<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
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-12231
BAY COMMERCIAL SERVICES
------------------------------
(Name of small business issuer in its charter)
<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)
</TABLE>
<TABLE>
<S> <C>
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 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: $8,906,000
------------
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, 1997: $9,012,069
----------
State the number of shares of Common Stock outstanding as of
March 5, 1997: 1,076,720
-----------
<TABLE>
<CAPTION>
Documents Incorporated by Reference: Part of Form 10-KSB
- ------------------------------------ -------------------
<S> <C>
1996 Annual Report to Shareholders for fiscal year Part II, Items 5, 6, 7 and 8
ended December 31, 1996.
Proxy Statement for 1997 Annual Meeting of Part III, Items 9, 10, 11 and 12
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> <C>
ITEM 1 - DESCRIPTION OF BUSINESS.............................................................. 1
ITEM 2 - DESCRIPTION OF PROPERTY.............................................................. 28
ITEM 3 - LEGAL PROCEEDINGS.................................................................... 29
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 29
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................. 29
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............................ 29
ITEM 7 - FINANCIAL STATEMENTS................................................................. 30
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................................. 30
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ..................................... 30
ITEM 10 - EXECUTIVE COMPENSATION............................................................... 30
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................... 30
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 31
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K..................................................... 31
</TABLE>
- ii -
<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.
CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS ANNUAL
REPORT ON FORM 10-KSB INCLUDING, BUT NOT LIMITED TO, THOSE DESCRIBED IN "ITEM 6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," ARE FORWARD-LOOKING
STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARDED-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, (1) SIGNIFICANT
INCREASES IN COMPETITIVE PRESSURE IN THE BANKING INDUSTRY; (2) CHANGES IN THE
INTEREST RATE ENVIRONMENT REDUCE MARGINS; (3) GENERAL ECONOMIC CONDITIONS,
EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN,
AMONG OTHER THINGS, A DETERIORATION IN CREDIT QUALITY; (4) CHANGES IN THE
REGULATORY ENVIRONMENT; (5) CHANGES IN BUSINESS CONDITIONS AND INFLATION; AND
(6) CHANGES IN SECURITIES MARKETS. THEREFORE, THE INFORMATION SET FORTH IN SUCH
FORWARD-LOOKING STATEMENTS SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE
BUSINESS PROSPECTS OF THE COMPANY AND THE BANK.
At present, the Company's principal business is conducted through the
Bank. At December 31, 1996, the Company had total consolidated assets of
$96,769,000. The Bank accounted for $96,734,000 or virtually all 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, in Alameda County, and the city of San Ramon, in Contra
Costa County, and the surrounding areas in California. The Company itself does
not engage in any business activities other than the ownership of the Bank, nor
does it own any other subsidiaries. The Company regularly reviews options to
expand the operations of the Bank and may seek opportunities for acquiring or
forming other banks and non-banking subsidiaries.
The Company is regulated by the Federal Reserve Board (the "FRB") and,
pursuant to that authority, is examined periodically by the Federal Reserve Bank
of San Francisco.
BAY BANK OF COMMERCE - GENERAL BANKING SERVICES
At December 31, 1996, the Bank had total assets of $96,734,000, total
loans of $71,362,000 (including loans held for sale) and total deposits of
$83,291,000. The Bank provides a wide range of commercial banking services to
individuals, professionals, and small and medium-sized businesses through its
principal office in San Leandro, California and its branch offices in Hayward
and San Ramon, California. In order to attract these types of customers, the
Bank offers personalized services and banking convenience. The services provided
include checking, interest checking, savings and interest-bearing demand, money
market and other time deposit accounts; commercial, real estate and consumer
loans; travelers' checks; safe deposit boxes; collection services; night
depository facilities and wire and telephone transfers. The Bank is a member of
the Federal Deposit Insurance Corporation (the "FDIC") and the deposits of each
depositor are insured up to $100,000. The Bank is not a member of the Federal
Reserve System. Professional firms and individuals and businesses form the core
of the Bank's customer and deposit base.
The Bank's Small Business Administration ("SBA") loan department has
been a component of the Bank's operations since 1985. Total SBA loan fundings
for 1996 were $1,714,000. SBA-guaranteed loans of $2,831,000 were sold in 1996.
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
<PAGE> 4
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.
EXISTING LOCATIONS
The Bank's headquarters are located at 1495 East 14th Street, San
Leandro, California and the Bank operates two branch offices located at 1030 La
Playa Drive, Hayward, California and at 2821 Crow Canyon Road, San Ramon,
California. The Bank also has an extension office located at 1500 Washington
Avenue, San Leandro, California, which houses its SBA and construction
divisions. The Bank currently has no branch applications pending or any plans to
open additional branch offices.
DEPOSITS
Most of the Bank's deposits are obtained from individuals,
professionals and small and medium-sized businesses. As of December 31, 1996,
the Bank had a total of 3,582 accounts representing 1,493 noninterest-bearing
demand deposit (checking) accounts with an average balance of approximately
$17,500 each; 1,359 savings, interest-bearing demand, and money market accounts
with an average balance of approximately $17,100 each; and 730 time accounts
with an average balance of approximately $46,400 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, 1996, real estate mortgage loans
accounted for 59%, commercial loans accounted for 22%, SBA loans held for sale
accounted for 4%, real estate construction loans accounted for 9%, real estate
equity loans accounted for 3% and consumer installment and other loans accounted
for 3% of the Bank's loan portfolio. See "Selected Statistical Information --
Loan Portfolio" herein for information concerning the composition of the Bank's
loan portfolio, maturities and sensitivity to changes in interest rates in the
loan portfolio and non-performing assets. The interest rates charged by the Bank
vary with the degree of risk and the size and maturity of the loans involved and
are generally affected by competition, governmental regulation and current
market interest rates.
Except as described in the discussion which accompanies Table F,
Summary of Nonaccrual, Past Due and Restructured Loans, the Bank's loan
portfolio is not concentrated in any one category and includes loans to
individuals, partnerships and corporations for diverse purposes.
At December 31, 1996, the Bank had total loans outstanding of
$71,362,000, net of deferred loan fees. Inherent in the lending function is the
fact that loan losses will be experienced and that the risk of loss will vary
with the type of loan being made and the creditworthiness of the borrower over
the term of the loan. To reflect currently perceived risks of loss associated
with its loan portfolio, adjustments are made to the Bank's allowance for loan
losses. At December 31, 1996, the Bank's allowance for loan losses was $971,000
or 1.4% 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
2
<PAGE> 5
The Bank has correspondent relationships with Union Bank of California,
Bank of America, N.T.&S.A. and Wells Fargo Bank. 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, 1996, the Company employed forty-three (43) full-time
employees and twelve (12) part-time employees.
SELECTED STATISTICAL INFORMATION
The following tables present certain consolidated statistical
information concerning the business of the Company and the Bank. This
information should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 1996 Annual Report to
Shareholders (the "Annual Report"), which have been incorporated herein by
reference.
DISTRIBUTION OF ASSETS, LIABILITIES AND
STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST
DIFFERENTIAL
Table A sets forth the Company's consolidated average balance sheets
for the years ended December 31, 1996 and 1995 and an analysis of interest rates
and the interest rate differential.
Table B sets forth the changes in interest income and interest expense
in 1996 and 1995 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, 1996 and 1995, and maturities and weighted average yield of
securities at December 31, 1996 are set forth in Table C.
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 1996 and 1995 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, 1996 are summarized in Table E.
Table F shows the composition of nonaccrual, past due and restructured
loans at December 31, 1996 and 1995. 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, 1996 and 1995.
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,
3
<PAGE> 6
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, 1996 and 1995.
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,
1996.
RETURN ON EQUITY AND ASSETS
Table J sets forth certain financial ratios for the years ended
December 31, 1996 and 1995.
4
<PAGE> 7
TABLE A
DISTRIBUTION OF 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,
1996 and 1995. The average balances are averages of daily balances.
<TABLE>
<CAPTION>
1996 1995
------------------------------------ ------------------------------
Average Interest Average Average Interest Average
Balances Income Yield Balances Income Yield
-------- ------ ----- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities (amortized cost):
Taxable (before securities
valuation allowance) $ 15,257 $ 947 6.21% $ 20,370 $1,217 5.97%
Non-taxable(1) 3,165 242 7.65% 2,186 158 7.23%
-------- -------- ----- -------- ------ -----
Total securities 18,422 1,189 6.45% 22,556 1,375 6.10%
Federal funds sold and securities
purchased under repurchase agreements 4,870 250 5.13% 6,469 368 5.69%
Loans(2)(3) 62,818 6,463 10.29% 52,627 5,764 10.95%
-------- -------- ----- -------- ------ -----
Total interest-earning assets(1) 86,110 7,902 9.18% 81,652 7,507 9.19%
Less allowance for loan losses (970) (852)
Nonaccrual loans 190 203
Cash and due from banks 6,377 6,333
Premises and equipment 2,070 2,214
OREO 0 432
Other assets 1,300 1,140
-------- --------
TOTAL ASSETS $ 95,077 $ 91,122
======== ========
Average earning loans/average earning 72.95% 64.45%
assets ======== ========
</TABLE>
(continued)
5
<PAGE> 8
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (CONT.)
<TABLE>
<CAPTION>
1996 1995
------------------------------------ ----------------------------------
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 $25,050 $ 651 2.60% $27,529 $ 716 2.60%
Time 27,239 1,407 5.17% 22,986 1,240 5.39%
Certificates of deposit, $100,000
and over 5,198 293 5.64% 5,176 294 5.68%
Other borrowed funds 2,209 106 4.80% 1,313 60 4.57%
------- ------ ---- ------- ------ ----
Total interest-bearing liabilities 59,696 2,457 4.12% 57,004 2,310 4.05%
Demand deposits 25,124 24,571
Other liabilities 1,028 989
Shareholders' equity 9,229 8,558
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $95,077 $91,122
======= =======
Interest income and average yield
on earning assets (1) 7,902 9.18% 7,507 9.19%
Interest expense and average effective
rate paid on all interest-bearing
liabilities 2,457 2.85% 2,310 2.83%
------ ---- ------ ----
Net interest income and margin(4) $5,445 6.32% $5,197 6.36%
====== ==== ====== ====
</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 1996 and 1995 in adjusting
interest on tax-exempt investment securities to a fully taxable basis.
The amount of the taxable equivalent adjustment was $76,000 and $51,000
in 1996 and 1995, respectively.
(2) Loan interest income includes loan fees of $319,000 in 1996 and
$271,000 in 1995.
(3) Average loans do not include nonaccrual loans.
6
<PAGE> 9
(4) Net interest margin is computed by dividing net interest income by
total average interest-earning assets.
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>
(Dollars in thousands)
Period Ended December 31,
-------------------------
1996 Compared to 1995 1995 Compared to 1994
Increase (decrease) in: Increase (decrease) in:
---------------------------- ------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Changes in interest income:
Securities:
Taxable (book value) $ (315) $ 45 $(270) $ (52) $ 193 $ 141
Non-taxable(1) 75 9 84 6 (34) (28)
------- ----- ----- ----- ----- -------
Total securities (240) 54 (186) (46) 159 113
Federal funds sold and securities purchased
under repurchase agreements (85) (33) (118) 145 68 213
Loans 1,064 (365) 699 450 585 1,035
------- ----- ----- ----- ----- -------
Total(1) 739 (344) 395 549 812 1,361
------- ----- ----- ----- ----- -------
Changes in interest expense:
Total interest bearing liabilities:
Savings and interest-bearing demand (64) (1) (65) (11) 89 78
Time 221 (54) 167 148 259 407
Certificates of deposit, $100,000 and over 1 (2) (1) (56) 89 33
Other borrowed funds 43 3 46 12 14 26
------- ----- ----- ----- ----- -------
Total 201 (54) 147 93 451 544
------- ----- ----- ----- ----- -------
Changes in net interest earnings(1) $ 538 $(290) $ 248 $ 456 $ 361 $ 817
======= ===== ===== ===== ===== =======
</TABLE>
(1) Taxable equivalent basis. See Note 1 to Table A.
7
<PAGE> 10
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,
1996 and 1995 and the amortized cost, maturities, and weighted average yield of
securities at December 31, 1996.
<TABLE>
<CAPTION>
Amortized Cost
At December 31,
---------------
SECURITIES HELD TO MATURITY (In Thousands)
1996 1995
------ ------
<S> <C> <C>
Securities of U.S. government agencies and corporations $3,198 $4,197
Obligations of states and political subdivisions 3,434 2,831
Mortgage-backed securities 72 183
------ ------
$6,704 $7,211
====== ======
</TABLE>
<TABLE>
<CAPTION>
Estimated
Fair Value
At December 31,
---------------
SECURITIES AVAILABLE FOR SALE (In Thousands)
1996 1995
------ ------
<S> <C> <C>
Securities of U.S. government agencies and corporations $8,974 $12,143
Mortgage-backed securities 365 552
Other securities -- 504
------ -------
$9,339 $13,199
====== =======
</TABLE>
8
<PAGE> 11
TABLE C
SECURITIES PORTFOLIO (CONTINUED)
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------------------
After One After Five
Amortized Cost In One Year Through Through
(Dollars in thousands) Or Less Five Years Ten Years
-------------------- -------------------- ----------
Cost Yield Cost Yield Cost
------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Treasury and agency securities $ -- -- $2,202 5.82% $ 996
Obligations of states and political subdivisions (1) 272 8.94% 881 8.15% 2,133
Mortgage-backed securities -- -- -- -- --
------ --------- ------ --------- ------
Total amortized cost $ 272 8.94% $3,083 6.48% $3,129
Estimated market value $ 274 $3,102 $3,143
AVAILABLE FOR SALE:
U.S. Treasury and agency securities $3,998 6.58% $3,000 5.46% $2,000
Mortgage-backed securities 84 1.06% 282 6.58% --
------ --------- ------ --------- ------
Total amortized cost $4,082 6.47% $3,282 5.56% $2,000
Estimated market value $4,110 $3,238 $1,991
</TABLE>
<TABLE>
<CAPTION>
Maturing
------------------------------------
After Five
Through After
Ten Years Ten Years Total
---------- -------------------- --------------------
Yield Cost Yield Cost Yield
---------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Treasury and agency securities 6.70% $ -- -- $3,198 6.09%
Obligations of states and political subdivisions (1) 7.36% 148 7.47% 3,434 7.68%
Mortgage-backed securities -- 72 9.00% 72 9.00%
--------- ------ --------- ------ ---------
Total amortized cost 7.15% $ 220 7.96% $6,704 6.94%
Estimated market value $ 224 -- $6,743 --
AVAILABLE FOR SALE:
U.S. Treasury and agency securities 7.23% $ -- -- $8,998 6.35%
Mortgage-backed securities -- -- -- 366 5.31%
--------- ------ --------- ------ ---------
Total amortized cost 7.23% $ -- -- $9,364 6.31%
Estimated market value $ -- $9,339
</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 1996 in adjusting interest on tax-exempt investment
securities to a fully taxable basis.
9
<PAGE> 12
TABLE C
SECURITIES PORTFOLIO (CONTINUED)
At December 31, 1996 investment securities from the following issuers
each totaled over ten percent (10%) of shareholders' equity of the Company:
<TABLE>
<CAPTION>
(In thousands)
Amortized Market
Cost Value
--------- ------
<S> <C> <C>
Federal Home Loan Mortgage Corporation $1,366 $1,357
Federal National Mortgage Association 3,994 3,982
Federal Home Loan Bank 4,202 4,194
Student Loan Marketing Association 1,000 1,000
</TABLE>
TABLE D
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 1996 and 1995 is
summarized in the table below.
<TABLE>
<CAPTION>
1996 1995
------- -------
(In Thousands)
<S> <C> <C>
Commercial, financial and agricultural $15,568 $13,319
Real estate:
Construction 6,813 2,250
Mortgage 41,930 35,137
Equity 2,178 1,042
Held for sale 2,923 4,984
Installment 1,602 1,211
Other 903 768
------- -------
71,917 58,711
Deferred loan fees (555) (559)
------- -------
$71,362 $58,152
======= =======
</TABLE>
10
<PAGE> 13
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, 1996.
<TABLE>
<CAPTION>
(In Thousands)
One After One After
Maturity Distribution of Year Through Five
Selected Loans: Or Less Five Years Years Total
------- ---------- ------- -------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $12,758 $ 2,520 $ 1,818 $17,096
Real estate-construction 8,541 -- -- 8,541
Equity -- -- 2,178 2,178
Other 30,044 5,353 8,497 43,894
------- ------- ------- -------
$51,343 $ 7,873 $12,493 $71,709
======= ======= ======= =======
Sensitivity to Changes in Interest Rates:
Loans with fixed interest rates $ 3,596 $ 7,873 $12,493 $23,962
Loans with floating interest rates 47,747 -- -- 47,747
------- ------- ------- -------
$51,343 $ 7,873 $12,493 $71,709
======= ======= ======= =======
</TABLE>
TABLE F
SUMMARY OF NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
A summary of nonaccrual, past due and restructured loans at December
31, 1996 and 1995 is set forth below:
<TABLE>
<CAPTION>
December 31,
(In Thousands)
-----------------
1996 1995
------ ------
<S> <C> <C>
Nonaccrual $ 208 $ --
Accruing loans past due 90 days or more 227 99
Restructured loans -- --
------ ------
$ 435 $ 99
====== ======
</TABLE>
The Company's consolidated financial statements are prepared on the
accrual basis of accounting, including the recognition of interest income on the
loan portfolio. Interest income from nonaccrual loans is not accrued on the
books, but rather is recorded only when and if received and the principal is
deemed to be collectible.
Loans are placed on a nonaccrual basis and any accrued but unpaid
interest is reversed and charged against income when the payment of interest or
principal is ninety days or more past due, except when the loan is well secured
and in the process of collection. Nonaccrual loans at December 31, 1996
constituted approximately 0.3% of total gross loans. The Bank had no nonaccrual
loans at December 31, 1995. 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
11
<PAGE> 14
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, 1996, the Bank had no restructured loans.
Interest income on nonaccrual loans that would have been recognized for
the year ended December 31, 1996, if the loans had been current in accordance
with their original terms totaled $45,407. The Company recognized $12,442 in
interest income on these loans for the year ended December 31, 1996.
There are no loans, which were current at December 31, 1996, where
known information about possible credit problems of borrowers causes management
of the Company to have serious doubt as to the ability of such borrowers to
comply with the present loan repayment terms.
Outstanding loans to contractors engaged in construction and land
development constituted $7,415,000 or 10% of total loans at December 31, 1996.
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, 1996,
except as set forth in Table D above.
12
<PAGE> 15
TABLE G
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan loss experience as of and for the
years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
(Dollars in thousands)
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of year $ 982 $ 756
Charge-offs:
Commercial, financial and agricultural 25 --
Real estate - mortgage -- 24
Installment 8 --
Other 2 3
-------- --------
Total loans charged-off 35 27
-------- --------
Recoveries:
19 398
Commercial, financial and agricultural
Real estate - mortgage 3 --
Other 2 10
-------- --------
Total recoveries 24 408
-------- --------
Net (charge-offs) recoveries (11) 381
Benefit for reduction in allowance -- (155)
-------- --------
Balance at end of year $ 971 $ 982
======== ========
Loans outstanding at December 31 $ 71,362 $ 58,152
======== ========
Average loans outstanding during period $ 63,008 $ 52,830
======== ========
Allowance for loan losses as a percentage
of outstanding loan balance 1.4% 1.7%
======== ========
Net (charge-offs) 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.
