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, 1998
[ ] 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: $ 11,141,000
-------------
State the aggregate market value of the voting and nonvoting common equity
held by nonaffiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of March 10, 1999: $ 12,851,181
------------
State the number of shares of Common Stock outstanding as of March 10, 1999:
1,194,435
- ----------------
<TABLE>
<CAPTION>
Documents Incorporated by Reference: Part of Form 10-KSB
- ----------------------------------- -------------------
<S> <C>
1998 Annual Report to Shareholders for Part II, Items 5, 6 and 7
fiscal year ended December 31, 1998
Proxy Statement for 1999 Annual Meeting of Part III, Items 9, 10, 11
Shareholders to be filed pursuant to and 12
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 ........................................ 30
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ......................... 30
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
ITEM 10 - EXECUTIVE COMPENSATION ...................................... 31
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 31
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 31
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; (6)
changes in securities markets; and (7) the effect of the Year 2000 phenomenon on
the Company and the Bank and their providers, vendors and customers. 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, 1998, the Company had total consolidated assets of $144,202,000.
The Bank accounted for $144,086,000, 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, 1998, the Bank had total assets of $144,086,000, total
loans of $93,129,000 (including loans held for sale) and total deposits of
$123,678,000. 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 is a PLP lender under the Small Business Administration ("SBA")
and has offered SBA loans since 1985. Total SBA loan fundings in 1998 were
$1,157,000.
1
<PAGE> 4
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 loan 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, 1998, the Bank had a
total of 4,522 accounts representing 1,924 noninterest-bearing demand deposit
(checking) accounts with an average balance of approximately $18,000 each; 1,697
savings, interest-bearing demand, and money market accounts with an average
balance of approximately $22,000 each; and 901 time accounts with an average
balance of approximately $58,000 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, 1998, commercial real estate
mortgage loans accounted for 47%, commercial loans accounted for 26%, real
estate construction loans accounted for 17%, real estate equity loans accounted
for 6%, consumer installment and other loans accounted for 3% and SBA loans held
for sale accounted for 1% 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, 1998, the Bank had total loans outstanding of $93,129,000,
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, 1998, the Bank's allowance for loan losses was $980,000 or 1.1% 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, Chase Manhattan Bank, Pacific Coast Bankers Bank,
and the Federal Home Loan Bank of San Francisco. 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 and purchase of federal funds (overnight interbank loans), collateralized
borrowing lines, and obtaining lines for letters of credit. As a net seller of
funds, 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.
2
<PAGE>5
EMPLOYEES
At December 31, 1998, the Company employed forty-five (45) full-time
employees and fifteen (15) 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 1998 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, 1998 and 1997 and an analysis of interest rates and
the interest rate differential.
TABLE B sets forth the changes in interest income and interest expense in
1998 and 1997 resulting from changes in volume and changes in rates.
SECURITIES PORTFOLIO
TABLE C sets forth the carrying value of securities available for sale
(fair value) and of securities held to maturity (amortized cost) at December 31,
1998 and 1997 and the maturities and weighted average yield of securities based
on amortized cost at December 31, 1998.
LOAN PORTFOLIO
TABLE D sets forth the composition of the loan portfolio at December 31,
1998 and 1997.
TABLE E sets forth 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, 1998.
TABLE F shows the composition of nonaccrual, past due and restructured
loans at December 31, 1998 and 1997. 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, 1998 and 1997.
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.
DEPOSITS
TABLE H sets forth the average amount of and the average rate paid on major
deposit categories for the years ended December 31, 1998 and 1997.
3
<PAGE> 6
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, 1998.
RETURN ON EQUITY AND ASSETS
TABLE J sets forth certain financial ratios for the years ended December
31, 1998 and 1997.
4
<PAGE>7
TABLE A
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
-------------------------------------------------------------
The following table sets forth the Company's 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, 1998 and 1997. The average balances are averages of daily
balances.
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
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 $23,750 $1,392 5.86% $ 18,396 $1,131 6.15%
Tax-exempt(l) 5,395 403 7.47 3,874 297 7.67
------- ----- ---- -------- ------ ----
Total securities 29,145 1,795 6.16 22,270 1,428 6.41
Federal funds sold and securities
purchased under repurchase agreements 6,438 355 5.51 5,338 288 5.40
Loans(2)(3) 81,091 8,177 10.08 69,824 7,137 10.22
------- ----- ---- -------- ------ ----
Total interest-earning assets(l) 116,674 10,327 8.85 97,432 8,853 9.09
Less allowance for loan losses (938) (977)
Nonaccrual loans 263 393
Cash and due from banks 7,712 6,963
Premises and equipment 2,022 2,205
Other assets 977 1,072
-------- --------
TOTAL ASSETS $126,710 $107,088
======== ========
Average earning loans/average
earning assets 69.5% 71.7%
===== =====
</TABLE>
5
<PAGE> 8
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
-------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
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>
------- ----- ---- -------- ------ ----
Deposits:
Savings and interest-bearing demand $ 34,876 $1,045 3.00% $ 25,893 $ 708 2.73%
Time 30,027 1,495 4.98 30,626 1,588 5.19
Certificates of deposit, $100
and over 16,185 866 5.35 9,974 564 5.65
Other borrowed funds 1,478 73 4.94 1,894 96 5.07
-------- ----- ---- ------- ------ ----
Total interest-bearing liabilities 82,566 3,479 4.21 68,387 2,956 4.32
Demand deposits 32,374 27,744
Other liabilities 1,000 1,006
Shareholders' equity 10,770 9,951
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $126,710 $107,088
======== ========
Interest income and average yield
on earning assets(1) 10,327 8.85 8,853 9.09
Interest expense and average interest
cost related to earning assets 3,479 2.98 2,956 3.03
------ ----- ------ -----
Net interest income and margin(1)(4) $6,848 5.87% $5,897 6.06%
====== ===== ====== =====
</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 1998 and 1997 in adjusting interest
on tax-exempt investment securities to a fully taxable basis. The amount of the
taxable equivalent adjustment was $127,000 and $94,000 in 1998 and 1997,
respectively.
(2) Loan interest income includes amortization of loan fees of $478,000 in
1998 and $334,000 in 1997.
(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>
Period Ended December 31,
---------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
Increase (decrease) in: Increase (decrease) in:
(in thousands) -------------------------- -----------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Changes in interest income: ------ ----- ------ ------ ----- -----
Securities (amortized cost):
Taxable $ 316 $(55) $ 261 $193 $ (9) $184
Tax-exempt(l) 114 (8) 106 52 1 53
------ ----- ------ ------ ----- -----
Total securities 430 (63) 367 245 (8) 237
Federal funds sold and securities
purchased under repurchase agreements 60 7 67 25 13 38
Loans 1,138 (98) 1,040 717 (43) 674
------ ----- ------ ------ ----- -----
Total(l) 1,628 (154) 1,474 987 (38) 949
------ ----- ------ ------ ----- -----
Changes in interest expense:
Total interest-bearing liabilities:
Savings and interest-bearing demand 264 73 337 22 35 57
Time (31) (62) (93) 176 5 181
Certificates of deposit, $100 and over 334 (32) 302 270 1 271
Other borrowed funds (21) (2) (23) (16) 6 (10)
------ ----- ------ ------ ----- -----
Total 546 (23) 523 452 47 499
------ ----- ------ ------ ----- -----
Changes in net interest income(l) $1,082 $(131) $ 951 $535 $(85) $450
====== ====== ====== ====== ===== ====
- ------------------
(1) Taxable equivalent basis. See Note 1 to TABLE A.
</TABLE>
7
<PAGE> 10
TABLE C
SECURITIES PORTFOLIO
--------------------
The following tables set forth the carrying value of debt securities
available for sale (fair value) and of debt securities held to maturity
(amortized cost) at December 31, 1998 and 1997 and the maturities and weighted
average yield of debt securities based on amortized cost at December 31, 1998.
<TABLE>
<CAPTION>
Estimated
Fair Value
(in thousands) At December 31,
------------------
SECURITIES AVAILABLE FOR SALE 1998 1997
- ----------------------------- ---- ----
<S> <C> <C>
U. S. Treasury and agency securities $ 1,994 $ 4,002
Corporate securities 19,644 14,401
Mortgage-backed securities 10,395 6,248
------ -----
$32,033 $24,651
======= =======
</TABLE>
<TABLE>
<CAPTION>
Amortized cost
(in thousands) At December 31,
-------------------
SECURITIES HELD TO MATURITY 1998 1997
- --------------------------- ------ ------
<S> <C> <C>
U. S. Treasury and agency securities $ --- $3,197
Obligations of states and political subdivisions 6,123 4,661
Mortgage-backed securities 1,386 71
------ ------
$7,509 $7,929
====== ======
</TABLE>
8
<PAGE>11
TABLE C
SECURITIES PORTFOLIO (continued)
--------------------------------
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------------------------------------
After One After Five
In One Year Through Through After
(Dollars in thousands) 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 5.21% --- --- --- --- $2,000 5.21%
Corporate securities $19,651 5.51% -- --- --- --- --- --- 19,651 5.51
Mortgage-backed securities 64 6.24 5,680 5.89 $4,574 6.12% --- --- 10,318 5.99
------- ----- ------ ----- ------ ----- ------ ----- ------- -----
Total amortized cost $19,715 5.51% $7,680 5.71% $4,574 6.12% --- --- $31,969 5.83%
======= ===== ====== ===== ====== ===== ====== ===== ======= =====
Estimated fair value $19,708 $7,693 $4,632 --- --- $32,033
======= ====== ====== ====== ===== =======
HELD TO MATURITY:
Obligations of states and
political subdivisions (1) $519 8.92% $1,307 7.24% $2,208 7.00% $2,089 7.07% $6,123 7.19%
Mortgage-backed securities --- --- 1,386 5.63 --- --- --- --- 1,386 5.63
---- ----- ------ ----- ------ ----- ------ ----- ------- -----
Total amortized cost $519 8.92% $2,693 6.41% $2,208 7.00% $2,089 7.07% $7,509 6.89%
==== ===== ====== ===== ====== ===== ====== ===== ====== =====
Estimated fair value $530 $2,738 $2,306 $2,174 $7,748
==== ====== ====== ====== ======
(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 1998 in adjusting interest on
tax-exempt securities to a fully taxable basis.
</TABLE>
9
<PAGE> 12
TABLE C
SECURITIES PORTFOLIO (continued)
--------------------------------
At December 31, 1998, debt securities from the following issuers each
totaled over ten percent (10%) of shareholders' equity of the Company:
<TABLE>
<CAPTION>
Amortized Fair
(in thousands): Cost Value
--------- ------
<S> <C> <C>
Federal Home Loan Mortgage Corporation $7,199 $7,235
Federal National Mortgage Association $4,504 $4,541
Federal Home Loan Bank $2,000 $1,993
Tyson Foods $1,499 $1,498
Baxter International $1,498 $1,497
Textron Inc. $1,497 $1,497
Zions Bancorp $1,497 $1,496
Praxair $1,496 $1,495
Safeway Inc. $1,495 $1,494
Rite Aid Corporation $1,494 $1,493
Crown Cork and Screw $1,491 $1,491
Comdisco $1,490 $1,490
MCI Worldcom $1,488 $1,488
Fedex FDX Corporation $1,486 $1,486
</TABLE>
TABLE D
LOAN PORTFOLIO
--------------
The composition of the loan portfolio at December 31, 1998 and 1997 is
summarized in the table below.
<TABLE>
<CAPTION>
(in thousands): 1998 1997
------- -------
<S> <C> <C>
Commercial $24,250 $18,980
Commercial held for sale 473 721
Real estate:
Construction 16,049 7,436
Mortgage 43,815 41,181
Equity 5,297 2,718
Held for sale 466 780
Installment 2,299 1,895
Other 979 947
------- -------
93,628 74,658
Deferred loan fees (499) (529)
------- -------
$93,129 $74,129
======= =======
</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, 1998.
<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 $12,965 $ 6,689 $ 4,596 $24,250
Commercial - held for sale --- --- 473 473
Real estate-construction 13,516 2,337 196 16,049
Real estate - mortgage 3,459 9,317 31,039 43,815
Real estate - held for sale --- --- 466 466
Equity --- --- 5,297 5,297
Installment 102 2,135 62 2,299
Other 617 362 --- 979
------- ------- ------- -------
$30,659 $20,840 $42,129 $93,628
======= ======= ======= =======
Sensitivity to Changes in Interest Rates:
Loans with fixed interest rates 1,463 6,905 13,903 22,271
Loans with variable interest rates 65,830 5,527 --- 71,357
------ ------- ------- -------
$67,293 $12,432 $13,903 $93,628
======= ======= ======= =======
</TABLE>
TABLE F
SUMMARY OF NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
------------------------------------------------------
A summary of nonaccrual, past due and restructured loans at December 31,
1998 and 1997 is set forth below:
<TABLE>
<CAPTION>
(in thousands): 1998 1997
---- ----
<S> <C> <C>
Nonaccrual $ 30 $440
Accruing loans past due 90 days or more --- ---
Restructured loans 469 471
--- ---
$499 $911
==== ====
</TABLE>
The Company's consolidated financial statements are prepared on the accrual
basis of accounting, including the recognition of interest income on the loan
portfolio. Interest income from nonaccrual loans is not accrued on the books,
but rather is recorded only when and if received and the principal is deemed to
be collectible.
Loans are placed on a nonaccrual basis and any accrued but unpaid interest
is reversed and charged against income when the payment of interest or principal
is ninety days or more past due, except when the loan is well secured and in the
process of collection. Nonaccrual loans constituted approximately 0.6% of total
gross loans at December 31, 1997 and less than 0.1% at December 31, 1998. 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
11
<PAGE> 14
assesses the loan portfolio monthly to determine which loans are specifically
identifiable problem credits in order to update the Bank's internal watch
list, which tracks all such credits. The Bank's internal Loan Review
Examiner grades all new commercial loans and all credits where the total
liability equals or exceeds certain thresholds established by management.
If either the Senior Loan Officer or the Loan Review Examiner identifies 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, 1998, the Bank had $469,000 in restructured loans.
Interest income on nonaccrual loans that would have been recognized for the
year ended December 31, 1998, if the loans had been current in accordance with
their original terms totaled $2,000. The Company recognized $15,000 in interest
income on nonaccrual loans which paid off or were charged off during the year
ended December 31, 1998.
There are no loans, which were current at December 31, 1998, 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 $11,497,000, or 12% of total loans, at December 31,
1998. 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, 1998,
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, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands): 1998 1997
------ ------
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of year: $1,000 $ 971
Charge-offs:
Commercial 122 5
Real estate - mortgage 48 ---
Installment --- ---
Other 2 26
------ ------
Total loans charged off 172 31
------ ------
Recoveries:
Commercial 6 6
Real estate - mortgage 11 ---
Other 1 2
------ ------
Total recoveries 18 8
------ ------
Net charge-offs (154) (23)
Provision for loan losses 134 52
------ ------
Balance at end of year $ 980 $1,000
====== ======
Loans outstanding at December 31 $93,129 $74,129
======= =======
Average loans outstanding during period $81,354 $70,217
======= =======
Allowance for loan losses as a percentage
of outstanding loan balance 1.1% 1.3%
==== ====
Net charge-offs to average loans outstanding 0.2% ---
==== ====
</TABLE>
The Bank provides for possible loan losses by a charge to operating income
based upon the composition of the loan portfolio, past loan loss experience,
current economic conditions and other factors which, in management's judgment,
deserve recognition in estimating loan losses. Management will charge off loans
when it determines there has been a permanent impairment of the related carrying
values. Management attributes general reserves to different types of loans using
percentages which are based upon perceived risk associated with the portfolio
and underlying collateral, historical loss experience, and vulnerability to
changing economic conditions which may affect the collectibility of the loans.
Specific reserves are allocated for impaired loans, for loans which have
experienced a decline in internal loan grading, and when management believes
additional loss exposure exists. 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.
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 Bank's internal
rating system as "doubtful" or "loss" or those "substandard" loans which have
been placed on nonaccrual. Restructured loans are always classified as impaired.
The Bank applies its normal loan review procedures when determining whether a
loan is impaired. 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
13
<PAGE> 16
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). Specific reserves for impaired
loans are recognized by adjusting the allocation of the existing allowance for
loan losses.
Although the Bank does not specifically allocate its allowance for loan
losses on the basis of type of loan, using these criteria the allocation of the
allowance for loan losses would be as set forth below:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES BY LOAN TYPE
1998 1997
---------------------- ------------------------
Percent of Percent of
Loans Loans
in Each in Each
Category to Category to
(Dollars in thousands): Amount Total Loans Amount Total Loans
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Commercial $439 26% $431 25%
Commercial held for sale 1 1 1 1
Real Estate
Construction 118 17 54 10
Mortgage 291 47 201 55
Held for sale 1 1 1 1
Equity 77 5 14 4
Installment 28 2 23 3
Other 15 1 33 1
Unallocated 10 N/A 242 N/A
---- ----- ------ -----
$980 100% $1,000 100%
==== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
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, 1998 and 1997.
(Dollars in thousands): 1998 1997
--------------- --------------
Balance Rate Balance Rate
-------- ----- ------- -----
<S> <C> <C>
Noninterest-bearing demand deposits $ 32,374 N/A $27,744 N/A
Savings and interest-bearing demand 34,876 3.00% 25,893 2.73%
Time 46,212 5.11% 40,600 5.30%
-------- -------
$113,462 $94,237
======== =======
</TABLE>
14
<PAGE> 17
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,
1998.
<TABLE>
<CAPTION>
Time Certificates Other Time
of Deposit of Deposits of
(in thousands): $100 or More $100 or More
------------ ------------
<S> <C> <C>
Three months or less $15,026 $11,335
Over 3 through 6 months 3,551 =======
Over 6 through 12 months 2,324
Over 12 months 710
-------
$21,611
=======
</TABLE>
TABLE J
RETURN ON EQUITY AND ASSETS
---------------------------
The following table sets forth certain financial ratios for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands): 1998 1997
------ ----
<S> <C> <C>
Net income $1,215 $1,062
Net income to average assets 1.0% 1.0%
Net income to average shareholders' equity 11.3% 10.7%
Dividends declared per share to diluted net income
per share --- 0.36 to 1
Average shareholders' equity to average assets 8.5% 9.3%
</TABLE>
COMPETITION
In California and in the Bank's primary service area, major banks dominate
the commercial banking industry. Among the advantages these banks have over the
Bank are their ability to finance wide-ranging advertising campaigns and to
allocate their investment assets, including loans, to regions of higher yield
and demand. By virtue of their larger amounts of capital, such institutions have
substantially greater lending limits than the Bank and perform certain
functions, including trust services and international banking, which are not
presently offered directly by the Bank but are offered indirectly by the Bank
through correspondent institutions. The Bank also competes for loans and
deposits with savings and loan associations, finance companies, money market
funds, brokerage houses, credit unions, and other nonfinancial institutions.
The Bank's primary service area consists principally of the cities of
Oakland, San Leandro, Hayward and San Ramon and the unincorporated areas of
Castro Valley and San Lorenzo which at June 30, 1998, contained ninety-eight
(98) competing banking offices, which includes the Bank and twenty-five (25)
branch offices of other independent banks. At June 30, 1998, the Bank's primary
service area also contained fifty-five (55) 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
15
<PAGE> 18
commercial banking in general or on the business of the Bank in particular.
See "SUPERVISION AND REGULATION - Recent and
Proposed Legislation".
SUPERVISION AND REGULATION
THE COMPANY
The Company, as a bank holding company, is subject to regulation under the
Bank Holding Company Act of 1956, as amended (the "BHC Act") and is registered
with and subject to the supervision of the Board of Governors of the Federal
Reserve System ("Federal Reserve"). It is the policy of the Federal Reserve that
each bank holding company serve as a source of financial and managerial strength
to its subsidiary banks. The Federal Reserve has the authority to examine the
Company and the Bank.
The BHC Act requires the Company to obtain the prior approval of the
Federal Reserve before acquisition of all or substantially all of the assets of
any bank or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition, the Company would own or control, directly or
indirectly, more than 5% of the voting shares of such bank. However, amendments
to the BHC Act effected by the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Riegle-Neal"), which is discussed further below, expand
the circumstances under which a bank holding company may acquire control of or
all or substantially all of the assets of a bank located outside the State of
California.
The Company may not engage in any business other than managing or
controlling banks or furnishing services to its subsidiaries, with the exception
of certain activities which, in the opinion of the Federal Reserve, are so
closely related to banking or to managing or controlling banks as to be
incidental to banking. The Company is also generally prohibited from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company unless that company is engaged in such activities and unless the
Federal Reserve approves the acquisition.
The Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or provision of services. For example, with certain exceptions, the
Bank may not condition an extension of credit on a customer obtaining other
services provided by it, the Company 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 certain statutory and regulatory provisions
and proposals is not intended to be a complete description of these provisions
or of the many laws and regulations to which the Company and the Bank are
subject, and is qualified in its entirety by reference to the particular
statutory or regulatory provisions discussed.
16
<PAGE> 19
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 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
- --------------------
(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; (iv) term subordinated debt and intermediate-term
preferred stock and related surplus; and (v) 45% of the unrealized gain, net of
taxes, on securities available for sale.
17
<PAGE> 20
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%).
Set forth below are the Company's and the Bank's risk based and leverage
capital ratios as of December 31, 1998:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
Company Bank
------------------ ------------------
(Dollars in thousands): Amount Ratio Amount Ratio
------- ----- ------- -----
<S> <C> <C> <C> <C>
Tier 1 capital $11,277 9.0% $10,837 8.7%
Tier 1 capital regulatory minimum requirement 4,993 4.0 4,988 4.0
------- ----- ------- -----
Capital held in excess of regulatory minimum $ 6,284 5.0% $ 5,849 4.7%
======= ==== ======= ====
Total capital $12,257 9.8% $11,817 9.5%
Total capital regulatory minimum requirement 9,985 8.0 9,976 8.0
------- ----- ------- -----
Capital held in excess of regulatory minimum $ 2,272 1.8% $ 1,841 1.5%
======= ==== ======= ====
Risk-weighted assets $124,814 $124,698
======== =========
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
Company Bank
------------------ -----------------
(Dollars in thousands): Amount Ratio Amount Ratio
------- ----- ------- -----
<S> <C> <C> <C> <C>
Tier 1 capital to average total assets $11,277 8.2% $10,837 7.9%
Range of regulatory minimum leverage 4,144- 3.0- 4,140- 3.0-
requirement 6,906 5.0% 6,901 5.0%
------- ----- ------- -----
Range of regulatory excess 4,371- 3.2- 3,936- 2.9-
$ 7,133 5.2% $ 6,697 4.9%
======= ==== ======== ====
Average total assets for fourth quarter $138,129 $138,013
======== ========
</TABLE>
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 rules and regulations, 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 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.
Further, the banking agencies 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
18
<PAGE> 21
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor that the banking agencies consider in evaluating
an institution's capital adequacy. Bank examiners 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 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.
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, 1998, the Company had no outstanding shares of preferred stock.
The principal sources of cash revenue to the Company have been dividends
received from the Bank. The Bank's ability to make dividend payments to the
Company is subject to state and federal regulatory restrictions.
Dividends payable by the Bank to the Company are restricted under
California law to the lesser of the Bank's retained earnings, or the Bank's net
income for the latest three fiscal years, less dividends previously declared
during that period, or, with the approval of the 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.
19
<PAGE> 22
IMPACT OF FEDERAL AND CALIFORNIA TAX LAWS
The following are the more significant federal and California income tax
provisions affecting commercial banks.
FEDERAL TAX LAWS
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 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.
20
<PAGE> 23
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).
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.
Certain securities are excepted from the mark-to-market rules provided the
taxpayer timely complies with specified identification rules. The principal
exceptions affecting banks are for (1) any security held for investment and (2)
any note, bond, or other evidence of indebtedness acquired or originated in the
ordinary course of business and which is not held for sale. If a taxpayer timely
and properly identifies loans and securities as being excepted from the
mark-to-market rules, these loans and securities will not be subject to these
rules. Generally, a financial institution may make the identification of an
excepted debt obligation in accordance with normal accounting practices, but no
later than 30 days after acquisition.
CALIFORNIA TAX LAWS
A commercial bank is subject to the California franchise tax at a special
bank tax rate based on the general corporate (non financial) rate plus 2%. For
calendar income year 1999, the bank tax rate is 10.84% (which reflects the
general corporate tax rate of 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) 6.65% of AMTI (computed for California purposes) over an
exemption amount and (b) the excess of the bank tax rate over the general
corporation tax rate applied against net income for the taxable year, unless the
bank's regular tax liability is greater.
California permits a bank to compute its deduction for bad debt losses
under either the specific charge-off method or according to the amount of a
reasonable addition to a bad debt reserve.
California has incorporated the federal NOL provisions, subject to
significant modifications for most corporations. First, NOLs arising in income
years beginning before 1987 are disregarded. Second, no carryback is permitted,
and for most corporations NOLs may be carried forward only five years. Third, in
most cases, only 50% of the NOL for any income year may be carried forward.
Fourth, 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.
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, the President's Fiscal Year 2000 Budget proposal contains
several provisions which could have a significant impact on the banking
industry. It is uncertain whether these provisions will be enacted into law and
what impact these provisions will have on the Bank.
21
<PAGE> 24
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 over the
past several years by the Federal Reserve's actions regarding interest rates,
its policies have had a significant effect on the operating results of
commercial banks and are expected to continue to do so in the future. The nature
and timing of any future changes in monetary policies are not predictable.
RECENT AND PROPOSED LEGISLATION
Federal and state laws applicable to financial institutions have undergone
significant changes in recent years. The most significant recent federal
legislative enactments are the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Riegle-Neal") and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA").
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994
In September 1994, President Clinton signed Riegle-Neal, which amends the
BHC Act and the Federal Deposit Insurance Act ("FDIA") to provide for interstate
banking, branching and mergers. Subject to the provisions of certain state laws
and other requirements, 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, 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
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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 have increased the
competitive environment in which the Company and the Bank operate as 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.
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.
- -----------------------------
(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%.
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<PAGE> 26
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) 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 have 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 has 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 does not offer any internet banking services.
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
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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 1998 ranged from
$0.0 to $0.27 per $100 of deposits. The FDIC has stated that the foregoing risk
assessment premiums will be in effect indefinately.
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 has generally reduced 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
During 1997 and several times during 1998, the Federal Financial
Institutions Examination Council ("FFIEC") issued statements and guidance to
financial institutions addressing critical issues for Year 2000 ("Y2K")
readiness. These statements address key phases of the Y2K project management
process and the specific responsibilities of senior management and the board of
directors to address business risks associated with the Y2K problem.
Additionally, in October 1998, the federal banking agencies jointly issued
"Interagency Guidelines Establishing Year 2000 Standards for Safety and
Soundness" (the "Guidelines"). The Guidelines, which are intended to be
consistent with FFIEC pronouncements, establish standards for management and
boards of directors in developing and managing Y2K projects plans, assessing and
testing mission-critical systems for Y2K readiness(8), validating remediation
efforts and planning for contingencies.
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 Y2K compliant well in advance of December 31,
1999. The Guidelines and FFIEC pronouncements describe certain essential steps
that insured depository institutions must take at the awareness, assessment,
renovation, validation, testing and implementation phases of their efforts to
achieve Y2K readiness.
In addition, banks face risks from vendors whose programs are not Y2K
compliant and must begin testing of programming changes no later than December
31, 1998. The computer programs of banks' corporate customers also may pose Y2K
risks. Failure to address Y2K issues could affect a borrower's creditworthiness
and may result
- --------------------------
(8) An application or system is "mission-critical" if it is vital to the
successful continuance of a core business activity. An application also may be
mission-critical if it interfaces with a designated mission-critical system.
Products of software vendors also may be mission-critical.
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from the failure of the customer to properly remediate its own
systems or from Y2K problems that are not addressed by the customer's suppliers
and clients.
Accordingly, the FFIEC and interagency Guidelines require senior management
to provide the board of directors with quarterly or more frequent reports on
efforts to reach Y2K goals both internally and by the institution's major
vendors. Continued monitoring of the Y2K efforts of vendors and customers is
required.
The Guidelines specify that an insured depository institution's initial
review of mission-critical systems for Y2K readiness should provide the basis
for establishing priorities and deadlines and for identifying and allocating
available resources. The development and adoption of a written project plan that
addressees each phase of the planning process also is required.
The banking agencies consider testing to be a critical process in achieving
Y2K readiness. Failure of an insured depository institution to perform adequate
testing of mission-critical systems may mask serious remediation problems, thus
posing a risk to the safe and sound operation of the institution. Failure to
properly identify or correct problems could further threaten the safety and
soundness of the institution.
The Guidelines and the FFIEC's statement on Y2K readiness testing of an
institution's mission-critical systems set forth the following milestones which
should be met by each institution:
June 30, 1998: Institutions should compLete the development of
their written testing strategies and plans.
September 1, 1998 Institutions processing in-house and service
providers should have commenced testing of internal
mission-critical systems, including those programmed
in-house and those purchased from software vendors.
December 31, 1998 Testing of internal mission-critical systems
should be substantially complete. Service providers
should be ready to test with customers.
March 31, 1999 Testing by institutions relying on service
providers for mission-critical systems should be
substantially complete. External testing with
material other third parties (customers, other
financial institutions, business partners, payment
system providers, etc.) should have begun.
June 30, 1999 Testing of mission-critical systems should be
complete and implementation should be substantially
complete.
Additional FFIEC interagency statements cover contingency planning and
steps that can be taken to establish a customer awareness program. At a minimum,
financial institutions must develop remediation contingency plans that (1)
outline the alternatives available if remediation efforts are not successful,
(2) consider the availability of alternative service providers or software
vendors and (3) establish trigger dates for activating the remediation
contingency plan, taking into account the time necessary to convert to alternate
service providers or software vendors.
