<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended: December 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
------------ ------------
Commission File Number: 0-12231
BAY COMMERCIAL SERVICES
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
California 77-2760444
(State or other jurisdiction of incorporation or organization (I.R.S. Employer Identification No.)
1495 East 14th Street, San Leandro, California 94577
(Address of principal executive offices) (Zip code)
Issuer's telephone number (510) 357-2265
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: Common Stock, No Par Value
(Title of Class)
</TABLE>
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year: $ 8,172,000
State the aggregate market value of the voting stock held by
nonaffiliates computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of March 1, 1996: $ 7,117,790
State the number of shares of Common Stock outstanding at March 5,
1996: 1,076,720
<TABLE>
<CAPTION>
Documents Incorporated by Reference: Part of Form 10-KSB
- ------------------------------------ -------------------
<C> <C>
1995 Annual Report to Shareholders for fiscal year Part II, Items 5, 6, 7 and 8
ended December 31, 1995.
Proxy Statement for 1996 Annual Part III, Items 9, 10, 11 and 12
Meeting of Shareholders to be filed
pursuant to Regulation 14A.
</TABLE>
Transitional Small Business Disclosure Format (Check one):
Yes No X
----- -----
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ITEM 1 - DESCRIPTION OF BUSINESS.......................................... 1
ITEM 2 - DESCRIPTION OF PROPERTY.......................................... 26
ITEM 3 - LEGAL PROCEEDINGS................................................ 27
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 27
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 27
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........ 27
ITEM 7 - FINANCIAL STATEMENTS............................................. 27
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 27
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................ 27
ITEM 10 - EXECUTIVE COMPENSATION........................................... 28
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 28
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 28
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K................................. 29
</TABLE>
<PAGE> 3
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
Bay Commercial Services (the "Company") is a California corporation and
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on June 7, 1981. Bay Bank of Commerce (the
"Bank"), was incorporated as a California banking corporation on August 11, 1980
and became a wholly-owned subsidiary of the Company through a reorganization in
1983.
At present, the Company's principal business is conducted through the
Bank. At December 31, 1995, the Company had total consolidated assets of
$92,819,000. The Bank accounted for $92,676,000 or 99.8% of the total assets of
the Company. The Company's primary source of income, other than interest earned
on the Company's capital, is the receipt of dividends and rent from the Bank.
The Bank is a full service commercial bank serving the cities of San Leandro and
Hayward and the surrounding area in California. The Company itself does not
engage in any business activities other than the ownership of the Bank, nor does
it own any other subsidiaries. The Company regularly reviews options to expand
the operations of the Bank and may seek opportunities for acquiring or forming
other banks and non-banking subsidiaries.
The Company is regulated by the Federal Reserve Board (the "FRB") and,
pursuant to that authority, is examined periodically by the Federal Reserve Bank
of San Francisco.
BAY BANK OF COMMERCE - GENERAL BANKING SERVICES
At December 31, 1995, the Bank had total assets of $92,676,000, total
loans of $58,152,000 and total deposits of $80,253,000. The Bank provides a wide
range of commercial banking services to individuals, professionals, and small
and medium-sized businesses through its principal office in San Leandro,
California and one branch office in Hayward, California. In order to attract
these types of customers, the Bank offers personalized services and banking
convenience. The services provided include checking, interest checking, savings
and interest-bearing demand, money market and other time deposit accounts;
commercial, real estate and consumer loans; travelers' checks; safe deposit
boxes; collection services; night depository facilities and wire and telephone
transfers. The Bank is a member of the Federal Deposit Insurance Corporation and
the deposits of each depositor are insured up to $100,000. Professional firms
and individuals and businesses form the core of the Bank's customer and deposit
base.
The Bank's Small Business Administration ("SBA") loan department has
been a component of the Bank's operations since 1985. Total SBA loan fundings
for 1995 were $1,090,000. None of these loans were sold by the Bank. With a
decline in SBA loan volume in recent years precipitated by increased competition
from other bank and non-bank financial entities, the Bank's SBA Division was
downsized during 1994 to better reflect the lower level of activity. The Bank is
still active in marketing SBA loans and continues as a Preferred (PLP) lender
with the Small Business Administration.
During 1994, the Bank inaugurated Bay Investment Services, a mutual
funds and annuities sales program, under which the Bank has contracted with
CoreLink Financial, Inc., a registered broker-dealer, to provide Bank customers
with the opportunity to purchase non-FDIC insured investment products. In June
1995, after one year of operations, the Bank determined that the market for
non-bank investment products was too limited and has stopped actively marketing
these products. The Bank does, however, intend to maintain its capability to
offer these products in order to satisfy customer needs.
EXISTING LOCATIONS
The Bank's headquarters are located at 1495 East 14th Street, San
Leandro, California and the Bank operates one branch office located at 1030 La
Playa Drive, Hayward, California. The Bank also has an extension office located
1
<PAGE> 4
at 1500 Washington Avenue, San Leandro, California, which houses its SBA
division. The Bank currently has no branch applications pending or any plans to
open additional branch offices.
DEPOSITS
Most of the Bank's deposits are obtained from individuals,
professionals and small and medium-sized businesses. As of December 31, 1995,
the Bank had a total of 3,495 accounts representing 1,433 noninterest- bearing
demand deposits (checking) accounts with an average balance of approximately
$17,700 each; 1,328 savings, interest-bearing demand, and money market accounts
with an average balance of approximately $19,300 each; and 734 time accounts
with an average balance of approximately $38,900 each.
LENDING ACTIVITIES
The Bank concentrates its lending activities in the areas of commercial
real estate mortgage loans, commercial loans to businesses and individuals and
real estate construction loans. At December 31, 1995, real estate loans held for
investment accounted for 60%, commercial loans accounted for 23%, SBA loans held
for sale accounted for 8%, real estate construction loans accounted for 4% and
consumer installment and other loans accounted for 5% of the Bank's loan
portfolio. See "SELECTED STATISTICAL INFORMATION -- LOAN PORTFOLIO AND LOAN
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES" herein for information
concerning the composition and maturities of the loan portfolio. The interest
rates charged by the Bank vary with the degree of risk and the size and maturity
of the loans involved and are generally affected by competition, governmental
regulation and current market interest rates.
Except as described in the discussion which accompanies Table F,
Summary of Nonaccrual, Past Due and Restructured Loans, the Bank's loan
portfolio is not concentrated in any one category and includes loans to
individuals, partnerships and corporations for diverse purposes.
At December 31, 1995, the Bank had net loans outstanding of
$57,170,000. Inherent in the lending function is the fact that loan losses will
be experienced and that the risk of loss will vary with the type of loan being
made and the creditworthiness of the borrower over the term of the loan. To
reflect currently perceived risks of loss associated with its loan portfolio,
adjustments are made to the Bank's allowance for loan losses. At December 31,
1995, the Bank's allowance for loan losses was $982,000 or 1.7% of total loans.
The Bank's entire allowance is a valuation allowance, which has been created by
direct charges against operations. See "SELECTED STATISTICAL INFORMATION --
SUMMARY OF LOAN LOSS EXPERIENCE" herein for a discussion of management's policy
for establishing and maintaining the allowance for loan losses.
CORRESPONDENT BANKS
The Bank has correspondent relationships with the Bank of California,
Union Bank, Bank of America, N.T.&S.A. and First Interstate Bank of California.
These relationships are a result of the Bank's efforts to obtain a wide range of
services for the Bank and its customers, including arranging loan
participations, investment services, sale of federal funds, and obtaining lines
for letters of credit. As a net seller of federal funds (overnight interbank
loans), the Bank also maintains such correspondent relationships to minimize the
risk of undue concentration of its resources with a few institutions. The Bank
does not currently serve, nor does it have plans to serve, as a correspondent to
other banks.
EMPLOYEES
At December 31, 1995, the Company employed thirty-eight (38) full-time
employees and eleven (11) part-time employees.
SELECTED STATISTICAL INFORMATION
The following tables present certain consolidated statistical
information concerning the business of the Company and the Bank. This
information should be read in conjunction with the consolidated financial
statements and the notes
2
<PAGE> 5
thereto included in the Company's 1995 Annual Report to Shareholders (the
"Annual Report"), which have been incorporated herein by reference.
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Table A sets forth the Company's consolidated average balance sheets
for the years ended December 31, 1995 and 1994 and an analysis of interest rates
and the interest rate differential.
Table B sets forth the changes in interest income and interest expense
in 1995 and 1994 resulting from changes in volume and changes in rates.
SECURITIES PORTFOLIO
The book value of investment securities and securities available for
sale at December 31, 1995 and 1994, and maturities and weighted average yield of
securities at December 31, 1995 are set forth in Table C.
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 1995 and 1994 is
summarized in Table D.
Maturities and sensitivity to changes in interest rates in the loan
portfolio, excluding real estate-mortgage loans, installment loans and lease
financing, at December 31, 1995 are summarized in Table E.
Table F shows the composition of nonaccrual, past due and restructured
loans at December 31, 1995 and 1994. Set forth in the text accompanying Table F
is a discussion of the Company's policy for placing loans on nonaccrual status.
SUMMARY OF LOAN LOSS EXPERIENCE
Table G sets forth an analysis of loan loss experience as of and for
the years ended December 31, 1995 and 1994.
Set forth in the text accompanying Table G is a description of the
factors which influenced management's judgment in determining the amount of the
additions to the allowance charged to operating expense in each fiscal year, a
table showing the allocation of the allowance for loan losses, as well as a
discussion of management's policy for establishing and maintaining the allowance
for loan losses.
DEPOSITS
Table H sets forth the average amount of and the average rate paid on
major deposit categories for the years ended December 31, 1995 and 1994.
Table I sets forth the maturity of time certificates of deposit of
$100,000 or more and other time deposits of $100,000 or more at December 31,
1995.
RETURN ON EQUITY AND ASSETS
Table J sets forth certain financial ratios for the years ended
December 31, 1995 and 1994.
3
<PAGE> 6
TABLE A
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table sets forth consolidated average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid; and
the average yields earned or rates paid thereon for the years ended December 31,
1995 and 1994. The average balances are averages of daily balances.
<TABLE>
<CAPTION>
1995 1994
--------------------------------- ---------------------------------
Average Average
Average Interest Rates Average Interest Rates
Balances Income Earned Balances Income Earned
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities (amortized cost):
Taxable $ 20,370 $ 1,217 5.97% $ 21,368 $ 1,076 5.04%
Non-taxable(1) 2,186 158 7.23% 2,113 186 8.80%
-------- -------- ----- -------- -------- -----
Total securities 22,556 1,375 6.10% 23,481 1,262 5.37%
Federal funds sold 6,469 368 5.69% 3,688 155 4.20%
Loans(2)(3) 52,627 5,764 10.95% 48,256 4,729 9.80%
-------- -------- ----- -------- -------- -----
Total interest-earning assets(1) 81,652 $ 7,507 9.19% 75,425 $ 6,146 8.15%
Less allowance for loan losses (852) (931)
Nonaccrual loans 203 853
Cash and due from banks 6,333 6,622
Premises and equipment 2,214 2,405
OREO 432 819
Other assets 1,140 977
-------- --------
TOTAL ASSETS $ 91,122 $ 86,170
======== ========
Average earning loans/average
earning assets 64.45% 63.98%
======== ========
</TABLE>
(continued)
4
<PAGE> 7
<TABLE>
<CAPTION>
1995 1994
--------------------------------- ---------------------------------
Average Average
Average Interest Rates Average Interest Rates
Balances Expense Paid Balances Expense Paid
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Savings and interest-bearing demand $27,529 $ 716 2.60% $28,008 $ 638 2.28%
Time 22,986 1,240 5.39% 19,803 833 4.21%
Certificates of deposit, $100,000 and 5,176 294 5.68% 6,406 261 4.07%
over
Other borrowed funds (4) 1,313 60 4.57% 1,021 34 3.33%
------- ------- ------- ------
Total interest-bearing liabilities 57,004 2,310 4.05% 55,238 1,766 3.20%
Demand deposits 24,571 22,473
Other liabilities 989 555
Shareholders' equity 8,558 7,904
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$91,122 $86,170
====== =======
Interest income and average rate 7,507 9.19% 6,146 8.15%
earned on earning assets(1)
Interest expense and average interest 2,310 2.83% 1,766 2.34%
cost related to earning assets
------- ---- ------ ----
Net interest income and margin (5) $ 5,197 6.36% $4,380 5.81%
======= ==== ====== ====
</TABLE>
- ------------
(1) Interest on non-taxable investment securities and total interest income
include the effect of taxable equivalent adjustments using the expected
federal corporate income tax rate of 34% in 1995 and 1994 in adjusting
interest on tax-exempt investment securities to a fully taxable basis.
The amount of the taxable equivalent adjustment was $51,000 and $60,000
in 1995 and 1994, respectively.
(2) Loan interest income includes loan fees of $271,000 in 1995 and $267,000
in 1994.
(3) Average loans do not include nonaccrual loans.
(4) Interest expense on other borrowed funds, does not include interest paid
on guarantee of ESOP debt, which is classified as ESOP expense.
(5) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
5
<PAGE> 8
TABLE B
RATE AND VOLUME ANALYSIS
The following table sets forth, for the periods indicated, a summary of
the changes in interest earned and interest paid resulting from changes in asset
and liability volumes and changes in rates. The change in interest due to both
rate and volume has been allocated to changes due to volume and rate in
proportion to the relationship of absolute dollar amounts of change in each.
<TABLE>
<CAPTION>
Period Ended December 31,
-------------------------
(Dollars in thousands)
1995 Compared to 1994 1994 Compared to 1993
--------------------- ---------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Securities:
Taxable (book value) $ (52) $ 193 $ 141 $ 349 $ (116) $ 233
Non-taxable (1) 6 (34) (28) (25) (6) (31)
------- ------- ------- ------- ------- -------
Total securities (46) 159 113 324 (122) 202
Federal funds sold 145 68 213 (9) 53 44
Loans 450 585 1,035 186 123 309
------- ------- ------- ------- ------- -------
Total (1) 549 812 1,361 501 54 555
------- ------- ------- ------- ------- -------
Interest expense:
Total interest bearing
liabilities:
Savings and interest-
bearing demand (11) 89 78 11 6 17
Time 148 259 407 93 118 211
Certificates of deposit,
$100,000 and over (56) 89 33 (29) 22 (7)
Other borrowed funds 12 14 26 (12) 5 (7)
------- ------- ------- ------- ------- -------
Total 93 451 544 63 151 214
------- ------- ------- ------- ------- -------
Net interest earnings (1) $ 456 $ 361 $ 817 $ 438 $ (97) $ 341
======= ======= ======= ======= ======= =======
</TABLE>
- -----------
(1) Taxable equivalent basis. See Note 1 to Table A.
6
<PAGE> 9
TABLE C
SECURITIES PORTFOLIO
The following tables set forth the amortized cost of securities held to
maturity and the market value of securities available for sale at December 31,
1995 and 1994 and the amortized cost, maturities, and weighted average yield of
securities at December 31, 1995.
<TABLE>
<CAPTION>
Amortized Cost
At December 31,
---------------
SECURITIES HELD TO MATURITY (In Thousands)
1995 1994
---- ----
<S> <C> <C>
Securities of U.S. government agencies and corporations $4,380 $11,869
Obligations of states and political subdivisions 2,831 2,954
------ -------
$7,211 $14,823
====== =======
</TABLE>
<TABLE>
<CAPTION>
Market Value
At December 31,
-------------------
SECURITIES AVAILABLE FOR SALE (In Thousands)
1995 1994
---- ----
<S> <C> <C>
Securities of U.S. government agencies and corporations $12,695 $ 2,792
Other securities 504 8,373
------- -------
$13,199 $11,165
======= =======
</TABLE>
7
<PAGE> 10
TABLE C
SECURITIES PORTFOLIO (CONTINUED)
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------------------------------------
AMORTIZED COST After One After Five
In One Year Through Through After
(Dollars in thousands) Or Less Five Years Ten Years Ten Years Total
------- ---------- --------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY:
Securities of U.S.
government agencies
and corporations $ -- -- $ 3,201 5.94% $ 996 6.71% $183 9.00% $ 4,380 6.24%
Obligations of states
and political
subdivisions (1) 241 6.29% 1,103 5.93% 1,487 5.12% -- -- 2,831 5.53%
------ ---- ------- ---- ------ ---- ---- ---- ------- ----
Total held to maturity 241 6.29% 4,304 5.94% 2,483 5.76% 183 9.00% 7,211 5.96%
------ ---- ------- ---- ------ ---- ---- ---- ------- ----
AVAILABLE FOR SALE:
Securities of U.S.
government agencies
and corporations 994 5.73% 7,551 5.90% 4,000 6.47% -- -- 12,545 6.06%
Other securities 500 7.86% -- -- -- -- -- -- 500 7.86%
------ ---- ------- ---- ------ ---- ---- ---- ------- ----
Total available for sale 1,494 6.44% 7,551 5.90% 4,000 6.47% -- -- 13,045 6.13%
------ ---- ------- ---- ------ ---- ---- ---- ------- ----
Total securities $1,735 6.42% $11,855 5.91% $6,483 6.19% $183 9.00% $20,256 6.07%
====== ==== ======= ==== ===== ==== ==== ==== ======= ====
</TABLE>
(1) Interest on non-taxable securities and total interest income include the
effect of taxable equivalent adjustments using the expected federal
corporate income tax rate of 34% in 1995 in adjusting interest on
tax-exempt investment securities to a fully taxable basis.
8
<PAGE> 11
TABLE C
SECURITIES PORTFOLIO (CONTINUED)
At December 31, 1995 investment securities from the following issuers
each totaled over ten percent (10%) of shareholders' equity of the Company:
<TABLE>
<CAPTION>
Amortized Cost Market Value
-------------- ------------
<S> <C> <C>
Federal Home Loan Mortgage
Corporation $ 4,732,121 $ 4,809,640
Federal National Mortgage 4,987,622 5,047,915
Association
Federal Home Loan Bank 6,204,143 6,269,390
Student Loan Marketing
Association 1,000,894 1,004,790
----------- -----------
$16,924,780 $17,131,735
</TABLE>
TABLE D
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 1995 and 1994 is
summarized in the table below.
<TABLE>
<CAPTION>
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Commercial, financial and agricultural $13,319 $12,416
Real estate:
Construction 2,250 1,039
Mortgage 35,137 33,229
Held for sale 4,984 3,929
Installment 1,211 885
Other 1,810 656
------- -------
58,711 52,154
Deferred loan fees (559) (588)
------- -------
$58,152 $51,566
======= =======
</TABLE>
9
<PAGE> 12
TABLE E
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table presents information concerning loan maturities and
sensitivity to changes in interest rates in the loan portfolio, as well as loans
that have fixed or floating interest rates at December 31, 1995.
(In Thousands)
<TABLE>
<CAPTION>
Maturity Distribution of After One After
Selected Loans: One Year Through Five
Or Less Five Years Years Total
-------- ---------- ------- -------
<S> <C> <C> <C> <C>
Commercial, financial $ 7,382 $ 4,278 $ 3,351 $15,011
and agricultural
Real estate-construction 2,250 -- -- 2,250
Other 4,414 12,074 24,962 41,450
------- ------- ------- -------
$14,046 $16,352 $28,313 $58,711
======= ======= ======= =======
Sensitivity to Changes
in Interest Rates:
Loans with fixed
interest rates $ 2,736 $ 6,553 $ 8,125 $17,414
Loans with floating
interest rates 41,297 -- -- 41,297
------- ------- ------- -------
$44,033 $ 6,553 $ 8,125 $58,711
======= ======= ======= =======
</TABLE>
TABLE F
SUMMARY OF NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
A summary of nonaccrual, past due and restructured loans at December 31,
1995 and 1994 is set forth below:
<TABLE>
<CAPTION>
December 31,
(In Thousands)
--------------
1995 1994
---- ----
<S> <C> <C>
Nonaccrual $ -- $626
Accruing loans past due 90
days or more 99 --
Restructured loans $ -- --
----- ----
$ 99 $626
===== ====
</TABLE>
The Company's consolidated financial statements are prepared on the
accrual basis of accounting, including the recognition of interest income on the
loan portfolio. Interest income from nonaccrual loans is not accrued on the
books, but rather is recorded only when and if received and the principal is
deemed to be collectible.
Loans are placed on a nonaccrual basis and any accrued but unpaid
interest is reversed and charged against income when the payment of interest or
principal is ninety days or more past due, except when the loan is well secured
10
<PAGE> 13
and in the process of collection. The Bank had no nonaccrual loans at December
31, 1995 and nonaccrual loans at December 31, 1994 constituted approximately
1.2% of total gross loans. Loans in the nonaccrual category are treated as
nonaccrual loans even though the Bank may ultimately recover all or a portion of
the interest due. The classification of a loan as a nonaccrual loan is not
necessarily indicative of a potential charge-off. The Senior Loan Officer, on at
least a quarterly basis, assesses the loan portfolio to determine which loans
should be added to or removed from the quarterly Watch list. The Bank's internal
Loan Review Examiner grades all new commercial loans and all credits where the
total liability equals or exceeds the reporting limit. If either the Senior Loan
Officer or the Loan Review Examiner detects a serious deficiency, the loan is
placed on the next quarterly Watch list.
Once a loan is on the Watch list, the Loan Officers are required to
complete a "Report of Collection Activity" and to make at least monthly status
reports. While the loan is on the Watch list, the Senior Loan Officer oversees
and coordinates the Loan Officer's efforts to either rehabilitate the loan or
effect collection in an expeditious manner.
Restructured loans reflect situations in which, due to the inability of
the borrower to comply with the original terms of the loan, the terms have been
modified, usually with the accrual of interest at a reduced rate. As of December
31, 1995, the Bank had no restructured loans.
There was no interest income on nonaccrual or restructured loans that
would have been recognized for the year ended December 31, 1995, if the loans
had been current in accordance with their original terms.
There are no loans, which were current at December 31, 1995, where
serious doubt exists as to the ability of the borrower to comply with the
present loan repayment terms.
Outstanding loans to contractors engaged in construction and land
development constituted $3,204,343 or 5% of total loans at December 31, 1995.
The loans are a cross-section of types, from commercial to real estate
construction, and are not all secured by real estate. The borrowers as a group,
however, are engaged in business activities which could be affected by changing
conditions in the real estate market. There were no other categories of loans
representing a concentration of 10% or more of total loans at December 31, 1995,
except as set forth in Table D above.
11
<PAGE> 14
TABLE G
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan loss experience as of and for the
years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
(Dollars in thousands)
<S> <C> <C>
Loans outstanding at December 31 $58,711 $52,154
======= =======
Average loans outstanding during period $52,830 $49,109
======= =======
Allowance for loan losses:
Balance at beginning of year $ 756 $ 866
Deduct loans charged-off:
Commercial, financial and agricultural -- 15
Real estate - mortgage 24 78
Other 3 40
------- -------
Total loans charged-off 27 133
------- -------
Add recoveries of loans charged-off:
Commercial, financial and agricultural 398 117
Other 10 6
------- -------
Total recoveries 408 123
------- -------
Net recoveries (charge-offs) 381 (10)
Add
Provision credited to operating expense 155 100
------- -------
Balance at end of year $ 982 $ 756
======= =======
Allowance for loan losses as a percentage
of outstanding loan balance 1.7% 1.5%
======= =======
Net recoveries to average loans outstanding 0.7% --%
======= =======
</TABLE>
In evaluating the allowance for loan losses, the Company considers such
factors as: historical loan loss experience; management's review of outstanding
credits; the current and projected size and composition of the loan portfolio;
expectations of future economic conditions and their impact on particular
industries and specific borrowers; evaluation of the underlying collateral for
secured loans; and periodic evaluations made by Bank regulatory authorities.
12
<PAGE> 15
Although the Bank does not specifically allocate its allowance for loan
losses on the basis of type of loan, using these criteria the allocation of the
allowance for loan losses would be as set forth below:
<TABLE>
<CAPTION>
Allowance for Loan Losses by Loan Type
1995 1994
---------------------------- ---------------------------
Percent of Loans Percent of Loans
in Each Category in Each Category
(Dollars in thousands) Amount to Total Loans Amount to Total Loans
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $184 23% $174 24%
Real estate - construction 11 4% 5 2%
Real estate - mortgage 256 60% 262 64%
Held for sale 14 8% 4 7%
Installment 19 2% 12 2%
Other 25 3% 10 1%
Unallocated 473 289
---- ----
$982 $756
==== ====
</TABLE>
The Company provides for potential loan losses by a charge to operating
income based upon the current composition of the loan portfolio, past loan loss
experience, current and projected economic conditions, an evaluation of the risk
elements in the loan portfolio and other factors that, in Management's judgment,
deserve recognition in estimating loan losses. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to make additions to the allowance based on their evaluations of information
available to them at the time of their examination. Management will charge off
loans to the allowance when it determines that there has been a permanent
impairment of the related carrying values.
13
<PAGE> 16
TABLE H
DEPOSITS
The following table sets forth the average amount of and the average
rate paid on certain deposit categories which were in excess of 10% of average
total deposits for the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
(Dollars in Thousands)
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Noninterest-bearing demand
deposits $24,571 N/A $22,473 N/A
Savings and interest-bearing
demand 27,529 2.60% 28,008 2.28%
Time 22,986 5.39% 19,823 4.20%
------- -------
$75,086 $70,304
======= =======
</TABLE>
TABLE I
TIME DEPOSITS
The following table sets forth the maturity of time certificates of
deposit of $100,000 or more and other time deposits of $100,000 or more at
December 31, 1995.