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:
13
<PAGE> 16
<TABLE>
<CAPTION>
Allowance for Loan Losses by Loan Type
1996 1995
------------------------- ---------------------------
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 $242 22% $184 23%
Real estate - construction 37 9% 11 4%
Real estate - mortgage 241 59% 256 60%
Equity 11 3% 5 2%
Held for sale 4 4% 14 8%
Installment 22 2% 19 2%
Other 29 1% 20 1%
Unallocated 385 N/A 473 N/A
---- ----
$971 $982
==== ====
</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.
14
<PAGE> 17
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, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in Thousands)
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $25,124 N/A $24,571 N/A
Savings and interest-bearing demand 25,050 2.60% 27,529 2.60%
Time 32,437 5.25% 22,986 5.39%
------- -------
$82,611 $75,086
======= =======
</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, 1996.
<TABLE>
<CAPTION>
(In Thousands)
Time Certificates of Other Time
Deposit of Deposits of
$100,000 or More $100,000 or More
---------------- ----------------
<S> <C> <C>
Three months or less $ 1,999 $11,952
Over 3 through 6 months 1,818 --
Over 6 through 12 months 1,600 --
Over 12 months 603 --
------- -------
$ 6,020 $11,952
======= =======
</TABLE>
TABLE J
RETURN ON EQUITY AND ASSETS
The following table sets forth certain financial ratios for the years
ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
-------- --------
<S> <C> <C>
Net income $ 1,083 $ 945
Net income
To average assets 1.1% 1.0%
To average shareholders' equity 11.8% 11.1%
Dividends declared per share to net income per share 0.34 to 1 0.38 to 1
- ----------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
<TABLE>
<S> <C> <C>
Average shareholders' equity to average assets 9.7% 9.4%
</TABLE>
COMPETITION
In California and in the Bank's primary service area, major banks
dominate the commercial banking industry. Among the advantages these banks have
over the Bank are their ability to finance wide-ranging advertising campaigns
and to allocate their investment assets, including loans, to regions of higher
yield and demand. By virtue of their larger amounts of capital, such
institutions have substantially greater lending limits than the Bank and perform
certain functions, including trust services and international banking, which are
not presently offered directly by the Bank but are offered indirectly by the
Bank through correspondent institutions. The Bank also competes for loans and
deposits with savings and loan associations, finance companies, money market
funds, brokerage houses, credit unions, and other nonfinancial institutions.
The Bank's primary service area consists principally of the cities of
Oakland, San Leandro, Hayward and San Ramon and the unincorporated areas of
Castro Valley and San Lorenzo which, at June 30, 1996, contained ninety-six (96)
competing banking offices, including the Bank, and twenty-four (24) branch
offices of other independent banks. At June 30, 1996, the Bank's primary service
area also contained forty-seven (47) 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.
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
16
<PAGE> 19
or any other subsidiary, or on a promise by the customer not to obtain other
services from a competitor. In addition, federal law imposes certain
restrictions on transactions between the Bank and its affiliates. As affiliates,
the Bank and the Company are subject, with certain exceptions, to the provisions
of federal law imposing limitations on and requiring collateral for loans by the
Bank to any affiliate.
THE BANK
As a California state-licensed bank, the Bank is subject to regulation,
supervision and periodic examination by the California State Banking Department
("SBD") and the FDIC. The Bank is not a member of the Federal Reserve System,
but is nevertheless subject to certain regulations of the Federal Reserve. The
Bank's deposits are insured by the FDIC to the maximum amount permitted by law,
which is currently $100,000 per depositor in most cases.
The regulations of these state and federal bank regulatory agencies
govern most aspects of the Bank's business and operations, including but not
limited to, the scope of its business, its investments, its reserves against
deposits, the nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
and insurance activities, and the maximum rates of interest allowed on certain
deposits. The Bank is also subject to the requirements and restrictions of
various consumer laws and regulations.
The following description of statutory and regulatory provisions and
proposals is not intended to be a complete description of these provisions and
is qualified in its entirety by reference to the particular statutory or
regulatory provisions discussed.
CHANGE IN CONTROL
The BHC Act and the Change in Bank Control Act of 1978, as amended (the
"Change in Control Act"), together with regulations of the Federal Reserve,
require that, depending on the particular circumstances, either Federal Reserve
approval must be obtained or notice must be furnished to the Federal Reserve and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has securities registered under Section 12 of the Exchange Act, or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The Financial Code also contains approval
requirements for the acquisition of 10% or more of the securities of a person or
entity which controls a California licensed bank. Finally, the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended, together with regulations of the
Federal Trade 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 adopted regulations which could impose additional capital
requirements on banks based on market risk and have added a component to the
uniform bank rating system which addresses sensitivity to market risk, including
interest rate risk. In addition, the Bank is subject to specific capital
requirements imposed by the FDIC and the SBD.
17
<PAGE> 20
THE FEDERAL RESERVE AND FDIC
The Federal Reserve has established risk-based and leverage capital
guidelines for bank holding companies which are similar to the FDIC's capital
adequacy regulations for nonmember banks. The Federal Reserve guidelines apply
on a consolidated basis to bank holding companies with consolidated assets of
$150 million or more.
The Federal Reserve capital guidelines for bank holding companies and
the FDIC's regulations for nonmember banks set total capital requirements and
define capital in terms of "core capital elements," or Tier 1 capital(1) and
"supplemental capital elements," or Tier 2 capital(2). At least fifty percent
(50%) of the qualifying total capital base must consist of Tier 1 capital. The
maximum amount of Tier 2 capital that may be recognized for risk-based capital
purposes is limited to one-hundred percent (100%) of Tier 1 capital, net of
goodwill.
Both bank holding companies and nonmember banks are required to
maintain a minimum ratio of qualifying total capital to risk-weighted assets of
eight percent (8%), at least one-half of which must be in the form of Tier 1
capital. Risk-based capital ratios are calculated with reference to
risk-weighted assets, including both on and off-balance sheet exposures, which
are multiplied by certain risk weights assigned by the Federal Reserve and the
FDIC to those assets.
The Federal Reserve and the FDIC have established a minimum leverage
ratio of three percent (3%) Tier 1 capital to total assets for bank holding
companies and nonmember banks that have received the highest composite
regulatory rating and are not anticipating or experiencing any significant
growth. All other institutions are required to maintain a leverage ratio of at
least 100 to 200 basis points above the 3% minimum for a minimum of four percent
(4%) or five percent (5%).
- --------
(1) Tier 1 capital is generally defined as the sum of the core capital elements
less goodwill and certain intangibles. The following items are defined as core
capital elements: (i) common stockholders' equity; (ii) qualifying noncumulative
perpetual preferred stock and related surplus; and (iii) minority interests in
the equity accounts of consolidated subsidiaries.
(2) Supplementary capital elements include: (i) allowance for loan and lease
losses (which cannot exceed 1.25% of an institution's risk-weighted assets);
(ii) perpetual preferred stock, long term preferred stock, and related surplus
not qualifying as core capital; (iii) hybrid capital instruments, including
mandatory convertible debt securities; and (iv) term subordinated debt and
intermediate-term preferred stock and related surplus.
18
<PAGE> 21
Set forth below are the Company's and the Bank's risk based and
leverage capital ratios as of December 31, 1996:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
(Dollars in thousands)
Company Bank
------- -------
Amount Ratio Amount Ratio
------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital $ 9,433 12.4% $ 9,589 12.6%
Tier 1 Capital minimum requirement 3,054 4.0 3,049 4.0
------- ---- ------- ----
Excess $ 6,379 8.4% $ 6,540 8.6%
======= ==== ======= ====
Total Capital $10,388 13.6% $10,542 13.8%
Total Capital minimum requirement 6,109 8.0 6,098 8.0
------- ---- ------- ----
Excess $ 4,279 5.6% $ 4,444 5.8%
======= ==== ======= ====
Risk weighted assets $76,360 $76,227
======= =======
</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 $9,433 9.9% $9,589 10.1%
Range of minimum leverage 2,852- 3.0- 2,848- 3.0-
requirement 4,754 5.0% 4,747 5.0%
------ ------ ------ ------
Range of excess 4,679- 4.9- 4,842- 5.1-
$6,581 6.9% $6,741 7.1%
====== ====== ====== ======
Average total assets* $95,077 $94,937
======= =======
</TABLE>
(*Average total assets do not include unrealized gains/losses on securities
available for sale.)
The risk-based capital ratio discussed above focuses principally on
broad categories of credit risk, and may not take into account many other
factors that can affect a bank's financial condition. These factors include
overall interest rate risk exposure; liquidity, funding and market risks; the
quality and level of earnings; concentrations of credit risk; certain risks
arising from nontraditional activities; the quality of loans and investments;
the effectiveness of loan and investment policies; and management's overall
ability to monitor and control financial and operating risks, including the risk
presented by concentrations of credit and nontraditional activities. The FDIC
has addressed many of these areas in related rule-making proposals and under
FDICIA (as defined below), some of which are discussed herein. In addition to
evaluating capital ratios, an overall assessment of capital adequacy must take
account of each
19
<PAGE> 22
of these other factors including, in particular, the level and severity of
problem and adversely classified assets. For this reason, the final supervisory
judgment on a bank's capital adequacy may differ significantly from the
conclusions that might be drawn solely from the absolute level of the bank's
risk-based capital ratio. In light of the foregoing, the FDIC has stated that
banks generally are expected to operate above the minimum risk-based capital
ratio. Banks contemplating significant expansion plans, as well as those
institutions with high or inordinate levels of risk, should hold capital
commensurate with the level and nature of the risks to which they are exposed.
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. In addition, the agencies have promulgated guidelines for institutions to
develop and implement programs for interest rate risk management, monitoring and
oversight.
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 movements in interest rates. While
interest rate risk is inherent in a bank's role as financial intermediary, it
introduces volatility to bank earnings and to the economic value of the bank.
The banking agencies have addressed this problem by implementing changes to the
capital standards to include a bank's 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.
Finally, institutions which are engaged in securities trading
activities and have significant exposure to market risk will be required as of
January 1, 1998 to maintain additional capital to support that exposure,
although voluntary compliance with the new regulations is permissible after
January 1, 1997. The additional capital requirements will apply to institutions
with trading assets and liabilities equal to 10% or more of total assets or
trading activity of $1 billion or more. Institutions subject to the rule will be
required to test internal models of market risk and the market risk capital
charge will be increased for institutions whose models are inaccurate. The
federal banking agencies may apply the market risk regulations on a case by case
basis to institutions not meeting the eligibility criteria if necessary for
safety and soundness reasons.
In connection with the recent regulatory attention to market risk and
interest rate risk, the federal banking agencies will evaluate an institution in
its periodic examination on the degree to which changes in interest rates,
foreign exchange rates, commodity prices or equity prices can affect a financial
institution's earnings or capital. In addition, the agencies will focus in the
examination on an institution's ability to monitor and manage its market risk,
and will provide management with a clearer and more focused indication of
supervisory concerns in this area.
In certain circumstances, the FDIC or the Federal Reserve may determine
that the capital ratios for an FDIC-insured bank or a bank holding company must
be maintained at levels which are higher than the minimum levels required by the
guidelines or the regulations. A bank or bank holding company which does not
achieve and maintain the required capital levels may be issued a capital
directive by the FDIC or the Federal Reserve to ensure the maintenance of
required capital levels.
20
<PAGE> 23
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, 1996, the Company had no outstanding 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 constraints, upon the Bank's
earnings during any fiscal period, the assessment of the respective Boards of
Directors of the capital requirements of such institutions and other factors,
including the maintenance of an adequate allowance for loan and lease losses.
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% 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.
21
<PAGE> 24
BAD DEBT DEDUCTION
A bank with average adjusted bases of all assets exceeding $500 million
(a "large bank") must compute its bad debt deduction using the specific
charge-off method. Under that method, a deduction is taken at the time the debt
becomes partially or wholly worthless. A bank not meeting the definition of a
large bank may use either the specific charge-off method or the "experience"
reserve method, under which the addition to bad debt reserve is based on the
bank's actual loss experience for the current year and five preceding years. The
U.S. Treasury has promulgated regulations which permit a bank to elect to
establish a conclusive presumption that a debt is worthless, based on applying a
single set of standards for both regulatory and tax accounting purposes.
INTEREST INCURRED FOR TAX-EXEMPT OBLIGATIONS
Generally, taxpayers are not allowed to deduct interest on indebtedness
incurred to purchase or carry tax-exempt obligations. This 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% 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. 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.
AMORTIZATION OF INTANGIBLE ASSETS INCLUDING BANK DEPOSIT BASE
Certain intangible property acquired by a taxpayer must be amortized
over a 15 year period. For this purpose, acquired assets required to be
amortized include goodwill and the deposit base or any similar asset acquired by
a financial institution (such as checking and savings accounts, escrow accounts
and similar items). The 15 year amortization rule generally applies to property
acquired after August 10, 1993.
MARK-TO-MARKET RULES
The Revenue Reconciliation Act of 1993 introduced certain
"mark-to-market" tax accounting rules for "dealers in securities." Under these
rules, certain "securities" held at the close of a taxable year must be marked
to fair market value, and the unrealized gain or loss inherent in the security
must be recognized in that year for federal income tax purposes. Under the
definition of a "dealer," a bank or financial institution that regularly
purchases or sells loans may be subject to the new rules. 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
22
<PAGE> 25
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 1996 is 11.3%. For calender income year
1997, the bank tax rate is 10.84% (which reflects a decrease in the general
corporate tax rate to 8.84%). The applicable tax rate is higher than that
applied to general corporations because it includes an amount "in lieu" of many
other state and local taxes and license fees payable by such corporations but
generally not payable by banks and financial corporations.
California has adopted substantially the federal AMT, subject to
certain modifications. Generally, a bank is subject to California AMT in an
amount equal to the sum of (a) 7% 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. The 7% rate is lowered to
6.65% for any income year beginning after 1996.
California permits a bank to compute its deduction for bad debt losses
under either the specific charge-off method or according to the amount of a
reasonable addition to a bad debt reserve.
California has incorporated the federal NOL provisions, subject to
significant modifications for most corporations. First, NOLs arising in income
years beginning before 1987 are disregarded. Second, no carryback is permitted,
and for most corporations NOLs may be carried forward only five years. Third, in
most cases, only 50% of the NOL for any income year may be carried forward.
Fourth, 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.
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 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 15, 1997, it is uncertain whether these bills will be enacted and what
impact these bills will have on 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
23
<PAGE> 26
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, as September 29, 1995, 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 ("IBBA"), which became effective on
October 2, 1995. The IBBA addresses the supervision of state chartered banks
which operate across state lines, and covers such areas as branching,
applications for new facilities and mergers, consolidations and conversions,
among other things. The IBBA allows a California state bank to have agency
relationships with affiliated and unaffiliated insured depository institutions
and allows a bank subsidiary of a bank holding company to act as an agent to
receive deposits, renew time deposits, service loans and receive payments for a
depository institution affiliate. In addition, pursuant to the IBBA, California
"opted in early" to the Riegle-Neal provisions regarding interstate branching,
allowing a state bank chartered in a state other than California to acquire by
merger or purchase, 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 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 and the Bank,
the competitive environment in which the Bank operates, or the impact on the
Company or the Bank of any regulations adopted or proposed under Riegle-Neal and
the IBBA.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
("FDICIA")
General
24
<PAGE> 27
FDICIA primarily addresses the safety and soundness of the deposit
insurance funds, supervision of and accounting by insured depository
institutions and prompt corrective action by the federal bank regulatory
agencies with respect to troubled institutions. FDICIA gives the FDIC, in its
capacity as federal insurer of deposits, broad authority to promulgate
regulations to assure the viability of the deposit insurance funds, including
regulations concerning safety and soundness standards. FDICIA also places
restrictions on the activities of state-chartered institutions and on
institutions failing to meet minimum capital standards and provides enhanced
enforcement authority for the Federal banking agencies. FDICIA also strengthened
Federal Reserve Act regulations regarding insider transactions.
Prompt Corrective Action
FDICIA amended the FDIA to establish a format for closer monitoring of
insured depository institutions and to enable prompt corrective action by
regulators when an institution begins to experience difficulty. The general
thrust of these provisions is to impose greater scrutiny and more restrictions
on institutions as they descend the capitalization ladder.
FDICIA establishes five capital categories for insured depository
institutions: (a) Well Capitalized;(3) (b) Adequately Capitalized;(4) (c)
Undercapitalized;(5) (d) Significantly Undercapitalized;(6) and (e) Critically
Undercapitalized.(7) All insured institutions (e.g., the Bank) are barred from
making capital distributions or paying management fees to a controlling person
(e.g., the Company) if to do so would cause the institution to fall into any of
the three undercapitalized categories.
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 the lesser of 5% of the institution's total assets or the amount needed
to bring the institution into full capital compliance, that the institution will
comply with the capital restoration plan until the
- --------
(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%.
25
<PAGE> 28
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, 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 adopted asset quality and earnings standards which were added
to the safety and soundness guidelines. The asset quality standards require a
depository institution to establish and maintain a system appropriate to the
institution's size and operations to identify and prevent deterioration in
problem assets. With respect to earnings, the institution should adopt and
maintain a system to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves.
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
26
<PAGE> 29
deposits by such institutions. An undercapitalized institution will not be
allowed to solicit brokered deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on insured deposits
in the particular institution's normal market areas or in the market area in
which such deposits would otherwise be accepted. In addition to these
restrictions on acceptance of brokered deposits, FDICIA provides that no
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. To arrive at a risk-based assessment for each depository
institution, the FDIC has constructed a matrix of nine risk categories based on
capital ratios and relevant supervisory information. Each institution is
assigned to one of three capital categories: "well capitalized," "adequately
capitalized" or "undercapitalized." Each institution also is assigned to one of
three supervisory groups based on levels of risk. Risk assessment premiums are
based on an institution's assignment within the matrix and for 1996 ranged from
$0.0 to $0.27 per $100 of deposits. For 1996, the FDIC lowered assessment rates
for all risk categories by four cents ($.04), with the lowest-rated
institutions' assessment being reduced from $0.31 per $100 of deposits.
FDICIA also places restrictions on insured state bank activities and
equity investments, interbank liabilities and extensions of credit to insiders
and transactions with affiliates.
Because the foregoing and other proposed regulations are subject to
change before they are adopted in final form, their ultimate impact on the
Company and the Bank cannot yet be determined.
OTHER RECENT LEGISLATION
The Deposit Insurance Funds Act of 1996 (the "Funds Act") requires the
FDIC to impose a one-time special assessment against deposits insured by the
Savings Association Insurance Fund ("SAIF") in order to recap- italize the SAIF
to its required reserve ratio. The special assessment was imposed at a rate of
65.7 cents ($0.657) per $100 of SAIF-assess- able deposits on October 8, 1996.
The Bank held no SAIF-assessable deposits as of that date. In addition, the
Funds Act authorizes the Financing Corporation, which provides funding for the
Federal Home Loan Bank System, to levy assessments on Bank Insurance Fund
("BIF") - assesable deposits. The rate of such assessment has not yet been
established.
