<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the Fiscal Year Ended December 31, 1996

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from ____________ to _____________

                         Commission File Number: 0-12231

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

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

         1495 East 14th Street, San Leandro, California                         94577
         ----------------------------------------------                       ----------
           (Address of principal executive offices)                           (Zip code)
</TABLE>

<TABLE>
<S>                                                             <C>
Issuer's telephone number (510) 357-2265
                          --------------

Securities registered under Section 12(b) of the Exchange Act:  NONE

Securities registered under Section 12(g) of the Exchange Act:  Common Stock, No Par Value
                                                                --------------------------
                                                                      (Title of Class)
</TABLE>

    Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

                               YES  X  NO
                                   ---    ---

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

    State issuer's revenues for its most recent fiscal year: $8,906,000
                                                            ------------

    State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 1, 1997: $9,012,069
                                                         ----------
    State the number of shares of Common Stock outstanding as of
March 5, 1997:  1,076,720
               -----------

<TABLE>
<CAPTION>
Documents Incorporated by Reference:                          Part of Form 10-KSB
------------------------------------                          -------------------
<S>                                                           <C>
1996 Annual Report to Shareholders for fiscal year            Part II, Items 5, 6, 7 and 8
ended December 31, 1996.

Proxy Statement for 1997 Annual Meeting of                    Part III, Items 9, 10, 11 and 12
Shareholders to be filed pursuant to Regulation 14A.
</TABLE>

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

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

ITEM 2 -   DESCRIPTION OF PROPERTY..............................................................  28

ITEM 3 -   LEGAL PROCEEDINGS....................................................................  29

ITEM 4 -   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................  29

ITEM 5 -   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................  29

ITEM 6 -   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............................  29

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

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

ITEM 9 -   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; SECTION
           16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE .....................................  30

ITEM 10 -  EXECUTIVE COMPENSATION...............................................................  30

ITEM 11 -  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................  30

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

ITEM 13 -  EXHIBITS AND REPORTS ON FORM 8-K.....................................................  31
</TABLE>


                                     - ii -
<PAGE>   3
                                     PART I

ITEM 1 -          DESCRIPTION OF BUSINESS

GENERAL

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

         CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS ANNUAL
REPORT ON FORM 10-KSB INCLUDING, BUT NOT LIMITED TO, THOSE DESCRIBED IN "ITEM 6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," ARE FORWARD-LOOKING
STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARDED-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, (1) SIGNIFICANT
INCREASES IN COMPETITIVE PRESSURE IN THE BANKING INDUSTRY; (2) CHANGES IN THE
INTEREST RATE ENVIRONMENT REDUCE MARGINS; (3) GENERAL ECONOMIC CONDITIONS,
EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN,
AMONG OTHER THINGS, A DETERIORATION IN CREDIT QUALITY; (4) CHANGES IN THE
REGULATORY ENVIRONMENT; (5) CHANGES IN BUSINESS CONDITIONS AND INFLATION; AND
(6) CHANGES IN SECURITIES MARKETS. THEREFORE, THE INFORMATION SET FORTH IN SUCH
FORWARD-LOOKING STATEMENTS SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE
BUSINESS PROSPECTS OF THE COMPANY AND THE BANK.

         At present, the Company's principal business is conducted through the
Bank. At December 31, 1996, the Company had total consolidated assets of
$96,769,000. The Bank accounted for $96,734,000 or virtually all of the total
assets of the Company. The Company's primary source of income, other than
interest earned on the Company's capital, is the receipt of dividends and rent
from the Bank. The Bank is a full service commercial bank serving the cities of
San Leandro and Hayward, in Alameda County, and the city of San Ramon, in Contra
Costa County, and the surrounding areas in California. The Company itself does
not engage in any business activities other than the ownership of the Bank, nor
does it own any other subsidiaries. The Company regularly reviews options to
expand the operations of the Bank and may seek opportunities for acquiring or
forming other banks and non-banking subsidiaries.

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

BAY BANK OF COMMERCE - GENERAL BANKING SERVICES

         At December 31, 1996, the Bank had total assets of $96,734,000, total
loans of $71,362,000 (including loans held for sale) and total deposits of
$83,291,000. The Bank provides a wide range of commercial banking services to
individuals, professionals, and small and medium-sized businesses through its
principal office in San Leandro, California and its branch offices in Hayward
and San Ramon, California. In order to attract these types of customers, the
Bank offers personalized services and banking convenience. The services provided
include checking, interest checking, savings and interest-bearing demand, money
market and other time deposit accounts; commercial, real estate and consumer
loans; travelers' checks; safe deposit boxes; collection services; night
depository facilities and wire and telephone transfers. The Bank is a member of
the Federal Deposit Insurance Corporation (the "FDIC") and the deposits of each
depositor are insured up to $100,000. The Bank is not a member of the Federal
Reserve System. Professional firms and individuals and businesses form the core
of the Bank's customer and deposit base.

         The Bank's Small Business Administration ("SBA") loan department has
been a component of the Bank's operations since 1985. Total SBA loan fundings
for 1996 were $1,714,000. SBA-guaranteed loans of $2,831,000 were sold in 1996.
With a decline in SBA loan volume in recent years precipitated by increased
competition from other bank and non-bank financial entities, the Bank's SBA
Division was downsized during 1994 to better reflect the
<PAGE>   4
lower level of activity. The Bank is still active in marketing SBA loans and
continues as a Preferred (PLP) lender with the Small Business Administration.

         During 1994, the Bank inaugurated Bay Investment Services, a mutual
funds and annuities sales program, under which the Bank has contracted with
CoreLink Financial, Inc., a registered broker-dealer, to provide Bank customers
with the opportunity to purchase non-FDIC insured investment products. In June
1995, after one year of operations, the Bank determined that the market for
non-bank investment products was too limited and has stopped actively marketing
these products.

EXISTING LOCATIONS

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

DEPOSITS

         Most of the Bank's deposits are obtained from individuals,
professionals and small and medium-sized businesses. As of December 31, 1996,
the Bank had a total of 3,582 accounts representing 1,493 noninterest-bearing
demand deposit (checking) accounts with an average balance of approximately
$17,500 each; 1,359 savings, interest-bearing demand, and money market accounts
with an average balance of approximately $17,100 each; and 730 time accounts
with an average balance of approximately $46,400 each.

LENDING ACTIVITIES

         The Bank concentrates its lending activities in the areas of commercial
real estate mortgage loans, commercial loans to businesses and individuals and
real estate construction loans. At December 31, 1996, real estate mortgage loans
accounted for 59%, commercial loans accounted for 22%, SBA loans held for sale
accounted for 4%, real estate construction loans accounted for 9%, real estate
equity loans accounted for 3% and consumer installment and other loans accounted
for 3% of the Bank's loan portfolio. See "Selected Statistical Information --
Loan Portfolio" herein for information concerning the composition of the Bank's
loan portfolio, maturities and sensitivity to changes in interest rates in the
loan portfolio and non-performing assets. The interest rates charged by the Bank
vary with the degree of risk and the size and maturity of the loans involved and
are generally affected by competition, governmental regulation and current
market interest rates.

         Except as described in the discussion which accompanies Table F,
Summary of Nonaccrual, Past Due and Restructured Loans, the Bank's loan
portfolio is not concentrated in any one category and includes loans to
individuals, partnerships and corporations for diverse purposes.

         At December 31, 1996, the Bank had total loans outstanding of
$71,362,000, net of deferred loan fees. Inherent in the lending function is the
fact that loan losses will be experienced and that the risk of loss will vary
with the type of loan being made and the creditworthiness of the borrower over
the term of the loan. To reflect currently perceived risks of loss associated
with its loan portfolio, adjustments are made to the Bank's allowance for loan
losses. At December 31, 1996, the Bank's allowance for loan losses was $971,000
or 1.4% of total loans. The Bank's entire allowance is a valuation allowance,
which has been created by direct charges against operations. See "Selected
Statistical Information -- Summary of Loan Loss Experience" herein for a
discussion of management's policy for establishing and maintaining the allowance
for loan losses.

CORRESPONDENT BANKS


                                        2
<PAGE>   5
         The Bank has correspondent relationships with Union Bank of California,
Bank of America, N.T.&S.A. and Wells Fargo Bank. These relationships are a
result of the Bank's efforts to obtain a wide range of services for the Bank and
its customers, including arranging loan participations, investment services,
sale of federal funds, and obtaining lines for letters of credit. As a net
seller of federal funds (overnight interbank loans), the Bank also maintains
such correspondent relationships to minimize the risk of undue concentration of
its resources with a few institutions. The Bank does not currently serve, nor
does it have plans to serve, as a correspondent to other banks.

