1995.
Executive Officers of the Registrant
The information required herein is incorporated by reference from Item
1(b), herein.
47
<PAGE>
Item 11. Executive Compensation.
The following table sets forth the cash compensation paid to or
allocated for the Chief Executive Officer of the Company and the Bank and those
executive officers whose cash compensation exceeded $100,000 for services
rendered in 1996, 1995, and 1994.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Name and Regular Compensation All Other
Principal Position Year1 Salary1, 2 Bonus Stock Options* Compensation3,4
- ------------------ ---- ---------- ----- -------------- ------------
<S> <C> <C> <C> <C> <C>
Robert R. Haight 1996 $18,950 N/A 0 $ 5,888
CEO of Company 1995 $17,750 N/A 0 $ 6,000
1994 $15,600 N/A 0 $ 5,920
John O. Brooks 1996 $150,000 $53,000 0 $13,500
CEO of Bank 1995 $135,000 $49,000 0 $13,500
1994 $127,500 $36,000 0 $13,500
Frank M. Bartaldo 1996 $100,000 $34,000 0 $ 6,451
EVP of Bank 1995 $ 85,000 $28,000 0 $ 5,200
1994 $ 81,000 $19,000 0 $ 5,050
Anthony J. Gould 1996 $ 90,000 $30,000 0 $ 5,792
CFO of Company 1995 $ 75,000 $25,000 0 $ 4,525
and Bank 1994 $ 71,000 $16,500 0 $ 4,450
Mark V. Schoenstein 1996 $ 75,000 $28,676 0 $4,519
SVP of Bank
<FN>
* Number of shares
- ---------------------
1 Amounts for Mr. Haight include all compensation received in the fiscal year.
2 Mr. Haight is paid $300 per Board meeting in addition to his regular, non-officer director fees. Mr. Brooks
has an annual base salary of $150,000. Mr. Bartaldo has an annual salary of $100,000. Mr. Gould has an
annual salary of $90,000 and Mr. Schoenstein's annual salary is $75,000.
3 Mr. Haight is not eligible for the Bank's 401(k) Plan as he is not an employee of the Bank. Mr. Haight
received health benefits with a cost of $550 per month effective April 1, 1996. During 1996, Mr. Brooks
received $6,000 ($500/month) as an auto allowance and $7,500 as a matching contribution under the
Bank's 401(k) Plan. Mr. Bartaldo received $6,451 as a matching contribution under the Bank's 401(k) Plan
and Mr. Gould and Mr. Schoenstein received $5,792 and $4,519 respectively.
4 In addition to this compensation, a Salary Continuation Plan was adopted
effective January 1, 1995, to provide salary continuation benefits to Mr.
Brooks, subject to certain terms and conditions as described below.
</FN>
</TABLE>
Executive Salary Continuation Plan
The Board of Directors of the Bank entered into a Salary Continuation
Plan for John Brooks effective January 1, 1995 by which he will receive salary
continuation benefits in accordance with the terms and conditions of a written
agreement. This could result in a maximum benefit of annual payments to Mr.
Brooks of $80,000 per year for a period of up to 15 years from 2006 through
2020. Each such annual payment is to consist of a basic benefit of $2,000 and a
target benefit of $78,000.
48
<PAGE>
The target benefit accrues proportionately for each calendar year from 1995
through 2005 in which Mr. Brooks remains as chief executive officer of the Bank
and in which the Bank achieves certain performance standards. If the performance
standards are not achieved in a particular year, the proportion of the target
benefit does not vest. The payment of the annual payments to the extent they are
vested will commence in 2006 and continue for up to 15 years through 2020 if
certain conditions are met.
The following table sets forth certain information regarding the Salary
Continuation Plan:
<TABLE>
<CAPTION>
LONG TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Performance or
Number of Other Period
Shares, Units Until Maturation
Name or Other Rights or Payout Threshold Target Maximum
<S> <C> <C> <C> <C> <C>
John O. Brooks N/A 10 years $2,000/yr. $78,000/yr. $80,000/yr.
</TABLE>
Profit Sharing Plan
The Bank instituted a capital accumulation and profit-sharing plan (the
"Plan") for eligible employees of the Bank effective January 1, 1985 which was
last amended November 1, 1987. The Plan is intended to provide benefits to the
Bank's employees at retirement or upon death or disability. To be eligible for
participation in the Plan, an employee must complete one half year of service
and not be included in a collective bargaining unit.
Benefits are provided through the Bank's discretionary profit-sharing
contributions as well as from salary saving contributions ("401(k)
contributions") made by the employee. 401(k) contributions are made with
before-tax dollars thereby reducing the employee's taxable income. The Bank may
contribute a matching amount equal to a percentage of the employee's 401(k)
contribution up to a maximum of 5% of the employee's earnings determined prior
to the 401(k) contribution. The amount of the Bank's matching contribution, if
any, is determined each year by the Bank's Board of Directors; however,
contributions by the Bank are not allowed until the Company has achieved certain
predefined performance standards. The Bank is not required to make a matching
contribution even if such performance standards are achieved.
An employee's 401(k) contribution may be in an amount from 1% to 15% of
the employee's earnings. If the employee contributes more than 5% of his
earnings each year, no more than 5% will be matched by the Bank in the event the
Bank determines it will make a discretionary contribution. The amount of the
Bank's discretionary contribution, if any, is determined on a yearly basis.
Following two years of service, the Bank's contributions begin to vest,
with 100% vesting occurring after four years of service. For the years ending
December 31, 1996, 1995 and 1994, the Bank contributed $72,000, $64,000, and
$64,000 and respectively, to the Plan.
Stock Option Plan
The Company adopted a Qualified Stock Option Plan (the "1993 Plan") in
1993, which was approved by the shareholders at the 1993 Annual Meeting. The
1993 Plan provides for the issuance of incentive and non-incentive stock options
to directors, key full-time employees and officers and
49
<PAGE>
consultants of the Company and the Bank. The 1993 Plan initially covered 231,431
shares of the Company's Common Stock, no par value, for which such options could
be granted. As of March 15, 1997, 174,469 shares were subject to outstanding
options and 9,558 shares remained available for future grant under the plan.
The Plan provides that all options be granted at an exercise price of
not less than 100% of fair market value on the date of grant in the case of
incentive stock options or not less than 85% of fair market value on the date of
grant in the case of other stock options. The Board of Directors of the Company
may issue options which become vested in the future based upon achieving certain
longevity requirements and/or performance standards. Within three months
following termination of employment for any reason other than death or
disability, an optionee (other than a director- optionee) may exercise his or
her option to the extent such option was exercisable on the date of termination,
subject to earlier termination by reason of expiration of the option. In the
event of the death or disability of an optionee (other than a
director-optionee), the option is exercisable for a period of six months after
that event, which is also subject to earlier termination if the option expires.
Director-optionees may exercise their options for a period of five years
following retirement, death or disability, subject to earlier termination of the
options.
The following table sets forth the value realized by the exercise of
options during 1996 and the value of outstanding stock options held by the
executive officers named in the Summary Compensation Table at December 31, 1996,
pursuant to the 1993 Plan. In addition, in February of 1997, Mr. Brooks
exercised options for 2,000 shares, with an exercise price of $4.75.
<TABLE>
<CAPTION>
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND
YEAR-END OPTION VALUES
Number of Value of Unexercised
Unexercised In-The-Money
Options Options
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise1 Realized2 Unexercisable1 Unexercisable3
<S> <C> <C> <C> <C>
Robert R. Haight 0 $0 11,613 / 0 $121,936 / $0
John O. Brooks 2,000 $15,500 28,935 / 0 $303,816 / $0
Frank M. Bartaldo 5,000 $37,500 11,968 / 0 $125,664 / $0
Anthony J. Gould 0 $0 14,078 / 0 $147,819 / $0
Mark V. Schoenstein 0 $0 0 / 0 $0 / $0
- --------------------------------
<FN>
1 Number of shares.
2 Value determined based on the difference between exercise price for shares
and fair market value of shares on date of exercise.
3 Value estimated based on fair market value of Common Stock at December 31, 1996 ($15.25 estimated
bid price) less the exercise price of those options.
</FN>
</TABLE>
SAR PLAN
In 1996, the Board of Directors of Bay Area Bancshares adopted a Stock
Appreciation Right Plan, by which full-time employees of the Company and the
Bank may be awarded stock appreciation rights (SARs). An employee to whom a SAR
is awarded may choose to exercise the SAR and receive the difference between the
base price of the SAR (which is equal to the fair market value of the stock at
the time the SAR is awarded) and the fair market value at the time the SAR is
50
<PAGE>
exercised. The following table sets forth the SARs awarded in 1996 to those
officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Number % of Total SARs
of Securities Granted to
Underlying Employees in Base Price Expiration
Name SARs Granted Fiscal Year ($/Share) Date
<S> <C> <C> <C> <C>
Frank M. Bartaldo 20,0001 44% $8.00 10/1/06
Anthony J. Gould 15,0002 33% $8.00 10/1/06
Mark V. Schoenstein 10,0003 22% $8.00 10/1/06
- --------------------------------
<FN>
1 Under the terms of the SAR agreement dated October 1, 1996, Mr.
Bartaldo's 20,000 SAR units are to be 40% vested as of October 1, 1997
and 15% vested on October 1st thereafter until fully vested in the year
2001. In the event of a change of control in the ownership of the
Company, the vesting of one-half of any remaining unvested portion of
outstanding SARs is to be accelerated.
2 Under the terms of the SAR agreement dated October 1, 1996, Mr. Gould's
15,000 SAR units are to be 40% vested as of October 1, 1997 and 15%
vested on October 1st thereafter until fully vested in the year 2001.
In the event of a change of control in the ownership of the Company,
the vesting of one-half of any remaining unvested portion of
outstanding SARs is to be accelerated.
3 Under the terms of the SAR agreement dated June 18, 1996, Mr.
Schoenstein's 10,000 SAR units are to be 40% vested as of June 30, 1997
and 20% vested on June 30th thereafter until fully vested in the year
2000. In the event of a change of control in the ownership of the
Company, the vesting of one-half of any remaining unvested portion of
outstanding SARs is to be accelerated.
</FN>
</TABLE>
Employment Agreement
On September 2, 1992, Bank President and Chief Executive Officer John
O. Brooks entered into an employment agreement with the Bank. The agreement has
no term and Mr. Brooks' employment is "at will" thus it may be terminated at any
time. The agreement primarily outlines Mr. Brooks' base salary (currently
$150,000 annually), auto allowance ($500 per month), performance requirements
for bonuses (annual bonus payments not to exceed 4.5% of Bank pretax income),
maximum severance benefits (six months if the Bank is sold or merged before
September 1997; after five years employment six months salary if terminated
without cause and nine months salary if the bank is sold or merged), authorities
and responsibilities, and other miscellaneous benefits.
Compensation of Directors
In 1996, non-officer directors of the Company received $200 per Company
Board meeting. The Chairman of the Company's Board received an additional $100
per meeting. Each non-officer director received $650 per Bank Board meeting and
the Chairman of the Bank's Board received an additional $200 per monthly
meeting. Each non-officer director receives $150 per monthly committee meeting
and also $550 per month for health insurance premiums. Total compensation for
the seven non-officer directors in 1996 was $193,000, which does not include the
health insurance.
Directors are also eligible to receive options and have received
options under the 1993 Plan and the prior plan of the Company. In 1996,
directors exercised options for 13,000 shares of stock, by which those directors
realized $99,500. As of March 15, 1997 the directors of the Company
51
<PAGE>
have options exercisable for a total of 99,577 shares. The value of those
exercisable options as of March 15, 1997 was approximately $1,170,030, which
value is estimated based on fair market value of Common Stock at March 15, 1997
($16.50 estimated bid price) less the exercise price of those options.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Management
The following table sets forth information as of March 15, 1997,
pertaining to beneficial ownership of the Company's Common Stock by current
directors of the Company and the Bank and all directors and executive officers1
of the Company as a group. The information contained herein has been obtained
from the Company's records and from information furnished directly by the
individual or entity to the Company.
