<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, 1997
[ ] 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)
California 77-2760444
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1495 East 14th Street. San Leandro. California 94577
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Issuer's telephone number (510) 357-2265
----------------------
Securities registered under Section 12(b) of the Exchange Act: NONE
---------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
--------------------------
(Title of Class)
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: $ 9,730,000.
----------------
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, 1998: $13,723,098
---------------
State the number of shares of Common Stock outstanding as of March 11, 1998:
1,080,720
- --------------
<TABLE>
<CAPTION>
Documents Incorporated by Reference: Part of Form 10-KSB
- ------------------------------------ -------------------
<S> <C>
1997 Annual Report to Shareholders for fiscal year Part II, Items 5, 6 and 7
ended December 31, 1997.
Proxy Statement for 1998 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>
ITEM 1 - DESCRIPTION OF BUSINESS ................................................ 1
ITEM 2 - DESCRIPTION OF PROPERTY ................................................ 29
ITEM 3 - LEGAL PROCEEDINGS ...................................................... 30
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................... 30
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ............... 30
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............... 30
ITEM 7 - FINANCIAL STATEMENTS ................................................... 31
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .................................... 31
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ............... 31
ITEM 10 - EXECUTIVE COMPENSATION ................................................ 31
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........ 32
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................ 32
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K ...................................... 32
</TABLE>
<PAGE> 3
PART I
ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
Bay Commercial Services (the "Company") is a California corporation and
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on June 7, 1981. Bay Bank of Commerce (the
"Bank"), was incorporated as a California banking corporation on August 11, 1980
and became a wholly-owned subsidiary of the Company through a reorganization in
1983.
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 forward-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, 1997, the Company had total consolidated assets of
$116,369,000. The Bank accounted for $116,245,000, or virtually all, of the
total assets of the Company. The Company's primary source of income, other than
its equity in the undistributed earnings of the Bank, 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, 1997, the Bank had total assets of $116,245,000, total
loans of $74,129,000 (including loans held for sale) and total deposits of
$101,174,000. 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 in
1997 were $985,000. SBA-guaranteed loans of $1,076,000 were sold in 1997. 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.
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, 1997, the Bank had a
total of 4,002 accounts representing 1,702 noninterest-bearing demand deposit
(checking) accounts with an average balance of approximately $17,000 each; 1,484
savings, interest-bearing demand, and money market accounts with an average
balance of approximately $20,000 each; and 816 time accounts with an average
balance of approximately $53,000 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, 1997, commercial real estate
mortgage loans accounted for 55%, commercial loans accounted for 25%, real
estate construction loans accounted for 10%, real estate equity loans accounted
for 4%, consumer installment and other loans accounted for 4% and SBA loans held
for sale accounted for 2% 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, 1997, the Bank had total loans outstanding of
$74,129,000, 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, 1997, the Bank's allowance for loan losses was
$1,000,000 or 1.3% of total loans. See "Selected Statistical Information --
Summary of Loan Loss Experience" herein for a discussion of Management's policy
for establishing and maintaining the allowance for loan losses.
CORRESPONDENT BANKS
The Bank has correspondent relationships with Union Bank of California
and Bank of America, N.T.&S.A. 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
2
<PAGE> 5
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, 1997, the Company employed forty-five (45) 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 1997 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, 1997 and 1996 and an analysis of interest rates and
the interest rate differential.
TABLE B sets forth the changes in interest income and interest expense
in 1997 and 1996 resulting from changes in volume and changes in rates.
SECURITIES PORTFOLIO
The book value of securities held to maturity and securities available
for sale at December 31, 1997 and 1996, and maturities and weighted average
yield of securities at December 31, 1997 are set forth in TABLE C.
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 1997 and 1996 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, 1997 are summarized in TABLE E.
TABLE F shows the composition of nonaccrual, past due and restructured
loans at December 31, 1997 and 1996. 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, 1997 and 1996.
Set forth in the text accompanying TABLE G is a description of the
factors which influenced Management's judgment in determining the amount of the
additions to the allowance charged to operating expense in each fiscal year, a
table showing the allocation of the allowance for loans losses, as well as a
discussion of Management's policy for establishing and maintaining the allowance
for loan losses.
3
<PAGE> 6
DEPOSITS
TABLE H sets forth the average amount of and the average rate paid on
major deposit categories for the years ended December 31, 1997 and 1996.
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,
1997.
RETURN ON EQUITY AND ASSETS
TABLE J sets forth certain financial ratios for the years ended December
31, 1997 and 1996.
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,
1997 and 1996. The average balances are averages of daily balances.
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balances Expense Rate Balances Expense Rate
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities (amortized cost):
Taxable $ 18,396 $ 1,131 6.15% $ 15,257 $ 947 6.21%
Tax-exempt(l) 3,874 297 7.67 3,165 244 7.65
--------- --------- -------- --------- --------- --------
Total securities 22,270 1,428 6.41 18,422 1,191 6.45
Federal funds sold and securities
purchased under repurchase agreements 5,338 288 5.40 4,870 250 5.13
Loans(2)(3) 69,824 7,137 10.22 62,818 6,463 10.29
--------- --------- -------- --------- --------- --------
Total interest-earning assets(l) 97,432 8,853 9.09 86,110 7,904 9.18
Less allowance for loan losses (977) (970)
Nonaccrual loans 393 190
Cash and due from banks 6,963 6,377
Premises and equipment 2,205 2,070
Other assets 1,702 1,300
--------- --------
TOTAL ASSETS $ 107,088 $ 95,077
========= =========
Average earning loans/average
earning assets 71.66% 72.95%
========= =========
</TABLE>
5
<PAGE> 8
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (CONT.)
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balances Expense Rate Balances Expense Rate
-------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Savings and interest-bearing demand $ 25,893 $ 708 2.73% $25,050 $ 651 2.60%
Time 30,626 1,588 5.19 27,239 1,407 5.17
Certificates of deposit, $100 and over 9,974 564 5.65 5,198 293 5.64
Other borrowed funds 1,894 96 5.07 2,209 106 4.80
-------- ------- ---- ------- ------- ----
Total interest-bearing liabilities 68,387 2,956 4.32 59,696 2,457 4.12
Demand deposits 27,744 25,124
Other liabilities 1,006 1,028
Shareholders' equity 9,951 9,229
-------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $107,088 $95,077
======== =======
Interest income and average yield
on earning assets(1) 8,853 9.09 7,904 9.18
Interest expense and average
interest cost related to earning assets 2,956 3.03 2,457 2.85
------- ---- ------- ----
Net interest income and
margin(1)(4) $5,897 6.06% $5,447 6.33%
======= ==== ======= ====
</TABLE>
(1) Interest on tax-exempt securities, total interest income and net
interest income include the effect of taxable equivalent adjustments
using the expected federal corporate income tax rate of 34% in 1997 and
1996 in adjusting interest on tax-exempt investment securities to a
fully taxable basis. The amount of the taxable equivalent adjustment was
$94,000 and $76,000 in 1997 and 1996, respectively.
(2) Loan interest income includes loan fees of $334,000 in 1997 and $319,000
in 1996.
(3) Average loans do not include nonaccrual loans.
(4) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
6
<PAGE> 9
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,
----------------------------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
Increase (decrease) in: Increase (decrease) in:
------------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Changes in interest income:
Securities (amortized cost):
Taxable $ 193 $ (9) $ 184 $ (315) $ 45 $ (270)
Tax-exempt(l) 52 1 53 77 9 86
------- ------- ------- ------- ------- -------
Total securities 245 (8) 237 (238) 54 (184)
Federal funds sold and securities
purchased under repurchase 25 13 38 (85) (33) (118)
agreements
Loans 717 (43) 674 1,064 (365) 699
------- ------- ------- ------- ------- -------
Total(l) 987 (38) 949 741 (344) 397
------- ------- ------- ------- ------- -------
Changes in interest expense:
Total interest-bearing liabilities:
Savings and interest-bearing demand 22 35 57 (64) (1) (65)
Time 176 5 181 221 (54) 167
Certificates of deposit, $100 and 270 1 271 1 (2) (1)
over
Other borrowed funds (16) 6 (10) 43 3 46
------- ------- ------- ------- ------- -------
Total 452 47 499 201 (54) 147
------- ------- ------- ------- ------- -------
Changes in net interest income(l) $ 535 $ (85) $ 450 $ 540 $ (290) $ 250
======= ======= ======= ======= ======= =======
</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 fair value of securities available for sale at December 31,
1997 and 1996 and the amortized cost, maturities, and weighted average yield of
securities at December 31, 1997.
<TABLE>
<CAPTION>
Estimated
Fair Value
At December 31,
---------------------
(In Thousands)
SECURITIES AVAILABLE FOR SALE 1997 1996
------- -------
<S> <C> <C>
U. S. Treasury and agency securities $ 4,002 $ 8,974
Corporate securities 14,401 --
Mortgage-backed securities 6,248 365
------- -------
$24,651 $ 9,339
======= =======
</TABLE>
<TABLE>
<CAPTION>
Amortized Cost
At December 31,
---------------------
(In thousands)
SECURITIES HELD TO MATURITY 1997 1996
------- -------
<S> <C> <C>
U. S. Treasury and agency securities $ 3,197 $ 3,198
Obligations of states and political subdivisions 4,661 3,434
Mortgage-backed securities 71 72
------- -------
$ 7,929 $ 6,704
======= =======
</TABLE>
8
<PAGE> 11
TABLE C
SECURITIES PORTFOLIO (CONTINUED)
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------------------------
After One After Five
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 $ -- --% $ 2,000 5.50% $ 2,000 7.23% $ -- --% $ 4,000 6.37%
Corporate securities 14,401 6.13 -- -- -- -- -- -- 14,401 6.13
Mortgage-backed securities -- -- 1,969 6.19 3,347 6.22 946 6.19 6,262 6.21
------- --------- ------- --------- ------- --------- ------- --------- ------- -----
Total amortized cost $14,401 6.13% $ 3,969 5.84% $ 5,347 6.60% $ 946 6.19% $24,663 6.19%
======= ========= ======= ========= ======= ========= ======= ========= ======= =====
Estimated fair value $14,401 $ 3,960 $ 5,351 $ 939 $24,651
======= ======= ======= ======= =======
HELD TO MATURITY:
U.S. Treasury and
agency securities $ 2,200 5.82% $ -- --% $ 997 6.69% $ -- --% $ 3,197 6.09%
Obligations of states and
political subdivisions (1) 107 7.97 1,074 8.26 2,072 7.08 1,408 7.34 4,661 7.39
Mortgage-backed securities -- -- -- -- -- -- 71 9.00 71 9.00
------- --------- ------- --------- ------- --------- ------- --------- ------- -----
Total amortized cost $ 2,307 5.92% $ 1,074 8.26% $ 3,069 6.96% $ 1,479 7.36% $ 7,929 7.07%
======= ========= ======= ========= ======= ========= ======= ========= ======= =====
Estimated fair value $ 2,309 $ 1,109 $ 3,126 $ 1,513 $ 8,057
======= ======= ======= ======= =======
</TABLE>
(1) Interest on tax-exempt securities, total interest income and net interest
income include the effect of taxable equivalent adjustments using the expected
federal corporate income tax rate of 34% in 1997 in adjusting interest on
tax-exempt securities to a fully taxable basis.
9
<PAGE> 12
TABLE C
SECURITIES PORTFOLIO (CONTINUED)
At December 31, 1997, securities from the following issuers each totaled
over ten percent (10%) of shareholders' equity of the Company:
<TABLE>
<CAPTION>
(In Thousands)
--------------------
Amortized Fair
Cost Value
------ ------
<S> <C> <C>
Federal Home Loan Mortgage $3,063 $3,066
Corporation
Federal National Mortgage Association 1,753 1,749
Federal Home Loan Bank 1,200 1,202
</TABLE>
TABLE D
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 1997 and 1996 is
summarized in the table below.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Commercial $ 18,980 $ 15,568
Real estate:
Construction 7,436 6,813
Mortgage 41,181 41,930
Equity 2,718 2,178
Held for sale 1,501 2,923
Installment 1,895 1,602
Other 947 903
-------- --------
74,658 71,917
Deferred loan fees (529) (555)
-------- --------
$ 74,129 $ 71,362
======== ========
</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 variable interest rates at December 31, 1997.
<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 $ 8,967 $ 5,477 $ 5,257 $19,701
Real estate-construction 7,436 -- -- 7,436
Real estate - mortgage 6,131 11,855 23,975 41,961
Equity -- -- 2,718 2,718
Installment 48 1,701 146 1,895
Other 657 290 -- 947
------- ------- ------- -------
$23,239 $19,323 $32,096 $74,658
======= ======= ======= =======
Sensitivity to Changes in Interest
Rates:
Loans with fixed interest rates $ 2,186 $ 8,015 $11,427 $21,628
Loans with variable interest
rates 53,030 -- -- 53,030
------- ------- ------- -------
$55,216 $ 8,015 $11,427 $74,658
======= ======= ======= =======
</TABLE>
TABLE F
SUMMARY OF NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
A summary of nonaccrual, past due and restructured loans at December 31,
1997 and 1996 is set forth below:
<TABLE>
<CAPTION>
December 31,
(In thousands)
1997 1996
---- ----
<S> <C> <C>
Nonaccrual $440 $208
Accruing loans past due 90 days or -- 227
more
Restructured loans 471 --
---- ----
$991 $435
==== ====
</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.
