SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED June 30, 1998
Commission File Number 2-76003
BAY AREA BANCSHARES
California #94-2779021
900 Veterans Blvd., Redwood City, CA 94063
Telephone (650) 562-3238
The registrant (1) has filed all reports required by Section 13 or
15(d) of the Securities Exchange Act during the preceding 12 months,
and
x Yes No
(2) has been subject to such filing requirements for the past 90 days.
x Yes No
982,528 Shares of Common Stock Outstanding as of June 30, 1998
<PAGE>
Part 1 Item 1
<TABLE>
<CAPTION>
BAY AREA BANCSHARES & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN THOUSANDS)
ASSETS 06/30/98 12/31/97
<S> <C> <C>
Cash and due from banks $13,578 $11,464
Federal Funds Sold 8,500 7,500
Cash and cash equivalents 22,078 18,964
Investment securities available for sale
(market value approximates book value) 1,609 1,106
Investment securities held to maturity
(market value of $12,410 in 1998 and $14,683 in 1997) 12,282 14,482
Loans, net of reserve for possible loan losses
of $1,773 in 1998 and $1,638 in 1997 100,258 84,374
Premises and equipment,net 542 653
Real estate owned 0 0
Interest receivable and other assets 2,061 2,506
Total assets $138,830 $122,085
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand $36,069 $28,248
Interest-bearing transaction 45,833 41,758
Savings 6,904 6,399
Time 34,532 31,021
Total Deposits 123,338 107,426
Interest payable and other liabilities 1,071 1,671
Federal funds purchased 0 0
Federal Home Loan Bank advances 1,500 1,000
Total liabilities 125,909 110,097
Shareholders' equity:
Common stock, no par value:
Authorized - 20,000,000 shares; issued & outstanding 4,854 4,736
982,528 in 1998 and 977,035 in 1997
Unrealized (loss) gain on securities held for sale 0 (2)
Additonal paid in capital 640 0
Retained earnings 7,427 7,254
Total shareholders' equity 12,921 11,988
Total liabilities and shareholders' equity $138,830 $122,085
</TABLE>
(1)
<PAGE>
Part 1 Item 1
BAY AREA BANCSHARES & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
06/30/98 06/30/97
<S> <C> <C>
Interest Income:
Interest and fees on loans $2,589 $1,990
Interest on investment securities 216 253
Interest on federal funds sold 158 92
Interest on time deposits with other financial institutions 0 1
Total Interest Income 2,963 2,336
Interest Expense:
Interest on interest-bearing transaction amounts 356 349
Interest on savings deposits 72 59
Interest on time deposits 462 287
Interest on short-term borrowing 21 0
Interest on notes payable and redeemable debentures 0 0
Total Interest Expense 911 695
Net interest income 2,052 1,641
Provision for possible loan losses 30 80
Net interest income after provision for possible loan losses 2,022 1,561
Noninterest income:
Service charges on deposit accounts 62 50
Net loss on sales of securities 0 0
Net gain on disposal of assets 0 0
Net gain on sale of loans held for sale 0 0
Other Mortgage Banking Revenue 52 51
ATM network revenue 479 514
Other 21 28
Total noninterest income 614 643
Noninterest expense:
Salaries and related benefits 634 519
Occupancy 121 122
Equipment 122 104
Professional fees 96 67
Stationery and supplies 22 30
Other 559 599
Total noninterest expense 1,554 1,441
Income before provision for income taxes 1,082 763
Provision for income taxes 458 312
Net Income 624 451
Comprehensive income: Unrealized gain (loss) on investment
securities held-for- sale, net 0 0
Comprehensive Income $624 $451
Earnings per share:
Average common and equivalent shares outstanding- Primary 981,903 982,000
Average common and equivalent shares outstanding- Fully Diluted 1,010,000 982,000
Earnings Per Common Share $0.64 $0.46
Earnings Per Common Share - Assuming Dilution $0.62 $0.46
</TABLE>
(2)
<PAGE>
Part 1 Item 1
BAY AREA BANCSHARES & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
6/30/98 6/30/97