The table should be read with the understanding that more than one
person may be the beneficial owner or possess certain attributes of beneficial
ownership with respect to the same securities. Therefore, careful attention
should be given to the footnote references set forth in the column entitled
"Amount Held and Nature of Holdings." In addition, shares issuable pursuant to
options which may be exercised within 60 days of March 15, 1997 are deemed to be
issued and outstanding and have been treated as outstanding in calculating the
percentage ownership of those individuals possessing such interest, but not for
any other individuals. Thus, the total number of shares considered to be
outstanding for the purposes of this table may vary depending upon the
individual's particular circumstance.
<TABLE>
<CAPTION>
Amount and Nature
of
Name and Address Relationship Beneficial Percent
of Beneficial Owner2,3 With Company Ownership4 of Class
<S> <C> <C> <C>
Frank M. Bartaldo Director and Sr. Banking 19,430 5 2.27%
Officer of the Bank
Mario A. Biagi Director 51,641 6 6.05%
John O. Brooks Director/Chief
Operating Officer 36,935 7 4.24%
Gary S. Goss Director & Secretary 92,894 8 10.91%
Robert R. Haight Chairman of the Board, 55,408 9 6.49%
President and CEO
Stanley A. Kangas Director 8,000 10 .94%
David J. Macdonald Director 40,280 11 4.66%
Thorwald A. Madsen Director 28,098 12 3.31%
Dennis W. Royer Director 6,977 13 .82%
------ ---
All directors, nominees and officers
of the Company and Bank as a Group
(11 in number) 337,185 14 35.18%
- -------------------
<FN>
1 As used throughout this Form 10-K and unless indicated to the contrary, the
terms "officer" and "executive officer" refer to the Company's Chairman of
the Board of Directors, President and Chief Executive Officer, Chief
Operating Officer, and Chief Financial Officer, and the Bank's Senior Banking
Officer.
2 Includes shares beneficially owned, directly and indirectly, together with
associates. Subject to applicable community property laws and shared voting
or investment power with a spouse, the persons listed have sole voting and
investment power with respect to such shares unless otherwise noted.
3 The address for all persons is: 900 Veterans Boulevard, Redwood City, California 94063.
4 Includes ownership of Common Stock, as well as shares of Common Stock which
could be acquired through the exercise of options currently outstanding
within 60 days of March 15, 1997.
52
<PAGE>
5 Includes 5,139 shares held by Frank and Kathy Bartaldo as joint tenants; 2,323 shares in the name of Frank M.
Bartaldo IRA; and options to acquire 11,968 shares of Common Stock.
6 Includes 40,028 shares held by Mario and June Biagi as joint tenants; and options to acquire 11,613 shares of
Common Stock.
7 Includes 8,000 shares of Common Stock held by the John O. Brooks Revocable Trust; and vested options to acquire
28,935 shares of Common Stock.
8 Includes 35,889 shares of Common Stock held by Gary and Chrystel Goss as
community property; 1,029 shares held by Gary S. Goss as custodian; 35,814
shares held in trust for Gary and Chrystel Goss; 1,613 in the name of Gary
S. Goss; 8,549 in the name of Gary S. Goss IRA; and options to acquire
10,000 shares of Common Stock. On December 27, 1991, the State Banking
Department approved an application by Mr. Goss to acquire up to 24.99% of
the Company's stock on the open market.
9 Includes 41,995 shares of Common Stock held by Robert and Sherrill Haight as
joint tenants; 1,400 shares held by Robert R. Haight IRA; 400 shares
Sherrill Haight IRA; and options to acquire 11,613 shares of Common Stock.
10 Includes 1,000 shares of Common Stock held by Stanley and Teresa A. Kangas
as Joint tenants; and 2,000 shares held by the Stanley A. Kangas IRA; and
options to acquire 5,000 shares of Common Stock
11 Includes 17,107 shares of Common Stock held by David and Pauline Macdonald
as joint tenants; and options to acquire 23,173 shares of Common Stock.
12 Includes 23,833 shares of Common Stock held by Thorwald and Jonelle Madsen
as Trustees of the Madsen Family Trust; 22 shares of Common Stock held by
Thorwald Madsen as custodian for his grandchild, a minor; and options to
acquire 4,242 shares of Common Stock.
13 Includes 1,977 shares of Common Stock held in the name of Dennis W. Royer
Keogh; and options to acquire 5,000 shares of Common Stock.
14 Includes as if currently outstanding, 116,855 shares subject to stock
options granted under the Company's 1993 Stock Option Plan.
</FN>
</TABLE>
Major Shareholders
The following sets forth information as of March 15, 1997, pertaining
to beneficial ownership of the Company's Common Stock by persons, other than
management, known to the Company to own 5% or more of the Company's common
stock. This information was obtained through the Company's stock transfer agent
and registrar.
<TABLE>
<CAPTION>
Name and Address Relationship Amount and Nature of Percent
of Beneficial Owner With Company Beneficial Ownership1 of Class
<S> <C> <C> <C>
James Burney , Nine C Corp. Director Emeritus 73,171 2 8.46%
900 Veterans Blvd.
Redwood City, CA
Alan Miller, #4 Bridle Lane Director Emeritus 56,480 3 6.53%
Woodside, CA
- ----------------------
<FN>
1 Includes shares beneficially owned, directly and indirectly, together with
associates. Subject to applicable community property laws and shared voting
or investment power with a spouse, the persons listed have sole voting and
investment power with respect to such shares unless otherwise noted.
2 Includes 49,988 shares of Common Stock held by James and Katherine Burney as
Trustees of the Burney Family Trust; and options to acquire 23,173 shares of
Common Stock. On 6/24/91 the State Banking Department approved an
application by Mr. James E. Burney to acquire up to 24.99% of the Company's
outstanding stock on the open market.
3 Includes 8,472 shares of Common Stock held by Heart Construction Company,
which is wholly owned by Alan B. Miller; 24,835 shares solely owned by Alan
B. Miller; and options to acquire 23,173 shares of Common Stock.
</FN>
</TABLE>
53
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Buildings Leases with Major Shareholders
The Company's and the Bank's principal offices are located in a modern,
six-story building at 900 Veterans Boulevard, Redwood City, which provides
approximately 8,300 square feet of ground floor interior space. In June of 1995
the Bank executed a lease for 7.5 years (90 months) with a seven year option to
renew. The new lease was made at essentially the same terms as the previous
lease. The current monthly cost for this space (which includes an allocation of
certain operating expenses) is approximately $20,700 per month or approximately
$2.49 per square foot. The rental amounts are subject to further adjustments
annually based on the Consumer Price Index and the allocation of property taxes
and operating expenses. This building was acquired in September of 1992 by
Nine-C Corporation, which is owned by Mr. James Burney, a major shareholder of
the Company and a Director Emeritus of the Company and the Bank.
In addition to the 8,300 square feet the Company leases for its primary
operations, an additional 2,100 square feet was leased in the same building in
1993 for the Bank's Mortgage and Construction Lending Department. With the
closing of the Mortgage department in February of 1997, the Bank expects to
utilize the portion of the space vacated for other purposes. The current cost
for this additional space (which includes an allocation of certain operating
expenses) is approximately $3,900 per month or $1.86 per square foot. The lease
expired in December 1995 and was renewed for a three year period with a three
year option to renew. This lease is also subject to adjustment annually based on
the Consumer Price Index and the allocation of property taxes and operating
expenses.
The Company leases additional premises for its data processing,
accounting and centralized operations departments in Redwood City. These
premises are located in a building owned by Mr. Alan Miller, a major shareholder
and Director Emeritus of the Company and the Bank. The lease covers total space
of approximately 5,200 square feet. On May of 1991, the Company executed a three
year lease with Mr. Alan Miller. This lease has been extended to March 31, 1999
with a three year option to renew. The current monthly cost under the lease
(which includes an allocation and adjustments for certain operating expenses) is
$4,750 per month, or $.91 per square foot. The monthly rent payment is subject
to annual adjustment based on the cost of living index as published by the U.S.
Department of Labor, Bureau of Labor Statistics. In addition to monthly rent
payments, the Company is also responsible for operating expenses (i.e., taxes,
utilities, insurance, landscaping, security) of the building based on the
Company's proportionate share of the building's square footage (29%).
The Company's leases were reviewed by management and the Board of
Directors and found to be equitable and competitive with other leases within the
immediate market area.
The Company owns leasehold improvements and furniture, fixtures and
equipment located at the above locations, all of which are used in the banking
business.
54
<PAGE>
Indebtedness of Management
Some of the Company's directors and executive officers, as well as
their immediate family and associates, are customers of, and have had banking
transactions with the Bank in the ordinary course of the Bank's business and the
Bank expects to have such ordinary banking transactions with these persons in
the future. In the opinion of management of the Bank, all loans and commitments
to lend included in such transactions were made in compliance with applicable
laws, and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons of similar creditworthiness, and did not involve more than a
normal risk of collectibility or present other unfavorable features. The
aggregate amount the Bank can lend to directors and officers as a group is
limited to 100% of the Bank's capital. Loans to individual directors and
officers must comply with the Bank's respective lending policies and statutory
lending limits, and prior approval of the Bank's Board of Directors is required
for most of these loans. Total loans outstanding at December 31, 1996 to current
directors and executive officers, and their associates was $1,549,000 or
approximately 16.70% of the Bank's capital.
55
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements.
Reference Page
Report of Independent Auditors:
Coopers & Lybrand.................................................. 59
Consolidated Financial Statements of
Bay Area Bancshares and Subsidiaries: .............................56
Consolidated Balance Sheets as
of December 31, 1996 and 1995: .....................................56
Consolidated Statements of
Income for the Years Ended
December 31, 1996, 1995 and 1994: ..................................57
Consolidated Statements of Changes
in Shareholders' Equity for the
Years Ended December 31, 1996, 1995, and 1994.......... ............59
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1996, 1995, and 1994: .................................58
Notes to Consolidated Financial Statements:.........................60
2. Financial Statement Schedules. In accordance with the rules
of Regulation S-X, schedules are not submitted because (a) they are not
applicable to or required of the Company, or (b) the information required to be
set forth therein is included in the financial statements or footnotes thereto.
3. Exhibits. Management contracts and compensation plans are
identified with a number sign ("#").
Exhibit
Number
3.1 Restated Articles of Incorporation of Company1
3.2 Amendment to Restated Articles of Incorporation2
3.3 Bylaws of Company, as amended2
3.4 Amendment to Bylaws of Company2
4.1 Certificate of Determination of Preferred Stock4
56
<PAGE>
10.3 Lease Entered Into By and Between Alan B. Miller and Bay Area Bank5
10.4 # Employment Agreement Between John O. Brooks, Bay Area Bancshares
and Bay Area Bank dated as of September 2, 19926
10.8 # 1993 Stock Option Plan6
10.9 # Forms of Stock Option Agreements6
10.11 #Director Emeritus Agreement Bay Area Bank and James E. Burney dated
March 21, 19957
10.12 #Director Emeritus Agreement Bay Area Bank and Alan Miller dated
May 16, 19957
10.13 Commercial Lease between Nine C Corporation dated June 30, 1995 for
the Bank's primary facility7
10.14 Commercial Lease between Nine C Corporation dated November 30,
1995
for the Bank's Mortgage Department7
10.15 #Salary Continuation Agreement between John O. Brooks and Bay Area
Bank dated January 1, 1995.
10.16 #1996 Stock Appreciation Rights Plan, Amendment No. 1 to the SAR
Plan and forms of SAR Agreement.
22 The only significant subsidiary of the Company is Bay Area Bank
--100%-owned subsidiary incorporated in the State of California.
Bay Area Bank owns 100% of Bay Counties Builders Escrow, Inc.,
an inactive California corporation.
23 Consent of Coopers & Lybrand LLP
27 Financial Data Schedule
- -------------------
1 Filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988.
2 Filed as Exhibit 3.2 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989.
3 Filed as Exhibits 3.2, and 3.3, respectively, to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
4 Filed as Exhibit 4.1, to the Company's Current Report on Form 8-K filed
September 15, 1988.
5 Filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
6 Filed as Exhibits 10.4, 10.8 and 10.9 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
7 Filed as Exhibits 10.11, 10.12, 10.13 and 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
57
<PAGE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter.
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act.
The Registrant's proxy material for its 1996 Annual Meeting of
Shareholders and its Annual Report to Shareholders covering Registrant's
last fiscal year is to be furnished to security holders subsequent to the
filing of this Annual Report on Form 10-K. The Registrant shall furnish
copies of such material to the Commission when it is sent to security
holders.