On September 23, 1994, President Clinton signed into law the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Regulatory
Improvement Act"). The Regulatory Improvement Act provides regulatory relief for
both large and small banks by, among other things, reducing the burden of
regulatory examinations, streamlining bank holding company procedures and
establishing a formal regulatory appeals process. The Regulatory Improvement Act
also addresses a variety of other topics, including, but not limited to,
mortgage loan settlement procedures, call reports, insider lending, money
laundering, currency transaction reports, management interlocks, foreign
accounts, mortgage servicing and credit card receivables. Although the
Regulatory Improvement Act should reduce the regulatory burden currently imposed
on banks, it is not possible to ascertain the precise effect its various
provisions will have on the Company or the Bank.
CONSUMER PROTECTION LAWS AND REGULATIONS
The bank regulatory agencies are focusing greater attention on
compliance with consumer protection laws and their implementing regulations.
Examination and enforcement have become more intense in nature, and insured
institutions have been advised to monitor carefully compliance with various
consumer protection laws and their implementing regulations. The Bank is subject
to many federal consumer protection statutes and regulations, including the
Community Reinvestment Act, the Equal Credit Opportunity Act, the Truth in
Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act and the Real
Estate Settlement Procedures Act. Due to heightened regulatory
27
<PAGE> 30
concern related to compliance with these and other statutes generally, the Bank
may incur additional compliance costs or be required to expend additional funds
for investments in its local community.
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 $2,729,000 through December 31,
1996 in leasehold improvements and furniture, fixtures and equipment in its
headquarters office, which includes 1495 and 1475 East 14th Street, San Leandro.
The Bank's SBA and construction divisions are located in the Bank's
extension office at 1500 Washington Avenue, San Leandro, California 94577. The
premises consists of a one-story wood frame structure which has a floor area of
2,072 square feet. There is a parking lot adjacent to the building. The property
was purchased by the Company at a cost of $196,512 in 1985, and the premises are
leased from the Company by the Bank for the SBA and construction divisions at a
monthly rental of $2,000. The Bank invested approximately $254,000 in leasehold
improvements and furniture, fixtures and equipment in its extension office
through December 31, 1996.
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 $693,000 in leasehold
improvements and furniture, fixtures and equipment in its Hayward branch office
through December 31, 1996.
28
<PAGE> 31
The Bank's San Ramon branch office is located in a modern facility at
2821 Crow Canyon Road, San Ramon, California. The San Ramon branch office
consists of approximately 5,526 square feet of space and includes five teller
stations and a night depository and automated teller machine. The Bank invested
approximately $168,000 in leasehold improvements and furniture, fixtures and
equipment in its San Ramon office through December 31, 1996.
The Bank entered into a lease for the San Ramon branch office premises
which commenced on November 1, 1996, extends for a term of sixty months and
provides for rental payments of $7,500 per month for the first twelve months of
the lease term, increasing to $8,000 per month for the next twelve months of the
lease term. On each subsequent anniversary of the lease commencement date, the
rental payments will be adjusted to reflect changes in the Consumer Price Index,
subject to a cap on each such adjustment of five percent. The lease also grants
to the Bank options to extend the lease term for three additional five year
periods with the rental payments for such extension periods to be determined by
mutual agreement of the Bank and the lessor or by appraisal.
ITEM 3 - LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings other than
ordinary routine litigation incidental to their respective businesses nor are
any such proceedings known to be contemplated by governmental authorities.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
For information concerning the Company's Common Stock and related
shareholder matters, see "Stock Prices and Dividend Information" on the inside
back cover of the Annual Report, which is incorporated herein by reference, and
"SUPERVISION AND REGULATION" under the heading "ITEM 1 - BUSINESS" above.
As of March 3, 1997, there were 440 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 16
through 24 of the Annual Report, which are incorporated herein by reference.
CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS ANNUAL
REPORT ON FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARDED-LOOKING STATEMENTS. SUCH RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED IN MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. THEREFORE, THE INFORMATION SET
FORTH THEREIN SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS
PROSPECTS OF THE COMPANY AND THE BANK.
ITEM 7 - FINANCIAL STATEMENTS
29
<PAGE> 32
For consolidated financial statements of the Company, see consolidated
balance sheets at December 31, 1996 and 1995, and consolidated income
statements, consolidated statements of cash flows and consolidated statements of
shareholders' equity for the years ended December 31, 1996, 1995 and 1994, and
notes to consolidated financial statements for the years ended December 31,
1996, 1995 and 1994 and the "Independent Auditors' Report" thereon at Pages 2
through 14 of the Annual Report, which are incorporated herein by reference.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
For information concerning directors and executive officers of the
Company, see "ELECTION OF DIRECTORS OF THE COMPANY" in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Shareholders to be filed
pursuant to Regulation 14A (the "Proxy Statement"), which is incorporated herein
by reference.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. To the best knowledge of the Company, there are no greater than
ten-percent holders of the Company's Common Stock other than Richard M. Kahler,
President and Chief Executive Officer of the Company and the Company's Employee
Stock Ownership Plan.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, for fiscal year 1996, the
officers and directors of the Company complied with all applicable filing
requirements, except that director Dimitri Koroslev failed to file on a timely
basis 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
30
<PAGE> 33
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.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) FINANCIAL STATEMENTS REFERENCE PAGE
--------------
1996 Annual
Report Form 10-KSB
------ -----------
<S> <C> <C>
1. CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS AT DECEMBER 31, 1996 AND 1995..................... 2
INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996,
1995 AND 1994........................................... 3
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994..................................... 4
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994........................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................... 6 - 14
INDEPENDENT AUDITORS' REPORT..................................... 14
</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 34-36 of this Form 10-KSB.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1996.
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
31
<PAGE> 34
shall be incorporated by reference into registrant's Registration Statements on
Form S-8 No. 2-97378, 33-24302 and 33-75330.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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<PAGE> 35
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 27, 1997 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.
<TABLE>
<S> <C> <C>
/s/Richard M. Kahler DATE: March 27, 1997
______________________________________________________
Richard M. Kahler,
President and Chief Executive Officer
(Principal Executive Officer) and Director
/s/Randall D. Greenfield* DATE: March 27, 1997
_____________________________________________________
Randall D. Greenfield,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
and Secretary
/s/Joshua Fong, O.D. DATE: March 27, 1997
_____________________________________________________
Joshua Fong, O.D.,
Chairman of the Board of Directors and Director
/s/William R. Henson DATE: March 27, 1997
_____________________________________________________
William R. Henson, Director
/s/Dimitri V. Koroslev DATE: March 27, 1997
_____________________________________________________
Dimitri V. Koroslev, Director
/s/William E. Peluso DATE: March 27, 1997
_____________________________________________________
William E. Peluso, Director
/s/Oswald A. Rugaard DATE: March 27, 1997
_____________________________________________________
Oswald A. Rugaard, Director
/s/Mark A. Wilton DATE: March 27, 1997
_____________________________________________________
Mark A. Wilton, Director
*By /s/Richard M. Kahler
_________________________________________________
(Richard M. Kahler, as Attorney-in-Fact)
</TABLE>
33
<PAGE> 36
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.(3)
10.3 Bay Commercial Services 1982 Amended and Restated Stock Option Plan.(4) *
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.(5)
10.5 Lease, dated October 1, 1987 for Bay Bank of Commerce premises at *
1475 East 14th Street, San Leandro, California.(5)
10.6 Bay Commercial Services Directors' Stock Option Plan and Form of *
Directors Stock Option Agreement.(6)
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.(7)
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.(7)
10.9 Bay Commercial Services Adoption Agreement of Nonstandardized Section 401(k) *
Profit Sharing Plan and Bank of California Defined Contribution Master Plan
and Trust Agreement.(8)
10.10 Bay Commercial Services 1994 Stock Option Plan and Form of Stock Option *
Agreements.(9)
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.(9)
10.12 Lease dated July 31, 1996 by and between Oak Creek Plaza Associates and ___
Bay Bank of Commerce for premises located at 2821 Crow Canyon Road,
San Ramon, California.
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------ ------- -------------
<S> <C> <C>
11 Not applicable. *
13 Bay Commercial Services 1996 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.(10) *
22 Not applicable. *
23 Independent Auditor's 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 10.2 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995, which is incorporated herein
by this reference.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
35
<PAGE> 38
(10) Filed as Exhibit 3 to the Company's Current Report on Form 8-K filed
with the Commission on June 14, 1983, which is 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-KSB for fiscal year ended
December 31, 1995, Exhibit 10.2.
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 10.12
OAK CREEK PLAZA
OFFICE LEASE
LESSOR: OAK CREEK PLAZA ASSOCIATES
LESSEE: BAY BANK OF COMMERCE
THIS AGREEMENT OF LEASE ("Lease") by and between Lessor and Lessee,
provides as follows:
I. SUMMARY PROVISIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
A. REFERENCE DATE: JULY 18, 1996.
(Introductory Paragraph) (Month) (Day) (Year)
B. PREMISES: 2821 Crow Canyon Road, Suite 100
San Ramon, California 94583
Approximate Rentable Area: 5,526 SQ. FT.
Upstairs: 714 SQ. FT.
Downstairs: 4,812 SQ. FT.
</TABLE>
(Addendum, Paragraph 1(B))
C. PERMITTED USE: BANKING SERVICES
(Introductory
Paragraph)
(Addendum, Paragraph 1(C))
D. TERM: SIXTY (60) MONTHS
(Paragraph 1)
E. LEASE COMMENCEMENT DATE: NOVEMBER 1, 1996
(Paragraph 2)
F. TURN-OVER DATE: UPON EXECUTION OF LEASE DOCUMENTS
G. BASE ANNUAL RATE: Monthly Payment $7,500.00
(Paragraph 3) Partial Month $ N/A
H. SECURITY DEPOSIT: $9,000.00
(Paragraph 4)
I. UTILITIES: X Separately Metered
(Paragraph 5) 100% of Meter #DJN 51-47402-4
J. INSURANCE & TAXES:
(Paragraphs 9 & 11)
Pro Rata Share of Increase in Insurance & Taxes N/A %
Base Year Taxes N/A
Base Year Insurance N/A
K. INCREASE IN COST OF LIVING:
(Paragraph 30) X Annual CPI Increase Maximum of 5%
<PAGE> 2
L. ADDRESS FOR NOTICES: LESSEE:
(Paragraph 27)
BAY BANK OF COMMERCE
1495 EAST 14TH STREET
SAN LEANDRO, CA 94577
LESSOR:
Oak Creek Plaza Associates
c/o Oakridge Management Company
2821 Crow Canyon Road, Suite 203
San Ramon, CA 94583
M. EXHIBITS: EXHIBIT A: SPACE PLAN
EXHIBIT B: OPTION TO EXTEND
EXHIBIT C: CONSTRUCTION OBLIGATIONS
N. SPECIAL PROVISIONS: See Addendum to Office Lease (p. 1-5)
--------------
O. INCORPORATION OF DETAILED PROVISIONS: The detailed provisions
contained on pages 3 through 9 of this Lease and all Exhibits to this
Lease are incorporated herein by this reference, unless specifically
eliminated on pages 1 or 2.
EXECUTION
IN WITNESS WHEREOF the parties have executed this Lease the day and
year set forth below.
LESSOR:
OAK CREEK PLAZA ASSOCIATES
A California General Partnership
Dated: 7/31/96 By /s/ William G. Smith
----------------- ----------------------------------
Managing Partner
LESSEE:
BAY BANK OF COMMERCE
Dated: 7/31/96 By /s/ Richard M. Kahler
------------------ -----------------------------------
Dated:__________________ By___________________________________
Dated:__________________ By___________________________________
2
<PAGE> 3
II. DETAILED PROVISIONS
THIS LEASE, executed in San Ramon, California, on the dates indicated
below and with a reference date as set forth in the Summary Provisions, is by
and between OAK CREEK PLAZA ASSOCIATES, a California general partnership,
herein called "Lessor," and the Lessee designated in the Summary Provisions,
herein called "Lessee."
In consideration of the prompt payment of the rents by Lessee and the
exact performance of the covenants and conditions hereinafter set forth by
Lessee, Lessor hereby leases to Lessee, and Lessee hires from Lessor, for the
sole purposes designated in the Summary Provisions those certain premises
("Premises") situated in the City of San Ramon, California, commonly described
as the street address indicated in the Summary Provisions, on the following
terms and conditions, reserving and excepting to Lessor all Common Areas,
defined below. Each of the terms and provisions to be performed by Lessee
shall be construed to be both covenants and conditions.
1. TERM: The term of this lease shall be for the period designated in the
Summary Provisions, plus the partial month, if any, immediately following
commencement of the lease term.
2. COMMENCEMENT: ADDENDUM, PARAGRAPH 2.
3. RENTAL: Lessee agrees to pay Lessor, in lawful money of the United
States of America, without deduction or offset, the amount of rent payable per
month as designated in the Summary Provisions in advance on the first day of
each month during the lease term. Said amount shall be adjusted pursuant to a
cost of living increase as described in this lease. At the signing hereof,
Lessee shall pay Lessor rental representing the first full month's rent and any
partial month due as designated in the Summary Provisions.
4. SECURITY DEPOSIT: Simultaneously with the execution of this lease,
Lessee shall deposit with Lessor the sum designated in the Summary Provisions,
as the security deposit. Such security deposit shall be considered as security
for obligations, covenants, conditions and agreements under the lease. Upon
the expiration of the term hereof (or any renewal or extension thereof in
accordance with this lease), Lessor shall (provided that Lessee is not in
default under the terms hereof) return and pay back such security deposit to
Lessee less such portion thereof as Lessor shall have appropriated to make good
any default by Lessee with respect to any of Lessee's aforesaid obligations,
covenants, conditions and agreements. In the event of any default by Lessee
hereunder during the term of this lease, Lessor shall have the right, but shall
not be obligated, to apply all or any portion of the security deposit to cure
such default, in which event Lessee shall be obligated promptly to deposit with
Lessor the amount necessary to restore the security deposit to its original
amount. In the event of the sale or transfer of Lessor's interest in the
Building, Lessor shall have the right to transfer the security deposit to such
purchaser or transferee, in which event Lessee shall look only to the new
Lessor for the return of the security deposit, and Lessor shall thereupon be
released from all liability to Lessee for the return of such security deposit,
(ADDENDUM, PARAGRAPH 4). Lessor shall not be required to keep Lessee's
security deposit in an account separate from Lessor's own accounts.
5. UTILITIES: ADDENDUM, PARAGRAPH 5.
6. LATE CHARGES: Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges and late charges which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises. (ADDENDUM, PARAGRAPH
6). The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute
a waiver of Lessee's default with respect to such overdue amount, nor prevent
Lessor from exercising any of the other rights and remedies granted hereunder
or by law. In the event that a late charge is payable hereunder, whether or
not collected for three (3) consecutive installments of rent, then rent shall
automatically become due and payable quarterly in advance, rather than monthly,
notwithstanding any other provision of this lease to the contrary.
Lessor:
----------/-----------
Lessee:
----------/-----------
3
<PAGE> 4
7. JANITORIAL: Lessee shall provide basic janitorial service on a
regular basis for the Premises. Lessor shall provide scavenger service,
maintenance of grounds, and cleaning of exterior windows.
8. IMPROVEMENTS: Lessor will provide the Premises as shown on
Exhibit C. Lessee shall provide at its expense all furniture, decoration,
cabinetry (except wet bars) and other furnishing necessary to Lessees business.
9. INSURANCE (INCLUDING POSSIBLE RENTAL ADJUSTMENT):
(A) During the lease term, Lessee shall, at its own expense,
maintain in full force a policy or policies of comprehensive liability
insurance, including property damage, which insure Lessee, Lessor and Lessor's
designees against any or all liability for injury to persons and property and
for death of any person or persons occurring in or about the Premises, but in
no vent shall the liability under such insurance be less than a combined single
limit of $1,000,000. Lessee shall maintain glass insurance coverage on all
exterior plate glass in the Premises, or be self insured for same. Lessee
shall provide Lessor with copies or certificates of all policies, including in
each instance an endorsement providing that such insurance shall not be
canceled without ten (10) days prior notice to Lessor.
(B) During the lease term, Lessor shall, at its own expense,
maintain in full force a policy or policies of fire insurance with standard
extended coverage endorsement, and with such co-insurance or other clauses as
Lessor may determine, covering the building of which the leased Premises form a
part and in an amount equal to 100% of the replacement cost of the building.
(ADDENDUM, PARAGRAPH 9(C)).
10. DAMAGE OR DESTRUCTION:
(A) If less than 25% of the building in which the Premises are
located shall be partially or totally destroyed by fire or other casualty
insurable under the insurance described above so as to become partially or
totally untenantable, and if the same can be repaired or rebuilt for the amount
of the insurance proceeds available therefor, such damage shall be repaired or
rebuilt promptly by Lessor. (ADDENDUM, PARAGRAPH 10(A)).
(B) If 25% or more of the building in which the Premises are
located shall be destroyed or damaged by fire or other casualty or if the cost
to repair exceeds available insurance proceeds, Lessor may elect to rebuild or
put said building in good condition within a reasonable time after such
destruction or damage, or (ADDENDUM, PARAGRAPH 10(B)(1)). it may give notice
terminating this lease as of a date not later than forty-five (45) days after
such damage or destruction. (ADDENDUM, PARAGRAPH 10(B)(2)). Unless Lessor
elects to terminate this lease, the lease shall remain in full force and
effect, and the parties waive the provisions of any law to the contrary,
including Sections 1932 and 1934 of the Civil Code of the State of California;
however, a just and proportionate part of the rent shall be abated until the
Premises are repaired or rebuilt.
(C) If Lessor should elect or be obligated to repair or
rebuild because of any damage or destruction, Lessor's obligation shall be
limited to the basic Premises, interior work as covered by the description of
Lessor's work in Exhibit "B" and any part of Lessee's work for which an
allowance was made; Lessee shall fully repair or replace any other
installations originally installed by Lessee at its expense. (ADDENDUM,
PARAGRAPH 10(D)).
11. TAXES AND ASSESSMENTS (INCLUDING POSSIBLE RENTAL ADJUSTMENTS):
(A) Lessee shall pay before delinquency any and all taxes,
assessments, license fees and public charges levied, assessed or imposed and
which become payable during the lease term upon Lessee's fixtures, furniture,
and personal property installed or located in the Premises.
(B) Lessor will pay in the first instance all real property
taxes which may be levied or assessed by any lawful authority against the land
and improvements.
LESSOR:
-----------/-----------
LESSEE:
-----------/-----------
4
<PAGE> 5
12. ASSIGNMENT AND SUBLETTING: Without Lessor's written consent,
which consent shall not be unreasonably withheld, Lessee shall not assign,
mortgage or hypothecate this lease or any interest in this lease, or permit the
use of the Premises by any person or persons other than Lessee, or sublet the
Premises, or any part of this lease. (ADDENDUM, PARAGRAPH 12(A)) Any rent
received by Lessee from its subtenants in excess of the rent payable by Lessee
to Lessor under this lease shall be paid to Lessor, or (ADDENDUM, PARAGRAPH
12(A)) any sums to be paid by an assignee to Lessee in consideration of the
assignment of this lease shall be paid to Lessor. (ADDENDUM, PARAGRAPH 12(B))
Lessee agrees to sign such documents as may be (ADDENDUM, PARAGRAPH 12(C))
requested in connection with Lessor's assignment to Lenders for financing. No
subletting or assignment, even with the consent of Lessor, shall relieve Lessee
of its obligation to pay the rent and to perform all of the other obligations
to be performed by Lessee hereunder. The acceptance of rent by Lessor from any
other person shall not be deemed to be a waiver by Lessor of any provision of
this lease or to be a consent to any assignment, subletting or other transfer
shall not be deemed to constitute consent to any subsequent assignment,
subletting or other transfer. Lessee, at the time of requesting an assignment
or subletting, shall pay Lessor the sum of One Hundred Fifty Dollars ($150.00)
as reimbursement to Lessor for Lessor's costs associated with the review of any
such proposed assignment and/or subletting. (ADDENDUM, PARAGRAPH 12(D)).
