U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  FORM 10-KSB

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
     
     For the Fiscal Year Ended December 31, 1998

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934 
     For the transition period from ___________________ to _________________

                        Commission File Number: 0-12231

                            BAY COMMERCIAL SERVICES
                            -----------------------
                 (Name of small business issuer in its charter)

     California                                              77-2760444
-------------------------------                          --------------------
(State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization)                           Identification No.)

1495 East 14th Street, San Leandro, California                  94577
----------------------------------------------                ---------
(Address of principal executive offices)                      (Zip code)
                                                              ---------
Issuer's telephone number (510) 357-2265
                          --------------
Securities registered under Section 12(b) of the Exchange Act: NONE
                                                               ----
Securities registered under Section 12(g) of the Exchange Act: 
                           Common Stock, No Par Value
                           --------------------------
                                (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by 
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
 has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]

Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year: $ 11,141,000
                                                         -------------

State the aggregate market value of the voting and nonvoting common equity
held by nonaffiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of March 10, 1999: $ 12,851,181
                   ------------

State the number of shares of Common Stock outstanding as of March 10, 1999:
 1,194,435
----------------
<TABLE>
<CAPTION>                                         
Documents Incorporated by Reference:              Part of Form 10-KSB
-----------------------------------               -------------------
<S>                                               <C>
1998 Annual Report to Shareholders for            Part II, Items 5, 6 and 7
fiscal year ended December 31, 1998 

Proxy Statement for 1999 Annual Meeting of        Part III, Items 9, 10, 11
Shareholders to be filed pursuant to              and 12
Regulation 14A.
</TABLE>

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE> 2
                               TABLE OF CONTENTS

<TABLE>

<S>                                                                         <C>
ITEM 1 -    DESCRIPTION OF BUSINESS ....................................     1

ITEM 2 -    DESCRIPTION OF PROPERTY .....................................   29

ITEM 3 -    LEGAL PROCEEDINGS ...........................................   30

ITEM 4 -    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .........   30

ITEM 5 -    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ....   30

ITEM 6 -    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ...   30

ITEM 7 -    FINANCIAL STATEMENTS ........................................   30

ITEM 8 -    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE .........................   30 

ITEM 9 -    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE            

ITEM 10 -   EXECUTIVE COMPENSATION ......................................   31

ITEM 11 -   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT...................................................   31

ITEM 12 -   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..............   31

ITEM 13 -   EXHIBITS AND REPORTS ON FORM 8-K ............................   32
</TABLE>

<PAGE> 3
                                     PART I
                                                                             
                                       
ITEM 1                       DESCRIPTION OF BUSINESS

General

     Bay Commercial  Services (the "Company") is a California  corporation and a
bank holding company  registered  under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on June 7, 1981. Bay Bank of Commerce (the
"Bank"), was incorporated as a California banking corporation on August 11, 1980
and became a wholly-owned  subsidiary of the Company through a reorganization in
1983.

     Certain  matters  discussed  or  incorporated  by  reference in this Annual
Report on Form 10-KSB including, but not limited to, those described in "ITEM 6-
MANAGEMENT'S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," are forward-looking
statements that are subject to risks and  uncertainties  that could cause actual
results  to  differ  materially  from  those  projected  in the  forward-looking
statements.  Such risks and uncertainties include, among others, (1) significant
increases in competitive  pressure in the banking  industry;  (2) changes in the
interest rate  environment  reduce  margins;  (3) general  economic  conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among  other  things,  a  deterioration  in credit  quality;  (4) changes in the
regulatory  environment;  (5) changes in business conditions and inflation;  (6)
changes in securities markets; and (7) the effect of the Year 2000 phenomenon on
the Company and the Bank and their providers, vendors and customers.  Therefore,
the information set forth in such forward-looking statements should be carefully
considered when evaluating the business prospects of the Company and the Bank.

     At present, the Company's principal business is conducted through the Bank.
At December 31, 1998, the Company had total consolidated assets of $144,202,000.
The Bank  accounted for  $144,086,000,  or virtually all, of the total assets of
the Company.  The Company's  primary source of income,  other than its equity in
the  undistributed  earnings of the Bank,  is the receipt of dividends  and rent
from the Bank. The Bank is a full service  commercial bank serving the cities of
San Leandro and Hayward, in Alameda County, and the city of San Ramon, in Contra
Costa County,  and the surrounding areas in California.  The Company itself does
not engage in any business  activities other than the ownership of the Bank, nor
does it own any other  subsidiaries.  The Company  regularly  reviews options to
expand the  operations of the Bank and may seek  opportunities  for acquiring or
forming other banks and non-banking subsidiaries.

     The  Company is  regulated  by the Federal  Reserve  Board (the "FRB") and,
pursuant to that authority, is examined periodically by the Federal Reserve Bank
of San Francisco.

BAY BANK OF COMMERCE - GENERAL BANKING SERVICES

     At December 31,  1998,  the Bank had total  assets of  $144,086,000,  total
loans of  $93,129,000  (including  loans  held for sale) and total  deposits  of
$123,678,000.  The Bank provides a wide range of commercial  banking services to
individuals,  professionals,  and small and medium-sized  businesses through its
principal  office in San Leandro,  California  and its branch offices in Hayward
and San Ramon,  California.  In order to attract these types of  customers,  the
Bank offers personalized services and banking convenience. The services provided
include checking,  interest checking, savings and interest-bearing demand, money
market and other time  deposit  accounts;  commercial,  real estate and consumer
loans;  travelers'  checks;  safe  deposit  boxes,  collection  services,  night
depository facilities and wire and telephone transfers.  The Bank is a member of
the Federal Deposit Insurance  Corporation (the "FDIC") and the deposits of each
depositor  are insured up to  $100,000.  The Bank is not a member of the Federal
Reserve System.  Professional firms and individuals and businesses form the core
of the Bank's customer and deposit base.

     The Bank is a PLP lender under the Small  Business  Administration  ("SBA")
and has  offered  SBA loans  since  1985.  Total SBA loan  fundings in 1998 were
$1,157,000.
                                       1
<PAGE> 4                                    
EXISTING LOCATIONS

     The Bank's  headquarters are located at 1495 East 14th Street, San Leandro,
California  and the Bank  operates two branch  offices  located at 1030 La Playa
Drive, Hayward,  California and at 2821 Crow Canyon Road, San Ramon, California.
The Bank also has an extension  office located at 1500  Washington  Avenue,  San
Leandro,  California,  which houses its SBA and construction loan divisions. The
Bank  currently  has no  branch  applications  pending  or  any  plans  to  open
additional branch offices.

DEPOSITS

     Most of the Bank's  deposits are obtained from  individuals,  professionals
and small and medium-sized  businesses.  As of December 31, 1998, the Bank had a
total of 4,522 accounts  representing 1,924  noninterest-bearing  demand deposit
(checking) accounts with an average balance of approximately $18,000 each; 1,697
savings,  interest-bearing  demand,  and money market  accounts  with an average
balance of  approximately  $22,000  each;  and 901 time accounts with an average
balance of approximately $58,000 each.

LENDING ACTIVITIES

     The Bank  concentrates  its lending  activities  in the areas of commercial
real estate mortgage loans,  commercial  loans to businesses and individuals and
real estate  construction  loans.  At December 31, 1998,  commercial real estate
mortgage  loans  accounted  for 47%,  commercial  loans  accounted for 26%, real
estate  construction loans accounted for 17%, real estate equity loans accounted
for 6%, consumer installment and other loans accounted for 3% and SBA loans held
for  sale  accounted  for  1%  of  the  Bank's  loan  portfolio.  See  "Selected
Statistical Information -- Loan Portfolio" herein for information concerning the
composition of the Bank's loan portfolio,  maturities and sensitivity to changes
in interest rates in the loan portfolio and non-performing  assets. The interest
rates charged by the Bank vary with the degree of risk and the size and maturity
of the loans involved and are generally  affected by  competition,  governmental
regulation and current market interest rates.

     Except as described in the discussion which accompanies TABLE F, SUMMARY OF
NONACCRUAL,  PAST DUE AND  RESTRUCTURED  LOANS, the Bank's loan portfolio is not
concentrated in any one category and includes loans to individuals, partnerships
and corporations for diverse purposes.
              
     At December 31, 1998, the Bank had total loans  outstanding of $93,129,000,
net of deferred  loan fees.  Inherent  in the lending  function is the fact that
loan  losses  will be  experienced  and that the risk of loss will vary with the
type of loan being made and the  creditworthiness  of the borrower over the term
of the loan. To reflect  currently  perceived  risks of loss associated with its
loan portfolio, adjustments are made to the Bank's allowance for loan losses. At
December 31, 1998, the Bank's  allowance for loan losses was $980,000 or 1.1% of
total  loans.  See  "Selected  Statistical  Information  -- Summary of Loan Loss
Experience" herein for a discussion of management's  policy for establishing and
maintaining the allowance for loan losses.

CORRESPONDENT BANKS

     The Bank has correspondent  relationships with Union Bank of California and
Bank of America,  N.T.& S.A, Chase Manhattan  Bank,  Pacific Coast Bankers Bank,
and the  Federal  Home Loan Bank of San  Francisco.  These  relationships  are a
result of the Bank's efforts to obtain a wide range of services for the Bank and
its customers,  including arranging loan  participations,  investment  services,
sale and purchase of federal funds (overnight  interbank loans),  collateralized
borrowing lines, and obtaining lines for letters of credit.  As a net seller of
funds, the Bank also maintains such correspondent  relationships to minimize the
risk of undue  concentration of its resources with a few institutions.  The Bank
does not currently serve, nor does it have plans to serve, as a correspondent to
other banks.

                                       2

<PAGE>5
EMPLOYEES

     At December  31,  1998,  the Company  employed  forty-five  (45)  full-time
employees and fifteen (15) part-time employees.

SELECTED STATISTICAL INFORMATION

     The following tables present certain consolidated  statistical  information
concerning the business of the Company and the Bank. This information  should be
read in conjunction  with the  consolidated  financial  statements and the notes
thereto  included in the  Company's  1998  Annual  Report to  Shareholders  (the
"Annual Report"), which have been incorporated herein by reference.

      DISTRIBUTION OF ASSETS, LIABILITIES AND
      STOCKHOLDERS' EQUITY; INTEREST RATES AND
      INTEREST DIFFERENTIAL

     TABLE A sets forth the Company's  consolidated  average  balance sheets for
the years ended December 31, 1998 and 1997 and an analysis of interest rates and
the interest rate differential.

     TABLE B sets forth the changes in interest  income and interest  expense in
1998 and 1997 resulting from changes in volume and changes in rates.

     SECURITIES PORTFOLIO

     TABLE C sets forth the  carrying  value of  securities  available  for sale
(fair value) and of securities held to maturity (amortized cost) at December 31,
1998 and 1997 and the maturities and weighted  average yield of securities based
on amortized cost at December 31, 1998. 

     LOAN PORTFOLIO
     
     TABLE D sets forth the  composition  of the loan  portfolio at December 31,
1998 and 1997.

     TABLE E sets forth  maturities and sensitivity to changes in interest rates
in the loan portfolio,  excluding real estate mortgage loans,  installment loans
and lease financing, at December 31, 1998.

     TABLE F shows the  composition  of  nonaccrual,  past due and  restructured
loans at December 31, 1998 and 1997. Accompanying TABLE F is a discussion of the
Company's policy for placing loans on nonaccrual status.

     SUMMARY OF LOAN LOSS EXPERIENCE

     TABLE G sets forth an  analysis of loan loss  experience  as of and for the
years ended December 31, 1998 and 1997.

     Accompanying  TABLE G is a  description  of the  factors  which  influenced
management's  judgment  in  determining  the  amount  of  the  additions  to the
allowance  charged to operating expense in each fiscal year, a table showing the
allocation  of the  allowance  for  loans  losses,  as well as a  discussion  of
management's  policy for  establishing  and  maintaining  the allowance for loan
losses.

     DEPOSITS

     TABLE H sets forth the average amount of and the average rate paid on major
deposit categories for the years ended December 31, 1998 and 1997.


                                       3

<PAGE> 6
     TABLE I sets forth the maturity of time certificates of deposit of $100,000
or more and other time deposits of $100,000 or more at December 31, 1998.


     RETURN ON EQUITY AND ASSETS

     TABLE J sets forth certain  financial  ratios for the years ended  December
31, 1998 and 1997.



























                                       4
<PAGE>7

                                    TABLE A

         DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
                    INTEREST RATES AND INTEREST DIFFERENTIAL
         -------------------------------------------------------------

     The following table sets forth the Company's  consolidated  average assets,
liabilities  and  shareholders'  equity;  interest  income  earned and  interest
expense paid;  and the average yields earned or rates paid thereon for the years
ended  December  31, 1998 and 1997.  The average  balances are averages of daily
balances.