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Three months or less $10,749
Over 3 through 6 months 979
Over 6 through 12 months 900
Over 12 months 1,002
-------
$13,630
=======
</TABLE>
14
<PAGE> 17
TABLE J
RETURN ON EQUITY AND ASSETS
The following table sets forth certain financial ratios for the years
ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
---- ----
<S> <C> <C>
Net income $ 945 $ 619
Net income
To average assets 1.0% 0.7%
To average shareholders' equity 11.1% 7.9%
Dividends declared per share to .38 to 1 .36 to 1
net income per share
Average shareholders' equity to 9.4% 9.1%
average assets
</TABLE>
COMPETITION
In California and in the Bank's primary service area, major banks
dominate the commercial banking industry. Among the advantages these banks have
over the Bank are their ability to finance wide-ranging advertising campaigns
and to allocate their investment assets, including loans, to regions of higher
yield and demand. By virtue of their larger amounts of capital, such
institutions have substantially greater lending limits than the Bank and perform
certain functions, including trust services and international banking, which are
not presently offered directly by the Bank but are offered indirectly by the
Bank through correspondent institutions. The Bank also competes for loans and
deposits with savings and loan associations, finance companies, money market
funds, brokerage houses, credit unions, and other nonfinancial institutions.
The Bank's primary service area consists principally of the cities of
Oakland, San Leandro and Hayward and the unincorporated areas of Castro Valley
and San Lorenzo which, at June 30, 1995, contained eighty (80) competing banking
offices, including the Bank, and twenty-one (21) branch offices of other
independent banks. At June 30, 1995, the Bank's primary service area also
contained twenty-five (25) offices of savings and loan associations.
From time to time, legislation is proposed or enacted which has the
effect of increasing the cost of doing business, limiting permissible activities
or affecting the competitive balance between banks and other financial
institutions. It is impossible to predict the competitive impact these and other
changes in legislation will have on commercial banking in general or on the
business of the Bank in particular. See "SUPERVISION AND REGULATION - Recent and
Proposed Legislation".
SUPERVISION AND REGULATION
THE COMPANY
The Company, as a bank holding company, is subject to regulation under
the Bank Holding Company Act of 1956, as amended (the "BHC Act") and is
registered with and subject to the supervision of the Board of Governors of the
Federal Reserve System ("Federal Reserve"). It is the policy of the Federal
Reserve that each bank holding company serve as a source of financial and
managerial strength to its subsidiary banks. The Federal Reserve has the
authority to examine the Company and the Bank.
15
<PAGE> 18
The BHC Act requires the Company to obtain the prior approval of the
Federal Reserve before acquisition of all or substantially all of the assets of
any bank or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition, the Company would own or control, directly or
indirectly, more than 5% of the voting shares of such bank. However, amendments
to the BHC Act effected by the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Riegle-Neal"), which is discussed further below, expand
the circumstances under which a bank holding company may acquire control of or
all or substantially all of the assets of a bank located outside the State of
California.
The Company may not engage in any business other than managing or
controlling banks or furnishing services to its subsidiaries, with the exception
of certain activities which, in the opinion of the Federal Reserve, are so
closely related to banking or to managing or controlling banks as to be
incidental to banking. The Company is also generally prohibited from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company unless that company is engaged in such activities and unless the
Federal Reserve approves the acquisition.
The Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or provision of services. For example, with certain exceptions, the
Bank may not condition an extension of credit on a customer obtaining other
services provided by it, the Company or any other subsidiary, or on a promise by
the customer not to obtain other services from a competitor. In addition,
federal law imposes certain restrictions on transactions between the Bank and
its affiliates. Affiliates of the Bank and the Company are subject, with certain
exceptions, to the provisions of federal law imposing limitations on and
requiring collateral for loans by the Bank to any affiliate.
THE BANK
As a California state-licensed bank, the Bank is subject to regulation,
supervision and periodic examination by the California State Banking Department
("SBD") and the Federal Deposit Insurance Corporation ("FDIC"). The Bank is not
a member of the Federal Reserve System, but is nevertheless subject to certain
regulations of the Federal Reserve. The Bank's deposits are insured by the FDIC
to the maximum amount permitted by law, which is currently $100,000 per
depositor in most cases.
The regulations of these state and federal bank regulatory agencies
govern most aspects of the Bank's business and operations, including but not
limited to, the scope of its business, its investments, its reserves against
deposits, the nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
activities, and the maximum rates of interest allowed on certain deposits.
Under state law, the Bank may invest in capital stock, obligations or
other securities of corporations. However, as a result of federal legislation
enacted during 1991, the Bank will be prohibited from relying on these
provisions of state law in the future. See "Recent and Proposed Legislation,"
herein.
CHANGE IN CONTROL
The Holding Company Act and the Change in Bank Control Act of 1978, as
amended (the "Change in Control Act"), together with regulations of the Federal
Reserve, require that, depending on the particular circumstances, either Federal
Reserve approval must be obtained or notice must be furnished to the Federal
Reserve and not disapproved prior to any person or company acquiring "control"
of a bank holding company, such as the Company, subject to exemptions for
certain transactions. Control is conclusively presumed to exist if an individual
or company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has registered securities under Section 12 of the Exchange Act, or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The Financial Code also contains approval
requirements for the acquisition of 10% or more of the securities of a person or
entity which controls a California licensed bank. Finally, the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended (the "Hart-Scott Act"), together
with regulations of the Federal Trade
16
<PAGE> 19
Commission, may require certain filings to be made with the Federal Trade
Commission and the United States Department of Justice, and certain waiting
periods to expire, prior to consummation of an acquisition of a company's voting
securities.
CAPITAL ADEQUACY REQUIREMENTS
The Company is subject to the Federal Reserve's capital guidelines for
bank holding companies and the Bank is subject to the FDIC's regulations
governing capital adequacy for nonmember banks. As noted below, the federal
banking agencies have proposed regulations which would impose additional capital
requirements on banks based on the market risk in foreign exchange and commodity
activities and in the trading of debt and equity investments. In addition, the
Bank is subject to specific capital requirements imposed by the FDIC and the
SBD.
THE FEDERAL RESERVE AND FDIC
The Federal Reserve has established risk-based and leverage capital
guidelines for bank holding companies which are similar to the FDIC's capital
adequacy regulations for nonmember banks. The Federal Reserve guidelines apply
on a consolidated basis to bank holding companies with consolidated assets of
$150 million or more.
The Federal Reserve capital guidelines for bank holding companies and
the FDIC's regulations for nonmember banks set total capital requirements and
define capital in terms of "core capital elements," or Tier 1 capital(1) and
"supplemental capital elements," or Tier 2 capital(2). The maximum amount of
supplemental capital elements which qualifies as Tier 2 capital is limited to
one-hundred percent (100%) of Tier 1 capital, net of goodwill.
Both bank holding companies and nonmember banks are required to maintain
a minimum ratio of qualifying total capital to risk-weighted assets of eight
percent (8%), at least one-half of which must be in the form of Tier 1 capital.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Federal Reserve to those assets.
The Federal Reserve and the FDIC have established a minimum leverage
ratio of three percent (3%) Tier 1 capital to total assets for bank holding
companies and nonmember banks that have received the highest composite
regulatory rating and are not anticipating or experiencing any significant
growth. All other institutions are required to maintain a leverage ratio of at
least 100 to 200 basis points above the three percent (3%) minimum for a minimum
of four percent (4%) or five percent (5%).
- -------------------------
(1) Tier 1 capital is generally defined as the sum of the core capital
elements less goodwill and certain intangibles. The following items are defined
as core capital elements: (i) common shareholders' equity; (ii) qualifying
noncumulative perpetual preferred stock and related surplus; and (iii) minority
interests in the equity accounts of consolidated subsidiaries.
(2) Supplementary capital elements include: (i) allowance for loan and
lease losses (which cannot exceed 1.25% of an institution's risk weighted
assets); (ii) perpetual preferred stock and related surplus not qualifying as
core capital; (iii) hybrid capital instruments, perpetual debt and mandatory
convertible debt instruments; and (iv) term subordinated debt and
intermediate-term preferred stock and related surplus.
17
<PAGE> 20
Set forth below are the Company's and the Bank's risk based and leverage
capital ratios as of December 31, 1995:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
(Dollars in thousands)
Company Bank
------- ----
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Tier 1 Capital $8,674 13.6% $8,788 13.8%
Tier 1 Capital minimum requirement 2,551 4.0% 2,545 4.0%
------ ---- ------ ----
Excess $6,123 9.6% $6,243 9.8%
====== ==== ====== ====
Total Capital $9,471 14.9% $9,583 15.1%
Total Capital minimum requirement 5,101 8.0% 5,090 8.0%
------ ---- ------ ----
Excess $4,370 6.9% $4,493 7.1%
====== ==== ====== ====
Risk weighted assets $63,766 $63,623
======= =======
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
(Dollars in thousands)
Company Bank
------- ----
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital to average total assets $8,674 9.5% $8,788 9.7%
Range of minimum leverage 2,734 3.0% 2,729 3.0%
requirement to to to to
4,556 5.0% 4,549 5.0%
------
Range of excess 4,118 4.5% 4,239 4.7%
to to to to
$5,940 6.5% $6,059 6.7%
====== === ====== ===
Average total assets* $91,122 $90,974
======= =======
</TABLE>
(*Average total assets do not include unrealized gains/losses on securities
available for sale.)
18
<PAGE> 21
Recently adopted regulations by the federal banking agencies have
revised the risk-based capital standards to take adequate account of
concentrations of credit and the risks of non-traditional activities.
Concentrations of credit refers to situations where a lender has a relatively
large proportion of loans involving one borrower, industry, location, collateral
or loan type. Non-traditional activities are considered those that have not
customarily been part of the banking business but that start to be conducted as
a result of developments in, for example, technology or financial markets. The
regulations require institutions with high or inordinate levels of risk to
operate with higher minimum capital standards. The federal banking agencies also
are authorized to review an institution's management of concentrations of credit
risk for adequacy and consistency with safety and soundness standards regarding
internal controls, credit underwriting or other operational and managerial
areas.
Further, the banking agencies recently have adopted modifications to the
risk-based capital regulations to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from adverse movements in interest rates.
While interest risk is inherent in a bank's role as financial intermediary, it
introduces volatility to bank earnings and to the economic value of the bank.
The banking agencies have addressed this problem by implementing changes to the
capital standards to include a bank's exposure to declines in the economic value
of its capital due to changes in interest rates as a factor that the banking
agencies will consider in evaluating an institution's capital adequacy. Bank
examiners will consider a bank's historical financial performance and its
earnings exposure to interest rate movements as well as qualitative factors such
as the adequacy of a bank's internal interest rate risk management. The banking
agencies also have proposed an inter-agency policy statement to establish a
minimum capital charge for interest rate risk.
In certain circumstances, the FDIC or the Federal Reserve may determine
that the capital ratios for an FDIC-insured bank or a bank holding company must
be maintained at levels which are higher than the minimum levels required by the
guidelines or the regulations. A bank or bank holding company which does not
achieve and maintain the required capital levels may be issued a capital
directive by the FDIC or the Federal Reserve to ensure the maintenance of
required capital levels.
PAYMENT OF DIVIDENDS
The shareholders of the Company are entitled to receive dividends when
and as declared by its Board of Directors, out of funds legally available,
subject to the dividends preference, if any, on preferred shares that may be
outstanding and also subject to the restrictions of the California Corporations
Code. At December 31, 1995, there were no outstanding shares of preferred stock.
The principal sources of cash revenue to the Company have been dividends
received from the Bank. The Bank's ability to make dividend payments to the
Company is subject to state and federal regulatory restrictions.
Dividends payable by the Bank to the Company are restricted under
California law to the lesser of the Bank's retained earnings, or the Bank's net
income for the latest three fiscal years, less dividends previously declared
during that period, or, with the approval of the SBD, to the greater of the
retained earnings of the Bank, the net income of the Bank for its last fiscal
year or the net income of the Bank for its current fiscal year.
The FDIC has broad authority to prohibit a bank from engaging in banking
practices which it considers to be unsafe or unsound. It is possible, depending
upon the financial condition of the bank in question and other factors, that the
FDIC may assert that the payment of dividends or other payments by the bank is
considered an unsafe or unsound banking practice and therefore, implement
corrective action to address such a practice.
In addition to the regulations concerning minimum uniform capital
adequacy requirements discussed above, the FDIC has established guidelines
regarding the maintenance of an adequate allowance for loan and lease losses.
Therefore, the future payment of cash dividends by the Bank to the Company will
generally depend, in addition to regulatory approval, upon the Bank's earnings
during any fiscal period, the assessment of the respective Boards of Directors
of the
19
<PAGE> 22
capital requirements of such institutions and other factors, including the
maintenance of an adequate allowance for loan and lease losses and any
regulatory restrictions under which the institutions are operating.
IMPACT OF FEDERAL AND CALIFORNIA TAX LAWS
The following are the more significant federal and California income tax
provisions affecting commercial banks.
CORPORATE TAX RATES
The federal corporate tax rate is 34% for up to $10 million of taxable
income, and 35% for taxable income over $10 million. The 1% differential is
phased out between $15 million and approximately $18.3 million so that
corporations with over approximately $18.3 million of taxable income are taxed
at a flat rate of 35%.
CORPORATE ALTERNATIVE MINIMUM TAX
Generally, a corporation will be subject to an alternative minimum tax
("AMT") to the extent the tentative minimum tax exceeds the corporation's
regular tax liability. The tentative minimum tax is equal to (a) 20 percent of
the excess of a corporation's "alternative minimum taxable income" ("AMTI") over
an exemption amount, less (b) the alternative minimum foreign tax credit. AMTI
is defined as taxable income computed with special adjustments and increased by
the amount of tax preference items for a tax year. An important adjustment is
made for "adjusted current earnings," which generally measures the difference
between corporate earnings and profits (as adjusted) and taxable income.
Finally, a corporation's net operating loss (computed for AMT purposes), if any,
can be utilized only up to 90% of AMTI, with the result that a corporation with
current year taxable income will pay some tax.
BAD DEBT DEDUCTION
The Tax Reform Act of 1986 (the "1986 Act") required a bank with average
adjusted bases of all assets exceeding $500 million (a "large bank") to compute
its bad debt deduction using the specific charge-off method. Under that method,
a deduction is taken at the time the debt becomes partially or wholly worthless.
The 1986 Act, as modified by the Revenue Reconciliation Act of 1990 (the "1990
Act"), continued to permit a bank not meeting the definition of a large bank to
use either the specific charge-off method or the "experience" reserve method,
under which the addition to bad debt reserve is based on the bank's actual loss
experience for the current year and five preceding years. The U.S. Treasury has
promulgated regulations which permit a bank to elect to establish a conclusive
presumption that a debt is worthless, based on applying a single set of
standards for both regulatory and tax accounting purposes.
INTEREST INCURRED FOR TAX-EXEMPT OBLIGATIONS
Generally, taxpayers are not allowed to deduct interest on indebtedness
incurred to purchase or carry tax-exempt obligations. This rules applies to a
bank, to the extent of its interest expense that is allocable to tax-exempt
obligations acquired after August 7, 1986. A special exception applies, however,
to a "qualified tax-exempt obligation," which includes any tax-exempt obligation
that (a) is not a private activity bond and (b) is issued after August 7, 1986
by an issuer that reasonably anticipates it will issue not more than $10 million
of tax-exempt obligations (other than certain private activity bonds) during the
calendar year. Interest expense on qualified tax-exempt obligations is
deductible, although it is subject to a 20 percent disallowance under special
rules applicable to financial institutions.
NET OPERATING LOSSES
Generally, a bank is permitted to carry a net operating loss ("NOL")
back to the prior three tax years and forward to the succeeding fifteen tax
years. If the NOL of a commercial bank is attributable to a bad debt deduction
taken under the specific charge-off method after December 31, 1986, and before
January 1, 1994, however, such portion of the NOL may be carried back ten years
and carried forward five years. The 1990 Act clarified that a commercial bank's
bad debt loss is treated as a separate NOL to be taken into account after the
remaining portion of the NOL for the year.
20
<PAGE> 23
AMORTIZATION OF INTANGIBLE ASSETS INCLUDING BANK DEPOSIT BASE
Prior to the Revenue Reconciliation Act of 1993 (the "1993 Act"), there
was considerable controversy regarding the amortization (depreciation) of
certain intangible assets, such as customer lists and similar items. Generally,
the issue involved whether the intangible asset represented nonamortizable
goodwill or a separate and distinct asset which could be amortized over its
useful life.
The 1993 Act provides that certain intangible property acquired by a
taxpayer must be amortized over a 15 year period. For this purpose, acquired
assets required to be amortized include goodwill and the deposit base or any
similar asset acquired by a financial institution (such as checking and savings
accounts, escrow accounts and similar items). The 15 year amortization rule
generally applies to property acquired after August 10, 1993.
MARK-TO-MARKET RULES
The 1993 Act introduced certain "mark-to-market" tax accounting rules
for "dealers in securities." Under these rules, certain "securities" held at the
close of a taxable year must be marked to fair market value, and the unrealized
gain or loss inherent in the security must be recognized in that year for
federal income tax purposes. Under the definition of a "dealer," a bank or
financial institution that regularly purchases or sells loans may be subject to
the new rules. The rules generally are effective for tax years ending on or
after December 31, 1993.
Certain securities are excepted from the mark-to-market rules provided
the taxpayer timely complies with specified identification rules. The principal
exceptions affecting banks are for (1) any security held for investment and (2)
any note, bond, or other evidence of indebtedness acquired or originated in the
ordinary course of business and which is not held for sale. If a taxpayer timely
and properly identifies loans and securities as being excepted from the
mark-to-market rules, these loans and securities will not be subject to these
rules. Generally, a financial institution may make the identification of an
excepted debt obligation in accordance with normal accounting practices, but no
later than 30 days after acquisition.
CALIFORNIA TAX LAWS
A commercial bank is subject to the California franchise tax at a
special bank tax rate based on the general corporate (non financial) rate plus
2%. The rate for calendar income year 1995 was 11.3%. The applicable tax rate is
higher than that applied to general corporations because it includes an amount
"in lieu" of many other state and local taxes and license fees payable by such
corporations but generally not payable by banks and financial corporations.
California has adopted substantially the federal AMT, subject to certain
modifications. Generally, a bank is subject to California AMT in an amount equal
to the sum of (a) seven percent of AMTI (computed for California purposes) over
an exemption amount and (b) the excess of the bank tax rate over the general
corporation tax rate applied against net income for the taxable year, unless the
bank's regular tax liability is greater.
California permits a bank to compute its deduction for bad debt losses
under either the specific charge-off method or according to the amount of a
reasonable addition to a bad debt reserve.
California has incorporated the federal NOL provisions, subject to
significant modifications for most corporations. First, NOLs arising in income
years beginning before 1987 are disregarded. Second, no carryback is permitted,
and for most corporations NOLs may be carried forward only five years. Third, in
most cases, only fifty percent of the NOL for any income year may be carried
forward. Fourth, NOL carryover deductions are suspended for income years
beginning in calendar years 1991 and 1992, although the carryover period is
extended by one year for losses sustained in income years beginning in 1991 and
by two years for losses sustained in income years beginning before 1991.
Finally, the special federal NOL rules regarding bad debt losses of commercial
banks do not apply for California purposes.
21
<PAGE> 24
Finally, in 1994, California enacted legislation conforming to the
federal tax treatment of amortization of intangibles and goodwill, with certain
modifications. No deduction is allowed under this provision for any income year
beginning prior to 1994.
The various laws discussed herein contain other changes that could have
a significant impact on the banking industry. The effect of these changes is
uncertain and varied, and it is unclear to what extent any of these changes may
influence the Company's or the Bank's operations or the banking industry
generally.
In addition, there are several tax bills currently pending before
Congress which could have a significant impact on the banking industry. As of
March 18, 1996, it is uncertain whether these bills will be enacted and what
impact these bills will have on the Company or the Bank.
IMPACT OF MONETARY POLICIES
The earnings and growth of the Bank and the Company are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment. The earnings of the Bank and, therefore, the
Company, are affected not only by general economic conditions but also by the
monetary and fiscal policies of the United States and federal agencies,
particularly the Federal Reserve. The Federal Reserve can and does implement
national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States Government securities
and by its control of the discount rates applicable to borrowings by banks from
the Federal Reserve System. The actions of the Federal Reserve in these areas
influence the growth of bank loans, investments and deposits and affect the
interest rates charged on loans and paid on deposits. As demonstrated recently
by the Federal Reserve's actions regarding interest rates, its policies have had
a significant effect on the operating results of commercial banks and are
expected to continue to do so in the future. The nature and timing of any future
changes in monetary policies are not predictable.
RECENT AND PROPOSED LEGISLATION
Federal and state laws applicable to financial institutions have
undergone significant changes in recent years. The most significant recent
federal legislative enactments are the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Riegle-Neal") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA").
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994
In September 1994, President Clinton signed Riegle-Neal, which amends
the BHC Act and the Federal Deposit Insurance Act ("FDIA") to provide for
interstate banking, branching and mergers. Subject to the provisions of certain
state laws and other requirements, on September 29, 1995, one year after the
date of its enactment, Riegle-Neal allows a bank holding company that is
adequately capitalized and adequately managed to acquire a bank located in a
state other than the holding company's home state regardless of whether or not
the acquisition is expressly authorized by state law. Similarly, beginning on
June 1, 1997, the federal banking agencies may approve interstate merger
transactions, subject to applicable restrictions and state laws. Further, a
state may elect to allow out of state banks to open de novo branches in that
state. Riegle-Neal includes several other provisions which may have an impact on
the Company's and the Bank's business. The provisions include, among other
things, a mandate for review of regulations to equalize competitive
opportunities between U.S. and foreign banks, evaluation on a bank-wide,
state-wide and, if applicable, metropolitan area basis of the Community
Reinvestment Act compliance of banks with interstate branches, and, in the event
the FDIC is appointed as conservator or receiver of a financial institution, the
revival of otherwise expired causes of action for fraud and intentional
misconduct resulting in unjust enrichment or substantial loss to an institution.
California has adopted the Caldera, Weggeland, and Killea California
Interstate Banking and Branching Act of 1995 (the "IBBA"), which became
effective on October 2, 1995. The IBBA is concerned with the supervision of
state chartered banks which operate across state lines, and covers such areas as
branching, applications for new facilities and mergers, consolidations and
conversions, among other things. The IBBA allows a California state bank to have
agency relationships with affiliated and unaffiliated insured and depository
institutions and allows a bank subsidiary of a bank
22
<PAGE> 25
holding company to act as an agent to receive deposits, renew time deposits,
service loans and receive payments for a depository institution affiliate. In
addition, pursuant to the IBBA, California "opts in early" to the Riegle-Neal
provisions regarding interstate branching, allowing a state bank chartered in a
state other than California to acquire by merger or purchase, at any time after
effectiveness of the IBBA, a California bank or industrial loan company which is
at least five (5) years old and thereby establish one or more California branch
offices. However, the IBBA prohibits a state bank chartered in a state other
than California from entering California by purchasing a California branch
office of a California bank or industrial loan company without purchasing the
entire entity or by establishing a de novo California branch office.
The changes effected by Riegle-Neal and the IBBA may increase the
competitive environment in which the Company and the Bank operate in the event
that out of state financial institutions directly or indirectly enter the Bank's
market area. It is expected that Riegle-Neal will accelerate the consolidation
of the banking industry as a number of the largest bank holding companies
attempt to expand into different parts of the country that were previously
restricted. However, at this time, it is not possible to predict what specific
impact, if any, Riegle-Neal and the IBBA will have on the Company or the Bank,
the competitive environment in which the Company and the Bank operate, or the
impact on the Company or the Bank of any regulations to be proposed under
Riegle-Neal or the IBBA.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA")
General
FDICIA primarily addresses the safety and soundness of the deposit
insurance funds, supervision of and accounting by insured depository
institutions and prompt corrective action by the federal bank regulatory
agencies with respect to troubled institutions. FDICIA gives the FDIC, in its
capacity as federal insurer of deposits, broad authority to promulgate
regulations to assure the viability of the deposit insurance funds, including
regulations concerning safety and soundness standards. FDICIA also places
restrictions on the activities of state-chartered institutions and on
institutions failing to meet minimum capital standards and provides enhanced
enforcement authority for the Federal banking agencies. FDICIA also strengthened
Federal Reserve Act regulations regarding insider transactions.
Prompt Corrective Action
FDICIA amended the FDIA to establish a format for closer monitoring of
insured depository institutions and to enable prompt corrective action by
regulators when an institution begins to experience difficulty. The general
thrust of these provisions is to impose greater scrutiny and more restrictions
on institutions as they descend the capitalization ladder.
23
<PAGE> 26
FDICIA establishes five capital categories for insured depository
institutions: (a) Well Capitalized;(3) (b) Adequately Capitalized;(4) (c)
Undercapitalized;(5) (d) Significantly Undercapitalized;(6) and (e) Critically
Undercapitalized.(7) All insured institutions (e.g., the Bank) are barred from
making capital distributions or paying management fees to a controlling person
(e.g., the Company) if to do so would cause the institution to fall into any of
the three undercapitalized categories.