EMPLOYEES

         At December 31, 1996, the Company employed forty-three (43) full-time
employees and twelve (12) part-time employees.

SELECTED STATISTICAL INFORMATION

         The following tables present certain consolidated statistical
information concerning the business of the Company and the Bank. This
information should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 1996 Annual Report to
Shareholders (the "Annual Report"), which have been incorporated herein by
reference.

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

         Table A sets forth the Company's consolidated average balance sheets
for the years ended December 31, 1996 and 1995 and an analysis of interest rates
and the interest rate differential.

         Table B sets forth the changes in interest income and interest expense
in 1996 and 1995 resulting from changes in volume and changes in rates.

         SECURITIES PORTFOLIO

         The book value of investment securities and securities available for
sale at December 31, 1996 and 1995, and maturities and weighted average yield of
securities at December 31, 1996 are set forth in Table C.

         LOAN PORTFOLIO

         The composition of the loan portfolio at December 31, 1996 and 1995 is
summarized in Table D.

         Maturities and sensitivity to changes in interest rates in the loan
portfolio, excluding real estate-mortgage loans, installment loans and lease
financing, at December 31, 1996 are summarized in Table E.

         Table F shows the composition of nonaccrual, past due and restructured
loans at December 31, 1996 and 1995. Set forth in the text accompanying Table F
is a discussion of the Company's policy for placing loans on nonaccrual status.

         SUMMARY OF LOAN LOSS EXPERIENCE

         Table G sets forth an analysis of loan loss experience as of and for
the years ended December 31, 1996 and 1995.

         Set forth in the text accompanying Table G is a description of the
factors which influenced management's judgment in determining the amount of the
additions to the allowance charged to operating expense in each fiscal year,


                                        3
<PAGE>   6
a table showing the allocation of the allowance for loan losses, as well as a
discussion of management's policy for establishing and maintaining the allowance
for loan losses.

         DEPOSITS

         Table H sets forth the average amount of and the average rate paid on
major deposit categories for the years ended December 31, 1996 and 1995.

         Table I sets forth the maturity of time certificates of deposit of
$100,000 or more and other time deposits of $100,000 or more at December 31,
1996.

         RETURN ON EQUITY AND ASSETS

         Table J sets forth certain financial ratios for the years ended
December 31, 1996 and 1995.



                                        4
<PAGE>   7
                                     TABLE A

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

         The following table sets forth consolidated average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid; and
the average yields earned or rates paid thereon for the years ended December 31,
1996 and 1995. The average balances are averages of daily balances.


<TABLE>
<CAPTION>
                                                                1996                                1995
                                               ------------------------------------    ------------------------------
                                               Average        Interest      Average    Average     Interest   Average
                                               Balances        Income        Yield     Balances     Income     Yield
                                               --------        ------        -----     --------     ------     -----
<S>                                            <C>            <C>           <C>        <C>         <C>        <C>
ASSETS
Securities (amortized cost):
     Taxable (before securities
        valuation allowance)                   $ 15,257       $    947        6.21%    $ 20,370     $1,217      5.97%
     Non-taxable(1)                               3,165            242        7.65%       2,186        158      7.23%
                                               --------       --------       -----     --------     ------     -----
          Total securities                       18,422          1,189        6.45%      22,556      1,375      6.10%
Federal funds sold and securities
purchased under repurchase agreements             4,870            250        5.13%       6,469        368      5.69%
Loans(2)(3)                                      62,818          6,463       10.29%      52,627      5,764     10.95%
                                               --------       --------       -----     --------     ------     -----
          Total interest-earning assets(1)       86,110          7,902        9.18%      81,652      7,507      9.19%
Less allowance for loan losses                     (970)                                   (852)
Nonaccrual loans                                    190                                     203
Cash and due from banks                           6,377                                   6,333
Premises and equipment                            2,070                                   2,214
OREO                                                  0                                     432
Other assets                                      1,300                                   1,140
                                               --------                                --------
     TOTAL ASSETS                              $ 95,077                                $ 91,122
                                               ========                                ========

Average earning loans/average earning             72.95%                                  64.45%
assets                                         ========                                ========
</TABLE>

                                                                     (continued)



                                        5
<PAGE>   8
         DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
                INTEREST RATES AND INTEREST DIFFERENTIAL (CONT.)


<TABLE>
<CAPTION>
                                                                   1996                                    1995
                                                   ------------------------------------     ----------------------------------
                                                                                Average                                Average
                                                    Average       Interest       Rates       Average    Interest        Rates
                                                   Balances       Expense        Paid       Balances     Expense         Paid
                                                   --------       -------        ----       --------     -------         ----
<S>                                                <C>            <C>           <C>         <C>         <C>            <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
     Savings and interest-bearing demand            $25,050        $  651        2.60%       $27,529       $  716         2.60%
     Time                                            27,239         1,407        5.17%        22,986        1,240         5.39%
     Certificates of deposit, $100,000
          and over                                    5,198           293        5.64%         5,176          294         5.68%
     Other borrowed funds                             2,209           106        4.80%         1,313           60         4.57%
                                                    -------        ------        ----        -------       ------         ----
          Total interest-bearing liabilities         59,696         2,457        4.12%        57,004        2,310         4.05%
     Demand deposits                                 25,124                                   24,571
Other liabilities                                     1,028                                      989
Shareholders' equity                                  9,229                                    8,558
                                                    -------                                  -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY                                $95,077                                  $91,122
                                                    =======                                  =======
Interest income and average yield
     on earning assets (1)                                          7,902        9.18%                      7,507         9.19%
Interest expense and average effective
 rate paid on all interest-bearing
 liabilities                                                        2,457        2.85%                      2,310         2.83%
                                                                   ------        ----                      ------         ----
Net interest income and margin(4)                                  $5,445        6.32%                     $5,197         6.36%
                                                                   ======        ====                      ======         ====
</TABLE>

------------------

(1)      Interest on non-taxable investment securities and total interest income
         include the effect of taxable equivalent adjustments using the expected
         federal corporate income tax rate of 34% in 1996 and 1995 in adjusting
         interest on tax-exempt investment securities to a fully taxable basis.
         The amount of the taxable equivalent adjustment was $76,000 and $51,000
         in 1996 and 1995, respectively.

(2)      Loan interest income includes loan fees of $319,000 in 1996 and
         $271,000 in 1995.

(3)      Average loans do not include nonaccrual loans.



                                        6
<PAGE>   9
(4)      Net interest margin is computed by dividing net interest income by
         total average interest-earning assets.

                                     TABLE B

                            RATE AND VOLUME ANALYSIS

         The following table sets forth, for the periods indicated, a summary of
the changes in interest earned and interest paid resulting from changes in asset
and liability volumes and changes in rates. The change in interest due to both
rate and volume has been allocated to changes due to volume and rate in
proportion to the relationship of absolute dollar amounts of change in each.


<TABLE>
<CAPTION>
                                                                         (Dollars in thousands)
                                                                        Period Ended December 31,
                                                                        -------------------------
                                                        1996 Compared to 1995              1995 Compared to 1994
                                                        Increase (decrease) in:            Increase (decrease) in:
                                                     ----------------------------      ------------------------------
                                                     Volume       Rate      Total      Volume      Rate        Total
                                                     ------       ----      -----      ------      ----        -----
<S>                                                  <C>          <C>       <C>        <C>         <C>        <C>
Changes in interest income:
     Securities:
          Taxable (book value)                       $  (315)     $  45      $(270)     $ (52)     $ 193      $   141
          Non-taxable(1)                                  75          9         84          6        (34)         (28)
                                                     -------      -----      -----      -----      -----      -------
               Total securities                         (240)        54       (186)       (46)       159          113
     Federal funds sold and securities purchased
         under repurchase agreements                     (85)       (33)      (118)       145         68          213
     Loans                                             1,064       (365)       699        450        585        1,035
                                                     -------      -----      -----      -----      -----      -------
          Total(1)                                       739       (344)       395        549        812        1,361
                                                     -------      -----      -----      -----      -----      -------
Changes in interest expense:
Total interest bearing liabilities:
     Savings and interest-bearing demand                 (64)        (1)       (65)       (11)        89           78
     Time                                                221        (54)       167        148        259          407
     Certificates of deposit, $100,000 and over            1         (2)        (1)       (56)        89           33
     Other borrowed funds                                 43          3         46         12         14           26
                                                     -------      -----      -----      -----      -----      -------
          Total                                          201        (54)       147         93        451          544
                                                     -------      -----      -----      -----      -----      -------
Changes in net interest earnings(1)                  $   538      $(290)     $ 248      $ 456      $ 361      $   817
                                                     =======      =====      =====      =====      =====      =======
</TABLE>

(1)      Taxable equivalent basis.  See Note 1 to Table A.