58
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
(Dollar amounts in thousands, except per share data)
For the years ended December 31,
...........................................................................................................................
Interest income: 1996 1995 1994
<S> <C> <C> <C>
Interest and fees on loans $7,208 $6,292 $5,520
Interest on taxable investment securities 771 581 519
Interest on tax exempt investment securities 61 70 73
Interest on federal funds sold 355 558 243
Interest on time deposits with other financial institutions 6 6 8
...........................................................................................................................
Total interest income 8,401 7,507 6,363
...........................................................................................................................
Interest expense:
Interest-bearing transaction accounts 1,320 1,263 903
Savings deposits 230 202 85
Time deposits 974 758 592
Notes payable and redeemable debentures 15 -- 10
...........................................................................................................................
Total interest expense 2,539 2,223 1,590
Net interest income 5,862 5,284 4,773
Provision for possible loan losses 435 210 300
...........................................................................................................................
Net interest income after provision for possible loan losses 5,427 5,074 4,473
...........................................................................................................................
Noninterest income:
Service charges on deposit accounts 211 270 288
Loss on securities sold - (16) -
Gain on disposal of assets 2 8 28
Gain on sale of loans held for sale 456 456 530
Other mortgage banking income 149 193 138
ATM network revenue 1,839 1,494 792
Other 164 127 57
...........................................................................................................................
Total noninterest income 2,821 2,532 1,833
...........................................................................................................................
Noninterest expense:
Salaries and related benefits 2,746 2,604 2,273
Occupancy 400 378 336
Equipment 544 550 385
Professional fees 243 236 224
ATM network expenses 628 504 302
Stationery and supplies 121 135 137
Other 1,194 1,149 1,065
...........................................................................................................................
Total noninterest expense 5,876 5,556 4,722
...........................................................................................................................
Income before provision for income taxes 2,372 2,050 1,584
Provision for income taxes 957 839 637
...........................................................................................................................
Net income $1,415 $1,211 $947
...........................................................................................................................
Primary earnings per share:
Weighted average common and common
equivalent shares-primary earnings per share 945,000 878,000 865,000
...........................................................................................................................
Primary net income per share $1.50 $1.37 $1.09
Fully diluted earnings per share:
Weighted average common and common equivalent shares-
fully diluted earnings per share 950,000 919,000 865,000
...........................................................................................................................
Fully diluted net income per share $1.50 $1.31 $1.09
Dividends declared per common share $.33 $.29 $.23
See accompanying notes.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)
December 31,
........................................................................................................................
Assets 1996 1995
<S> <C> <C>
Cash and due from banks $11,011 $8,276
Federal funds sold 6,850 9,800
...........................................................................................................................
Cash and cash equivalents 17,861 18,076
Time deposits with other financial institutions 100 103
Investment securities held to maturity 12,081 10,133
(market value of $12,203 in 1996 and $10,269 in 1995)
Investment securities available for sale (at market) 2,588 3,111
Loans, net of allowance for possible loan losses
of $1,493 in 1996 and $1,516 in 1995 67,012 59,209
Loans held for sale 723 772
Premises and equipment, net 811 948
Interest receivable and other assets 2,011 1,463
...........................................................................................................................
Total assets $103,187 $93,815
...........................................................................................................................
Liabilities and Shareholders' Equity
Deposits
Demand $23,599 $22,998
Interest-bearing transaction 44,493 40,480
Savings 5,551 4,376
Time 19,325 16,125
...........................................................................................................................
Total deposits 92,968 83,979
Interest payable and other liabilities 938 758
Federal funds purchased - 1,000
...........................................................................................................................
Total liabilities 93,906 85,737
Shareholders' equity:
Preferred stock, $10 stated value; 6% Series A, non-voting,
convertible and redeemable:
Authorized -- 10,000,000 shares
Issued and outstanding-- 1,000 shares in 1995 - 10
Common stock, no par value:
Authorized -- 20,000,000 shares
Issued and outstanding -- 839,638 shares in 1996
and 821,829 shares in 1995 4,143 4,053
Net unrealized (loss) gain on securities available for sale (5) 10
Retained earnings 5,143 4,005
...........................................................................................................................
Total shareholders' equity 9,281 8,078
Total liabilities and shareholders' equity $103,187 $93,815
...........................................................................................................................
</TABLE>
See accompanying notes.
60
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(Dollar amounts in thousands, except per share data)
For the years ended December 31,
...........................................................................................................................
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,415 $1,211 $947
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 447 426 250
Provision for possible loan losses 435 210 300
Loss on securities sold -- 16 --
Gain on sale of other assets (2) (8) (28)
Net proceeds from sale of loans held for sale 505 11 619
Gain on sales of loans held for sale (456) (456) (530)
Net amortization and accretion of
investment premiums and discounts 56 51 66
Net increase in interest receivable and other assets (548) (118) (377)
Net increase in interest payable and other liabilities 180 206 169
Net (increase) decrease in deferred loan fees 164 (23) (14)
...........................................................................................................................
Total adjustments 781 315 455
Net cash provided by operating activities 2,196 1,526 1,402
Cash flows from investing activities:
Net decrease in time deposits with other financial institutions 3 95 4
Proceeds from maturity of investment
securities held to maturity 1,650 1,705 1,425
Proceeds from the maturity of investment
securities held from sale 500 -- --
Sale of investment securities available for sale -- 484 --
Principal payments received on mortgage backed securities 997 239 1,066
Purchase of investment securities held to maturity (4,444) (4,285) (2,587)
Purchase of investment securities available for sale -- (1,502) (499)
Net (increase) decrease in gross loans (8,726) (7,379) 2,670
Net capital expenditures, premises and equipment (310) (343) (1,105)
Proceeds from the sale of real estate owned 128 -- 628
...........................................................................................................................
Net cash (used in) provided by investing activities (10,202) (10,986) 1,602
Cash flows from financing activities:
Net increase in demand deposits 601 2,180 2,656
Net increase (decrease) in interest-bearing
transaction and savings deposits 5,187 7,532 (75)
Net increase (decrease) in time deposits 3,200 2,253 (2,549)
Federal funds purchased (1,000) 1,000 --
Principal payments on note payable -- -- (150)
Proceeds from the exercise of common stock options 80 51 83
Cash dividends (277) (241) (188)
...........................................................................................................................
Net cash provided by (used in) financing activities 7,791 12,775 (223)
Net (decrease) increase in cash and cash equivalents (215) 3,315 2,781
Cash and cash equivalents, beginning of period 18,076 14,761 11,980
...........................................................................................................................
Cash and cash equivalents, end of period $17,861 $18,076 $14,761
...........................................................................................................................
Supplemental Disclosures:
Cash payments for interest $2,496 $2,166 $1,576
Cash payments for taxes 1,241 884 926
Loans transferred to real estate owned 130 -- --
</TABLE>
See accompanying notes.
61
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
(Dollar amounts in thousands, except per share data)
For the Years ended December 31, 1996, 1995 and 1994
...........................................................................................................................
Net Unrealized
Gain(Loss) on
Securities
Preferred Common Available Retained
Stock Stock for Sale Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $123 $3,806 -- $2,276 $6,205
Preferred stock converted to common (20) 20 -- -- --
Unrealized loss on securities held for sale -- -- $(76) -- (76)
Cash dividends -- -- -- (188) (188)
Stock options exercised -- 83 -- -- 83
Net income -- -- -- 947 947
...........................................................................................................................
Balance at December 31, 1994 103 3,909 (76) 3,035 6,971
Preferred stock converted to common (93) 93 -- -- --
Unrealized gain on securities held for sale -- -- 86 -- 86
Cash dividends -- -- -- (241) (241)
Stock options exercised -- 51 -- -- 51
Net income -- -- -- 1,211 1,211
...........................................................................................................................
Balance at December 31, 1995 10 4,053 10 4,005 8,078
Preferred stock converted to common (10) 10 -- -- --
Unrealized gain on securities held for sale -- -- (15) -- (15)
Cash dividends -- -- -- (277) (277)
Stock options exercised -- 80 -- -- 80
Net income -- -- -- 1,415 1,415
...........................................................................................................................
Balance at December 31, 1996 $0 $4,143 $(5) $5,143 $9,281
...........................................................................................................................
</TABLE>
See accompanying notes.
Report of Independent Accountants
To the Shareholders and the Board of Directors of Bay Area Bancshares: We have
audited the accompanying consolidated balance sheet of BAY AREA BANCSHARES (the
Company) as of December 31, 1996 and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements as of December 31, 1995 and for the years
ended December 31, 1995 and 1994 were audited by other auditors whose report
dated January 19, 1996 expressed an unqualified opinion.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bay Area
Bancshares at December 31, 1996 and the consolidated results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand
San Francisco, California
February 8, 1997
62
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 1-Summary of Significant Accounting Policies
The consolidated financial statements of Bay Area Bancshares (the Company), and
its wholly owned subsidiary, Bay Area Bank (the Bank), have been prepared in
conformity with generally accepted accounting principles and general practice
within the banking industry. The Company's significant accounting policies are
as follows:
a. Basis of Presentation The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
All dollar amounts are shown in thousands except per share data.
b. Use of Estimates in the Preparation of Financial Statements The preparation
of the consolidated financial statements of the Company requires management to
make estimates and assumptions that affect reported amounts. These estimates are
based on information available as of the date of the financial statements.
Therefore, actual results could differ from those estimates.
c. Cash and Cash Equivalents The Company considers cash and due from banks and
federal funds sold to be cash and cash equivalents.
d. Investment Securities Held to Maturity and Available for Sale The amortized
cost of debt securities classified as held-to-maturity or available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity, or
in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization is included in interest income from investments.
Interest and dividends are included in interest income from investments.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method. Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Available-for-sale
securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity.
e. Loans Loans are stated at the amount of principal
outstanding at the balance sheet date. Interest on commercial, installment and
real estate loans is accrued daily on a simple interest basis on the amount of
principal outstanding. The Bank's policy is to place loans on nonaccrual status
if either principal or interest has become past due for 90 days or more, or when
payment in full of principal or interest is not expected. When a loan is placed
on nonaccrual status, all interest previously accrued is reversed against
current period income. Bank management may waive nonaccrual status and the
previously accrued interest may not be reversed if a loan is well secured and in
the process of collection. Cash received on non-accrual loans is applied to
reduce the principal balance.
f. Loans Held for Sale Loans held for sale in the
normal course of business consist of residential real estate loans that were
originated or acquired with the intent to sell. These loans are recorded at the
lower of cost or fair value and are originated through the Bank's Mortgage
Department.
g. Allowance for Possible Loan Losses The allowance for possible loan losses is
maintained at a level considered by management as adequate to provide for losses
that are inherent in the loan portfolio. The allowance is increased by
provisions charged to operating expense and reduced by net charge-offs. The Bank
makes periodic credit reviews of the loan portfolio and considers current
economic conditions, historical loan loss experience and other factors in
determining the adequacy of the allowance. The allowance for possible loan
losses is based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the periods in which they become
known.
h. Premises and Equipment Premises and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets, which are generally three to five years for furniture and equipment.
Leasehold improvements are amortized over the term of the respective lease or
the estimated useful life of the property, whichever is shorter.
i. Real Estate
Owned Real estate owned is carried at the lower of cost or fair value. When the
property is acquired through foreclosure, any excess of the related loan balance
over the fair value is charged to the reserve for possible loan losses.
Subsequent write-downs, operating expense, and losses upon sale, if any, are
charged to operating expenses.
j. Earnings per Share Earnings per common and
common equivalent shares are computed by dividing net income by the weighted
average number of common shares and common equivalent shares outstanding which
include dilutive and anti-dilutive stock options, preferred stock and a
corresponding adjustment of net interest income net of income taxes. The
computation of common equivalent shares for primary earnings per share is based
on the weighted average market price of the Company's common stock throughout
the period. The computation of common equivalent shares for fully diluted
earnings per share is based on the market price of the Company's common stock at
the end of the period.
k. Reclassifications Certain reclassifications have been
made to prior years' amounts to conform with the current year presentation.
These reclassifications have no effect on previously reported net income.