An institution which is undercapitalized, significantly undercapitalized
or critically undercapitalized becomes subject to the following mandatory
supervisory actions immediately upon notification of its capital category: (1)
restrictions on payment of capital distributions, such as dividends; (2)
restrictions on payment of management fees to any person having control of the
institution; (3) close monitoring by the FDIC of the condition of the
institution, compliance with capital restoration plans, restrictions, and
requirements imposed under Section 38 of the FDIA, and periodic review of the
institution's efforts to restore its capital and comply with restrictions; (4)
requirement that the institution submit within the time allowed by the FDIC a
capital restoration plan, which must include (a) the steps the institution will
take to become adequately capitalized, (b) the levels of capital to be attained
during each year in which the plan will be in effect, (c) how the institution
will comply with restrictions or requirements imposed on its activities, (d) the
types and levels of activities in which the institution will engage, and (e)
such other information as the FDIC may require; (5) requirement that any company
which controls an undercapitalized institution must guarantee, in an amount
equal to 5% of the institution's total assets or the amount needed to bring the
institution into full capital compliance, that the institution will comply with
the capital restoration plan until the institution has been adequately
capitalized, on the average, for four consecutive quarters; (6) restrictions on
growth of the institution's total assets so that its average total assets during
any calendar quarter do not exceed its average total assets during the preceding
calendar quarter unless (a) the FDIC has accepted the institution's capital
restoration plan, (b) any increase in total assets is consistent with the
capital restoration plan, and (c) the institution's ratio of tangible equity to
assets increases during the calendar quarter at a rate sufficient to enable the
institution to become adequately capitalized within a reasonable time; and (7)
limitations on the institution's ability to make any acquisition, open any new
branch offices or engage in any new line of business unless the FDIC has
accepted the institution's capital plan and has granted prior approval.
In addition to the above, the FDIC may take any of the actions described
below for institutions which fail to submit and implement a capital restoration
plan.
Significantly undercapitalized and undercapitalized institutions that
fail to submit and implement adequate capital restoration plans are subject to
the mandatory provisions set forth above and, in addition, will be required to
do or comply with one or more of the following: (1) sell enough additional
capital, including voting shares, to bring the institution to an adequately
capitalized level or if one or more grounds exist for appointing a conservator
or receiver for the institution,
- -------------------------
(3) Well Capitalized means a financial institution with a total risk-based
ratio of 10% or more, a Tier 1 risk-based ratio of 6% or more and a leverage
ratio of 5% or more, so long as the institution is not subject to any written
agreement or order issued by the FDIC.
(4) Adequately Capitalized means a total risk-based ratio of 8% or more, a
Tier 1 risk-based ratio of 4% or more and a leverage ratio of 4% or more (3% or
more if the institution has received the highest composite rating in its most
recent report of examination) and does not meet the definition of a Well
Capitalized institution.
(5) Undercapitalized means a total risk-based capital ratio of less than
8%, a Tier 1 risk-based capital ratio of less than 4% or a leverage ratio of
less than 4%.
(6) Significantly Undercapitalized means a financial institution with a
total risk-based ratio of less than 6%, a Tier 1 risk-based ratio of less than
3% or a leverage ratio of less than 3%.
(7) Critically Undercapitalized means a financial institution with a ratio
of tangible equity to total assets that is equal to or less than 2%.
24
<PAGE> 27
be acquired by or combined with another insured depository institution; (2)
restrict transactions with affiliates; (3) restrict interest rates paid on
deposits to the prevailing rates in the region where the institution is located,
as determined by the FDIC; (4) restrict asset growth or reduce total assets more
stringently than described above; (5) terminate, reduce or alter any activity
(including any activity conducted by a subsidiary of the institution) determined
by the FDIC to pose an excessive risk to the institution; (6) hold a new
election for the institution's board of directors; (7) dismiss directors or
senior officers and/or employ new officers, subject to agency approval; (8)
cease accepting deposits from correspondent depository institutions, including
renewals and rollovers of prior deposits; (9) divest or liquidate any subsidiary
that is in danger of becoming insolvent and poses a significant risk to the
institution or that is likely to cause significant dissipation of the
institution's assets or earnings; or (10) take any other action that the FDIC
determines to be appropriate.
In addition, significantly undercapitalized institutions are prohibited
from paying any bonus or raise to a senior executive officer without prior FDIC
approval. No such approval will be granted to an institution which is required
but has failed to submit an acceptable capital restoration plan. Further, the
FDIC may impose one or more of the restrictions applicable to critically
undercapitalized institutions set forth below.
In addition to all of the above restrictions, a critically
undercapitalized institution must be placed in conservatorship or receivership
within 90 days of becoming critically undercapitalized, unless the FDIC
determines that other action would better achieve the purposes of the FDIA. A
determination of alternate action by the FDIC is effective for only 90 days,
after which period the FDIC must reexamine whether to appoint a conservator or
receiver for the bank. Critically undercapitalized institutions which are not
placed in conservatorship or receivership may be subject to additional stringent
operating restrictions.
Other Provisions of FDICIA
FDICIA required the federal banking agencies to adopt regulations or
guidelines with respect to safety and soundness standards. The agencies have
adopted uniform Guidelines which are used, primarily in connection with
examinations, to identify and address problems at insured depository
institutions before capital becomes impaired. The federal bank regulatory
agencies recently proposed asset quality and earnings standards which would be
added to the safety and soundness Guidelines.
FDICIA restricts the acceptance of brokered deposits by insured
depository institutions that are not well capitalized. It also places
restrictions on the interest rate payable on brokered deposits and the
solicitation of such deposits. An undercapitalized institution will not be
allowed to solicit brokered deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on insured deposits
in the particular institution's normal market areas or in the market area in
which such deposits would otherwise be accepted. In addition to these
restrictions on acceptance of brokered deposits, FDICIA provides that no
pass-through deposit insurance will be provided to employee benefit plan
deposits accepted by an institution which is ineligible to accept brokered
deposits under applicable law and regulations.
FDICIA also adds grounds to the previously existing list of reasons for
appointing a conservator or receiver for an insured depository institution.
Pursuant to FDICIA, the FDIC has established a risk-based assessment
system for depository institutions. This risk-based system is used to calculate
a depository institution's semiannual deposit insurance assessment based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution.
FDICIA also places restrictions on insured state bank activities and
equity investments, interbank liabilities and extensions of credit to insiders
and transactions with affiliates.
Finally, the federal banking agencies recently have proposed regulations
establishing new capital requirements for general market risk and specific risk
as they pertain to the trading activities of a banking organization and to the
organization's other foreign exchange and commodities activities. Because these
and other proposed regulations are
25
<PAGE> 28
subject to change before they are adopted in final form, their ultimate impact
on the Company and the Bank cannot yet be determined.
OTHER
Other legislation which has been or may be proposed to the United States
Congress and the California Legislature and regulations which may be proposed by
the Federal Reserve, the FDIC and the SBD may affect the business of the Company
or the Bank. It cannot be predicted whether any pending or proposed legislation
or regulations will be adopted or the effect such legislation or regulations may
have upon the business of the Company or the Bank.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company and the Bank have their principal offices in a modern
facility located at 1495 East 14th Street, San Leandro, California 94577, which
serves as the Bank's headquarters office. The headquarters office consists of
11,000 square feet of interior space and includes eight (8) teller stations, a
night depository and an automated teller machine.
The Bank entered into a lease for the premises which commenced on April
1, 1981, extends for a term of twenty-five years and provided for rental
payments of $4,000 per month for the first ten years of the lease term. On the
tenth anniversary, April 1, 1991, the monthly rental payment obligation of the
Bank was raised to $10,310. As of the fifteenth anniversary, April 1, 1996 and
for the five year period ending March 31, 2001, the monthly rental payment
obligation of the Bank will remain at $10,310. Each fifth anniversary
thereafter, the monthly rental amount is to be adjusted as negotiated by the
Bank and the lessor or, if the parties are unable to agree on such adjustment,
by arbitration. The lease also grants to the Bank a right of first refusal in
the event of a proposed sale of the leased premises.
The Bank entered into an 18-year lease which commenced on October 1,
1987, pursuant to which the Bank acquired an additional 3,000 square feet of
office space at 1475 East 14th Street adjacent to its original headquarters
office. The lease provided for monthly rental payments of $1,800 for the first
three years, and $2,200, $2,680, and $3,270, respectively, for each subsequent
five-year period. The area accommodates the accounting department, computer
operations, storage facilities and certain operations functions.
The Bank has invested approximately $2,630,000 through December 31, 1995
in leasehold improvements and furniture, fixtures and equipment in its
headquarters office, which includes 1495 and 1475 East 14th Street, San Leandro.
The Bank's SBA and construction divisions ares located in the Bank's
extension office at 1500 Washington Avenue, San Leandro, California 94577. The
premises consists of a one-story wood frame structure which has a floor area of
2,072 square feet. There is a parking lot adjacent to the building. The property
was purchased by the Company at a cost of $196,512 in 1985, and the premises are
leased from the Company by the Bank for the SBA and construction divisions at a
monthly rental of $2,000. The Bank invested approximately $254,000 in leasehold
improvements and furniture, fixtures and equipment in its extension office
through December 31, 1995.
The Bank's Hayward branch office is located in a modern facility at 1030
La Playa Drive, Hayward, California. The Hayward branch office consists of 4,285
square feet of interior space and includes four (4) teller stations, and a night
depository and an automated teller machine.
The Bank purchased the Hayward branch premises in February, 1993 at a
total cost of $700,000. The Bank invested approximately $688,000 in leasehold
improvements and furniture, fixtures and equipment in its Hayward branch office
through December 31, 1995.
26
<PAGE> 29
ITEM 3 - LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings other than
ordinary routine litigation incidental to their respective businesses nor are
any such proceedings known to be contemplated by governmental authorities.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
For information concerning the Company's Common Stock and related
shareholder matters, see "Stock Prices and Dividend Information" on the inside
back cover of the Annual Report, which is incorporated herein by reference, and
"SUPERVISION AND REGULATION" under the heading "ITEM 1 - BUSINESS" above.
As of March 5, 1996, there were 465 holders of record of the Company's
Common Stock.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
For Management's Discussion and Analysis, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" at Pages 15
through 19 of the Annual Report, which is incorporated herein by reference.
ITEM 7 - FINANCIAL STATEMENTS
For consolidated financial statements of the Company, see consolidated
balance sheets at December 31, 1995 and 1994, and consolidated income
statements, consolidated statements of cash flows and consolidated statements of
shareholders' equity for the years ended December 31, 1995, 1994 and 1993, and
notes to consolidated financial statements for the years ended December 31,
1995, 1994 and 1993 and the "Independent Auditors' Report" thereon at Pages 2
through 13 of the Annual Report, which are incorporated herein by reference.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
For information concerning directors and executive officers of the
Company, see "ELECTION OF DIRECTORS OF THE COMPANY" in the definitive Proxy
Statement for the Company's 1996 Annual Meeting of Shareholders to be filed
pursuant to Regulation 14A (the "Proxy Statement"), which is incorporated herein
by reference.
27
<PAGE> 30
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. To the best knowledge of the Company, there are no greater than
ten-percent holders of the Company's Common Stock other than Richard M. Kahler,
President and Chief Executive Officer of the Company.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, for fiscal year 1995, the
officers and directors of the Company complied with all applicable filing
requirements, except that director William E. Peluso failed to file a Report of
Changes in Beneficial Ownership on Form 4 to report one transaction in
securities, which was subsequently reported during 1996.
ITEM 10 - EXECUTIVE COMPENSATION
For information concerning executive compensation, see "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial
owners and management, see "PRINCIPAL SHAREHOLDERS" and "ELECTION OF DIRECTORS
OF THE COMPANY" in the Proxy Statement, which is incorporated herein by
reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related
transactions, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and
"INDEBTEDNESS OF MANAGEMENT" in the Proxy Statement, which is incorporated
herein by reference.
28
<PAGE> 31
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS REFERENCE PAGE
- -------------------- --------------
1995
Annual Form
Report 10-KSB
------ ------
<S> <C> <C>
1. CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets at December 31, 1995
and 1994 ................................. 2
Income Statements for the years
ended December 31, 1995, 1994 and
1993 ..................................... 3
Statements of Cash Flows for the
years ended December 31, 1995,
1994 and 1993............................. 4
Statements of Shareholders' Equity
for the years ended December 31,
1995, 1994 and 1993 ...................... 5
Notes to Consolidated Financial
Statements ............................... 6 - 13
Independent Auditors' Report .............. 13
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES:
In accordance with Regulation S-X, the financial statement schedules
have been omitted because (a) they are not applicable to or required of the
Company; or (b) the information required is included in the consolidated
financial statements or notes thereto.
EXHIBITS
See Index to Exhibits at pages 33-35 of this Form 10-KSB.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1995.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
No. 2-97378, 33-24302 and 33-75330.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against
29
<PAGE> 32
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
30
<PAGE> 33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 21 , 1996 BAY COMMERCIAL SERVICES
----
By: /s/Richard M. Kahler
--------------------------------
Richard M. Kahler,
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/Richard M. Kahler DATE: March 21 , 1996
- ------------------------------------- ----
Richard M. Kahler,
President and Chief Executive
Officer (Principal Executive Officer)
and Director
Randall D. Greenfield* DATE: March 21 , 1996
- ------------------------------------- ----
Randall D. Greenfield,
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
and Secretary
Joshua Fong* DATE: March 21 , 1996
- ------------------------------------- ----
Joshua Fong, O.D.,
Chairman of the Board of
Directors and Director
DATE: March , 1996
- ------------------------------------- ---
William R. Henson,
Director
DATE: March , 1996
- ------------------------------------- ---
Dimitri V. Koroslev,
Director
31
<PAGE> 34
William E. Peluso* DATE: March 21 , 1996
- ------------------------------------- ----
William E. Peluso,
Director
Oswald A. Rugaard* DATE: March 21 , 1996
- ------------------------------------- ----
Oswald A. Rugaard
Director
*By /s/Richard M. Kahler
---------------------------------
(Richard M. Kahler,
as Attorney-in-Fact)
32
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------- ------- -------------
<S> <C> <C>
2 Not applicable. *
3.1 Articles of Incorporation of *
Company, as amended to date. (1)
3.2 Bylaws of Company, as amended to *
date. (1)
4 Not applicable. *
9 Not applicable. *
10.1 Lease dated September 28, 1980 *
between Bay Bank of Commerce
and John J. Montero and
Margaret Montero. (2)
10.2 Employee Stock Ownership Plan ___
of Bay Bank of Commerce, as amended
and restated as of January 1, 1987.
10.3 Bay Commercial Services 1982 *
Amended and Restated Stock
Option Plan. (3)
10.4 Form of Stock Option Agreements,
Amended Stock Option Agreements and
Supplemental Letter under Bay
Commercial Services 1982 Amended
and Restated Stock Option Plan. (4)
10.5 Lease dated October 1, 1987 for *
Bay Bank of Commerce premises at
1475 East 14th Street, San Leandro,
California. (4)
10.6 Bay Commercial Services Directors' *
Stock Option Plan and Form of
Directors Stock Option Agreement. (5)
</TABLE>
33
<PAGE> 36
<TABLE>
<S> <C> <C>
10.7 Letter dated December 5, 1990 *
modifying rental obligation
under Lease dated September 28,
1980 between Bay Bank of Commerce
and John J. Montero and Margaret
Montero. (6)
10.8 Lease dated November 1, 1990 by *
and between Metro Properties and
Bay Bank of Commerce for premises
located at 286 Juana Avenue,
San Leandro, California. (6)
10.9 Bay Commercial Services Adoption *
Agreement of Nonstandardized Section401(k)
Profit Sharing Plan and Bank of
California Defined Contribution
Master Plan and Trust Agreement. (7)
10.10 Bay Commercial Services 1994 Stock *
Option Plan and Form of Stock Option
Agreements. (8)
10.11 Mutual Funds and Annuity Services Agreement *
entered into as of February 17, 1994 by and
between Bay Bank of Commerce and CoreLink
Financial, Inc. (8)
11 Not applicable. *
12 Not applicable. *
13 Bay Commercial Services 1995 Annual Report ___
to Shareholders (parts not incorporated by
reference are furnished for informational purposes
only and are not filed herewith).
16 Not applicable. *
18 Not applicable. *
21 Subsidiaries of the Company. (2) *
22 Not applicable. *
</TABLE>
34
<PAGE> 37
<TABLE>
<S> <C> <C>
23 Independent Auditors' Consent. ___
24 Power of Attorney. ___
27 Financial Data Schedule. ___
28 Not applicable. *
</TABLE>
- -----------------------
* Not applicable.
(1) Filed as Exhibits 3.2 and 3.4, respectively, to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993, which are
incorporated herein by this reference.
(2) Filed as Exhibit 10.4 to the Company's Registration Statement on Form S-14
(Registration No. 2-79801), which is incorporated herein by this reference.
(3) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 1987, which is incorporated herein by this
reference.
(4) Filed as Exhibits 10.10 and 10.12, respectively, to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987, which are
incorporated herein by this reference.
(5) Filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988, which is incorporated herein by this
reference.
(6) Filed as Exhibits 10.10 and 10.11, respectively, to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990, which are
incorporated herein by this reference.
(7) Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, which is incorporated herein by this
reference.
(8) Filed as Exhibits 10.14 and 10.15, respectively, to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, which are
incorporated herein by this reference.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
1. Bay Commercial Services Employee Stock Ownership Plan, as amended and
restated as of January 1, 1987 - Form 10-K for fiscal year ended December
31, 1995, Exhibit 10.2.
35
<PAGE> 38
2. Bay Commercial Services 1982 Amended and Restated Stock Option Plan - Form
10-Q for the Quarter Ended September 30, 1987, Exhibit 10.1.
3. Form of Stock Option Agreements, Amended Stock Option Agreements and
Supplemental Letter under Bay Commercial Services 1982 Amended and Restated
Stock Option Plan - Form 10-K for fiscal year ended December 31, 1987,
Exhibit 10.10.
4. Bay Commercial Services Directors' Stock Option Plan and Form of Directors
Stock Option Agreement - Form 10-K for fiscal year ended December 31, 1988,
Exhibit 10.10.
5. Bay Commercial Services 1994 Stock Option Plan and Form of Stock Option
Agreements- Form 10-K for fiscal year ended December 31, 1994, Exhibit
10.14.
36
<PAGE> 1
EXHIBIT 10.2
BAY COMMERCIAL SERVICES
EMPLOYEE STOCK OWNERSHIP PLAN
As Amended and Restated as of January 1, 1987
<PAGE> 2
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. Nature of the Plan . . . . . . . . . . . . . . . . . . . . 1
2. Definitions . . . . . . . . . . . . . . . . . . . . . . . 2
3. Eligibility and Participation . . . . . . . . . . . . . . 7
4. Employer Contributions . . . . . . . . . . . . . . . . . . 10
5. Investment of Trust Assets . . . . . . . . . . . . . . . . 11
6. Allocations to Participants' Accounts . . . . . . . . . . 14
7. Allocation Limitations . . . . . . . . . . . . . . . . . . 19
8. Voting Bank Stock . . . . . . . . . . . . . . . . . . . . 21
9. Disclosure to Participants . . . . . . . . . . . . . . . . 21
10. Vesting and Forfeitures . . . . . . . . . . . . . . . . . 23
11. Credited Service and Break in Service . . . . . . . . . . 26
12. When Capital Accumulation Will Be Distributed . . . . . . 28
13. In-Service Distributions . . . . . . . . . . . . . . . . . 31
14. How Capital Accumulation Will Be Distributed . . . . . . . 35
15. No Assignment of Benefits . . . . . . . . . . . . . . . . 38
16. Administration . . . . . . . . . . . . . . . . . . . . . . 38
17. Claims Procedure . . . . . . . . . . . . . . . . . . . . . 43
18. Limitation on Participants' Rights . . . . . . . . . . . . 44
19. Future of the Plan . . . . . . . . . . . . . . . . . . . . 45
20. "Top-Heavy" Contingency Provisions . . . . . . . . . . . . 47
21. Governing Law . . . . . . . . . . . . . . . . . . . . . . 49
22. Execution . . . . . . . . . . . . . . . . . . . . . . . . 50
<PAGE> 3
BAY COMMERCIAL SERVICES
EMPLOYEE STOCK OWNERSHIP PLAN
As Amended and Restated as of January 1, 1987
Section 1. Nature of the Plan.
The purpose of this Plan is to enable participating Employees to share
in the growth and prosperity of Bay Commercial Services (the "Bank") and to
provide Participants with an opportunity to accumulate capital for their future
economic security. The Plan is intended to do this without any deductions from
Participants' paychecks and without requiring them to invest their personal
savings. The primary purpose of the Plan is to enable Participants to acquire
stock ownership interests in the Bank. Therefore, the Trust established under
the Plan is designed to invest primarily in Bank Stock.
The Plan is also designed to be available as a technique of corporate
finance to the Bank. Accordingly, it may be used to accomplish the following
objectives:
(a) To meet general financing requirements of the Bank, including
capital growth and transfers in the ownership of Bank Stock;
(b) To provide Participants with beneficial ownership of Bank
Stock, substantially in proportion to their relative
Compensation, without requiring any cash outlay, any reduction
in pay or other personal investment on the part of
Participants; and
(c) To receive loans (or other extensions of credit) to finance
the acquisition of Bank Stock, with such loans to be repaid by
Employer Contributions to the Trust and dividends received on
such Bank Stock.
<PAGE> 4
The Plan, originally adopted effective as of January 1, 1981, is
hereby amended and restated as of January 1, 1987 (except as otherwise noted
below). The Plan is a stock bonus plan under Section 401(a) of the Internal
Revenue Code (the "Code"), and an employee stock ownership plan under Section
4975(e)(7) of the Code. For purposes of this restatement, (1) the definition
of "Approved Absence" in Section 2 and the fourth sentence in Section 11(b) are
effective as of August 5, 1993, and (2) the definition of "Retirement" in
Section 2 and the fourth sentence in Section 8 are effective as of January 1,
1996.
All Trust Assets held under the Plan will be administered,
distributed, forfeited and otherwise governed by the provisions of this Plan
and the related Trust Agreement. The Plan is administered by an Administrative
Committee for the exclusive benefit of Participants (and their Beneficiaries).
Section 2. Definitions.
In this Plan, whenever the context so indicates, the singular or
plural number and the masculine, feminine or neuter gender shall be deemed to
include the other, the terms "he," "his" and "him" shall refer to a
Participant, and the capitalized terms shall have the following meanings:
Account .................. One of two accounts maintained to record the
interest of a Participant under the Plan.
See Section 6.
Acquisition Loan ......... A loan (or other extension of credit) used by
the Trust to finance the acquisition of Bank
Stock,
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<PAGE> 5
which loan may constitute an extension of
credit to the Trust from a party in interest
(as defined in ERISA). See Section 5(b).
Allocation Date .......... December 31st of each year (the last day of
each Plan Year).
Approved Absence ......... A leave of absence (without pay) for a period
not exceeding one year, granted to an
Employee by the Bank under its established
leave policy, including any unpaid leave
covered under the Family and Medical Leave
Act of 1993. See Section 3(c).
Bank ..................... Either the Holding Company or Bay Bank of
Commerce (a wholly-owned subsidiary of the
Holding Company).
Bank Stock ............... Shares of voting common stock issued by the
Holding Company, which shares constitute
"employer securities" under Section 409(l) of
the Code.
Bank Stock Account ....... The Account which reflects each Participant's
interest in Bank Stock held under the Plan.
See Section 6.
Beneficiary .............. The person (or persons) entitled to receive
any benefit under the Plan in the event of a
Participant's death. See Section 14(b).
Board of Directors ....... The Board of Directors of the Holding
Company.
Break in Service ......... A period of time commencing with the date on
which an Employee's Service terminates and
ending on the date he resumes Service. See
Section 11(b).
Capital Accumulation ..... A Participant's vested, nonforfeitable
interest in his Accounts under the Plan.
Each Participant's Capital Accumulation shall
be determined in accordance with the
provisions of Section 10 and dis-
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<PAGE> 6
tributed as provided in Sections 12, 13 and
14.
Code ..................... The Internal Revenue Code of 1986, as
amended.
Committee ................ The Administrative Committee appointed by the
Board of Directors to administer the Plan.
See Section 16.
Compensation ............. The total wages and other compensation paid
to an Employee by the Bank during the Plan
Year and reportable on the Employee's Wage
and Tax Statement (Form W-2), plus any
"Elective Deferrals" made by him to the
401(k) Plan for the Plan Year. For Plan
Years beginning before January 1, 1993,
Compensation shall not include a
Participant's commissions in excess of
$36,000 per year. For Plan Years beginning
on and after January 1, 1993, the
Compensation of a Participant who is a Highly
Compensated Employee shall not include
commissions in excess of the Compensation
limit for the Plan Year determined under
paragraph (3) of the definition of "Highly
Compensated Employee" in this Section 2. For
any Plan Year beginning after 1988 and before
1994, any amount in excess of $200,000 shall
be excluded, and for any Plan Year beginning
after 1993, any amount in excess of $150,000
shall be excluded (and each dollar amount
shall be adjusted for increases in the cost
of living pursuant to Section 401(a)(17) of
the Code). For purposes of applying these
$200,000 and $150,000 limitations, the
Compensation of a 5% owner or of a Highly
Compensated Employee who is one of the ten
most highly compensated Highly Compensated
Employees shall be aggregated with the
Compensation of his spouse and his lineal
descendants who are under age 19.
