UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission File No. 2-76003
BAY AREA BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2779021
- ------------------------------- ----------
(State or other jurisdiction of IRS Employer
incorporation or organization) (Identification No.)
900 Veterans Boulevard, Redwood City, CA 94063
- ---------------------------------------- -----
(Address of principal executive office (Zip Code)
(650) 367-1600
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES X NO ____
-----
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 1, 1999: $8,874,060
Number of shares of Common Stock outstanding at February 1, 1999: 1,009,141
-----------
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 1
Item 2. Properties 33
Item 3. Legal Proceedings 34
Item 4. Submission of Matters to a Vote of Security
Holders 34
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 35
Item 6. Selected Financial Data 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 36
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 41
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 61
PART III
Item 10. Directors and Executive Officers of the Registrant 62
Item 11. Executive Compensation 64
Item 12. Security Ownership of Certain Beneficial
Owners and Management 68
Item 13. Certain Relationships and Related Transactions 70
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 72
SIGNATURES 75
PART I
------
ITEM 1. BUSINESS.
---------
Certain statements in this Annual Report on Form 10-K include forward-
looking information within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: the proposed merger with Greater Bay Bancorp; significant
increases in competitive pressure in the banking industry; changes in the
interest rate environment which reduce margins; general economic conditions,
either nationally or regionally, less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; changes in the regulatory environment;
changes in business conditions, particularly in San Mateo County;
asset/liability matching risks and liquidity risks; costs and potential
liabilities arising from data processing problems including those stemming from
year 2000 computer malfunctions; changes in the laws and regulations regarding
ATM fees, which reduce significantly the Bank's income from ATM service fees;
and changes in the securities markets.
(A) GENERAL
-------
Bay Area Bancshares, formerly known as Area Financial Corp (the
"Company"), is a California corporation and bank holding company which was
incorporated on October 22, 1981. Bay Area Bank (the "Bank") was organized as a
California banking corporation in 1979 and, through a reorganization in 1982,
became a wholly owned subsidiary of the Company. The Bank is the only active
entity affiliated with the Company. It is a full service commercial bank
primarily serving Redwood City and San Carlos, California.
(B) EXECUTIVE OFFICERS OF THE REGISTRANT.
-------------------------------------
Mr. Robert R. Haight, 70, is the owner and founder of Woodside Road
Insurance Agency in Redwood City. He is also a licensed insurance broker and
agent. Mr. Haight graduated from Redwood City's Sequoia High School, having
lived in Redwood City since 1942. He is a past president and director of the
Redwood City Chamber of Commerce, the Redwood City Independent Insurance Agents
Association, and San Mateo County Independent Agents Association. Currently Mr.
Haight is a member of the Sequoia Club in Redwood City. Mr. Haight was elected
Chairman of the Board, President and Chief Executive Officer of Bay Area
Bancshares in 1991.
Frank M. Bartaldo, Jr., 50, has been with Bay Area Bank since 1986.
He currently serves as President and Chief Executive Officer of Bay Area Bank.
Prior to being named President & CEO Mr. Bartaldo served as Executive Vice
President and Senior Banking Officer of the Bank. In February 1996, Mr.
Bartaldo was elected to serve as a director of the company's sole subsidiary,
Bay Area Bank. Before his employment at Bay Area Bank, Mr. Bartaldo was a
partner in a mortgage banking business and prior to that he was employed for
eight years at Wells Fargo Bank. Mr. Bartaldo received his BS in Business
Administration from California State University at Chico in 1971. Mr. Bartaldo
is Past-President of the Redwood City-San Mateo County Chamber of Commerce.
1
Mr. Anthony J. Gould, 37, has been with Bay Area Bank since 1988. He
currently serves as the Executive Vice President, Chief Operating Officer and
Chief Financial Officer of the Company and of the Bank. Prior to his employment
at the Bank, Mr. Gould was Controller of Old Stone Bank of California and an
auditor at Deloitte and Touche, Certified Public Accountants, in Minneapolis,
Minnesota. He successfully completed the uniform Certified Public Accountant's
Examination in 1988. Mr. Gould received his MBA in Finance from Cal State-
Hayward in 1992 and a BA in Business Administration from The University of
Wisconsin - Eau Claire in 1984.
William A. Peterson, 39, was hired by the Bank in September 1997 as
Senior Vice President/Senior Lending Officer. Before his employment with the
Bank, Mr. Peterson worked as Vice President, Construction Loan Manager for The
Pacific Bank (formerly Burlingame Bank) since 1994. Prior to that he was Vice
President at Borel Bank beginning his employment there in 1984. Mr. Peterson
graduated from Stanford University in 1982 with BA degrees in both Economics and
English.
Mark V. Schoenstein, 42, has been with Bay Area Bank since May, 1988.
He currently serves as Senior Vice President, Construction Loan Department.
Prior to joining the Bank, Mr. Schoenstein worked two years at Glendale Federal
in its Construction Loan Department and worked in construction management prior
to that. Mr. Schoenstein is a graduate of the Pacific Coast Banking School
(1996), holds a BA in History from San Francisco State University (1982) and is
a licensed California general contractor.
(C) BAY AREA BANK - COMPANY SUBSIDIARY
----------------------------------
PROPOSED MERGER OF HOLDING COMPANIES
- ------------------------------------
On January 26, 1999, the Company and Greater Bay Bancorp signed an
Agreement and Plan of Reorganization for a merger of the two companies.
Following the transaction, Bay Area Bank, will operate as a wholly owned
subsidiary of Greater Bay Bancorp, along with Greater Bay Bancorp's other bank
subsidiaries, Mid-Peninsula Bank, Cupertino National Bank, Peninsula Bank of
Commerce and Golden Gate Bank. The combined company will have total assets of
approximately $1.8 billion and equity of approximately $107 million.
The terms of the agreement provide for the Company's shareholders to
receive shares of Greater Bay Bancorp stock in a tax-free exchange for their
shares of the Company. For each outstanding share of the Company, Greater Bay
Bancorp will issue 1.38682 shares if the market price of its stock is $30.00 or
more at closing, or 1.44271 shares if the market price of its stock is $30.00 or
more at the closing. Following the merger, the shareholders of the Company will
own approximately 12.7% of the combined company, after giving effect to all
outstanding options.
The merger is expected to be accretive to Greater Bay Bancorp's
earnings in 1999 based on reductions in operating expenses and revenue
enhancements resulting from an expanded product line and increased lending
capacity that can be utilized at the Bank. Management of the organizations
believe that significant opportunities exist to enhance the spectrum of
financial services offered to both existing and future clients of the Bank while
also increasing market penetration in the San Francisco Peninsula market areas.
Greater Bay Bancorp's Board of Directors will be expanded to 15
members with the addition of one current director of the Company. The Board
of Directors of Bay Area Bank will continue and will include David L.
Kalkbrenner, President and Chief Executive Officer of Greater Bay
2
Bancorp. Frank Bartaldo, Jr., President and Chief Executive Officer of Bay Area
Bank, will remain in that capacity.
The merger is subject to certain conditions, including the approval of
the Company's shareholders and regulatory approval, and will be accounted for as
a pooling of interests. Subject to these conditions, the merger is expected to
be completed late in the second quarter of 1999.
Greater Bay Bancorp and its financial services subsidiaries, Cupertino
National Bank, Mid-Peninsula Bank, Peninsula Bank of Commerce and Golden Gate
Bank, along with its operating divisions, Greater Bay Bank Santa Clara Valley
Commercial Banking Group, Greater Bay Corporate Finance Group, Greater Bay
International Banking Division, Greater Bay Trust Company, Pacific Business
Funding and Venture Banking Group, serve clients throughout Silicon Valley, the
San Francisco Peninsula and the Contra Costa Tri Valley Region, with offices
located in San Jose, Cupertino, Santa Clara, Palo Alto, Redwood City, San Mateo,
Millbrae, San Bruno, San Francisco and Walnut Creek.
GENERAL BANKING SERVICES
- ------------------------
The Bank provides a wide range of commercial banking services to
individuals, professionals and small to medium-sized businesses. The services
provided include those typically offered by commercial banks, such as:
interest-bearing and noninterest-bearing checking accounts, savings and time
deposit accounts, business and personal loans, collection services, safe
depository facilities, funds transfers, the issuance of money orders, cashiers
checks, and the sale of travelers' checks. The Bank also operates a network of
off-site Automated Teller Machines (ATMs).
The Bank does not generally provide international banking or trust
services but has arranged for its correspondent banks to offer those and other
services to its customers.
Individuals and small to medium-sized businesses form the core of the
Bank's customer and deposit base. In order to attract these types of customers,
the Bank offers extensive personalized contact, specialized services and banking
convenience, including extended banking hours.
The Bank is not a member of the Federal Reserve System. However, the
deposits of each of its depositors are insured up to $100,000 by the Bank
Insurance Fund which is managed by the Federal Deposit Insurance Corporation
(the "FDIC").
The Bank's business is not seasonal with the exception of ATM
revenues, which are highest in the summer months.
EXISTING LOCATIONS
- ------------------
The Bank conducts business from its principal office located at 900
Veterans Boulevard, Redwood City, California. One other location in Redwood
City houses the Bank's data processing and accounting activities. See Item 2,
"Properties." The Bank also operates 52 (as of December 31, 1998) automated
teller machines (ATMs) at 37 additional locations.
DEPOSITS
- --------
Most of the Bank's deposits are obtained from individuals,
professionals and small to medium-sized businesses. As of December 31, 1998,
the Bank had a total of approximately 7,102
3
accounts consisting of 1,939 noninterest-bearing demand deposit (checking)
accounts with an average balance of approximately $17,300 each; 2,111 savings,
interest-bearing demand, and money market accounts with an average balance of
approximately $32,300 each; and 1,390 certificates of deposit, IRAs and Keoghs
with an average balance of approximately $24,900. See "Description of Business -
Selected Statistical Information - Deposits and Time Deposits."
The Bank has a local corporate customer whose total deposit
relationship with the Bank comprised approximately 4.5% of the Bank's total
deposit balances at 12/31/98. This customer has never borrowed from the Bank
and the funds, which had historically been held in a money market deposit
account, were transferred to time deposits accounts in September of 1998 which
mature at various times in 1999. Bank management believes that some of these
funds may be withdrawn from the Bank in 1999. Given the Bank's ability to
raise cash through taking on additional deposits, using its available credit
facilities, and the sale of liquid assets, the loss of these deposits, or any
one deposit or a few depositors would not, in the opinion of management, have a
material adverse effect on the business of the Bank.
LENDING ACTIVITIES
- ------------------
The Bank concentrates its lending activities primarily in four areas:
1) business loans, 2) short-term real estate loans, with a particular emphasis
on providing loans to small to medium-sized businesses, 3) construction lending
and 4) consumer/installment loans. As of December 31, 1998 these four loan
categories accounted for approximately 26%, 37%, 30% and 7%, respectively, of
the Bank's gross loan portfolio. The interest rates charged for the various
loans made by the Bank vary with the degree of risk and size and maturity of the
loans involved and are generally affected by competition, governmental
regulation and current money market rates. As of December 31, 1998 the Bank
had gross loans outstanding of $110.2 million as well as undisbursed loan
commitments of approximately $33.3 million. As of December 31, 1997 the
Bank had gross loans outstanding of $86.0 million as well as undisbursed loan
commitments of approximately $34.1 million.
For borrowers desiring loans in excess of the Bank's lending limits,
the Bank may make such loans on a participation basis, with its correspondent
banks taking the amount of the loans which are in excess of the Bank's lending
limits. In other cases, the Bank may refer such borrowers to larger banks or
lending institutions. The proposed merger of the Company and Greater Bay
Bancorp would affiliate the Bank with other subsidiaries of Greater Bay Bancorp
and provide additional resources for loan participations. See Item 1, "Business
- - Bay Area Bank - Company Subsidiary - Proposed Merger of Holding Companies."
The Bank's business activity is primarily with customers located
within San Mateo County. Although management of the Bank attempts to keep the
loan portfolio diversified, a significant portion of the loan portfolio is
dependent upon the real estate economic sector. If the local real estate sector
were to experience a substantial economic decline, it could have a material
detrimental effect on the performance of the Bank's loans.
In an effort to dilute the potential effect of such an event, the Bank
has several precautionary measures in place. Generally, the Bank's loans are
secured by real estate, stock or other assets. Loans are based on the
borrowers' established integrity, historical cash flow, and willingness and
ability to perform on commitments. The Bank's policy is to protect the
soundness of the loan and to secure it with collateral where deemed necessary.
In the event of loan default, the Bank's means of recovery is through collection
efforts and judicial procedures. For most loans, the Bank is required by law to
obtain an appraisal of collateral to determine the adequacy of the
4
collateral. Loans collateralized by real estate generally do not exceed 80% of
appraised market value at the time of origination.
The Bank does not normally make long-term fixed rate loans to be held
to maturity. Approximately 80% of the loans in the portfolio were originated as
adjustable rate loans. The most frequently used index to determine adjustments
is the prime rate as published in The Wall Street Journal. Other indexes used
are the six month treasury bill rate and an internal bank base rate. Most of
these loans are subject to adjustment on a monthly, quarterly, semi-annual or
annual basis. The Bank typically holds the loans originated, in the normal
lending activities listed above, to maturity.
ELECTRONICS FUNDS SERVICES
- --------------------------
In 1993, the Bank started an Electronic Funds Transfer (EFT)
Department for the purpose of increasing service fee income primarily by
establishing a network of off-site automatic teller machines (ATMs). As of
December 31, 1998 the Bank had 52 machines in 37 locations (as compared to 46
machines in 32 locations at December 31, 1997), including tourist centers, horse
racing tracks, truck stops and shopping centers in California. As of December
31, 1998, the Bank's investment in ATMs and related equipment was $1.7 million .
This equipment had a book value (cost less accumulated depreciation) of
approximately $206,000 at December 31, 1998. Depreciation expense for the
Bank's ATM assets was $265,000 in 1998 and $320,000 in 1997. The average cash
outstanding in the machines throughout 1998 was $2.8 million as compared to $3.5
million in 1997. The Bank enters into individual agreements with the owner of
each site to place the machine; the Bank does not own these premises.
The Bank receives revenue from each transaction based on a service
contract negotiated with the management at each site. During 1998, ATM service
fee income was $1.44 million and ATM interchange and other income was $535,000.
Total revenue from the EFT department was $1.97 million, a decrease of $80,000
or 4.0% under total department revenues in 1997. Total expense for the
department was $1.52 million in 1998, a 16% decrease over 1997, bringing the EFT
department's contribution to pretax income for 1998 to $454,000 as compared to
$346,000 in 1997.
During 1997, ATM service fee income was $1.48 million and ATM
interchange and other income was $634,000. Total revenue from the EFT department
was $2.03 million in 1997, an increase of $236,000 or 13% over total department
revenues in 1996. Total expense for the department in 1997 was $1.77 million, an
increase of $116,000 or 7% over 1996, bringing the EFT department's contribution
to pretax income for the year ended December 31, 1997 to $346,000 as compared to
$226,000 for the year ended December 31, 1996.
The 1998 results include approximately $164,000 in costs allocated to
the department from the Bank, including $152,000 in internal interest charges (@
5.53% per annum) for the use of funds, and $12,000 in administrative support.
Another primary component of expense was $309,000 in first line and second line
maintenance, which is the cost of servicing these machines by a third party
(i.e. adding cash, clearing paper jams, etc.). The 1997 results include
approximately $208,000 in costs allocated to the department from the Bank,
including $196,000 in internal charges for the use of funds, and $12,000 in
administrative support. See a further discussion of ATM operations at Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Bank expects its operating costs in the EFT department to continue
go down in 1999 in large part due to a decrease in depreciation expense, which
averaged $370,000 in 1996 and 1997,
5
and declined to $265,000 in 1998. The amortization of a settlement expense
incurred in connection with a former EFT consultant ended in June 1998. The
Company had approximately 12% of the original costs of the capital expenditures
of the department ,or $206,000, remaining on its books at December 31, 1998.
Depreciation expense for ATM assets held at December 31, 1998 is expected to be
approximately $103,000 in 1999 and $40,000 in 2000.
The Bank is uncertain as to whether or not it will be successful in
expanding ATM operations in 1999. The market place has become saturated and
competition for new ATM sites, as well as bidding for contractual renewals, has
been intense and is expected to continue. This competition may result in
marginally less revenue to the Bank on future new ATM sites and upon site
renewals.
Income from the EFT Department may also be less than expected if state
or federal laws are changed to limit the ability of the Bank to place more ATMs
in service, or to limit or eliminate the charges the Bank may collect from the
use of those ATMs. If this such legislation is adopted, the Bank's income from
its ATM network may be severely reduced to the amount the Bank receives from
interchange fees. The department could not cover its expenses at that level of
revenue.
YEAR 2000 COMPUTER PROGRAMMING STATUS
- -------------------------------------
The Company is actively involved in evaluating and addressing any
potential effects on the Company's operations as a result of Year 2000 ("Y2K")
computer programming problems. The Company's primary plan is to merge with
Greater Bay Bancorp ("GBB") and have the Bank's computer systems converted to
the systems operated by GBB. It is projected that the merger will take place in
the second quarter of 1999 and that the Bank's systems will be converted shortly
thereafter. There can be no assurance, however, that the merger and conversion
will take place as scheduled. See Item 1, "Business - Bay Area Bank - Company
Subsidiary - Proposed Merger of Holding Companies."
GBB's computer systems and programs are designed and supported by
companies specifically in the business of providing such products and services.
GBB's year 2000 plan includes evaluating existing hardware, software, ATM's,
vaults, alarm systems, communication systems and other electrical devices,
testing critical application programs and systems, both internally and
externally, establishing a contingency plan and upgrading hardware and software
as necessary. The initial phase of the project was to assess and identify all
internal business processes requiring modification and to develop comprehensive
renovation plans as needed. This phase was largely completed in mid-1998. The
second phase was to execute those renovation plans and begin testing systems by
simulating year 2000 data conditions. This phase was largely completed in 1998.
Testing and implementation is planned to be completed during the first half of
1999.
GBB is currently in the process of developing contingency plans for
year 2000 readiness. GBB has engaged a third party company, which specializes in
developing contingency plans for financial institutions for year 2000, to assist
GBB in analyzing the impact of year 2000 on its business. This business impact
analysis was completed in 1998 and GBB's contingency plans for year 2000
readiness currently are substantially complete. There can be no assurance,
however, that such contingency plans will be successful.
Prior to the announcement of the proposed merger of the Company with
GBB, the Bank adopted and was pursuing a separate Policy and Strategy to guard
against any disruption of service arising from the date change at January 1,
2000. This Policy and Strategy are now the
6
contingency plan in the event the proposed merger is not completed in time to
convert the Bank's system prior to December 31, 1999. The Company intends to
pursue the Policy and Strategy to the extent necessary for it to be available as
a contingency plan.
The primary elements of the Policy and Strategy address the Bank's
ability to become Y2K compliant in the following areas: deposit data processing,
wire transfer processing, loan data processing and documentation, ATM servicing
and electronic data interchange systems, accounting and various
internal/environmental systems, such as voicemail and electronic mail systems
and HVAC and office equipment.
The Bank's Year 2000 Strategy contains detailed steps for assessment
of the complexity of becoming Y2K compliant, including determining (1) the
effect of Y2K on the Bank's main computer system, and on each subproduct used by
each department that interfaces with the main computer system; (2) hardware
requirements for all applications and whether new hardware needs to be
purchased; (3) whether the internal/environmental systems are Y2K compliant; and
(4) whether the services provided by outside vendors with respect to the payment
system functions are Y2K compliant. In addition, the assessment includes
reviewing third-party contracts to determine whether vendors are required to be
Y2K compliant and changing contracts or vendors as necessary to assure
compliance, and reviewing the effect of Y2K on all large corporate borrowers and
assessing those borrowers' ability to become Y2K compliant with respect to
credit evaluations.
Once the above assessment is completed, the Bank will take the steps
necessary to replace equipment or software as needed, and to replace vendors of
services who cannot provide certification of compliance. This is being done in
connection with a planned upgrade of computer equipment and products that would
go forward even if the year 2000 were not approaching. In connection with the
Policy and Strategy described above, the Bank has adopted a formal testing plan,
which sets forth the specific testing methodology guidelines and types of
testing to be used, and sets forth the dates for which accuracy testing is to be
conducted. In addition to evaluating its own systems, the Loan Committee of the
Board of Directors has instructed bank management to include a Y2K exposure
evaluation of all new loans submitted.
The Bank's primary data processing system (which consists of software
that manages loans, deposits and accounting) is provided to the Bank by a third
party. The programming that controls the deposit function was upgraded in 1997
in order to be year 2000 compliant. The lending and accounting programs were
upgraded in 1998. The Bank's investments software is handled by a third party
that has provided assurances of Y2K readiness.
The Bank will incur certain costs associated with the testing and
determinations necessary to address Y2K compliance. These costs include the cost
of the internal testing that is being done, and the costs of any outside
auditors or other personnel that will be necessary to evaluate the results of
the tests. In addition, the Bank will be receiving the software upgrades
referred to above, and will be purchasing new computer hardware to achieve
compliance. The Bank currently estimates that the cost of becoming compliant
will be approximately $239,000. The expenditures are not expected to have a
material impact on the Bank's results of operations.
The Bank is also developing a business resumption contingency plan to
respond to any failures of core business processes at critical dates due to the
Y2K problem. The purpose of the plan is to establish a course of action to help
it resume core business processes in an orderly way in the event of a system
failure. This business resumption contingency planning is being done because,
notwithstanding successful efforts to thoroughly implement Y2K-ready systems,
the
7
potential exists that systems will not operate as expected. The plan is being
developed in order to be implemented in a timely manner.
Finally, the Bank does not expect that any of its major corporate
customers will have Y2K problems that result in any loan losses to the Bank from
those customers, based on the due diligence that the Bank has conducted to date.
However, it is relatively early in the time by which many businesses are
determining their exposure to this risk, and the Bank is continuing to evaluate
whether any of its customers may incur problems from the date change. In
addition, despite the Company's activities regarding the Y2K issue, there can be
no assurances that partial or total system interruptions and costs to update the
necessary hardware and software would not have a material adverse effect on the
Company.
CORRESPONDENT BANKS
- -------------------
The Bank's primary correspondent banking relationship is with Wells
Fargo Bank, San Francisco. The Bank also has accounts with Union Bank of
California, Bank of America, The Federal Reserve Bank of San Francisco, Citibank
of Nevada, and First USA Bank. These relationships are a result of the Bank's
efforts to obtain a wide range of services for the Bank and its customers. The
proposed merger of the Company and Greater Bay Bancorp would provide the Bank
with an affiliate banking relationship with Greater Bay Bancorp and its
subsidiary banks. See Item 1, "Business - Bay Area Bank - Company Subsidiary -
Proposed Merger of Holding Companies."