63
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 2-Nature of operations
The Company, through its subsidiary bank, provides a wide range of commercial
banking services to individuals, professionals and small to medium sized
businesses. The services provided include those typically offered by commercial
banks, such as: interest-bearing and noninterest bearing checking accounts,
savings and time deposits, business and personal loans, collection services,
safe depository facilities, funds transfer, the issuance of money orders,
cashiers checks, and the sale of travelers' checks. The Bank also operates a
network of off-site Automated Teller Machines (ATM's), and a Mortgage Department
(which was closed in February 1997), which generally sold the loans it
originated in the secondary mortgage market.
Note 3--Investment Securities
The amortized cost and approximate market value of investment securities
as of December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996
...........................................................................................................................
Amortized Unrealized Unrealized Aggregate
Cost Gain LossFair Value
<S> <C> <C> <C> <C>
Available-for-sale:
Securities of the U.S. government and its agencies $2,001 $2 $ -- $2,003
Mortgage backed securities 595 -- (10) 585
...........................................................................................................................
Total 2,596 2 (10) 2,588
Held-to-maturity:
Securities of the U.S. government and its agencies 4,003 19 (1) 4,021
States of the U.S. and political subdivisions 1,179 4 (2) 1,181
Mortgage backed securities 6,605 108 (6) 6,707
Federal Home Loan Bank Stock 294 -- -- 294
...........................................................................................................................
Total $12,081 $131 $(9) $12,203
...........................................................................................................................
1995
...........................................................................................................................
Amortized Unrealized Unrealized Aggregate
Cost Gain Loss Fair Value
Available-for-sale:
Securities of the U.S. government and its agencies $2,507 $9 $ -- $2,516
Mortgage backed securities 594 1 -- 595
...........................................................................................................................
Total 3,101 10 -- 3,111
Held-to-maturity:
Securities of the U.S. government and its agencies 3,773 36 -- 3,809
States of the U.S. and political subdivisions 1,582 2 -- 1,584
Mortgage backed securities 4,505 106 (8) 4,603
Federal Home Loan Bank Stock 273 -- -- 273
...........................................................................................................................
Total $10,133 $144 $(8) $10,269
...........................................................................................................................
</TABLE>
The amortized cost and aggregate fair value of investment securities at December
31, 1996 by type and maturity are shown below. Mortgage-backed securities are
shown at final contractual maturity. The expected maturities of mortgage backed
securities will differ from contractual maturities because borrowers have the
right to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
Securities Securities
Held to Maturity Available for sale
...........................................................................................................................
Fair Fair
Cost Market Value Cost Market Value
<S> <C> <C> <C> <C>
Due within one year $2,301 $2,306 $2,001 $2,003
Due after one year through five years 5,024 5,067 595 585
Due after five years through ten years 2,374 2,426 -- --
Due after ten but within thirty years 2,088 2,110 -- --
...........................................................................................................................
Total $11,787 $11,909 $2,596 $2,588
...........................................................................................................................
</TABLE>
64
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 3--Investment Securities (Continued)
In 1995, the Company sold a security with a par value of $500 from its available
for sale portfolio. As a result of this transaction, the Company realized a loss
of $16. The Company did not sell any securities in 1996.
The net adjustment to unrealized gain on investment securities available for
sale, included as a separate component of shareholders' equity, was $15 between
December 31, 1995 and December 31, 1996. The Financial Accounting Standards
Board allowed companies to revisit the designations of their held to maturity
and held for sale securities in the fourth quarter of 1995. In December of 1995,
the Company elected to transfer a security from its held to maturity portfolio
to its held for sale portfolio in anticipation that it may be sold prior to
maturity. The security had an amortized cost of $595 and an unrealized loss of
$13 at the time of transfer. As of December 31, 1996 and 1995, investment
securities with an amortized cost of $2,057 and $1,590 respectively, were
pledged to secure public deposits and other borrowings as required by law.
Note 4--Loans and allowance for Possible Loan Losses
Loan balances as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commercial and financial $20,019 $17,390
Real estate mortgage 33,255 27,962
Real estate construction 10,799 10,849
Installment 4,432 4,524
...........................................................................................................................
68,505 60,725
Less--Allowance for possible loan losses 1,493 1,516
Net loans $67,012 $59,209
</TABLE>
The changes in the allowance for possible loan losses for the years
ended December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at January 1, $1,516 $1,505 $1,006
Provision for possible loan losses 435 210 300
Loans charged off (510) (233) (3)
Recoveries 52 34 202
...........................................................................................................................
Balance at December 31, $1,493 $1,516 $1,505
</TABLE>
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, effective January 1, 1995. As
a result of applying the new rules, certain impaired loans are reported at the
present value of expected future cash flows using the loan's effective interest
rate, or as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. If the
estimated value of the loan is less than the carrying value of the loan, the
impairment is recorded through a valuation allowance. The valuation allowance
for impaired loans at December 31, 1996 and 1995 under SFAS No. 114 was $258 and
$185 which is included in the Company's allowance for loan loss.
The Company considers all nonaccrual loans to be impaired loans. At December 31,
1996 and 1995 there were loans totaling approximately $1,431 and $470
respectively, on nonaccrual status. Interest earned but not recorded on all
loans that were on nonaccrual status during the years ended December 31, 1996,
1995, and 1994 was approximately $127, $43 and $60, respectively.
The Bank has, 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. These transactions, including loans and
deposits, are granted on substantially the same terms, including interest rates
and collateral, as those prevailing at the same time for comparable transactions
with others and do not involve more than the normal risk of collectability or
present other unfavorable features. The loan activity with respect to these
related parties during 1996 is summarized below:
Loans to directors, executive officers, principal shareholders and their
associates
Balance at January 1, 1996 1995
$945 $1,024
Additions 888 --
Paydowns or Retirements 284 79
................................................................................
Balance at December 31, $1,549 $945
65
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 4--Loans and allowance for Possible Loan Losses (Continued)
The Bank's business activity is with customers primarily located within San
Mateo County. The Bank grants real estate, commercial, and installment loans to
these customers. Although the Bank has a diversified loan portfolio, a
significant portion of its customers' ability to repay the loans is dependent
upon the real estate economic sector. Generally, the loans are secured by assets
or stock. Loans are based on the borrowers' established integrity, historical
cash flow, and their willingness and ability to perform on commitments. The
Bank's policy is to secure collateral where deemed necessary to protect the
soundness of the loan. In the event of loan default, the Bank's means of
recovery is through judicial procedures.
Note 5--Premises and Equipment
<TABLE>
<CAPTION>
Premises and equipment as of December 31, 1996 and 1995 were
comprised of the following:
1996 1995
<S> <C> <C>
Automobiles $37 $37
Furniture and equipment 2,404 2,149
Leasehold improvements 210 170
...........................................................................................................................
2,651 2,356
Less - Accumulated depreciation and amortization 1,840 1,408
Net premises and equipment $811 $948
...........................................................................................................................
</TABLE>
Note 6--Deposits and Interest on Deposits
As of December 31, 1996 and 1995, the Bank had time certificates of deposit in
denominations of $100 or more totaling approximately $9,959 and $7,850,
respectively. Interest paid on these deposits was approximately $494 in 1996,
$347 in 1995 and $333 in 1994.
Note 7--available credit
As of December 31, 1996 and 1995, the Bank had in place $9,000 in unsecured
liquidity lines of credit. These funds were available through its correspondent
banks. The Bank is a member of the Federal Home Loan Bank of San Francisco
(FHLB). The Bank may borrow up to 25% of its assets subject to collateral and
FHLB stock purchase requirements. At December 31, 1996 the Bank held $294 in
FHLB stock and was able to borrow up to approximately $2,058. There were no
borrowings at December 31, 1996 or 1995.
Note 8--Regulatory capital requirements
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material affect on the
Bank's financial condition. 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 judgements 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 Icapital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
...........................................................................................................................
Amount Ratio Amount Ratio Amount Ratio
...........................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital (to Risk Weighted Assets) $10,205 13.81% $5,911 8.0% $7,388 10.0%
...........................................................................................................................
Tier 1 Capital (to Risk Wieghted Assets) $9,282 12.56% $2,955 4.0% $4,433 6.0%
Tier 1 Capital (to Average Assets) $9,282 8.96% $4,145 4.0% $5,182 5.0%
</TABLE>
66
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 8--Regulatory capital requirements (Continued)
As of December 31, 1996, the Bank was categorized as "well- capitalized" under
the regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratio as set forth in the table, and not be subject
to a capital directive.
The retained earnings of the Company include
undistributed earnings of the Bank. Dividends by the Bank to the Company are
restricted under California law to the lesser of the Bank's retained earnings,
or the Bank's net income for the latest three fiscal years, less dividends
previously declared during that period, or with the approval of the California
Superintendent of Banks, to the greater of the retained earnings of the Bank,
the net income of the Bank for its last fiscal year or the net income of the
Bank for its current fiscal year. As of December 31, 1996, the Bank had retained
earnings available for dividend distribution of $3,774.
Additionally, the Federal Reserve Act generally restricts loans, advances and
investments by the Bank, in or to the Company, to 10% of the shareholders'
equity of the Bank.
Note 9--Commitments and Contingent Liabilities
The Company is obligated for rental payments under certain operating leases and
contract agreements. Rental expense included in occupancy expense and equipment
expense was approximately $378, $359 and $315 for the years ended December 31,
1996, 1995 and 1994, respectively.
At December 31, 1996, the approximate future lease rentals payable under
operating leases for premises were as follows:
1997 $330
1998 330
1999 249
2000 231
2001 231
Thereafter 231
.........................................................................
Total Minimum Lease Payments $1,602
The Company's primary location (900 Veterans Blvd.) was acquired by a former
director in October of 1992. The lease for approximately 8,300 square feet,
which was negotiated with the previous lessor, a non-related party, was renewed
for a seven year term in June of 1996 with an additional seven and one-half year
option. An additional lease for approximately 2,100 square feet for the Bank's
Mortgage Department was negotiated with the former director and renewed for a
three year term in December of 1996 with an additional three year option. Total
rent paid in 1996 for all space leased at 900 Veterans Blvd was $276. In 1996
the Company executed a three year extension of its data processing center with a
three year option with a former director. Total rent paid in 1996 for the data
processing center was approximately $53. In the opinion of management, the terms
of the leases are no less favorable than terms which could have been obtained
from unrelated parties. The Bank is required to maintain reserves with the
Federal Reserve Bank (FRB) of San Francisco. Reserve requirements are primarily
based on a percentage of deposit liabilities. At December 31, 1996 and 1995 the
Bank had balances of $964 and $310 respectively with the FRB. In the normal
course of business, the Company is at times subject to pending and threatened
legal actions and proceedings. After reviewing pending and threatened actions
and proceedings with counsel, management believes that the outcome of such
actions or proceedings will not have a material adverse effect on the
consolidated financial condition of the Company.
67
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 10--Off-Balance Sheet Instruments With Risk
In the ordinary course of business, the Bank enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to extend credit and standby letters of
credit and are not reflected in the accompanying balance sheets. These
transactions may involve, to varying degrees, credit and interest rate risk in
excess of the amount, if any, recognized in the balance sheets. Management does
not anticipate any loss to result from these commitments. The Bank's off-balance
sheet credit risk exposure is the contractual amount of commitments to extend
credit and standby letters of credit. The Bank applies the same credit standards
to these contracts as it uses in its lending process.
<TABLE>
<CAPTION>
Financial instruments whose contractual amount represented risk: 1996 1995
<S> <C> <C>
Commitments to extend credit $36,251 $24,347
Standby letters of credit $ 327 $ 101
</TABLE>
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed expiration
dates but may be terminated by the Bank if certain conditions of the contract
are violated. Although currently subject to drawdown, many of these commitments
are expected to expire or terminate without funding. Therefore, the total
commitment amounts do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but may include cash,
securities and real estate. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Credit risk arises in these transactions from the possibility that
a customer may not be able to repay the Bank upon default of performance.
Collateral held for standby letters of credit is based on an individual
evaluation of each customer's creditworthiness, but may include cash and
securities.
Note 11--Profit Sharing and salary continuation PlanS
The Bank has a qualified profit sharing plan for most full-time employees.
