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, 1997
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, 1998: $22,466,000
Number of shares of Common Stock outstanding at March 15, 1998: 981,278
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 36
Item 3. Legal Proceedings 37
Item 4. Submission of Matters to a Vote of Security
Holders 37
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 37
Item 6. Selected Financial Data 38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 39
Item 7A. Quantitative and Qualitative disclosures about Market Risk 45
Item 8. Financial Statements and Supplementary Data 45
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 66
PART III
Item 10. Directors and Executive Officers of the Registrant 66
Item 11. Executive Compensation 68
Item 12. Security Ownership of Certain Beneficial
Owners and Management 70
Item 13. Certain Relationships and Related Transactions 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 73
SIGNATURES 76
<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; costs and potential liabilities arising from data processing problems
including those stemming from year 2000 computer malfunctions; 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, 69, 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 a
member of the Sequoia Club in Redwood City. Mr. Haight was elected Chairman of
the Board, President and Chief Executive Officer of Bay Area Bancshares in 1991.
Mr. John O. Brooks, 57, 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. In February of 1998 Mr. Brooks retired and resigned his
positions with the Company and the Bank.
Mr. Anthony J. Gould, 36, 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.
Frank M. Bartaldo, Jr., 49, has been with Bay Area Bank since 1986. He currently
serves as Acting President of Bay Area Bank, a position he has held since the
retirement of Mr. Brooks in February 1998. Prior to being named Acting President
Mr. Bartaldo served 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 Past-President of the Redwood City-San Mateo County
Chamber of Commerce.
William A. Peterson, 38, was hired by the Bank in September 1997 as Senior Vice
President/Senior Lending Officer. Before his employment with the Bank, Mr.
Peterson worked as Vice President, Construction Loan Manager for The Pacific
Bank (formerly Burlingame Bank) since 1994. Prior to that he was Vice President
at Borel Bank beginning his employment there in 1984. Mr. Peterson graduated
from Stanford University in 1982 with BA degrees in both Economics and English.
Mark V. Schoenstein, 41, 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.
<PAGE>
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 46 (as of December 31, 1997) automated
teller machines (ATMs) at 32 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, 1997, the
Bank had a total of approximately 5,850 accounts consisting of 1,650
noninterest-bearing demand deposit (checking) accounts with an average balance
of approximately $17,100 each; 3,133 savings, interest-bearing demand, and money
market accounts with an average balance of approximately $15,400 each; and 1,067
certificates of deposit, IRAs and Keoghs with an average balance of
approximately $29,100. See "Description of Business - Selected Statistical
Information - Deposits and Time Deposits."
The Bank has a local corporate customer whose total deposit
relationship with the Bank comprised approximately 6.4% of the Bank's total
deposit balances at 12/31/97. This customer has never borrowed from the Bank and
the funds, which had historically been held in a money market deposit account,
were transferred to time deposits accounts in September of 1997 which mature at
various times in 1998. Bank management believes that some of these funds may be
withdrawn from the Bank in 1998 or 1999. 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 these deposits, or any one deposit 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, 1997 these four loan
categories accounted for approximately 26%, 42%, 25% and 7%, 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, 1997 the Bank had
gross loans outstanding of $86,012,000 as well as undisbursed loan commitments
of approximately $41,174,000. As of December 31, 1996 the Bank had gross loans
outstanding of $69,228,000 as well as 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.
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.
At December 31, 1996 $1.02 million in Mortgage department generated
loans were categorized as nonaccrual (nonperforming) loans. During 1997,
approximately $1.2 million of these loans were repaid fully and three loans
totaling $656,000 were foreclosed upon in 1997 with a total charge off to the
bank's loan loss reserve of $40,000.
Electronic Funds Services
In 1993, the Bank started an Electronic Funds Transfer (EFT) Department
for the purpose of increasing service fee income primarily by establishing a
network of off-site automatic teller machines (ATMs). As of December 31, 1997
the Bank had 46 machines in 32 locations (as compared to 54 machines in 39
locations at December 31, 1996) in California, including tourist centers, horse
racing tracks, truck stops and shopping centers. As of December 31, 1997, the
Bank's investment in ATMs and related equipment was $1.6 million . This
equipment had a book value (cost less accumulated depreciation) of approximately
$399,000 at December 31, 1997. Depreciation expense for the Bank's ATM assets
was $320,000 in 1997 and $350,000 in 1996. The average cash outstanding in the
machines throughout 1997 was $3.5 million as compared to $3.4 million in 1996.
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 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 accelerated the amortization period from 4 to 2 years in
1997. The current amortization expense is $10,000 per month. The settlement will
be fully amortized in June of 1998.
The Bank receives revenue from each transaction based on a service
contract negotiated with the management at each site. During 1997, ATM service
fee income was $1.48 million and ATM interchange and other income was $440,000.
Total revenue from the EFT department was $2.03 million, an increase of $187,000
or 10% over total department revenues in 1996. Total expense for the department
was $1.77 million in 1997 , a 7.3% increase over 1996, bringing the EFT
department's contribution to pretax income for 1997 to $346,000 as compared to
$226,000 in 1996. 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 1997 results include approximately $209,000 in costs allocated to
the department from the Bank, including $197,000 in internal interest charges (@
5.75% per annum) for the use of funds, and $12,000 in administrative support.
Another main component of expense was $253,000 in first line and second line
maintenance, which is the cost of servicing these machines by a third party
(i.e. adding cash, clearing paper jams, etc.). 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. 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 increase the number of machines in service and to
generate greater transaction levels in 1998, with the intent to continue
increasing the profitability of the EFT department. Competition for new ATM
sites and bidding for contractual renewals has been intense and is expected to
continue. This competition may result in marginally less revenue to the Bank on
future new ATM sites and upon site renewals.
However, the Bank expects its operating costs in the EFT department to
go down in 1998 as the amortization of the consultant's settlement will end in
June of 1998 and depreciation, which has averaged $370,000 for the past two
years, will begin to decline significantly in the second half of 1998 as the
remaining undepreciated book value of ATM assets was $399,000 at December 31,
1997. Because the Bank had approximately 15 ATM machines idle at December 31,
1997 it does not expect the level of new capital investments made in previous
years to continue in 1998 and 1999.
Income from the EFT Department may also 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 or eliminate the charges the
Bank may collect from the use of those ATMs. If this such legislation is
adopted, the Bank's income from its ATM network may be severely reduced to the
amount the Bank receives from interchange fees. The department could not cover
its expenses at that level of revenue.
<PAGE>
Year 2000 Computer Programming Status
The Audit Committee of the Board of Directors is responsible to oversee
Bank management's evaluation of any potential effects on the Company's
operations as a result of the Year 2000 computer programming problem. The Bank's
primary data processing system, (which consists of software that manages loans,
deposits, accounting and investments) is provided to the Bank by First
Integrated Systems (FIS) of Omaha Nebraska, a subsidiary of First National Bank
of Omaha. The programming that controls the deposit function was upgraded in
1997 and is year 2000 compliant. The lending, accounting and investment programs
are set to be upgraded in the fourth quarter of 1998. Bank management reports
monthly to the Audit Committee on the status and evaluation of these upgrades
and all other related software that may have year 2000 exposure. Management has
been directed by the committee to contact new vendors for those software
providers which have not documented their year 2000 compliance by December 31,
1998.
In addition to evaluating its own systems, the Loan Committee of the
Board of Directors has instructed bank management to include a year 2000
exposure evaluation of all new loans submitted.
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 $320,000 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.
As a member of the FHLB, 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 $320,000 purchase may be retired as the debt
is repaid. The Bank borrowed $1.0 million (collateralized by pledged investment
grade securities) in July of 1997, $500,000 due in July of 1998 and $500,000 due
in July of 1999.
The Bank does not currently serve, nor does it have plans to serve, as
a correspondent to other banks.
Employees
As of March 15, 1998, the Bank employed 32 full-time employees,
including 17 Bank officers, and 9 part-time employees. As of March 15, 1998, the
Company employed no full-time or part-time employees. The Bank pays a salary to
those individuals who serve as officers of the Bank and the Company. The Bank
was reimbursed $12,000 by the Company in 1997 for administrative services
rendered by Mr. Gould, Mr. Brooks (who served as the President of the Bank and
Executive Vice President and Chief Operating Officer of the Company until
February of 1998), and the Bank's accounting staff. Mr. Haight receives
remuneration for his services through Director fees. See "Business Executive
Officers of the Registrant".
<PAGE>
(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 1997 Financial Statements, herein, at Item 8.
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,
1997 and 1996. Average balances have been computed using daily balances.
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/97 12/31/96
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 $11,350 10.1% $10,741 11.0%
Taxable Investment Securities 14,125 12.5% 12,446 12.7
Non-Taxable Investment Securities 1,196 1.1% 1,395 1.4
Federal Funds Sold 8,161 7.2 6,660 6.8
Loans, Net (1) 74,745 66.4 64,195 66.2
Premises & Equipment, Net 736 0.7 866 0.9
Real Estate Owned 126 0.1 18 0.0
Other Assets & Accrued Int. Receivable 2,186 1.9 1,524 1.6
----- --- ----- ---
Total Assets $112,625 100.0% $97,845 100.0%
======== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest-Bearing Transaction Accounts 44,683 39.7% 41,993 42.9%
Demand 26,357 23.4 22,456 23.0
Savings 6,191 5.5 5,432 5.6
Time 23,649 21.0 18,227 18.6
------ ---- ------ ----
Total Deposits 100,880 89.6 88,108 90.0
Other Borrowings 518 0.5 284 0.3
Other Liabilities & Accrued Interest 1,004 0.8 773 0.8
Shareholders' Equity 10,283 9.1 8,680 8.9
Total Liabilities & Shareholders' Equity $112,685 100.0% $97,845 100.0%
======== ====== ======= ======
- --------------------
<FN>
1 Average loans include nonaccrual loans and are net of the allowance for loan
losses.
</FN>
</TABLE>
<PAGE>
Interest Rates and Differentials
The following table sets forth information for the periods indicated
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, 1997
Interest
Average Income/ Average
Balance Expense Yield/
(000's) (000's) Rate
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Taxable Investment Securities $14,125 971 6.9%
Non-Taxable Investment Securities1 1,196 58 4.8
Federal Funds Sold 8,161 462 5.7
Loans (Net of loan loss allowance)2,3 74,745 8,243 11.0
------ ----- ----
Total Interest-Earning Assets $98,227 $9,734 9.9%
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction Accounts 44,683 1,364 3.1%
Savings 6,191 262 4.2
Time 23,649 1,299 5.5
Other Borrowings 518 28 5.4
--- -- ---
Total Interest-Bearing Liabilities $75,041 $2,953 3.9%
======= ====== ====
Net Interest Income and Margin4 $6,781 6.9%
====== ====
Net Interest Spread5 6.0%
====
</TABLE>
<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
Taxable Investment Securities 12,445 777 6.2
Non-Taxable Investment Securities1 1,395 61 4.4
Federal Funds Sold 6,660 355 5.3
Loans (Net of loan loss allowance)2,3 64,195 7,208 11.2
------ ----- ----
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 6.1%
====
- ---------------
<FN>
1 Yields on non-taxable investment securities are not tax adjusted.
2 Averageloans include nonaccrual loans and are net of allowances for possible loan
losses.
3 Loan interest income includes loan fees of $599,000 and $505,000 in
1997 and 1996, 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>
<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, 1997
Compared to 1996
Volume Rate Total
(000's) (000's) (000's)
<S> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME
Taxable Investment Securities 98 96 194
Non-Taxable Investment Securities (9) 6 (3)
Federal Funds Sold 80 27 107
Loans 1,185 (150) 1,035
----- ----- -----
Total $1,354 $ (21) $ 1,333
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest-Bearing Transaction Accounts 85 (41) 44
Savings Deposits 32 0 32
Time Deposits 290 35 325
Other Borrowings 12 1 13
-- - --
Total 419 (5) 414
--- --- ---
Change in Net Interest Income $ 935 $(16) $ 919
===== ===== =====
</TABLE>
<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
Taxable Investment Securities 178 12 190
Non-Taxable Investment Securities (9) 0 (9)
Federal Funds Sold (165) (38) (203)
Loans 1,450 (534) 916
----- ----- ---
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
Other Borrowings 0 16 16
- -- --
Total 389 (73) 316
--- ---- ---
Change in Net Interest Income $1,065 $(487) $578
===== ====== ====
</TABLE>
<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, 1997 (in thousands of
dollars). Mortgage-backed securities are shown based on expected cash flows
which includes prepayments of principal. Non accrual loans of $373,000 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>
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 $7,500 $ 0 $ 0 $ 0 $0 $7,500
Investments 940 1,123 2,135 8,988 2,402 15,588
Gross Loans 44,181 12,944 7,933 12,174 8,407 85,639
-------- ------ ------- ------- ----- -------
Total (A) $52,621 $14,067 $10,068 $21,162 $10,809 $108,727
======== ======= ======= ======= ======== ========
LIABILITIES
Money Market & Savings $48,157 $0 $0 $0 $ 0 $48,157
Time Deposits 14,038 7,227 6,529 3,227 0 31,021
------ ------ ------ ----- - ------
Total (B) $62,195 $7,227 $ 6,529 $3,227 $ 0 $ 79,178
======= ====== ======= ====== ===== ========
GAP (A) - (B) ($9,574) $6,840 $3,539 $17,935 $10,809 $29,549
======== ======= ====== ======= ======= =======
GAP / (A) % -18.19% 48.62% 35.15% 84.75% 100.00% 27.18%
======= ====== ======= ====== ======= ======
Cumulative GAP ($9.574) ($2,734) ($ 805) 18,740 $29,549 $59,098
========= ======== ======= ====== ======= =======
Cumulative GAP % -18.19% -4.10% 1.05% 19.14% 27.18% 27.18%
======== ======== ====== ====== ====== =======
</TABLE>
The table shows the Company had approximately $76.8 million dollars in
assets and $76.0 million in liabilities which mature or can reprice during 1997.
This indicates a cumulative one year GAP position of approximately $805,000 or
1.1% of one year assets. Because $805,000 million more liabilities than assets
can mature or reprice in 1998, the Company was slightly liability sensitive, on
a simple GAP basis, at December 31, 1997 (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 1997, 6.9% in 1996 and 7.2% in 1995. 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 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.
