ANNUAL REPORT COVER

BAY COMMERCIAL SERVICES
1998 ANNUAL REPORT

(logo)


<PAGE>




<TABLE>
<CAPTION>
                                                      
                                                       FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------------------------------

(Dollars in thousands, except per share amounts):           1998      1997      1996      1995      1994
--------------------------------------------------------------------------------------------------------
Years ended December 31:
<S>                                                      <C>        <C>       <C>       <C>       <C>   
Interest income                                          $10,200    $8,759    $7,826    $7,456    $6,086
Interest income on a taxable equivalent basis             10,327     8,853     7,904     7,505     6,146
Interest expense                                           3,479     2,956     2,457     2,310     1,766
Net interest income                                        6,721     5,803     5,369     5,146     4,320
Net interest income on a taxable equivalent basis          6,848     5,897     5,447     5,195     4,380
Net income                                                 1,215     1,062     1,083       945       619
Net income per common share - basic                         1.12      0.99      1.01      0.88      0.57
Net income per common share - diluted                       0.95      0.84      0.89      0.80      0.56
Return on average assets                                     1.0%      1.0%      1.1%      1.0%      0.7%
Return on average shareholders' equity                      11.3%     10.7%     11.8%     11.1%      7.9%

--------------------------------------------------------------------------------------------------------
At December 31:
Assets                                                  $144,202  $116,369   $96,769   $92,819   $89,193
Loans                                                     93,129    74,129    71,362    58,152    51,566
Securities                                                39,542    32,580    16,043    20,410    25,988
Deposits                                                 123,395   101,135    83,291    80,253    79,258
Shareholders' equity                                      11,395    10,173     9,418     8,767     7,946
Book value per share                                       10.54      9.43      8.75      8.14      7.36
--------------------------------------------------------------------------------------------------------
</TABLE>














                     BAY COMMERCIAL SERVICES AND SUBSIDIARY


<PAGE>


                   REPORT TO SHAREHOLDERS - 1998 ANNUAL REPORT
--------------------------------------------------------------------------------


Completing a year of exceptional financial performance,  Bay Commercial Services
attained record total assets and net income in 1998.

With a focused  marketing  message and a vibrant East Bay  economy,  the Company
achieved strong account growth in its targeted  markets during 1998,  propelling
total assets to a record  $144,202,000  at December 31, 1998, an increase of 24%
over 1997.



Fueled by this  strong  growth in earning  assets,  net  income for the  Company
increased 14% to a record  $1,215,000,  or $0.95 per diluted share in 1998. This
was up from net income of $1,062,000, or $0.84 per diluted share during 1997.



Total loans  reached  $93,129,000  at December 31, 1998,  a  $19,000,000  or 26%
increase for the year. Total deposits grew $22,260,000 or 22% to $123,395,000.



To mark the strong financial  performance during 1998, the Board of Directors of
the Company  declared a cash dividend of $0.40 per share in January,  1999. This
was the  thirteenth  cash  dividend  paid to  shareholders  during  17  years of
operations  and a 33% increase  over the $0.30 per share cash  dividend  paid in
1998.



Although all three offices of the Bank demonstrated excellent growth in 1998, we
were especially  proud of the fact that our newest branch in San Ramon ended the
year with total assets of almost  $18,000,000,  and became profitable after only
18 months of operations.  This  achievement is a credit to every employee of the
Bank who made this possible.



This year's exceptional  performance  confirms the need for a community business
bank  that  can  deliver  the  personal  service  that a  business  needs  to be
successful.  With  projections  for  sustained  economic  strength  in  the  San
Francisco Bay region in 1999, the Company  intends to capitalize on its position
as a leader in East Bay business banking for continued growth and profitability.



We look forward to a prosperous year and thank you for your ongoing support.

<TABLE>

<S>                   <C>                                        <C>
/s/Dimitri Koroslev        /s/Richard M. Kahler                   /s/Joshua Fong, O.D.
 Dimitri Koroslev            Richard M. Kahler                      Joshua Fong, O.D.
    Chairman          President and Chief Executive Officer           Chairman
Bay Bank of Commerce      Bay Bank of Commerce                   Bay Commercial Services
                         Bay Commercial Services
</TABLE>





                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                        1


<PAGE>

<TABLE>
<CAPTION>
                                                          CONSOLIDATED BALANCE SHEETS
    ---------------------------------------------------------------------------------------------------


    December 31 (dollars in thousands):                                                1998       1997
    ---------------------------------------------------------------------------------------------------
    ASSETS
<S>                                                                                <C>        <C>     
    Cash and cash equivalents                                                      $  9,077   $  7,548
    Securities available for sale, stated at fair value
      (amortized cost of $31,969 for 1998; $24,663 for 1997)                         32,033     24,651
    Securities held to maturity (fair values of $7,748 for 1998; $8,057 for 1997)     7,509      7,929
    Federal Home Loan Bank stock                                                        359        ---
    Loans held for sale                                                                 939      1,501
    Loans held for investment                                                        92,190     72,628
      Allowance for loan losses                                                        (980)    (1,000)
    ---------------------------------------------------------------------------------------------------
      Net loans                                                                      92,149     73,129
    ---------------------------------------------------------------------------------------------------
    Premises and equipment, net                                                       1,949      2,111
    Interest and fees receivable                                                        635        566
    Other assets                                                                        491        435
    ---------------------------------------------------------------------------------------------------
      Total assets                                                                 $144,202   $116,369
    ===================================================================================================

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Deposits:
      Noninterest-bearing demand                                                   $ 33,904   $ 29,076
      Savings and interest-bearing demand                                            37,571     29,203
      Time                                                                           30,309     30,022
      Certificates of deposit, $100 and over                                         21,611     12,834
    ---------------------------------------------------------------------------------------------------
      Total deposits                                                                123,395    101,135
    ---------------------------------------------------------------------------------------------------
    Securities sold under agreements to repurchase                                    1,344      1,290
    Other short-term borrowing                                                        7,000      2,500
    Interest payable and other liabilities                                            1,068      1,271
    ---------------------------------------------------------------------------------------------------
      Total liabilities                                                             132,807    106,196
    ---------------------------------------------------------------------------------------------------

    Commitments and contingent liabilities (Notes 4, 12 and 13)                         ---        ---

    Shareholders' equity:
      Common stock - no par value: authorized 20,000,000
        shares; issued & outstanding 1,080,670 in 1998 and 1,078,720 in 1997          3,622      3,671
      Retained earnings                                                               7,734      6,509
      Accumulated other comprehensive income, net of tax                                 39         (7)
    ---------------------------------------------------------------------------------------------------
      Total shareholders' equity                                                     11,395     10,173
    ---------------------------------------------------------------------------------------------------
      Total liabilities and shareholders' equity                                   $144,202   $116,369
    ===================================================================================================
</TABLE>  
      See accompanying notes to consolidated financial statements.





                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                        2



<PAGE>
<TABLE>
<CAPTION>

                                                    CONSOLIDATED INCOME STATEMENTS
-----------------------------------------------------------------------------------------


Years ended December 31 (dollars in thousands, 
except per share amounts):                                  1998        1997         1996
-----------------------------------------------------------------------------------------
Interest income:                                          
<S>                                                         <C>         <C>          <C>   
  Loans, including fees                                   $8,177      $7,137       $6,463
  Federal funds sold and reverse repurchase agreements       355         288          250
  Securities:
    Taxable                                                1,392       1,131          947
    Tax exempt                                               276         203          166
------------------------------------------------------------------------------------------
      Total interest income                               10,200       8,759        7,826
------------------------------------------------------------------------------------------
Interest expense:
  Deposits:
    Savings and interest-bearing demand                    1,045         708          651
    Time                                                   1,495       1,588        1,407
    Certificates of deposit, $100 and over                   866         564          293
  Other borrowed funds                                        73          96          106
------------------------------------------------------------------------------------------
      Total interest expense                               3,479       2,956        2,457
------------------------------------------------------------------------------------------
      Net interest income                                  6,721       5,803        5,369
Provision for loan losses                                    134          52          ---
------------------------------------------------------------------------------------------
      Net interest income after
         provision for loan losses                         6,587       5,751        5,369
------------------------------------------------------------------------------------------
Noninterest income:
  Bankcard income                                            414         307          254
  Service charges and fees                                   308         274          264
  Gain on sale of loans                                       88          57          174
  Loan servicing                                              85         132          138
  Net gain on sale of other real estate owned                ---         ---          119
  Net losses on sales of securities available for sale       ---          (3)          (3)
  Other                                                       46         204          134
------------------------------------------------------------------------------------------
      Total noninterest income                               941         971        1,080
------------------------------------------------------------------------------------------
Noninterest expenses:
  Salaries and employee benefits                           3,237       2,872        2,554
  Occupancy                                                  683         694          613
  Other                                                    1,736       1,506        1,519
------------------------------------------------------------------------------------------
      Total noninterest expenses                           5,656       5,072        4,686
------------------------------------------------------------------------------------------
      Income before income tax expense                     1,872       1,650        1,763
Income tax expense                                           657         588          680
------------------------------------------------------------------------------------------
      Net income                                          $1,215      $1,062       $1,083
=========================================================================================

      Net income per common share - basic                  $1.12      $ 0.99       $ 1.01
      Weighted average common shares - basic           1,080,362   1,076,774    1,076,720

      Net income per common share - diluted                $0.95      $ 0.84       $ 0.89
      Weighted average common shares - diluted         1,277,190   1,257,680    1,217,235
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.



                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                        3
<PAGE>

<TABLE>
<CAPTION>
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------

Years ended December 31 (dollars in thousands):                       1998         1997        1996
----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                              <C>           <C>         <C>     
   Net income                                                    $   1,215     $  1,062    $  1,083
   Adjustments to reconcile net income to
     net cash provided by operating activities:
       Depreciation and amortization                                  (401)         (60)        308
       Provision for loan losses                                       134           52         ---
       Unamortized deferred loan fees, net                            (120)         (86)       (163)
       Losses on sales of securities available for sale                ---            3           3
       Originations of SBA loans held for sale                      (1,157)        (985)     (1,714)
       Proceeds from the sale of SBA loans held for sale             1,764        1,095       2,884
       Net gain on sale of other real estate owned                     ---          ---        (119)
       Loss on sale of equipment                                         2          ---           2
       Provision for deferred taxes                                    (72)         (31)         26
       Change in interest and fees receivable and other assets         (50)         254        (125)
       Change in interest payable and other liabilities                120           26        (306)
----------------------------------------------------------------------------------------------------
     Net cash provided by operating activities                       1,435        1,330       1,879
----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Proceeds from maturities of securities available for sale       109,024       42,603       1,681
   Proceeds from sales of securities available for sale                ---          997       1,997
   Proceeds from maturities of securities held to maturity           4,043        1,271       1,661
   Purchases of securities available for sale                     (115,583)     (59,557)        ---
   Purchases of securities held to maturity                         (3,693)      (1,493)     (1,177)
   Purchase of Federal Home Loan Bank stock                           (359)          ---        ---
   Net change in loans                                             (19,663)      (2,829)    (14,109)
   Proceeds from sale of other real estate owned                       ---          ---         252
   Purchases of premises and equipment                                (116)        (235)       (318)
   Proceeds from sale of equipment                                     ---          ---           6
----------------------------------------------------------------------------------------------------
     Net cash used in investing activities                         (26,347)     (19,243)    (10,007)
----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Net change in deposits                                           22,260       17,844       3,038
   Net change in securities sold under agreements to repurchase         54       (1,014)        101
   Net change in other short-term borrowing                          4,500        2,000         500
   Exercise of stock options                                            35            9         ---
   Repurchase and retirement of common stock                           (84)         ---         ---
   Cash dividends paid                                                (324)        (323)       (323)
----------------------------------------------------------------------------------------------------
     Net cash provided by financing activities                      26,441       18,516       3,316
----------------------------------------------------------------------------------------------------
     Net change in cash and cash equivalents                         1,529          603      (4,812)
Cash and cash equivalents at beginning of year                       7,548        6,945      11,757
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                         $   9,077     $  7,548    $  6,945
====================================================================================================
Supplemental disclosure of cash flow information: 
Cash paid during the year for:
      Interest                                                      $3,463       $2,982      $2,397
      Income taxes                                                     630          532         751
Noncash investing and financing activities during the year:
      Stock dividend Federal Home Loan Bank                         $    9       $  ---      $  ---
      Loan in connection with sale of other real estate owned          ---          ---         178
      Receivable at close of escrow on sale of other real 
        estate owned                                                   ---          ---          48
      Dividend payable                                                 ---          324         323
       Tax benefit of disqualified disposition of incentive
        stock options                                                   10          ---         ---

See accompanying notes to consolidated financial statements.
</TABLE>


                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                        4


<PAGE>


<TABLE>
<CAPTION>
                                                    CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996 (dollars in thousands,  except per share amounts):
                                                                                                            
                                                                                                        Accumulated
                                                                                                           Other          Total
                                                           Shares      Common  Comprehensive  Retained  Comprehensive Shareholders'
                                                        Outstanding    Stock      Income      Earnings     Income        Equity
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>       <C>           <C>         <C>          <C>    
Balance, January 1, 1996                                  1,076,720    $3,662                  $5,011      $  94        $ 8,767
                                                                                                        
Comprehensive income:                                                                                   
   Net income                                                                    $1,083         1,083                     1,083
   Other comprehensive income, net of tax of $(10):                                                     
       Unrealized losses on securities available for                                                    
           sale, net of reclassification adjustment*                               (109)                    (109)          (109)
                                                                                   -----                
Total comprehensive income                                                          974                 
                                                                                   -----                 
                                                                                                        
Cash dividends declared ($0.30/share)                                                            (323)                     (323)
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                                1,076,720     3,662                   5,771        (15)         9,418
                                                                                                        
Comprehensive income:                                                                                   
   Net income                                                                     1,062         1,062                     1,062
   Other comprehensive income, net of tax of $(5):                                                      
       Unrealized gains on securities available for                                                     
           sale, net of reclassification adjustment*                                  8                        8              8
                                                                                  -----                 
Total comprehensive income                                                        1,070                 
                                                                                  -----                 
                                                                                                        
Exercise of stock options                                     2,000         9                                                 9
                                                                                                        
Cash dividends declared ($0.30/share)                                                            (324)                     (324)
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997                                1,078,720     3,671                   6,509         (7)        10,173
                                                                                                        
Comprehensive income:                                                                                   
   Net income                                                                     1,215         1,215                     1,215
   Other comprehensive income, net of tax of $25:                                                       
       Unrealized gains on securities available for                                                     
           sale, net of reclassification adjustment*                                 46                       46             46
                                                                                 ------                 
Total comprehensive income                                                       $1,261                 
                                                                                 ------                 
                                                                                                        
Tax benefit of disqualified disposition of                                                              
    incentive stock options                                                                        10                        10
                                                                                                        
Exercise of stock options                                     6,950        35                                                35
                                                                                                        
Repurchase and retirement of common stock                    (5,000)      (84)                                              (84)
--------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1998                                1,080,670    $3,622                  $7,734      $  39        $11,395
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                                                       
*Disclosure of reclassification amount:

Years ended December 31 (in thousands):                                 1998   1997    1996
---------------------------------------------------------------------------------------------
<S>                                                                      <C>    <C>   <C>   
  Unrealized holding gains (losses) arising during period                $46    $ 5   $(112)
   Add reclassification adjustment for losses included in net income     ---      3       3
---------------------------------------------------------------------------------------------
   Net unrealized gains (losses) on securities available for sale        $46    $ 8   $(109)
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                        5
<PAGE>



 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 
 1998, 1997 AND 1996
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Bay Commercial Services (the "Company")
and its wholly owned subsidiary, Bay Bank of Commerce (the "Bank"), conform with
generally  accepted  accounting  principles and prevailing  practices within the
banking  industry.  The methods of applying those  principles  which  materially
affect the consolidated financial statements are summarized below.