11
<PAGE> 14
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 constituted approximately 0.6 % and 0.3%
of total gross loans at December 31, 1997 and 1996, respectively. Loans in the
nonaccrual category are treated as nonaccrual loans even though the Bank may
ultimately recover all or a portion of the interest due. The classification of a
loan as a nonaccrual loan is not necessarily indicative of a potential
charge-off. The Senior Loan Officer, on at least a quarterly basis, assesses the
loan portfolio to determine which loans should be added to or removed from the
quarterly Watch list. The Bank's internal Loan Review Examiner grades all new
commercial loans and all credits where the total liability equals or exceeds the
reporting limit. If either the Senior Loan Officer or the Loan Review Examiner
detects a serious deficiency, the loan is placed on the next quarterly Watch
list.
Once a loan is on the Watch List, the Loan Officers are required to
complete a "Report of Collection Activity" and to make at least monthly status
reports. While the loan is on the Watch list, the Senior Loan Officer oversees
and coordinates the Loan Officer's efforts to either rehabilitate the loan or
effect collection in an expeditious manner.
Restructured loans reflect situations in which, due to the inability of
the borrower to comply with the original terms of the loan, the terms have been
modified, usually with the accrual of interest at a reduced rate. As of December
31, 1997, the Bank had $471,000 in restructured loans.
Interest income on nonaccrual loans that would have been recognized for
the year ended December 31, 1997, if the loans had been current in accordance
with their original terms totaled $39,498. The Company recognized $12,602 in
interest income on these loans for the year ended December 31, 1997.
There are no loans, which were current at December 31, 1997, 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 $7,436,000, or 10% of total loans, at December 31, 1997.
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, 1997,
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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of year: $ 971 $ 982
Charge-offs:
Commercial 5 25
Real estate - mortgage -- --
Installment -- 8
Other 26 2
-------- --------
Total loans charged off 31 35
-------- --------
Recoveries:
Commercial 6 19
Real estate - mortgage -- 3
Other 2 2
-------- --------
Total recoveries 8 24
-------- --------
Net charge-offs (23) (11)
Provision for loan losses 52 --
-------- --------
Balance at end of year $ 1,000 $ 971
======== ========
Loans outstanding at December 31 $ 74,129 $ 71,362
======== ========
Average loans outstanding during period $ 70,217 $ 63,008
======== ========
Allowance for loan losses as a percentage
of outstanding loan balance 1.3% 1.4%
======== ========
Net charge-offs to average loans outstanding -- --
======== ========
</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
ALLOWANCE FOR LOAN LOSSES BY LOAN TYPE
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Percent of Percent of
Loans Loans
in Each in Each
Category Category
(Dollars in thousands) Amount to Total Loans Amount to Total Loans
------ ------ ------ ------
<S> <C> <C> <C> <C>
Commercial $ 431 25% $ 242 22%
Real estate - mortgage 201 55 241 59
Equity 14 4 11 3
Held for sale 2 2 4 4
Installment 23 3 22 2
Other 33 1 29 1
Unallocated 242 N/A 385 N/A
------ ------ ------ ------
$1,000 N/A $ 971 N/A
</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, 1997 and 1996.
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---------------- ----------------
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $27,744 N/A $25,124 N/A
Savings and interest-bearing demand 25,893 2.73% 25,050 2.60%
Time 40,600 5.30% 32,437 5.25%
------ ------
$94,237 $82,611
======= =======
</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, 1997.
<TABLE>
<CAPTION>
(Dollars in thousands) Time Certificates of Other Time
Deposit of Deposits of
$100 or More $100 or More
------- -------
<S> <C> <C>
Three months or less $7,355 $11,585
Over 3 through 6 months 2,153
Over 6 through 12 months 1,701
Over 12 months 1,625
------- -------
$12,834 $11,585
======= =======
</TABLE>
TABLE J
RETURN ON EQUITY AND ASSETS
The following table sets forth certain financial ratios for the years
ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Net income $1,062 $1,083
Net income to average assets 1.0% 1.1%
Net income to average shareholders' equity 10.7% 11.8%
Dividends declared per share to diluted net
income per share 0.36 to 1 0.34 to 1
Average shareholders' equity to average 9.3% 9.7%
assets
</TABLE>
15
<PAGE> 18
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, 1997, contained ninety-six (96)
competing banking offices, which includes the Bank and twenty-two (22) branch
offices of other independent banks. At June 30, 1997, the Bank's primary service
area also contained sixty-three (63) 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
16
<PAGE> 19
exceptions, the Bank may not condition an extension of credit on a customer
obtaining other services provided by it, the Company or any other subsidiary, or
on a promise by the customer not to obtain other services from a competitor. In
addition, federal law imposes certain restrictions on transactions between the
Bank and its affiliates. 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 Department of Financial
Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is not a member of the Federal Reserve System, but is nevertheless subject
to certain regulations of the Federal Reserve. The Bank's deposits are insured
by the FDIC to the maximum amount permitted by law, which is currently $100,000
per depositor in most cases.
The regulations of these state and federal bank regulatory agencies
govern most aspects of the Bank's business and operations, including but not
limited to, the scope of its business, its investments, its reserves against
deposits, the nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
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.
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. Additional capital requirements
may be imposed on banks based on market risk.
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
17
<PAGE> 20
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 and related surplus not qualifying as core
capital; (iii) hybrid capital instruments, perpetual debt and 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, 1997:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
(Dollars in thousands)
Company Bank
------------------------- -----------------------
Amount Ratio Amount Ratio
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Tier 1 capital $ 10,069 10.7% $ 10,214 10.9%
Tier 1 capital regulatory minimum requirement 3,763 4.0 3,758 4.0
-------- -------- -------- -------
Capital held in excess of regulatory minimum $ 6,306 6.7% $ 6,456 6.9%
======== ======== ======== =======
Total capital $ 11,069 11.8% $ 11,214 11.9%
Total capital regulatory minimum requirement 7,526 8.0 7,516 8.0
-------- -------- -------- -------
Capital held in excess of regulatory minimum $ 3,543 3.8% $ 3,698 3.9%
======== ======== ======== =======
Risk weighted assets $ 94,071 $ 93,947
======================== =======================
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
(Dollars in thousands)
Company Bank
------------------------- -------------------------
Amount Ratio Amount Ratio
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Tier 1 capital to average total assets $ 10,069 8.7% $ 10,214 8.8%
Range of regulatory minimum leverage 3,476- 3.0- 3,472- 3.0-
requirement 5,793 5.0 5,787 5.0
--------- ------- --------- -------
Range of regulatory excess 4,276- 3.7- 4,427- 3.8-
$ 6,593 5.7% $ 6,742 5.8%
========= ======= ========= =======
Average total assets for fourth quarter* $ 115,855 $ 115,730
========================= =========================
</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 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
19
<PAGE> 22
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 with significant trading activities must measure
and hold capital for exposure to general market risk arising from fluctuations
in interest rates, equity prices, foreign exchange rates and commodity prices
and exposure to specific risk associated with debt and equity positions in the
trading portfolio. General market risk refers to changes in the market value of
on-balance-sheet assets and off-balance-sheet items resulting from broad market
movements. Specific market risk refers to changes in the market value of
individual positions due to factors other than broad market movements and
includes such risks as the credit risk of an instrument's issuer. The additional
capital requirements apply effective January 1, 1998 to institutions with
trading assets and liabilities equal to 10% or more of total assets or trading
activity of $1 billion or more. 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, 1997, the Company had no outstanding shares of preferred
stock.
The principal source of cash revenue to the Company has 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 DFI, 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) only can be
utilized to offset up to 90% of AMTI, with the result that a corporation with
current year taxable income will pay some tax.
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
21
<PAGE> 24
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 rule applies to a
bank, to the extent of its interest expense that is allocable to tax-exempt
obligations acquired after August 7, 1986. The Taxpayer Relief Act of 1997 (the
"1997 Act") made a technical change which expands the interest potentially
disallowed. 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
The 1997 Act changed the tax treatment of net operating losses (an
"NOL"). Effective for tax years beginning after August 5, 1997, a bank generally
is permitted to carry a NOL back to the prior two tax years and forward to the
succeeding twenty tax years. For tax years beginning on or before August 5,
1997, the NOL may be carried back three years and forward fifteen years.
However, 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, 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 may make the identification of an
excepted debt obligation in accordance with normal accounting practices, but no
later than 30 days after acquisition.
22
<PAGE> 25
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%. For calendar 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 tax 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. 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
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.
23
<PAGE> 26
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, 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 were permitted to 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. However, recently adopted regulations of the federal
banking agencies prohibit interstate branching primarily for the purpose of
deposit production and provide guidelines to ensure that banks operating
interstate branches are reasonably helping to meet the credit needs of the
communities served by the branches.
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 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.
24
<PAGE> 27
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA")
General
FDICIA primarily addresses the safety and soundness of the deposit
insurance funds, supervision of and accounting by insured depository
institutions and prompt corrective action by the federal bank regulatory
agencies with respect to troubled institutions. FDICIA gives the FDIC, in its
capacity as federal insurer of deposits, broad authority to promulgate
regulations to assure the viability of the deposit insurance funds, including
regulations concerning safety and soundness standards. FDICIA also places
restrictions on the activities of state-chartered institutions and on
institutions failing to meet minimum capital standards and provides enhanced
enforcement authority for the federal banking agencies. FDICIA also strengthened
Federal Reserve Act regulations regarding insider transactions.
Prompt Corrective Action
FDICIA amended the FDIA to establish a format for closer monitoring of
insured depository institutions and to enable prompt corrective action by
regulators when an institution begins to experience difficulty. The general
thrust of these provisions is to impose greater scrutiny and more restrictions
on institutions as they descend the capitalization ladder.
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 mandatory supervisory actions,
including: (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)
submission to the FDIC of a capital restoration plan; (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 institution
has been adequately capitalized, on the average, for four consecutive quarters;
(6) restrictions on the institution's asset growth; and (7)
- ----------------
(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
limitations on the institution's ability to make any acquisition, open any new
branch offices or engage in any new line of business.
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, to increasingly
stringent operating restrictions, including an immediate requirement to raise
capital.
Finally, 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. Critically undercapitalized institutions which
are not placed in conservatorship or receivership may be subject to additional
stringent operating restrictions.
Safety and Soundness; 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 have adopted asset quality and earnings standards as part of 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.
The federal banking agencies recently published a "Policy Statement on
the Internal Audit Function and its Outsourcing," which provides guidance on the
elements of an effective internal audit function, including director and senior
management responsibilities, the structure of the internal audit department and
procedures for resolving internal control weaknesses. The Policy Statement also
provides guidance on how outsourcing arrangements may affect an examiner's
internal control assessment, as well as the independence of an external auditor
who is also providing internal audit services to an institution.
In response to the increasing number of financial institutions using the
Internet, the FDIC recently issued a paper identifying many of the risks to an
institution's information system security associated with Internet use, together
with several security and risk control measures. The paper is designed to
complement the FDIC's safety and soundness examination procedures for electronic
banking activities. The Bank is investigating internet banking options, however,
there are no plans at this time to offer such a service.
FDICIA restricts the acceptance of brokered deposits by insured
depository institutions that are not well capitalized. It also places
restrictions on the interest rate payable on brokered deposits and the
solicitation of such deposits 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.
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 1997 ranged from
$0.00 to $0.27 per $100 of deposits. The FDIC has stated that the foregoing risk
assessment premiums will be in effect indefinitely.
26
<PAGE> 29
FDICIA also places restrictions on insured state bank activities and
equity investments, interbank liabilities and extensions of credit to insiders
and transactions with affiliates.
OTHER RECENT LEGISLATION
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.
YEAR 2000 COMPLIANCE
The Federal Financial Institutions Examination Council ("FFIEC")
released interagency statements in May and December, 1997 addressing critical
issues for Year 2000 readiness. Year 2000 issues exist because most computer
programs use only two digits to identify a year in the date field (e.g., "98"
for "1998"). Bank information processing systems must be made Year 2000
compliant well in advance of December 31, 1999. In addition, banks face risks
from vendors whose programs are not Year 2000 compliant and must begin testing
of programming changes no later than December 31, 1998. The computer programs of
banks' corporate customers also may pose Year 2000 risks. Failure to address
Year 2000 issues could affect a borrower's creditworthiness. Accordingly, the
FFIEC guidelines require senior management to provide the board of directors
with quarterly or more frequent reports on efforts to reach Year 2000 goals both
internally and by the institution's major vendors. Each institution must
implement its own internal testing or verification processes for vendor products
and services to insure that its different computer systems function properly
together and should develop processes to periodically assess large corporate
borrower Year 2000 efforts. Finally, institutions should develop contingency
plans for all vendors that service "mission-critical" applications should the
vendor not complete its conversion efforts on time.