The Bank has an unsecured line of credit with Wells Fargo Bank of $5.0
million and an additional unsecured line of credit with Union Bank of California
for $4.0 million.
The Bank is also a member of the Federal Home Loan Bank of San
Francisco (FHLB). The Bank has purchased $390,000 of FHLB stock, which typically
pays quarterly dividends at approximately the 90 day treasury bill yield.
As a member of the FHLB, the Bank may borrow up to 25% of its assets,
subject to collateral and additional FHLB stock purchase requirements. Borrowing
is limited to seven times the Bank's FHLB stock holdings ($2.73 million).
Borrowings in excess of that amount require the purchase of FHLB stock at a
ratio of one dollar of stock for every seven dollars of excess borrowing. The
additional stock above the original $390,000 purchase may be retired as the debt
is repaid. The Bank had $2.5 million in outstanding FHLB advances at December
31, 1998. The Bank had adequate collateral with the FHLB at December 31, 1998 to
borrow an additional $3.22 million.
The Bank does not currently serve, nor does it have plans to serve, as
a correspondent to other banks.
EMPLOYEES
- ---------
As of February 1, 1999, the Bank employed 36 full-time employees,
including 18 Bank officers, and 10 part-time employees. Various employee
benefit plans and policies are included as exhibits to this and prior Annual
Reports on Form 10-K. As of February 1, 1999, the Company employed no full-time
or part-time employees. The Bank pays a salary to those individuals who serve as
officers of the Bank and the Company. Mr. Haight receives remuneration for his
services through Director fees. See Item 1, "Business - Executive Officers of
the Registrant."
8
(D) SELECTED STATISTICAL INFORMATION
--------------------------------
The following tables present certain consolidated statistical
information concerning the business of the Company and its subsidiary (the
Bank). This information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations at Item
7, herein, and the consolidated financial statements and the notes thereto
included in the Company's 1998 Financial Statements, herein, at Item 8.
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------
The following table sets forth the distribution of consolidated
average assets, liabilities and shareholders' equity for the years ended
December 31, 1998 and 1997. Average balances have been computed using daily
balances.
Year Ended Year Ended
12/31/98 12/31/97
-------- --------
Average Average
Balance Percent Balance Percent
(000's) of Total (000's) of Total
------- -------- ------- --------
ASSETS
Cash and Due From Banks $ 12,379 8.9% $ 11,350 10.1%
Taxable Investment Securities 13,138 9.5 14,125 12.5
Non-Taxable Investment Securities 1,179 0.8 1,196 1.1
Federal Funds Sold 14,362 10.3 8,161 7.2
Loans, Net /(1)/ 95,212 68.5 74,745 66.4
Premises & Equipment, Net 539 0.4 736 0.7
Real Estate Owned 0 0.0 126 0.1
Other Assets & Accrued Int. Receivable 2,148 1.5 2,186 1.9
-------- -------- -------- -----
Total Assets $138,957 100.0% $112,625 100.0%
======== ======== ======== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest-Bearing Transaction Accounts $48,538 34.9% $ 44,683 39.7%
Demand 31,822 22.9 26,357 23.4
Savings 7,366 5.3 6,191 5.5
Time 34,755 25.0 23,649 21.0
-------- -------- -------- -----
Total Deposits 122,481 88.1 100,880 89.6
Other Borrowings 1,760 1.3 518 0.5
Other Liabilities & Accrued Interest 1,523 1.1 1,004 0.8
Shareholders' Equity 13,193 9.5 10,283 9.1
-------- -------- -------- -----
Total Liabilities & Shareholders' Equity $138,957 100.0% $112,685 100.0%
======== ======== ======== =====
- --------------------
/1/ Average loans include nonaccrual loans and are net of the allowance for
loan losses.
INTEREST RATES AND DIFFERENTIALS
- --------------------------------
The following table sets forth information for the periods indicated
concerning interest-earning assets and interest-bearing liabilities, and
respective average yields or rates, the amount of interest income or interest
expense, the net interest margin and net interest spread.
9
Year Ended December 31, 1998
-----------------------------
Interest
Average Income/ Average
Balance Expense Yield/
(000's) (000's) Rate
------ ------ ----
INTEREST-EARNING ASSETS
Taxable Investment Securities $ 13,138 $ 797 6.5%
Non-Taxable Investment Securities/1/ 1,179 60 5.1
Federal Funds Sold 14,362 756 4.8
Loans (Net of loan loss allowance)/2,3/ 95,212 10,265 10.8
-------- ------- ----
Total Interest-Earning Assets $123,891 $11,878 9.6%
======== ======= ====
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction Accounts $ 48,538 $ 1,446 3.0%
Savings 7,366 297 4.0
Time 34,755 1,863 5.4
Other Borrowings 1,760 102 5.8
-------- ------- ----
Total Interest-Bearing Liabilities $ 92,419 $ 3,708 4.0%
======== ======= ====
Net Interest Income and Margin/4/ $ 8,170 6.6%
======= ====
Net Interest Spread/5/ 5.6%
====
Year Ended December 31, 1997
----------------------------
Interest
Average Income/ Average
Balance Expense Yield/
(000's) (000's) Rate
------- ------ ----
INTEREST-EARNING ASSETS
Taxable Investment Securities $ 14,125 $ 971 6.9%
Non-Taxable Investment Securities/1/ 1,196 58 4.8
Federal Funds Sold 8,161 462 5.7
Loans (Net of loan loss allowance)/2,3/ 74,745 8,243 11.0
-------- ------- ----
Total Interest-Earning Assets $ 98,227 $ 9,734 9.9%
======== ======= ====
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction Accounts $ 44,683 $ 1,364 3.1%
Savings 6,191 262 4.2
Time 23,649 1,299 5.5
Other Borrowings 518 28 5.4
-------- ------- ----
Total Interest-Bearing Liabilities $ 75,041 $ 2,953 3.9%
======== ======= ====
Net Interest Income and Margin/4/ $ 6,781 6.9%
======= ====
Net Interest Spread/5/ 6.0%
====
_______________
/1/ Yields on non-taxable investment securities are not tax adjusted.
/2/ Average loans include nonaccrual loans and are net of allowances for
possible loan losses.
/3/ Loan interest income includes loan fees of $806,000 and $673,000 in
1998 and 1997, respectively.
/4/ Net interest margin is computed by dividing net interest income by
total average interest-earning assets.
/5/ Net interest spread represents the average yield earned on interest-
earning assets less the average rate paid on interest-bearing
liabilities.
RATE AND VOLUME VARIANCES
- -------------------------
The following tables set forth, for the periods indicated, a summary
of the changes in interest earned and interest paid resulting from changes in
average asset and liability balances (volume) and changes in average interest
rates. The change in interest, due to both rate and volume, has been allocated
to change due to volume and rate in proportion to the relationship of absolute
dollar amounts in each./1/
10
Year Ended December 31, 1998
Compared to 1997
----------------
Volume Rate Total
(000's) (000's) (000's)
----- ----- -----
Taxable Investment Securities $ (68) $ (46) $ (114)
Non-Taxable Investment Securities (1) 3 2
Federal Funds Sold 351 (117) 234
Loans 2,257 (235) 2,022
------ ----- ------
Total $2,540 $(396) $2,144
====== ===== ======
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest-Bearing Transaction Accounts $ 118 $ (36) $ 82
Savings Deposits 50 (15) 35
Time Deposits 610 (45) 565
Other Borrowings 67 7 74
------ ----- ------
Total 845 (89) 756
------ ----- ------
Change in Net Interest Income $1,695 $(307) $1,388
====== ===== ======
Year Ended December 31, 1997
Compared to 1996
----------------
Volume Rate Total
(000's) (000's) (000's)
----- ----- -----
INCREASE (DECREASE) IN INTEREST INCOME
Taxable Investment Securities $ 98 $ 96 $ 194
Non-Taxable Investment Securities (9) 6 (3)
Federal Funds Sold 80 27 107
Loans 1,185 (150) 1,035
------ ----- ------
Total $1,354 $ (21) $1,333
====== ===== ======
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest-Bearing Transaction Accounts $ 85 $ (41) $ 44
Savings Deposits 32 0 32
Time Deposits 290 35 325
Other Borrowings 12 1 13
------ ----- ------
Total 419 (5) 414
------ ----- ------
Change in Net Interest Income $ 935 $ (16) $ 919
====== ===== ======
- ----------------------
/1/ Some totals may not foot or agree to financial statements or
Management's Discussion by immaterial amounts due to averaging and rounding.
GAP TABLE
- ---------
The following table shows the Company's interest sensitive assets and
liabilities based on respective maturity dates or earliest repricing
opportunities (whichever is earliest) as of December 31, 1998 (in thousands of
dollars). Mortgage-backed securities are shown based on expected cash flows
which includes prepayments of principal. Non accrual loans of $373,000 are
excluded from the table below. Adjustable rate loans which have reached an
interest rate floor or ceiling are considered fixed rate loans in accordance
with FDIC accounting guidelines.
3 Months 3 to 6 6 Months 1 Year More than
or Less Months to 1 Year to 5 Years 5 Years Total
--------- -------- ---------- ----------- ---------- ---------
ASSETS
Fed Funds Sold $19,200 $ 0 $ 0 $ 0 $ 0 $ 19,200
Investments 2,100 501 2,874 6,660 3,082 15,217
Gross Loans 64,606 13,383 9,161 11,365 11,676 110,191
------- ------- ------- ------- ------- --------
Total (A) $85,906 $13,884 $12,035 $18,025 $14,758 $144,608
======= ======= ======= ======= ======= ========
LIABILITIES
Money Market & Savings $68,189 $ 0 $ 0 $ 0 0 $ 68,189
Time Deposits 14,954 9,621 7,685 2,448 0 34,708
11
FHLB Advances 0 0 500 2,000 0 2,500
------- ------- ------- ------- ------- --------
Total (B) $83,143 $ 9,621 $ 8,185 $ 4,448 0 $105,397
======= ======= ======= ======= ======= ========
GAP (A) - (B) $ 2,763 $ 4,263 $ 3,850 $13,577 $14,758 $ 39,211
======= ======= ======= ======= ======= ========
GAP / (A) % 3.22% 30.70% 31.99% 75.32% 100.00% 27.11%
======= ======= ======= ======= ======= ========
Cumulative GAP $ 2,763 $ 7,026 $10,876 $24,453 $39,211 $ 78.144
======= ======= ======= ======= ======= ========
Cumulative GAP % 3.22% 7.04% 9.73% 18.83% 27.11% 27.11%
======= ======= ======= ======= ======= ========
The table shows the Company had approximately $112 million dollars in
assets and $101 million in liabilities which mature or can reprice during 1999.
This indicates a cumulative one year GAP position of approximately $10.9 or
9.73% of one year assets. Because $10.9 million more liabilities than assets can
mature or reprice in 1999, the Company was slightly asset sensitive, on a simple
GAP basis, at December 31, 1998 (i.e., net interest margin will most likely
expand when rates rise and compress if rates fall).
Historically, the Company has maintained a strong net interest margin as
compared to the overall banking industry. The Company manages its net interest
rate margin by using defensive strategies such as extending the maturity or
repricing of new liability fundings or shortening the maturity or repricing of
new assets fundings. In addition, the Company has had success in recent years in
growing demand deposits, which do not pay interest, thus lowering the cost of
funds and exposure to rising rates.
The Company's net interest margin (net interest income divided by average
earning assets, see Item 1 "Business, Interest Rates and Differentials") was
6.6% in 1998, 6.9% in 1997 and 6.9% in 1996. The Company uses a computer
software program which goes beyond a simple GAP analysis in its asset and
liability management and measurement of interest rate exposure. This software
quantifies and estimates the speed that different indexes and rates move
relative to each other as well as the effect of interest rate "ceilings and
floors." It also estimates the repricing speed that will most likely occur in
the Company's deposit portfolio. This information is used as an indicator of the
Company's real interest rate risk position, and to determine the pricing of
loans and deposits, as well as to make investment decisions.
INVESTMENT PORTFOLIO
- --------------------
The investment portfolio is used primarily for investment income and
secondarily to provide a source of liquidity to the Company through the sale and
maturity of securities and through pledging of securities to secure borrowings.
The investments purchased are readily marketable and have a stated or expected
maturity of five years or less so as to reduce the impact on the portfolio's
value when changes in interest rates occur in the marketplace.
The Company held U.S. Treasury and Mortgage-backed Securities with a
carrying value of approximately $1,775,000 at December 31, 1998, as "Available
for Sale" (see Item 8, "Financial Statements and Supplemental Data", footnote 1d
and 3) pursuant to Financial Accounting Standard Board Statement No. 115 (SFAS
No. 115). Mortgage-backed securities are government issued instruments whose
underlying collateral are generally first deeds of trusts conforming single
family mortgages. The cash flows on these instruments are determined by the
homeowners' whose notes comprise the collateral.
12
The total investment portfolio at December 31, 1998 and 1997 had an average
expected maturity of approximately 4.0 and 2.8 years, respectively. The increase
in average expected maturity is a result of the Bank's purchase during 1998 of
$1.2 million in tax-free municipal bonds with an average maturity of 18 years.
Expected maturity differs from actual maturity in the case of mortgage-backed
securities due to the possibility of the loans being paid-off or refinanced
before the maturity date.
At December 31, 1998, the Company's total investment portfolio (which
includes both available for sale and held to maturity securities) had a net
unrealized gain of $119,000 (or .78% of the total portfolio). The increase in
the market value of the portfolio was primarily a result of declining interest
rates in the bond market in 1998, which increased the relative market value of
the Company's fixed rate bond portfolio. On December 31, 1997 there was a
$198,000 net unrealized gain (1.27% of the total portfolio).
The Company has purchased municipal securities since June 1991 in an effort
to lower the Company's effective tax rate. The Company held municipal securities
with an amortized cost of $1.817 million at December 31, 1998 and $1.01 million
at December 31, 1997. The Company's effective book tax rate was 41.6% in 1998,
41.1% in 1997 and 40.3% in 1996.
The amortized cost and market value of the portfolio of investment
securities as of December 31, 1998 and 1997 were as follows:
INVESTMENT SECURITIES HELD TO MATURITY
December 31, 1998
-----------------
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
----- ----- -----
U.S. Treasury and Securities of
Other Government Agencies and Corporations $ 3,395 $ 3,417 $ 22
States of the U.S. and Political Subdivisions 1,817 1,851 34
Mortgage Backed Securities 8,230 8,295 65
------- ------- ----
Total $13,442 $13,563 $121
======= ======= ====
December 31, 1997
-----------------
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
----- ----- -----
U.S. Treasury and Securities of
Other Government Agencies and Corporations $ 4,829 $ 4,852 $ 23
States of the U.S. and Political Subdivisions 1,007 1,027 20
Mortgage Backed Securities 8,646 8,804 158
------- ------- ----
Total $14,482 $14,683 $201
======= ======= ====
13
INVESTMENT SECURITIES AVAILABLE FOR SALE
December 31, 1998
-----------------
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
------- ------- -------
U.S. Treasury Securities $ 504 $ 507 $ 3
Mortgage Backed Securities 1,273 1,268 (5)
------ ------ ---
Total $1,777 $ 1,775 $ (2)
======= ====== =====
December 31, 1997
-----------------
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
------- ------- -------
U.S. Treasury Securities $ 513 $ 513 $--
Mortgage Backed Securities 596 593 (3)
------ ------ ---
Total $1,109 $1,106 $(3)
====== ====== ===
The following table is a summary of the relative maturities and weighted
average yields of investment securities as of December 31, 1998. Yields on
securities have been calculated by dividing interest income, adjusted for
amortization of premium and accretion of discount, by the amortized cost of the
related securities. Yields on mortgage-backed securities have been calculated
using management's estimate of the expected life of the instrument. Yields on
municipal securities are calculated on a tax equivalent basis using a tax rate
of 40%.
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Treasury States of
and Securities of the U.S. and Mortgage
Other Government Political Backed
Agencies & Corporations Subdivisions Securities
------------------------ ------------- -----------
Maturing in One Year or Less
Amount (000's) $3,005 $ 201 $1,265
Yield 6.15% 6.64% 6.74%
Maturing After One but Within Five Years
Amount (000's) $ 0 $ 0 $6,053
Yield 6.77%
Maturing After Five but Within Ten Years
Amount (000's) $ 0 $ 0 $ 912
Yield 6.96%
Maturing After Ten Years
Amount (000's) $ 0 $1,616 $ 0
Yield 6.58%
EQUITY SECURITIES
U.S. Treasury States of
and Securities of the U.S. and Mortgage
Other Government Political Backed
Agencies & Corporations Subdivisions Securities
------------------------ ------------ ----------
Amount (000's) $ 390* $0 $0
Yield 5.40%
_________
* Equity Securities consist of Federal Home Loan Bank stock.
14
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury States of
and Securities of the U.S. and Mortgage
Other Government Political Backed
Agencies & Corporations Subdivisions Securities
------------------------ ------------- ----------
Maturing in One Year or Less
Amount (000's) $ 504 $ 0 $ 0
Yield 6.07%
Maturing After One but Within
Five Years $ 0 $ 0 $1,271
Yield 6.59%
LOAN PORTFOLIO
- --------------
The following table shows the composition of loans by type of loan or
borrower as of the end of the past five years:
December 31
(000's)
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
Commercial $ 28,591 $20,679 $20,109 $17,390 $14,933
Real Estate--Mortgage 41,077 38,567 10,799 10,849 6,856
Real Estate--Construction 33,154 20,978 33,255 27,962 27,181
Installment Loans to Individuals 7,369 5,788 4,432 4,524 4,552
Loans Held For Sale 0 0 723 772 327
-------- ------- ------- ------- -------
Total $110,191 $86,012 $69,318 $61,497 $53,849
Less:
Allowance for
Possible Loan Losses 2,075 1,638 1,493 1,516 1,505
-------- ------- ------- ------- -------
Net Loans $108,116 $84,374 $67,825 $59,981 $52,344
======== ======= ======= ======= =======
Total gross loans increased 28% or $24.2 million from $86.0 million at
December 31, 1997 to $110.2 million at December 31, 1998. Gross loans averaged
$97.1 million in 1998, an increase of $20.8 million or 27.3% in comparison to
average net portfolio loans of $76.3 million in 1997.
The Company's market area is primarily suburban and within commuting
distance of downtown San Francisco and San Jose. Housing prices in the San
Francisco Bay Area escalated rapidly in the late 1980's, creating demand for
more affordable new home construction. The housing market slump beginning in
1990 resulted in decreased demand and decreasing property values that continued
through 1994. Property values began to stabilize in 1996 and appreciate in 1997
and 1998. Throughout 1998 and thus far in 1999 there is a very low inventory of
single family homes available for sale in San Mateo County and the market is
continuing to appreciate. The Bank is located less than ten miles from the
corporate headquarters of a number of large growing companies such as Oracle
Corporation, Sun Microsystems, Electronic Arts, Visa International, DHL
Airfreight, Oral B, Raychem Corporation, Excite, Yahoo, @Home, Franklin Funds,
and Silicon Graphics. Bank management expects that continued growth in these
companies will result in continued demand for commercial and residential real
estate and that continued demand will increase the value of much of the
collateral that secures the Bank's real estate loans.
Commercial and financial lending is typically to professional corporations
and companies with sales from $1 million to $10 million. Commercial revolving
lines of credit are made for short-term working capital purposes and are
normally secured by business
15
trade cycles. Business term loans are granted for expansion or equipment
acquisition. These loans are typically repaid within five years and are granted
after evaluation of the borrowers' ability to service the debt through its
business operations.
The Company's real estate construction loans are primarily for single
family residences and commercial properties under $2 million located within San
Mateo and Santa Clara counties. Loans are made to developers with a successful
history of developing projects in the Company's market area. Loan to value
ratios on construction loans depend upon the nature of the property, whether the
property is residential or commercial and whether or not it is to be owner
occupied. Typically, for residential construction loans, whether built to be
owner-occupied or not, the Company's policy is to require that the loan-to-value
ratio be no more than 70% and that the borrower have no less than a 50% equity
interest in the land. With respect to commercial construction loans, the Company
typically requires that the loan not exceed 65% of the value of the property
based on capitalization of projected net income.
The Company's policy is to maintain an interest reserve for the life of a
construction loan, or verify adequate cash reserves or income sources to service
the loan. Progress payment disbursements are made upon receipt of lien waivers,
or after analysis of the project's progress by a qualified inspector. The
construction lending officers also monitor progress by periodic visits to the
site. Construction and land loan balances averaged $34.2 million in 1998
compared to $18.9 million in 1997. There were no construction loans transferred
to real estate owned in 1998 or 1997.
Aside from its construction lending, the Company generally does not make
long term first deed of trust, one to four family real estate loans to be held
in portfolio. However, in the event that such a loan is made, the loan amount
will generally not exceed 75% of the current market value of the collateral on
owner occupied properties. For non-owner occupied first deed of trust, one to
four family real estate loans, the Company typically requires that the loan-to-
value ratio be no more than 70%. Fixed rate loans of this type have a maturity
of five years or less. Loans with annual or more frequent rate adjustment
periods have a maximum maturity of fifteen years. Loan amortizations do not
exceed twenty-five years.
Included in installment loans to individuals are home equity lines of
credit which are secured primarily by second trust deeds on single family
residences. The Company typically requires a loan-to-value ratio of no more than
75% for home equity loans. Rates adjust annually and terms do not exceed fifteen
years.
The Company offers new and used direct automobile financing, which are also
categorized as installment loans to individuals. Automobile loan terms do not
exceed five years for new vehicles, with shorter terms for used cars depending
on the age of the vehicle. Loans are made for up to 90% of the wholesale value
for used autos and 80% of the purchase price, including tax and license, on new
vehicles. The Company originates and funds all of its automobile loans directly
and does not engage in indirect automobile financing or the purchase of loans
from auto dealers and other third party sources.
The Company had standby letter of credit commitments aggregating $825,000
and $1,205,000 at December 31, 1998 and December 31, 1997, respectively. In
addition, the Company had commitments to grant $14.6 million in real estate
construction loans, $13.0 million in commercial loan and other real estate loans
and $5.7 million in consumer loans (including home equity loans) at December 31,
1998.
16
LOAN CONCENTRATIONS
- -------------------
The Company held $28.6 million, or 26% of the Company's total loans, in
loans categorized as commercial at December 31, 1998. Since a majority of these
loans are to businesses in the San Mateo County area, a major economic recession
in that area could have a significant and detrimental impact on the Company.