13. CONTROL OF APPEARANCE, SIGNS AND ADVERTISING MEDIA: Without
Lessor's written consent and approval, Lessee shall not install any exterior
decoration, paint, build any fences, erect or install any exterior window or
door lettering, signs, advertising media or placards, keep or display any
merchandise on, or otherwise obstruct, the sidewalks, Common Areas or areaways
adjacent to the Premises. Lessee shall not use any advertising or other media
objectionable to Lessor, such as loudspeakers, phonographs or radio broadcasts
that can be heard outside the Premises. Lessee will have exclusive use of the
existing sign monument on Crow Canyon Road. In addition, Lessee will have
Lessor's permission to install signage on the Eastern-most location of the
building subject to City of San Ramon and owner approval. All signage costs
will be at Lessee's sole cost and expense.
14. REPAIRS, ALTERATIONS AND IMPROVEMENTS:
(a) Lessor shall keep in good order, condition and repair the
building foundations, exterior walls (except for the interior faces),
downspouts, gutters and the roof of the Premises, the plumbing and sewage
system, and the heating, ventilating and air conditioning equipment in the
Premises, except (as to all items) for reasonable use and wear and for any
damage caused by any negligent act or omission of Lessee or its employees,
agents, invitees, licensees or contractors. Lessor shall not be obligated to
repair the exterior or interior of doors, windows, plate glass and/or showcases
used on or in the Premises, and damage caused by any casualty or act of God,
except as otherwise provided for(ADDENDUM, PARAGRAPH 14(A)).
(b) (ADDENDUM, PARAGRAPH 14(B)(1)) Lessee shall keep and maintain
in good order, condition and repair, except for reasonable use and wear, the
(ADDENDUM, PARAGRAPH 14(B)(2)) Premises, fixtures, interior walls, floor, ceil-
ings and facilities that are within the Premises, including without limitation,
all interior building appliances and similar equipment (except heating, ventila-
tion and air conditioning equipment), and the exterior and interior portions of
doors, windows, plate glass and showcases in the Premises. If Lessor deems any
repairs required to be made by Lessee necessary, it may demand that Lessee make
them, and if Lessee refuses or neglects to commence such repairs and to
complete them with reasonable dispatch, Lessor may make or cause such repairs
to be made. If Lessor make or causes repairs to be made, Lessee shall, on
demand, immediately pay to Lessor (ADDENDUM, PARAGRAPH 14(B)(3)) cost of the
repairs. (ADDENDUM, PARAGRAPH 14(B)(4)).
(c) Without first obtaining Lessor's written consent, Lessee,
its employees, agents, licensees or contractors shall not make or install any
alterations, improvements, additions or fixtures that affect the exterior of
the Premises or any structural, mechanical or electrical component of the
Premises. Lessee shall keep the demised Premises free from any liens arising
out of work performed, material furnished or obligation incurred by Lessee.
(d) All alterations, improvements, additions or fixtures,
other than trade fixtures not permanently affixed to realty, that may be made
or installed upon the Premises by either of the parties and that in any manner
are attached to the floors, walls or ceilings, shall be the property of Lessor,
and at the termination of this lease, shall, at the election of Lessor, either
remain upon and be surrendered with the Premises as a part of the Premises,
without disturbance or injury, or be removed by Lessee (in which case, Lessee
shall correct any damage caused by the installation and removal of the
improvement or fixture.
(e) Lessee shall not change window treatments provided by
Lessor without the written consent of Lessor.
LESSOR:
-----------/-----------
LESSEE:
-----------/-----------
5
<PAGE> 6
15. LESSOR'S ACCESS TO PREMISES:
(a) Lessor and its designees shall have the right to enter the
Premises at all reasonable hours and, (ADDENDUM, PARAGRAPH 15(A)), to inspect
the Premises, to make repairs, additions, alterations to the Premises, the
building of which the Premises form a part, or any property owned or controlled
by Lessor.
(b) For a period commencing one hundred eighty (180) days
prior to the end of the lease term, Lessor may (ADDENDUM, PARAGRAPH 15(B)),
have reasonable access to the Premises for the purpose of exhibiting them to
prospective lessees and may post any usual "To Let" or "To Lease" signs upon or
about the Premises.
(ADDENDUM, PARAGRAPH 15(C))
16. INDEMNITY: Lessee agrees to indemnify and save Lessor harmless
from and against any and all claims and expenses, including legal fees, arising
from any act, omission or negligence of Lessee, or its contractors, licensees,
agents, invitees or employees, or arising from any accident, injury or damage
whatsoever caused to any person or property occurring in, on or about the
Premises or any part of them, the sidewalks adjoining the Premises, the parking
area and from and against all costs, expenses and liabilities incurred in or in
connection with any such claim or proceeding brought thereon, except any such
claim resulting from the intentional act or negligence of Lessor. (ADDENDUM,
PARAGRAPH 16)
17. ABANDONMENT: Lessee shall not vacate or abandon the Premises at
any time during the term. If Lessee shall abandon, vacate or surrender the
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor, except such property as may be mortgaged to
Lessor.
18. COMMON AREAS: The term "Common Areas" means all areas and
facilities outside the Premises that are provided and designated by Lessor for
general use and convenience of Lessee and other lessees and their respective
employees, customers and invitees. Common Areas include, but are not limited
to, pedestrian sidewalks, landscaped areas, exterior stairways, corridors,
interior stairs, balconies, parking areas, foyers and any room designated for
meetings for the use of Lessee and other lessees.
During the terms of the lease, Lessor shall operate, manage and maintain
all Common Areas at its expense. The manner in which such areas and facilities
shall be maintained, and the expenditures for maintenance, shall be at the sole
discretion of Lessor and the use of such areas and facilities shall be subject
to such reasonable regulations and changes as Lessor shall make from time to
time including, without limitation, the right to close, if necessary, all or
any portion of such Common Areas. Lessor hereby grants to Lessee, during the
term of this lease, the right to use, for the benefit of Lessee and Lessee's
officers, agents, customers and invitees, in common with others entitled to
such use, all Common Areas, subject to any rights, powers and privileges
reserved to Lessor.
19. USE AND COMPLIANCE:
(a) (ADDENDUM, PARAGRAPH 19(A))
(b) Lessee shall not cause or allow the generation, treatment,
storage or disposal of hazardous/infectious substances (as defined in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), the Superfund Amendments and Reauthorization Act of 1986 (SARA), any
subsequent amendments thereto, and/or any similar state or local legislation in
effect in the state where the Premises are located) at the Premises except in
accordance with the local, state, and federal statutes and regulations. Lessee
shall immediately notify Lessor of any hazardous/infectious substances to be
used, generated or discharged from the Premises. If any such substances shall
be present on the Premises, (ADDENDUM, PARAGRAPH 19(B)(1)) Lessee shall submit
to Lessor detailed plans for the handling, storage and disposal of such
substances; shall comply with any reasonable regulations for handling of such
substances, including use of specifically provided waste management systems;
and shall comply with all requirements of the Resource Conservation and
Recovery Act and any applicable state law for disposal of such substances.
Failure to comply with any of the above requirements shall be considered a
default under this lease and cause for immediate termination. Lessee shall
indemnify Lessor and hold it harmless from and against any and all other
liability, judgments, fines, settlements, costs or expenses (including counsel
fees) sustained by Lessor to the extent resulting from any (ADDENDUM, PARAGRAPH
19(B)(2)) Lessee which brings about an action brought pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(CERCLA), the Superfund Amendments and Reauthorization Act of 1986 (SARA), any
subsequent amendments thereto, and/or any similar state or local legislation.
(ADDENDUM, PARAGRAPH 19(B)(3)) This provision and Lessee's (ADDENDUM, PARAGRAPH
19(B)(4)) obligations hereunder shall survive any termination of the lease
agreement.
LESSOR:
-----------/-----------
LESSEE:
-----------/-----------
6
<PAGE> 7
(c) Lessee and Lessee's agents, employees, contractors,
invitees and licensees shall observe faithfully and comply strictly with all
reasonable (ADDENDUM, PARAGRAPH 19(C)) rules and regulations promulgated by
Lessor at any time and from time to time for the general well-being, safety,
care and cleanliness of the Premises and the Common Areas.
20. CONVEYANCE BY LESSOR: If during the term of this lease, Lessor
shall sell its interest in the Premises, from and after the effective date of
the sale, Lessor shall be released and discharged from any and all obligations
and responsibilities under this lease accruing or arising after the date.
(ADDENDUM, PARAGRAPH 20)
21. CONDEMNATION:
(A) If title to all the Premises is taken for any public or
quasi-public use by right of eminent domain or by private purchase in lieu of
eminent domain or if title to a portion of the Premises is taken and a
reasonable amount of reconstruction of the Premises will not result in the
Premises being a practical improvement and reasonably suitable for Lessee's
continued occupancy for the uses and purposes for which the Premises are
leased, in either such event, Lessor or Lessee may, upon written notice given
within thirty (30) days after the date that possession of the Premises or a
part thereof is taken, terminate this lease. If any part of the Premises shall
be so taken and the remaining part of the Premises (after reconstruction of the
then-existing building in which the Premises are located) is reasonably
suitable for Lessee's continued occupancy for the purposes and uses for which
the Premises are leased, this lease shall terminate, as to the part so taken,
and the rent shall be reduced in the same proportion that the floor area of the
portion of the Premises so taken (less any additions to the Premises by
reconstruction) bears to the original floor area of the Premises. If the net
amount of condemnation proceeds available to Lessor are sufficient to rebuild
or restore the Premises not taken (ADDENDUM, PARAGRAPH 21(A)(1)), Lessor shall,
at its own cost and expense, make all necessary repairs or alterations to the
building in which the Premises are located so as to constitute that portion of
the building not taken as a complete merchandising unit. (ADDENDUM, PARAGRAPH
21(A)(2)) If the net amount of condemnation proceeds available to Lessor are
insufficient to rebuild or restore the Premises as aforesaid, Lessor shall have
the right to elect to terminate this lease upon written notice to Lessee.
(ADDENDUM, PARAGRAPH 21(A)(3))
(B) Lessee shall not be entitled to share in any portion of
the award, and Lessee hereby expressly waives any right or claim to any part
thereof. All compensation awarded or paid upon a total or partial taking of
the Premises shall belong to Lessor, whether such compensation be awarded or
paid as compensation for diminution in value of the leasehold or of the fee.
Lessee shall, however, have the right to claim and recover, only from the
condemning authority and not from Lessor, any amount necessary to reimburse
Lessee for the cost of removing stock and fixtures. (ADDENDUM, PARAGRAPH 21(B))
(C) Each party agrees to execute and deliver to the other all
instruments that may be required to effectuate the provisions of this
agreement.
22. DEFAULT: REMEDIES:
(A) The occurrence of any of the following shall constitute a
material default and breach of this lease by Lessee: (i) any failure by Lessee
to pay rent or any other monetary sums required to be paid hereunder(ADDENDUM,
PARAGRAPH 22(A)(1)); (ii) a failure by Lessee to observe and perform any other
provision of this lease to be observed or performed by Lessee, where such
failure continues for (ADDENDUM, PARAGRAPH 22(A)(2)) days after written notice
thereof by Lessor to Lessee(ADDENDUM, PARAGRAPH 22(A)(3)); (iii) the making by
Lessee of any general assignment or general arrangement for the benefit of
creditors; (iv) the filing by or against Lessor of a petition to have Lessee
adjudged bankrupt or of a petition for reorganization or arrangement under any
law relating to bankruptcy unless, in the case of a petition against Lessee,
the same is dismissed within sixty (60) days; (v) the appointment of a trustee
or receiver to take possession of substantially all of Lessee's assets located
at the Premises or of Lessee's interest in this lease, where possession is not
restored to Lessee within thirty (30) days; or (vi) the attachment, execution
or other judicial seizure of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in the lease where such seizure is not
discharged within thirty (30) days. (ADDENDUM, PARAGRAPH 22(A)(4))
(B) In the event of any such material default or breach by
Lessee, Lessor may, at any time thereafter without limiting Lessor in the
exercise of any right or remedy at law or in equity which Lessor may have by
reason of such default or breach: (i) maintain this lease in full force and
effect and recover the rent and other monetary charges as they become due,
without terminating Lessee's right to possession irrespective of whether Lessee
shall have abandoned the Premises. In the event Lessor elects not to terminate
the lease, Lessor shall have the right to attempt to re-let the Premises at
such rent and upon such conditions and for such a term, and to do all acts
necessary to maintain or preserve the Premises as Lessor deems responsible and
necessary without being deemed to have elected to terminate the lease,
including removal of all
LESSOR:
-----------/-----------
LESSEE:
-----------/----------- 7
<PAGE> 8
persons and property from the Premises; such property may be removed and stored
in a public warehouse or elsewhere at the cost of and for the account of
Lessee. In the event any such re-letting occurs, this lease shall terminate
automatically upon the new lessee taking possession of the Premises.
Notwithstanding that Lessor fails to elect to terminate the lease initially,
Lessor at anytime during the term of this lease may elect to terminate this
lease by virtue of such previous default of Lessee; (ii) terminate Lessee's
right to possession by any lawful means, in which case this lease shall
terminate and Lessee shall immediately surrender possession of the Premises to
Lessor. In such event Lessor shall be entitled to recover from Lessee all
damages incurred by Lessor by reason of Lessee's default, including without
limitation thereto, the following: (1) the worth at the time of award of any
unpaid rent which had been earned at the time of such termination; plus (2) the
worth at the time of award of the amount by which the unpaid rent which would
have been earned after termination until the time of award exceeds the amount
of such rental loss that is proved could have been reasonable avoided; plus (3)
the worth at the time of award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of such rental
loss that is proved could be reasonably avoided; plus (4) any other amount
necessary to compensate Lessor for all the detriment proximately caused by
Lessee's failure to perform its obligations under this lease or which in the
ordinary course of events would be likely to result therefrom; including
without limitation the cost of restoring the Premises to a marketable condition
which may involve destruction of certain tenant improvements and reconstruction
of other tenant improvements; plus (5) at Lessor's election, such other amounts
in addition to or in lieu of the foregoing as may be permitted from time to
time by applicable State law. Upon any such re-entry Lessor shall have the
right to make any reasonable repairs, alterations or modifications to the
Premises which Lessor in its sole discretion deems reasonable and necessary.
As used in (1) and (2) above, the "worth at the time of award" is computed by
allowing interest at the rate of ten percent (10%) per annum from the date of
default. As used in (3) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the U.S. Federal Reserve Bank
at the time of award plus one percent (1%). The term "rent" as used in this
subparagraph shall be deemed to be and to mean the rent to be paid pursuant to
this lease and all other monetary sums required to be paid by Lessee pursuant
to the terms of this lease. (ADDENDUM, PARAGRAPH 22(B)
23. ATTORNEY'S FEES: In the event an action is brought to enforce or
interpret the provisions hereof, the prevailing party shall be entitled to
attorney's fees in an amount fixed by Court.
24. SUBORDINATION AND ESTOPPEL CERTIFICATES:
(a) (ADDENDUM, PARAGRAPH 24(A)(1))This lease, at Lessor's
option, shall be subordinate to the lien of any mortgage or deed of trust
subsequently placed upon the real property of which Premises are a part, and to
any and all advances made on the security thereof, and to all renewals,
modifications, replacements and extensions thereof; provided, however, that as
to the lien of any such deed of trust or mortgage, Lessee's right to quiet
possession of the Premises shall not be disturbed if Lessee is not in default
and so long as Lessee shall pay the rent and observe and perform all the
provisions of this lease, unless this lease is otherwise terminated pursuant to
its terms. In the event any proceedings are brought for foreclosure or in the
event of the exercise of the power of sale under any mortgage or deed trust
made by Lessor covering the demised Premises (ADDENDUM, PARAGRAPH 24(A)(2)),
Lessee shall attorn to the purchaser upon any such foreclosure or sale and
shall recognize such purchaser as the Lessor under this lease.
(b) Lessee shall, at any time and from time to time, without
cost or charge to Lessor, upon not less than ten (10) days prior written
request by Lessor, execute, acknowledge and deliver to Lessor a statement in
writing certifying that this lease is unmodified and in full force and effect
(or if there have been modifications, that the same are in full force and
effect as modified and stating the modification) and, if so, the dates to which
the fixed rent and any other charges have been paid in advance, it being
intended that any such statement delivered pursuant to this subsection may be
relied upon by any prospective purchaser or encumbrancer (including assignees)
of the Premises.
25. HOLDING OVER AND SURRENDER:
(a) If Lessee should remain in possession of the Premises
after the expiration of the lease term without executing a new lease, such
holding over shall be construed as a tenancy from month-to-month subject to all
the conditions, provisions and obligations of this lease insofar as the same
are applicable to a month-to-month tenancy, at a rate equal to (ADDENDUM,
PARAGRAPH 25(A)), of the monthly rental in effect at the time, payable in
advance on the first day of each and every month.
(b) On the last day or sooner termination of the lease term,
Lessee shall surrender the Premises, broom clean, in good condition and repair
(reasonable wear and tear excepted) together with all alterations, additions
and improvements that have been made in, to or on the Premises with the consent
of Lessor. Within (ADDENDUM, PARAGRAPH 25(B)), days before the end of the
lease term, Lessor shall notify Lessee whether Lessor desires to have the
Premises or any part of the
LESSOR:
-----------/-----------
LESSEE:
-----------/----------- 8
<PAGE> 9
Premises restored to their condition when the Premises were delivered to
Lessee, and if Lessor shall so desire, Lessee shall restore the Premises at the
end of the lease term at Lessee's sole cost and expense. If Lessee fails to
remove any of its property from the Premises at the end of the term, all
property not removed shall be deemed abandoned by Lessee. If the Premises be
not surrendered at the end of the lease term, Lessee shall be responsible for
and shall indemnify Lessor against loss or liability resulting from delay by
Lessee in surrendering the Premises, including without limitation, any claims
made by the succeeding lessee.
26. COMMISSIONS: Lessor shall be responsible for paying any cost,
expense, liability or commission to Oakridge Management Company and Kerry and
Associates with respect to the negotiation of this lease.
27. NOTICES: All notices and demands under this lease by either party
to the other shall be in writing and shall be sufficiently given and served upon
the other party if sent by certified mail, return receipt requested, postage
prepaid or by overnight courier and addressed as indicated in the Summary
Provisions. Such notices and demands shall be deemed effective upon the earlier
of (a) the date shown as delivered on the receipt, and (b) the date which it
three (3) days after mailing. Either party may designate a different address
upon three (3) days written notice.