The Company presently believes that with modifications to the Bank's
existing software and/or, if required, upgrading to new software, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified and/or upgraded. However, if such modifications
and conversions are not completed on a timely basis, the Year 2000 problem could
have a material impact on the operations of the Bank.
During 1997, the Company performed a comprehensive review of its
information systems and, in connection with that review, has initiated formal
communications with all of its significant vendors and service providers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. There can be no guarantee that
the systems of the other companies on which the Company's systems rely will be
timely remediated. Therefore, it is possible that the Company could be
negatively affected to the extent that other entities not affiliated with the
Company are unsuccessful in addressing these issues. The Company is developing
contingency plans wherever possible to limit those potential negative impacts.
The Company plans to utilize both internal and external resources to
attempt to identify, correct or replace, and test systems for Year 2000
compliance. The Company anticipates that all corrective action and testing of
the key systems will be completed by December 31, 1998.
Other significant Year 2000 risks to the Bank include the adequacy of
steps taken by the Bank's borrowers to address the potential impact of the Year
2000 problem on their own businesses. The Bank intends to require information
from its borrowers as part of its credit underwriting process to determine
whether they will take appropriate remedial action in time to avoid Year 2000
problems. However, no assurance can be given that these
27
<PAGE> 30
actions will be taken on a timely basis, and no assurance can be given that the
Bank's existing borrowers will not suffer Year 2000 problems, either of which
could have the effect of increasing the Bank's problem loans and credit losses
in future years.
For 1997, the Company did not incur a material increase in expense
related to the Year 2000 problem and, during 1998, Year 2000 related expenses
are projected not to exceed $25,000. However, no assurance can be given that the
Company may not be required to expend additional amounts in connection with the
Year 2000 problem in the future.
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 such laws
and regulations. The Bank is subject to many federal consumer protection
statutes and regulations, some of which are discussed below.
The Community Reinvestment Act ("CRA") is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. The CRA specifically directs the federal
regulatory agencies, in examining insured depository institutions, to assess a
bank's record of helping meet the credit needs of its entire community,
including low- and moderate-income neighborhoods, consistent with safe and sound
banking practices. The CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when
evaluating applications for, among other things, domestic branches, mergers or
acquisitions, or holding company formations. The agencies use the CRA assessment
factors in order to provide a rating to the financial institution. The ratings
range from a high of "outstanding" to a low of "substantial noncompliance." The
Bank was examined for CRA compliance by its primary regulator within the past 12
months and received a "Satisfactory" CRA Assessment Rating. New evaluation
criteria in the examination process for small institutions (total assets of $250
million or less) were implemented on January 1, 1996, while new criteria for
large institutions (assets of $250 million or more and, for multiple-bank
holding companies, total bank and thrift assets in excess of $1 billion) were
implemented beginning July 1, 1997.
The Equal Credit Opportunity Act ("ECOA") generally prohibits
discrimination in any credit transaction, whether for consumer or business
purposes, on the basis of race, color, religion, national origin, sex, marital
status, age (except in limited circumstances), receipt of income from public
assistance programs, or good faith exercise of any rights under the Consumer
Credit Protection Act. The Truth in Lending Act ("TILA") is designed to ensure
that credit terms are disclosed in a meaningful way so that consumers may
compare credit terms more readily and knowledgeably. As a result of the TILA,
all creditors must use the same credit terminology to express rates and
payments, including the annual percentage rate, the finance charge, the amount
financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act ("FH Act") regulates many practices, including
making it unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap, or familial status. A number of lending practices have been found
by the courts to be, or may be considered, illegal under the FH Act, including
some that are not specifically mentioned in the FH Act itself. The Home Mortgage
Disclosure Act ("HMDA") grew out of public concern over credit shortages in
certain urban neighborhoods and provides public information that will help show
whether financial institutions are serving the housing credit needs of the
neighborhoods and communities in which they are located. The HMDA also includes
a "fair lending" aspect that requires the collection and disclosure of data
about applicant and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act ("RESPA") requires
lenders to provide borrowers with disclosures regarding the nature and cost of
real estate settlements. Also, RESPA prohibits certain abusive practices, such
as kickbacks, and places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursements and
other penalties. Due to heightened
28
<PAGE> 31
regulatory concern related to compliance with the CRA, TILA, FH Act, ECOA, HMDA
and RESPA 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 DFI 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 $2,782,000 through December 31, 1997
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, 1997.
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, a night
depository and an automated teller machine.
29
<PAGE> 32
The Bank purchased the Hayward branch premises in February, 1993 at a total
cost of $700,000. The Bank invested approximately $693,000 in improvements and
furniture, fixtures and equipment in its Hayward branch office through December
31, 1997.
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, a night depository and an automated teller machine. The Bank invested
approximately $345,000 in leasehold improvements and furniture, fixtures and
equipment in its San Ramon office through December 31, 1997.
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 11, 1998, there were 418 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 18
through 22 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 FORWARD-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.
30
<PAGE> 33
ITEM 7 - FINANCIAL STATEMENTS
For consolidated financial statements of the Company, see consolidated
balance sheets at December 31, 1997 and 1996, and consolidated income
statements, consolidated statements of cash flows and consolidated statements of
changes in shareholders' equity for the years ended December 31, 1997, 1996 and
1995, and notes to consolidated financial statements for the years ended
December 31, 1997, 1996 and 1995 and the "Independent Auditors' Report" thereon
at Pages 2 through 16 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 1998 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 1997, the
officers and directors of the Company complied with all applicable filing
requirements, except that executive officer Randall D. Greenfield 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
1997.
ITEM 10 - EXECUTIVE COMPENSATION
For information concerning executive compensation, see "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.
31
<PAGE> 34
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial
owners and Management, see "PRINCIPAL SHAREHOLDERS" and "ELECTION OF DIRECTORS
OF THE COMPANY" in the Proxy Statement, which is incorporated herein by
reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related
transactions, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and
"INDEBTEDNESS OF MANAGEMENT" in the Proxy Statement, which is incorporated
herein by reference.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) FINANCIAL STATEMENTS REFERENCE PAGE
1997 Annual
Report
<S> <C>
1. Consolidated Financial Statements:
Balance Sheets at December 31, 1997 and 1996 2
Income Statements for the years ended December 31, 1997,
1996 and 1995 3
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 4
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995 5
Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995 6-15
Independent Auditors' Report 16
</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 35 and 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, 1997.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
No. 2-97378, 33-24302 and 33-75330.
32
<PAGE> 35
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.
33
<PAGE> 36
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 25, 1998 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>
/ s/Richard M. Kahler DATE: March 25, 1998
- ----------------------
Richard M. Kahler,
President and Chief Executive Officer
(Principal Executive Officer) and Director
Randall D. Greenfield* DATE: March 25, 1998
- ----------------------
Randall D. Greenfield,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and
Secretary
Joshua Fong, O.D.* DATE: March 25, 1998
- ----------------------
Joshua Fong, O.D.,
Chairman of the Board of Directors and Director
William R. Henson* DATE: March 25, 1998
- ------------------
William R. Henson, Director
Dimitri V. Koroslev* DATE: March 25, 1998
- --------------------
Dimitri V. Koroslev, Director
William E. Peluso* DATE: March 25, 1998
- ------------------
William E. Peluso, Director
Oswald A. Rugaard* DATE: March 25, 1998
- ------------------
Oswald A. Rugaard, Director
*By /s/Richard M. Kahler DATE: March 25, 1998
----------------------
(Richard M. Kahler, as Attorney-in-Fact)
</TABLE>
34
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <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)
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
10.11 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.(11)
11 Not applicable.
13 Bay Commercial Services 1997 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 Auditors' Consent.
24 Power of Attorney.
27.1 Financial Data Schedule year ended 12-31-1997.
27.2 Restated Financial Data Schedule year ended 12-31-1996.
27.3 Restated Financial Data Schedule year ended 12-31-1995.
27.4 Restated Financial Data Schedule quarter ended 09-30-1997.
27.5 Restated Financial Data Schedule quarter ended 06-30-1997.
27.6 Restated Financial Data Schedule quarter ended 03-31-1997.
27.7 Restated Financial Data Schedule quarter ended 09-30-1996.
27.8 Restated Financial Data Schedule quarter ended 06-30-1996.
27.9 Restated Financial Data Schedule quarter ended 03-31-1996.
28 Not applicable.
</TABLE>
(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.
36
<PAGE> 39
(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 Exhibit 10.14 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, which is incorporated herein by
this reference.
(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.
(11) Filed as Exhibit 10.12 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, 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.
37
<PAGE> 1
ANNUAL REPORT COVER
<PAGE> 2
Financial Highlights
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts): 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years ended December 31:
Interest income $8,759 $7,826 $7,456 $6,086 $5,520
Interest income on a taxable equivalent basis 8,853 7,904 7,505 6,146 5,591
Interest expense 2,956 2,457 2,310 1,766 1,552
Net interest income 5,803 5,369 5,146 4,320 3,968
Net interest income on a taxable equivalent basis 5,897 5,447 5,195 4,380 4,039
Net income 1,062 1,083 945 619 374
Net income per common share - basic 0.99 1.01 0.88 0.57 0.35
Net income per common share - diluted 0.84 0.89 0.88 0.56 0.56
Return on average assets 1.0% 1.1% 1.0% 0.7% 0.5%
Return on average shareholders' equity 10.7% 11.8% 11.1% 7.9% 5.1%
- ----------------------------------------------------------------------------------------------------------------
At December 31:
Assets $116,369 $96,769 $92,819 $89,193 $81,895
Loans 74,129 71,362 58,152 51,566 48,777
Securities 32,580 16,043 20,410 25,988 24,421
Deposits 101,135 83,291 80,253 79,258 72,609
Shareholders' equity 10,173 9,418 8,767 7,946 7,632
Book value per share 9.43 8.75 8.14 7.36 7.07
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
<PAGE> 3
Exhibit 13
Report to Shareholders--1997 Annual Report
Bay Commercial Services completed another successful year with near-record net
income, solid asset growth and strong stock performance in 1997.
The Company's net income for 1997 was $1,062,000, just 2% less than the 1996
record. On a fully diluted basis, net income was $0.84 per share, compared to
$0.89 per share in 1996. Those results were above expectations considering the
initial and ongoing expense of the Bank's San Ramon regional office which opened
in December 1996.
The Bank's investment in the San Ramon office, located on the rapidly growing
"I-680 corridor," has significantly increased the opportunities for asset
growth. This is evident as the Company recognized record total assets at
year-end 1997 of $116,369,000, a $19,600,000 or 20% increase over 1996.
In recognition of the Company's earnings and strong capital position, the Board
of Directors approved the payment of a cash dividend of $0.30 per share in
January 1998. This was the fourth consecutive annual cash dividend and twelfth
cash dividend paid since the Bank opened in 1981.
During 1997, the San Francisco company of Hoefer and Arnett became market makers
in the Company's stock. Hoefer and Arnett specialize in community bank stocks
and are a welcome addition along with Sutro & Company, who have made a market in
the Company's stock for many years. The Company is traded over-the-counter under
the symbol BCSV.
For the fourth straight year, Bay Bank of Commerce received recognition for
safety and soundness as Bauer Financial Services and Veribanc awarded their
highest ratings of quarterly financial performance to the Bank. In addition, the
California-based Findley Company gave the Bank a fourth consecutive Premier
Performance rating based on 1997 financial results.
The outlook of the Company continues to be bright. Most predictions are for
additional consolidation of financial institutions with larger banks acquiring
smaller banks, then cutting back on staffing. While this may help earnings in
the short term, a service void is created. By maintaining a focus on quality
service provided by experienced, professional bankers, Bay Bank of Commerce is
well positioned to fill this void. The Bank will continue to court those
business owners and professionals who desire the type of personal attention that
community banks can offer.
We are excited about the prospects for the future and thank you for your
continued support.