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 $1,106,000 at December 31, 1997, as "Available
for Sale" (see "Item 8 - Financial Statements and Supplemental Data", footnote
1d and 3) 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 total investment portfolio at December 31, 1997 and 1996 had an
average expected maturity of approximately 2.8 and 2.2 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, 1997, the Company's total investment portfolio (which
includes both available for sale and held to maturity securities) had a net
unrealized gain of $198,000 (or 1.27% of the total portfolio), while on December
31, 1996 there was a $127,000 net unrealized gain (0.87% of the total
portfolio). The increase in the market value of the portfolio was primarily a
result of declining interest rates in the bond market in 1997, 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 $1.01 million at December 31, 1997 and
$1.18 million at December 31, 1996. The Company's effective book tax rate was
41.1% in 1997, 40.3% in 1996 and 40.9% in 1995.
The amortized cost and market value of the portfolio of investment
securities as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES HELD TO MATURITY
December 31, 1997
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 $4,829 $ 4,852 $23
States of the U.S. and Political Subdivisions 1,007 1,027 20
Mortgage Backed Securities 8,646 8,804 158
------- ------- ---
Total
$14,482 $14,683 $ 201
======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
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>
INVESTMENT SECURITIES AVAILABLE FOR SALE
December 31, 1997
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
<S> <C> <C> <C>
U.S. Treasury Securities $ 513 $513 $ ---
Mortgage Backed Securities 596 593 (3)
----- ---- ----
Total $1,109 $1,106 $ (3)
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
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>
The following table is a summary of the relative maturities and
weighted average yields of investment securities as of December 31, 1997. 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
<S> <C> <C> <C>
Maturing in One Year or Less
Amount (000's) $1,499 $390 $1,795
Yield 6.21% 6.90% 7.09%
Maturing After One but Within
Five Years
Amount (000's) $3,010 $202 $5,184
Yield 6.15% 6.64% 7.28%
Maturing After Five but Within
Ten Years
Amount (000's) $0 $0 $1,667
Yield 8.0%
Maturing After Ten
Amount (000's) $0 $414 $0
Yield 8.54%
</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) $320 $0 $0
Yield* 6.59%
*Equity Securities consist of Federal Home Loan Bank stock.
</TABLE>
<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) $514 $0 $0
Yield 5.61%
Maturing After One but Within
Five Years $0 $0 $596
Yield 5.89%
</TABLE>
Loan Portfolio
The following table shows the composition of loans by type of loan or borrower
as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
(000's) (000's)
<S> <C> <C>
Commercial and Financial $20,679 $20,019
Real Estate--Construction 20,978 10,799
Real Estate--Mortgage 38,567 33,978
Installment Loans to Individuals 5,788 4,432
----- -----
Total $86,012 $69,228
Less:
Reserve for Possible Loan Losses 1,658 1,493
----- -----
Net Loans $84,374 $67,735
======= ======
</TABLE>
Total gross loans increased 24.2% or $17.5 million from $69.2 million
at December 31, 1996 to $86.0 million at December 31, 1997. Gross loans averaged
$76.3 million in 1997, an increase of $10.1 million or 15.2% in comparison to
average net portfolio loans of $66.2 million in 1996.
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
and 1997. Throughout 1997 and thus far in 1998 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 commercial and residential real estate 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 majority of which is commercial
real estate. 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 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 and land loan balances averaged $18.9 million
in 1997 compared to $12.3 million in 1996, an increase of 53%. There were no
construction loans transferred to real estate owned in 1997 or 1996.
Aside from its construction lending, the Company generally does not
make long term 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.
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
$1,205,000 and $327,000 at December 31, 1997 and December 31, 1996,
respectively. In addition, the Company had commitments to grant $21.2 million in
real estate construction loans, $14.6 million in commercial loan and other real
estate loans and $5.4 million in consumer loans (including home equity loans) at
December 31, 1997. As a result of the local economic expansion and the increased
demand for commercial and residential real estate, Construction lending
commitments increased from $15.5 million at December 31, 1996 to $21.2 million
at December 31, 1997.
Loan Concentrations
The Company held $20.7 million, or 24% of the Company's total loans, in
loans categorized as commercial and financial at December 31, 1997. 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.
There were also $38.6 million, or 45% 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, 1997, approximately $21.0 million or 24% of the
Company's total loans consisted of real estate construction loans. In addition,
as discussed above, undisbursed construction loan commitments totaled $21.2
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, 1997.
The timing of payments is based on the final maturity of the loans, rather than
amortization schedules. Non accrual loans of $373,000 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.
<PAGE>
Commercial Loans:
Loans with a Remaining Maturity of:
One Year or Less $15,973
Over One Year to Five Years 3,785
Over Five Years 548
----
Total $ 20,306
=======
Construction Loans
Loans with a Remaining Maturity of:
One Year or Less $ 20,978
Over One Year to Five Years 0
Over Five Years 0
-
Total $ 20,978
========
Real Estate, Installment and Other
Loans with a Remaining Maturity of:
One Year or Less $ 28,107
Over One Year to Five Years 8,389
Over Five Years 7,859
-------
Total $ 44,355
Grand Total $ 85,639
========
Total Loans Due in One Year or More Fixed Rate Loans with a Remaining Maturity
of:
Over One Year to Five Years $ 10,076
Over Five Years 6,943
-------
Total Fixed Rate loans due in
One Year or More $ 17,019
========
Variable Rate Loans with a Repricing Frequency Of:
Annually or more frequently, but less
frequently than quarterly $ 23,486
--------
Total Variable Rate Loans due in One Year or More $ 23,486
========
Total Loans due in One Year or More $ 40,505
=======
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,
1997 and 1996:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
(000's) (000's)
<S> <C> <C>
Nonaccrual Loans $373 $1,431
Accruing Loans Past Due 90
Days or More 0 234
Restructured Loans 0 0
----- -----
Total $373 $1,665
==== ======
</TABLE>
At December 31, 1997 and 1996, the Company carried an unsecured loan,
with a principal balance of $10,000 at December 31, 1997, on nonaccrual status.
The borrower has maintained current interest payments since the loan was
originally made. Despite making principal reductions of $490,000 on the original
loan of $500,000, the borrower did not meet the original schedule of principal
reductions, and the Bank did not recognize the interest payments (totaling
approximately $130,000 to date ) as interest income. Instead the bank has
credited these interest payments to the principle balance of the loan. Thus,
although the Bank records this loan at $10,000 in its loan balances at December
31, 1997, the borrower still owes the Bank approximately $140,000 ($10,000
principal + $130,000 in deferred interest). If the borrower continues to make
regular payments the Company will most likely recognize begin to recognize
deferred interest income in 1998 (approximately $130,000 at December 31, 1997)
after the remaining $10,000 in principal has been retired.
There were four loans totaling $373,000 past due 90 days or more at
December 31, 1997. There were nine loans totaling $1.67 million past due 90 days
or more at December 31, 1996. There were seven loans totaling $339,000 past due
90 days or more at December 31, 1995. Loans past due 30 days or more but less
than 90 days at December 31, 1997, 1996 and 1995, totaled $1.23 million,
$435,000 and $509,200, respectively. The $795,000 increase in delinquent loans
accruing interest between December 31, 1996 and December 31, 1997 was due to
four loans totaling $944,000 (76% of the total) which were delinquent at year
end, but were current or paid off by February 28,1998.
At December 31, 1996 the bank held approximately $548,000 in loans
secured by lease contracts, originally sold to the Bank by the now bankrupt
Bennett Funding and Bennett Leasing, which had an original principal balance of
$872,000 before a charge-off of $318,000 in 1996. Pursuant to an agreement the
Bank entered into in early 1997 the Bank has received payments in 1997 which
retired the entire $548,000 balance. An additional $9,600 was received which was
recorded as a recovery to loan loss reserves in 1997. Under the terms of the
agreement, the Bank expects to receive an additional amount of approximately
$45,000 which will be booked as a recovery to the Bank's loan loss reserve in
1998 if collected.
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, 1997 that would have been recognized in 1997 if the loans had been
current in accordance with their original terms, totaled $53,000.
There were no loans, other than $373,000 in nonaccrual loans at
December 31, 1997 and $1,431,000 at December 31, 1996 which are discussed above,
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), 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, 1997 under SFAS No. 114 was $93,000
($258,000 at December 31, 1996) 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 $1,638,000
or 1.90% of total gross loans at December 31, 1997. 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.
An analysis of the reserve for loan losses for the fiscal years ending
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
(000's) (000's)
<S> <C> <C>
Allowance for possible loan losses--January 1 $1,493 $1,516
Loans Charged Off:
Commercial and Financial (81) (459)
Real Estate--Construction 0 0
Real Estate--Mortgage (40) (30)
Installment Loans to Individuals (14) (21)
---- ----
Total Loans Charged Off (135) (510)
Recoveries:
Commercial and Financial 39 28
Real Estate--Construction 0 0
Real Estate--Mortgage 1 24
Installment Loans to Individuals 0 0
- -
Total Recoveries 40 52
-- --
Net Charge-Offs (95) (458)
Provision for Possible Loan Losses 240 435
--- ---
Allowance for Possible Loan Losses--December 31 $1,638 $1,493
====== ======
Charge-Offs Percentage of
Average Outstanding Loans 0.12% 0.69%
Allowance For Possible Loan Losses as a
Percentage of Gross Loans at Year End 1.90% 2.16%
Allowance For Possible Loan Losses as a
Percentage of Non-Performing Loans 439% 96%
Non-Performing Loans as a Percentage of
Gross Loans at Year End 0.46% 2.07%
Non-Performing Assets as a Percentage of
Total Assets at Year End 0.31% 1.39%
Loans:
Average Gross Loans Outstanding During Year $76,310 $66,235
Total Gross Loans at End of Year $86,012 $69,228
</TABLE>
As illustrated in the table above, loan charge-offs exceeded recoveries by
$95,000 in 1997 and by $458,000 in 1996.
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 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
subjective and approximate.
At December 31, 1997 commercial loans comprised approximately 24% of
gross loans, real estate mortgage loans were 45%, real estate construction loans
were 24% and installment and other loans were 7%. 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%.
The allowance for possible loan losses at December 31, 1997 was $1,638,000
compared to $1,493,000 at December 31, 1996 and was allocated approximately as
follows:
<TABLE>
<CAPTION>
12/31/97 12/31/96
<S> <C> <C>
Commercial loans $700,000 $800,000
Real estate mortgage 350,000 300,000
Real estate construction 500,000 300,000
Installment loans $88,000 93,000
</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, 1997 and 1996, the Company had no real estate owned
("REO"). During 1997 the Company transferred $870,000 ($656,000 of which were
included in nonaccrual loans at December 31, 1996) in loans to real estate
owned. All properties were sold in 1997 and resulted in a total charge-off to
the Company's loan loss reserve of $40,000 at the time of foreclosure.
Deposits
The following table reflects average balances and the average rates
paid for the major categories of deposits for the years ended December 31, 1997
and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 Average 1997 1996 Average 1996
Balance Average Balance Average
(000's) Rate (000's) Rate
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $26,357 --% $22,456 --%
Interest bearing transaction accounts 44,683 3.1% 41,993 3.1%
Savings Deposits 6,191 4.2% 5,432 5.3%
Time Deposits 23,649 5.5% 18,227 5.6%
------ ---- ------ ----
Total Deposits $100,880 2.90% $88,108 2.87%
======== ===== ======= =====
</TABLE>
Time Deposits
The following table sets forth, by time remaining to maturity, the
domestic time deposits at December 31, 1997.
December 31, 1997
(000's)
Time Deposits Maturing In:
Three months or less 14,038
Over three through six months 7,227
Over six through twelve months 6,529
Over twelve months 3,227
-----
Total $31,021
The following table sets forth, by time remaining to maturity, the
domestic time deposits over $100,000 at December 31, 1997.
December 31, 1997
(000's)
Time Deposits Maturing In:
Three months or less 10,643
Over three through six months 4,805
Over six through twelve months 2,822
Over twelve months 1,887
-----
Total $20,261
Selected Financial Ratios
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using monthly figures, see "Item 8 - Financial
Statements and Supplemental Data", footnote 1j, for a description of earnings
per share computations):
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
Net income to:
Average total assets 1.60% 1.45%
Average shareholders' equity 17.56% 16.30%
Cash dividend payments to:
Net income 18.50% 19.57%
Average shareholders' equity 3.25% 3.19%
Common Stock Dividend per share to:
Earnings per common share 18.14% 19.53%
Earnings per common share - assuming dilution 20.11% 21.85%
Average shareholders' equity to:
Average total assets 9.13% 8.87%
</TABLE>
(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, 1997 approximated $2.2 billion. Based on this Company's
best available data, thismarket is allocated approximately as follows: Banks
35%, Savings and Loans 23% and Credit Unions 42%. The Company's deposits at
December 31, 1997 represent approximately 4.9% of total deposits and
approximately 14.0% 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
Reserve Board determines that such activities are so closely related to banking
as to be a proper incident thereof.
The Board has the authority to examine the Company periodically. During
1997, the Board adopted a policy for risk-focused supervision of small bank
holding companies that do not engage in significant non-banking activities.
Under the new policy, examinations will focus on whether the Company has systems
in place to manage the risks inherent in its business. In analyzing risk, the
Board will look at the financial condition of the Company and the Bank,
management, compliance with laws and regulations, inter-company transactions and
any new or contemplated activities.
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."
Bank Regulation
The Bank is subject to regulation, supervision and regular examination
by the California Commissioner of Financial Institutions (the "Commissioner").
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.
In late 1997, the FDIC notified the banks for which it is the primary
Federal regulator that it is implementing a new examination system that focuses
on risk and emerging risk issues at banks. The purpose of the risk-focused
examination framework is to permit the examiners to target those activities that
present a risk of loss to a bank and to diagnose emerging problems, which the
agency contends will result in examinations that are more efficient and less
burdensome for the regulated banks.
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.
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
Commissioner, 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,
1997, 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.
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. During 1997,
the OCC considered applications by national banks to engage in activities in
which the parent banks may not engage, such as investing in real estate. 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 Commissioner 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 Commissioner
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 Commissioner 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.