In appropriate circumstances, a federal banking agency may require an
insured depository institution that fails to comply with the Guidelines to
prepare and submit an acceptable compliance plan. An insured depository
institution that fails to submit an acceptable compliance plan within the time
allowed or fails in any material respect to implement an accepted compliance
plan will be subject to an agency order directing the institution to correct the
deficiency. The Guidelines do not limit the authority of a banking agency to
address unsafe or unsound practices or conditions, violations of law, or other
practices, or to adopt appropriate remedies to achieve compliance with the
Guidelines. Further, remedies provided by Section 39 of the FDIA allow the
banking agencies to move promptly in situations where immediate supervisory
action is essential for safety and soundness reasons. Actions under FDIA Section
39 and the Guidelines may be taken independently of, in conjunction with, or in
addition to, other appropriate enforcement actions.
The FDIC and state banking authorities will continue to review the efforts
of all FDIC-supervised banks to achieve Y2K readiness. An institution's failure
to appropriately address Y2K readiness problems may result in
26
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supervisory actions, including formal and informal enforcement actions,
denials of applications filed pursuant to the FDIA, civil money penalties, and
reductions in the institution's management component or composite ratings.
For a description of the Company's Y2K readiness efforts, see Item 6,
herein.
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 in 1997 and
received a "satisfactory" CRA Assessment Rating.
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 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.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS No. 130"), which establishes standards for the reporting and
display of comprehensive income and its components in financial statements. The
Company has retroactively adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the period
from nonowner sources. The adoption of this Statement resulted in a change in
the financial statement presentation but did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
In applying the "management approach" established by the Statement, management
determined that since all of the commercial banking products and services of the
Bank are available in each branch of the Bank, all branches are located within
the same economic environment and management does not allocate resources based
on the performance of different lending or transaction activities, the financial
disclosures of this statement related to operating performance of reportable
segments does not apply.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. The statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is in the process of
determining the impact of adopting SFAS 133, however, the Company currently does
not have any derivative instruments and is not involved in any hedging
activities.
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.
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The Bank has invested approximately $2,857,000 through December 31, 1998 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 $255,000 in leasehold
improvements and furniture, fixtures and equipment in its extension office
through December 31, 1998.
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.
The Bank purchased the Hayward branch premises in February, 1993 at a total
cost of $700,000. The Bank invested approximately $707,000 in improvements and
furniture, fixtures and equipment in its Hayward branch office through December
31, 1998.
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 $352,000 in leasehold improvements and furniture, fixtures and
equipment in its San Ramon office through December 31, 1998.
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.
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As of March 10, 1999, there were 409 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 17 through
23 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.
ITEM 7 - FINANCIAL STATEMENTS
For consolidated financial statements of the Company, see consolidated
balance sheets at December 31, 1998 and 1997, and consolidated income
statements, consolidated statements of cash flows and consolidated statements of
changes in shareholders' equity for the years ended December 31, 1998, 1997 and
1996, and notes to consolidated financial statements for the years ended
December 31, 1998, 1997 and 1996 and the "Independent Auditors' Report" thereon
at Pages 2 through 15 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 1999 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 1998, the
officers and directors of the Company complied with all applicable filing
requirements, except that
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executive officer Randall D. Greenfield and director Dimitri Koroslev each
failed to file on a timely basis one Report of Changes in Beneficial Ownership
on Form 4 to report one transaction in securities. These transactions were
subsequently reported during 1998.
ITEM 10 - EXECUTIVE COMPENSATION
For information concerning executive compensation, see "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial owners
and Management, see "PRINCIPAL SHAREHOLDERS" and "ELECTION OF DIRECTORS OF THE
COMPANY" in the Proxy Statement, which is incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions,
see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "INDEBTEDNESS OF
MANAGEMENT" in the Proxy Statement, which is incorporated herein by reference.
31
<PAGE> 34
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) FINANCIAL STATEMENTS Reference Page
-------------------- --------------
1998 Annual Report
1. Consolidated Financial Statements:
---------------------------------
<S> <C>
Balance Sheets at December 31, 1998 and 1997 2
Income Statements for the years ended December 31, 1998,
1997 and 1996 3
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 4
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996 5
Notes to Consolidated Financial Statements for the years ended
December 31, 1998, 1997 and 1996 6-15
Independent Auditors' Report 15
2. Financial Statement Schedules:
-----------------------------
</TABLE>
In accordance with Regulation S-X, the financial statement
schedules have been omitted because (a) they are not applicable to or required
of the Company or (b) the information required is included in the consolidated
financial statements or notes thereto.
EXHIBITS
- --------
See Index to Exhibits at pages 34 and 35 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, 1998.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into registrant's Registration Statements on Form
S-8 No. 2-97378, 33-24302 and 33-75330.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against 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.
32
<PAGE>35
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 17, 1999 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>
<CAPTION>
<S> <C>
/s/Richard M. Kahler DATE: March 17, 1999
- ---------------------
Richard M. Kahler,
President and Chief Executive Officer
(Principal Executive Officer) and Director
Randall D. Greenfield* DATE: March 17, 1999
- ----------------------
Randall D. Greenfield,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and
Secretary
Joshua Fong, O.D.* DATE: March 17, 1999
- ------------------
Joshua Fong, O.D.,
Chairman of the Board of Directors and Director
William R. Henson* DATE: March 17, 1999
- ------------------
William R. Henson, Director
Dimitri V. Koroslev* DATE: March 17, 1999
- --------------------
Dimitri V. Koroslev, Director
William E. Peluso* DATE: March 17, 1999
- ------------------
William E. Peluso, Director
Oswald A. Rugaard* DATE: March 17, 1999
- ------------------
Oswald A. Rugaard, Director
Mark A. Wilton* DATE: March 17, 1999
- -----------------
Mark A. Wilton, Director
*By /s/Richard M. Kahler DATE: March 17, 1999
---------------------
(Richard M. Kahler, as Attorney-in-Fact)
</TABLE>
33
<PAGE>36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
2 Not applicable.
3.1 Articles of Incorporation of Company, as amended to date.
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
ss.401(k) Profit Sharing Plan and Bank of California Defined
Contribution Master Plan and Trust Agreement.(8)
10.10 Bay Commercial Services 1994 Stock Option Plan and Form of Stock
Option Agreements.(9)
10.11 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)
10.12 Change in Control Agreement dated November 24, 1998 by and between
the Company and Richard M. Kahler.
34
<PAGE>37
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.13 Change in Control Agreement dated November 30, 1998 by and between
the Company and Randall D. Greenfield.
10.14 Change in Control Agreement dated November 30, 1998 by and between
the Company and Robert A. Perantoni.
11 Not applicable.
13 Bay Commercial Services 1998 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 Financial Data Schedule.
28 Not applicable.
</TABLE>
- --------------------
(1) Filed as Exhibits 3.4, to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, which are
incorporated herein by this reference.
(2) Filed as Exhibit 10.4 to the Company's Registration Statement on
Form S-14 (Registration No. 2-79801), which is incorporated
herein by this reference.
(3) Filed as Exhibit 10.2 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995, which is
incorporated herein by this reference.
(4) Filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1987. which is
incorporated herein by this reference.
(5) Filed as Exhibits 10.10 and 10.12, respectively, to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1987, which are incorporated herein by this reference.
(6) Filed as Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988, which is
incorporated herein by this reference.
(7) Filed as Exhibits 10. 10 and 10.11, respectively, to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990 which are incorporated herein by this
reference.
(8) Filed as Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, which is
incorporated herein by this reference.
35
<PAGE>38
(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.
36
[LOGO]
State of California
Office of the Secretary of State
I, MARCH FONG EU, Secretary of State of the State of California, hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this June 17, 1981.
/s/March Fong Eu
Secretary of State
[SEAL]
<PAGE>
[STAMP: 1079749 ENDORSED FILED in the office of the Secretary of State of the
State of California June 17, 1981, March Fong Eu, Secretary of State, Colleen
R. Peterson, Deputy]
ARTICLES OF INCORPORATION
OF
BAY BANCORPORATION
FIRST
-----
The name of this corporation is:
BAY BANCORPORATION
SECOND
------
The purpose of the corporation is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
THIRD
-----
The name and address of this corporation's initial agent for service of process
is:
Richard M. Kahler
1409 Washington Avenue
San Leandro, CA 94577
FOURTH
------
(a) This corporation is authorized to issue two classes of shares designated
"Preferred Stock" and "Common Stock", respectively. The number of shares of
Preferred Stock authorized to be issued is One Million (1,000,000) and the
number of shares of Common Stock authorized to be issued is Twenty Million
(20,000,000).
(b) The Preferred Stock may be divided into such number of series as the board
of directors may determine. The board of directors is authorized to determine
and alter the rights, preferences, privileges and restrictions granted to and
imposed upon the Preferred Stock or any series thereof with respect to any
wholly unissued class or series of Preferred Stock, and to fix the number of
shares of any series of Preferred Stock and the designation of any such series
of Preferred Stock. The board of directors, within the limits and restrictions
stated in any resolution or resolutions of the board of directors originally
fixing the number of shares constituting any series, may increase or decrease
(but not below the number of shares of such series then outstanding) the number
of shares of any series subsequent to the issue of shares of that series.
<PAGE>
IN WITNESS WHEREOF, for the purpose of forming this corporation under the laws
of the State of California I, the undersigned incorporator, have executed these
Articles of Incorporation this 16th day of June, 1981.
/S/ Steven M. Plevin
--------------------
STEVEN M. PLEVIN
<PAGE>
DECLARATION
I declare that I am the person who executed the foregoing Articles of
Incorporation and that said instrument is my act and deed.
Executed at San Francisco, California, this 16th day of June, 1981.
/S/ Steven M. Plevin
---------------------
STEVEN M. PLEVIN
<PAGE>
[LOGO]
State of California
Office of the Secretary of State
I, MARCH FONG EU, Secretary of State of the State of California, hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this May 10, 1983.
/s/March Fong Eu
Secretary of State
[SEAL]
<PAGE>
[STAMP: ENDORSED FILED in the office of the Secretary of State of the State of
California May 10, 1983, March Fong Eu, Secretary of State, by James E. Harris,
Deputy]
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
BAY BANCORPORATION
Robert L. Swanson certifies that:
1. He is the President and Secretary of Bay Bancorporation, a California
corporation.
2. ARTICLE FIRST of the Articles of Incorporation is amended, in full to read:
The name of this corporation is:
BAY COMMERCIAL SERVICES
3. The amendment herein set forth has been duly approved by the Board of
Directors.
4. The amendment herein set forth has been duly approved by shareholders holding
100% of the outstanding shares. The corporation has only one class of shares and
the number of outstanding shares is 100.
/S/ Robert L. Swanson
---------------------
Robert L. Swanson
President and Secretary
Robert L. Swanson declares under penalty of perjury that he has read the
foregoing certificate and knows the contents thereof and that the same is true
of his own knowledge.
Executed at San Leandro, California on May 5, 1983.
/S/ Robert L. Swanson
-----------------------
Robert L. Swanson
<PAGE>
[LOGO]
State of California
Office of the Secretary of State
Corporation Division
I, MARCH FONG EU, Secretary of State of the State of California, hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this September 20, 1988.
/s/March Fong Eu
Secretary of State
[SEAL]
<PAGE> 46
[STAMP: ENDORSED FILED in the office of the Secretary of State of the State of
California, September 16, 1988, March Fong Eu, Secretary of State]
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
BAY COMMERCIAL SERVICES
Richard M. Kahler and Randall D. Greenfield certify that:
1. They are the duly elected and acting President and Secretary, respectively,
of Bay Commercial Services, a California corporation.
2. ARTICLE FIFTH is added to the Articles of Incorporation to read as follows:
FIFTH
(a) The liability of the directors of the corporation for monetary damages shall
be eliminated to the fullest extent permissible under California law.
(b) The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the Corporations Code) for breach of duty to the
corporation and its shareholders through bylaw provisions, through agreements
with the agents, or otherwise, in excess of the indemnification otherwise
permitted by Section 317 of the Corporations Code, subject to the limits on such
excess indemnification set forth in Section 204 of the Corporations Code."
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of the shareholders in accordance with Section 902
of the California General Corporation Law. The total number of outstanding
shares of the corporation is 1,149,796. The number of shares voting in favor of
amendment equaled or exceeded the vote required, such required vote being a
majority of the outstanding shares.
By: /S/ Richard M. Kahler By: /S/ Randall D. Greenfield
---------------------- -------------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Executed at San Leandro, California on August 30, 1988.
/S/ Richard M. Kahler /S/ Randall D. Greenfield
- --------------------- --------------------------
Richard M. Kahler Randall D. Greenfield
<PAGE>
[STAMP: A371240]
[LOGO]
State of California
Office of the Secretary of State
Corporation Division
I, MARCH FONG EU, Secretary of State of the State of California, hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this June 12, 1989.
/s/March Fong Eu
Secretary of State
[SEAL]
<PAGE>
[STAMP: A371240 ENDORSED FILED in the office of the Secretary of State of the
State of California June 8, 1989, March Fong Eu, Secretary of State]
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
BAY COMMERCIAL SERVICES
Richard M. Kahler and Randall D. Greenfield certify that:
1. They are the duly elected and acting President and secretary, respectively,
of Bay Commercial Services, a California corporation.
2. ARTICLE EIGHTH is added to the Articles of Incorporation to read as follows:
"EIGHTH. Vote Required for Certain Business Combinations.
A. Definitions. For the purposes of this Article EIGHTH:
-----------
1. "Affiliate" shall mean any person who, directly or indirectly
through one or more intermediaries, controls, or is Controlled by, or is under
common control with another person.
2. "Announcement Date" shall mean the date of the first public
announcement of a proposed Business Combination.
3. "Approved by a Majority of Continuing Directors" with respect to
any matter shall mean that such matter has been approved by a majority vote of
the members of the Board of Directors who are not disqualified as
provided in the following sentence. Persons shall be disqualified with respect
to the vote referred to in the preceding sentence if they are not Continuing
Directors.
4. "Associate" shall mean (i) with respect to a corporation or
association, any officer or director thereof or of a subsidiary thereof,
(ii) with respect to a partnership, any general partner thereof or any limited
partner thereof having a 10 percent ownership interest in such partnership,
(iii) with respect to a business trust, any officer or trustee thereof or of any
subsidiary thereof, (iv) with respect to any other trust or an estate, any
trustee, executor or similar fiduciary and any person who has a substantial
interest as a beneficiary of such trust or estate, (v) with respect to a natural
person, the spouses and children thereof and any other relative thereof or of
the spouse thereof who has the same home, and (vi) any Affiliate of any such
person.
5."Beneficial owner" shall mean, as to any shares of voting
Stock, a person:
(a) who beneficially owns, directly or indirectly, such shares;
or
(b) who has (i) the right to acquire such shares from another
person (whether such right is exercisable immediately or
only after the passage of time) pursuant to any agreement,
arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise or (ii) the right to vote or to direct the voting
thereof pursuant to any agreement, arrangement or
understanding. For purposes of this definition, a Person
shall be deemed to own any shares and possess all rights
owned or possessed, directly or indirectly, by all of its
Associates and Affiliates or by any other person with which
such Person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of
Voting Stock.
<PAGE>
6. "Business Combination" shall mean any transaction which is referred
to in any one or more of subparagraphs 1 through 4 of paragraph B of this
Article EIGHTH.
7. "Continuing Director" shall mean any member of the Board of
Directors of this corporation who is neither an Affiliate nor an Associate of,
and not a nominee of, an Interested Shareholder involved in a Business
Combination, or an Affiliate or Associate of such Interested Shareholder; and
who (i) was a member of the Board of Directors prior to the time that such
Interested Shareholder became such, or (ii) is a successor of such a member who
was nominated to succeed such a member by a majority of Continuing Directors
then on the Board.
8. "Determination Date" shall mean the date on which an Interested
Shareholder became such.
9. "Fair Market Value" shall mean: (a) in the case of stock, the
closing sale price on the date in question of a share of such stock on the
National Market System of the National Association of Securities Dealers
Automated Quotation System or any system then in use on any national securities
exchange or automated quotation system, or if no such quotations are available,
the fair market value on the date in question of a share of such stock as
determined by a majority of the Continuing Directors in good faith; and (b) in
the case of property other than cash or stock, the fair market value of such
property on the date in question as determined by a majority of the Continuing
Directors in good faith.
10. "Interested Shareholder" shall mean any Person (other than this
corporation, any Subsidiary, any employee benefit plan or trust of this
corporation or a Subsidiary or any Person who on April 1, 1989 was a director of
this corporation) who or which on or after April 1, 1989:
(a) is the beneficial owner, directly or indirectly,
of more than 5% of the combined voting power of
the then outstanding Voting Stock, or is an
Affiliate or Associate of such Person; or
(b) acts with any other Person through or as a
partnership (general or limited), syndicate, or
other group for the purpose of acquiring, holding
or disposing of securities of this corporation,
which entity or group is the Beneficial Owner,
directly or indirectly, of 5% of the combined
voting power of the outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to
the beneficial ownership of any shares of Voting
Stock which were at any time within the two-year
period immediately prior to the date in question
beneficially owned by an Interested Shareholder,
unless such assignment or succession shall have
occurred pursuant to a Public Transaction or any
series of transactions involving a Public
Transaction.
Any reference to an Interested Shareholder involved in a Business
Combination shall also refer to any Affiliates or Associates thereof, any
predecessor thereto, and all members of any partnership, syndicate or group
which includes such Interested Shareholder. For purposes of determining whether
a person is an Interested Shareholder, the number of shares of Voting Stock
deemed to be outstanding shall include shares deemed owned through application
of definition 5 above but shall not include any other shares of Voting Stock
which may be issuable pursuant to any agreement, arrangement or understanding,
or upon exercise of conversion rights, warrants or options, or otherwise.
11. "Person" shall mean any individual, firm, trust, partnership,
association, corporation or other entity.
12. "Public Transaction" shall mean any (a) purchase of shares offered
pursuant to an effective registration statement under the Securities Act of 1933
or (b) open market purchase of shares on a national securities exchange or
automated quotation system if, in either such case, the price and other terms of
sale are not negotiated by the purchaser and the seller of the beneficial
interest in the shares.
<PAGE>
13. "Subsidiary" shall mean any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by this corporation;
provided, however, that, for the purposes of the definition of Interested
Shareholder the term "Subsidiary" shall mean only a corporation of which a
majority of each class of equity security is owned, directly or indirectly, by
this corporation.
14. "Voting Stock" shall mean stock of all classes and series of this
corporation entitled to vote generally in the election of directors.
B. TRANSACTIONS REQUIRING 66-2/3% AFFIRMATIVE VOTE. In addition to any
affirmative vote required by law, by these Articles of Incorporation, or
otherwise, and except as otherwise expressly provided in paragraph C of this
Article EIGHTH none of the following transactions shall be consummated unless
such consummation shall have been approved by the affirmative vote of the
holders of at least 66-2/3% of the combined voting power of the then outstanding
shares of Voting Stock voting together as a single class. Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law, in these Articles of Incorporation
or otherwise.
1. Any merger or consolidation of this corporation or any
Subsidiary with (a) an Interested Shareholder or (b) any other
corporation (whether or not itself an Interested Shareholder)
which is, or after such merger or consolidation would be, an
Interested Shareholder or an Affiliate or Associate of an
Interested Shareholder.
2. Any sale, lease, exchange, mortgage, pledge, grant of a
security interest, transfer or other disposition (in one
transaction or a series of transactions) directly or indirectly,
to or with (a) an Interested Shareholder or (b) any other person
(whether or not itself an Interested Shareholder) which is, or
after such transaction would be, an Affiliate or Associate of an
Interested Shareholder of any of the assets of this corporation
(including, without limitation, any voting securities of a
Subsidiary) or any Subsidiary having an aggregate Fair Market
Value of one million dollars or more.
3. The issuance or transfer by this corporation or any Subsidiary
(in one transaction or a series of transactions) of any
securities of this corporation or any Subsidiary, or both, to (a)
an Interested Shareholder or (b) any other person (whether or not
itself an Interested Shareholder) which is, or after such
issuance or transfer would be, an Affiliate or Associate of an
Interested Shareholder, except as part of a stock split or
dividend in which all shareholders of such class are treated
equally, or on the conversion or exchange of securities of this
corporation or a Subsidiary acquired by the Interested
Shareholders in a transaction approved as herein provided.
4. Any reclassification of securities (including any reverse
stock split), or recapitalization of this corporation, or any
merger or consolidation of this corporation with any of its
Subsidiaries or any other transaction (whether or not with or
into or otherwise involving an Interested Shareholder) which has
the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity or convertible securities of this corporation or any
Subsidiary directly or indirectly beneficially owned by (a) an
Interested Shareholder or (b) any other person (whether or not
itself an Interested Shareholder) which is, or after such
reclassification, recapitalization, merger or consolidation or
other transaction would be, an Affiliate or Associate of an
Interested Shareholder; or as a result of which the shareholders
of this corporation would cease to be shareholders of a
corporation incorporated under the laws of the State of
California having, as part of its articles of incorporation,
provisions to the same effect as this Article EIGHTH.
C. EXCEPTIONS TO 66-2/3% AFFIRMATIVE VOTE REQUIREMENT. The requirements of
paragraph B of this Article EIGHTH shall not be applicable to any particular
Business Combination, and such Business combination shall require only such
affirmative vote as is required by law, by any other provision of these Articles
of Incorporation or otherwise, if the Business Combination shall have been
Approved by a Majority of the Continuing Directors, or if a state regulatory
authority having jurisdiction under the circumstances shall have determined
specifically, and not by implication, that the Business Combination is fair to
the holders of the Voting Stock, or if all of the following conditions (other
than those which are, by their terms, inapplicable) shall have been met.
<PAGE>
1. The transaction constituting the Business Combination shall
provide for a consideration per share to be received by all
holders of Common Stock in exchange for all of their shares of
Common Stock, and the aggregate amount of cash and the Fair
Market Value as of the date of the consummation of the Business
Combination of any consideration other than cash to be received
per share by holders of Common Stock in such Business Combination
shall be at least equal to the highest of the following:
(a) The Fair Market Value per share of Common Stock
on the last trading day before the Announcement
Date.
(b) The average of the Fair Market Values of a
share of Common Stock over each trading day in the
90 calendar days immediately prior to the
Announcement Date.
(c) If the Announcement Date of such Business
Combination is within five years of the
Determination Date in respect of the Interested
Shareholder involved in such Business Combination,
the highest per-share price (including any
brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by such Interested
Shareholder to acquire any shares of Common Stock
which are or were at any time within such five year
period Beneficially Owned by such Interested
Shareholder and were acquired by it at any time
within such five year period. The price
determination in accordance with this subparagraph
1 and the following subparagraph 2 of this
paragraph shall be subject to appropriate
adjustment in the event of any recapitalization,
stock dividend, stock split, combination of shares
or similar event.
2. If the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of any
class or series of outstanding Voting Stock other than Common
Stock, the aggregate amount of the cash and the Fair Market Value
as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders
of shares of each such class or series of Voting Stock shall be
determined in the same manner as provided in subparagraph 1
above.
3. The consideration to be received by holders of a particular
class or series of outstanding Voting Stock (including Common
Stock) shall be in cash or in the same form as was previously
paid by the Interested Shareholder involved in such Business
Combination in order to acquire shares of such class or series of
Voting Stock which are beneficially owned by an Interested
Shareholder and, if an Interested Shareholder beneficially owns
shares of any class or series of Voting Stock which were acquired
with varying forms of consideration, the form of consideration
for such class or series of Voting Stock shall be either cash or
the form used to acquire the largest number of shares of such
class or series of Voting Stock beneficially owned by it.
4. After such Interested Shareholder has become such and prior to
the consummation of such Business combination:
(a) Except as Approved by a Majority of the
Continuing Directors, there shall have been no
failure to declare and pay at the regular dates
therefor the full amount of any dividends (whether
or not cumulative) payable on any outstanding class
of stock having a preference over the Common Stock
as to dividends.
(b) There shall have been (i) no reduction in the
annual rate of dividends paid on the Common Stock
(except as necessary to reflect any subdivision of
the Common Stock) other than as Approved by a
Majority of the Continuing Directors and (ii) an
increase in such annual rate of dividends as
necessary to prevent any such reduction in the
event of any reclassification (including any
reverse stock split or combination of shares),
recapitalization, reorganization or any similar
transaction which has the effect of reducing the
number of outstanding shares of the Common Stock,
unless the failure so to increase such annual rate
is Approved by a Majority of the Continuing
Directors.
<PAGE>
5. After the Determination Date such Interested Shareholder shall
not have received the benefit, directly or indirectly (except
proportionately as a shareholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by this corporation,
whether in anticipation of or in connection with such Business
Combination or otherwise.
6. A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (or any subsequent provisions replacing
such Act, rules or regulations) shall, at this corporation's
expense, be mailed to the shareholders of this corporation, no
later than the earlier of (a) 30 days prior to any vote on the
proposed Business Combination or (b) if no vote on such Business
Combination is required, 60 days prior to the consummation of
such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such
Act or subsequent provisions). Such proxy statement shall contain
at the front thereof, in a prominent place, any recommendations
as to the advisability (or inadvisability) of the Business
Combination which have been Approved by a Majority of the
Continuing Directors and furnished in writing, and an opinion of
a reputable investment banking firm as to the fairness (or lack
of fairness) of the terms of such Business Combination, from the
point of view of the holders of Voting Stock other than an
Interested Shareholder if such requirement has been Approved by a
Majority of Continuing Directors, (such investment banking firm
to be Approved by a Majority of the Continuing Directors, to be
furnished with all information it reasonably requests and to be
paid a reasonable fee for its services upon receipt by this
corporation of such opinion).
D. APPROVAL BY A MAJORITY OF THE CONTINUING DIRECTORS. The power and duty to
determine for the purposes of this Article EIGHTH, on the basis of information
known to them after reasonable inquiry, all facts necessary to determine
compliance with this Article EIGHTH, including, without limitation, (1) whether
a Person is an Interested Shareholder, (2) the number of shares of Voting Stock
beneficially owned by any Person, (3) whether a Person is an Affiliate or
Associate of another, (4) whether the requirements of paragraph C of this
Article EIGHTH have been met and (5) such other matters with respect to which a
determination is required under this Article EIGHTH shall be exercised in a
manner Approved by a Majority of Continuing Directors. The good faith
determination with respect to such Approval by a Majority of the Continuing
Directors on such matters shall be conclusive and binding for all purposes of
this Article EIGHTH.
E. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS. Nothing
contained in this Article EIGHTH shall be construed to relieve an Interested
Shareholder of any fiduciary obligation imposed by law.
F. AMENDMENT, REVEAL, ETC. Notwithstanding any other provisions of these
Articles of Incorporation or the Bylaws of this corporation or the fact that a
lesser percentage may be specified by law, these Articles of Incorporation or
the Bylaws of this corporation, the affirmative vote of the holders of at least
66-2/3% of the combined voting power of the then outstanding Voting Stock,
voting together as a single class, shall be required to amend, alter, adopt any
provision inconsistent with or repeal this Article EIGHTH."
3. The foregoing amendment of the Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has
been duly approved by the required vote of the shareholders in
accordance with Section 902 of the California General Corporation
Law. The total number of outstanding shares of the corporation is
1,149,796. The number of shares voting in favor of the amendment
equaled or exceeded the vote required, such required vote being a
66-2/3% vote of the outstanding shares.
By: /S/ Richard M. Kahler By: /S/ Randall D. Greenfield
------------------------- ------------------------
Richard M. Kahler Randall D. Greenfield
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Executed at San Leandro, California on June 6, 1989.
/S/ Richard M. Kahler /S/ Randall D. Greenfield
Richard M. Kahler Randall D. Greenfield
<PAGE>
[STAMP: A376514]
[LOGO]
State of California
Office of the Secretary of State
Corporation Division
I, MARCH FONG EU, Secretary of State of the State of California, hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this October 2, 1989.
/s/March Fong Eu
Secretary of State
[SEAL]
<PAGE>
[STAMP: A376514 ENDORSED FILED in the office of the Secretary of State of the
State of California September 15, 1989, March Fong Eu, Secretary of State]
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
BAY COMMERCIAL SERVICES
Richard M. Kahler and Randall D. Greenfield certify that:
1. They are the duly elected and acting President and Secretary, respectively,
of Bay Commercial Services, a California corporation.
2. ARTICLE NINTH is added to the Articles of Incorporation to read as follows:
"NINTH. Prevention of Greenmail.
A. In addition to any affirmative vote required by law or the Articles of
Incorporation or the Bylaws of this corporation, and except as otherwise
expressly provided in Section B of this Article NINTH, this corporation shall
not engage, directly or indirectly, in any Stock Repurchase (as hereinafter
defined) from an Interested Shareholder (as hereinafter defined) or an Affiliate
(as hereinafter defined) or Associate (as hereinafter defined) of an Interested
Shareholder who has beneficially acquired any shares of Voting Stock (as
hereinafter defined) within a period of less than two years immediately prior to
the date of such proposed Stock Repurchase (or the date of an agreement in
respect thereof) without the affirmative vote of not less than a majority of the
votes entitled to be cast by the holders of all then outstanding shares of
Voting Stock which are beneficially owned by persons other than such Interested
Shareholder, voting together as a single class. Such affirmative vote shall be
required notwithstanding the fact that no vote may be specified, by law or
otherwise.
B. The provisions of Section A of this Article NINTH shall not be applicable to
any particular Stock Repurchase from an Interested Shareholder, and such Stock
Repurchase shall require only such affirmative vote, if any, as is required by
law or by any other provision of the Articles of Incorporation or the Bylaws of
this corporation, if the conditions specified in either of the following
Paragraphs 1 and 2 are met:
1. The Stock Repurchase is made pursuant to a tender offer
or exchange offer for a class of Capital Stock (as
hereinafter defined) made available on the same basis
to all holders of such class of Capital Stock.
2. The Stock Repurchase is made pursuant to an open market
purchase program Approved by a Majority of Continuing
Directors (as hereinafter defined), provided that such
repurchase is effected on the open market and is not
the result of a privately negotiated transaction.
C. For purposes of this Article NINTH:
1. The term "Stock Repurchase" shall mean any repurchase (or any
agreement to repurchase), directly or indirectly, by this
corporation or any Subsidiary of any shares of Capital Stock at a
price greater than the then Fair Market Value of such shares.