28. LIMITATION OF LIABILITY: Lessee agrees that the liability of
Lessor to Lessee under this lease is limited solely to the assets of the
general partnership which owns the building and that the partners thereof shall
have no personal liability under this lease. Lessee covenants and agrees to
look solely to the assets of the general partnership for the satisfaction of
any liability of Lessor to Lessee under this lease and Lessee agrees not to
bring any action asserting personal liability of the partners of said general
partnership. (ADDENDUM, PARAGRAPH 28),
29. MISCELLANEOUS:
(a) One or more waivers, consents or approvals by Lessor
(ADDENDUM, PARAGRAPH 29(A)), of any breach of any covenant or condition shall
not be construed as a waiver of any subsequent breach or as a consent or
approval to the same or any other covenant or condition.
(b) Whenever the singular number or plural number is used,
when required by the context, each shall include the other; and the masculine,
feminine and neuter genders shall include the others. The word "person" shall
include without limitation a corporation, firm or association. If there is
more than one Lessee, the obligations imposed under this lease upon Lessee
shall be joint and several.
(c) Time is of the essence of each term and provision hereof.
(d) This lease constitutes the entire agreement between the
parties hereto and supersedes all prior communications. Neither party has made
or relied upon any agreement, warranty, representation, promise or statement,
oral or written, not expressly included herein. No change in this lease shall
be valid unless it is writing and signed by Lessor and Lessee.
(e) If Lessor does not increase rents for authorized rental
adjustments under the terms of this lease agreement, it does not waive its
right of doing so. Upon three days written notice, rent may be adjusted up to
the allowed rent authorized retroactively and from the date of notice through
the duration of the lease.
(f) Lessee acknowledges that neither Lessor nor any broker,
agent, or employee of Lessor has made any representations or promises with
respect to any manner or thing affecting or relating to the Premises or the
Common Areas except as herein expressly set forth, and no rights, privileges,
easements or licenses are acquired by Lessee except as herein expressly
provided. Lessee acknowledges that the taking of the possession of the
Premises shall be conclusive evidence that the Premises and the Common Areas
were in good and satisfactory condition at the time such possession was so
taken, except as to latent defects, if any.
30. COST OF LIVING INDEX INCLUDING POSSIBLE RENTAL ADJUSTMENT:
Commencing for the first month of the third lease year and on each anniversary
thereafter for the duration of this lease, the amount of the monthly rental set
forth in this lease shall be subject to an adjustment. For each year after the
second full year, the monthly rental shall be adjusted upward only in the same
percentage proportion that the revised Consumers Price Index for All Urban
Consumers (1982-84=100) for the San Francisco-Oakland area as published
bi-monthly by the U.S. Department of Labor, Bureau or Labor Statistics, shall
increase over such index for the month in which this lease commenced as
designated in the Summary Provisions. The rent so fixed and adjusted shall be
the rent for each year period commencing with the date on which said rent is to
be adjusted as herein provided. If the official monthly "BLS Consumer's Price
Index" is not available for use as a cost of living index for the month
described for use as the basis for the rent adjustments, it is agreed that the
"BLS Consumer's Price Index" as issued and published for the earliest
LESSOR:
-----------/-----------
LESSEE:
-----------/----------- 9
<PAGE> 10
preceding months shall be used for determining such basic rent adjustments. In
the event that at any time during the term hereof the United States Bureau of
Labor Statistics shall discontinue the issuance of the "BLS Consumer's Price
Index," then in such event the parties hereto shall use such other standard
nationally recognized cost of living index that is then issued and available.
Commencing on the first month of the second lease year and on each
anniversary thereafter the amount of monthly rental set forth in this lease
shall be subject to adjustment as follows:
Months 1 - 12: $7,500.00 per month
Months 13 - 24: $8,000.00 per month
Months 25 - 36: CPI Increase Capped @ 5%
Months 37 - 48: CPI Increase Capped @ 5%
Months 49 - 60: CPI Increase Capped @ 5%
31. PARKING: (ADDENDUM, PARAGRAPH 31)
32. EXHIBITS: The following Exhibits in the printed text of the lease
are attached and are made part of this lease (if none, indicate so):
(ADDENDUM, PARAGRAPH 32,33,34)
EXHIBIT A: SPACE PLAN
EXHIBIT B: OPTION TO EXTEND
EXHIBIT C: CONSTRUCTION OBLIGATIONS
SIGNATURES APPEAR ON PAGE 2
LESSOR:
-----------/-----------
LESSEE:
-----------/-----------
EXHIBIT A
SPACE PLAN
2821 Crow Canyon Road
Suite 100
San Ramon, CA
< Table >
/s/ RMK
10
<PAGE> 11
EXHIBIT B
OPTION TO EXTEND LEASE TERM
Provided that Lessee is not then in default, Lessee shall have three (3)
five (5) year options to extend this lease term as indicated in the Summary
Provisions, provided that Lessee has provided Lessor with written notice of
such exercise not more than 365 and not less than 180 days prior to the
expiration of the original or extended term of the lease. The rental for the
first year of the extended term shall be negotiated and mutually agreed upon by
Lessor and Lessee. The notice of exercise of option shall contain Lessee's
option of the rental rate for the first year of the option term. Lessor and
Lessee shall have sixty (60) days in which to reach an agreement of the rental
value for the first year of the extension term. In the event that Lessor and
Lessee do not reach an agreement during the described sixty (60) day period,
Lessee may accede to Lessor's position (ADDENDUM, EXHIBIT B), or may request an
appraisal process in order to determine the fair market rental value. In the
event of such a request, Lessor and Lessee shall each select an appraiser or
real estate broker with at least five (5) years of experience in the San Ramon
office market. These two appraisers or brokers shall select a third appraiser
or broker and these three individuals shall submit their respective
determinations as to fair market rental value and schedule of escalations
within thirty (30) days of the appointment of the third appraiser or broker.
The fair market rental value of the Premises shall be deemed to be the average
of the three determinations. The cost for the appraisal process shall be paid
in equal shares by Lessor and Lessee, but neither Lessor nor Lessee shall be
obligated to pay more than $1,000.
LESSOR:
-----------/-----------
LESSEE:
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11
<PAGE> 12
EXHIBIT C
CONSTRUCTION OBLIGATIONS
Lessor will turn-over Premises to Lessee in an "as-is" condition. Any and
all repairs or modifications to the Premises shall be at Lessee's sole cost and
expense.
Should Lessee commence improvements to Premises, all terms and conditions of
Paragraph 14 shall apply.
LESSOR:
------------/------------
LESSOR:
------------/------------
12
<PAGE> 13
BAYBLEAS.REV
ADDENDUM TO LEASE
This ADDENDUM ("Addendum") is made and entered into by and between Oak
Creek Plaza Associates, a California general partnership ("Lessor") and Bay
Bank of Commerce ("Lessee"), and is dated as of the date set forth on the first
page of the Office Lease dated July 18, 1996 to which this Addendum is attached
(the "Lease").
I.B. Lessor and Lessee agree that the usable and rentable area of
the Premises, and the rentable area of the Building for all purposes under this
Lease, are as specified above.
I.C. and any other legally permitted use.
2. COMMENCEMENT: The term of this lease, and leasee's obligation to
pay rent, shall commence on November 1, 1996. Upon execution of this lease by
lessor and Lessee, and receipt of cashiers checks by lessor in the total
principal amount of $16,500 (security deposit of $9,000 and November 1996 rent
of $7,500), the lessor shall immediately give the Lessee the keys to the
Premises and the Lessee shall occupy the Premises rent free until November 1,
1996.
Notwithstanding anything to the contrary contained herein, Lessee
shall have the right to occupy and commence business from the Premises prior to
the Lease Commencement Date provided that a certificate of occupancy, if
required, or its equivalent shall have been issued by the appropriate
governmental authorities for the Premises, and all of the terms and conditions
of this Lease shall apply, other than Lessee's obligation to pay any rental as
though the Lease Commencement Date had occurred.
4. , provided that such purchaser or transferee acknowledges
receipt of the security deposit in writing.
5. UTILITIES: Lessor shall pay for all HVAC (heating, ventilating and
air conditioning) services for Premises. Lessee shall pay for all light and
power for Premises, together with any taxes thereon, as are separately metered
on meter #DJN 51-47402-4. Lessee shall also pay for all telephone and other
utilities and services supplied to the Premises.
Lessee shall be permitted ready access to the Building
telephone room(s) and the Building telephone riser closet(s) and space in such
room(s) and closet(s) for the installation and repair of Lessee'
telecommunications and telephone cabling.
6. Accordingly, if any installment of rent or any other sum due
from Lessee shall not be received by Lessor or Lessor's designee within
fifteen (15) days after such amount shall be due, then, without any requirement
for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 3% of
such overdue amount.
9(c). Notwithstanding anything to the contrary contained in this
Lease, Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any rights of subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance carried by Lessor and Lessee, respectively, is not invalidated
thereby. As long as such waivers of subrogation are contained in their
respective insurance policies, Lessor and Lessee hereby waive any right that
either may have against the other on account of any loss or damage to their
respective property to the extent such loss or damage is insurable under
policies of insurance for fire and all risk coverage, theft, public liability,
or other similar insurance.
10(a). Notwithstanding anything to the contrary contained herein, if
the Premises is damaged such that the remaining portion thereof is not
sufficient to allow Lessee to conduct reasonably normal business operations
from such remaining portion, or the repair of the Premises prevents Lessee from
conducting its normal business operations from the Premises, or any portion
thereof, and Lessee does not conduct its business operations therefrom, Lessor
shall allow Lessee a proportionate abatement of rent and any other charges
payable by Lessee hereunder during the time and to the extent Lessee cannot and
does not conduct its normal business operations in the Premises. All repair
and reconstruction of the Premises by Lessor pursuant to this Paragraph 10
shall be deemed to mean restoration to substantially the same condition of the
Building prior to the casualty.
10(b)(1). (provided Lessor terminates the leases of lessees
(including Lessee) occupying at least sixty-six and two-thirds percent (66
2/3%) of the rentable square footage of the Building and Lessor does not, in
good faith, intend to relet such space so terminated for a period of twelve
(12) months after such termination)
LESSOR:
___________/___________
LESSEE:
-----------/-----------
13
<PAGE> 14
10(b)(2). (in which case Lessee shall have sixty (60) days to vacate the
Premises).
10(d). Notwithstanding anything to the contrary contained herein, if
Lessor does not elect to terminate this Lease pursuant to Lessor's termination
right as provided above and (i) Lessor's and Lessee's repairs cannot be
completed within one hundred eighty (180) days after the date of damage, or
(ii) the Premises or the Building is destroyed during the last six months of
the term, as may be extended, to such an extent that Lessee is unable to
conduct reasonably normal business operations therein for more than thirty (30)
days, Lessee may elect not later than thirty (30) days after the date of damage
to terminate this Lease upon written notice to Lessor effective upon the date
specified in the notice.
12(a). Fifty percent (50%) of
12(b). The amounts to be paid by Lessee to Lessor pursuant to the
preceding sentence shall be calculated after deducting (i) the rent payable by
Lessee to Lessor hereunder in connection with such portion of the Premises to
be sublet or assigned; (ii) any improvement allowance or other economic
concession paid by Lessee to the sublessee or assignee; (iii) any brokerage
commission actually paid in connection with the assignment or sublease; (iv)
reasonable attorneys' fees in connection with the assignment or sublease; (v)
any actual cost to buy-out or take over the previous lease of an assignee or
sublessee; and (vi) any changes, alterations and improvements to the Premises
in connection with the transfer.
12(c). reasonably
12(d). Notwithstanding anything to the contrary contained in this
Paragraph 12, (i) an assignment or subletting of all or a portion of the
Premises to an affiliate of Lessee (an entity which is controlled by, controls,
or is under common control with, Lessee) ("Affiliate"), or to a purchaser of
all or substantially all of the assets of Lessee or an Affiliate, or (ii) a
transfer, by law or otherwise, in connection with the merger, consolidation or
other reorganization of Lessee or an Affiliate, shall not be deemed a transfer
requiring Lessor's consent or payment of any sums under this Paragraph 12,
provided that Lessee notifies Lessor of any such assignment or sublease and
such assignment or sublease is not a subterfuge by Lessee to avoid its
obligations under this Lease. "Control," as used in this Paragraph 12, shall
mean the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person or entity, or ownership of
any sort, whether through the ownership of voting securities, by contract or
otherwise. Lessee warrants that any assignment will be limited to an entity
whose equity capital will be substantially equal to or greater than that of
Lessee.
14(a). in Paragraph 10
14(b)(1). Except as set forth as Lessor's obligations above,
14(b)(2). non-structural, non-systems portions of the
14(b)(3). Lessor's actual, reasonable, out-of-pocket
14(b)(4). If Lessee deems any repairs required to be made by
Lessor necessary, it may demand that Lessor make them, and if Lessor refuses or
neglects to commence such repairs and to complete them with reasonable
dispatch, Lessee may make or cause such repairs to be made. If Lessee makes or
causes repairs to be made, Lessor shall, on demand, immediately pay to Lessee,
Lessee's actual, reasonable, out-of- pocket cost of the repairs.
15(a). upon at least forty-eight (48) hours' prior written notice to
Lessee (except in the case of emergencies)
15(b). upon at least forty-eight (48) hours' prior written notice to Lessee
15(c). Lessee, its employees, agents and invitees shall have access
to the Premises twenty- four (24) hours per day, seven (7) days per week.
16. Lessor agrees to indemnify and save Lessee harmless from and
against any and all claims and expenses, including legal fees, arising from any
act, omission or negligence or Lessor, or its contractors, licensees, agents,
invitees or employees, or arising from any accident, injury or damage
whatsoever caused to any person or property occurring in, on or about the
Building or any part thereof, the sidewalks, Common Areas and the parking area,
and from and against all costs, expenses and liabilities incurred in or in
connection with any such claim or proceeding brought thereon, except any such
claim resulting from the intentional act or negligence of Lessee.
LESSOR:
-----------/-----------
LESSEE:
-----------/-----------
14
<PAGE> 15
19(a). The use by lessee of the premises shall be in lawful, careful,
safe and proper manner, and lessee shall not do or permit anything to be done
in or about the Premises that would increase the rate of affect any fire or
other insurance covering the Premises. Lessee shall not permit the same to be
used for any unlawful purpose nor shall Lessee commit or suffer any waste.
Lessor shall at its own cost and expense promptly observe, comply with and
execute all present and future orders, regulations, rules, laws, ordinances and
requirements of all governmental authorities (including the Americans with
Disabilities Act) and the board of fire underwriters, arising out of, or
connected with the use or occupancy of the Premises (collectively, "Laws");
provided, however, that Lessee hereby covenants and agrees that if such
compliance is required in the Premises, or on a floor of the Building on which
the Premises are located, and such compliance relates to Lessee's alterations,
additions or improvements in the Premises, or is required as a result of
Lessee's non-general office use of the Premises, Lessee shall be responsible
for the cost of causing, and Lessee shall cause, the Premises and the Building
on the floor(s) on which the Premises are located to comply with such Laws.
Lessor represents and warrants that as of the Lease Commencement Date Lessor
has no knowledge of any violation of any applicable Laws respecting the
Premises. All doors are for the purposes of access only. When not in use for
said purpose, doors shall be kept closed for heating and air conditioning
purposes. Thermostats for mechanical equipment are to be operated by Lessor
only; provided, however, that Lessor shall maintain a temperature within the
Premises which is reasonably acceptable to Lessee. All lights under control of
Lessee shall be turned off by Lessee when not in use.
19(b)(1). and shall have been brought to the Premises by
Lessee,
19(b)(2). hazardous substances brought to the Premises by
19(b)(3). Lessor shall indemnify Lessee and hold it harmless
from and against any and all other liability, judgments, fines, settlements,
costs or expenses (including counsel fees) sustained by Lessee to the extent
resulting from any hazardous substances not brought to the Premises by Lessee.
19(b)(4). and Lessor's
19(c). , nondiscriminatory
20. of such transfer
21(a)(1). to substantially the same condition existing prior to
the condemnation
21(a)2). If any portion of the Premises shall be taken, and
this Lease shall not be terminated, all rent shall be proportionally abated.
21(a)(3). giving Lessee ninety (90) days to vacate the
Premises.
22(a)(1). within three (3) business days after receipt of
notice from Lessor that the same is due
22(a)(2). thirty (30)
22(a)(3). ; provided, however, if the nature of such default is
such that the same cannot reasonably be cured within a thirty (30)-day period,
Lessee shall not be deemed to be in default if it commences such cure within
such period and thereafter diligently prosecutes such cure to completion
22(a)(4). (vii) If Lessee vacates Premises in excess of six
months.
22(b). Notwithstanding anything to the contrary contained in this
Paragraph 22, Lessor shall only have the remedies set forth above in this
Paragraph 22(b) to the extent permitted by applicable law.
24(a)(1). Provided that Lessor delivers to Lessee a
non-disturbance agreement in form and substance acceptable to Lessee from any
holder of any mortgage or deed of trust placed upon the real property of which
the Premises are a part,
24(a)(2). so long as the non-disturbance agreement described
above has been provided to Lessee,
25(a). 110%
25(b). one hundred fifty (150)
LESSOR:
-----------/----------
LESSEE:
-----------/----------
15
<PAGE> 16
28. Further, Lessor agrees that, notwithstanding anything in this
Lease to the contrary, and notwithstanding any applicable law to the contrary,
the obligations of Lessee under this Lease do not constitute personal
obligations of the individual partners, directors, officers or shareholders of
Lessee, and Lessor will not seek recourse against any individual partners,
directors, officers or shareholders of Lessee or any of their personal assets
for satisfaction of any liability of Lessee in respect of this Lease.
29(a). or Lessee
31. PARKING: Lessor will designate the seven (7) parking spaces
located immediately adjacent to the West entrance of Premises, as spaces
reserved specifically for patrons of Lessee.
32. LEASE SUBJECT TO REGULATORY APPROVAL: Notwithstanding
anything to the contrary contained in this Lease, and notwithstanding the
execution of this Lease by Lessee and/or Lessor, this Lease shall not become
effective unless and until Lessee receives all state and federal regulatory
approvals for its proposed branch to be located at the Premises.
33. MINIMIZATION OF INTERFERENCE: Notwithstanding the foregoing,
Lessor agrees that the exercise of any of the rights set forth herein shall not
prevent ingress to and egress from the Premises or otherwise interfere with
Lessee's exercise of any of Lessee's rights under this Lease or Lessee's use of
the Premises as permitted under this Lease and that Lessor shall use
commercially reasonable efforts to cause any of such rights set forth herein to
be performed or carried out so as not to adversely interfere with Lessee's
normal business functions.
34. REASONABLENESS AND GOOD FAITH: Neither Lessor nor Lessee
shall unreasonably withhold or delay any consent, approval or other
determination provided for hereunder. Furthermore, whenever the Lease grants
Lessor or Lessee the right to take action, exercise discretion, establish rules
and regulations, make allocations or other determinations, or otherwise
exercise rights or fulfill obligations, Lessor and Lessee shall act reasonably
and in good faith and take no action which might result in the frustration of
the reasonable expectations of a sophisticated lessor and a sophisticated
lessee concerning the benefits to be enjoyed under this Lease.