<PAGE>
The capital totals of the Bank as of December 31, 1997 and 1996
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, 1997 and 1996:
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 Weighting Weighted Assets Weighted Assets
Adjustment 12/31/97 12/31/96
<S> <C> <C> <C>
Beginning Unadjusted Assets $122,085 $103,187
Less:
Fed. Reserve Balances 100% (1,123) (777)
Currency and Coin 100% (4,010) (4,907)
US Treasury Securities 100% (5,023) (6,006)
Time Deposits with Other Banks 80% (8,452) (80)
Agency and Municipals 80% (8,452) (7,010)
Federal Funds Sold 80% (6,000) (5,480)
Balances at U.S. Banks 80% (4,890) (4,051)
Loans Secured by Deposits 80% (722) (590)
1-4 Family 1st Deeds 50% (1,995) (2,358)
Plus Off Balance Sheet Items:
Letters of Credit 20% 241 65
Home Equity Lines 50% 1,784 1,53
Original Commitments Over 1 Year 50% 739 274
--- ---
Total Risk Weighted Assets 92,635 $73,882
====== =======
Tier 1 Capital
Common Stock $3,620 $3,620
Retained Earnings 7,070 5,666
Unrealized Loss on Securities Held For Sale 2 (5)
Total Tier 1 Capital $10,692 $9,281
======= ======
Tier 1 Capital/Risk Weighted Assets 11.54% 12.56%
====== ======
Tier 2 Capital
Tier 1 Capital $10,692 $9,281
Loan Allowances up to 1.25% of Risk Weighted Assets 1,158 924
----- ---
Total Tier 2 Capital $11,850 $10,205
======= =======
Tier 2 Capital/Risk Weighted Assets 12.79% 13.81%
====== ======
Leverage capital ratio 9.49% 9.50%
Required leverage capital ratio1 4.00% 4.00%
Total risk-based capital ratio 12.79% 13.81%
Required total risk-based capital ratio 8.00% 8.00%
Tier 1 risk-based capital ratio 11.54% 12.58%
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>
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 increase capital by
retaining earnings or raising 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.
Under the risk-based capital rules, when the agencies assess the
capital adequacy of a bank, they must take into account the effect on that banks
capital that would occur if interest rates moved up or down. The purpose of this
requirement 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 Federal Reserve Bank. The average reserve
requirement for the Bank for the year ended December 31, 1997 was approximately
$732,000.
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 the extent of
the protection it will receive for the loans it makes that are secured by real
property.
In addition, the Company and the Bank are still subject to the risks
that a borrowers 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 that the borrower will be adversely affected by
environmental liability, the Banks Loan Policy calls for the Bank to study the
history of the property and the uses of the property. When the Banks 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.
Public Interest Laws, Consumer and Lending Laws
In addition to the other laws and regulations discussed herein, the
Bank is subject to certain consumer and public interest laws and regulations
that are designed to protect customers in transactions with banks. While the
list set forth below is not exhaustive, these laws and regulations include the
Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer
Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the
Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage
Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection
Practices Act and the Right to Financial Privacy Act.
These laws and regulations mandate certain disclosure requirements and
regulate the manner in which financial institutions must deal with customers
when taking deposits, making loans, collecting loans and providing other
services. The Bank must comply with the applicable provisions of these laws and
regulations as part of its ongoing customer relations. Failure to comply with
these laws and regulations can subject the Bank to various penalties, including
but not limited to enforcement actions, injunctions, fines or criminal
penalties, punitive damages to consumers and the loss of certain contractual
rights.
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, continues to have a major
impact on the banking industry. The primary purpose of the Economic Growth Act
was to address the problems that arose from the disparity between the deposit
insurance premiums payable by banks and savings associations.
The crisis in the savings and loan industry during the late 1980s
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 failed savings associations. Bank deposits are insured through the Bank
Insurance Fund (BIF) of the FDIC. 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 provides that the cost of
carrying the FICO bonds will now be allocated between BIF insured institutions
and SAIF insured institutions, with BIF insured institutions paying 1/5 the
amount paid by SAIF insured institutions. BIF institutions pay an assessment of
approximately $.0128 annually per $100 of insured deposits and SAIF institutions
pay approximately $.0644 annually per $100 of insured deposits. Starting in the
year 2000, BIF and SAIF institutions will share the FICO bond costs equally,
with an estimated assessment of $.0243 annually per $100 of insured deposits.
This legislation has increased the Banks premiums, as it is now
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 were 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.
State Regulatory Relief and Regulatory Agency Consolidation
Effective July 1, 1997, the California State Banking Department and the
Department of Savings and Loan were consolidated. The combined agency is known
as the Department of Financial Institutions (the Department). The Department
also has jurisdiction over credit unions and industrial loan companies, also
known as thrift and loan companies. The various types of financial institutions
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 has reduced the Banks cost of establishing new
ATMs, and may reduce its other costs of doing business, in the event it
determines to pursue any of the matters affected by the new legislation.
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. Presently, a 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.
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
the steps management believes are called for by the legislation. The cost of
such steps, both signs and electronic display, was 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
fully effective June 1, 1997.
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 not
opted-out of interstate banking. Since the beginning of 1996, several large
banks and thrifts from outside of California have acquired banks in California
under this legislation, and the effect has been to increase competition within
California.
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.
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" for CRA purposes. 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 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.
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 for two consecutive year-ends. The impact of this amendment on
the business of the Bank will increase if and 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 change and as the Bank
grows and may no longer qualify as a small institution.
Taxation of Automatic Teller Machines
In 1997, the California State Board of Equalization (SBOE) amended its
regulations to provide that ATMs are personal property and are not subject to
local property taxes. The amendment was criticized by several members of the
California Legislature and by several county assessors, as exceeding the
authority of the SBOE. The amendments have not yet been approved by the State
Office of Administrative Law, so they are not yet effective.
If the amendments become effective, they will reduce the Banks tax
expense, and permit it to seek refunds for prior years property taxes paid on
ATMs. However, later in 1997, the SBOE proposed to amend its regulations
further, to provide that some ATMs might be real property. It is unknown whether
this latest amendment will be adopted, or if the first amendment will become
final.
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 are being considered 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. Although legislation that would have prohibited ATM fees was defeated in
the California legislature last year, it is expected that some kind of ATM fee
legislation will be introduced this year. If the collection of interchange fees
by the operator of an ATM is prohibited, as some of these bills have proposed,
the Banks income from its ATM network would be severely reduced and the EFT
Department could not cover its expenses.
During 1997, the Unites States Congress considered financial
modernization legislation that would have permitted banks or bank holding
companies to become affiliated with securities companies, insurance companies
and other financial firms. The legislation would also have eliminated the
Federal thrift or savings and loan charter, by merging the charter with the bank
charter. Such legislation, if adopted, is expected to have a significant impact
on the business of the Company and the Bank, as the affiliation of banks with
large and powerful companies in these other industries could make those banks
strong competitors and give those banks advantages with respect to obtaining
customers, accessing funds and capital markets and providing related services.
Legislation was also introduced during 1997 to lift the current ban on
the payment of interest on business checking accounts. Legislation lifting the
ban on paying interest on business checking accounts is expect to the considered
again in 1998. The adopting of this legislation would permit the Bank to compete
more directly for commercial deposits, but increase its costs of funds.
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 or regulations 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 $21,400 per month or approximately
$2.58 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 Director Emeritus of
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
which is now occupied by the Bank's Commercial and Construction Lending
Department. The current cost for this additional space (which includes an
allocation of certain operating expenses) is approximately $4,000 per month or
$1.93 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 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, 1997, 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 one 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 suits seek damages claiming that Mr.
Clancy was wrongfully terminated and that he was wrongfully excluded from the
Bank's 401(k) program. The Federal court case was remanded to the State court
and that decision is being appealed by Mr. Clancy.
In response to the foregoing lawsuit, 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.
<PAGE>
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,
1998, the Company had approximately 415 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
Approximate
Quarter Ended High Low Trading Volume
- ------------- ---- --- --------------
<S> <C> <C> <C>
March 31, 1996 $12.75 $11.88 20,300
June 30, 1996 14.13 12.75 42,700
September 30, 1996 14.50 13.25 14,300
December 31, 1996 15.75 14.50 17,800
March 31, 1997 $15.13 $16.88 20,800
June 30, 1997 16.12 20.50 44,600
September 30, 1997 20.75 24.50 65,200
December 31, 1997 24.25 28.00 202,700
</TABLE>
The following table sets forth the Company's cash dividend history from
1991 to the date this report is filed.
Cash Dividends on the Company's Common Stock
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
June 17, 1997 July 3, 1997 $.09
September 16, 1997 October 10, 1997 $.09
December 16. 1997 January 13, 1998 $.10
March 17, 1998 April 14, 1998* $.10
* Expected payment date.
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 amounts are in thousands except per share data.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income $9,734 $8,401 $7,507 $6,363 $5,983
Interest Expense 2,953 2,539 2,223 1,590 1,434
----- ----- ----- ----- -----
Net Interest Income 6,781 5,862 5,284 4,773 4,549
Provision for Loan Losses 240 435 210 300 420
Other Income 2,517 2,821 2,532 1,833 692
Other Expenses 5,995 5,876 5,555 4,722 3,376
Provision for Income Taxes 1,258 957 839 637 586
----- --- --- --- ---
Net Income $1,805 $1,415 $1,211 $947 $860
====== ====== ===== === ===
Earnings per common share $2.04 $1.69 $1.50 $1.21 $1.14
EPS - assuming dilution $1.84 $1.51 $1.38 $1.09 $1.02
Dividends per Common Share $.37 $.33 $.29 $.23 $.20
Net Loans $84,374 $ 67,735 $59,981 $52,344 $55,389
Total Assets $122,085 $103,187 $93,815 $79,537 $78,719
Total Deposits $107,426 $ 92,968 $83,979 $72,014 $71,982
Shareholders' Equity $11,988 $ 9,281 $ 8,078 $ 6,971 $ 6,204
</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 1997) is its
investment in the Bank, the following relates almost entirely to the financial
condition and results of operations of the Bank.
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 and 1997.
The San Mateo region has historically outperformed the State of
California as a whole. While the state unemployment rate averaged approximately
8.5% over the last five years San Mateo county has been less than 5% which may
be considered full employment. These employment figures are based on the
Company's best available data. 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.
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,
Raychem Corporation, Excite, Yahoo, Franklin Funds, and Silicon Graphics. Over
the last two years, coinciding with our national and local economic expansion,
the Bank has had increasing difficulty in securing qualified candidates for
employment positions at the Bank. This has resulted in increased pay levels and
increased time to fill needed positions. 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
1997, the Bank paid $450,000 in dividends to the parent as compared to $225,000
paid in 1996. The Parent company's cash position increased from $105,000 at
December 31, 1996 to $626,000 at December 31, 1997. Stock options exercised in
1997 generated $1,002,000 (an additional $320,000 in cashflows from tax benefits
will be realized in 1998) compared to $80,000 generated in 1996. Management
believes liquidity will be adequate to meet the Company's obligations in 1998,
which include approximately $25,000 in net operational expenses expected in
1998. The Company had no borrowings at December 31, 1997, and does not
anticipate needing debt in 1998. 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. Both assets and
liabilities contribute to the Bank's liquidity ratio. Assets such as investment
securities, cash and due from banks, federal funds sold and loan repayments
contribute to liquidity. The Bank's funding sources include demand deposits,
interest-bearing transaction accounts, savings deposits, time deposits and
advances from the Federal Home Loan Bank and other correspondent banks.
As of December 31, 1997, cash and due from banks, investment
securities, time deposits with other banks and federal funds sold amounted to
$34.6 million, which represents a $1.9 million or 5.9% increase over the $32.6
million at year end 1996. Although total liquid assets increased throughout
1997, the ratio of liquid assets to deposits and advances decreased in 1997 as
deposit and advance growth was greater than the growth in liquid assets. The
Bank's year-end deposits and advances increased $15.5 million or 16.6% and ended
1997 at $108.4 million. Liquid assets as a percentage of total year-end deposits
and advances decreased from 35.1% at year-end 1996 to 31.9% at the end of 1996 .
During 1997, liquid assets averaged $34.8 million or 34.4% of deposits and
advances as compared to 1996 when average liquid assets totaled $31.2 million or
35.6% of average deposits.
Average deposits and advances were $101.4 million in 1997, which
constitutes a $13.0 million (14.7%) increase over average deposits and advances
in 1996. During 1997 total net loans averaged $74.8 million, a $10.6 million or
16.4% increase from average net loans in 1996. In comparing the change in cash
flows during 1997 with 1996, the Company increased cash and cash equivalents by
$1.1 to $19.0 million.
As of March 15, 1998, 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, 1997.
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, 1997 the Bank had Tier 1
risk based capital of 12.79% and total risk based capital of 11.54%, both of
which exceed the risk based capital requirements of the FDIC.
Total Bank capital plus allowances for possible loan losses at year end
1997 of $12.3 million represents an increase of $1.6 million, or 14.5% growth
over the 1996 year end balance of $10.8 million.
Results of Operations
The Company posted after-tax earnings of $1,805,000 in 1997, a 27.6%
increase over 1996 in which net income was $1,415,000 and a 54.5% increase over
1995 in which net income was $1,211,000. Pretax earnings were $3,063,000 in
1997, as compared to $2,372,000 in 1996 and $2,050,000 in 1995. The increase in
1997 pretax earnings represents a 29.1% increase over 1996 and a 49.4% increase
over 1995. The increase of $691,000 in pretax income in 1997 over 1996 was
comprised of a $919,000 increase in net interest income and a $195,000 decrease
in loan loss provisions, offset in part by a decrease of $304,000 in noninterest
income and a $119,000 increase in noninterest expense.
Earnings per common share were $2.04 in 1997 as compared to $1.69 in
1996 and $1.50 in 1995. Earnings per common share assuming dilution were $1.84
in 1997 as compared to $1.51 in 1996 and $1.38 in 1995. The increase in earnings
per share of 20.7% in 1997 compared with 12.7% in 1996 was a result of the 27.6%
increase in earnings being offset in part by 5.8% increase in the average number
of shares of common stock shares outstanding in 1997 from 835,000 in 1996 to
883,000 in 1997. Earnings per share assuming dilution was $1.84 in 1997 as
compared to $1.51 in 1996 and $1.38 in 1995. The increase in earnings per share
assuming dilution of 21.9% in 1997 compared with 9.4% in 1996 was a result of
the 27.6% increase in earnings being offset in part by a 4.5% increase in number
of shares of common stock and assumed conversions used to compute earnings per
share assuming dilution (see "Item 8 - Financial Statements and Supplemental
Data", footnote 1j, for a description of earnings per share computations).
