U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                   FORM 10-QSB
(Mark 
[X]             QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

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

             For the transition period from____________to____________


                         Commission File Number: 0-12231

                             BAY COMMERCIAL SERVICES
        (Exact name of small business issuer as specified in its charter)

 California                                                          94-2760444
------------                                                         ----------
(State or other jurisdiction of                                 (I.R.S.Employer
incorporation or organization)                              Identification No.)


                              1495 EAST 14TH STREET
                          SAN LEANDRO, CALIFORNIA 94577
                          -----------------------------
                    (Address of principal executive offices)

                                 (510) 357-2265
                                 --------------
                           (Issuer's telephone number)

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

YES    X          NO 
   ------           -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.

Class                                           Outstanding at October 31, 1998
------                                          -------------------------------
Common stock, no par value                                     1,080,570 shares
                                             

Transitional Small Business Disclosure Format

YES              NO   X
   -----           -----

This report contains a total of 22 pages.

<PAGE>


<TABLE>
                                 BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                 CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
                                                                          SEPTEMBER 30,
                                                                                   1998 DECEMBER 31,
(DOLLARS IN THOUSANDS):                                                     (UNAUDITED)         1997
----------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>      
Cash and due from banks .....................................................  $  9,769     $  7,548
Federal funds sold and reverse repurchase agreements ........................    13,300           --
----------------------------------------------------------------------------------------------------
  Cash and cash equivalents .................................................    23,069        7,548
----------------------------------------------------------------------------------------------------

Securities available for sale, stated at fair value
  (amortized cost of $17,107 for 1998; $24,663 for 1997) ....................    17,265       24,651
Securities held to maturity (fair values of $9,499 for 1998;
   $8,057 for 1997) .........................................................     9,251        7,929
Federal Home Loan Bank stock ................................................       354           --
                                                                                           
Loans held for sale .........................................................     1,096        1,501
Loans held for investment ...................................................    82,649       72,628
  Allowance for loan losses .................................................      (936)      (1,000)
----------------------------------------------------------------------------------------------------
  Net loans .................................................................    82,809       73,129
----------------------------------------------------------------------------------------------------
Premises and equipment, net .................................................     1,949        2,111
Interest and fees receivable ................................................       624          566
Other assets ................................................................       456          435
----------------------------------------------------------------------------------------------------
  TOTAL ASSETS ..............................................................  $135,777     $116,369
====================================================================================================    

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
  Noninterest-bearing demand ................................................  $ 35,499     $ 29,076
  Savings and interest-bearing demand .......................................    39,141       29,203
  Time ......................................................................    30,666       30,022
  Certificates of deposit, $100 and over ....................................    17,076       12,834
 ---------------------------------------------------------------------------------------------------
  Total deposits ............................................................   122,382      101,135
 ---------------------------------------------------------------------------------------------------

Securities sold under agreements to repurchase ..............................     1,219        1,290
Federal funds purchased .....................................................       --         2,500
Interest payable and other liabilities ......................................     1,064        1,271
----------------------------------------------------------------------------------------------------
  Total liabilities .........................................................   124,665      106,196
----------------------------------------------------------------------------------------------------

Commitments and contingent liabilities                                              --           -- 
                                                                               