2. The term "Capital Stock" shall mean all capital stock of this
corporation authorized to be issued from time to time under
Article FOURTH of the Articles of Incorporation, and the term
"Voting Stock" shall mean all Capital Stock entitled to vote on
all matters submitted to shareholders of this corporation
generally.
3. The term "Approved by a Majority of Continuing Directors" with
respect to any matter shall mean that such matter has been
approved by a majority vote of the members of the Board of
Directors who are not disqualified as provided in the following
sentence. Persons shall be disqualified with respect to the vote
referred to in the preceding sentence if they are not Continuing
Directors.
<PAGE>
4. The term "person" shall mean any individual, firm, corporation or
other entity and shall include any group comprised of any person
and any other person with whom such person or any Affiliate or
Associate of such person has any agreement, arrangement or
understanding, direct or indirect, for the purpose of acquiring,
holding, voting or disposing of Capital Stock.
5. The term "Interested Shareholder" shall mean any person (other
than this corporation or any subsidiary and other than any
profit-sharing, employee stock ownership or other employee
benefit plan of this corporation or any Subsidiary or any trustee
of or fiduciary with respect to any such plan when acting in such
capacity) who (a) is the beneficial owner of Voting Stock
representing five percent (5%) or more of the votes entitled to
be cast by the holders of all then outstanding shares of Voting
Stock; or (b) is an Affiliate or Associate of this corporation
and at any time within the two year period immediately prior to
the date in question was the beneficial owner of Voting Stock
representing five percent (5%) or more of the votes entitled to
be cast by the holders of all then outstanding shares of Voting
Stock.
6. A person shall be a "beneficial owner" of any Capital Stock (a)
which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; (b) which such person
or any of its Affiliates or Associates has, directly or
indirectly, (i) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (ii) the right to vote pursuant to any
agreement, arrangement or understanding; or (c) which are
beneficially owned, directly or indirectly, by any other person
with which such person or any of its Affiliates or Associates has
any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of Capital
Stock. For the purposes of determining whether a person is an
Interested Shareholder pursuant to Paragraph 4 of this Section C,
the number of shares of Capital Stock deemed to be outstanding
shall include shares deemed beneficially owned by such person
through application of Paragraph 5 of this Section C, but shall
not include any other shares of Capital Stock that may be
issuable pursuant to any agreement, arrangement or understanding,
or upon exercise of conversion rights, warrants or options, or
otherwise.
7. The term "Affiliate" shall mean any person who, directly or
indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with another person.
8. The term "Associate" shall mean (i) with respect to a corporation
or association, any officer or director thereof or of a
subsidiary thereof, (ii) with respect to a partnership, any
general partner thereof or any limited partner thereof having a
10 percent ownership interest in such partnership, (iii) with
respect to a business trust, any officer or trustee thereof or of
any subsidiary thereof, (iv) with respect to any other trust or
an estate, any trustee, executor or similar fiduciary and any
person who has a substantial interest as a beneficiary of such
trust or estate, (v) with respect to a natural person, the
spouses and children thereof and any other relative thereof or of
the spouse thereof who has the same home, and (vi) any Affiliate
of any such person.
9. The term "Subsidiary" means any corporation of which a majority
of any class of equity security is beneficially owned by this
corporation; provided, however, that for the purposes of the
definition of Interested Shareholder set forth in Paragraph 4 of
this Section C, the term "Subsidiary" shall mean only a
corporation of which a majority of each class of equity security
is beneficially owned by this corporation.
10. The term "Continuing Director" means any member of the Board of
Directors of this corporation (the "Board"), while such person is
a member of the Board, who is not an Affiliate, Associate or
representative of the Interested Shareholder and was a member of
the Board prior to the time that the Interested Shareholder
became an Interested Shareholder, and any successor of a
Continuing Director, while such successor is a member of the
Board, provided that such successor is not an Affiliate,
Associate, or representative of the Interested Shareholder and is
recommended or elected to succeed the Continuing Director by a
majority of Continuing Directors.
<PAGE>
11. The term "Fair Market Value" shall mean: (a) in the case of
stock, the closing sale price on the date in question of a share
of such stock on the National Market System of the National
Association of Securities Dealers Automated Quotation System or
any system then in use on any national securities exchange or
automated quotation system, or if no such quotations are
available, the fair market value on the date in question of a
share of such stock as determined by a majority of the Continuing
Directors in good faith; and (b) in the case of property other
than cash or stock, the fair market value of such property on the
date in question as determined by a majority of the Continuing
Directors in good faith.
D. The Board of Directors shall have the power and duty to determine for the
purposes of this Article NINTH, on the basis of information known to them after
reasonable inquiry, (a) whether a person is an Interested Shareholder, (b) the
number of shares of Capital Stock or other securities beneficially owned by any
person, (c) whether a person is an Affiliate or Associate of another and (d)
whether the consideration to be paid in any Stock Repurchase has an aggregate
Fair Market Value in excess of the then Fair Market Value of the shares of
Capital Stock being repurchased. Any such determination made in good faith shall
be binding and conclusive on all parties.
E. Nothing contained in this Article NINTH shall be construed to relieve any
Interested Shareholder from any fiduciary obligation imposed by law.
F.Notwithstanding any other provisions of the Articles of Incorporation or the
Bylaws of this corporation (and notwithstanding the fact that a lesser
percentage or separate class vote may be specified by law, the Articles of
Incorporation or the Bylaws of this corporation), the affirmative vote of the
shareholders having not less than a majority of the votes entitled to be cast by
the holders of all then outstanding shares of Voting Stock which are
beneficially owned by persons other than any Interested Shareholder and its
Affiliates and Associates, voting together as a single class, shall be required
to amend or repeal, or adopt any provisions inconsistent with, this Article
NINTH.
3. The foregoing amendment of the Articles of Incorporation has been
duly approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has been
duly approved by the required vote of the shareholders in
accordance with Section 902 of the California General Corporation
Law. The total number of outstanding shares of the corporation is
1,149,796. The number of shares voting in favor of the amendments
equaled or exceeded the vote required, such required vote being a
majority of the outstanding shares.
/S/ Richard M. Kahler /S/ Randall D. Greenfield
------------------------- ----------------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Executed at San Leandro, California on July 12, 1989.
/S/ Richard M. Kahler /S/ Randall D. Greenfield
------------------------- --------------------------
Richard M. Kahler Randall D. Greenfield
<PAGE>
STAMP: A378128 ENDORSED FILED in the office of the Secretary of State of the
State of California October 12, 1989, March Fong Eu, Secretary of State]
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
BAY COMMERCIAL SERVICES
Richard M. Kahler and Randall D. Greenfield certify that:
1. They are the duly elected and acting President and Secretary, respectively,
of Bay Commercial Services, a California corporation.
2. ARTICLE SIXTH is added to the Articles of Incorporation to read as follows:
"SIXTH. Consideration of Nonmonetary-Factors in Certain Transactions. The Board
of Directors of this corporation may, and it is hereby declared a proper
corporate purpose for the Board of Directors, if it deems it advisable, to
oppose any offer, proposal or attempt by any corporation or other business
entity, person or group to (a) make any tender or other offer to acquire any of
this corporation's securities; (b) merge or consolidate this corporation with or
into another entity; (c) purchase or otherwise acquire all or substantially all
of the assets of this corporation; or (d) make any transaction similar in
purpose or effect to any of the above. In considering whether to oppose,
recommend or remain neutral with respect to any of the aforesaid offers,
proposals or plans, the Board of Directors shall evaluate what is in the best
interests of this corporation and its shareholders and shall consider any
pertinent factors which may include but are not limited to any of the following:
(1) Whether the offering price, whether in cash or in securities, is
adequate and acceptable based upon both the current market price
of this corporation's securities and the historical and present
operating results or financial condition of this corporation;
(2) Whether a price more favorable to the shareholders may be
obtained now or in the future from other offerors and whether
this corporation's continued existence as an independent
corporation will affect the future value of this corporation;
(3) The impact the offer would have an the employees, depositors,
clients and customers of this corporation or its subsidiaries and
the communities which they serve;
(4) The present and historical financial position of the offeror, its
reputation in the communities which it serves and the social
and/or economic effect which the reputation and practices of the
offeror or its management and affiliates would have upon the
employees, depositors and customers of this corporation and the
community which this corporation serves;
(5) An analysis of the value of securities (if any) offered in
exchange for this corporation's securities; and
(6) Any anti-trust or other legal or regulatory issues raised by the
offer.
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors.
6. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of the shareholders in accordance with Section 902
of the California General Corporation Law. The total number of outstanding
shares of the corporation is 1,149,796. The number of shares voting in favor of
the amendments equaled or exceeded the vote required, such required vote being a
majority of the outstanding shares
<PAGE>
/S/ Richard M. Kahler /S/ Randall D. Greenfield
------------------------ -----------------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge. Executed at San Leandro, California on September 29, 1989.
/S/ Richard M. Kahler /S/ Randall D. Greenfield
------------------------ -----------------------------
Richard M. Kahler Randall D. Greenfield
<PAGE>
[STAMP: A378129]
[LOGO]
State of California
Office of the Secretary of State
I, MARCH FONG EU, Secretary of State of the State of California, hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this November ___, 1989.
/s/March Fong Eu
Secretary of State
[SEAL]
<PAGE>
[STAMP: A378129 ENDORSED FILED in the office of the Secretary of State of
the State of California October 12, 1989, March Fong Eu, Secretary of State,
Colleen R. Peterson, Deputy]
CERTIFICATE OF AMENDMENT
OF ARTICLES OF INCORPORATION
OF BAY COMMERCIAL SERVICES
Richard M. Kahler and Randall D. Greenfield certify that:
1. They are the duly elected and acting President and Secretary, respectively,
of Bay Commercial Services, a California corporation.
2. ARTICLE SEVENTH is added to the Articles of Incorporation to read as follows:
"SEVENTH. SHAREHOLDER ACTION BY WRITTEN CONSENT. Any action which may be taken
at any annual or special meeting of shareholders of this corporation may be
taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken shall be signed by the holders of outstanding
shares of the corporation having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted, provided that the board
of directors of this corporation, by resolution, shall have previously approved
any such action. Notwithstanding the foregoing, this ARTICLE SEVENTH shall not
apply to any matter which may be approved by action of the shareholders of the
corporation acting alone."
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors.
1. The foregoing amendment of the Articles of Incorporation has
been duly approved by the required vote of the shareholders in
accordance with Section 902 of the California General Corporation
Law. The total number of outstanding shares of the corporation is
1,149,796. The number of shares voting in favor of the amendments
equaled or exceeded the vote required, such required vote being a
majority of the outstanding shares.
/S/ Richard M. Kahler /S/ Randall D. Greenfield
---------------------- ----------------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Executed at San Leandro, California on September 29, 1989.
/S/ Richard M. Kahler /S/ Randall D. Greenfield
----------------------- ---------------------------
Richard M. Kahler Randall D. Greenfield
<PAGE>
[STAMP A404489]
[LOGO]
State of California
Office of the Secretary of State
I, MARCH FONG EU, Secretary of State of the State of California, hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this June 18, 1991.
/s/March Fong Eu
Secretary of State
[SEAL]
<PAGE>
[STAMP: A404489 ENDORSED FILED in the office of the Secretary of State of the
State of California June 7, 1991, March Fong Eu, Secretary of State]
CERTIFICATE OF AMENDMENT
OF ARTICLES OF INCORPORATION
OF BAY COMMERCIAL SERVICES
Richard M. Kahler and Randall D. Greenfield certify that:
1. They are the duly elected and acting President and Secretary, respectively,
of Bay Commercial Services, a California corporation.
2. The following amendment is readopted pursuant to Section 710 of the
California Corporations Code. ARTICLE EIGHTH is added to the Articles of
Incorporation to read as follows:
"EIGHTH. Vote Required for Certain Business Combinations.
-----------------------------------------------
A. DEFINITIONS. For the purposes of this Article EIGHTH:
1. "Affiliate" shall mean any person who, directly or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with another person.
2. "Announcement Date" shall mean the date of the first public announcement of a
proposed Business Combination.
3. "Approved by a Majority of Continuing Directors" with respect to any matter
shall mean that such matter has been approved by a majority vote of the members
of the Board of Directors who are not disqualified as provided in the following
sentence. Persons shall be disqualified with respect to the vote referred to in
the preceding sentence if they are not Continuing Directors.
4. "Associate" shall mean (i) with respect to a corporation or association, any
officer or director thereof or of a subsidiary thereof, (ii) with respect to a
partnership, any general partner thereof or any limited partner thereof having a
10 percent ownership interest in such partnership, (iii) with respect to a
business trust, any officer or trustee thereof or of any subsidiary thereof,
(iv) with respect to any other trust or an estate, any trustee, executor or
similar fiduciary and any person who has a substantial interest as a beneficiary
of such trust or estate, (v) with respect to a natural person the spouses and
children thereof and any other relative thereof or of the spouse thereof who has
the same home, and any Affiliate of any such person.
5. "Beneficial Owner" shall mean, as to any shares of Voting Stock, a person:
(a) who beneficially owns, directly or indirectly, such shares; or
(b) who has (i) the right to acquire such shares from another person
(whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise or (ii) the right to
vote or to direct the voting thereof pursuant to any agreement,
arrangement or understanding. For purposes of this definition, a
Person shall be deemed to own any shares and possess all rights
owned or possessed, directly or indirectly, by all of its
Associates and Affiliates or by any other person with which such
Person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of Voting Stock.
6. "Business Combination" shall mean any transaction which is referred to in any
one or more of subparagraphs 1 through 4 of paragraph B of this Article EIGHTH.
7. "Continuing Director" shall mean any member of the Board of Directors of this
corporation who is neither an Affiliate nor an Associate of, and not a nominee
of, an Interested Shareholder involved in a Business Combination, or an
Affiliate or Associate of such Interested Shareholder; and who (i) was a member
of the Board of Directors prior to the time that such Interested Shareholder
became such, or (ii) is a successor of such a member who was nominated to
succeed such a member by a majority of Continuing Directors then on the Board.
8. "Determination Date" shall mean the date on which an Interested
Shareholder became such.
<PAGE>
9. "Fair Market Value" shall mean: (a) in the case of stock, the closing sale
price on the date in question of a share of such stock on the National Market
System of the National Association of Securities Dealers Automated Quotation
System or any system then in use on any national securities exchange or
automated quotation system, or if no such quotations are available, the fair
market value on the date in question of a share of such stock as determined by a
majority of the Continuing Directors in good faith; and (b) in the case of
property other than cash or stock, the fair market value of such property on the
date in question as determined by a majority of the Continuing Directors in good
faith.
10. "Interested Shareholder" shall mean any Person (other than this
corporation, any Subsidiary, any employee benefit plan or trust of this
corporation or a Subsidiary or any Person who on April 1, 1989 was a director of
this corporation) who or which on or after April 1, 1989:
(a) is the beneficial owner, directly or indirectly, of more than 5%
of the combined voting power of the then outstanding Voting
Stock, or is an Affiliate or Associate of such Person; or
(b) acts with any other Person through or as a partnership (general
or limited), syndicate, or other group for the purpose of
acquiring, holding or disposing of securities of this
corporation, which entity or group is the Beneficial Owner,
directly or indirectly, of 5% of the combined voting power of the
outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to the beneficial
ownership of any shares of Voting Stock which were at any time
within the two-year period immediately prior to the date in
question beneficially owned by an Interested Shareholder, unless
such assignment or succession shall have occurred pursuant to a
Public Transaction or any series of transactions involving a
Public Transaction.
Any reference to an Interested Shareholder involved in a Business Combination
shall also refer to any Affiliates or Associates thereof, any predecessor
thereto, and all members of any partnership, syndicate or group which includes
such Interested Shareholder. For purposes of determining whether a person is an
Interested Shareholder, the number of shares of Voting Stock deemed to be
outstanding shall include shares deemed owned through application of definition
5 above but shall not include any other shares of Voting Stock which may be
issuable pursuant to any agreement, arrangement or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
11. "Person" shall mean any individual, firm, trust, partnership, association,
corporation or other entity.
12. "Public Transaction" shall mean any (a) purchase of shares offered pursuant
to an effective registration statement under the Securities Act of 1933 or (b)
open market purchase of shares on a national securities exchange or automated
quotation system if, in either such case, the price and other terms of sale are
not negotiated by the purchaser and the seller of the beneficial interest in the
shares.
13. "Subsidiary" shall mean any corporation of which a majority of any class of
equity security is owned, directly or indirectly, by this corporation; provided,
however, that, for the purposes of the definition of Interested Shareholder the
term "Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by this corporation.
14. "Voting Stock" shall mean stock of all classes and series of this
corporation entitled to vote generally in the election of directors.
B. TRANSACTIONS REQUIRING 66-2/3% AFFIRMATIVE VOTE. In addition to any
affirmative vote required by law, by these Articles of Incorporation, or
otherwise, and except as otherwise expressly provided in paragraph C of this
Article EIGHTH none of the following transactions shall be consummated unless
such consummation shall have been approved by the affirmative vote of the
holders of at least 66-2/3% of the combined voting power of the then outstanding
shares of Voting Stock voting together as a single class. Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law, in these Articles of Incorporation
or otherwise.
1. Any merger or consolidation of this corporation or any Subsidiary
with (a) an Interested Shareholder or (b) any other corporation
(whether or not itself an Interested Shareholder which is, or
after such merger or consolidation would be, an Interested
Shareholder or an Affiliate or Associate of an Interested
Shareholder.
<PAGE>
2. Any sale, lease, exchange, mortgage, pledge, grant of a security
interest, transfer or other disposition (in one transaction or a
series of transactions) directly or indirectly, to or with (a) an
Interested Shareholder or (b) any other person (whether or not
itself an Interested Shareholder) which is, or after such
transaction would be, an Affiliate or Associate of an Interested
Shareholder of any of the assets of this corporation (including,
without limitation, any voting securities of a Subsidiary) or any
Subsidiary having an aggregate Fair Market Value of one million
dollars or more.
3. The issuance or transfer by this corporation or any Subsidiary
(in one transaction or a series of transactions) of any
securities of this corporation or any Subsidiary, or both, to (a)
an Interested Shareholder or (b) any other person (whether or not
itself an Interested Shareholder) which is, or after such
issuance or transfer would be, an Affiliate or Associate of an
Interested Shareholder, except as part of a stock split or
dividend in which all shareholders of such class are treated
equally, or on the conversion or exchange of securities of this
corporation or a Subsidiary acquired by the Interested
Shareholders in a transaction approved as herein provided.
4. Any reclassification of securities (including any reverse stock
split), or recapitalization of this corporation, or any merger or
consolidation of this corporation with any of its Subsidiaries or
any other transaction (whether or not with or into or otherwise
involving an Interested Shareholder) which has the effect,
directly or indirectly, of increasing the proportionate share of
the outstanding shares of any class of equity or convertible
securities of this corporation or any Subsidiary directly or
indirectly beneficially owned by (a) an Interested Shareholder or
(b) any other person (whether or not itself an Interested
Shareholder) which is, or after such reclassification,
recapitalization, merger or consolidation or other transaction
would be, an Affiliate or Associate of an Interested Shareholder;
or as a result of which the shareholders of this corporation
would cease to be shareholders of a corporation incorporated
under the laws of the State of California having, as part of its
articles of incorporation, provisions to the same effect as this
Article EIGHTH.
C. EXCEPTIONS TO 66-2/3% AFFIRMATIVE VOTE REQUIREMENT. The requirements of
paragraph B of this Article EIGHTH shall not be applicable to any particular
Business Combination, and such Business Combination shall require only such
affirmative vote as is required by law, by any other provision of these Articles
of Incorporation or otherwise, if the Business Combination shall have been
Approved by a Majority of the Continuing Directors, or if a state regulatory
authority having jurisdiction under the circumstances shall have determined
specifically, and not by implication, that the Business Combination is fair to
the holders of the Voting Stock, or if all of the following conditions (other
than those which are, by their terms, inapplicable) shall have been met.
1. The transaction constituting the Business Combination shall provide
for a consideration per share to be received by all holders of Common
Stock in exchange for all of their shares of Common Stock, and the
aggregate amount of cash and the Fair Market Value as of the date of
the consummation of the Business Combination of any consideration
other than cash to be received per share by holders of Common Stock in
such Business Combination shall be at least equal to the highest of
the following:
(a) The Fair Market Value per share of Common Stock on the last
trading day before the Announcement Date.
(b) The average of the Fair Market Values of a share of Common
Stock over each trading day in the 90 calendar days immediately
prior to the Announcement Date.
(c) If the Announcement Date of such Business Combination is
within five years of the Determination Date in respect of the
Interested Shareholder involved in such Business Combination, the
highest per-share price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid by such
Interested Shareholder to acquire any shares of Common Stock
which are or were at any time within such five year period
Beneficially Owned by such Interested Shareholder and were
acquired by it at any time within such five year period. The
price determination in accordance with this subparagraph 1 and
the following subparagraph 2 of this paragraph shall be subject
to appropriate adjustment in the event of any recapitalization,
stock dividend, stock split, combination of shares or similar
event.
<PAGE>
2. If the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of any class or
series of outstanding Voting Stock other than Common Stock, the
aggregate amount of the cash and the Fair Market Value as of the date
of the consummation of the Business Combination of consideration other
than cash to be received per share by holders of shares of each such
class or series of Voting Stock shall be determined in the same manner
as provided in subparagraph 1 above.
3. The consideration to be received by holders of a particular class
or series of outstanding Voting Stock (including Common Stock) shall
be in cash or in the same form as was previously paid by the
Interested Shareholder involved in such Business Combination in order
to acquire shares of such class or series of Voting Stock which are
beneficially owned by an Interested Shareholder and, if an Interested
Shareholder beneficially owns shares of any class or series of Voting
Stock which were acquired with varying forms of consideration, the
form of consideration for such class or series of Voting Stock shall
be either cash or the form used to acquire the largest number of
shares of such class or series of Voting Stock beneficially owned by
it.
4. After such Interested Shareholder has become such and prior to the
consummation of such Business Combination:
(a) Except as Approved by a Majority of the Continuing Directors,
there shall have been no failure to declare and pay at the
regular dates therefor the full amount of any dividends (whether
or not cumulative) payable on any outstanding class of stock
having a preference over the Common Stock as to dividends.
(b) There shall have been (i) no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary to
reflect any subdivision of the Common Stock) other than as
Approved by a Majority of the Continuing Directors and (ii) an
increase in such annual rate of dividends as necessary to prevent
any such reduction in the event of any reclassification
(including any reverse stock split or combination of shares),
recapitalization, reorganization or any similar transaction which
has the effect of reducing the number of outstanding shares of
the Common Stock, unless the failure so to increase such annual
rate is Approved by a Majority of the Continuing Directors.
5. After the Determination Date such Interested Shareholder shall not
have received the benefit, directly or indirectly (except
proportionately as a shareholder), of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided by this corporation, whether in anticipation of or
in connection with such Business Combination or otherwise.
6. A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) shall, at this corporation's expense, be mailed to the
shareholders of this corporation, no later than the earlier of (a) 30
days prior to any vote on the proposed Business Combination or (b) if
no vote on such Business Combination is required, 60 days prior to the
consummation of such Business Combination (whether or not such proxy
or information statement is required to be mailed pursuant to such Act
or subsequent provisions). Such proxy statement shall contain at the
front thereof, in a prominent place, any recommendations as to the
advisability (or inadvisability) of the Business Combination which
have been approved by a Majority of the Continuing Directors and
furnished in writing, and an opinion of a reputable investment banking
firm as to the fairness (or lack of fairness) of the terms of such
Business Combination, from the point of view of the holders of Voting
Stock other than an Interested Shareholder if such requirement has
been Approved by a Majority of Continuing Directors, (such investment
banking firm to be Approved by a Majority of the Continuing Directors,
to be furnished with all information it reasonably requests and to be
paid a reasonable fee for its services upon receipt by this
corporation of such opinion).
D. APPROVAL BY A MAJORITY OF THE CONTINUING DIRECTORS. The power and duty to
determine for the purposes of this Article EIGHTH, on the basis of information
known to them after reasonable inquiry, all facts necessary to determine
compliance with this Article EIGHTH, including, without limitation, (1) whether
a Person is an Interested
<PAGE>
Shareholder, (2) the number of shares of Voting Stock beneficially owned by any
Person, (3) whether a Person is an Affiliate or Associate of another, (4)
whether the requirements of paragraph C of this Article EIGHTH have been met and
(5) such other matters with respect to which a determination is required under
this Article EIGHTH shall be exercised in a manner Approved by a Majority of
Continuing Directors. The good faith determination with respect to such Approval
by a Majority of the Continuing Directors on such matters shall be conclusive
and binding for all purposes of this Article EIGHTH.
E. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS. Nothing
contained in this Article EIGHTH shall be construed to relieve an Interested
Shareholder of any fiduciary obligation imposed by law.
F. AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of these
Articles of Incorporation or the Bylaws of this corporation or the fact that a
lesser percentage may be specified by law, these Articles of Incorporation or
the Bylaws of this corporation, the affirmative vote of the holders of at least
66-2/3% of the combined voting power of the then outstanding Voting Stock,
voting together as a single class, shall be required to amend, alter, adopt any
provision inconsistent with or repeal this Article EIGHTH."
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of the shareholders in accordance with
Section 902 of the California General Corporation Law. The total
number of outstanding shares of the corporation is 1,109,985. The
number of shares voting in favor of the amendment equaled or exceeded
the vote required, such required vote being 66-2/3% vote of the
outstanding shares.
/S/ Richard M. Kahler /S/ Randall D. Greenfield
- --------------------------- ------------------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Executed at San Leandro, California on June 5, 1991.
/S/ Richard M. Kahler /S/ Randall D. Greenfield
- --------------------------- ------------------------------
Richard M. Kahler Randall D. Greenfield
<PAGE>
[STAMP: A435443]
[LOGO]
State of California
Office of the Secretary of State
Corporation Division
I, MARCH FONG EU, Secretary of State of the State of California,
hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this August 10, 1993.
/s/March Fong Eu
Secretary of State
[SEAL]
<PAGE>
[STAMP: A435443; ENDORSED FILED in the office of the Secretary of State,
State of California AUG 9 1993, MARCH FONG EU Secretary of State]
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BAY COMMERCIAL SERVICES
Richard M. Kahler and Randall D. Greenfield certify that:
l. They are the duly elected and acting President and Secretary,
respectively, of Bay Commercial Services, a California corporation.
2. The following amendment is readopted pursuant to Section 710 of the
California Corporations Code. ARTICLE EIGHTH is added to the Articles of
Incorporation to read as follows:
"EIGHTH. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS.
A. DEFINITIONS. FOR THE PURPOSES OF THIS ARTICLE EIGHTH:
1. "Affiliate" shall mean any person who, directly or indirectly
through one or more intermediaries, controls, or is controlled
by, or is under common control with another person.
2. "Announcement Date" shall mean the date of the first public
announcement of a proposed Business Combination.
3. "Approved by a Majority of Continuing Directors" with respect to
any matter shall mean that such matter has been approved by a
majority vote of the members of the Board of Directors who are
not disqualified as provided in the following sentence. Persons
shall be disqualified with respect to the vote referred to in the
preceding sentence if they are not Continuing Directors.
4. "Associate" shall mean (i) with respect to a corporation or
association, any officer or director thereof or of a subsidiary
thereof, (ii) with respect to a partnership, any general partner
thereof or any limited partner thereof having a 10 percent
ownership interest in such partnership, (iii) with respect to a
business trust, any officer or trustee thereof or of any
subsidiary thereof, (iv) with respect to any other trust or an
estate, any trustee, executor or similar fiduciary and any person
who has a substantial interest as a beneficiary of such trust or
estate, (v) with respect to a natural person, the spouses and
children thereof and any other relative thereof or of the spouse
thereof who has the same home, and (vi) any Affiliate of any such
person.
5. "Beneficial Owner" shall mean, as to any shares of Voting Stock,
a person:
(a) who beneficially owns, directly or indirectly, such
shares; or
(b) who has (i) the right to acquire such shares from
another person (whether such right is exercisable
immediately or only after the passage of time) pursuant
to any agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange rights,
warrants or options, or otherwise or (ii) the right to
vote or to direct the voting thereof pursuant to any
agreement, arrangement or understanding. For purposes
of this definition, a Person shall be deemed to own any
shares and possess all rights owned or possessed,
directly or indirectly, by all of its Associates and
Affiliates or by any other person with which such
Person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose
of acquiring, holding, voting or disposing of any
shares of Voting Stock.
<PAGE>
6. "Business Combination" shall mean any transaction which is
referred to in any one or more of subparagraphs 1 through 4 of
paragraph B of this Article EIGHTH.
7. "Continuing Director" shall mean any member of the Board of
Directors of this corporation who is neither an Affiliate nor an
Associate of, and not a nominee of, an Interested Shareholder
involved in a Business Combination, or an Affiliate or Associate
of such Interested Shareholder; and who (i) was a member of the
Board of Directors prior to the time that such Interested
Shareholder became such, or (ii) is a successor of such a member
who was nominated to succeed such a member by a majority of
Continuing Directors then on the Board.
8. "Determination Date" shall mean the date on which an Interested
Shareholder became such.
9. "Fair Market Value" shall mean: (a) in the case of stock, the
closing sale price on the date in question of a share of such
stock on the National Market System of the National Association
of Securities Dealers Automated Quotation System or any system
then in use on any national securities exchange or automated
quotation system, or if no such quotations are available, the
fair market value on the date in question of a share of such
stock as determined by a majority of the Continuing Directors in
good faith; and (b) in the case of property other than cash or
stock, the fair market value of such property on the date in
question as determined by a majority of the Continuing Directors
in good faith.