Consolidated net income was comprised of Bank-only profits of
$1,862,000 in 1997 as compared to $1,471,000 in 1996 and $1,270,000 in 1995. The
parent Company (without consideration of inter-company dividends) recorded a
loss of $57,000 in 1997 as compared to losses of $56,000 in 1996 and $59,000 in
1995. The Company's (parent only) loss in 1997 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 $6.8 million
in 1997, $5.9 million in 1996, and $5.3 million in 1995. This represents an
improvement in net interest income of 15.7% in 1997 over 1996 and 10.9% in 1996
over 1995. The Company's net interest margin (net interest income divided by
average earning assets) was 6.9% in 1997, 6.9% in 1996, and 7.2% in 1995. During
1997, the yield the Company earned on its earning assets remained at 9.9% from
the preceding year and the cost of funding sources (primarily deposits) for
these assets also remained at 3.9% resulting in a slight reduction in net
interest spread due to rounding from 6.1% to 6.0%. The average yield on the
Company's earning assets was 9.9% in 1997 as compared to 9,9% in 1996 and 10.3%
in 1995. Interest paid on deposits and other liabilities was 3.9% in 1997, 3.9%
in 1996 and 4.0% in 1995.
The $919,000 increase in net interest income in 1997 was a result of an
increase in interest income of $1.3 million offset in part by an increase in
interest expense of $414,000. The growth in net interest income in 1997 was
comprised of a $935,000 increase related to an increase in average earning
assets offset in part by a $16,000 reduction caused by a slight decrease in the
yield of the portfolio. The $578,000 increase in net interest income in 1996
over 1995 interest income was a result of an increase in interest income of
$894,000 partially offset by an increase in interest expense of $316,000. (See
"Item 1 - Business, (d) Selected Statistics/Information-Distribution of Average
Assets; Interest Rates and Differentials, and Rate and Volume Variances.") The
Company's 1997 fourth quarter results indicate that interest margins are
beginning to tighten primarily because of competitive pricing pressure on loans.
In the fourth quarter of 1997 total earning assets averaged $109.4 million and
total interest bearing liabilities averaged $79.7 million. The annualized yield
on earning assets was 9.4% (as compared to 9.9% for all of 1997) and the cost of
funds was 4.1% (as compared to 3.9% for 1997) resulting in an annualized net
interest margin for that quarter of 6.8%.
Loan loss provisions were $240,000 in 1997, as compared to $435,000 in
1996 and $210,000 in 1995. The decreased provision resulted primarily because of
reduced loan charge-offs in 1997. Gross loans charge-offs were $135,000 in 1997,
$510,000 in 1996 and $233,000 in 1995. Total 1997 gross charge-offs represent a
74% decrease as compared to 1996. Charge-offs of certain lease contracts (see
Bennett Funding discussion below) comprised 62% of 1996 charge-offs. Loan loss
recoveries were $40,000 in 1997, $52,000 in 1996, and $34,000 in 1995 resulting
in net loan charge-offs (charge-offs less recoveries) of $95,000 in 1997,
$458,000 in 1996 and $199,000 in 1995. Net loan charge-offs as a percentage of
average loans were 0.12% in 1997, 0.69% in 1996 and 0.36% in 1995.
The Company's allowance for possible loan loss ratios and asset
performance ratios were more favorable at December 31, 1997 than December 31,
1996. (See Item 1d "Business, Selected Statistical Information, Summary of Loan
Loss Experience"). Of the Company's gross loans, $373,000 or 0.46% were not
performing at December 31, 1997, 2.07% or $1,431,000 were not performing at year
end 1996, and .76% or $470,000 were not performing at year end 1995.
The Company's ratio of nonperforming assets to total assets was 0.31%
at year end 1997, 1.39% at year end 1995 and .50% at year end 1995. The
Company's allowance for possible loan losses as a percentage of nonperforming
loans was 439% at year end 1997, as compared to 96% at December 31, 1996 and
323% at December 31, 1995. Nonperforming assets are discussed at "Item
1-Business" at "(d) Selected Statistical Information, Nonaccrual, Past Due and
Restructured Loans."
Nonaccrual loans fell 74% from $1.431 million at December 31, 1996 to
$373,000 at December 31, 1997. Included in nonperforming assets (38% of the
total) at December 31, 1996 was $548,000 in loans secured by lease contracts,
originally sold to the Bank by the now bankrupt Bennett Funding and Bennett
Leasing, which had an original principal balance of $872,000 before a charge-off
of $318,000 in 1996. Pursuant to an agreement the Bank entered into in early
1997 the Bank has received payments in 1997 which retired the entire $548,000
balance. An additional $9,600 was received which was recorded as a recovery to
loan loss reserves in 1997. Under the terms of the agreement, the Bank expects
to receive an additional amount of approximately $45,000 which will be booked as
a recovery to the Bank's loan loss reserve in 1998 if collected.
Also included in the December 31, 1996 total nonperforming assets were
$656,000 (46% of the total) in loans which were ultimately transferred to real
estate owned in 1997. All properties were sold in 1997 and resulted in a total
charge-off to the Company's loan loss reserve of $40,000 at the time of
foreclosure.
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 1997 year end allowance for possible
loan losses of $1.6 million or 1.90% of year end gross loans.
The Company's concentration of real estate secured loans was
approximately 69% at year end 1997, 64% at year end 1996 and 64% in 1995. The
Company's concentration in real estate in the San Mateo region represents an
inherent and continued risk to operations. A severe decline in local real estate
values could be expected to effect adversely and materially affect the Company's
earnings and capital position. There was no real estate owned at December 31,
1997 or December 31, 1996.
Noninterest income decreased $304,000 or 10.8% to $2.5 million in 1997
as compared to an increase of $289,000 or 11.4% in 1996. The decrease in 1997 is
primarily attributable to the closure of the mortgage department in February
1997 which reduced income from gains on sales of loans by $444,000 to just
$12,000. Offsetting in part this decline in loan sale revenue was an increase in
ATM revenues which were up 10.2% or $187,000 from $1,839,000 in 1996 to
$2,026,000 in 1997.
The EFT Department contributed $346,000 to consolidated pretax income
(after allocation of certain inter-company costs) as compared to $226,000 in
1996. 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. 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."
Noninterest expense increased $119,000 or 2.0% in 1997 as compared to
an increase of $320,000 or 5.8% in 1996 and $834,000 or 17.6% in 1995. This
increase was due to a $281,000 increase in other expenses which was primarily
driven by a operational loss provision of $130,000 in the fourth quarter which
the Company does not expect to recur in the future.
The Company's tax expense increased from $839,000 in 1995 to $957,000
in 1996 and to $1,258,000 in 1997. The 1997 tax amount represents a $301,000 or
31% increase over the prior year. This is a result of a 29.1% increase in pretax
income during 1997 which resulted in an effective tax rate of 41.1% for 1997 (as
compared to 40.3% for 1996 and 40.9% in 1995).
Impact of Inflation
The low proportion of the Company's fixed assets to total assets (less
than 1% at year end 1997) 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 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is not required to provide the information required by Item
305 of the Regulation S-K as it is a small business issuer as defined in 12
C.F.R. 230.405.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Financial Highlights
(Dollar amounts in thousands, except per share data)
1997 1996 1995
<S> <C> <C> <C>
Total interest income $9,734 $8,401 $7,507
Total interest expense 2,953 2,539 2,223
Net interest income 6,781 5,862 5,284
- ---------------------------------------------------------------------------------------------------------
Provision for possible loan losses 240 435 210
- ---------------------------------------------------------------------------------------------------------
Total noninterest income 2,517 2,821 2,532
Total noninterest expense 5,995 5,876 5,556
Provision for income taxes 1,258 957 839
- ---------------------------------------------------------------------------------------------------------
Net income $1,805 $1,415 $1,211
- ---------------------------------------------------------------------------------------------------------
Earnings per share
Earnings per common share $2.04 $1.69 $1.50
Earnings per common share - assuming dilution $1.84 $1.51 $1.38
Book value per share $12.27 $11.05 $9.82
Dividends declared per common share $.37 $.33 $.29
Total loans, net of allowance for possible loan losses $84,374 $67,735 $59,981
Total assets $122,085 $103,187 $93,815
Total deposits $107,426 $92,968 $83,979
Total shareholders' equity $11,988 $9,281 $8,078
</TABLE>
This information is derived from the following audited financial statements, and
should be read in conjunction with those audited financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
(Dollar amounts in thousands, except per share data)
For the years ended December 31,
1997 1996 1995
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $8,243 $7,208 $6,292
Interest on taxable investment securities 971 777 587
Interest on tax exempt investment securities 58 61 70
Interest on federal funds sold 462 355 558
- ------------------------------------------------------------------------------------------------------------------
Total interest income 9,734 8,401 7,507
- ------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing transaction accounts 1,364 1,320 1,263
Savings deposits 262 230 202
Time deposits 1,299 974 758
Notes payable and redeemable debentures 28 15 0
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 2,953 2,539 2,223
- ------------------------------------------------------------------------------------------------------------------
Net interest income 6,781 5,862 5,284
Provision for possible loan losses 240 435 210
Net interest income after provision for possible loan losses 6,541 5,427 5,074
Noninterest income:
Service charges on deposit accounts 206 211 270
Loss on securities sold -- -- (16)
Gain on disposal of assets -- 2 8
Gain on sale of loans held for sale 12 456 456
Other mortgage banking income 135 149 193
ATM network revenue 2,026 1,839 1,494
Other 138 164 127
- ------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,517 2,821 2,532
- ------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and related benefits 2,466 2,598 2,516
Occupancy 463 400 378
Equipment 495 544 550
Professional fees 281 243 236
ATM network expenses 558 628 504
Stationery and supplies 109 121 135
Other 1,623 1,342 1,237
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expense 5,995 5,876 5,556
- ------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 3,063 2,372 2,050
Provision for income taxes 1,258 957 839
- ------------------------------------------------------------------------------------------------------------------
Net Income $1,805 $1,415 $1,211
- ------------------------------------------------------------------------------------------------------------------
Earnings per common share $2.04 $1.69 $1.50
- ----------------------------------------------------------------------------------------------
Earnings per common share - assuming dilution $1.84 $1.51 $1.38
- ------------------------------------------------------------------------------------------------------------------
Dividends declared per common share $.37 $.33 $.29
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)
December 31,
1997 1996
Assets
<S> <C> <C>
Cash and due from banks $11,464 $11,011
Federal funds sold 7,500 6,850
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 18,964 17,861
Time deposits with other financial institutions -- 100
Investment securities held to maturity 14,482 12,081
(market value of $14,683 in 1997 and $12,203 in 1996)
Investment securities available for sale (at market) 1,106 2,588
Loans, net of allowance for possible loan losses of $1,638 in 1997 and $1,493 in 1996 84,374 67,735
Premises and equipment, net 653 811
Interest receivable and other assets 2,506 2,011
- -----------------------------------------------------------------------------------------------------------------------
Total assets $122,085 $103,187
- -----------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits
Demand $28,248 $23,599
Interest-bearing transaction 41,758 44,493
Savings 6,399 5,551
Time 31,021 19,325
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 107,426 92,968
Interest payable and other liabilities 1,671 938
Federal Home Loan Bank advances 1,000 --
Total liabilities 110,097 93,906
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 9 and 10)
Shareholders' equity:
Common stock, no par value:
Authorized -- 20,000,000 shares
Issued and outstanding-- 977,035 shares in 1997 and 839,638 shares in 1996 4,736 4,143
Net unrealized (loss) gain on securities available for sale (2) (5)
Net unrealized loss on securities available for sale (2) (5)
Additional paid in capital 640 --
Retained earnings 6,614 5,143
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 11,988 9,281
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $122,085 $103,187
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(Dollar amounts in thousands, except per share data)
For the years ended December 31,
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $1,805 $1,415 $1,211
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 413 447 426
Provision for possible loan losses 240 435 210
Deferred income Taxes (27) (136) (6)
Loss on securities sold -- -- 16
Gain on sale of other assets -- (2) (8)
Net proceeds from the sale of loans held for sale 723 49 (445)
Net amortization and accretion of investment premiums and discounts 90 56 51
Net increase in interest receivable and other assets (468) (412) (112)
Net increase in interest payable and other liabilities 733 180 206
Net increase (decrease) in deferred loan fees 27 164 (23)
- --------------------------------------------------------------------------------------------------------------------
Total adjustments 1,731 781 315
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,536 2,196 1,526
Cash flows from investing activities:
Net decrease in time deposits with other financial institutions 100 3 95
Proceeds from the sale of investment securities available for sale -- -- 484
Proceeds from the maturity of investment securities held to maturity 1,500 1,650 1,705
Proceeds from the maturity of investment securities available for sale 1,500 500 --
Principal payments received on mortgage backed securities 1,494 997 239
Purchase of investment securities held to maturity (5,492) (4,444) (4,285)
Purchase of investment securities available for sale 0 -- (1,502)
Net increase in gross loans (18,073) (8,726) (7,379)
Net capital expenditures, premises and equipment (255) (310) (343)
Proceeds from the sale of real estate owned 436 128 --
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (18,790) (10,202) (10,986)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 14,458 8,988 11,965
Net change in other borrowings 1,000 (1,000) 1,000
Additional paid in capital 640 -- --
Proceeds from the exercise of common stock options 682 80 51
Common stock retired (89) -- --
Cash dividends (334) (277) (241)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,357 7,791 12,775
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,103 (215) 3,315
Cash and cash equivalents, beginning of period 17,861 18,076 14,761
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $18,964 $17,861 $18,076
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Cash payments for interest $2,870 $2,496 $2,166
Cash payments for taxes 1,295 1,241 884
Loans transferred to real estate owned 870 130 --
See accompanying notes.