Shareholders' equity:
  Common stock - no par value: authorized 20,000,000 shares;
    issued & outstanding 1,080,570 in 1998; 1,078,720 in 1997 ...............     3,622        3,671
  Retained earnings .........................................................     7,393        6,509
  Net unrealized gain (loss) on securities available for sale, net of taxes..        97           (7)
----------------------------------------------------------------------------------------------------
  Total shareholders' equity ................................................    11,112       10,173
----------------------------------------------------------------------------------------------------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................  $135,777    $ 116,369
====================================================================================================
See accompanying notes to consolidated condensed financial statements 
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
                                            BAY COMMERCIAL SERVICES AND SUBSIDIARY
                                     CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                                                            NINE MONTHS ENDED       THREE MONTHS ENDED
                                                                SEPTEMBER 30,            SEPTEMBER 30,
(Dollars in thousands, except per share amounts):              1998      1997           1998      1997
------------------------------------------------------------------------------------------------------
Interest income:
<S>                                                          <C>       <C>            <C>       <C>   
  Loans, including fees .................................    $6,085    $5,327         $2,114    $1,801
  Federal funds sold and reverse repurchase agreements...       317       199            124        59
  Securities:
    Taxable .............................................       904       741            349       328
    Tax exempt ..........................................       198       143             74        51
------------------------------------------------------------------------------------------------------
      Total interest income .............................     7,504     6,410          2,661     2,239
------------------------------------------------------------------------------------------------------
Interest expense:
  Deposits:
    Savings and interest-bearing demand .................       777       496            298       177
    Time ................................................     1,134     1,166            373       415
    Certificates of deposit, $100 and over ..............       613       398            229       153
  Other borrowed funds ..................................        49        73             15        23
------------------------------------------------------------------------------------------------------
      Total interest expense ............................     2,573     2,133            915       768
------------------------------------------------------------------------------------------------------
      Net interest income ...............................     4,931     4,277          1,746     1,471
Provision for loan losses ...............................        99        52             30         5
------------------------------------------------------------------------------------------------------
      Net interest income after
        provision for loan losses .......................     4,832     4,225          1,716     1,466
------------------------------------------------------------------------------------------------------
Noninterest income:
  Bankcard income .......................................       309       225            104        80
  Service charges and fees ..............................       228       200             80        67
  Gain on sale of loans .................................        88        57             --        --
  Loan servicing ........................................        62        99             13        37
  Other .................................................        36       198              6         6
------------------------------------------------------------------------------------------------------
      Total noninterest income ..........................       723       779            203       190
------------------------------------------------------------------------------------------------------         
Noninterest expenses:
  Salaries and employee benefits ........................     2,380     2,116            819       695
  Occupancy .............................................       513       511            170       164
  Data processing .......................................       260       233             86        78
  Bankcard processing expense ...........................       264       179             89        62
  Professional services .................................        96        90             28        21
  Other .................................................       680       638            223       235
------------------------------------------------------------------------------------------------------         
      Total noninterest expenses ........................     4,193     3,767          1,415     1,255
------------------------------------------------------------------------------------------------------         
      Income before income tax expense ..................     1,362     1,237            504       401
Income tax expense ......................................       478       457            177       146
------------------------------------------------------------------------------------------------------         
      NET INCOME ........................................    $  884    $  780         $  327    $  255
======================================================================================================
      NET INCOME PER COMMON SHARE - BASIC ...............    $ 0.82    $ 0.72         $ 0.30    $ 0.24
      Weighted average common shares - basic............. 1,080,286 1,076,720      1,080,022 1,076,720
      NET INCOME PER COMMON SHARE - DILUTED .............    $ 0.69    $ 0.62         $ 0.26    $ 0.20
      Weighted average common shares - .diluted.......... 1,280,216 1,252,542      1,279,831 1,260,098
======================================================================================================
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        BAY COMMERCIAL SERVICES AND SUBSIDIARY
              CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                                                              NINE MONTHS ENDED
                                                                                SEPTEMBER 30,
(Dollars in thousands):                                                       1998         1997
-----------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                                       <C>          <C>      
   Net income ........................................................... $    884     $    780 
   Adjustments to reconcile net income to
     net cash provided by operating activities:
       Depreciation and amortization ....................................     (192)          51
       Provision for loan losses ........................................       99           52
       Unamortized deferred loan fees, net ..............................      (94)         (59)
       Originations of SBA loans held for sale ..........................   (1,071)        (659)
       Proceeds from the sale of SBA loans held for sale ................    1,764        1,095
       Loss on sale of fixed assets .....................................        2           --
       Change in interest and fees receivable and other assets...........      (62)         104
       Change in interest payable and other liabilities..................       56         (123)
-----------------------------------------------------------------------------------------------
     Net cash provided by operating activities ..........................    1,386        1,241
----------------------------------------------------------------------------------------------- 
Cash flows from investing activities:
   Proceeds from maturities or calls of securities available for sale ...   73,001       17,464
   Proceeds from maturities or calls of securities held to maturity .....    2,382        1,271
   Purchases of securities available for sale ...........................  (65,060)     (26,532)
   Purchases of securities held to maturity .............................   (4,043)      (1,139)
   Net change in loans ..................................................  (10,400)       1,585
   Purchases of premises and equipment ..................................      (48)        (198)
----------------------------------------------------------------------------------------------- 
     Net cash used in investing activities ..............................   (4,168)      (7,549)
----------------------------------------------------------------------------------------------- 
Cash flows from financing activities:
   Net change in deposits ...............................................   21,247       15,815
   Net change in securities sold under agreements to repurchase .........      (71)        (572)
   Net change in federal funds purchased ................................   (2,500)        (500)
   Exercise of stock options ............................................       35           --
   Repurchase and retirement of common stock ............................      (84)          --
   Cash dividends paid ..................................................     (324)        (323)
----------------------------------------------------------------------------------------------- 
     Net cash provided by financing activities ..........................   18,303       14,420
----------------------------------------------------------------------------------------------- 
     Net change in cash and cash equivalents ............................   15,521        8,112
Cash and cash equivalents at beginning of year ..........................    7,548        6,945
----------------------------------------------------------------------------------------------- 
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................. $ 23,069     $ 15,057
=============================================================================================== 
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
      Interest .......................................................... $  2,615     $  2,171
      Income taxes ......................................................      388          413
Noncash investing activities during the period:
    Loss on disposition of equipment ....................................        2           --

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


<PAGE>


                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


1)   All adjustments  (consisting only of normal  recurring  accruals) which, in
     the opinion of  Management,  are necessary for a fair  presentation  of the
     Company's  financial  position at September  30, 1998 and December 31, 1997
     and the results of its operations and its cash flows for the three and nine
     month periods ended  September  30, 1998 and 1997 have been  included.  The
     results of  operations  and cash flows for the  periods  presented  are not
     necessarily indicative of the results for a full year.

2)   The  accompanying   unaudited  condensed  financial  statements  have  been
     prepared on a basis consistent with the accounting  principles and policies
     reflected in the Company's  annual  report for the year ended  December 31,
     1997.

3)   Net income per  common  share - basic for the three and nine month  periods
     ended  September  30, 1998 and 1997 was  computed by dividing net income by
     the weighted  average number of outstanding  common shares.  Net income per
     common share - diluted for the three and nine month periods ended September
     30,  1998 and 1997 is  computed  by  dividing  net  income by the  weighted
     average number of outstanding  common shares  including the dilutive effect
     of stock options.  The weighted average number of outstanding common shares
     for the three and nine month periods ended September 30, 1998 was 1,080,286
     and  1,080,022,  respectively.  The weighted  average number of outstanding
     common shares for the three and nine month periods ended September 30, 1997
     was 1,076,720.  The weighted  average  number of outstanding  common shares
     including the dilutive effect of stock options for the three and nine month
     periods ended September 30, 1998 was 1,280,216 and 1,279,831, respectively.
     The weighted  average  number of  outstanding  common shares  including the
     dilutive effect of stock options for the three and nine month periods ended
     September 30, 1997 was 1,252,542 and 1,260,098, respectively.