<TABLE>
<CAPTION>
                                                         1998                                 1997      
                                              ---------------------------       --------------------------- 
                                                        Interest  Average                 Interest  Average
                                               Average  Income/   Yield/         Average  Income/   Yield/
(Dollars in thousands)                        Balances  Expense     Rate        Balances  Expense     Rate
                                               -------  -------     ----        --------  -------     ----
<S>                                            <C>       <C>        <C>         <C>        <C>        <C>   
ASSETS

Securities (amortized cost):


   Taxable                                     $23,750   $1,392     5.86%       $ 18,396   $1,131     6.15%

   Tax-exempt(l)                                 5,395      403     7.47           3,874      297     7.67
                                               -------    -----     ----        --------   ------     ----

          Total securities                      29,145    1,795     6.16          22,270    1,428     6.41

Federal funds sold and securities
  purchased under repurchase agreements          6,438      355     5.51           5,338      288     5.40

Loans(2)(3)                                     81,091    8,177    10.08          69,824    7,137    10.22
                                               -------    -----     ----        --------   ------     ----

          Total interest-earning assets(l)     116,674   10,327     8.85          97,432    8,853     9.09

Less allowance for loan losses                   (938)                             (977)

Nonaccrual loans                                   263                               393

Cash and due from banks                          7,712                             6,963

Premises and equipment                           2,022                             2,205

Other assets                                       977                             1,072
                                              --------                          --------

TOTAL ASSETS                                  $126,710                          $107,088
                                              ========                          ========

Average earning loans/average
  earning assets                                 69.5%                             71.7%
                                                 =====                             =====
</TABLE>
 
                                      5


<PAGE> 8


      DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
                    INTEREST RATES AND INTEREST DIFFERENTIAL
      -------------------------------------------------------------
<TABLE>
<CAPTION>
                                                         1998                                 1997      
                                              ---------------------------       --------------------------- 
                                                        Interest  Average                 Interest  Average
                                               Average  Income/   Yield/         Average  Income/   Yield/
(Dollars in thousands)                        Balances  Expense     Rate        Balances  Expense     Rate
<S>                                            <C>       <C>        <C>         <C>        <C>        <C>   
                                               -------   -----      ----        --------   ------     ----
Deposits:
                                              
   Savings and interest-bearing demand        $ 34,876   $1,045     3.00%       $ 25,893   $  708     2.73%

   Time                                         30,027    1,495     4.98          30,626    1,588     5.19

   Certificates of deposit, $100
        and over                                16,185      866     5.35           9,974      564     5.65

   Other borrowed funds                          1,478       73     4.94           1,894       96     5.07
                                              --------    -----     ----         -------   ------     ----
        Total interest-bearing liabilities      82,566    3,479     4.21          68,387    2,956     4.32

   Demand deposits                              32,374                            27,744

Other liabilities                                1,000                             1,006

Shareholders' equity                            10,770                             9,951
                                              --------                          --------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY                          $126,710                          $107,088
                                              ========                          ========

Interest income and average yield
    on earning assets(1)                                  10,327    8.85                    8,853     9.09

Interest expense and average interest
    cost related to earning assets                         3,479    2.98                    2,956     3.03
                                                          ------    -----                  ------     -----


Net interest income and margin(1)(4)                      $6,848    5.87%                  $5,897     6.06%
                                                          ======    =====                  ======     =====
</TABLE>

(1) Interest on tax-exempt  securities,  total interest  income and net interest
income include the effect of taxable  equivalent  adjustments using the expected
federal corporate income tax rate of 34% in 1998 and 1997 in adjusting  interest
on tax-exempt  investment securities to a fully taxable basis. The amount of the
taxable  equivalent  adjustment  was  $127,000  and  $94,000  in 1998 and  1997,
respectively.

(2) Loan interest income includes  amortization of loan fees of $478,000 in
1998 and $334,000 in 1997.  

(3) Average loans do not include  nonaccrual  loans.

(4) Net interest  margin is computed by dividing  net  interest  income by total
average interest-earning assets.


                                       6
<PAGE>9

                                    TABLE B

                            RATE AND VOLUME ANALYSIS
                            ------------------------

     The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in asset and
liability  volumes and changes in rates. The change in interest due to both rate
and volume has been allocated to changes due to volume and rate in proportion to
the relationship of absolute dollar amounts of change in each.
<TABLE>
<CAPTION>
                                                           Period Ended December 31,
                                             ---------------------------------------------------------
                                               1998 Compared to 1997            1997 Compared to 1996
                                              Increase (decrease) in:          Increase (decrease) in:
(in thousands)                               --------------------------        -----------------------      
                                             Volume      Rate     Total         Volume    Rate   Total
<S>                                          <C>        <C>      <C>            <C>      <C>     <C>
Changes in interest income:                  ------     -----    ------         ------   -----   -----      
  Securities (amortized cost):                                                                  
                                                                                                
    Taxable                                  $  316     $(55)    $  261          $193    $ (9)    $184
                                                                                                
    Tax-exempt(l)                               114       (8)       106            52       1       53
                                             ------     -----    ------         ------   -----   ----- 
                                                                                                
      Total securities                          430      (63)       367           245      (8)     237
                                                                                                
                                                                                                
  Federal funds sold and securities                                                             
    purchased under repurchase agreements        60        7         67            25      13       38
                                                                                                

  Loans                                       1,138      (98)     1,040           717     (43)     674
                                             ------     -----    ------         ------   -----   -----  
                                                                                                
    Total(l)                                  1,628     (154)     1,474           987     (38)     949
                                             ------     -----    ------         ------   -----   ----- 
                                                                                                
Changes in interest expense:                                                                    
                                                                                                
Total interest-bearing liabilities:                                                             
                                                                                                
  Savings and interest-bearing demand           264       73        337            22      35       57
                                                                                                
  Time                                          (31)     (62)       (93)          176       5      181
                                                                                                
  Certificates of deposit, $100 and over        334      (32)       302           270       1      271
                                                                                                
  Other borrowed funds                          (21)      (2)       (23)          (16)      6      (10)
                                             ------     -----    ------         ------   -----   ----- 
                                                                                                
    Total                                       546      (23)       523           452      47      499
                                             ------     -----    ------         ------   -----   ----- 
                                                                                                
Changes in net interest income(l)            $1,082    $(131)    $  951          $535    $(85)    $450
                                             ======    ======    ======         ======   =====    ====

------------------   
(1) Taxable equivalent basis.  See Note 1 to TABLE A.
</TABLE>

                                       7

<PAGE> 10
                                    TABLE C

                              SECURITIES PORTFOLIO
                              --------------------

     The  following  tables  set forth  the  carrying  value of debt  securities
available  for  sale  (fair  value)  and of debt  securities  held  to  maturity
(amortized  cost) at December 31, 1998 and 1997 and the  maturities and weighted
average yield of debt securities based on amortized cost at December 31, 1998.
<TABLE>
<CAPTION>

                                                         Estimated
                                                        Fair Value
(in thousands)                                        At December 31,
                                                     ------------------
SECURITIES AVAILABLE FOR SALE                           1998       1997
-----------------------------                           ----       ----
<S>                                                  <C>        <C>    
U. S. Treasury and agency securities                 $ 1,994    $ 4,002

Corporate securities                                  19,644     14,401

Mortgage-backed securities                            10,395      6,248
                                                      ------      -----

                                                     $32,033    $24,651
                                                     =======    =======
</TABLE>
<TABLE>
<CAPTION>
                                                       
                                                       Amortized cost
(in thousands)                                         At December 31,
                                                    -------------------
SECURITIES HELD TO MATURITY                             1998       1997
---------------------------                           ------     ------
<S>                                                   <C>       <C>
U. S. Treasury and agency securities                  $  ---     $3,197

Obligations of states and political subdivisions       6,123      4,661

Mortgage-backed securities                             1,386         71
                                                      ------     ------ 

                                                      $7,509     $7,929
                                                      ======     ======
</TABLE>

                                       8

<PAGE>11


                                    TABLE C

                        SECURITIES PORTFOLIO (continued)
                        --------------------------------
<TABLE>
<CAPTION>

                                                                          Maturing
                              -----------------------------------------------------------------------------
                                                       After One             After Five
                                  In One Year           Through               Through             After
(Dollars in thousands)              Or Less            Five Years            Ten Years          Ten Years             Total
                              -----------------    ----------------       -------------       -------------      ---------------
                                  Cost    Yield       Cost    Yield       Cost    Yield       Cost    Yield        Cost    Yield
                               -------    -----     ------    -----     ------    -----     ------    -----      ------    -----
<S>                            <C>        <C>       <C>       <C>       <C>       <C>       <C>       <C>        <C>       <C> 
AVAILABLE FOR SALE:                                                                                          
U.S. Treasury and agency 
  securities                       ---      ---     $2,000    5.21%        ---      ---        ---      ---      $2,000    5.21%
                                                                                                             
Corporate securities           $19,651    5.51%        --       ---        ---      ---        ---      ---      19,651    5.51
                                                                                                             

Mortgage-backed securities          64    6.24       5,680    5.89      $4,574    6.12%        ---      ---      10,318    5.99
                               -------    -----     ------    -----     ------    -----     ------    -----     -------    -----
Total amortized cost           $19,715    5.51%     $7,680    5.71%     $4,574    6.12%        ---      ---     $31,969    5.83%
                               =======    =====     ======    =====     ======    =====     ======    =====     =======    =====
Estimated fair value           $19,708              $7,693              $4,632                 ---      ---     $32,033
                               =======              ======              ======              ======    =====     =======
                                                                                                             
                                                                                                             
HELD TO MATURITY:                                                                                            
Obligations of states and                                                                                    
  political subdivisions (1)      $519    8.92%     $1,307    7.24%     $2,208    7.00%     $2,089    7.07%      $6,123    7.19%
                                                                                                             
Mortgage-backed securities         ---      ---      1,386    5.63         ---      ---        ---      ---       1,386    5.63
                                  ----    -----     ------    -----     ------    -----     ------    -----     -------    -----
Total amortized cost              $519    8.92%     $2,693    6.41%     $2,208    7.00%     $2,089    7.07%      $7,509    6.89%
                                  ====    =====     ======    =====     ======    =====     ======    =====      ======    =====
Estimated fair value              $530              $2,738              $2,306              $2,174               $7,748
                                  ====              ======              ======              ======               ======

(1) Interest on tax-exempt  securities,  total interest  income and net interest
income include the effect of taxable  equivalent  adjustments using the expected
federal  corporate  income  tax  rate of 34% in 1998 in  adjusting  interest  on
tax-exempt securities to a fully taxable basis.
</TABLE>
                                       9
<PAGE> 12

                                     TABLE C

                        SECURITIES PORTFOLIO (continued)
                        --------------------------------

     At December 31,  1998,  debt  securities  from the  following  issuers each
totaled over ten percent (10%) of shareholders' equity of the Company:
<TABLE>
<CAPTION>

                                            Amortized     Fair
    (in thousands):                               Cost     Value
                                            ---------    ------
<S>                                            <C>       <C>   
    Federal Home Loan Mortgage Corporation     $7,199    $7,235
    Federal National Mortgage Association      $4,504    $4,541
    Federal Home Loan Bank                     $2,000    $1,993
    Tyson Foods                                $1,499    $1,498
    Baxter International                       $1,498    $1,497
    Textron Inc.                               $1,497    $1,497
    Zions Bancorp                              $1,497    $1,496
    Praxair                                    $1,496    $1,495
    Safeway Inc.                               $1,495    $1,494
    Rite Aid Corporation                       $1,494    $1,493
    Crown Cork and Screw                       $1,491    $1,491
    Comdisco                                   $1,490    $1,490
    MCI Worldcom                               $1,488    $1,488
    Fedex FDX Corporation                      $1,486    $1,486
</TABLE>


                                     TABLE D

                                 LOAN PORTFOLIO
                                 --------------

The  composition  of the  loan  portfolio  at  December  31,  1998  and  1997 is
summarized in the table below.
<TABLE>
<CAPTION>
   (in thousands):              1998         1997
                             -------      -------

<S>                          <C>          <C>    
   Commercial                $24,250      $18,980
   Commercial held for sale      473          721
   Real estate:
       Construction           16,049        7,436
       Mortgage               43,815       41,181
       Equity                  5,297        2,718
       Held for sale             466          780
   Installment                 2,299        1,895
   Other                         979          947
                             -------      -------
                              93,628       74,658
   Deferred loan fees           (499)        (529)
                             -------      -------
                             $93,129      $74,129
                             =======      =======                                                                               
</TABLE>

                                       10

<PAGE> 13

                                     TABLE E

          LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
          ------------------------------------------------------------

     The following  table presents  information  concerning  loan maturities and
sensitivity to changes in interest rates in the loan portfolio, as well as loans
that have fixed or variable interest rates at December 31, 1998.
<TABLE>
<CAPTION>
(in thousands):                    
                                                 One   After One      After
Maturity Distribution of                        Year     Through       Five
Selected Loans:                              Or Less  Five Years      Years      Total
                                             -------  ----------    -------    -------
<S>                                          <C>        <C>         <C>        <C>    
    Commercial                               $12,965    $  6,689    $ 4,596    $24,250
    Commercial - held for sale                   ---         ---        473        473
    Real estate-construction                  13,516       2,337        196     16,049
    Real estate - mortgage                     3,459       9,317     31,039     43,815
    Real estate - held for sale                  ---         ---        466        466
    Equity                                       ---         ---      5,297      5,297
    Installment                                  102       2,135         62      2,299
                                                                 
    Other                                        617         362        ---        979
                                             -------     -------    -------    -------
                                             $30,659     $20,840    $42,129    $93,628
                                             =======     =======    =======    =======
                                                                 
Sensitivity to Changes in Interest Rates:                        
    Loans with fixed interest rates            1,463       6,905     13,903     22,271
    Loans with variable interest rates        65,830       5,527        ---     71,357
                                              ------     -------    -------    -------
                                             $67,293     $12,432    $13,903    $93,628
                                             =======     =======    =======    =======

</TABLE>

                                     TABLE F

             SUMMARY OF NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
             ------------------------------------------------------

     A summary of nonaccrual,  past due and  restructured  loans at December 31,
1998 and 1997 is set forth below:
<TABLE>
<CAPTION>

 (in thousands):                              1998    1997
                                              ----    ----
<S>                                          <C>      <C> 
 Nonaccrual                                  $  30    $440
 Accruing loans past due 90 days or more       ---     ---
 Restructured loans                            469     471
                                               ---     ---
                                              $499    $911
                                              ====    ====
</TABLE>

     The Company's consolidated financial statements are prepared on the accrual
basis of accounting, including the  recognition of interest income on the loan
portfolio.  Interest income from nonaccrual loans is not accrued on the books, 
but rather is recorded only when and if received and the principal is deemed to
be collectible.