</TABLE>
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity (Dollar amounts in
thousands, except per share data)
For the Years ended December 31,
1997, 1996 and 1995
<TABLE>
<CAPTION>
Gain(Loss) on
Addition Securities
Preferred Common Paid in Available Retained
Stock Stock Capital for Sale Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $103 $3,909 $0 $(76) $3,035 $6,971
Preferred stock converted to common (93) 93 -- -- -- --
Unrealized loss 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 -- 4,143 -- (5) 5,143 9,281
Stock repurchases -- (89) -- -- -- (89)
Unrealized loss on securities held for sale -- -- -- 3 -- 3
Cash dividends -- -- -- -- (334) (334)
Stock options exercised and related tax benefit -- 682 640 -- -- 1,322
Net income -- -- -- -- 1,805 1,805
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $0 $4,736 $640 $(2) $6,614 $11,988
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
Report of Independent Accountants
To the Shareholders and the Board of Directors of Bay Area Bancshares:
We have audited the accompanying consolidated balance sheets of BAY AREA
BANCSHARES (the Company) as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements for the year ended December 31, 1995 were
audited by other auditors whose report dated January 19, 1996 expressed an
unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bay Area
Bancshares at December 31, 1997 and 1996, the consolidated results of its
operations and its cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
Coopers & Lybrand, L.L.P.
San Francisco, California
February 6, 1998
<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 Other 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 share
(EPS) for the years ended December 31, 1997, 1996, and 1995 are stated in
accordance with SFAS No. 128 "Earnings per Share." Basic EPS is computed by
dividing net income available to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted EPS is computed by
dividing net income available to common shareholders by the weighted average
number of common shares and common equivalent shares outstanding including
dilutive stock options. The computation of common stock equivalent shares is
based on the weighted average market price of the Company's common stock
throughout the period.
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted earnings per share (EPS) computations for the years
ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
For the year ended December 31, 1997
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
Net income $1,805 Basic EPS:
<S> <C> <C> <C>
Income available to common shareholders 1,805 883,000 $2.04
Effect of dilutive securities:
Stock options __--_ 99,000 --
-------------------------------------
Diluted EPS: Income available to
common shareholders and assumed conversions $1,805 $982,000 $1.84
--------------------------------------
For the year ended December 31, 1996
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
Net income $1,415 Basic EPS:
Income available to common shareholders 1,415 835,000 $1.69
Effect of dilutive securities:
Stock options ____-- 105,000 --
-------------------------------------
Diluted EPS: Income available to
common shareholders and assumed conversions $1,415 $940,000 $1.51
--------------------------------------
For the year ended December 31, 1995
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
Net income $1,211
Less: Preferred stock dividends (6)
Basic EPS:
Income available to common shareholders 1,205 806,000 $1.50
Effect of dilutive securities:
Stock options ____-- 67,000 --
-------------------------------------
Diluted EPS: Income available to
common shareholders and assumed conversions $1,205 873,000 $1.38
--------------------------------------
</TABLE>
k. Automatic Teller Machine (ATM) Network
The Bank's Electronic Funds Department (EFT) operates a network of approximately
fifty off-site ATM machines which generate revenue consisting primarily of
transaction and interchange fees. ATM network expenses consist primarily of
machine maintenance fees, cash delivery fees, sales consultant commissions and
transaction charges .
l. 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 income.
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, safe depository
facilities, funds transfer, cashiers checks and the sale of travelers' checks.
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
NOTE 3--INVESTMENT SECURITIES
The amortized cost and approximate market value of investment securities as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
Aggregate
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
Available-for-sale:
Securities of the U.S. government and its agencies $513 $-- $-- $513
Mortgage backed securities 596 -- (3) 593
- -------------------------------------------------------------------------------------------------------------------
Total 1,109 -- (3) 1,106
Held-to-maturity:
Securities of the U.S. government and its agencies 4,509 23 -- 4,532
States of the U.S. and political subdivisions 1,007 20 -- 1,027
Mortgage backed securities 8,646 167 (9) 8,804
Federal Home Loan Bank Stock 320 -- -- 320
- --------------------------------------------------------------------------------------------------------------------
Total $14,482 $210 $(9) $14,683
- --------------------------------------------------------------------------------------------------------------------
1996
Aggregate
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and aggregate fair value of investment securities at December
31, 1997 by type and maturity are shown below. The maturity of mortgage-backed
securities is estimated based on expected principal prepayments, all other
securities have defined maturities.
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
Cost Fair Market Value Cost Fair Market Value
<S> <C> <C> <C> <C>
Due within one year $3,684 $3,713 $513 $513
Due after one year through five years 8,396 8,527 596 593
Due after five years through ten years 1,667 1,689 -- --
Due after ten years 415 434 -- --
- --------------------------------------------------------------------------------------------------------------------
Total $14,162 $14,363 $1,109 $1,106
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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 and 1997.
As of December 31, 1997, and 1996, investment securities with an amortized cost
of $2,263 and $2,057 respectively, were pledged to secure public deposits and
other borrowings as required by law.
<PAGE>
<TABLE>
<CAPTION>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
NOTE 4--LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Loan balances as of
December 31, 1997 and 1996 were as follows:
1997 1996
<S> <C> <C>
Commercial and financial $20,679 $20,019
Real estate mortgage 38,567 33,978
Real estate construction 20,978 10,799
Installment 5,788 4,432
- -----------------------------------------------------------------------------------------------------------------------
86,012 69,228
Less--Allowance for possible loan losses (1,638) (1,493)
- ------------------------------------------------------------------------------------------------------------------------
Net loans $84,374 $67,735
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The changes in the allowance for possible loan losses for the years ended
December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
<S> <C> <C> <C> <C>
Balance at January 1, $1,493 $1,516 $1,505
Provision for possible loan losses 240 435 210
Loans charged off (135) (510) (233)
Recoveries 40 52 34
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Balance at December 31, $1,638 $1,493 $1,516 The Company adopted Financial
Accounting Standards Board Statement (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, 1997 and 1996 under SFAS No. 114 was $93 and $258 respectively,
which is included in the Company's allowance for loan loss. For the years ended
December 31, 1997 and 1996, the average recorded investment in impaired bans was
approximately $995 and $1,212, respectively.
The Company considers all nonaccrual loans to be impaired loans. At December 31,
1997 and 1996 there were loans totaling approximately $373 and $1,431
respectively, on nonaccrual status. Interest earned but not recorded on all
loans that were on nonaccrual status during the years ended December 31, 1997,
1996, and 1995 was approximately $53, $127 and $43, 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. The loan activity with respect to these
related parties during 1997 is summarized below:
<TABLE>
<CAPTION>
1997 1996
Loans to directors, executive officers, principal shareholders and their
associates:
<S> <C> <C> <C>
Balance at January 1, $1,549 $945
Additions 926 888
Paydowns or Retirements (1,080) (284)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, $1,395 $1,549
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
NOTE 5--PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Premises and equipment as of December 31, 1997 and 1996 were comprised of the
following:
1997 1996
<S> <C> <C>
Automobiles $55 $37
Furniture and equipment 2,625 2,404
Leasehold improvements 225 210
- -------------------------------------------------------------------------------------------------------------
2,905 2,651
Less - Accumulated depreciation and amortization (2,252) (1,840)
- -------------------------------------------------------------------------------------------------------------
Net premises and equipment $653 $811
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense was $413, $447 and $426 for the years ended December 31,
1997, 1996 and 1995.
NOTE 6--DEPOSITS AND INTEREST ON DEPOSITS
As of December 31, 1997 and 1996, the Bank had time certificates of deposit in
denominations of $100 or more totaling approximately $20,261 and $9,959,
respectively. Interest paid on these deposits was approximately $772 in 1997,
$494 in 1996 and $347 in 1995.
NOTE 7--AVAILABLE CREDIT
As of December 31, 1997 and 1996, 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, 1997 the Bank held $320 in
FHLB stock and was able to borrow up to approximately $2,240. There were $1,000
in borrowings at December 31, 1997 and no borrowings at December 31, 1996.
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 effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative 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 I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
For Capital To Be Well Capitalized Under Prompt
Actual Adequacy Purposes Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets) $10,205 13.81% $5,911 8.0% $7,388 10.0%
Tier 1 Capital (to Risk Weighted Assets) $9,291 12.58% $2,955 4.0% $4,433 6.0%
Tier 1 Capital (to Average Assets) $9,291 9.50% $4,145 4.0% $5,182 5.0%
As of December 31, 1997
Total Capital (to Risk Weighted Assets) $11,850 12.79% $7,347 8.0% $9,184 10.0%
Tier 1 Capital (to Risk Weighted Assets) $10,692 11.54% $3,674 4.0% $5,510 6.0%
Tier 1 Capital (to Average Assets) $10,692 9.49% $4,498 4.0% $5,623 5.0%
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
As of December 31, 1997 and 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, 1997, the Bank had retained earnings available for dividend
distribution of $3,652.
Additionally, the Federal Reserve Act generally restricts loans, advances and
investments by the Bank, in or to the Company, to 10% of the shareholder's
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 $440, $378 and $359 for the years ended December 31,
1997, 1996 and 1995, respectively.
At December 31, 1997, the approximate future lease rentals payable under
operating leases for premises were as follows:
1998 $361
1999 275
2000 256
2001 256
2002 256
Thereafter 0
----------------------------------------------------
Total Minimum Lease Payments $1,404
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, 1997 and 1996 the Bank had balances of
$1,171 and $964 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.
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.
Financial instruments whose contractual amount represented risk:
1997 1996
Commitments to extend credit $41,174 $36,251
Standby letters of credit $1,205 $327
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 vary, but may include cash,
securities and real estate.
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
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 $74, $72 and $64 during 1997, 1996 and 1995,
respectively.
During 1996, the Company implemented a salary continuation plan for the Bank's
former Chief Executive Officer. Under the plan, as revised in early 1998, the
Company is obligated to provide the officer or his beneficiaries, $36 per year
for 15 years beginning in 2006. Salary continuation expense was $87, $57 and $81
in 1997, 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 $211, which is included in other assets at December 31, 1997. The
Company has made premium payments of $89 to this policy in the last three fiscal
years and does not anticipate making additional premium payments on the Bank's
former CEO's policy.
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 zero
to five years and have a maximum term of ten 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, 1997, 9,558 shares were available for
grant. The following table summarizes the option activity for the years ended
December 31, 1997, 1996 and 1995 (all share amounts are in thousands):
<TABLE>
<CAPTION>
Weighted
Weighted Average Average Fair Value
1993 Plan Available Outstanding Exercise Share of Options Granted
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 24 191 $4.75
Granted (5) 5 $7.25 $13.11
Exercised -- (11) $4.75
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1995 19 185 $4.82
Granted (10) 10 $12.50 $15.87
Exercised -- (15) $5.08
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1996 9 180 $5.22
Exercised -- (142) $4.80
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1997 9 38 $6.79
- -------------------------------------------------------------------------------------------------
</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 APB Opinion 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>
1997 1996 1995
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Net income $1,805 $1,789 $1,415 $1,240 $1,211 $1,195
Basic earnings per share $2.04 $2.03 $1.69 $1.49 $1.50 $1.48
Diluted earnings per share $1.84 $1.82 $1.51 $1.32 $1.38 $1.37
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
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. No options were granted in 1997. The remaining average contractual life
of outstanding options is seven years.
The following table summarizes information about the Plan's stock options at
December 31, 1997:
Options Outstanding
Number Outstanding Number Exercisable
at 12/31/97 at 12/31/97
Exercise Rate
$ 4.75 28 28
$12.50 10 10
- ----------------------------------------------------------------------
Total 38 38
- ----------------------------------------------------------------------
The Company has a stock appreciation rights (SAR) plan under which the Board of
Directors may award up to 200,000 units to employees. The SAR can be redeemed
for the amount by which the fair market value of a share of common stock on the
date of exercise exceeds the SAR's grant price as established by the Board. The
SAR becomes fully exercisable based on a vesting schedule established by the
Board which generally does not exceed five years. Each SAR expires ten years
from the date the SAR is awarded. Compensation cost recognized for SAR's granted
under the plan totaled approximately $222,$75 and $0 for 1997, 1996 and 1995,
respectively. The SAR liability amounted to $297, and $75 at December 31, 1997
and 1996, respectively.
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 (liabilities) are set forth below:
1997 1996
Book loan loss allowance in excess of tax $448 $472
Book depreciation in excess of tax 49 46
Deferred compensation 198 71
State franchise tax 1 51
Other (16) 13
Deferred tax asset $680 $653
The current and deferred amounts of the tax provision (benefit) for the years
ended December 31, 1997, 1996, and 1995
were as follows:
<TABLE>
<CAPTION>
Total
Federal State Provision
<S> <C> <C> <C>
1997
Current $909 $376 $1,285
Deferred (77) 50 (27)
- -----------------------------------------------------------------------------------
$832 $426 $1,258
- ------------------------------------------------------------------------------
1996
Current $774 $319 $1,093
Deferred (81) (55) (136)
- --------------------------------------------------------------------------------------------------------------------
$693 $264 $957
- --------------------------------------------------------------------------------------------------------------------
1995
Current $583 $262 $845
Deferred (14) 8 (6)
- --------------------------------------------------------------------------------------------------------------------
$569 $270 $839
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The provisions for income taxes differ from the amounts computed by applying the
statutory federal income tax rates to income before taxes as follows:
1997 1996 1995
<S> <C> <C> <C> <C>
Federal income tax expense, based on statutory 34% federal income tax rate $1,042 $807 $697
State franchise taxes, net of federal benefit 219 174 178
Tax exempt income (17) (21) (21)
Other, net 14 (3) (15)
- ----------------------------------------
Total $1,258 $957 $839
- ----------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
NOTE 14-FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments", 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. Federal Home Loan Bank Advances: Federal Home Loan Bank advances 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, 1997 December 31, 1996
Carrying Amount Fair Value Carrying Amount Fair Value
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $18,964 $18,964 $17.861 $17,861
Time deposits with other financial institutions -- -- 100 100
Investment securities available for sale 1,106 1,106 2,588 2,588
Investment securities held to maturity 14,482 14,683 12,081 12,203
Loans 84,374 82,869 67,735 67,824
Interest receivable 741 741 587 587
Liabilities
Demand deposits 28,248 28,248 23,599 23,599
Interest bearing transaction and savings deposits 48,157 48,157 50,044 50,044
Time deposits 31,021 30,813 19,325 19,359
Interest payable 251 251 167 167
Federal Home Loan Bank advances 1,000 1,000 -- --
</TABLE>
<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, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Assets
Cash and cash equivalents $626 $105
Investment in subsidiary 10,690 9,276
Notes receivable 470 --
Other assets 325 --
- ------------------------------------------------------------------------------------------------------------------
Total assets $12,111 $9,381
Liabilities & Shareholders' Equity
Other liabilities 123 100
Total liabilities 123 100
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 11,988 9,281
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $12,111 $9,381
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Bay Area Bancshares (Parent) Statements of Income For the Years Ended December
31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash dividends received from subsidiary $450 $225 $275
Interest income 11 2 1
Professional fees (37) (16) (25)
Miscellaneous expense (30) (42) (35)
- ------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiary 394 169 216
Equity in undistributed income of subsidiary 1,411 1,246 995
- ------------------------------------------------------------------------------------------------------------------
Net income $1,805 $1,415 $1,211
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Bay Area Bancshares (Parent) Statements of Cash Flows For the Years Ended
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,805 $1,415 $1,211
Adjustments to reconcile net income to cash provided by operating
activities:
Net increase in other assets (325) -- --
Net increase in other liabilities 23 13 74
Equity in undistributed income of subsidiary (1,411) (1,246) (995)
- ------------------------------------------------------------------------------------------------------------------
Total adjustments (1,713) (1,233) (921)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 92 182 290
Cash flows from financing activities:
Net increase in notes receivable (470) -- --
Additional paid in capital 640 -- --
Exercise of common stock options 682 80 51
Common stock retired (89) -- --
Cash dividends (334) (277) (241)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 429 (197) (190)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 521 (15) 100
Cash and cash equivalents, beginning of year 105 120 20
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $626 $105 $120
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Information with respect to the Company's change in auditors is
provided by the Company's Current Report on Form 8-K filed with the SEC on
September 19, 1996. As reported at that time, the Company had no disagreement
with its prior auditor.