CONSOLIDATION
The  consolidated  financial  statements  include  the  Company  and  the  Bank.
Significant   intercompany   accounts  and   transactions   are   eliminated  in
consolidation.

NATURE OF OPERATIONS
The Company operates as one business segment and principally engages in business
banking in the  Counties of Alameda and Contra  Costa,  California.  The Company
primarily  grants business loans including lines of credit,  and commercial real
estate  and  construction  loans,  the  majority  of which  are  secured  by the
underlying  properties.  Lending for single family residential  construction and
equity  lines of credit has  increased  in recent  years,  while  other types of
consumer  lending  remains  limited.  Although  the  Company  has a  diversified
portfolio,  a  substantial  portion  of its  debtors'  ability  to  honor  their
contracts  is  dependent  upon  the  economic  sector  of  Northern  California,
including the real estate  markets of the San Francisco Bay Area.  The Company's
primary  source of  revenues is  interest  income  from its loan and  investment
securities  portfolios.  The Company is not dependent on any single customer for
more than ten percent of the Company's revenues.

ESTIMATES
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets,  liabilities,  revenue and expenses as of the
date and for the  periods  presented.  Actual  results  could  differ from those
estimates.

CASH AND CASH EQUIVALENTS
The Company  considers cash on hand,  cash due from banks and federal funds sold
as cash and cash equivalents. Federal funds sold generally mature in one day.

SECURITIES
Debt  securities  are  classified  as held to maturity and measured at amortized
cost only if the  Company  has the  positive  intent  and  ability  to hold such
securities to maturity.  All other debt  securities  are classified as available
for sale  securities,  which are  carried at market  value with a  corresponding
recognition of the unrealized  holding gain or loss (net of taxes) in a separate
component of shareholders'  equity until realized.  Realized gains and losses on
sales, if any, are included in noninterest income.

Amortization  of premiums and accretion of discounts  arising at  acquisition of
securities  are included in income using methods that  approximate  the interest
method.  Gains or  losses  on the sale of  securities  are  computed  using  the
specific identification method.

LOANS
Loans held for investment are reported at the principal amount outstanding,  net
of deferred loan fees and related direct loan  origination  costs.  Deferred net
fees and costs are  recognized  in  interest  income  over the loan term using a
method  that  generally  produces  a level  yield on the  unpaid  loan  balance.
Interest on loans is credited to income as earned. Accrual of interest income is
discontinued  when the payment of interest or  principal is 90 days or more past
due, except when the loan is well secured and in the process of collection. When
a loan is placed on nonaccrual status,  any interest  previously accrued but not
received is generally  reversed.  All  subsequent  payments are first applied to
uncollected principal and then to unpaid interest. Interest income is accrued at
such  time as the  loan is  brought  fully  current  as to  both  principal  and
interest,  and, in management's judgment,  such loans are considered to be fully
collectible.

Loans held for sale include the portions of certain  loans which are  guaranteed
by the federal Small Business Administration ("SBA"). These loans are carried at
the lower of  aggregate  cost or market  value.  Market value is  determined  by
reference  to quoted  yields for  similar  types of  instruments.  Loan fees and
direct loan  origination  costs  related to loans held for sale are deferred and
recognized as a component of the gain or loss on sale.

In  determining  the gain  realized  on the sale of SBA  guaranteed  loans,  the
recorded  investment  is  allocated  between the  portion of the loan sold,  the
portion retained, and the servicing and other financial assets based on relative
fair values as of the date the loan is sold.

ALLOWANCE FOR LOAN LOSSES
The Bank provides for possible loan losses by a charge to operating income based
upon the composition of the loan portfolio,  past loan loss experience,  current
economic conditions and other factors which, in management's  judgment,  deserve
recognition in estimating loan losses.  Management will charge off loans when it
determines there has been a permanent impairment of the related carrying values.
Management  attributes  general  reserves  to  different  types of  loans  using
percentages  which are based upon perceived risk  associated  with the portfolio
and underlying  collateral,  historical loss  experience,  and  vulnerability to
changing economic  conditions which may affect the  collectibility of the loans.
Specific  reserves  are  allocated  for  impaired  loans,  for loans  which have
experienced  a decline in internal loan grading,  and when  management  believes
additional  loss  exposure  exists.  Although the  allowance  for loan losses is
allocated  to  various  portfolio  segments,  it is  general  in  nature  and is
available for the loan portfolio in its entirety.  Management  believes that the
allowance  for  loan  losses  is  adequate.   While  management  uses  available
information to recognize losses on loans,  future additions to the allowance may
be  necessary  based on changes in economic  conditions.  In  addition,  various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the Company's  allowance for losses on loans. Such agencies
may require the Company to recognize  additions to the allowance  based on their
analysis of information available to them at the time of their examination.

A loan is considered  impaired when  management  determines  that it is probable
that the Company  will be unable to collect all  amounts  due  according  to the
original  contractual terms of the loan agreement,  including interest payments.
Impaired  loans are those  loans  identified  under the Bank's  internal  rating
system as  "doubtful"  or "loss" or those  "substandard"  loans  which have been
placed on nonaccrual.  Restructured loans are always classified as impaired. The
Bank applies its normal loan review  procedures when determining  whether a loan
is impaired. The


                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                        6

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 
 1998, 1997 AND 1996
--------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES, CONTINUED
amount of impairment is measured using  discounted  cash flows or the fair value
of the  collateral,  if the  loan is  collateral  dependent.  Excluded  from the
impairment  analysis are large groups of smaller balance  homogeneous loans such
as installment and residential mortgage loans. Impaired loans are carried at the
estimated  present  value of the future  cash  flows,  discounted  at the loan's
effective interest rate, or at the fair value of the collateral if less than the
recorded  investment in the loan  (including  accrued  interest and net deferred
loan fees or costs).  Specific  reserves for impaired  loans are  recognized  by
adjusting the allocation of the existing allowance for loan losses.

PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation computed
on the  straight-line  method over estimated  useful lives ranging from three to
fifteen years.  Leasehold improvements are capitalized at cost and are amortized
over the lesser of the term of the lease or the  estimated  useful  lives of the
improvements ranging from fifteen to twenty-five years.

OTHER REAL ESTATE OWNED (OREO)
OREO  consists  of real  estate  acquired  as a result of legal  foreclosure  or
through  receipt of a deed in lieu of  foreclosure.  OREO amounts are carried at
the  lower  of the  recorded  investment  in the  property  or fair  value  less
estimated  costs of disposal.  When the property is acquired,  any excess of the
loan  balance over fair value of the  property is charged to the  allowance  for
loan losses.  Subsequent  write-downs,  if any, and disposition gains and losses
are included in noninterest income or noninterest expense. Operating expenses of
such properties, net of related income, are included in other expenses and gains
or losses on their disposition are included in other income and other expenses.

OTHER SHORT-TERM BORROWING
Other  short-term  borrowing  consists of federal  funds  purchased  and amounts
borrowed from the Federal Home Loan Bank.

INCOME TAXES
The Company  and the Bank file a  consolidated  federal  income tax return and a
combined  California  franchise  tax  return.  Amounts  provided  for income tax
expenses are determined based on the asset and liability method. Deferred income
taxes are  recognized for the tax  consequences  of "temporary  differences"  by
applying  enacted  statutory tax rates applicable to future years to differences
between the consolidated  financial statement carrying amounts and the tax bases
of existing assets and liabilities.  The effect on deferred taxes of a change in
tax rates is  recognized  in income in the period that  includes  the  enactment
date.

NET INCOME PER COMMON SHARE
Net income per common  share - basic is computed  by dividing  net income by the
average  number of  outstanding  common  shares.  Net income per common  share -
diluted is computed by dividing net income by the average  number of outstanding
common shares  including the dilutive effect of stock options.  A reconciliation
of  the  numerators  and  denominators  of  the  basic  and  diluted   per-share
computations for net income can be found in Note 7.

STOCK-BASED  COMPENSATION  
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation ", establishes accounting and disclosure  requirements
using  a  fair  value-based  method  of  accounting  for  stock-based   employee
compensation plans. As allowed under the provisions of SFAS No. 123, the Company
has  chosen  to  continue  using  the  intrinsic  value-based  method  of option
valuation prescribed in Accounting  Principles Board Opinion No. 25, "Accounting
for Stock Issued to  Employees",  and related  Interpretations  (APB No. 25) and
provide pro forma  disclosures (see Note 8) of net income and earnings per share
as if the accounting provisions of SFAS No. 123 had been adopted.

The binomial  option  pricing model was used by the Company to calculate  option
values pursuant to SFAS No. 123. This model, as well as other currently accepted
option valuation models,  incorporates highly subjective assumptions,  including
future stock price  volatility and expected time until  exercise,  which greatly
affect the calculated values.

COMPREHENSIVE INCOME
The Company has  retroactively  adopted SFAS No. 130,  "Reporting  Comprehensive
Income",  which  requires  that an  enterprise  report  and  display,  by  major
components and as a single total, the change in its net assets during the period
from nonowner  sources.  The adoption of this Statement  resulted in a change in
the financial statement presentation but did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.

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

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

RECLASSIFICATIONS
Certain  prior year amounts have been  reclassified  to conform to the financial
statement presentation for the current year. The reclassifications had no impact
on the Bank's results of operations or shareholders' equity.


                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                        7


<PAGE>


 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 
 1998, 1997 AND 1996
--------------------------------------------------------------------------------
(2)  SECURITIES
The amortized cost,  gross unrealized gains (losses) and estimated fair value of
debt securities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                               1998                                       1997
                            ------------------------------------------   ------------------------------------------- 
                                         Gross      Gross                           Gross      Gross
                            Amortized Unrealized Unrealized Estimated    Amortized Unrealized Unrealized Estimated
(Dollars in thousands)          Cost     Gains      Losses  Fair value     Cost      Gains     Losses     Fair value
                            -------------------------------------------  -------------------------------------------
AVAILABLE FOR SALE:         
<S>                          <C>         <C>        <C>      <C>          <C>         <C>       <C>       <C>    
U.S. Treasury and
   agency securities .....   $ 2,000     $---       $ (6)    $ 1,994      $ 4,000     $ 10      $ (8)     $ 4,002
Corporate securities .....    19,651      ---         (7)     19,644       14,401        1        (1)      14,401
Mortgage-backed securities    10,318       91        (14)     10,395        6,262        8       (22)       6,248
--------------------------------------------------------------------------------------------------------------------
  Total ..................   $31,969     $ 91       $(27)    $32,033      $24,663     $ 19      $(31)     $24,651
====================================================================================================================

HELD TO MATURITY:
U.S. Treasury and
   agency securities .....   $  ---      $---       $---     $   ---      $ 3,197     $  5      $ (1)     $ 3,201
Obligations of states and
    political subdivisions     6,123      244        ---       6,367        4,661      120       ---        4,781
Mortgage-backed securities     1,386      ---         (5)      1,381           71        4       ---           75
--------------------------------------------------------------------------------------------------------------------
  Total ..................   $ 7,509     $244       $ (5)    $ 7,748      $ 7,929     $129      $ (1)     $ 8,057
====================================================================================================================
</TABLE>
                                       
Securities with a carrying amount of $19,826,000 and $11,074,000 at December 31,
1998 and  1997,  respectively,  were  pledged  to  secure  public  deposits  and
securities  sold  under  agreements  to  repurchase  and for other  purposes  as
required by law or contract.