     Loans are placed on a nonaccrual  basis and any accrued but unpaid interest
is reversed and charged against income when the payment of interest or principal
is ninety days or more past due, except when the loan is well secured and in the
process of collection.  Nonaccrual loans constituted approximately 0.6% of total
gross loans at December 31, 1997 and less than 0.1% at December 31, 1998.  Loans
in the nonaccrual  category are treated as nonaccrual loans even though the Bank
may ultimately  recover all or a portion of the interest due. The classification
of a loan as a  nonaccrual  loan is not  necessarily  indicative  of a potential
charge-off. The Senior Loan Officer

                                       11
<PAGE>  14
assesses  the loan  portfolio monthly to determine which loans are specifically
identifiable  problem credits in order to update  the  Bank's  internal  watch
list,  which  tracks  all such credits.  The Bank's  internal Loan Review 
Examiner  grades all new  commercial loans and all  credits  where  the total 
liability  equals or  exceeds  certain thresholds  established by management.
If either the Senior Loan Officer or the Loan Review Examiner identifies a
serious deficiency,  the loan is placed on the next quarterly watch list.

     Once a loan is on the  watch  list,  the  Loan  Officers  are  required  to
complete a "Report of Collection  Activity" and to make at least monthly  status
reports.  While the loan is on the watch list, the Senior Loan Officer  oversees
and coordinates the Loan Officer's  efforts to either  rehabilitate  the loan or
effect  collection  in  an  expeditious   manner.   

     Restructured loans reflect situations in which, due to the inability of the
borrower  to comply  with the  original  terms of the loan,  the terms have been
modified, usually with the accrual of interest at a reduced rate. As of December
31, 1998, the Bank had $469,000 in restructured loans.

     Interest income on nonaccrual loans that would have been recognized for the
year ended  December 31, 1998, if the loans had been current in accordance  with
their original terms totaled $2,000.  The Company recognized $15,000 in interest
income on  nonaccrual  loans which paid off or were  charged off during the year
ended December 31, 1998.

     There are no loans,  which were current at December  31, 1998,  where known
information about possible credit problems of borrowers causes management of the
Company to have serious doubt as to the ability of such borrowers to comply with
the present loan repayment terms.

     Outstanding   loans  to  contractors   engaged  in  construction  and  land
development  constituted  $11,497,000,  or 12% of total  loans,  at December 31,
1998. The loans are a  cross-section  of types,  from  commercial to real estate
construction  and are not all secured by real estate.  The borrowers as a group,
however,  are engaged in business activities which could be affected by changing
conditions in the real estate  market.  There were no other  categories of loans
representing a concentration of 10% or more of total loans at December 31, 1998,
except as set forth in TABLE D above.

                                       12

<PAGE> 15
                                     TABLE G

                         SUMMARY OF LOAN LOSS EXPERIENCE
                         -------------------------------

     The following table summarizes loan loss experience as of and for the years
ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
   (Dollars in thousands):                              1998         1997
                                                      ------       ------
   <S>                                               <C>        <C>     
   Allowance for loan losses:  
   Balance at beginning of year:                      $1,000       $  971
   Charge-offs:                                                  
     Commercial                                          122            5
     Real estate - mortgage                               48          ---
     Installment                                         ---          ---
     Other                                                 2           26
                                                      ------       ------
       Total loans charged off                           172           31
                                                      ------       ------
   Recoveries:                                                    
   Commercial                                              6            6
     Real estate - mortgage                               11          ---
     Other                                                 1            2
                                                      ------       ------
       Total recoveries                                   18            8
                                                      ------       ------
   Net charge-offs                                      (154)         (23)
   Provision for loan losses                             134           52
                                                      ------       ------
   Balance at end of year                             $  980       $1,000
                                                      ======       ======
   Loans outstanding at December 31                  $93,129      $74,129
                                                     =======      =======
   Average loans outstanding during period           $81,354      $70,217
                                                     =======      =======
   Allowance for loan losses as a percentage                                       
     of outstanding loan balance                        1.1%         1.3%
                                                        ====         ====
   Net charge-offs to average loans outstanding         0.2%          ---
                                                        ====         ====
</TABLE>
                                                 
     The Bank provides for possible loan losses by a charge to operating  income
based upon the  composition of the loan  portfolio,  past loan loss  experience,
current economic  conditions and other factors which, in management's  judgment,
deserve recognition in estimating loan losses.  Management will charge off loans
when it determines there has been a permanent impairment of the related carrying
values. Management attributes general reserves to different types of loans using
percentages  which are based upon perceived risk  associated  with the portfolio
and underlying  collateral,  historical loss  experience,  and  vulnerability to
changing economic  conditions which may affect the  collectibility of the loans.
Specific  reserves  are  allocated  for  impaired  loans,  for loans  which have
experienced  a decline in internal loan grading,  and when  management  believes
additional  loss  exposure  exists.  Although the  allowance  for loan losses is
allocated  to  various  portfolio  segments,  it is  general  in  nature  and is
available for the loan portfolio in its entirety.  Management  believes that the
allowance  for  loan  losses  is  adequate.   While  management  uses  available
information to recognize losses on loans,  future additions to the allowance may
be  necessary  based on changes in economic  conditions.  In  addition,  various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the Company's  allowance for losses on loans. Such agencies
may require the Company to recognize  additions to the allowance  based on their
analysis of information available to them at the time of their examination.

     A loan  is  considered  impaired  when  management  determines  that  it is
probable that the Company will be unable to collect all amounts due according to
the  original  contractual  terms  of the  loan  agreement,  including  interest
payments.  Impaired loans are those loans  identified  under the Bank's internal
rating system as "doubtful"  or "loss" or those  "substandard"  loans which have
been placed on nonaccrual. Restructured loans are always classified as impaired.
The Bank applies its normal loan review  procedures when  determining  whether a
loan is impaired.  The amount of impairment is measured  using  discounted  cash
flows or the fair value of the collateral,  if the loan is collateral dependent.
Excluded  from the  impairment  analysis  are large  groups of  smaller  balance

                                       13
<PAGE> 16

homogeneous loans such as installment and residential  mortgage loans.  Impaired
loans are  carried at the  estimated  present  value of the future  cash  flows,
discounted at the loan's  effective  interest  rate, or at the fair value of the
collateral if less than the recorded  investment in the loan (including  accrued
interest and net deferred  loan fees or costs).  Specific  reserves for impaired
loans are recognized by adjusting the  allocation of the existing  allowance for
loan losses.

     Although the Bank does not  specifically  allocate its  allowance  for loan
losses on the basis of type of loan,  using these criteria the allocation of the
allowance for loan losses would be as set forth below:
<TABLE>
<CAPTION>
                         ALLOWANCE FOR LOAN LOSSES BY LOAN TYPE

                                        1998                          1997
                             ----------------------       ------------------------
                                         Percent of                    Percent of
                                              Loans                         Loans
                                            in Each                       in Each
                                        Category to                   Category to
(Dollars in thousands):      Amount     Total Loans        Amount     Total Loans
                             ------  --------------        ------  --------------

<S>                            <C>            <C>            <C>           <C>
Commercial                     $439            26%           $431           25%
                                                       
Commercial held for sale          1             1               1            1
                                                       
                                                       
Real Estate                                            
                                                       
  Construction                  118            17              54           10
                                                       
  Mortgage                      291            47             201           55
                                                       
  Held for sale                   1             1               1            1
                                                       
  Equity                         77             5              14            4
                                                       
Installment                      28             2              23            3
                                                       
Other                            15             1              33            1
                                                                             
                                                       
Unallocated                      10           N/A             242          N/A
                               ----          -----         ------         -----
                                                       
                               $980           100%         $1,000          100%
                               ====          =====         ======         =====
</TABLE>
<TABLE>
<CAPTION>                                                      
                                     TABLE H

                                    DEPOSITS
                                    --------

     The following  table sets forth the average  amount of and the average rate
paid on certain deposit  categories which were in excess of 10% of average total
deposits for the years ended December 31, 1998 and 1997.

(Dollars in thousands):                       1998                 1997
                                       ---------------       --------------
                                        Balance   Rate       Balance   Rate
                                       --------  -----       -------  -----
<S>                                    <C>                   <C>           
Noninterest-bearing demand deposits    $ 32,374    N/A       $27,744    N/A
Savings and interest-bearing demand      34,876  3.00%        25,893  2.73%
Time                                     46,212  5.11%        40,600  5.30%
                                       --------              -------
                                       $113,462              $94,237
                                       ========              =======
</TABLE>
                                       14
<PAGE> 17

                                     TABLE I

                                  TIME DEPOSITS
                                  -------------

     The following table sets forth the maturity of time certificates of deposit
of $100,000 or more and other time  deposits of $100,000 or more at December 31,
1998.
 <TABLE>
<CAPTION>
                             Time Certificates                        Other Time
                                 of Deposit of                       Deposits of
(in thousands):                   $100 or More                      $100 or More
                                  ------------                      ------------
<S>                                    <C>                               <C>    
 Three months or less                  $15,026                           $11,335
 Over 3 through 6 months                 3,551                           =======
 Over 6 through 12 months                2,324
 Over 12 months                            710
                                       -------
                                       $21,611
                                       =======
</TABLE>

                                     TABLE J

                           RETURN ON EQUITY AND ASSETS
                           ---------------------------

     The following table sets forth certain financial ratios for the years ended
December 31, 1998 and 1997.
                  
<TABLE>
<CAPTION>
(Dollars in thousands):                                  1998         1997
                                                       ------         ----
<S>                                                    <C>          <C>   
 Net income                                            $1,215       $1,062
 Net income to average assets                            1.0%         1.0%
 Net income to average shareholders' equity             11.3%        10.7%
 Dividends declared per share to diluted net income            
    per share                                             ---    0.36 to 1
 Average shareholders' equity to average assets          8.5%         9.3%
</TABLE>
                                                              

COMPETITION

     In California and in the Bank's primary service area,  major banks dominate
the commercial banking industry.  Among the advantages these banks have over the
Bank are their  ability to finance  wide-ranging  advertising  campaigns  and to
allocate their  investment  assets,  including loans, to regions of higher yield
and demand. By virtue of their larger amounts of capital, such institutions have
substantially   greater  lending  limits  than  the  Bank  and  perform  certain
functions,  including trust services and  international  banking,  which are not
presently  offered  directly by the Bank but are offered  indirectly by the Bank
through  correspondent  institutions.  The Bank  also  competes  for  loans  and
deposits with savings and loan  associations,  finance  companies,  money market
funds, brokerage houses, credit unions, and other nonfinancial institutions.

     The Bank's  primary  service  area  consists  principally  of the cities of
Oakland,  San  Leandro,  Hayward and San Ramon and the  unincorporated  areas of
Castro  Valley and San Lorenzo  which at June 30, 1998,  contained  ninety-eight
(98) competing  banking  offices,  which includes the Bank and twenty-five  (25)
branch offices of other independent  banks. At June 30, 1998, the Bank's primary
service  area  also  contained  fifty-five  (55)  offices  of  savings  and loan
associations.

     From time to time,  legislation is proposed or enacted which has the effect
of increasing the cost of doing  business,  limiting  permissible  activities or
affecting  the   competitive   balance   between   banks  and  other   financial
institutions. It is impossible to predict the competitive impact these and other
changes  in  legislation  will have on

                                       15
<PAGE> 18

commercial  banking in general or on the business of the Bank in particular.
See "SUPERVISION AND REGULATION - Recent and
Proposed Legislation".