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>
Director of
Position Position the Company
Name Age with Company with Bank Since
<S> <C> <C> <C> <C>
Frank M. Bartaldo Jr. 49 N/A Director, N/A
Executive Vice
President,
Acting President
Gary S. Goss 62 Director, Director, 1981
Secretary Secretary
Robert R. Haight 69 Chairman of Director 1981
the Board,
President,
Chief Executive
Officer
Stanley A. Kangas 60 Director Director 1996
David J. Macdonald 58 Director Director 1981
Thorwald A. Madsen 81 Director Director 1981
Dennis Royer 55 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.
FRANK M. BARTALDO, JR. Mr. Bartaldo, Jr., 49, has been with Bay Area Bank since
1986. He currently serves as Acting President of Bay Area Bank, a position he
has held since the retirement of Mr. Brooks in February 1998. Prior to being
named Acting President Mr. Bartaldo served 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 Past-President of
the Redwood City-San Mateo County Chamber of Commerce.
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 a
member of the Sequoia Club in Redwood City. Mr. Haight was elected Chairman of
the Board, President and Chief Executive Officer of Bay Area Bancshares in 1991.
STANLEY A. KANGAS: Mr. Kangas retired in 1997 as chairman of the Board of Brian
Kangas Foulk (BKF), a 150 person civil engineering firm with offices in Redwood
City, San Jose and Walnut Creek. Mr. Kangas was President of BKF from 1975 to
1995. Mr. Kangas' firm provided engineering services to Stanford University and
he served as Principal-In-Charge of many of BKF's large scale projects including
the 1,200 acre Redwood Shores community in Redwood City. Mr. Kangas served as an
officer in many professional societies and civil engineering organizations. Mr.
Kangas is currently involved in many local community programs and non-profit
groups including the Redwood City-San Mateo County Chamber of Commerce, the
Redwood City Library Foundation, the Redwood City School District Bond Oversight
Committee, the 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 for the past 35
years, Mr. Macdonald is owner and broker of David J. Macdonald Real Estate
Company in San Carlos. Mr. Macdonald is a member of the San Carlos Board of
Realtors and is an active volunteer and member of San Mateo County Sheriff's Air
Squadron, 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. Mr. Madsen retired from the San Carlos Lions Club after 45 years of
membership. Currently Mr. Madsen is an active participant in Peninsula
Association of Contractors and Engineers and the San Carlos Branch of Sons in
Retirement.
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. In July 1997 Mr. Royer was elected
Chairman of the Board of Bay Area Bank.
Executive Officers of the Registrant
The information required herein is incorporated by reference from Item
1(b), herein.
Compliance with Section 16(a) of the exchange Act.
The Company's common stock is not registered pursuant to Section 12 of
the Exchange Act, therefore Item 405 of Regulation S-K is not applicable to the
Company.
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 1997, 1996, and 1995.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Name and Regular Compensation All Other
Principal Position Year1 Salary1, 2 Bonus Stock Options/SARs* Compensation3, 4
- ------------------ ---- ------ ----- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Robert R. Haight 1997 $20,350 N/A 0 $ 6,600
CEO of Company 1996 $18,950 N/A 0 $ 5,888
1995 $17,750 N/A 0 $ 6,000
Frank M. Bartaldo 1997 $100,000 $32,000 20,000 $ 6,700
EVP/Acting President 1996 $100,000 $34,000 20,0005 $ 6,451
of Bank 1995 $ 85,000 $28,000 0 $ 5,200
Anthony J. Gould 1997 $ 90,000 $32,000 15,000 $ 6,000
SVP/CFO of Company 1996 $ 90,000 $30,000 15,0005 $ 5,792
and Bank 1995 $ 75,000 $25,000 0 $ 4,525
Mark V. Schoenstein 1997 $ 75,000 $33,180 12,500 $5,183
SVP/Construction Loans 1996 $ 75,000 $30,156 10,0006 $4,519
of Bank
William A. Peterson 1997 $ 30,0007 $17,0007 0
SVP/Sr. Lending Officer
of Bank
John O. Brooks 1997 $150,000 N/A 0 $13,500
President/CEO of Bank 1996 $150,000 53,000 0 $13,500
EVP/COO of Company 1995 $135,000 49,000 0 $13,500
(Retired 2/20/98)
* Number of shares
- ---------------------
<FN>
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. Bartaldo has an annual salary of $100,000.
Mr. Gould has an annual salary of $90,000 , Mr. Schoenstein's annual
salary is $75,000, and Mr. Brooks' annual salary was $150,000.
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 $650 per month. During 1997, Mr. Bartaldo received $6,700 as a
matching contribution under the Bank's 401(k) Plan and Mr. Gould and
Mr. Schoenstein received $6,000 and $5,183 respectively. During
1997 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.
4 In addition to this compensation, Salary Continuation Plans were adopted
effective January 1, 1997, to provide salary continuation benefits to Mr.
Bartaldo and Mr. Gould, subject to certain terms and conditions as
described below.
5 Under the terms of the SAR agreement dated October 1, 1996, Mr. Bartaldo's
and Mr. Gould's SAR units were 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.
6 Under the terms of the SAR agreement dated June 18, 1996, Mr.
Schoenstein's 10,000 SAR units were 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.
7 Mr. Peterson's employment with the Bank started September 1, 1997. Bonus
amount includes a $5,000 signing bonus.
</FN>
</TABLE>
Executive Salary Continuation Plan
The Board of Directors of the Bank approved a Salary Continuation Plan
for executives of the Bank by which certain executives will receive deferred
compensation in accordance with the terms and conditions of written agreements
to be entered into under the Plan. A written agreement exists with John Brooks
as described in elsewhere in connection with his retirement and written
agreements are being prepared for Frank Bartaldo and Anthony Gould. The
additional two agreements have not been finalized. The Bank has purchased life
insurance products in connection with the Salary Continuation Plan relating to
Mr. Brooks' agreement and the proposed agreements relating to Mr.
Bartaldo and Mr. Gould.
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 December, 1994. 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, 1997, 1996 and 1995, the Bank contributed $74,000, $72,000, 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 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, 1998, 33,471 shares were subject to outstanding options 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 1997 and the value of outstanding stock options held by the
executive officers named in the Summary Compensation Table at December 31, 1997,
pursuant to the 1993 Plan.
<TABLE>
<CAPTION>
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND
YEAR-END OPTION VALUES
Number of Value of Unexercised
Unexercised Options In-The-Money-Options
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise1 Realized2 Unexercisable1 Unexercisable3
- ---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Robert R. Haight 1,005 $22,358 10,608 / 0 $236,028 / $0
Frank M. Bartaldo 11,968 $266,288 0 / 0 $0 / $0
Anthony J. Gould 14,078 $214,670 0 / 0 $0 / $0
John O. Brooks 30,935 $666,304 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, 1997 ($27.00 estimated bid price)
less the exercise price of those options.
</FN>
</TABLE>
On November 18, 1997, the Board of Directors of the Company adopted an
amendment to the Stock Option Plan to (1) to increase the number of shares
covered by the Plan from 231,431 to 750,000, subject to the limitation that
outstanding options (plus other rights to receive stock pursuant to compensation
plans) may not at any time exceed 30% of the Company's outstanding stock; (2) to
provide that options may be exercised by the delivery of a note for the exercise
price; and (3) to provide that if there is a change in control of the Company
and, as a result, an option held by an officer, director or consultant will be
terminated and that option has not fully vested, the vesting of the option will
accelerate. The amendment is subject to the approval of the shareholders of the
Company, which will be sought at the 1998 annual shareholders meeting.
Subject to the approval of the shareholders of Amendment No. 1 to the
Plan and other conditions, the Board granted options to employees on November
18, 1997. The following table shows the options granted to those officers of the
Bank listed in the Summary Compensation Table. All of the options listed below
were granted subject to a further condition that the officer agree to amend his
Salary Continuation Agreement to cap the appreciation under that agreement at
$24.00 per share.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Number % of Total Options
of Securities Granted to
Underlying Employees in Exercise Price Expiration
Name Option Granted1 Fiscal Year ($/Share) Date
- ---- -------------- ----------- --------- ----
<S> <C> <C> <C> <C>
Frank M. Bartaldo 20,000 28.0% $24.00 11/18/07
Anthony J. Gould 15,000 21.3% $24.00 11/18/07
Mark V. Schoenstein 12,500 17.7% $24.00 11/18/07
William A. Peterson 10,000 14.2% $24.00 11/18/07
- ---------------------
<FN>
1 Under the terms of the 1993 Stock Option Plan, as amended, terms of the
incentive stock options granted are as follows: 10 year terms; vesting 20%
per year on the anniversary date of the grant date, starting on the 1st
year anniversary date, to be fully vested on the 5th anniversary date.
</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
exercised. During 1997, each holder of a SAR right agreed to amend his SAR right
to cap the appreciation for which he receives payment at $24.00 per share, as a
condition to the award of options discussed above. The following table sets
forth the aggregate value of SARs held by those officers named in the Summary
Compensation Table. There were no SARs awarded in 1997.
<TABLE>
<CAPTION>
AGGREGATE VALUE OF SARS AT FISCAL YEAR
Number of Value of Unexercised
Unexercised SARs In-The-Money SARs
Exercisable/ Exercisable/
Name Unexercisable1 Unexercisable2
<S> <C> <C>
Frank M. Bartaldo 8,000 /12,000 $128,000 / $192,000
Anthony J. Gould 6,000 / 9,000 $ 96,000 / $144,000
Mark V. Schoenstein 4,000 / 6,000 $ 64,000 / $ 96,000
- --------------------------------
<FN>
1 Value determined based on the difference between exercise price for SARS and the capped stop value of the SARS at
$24.00 per share.
</FN>
</TABLE>
Retirement Agreement
On February 27, 1998 the Bank announced the retirement of its president
and chief executive officer, John Brooks. He also retired as an officer of the
Company and as a director of both the Bank and the Company. Pursuant to a
retirement agreement between Mr. Brooks and the Bank and Company, Mr. Brooks was
paid a total of $104,000 and entered into an Amended and Restated Salary
Continuation Agreement with the Bank providing for deferred compensation of
$36,000.00 per year beginning in April 2006 and ending in April 2020.
Compensation of Directors
In 1997, 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 six non-officer directors in 1997 was $94,650, 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 1997,
directors exercised options for 68,313 shares of stock, by which those directors
realized $1,254,850. As of March 15, 1998 the directors of the Company have
options exercisable for a total of 20,608 shares. The value of those exercisable
options as of March 15, 1998 was approximately $463,460 which value is estimated
based on fair market value of Common Stock at March 15, 1998 ($29.50 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, 1998,
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, 1998 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 Acting 19,430 5 1.98%
President of the Bank
Gary S. Goss Director & Secretary 59,839 6 6.10%
Robert R. Haight Chairman of the Board, 55,648 7 5.61%
President and CEO
Stanley A. Kangas Director 8,900 8 .90%
David J. Macdonald Director 37,280 9 3.80%
Thorwald A. Madsen Director 27,397 10 2.79%
Dennis W. Royer Director 6,977 11 .71%
Anthony J. Gould Sr. VP/CFO 16,952 12 1.73%
------ ----
All directors, nominees and officer
of the Company and Bank as a Group 232,423 13 23.20%
(10 in number)
John O. Brooks Retired EVP/COO 36,935 14 3.76%
of Company and
President/CEO of Bank
- -------------------
<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, 1998.
5 Includes 17,107 shares held by Frank and Kathy Bartaldo as joint tenants;
and 2,323 shares in the name of Frank M. Bartaldo IRA.
6 Includes 54,535 shares of Common Stock held in the name of The Gary Goss
Trust; 1,029 shares held by Gary S. Goss as custodian; and 4,275 shares in
the name of Gary S. Goss IRA. On December 27, 1991, the State Banking
Dept. approved an application by Mr. Goss to acquire up to 24.99% of the
Company's stock on the open market.
7 Includes 43,000 shares of Common Stock held by Robert and Sherrill Haight
as joint tenants; 1,600 shares held by Robert R. Haight IRA; 540 shares
Sherrill Haight IRA; and options to acquire 10,608 shares of Common Stock.
8 Includes 1,500 shares of Common Stock held by Stanley and Teresa A. Kangas
as joint tenants; and 2,400 shares held by the Stanley A. Kangas IRA; and
options to acquire 5,000 shares of Common Stock.
9 Includes 14,107 shares of Common Stock held by David and Pauline Macdonald
as joint tenants; and 23,173 shares in the name of David J. Macdonald.
10 Includes 27,375 shares of Common Stock held by Thorwald and Jonelle Madsen
as Trustees of the Madsen Family Trust; and 22 shares of Common Stock held
by Thorwald Madsen as custodian for his grandchild, a minor.
11 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.
12 Includes 16,952 shares of Common Stock held in the name of Anthony J.
Gould.