                                        7
<PAGE>   10
                                     TABLE C

                              SECURITIES PORTFOLIO

         The following tables set forth the amortized cost of securities held to
maturity and the market value of securities available for sale at December 31,
1996 and 1995 and the amortized cost, maturities, and weighted average yield of
securities at December 31, 1996.


<TABLE>
<CAPTION>
                                                              Amortized Cost
                                                              At December 31,
                                                              ---------------
SECURITIES HELD TO MATURITY                                   (In Thousands)
                                                             1996       1995
                                                            ------     ------
<S>                                                         <C>        <C>
Securities of U.S. government agencies and corporations     $3,198     $4,197
Obligations of states and political subdivisions             3,434      2,831
Mortgage-backed securities                                      72        183
                                                            ------     ------
                                                            $6,704     $7,211
                                                            ======     ======
</TABLE>

<TABLE>
<CAPTION>
                                                                Estimated
                                                                Fair Value
                                                             At December 31,
                                                             ---------------
SECURITIES AVAILABLE FOR SALE                                 (In Thousands)
                                                             1996       1995
                                                            ------     ------
<S>                                                         <C>        <C>
Securities of U.S. government agencies and corporations     $8,974     $12,143
Mortgage-backed securities                                     365         552
Other securities                                                --         504
                                                            ------     -------
                                                            $9,339     $13,199
                                                            ======     =======
</TABLE>



                                        8
<PAGE>   11
                                     TABLE C

                        SECURITIES PORTFOLIO (CONTINUED)



<TABLE>
<CAPTION>
                                                                                   Maturing
                                                         -----------------------------------------------------------
                                                                                       After One          After Five
Amortized Cost                                               In One Year                Through             Through
(Dollars in thousands)                                         Or Less                 Five Years          Ten Years
                                                         --------------------      --------------------   ----------
                                                          Cost        Yield         Cost        Yield         Cost
                                                         ------     ---------      ------     ---------      ------
<S>                                                      <C>        <C>            <C>        <C>          <C>
HELD TO MATURITY:
U.S. Treasury and agency securities                      $   --            --      $2,202          5.82%     $  996
Obligations of states and political subdivisions (1)        272          8.94%        881          8.15%      2,133
Mortgage-backed securities                                   --            --          --            --          --
                                                         ------     ---------      ------     ---------      ------
Total amortized cost                                     $  272          8.94%     $3,083          6.48%     $3,129
Estimated market value                                   $  274                    $3,102                    $3,143
AVAILABLE FOR SALE:
U.S. Treasury and agency securities                      $3,998          6.58%     $3,000          5.46%     $2,000
Mortgage-backed securities                                   84          1.06%        282          6.58%         --
                                                         ------     ---------      ------     ---------      ------
Total amortized cost                                     $4,082          6.47%     $3,282          5.56%     $2,000
Estimated market value                                   $4,110                    $3,238                    $1,991
</TABLE>


<TABLE>
<CAPTION>
                                                                     Maturing
                                                        ------------------------------------
                                                        After Five
                                                          Through              After
                                                         Ten Years           Ten Years                    Total
                                                        ----------      --------------------      --------------------
                                                           Yield         Cost        Yield         Cost        Yield
                                                        ----------      ------     ---------      ------     ---------
<S>                                                     <C>             <C>        <C>            <C>        <C>

HELD TO MATURITY:
U.S. Treasury and agency securities                           6.70%     $   --            --      $3,198          6.09%
Obligations of states and political subdivisions (1)          7.36%        148          7.47%      3,434          7.68%
Mortgage-backed securities                                      --          72          9.00%         72          9.00%
                                                         ---------      ------     ---------      ------     ---------
Total amortized cost                                          7.15%     $  220          7.96%     $6,704          6.94%
Estimated market value                                                  $  224            --      $6,743            --
AVAILABLE FOR SALE:
U.S. Treasury and agency securities                           7.23%     $   --            --      $8,998          6.35%
Mortgage-backed securities                                      --          --            --         366          5.31%
                                                         ---------      ------     ---------      ------     ---------
Total amortized cost                                          7.23%     $   --            --      $9,364          6.31%
Estimated market value                                                  $   --                    $9,339
</TABLE>


(1) Interest on non-taxable securities and total interest income include the
effect of taxable equivalent adjustments using the expected federal corporate
income tax rate of 34% in 1996 in adjusting interest on tax-exempt investment
securities to a fully taxable basis.


                                        9
<PAGE>   12
                                     TABLE C

                        SECURITIES PORTFOLIO (CONTINUED)

         At December 31, 1996 investment securities from the following issuers
each totaled over ten percent (10%) of shareholders' equity of the Company:


<TABLE>
<CAPTION>
                                                              (In thousands)
                                                           Amortized   Market
                                                             Cost       Value
                                                           ---------   ------
<S>                                                        <C>         <C>
Federal Home Loan Mortgage Corporation                      $1,366     $1,357
Federal National Mortgage Association                        3,994      3,982
Federal Home Loan Bank                                       4,202      4,194
Student Loan Marketing Association                           1,000      1,000
</TABLE>

                                     TABLE D

                                 LOAN PORTFOLIO

         The composition of the loan portfolio at December 31, 1996 and 1995 is
summarized in the table below.


<TABLE>
<CAPTION>
                                                            1996        1995
                                                           -------    -------
                                                              (In Thousands)
<S>                                                        <C>        <C>
Commercial, financial and agricultural                     $15,568    $13,319
Real estate:
  Construction                                               6,813      2,250
  Mortgage                                                  41,930     35,137
  Equity                                                     2,178      1,042
Held for sale                                                2,923      4,984
Installment                                                  1,602      1,211
Other                                                          903        768
                                                           -------    -------
                                                            71,917     58,711
Deferred loan fees                                            (555)      (559)
                                                           -------    -------
                                                           $71,362    $58,152
                                                           =======    =======
</TABLE>


                                       10
<PAGE>   13
                                     TABLE E

          LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES

         The following table presents information concerning loan maturities and
sensitivity to changes in interest rates in the loan portfolio, as well as loans
that have fixed or floating interest rates at December 31, 1996.


<TABLE>
<CAPTION>
                                                              (In Thousands)

                                                One        After One      After
Maturity Distribution of                        Year        Through       Five
Selected Loans:                                Or Less    Five Years      Years        Total
                                               -------    ----------     -------      -------
<S>                                            <C>        <C>            <C>          <C>
  Commercial, financial and agricultural       $12,758      $ 2,520      $ 1,818      $17,096
  Real estate-construction                       8,541           --           --        8,541
  Equity                                            --           --        2,178        2,178
  Other                                         30,044        5,353        8,497       43,894
                                               -------      -------      -------      -------
                                               $51,343      $ 7,873      $12,493      $71,709
                                               =======      =======      =======      =======
Sensitivity to Changes in Interest Rates:
  Loans with fixed interest rates              $ 3,596      $ 7,873      $12,493      $23,962
  Loans with floating interest rates            47,747           --           --       47,747
                                               -------      -------      -------      -------
                                               $51,343      $ 7,873      $12,493      $71,709
                                               =======      =======      =======      =======
</TABLE>


                                     TABLE F

             SUMMARY OF NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

         A summary of nonaccrual, past due and restructured loans at December
31, 1996 and 1995 is set forth below:


<TABLE>
<CAPTION>
                                                               December 31,
                                                              (In Thousands)
                                                            -----------------
                                                             1996       1995
                                                            ------     ------
<S>                                                         <C>        <C>
Nonaccrual                                                  $  208     $   --
Accruing loans past due 90 days or more                        227         99
Restructured loans                                              --         --
                                                            ------     ------
                                                            $  435     $   99
                                                            ======     ======
</TABLE>

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

         Loans are placed on a nonaccrual basis and any accrued but unpaid
interest is reversed and charged against income when the payment of interest or
principal is ninety days or more past due, except when the loan is well secured
and in the process of collection. Nonaccrual loans at December 31, 1996
constituted approximately 0.3% of total gross loans. The Bank had no nonaccrual
loans at December 31, 1995. Loans in the nonaccrual category are treated as
nonaccrual loans even though the Bank may ultimately recover all or a portion of
the interest due. The classification


                                       11
<PAGE>   14
of a loan as a nonaccrual loan is not necessarily indicative of a potential
charge-off. The Senior Loan Officer, on at least a quarterly basis, assesses the
loan portfolio to determine which loans should be added to or removed from the
quarterly Watch list. The Bank's internal Loan Review Examiner grades all new
commercial loans and all credits where the total liability equals or exceeds the
reporting limit. If either the Senior Loan Officer or the Loan Review Examiner
detects a serious deficiency, the loan is placed on the next quarterly Watch
list.