SUPERVISION AND REGULATION

THE COMPANY

     The Company,  as a bank holding company, is subject to regulation under the
Bank Holding  Company Act of 1956,  as amended (the "BHC Act") and is registered
with and subject to the  supervision  of the Board of  Governors  of the Federal
Reserve System ("Federal Reserve"). It is the policy of the Federal Reserve that
each bank holding company serve as a source of financial and managerial strength
to its subsidiary  banks.  The Federal  Reserve has the authority to examine the
Company and the Bank.

     The BHC Act  requires  the  Company  to obtain  the prior  approval  of the
Federal Reserve before  acquisition of all or substantially all of the assets of
any bank or  ownership  or control of the  voting  shares of any bank if,  after
giving effect to such acquisition, the Company would own or control, directly or
indirectly,  more than 5% of the voting shares of such bank. However, amendments
to the BHC Act  effected by the  Riegle-Neal  Interstate  Banking and  Branching
Efficiency Act of 1994 ("Riegle-Neal"), which is discussed further below, expand
the  circumstances  under which a bank holding company may acquire control of or
all or  substantially  all of the assets of a bank located  outside the State of
California.
               
     The  Company  may  not  engage  in any  business  other  than  managing  or
controlling banks or furnishing services to its subsidiaries, with the exception
of certain  activities  which,  in the  opinion of the Federal  Reserve,  are so
closely  related  to  banking  or to  managing  or  controlling  banks  as to be
incidental to banking.  The Company is also generally  prohibited from acquiring
direct or indirect  ownership or control of more than 5% of the voting shares of
any company  unless that  company is engaged in such  activities  and unless the
Federal Reserve approves the acquisition.

     The Company and its  subsidiaries  are prohibited  from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or provision of services.  For example,  with certain  exceptions,  the
Bank may not  condition  an extension  of credit on a customer  obtaining  other
services provided by it, the Company or any other subsidiary, or on a promise by
the  customer  not to obtain  other  services  from a  competitor.  In addition,
federal law imposes certain  restrictions  on transactions  between the Bank and
its  affiliates.  As  affiliates,  the Bank and the  Company are  subject,  with
certain exceptions, to the provisions of federal law imposing limitations on and
requiring collateral for loans by the Bank to any affiliate.

THE BANK

     As a California  state-licensed  bank,  the Bank is subject to  regulation,
supervision and periodic  examination by the California  Department of Financial
Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is not a member of the Federal Reserve System, but is nevertheless  subject
to certain  regulations of the Federal Reserve.  The Bank's deposits are insured
by the FDIC to the maximum amount permitted by law, which is currently  $100,000
per depositor in most cases.
               
     The regulations of these state and federal bank regulatory  agencies govern
most aspects of the Bank's  business and  operations,  including but not limited
to, the scope of its business,  its investments,  its reserves against deposits,
the nature and amount of any collateral for loans, the timing of availability of
deposited  funds,  the issuance of  securities,  the payment of dividends,  bank
expansion and bank activities,  including real estate  development and insurance
activities,  and the maximum rates of interest allowed on certain deposits.  The
Bank is also subject to the  requirements  and  restrictions of various consumer
laws and regulations.

     The following  description of certain  statutory and regulatory  provisions
and proposals is not intended to be a complete  description of these  provisions
or of the  many  laws and  regulations  to which  the  Company  and the Bank are
subject,  and is  qualified  in its  entirety  by  reference  to the  particular
statutory or regulatory provisions discussed.

                                       16
<PAGE> 19                                     

CHANGE IN CONTROL

     The BHC Act and the Change in Bank  Control  Act of 1978,  as amended  (the
"Change in Control  Act"),  together with  regulations  of the Federal  Reserve,
require that, depending on the particular circumstances,  either Federal Reserve
approval must be obtained or notice must be furnished to the Federal Reserve and
not  disapproved  prior to any person or company  acquiring  "control" of a bank
holding  company,  such  as the  Company,  subject  to  exemptions  for  certain
transactions.  Control is  conclusively  presumed to exist if an  individual  or
company  acquires  25% or more of any  class of  voting  securities  of the bank
holding  company.  Control is rebuttably  presumed to exist if a person acquires
10% or more but less than 25% of any class of voting  securities  and either the
company has  securities  registered  under  Section 12 of the Exchange Act or no
other person will own a greater  percentage  of that class of voting  securities
immediately  after the  transaction.  The Financial Code also contains  approval
requirements for the acquisition of 10% or more of the securities of a person or
entity which controls a California licensed bank.

CAPITAL ADEQUACY REQUIREMENTS

     The Company is subject to the Federal Reserve's capital guidelines for bank
holding  companies and the Bank is subject to the FDIC's  regulations  governing
capital adequacy for nonmember  banks.  Additional  capital  requirements may be
imposed on banks based on market risk.
               
     THE FEDERAL RESERVE AND FDIC

     The  Federal  Reserve  has  established  risk-based  and  leverage  capital
guidelines  for bank holding  companies  which are similar to the FDIC's capital
adequacy  regulations for nonmember banks. The Federal Reserve  guidelines apply
on a consolidated  basis to bank holding companies with  consolidated  assets of
$150 million or more.

     The Federal Reserve capital  guidelines for bank holding  companies and the
FDIC's regulations for nonmember banks set total capital requirements and define
capital  in  terms  of  "core  capital   elements,"  or  Tier  1 capital(1) and
"supplemental  capital  elements,"  or Tier 2 capital(2). At least fifty percent
(50%) of the qualifying  total capital base must consist of Tier 1 capital.  The
maximum amount of Tier 2 capital that may be recognized  for risk-based  capital
purposes  is limited to  one-hundred  percent  (100%) of Tier 1 capital,  net of
goodwill.

     Both bank holding  companies and nonmember banks are required to maintain a
minimum  ratio of  qualifying  total  capital to  risk-weighted  assets of eight
percent (8%), at least  one-half of which must be in the form of Tier 1 capital.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including  both on and  off-balance  sheet  exposures,  which are  multiplied by
certain  risk  weights  assigned  by the  Federal  Reserve and the FDIC to those
assets.

     The Federal Reserve and the FDIC have  established a minimum leverage ratio
of three percent (3%) Tier 1 capital to total assets for bank holding  companies
and nonmember banks that have received the highest  composite  regulatory rating
and are not  anticipating or  experiencing  any  significant  growth.  All other
institutions  are  required

--------------------
(1) Tier 1 capital is generally defined as the sum of the core capital elements
less goodwill and certain intangibles.  The following items are defined as core 
capital elements: (i) common stockholders' equity; (ii) qualifying noncumulative
perpetual preferred stock and related surplus; and (iii) minority interests in
the equity accounts of consolidated subsidiaries.

(2) Supplementary capital elements include: (i) allowance for loan and lease
losses (which cannot exceed 1.25% of an institution's risk-weighted assets);
(ii) perpetual preferred stock and related surplus not qualifying as core
capital; (iii) hybrid capital instruments, perpetual debt and mandatory
convertible debt securities; (iv) term subordinated debt and intermediate-term
preferred stock and related surplus; and (v) 45% of the unrealized gain, net of
taxes, on securities available for sale.


                                       17
  
<PAGE> 20
to maintain a leverage  ratio of at least 100 to 200 basis  points  above the
3% minimum for a minimum of four  percent  (4%) or five percent (5%).

     Set forth below are the  Company's  and the Bank's risk based and  leverage
capital ratios as of December 31, 1998:

<TABLE>
<CAPTION>
                                                             RISK BASED CAPITAL RATIO       

                                                     Company                     Bank
                                                ------------------       ------------------
(Dollars in thousands):                          Amount      Ratio        Amount      Ratio
                                                -------      -----       -------      -----
<S>                                             <C>           <C>        <C>          <C> 
Tier 1 capital                                  $11,277       9.0%       $10,837       8.7%
Tier 1 capital regulatory minimum requirement     4,993       4.0          4,988       4.0
                                                -------      -----       -------      -----
Capital held in excess of regulatory minimum    $ 6,284       5.0%       $ 5,849       4.7%
                                                =======       ====       =======       ====

Total capital                                   $12,257       9.8%       $11,817       9.5%
Total capital regulatory minimum requirement      9,985       8.0          9,976       8.0
                                                -------      -----       -------      -----
Capital held in excess of regulatory minimum    $ 2,272       1.8%       $ 1,841       1.5%
                                                =======       ====       =======      ====
Risk-weighted assets                                  $124,814                 $124,698
                                                      ========                =========
</TABLE>
<TABLE>
<CAPTION>
                                                                LEVERAGE RATIO

                                                      Company                   Bank
                                                ------------------       -----------------
(Dollars in thousands):                          Amount      Ratio        Amount      Ratio
                                                -------      -----       -------      -----
<S>                                             <C>           <C>        <C>           <C> 
Tier 1 capital to average total assets          $11,277       8.2%       $10,837       7.9%
Range of regulatory minimum leverage              4,144-      3.0-         4,140-      3.0-
  requirement                                     6,906       5.0%         6,901       5.0%
                                                -------      -----       -------      -----
Range of regulatory excess                        4,371-      3.2-         3,936-      2.9-
                                                $ 7,133       5.2%       $ 6,697       4.9%
                                                =======       ====      ========      ====
Average total assets for fourth quarter               $138,129                 $138,013
                                                      ========                 ========
</TABLE>

     The risk-based  capital ratio discussed above focuses  principally on broad
categories of credit risk, and may not take into account many other factors that
can affect a bank's financial condition.  These factors include overall interest
rate risk exposure;  liquidity,  funding and market risks; the quality and level
of  earnings;   concentrations  of  credit  risk;  certain  risks  arising  from
nontraditional   activities;   the  quality  of  loans  and   investments;   the
effectiveness of loan and investment policies;  and management's overall ability
to monitor  and  control  financial  and  operating  risks,  including  the risk
presented by concentrations of credit and  nontraditional  activities.  The FDIC
has  addressed  many of these areas in related  rules and  regulations,  some of
which are discussed herein. In addition to evaluating capital ratios, an overall
assessment of capital  adequacy must take account of each of these other factors
including,  in  particular,  the level and  severity  of problem  and  adversely
classified assets.  For this reason, the final supervisory  judgment on a bank's
capital  adequacy may differ  significantly  from the conclusions  that might be
drawn solely from the absolute level of the bank's risk-based  capital ratio. In
light of the foregoing, the FDIC has stated that banks generally are expected to
operate  above  the  minimum  risk-based  capital  ratio.  Banks   contemplating
significant  expansion  plans,  as  well  as  those  institutions  with  high or
inordinate levels of risk,  should hold capital  commensurate with the level and
nature of the risks to which they are exposed.

     Further, the banking agencies have adopted  modifications to the risk-based
capital  regulations  to include  standards  for interest  rate risk  exposures.
Interest rate risk is the exposure of a bank's  current and future  earnings and
equity  capital  arising from movements in interest  rates.  While interest rate
risk is inherent  in a bank's  role as  financial  intermediary,  it  introduces
volatility to bank earnings and to the economic  value of the bank.  The banking
agencies  have  addressed  this problem by  implementing  changes to the capital
standards to include a bank's
                                       18
<PAGE> 21

exposure to declines in the economic value of its capital due to changes in 
interest  rates as a factor that the banking  agencies consider  in  evaluating
an  institution's  capital  adequacy.  Bank  examiners consider a bank's
historical financial  performance and its earnings exposure to interest rate
movements as well as qualitative factors such as the adequacy of a bank's 
internal interest rate risk management.

     Finally,  institutions with significant trading activities must measure and
hold capital for exposure to general  market risk arising from  fluctuations  in
interest rates,  equity prices,  foreign exchange rates and commodity prices and
exposure to  specific  risk  associated  with debt and equity  positions  in the
trading portfolio.  General market risk refers to changes in the market value of
on-balance-sheet  assets and off-balance-sheet items resulting from broad market
movements.  Specific  market  risk  refers to  changes  in the  market  value of
individual  positions  due to  factors  other than broad  market  movements  and
includes such risks as the credit risk of an instrument's issuer. The additional
capital  requirements  apply  effective  January  1, 1998 to  institutions  with
trading assets and  liabilities  equal to 10% or more of total assets or trading
activity  of $1 billion or more.  The  federal  banking  agencies  may apply the
market risk  regulations on a case by case basis to institutions not meeting the
eligibility criteria if necessary for safety and soundness reasons.

     In  connection  with the recent  regulatory  attention  to market  risk and
interest rate risk, the federal banking agencies will evaluate an institution in
its  periodic  examination  on the degree to which  changes in  interest  rates,
foreign exchange rates, commodity prices or equity prices can affect a financial
institution's  earnings or  capital.  In  addition,  the  agencies  focus in the
examination on an  institution's  ability to monitor and manage its market risk,
and will  provide  management  with a clearer  and more  focused  indication  of
supervisory concerns in this area.

     In certain  circumstances,  the FDIC or the Federal  Reserve may  determine
that the capital ratios for an FDIC-insured  bank or a bank holding company must
be maintained at levels which are higher than the minimum levels required by the
guidelines  or the  regulations.  A bank or bank holding  company which does not
achieve  and  maintain  the  required  capital  levels  may be  issued a capital
directive  by the FDIC or the  Federal  Reserve  to ensure  the  maintenance  of
required capital levels.