The amortized cost and estimated  fair value of debt  securities at December 31,
1998, by contractual maturity,  are shown below. Expected maturities will differ
from  contractual  maturities  because  borrowers  may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                               MATURING
                           ----------------------------------------------
AMORTIZED COST                           After One  After Five
(Dollars in thousands)     In One Year    Through    Through     After
                             or Less    Five Years  Ten Years  Ten Years          Total
                           ----------------------------------------------        -------
AVAILABLE FOR SALE:
<S>                          <C>          <C>          <C>         <C>           <C>    
U.S.Treasury and
  agency .................   $   ---      $2,000      $  ---      $---           $ 2,000
Corporate securities .....    19,651         ---         ---       ---            19,651
Mortgage-backed securities        64       5,680       4,574       ---            10,318
----------------------------------------------------------------------------------------
  Total amortized cost ...   $19,715      $7,680      $4,574       ---           $31,969
  Estimated fair value ...   $19,708      $7,693      $4,632      $---           $32,033
========================================================================================
                                                                          
HELD TO MATURITY:
Obligations of states and    
  political subdivisions     $   519      $1,307      $2,208      $2,089         $ 6,123
Mortgage-backed securities       ---       1,386         ---         ---           1,386
----------------------------------------------------------------------------------------
  Total amortized cost       $   519      $2,693      $2,208      $2,089         $ 7,509
  Estimated fair value       $   530      $2,738      $2,306      $2,174         $ 7,748
========================================================================================
</TABLE>

Following  is a  schedule  of gains  (losses)  realized  on sales of  securities
available for sale for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands)   1998   1997   1996
-----------------------------------
<S>              <C>    <C>    <C> 
Gains ........   $---   $---   $---
Losses .......    --     (3)    (3)
-----------------------------------
Net losses ...   $---   $(3)   $(3)
===================================
</TABLE>

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                        8


<PAGE>

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 
 1998, 1997 AND 1996
--------------------------------------------------------------------------------
(3) LOANS AND  ALLOWANCE  FOR LOAN LOSSES 
Loans at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands):                1998        1997
-----------------------------------------------
<S>                        <C>         <C>     
Commercial .............   $ 24,250    $ 18,980
Commercial held for sale        473         721
Real Estate:
  Construction .........     16,049       7,436
  Mortgage .............     43,815      41,181
  Held for sale ........        466         780
  Equity ...............      5,297       2,718
Installment ............      2,299       1,895
Other ..................        979         947
-----------------------------------------------
                             93,628      74,658
Deferred loan fees .....       (499)       (529)
-----------------------------------------------
                           $ 93,129    $ 74,129
================================================
</TABLE>

Loans on which the accrual of interest had been discontinued amounted to $30,000
at  December  31,  1998 and  $440,000  at  December  31,  1997.  Once  placed on
nonaccrual,  no interest was  recognized  on such loans and, if interest on such
loans had been  accrued,  it would have  amounted  to  approximately  $2,000 and
$39,000 for 1998 and 1997,  respectively.  As of December 31, 1998 and 1997, the
Company had $469,000 and  $476,000,  respectively,  in  restructured  loans.  At
December  31,  1998,  there  were no  commitments  to lend  additional  funds to
borrowers whose loans were restructured or classified as nonaccrual.

Of total  nonperforming  loans of $499,000 and $911,000 at December 31, 1998 and
1997,  respectively,  $27,000 and $231,000 were guaranteed by the Small Business
Administration  ("SBA") and, therefore,  not considered impaired. As of December
31,  1998 and  1997,  the  Company  had  approximately  $472,000  and  $680,000,
respectively,  of loans  considered  to be impaired.  Evaluation of the impaired
loans in 1998 applied the collateral  method to $469,000 while the remainder was
evaluated  using  discounted  cashflow  analysis.  This  evaluation  required an
allowance for loan losses of $70,000 in 1998.  Evaluation of the impaired  loans
in 1997  applied the  collateral  method to  $209,000  while the  remainder  was
evaluated  using  discounted  cashflow  analysis.  This  evaluation  required an
allowance  for loan  losses  of  $164,000  in 1997  related  to  loans  totaling
$635,000.  For the remaining  1997 balance of impaired  loans,  no allowance for
loan losses was required as collateral  values  equaled or exceeded the recorded
investments in the loans.

The  average  recorded  investment  in  impaired  loans was  $732,000  for 1998,
$879,000 for 1997 and $190,000 for 1996.  Interest income recognized on impaired
loans amounted to $56,000 in 1998, $57,000 in 1997 and $12,000 in 1996. Interest
income is only recognized on restructured  loans which are performing  under the
restructured terms.  Interest income is recognized on nonaccrual loans only when
principal has been fully recovered or the loan has returned to accrual status.

Certain  directors and executive  officers of the Company,  certain  entities to
which they are related and certain of their  relatives are loan customers of the
Bank.  Such loans,  all of which were made in the ordinary course of business on
normal credit terms, including interest rate and collateralization, consisted of
the following at December 31:
<TABLE>
<CAPTION>
(in thousands):        1998     1997
------------------------------------
<S>                 <C>        <C>  
Beginning balance   $    53    $ 178
Advance .........     1,351       31
Payments ........      (184)     (40)
Other ...........       ---     (116)
------------------------------------
Ending balance ..   $ 1,220    $  53
====================================
</TABLE>

At December 31, 1998,  these loans were real estate  loans,  revolving  lines of
credit or credit  card  lines  with  credit  limits in the  aggregate  amount of
$1,312,000.  At December  31, 1997 these loans were  revolving  lines of credit,
installment  loans or credit  card lines  with  credit  limits in the  aggregate
amount of $99,000.  Additionally,  at December 31, 1998 and 1997,  there were no
loans related to these parties which were nonperforming.

Following is a schedule of the activity in the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>

(in thousands):                   1998       1997     1996
-----------------------------------------------------------
<S>                            <C>        <C>        <C>  
Balance, beginning of year     $ 1,000    $   971    $ 982
Loans charged off ..........      (172)       (31)     (35)
Recoveries on loans
  charged off ..............        18          8       24
-----------------------------------------------------------                                             
Net chargeoffs .............      (154)       (23)     (11)
Provision charged to expense       134         52      ---
 ----------------------------------------------------------                                                
Balance, end of year .......   $   980    $ 1,000    $ 971
=========================================================== 
</TABLE>
                                                   
In  certain  circumstances,  the  Company  sells a portion of its SBA loans with
servicing retained.  The amount of SBA loans serviced for others at December 31,
1998 and 1997 was approximately $11,058,000 and $14,797,000, respectively.

(4)  PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of:
<TABLE>
<CAPTION>
(in thousands):                  1998     1997
-------------------------------------------------
<S>                               <C>      <C>   
Land ..................           $  354   $  354
Premises ..............            1,167    1,164
Furniture and equipment            2,227    2,135
Leasehold improvements             1,318    1,318
-------------------------------------------------
                                   5,066    4,971
-------------------------------------------------
Less accumulated           
  depreciation and amortization   (3,117)  (2,860)
-------------------------------------------------
                                  $1,949  $ 2,111
=================================================
</TABLE>

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                        9
<PAGE>


NOTES TO  CONSOLIDATED  FINANCIAL  STATEMENTS  FOR YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
--------------------------------------------------------------------------------

PREMISES AND  EQUIPMENT,  CONTINUED 
The Company leases certain premises under non-cancelable operating leases.
Future minimum rental payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
                                    Amount
     Year                    (in thousands)
     -------------------------------------
<S>                                   <C> 
     1999                             $252
     2000                              254
     2001                              243
     2002                              163
     2003                              163
    Thereafter                         344
    --------------------------------------      
    Total minimum payments required $1,419
    ======================================
</TABLE>

Rent  expense  was  $250,000,  $269,000  and  $202,000  in 1998,  1997 and 1996,
respectively.

(5) INCOME  TAXES  
Components  of income tax  expense  for the years  ended
December 31 were as follows:
<TABLE>
<CAPTION>
(in thousands):                   1998     1997     1996
--------------------------------------------------------
Taxes currently payable:
<S>                              <C>      <C>      <C>  
   Federal ...................   $ 571    $ 471    $ 470
   State .....................     158      148      184
--------------------------------------------------------
      Total currently payable      729      619      654
--------------------------------------------------------                                              
Deferred taxes:
   Federal ...................     (67)     (13)      35
   State .....................      (5)     (18)      (9)
--------------------------------------------------------                                                   
      Total deferred taxes ...     (72)     (31)      26
--------------------------------------------------------                                                 
Total income tax expense .....   $ 657    $ 588    $ 680
========================================================
</TABLE>

     Cumulative  deferred  income tax assets and liabilities at December 31 were
as follows:
<TABLE>
<CAPTION>
(in thousands):                        1998     1997
----------------------------------------------------
Deferred tax assets:
<S>                                   <C>      <C>  
  State franchise tax .............   $  51    $  43
  Provision for loan losses .......     195      135
  Nonaccrual interest .............       3        7
  Unrealized loss on securities
    available for sale ............     ---        5
----------------------------------------------------
    Total deferred tax assets .....     249      190
----------------------------------------------------
Deferred tax liabilities:
   Differences in tax and
     book depreciation ............    (120)    (148)
   Federal Home Loan Bank dividends      (4)     ---
   Unrealized gain on securities
      available for sale ..........     (25)     ---
   Other ..........................     (43)     (27)
----------------------------------------------------
    Total deferred tax liabilities     (192)    (175)
----------------------------------------------------
Net deferred tax assets ...........   $  57    $  15
====================================================
</TABLE>

The Company  believes  that it is more likely than not that it will  realize the
above  deferred  tax  assets in future  periods  and,  therefore,  no  valuation
allowance has been provided against its deferred tax assets.

The  effective  tax rate as a  percentage  of income  before  income tax expense
differs from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
                                    1998     1997     1996
-----------------------------------------------------------
Statutory federal
<S>                                 <C>      <C>      <C>  
  income tax rate .............     35.0%    35.0%    35.0%
Increase (decrease)
  resulting from:
  Tax exempt income
    on municipal securities ...     (4.5)    (3.7)    (2.9)
  State franchise taxes, net of
    federal income tax benefit       5.4      5.2      6.5
  Other .......................     (0.8)    (0.8)     ---
-----------------------------------------------------------
    Effective tax rate ........     35.1%    35.7%    38.6%
===========================================================
</TABLE>

(6)  DEPOSITS
The  aggregate  amount of  certificates  of deposit of $100,000 or more was
approximately $21,611,000 and $12,834,000 at December 31, 1998 and 1997,
respectively.

At December 31, 1998, the scheduled  maturities of all  certificates  of deposit
were as follows:
            
<TABLE>
<CAPTION>
                                 Amount
            Year          (in thousands)
            ---------------------------
<S>                             <C>    
            1999                $31,975
            2000                    783
            2001                    124
            2002                    809
            2003 and thereafter     602
            ---------------------------
            Total               $34,293
            ===========================
</TABLE>

(7) EARNINGS PER SHARE
The following is a  reconciliation  of numerators and  denominators of the basic
and diluted EPS computations.
<TABLE>
<CAPTION>
                                 FOR THE YEARS ENDED DECEMBER 31,
(Dollars in thousands
except per share amounts):          1998         1997         1996
------------------------------------------------------------------
BASIC EPS COMPUTATION:
<S>                           <C>          <C>          <C>
Net income available
  to shareholders .........   $    1,215   $    1,062   $    1,083
------------------------------------------------------------------
Weighted average
  common shares outstanding    1,080,362    1,076,774    1,076,720
------------------------------------------------------------------
NET INCOME PER
  COMMON SHARE - BASIC ....   $     1.12   $     0.99   $     1.01
==================================================================
</TABLE>


                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       10

<PAGE>


 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 
 1998, 1997 AND 1996
------------------------------------------------------------------------
EARNINGS PER SHARE, CONTINUED
<TABLE>
<CAPTION>
                                 FOR THE YEARS ENDED DECEMBER 31,
(Dollars in thousands
except per share amounts):          1998         1997         1996
------------------------------------------------------------------
DILUTED EPS COMPUTATION:
<S>                           <C>          <C>          <C>    
Net income available
  to shareholders .........   $    1,215   $    1,062   $    1,083
------------------------------------------------------------------
Weighted average
  common shares outstanding    1,080,362    1,076,774    1,076,720
Dilutive effect of
    stock options .........      196,828      180,906      140,515
------------------------------------------------------------------
Weighted average
    common shares - diluted    1,277,190    1,257,680    1,217,235
------------------------------------------------------------------
NET INCOME PER
  COMMON SHARE - DILUTED ..   $     0.95   $     0.84   $     0.89
==================================================================
</TABLE>

(8) STOCK  OPTION  PLANS
Under the Company's  stock option plans,  up to 303,186  shares of the Company's
common  stock  were  reserved  for the  exercise  of stock  options  granted  to
directors,  officers  and key  employees.  Under the plans,  options  may not be
granted at a price less than the fair market value at the date of the grant, may
be  exercised  over a ten-year  term and vest ratably over periods of up to five
years from the date of the grant.  Options for the  purchase  of 262,551  shares
were  exercisable  at a weighted  average  price of $4.95 at December  31, 1998.
Options  for  the   purchase   of  251,686   shares   were   exercisable   at  a
weighted-average  exercise  price of $4.95 as of December 31, 1997.  Options for
the purchase of 228,571 shares were  exercisable at a weighted  average price of
$4.96 as of December 31, 1996.  There were no shares  available  for grant as of
December 31, 1998.  There were 7,185 shares  available  for grant as of December
31, 1997 and 1996.
The following is a summary of changes in options outstanding:

<TABLE>
<CAPTION>
                                                       Weighted
                                                        Average
                                            Shares        Price
----------------------------------------------------------------
<S>                                        <C>          <C>    
Outstanding at January 1, 1996 and 1997    294,266       $ 4.99
Options exercised .....................     (2,000)        4.61
----------------------------------------------------------------
Outstanding at December 31, 1997 ......    292,266       $ 5.00
Options granted .......................      8,500        16.00
                                                   
Options forfeited .....................     (1,315)        5.12
                                                  
Options exercised .....................     (6,950)        5.02
----------------------------------------------------------------
Outstanding at December 31, 1998           292,501       $ 5.31
===============================================================
</TABLE>

SFAS NO. 123 PRO FORMA DISCLOSURES
The Company applies the intrinsic value-based method in APB No. 25 in accounting
for its stock options granted.  Under the intrinsic value method no compensation
cost has been recognized for its stock option grants. The proforma  presentation
applies only to stock options granted in 1995 and later. Had  compensation  cost
been determined for options granted since 1995 consistent with SFAS No. 123, the
Company's  net income and  earnings per share would have been changed to the pro
forma amounts indicated below for the years ended December 31,:
<TABLE>
<CAPTION>
(in thousands, except per share amounts):   1998       1997       1996
-----------------------------------------------------------------------
Net income:                               
<S>                                        <C>        <C>        <C>   
  As reported ........................     $1,215   $1,062       $1,083
  Pro forma ..........................     $1,206   $1,049       $1,070
                                                              
Net income per common share - basic:                          
  As reported ........................      $1.12    $0.99        $1.01
  Pro forma ..........................      $1.12    $0.97        $0.99
                                                              
Net income per common share - diluted:                        
  As reported ........................      $0.95    $0.84        $0.89
  Pro forma ..........................      $0.94    $0.83        $0.88
</TABLE>                                  
                                                             
The  Company  granted  stock  options  in 1998 and 1995.  The fair  value of the
options  granted  during 1998 and 1995 was  estimated  as $23,000  and  $65,000,
respectively on the date of the grant using a binomial option-pricing model with
the  following  assumptions:  $0.30 annual  dividend,  volatility of 8% and 40%,
risk-free interest rate of 4.63% and 6.00%, assumed forfeiture rate of zero, and
an expected life of 10 years.  The weighted  average per share fair value of the
1998 and 1995 awards was $2.70 and $3.45.  The impact of  outstanding  nonvested
stock  options  granted  prior  to 1995  has been  excluded  from the pro  forma
calculations; accordingly, the 1998, 1997 and 1996 pro forma adjustments are not
indicative of future pro forma  adjustments  when the calculation  will apply to
all applicable stock options.