10. "Interested Shareholder" shall mean any Person (other than this
corporation, any Subsidiary, any employee benefit plan or trust
of this corporation or a Subsidiary or any Person who on April 1,
1989 was a director of this corporation) who or which on or after
April 1, 1989:
(a) is the beneficial owner, directly or indirectly, of more
than 5% of the combined voting power of the then outstanding
Voting Stock, or is an Affiliate or Associate of such
Person; or
(b) acts with any other Person through or as a partnership
(general or limited), syndicate, or other group for the
purpose of acquiring, holding or disposing of securities of
this corporation, which entity or group is the Beneficial
Owner, directly or indirectly, of 5% of the combined voting
power of the outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to the
beneficial ownership of any shares of Voting Stock which
were at any time within the two-year period immediately
prior to the date in question beneficially owned by an
Interested Shareholder, unless such assignment or succession
shall have occurred pursuant to a Public Transaction or any
series of transactions involving a Public Transaction.
Any reference to an Interested Shareholder involved in a Business
Combination shall also refer to any Affiliates or Associates thereof,
any predecessor thereto, and all members of any partnership, syndicate
or group which includes such Interested Shareholder. For purposes of
determining whether a person is an Interested Shareholder, the number
of shares of Voting Stock deemed to be outstanding shall include
shares deemed owned through application of definition 5 above but
shall not include any other shares of Voting Stock which may be
issuable pursuant to any agreement, arrangement or understanding, or
upon exercise of conversion rights, warrants or options, or otherwise.
11. "Person" shall mean any individual, firm, trust, partnership,
association, corporation or other entity.
12. "Public Transaction" shall mean any (a) purchase of shares
offered pursuant to an effective registration statement under the
Securities Act of 1933 or (b) open-market purchase of shares on a
national securities exchange or automated quotation system if, in
either such case, the price and other terms of sale are not
negotiated by the purchaser and the seller of the beneficial
interest in the shares.
<PAGE>
13. "Subsidiary" shall mean any corporation of which a majority of
any class of equity security is owned, directly or indirectly, by
this corporation; provided, however, that, for the purposes of
the definition of Interested Shareholder the term "Subsidiary"
shall mean only a corporation of which a majority of each class
of equity security is owned, directly or indirectly, by this
corporation.
14. "Voting Stock" shall mean stock of all classes and series of this
corporation entitled to vote generally in the election of
directors.
B. TRANSACTIONS REQUIRING 66-2/3% AFFIRMATIVE VOTE. In addition to any
affirmative vote required by law, by these Articles of Incorporation, or
otherwise, and except as otherwise expressly provided in paragraph C of this
Article EIGHTH none of the following transactions shall be consummated unless
such consummation shall have been approved by the affirmative vote of the
holders of at least 66-2/3% of the combined voting power of the then outstanding
shares of Voting Stock voting together as a single class. Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law, in these Articles of Incorporation
or otherwise.
1. Any merger or consolidation of this corporation or any Subsidiary
with (a) an Interested Shareholder or (b) any other corporation
(whether or not itself an Interested Shareholder) which is, or
after such merger or consolidation would be, an Interested
Shareholder or an Affiliate or Associate of an Interested
Shareholder.
2. Any sale, lease, exchange, mortgage, pledge, grant of a security
interest, transfer or other disposition (in one transaction or a
series of transactions) directly or indirectly, to or with (a) an
Interested Shareholder or (b) any other person (whether or not
itself an Interested Shareholder) which is, or after such
transaction would be, an Affiliate or Associate of an Interested
Shareholder of any of the assets of this corporation (including,
without limitation, any voting securities of a Subsidiary) or any
Subsidiary having an aggregate Fair Market Value of one million
dollars or more.
3. The issuance or transfer by this corporation or any Subsidiary
(in one transaction or a series of transactions) of any
securities of this corporation or any Subsidiary, or both, to (a)
an Interested Shareholder or (b) any other person (whether or not
itself an Interested Shareholder) which is, or after such
issuance or transfer would be, an Affiliate or Associate of an
Interested Shareholder, except as part of a stock split or
dividend in which all shareholders of such class are treated
equally, or on the conversion or exchange of securities of this
corporation or a Subsidiary acquired by the Interested
Shareholders in a transaction approved as herein provided.
4. Any reclassification of securities (including any reverse stock
split), or recapitalization of this corporation, or any merger or
consolidation of this corporation with any of its Subsidiaries or
any other transaction (whether or not with or into or otherwise
involving an Interested Shareholder) which has the effect,
directly or indirectly, of increasing the proportionate share of
the outstanding shares of any class of equity or convertible
securities of this corporation or any Subsidiary directly or
indirectly beneficially owned by (a) an Interested Shareholder or
(b) any other person (whether or not itself an Interested
Shareholder) which is, or after such reclassification,
recapitalization, merger or consolidation or other transaction
would be, an Affiliate or Associate of an Interested Shareholder;
or as a result of which the shareholders of this corporation
would cease to be shareholders of a corporation incorporated
under the laws of the State of California having, as part of its
articles of incorporation, provisions to the same effect as this
Article EIGHTH.
C. EXCEPTIONS TO 66-2/3% AFFIRMATIVE VOTE REQUIREMENT. The requirements of
paragraph B of this Article EIGHTH shall not be applicable to any particular
Business Combination, and such Business Combination shall require only such
affirmative vote as is required by law, by any other provision of these Articles
of Incorporation or otherwise, if the Business Combination shall have been
Approved by a Majority of the Continuing Directors, or if a state regulatory
authority having jurisdiction under the circumstances shall have determined
specifically, and not by implication, that the Business Combination is fair to
the holders of the Voting Stock, or if all of the following conditions (other
than those which are, by their terms, inapplicable) shall have been met.
<PAGE>
1. The transaction constituting the Business Combination shall
provide for a consideration per share to be received by all
holders of Common Stock in exchange for all of their shares of
Common Stock, and the aggregate amount of cash and the Fair
Market Value as of the date of the consummation of the Business
Combination of any consideration other than cash to be received
per share by holders of Common Stock in such Business Combination
shall be at least equal to the highest of the following:
(a) The Fair Market Value per share of Common Stock on the
last trading day before the Announcement Date.
(b) The average of the Fair Market Values of a share of
Common Stock over each trading day in the 90 calendar days
immediately prior to the Announcement Date.
(c) If the Announcement Date of such Business Combination is
within five years of the Determination Date in respect of
the Interested Shareholder involved in such Business
Combination, the highest per-share price (including any
brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by such Interested Shareholder to
acquire any shares of Common Stock which are or were at any
time within such five year period Beneficially Owned by such
Interested Shareholder and were acquired by it at any time
within such five year period. The price determination in
accordance with this subparagraph 1 and the following
subparagraph 2 of this paragraph shall be subject to
appropriate adjustment in the event of any recapitalization,
stock dividend, stock split, combination of shares or
similar event.
2. If the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of any
class or series of outstanding Voting Stock other than Common
Stock, the aggregate amount of the cash and the Fair Market Value
as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders
of shares of each such class or series of Voting Stock shall be
determined in the same manner as provided in subparagraph 1
above.
3. The consideration to be received by holders of a particular class
or series of outstanding Voting Stock (including Common Stock)
shall be in cash or in the same form as was previously paid by
the Interested Shareholder involved in such Business Combination
in order to acquire shares of such class or series of Voting
Stock which are beneficially owned by an Interested Shareholder
and, if an Interested Shareholder beneficially owns shares of any
class or series of Voting Stock which were acquired with varying
forms of consideration, the form of consideration for such class
or series of Voting Stock shall be either cash or the form used
to acquire the largest number of shares of such class or series
of Voting Stock beneficially owned by it.
4. After such Interested Shareholder has become such and prior to
the consummation of such Business Combination:
(a) Except as Approved by a Majority of the Continuing
Directors, there shall have been no failure to declare and
pay at the regular dates therefor the full amount of any
dividends (whether or not cumulative) payable on any
outstanding class of stock having a preference over the
Common Stock as to dividends.
(b) There shall have been (i) no reduction in the annual
rate of dividends paid on the Common Stock (except as
necessary to reflect any subdivision of the Common Stock)
other than as Approved by a Majority of the Continuing
Directors and (ii) an increase in such annual rate of
dividends as necessary to prevent any such reduction in the
event of any reclassification (including any reverse stock
split or combination of shares), recapitalization,
reorganization or any similar transaction which has the
effect of reducing the number of outstanding shares of the
Common Stock, unless the failure so to increase such annual
rate is Approved by a Majority of the Continuing Directors.
5. After the Determination Date such Interested Shareholder shall
not have received the benefit, directly or indirectly (except
proportionately as a shareholder), of any loans, advances,
guarantees,
<PAGE>
pledges or other financial assistance or any tax
credits or other tax advantages provided by this corporation,
whether in anticipation of or in connection with such Business
Combination or otherwise.
6. A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations
thereunder (or any subsequent provisions replacing such Act,
rules or regulations) shall, at this corporation's expense, be
mailed to the shareholders of this corporation, no later than the
earlier of (a) 30 days prior to any vote on the proposed Business
Combination or (b) if no vote on such Business Combination is
required, 60 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement
is required to be mailed pursuant to such Act or subsequent
provisions). Such proxy statement shall contain at the front
thereof, in a prominent place, any recommendations as to the
advisability (or inadvisability) of the Business Combination
which have been Approved by a Majority of the Continuing
Directors and furnished in writing, and an opinion of a reputable
investment banking firm as to the fairness (or lack of fairness)
of the terms of such Business Combination, from the point of view
of the holders of Voting Stock other than an Interested
Shareholder if such requirement has been Approved by a Majority
of Continuing Directors, (such investment banking firm to be
Approved by a Majority of the Continuing Directors, to be
furnished with all information it reasonably requests and to be
paid a reasonable fee for its services upon receipt by this
corporation of such opinion).
D. APPROVAL BY A MAJORITY OF THE CONTINUING DIRECTORS.
The power and duty to determine for the purposes of this Article EIGHTH, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine compliance with this Article EIGHTH, including, without limitation,
(1) whether a Person is an Interested Shareholder, (2) the number of shares of
Voting Stock beneficially owned by any Person, (3) whether a Person is an
Affiliate or Associate of another, (4) whether the requirements of paragraph C
of this Article EIGHTH have been met and (5) such other matters with respect to
which a determination is required under this Article EIGHTH shall be exercised
in a manner Approved by a Majority of Continuing Directors. The good faith
determination with respect to such Approval by a Majority of the Continuing
Directors on such matters shall be conclusive and binding for all purposes of
this Article EIGHTH.
E. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS. Nothing
contained in this Article EIGHTH shall be construed to relieve an Interested
Shareholder of any fiduciary obligation imposed by law.
F. AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of these
Articles of Incorporation or the Bylaws of this corporation or the fact that a
lesser percentage may be specified by law, these Articles of Incorporation or
the Bylaws of this corporation, the affirmative vote of the holders of at least
66-2/3% of the combined voting power of the then outstanding Voting Stock,
voting together as a single class, shall be required to amend, alter, adopt any
provision inconsistent with or repeal this Article EIGHTH."
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of the shareholders in accordance with Section 902
of the California General Corporation Law. The total number of outstanding
shares of the corporation is 1,079,985. The number of shares voting in favor of
the amendment equaled or exceeded the vote required, such required vote being a
66-2/3% vote of the outstanding shares.
By: /s/Richard M. Kahler By: /s/ Randall D. Greenfield
----------------------- ----------------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and
correct of our own knowledge.
Executed at San Leandro, California on August 5, 1993.
/s/Richard M. Kahler /s/Randall D. Greenfield
- ----------------------- ------------------------
Richard M. Kahler Randall D. Greenfield
<PAGE>
[STAMP: A476826]
[LOGO]
State of California
Secretary of State
Corporation Division
I, BILL JONES, Secretary of State of the State of California, hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this JUNE 4, 1996.
/s/Bill Jones
Secretary of State
[SEAL]
<PAGE>
[STAMP: A476826; ENDORSED FILED in the office of the Secretary of State of the
State of California MAY 30, 1996, BILL JONES, Secretary of State]
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BAY COMMERCIAL SERVICES
Richard M. Kahler and Randall D. Greenfield certify that:
l. They are the duly elected and acting President and Secretary,
respectively, of Bay Commercial Services, a California corporation.
2. The following amendment is readopted pursuant to Section 710 of the
California Corporations Code. ARTICLE EIGHTH is added to the Articles of
Incorporation to read as follows:
"EIGHTH. Vote Required for Certain Business Combinations.
A. Definitions. For the purposes of this Article EIGHTH:
1. "Affiliate" shall mean any person who, directly or indirectly through
one or more intermediaries, controls, or is controlled by, or is under
common control with another person.
2. "Announcement Date" shall mean the date of the first public announcement
of a proposed Business Combination.
3. "Approved by a Majority of Continuing Directors" with respect to any
matter shall mean that such matter has been approved by a majority vote of
the members of the Board of Directors who are not disqualified as provided
in the following sentence. Persons shall be disqualified with respect to
the vote referred to in the preceding sentence if they are not Continuing
Directors.
4. "Associate" shall mean (i) with respect to a corporation or association,
any officer or director thereof or of a subsidiary thereof, (ii) with
respect to a partnership, any general partner thereof or any limited
partner thereof having a 10 percent ownership interest in such partnership,
(iii) with respect to a business trust, any officer or trustee thereof or
of any subsidiary thereof, (iv) with respect to any other trust or an
estate, any trustee, executor or similar fiduciary and any person who has a
substantial interest as a beneficiary of such trust or estate, (v) with
respect to a natural person, the spouses and children thereof and any other
relative thereof or of the spouse thereof who has the same home, and (vi)
any Affiliate of any such person.
5. "Beneficial Owner" shall mean, as to any shares of Voting Stock, a
person:
(a) who beneficially owns, directly or indirectly, such shares; or
(b) who has (i) the right to acquire such shares from another person
(whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise or (ii) the right to vote or
to direct the voting thereof pursuant to any agreement, arrangement or
understanding. For purposes of this definition, a Person shall be
deemed to own any shares and possess all rights owned or possessed,
directly or indirectly, by all of its Associates and Affiliates or by
any other person with which such Person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.
<PAGE>
6. "Business Combination" shall mean any transaction which is referred to
in any one or more of subparagraphs 1 through 4 of paragraph B of this
Article EIGHTH.
7. "Continuing Director" shall mean any member of the Board of Directors of
this corporation who is neither an Affiliate nor an Associate of, and not a
nominee of, an Interested Shareholder involved in a Business Combination,
or an Affiliate or Associate of such Interested Shareholder; and who (i)
was a member of the Board of Directors prior to the time that such
Interested Shareholder became such, or (ii) is a successor of such a member
who was nominated to succeed such a member by a majority of Continuing
Directors then on the Board.
8. "Determination Date" shall mean the date on which an Interested
Shareholder became such.
9. "Fair Market Value" shall mean: (a) in the case of stock, the closing
sale price on the date in question of a share of such stock on the National
Market System of the National Association of Securities Dealers Automated
Quotation System or any system then in use on any national securities
exchange or automated quotation system, or if no such quotations are
available, the fair market value on the date in question of a share of such
stock as determined by a majority of the Continuing Directors in good
faith; and (b) in the case of property other than cash or stock, the fair
market value of such property on the date in question as determined by a
majority of the Continuing Directors in good faith.
10. "Interested Shareholder" shall mean any Person (other than this
corporation, any Subsidiary, any employee benefit plan or trust of this
corporation or a Subsidiary or any Person who on April 1, 1989 was a
director of this corporation) who or which on or after April 1, 1989:
(a) is the beneficial owner, directly or indirectly, of more than 5%
of the combined voting power of the then outstanding Voting Stock, or
is an Affiliate or Associate of such Person; or
(b) acts with any other Person through or as a partnership (general or
limited), syndicate, or other group for the purpose of acquiring,
holding or disposing of securities of this corporation, which entity
or group is the Beneficial Owner, directly or indirectly, of 5% of the
combined voting power of the outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to the beneficial
ownership of any shares of Voting Stock which were at any time within
the two-year period immediately prior to the date in question
beneficially owned by an Interested Shareholder, unless such
assignment or succession shall have occurred pursuant to a Public
Transaction or any series of transactions involving a Public
Transaction.
Any reference to an Interested Shareholder involved in a Business
Combination shall also refer to any Affiliates or Associates thereof, any
predecessor thereto, and all members of any partnership, syndicate or group
which includes such Interested Shareholder. For purposes of determining
whether a person is an Interested Shareholder, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned
through application of definition 5 above but shall not include any other
shares of Voting Stock which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
11. "Person" shall mean any individual, firm, trust, partnership,
association, corporation or other entity.
12. "Public Transaction" shall mean any (a) purchase of shares offered
pursuant to an effective registration statement under the Securities Act of
1933 or (b) open-market purchase of shares on a national securities
exchange or automated quotation system if, in either such case, the price
and other terms of sale are not negotiated by the purchaser and the seller
of the beneficial interest in the shares.
<PAGE>
13. "Subsidiary" shall mean any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by this
corporation; provided, however, that, for the purposes of the definition of
Interested Shareholder the term "Subsidiary" shall mean only a corporation
of which a majority of each class of equity security is owned, directly or
indirectly, by this corporation.
14. "Voting Stock" shall mean stock of all classes and series of this
corporation entitled to vote generally in the election of directors.
B. TRANSACTIONS REQUIRING 66-2/3% AFFIRMATIVE VOTE. In addition to any
affirmative vote required by law, by these Articles of Incorporation, or
otherwise, and except as otherwise expressly provided in paragraph C of this
Article EIGHTH none of the following transactions shall be consummated unless
such consummation shall have been approved by the affirmative vote of the
holders of at least 66-2/3% of the combined voting power of the then outstanding
shares of Voting Stock voting together as a single class. Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law, in these Articles of Incorporation
or otherwise.
1. Any merger or consolidation of this corporation or any Subsidiary with
(a) an Interested Shareholder or (b) any other corporation (whether or not
itself an Interested Shareholder) which is, or after such merger or
consolidation would be, an Interested Shareholder or an Affiliate or
Associate of an Interested Shareholder.
2. Any sale, lease, exchange, mortgage, pledge, grant of a security
interest, transfer or other disposition (in one transaction or a series of
transactions) directly or indirectly, to or with (a) an Interested
Shareholder or (b) any other person (whether or not itself an Interested
Shareholder) which is, or after such transaction would be, an Affiliate or
Associate of an Interested Shareholder of any of the assets of this
corporation (including, without limitation, any voting securities of a
Subsidiary) or any Subsidiary having an aggregate Fair Market Value of one
million dollars or more.
3. The issuance or transfer by this corporation or any Subsidiary (in one
transaction or a series of transactions) of any securities of this
corporation or any Subsidiary, or both, to (a) an Interested Shareholder or
(b) any other person (whether or not itself an Interested Shareholder)
which is, or after such issuance or transfer would be, an Affiliate or
Associate of an Interested Shareholder, except as part of a stock split or
dividend in which all shareholders of such class are treated equally, or on
the conversion or exchange of securities of this corporation or a
Subsidiary acquired by the Interested Shareholders in a transaction
approved as herein provided.
4. Any reclassification of securities (including any reverse stock split),
or recapitalization of this corporation, or any merger or consolidation of
this corporation with any of its Subsidiaries or any other transaction
(whether or not with or into or otherwise involving an Interested
Shareholder) which has the effect, directly or indirectly, of increasing
the proportionate share of the outstanding shares of any class of equity or
convertible securities of this corporation or any Subsidiary directly or
indirectly beneficially owned by (a) an Interested Shareholder or (b) any
other person (whether or not itself an Interested Shareholder) which is, or
after such reclassification, recapitalization, merger or consolidation or
other transaction would be, an Affiliate or Associate of an Interested
Shareholder; or as a result of which the shareholders of this corporation
would cease to be shareholders of a corporation incorporated under the laws
of the State of California having, as part of its articles of
incorporation, provisions to the same effect as this Article EIGHTH.
C. EXCEPTIONS TO 66-2/3% AFFIRMATIVE VOTE REQUIREMENT. The requirements of
paragraph B of this Article EIGHTH shall not be applicable to any particular
Business Combination, and such Business Combination shall require only such
affirmative vote as is required by law, by any other provision of these Articles
of Incorporation or otherwise, if the Business Combination shall have been
Approved by a Majority of the Continuing Directors, or if a state regulatory
authority having jurisdiction under the circumstances shall have determined
specifically, and not by implication, that the Business Combination is fair to
the holders of the Voting Stock, or if all of the following conditions (other
than those which are, by their terms, inapplicable) shall have been met.
<PAGE>
1. The transaction constituting the Business Combination shall provide for
a consideration per share to be received by all holders of Common Stock in
exchange for all of their shares of Common Stock, and the aggregate amount
of cash and the Fair Market Value as of the date of the consummation of the
Business Combination of any consideration other than cash to be received
per share by holders of Common Stock in such Business Combination shall be
at least equal to the highest of the following:
(a) The Fair Market Value per share of Common Stock on the last
trading day before the Announcement Date.
(b) The average of the Fair Market Values of a share of Common Stock
over each trading day in the 90 calendar days immediately prior to the
Announcement Date.
(c) If the Announcement Date of such Business Combination is within
five years of the Determination Date in respect of the Interested
Shareholder involved in such Business Combination, the highest
per-share price (including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by such Interested Shareholder to
acquire any shares of Common Stock which are or were at any time
within such five year period Beneficially Owned by such Interested
Shareholder and were acquired by it at any time within such five year
period. The price determination in accordance with this subparagraph 1
and the following subparagraph 2 of this paragraph shall be subject to
appropriate adjustment in the event of any recapitalization, stock
dividend, stock split, combination of shares or similar event.
2. If the transaction constituting the Business Combination shall provide
for a consideration to be received by holders of any class or series of
outstanding Voting Stock other than Common Stock, the aggregate amount of
the cash and the Fair Market Value as of the date of the consummation of
the Business Combination of consideration other than cash to be received
per share by holders of shares of each such class or series of Voting Stock
shall be determined in the same manner as provided in subparagraph 1 above.
3. The consideration to be received by holders of a particular class or
series of outstanding Voting Stock (including Common Stock) shall be in
cash or in the same form as was previously paid by the Interested
Shareholder involved in such Business Combination in order to acquire
shares of such class or series of Voting Stock which are beneficially owned
by an Interested Shareholder and, if an Interested Shareholder beneficially
owns shares of any class or series of Voting Stock which were acquired with
varying forms of consideration, the form of consideration for such class or
series of Voting Stock shall be either cash or the form used to acquire the
largest number of shares of such class or series of Voting Stock
beneficially owned by it.
4. After such Interested Shareholder has become such and prior to the
consummation of such Business Combination:
(a) Except as Approved by a Majority of the Continuing Directors,
there shall have been no failure to declare and pay at the regular
dates therefor the full amount of any dividends (whether or not
cumulative) payable on any outstanding class of stock having a
preference over the Common Stock as to dividends.
(b) There shall have been (i) no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary to reflect any
subdivision of the Common Stock) other than as Approved by a Majority
of the Continuing Directors and (ii) an increase in such annual rate
of dividends as necessary to prevent any such reduction in the event
of any reclassification (including any reverse stock split or
combination of shares), recapitalization, reorganization or any
similar transaction which has the effect of reducing the number of
outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is Approved by a Majority of the Continuing
Directors.
5. After the Determination Date such Interested Shareholder shall not have
received the benefit, directly or indirectly (except proportionately as a
shareholder), of any loans, advances, guarantees,
<PAGE>
pledges or other financial assistance or any tax credits or other tax
advantages provided by this corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
6. A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall, at
this corporation's expense, be mailed to the shareholders of this
corporation, no later than the earlier of (a) 30 days prior to any vote on
the proposed Business Combination or (b) if no vote on such Business
Combination is required, 60 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is required
to be mailed pursuant to such Act or subsequent provisions). Such proxy
statement shall contain at the front thereof, in a prominent place, any
recommendations as to the advisability (or inadvisability) of the Business
Combination which have been Approved by a Majority of the Continuing
Directors and furnished in writing, and an opinion of a reputable
investment banking firm as to the fairness (or lack of fairness) of the
terms of such Business Combination, from the point of view of the holders
of Voting Stock other than an Interested Shareholder if such requirement
has been Approved by a Majority of Continuing Directors, (such investment
banking firm to be Approved by a Majority of the Continuing Directors, to
be furnished with all information it reasonably requests and to be paid a
reasonable fee for its services upon receipt by this corporation of such
opinion).
D. APPROVAL BY A MAJORITY OF THE CONTINUING DIRECTORS. The power and duty to
determine for the purposes of this Article EIGHTH, on the basis of information
known to them after reasonable inquiry, all facts necessary to determine
compliance with this Article EIGHTH, including, without limitation, (1) whether
a Person is an Interested Shareholder, (2) the number of shares of Voting Stock
beneficially owned by any Person, (3) whether a Person is an Affiliate or
Associate of another, (4) whether the requirements of paragraph C of this
Article EIGHTH have been met and (5) such other matters with respect to which a
determination is required under this Article EIGHTH shall be exercised in a
manner Approved by a Majority of Continuing Directors. The good faith
determination with respect to such Approval by a Majority of the Continuing
Directors on such matters shall be conclusive and binding for all purposes of
this Article EIGHTH.
E. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing
contained in this Article EIGHTH shall be construed to relieve an Interested
Shareholder of any fiduciary obligation imposed by law.
F. Amendment, Repeal, etc. Notwithstanding any other provisions of these
Articles of Incorporation or the Bylaws of this corporation or the fact that a
lesser percentage may be specified by law, these Articles of Incorporation or
the Bylaws of this corporation, the affirmative vote of the holders of at least
66-2/3% of the combined voting power of the then outstanding Voting Stock,
voting together as a single class, shall be required to amend, alter, adopt any
provision inconsistent with or repeal this Article EIGHTH."
3. The foregoing amendment of the Articles of Incorporation has been
duly approved by the Board of Directors.
5. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of the shareholders in accordance with
Section 902 of the California General Corporation Law. The total number of
outstanding shares of the corporation is 1,076,720. The number of shares
voting in favor of the amendment equaled or exceeded the vote required,
such required vote being a 66-2/3% vote of the outstanding shares.
By: /s/Richard M. Kahler By: /s/ Randall D. Greenfield
------------------------- --------------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
<PAGE>
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this Certificate are true and
correct of our own knowledge.
Executed at San Leandro, California on May 28, 1996.
/s/Richard M. Kahler /s/Randall D. Greenfield
------------------------- ------------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
<PAGE>
[STAMP: A0509810]
[LOGO]
State of California
Secretary of State
I, BILL JONES, Secretary of State of the State of California, hereby certify:
That the annexed transcript has been compared with the corporate record on file
in this office, of which it purports to be a copy, and that the same is full,
true and correct.
IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the
State of California this _________________.
/s/Bill Jones
Secretary of State
[SEAL]
<PAGE>
[STAMP: A0509810; ENDORSED FILED in the office of the Secretary of State of the
State of California JUN 11, 1998, BILL JONES, Secretary of State]
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
BAY COMMERCIAL SERVICES
Richard M. Kahler and Randall D. Greenfield certify that:
l. They are the duly elected and acting President and Secretary,
respectively, of Bay Commercial Services, a California corporation.
2. The following amendment is readopted pursuant to Section 710
of the California Corporations Code. ARTICLE EIGHTH is added to the Articles
of Incorporation to read as follows:
"EIGHTH. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS.
A. Definitions. For the purposes of this Article EIGHTH:
1. "Affiliate" shall mean any person who, directly or indirectly
through one or more intermediaries, controls, or is controlled by, or is
under common control with another person.
2. "Announcement Date" shall mean the date of the first public
announcement of a proposed Business Combination.
3. "Approved by a Majority of Continuing Directors" with respect to
any matter shall mean that such matter has been approved by a majority vote
of the members of the Board of Directors who are not disqualified as
provided in the following sentence. Persons shall be disqualified with
respect to the vote referred to in the preceding sentence if they are not
Continuing Directors.
4. "Associate" shall mean (i) with respect to a corporation or
association, any officer or director thereof or of a subsidiary thereof,
(ii) with respect to a partnership, any general partner thereof or any
limited partner thereof having a 10 percent ownership interest in such
partnership, (iii) with respect to a business trust, any officer or trustee
thereof or of any subsidiary thereof, (iv) with respect to any other trust
or an estate, any trustee, executor or similar fiduciary and any person who
has a substantial interest as a beneficiary of such trust or estate, (v)
with respect to a natural person, the spouses and children thereof and any
other relative thereof or of the spouse thereof who has the same home, and
(vi) any Affiliate of any such person.
5. "Beneficial Owner" shall mean, as to any shares of Voting Stock, a
person:
(a) who beneficially owns, directly or indirectly, such shares; or
(b) who has (i) the right to acquire such shares from another person
(whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise or (ii) the right to vote or
to direct the voting thereof pursuant to any agreement, arrangement or
understanding. For purposes of this definition, a Person shall be
deemed to own any shares and possess all rights owned or possessed,
directly or indirectly, by all of its Associates and Affiliates or by
any other person with which such Person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.
<PAGE>
6. "Business Combination" shall mean any transaction which is referred
to in any one or more of subparagraphs 1 through 4 of paragraph B of this
Article EIGHTH.
7. "Continuing Director" shall mean any member of the Board of
Directors of this corporation who is neither an Affiliate nor an Associate
of, and not a nominee of, an Interested Shareholder involved in a Business
Combination, or an Affiliate or Associate of such Interested Shareholder;
and who (i) was a member of the Board of Directors prior to the time that
such Interested Shareholder became such, or (ii) is a successor of such a
member who was nominated to succeed such a member by a majority of
Continuing Directors then on the Board.
8. "Determination Date" shall mean the date on which an Interested
Shareholder became such.
9. "Fair Market Value" shall mean: (a) in the case of stock, the
closing sale price on the date in question of a share of such stock on the
National Market System of the National Association of Securities Dealers
Automated Quotation System or any system then in use on any national
securities exchange or automated quotation system, or if no such quotations
are available, the fair market value on the date in question of a share of
such stock as determined by a majority of the Continuing Directors in good
faith; and (b) in the case of property other than cash or stock, the fair
market value of such property on the date in question as determined by a
majority of the Continuing Directors in good faith.