<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 & Chief Executive Officer Chairman
Bay Bank of Commerce Bay Bank of Commerce Bay Commercial
Bay Commercial Services Services
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
1
<PAGE> 4
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 (dollars in thousands): 1997 1996
--------- ---------
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,548 $ 6,945
Federal funds sold -- --
--------- ---------
Cash and cash equivalents 7,548 6,945
--------- ---------
Securities available for sale, stated at fair value
(amortized cost of $24,663 for 1997; $9,364 for 1996) 24,651 9,339
Securities held to maturity (fair values of $8,057 for 1997;
$6,743 for 1996) 7,929 6,704
Loans held for sale 1,501 2,923
Loans held for investment 72,628 68,439
--------- ---------
Allowance for loan losses (1,000) (971)
--------- ---------
Net loans 73,129 70,391
--------- ---------
Premises and equipment, net 2,111 2,164
Interest and fees receivable 566 585
Other assets 435 641
--------- ---------
Total assets $ 116,369 $ 96,769
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 29,076 $ 26,198
Savings and interest-bearing demand 29,203 23,250
Time 30,022 27,823
Certificates of deposit, $100 and over 12,834 6,020
--------- ---------
Total deposits 101,135 83,291
--------- ---------
Securities sold under agreements to repurchase 1,290 2,304
Federal funds purchased 2,500 500
Interest payable and other liabilities 1,271 1,256
--------- ---------
Total liabilities 106,196 87,351
--------- ---------
Commitments and contingent liabilities (Notes 4, 12 and 13) -- --
Shareholders' equity:
Common stock--no par value: authorized 20,000,000 shares;
issued & outstanding 1,078,720 in 1997 and 1,076,720 in 1996 3,671 3,662
Retained earnings 6,509 5,771
Net unrealized loss on securities available for sale, net of taxes (7) (15)
--------- ---------
Total shareholders' equity 10,173 9,418
--------- ---------
Total liabilities and shareholders' equity $ 116,369 $ 96,769
========= =========
</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
(dollars in thousands, except per share amounts): 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 7,137 $ 6,463 $ 5,764
Federal funds sold and reverse repurchase agreements 288 250 368
Securities:
Taxable 1,131 947 1,217
Tax exempt 203 166 107
----------- ----------- -----------
Total interest income 8,759 7,826 7,456
----------- ----------- -----------
Interest expense:
Deposits:
Savings and interest-bearing demand 708 651 716
Time 1,588 1,407 1,240
Certificates of deposit, $100 and over 564 293 294
Other borrowed funds 96 106 60
----------- ----------- -----------
Total interest expense 2,956 2,457 2,310
----------- ----------- -----------
Net interest income 5,803 5,369 5,146
Provision (benefit) for loan losses 52 -- (155)
----------- ----------- -----------
Net interest income after
provision (benefit) for loan losses 5,751 5,369 5,301
----------- ----------- -----------
Noninterest income:
Bankcard income 307 254 211
Service charges and fees 274 264 240
Loan servicing 132 138 170
Gain on sale of loans 57 174 7
Net gain on sale of OREO -- 119 57
Net loss on sale of securities
available for sale (3) (3) (35)
Other 204 134 66
----------- ----------- -----------
Total noninterest income 971 1,080 716
----------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits 2,872 2,554 2,470
Occupancy 694 613 596
Other 1,506 1,519 1,406
----------- ----------- -----------
Total noninterest expenses 5,072 4,686 4,472
----------- ----------- -----------
Income before income tax expense 1,650 1,763 1,545
Income tax expense 588 680 600
----------- ----------- -----------
NET INCOME $ 1,062 $ 1,083 $ 945
=========== =========== ===========
NET INCOME PER COMMON SHARE - BASIC $ 0.99 $ 1.01 $ 0.88
Weighted average common shares - basic 1,076,774 1,076,720 1,076,720
NET INCOME PER COMMON SHARE - DILUTED $ 0.84 $ 0.89 $ 0.80
Weighted average common shares - diluted 1,257,680 1,217,235 1,174,850
=========== =========== ===========
</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 (dollars in thousands): 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,062 $ 1,083 $ 945
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization (60) 308 166
Provision (benefit) for loan losses 52 -- (155)
Unamortized deferred loan fees, net (86) (163) 122
Losses on sales of securities available for sale 3 3 35
Originations of SBA loans held for sale (985) (1,714) (1,090)
Proceeds from the sale of SBA loans held for sale 1,095 2,884 188
Receipts net of expenses due to OREO -- (119) (73)
Loss on sale of equipment -- 2 --
Change in interest and fees receivable and other assets 235 (125) 169
Change in interest payable and other liabilities 14 (280) 658
-------- -------- --------
Net cash provided by operating activities 1,330 1,879 965
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 997 1,997 965
Proceeds from maturities of securities available for sale 42,603 1,681 21,369
Proceeds from maturities of securities held to maturity 1,271 1,661 3,044
Purchases of securities available for sale (59,557) -- (14,891)
Purchases of securities held to maturity (1,493) (1,177) (4,446)
Net change in loans (2,829) (14,109) (5,115)
Proceeds from sale of OREO -- 252 76
Purchases of premises and equipment (235) (318) (131)
Proceeds from sale of equipment -- 6 2
-------- -------- --------
Net cash provided by (used in) investing activities (19,243) (10,007) 873
-------- -------- --------
Cash flows from financing activities:
Net change in deposits 17,844 3,038 995
Net change in securities sold under agreements to repurchase (1,014) 101 1,167
Net change in federal funds purchased 2,000 500 --
Exercise of stock options 9 -- 9
Repurchase and retirement of common stock -- -- (42)
Cash dividends paid (323) (323) (216)
-------- -------- --------
Net cash provided by financing activities 18,516 3,316 1,913
-------- -------- --------
Net change in cash and cash equivalents 603 (4,812) 3,751
Cash and cash equivalents at beginning of year 6,945 11,757 8,006
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,548 $ 6,945 $ 11,757
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,982 $ 2,397 $ 2,128
Income taxes 532 751 139
Noncash investing and financing activities during the year:
Repossession of loan collateral $ -- $ -- $ 319
Loan in connection with sale of OREO -- 178 1,003
Receivable at close of escrow on sale of OREO -- 48 --
Dividend payable 324 323 323
</TABLE>
See accompanying notes to consolidated financial statements
BAY COMMERCIAL SERVICES AND SUBSIDIARY
4
<PAGE> 7
Consolidated Statements of Changes in Shareholders' Equity
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS):
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Securities Total
Shares Common Retained Available Shareholders'
Outstanding Stock Earnings For Sale(*) Equity
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 1,079,985 $ 3,695 $ 4,389 $ (138) $ 7,946
Exercise of stock options 1,735 9 9
Repurchase and retirement of common stock (5,000) (42) (42)
Cash dividends declared ($0.30/share) (323) (323)
Changes in net unrealized gain (loss) on
securities available for sale(*) 232 232
Net income 945 945
--------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 1,076,720 3,662 5,011 94 8,767
Cash dividends declared ($0.30/share) (323) (323)
Changes in net unrealized gain (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) 9,418
Exercise of stock options 2,000 9 9
Cash dividends declared ($0.30/share) (324) (324)
Changes in net unrealized gain (loss) on
securities available for sale(*) 8 8
Net income 1,062 1,062
--------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 1,078,720 $ 3,671 $ 6,509 $ (7) $ 10,173
========= ========== ========== ========== ==========
</TABLE>
(*) Net of taxes
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
5
<PAGE> 8
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
(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.
SECURITIES
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 debt securities are classified as
available-for-sale securities, which are carried at fair value with a
corresponding recognition of the unrealized holding gain or loss (net of taxes)
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
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 and related direct loan origination costs. Deferred net
fees and costs are recognized in interest income over the loan term using a
method that generally produces a level yield on the unpaid loan balance.
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. All subsequent payments are first applied to
uncollected principal and then to unpaid interest. Interest income is accrued at
such time as the loan is brought fully current as to both principal and
interest, and, in Management's judgment, such loans are considered to be fully
collectible.
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. Loan fees and
direct loan origination costs related to loans held for sale are deferred and
recognized as a component of the gain or loss on sale.
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 Company 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. For analytical purposes, Management attributes portions of the allowance
for loan losses to individual loans or groups of loans. Although the allowance
for loan losses is allocated to various portfolio segments, it is general in
nature and is available for the loan portfolio in its entirety. 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.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
6
<PAGE> 9
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
ALLOWANCE FOR LOAN LOSSES, CONTINUED
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, including interest payments.
Impaired loans are those loans identified under the Company'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
Company applies its normal loan review procedures when determining whether a
loan is impaired. The amount of impairment is measured using discounted cash
flows or the fair value of the collateral, if the loan is collateral dependent.
Excluded from the impairment analysis are large groups of smaller balance
homogeneous loans such as installment and residential mortgage loans. Impaired
loans are carried at the estimated present value of the future cash flows,
discounted at the loan's effective interest rate, or at the fair value of the
collateral if less than the recorded investment in the loan (including accrued
interest and net deferred loan fees or costs). An impairment is recognized by
adjusting an allocation of the existing allowance for loan losses.
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.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" in 1997. 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. Certain provisions of SFAS No. 125
have been postponed under SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125." Also see "NEW ACCOUNTING PRO-
NOUNCEMENTS."
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 COMMON SHARE
The Company adopted SFAS No. 128, "Earnings per Share" in 1997. SFAS No. 128
specifies the computation, presentation and disclosure requirements for earnings
per share ("EPS") for entities with publicly held common stock or potential
common stock. Entities with simple capital structures are defined as those with
only common stock outstanding. Entities, such as the Company, with capital
structures that are not simple, are required to present basic per-share amounts
and diluted per-share amounts for net income on the face of the income
statement. Net income per common share - basic is computed by dividing net
income by the average number of outstanding common shares. Net income per common
share - diluted is computed by dividing net income by the average number of
outstanding common shares including the dilutive effect of stock options. A
reconciliation of the numerators and denominators of the basic and diluted
per-share computations for net income can be found in Note 7.
STOCK-BASED COMPENSATION
The Company adopted 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 prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations (APB
No. 25) and provide pro forma disclosures (see Note 8) of net
income and earnings 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.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
7
<PAGE> 10
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
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 Company's results of operations or shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1996, the Financial Accounting Standards Board ("FASB") reconsidered
certain provisions of SFAS No. 125 and issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" to defer the
effective date of implementation for transactions related to repurchase
agreements, dollar-roll repurchase agreements, securities lending and similar
transactions until January 1, 1998. Earlier adoption or retroactive application
of this statement with respect to any of its provisions was not permitted.
Management believes that the effect on the Company's consolidated financial
statements of adoption of SFAS No. 125, for those transactions covered under
SFAS No. 127, will not be material.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," were
issued. SFAS No. 130 requires that an enterprise report, by major components and
as a single total, the change in its net assets during the period from nonowner
sources. SFAS No. 131 establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. In
addition, disclosure of comprehensive income is required in the interim
financial statements beginning with the first quarter of 1998.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
8
<PAGE> 11
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
(2) SECURITIES
The amortized cost, gross unrealized gains (losses) and estimated fair value of
debt securities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------- --------------------------------------------
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 $ 4,000 $ 10 $ (8) $ 4,002 $ 8,998 $ 29 $ (53) $ 8,974
Corporate securities 14,401 1 (1) 14,401 -- -- -- --
Mortgage-backed securities 6,262 8 (22) 6,248 366 -- (1) 365
------- ------- ------- ------- ------- ------- ------- -------
Total $24,663 $ 19 $ (31) $24,651 $ 9,364 $ 29 $ (54) $ 9,339
======= ======= ======= ======= ======= ======= ======== =======
HELD TO MATURITY:
U.S. Treasury and
agency securities $ 3,197 $ 5 $ (1) $ 3,201 $ 3,198 $ -- $ (14) $ 3,184
Obligations of states and
political subdivisions 4,661 120 -- 4,781 3,434 54 (4) 3,484
Mortgage-backed securities 71 4 -- 75 72 3 -- 75
------- ------- ------- ------- ------- ------- ------- -------
Total $ 7,929 $ 129 $ (1) $ 8,057 $ 6,704 $ 57 $ (18) $ 6,743
======= ======= ======= ======= ======= ======= ======== =======
</TABLE>
Securities with a carrying amount of $11,074,000 and $5,000,000 at December 31,
1997 and 1996, 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 and estimated fair value of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities may 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
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and
agency securities $ -- $ 2,000 $ 2,000 $ -- $ 4,000
Corporate securities 14,401 -- -- -- 14,401
Mortgage-backed securities -- 1,969 3,347 946 6,262
------- ------- ------- ------- -------
Total amortized cost $14,401 $ 3,969 $ 5,347 $ 946 $24,663
Estimated fair value $14,401 $ 3,960 $ 5,351 $ 939 $24,651
------- ------- ------- ------- -------
HELD TO MATURITY:
U.S.Treasury and
agency securities $ 2,200 $ -- $ 997 $ -- $ 3,197
Obligations of states and
political subdivisions 107 1,074 2,072 1,408 4,661
Mortgage-backed securities -- -- -- 71 71
------- ------- ------- ------- -------
Total amortized cost $ 2,307 $ 1,074 $ 3,069 $ 1,479 $ 7,929
Estimated fair value $ 2,309 $ 1,109 $ 3,126 $ 1,513 $ 8,057
------- ------- ------- ------- -------
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
9
<PAGE> 12
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
(2) SECURITIES, CONTINUED
Following is a schedule of gains (losses) realized on sales of securities
available for sale for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands): 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gains $ -- $ -- $ --
Losses (3) (3) (35)
---- ---- ----
Net losses $ (3) $ (3) $(35)
==== ==== ====
</TABLE>
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands): 1997 1996
-------- --------
<S> <C> <C>
Commercial $ 18,980 $ 15,568
Commercial held for sale 721 --
Real Estate:
Construction 7,436 6,813
Mortgage 41,181 41,930
Held for sale 780 2,923
Equity 2,718 2,178
Installment 1,895 1,602
Other 947 903
-------- --------
74,658 71,917
Deferred loan fees (529) (555)
-------- --------
$ 74,129 $ 71,362
======== ========
</TABLE>
Loans on which the accrual of interest had been discontinued amounted to
$440,000 at December 31, 1997 and $208,000 at December 31, 1996. 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 $39,000 and
$33,000 for 1997 and 1996, respectively.