PAYMENT OF DIVIDENDS

     The shareholders of the Company are entitled to receive  dividends when and
as declared by its Board of Directors,  out of funds legally available,  subject
to the dividends preference, if any, on preferred shares that may be outstanding
and also subject to the  restrictions  of the California  Corporations  Code. At
December 31, 1998, the Company had no outstanding shares of preferred stock.

     The  principal  sources of cash revenue to the Company have been  dividends
received  from the Bank.  The Bank's  ability to make  dividend  payments to the
Company is subject to state and federal regulatory restrictions.

     Dividends  payable  by  the  Bank  to  the  Company  are  restricted  under
California law to the lesser of the Bank's retained earnings,  or the Bank's net
income for the latest three fiscal years,  less  dividends  previously  declared
during  that  period,  or,  with the  approval of the DFI, to the greater of the
retained  earnings  of the Bank,  the net income of the Bank for its last fiscal
year or the net income of the Bank for its current fiscal year.

     The FDIC has broad  authority  to prohibit a bank from  engaging in banking
practices which it considers to be unsafe or unsound. It is possible,  depending
upon the financial condition of the bank in question and other factors, that the
FDIC may assert that the payment of dividends  or other  payments by the bank is
considered  an unsafe or  unsound  banking  practice  and  therefore,  implement
corrective action to address such a practice.

     In addition to the regulations  concerning minimum uniform capital adequacy
requirements  discussed above, the FDIC has established guidelines regarding the
maintenance of an adequate allowance for loan and lease losses.  Therefore,  the
future  payment of cash  dividends  by the Bank to the  Company  will  generally
depend, in addition to regulatory  constraints,  upon the Bank's earnings during
any fiscal period,  the assessment of the respective  Boards of Directors of the
capital  requirements  of such  institutions  and other  factors,  including the
maintenance of an adequate allowance for loan and lease losses.


                                       19
<PAGE> 22

IMPACT OF FEDERAL AND CALIFORNIA TAX LAWS

     The following are the more  significant  federal and California  income tax
provisions affecting commercial banks.

     FEDERAL TAX LAWS

          CORPORATE TAX RATES

     The  federal  corporate  tax rate is 34% for up to $10  million  of taxable
income,  and 35% for taxable  income over $10 million.  The 1%  differential  is
phased  out  between  $15  million  and  approximately  $18.3  million  so  that
corporations with over  approximately  $18.3 million of taxable income are taxed
at a flat rate of 35%.

          CORPORATE ALTERNATIVE MINIMUM TAX

     Generally,  a  corporation  will be subject to an  alternative  minimum tax
("AMT")  to the extent the  tentative  minimum  tax  exceeds  the  corporation's
regular  tax  liability.  The  tentative  minimum tax is equal to (a) 20% of the
excess of a corporation's  "alternative minimum taxable income" ("AMTI") over an
exemption amount,  less (b) the alternative  minimum foreign tax credit. AMTI is
defined as taxable income computed with special adjustments and increased by the
amount of tax preference  items for a tax year. An important  adjustment is made
for "adjusted current earnings," which generally measures the difference between
corporate  earnings and profits (as adjusted)  and taxable  income.  Finally,  a
corporation's  net operating loss computed for AMT purposes (if any) only can be
utilized to offset up to 90% of AMTI,  with the result that a  corporation  with
current year taxable income will pay some tax.

          BAD DEBT DEDUCTION

     A bank with average  adjusted bases of all assets exceeding $500 million (a
"large bank") must compute its bad debt deduction using the specific  charge-off
method.  Under that  method,  a deduction  is taken at the time the debt becomes
partially or wholly worthless. A bank not meeting the definition of a large bank
may use  either  the  specific  charge-off  method or the  "experience"  reserve
method,  under  which the  addition  to bad debt  reserve is based on the bank's
actual loss experience for the current year and five preceding  years.  The U.S.
Treasury has promulgated regulations which permit a bank to elect to establish a
conclusive presumption that a debt is worthless,  based on applying a single set
of standards for both regulatory and tax accounting purposes.

          INTEREST INCURRED FOR TAX-EXEMPT OBLIGATIONS

     Generally,  taxpayers  are not allowed to deduct  interest on  indebtedness
incurred to purchase or carry  tax-exempt  obligations.  This rule  applies to a
bank,  to the extent of its interest  expense  that is  allocable to  tax-exempt
obligations  acquired after August 7, 1986. The Taxpayer Relief Act of 1997 (the
"1997 Act") made a technical  change  which  expands  the  interest  potentially
disallowed.  A special exception applies,  however,  to a "qualified  tax-exempt
obligation," which includes any tax-exempt  obligation that (a) is not a private
activity  bond  and  (b) is  issued  after  August  7,  1986 by an  issuer  that
reasonably  anticipates  it will issue not more than $10  million of  tax-exempt
obligations  (other than certain  private  activity  bonds)  during the calendar
year.  Interest  expense on  qualified  tax-exempt  obligations  is  deductible,
although it is subject to a 20%  disallowance  under special rules applicable to
financial institutions.

          NET OPERATING LOSSES

     The 1997 Act changed the tax treatment of net operating  losses (an "NOL").
Effective  for tax years  beginning  after August 5, 1997,  a bank  generally is
permitted  to carry a NOL back to the prior two tax  years  and  forward  to the
succeeding  twenty tax years.  For tax years  beginning  on or before  August 5,
1997, the NOL may be carried back three years and forward fifteen years.

                                       20

<PAGE> 23

          AMORTIZATION OF INTANGIBLE ASSETS INCLUDING BANK DEPOSIT BASE

     Certain intangible property acquired by a taxpayer must be amortized over a
15-year  period.  For this  purpose,  acquired  assets  required to be amortized
include  goodwill  and the  deposit  base or any  similar  asset  acquired  by a
financial  institution (such as checking and savings  accounts,  escrow accounts
and similar items).

          MARK-TO-MARKET RULES

     The Revenue Reconciliation Act of 1993 introduced certain  "mark-to-market"
tax accounting  rules for "dealers in  securities."  Under these rules,  certain
"securities"  held at the close of a taxable  year must be marked to fair market
value,  and the  unrealized  gain  or  loss  inherent  in the  security  must be
recognized in that year for federal income tax purposes. Under the definition of
a "dealer," a bank or financial  institution  that regularly  purchases or sells
loans may be subject to the new rules.

     Certain securities are excepted from the mark-to-market  rules provided the
taxpayer  timely  complies with specified  identification  rules.  The principal
exceptions  affecting banks are for (1) any security held for investment and (2)
any note, bond, or other evidence of indebtedness  acquired or originated in the
ordinary course of business and which is not held for sale. If a taxpayer timely
and  properly  identifies  loans  and  securities  as  being  excepted  from the
mark-to-market  rules,  these loans and securities  will not be subject to these
rules.  Generally,  a financial  institution may make the  identification  of an
excepted debt obligation in accordance with normal accounting practices,  but no
later than 30 days after acquisition.

     CALIFORNIA TAX LAWS

     A commercial  bank is subject to the California  franchise tax at a special
bank tax rate based on the general  corporate (non  financial) rate plus 2%. For
calendar  income  year 1999,  the bank tax rate is 10.84%  (which  reflects  the
general  corporate tax rate of 8.84%).  The  applicable  tax rate is higher than
that applied to general  corporations because it includes an amount "in lieu" of
many other state and local taxes and license fees  payable by such  corporations
but generally not payable by banks and financial corporations.

     California has adopted  substantially  the federal AMT,  subject to certain
modifications. Generally, a bank is subject to California AMT in an amount equal
to the sum of (a)  6.65% of AMTI  (computed  for  California  purposes)  over an
exemption  amount  and (b) the  excess  of the bank tax  rate  over the  general
corporation tax rate applied against net income for the taxable year, unless the
bank's regular tax liability is greater.

     California  permits a bank to compute  its  deduction  for bad debt  losses
under  either the  specific  charge-off  method or  according to the amount of a
reasonable addition to a bad debt reserve.

     California  has  incorporated  the  federal  NOL  provisions,   subject  to
significant  modifications for most corporations.  First, NOLs arising in income
years beginning before 1987 are disregarded.  Second, no carryback is permitted,
and for most corporations NOLs may be carried forward only five years. Third, in
most  cases,  only 50% of the NOL for any income  year may be  carried  forward.
Fourth,  the special  federal NOL rules  regarding bad debt losses of commercial
banks do not apply for California purposes.

     Finally, in 1994, California enacted legislation  conforming to the federal
tax  treatment  of  amortization  of  intangibles  and  goodwill,  with  certain
modifications.

     The various tax laws discussed herein contain other changes that could have
a  significant  impact on the banking  industry.  The effect of these changes is
uncertain and varied,  and it is unclear to what extent any of these changes may
influence the Bank's operations or the banking industry generally.

     In addition,  the  President's  Fiscal Year 2000 Budget  proposal  contains
several  provisions  which  could  have a  significant  impact  on  the  banking
industry.  It is uncertain whether these provisions will be enacted into law and
what impact these provisions will have on the Bank.

                                       21

<PAGE> 24

IMPACT OF MONETARY POLICIES

     The  earnings  and growth of the Bank and the  Company  are  subject to the
influence  of domestic and foreign  economic  conditions,  including  inflation,
recession  and  unemployment.  The  earnings  of the Bank  and,  therefore,  the
Company,  are affected not only by general  economic  conditions but also by the
monetary  and  fiscal  policies  of the  United  States  and  federal  agencies,
particularly  the Federal  Reserve.  The Federal  Reserve can and does implement
national  monetary  policy,  such  as  seeking  to  curb  inflation  and  combat
recession,  by its open market operations in United States Government securities
and by its control of the discount rates  applicable to borrowings by banks from
the Federal  Reserve  System.  The actions of the Federal Reserve in these areas
influence  the growth of bank loans,  investments  and  deposits  and affect the
interest rates charged on loans and paid on deposits.  As demonstrated  over the
past several years by the Federal Reserve's  actions  regarding  interest rates,
its  policies  have  had a  significant  effect  on  the  operating  results  of
commercial banks and are expected to continue to do so in the future. The nature
and timing of any future changes in monetary policies are not predictable.

RECENT AND PROPOSED LEGISLATION

     Federal and state laws applicable to financial  institutions have undergone
significant  changes  in  recent  years.  The most  significant  recent  federal
legislative  enactments  are the  Riegle-Neal  Interstate  Banking and Branching
Efficiency  Act of  1994  ("Riegle-Neal")  and  the  Federal  Deposit  Insurance
Corporation Improvement Act of 1991 ("FDICIA").

     RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994

     In September 1994,  President Clinton signed Riegle-Neal,  which amends the
BHC Act and the Federal Deposit Insurance Act ("FDIA") to provide for interstate
banking,  branching and mergers. Subject to the provisions of certain state laws
and  other  requirements,  Riegle-Neal  allows a bank  holding  company  that is
adequately  capitalized  and  adequately  managed to acquire a bank located in a
state other than the holding  company's home state  regardless of whether or not
the acquisition is expressly  authorized by state law.  Similarly,  beginning on
June 1, 1997, the federal banking agencies were permitted to approve  interstate
merger transactions, subject to applicable restrictions and state laws. Further,
a state may elect to allow out of state  banks to open de novo  branches in that
state.  However,  recently  adopted  regulations of the federal banking agencies
prohibit  interstate  branching  primarily for the purpose of deposit production
and provide  guidelines to ensure that banks operating  interstate  branches are
reasonably  helping to meet the credit  needs of the  communities  served by the
branches.

     Riegle-Neal  includes  several other provisions which may have an impact on
the Company's  and the Bank's  business.  The  provisions  include,  among other
things,   a  mandate  for  review  of   regulations   to  equalize   competitive
opportunities  between  U.S.  and  foreign  banks,  evaluation  on a  bank-wide,
state-wide  and,  if  applicable,  metropolitan  area  basis,  of the  Community
Reinvestment Act compliance of banks with interstate branches, and, in the event
the FDIC is appointed as conservator or receiver of a financial institution, the
revival  of  otherwise  expired  causes  of action  for  fraud  and  intentional
misconduct resulting in unjust enrichment or substantial loss to an institution.

     California  has  adopted  the  Caldera,  Weggeland,  and Killea  California
Interstate Banking and Branching Act of 1995 ("IBBA"), which became effective on
October 2, 1995. The IBBA addresses the  supervision  of state  chartered  banks
which  operate  across  state  lines,   and  covers  such  areas  as  branching,
applications  for new facilities and mergers,  consolidations  and  conversions,
among  other  things.  The IBBA  allows a  California  state bank to have agency
relationships with affiliated and unaffiliated  insured depository  institutions
and allows a bank  subsidiary  of a bank  holding  company to act as an agent to
receive deposits, renew time deposits,  service loans and receive payments for a
depository institution affiliate. In addition,  pursuant to the IBBA, California
"opted in early" to the Riegle-Neal  provisions regarding interstate  branching,
allowing a state bank  chartered in a state other than  California to acquire by
merger or purchase,  a California  bank or  industrial  loan company which is at
least five (5) years old and thereby  establish  one or more  California  branch
offices.  However,  the IBBA  prohibits a state bank  chartered in a state other
than  California  from entering  California  by  purchasing a California  branch
office of a

                                       22
<PAGE> 25

California bank or industrial  loan company  without  purchasing the entire
entity or establishing a de novo California branch office.