There were also $41.1 million, or 37% of total loans, in commercial real
estate mortgage loans. These loans are generally secured by first deeds of trust
on commercial properties and are due in five years or less.
At December 31, 1998, approximately $33.2 million or 30% of the Company's
total loans consisted of real estate construction loans. In addition, as
discussed above, undisbursed construction loan commitments totaled approximately
$14.6 million.
The Company is subject to the fluctuations of the California housing market
generally and specifically in the San Mateo and Santa Clara County areas. The
Company's construction lending business is subject to, among other things, the
volatility of interest rates, real estate prices in the Company's service area
and market availability of conventional real estate financing to repay such
construction loans since the Company does not usually require take-out
commitments. General economic conditions and, more specifically, changes in real
estate values in California and the San Mateo and Santa Clara County areas could
have an impact on the repayment of construction and conventional real estate
loans. There can be no assurance that builders or developers will find buyers
for the types of properties being constructed at prices which will insure
repayment to the Company. A significant decline in real estate values and/or the
demand for housing in California or in the San Mateo and Santa Clara County
areas could have a material adverse impact on the financial condition of the
Company.
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS
- ------------------------------------------------------------
The following tables show the estimated maturity distribution (in thousands
of dollars) of the Company's loan portfolio, as of December 31, 1998. Non
accrual loans of $145,000 are excluded from the table below. Adjustable rate
loans which have reached an interest rate floor or ceiling are considered fixed
rate loans in accordance with FDIC accounting guidelines.
Commercial Loans:
- ----------------
Loans with a Remaining Maturity of:
One Year or Less $ 16,126
Over One Year to Five Years 9,432
Over Five Years 3,050
--------
Total $ 28,608
========
Construction Loans
- ------------------
Loans with a Remaining Maturity of:
One Year or Less $ 37,798
Over One Year to Five Years 1,395
Over Five Years 0
--------
Total $ 39,193
========
Real Estate, Installment and Other
- ----------------------------------
Loans with a Remaining Maturity of:
One Year or Less $ 7,479
Over One Year to Five Years 15,846
Over Five Years 18,920
--------
17
Total $ 42,245
========
Grand Total $110,046
========
Total Loans Due in One Year or More
- -----------------------------------
Fixed Rate Loans with a Remaining Maturity of:
Over One Year to Five Years $ 13,335
Over Five Years 3,215
--------
Total Fixed Rate loans due in One Year or More $ 16,550
========
Variable Rate Loans with a Repricing Frequency Of:
Annually or more frequently, but less frequently
than quarterly $ 32,093
--------
Total Variable Rate Loans due in One Year or More $ 32,093
========
Total Loans due in One Year or More $ 48,643
========
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
- -------------------------------------------
The following table shows the amount of loans classified as nonaccrual, 90
days or more past due as to principal and/or interest and restructured (as
defined in Statement of Financial Accounting Standards 15) as of the end of the
last five years:
December 31
(000's)
1998 1997 1996 1995 1994
----- ----- ------ ----- -----
Nonaccrual Loans $ 145 $ 373 $1,431 $ 470 $ 200
Accruing Loans Past Due
90 Days or More 0 0 234 25 0
Restructured Loans 0 0 0 0 0
----- ----- ------ ----- -----
Total $ 145 $ 373 $1,665 $ 495 $ 200
===== ===== ====== ===== =====
There was one loan totaling $145,000 past due 90 days or more at December
31, 1998. There were four loans totaling $373,000 past due 90 days or more at
December 31, 1997. There were nine loans totaling $1.67 million past due 90 days
or more at December 31, 1996. Loans past due 30 days or more but less than 90
days at December 31, 1998, 1997 and 1996, totaled $70,000, $1.23 million and
$435,000, respectively.
Loans are generally placed on a nonaccrual status and any accrued but
unpaid interest income is typically reversed and charged against income when
payment of interest or principal on the loan is 90 or more days past due. The
interest accrued through 90 days may not be reversed when a loan is placed on
nonaccrual status if, in the opinion of management, the collateral is sufficient
to support the principal, accrued interest and any other liens, and the loan is
in the process of collection. Real estate and consumer loans which are well
collateralized by residential property or highly marketable collateral and which
are in the process of collection, or if other circumstances exist which would
justify the treatment of the loan as fully collectible, may be excepted for
limited periods. Additionally, loans are placed on nonaccrual if classified
doubtful or if full and timely collection becomes uncertain. Loans in the
nonaccrual category are treated as nonaccrual loans even though the Company may
ultimately recover all or a portion of the interest
18
due. The classification of a loan as a nonaccrual loan is not necessarily
indicative of a potential charge-off.
Restructured loans reflect situations where, due to the inability of the
borrower to comply with the original terms of the loan, the terms have been
modified, usually with an extension in maturity. These loans may reflect accrual
of interest at a reduced rate. The Company's policy is to place restructured
loans on nonaccrual status until such time as management determines the
restructured loan's performance warrants the recognition of interest on an
accrual basis. The Company may also change the terms of a loan in return for
additional consideration from the borrower such as additional collateral,
accelerated payment terms or principal reductions. In such cases if Company
management feels the Company's position has substantially improved from the
terms of the original note, the loan will not be classified as restructured.
Interest income on loans on nonaccrual status during the years ended
December 31, 1998, 1997, 1996 that would have been recognized in if the loans
had been current in accordance with their original terms, totaled $8,000,
$53,000 and $127,000 respectively.
There were no loans, other than $145,000 in nonaccrual loans at December
31, 1998 and $373,000 at December 31, 1997 which are discussed above, where
known information about possible credit problems of borrowers caused management
to have serious doubts as to the ability of the borrowers to comply with the
existing loan repayment terms. The Company adopted Financial Accounting
Standards Board Statement No. 114 (SFAS No. 114), Accounting by Creditors for
Impairment of a Loan, effective January 1, 1996. As a result of applying the new
rules, certain impaired loans, generally non-accrual loans, are reported at the
present value of expected future cash flows using the loan's effective interest
rate, or as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. The valuation
allowance for impaired loans at December 31, 1998 under SFAS No. 114 was $36,000
($93,000 at December 31, 1997) which is included in the Company's allowance for
possible loan losses.
SUMMARY OF LOAN LOSS EXPERIENCE
- -------------------------------
Inherent in the lending function is the fact that loan losses will be
experienced and the risk of loss will vary with each type of loan made and the
credit worthiness of the borrower over the term of the loan. To reflect the
currently perceived risks of loss associated with its loan portfolio, the
Company makes additions to its allowance for possible loan losses. The Company's
allowance has been created by direct charges against operations through the
provision for loan losses.
The allowance for possible loan losses is based upon actual loan losses
incurred, recoveries of previously charged off loans and other factors which, in
management's judgment, deserve recognition in estimating possible loan losses,
including credit risks associated with specific loans as determined by
management and regulatory agencies, the historical relationship between charge-
offs and the level of the allowance, the amount of past due and non-performing
loans and prevailing economic conditions. In determining the actual allowance
for possible loan losses to be maintained and in revising risk category
assignments from time to time, management also considers the comments of a third
party loan review consultant hired by the Company on a quarterly basis. Thus,
the actual calculation of the adequacy of the allowance is augmented by an
analysis of the present and prospective financial condition of certain
borrowers, industry concentrations within the portfolio and general economic
conditions.
19
The above factors used by management are essentially judgmental.
After reviewing these factors, management has established the allowance at
$2,075,000 or 1.88% of total gross loans at December 31, 1998. There can be no
assurance that in any given period the Company might not sustain charge-offs
which are substantial in relation to the size of the allowance. Loans are
charged to the allowance for possible loan losses when a loss is considered
probable. It is the policy of management to make additions from earnings to the
allowance in relation to anticipated loan charge-offs and the inherent risk
given the portfolio's composition. The continuing evaluation of the loan
portfolio and assessment of current economic conditions will dictate future
allowance levels.
An analysis of the allowance for loan losses for the fiscal years
ending December 31 for the past five years follows:
December 31
(000's)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Allowance for possible
loan losses January 1 $ 1,638 $ 1,493 $ 1,516 $ 1,505 $ 1,005
Loans Charged Off:
Commercial (39) (81) (459) (213) 0
Real Estate--Mortgage 0 0 0 0 0
Real Estate--Construction 0 (40) (30) 0 0
Installment Loans (37) (14) (21) (20) (3)
-------- ------- ------- ------- -------
Total Loans Charged Off (76) (135) (510) (233) (3)
Recoveries:
Commercial 280 39 28 33 203
Real Estate--Mortgage 0 0 0 0 0
Real Estate--Construction 0 1 24 0 0
Installment Loans 33 0 0 1 0
-------- ------- ------- ------- -------
Total Loans Recovered 313 40 52 34 203
Net Recoveries (Charge-offs) 237 (95) (458) (199) 200
Provision for possible Loan Losses 200 240 435 210 300
Allowance for possible
loan losses December 31 $ 2,075 $ 1,638 $ 1,493 $ 1,516 $ 1,505
======== ======= ======= ======= =======
Net Recoveries (Charge-offs)
as Percentage of Average
Outstanding Loans 0.24% -0.12% -0.69% -0.38% 0.37%
Allowance For Possible Loan
Losses as Percentage of
Gross Loans 1.88% 1.90% 2.15% 2.47% 2.79%
Allowance For Possible Loan
Losses as Percentage of
Non-performing Loans 1,431% 439% 90% 306% 753%
20
Non-performing Loans as
Percentage of Gross Loans 0.13% 0.49% 2.16% 0.90% 0.37%
Non-performing Loans as
Percentage of Total Assets 0.09% 0.31% 1.61% 0.53% 0.25%
Average Gross Loans $ 97,073 $76,310 $66,235 $52,487 $53,862
Total Gross Loans at Year End $110,191 $86,012 $69,318 $61,497 $53,849
As illustrated in the table above, loan recoveries exceeded charge-
offs by $237,000 in 1998 and loan charge-offs exceeded recoveries by $95,000
in 1997.
Management has a reporting system that monitors past due loans and has
adopted policies to pursue its creditor's rights in order to preserve the
Company's position. The primary risk elements considered by management with
respect to each installment and conventional real estate loan is lack of timely
payment and the value of the collateral. The primary risk elements considered by
management with respect to real estate construction loans are fluctuations in
real estate values in the Company's market areas, fluctuations in interest
rates, the availability of conventional financing, the demand for housing in the
Company's market areas, and general economic conditions. (See "Loan Portfolio"
and "Loan Concentrations," above.) The primary risk elements with respect to
commercial loans are the financial condition of the borrower, general economic
conditions in the borrower's market area, the sufficiency of collateral, the
timeliness of payment, and, with respect to adjustable rate loans, interest rate
fluctuations. Management has a policy of requesting and reviewing annual
financial statements from its commercial loan customers and periodically reviews
the existence of collateral and its value. As indicated by the table above,
commercial loans have been the largest category of loans charged-off in the last
two years.
While it is the Company's policy to charge off in the current period
those loans where a loss is considered probable, there also exists the risk of
future losses which cannot be precisely quantified or attributed to particular
loans or classes of loans. Because this risk is continually changing in
response to factors beyond the control of the Company, such as the state of the
economy, management's decisions as to the level of the provision are necessarily
subjective and approximate.
At December 31, 1998 commercial loans comprised approximately 26% of
gross loans, real estate mortgage loans were 37%, real estate construction loans
were 30% and installment and other loans were 7%. At December 31, 1997
commercial loans comprised approximately 24% of gross loans, real estate
mortgage loans were 45%, real estate construction loans were 24% and installment
and other loans were 7%.
The allowance for possible loan losses at December 31, 1998 was
$2,075,000 compared to $1,638,000 at December 31, 1997 and was allocated
approximately as follows over the past five years:
December 31
(000's)
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Commercial $ 875 $ 700 $ 800 $ 750 $ 750
Real Estate--Mortgage 450 350 300 300 300
Real Estate--Construction 650 500 300 350 350
Installment Loans 100 88 93 116 105
------ ------ ------ ------ ------
21
Total $2,075 $1,638 $1,493 $1,516 $1,505
------ ------ ------ ------ ------
The allowance for possible loan losses is maintained without any
internal allocation to the segments of the loan portfolio. The above
information is being presented in accordance with the Securities and Exchange
Commission's requirements to provide an allocation of the allowance. The
allocation is based on the subjective estimates that take into account
historical loss experience and management's current assessments of the relative
risk characteristics of the portfolio as of the reporting date noted above and
as described more fully under the section "Summary of Loan Loss Experience."
Among other factors, any loans classified for regulatory purposes as
either substandard, doubtful or loss are considered when determining the
adequacy of the allowance for possible loan losses. Management believes that
these loans do not represent or result from trends or uncertainties which are
reasonably expected to materially impact future operating results, liquidity or
capital resources of the Company or the Bank.
In assessing adequacy of the allowance for possible loan losses,
management relies predominantly on its ongoing review of the loan portfolio,
which is undertaken both to ascertain whether there are probable losses which
must be charged off and to assess the risk characteristics of the portfolio in
the aggregate.
REAL ESTATE OWNED
- -----------------
At December 31, 1998 and 1997, the Company had no real estate owned
("REO"). During 1997 the Company transferred $870,000 ($656,000 of which were
included in nonaccrual loans at December 31, 1997) in loans to real estate
owned. All properties were sold in 1998 and resulted in a loss to the Company
of $40,000 at the time of foreclosure.
DEPOSITS
- --------
The following table reflects average balances and the average rates
paid for the major categories of deposits for the years ended December 31, 1998
and 1997:
1998 1997
------------------- -----------------
Average Average
Balance Average Balance Average
(000's) Rate (000's) Rate
------- ---- ------- ----
Non-interest bearing demand deposits $ 31,822 --% $ 26,357 --%
Interest bearing transaction accounts 48,538 3.0 44,683 3.1
Savings Deposits 7,366 4.0 6,191 4.2
Time Deposits 34,755 5.4 23,649 5.5
-------- ---- -------- ----
Total Deposits $122,481 2.94% $100,880 2.90%
======== ==== ======== ====
TIME DEPOSITS
- -------------
The following table sets forth, by time remaining to maturity, the
domestic time deposits at December 31, 1998.
22
December 31, 1998
(000's)
-----
Time Deposits Maturing In:
Three months or less $14,954
Over three through six months 9,621
Over six through twelve months 7,685
Over twelve months 2,448
-------
Total $34,708
=======
The following table sets forth, by time remaining to maturity, the
domestic time deposits over $100,000 at December 31, 1998.
December 31, 1998
(000's)
-----
Time Deposits Maturing In:
Three months or less $10,340
Over three through six months 4,938
Over six through twelve months 4,804
Over twelve months 2,155
-------
Total $22,237
=======
SELECTED FINANCIAL RATIOS
- -------------------------
The following table sets forth certain financial ratios for the
periods indicated (averages are computed using monthly figures, see "Item 8 -
Financial Statements and Supplemental Data", footnote 1i, for a description of
earnings per share computations):
YEAR ENDED DECEMBER 31,
1998 1997
---- ----
Net income to:
Average total assets 1.70% 1.60%
Average shareholders' equity 17.93% 17.56%
Cash dividend payments to:
Net income 17.25% 18.50%
Average shareholders' equity 3.09% 3.25%
Common Stock Cash Dividend per share to:
Earnings per common share 17.15% 18.14%
Earnings per common share - assuming dilution 17.60% 20.11%
Average shareholders' equity to:
Average total assets 9.49% 9.13%
(E) COMPETITION
-----------
The Company's primary market area consists of the entire city of
Redwood City and portions of Menlo Park, Woodside and San Carlos, California.
The banking business in California generally, and specifically in the Company's
primary market area, is highly competitive with respect to both loans and
deposits. The business is dominated by a relatively small number of major banks
which have many offices operating over wide geographic areas. Many of the major
commercial
23
banks offer certain services (such as international, trust and securities
brokerage services) which are not offered directly by the Company. By virtue of
their greater total capitalization, such banks have substantially higher lending
limits than the Company and substantial advertising and promotional budgets.
However, smaller independent financial institutions also represent a
competitive force. To illustrate the Company's relative market share, total
deposits in financial institutions in Redwood City, California (the Bank's
primary market place) at December 31, 1998 approximated $2.5 billion. Based on
the Company's best available data, this market is allocated approximately as
follows: Banks 35%, Savings and Loans 25% and Credit Unions 40%. The Company's
deposits at December 31, 1998 represent approximately 5.4% of total deposits and
approximately 15.5% of bank deposits.
To compete with major financial institutions in its service area, the
Company relies upon specialized services, responsive handling of customer needs,
local promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multibranch banks, most of which compete primarily
through interest rates and location of branches. For customers whose loan
demands exceed the Company's lending limits, the Company seeks to arrange for
such loans on a participation basis with its correspondent banks or other
independent commercial banks. The Company also assists customers requiring
services not offered by the Company to obtain such services from its
correspondent banks.
In the past, an independent bank's principal competitors for deposits and
loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, credit card companies,
and even retail establishments have offered new investment vehicles, such as
money market funds, which also compete with banks for deposit business. The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue. While the impact of these changes cannot be predicted with certainty,
it is clear that the business of banking in California will remain highly
competitive.
The proposed merger of the Company and Greater Bay Bancorp would provide
the Bank additional products and resources, including data processing
enhancements, from Greater Bay Bancorp and its subsidiaries in order for the
Bank to be more competitive with larger financial institutions. See Item 1,
"Business - Bay Area Bank - Company Subsidiary - Proposed Merger of Holding
Companies."
(F) SUPERVISION AND REGULATION
--------------------------
Bank Holding Company Regulation
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956 and is subject to the supervision of the Board of Governors
of the Federal Reserve System ("Board"). As a bank holding company, the Company
must obtain the approval of the Board before it may acquire all or substantially
all of the assets of any bank, or ownership or control of the voting shares of
any bank if, after giving effect to such acquisition of shares, the Company
would own or control more than 5% of the voting shares of such bank. With
certain limited exceptions, the Company is prohibited from engaging in or
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company engaged in non-banking activities, unless the Federal
24
Reserve Board determines that such activities are so closely related to banking
as to be a proper incident thereof.
The Board has the authority to examine the Company periodically. During
1997, the Board adopted a policy for risk-focused supervision of small bank
holding companies that do not engage in significant non-banking activities.
Under the new policy, examinations will focus on whether the Company has systems
in place to manage the risks inherent in its business. In analyzing risk, the
Board will look at the financial condition of the Company and the Bank,
management, compliance with laws and regulations, inter-company transactions and
any new or contemplated activities.
The Company and any subsidiary which it may acquire or organize in the
future are deemed to be affiliates of the Bank within the meaning set forth in
the Federal Reserve Act and are subject to that Act. This means, for example,
that there are limitations on loans by the Bank to affiliates, on investments by
the Bank in any affiliate's stock and on the Bank's taking any affiliate's stock
as collateral for loans to any borrower. All affiliate transactions must satisfy
certain limitations and otherwise be on terms and conditions that are consistent
with safe and sound banking practices. In this regard, the Bank generally may
not purchase from any affiliate a low-quality asset (as that term is defined in
the Federal Reserve Act). Also, transactions by the Bank with an affiliate must
be on substantially the same terms as would be available for non-affiliates.
The Company and its subsidiary are also subject to certain restrictions
with respect to engaging in the underwriting, public sale and distribution of
securities.
The Company and the Bank are prohibited from engaging in certain tie-in
arrangements in connection with the extension of credit. For example, the Bank
generally may not extend credit on the condition that the customer obtain some
additional service from the Bank or the Company, or refrain from obtaining such
service from a competitor.
Dividends Payable by the Company
Holders of Common Stock of the Company are entitled to receive dividends as
and when declared by the Board of Directors out of funds legally available
therefor under the laws of the State of California. Under California law, the
Company is prohibited from paying dividends unless: (a) the amount of its
retained earnings immediately prior to the dividend payment equals or exceeds
the amount of the dividend; or (b) immediately after giving effect to the
dividend (i) the sum of its assets would be at least equal to 125 percent of its
liabilities and (ii) its current assets would be at least equal to its current
liabilities, or, if the average of its earnings before taxes on income and
before interest expense for the two preceding fiscal years was less than the
average of its interest expense for the two preceding fiscal years, at least
equal to 125 percent of its current liabilities.
The Board of Governors has advised bank holding companies that it believes
that payment of cash dividends in excess of current earnings from operations is
inappropriate and may be cause for supervisory action. As a result of this
policy, banks and their holding companies may find it difficult to pay dividends
out of retained earnings from historical periods prior to the most recent fiscal
year or to take advantage of earnings generated by extraordinary items such as
sales of buildings or other large assets in order to generate profits to enable
payment of future dividends. Further, the Board of Governors' position that
holding companies are expected to provide a source of managerial and financial
strength to their subsidiary banks potentially restricts a bank holding
company's ability to pay dividends.
25
The Company's ability to pay dividends on its Common Stock is subject to
the rights of senior security holders and lenders, which will include the
holders of preferred stock in the future if preferred stock is again issued.
Dividend payments will also be dependent upon its separate liquidity needs. See
Item 7, "Management's Discussion and Analysis of Financial Condition." In that
regard, Federal and state statutes, regulations and policies impose restrictions
on the payment of management fees and cash dividends by the Bank to the Company.
Information regarding the Company's cash dividend payment history can be found
in Item 5, "Market for Registrant's Common Stock and Related Stockholder
Matters." In addition, the terms of the proposed merger of the Company and
Greater Bay Bancorp provide that the consent of Greater Bay Bancorp must be
obtained for any dividends that are not consistent with past practices of the
Company. See Item 1, "Business - Bay Area Bank - Company Subsidiary - Proposed
Merger of Holding Companies."
Bank Regulation
The Bank is subject to regulation, supervision and regular examination by
the California Commissioner of Financial Institutions (the "Commissioner"). The
deposits of the Bank are insured up to the maximum legal limits by the Bank
Insurance Fund ("BIF"), which is managed by the Federal Deposit Insurance
Corporation ("FDIC"), and the Bank is therefore subject to applicable provisions
of the Federal Deposit Insurance Act, and is also subject to regulation,
supervision and regular examination by the FDIC. The regulations of these
agencies affect most aspects of the Bank's business and prescribe permissible
types of loans and investments, the amount of required reserves, requirements
for branch offices, the permissible scope of the Bank's activities and various
other requirements. While the Bank is not a member of the Federal Reserve
System, it is nevertheless also subject to certain regulations of the Board of
Governors dealing primarily with check clearing activities, establishment of
banking reserves, Truth in Lending (Regulation Z), Equal Credit Opportunity
(Regulation B) and Truth in Savings (Regulation DD). It is also subject to other
consumer oriented laws, such as the Community Reinvestment Act.