4)   The  provision  for income  taxes for the periods  presented  is based on a
     projected tax rate for the entire year.  The  Company's  effective tax rate
     was 35% and 37% for the nine month  periods  ended  September  30, 1998 and
     1997,  respectively.  The Company's  effective tax rate was 35% and 36% for
     the three month periods ended September 30, 1998 and 1997, respectively.

5)   Effective  January 1, 1998,  the Company  adopted  Statement  of  Financial
     Accounting  Standards  No.  130,  "Reporting  Comprehensive  Income".  This
     Statement  requires  disclosure of total nonowner  changes in shareholders'
     equity as comprehensive  income.  Comprehensive  income includes net income
     and net  unrealized  gain (loss) on securities  available for sale,  net of
     taxes.  Total  comprehensive  income was $988,000 and $788,000 for the nine
     months ended September 30, 1998 and 1997, respectively. Total comprehensive
     income was $407,000 and $280,000 for the three months ended  September  30,
     1998 and 1997, respectively.
<PAGE>
6)   In June 1998, the Financial Accounting Standards Board Issued Statement No.
     133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
     required to be adopted in years beginning  after June 15, 1999.  Because of
     the Company's  minimal use of  derivatives,  Management does not anticipate
     that the adoption of the new Statement  will have a  significant  effect on
     earnings or the financial position of the Company.

<PAGE>

<TABLE>
<CAPTION>
                   BAY COMMERCIAL SERVICES AND SUBSIDIARY

                   The Table Below Illustrates Changes in
Major Categories of the Average Balance Sheets and Statements of Income and in
                   Certain Performance Ratios (Unaudited)

                                                           NINE MONTHS ENDED        INCREASE
                                                              SEPTEMBER 30,        (DECREASE)
(Dollars in thousands):                                      1998       1997         $      %
----------------------------------------------------------------------------------------------
Average Balances:
<S>                                                      <C>        <C>        <C>        <C>   
  Assets (1) .........................................   $122,830   $104,094   $ 18,736   18.0% 
  Securities - taxable (1) ...........................     20,368     15,926      4,442   27.9
  Securities - tax exempt ............................      5,153      3,618      1,535   42.4
  Federal funds sold and reverse repurchase agreements      7,593      5,025      2,568   51.1
  Total loans ........................................     79,810     70,318      9,492   13.5
  Nonaccrual loans ...................................        311        374        (63)
  Deposits ...........................................    109,958     91,381     18,577   20.3
  Shareholders' equity (1) ...........................     10,613      9,836        777    7.9

  Interest-earning assets (1) ........................    112,613     94,513     18,100   19.2
  Interest-bearing liabilities .......................     79,915     66,221     13,694   20.7

Income Statements:
  Interest income (2) ................................   $  7,595   $  6,476   $  1,119   17.3%
  Interest expense ...................................      2,573      2,133        440   20.6
----------------------------------------------------------------------------------------------                            ----
    Net interest income (2) ..........................      5,022      4,343        679   15.6
  Taxable equivalent adjustment ......................         91         66         25   37.9
----------------------------------------------------------------------------------------------                            ----
    Net interest income ..............................      4,931      4,277        654   15.3
  Provision for loan losses ..........................         99         52         47   90.4
----------------------------------------------------------------------------------------------                            ----
    Net interest income after provision
      for loan losses ................................      4,832      4,225        607   14.4
----------------------------------------------------------------------------------------------                            ----
  Noninterest income .................................        723        779        (56)   7.2
  Noninterest expenses ...............................      4,193      3,767        426   11.3
  Income tax expense .................................        478        457         21    4.6
----------------------------------------------------------------------------------------------                            ----
    NET INCOME .......................................   $    884   $    780   $    104   13.3%
==============================================================================================                            ====
</TABLE>
<TABLE>
<CAPTION>
Performance Ratios: (3)                                                           Change
                                                                                  ------
<S>                                                          <C>        <C>       <C>    
Yield on average interest-earning assets ............        8.91%      9.07%     (0.16)%
Yield on average interest-earning assets (2) ........        9.02%      9.16%     (0.14)%
Interest rate on average interest-bearing  
    liabilities .....................................        4.30%      4.31%     (0.01)%
Interest expense as a percent of average
    interest-earning assets .........................        3.05%      3.02%      0.03 %

Net yield on average interest-earning assets ........        5.86%      6.05%     (0.19)%
Net yield on average interest-earning assets (2) ....        5.97%      6.14%     (0.17)%
<FN>
(1) Before unrealized gain or loss on securities available for sale.
(2) Federal taxable equivalent basis. 
(3) Ratios have been annualized and are not necessarily indicative of results for a full year.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                   BAY COMMERCIAL SERVICES AND SUBSIDIARY

                   The Table Below Illustrates Changes in
Major Categories of the Average Balance Sheets and Statements of Income and in
                   Certain Performance Ratios (Unaudited)