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<PAGE> 7
Credited Service ......... The elapsed period of an Employee's Service.
See Section 11.
Disability ............... A physical or mental condition which renders
an Employee incapable of performing the work
for which he was employed or similar work, as
determined by the Committee on the basis of a
certificate from a qualified physician
approved by the Committee.
Employee ................. Any common-law employee of the Bank. A
leased employee, as described in Section
414(n) of the Code, is not an Employee for
purposes of this Plan.
Employer Contributions ... Payments made to the Trust by the Bank. See
Section 4.
ERISA .................... The Employee Retirement Income Security Act
of 1974, as amended.
Fair Market Value ........ The fair market value of Bank Stock, as
determined by the Committee by reference to
either (1) the price of Bank Stock prevailing
on a national securities exchange which is
registered under Section 6 of the Securities
Exchange Act of 1934, or (2) if Bank Stock is
not traded on such a national securities
exchange, the price of Bank Stock as
established by the current bid and asked
prices quoted by persons independent of the
Bank and of any party in interest (as defined
in ERISA).
Financed Shares .......... Shares of Bank Stock acquired by the Trust
with the proceeds of an Acquisition Loan.
Forfeiture ............... Any portion of a Participant's Accounts which
does not become a part of his Capital
Accumulation and which is forfeited under
Section 10(b).
401(k) Plan .............. The Bay Commercial Service 401(k) Savings
Plan, a profit sharing plan qualified under
Section 401(a) of
- 5 -
<PAGE> 8
the Code that includes a "cash or deferred
arrangement" under Section 401(k) of the Code.
Highly Compensated
Employee ................. An Employee who (1) is a 5% owner of the
Holding Company, (2) has Compensation in
excess of $75,000, (3) has Compensation in
excess of $50,000 and is in the top-paid 20%
group of Employees, or (4) is an officer of
the Bank and has Compensation in excess of
50% of the dollar amount in effect under
Section 415(b)(1)(A) of the Code for the Plan
Year, as determined in accordance with
Section 414(q) of the Code. The $75,000 and
$50,000 amounts shall be adjusted after 1987
for increases in the cost of living pursuant
to Section 414(q)(1) of the Code.
Holding Company .......... Bay Commercial Services, a California bank
holding company.
Hour of Service .......... Each hour of Service for which an Employee is
credited under the Plan, as described in
Section 3(e).
Other Investments
Account .................. The Account which reflects each Participant's
interest under the Plan attributable to Trust
Assets other than Bank Stock. See Section 6.
Participant .............. Any Employee or former Employee who has met
the applicable eligibility requirements of
Section 3(a) and who has not yet received a
complete distribution of his Capital
Accumulation.
Plan ..................... The Bay Commercial Services Employee Stock
Ownership Plan, which includes this Plan and
the Trust Agreement.
Plan Year ................ The 12-month period ending on each Allocation
Date (and coinciding with each calendar year,
which is the taxable year of the Bank).
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<PAGE> 9
Retirement ............... Termination of Service upon attaining the
earlier of (1) age 55 and completing at least
seven years of Credited Service, or (2) age
65.
Service .................. Employment with the Bank.
Statutory Compensation ... The total wages and other compensation paid
to an Employee by the Bank during the Plan
Year and reportable on the Employee's Wage
and Tax Statement (Form W-2).
Statutory Dollar Amount .. For any Plan Year, $30,000, as may be
increased pursuant to Section 415(c)(1)(A) of
the Code.
Trust .................... The Bay Commercial Services Employee Stock
Ownership Trust maintained pursuant to the
Trust Agreement entered into between the Bank
and the Trustee.
Trust Agreement .......... The Agreement between the Bank and the
Trustee specifying the duties of the Trustee.
Trust Assets ............. The Bank Stock (and other assets) held in the
Trust for the benefit of Participants. See
Section 5.
Trustee ................... The Trustee (and any successor Trustee)
appointed by the Board of Directors to hold
the Trust Assets.
Section 3. Eligibility and Participation.
(a) In General - Effective January 1, 1992, each Employee who is not
a Participant in the Plan shall become a Participant on the January 1st, April
1st, July 1st or October 1st coinciding with or next following the date on
which he attains age 21 and completes one full year of Service (in which he is
credited with at least 1000 Hours of Service). For this purpose, the
eligibility computation period for determining the one year of Service
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<PAGE> 10
shall initially be the period of 12 consecutive months beginning on the
Employee's initial date of Service and thereafter shall be each Plan Year
beginning after his initial date of Service.
(b) Transitional Rule - Each Employee who was a Participant in the
Plan on January 1, 1987, shall continue as a Participant as of that date. Each
other Employee shall become a Participant in the Plan on the December 31st next
following his initial date of Service, if he has attained age 21 and completed
at least 500 Hours of Service and if he was employed by the Bank prior to
October 1st of that Plan Year. An Employee who fails to satisfy these
requirements by the December 31st next following his initial date of Service
shall become a Participant in the Plan on the date he attains age 21 and
completes one full year of Service (in which he is credited with at least 500
Hours of Service), provided that he satisfies those requirements before January
1, 1992.
(c) A Participant is entitled to share in the allocation of
Employer Contributions and Forfeitures under Section 6(a) for each Plan Year in
which he is credited with at least 500 Hours of Service and in which he is an
Employee (or on Approved Absence) on the Allocation Date. A Participant shall
also share in the allocation of Employer Contributions and Forfeitures for the
Plan Year of his Retirement, Disability or death.
(d) A former Participant who is reemployed by the Bank shall become a
Participant as of the date of his reemployment. An Employee who is on an
Approved Absence shall not become a
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<PAGE> 11
Participant until the end of his Approved Absence, but a Participant who is on
an Approved Absence shall continue as a Participant during the period of his
Approved Absence.
(e) Hours of Service - For purposes of determining the Hours of
Service to be credited to an Employee under the Plan, the following rules shall
be applied:
(1) Hours of Service shall include each hour of Service
for which an Employee is paid (or entitled to
payment) for the performance of duties; each hour of
Service for which an Employee is paid (or entitled to
payment) for a period during which no duties are
performed due to vacation, holiday, illness,
incapacity (including disability), lay-off, jury
duty, military duty, or paid leave of absence; and
each additional hour of Service for which back pay is
either awarded or agreed to (irrespective of
mitigation of damages); provided, however, that not
more than 501 Hours of Service are to be credited for
a single continuous period during which an Employee
does not perform any duties.
(2) The crediting of Hours of Service shall be determined
in accordance with the rules set forth in Section
2530.200b-2 of the regulations prescribed by the
Department of Labor, which rules shall be
consistently applied with respect to all Employees
within the same job category.
(3) Hours of Service shall not be credited to an Employee
for a period during which no duties are performed if
payment is made or due under a plan maintained solely
for the purpose of complying with applicable worker's
compensation, unemployment compensation or disability
insurance laws, and Hours of Service shall not be
credited on account of any payment made or due an
Employee solely in reimbursement of medical or
medically-related expenses.
(4) An Employee compensated on an hourly basis shall be
credited for each Hour of Service as described above.
Unless records of actual Hours of Service are
maintained, a salaried Employee who completes at
least one Hour of Service during a semi-monthly
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<PAGE> 12
payroll period shall be credited with 95 Hours of
Service for each such period of Service.
Section 4. Employer Contributions.
(a) Employer Contributions shall be paid to the Trustee for each
Plan Year in such amounts (or under such formula) as may be determined by the
Board of Directors; provided, however, that Employer Contributions shall not be
made for any Plan Year in amounts which can be allocated to no Participant's
Accounts by reason of the allocation limitation described in Section 7(a) or in
amounts which are not deductible under Section 404(a) of the Code.
(b) Employer Contributions for each Plan Year shall be paid to the
Trustee not later than the due date (including extensions) for filing the
Holding Company's Federal income tax return for that Plan Year. Employer
Contributions may be paid in cash and/or in shares of Bank Stock, as determined
by the Board of Directors; provided, however, that the Board of Directors may
determine that Employer Contributions may be paid as provided in Section 5(c)
with notice to the Committee and the Trustee. The amount of any Employer
Contributions that are paid in the form of shares of Company Stock shall be
based upon Fair Market Value as of the date such shares are issued to the
Trust.
(c) Any Employer Contributions which are not deductible under Section
404(a) of the Code shall be returned to the Bank by the Trustee (upon the
direction of the Bank) within one year after the deduction is disallowed or
after it is determined that
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<PAGE> 13
the deduction is not available. In the event that Employer Contributions are
paid to the Trust by reason of a mistake of fact, such Employer Contributions
shall be returned to the Bank by the Trustee (upon the direction of the Bank)
within one year after the payment to the Trust.
(d) No Participant shall be required or permitted to make
contributions to the Trust.
Section 5. Investment of Trust Assets.
(a) In General - Trust Assets will be invested by the Trustee
primarily (or exclusively) in Bank Stock in accordance with directions from the
Committee. Employer Contributions (and other Trust Assets) may be used to
acquire shares of Bank Stock from any Bank shareholder (through open-market
purchases or privately-negotiated transactions) or from the Bank. All
purchases of Bank Stock by the Trustee shall be made only as directed by the
Committee and only at prices which do not exceed Fair Market Value as of the
date of the purchase. The Committee may direct the Trustee to invest and hold
up to 100% of the Trust Assets in Bank Stock. The Trustee may also invest
Trust Assets in such other prudent investments as the Committee deems to be
desirable for the Trust, or Trust Assets may be held temporarily in cash.
(b) Acquisition Loans - With the approval of the Board of
Directors, the Committee may direct the Trustee to incur Acquisition Loans from
time to time to finance the acquisition of Bank
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<PAGE> 14
Stock (Financed Shares) or to repay a prior Acquisition Loan. An installment
obligation incurred in connection with the purchase of Bank Stock shall be
treated as an Acquisition Loan, and all indebtedness incurred to acquire Bank
Stock in a single transaction shall be treated as one Acquisition Loan. An
Acquisition Loan shall be for a specific term, shall bear a reasonable rate of
interest and shall not be payable on demand except in the event of default. An
Acquisition Loan may be secured by a pledge of the Financed Shares so acquired
(or acquired with the proceeds of a prior Acquisition Loan which is being
refinanced), so long as such pledge does not violate applicable Federal or
state laws. No other Trust Assets may be pledged as collateral for an
Acquisition Loan, and no lender shall have recourse against Trust Assets other
than any Financed Shares remaining subject to pledge. Any pledge of Financed
Shares must provide for the release of the shares so pledged as payments on the
Acquisition Loan are made by the Trustee and such Financed Shares are allocated
to Participants' Bank Stock Accounts under Section 6. If the lender is a party
in interest (as defined in ERISA), any pledge of Financed Shares must also
provide for a transfer of Trust Assets to the lender on default only upon and
to the extent of the failure of the Trust to meet the payment schedule of the
Acquisition Loan.
(c) Acquisition Loan Payments - Payments of principal and/or
interest on any Acquisition Loan shall be made by the Trustee (as directed by
the Committee) only from Employer Con-
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<PAGE> 15
tributions paid in cash to enable the Trust to repay such Acquisition Loan,
from earnings attributable to such Employer Contributions and from any cash
dividends received by the Trust on the Financed Shares (whether allocated or
unallocated) purchased with the proceeds of such Acquisition Loan; and the
payments made with respect to an Acquisition Loan for a Plan Year must not
exceed the sum of such Employer Contributions, earnings and dividends for that
Plan Year (and prior Plan Years), less the amount of such payments for prior
Plan Years. If the Bank is the lender with respect to an Acquisition Loan,
Employer Contributions may be paid in the form of cancellation of indebtedness
under the Acquisition Loan. If the Bank is not the lender with respect to an
Acquisition Loan, the Bank may elect to make payments on the Acquisition Loan
directly to the lender and to treat such payments as Employer Contributions.
(d) Sales of Bank Stock - Subject to the approval of the Board of
Directors, the Committee may direct the Trustee to sell shares of Bank Stock to
any person (including the Bank), provided that any such sale must be made at a
price not less than Fair Market Value as of the date of the sale; provided,
further, that any such sale shall comply with all applicable Federal and state
securities laws. Notwithstanding the provisions of Section 5(c), the Committee
may direct the Trustee to apply the proceeds from the sale of unallocated
Financed Shares to repay the Acquisition Loan (incurred to finance the purchase
of such Financed Shares) in the event of the sale of the Bank or the
termination of the
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<PAGE> 16
Plan or if the Plan ceases to be an employee stock ownership plan under Section
4975(e)(7) of the Code. If the Trustee is unable to make payments of principal
and/or interest on an Acquisition Loan when due, the Committee may direct the
Trustee either to sell (with the approval of the Board of Directors) any
Financed Shares that have not yet been allocated to Participants' Bank Stock
Accounts or to obtain a new Acquisition Loan in an amount sufficient to make
such payments. Any decision by the Committee to direct the Trustee to sell
Bank Stock under this Section 5(d) must comply with the fiduciary duties
applicable under Section 404(a)(1) of ERISA.
Section 6. Allocations to Participants' Accounts.
A Bank Stock Account and an Other Investments Account shall be
maintained to reflect the interest of each Participant under the Plan.
Bank Stock Account - The Bank Stock Account maintained for each
Participant will be credited annually with his allocable share of Bank Stock
(including fractional shares) purchased and paid for by the Trust or contributed
in kind to the Trust as an Employer Contribution, with any Forfeitures from Bank
Stock Accounts and with any stock dividends on Bank Stock allocated to his Bank
Stock Account.
Other Investments Account - The Other Investments Account maintained
for each Participant will be credited annually with his allocable share of
Employer Contributions that are not in the
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<PAGE> 17
form of Bank Stock, with any Forfeitures from Other Investments Accounts, with
any cash dividends on Bank Stock allocated to his Bank Stock Account (other
than currently distributed dividends) and any net income (or loss) of the
Trust. Such Account will be debited for the Participant's share of any cash
payments made by the Trustee for the acquisition of Bank Stock or for the
payment of any principal and/or interest on an Acquisition Loan.
The allocations to Participants' Accounts for each Plan Year will be
made as follows:
(a) Employer Contributions and Forfeitures - Employer
Contributions under Section 4(a) and Forfeitures under Section 10(b) for each
Plan Year will be allocated as of the Allocation Date among the Accounts of
Participants so entitled under Section 3(c) in the ratio that the Compensation
of each such Participant bears to the total Compensation of all such
Participants, subject to the allocation limitations described in Section 7.
(b) Financed Shares - Any Financed Shares acquired by the Trust
shall initially be credited to a "Loan Suspense Account" and will be allocated
to the Bank Stock Accounts of Participants only as payments on the Acquisition
Loan are made by the Trustee. The number of Financed Shares to be released
from the Loan Suspense Account for allocation to Participants' Bank Stock
Accounts for each Plan Year shall be determined by the Committee (as of each
Allocation Date) as follows:
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<PAGE> 18
(1) Principal/Interest Method - The number of Financed Shares
held in the Loan Suspense Account immediately before the release for the
current Plan Year shall be multiplied by a fraction. The numerator of the
fraction shall be the amount of principal and/or interest paid on the
Acquisition Loan for that Plan Year. The denominator of the fraction shall be
the sum of the numerator plus the total payments of principal and interest on
that Acquisition Loan projected to be paid for all future Plan Years. For this
purpose, the interest to be paid in future years is to be computed by using the
interest rate in effect as of the current Allocation Date.
(2) Principal Only Method - The Committee may elect (as to
each Acquisition Loan) or the provisions of the Acquisition Loan may provide
for the release of Financed Shares from the Loan Suspense Account based solely
on the ratio that the payments of principal for each Plan Year bear to the
total principal amount of the Acquisition Loan. This method may be used only
to the extent that: (A) the Acquisition Loan provides for annual payments of
principal and interest at a cumulative rate that is not less rapid at any time
than level annual payments of such amounts for ten years; (B) interest included
in any payment on the Acquisition Loan is disregarded only to the extent that
it would be determined to be interest under standard loan amortization tables;
and (C) the entire duration of the Acquisition Loan repayment period does not
exceed ten years, even in the event of a renewal, extension or refinancing of
the Acquisition Loan.
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<PAGE> 19
In each Plan Year in which Trust Assets are applied to make payments
on an Acquisition Loan, the Financed Shares released from the Loan Suspense
Account in accordance with the provisions of this Section 6(b) shall be
allocated among the Bank Stock Accounts of Participants in the manner
determined by the Committee based upon the source of funds (Employer
Contributions, earnings attributable to such Employer Contributions and cash
dividends on Financed Shares allocated to Participants' Bank Stock Accounts or
cash dividends on Financed Shares credited to the Loan Suspense Account) used
to make the payments on the Acquisition Loan. If cash dividends on Financed
Shares allocated to a Participant's Bank Stock Account are used to make
payments on an Acquisition Loan, Financed Shares (representing that portion of
such payments and whose Fair Market Value is at least equal to the amount of
such dividends) released from the Loan Suspense Account shall be allocated to
that Participant's Bank Stock Account.
(c) Net Income (or Loss) of the Trust - The net income (or loss) of
the Trust for each Plan Year will be determined as of the Allocation Date.
Prior to the allocation of Employer Contributions and Forfeitures for the Plan
Year, each Participant's share of any net income (or loss) will be allocated to
his Other Investments Account in the ratio that the balance of his Other
Investments Account on the preceding Allocation Date (reduced by any
distribution of Capital Accumulation from such Account during the Plan Year)
bears to the sum of such Account balances for all
- 17 -
<PAGE> 20
Participants as of that date. The net income (or loss) of the Trust includes
the increase (or decrease) in the fair market value of Trust Assets (other than
Bank Stock), interest income, dividends and other income and gains (or losses)
attributable to Trust Assets (other than any dividends on allocated Bank Stock)
since the preceding Allocation Date, reduced by any expenses charged to the
Trust Assets for that Plan Year. The determination of the net income (or loss)
of the Trust shall not take into account any interest paid by the Trust under
an Acquisition Loan.
(d) Dividends on Bank Stock - Any cash dividends received on shares
of Bank Stock allocated to Participants' Bank Stock Accounts will be allocated
to the respective Other Investments Accounts of such Participants. Any cash
dividends received on unallocated shares of Bank Stock (including any Financed
Shares credited to the Loan Suspense Account) shall be included in the
computation of net income (or loss) of the Trust. Any stock dividends received
on Bank Stock shall be credited to the Accounts (including the Loan Suspense
Account) to which such Bank Stock was allocated. Any cash dividends which are
currently distributed to Participants (or their Beneficiaries) under Section
13(a) shall not be credited to their Other Investments Accounts.
(e) Accounting for Allocations - The Committee shall establish
accounting procedures for the purpose of making the allocations to
Participants' Accounts provided for in this Section 6. The Committee shall
maintain adequate records of the aggregate
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<PAGE> 21
cost basis of Bank Stock allocated to each Participant's Bank Stock Account.
The Committee shall also keep separate records of the Financed Shares acquired
with the proceeds of each Acquisition Loan and of Employer Contributions (and
any earnings thereon) made for the purpose of enabling the Trust to repay that
Acquisition Loan. From time to time, the Committee may modify its accounting
procedures for the purposes of achieving equitable and nondiscriminatory
allocations among the Accounts of Participants in accordance with the general
concepts of the Plan, the provisions of this Section 6 and the requirements of
the Code and ERISA.
Section 7. Allocation Limitations.
(a) Limitation on Annual Additions - The Annual Additions for each
Plan Year with respect to any Participant may not exceed the lesser of:
(1) 25% of his Statutory Compensation; or
(2) the Statutory Dollar Amount.
For this purpose, "Annual Additions" shall be the total of the Employer
Contributions and Forfeitures (including any income attributable to
Forfeitures) allocated to the Accounts of a Participant for the Plan Year,
except as provided in Section 7(b), plus any Elective deferrals, any Matching
Contributions, Nonelective Contributions and Qualified Nonelective
Contributions made on his behalf for the Plan Year to the 401(k)
- 19 -
<PAGE> 22
Plan. In determining such Annual Additions, Forfeitures of Bank Stock shall be
included at the Fair Market Value as of the Allocation Date.
If the aggregate amount that would be allocated to the Accounts of a
Participant in the absence of this limitation would exceed the amount set forth
in this limitation, his allocation under this Plan shall be reduced prior to
any reduction under the 401(k) Plan. Any Forfeitures which can be allocated to
no Participant's Accounts by reason of this limitation shall be credited to a
"Forfeiture Suspense Account" and allocated as Forfeitures under Section 6(a)
for the next succeeding Plan Year (prior to the allocation of Employer
Contributions for such succeeding Plan Year).
(b) Special Acquisition Loan Rules - Any Employer Contributions which
are used by the Trust (not later than the due date, including extensions, for
filing the Holding Company's Federal income tax return for that Plan Year) to
pay interest on an Acquisition Loan, and any Financed Shares which are
allocated as Forfeitures, shall not be included as Annual Additions under
Section 7(a); provided, however, that the provisions of this Section 7(b) shall
be applicable for any Plan Year only if not more than one-third of the Employer
Contributions applied to pay principal and/or interest on an Acquisition Loan
are allocated to Participants who are Highly Compensated Employees; and the
Committee shall reallocate such Employer Contributions to the extent it deems
it to be appropriate to satisfy this special rule.
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<PAGE> 23
Annual Additions shall not include any allocation attributable to any
proceeds from the sale of Financed Shares by the Trust or to appreciation
(realized or unrealized) in the Fair Market Value of Bank Stock.
Section 8. Voting Bank Stock.
All shares of Bank Stock held by the Trust shall be voted by the
Trustee only in accordance with the provisions of this Section 8. Each
Participant (or Beneficiary) will be entitled to give confidential instructions
to the Trustee as to the manner in which shares of Bank Stock then allocated to
his Bank Stock Account on the record date will be voted on all matters
presented for a vote of Bank shareholders. Each Participant (or Beneficiary)
who is entitled to direct the Trustee as to the manner in which shares of Bank
Stock will be voted shall be provided with the proxy statement and other
materials provided to Bank shareholders in connection with each shareholder
meeting, together with a form upon which confidential voting instructions may
be given to the Trustee. A Participant (or Beneficiary) who does not give
instructions to the Trustee shall be treated as having directed the Trustee to
vote the shares of Bank Stock allocated to his Bank Stock Account. The Trustee
shall vote the shares of Bank Stock not then allocated to Participants' Bank
Stock Accounts and the shares of Bank Stock for which no instructions are
received only in the manner directed by the Committee.
Section 9. Disclosure to Participants.
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<PAGE> 24
(a) Summary Plan Description - Each Participant shall be furnished
with a summary plan description of the Plan required by Sections 102(a)(1) and
104(b)(1) of ERISA. Such summary plan description shall be updated from time
to time as required under ERISA and Department of Labor regulations thereunder.
(b) Summary Annual Report - Within nine months after each Allocation
Date, each Participant shall be furnished with the summary annual report of the
Plan required by Section 104(b)(3) of ERISA, in the form prescribed in
regulations of the Department of Labor.
(c) Annual Statement - Following each Allocation Date, each
Participant shall be furnished with a statement reflecting the following
information:
(1) The balances (if any) in his Accounts as of the beginning
of the Plan Year.
(2) The amount of Employer Contributions and Forfeitures
allocated to his Accounts for that Plan Year.
(3) The adjustments to his Accounts to reflect his share of
dividends (if any) on Bank Stock and any net income (or
loss) of the Trust for that Plan Year.
(4) The new balances in his Accounts, including the number of
shares of Bank Stock allocated to his Bank Stock Account.
(5) His number of years of Credited Service and his vested
percentage in his Account balances (under Sections 10 and
11) as of that Allocation Date.
(d) Additional Disclosure - The Bank shall make available for
examination by any Participant copies of the Plan, the
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<PAGE> 25
Trust Agreement and the latest annual report of the Plan filed (on Form 5500)
with the Internal Revenue Service. Upon written request of any Participant,
the Bank shall furnish copies of such documents and may make a reasonable
charge to cover the cost of furnishing such copies, as provided in regulations
of the Department of Labor.
Section 10. Vesting and Forfeitures.
(a) Vesting -
(1) A Participant's interest in his Accounts shall become 100%
vested and nonforfeitable without regard to his Credited Service if he (A) is
employed by the Bank on or after the later of his 65th birthday or the tenth
anniversary of the date he became a Participant (if he is not credited with at
least one Hour of Service after December 31, 1987), (B) is employed by the Bank
on or after the later of his 65th birthday or the fifth anniversary of the date
he became a Participant (if he is credited with at least one Hour of Service
after December 31, 1987), (C) incurs a Disability while employed by the Bank, or
(D) dies while employed by the Bank.
(2) Except as otherwise provided in Section 10(a)(1), the interest
of each Participant in his Accounts shall become vested and nonforfeitable in
accordance with the following schedule:
Credited Service Nonforfeitable
Under Section 11 Percentage
---------------- --------------
- 23 -
<PAGE> 26
<TABLE>
<S> <C>
Less than Three Years 0%
Three Years 40%
Four Years 55%
Five Years 70%
Six Years 85%
Seven Years or More 100%
</TABLE>
(b) Forfeitures - Any portion of the final balances in a
Participant's Accounts which is not vested (and does not become part of his
Capital Accumulation) will become a Forfeiture upon occurrence of a one-year
Break in Service. Forfeitures shall first be charged against a Participant's
Other Investments Account, with any balance charged against his Bank Stock
Account (at Fair Market Value). Financed Shares shall be forfeited only after
other shares of Bank Stock have been forfeited. All Forfeitures will be
reallocated to the Accounts of remaining Participants, as provided in Section
6(a), as of the Allocation Date of the Plan Year in which a one-year Break in
Service occurs.