Supervision and Examinations
Federal law mandates frequent examinations of all banks, with the costs of
examinations to be assessed against the bank being examined. In the case of the
Bank, its primary Federal regulator is the FDIC. The Federal banking regulatory
agencies have substantial enforcement powers over the depository institutions
that they regulate. Civil and criminal penalties may be imposed on such
institutions and persons associated with those institutions for violations of
any law or regulation. The penalties can be up to $5,000 per day that a
violation continues when the violation is unintentional, or up to $1 million per
day that a violation continues when the violation is willful. The amount of the
penalty also depends on whether the violation is part of a pattern or causes a
loss to the financial institution.
In late 1997, the FDIC notified the banks for which it is the primary
Federal regulator that it is implementing a new examination system that focuses
on risk and emerging risk issues at banks. The purpose of the risk-focused
examination framework is to permit the examiners to target those activities that
present a risk of loss to a bank and to diagnose emerging problems, which the
agency contends will result in examinations that are more efficient and less
burdensome for the regulated banks.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") places limits on brokered deposits and extends the limits to any bank
that is not "well capitalized" or is notified that it is in "troubled
condition." Previously, the limitations applied only to troubled banks.
26
A well-capitalized institution (which generally includes an institution that is
considered well capitalized for purposes of the prompt corrective action
regulations discussed below) may still accept brokered deposits without
restriction, unless it has been informed by its appropriate Federal regulatory
agency that it is in "troubled condition." All other insured depository
institutions are prohibited from accepting brokered deposits unless a waiver is
obtained from the FDIC. If a waiver is obtained, the interest paid on such
deposits may not exceed the rate paid for deposits in its normal market area, or
the national rate as determined in the FDIC's regulation.
If a depository institution solicits deposits by offering interest rates
significantly higher than rates being offered in its market area, it is deemed
under FDICIA to be a deposit broker. Therefore, depending on its capital
category, it may be prohibited from such practice, or need a prior waiver from
the FDIC in order to offer such rates. The FDIC's regulations specify that an
institution that is not well capitalized may offer rates that exceed the
prevailing effective rates offered in the normal market area only if the
institution obtains a waiver, but the institution may not offer rates more than
75 basis points above such prevailing rates.
The Bank is at this time considered well capitalized and not in a "troubled
condition," and it is not, therefore, subject to the brokered-deposit
limitations. If the Bank's status changes in the future, these regulations could
restrict the ability to attract such deposits.
Risk-Based Deposit Insurance Assessments
In addition, FDICIA required the FDIC to develop and implement a system to
account for risks attributable to different categories and concentrations of
assets and liabilities in assessing deposit insurance premiums. The FDIC adopted
a risk-assessment system effective January 1, 1994. Under this system, each
bank's deposit insurance premium assessment is calculated based on the level of
risk that the Bank Insurance Fund will incur a loss if that bank fails and the
amount of the loss if such failure occurs. This requirement, along with the
increased emphasis on exceeding capital measures, may cause banks to adjust
their asset mix in order to affect their deposit insurance premium and their
ability to engage in activities.
Dividends Payable by the Bank to the Company
The Bank is a legal entity which is separate and distinct from the Company.
Aside from raising capital on its own, the exercise of stock options or
borrowing funds for operating capital, it is anticipated that the Company may
receive additional income through dividends paid by, and management fees charged
to, the Bank. Subject to the regulatory restrictions described below, future
cash dividends by the Bank will depend upon management's assessment of future
capital requirements, contractual restrictions and other factors.
The power of the Board of Directors of a California chartered commercial
bank to declare a cash dividend is subject to California law, which restricts
the amount available for cash dividends to the lesser of the retained earnings
or the bank's net income for its last three fiscal years (less any distributions
to shareholders made during such period). Where the above test is not met, cash
dividends may still be paid, with the prior approval of the Commissioner, in an
amount not exceeding the greatest of (1) the retained earnings of the bank; (2)
the net income of the bank for its last fiscal year; or (3) the net income of
the bank for its current fiscal year. On December 31, 1998, the Bank was legally
able to pay dividends.
Under the Federal Deposit Insurance Act, bank regulators also have
authority to prohibit a bank from engaging in business practices which are
considered to be unsafe or unsound. It is
27
possible, depending upon the financial condition of the bank in question and
other factors, that such regulators could assert that the payment of dividends
or other payments might under certain circumstances be an unsafe or unsound
practice, even if technically permissible.
California Law
The activities of the Bank are also regulated by state law. State law, for
example, regulates certain loans to any officer of the Bank, directly or
indirectly, or to any related corporation in which such officer is a
stockholder, director, officer or employee.
California law permits California state-chartered banks to invest in the
stock and equity securities of other corporations, to engage directly in or
invest directly in subsidiaries which conduct real estate related activities
(including property management and real estate appraisal), and to participate in
management consulting and data processing services for third parties. FDICIA
limits the powers, including investment authority and subsidiaries, of state
banks to those activities that are either permitted to national banks, or
activities that the FDIC finds do not pose a significant risk to the deposit
insurance fund. In November 1998, the FDIC announced it will make it easier for
well run state banks to engage in real estate and securities underwriting, if
permitted by state law. State banks are now required to file notice of intention
to engage in such activities. The new rule contains anti-tying provisions.
In 1996, the primary regulator of national banks, the Comptroller of the
Currency, adopted regulations giving national banks the authority to engage in,
directly or through subsidiaries, a wider range of activities outside of
banking, and revised its application procedures to make obtaining permission
easier for well-managed and strongly capitalized national banks. Since that
time, the OCC has considered applications by national banks to engage in
activities through subsidiaries in which the parent banks may not engage, such
as investing in real estate.
The Commissioner has the authority to give state-chartered banks the powers
and rights that national banks have, even if those powers and rights are
inconsistent with state law, but this authority may be exercised only through
the formal rule-making procedure provided by law. Any regulation adopted by the
Commissioner without complying with formal rule-making procedures will expire at
the end of the year after adoption.
Capital Regulations
The Federal Reserve Board requires bank holding companies to maintain
adequate capital and has adopted capital leverage guidelines for evaluating the
capital adequacy of bank holding companies. The FDIC has also adopted a similar
minimum leverage regulation, requiring insured banks to maintain at least a
minimum capital to asset ratio. The Board's guidelines and the FDIC's
regulations require the banks and bank holding companies subject to them to
achieve and maintain a Tier 1 capital to total asset ratio of at least three
percent (3.0%) to five percent (5.0%), depending on the condition and rate of
growth of the bank or holding company. Tier 1 or core capital is defined to
consist primarily of common equity, retained earnings, and certain qualified
perpetual preferred stock. These minimum leverage ratio requirements limit the
ability of the banking industry, including the Bank, to leverage assets.
The Board also uses risk-based capital guidelines to evaluate the capital
adequacy of member banks and bank holding companies. Under these guidelines,
assets are categorized according to risk and the various categories are assigned
risk weightings. Assets considered to present less risk than others require
allocation of less capital. In addition, off-balance sheet and
28
contingent liabilities and commitments must be categorized and included as
assets for this purpose. Under these guidelines, when the Company's total assets
equal or exceed $150 million it will be required to maintain total capital of at
least 8.00% of risk-adjusted assets, and half of that minimum total capital must
consist of Tier 1 capital as defined above. For bank holding companies with less
than $150 million in total assets, the Board reviews the capital adequacy of the
subsidiary bank of the holding company, instead of the consolidated entity.
The FDIC requires insured banks to maintain capital in proportion to risk-
adjusted assets under capital guidelines that are similar to the Federal
Reserve's risk-based capital guidelines. At this time, the Bank is required to
maintain total capital of at least 8.00% of risk-adjusted assets.
The capital totals of the Bank as of December 31, 1998 and 1997 exceeded
the amounts of capital required under the regulatory guidelines at those times.
The following table shows the capital of the Bank, as a percentage of assets,
and the capital that it is required to maintain under the capital regulations,
as of December 31, 1998 and 1997:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------
As of December 31, 1998
Total Capital (to Risk Weighted Assets) $15,800 13.77% $9,181 8.0% $11,476 10.0%
Tier 1 Capital (to Risk Weighted Assets) $14,365 12.52% $4,590 4.0% $ 6,886 6.0%
Tier 1 Capital (to Average Assets) $14,365 10.32% $5,566 4.0% $ 6,957 5.0%
As of December 31, 1997
Total Capital (to Risk Weighted Assets) $11,850 12.79% $7,347 8.0% $ 9,184 10.0%
Tier 1 Capital (to Risk Weighted Assets) $10,692 11.54% $3,674 4.0% $ 5,510 6.0%
Tier 1 Capital (to Average Assets) $10,692 9.49% $4,498 4.0% $ 5,623 5.0%
The risk-based guidelines and the leverage ratio do not have a significant
effect on the Company and the Bank at this time because the Bank exceeds its
required ratios. The effect the requirements may have in the future is
uncertain, but management does not believe they will have an adverse effect on
the Company or the Bank. The risk-based capital guidelines may affect the
allocation of the Bank's assets between various types of loans and investments.
If the Bank continues to grow it may be required to increase capital by
retaining earnings or raising additional capital.
As required by FDICIA, the Federal banking agencies now take credit risk
concentrations and an individual institution's ability to manage such
concentrations into account when they assess a bank's capital adequacy. Non-
traditional investments and activities, such as the use of derivatives, are also
taken into account in assessing capital requirements. The agencies can adjust
the standards for risk-based capital on a case by case basis to take such risks
into account, but there is no formula that a bank can use prior to evaluation by
the agency to determine how credit concentration or nontraditional activities
will affect its capital requirements.
Under the risk-based capital rules, when the agencies assess the capital
adequacy of a bank, they must take into account the effect on that bank's
capital that would occur if interest rates moved up or down. The purpose of this
requirement is to ensure that banks with high levels of interest rate risk have
enough capital to cover the loss exposure.
Prompt Corrective Action
29
FDICIA requires the banking agencies to take corrective action against
certain financial institutions, based upon the financial institutions'
compliance with the various capital measurements. A financial institution is
subject to corrective action if its total risk-based capital is less than 8%, or
its Tier 1 risk-based capital ratio or leverage ratio is less than 4%. In
addition, an institution having a total risk-based capital to assets ratio of
less than 10%, a Tier 1 risk-based ratio of less than 6%, or a leverage ratio of
less than 5% may be subject to corrective action if it receives a less-than-
satisfactory rating for assets, management, earnings or liquidity in an
examination or if such ratios fall significantly below such standards. These
corrective actions become increasingly more severe as an institution becomes
more and more undercapitalized. Ultimately, the federal regulator is required to
seize an institution within 90 days of its becoming "critically
undercapitalized," unless the regulator can document that another course of
action will better achieve the purposes of this section of the law.
As discussed above, the Bank has capital ratios in excess of all such
capital measurements, and is not subject to any corrective actions.
Impact of Monetary Policies
Banking is a business in which profitability depends on rate differentials.
In general, the difference between the interest rate received by the Bank on
loans extended to its customers and securities held in the Bank's investment
portfolio and the interest rate paid by the Bank on its deposits and its other
borrowings comprise the major portion of the Bank's earnings. To the extent that
the Bank is not able to compensate for increases in the cost of deposits and
other borrowings with greater income from loans, securities and fees, the net
earnings of the Bank will be reduced. The interest rates paid and received by
the Bank are highly sensitive to many factors which are beyond the control of
the Bank, including the influence of domestic and foreign economic conditions.
The business of the Bank is also affected by the Board's regulations, which
require the Bank to maintain cash reserve balances on transaction accounts and
non-personal time deposits at the Federal Reserve Bank. The average reserve
requirement for the Bank for the year ended December 31, 1998 was approximately
$746,000.
The earnings and growth of the Bank are also affected by the monetary and
fiscal policy of the United States and its agencies, particularly the Board.
These agencies can and do implement national monetary policy, which is used in
part to curb inflation and combat recession. Among the instruments of monetary
policy used by these agencies are open market transactions in United States
Government securities, changes in the discount rates of member bank borrowings
and changes in reserve requirements. The actions of the Board have had a
significant effect on lending by banks, investments and deposits, and such
actions are expected to continue to have a substantial effect in the future. The
nature and timing of any further changes in such polices and their impact on the
Bank cannot be predicted.
Environmental Regulation
Federal, state and local regulations regarding the discharge of materials
into the environment may have an impact on the Company and the Bank. Under
Federal law, liability for environmental damage and the cost of cleanup may be
imposed upon any person or entity who is an owner or operator of contaminated
property. State law provisions, which were modeled after Federal law, impose
substantially similar requirements. Both Federal and state laws were
30
amended in 1996 to provide generally that a lender who is not actively involved
in operating the contaminated property will not be liable to clean up the
property, even if the lender has a security interest in the property or becomes
an owner of the property through foreclosure.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Economic Growth Act"), discussed in more detail below, includes protection for
lenders from liability under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"). The Economic Growth Act adds
a new section to CERCLA to specify the actions a lender may take with respect to
lending and foreclosure without incurring environmental clean-up liability or
responsibility. Typical contractual provisions regarding environmental issues in
the loan documentation and due diligence inspections will not lead to lender
liability for clean-up, and a lender may foreclose on contaminated property, so
long as it merely maintains the property and moves to divest it at the earliest
possible time.
Under California law, a lender generally will not be liable for the cost
associated with cleaning up contaminated property unless the lender realized
some benefit from the property, failed to divest the property promptly, caused
or contributed to the release of the hazardous materials or made the loan
primarily for investment purposes. This amendment to California law became
effective with respect to judicial proceedings filed and orders issued after
January 1, 1997.
The extent of the protection provided by both the Federal and state lender
protection statutes will depend on their interpretation by the administrative
agencies and courts, and the Bank cannot predict the extent of the protection it
will receive for the loans it makes that are secured by real property.
In addition, the Company and the Bank are still subject to the risks that a
borrower's financial position will be impaired by liability under the
environmental laws and that property securing a loan made by the Bank may be
environmentally impaired and not provide adequate security for the Bank.
California law provides some protection against the second risk, by establishing
certain additional, alternative remedies for a lender in the situation where the
property securing a loan is later found to be environmentally impaired.
Primarily, the law permits the lender in such a case to pursue remedies against
the borrower other than foreclosure under the deed of trust.
To address the risk that the borrower will be adversely affected by
environmental liability, the Bank's Loan Policy calls for the Bank to study the
history of the property and the uses of the property. When the Bank's review of
the history of the property and the surrounding property indicates that there
may be environmental issues, a Phase I environmental report is obtained for the
property, and a Phase II report is obtained where its usefulness is indicated by
the results of the Phase I environmental report.
Public Interest Laws, Consumer and Lending Laws
In addition to the other laws and regulations discussed herein, the Bank is
subject to certain consumer and public interest laws and regulations that are
designed to protect customers in transactions with banks. While the list set
forth below is not exhaustive, these laws and regulations include the Truth in
Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the
Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair
Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage
Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection
Practices Act, the Right to Financial Privacy Act and the Community Reinvestment
Act.
31
These laws and regulations mandate certain disclosure requirements and
regulate the manner in which financial institutions must deal with customers
when taking deposits, making loans, collecting loans and providing other
services. The Bank must comply with the applicable provisions of these laws and
regulations as part of its ongoing customer relations. Failure to comply with
these laws and regulations can subject the Bank to various penalties, including
but not limited to enforcement actions, injunctions, fines or criminal
penalties, punitive damages to consumers and the loss of certain contractual
rights.
Americans with Disabilities Act
The Americans with Disabilities Act ("ADA") enacted by Congress, in
conjunction with similar California legislation, is having an impact on banks
and their cost of doing business. The legislation requires employers with 15 of
more employees and all businesses operating "commercial facilities" or "public
accommodations" to accommodate disabled employees and customers. The ADA has two
major objectives (1) to prevent discrimination against disabled job applicants,
job candidates and employees and (2) to provide disabled persons with ready
access to commercial facilities and public accommodations. Commercial
facilities, such as the Bank, must ensure all new facilities are accessible to
disabled persons, and in some instances may be required to adapt existing
facilities to make them accessible, such as ATM's and bank premises.
New and Pending Legislation
Certain legislative and regulatory proposals that could affect the Company,
the Bank and the banking business in general are pending or may be introduced,
before the United States Congress, the California State Legislature, and
Federal, state and local government agencies.
ATM Fees. Legislation has been proposed in the past in the Congress and the
California legislature and measures are currently being proposed in local
jurisdictions to regulate the amount of ATM fees that operators of ATMs may
charge, and to further regulate the disclosure of such fees. If the collection
of interchange fees by the operator of an ATM is prohibited, as some of these
bills have proposed, the Bank's income from its ATM network would be severely
reduced and the EFT Department could not cover its expenses.
Banking Reform Bills. A new financial service reform bill was introduced
early in the 1999 session of the House of Representatives, patterned on the
Senate version which was considered last year but not passed. A similar bill
passed the House in 1998. The new Bill, H.R. 10, would repeal the Glass Steagall
Act prohibitions on bank affiliation with securities firms. It would allow bank
affiliates to engage in certain securities underwritings and dealing and
distributions of mutual funds. It expands bank powers by allowing them to engage
in activities 'financial in nature' rather than be limited by the current
standard, 'closely related to banking'. It would allow banks to underwrite and
broker insurance products, and requires the Federal Reserve to defer to the
State and Federal agencies on securities and insurance law issues. It also
requires a satisfactory CRA rating for a bank to be eligible for new powers, and
expands compliance with CRA requirements to other financial companies created by
H.R. 10. Similar legislation permitting cross ownership of banks and commercial
businesses and continuation of the thrift charter is expected to be introduced
in the Senate for consideration this year.
Expansion in Credit Union Membership. A broad rule has been adopted by
the National Credit Union Administration ('NCUA'), relaxing limits of credit
union membership. The new rule takes effect January 1, 1999. The NCUA will now
approve credit unions with membership of more
32
than 300,000 residents with proof that they function as a community. The effect
is to substantially expand credit union membership and make credit unions as tax
exempt entities, serving credit needs of large communities, more competitive to
banks. Litigation attacking the new rule is pending.
Office of Thrift Supervision ('OTS') Expansion of Charters to Insurance
Industry. In 1998 the OTS granted its ninth charter for an insurance company to
operate a thrift or savings and loan subsidiary. In this case the OTS approved
the application of State Farm Mutual Auto Insurance Co. to operate a savings and
loan business at some 16,000 sites where State Farm has insurance agents. State
Farm will offer auto, home equity and mortgage loans both directly through
agents and through the mail. There have been 41 new thrifts approved by the OTS
since 1994 with 54 charter applications pending which is expected to result in
yet more competition for banks.
Proposed 'Know Your Customer Rule'; Privacy. The 'Know Your Customer' rule
was proposed by the Federal Reserve to enforce the Bank Secrecy Act, and
requires bank management to determine the identity of their customers and their
customers' source of funds and then monitor the accounts for unusual events.
Suspicious events are then to be reported to law enforcement authorities by the
banks. The rule has been widely criticized as requiring an additional
expenditure of resources by banks as well as requiring invasion of the privacy
of customers. At the same time, other regulators such as the OCC are proposing
privacy rules to prevent such information from being provided. It is not known
whether the know your customer rule will be finally adopted, but it is expected
that banks will be required to adopt privacy policies allowing customers to
object to the banks' providing confidential customer information to affiliates
of the banks as well as third parties (other than law enforcement officials).
Interest on Business Checking. Legislation has again been introduced
during 1999 to lift the current ban on the payment of interest on business
checking accounts. Legislation lifting the ban on paying interest on business
checking accounts is expect to the considered in 1999 in the Shelby-Mack
Regulatory Relief Bill. The adoption of this legislation would permit the Bank
to compete more directly for commercial deposits, but increase its costs of
funds.
It is not known to what extent, if any, these proposals will be enacted and
what effect such legislation would have on the structure, regulation and
competitive relationship of financial institutions. It is likely, however, that
many of these proposals would subject the Company and the Bank to increased
regulation, disclosure and reporting requirements and would increase competition
to the Bank and its cost of doing business.
In addition to pending legislative changes, the various banking regulatory
agencies frequently propose rules and regulations to implement and enforce
already existing legislation. It cannot be predicted whether or in what form any
such legislation or regulations will be enacted or the effect that such
legislation or regulations may have on the Bank's business.
ITEM 2. PROPERTIES.
-----------
The Company's and the Bank's principal offices are located in a modern,
six-story building at 900 Veterans Boulevard, Redwood City, which provides
approximately 8,300 square feet of ground floor interior space. In June of 1995
the Bank executed a lease for 7.5 years (90 months) with a seven year option to
renew. The new lease was made at essentially the same terms as the previous
lease. The current monthly cost for this space (which includes an allocation of
certain operating expenses) is approximately $20,700 per month or approximately
$2.49 per square foot. The rental amounts are subject to further adjustments
annually based on the Consumer Price Index
33
and the allocation of property taxes and operating expenses.
In addition to the 8,300 square feet the Company leases for its primary
operations, an additional 2,100 square feet was leased in the same building
which is now occupied by the Bank's Commercial and Construction Lending
Department. The current cost for this additional space (which includes an
allocation of certain operating expenses) is approximately $4,000 per month or
$1.93 per square foot. The lease expired in December 1995 and was renewed for a
three year period with a three year option to renew. This lease is also subject
to adjustment annually based on the Consumer Price Index and the allocation of
property taxes and operating expenses.
The Company leases additional premises for its data processing, accounting
and centralized operations departments in Redwood City. These premises are
located in a building owned by Mr. Alan Miller, a major shareholder and Director
Emeritus of the Company and the Bank. The lease covers total space of
approximately 5,200 square feet. In May of 1991, the Company executed a three
year lease with Mr. Alan Miller. This lease has been extended to March 31, 1999
with an additional three year option to renew. The current monthly cost under
the lease (which includes an allocation and adjustments for certain operating
expenses) is approximately $4,750 per month, or $.91 per square foot. The
monthly rent payment is subject to annual adjustment based on the cost of living
index as published by the U.S. Department of Labor, Bureau of Labor Statistics.
In addition to monthly rent payments, the Company is also responsible for its
pro rata share of the building's operating expenses (i.e., taxes, utilities,
insurance, landscaping, security).
The Company's leases were reviewed by management and the Board of Directors
and found to be equitable and competitive with other leases within the immediate
market area. The Company owns leasehold improvements and furniture, fixtures and
equipment located at the above locations, all of which are used in the banking
business.
ITEM 3. LEGAL PROCEEDINGS.