                                                           THREE MONTHS ENDED        INCREASE
                                                                SEPTEMBER 30,       (DECREASE)
(Dollars in thousands):                                        1998      1997         $     %
-----------------------------------------------------------------------------------------------
Average Balances:
<S>                                                      <C>        <C>        <C>         <C>  
  Assets (1) .........................................   $130,359   $109,163   $ 21,196    19.4% 
  Securities - taxable (1) ...........................     24,148     21,353      2,795    13.1
  Securities - nontaxable ............................      5,760      3,941      1,819    46.2
  Federal funds sold and reverse repurchase agreements      8,763      4,283      4,480   104.6
  Total loans ........................................     81,731     70,722     11,009    15.6
  Nonaccrual loans ...................................        210        490       (280)  (57.1)
  Deposits ...........................................    117,167     96,351     20,816    21.6
  Shareholders' equity (1) ...........................     10,905     10,122        783     7.7

  Interest-earning assets (1) ........................    120,192     99,809     20,383    20.4
  Interest-bearing liabilities .......................     85,238     69,841     15,397    22.0

Income Statements:
  Interest income (2) ................................   $  2,695   $  2,262   $    433    19.1%
  Interest expense ...................................        915        768        147    19.1
-----------------------------------------------------------------------------------------------  
    Net interest income (2) ..........................      1,780      1,494        286    19.1
  Taxable equivalent adjustment ......................         34         23         11    47.8
-----------------------------------------------------------------------------------------------  
    Net interest income ..............................      1,746      1,471        275    18.7
  Provision for loan losses ..........................         30          5         25   500.0
-----------------------------------------------------------------------------------------------  
    Net interest income after provision
      for loan losses ................................      1,716      1,466        250    17.1
  Noninterest income .................................        203        190         13     6.8
  Noninterest expenses ...............................      1,415      1,255        160    12.7
  Income tax expense .................................        177        146         31    21.2
----------------------------------------------------------------------------------------------   
    NET INCOME .......................................   $    327   $    255   $     72    28.2%
===============================================================================================  
</TABLE>
<TABLE>
<CAPTION>
Performance Ratios: (3)                                                           Change
                                                                                  ------
<S>                                                          <C>       <C>        <C>    
  Yield on average interest-earning assets                   8.78%     8.90%      (0.12)%
  Yield on average interest-earning assets (2)               8.90%     8.99%      (0.09)%
  Interest rate on average interest-bearing               
      liabilities                                            4.26%     4.36%      (0.10)%
  Interest expense as a percent of average                
      interest-earning assets                                3.02%     3.05%      (0.03)%
                                                        
  Net yield on average interest-earning assets               5.76%     5.85%      (0.09)%
  Net yield on average interest-earning assets (2)           5.88%     5.94%      (0.06)%
<FN>
(1) Before unrealized gain or loss on securities available for sale
(2) Federal taxable equivalent basis. 
(3) Ratios have been annualized and are not necessarily indicative of results for a full year.
</FN>
</TABLE>


<PAGE>
                     BAY COMMERCIAL SERVICES AND SUBSIDIARY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
                      NINE MONTHS ENDED SEPTEMBER 30, 1997

OVERVIEW

Certain  matters  discussed  in this  Management's  Discussion  and Analysis are
forward-looking  statements  that are  subject to risks and  uncertainties  that
could cause  actual  results to differ  materially  from those  projected in the
forward-looking  statements. Such risks and uncertainties include, among others,
(1) significant  increases in competitive pressure in the banking industry;  (2)
changes in the interest rate  environment  reduce margins;  (3) general economic
conditions,  either nationally or regionally,  are less favorable than expected,
resulting in, among other things, a deterioration in credit quality; (4) changes
in the regulatory environment; (5) changes in business conditions and inflation;
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 (the "Company") and Bay Bank
of Commerce (the "Bank").

Net  income  of the  Company  was  $884,000  for the first  nine  months of 1998
compared  to $780,000  for the first nine months of 1997.  Net income per common
share - basic was $0.82  and $0.72 for the first  nine  months of 1998 and 1997,
respectively.  Net income per common share - diluted was $0.69 and $0.62 for the
first nine months of 1998 and 1997, respectively.

The  $104,000  or 13% growth in net  income  for the first  nine  months of 1998
compared  to the  first  nine  months  of 1997  reflected  strong  growth in net
interest  income  which was  partially  offset  by an  increase  in  noninterest
expenses,  a decrease in noninterest  income and higher income tax expense.  Net
interest income increased  $654,000 or 15% in the 1998 period principally due to
strong growth in average interest-earning assets. Noninterest expenses increased
$426,000 or 11%, largely due to higher salaries and employee benefits associated
with staff growth in the Bank.  Noninterest income dropped $56,000 or 7% between
the  two  periods  principally  due to a  1997  recovery  of  $149,000  in  loan
collection expenses.

Total  assets  reached  $135,777,000  at  September  30,  1998,  representing  a
$19,408,000  or  17%  increase  from  December  31,  1997.   Total  deposits  of
$122,382,000  at  September  30, 1998 grew  $21,247,000  or 21%.  Funds from the
deposit  growth and from  securities  which  matured or were  called  during the
period were  principally  invested in federal funds sold and reverse  repurchase
agreements  ("overnight   investments")  and  in  loans.  Overnight  investments
increased  $13,300,000  and loans  increased  $9,616,000 or 13% during the first
nine months of 1998.

<PAGE>

RESULTS OF OPERATIONS

NET INTEREST INCOME
Net interest  income,  the principal  source of the Company's  earnings,  is the
amount by which  interest and fees generated by  interest-earning  assets (loans
and investments) exceed the interest cost of deposits and other 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 $4,931,000  for the first nine months of 1998  increased
$654,000  or 15%  compared  to the  first  nine  months  of 1997.  The  increase
reflected an $18,100,000 or 19% growth in average  interest-earning  assets. The
net yield on  average  interest-earning  assets  declined  to 5.86% for the 1998
period from 6.05% for the 1997 period.