Employer contributions are to be made from current-year profits, predicated on
the performance of the Bank based on a formula approved annually by the Bank's
Board of Directors. Participants in the plan are allowed to make contributions
in accordance with the plan agreement. The Bank matches the participants'
contributions up to 5% of their annual salary so long as certain Bank
profitability goals are met. Full vesting of the Bank's contribution to the
employee occurs after five years of employment. The Bank provided for
contribution expense of $72, $64 and $64 during 1996, 1995 and 1994,
respectively. During 1996, the Company implemented a salary continuation plan
for the Bank's Chief Executive Officer. Under the plan, the Company is obligated
to provide the officer or his beneficiaries, during a period of 15 years after
retirement, an annual benefit of $80. The officer vests in the benefits of the
plan equally each year and fully vests in 2005 if certain bank performance
standards are met and if he reaches normal retirement age while working for the
Bank. The costs of these benefits accrue over the remaining expected service
life of the officer based on the estimated present value of the related
benefits. Salary continuation expense was $57 and $81 in 1996 and 1995,
respectively. The Bank has elected to fund its obligation under the plan
described above with a life insurance contract. The Bank is the beneficiary of a
life insurance policy with a current cash surrender value of $129 which is
included in other assets at December 31, 1996. The Company made a premium
payment of $89 to this policy in both 1996 and 1995 and anticipates making
additional premium payments of $89 for the next two fiscal years to the policy.
68
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 12--Employee Stock Option Plan and rights
The Company has a stock option plan for full-time, salaried officers and
directors and employees who have substantial responsibility for the successful
operation of the Company. Options are granted at no less than the fair market
value of the stock at the date of the grant. Options vest over a period of 0 to
5 years and have a maximum term of 10 years. The options may be granted in
accordance with terms determined by the Board of Directors until the expiration
of the plan. At December 31, 1996, 9,558 shares were available for grant. The
following table summarizes the option activity for the years ended December 31,
1996, 1995, 1994 and 1993 (all share amounts are in thousands):
<TABLE>
<CAPTION>
1993 Plan
Weighted Average
Available Outstanding Price Per Share Fair Value of options
...........................................................................................................................
<S> <C> <C> <C> <C>
Inception of Plan 231 -- --
Granted (207) 207 $4.75 - $5.23
...........................................................................................................................
Balance, December 31, 1993 24 207 $4.75 - $5.23
Exercised -- (16) $4.75
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 24 191 $4.75 - $5.23
Granted (5) 5 $7.25 $13.11
Exercised -- (11) $4.75
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 19 185 $4.75 - $7.25
...........................................................................................................................
Granted (10) 10 $12.50 $15.78
Exercised -- (15) $4.75 - $7.25
...........................................................................................................................
Balance, December 31, 1996 9 180 $4.75 - $12.50
</TABLE>
On January 1, 1996, the Bank adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As permitted by
SFAS 123, the Bank has chosen to apply APBOpinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations in accounting for its
Plans. Accordingly, no compensation cost has been recognized for options granted
under the Plan. Had compensation cost for the Bank's Plan been determined based
on the fair value at the grant dates for awards under the Plan consistent with
the method of SFAS 123, the Bank's net income and net income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
...........................................................................................................................
As As
Reported Pro Forma Reported ProForma
...........................................................................................................................
<S> <C> <C> <C> <C>
Net income $1,415 $1,240 $1,211 $1,195
Primary income per share $ 1.50 $ 1.31 $ 1.37 $ 1.36
Fully diluted net income per share $ 1.50 $ 1.31 $ 1.31 $ 1.30
</TABLE>
The fair value of each option grant is estimated on the date of grant using a
method that approximates the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grant in 1996 and 1995; expected
volatility of 15%, risk-free interest rates of 6.00% and expected lives of 10
years.
The following table summarizes information about the Plan's stock
options at December 31, 1996:
Options Outstanding
................................................................................
Number Outstanding Number Excercisable
Exercise Rate
...............................................................................
$4.75 158 158
$5.23 10 10
$7.25 2 2
$12.50 10 10
Total 180 180
...............................................................................
Weighted average exercise price $5.24 $5.24
69
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 13--Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are set forth below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Book loan loss allowance in excess of tax $472 $414
Book depreciation in excess of tax 46 8
State franchise tax 51 87
Other 84 14
...........................................................................................................................
Deferred tax asset $653 $523
...........................................................................................................................
</TABLE>
The current and deferred amounts of the tax provision (benefit) for the years
ended December 31, 1996, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
Total
Federal State Provision
<S> <C> <C> <C>
...........................................................................................................................
1996
Current $774 $319 $1,093
Deferred (81) (55) (136)
...........................................................................................................................
Total $693 $264 $957
...........................................................................................................................
1995
Current $583 $262 $845
Deferred (14) 8 (6)
...........................................................................................................................
Total $569 $270 $839
...........................................................................................................................
1994
Current $561 $233 $794
Deferred (104) (53) (157)
...........................................................................................................................
Total $457 $180 $637
...........................................................................................................................
</TABLE>
The provisions for income taxes differ from the amounts computed by applying the
statutory federal income tax rates to income before taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal income tax expense, based on
statutory 34% federal income tax rate $807 $697 $539
State franchise taxes, net of federal benefit 174 178 119
Tax exempt income (21) (21) (24)
Other, net (3) (15) 3
...........................................................................................................................
Total $957 $839 $637
...........................................................................................................................
</TABLE>
70
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 14-FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting No. 107 "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), the estimated fair value of the
Company's financial instruments are disclosed below. 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 instrument. Statement 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not necessarily represent or affect the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosure for financial instruments:
Cash and Cash Equivalents:
Cash and cash equivalents, which includes federal funds sold, is carried at an
amount that approximates fair value. Time Deposits With Other Financial
Institutions:
Time deposits are carried at an amount that approximates fair value. Investment
Securities: Fair value is based on quoted market prices, where available or
quoted market prices of comparable instruments. If not material, the carrying
value of investment securities approximates fair value. Loans and Loans Held for
Sale: Most adjustable rate loans are valued at the carrying amount. All fixed
and adjustable rate loans with interest rate caps and floors are valued by loan
type. To determine the fair value, the interest rate used to discount the cash
flows is the current market rate for a like class of loans. Additionally, the
allowance for loan losses was applied against the estimated fair value to
recognize future defaults of contractual cash flows. Interest Receivable:
Interest receivable is carried at an amount that approximates fair value.
Deposits: The fair values disclosed for demand (interest bearing transaction and
savings deposits) are equal to the amount payable on demand at the reporting
date (carrying amount). Fair value for time deposits (fixed-rate certificate of
deposits) are estimated using a discounted cash flow calculation that applies
interest rates currently offered on deposits of similar remaining maturities.
Interest Payable: Interest payable is carried at an amount that approximates
fair value. Fed Funds Purchased: Fed funds purchased are carried at an amount
that approximates fair value. Off-Balance-Sheet Instruments: The fair value of
commitments to extend credit were not significant.
The estimated fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31, 1996
Carrying Amount Fair Value
...........................................................................................................................
<S> <C> <C>
Assets
Cash and cash equivalents $17,861 $17,861
Time deposits with other financial institutions 100 100
Investment securities available for sale 2,588 2,588
Investment securities held to maturity 12,081 12,203
Loans 67,012 67,101
Loans held for sale 723 723
Interest receivable 587 587
Liabilities
Demand deposits 23,599 23,599
Interest bearing transaction and savings deposits 50,044 50,044
Time deposits 19,325 19,359
Interest payable 167 167
</TABLE>
71
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 15--Condensed Financial Information of the Parent Company
Condensed balance sheets, statements of income, and cash flows for
Bay Area Bancshares (parent company only) are presented below:
Bay Area Bancshares (Parent) Balance Sheets at December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Cash and cash equivalents $105 $120
Investment in subsidiary 9,276 8,045
...........................................................................................................................
Total assets $9,381 $8,165
Liabilities & Shareholders' Equity
Other liabilities 100 87
...........................................................................................................................
Total liabilities 100 87
Total shareholders' equity 9,281 8,078
Total liabilities and shareholders' equity $9,381 $8,165
...........................................................................................................................
</TABLE>
Bay Area Bancshares (Parent) Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash dividends received from subsidiary $225 $275 $325
Other income 2 1 1
Interest expense - - (10)
Professional fees (16) (25) (37)
Miscellaneous expense (42) (35) (40)
...........................................................................................................................
Income before equity in undistributed income of subsidiary 169 216 239
Equity in undistributed income of subsidiary 1,246 995 708
...........................................................................................................................
Net income 1,415 $1,211 $947
...........................................................................................................................
</TABLE>
Bay Area Bancshares (Parent) Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Cash flows from operating activities: 1996 1995 1994
<S> <C> <C> <C>
Net income $1,415 $1,211 $947
Adjustments to reconcile net income to cash provided by
operating activities:
Net decrease in other assets -- -- 2
Net increase in other liabilities 13 74 8
Equity in undistributed income of subsidiary (1,246) (995) (708)
...........................................................................................................................
Total adjustments (1,233) (921) (698)
...........................................................................................................................
Net cash provided by operating activities 182 290 249
Cash flows from financing activities:
Principal payment on note payable -- -- (150)
Exercise of common stock options 80 51 83
Cash dividends (277) (241) (188)
...........................................................................................................................
Net cash used in financing activities (197) (190) (255)
Net (decrease) increase in cash and cash equivalents (15) 100 (6)
Cash and cash equivalents, beginning of year 120 20 26
...........................................................................................................................
Cash and cash equivalents, end of year $105 $120 $20
...........................................................................................................................
Cash paid for interest -- -- $11
</TABLE>
72
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: March 26, 1997
BAY AREA BANCSHARES
By /s/ Robert R. Haight
Robert R. Haight, Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
By /s/ John O. Brooks
John O. Brooks, Director, Executive Vice President
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE: DATE:
/s/ Mario A. Biagi March 26, 1997
MARIO A. BIAGI, Director
/s/ John O. Brooks March 26, 1997
JOHN O. BROOKS, Director
/s/ Gary S. Goss March 26, 1997
GARY S. GOSS, Director
/s/ Robert R. Haight March 26, 1997
ROBERT R. HAIGHT, Chairman
of the Board of Directors, President
and Chief Executive Officer
/s/ Stanley A. Kangas March 26, 1997
STANLEY A. KANGAS, Director
73
<PAGE>
/s/ David J. Macdonald March 26, 1997
DAVID J. MACDONALD, Director
/s/ Thorwald A. Madsen March 26, 1997
THORWALD A. MADSEN, Director
/s/ Dennis W. Royer March 26, 1997
DENNIS W. ROYER, Director
/s/ Anthony J. Gould March 26, 1997
ANTHONY J. GOULD, Vice President
Chief Accounting Officer
Exhibit Index
10.15 Salary Continuation Agreement between John O Brooks and Bay Area
Bank dated January 1, 1995
10.16 #1996 Stock Apreciation Rights Plan, Amendment No. 1 to SAR Plan and
forms of Agreement
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
74
Salary Continuation Agreement
THIS AGREEMENT dated as of January 1, 1995, between BAY AREA BANK (the
"Corporation" or the "Company"), a wholly owned subsidiary of Bay Area
Bancshares and JOHN O. BROOKS (the "Participant") is freely entered into by the
parties.
The Company primarily is engaged in the banking business.
The Participant is a member of the Company's key management team and
has been employed by the Company since November, 1992.
The Participant is presently employed in an executive capacity by
Company as its Chief Executive Officer. The Company believes that the
Participant's services are and will continue to be of great value to the
Company, and therefore the Company and the Participant have negotiated this
salary continuation arrangement and are documenting same by means of this
Agreement.
The Company wishes to provide a salary continuation benefit to
Participant of Eighty Thousand Dollars ($80,000) a year (the "Target Benefit")
for Fifteen (15) years after retirement. The Target Benefit is contingent upon
survival and the employment and performance standards being met.
The execution of this Agreement by the Company has been duly authorized
by its Board of Directors (the "Board"), by appropriate resolution granting
authority to the signatory officer to execute the Agreement on behalf of the
Company. In reaching its decision reflected in this Agreement, the Board
thoroughly evaluated various alternatives respecting compensation, considered
the Company's best interests, and determined that this Agreement is fair and
reasonable to the Company.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein the parties agree as follows:
1. The Participant agrees to serve the Company at the pleasure of the
Board as the Company's Chief Executive Officer and further agrees to perform
such services not inconsistent with his position as shall from time to time be
assigned to the Participant by the Board.