------------------
As of December 31, 1998, neither the Company nor the Bank was a party to,
nor is any of their property the subject of any material pending legal
proceedings, nor are any such proceedings known to be contemplated by others
against the Company or the Bank. In November 1998, the Bank executed a
settlement agreement in the case of Clancy v. Bay Area Bank et al. The case was
previously reported in the Company's Form 10-K for the year ended December 31,
1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
No matter was submitted, through the solicitation of proxies or otherwise,
to a vote of security holders during the fourth quarter of the fiscal year
covered by this Form 10-K.
34
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
The Company's Common Stock is not listed on any exchange nor is it
listed on the NASDAQ system. U.S. Stock Transfer Corporation acts as transfer
agent and registrar for trades. Hoeffer & Arnett, Inc., Sutro & Company, and
Van Kasper and Company handle transactions in the Company's stock. At
February 1, 1999, the Company had approximately 450 shareholders of common
stock.
The following table indicates the range of high and low bid prices,
not including broker's commissions, for the periods shown, based upon
information provided by Hoeffer & Arnett, Inc., Van Kasper and Company, and
Sutro & Company. The table does not include transactions made privately by
individuals. The prices listed below are inter-dealer prices, and do not
necessarily represent actual transactions and do not include retail mark-up,
mark-downs or commissions.
BID PRICES OF THE COMPANY'S COMMON STOCK
Quarter Ended High Low Approximate Trading Volume
- -------------------- ------ ------ --------------------------
March 31, 1997 $16.88 $15.13 20,800
June 30, 1997 20.50 16.12 44,600
September 30, 1997 24.50 20.75 65,200
December 31, 1997 28.00 24.25 202,700
March 31, 1998 $31.25 $28.00 64,700
June 30, 1998 34.00 29.50 31,500
September 30, 1998 32.75 25.00 45,600
December 31, 1998 28.00 23.00 68,700
The following table sets forth the Company's cash dividend history
from 1991 to the date this report is filed.
CASH DIVIDENDS ON THE COMPANY'S COMMON STOCK
DATE DECLARED DATE PAID AMOUNT/SHARE
------------- --------- ------------
November 19, 1991 December 11, 1991 $.05
March 17, 1992 April 8, 1992 $.05
June 16, 1992 July 8, 1992 $.05
September 15, 1992 October 7, 1992 $.05
December 15, 1992 December 23, 1992 $.05
March 16, 1993 April 9, 1993 $.05
June 15, 1993 July 9, 1993 $.05
September 21, 1993 October 15, 1993 $.05
November 16, 1993 December 17, 1993 $.05
March 15, 1994 April 8, 1994 $.05
June 21, 1994 July 15, 1994 $.06
September 20, 1994 October 14, 1994 $.06
November 15, 1994 December 16, 1994 $.06
March 21, 1995 April 7, 1995 $.07
June 20, 1995 July 7, 1995 $.07
September 9, 1995 October 13, 1995 $.07
December 18, 1995 January 5, 1996 $.08
March 19, 1996 April 5, 1996 $.08
June 18, 1996 July 5, 1996 $.08
September 17, 1996 October 4, 1996 $.08
December 16, 1996 January 3, 1997 $.09
March 25, 1997 April 8, 1997 $.09
June 17, 1997 July 3, 1997 $.09
September 16, 1997 October 10, 1997 $.09
35
December 16, 1997 January 13, 1998 $.10
March 17, 1998 April 14, 1998 $.10
June 16, 1998 July 7, 1998 $.10
September 15, 1998 October 9, 1998 $.10
December 16, 1998 January 5, 1999 $.11
Continuation of future cash dividend payments by the Company is
contingent upon the Board of Directors' assessment of the Company's current
financial position as well as their expectation of future results. The Board
also considers, among other factors, the current capital position of both the
Company and the Bank as well as the need for cash and capital in the future.
The terms of the proposed merger of the Company and Greater Bay Bancorp provide
that the consent of Greater Bay Bancorp must be obtained for any dividends that
are not consistent with past practices of the Company. See Item 1, "Business -
Bay Area Bank - Company Subsidiary - Proposed Merger of Holding Companies."
For a discussion of the legal and other restrictions on the Company's
ability to pay dividends, see "(f) Supervision and Regulation --Bank Holding
Company Regulation - Dividends Payable by the Company" and "Bank Regulation"
under the Item 1, "Business" above.
ITEM 6. SELECTED FINANCIAL DATA.
------------------------
The selected consolidated financial information for the Company and
its subsidiaries presented below for the five years ended December 31, 1998
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto which are included in the Annual Report on this
Form 10-K. All amounts are in thousands except per share data.
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
Interest Income $ 11,878 $ 9,734 $ 8,401 $ 7,507 $ 6,363
Interest Expense 3,708 2,953 2,539 2,223 1,590
-------- -------- -------- ------- -------
Net Interest Income 8,170 6,781 5,862 5,284 4,773
Provision for Loan Losses 200 240 435 210 300
Other Income 2,465 2,517 2,821 2,532 1,833
Other Expenses 6,384 5,995 5,876 5,555 4,722
Provision for Income Taxes 1,686 1,258 957 839 637
-------- -------- -------- ------- -------
Net Income $ 2,365 $ 1,805 $ 1,415 $ 1,211 $ 947
======== ======== ======== ======= =======
Earnings per common share $ 2.39 $ 2.04 $ 1.69 $ 1.50 $ 1.21
EPS - assuming dilution $ 2.33 $ 1.84 $ 1.51 $ 1.38 $ 1.09
Dividends per Common Share $ .41 $ .37 $ .33 $ .29 $ .23
Net Loans $108,116 $ 84,374 $ 67,735 $59,981 $52,344
Total Assets $155,324 $122,085 $103,187 $93,815 $79,537
Total Deposits $136,455 $107,426 $ 92,968 $83,979 $72,014
Shareholders' Equity $ 14,365 $ 11,988 $ 9,281 $ 8,078 $ 6,971
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
36
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included as part of Item 8
herein, and selected statistical data included in Item 1, herein. Since the
Company is a holding company whose only asset (with the exception of average
cash , notes receivable and prepaid assets, all of which averaged approximately
$1.4 million in 1998) is its investment in the Bank, the following relates
almost entirely to the financial condition and results of operations of the
Bank.
Because the Company's primary operations are concentrated in a
relatively small geographic market place (San Mateo County), there are certain
inherent risks that the Company's financial operations may be adversely affected
if the local economy were to sustain a severe or prolonged economic decline.
Housing prices in the San Francisco Bay Area escalated rapidly in the late
1980's, creating demand for more affordable new home construction. The housing
market slump beginning in 1990 resulted in decreased demand and decreasing
property values that continued through 1994. Property values began to stabilize
in 1995 and have appreciated in 1996, 1997 and 1998.
The San Mateo region has historically outperformed the State of
California as a whole. While the state unemployment rate averaged approximately
7.0% over the last five years San Mateo county has been less than 5%. These
employment figures are based on the Company's best available data. Economic
growth in the Company's local area has continued to be strong, bolstered by the
residential and commercial development of the Redwood Shores area which is
within five miles of the Company.
The Bank is located less than ten miles from the corporate
headquarters of a number of large growing companies such as Oracle Corporation,
Sun Microsystems, Electronic Arts, Visa International, DHL Airfreight, Oral B,
Raychem Corporation, Excite, Yahoo, @Home, Franklin Funds, and Silicon
Graphics. Over the last two years, coinciding with national and local economic
expansion, the Bank has had increasing difficulty in securing qualified
candidates for employment positions at the Bank. This has resulted in
increased pay levels and increased time to fill needed positions. Bank
management expects that continued growth in these companies will result in
continuing demand for local housing and in increasing value of much of the
collateral that collateralizes the Bank's real estate loans.
LIQUIDITY
- ---------
Liquidity is the ability of the Company and the Bank to meet their
present and future obligations. The Company's liquidity requirements on a
parent company-only basis are centered primarily around debt obligations that
it may incur and costs associated with managing corporate affairs.
The Company's (parent only) principal sources of liquidity consist of
dividends from the Bank, borrowings and infusion of additional capital from the
exercise of stock options. During 1998, the Bank paid no in dividends to the
parent as compared to $450,000 paid in 1997. The Parent company's cash position
increased from $626,000 at December 31, 1997 to $787,000 at December 31, 1998.
Stock options exercised in 1998 (plus the related tax benefits) generated
$479,000 compared to $1,322,000 generated in 1997. Management believes liquidity
will be adequate to meet the Company's obligations in 1999, which include
approximately $36,000 in net operational expenses expected in 1999. The Company
had no borrowings at December 31, 1998, and does not anticipate incurring
additional debt in 1999. Any excess liquidity of the Company may be used
continue to pay cash dividends to shareholders and/or to reduce the Company's
reliance on dividends from the Bank.
37
The Bank's need for liquidity arises from potential withdrawals of
maturing time deposits, savings accounts and demand deposit accounts. The
Bank's ability to maintain adequate levels of liquidity is also significant in
providing for funding of loans to new and existing borrowers. Both assets and
liabilities contribute to the Bank's liquidity ratio. Assets such as investment
securities, cash and due from banks, federal funds sold and loan repayments
contribute to liquidity. The Bank's funding sources include demand deposits,
interest-bearing transaction accounts, savings deposits, time deposits and
advances from the Federal Home Loan Bank and other correspondent banks.
As of December 31, 1998, cash and due from banks, investment
securities and federal funds sold amounted to $44.0 million, which represents a
$9.5 million or 27% increase over the $34.6 million at year end 1997. The
Bank's year-end deposits and advances increased $29.9 million or 27.4% and ended
1998 at $138.9 million. Liquid assets as a percentage of total year-end
deposits and advances decreased slightly from 31.9% at year-end 1997 to 31.7%
at the end of 1998 . During 1998, liquid assets averaged $41.1 million or 33.1%
of deposits and advances as compared to 1997 when liquid assets averaged $34.8
million or 34.4% of average deposits.
Average deposits and advances were $124.2 million in 1998, which
constitutes a $22.8 million (22.5%) increase over average deposits and advances
in 1997. During 1998 total net loans averaged $95.2 million, a $20.5 million
or 27.4% increase from average net loans in 1997. In comparing the change in
cash flows during 1998 with 1997, the Company increased cash and cash
equivalents by $9.8 to $28.8 million.
As of March 15, 1999, the Company has in place $9.0 million in
unsecured liquidity lines of credit through its correspondent banks and
maintains additional secured liquidity lines through the Federal Reserve Bank.
The Company may borrow up to 25% of its assets from The Federal Home Loan Bank
(FHLB) subject to collateral and additional FHLB stock purchase requirements.
At December 31,1998 the company had $2.5 million outstanding in advances from
the Federal Home Loan Bank and had collateral available to borrow an additional
$3.2 million. See Item 1,"Business -- Bay Area Bank -- Company Subsidiary --
Correspondent Banks."
CAPITAL RESOURCES
- -----------------
The Company is subject to Federal Reserve Board ("FRB") guidelines and
the Bank is subject to Federal Deposit Insurance Corporation ("FDIC")
regulations governing capital adequacy. The Company and the Bank exceed the
minimum capital levels as required by the FRB and FDIC as of December 31, 1998.
See "Item 1 Business at " (e) Supervision and Regulation, Capital Guidelines".
The Bank is required to be in compliance with the "Risk Based Capital"
regulations as required by the FDIC. As of December 31, 1998 the Bank had Tier
1 risk based capital of 12.52% and total risk based capital of 13.77%, both of
which exceed the risk based capital requirements of the FDIC. Total Bank capital
plus allowances for possible loan losses at year end 1998 of $16.4 million
represents an increase of $4.1 million, or 33% growth over the 1997 year end
balance of $12.3 million.
RESULTS OF OPERATIONS
- ---------------------
The Company posted after-tax earnings of $2.4 million in 1998, a 31%
increase over 1997 in which net income was $1.8 million and a 67% increase over
1996 in which net income was
38
$1,415,000. Pretax earnings were $4.1 million in 1998, as compared to $3.1
million in 1997 and $2.4 million in 1996. The increase in 1998 pretax earnings
represents a 32% increase over 1997 and a 71% increase over 1996. The increase
of $988,000 in pretax income in 1998 over 1997 was comprised of a $1.4 million
increase in net interest income and a $40,000 decrease in loan loss provisions,
offset in part by a decrease of $52,000 in noninterest income and a $388,000
increase in noninterest expense.
Earnings per common share were $2.39 in 1998 as compared to $2.04 in
1997 and $1.69 in 1996. Earnings per common share assuming dilution were $2.33
in 1998 as compared to $1.84 in 1997 and $1.51 in 1996. The increase in
earnings per share of 17% in 1998 compared with 21% in 1997 was a result of the
31% increase in earnings being offset in part by 12% increase in the average
number of shares of common stock shares outstanding in 1998 from 883,000 in 1997
to 990,000 in 1998. The increase in earnings per share assuming dilution of 27%
in 1998 compared with 21.9% in 1997 was a result of the 31% increase in
earnings being offset in part by a 3.3% increase in number of shares of common
stock and assumed conversions used to compute earnings per share assuming
dilution (see "Item 8 - Financial Statements and Supplemental Data", footnote
1i, for a description of earnings per share computations).
Consolidated net income was comprised of Bank-only profits of
$2,395,000 in 1998 as compared to $1,862,000 in 1997 and $1,471,000 in 1996.
The parent Company (without consideration of inter-company dividends) recorded a
loss of $30,000 in 1998 as compared to losses of $57,000 in 1997 and $56,000 in
1996. The Company's (parent only) loss in 1998 was primarily comprised of legal
costs, director fees, fees paid to the Bank for administrative services, annual
report costs and other miscellaneous costs.
The Company recorded consolidated net interest income of $8.2 million
in 1998, $6.8 million in 1997, and $5.9 million in 1996. This represents an
improvement in net interest income of 20.1% in 1998 over 1997 and 15.7% in 1997
over 1996. The Company's net interest margin (net interest income divided by
average earning assets) was 6.6% in 1998, 6.9% in 1997, and 6.9% in 1996.
During 1998, the yield the Company earned on its earning assets decreased from
9.9% in 1997 to 9.6% in 1998. The cost of funding sources (primarily
deposits) for these assets increased from 3.9% in 1997 to 4.0% in 1998.
The $1.38 million increase in net interest income in 1998 was a result
of an increase in interest income of $2.14 million offset in part by an increase
in interest expense of $756,000. The growth in net interest income in 1998 was
comprised of a $2.54 million increase related to an increase in average earning
assets offset in part by a $396,000 reduction caused by a decrease in the yield
of the portfolio. The $919,000 increase in net interest income in 1997 over
1996 interest income was a result of an increase in interest income of $1.3
million offset by an increase in interest expense of $414,000. (See "Item 1 -
Business, (d) Selected Statistics/Information-Distribution of Average Assets;
Interest Rates and Differentials, and Rate and Volume Variances.") The
Company's 1998 fourth quarter results indicate that interest margins are
beginning to tighten primarily because of competitive pricing pressure on loans.
In the fourth quarter of 1998 total earning assets averaged $137.7 million and
total interest bearing liabilities averaged $102.4 million. The annualized yield
on earning assets was 9.2% (as compared to 9.6% for all of 1998) and the cost of
funds was 3.8% (as compared to 4.0% for 1998) resulting in an annualized net
interest margin for that quarter of 6.3% (as compared to 6.6% for all of 1998).
Loan loss provisions were $200,000 in 1998, as compared to $240,000 in
1997 and $435,000 in 1996. The decreased provision resulted primarily because
of reduced loan charge-offs and increased recoveries in 1998. Gross loans
charge-offs were $76,000 in 1998, $135,000 in
39
1997 and $510,000 in 1996. Loan loss recoveries were $313,000 in 1998, $40,000
in 1997, and $52,000 in 1996. This resulted in net loan loss recoveries of
$237,000 in 1998 as compared to net loan charge-offs (charge-offs less
recoveries) of $95,000 in 1997 and $458,000 in 1996. Net loan recoveries
(charge-offs) as a percentage of average loans were 0.25% in 1998, (0.12)% in
1997 and (0.69)% in 1996.
The Company's allowance for possible loan loss ratios and asset
performance ratios were more favorable at December 31, 1998 than December 31,
1997. (See Item 1d "Business, Selected Statistical Information, Summary of Loan
Loss Experience"). Of the Company's gross loans, $145,000 or 0.13% were not
performing at December 31, 1998, $373,000 or 0.46% were not performing at year
end 1997, and $1,431,000 or 2.05% were not performing at year end 1996.
The Company's ratio of nonperforming assets to total assets was .09%
at year end 1998, 0.31% at year end 1997 and 1.39% at year end 1996. The
Company's allowance for possible loan losses as a percentage of nonperforming
loans was 1,431% at year end 1998, as compared to 439% at December 31, 1997 and
96% at December 31, 1996. Nonperforming assets are discussed at "Item 1-
Business" at "(d) Selected Statistical Information, Nonaccrual, Past Due and
Restructured Loans."
Management evaluates the size, quality, composition and growth of the
portfolio as well the historical experience of losses in various loan categories
when determining the amount of the allowance for possible loan losses.
Potential adverse economic conditions and threats to the local real estate
market are considered as well as their effect on a borrower's ability to repay
the debt. The Board continues to employ a former regulator as an outside loan
consultant to review specific loans as well as the adequacy of the entire loan
loss allowance. Management has established a 1998 year end allowance for
possible loan losses of $2.1 million or 1.88% of year end gross loans.
The Company's concentration of real estate secured loans was
approximately 67% at year end 1998, 69% at year end 1997 and 64% in 1996. The
Company's concentration in real estate in the San Mateo region represents an
inherent and continued risk to operations. A severe decline in local real
estate values could be expected to effect adversely and materially affect the
Company's earnings and capital position. There was no real estate owned at
December 31, 1998 or December 31, 1997.
Noninterest income decreased $52,000 or 2.1% to $2,465,000 in 1998 as
compared to a decrease of $304,000 or 10.8% in 1997.
The EFT Department contributed $454,000 to consolidated pretax income
(after allocation of certain inter-company costs) as compared to $346,000 in
1997. There can be no assurance of the continued profitability of the EFT
Department. Income from the EFT Department may be less than expected if state
or federal laws are changed to limit the ability of the Bank to place more ATMs
in service, or to limit the charges the Bank may collect from the use of those
ATMs. For a further discussion of the EFT Department's operating results, see
Item 1, "Business -- Bay Area Bank -- Company Subsidiary -- Electronic Funds
Services."
Noninterest expense increased $389,000 or 6.5% in 1998 as compared to
an increase of $119,000 or 2.0% in 1997 and $320,000 or 5.8% in 1996. This
increase in noninterest expense in 1988 was primarily due to a $404,000 increase
in salary expense, a $205,000 increase in professional fees offset in part by a
decrease in other expense of $181,000. Approximately $250,000 of salary expense
and $200,000 in professional fees in 1988 are considered by
40
management to be nonrecurring. In addition to these nonrecurring items, an
operational loss of $130,000 recorded in 1997 was recovered in full in 1998.
The Company's tax expense increased from $957,000 in 1996 to
$1,258,000 in 1997 and to $1,686,000 in 1998. The 1998 tax amount represents a
$428,000 or 34% increase over the prior year. This is a result of a 32%
increase in pretax income during 1998 which resulted in an effective tax rate of
41.6% for 1998 (as compared to 41.1% for 1997 and 40.3% in 1996).
IMPACT OF INFLATION
- -------------------
The low proportion of the Company's fixed assets to total assets (less
than 1% at year end 1998) reduces the potential for inflated earnings resulting
from understated depreciation and the potential understatement of absolute asset
values. The effect of higher interest rates in the bond and credit markets
would be to increase the net interest margin in the short term as a result of
the Company's loan portfolio's sensitivity to interest rates. Offsetting this
increase would be a loss in the Company's bond portfolio and an increase in the
Company's cost of funds.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is not required to provide the information required by
Item 305 of the Regulation S-K as it is a small business issuer as defined in 17
C.F.R. 230.405.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
FINANCIAL HIGHLIGHTS
(Dollar amount in thousand, except per share data)
1998 1997 1996
Total interest income $ 11,878 $ 9,734 $ 8,401
Total interest expense 3,708 2,953 2,539
Net interest income 8,170 6,781 5,862
- ---------------------------------------------------------------------------------------
Provision for possible loan losses 200 240 435
- ---------------------------------------------------------------------------------------
Total noninterest income 2,465 2,517 2,821
Total noninterest expense 6,384 5,995 5,876
Provision for income taxes 1,686 1,258 957
- ---------------------------------------------------------------------------------------
Net income $ 2,365 $ 1,805 $ 1,415
- ---------------------------------------------------------------------------------------
Earnings per share
Earnings per common share $ 2.39 $ 2.04 $ 1.69
Earnings per common share - assuming dilution $ 2.33 $ 1.84 $ 1.51
Book value per share $ 14.31 $ 12.27 $ 11.05
Dividends declared per common share $ .41 $ .37 $ .33
Total loans, net of allowance for possible loan losses $108,116 $ 84,374 $ 67,735
Total assets $155,324 $122,085 $103,187
Total deposits $136,455 $107,426 $ 92,968
Total shareholders' equity $ 14,365 $ 11,988 $ 9,281
This information is derived from the following audited financial statements, and
should be read in conjunction with those audited financial statements.