     The  changes  effected  by  Riegle-Neal  and the IBBA  have  increased  the
competitive  environment  in which the  Company  and the Bank  operate as out of
state  financial  institutions  directly or  indirectly  enter the Bank's market
area. It is expected that Riegle-Neal  will accelerate the  consolidation of the
banking  industry as a number of the largest bank holding  companies expand into
different parts of the country that were previously restricted. However, at this
time, it is not possible to predict what specific  impact,  if any,  Riegle-Neal
and the IBBA will have on the Company and the Bank, the competitive  environment
in which the Bank  operates,  or the  impact on the  Company  or the Bank of any
regulations adopted or proposed under Riegle-Neal and the IBBA.

     FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA")

         GENERAL

     FDICIA  primarily  addresses  the  safety  and  soundness  of  the  deposit
insurance   funds,   supervision  of  and   accounting  by  insured   depository
institutions  and  prompt  corrective  action  by the  federal  bank  regulatory
agencies  with respect to troubled  institutions.  FDICIA gives the FDIC, in its
capacity  as  federal  insurer  of  deposits,   broad  authority  to  promulgate
regulations to assure the viability of the deposit  insurance  funds,  including
regulations  concerning  safety and  soundness  standards.  FDICIA  also  places
restrictions  on  the  activities  of   state-chartered   institutions   and  on
institutions  failing to meet minimum  capital  standards and provides  enhanced
enforcement authority for the federal banking agencies. FDICIA also strengthened
Federal Reserve Act regulations regarding insider transactions.

         PROMPT CORRECTIVE ACTION

     FDICIA  amended  the FDIA to  establish a format for closer  monitoring  of
insured  depository  institutions  and to  enable  prompt  corrective  action by
regulators  when an  institution  begins to experience  difficulty.  The general
thrust of these provisions is to impose greater  scrutiny and more  restrictions
on institutions as they descend the capitalization ladder.

     FDICIA   establishes  five  capital   categories  for  insured   depository
institutions:   (a)  Well  Capitalized(3); (b)  Adequately   Capitalized(4); (c)
Undercapitalized(5); (d)  Significantly  Undercapitalized(6); and (e) Critically
Undercapitalized(7).  All insured  institutions (e.g., the Bank) are barred from
making capital  distributions or paying management fees to a controlling  person
(e.g.,  the Company) if to do so would cause the institution to fall into any of
the three undercapitalized categories.


-----------------------------
(3) Well Capitalized  means a financial  institution with a total risk-based
ratio of 10% or more,  a Tier 1  risk-based  ratio of 6% or more and a  leverage
ratio of 5% or more,  so long as the  institution  is not subject to any written
agreement or order issued by the FDIC.

(4) Adequately  Capitalized  means a total risk-based ratio of 8% or more, a
Tier 1 risk-based  ratio of 4% or more and a leverage ratio of 4% or more (3% or
more if the  institution has received the highest  composite  rating in its most
recent  report  of  examination)  and does not  meet  the  definition  of a Well
Capitalized institution.

(5) Undercapitalized means a total risk-based capital ratio of less than 8%, a
Tier 1 risk-based  capital  ratio of less than 4% or a leverage  ratio of less
than 4%.

(6)  Significantly  Undercapitalized  means a financial  institution  with a
total  risk-based  ratio of less than 6%, a Tier 1 risk-based ratio of less than
3% or a leverage ratio of less than 3%.

(7) Critically  Undercapitalized  means a financial institution with a ratio of
tangible equity to total assets that is equal to or less than 2%.


                                       23

<PAGE> 26

     An institution which is undercapitalized, significantly undercapitalized or
critically  undercapitalized  becomes subject to mandatory  supervisory actions,
including:  (1)  restrictions  on  payment  of  capital  distributions,  such as
dividends;  (2)  restrictions on payment of management fees to any person having
control of the institution; (3) close monitoring by the FDIC of the condition of
the institution,  compliance with capital restoration plans,  restrictions,  and
requirements  imposed under Section 38 of the FDIA,  and periodic  review of the
institution's  efforts to restore its capital and comply with restrictions;  (4)
submission to the FDIC of a capital  restoration  plan; (5) requirement that any
company which controls an  undercapitalized  institution  must guarantee,  in an
amount equal to the lesser of 5% of the institution's total assets or the amount
needed  to  bring  the  institution  into  full  capital  compliance,  that  the
institution will comply with the capital  restoration plan until the institution
has been adequately capitalized,  on the average, for four consecutive quarters;
(6) restrictions on the institution's  asset growth;  and (7) limitations on the
institution's  ability to make any  acquisition,  open any new branch offices or
engage in any new line of business.

     Significantly  undercapitalized and undercapitalized institutions that fail
to submit and implement  adequate capital  restoration  plans are subject to the
mandatory provisions set forth above and, in addition, to increasingly stringent
operating restrictions, including an immediate requirement to raise capital.

     Finally,  a  critically  undercapitalized  institution  must be  placed  in
conservatorship   or  receivership   within  90  days  of  becoming   critically
undercapitalized,  unless the FDIC  determines  that other  action  would better
achieve the purposes of the FDIA. Critically undercapitalized institutions which
are not placed in  conservatorship  or receivership may be subject to additional
stringent operating restrictions.

               SAFETY AND SOUNDNESS; OTHER PROVISIONS OF FDICIA

     FDICIA  required  the  federal  banking  agencies to adopt  regulations  or
guidelines  with respect to safety and  soundness  standards.  The agencies have
adopted  uniform  guidelines  which  are  used,  primarily  in  connection  with
examinations,   to  identify   and  address   problems  at  insured   depository
institutions  before  capital  becomes  impaired.  The federal  bank  regulatory
agencies have adopted asset quality and earnings standards as part of the safety
and  soundness  guidelines.  The asset  quality  standards  require a depository
institution to establish and maintain a system  appropriate to the institution's
size and  operations to identify and prevent  deterioration  in problem  assets.
With respect to earnings,  the institution should adopt and maintain a system to
evaluate  and  monitor  earnings  and ensure that  earnings  are  sufficient  to
maintain adequate capital and reserves.

     The federal  banking  agencies  have  published a "Policy  Statement on the
Internal Audit  Function and its  Outsourcing,"  which provides  guidance on the
elements of an effective internal audit function,  including director and senior
management responsibilities,  the structure of the internal audit department and
procedures for resolving internal control weaknesses.  The Policy Statement also
provides  guidance  on how  outsourcing  arrangements  may affect an  examiner's
internal control assessment,  as well as the independence of an external auditor
who is also providing internal audit services to an institution.

     In response to the increasing  number of financial  institutions  using the
Internet,  the  FDIC  has  issued a paper  identifying  many of the  risks to an
institution's information system security associated with Internet use, together
with  several  security  and risk  control  measures.  The paper is  designed to
complement the FDIC's safety and soundness examination procedures for electronic
banking activities. The Bank does not offer any internet banking services.

     FDICIA restricts the acceptance of brokered deposits by insured  depository
institutions that are not well capitalized.  It also places  restrictions on the
interest rate payable on brokered deposits and the solicitation of such deposits
by such  institutions.  An  undercapitalized  institution will not be allowed to
solicit brokered  deposits by offering rates of interest that are  significantly
higher  than the  prevailing  rates  of  interest  on  insured  deposits  in the
particular institution's normal market areas or in the market area in which such
deposits  would  otherwise be  accepted.  In addition to these  restrictions  on
acceptance of brokered  deposits,  FDICIA provides that no

                                       24

<PAGE> 27

pass-through  deposit insurance  will be provided to employee  benefit  plan 
deposits  accepted by an institution which is ineligible to accept brokered 
deposits under applicable law and regulations.

     Pursuant to FDICIA, the FDIC has established a risk-based assessment system
for  depository  institutions.  This  risk-based  system is used to  calculate a
depository  institution's  semiannual deposit insurance  assessment based on the
probability  that the deposit  insurance  fund will incur a loss with respect to
the  institution.  To  arrive at a  risk-based  assessment  for each  depository
institution,  the FDIC has constructed a matrix of nine risk categories based on
capital  ratios  and  relevant  supervisory  information.  Each  institution  is
assigned to one of three capital  categories:  "well  capitalized,"  "adequately
capitalized" or "undercapitalized."  Each institution also is assigned to one of
three supervisory  groups based on levels of risk. Risk assessment  premiums are
based on an institution's  assignment within the matrix and for 1998 ranged from
$0.0 to $0.27 per $100 of deposits.  The FDIC has stated that the foregoing risk
assessment premiums will be in effect indefinately.

     FDICIA also places restrictions on insured state bank activities and equity
investments,  interbank  liabilities  and  extensions  of credit to insiders and
transactions with affiliates.

               OTHER RECENT LEGISLATION

     On  September  23,  1994,  President  Clinton  signed  into law the  Riegle
Community  Development and Regulatory  Improvement Act of 1994 (the  "Regulatory
Improvement Act"). The Regulatory Improvement Act provides regulatory relief for
both  large and small  banks by,  among  other  things,  reducing  the burden of
regulatory  examinations,  streamlining  bank  holding  company  procedures  and
establishing a formal regulatory appeals process. The Regulatory Improvement Act
also  addresses  a variety  of other  topics,  including,  but not  limited  to,
mortgage loan  settlement  procedures,  call  reports,  insider  lending,  money
laundering,   currency  transaction  reports,  management  interlocks,   foreign
accounts,   mortgage  servicing  and  credit  card  receivables.   Although  the
Regulatory Improvement Act has generally reduced the regulatory burden currently
imposed on banks, it is not possible to ascertain the precise effect its various
provisions will have on the Company or the Bank.

YEAR 2000 COMPLIANCE

     During  1997  and  several  times  during  1998,   the  Federal   Financial
Institutions  Examination  Council  ("FFIEC") issued  statements and guidance to
financial  institutions   addressing  critical  issues  for  Year  2000  ("Y2K")
readiness.  These  statements  address key phases of the Y2K project  management
process and the specific  responsibilities of senior management and the board of
directors  to  address   business  risks   associated   with  the  Y2K  problem.
Additionally,  in October 1998,  the federal  banking  agencies  jointly  issued
"Interagency   Guidelines  Establishing  Year  2000  Standards  for  Safety  and
Soundness"  (the  "Guidelines").  The  Guidelines,  which  are  intended  to  be
consistent  with FFIEC  pronouncements,  establish  standards for management and
boards of directors in developing and managing Y2K projects plans, assessing and
testing  mission-critical  systems for Y2K  readiness(8), validating remediation
efforts and planning for contingencies.

     Year 2000 issues exist because most  computer  programs use only two digits
to identify a year in the date field (e.g.,  "98" for "1998").  Bank information
processing  systems must be made Y2K  compliant  well in advance of December 31,
1999. The Guidelines and FFIEC  pronouncements  describe certain essential steps
that insured  depository  institutions  must take at the awareness,  assessment,
renovation,  validation,  testing and implementation  phases of their efforts to
achieve Y2K readiness.

     In  addition,  banks face risks from  vendors  whose  programs  are not Y2K
compliant  and must begin testing of programming changes no later than December
31, 1998. The computer programs of banks' corporate  customers also may pose Y2K
risks. Failure to address Y2K issues could affect a borrower's  creditworthiness
and may result

--------------------------
(8) An application or system is "mission-critical" if it is vital to the
successful continuance of a core business activity.  An application also may be
mission-critical if it interfaces with a designated mission-critical system.  
Products of software vendors also may be mission-critical.



                                       25

<PAGE>28



from the failure of the  customer to properly  remediate  its own
systems or from Y2K problems that are not addressed by the customer's  suppliers
and clients.

     Accordingly, the FFIEC and interagency Guidelines require senior management
to provide the board of directors  with  quarterly or more  frequent  reports on
efforts  to reach Y2K  goals  both  internally  and by the  institution's  major
vendors.  Continued  monitoring  of the Y2K efforts of vendors and  customers is
required.

     The Guidelines  specify that an insured  depository  institution's  initial
review of  mission-critical  systems for Y2K readiness  should provide the basis
for  establishing  priorities and deadlines and for  identifying  and allocating
available resources. The development and adoption of a written project plan that
addressees each phase of the planning process also is required.

     The banking agencies consider testing to be a critical process in achieving
Y2K readiness.  Failure of an insured depository institution to perform adequate
testing of mission-critical  systems may mask serious remediation problems, thus
posing a risk to the safe and sound  operation  of the  institution.  Failure to
properly  identify or correct  problems  could  further  threaten the safety and
soundness of the institution.