Of the $440,000 in nonaccrual loans at December 31, 1997 and $208,000 at
December 31, 1996, $231,000 and $126,000, respectively, were guaranteed by the
Small Business Administration and were, therefore, not considered impaired.
As of December 31, 1997 and 1996, the Company had approximately $680,000 and
$82,000, respectively, of loans considered to be impaired. Evaluation of the
impaired loans in 1997 applied the collateral method to $209,000 while the
remainder was evaluated using discounted cashflow analysis. This evaluation
required an allowance for loan losses of $164,000 in 1997 related to loans
totaling $635,000. For the remaining 1997 balance of impaired loans, no
allowance for loan losses was required as collateral values equaled or exceeded
the recorded investments in the loans. Evaluation of the impaired loans in 1996
applied the collateral method to the entire balance of $82,000. For all 1996
impaired loans, no allowance for loan losses was required as collateral values
equaled or exceeded the recorded investments in the loans.
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, consisted of
the following at December 31:
<TABLE>
<CAPTION>
(in thousands): 1997 1996
----- -----
<S> <C> <C>
Beginning balance $ 178 $ 66
Advances 31 136
Payments (40) (24)
Directors or officers no longer
associated with the Company (116) --
----- -----
Ending balance $ 53 $ 178
===== =====
</TABLE>
At December 31, 1997, these loans were revolving lines of credit, with credit
limits in the aggregate amount of $99,000. 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. Additionally, at December 31, 1997
and 1996, there were no loans related to these parties which were nonperforming.
Following is a schedule of the activity in the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>
(in thousands): 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $ 971 $ 982 $ 756
Loans charged off (31) (35) (27)
Recoveries on loans
charged off 8 24 408
------- ------- -------
Net (chargeoffs) recoveries (23) (11) 381
Provision (benefit) charged
(credited) to expense 52 -- (155)
------- ------- -------
Balance, end of year $ 1,000 $ 971 $ 982
======= ======= =======
</TABLE>
In certain circumstances, the Company sells a portion of its SBA loans with
servicing retained. The amount of SBA loans serviced for others at December 31,
1997 and 1996 was approximately $14,797,000 and $16,237,000, respectively.
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of:
<TABLE>
<CAPTION>
(in thousands): 1997 1996
------- -------
<S> <C> <C>
Land $ 354 $ 354
Premises 1,164 1,106
Furniture and equipment 2,135 2,032
Leasehold improvements 1,318 1,248
------- -------
4,971 4,740
------- -------
Less accumulated
depreciation and amortization (2,860) (2,576)
------- -------
$ 2,111 $ 2,164
======= =======
</TABLE>
Depreciation and amortization expense totaled $284,000, $285,000 and $277,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
10
<PAGE> 13
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
(4) PREMISES AND EQUIPMENT, CONTINUED
The Company leases certain premises under non-cancelable operating leases.
Future minimum rental payments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Amount
Year (in thousands)
---- --------------
<S> <C>
1998 $252
1999 252
2000 257
2001 243
2002 163
Thereafter 507
</TABLE>
Rent expense was $269,000, $202,000 and $164,000 in 1997, 1996 and 1995,
respectively.
(5) INCOME TAXES
Components of income tax expense for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
(in thousands): 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Taxes currently payable:
Federal $ 471 $ 470 $ 456
State 148 184 146
----- ----- -----
Total currently payable 619 654 602
----- ----- -----
Deferred taxes:
Federal (13) 35 (20)
State (18) (9) 18
----- ----- -----
Total deferred taxes (31) 26 (2)
----- ----- -----
Total income tax expense $ 588 $ 680 $ 600
===== ===== =====
</TABLE>
Cumulative deferred income tax assets and liabilities at December 31 were as
follows:
<TABLE>
<CAPTION>
(in thousands): 1997 1996
----- -----
<S> <C> <C>
Deferred tax assets:
State franchise tax $ 43 $ 63
Provision for loan losses 135 112
Nonaccrual interest 7 15
Unrealized loss on securities
available for sale 5 10
Other -- 32
----- -----
Total deferred tax assets 190 232
----- -----
Deferred tax liabilities:
Differences in tax and
book depreciation (148) (178)
Other (27) (65)
----- -----
Total deferred tax liabilities (175) (243)
----- -----
$ 15 $ (11)
===== =====
</TABLE>
The effective tax rate as a percentage of income before income tax expense
differs from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<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 (3.7) (2.9) (2.1)
State franchise taxes, net of
federal income tax benefit 5.2 6.5 7.0
Other (0.8) -- (1.1)
---- ---- ----
Effective tax rate 35.7% 38.6% 38.8%
==== ==== ====
</TABLE>
(6) DEPOSITS
The aggregate amount of certificates of deposit of $100,000 or more was
approximately $12,834,000 and $6,020,000 at December 31, 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit of
$100,000 or more are as follows:
<TABLE>
<CAPTION>
Amount
Year (in thousands)
- ---- --------------
<S> <C>
1998 $11,210
1999 1,015
2000 --
2001 109
2002 and thereafter 500
-------
$12,834
=======
</TABLE>
(7) EARNINGS PER SHARE
The following is a reconciliation of numerators and denominators of the basic
and diluted EPS computations.
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------
(Dollars in thousands
except per share amounts): 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EPS COMPUTATION:
Net income available
to shareholders $ 1,062 $ 1,083 $ 945
---------- ---------- ----------
Weighted average
common shares outstanding 1,076,774 1,076,720 1,076,720
---------- ---------- ----------
NET INCOME PER
COMMON SHARE - BASIC $ 0.99 $ 1.01 $ 0.88
========== ========== ==========
DILUTED EPS COMPUTATION:
Net income available
to shareholders $ 1,062 $ 1,083 $ 945
---------- ---------- ----------
Weighted average
common shares outstanding 1,076,774 1,076,720 1,076,720
Dilutive effect of
stock options 180,906 140,515 98,130
---------- ---------- ----------
Weighted average
common shares-diluted 1,257,680 1,217,235 1,174,850
---------- ---------- ----------
NET INCOME PER
COMMON SHARE - DILUTED $ 0.84 $ 0.89 $ 0.80
========== ========== ==========
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
11
<PAGE> 14
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
(8) 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 251,686 shares
were exercisable at a weighted average price of $4.95 at December 31, 1997.
Options for the purchase of 228,571 shares were exercisable at a weighted
average exercise price of $4.96 as of December 31, 1996. Options for the
purchase of 192,373 shares were exercisable at a weighted average price of $5.01
as of December 31, 1995. There were 8,920 shares available for grant as of
December 31, 1997, 1996 and 1995.
The following is a summary of changes in options outstanding:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price
------- -----
<S> <C> <C>
Outstanding at January 1, 1995 298,251 $4.80
Options forfeited (21,000) 4.85
Options exercised (1,735) 5.44
Options granted (fair value $3.45) 18,750 7.88
------- -----
Outstanding at December 31, 1995 and 1996 294,266 4.99
Options exercised (2,000) 4.61
------- -----
Outstanding at December 31, 1997 292,266 $5.00
======= =====
</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): 1997 1996 1995
--------- --------- ---------
Net income:
<S> <C> <C> <C>
As reported $ 1,062 $ 1,083 $ 945
Pro forma 1,049 1,070 932
Net income per common share - basic:
As reported $ 0.99 $ 1.01 $ 0.88
Pro forma 0.97 0.99 0.87
Net income per common share - diluted:
As reported $ 0.84 $ 0.89 $ 0.80
Pro forma 0.83 0.88 $ 0.79
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<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>
292,266 6 $4.25-$7.88 251,686 $4.95
</TABLE>
(9) 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 $54,000 in 1997, $57,000 in 1996 and
$68,000 in 1995.
(10) 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 1997, $41,000 for 1996 and $35,000 for 1995.
(11) OTHER EXPENSES
Components of other 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): 1997 1996 1995
------ ------ ------
Other expenses:
<S> <C> <C> <C>
Data processing $ 317 $ 287 $ 278
Bankcard 243 202 164
Directors' fees and expenses 154 139 145
Professional services 111 226 196
FDIC insurance 10 2 90
Other 671 663 533
------ ------ ------
$1,506 $1,519 $1,406
------ ------ ------
</TABLE>
(12) 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.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
12
<PAGE> 15
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
(13) 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 $29,749,000 and
$14,969,000 at December 31, 1997 and 1996, respectively. Commitments under
standby letters of credit approximated $172,000 and $264,000 at December 31,
1997 and 1996, respectively. Commitments under the Bank's credit card program
approximated $872,000 and $643,000 at December 31, 1997 and 1996, 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 non-performance 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.
(14) 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, 1997, 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 ("FRB").
Due to the Bank's cash balances during 1997, no balances were required to be
maintained at the FRB. The average required reserve balance was approximately
$24,000 during 1996.
Bank dividends are regulated by various government entities, including the
Federal Deposit Insurance Corporation ("FDIC") and the California Department of
Financial Institutions. In addition, California law limits the amount of
dividends the Bank may pay, without prior approval of the California
Commissioner of Financial Institutions, 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, 1997, the Bank has
approximately $2,195,000 available for payment of dividends, which payment would
not require the prior approval of the Commissioner of Financial Institutions
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 Bank's assets, liabilities, and certain off-balance-sheet items
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). Management believes, as of December 31,
1997, that the Company and the Bank met all capital adequacy requirements to
which they are subject.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
13
<PAGE> 16
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
(14) REGULATORY MATTERS, CONTINUED
As of December 31, 1997 and 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the tables. There are no conditions
or events since that notification that Management believes have changed the
Bank's category.
The actual capital amounts and ratios for the Company and the Bank at December
31, 1997 and 1996 are also presented in the following tables:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
COMPANY BANK
-------------------- --------------------
December 31, 1997 (dollars in thousands): AMOUNT RATIO AMOUNT RATIO
--------- ---- --------- ----
<S> <C> <C> <C> <C>
Tier 1 capital (actual) $ 10,069 10.7% $ 10,214 10.9%
Tier 1 capital for adequacy purposes 3,763 4.0 3,758 4.0
Tier 1 capital to be well capitalized under
prompt corrective action provisions N/A N/A $ 5,637 6.0%
Total capital (actual) $ 11,069 11.8% $ 11,214 11.9%
Total capital for adequacy purposes 7,526 8.0 7,516 8.0
Total capital to be well capitalized under
prompt corrective action provisions N/A N/A $ 9,395 10.0%
-------------------- --------------------
Risk-weighted assets $ 94,071 $ 93,947
==================== ====================
</TABLE>
<TABLE>
TIER 1 LEVERAGE RATIOS
COMPANY BANK
---------------------- ----------------------
December 31, 1997 (dollars in thousands): AMOUNT RATIO AMOUNT RATIO
---------------------- ----------------------
<S> <C> <C> <C> <C>
Tier 1 capital (actual) $ 10,069 8.7% $ 10,214 8.8%
Tier 1 capital for adequacy purposes 4,634 4.0 4,629 4.0
Tier 1 capital to be well capitalized under
prompt corrective action provisions N/A N/A $ 5,787 5.0%
---------------------- ----------------------
Average assets(*) $ 115,855 $ 115,730
====================== ======================
</TABLE>
(* Average total assets for the fourth quarter of the year do not include
unrealized gains/losses on securities available for sale or excess servicing.)
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
COMPANY BANK
-------------------- --------------------
December 31, 1996 (dollars in thousands): AMOUNT RATIO AMOUNT RATIO
--------- ---- --------- ----
<S> <C> <C> <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 N/A N/A $ 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 N/A N/A $ 7,623 10.0%
-------------------- --------------------
Risk-weighted assets $ 76,360 $ 76,227
==================== ====================
</TABLE>
<TABLE>
<CAPTION>
TIER 1 LEVERAGE RATIOS
COMPANY BANK
-------------------- --------------------
December 31, 1996 (dollars in thousands): AMOUNT RATIO AMOUNT RATIO
--------- --- ------- ---
<S> <C> <C> <C> <C>
Tier 1 capital (actual) $ 9,433 9.7% $ 9,589 9.9%
Tier 1 capital for adequacy purposes 3,881 4.0 3,875 4.0
Tier 1 capital to be well capitalized under
prompt corrective action provisions N/A N/A $ 4,844 5.0%
-------------------- --------------------
Average assets(*) $ 97,019 $ 96,885
==================== ====================
</TABLE>
(* Average total assets for the fourth quarter of the year do not include
unrealized gains/losses on securities available for sale.)