EXHIBIT B. , withdraw its election to extend
To the extent that the provisions of the Addendum are
inconsistent with the terms and conditions of the Lease, the terms and
conditions of this Addendum shall control.
LESSOR:
OAK CREEK PLAZA ASSOCIATES,
a California general partnership
Dated: 7/31/96 By: /s/ William G. Smith
---------------------- ----------------------------------------
Managing Partner
LESSEE:
BAY BANK OF COMMERCE
Dated: 7/31/96 By: /s/ Richard M. Kahler
---------------------- ----------------------------------------
President & CEO
16
<PAGE> 1
BAY COMMERCIAL SERVICES EXHIBIT 13
1996 ANNUAL REPORT
(logo)
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years ended December 31:
Interest income $ 7,826 $ 7,456 $ 6,086 $ 5,520 $ 6,215
Interest income on a taxable equivalent basis 7,904 7,505 6,146 5,591 6,285
Interest expense 2,457 2,310 1,766 1,552 2,206
Net interest income 5,369 5,146 4,320 3,968 4,009
Net interest income on a taxable equivalent basis 5,447 5,195 4,380 4,039 4,079
Net income (loss) 1,083 945 619 374 (220)
Net income (loss) per common and equivalent share 0.89 0.78 0.55 0.35 (0.20)
Return on average assets 1.1% 1.0% 0.7% 0.5% (0.3)%
Return on average shareholders' equity 11.8% 11.1% 7.9% 5.1% (2.9)%
- -------------------------------------------------------------------------------------------------------------------
At December 31 :
Assets $96,769 $92,819 $89,193 $81,895 $81,880
Loans 71,362 58,152 51,566 48,777 52,899
Securities 16,043 20,410 25,988 24,421 16,979
Deposits 83,291 80,253 79,258 72,609 71,913
Shareholders' equity 9,418 8,767 7,946 7,632 7,208
Book value per share $ 8.75 $ 8.14 $ 7.36 $ 7.07 $ 6.67
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
<PAGE> 3
REPORT TO OUR SHAREHOLDERS - 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Bay Commercial Services reached two important milestones during 1996,
celebrating the Bank's fifteenth anniversary in February and generating record
earnings for the year, with net income of $1,083,000 or $0.89 per share. Net
income for 1996 represents a 15% increase over net income of $945,000 or $0.78
per share earned in 1995.
Boosted by the prospering East Bay economy, the Company experienced continued
strong growth in average earning assets, which were up by 5.5% for 1996. The
Company's loan portfolio experienced even more significant growth, with an
increase of over 19% in average outstanding loan balances during the year.
In recognition of continued strong financial performance and a growing capital
position, the Board of Directors of the Company approved a cash dividend of
$0.30 per share which was paid to shareholders in January 1997.
At the end of the year, the Bank opened a regional banking office in San Ramon,
expanding our presence in the fast-growing Tri-Valley area. The San Ramon office
will allow the Bank to develop new business relationships in the rapidly
expanding "I-680 corridor" of the East Bay.
As a result of the recent merger of several local community banks into a large,
multi-state bank, Bay Bank of Commerce has expanded its marketing and business
development efforts in its primary area of expertise: small business banking.
The Bank differentiates itself from the larger banks by marketing the advantages
of a community-based bank with local control, customized banking solutions, and
personal service.
To meet increased demand for the electronic delivery of banking products and
services, the Bank is expanding its customer delivery systems. Plans for 1997
include the introduction of a phone banking system and evaluation of PC-based
and Internet banking solutions. Other product enhancements and introductions in
development include merchant debit card services, a new money market cash
management account and an ATM/debit card for personal accounts.
In 1996, Bay Bank of Commerce was again awarded top honors for safety and
soundness by two independent rating firms. Bauer Financial Services rated the
Bank five stars out of a possible five stars in their most recent public rating.
Similarly, Veribanc gave the Bank a blue ribbon for financial health. The Bank
was also rated as a Premier Performing bank for the third consecutive year by
the California-based Findley Company.
Bay Commercial Services and Bay Bank of Commerce remain in good position to
continue the success that has been built on the simple notion of delivering
quality products with the best service. As shareholders, your support continues
to be an important part of this success.
<TABLE>
<S> <C> <C>
/s/Dimitri Koroslev /s/Richard M. Kahler /s/Joshua Fong, O.D.
Dimitri Koroslev Richard M. Kahler Joshua Fong, O.D.
Chairman President and Chief Executive Officer Chairman
Bay Bank of Commerce Bay Bank of Commerce Bay Commercial Services
Bay Commercial Services
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
1
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
December 31 (dollars in thousands): 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,945 $ 5,057
Federal funds sold 0 6,700
- -------------------------------------------------------------------------------------------
Cash and cash equivalents 6,945 11,757
- -------------------------------------------------------------------------------------------
Securities available for sale, stated at market value
(amortized cost of $9,364 for 1996; $13,045 for 1995) 9,339 13,199
Securities held to maturity (market values of $6,743 for 1996;
$7,339 for 1995) 6,704 7,211
Loans held for sale 2,923 4,984
Loans held for investment 68,439 53,168
Allowance for loan losses (971) (982)
- -------------------------------------------------------------------------------------------
Net loans 70,391 57,170
- -------------------------------------------------------------------------------------------
Premises and equipment, net 2,164 2,139
Interest and fees receivable 585 600
Other real estate owned 0 359
Other assets 641 384
- -------------------------------------------------------------------------------------------
Total assets $96,769 $92,819
- -------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $26,198 $26,841
Savings and interest-bearing demand 23,250 24,516
Time 27,823 23,773
Certificates of deposit, $100,000 and over 6,020 5,123
- -------------------------------------------------------------------------------------------
Total deposits 83,291 80,253
- -------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 2,304 2,203
Federal funds purchased 500 0
Interest payable and other liabilities 1,256 1,596
- -------------------------------------------------------------------------------------------
Total liabilities 87,351 84,052
- -------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 4, 11 and 12) 0 0
Shareholders' equity:
Common stock - no par value: authorized 20,000,000
shares; issued & outstanding 1,076,720 in 1996 and 1995 3,662 3,662
Retained earnings 5,771 5,011
Net unrealized gain (loss) on securities available for sale (15) 94
- -------------------------------------------------------------------------------------------
Total shareholders' equity 9,418 8,767
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $96,769 $92,819
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
2
<PAGE> 5
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Years ended December 31 (in thousands, except per share amounts): 1996 1995 1994
<S> <C> <C> <C>
Interest income:
Loans, including fees $6,463 $5,764 $4,729
Federal funds sold and reverse repurchase agreements 250 368 155
Investment securities:
Taxable 947 1,217 1,076
Nontaxable 166 107 126
- ----------------------------------------------------------------------------------------------------------
Total interest income 7,826 7,456 6,086
- ----------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing demand 651 716 638
Time 1,407 1,240 833
Certificates of deposit, $100,000 and over 293 294 261
Other borrowed funds 106 60 34
- ----------------------------------------------------------------------------------------------------------
Total interest expense 2,457 2,310 1,766
- ----------------------------------------------------------------------------------------------------------
Net interest income 5,369 5,146 4,320
Benefit for loan losses 0 155 100
- ----------------------------------------------------------------------------------------------------------
Net interest income after
benefit for loan losses 5,369 5,301 4,420
- ----------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges and fees 264 240 264
Bankcard income 254 211 181
Loan servicing 138 170 194
Net gain on sale of OREO 119 57 68
Gain on sale of loans 174 7 7
Net losses on sales of investment securities (3) (35) (3)
Other 134 66 365
- ----------------------------------------------------------------------------------------------------------
Total noninterest income 1,080 716 1,076
- ----------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 2,554 2,470 2,437
Occupancy 613 596 608
Other 1,519 1,406 1,473
- ----------------------------------------------------------------------------------------------------------
Total noninterest expenses 4,686 4,472 4,518
- ----------------------------------------------------------------------------------------------------------
Income before income tax expense 1,763 1,545 978
Income tax expense 680 600 359
- ----------------------------------------------------------------------------------------------------------
Net income $1,083 $ 945 $ 619
- ----------------------------------------------------------------------------------------------------------
Net income per common and equivalent share $ 0.89 $ 0.78 $ 0.55
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
BAY COMMERCIAL SERVICES AND SUBSIDIARY
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Years ended December 31 (in thousands): 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,083 $ 945 $ 619
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 308 166 27
Benefit for loan losses 0 (155) (100)
Unamortized deferred loan fees, net (163) 122 44
Securities losses 3 35 3
Gain on sale of mortgage servicing rights 0 0 (43)
Originations of mortgage loans held for sale 0 0 (1,907)
Originations of SBA loans held for sale (1,714) (1,090) (1,999)
Proceeds from the sale of mortgage loans held for sale 0 0 1,954
Proceeds from the sale of SBA loans held for sale 2,884 188 221
Receipts net of expenses due to OREO (119) (73) (59)
Loss on sale of equipment 2 0 14
Change in interest and fees receivable and other assets (125) 169 (117)
Change in interest payable and other liabilities (280) 658 189
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,879 965 (1,154)
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 1,997 965 1,248
Proceeds from maturities of securities available for sale 1,681 21,369 25,823
Proceeds from maturities of securities held to maturity 1,661 3,044 2,564
Purchase of securities available for sale 0 (14,891) (24,725)
Purchase of securities held to maturity (1,177) (4,446) (6,459)
Net change in loans (14,109) (5,115) (1,182)
Proceeds from sale of mortgage servicing rights 0 0 30
Proceeds from sale of OREO 252 76 110
Purchases of premises and equipment (318) (131) (102)
Proceeds from sale of equipment 6 2 27
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (10,007) 873 (2,666)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 3,038 995 6,649
Net change in securities sold under agreements to repurchase 101 1,167 51
Net change in fed funds purchased 500 0 0
Exercise of stock options 0 9 0
Repurchase and retirement of common stock 0 (42) 0
Cash dividends paid (323) (216) 0
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,316 1,913 6,700
- --------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (4,812) 3,751 2,880
Cash and cash equivalents at beginning of year 11,757 8,006 5,126
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,945 $ 11,757 $ 8,006
- --------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,397 $ 2,128 $ 1,673
Income taxes 751 139 253
Noncash investing activities during the year:
Repossession of loan collateral $ 0 $ 319 $ 103
Loan in connection with sale of OREO 178 1,003 32
Receivable at close of escrow on sale of OREO 48 0 0
Noncash financing activities during the year:
Reduction of guaranteed ESOP obligation $ 0 $ 0 $ 49
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
4
<PAGE> 7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996, 1995, and 1994 (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, 1994 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) 0 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 0 8,767
Cash dividends declared ($0.30/share) (323) (323)
Net unrealized loss on securities
available for sale (109) (109)
Net income 1,083 1,083
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,076,720 $3,662 $5,771 $ (15) $ 0 $9,418
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
5
<PAGE> 8
(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 Counties
of Alameda and Contra Costa, 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.
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.
INVESTMENTS IN DEBT SECURITIES
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 available-for-sale securities, which 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. Realized
gains and losses on sales, if any, are included in noninterest income.
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 reported 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.
A loan is considered impaired when Management determines that it is probable
that the Company will be unable to collect all amounts due according to the
original contractual terms of the loan agreement. Impaired loans are those loans
identified under the Bank's internal rating system as "doubtful" or "loss" or
those "substandard" loans which have been placed on nonaccrual. Restructured
loans are always classified as impaired. The Bank applies its normal loan review
procedures when determining whether a loan is impaired.
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.
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 depreciated and any rental income is
applied against current expenses or the recorded balance of the asset.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
6
<PAGE> 9
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 1,220,446,
1,215,877 and 1,127,920 for 1996, 1995 and 1994, respectively.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" in 1996. SFAS No. 123 establishes
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed under the
provisions of SFAS No. 123, the Company has chosen to continue using the
intrinsic value-based method of option valuation ("APB 25") and provide pro
forma disclosures (see note 7) of net income (loss) and earnings (loss) per
share as if the accounting provisions of SFAS No. 123 had been adopted.
The binomial option pricing model was used by the Company to calculate option
values pursuant to SFAS No. 123. This model, as well as other currently accepted
option valuation models, incorporates highly subjective assumptions, including
future stock price volatility and expected time until exercise, which greatly
affect the calculated values.
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.
NEW ACCOUNTING PRONOUNCEMENT
In June 1996, SFAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued. The Statement establishes
standards for when transfers of financial assets, including those with
continuing involvement by the transferor, should be considered sales. SFAS No.
125 also establishes standards for when a liability should be considered
extinguished. This statement is effective for transfers of assets and
extinguishments of liabilities after December 31, 1996, applied prospectively.
In December 1996, the FASB reconsidered certain provisions of SFAS No. 125 and
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statements No. 125" to defer for one year the effective date of
implementation for transactions related to repurchase agreements, dollar-roll
repurchase agreements, securities lending and similar transactions. Earlier
adoption or retroactive application of this statement with respect to any of its
provisions is not permitted. Management believes that the effect of adoption on
the Company's financial statements will not be material.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
7
<PAGE> 10
(2) INVESTMENT IN DEBT SECURITIES
The amortized cost, gross unrealized gains (losses), estimated fair value and
weighted average yield of debt securities at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gains Losses Fair value Cost Gains Losses Fair value
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and
agency securities $8,998 $29 $(53) $8,974 $11,989 $167 $(13) $12,143
Corporate securities 0 0 0 0 500 4 0 504
Mortgage-backed securities 366 0 (1) 365 556 0 (4) 552
- --------------------------------------------------------------------------------------------------------------------------
Total $9,364 $29 $(54) $9,339 $13,045 $171 $(17) $13,199
- --------------------------------------------------------------------------------------------------------------------------
Weighted average yield 6.31% 6.13%
- --------------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury and
agency securities $3,198 $0 $(14) $3,184 $ 4,197 $ 50 $0 $4,247
Obligations of states and
political subdivisions 3,434 54 (4) 3,484 2,831 73 (2) 2,902
Mortgage-backed securities 72 3 0 75 183 7 0 190
- --------------------------------------------------------------------------------------------------------------------------
Total $6,704 $57 $(18) $6,743 $ 7,211 $130 $(2) $ 7,339
- --------------------------------------------------------------------------------------------------------------------------
Weighted average yield 6.94% 5.96%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities with a carrying amount of $5,000,000 and $4,665,000 at December 31,
1996 and 1995, respectively, were pledged to secure public deposits and
securities sold under agreements to repurchase and for other purposes as
required by law or contract.
The amortized cost, estimated market value and weighted average yield of debt
securities at December 31, 1996, 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>
Maturing
---------------------------------------------------------
Amortized Cost After One After Five
(Dollars in thousands) In One Year Through Through After
or Less Five Years Ten Years Ten Years Total
------------ ------------ ------------ ----------- ------------
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S.Treasury and
agency securities $3,998 6.58% $3,000 5.46% $2,000 7.23% $ 0 NA $8,998 6.35%
Mortgage-backed securities 84 1.06 282 6.58 0 NA 0 NA 366 5.31
- --------------------------------------------------------------------------------------------------------
Total amortized cost $4,082 6.47% $3,282 5.56% $2,000 7.23% $ 0 NA $9,364 6.31%
Estimated market value $4,110 $3,238 $1,991 $ 0 $9,339
- --------------------------------------------------------------------------------------------------------
Held to maturity:
U.S.Treasury and
agency securities $ 0 NA $2,202 5.82% $ 996 6.70% $ 0 NA $3,198 6.09%
Obligations of states and
political subdivisions(1) 272 8.94% 881 8.15 2,133 7.36 148 7.47% 3,434 7.68
Mortgage-backed securities $ 0 NA 0 NA 0 NA 72 9.00 72 9.00
- --------------------------------------------------------------------------------------------------------
Total amortized cost 272 8.94% $3,083 6.48% $3,129 7.15% $220 7.96% $6,704 6.94%
Estimated market value $ 274 $3,102 $3,143 $224 $6,743
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest on non-taxable securities and total interest income includes the
effect of taxable equivalent adjustments using the expected federal
corporate income tax rate of 34% in 1996 in adjusting interest on
tax-exempt investment securities to a fully taxable basis.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
8
<PAGE> 11
(2) INVESTMENT IN DEBT SECURITIES, CONTINUED
At December 31, 1996, 79% of the portfolio was composed of "AAA" rated U.S.
Treasury and agency securities. The balance of the portfolio was composed of
municipal securities rated as follows: 9% rated "AAA"; 3% rated "AA", and 9%
rated "A". Municipal securities comprised 21% 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) 1996 1995 1994
- -------------------------------------------------
<S> <C> <C> <C>
Gains $ 0 $ 0 $ 11
Losses (3) (35) (14)
- -------------------------------------------------
Net losses $(3) $(35) $ (3)
- -------------------------------------------------
</TABLE>
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Commercial $15,568 $13,319
Real Estate:
Construction 6,813 2,250
Mortgage 41,930 35,137
Held for sale 2,923 4,984
Equity 2,178 1,042
Installment 1,602 1,211
Other 903 768
- -------------------------------------------------------
71,917 58,711
Deferred loan fees (555) (559)
- -------------------------------------------------------
$71,362 $58,152
- -------------------------------------------------------
</TABLE>
Loans on which the accrual of interest had been discontinued amounted to
$208,000 at December 31, 1996. There were no such loans at December 31, 1995.
Once placed on nonaccrual, no interest was recognized on such loans and if
interest on such loans had been accrued, it would have amounted to approximately
$33,000 for 1996.
Of the $208,000 in nonaccrual loans at December 31, 1996, only $82,000 was
considered impaired; the remaining balances are guaranteed by the Small Business
Administration. There were no impaired loans at December 31, 1995.
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
$178,000 and $66,000 at December 31, 1996 and 1995, respectively. At December
31, 1996, these loans were revolving lines of credit, installment loans or
credit card lines with credit limits in the aggregate amount of $277,000. At
December 31, 1995, such loans were all revolving lines of credit with credit
limits in the aggregate amount of $90,000.
Following is a schedule of the activity in the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $982 $ 756 $ 866
Loans charged off (35) (27) (133)
Recoveries on loans
charged off 24 408 123
- ----------------------------------------------------------------------------
Net (charge-offs) recoveries (11) 381 (10)
Benefit for reduction
in allowance 0 (155) (100)
- ----------------------------------------------------------------------------
Balance, end of year $971 $ 982 $ 756
- ----------------------------------------------------------------------------
</TABLE>
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, 1996 and 1995 was approximately
$16,237,000 and $18,289,000, respectively.
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Land $ 354 $ 354
Premises 1,106 1,091
Furniture and equipment 2,032 1,800
Leasehold improvements 1,248 1,224
- -----------------------------------------------------------------
4,740 4,469
- -----------------------------------------------------------------
Less accumulated
depreciation and amortization (2,576) (2,330)
- -----------------------------------------------------------------
$2,164 $ 2,139
- -----------------------------------------------------------------
</TABLE>
The Company leases certain premises under non-cancelable operating leases.