2. During the term of his employment, the Participant shall devote all of his
time, attention skill and efforts to the performance of his duties for the
Company.
<PAGE>
3. In addition to base salary and whatever other benefits the Board has
or shall determine to be appropriate for the Participant, the Company agrees to
pay to the Participant the amount of compensation credited under paragraph 4,
payable as provided in paragraph 5 below, unless forfeited by the occurrence of
any of the events of forfeiture specified in paragraph 7, below.
4. (a) The Target Benefit is comprised of Two (2) parts, the "Basic
Benefit" and the "Performance Benefit". If the employment standards applicable
to the Participant are satisfied and the Company performance standards described
below are continuously met through December 31, 2005, the Performance Benefit
payable to the Participant would be Seventy Eight Thousand Dollars ($78,000) a
year for Fifteen (15) years beginning April 30, 2006 (the "Performance
Benefit"). After the Participant's death if the Participant's spouse is still
living, One Hundred Percent (100%) of the Performance Benefit (but no part of
the Basic Benefit) will be payable to the Participant's spouse for the remainder
of the Fifteen (15) year period. All benefits under this Agreement will cease
after the death of the survivor of the Participant and the Participant's spouse.
(b) Beginning January 1, 1995, each year that the Company
meets the performance standards described in subparagraph (d) below while the
Participant continues as the Company's Chief Executive Officer and is so
employed on the last day of such year, One Eleventh (1/11th) of the Performance
Benefit shall vest on the last day of the Company's fiscal year. For example, if
the Company meets the performance standards described in subparagraph (d) below
for each and every year through the year 2005 but the Participant retires as the
Company's Chief Executive Officer on April 20, 2005 or if the Company meets the
performance standards described in subparagraph (d) below for ten of the eleven
years through the year 2005 and the Participant retires as the Company's Chief
Executive Officer on April 20, 2006, the Participant would only be entitled to
receive Ten Elevenths (10/11ths) of the Performance Benefit or Seventy Thousand
Nine Hundred Nine Dollars and Ninety Cents ($70,909.90) annually (not including
the $2,000 Basic Benefit described below in subparagraph (f)).
(c) The Company may, but need not, set aside assets or
investments as a reserve for the compensation hereunder. Title to and beneficial
ownership of any assets, whether cash or other investments which the Corporation
may set aside to pay the contingent compensation hereunder, shall at all times
remain in the Corporation and the Participant and his spouse shall not have any
property interest whatsoever in any specific assets of the Corporation.
(d) Beginning January 1, 1995, for each year that the
Participant remains as the Company's Chief Executive Officer, the Company must
meet or exceed all of the following performance standards based on a three-year
average (consisting of that year and the preceding two years): (i) the Company
must produce a One Percent (1%) return on average Company assets; (ii) the
Company must maintain a Six Percent (6%) leveraged capital ratio; (iii) the
Company must produce a Ten Percent (10%) return on average Company equity; and
(iv) the Company must be considered "adequately capitalized", in accordance with
applicable Federal Deposit Insurance Corporation (FDIC) standards. For example,
if the Company has a 0.9% return on assets during 1996, but had a 1.2% return
during 1994 and 1995, the three-year average would be 1.1% and would meet the
performance standard described in subparagraph (d)(i). The determination of
whether these performance standards are met shall be made by the independent
accounting firm which regularly performs accounting services for the Company and
such determination shall be binding on all persons for all purposes.
Notwithstanding that the Company meets all of the foregoing performance
standards, the Company shall be deemed to have not satisfied the performance
standards in any year during which a regulatory order, memorandum or agreement
is issued or entered into or in any year in which a majority of the Board of
Directors of the Company determines in good faith that the Participant's
performance as Chief Executive Officer is unsatisfactory for any reason. In the
event the Company fails to meet the performance standards in any year, not only
will no portion of the Performance Benefit be credited for such year, there will
be no opportunity in the future to make up for the portion not credited for such
year. Thus, for the Participant to be entitled to the full Target Benefit, the
performance standards (and other requirements contained in this Agreement) must
be met each and every year through 2005.
(e) If the Participant's employment is terminated or modified
as a result of a change of control before the Participant shall have remained in
his capacity as Chief Executive Officer in a substantially full time capacity up
to and including calendar year 2005, One Twenty-Second (1/22nd) of the
Performance Benefit shall vest on the last day of each of the Company's fiscal
years subsequent to such change of control through 2005, regardless of the
performance standards described in subparagraph (d) above. For purposes of this
subparagraph, "change of control" is defined as a merger, acquisition or change
of control that requires notice to or approval of State or Federal banking
regulators.
(f) In addition to the Performance Benefit, the Participant
shall be entitled to a Basic Benefit equal to Two Thousand Dollars ($2,000) per
year, for the remainder of Participant's life, beginning on April 30th of the
year following the year Participant reaches age Sixty-Five (65). The Participant
shall be entitled to the Basic Benefit only if the Participant is still living
on April 30th of the year following the year Participant reaches age Sixty Five
(65). The performance standards described in subparagraph (d) above shall not
apply to this Basic Benefit. The Basic Benefit shall terminate on Participant's
death.
5. The benefits to be paid as compensation (unless forfeited by occurrence of
any of the events of forfeiture specified in paragraph 7, below) are to be paid
as follows:
(a) The Basic Benefit shall be paid to the Participant on each April 30th
following the year in which Participant reaches age Sixty-Five (65), for as long
as the Participant is living. This Basic Benefit shall terminate on
Participant's death. For example, if Participant dies on April 29, 2006, no
Basic Benefit will be payable under this Agreement or if Participant dies on
April 29, 2025, the Basic Benefit will be payable for a total of Twenty (20)
years.
(b) The Performance Benefit shall be payable on April 30, 2006, and each April
30th thereafter up to and including April 30, 2020, as long as the Participant
is living on April 30th of each year and the other requirements of this
Agreement are and continue to be met.
(c) In the event of Participant's death before some or all of
the Fifteen (15) Performance Benefit payments have been made to the Participant,
One Hundred Percent (100%) of the Performance Benefit payments (not including
the Basic Benefit) which would have been paid to the Participant but for his
death, shall be paid on an annual basis for the Participant's spouse beginning
on the first April 30th following Participant's death. Such payments shall cease
on the earlier of the death of the spouse or upon making the Fifteenth (15th)
payment. In the event that the Participant's spouse predeceases the Participant
or dies under circumstances in which it cannot be determined whether such spouse
survived the Participant, no payments shall be made to the spouse under this
subparagraph.
(d) Participant or Participant's spouse shall only be entitled
to payment on April 30th of any year if the Participant, or the Participant's
spouse, as the case may be, is living on said April 30th. All benefits hereunder
shall cease and terminate after the death of the survivor of the Participant and
the Participant's spouse. For example, if the Participant and the Participant's
spouse died in a common accident on May 1st, prior to the Company having paid
the compensation due the previous day, that payment in "pay status" would be
made to the Participant's Estate (or to a trust established by the Participant
for his benefit for his life), but no payments would be made under this
Agreement in any subsequent year.
(e) If the Participant's employment by the Company is
terminated (including on account of death or disability, voluntary resignation
or termination with or without cause) or if Participant's employment is modified
for any reason (such as continuing employment but on a part-time basis or in a
different capacity), before the Participant shall have remained in his capacity
as Chief Executive Officer in a substantially full time capacity up to and
including calendar year 2005, then the compensation accrued to that date, plus
any compensation that may accrue as specified in subparagraph 4(e) above, shall
be held as the Board in its discretion may determine and no payments shall be
made until April 30 of the year following the earlier of Participant's death or
Participant's Sixty-Fifth (65th) birthday, at which time payments shall be made
in the same manner and to the same extent as set forth herein.
(f) Except as otherwise provided herein, all of the foregoing payments shall be
made on April 30 (unless April 30 is a Saturday, Sunday or holiday, in which
case payment shall be made on the next business day). All payments shall be
subject to customary tax and other withholding as required by law.
(g) The Participant shall be deemed to have become disabled for purposes of
subparagraph (e), above, if the Participant has been determined to be
permanently disabled under the Company's group disability plan.
(h) Notwithstanding anything herein to the contrary, the Board
shall have the right in its sole discretion to vary the manner and time of
making the installment distributions provided in this Agreement and may make
such distributions in lump sums or over a shorter or longer period of time as it
may find appropriate; provided that the installment distributions may only be
made over a longer period of time if necessary in order to comply with bank
regulatory requirements.
6. Nothing contained in this Agreement and no action taken pursuant to
the provisions of this Agreement shall create or be construed to create a trust
of any kind, or a fiduciary relationship between the Corporation and the
Participant, his spouse or any other person. Any funds which may be set aside
under the provisions of this Agreement shall continue for all purposes to be a
part of the general funds of the Corporation and no person other than the
Company shall by virtue of the provisions of this Agreement have any interest in
such funds. To the extent that any person acquires a right to receive payments
from the Company under this Agreement, such right shall be no greater than the
right of any unsecured general creditor of the Company.
7. Notwithstanding anything herein contained to the contrary, no
payment of any then unpaid installments of compensation shall be made and all
rights under the Agreement of the Participant and his spouse, or any other
person, to receive payments thereof shall be forfeited if any of the following
events shall occur:
(a) The Participant while employed by the Company shall engage in any activity
or conduct which in the opinion of the Board is contrary to the established
policies of the Company, including, for example, the Ethics and Conflicts of
Interest policy then in effect.
(b) After the Participant ceases to be employed by the Company, he shall fail or
refuse to provide advice and counsel to the Company when reasonably requested to
do so, except Participant shall not be required to render such services during
vacation periods or during any periods of illness or other incapacity.
(c) If it is determined by any bank regulatory authority that this Agreement is
excessive, illegal or otherwise improper.
8. The rights of the Participant and his spouse under this Agreement may not be
assigned, pledged, encumbered or otherwise transferred.
9. If the Board shall find that any person to whom any payment is
payable under this Agreement is unable to care for his affairs because of
illness, accident or disability, any payment due may be paid to the spouse of
such person or the custodian of such person or the trustee of a trust which was
established by such person for such person's benefit. Any payments to a spouse,
custodian or trustee as provided above shall act as a complete discharge of the
liabilities of the Company under this Agreement.
10. Nothing contained herein shall be construed as conferring upon the
Participant the right to continue in the employ of the Company as Chief
Executive Officer or in any other capacity.
11. Any compensation payable under this Agreement shall not be deemed salary or
other compensation to the Participant for the purpose of computing benefits to
which he may be entitled under any pension plan or other arrangement of the
Company for the benefit of its Participants.
12. The Board shall have full power and authority to interpret,
construe, and administer this Agreement and the Board's interpretations and
construction thereof, and actions thereunder, including the amount of the
Performance Benefit, or the amount or recipient of the payment to be made
therefrom, shall be binding and conclusive on all persons for all purposes. No
member of the Board shall be liable to any person for any action taken or
omitted in connection with the interpretation and administration of this
Agreement unless attributable to his or her own willful misconduct or lack of
good faith. Any decision by the Company denying a claim by the Participant or
his beneficiary for benefits under this Agreement shall be stated in writing and
delivered or mailed to the Participant or such beneficiary. Such decision shall
set forth the specific reasons for the denial, written to the best of the
Company's ability in a manner that may be understood without legal or actuarial
counsel. In addition, the Company shall afford a reasonable opportunity to the
Participant or such beneficiary for a full and fair review of the decision
denying such claim.
13. For purposes of this Agreement, the spouse of the Participant shall be that
person who is legally married to the Participant and was not living separate and
apart from the Participant at the time of the Participant's death.
14. This Agreement shall be binding upon and inure to the benefit of
the Corporation, its successors and assigns, and the Participant and his heirs,
executors, administrators, and legal representatives. Nothing contained in the
foregoing shall be interpreted as requiring any entity which acquires control of
the Company or acquires substantially all of the Company's assets from
continuing to employ Participant in his capacity as Chief Executive Officer or
in any other capacity or requiring the acquiring entity to continue to set aside
or credit any further amounts for the Participant's Performance Benefit.