The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
           OUTSTANDING                       EXERCISABLE
--------------------------------------  ---------------------
             Weighted                                Weighted
             Average                                  Average
 Number of  Remaining    Range of         Number     Exercise
   Options    Years   Exercise Prices   of Options     Price
--------------------------------------  ---------------------
<S>           <C>      <C>                <C>          <C>  
  266,866     4.6      $4.25-$5.625       252,701      $4.84
   17,135     6.8         $7.875            9,850      $7.875
    8,500     9.8        $16.00               ---         ---
-------------------------------------------------------------
  292,501     4.8      $4.25-$16.00       262,551      $4.95
=============================================================
</TABLE>

(9)  EMPLOYEE  STOCK  OWNERSHIP  PLAN  
All  employees  of the  Company  who have  satisfied  age and  length of service
requirements  are eligible to participate  in an employee  stock  ownership plan
("ESOP"). Contributions by the Company were $60,000 in 1998, $54,000 in 1997 and
$57,000 in 1996.

(10) EMPLOYEE  SAVINGS PLAN 
The Company  sponsors  an  employee  savings  plan under  Section  401(k) of the
Internal Revenue Code. This plan covers  substantially all full-time  employees.
The  plan  provides  for  employer  matching  contributions  at 50% of  employee
contributions,  not to  exceed  2.5%  of  eligible  employee  compensation.  The
Company's expense was $48,000 for 1998, $41,000 for 1997 and $41,000 for 1996.

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       11


<PAGE>


 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 
 1998, 1997 AND 1996
--------------------------------------------------------------------------------
(11)  OTHER EXPENSES
Components  of other  expenses  which  exceed one percent of total  income in at
least one of the years  presented  are shown below for the years ended  December
31:
<TABLE>
<CAPTION>
(in thousands) ........................................     1998     1997     1996
----------------------------------------------------------------------------------
Other expenses:
<S>                                                       <C>      <C>      <C>   
  Data processing .....................................   $  352   $  317   $  287
  Bankcard ............................................      352      243      202
  Directors' fees and expenses ........................      158      154      139
  Professional services ...............................      127      111      226
  Other ...............................................      747      681      665
----------------------------------------------------------------------------------
                                                          $1,736   $1,506   $1,519
==================================================================================
</TABLE>

(12) PENDING  LITIGATION  
The Company and the Bank are involved in various legal proceedings.  Management,
after reviewing  these  proceedings  with legal counsel,  believes the aggregate
liability,  if any,  will  not  materially  affect  the  Company's  consolidated
financial position or results of operations.

(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK 
The Company is a party to  financial  instruments  with  off-balance-sheet  risk
which occur in the normal course of business to meet the financing  needs of its
customers.  These financial instruments include commitments to extend credit and
standby  letters of  credit.  Those  instruments  involve,  to varying  degrees,
elements of credit risk in excess of the amount  recognized in the  consolidated
balance sheet. The contract amounts of those  instruments  reflect the extent of
involvement the Company has in particular classes of financial instruments.

The Company's commitments to extend credit totaled approximately $41,576,000 and
$29,749,000  at December  31,  1998 and 1997,  respectively.  Commitments  under
standby  letters of credit  approximated  $355,000  and $172,000 at December 31,
1998 and 1997,  respectively.  Commitments  under the Bank's credit card program
approximated   $1,202,000   and   $872,000  at  December   31,  1998  and  1997,
respectively.  No  significant  losses  are  anticipated  as a  result  of these
commitments.  Most  of the  outstanding  commitments  to  extend  credit  are at
variable rates tied to the Bank's reference rate.

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the financial  instrument  for  commitments  to extend credit and
standby letters of credit issued is the contractual amount of those instruments.
The Company uses the same credit policies in making  commitments and conditional
obligations as it does for on-balance-sheet  financial instruments.  The Company
controls the credit risk of the off-balance-sheet  financial instruments through
the normal credit  approval and monitoring  process.  Unless noted,  the Company
does not necessarily  require  collateral or other security to support financial
instruments with credit risk.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future cash  requirements.  The  Company  evaluates  each  customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed  necessary  by  the  Company  upon  extension  of  credit,  is  based  on
management's  credit evaluation of the customer.  Collateral held varies but may
include  accounts  receivable,  inventory,  property,  plant and equipment,  and
income-producing commercial properties.

Standby letters of credit are conditional commitments, the majority of which are
for one year or less,  issued by the Company to guarantee the  performance  of a
customer to a third party. The credit risk involved in issuing letters of credit
is  essentially  the same as that  involved  in  extending  loan  facilities  to
customers.

(14)  REGULATORY MATTERS
The Bank is subject to  certain  restrictions  under the  Federal  Reserve  Act,
including restrictions on extensions of credit to its affiliates. In particular,
the  Company is  prohibited  from  borrowing  from the Bank unless the loans are
secured by specified  obligations.  Such secured loans and other advances by the
Bank to affiliates of the Bank are limited in amount to 10 percent of the Bank's
capital  and  surplus on a per  affiliate  basis and to 20 percent of the Bank's
capital and surplus on an aggregate  affiliate  basis. At December 31, 1998, the
Bank had no loans outstanding to the Company.

Federal Reserve Board  regulations  require  reserve  balances on deposits to be
maintained by the Bank with the Federal  Reserve Bank of San Francisco  ("FRB").
The average required reserve balance was  approximately  $9,000 during 1998. Due
to the Bank's  cash  balances  during  1997,  no  balances  were  required to be
maintained at the FRB.

Bank  dividends  are  regulated by various  government  entities,  including the
Federal Deposit Insurance  Corporation  (FDIC) and the California  Department of
Financial  Institutions.  In  addition,  California  law  limits  the  amount of
dividends  the  Bank  may  pay,   without  prior   approval  of  the  California
Commissioner of Financial  Institutions,  to the lesser of the retained earnings
of the Bank or the net income of the Bank for its last three fiscal years,  less
any  distributions  during such  period.  At  December  31,  1998,  the Bank has
approximately $2,118,000 available for payment of dividends, which payment would
not require the prior  approval of the  Commissioner  of Financial  Institutions
under this limitation.

The Company and the Bank are subject to various regulatory capital  requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate   certain   mandatory,   and  possibly   additional
discretionary,  actions by regulators  that, if undertaken,  could have a direct
material effect on the financial  statements of the Company and the Bank.  Under
capital adequacy  guidelines and the regulatory  framework for prompt corrective
action, the Bank must meet specific capital guidelines

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       12


<PAGE>


 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 
 1998, 1997 AND 1996
--------------------------------------------------------------------------------
REGULATORY MATTERS, CONTINUED
that  involve  quantitative  measures  of the Bank's  assets,  liabilities,  and
certain  off-balance-sheet  items  as  calculated  under  regulatory  accounting
practices.  The capital amounts and  classification  of the Company and the Bank
are also subject to qualitative  judgments by the regulators  about  components,
risk weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  tables  below)  of total  and Tier 1 capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998,  that the Company and the Bank met all capital  adequacy  requirements  to
which they are subject.

As of December 31, 1998 and 1997, the most recent  notification from the Federal
Deposit  Insurance  Corporation  ("FDIC")  categorized  the Bank as  "adequately
capitalized"  and  "well  capitalized",   respectively,   under  the  regulatory
framework for prompt corrective action.  Under this framework,  the Bank's total
capital  level at December  31, 1998 does not allow the Bank to accept  brokered
deposits or high rate deposits  without  prior  approval from the FDIC while the
bank is considered adequately capitalized. At December 31, 1998, the Bank had no
brokered deposits or high rate deposits. There are no conditions or events since
that notification that management believes have changed the Bank's category.

The actual  capital  amounts and ratios for the Company and the Bank at December
31, 1998 and 1997 are presented in the following tables:
<TABLE>
<CAPTION>
                                            RISK-BASED CAPITAL RATIOS
December 31, 1998                          Company              Bank
(dollars in thousands):                Amount    Ratio     Amount    Ratio
--------------------------------------------------------------------------
<S>                                   <C>         <C>     <C>         <C> 
Tier 1 capital (actual) ...........   $11,277     9.0%    $10,837     8.7%
Tier 1 capital for capital adequacy                      
  purposes ........................   $ 4,993     4.0%    $ 4,988     4.0%
                                                         
Tier 1 capital to be adequately                          
  capitalized under prompt                               
  corrective action provisions ....       N/A     N/A     $ 4,988     4.0%
                                                         
                                                         
Total capital (actual) ............   $12,257     9.8%    $11,817     9.5%
Total capital for capital adequacy                       
  purposes ........................   $ 9,985     8.0%    $ 9,976     8.0%
                                                         
Total capital to be adequately                         
  capitalized under prompt
  corrective action provisions            N/A     N/A     $ 9,976    8.0%
--------------------------------------------------------------------------
Risk-weighted assets                       $124,814            $124,698
==========================================================================
</TABLE>
<TABLE>
<CAPTION>

                                              TIER 1 LEVERAGE RATIOS
December 31, 1998                          Company              Bank
 (dollars in thousands):               Amount    Ratio     Amount    Ratio
--------------------------------------------------------------------------
<S>                                   <C>         <C>     <C>         <C> 
Tier 1 capital (actual) ...........   $11,277     8.2%    $10,837     7.9%
Tier 1 capital for capital adequacy                      
  purposes ........................   $ 5,525     4.0%    $ 5,521     4.0%
Tier 1 capital to be adequately                        
  capitalized under prompt
  corrective action provisions ....       N/A     N/A     $ 5,521     4.0%
--------------------------------------------------------------------------
Average assets for fourth quarter          $138,129            $138,013
==========================================================================
</TABLE>

<PAGE>


<TABLE>
<CAPTION>

                                            RISK-BASED CAPITAL RATIOS
December 31, 1997                          Company               Bank
 (dollars in thousands):               Amount    Ratio     Amount    Ratio
--------------------------------------------------------------------------
<S>                                   <C>        <C>      <C>        <C>  
Tier 1 capital (actual) ............. $10,069    10.7%    $10,214    10.9%
Tier 1 capital for capital adequacy                      
  purposes .......................... $ 3,763     4.0%    $ 3,758     4.0%
                                                       
Tier 1 capital to be well capitalized
  under prompt corrective
  action provisions .................     N/A     N/A     $ 5,637     6.0%


Total capital (actual) .............. $11,069    11.8%    $11,214    11.9%
Total capital for capital adequacy
  purposes .......................... $ 7,526     8.0%    $ 7,516     8.0%

Total capital to be well capitalized
  under prompt corrective
  action provisions .................     N/A     N/A     $ 9,395    10.0%
--------------------------------------------------------------------------
Risk-weighted assets                        $94,071             $93,947
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
                                              TIER 1 LEVERAGE RATIOS
December 31, 1997                          Company              Bank
(dollars in thousands):                Amount    Ratio     Amount    Ratio
--------------------------------------------------------------------------
<S>                                   <C>         <C>     <C>         <C> 
Tier 1 capital (actual) ............  $10,069     8.7%    $10,214     8.8%
Tier 1 capital for capital adequacy                       
  purposes .........................  $ 4,634     4.0%    $ 4,629     4.0%
Total capital to be well capitalized                   
  under prompt corrective
   action provisions ...............      N/A     N/A     $ 5,787     5.0%
--------------------------------------------------------------------------
Average assets for fourth quarter          $115,855            $115,730
==========================================================================
</TABLE>

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       13

<PAGE>


 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 
 1998, 1997 AND 1996
--------------------------------------------------------------------------------

(15)  PARENT COMPANY FINANCIAL INFORMATION
The Condensed Balance Sheets, Income Statements and Statements of Cash Flows for
Bay Commercial Services (Parent Company only) are presented below:
<TABLE>
<CAPTION>
                             CONDENSED BALANCE SHEETS
December 31 (in thousands): ....................      1998      1997
--------------------------------------------------------------------
ASSETS 
<S>                                                <C>       <C>    
Cash............................................   $   283   $    38
Investment in Bay Bank of Commerce .............    10,955    10,318
Premises, net ..................................       112       121
Other assets ...................................        61        31
--------------------------------------------------------------------
  TOTAL ASSETS .................................   $11,411   $10,508
====================================================================

LIABILITIES AND
   SHAREHOLDERS' EQUITY
Borrowed funds and other liabilities ...........   $    16   $   335
Shareholders' equity ...........................    11,395    10,173
--------------------------------------------------------------------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...   $11,411   $10,508
====================================================================
</TABLE>
<TABLE>
<CAPTION>
               CONDENSED INCOME AND COMPREHENSIVE INCOME STATEMENTS

Years ended December 31 (in thousands): ....      1998       1997       1996
----------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>    
Cash dividends from
  Bay Bank of Commerce .....................   $   675    $   365    $   325
Other income ...............................        24         24         24
Other expenses .............................       (65)       (63)       (67)
----------------------------------------------------------------------------
Income before equity in
  undistributed income of subsidiary .......       634        326        282
Equity in undistributed income of subsidiary       581        736        801
----------------------------------------------------------------------------
Net income .................................   $ 1,215    $ 1,062    $ 1,083
Other comprehensive income--net of tax .....        46          8       (109)
----------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME .................   $ 1,261    $ 1,070    $   974
============================================================================
</TABLE>
<TABLE>
<CAPTION>
                            CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31 (in thousands): ....      1998       1997       1996
----------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>  
Net income .................................   $ 1,215    $ 1,062    $ 1,083
Adjustments to reconcile net income to
  net cash provided by operating activities:
     Equity in undistributed income of
        subsidiary .........................      (581)      (736)      (801)
     Depreciation ..........................         9         10         10
     Change in other assets ................       (30)       (29)        30
     Change in borrowed funds and other
        liabilities ........................         5       (105)       101
----------------------------------------------------------------------------
Net cash provided by operating activities ..       618        202        423
----------------------------------------------------------------------------
Cash flows from financing activities:
    Exercise of stock options ..............        35          9        ---
    Repurchase and retirement of
       common stock ........................       (84)       ---        ---
    Dividends paid .........................      (324)      (323)      (323)
----------------------------------------------------------------------------
Net cash used in financing  activities .....      (373)      (314)      (323)
----------------------------------------------------------------------------
Net change in cash .........................       245       (112)       100
Cash at beginning of year ..................        38        150         50
----------------------------------------------------------------------------
CASH AT END OF YEAR ........................   $   283    $    38    $   150
============================================================================
Noncash financing activities during the year:
Dividend payable                                   ---       $324       $323
</TABLE>

(16)  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been  determined  using  available  market
information  and  appropriate  valuation  methodologies.  However,  considerable
judgment is required to interpret  market data to develop the  estimates of fair
value.   Accordingly,   the  estimates  presented  herein  are  not  necessarily
indicative  of the  amounts  the  Company  could  realize  in a  current  market
exchange.   The  use  of  different   market   assumptions   and/or   estimation
methodologies  may have a material  effect on the estimated  fair value amounts.
Fair  value has not been  adjusted  to  reflect  changes  in  market  conditions
subsequent to December 31, 1998 and,  therefore,  estimates are not  necessarily
indicative of amounts which could be realized in a current transaction.