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

         Restructured loans reflect situations in which, due to the inability of
the borrower to comply with the original terms of the loan, the terms have been
modified, usually with the accrual of interest at a reduced rate. As of December
31, 1996, the Bank had no restructured loans.

         Interest income on nonaccrual loans that would have been recognized for
the year ended December 31, 1996, if the loans had been current in accordance
with their original terms totaled $45,407. The Company recognized $12,442 in
interest income on these loans for the year ended December 31, 1996.

         There are no loans, which were current at December 31, 1996, where
known information about possible credit problems of borrowers causes management
of the Company to have serious doubt as to the ability of such borrowers to
comply with the present loan repayment terms.

         Outstanding loans to contractors engaged in construction and land
development constituted $7,415,000 or 10% of total loans at December 31, 1996.
The loans are a cross-section of types, from commercial to real estate
construction, and are not all secured by real estate. The borrowers as a group,
however, are engaged in business activities which could be affected by changing
conditions in the real estate market. There were no other categories of loans
representing a concentration of 10% or more of total loans at December 31, 1996,
except as set forth in Table D above.



                                       12
<PAGE>   15
                                     TABLE G

                         SUMMARY OF LOAN LOSS EXPERIENCE

         The following table summarizes loan loss experience as of and for the
years ended December 31, 1996 and 1995.


<TABLE>
<CAPTION>
                                                                   1996              1995
                                                                 --------          --------
                                                                  (Dollars in thousands)
<S>                                                              <C>               <C>
Allowance for loan losses:
  Balance at beginning of year                                   $    982          $    756
  Charge-offs:
    Commercial, financial and agricultural                             25                --
    Real estate - mortgage                                             --                24
    Installment                                                         8                --
    Other                                                               2                 3
                                                                 --------          --------
      Total loans charged-off                                          35                27
                                                                 --------          --------
  Recoveries:
                                                                       19               398
    Commercial, financial and agricultural
    Real estate - mortgage                                              3                --
    Other                                                               2                10
                                                                 --------          --------
      Total recoveries                                                 24               408
                                                                 --------          --------
    Net (charge-offs) recoveries                                      (11)              381
      Benefit for reduction in allowance                               --              (155)
                                                                 --------          --------
  Balance at end of year                                         $    971          $    982
                                                                 ========          ========
Loans outstanding at December 31                                 $ 71,362          $ 58,152
                                                                 ========          ========
Average loans outstanding during period                          $ 63,008          $ 52,830
                                                                 ========          ========
Allowance for loan losses as a percentage
  of outstanding loan balance                                         1.4%              1.7%
                                                                 ========          ========
Net (charge-offs) recoveries to average loans outstanding             --%               0.7%
                                                                 ========          ========
</TABLE>


         In evaluating the allowance for loan losses, the Company considers such
factors as: historical loan loss experience; management's review of outstanding
credits; the current and projected size and composition of the loan portfolio;
expectations of future economic conditions and their impact on particular
industries and specific borrowers; evaluation of the underlying collateral for
secured loans; and periodic evaluations made by Bank regulatory authorities.

         Although the Bank does not specifically allocate its allowance for loan
losses on the basis of type of loan, using these criteria the allocation of the
allowance for loan losses would be as set forth below:


                                       13
<PAGE>   16
<TABLE>
<CAPTION>
                                          Allowance for Loan Losses by Loan Type

                                           1996                             1995
                                 -------------------------       ---------------------------
                                          Percent of Loans                  Percent of Loans
                                          in Each Category                  in Each Category
(Dollars in thousands)           Amount    to Total Loans        Amount      to Total Loans
                                 ------    --------------        ------      --------------
<S>                              <C>      <C>                    <C>        <C>
Commercial, financial
  and agricultural                $242          22%               $184             23%
Real estate - construction          37           9%                 11              4%
Real estate - mortgage             241          59%                256             60%
Equity                              11           3%                  5              2%
Held for sale                        4           4%                 14              8%
Installment                         22           2%                 19              2%
Other                               29           1%                 20              1%
Unallocated                        385          N/A                473            N/A
                                  ----                            ----
                                  $971                            $982
                                  ====                            ====
</TABLE>


         The Company provides for potential loan losses by a charge to operating
income based upon the current composition of the loan portfolio, past loan loss
experience, current and projected economic conditions, an evaluation of the risk
elements in the loan portfolio and other factors that, in management's judgment,
deserve recognition in estimating loan losses. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to make additions to the allowance based on their evaluations of information
available to them at the time of their examination. Management will charge off
loans to the allowance when it determines that there has been a permanent
impairment of the related carrying values.



                                       14
<PAGE>   17
                                     TABLE H

                                    DEPOSITS

         The following table sets forth the average amount of and the average
rate paid on certain deposit categories which were in excess of 10% of average
total deposits for the years ended December 31, 1996 and 1995.


<TABLE>
<CAPTION>
                                                                 1996                                 1995
                                                                 ----                                 ----
(Dollars in Thousands)
                                                        Balance           Rate                Balance        Rate
                                                        -------           ----                -------        ----
<S>                                                     <C>               <C>                 <C>            <C>
Noninterest-bearing demand deposits                     $25,124            N/A                $24,571         N/A
Savings and interest-bearing demand                      25,050           2.60%                27,529        2.60%
Time                                                     32,437           5.25%                22,986        5.39%
                                                        -------                               -------
                                                        $82,611                               $75,086
                                                        =======                               =======
</TABLE>

                                     TABLE I

                                  TIME DEPOSITS

         The following table sets forth the maturity of time certificates of
deposit of $100,000 or more and other time deposits of $100,000 or more at
December 31, 1996.


<TABLE>
<CAPTION>
                                                        (In Thousands)
                                          Time Certificates of        Other Time
                                                Deposit of            Deposits of
                                             $100,000 or More       $100,000 or More
                                             ----------------       ----------------
<S>                                       <C>                       <C>
Three months or less                              $ 1,999                $11,952
Over 3 through 6 months                             1,818                     --
Over 6 through 12 months                            1,600                     --
Over 12 months                                        603                     --
                                                  -------                -------
                                                  $ 6,020                $11,952
                                                  =======                =======
</TABLE>

                                     TABLE J

                           RETURN ON EQUITY AND ASSETS

         The following table sets forth certain financial ratios for the years
ended December 31, 1996 and 1995.


<TABLE>
<CAPTION>
(Dollars in thousands)                                            1996                 1995
                                                                --------             --------
<S>                                                            <C>                  <C>
Net income                                                     $   1,083            $     945
Net income
         To average assets                                           1.1%                 1.0%
         To average shareholders' equity                            11.8%                11.1%
Dividends declared per share to net income per share           0.34 to 1            0.38 to 1
----------------------------------------------------------------------------------------------
</TABLE>


                                       15
<PAGE>   18
<TABLE>
<S>                                                                  <C>                  <C>
Average shareholders' equity to average assets                       9.7%                 9.4%
</TABLE>

COMPETITION

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

         The Bank's primary service area consists principally of the cities of
Oakland, San Leandro, Hayward and San Ramon and the unincorporated areas of
Castro Valley and San Lorenzo which, at June 30, 1996, contained ninety-six (96)
competing banking offices, including the Bank, and twenty-four (24) branch
offices of other independent banks. At June 30, 1996, the Bank's primary service
area also contained forty-seven (47) offices of savings and loan associations.

         From time to time, legislation is proposed or enacted which has the
effect of increasing the cost of doing business, limiting permissible activities
or affecting the competitive balance between banks and other financial
institutions. It is impossible to predict the competitive impact these and other
changes in legislation will have on commercial banking in general or on the
business of the Bank in particular. See "SUPERVISION AND REGULATION - Recent and
Proposed Legislation".

SUPERVISION AND REGULATION

         THE COMPANY

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

         The BHC Act requires the Company to obtain the prior approval of the
Federal Reserve before acquisition of all or substantially all of the assets of
any bank or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition, the Company would own or control, directly or
indirectly, more than 5% of the voting shares of such bank. However, amendments
to the BHC Act effected by the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Riegle-Neal"), which is discussed further below, expand
the circumstances under which a bank holding company may acquire control of or
all or substantially all of the assets of a bank located outside the State of
California.