     The  Guidelines  and the FFIEC's  statement on Y2K readiness  testing of an
institution's  mission-critical systems set forth the following milestones which
should be met by each institution:

     June 30, 1998:           Institutions should compLete the development of 
                          their written testing strategies and plans.
     September 1, 1998        Institutions processing in-house and service
                          providers should have commenced testing of internal 
                          mission-critical systems, including those programmed
                          in-house  and  those purchased from software vendors.
     December 31, 1998        Testing of internal mission-critical systems 
                          should be substantially complete.  Service providers 
                          should be ready to test with customers.
     March 31, 1999           Testing by institutions relying on service 
                          providers for mission-critical systems should be 
                          substantially complete.  External testing with 
                          material other third parties (customers, other
                          financial institutions, business partners, payment 
                          system providers, etc.) should have begun.
     June 30, 1999            Testing of mission-critical systems should be 
                          complete and implementation should be substantially 
                          complete.

     Additional  FFIEC  interagency  statements cover  contingency  planning and
steps that can be taken to establish a customer awareness program. At a minimum,
financial  institutions  must  develop  remediation  contingency  plans that (1)
outline the  alternatives  available if remediation  efforts are not successful,
(2) consider  the  availability  of  alternative  service  providers or software
vendors  and  (3)  establish   trigger  dates  for  activating  the  remediation
contingency plan, taking into account the time necessary to convert to alternate
service providers or software vendors.

     In  appropriate  circumstances,  a federal  banking  agency may  require an
insured  depository  institution  that fails to comply  with the  Guidelines  to
prepare  and  submit  an  acceptable  compliance  plan.  An  insured  depository
institution  that fails to submit an acceptable  compliance plan within the time
allowed or fails in any material  respect to  implement  an accepted  compliance
plan will be subject to an agency order directing the institution to correct the
deficiency.  The  Guidelines do not limit the  authority of a banking  agency to
address unsafe or unsound  practices or conditions,  violations of law, or other
practices,  or to adopt  appropriate  remedies  to achieve  compliance  with the
Guidelines.  Further,  remedies  provided  by  Section  39 of the FDIA allow the
banking  agencies to move promptly in  situations  where  immediate  supervisory
action is essential for safety and soundness reasons. Actions under FDIA Section
39 and the Guidelines may be taken  independently of, in conjunction with, or in
addition to, other appropriate enforcement actions.

     The FDIC and state banking  authorities will continue to review the efforts
of all FDIC-supervised banks to achieve Y2K readiness.  An institution's failure
to  appropriately  address  Y2K  readiness  problems  may result in

                                       26

<PAGE>  29


supervisory actions,   including  formal  and  informal  enforcement  actions, 
denials of applications  filed pursuant to the FDIA, civil money penalties, and
reductions in the institution's management component or composite ratings.

     For a  description  of the Company's  Y2K  readiness  efforts,  see Item 6,
herein.

CONSUMER PROTECTION LAWS AND REGULATIONS

     The bank regulatory  agencies are focusing greater  attention on compliance
with consumer  protection laws and their implementing  regulations.  Examination
and  enforcement  have become more intense in nature,  and insured  institutions
have  been  advised  to  monitor   carefully   compliance  with  such  laws  and
regulations.  The Bank is subject to many federal consumer  protection  statutes
and regulations, some of which are discussed below.

     The  Community  Reinvestment  Act ("CRA") is intended to encourage  insured
depository  institutions,  while operating safely and soundly,  to help meet the
credit  needs of their  communities.  The CRA  specifically  directs the federal
regulatory agencies, in examining insured depository  institutions,  to assess a
bank's  record  of  helping  meet  the  credit  needs of its  entire  community,
including low- and moderate-income neighborhoods, consistent with safe and sound
banking  practices.  The CRA further  requires  the agencies to take a financial
institution's  record of meeting its  community  credit  needs into account when
evaluating applications for, among other things,  domestic branches,  mergers or
acquisitions, or holding company formations. The agencies use the CRA assessment
factors in order to provide a rating to the financial  institution.  The ratings
range from a high of "outstanding" to a low of "substantial  noncompliance." The
Bank was  examined  for CRA  compliance  by its  primary  regulator  in 1997 and
received a "satisfactory" CRA Assessment Rating.

     The   Equal   Credit   Opportunity   Act   ("ECOA")   generally   prohibits
discrimination  in any credit  transaction,  whether  for  consumer  or business
purposes, on the basis of race, color,  religion,  national origin, sex, marital
status,  age  (except in limited  circumstances),  receipt of income from public
assistance  programs,  or good faith  exercise of any rights  under the Consumer
Credit  Protection  Act. The Truth in Lending Act ("TILA") is designed to ensure
that credit  terms are  disclosed  in a  meaningful  way so that  consumers  may
compare  credit terms more readily and  knowledgeably.  As a result of the TILA,
all  creditors  must  use the same  credit  terminology  to  express  rates  and
payments,  including the annual percentage rate, the finance charge,  the amount
financed, the total of payments and the payment schedule, among other things.

     The Fair Housing Act ("FH Act") regulates many practices,  including making
it  unlawful  for any  lender to  discriminate  in its  housing-related  lending
activities against any person because of race, color, religion, national origin,
sex,  handicap or familial status. A number of lending practices have been found
by the courts to be, or may be considered,  illegal under the FH Act,  including
some that are not specifically mentioned in the FH Act itself. The Home Mortgage
Disclosure  Act ("HMDA")  grew out of public  concern  over credit  shortages in
certain urban  neighborhoods and provides public information that will help show
whether  financial  institutions  are serving the  housing  credit  needs of the
neighborhoods and communities in which they are located.  The HMDA also includes
a "fair  lending"  aspect that requires the  collection  and  disclosure of data
about applicant and borrower  characteristics  as a way of identifying  possible
discriminatory lending patterns and enforcing anti-discrimination statutes.
               
     Finally,  the Real Estate  Settlement  Procedures  Act  ("RESPA")  requires
lenders to provide  borrowers with disclosures  regarding the nature and cost of
real estate settlements.  Also, RESPA prohibits certain abusive practices,  such
as kickbacks, and places limitations on the amount of escrow accounts.
               
     Penalties under the above laws may include fines,  reimbursements and other
penalties.  Due to heightened  regulatory concern related to compliance with the
CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may incur additional
compliance  costs or be required to expend  additional  funds for investments in
its local community.

                                       27

<PAGE> 30

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards No. 130,  Reporting  Comprehensive
Income  ("SFAS No.  130"),  which  establishes  standards  for the reporting and
display of comprehensive income and its components in financial statements.  The
Company  has  retroactively  adopted  SFAS  No.  130,  "Reporting  Comprehensive
Income",  which  requires  that an  enterprise  report  and  display,  by  major
components and as a single total, the change in its net assets during the period
from nonowner  sources.  The adoption of this Statement  resulted in a change in
the financial statement presentation but did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.

     On January 1, 1998, the Company  adopted SFAS No. 131,  "Disclosures  About
Segments of an Enterprise and Related Information", which establishes annual and
interim reporting  standards for an enterprise's  operating segments and related
disclosures about its products, services,  geographic areas and major customers.
In applying the "management approach"  established by the Statement,  management
determined that since all of the commercial banking products and services of the
Bank are available in each branch of the Bank,  all branches are located  within
the same economic  environment and management does not allocate  resources based
on the performance of different lending or transaction activities, the financial
disclosures  of this  statement  related to operating  performance of reportable
segments does not apply.

     In June 1998, the Financial  Accounting Standards Board issued SFAS No. 133
Accounting  for Derivative  Instruments  and Hedging  Activities.  The statement
establishes  accounting and reporting  standards for derivative  instruments and
hedging activities. The statement is effective for all fiscal quarters of fiscal
years  beginning  after  June  15,  1999.  The  Company  is in  the  process  of
determining the impact of adopting SFAS 133, however, the Company currently does
not  have  any  derivative  instruments  and is  not  involved  in  any  hedging
activities.

OTHER

     Other  legislation  which has been or may be proposed to the United  States
Congress and the California Legislature and regulations which may be proposed by
the Federal Reserve, the FDIC and the DFI may affect the business of the Company
or the Bank. It cannot be predicted whether any pending or proposed  legislation
or regulations will be adopted or the effect such legislation or regulations may
have upon the business of the Company or the Bank.

ITEM 2 -       DESCRIPTION OF PROPERTY

     The Company and the Bank have their principal  offices in a modern facility
located at 1495 East 14th Street, San Leandro, California 94577, which serves as
the Bank's  headquarters  office.  The  headquarters  office  consists of 11,000
square feet of interior  space and includes eight (8) teller  stations,  a night
depository and an automated teller machine.
               
     The Bank entered into a lease for the premises which  commenced on April 1,
1981,  extends for a term of twenty-five  years and provided for rental payments
of $4,000  per month  for the  first ten years of the lease  term.  On the tenth
anniversary  (April 1, 1991). the monthly rental payment  obligation of the Bank
was raised to $10,310.  As of the fifteenth  anniversary (April 1, 1996) and for
the five  year  period  ending  March  31,  2001,  the  monthly  rental  payment
obligation  of  the  Bank  will  remain  at  $10,310.   Each  fifth  anniversary
thereafter,  the monthly  rental  amount is to be adjusted as  negotiated by the
Bank and the lessor or, if the parties  are unable to agree on such  adjustment,
by  arbitration.  The lease also grants to the Bank a right of first  refusal in
the event of a proposed sale of the leased premises.

     The Bank entered into an 18-year lease which  commenced on October 1, 1987,
pursuant to which the Bank  acquired an  additional  3,000 square feet of office
space at 1475 East 14th Street adjacent to its original headquarters office. The
lease provided for monthly rental  payments of $1,800 for the first three years,
and $2,200,  $2,680,  and $3,270,  respectively,  for each subsequent  five-year
period. The area accommodates the accounting  department,  computer  operations,
storage facilities and certain operations functions.

                                       28

<PAGE> 31


     The Bank has invested approximately $2,857,000 through December 31, 1998 in
leasehold improvements and furniture, fixtures and equipment in its headquarters
office, which includes 1495 and 1475 East 14th Street, San Leandro.

     The  Bank's  SBA and  construction  divisions  are  located  in the  Bank's
extension office at 1500 Washington Avenue,  San Leandro,  California 94577. The
premises  consists of a one-story wood frame structure which has a floor area of
2,072 square feet. There is a parking lot adjacent to the building. The property
was purchased by the Company at a cost of $196,512 in 1985, and the premises are
leased from the Company by the Bank for the SBA and construction  divisions at a
monthly rental of $2,000. The Bank invested  approximately $255,000 in leasehold
improvements  and  furniture,  fixtures and  equipment in its  extension  office
through December 31, 1998.

     The Bank's Hayward branch office is located in a modern facility at 1030 La
Playa Drive,  Hayward,  California.  The Hayward branch office consists of 4,285
square feet of interior  space and includes  four (4) teller  stations,  a night
depository and an automated teller machine.

     The Bank purchased the Hayward branch premises in February, 1993 at a total
cost of $700,000.  The Bank invested  approximately $707,000 in improvements and
furniture,  fixtures and equipment in its Hayward branch office through December
31, 1998.

     The Bank's San Ramon branch office is located in a modern  facility at 2821
Crow Canyon Road, San Ramon, California. The San Ramon branch office consists of
approximately  5,526 square feet of space and includes five teller  stations,  a
night   depository  and  an  automated   teller   machine.   The  Bank  invested
approximately  $352,000 in leasehold  improvements  and furniture,  fixtures and
equipment in its San Ramon office through December 31, 1998.

     The Bank  entered  into a lease for the San Ramon  branch  office  premises
which  commenced  on  November 1, 1996,  extends for a term of sixty  months and
provides for rental  payments of $7,500 per month for the first twelve months of
the lease term, increasing to $8,000 per month for the next twelve months of the
lease term. On each subsequent  anniversary of the lease  commencement date, the
rental payments will be adjusted to reflect changes in the Consumer Price Index,
subject to a cap on each such adjustment of five percent.  The lease also grants
to the Bank  options  to extend the lease  term for three  additional  five year
periods with the rental payments for such extension  periods to be determined by
mutual agreement of the Bank and the lessor or by appraisal.

ITEM 3 -       LEGAL PROCEEDINGS

     Neither  the  Company  nor  the  Bank is a party  to,  nor is any of  their
property  the subject of, any  material  pending  legal  proceedings  other than
ordinary routine  litigation  incidental to their respective  businesses nor are
any such proceedings known to be contemplated by governmental authorities.

ITEM 4 -       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No  matter  was  submitted  to a vote  of  security  holders,  through  the
solicitation  of proxies or otherwise,  during the fourth  quarter of the fiscal
year covered by this report.

                                     PART II

ITEM 5 -       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     For  information   concerning  the  Company's   Common  Stock  and  related
shareholder matters,  see "Stock Prices and Dividend  Information" on the inside
back cover of the Annual Report,  which is incorporated  herein by reference and
"SUPERVISION AND REGULATION" under the heading "ITEM 1 - BUSINESS" above.

                                       29

<PAGE> 32

     As of March 10,  1999,  there were 409  holders of record of the  Company's
Common Stock.


ITEM 6 -       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     For Management's Discussion and Analysis, see "Management's  Discussion and
Analysis of Financial  Condition and Results of  Operations" at Pages 17 through
23 of the Annual Report, which are incorporated herein by reference.