15. If any of the provisions of this Agreement shall be determined to be
invalid, the remaining provisions of this Agreement shall continue in full force
and effect.
16. This Agreement shall be construed in accordance with and governed by the
laws of the State of California.
17. Any controversy or claim arising out of or relating to this Agreement, or
the breach thereof, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. In the event of any arbitration or court proceeding
arising as the result of a dispute arising under any or all of the provisions
contained in this Agreement, the prevailing party or parties shall be entitled
to recover from the other party its reasonable attorneys' fees and costs of
suit.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to
be executed by its duly authorized officers and Participant has hereunto set his
hand and seal as of the date first above written.
BAY AREA BANK PARTICIPANT
By_____________________ _________________________
Its____________________ John O. Brooks
BAY AREA BANCSHARES
1996
<PAGE>
STOCK APPRECIATION RIGHTS PLAN
1. PURPOSE
(a) The purpose of this Stock Appreciation Rights ("Plan") is to provide a
means whereby full-time employees of Bay Area Bancshares ("Corporation"),
or of other corporations which are or may hereafter become subsidiaries of
the Corporation (Subsidiaries"), including Bay Area Bank ("Bank"), may be
given an opportunity to participate in the appreciation in the value of the
Corporation's common stock ("Common Stock").
(b) The Plan is intended to advance the profits and prosperity of the
Corporation and the Subsidiaries by enabling the Corporation and the
Subsidiaries to secure and retain the services of highly qualified
employees, by providing such employees with an additional incentive to make
every effort to enhance the success of the Corporation and the
Subsidiaries, and by providing a means whereby employees may be compensated
for significant contributions to the success of the Corporation and the
Subsidiaries.
2. STOCK APPRECIATION RIGHTS AVAILABLE
(a) Subject to adjustment as provided in Section 6(i) hereof, the maximum
number of units for which Stock Appreciation Rights ("SARs") may be awarded
to participants under the Plan is 200,000 units.
(b) Any or all of the SARs subject to the Plan may be allocated to one or
more Subsidiaries, including the Bank, in which case the award of such SARs
to eligible employees of such Subsidiary shall be subject to approval of
the Board of Directors of such Subsidiary and shall be payable by such
Subsidiary when exercised.
3. ADMINISTRATION
(a) The Plan shall be administered by the Board of Directors of the Corporation
("Board") or by a Committee of the Board ("Committee") to which the Board
delegates such administration. If the administration is delegated to a
Committee, the Committee shall be responsible to the Board for the
operation of the Plan, and shall make recommendations to the Board with
respect to participation in the Plan and with respect to the extent of that
participation. The Board of Directors (or the Executive Committee of the
Board of Directors) of any Subsidiary may submit a recommendation to the
Board of Directors of the Corporation (or its delegated Committee) for SARs
to be awarded to an eligible employee of such Subsidiary.
(b) In administering the terms of the Plan as they apply to any participant
who is also a director, the vote of such director shall not be counted in
determining the vote required in connection with the award of SARs to such
director or in connection with any other determination with respect to SARs
awarded to such director. Minutes of the meetings of the Board with respect
to the award of SARs and the administration of the Plan shall be kept as
minutes of any other meeting, and the names of the directors who vote or
who abstain from voting shall be noted therein.
(c) The Board shall have plenary authority in its discretion to
determine the employees of the Corporation and/or the Subsidiaries who are
within that class set forth herein as participants, to whom SARs shall be
awarded, the number of SAR units to be awarded, the time or times at which any
SAR shall be awarded or exercisable, to interpret the Plan, and to prescribe,
amend, and rescind rules and regulations relating to it. All questions of
interpretation and application of the Plan and of any SARs awarded under it
shall be determined by the Board and such determination shall be final and
binding upon all persons. No member of the Board shall be liable for any action
or determination made in good faith, and the members shall be entitled to
indemnification and reimbursement in the manner and to the extent permitted by
applicable law.
4. PARTICIPANTS
All full-time employees of the Corporation and the Subsidiaries shall
be eligible to be awarded SARs under the Plan, as and when selected by the Board
("Participants"). SARs may be awarded by the Board at any time and from time to
time to new Participants, or to then Participants.
5. AWARD OF STOCK APPRECIATION RIGHTS
SARs may be awarded under the Plan from time to time, but not after
June 30, 2006. In making any determination as to the employees of the
Corporation and/or the Subsidiaries to whom SARs shall be awarded and as to the
number SAR units awarded, the Board shall take into account the duties of the
respective Participants, their present and potential contributions to the
success of the Corporation or the Subsidiaries, and such other factors as the
Board shall deem relevant in connection with accomplishing the purposes of the
Plan.
6. TERMS AND CONDITIONS OF SARS
SARs awarded pursuant to the Plan shall be evidenced by SARs agreements
in such form, not inconsistent with the Plan, as the Board shall from time to
time approve. Such agreements shall comply with and be subject to the following
terms and conditions:
(a) Base Price. Each SARs agreement shall state the total number of units
to which it pertains and the Base Price per unit applicable to the SARs
awarded. The Base Price shall be established in its discretion by the
Board. The Base Price may be lower than, may be higher than, or may be
based on the fair market value of the shares of Common Stock of the
Corporation at the time of the award of the SARs. Unless otherwise set by
the Board at the time of an award, the Base Price shall be seventy five
percent (75%) of the fair market value of the shares of Common Stock of the
Corporation.
(b) Amount of Appreciation. Each SAR unit shall entitle a Participant to
the following amount of appreciation: the excess of the fair market value
of a share of Common Stock of the Corporation on the exercise date over the
Base Price. The total appreciation available to a Participant from any
exercise of SARs shall be equal to the number of units of SARs being
exercised, multiplied by the amount of appreciation per unit as determined
above.
(c) Fair Market Value. For purposes of the Plan, the fair market value of
the shares of Common Stock of the Corporation shall be established by the
Board by use of any reasonable valuation method, taking into consideration
prices at which shares of the Corporation's Common Stock have recently
traded, the number of shares traded and other relevant factors as
determined by the Board. Unless otherwise determined by the Board at the
time of an award, the fair market value of the shares of Common Stock of
the Corporation shall be the weighted average price of the shares traded
during the prior ninety (90) days.
(d) Term of SARs. Each SAR awarded under the Plan shall expire not more
than ten (10) years from the date the SAR is awarded. Any unit of SAR awarded,
but not exercised prior to termination shall be terminated and returned to the
number of units available to be awarded under the Plan.
(e) Exercise of SARs. Each unit of SAR may be exercised upon such terms
and conditions as the Board shall determine; provided, however, that if any SAR
is not fully exercisable at the time it is awarded, such SAR shall become fully
exercisable within five (5) years from the date it is awarded, at a rate of at
least 20% per year following the date of award. Installments shall be
cumulative.
(f) Manner of Exercise. To the extent that the right to exercise SARs
has accrued hereunder, SARs may be exercised from time to time by written notice
to the Corporation stating the number of units with respect to which the SAR is
being exercised. The Board may require that a partial exercise of SARs be for no
less than one hundred (100) units.
(g) Non-Assignability of SARs. No SAR shall be assignable or
transferable otherwise than by will or the laws of descent and distribution.
During the life of a Participant, a SAR shall be exercisable only by the
Participant.
(a) Termination of Employment.
<PAGE>
(1) In the event that a Participant is no longer an employee of
the Corporation or one of the Subsidiaries for any reason, his or her SAR
shall terminate immediately; provided, however, that the Participant shall
have the right, subject to the provisions of Section 6(d) hereof with
respect to the maximum term of the SAR, to exercise the SAR, at any time
within three (3) months from the day he or she ceases to be an employee to
the extent that he or she was entitled to exercise the same immediately
prior to such day, except as provided below. Whether an authorized leave of
absence on military or government service or for other reasons shall
constitute a termination of employment or service as a director or
consultant for purposes of the Plan shall be determined by the Board, and
such determination of the Board shall be final and conclusive.
(2) In the case of a Participant who is disabled, the
three (3) month period specified in Subsection (h)(1) shall be six (6)
months.
(3) If a Participant shall die while an employee, or within
not more than three (3) months from the date when he or she ceases to be an
employee, his or her estate, personal representative, or beneficiary shall have
the right, subject to the provisions of Section 6(d) hereof, to exercise his or
her SARs, at any time within six (6) months from the date of death, to the
extent that he or she was entitled to exercise the same immediately prior to
death.
(i) Adjustments or Changes in Stock; Change in Control.
<PAGE>
(1) In the event that the outstanding shares of Common Stock of
the Corporation are hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of
the Corporation or of another corporation, by reason of reorganization,
merger, consolidation, recapitalization, reclassification, stock split,
combination of shares, dividend payable in common stock, or acquisition, or
any similar transaction, in which the Corporation receives no additional
consideration other than shares or other securities, appropriate adjustment
shall be made by the Board in the number of SARs units which may be awarded
under the Plan. In addition, the Board shall make appropriate adjustment in
the Base Price for unexercised SARs awarded under the Plan so that
Participants' total appreciation to date shall be maintained as before the
occurrence of such event.
(2) In the event of a dissolution or liquidation of the
Corporation, a merger, consolidation, acquisition, or other reorganization
involving the Corporation or a principal subsidiary, in which the Corporation or
such principal subsidiary is not the surviving or resulting corporation, or a
sale by the Corporation or by a principal subsidiary of all or substantially all
of its assets, the Board shall cause the termination of all SARs outstanding
hereunder as of the effective date of such transaction, provided, however, that
advance notice of the expected effective date of such transaction shall be given
to each Participant, to the extent practicable, and each Participant shall have
the right to exercise his or her SARs until the date of such termination as to
all or any part of the SARs which is at that time exercisable.
7. RIGHTS AS A SHAREHOLDER
The Participant shall have no rights as a shareholder with respect to
any shares of Common Stock of the Corporation by virtue of participation in the
Plan. No adjustment shall be made for dividends or other rights, except as
otherwise provided in Section 6(i) hereof.
8. WITHHOLDING TAXES
Whenever the Corporation or a Subsidiary proposes or is required to
make payment to a Participant as a result of an exercise of SARs under the Plan,
the Corporation or applicable Subsidiary shall have the right to withhold
amounts sufficient to satisfy any Federal, state and/or local withholding tax
requirements prior to the payment of the balance of the amount to the
Participant
9. EFFECTIVE DATE AND TERMINATION OF PLAN
The Plan shall become effective, and SARs may be awarded and exercised
hereunder, upon approval of the Board of Directors of the Corporation. The Plan
shall terminate on June 30, 2006, and no further SARs may be awarded thereafter
under the Plan. Termination of the Plan shall not, without the written consent
of the Participant, alter or impair any of the rights or obligations under any
SAR theretofore awarded under the Plan.
10. AMENDMENTS
The Board may terminate the Plan at any time and from time to time
modify or amend the Plan in such respects as it shall deem advisable, or to
conform to any requirements of the laws and regulations relating to the
Corporation or in any other respect.
11. RIGHT TO TERMINATE EMPLOYMENT
Nothing in the Plan or in any agreement entered into pursuant to the
Plan shall confer upon any Participant the right to continue in the employment
of the Corporation or any of the Subsidiaries or effect any right which the
Corporation or any of the Subsidiaries may have to terminate the employment of
such Participant.
<PAGE>
BAY AREA BANK
STOCK APPRECIATION RIGHT AGREEMENT
THIS STOCK APPRECIATION RIGHT AGREEMENT ("Agreement") is made
as of the day of , 19 , by and between Bay Area Bank, a California
state-chartered banking corporation ("Bank"),
and ("Participant").
RECITAL
The Board of Directors (the "Board") of the Bay Area
Bancshares (the "Corporation") and the Board of Directors of Bank, pursuant to
the Bay Area Bancshares 1996 Stock Appreciation Right Plan ("Plan"), has
determined to grant to Participant, pursuant to the Plan and as an incentive for
increased efforts during his or her service in the employ of Bank, a stock
appreciation right on the terms and conditions set forth below.
NOW, THEREFORE, the parties agree as follows:
1. Grant of Stock Appreciation Rights. The Corporation hereby grants and the
Bank hereby approves and joins in granting to Participant, under and pursuant to
the Plan, a stock appreciation right ("SAR"), on the terms and conditions
hereinafter set forth, for an aggregate of (_____) units.