10. "Interested Shareholder" shall mean any Person (other than this
corporation, any Subsidiary, any employee benefit plan or trust of this
corporation or a Subsidiary or any Person who on April 1, 1989 was a
director of this corporation) who or which on or after April 1, 1989:
(a) is the beneficial owner, directly or indirectly, of more than 5%
of the combined voting power of the then outstanding Voting Stock, or
is an Affiliate or Associate of such Person; or
(b) acts with any other Person through or as a partnership (general or
limited), syndicate, or other group for the purpose of acquiring,
holding or disposing of securities of this corporation, which entity
or group is the Beneficial Owner, directly or indirectly, of 5% of the
combined voting power of the outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to the beneficial
ownership of any shares of Voting Stock which were at any time within
the two-year period immediately prior to the date in question
beneficially owned by an Interested Shareholder, unless such
assignment or succession shall have occurred pursuant to a Public
Transaction or any series of transactions involving a Public
Transaction.
Any reference to an Interested Shareholder involved in a Business
Combination shall also refer to any Affiliates or Associates thereof, any
predecessor thereto, and all members of any partnership, syndicate or group
which includes such Interested Shareholder. For purposes of determining
whether a person is an Interested Shareholder, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned
through application of definition 5 above but shall not include any other
shares of Voting Stock which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
11. "Person" shall mean any individual, firm, trust, partnership,
association, corporation or other entity.
12. "Public Transaction" shall mean any (a) purchase of shares offered
pursuant to an effective registration statement under the Securities Act of
1933 or (b) open-market purchase of shares on a national securities
exchange or automated quotation system if, in either such case, the price
and other terms of sale are not negotiated by the purchaser and the seller
of the beneficial interest in the shares.
<PAGE>
13. "Subsidiary" shall mean any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by this
corporation; provided, however, that, for the purposes of the definition of
Interested Shareholder the term "Subsidiary" shall mean only a corporation
of which a majority of each class of equity security is owned, directly or
indirectly, by this corporation.
14. "Voting Stock" shall mean stock of all classes and series of this
corporation entitled to vote generally in the election of directors.
B. TRANSACTIONS REQUIRING 66-2/3% AFFIRMATIVE VOTE. In addition to any
affirmative vote required by law, by these Articles of Incorporation, or
otherwise, and except as otherwise expressly provided in paragraph C of this
Article EIGHTH none of the following transactions shall be consummated unless
such consummation shall have been approved by the affirmative vote of the
holders of at least 66-2/3% of the combined voting power of the then outstanding
shares of Voting Stock voting together as a single class. Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law, in these Articles of Incorporation
or otherwise.
1. Any merger or consolidation of this corporation or any Subsidiary
with (a) an Interested Shareholder or (b) any other corporation (whether or
not itself an Interested Shareholder) which is, or after such merger or
consolidation would be, an Interested Shareholder or an Affiliate or
Associate of an Interested Shareholder.
2. Any sale, lease, exchange, mortgage, pledge, grant of a security
interest, transfer or other disposition (in one transaction or a series of
transactions) directly or indirectly, to or with (a) an Interested
Shareholder or (b) any other person (whether or not itself an Interested
Shareholder) which is, or after such transaction would be, an Affiliate or
Associate of an Interested Shareholder of any of the assets of this
corporation (including, without limitation, any voting securities of a
Subsidiary) or any Subsidiary having an aggregate Fair Market Value of one
million dollars or more.
3. The issuance or transfer by this corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of this
corporation or any Subsidiary, or both, to (a) an Interested Shareholder or
(b) any other person (whether or not itself an Interested Shareholder)
which is, or after such issuance or transfer would be, an Affiliate or
Associate of an Interested Shareholder, except as part of a stock split or
dividend in which all shareholders of such class are treated equally, or on
the conversion or exchange of securities of this corporation or a
Subsidiary acquired by the Interested Shareholders in a transaction
approved as herein provided.
4. Any reclassification of securities (including any reverse stock
split), or recapitalization of this corporation, or any merger or
consolidation of this corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Shareholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class
of equity or convertible securities of this corporation or any Subsidiary
directly or indirectly beneficially owned by (a) an Interested Shareholder
or (b) any other person (whether or not itself an Interested Shareholder)
which is, or after such reclassification, recapitalization, merger or
consolidation or other transaction would be, an Affiliate or Associate of
an Interested Shareholder; or as a result of which the shareholders of this
corporation would cease to be shareholders of a corporation incorporated
under the laws of the State of California having, as part of its articles
of incorporation, provisions to the same effect as this Article EIGHTH.
C. EXCEPTIONS TO 66-2/3% AFFIRMATIVE VOTE REQUIREMENT. The requirements of
paragraph B of this Article EIGHTH shall not be applicable to any particular
Business Combination, and such Business Combination shall require only such
affirmative vote as is required by law, by any other provision of these Articles
of Incorporation or otherwise, if the Business Combination shall have been
Approved by a Majority of the Continuing Directors, or if a state regulatory
authority having jurisdiction under the circumstances shall have determined
specifically, and not by implication, that the Business Combination is fair to
the holders of the Voting Stock, or if all of the following conditions (other
than those which are, by their terms, inapplicable) shall have been met.
<PAGE>
1. The transaction constituting the Business Combination shall provide
for a consideration per share to be received by all holders of Common Stock
in exchange for all of their shares of Common Stock, and the aggregate
amount of cash and the Fair Market Value as of the date of the consummation
of the Business Combination of any consideration other than cash to be
received per share by holders of Common Stock in such Business Combination
shall be at least equal to the highest of the following:
(a) The Fair Market Value per share of Common Stock on the last
trading day before the Announcement Date.
(b) The average of the Fair Market Values of a share of Common Stock
over each trading day in the 90 calendar days immediately prior to the
Announcement Date.
(c) If the Announcement Date of such Business Combination is within
five years of the Determination Date in respect of the Interested
Shareholder involved in such Business Combination, the highest
per-share price (including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by such Interested Shareholder to
acquire any shares of Common Stock which are or were at any time
within such five year period Beneficially Owned by such Interested
Shareholder and were acquired by it at any time within such five year
period. The price determination in accordance with this subparagraph 1
and the following subparagraph 2 of this paragraph shall be subject to
appropriate adjustment in the event of any recapitalization, stock
dividend, stock split, combination of shares or similar event.
2. If the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of any class or
series of outstanding Voting Stock other than Common Stock, the aggregate
amount of the cash and the Fair Market Value as of the date of the
consummation of the Business Combination of consideration other than cash
to be received per share by holders of shares of each such class or series
of Voting Stock shall be determined in the same manner as provided in
subparagraph 1 above.
3. The consideration to be received by holders of a particular class
or series of outstanding Voting Stock (including Common Stock) shall be in
cash or in the same form as was previously paid by the Interested
Shareholder involved in such Business Combination in order to acquire
shares of such class or series of Voting Stock which are beneficially owned
by an Interested Shareholder and, if an Interested Shareholder beneficially
owns shares of any class or series of Voting Stock which were acquired with
varying forms of consideration, the form of consideration for such class or
series of Voting Stock shall be either cash or the form used to acquire the
largest number of shares of such class or series of Voting Stock
beneficially owned by it.
4. After such Interested Shareholder has become such and prior to the
consummation of such Business Combination:
(a) Except as Approved by a Majority of the Continuing Directors,
there shall have been no failure to declare and pay at the regular
dates therefor the full amount of any dividends (whether or not
cumulative) payable on any outstanding class of stock having a
preference over the Common Stock as to dividends.
(b) There shall have been (i) no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary to reflect any
subdivision of the Common Stock) other than as Approved by a Majority
of the Continuing Directors and (ii) an increase in such annual rate
of dividends as necessary to prevent any such reduction in the event
of any reclassification (including any reverse stock split or
combination of shares), recapitalization, reorganization or any
similar transaction which has the effect of reducing the number of
outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is Approved by a Majority of the Continuing
Directors.
5. After the Determination Date such Interested Shareholder shall not
have received the benefit, directly or indirectly (except proportionately
as a shareholder), of any loans, advances, guarantees,
<PAGE>
pledges or other financial assistance or any tax credits or other tax
advantages provided by this corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
6. A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall, at
this corporation's expense, be mailed to the shareholders of this
corporation, no later than the earlier of (a) 30 days prior to any vote on
the proposed Business Combination or (b) if no vote on such Business
Combination is required, 60 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is required
to be mailed pursuant to such Act or subsequent provisions). Such proxy
statement shall contain at the front thereof, in a prominent place, any
recommendations as to the advisability (or inadvisability) of the Business
Combination which have been Approved by a Majority of the Continuing
Directors and furnished in writing, and an opinion of a reputable
investment banking firm as to the fairness (or lack of fairness) of the
terms of such Business Combination, from the point of view of the holders
of Voting Stock other than an Interested Shareholder if such requirement
has been Approved by a Majority of Continuing Directors, (such investment
banking firm to be Approved by a Majority of the Continuing Directors, to
be furnished with all information it reasonably requests and to be paid a
reasonable fee for its services upon receipt by this corporation of such
opinion).
D. APPROVAL BY A MAJORITY OF THE CONTINUING DIRECTORS.
The power and duty to determine for the purposes of this Article EIGHTH, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine compliance with this Article EIGHTH, including, without limitation,
(1) whether a Person is an Interested Shareholder, (2) the number of shares of
Voting Stock beneficially owned by any Person, (3) whether a Person is an
Affiliate or Associate of another, (4) whether the requirements of paragraph C
of this Article EIGHTH have been met and (5) such other matters with respect to
which a determination is required under this Article EIGHTH shall be exercised
in a manner Approved by a Majority of Continuing Directors. The good faith
determination with respect to such Approval by a Majority of the Continuing
Directors on such matters shall be conclusive and binding for all purposes of
this Article EIGHTH.
E. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS. Nothing
contained in this Article EIGHTH shall be construed to relieve an Interested
Shareholder of any fiduciary obligation imposed by law.
F. AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of these
Articles of Incorporation or the Bylaws of this corporation or the fact
that a lesser percentage may be specified by law, these Articles of
Incorporation or the Bylaws of this corporation, the affirmative vote of the
holders of at least 66-2/3% of the combined voting power of the then outstanding
Voting Stock, voting together as a single class, shall be required to amend,
alter, adopt any provision inconsistent with or repeal this Article EIGHTH."
3. The foregoing amendment of the Articles of Incorporation has been
duly approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has been
duly approved by the required vote of the shareholders in accordance with
Section 902 of the California General Corporation Law. The total number of
outstanding shares of the corporation entitled to vote with respect to the
foregoing amendment is 1,080,720. The number of shares voting in favor of
the amendment equaled or exceeded the vote required, such required vote
being a 66-2/3% vote of the outstanding shares.
By: /s/Richard M. Kahler By: /s/Randall D. Greenfield
-------------------------- ---------------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
<PAGE>
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this Certificate are true and
correct of our own knowledge.
Executed at San Leandro, California on June 9, 1998.
/s/Richard M. Kahler /s/Randall D. Greenfield
------------------------ -----------------------
Richard M. Kahler Randall D. Greenfield
President Secretary
EXHIBIT 10.12
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT is made and entered into this
24th of November, 1998, (this "Agreement"), by and among BAY COMMERCIAL
SERVICES, a California corporation and bank holding company (the "Company"), BAY
BANK OF COMMERCE, a California corporation (the "Bank") (the Company and the
Bank are jointly and severally referred to herein as "Employers") and RICHARD M.
KAHLER (hereinafter referred to as "Executive"):
WHEREAS, Executive currently is employed by each of the Employers
as President and Chief Executive Officer; and
WHEREAS, Executive is willing to continue to serve Employers but
desires that in the event of a change in control of Employers, he will be paid
change in control benefits irrespective of whether he is retained by Employers
or any successor to Employers;
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein contained, Employers and Executive hereby agree as follows:
1. TERM. This Agreement shall terminate, except to the extent
that any obligation of Employers hereunder remains unpaid as of such time, upon
the earliest of (a) the voluntary or involuntary termination of Executive's
employment with Employers or (b) the effective date of a Change in Control, as
defined in Section 2 hereof.
2. CHANGE IN CONTROL OF THE COMPANY OR THE BANK. The term "Change
in Control" shall mean a change in control of the Company or the Bank of a
nature that would be required to be reported in response to Item 5(f) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934 as in effect on the date of this Agreement (the "Exchange Act") or, if Item
5(f) is no longer in effect, any regulations issued by the Securities and
Exchange Commission pursuant to the Exchange Act which serve similar purposes;
provided that, without limitation, such change in control shall be deemed to
have occurred if and when (A) any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) is or becomes a beneficial owner,
directly or indirectly, of securities of the Company or the Bank representing 25
percent or more of the combined voting power of the Company's or the Bank's then
outstanding securities or (B) individuals who were members of the Board of
Directors of the Company immediately prior to a meeting of the shareholders of
the Company involving a contest for the election of directors shall not
constitute a majority of the Board of Directors following such election.
3. PAYMENT OF CHANGE IN CONTROL BENEFIT.
(1) Executive shall be entitled to payment of a Change
in Control Benefit under this Agreement upon a Change in Control. Such payment
will be reduced by any required federal, state, and local income tax, employment
tax, and benefits withholdings. The Change in
-2-
<PAGE>
Control Benefit shall be paid as soon as practicable following a Change in
Control in the form of a single sum payment or, if elected by the Executive
prior to said Change in Control, in the form of an annuity with such term as is
elected by the Executive. If the Change in Control Benefit is paid as an
annuity, the annuity shall be purchased by the Bank and shall be held as part of
the Bank's general assets. The Bank's obligation to pay said annuity shall be
considered unfunded as provided under Section 11 of this Agreement.
(2) In the event that any payment or benefit received
or to be received by Executive as a result of a change of control, or the
termination of Executive's employment (whether payable pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with Employers, any
person whose actions result in a change in control of Employers or any person
affiliated with Employers or such person (together with the Change in Control
Benefit, the "Total Payments")) would not be deductible (in whole or in part) as
a result of Section 280G of the Internal Code of 1986, as amended (the "Code"),
the Change in Control Benefit shall be reduced until no portion of the Total
Payments is not deductible as a result of Section 280G of the Code, or the
Change in Control Benefit is reduced to zero. For purposes of this limitation
(i) no portion of the Total Payments, the receipt or enjoyment of which
Executive shall have effectively waived in writing prior to the date of payment
of the Change in Control Benefit, shall be taken into account; (ii) no portion
of the Total Payments shall be taken into account which, in the opinion of tax
counsel selected by Employers' independent auditors and acceptable to Executive,
does not constitute a "parachute payment" within the meaning of Section
280G(b)(2) of the Code; (iii) the Change in Control Benefit shall be reduced
only to the extent necessary so that the Total Payments (other than those
referred to in clause (i) or clause (ii)) in their entirety constitute
reasonable compensation for services actually rendered within the meaning of
Section 280G(b)(4) of the Code, in the opinion of the tax counsel referred to in
clause (ii); and (iv) the value of any non-cash benefit or any deferred payment
or benefit included in the Total Payments shall be determined by Employers'
independent auditors in accordance with the principles of Sections 280G(d)(3)
and (4) of the Code.
(3) BENEFICIARY. "Beneficiary" means the person or
persons whom the Executive shall designate in writing (on the for attached
hereto as Exhibit A) to receive the Change in Control Benefit provided hereunder
in the event of his death following a Change in Control and prior to
the Bank's purchase of an annuity (if so elected by the Executive). Such
designation shall be valid only if it is made on said form, and the Bank
receives said form prior to the Executive's death.
(4) CHANGE IN CONTROL BENEFIT. "Change in Control
Benefit" means the total amount of Executive's Annual Compensation (including
Salary, Bonus and Other Annual Compensation), calculated in accordance with the
definitions and requirements of Item 402(b) of Regulation S-B, for the Company's
two (2) most recent fiscal years ended preceding the date of the Change in
Control.
4. NO EFFECT ON EMPLOYMENT RIGHTS. Nothing contained in this
Agreement or any modification or amendment hereto, or the payment of any
benefit, gives or shall be deemed to give Executive any right to continued
employment, or any legal or equitable right against Employers or any employee of
Employers. Moreover, nothing contained in this Agreement or any modification or
amendment hereto, or the payment of any benefit shall modify, or otherwise have
any effect on, Executive's employment relationship with Employers.
<PAGE>
This Agreement shall also not affect Executive's rights under any
employee benefit plan offered by Employers, such as any pension or
profit-sharing, medical, dental or hospitalization, life insurance, AD&D, bonus,
incentive compensation, stock option, or vacation pay plan. Executive's rights
under those plans are governed solely by their terms, and Executive should
review those plans to ascertain his rights under them. In particular,
Executive's receipt of a Change in Control Benefit under this Agreement does not
change the date of his termination of employment for purposes under any such
plans.
5. NOTICES. Any notices to be given hereunder by either party to
the other may be effected in writing either by personal delivery or by mail,
registered or certified, postage prepaid with return receipt requested. Notices
to Employers shall be given to the Bank at its then current principal office,
c/o Chairman of the Board of Directors. Notices to Executive shall be sent to
Executive's then current personal residence. Notices delivered personally shall
be deemed communicated as of actual receipt; mailed notices shall be deemed
communicated as of five (5) days after mailing.
6. ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to severance benefits or benefits tied to a Change in Control. Each party to
this Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein, and that no other agreement,
statement or promise not contained in this Agreement shall be valid and binding.
Any modification of this Agreement will be effective only if it is in writing
signed by all parties to this Agreement.
7. SEVERABILITY. In the event that any term or condition
contained in this Agreement shall, for any reason, be held by a court of
competent jurisdiction to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or non-enforceability shall not affect any other
term or condition of this Agreement, but this Agreement shall be construed as if
such invalid or illegal or unenforceable term or condition had never been
contained herein.
8. ADMINISTRATION. Employers shall have the power, in their
discretion, to interpret and make all determinations as to the right to a Change
in Control Benefit under this Agreement. Their interpretation or determinations
thereof in good faith shall be final and conclusive, and subject to review only
to the extent a court or arbitrator concludes that any such interpretation or
determination is arbitrary or capricious.
9. CHOICE OF LAW AND FORUM. This Agreement shall be governed by
and construed in accordance with the laws of the State of California, except to
the extent preempted by the laws of the United States. Any action or proceeding
brought upon, or arising out of, this Agreement or its termination shall be
brought in a forum located within the State of California, and Executive hereby
agrees to be subject to service of process in the State of California.
-3-
<PAGE>
10. WAIVER. The parties hereto shall not be deemed to have waived
any of their respective rights under this Agreement unless the waiver is in
writing and signed by such waiving party. No delay in exercising any rights
shall be a waiver nor shall a waiver on one occasion operate as a waiver of such
right on a future occasion.
11. EXECUTIVE'S RIGHTS UNSECURED. The Agreement is intended to be
unfunded for purposes of the Code. The Bank's obligation under this Agreement
shall be that of an unfunded and unsecured promise by the Bank to pay money in
the future. All distributions under this Agreement shall be paid from the
general assets of the Bank. The right of the Executive or any Beneficiary to
receive a distribution under this Agreement shall be an unsecured claim against
the general assets of the Bank, and neither the Executive nor any Beneficiary
shall have any rights in or against any assets of the Employers.
12. NONASSIGNABLE. Neither the Executive nor his Beneficiary
shall have any power or right to transfer, assign, anticipate, hypothecate,
mortgage, commute, modify, or otherwise encumber in advance any of the benefits
payable hereunder, nor shall any of said benefits be subject to seizure for the
payment of any debts, judgments, alimony, or separate maintenance owed by the
Executive or his Beneficiary, or be transferrable by operation of law in the
event of bankruptcy, insolvency, or otherwise.
13. ASSUMPTION. The surviving or resulting corporation, the
transferee of Employers' assets, or Employers, as the case may be, shall be
bound by the provisions of this Agreement. Employers shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of either Employer, by
agreement in form and substance satisfactory to Executive, to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that Employers would be required to perform it if no such succession had taken
place. As used in this Agreement, "Employers" shall mean Employers as
hereinbefore defined and any successor to Employers' business and/or assets as
aforesaid which executes and delivers the agreement provided for in this Section
13 or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
14. CAPTIONS AND PARAGRAPH HEADINGS. Captions and paragraph
headings used herein are for convenience and ready reference only and are not a
part of this Agreement and shall not be used in the construction or
interpretation thereof.
-4-
<PAGE>
15. ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement, or breach of this Agreement, shall be settled by
arbitration in accordance with the Employment Arbitration Rules of the American
Arbitration Association, and judgment on the award rendered by the arbitrators
may be entered in any court having jurisdiction. There shall be three
arbitrators, one to be chosen directly by each party, and the third arbitrator
to be selected by the two arbitrators so chosen. Each party shall pay the fees
of the arbitrator he or it selects and of his or its own attorneys, and the
expenses of him or its witnesses and all other expenses connected with
representing him or its case. Other costs of the arbitration, including the cost
of any record or transcripts of the arbitration, administrative fees, the fee of
the third arbitrator, and all other fees and costs, shall be borne equally by
the parties.
-5-
<PAGE>
EXECUTED on the day and year first-above written.
EMPLOYERS: EXECUTIVE:
BAY COMMERCIAL SERVICES /s/ Richard M. Kahler
---------------------
Richard M. Kahler
By /s/ Joshua Fong
----------------------------------
Joshua Fong, Chairman of the Board
BAY BANK OF COMMERCE
By /s/ Dimitri Koroslev
-----------------------------------
Dimitri Koroslev, Chairman of the Board
-6-
<PAGE>
EXHIBIT 10.12
EXHIBIT A
DESIGNATION OF BENEFICIARIES
I, Richard M. Kahler, hereby designate the following person(s) as
my Beneficiary(ies) under the Change in Control Agreement ("Agreement") to
receive any amounts that might be payable as of the date of my death:
Primary Beneficiary
Name: Percentage: 100%
Address:
Alternate Beneficiary
Name: Percentage: 50%
Address:
Name: Percentage: 50%
Address:
This designation supersedes all prior Beneficiary designations I have made under
the Agreement.
DATED:________ ___, ________. _____________________________________
Richard M. Kahler
EXHIBIT 10.13
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT is made and entered into this
30th day of November, 1998, (this "Agreement"), by and among BAY COMMERCIAL
SERVICES, a California corporation and bank holding company (the "Company"), BAY
BANK OF COMMERCE, a California corporation (the "Bank") (the Company and the
Bank are jointly and severally referred to herein as "Employers") and RANDALL D.
GREENFIELD (hereinafter referred to as "Executive"):
WHEREAS, Executive currently is employed by the Company as Vice
President and Chief Financial Officer and as Senior Vice President and Chief
Administrative Officer of the Bank; and
WHEREAS, Executive is willing to continue to serve Employers but
desires that in the event of a change in control of Employers, he will be paid
change in control benefits irrespective of whether he is retained by Employers
or any successor to Employers;
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein contained, Employers and Executive hereby agree as follows:
1. TERM. This Agreement shall terminate, except to the extent
that any obligation of Employers hereunder remains unpaid as of such time, upon
the earliest of (a) the voluntary or involuntary termination of Executive's
employment with Employers or (b) the effective date of a Change in Control, as
defined in Section 2 hereof.
2. CHANGE IN CONTROL OF THE COMPANY OR THE BANK. The term "Change
in Control" shall mean a change in control of the Company or the Bank of a
nature that would be required to be reported in response to Item 5(f) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934 as in effect on the date of this Agreement (the "Exchange Act") or, if Item
5(f) is no longer in effect, any regulations issued by the Securities and
Exchange Commission pursuant to the Exchange Act which serve similar purposes;
provided that, without limitation, such change in control shall be deemed to
have occurred if and when (A) any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) is or becomes a beneficial owner,
directly or indirectly, of securities of the Company or the Bank representing 25
percent or more of the combined voting power of the Company's or the Bank's then
outstanding securities or (B) individuals who were members of the Board of
Directors of the Company immediately prior to a meeting of the shareholders of
the Company involving a contest for the election of directors shall not
constitute a majority of the Board of Directors following such election.
3. PAYMENT OF CHANGE IN CONTROL BENEFIT.
(1) Executive shall be entitled to payment of a Change in
Control Benefit under this Agreement upon a Change in Control. Such payment will
be reduced by any required federal, state, and local income tax, employment tax,
and benefits withholdings. The Change in Control Benefit shall be paid as soon
as practicable following a Change in Control in the form of a single sum payment
or, if elected by the Executive prior to said Change in Control, in the form of
an annuity with such term as is elected by the Executive. If the Change in
Control Benefit is paid as an annuity, the annuity shall be purchased by the
Bank and shall be held as part of the Bank's general assets. The Bank's
obligation to pay said annuity shall be considered unfunded as provided under
Section 11 of this Agreement.
(2) In the event that any payment or benefit received or to be
received by Executive as a result of a change of control, or the termination of
Executive's employment (whether payable pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with Employers, any person whose
actions result in a change in control of Employers or any person affiliated with
Employers or such person (together with the Change in Control Benefit, the
"Total Payments")) would not be deductible (in whole or in part) as a result of
Section 280G of the Internal Code of 1986, as amended (the "Code"), the Change
in Control Benefit shall be reduced until no portion of the Total Payments is
not deductible as a result of Section 280G of the Code, or the Change in Control
Benefit is reduced to zero. For purposes of this limitation (i) no portion of
the Total Payments, the receipt or enjoyment of which Executive shall have
effectively waived in writing prior to the date of payment of the Change in
Control Benefit, shall be taken into account; (ii) no portion of the Total
Payments shall be taken into account which, in the opinion of tax counsel
selected by Employers' independent auditors and acceptable to Executive, does
not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of
the Code; (iii) the Change in Control Benefit shall be reduced only to the
extent necessary so that the Total Payments (other than those referred to in
clause (i) or clause (ii)) in their entirety constitute reasonable compensation
for services actually rendered within the meaning of Section 280G(b)(4) of the
Code, in the opinion of the tax counsel referred to in clause (ii); and (iv) the
value of any non-cash benefit or any deferred payment or benefit included in the
Total Payments shall be determined by Employers' independent auditors in
accordance with the principles of Sections 280G(d)(3) and (4) of the Code.
(3) BENEFICIARY. "Beneficiary" means the person or persons
whom the Executive shall designate in writing (on the form attached hereto as
Exhibit A) to receive the Change in Control Benefit provided hereunder in the
event of his death following a Change in Control and prior to the Bank's
purchase of an annuity (if so elected by the Executive). Such designation shall
be valid only if it is made on said form, and the Bank receives said form prior
to the Executive's death.
(4) CHANGE IN CONTROL BENEFIT. means a benefit equal to
Executive's Total Compensation multiplied by his Years of Service divided by 12.
(5) MONTHS OF SERVICE. "Months of Service" mean the number of
complete months which have elapsed starting from the date the Executive first
performed an hour of service for the Bank and ending on the effective date of
the Change in Control.
(6) TOTAL COMPENSATION. "Total Compensation" means the total
amount of Executive's Annual Compensation (including Salary, Bonus and Other
Annual Compensation), calculated in accordance with the definitions and
requirements of Item 402(b) of Regulation S-B, for the Company's most recent
fiscal year ended preceding the date of the Change in Control. (7) Years of
Service. "Years of Service" mean Months of Service divided by 12, rounded to two
decimal places.
(7) YEARS OF SERVICES. "Years of Service" mean Months of Service
divided by 12, rounded to two decimal places.
4. NO EFFECT ON EMPLOYMENT RIGHTS. Nothing contained in this
Agreement or any modification or amendment hereto, or the payment of any
benefit, gives or shall be deemed to give Executive any right to continued
employment, or any legal or equitable right against Employers or any employee of
Employers. Moreover, nothing contained in this Agreement or any modification or
amendment hereto, or the payment of any benefit shall modify, or otherwise have
any effect on, Executive's employment relationship with Employers.
This Agreement shall also not affect Executive's rights under any
employee benefit plan offered by Employers, such as any pension or
profit-sharing, medical, dental or hospitalization, life insurance, AD&D, bonus,
incentive compensation, stock option, or vacation pay plan. Executive's rights
under those plans are governed solely by their terms, and Executive should
review those plans to ascertain his rights under them. In particular,
Executive's receipt of a Change in Control Benefit under this Agreement does not
change the date of his termination of employment for purposes under any such
plans.
5. NOTICES. Any notices to be given hereunder by either party to
the other may be effected in writing either by personal delivery or by mail,
registered or certified, postage prepaid with return receipt requested. Notices
to Employers shall be given to the Bank at its then current principal office,
c/o Chairman of the Board of Directors. Notices to Executive shall be sent to
Executive's then current personal residence. Notices delivered personally shall
be deemed communicated as of actual receipt; mailed notices shall be deemed
communicated as of five (5) days after mailing.
6. ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to severance benefits or benefits tied to a Change in Control. Each party to
this Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein, and that no other agreement,
statement or promise not contained in this Agreement shall be valid and binding.
Any modification of this Agreement will be effective only if it is in writing
signed by all parties to this Agreement.
7. SEVERABILITY. In the event that any term or condition
contained in this Agreement shall, for any reason, be held by a court of
competent jurisdiction to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or non-enforceability shall not affect any other
term or condition of this Agreement, but this Agreement shall be construed as if
such invalid or illegal or unenforceable term or condition had never been
contained herein.
8. ADMINISTRATION. Employers shall have the power, in their
discretion, to interpret and make all determinations as to the right to a Change
in Control Benefit under this Agreement. Their interpretation or determinations
thereof in good faith shall be final and conclusive, and subject to review only
to the extent a court or arbitrator concludes that any such interpretation or
determination is arbitrary or capricious.
9. CHOICE OF LAW AND FORUM. This Agreement shall be governed by
and construed in accordance with the laws of the State of California, except to
the extent preempted by the laws of the United States. Any action or proceeding
brought upon, or arising out of, this Agreement or its termination shall be
brought in a forum located within the State of California, and Executive hereby
agrees to be subject to service of process in the State of California.