The  increase  in  average  interest-earning  assets  between  the 1998 and 1997
periods  was due to  growth of  $9,555,000  or 14% in  average  interest-earning
loans,  $5,977,000 or 31% in average total  securities  and $2,568,000 or 51% in
federal funds sold and reverse  repurchase  agreements.  Despite the strong loan
growth, the ratio of average  interest-earning loans to average interest-earning
assets  dropped to 71% for the 1998 period  compared to 74% for the 1997 period.
The  larger  proportion  of  interest-earning   assets  invested  in  short-term
securities  reduced the yield on  interest-earning  assets to 8.91% for the 1998
period compared to 9.07% for the 1997 period.

Average  interest-bearing  liabilities  increased $13,694,000 or 21% between the
1998 and 1997 periods.  The average rate paid for  interest-bearing  liabilities
remained  fairly  stable at 4.30% for the 1998 period  compared to 4.31% for the
1997  period.  Savings and  interest-bearing  demand  deposits  experienced  the
greatest growth during the 1998 period, up an average $9,283,000 or 38% compared
to the 1997  period.  The average  cost of savings and  interest-bearing  demand
deposits also increased,  to 3.05% for the 1998 period compared to 2.68% for the
1997  period,  due  to the  introduction  of a new  money  market  product.  The
increased  cost of this  deposit type offset the benefits of a small drop in the
average  cost of time  deposits  and a decline in the ratio of time  deposits to
average total  interest-bearing  liabilities to 56% for the 1998 period compared
to  60%  for  the  1997  period.  Average  noninterest-bearing  demand  deposits
increased $4,243,000 or 16% between the periods.

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. If more assets than liabilities reprice in a given period (an asset
sensitive  position),  interest  rate changes will be reflected  more quickly in
rates on earning assets. If interest rates decline,  an asset sensitive position
could adversely affect net interest  income.  Alternatively,  where  liabilities
reprice  more  quickly  than  assets in a given  period (a  liability  sensitive
position),  a decline in market  rates could  benefit net interest  income.  The
results would reverse if market rates were to increase.

The  following  table  presents the  Company's  interest  rate  sensitivity  gap
position at September 30, 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 
<PAGE>
contractual  maturity or,for those  assets which are held for sale,  within the
time period  during whichsale may  reasonably  be expected to be  accomplished.
loating  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
                                            ------------------------------------------
                                                 3       OVER        OVER 1
AS OF SEPTEMBER 30, 1998:                     MONTHS   3 MONTHS     YEAR TO     OVER 5
(Dollars in thousands)                       OR LESS  TO 1 YEAR     5 YEARS      YEARS      TOTAL
-------------------------------------------------------------------------------------------------
Interest rate sensitive assets:         
<S>                                          <C>        <C>         <C>        <C>       <C>     
  Loans (excluding nonaccrual) ..........    $60,924    $ 1,600     $ 9,592    $11,979   $ 84,095
  Securities (before unrealizedgain(loss)
   on securities available for sale) ....      6,979        503       9,431      9,444     26,357
  Federal funds sold and reverse
    repurchase agreements ...............     13,300        --           --         --     13,300
-------------------------------------------------------------------------------------------------                                   
    Total ...............................     81,203      2,103      19,023     21,423    123,752
-------------------------------------------------------------------------------------------------                                   
Interest rate sensitive liabilities:
  Interest-bearing transaction accounts .     32,411         --          --         --     32,411
  Savings deposits ......................      6,730         --          --         --      6,730
  Time deposits, $100 and over ..........     23,453      5,691         509        100     29,753
  Other time deposits ...................     10,900      5,514       1,574          1     17,989
  Other borrowed funds ..................      1,119        100          --         --      1,219
-------------------------------------------------------------------------------------------------                                   
    Total ...............................     74,613     11,305       2,083        101     88,102
-------------------------------------------------------------------------------------------------                                   
Interest rate sensitivity gap ...........      6,590     (9,202)     16,940     21,322   $ 35,650
-------------------------------------------------------------------------------------------------                                   
Cumulative interest rate
  sensitivity gap........................    $ 6,590    $(2,612)    $14,328    $35,650
=================================================================================================
Cumulative interest rate                
 sensitivity gap to total assets........        4.9%      (1.9%)      10.6%      26.3%
</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 September 30, 1998,  indicates that the Company, on a cumulative gap
basis, is liability sensitive for the period "Over 3 months to 1 year" and asset
sensitive over the remaining time periods.

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

<PAGE>

The provision for loan losses  reflects an amount  sufficient to cover estimated
loan losses and to maintain the allowance  for loan losses at 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 September 30, 1998, the allowance for loan losses was $936,000 compared to
$1,000,000  at December  31,  1997.  The  reduction  principally  reflected  net
charge-offs totaling $163,000,  partially offset by a $99,000 provision for loan
losses.  The ratio of the  allowance  for loan losses to total loans was 1.1% at
September  30, 1998 and 1.3% at December  31,  1997.  Although  Management  uses
available  information to provide for losses on loans,  future  additions to the
allowance may be necessary based on changes in economic  conditions.  Based upon
information currently available, Management believes that the allowance for loan
losses at  September  30,  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.