(15) 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): 1997 1996
------- -------
<S> <C> <C>
ASSETS
Cash $ 38 $ 150
Investment in Bay Bank of Commerce 10,318 9,574
Premises, net 121 131
Other assets 31 2
------- -------
Total assets $10,508 $ 9,857
======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Borrowed funds and other liabilities $ 335 $ 439
Shareholders' equity 10,173 9,418
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,508 $ 9,857
======= =======
</TABLE>
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
Years ended December 31 (in thousands): 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash dividends from
Bay Bank of Commerce $ 365 $ 325 $ 335
Other income 24 24 24
Other expenses (63) (67) (72)
------- ------- -------
Income before equity in
undistributed income of subsidiary 326 282 287
Equity in undistributed income of
subsidiary 736 801 658
------- ------- -------
Net income $ 1,062 $ 1,083 $ 945
======= ======= =======
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
14
<PAGE> 17
Notes to Consolidated Financial Statements
for Years Ended December 31, 1997, 1996 and 1995
(15) PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31 (in thousands): 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income $ 1,062 $ 1,083 $ 945
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of
subsidiary (736) (801) (658)
Depreciation 10 10 9
Change in other assets (29) 30 1
Change in borrowed funds and other
liabilities (105) 101 (7)
------- ------- -------
Net cash provided by operating activities 202 423 290
------- ------- -------
Cash flows from financing activities:
Exercise of stock options 9 -- 9
Repurchase and retirement of
common stock -- -- (42)
Dividends paid (323) (323) (216)
------- ------- -------
Net cash used in financing activities (314) (323) (249)
------- ------- -------
Net change in cash (112) 100 41
Cash at beginning of year 150 50 9
------- ------- -------
Cash at end of year $ 38 $ 150 $ 50
======= ======= =======
Noncash financing activities during the year:
Dividend payable $ 324 $ 323 $ 323
</TABLE>
(16) 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 SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." The estimated fair value amounts have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
The following methods and assumptions were used to estimate the fair value for
financial instruments.
Cash and cash equivalents: The carrying amounts reported in the balance sheets
for cash and cash equivalents are reasonable estimates of fair value.
Securities available for sale and securities held to maturity: Fair values are
based on quoted market prices.
Loans held for sale: As this category includes only fully funded loans partially
guaranteed by 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 loan losses to reflect the estimated loan 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 demand,
savings and interest-bearing demand, is equal to the amount payable on demand
as of December 31, 1997. 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, 1997.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
(in thousands): VALUE FAIR VALUE
-------- --------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,548 $ 7,548
Securities available for sale 24,651 24,651
Securities held to maturity 7,929 8,057
Loans held for sale, net of
allowance for loan losses 1,499 1,594
Loans, net of allowance for
loan losses 72,914 72,829
Financial liabilities:
Deposits 101,135 101,210
Securities sold under
agreements to repurchase 1,290 1,290
</TABLE>
At December 31, 1997, 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 13.
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, 1997.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
15
<PAGE> 18
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
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, 1997 and 1996,
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, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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, 1997 and 1996, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
----------------------------------
San Francisco, California
February 3, 1998
BAY COMMERCIAL SERVICES AND SUBSIDIARY
16
<PAGE> 19
Selected Financial Data
<TABLE>
<CAPTION>
1997 1996
(Dollars in thousands, Compared Compared
except per share amounts): 1997 1996 1995 1994 1993 to 1996 to 1995
---------- ---------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Years ended December 31,
RESULTS OF OPERATIONS:
Interest income $ 8,759 $ 7,826 $ 7,456 $ 6,086 $ 5,520 $ 933 $ 370
Interest income on a
taxable equivalent basis 8,853 7,904 7,505 6,146 5,591 949 399
Interest expense 2,956 2,457 2,310 1,766 1,552 499 147
Net interest income 5,803 5,369 5,146 4,320 3,968 434 223
Net interest income on a
taxable equivalent basis 5,897 5,447 5,195 4,380 4,039 450 252
Provision (benefit) for loan losses 52 -- (155) (100) -- 52 155
Net interest income
after provision (benefit)
for loan losses 5,751 5,369 5,301 4,420 3,968 382 68
Noninterest income 971 1,080 716 1,076 1,178 (109) 364
Noninterest expense 5,072 4,686 4,472 4,518 4,626 386 214
Income tax expense 588 680 600 359 146 (92) 80
Net income 1,062 1,083 945 619 374 (21) 138
---------- ---------- ----------- ----------- ----------- ----------- --------
PER COMMON SHARE:
Net income per common share - basic $ 0.99 $ 1.01 $ 0.88 $ 0.57 $ 0.35 ($ 0.02) $ 0.13
Net income per common share - diluted 0.84 0.89 0.80 0.56 0.35 (0.05) 0.09
Book value (year-end) 9.43 8.75 8.14 7.36 7.07 0.68 0.61
Cash dividends declared 0.30 0.30 0.30 0.20 -- -- --
Weighted average common shares - basic 1,076,774 1,076,720 1,076,720 1,079,985 1,079,985 54 --
Weighted average common shares - diluted 1,257,680 1,217,235 1,174,850 1,105,280 1,080,263 40,445 42,385
---------- ---------- ----------- ----------- ----------- ----------- --------
BALANCE SHEET AT DECEMBER 31:
Assets $ 116,369 $ 96,769 $ 92,819 $ 89,193 $ 81,895 $ 19,600 $ 3,950
Securities held to maturity 7,929 6,704 7,211 14,823 10,943 1,225 (507)
Securities available for sale 24,651 9,339 13,199 11,165 13,478 15,312 (3,860)
Federal funds sold -- -- 6,700 2,530 1,000 -- (6,700)
Total loans 74,129 71,362 58,152 51,566 48,777 2,767 13,210
Deposits 101,135 83,291 80,253 79,258 72,609 17,844 3,038
Funds borrowed, other than deposits 3,790 2,804 2,203 1,036 985 986 601
Shareholders' equity 10,173 9,418 8,767 7,946 7,632 755 651
---------- ---------- ----------- ----------- ----------- ----------- --------
BALANCE SHEET--AVERAGE BALANCES:
Assets $ 107,057 $ 95,063 $ 91,106 $ 86,112 $ 81,613 $ 11,994 $ 3,957
Securities--taxable (1) 18,396 15,234 20,370 21,368 14,647 3,162 (5,136)
Securities--tax exempt (1) 3,874 3,165 2,186 2,113 2,406 709 979
Federal funds sold and
securities purchased
under agreements to resell 5,338 4,870 6,469 3,688 3,987 468 (1,599)
Total loans 70,217 63,008 52,830 49,109 49,319 7,209 10,178
Earning assets (1) 97,432 86,110 81,652 75,425 67,380 11,322 4,458
Deposits 94,237 82,611 80,262 76,690 72,027 11,626 2,349
Funds borrowed, other than deposits 1,894 2,209 1,313 1,021 1,412 (315) 896
Interest-bearing liabilities 68,387 59,696 57,004 55,238 53,509 8,691 2,692
Shareholders' equity 9,920 9,215 8,541 7,846 7,395 705 674
---------- ---------- ----------- ----------- ----------- ----------- --------
</TABLE>
(1) Excluding unrealized gain (loss) on securities available for sale
BAY COMMERCIAL SERVICES AND SUBSIDIARY
17
<PAGE> 20
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.
Certain matters discussed in this Annual Report in Management's Discussion and
Analysis of Financial Condition and Results of Operations are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-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 Bay Commercial Services.
OVERVIEW
Net income of Bay Commercial Services (the "Company") in 1997 was $1,062,000
compared to $1,083,000 in 1996 and $945,000 in 1995. Net income per common share
- - basic was $0.99, $1.01 and $0.88 for 1997, 1996 and 1995, respectively. Net
income per common share - diluted was $0.84, $0.89 and $0.80 for 1997, 1996 and
1995, respectively. The return on average assets was 1.0% in 1997 compared to
1.1% and 1.0% in 1996 and 1995, respectively. The return on average
shareholders' equity was 10.7% in 1997, 11.8% in 1996 and 11.1% in 1995.
Net income for the year declined $21,000 or 2% compared to 1996 as growth in net
interest income was offset by higher branch operating expenses, reduced
noninterest income and the 1997 loan loss provision.
The $434,000 or 8% growth in net interest income for 1997 was the result of
$11,322,000 or 13% growth in average interest earning assets compared to 1996.
With the opening of a regional branch in San Ramon in late 1996, Bay Bank of
Commerce (the "Bank") experienced increased payroll and occupancy expenses
during 1997 which were largely responsible for the $386,000 or 8% increase in
noninterest expenses. Noninterest income declined by $109,000 or 10% primarily
due to reduced gains on sales of other real estate owned ("OREO") and loan sales
compared to 1996. As a result of the increase in outstanding loan balances, a
$52,000 provision for loan losses was made during 1997. No provision was made in
1996.
Net income of the Company of $1,083,000 in 1996 was $138,000 or 15% higher than
in 1995, principally due to a $364,000 or 51% increase in noninterest income and
$223,000 or 4% growth in net interest income. 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 compared to 1995.
As a result of strong deposit growth during the year, total assets increased by
$19,600,000 to $116,369,000 at December 31, 1997, an increase of 20% over
December 31, 1996. Total deposits increased by $17,844,000 or 21% during the
period and included $4,000,000 in time certificates of deposit from the State of
California. The $19,072,000 increase in interest-earning assets included
$16,537,000 in securities and $2,535,000 in earning loans as of December 31,
1997. Net loan growth slowed early in 1997 as loan refinancing accelerated and
the Bank experienced a higher volume of loan payoffs. Loan growth was strong
during the fourth quarter of 1997 with outstanding loans increasing $4,767,000
or 6.9% between September 30 and December 31, 1997.
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 $5,803,000 for 1997 increased $434,000 or 8% compared to
1996. The increase reflected a $11,322,000 or 13% growth in average
interest-earning assets. The net interest margin, the ratio of net interest
income to average interest-earning assets, was 5.96% in 1997 compared to 6.24%
in 1996.
Net interest income of $5,369,000 for 1996 increased $223,000 or 4% compared to
1995. The increase was due to a $4,458,000 or 5% growth in average
interest-earning assets. The net interest margin declined to 6.24% in 1996
compared to 6.30% in 1995.
Interest income, which includes interest and fees generated by interest-earning
assets, totaled $8,759,000 in 1997, a $933,000 or 12% increase over 1996.
Average interest-earnings assets grew $11,322,000 or 13% in 1997 while the yield
earned on those assets declined to 8.99% compared to 9.09% during 1996. The
growth in average interest-earning assets reflected increases of $7,006,000 or
11% in average earning loan balances and $3,848,000 or 21% in average total
securities. The higher level of average earning loan balances in 1997 benefited
from the strong loan growth during the last two quarters of 1996. Loan growth
slowed in 1997 with a year-end total loan balance only $2,767,000 higher than
year end 1996. The reduced yield on earning assets of 8.99% in 1997 compared to
9.09% in 1996 reflected a drop in the yield on average earning loans and in the
proportion of loans in the mix of average interest-earning assets.
Interest income of $7,826,000 in 1996 increased $370,000 or 5% over 1995. The
increase was due to a $4,458,000 or 5% growth in average interest-earning
assets. Growth of $10,191,000 or 19% in average earning loans was partially
funded by a $5,756,000 or 20% reduction in average total investment securities
and overnight funds. The yield on average interest-earning assets was 9.09% in
1996 compared to 9.13% during 1995.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
18
<PAGE> 21
Management's Discussion and Analysis, continued
Interest expense of $2,956,000 in 1997 rose $499,000 or 20% compared to 1996.
The higher interest expense reflected an $8,691,000 or 15% increase in average
interest-bearing liabilities and an increase in the rate paid for those
liabilities to 4.32% in 1997 from 4.12% in 1996. Average time deposits as a
percentage of average interest-bearing liabilities increased to 59% for 1997
from 54% for 1996.
Interest expense of $2,457,000 in 1996 increased $147,000 or 6% compared to
1995. Average interest-bearing liabilities grew $2,692,000 or 5% and the rate
paid for those liabilities rose to 4.12% in 1996 from 4.05% in 1995. Average
time deposits as a percentage of average interest-bearing liabilities increased
to 54% for 1996 from 49% for 1995.
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.