13 Includes as if currently outstanding, 33,471 shares subject to stock
options granted under the Company's 1993 Stock Option Plan.
14 Includes 36,935 shares of Common Stock held in the name of the John O.
Brooks Revocable Trust.
</FN>
</TABLE>
Major Shareholders
The following sets forth information as of March 15, 1998, 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>
Mario Biagi, 10541 Valley Drive Director Emeritus 51,6412 5.20%
Plymouth, CA of the Bank
Alan Miller, #4 Bridle Lane Director Emeritus 56,4803 5.76%
Woodside, CA of the Bank
Bank Funds, 208 S. LaSalle Major Shareholder 70,986 7.22%
Chicago, IL
- ----------------------
<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 40,028 shares held by Mario and June Biagi as joint tenants; and options to acquire 11,613 shares of
Common Stock.
3 Includes 8,472 shares of Common Stock held by Heart Construction Company,
which is wholly owned by Alan B. Miller; and 48,008 shares solely owned by
Alan B. Miller.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions.
Buildings Leases with Major Shareholder
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 $21,400 per month or approximately
$2.58 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 Director Emeritus of
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. The current
cost for this additional space (which includes an allocation of certain
operating expenses) is approximately $4,000 per month or $1.93 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, lands-caping, 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 location, all of which are used in the banking
business.
Indebtedness of Management
The Company has made loans to certain of its and the Bank's directors
and executive officers, which loans are secured by shares of common stock of the
Company owned by the director or executive officer. All of the loans were made
after the individual exercised a stock option. The following provides
information with respect to all of such loans to persons who are currently
directors or executive officers and whose loans exceeded $60,000.
In September of 1997, the Company loaned $100,000 to Mr. Gary Goss, a
director of the Company, which loan is secured by 11,000 shares of the Company's
stock. The loan bears interest at the rate of 7.2% per year, and the largest
amount outstanding during 1997 and the amount outstanding as of March 15, 1998
was $100,000.
In July of 1997, the Company loaned $110,000 to Mr. David Macdonald, a
director of the Company, which loan is secured by 11,000 shares of the Company's
stock. The loan bears interest at the rate of 6% per year, and the largest
amount outstanding during 1997 and the amount outstanding as of March 15, 1998
was $110,000.
In November of 1997, the Company loaned $70,000 to Mr. Anthony Gould,
an executive officer of the Company, which loan is secured by 8,000 shares of
the Company's stock. The loan bears interest at the rate of 6% per year, and the
largest amount outstanding during 1997 and the amount outstanding as of March
15, 1998 was $70,000.
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, 1997 to current
directors and executive officers, and their associates was $522,606 or
approximately 4.89% of the Bank's capital.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
(a) 1. Financial Statements.
Reference Page
Report of Independent Accountants:
Coopers & Lybrand L.L.P 49
Consolidated Financial Statements of
Bay Area Bancshares and Subsidiaries: 49
Consolidated Balance Sheets as
of December 31, 1997 and 1996: 47
Consolidated Statements of
Income for the Years Ended
December 31, 1997, 1996 and 1995: 46
Consolidated Statements of Changes
in Shareholders' Equity for the
Years Ended December 31, 1997, 1996, and 1995: 49
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1997, 1996, and 1995: 48
Notes to Consolidated Financial Statements: 50
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
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, 1992 6
10.8 # 1993 Stock Option Plan 6
10.9 # Forms of Stock Option Agreements 6
10.11 #Director Emeritus Agreement Bay Area Bank and James E.
Burney dated March 21, 1995 7
10.12 #Director Emeritus Agreement Bay Area Bank and Alan Miller
dated May 16, 1995 7
10.13 Commercial Lease between Nine C Corporation dated June 30,
1995 for the Bank's primary facility 7
10.14 Commercial Lease between Nine C Corporation dated November
30, 1995 for the Bank's Mortgage Department 7
10.15 #Salary Continuation Agreement between John O. Brooks and
Bay Area Bank dated January 1, 1995 8
10.16 #1996 Stock Appreciation Rights Plan and form of Agreement 8
10.17 #Amended No. 1 to the Bay Area Bancshares 1993 Stock Option
Plan. 9
10.18 #Form of Incentive Stock Option Agreement to be used after
Amendment No. 1 (employees who are not directors) 9
10.19 #Form of Incentive Stock Option Agreement to be used after
Amendment No. 1 (employees who are directors) 9
10.20 #Form of Stock Option Agreement to be used after Amendment
No. 1 (non-employee directors or consultants) 9
10.21 #Retirement and Release Agreement between Bay Area Bank, Bay
Area Bancshares and John O. Brooks, dated February 20, 1998.
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.
8 Filed as Exhibits 10.1 and 10.16 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
9 Filed as Exhibits 4.2, 4.3, 4.4 and 4.5 to the Company's Post Effective
Amendment No. 1 to its Registration Statement on Form S-8, SEC File No.
33-78242, filed on March 18, 1998.
(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 1998 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.
<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, 1998
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/ Anthony J. Gould
Anthony J. Gould, Sr. Vice President, Chief
Accounting 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/ Gary S. Goss March 26, 1998
GARY S. GOSS, Director
/s/ Robert R. Haight March 26, 1998
ROBERT R. HAIGHT, Chairman
of the Board of Directors, President
and Chief Executive Officer
/s/ David J. Macdonald March 26, 1998
DAVID J. MACDONALD, Director
/s/ Thorwald A. Madsen March 26, 1998
THORWALD A. MADSEN, Director
/s/ Dennis W. Royer March 26, 1998
DENNIS W. ROYER, Director
/s/ Anthony J. Gould March 26, 1998
ANTHONY J. GOULD, Vice President
Chief Accounting Officer
Exhibit Index
10.21 Retirement and Release Agreement between Bay Area Bank, Bay Area
Bancshares and John O. Brooks, dated February 20, 1998.
23 Consent of Coopers & Lybrand LLP
27 Financial Data Schedule
<PAGE>
RETIREMENT AND RELEASE AGREEMENT
This Retirement and Release Agreement (hereinafter "Agreement") is
entered into by and between John O. Brooks (hereinafter "BROOKS"), and BAY AREA
BANK (hereinafter the "BANK") and BAY AREA BANCSHARES (hereinafter
"BANCSHARES").
WHEREAS, BROOKS has been and is currently employed by the BANK as
President and Chief Executive Officer of the BANK and Chief Operating Officer of
BANCSHARES;
WHEREAS, BROOKS has been and is currently a director of the BANK and a director
of BANCSHARES; WHEREAS, the parties desire to provide for BROOKS' retirement
which will result in the termination of his employment with the BANK,
termination of his appointment as an officer of the BANK and BANCSHARES and
termination of his election as a director of the BANK and BANCSHARES; and
WHEREAS, the parties hereto desire to enter a final agreement and a
binding waiver and release of any and all matters or claims by BROOKS.
NOW, THEREFORE, in consideration of the mutual promises herein, the
parties agree and covenant as follows:
1. The BANK and BROOKS have negotiated the retirement and termination
of BROOKS' employment with the BANK as a regular full-time employee, which
retirement and termination shall be effective upon BROOKS' execution of this
Agreement, subject to the following terms:
a. The BANK shall pay to BROOKS, less any amounts required by
law to be withheld, a payment of One Hundred Four Thousand Dollars
($104,000.00).
b. Such payment shall be made by check and delivered to BROOKS
by hand or via overnight delivery service no later than the eighth (8th) day
after his execution of this Agreement, subject to the conditions set forth
herein.
c. The BANK and BROOKS shall enter into an Amended and
Restated Salary Continuation Agreement dated the same day as this Agreement and
attached hereto as Exhibit A.
d. The terms of that certain promissory note dated December 4,
1997, from BROOKS in favor of BANCSHARES shall be amended to provide that the
note shall be repaid in full no later than December 31, 2002. The principal
shall be reduced by at least 25%, 50% and 75% of the balance now outstanding by
no later than December 31, 1999, 2000 and 2001, respectively. BROOKS shall have
the right to prepay the principal in whole or in part at any time without
penalty. All other terms and conditions of the promissory note shall remain
unchanged.
e. The BANK shall pay BROOKS' COBRA payments through August
31, 1998 and BROOKS shall be responsible thereafter if BROOKS elects to maintain
COBRA coverage.
f. This Agreement shall not become final and no payment or
other benefit described in this Agreement shall be due if BROOKS revokes his
acceptance of this Agreement
within the time limits and in the manner provided in paragraph 4 below.
2. BROOKS last day as an employee of the BANK shall be the date he
executes this Agreement, after which all salary due to BROOKS and all accrued
but unpaid vacation shall be paid and notice of COBRA rights shall be given.
BROOKS shall return all keys and other property of the BANK upon his execution
of this Agreement.
3. BROOKS= signature to this Agreement shall serve as his election to
retire as an employee and to resign as an officer and director of the BANK and
as an officer and director of BANCSHARES.
4. In entering into this Agreement, BROOKS knowingly and voluntarily
waives and releases any and all rights and protections BROOKS may otherwise have
against the BANK or BANCSHARES under federal, state and local employment
discrimination laws, statutes and ordinances, and specifically those rights and
protections under the Age Discrimination and Employment Act of 1967 (hereinafter
"ADEA"), the Older Worker's Benefit Protection Act of 1990 (hereinafter
"OWBPA"), the Civil Rights Act of 1964 (hereinafter "TITLE VII"), the Civil
Rights Act of 1991 (hereinafter "CRA"), the Americans With Disabilities Act
(hereinafter "ADA"), the Employee Retirement Income Security Act (hereinafter
"ERISA"), and the California Fair Employment and Housing Act (hereinafter
"FEHA"). In making this waiver and release of BROOKS' rights and protections
under all federal, state and municipal laws, statutes and ordinances, including
the above-referenced laws, BROOKS acknowledges the following:
a. BROOKS has had a full, unrestricted opportunity to consult
with legal counsel of his own choosing for the purpose of being advised of his
rights and the consequences of entering into this Agreement, which Agreement
waives his rights and protections under the above-referenced laws, statutes and
ordinances. BROOKS acknowledges that he has received no legal advice from the
BANK or from the BANK's attorneys, and is not relying on a position of trust nor
his past working relationship with the BANK or the BANK's attorneys.
b. BROOKS is receiving lawful consideration in exchange for
his waiver and release of his rights and protections under the above-described
laws statutes and ordinances, including the ADEA, OWBPA, TITLE VII, CRA, ADA,
ERISA, and the FEHA.
c. BROOKS acknowledges that in accordance with the provisions
of the OWBPA, the BANK has given BROOKS the opportunity to take twenty-one (21)
days to consider the terms of this Agreement and has encouraged him to consult
with counsel of his own choosing (which he has done), which right BROOKS may
waive at his option by signing this Agreement before the expiration of
twenty-one (21) days, but which the BANK has not required him to waive.
Moreover, the BANK hereby notifies BROOKS that, also pursuant to the OWBPA and
ADEA, BROOKS has seven (7) days to revoke this Agreement after he has signed it
with respect to claims under the OWBPA and ADEA. The BANK hereby notifies
BROOKS, and BROOKS acknowledges, that BROOKS is not waiving any rights or claims
under the ADEA, if any, that may arise after the execution of this Agreement.
This Agreement shall become effective and enforceable upon the expiration of
seven (7) days following the date that BROOKS executes this Agreement. BROOKS
understands that the Agreement may not be revoked after the seven (7) day
period.
5. This Agreement shall not become effective or enforceable until the
period set forth in paragraph 4 has expired, and then only if BROOKS has not
revoked this Agreement during the interim. From the date he executes this
Agreement through the interim waiting period for this Agreement to become
effective or until it is revoked pursuant to paragraph 4 above, BROOKS shall
render no services to the BANK, shall be considered on an unpaid leave of
absence from the BANK, shall have no access to the non-public area of the BANK's
property and shall not hold himself out to be an employee, officer or director
of the BANK or any affiliate.
6. BROOKS further agrees not to file or process in any state or federal
court or before any local, state or federal governmental agency any charge or
complaint which is in any manner inconsistent with the terms of this Agreement.
BROOKS represents and warrants that he has not assigned to any other person or
entity any cause of action he may have had against the BANK or BANCSHARES.
7. In consideration of the terms of this Agreement, BROOKS acknowledges
complete satisfaction of, and does hereby forever release, absolve, and
discharge the BANK and BANCSHARES, including but not limited to their affiliated
corporations, successors, assigns, directors, officers, employees, agents,
attorneys, and representatives from any and all causes of action, judgments,
liens, indebtedness, damages, claims, liabilities, and demands, and causes of
action of whatever kind or nature, whether known or unknown, suspected or
unsuspected, which BROOKS now has or holds, or any time had or held against the
BANK, BANCSHARES, their affiliated corporations, successors, assigns, directors,
officers, employees, agents, attorneys, and representatives. This release
expressly waives any and all claims BROOKS may presently have against the BANK
or BANCSHARES regardless of the nature, source, or basis for any such claim
(except for claims arising solely as a result of deposit accounts that he has at
the BANK), including, but not limited to, all matters related to BROOKS'
employment, compensation for employment and separation from employment or claims
pursuant to any rights under federal, state or local laws, regulations or
ordinances prohibiting discrimination on the basis of race, color, religion,
national origin, age, sex, sexual orientation, physical or mental disability and
specifically any claims arising under the ADEA, OWBPA, TITLE VII, CRA, ADA,
ERISA, and FEHA, as identified in paragraph 4 above.
8. As further consideration for this Agreement, BROOKS agrees that he
shall make himself available to the BANK for reasonable consultation in
connection and in cooperation with BANK and BANCSHARES with respect to matters
for which he may have personal knowledge, including but not limited to lawsuits
(without the necessity of a subpoena), collections, audits, investigations and
operations inquiries. Such consultation shall be provided without charge to the
BANK if it relates to factual information not known to others in the BANK and
shall be provided for a charge of $100 per hour for all other matters. In
addition, BROOKS agrees that he shall not use in any way nor disclose to any
person or entity any confidential information or trade secrets of the BANK,
directly or indirectly, at any time during the next four years or such
additional time beyond four years as may be permitted by law. BROOKS expressly
warrants that he has returned or will return on or before the date he executes
this Agreement, any and all confidential information or trade secrets previously
obtained from the BANK. BROOKS understands that such confidential information
and trade secrets include, but are not limited to customer client lists,
customer client information, vendor agreements, marketing and business
<PAGE>
development plans and policy and procedural manuals and that solicitation of now
existing customers of the Bank, interference with the BANK with respect to its
now existing locations and marketing agents and competition with the BANK with
respect to its now existing ATM locations (same owner/lessor and same site),
affinity groups and SAP merchants, is prohibited by this paragraph. The parties
agree that, in the event BROOKS violates the provisions of this paragraph, the
BANK cannot be reasonably or adequately compensated in damages in an action at
law as a result of BROOKS' breach of this Agreement. In such event and in
addition to having the right to rescind this Agreement and seek restitution of
any monies paid pursuant to this Agreement, the BANK shall be entitled to file
an action in a court of competent jurisdiction for damages and injunctive
relief, which may include but shall not be limited to restraining BROOKS from
taking any further action in violation of this paragraph.