(c) Restoration of Forfeited Amounts - If a Participant who did
not incur a one-year Break in Service prior to January 1, 1985, is reemployed
prior to the occurrence of a five-year Break in Service, the portion of his
Accounts (attributable to the prior period of Service) that was forfeited upon
the occurrence of a one-year Break in Service shall be restored as if there had
been no Forfeiture. Such restoration shall be made out of Forfeitures
occurring in the Plan Year of reemployment (prior to allocation under Section
6(a)). To the extent such Forfeitures
- 24 -
<PAGE> 27
are not sufficient, the Bank shall make a special contribution to the
Participant's restored Accounts. Any amount so restored to a Participant shall
not constitute an Annual Addition under Section 7(a).
(d) Vesting Upon Reemployment - If a Participant who is not 100%
vested and who did not incur a one-year Break in Service prior to January 1,
1985, receives a distribution of his Capital Accumulation prior to the
occurrence of a five-year Break in Service and he is reemployed prior to the
occurrence of such a Break in Service, the portion of his Accounts which was
not vested (including any restored Accounts) shall be maintained separately
until he becomes 100% vested. His vested and nonforfeitable percentage in such
separate Accounts upon his subsequent termination of Service shall be equal to:
X-Y
------
100%-Y
- 25 -
<PAGE> 28
For purposes of applying this formula, X is the vested percentage at the time
of the subsequent termination, and Y is the vested percentage at the time of
the prior termination.
Section 11. Credited Service and Break in Service.
(a) Credited Service - An Employee's Credited Service shall include
each period of his Service, computed (in full years and days) from the date his
Service begins (the date he was first credited with an Hour of Service) until
the date on which his Service terminates (the date he is last credited with an
Hour of Service); provided, however, that for Service prior to January 1, 1989,
an Employee must be credited with at least 500 Hours of Service during each
full 12-month period of Service. For purposes of this Section 11(a), a Break
in Service that does not exceed one year and the period of an Approved Absence
shall be included in an Employee's Credited Service.
(b) Break in Service - A one-year Break in Service shall occur one
year after the date of an Employee's termination of Service. A five-year Break
in Service shall occur five years after the date of an Employee's termination
of Service. A Break in Service shall end in the event of an Employee's
reemployment. For purposes of determining the period of an Employee's Break in
Service, the period of a maternity/paternity absence not exceeding one year,
described in Section 411(a)(6)(E)(i) of the Code, beginning after December 31,
1984, or effective August 5, 1993,
- 26 -
<PAGE> 29
any unpaid leave covered under the Family and Medical Leave Act of 1993, shall
not be treated as a Break in Service.
(c) Reemployment - If a former Employee is reemployed after a
one-year Break in Service, the following special rules shall apply in
determining his Credited Service:
(1) New Accounts will be established to reflect his interest
in the Plan attributable to Service after the Break in
Service.
(2) If he is reemployed after the occurrence of a
five-consecutive-year Break in Service (or if he incurred
a one-year Break in Service prior to January 1, 1985),
Credited Service after the Break in Service will not
increase his vested interest in his Accounts attributable
to Service prior to the Break in Service.
(3) After he completes one year of Credited Service following
reemployment, his Credited Service with respect to his
new Accounts will include his Credited Service
accumulated prior to the Break in Service.
(4) In the case of an Employee who incurred a one-year Break
in Service prior to January 1, 1985, Service prior to the
Break in Service shall not be included in determining his
Credited Service if the elapsed period of his absence
from Service as of December 31, 1984, equalled or
exceeded the Credited Service accumulated prior to the
Break in Service.
(5) In the case of an Employee who did not incur a one-year
Break in Service prior to January 1, 1985 (or who
incurred a one-year Break in Service prior to January 1,
1985, but the elapsed period of his absence from Service
as of December 31, 1984, was less than his Credited
Service accumulated prior to the Break in Service), who
is reemployed after a five-consecutive-year Break in
Service and has
- 27 -
<PAGE> 30
not attained a vested interest under the Plan, Service
prior to the Break in Service shall not be included in
determining his Credited Service.
Section 12. When Capital Accumulation Will Be Distributed.
(a) Except as otherwise provided in Sections 12(c) and 13, a
Participant's Capital Accumulation will be distributed following his
termination of Service, but only at the time and in the manner determined by
the Committee. If the value of a Participant's Capital Accumulation at the
time a distribution would otherwise commence under this Section 12 exceeds
$3,500, no portion of his Capital Accumulation may be distributed to him before
he attains age 62 without his written consent.
(b) In the event of a Participant's Retirement, Disability or
death, distribution of his Capital Accumulation attributable to shares of Bank
Stock acquired by the Trust after December 31, 1986, shall commence prior to
the Allocation Date of the Plan Year following the Plan Year in which his
Retirement, Disability or death occurs. If a Participant's Service terminates
for any other reason, distribution of his Capital Accumulation may be deferred
until after he attains age 55; provided, however, that distribution of any
portion of his Capital Accumulation attributable to shares of Bank Stock
acquired by the Trust after December 31, 1986, shall commence prior to the
Allocation Date of the sixth Plan Year following the Plan Year in which his
Service terminates (unless he is reemployed by the Bank). For purposes of this
Section 12(b) and except as otherwise provided in Sec-
- 28 -
<PAGE> 31
tion 12(c), if a Participant's Capital Accumulation includes Financed Shares,
the Committee may elect to defer the distribution of that portion of his
Capital Accumulation attributable to such Financed Shares until the Plan Year
following the Plan Year in which the Acquisition Loan (incurred to acquire such
Financed Shares) has been fully repaid. For this purpose, all indebtedness
incurred to acquire Bank Stock in a single transaction shall be treated as one
Acquisition Loan.
The following alternative modes of distribution may be selected by the
Committee (after considering the available liquid assets of the Bank and the
Trust):
(1) Distribution of a Participant's Capital Accumulation
in a single lump sum; or
(2) Distribution of a Participant's Capital Accumulation
in substantially equal, annual installments. If the
portion of a Participant's Capital Accumulation that
is not attributable to shares of Bank Stock acquired
by the Trust after December 31, 1986, is distributed
in installments, the period over which installments
may be distributed may not exceed ten years. If the
portion of a Participant's Capital Accumulation
attributable to shares of Bank Stock acquired by the
Trust after December 31, 1986, is distributed in
installments, the period over which installments may
be distributed may not exceed five years (provided
that the period over which installments may be
distributed may be extended an additional year (up to
an additional five years) for each $100,000 or
fraction thereof by which his Capital Accumulation
exceeds $500,000 (as adjusted after 1987 for
increases in the cost of living pursuant to Section
409(o)(2) of the Code)); or
(3) Any combination of the foregoing.
- 29 -
<PAGE> 32
(c) Unless the Committee permits Participants to elect to defer the
distribution of their Capital Accumulations, distribution of a Participant's
Capital Accumulation shall commence not later than 60 days after the Allocation
Date coinciding with or next following the latest of (1) his 65th birthday, (2)
the tenth anniversary of the date he became a Participant, or (3) his
termination of Service. A Participant who terminates Service after completing
at least seven years of Credited Service shall be entitled (upon his request)
to have the distribution of his Capital Accumulation commence upon his
attaining age 55. The distribution of the Capital Accumulation of any
Participant who attains age 70-1/2 in a Plan Year must commence not later than
April 1st of the next Plan Year (even if he has elected to defer distribution
or has not terminated Service) and must be made in accordance with the
regulations under Section 401(a)(9) of the Code, including Section
1.401(a)(9)-2; provided, however, that for Plan Years prior to 1989, such
distribution need be made only if the Participant is a "5% owner" of Bank Stock
(as defined in Section 416(i)(1)(B)(i) of the Code). If the amount of a
Participant's Capital Accumulation cannot be determined (by the Committee) by
the date on which a distribution is to commence, or if the Participant cannot
be located, distribution of his Capital Accumulation shall commence within 60
days after the date on which his Capital Accumulation can be determined or
after the date on which the Committee locates the Participant.
- 30 -
<PAGE> 33
(d) If any part of a Participant's Capital Accumulation is retained
in the Trust after his Service ends, his Accounts will continue to be treated
as described in Section 6. However, except as otherwise provided in Section
3(b), such Accounts shall not be credited with any additional Employer
Contributions and Forfeitures. If a Participant whose Capital Accumulation
exceeds $3,500 fails to consent to a distribution before he attains age 62, or
if a Participant cannot be located, his entire Capital Accumulation may be
segregated and invested in assets other than Bank Stock (as determined by the
Committee).
Section 13. In-Service Distributions.
(a) Cash Dividends - If so determined by the Board of Directors,
any cash dividends payable on Bank Stock allocated to the Bank Stock Accounts
of Participants may be paid currently (or within 90 days after the end of the
Plan Year in which the dividends are paid to the Trust) in cash by the Trustee
to such Participants (or their Beneficiaries) on a nondiscriminatory basis, or
the Bank may pay such dividends directly to the Participants (or
Beneficiaries). Such distribution (if any) of cash dividends may be limited to
Participants who are still Employees, may be limited to dividends on shares of
Bank Stock which are then vested or may be applicable to cash dividends on all
shares allocated to Participants' Bank Stock Accounts.
(b) Diversification - A Participant who has attained age 55 and
completed at least ten Years of Participation in the Plan
- 31 -
<PAGE> 34
shall be notified of his right to elect to "diversify" a portion of the balance
in his Bank Stock Account attributable to shares of Bank Stock acquired by the
Trust after December 31, 1986 ("Post-1986 Shares"), as provided in Section
401(a)(28)(B) of the Code. An election to "diversify" must be made on the
prescribed form and filed with the Committee within the 90-day period
immediately following the Allocation Date of a Plan Year in the Election
Period. For purposes of this Section 13(b), "Years of Participation" includes
only those Plan Years in which the Participant is entitled to receive an
allocation of Employer Contributions or Forfeitures under Section 3(c), and the
"Election Period" means the period of six consecutive Plan Years beginning with
the Plan Year in which the Participant first becomes eligible to make an
election.
For each of the first five Plan Years in the Election Period, the
Participant may elect to "diversify" an amount which does not exceed 25% of the
number of Post-1986 Shares allocated to his Bank Stock Account since the
inception of the Plan, less all shares with respect to which an election under
this Section 13(b) was previously made. In the case of the sixth Plan Year in
the Election Period, the Participant may elect to "diversify" an amount which
does not exceed 50% of the number of Post-1986 Shares allocated to his Bank
Stock Account since the inception of the Plan, less all shares with respect to
which an election under this Section 13(b) was previously made. No
"diversification" election shall be permitted if the balance of
- 32 -
<PAGE> 35
Post-1986 Shares in a Participant's Bank Stock Account as of the Allocation
Date of the first Plan Year in the Election Period has a Fair Market Value of
$500 or less, unless and until the balance of Post-1986 Shares in his Bank
Stock Account as of a subsequent Allocation Date in the Election Period exceeds
$500.
"Diversification" will be effected by transferring to the 401(k) Plan
in cash that portion of the Participant's Bank Stock Account with respect to
which a "diversification" election is made. Any transfer to the 401(k) Plan
under this Section 13(b) shall occur no earlier than 30 days after any
necessary forms with respect to such transfer have been filed with the
Internal Revenue Service, but not later than 90 days after the 90-day period in
which the election may be made. Any "diversification" election pursuant to
this Section 13(b) shall be deemed to be made first with respect to shares of
Bank Stock that have been allocated to the electing Participant's Bank Stock
Account for more than six months.
(c) The Committee may, upon its approval of a request by the
Participant demonstrating financial need, direct the Trustee to permit a
withdrawal of all or any part of his Capital Accumulation. Such a withdrawal
shall be available only if necessary in light of immediate and heavy financial
needs of the Participant, as determined by the Committee in accordance with
nondiscriminatory standards substantially similar to those prescribed under
Section 1.401(k)-1(d)(2) of the regulations under the Code. A hardship
withdrawal cannot exceed the amount necessary to meet
- 33 -
<PAGE> 36
such financial needs. For this purpose, immediate and heavy financial needs
shall include only funds to be used for the following:
(1) Payment of medical expenses described in Section
213(d) of the Code previously incurred by or
necessary to obtain care for the Participant, his
spouse or his dependents;
(2) Payment of tuition and related educational fees for
the next 12 months of post-secondary education of the
Participant, his spouse, his children or his
dependents;
(3) Costs directly related to the purchase (excluding
mortgage payments) of a principal residence for the
Participant; or
(4) For prevention of eviction of the Participant from
his principal residence or foreclosure on the
mortgage of his principal residence.
In determining the amount which is necessary to meet such financial
needs of the Participant, the Committee shall make the following findings:
(1) The distribution requested by the Participant is not
in excess of the amount of the immediate and heavy
financial need of the Participant;
(2) The Participant has obtained all distributions (other
than hardship distributions) and all nontaxable loans
available under this Plan and all other qualified
plans of the Bank and has obtained all hardship
distributions available under the 401(k) Plan; and
(3) The Participant will receive no allocations under
Section 6(a) during the 12-month period commencing
upon his receipt of a hardship withdrawal.
- 34 -
<PAGE> 37
Section 14. How Capital Accumulation Will Be Distributed.
(a) The Trustee will make distributions from the Trust only as
directed by the Committee. Distribution of a Participant's Capital
Accumulation will be made in shares of Bank Stock, cash or a combination of
both, as determined by the Committee; provided, however, that the Committee
shall notify the Participant of his right to demand distribution of his Capital
Accumulation entirely in whole shares of Bank Stock (with only the value of any
fractional share paid in cash).
(b) Distribution of a Participant's Capital Accumulation will be made
to the Participant if living, and if not, to his Beneficiary. In the event of
a Participant's death, his Beneficiary shall be his surviving spouse, or if
none, his estate. A Participant (with the notarized written consent of his
spouse, if any, acknowledging the effect of the consent) may designate a
different Beneficiary or Beneficiaries from time to time by filing a written
designation with the Committee. A deceased Participant's entire Capital
Accumulation shall be distributed to his Beneficiary within five years after
his death, except to the extent that distribution has previously commenced in
accordance with Section 12(b)(2).
(c) The Bank shall furnish the recipient of a distribution with the
tax consequences explanation required by Section 402(f) of the Code and shall
comply with the withholding requirements of Section 3405 of the Code and of any
applicable state law with
- 35 -
<PAGE> 38
respect to distributions from the Trust (other than any dividend distributions
under Section 13(a)). If the Committee so elects for a Plan Year,
distributions to Participants may commence less than 30 days after the notice
required under Section 1.411(a)-11(c) of the regulations under the Code is
given; provided that no such distribution to a Participant shall be made unless
(1) the Participant is informed that he has the right for a period of at least
30 days after receiving the notice to consider whether or not to consent to a
distribution (or a particular distribution option), and (2) the Participant
affirmatively elects to receive a distribution after receiving the notice.
(d) If a distribution of a Participant's Capital Accumulation
occurs after December 31, 1992, and is neither one of a series of annual
installments over a period of ten years (or more) nor the minimum amount
required to be distributed pursuant to the third sentence of Section 12(c) (an
"eligible rollover distribution"), the Committee shall notify the Participant
(or any spouse or former spouse who is his alternate payee under a "qualified
domestic relations order") (as defined in Section 414(p) of the Code)) of his
right to elect to have the "eligible rollover distribution" paid directly to an
"eligible retirement plan" (within the meaning of Section 401(a)(31) of the
Code) that is an individual retirement account described in Section 408(a) of
the Code, an individual retirement annuity described in Section 408(b) of the
Code, a qualified trust described in Section 401(a) of the Code or a qualified
annuity plan
- 36 -
<PAGE> 39
described in Section 403(a) of the Code that accepts "eligible rollover
distributions." If such an "eligible rollover distribution" is to be made to
the Participant's surviving spouse, the Committee shall notify the surviving
spouse of his right to elect to have the distribution paid directly to an
"eligible retirement plan" that is either an individual retirement account
described in Section 408(a) of the Code or an individual retirement annuity
described in Section 408(b) of the Code. Any election under this Section 14(d)
shall be made and effected in accordance with such rules and procedures as may
be established from time to time by the Committee in order to comply with
Section 401(a)(31) of the Code.
- 37 -
<PAGE> 40
(e) Shares of Bank Stock held or distributed by the Trustee may
include such legend restrictions on transferability as the Bank may reasonably
require in order to assure compliance with applicable Federal and state
securities laws. Shares of Bank Stock distributed by the Trustee shall be
readily tradable on an established securities market. No shares of Bank Stock
held or distributed by the Trustee may be subject to a put, call or other
option, or buy-sell or similar arrangement. The provisions of this Section
14(e) shall continue to be applicable to Bank Stock even if the Plan ceases to
be an employee stock ownership plan under Section 4975(e)(7) of the Code.
Section 15. No Assignment of Benefits.
A Participant's Capital Accumulation may not be anticipated, assigned
(either at law or in equity), alienated or subject to attachment, garnishment,
levy, execution or other legal or equitable process, except in accordance with
a "qualified domestic relations order" (as defined in Section 414(p) of the
Code).
Section 16. Administration.
(a) Administrative Committee - The Plan will be administered by an
Administrative Committee composed of three or more individuals who shall serve
without compensation. At a minimum, three members of the Committee shall
include the Chairman of the Board of Directors of Bay Bank of Commerce, the
President of Bay Bank of Commerce and one full-time Employee (who is not an
offi-
- 38 -
<PAGE> 41
cer of the Bank) to be elected annually by the Participants. Any additional
members may be appointed by the Board of Directors of Bay Bank of Commerce, to
serve at its pleasure. The members of the Committee shall be the named
fiduciaries with authority to control and manage the operation and
administration of the Plan. Except as described above, members of the
Committee need not be Employees or Participants. Any Committee member may
resign by giving notice, in writing, to the Board of Directors of Bay Bank of
Commerce.
(b) Committee Action - Committee action will be by vote of a majority
of the members at a meeting or in writing without a meeting. Minutes of each
Committee meeting shall be kept. A Committee member who is a Participant shall
not vote on any question relating specifically to himself.
The Committee shall choose from its members a Chairman and a
Secretary. The Chairman or the Secretary of the Committee shall be authorized
to execute any certificate or other written direction on behalf of the
Committee. The Secretary shall keep a record of the Committee's proceedings
and of all dates, records and documents pertaining to the administration of the
Plan.
(c) Powers and Duties of the Committee - The Committee shall have all
powers necessary to enable it to administer the Plan and the Trust Agreement in
accordance with their provisions, including without limitation the following:
(1) resolving all questions relating to the eligibility of
Employees to become Participants;
- 39 -
<PAGE> 42
(2) determining the appropriate allocations to Participants'
Accounts pursuant to Section 6;
(3) determining the amount of benefits payable to a
Participant (or Beneficiary), and the time and manner in
which such benefits are to be paid;
(4) authorizing and directing all disbursements of Trust
Assets by the Trustee;
(5) establishing procedures in accordance with Section 414(p)
of the Code to determine the qualified status of domestic
relations orders and to administer distributions under
such qualified orders;
(6) engaging any administrative, legal, accounting, clerical
or other services that it may deem appropriate;
(7) construing and interpreting the Plan and the Trust
Agreement and adopting rules for administration of the
Plan that are consistent with the terms of the Plan
documents and of ERISA and the Code;
(8) compiling and maintaining all records it determines to be
necessary, appropriate or convenient in connection with
the administration of the Plan;
(9) reviewing the performance of the Trustee with respect to
the Trustee's administrative duties, responsibilities and
obligations under the Plan and Trust Agreement; and
(10) executing agreements and other documents on behalf of the
Plan and Trust.
The Committee shall be responsible for directing the Trustee as to the
investment of Trust Assets. The Committee may delegate to the Trustee the
responsibility for investing Trust Assets other than Bank Stock. The Committee
shall establish a funding policy and method for directing the Trustee to
acquire Bank Stock (and for otherwise investing the Trust Assets) in a manner
that is consistent with the objectives of the Plan and the requirements of
ERISA.
- 40 -
<PAGE> 43
The Committee shall perform its duties under the Plan and the Trust
Agreement solely in the interests of the Participants (and their
Beneficiaries). Any discretion granted to the Committee under any of the
provisions of the Plan or the Trust Agreement shall be exercised only in
accordance with rules and policies established by the Committee which shall be
applicable on a nondiscriminatory basis. The Committee shall have sole and
exclusive discretionary authority to construe and interpret the terms of the
Plan and Trust. All decisions and interpretations of the Trustees under this
Section 16 shall be conclusive and binding upon all persons with an interest in
the Plan and shall be given the greatest deference permitted by law.
(d) Expenses - All reasonable expenses of administering the Plan and
Trust (including Trustee's fees) shall be charged to and paid out of the Trust
Assets. The Bank may, however, pay all or any portion of such expenses
directly, and payment of expenses by the Bank shall not be deemed to be
Employer Contributions.
(e) Information to be Submitted to the Committee - To enable the
Committee to perform its functions, the Bank shall supply full and timely
information to the Committee on all matters as the Committee may require, and
shall maintain such other records as the Committee may determine are necessary
or appropriate in order to determine the benefits due or which may become due
to Participants (or Beneficiaries) under the Plan.
(f) Delegation of Fiduciary Responsibility - The Committee from time
to time may allocate to one or more of its members
- 41 -
<PAGE> 44
and/or may delegate to any other persons or organizations any of its rights,
powers, duties and responsibilities with respect to the operation and
administration of the Plan that are permitted to be so delegated under ERISA;
provided, however, that responsibility for investment of the Trust Assets may
not be allocated or delegated except as provided in Section 16(c). Any such
allocation or delegation shall be made in writing, shall be reviewed
periodically by the Committee and shall be terminable upon such notice as the
Committee in its discretion deems reasonable and proper under the
circumstances.
(g) Bonding, Insurance and Indemnity - To the extent required under
Section 412 of ERISA, the Bank shall secure fidelity bonding for the
fiduciaries of the Plan.
The Bank (in its discretion) or the Trustee (as directed by the
Committee) may obtain a policy or policies of insurance for the Committee (and
other fiduciaries of the Plan) to cover liability or loss occurring by reason
of the act or omission of a fiduciary. If such insurance is purchased with
Trust Assets, the policy must permit recourse by the insurer against the
fiduciary in the case of a breach of a fiduciary obligation by such fiduciary.
The Bank hereby indemnifies each member of the Committee (to the extent
permitted by law) against any personal liability or expense resulting from his
service on the Committee, except such liability or expense as may result from
his own willful misconduct.
- 42 -
<PAGE> 45
(h) Notices, Statements and Reports - Bay Bank of Commerce shall be
the "Plan Administrator" (as defined in Section 3(16)(A) of ERISA and Section
414(g) of the Code) for purposes of the reporting and disclosure requirements
of ERISA and the Code. The Committee shall assist the Bank, as requested, in
complying with such reporting and disclosure requirements. The Committee shall
be the designated agent of the Plan for the service of legal process.
Section 17. Claims Procedure.
A Participant (or Beneficiary) who does not receive a distribution of
benefits to which he believes he is entitled may present a claim to the
Committee. The claim for benefits must be in writing and addressed to the
Committee or to Bay Bank of Commerce. If the claim for benefits is denied, the
Committee shall notify the Participant (or Beneficiary) in writing within 90
days after the Committee initially received the benefit claim. Any notice of a
denial of benefits shall advise the Participant (or Beneficiary) of the basis
for the denial, any additional material or information necessary for the
Participant (or Beneficiary) to perfect his claim and the steps which the
Participant (or Beneficiary) must take to have his claim for benefits reviewed.
Each Participant (or Beneficiary) whose claim for benefits has been
denied may file a written request for a review of his claim by the Committee.
The request for review must be filed by
- 43 -
<PAGE> 46
the Participant (or Beneficiary) within 60 days after he receives the written
notice denying his claim. The decision of the Committee will be made within 60
days after receipt of a request for review and shall be communicated in writing
to the claimant. Such written notice shall set forth the basis for the
Committee's decision. If there are special circumstances (such as the need to
hold a hearing) which require an extension of time for completing the review,
the Committee's decision shall be rendered not later than 120 days after
receipt of a request for review. All decisions and interpretations of the
Committee under this Section 17 shall be conclusive and binding upon all
persons with an interest in the Plan and shall be given the greatest deference
permitted by law.
Section 18. Limitation on Participants' Rights.
A Participant's Capital Accumulation will be based solely upon his
vested interest in his Accounts and will be paid only from the Trust Assets.
The Bank, the Committee or the Trustee shall not have any duty or liability to
furnish the Trust with any funds, securities or other assets, except as
expressly provided in the Plan.
The adoption and maintenance of the Plan shall not be deemed to
constitute a contract of employment or otherwise between the Bank and any
Employee, or to be a consideration for, or an inducement or condition of, any
employment. Nothing contained in this Plan shall be deemed to give an Employee
the right to be
- 44 -
<PAGE> 47
retained in the Service of the Bank or to interfere with the right of the Bank
to discharge, with or without cause, any Employee at any time.
Section 19. Future of the Plan.