42
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
(Dollar amounts in thousands, except per share data)
For the Years ended December 31,
-------------------------------
1998 1997 1996
Interest Income:
Interest and fees on loans $10,265 $8,243 $7,208
Interest on taxable investment securities 797 971 777
Interest on tax exempt investment securities 60 58 61
Interest on federal funds sold 756 462 355
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 11,878 9,734 8,401
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing transaction accounts 1,446 1,364 1,320
Savings deposits 297 262 230
Time deposits 1,863 1,299 974
Other borrowings 102 28 15
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,708 2,953 2,539
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,170 6,781 5,862
Provision for possible loan losses 200 240 435
Net interest income after provision for possible loan losses 7,970 6,541 5,427
Noninterest income:
Service charges on deposit accounts 261 206 211
Gain on disposal of assets -- -- 2
Gain on sale of loans held for sale -- 12 456
Other mortgage banking income 140 135 149
ATM network revenue 1,946 2,026 1,839
Other 118 138 164
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,465 2,517 2,821
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and related benefits 2,870 2,466 2,598
Occupancy 487 463 400
Equipment 472 495 544
Professional fees 486 281 243
ATM network expenses 526 558 628
Stationery and supplies 101 109 121
Other 1,442 1,623 1,342
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 6,384 5,995 5,876
- -----------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 4,051 3,063 2,372
Provision for income taxes 1,686 1,258 957
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,365 $ 1,805 $ 1,415
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income: Unrealized gain (loss) on
Investment securities held-for-sale, net of tax -- 3 (15)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 2,365 $1,808 $1,400
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share $ 2.39 $ 2.04 $ 1.69
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share-assuming dilution $ 2.33 $ 1.84 $ 1.51
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends declared per common share $ .41 $ .37 $ .33
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
43
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
December 31,
------------
1998 1997
Assets
Cash and due from banks $ 9,608 $ 11,464
Federal funds sold 19,200 7,500
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 28,808 18,964
Investment securities held to maturity, at cost 13,442 14,482
(market value of $13,563 in 1998 and $14,683 in 1997)
Investment securities available for sale (at market) 1,775 1,106
Loans, net of allowance for possible loan losses of $2,075 in 1998 and $1,638 in 1997 108,116 84,374
Premises and equipment, net 419 653
Interest receivable and other assets 2,764 2,506
- ----------------------------------------------------------------------------------------------------------------
Total assets $155,324 $122,085
- ----------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits
Demand $ 33,558 $ 28,248
Interest-bearing transaction 59,044 41,758
Savings 9,145 6,399
Time 34,708 31,021
- ----------------------------------------------------------------------------------------------------------------
Total deposits 136,455 107,426
Interest payable and other liabilities 2,004 1,671
Federal Home Loan Bank advances 2,500 1,000
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 140,959 110,097
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 9 and 10)
Shareholders' equity:
Common stock, no par value:
Authorized -- 20,000,000 shares
Issued and outstanding -- 1,004,141 shares in 1998 and 977,035 shares
in 1997 4,896 4,736
Accumulated other comprehensive income (2) (2)
Additional paid in capital 900 640
Retained earnings 8,571 6,614
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 14,365 11,988
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $155,324 $122,085
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except per share data)
For the years ended December 31,
--------------------------------
1998 1997 1996
Cash flows from operating activities:
Net income $ 2,365 $ 1,805 $ 1,415
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 378 413 447
Provision for possible loan losses 200 240 435
Gain on sale of other assets -- -- (2)
Proceeds from sale of loans held for sale -- 1,458 505
Cost of loans held for sale -- (723) (456)
Net amortization and accretion of investment premiums and
discounts 105 90 56
Net increase in interest receivable and other assets (258) (507) (548)
Net increase in interest payable and other liabilities 333 733 180
Net increase (decrease) in deferred loan fees (46) 27 164
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments 712 1,731 781
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,077 3,536 2,196
Cash flows from investing activities:
Net decrease in time deposits with other financial
institutions -- 100 3
Proceeds from the maturity of investment securities held to
maturity 2,390 1,500 1,650
Proceeds from the maturity of investment securities
available for sale -- 1,500 500
Principal payments received on mortgaged backed securities 3,694 1,494 997
Purchase of investment securities (5,840) (5,492) (4,444)
Net increase in gross loans (23,874) (18,073) (8,726)
Net capital expenditures, premises and equipment (144) (255) (310)
Proceeds from the sale of real estate owned -- 436 128
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,774) (18,790) (10,202)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 29,029 14,458 8,988
Net change in other borrowings 1,500 1,000 (1,000)
Proceeds from the exercise of common stock options 479 1,322 80
Common stock retired (59) (89) --
Cash dividends (408) (334) (277)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 30,541 16,357 7,791
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,844 1,103 (215)
Cash and cash equivalents, beginning of period 18,964 17,861 18,076
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 28,808 $ 18,964 $ 17,861
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Cash payments for interest $ 3,727 $ 2,870 $ 2,496
Cash payments for taxes 1,550 1,295 1,241
Loans transferred to real estate owned -- 870 130
See accompanying notes.
45
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
For the Years ended December 31, 1998, 1997 and 1996
Accumulated
Additional Other
Preferred Common Paid in Comprehensive Retained
Stock Stock Capital Income Earnings Total
----- ----- ------- ------ -------- -----
Balance at December 31, 1995 $ 10 $4,053 $ -- $ 10 $4,005 $ 8,078
Preferred stock converted to common (10) 10 -- -- -- --
Accumulated other comprehensive income -- -- -- (15) -- (15)
Cash dividends -- -- -- -- (277) (277)
Stock options exercised -- 80 -- -- -- 80
Net income -- -- -- -- 1,415 1,415
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- 4,143 -- (5) 5,143 9,281
Stock repurchases -- (89) -- -- -- (89)
Accumulated other comprehensive income -- -- -- 3 -- 3
Cash dividends -- -- -- -- (334) (334)
Stock options exercised and related tax benefit -- 682 640 -- -- 1,322
Net income -- -- -- -- 1,805 1,805
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- 4,736 640 (2) 6,614 11,988
Stock repurchases -- (59) -- -- -- (59)
Accumulated other comprehensive income -- -- -- -- -- --
Cash dividends -- -- -- -- (408) (408)
Stock options exercised and related tax benefit -- 219 260 -- -- 479
Net income -- -- -- -- 2,365 2,365
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 0 $4,896 $900 $ (2) $8,571 $14,365
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of Bay Area Bancshares:
In our opinion, the accompanying consolidated balance sheets and the related
statements of income and other comprehensive income, changes in shareholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Bay Area Bancshares (the Company) at 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. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Pricewaterhouse Coopers, LLP
San Francisco, California
February 9, 1999
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Bay Area Bancshares (the Company), and
its wholly owned subsidiary, Bay Area Bank (the Bank), have been prepared in
conformity with generally accepted accounting principles and general practice
within the banking industry. The Company's significant accounting policies are
as follows:
A. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation. All dollar amounts are shown
in thousands except per share data.
B. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of the consolidated financial statements of the Company requires
management to make estimates and assumptions that affect reported amounts.
These estimates are based on information available as of the date of the
financial statements. Therefore, actual results could differ from those
estimates.
C. CASH AND CASH EQUIVALENTS
The Company considers cash and due from banks and federal funds sold to be cash
and cash equivalents.
D. INVESTMENT SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method. Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Available-for-sale
securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity.
E. LOANS
Loans are stated at the amount of principal outstanding at the balance sheet
date. Interest on commercial, installment and real estate loans is accrued daily
on a simple interest basis on the amount of principal outstanding. The Bank's
policy is to place loans on nonaccrual status if either principal or interest
has become past due for 90 days or more, or when payment in full of principal or
interest is not expected. When a loan is placed on nonaccrual status, all
interest previously accrued is reversed against current period income and the
amortization of deferred loan fees is terminated. Bank management may waive
nonaccrual status and the previously accrued interest may not be reversed if a
loan is well collateralized and in the process of collection. Cash received on
non-accrual loans is applied to reduce the principal balance.
F. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered by
management as adequate to provide for losses that are inherent in the loan
portfolio. The allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. The Bank makes periodic credit reviews of the
loan portfolio and considers current economic conditions, historical loan loss
experience and other factors in determining the adequacy of the allowance. The
allowance for possible loan losses is based on estimates, and ultimate losses
may vary from the current estimates. These estimates are reviewed periodically
and, as adjustments become necessary, they are reported in earnings in the
periods in which they become known.
G. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost and depreciated using the straight-
line method over the estimated useful lives of the assets, which are generally
three to five years for furniture and equipment. Leasehold improvements are
amortized over the term of the respective lease or the estimated useful life of
the property, whichever is shorter.
H. REAL ESTATE OWNED
Other real estate owned is carried at the lower of cost or fair value. When the
property is acquired through foreclosure, any excess of the related loan balance
over the fair value is charged to the allowance for possible loan losses.
Subsequent write-downs, operating expense, and losses upon sale, if any, are
charged to operating expenses.
I. EARNINGS PER SHARE
Earnings per share (EPS) for the years ended December 31, 1998, 1997, and 1996
are stated in accordance with SFAS No. 128 "Earnings per Share." Basic EPS is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding during the year. Diluted EPS is
computed by dividing diluted net income available to common shareholders by the
weighted average number of common shares and common equivalent shares
outstanding including dilutive stock options. The computation of common stock
equivalent shares is based on the weighted average market price of the Company's
common stock throughout the period.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted earnings per share (EPS) computations for the years
ended December 31, 1998, 1997 and 1996.
For the year ended December 31, 1998
------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------
Net income $2,365
Basic EPS:
Income available to common shareholders 2,365 990,000 $2.39
Effect of dilutive securities:
Stock options --- 24,000 ---
-------------------------------------
Diluted EPS: income available to
common shareholders and assumed conversions $2,365 1,014,000 $2.33
-------------------------------------
For the year ended December 31, 1997
------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------
Net income $1,805
Basic EPS:
Income available to common shareholders 1,805 883,000 $2.04
Effect of dilutive securities:
Stock options --- 99,000 ---
-------------------------------------
Diluted EPS: income available to
common shareholders and assumed conversions $1,805 982,000 $1.84
-------------------------------------
For the year ended December 31, 1996
------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------
Net income $1,415
Basic EPS:
Income available to common shareholders 1,415 835,000 $1.69
Effect of dilutive securities:
Stock options --- 105,000 ---
-------------------------------------
Diluted EPS: income available to
common shareholders and assumed conversions $1,415 940,000 $1.51
-------------------------------------
There were no options that were considered anti-dilutive, the options' exercise
price was greater than the average market price of the common shares during the
years ended December 31, 1998, 1997 and 1996.
J. COMPREHENSIVE INCOME
On January 1, 1998 the Company adopted SFAS 130, "Reporting Comprehensive
Income". This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display the
accumulated other comprehensive income separately from retained earnings in the
equity statement of the balance sheet. The changes to the balances of
accumulated other comprehensive income are as follows:
- ------------------------------------------------------------------------------------------------------
Unrealized Gain on Securities Accumulated Other Comprehensive
Income (Loss)
- ------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 $ (2) $ (2)
- ------------------------------------------------------------------------------------------------------
Current period change - -
- ------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 $ (2) $ (2)
- ------------------------------------------------------------------------------------------------------
48
K. SEGMENT INFORMATION
In 1998, the Company adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS 131 supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise", replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information.
L. RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform with
the current year presentation. These reclassifications have no effect on
previously reported income.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 2--NATURE OF OPERATIONS
The Company, through its subsidiary bank, provides a wide range of commercial
banking services to individuals, professionals and small to medium sized
businesses. The services provided include those typically offered by commercial
banks, such as: interest-bearing and noninterest bearing checking accounts,
savings and time deposits, business and personal loans, safe depository
facilities, funds transfer, cashiers checks and the sale of travelers' checks.
The Bank also operates a network of approximately fifty off-site Automated
Teller Machines (ATMs) which generate transaction fees.
NOTE 3--INVESTMENT SECURITIES
The amortized cost and approximate market value of investment securities as of
December 31, 1998 and 1997 are as follows:
1998
Aggregate
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---- ---- -----
Available-for-sale:
Securities of the U.S. government and its agencies $ 504 $ 3 $ -- $ 507
Mortgage backed securities 1,273 2 (7) 1,268
- -------------------------------------------------------------------------------------------------------------
Total 1,777 5 (7) 1,775
Held-to-maturity:
Securities of the U.S. government and its agencies 3,005 22 -- 3,027
States of the U.S. and political subdivisions 1,817 35 (1) 1,851
Mortgage backed securities 8,230 88 (23) 8,295
Federal Home Loan Bank Stock 390 -- -- 390
- -------------------------------------------------------------------------------------------------------------
Total $13,442 $145 $(24) $13,563
- -------------------------------------------------------------------------------------------------------------
1997
Aggregate
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---- ---- -----
Available-for-sale:
Securities of the U.S. government and its agencies $ 513 $ -- $-- $ 513
Mortgage backed securities 595 -- (2) 593
- -------------------------------------------------------------------------------------------------------------
Total 1,108 -- (2) 1,106
Held-to-maturity:
Securities of the U.S. government and its agencies 4,509 23 -- 4,532
States of the U.S. and political subdivisions 1,007 20 -- 1,027
Mortgage backed securities 8,646 167 (9) 8,804
Federal Home Loan Bank Stock 320 -- -- 320
- -------------------------------------------------------------------------------------------------------------
Total $14,482 $210 $(9) $14,683
- -------------------------------------------------------------------------------------------------------------
The amortized cost and aggregate fair value of investment securities at December
31, 1998 by type and maturity are shown below. The maturity of mortgage-backed
securities is estimated based on expected principal prepayments, all other
securities have defined maturities.
Securities Held to Maturity Securities Available for Sale
Cost Fair Market Value Cost Fair Market Value
- -----------------------------------------------------------------------------------------------------------
Due within one year $ 4,471 $ 4,513 $ 504 $ 507
Due after one year through five years 6,053 6,097 1,108 1,107
Due after five years through ten years 912 912 165 161
Due after ten years 1,616 1,651 -- --
- -------------------------------------------------------------------------------------------------------
Total $13,052 $13,173 $1,777 $1,775
- -------------------------------------------------------------------------------------------------------
The Company did not sell any securities in 1996,1997 or 1998.
As of December 31, 1998, and 1997, investment securities with an amortized cost
of $ 3,836 and $3,874 respectively, were pledged to secure public deposits and
other borrowings as required by law.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 4--LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loan balances as of December 31, 1998 and 1997 were as follows:
1998 1997
Commercial $ 28,591 $20,679
Real estate mortgage 41,077 38,567
Real estate construction 33,154 20,978
Installment 7,369 5,788
- -----------------------------------------------------------------------------
110,191 86,012
Less--Allowance for possible loan losses (2,075) (1,638)
- -----------------------------------------------------------------------------
Net loans $108,116 $84,374
- -----------------------------------------------------------------------------
The changes in the allowance for possible loan losses for the years ended
December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996
Balance at January 1, $1,638 $1,493 $1,516
Provision for possible loan losses 200 240 435
Loans charged off (76) (135) (510)
Recoveries 313 40 52
- --------------------------------------------------------------------------------
Balance at December 31, $2,075 $1,638 $1,493
- --------------------------------------------------------------------------------
The Company adopted Financial Accounting Standards Board Statement (SFAS) No.
114, Accounting by Creditors for Impairment of a Loan, effective January 1,
1995. As a result of applying the new rules, certain impaired loans are reported
at the present value of expected future cash flows using the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
If the estimated value of the loan is less than the carrying value of the loan,
the impairment is recorded through a valuation allowance. The valuation
allowance for impaired loans at December 31, 1998 and 1997 under SFAS No. 114
was $36 and $93 respectively, which is included in the Company's allowance for
loan loss. For the years ended December 31, 1998 and 1997, the average recorded
investment in impaired loans was approximately $201 and $995, respectively.
The Company considers all nonaccrual loans to be impaired loans. At December 31,
1998 and 1997 there were loans totaling approximately $145 and $373
respectively, on nonaccrual status. Interest earned but not recorded on all
loans that were on nonaccrual status during the years ended December 31, 1998
and 1997 was approximately $8 and $53 respectively.
The Bank has, and expects to have in the future, banking transactions in the
ordinary course of its business with directors, executive officers, principal
shareholders and their associates. The loan activity with respect to these
related parties during 1998 is summarized below:
Loans to directors, executive officers, principal shareholders and their
associates:
1998 1997
Balance at January 1, $ 1,395 $ 1,549
Additions 195 926
Paydowns or Retirements (752) (1,080)
- --------------------------------------------------------------------------------
Balance at December 31, $ 838 $ 1,395
- --------------------------------------------------------------------------------
The Bank's business activity is with customers primarily located within San
Mateo County. The Bank grants real estate, commercial, and installment loans to
these customers. Although the Bank has a diversified loan portfolio, a
significant portion of its customers' ability to repay the loans is dependent
upon the real estate economic sector. Generally, the loans are secured by assets
or stock. Loans are based on the borrowers' established integrity, historical
cash flow, and their willingness and ability to perform on commitments. The
Bank's policy is to secure collateral where deemed necessary to protect the
soundness of the loan. In the event of loan default, the Bank's means of
recovery is through judicial procedures.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1998 and 1997 were comprised of the
following:
1998 1997
Automobiles $ 55 $ 55
Furniture and equipment 2,759 2,625
Leasehold improvements 226 225
- --------------------------------------------------------------------------------
3,040 2,905
Less - Accumulated depreciation and amortization (2,621) (2,252)
- --------------------------------------------------------------------------------
Net premises and equipment $ 419 $ 653
- --------------------------------------------------------------------------------
Depreciation expense was $ 378, $413 and $447 for the years ended December 31,
1998, 1997 and 1996.
NOTE 6--DEPOSITS AND INTEREST ON DEPOSITS
As of December 31, 1998 and 1997, the Bank had time certificates of deposit in
denominations of $100 or more totaling approximately $22,237 and $20,261,
respectively. Interest paid on these deposits was approximately $1,255 in 1998,
$772 in 1997 and $494 in 1996.
NOTE 7--BORROWINGS AND AVAILABLE CREDIT
At December 31, 1998 and 1997 the Bank had advances from the Federal Home Loan
Bank of San Francisco (FHLB) of $2,500 and $1,000 at a weighted average interest
rate of 5.70% and 5.93%, respectively. The terms of these advances range from
one to five years and are collaterialized by loans and investment securities of
the Bank. Of the advances outstanding at December 31, 1998, $500 mature within
one year and $2,000 mature within five years.
As of December 31, 1998 and 1997, the Bank had in place $9,000 in unsecured
liquidity lines of credit. These funds were available through its correspondent
banks. The Bank is a member of the FHLB. The Bank may borrow up to 25% of its
assets subject to collateral and FHLB stock purchase requirements. At December
31, 1998 the Bank held $390 in FHLB stock and had enough collateral available
with the FHLB to borrow an additional $3,222.
NOTE 8--REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------
As of December 31, 1998
Total Capital (to Risk Weighted Assets) $15,800 13.77% $9,181 8.0% $11,476 10.0%
Tier 1 Capital (to Risk Weighted Assets) $14,365 12.52% $4,590 4.0% $ 6,886 6.0%
Tier 1 Capital (to Average Assets) $14,365 10.32% $5,566 4.0% $ 6,957 5.0%
52
As of December 31, 1997
Total Capital (to Risk Weighted Assets) $11,850 12.79% $7,347 8.0% $ 9,184 10.0%
Tier 1 Capital (to Risk Weighted Assets) $10,692 11.54% $3,674 4.0% $ 5,510 6.0%
Tier 1 Capital (to Average Assets) $10,692 9.49% $4,498 4.0% $ 5,623 5.0%
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
As of December 31, 1998 and 1997, the Bank was categorized as "well capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as well-capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratio as set forth in the table, and not subject to
a capital directive.
The retained earnings of the Company include undistributed earnings of the Bank.
Dividends by the Bank to the Company are restricted under California law to the
lesser of the Bank's retained earnings, or the Bank's net income for the latest
three fiscal years, less dividends previously declared during that period, or
with the approval of the California Superintendent of Banks, to the greater of
the retained earnings of the Bank, the net income of the Bank for its last
fiscal year or the net income of the Bank for its current fiscal year. As of
December 31, 1998, the Bank had retained earnings available for dividend
distribution of $5,052
Additionally, the Federal Reserve Act generally restricts loans, advances and
investments by the Bank, in or to the Company, to 10% of the shareholder's
equity of the Bank.
NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES
The Company is obligated for rental payments under certain operating leases and
contract agreements. Rental expense included in occupancy expense and equipment
expense was approximately $463, $440 and $378 for the years ended December 31,
1998, 1997 and 1996, respectively.
At December 31, 1998, the approximate future lease rentals payable under
operating leases for premises were as follows:
1999 $ 277
2000 258
2001 258
2002 258
Thereafter 0
- ------------------------------------------------------------------
Total Minimum Lease Payments $1,051
- ------------------------------------------------------------------
The Bank is required to maintain reserves with the Federal Reserve Bank (FRB) of
San Francisco. Reserve requirements are primarily based on a percentage of
deposit liabilities. At December 31, 1998 the required reserves were $1,217.
In the normal course of business, the Company is at times subject to pending and
threatened legal actions and proceedings. After reviewing pending and threatened
actions and proceedings with counsel, management believes that the outcome of
such actions or proceedings will not have a material adverse effect on the
consolidated financial condition of the Company.
NOTE 10--OFF-BALANCE SHEET INSTRUMENTS WITH RISK
In the ordinary course of business, the Bank enters into various types of
transactions, which involve financial instruments with off-balance sheet risk.
These instruments include commitments to extend credit and standby letters of
credit and are not reflected in the accompanying balance sheets. These
transactions may involve, to varying degrees, credit and interest rate risk in
excess of the amount, if any, recognized in the balance sheets. Management does
not anticipate any loss to result from these commitments.
The Bank's off-balance sheet credit risk exposure is the contractual amount of
commitments to extend credit and standby letters of credit. The Bank applies
the same credit standards to these contracts as it uses in its lending process.
Financial instruments whose contractual amount represented risk: 1998 1997
Commitments to extend credit $33,296 $34,102
Standby letters of credit $ 825 $ 1,205
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed expiration
dates but may be terminated by the Bank if certain conditions of the contract
are violated. Although currently subject to drawdown, many of these commitments
are expected to expire or terminate without funding. Therefore, the total
commitment amounts do not necessarily represent future cash requirements.
Collateral held relating to these commitments vary, but may include cash,
securities and real estate.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Credit risk arises in
these transactions from the possibility that a customer may not be able to repay
the Bank upon default of performance. Collateral held for standby letters of
credit is based on an individual evaluation of each customer's creditworthiness,
but may include cash and securities.
NOTE 11--PROFIT SHARING AND SALARY CONTINUATION PLANS
The Bank has a qualified profit sharing plan for most full-time employees.
Employer contributions are to be made from current-year profits, predicated on
the performance of the Bank based on a formula approved annually by the Bank's
Board of Directors. Participants in the plan are allowed to make contributions
in accordance with the plan agreement. The Bank matches the participants'
contributions up to 5% of their annual salary so long as certain Bank
profitability goals are met. Full vesting of the Bank's contribution to the
employee occurs after five years of employment. The Bank provided for
contribution expense of $60, $74 and $72 during 1998, 1997 and 1996,
respectively.
The Company has agreed to salary continuation plans for certain former and
current key executive officers. Under the plan, the Company is obligated to
provide the officer or his beneficiaries, a fixed amount for 15 years after they
have reached retirement age. The Company has established a reserve for this
liability based on the present value of the vested portion. Salary continuation
expense was $301, $87 and $57 in 1998, 1997 and 1996, respectively. The Bank has
elected to fund its obligation under the plans with life insurance contracts.
The Bank is the beneficiary of the life insurance policies with a current cash
surrender value of $385, which is included in other assets at December 31, 1998.