The following table presents the Company's interest rate sensitivity gap
position at December 31, 1997. 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 year to Over 5
(Dollars in thousands): or less to 1 year 5 years years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest rate sensitive assets:
Loans (net of nonaccrual
and deferred fees) $ 52,945 $ 2,209 $ 8,143 $ 10,921 $ 74,218
Securities
(amortized cost) 14,401 2,307 5,043 10,841 32,592
-------- -------- -------- -------- --------
Total 67,346 4,516 13,186 21,762 106,810
-------- -------- -------- -------- --------
Interest rate sensitive liabilities:
Interest-bearing
transaction accounts 21,896 -- -- -- 21,896
Savings deposits 7,307 -- -- -- 7,307
Time deposits of
$100 or more 18,940 3,854 1,525 100 24,419
Other time deposits 11,355 5,373 1,709 -- 18,437
Other borrowed funds 2,740 1,050 -- -- 3,790
-------- -------- -------- -------- --------
Total 62,238 10,277 3,234 100 75,849
-------- -------- -------- -------- --------
Interest rate sensitivity gap 5,108 (5,761) 9,952 21,662 30,961
-------- -------- -------- -------- --------
Cumulative interest rate
sensitivity gap $ 5,108 $ (653) $ 9,299 $ 30,961
======== ======== ======== ========
Cumulative interest rate
sensitivity gap to
total assets 4.4% (0.6%) 8.0% 26.6%
</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, 1997, indicates that the
Company, on a cumulative basis was liability sensitive for the "Over 3 months to
1 year" period and asset sensitive over the remaining 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.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
19
<PAGE> 22
Management's Discussion and Analysis, continued
PROVISION AND ALLOWANCE FOR LOAN LOSSES, CONTINUED
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, 1997, the allowance for loan losses was $1,000,000 compared
to $971,000 at December 31, 1996. The increased allowance reflected a loan loss
provision in 1997 of $52,000 which was partially offset by net loan charge-offs
of $23,000 during the year. The ratio of the allowance for loan losses to total
loans was 1.3% at December 31, 1997, and 1.4% at December 31, 1996. 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, 1997, 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, 1997 and 1996 is
summarized in the following table.
<TABLE>
<CAPTION>
(Dollars in thousands): 1997 1996 $ Change % Change
----- ----- ----- ---
<S> <C> <C> <C> <C>
Net loan charge-offs $ (23) $ (11) $ (12) 109%
Nonperforming loans at December 31:
Nonaccrual loans $ 440 $ 208 $ 232 112%
Accruing loans past due
90 days or more -- 227 (227) (100%)
Restructured loans 471 -- 471 NM
----- ----- ----- ---
Total nonperforming loans $ 911 $ 435 $ 476 109%
----- ----- ----- ---
Ratio of nonperforming loans
to total loans 1.2% 0.6%
Ratio of allowance for loan losses
to nonperforming loans 110% 223%
</TABLE>
NM-not meaningful
Because $231,000 of total nonperforming loans at December 31, 1997 are
guaranteed by the SBA, only $680,000 is considered to be impaired. The
collateral method was used in the evaluation of $209,000 and the remainder was
evaluated using discounted cash flow analysis. These evaluations required the
allocation of $164,000 of the allowance for loan losses.
OTHER REAL ESTATE OWNED
The Bank held no OREO at December 31, 1997 or December 31, 1996. During 1996,
three properties which had been acquired through foreclosure were sold.
NONINTEREST INCOME
Total noninterest income of $971,000 for 1997 declined $109,000 or 10% compared
to 1996. A large portion of the change in noninterest income reflected a 1996
gain on sale of OREO of $119,000 which was not repeated in 1997. A further
reduction resulted from a $117,000 or 67% decrease in gain on sale of loans,
reflecting larger sales in 1996 of loans guaranteed by the Small Business
Administration ("SBA loans"). Partially offsetting the decreases in noninterest
income were increases of $70,000 or 52% in other noninterest income, principally
contributed by larger recoveries during 1997 of prior years' expenses related to
charged-off loans, and $53,000 or 21% in bankcard income resulting from
increased merchant sales volume. Loan servicing income declined slightly in 1997
as serviced loan payoffs more than offset servicing added from loan sales
volume.
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 SBA loans during 1996 than in 1995. Other
noninterest income increased $68,000 or 103% in 1996, principally due to the
recovery of prior years' expenses related to charged-off loans. Other increases
in 1996 included $62,000 or 109% from gain on sale of OREO and $43,000 or 20%
from bankcard income. The increases in noninterest income were partially offset
by a decrease in 1996 of $32,000 or 19% in loan servicing income, principally
reflecting SBA loan payoffs.
NONINTEREST EXPENSE
Total noninterest expenses of $5,072,000 for 1997 increased $386,000 or 8%
compared to 1996. Salaries and employee benefits grew $318,000 or 12%,
principally reflecting a full year's operations of the Bank's San Ramon branch
opened in December 1996. Occupancy expense also reflected new branch operations
and rose $81,000 or 13% in 1997. Bankcard expense increased $41,000 or 20% with
the 1997 increase in merchant bankcard activity. Professional services fees for
1997 dropped $115,000 or 51% compared to 1996, reflecting lower legal and
accounting fees.
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 December 1996 opening of the Bank's San Ramon
branch. Occupancy expense increased $17,000 or 3% principally due to the opening
of the new branch. Factors contributing to the growth in other noninterest
expense included increases of $138,000 or 30% in the category "Other" (which
principally resulted from the 1996 settlement of a litigation matter), $38,000
or 23% in bankcard expense and $30,000 or 15% in professional fees, which were
partially offset by an $88,000 or 98% decrease in assessment fees paid to the
Federal Deposit Insurance Corporation ("FDIC").
BAY COMMERCIAL SERVICES AND SUBSIDIARY
20
<PAGE> 23
Management's Discussion and Analysis, continued
PROVISION FOR INCOME TAXES
The provision for income tax expense was $588,000 in 1997 compared to $680,000
in 1996. The $92,000 or 14% decline reflected the decrease in taxable income as
well as tax benefits of increased interest income from municipal securities and
loans to businesses in areas classified as "enterprise zones" by the State of
California. The effective income tax rates were 35.7%, 38.6% and 38.8% for 1997,
1996, and 1995, respectively. See also Note 5 in "Notes to Consolidated
Financial Statements."
FINANCIAL CONDITION
LOANS AND SECURITIES
Total loans of $74,129,000 at December 31, 1997 increased $2,767,000 or 4% from
December 31, 1996. Total securities increased $16,537,000 or 103%.
DEPOSITS AND OTHER BORROWED FUNDS
Total deposits of $101,135,000 at December 31, 1997 increased $17,844,000 or 21%
compared to December 31, 1996. Nearly 40% of the deposit growth was generated by
the new San Ramon branch. Funds were also provided by a $2,000,000 increase in
federal funds purchased at December 31, 1997. Deposit growth was strongest in
certificates of deposit of $100,000 or more which increased $6,814,000 or 113%,
and included $4,000,000 in deposits from the State of California. Total time
deposits increased $9,013,000 or 27% compared to December 31, 1996. Savings and
interest-bearing demand deposits grew $5,953,000 or 26% and noninterest-bearing
demand deposits increased $2,878,000 or 11% compared to December 31, 1996.
OTHER ASSETS AND OTHER LIABILITIES
Interest and fees receivable of $566,000 at December 31, 1997 declined $19,000
or 3% from December 31, 1996, in part reflecting a lower yield on the loan
portfolio at year end 1997. Other assets of $435,000 at December 31, 1997
declined $206,000 or 32% compared to December 31, 1996, principally due to the
application in 1997 of income tax refunds receivable and receipt of other
accrued receivables. Interest payable and other liabilities of $1,271,000 at
December 31, 1997 were relatively unchanged from December 31, 1996.
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 with maturities of one year or less, securities
available for sale with maturities beyond one year, 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 32% at
December 31, 1997, and 19% at December 31, 1996. The higher liquidity ratio at
December 31, 1997 compared to December 31, 1996 reflects the increase in the
Bank's investment portfolio. 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 $6,000,000 with a correspondent bank and a repurchase
facility, in the amount of $5,000,000 as of December 31, 1997, to meet
unforeseen outflows. As of December 31, 1997, $2,500,000 was outstanding from
these credit facilities. As of December 31, 1997, 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 riskweighted assets,
including both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Federal Reserve Board to those assets. Both
bank holding companies and nonmember banks are required to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of 8%, at least
one-half of which must be in the form of Tier 1 capital.
The Federal Reserve Board and the FDIC also have established a minimum leverage
ratio of 3% of Tier 1 capital to total assets for bank holding companies and
nonmember banks that have received the highest composite regulatory rating and
are not anticipating or experiencing any significant growth. All other
institutions are required to maintain a leverage ratio of at least 100 to 200
basis points above the 3% minimum.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
21
<PAGE> 24
Management's Discussion and Analysis, continued
CAPITAL, CONTINUED
The following tables present the Company's and the Bank's regulatory capital
positions at December 31, 1997:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
Company Bank
(Dollars in thousands): Amount Ratio Amount Ratio
--------- ---- --------- ----
<S> <C> <C> <C> <C>
Tier 1 capital $ 10,069 10.7% $ 10,214 10.9%
Tier 1 capital regulatory minimum requirement 3,763 4.0 3,758 4.0
--------- ---- --------- ----
Capital held in excess of regulatory minimum $ 6,306 6.7% $ 6,456 6.9%
Total capital $ 11,069 11.8% $ 11,214 11.9%
Total capital regulatory minimum requirement 7,526 8.0 7,516 8.0
--------- ---- --------- ----
Capital held in excess of regulatory minimum $ 3,543 3.8% $ 3,698 3.9%
------------------ -------------------
Risk weighted assets $ 94,071 $ 93,947
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIOS
Company Bank
--------------------- ----------------------
(Dollars in thousands): Amount Ratio Amount Ratio
---------- ---- -------- ---
<S> <C> <C> <C> <C>
Tier 1 capital to average total assets $ 10,069 8.7% $ 10,214 8.8%
Range of regulatory minimum leverage 3,476- 3.0- 3,472- 3.0-
requirement 5,793 5.0 5,787 5.0
---------- ---- -------- ---
Range of regulatory excess 4,276- 3.7- 4,427- 3.8-
$ 6,593 5.7% $ 6,742 5.8%
--------------------- ---------------------
Average total assets for fourth quarter(*) $ 115,855 $ 115,730
</TABLE>
(*) Average total assets do not include unrealized gains/losses on securities
available for sale or excess servicing.
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.
YEAR 2000 OR "Y2K" ISSUE
Many computer hardware systems and software programs in use today were developed
using a two digit date code to specify the year. As a result, some of these
systems and programs may not properly recognize the date transition at the year
2000 and may recognize a date using `00' as the year 1900. This could result in
a major system failure or miscalculations. The Company presently believes that
with modifications to the Bank's existing software and/or, if required,
upgrading to new software, the Y2K problem will not pose significant operational
problems for the Company's computer systems as so modified and/or upgraded.
However, if such modifications and conversions are not completed on a timely
basis, the Y2K problem could have a material impact on the operations of the
Bank.
During 1997, the Company performed a comprehensive review of its information
systems and, in connection with that review, has initiated formal communications
with all of its significant vendors and service providers to determine the
extent to which the Company is vulnerable to those third parties' failure to
remediate their own Y2K issues. There can be no guarantee that the systems of
the other companies on which the Company's systems rely will be timely
remediated. Therefore, it is possible that the Company could be negatively
affected to the extent that other entities not affiliated with the Company are
unsuccessful in addressing these issues. The Company is developing contingency
plans wherever possible to limit those potential negative impacts.
The Company plans to utilize both internal and external resources to attempt to
identify, correct or replace, and test systems for Y2K compliance. The Company
anticipates that all corrective action and testing of the key systems will be
completed by December 31, 1998.
Other significant Y2K risks to the Bank include the adequacy of steps taken by
the Bank's borrowers to address the potential impact of the Y2K problem on their
own businesses. The Bank intends to require information from its borrowers as
part of its credit underwriting process to determine whether they will take
appropriate remedial action in time to avoid Y2K problems. However, no assurance
can be given that these actions will be taken on a timely basis, and no
assurance can be given that the Bank's existing borrowers will not suffer Y2K
problems, either of which could have the effect of increasing the Bank's problem
loans and credit losses in future years.
For 1997, the Company did not incur a material increase in expenses related to
the Y2K problem and, during 1998, Y2K related expenses are projected not to
exceed $25,000. However, no assurance can be given that the Company may not be
required to expend additional amounts in connection with the Y2K problem in the
future.
INFLATION
It is Management's opinion that the effects of inflation on the consolidated
financial statements for the periods ended December 31, 1997 and 1996 have not
been material.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
22
<PAGE> 25
THE COMPANY WILL PROVIDE TO ANY SHAREHOLDER, WITHOUT CHARGE, A COPY OF THE
COMPANY'S ANNUAL REPORT FOR 1997 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 Francisco, 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 418 shareholders of record as of March 11, 1998.
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, 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
March 31, 1997 $ 10.00 $ 10.875
June 30, 1997 $ 10.875 $ 12.00
September 30, 1997 $ 12.00 $ 13.125
December 31, 1997 $ 13.25 $ 16.25
</TABLE>
The Company paid cash dividends of $0.30 per share in 1997 and 1996.
MARKET MAKERS
SUTRO & CO., Troy Norlander
Big Bear Lake, CA
(800) 288-2811
HOEFER & ARNETT, Marc Arnett or Lisa Gallo
San Francisco, CA
(800) 346-5544
THE COMPANY
Bay Bank of Commerce is a state chartered, and FDIC insured, commercial bank.