<S> <C> <C>
Interest Income:
Interest and fees on loans $4,837 $3,846
Interest on investment securities 448 480
Interest on federal funds sold 293 203
Interest on time deposits with other financial institutions 0 2
Total Interest Income 5,578 4,531
Interest Expense:
Interest on interest-bearing transaction amounts 655 688
Interest on savings deposits 142 117
Interest on time deposits 900 551
Interest on short-term borrowing 37 0
Interest on notes payable and redeemable debentures 0 0
Total Interest Expense 1,734 1,356
Net interest income 3,844 3,175
Provision for possible loan losses 70 120
Net interest income after provision for possible loan losses 3,774 3,055
Noninterest income:
Service charges on deposit accounts 122 98
Net loss on sales of securities 0 0
Net gain on disposal of assets 0 0
Net gain on sale of loans held for sale 0 12
Other Mortgage Banking Revenue 101 75
ATM network revenue 930 995
Other 56 49
Total noninterest income 1,209 1,229
Noninterest expense:
Salaries and related benefits 1,306 1,156
Occupancy 245 232
Equipment 247 235
Professional fees 173 113
Stationery and supplies 47 58
Other 1,078 1,046
Total noninterest expense 3,096 2,840
Income before provision for income taxes 1,887 1,444
Provision for income taxes 788 601
Net Income 1,099 843
Comprehensive income: Unrealized gain (loss) on investment
securities held-for- sale, net 2 (3)
Comprehensive Income $1,101 $840
Earnings per share:
Average common and equivalent shares outstanding- Primary 982,111 980,000
Average common and equivalent shares outstanding- Fully Diluted 1,010,000 980,000
Earnings Per Common Share $1.12 $0.86
Earnings Per Common Share - Assuming Dilution $1.09 $0.86
</TABLE>
(3)
<PAGE>
Part 1 Item 1
BAY AREA BANCSHARES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
06/30/98 06/30/97
<S> <C> <C>
Cash flows from operating activities:
Net Income $1,099 $843
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of premises and equipment 176 216
Provision for possible loan losses 70 140
Net gain loss on sale of assets 0 0
Funding of loans held for sale 0 (947)
Proceeds from the sale of loans held for sale 0 1,682
Net gain on sale of loans held for sale 0 (12)
Net loss on sale of investment securities 0 0
Net ammortization and accretion of investment premiums and discounts 63 8
Net decrease in interest receivable and other assets 445 49
Net increase in interest payable and other liabilities (600) (524)
Net decrease in deferred loan fees (42) (97)
Total adjustments 112 515
Net cash provided by operating activities 1,211 1,358
Cash flows from investing activities:
Proceeds from sale of investment securities 0 100
Proceeds from the maturity of investment securities
held for sale 0 0
Proceeds from the maturity of investment securities
held to maturity 1,085 1,715
Mortgage backed securities principal payments 1,715 256
Purchase of investment securities held to maturity (1,166) (2,741)
Purchase of investment securities held for sale 0
Net increase in gross loans (15,911) (12,197)
Proceeds from the sale of Real Estate Owned 0 0
Capital expenditures (65) (126)
Net cash used in investing activities (14,342) (12,993)
Cash flows from financing activities:
Net increase in demand deposits,transaction and savings 12,401 3,002
Net increase in time deposits 3,511 2,356
Repayment of Federal Funds Purchased 0 0
Net proceeds of Federal Home Loan Bank advances 500 0
Proceeds from stock warrants and options exercised 29 211
Cash Dividends paid (196) (156)
Net cash provided by financing activities 16,245 5,413
Net increase (decrease) in cash and cash equivalents 3,114 (6,222)
Cash and cash equivalents,beginning of period 18,964 17,861
Cash and cash equivalents,end of period $22,078 $11,639
</TABLE>
There were $0 and $499 in loans transferred to Real Estate Owned in 1998 and
1997 respectively.