The following methods and assumptions were used as of December 31, 1998 and 1997
to estimate the fair value for financial instruments.

Cash and cash  equivalents:  The carrying amounts reported in the balance sheets
for cash and cash equivalents are reasonable estimates of fair value.

Securities  available for sale and securities held to maturity:  Fair values are
based on quoted market prices.

Loans held for sale: As this category includes only fully funded loans partially
guaranteed  by SBA,  fair value was based on quoted  market prices of comparable
SBA loans.

Loans:  Fair values are estimated for portfolios of loans with similar financial
characteristics.  For  variable  rate  loans and  other  loans  with  short-term
characteristics,  carrying  value  approximates  fair  value.  The fair value of
certain  1-4  family  residential  loans was based on quoted  market  prices for
securities  backed by similar loans.  For other loans,  the adjusted fair market
values were calculated by discounting  scheduled future cash flows using current
interest  rates offered on loans with similar terms and by netting the allocated
allowance for loan losses to reflect the estimated  loan losses  inherent in the
portfolio. For credit card loans, carrying value approximates fair market value;
there is no  allocated  credit  reserve  since  these loans are charged off upon
becoming  90 days past due and no value has been added  related to the  customer
relationship.

Deposit  liabilities,  securities sold under  agreements to repurchase and other
borrowings.  The  fair  value  of  deposits  with no  stated  maturity,  such as
noninterest-bearing demand, savings and interest-bearing demand, is equal to the
amount payable on demand as of December 31, 1998. The fair value of certificates
of deposit,  securities sold under agreements to repurchase and other borrowings
are based on the discounted  value of contractual  cash flows,  calculated using
the discount rates that equaled the interest rates offered at the valuation date
for instruments of similar remaining maturities.

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       14
<PAGE>


 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 
 1998, 1997 AND 1996
--------------------------------------------------------------------------------

Disclosures About Fair Value of Financial Instruments, continued
The following is a summary of the carrying  amounts and estimated fair values of
the Company's financial assets and liabilities at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
------------------------------------------------------
DECEMBER 31, 1998                 CARRYING  ESTIMATED
(in thousands):                     VALUE  FAIR VALUE
------------------------------------------------------
Financial assets:
<S>                               <C>        <C>     
  Cash and cash equivalents ...   $  9,077   $  9,077
  Securities available for sale     32,033     32,033
  Securities held to maturity .      7,509      7,748
  Loans held for sale, net of
    allowance for loan losses .        939        983
  Loans, net of allowance for
    loan losses ...............     92,648     93,154
Financial liabilities:
  Deposits ....................    123,395    123,405
  Securities sold under
    agreements to repurchase ..      1,344      1,344
  Other borrowing .............      7,000      7,000

------------------------------------------------------
DECEMBER 31, 1997 .............   CARRYING   ESTIMATED
(in thousands): ...............     VALUE   FAIR VALUE
------------------------------------------------------
Financial assets:
Cash and cash equivalents .....   $  7,548   $  7,548
  Securities available for sale     24,651     24,651
  Securities held to maturity .      7,929      8,057
  Loans held for sale, net of
    allowance for loan losses .      1,499      1,594
  Loans, net of allowance for
    loan losses ...............     72,914     72,829
Financial liabilities:
  Deposits ....................    101,135    101,210
  Securities sold under
    agreements to repurchase ..      1,290      1,290
  Other borrowing .............      2,500      2,500
</TABLE>

At December 31, 1998 and 1997, the Company had  outstanding  standby  letters of
credit and  commitments  to extend credit.  These  off-balance-sheet  financial
instruments are generally  exercisable at the market rate prevailing at the date
the underlying transaction will be completed and, therefore, they were deemed to
have no current fair market value. See Note 13.

Fair value estimates are based on existing  balance sheet financial  instruments
without  attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered  financial  instruments.
Significant  assets and liabilities that are not considered  financial assets or
liabilities  include  other  assets and the value of premises  and  equipment at
December 31, 1998.

(17)  SUBSEQUENT  EVENTS:  
On January  6, 1999,  Bay  Commercial  Services  declared a $0.40 per share cash
dividend  payable on February 15, 1999 to shareholders of record at the close of
business on January 29, 1999. The total dividend payable amounted to $478,000.



INDEPENDENT AUDITORS' REPORT     


                                                               DELOITTE & TOUCHE
                                                                          (logo)
TO THE SHAREHOLDERS AND DIRECTORS OF
BAY COMMERCIAL SERVICES:

We have audited the accompanying  consolidated  balance sheets of Bay Commercial
Services  and  Subsidiary  as of  December  31,  1998 and 1997,  and the related
consolidated  statements of income,  changes in shareholders'  equity,  and cash
flows for each of the three years in the period ended  December 31, 1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position  of Bay  Commercial  Services  and
Subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three  years in the period  ended  December
31, 1998 in conformity with generally accepted accounting principles.

/s/ Deloitte & Touche LLP

San Francisco, California
January 29, 1999

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       15



<PAGE>
<TABLE>
<CAPTION>
                                                      SELECTED FINANCIAL DATA
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                                  1998     1997
(Dollars in thousands, except per share amounts):                                                             Compared Compared
Years ended December 31,                                    1998       1997       1996        1995       1994  to 1997  To 1996
-------------------------------------------------------------------------------------------------------------------------------

RESULTS OF OPERATIONS:
<S>                                                      <C>         <C>        <C>         <C>        <C>      <C>       <C>  
  Interest income ....................................   $10,200     $8,759     $7,826      $7,456     $6,086   $1,441    $ 933
  Interest income on a taxable equivalent basis ......    10,327      8,853      7,904       7,505      6,146    1,474      949
  Interest expense ...................................     3,479      2,956      2,457       2,310      1,766      523      499
  Net interest income ................................     6,721      5,803      5,369       5,146      4,320      918      434
  Net interest income on a taxable equivalent basis ..     6,848      5,897      5,447       5,195      4,380      951      450
  Provision (benefit) for loan losses ................       134         52        ---        (155)      (100)      82       52
  Net interest income after provision (benefit)
     for loan losses .................................     6,587      5,751      5,369       5,301      4,420      836      382
  Noninterest income .................................       941        971      1,080         716      1,076      (30)    (109)
  Noninterest expense ................................     5,656      5,072      4,686       4,472      4,518      584      386
  Income tax expense .................................       657        588        680         600        359       69      (92)
  Net income .........................................     1,215      1,062      1,083         945        619      153      (21)
-------------------------------------------------------------------------------------------------------------------------------

PER COMMON SHARE:
  Net income per common share - basic ................    $ 1.12      $0.99      $1.01       $0.88      $0.57   $ 0.13   $(0.02)
  Net income per common share - diluted ..............    $ 0.95      $0.84      $0.89       $0.80      $0.56   $ 0.11   $(0.05)
  Book value (year-end) ..............................    $10.54      $9.43      $8.75       $8.14      $7.36   $ 1.11   $ 0.68
  Cash dividends declared ............................       ---      $0.30      $0.30       $0.30      $0.20   $(0.30)     ---
  Weighted average common shares - basic ............. 1,080,362  1,076,774  1,076,720   1,076,720  1,079,985    3,588       54
  Weighted average common shares - diluted ........... 1,277,190  1,257,680  1,217,235   1,174,850  1,105,280   19,510   40,445
-------------------------------------------------------------------------------------------------------------------------------
  
BALANCE SHEET AT DECEMBER 31:
  Assets .............................................  $144,202   $116,369    $96,769     $92,819    $89,193  $27,833  $19,600
  Securities held to maturity ........................     7,509      7,929      6,704       7,211     14,823     (420)   1,225
  Securities available for sale ......................    32,033     24,651      9,339      13,199     11,165    7,382   15,312
  Federal funds sold and securities purchased
    under agreements to resell .......................       ---        ---        ---       6,700      2,530      ---      ---
  Total loans ........................................    93,129     74,129     71,362      58,152     51,566   19,000    2,767
  Deposits ...........................................   123,395    101,135     83,291      80,253     79,258   22,260   17,844
  Other borrowed funds ...............................     8,344      3,790      2,804       2,203      1,036    4,554      986
  Shareholders' equity ...............................    11,395     10,173      9,418       8,767      7,946    1,222      755
-------------------------------------------------------------------------------------------------------------------------------

BALANCE SHEET - AVERAGE BALANCES (1):
  Assets .............................................  $126,710   $107,057    $95,063     $91,106    $86,112  $19,653  $11,994
  Securities -  taxable ..............................    23,750     18,396     15,234      20,370     21,368    5,354    3,162
  Securities -  tax exempt ...........................     5,395      3,874      3,165       2,186      2,113    1,521      709
  Federal funds sold and securities purchased
    under agreements to resell .......................     6,438      5,338      4,870       6,469      3,688    1,100      468
  Total loans ........................................    81,354     70,217     63,008      52,830     49,109   11,137    7,209
  Earning assets .....................................   116,674     97,432     86,110      81,652     75,425   19,242   11,322
  Deposits ...........................................   113,462     94,237     82,611      80,262     76,690   19,225   11,626
  Other borrowed funds ...............................     1,478      1,894      2,209       1,313      1,021     (416)    (315)
  Interest-bearing liabilities .......................    82,566     68,387     59,696      57,004     55,238   14,179    8,691
  Shareholders' equity ...............................    10,770      9,920      9,215       8,541      7,846      850      705
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding unrealized gain(loss) on securities available for sale.

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                     16 

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

The following  discussion  should be read in conjunction  with the  consolidated
financial  statements  and notes  thereto  and  selected  financial  data  found
elsewhere in this Annual Report.

Certain matters  discussed in this Annual Report in Management's  Discussion and
Analysis of Financial  Condition and Results of Operations  are  forward-looking
statements that are subject to risks and  uncertainties  that could cause actual
results  to  differ  materially  from  those  projected  in the  forward-looking
statements.  Such risks and uncertainties  include, among others (1) significant
increases in competitive  pressure in the banking  industry;  (2) changes in the
interest  rate  environment  which could reduce  margins;  (3) general  economic
conditions,  either  nationally  or  regionally,  that are less  favorable  than
expected,  resulting in, among other things,  a deterioration in credit quality;
(4) changes in the regulatory  environment;  (5) changes in business  conditions
and inflation; and (6) changes in securities markets. Therefore, the information
set forth in such forward-looking statements should be carefully considered when
evaluating the business prospects of Bay Commercial Services.

OVERVIEW

Net income of Bay  Commercial  Services (the  "Company") in 1998 was  $1,215,000
compared to  $1,062,000 in 1997 and  $1,083,000  in 1996.  Net income per common
share - basic was $1.12, $0.99 and $1.01 for 1998, 1997 and 1996,  respectively.
Net income per common share - diluted was $0.95,  $0.84 and $0.89 for 1998, 1997
and 1996,  respectively.  The return on average assets was 1.0% in 1998 compared
to 1.0%  and  1.1%  in 1997  and  1996,  respectively.  The  return  on  average
shareholders' equity was 11.3% in 1998, 10.7% in 1997 and 11.8% in 1996.

Net income for the year  increased  $153,000  or 14%  compared to 1997 as strong
growth  in net  interest  income  more  than  offset  increases  in  noninterest
expenses,  a larger  provision  for loan losses,  higher  income tax expense and
reduced noninterest income during 1998.

Net interest  income rose $918,000 or 16% in 1998,  the result of $19,242,000 or
20% growth in average  interest-earning  assets  compared  to 1997.  Noninterest
expenses rose  $584,000 or 12% in 1998. A significant  factor in the increase in
noninterest  expenses was a $365,000  increase in salaries and employee benefits
expense,  much  of  which  was  attributable  to the  first  whole  year  with a
fully-staffed  San  Ramon  branch  of Bay Bank of  Commerce  (the  "Bank").  The
remaining balance of the increase was attributable to higher performance bonuses
and normal  annual  salary  increases  in 1998.  The  provision  for loan losses
increased  $82,000 during 1998 principally in response to the strong loan growth
during the year.  Income tax expense  increased  $69,000 or 12% due to increased
taxable income in 1998. Although several sources of noninterest income increased
in 1998, the lack of significant  recoveries of prior years' expenses related to
charged-off  loans  compared  to 1997 as well as a  continuing  decline  in loan
servicing  income resulted in a $30,000 or 3% decrease in noninterest  income in
1998.

The $434,000 or 8% growth in net interest income for 1997 reflected  $11,322,000
or 13% growth in average  interest-earning  assets compared to 1996. The opening
of the San  Ramon  branch  of the  Bank in late  1996  and  subsequent  staffing
increases  throughout 1997 resulted in increased payroll and occupancy expenses,
which were a key factor in the $386,000 or 8% increase in  noninterest  expenses
in 1997. Noninterest income declined by $109,000 or 10% in 1997 primarily due to
reduced  gains on sales of other real estate owned  ("OREO") and reduced gain on
sale of loans  compared to 1996.  The major factor in the $52,000  provision for
loan  losses  during  1997 was the  higher  level of  average  outstanding  loan
balances. No provision was made in 1996.