Future minimum rental payments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Amount
Year (in thousands)
---------------------------
<S> <C>
1997 $247
1998 252
1999 252
2000 257
2001 243
Thereafter 670
</TABLE>
Rent expense was $202,000 in 1996 and $164,000 and $160,000 in 1995 and 1994,
respectively.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
9
<PAGE> 12
(5) INCOME TAXES
Components of income tax expense for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes currently payable:
Federal $470 $456 $281
State 184 146 79
- --------------------------------------------------------------------------------
Total currently payable $654 602 360
- --------------------------------------------------------------------------------
Deferred taxes:
Federal 35 (20) 15
State (9) 18 (16)
- --------------------------------------------------------------------------------
Total deferred taxes 26 (2) (1)
- --------------------------------------------------------------------------------
Total income tax expense $680 $600 $359
- --------------------------------------------------------------------------------
</TABLE>
Cumulative deferred income tax assets and liabilities at December 31 were as
follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State franchise tax $ 63 $ 51
Provision for loan losses 112 114
Nonaccrual interest 15 0
Unrealized loss on securities
available for sale 10 0
Other 32 66
- -----------------------------------------------------------
Total deferred tax assets $ 232 $ 231
- -----------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities
available for sale 0 (60)
Differences in tax and
book depreciation (178) (198)
Other (65) (28)
- -----------------------------------------------------------
Total deferred tax liabilities (243) (286)
- -----------------------------------------------------------
$ (11) $ (55)
- -----------------------------------------------------------
</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>
1996 1995 1994
- ---------------------------------------------------------------------------
<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 (2.9) (2.1) (4.2)
State franchise taxes, net of
federal income tax benefit 6.5 7.0 7.0
Other 0 (1.1) (1.1)
- ---------------------------------------------------------------------------
Effective tax rate 38.6% 38.8% 36.7%
- ---------------------------------------------------------------------------
</TABLE>
(6) DEPOSITS
The aggregate amount of certificates of deposit of $100,000 or more was
approximately $6,020,000 and $5,123,000 at December 31, 1996 and 1995,
respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit of
$100,000 or more are as follows:
<TABLE>
<CAPTION>
Amount
Year (in thousands)
------------------------------------
<S> <C>
1997 $5,417
1998 300
1999 100
2000 0
2001 and thereafter 203
------------------------------------
$6,020
------------------------------------
</TABLE>
(7) STOCK OPTION PLANS
Under the Company's stock option plans, 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 plans, 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 228,571 shares
were exercisable and 8,920 shares were available for grant as of December 31,
1996.
The following is a summary of changes in options outstanding:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1994 241,575 $ 5.50
Options forfeited (97,065) 5.65
Options granted 153,741 4.25
- ---------------------------------------------------------------------------
Outstanding at December 31, 1994 298,251 4.80
Options forfeited (21,000) 4.85
Options exercised (1,735) 5.44
Options granted (fair value $3.45) 18,750 7.875
- ---------------------------------------------------------------------------
Outstanding at December 31, 1995 and 1996 294,266 $ 4.99
- ---------------------------------------------------------------------------
</TABLE>
SFAS No. 123 Pro forma disclosures
The Company applies APB No. 25 in accounting for its stock options granted. Had
compensation cost been determined for options granted in 1995 consistent with
SFAS No. 123, the Company's net income and earnings per share would have been
changed to the pro forma amounts indicated below for the years ended December
31,:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $1,083 $ 945
Pro forma 1,070 932
Net income per common and equivalent share:
As reported $ 0.89 $0.78
Pro forma 0.88 0.77
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
10
<PAGE> 13
(7) STOCK OPTION PLANS, CONTINUED
The fair value of the 1995 option grants was estimated using the binomial option
pricing model with the following weighted-average assumptions.
<TABLE>
<S> <C>
Dividend Yield 3.6%
Volatility 40%
Risk free interest rate 6%
Expected term (years) 10
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Outstanding Exercisable
- --------------------------------------- ----------------------
Weighted
Average Weighted
Remaining Range of Average
Number Life Exercise Number Exercise
of options (years) Prices of options Price
- ---------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
294,266 7 $4.25-$7.875 228,571 $4.96
</TABLE>
(8) 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 $57,000 in 1996, $68,000 in 1995 and
$63,000 in 1994.
(9)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 $41,000 for 1996, $35,000 for 1995 and $32,000 for 1994.
(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) 1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Other income:
Recovery of prior years'
expenses in connection
with OREO $ 0 $ 0 $ 215
Gain on sale of mortgage
servicing rights 0 0 43
Other 134 66 107
- -------------------------------------------------------------------------
$ 134 $ 66 $ 365
- -------------------------------------------------------------------------
Other expenses:
Data processing $ 287 $ 278 $ 242
Professional services 226 196 285
Bankcard 202 164 139
Directors' fees and expenses 139 145 83
FDIC insurance 2 90 191
Other bank insurance 69 77 88
Other 594 456 445
- -------------------------------------------------------------------------
$1,519 $1,406 $1,473
- -------------------------------------------------------------------------
</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 $14,969,000 and
$15,057,000 at December 31, 1996 and 1995, respectively. Commitments under
standby letters of credit approximated $264,000 and $335,000 at December 31,
1996 and 1995, respectively. Commitments under the Bank's credit card program
approximated $643,000 and $649,000 at December 31, 1996 and 1995, 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.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
11
<PAGE> 14
(13) REGULATORY MATTERS
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, 1996, 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 $24,000 and $127,000 during
1996 and 1995, 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, 1996, the Bank has approximately $2,110,000 available for payment
of dividends, which payment would not require the prior approval of the
Superintendent of Banks under this limitation.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators, that if undertaken, could have a direct
material effect on the financial statements of the Company and the Bank. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the assets, liabilities, and certain off-balance-sheet items of the
Bank as calculated under regulatory accounting practices. The capital amounts
and classification of the Company and the Bank are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the tables below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined).
As of December 31, 1996, the Bank was "well" capitalized under the regulatory
framework for prompt corrective action. As of December 31, 1996, the Company
and the Bank met all capital adequacy requirements to which they are subject
and no conditions or events have occurred since notification to change the
Bank's prompt corrective action category.
To be categorized as well capitalized, the Company and the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the tables.
The actual capital amounts and ratios for the Company and the Bank at December
31, 1996 and 1995 are also presented in the following tables:
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
Company Bank
December 31, 1996 (dollars in thousands): Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (actual) $ 9,433 12.4% $ 9,589 12.6%
Tier 1 capital for adequacy purposes 3,054 4.0 3,049 4.0
Tier 1 capital to be well capitalized under
prompt corrective action provisions NA NA $ 4,574 6.0%
Total capital (actual) $10,388 13.6% $10,542 13.8%
Total capital for adequacy purposes 6,109 8.0 6,098 8.0
Total capital to be well capitalized under
prompt corrective action provisions NA NA $ 7,623 10.0%
- ------------------------------------------------------------------------------
Risk-weighted assets $76,360 $76,227
- ------------------------------------------------------------------------------
</TABLE>
TIER 1 LEVERAGE RATIOS
<TABLE>
<CAPTION>
Company Bank
December 31, 1996 (dollars in thousands): Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (actual) $9,433 9.9% $9,589 10.1%
Tier 1 capital for adequacy purposes 3,803 4.0 3,797 4.0
Tier 1 capital to be well capitalized under
prompt corrective action provisions NA NA $4,747 5.0%
- ------------------------------------------------------------------------------
Average assets* $95,077 $94,937
- ------------------------------------------------------------------------------
</TABLE>
(* Average total assets do not include unrealized gains/losses on securities
available for sale.)
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
Company Bank
December 31, 1995 (dollars in thousands): Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (actual) $ 8,674 13.6% $ 8,788 13.8%
Tier 1 capital for adequacy purposes 2,551 4.0 2,545 4.0
Tier 1 capital to be well capitalized under
prompt corrective action provisions NA NA $ 3,817 6.0%
Total capital (actual) $ 9,471 14.9% $ 9,583 15.1%
Total capital for adequacy purposes 5,101 8.0 5,090 8.0
Total capital to be well capitalized under
prompt corrective action provisions NA NA $ 6,362 10.0%
- ------------------------------------------------------------------------------
Risk-weighted assets $63,766 $63,623
- ------------------------------------------------------------------------------
</TABLE>
TIER 1 LEVERAGE RATIOS
<TABLE>
<CAPTION>
Company Bank
December 31, 1995 (dollars in thousands): Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (actual) $8,674 9.5% $8,788 9.7%
Tier 1 capital for adequacy purposes 3,645 4.0 3,639 4.0
Tier 1 capital to be well capitalized under
prompt corrective action provisions NA NA $4,549 5.0%
- ------------------------------------------------------------------------------
Average assets* $91,122 $90,974
- ------------------------------------------------------------------------------
</TABLE>
(* Average total assets do not include unrealized gains/losses on securities
available for sale.)
BAY COMMERCIAL SERVICES AND SUBSIDIARY
12
<PAGE> 15
(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): 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 150 $ 50
Investment in Bay Bank of Commerce 9,574 8,882
Premises, net 131 141
Other assets 2 32
- -----------------------------------------------------------------------
Total assets $9,857 $9,105
- -----------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Borrowed funds and other liabilities $ 439 $ 338
Shareholders' equity 9,418 8,767
- -----------------------------------------------------------------------
Total liabilities and shareholders' equity $9,857 $9,105
- -----------------------------------------------------------------------
</TABLE>
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
Years ended December 31 (in thousands): 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Cash dividends from
Bay Bank of Commerce $ 325 $335 $ 20
Other income 24 24 24
Other expenses (67) (72) (76)
- -----------------------------------------------------------------------
Income (loss) before equity in
undistributed income of subsidiary 282 287 (32)
Equity in undistributed income of
subsidiary 801 658 651
- -----------------------------------------------------------------------
Net income $1,083 $945 $619
- -----------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net income $1,083 $ 945 $ 619
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in undistributed income of
subsidiary (801) (658) (651)
Depreciation 10 9 10
Change in other assets 30 1 338
Change in borrowed funds and other
liabilities 101 (7) 5
- -----------------------------------------------------------------------
Net cash provided by operating activities 423 290 321
- -----------------------------------------------------------------------
Cash flows used in investing activities:
Capital contribution to subsidiary 0 0 (315)
- -----------------------------------------------------------------------
Cash flows provided by (used in)
financing activities:
Exercise of stock options 0 9 0
Repurchase and retirement of
common stock 0 (42) 0
Dividends paid (323) (216) 0
- -----------------------------------------------------------------------
Net cash used in financing activities (323) (249) 0
- -----------------------------------------------------------------------
Net increase in cash 100 41 6
Cash at beginning of year 50 9 3
- -----------------------------------------------------------------------
Cash at end of year $ 150 $ 50 $ 9
- -----------------------------------------------------------------------
Noncash financing activities during
the year:
Dividend payable $ 323 $323 $216
Payoff guaranteed ESOP obligation 0 0 49
</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.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
13
<PAGE> 16
15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTURMENTS, CONTINUED
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.
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.
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, 1996. 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, 1996.
<TABLE>
<CAPTION>
Carrying Estimated
value fair value
- -------------------------------------------------------------------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $ 6,945 $ 6,945
Securities available for sale 9,339 9,339
Securities held to maturity 6,704 6,743
Loans held for sale, net of
reserve for credit losses 2,919 3,019
Loans, net of reserve for
credit losses 68,412 68,441
Financial liabilities:
Deposits 83,291 83,334
Securities sold under
agreement to repurchase 2,304 2,306
</TABLE>
At December 31, 1996, 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, 1996.
INDEPENDENT AUDITORS' REPORT (Deloitte's logo)
To the Shareholders and Directors of
Bay Commercial Services:
We have audited the accompanying consolidated balance sheets of Bay Commercial
Services and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bay Commercial
Services and subsidiary at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Jose, California
January 15, 1997
BAY COMMERCIAL SERVICES AND SUBSIDIARY
14
<PAGE> 17
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts): 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years ended December 31,
Results of operations:
Interest income $ 7,826 $ 7,456 $ 6,086 $ 5,520 $ 6,215
Interest income on a taxable equivalent basis 7,904 7,505 6,146 5,591 6,285
Interest expense 2,457 2,310 1,766 1,552 2,206
Net interest income 5,369 5,146 4,320 3,968 4,009
Net interest income on a taxable equivalent basis 5,447 5,195 4,380 4,039 4,079
Provision (benefit) for loan losses 0 (155) (100) 0 2,039
Net interest income after provision (benefit)
for loan losses 5,369 5,301 4,420 3,968 1,970
Noninterest income 1,080 716 1,076 1,178 1,953
Noninterest expense 4,686 4,472 4,518 4,626 4,336
Income tax expense (benefit) 680 600 359 146 (193)
Net income (loss) 1,083 945 619 374 (220)
- --------------------------------------------------------------------------------------------------------------------------------
Per common and equivalent share:
Net income (loss) $ 0.89 $ 0.78 $ 0.55 $ 0.35 $ (0.20)
Book value (year-end) 8.75 8.14 7.36 7.07 6.67
Cash dividends declared 0.30 0.30 0.20 0 0
Weighted average common and
equivalent shares outstanding 1,220,446 1,215,877 1,127,920 1,079,985 1,079,985
- --------------------------------------------------------------------------------------------------------------------------------
Balance sheet at December 31:
Assets $ 96,769 $ 92,819 $ 89,193 $ 81,895 $ 81,880
Securities held to maturity 6,704 7,211 14,823 10,943 7,761
Securities available for sale 9,339 13,199 11,165 13,478 9,218
Federal funds sold 0 6,700 2,530 1,000 0
Total loans 71,362 58,152 51,566 48,777 52,899
Deposits 83,291 80,253 79,258 72,609 71,913
Funds borrowed, other than deposits 2,804 2,203 1,036 985 2,212
Shareholders' equity 9,418 8,767 7,946 7,632 7,208
- --------------------------------------------------------------------------------------------------------------------------------
Balance sheet - average balances:
Assets $ 95,063 $ 91,106 $ 86,112 $ 81,613 $ 83,755
Securities - taxable (1) 15,234 20,370 21,368 14,647 13,790
Securities - nontaxable (1) 3,165 2,186 2,113 2,406 2,344
Federal funds sold and securities purchased
under agreements to resell 4,870 6,469 3,688 3,987 2,001
Total loans 63,008 52,830 49,109 49,319 55,075
Earning assets (1) 86,110 81,652 75,425 67,380 69,973
Deposits 82,611 80,262 76,690 72,027 73,459
Funds borrowed, other than deposits 2,209 1,313 1,021 1,412 1,958
Interest-bearing liabilities 59,696 57,004 55,238 53,509 58,730
Shareholders' equity 9,215 8,541 7,846 7,395 7,538
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1996 1995
Compared Compared
(Dollars in thousands, except per share amounts): to 1995 to 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Years ended December 31,
Results of operations:
Interest income $ 370 $ 1,370
Interest income on a taxable equivalent basis 399 1,359
Interest expense 147 544
Net interest income 223 826
Net interest income on a taxable equivalent basis 252 815
Provision (benefit) for loan losses 155 (55)
Net interest income after provision (benefit)
for loan losses 68 881
Noninterest income 364 (360)
Noninterest expense 214 (46)
Income tax expense (benefit) 80 241
Net income (loss) 138 326
- ---------------------------------------------------------------------------------
Per common and equivalent share:
Net income (loss) $ 0.11 $ 0.23
Book value (year-end) 0.61 0.78
Cash dividends declared 0.00 0.10
Weighted average common and
equivalent shares outstanding 4,569 87,957
- ---------------------------------------------------------------------------------
Balance sheet at December 31:
Assets $ 3,950 $ 3,626
Securities held to maturity (507) (7,612)
Securities available for sale (3,860) 2,034
Federal funds sold (6,700) 4,170
Total loans 13,210 6,586
Deposits 3,038 995
Funds borrowed, other than deposits 601 1,167
Shareholders' equity 651 821
- ---------------------------------------------------------------------------------
Balance sheet - average balances:
Assets $ 3,957 $ 4,994
Securities - taxable (1) (5,136) (998)
Securities - nontaxable (1) 979 73
Federal funds sold and securities purchased
under agreements to resell (1,599) 2,781
Total loans 10,178 3,721
Earning assets (1) 4,458 6,227
Deposits 2,349 3,572
Funds borrowed, other than deposits 896 292
Interest-bearing liabilities 2,692 1,766
Shareholders' equity 674 695
- ---------------------------------------------------------------------------------
</TABLE>
(1) Excluding unrealized gain(loss) on securities available for sale
BAY COMMERCIAL SERVICES AND SUBSIDIARY
15
<PAGE> 18
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 1996 was $1,083,000 or
$0.89 per share compared to $945,000 or $0.78 per share in 1995. The return on
average assets was 1.1% in 1996 and 1.0% in 1995. The return on average
shareholders' equity was 11.8% in 1996 and 11.1% in 1995.
Strong loan growth during 1996 was a significant factor in the $138,000 or 15%
increase in net income compared to 1995. Net interest income increased $223,000
or 4%, principally due to a $10,191,000 or 19% growth in average earning loans
during 1996 compared to 1995. Noninterest income increased $364,000 or 51% over
1995 with the largest contribution from a $167,000 increase in gain on sale of
loans. The increased income was partially offset by a $214,000 or 5% increase in
noninterest expenses, a $155,000 credit to the provision for loan losses during
1995 which was not repeated in 1996, and an $80,000 or 13% increase in income
tax expense. Higher noninterest expenses in 1996 were principally due to
increases in salaries and employee benefits related to the Bank's 1996 branch
expansion and the settlement of a litigation matter during 1996.
Net income for the Company in 1995 of $945,000 was $326,000 or 53% higher than
in 1994. principally due to 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.
Total assets were $96,769,000 at December 31, 1996, compared to $92,819,000 at
December 31, 1995. The $3,950,000 or 4% increase in assets reflected the use of
funds generated principally from deposit growth of $3,038,000 or 4% and a
$651,000 or 7% increase in shareholders' equity during 1996. Total loans at
December 31, 1996 increased $13,210,000 or 23% from December 31, 1995, funded by
the deposit growth and reductions in the investment portfolio and cash and cash
equivalents. Total securities declined $4,367,000 or 21% and cash and cash
equivalents declined $4,812,000 or 41% during 1996.
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
exceed 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 $5,369,000 for 1996 increased $223,000 or 4% compared to
1995. The increase was principally due to a $4,458,000 or 5% growth in average
interest-earning assets. The net interest margin, the ratio of net interest
income to average interest-earning assets, was 6.24% in 1996 compared to 6.30%
in 1995.
Net interest income of $5,146,000 in 1995 increased $826,000 or 19% compared to
1994, reflecting 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 rose to 6.30% in 1995
compared to 5.73% in 1994 as the result of generally higher interest rates in
1995 compared to 1994.
Interest income, which includes interest and fees generated by interest-earning
assets, totaled $7,826,000 in 1996, a $370,000 or 5% increase over 1995. The
increase was due to a $4,458,000 or 5% growth in average interest-earning
assets. The yield on average interest-earning assets declined slightly to 9.09%
in 1996 compared to 9.13% during 1995. The growth in average interest-earning
assets in 1996 principally reflected $10,191,000 or 19% growth in average
earning loans which was partially funded by a $5,756,000 or 20% reduction in
average total securities and overnight funds (federal funds sold and securities
purchased under repurchase agreements). The benefit of the shift in the asset
mix during 1996 to a larger proportion of higher yielding loans (73% of average
interest-earning assets in 1996 compared to 64% in 1995) was not sufficient to
outweigh the effect of lower overall lending and money market rates.