(4)
<PAGE>
BAY AREA BANCSHARES & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All adjustments, which in the opinion of management are necessary for a fair
statement of the Company's financial condition at June 30, 1998, results of
operations for the three and six month periods ended June 30, 1998 and the
statement of cash flows for the six month period ended June 30, 1998 have been
included. These adjustments are of a normal and recurring nature. The results of
operations and statement of cash flows are not necessarily indicative of the
results for a full year's activity.
The accompanying unaudited 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.
All references to the "Bank" are in reference to the Company's sole, and wholly
owned, subsidiary Bay Area Bank.
New Statements of Financial Accounting Standards:
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income"
("SFAS 130"). Under the provisions of SFAS 130, the Company is required to
report comprehensive income in its financial statements; the term comprehensive
income describes the total of all components of comprehensive income including
net income as well as other revenues, expenses, gains and losses that are
included in comprehensive but excluded from earnings (net income). The Company
started to report comprehensive income as part of the consolidated statements of
operations, including other comprehensive income items added separately to net
income resulting in total comprehensive income. SFAS 130 is effective with the
year-end 1998 financial statements; however, the total comprehensive income is
required in the financial statements for interim periods beginning in 1998. The
Company adopted SFAS 130 as of January 1, 1998; the adoption of the statement
did not have a material impact on the Company's financial statements.
In June of 1997, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). Under the provisions of
SFAS 131, an entity is required to report selected information about operating
segments in annual financial statements and interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Statement uses a "management approach"
to identify operating segments and defines an operating segment as a component
of an enterprise (I) for which discrete financial information is available; (ii)
that engages in business activities that may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components
of the same enterprise) and (iii) whose operating results are regularly reviewed
by the enterprise's chief operating decision maker. Reportable segments
(5)
<PAGE>
(aggregated if appropriate) are operating segments that meet specified
quantitative thresholds based on revenues, profit or loss and assets, using a
ten percent rule. SFAS 131 is effective for fiscal years beginning after
December 15, 1997. Segment information that is presented for comparative
purposes is to be restated to conform to the requirements of SFAS 131 unless it
is impracticable to do so. The required interim disclosures are not required to
be made in the initial year of application but the information for the interim
periods for the initial year is required as comparative information in the
second year of application.
BAY AREA BANCSHARES & SUBSIDIARIES
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 2A Financial Condition
Liquidity
Liquid assets (Cash, Federal Funds Sold and Investments) increased $1.4 million
or 4.1% to $35.7 million over the six month period from December 31, 1997 to
June 30, 1998. At year-end, total liquid assets as a percentage of total assets
was 28.3%, whereas on June 30, 1998 it had decreased to 25.9%.
Cash & due from banks increased $2.1 million over the first six months of 1998
to $13.6 million at June 30, 1998. During the first six months of 1998 cash and
due from banks averaged $10.8 million. The portion of the total cash & due from
banks representing ATM ("Automatic Teller Machine") network cash inventory has
averaged approximately $2.6 million during 1998 and averaged $3.7 in the first
two quarters of 1997. The reduction in ATM cash is primarily a result of more
aggressive management of the cash inventory in the machines.
Both average and period end loans and deposits outstanding are at record levels
for the Company. During the first six months of 1998 gross loans outstanding has
averaged $91.2 million as compared to $71.7 million in the first six months of
1997, an increase of 27%. Gross loans were $102.0 million at June 30, 1998 a
record level for the Company and a $16.0 million or 18.6% increase over the
balance at December 31, 1998. The $16.0 million increase in loans outstanding
was comprised primarily of an increase in commercial loans of approximately $6.0
million and increase in construction loans outstanding of $9.0 million. The
Company expects construction lending to remain strong in the near term, as
construction commitments have grown $16.4 million or 40% since December 31, 1997
to $57.5 million at June 30, 1998.