NOTE 12--EMPLOYEE STOCK OPTION PLAN AND RIGHTS
The Company has a stock option plan for full-time, salaried officers and
directors and employees who have substantial responsibility for the successful
operation of the Company. Options are granted at no less than the fair market
value of the stock at the date of the grant. Options vest over a period of zero
to five years and have a maximum term of ten years. The options may be granted
in accordance with terms determined by the Board of Directors until the
expiration of the plan. At the Company's annual meeting in May 1998,
shareholders ratified an amendment to the plan authorizing an additional 293,000
shares. At December 31, 1998, 83,108 shares were outstanding at an average
exercise price of $22.01. The following table summarizes the option activity for
the years ended December 31, 1998, 1997 and 1996 (all share amounts are in
thousands):
Weighted
Weighted Average Average Fair Value
Available Outstanding Exercise Share of Options Granted
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1995 19 185 $ 4.82
Granted (10) 10 $12.50 $4.38
Exercised -- (15) $ 5.08
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1996 9 180 $ 5.22
Exercised -- (142) $ 4.80
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1997 9 38 $ 6.79
Plan Amendment 293 -- --
Granted (74) 74 $24.00 $8.40
Exercised -- (29) $ 7.52
- --------------------------------------------------------------------------------------------------
Balance, December 31, 1998 228 83 $22.22
- --------------------------------------------------------------------------------------------------
On January 1, 1996, the Bank adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As permitted by
SFAS 123, the Bank has chosen to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations in accounting for its
Plans. Accordingly, no compensation cost has been recognized for options granted
under the Plan. Had compensation cost for the Bank's Plan been determined based
on the fair value at the grant dates for awards under the Plan consistent with
the method of SFAS 123, the Bank's net income and net income per share would
have been reduced to the pro forma amounts indicated below:
1998 1997 1996
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------------------------------------------------------------------
Net income $2,365 $2,267 $1,805 $1,789 $1,415 $1,376
Basic earnings per share $ 2.39 $ 2.29 $ 2.04 $ 2.03 $ 1.69 $ 1.45
Diluted earnings per share $ 2.33 $ 2.24 $ 1.84 $ 1.82 $ 1.51 $ 1.45
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The fair value of each option grant is estimated on the date of grant using a
method that approximates the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grant in 1997 and 1996; expected
volatility of 15%, risk-free interest rates of 6.00% and expected lives of 10
years. 74,000 options were granted in 1998.
The following table summarizes information about the Plan's stock options at
December 31, 1998:
Options Outstanding at 12/31/98 Options Exercisable at 12/31/98
------------------------------- -------------------------------
Exercise Number Weighted Weighted Average Number Weighted Weighted Average
Price Outstanding Average Price Remaining Life Exercisable Average Price Remaining Life
- -------- ----------- ------------- -------------- ----------- ------------- --------------
$ 4.75 8,608 $ 4.75 5.00 8,608 $ 4.75 5.00
$24.00 74,500 $24.00 9.11 74,500 $24.00 9.11
The Company has a stock appreciation rights (SAR) plan under which the Board of
Directors may award up to 200,000 units to employees. The SAR can be redeemed
for the amount by which the fair market value of a share of common stock on the
date of exercise exceeds the SAR's grant price as established by the Board. The
SAR becomes fully exercisable based on a vesting schedule established by the
Board which generally does not exceed five years. Each SAR expires ten years
from the date the SAR is awarded. Compensation cost recognized for SAR's granted
under the plan totaled approximately $111,$222 and $75 for 1998, 1997 and 1996,
respectively.
NOTE 13--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) are set forth below:
1998 1997
Book loan loss allowance in excess of tax $ 538 $448
Book depreciation in excess of tax 82 49
Deferred compensation 382 198
State franchise tax 60 1
Other (24) (16)
- --------------------------------------------------------------------------
Deferred tax asset $1,038 $680
- --------------------------------------------------------------------------
The current and deferred amounts of the tax provision (benefit) for the years
ended December 31, 1998, 1997, and 1996 were as follows:
TOTAL
FEDERAL STATE PROVISION
1998
Current $1,519 $521 $2,040
Deferred (279) (75) 354
- --------------------------------------------------------------------------
$1,240 $446 $1,686
- --------------------------------------------------------------------------
1997
Current $ 909 $376 $1,285
Deferred (77) 50 (27)
- --------------------------------------------------------------------------
$ 832 $426 $1,258
- --------------------------------------------------------------------------
1996
Current $ 774 $319 $1,093
Deferred (81) (55) (136)
- --------------------------------------------------------------------------
$ 693 $264 $ 957
- --------------------------------------------------------------------------
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The provisions for income taxes differ from the amounts computed by applying the
statutory federal income tax rates to income before taxes as follows:
1998 1997 1996
Federal income tax expense $1,377 34.0% $1,042 34.0% $ 807 34.0%
State franchise taxes, net of federal benefit 294 7.2 219 7.1 174 7.2
Tax exempt income (18) (0.4) (17) (0.6) (21) (0.8)
Other, net 33 0.8 14 0.6 (3) 0.1
- --------------------------------------------------------------------------------------------------------------------
Total $1,686 $41.1% $1,258 $41.6% $ 957 40.3%
- --------------------------------------------------------------------------------------------------------------------
NOTE 14--ACTIVITY OF BUSINESS SEGMENTS
In 1998 the Company adopted SFAS No. 131. The prior year's segment information
has been restated to present the Company's two reportable segments, Community
banking and ATM operations (also known as Electronic funds Transfer "EFT"
operations).
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies." Segment data includes intersegment
revenue, as well as charges all direct operating expenses and allocated charges
for personnel and interest expense for the use of cash that is dispensed from
the ATM machines.
The Company is organized primarily along community banking and ATM operations.
Community banking provides a range of commercial banking services to
individuals, professionals and small to medium-sized businesses. ATM operations
runs a network of off-site ATMs including tourist centers, horse racing tracks,
truck stops and shopping centers in California. The Company's business is
conducted principally in the U.S.; foreign operations are not material.
The following table shows each segments key operating results and financial
position for the years ended or as of December 31, 1998, 1997 and 1996:
1998 1997 1996
Community ATM Community ATM Community ATM
banking operations banking operations banking operations
--------- ----------- --------- ----------- --------- -----------
Net interest income (1) $ 8,069 $ (152) $ 6,726 $ (196) $ 5,621 $ (194)
Other income 519 1,946 491 2,026 982 1,839
Operating expenses 4,961 1,340 4,894 1,484 4,626 1,419
Net income before income tax 3,627 454 2,323 346 1,977 226
Total assets $136,487 $4,342 $105,559 $4,415 $88,241 $5,565
(1) After loan loss provisions
A reconciliation of total segment net interest income and other income combined,
net income before income taxes, and total assets to the consolidated numbers in
each of these categories for the years ended December 31, 1998, 1997 and 1996 is
presented below.
1998 1997 1996
---------- ---------- ----------
Total segment net interest income and other income 10,382 9,047 8,248
Parent company net interest income and other income 3,961 3,204 3,974
---------- ---------- ----------
Consolidated net interest income and other income 14,343 12,251 11,222
========== ========== ==========
Total segment net income before income tax 4,081 2,669 2,203
Parent company net income before income tax (30) 394 169
---------- ---------- ----------
Consolidated net income before income tax 4,051 3,063 2,372
========== ========== ==========
Total segment total assets 140,829 109,974 93,806
Parent company assets 14,495 12,111 9,381
---------- ---------- ----------
Consolidated total assets 155,324 122,085 103,187
========== ========== ==========
NOTE 15-SUBSEQUENT EVENT
On January 26, 1999 the Company and Greater Bay Bancorp (GBB) signed a
definitive agreement for a merger between the two companies. The terms of the
agreement provide for the Company's shareholders to receive shares of GBB stock
in a tax-free exchange for their shares of Bay Area Bancshares. For each
outstanding share of Bay Area Bancshares, GBB will issue 1.38682 shares if the
average closing price of its stock is $30.00 or more, or 1.44271 shares if the
average closing price of its stock is less than $30.00 upon completion of the
merger. Following the merger, the shareholders of Bay Area Bancshares will own
approximately 12.7% of the combined company, after giving effect to all
outstanding options.
57
NOTE 16-FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments", the estimated fair value of the Company's financial instruments
are disclosed below. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
realized in immediate settlement of the instrument. Statement 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not necessarily represent or affect the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosure for financial instruments:
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents, which includes federal funds sold, is carried at an
amount that approximates fair value.
INVESTMENT SECURITIES:
Fair value is based on quoted market prices, where available or quoted market
prices of comparable instruments. If not material, the carrying value of
investment securities approximates fair value.
LOANS AND LOANS HELD FOR SALE:
Most adjustable rate loans are valued at the carrying amount. All fixed and
adjustable rate loans with interest rate caps and floors are valued by loan
type. To determine the fair value, the interest rate used to discount the cash
flows is the current market rate for a like class of loans. Additionally, the
allowance for loan losses was applied against the estimated fair value to
recognize future defaults of contractual cash flows.
INTEREST RECEIVABLE:
Interest receivable is carried at an amount that approximates fair value.
DEPOSITS:
The fair values disclosed for demand (interest bearing transaction and savings
deposits) are equal to the amount payable on demand at the reporting date
(carrying amount). Fair value for time deposits (fixed-rate certificate of
deposits) are estimated using a discounted cash flow calculation that applies
interest rates currently offered on deposits of similar remaining maturities.
INTEREST PAYABLE:
Interest payable is carried at an amount that approximates fair value.
FEDERAL HOME LOAN BANK ADVANCES:
Federal Home Loan Bank advances are carried at an amount that approximates fair
value.
OFF-BALANCE-SHEET INSTRUMENTS:
The fair value of commitments to extend credit were not significant.
The estimated fair values of the Company's financial instruments are as follows:
December 31, 1998 December 31, 1997
Carrying Amount Fair Value Carrying Amount Fair Value
------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 28,808 $ 28,808 $18,964 $18,964
Investment securities available for sale 1,775 1,775 1,106 1,106
Investment securities held to maturity 13,442 13,563 14,482 14,683
Loans 108,116 107,548 84,374 82,869
Interest receivable 842 842 741 741
LIABILITIES:
Demand deposits 33,558 33,558 28,248 28,248
Interest bearing transaction and savings deposits 68,189 68,189 48,157 48,157
Time deposits 34,708 31,647 31,021 30,813
Interest payable 232 232 251 251
Federal Home Loan Bank advances 2,500 2,500 1,000 1,000
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 17--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets, statements of income, and cash flows for Bay Area
Bancshares (parent company only) are presented below:
Bay Area Bancshares (Parent) Balance Sheets at December 31, 1998 and 1997
1998 1997
ASSETS
Cash and cash equivalents $ 787 $ 626
Investment in subsidiary 13,085 10,690
Notes receivable 533 470
Other assets 90 325
- ------------------------------------------------------------------------------
Total assets 14,495 12,111
Liabilities & Shareholders' Equity
Other liabilities 130 123
Total liabilities 130 123
- ------------------------------------------------------------------------------
Total shareholders' equity 14,365 11,988
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $14,495 $12,111
- ------------------------------------------------------------------------------
Bay Area Bancshares (Parent) Statements of Income For the Years Ended December
31, 1998, 1997 and 1996
1998 1997 1996
Cash dividends received from subsidiary $ 0 $ 450 $ 225
Interest income 52 11 2
Professional fees (29) (37) (16)
Miscellaneous expense (53) (30) (42)
- -----------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiary (30) 394 169
Equity in undistributed income of subsidiary 2,395 1,411 1,246
- -----------------------------------------------------------------------------------------
Net income $2,365 $1,805 $1,415
- -----------------------------------------------------------------------------------------
Bay Area Bancshares (Parent) Statements of Cash Flows For the Years Ended
December 31, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities:
Net income $ 2,365 $ 1,805 $ 1,415
Adjustments to reconcile net income to cash provided by operating activities:
Net decrease (increase) in other assets 235 (325) --
Net increase in other liabilities 7 23 13
Equity in undistributed income of subsidiary (2,395) (1,411) (1,246)
- -----------------------------------------------------------------------------------------------------------------
Total adjustments (2,153) (1,713) (1,233)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 212 92 182
Cash flows from financing activities:
Net increase in notes receivable (63) (470) --
Exercise of common stock options 479 1,322 80
Common stock retired (59) (89) --
Cash dividends (408) (334) (277)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (51) 429 (197)
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 161 521 (15)
60
Cash and cash equivalents, beginning of year 626 105 120
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 787 $ 626 $ 105
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
Not applicable.
61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table provides certain information regarding the Board of
Directors of the Company and the Bank.
DIRECTOR OF
POSITION POSITION THE COMPANY
NAME AGE WITH COMPANY WITH BANK SINCE
- ---- --- ------------ --------- -----
Frank M. Bartaldo Jr. 50 N/A Director, N/A
President & CEO
Gary S. Goss 63 Director, Director, 1981
Secretary Secretary
Robert R. Haight 70 Chairman of Director 1981
the Board,
President,
Chief Executive
Officer
Stanley A. Kangas 61 Director Director 1996
David J. Macdonald 59 Director Director 1981
Thorwald A. Madsen 82 Director Director 1981
Dennis Royer 56 Director Director 1995
None of the directors of the Company or the Bank were selected pursuant to
any arrangement or understanding other than the directors and officers of the
Company and the Bank acting in their capacities as such. The terms of the
proposed merger of the Company and Greater Bay Bancorp provide that one director
from the Company's Board would serve as a director of Greater Bay Bancorp and
that the directors of the Bank would continue with the President of Greater Bay
Bancorp as an additional member of the Bank's Board. Director Thorwald Madsen
has announced that he will retire from and Board and the Board of the Bank has
approved the terms of a director emeritus agreement for Mr. Madsen. There are no
family relationships between any two or more of the directors or officers.
Set forth below are brief summaries of the background and business
experience, including the principal occupation, of the Company's and Bank's
directors. Except for the Bank, no corporation or organization discussed below
is an affiliate or a subsidiary of the Company.
FRANK M. BARTALDO, JR. Mr. Bartaldo, Jr., 50, has been with Bay Area Bank since
1986. He currently serves as President and Chief Executive Officer of Bay Area
Bank, a position he received after the retirement of Mr. John Brooks in February
1998. Prior to being named President, Mr. Bartaldo served as Executive Vice
President and Senior Banking Officer of the Bank. In February 1996, Mr. Bartaldo
was elected to serve as a director of the company's sole subsidiary, Bay Area
Bank. Before his employment at Bay Area Bank, Mr. Bartaldo was a partner in a
mortgage banking business and prior to that he was employed for eight years at
Wells Fargo Bank. Mr. Bartaldo received his BS in Business Administration from
California State University at
62
Chico in 1971. Mr. Bartaldo is Past-President of the Redwood City-San Mateo
County Chamber of Commerce.
GARY S. GOSS: A Certified Public Accountant since 1961, Mr. Goss is the
principal in the accounting firm of Gary S. Goss, San Carlos, California.
Currently a member of the Redwood City, San Carlos and Foster City Chambers of
Commerce and the San Carlos Rotary. Mr. Goss has been president of the San
Carlos Chamber and served on the Board of Directors of the Half Moon Bay Chamber
of Commerce. He also served as president of the YMCA.
ROBERT R. HAIGHT: Mr. Haight is the owner and founder of Woodside Road Insurance
Agency in Redwood City. He is also a licensed insurance broker and agent. Mr.
Haight graduated from Redwood City's Sequoia High School, having lived in
Redwood City since 1942. He is a past president and director of the Redwood City
Chamber of Commerce, the Redwood City Independent Insurance Agents Association,
and San Mateo County Independent Agents Association. Currently Mr. Haight is a
member of the Sequoia Club in Redwood City. Mr. Haight was elected Chairman of
the Board, President and Chief Executive Officer of Bay Area Bancshares in 1991.
STANLEY A. KANGAS: Mr. Kangas retired in 1998 as chairman of the Board of Brian
Kangas Foulk (BKF), a 150 person civil engineering firm with offices in Redwood
City, San Jose and Walnut Creek. Mr. Kangas was President of BKF from 1975 to
1995. Mr. Kangas' firm provided engineering services to Stanford University and
he served as Principal-In-Charge of many of BKF's large scale projects including
the 1,200 acre Redwood Shores community in Redwood City. Mr. Kangas served as an
officer in many professional societies and civil engineering organizations. Mr.
Kangas is currently involved in many local community programs and non-profit
groups including the Redwood City-San Mateo County Chamber of Commerce, the
Redwood City Library Foundation, the Redwood City School District Bond Oversight
Committee, the San Carlos Youth Center Foundation and the Boys and Girls Club of
the Peninsula. Mr. Kangas and BKF were recently honored with the Sequoia Award
for civic service by a Redwood City business. Mr. Kangas was appointed to the
Board of Directors of Bay Area Bank and Bay Area Bancshares on February 20,
1996.
DAVID J. MACDONALD: A real estate developer and syndicator for the past 35
years, Mr. Macdonald is owner and broker of David J. Macdonald Real Estate
Company in San Carlos. Mr. Macdonald is a member of the San Carlos Board of
Realtors and is an active volunteer and member of San Mateo County Sheriff's Air
Squadron, Search and Rescue.
THORWALD A. MADSEN: Retired since 1989, Mr. Madsen was Manager of Bay Counties
Builders Escrow from 1972 to 1989, and Executive Director of the Peninsula
Builder's Exchange from 1972 to 1984. Prior to assuming dual responsibilities at
PBE, he ran his own company, Thor Madsen Plumbing and Heating from 1944 to 1970.
Always an active member of the community, Mr. Madsen served as Mayor of San
Carlos in 1974 and served on the city council from 1972 to 1976. He was on the
San Carlos Park & Recreation Commission for 12 years, serving as Chairman five
times. Mr. Madsen retired from the San Carlos Lions Club after 45 years of
membership. Currently Mr. Madsen is an active participant in Peninsula
Association of Contractors and Engineers and the San Carlos Branch of Sons in
Retirement.
DENNIS W. ROYER. Mr. Royer is a partner in his family-owned and operated
business, Royer Realty in Redwood City, which his father began in 1954. Upon
receiving his MBA from the University of Santa Clara in 1967, Mr. Royer began
his career as a residential real estate broker. He is a former board member of
the Redwood City/San Carlos Association of Realtors and the
63
Peninsula Golf and Country Club. Mr. Royer was appointed to the Board of
Directors of Bay Area Bank and Bay Area Bancshares on June 6, 1995. In July 1997
Mr. Royer was elected Chairman of the Board of Bay Area Bank.
EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from Item
1(b), herein.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Company's common stock is not registered pursuant to Section 12 of the
Exchange Act, therefore Item 405 of Regulation S-K is not applicable to the
Company.
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The following table sets forth the cash compensation paid to or allocated
for the Chief Executive Officer of the Company and the Bank and those executive
officers whose cash compensation exceeded $100,000 for services rendered in
1998, 1997, and 1996.
SUMMARY COMPENSATION TABLE
Long Term
Name and Regular Compensation All Other
Principal Position Year Salary/2/ Bonus Stock Options/SARs* Compensation/3,/4,/5/
- ------------------ ---- --------- ----- ------------------- -------------------------
Robert R. Haight/1/ 1998 $ 24,500 N/A 0 $ 6,600
CEO of Company 1997 $ 20,350 N/A 0 $ 6,600
1996 $ 18,950 N/A 0 $ 5,888
Frank M. Bartaldo 1998 $115,000 $55,000 20,000 $ 9,104
President & CEO 1997 $100,000 $32,000 20,000 $ 6,700
of Bank 1996 $100,000 $34,000 20,000/6/ $ 6,451
Anthony J. Gould 1998 $100,000 $55,000 15,000 $ 8,102
COO/CFO of Company 1997 $ 90,000 $32,000 15,000 $ 6,000
and EVP/CFO of Bank 1996 $ 90,000 $30,000 15,000/6/ $ 5,792
Mark V. Schoenstein 1998 $ 85,000 $45,000 12,500 $ 9,957
SVP/Construction Loans 1997 $ 75,000 $33,180 12,500 $ 5,183
of Bank 1996 $ 75,000 $30,156 10,000/7/ $ 4,519
William A. Peterson 1998 $ 92,000 $35,000 0 $ 2,453
SVP/Sr. Lending Officer 1997 $ 30,000/8/ $17,000/8/ 0 0
of Bank
* Number of shares
_____________________
/1/ Amounts for Mr. Haight include all compensation received in the fiscal
year.
/2/ Mr. Haight is paid $475 per Board meeting in addition to his regular, non-
officer director fees. Mr. Bartaldo has an annual salary of $115,000. Mr.
Gould has an annual salary of $100,000, Mr. Schoenstein's annual salary is
$85,000, and Mr. Peterson's' annual salary is $92,000.
64
/3/ Mr. Haight is not eligible for the Bank's 401(k) Plan as he is not an
employee of the Bank. Mr. Haight received health benefits with a cost of
$550 per month. During 1998, Mr. Bartaldo received $7,354 as a matching
contribution under the Bank's 401(k) Plan and Mr. Gould, Mr. Schoenstein
and Mr. Peterson received $6,602, $9,957 and $2,453 respectively.
/4/ In addition to this compensation, Salary Continuation Plans were adopted
effective January 1, 1997, to provide salary continuation benefits to Mr.
Bartaldo and Mr. Gould, subject to certain terms and conditions as
described below. Mr. Bartaldo, Mr. Gould, Mr. Schoenstein and Mr. Peterson
are also entitled to severance pay benefits in accordance with the
Severance Pay Policy adopted by the Bank on October 20, 1998 and amended
on November 3, 1998. The Severance Pay Policy provides for severance pay
to Bank employees upon termination in certain cases, subject to the terms
and conditions set forth in the Severance Pay Policy.
/5/ In 1998 Mr. Bartaldo and Mr. Gould began receiving a monthly car allowance
of $350 and $300, respectively.
/6/ Under the terms of the SAR agreement dated October 1, 1996, Mr. Bartaldo's
and Mr. Gould's SAR units were 40% vested as of October 1, 1997 and 15%
vested on October 1st thereafter until fully vested in the year 2001. In the
event of a change of control in the ownership of the Company, the vesting of
one-half of any remaining unvested portion of outstanding SARs is to be
accelerated.
/7/ Under the terms of the SAR agreement dated June 18, 1996, Mr. Schoenstein's
10,000 SAR units were 40% vested as of June 30, 1997 and 20% vested on June
30th thereafter until fully vested in the year 2000. In the event of a
change of control in the ownership of the Company, the vesting of one-half
of any remaining unvested portion of outstanding SARs is to be accelerated.