10. WAIVER. The parties hereto shall not be deemed to have waived
any of their respective rights under this Agreement unless the waiver is in
writing and signed by such waiving party. No delay in exercising any rights
shall be a waiver nor shall a waiver on one occasion operate as a waiver of such
right on a future occasion.
11. EXECUTIVE'S RIGHTS UNSECURED. The Agreement is intended to be
unfunded for purposes of the Code. The Bank's obligation under this Agreement
shall be that of an unfunded and unsecured promise by the Bank to pay money in
the future. All distributions under this Agreement shall be paid from the
general assets of the Bank. The right of the Executive or any Beneficiary to
receive a distribution under this Agreement shall be an unsecured claim against
the general assets of the Bank, and neither the Executive nor any Beneficiary
shall have any rights in or against any assets of the Employers.
12. NONASSIGNABLE. Neither the Executive nor his Beneficiary
shall have any power or right to transfer, assign, anticipate, hypothecate,
mortgage, commute, modify, or otherwise encumber in advance any of the benefits
payable hereunder, nor shall any of said benefits be subject to seizure for the
payment of any debts, judgments, alimony, or separate maintenance owed by the
Executive or his Beneficiary, or be transferable by operation of law in the
event of bankruptcy, insolvency, or otherwise.
13. ASSUMPTION. The surviving or resulting corporation, the
transferee of Employers' assets, or Employers, as the case may be, shall be
bound by the provisions of this Agreement. Employers shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of either Employer, by
agreement in form and substance satisfactory to Executive, to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that Employers would be required to perform it if no such succession had taken
place. As used in this Agreement, "Employers" shall mean Employers as
hereinbefore defined and any successor to Employers' business and/or assets as
aforesaid which executes and delivers the agreement provided for in this Section
13 or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
14. CAPTIONS AND PARAGRAPH HEADINGS. Captions and paragraph
headings used herein are for convenience and ready reference only and are not a
part of this Agreement and shall not be used in the construction or
interpretation thereof.
15. ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement, or breach of this Agreement, shall be settled by
arbitration in accordance with the Employment Arbitration Rules of the American
Arbitration Association, and judgment on the award rendered by the arbitrators
may be entered in any court having jurisdiction. There shall be three
arbitrators, one to be chosen directly by each party, and the third arbitrator
to be selected by the two arbitrators so chosen. Each party shall pay the fees
of the arbitrator he or it selects and of his or its own attorneys, and the
expenses of him or its witnesses and all other expenses connected with
representing him or its case. Other costs of the arbitration, including the cost
of any record or transcripts of the arbitration, administrative fees, the fee of
the third arbitrator, and all other fees and costs, shall be borne equally by
the parties.
EXECUTED on the day and year first-above written.
<PAGE>
EMPLOYERS: EXECUTIVE:
BAY COMMERCIAL SERVICES
/s/ Randall D. Greenfield
-------------------------
By /s/ Joshua Fong Randall D. Greenfield
- ----------------------------------
Joshua Fong, Chairman of the Board
BAY BANK OF COMMERCE
By /s/ Dimitri Koroslev
- --------------------------------------
Dimitri Koroslev, Chairman of the Board
<PAGE>
EXHIBIT 10.13
EXHIBIT A
DESIGNATION OF BENEFICIARIES
I, Randall D. Greenfield, hereby designate the following person(s) as my
Beneficiary(ies) under the Change in Control Agreement ("Agreement") to receive
any amounts that might be payable as of the date of my death:
Primary Beneficiary
Name: Percentage: %
Address:
Alternate Beneficiary
Name: Percentage: %
Address:
Name: Percentage: %
Address:
Name: Percentage: %
Address:
This designation supersedes all prior Beneficiary designations I have made under
the Agreement. DATED:________ ___, ________.
---------------------------------------------
Randall D. Greenfield
EXHIBIT 10.14
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT is made and entered into this
30th day of November, 1998, (this "Agreement"), by and between BAY BANK OF
COMMERCE, a California corporation (the "Employer") and ROBERT A. PERANTONI
(hereinafter referred to as "Executive"):
WHEREAS, Executive currently is employed by the Bank as Senior
Vice President and Senior Lending Officer; and
WHEREAS, Executive is willing to continue to serve Employer but
desires that in the event of a change in control of Employer, he will be paid
change in control benefits irrespective of whether he is retained by Employer
or any successor to Employer; and
WHEREAS, the Bank is the wholly-owned subsidiary of Bay
Commercial Services, a California corporation (the "Company");
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein contained, Employer and Executive hereby agree as follows:
1. TERM. This Agreement shall terminate, except to the extent
that any obligation of Employer hereunder remains unpaid as of such time, upon
the earliest of (a) the voluntary or involuntary termination of Executive's
employment with Employer or (b) the effective date of a Change in Control, as
defined in Section 2 hereof.
2. CHANGE IN CONTROL OF THE COMPANY OR THE BANK. The term "Change
in Control" shall mean a change in control of the Company or the Bank of a
nature that would be required to be reported in response to Item 5(f) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934 as in effect on the date of this Agreement (the "Exchange Act") or, if Item
5(f) is no longer in effect, any regulations issued by the Securities and
Exchange Commission pursuant to the Exchange Act which serve similar purposes;
provided that, without limitation, such change in control shall be deemed to
have occurred if and when (A) any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) is or becomes a beneficial owner,
directly or indirectly, of securities of the Company or the Bank representing 25
percent or more of the combined voting power of the Company's or the Bank's then
outstanding securities or (B) individuals who were members of the Board of
Directors of the Company immediately prior to a meeting of the shareholders of
the Company involving a contest for the election of directors shall not
constitute a majority of the Board of Directors following such election.
3. PAYMENT OF CHANGE IN CONTROL BENEFIT.
(1) Executive shall be entitled to payment of a Change in
Control Benefit under this Agreement upon a Change in Control. Such payment will
be reduced by any required federal, state, and local income tax, employment tax,
and benefits withholdings. The Change in Control Benefit shall be paid as soon
as practicable following a Change in Control in the form of a single sum payment
or, if elected by the Executive prior to said Change in Control, in the form of
an annuity with such term as is elected by the Executive. If the Change in
Control Benefit is paid as an annuity, the annuity shall be purchased by the
Bank and shall be held as part of the Bank's general assets. The Bank's
obligation to pay said annuity shall be considered unfunded as provided under
Section 11 of this Agreement.
(2) In the event that any payment or benefit received or to be
received by Executive as a result of a change of control, or the termination of
Executive's employment (whether payable pursuant to the terms of this Agreement
or any other plan, arrangement or agreement with Employer, any person whose
actions result in a change in control of Employer or any person affiliated with
Employer or such person (together with the Change in Control Benefit, the "Total
Payments")) would not be deductible (in whole or in part) as a result of Section
280G of the Internal Code of 1986, as amended (the "Code"), the Change in
Control Benefit shall be reduced until no portion of the Total Payments is not
deductible as a result of Section 280G of the Code, or the Change in Control
Benefit is reduced to zero. For purposes of this limitation (i) no portion of
the Total Payments, the receipt or enjoyment of which Executive shall have
effectively waived in writing prior to the date of payment of the Change in
Control Benefit, shall be taken into account; (ii) no portion of the Total
Payments shall be taken into account which, in the opinion of tax counsel
selected by Employer' independent auditors and acceptable to Executive, does not
constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the
Code; (iii) the Change in Control Benefit shall be reduced only to the extent
necessary so that the Total Payments (other than those referred to in clause (i)
or clause (ii)) in their entirety constitute reasonable compensation for
services actually rendered within the meaning of Section 280G(b)(4) of the Code,
in the opinion of the tax counsel referred to in clause (ii); and (iv) the value
of any non-cash benefit or any deferred payment or benefit included in the Total
Payments shall be determined by Employer' independent auditors in accordance
with the principles of Sections 280G(d)(3) and (4) of the Code.
(3) BENEFICIARY. "Beneficiary" means the person or persons
whom the Executive shall designate in writing (on the form attached hereto as
Exhibit A) to receive the Change in Control Benefit provided hereunder in the
event of his death following a Change in Control and prior to the Bank's
purchase of an annuity (if so elected by the Executive). Such designation shall
be valid only if it is made on said form, and the Bank receives said form prior
to the Executive's death.
(4) CHANGE IN CONTROL BENEFIT. "Change in Control Benefit"
means a benefit equal to Executive's Total Compensation multiplied by his Years
of Service divided by 12.
(5) MONTHS OF SERVICE. "Months of Service" mean the number of
complete months which have elapsed starting from the date the Executive first
performed an hour of service for the Bank and ending on the effective date of
the Change in Control.
(6) TOTAL COMPENSATION. "Total Compensation" means the total
amount of Executive's Annual Compensation (including Salary, Bonus and Other
Annual Compensation), calculated in accordance with the definitions and
requirements of Item 402(b) of Regulation S-B, for the Company's most recent
fiscal year ended preceding the date of the Change in Control. (7) Years of
Service. "Years of Service" mean Months of Service divided by 12, rounded to two
decimal places.
(7) YEARS OF SERVICES. "Years of Service" mean Months of Service
divided by 12, rounded to two decimal places.
4. NO EFFECT ON EMPLOYMENT RIGHTS. Nothing contained in this
Agreement or any modification or amendment hereto, or the payment of any
benefit, gives or shall be deemed to give Executive any right to continued
employment, or any legal or equitable right against Employer or any employee of
Employer. Moreover, nothing contained in this Agreement or any modification or
amendment hereto, or the payment of any benefit shall modify, or otherwise have
any effect on, Executive's employment relationship with Employer.
This Agreement shall also not affect Executive's rights under any
employee benefit plan offered by Employer, such as any pension or
profit-sharing, medical, dental or hospitalization, life insurance, AD&D, bonus,
incentive compensation, stock option, or vacation pay plan. Executive's rights
under those plans are governed solely by their terms, and Executive should
review those plans to ascertain his rights under them. In particular,
Executive's receipt of a Change in Control Benefit under this Agreement does not
change the date of his termination of employment for purposes under any such
plans.
5. NOTICES. Any notices to be given hereunder by either party to
the other may be effected in writing either by personal delivery or by mail,
registered or certified, postage prepaid with return receipt requested. Notices
to Employer shall be given to the Bank at its then current principal office, c/o
Chairman of the Board of Directors. Notices to Executive shall be sent to
Executive's then current personal residence. Notices delivered personally shall
be deemed communicated as of actual receipt; mailed notices shall be deemed
communicated as of five (5) days after mailing.
6. ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to severance benefits or benefits tied to a Change in Control. Each party to
this Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein, and that no other agreement,
statement or promise not contained in this Agreement shall be valid and binding.
Any modification of this Agreement will be effective only if it is in writing
signed by all parties to this Agreement.
7. SEVERABILITY. In the event that any term or condition
contained in this Agreement shall, for any reason, be held by a court of
competent jurisdiction to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or non-enforceability shall not affect any other
term or condition of this Agreement, but this Agreement shall be construed as if
such invalid or illegal or unenforceable term or condition had never been
contained herein.
8. ADMINISTRATION. Employer shall have the power, in their
discretion, to interpret and make all determinations as to the right to a Change
in Control Benefit under this Agreement. Their interpretation or determinations
thereof in good faith shall be final and conclusive, and subject to review only
to the extent a court or arbitrator concludes that any such interpretation or
determination is arbitrary or capricious.
9. CHOICE OF LAW AND FORUM. This Agreement shall be governed by
and construed in accordance with the laws of the State of California, except to
the extent preempted by the laws of the United States. Any action or proceeding
brought upon, or arising out of, this Agreement or its termination shall be
brought in a forum located within the State of California, and Executive hereby
agrees to be subject to service of process in the State of California.
10. WAIVER. The parties hereto shall not be deemed to have waived
any of their respective rights under this Agreement unless the waiver is in
writing and signed by such waiving party. No delay in exercising any rights
shall be a waiver nor shall a waiver on one occasion operate as a waiver of such
right on a future occasion.
11. EXECUTIVE'S RIGHTS UNSECURED. The Agreement is intended to be
unfunded for purposes of the Code. The Bank's obligation under this Agreement
shall be that of an unfunded and unsecured promise by the Bank to pay money in
the future. All distributions under this Agreement shall be paid from the
general assets of the Bank. The right of the Executive or any Beneficiary to
receive a distribution under this Agreement shall be an unsecured claim against
the general assets of the Bank, and neither the Executive nor any Beneficiary
shall have any rights in or against any assets of the Employer.
12. NONASSIGNABLE. Neither the Executive nor his Beneficiary
shall have any power or right to transfer, assign, anticipate, hypothecate,
mortgage, commute, modify, or otherwise encumber in advance any of the benefits
payable hereunder, nor shall any of said benefits be subject to seizure for the
payment of any debts, judgments, alimony, or separate maintenance owed by the
Executive or his Beneficiary, or be transferable by operation of law in the
event of bankruptcy, insolvency, or otherwise.
13. ASSUMPTION. The surviving or resulting corporation, the
transferee of Employer' assets, or Employer, as the case may be, shall be bound
by the provisions of this Agreement. Employer shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of either Employer, by
agreement in form and substance satisfactory to Executive, to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that Employer would be required to perform it if no such succession had taken
place. As used in this Agreement, "Employer" shall mean Employer as hereinbefore
defined and any successor to Employer' business and/or assets as aforesaid which
executes and delivers the agreement provided for in this Section 13 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
14. CAPTIONS AND PARAGRAPH HEADINGS. Captions and paragraph
headings used herein are for convenience and ready reference only and are not a
part of this Agreement and shall not be used in the construction or
interpretation thereof.
15. ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement, or breach of this Agreement, shall be settled by
arbitration in accordance with the Employment Arbitration Rules of the American
Arbitration Association, and judgment on the award rendered by the arbitrators
may be entered in any court having jurisdiction. There shall be three
arbitrators, one to be chosen directly by each party, and the third arbitrator
to be selected by the two arbitrators so chosen. Each party shall pay the fees
of the arbitrator he or it selects and of his or its own attorneys, and the
expenses of him or its witnesses and all other expenses connected with
representing him or its case. Other costs of the arbitration, including the cost
of any record or transcripts of the arbitration, administrative fees, the fee of
the third arbitrator, and all other fees and costs, shall be borne equally by
the parties.
EXECUTED on the day and year first-above written.
<PAGE>
EMPLOYER: EXECUTIVE:
BAY COMMERCIAL SERVICES
By /s/ Joshua Fong /s/ Robert A. Perantoni
-------------------------------- -----------------------
Joshua Fong, Chairman of the Board Robert A. Perantoni
BAY BANK OF COMMERCE
By /s/ Dimitri Koroslev
-------------------------------------
Dimitri Koroslev, Chairman of the Board
<PAGE>
EXHIBIT 10.14
EXHIBIT A
DESIGNATION OF BENEFICIARIES
I, Robert A. Perantoni, hereby designate the following person(s)
as my Beneficiary(ies) under the Change in Control Agreement ("Agreement") to
receive any amounts that might be payable as of the date of my death:
Primary Beneficiary
Name: Percentage: %
Address:
Alternate Beneficiary
Name: Percentage: %
Address:
Name: Percentage: %
Address:
This designation supersedes all prior Beneficiary designations I have made under
the Agreement. DATED:________ ___, ________.
Robert A. Perantoni
ANNUAL REPORT COVER
BAY COMMERCIAL SERVICES
1998 ANNUAL REPORT
(logo)
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts): 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
Years ended December 31:
<S> <C> <C> <C> <C> <C>
Interest income $10,200 $8,759 $7,826 $7,456 $6,086
Interest income on a taxable equivalent basis 10,327 8,853 7,904 7,505 6,146
Interest expense 3,479 2,956 2,457 2,310 1,766
Net interest income 6,721 5,803 5,369 5,146 4,320
Net interest income on a taxable equivalent basis 6,848 5,897 5,447 5,195 4,380
Net income 1,215 1,062 1,083 945 619
Net income per common share - basic 1.12 0.99 1.01 0.88 0.57
Net income per common share - diluted 0.95 0.84 0.89 0.80 0.56
Return on average assets 1.0% 1.0% 1.1% 1.0% 0.7%
Return on average shareholders' equity 11.3% 10.7% 11.8% 11.1% 7.9%
- --------------------------------------------------------------------------------------------------------
At December 31:
Assets $144,202 $116,369 $96,769 $92,819 $89,193
Loans 93,129 74,129 71,362 58,152 51,566
Securities 39,542 32,580 16,043 20,410 25,988
Deposits 123,395 101,135 83,291 80,253 79,258
Shareholders' equity 11,395 10,173 9,418 8,767 7,946
Book value per share 10.54 9.43 8.75 8.14 7.36
- --------------------------------------------------------------------------------------------------------
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
<PAGE>
REPORT TO SHAREHOLDERS - 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
Completing a year of exceptional financial performance, Bay Commercial Services
attained record total assets and net income in 1998.
With a focused marketing message and a vibrant East Bay economy, the Company
achieved strong account growth in its targeted markets during 1998, propelling
total assets to a record $144,202,000 at December 31, 1998, an increase of 24%
over 1997.
Fueled by this strong growth in earning assets, net income for the Company
increased 14% to a record $1,215,000, or $0.95 per diluted share in 1998. This
was up from net income of $1,062,000, or $0.84 per diluted share during 1997.
Total loans reached $93,129,000 at December 31, 1998, a $19,000,000 or 26%
increase for the year. Total deposits grew $22,260,000 or 22% to $123,395,000.
To mark the strong financial performance during 1998, the Board of Directors of
the Company declared a cash dividend of $0.40 per share in January, 1999. This
was the thirteenth cash dividend paid to shareholders during 17 years of
operations and a 33% increase over the $0.30 per share cash dividend paid in
1998.
Although all three offices of the Bank demonstrated excellent growth in 1998, we
were especially proud of the fact that our newest branch in San Ramon ended the
year with total assets of almost $18,000,000, and became profitable after only
18 months of operations. This achievement is a credit to every employee of the
Bank who made this possible.
This year's exceptional performance confirms the need for a community business
bank that can deliver the personal service that a business needs to be
successful. With projections for sustained economic strength in the San
Francisco Bay region in 1999, the Company intends to capitalize on its position
as a leader in East Bay business banking for continued growth and profitability.
We look forward to a prosperous year and thank you for your ongoing 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 and Chief Executive Officer Chairman
Bay Bank of Commerce Bay Bank of Commerce Bay Commercial Services
Bay Commercial Services
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------------------
December 31 (dollars in thousands): 1998 1997
---------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 9,077 $ 7,548
Securities available for sale, stated at fair value
(amortized cost of $31,969 for 1998; $24,663 for 1997) 32,033 24,651
Securities held to maturity (fair values of $7,748 for 1998; $8,057 for 1997) 7,509 7,929
Federal Home Loan Bank stock 359 ---
Loans held for sale 939 1,501
Loans held for investment 92,190 72,628
Allowance for loan losses (980) (1,000)
---------------------------------------------------------------------------------------------------
Net loans 92,149 73,129
---------------------------------------------------------------------------------------------------
Premises and equipment, net 1,949 2,111
Interest and fees receivable 635 566
Other assets 491 435
---------------------------------------------------------------------------------------------------
Total assets $144,202 $116,369
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 33,904 $ 29,076
Savings and interest-bearing demand 37,571 29,203
Time 30,309 30,022
Certificates of deposit, $100 and over 21,611 12,834
---------------------------------------------------------------------------------------------------
Total deposits 123,395 101,135
---------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 1,344 1,290
Other short-term borrowing 7,000 2,500
Interest payable and other liabilities 1,068 1,271
---------------------------------------------------------------------------------------------------
Total liabilities 132,807 106,196
---------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 4, 12 and 13) --- ---
Shareholders' equity:
Common stock - no par value: authorized 20,000,000
shares; issued & outstanding 1,080,670 in 1998 and 1,078,720 in 1997 3,622 3,671
Retained earnings 7,734 6,509
Accumulated other comprehensive income, net of tax 39 (7)
---------------------------------------------------------------------------------------------------
Total shareholders' equity 11,395 10,173
---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $144,202 $116,369
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS
- -----------------------------------------------------------------------------------------
Years ended December 31 (dollars in thousands,
except per share amounts): 1998 1997 1996
- -----------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Loans, including fees $8,177 $7,137 $6,463
Federal funds sold and reverse repurchase agreements 355 288 250
Securities:
Taxable 1,392 1,131 947
Tax exempt 276 203 166
- ------------------------------------------------------------------------------------------
Total interest income 10,200 8,759 7,826
- ------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing demand 1,045 708 651
Time 1,495 1,588 1,407
Certificates of deposit, $100 and over 866 564 293
Other borrowed funds 73 96 106
- ------------------------------------------------------------------------------------------
Total interest expense 3,479 2,956 2,457
- ------------------------------------------------------------------------------------------
Net interest income 6,721 5,803 5,369
Provision for loan losses 134 52 ---
- ------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,587 5,751 5,369
- ------------------------------------------------------------------------------------------
Noninterest income:
Bankcard income 414 307 254
Service charges and fees 308 274 264
Gain on sale of loans 88 57 174
Loan servicing 85 132 138
Net gain on sale of other real estate owned --- --- 119
Net losses on sales of securities available for sale --- (3) (3)
Other 46 204 134
- ------------------------------------------------------------------------------------------
Total noninterest income 941 971 1,080
- ------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 3,237 2,872 2,554
Occupancy 683 694 613
Other 1,736 1,506 1,519
- ------------------------------------------------------------------------------------------
Total noninterest expenses 5,656 5,072 4,686
- ------------------------------------------------------------------------------------------
Income before income tax expense 1,872 1,650 1,763
Income tax expense 657 588 680
- ------------------------------------------------------------------------------------------
Net income $1,215 $1,062 $1,083
=========================================================================================
Net income per common share - basic $1.12 $ 0.99 $ 1.01
Weighted average common shares - basic 1,080,362 1,076,774 1,076,720
Net income per common share - diluted $0.95 $ 0.84 $ 0.89
Weighted average common shares - diluted 1,277,190 1,257,680 1,217,235
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
Years ended December 31 (dollars in thousands): 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 1,215 $ 1,062 $ 1,083
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization (401) (60) 308
Provision for loan losses 134 52 ---
Unamortized deferred loan fees, net (120) (86) (163)
Losses on sales of securities available for sale --- 3 3
Originations of SBA loans held for sale (1,157) (985) (1,714)
Proceeds from the sale of SBA loans held for sale 1,764 1,095 2,884
Net gain on sale of other real estate owned --- --- (119)
Loss on sale of equipment 2 --- 2
Provision for deferred taxes (72) (31) 26
Change in interest and fees receivable and other assets (50) 254 (125)
Change in interest payable and other liabilities 120 26 (306)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,435 1,330 1,879
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 109,024 42,603 1,681
Proceeds from sales of securities available for sale --- 997 1,997
Proceeds from maturities of securities held to maturity 4,043 1,271 1,661
Purchases of securities available for sale (115,583) (59,557) ---
Purchases of securities held to maturity (3,693) (1,493) (1,177)
Purchase of Federal Home Loan Bank stock (359) --- ---
Net change in loans (19,663) (2,829) (14,109)
Proceeds from sale of other real estate owned --- --- 252
Purchases of premises and equipment (116) (235) (318)
Proceeds from sale of equipment --- --- 6
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,347) (19,243) (10,007)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 22,260 17,844 3,038
Net change in securities sold under agreements to repurchase 54 (1,014) 101
Net change in other short-term borrowing 4,500 2,000 500
Exercise of stock options 35 9 ---
Repurchase and retirement of common stock (84) --- ---
Cash dividends paid (324) (323) (323)
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,441 18,516 3,316
- ----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 1,529 603 (4,812)
Cash and cash equivalents at beginning of year 7,548 6,945 11,757
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,077 $ 7,548 $ 6,945
====================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $3,463 $2,982 $2,397
Income taxes 630 532 751
Noncash investing and financing activities during the year:
Stock dividend Federal Home Loan Bank $ 9 $ --- $ ---
Loan in connection with sale of other real estate owned --- --- 178
Receivable at close of escrow on sale of other real
estate owned --- --- 48
Dividend payable --- 324 323
Tax benefit of disqualified disposition of incentive
stock options 10 --- ---
See accompanying notes to consolidated financial statements.
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996 (dollars in thousands, except per share amounts):
Accumulated
Other Total
Shares Common Comprehensive Retained Comprehensive Shareholders'
Outstanding Stock Income Earnings Income Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 1,076,720 $3,662 $5,011 $ 94 $ 8,767
Comprehensive income:
Net income $1,083 1,083 1,083
Other comprehensive income, net of tax of $(10):
Unrealized losses on securities available for
sale, net of reclassification adjustment* (109) (109) (109)
-----
Total comprehensive income 974
-----
Cash dividends declared ($0.30/share) (323) (323)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,076,720 3,662 5,771 (15) 9,418
Comprehensive income:
Net income 1,062 1,062 1,062
Other comprehensive income, net of tax of $(5):
Unrealized gains on securities available for
sale, net of reclassification adjustment* 8 8 8
-----
Total comprehensive income 1,070
-----
Exercise of stock options 2,000 9 9
Cash dividends declared ($0.30/share) (324) (324)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,078,720 3,671 6,509 (7) 10,173
Comprehensive income:
Net income 1,215 1,215 1,215
Other comprehensive income, net of tax of $25:
Unrealized gains on securities available for
sale, net of reclassification adjustment* 46 46 46
------
Total comprehensive income $1,261
------
Tax benefit of disqualified disposition of
incentive stock options 10 10
Exercise of stock options 6,950 35 35
Repurchase and retirement of common stock (5,000) (84) (84)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,080,670 $3,622 $7,734 $ 39 $11,395
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
*Disclosure of reclassification amount:
Years ended December 31 (in thousands): 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during period $46 $ 5 $(112)
Add reclassification adjustment for losses included in net income --- 3 3
- ---------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities available for sale $46 $ 8 $(109)
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Bay Commercial Services (the "Company")
and its wholly owned subsidiary, Bay Bank of Commerce (the "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 operates as one business segment and principally engages in business
banking in the Counties of Alameda and Contra Costa, California. The Company
primarily grants business loans including lines of credit, and commercial real
estate and construction loans, the majority of which are secured by the
underlying properties. Lending for single family residential construction and
equity lines of credit has increased in recent years, while other types of
consumer lending remains 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 San Francisco Bay Area. The Company's
primary source of revenues is interest income from its loan and investment
securities portfolios. The Company is not dependent on any single customer for
more than ten percent of the Company's revenues.
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
as cash and cash equivalents. Federal funds sold generally mature in one day.
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 market 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 carried 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 the servicing and other financial assets based on relative
fair values as of the date the loan is sold.
ALLOWANCE FOR LOAN LOSSES
The Bank provides for possible loan losses by a charge to operating income based
upon the composition of the loan portfolio, past loan loss experience, current
economic conditions and other factors which, in management's judgment, deserve
recognition in estimating loan losses. Management will charge off loans when it
determines there has been a permanent impairment of the related carrying values.
Management attributes general reserves to different types of loans using
percentages which are based upon perceived risk associated with the portfolio
and underlying collateral, historical loss experience, and vulnerability to
changing economic conditions which may affect the collectibility of the loans.
Specific reserves are allocated for impaired loans, for loans which have
experienced a decline in internal loan grading, and when management believes
additional loss exposure exists. 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.
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 Bank's internal rating
system as "doubtful" or "loss" or those "substandard" loans which have been
placed on nonaccrual. Restructured loans are always classified as impaired. The
Bank applies its normal loan review procedures when determining whether a loan
is impaired. The
BAY COMMERCIAL SERVICES AND SUBSIDIARY
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES, CONTINUED
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). Specific reserves for impaired loans are recognized by
adjusting the 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 the recorded investment in the property 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. Operating expenses of
such properties, net of related income, are included in other expenses and gains
or losses on their disposition are included in other income and other expenses.
OTHER SHORT-TERM BORROWING
Other short-term borrowing consists of federal funds purchased and amounts
borrowed from the Federal Home Loan Bank.
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
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
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation ", 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.