Information on nonperforming  loans for the periods ended September 30, 1998 and
1997 and the year ended December 31, 1997 is summarized in the following table.
<TABLE>
<CAPTION>

                                                SEPTEMBER DECEMBER 31, SEPTEMBER
(Dollars in thousands)                                30,        1997   30, 1997
                                                     1998
------------------------------------------------------------------------------------
<S>                                                  <C>        <C>        <C>
Net loan charge-offs ..............................   $163      $ 23       $ 23

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

Nonperforming loans:
  Nonaccrual ......................................   $138      $440       $464
  Accruing loans past due 90 days or more .........     18        --        168
  Restructured ....................................    469       471         --
                                                                      
   Total nonperforming loans ......................   $625      $911       $632
                                                                      

Ratio of nonperforming loans to total loans .......    0.7%     1.2%        0.9%
Ratio of allowance for loan losses to nonperforming
  loans ...........................................    150%     110%        158%
</TABLE>

Total  Bank  nonperforming   loans  dropped  $286,000  during  the  1998  period
principally due to a charge-off of $163,000 in nonaccruing loan balances.  As of
September 30, 1998,  $134,000  represents loans guaranteed by the Small Business
Administration ("SBA loans") while the restructured loan balance consists of one
loan secured by real estate and paying as agreed.

NONINTEREST INCOME
Noninterest  income  between  the  first  nine  month  periods  of 1998 and 1997
declined $56,000 or 7%. The largest  contribution to higher  noninterest  income
for the first nine  months of 1997 was a $149,000  recovery  of loan  collection
expenses from previous years.  Loan servicing  income also declined,  $37,000 or
37% for the 1998 period  compared to the 1997  period,  due to SBA loan  payoffs
between the periods.  Partially  offsetting the decreases in noninterest  income
were

<PAGE>

increases of $84,000 or 37% in bankcard income, $31,000 or 54% from gain on
sale of loans and $28,000 or 14% in service  charges and fees.  The  increase in
bankcard income reflected an increase in merchant  bankcard activity between the
1998 and 1997 periods.  The larger gain on sale of loans for the 1998 period was
due to a larger volume of loans sold  compared to the 1997 period.  The increase
in service  charges and fees  principally  reflected the strong  deposit  growth
between the periods.

NONINTEREST EXPENSES
Total  noninterest  expenses  of  $4,193,000  for the first nine  months of 1998
increased $426,000 or 11% compared to the first nine months of 1997. The largest
change  was a  $264,000  or 13%  increase  in  salaries  and  employee  benefits
principally related to increased staffing. Bankcard processing expense increased
$85,000 or 48% due to increased  volume and higher  interchange  fees during the
1998 period.  A $42,000 or 7% increase in other  noninterest  expenses  included
higher marketing and loan processing costs. Data processing expense grew $27,000
or 12% due to account growth between the periods.


PROVISION FOR INCOME TAXES
The  provision  for income tax expense was $478,000 for the first nine months of
1998  compared to $457,000 for the first nine months of 1997.  The $21,000 or 5%
increase  in income tax expense  reflected  higher  taxable  income for the 1998
period.  The  effective  income tax rates were 35% and 37% for the 1998 and 1997
periods, respectively. The lower rate for the 1998 period reflects higher levels
of tax exempt income from  municipal  securities  and loan interest  exempt from
state tax.

                THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
                      THREE MONTHS ENDED SEPTEMBER 30, 1997

OVERVIEW

Net income for the Company for the third  quarter of 1998 was $327,000  compared
to $255,000 for the third  quarter of 1997.  Net income per common share - basic
was $0.30 and $0.24 for the third  quarter of 1998 and 1997,  respectively.  Net
income per common  share - diluted was $0.26 and $0.20 for the third  quarter of
1998 and 1997, respectively.

The  $72,000 or 28%  increase in net income  between the 1998 and 1997  quarters
principally  resulted  from a $275,000 or 19%  increase in net  interest  income
which  was  partially  offset  by a  $160,000  or 13%  increase  in  noninterest
expenses, a $31,000 or 21% increase in income tax expense and a $25,000 increase
in  the  provision  for  loan  losses.  The  largest   contributions  to  higher
noninterest  expenses  included  increases  of $124,000  or 18% in salaries  and
employee benefits expenses and $27,000 or 44% in bankcard processing expense.

<PAGE>

RESULTS OF OPERATIONS

NET INTEREST INCOME
Net  interest  income of  $1,746,000  for the third  quarter  of 1998  increased
$275,000 or 19% compared to the third quarter of 1997. The increase  principally
reflected  $20,383,000  or 20%  growth in average  earning  assets  between  the
quarters.  The net interest  margin  declined to 5.76% for the 1998 quarter from
5.85% for the 1997 quarter.

The growth in average interest-earning assets between the 1998 and 1997 quarters
was due to increases of  $11,289,000 or 16% in average  interest-earning  loans,
$4,614,000 or 18% in average total  securities and $4,480,000 or 105% in average
federal funds sold and reverse  repurchase  agreements  between the quarters.  A
larger  proportion of earning assets was invested in lower  yielding  short-term
securities  during the 1998 quarter,  which was the principal factor in the drop
in the yield on average earning assets to 8.78% from 8.90% for the 1997 quarter.

Average  interest-bearing  liabilities of  $85,238,000  for the third quarter of
1998  increased  $15,397,000  or 22% over the third quarter of 1997. The average
rate paid for  interest-bearing  deposits declined to 4.26% for the 1998 quarter
from 4.36% for the 1997  quarter.  A drop in market  rates  between the quarters
resulted in a drop in the average cost of the Bank's time  deposits to 5.14% for
the 1998 quarter from 5.32% for the 1997 quarter. In addition, the proportion of
average interest-bearing  liabilities due to higher cost time deposits decreased
to 55% for the 1998 quarter from 61% for the 1997 quarter. These changes in time
deposits   more  than   offset  the   higher   average   cost  of  savings   and
interest-bearing demand deposits,  which was 3.15% for the 1998 quarter compared
to 2.73% for the 1997 quarter.