2. Exercise. The SAR may be exercised [EITHER: at any time, in whole or in part,
during the term hereof, as provided in Section 4 herein. OR: during the term
hereof, as provided in Section 4 below, upon such terms and conditions as the
Board shall determine; provided, however, that describe vesting schedule
determined by Board . CONTINUE IN EITHER CASE] The SAR shall be exercisable only
when the fair market value of a share of common stock ("Common Stock") of the
Corporation, determined as provided in subsection 6(c) of the Plan, exceeds the
base price of the SAR specified in Section 3 below.
3. Base Price. The base price per unit upon exercise of the SAR shall be
$__________ per share.
4. Term of SAR. The term of this Agreement and the SAR shall commence on the
date hereof, and expire ten (10) years from the date hereof, that is, at 5:00
p.m. Pacific Time, on , , or at such earlier time as provided herein.
<PAGE>
5. Manner of Exercise of SARs.
(a) Exercise by Notice. To the extent the right to exercise the
SAR has vested under this Agreement, the SAR may be exercised from time to
time by written notice to the Bank stating the number of units with respect
to which the SAR is being exercised. A partial exercise shall be for no
less than one hundred (100) units. The date the Bank receives such notice
shall be the Exercise Date. Within fifteen (15) days after receipt of such
notice, the Bank shall deliver to the person exercising such right a
certified or official bank check in an amount determined as set forth in
Subsection 5(b) below.
(b) Amount of Payment. The amount of payment to which
Participant shall be entitled upon the exercise of the SAR shall be equal to
100% of the amount, if any, by which the fair market value of a share of Common
Stock on the Exercise Date, determined as provided in subsection 6(c) of the
Plan, exceeds the base price provided in this Agreement, times the number of
units as to which the SAR is being exercised.
6. Non-Assignability of SAR Rights. During Participant's
lifetime, the SAR may be exercised only by Participant, and the SAR is
non-assignable, except by will or comparable testamentary instrument, or by the
laws of descent and distribution. In the event of any attachment, execution, or
similar process upon the SAR, the Bank shall, as soon as practicable, notify
Participant of such process and, if Participant does not within a reasonable
time (but not to exceed sixty (60) days) obtain an appropriate release of the
SAR from such process, the Bank may exercise its right to terminate the SAR by
notice to Participant. The SAR shall thereupon become null and void.
7. Termination of Employment.
(a) In the event that Participant is no longer an employee of the
Bank or any subsidiary of the Bank for any reason, the SAR shall terminate
immediately; provided, however, that Participant shall have the right,
subject to the provisions of Section 4 hereof with respect to the maximum
term of the SAR, to exercise the SAR, at any time within three (3) months
from the day he or she ceases to be an employee to the extent that he or
she was entitled to exercise the same immediately prior to such day, except
as provided below. Whether an authorized leave of absence on military or
government service or for other reasons shall constitute a termination of
employment or service as a director or consultant for purposes of the Plan
shall be determined by the Board, and such determination of the Board shall
be final and conclusive.
(b) If Participant becomes disabled, the three (3) month period specified in
Subsection 7(a) shall be six (6) months.
(c) If Participant shall die while an employee, or within not more than three
(3) months from the date when he or she ceases to be an employee, his or her
estate, personal representative, or beneficiary shall have the right, subject to
the provisions of Section 4 hereof, to exercise the SARs, at any time within six
(6) months from the date of death, to the extent that he or she was entitled to
exercise the same immediately prior to death.
8. Adjustments or Changes in Stock; Dissolution or Acquisition.
(a) In the event that the outstanding shares of common stock of
the Corporation are hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of
the Corporation or of another corporation, by reason of reorganization,
merger, consolidation, recapitalization, reclassification, stock split,
combination of shares, dividend payable in common stock, or acquisition, or
any similar transaction, in which the Corporation receives no additional
consideration other than shares or other securities, appropriate adjustment
shall be made by the Board under the Plan in the number of units as to
which the SAR or portion thereof then unexercised shall be exercisable,
with a corresponding adjustment, if necessary, in the base price, so that
Participant's total appreciation immediately after such event and
adjustment with respect to the unexercised portion of the SAR shall be
maintained as before the occurrence of such event and adjustment.
(b) In the event of a dissolution or liquidation of the
Corporation, a merger, consolidation, acquisition, or other reorganization
involving the Corporation or a principal subsidiary, in which the Corporation or
such principal subsidiary is not the surviving or resulting corporation, or a
sale by the Corporation or by a principal subsidiary of all or substantially all
of its assets, the Board shall cause the termination of the SAR as of the
effective date of such transaction, provided, however, that advance notice of
the expected effective date of such transaction shall be given to Participant,
to the extent practicable, and Participant shall have the right to exercise the
SAR until the date of such termination as to all or any part of the SAR which is
at that time exercisable.
9. Rights as a Shareholder. Participant shall have no rights
as a shareholder with respect to any shares of common stock of the Corporation.
No adjustment shall be made for dividends or other rights for which the record
date is prior to the date of such issuance, except as otherwise provided in
Section 8 herein.
10. Withholding Taxes. Whenever the Bank proposes or is
required to make a payment under this Agreement, the Bank shall have the right
to withhold an amount sufficient to satisfy any Federal, state and/or local
withholding tax requirements prior to the payment of the balance of the amount
to Participant.
11. No Obligation to Exercise. The granting of the SAR hereunder shall impose no
obligation upon Participant to exercise the SAR as to the shares or any portion
thereof covered thereby.
12. Incorporation of Bay Area Bancshares 1996 Stock
Appreciation Plan. This SAR is granted by the Corporation and the Bank pursuant
to the Plan, adopted by the Board of the Corporation. The parties hereby agree
that the terms and conditions of the Plan, as now in effect, shall by this
reference be incorporated in this Agreement as though set forth in full.
Participant acknowledges receipt of a copy of the Plan. A copy of the Plan shall
also be maintained at the principal office of the Corporation and made available
to Participant for inspection during the business hours of the Corporation. In
the event of any conflict between the provisions of this Agreement and the
provisions of the Plan, then the provisions of the Plan shall be controlling.
13. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing and if sent by registered
or certified mail to the address indicated on the signature page of this
Agreement for such party, or such other address as one may communicate to the
other in writing.
14. Waiver of Breach. The waiver by either party of the breach of any provision
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any such party.
15. Assignment. The rights and obligations of the parties under this Agreement
shall inure to the benefit of and shall be binding upon their successors and
assigns, except that the right to exercise the SAR herein provided for shall not
be assignable except to the extent set forth in Section 6 hereof.
16. Arbitration. The parties shall submit all disputes relating to this
Agreement (whether contract, tort or both) to binding arbitration, in accordance
with California Code of Civil Procedure sections 1280 through 1294.2 in the
County of San Mateo, California. Either party may enforce the award of the
arbitrator under Section 1285 of the Code. The parties understand that they are
waiving their rights to a jury trial.
17. Entire Agreement. This instrument contains the entire Agreement of the
parties. It may not be changed orally, but only by agreement in writing signed
by the parties against whom enforcement of any waiver, change, modification,
extension, or discharge is sought.
18. Right to Terminate Employment. Nothing in the Plan or this Agreement shall
confer upon Participant the right to continue in the employment of the Bank or
any of the Subsidiaries or effect any right which the Bank or any of the
Subsidiaries may have to terminate the employment of Participant.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day of ,
19 .
BAY AREA BANCSHARES, BAY AREA BANK
a California corporation a California state-chartered bank
900 Veterans Blvd. 900 Veterans Blvd.
Redwood City, CA 94063 Redwood City, CA 94063
By By
Its Its
[Name of Participant]
[Address of Participant]
-----------------
[Signature of Participant]
<PAGE>
AMENDMENT NO. 1
TO
BAY AREA BANCSHARES
1996 STOCK APPRECIATION RIGHTS PLAN
THIS AMENDMENT NO. 1 to the Bay Area Bancshares 1996 Stock Appreciation
Rights Plan ("Plan") is adopted by the Board of Directors of Bay Area Bancshares
(the "Corporation") with reference to the following:
RECITALS
A. The Board of Directors of the Corporation previously adopted and approved the
Plan, which is currently outstanding and effective.
B. The Board of Directors of the Corporation desires to amend the Plan to
provide that Stock Appreciation Rights ("SARs") will partially vest upon a
change in control of the Corporation.
THEREFORE, the Plan is hereby amended as follows:
1. Subsection 6 (i) is amended to read in full as follows:
(i) Adjustments or Changes in Stock; Reorganization, or Change in
Control.
(1) In the event that the outstanding shares of Common Stock of
the Corporation are hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of
the Corporation or of another corporation, by reason of reorganization,
merger, consolidation, recapitalization, reclassification, stock split,
combination of shares, dividend payable in common stock, or acquisition, or
any similar transaction, in which the Corporation receives no additional
consideration other than shares or other securities, appropriate adjustment
shall be made by the Board in the number of SARs units which may be awarded
under the Plan. In addition, the Board shall make appropriate adjustment in
the Base Price for unexercised SARs awarded under the Plan so that
Participants' total appreciation to date shall be maintained as before the
occurrence of such event.
(2) In the event of a dissolution or liquidation of the
Corporation; a merger, consolidation, acquisition, or other reorganization
involving the Corporation or a principal subsidiary, in which the Corporation or
such principal subsidiary is not the surviving or resulting corporation; or a
sale by the Corporation or by a principal subsidiary of all or substantially all
of its assets, the Board shall cause the termination of all SARs outstanding
hereunder as of the effective date of such transaction, provided, however, that
advance notice of the expected effective date of such transaction shall be given
to each Participant, to the extent practicable, and each Participant shall have
the right to exercise his or her SARs from the date of such notice until the
date of such termination, as to all or any part of the SARs which is at that
time exercisable plus 50% of the unexercisable portion of the SARs.
(3) In the event of a change in control in which the
Corporation or a principal subsidiary survives or results from the transaction,
50% of all unexercisable SARs shall vest and become exercisable on the effective
date of such change in control. Provided the Participant remains eligible,
subsequent vesting installments shall continue at the same rate that such SAR
would have vested prior to such event, with the effect that the accelerated
portion of such SAR shall be the portion that would have vested last in time.
For purposes of this subparagraph, "change in control" is defined as a merger,
acquisition or change in control that requires notice to or approval of State or
Federal banking regulators.
2. Except as amended herein, the Plan shall remain in full force and effect.
We consent to the incorporation by reference in the Regisration Statement Number
33-78942 on Form S-8 dated April 26, 1994 pertaining to the Bay Area Bancshares
1993 Stock OptionPlan of our report dated February 8, 1997, with respect to the
consolidated financial statements of Bay Area Bancshares included in its Annual
Report on Form 10-K for the year ended December 31, 1996.
/s/Coopers & Lybrand L.L.P.
San Francisco, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Schedule contains summary financial information extracted from the Balance
Sheet and Statement of Income and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,011
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 6,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,588
<INVESTMENTS-CARRYING> 12,081
<INVESTMENTS-MARKET> 12,203
<LOANS> 67,735
<ALLOWANCE> 1,493
<TOTAL-ASSETS> 103,187
<DEPOSITS> 92,968
<SHORT-TERM> 0
<LIABILITIES-OTHER> 938
<LONG-TERM> 0
0
0
<COMMON> 4,143
<OTHER-SE> 5,138
<TOTAL-LIABILITIES-AND-EQUITY> 103,187
<INTEREST-LOAN> 7,208
<INTEREST-INVEST> 832
<INTEREST-OTHER> 361
<INTEREST-TOTAL> 8,401
<INTEREST-DEPOSIT> 2,524
<INTEREST-EXPENSE> 2,539
<INTEREST-INCOME-NET> 5,862
<LOAN-LOSSES> 435
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,876
<INCOME-PRETAX> 2,372
<INCOME-PRE-EXTRAORDINARY> 2,372
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,415
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 9.90
<LOANS-NON> 1,431
<LOANS-PAST> 234
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,493
<CHARGE-OFFS> 510
<RECOVERIES> 52
<ALLOWANCE-CLOSE> 1,493
<ALLOWANCE-DOMESTIC> 1,493
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