         The Company may not engage in any business other than managing or
controlling banks or furnishing services to its subsidiaries, with the exception
of certain activities which, in the opinion of the Federal Reserve, are so
closely related to banking or to managing or controlling banks as to be
incidental to banking. The Company is also generally prohibited from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company unless that company is engaged in such activities and unless the
Federal Reserve approves the acquisition.

         The Company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale or
lease of property or provision of services. For example, with certain
exceptions, the Bank may not condition an extension of credit on a customer
obtaining other services provided by it, the Company


                                       16
<PAGE>   19
or any other subsidiary, or on a promise by the customer not to obtain other
services from a competitor. In addition, federal law imposes certain
restrictions on transactions between the Bank and its affiliates. As affiliates,
the Bank and the Company are subject, with certain exceptions, to the provisions
of federal law imposing limitations on and requiring collateral for loans by the
Bank to any affiliate.

         THE BANK

         As a California state-licensed bank, the Bank is subject to regulation,
supervision and periodic examination by the California State Banking Department
("SBD") and the FDIC. The Bank is not a member of the Federal Reserve System,
but is nevertheless subject to certain regulations of the Federal Reserve. The
Bank's deposits are insured by the FDIC to the maximum amount permitted by law,
which is currently $100,000 per depositor in most cases.

         The regulations of these state and federal bank regulatory agencies
govern most aspects of the Bank's business and operations, including but not
limited to, the scope of its business, its investments, its reserves against
deposits, the nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
and insurance activities, and the maximum rates of interest allowed on certain
deposits. The Bank is also subject to the requirements and restrictions of
various consumer laws and regulations.

         The following description of statutory and regulatory provisions and
proposals is not intended to be a complete description of these provisions and
is qualified in its entirety by reference to the particular statutory or
regulatory provisions discussed.

         CHANGE IN CONTROL

         The BHC Act and the Change in Bank Control Act of 1978, as amended (the
"Change in Control Act"), together with regulations of the Federal Reserve,
require that, depending on the particular circumstances, either Federal Reserve
approval must be obtained or notice must be furnished to the Federal Reserve and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has securities registered under Section 12 of the Exchange Act, or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The Financial Code also contains approval
requirements for the acquisition of 10% or more of the securities of a person or
entity which controls a California licensed bank. Finally, the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended, together with regulations of the
Federal Trade Commission, may require certain filings to be made with the
Federal Trade Commission and the United States Department of Justice, and
certain waiting periods to expire, prior to consummation of an acquisition of a
company's voting securities.

         CAPITAL ADEQUACY REQUIREMENTS

         The Company is subject to the Federal Reserve's capital guidelines for
bank holding companies and the Bank is subject to the FDIC's regulations
governing capital adequacy for nonmember banks. As noted below, the federal
banking agencies have adopted regulations which could impose additional capital
requirements on banks based on market risk and have added a component to the
uniform bank rating system which addresses sensitivity to market risk, including
interest rate risk. In addition, the Bank is subject to specific capital
requirements imposed by the FDIC and the SBD.


                                       17
<PAGE>   20
         THE FEDERAL RESERVE AND FDIC

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

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

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

         The Federal Reserve and the FDIC have established a minimum leverage
ratio of three percent (3%) Tier 1 capital to total assets for bank holding
companies and nonmember banks that have received the highest composite
regulatory rating and are not anticipating or experiencing any significant
growth. All other institutions are required to maintain a leverage ratio of at
least 100 to 200 basis points above the 3% minimum for a minimum of four percent
(4%) or five percent (5%).

--------

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

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


                                       18
<PAGE>   21
         Set forth below are the Company's and the Bank's risk based and
leverage capital ratios as of December 31, 1996:


<TABLE>
<CAPTION>
                                                          RISK BASED CAPITAL RATIO
                                                           (Dollars in thousands)

                                                    Company                           Bank
                                                    -------                          -------
                                          Amount              Ratio        Amount              Ratio
                                          -------             -----        -------             -----
<S>                                       <C>       <C>       <C>          <C>       <C>       <C>
Tier 1 Capital                            $ 9,433             12.4%        $ 9,589             12.6%
Tier 1 Capital minimum requirement          3,054              4.0           3,049              4.0
                                          -------             ----         -------             ----
     Excess                               $ 6,379              8.4%        $ 6,540              8.6%
                                          =======             ====         =======             ====

Total Capital                             $10,388             13.6%        $10,542             13.8%
Total Capital minimum requirement           6,109              8.0           6,098              8.0
                                          -------             ----         -------             ----
     Excess                               $ 4,279              5.6%        $ 4,444              5.8%
                                          =======             ====         =======             ====
Risk weighted assets                                $76,360                          $76,227
                                                    =======                          =======
</TABLE>

<TABLE>
<CAPTION>
                                                                   LEVERAGE RATIO
                                                                (Dollars in thousands)
                                                       Company                          Bank
                                                       -------                         -------
                                              Amount            Ratio         Amount            Ratio
                                              ------            ------        ------            ------
<S>                                           <C>      <C>      <C>           <C>      <C>      <C>
Tier 1 Capital to average total assets        $9,433               9.9%       $9,589              10.1%
Range of minimum leverage                      2,852-              3.0-        2,848-              3.0-
 requirement                                   4,754               5.0%        4,747               5.0%
                                              ------            ------        ------            ------
Range of excess                                4,679-              4.9-        4,842-              5.1-
                                              $6,581               6.9%       $6,741               7.1%
                                              ======            ======        ======            ======
Average total assets*                                  $95,077                         $94,937
                                                       =======                         =======
</TABLE>

(*Average total assets do not include unrealized gains/losses on securities
available for sale.)

         The risk-based capital ratio discussed above focuses principally on
broad categories of credit risk, and may not take into account many other
factors that can affect a bank's financial condition. These factors include
overall interest rate risk exposure; liquidity, funding and market risks; the
quality and level of earnings; concentrations of credit risk; certain risks
arising from nontraditional activities; the quality of loans and investments;
the effectiveness of loan and investment policies; and management's overall
ability to monitor and control financial and operating risks, including the risk
presented by concentrations of credit and nontraditional activities. The FDIC
has addressed many of these areas in related rule-making proposals and under
FDICIA (as defined below), some of which are discussed herein. In addition to
evaluating capital ratios, an overall assessment of capital adequacy must take
account of each


                                       19
<PAGE>   22
of these other factors including, in particular, the level and severity of
problem and adversely classified assets. For this reason, the final supervisory
judgment on a bank's capital adequacy may differ significantly from the
conclusions that might be drawn solely from the absolute level of the bank's
risk-based capital ratio. In light of the foregoing, the FDIC has stated that
banks generally are expected to operate above the minimum risk-based capital
ratio. Banks contemplating significant expansion plans, as well as those
institutions with high or inordinate levels of risk, should hold capital
commensurate with the level and nature of the risks to which they are exposed.

         Recently adopted regulations by the federal banking agencies have
revised the risk-based capital standards to take adequate account of
concentrations of credit and the risks of non-traditional activities.
Concentrations of credit refers to situations where a lender has a relatively
large proportion of loans involving one borrower, industry, location, collateral
or loan type. Non-traditional activities are considered those that have not
customarily been part of the banking business but that start to be conducted as
a result of developments in, for example, technology or financial markets. The
regulations require institutions with high or inordinate levels of risk to
operate with higher minimum capital standards. The federal banking agencies also
are authorized to review an institution's management of concentrations of credit
risk for adequacy and consistency with safety and soundness standards regarding
internal controls, credit underwriting or other operational and managerial
areas. In addition, the agencies have promulgated guidelines for institutions to
develop and implement programs for interest rate risk management, monitoring and
oversight.

         Further, the banking agencies recently have adopted modifications to
the risk-based capital regulations to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from movements in interest rates. While
interest rate risk is inherent in a bank's role as financial intermediary, it
introduces volatility to bank earnings and to the economic value of the bank.
The banking agencies have addressed this problem by implementing changes to the
capital standards to include a bank's exposure to declines in the economic value
of its capital due to changes in interest rates as a factor that the banking
agencies will consider in evaluating an institution's capital adequacy. Bank
examiners will consider a bank's historical financial performance and its
earnings exposure to interest rate movements as well as qualitative factors such
as the adequacy of a bank's internal interest rate risk management.

         Finally, institutions which are engaged in securities trading
activities and have significant exposure to market risk will be required as of
January 1, 1998 to maintain additional capital to support that exposure,
although voluntary compliance with the new regulations is permissible after
January 1, 1997. The additional capital requirements will apply to institutions
with trading assets and liabilities equal to 10% or more of total assets or
trading activity of $1 billion or more. Institutions subject to the rule will be
required to test internal models of market risk and the market risk capital
charge will be increased for institutions whose models are inaccurate. The
federal banking agencies may apply the market risk regulations on a case by case
basis to institutions not meeting the eligibility criteria if necessary for
safety and soundness reasons.