/8/ Mr. Peterson's employment with the Bank started September 1, 1997. His 1997
bonus amount includes a $5,000 signing bonus.
EXECUTIVE SALARY CONTINUATION PLAN
The Board of Directors of the Bank approved a Salary Continuation Plan for
executives of the Bank by which certain executives will receive deferred
compensation in accordance with the terms and conditions of written agreements
to be entered into under the Plan. A written agreement exists with John Brooks,
former president of the Bank and agreements dated January 1, 1997 and amended
September 8, 1998 exist with Frank Bartaldo and Anthony Gould. The Bank has
purchased life insurance products in connection with the Salary Continuation
Plan relating to these agreements.
PROFIT SHARING PLAN
The Bank instituted a capital accumulation and profit-sharing plan (the
"Plan") for eligible employees of the Bank effective January 1, 1985 which was
last amended December, 1994. The Plan is intended to provide benefits to the
Bank's employees at retirement or upon death or disability. To be eligible for
participation in the Plan, an employee must complete one half year of service
and not be included in a collective bargaining unit.
Benefits are provided through the Bank's discretionary profit-sharing
contributions as well as from salary saving contributions ("401(k)
contributions") made by the employee. 401(k) contributions are made with before-
tax dollars thereby reducing the employee's taxable income. The Bank may
contribute a matching amount equal to a percentage of the employee's 401(k)
contribution up to a maximum of 5% of the employee's earnings determined prior
to the 401(k) contribution. The amount of the Bank's matching contribution, if
any, is determined each year by the Bank's Board of Directors; however,
contributions by the Bank are not allowed until the Company has achieved certain
predefined performance standards. The Bank is not required to make a matching
contribution even if such performance standards are achieved.
An employee's 401(k) contribution may be in an amount from 1% to 15% of the
employee's earnings. If the employee contributes more than 5% of his earnings
each year, no more than 5% will be matched by the Bank in the event the Bank
determines it will make a discretionary contribution. The amount of the Bank's
discretionary contribution, if any, is determined on a yearly basis.
65
Following two years of service, the Bank's contributions begin to vest,
with 100% vesting occurring after four years of service. For the years ending
December 31, 1998, 1997 and 1996, the Bank contributed $77,100, $74,000, and
$72,000 respectively, to the Plan.
STOCK OPTION PLAN
The Company adopted a Qualified Stock Option Plan (the "1993 Plan") in
1993, which was approved by the shareholders at the 1993 Annual Meeting. The
1993 Plan provides for the issuance of incentive and non-incentive stock options
to directors, key full-time employees and officers and consultants of the
Company and the Bank. The 1993 Plan initially covered 231,431 shares of the
Company's Common Stock, no par value, for which such options could be granted.
On November 18, 1997, the Board of Directors of the Company adopted an amendment
to the Stock Option Plan: (1) to increase the number of shares covered by the
Plan from 231,431 to 750,000, subject to the limitation that outstanding options
(plus other rights to receive stock pursuant to compensation plans) may not at
any time exceed 30% of the Company's outstanding stock; (2) to provide that
options may be exercised by the delivery of a note for the exercise price; and
(3) to provide that if there is a change in control of the Company and, as a
result, an option held by an officer, director or consultant will be terminated
and that option has not fully vested, the vesting of the option will accelerate.
The amendment was approved by the shareholders of the Company at the 1998 annual
shareholders meeting. As of February 1, 1999 there are 78,108 shares subject to
outstanding options under the Plan.
The Plan provides that all options be granted at an exercise price of not
less than 100% of fair market value on the date of grant in the case of
incentive stock options or not less than 85% of fair market value on the date of
grant in the case of other stock options. The Board of Directors of the Company
may issue options which become vested in the future based upon achieving certain
longevity requirements and/or performance standards. Within three months
following termination of employment for any reason other than death or
disability, an optionee (other than a director-optionee) may exercise his or her
option to the extent such option was exercisable on the date of termination,
subject to earlier termination by reason of expiration of the option. In the
event of the death or disability of an optionee (other than a director-
optionee), the option is exercisable for a period of six months after that
event, which is also subject to earlier termination if the option expires.
Director-optionees may exercise their options for a period of five years
following retirement, death or disability, subject to earlier termination of the
options.
The following table sets forth the value realized by the exercise of
options during 1998 and the value of outstanding stock options held by the
executive officers named in the Summary Compensation Table at December 31, 1998,
pursuant to the 1993 Plan.
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND
YEAR-END OPTION VALUES
Number of Value of Unexercised
Unexercised Options In-The-Money-Options
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise/1/ Realized/2/ Unexercisable/1/ Unexercisable/3/
- ---- -------------- ----------- ---------------- ----------------
Robert R. Haight 2,000 $41,500 8,608 / 0 $200,136 / $0
_______________________
66
/1/ Number of shares.
/2/ Value determined based on the difference between exercise price for shares
and fair market value of shares on date of exercise.
/3/ Value estimated based on fair market value of Common Stock at December 31,
1998 ($28.00 estimated bid price) less the exercise price of those options.
On July 21, 1998 and October 20, 1998, 2,500 and 1,500 options were granted,
respectively, to employees of the Bank. No options were granted to those
officers listed in the Summary Compensation Table.
SAR PLAN
In 1996, the Board of Directors of Bay Area Bancshares adopted a Stock
Appreciation Right Plan, by which full-time employees of the Company and the
Bank may be awarded stock appreciation rights (SARs). An employee to whom a SAR
is awarded may choose to exercise the SAR and receive the difference between the
base price of the SAR (which is equal to the fair market value of the stock at
the time the SAR is awarded) and the fair market value at the time the SAR is
exercised. During 1997, each holder of a SAR right agreed to amend his SAR right
to cap the appreciation for which he receives payment at $24.00 per share, as a
condition to the award of options discussed above. The following table sets
forth the aggregate value of SARs held by those officers named in the Summary
Compensation Table. There were no SARs awarded in 1997 or 1998.
AGGREGATE VALUE OF SARS AT FISCAL YEAR END
Number of Value of Unexercised
Unexercised SARs In-The-Money SARs
Exercisable/ Exercisable/
Name Unexercisable/1/ Unexercisable/2/
- ---- ---------------- ----------------
Frank M. Bartaldo 11,000 / 9,000 $176,000 / $144,000
Anthony J. Gould 8,250 / 6,750 $132,000 / $108,000
Mark V. Schoenstein 6,000 / 4,000 $ 96,000 / $ 64,000
_____________________
/1/ Value determined based on the difference between exercise price for SARS and
the capped stop value of the SARS at $24.00 per share.
COMPENSATION OF DIRECTORS
In 1998, non-officer directors of the Company received $250 per Company
Board meeting. The Chairman of the Company's Board received an additional $100
per meeting. Each non-officer director received $700 per Bank Board meeting and
the Chairman of the Bank's Board received an additional $250 per monthly
meeting. Each non-officer director receives $175 per monthly committee meeting
and also $550 per month for health insurance premiums. Total compensation for
the six non-officer directors in 1998 was $108,700, which does not include the
health insurance.
Directors are also eligible to receive options and have received options
under the 1993 Plan and the prior plan of the Company. In 1998, directors
exercised options for 16,243 shares of stock, by which those directors realized
approximately $267,000. In addition, a director exercised options for 5,000
shares on January 26, 1999 and realized approximately $136,250. As of
67
February 1, 1999 the directors of the Company have options exercisable for a
total of 3,608 shares. The value of those exercisable options as of February 1,
1999 was approximately $123,000 which value is estimated based on fair market
value of Common Stock at February 1, 1999 less the exercise price of those
options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of February 1, 1999,
pertaining to beneficial ownership of the Company's Common Stock by current
directors of the Company and the Bank and all directors and executive
officers/1/ of the Company as a group. The information contained herein has been
obtained from the Company's records and from information furnished directly by
the individual or entity to the Company.
The table should be read with the understanding that more than one person
may be the beneficial owner or possess certain attributes of beneficial
ownership with respect to the same securities. Therefore, careful attention
should be given to the footnote references set forth in the column entitled
"Amount Held and Nature of Holdings." In addition, shares issuable pursuant to
options which may be exercised within 60 days of February 1, 1999 are deemed to
be issued and outstanding and have been treated as outstanding in calculating
the percentage ownership of those individuals possessing such interest, but not
for any other individuals. Thus, the total number of shares considered to be
outstanding for the purposes of this table may vary depending upon the
individual's particular circumstance.
AMOUNT AND NATURE OF
NAME AND ADDRESS RELATIONSHIP BENEFICIAL PERCENT
OF BENEFICIAL OWNER/2,/3/ WITH COMPANY OWNERSHIP/4/ OF CLASS
- -------------------------- ------------ ------------ --------
Frank M. Bartaldo Director, President 31,430/5/ 3.08%
And CEO of the Bank
Gary S. Goss Director & Secretary 59,839/6/ 5.93%
Robert R. Haight Chairman of the Board, 55,848/7/ 5.49%
President and CEO
Stanley A. Kangas Director 9,900/8/ .98%
David J. Macdonald Director 36,173/9/ 3.58%
Thorwald A. Madsen Director 26,497/10/ 2.63%
Dennis W. Royer Director 7,977/11/ .79%
Anthony J. Gould EVP/CFO 25,952/12/ 2.56%
William A. Peterson SVP of the Bank 2,000/13/ 0.20%
Mark V. Schoenstein SVP of the Bank 6,500/14/ 0.64%
All directors, nominees and officers
of the Company and Bank as a Group (10 in number) 262,116/15/ 25.03%
___________________
/1/ As used throughout this Form 10-K and unless indicated to the contrary, the
terms "officer" and "executive officer" refer to the Company's Chairman of
the Board of Directors, President and Chief Executive Officer, Chief
Operating Officer, and Chief Financial Officer, and the Bank's President.
68
/2/ Includes shares beneficially owned, directly and indirectly, together with
associates. Subject to applicable community property laws and shared voting
or investment power with a spouse, the persons listed have sole voting and
investment power with respect to such shares unless otherwise noted.
/3/ The address for all persons is: 900 Veterans Boulevard, Redwood City,
California 94063.
/4/ Includes ownership of Common Stock, as well as shares of Common Stock which
could be acquired through the exercise of options currently outstanding
within 60 days of February 1, 1999.
/5/ Includes 17,107 shares held by Frank and Kathy Bartaldo as joint tenants;
and 2,323 shares in the name of Frank M. Bartaldo IRA; and vested options
to acquire 12,000 shares of common stock.
/6/ Includes 54,535 shares of Common Stock held in the name of The Gary Goss
Trust; 1,029 shares held by Gary S. Goss as custodian; and 4,275 shares in
the name of Gary S. Goss IRA. On December 27, 1991, the State Banking Dept.
approved an application by Mr. Goss to acquire up to 24.99% of the
Company's stock on the open market.
/7/ Includes 50,000 shares of Common Stock held by Robert and Sherrill Haight
as joint tenants; 1,600 shares held by Robert R. Haight IRA; 640 shares
Sherrill Haight IRA; and options to acquire 3,608 shares of the Company's
Common Stock.
/8/ Includes 6,500 shares of Common Stock held by Stanley and Teresa A. Kangas
as joint tenants; and, 3,400 shares held by the Stanley A. Kangas IRA.
/9/ Includes 14,000 shares of Common Stock held by David and Pauline Macdonald
as joint tenants; and 22,173 shares in the name of David J. Macdonald.
/10/ Includes 26,475 shares of Common Stock held by Thorwald and Jonelle Madsen
as Trustees of the Madsen Family Trust; and 22 shares of Common Stock held
by Thorwald Madsen as custodian for his grandchild, a minor.
/11/ Includes 5,000 shares of Common Stock held by Dennis and Christine Royer as
joint tenants; and 1,977 shares of Common Stock held in the name of Dennis
W. Royer Keogh.
/12/ Includes 16,952 shares of Common Stock held in the name of Anthony J.
Gould; and vested options to acquire 9,000 shares of the Company's common
stock.
/13/ Includes vested options in the name of William A. Peterson to acquire 2,000
shares of the Company's common stock.
/14/ Includes vested options in the name of Mark V. Schoenstein to acquire 6,500
shares of the Company's common stock.
/15/ Includes as if currently outstanding, 78,108 shares subject to stock
options granted under the Company's 1993 Stock Option Plan.
MAJOR SHAREHOLDERS
The following sets forth information as of February 1, 1999, pertaining
to beneficial ownership of the Company's Common Stock by persons, other than
management, known to the Company to own 5% or more of the Company's common
stock. This information was obtained through the Company's stock transfer agent
and registrar.
Name and Address Relationship Amount and Nature of Percent
of Beneficial Owner With Company Beneficial Ownership/1/ of Class
- ------------------- ------------ ----------------------- --------
Alan Miller, #4 Bridle Lane Director Emeritus 56,480/2/ 5.60%
Woodside, CA of the Bank
69
The Banc Funds, Shareholder 65,986 6.54%
208 S. LaSalle, Chicago, IL
_____________________
/1/ Includes shares beneficially owned, directly and indirectly, together with
associates. Subject to applicable community property laws and shared voting
or investment power with a spouse, the persons listed have sole voting and
investment power with respect to such shares unless otherwise noted.
/2/ Includes 8,472 shares of Common Stock held by Heart Construction Company,
which is wholly owned by Alan B. Miller; and 48,008 shares solely owned by
Alan B. Miller.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In addition to its principal offices, the Company leases additional
premises for its data processing, accounting and centralized operations
departments in Redwood City. These premises are located in a building owned by
Mr. Alan Miller, a major shareholder and Director Emeritus of the Company and
the Bank. The lease covers total space of approximately 5,200 square feet. On
May of 1991, the Company executed a three year lease with Mr. Alan Miller. This
lease has been extended to March 31, 1999 with a three year option to renew. The
current monthly cost under the lease (which includes an allocation and
adjustments for certain operating expenses) is $4,750 per month, or $.91 per
square foot. The monthly rent payment is subject to annual adjustment based on
the cost of living index as published by the U.S. Department of Labor, Bureau of
Labor Statistics. In addition to monthly rent payments, the Company is also
responsible for operating expenses (i.e., taxes, utilities, insurance,
landscaping, security) of the building based on the Company's proportionate
share of the building's square footage (29%). This lease has been reviewed by
management and the Board of Directors and found to be equitable and competitive
with other leases within the immediate market area.
INDEBTEDNESS OF MANAGEMENT
The Company has made loans to certain of its and the Bank's directors and
executive officers, which loans are secured by shares of common stock of the
Company owned by the director or executive officer. All of the loans were made
after the individual exercised a stock option. The following provides
information with respect to all of such loans to persons who are currently
directors or executive officers and whose loans exceeded $60,000.
In July of 1997, the Company loaned $110,000 to Mr. David Macdonald, a
director of the Company, which loan is secured by 11,000 shares of the Company's
stock. The loan bears interest at the rate of 6% per year, and the largest
amount outstanding during 1998 and the amount outstanding as of February 1, 1999
was $110,000.
In September of 1997, the Company loaned $100,000 to Mr. Gary Goss, a
director of the Company, which loan is secured by 11,000 shares of the Company's
stock. The loan bears interest at the rate of 7.2% per year, and the largest
amount outstanding during 1998 and the amount outstanding as of February 1, 1999
was $100,000.
In November of 1997, the Company loaned $70,000 to Mr. Anthony Gould, an
executive officer of the Company, which loan is secured by 5,800 shares of the
Company's stock. The loan bears interest at the rate of 6% per year, and the
largest amount outstanding during 1998 and the amount outstanding as of February
1, 1999 was $70,000.
In November of 1997, the Company loaned $57,000 to Mr. Frank Bartaldo,
President & CEO of the Bank, which loan is secured by 5,000 shares of the
Company's stock. The loan bears
70
interest at the rate of 6% per year, and the largest amount outstanding during
1998 and the amount outstanding as of February 1, 1999 was $70,000.
In September of 1998, the Company loaned $62,500 to Mr. Stanley Kangas, a
director of the Company, which loan is secured by 5,000 shares of the Company's
stock. The loan bears interest at the rate of 6% per year, and the largest
amount outstanding during 1998 and the amount outstanding as of February 1, 1999
was $62,500.
Some of the Company's directors and executive officers, as well as their
immediate family and associates, are customers of, and have had banking
transactions with the Bank in the ordinary course of the Bank's business and the
Bank expects to have such ordinary banking transactions with these persons in
the future. In the opinion of management of the Bank, all loans and commitments
to lend included in such transactions were made in compliance with applicable
laws, and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons of similar creditworthiness, and did not involve more than a
normal risk of collectibility or present other unfavorable features. The
aggregate amount the Bank can lend to directors and officers as a group is
limited to 100% of the Bank's capital. Loans to individual directors and
officers must comply with the Bank's respective lending policies and statutory
lending limits, and prior approval of the Bank's Board of Directors is required
for most of these loans. Total loans outstanding at December 31, 1998 to current
directors and executive officers, and their associates was $838,000 or
approximately 5.83% of the Bank's capital.
71
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
--------------------
REFERENCE PAGE
--------- ----
Report of Independent Accountants:
Pricewaterhouse Coopers L.L.P 46
Consolidated Financial Statements of
Bay Area Bancshares and Subsidiaries: 43
Consolidated Balance Sheets as
of December 31, 1998 and 1997: 44
Consolidated Statements of
Income for the Years Ended
December 31, 1998, 1997 and 1996: 43
Consolidated Statements of Changes
in Shareholders' Equity for the
Years Ended December 31, 1998, 1997, and 1996: 46
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1998, 1997, and 1996: 45
Notes to Consolidated Financial Statements: 47
2. FINANCIAL STATEMENT SCHEDULES. In accordance with the rules of
-----------------------------
Regulation S-X, schedules are not submitted because (a) they are not applicable
to or required of the Company, or (b) the information required to be set forth
therein is included in the financial statements or footnotes thereto.
3. EXHIBITS. Management contracts and compensation plans are
--------
identified with a number sign ("#").
EXHIBIT
NUMBER
------
2.1 Agreement and Plan of Reorganization By And Among Greater Bay
Bancorp and Bay Area Bancshares dated January 26, 1999
3.1 Restated Articles of Incorporation of Company/1/
3.2 Amendment to Restated Articles of Incorporation/2/
3.3 Bylaws of Company, as amended/2/
72
3.4 Amendment to Bylaws of Company/2/
4.1 Certificate of Determination of Preferred Stock/4/
10.3 Lease Entered Into By and Between Alan B. Miller and Bay Area
Bank/5/
10.4 # Employment Agreement Between John O. Brooks, Bay Area
Bancshares and Bay Area Bank dated as of September 2, 1992/6/
10.8 # 1993 Stock Option Plan/6/
10.9 # Forms of Stock Option Agreements/6/
10.11 #Director Emeritus Agreement Bay Area Bank and James E. Burney
dated March 21, 1995/7/
10.12 #Director Emeritus Agreement Bay Area Bank and Alan Miller dated
May 16, 1995/7/
10.13 Commercial Lease between Nine C Corporation dated June 30, 1995
for the Bank's primary facility/7/
10.14 Commercial Lease between Nine C Corporation dated November 30,
1995 for the Bank's Mortgage Department/7/
10.15 #Salary Continuation Agreement between John O. Brooks and Bay
Area Bank dated January 1, 1995./8/
10.16 #1996 Stock Appreciation Rights Plan and form of Agreement./8/
10.17 #Amended No. 1 to the Bay Area Bancshares 1993 Stock Option
Plan./9/
10.18 #Form of Incentive Stock Option Agreement to be used after
Amendment No. 1 (employees who are not directors)/9/
10.19 #Form of Incentive Stock Option Agreement to be used after
Amendment No. 1 (employees who are directors)/9/
10.20 #Form of Stock Option Agreement to be used after Amendment No. 1
(non-employee directors or consultants)/9/
10.21 #Retirement and Release Agreement between Bay Area Bank, Bay Area
Bancshares and John O. Brooks, dated February 20, 1998 /10/
10.22 #Director Emeritus Agreement Bay Area Bank and Mario Biagi dated
July 15, 1997
10.23 #Salary Continuation Plan
10.24 #Severance Policy
22 The only significant subsidiary of the Company is Bay Area Bank--
100%-owned
73
subsidiary incorporated in the State of California. Bay Area Bank
owns 100% of Bay Counties Builders Escrow, Inc., an inactive
California corporation.
23 Consent of Pricewaterhouse Coopers LLP
27 Financial Data Schedule
___________________
/1/ Filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988.
/2/ Filed as Exhibit 3.2 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989.
/3/ Filed as Exhibits 3.2, and 3.3, respectively, to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
/4/ Filed as Exhibit 4.1, to the Company's Current Report on Form 8-K filed
September 15, 1988.
/5/ Filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
/6/ Filed as Exhibits 10.4, 10.8 and 10.9 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
/7/ Filed as Exhibits 10.11, 10.12, 10.13 and 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
/8/ Filed as Exhibits 10.15 and 10.16 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
/9/ Filed as Exhibits 4.2, 4.3, 4.4 and 4.5 to the Company's Post Effective
Amendment No. 1 to its Registration Statement on Form S-8, SEC File No. 33-
78242, filed on March 18, 1998.
/10/ Filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the fourth quarter.
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act.
Unless the proposed merger with Greater Bay Bancorp occurs first, the
Registrant's proxy material for its 1999 Annual Meeting of Shareholders and
its Annual Report to Shareholders covering Registrant's last fiscal year is
to be furnished to security holders subsequent to the filing of this Annual
Report on Form 10-K. The Registrant shall furnish copies of such material
to the Commission when it is sent to security holders.
74
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: February 16, 1999 BAY AREA BANCSHARES
By /s/ Robert R. Haight
-----------------------
Robert R. Haight, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Anthony J. Gould
-----------------------
Anthony J. Gould, Chief Operating
Officer and Chief Financial Officer
(Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE DATE:
- --------- -----
/s/ Gary S. Goss February 16, 1999
- --------------------------------------------------------------
GARY S. GOSS, Director
/s/ Robert R. Haight February 16, 1999
- --------------------------------------------------------------
ROBERT R. HAIGHT, Chairman
of the Board of Directors, President
and Chief Executive Officer
/s/ Stanley A. Kangas February 16, 1999
- --------------------------------------------------------------
STANLEY A. KANGAS, Director
/s/ David J. Macdonald February 16, 1999
- --------------------------------------------------------------
DAVID J. MACDONALD, Director
/s/ Thorwald A. Madsen February 16, 1999
- --------------------------------------------------------------
THORWALD A. MADSEN, Director
/s/ Dennis W. Royer February 16, 1999
- --------------------------------------------------------------
DENNIS W. ROYER, Director
75