The Holding Company reserves the right to amend or terminate the Plan
(in whole or in part) and the Trust Agreement at any time, by action of the
Board of Directors; provided, however, that the provisions of the Plan relating
to the allocation of Bank Stock to the Accounts of Participants may not be
amended more often than once every six months (other than as may be required to
comply with changes in the Code, ERISA or the rules thereunder). Neither
amendment nor termination of the Plan shall retroactively reduce the vested
rights of Participants or permit any part of the Trust Assets to be diverted to
or used for any purpose other than for the exclusive benefit of the
Participants (and their Beneficiaries).
The Holding Company specifically reserves the right to amend the Plan
and the Trust Agreement retroactively in order to satisfy any applicable
requirements of the Code and ERISA.
If the Plan is terminated (or partially terminated), participation of
Participants affected by the termination will end. If Employer Contributions
are not replaced by contributions to a comparable plan which satisfies the
requirements of Section 401(a) of the Code, the Accounts of only those
Participants who are Employees on the effective date of the termination will
- 45 -
<PAGE> 48
become nonforfeitable as of that date. A complete discontinuance of Employer
Contributions shall be deemed to be a termination of the Plan for this purpose.
The Capital Accumulations of those Participants whose Service terminated prior
to the effective date of Plan termination will continue to be determined
pursuant to Section 10(a); and, to the extent that such Participants are not
vested, the nonvested balances in their Accounts will become Forfeitures to be
reallocated as of the effective date of Plan termination (even if they have not
incurred a one-year Break in Service).
After termination of the Plan, the Trust will be maintained until the
Capital Accumulations of all Participants have been distributed. Capital
Accumulations may be distributed following termination of the Plan or
distributions may be deferred as provided in Section 12, as the Holding Company
shall determine. In the event that Bank Stock is sold in connection with the
termination of the Plan or the amendment of the Plan to become a qualified
employee plan that is not a stock bonus plan, all Capital Accumulations will be
distributed in cash.
- 46 -
<PAGE> 49
In the event of the merger or consolidation of this Plan with another
plan, or the transfer of Trust Assets (or liabilities) to another plan, the
Account balances of each Participant immediately after such merger,
consolidation or transfer must be at least as great as immediately before such
merger, consolidation or transfer (as if the Plan had then terminated).
Section 20. "Top-Heavy" Contingency Provisions.
(a) The provisions of this Section 20 are included in the Plan
pursuant to Section 401(a)(10)(B)(ii) of the Code and shall become applicable
only if the Plan becomes a "top-heavy plan" under Section 416(g) of the Code
for any Plan Year.
(b) The determination as to whether the Plan becomes "top-heavy" for
any Plan Year shall be made as of the Allocation Date of the immediately
preceding Plan Year by considering the Plan together with the 401(k) Plan. The
Plan (and the 401(k) Plan) shall be "top-heavy" only if the total account
balances under the Plan and the 401(k) Plan of "key employees" as of the
determination date exceeds 60% of the total account balances of all
Participants. For such purpose, account balances shall be computed and
adjusted pursuant to Section 416(g) of the Code. "Key employees" shall be
certain Participants (who are officers or shareholders of the Bank) and
Beneficiaries described in Section 416(i)(1) or (5) of the Code.
- 47 -
<PAGE> 50
(c) For any Plan Year in which the Plan is "top-heavy," each
Participant who is an Employee on the Allocation Date (and who is not a "key
employee") shall receive a minimum allocation of Employer Contributions and
Forfeitures which is equal to the lesser of:
(1) 3% of his Statutory Compensation; or
(2) the same percentage of his Statutory Compensation as the
allocation to the "key employee" for whom the percentage
is the highest for that Plan Year. For this purpose, the
allocation to a "key employee" shall include any Elective
deferrals made by him for the Plan Year under the 401(k)
Plan.
(d) For any Plan Year in which the Plan is "top-heavy," Statutory
Compensation of each Employee for purposes of the Plan shall not take into
account any amount in excess of $200,000 for Plan Years after 1988 and before
1994, or any amount in excess of $150,000 for Plan Years after 1993 (each as
adjusted for increases in the cost of living).
(e) As of the first day of any Plan Year in which the Plan has
become "top-heavy," the vesting schedule in Section 10(a)(2) shall be amended
(with respect to any Employee who is credited with at least one Hour of Service
after the Plan has become "top-heavy") to read as follows:
- 48 -
<PAGE> 51
<TABLE>
<CAPTION>
Nonforfeitable
Credited Service Percentage
---------------- --------------
<S> <C>
Less than Two Years 0%
Two Years 20%
Three Years 40%
Four Years 60%
Five Years 80%
Six Years or More 100%
</TABLE>
If the Plan ceases to be "top-heavy," the Capital Accumulation of a
Participant who, at that time, has less than three years of Service shall
thereafter be determined under the vesting schedule in Section 10(a)(2),
instead of the vesting schedule in this Section 20(e), except that his
nonforfeitable percentage shall not be reduced below the nonforfeitable
percentage that he had at the time the Plan ceased to be "top-heavy." If the
Plan ceases to be "top-heavy," the Capital Accumulation of a Participant who,
at that time, has three or more years of Service shall continue to be
determined under the vesting schedule in this Section 20(e).
Section 21. Governing Law.
The provisions of this Plan and the Trust Agreement shall be
construed, administered and enforced in accordance with the laws of the State
of California, to the extent such laws are not superseded by ERISA.
- 49 -
<PAGE> 52
Section 22. Execution.
To record the adoption of this amendment and restatement of the Plan,
the Holding Company has caused it to be executed on this 19th day of March,
1996.
BAY COMMERCIAL SERVICES
By /s/ Richard M. Kahler
----------------------------
By /s/ Randall D. Greenfield
----------------------------
- 50 -
<PAGE> 1
EXHIBIT 13
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31:
<S> <C> <C> <C> <C> <C>
Interest income $ 7,456 $ 6,086 $ 5,520 $ 6,215 $ 7,575
Interest income on a taxable equivalent basis 7,505 6,146 5,591 6,285 7,632
Interest expense 2,310 1,766 1,552 2,206 3,197
Net interest income 5,146 4,320 3,968 4,009 4,378
Net interest income on a taxable equivalent basis 5,195 4,380 4,039 4,079 4,436
Net income (loss) 945 619 374 (220) 696
Net income (loss) per common and equivalent share 0.78 0.55 0.35 (0.20) 0.61
Return on average assets 1.0% 0.7% 0.5% (0.3)% 0.9%
Return on average shareholders' equity 11.1% 7.9% 5.1% (2.9)% 9.5%
- -------------------------------------------------------------------------------------------------------------
AT DECEMBER 31:
Assets $92,819 $89,193 $81,895 $81,880 $80,591
Loans 58,152 51,566 48,777 52,899 57,030
Securities 20,410 25,988 24,421 16,979 14,567
Deposits 80,253 79,258 72,609 71,913 70,633
Shareholders' equity 8,767 7,946 7,632 7,208 7,377
Book value per share $ 8.14 $ 7.36 $ 7.07 $ 6.67 $ 6.83
- -------------------------------------------------------------------------------------------------------------
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
(INSIDE FRONT COVER)
<PAGE> 2
REPORT TO OUR SHAREHOLDERS
The Company completed another successful year in 1995, with net income of
$945,000 or $0.78 per share. This represents a strong 53% increase over 1994's
net income of $619,000 or $0.55 per share. The growth in earning assets and a
higher net interest margin were important factors contributing to the increase
in 1995 net income.
Reflecting the overall improvement in the California economy during the year,
the business climate in the East Bay Region continued to strengthen and provide
a more favorable environment for loan and deposit growth compared to 1994. As a
result, the Company experienced strong growth of $6,227,000 or 8.3% in average
earning assets during the year.
The average yield on earning assets was higher in 1995 even though short-term
interest rates, and the prime rate, peaked by mid-year and then declined. With
the increase in interest income, in addition to some moderation in the cost of
funds during the year, the Company's net interest margin rose to 6.3% for 1995
as compared to 5.7% in 1994.
As a result of the increase in 1995 earnings, and the strength of the Company's
year-end capital position, the Board of Directors approved a cash dividend of
$0.30 per share that was paid in January 1996.
For the second year in a row, the Bank was recognized for outstanding
performance by two prestigious bank research firms. Veribanc, Inc. awarded its
Blue Ribbon rating for safety and soundness and rated the Bank as an Elite
financial institution. The Bank was also rated as a Premier Performing bank by
the California based Findley Company.
Following the trend of national bank consolidation in recent years, bank mergers
are likely to have a significant impact on the industry in California for the
foreseeable future. Currently, four of California's largest banks are in the
process of merging into two; and here in the East Bay, a recently announced
merger will transform 25 branches of 5 local independent banks, that are
operating under a holding company, into branches of an out-of-state bank.
As these banks consolidate operations and reduce staffing to cut costs, we
expect it will have a direct impact on their customer service over the next few
years, presenting an opportunity for us to gain additional market share.
Since opening in 1981, we have been committed to providing exceptional banking
service to the business community in the East Bay. The development of long-term
banking relationships and customer satisfaction have been the focus of this
approach. As other banks cut back operations, our commitment to personal service
will have even more importance for those customers who want this added value.
To ensure our competitive advantage during 1996 and beyond, we are developing
new deposit, loan and electronic banking products to offer to our core business
customers. As the cost of computers goes down and access to information
increases in value, the delivery of account information through personal
computer based technology becomes more important.
We look forward to a promising year and thank you for your continued support.
/s/ WILLIAM R. HENSON
WILLIAM R. HENSON
CHAIRMAN
BAY BANK OF COMMERCE
/s/ RICHARD M. KAHLER
RICHARD M. KAHLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BAY BANK OF COMMERCE
BAY COMMERCIAL SERVICES
/s/ JOSHUA FONG, O.D.
JOSHUA FONG, O.D.
CHAIRMAN
BAY COMMERCIAL SERVICES
BAY COMMERCIAL SERVICES AND SUBSIDIARY
1
<PAGE> 3
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------
December 31 (dollars in thousands): 1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,057 $ 5,476
Federal funds sold 6,700 2,530
- --------------------------------------------------------------------------------------
Cash and cash equivalents 11,757 8,006
- --------------------------------------------------------------------------------------
Securities available for sale stated at market value
(amortized cost $13,045 for 1995; $11,399 for 1994) 13,199 11,165
Securities held to maturity (market values of $7,339 for 1995;
$14,146 for 1994) 7,211 14,823
Loans held for sale 4,984 3,929
Loans 53,168 47,637
Allowance for loan losses (982) (756)
- --------------------------------------------------------------------------------------
Net loans 57,170 50,810
- --------------------------------------------------------------------------------------
Premises and equipment, net 2,139 2,286
Interest and fees receivable 600 539
Other real estate owned 359 854
Other assets 384 710
- --------------------------------------------------------------------------------------
TOTAL ASSETS $92,819 $89,193
- --------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $26,841 $24,252
Savings and interest-bearing demand 24,516 28,593
Time 23,773 21,123
Certificates of deposit, $100,000 and over 5,123 5,290
- --------------------------------------------------------------------------------------
Total deposits 80,253 79,258
- --------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 2,203 1,036
Interest payable and other liabilities 1,596 953
- --------------------------------------------------------------------------------------
Total liabilities 84,052 81,247
- --------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 9, 11 and 12) --- ---
Shareholders' equity:
Common stock--no par value: authorized 20,000,000
shares; issued and outstanding 1,076,720 shares in 1995 and
1,079,985 shares in 1994 3,662 3,695
Retained earnings 5,011 4,389
Net unrealized gain (loss) on securities available for sale 94 (138)
- --------------------------------------------------------------------------------------
Total shareholders' equity 8,767 7,946
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $92,819 $89,193
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
2
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS
- -------------------------------------------------------------------------------------------------
Years ended December 31 (in thousands, except per share amounts): 1995 1994 1993
<S> <C> <C> <C>
Interest income:
Loans, including fees $5,764 $4,729 $4,420
Federal funds sold 368 155 111
Investment securities:
Taxable 1,217 1,076 843
Nontaxable 107 126 146
- -------------------------------------------------------------------------------------------------
Total interest income 7,456 6,086 5,520
- -------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing demand 716 638 621
Time 1,240 833 622
Certificates of deposit, $100,000 and over 294 261 268
Other borrowed funds 60 34 41
- -------------------------------------------------------------------------------------------------
Total interest expense 2,310 1,766 1,552
- -------------------------------------------------------------------------------------------------
Net interest income 5,146 4,320 3,968
Benefit for loan losses 155 100 ---
- -------------------------------------------------------------------------------------------------
Net interest income after
benefit for loan losses 5,301 4,420 3,968
- -------------------------------------------------------------------------------------------------
Noninterest income:
Service charges and fees 240 264 273
Bankcard income 211 181 178
Loan servicing 170 194 228
Net gain on sale of OREO 57 68 141
Gain on sale of mortgage servicing rights --- 43 91
Gain on sale of loans 7 7 201
Securities gains (losses) (35) (3) 16
Other 66 322 50
- -------------------------------------------------------------------------------------------------
Total noninterest income 716 1,076 1,178
- -------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 2,470 2,437 2,342
Occupancy 596 608 657
Other 1,406 1,473 1,627
- -------------------------------------------------------------------------------------------------
Total noninterest expenses 4,472 4,518 4,626
- -------------------------------------------------------------------------------------------------
Income before income tax expense 1,545 978 520
Income tax expense 600 359 146
- -------------------------------------------------------------------------------------------------
NET INCOME $ 945 $ 619 $ 374
- -------------------------------------------------------------------------------------------------
NET INCOME PER COMMON AND EQUIVALENT SHARE $ 0.78 $ 0.55 $ 0.35
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
3
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
Years ended December 31 (in thousands): 1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 945 $ 619 $ 374
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 166 27 313
Benefit for loan losses (155) (100) ---
Unamortized deferred loan fees, net 122 44 (77)
Securities (gains) losses 35 3 (16)
Gain on sale of mortgage servicing rights --- (43) (76)
Originations of mortgage loans held for sale --- (1,907) (22,699)
Originations of SBA loans held for sale (1,090) (1,999) (6,143)
Proceeds from the sale of mortgage loans held for sale --- 1,954 24,017
Proceeds from the sale of SBA loans held for sale 188 221 3,587
Receipts net of expenses due to OREO (73) (59) (134)
Loss on sale of equipment --- 14 3
Change in interest and fees receivable and other assets 169 (117) 678
Change in interest payable and other liabilities 658 189 184
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 965 (1,154) 11
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 965 1,248 1,527
Proceeds from maturities of securities available for sale 21,369 25,823 ---
Proceeds from maturities of securities held to maturity 3,044 2,564 10,668
Purchase of securities available for sale (14,891) (24,725) ---
Purchase of securities held to maturity (4,446) (6,459) (19,644)
Net change in loans (5,115) (1,182) 2,955
Proceeds from sale of mortgage servicing rights --- 30 76
Proceeds from sale of OREO 76 110 1,647
Purchases of premises and equipment (131) (102) (75)
Proceeds from sale of equipment 2 27 31
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 873 (2,666) (2,815)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in noninterest-bearing demand deposits 2,589 3,070 1,289
Net change in savings and interest-bearing demand deposits (4,077) 1,586 1,505
Net change in time deposits 2,650 3,110 (766)
Net change in certificates of deposit, $100,000 and over (167) (1,117) (1,332)
Net change in securities sold under agreements to repurchase 1,167 51 (1,227)
Exercise of stock options 9 --- ---
Repurchase and retirement of common stock (42) --- ---
Cash dividends paid (216) --- ---
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,913 6,700 (531)
- ----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 3,751 2,880 (3,335)
Cash and cash equivalents at beginning of year 8,006 5,126 8,461
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,757 $ 8,006 $ 5,126
- ----------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest $ 2,128 $ 1,673 $ 1,527
Income taxes 139 253 (186)
Noncash investing activities during the period:
Repossession of loan collateral $ 319 $ 103 $ 2,288
Loan in connection with sale of OREO 1,003 32 ---
Noncash financing activities during the period:
Reduction of guaranteed ESOP obligation $ --- $ 49 $ 50
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
4
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1995, 1994, and 1993 (dollars in thousands, except per share amounts):
NET UNREALIZED
GAIN (LOSS)
ON SECURITIES GUARANTEED TOTAL
SHARES COMMON RETAINED AVAILABLE ESOP SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS FOR SALE OBLIGATION EQUITY
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1993 1,079,985 $3,695 $3,612 $(99) $7,208
Reduction of guaranteed ESOP obligation 50 50
Net income 374 374
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 1,079,985 3,695 3,986 (49) 7,632
Cash dividends declared ($0.20/share) (216) (216)
Net unrealized loss on adoption of SFAS 115 $ (12) (12)
Reduction of guaranteed ESOP obligation 49 49
Net unrealized loss on securities
available for sale (126) (126)
Net income 619 619
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 1,079,985 3,695 4,389 (138) --- 7,946
Exercise of stock options 1,735 9 9
Repurchase and retirement of common stock (5,000) (42) (42)
Cash dividends declared ($0.30/share) (323) (323)
Net unrealized gain on securities
available for sale 232 232
Net income 945 945
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,076,720 $3,662 $5,011 $ 94 $--- $8,767
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
5
<PAGE> 7
Notes to Consolidated Financial Statements for Years Ended December 31, 1995,
1994, and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Bay Commercial Services (Company) and
its wholly owned subsidiary, Bay Bank of Commerce (Bank), conform with generally
accepted accounting principles and prevailing practices within the banking
industry. The methods of applying those principles which materially affect the
consolidated financial statements are summarized below.
CONSOLIDATION
The consolidated financial statements include the Company and the Bank.
Significant intercompany accounts and transactions are eliminated in
consolidation.
NATURE OF OPERATIONS
The Company is principally engaged in business-oriented banking in the County of
Alameda, California. The Company primarily grants commercial loans, the majority
of which are secured by owner-occupied commercial properties. Lending in
residential and consumer categories is limited. Although the Company has a
diversified portfolio, a substantial portion of its debtors' ability to honor
their contracts is dependent upon the economic sector of Northern California,
including the real estate markets of the Northern California Bay Area.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, revenue and expenses as of the
date and for the periods presented. Actual results could differ from those
estimates.
INVESTMENTS IN DEBT SECURITIES
Investments in debt securities are classified according to the requirements of
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. This Statement requires
entities to classify debt and equity securities into one of three categories,
held-to-maturity, trading or available-for-sale. Investments in debt securities
are classified as held-to-maturity and measured at amortized cost only if the
Company has the positive intent and ability to hold such securities to maturity.
All other investments in debt securities are classified as either trading
securities, which are bought and held principally for sale in the near term and
are carried at market value with a corresponding recognition of the unrealized
holding gain or loss in results of operations, or as available-for- sale
securities, which are all other securities and are carried at market value with
a corresponding recognition of the unrealized holding gain or loss as a net
amount in a separate component of shareholders' equity until realized.
Amortization of premiums and accretion of discounts arising at acquisition of
investment securities are included in income using methods that approximate the
interest method. Gains or losses on the sale of securities are computed using
the specific identification method.
LOANS
Loans held for investment are stated at the principal amount outstanding net of
deferred loan fees. Interest on loans is credited to income as earned. Accrual
of interest income is discontinued when the payment of interest or principal is
90 days or more past due, except when the loan is well secured and in the
process of collection. When a loan is placed on nonaccrual status, any interest
previously accrued but not received is generally reversed.
Loans held for sale include the portions of certain loans which are guaranteed
by the federal Small Business Administration (SBA). These loans are stated at
the lower of aggregate cost or market value. Market value is determined by
reference to quoted yields for similar types of instruments.
In determining the gain realized on the sale of SBA guaranteed loans, the
recorded investment is allocated between the portion of the loan sold, the
portion retained, and excess servicing, based on relative fair values as of the
date the loan is sold.
ALLOWANCE FOR LOAN LOSSES
The Bank provides for possible loan losses by a charge to operating income based
upon the composition of the loan portfolio, past loan loss experience, current
economic conditions and other factors which, in management's judgment, deserve
recognition in estimating loan losses. Management will charge off loans when it
determines there has been a permanent impairment of the related carrying values.
Management believes that the allowance for loan losses is adequate. While
Management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their analysis of information available to them at the
time of their examination.
On January 1, 1995, SFAS No. 114, Accounting by Creditors for Impairment of a
Loan and SFAS No. 118, Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures, became effective. SFAS No. 114 provides new rules
for measuring losses on impaired loans. Impaired loans are required to be
measured based on the present value of expected future cash flows discounted at
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. SFAS No. 118 amends SFAS No. 114 and eliminates its
provisions regarding how a creditor should report income on an impaired loan
and, as a result, allows creditors to continue to use existing methods for
recognizing income on impaired loans. The implementation of these Statements in
1995 had no material impact on the Company's consolidated financial statements.
The Bank will classify a loan as impaired when, based on current information and
events, it is likely that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The Bank applies its
normal loan review procedures when determining whether a loan covered by SFAS
No. 114 is impaired. Impaired loans are those loans identified under the Bank's
internal rating system as "doubtful" or "loss" or those "substandard" loans
which have been placed on nonaccrual. Restructured loans are always classified
as impaired. There were no loans at December 31, 1995, which the Company
considered impaired.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
6
<PAGE> 8
Notes to Consolidated Financial Statements for Years Ended December 31, 1995,
1994, and 1993
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation computed
on the straight-line method over estimated useful lives ranging from three to
fifteen years. Leasehold improvements are capitalized at cost and are amortized
over the lesser of the term of the lease or the estimated useful lives of the
improvements ranging from fifteen to twenty-five years. The Company adopted SFAS
No. 121, Accounting for the Impairment of Long-lived Assets to be Disposed Of,
effective January 1, 1995. The adoption of this Statement had no impact on the
Company's financial condition or results of operations.
OTHER REAL ESTATE OWNED (OREO)
OREO consists of real estate acquired as a result of legal foreclosure or
through receipt of a deed in lieu of foreclosure. OREO amounts are carried at
the lower of cost or fair value less estimated costs of disposal. When the
property is acquired, any excess of the loan balance over fair value of the
property is charged to the allowance for loan losses. Subsequent write-downs, if
any, and disposition gains and losses are included in noninterest income or
noninterest expense. OREO assets are not being depreciated and any rental income
is applied against current expenses or the recorded balance of the asset.
INCOME TAXES
The Company and the Bank file a consolidated federal income tax return and a
combined California franchise tax return. Amounts provided for income tax
expenses are determined based on the asset and liability method. Deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences
between the consolidated financial statement carrying amounts and the tax bases
of existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
NET INCOME PER SHARE
Net income per common and equivalent share is computed by dividing net income by
the average number of outstanding common shares including the dilutive effect of
stock options. Weighted average common and equivalent shares were 1,215,877,
1,127,920 and 1,079,985 for 1995, 1994 and 1993, respectively.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. The new standard defines a fair value
method of accounting for stock options and other equity instruments, such as
stock purchase plans. The new standard permits companies to continue to account
for equity transactions with employees under existing accounting rules but
requires disclosure in a note to the financial statements of the pro-forma net
income and net income per common and equivalent share as if the company had
applied the new method of accounting. The Company intends to follow these
disclosure requirements for its employee stock plans. As a result, adoption of
the new standard will not impact reported earnings or earnings per share, and
will have no effect on the Company's cash flows.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, cash due from banks and federal funds sold
for less than 90 day periods to be cash and cash equivalents.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the financial
statement presentation for the current year. The reclassifications had no impact
on the Bank's results of operations or shareholders' equity.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
7
<PAGE> 9
Notes to Consolidated Financial Statements for Years Ended December 31, 1995,
1994, and 1993
(2) SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
The amortized cost, unrealized gains (losses), estimated market value and
weighted average yield of investments in debt securities at December 31, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
1995
- -----------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Market Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. Treasury and agency securities $ 4,197 $ 50 $--- $ 4,247
Obligations of states and political subdivisions 2,831 73 (2) 2,902
Mortgage-backed securities 183 7 --- 190
- -----------------------------------------------------------------------------------------------------
$ 7,211 $130 $ (2) $ 7,339
- -----------------------------------------------------------------------------------------------------
Weighted average yield 5.96%
- -----------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and agency securities $11,989 $167 $(13) $12,143
Corporate securities 500 4 --- 504
Mortgage-backed securities 556 --- (4) 552
- -----------------------------------------------------------------------------------------------------
$13,045 $171 $(17) $13,199
- -----------------------------------------------------------------------------------------------------
Weighted average yield 6.13%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994
- -----------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses Market Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. Treasury and agency securities $11,471 --- $(668) $10,803
Obligations of states and political subdivisions 2,954 $ 22 (24) 2,952
Mortgage-backed securities 398 --- (7) 391
- -----------------------------------------------------------------------------------------------------
$14,823 $ 22 $(699) $14,146
- -----------------------------------------------------------------------------------------------------
Weighted average yield 5.83%
- -----------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and agency securities $ 2,000 --- $(109) $ 1,891
Corporate securities 6,482 --- (81) 6,401
Bankers acceptances 1,984 --- (12) 1,972
Mortgage-backed securities 933 --- (32) 901
- -----------------------------------------------------------------------------------------------------
$11,399 --- $(234) $11,165
- -----------------------------------------------------------------------------------------------------
Weighted average yield 5.50%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Securities with a carrying amount of $6,795,000 and $6,435,000 at December 31,
1995 and 1994, respectively, were pledged to secure public deposits and
securities sold under agreements to repurchase and for other purposes as
required by law or contract.