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

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


                                       20
<PAGE>   23
         PAYMENT OF DIVIDENDS

         The shareholders of the Company are entitled to receive dividends when
and as declared by its Board of Directors, out of funds legally available,
subject to the dividends preference, if any, on preferred shares that may be
outstanding and also subject to the restrictions of the California Corporations
Code. At December 31, 1996, the Company had no outstanding preferred stock.

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

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

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

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

         IMPACT OF FEDERAL AND CALIFORNIA TAX LAWS

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

         CORPORATE TAX RATES

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

         CORPORATE ALTERNATIVE MINIMUM TAX

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


                                       21
<PAGE>   24
         BAD DEBT DEDUCTION

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

         INTEREST INCURRED FOR TAX-EXEMPT OBLIGATIONS

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

         NET OPERATING LOSSES

         Generally, a bank is permitted to carry a net operating loss ("NOL")
back to the prior three tax years and forward to the succeeding fifteen tax
years. If the NOL of a commercial bank is attributable to a bad debt deduction
taken under the specific charge-off method after December 31, 1986, and before
January 1, 1994, however, such portion of the NOL may be carried back ten years
and carried forward five years. A commercial bank's bad debt loss is treated as
a separate NOL to be taken into account after the remaining portion of the NOL
for the year.

         AMORTIZATION OF INTANGIBLE ASSETS INCLUDING BANK DEPOSIT BASE

         Certain intangible property acquired by a taxpayer must be amortized
over a 15 year period. For this purpose, acquired assets required to be
amortized include goodwill and the deposit base or any similar asset acquired by
a financial institution (such as checking and savings accounts, escrow accounts
and similar items). The 15 year amortization rule generally applies to property
acquired after August 10, 1993.

         MARK-TO-MARKET RULES

         The Revenue Reconciliation Act of 1993 introduced certain
"mark-to-market" tax accounting rules for "dealers in securities." Under these
rules, certain "securities" held at the close of a taxable year must be marked
to fair market value, and the unrealized gain or loss inherent in the security
must be recognized in that year for federal income tax purposes. Under the
definition of a "dealer," a bank or financial institution that regularly
purchases or sells loans may be subject to the new rules. The rules generally
are effective for tax years ending on or after December 31, 1993.

         Certain securities are excepted from the mark-to-market rules provided
the taxpayer timely complies with specified identification rules. The principal
exceptions affecting banks are for (1) any security held for investment and (2)
any note, bond, or other evidence of indebtedness acquired or originated in the
ordinary course of business and which is not held for sale. If a taxpayer timely
and properly identifies loans and securities as being excepted from the
mark-to-market rules, these loans and securities will not be subject to these
rules. Generally, a financial institution


                                       22
<PAGE>   25
may make the identification of an excepted debt obligation in accordance with
normal accounting practices, but no later than 30 days after acquisition.

         CALIFORNIA TAX LAWS

         A commercial bank is subject to the California franchise tax at a
special bank tax rate based on the general corporate (non financial) rate plus
2%. The rate for calendar income year 1996 is 11.3%. For calender income year
1997, the bank tax rate is 10.84% (which reflects a decrease in the general
corporate tax rate to 8.84%). The applicable tax rate is higher than that
applied to general corporations because it includes an amount "in lieu" of many
other state and local taxes and license fees payable by such corporations but
generally not payable by banks and financial corporations.

         California has adopted substantially the federal AMT, subject to
certain modifications. Generally, a bank is subject to California AMT in an
amount equal to the sum of (a) 7% of AMTI (computed for California purposes)
over an exemption amount and (b) the excess of the bank tax rate over the
general corporation tax rate applied against net income for the taxable year,
unless the bank's regular tax liability is greater. The 7% rate is lowered to
6.65% for any income year beginning after 1996.

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

         California has incorporated the federal NOL provisions, subject to
significant modifications for most corporations. First, NOLs arising in income
years beginning before 1987 are disregarded. Second, no carryback is permitted,
and for most corporations NOLs may be carried forward only five years. Third, in
most cases, only 50% of the NOL for any income year may be carried forward.
Fourth, NOL carryover deductions are suspended for income years beginning in
calendar years 1991 and 1992, although the carryover period is extended by one
year for losses sustained in income years beginning in 1991 and by two years for
losses sustained in income years beginning before 1991. Finally, the special
federal NOL rules regarding bad debt losses of commercial banks do not apply for
California purposes.

         Finally, in 1994, California enacted legislation conforming to the
federal tax treatment of amortization of intangibles and goodwill, with certain
modifications. No deduction is allowed under this provision for any income year
beginning prior to 1994.

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

         In addition, there are several tax bills currently pending before
Congress which could have a significant impact on the banking industry. As of
March 15, 1997, it is uncertain whether these bills will be enacted and what
impact these bills will have on the Bank.

         IMPACT OF MONETARY POLICIES

         The earnings and growth of the Bank and the Company are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment. The earnings of the Bank and, therefore, the
Company, are affected not only by general economic conditions but also by the
monetary and fiscal policies of the United States and federal agencies,
particularly the Federal Reserve. The Federal Reserve can and does implement
national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States Government securities
and by its control of the discount rates applicable to borrowings by banks from
the Federal Reserve System. The actions of the Federal Reserve in these areas
influence the growth of bank loans, investments and deposits and affect the
interest rates charged on loans and paid on deposits. As demonstrated recently


                                       23
<PAGE>   26
by the Federal Reserve's actions regarding interest rates, its policies have had
a significant effect on the operating results of commercial banks and are
expected to continue to do so in the future. The nature and timing of any future
changes in monetary policies are not predictable.

         RECENT AND PROPOSED LEGISLATION

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

         RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994

         In September 1994, President Clinton signed Riegle-Neal, which amends
the BHC Act and the Federal Deposit Insurance Act ("FDIA") to provide for
interstate banking, branching and mergers. Subject to the provisions of certain
state laws and other requirements, as September 29, 1995, Riegle-Neal allows a
bank holding company that is adequately capitalized and adequately managed to
acquire a bank located in a state other than the holding company's home state
regardless of whether or not the acquisition is expressly authorized by state
law. Similarly, beginning on June 1, 1997, the federal banking agencies may
approve interstate merger transactions, subject to applicable restrictions and
state laws. Further, a state may elect to allow out of state banks to open de
novo branches in that state. Riegle-Neal includes several other provisions which
may have an impact on the Company's and the Bank's business. The provisions
include, among other things, a mandate for review of regulations to equalize
competitive opportunities between U.S. and foreign banks, evaluation on a
bank-wide, state-wide and, if applicable, metropolitan area basis of the
Community Reinvestment Act compliance of banks with interstate branches, and, in
the event the FDIC is appointed as conservator or receiver of a financial
institution, the revival of otherwise expired causes of action for fraud and
intentional misconduct resulting in unjust enrichment or substantial loss to an
institution.

         California has adopted the Caldera, Weggeland, and Killea California
Interstate Banking and Branching Act of 1995 ("IBBA"), which became effective on
October 2, 1995. The IBBA addresses the supervision of state chartered banks
which operate across state lines, and covers such areas as branching,
applications for new facilities and mergers, consolidations and conversions,
among other things. The IBBA allows a California state bank to have agency
relationships with affiliated and unaffiliated insured depository institutions
and allows a bank subsidiary of a bank holding company to act as an agent to
receive deposits, renew time deposits, service loans and receive payments for a
depository institution affiliate. In addition, pursuant to the IBBA, California
"opted in early" to the Riegle-Neal provisions regarding interstate branching,
allowing a state bank chartered in a state other than California to acquire by
merger or purchase, at any time after effectiveness of the IBBA, a California
bank or industrial loan company which is at least five (5) years old and thereby
establish one or more California branch offices. However, the IBBA prohibits a
state bank chartered in a state other than California from entering California
by purchasing a California branch office of a California bank or industrial loan
company without purchasing the entire entity or establishing a de novo
California branch office.

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

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

                  General


                                       24
<PAGE>   27
         FDICIA primarily addresses the safety and soundness of the deposit
insurance funds, supervision of and accounting by insured depository
institutions and prompt corrective action by the federal bank regulatory
agencies with respect to troubled institutions. FDICIA gives the FDIC, in its
capacity as federal insurer of deposits, broad authority to promulgate
regulations to assure the viability of the deposit insurance funds, including
regulations concerning safety and soundness standards. FDICIA also places
restrictions on the activities of state-chartered institutions and on
institutions failing to meet minimum capital standards and provides enhanced
enforcement authority for the Federal banking agencies. FDICIA also strengthened
Federal Reserve Act regulations regarding insider transactions.