As a result of continued  strong  deposit  growth during the year,  total assets
increased by  $27,833,000 to  $144,202,000  at December 31, 1998, an increase of
24% over December 31, 1997.  Total deposits grew $22,260,000 or 22% during 1998,
reflecting  growth in all deposit  categories.  Additionally,  other  short-term
borrowing  increased  $4,500,000  compared to December 31,  1997.  The growth in
funding  was  principally  invested  in  a  $19,000,000  increase  in  loans,  a
$6,962,000  increase in  securities  and a $1,529,000  increase in cash and cash
equivalents compared to December 31, 1997.
<PAGE>

RESULTS OF OPERATIONS

NET INTEREST INCOME
Net interest income, which is the principal source of the Company's earnings, is
the amount by which  interest  and fees  generated  by  interest-earning  assets
exceed the cost of interest-bearing liabilities. Net interest income is affected
by  changes  in  interest  rates  as  well  as the  composition  and  volume  of
interest-earning assets and interest-bearing liabilities.

Net interest income of $6,721,000 for 1998 increased $918,000 or 16% compared to
1997. The increase reflected the growth in average  interest-earning assets. The
net   interest   margin,   the  ratio  of  net   interest   income  to   average
interest-earning assets, was 5.76% in 1998 compared to 5.96% in 1997, reflecting
changes in the portfolio  mix of  interest-earning  assets and  interest-bearing
liabilities  and  the  impact  of  declining  market  interest  rates  on  those
portfolios.

Net interest income of $5,803,000 for 1997 increased  $434,000 or 8% compared to
1996.   The  increase   reflected  an  $11,322,000  or  13%  growth  in  average
interest-earning  assets.  The net interest margin was 5.96% in 1997 compared to
6.24% in 1996.

Interest income,  which includes interest and fees generated by interest-earning
assets,  totaled  $10,200,000  in 1998, a $1,441,000  or 16% increase over 1997.
Average  interest-earning assets grew $19,242,000 or 20% in 1998 while the yield
earned on those assets  declined to 8.74%  compared to 8.99%  during 1997.  Loan
growth  strengthened  in  1998,  particularly  in  construction  and  commercial
lending;  average earning loan balances increased $11,267,000 or 16% compared to
1997. Average total securities  increased  $6,875,000 or 31%. The decline in the
yield on  interest-earning  assets  during  1998  was  attributable  to  several
factors. A significant proportion of the

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       17

<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
--------------------------------------------------------------------------------
NET INTEREST INCOME, CONTINUED
Bank's  assets are interest  rate  sensitive  and the decline in overall  market
interest rates,  primarily during the second half of the year,  caused a decline
in yields  earned.  Throughout  the year,  loan rates  were also under  downward
pressure  due to the  competitive  loan  market in the San  Francisco  Bay Area.
Finally,  although the Bank's loan growth was exceptionally  strong during 1998,
the  increase  in  investment  securities  was  even  greater,  resulting  in an
increased percentage of earning assets invested in lower yielding securities.

Interest  income  totaled  $8,759,000  in 1997, a $933,000 or 12% increase  over
1996. Average  interest-earning assets grew $11,322,000 or 13% in 1997 while the
yield  earned on those assets  declined to 8.99%  compared to 9.09% during 1996.
Although  average  earning loan  balances in 1997 were  $7,006,000 or 11% higher
than 1996,  the higher  average  balance  benefited  from the strong loan growth
during the last two quarters of 1996. Loan growth slowed in 1997 with a year-end
total loan  balance only  $2,767,000  higher than year end 1996.  Average  total
securities  grew  $3,871,000 or 21% in 1997. The reduced yield on earning assets
of 8.99% in 1997 compared to 9.09% in 1996 largely reflected a drop in the yield
on average  earning  loans and in the  proportion of loans in the mix of average
interest-earning assets.

Interest  expense of  $3,479,000  in 1998 rose $523,000 or 18% compared to 1997.
The  increased  expense  reflected  a  $14,179,000  or 21%  increase  in average
interest-bearing   liabilities.  The  rate  paid  for  average  interest-bearing
liabilities  declined  to 4.21% from  4.32% in 1997,  reflecting  lower  overall
market  deposit rates as well as a drop in average time deposits as a percentage
of average interest-bearing liabilities to 56% in 1998 from 59% in 1997. Average
savings and interest-bearing  demand deposits grew $8,983,000 or 35%, benefiting
from the 1998  introduction of a new rate-indexed  money market deposit account.
The average rate paid on savings and interest-bearing  demand deposits also rose
to 3.00%  compared to 2.73% in 1997 as a result of this new variable  rate money
market account,  which was introduced to the Bank's deposit line to compete with
similar products offered by financial institutions in the Bank's trading area.

Interest  expense of  $2,956,000  in 1997 rose $499,000 or 20% compared to 1996.
The higher interest  expense  reflected an $8,691,000 or 15% increase in average
interest-bearing  liabilities  and  an  increase  in the  rate  paid  for  those
liabilities  to 4.32% in 1997 from 4.12% in 1996.  Average  time  deposits  as a
percentage  of average  interest-bearing  liabilities  increased to 59% for 1997
from 54% for 1996.

INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship  between market interest rates and
net  interest  income  due  to  the  repricing  characteristics  of  assets  and
liabilities.  For  example,  in a  static  gap  analysis,  if more  assets  than
liabilities  repriced in a given period (an asset sensitive position) and market
interest  rates  declined,  net interest  income  could be  adversely  impacted.
Conversely, if interest rates increased, net interest income could be positively
impacted.

<PAGE>

The  following  table  presents the  Company's  interest  rate  sensitivity  gap
position at December 31, 1998.  For any given  period,  the repricing is matched
when an equal amount of assets and liabilities reprice. The repricing of a fixed
rate asset or liability is considered to occur at its  contractual  maturity or,
for those  assets which are held for sale,  within the time period  during which
sale may  reasonably  be expected to be  accomplished.  Floating  rate assets or
liabilities  are  considered  to reprice in the period during which the rate can
contractually  change.  Any excess of either assets or  liabilities  in a period
results in a gap, or  mismatch,  shown in the table.  A positive  gap  indicates
asset sensitivity and a negative gap indicates liability sensitivity.
<TABLE>
<CAPTION>
                                                   INTEREST SENSITIVITY PERIOD
                                          ----------------------------------------------
                                                        Over 3        Over 1
                                          3 months    months to      year to      Over 5
(Dollars in thousands):                    or less      1 year       5 years       years       Total
----------------------------------------------------------------------------------------------------
Interest rate sensitive assets:
<S>                                        <C>          <C>          <C>         <C>        <C>       
  Loans (excluding nonaccrual and
    deferred fees) ....................    $62,351      $ 4,942      $12,402     $13,903    $ 93,598
  Securities, excluding FHLB
    stock,  (amortized cost) ..........     19,715          519       10,373       8,871      39,478
----------------------------------------------------------------------------------------------------
  Total ...............................    $82,066      $ 5,461      $22,775     $22,774    $133,076
----------------------------------------------------------------------------------------------------
Interest rate sensitive liabilities:
  Interest-bearing
    transaction accounts ..............     31,010          ---          ---         ---      31,010
  Savings deposits ....................      6,561          ---          ---         ---       6,561
  Time deposits of
    $100 or more ......................     26,361        5,875          710         ---      32,946
  Other time deposits .................     12,061        5,304        1,608           1      18,974
  Other borrowed funds ................      7,246        1,098          ---         ---       8,344
----------------------------------------------------------------------------------------------------
  Total ...............................    $83,239      $12,277      $ 2,318     $     1    $ 97,835
----------------------------------------------------------------------------------------------------
Interest rate sensitivity gap .........    $(1,173)     $(6,816)     $20,457     $22,773    $ 35,241
====================================================================================================
Cumulative interest rate
 sensitivity gap ......................   $ (1,173)     $(7,989)    $ 12,468    $ 35,241
====================================================================================================
Cumulative interest rate
 sensitivity gap
  to total assets .....................     (0.8)%       (5.5)%        8.6%       24.4%
====================================================================================================
</TABLE>

     This table  presents a static gap,  which is a position at a point in time.
It does not address the interest rate sensitivity of assets or liabilities which
would be added through  growth,  nor does it anticipate the future interest rate
sensitivity of assets and  liabilities  once they have repriced,  and it assumes
equivalent elasticity of assets and liabilities.

The interest rate sensitivity  analysis at December 31, 1998, indicates that the
Company, on a cumulative basis was liability sensitive in the "3 months or less"
and "Over 3 months to 1 year"  periods and asset  sensitive  over all  remaining
periods.

PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Bank provides for possible loan losses by a charge to operating income based
upon the composition of the loan portfolio,  past loan loss experience,  current
economic conditions and other factors

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       18


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
-----------------------------------------------

PROVISION AND ALLOWANCE FOR LOAN LOSSES, CONTINUED
which, in management's judgment,  deserve recognition in estimating loan losses.
Management  will charge off loans when it determines  there has been a permanent
impairment of the related carrying values.

The loan loss reserve is reviewed by management at least  quarterly.  Management
attributes  general reserves to different types of loans using percentages which
are based upon  perceived  risk  associated  with the portfolio  and  underlying
collateral,  historical loss experience,  and vulnerability to changing economic
conditions which may affect the  collectibility of the loans.  Specific reserves
are allocated for impaired loans,  for loans which have experienced a decline in
internal loan grading,  and when  management  believes  additional loss exposure
exists. Although the allowance for loan losses is allocated to various portfolio
segments, it is general in nature and is available for the loan portfolio in its
entirety.  While  management uses available  information to recognize  losses on
loans,  future  additions to the allowance may be necessary  based on changes in
economic conditions.  In addition,  various regulatory agencies,  as an integral
part of their examination  process,  periodically review the Company's allowance
for  losses on loans.  Such  agencies  may  require  the  Company  to  recognize
additions to the allowance  based on their analysis of information  available to
them at the time of their examination.

The Senior Loan Officer  assesses the loan portfolio  monthly to determine which
loans are  specifically  identifiable  problem  credits  in order to update  the
Bank's internal watch list,  which tracks all such credits.  The Bank's internal
Loan Review Examiner  grades all new commercial  loans and all credits where the
total liability equals or exceeds certain thresholds  established by management.
If either the Senior  Loan  Officer or the Loan  Review  Examiner  identifies  a
serious  deficiency,  the loan is  placed  on the  next  quarterly  watch  list.
Management  provides a specific reserve allowance for the effects of the problem
applicable to each watchlisted credit. When management  identifies a generalized
risk not evidenced by a specially  identifiable  loan or portfolio segment as of
the  evaluation  date,  management's  evaluation  of the probable  loss exposure
concerning this condition will be provided for by adjusting the level of general
reserve for this exposure.

The  provision  for loan  losses  reflects  an amount  necessary  to adjust  the
allowance for loan losses to a level which, in management's opinion, is adequate
to  absorb  potential   credit  losses  inherent  in  loans,   outstanding  loan
commitments and standby letters of credit.

As of December 31, 1998, the allowance for loan losses was $980,000  compared to
$1,000,000  at December  31,  1997.  The reduced  allowance  reflected  net loan
charge-offs  of  $154,000  during  the year,  which were  partially  offset by a
$134,000  loan loss  provision in 1998.  The loan loss  provision was $52,000 in
1997.  Although  nonperforming  loans dropped during 1998,  (see  information on
non-performing loans below),  additional credit risk inherent in the strong loan
growth,  particularly in construction  lending,  was reflected in the provision.
The ratio of the  allowance  for loan losses to total loans was 1.1% at December
31,  1998,  and 1.3% at December  31,  1997.  Based upon  information  currently
available,  management  believes  that the allowance for loan losses at December
31, 1998, is adequate to absorb future possible  losses.  However,  no assurance
can be given that the Company may not sustain charge-offs which are in excess of
the size of the allowance in any given period.

At December  31, 1998 and 1997,  the Bank also held  California  Capital  Access
Program ("CalCAP") deposits of $203,000 and $137,000, respectively, which CalCAP
has  pledged to offset any losses on any loans in the Bank's  CalCAP  portfolio.
The Bank had a total of $1,584,000 and $1,460,000 in CalCAP loans as of December
31,  1998  and  1997,  respectively.  CalCAP  is a  program  authorized  by  the
California  Legislature to encourage California  financial  institutions to make
loans to small businesses whose  operations  affect the state's  environment and
which  may  not  meet  the  normal  underwriting   standards  of  the  financial
institution.


<PAGE>

Information  on  nonperforming  loans for the years ended  December 31, 1998 and
1997 is summarized in the following table.
<TABLE>
<CAPTION>
(Dollars in thousands):               1998       1997  $ Change   % Change
---------------------------------------------------------------------------
<S>                                  <C>       <C>       <C>        <C>   
Net loan charge-offs ................$(154)    $ (23)    $(131)     569.6%

Ratio of net loan charge-offs
  to average loans .................. (0.2%)     ---

Nonperforming loans at December 31:
  Nonaccrual loans ..................$  30     $ 440     $(410)     (93.2)%
  Accruing loans past due
   90 days or more ..................  ---       ---       ---        ---
  Restructured loans ................  469       471        (2)      (0.4)
---------------------------------------------------------------------------
    Total nonperforming loans .......$ 499     $ 911     $(412)     (45.2)%
===========================================================================

Ratio of nonperforming loans         
  to total loans .................... 0.5%       1.2%

Ratio of allowance for loan losses
  to nonperforming loans ...........196.4%     109.8%
</TABLE>

     The  nonaccrual  balance at December 31, 1998  represents one loan of which
$27,000 is guaranteed by the Small Business  Administration  ("SBA"). All of the
nonaccrual loans at December 31, 1997 were SBA loans which were addressed during
1998;  $231,000 was received for the  SBA-guaranteed  portions of several loans,
$163,000 was charged off and $46,000 was paid off. 

Of total  nonperforming  loans at  December  31,  1998 and  1997,  respectively,
$27,000 and $231,000 were guaranteed by the SBA and,  therefore,  not considered
impaired.  At December 31,1998, the collateral method was used in the evaluation
of $469,000 and the remainder was evaluated using discounted cash flow analysis.
At  December  31,1997,  the  collateral  method  was used in the  evaluation  of
$209,000 and  discounted  cash flow analysis was used to evaluate the remainder.
At December 31, 1998 and 1997,  these  evaluations  required the  allocation  of
$70,000 and $164,000 of the respective allowances for loan losses.

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       19

<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
-----------------------------------------------
OTHER REAL ESTATE OWNED
The Bank held no OREO at December 31, 1998 or 1997.  There were no sales of OREO
during 1998 or 1997.  During  1996,  three  properties  which had been  acquired
through foreclosure were sold.