During 1995, the Financial Accounting Standards Board allowed a one time
transfer of securities between the held-to-maturity and the available-for-sale
categories. The Bank transferred approximately $10,998,000 from its held-to-
maturity category to its available-for-sale category.
The amortized cost, estimated market value and weighted average yield of debt
securities at December 31, 1995, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Securities held to maturity Securities available for sale
---------------------------------------------------------------
Amortized Estimated Amortized Weighted
(in thousands) Cost Market Value Cost Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 241 $ 242 $ 1,494 $ 1,503
Due after one year through five years 4,304 4,377 7,551 7,619
Due after five years through ten years 2,483 2,530 4,000 4,077
Due after ten years 183 190 --- ---
- --------------------------------------------------------------------------------------------------------
$7,211 $7,339 $13,045 $13,199
- --------------------------------------------------------------------------------------------------------
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
8
<PAGE> 10
Notes to Consolidated Financial Statements for Years Ended December 31, 1995,
1994, and 1993
(2) SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE
FOR SALE, CONTINUED
At December 31, 1995, 84% of the portfolio was composed of "AAA" rated U.S.
Treasury and agency securities. The balance of the portfolio was composed of
municipal and other debt securities rated as follows: 4% rated "AAA"; 6% rated
"AA," and 6% rated "A." Municipal securities comprised 14% of the Bank's
portfolio and are primarily issued by smaller, local government entities subject
to a less active trading market. All other securities are subject to an active
trading market and are widely available to the public.
Following is a schedule of gains (losses) realized on sales of securities for
the years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gains $--- $ 11 $19
Losses (35) (14) (3)
- --------------------------------------------------------------------------------
Net gains (losses) $(35) $ (3) $16
- --------------------------------------------------------------------------------
</TABLE>
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial $13,319 $12,416
Real Estate:
Construction 2,250 1,039
Mortgage 35,137 33,229
Held for sale 4,984 3,929
Installment 1,211 885
Other 1,810 656
- --------------------------------------------------------------------------------
58,711 52,154
- --------------------------------------------------------------------------------
Deferred loan fees (559) (588)
- --------------------------------------------------------------------------------
$58,152 $51,566
- --------------------------------------------------------------------------------
</TABLE>
Loans on which the accrual of interest had been discontinued amounted to
$626,000 at December 31, 1994. There were no such loans at December 31, 1995. No
interest was recognized on such loans and if interest on such loans had been
accrued, it would have amounted to approximately $60,000 for 1994.
Certain directors and executive officers of the Company, certain entities to
which they are related and certain of their relatives are loan customers of the
Bank. Such loans, all of which were made in the ordinary course of business on
normal credit terms, including interest rate and collateralization, were $66,000
and $76,000 at December 31, 1995 and 1994, respectively. At December 31, 1995,
all of these loans were revolving lines of credit with credit limits in the
aggregate of $90,000. At December 31, 1994, such loans were all revolving lines
of credit with credit limits in the aggregate of $132,000.
Following is a schedule of the activity in the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning Balance $ 756 $ 866 $1,060
- --------------------------------------------------------------------------------
Loans charged off (27) (133) (607)
Recoveries on loans
charged off 408 123 413
- --------------------------------------------------------------------------------
Net (charge-offs) recoveries 381 (10) (194)
Benefit for reduction
in allowance (155) (100) ---
- --------------------------------------------------------------------------------
Balance, end of year $ 982 $ 756 $ 866
- --------------------------------------------------------------------------------
</TABLE>
During 1994, the Company closed its mortgage division and sold the remainder of
its mortgage servicing rights to approximately $2,765,000 of mortgage loans to
an independent third party for approximately $30,000. Under the terms of the
sale, the purchaser has limited recourse to the Company. The Company does not
anticipate its liability under the recourse provisions to be material and has
provided for that estimate in the consolidated financial statements.
The Company originates, and in certain instances sells, a portion of its Small
Business Administration (SBA) loans with servicing retained. The amount of SBA
loans serviced for others at December 31, 1995 and 1994 was approximately
$18,289,000 and $20,499,000, respectively.
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 354 $ 354
Premises 1,091 1,095
Furniture and equipment 1,800 1,988
Leasehold improvements 1,224 1,214
- --------------------------------------------------------------------------------
4,469 4,651
- --------------------------------------------------------------------------------
Less accumulated
depreciation and amortization (2,330) (2,365)
- --------------------------------------------------------------------------------
$ 2,139 $ 2,286
- --------------------------------------------------------------------------------
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
9
<PAGE> 11
Notes to Consolidated Financial Statements for Years Ended December 31, 1995,
1994, and 1993
(5) INCOME TAXES
Components of income tax expense (benefit) for the years ended December 31 were
as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $456 $281 $ 47
State 146 79 4
- --------------------------------------------------------------------------------
Total current 602 360 51
- --------------------------------------------------------------------------------
Deferred:
Federal (20) 15 85
State 18 (16) 10
- --------------------------------------------------------------------------------
Total deferred (2) (1) 95
- --------------------------------------------------------------------------------
$600 $359 $146
- --------------------------------------------------------------------------------
</TABLE>
The cumulative deferred income tax benefits at December 31 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State franchise tax $ 51 $ 20
Provision for loan losses 114 184
Nonaccrual interest --- 23
Investments available for
sale recorded at market --- 96
Other 66 25
- --------------------------------------------------------------------------------
Total deferred tax assets 231 348
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Investments available for
sale recorded at market (60) ---
Differences in tax and
book depreciation (198) (215)
Other (28) (30)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (286) (245)
- --------------------------------------------------------------------------------
$ (55) $ 103
- --------------------------------------------------------------------------------
</TABLE>
The effective tax rate as a percentage of income or loss before income tax
expense or benefit differs from the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Statutory federal
income tax rate 35.0% 35.0% 35.0%
Increase (decrease)
resulting from:
Tax exempt income
on municipal securities (2.1) (4.2) (9.5)
State franchise taxes,
net of federal benefit 7.0 7.0 7.3
Other (1.1) (1.1) (4.6)
- --------------------------------------------------------------------------------
Effective tax rate 38.8% 36.7% 28.2%
- --------------------------------------------------------------------------------
</TABLE>
(6) STOCK OPTION PLAN
Under the Company's stock option plan, up to 303,186 shares of the Company's
common stock were reserved for the purpose of granting stock options to
directors, officers and key employees. Under the plan, options may not be
granted at a price less than the fair market value at the date of the grant,
may be exercised over a ten-year term and vest ratably over periods of up to
five years from the date of the grant. Options for the purchase of 196,950
shares were exercisable and 8,920 shares were available for grant as of
December 31, 1995.
The following is a summary of changes in options outstanding:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1993 265,700 $5.250-$8.50
Options forfeited (29,125) 5.375-5.625
Options granted 5,000 3.50
- -------------------------------------------------------------
Outstanding at December 31, 1993 241,575 3.50-8.50
Options forfeited (97,065) 3.50-8.50
Options granted 153,741 4.25
- -------------------------------------------------------------
Outstanding at December 31, 1994 298,251 4.25-5.625
Options forfeited (21,000) 4.25-5.375
Options exercised (1,735) 4.25-5.625
Options granted 18,750 7.875
- -------------------------------------------------------------
Outstanding at December 31, 1995 294,266 $4.25-$7.875
- --------------------------------------------------------------------------------
</TABLE>
(7) EMPLOYEE STOCK OWNERSHIP PLAN
All employees of the Company who have satisfied age and length of service
requirements are eligible to participate in an employee stock ownership plan
(ESOP). Contributions by the Company were $68,000 in 1995, $63,000 in 1994 and
$98,000 in 1993.
In May of 1990, the ESOP entered into a loan agreement with a bank unaffiliated
with the Company to borrow up to $200,000 and used the proceeds of the loan to
purchase 23,505 shares of Bay Commercial Services common stock. Since the
Company had guaranteed the ESOP's borrowings, the unpaid balance was reported as
a liability of the Company and a corresponding amount, representing unearned
compensation, was shown as a reduction of shareholders' equity. In 1994, this
borrowing was paid in full by the ESOP.
(8) EMPLOYEE SAVINGS PLAN
The Company sponsors an employee savings plan under Section 401(k) of the
Internal Revenue Code. This plan covers substantially all full-time employees.
The plan provides for employer matching contributions at 50% of employee
contributions, not to exceed 2.5% of eligible employee compensation. The
Company's expense was $35,000 for 1995, $32,000 for 1994 and $35,000 for 1993.
(9) LEASE COMMITMENTS
The Company leases certain premises under non-cancelable operating leases.
Future minimum rental payments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AMOUNT
YEAR (IN THOUSANDS)
- --------------------------------------------------------------------------------
<S> <C>
1996 $156
1997 156
1998 156
1999 156
2000 161
Thereafter 836
</TABLE>
Rent expense was $164,000 in 1995 and $160,000 in both 1994 and 1993.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
10
<PAGE> 12
Notes to Consolidated Financial Statements for Years Ended December 31, 1995,
1994, and 1993
(10) OTHER INCOME AND EXPENSES
Components of other income and expenses which exceed one percent of total income
in at least one of the years presented are shown below for the years ended
December 31:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income:
Recovery of prior years'
expenses in connection
with OREO $ --- $ 215 $ ---
Other 66 107 50
- --------------------------------------------------------------------------------
$ 66 $ 322 $ 50
- --------------------------------------------------------------------------------
Other expenses:
Data processing $ 278 $ 242 $ 189
Professional services 196 285 367
Bankcard 164 139 159
Directors' fees and expenses 145 83 99
FDIC insurance 90 191 198
Other bank insurance 77 88 95
Other 456 445 520
- --------------------------------------------------------------------------------
$1,406 $1,473 $1,627
- --------------------------------------------------------------------------------
</TABLE>
(11) PENDING LITIGATION
The Company and the Bank are involved in various legal proceedings. Management,
after reviewing these proceedings with legal counsel, believes the aggregate
liability, if any, will not materially affect the Company's consolidated
financial position or results of operations.
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
which occur in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
balance sheet. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's commitments to extend credit totaled approximately $15,057,000 and
$11,079,000 at December 31, 1995 and 1994, respectively. Commitments under
standby letters of credit approximated $335,000 and $97,000 at December 31, 1995
and 1994, respectively. Commitments under the Bank's credit card program
approximated $649,000 and $647,000 at December 31, 1995 and 1994, respectively.
No significant losses are anticipated as a result of these commitments. Most of
the outstanding commitments to extend credit are at variable rates tied to the
Bank's reference rate.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit issued is the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet financial instruments. The Company
controls the credit risk of the off-balance sheet financial instruments through
the normal credit approval and monitoring process. Unless noted, the Company
does not necessarily require collateral or other security to support financial
instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
credit- worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments, the majority of which are
for one year or less, issued by the Company to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers.
(13) REGULATORY RESTRICTIONS
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on extensions of credit to its affiliates. In particular,
the Company is prohibited from borrowing from the Bank unless the loans are
secured by specified obligations. Such secured loans and other advances by the
Bank to affiliates of the Bank are limited in amount to 10 percent of the Bank's
capital and surplus on a per affiliate basis and to 20 percent of the Bank's
capital and surplus on an aggregate affiliate basis. At December 31, 1995, the
Bank had no loans outstanding to the Company.
Federal Reserve Board regulations require reserve balances on deposits to be
maintained by the Bank with the Federal Reserve Bank of San Francisco. The
average required reserve balances were approximately $127,000 and $143,000
during 1995 and 1994, respectively.
Bank dividends are regulated by various government entities, including the
Federal Deposit Insurance Corporation (FDIC) and the California State Banking
Department. In addition, California law limits the amount of dividends the Bank
may pay, without prior approval of the California Superintendent of Banks, to
the lesser of the retained earnings of the Bank or the net income of the Bank
for its last three fiscal years, less any distributions during such period. At
December 31, 1995, the Bank has approximately $1,668,000 available for payment
of dividends, which payment would not require the prior approval of the
Superintendent of Banks under this limitation.
The Company is subject to Federal Reserve Board guidelines and the Bank is
subject to FDIC regulations governing capital adequacy. The Federal Reserve
Board guidelines and the FDIC regulations require that bank holding companies
and banks meet both risk-weighted capital and leverage capital ratio
requirements. The risk-weighted capital requirements involve assigning assets to
four broad risk categories and establishing minimum capital ratios based on
these assignments. The regulations and guidelines require maintenance of an 8.0%
ratio of capital to risk-weighted assets, with Tier 1 capital comprising at
least 50% of qualifying capital. Tier 1 capital consists of common equity,
minority interest in equity accounts of subsidiaries and non-cumulative
perpetual preferred stock. In addition, the Federal
BAY COMMERCIAL SERVICES AND SUBSIDIARY
11
<PAGE> 13
Notes to Consolidated Financial Statements for Years Ended December 31, 1995,
1994, and 1993
Reserve Board and the FDIC have adopted leverage capital guidelines which call
for a minimum 3% ratio of Tier 1 capital to total assets for bank holding
companies and banks which have received the highest composite regulatory rating
and are not experiencing or anticipating significant growth. All other entities
are required to maintain a minimum leverage capital ratio of at least 100 to 200
basis points above the 3% minimum requirement.
At December 31, 1995, the ratio of total capital to risk weighted assets was
15.1% and 14.9% for the Bank and the Company, respectively, and the leverage
ratio of Tier 1 capital to total assets was 9.7% and 9.5% for the Bank and the
Company, respectively.
At December 31, 1994, the ratio of total capital to risk weighted assets was
13.7% and 13.6% for the Bank and the Company, respectively, and the leverage
ratio of Tier 1 capital to total assets was 9.5% and 9.4% for the Bank and the
Company, respectively.
(14) PARENT COMPANY FINANCIAL INFORMATION
The Condensed Balance Sheets, Income Statements and Statements of Cash Flows for
Bay Commercial Services (Parent Company only) are presented below:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 50 $ 9
Investment in Bay Bank of Commerce 8,882 7,992
Premises, net 141 150
Other assets 32 33
- --------------------------------------------------------------------------------
Total assets $9,105 $8,184
- --------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Borrowed funds and other liabilities $ 338 $ 238
Shareholders' equity 8,767 7,946
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,105 $8,184
- --------------------------------------------------------------------------------
</TABLE>
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1995 1994 1993
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Cash dividends from
Bay Bank of Commerce $ 335 $ 20 $ 65
Other income 24 24 24
Other expenses (72) (76) (74)
- --------------------------------------------------------------------------------
Income (loss) before equity in
undistributed income of subsidiary 287 (32) 15
Equity in undistributed income of
subsidiary 658 651 359
- --------------------------------------------------------------------------------
Net income $ 945 $ 619 $ 374
- --------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 945 $ 619 $ 374
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed income of
subsidiary (658) (651) (359)
Depreciation 9 10 9
Change in other assets 1 338 (28)
Change in borrowed funds and other
liabilities (7) 5 1
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 290 321 (3)
- --------------------------------------------------------------------------------
Cash used in investing activities:
Capital contribution to subsidiary --- (315) ---
- --------------------------------------------------------------------------------
Cash flows provided by (used in)
financing activities:
Exercise of stock options 9 --- ---
Repurchase and retirement of
common stock (42) --- ---
Dividends paid (216) --- ---
- --------------------------------------------------------------------------------
Net cash used in financing activities (249) --- ---
- --------------------------------------------------------------------------------
Net increase (decrease) in cash 41 6 (3)
Cash at beginning of year 9 3 6
- --------------------------------------------------------------------------------
Cash at end of year $ 50 $ 9 $ 3
- --------------------------------------------------------------------------------
Noncash financing activities during the year:
Dividend payable $ 323 $ 216 $ ---
Reduction of guaranteed ESOP obligation $ --- $ 49 $ 50
</TABLE>
(15) DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the provisions of Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments. The
estimated fair value amounts have been determined using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value for
financial instruments.
Cash and cash equivalents: The carrying amounts reported in the balance sheets
for cash and cash equivalents are reasonable estimates of fair value.
Securities available for sale and securities held to maturity: Fair values are
based on quoted market prices.
Loans held for sale: As this category includes only fully funded loans partially
guaranteed by the Small Business Administration (SBA), fair value was based on
quoted market prices of comparable SBA loans.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
12
<PAGE> 14
Notes to Consolidated Financial Statements for Years Ended December 31, 1995,
1994, and 1993
Loans: Fair values are estimated for portfolios of loans with similar financial
characteristics. For variable rate loans and other loans with short-term
characteristics, carrying value approximates fair value. The fair value of
certain 1-4 family residential loans was based on quoted market prices for
securities backed by similar loans. For other loans, the adjusted fair market
values were calculated by discounting scheduled future cash flows using current
interest rates offered on loans with similar terms and by netting the allocated
allowance for credit losses to reflect the estimated credit losses inherent in
the portfolio. For credit card loans, carrying value approximates fair market
value; there is no allocated credit reserve since these loans are charged off
upon becoming 90 days past due and no value has been added related to the
customer relationship. Net deferred loan fees were immaterial.
Deposit liabilities and securities sold under agreements to repurchase: The fair
value of deposits with no stated maturity, such as noninterest-bearing deposits,
savings and interest-bearing demand, is equal to the amount payable on demand as
of December 31, 1995. The fair value of certificates of deposit and securities
sold under agreements to repurchase are based on the discounted value of
contractual cash flows, calculated using the discount rates that equaled the
interest rates offered at the valuation date for instruments of similar
remaining maturities.
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities at December 31, 1995.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE VALUE
<S> <C> <C>
- --------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $11,757 $11,757
Securities available for sale 13,199 13,199
Securities held to maturity 7,211 7,339
Loans held for sale, net of reserve for
credit losses 4,978 5,277
Loans, net of reserve for credit losses 53,218 53,109
Financial liabilities:
Deposits 80,253 80,347
Securities sold under agreement to repurchase 2,203 2,203
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, the Company had outstanding standby letters of credit and
commitments to extend credit. These off-balance sheet financial instruments are
generally exercisable at the market rate prevailing at the date the underlying
transaction will be completed and, therefore, they were deemed to have no
current fair market value. See Note 12.
Fair value estimates are based on existing balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include the estimated fair value of originated servicing rights on
SBA loans, and the value of premises and equipment at December 31, 1995.
INDEPENDENT AUDITORS' REPORT
BAY COMMERCIAL SERVICES:
We have audited the accompanying consolidated balance sheets of Bay Commercial
Services and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bay Commercial Services and
subsidiary at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Jose, California
January 19, 1996
BAY COMMERCIAL SERVICES AND SUBSIDIARY
13
<PAGE> 15
Selected Financial Data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994
Compared Compared
(Dollars in thousands, except per share amounts) 1995 1994 1993 1992 1991 to 1994 to 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Years ended December 31,
RESULTS OF OPERATIONS:
Interest income $ 7,456 $ 6,086 $ 5,520 $ 6,215 $ 7,575 $ 1,370 $ 566
Interest income on a taxable equivalent basis 7,505 6,146 5,591 6,285 7,632 1,359 555
Interest expense 2,310 1,766 1,552 2,206 3,197 544 214
Net interest income 5,146 4,320 3,968 4,009 4,378 826 352
Net interest income on a taxable
equivalent basis 5,195 4,380 4,039 4,079 4,436 815 341
Provision (benefit) for loan losses (155) (100) -- 2,039 255 (55) (100)
Net interest income after
provision (benefit) for loan losses 5,301 4,420 3,968 1,970 4,123 881 452
Noninterest income 716 1,076 1,178 1,953 1,173 (360) (102)
Noninterest expense 4,472 4,518 4,626 4,336 4,150 (46) (108)
Income tax expense (benefit) 600 359 146 (193) 451 241 213
Net income (loss) 945 619 374 (220) 696 326 245
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON AND EQUIVALENT SHARE:
Net income (loss) $ 0.78 $ 0.55 $ 0.35 $ (0.20) $ 0.61 $ 0.23 $ 0.20
Book value (year-end) 8.14 7.36 7.07 6.67 6.83 0.78 0.29
Cash dividends declared 0.30 0.20 -- -- 0.175 0.10 0.20
Weighted average common stock
and equivalent shares outstanding 1,215,877 1,127,920 1,079,985 1,079,985 1,138,535 87,957 47,935
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET AT DECEMBER 31:
Assets $ 92,819 $ 89,193 $ 81,895 $ 81,880 $ 80,591 $ 3,626 $ 7,298
Securities held to maturity 7,211 14,823 10,943 7,761 14,567 (7,612) 3,880
Securities available for sale 13,199 11,165 13,478 9,218 -- 2,034 (2,313)
Federal funds sold 6,700 2,530 1,000 -- 800 4,170 1,530
Total Loans 58,152 51,566 48,777 52,899 57,030 6,586 2,789
Deposits 80,253 79,258 72,609 71,913 70,633 995 6,649
Funds borrowed, other than deposits 2,203 1,036 985 2,212 1,489 1,167 51
Shareholders' equity 8,767 7,946 7,632 7,208 7,377 821 314
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET--AVERAGE BALANCES:
Assets $ 91,106 $ 86,112 $ 81,613 $ 83,755 $ 79,448 $ 4,994 $ 4,499
Securities--taxable(1) 20,370 21,368 14,647 13,790 10,818 (998) 6,721
Securities--nontaxable(1) 2,186 2,113 2,406 2,344 1,776 73 (293)
Federal funds sold 6,469 3,688 3,987 2,001 3,015 2,781 (299)
Total loans 52,830 49,109 49,319 55,075 55,718 3,721 (210)
Earning assets(1) 81,652 75,425 67,380 69,973 70,793 6,227 8,045
Deposits 80,262 76,690 72,027 73,459 70,293 3,572 4,663
Funds borrowed, other than deposits 1,313 1,021 1,412 1,958 893 292 (391)
Interest-bearing liabilities 57,004 55,238 53,509 58,730 55,523 1,766 1,729
Shareholders' equity 8,541 7,846 7,395 7,538 7,315 695 451
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding unrealized loss on securities available for sale
BAY COMMERCIAL SERVICES AND SUBSIDIARY
14
<PAGE> 16
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 and selected financial data found
elsewhere in this Annual Report.
OVERVIEW
Net income of Bay Commercial Services (the "Company") in 1995 was $945,000 or
$0.78 per share compared to $619,000 or $0.55 per share in 1994. The $326,000
or 53% increase in earnings principally reflected an $826,000 or 19% increase
in net interest income which was partially offset by a $360,000 or 33%
reduction in noninterest income and a $241,000 or 67% increase in income tax
expense.
Net income for the Company in 1994 of $619,000 or $0.55 per share, was a
$245,000 or 66% improvement over net income of $374,000, or $0.35 per share in
1993. The increase in earnings principally reflected a $352,000 or 9% increase
in net interest income, a $108,000 or 2% decrease in noninterest expense and a
$100,000 benefit for loan losses. These changes were partially offset by a
$102,000 or 9% decrease in noninterest income and a $213,000 or 146% increase in
income tax expense.
Total assets reached $92,819,000 at December 31, 1995, compared to $89,193,000
at December 31, 1994, a $3,626,000 or 4% increase. Funding for this growth was
provided principally by increases of $995,000 or 1% in deposits and $1,167,000
or 113% in securities sold under agreements to repurchase in addition to net
income of $945,000. The funds were primarily invested in loans, which grew
$6,586,000 or 13%, and federal funds sold, which increased $4,170,000 or 52%,
compared to December 31, 1994. Additional funding was provided by a $5,578,000
or 21% decrease in investment in debt securities. A significant portion of the
loan growth occurred during the fourth quarter of 1995. Average loans for all
of 1995 of $52,830,000 was $3,721,000 or 8% higher than during 1994. Average
loans during the fourth quarter of 1995 totaled $55,480,000, which was
$3,706,000 or 7% higher than third quarter average volume.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, which is the principal source of the Company's earnings,
is the amount by which interest and fees generated by interest-earning assets
exceeds the cost of interest-bearing liabilities. Net interest income is
affected by changes in interest rates, as well as the composition and volume of
interest-earning assets and interest-bearing liabilities.
Net interest income of $5,146,000 in 1995 increased $826,000 or 19% compared
to 1994, reflecting both growth in average interest-earning assets and an
increase in the net interest margin. Average interest-earning assets during
1995 increased $6,227,000 or 8% compared to 1994. The net interest margin, the
ratio of net interest income to average interest-earning assets, rose to 6.3%
in 1995 compared to 5.7% in 1994. The higher net interest margin was the result
of generally higher interest rates in 1995 compared to 1994.
Net interest income of $4,320,000 in 1994 increased $352,000 or 9% compared to
1993, reflecting an $8,045,000 or 12% increase in average interest-earning
assets. The net interest margin, the ratio of net interest income to average
interest-earning assets, declined to 5.7% in 1994 compared to 5.9% in 1993. The
reduced net interest margin principally reflected the investment of funds
provided by deposit growth in lower yielding short-term debt securities.
Interest income, which includes interest and fees generated by interest-
earning assets, totaled $7,456,000 in 1995, a $1,370,000 or 23% increase from
1994. The increase was due to a $6,227,000, or 8% growth in average interest-
earning assets and an increase in the average yield on earning assets to 9.1%
in 1995 from 8.1% in 1994. The higher yield in 1995 reflected higher overall
lending and money market rates compared to 1994 and the interest-rate
sensitivity of the Bank's assets. Average earning loans as a percentage of
average earning assets was unchanged at 64% in both 1995 and 1994.