PROVISION AND ALLOWANCE FOR LOAN LOSSES
As a result of  growth in loans  held for  investment  and net loan  charge-offs
during the 1998  quarter,  a $30,000  provision for loan losses was added to the
reserve for loan losses during the 1998 quarter  compared to a $5,000  provision
for loan losses made during the third quarter of 1997.

NONINTEREST INCOME
Total  noninterest  income of $203,000 for the third  quarter of 1998  increased
$13,000 or 7% compared to the third quarter of 1997 A $24,000 or 30% increase in
bankcard income was offset by a $24,000 or 65% decrease in loan servicing income
between the  quarters.  Service  charges and fees were $13,000 or 19% higher for
the 1998 quarter,  reflecting  the strong  deposit  growth  compared to the 1997
quarter.

NONINTEREST EXPENSES
Total noninterest expenses of $1,415,000 for the third quarter of 1998 increased
$160,000 or 13%  compared to the same  quarter in 1997.  Salaries  and  employee
benefits increased $124,000 or 18% principally due to staff additions. A $27,000
or  44%  rise  in  bankcard  expenses  reflected  increased  volume  and  higher
interchange  fees.  Other  noninterest  expenses  declined  $12,000 or 5%.  Data
processing costs increased $8,000 or 10% above the 1997 quarter,  reflecting the
Bank's strong asset growth between the quarters.

<PAGE>

PROVISION FOR INCOME TAXES
The  provision for income tax expense was $177,000 for the third quarter of 1998
compared  to  $146,000  for the third  quarter of 1997.  The  higher  income tax
expense  reflected  the  increase in taxable  income for the 1998  quarter.  The
effective  income  tax rate  was 35% and 36% for the  1998  and  1997  quarters,
respectively.

FINANCIAL CONDITION

LOANS AND INVESTMENTS
Cash and cash  equivalents  of  $23,069,000  at  September  30,  1998  increased
$15,521,000  or 206%  from  year-end  1997.  Total  loans  of  $83,745,000  grew
$9,616,000 or 13% during the same period.  The funding for these  increases came
from a  $21,247,000  or 21% increase in deposits and a $5,710,000 or 18% decline
in  securities  balances  during  the first  nine  months  of 1998.  The drop in
securities balances reflected maturities and calls during the period.

DEPOSITS AND OTHER BORROWED FUNDS
The $21,247,000 or 21% deposit growth since December 31, 1997 included growth of
$9,938,000 or 34% in savings and interest-bearing demand deposits, $6,423,000 or
22% in noninterest-bearing demand deposits and $4,242,000 or 33% in certificates
of deposit of $100,000 or more.  Federal funds purchased dropped $2,500,000 from
December 31, 1997.

OTHER ASSETS AND OTHER LIABILITIES
Other  assets of $456,000 at  September  30,  1998 were  nearly  unchanged  from
$435,000  at December  31,  1997.  Interest  payable  and other  liabilities  at
September 30, 1998,  dropped  $207,000 or 16% from year-end 1997 principally due
to the payment in 1998 of a cash dividend declared 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 noninterest-bearing deposit balances, federal funds sold and
reverse repurchase agreements,  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  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 32% at September  30, 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

<PAGE>

$8,500,000 and a repurchase facility, as well as access to collateralized 
borrowings from the Federal Home Loan Bank of San Francisco.  As of 
September 30, 1998, no borrowed funds were  outstanding  from these credit
facilities.

CAPITAL
The following  tables  present the Company's and the Bank's  regulatory  capital
positions at September 30, 1998,  and average assets over the three month period
ended September 30, 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 ...................  $ 10,927   10.6%    $ 10,476     10.1%
Tier 1 Capital minimum requirement     4,141    4.0        4,136      4.0
                                                                
Excess ...........................  $  6,786    6.6%    $  6,340      6.1%

Total Capital ....................  $ 11,863   11.5%    $ 11,412     11.0%
Total Capital minimum requirement      8,282    8.0        8,272      8.0
                                                                 
Excess ...........................  $  3,581    3.5%    $  3,140      3.0%

   Risk weighted assets...........  $103,521            $103,404
</TABLE>
<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 ..   $ 10,927   8.4%   $ 10,476   8.1%
Range of minimum leverage ...............     3,908-   3.0-      3,904-  3.0-
  requirement ...........................      6,513   5.0       6,507   5.0

Range of excess .........................     4,414-   3.4-      3,969-  3.1-
                                            $  7,019   5.4%   $  6,572   5.1%

Average total assets for third quarter*..   $130,257          $130,137
<FN>
(* Average  total assets do not include  unrealized  gains/losses  on securities
available for sale or excess servicing.) 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.
</FN>
</TABLE>

YEAR 2000
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.

<PAGE>

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 is assessing  the readiness of
these third  parties and will be preparing  contingency  plans,  there can be no
guarantees  that the failure of these third  parties to modify their  systems in
advance of  December  31, 1999 would not have a material  adverse  affect on the
Company.

The  Company  initiated  its  Year  2000  planning  in 1997 and has  prepared  a
comprehensive 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 the first
quarter of 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 involved in customer account  processing,  computer networks
and workstations, and telecommunications systems.

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.

The survey did identify mission critical IT systems,  both internal and external
that were not Year 2000 compliant.  These 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 personal  computer ("PC") based
system  connecting all of the Bank's  offices to a central  location at its Head
office.