NONINTEREST INCOME
Total noninterest income of $941,000 for 1998 declined $30,000 or 3% compared to
1997.  During 1997,  other  noninterest  income was $58,000 or 77% higher due to
recovery of prior years' expenses  related to charged-off  loans,  which was not
repeated in 1998. Loan servicing  income  declined  $47,000 or 36% as payoffs of
serviced loans  exceeded the addition of new serviced  loans in 1998.  Partially
offsetting the decreases in noninterest income was a $107,000 or 35% increase in
bankcard income,  reflecting  continuing growth in merchant  bankcard  activity.
Gain on sale of loans was $31,000 or 54% higher in 1998,  due to larger sales of
the guaranteed portion of SBA loans.

Total noninterest  income of $971,000 for 1997 declined $109,000 or 10% compared
to  1996.  A  $119,000  gain on sale of OREO in 1996 was not  repeated  in 1997.
Additionally,  a smaller  volume of SBA loan sales during 1997 led to a $117,000
or 67% decrease in gain on sale of loans  compared to 1996.  These  decreases in
noninterest income were partially offset by increases of $70,000 or 52% in other
noninterest income,  principally recoveries during 1997 of prior years' expenses
related to  charged-off  loans,  and  $53,000 or 21% in  bankcard  income due to
growth in merchant sales volume. Loan servicing income declined slightly in 1997
as serviced loan payoffs more than offset servicing added from loan sales.

NONINTEREST EXPENSE
Total  noninterest  expenses of $5,656,000  for 1998  increased  $584,000 or 12%
compared to 1997.  Salaries and employee  benefits showed the largest  increase,
$365,000 or 13%,  much of which was  attributable  to the now fully  staffed San
Ramon branch of the Bank as well as higher performance bonuses and normal annual
salary increases in 1998.  Occupancy  expense declined by $11,000 or 2% compared
to 1997. Other noninterest  expenses  increased $230,000 or 15% during 1998 with
the most significant  increase in merchant bankcard expense,  up $109,000 or 45%
as merchant  bankcard  activity  continues  to grow.  Operating  expenses  which
increased  principally  as a  function  of asset  growth  were  data  processing
expense, up $35,000 or 11%, and "other" expenses, up $66,000 or 10%.

Total  noninterest  expenses of  $5,072,000  for 1997  increased  $386,000 or 8%
compared to 1996.  Salaries and  employee  benefits  increased  $318,000 or 12%,
principally  reflecting the first full year of operations  and continuing  staff
growth at the Bank's San Ramon branch which opened in December  1996.  Occupancy
expense also  reflected new branch  operations  and rose $81,000 or 13% in 1997.
Bankcard  expense  increased  $41,000 or 20% with the 1997  increase in merchant
bankcard activity.  Professional  services fees for 1997 dropped $115,000 or 51%
compared to 1996, reflecting lower legal and accounting fees.

PROVISION FOR INCOME TAXES
The  provision  for income tax expense was $657,000 in 1998 compared to $588,000
in 1997. The $69,000 or 12% increase  reflected the increase in taxable  income.
The effective  income tax rates were 35.1%,  35.7% and 38.6% for 1998,  1997 and
1996,  respectively.  See  also  Note  5 in  "Notes  to  Consolidated  Financial
Statements".  The Company has reduced the effective  income tax rate in the last
two years through increased investment in nontaxable municipal securities and in
loans to businesses in areas  classified as  "enterprise  zones" by the State of
California.

FINANCIAL CONDITION

Total loans of  $93,129,000  at December 31, 1998  increased  $19,000,000 or 26%
from December 31, 1997. The most  significant  increases were $8,613,000 or 116%
in real estate  construction  loans,  primarily  residential  construction,  and
$5,270,000  or 28% in  commercial  loans,  compared to December 31, 1997.  Total
securities of $39,542,000 at December 31, 1998 increased  $6,962,000 or 21% from
December 31, 1997,  principally due to increased investment in commercial paper,
mortgage-backed  securities  and  municipal  securities,  partially  offset by a
decline in U.S. government agencies securities.

DEPOSITS AND OTHER BORROWED FUNDS
Total deposits of $123,395,000 at December 31, 1998 increased $22,260,000 or 22%
compared to December 31, 1997. The strongest growth was in time  certificates of
deposit of $100,000 and over, which increased $8,777,000 or 68%, and savings and
interest-bearing demand deposits, which increased $8,368,000 or 29%, compared to
December  31,  1997.   Noninterest-bearing   demand   deposits  also  increased,
$4,828,000 or 17% from December 31, 1997 to December 31, 1998.  Other short-term
borrowing  increased  $4,500,000  to  $7,000,000  at  December  31,  1998 due to
year-end deposit fluctuations.


OTHER ASSETS AND OTHER LIABILITIES
Interest and fees receivable of $635,000 at December 31, 1998 increased  $69,000
or 12% from December 31, 1997,  reflecting increased accrued interest receivable
associated  with the strong loan growth in 1998 as well as higher  deferred  tax
assets and  prepaid  expenses  at  year-end  1998.  Interest  payable  and other
liabilities of $1,068,000 at December 31, 1998 declined $203,000 or 16% compared
to  December  31,  1997,  largely due to the 1998  dividend  payment of $324,000
accrued in 1997.

LIQUIDITY
Liquidity  is defined as the ability of the  Company to meet  present and future
obligations  either through the sale or maturity of existing  assets,  or by the
acquisition  of funds  through  liability  management.  The Company  manages its
liquidity to provide  adequate funds to support both the borrowing  needs of its
customers and  fluctuations in deposit flows.  The Company defines liquid assets
to include cash and cash equivalents,  all marketable securities with maturities
of one year or less,  securities  available for sale with maturities  beyond one
year, and loans held for sale, less any reserve requirements

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       20

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
-----------------------------------------------
Liquidity, continued
being met by any of the above. Net deposits and short-term  liabilities  include
all  deposits,   federal  funds  purchased,   repurchase  agreements  and  other
borrowings and debt due in one year or less.  The liquidity  ratio is calculated
by dividing total liquid assets by net deposits and short-term liabilities.  The
Company's  liquidity ratio by this measure was 30% at December 31, 1998, and 32%
at December 31, 1997. It is the opinion of management that the Company's and the
Bank's liquidity positions are sufficient to meet their respective needs.

In addition,  to meet unforeseen  outflows,  the Bank has informal,  non-binding
borrowing arrangements with two correspondent banks, which include federal funds
borrowing lines totaling $8,500,000 and a repurchase facility.  During 1998, the
Bank  became a member of the  Federal  Home Loan  Bank of San  Francisco,  which
membership  provides access to collateralized  borrowing.  At December 31, 1998,
the  Bank  had  an  outstanding  balance  of  $7,000,000  on a  total  available
collaterized credit line of approximately $12,000,000.

CAPITAL
The Company and the Bank are subject to Federal  Reserve  Board  guidelines  and
regulations of the Federal  Deposit  Insurance  Corporation  ("FDIC")  governing
capital  adequacy.  The Federal Reserve Board's  risk-based and leverage capital
guidelines for bank holding  companies are  substantially the same as the FDIC's
capital regulations for nonmember banks.

The Federal Reserve Board's  capital  guidelines for bank holding  companies and
the FDIC's  regulations for nonmember banks set total capital  requirements  and
define capital in terms of "core capital  elements"  (comprising Tier 1 capital)
and "supplemental capital elements" (comprising Tier 2 capital).  Tier 1 capital
is generally defined as the sum of the core capital elements less goodwill, with
core  capital  elements  including  (i)  common   stock-holders'   equity;  (ii)
qualifying noncumulative perpetual preferred stock; and (iii) minority interests
in the equity  accounts  of  consolidated  subsidiaries.  Supplementary  capital
elements  include:  (i) allowance for loan and lease losses (which cannot exceed
1.25% of risk weighted assets); (ii) perpetual preferred stock not qualifying as
core capital;  (iii) hybrid capital  instruments and mandatory  convertible debt
instruments;  (iv) term subordinated debt and intermediate-term preferred stock;
and (v) 45% of the unrealized  gain, net of taxes,  on securities  available for
sale. The maximum amount of  supplemental  capital  elements which  qualifies as
Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill.

Risk-based capital ratios are calculated with reference to risk-weighted assets,
including  both on- and  off-balance  sheet  exposures,  which are multiplied by
certain risk weights assigned by the Federal Reserve Board to those assets. Both
bank holding  companies and  nonmember  banks are required to maintain a minimum
ratio of  qualifying  total  capital  to  risk-weighted  assets  of 8%, at least
one-half  of which must be in the form of Tier 1 capital.  The  Federal  Reserve
Board and the FDIC also have  established a minimum leverage ratio of 3% of Tier
1 capital to total assets for bank holding  companies and  nonmember  banks that
have received the highest  composite  regulatory rating and are not anticipating
or experiencing any significant  growth.  All other institutions are required to
maintain  a  leverage  ratio of at least  100 to 200 basis  points  above the 3%
minimum.

The following  tables  present the Company's and the Bank's  regulatory  capital
positions at December 31, 1998:
<TABLE>
<CAPTION>
                                               RISK BASED CAPITAL RATIO
                                              Company               Bank
(Dollars in thousands):                    Amount  Ratio      Amount  Ratio
---------------------------------------------------------------------------
<S>  <C>                                  <C>       <C>      <C>       <C> 
Tier 1 capital ........................   $11,277   9.0%     $10,837   8.7%
Tier 1 capital regulatory                                    
  minimum requirement .................   $ 4,993   4.0%     $ 4,988   4.0%
---------------------------------------------------------------------------
Capital held in excess of                                    
  regulatory minimum ..................   $ 6,284   5.0%     $ 5,849   4.7%
                                                             
Total capital .........................   $12,257   9.8%     $11,817   9.5%
Total capital regulatory                                     
  minimum requirement .................   $ 9,985   8.0%     $ 9,976   8.0%
---------------------------------------------------------------------------
Capital held in excess of                                    
  regulatory minimum ..................   $ 2,272   1.8%     $ 1,841   1.5%
---------------------------------------------------------------------------
Risk weighted assets ..................       $124,814           $124,698
===========================================================================
</TABLE>

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

As of December  31, 1998 and 1997,  the most recent  notification  from the FDIC
categorized  the  Bank  as  "adequately  capitalized"  and  "well  capitalized",
respectively,  under the regulatory  framework for prompt corrective action. The
change in the Bank's  classification to "adequately  capitalized" as of December
31, 1998  reflected the strong asset growth during 1998 which  outperformed  the
growth in capital.  The Company currently does not have any material commitments
for capital  expenditures,  and in the opinion of management,  the Company's and
the Bank's capital positions are sufficient to meet their respective needs.

INFLATION
It is  management's  opinion that the effects of  inflation on the  consolidated
financial  statements  for the periods ended December 31, 1998 and 1997 have not
been material.

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       21


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
-----------------------------------------------
YEAR 2000 READINESS DISCLOSURE
The following  discussion of the  implications  of the Year 2000 problem for the
Company  contains  numerous  forward-looking   statements  based  on  inherently
uncertain information. The cost of the project and the date on which the Company
plans to complete the internal Year 2000 modifications are based on management's
best estimates,  which were derived  utilizing a number of assumptions of future
events including the continued  availability of internal and external resources,
third party modifications and other factors.  However, there can be no guarantee
that these estimates will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance,  there can be no guarantee  that failure to modify the systems would
not have a material adverse affect on the Company.

In addition, the Company places a high degree of reliance on computer systems of
third  parties,   such  as  customers,   suppliers,   and  other  financial  and
governmental  institutions.   Although  the  Company  continues  to  assess  the
readiness of these third parties and is preparing  contingency  plans, there can
be no  guarantees  that the failure of any one of these third  parties to modify
their systems in advance of December 31, 1999 would not have a material  adverse
affect on the Company.

Many computer hardware systems and software programs in use today were developed
using a two digit date code to specify the year.  As a result  many  systems and
programs  that are date  sensitive  will treat  "00" as the year  1900,  and not
properly  recognize the date transition at the year 2000. An additional issue is
that  1900 was not a leap  year,  whereas  the year  2000  is.  Therefore,  some
programs may not properly provide for February 29, 2000.

The  Company  initiated  its  Year  2000  planning  in 1997 and has  prepared  a
comprehensive  written plan which addresses both internal and external Year 2000
exposure  and  includes  the  following   phases  -  Inventory  and  Assessment,
Renovation, Testing and Implementation, and Contingency Planning.

Inventory & Assessment
The Company  completed its inventory and  assessment  phase during 1997.  During
this process the Company made a physical  inventory  of  information  technology
("IT") systems and non-IT  systems at each office  location.  Additionally,  all
vendor  supplied  services  were  reviewed  to  identify IT and non-IT Year 2000
issues. The systems examined included hardware and software platforms associated
with  customer  account  processing,  computer  networks and  workstations,  and
telecommunications systems.

Although the assessment  determined  that there was no  significant  reliance on
non-IT technology (that is, equipment with embedded microprocessor controls such
as elevators,  climate control systems,  etc.), it did identify mission critical
IT systems, both internal and external that were not Year 2000 compliant.

These  noncompliant  systems included data processing  applications  provided by
third party  suppliers,  the teller  platform at two branch offices of the Bank,
and some of the hardware  and software  elements of the Bank's Wide Area Network
("WAN") computer network.  The WAN is a centralized,  server based,  system that
interconnects employees' desktop PC workstations at each location.

One additional  element of Year 2000 concern has been the Bank's customers.  The
Bank is reliant on its customers to make the necessary preparations for the Year
2000 so that their business operations will not be interrupted, thus threatening
their ability to honor financial commitments.

In an ongoing  effort to ensure that its customer base is aware of the Year 2000
issue,  during the second  quarter  of 1998 the Bank  mailed to each  commercial
account,  and  included in each  commercial  account  loan and  deposit  account
statement,  a letter  addressing Year 2000 issues and encouraging the assessment
of Year 2000  risk.  Year 2000  reference  resources  for  businesses  were also
provided.

As part of its customer Year 2000 assessment, the Bank identified all commercial
account  borrowing  relationships in excess of $100,000.  These represented over
200 relationships  and approximately 95% of the total borrowings  outstanding as
of June 30, 1998.  Each of these business  relationships  was analyzed as to its
potential  for Year 2000 risk and  approximately  20% were selected to receive a
detailed  Year 2000  questionnaire.  The  questionnaire,  requesting  additional
information  on Year 2000  status,  was  delivered to these  selected  customers
during the third quarter of 1998. The completed questionnaires were analyzed for
risk and each borrower was assigned a Year 2000 risk rating. As a result of this
analysis,  the Bank  modified  its credit  review  process and its  underwriting
criteria to include consideration of Year 2000 issues.