Interest income of $6,086,000 in 1994 increased $566,000 or 10% from 1993. The
increase was attributable principally to an $8,045,000 or 12% growth in average
interest-earning assets. The yield on average interest-earning assets declined
to 8.1% in 1994 from 8.2% in 1993 due to the reduced proportion of assets
invested in higher yielding loans. Average earning loans as a percentage of
average interest-earning assets fell to 64% during 1994 from 69% during 1993.
The effects of the increased proportion of assets invested in lower yielding
debt securities in 1994 was compounded by a reduction in the yield earned on
those securities to 5.1% from 5.8% in 1993.
Interest expense of $2,310,000 in 1995 rose $544,000 or 31% compared to 1994
as a result of an increase in both average rates paid and the volume of
interest-bearing liabilities. Average interest-bearing liabilities increased
$1,766,000 or 3% while the average rate paid for those liabilities increased to
4.1% from 3.2% in 1994. The higher rate paid for interest-bearing liabilities
principally reflected the higher prevailing market interest rates during 1995.
Average noninterest-bearing demand deposits also increased during 1995, by
$2,098,000 or 9% compared to 1994.
Interest expense of $1,766,000 in 1994 rose $214,000 or 14% compared to 1993
as a result of increases in both average rates paid and the volume of interest-
bearing liabilities. Average interest-bearing liabilities increased $1,729,000
or 3% while the average rate paid for those liabilities rose to 3.2% from 2.9%
in 1993. The higher rate paid for interest-bearing liabilities principally
reflected the higher prevailing market interest rates during 1994 compared to
1993. During 1994, average noninterest-bearing demand deposits increased
$2,543,000 or 13%.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
15
<PAGE> 17
Management's Discussion and Analysis, Continued
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest rates
and net interest income due to the repricing characteristics of assets and
liabilities. If more assets than liabilities reprice in a given period (an
asset sensitive position), interest rate changes will be reflected more quickly
in asset rates. If interest rates decline, an asset sensitive position could
adversely affect net interest income. Alternatively, where liabilities reprice
more quickly than assets in a given period (a liability sensitive position) a
decline in interest rates could benefit net interest income. The results would
reverse if interest rates were to increase.
The following table presents the Company's interest rate sensitivity gap
position at December 31, 1995. For any given period, the repricing is matched
when an equal amount of assets and liabilities reprice. The repricing of a
fixed rate asset or liability is considered to occur at its contractual
maturity or, for those assets which are held for sale, within the time period
during which sale may reasonably be expected to be accomplished. Floating rate
assets or liabilities are considered to reprice in the period during which the
rate can contractually change. Any excess of either assets or liabilities in a
period results in a gap, or mismatch, shown in the table. A positive gap
indicates asset sensitivity and a negative gap indicates liability sensitivity.
<TABLE>
<CAPTION>
Interest Sensitivity Period
------------------------------------------
Over 3 Over 1
3 months months to year to Over 5
(Dollars in thousands) or less 1 year 5 years years Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate sensitive assets:
Loans (excluding
deferred fees) $41,348 $ 2,685 $ 6,553 $ 8,125 $58,711
Securities (excluding
valuation allowance) 3,128 1,605 8,857 6,666 20,256
Federal funds sold 6,700 -- -- -- 6,700
- -------------------------------------------------------------------------------------------
Total 51,176 4,290 15,410 14,791 85,667
- -------------------------------------------------------------------------------------------
Interest rate sensitive liabilities:
Interest-bearing
transaction accounts 5,494 -- -- -- 5,494
Savings deposits 19,022 -- -- -- 19,022
Time deposits,
$100,000 and over 10,749 1,879 1,002 -- 13,630
Other time deposits 9,050 3,993 2,222 1 15,266
Other borrowed funds 2,203 -- -- -- 2,203
- -------------------------------------------------------------------------------------------
Total 46,518 5,872 3,224 1 55,615
- -------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 4,658 $(1,582) $12,186 $14,790 $30,052
- -------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap $ 4,658 $ 3,076 $15,262 $30,052
- -------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap to total assets 5.0% 3.3% 16.4% 32.4%
</TABLE>
This table presents a static gap, which is a position at a point in time. It
does not address the interest rate sensitivity of assets or liabilities which
would be added through growth, nor does it anticipate the future interest rate
sensitivity of assets and liabilities once they have repriced, and it assumes
equivalent elasticity of assets and liabilities.
The interest rate sensitivity analysis at December 31, 1995, indicates that
the Company, on a cumulative gap basis, is asset sensitive in all time periods
shown. This suggests that if interest rates were to rise net interest income
could rise, whereas in a declining interest rate environment, net interest
income could fall.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company provides for potential loan losses by a charge to operating income
based upon the current composition of the loan portfolio, past loan loss
experience, current and projected economic conditions, an evaluation of the
risk elements in the loan portfolio and other factors that, in Management's
judgment, deserve recognition in estimating loan losses. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additions to the allowance based on their
evaluations of information available to them at the time of their examination.
Management will charge off loans to the allowance when it determines there has
been a permanent impairment of the related carrying values.
The provision for loan losses reflects an amount sufficient to cover estimated
loan losses and to maintain the allowance at a level which, in Management's
opinion, is adequate to absorb potential credit losses inherent in loans,
outstanding loan commitments and standby letters of credit.
As of December 31, 1995, the allowance for loan losses was $982,000 compared
to $756,000 at December 31, 1994. The ratio of the allowance for loan losses to
total loans was 1.7% at year-end 1995 and 1.5% at year-end 1994. Due to the
level of the allowance for loan losses in relation to total loans and in
relation to nonperforming loans, as well as net loan recoveries of $381,000 in
1995 compared to net loan charge-offs of $10,000 in 1994, the allowance for
loan losses was reduced by a $155,000 credit to the provision of loan losses in
1995. A credit to the provision of $100,000 was applied in 1994. While
Management uses available information to provide for losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. Based upon information currently available, Management believes
that the allowance for loan losses at December 31, 1995, is adequate to absorb
future possible losses. However, no assurance can be given that the Company may
not sustain charge-offs which are in excess of the size of the allowance in
any given period.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
16
<PAGE> 18
Management's Discussion and Analysis, Continued
Information on nonperforming loans for the years ending December 31, 1995 and
1994 is summarized in the following table.
<TABLE>
<CAPTION>
$ %
(Dollars in thousands) 1995 1994 Change Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loan (charge-offs) recoveries $ 381 $(10) $ 391 NA
Ratio of net loan charge-offs
(recoveries) to average loans (0.7%) --
Nonperforming loans at December 31:
Nonaccrual loans $ -- $626 $(626) (100.0)%
Accruing loans past due
90 days or more 99 -- 99 100.0%
Restructured loans -- -- -- --
- --------------------------------------------------------------------------------
Total nonperforming loans $ 99 $626 $(527) (84.2)%
- --------------------------------------------------------------------------------
Ratio of nonperforming loans
to total loans 0.2% 1.2%
Ratio of allowance for loan losses
to nonperforming loans 992% 121%
Other real estate owned $ 359 $854 $(495) (58)%
</TABLE>
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) was $359,000 at December 31, 1995, and consisted
of three properties acquired through foreclosure. Two of the three properties
listed in OREO at December 31, 1994 were sold during 1995 and two new properties
were added during 1995. OREO consists of real estate acquired as a result of
legal foreclosure or through receipt of a deed in lieu of foreclosure. OREO
amounts are carried at the lower of cost or fair value less estimated disposal
costs. When the property is acquired, any excess of the loan balance over fair
value of the property is charged to the allowance for loan losses. Subsequent
write-downs, if any, and disposition gains and losses are included in
noninterest income or noninterest expense. OREO assets are not depreciated and
any rental income is applied against current expenses or the recorded balance of
the asset.
NONINTEREST INCOME
Noninterest income of $716,000 for 1995 declined $360,000 or 33% compared to
1994. Of this decrease, $215,000 represented 1994 recoveries of costs previously
expensed on OREO properties. Other significant changes contributing to the
decline in noninterest income included a $43,000 reduction in gain on sale of
mortgage servicing rights, an increase of $32,000 in losses on securities sales,
and decreases of $24,000 in both service charges and fees, and loan servicing
income. The reduction in gain on sale of mortgage servicing rights and the
decrease in loan servicing income were both attributable to the closure of the
mortgage division in 1994. Service charges and fees declined principally due to
reduced analysis charges as customer deposits earned higher rates during 1995.
Partially offsetting these reductions in noninterest income was a $30,000 or 17%
increase in bankcard income compared to 1994.
Noninterest income of $1,076,000 for 1994 declined $102,000 or 9% compared to
1993. A $275,000 or 121% increase in other income was more than offset by
decreases in all other categories of noninterest income. The $275,000 increase
in other income was principally attributable to 1994 recoveries of prior years'
expenses related to OREO properties. Changes in noninterest income included a
$194,000 or 97% decrease in gain on sale of loans which was principally due to
reduced sales of SBA guaranteed loans during 1994. Gains on sale in 1994 of two
OREO properties were $73,000 or 52% below the gain realized in 1993 on the sale
of one property. As a result of reduced mortgage loan originations in the Bank's
market area, reflecting both higher interest rates in 1994 and the lingering
effects of the California recession, the Bank's Mortgage Division was closed
during 1994. With reduced mortgage loan originations, gains from the sale of
mortgage loan servicing declined by $48,000 or 53% compared to 1993.
NONINTEREST EXPENSE
Total noninterest expenses of $4,472,000 for 1995 were $46,000 or 1% less than
1994. The most significant changes were in other noninterest expenses which
declined $67,000 or 5% to $1,406,000 in 1995. These changes included decreases
of $101,000 or 53% in Federal Deposit Insurance Corporation (FDIC) insurance
premiums and $89,000 or 31% in professional services which were partially offset
by increases of $62,000 or 75% in directors' fees, and $36,000 or 15% in data
processing fees. The decrease in FDIC insurance premiums reflected the 1995
reduction by the FDIC in bank deposit insurance rates. The decline in
professional services was principally due to a reduction in legal fees related
to loan collection activities as the level of nonperforming loans continued to
decline. The increase in data processing expense reflected a full year with the
service bureau that performs the Bank's proof, transit and statement processing
work. The increase in directors' fees was due to a 1995 increase in the amount
paid per meeting for attendance at board and committee meetings. Salaries and
employee benefits expense, net of deferred loan origination costs, increased
$33,000 or 1% to $2,470,000 in 1995, as an increase in executive officer bonus
of $46,000 or 70% was partially offset by reduced group insurance expense and
higher deferred loan origination costs.
Total noninterest expenses of $4,518,000 for 1994 were $108,000 or 2% less than
1993. The largest change was in other noninterest expenses, which decreased
$154,000 or 10% in 1994. The most significant contribution to this decrease was
an $82,000 or 22% decline in professional services, principally due to a
reduction in legal fees related to loan collection activities as the level of
nonperforming loans continued to decline. Other expenses declined $75,000 or 14%
in 1994 as a result of the Bank's ongoing efforts to reduce operating expenses.
Data processing expense increased by $53,000 or 28% as a result of the Bank's
decision to outsource proof, transit and statement processing during the fourth
quarter of 1994 and also due to costs associated with upgrading the Bank's
computer network during the year. Although actual salary and employee benefit
expenses declined $65,000 or 3% compared to 1993, this was more than offset by a
$160,000 reduction in deferred loan origination costs credited
BAY COMMERCIAL SERVICES AND SUBSIDIARY
17
<PAGE> 19
Management's Discussion and Analysis, Continued
against these expenses, leaving a net increase in salary and employee benefit
expenses of $95,000 or 4%. Occupancy expenses declined $49,000 or 7% compared
to 1993, primarily as a result of reduced depreciation expense.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $600,000 in 1995 compared to $359,000
in 1994. The $241,000 or 67% increase reflected an increase in taxable income.
The effective income tax rates were 39%, 37%, and 28% for 1995, 1994, and 1993,
respectively. See also Note 5 in "Notes to Consolidated Financial Statements."
FINANCIAL CONDITION
LOANS
Total loans of $58,152,000 at December 31, 1995, increased $6,586,000 or 13%
from year-end 1994. The increase in loans was the result of successful loan
marketing efforts during the year.
OTHER ASSETS AND OTHER LIABILITIES
Interest receivable of $600,000 at December 31, 1995, increased $61,000 or 11%
compared to year-end 1994 due to the increase in interest-earning assets and
the higher yield in 1995. Other assets of $384,000 declined $326,000 or 46%
compared to December 31, 1994. The reduction in other assets was largely due to
a decrease in deferred tax assets. Interest payable and other liabilities of
$1,596,000 at December 31, 1995 were $643,000 or 67% higher than at year-end
1994 due to increases in dividends payable, accrued interest payable and income
taxes payable.
LIQUIDITY
Liquidity is defined as the ability of the Company to meet present and future
obligations either through the sale or maturity of existing assets, or by the
acquisition of funds through liability management. The Company manages its
liquidity to provide adequate funds to support both the borrowing needs of its
customers and fluctuation in deposit flows. The Company defines liquid assets
to include cash and noninterest-bearing deposit balances, federal funds sold,
all marketable securities less liabilities that are secured by any of the
securities, and loans held for sale, less any reserve requirements being met by
any of the above. Net deposits and short term liabilities include all deposits,
federal funds purchased, repurchase agreements and other borrowings and debt
due in one year or less. The liquidity ratio is calculated by dividing total
liquid assets by net deposits and short term liabilities. The Company's
liquidity ratio by this measure was 41% at December 31, 1995 and 42% at
December 31, 1994.
The Bank has informal, non-binding federal funds borrowing arrangements totaling
$4,000,000 with two correspondent banks, in addition to a $3,000,000 reverse
repurchase facility to meet unforeseen outflows. As of December 31, 1995, no
borrowed funds were outstanding on these lines. As of December 31, 1995 the Bank
did not carry any brokered deposit balances. It is the opinion of Management
that the Company's and the Bank's liquidity positions are sufficient to meet
their respective needs.
CAPITAL
The Company and the Bank are subject to Federal Reserve Board guidelines and
regulations of the FDIC governing capital adequacy. The Federal Reserve Board
has established final risk-based and leverage capital guidelines for bank
holding companies which are substantially the same as the FDIC's capital
regulations for nonmember banks.
The Federal Reserve Board capital guidelines for bank holding companies and
the FDIC's regulations for nonmember banks set total capital requirements and
define capital in terms of "core capital elements" (comprising Tier 1 capital)
and "supplemental capital elements" (comprising Tier 2 capital). Tier 1 capital
is generally defined as the sum of the core capital elements less goodwill,
with core capital elements including (i) common stockholders' equity; (ii)
qualifying noncumulative perpetual preferred stock; and (iii) minority
interests in the equity accounts of consolidated subsidiaries. Supplementary
capital elements include: (i) allowance for loan and lease losses (which cannot
exceed 1.25% of risk weighted assets); (ii) perpetual preferred stock not
qualifying as core capital; (iii) hybrid capital instruments and mandatory
convertible debt instruments; and (iv) term subordinated debt and intermediate-
term preferred stock. The maximum amount of supplemental capital elements which
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of
goodwill.
Risk-based capital ratios are calculated with reference to risk-weighted
assets, including both on and off-balance sheet exposures, which are multiplied
by certain risk weights assigned by the Federal Reserve Board to those assets.
Both bank holding companies and nonmember banks are required to maintain a
minimum ratio of qualifying total capital to risk-weighted assets of 8%, at
least one-half of which must be in the form of Tier 1 capital.
The Federal Reserve Board and the FDIC also have established a minimum
leverage ratio of 3% of Tier 1 capital to total assets for bank holding
companies and nonmember banks that have received the highest composite
regulatory rating and are not anticipating or experiencing any significant
growth. All other institutions are required to maintain a leverage ratio of at
least 100 to 200 basis points above the 3% minimum.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
18
<PAGE> 20
Management's Discussion and Analysis, Continued
The following tables present the Company's and the Bank's regulatory capital
positions at December 31, 1995:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 8,674 13.6% $ 8,788 13.8%
Tier 1 Capital
minimum requirement 2,551 4.0 2,545 4.0
- --------------------------------------------------------------------------------
Excess $ 6,123 9.6% $ 6,243 9.8%
Total Capital $ 9,471 14.9% $ 9,583 15.1%
Total Capital
minimum requirement 5,101 8.0 5,090 8.0
- --------------------------------------------------------------------------------
Excess $ 4,370 6.9% $ 4,493 7.1%
- --------------------------------------------------------------------------------
Risk weighted assets $63,766 $63,623
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital to
average total assets $ 8,674 9.5% $ 8,788 9.7%
- --------------------------------------------------------------------------------
Range of minimum 2,734- 3.0- 2,729- 3.0-
leverage requirement 4,556 5.0% 4,549 5.0%
- --------------------------------------------------------------------------------
4,118- 4.5- 4,239- 4.7-
Range of excess $ 5,940 6.5% $ 6,059 6.7%
- --------------------------------------------------------------------------------
Average total assets* $91,122 $90,974
</TABLE>
(* Average total assets do not include unrealized gains/losses on securities
available for sale.)
The Company currently does not have any material commitments for capital
expenditures, and in the opinion of Management, the Company's and the Bank's
capital positions are sufficient to meet their respective needs.
INFLATION
It is Management's opinion that the effects of inflation on the consolidated
financial statements for the periods ended December 31, 1995 and 1994 have not
been material.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
19
<PAGE> 21
<TABLE>
DIRECTORS
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Joshua Fong, O.D. Richard M. Kahler William E. Peluso
Chairman, President & CEO, Restaurant Consultant
Bay Commercial Services Bay Commercial Services Sunol
Optometrist, President & CEO,
San Leandro Bay Bank of Commerce Oswald A. Rugaard
Self-employed
Dimitri Koroslev Independent Consultant
William Henson President, San Leandro
Chairman, Bay Business Credit
Bay Bank of Commerce Walnut Creek
President,
Superior Home Loans
Hayward
</TABLE>
<TABLE>
BANK OFFICERS
- ---------------------------------------------------------------------------------------
<C> <C> <C>
EXECUTIVE Jim Nunn OPERATIONS
Vice President &
Richard M. Kahler Hayward Branch Manager Nancy Bowers
President & CEO Vice President
Randall Greenfield Sally Porfido Arlene Dalldorf
Senior Vice President & Vice President Assistant Vice President
Chief Administrative Officer, Operations Officer
Bay Bank of Commerce Earl Rupp
Chief Financial Officer, Vice President Kay Tropiano
Bay Commercial Services Operations Officer
John Stevens
Robert Perantoni Vice President, Brenda Abrew
Senior Vice President & Construction Lending Assistant Vice President &
Senior Lending Officer Credit Operations Officer
LENDING AND BUSINESS Rebecca Worthen Carol Barfuss
DEVELOPMENT Commercial Loan Officer Special Projects Manager
Teresa Jensen ADMINISTRATIVE William Reynolds
Vice President & Manager of Courier Service &
SBA Loan Manager Jane C. Christopherson Security Officer
Vice President &
Alan Lozito Chief Financial Officer
Vice President
Diane Pierotti
Michael Maxson Assistant Vice President
Vice President Marketing
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
20
<PAGE> 22
THE COMPANY WILL PROVIDE TO ANY SHAREHOLDER, WITHOUT CHARGE, A COPY OF THE
COMPANY'S ANNUAL REPORT FOR 1995 ON FORM 10-KSB FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THE REPORT MAY BE OBTAINED BY WRITTEN REQUEST TO:
Corporate Secretary
Bay Commercial Services
1495 E. 14th Street
San Leandro, CA 94577
TRANSFER AGENT
FIRST INTERSTATE BANK OF CALIFORNIA
Corporate Trust Department, San Francisco, CA
INDEPENDENT AUDITORS
DELOITTE & TOUCHE LLP, SAN JOSE, CA
CORPORATE COUNSEL
LILLICK & CHARLES LLP, SAN FRANCISCO, CA
STOCK PRICES AND DIVIDEND INFORMATION
The Company's common stock is not listed on any exchange
nor is it listed with NASDAQ. It is, however, listed with the National Daily
Quotation Service and appears in the weekly "pink sheets" issued by the
organization. Trading in the common stock of the Company has historically not
been active. According to the Company's records, there were 465 shareholders of
record as of March 5, 1996.
The following table summarizes bid quotations for the Company's common stock.
The prices indicated may not necessarily represent actual transactions. Bid
information has been obtained from Sutro & Co., which makes a market in the
Company's common stock.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED LOW HIGH
<S> <C> <C>
March 31, 1994 $3.50 $4.00
June 30, 1994 3.75 4.00
September 30, 1994 4.00 4.75
December 31, 1994 4.75 5.25
March 31, 1995 4.50 5.50
June 30, 1995 5.50 6.00
September 29, 1995 6.00 7.50
December 29,1995 7.50 8.50
- --------------------------------------------------------------------------------
</TABLE>
For information regarding restriction on the payment of dividends, see Note 13
of Notes to Consolidated Financial Statements.
MARKET MAKERS
TROY NORLANDER,
SUTRO & CO.
Big Bear Lake, CA
(800) 288-2811
THE COMPANY
Bay Commercial Services, a one-bank holding company, began operations on May 31,
1983, the date Bay Bank of Commerce became a wholly-owned subsidiary. Bay Bank
of Commerce is a state chartered bank that was incorporated on August 11, 1980
and commenced operations on February 13, 1981. All deposits are insured by the
Federal Deposit Insurance Corporation up the current legal maximum per
depositor.
Headquartered in downtown San Leandro, with a branch in Hayward, the Bank
provides the Alameda County business community high quality banking products and
emphasizes exceptional customer service with an experienced, professional staff.
At Bay Bank of Commerce, the commitment to meeting the needs of customers is a
top priority. Customer satisfaction and developing long-term banking
relationships with every client are the focus of this commitment. A unique
aspect of this is the direct customer access to all Bank officers, including the
President.
In commercial lending, the Bank tailors its lending programs to meet customers'
individual borrowing needs. SBA loans are available and the Bank is the only
Preferred SBA lender head quartered in Alameda County. SBA loans can be
structured for various business needs including working capital, equipment
financing, business acquisition and owner/user commercial real estate
construction and purchase.
The Bank's Construction Lending Division provides residential construction
financing for individuals and builders throughout the East Bay. The primary
focus is on the single family residences of one to four units.
From its central location in the East Bay, Bay Bank of Commerce provides
exceptional service, quality banking products and convenient access to the
growing needs of the East Bay business and professional communities.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
(INSIDE BACK COVER)
<PAGE> 23
BAY BANK
OF COMMERCE
"ALAMEDA COUNTY'S BUSINESS BANK"(R)
MAIN OFFICE
1495 East 14th Street
San Leandro, California 94577
(510) 357-2265
HAYWARD OFFICE
1030 La Playa Drive
Hayward, California 94545
(510) 783-8000
CONSTRUCTION LOAN OFFICE
1500 Washington Avenue
San Leandro, California 94577
(510) 357-2265
SBA LOAN OFFICE
1500 Washington Avenue
San Leandro, California 94577
(510) 895-5515
MEMBER FDIC EQUAL HOUSING LENDER
Copyright 1996, Bay Commercial Services Printed in U.S.A.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
2-97378, 33-24302 and 33-75330 of Bay Commercial Services on Form S-8 of our
report dated January 19, 1996, incorporated by reference in the Annual Report on
Form 10-KSB of Bay Commercial Services for the year ended December 31, 1995.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
March 25, 1996
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Richard M.
Kahler, as attorney-in-fact, to sign in his behalf, individually and in each
capacity stated below, and to file this Annual Report on Form 10-K and all
amendments and/or supplements to this Annual Report on Form 10-KSB.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Joshua Fong Chairman of the Board March 21 , 1996
- ------------------------ and Director
Joshua Fong, O.D.
Director March , 1996
- ------------------------
William R. Henson
Director March , 1996
- ------------------------
Dimitri V. Koroslev
/s/William E. Peluso Director March 21 , 1996
- ------------------------
William E. Peluso
/s/Oswald A. Rugaard Director March 21, 1996
- ------------------------
Oswald A. Rugaard
/s/Randall D. Greenfield Chief Financial March 21 , 1996
- ------------------------ Officer (Principal
Randall D. Greenfield Financial Officer
and Principal
Accounting Officer)
and Secretary
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,057
<INT-BEARING-DEPOSITS> 53,412
<FED-FUNDS-SOLD> 6,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,199
<INVESTMENTS-CARRYING> 20,256
<INVESTMENTS-MARKET> 20,538
<LOANS> 58,152
<ALLOWANCE> 982
<TOTAL-ASSETS> 92,819
<DEPOSITS> 80,253
<SHORT-TERM> 2,203
<LIABILITIES-OTHER> 1,596
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 92,819
<INTEREST-LOAN> 5,764
<INTEREST-INVEST> 1,324
<INTEREST-OTHER> 368
<INTEREST-TOTAL> 7,456
<INTEREST-DEPOSIT> 2,250
<INTEREST-EXPENSE> 2,310
<INTEREST-INCOME-NET> 5,146
<LOAN-LOSSES> (155)
<SECURITIES-GAINS> (35)
<EXPENSE-OTHER> 4,472
<INCOME-PRETAX> 1,545
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 945
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 6.30
<LOANS-NON> 0
<LOANS-PAST> 99
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 99
<ALLOWANCE-OPEN> 756
<CHARGE-OFFS> 27
<RECOVERIES> 408
<ALLOWANCE-CLOSE> 982
<ALLOWANCE-DOMESTIC> 982
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 473
</TABLE>