COMPREHENSIVE INCOME
The Company has retroactively adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the period
from nonowner sources. The adoption of this Statement resulted in a change in
the financial statement presentation but did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
DISCLOSURES ABOUT OPERATING SEGMENTS
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
In applying the "management approach" established by the Statement, management
determined that since all of the commercial banking products and services of the
Bank are available in each branch of the Bank, all branches are located within
the same economic environment and management does not allocate resources based
on the performance of different lending or transaction activities, the financial
disclosures of this statement related to operating performance of reportable
segments does not apply.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. The statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is in the process of
determining the impact of adopting SFAS 133, however, the Company currently does
not have any derivative instruments and is not involved in any hedging
activities.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the financial
statement presentation for the current year. The reclassifications had no impact
on the Bank's results of operations or shareholders' equity.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(2) SECURITIES
The amortized cost, gross unrealized gains (losses) and estimated fair value of
debt securities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ -------------------------------------------
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
------------------------------------------- -------------------------------------------
AVAILABLE FOR SALE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
agency securities ..... $ 2,000 $--- $ (6) $ 1,994 $ 4,000 $ 10 $ (8) $ 4,002
Corporate securities ..... 19,651 --- (7) 19,644 14,401 1 (1) 14,401
Mortgage-backed securities 10,318 91 (14) 10,395 6,262 8 (22) 6,248
- --------------------------------------------------------------------------------------------------------------------
Total .................. $31,969 $ 91 $(27) $32,033 $24,663 $ 19 $(31) $24,651
====================================================================================================================
HELD TO MATURITY:
U.S. Treasury and
agency securities ..... $ --- $--- $--- $ --- $ 3,197 $ 5 $ (1) $ 3,201
Obligations of states and
political subdivisions 6,123 244 --- 6,367 4,661 120 --- 4,781
Mortgage-backed securities 1,386 --- (5) 1,381 71 4 --- 75
- --------------------------------------------------------------------------------------------------------------------
Total .................. $ 7,509 $244 $ (5) $ 7,748 $ 7,929 $129 $ (1) $ 8,057
====================================================================================================================
</TABLE>
Securities with a carrying amount of $19,826,000 and $11,074,000 at December 31,
1998 and 1997, 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,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURING
----------------------------------------------
AMORTIZED COST After One After Five
(Dollars in thousands) In One Year Through Through After
or Less Five Years Ten Years Ten Years Total
---------------------------------------------- -------
AVAILABLE FOR SALE:
<S> <C> <C> <C> <C> <C>
U.S.Treasury and
agency ................. $ --- $2,000 $ --- $--- $ 2,000
Corporate securities ..... 19,651 --- --- --- 19,651
Mortgage-backed securities 64 5,680 4,574 --- 10,318
- ----------------------------------------------------------------------------------------
Total amortized cost ... $19,715 $7,680 $4,574 --- $31,969
Estimated fair value ... $19,708 $7,693 $4,632 $--- $32,033
========================================================================================
HELD TO MATURITY:
Obligations of states and
political subdivisions $ 519 $1,307 $2,208 $2,089 $ 6,123
Mortgage-backed securities --- 1,386 --- --- 1,386
- ----------------------------------------------------------------------------------------
Total amortized cost $ 519 $2,693 $2,208 $2,089 $ 7,509
Estimated fair value $ 530 $2,738 $2,306 $2,174 $ 7,748
========================================================================================
</TABLE>
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) 1998 1997 1996
- -----------------------------------
<S> <C> <C> <C>
Gains ........ $--- $--- $---
Losses ....... -- (3) (3)
- -----------------------------------
Net losses ... $--- $(3) $(3)
===================================
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands): 1998 1997
- -----------------------------------------------
<S> <C> <C>
Commercial ............. $ 24,250 $ 18,980
Commercial held for sale 473 721
Real Estate:
Construction ......... 16,049 7,436
Mortgage ............. 43,815 41,181
Held for sale ........ 466 780
Equity ............... 5,297 2,718
Installment ............ 2,299 1,895
Other .................. 979 947
- -----------------------------------------------
93,628 74,658
Deferred loan fees ..... (499) (529)
- -----------------------------------------------
$ 93,129 $ 74,129
================================================
</TABLE>
Loans on which the accrual of interest had been discontinued amounted to $30,000
at December 31, 1998 and $440,000 at December 31, 1997. 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 $2,000 and
$39,000 for 1998 and 1997, respectively. As of December 31, 1998 and 1997, the
Company had $469,000 and $476,000, respectively, in restructured loans. At
December 31, 1998, there were no commitments to lend additional funds to
borrowers whose loans were restructured or classified as nonaccrual.
Of total nonperforming loans of $499,000 and $911,000 at December 31, 1998 and
1997, respectively, $27,000 and $231,000 were guaranteed by the Small Business
Administration ("SBA") and, therefore, not considered impaired. As of December
31, 1998 and 1997, the Company had approximately $472,000 and $680,000,
respectively, of loans considered to be impaired. Evaluation of the impaired
loans in 1998 applied the collateral method to $469,000 while the remainder was
evaluated using discounted cashflow analysis. This evaluation required an
allowance for loan losses of $70,000 in 1998. 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.
The average recorded investment in impaired loans was $732,000 for 1998,
$879,000 for 1997 and $190,000 for 1996. Interest income recognized on impaired
loans amounted to $56,000 in 1998, $57,000 in 1997 and $12,000 in 1996. Interest
income is only recognized on restructured loans which are performing under the
restructured terms. Interest income is recognized on nonaccrual loans only when
principal has been fully recovered or the loan has returned to accrual status.
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): 1998 1997
- ------------------------------------
<S> <C> <C>
Beginning balance $ 53 $ 178
Advance ......... 1,351 31
Payments ........ (184) (40)
Other ........... --- (116)
- ------------------------------------
Ending balance .. $ 1,220 $ 53
====================================
</TABLE>
At December 31, 1998, these loans were real estate loans, revolving lines of
credit or credit card lines with credit limits in the aggregate amount of
$1,312,000. At December 31, 1997 these loans were revolving lines of credit,
installment loans or credit card lines with credit limits in the aggregate
amount of $99,000. Additionally, at December 31, 1998 and 1997, 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): 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,000 $ 971 $ 982
Loans charged off .......... (172) (31) (35)
Recoveries on loans
charged off .............. 18 8 24
- -----------------------------------------------------------
Net chargeoffs ............. (154) (23) (11)
Provision charged to expense 134 52 ---
----------------------------------------------------------
Balance, end of year ....... $ 980 $ 1,000 $ 971
===========================================================
</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,
1998 and 1997 was approximately $11,058,000 and $14,797,000, respectively.
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of:
<TABLE>
<CAPTION>
(in thousands): 1998 1997
- -------------------------------------------------
<S> <C> <C>
Land .................. $ 354 $ 354
Premises .............. 1,167 1,164
Furniture and equipment 2,227 2,135
Leasehold improvements 1,318 1,318
- -------------------------------------------------
5,066 4,971
- -------------------------------------------------
Less accumulated
depreciation and amortization (3,117) (2,860)
- -------------------------------------------------
$1,949 $ 2,111
=================================================
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, CONTINUED
The Company leases certain premises under non-cancelable operating leases.
Future minimum rental payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Amount
Year (in thousands)
-------------------------------------
<S> <C>
1999 $252
2000 254
2001 243
2002 163
2003 163
Thereafter 344
--------------------------------------
Total minimum payments required $1,419
======================================
</TABLE>
Rent expense was $250,000, $269,000 and $202,000 in 1998, 1997 and 1996,
respectively.
(5) INCOME TAXES
Components of income tax expense for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
(in thousands): 1998 1997 1996
- --------------------------------------------------------
Taxes currently payable:
<S> <C> <C> <C>
Federal ................... $ 571 $ 471 $ 470
State ..................... 158 148 184
- --------------------------------------------------------
Total currently payable 729 619 654
- --------------------------------------------------------
Deferred taxes:
Federal ................... (67) (13) 35
State ..................... (5) (18) (9)
- --------------------------------------------------------
Total deferred taxes ... (72) (31) 26
- --------------------------------------------------------
Total income tax expense ..... $ 657 $ 588 $ 680
========================================================
</TABLE>
Cumulative deferred income tax assets and liabilities at December 31 were
as follows:
<TABLE>
<CAPTION>
(in thousands): 1998 1997
- ----------------------------------------------------
Deferred tax assets:
<S> <C> <C>
State franchise tax ............. $ 51 $ 43
Provision for loan losses ....... 195 135
Nonaccrual interest ............. 3 7
Unrealized loss on securities
available for sale ............ --- 5
- ----------------------------------------------------
Total deferred tax assets ..... 249 190
- ----------------------------------------------------
Deferred tax liabilities:
Differences in tax and
book depreciation ............ (120) (148)
Federal Home Loan Bank dividends (4) ---
Unrealized gain on securities
available for sale .......... (25) ---
Other .......................... (43) (27)
- ----------------------------------------------------
Total deferred tax liabilities (192) (175)
- ----------------------------------------------------
Net deferred tax assets ........... $ 57 $ 15
====================================================
</TABLE>
The Company believes that it is more likely than not that it will realize the
above deferred tax assets in future periods and, therefore, no valuation
allowance has been provided against its deferred tax assets.
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>
1998 1997 1996
- -----------------------------------------------------------
Statutory federal
<S> <C> <C> <C>
income tax rate ............. 35.0% 35.0% 35.0%
Increase (decrease)
resulting from:
Tax exempt income
on municipal securities ... (4.5) (3.7) (2.9)
State franchise taxes, net of
federal income tax benefit 5.4 5.2 6.5
Other ....................... (0.8) (0.8) ---
- -----------------------------------------------------------
Effective tax rate ........ 35.1% 35.7% 38.6%
===========================================================
</TABLE>
(6) DEPOSITS
The aggregate amount of certificates of deposit of $100,000 or more was
approximately $21,611,000 and $12,834,000 at December 31, 1998 and 1997,
respectively.
At December 31, 1998, the scheduled maturities of all certificates of deposit
were as follows:
<TABLE>
<CAPTION>
Amount
Year (in thousands)
---------------------------
<S> <C>
1999 $31,975
2000 783
2001 124
2002 809
2003 and thereafter 602
---------------------------
Total $34,293
===========================
</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): 1998 1997 1996
- ------------------------------------------------------------------
BASIC EPS COMPUTATION:
<S> <C> <C> <C>
Net income available
to shareholders ......... $ 1,215 $ 1,062 $ 1,083
- ------------------------------------------------------------------
Weighted average
common shares outstanding 1,080,362 1,076,774 1,076,720
- ------------------------------------------------------------------
NET INCOME PER
COMMON SHARE - BASIC .... $ 1.12 $ 0.99 $ 1.01
==================================================================
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- ------------------------------------------------------------------------
EARNINGS PER SHARE, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(Dollars in thousands
except per share amounts): 1998 1997 1996
- ------------------------------------------------------------------
DILUTED EPS COMPUTATION:
<S> <C> <C> <C>
Net income available
to shareholders ......... $ 1,215 $ 1,062 $ 1,083
- ------------------------------------------------------------------
Weighted average
common shares outstanding 1,080,362 1,076,774 1,076,720
Dilutive effect of
stock options ......... 196,828 180,906 140,515
- ------------------------------------------------------------------
Weighted average
common shares - diluted 1,277,190 1,257,680 1,217,235
- ------------------------------------------------------------------
NET INCOME PER
COMMON SHARE - DILUTED .. $ 0.95 $ 0.84 $ 0.89
==================================================================
</TABLE>
(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 exercise of stock options granted 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 262,551 shares
were exercisable at a weighted average price of $4.95 at December 31, 1998.
Options for the purchase of 251,686 shares were exercisable at a
weighted-average exercise price of $4.95 as of December 31, 1997. Options for
the purchase of 228,571 shares were exercisable at a weighted average price of
$4.96 as of December 31, 1996. There were no shares available for grant as of
December 31, 1998. There were 7,185 shares available for grant as of December
31, 1997 and 1996.
The following is a summary of changes in options outstanding:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price
- ----------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1996 and 1997 294,266 $ 4.99
Options exercised ..................... (2,000) 4.61
- ----------------------------------------------------------------
Outstanding at December 31, 1997 ...... 292,266 $ 5.00
Options granted ....................... 8,500 16.00
Options forfeited ..................... (1,315) 5.12
Options exercised ..................... (6,950) 5.02
- ----------------------------------------------------------------
Outstanding at December 31, 1998 292,501 $ 5.31
===============================================================
</TABLE>
SFAS NO. 123 PRO FORMA DISCLOSURES
The Company applies the intrinsic value-based method in APB No. 25 in accounting
for its stock options granted. Under the intrinsic value method no compensation
cost has been recognized for its stock option grants. The proforma presentation
applies only to stock options granted in 1995 and later. Had compensation cost
been determined for options granted since 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): 1998 1997 1996
- -----------------------------------------------------------------------
Net income:
<S> <C> <C> <C>
As reported ........................ $1,215 $1,062 $1,083
Pro forma .......................... $1,206 $1,049 $1,070
Net income per common share - basic:
As reported ........................ $1.12 $0.99 $1.01
Pro forma .......................... $1.12 $0.97 $0.99
Net income per common share - diluted:
As reported ........................ $0.95 $0.84 $0.89
Pro forma .......................... $0.94 $0.83 $0.88
</TABLE>
The Company granted stock options in 1998 and 1995. The fair value of the
options granted during 1998 and 1995 was estimated as $23,000 and $65,000,
respectively on the date of the grant using a binomial option-pricing model with
the following assumptions: $0.30 annual dividend, volatility of 8% and 40%,
risk-free interest rate of 4.63% and 6.00%, assumed forfeiture rate of zero, and
an expected life of 10 years. The weighted average per share fair value of the
1998 and 1995 awards was $2.70 and $3.45. The impact of outstanding nonvested
stock options granted prior to 1995 has been excluded from the pro forma
calculations; accordingly, the 1998, 1997 and 1996 pro forma adjustments are not
indicative of future pro forma adjustments when the calculation will apply to
all applicable stock options.
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
- -------------------------------------- ---------------------
Weighted Weighted
Average Average
Number of Remaining Range of Number Exercise
Options Years Exercise Prices of Options Price
- -------------------------------------- ---------------------
<S> <C> <C> <C> <C>
266,866 4.6 $4.25-$5.625 252,701 $4.84
17,135 6.8 $7.875 9,850 $7.875
8,500 9.8 $16.00 --- ---
- -------------------------------------------------------------
292,501 4.8 $4.25-$16.00 262,551 $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 $60,000 in 1998, $54,000 in 1997 and
$57,000 in 1996.
(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 $48,000 for 1998, $41,000 for 1997 and $41,000 for 1996.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(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) ........................................ 1998 1997 1996
- ----------------------------------------------------------------------------------
Other expenses:
<S> <C> <C> <C>
Data processing ..................................... $ 352 $ 317 $ 287
Bankcard ............................................ 352 243 202
Directors' fees and expenses ........................ 158 154 139
Professional services ............................... 127 111 226
Other ............................................... 747 681 665
- ----------------------------------------------------------------------------------
$1,736 $1,506 $1,519
==================================================================================
</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.
(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 $41,576,000 and
$29,749,000 at December 31, 1998 and 1997, respectively. Commitments under
standby letters of credit approximated $355,000 and $172,000 at December 31,
1998 and 1997, respectively. Commitments under the Bank's credit card program
approximated $1,202,000 and $872,000 at December 31, 1998 and 1997,
respectively. No significant losses are anticipated as a result of these
commitments. Most of the outstanding commitments to extend credit are at
variable rates tied to the Bank's reference rate.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit issued is the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet financial instruments. The Company
controls the credit risk of the off-balance-sheet financial instruments through
the normal credit approval and monitoring process. Unless noted, the Company
does not necessarily require collateral or other security to support financial
instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments, the majority of which are
for one year or less, issued by the Company to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers.
(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, 1998, 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").
The average required reserve balance was approximately $9,000 during 1998. Due
to the Bank's cash balances during 1997, no balances were required to be
maintained at the FRB.
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, 1998, the Bank has
approximately $2,118,000 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
BAY COMMERCIAL SERVICES AND SUBSIDIARY
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- --------------------------------------------------------------------------------
REGULATORY MATTERS, CONTINUED
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,
1998, that the Company and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 1998 and 1997, the most recent notification from the Federal
Deposit Insurance Corporation ("FDIC") categorized the Bank as "adequately
capitalized" and "well capitalized", respectively, under the regulatory
framework for prompt corrective action. Under this framework, the Bank's total
capital level at December 31, 1998 does not allow the Bank to accept brokered
deposits or high rate deposits without prior approval from the FDIC while the
bank is considered adequately capitalized. At December 31, 1998, the Bank had no
brokered deposits or high rate deposits. 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, 1998 and 1997 are presented in the following tables:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
December 31, 1998 Company Bank
(dollars in thousands): Amount Ratio Amount Ratio
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital (actual) ........... $11,277 9.0% $10,837 8.7%
Tier 1 capital for capital adequacy
purposes ........................ $ 4,993 4.0% $ 4,988 4.0%
Tier 1 capital to be adequately
capitalized under prompt
corrective action provisions .... N/A N/A $ 4,988 4.0%
Total capital (actual) ............ $12,257 9.8% $11,817 9.5%
Total capital for capital adequacy
purposes ........................ $ 9,985 8.0% $ 9,976 8.0%
Total capital to be adequately
capitalized under prompt
corrective action provisions N/A N/A $ 9,976 8.0%
- --------------------------------------------------------------------------
Risk-weighted assets $124,814 $124,698
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
TIER 1 LEVERAGE RATIOS
December 31, 1998 Company Bank
(dollars in thousands): Amount Ratio Amount Ratio
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital (actual) ........... $11,277 8.2% $10,837 7.9%
Tier 1 capital for capital adequacy
purposes ........................ $ 5,525 4.0% $ 5,521 4.0%
Tier 1 capital to be adequately
capitalized under prompt
corrective action provisions .... N/A N/A $ 5,521 4.0%
- --------------------------------------------------------------------------
Average assets for fourth quarter $138,129 $138,013
==========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
December 31, 1997 Company Bank
(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 capital 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 capital 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>
<CAPTION>
TIER 1 LEVERAGE RATIOS
December 31, 1997 Company Bank
(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 capital adequacy
purposes ......................... $ 4,634 4.0% $ 4,629 4.0%
Total capital to be well capitalized
under prompt corrective
action provisions ............... N/A N/A $ 5,787 5.0%
- --------------------------------------------------------------------------
Average assets for fourth quarter $115,855 $115,730
==========================================================================
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(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:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31 (in thousands): .................... 1998 1997
- --------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash............................................ $ 283 $ 38
Investment in Bay Bank of Commerce ............. 10,955 10,318
Premises, net .................................. 112 121
Other assets ................................... 61 31
- --------------------------------------------------------------------
TOTAL ASSETS ................................. $11,411 $10,508
====================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Borrowed funds and other liabilities ........... $ 16 $ 335
Shareholders' equity ........................... 11,395 10,173
- --------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $11,411 $10,508
====================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED INCOME AND COMPREHENSIVE INCOME STATEMENTS
Years ended December 31 (in thousands): .... 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash dividends from
Bay Bank of Commerce ..................... $ 675 $ 365 $ 325
Other income ............................... 24 24 24
Other expenses ............................. (65) (63) (67)
- ----------------------------------------------------------------------------
Income before equity in
undistributed income of subsidiary ....... 634 326 282
Equity in undistributed income of subsidiary 581 736 801
- ----------------------------------------------------------------------------
Net income ................................. $ 1,215 $ 1,062 $ 1,083
Other comprehensive income--net of tax ..... 46 8 (109)
- ----------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME ................. $ 1,261 $ 1,070 $ 974
============================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31 (in thousands): .... 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ................................. $ 1,215 $ 1,062 $ 1,083
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of
subsidiary ......................... (581) (736) (801)
Depreciation .......................... 9 10 10
Change in other assets ................ (30) (29) 30
Change in borrowed funds and other
liabilities ........................ 5 (105) 101
- ----------------------------------------------------------------------------
Net cash provided by operating activities .. 618 202 423
- ----------------------------------------------------------------------------
Cash flows from financing activities:
Exercise of stock options .............. 35 9 ---
Repurchase and retirement of
common stock ........................ (84) --- ---
Dividends paid ......................... (324) (323) (323)
- ----------------------------------------------------------------------------
Net cash used in financing activities ..... (373) (314) (323)
- ----------------------------------------------------------------------------
Net change in cash ......................... 245 (112) 100
Cash at beginning of year .................. 38 150 50
- ----------------------------------------------------------------------------
CASH AT END OF YEAR ........................ $ 283 $ 38 $ 150
============================================================================
Noncash financing activities during the year:
Dividend payable --- $324 $323
</TABLE>
(16) 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.
Fair value has not been adjusted to reflect changes in market conditions
subsequent to December 31, 1998 and, therefore, estimates are not necessarily
indicative of amounts which could be realized in a current transaction.
The following methods and assumptions were used as of December 31, 1998 and 1997
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, securities sold under agreements to repurchase and other
borrowings. 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, 1998. The fair value of certificates
of deposit, securities sold under agreements to repurchase and other borrowings
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.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Disclosures About Fair Value of Financial Instruments, continued
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------
DECEMBER 31, 1998 CARRYING ESTIMATED
(in thousands): VALUE FAIR VALUE
- ------------------------------------------------------
Financial assets:
<S> <C> <C>
Cash and cash equivalents ... $ 9,077 $ 9,077
Securities available for sale 32,033 32,033
Securities held to maturity . 7,509 7,748
Loans held for sale, net of
allowance for loan losses . 939 983
Loans, net of allowance for
loan losses ............... 92,648 93,154
Financial liabilities:
Deposits .................... 123,395 123,405
Securities sold under
agreements to repurchase .. 1,344 1,344
Other borrowing ............. 7,000 7,000
- ------------------------------------------------------
DECEMBER 31, 1997 ............. CARRYING ESTIMATED
(in thousands): ............... VALUE FAIR VALUE
- ------------------------------------------------------
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
Other borrowing ............. 2,500 2,500
</TABLE>
At December 31, 1998 and 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 other assets and the value of premises and equipment at
December 31, 1998.
(17) SUBSEQUENT EVENTS:
On January 6, 1999, Bay Commercial Services declared a $0.40 per share cash
dividend payable on February 15, 1999 to shareholders of record at the close of
business on January 29, 1999. The total dividend payable amounted to $478,000.
INDEPENDENT AUDITORS' REPORT
DELOITTE & TOUCHE
(logo)
TO THE SHAREHOLDERS AND DIRECTORS OF
BAY COMMERCIAL SERVICES:
We have audited the accompanying consolidated balance sheets of Bay Commercial
Services and Subsidiary as of December 31, 1998 and 1997, 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, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bay Commercial Services and
Subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
January 29, 1999
BAY COMMERCIAL SERVICES AND SUBSIDIARY
15
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997
(Dollars in thousands, except per share amounts): Compared Compared
Years ended December 31, 1998 1997 1996 1995 1994 to 1997 To 1996
- -------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income .................................... $10,200 $8,759 $7,826 $7,456 $6,086 $1,441 $ 933
Interest income on a taxable equivalent basis ...... 10,327 8,853 7,904 7,505 6,146 1,474 949
Interest expense ................................... 3,479 2,956 2,457 2,310 1,766 523 499
Net interest income ................................ 6,721 5,803 5,369 5,146 4,320 918 434
Net interest income on a taxable equivalent basis .. 6,848 5,897 5,447 5,195 4,380 951 450
Provision (benefit) for loan losses ................ 134 52 --- (155) (100) 82 52
Net interest income after provision (benefit)
for loan losses ................................. 6,587 5,751 5,369 5,301 4,420 836 382
Noninterest income ................................. 941 971 1,080 716 1,076 (30) (109)
Noninterest expense ................................ 5,656 5,072 4,686 4,472 4,518 584 386
Income tax expense ................................. 657 588 680 600 359 69 (92)
Net income ......................................... 1,215 1,062 1,083 945 619 153 (21)
- -------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Net income per common share - basic ................ $ 1.12 $0.99 $1.01 $0.88 $0.57 $ 0.13 $(0.02)
Net income per common share - diluted .............. $ 0.95 $0.84 $0.89 $0.80 $0.56 $ 0.11 $(0.05)
Book value (year-end) .............................. $10.54 $9.43 $8.75 $8.14 $7.36 $ 1.11 $ 0.68
Cash dividends declared ............................ --- $0.30 $0.30 $0.30 $0.20 $(0.30) ---
Weighted average common shares - basic ............. 1,080,362 1,076,774 1,076,720 1,076,720 1,079,985 3,588 54
Weighted average common shares - diluted ........... 1,277,190 1,257,680 1,217,235 1,174,850 1,105,280 19,510 40,445
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET AT DECEMBER 31:
Assets ............................................. $144,202 $116,369 $96,769 $92,819 $89,193 $27,833 $19,600
Securities held to maturity ........................ 7,509 7,929 6,704 7,211 14,823 (420) 1,225
Securities available for sale ...................... 32,033 24,651 9,339 13,199 11,165 7,382 15,312
Federal funds sold and securities purchased
under agreements to resell ....................... --- --- --- 6,700 2,530 --- ---
Total loans ........................................ 93,129 74,129 71,362 58,152 51,566 19,000 2,767
Deposits ........................................... 123,395 101,135 83,291 80,253 79,258 22,260 17,844
Other borrowed funds ............................... 8,344 3,790 2,804 2,203 1,036 4,554 986
Shareholders' equity ............................... 11,395 10,173 9,418 8,767 7,946 1,222 755
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET - AVERAGE BALANCES (1):
Assets ............................................. $126,710 $107,057 $95,063 $91,106 $86,112 $19,653 $11,994
Securities - taxable .............................. 23,750 18,396 15,234 20,370 21,368 5,354 3,162
Securities - tax exempt ........................... 5,395 3,874 3,165 2,186 2,113 1,521 709
Federal funds sold and securities purchased
under agreements to resell ....................... 6,438 5,338 4,870 6,469 3,688 1,100 468
Total loans ........................................ 81,354 70,217 63,008 52,830 49,109 11,137 7,209
Earning assets ..................................... 116,674 97,432 86,110 81,652 75,425 19,242 11,322
Deposits ........................................... 113,462 94,237 82,611 80,262 76,690 19,225 11,626
Other borrowed funds ............................... 1,478 1,894 2,209 1,313 1,021 (416) (315)
Interest-bearing liabilities ....................... 82,566 68,387 59,696 57,004 55,238 14,179 8,691
Shareholders' equity ............................... 10,770 9,920 9,215 8,541 7,846 850 705
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding unrealized gain(loss) on securities available for sale.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
16
<PAGE>
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 which could reduce margins; (3) general economic
conditions, either nationally or regionally, that 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 1998 was $1,215,000
compared to $1,062,000 in 1997 and $1,083,000 in 1996. Net income per common
share - basic was $1.12, $0.99 and $1.01 for 1998, 1997 and 1996, respectively.
Net income per common share - diluted was $0.95, $0.84 and $0.89 for 1998, 1997
and 1996, respectively. The return on average assets was 1.0% in 1998 compared
to 1.0% and 1.1% in 1997 and 1996, respectively. The return on average
shareholders' equity was 11.3% in 1998, 10.7% in 1997 and 11.8% in 1996.
Net income for the year increased $153,000 or 14% compared to 1997 as strong
growth in net interest income more than offset increases in noninterest
expenses, a larger provision for loan losses, higher income tax expense and
reduced noninterest income during 1998.
Net interest income rose $918,000 or 16% in 1998, the result of $19,242,000 or
20% growth in average interest-earning assets compared to 1997. Noninterest
expenses rose $584,000 or 12% in 1998. A significant factor in the increase in
noninterest expenses was a $365,000 increase in salaries and employee benefits
expense, much of which was attributable to the first whole year with a
fully-staffed San Ramon branch of Bay Bank of Commerce (the "Bank"). The
remaining balance of the increase was attributable to higher performance bonuses
and normal annual salary increases in 1998. The provision for loan losses
increased $82,000 during 1998 principally in response to the strong loan growth
during the year. Income tax expense increased $69,000 or 12% due to increased
taxable income in 1998. Although several sources of noninterest income increased
in 1998, the lack of significant recoveries of prior years' expenses related to
charged-off loans compared to 1997 as well as a continuing decline in loan
servicing income resulted in a $30,000 or 3% decrease in noninterest income in
1998.
The $434,000 or 8% growth in net interest income for 1997 reflected $11,322,000
or 13% growth in average interest-earning assets compared to 1996. The opening
of the San Ramon branch of the Bank in late 1996 and subsequent staffing
increases throughout 1997 resulted in increased payroll and occupancy expenses,
which were a key factor in the $386,000 or 8% increase in noninterest expenses
in 1997. Noninterest income declined by $109,000 or 10% in 1997 primarily due to
reduced gains on sales of other real estate owned ("OREO") and reduced gain on
sale of loans compared to 1996. The major factor in the $52,000 provision for
loan losses during 1997 was the higher level of average outstanding loan
balances. No provision was made in 1996.
As a result of continued strong deposit growth during the year, total assets
increased by $27,833,000 to $144,202,000 at December 31, 1998, an increase of
24% over December 31, 1997. Total deposits grew $22,260,000 or 22% during 1998,
reflecting growth in all deposit categories. Additionally, other short-term
borrowing increased $4,500,000 compared to December 31, 1997. The growth in
funding was principally invested in a $19,000,000 increase in loans, a
$6,962,000 increase in securities and a $1,529,000 increase in cash and cash
equivalents compared to December 31, 1997.
<PAGE>
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 $6,721,000 for 1998 increased $918,000 or 16% compared to
1997. The increase reflected the growth in average interest-earning assets. The
net interest margin, the ratio of net interest income to average
interest-earning assets, was 5.76% in 1998 compared to 5.96% in 1997, reflecting
changes in the portfolio mix of interest-earning assets and interest-bearing
liabilities and the impact of declining market interest rates on those
portfolios.
Net interest income of $5,803,000 for 1997 increased $434,000 or 8% compared to
1996. The increase reflected an $11,322,000 or 13% growth in average
interest-earning assets. The net interest margin was 5.96% in 1997 compared to
6.24% in 1996.
Interest income, which includes interest and fees generated by interest-earning
assets, totaled $10,200,000 in 1998, a $1,441,000 or 16% increase over 1997.
Average interest-earning assets grew $19,242,000 or 20% in 1998 while the yield
earned on those assets declined to 8.74% compared to 8.99% during 1997. Loan
growth strengthened in 1998, particularly in construction and commercial
lending; average earning loan balances increased $11,267,000 or 16% compared to
1997. Average total securities increased $6,875,000 or 31%. The decline in the
yield on interest-earning assets during 1998 was attributable to several
factors. A significant proportion of the
BAY COMMERCIAL SERVICES AND SUBSIDIARY
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
- --------------------------------------------------------------------------------
NET INTEREST INCOME, CONTINUED
Bank's assets are interest rate sensitive and the decline in overall market
interest rates, primarily during the second half of the year, caused a decline
in yields earned. Throughout the year, loan rates were also under downward
pressure due to the competitive loan market in the San Francisco Bay Area.
Finally, although the Bank's loan growth was exceptionally strong during 1998,
the increase in investment securities was even greater, resulting in an
increased percentage of earning assets invested in lower yielding securities.
Interest income totaled $8,759,000 in 1997, a $933,000 or 12% increase over
1996. Average interest-earning 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.
Although average earning loan balances in 1997 were $7,006,000 or 11% higher
than 1996, the higher average balance 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. Average total
securities grew $3,871,000 or 21% in 1997. The reduced yield on earning assets
of 8.99% in 1997 compared to 9.09% in 1996 largely 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 expense of $3,479,000 in 1998 rose $523,000 or 18% compared to 1997.