     Certain  matters  discussed  or  incorporated  by  reference in this Annual
Report on Form 10-KSB are  forward-looking  statements that are subject to risks
and  uncertainties  that could cause actual  results to differ  materially  from
those projected in the forward-looking  statements. Such risks and uncertainties
include, but are not limited to, those described in Management's  Discussion and
Analysis or Plan of  Operation.  Therefore,  the  information  set forth therein
should be carefully  considered  when  evaluating the business  prospects of the
Company and the Bank.

ITEM 7 -       FINANCIAL STATEMENTS

     For  consolidated  financial  statements of the Company,  see  consolidated
balance  sheets  at  December  31,  1998  and  1997,  and  consolidated   income
statements, consolidated statements of cash flows and consolidated statements of
changes in shareholders'  equity for the years ended December 31, 1998, 1997 and
1996,  and  notes to  consolidated  financial  statements  for the  years  ended
December 31, 1998, 1997 and 1996 and the "Independent  Auditors' Report" thereon
at Pages 2 through 15 of the Annual  Report,  which are  incorporated  herein by
reference.

ITEM 8 -       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE

               None.


                                    PART III

ITEM 9 -       DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
               SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     For information concerning directors and executive officers of the Company,
see "ELECTION OF DIRECTORS OF THE COMPANY" in the definitive Proxy Statement for
the  Company's  1999  Annual  Meeting of  Shareholders  to be filed  pursuant to
Regulation  14A  (the  "Proxy  Statement"),  which  is  incorporated  herein  by
reference.

Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers  and  directors,  and  persons  who own  more  than  ten  percent  of a
registered  class  of the  Company's  equity  securities,  to  file  reports  of
ownership and changes in ownership with the Securities and Exchange  Commission.
Officers,  directors and greater than  ten-percent  shareholders are required by
SEC  regulation  to furnish the Company  with copies of all Section  16(a) forms
they file.  To the best  knowledge  of the  Company,  there are no greater  than
ten-percent  holders of the Company's Common Stock other than Richard M. Kahler,
President and Chief Executive Officer of the Company and the Company's  Employee
Stock Ownership Plan.

     Based  solely on its review of the copies of such forms  received by it, or
written  representations  from  certain  reporting  persons that no Forms 5 were
required for those persons the Company believes that, for fiscal year 1998, the
officers  and  directors  of the Company  complied  with all  applicable  filing
requirements,  except that 

                                       30

<PAGE> 33

executive  officer Randall D. Greenfield and director Dimitri  Koroslev each
failed to file on a timely basis one Report of Changes in Beneficial  Ownership
on Form 4 to report one  transaction in securities.  These transactions were
subsequently reported during 1998.

ITEM 10 -      EXECUTIVE COMPENSATION

     For  information   concerning   executive   compensation,   see  "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.

ITEM 11 -      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     For information  concerning security ownership of certain beneficial owners
and Management,  see "PRINCIPAL  SHAREHOLDERS" and "ELECTION OF DIRECTORS OF THE
COMPANY" in the Proxy Statement, which is incorporated herein by reference.

ITEM 12 -      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     For information  concerning certain relationships and related transactions,
see  "CERTAIN  RELATIONSHIPS  AND RELATED  TRANSACTIONS"  and  "INDEBTEDNESS  OF
MANAGEMENT" in the Proxy Statement, which is incorporated herein by reference.

                                       31


<PAGE> 34


ITEM 13 -                     EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)            FINANCIAL STATEMENTS                                                 Reference Page
               --------------------                                                 --------------
                                                                                1998 Annual Report

1.             Consolidated Financial Statements:  
               ---------------------------------                                    
<S>                                                                                  <C>
               Balance Sheets at December 31, 1998 and 1997                             2

               Income Statements for the years ended December 31, 1998,
                   1997 and 1996                                                        3

               Statements of Cash Flows for the years ended December 31,
                   1998, 1997 and 1996                                                  4

               Statements of Changes in Shareholders' Equity for the years ended
                   December 31, 1998, 1997 and 1996                                     5

               Notes to Consolidated Financial Statements for the years ended
                   December 31, 1998, 1997 and 1996                                  6-15

               Independent Auditors' Report                                            15

2.             Financial Statement Schedules:
               -----------------------------
</TABLE>

               In  accordance  with  Regulation  S-X,  the  financial  statement
schedules  have been omitted  because (a) they are not applicable to or required
of the Company or (b) the information  required is included in the  consolidated
financial statements or notes thereto.

EXHIBITS
--------
               See Index to Exhibits at pages 34 and 35 of this Form 10-KSB.

(b)            REPORTS ON FORM 8-K
               -------------------
               No  reports  on Form 8-K were  filed by the  Company  during  the
quarter ended December 31, 1998.

               For the purposes of complying  with the  amendments  to the rules
governing Form S-8  (effective  July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into registrant's  Registration  Statements on Form
S-8 No. 2-97378, 33-24302 and 33-75330.

               Insofar as  indemnification  for  liabilities  arising  under the
Securities  Act of 1933 (the "Act") may be permitted to directors,  officers and
controlling persons of the registrant pursuant to the foregoing  provisions,  or
otherwise, the registrant has been advised that in the opinion of the Securities
and  Exchange  Commission  such  indemnification  is  against  public  policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for  indemnification  against  such  liabilities  (other than the payment by the
registrant of expenses  incurred or paid by a director,  officer or  controlling
person of the  registrant  in the  successful  defense  of any  action,  suit or
proceeding)  is  asserted by such  director,  officer or  controlling  person in
connection with the securities being registered,  the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit  to a  court  of  appropriate  jurisdiction  the  question  whether  such
indemnification  by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

                                       32

<PAGE>35


                                   SIGNATURES

               In  accordance  with Section 13 or 15(d) of the Exchange Act, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

Date: March 17, 1999                       BAY COMMERCIAL SERVICES
                                           By: /s/Richard M. Kahler
                                           Richard M. Kahler,
                                           President and Chief Executive Officer

               In accordance  with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
                                                 

<S>                                                 <C> 
/s/Richard M. Kahler                                DATE:  March 17, 1999
---------------------
Richard M. Kahler,
President and Chief Executive Officer
(Principal Executive Officer) and Director

Randall D. Greenfield*                              DATE:  March 17, 1999
----------------------
Randall D. Greenfield,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and
Secretary

Joshua Fong, O.D.*                                  DATE:  March 17, 1999
------------------
Joshua Fong, O.D.,
Chairman of the Board of Directors and Director

William R. Henson*                                  DATE:  March 17, 1999
------------------
William R. Henson, Director

Dimitri V. Koroslev*                                DATE:  March 17, 1999
--------------------
Dimitri V. Koroslev, Director

William E. Peluso*                                  DATE:  March 17, 1999
------------------
William E. Peluso, Director

Oswald A. Rugaard*                                  DATE:  March 17, 1999
------------------
Oswald A. Rugaard, Director

Mark A. Wilton*                                     DATE:  March 17, 1999
-----------------
Mark A. Wilton, Director

*By /s/Richard M. Kahler                            DATE:  March 17, 1999
   ---------------------
(Richard M. Kahler, as Attorney-in-Fact)
</TABLE>

                                       33
<PAGE>36


                                INDEX TO EXHIBITS
<TABLE>     
<CAPTION>
EXHIBIT
NUMBER       EXHIBIT
------       -------
<S>          <C>          
2            Not applicable.

3.1          Articles of Incorporation of Company, as amended to date.

3.2          Bylaws of Company, as amended to date.(1)

4            Not applicable.

9            Not applicable.

10.1         Lease dated  September 28, 1980 between Bay Bank of
             Commerce   and  John  J.   Montero   and   Margaret
             Montero.(2)

10.2         Employee  Stock  Ownership  Plan  of  Bay  Bank  of
             Commerce,  as amended and restated as of January 1,
             1987.(3)

10.3         Bay Commercial Services 1982 Amended and Restated Stock Option Plan
             (4)

10.4         Form of Stock Option Agreements, Amended Stock Option Agreements
             and Supplemental Letter under Bay Commercial Services 1982
             Amended and Restated Stock Option Plan.(5)

10.5         Lease,  dated  October  1,  1987  for  Bay  Bank of
             Commerce  premises  at 1475 East 14th  Street,  San
             Leandro, California.(5)

10.6         Bay Commercial Services Directors' Stock Option Plan and Form of
             Directors Stock Option Agreement.(6)

10.7         Letter dated December 5, 1990 modifying rental obligation under 
             Lease dated September 28, 1980 between Bay Bank of Commerce and
             John J. Montero and Margaret Montero.(7)

10.8         Lease dated November 1, 1990 by and between Metro Properties and
             Bay Bank of Commerce for premises located at 286 Juana Avenue,
             San Leandro, California.(7)

10.9         Bay Commercial Services Adoption Agreement of Nonstandardized
             ss.401(k) Profit Sharing Plan and Bank of California Defined 
             Contribution Master Plan and Trust Agreement.(8)

10.10        Bay Commercial Services 1994 Stock Option Plan and Form of Stock 
             Option Agreements.(9)

10.11        Lease dated July 31, 1996 by and between Oak Creek Plaza Associates
             and Bay Bank of Commerce for premises located at 2821 Crow Canyon
             Road, San Ramon, California.(11)

10.12        Change in Control Agreement dated November 24, 1998 by and between
             the Company and Richard M. Kahler.
                                       34

<PAGE>37

EXHIBIT
NUMBER       EXHIBIT
------       -------

10.13        Change in Control Agreement dated November 30, 1998 by and between
             the Company and Randall D. Greenfield.

10.14        Change in Control Agreement dated November 30, 1998 by and between
             the Company and Robert A. Perantoni.

11           Not applicable.

13           Bay  Commercial  Services  1998  Annual  Report  to
             Shareholders  (parts not  incorporated by reference
             are furnished for  informational  purposes only and
             are not filed herewith).

16           Not applicable.

18           Not applicable.

21           Subsidiaries of the Company.(10)

22           Not applicable.

23           Independent Auditors' Consent.

24           Power of Attorney.

27           Financial Data Schedule.

28           Not applicable.
</TABLE>

--------------------
(1)            Filed as Exhibits 3.4, to the Company's Annual Report on 
               Form 10-K for the fiscal year ended December 31, 1993, which are
               incorporated herein by this reference.

(2)            Filed as Exhibit 10.4 to the Company's Registration Statement on 
               Form S-14 (Registration No. 2-79801), which is incorporated 
               herein by this reference.

(3)            Filed as Exhibit 10.2 to the Company's Annual Report on 
               Form 10-KSB for the fiscal year ended December 31, 1995, which is
               incorporated herein by this reference.

(4)            Filed as Exhibit 10.1 to the Company's Quarterly Report on
               Form 10-Q for the Quarter Ended September 30, 1987. which is 
               incorporated herein by this reference.

(5)            Filed as Exhibits 10.10 and 10.12, respectively, to the Company's
               Annual Report on Form 10-K for the fiscal year ended December 31,
               1987, which are incorporated herein by this reference.

(6)            Filed as Exhibit 10.10 to the Company's Annual Report on 
               Form 10-K for the fiscal year ended December 31, 1988, which is 
               incorporated herein by this reference.

(7)            Filed as Exhibits 10. 10 and 10.11, respectively, to the 
               Company's Annual Report on Form 10-K for the fiscal year ended
               December 31, 1990 which are incorporated herein by this
               reference.

(8)            Filed as Exhibit 10.13 to the Company's Annual Report on
               Form 10-K for the fiscal year ended December 31, 1991, which is 
               incorporated herein by this reference.

                                       35
<PAGE>38

(9)            Filed as Exhibit 10.14 to the Company's Annual Report on 
               Form 10-K for the fiscal year ended December 31, 1994, which is 
               incorporated herein by this reference.

(10)           Filed as Exhibit 3 to the Company's Current Report on 
               Form 8-K filed with the Commission on June 14, 1983, which is
               incorporated herein by this reference.

(11)           Filed as Exhibit 10.12 to the Company's Annual Report on 
               Form 10-KSB for the fiscal year ended December 31, 1996, which is
               incorporated herein by this reference.


                  EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
                  ---------------------------------------------
1.             Bay Commercial Services Employee Stock Ownership Plan, as amended
               and restated as of January 1, 1987 - Form 10-KSB for fiscal year 
               ended December 31, 1995, Exhibit 10.2.

2.             Bay Commercial Services 1982 Amended and Restated Stock Option 
               Plan - Form 10-Q for the Quarter Ended September 30, 1987, 
               Exhibit 10.1.

3.             Form of Stock Option  Agreements,  Amended Stock Option 
               Agreements and Supplemental Letter under Bay Commercial Services
               1982 Amended and Restated Stock Option Plan - Form 10-K for
               fiscal year ended December 31, 1987, Exhibit 10.10.

4.             Bay Commercial Services Directors' Stock Option Plan and Form of 
               Directors Stock Option Agreement Form 10-K for fiscal year ended 
               December 31, 1988,  Exhibit 10.10.

5.             Bay Commercial Services 1994 Stock Option Plan and Form of Stock 
               Option Agreements- Form 10-K for fiscal year ended December 31, 
               1994,  Exhibit 10.14.

                                       36