                  Prompt Corrective Action

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

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

         An institution which is undercapitalized, significantly
undercapitalized or critically undercapitalized becomes subject to the following
mandatory supervisory actions immediately upon notification of its capital
category: (1) restrictions on payment of capital distributions, such as
dividends; (2) restrictions on payment of management fees to any person having
control of the institution; (3) close monitoring by the FDIC of the condition of
the institution, compliance with capital restoration plans, restrictions, and
requirements imposed under Section 38 of the FDIA, and periodic review of the
institution's efforts to restore its capital and comply with restrictions; (4)
requirement that the institution submit within the time allowed by the FDIC a
capital restoration plan, which must include (a) the steps the institution will
take to become adequately capitalized, (b) the levels of capital to be attained
during each year in which the plan will be in effect, (c) how the institution
will comply with restrictions or requirements imposed on its activities, (d) the
types and levels of activities in which the institution will engage, and (e)
such other information as the FDIC may require; (5) requirement that any company
which controls an undercapitalized institution must guarantee, in an amount
equal to the lesser of 5% of the institution's total assets or the amount needed
to bring the institution into full capital compliance, that the institution will
comply with the capital restoration plan until the

--------

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

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

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

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

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


                                       25
<PAGE>   28
institution has been adequately capitalized, on the average, for four
consecutive quarters; (6) restrictions on growth of the institution's total
assets so that its average total assets during any calendar quarter do not
exceed its average total assets during the preceding calendar quarter unless (a)
the FDIC has accepted the institution's capital restoration plan, (b) any
increase in total assets is consistent with the capital restoration plan, and
(c) the institution's ratio of tangible equity to assets increases during the
calendar quarter at a rate sufficient to enable the institution to become
adequately capitalized within a reasonable time; and (7) limitations on the
institution's ability to make any acquisition, open any new branch offices or
engage in any new line of business unless the FDIC has accepted the
institution's capital plan and has granted prior approval.

         In addition to the above, the FDIC may take any of the actions
described below for institutions which fail to submit and implement a capital
restoration plan.

         Significantly undercapitalized and undercapitalized institutions that
fail to submit and implement adequate capital restoration plans are subject to
the mandatory provisions set forth above and, in addition, will be required to
do or comply with one or more of the following: (1) sell enough additional
capital, including voting shares, to bring the institution to an adequately
capitalized level or if one or more grounds exist for appointing a conservator
or receiver for the institution, be acquired by or combined with another insured
depository institution; (2) restrict transactions with affiliates; (3) restrict
interest rates paid on deposits to the prevailing rates in the region where the
institution is located, as determined by the FDIC; (4) restrict asset growth or
reduce total assets more stringently than described above; (5) terminate, reduce
or alter any activity (including any activity conducted by a subsidiary of the
institution) determined by the FDIC to pose an excessive risk to the
institution; (6) hold a new election for the institution's board of directors;
(7) dismiss directors or senior officers and/or employ new officers, subject to
agency approval; (8) cease accepting deposits from correspondent depository
institutions, including renewals and rollovers of prior deposits; (9) divest or
liquidate any subsidiary that is in danger of becoming insolvent and poses a
significant risk to the institution or that is likely to cause significant
dissipation of the institution's assets or earnings; or (10) take any other
action that the FDIC determines to be appropriate.

         In addition, significantly undercapitalized institutions are prohibited
from paying any bonus or raise to a senior executive officer without prior FDIC
approval. No such approval will be granted to an institution which is required
but has failed to submit an acceptable capital restoration plan. Further, the
FDIC may impose one or more of the restrictions applicable to critically
undercapitalized institutions set forth below.

         In addition to all of the above restrictions, a critically
undercapitalized institution must be placed in conservatorship or receivership
within 90 days of becoming critically undercapitalized, unless the FDIC
determines that other action would better achieve the purposes of the FDIA. A
determination of alternate action by the FDIC is effective for only 90 days,
after which period the FDIC must reexamine whether to appoint a conservator or
receiver for the bank. Critically undercapitalized institutions which are not
placed in conservatorship or receivership may be subject to additional stringent
operating restrictions.

                  Other Provisions of FDICIA

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

         FDICIA restricts the acceptance of brokered deposits by insured
depository institutions that are not well capitalized. It also places
restrictions on the interest rate payable on brokered deposits and the
solicitation of such


                                       26
<PAGE>   29
deposits by such institutions. An undercapitalized institution will not be
allowed to solicit brokered deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on insured deposits
in the particular institution's normal market areas or in the market area in
which such deposits would otherwise be accepted. In addition to these
restrictions on acceptance of brokered deposits, FDICIA provides that no
pass-through deposit insurance will be provided to employee benefit plan
deposits accepted by an institution which is ineligible to accept brokered
deposits under applicable law and regulations.

         FDICIA also adds grounds to the previously existing list of reasons for
appointing a conservator or receiver for an insured depository institution.

         Pursuant to FDICIA, the FDIC has established a risk-based assessment
system for depository institutions. This risk-based system is used to calculate
a depository institution's semiannual deposit insurance assessment based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution. To arrive at a risk-based assessment for each depository
institution, the FDIC has constructed a matrix of nine risk categories based on
capital ratios and relevant supervisory information. Each institution is
assigned to one of three capital categories: "well capitalized," "adequately
capitalized" or "undercapitalized." Each institution also is assigned to one of
three supervisory groups based on levels of risk. Risk assessment premiums are
based on an institution's assignment within the matrix and for 1996 ranged from
$0.0 to $0.27 per $100 of deposits. For 1996, the FDIC lowered assessment rates
for all risk categories by four cents ($.04), with the lowest-rated
institutions' assessment being reduced from $0.31 per $100 of deposits.

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

         Because the foregoing and other proposed regulations are subject to
change before they are adopted in final form, their ultimate impact on the
Company and the Bank cannot yet be determined.

         OTHER RECENT LEGISLATION

         The Deposit Insurance Funds Act of 1996 (the "Funds Act") requires the
FDIC to impose a one-time special assessment against deposits insured  by the
Savings Association Insurance Fund ("SAIF") in order to recap- italize the SAIF
to its required reserve ratio. The special assessment was imposed at a rate of
65.7 cents ($0.657) per $100 of SAIF-assess- able deposits on October 8, 1996.
The Bank held no SAIF-assessable  deposits as of that date.  In addition, the
Funds Act authorizes the  Financing Corporation, which provides funding for the
Federal Home Loan Bank System, to levy assessments on Bank Insurance Fund
("BIF") - assesable deposits.  The rate of such assessment has not yet been
established.

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

         CONSUMER PROTECTION LAWS AND REGULATIONS

         The bank regulatory agencies are focusing greater attention on
compliance with consumer protection laws and their implementing regulations.
Examination and enforcement have become more intense in nature, and insured
institutions have been advised to monitor carefully compliance with various
consumer protection laws and their implementing regulations. The Bank is subject
to many federal consumer protection statutes and regulations, including the
Community Reinvestment Act, the Equal Credit Opportunity Act, the Truth in
Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act and the Real
Estate Settlement Procedures Act. Due to heightened regulatory



                                       27
<PAGE>   30
concern related to compliance with these and other statutes generally, the Bank
may incur additional compliance costs or be required to expend additional funds
for investments in its local community.

         OTHER

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


ITEM 2 -          DESCRIPTION OF PROPERTY

         The Company and the Bank have their principal offices in a modern
facility located at 1495 East 14th Street, San Leandro, California 94577, which
serves as the Bank's headquarters office. The headquarters office consists of
11,000 square feet of interior space and includes eight (8) teller stations, a
night depository and an automated teller machine.

         The Bank entered into a lease for the premises which commenced on April
1, 1981, extends for a term of twenty-five years and provided for rental
payments of $4,000 per month for the first ten years of the lease term. On the
tenth anniversary, April 1, 1991, the monthly rental payment obligation of the
Bank was raised to $10,310. As of the fifteenth anniversary, April 1, 1996 and
for the five year period ending March 31, 2001, the monthly rental payment
obligation of the Bank will remain at $10,310. Each fifth anniversary
thereafter, the monthly rental amount is to be adjusted as negotiated by the
Bank and the lessor or, if the parties are unable to agree on such adjustment,
by arbitration. The lease also grants to the Bank a right of first refusal in
the event of a proposed sale of the leased premises.

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

         The Bank has invested approximately $2,729,000 through December 31,
1996 in leasehold improvements and furniture, fixtures and equipment in its
headquarters office, which includes 1495 and 1475 East 14th Street, San Leandro.