9. In consideration of the terms of this Agreement, the BANK and
BANCSHARES acknowledge complete satisfaction of, and do hereby forever release,
absolve, and discharge BROOKS, including but not limited to his heirs,
successors, assigns, agents, attorneys, and representatives from any and all
causes of action, judgments, liens, indebtedness, damages, claims, liabilities,
and demands, and causes of action of whatever kind or nature, whether known or
unknown, suspected or unsuspected, which the BANK or BANCSHARES now has or
holds, or any time had or held against BROOKS, his heirs, successors, assigns,
agents, attorneys, and representatives. This release expressly waives any and
all claims the BANK and BANCSHARES may presently have against BROOKS regardless
of the nature, source, or basis for any such claim (except for claims arising
solely as a result of extensions of credit from the BANK or BANCSHARES to
BROOKS).
10. The parties acknowledge that this is a full and final release, and
that the parties intend and expressly agree that it will be effective as a bar
to each and every claim, demand and cause of action BROOKS has against the BANK
and BANCSHARES and the BANK or BANCSHARES has against BROOKS as of the date of
this Agreement. The parties also expressly waive any and all rights and benefits
conferred upon them now or in the future under
<PAGE>
the terms of California Civil Code section 1542, which provides as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the time of
executing the release, which, if known by him, must have materially
affected his settlement with the debtor."
11. By entering into this Agreement, none of the parties admits any
violation of any provisions of federal, state or local law or any other legal
obligation owed to each other and no incidental or implied admissions of
liability shall arise from execution of this document.
12. The parties agree that the events leading to this Agreement, the
fact of this Agreement and the terms and conditions of this Agreement are and
shall be maintained in privacy and confidence, unless otherwise required by law.
Both parties agree that this confidentiality is a material term of the
Agreement. The parties may disclose the terms of this Agreement to their own
attorneys, accountants or tax preparer on a confidential, as-needed basis, and
the BANK and BANCSHARES may do the same with regard to their internal operations
and with government regulators. The parties may disclose language to the effect
that BROOKS is retiring and that BROOKS has been the president of the BANK for
the past five years, during which the BANK has recorded historic earnings and
grown to an asset size in excess of One Hundred Twenty-Five Million Dollars and
the BANK and BANCSHARES may respond to inquiries and provide a reference letter
to appropriate potential employers in the form attached hereto as Exhibit B.
13. The parties agree that this Agreement constitutes the entire
agreement and understanding of the parties. The parties further agree that the
terms of this Agreement are contractual and that the parties, their heirs,
successors, and assigns are bound by it, and that any dispute as to its terms or
its interpretation is governed by the laws of the State of California. Should
any arbitrator or court of law find any term or clause invalid under the
prevailing law, then that term or clause only will be omitted from enforcement,
all other terms and conditions remaining enforceable.
14. BROOKS warrants that no promise, inducement or agreement not
expressed herein has been made in connection with this Agreement. It is
expressly understood and agreed that this Agreement may not be altered, amended,
modified, or otherwise changed in any respect whatsoever except by a writing
duly executed by authorized representatives of the parties thereto. BROOKS and
the BANK and BANCSHARES hereby agree that they will make no claim at anytime or
place that this Agreement has been orally altered or modified or otherwise
changed by oral communication or any kind or character.
15. The parties further state that they have read this Agreement, that
they know and understand the contents of this Agreement, and that they have
signed this Agreement of their own free act and after having a full,
unrestricted opportunity to consult with their own attorneys. The parties
approve and accept the terms and provisions of this Agreement and agree to be
bound thereby. This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
Dated: February ____, 1998
___________________
John O. Brooks
Dated: February ____, 1998
BAY AREA BANK
By___________________________
Dennis Royer
Chairman of the Board
Dated: February ____, 1998
BAY AREA BANCSHARES
By___________________________
Robert Haight
Chairman of the Board
APPROVED AS TO FORM:
- ------------------------
David J. Block
Leland, Parachini, Steinberg,
Matzger & Melnick
Counsel for BROOKS
APPROVED AS TO FORM:
- -------------------------
Jay D. Pimentel
Haines Brydon & Lea
Counsel for the BANK
and BANCSHARES
<PAGE>
AMENDED AND RESTATED
SALARY CONTINUATION AGREEMENT
THIS AMENDED AND RESTATED SALARY CONTINUATION AGREEMENT ("Agreement")
is made and entered into this _____ day of February, 1998, by and between Bay
Area Bancshares, a California corporation, Bay Area Bank, a California banking
corporation (collectively "Employer"), their successors or assigns, and John O.
Brooks (the "Executive").
WITNESSETH:
WHEREAS, the Executive is a member of Employer's key management team
and has been employed by Employer since November, 1992; and
WHEREAS, the experience of the Executive, his knowledge of the affairs
of the Employer, and his reputation and contacts in the banking industry has
been so valuable to Employer and Employer wishes to compensate the Executive for
his past contributions to Employer; and
WHEREAS, Employer and Executive have mutually agreed to permit
Executive to retire from his employment with Employer at this time; and
WHEREAS, this Agreement shall supersede any prior agreements between
Employer and Executive regarding any salary continuation benefits; and
WHEREAS, the Executive is willing to retire from the employ of the
Employer provided the Employer agrees to pay the Executive or his beneficiaries
certain benefits in accordance with the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of services performed in the past, as
well as the mutual promises and covenants herein contained, it is hereby agreed
as follows:
ARTICLE 1.
1.1. Beneficiary. The term Beneficiary shall mean the person or persons whom the
Executive shall designate in writing to receive the benefits provided hereunder.
1.2. Named Fiduciary and Plan Administrator. The named Fiduciary and Plan
Administrator of this plan shall be Bay Area Bank.
ARTICLE 2.
2.1. Employment. Employer has employed the Executive from November ___,
1992 until February ___, 1998.
<PAGE>
2.2. Fringe Benefits. The salary continuation benefits provided by this
Agreement are granted by the Employer as a fringe benefit to the Executive and
are not part of any salary reduction plan or any arrangement deferring a bonus
or a salary increase. The Executive has no option to take any current payment or
bonus in lieu of these salary continuation benefits.
ARTICLE 3.
3.1. Retirement. For purposes of this Agreement the Executive shall be
considered to have retired on April 30, 2006 (the "Retirement Date").
3.2. Payment. The Employer agrees that upon such Retirement Date it will pay to
the Executive the annual sum of Thirty-Six Thousand, Three Hundred Sixty-Three
Dollars and Sixty Cents ($36,363.60), payable on April 1st of each year
beginning on April 30, 2006 and ending on April 30, 2020, subject to the
conditions and limitations set forth in this Agreement.
3.3 Death After Retirement. The Employer agrees that if the Executive dies after
the Retirement Date but shall die before receiving the full amount of monthly
payments to which he is entitled under this Agreement, the Employer will
continue to make such monthly payments to the Executive's designated Beneficiary
for the remaining period. If a valid Beneficiary Designation is not in effect,
the payments shall be made to the John O. Brooks Family Revocable Trust Utd
4/5/91 (the "Brooks Family Trust").
ARTICLE 4.
4. Death Prior to Retirement Date. In the event the Executive should die at any
time after the date of this Agreement but prior to his Retirement Date, Employer
shall begin to make the payments required by Section 3.2 of this Agreement on
April 30 of the year following the death of the Executive. If a valid
Beneficiary Designation is not in effect, the payments shall be made to the
Brooks Family Trust.
ARTICLE 5.
5. Nonassignable. Neither the Executive, his spouse, nor any other beneficiary
under this Agreement shall have any power or right to transfer, assign,
anticipate, hypothecate, mortgage, commute, modify, or otherwise encumber in
advance any of the benefits payable hereunder, nor shall any of said benefits be
subject to seizure for the payment of any debts, judgments, alimony or separate
maintenance, owed by the Executive or his beneficiary or any of them, or be
transferable by operation of law in the event of bankruptcy, insolvency or
otherwise.
<PAGE>
ARTICLE 6.
6. Unsecured General Creditor. The Executive's rights are limited to the right
to receive payments as provided in this Agreement and the Executive's position
with respect thereto is that of a general unsecured creditor of the Employer.
ARTICLE 7.
7. Reorganization. The Employer shall not voluntarily engage in any merger,
reorganization, recapitalization or sale of all or substantially all of the
business or assets of the Employer unless and until such succeeding or
continuing corporation, firm, association, partnership, trust or person agrees
to assume and discharge the obligations of the Employer under this Agreement.
Upon the occurrence of such event, the term "Employer" as used in this Agreement
shall be deemed to refer to such successor or survivor corporation, firm,
association, partnership, trust or person.
ARTICLE 8. 8. Not a Contract of Employment. This Agreement shall not be deemed
to constitute a contract of employment between the parties hereto.
ARTICLE 9.
9. Liquidated Damages. The parties hereto, before entering into this Agreement,
have been concerned with the fact that substantial damages will be suffered by
Executive in the event that the Employer shall fail to perform according to this
Agreement. In the event of nonperformance by the Employer for a period of thirty
(30) days from the time any such payment was scheduled to be made pursuant to
this Agreement, Executive shall immediately be entitled to liquidated damages
equal to one and one-quarter (1-1/4) times the remaining payments due to
Executive under this Agreement. This provision shall not be applicable in the
event that such nonpayment is the result of prohibition of such payment by law,
regulations or order of a banking regulatory agency.
ARTICLE 10.
10.1 Successors and Assigns; Assignment. The rights and obligations of this
Agreement shall be binding upon and inure to the benefit of the successors,
assigns, heirs and personal representatives of the parties hereto. Executive may
not assign this Agreement or any of Executive's rights hereunder except with the
prior written consent of the Employer.
10.2 Severability. If any provision of this Agreement, as applied to either
party or to any circumstance, is judged by a court to be void or unenforceable,
in whole or in part,
<PAGE>
the same shall in no way affect any other provision of this Agreement, the
application of such provision in any other circumstances, or the validity or
enforceability of this Agreement.
10.3 Applicable Law; Jurisdiction and Venue. This Agreement and all matters or
issues collateral hereto shall be governed by the laws of the State of
California applicable to contracts performed entirely therein. Executive and
Employer each consent to the jurisdiction of, and any action concerning this
Agreement shall be brought and tried in, the Superior or Municipal Court for the
County of San Mateo.
10.4 Waiver. A waiver by either party of any of the terms or conditions of this
Agreement in any one instance shall not be deemed or construed to be a waiver of
such terms or conditions for the future, or of any subsequent breach thereof.
All remedies, rights, undertakings, obligations, and agreements contained in
this Agreement shall be cumulative, and none of them shall be in limitation of
any other remedy, right, undertaking, obligation or agreement of either party.
10.5 Attorneys' Fees. If any legal action or other proceeding is brought for the
enforcement of this Agreement, or because of an alleged dispute, breach,
default, or misrepresentation in connection with any of the provisions of this
Agreement, the successful or prevailing party or parties shall be entitled to
recover reasonable attorneys'fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
10.6 Headings. The headings in this Agreement are for convenience only and shall
not in any manner affect the interpretation or construction of the Agreement or
any of its provisions.
10.7 Notice. Any notice or other communication to be given under this Agreement
shall be in writing and shall be deemed to have been duly given on the date of
service if personally served, or if mailed, upon deposit in the United States
mail, first class postage prepaid, express or certified, return receipt
requested, and properly addressed to the parties as follows: if to Executive at
his last address shown in Bank's records; if to Employer
------------------------------------------------
------------------------------------------------
------------------------------------------------
Either party may designate a new address for purposes of this Section 10.7 by
giving the other notice of the new address as provided herein.
Signature page follows.
<PAGE>
IN WITNESS WHEREOF, the Employer has caused this Agreement to be duly executed
by its proper officers and the Executive has hereunto set his hand at Redwood
City, California, the day and year first above written.
EMPLOYER: EXECUTIVE:
Bay Area Bank _____________________________
John O. Brooks
By: ____________________________
Bay Area Bancshares
By: ______________________________
Its: Chairman
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statements on
Form S-8 of Bay Area Bancshares, SEC File No. 33-78242 and SEC File No. 33-48203
of our report dated February 6, 1998, on our audit of the consolidated financial
statements of Bay Area Bancshares as of december 31, 1997 and 1996 and for the
years then ended, appearing in the Annual Report on form 10-K of Bay Area
Bancshares for 1997.
/s/Coopers & Lybrand LLP
Coopers & Lybrand LLP
San Francisco, California
March 30, 1998
<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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,464
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,106
<INVESTMENTS-CARRYING> 14,482
<INVESTMENTS-MARKET> 14,683
<LOANS> 86,012
<ALLOWANCE> 1,638
<TOTAL-ASSETS> 122,085
<DEPOSITS> 107,426
<SHORT-TERM> 500
<LIABILITIES-OTHER> 500
<LONG-TERM> 0
0
0
<COMMON> 4,736
<OTHER-SE> 7,252
<TOTAL-LIABILITIES-AND-EQUITY> 122,085
<INTEREST-LOAN> 8,243
<INTEREST-INVEST> 1,029
<INTEREST-OTHER> 462
<INTEREST-TOTAL> 9,734
<INTEREST-DEPOSIT> 2,925
<INTEREST-EXPENSE> 2,953
<INTEREST-INCOME-NET> 6,781
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,995
<INCOME-PRETAX> 3,063
<INCOME-PRE-EXTRAORDINARY> 3,063
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,805
<EPS-PRIMARY> 2.04
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 9.9
<LOANS-NON> 373
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,638
<CHARGE-OFFS> 135
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 1,638
<ALLOWANCE-DOMESTIC> 1,638
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