The increased expense reflected a $14,179,000 or 21% increase in average
interest-bearing liabilities. The rate paid for average interest-bearing
liabilities declined to 4.21% from 4.32% in 1997, reflecting lower overall
market deposit rates as well as a drop in average time deposits as a percentage
of average interest-bearing liabilities to 56% in 1998 from 59% in 1997. Average
savings and interest-bearing demand deposits grew $8,983,000 or 35%, benefiting
from the 1998 introduction of a new rate-indexed money market deposit account.
The average rate paid on savings and interest-bearing demand deposits also rose
to 3.00% compared to 2.73% in 1997 as a result of this new variable rate money
market account, which was introduced to the Bank's deposit line to compete with
similar products offered by financial institutions in the Bank's trading area.
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 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. For example, in a static gap analysis, if more assets than
liabilities repriced in a given period (an asset sensitive position) and market
interest rates declined, net interest income could be adversely impacted.
Conversely, if interest rates increased, net interest income could be positively
impacted.
<PAGE>
The following table presents the Company's interest rate sensitivity gap
position at December 31, 1998. For any given period, the repricing is matched
when an equal amount of assets and liabilities reprice. The repricing of a fixed
rate asset or liability is considered to occur at its contractual maturity or,
for those assets which are held for sale, within the time period during which
sale may reasonably be expected to be accomplished. Floating rate assets or
liabilities are considered to reprice in the period during which the rate can
contractually change. Any excess of either assets or liabilities in a period
results in a gap, or mismatch, shown in the table. A positive gap indicates
asset sensitivity and a negative gap indicates liability sensitivity.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIOD
----------------------------------------------
Over 3 Over 1
3 months months to year to Over 5
(Dollars in thousands): or less 1 year 5 years years Total
- ----------------------------------------------------------------------------------------------------
Interest rate sensitive assets:
<S> <C> <C> <C> <C> <C>
Loans (excluding nonaccrual and
deferred fees) .................... $62,351 $ 4,942 $12,402 $13,903 $ 93,598
Securities, excluding FHLB
stock, (amortized cost) .......... 19,715 519 10,373 8,871 39,478
- ----------------------------------------------------------------------------------------------------
Total ............................... $82,066 $ 5,461 $22,775 $22,774 $133,076
- ----------------------------------------------------------------------------------------------------
Interest rate sensitive liabilities:
Interest-bearing
transaction accounts .............. 31,010 --- --- --- 31,010
Savings deposits .................... 6,561 --- --- --- 6,561
Time deposits of
$100 or more ...................... 26,361 5,875 710 --- 32,946
Other time deposits ................. 12,061 5,304 1,608 1 18,974
Other borrowed funds ................ 7,246 1,098 --- --- 8,344
- ----------------------------------------------------------------------------------------------------
Total ............................... $83,239 $12,277 $ 2,318 $ 1 $ 97,835
- ----------------------------------------------------------------------------------------------------
Interest rate sensitivity gap ......... $(1,173) $(6,816) $20,457 $22,773 $ 35,241
====================================================================================================
Cumulative interest rate
sensitivity gap ...................... $ (1,173) $(7,989) $ 12,468 $ 35,241
====================================================================================================
Cumulative interest rate
sensitivity gap
to total assets ..................... (0.8)% (5.5)% 8.6% 24.4%
====================================================================================================
</TABLE>
This table presents a static gap, which is a position at a point in time.
It does not address the interest rate sensitivity of assets or liabilities which
would be added through growth, nor does it anticipate the future interest rate
sensitivity of assets and liabilities once they have repriced, and it assumes
equivalent elasticity of assets and liabilities.
The interest rate sensitivity analysis at December 31, 1998, indicates that the
Company, on a cumulative basis was liability sensitive in the "3 months or less"
and "Over 3 months to 1 year" periods and asset sensitive over all remaining
periods.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Bank provides for possible loan losses by a charge to operating income based
upon the composition of the loan portfolio, past loan loss experience, current
economic conditions and other factors
BAY COMMERCIAL SERVICES AND SUBSIDIARY
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
- -----------------------------------------------
PROVISION AND ALLOWANCE FOR LOAN LOSSES, CONTINUED
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.
The loan loss reserve is reviewed by management at least quarterly. Management
attributes general reserves to different types of loans using percentages which
are based upon perceived risk associated with the portfolio and underlying
collateral, historical loss experience, and vulnerability to changing economic
conditions which may affect the collectibility of the loans. Specific reserves
are allocated for impaired loans, for loans which have experienced a decline in
internal loan grading, and when management believes additional loss exposure
exists. 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. 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.
The Senior Loan Officer assesses the loan portfolio monthly to determine which
loans are specifically identifiable problem credits in order to update the
Bank's internal watch list, which tracks all such credits. The Bank's internal
Loan Review Examiner grades all new commercial loans and all credits where the
total liability equals or exceeds certain thresholds established by management.
If either the Senior Loan Officer or the Loan Review Examiner identifies a
serious deficiency, the loan is placed on the next quarterly watch list.
Management provides a specific reserve allowance for the effects of the problem
applicable to each watchlisted credit. When management identifies a generalized
risk not evidenced by a specially identifiable loan or portfolio segment as of
the evaluation date, management's evaluation of the probable loss exposure
concerning this condition will be provided for by adjusting the level of general
reserve for this exposure.
The provision for loan losses reflects an amount necessary to adjust the
allowance for loan losses to 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, 1998, the allowance for loan losses was $980,000 compared to
$1,000,000 at December 31, 1997. The reduced allowance reflected net loan
charge-offs of $154,000 during the year, which were partially offset by a
$134,000 loan loss provision in 1998. The loan loss provision was $52,000 in
1997. Although nonperforming loans dropped during 1998, (see information on
non-performing loans below), additional credit risk inherent in the strong loan
growth, particularly in construction lending, was reflected in the provision.
The ratio of the allowance for loan losses to total loans was 1.1% at December
31, 1998, and 1.3% at December 31, 1997. Based upon information currently
available, management believes that the allowance for loan losses at December
31, 1998, 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.
At December 31, 1998 and 1997, the Bank also held California Capital Access
Program ("CalCAP") deposits of $203,000 and $137,000, respectively, which CalCAP
has pledged to offset any losses on any loans in the Bank's CalCAP portfolio.
The Bank had a total of $1,584,000 and $1,460,000 in CalCAP loans as of December
31, 1998 and 1997, respectively. CalCAP is a program authorized by the
California Legislature to encourage California financial institutions to make
loans to small businesses whose operations affect the state's environment and
which may not meet the normal underwriting standards of the financial
institution.
<PAGE>
Information on nonperforming loans for the years ended December 31, 1998 and
1997 is summarized in the following table.
<TABLE>
<CAPTION>
(Dollars in thousands): 1998 1997 $ Change % Change
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loan charge-offs ................$(154) $ (23) $(131) 569.6%
Ratio of net loan charge-offs
to average loans .................. (0.2%) ---
Nonperforming loans at December 31:
Nonaccrual loans ..................$ 30 $ 440 $(410) (93.2)%
Accruing loans past due
90 days or more .................. --- --- --- ---
Restructured loans ................ 469 471 (2) (0.4)
- ---------------------------------------------------------------------------
Total nonperforming loans .......$ 499 $ 911 $(412) (45.2)%
===========================================================================
Ratio of nonperforming loans
to total loans .................... 0.5% 1.2%
Ratio of allowance for loan losses
to nonperforming loans ...........196.4% 109.8%
</TABLE>
The nonaccrual balance at December 31, 1998 represents one loan of which
$27,000 is guaranteed by the Small Business Administration ("SBA"). All of the
nonaccrual loans at December 31, 1997 were SBA loans which were addressed during
1998; $231,000 was received for the SBA-guaranteed portions of several loans,
$163,000 was charged off and $46,000 was paid off.
Of total nonperforming loans at December 31, 1998 and 1997, respectively,
$27,000 and $231,000 were guaranteed by the SBA and, therefore, not considered
impaired. At December 31,1998, the collateral method was used in the evaluation
of $469,000 and the remainder was evaluated using discounted cash flow analysis.
At December 31,1997, the collateral method was used in the evaluation of
$209,000 and discounted cash flow analysis was used to evaluate the remainder.
At December 31, 1998 and 1997, these evaluations required the allocation of
$70,000 and $164,000 of the respective allowances for loan losses.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
- -----------------------------------------------
OTHER REAL ESTATE OWNED
The Bank held no OREO at December 31, 1998 or 1997. There were no sales of OREO
during 1998 or 1997. During 1996, three properties which had been acquired
through foreclosure were sold.
NONINTEREST INCOME
Total noninterest income of $941,000 for 1998 declined $30,000 or 3% compared to
1997. During 1997, other noninterest income was $58,000 or 77% higher due to
recovery of prior years' expenses related to charged-off loans, which was not
repeated in 1998. Loan servicing income declined $47,000 or 36% as payoffs of
serviced loans exceeded the addition of new serviced loans in 1998. Partially
offsetting the decreases in noninterest income was a $107,000 or 35% increase in
bankcard income, reflecting continuing growth in merchant bankcard activity.
Gain on sale of loans was $31,000 or 54% higher in 1998, due to larger sales of
the guaranteed portion of SBA loans.
Total noninterest income of $971,000 for 1997 declined $109,000 or 10% compared
to 1996. A $119,000 gain on sale of OREO in 1996 was not repeated in 1997.
Additionally, a smaller volume of SBA loan sales during 1997 led to a $117,000
or 67% decrease in gain on sale of loans compared to 1996. These decreases in
noninterest income were partially offset by increases of $70,000 or 52% in other
noninterest income, principally recoveries during 1997 of prior years' expenses
related to charged-off loans, and $53,000 or 21% in bankcard income due to
growth in merchant sales volume. Loan servicing income declined slightly in 1997
as serviced loan payoffs more than offset servicing added from loan sales.
NONINTEREST EXPENSE
Total noninterest expenses of $5,656,000 for 1998 increased $584,000 or 12%
compared to 1997. Salaries and employee benefits showed the largest increase,
$365,000 or 13%, much of which was attributable to the now fully staffed San
Ramon branch of the Bank as well as higher performance bonuses and normal annual
salary increases in 1998. Occupancy expense declined by $11,000 or 2% compared
to 1997. Other noninterest expenses increased $230,000 or 15% during 1998 with
the most significant increase in merchant bankcard expense, up $109,000 or 45%
as merchant bankcard activity continues to grow. Operating expenses which
increased principally as a function of asset growth were data processing
expense, up $35,000 or 11%, and "other" expenses, up $66,000 or 10%.
Total noninterest expenses of $5,072,000 for 1997 increased $386,000 or 8%
compared to 1996. Salaries and employee benefits increased $318,000 or 12%,
principally reflecting the first full year of operations and continuing staff
growth at the Bank's San Ramon branch which 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.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $657,000 in 1998 compared to $588,000
in 1997. The $69,000 or 12% increase reflected the increase in taxable income.
The effective income tax rates were 35.1%, 35.7% and 38.6% for 1998, 1997 and
1996, respectively. See also Note 5 in "Notes to Consolidated Financial
Statements". The Company has reduced the effective income tax rate in the last
two years through increased investment in nontaxable municipal securities and in
loans to businesses in areas classified as "enterprise zones" by the State of
California.
FINANCIAL CONDITION
Total loans of $93,129,000 at December 31, 1998 increased $19,000,000 or 26%
from December 31, 1997. The most significant increases were $8,613,000 or 116%
in real estate construction loans, primarily residential construction, and
$5,270,000 or 28% in commercial loans, compared to December 31, 1997. Total
securities of $39,542,000 at December 31, 1998 increased $6,962,000 or 21% from
December 31, 1997, principally due to increased investment in commercial paper,
mortgage-backed securities and municipal securities, partially offset by a
decline in U.S. government agencies securities.
DEPOSITS AND OTHER BORROWED FUNDS
Total deposits of $123,395,000 at December 31, 1998 increased $22,260,000 or 22%
compared to December 31, 1997. The strongest growth was in time certificates of
deposit of $100,000 and over, which increased $8,777,000 or 68%, and savings and
interest-bearing demand deposits, which increased $8,368,000 or 29%, compared to
December 31, 1997. Noninterest-bearing demand deposits also increased,
$4,828,000 or 17% from December 31, 1997 to December 31, 1998. Other short-term
borrowing increased $4,500,000 to $7,000,000 at December 31, 1998 due to
year-end deposit fluctuations.
OTHER ASSETS AND OTHER LIABILITIES
Interest and fees receivable of $635,000 at December 31, 1998 increased $69,000
or 12% from December 31, 1997, reflecting increased accrued interest receivable
associated with the strong loan growth in 1998 as well as higher deferred tax
assets and prepaid expenses at year-end 1998. Interest payable and other
liabilities of $1,068,000 at December 31, 1998 declined $203,000 or 16% compared
to December 31, 1997, largely due to the 1998 dividend payment of $324,000
accrued in 1997.
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 cash equivalents, 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
BAY COMMERCIAL SERVICES AND SUBSIDIARY
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
- -----------------------------------------------
Liquidity, continued
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 30% at December 31, 1998, and 32%
at December 31, 1997. 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, to meet unforeseen outflows, the Bank has informal, non-binding
borrowing arrangements with two correspondent banks, which include federal funds
borrowing lines totaling $8,500,000 and a repurchase facility. During 1998, the
Bank became a member of the Federal Home Loan Bank of San Francisco, which
membership provides access to collateralized borrowing. At December 31, 1998,
the Bank had an outstanding balance of $7,000,000 on a total available
collaterized credit line of approximately $12,000,000.
CAPITAL
The Company and the Bank are subject to Federal Reserve Board guidelines and
regulations of the Federal Deposit Insurance Corporation ("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's 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 stock-holders' 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; (iv) term subordinated debt and intermediate-term preferred stock;
and (v) 45% of the unrealized gain, net of taxes, on securities available for
sale. The maximum amount of supplemental capital elements which qualifies as
Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including both on- and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Federal Reserve Board to those assets. Both
bank holding companies and nonmember banks are required to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of 8%, at least
one-half of which must be in the form of Tier 1 capital. The Federal Reserve
Board and the FDIC also have established a minimum leverage ratio of 3% of Tier
1 capital to total assets for bank holding companies and nonmember banks that
have received the highest composite regulatory rating and are not anticipating
or experiencing any significant growth. All other institutions are required to
maintain a leverage ratio of at least 100 to 200 basis points above the 3%
minimum.
The following tables present the Company's and the Bank's regulatory capital
positions at December 31, 1998:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
Company Bank
(Dollars in thousands): Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 capital ........................ $11,277 9.0% $10,837 8.7%
Tier 1 capital regulatory
minimum requirement ................. $ 4,993 4.0% $ 4,988 4.0%
- ---------------------------------------------------------------------------
Capital held in excess of
regulatory minimum .................. $ 6,284 5.0% $ 5,849 4.7%
Total capital ......................... $12,257 9.8% $11,817 9.5%
Total capital regulatory
minimum requirement ................. $ 9,985 8.0% $ 9,976 8.0%
- ---------------------------------------------------------------------------
Capital held in excess of
regulatory minimum .................. $ 2,272 1.8% $ 1,841 1.5%
- ---------------------------------------------------------------------------
Risk weighted assets .................. $124,814 $124,698
===========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
Company Bank
(Dollars in thousands): Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 capital to average total assets $11,277 8.2% $10,837 7.9%
Range of regulatory minimum ........... $ 4,144- 3.0- $ 4,140- 3.0-
leverage requirement ................ $ 6,906 5.0% $ 6,901 5.0%
- ---------------------------------------------------------------------------
Range of regulatory excess ............ $ 4,371- 3.2- $ 3,936- 2.9-
$ 7,133 5.2% $ 6,697 4.9%
---------------------------------------------------------------------------
Average total assets for fourth quarter $138,129 $138,013
===========================================================================
</TABLE>
As of December 31, 1998 and 1997, the most recent notification from the FDIC
categorized the Bank as "adequately capitalized" and "well capitalized",
respectively, under the regulatory framework for prompt corrective action. The
change in the Bank's classification to "adequately capitalized" as of December
31, 1998 reflected the strong asset growth during 1998 which outperformed the
growth in capital. The Company currently does not have any material commitments
for capital expenditures, and in the opinion of management, the Company's and
the Bank's capital positions are sufficient to meet their respective needs.
INFLATION
It is management's opinion that the effects of inflation on the consolidated
financial statements for the periods ended December 31, 1998 and 1997 have not
been material.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
- -----------------------------------------------
YEAR 2000 READINESS DISCLOSURE
The following discussion of the implications of the Year 2000 problem for the
Company contains numerous forward-looking statements based on inherently
uncertain information. The cost of the project and the date on which the Company
plans to complete the internal Year 2000 modifications are based on management's
best estimates, which were derived utilizing a number of assumptions of future
events including the continued availability of internal and external resources,
third party modifications and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse affect on the Company.
In addition, the Company places a high degree of reliance on computer systems of
third parties, such as customers, suppliers, and other financial and
governmental institutions. Although the Company continues to assess the
readiness of these third parties and is preparing contingency plans, there can
be no guarantees that the failure of any one of these third parties to modify
their systems in advance of December 31, 1999 would not have a material adverse
affect on the Company.
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 many systems and
programs that are date sensitive will treat "00" as the year 1900, and not
properly recognize the date transition at the year 2000. An additional issue is
that 1900 was not a leap year, whereas the year 2000 is. Therefore, some
programs may not properly provide for February 29, 2000.
The Company initiated its Year 2000 planning in 1997 and has prepared a
comprehensive written plan which addresses both internal and external Year 2000
exposure and includes the following phases - Inventory and Assessment,
Renovation, Testing and Implementation, and Contingency Planning.
Inventory & Assessment
The Company completed its inventory and assessment phase during 1997. During
this process the Company made a physical inventory of information technology
("IT") systems and non-IT systems at each office location. Additionally, all
vendor supplied services were reviewed to identify IT and non-IT Year 2000
issues. The systems examined included hardware and software platforms associated
with customer account processing, computer networks and workstations, and
telecommunications systems.
Although the assessment determined that there was no significant reliance on
non-IT technology (that is, equipment with embedded microprocessor controls such
as elevators, climate control systems, etc.), it did identify mission critical
IT systems, both internal and external that were not Year 2000 compliant.
These noncompliant systems included data processing applications provided by
third party suppliers, the teller platform at two branch offices of the Bank,
and some of the hardware and software elements of the Bank's Wide Area Network
("WAN") computer network. The WAN is a centralized, server based, system that
interconnects employees' desktop PC workstations at each location.
One additional element of Year 2000 concern has been the Bank's customers. The
Bank is reliant on its customers to make the necessary preparations for the Year
2000 so that their business operations will not be interrupted, thus threatening
their ability to honor financial commitments.
In an ongoing effort to ensure that its customer base is aware of the Year 2000
issue, during the second quarter of 1998 the Bank mailed to each commercial
account, and included in each commercial account loan and deposit account
statement, a letter addressing Year 2000 issues and encouraging the assessment
of Year 2000 risk. Year 2000 reference resources for businesses were also
provided.
As part of its customer Year 2000 assessment, the Bank identified all commercial
account borrowing relationships in excess of $100,000. These represented over
200 relationships and approximately 95% of the total borrowings outstanding as
of June 30, 1998. Each of these business relationships was analyzed as to its
potential for Year 2000 risk and approximately 20% were selected to receive a
detailed Year 2000 questionnaire. The questionnaire, requesting additional
information on Year 2000 status, was delivered to these selected customers
during the third quarter of 1998. The completed questionnaires were analyzed for
risk and each borrower was assigned a Year 2000 risk rating. As a result of this
analysis, the Bank modified its credit review process and its underwriting
criteria to include consideration of Year 2000 issues.
Renovation, Testing & Implementation
The correction and testing phase of the Company's Year 2000 Plan includes the
renovation and/or replacement of all mission critical IT hardware, software and
equipment identified as not compliant with the Year 2000. The majority of the
internal mission critical renovation centered around the upgrade to the Bank's
WAN and teller systems. The installation of the Year 2000 compliant teller
system was completed by December 31, 1998.
To ensure Year 2000 compliance of its WAN and reduce the administrative overhead
of its IT systems, management determined that a complete renovation of the WAN
would provide the most cost effective solution. Most of the elements of the
Bank's WAN upgrade were completed by December 31, 1998. Due to the overall
complexity of this project, however, only a few of the desktop workstations were
operational on the new system at that time. Current projections are for all
users to be converted over to the new Year 2000 compliant system during the
second quarter of 1999.
The Bank relies on two primary off-site data processing vendors for the mission
critical processing of the Bank's customer accounting system and general ledger
applications. These vendors identified
BAY COMMERCIAL SERVICES AND SUBSIDIARY
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
- -----------------------------------------------
Renovation, Testing & Implementation, continued
certain Year 2000 compliance issues and the renovations to these systems were
completed by December 31, 1998. Testing of these systems is expected to be
substantially completed during the first quarter of 1999.
Although no vendors were identified where the inability to be Year 2000
compliant would cause the Company to seek alternative suppliers, the Company has
no viable alternatives for some vendors, such as power distribution and local
telephone companies. The Year 2000 efforts of these companies continue to be
monitored and are part of the Company's contingency plan. As with all financial
institutions, the Company places a high degree of reliance on systems of other
institutions, including governmental agencies, to settle transactions.
Costs
The majority of the costs associated with the Company's Year 2000 project are
for the installation and testing of the components to upgrade the Bank's teller
systems and WAN. Included in this project were improved communication
connections between offices, higher capacity computer file servers, and
operating system upgrades for the entire network. While these investments were
not specifically accelerated due to the Company's Year 2000 project, these costs
have been included.
As of December 31, 1998, the Company had invested approximately $75,000 for
capital improvements to the WAN. Additional capital costs projected to be
incurred for this project during 1999 are estimated at $160,000. The capital
cost to upgrade the Bank's teller system for Year 2000 compliance is $60,000, of
which $18,000 was expended as of December 31, 1998. Other costs incurred during
1998 by the Company include staff time devoted to the issue at a cost of
approximately $15,000 and outside consulting of $7,000. Current estimates of
additional costs for staff and outside consultants in 1999 and the year 2000 are
$60,000.
While management believes it has identified and planned for the resolution of
the mission critical issues relevant to the Year 2000, no assurance can be given
that the Company may not be required to expend significant additional amounts
related to the Year 2000 issue.
Risks
The principal risks associated with the Year 2000 problem primarily fall into
three categories. The first risk is that the Company is unable to successfully
renovate and/or migrate to Year 2000 compliant systems. The second risk is the
disruption of operations due to the failure of third parties. The third is the
risk of business interruption among fund providers and fund users which affects
their ability to contractually perform.
The only risk largely under the Company's control for the Year 2000 project is
the identification, renovation and implementation of its internal operations.
The Company, like other financial institutions, is heavily dependent upon its
computer systems. Reliance on readily available PC-based systems and technology
for WAN and desktop workstations has simplified this process to some extent, and
management believes it will be able to make the necessary renovations of its
internal systems for Year 2000 compliance.
Because of the reliance on outside vendors for processing mission critical
customer accounting systems, a computer failure of a third party may jeopardize
Company operations. How serious this would be depends on the nature and duration
of such failures. Because of the complexity, integration and dependence of these
outside systems to the Company's operations, switching to another vendor on
short notice does not represent a viable option. At this time, management
believes that the necessary renovations to these third party systems will be
completed on schedule.
Another serious impact to Company operations would occur if basic services such
as telecommunications, electric power supplies and services provided by other
governmental agencies were disrupted. To date definitive public disclosure of
the state of readiness among basic infrastructure suppliers has not been
generally available. Although inquiries continue, the Company does not yet have
the information to estimate the likelihood of significant disruptions among
these suppliers.
Contingency Planning
The Company has developed contingency plans for the Year 2000 in the event that
remediation is not completed in time, or if systems fail for reasons that are
not presently foreseen. In the event of a failure, these plans outline the steps
that will be taken to deal with the situation to minimize the effect on
customers and losses to the Company. As the Company's identified Year 2000 risks
are largely concentrated with the ability of third parties to provide services
after the year 2000, contingency plans being developed will primarily
concentrate on the inability of these suppliers to complete their Year 2000
projects. Based upon currently known information, management believes that its
primary vendors have the resources to complete their Year 2000 projects
successfully and on time.
Apart from the Company's Year 2000 project, federal banking regulators are
conducting special examinations of FDIC-insured financial institutions and third
party data processors, including suppliers to the Company, to determine whether
they are taking necessary steps to prepare for the Year 2000. They are closely
monitoring the progress made by these institutions in completing key steps
required by their individual Year 2000 plans.
The Company's disclosure and announcement herein concerning its Year 2000
planning and programs are intended to constitute "year 2000 readiness
disclosures" as defined in the recently-enacted Year 2000 Information and
Readiness Disclosure Act (the "Act"). The Act provided certain protection from
liability for certain public and private statements concerning an entity's Year
2000 readiness and the Year 2000 readiness of its products and services.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
23
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS
- ---------------------------- ------------------------------------------------------------------
<S> <C> <C>
Joshua Fong, O.D. Richard M. Kahler William E. Peluso
Chairman, President & CEO, Restaurant Consultant,
Bay Commercial Services Bay Commercial Services Livermore
Retired Optometrist, President & CEO,
San Leandro Bay Bank of Commerce Oswald A. Rugaard
Self-employed
William R. Henson Dimitri Koroslev Independent Sales Consultant,
President, Chairman, San Leandro
Superior Home Loans, Bay Bank of Commerce
Hayward President, Mark Wilton
Bay Business Credit, Owner,
Walnut Creek Marwil Investments
Lafayette
</TABLE>
<TABLE>
<CAPTION>
OFFICERS
- ---------------------------- ------------------------------------------------------------------
<S> <C> <C>
EXECUTIVE Rebecca Worthen ADMINISTRATIVE
Assistant Vice President,
Richard M. Kahler Commercial Lending Jane C. Christopherson
President & CEO Vice President &
Bay Bank of Commerce & David A. Weinshelbaum Chief Financial Officer
Bay Commercial Services Assistant Vice President,
Commercial Lending Eileen Berry Wortham
Randall D. Greenfield Marketing Director
Senior Vice President & CAO, Maria Mabardy
Bay Bank of Commerce Assistant Vice President, Operations
Chief Financial Officer, Lending
Bay Commercial Services Nancy Bowers
Construction Lending Vice President, Operations
Robert A. Perantoni Director of Human Resources
Senior Vice President & Cindy Chase
Senior Lending Officer Vice President, Arlene Dalldorf
Construction Lending Assistant Vice President,
COMMERCIAL LENDING Operations Officer
John Stevens
Teresa Jensen Vice President, Kay Tropiano
Vice President & SBA Loan Construction Lending Operations Officer
Manager
BRANCH ADMINISTRATION & Brenda Fernandez
Alan Lozito BUSINESS DEVELOPMENT Assistant Vice President &
Vice President, Credit Operations Officer
Commercial Lending Jim Nunn
Vice President & Carol Barfuss
Michael Maxson Hayward Branch Manager Assistant Vice President &
Vice President, Compliance Officer
Commercial Lending Margie Perry
Vice President & William Reynolds
Sally Porfido San Ramon Branch Manager Manager of Courier Services &
Vice President, Security Officer
Commercial Lending Michelle Munson
Business Development Officer
Earl Rupp
Vice President,
Commercial Lending
</TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
24
<PAGE>
(back cover - inside)
THE COMPANY WILL PROVIDE TO ANY SHAREHOLDER, WITHOUT CHARGE, A COPY OF THE
COMPANY'S ANNUAL REPORT FOR 1998 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 409 shareholders of record as of March 10, 1999.
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, 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
March 31, 1998 $15.125 $16.25
June 30, 1998 $15.75 $17.00
September 30, 1998 $13.00 $17.25
December 31, 1998 $12.25 $15.50
- -------------------------------------------------------------------
</TABLE>
The Company paid cash dividends of $0.30 per share in 1998 and 1997. On January
6, 1999, Bay Commercial Services declared a $0.40 per share cash dividend
payable on February 15, 1999 to shareholders of record at the close of business
on January 29, 1999. The total dividend payable amounted to $478,000.
MARKET MAKERS
SUTRO & CO., Troy Norlander
Big Bear Lake, CA
(800) 288-2811
HOEFER & ARNETT, INC., Marc Arnett or Lisa Gallo
San Francisco, CA
(800) 346-5544
<PAGE>
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
<PAGE>
(back cover- outside)
(LOGO)
BAY BANK OF COMMERCE
MAIN OFFICE
1495 East 14th Street
San Leandro, California 94577
(510) 357-2265
HAYWARD OFFICE
1030 La Playa Drive
Hayward, California 94545
(510) 783-8000
SAN RAMON OFFICE
2821 Crow Canyon Road
San Ramon, California 94583
(925) 831-6111
CONSTRUCTION LOAN OFFICE
1500 Washington Avenue
San Leandro, California 94577
(510) 357-2265
SBA LOAN OFFICE
1500 Washington Avenue
San Leandro, California 94577
(510) 895-5515
Member FDIC
Equal Housing Lending
Copyright 1999, Bay Commercial Services Printed in the USA
<PAGE>
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 January 29, 1999, appearing in this Annual Report on Form 10-KSB of
Bay Commercial Services for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
March 24, 1999
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.
Signature Title Date
- --------- ----- ----
/s/ Joshua Fong, O.D. Chairman of the Board and Director March 17, 1999
- --------------------------
Joshua Fong, O.D.
/s/ William. R. Henson Director March 17, 1999
- --------------------------
William R. Henson
/s/ Dimitri V. Koroslev Director March 17, 1999
- --------------------------
Dimitri V. Koroslev
/s/ William E. Peluso Director March 17, 1999
- --------------------------
William E. Peluso
/s/ Oswald A. Rugaard Director March 17, 1999
- --------------------------
Oswald A. Rugaard
/s/ Mark A. Wilton Director March 17, 1999
- --------------------------
Mark A. Wilton
/s/ Randall D. Greenfield Chief Financial Officer (Principal March 17, 1999
- -------------------------
Randall D. Greenfield Financial Officer and Principal
Accounting Officer) and Secretary
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,077
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<INVESTMENTS-HELD-FOR-SALE> 32,033
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<TOTAL-ASSETS> 144,202
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