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

<PAGE>

The Company has made  efforts to ensure that its  customer  base is aware of the
Year 2000 issue.  During the second  quarter of 1998 the Company  mailed to each
commercial  account,  and included in each  commercial  account loan and deposit
account  statement,  a letter addressing the Year 2000 issue and encouraging the
assessment of Year 2000 risk. Year 2000 reference  resources for businesses were
also provided. In addition to mailings to its commercial accounts,  the Bank has
modified its credit review process to include consideration of Year 2000 issues.

As part of its  customer  Year  2000  assessment,  the  Company  identified  all
commercial account borrowing relationships in excess of $100,000. These numbered
in  excess of 200 and  represented  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 about 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 are currently in the process of being analyzed and
risk rated. The Company expects to complete this phase during the fourth quarter
of 1998.

RENOVATION, TESTING & IMPLEMENTATION
The  correction  and testing phase of the Company's  Year 2000 Plan includes the
renovation and/or replacement of IT hardware,  software and equipment identified
as not  compliant  with the Year 2000.  The  majority  of the  internal  mission
critical  remediation  activity centers around the upgrade to the WAN and teller
systems.  While the  equipment  operating  the WAN was  fundamentally  Year 2000
compliant,  some of the commercially  available software applications running on
the WAN were not.  Management  determined that to improve the  administration of
its IT systems and also  provide a better  platform  for  upgrading to Year 2000
compliant software, a complete renovation of the WAN would provide the most cost
effective solution.

The  Company  expects  that  most of the  elements  of the WAN  upgrade  will be
completed  by  December  31,  1998.  As  elements  of the  upgrade  project  are
completed,  testing  for Year 2000  compliance  will be  initiated.  The Company
currently  projects  that  renovation  and testing of the WAN will be  completed
during the first quarter of 1999.

The teller systems at two branch offices of the Bank are not Year 2000 compliant
and must be  replaced.  Year 2000  compliant  equipment  has been  ordered,  and
installation  and  integration  into the WAN should be completed by December 31,
1998.

The Company also relies on two primary vendors for the mission critical off-site
processing  of  the  Bank's  customer  accounting  systems  and  general  ledger
applications.  These  vendors  have Year  2000  compliance  issues  and are each
working on the  renovation of their systems.  The projected  completion of these
renovations is December 31, 1998.

The  Company  has  been  closely  following  the  progress  of these  and  other
individual vendors toward reaching Year 2000 compliance and expects  substantial
completion  by December 31, 

<PAGE>

1998.  System and software  testing with third party vendors  will be  initiated
during the first quarter of 1999 and should be substantially completed by
March 31, 1999.

Although no vendors have been  identified to date 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.  These  companies  are being  evaluated and the
results  will be used as  information  for  contingency  planning.  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 costs  associated with the Company's Year 2000 project are integral with the
planned upgrade to the Bank's WAN and include 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 are included.

As of September 30, 1998, the Company had invested approximately $115,000 during
1998 for capital  improvements to the WAN. Additional capital costs projected to
be  incurred  for  this  project  during  the  remainder  of 1998  and  1999 are
approximately $75,000.

The capital cost to upgrade the Bank's teller system for Year 2000 compatibility
is  currently  projected  to be  $50,000,  of which  $11,000 had been paid as of
September 30, 1998.

Other costs  incurred  by the  Company  related to the Year 2000 issue have been
primarily  staff time devoted to the issue and  approximate  $10,000.  Estimated
future costs for staff and outside consultants,  if required,  are projected not
to exceed an additional $40,000.

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 effects
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 on 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,  making a 

<PAGE>

switch to another vendor on short notice would be nearly impossible as would be
necessary if corrections were not made in advance.  At this time, management 
believes that the necessary advance corrections 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
financial  institutions  and  governmental  agencies  were  disrupted.  To  date
significant   public   disclosure   of  the  state  of  readiness   among  basic
infrastructure  and other suppliers has not been generally  available.  Although
inquiries  are  underway,  the  Company  does not yet have  the  information  to
estimate the likelihood of significant disruptions among these suppliers.

CONTINGENCY PLANNING
The Company is in the process of developing a contingency plan for the Year 2000
in the event that remediation is not completed in time or fails for reasons that
are not  presently  foreseen.  In the event of such a failure,  these plans will
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 know information,  management  believes that its
primary  vendors  have the  resources  to  complete  their  Year  2000  projects
successfully  and on time.  The  Company  expects to have its  contingency  plan
completed during the first quarter of 1999.

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.

INFLATION
It is  Management's  opinion that the effects of  inflation on the  consolidated
financial  statements for the periods ended September 30, 1998 and 1997 have not
been material.


<PAGE>


                           PART II - OTHER INFORMATION


Item 5.  Other Information:  None

Item 6.  Exhibits and Reports on Form 8-K.

    (a)  Exhibits:  None.

    (b)  Reports on Form 8-K:
         No reports on Form 8-K were filed by the Company for the quarter  ended
         September 30, 1998.


<PAGE>


                                   SIGNATURES



Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                          BAY COMMERCIAL SERVICES
                                          (Registrant)




Date:  November 13, 1998                  /s/ R. M. Kahler
                                          ----------------
                                          R. M. Kahler
                                          President and
                                          Chief Executive Officer
                                          (Principal Executive Officer)



Date:  November 13, 1998                  /s/ R. D. Greenfield
                                          --------------------
                                          R. D. Greenfield
                                          Chief Financial Officer
                                          (Principal Accounting Officer)