         The Bank's SBA and construction divisions are located in the Bank's
extension office at 1500 Washington Avenue, San Leandro, California 94577. The
premises consists of a one-story wood frame structure which has a floor area of
2,072 square feet. There is a parking lot adjacent to the building. The property
was purchased by the Company at a cost of $196,512 in 1985, and the premises are
leased from the Company by the Bank for the SBA and construction divisions at a
monthly rental of $2,000. The Bank invested approximately $254,000 in leasehold
improvements and furniture, fixtures and equipment in its extension office
through December 31, 1996.

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

         The Bank purchased the Hayward branch premises in February, 1993 at a
total cost of $700,000. The Bank invested approximately $693,000 in leasehold
improvements and furniture, fixtures and equipment in its Hayward branch office
through December 31, 1996.


                                       28
<PAGE>   31
         The Bank's San Ramon branch office is located in a modern facility at
2821 Crow Canyon Road, San Ramon, California. The San Ramon branch office
consists of approximately 5,526 square feet of space and includes five teller
stations and a night depository and automated teller machine. The Bank invested
approximately $168,000 in leasehold improvements and furniture, fixtures and
equipment in its San Ramon office through December 31, 1996.

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


ITEM 3 -          LEGAL PROCEEDINGS

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


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

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


                                     PART II

ITEM 5 -          MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

         As of March 3, 1997, there were 440 holders of record of the Company's
Common Stock.


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

         For Management's Discussion and Analysis, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" at Pages 16
through 24 of the Annual Report, which are incorporated herein by reference.

         CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS ANNUAL
REPORT ON FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARDED-LOOKING STATEMENTS. SUCH RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED IN MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. THEREFORE, THE INFORMATION SET
FORTH THEREIN SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS
PROSPECTS OF THE COMPANY AND THE BANK.

ITEM 7 -          FINANCIAL STATEMENTS


                                       29
<PAGE>   32
         For consolidated financial statements of the Company, see consolidated
balance sheets at December 31, 1996 and 1995, and consolidated income
statements, consolidated statements of cash flows and consolidated statements of
shareholders' equity for the years ended December 31, 1996, 1995 and 1994, and
notes to consolidated financial statements for the years ended December 31,
1996, 1995 and 1994 and the "Independent Auditors' Report" thereon at Pages 2
through 14 of the Annual Report, which are incorporated herein by reference.


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

         None.


                                    PART III

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

         For information concerning directors and executive officers of the
Company, see "ELECTION OF DIRECTORS OF THE COMPANY" in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Shareholders to be filed
pursuant to Regulation 14A (the "Proxy Statement"), which is incorporated herein
by reference.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

         Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, for fiscal year 1996, the
officers and directors of the Company complied with all applicable filing
requirements, except that director Dimitri Koroslev failed to file on a timely
basis a Report of Changes in Beneficial Ownership on Form 4 to report one
transaction in securities, which was subsequently reported during 1996.


ITEM 10 -         EXECUTIVE COMPENSATION

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


ITEM 11 -         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


                                       30
<PAGE>   33
         For information concerning security ownership of certain beneficial
owners and management, see "PRINCIPAL SHAREHOLDERS" and "ELECTION OF DIRECTORS
OF THE COMPANY" in the Proxy Statement, which is incorporated herein by
reference.


ITEM 12 -         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


ITEM 13 -         EXHIBITS AND REPORTS ON FORM 8-K


<TABLE>
<CAPTION>
(a)  FINANCIAL STATEMENTS                                                                REFERENCE PAGE
                                                                                         --------------
                                                                               1996 Annual
                                                                                  Report              Form 10-KSB
                                                                                  ------              -----------
<S>                                                                            <C>                    <C>
1.     CONSOLIDATED FINANCIAL STATEMENTS:
       BALANCE SHEETS AT DECEMBER 31, 1996 AND 1995.....................            2
       INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996,
                1995 AND 1994...........................................            3
       STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
                1996, 1995 AND 1994.....................................            4
       STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS
       ENDED DECEMBER 31, 1996, 1995 AND 1994...........................            5
       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................          6 - 14
       INDEPENDENT AUDITORS' REPORT.....................................            14
</TABLE>

2.       FINANCIAL STATEMENT SCHEDULES:

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

EXHIBITS

         See Index to Exhibits at pages 34-36 of this Form 10-KSB.

(b)  REPORTS ON FORM 8-K

         No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1996.

         For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows, which undertaking


                                       31
<PAGE>   34
shall be incorporated by reference into registrant's Registration Statements on
Form S-8 No. 2-97378, 33-24302 and 33-75330.

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


                                       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 27, 1997             BAY COMMERCIAL SERVICES


                                  By: /s/Richard M. Kahler
                                      -----------------------------------------
                                         Richard M. Kahler,
                                         President and Chief Executive Officer

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

<TABLE>
<S>                                                           <C>           <C>
/s/Richard M. Kahler                                          DATE:         March 27, 1997
______________________________________________________
Richard M. Kahler,
President and Chief Executive Officer
 (Principal Executive Officer) and Director

/s/Randall D. Greenfield*                                     DATE:        March 27, 1997
_____________________________________________________
Randall D. Greenfield,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
and Secretary

/s/Joshua Fong, O.D.                                          DATE:        March 27, 1997
_____________________________________________________
Joshua Fong, O.D.,
Chairman of the Board of Directors and Director

/s/William R. Henson                                          DATE:        March 27, 1997
_____________________________________________________
William R. Henson, Director

/s/Dimitri V. Koroslev                                        DATE:        March 27, 1997
_____________________________________________________
Dimitri V. Koroslev, Director

/s/William E. Peluso                                          DATE:        March 27, 1997
_____________________________________________________
William E. Peluso, Director

/s/Oswald A. Rugaard                                          DATE:        March 27, 1997
_____________________________________________________
Oswald A. Rugaard, Director

/s/Mark A. Wilton                                             DATE:        March 27, 1997
_____________________________________________________
Mark A. Wilton, Director


*By /s/Richard M. Kahler
    _________________________________________________
       (Richard M. Kahler, as Attorney-in-Fact)
</TABLE>


                                       33
<PAGE>   36
                                INDEX TO EXHIBITS



<TABLE>
<CAPTION>
EXHIBIT                                                                                          SEQUENTIALLY
NUMBER                            EXHIBIT                                                        NUMBERED PAGE
------                            -------                                                        -------------
<S>           <C>                                                                                <C>
2             Not applicable.                                                                          *

3.1           Articles of Incorporation of Company, as amended to date.(1)                             *

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

4             Not applicable.                                                                          *

9             Not applicable.                                                                          *

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

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

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

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

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

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

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

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

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

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

10.11         Mutual Funds and Annuity Services Agreement entered into as of                           *
              February 17, 1994 by and between Bay Bank of Commerce and CoreLink
              Financial, Inc.(9)

10.12         Lease dated July 31, 1996 by and between Oak Creek Plaza Associates and                 ___
              Bay Bank of Commerce for premises located at 2821 Crow Canyon Road,
              San Ramon, California.
</TABLE>



                                       34
<PAGE>   37
<TABLE>
<CAPTION>
EXHIBIT                                                                                          SEQUENTIALLY
NUMBER                            EXHIBIT                                                        NUMBERED PAGE
------                            -------                                                        -------------
<S>           <C>                                                                                <C>
11            Not applicable.                                                                          *
13            Bay Commercial Services 1996 Annual Report to Shareholders (parts not                   __
              incorporated by reference are furnished for informational purposes only and
              are not filed herewith).
16            Not applicable.                                                                          *
18            Not applicable.                                                                          *
21            Subsidiaries of the Company.(10)                                                         *
22            Not applicable.                                                                          *
23            Independent Auditor's Consent.                                                          __
24            Power of Attorney.                                                                      __
27            Financial Data Schedule.                                                                __
28            Not applicable.                                                                          *
</TABLE>

-----------------------

*  Not applicable.

(1)      Filed as Exhibits 3.2 and 3.4, respectively, to the Company's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1993, which
         are incorporated herein by this reference.

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

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

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

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

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

(7)      Filed as Exhibits 10.10 and 10.11, respectively, to the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31, 1990,
         which are incorporated herein by this reference.

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

(9)      Filed as Exhibits 10.14 and 10.15, respectively, to the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
         which are incorporated herein by this reference.


                                       35
<PAGE>   38
(10)     Filed as Exhibit 3 to the Company's Current Report on Form 8-K filed
         with the Commission on June 14, 1983, which is incorporated herein by
         this reference.


                  EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

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

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

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

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

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



                                       36