The Bank was incorporated on August 11, 1980, and, after its initial stock
offering, commenced operations on February 13, 1981. To enhance its corporate
flexibility, Bay Commercial Services was formed to serve as a bank holding
company. On May 31, 1983, Bay Bank of Commerce became its wholly owned
subsidiary.
Bay Bank of Commerce serves the banking needs of businesses and professionals in
the East Bay region of the San Francisco Area with three full-service offices.
Headquartered in San Leandro, the Bank opened its Hayward branch in 1992, and a
regional banking office in San Ramon in 1996 to serve the growing business
market on the "I-680" corridor of the East Bay.
Bay Bank of Commerce specializes in commercial and construction lending services
and provides customized credit solutions based on customers' particular needs.
The Bank's construction loan services cover both commercial and residential
building projects. As a "preferred" SBA lender, Bay Bank of Commerce can offer
faster pre-qualification and funding than many of its competitors. Other
business lending services include loans for equipment financing, commercial real
estate, letters of credit, VISA business cards and small business assistance
loans under the State of California "CalCap" program.
For individuals, Bay Bank offers residential construction loans, home equity
lines of credit, overdraft lines, installment loans and VISA Gold cards.
The Bank also provides a full range of business and personal deposit services
include checking, savings, time and money market accounts and ATM/debit cards.
Other business deposit services include cash vault, courier deposit pick-up, and
merchant credit and debit card processing.
Over the years Bay Bank of Commerce 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.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
23
<PAGE> 26
DIRECTORS
<TABLE>
<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,
Bay Business Credit,
Walnut Creek
OFFICERS
EXECUTIVE Rebecca Worthen ADMINISTRATIVE
Assistant Vice President,
Richard M. Kahler Commercial Lending Jane C. Christopherson
President & CEO Vice President &
David A. Weinshelbaum Chief Financial Officer
Randall Greenfield Assistant Vice President,
Senior Vice President & CAO, Commercial Lending Eileen Berry Wortham
Bay Bank of Commerce Marketing Director
Chief Financial Officer, Maria Mabardy
Bay Commercial Services Assistant Vice President, OPERATIONS
Lending
Robert A. Perantoni
Senior Vice President & CONSTRUCTION LENDING Vice President, Operations
Senior Lending Officer Director of Human Resources
Cindy Chase
COMMERCIAL LENDING Vice President, Arlene Dalldorf
Construction Lending Assistant Vice President,
Teresa Jensen Operations Officer
Vice President & SBA Loan John Stevens
Manager Vice President, Kay Tropiano
Construction Lending Operations Officer
Alan Lozito
Vice President, BRANCH ADMINISTRATION & Brenda Fernandez
Commercial Lending BUSINESS DEVELOPMENT Assistant Vice President &
Credit Operations Officer
Michael Maxson Jim Nunn
Vice President, Vice President & Carol Barfuss
Commercial Lending Hayward Branch Manager Assistant Vice President &
Compliance Officer
Sally Porfido Margie Perry
Vice President, Vice President & William Reynolds
Commercial Lending San Ramon Branch Manager Manager of Courier Services &
Security Officer
Earl Rupp Michelle Munson
Vice President, Business Development Officer
Commercial Lending
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
24
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
2-97378, 33-24302 and 33-75330 on Form S-8 of Bay Commercial Services of our
report dated February 3, 1998, appearing in this Annual Report on Form 10-KSB of
Bay Commercial Services for the year ended December 31, 1997.
Deloitte & Touche LLP
San Francisco, California
March 30, 1998
<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 25, 1998
- -----------------------------------
Joshua Fong, O.D.
/s/ William. R. Henson Director March 25, 1998
- -----------------------------------
William R. Henson
/s/ Dimitri V. Koroslev Director March 18, 1998
- -----------------------------------
Dimitri V. Koroslev
/s/ William E. Peluso Director March 18, 1998
- -----------------------------------
William E. Peluso
/s/ Oswald A. Rugaard Director March 18, 1998
- -----------------------------------
Oswald A. Rugaard
/s/ Randall D. Greenfield Chief Financial Officer (Principal March 24, 1998
- ------------------------------------
Randall D. Greenfield Financial Officer and Principal
Accounting Officer) and Secretary
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BAY
COMMERCIAL SERVICES 1997 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,548
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,651
<INVESTMENTS-CARRYING> 32,592
<INVESTMENTS-MARKET> 31,394
<LOANS> 74,129
<ALLOWANCE> 1,000
<TOTAL-ASSETS> 116,369
<DEPOSITS> 101,135
<SHORT-TERM> 1,290
<LIABILITIES-OTHER> 1,271
<LONG-TERM> 0
0
0
<COMMON> 3,671
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 116,369
<INTEREST-LOAN> 7,137
<INTEREST-INVEST> 1,334
<INTEREST-OTHER> 288
<INTEREST-TOTAL> 8,759
<INTEREST-DEPOSIT> 2,860
<INTEREST-EXPENSE> 2,956
<INTEREST-INCOME-NET> 5,803
<LOAN-LOSSES> 52
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 5,072
<INCOME-PRETAX> 1,650
<INCOME-PRE-EXTRAORDINARY> 1,650
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,062
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.84
<YIELD-ACTUAL> 5.96
<LOANS-NON> 440
<LOANS-PAST> 0
<LOANS-TROUBLED> 471
<LOANS-PROBLEM> 911
<ALLOWANCE-OPEN> 971
<CHARGE-OFFS> 31
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,000
<ALLOWANCE-DOMESTIC> 1,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 211
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,945
<INT-BEARING-DEPOSITS> 0
<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> 1,763
<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> 0
<ALLOWANCE-OPEN> 982
<CHARGE-OFFS> 35
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 971
<ALLOWANCE-DOMESTIC> 971
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 385
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,057
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,199
<INVESTMENTS-CARRYING> 20,256
<INVESTMENTS-MARKET> 20,538
<LOANS> 58,152
<ALLOWANCE> 982
<TOTAL-ASSETS> 92,819
<DEPOSITS> 80,253
<SHORT-TERM> 2,203
<LIABILITIES-OTHER> 1,596
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 92,819
<INTEREST-LOAN> 5,764
<INTEREST-INVEST> 1,324
<INTEREST-OTHER> 368
<INTEREST-TOTAL> 7,456
<INTEREST-DEPOSIT> 2,250
<INTEREST-EXPENSE> 2,310
<INTEREST-INCOME-NET> 5,146
<LOAN-LOSSES> (155)
<SECURITIES-GAINS> (35)
<EXPENSE-OTHER> 4,472
<INCOME-PRETAX> 1,545
<INCOME-PRE-EXTRAORDINARY> 1,545
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 945
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 6.30
<LOANS-NON> 0
<LOANS-PAST> 99
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 756
<CHARGE-OFFS> 27
<RECOVERIES> 408
<ALLOWANCE-CLOSE> 982
<ALLOWANCE-DOMESTIC> 982
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 473
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,257
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,538
<INVESTMENTS-CARRYING> 25,163
<INVESTMENTS-MARKET> 25,192
<LOANS> 69,362
<ALLOWANCE> 1,000
<TOTAL-ASSETS> 111,830
<DEPOSITS> 99,106
<SHORT-TERM> 1,732
<LIABILITIES-OTHER> 810
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 111,830
<INTEREST-LOAN> 5,327
<INTEREST-INVEST> 884
<INTEREST-OTHER> 199
<INTEREST-TOTAL> 6,140
<INTEREST-DEPOSIT> 2,060
<INTEREST-EXPENSE> 2,133
<INTEREST-INCOME-NET> 4,277
<LOAN-LOSSES> 52
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,767
<INCOME-PRETAX> 1,237
<INCOME-PRE-EXTRAORDINARY> 1,237
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 780
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.62
<YIELD-ACTUAL> 6.05
<LOANS-NON> 464
<LOANS-PAST> 168
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 971
<CHARGE-OFFS> 25
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,000
<ALLOWANCE-DOMESTIC> 1,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 353
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,295
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,473
<INVESTMENTS-CARRYING> 23,275
<INVESTMENTS-MARKET> 23,273
<LOANS> 71,474
<ALLOWANCE> 1,000
<TOTAL-ASSETS> 106,822
<DEPOSITS> 94,271
<SHORT-TERM> 1,730
<LIABILITIES-OTHER> 895
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 106,822
<INTEREST-LOAN> 3,526
<INTEREST-INVEST> 505
<INTEREST-OTHER> 140
<INTEREST-TOTAL> 4,171
<INTEREST-DEPOSIT> 1,315
<INTEREST-EXPENSE> 1,365
<INTEREST-INCOME-NET> 2,806
<LOAN-LOSSES> 47
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,512
<INCOME-PRETAX> 836
<INCOME-PRE-EXTRAORDINARY> 836
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 525
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 6.16
<LOANS-NON> 359
<LOANS-PAST> 223
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 971
<CHARGE-OFFS> 20
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,000
<ALLOWANCE-DOMESTIC> 1,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 414
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,046
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,171
<INVESTMENTS-CARRYING> 16,016
<INVESTMENTS-MARKET> 15,876
<LOANS> 70,582
<ALLOWANCE> 954
<TOTAL-ASSETS> 101,597
<DEPOSITS> 88,967
<SHORT-TERM> 2,206
<LIABILITIES-OTHER> 868
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 101,597
<INTEREST-LOAN> 1,731
<INTEREST-INVEST> 242
<INTEREST-OTHER> 48
<INTEREST-TOTAL> 2,021
<INTEREST-DEPOSIT> 637
<INTEREST-EXPENSE> 665
<INTEREST-INCOME-NET> 1,356
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,252
<INCOME-PRETAX> 298
<INCOME-PRE-EXTRAORDINARY> 298
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 182
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.15
<YIELD-ACTUAL> 6.13
<LOANS-NON> 384
<LOANS-PAST> 224
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 971
<CHARGE-OFFS> 19
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 954
<ALLOWANCE-DOMESTIC> 954
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 340
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,176
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,346
<INVESTMENTS-CARRYING> 17,950
<INVESTMENTS-MARKET> 17,895
<LOANS> 65,761
<ALLOWANCE> 964
<TOTAL-ASSETS> 99,128
<DEPOSITS> 86,634
<SHORT-TERM> 2,167
<LIABILITIES-OTHER> 820
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 99,128
<INTEREST-LOAN> 4,736
<INTEREST-INVEST> 862
<INTEREST-OTHER> 209
<INTEREST-TOTAL> 5,807
<INTEREST-DEPOSIT> 1,750
<INTEREST-EXPENSE> 1,827
<INTEREST-INCOME-NET> 3,980
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,441
<INCOME-PRETAX> 1,429
<INCOME-PRE-EXTRAORDINARY> 1,429
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 862
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 6.22
<LOANS-NON> 171
<LOANS-PAST> 267
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 982
<CHARGE-OFFS> 33
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 964
<ALLOWANCE-DOMESTIC> 964
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 397
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,077
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,361
<INVESTMENTS-CARRYING> 19,016
<INVESTMENTS-MARKET> 18,945
<LOANS> 64,717
<ALLOWANCE> 968
<TOTAL-ASSETS> 98,557
<DEPOSITS> 86,470
<SHORT-TERM> 2,242
<LIABILITIES-OTHER> 709
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 98,557
<INTEREST-LOAN> 3,095
<INTEREST-INVEST> 585
<INTEREST-OTHER> 115
<INTEREST-TOTAL> 3,795
<INTEREST-DEPOSIT> 1,126
<INTEREST-EXPENSE> 1,177
<INTEREST-INCOME-NET> 2,618
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,299
<INCOME-PRETAX> 811
<INCOME-PRE-EXTRAORDINARY> 811
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 495
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 6.39
<LOANS-NON> 318
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 982
<CHARGE-OFFS> 24
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 968
<ALLOWANCE-DOMESTIC> 968
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 420
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,317
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,916
<INVESTMENTS-CARRYING> 19,545
<INVESTMENTS-MARKET> 19,545
<LOANS> 57,429
<ALLOWANCE> 969
<TOTAL-ASSETS> 93,646
<DEPOSITS> 81,549
<SHORT-TERM> 2,217
<LIABILITIES-OTHER> 945
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 93,646
<INTEREST-LOAN> 1,525
<INTEREST-INVEST> 297
<INTEREST-OTHER> 36
<INTEREST-TOTAL> 1,858
<INTEREST-DEPOSIT> 545
<INTEREST-EXPENSE> 570
<INTEREST-INCOME-NET> 1,288
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,100
<INCOME-PRETAX> 450
<INCOME-PRE-EXTRAORDINARY> 450
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 271
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 6.34
<LOANS-NON> 110
<LOANS-PAST> 449
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 559
<ALLOWANCE-OPEN> 982
<CHARGE-OFFS> 14
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 996
<ALLOWANCE-DOMESTIC> 996
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 470
</TABLE>