Renovation, Testing & Implementation
The  correction  and testing phase of the Company's  Year 2000 Plan includes the
renovation and/or replacement of all mission critical IT hardware,  software and
equipment  identified as not compliant  with the Year 2000.  The majority of the
internal mission critical  renovation  centered around the upgrade to the Bank's
WAN and teller  systems.  The  installation  of the Year 2000  compliant  teller
system was completed by December 31, 1998.

To ensure Year 2000 compliance of its WAN and reduce the administrative overhead
of its IT systems,  management  determined that a complete renovation of the WAN
would  provide the most cost  effective  solution.  Most of the  elements of the
Bank's WAN upgrade  were  completed  by December  31,  1998.  Due to the overall
complexity of this project, however, only a few of the desktop workstations were
operational  on the new system at that  time.  Current  projections  are for all
users to be  converted  over to the new Year 2000  compliant  system  during the
second quarter of 1999.

The Bank relies on two primary off-site data processing  vendors for the mission
critical  processing of the Bank's customer accounting system and general ledger
applications. These vendors identified

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       22


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
-----------------------------------------------     
Renovation, Testing & Implementation,   continued
certain Year 2000  compliance  issues and the  renovations to these systems were
completed  by  December  31,  1998.  Testing of these  systems is expected to be
substantially completed during the first quarter of 1999.

Although  no  vendors  were  identified  where  the  inability  to be Year  2000
compliant would cause the Company to seek alternative suppliers, the Company has
no viable  alternatives for some vendors,  such as power  distribution and local
telephone  companies.  The Year 2000 efforts of these  companies  continue to be
monitored and are part of the Company's  contingency plan. As with all financial
institutions,  the Company  places a high degree of reliance on systems of other
institutions, including governmental agencies, to settle transactions.

Costs
The majority of the costs  associated  with the Company's  Year 2000 project are
for the  installation and testing of the components to upgrade the Bank's teller
systems  and  WAN.   Included  in  this  project  were  improved   communication
connections  between  offices,   higher  capacity  computer  file  servers,  and
operating system upgrades for the entire network.  While these  investments were
not specifically accelerated due to the Company's Year 2000 project, these costs
have been included.

As of December 31,  1998,  the Company had  invested  approximately  $75,000 for
capital  improvements  to the WAN.  Additional  capital  costs  projected  to be
incurred for this  project  during 1999 are  estimated at $160,000.  The capital
cost to upgrade the Bank's teller system for Year 2000 compliance is $60,000, of
which $18,000 was expended as of December 31, 1998.  Other costs incurred during
1998 by the  Company  include  staff  time  devoted  to the  issue  at a cost of
approximately  $15,000 and outside  consulting of $7,000.  Current  estimates of
additional costs for staff and outside consultants in 1999 and the year 2000 are
$60,000.

While  management  believes it has  identified and planned for the resolution of
the mission critical issues relevant to the Year 2000, no assurance can be given
that the Company may not be required to expend  significant  additional  amounts
related to the Year 2000 issue.

Risks
The principal risks  associated  with the Year 2000 problem  primarily fall into
three  categories.  The first risk is that the Company is unable to successfully
renovate and/or migrate to Year 2000 compliant  systems.  The second risk is the
disruption of operations due to the failure of third  parties.  The third is the
risk of business  interruption among fund providers and fund users which affects
their ability to contractually perform.

The only risk largely under the  Company's  control for the Year 2000 project is
the  identification,  renovation and implementation of its internal  operations.
The Company,  like other financial  institutions,  is heavily dependent upon its
computer systems.  Reliance on readily available PC-based systems and technology
for WAN and desktop workstations has simplified this process to some extent, and
management  believes it will be able to make the  necessary  renovations  of its
internal systems for Year 2000 compliance.

Because of the  reliance on outside  vendors  for  processing  mission  critical
customer  accounting systems, a computer failure of a third party may jeopardize
Company operations. How serious this would be depends on the nature and duration
of such failures. Because of the complexity, integration and dependence of these
outside  systems to the  Company's  operations,  switching to another  vendor on
short  notice  does not  represent  a viable  option.  At this time,  management
believes  that the  necessary  renovations  to these third party systems will be
completed on schedule.

Another serious impact to Company  operations would occur if basic services such
as  telecommunications,  electric power supplies and services  provided by other
governmental  agencies were disrupted.  To date definitive  public disclosure of
the  state  of  readiness  among  basic  infrastructure  suppliers  has not been
generally available.  Although inquiries continue, the Company does not yet have
the  information  to estimate the likelihood of  significant  disruptions  among
these suppliers.

Contingency Planning
The Company has developed  contingency plans for the Year 2000 in the event that
remediation  is not  completed in time,  or if systems fail for reasons that are
not presently foreseen. In the event of a failure, these plans outline the steps
that  will be taken  to deal  with the  situation  to  minimize  the  effect  on
customers and losses to the Company. As the Company's identified Year 2000 risks
are largely  concentrated  with the ability of third parties to provide services
after  the  year  2000,   contingency   plans  being  developed  will  primarily
concentrate  on the  inability of these  suppliers  to complete  their Year 2000
projects.  Based upon currently known information,  management believes that its
primary  vendors  have the  resources  to  complete  their  Year  2000  projects
successfully and on time.

Apart from the  Company's  Year 2000 project,  federal  banking  regulators  are
conducting special examinations of FDIC-insured financial institutions and third
party data processors,  including suppliers to the Company, to determine whether
they are taking  necessary  steps to prepare for the Year 2000. They are closely
monitoring  the progress  made by these  institutions  in  completing  key steps
required by their individual Year 2000 plans.

The  Company's  disclosure  and  announcement  herein  concerning  its Year 2000
planning  and  programs  are  intended  to  constitute   "year  2000   readiness
disclosures"  as  defined  in the  recently-enacted  Year 2000  Information  and
Readiness  Disclosure Act (the "Act").  The Act provided certain protection from
liability for certain public and private statements  concerning an entity's Year
2000 readiness and the Year 2000 readiness of its products and services.

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       23

<PAGE>

<TABLE>
<CAPTION>
DIRECTORS                          
---------------------------- ------------------------------------------------------------------
<S>                               <C>                               <C>
Joshua Fong, O.D.                 Richard M. Kahler                 William E. Peluso
Chairman,                         President & CEO,                  Restaurant Consultant,
Bay Commercial Services           Bay Commercial Services           Livermore
Retired Optometrist,              President & CEO,                 
San Leandro                       Bay Bank of Commerce              Oswald A. Rugaard
                                                                    Self-employed
William R. Henson                 Dimitri Koroslev                  Independent Sales Consultant,
President,                        Chairman,                         San Leandro
Superior Home Loans,              Bay Bank of Commerce             
Hayward                           President,                        Mark Wilton
                                  Bay Business Credit,              Owner,
                                  Walnut Creek                      Marwil Investments
                                                                    Lafayette
</TABLE>                     
<TABLE>                      
<CAPTION>                    
                             
OFFICERS                     
---------------------------- ------------------------------------------------------------------
<S>                               <C>                               <C>
EXECUTIVE                         Rebecca Worthen                   ADMINISTRATIVE
                                  Assistant Vice President,
Richard M. Kahler                 Commercial Lending                Jane C. Christopherson
President & CEO                                                     Vice President &
Bay Bank of Commerce &            David A. Weinshelbaum             Chief Financial Officer
Bay Commercial Services           Assistant Vice President,
                                  Commercial Lending                Eileen Berry Wortham
Randall D. Greenfield                                               Marketing Director
Senior Vice President & CAO,      Maria Mabardy
Bay Bank of Commerce              Assistant Vice President,         Operations
Chief Financial Officer,          Lending
Bay Commercial Services                                             Nancy Bowers
                                  Construction Lending              Vice President, Operations
Robert A. Perantoni                                                 Director of Human Resources
Senior Vice President &           Cindy Chase
Senior Lending Officer            Vice President,                   Arlene Dalldorf
                                  Construction Lending              Assistant Vice President,
COMMERCIAL LENDING                                                  Operations Officer
                                  John Stevens
Teresa Jensen                     Vice President,                   Kay Tropiano
Vice President & SBA Loan         Construction Lending              Operations Officer
Manager                         
                                  BRANCH ADMINISTRATION &           Brenda Fernandez
Alan Lozito                       BUSINESS DEVELOPMENT              Assistant Vice President &
Vice President,                                                     Credit Operations Officer
Commercial Lending                Jim Nunn
                                  Vice President &                  Carol Barfuss
Michael Maxson                    Hayward Branch Manager            Assistant Vice President &
Vice President,                                                     Compliance Officer
Commercial Lending                Margie Perry
                                  Vice President &                  William Reynolds
Sally Porfido                     San Ramon Branch Manager          Manager of Courier Services &
Vice President,                                                     Security Officer
Commercial Lending                Michelle Munson
                                  Business Development Officer
Earl Rupp                         
Vice President,                   
Commercial Lending                
</TABLE>
                                  
                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                       24

<PAGE>
(back cover - inside)

THE COMPANY  WILL  PROVIDE TO ANY  SHAREHOLDER,  WITHOUT  CHARGE,  A COPY OF THE
COMPANY'S  ANNUAL REPORT FOR 1998 ON FORM 10-KSB FILED WITH THE  SECURITIES  AND
EXCHANGE COMMISSION. THE REPORT MAY BE OBTAINED BY WRITTEN REQUEST TO:

Corporate Secretary
Bay Commercial Services
1495 East 14th Street
San Leandro, CA  94577

TRANSFER AGENT
CHASE MELLON SHAREHOLDERS SERVICES
Ridgefield Park, NJ

INDEPENDENT AUDITORS
DELOITTE & TOUCHE LLP, SAN FRANCISCO, CA

CORPORATE COUNSEL
LILLICK & CHARLES LLP, SAN FRANCISCO, CA

STOCK PRICES AND DIVIDEND INFORMATION
The  Company's  common  stock is not listed on any  exchange nor is it listed on
NASDAQ.  It is, however,  listed with the National Daily  Quotation  Service and
appears in the weekly "pink sheets" issued by the  organization.  Trading in the
common stock of the Company has historically  not been active.  According to the
Company's records, there were 409 shareholders of record as of March 10, 1999.

The following  table  summarizes bid quotations for the Company's  common stock.
The prices  indicated may not necessarily  represent  actual  transactions.  Bid
information  has been  obtained  from Sutro & Co.,  which  makes a market in the
Company's common stock.
<TABLE>
<CAPTION>

-------------------------------------------------------------------
QUARTER END                  LOW                            HIGH
<S>                          <C>                            <C>    
March 31, 1997               $10.00                         $10.875
June 30, 1997                $10.875                        $12.00
September 30, 1997           $12.00                         $13.125
December 31, 1997            $13.25                         $16.25
March 31, 1998               $15.125                        $16.25
June 30, 1998                $15.75                         $17.00
September 30, 1998           $13.00                         $17.25
December 31, 1998            $12.25                         $15.50
-------------------------------------------------------------------
</TABLE>

The Company paid cash  dividends of $0.30 per share in 1998 and 1997. On January
6, 1999,  Bay  Commercial  Services  declared  a $0.40 per share  cash  dividend
payable on February 15, 1999 to  shareholders of record at the close of business
on January 29, 1999. The total dividend payable amounted to $478,000.


MARKET MAKERS
SUTRO & CO., Troy Norlander
Big Bear Lake, CA
(800) 288-2811

HOEFER & ARNETT, INC., Marc Arnett or Lisa Gallo
San Francisco, CA
(800) 346-5544
<PAGE>

THE COMPANY

Bay Bank of Commerce is a state  chartered,  and FDIC insured,  commercial Bank.
The Bank was  incorporated  on August 11,  1980,  and,  after its initial  stock
offering,  commenced  operations  on February 13, 1981. To enhance its corporate
flexibility,  Bay  Commercial  Services  was  formed to serve as a bank  holding
company.  On May 31,  1983,  Bay  Bank  of  Commerce  became  its  wholly  owned
subsidiary.

Bay Bank of Commerce serves the banking needs of businesses and professionals in
the East Bay region of the San Francisco Area with three  full-service  offices.
Headquartered in San Leandro,  the Bank opened its Hayward branch in 1992, and a
regional  banking  office  in San Ramon in 1996 to serve  the  growing  business
market on the "I-680" corridor of the East Bay.

Bay Bank of Commerce specializes in commercial and construction lending services
and provides  customized credit solutions based on customers'  particular needs.
The Bank's  construction  loan services cover both  commercial  and  residential
building  projects.  As a "preferred" SBA lender, Bay Bank of Commerce can offer
faster  pre-qualification  and  funding  than  many  of its  competitors.  Other
business lending services include loans for equipment financing, commercial real
estate,  letters of credit,  VISA business cards and small  business  assistance
loans under the State of California "CalCap" program.

For individuals,  Bay Bank offers  residential  construction  loans, home equity
lines of credit, overdraft lines, installment loans and VISA Gold cards.

The Bank also  provides a full range of business and personal  deposit  services
include checking,  savings, time and money market accounts, and ATM/debit cards.
Other business deposit services include cash vault, courier deposit pick-up, and
merchant credit and debit card processing.

Over  the  years  Bay  Bank of  Commerce  has won many  loyal  customers  with a
reputation of service excellence, a commitment to quality banking products and a
focus on meeting customer needs.  Building  successful  long-term  relationships
with customers is a top priority for Bay Bank of Commerce.

                     BAY COMMERCIAL SERVICES AND SUBSIDIARY

<PAGE>

(back cover- outside)

(LOGO)
BAY BANK OF COMMERCE

MAIN OFFICE
1495 East 14th Street
San Leandro, California 94577
(510) 357-2265

HAYWARD OFFICE
1030 La Playa Drive
Hayward, California  94545
(510) 783-8000

SAN RAMON OFFICE
2821 Crow Canyon Road
San Ramon, California  94583
(925) 831-6111

CONSTRUCTION LOAN OFFICE
1500 Washington Avenue
San Leandro, California  94577
(510) 357-2265

SBA LOAN OFFICE
1500 Washington Avenue
San Leandro, California  94577
(510) 895-5515


Member FDIC
Equal Housing Lending

Copyright 1999, Bay Commercial Services      Printed in the USA




<PAGE>