Interest income of $7,456,000 in 1995 increased $1,370,000 or 23% 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. The ratio of average earning loans to total average interest-earning
assets was unchanged at 64% in both 1995 and 1994.
Interest expense of $2,457,000 in 1996 rose $147,000 or 6% compared to 1995. The
higher interest expense reflected a $2,692,000 or 5% increase in average
interest-bearing liabilities and an increase in the rate paid for those
liabilities to 4.12% in 1996 from 4.05% in 1995. When compared to 1995, the
average rates paid on individual deposit categories generally declined during
1996 in response to overall lower market rates but the composition of the
portfolio in 1996 shifted to a larger proportion of higher cost time deposits.
Average time deposits as a percentage of average interest-bearing liabilities
increased to 54% for 1996 from 49% for 1995.
Interest expense of $2,310,000 in 1995 rose $544,000 or 31% compared to 1994 as
a result of an increase in the volume of average interest-bearing liabilities.
Average interest-bearing liabilities increased $1,766,000 or 3% and 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 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
rates on earning assets. 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 market rates could benefit net interest income. The
results would reverse if market rates were to increase.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
16
<PAGE> 19
The following table presents the Company's interest rate sensitivity gap
position at December 31, 1996. 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 (net of nonaccrual) $47,407 $ 3,936 $ 7,873 $12,493 $71,709
Securities (excluding valuation allowance) 2,245 2,109 6,366 5,349 16,069
- ------------------------------------------------------------------------------------------------------------------------
Total 49,652 6,045 14,239 17,842 87,778
- ------------------------------------------------------------------------------------------------------------------------
Interest rate sensitive liabilities:
Interest-bearing
transaction accounts 16,684 -- -- -- 16,684
Savings deposits 6,566 -- -- -- 6,566
Time deposits of $100,000 or more 13,951 3,418 503 100 17,972
Other time deposits 10,724 3,972 1,175 -- 15,871
Other borrowed funds 733 2,071 -- -- 2,804
- ------------------------------------------------------------------------------------------------------------------------
Total 48,658 9,461 1,678 100 59,897
- ------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 994 $(3,416) $12,561 $17,742 $27,881
========================================================================================================================
Cumulative interest rate
sensitivity gap $ 994 $(2,422) $10,139 $27,881
========================================================================================================================
Cumulative interest rate
sensitivity gap to total assets 1.0% (2.5)% 10.5% 28.8%
</TABLE>
This table presents a static gap, which is a position at a point in time. It
does not address the interest rate sensitivity of assets or liabilities which
would be added through growth, nor does it anticipate the future interest rate
sensitivity of assets and liabilities once they have repriced, and it assumes
equivalent elasticity of assets and liabilities.
The interest rate sensitivity analysis at December 31, 1996, indicates that the
Company is liability sensitive in the "Over 3 months to 1 year" period and asset
sensitive over the remaining time periods.
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 for loan losses 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, 1996, the allowance for loan losses was $971,000 compared to
$982,000 at December 31, 1995. The reduced allowance reflected net loan
charge-offs of $11,000 during 1996. The ratio of the allowance for loan losses
to total loans was 1.4% at December 31, 1996, and 1.7% at December 31, 1995. Due
to the level of the allowance in relation to both nonperforming and total
outstanding loans, no provision for loan losses was made during either 1996 or
1995. The reserve was decreased by a $155,000 credit to the provision for loan
losses during 1995 due to a net reduction during 1995 in nonperforming loans and
an evaluation of the allowance for loans losses in relation to nonperforming
loans. 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, 1996, 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.
Information on nonperforming loans for years ended December 31, 1996 and 1995 is
summarized in the following table.
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 $ CHANGE % CHANGE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loan (charge-offs) recoveries $(11) $381 $(392) (103)%
Ratio of net loan (charge-offs)
recoveries to average loans 0 0.7% (0.7)%
Nonperforming loans at December 31:
Nonaccrual loans $208 $ 0 $ 208 0
Accruing loans past due
90 days or more 227 99 128 129%
Restructured loans 0 0 0 0
- --------------------------------------------------------------------------------------
Total nonperforming loans $435 $ 99 $ 336 339%
======================================================================================
Ratio of nonperforming loans 0.6% 0.2%
to total loans
Ratio of allowance for loan losses
to nonperforming loans 232% 992%
Other real estate owned 0 $359 $(359) (100)%
</TABLE>
Because 56% of total nonperforming loans at December 31, 1996 are guaranteed by
the SBA, any potential loss would be proportionately reduced. The ratio of
nonperforming loans to total loans, at 0.6%, is well below statewide peer
averages according to data published by the FDIC for the period ended September
30, 1996, and Management believes that the increases in nonperforming loans as
of December 31, 1996 are not representative of any specific trend within the
loan portfolio.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
17
<PAGE> 20
OTHER REAL ESTATE OWNED
As of December 31, 1996, all properties classified as other real estate owned
("OREO") had been sold. At December 31, 1995, OREO of $359,000 consisted of
three properties acquired through foreclosure. 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
Total noninterest income of $1,080,000 for 1996 increased $364,000 or 51%
compared to 1995. The greatest change was a $167,000 increase in gain on sale of
loans, reflecting larger sales of loans guaranteed by the Small Business
Administration ("SBA loans") during 1996 than in 1995. Other noninterest income
increased $68,000 or 103% in 1996, principally due to the 1996 recovery of prior
years' expenses related to charged-off loans. Increases also occurred from the
gain on sale of OREO and in bankcard income, which were up $62,000 or 109% and
$43,000 or 20%, respectively, over 1995. Income related to gain on sale of OREO
is not anticipated in 1997. The increases in noninterest income were partially
offset by a decrease in 1996 of $32,000 or 19% in loan servicing income,
principally due to SBA loan payoffs. The Bank experienced increased payoffs of
SBA loans during 1996 as some borrowers refinanced with aggressively priced
fixed-rate (non-SBA) loans offered by other lenders. These payoffs caused the
Bank's serviced portfolio to decrease and servicing income to decline. The
serviced portfolio could experience additional reductions if payoffs were to
continue at a rate in excess of SBA loan sales.
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. The closing of the Bank's mortgage division in 1994
contributed to reductions in 1995 noninterest income of $43,000 in gain on sale
of mortgage servicing rights and $15,000 in loan servicing income. Other factors
contributing to the decline in noninterest income in 1995 included additional
losses of $32,000 on sales of securities as well as decreases of $24,000 in
service charges and $9,000 in SBA loan servicing income. Service charges and
fees declined principally due to reduced analysis charges as customer deposit
balances earned at 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 EXPENSE
Total noninterest expenses of $4,686,000 for 1996 increased $214,000 or 5%
compared to 1995. The largest factor contributing to this increase was a
$113,000 or 8% increase in other noninterest expense. Salaries and employee
benefits increased $84,000 or 3%, reflecting incentive bonuses and the addition
of staff in preparation for the opening of a new branch of the Bank in December,
1996. Occupancy expense increased $17,000 or 3% principally due to the opening
of the new branch. Factors contributing to the increase in other noninterest
expense included a $138,000 or 30% increase in other expenses which principally
reflected the settlement of a litigation matter. Bankcard expense increased
$38,000 or 23% as merchant bankcard activity increased. Professional fees rose
$30,000 or 15% principally due to increased legal fees. These increases were
partially offset by an $88,000 or 98% decrease in assessment fees paid to the
Federal Deposit Insurance Corporation (FDIC), the result of a reduction in
deposit insurance rates for the Bank Insurance Fund.
Total noninterest expenses of $4,472,000 for 1995 were $46,000 or 1% less than
in 1994. The largest change was in other noninterest expenses, which declined
$67,000 or 5% to $1,406,000 in 1995. Included in this change were decreases of
$101,000 or 53% in 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. Professional
services fees declined principally due to reduced legal fees related to loan
collection activities. Increased data processing expense reflected a full year
with the service bureau performing the Bank's proof, transit and statement
processing work. Directors' fees rose in 1995 due to an increase in the amount
paid per meeting. Salaries and employee benefits, net of deferred loan
origination costs, increased $33,000 or 1% to $2,470,000 in 1995, as a $46,000
or 70% increase in executive officer bonuses was partially offset by reduced
group insurance expense and higher deferred loan origination costs.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $680,000 in 1996 compared to $600,000
in 1995. The $80,000 or 13% increase reflected the increase in taxable income.
The effective income tax rates were 38.6%, 38.8% and 36.7% for 1996, 1995, and
1994, respectively. See also Note 5 in "Notes to Consolidated Financial
Statements".
FINANCIAL CONDITION
LOANS AND INVESTMENTS
Total loans of $71,362,000 at December 31, 1996 increased $13,210,000 or 23%
from December 31, 1995. Total securities declined $4,367,000 or 21% and cash and
cash equivalents declined $4,812,000 or 41% compared to December 31, 1995. The
strong loan growth in 1996 reflected loan marketing efforts by the Bank and the
resurgence of loan demand in the East Bay.
DEPOSITS AND OTHER BORROWED FUNDS
Total deposits of $83,291,000 at December 31, 1996 increased $3,038,000 or 4%
compared to December 31, 1995. Funds were also provided by increases of $101,000
or 5% in securities sold under agreements to repurchase and $500,000 in federal
funds purchased compared to December 31, 1995. Deposit growth was strongest in
time deposits, up $4,050,000 or 17%. Certificates of deposit of $100,000 or more
also increased, $897,000 or 18% compared to December 31, 1995. The growth in
time deposits was partially offset by decreases of $1,266,000 or 5% in savings
and interest-bearing demand and $643,000 or 2% in noninterest-bearing demand
compared to year-end 1995.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
18
<PAGE> 21
OTHER ASSETS AND OTHER LIABILITIES
As previously discussed, all OREO assets had been sold as of December 31, 1996,
resulting in a $359,000 decrease from December 31, 1995. Interest and fees
receivable remained relatively unchanged at $585,000 compared to $600,000 at
December 31, 1995. Other assets of $641,000 at December 31, 1996 were 257,000 or
67% higher than year-end 1995, reflecting increased receivables and deferred tax
assets. Interest payable and other liabilities at December 31, 1996, declined
$340,000 or 21% from year-end 1995 principally due to payment of income tax
liabilities.
LIQUIDITY
Liquidity is defined as the ability of the Company to meet present and future
obligations either through the sale or maturity of existing assets, or by the
acquisition of funds through liability management. The Company manages its
liquidity to provide adequate funds to support both the borrowing needs of its
customers and fluctuations in deposit flows. The Company defines liquid assets
to include cash and 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 28% at December 31, 1996, and 42% at December 31, 1995. The
lower liquidity ratio at December 31, 1996 compared to December 31, 1995 is the
result of reductions in the Bank's investment portfolio to fund its loan growth
during the period. It is the opinion of Management that the Company's and the
Bank's liquidity positions are sufficient to meet their respective needs.
In addition, the Bank has informal, non-binding, federal funds borrowing
arrangements totaling $5,000,000 with a correspondent bank and a $3,000,000
repurchase facility to meet unforeseen outflows. As of December 31, 1996,
$500,000 was outstanding from these credit facilities. As of December 31, 1996,
the Bank did not carry any brokered deposit balances.
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's
risk-based and leverage capital guidelines for bank holding companies 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.
The following tables present the Company's and the Bank's regulatory capital
positions at December 31, 1996:
RISK BASED CAPITAL RATIO
<TABLE>
<CAPTION>
COMPANY BANK
Dollars in thousands) AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 Capital $ 9,433 12.4% $ 9,589 12.6%
Tier 1 Capital minimum requirement 3,054 4.0 3,049 4.0
- ---------------------------------------------------------------------------------
Excess $ 6,379 8.4% 6,540 8.6%
Total Capital $10,388 13.6% $10,542 13.8%
Total Capital minimum requirement 6,109 8.0 6,098 8.0
- ---------------------------------------------------------------------------------
Excess $ 4,279 5.6% $ 4,444 5.8%
=================================================================================
Risk weighted assets $76,360 $76,227
</TABLE>
LEVERAGE RATIO
<TABLE>
<CAPTION>
COMPANY BANK
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 Capital to average total assets $9,433 9.9% $9,589 10.1%
Range of minimum leverage 2,852- 3.0- 2,848- 3.0-
requirement 4,754 5.0% 4,747 5.0%
- ------------------------------------------------------------------------------------
Range of excess 4,679- 4.9- 4,842- 5.1-
$6,581 6.9% $6,741 7.1%
====================================================================================
Average total assets* $95,077 $94,937
</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, 1996 and 1995 have not
been material.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
19
<PAGE> 22
<TABLE>
<CAPTION>
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 Livermore
Optometrist, President & CEO,
San Leandro Bay Bank of Commerce Oswald A. Rugaard
Self-employed
William R. Henson Dimitri Koroslev Independent Sales Consultant
President, Chairman, San Leandro
Superior Home Loans Bay Bank of Commerce
Hayward President, Mark A. Wilton
Bay Business Credit Owner,
Walnut Creek Marwil Investments
Lafayette
BANK OFFICERS
- ------------------------------------------------------------------------------------------------
EXECUTIVE Jim Nunn OPERATIONS
Richard M. Kahler Vice President & Nancy Bowers
President & CEO Hayward Branch Manager Vice President
Randall Greenfield Margie Perry Arlene Dalldorf
Senior Vice President & CAO Assistant Vice President & Assistant Vice President
Chief Financial Officer, San Ramon Branch Manager Operations Officer
Bay Commercial Services
Sally Porfido Kay Tropiano
Robert A. Perantoni Vice President Operations Officer
Senior Vice President &
Senior Lending Officer Earl Rupp Brenda Abrew
Vice President Assistant Vice President &
LENDING & BUSINESS Credit Operations Officer
DEVELOPMENT John Stevens
Teresa Jensen Vice President Carol Barfuss
Vice President & Construction Lending Special Projects Manager
SBA Loan Manager
Rebecca Worthen William Reynolds
Alan Lozito Assistant Vice President Manager of Courier Services &
Vice President Security Officer
ADMINISTRATIVE
Michael Maxon Jane C. Christopherson
Vice President Vice President &
Chief Financial Officer
Diane Pierotti
Vice President &
Manager Relationship Development
Eileen Berry Wortham
Marketing Director
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
20
<PAGE> 23
THE COMPANY WILL PROVIDE TO ANY SHAREHOLDER, WITHOUT CHARGE, A COPY OF THE
COMPANY'S ANNUAL REPORT FOR 1996 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 East 14th Street
San Leandro, CA 94577
TRANSFER AGENT
Chase Mellon Shareholders Services
Ridgefield Park, NJ
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 on
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 440 shareholders of record as of March 3, 1997.
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 END LOW HIGH
- --------------------------------------------------
<S> <C> <C>
March 31, 1995 $4.50 $ 5.50
June 30, 1995 $5.50 $ 6.00
September 30, 1995 $6.00 $ 7.50
December 31, 1995 $7.50 $ 8.50
March 31, 1996 $8.00 $ 8.50
June 30, 1996 $8.00 $ 8.75
September 30, 1996 $8.75 $ 9.00
December 31, 1996 $9.00 $10.00
- --------------------------------------------------
</TABLE>
The Company paid cash dividends of $0.30 per share in 1996 and 1995.
MARKET MAKERS
Sutro & Co., Troy Norlander
Big Bear Lake, CA
(800) 288-2811
THE COMPANY
Bay Bank of Commerce, a state chartered non-member bank, was incorporated on
August 11, 1980, and commenced operations on February 13, 1981. On May 31, 1983,
Bay Commercial Services was formed to serve as a holding company with Bay Bank
of Commerce as its wholly-owned subsidiary.
Bay Bank of Commerce has three offices to serve the business community in the
East Bay region of the San Francisco Bay Area. The main office, including the
SBA and Construction Loan divisions, is centrally located in downtown San
Leandro. In 1992, the Bank opened a branch office in Hayward to serve the
southern Alameda County region, and in 1996 a regional branch office was opened
in San Ramon to serve the growing business market on the "I-680 corridor" of the
East Bay.
With the recent consolidation of several community banks in the East Bay region,
Bay Bank of Commerce remains one of the few local, independent banks serving
small to mid-sized businesses and professionals with a wide v The Bank offers a
full range of deposit services for businesses and individuals including
checking, savings, time and money market accounts. These accounts are insured to
the current legal limit by the Federal Deposit Insurance Corporation. Other
business services include cash vault, merchant card and courier deposit pick-up.
Bay Bank of Commerce specializes in providing custom credit solutions for
business customers including commercial real estate loans, letters of credit,
equipment loans, VISA business cards and reserve lines of credit, to name a few.
As a "Preferred" SBA Lender, the Bank provides faster pre-qualification and
funding than many other SBA Lenders. For individuals, the Bank offers home
equity lines, residential construction loans, VISA credit cards, and other
sources of credit.
Over the years the Bank has won many loyal customers with a reputation of
service excellence, a commitment to quality banking products and a focus on
meeting customer needs. Building successful long-term relationships with
customers is a top priority for Bay Bank of Commerce.
<PAGE> 24
[LOGO]
BAY BANK OF COMMERCE
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
SAN RAMON OFFICE
2821 Crow Canyon Road
San Ramon, California 94583
(510) 831-6111
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 Lending
Copyright 1997, Bay Commercial Services
Printed in the USA
<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 on Forms S-8 of Bay Commercial Services of our
report dated January 15, 1997, appearing in this Annual Report on Form 10-KSB of
Bay Commercial Services for the year ended December 31, 1996.
Deloitte & Touche LLP
San Jose, California
March 26, 1997
<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-KSB 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, O.D. Chairman of the Board and Director March 26, 1997
- -----------------------------
Joshua Fong, O.D.
/s/William R. Henson Director March 25, 1997
- -----------------------------
William R. Henson
/s/Dimitri V. Koroslev Director March 25, 1997
- -----------------------------
Dimitri V. Koroslev
/s/William E. Peluso Director March 26, 1997
- -----------------------------
William E. Peluso
/s/Oswald A. Rugaard Director March 26, 1997
- -----------------------------
Oswald A. Rugaard
/s/Mark A Wilton Director March 26, 1997
- -----------------------------
Mark A. Wilton
/s/Randall D. Greenfield Chief Financial Officer (Principal March 27, 1997
- ----------------------------- Financial Officer and Principal
Randall D. Greenfield Accounting Officer) and Secretary
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,945
<INT-BEARING-DEPOSITS> 57,093
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,339
<INVESTMENTS-CARRYING> 16,068
<INVESTMENTS-MARKET> 16,082
<LOANS> 71,362
<ALLOWANCE> 971
<TOTAL-ASSETS> 96,769
<DEPOSITS> 83,291
<SHORT-TERM> 2,304
<LIABILITIES-OTHER> 1,256
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 96,769
<INTEREST-LOAN> 6,463
<INTEREST-INVEST> 1,113
<INTEREST-OTHER> 250
<INTEREST-TOTAL> 7,826
<INTEREST-DEPOSIT> 2,351
<INTEREST-EXPENSE> 2,457
<INTEREST-INCOME-NET> 5,369
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 4,686
<INCOME-PRETAX> 1,763
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,083
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 6.24
<LOANS-NON> 208
<LOANS-PAST> 227
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 99
<ALLOWANCE-OPEN> 982
<CHARGE-OFFS> 35
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 971
<ALLOWANCE-DOMESTIC> 971
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 385
</TABLE>