Deposits have averaged $114.1 million in the first six months of 1998 while they
averaged $96.3 million during the first six months of 1997, an increase of
18.4%. Deposits were $123.3 million at 6/30/98, an increase of $15.9 million or
15% since year end 1997.
Management believes current liquid assets and current available credit lines are
adequate to cover the working capital requirements of the Company and any
reasonable needs arising from deposit withdrawals.
(6)
<PAGE>
Capital
Consolidated equity capital plus reserves increased $1.1 million in the first
six months of 1998 from $13.6 million or 11.16% of total gross assets at
December 31, 1997 to $14.7 million or 10.9% of total gross assets at June 30,
1998. Bank capital plus reserves totaled $13.6 million on June 30, 1998 or 9.7%
of total adjusted assets as compared to capital plus reserves of $12.3 million
or 10.03% of total adjusted assets at December 31, 1997. At June 30, 1998 the
Bank maintained a tier one capital ratio of 11.02% and a tier two capital ratio
of 12.27% as compared to 11.7% and 12.9% respectively at December 31, 1997.
The Bank's capital level continues to exceed State and Federal Deposit Insurance
Corporation requirements and satisfies the Federal Reserve Board's current
risk-based capital Guidelines.
The Bank declared no dividends to the Parent company in the first six months of
1998 and the Company declared cash dividends to common shareholders of $.10 per
share in June of 1998. The second quarter dividend represents twenty seven
consecutive quarterly cash dividends declared by the Parent company to
shareholders.
Item 2B Results of Operations
Results of Operations
Consolidated operating profits were $624,000 ($.62 per common share assuming
dilution vs. $.46 in the prior year) for the second quarter of 1998, the highest
second quarter earnings in the Company's history. This represents a $173,000 or
38.36% increase over the second quarter of 1997 when net income was $451,000.
The increase in second quarter earnings in 1998 versus the second quarter of
1997 is a result of an increase in pretax earnings of $319,000 which is
comprised of an increase in net interest income of $411,000 and a decrease in
loan loss provisions of $50,000, offset in part by a decrease in other income of
$29,000 and an increase in noninterest expense of $113,000.
Consolidated operating profits were $1,099,000 ($1.09 per common share assuming
dilution vs. $.86 in the prior year) for the first six months of 1998, the
highest six months of earnings in the Company's history. This represents a
$256,000 or 30.1% increase over the first six months of 1997 when net income was
$843,000.
The increase in six month earnings in 1998 versus the first six months of 1997
is a result of an increase in pretax earnings of $443,000 which is comprised of
an increase in net interest income of $669,000 and a decrease in loan loss
provisions of $50,000, offset in part by a decrease in other income of $20,000
and a increase in noninterest expense of $256,000.
The growth in net interest income of 25.1% in the second quarter of 1998 is
primarily a result of growth in total earning assets offset in part by a
decrease in net interest margin. (Net interest margin is computed by dividing
annualizing net interest income by average earning assets during the respective
period). Average earning assets in the second quarter of 1998 were $122.5
million, a $26.3 million or 27.3% increase over the second quarter of 1997 when
earning assets averaged $96.2 million. Net interest margin in the second quarter
of 1998 was approximately 6.70% as compared to 6.82% in the second quarter of
1997.
(7)
<PAGE>
The growth in net interest income of 23.5% in the first six months of 1998 is
primarily a result of growth in total earning assets offset in part by a
decrease in net interest margin. Average earning assets in the first six months
of 1998 have been $116.9 million, a $22.5 million or 23.8% increase over the
first six months of 1997 when earning assets averaged $94.4 million. Net
interest margin in the first half of 1998 was approximately 6.58% as compared to
6.73% in the first six months of 1997.
The modest decline in net interest margin that has occurred throughout the first
half of 1998 is a result of an decrease in the yield on earning assets and an
increase in the cost of deposits and advances. The yield on earning assets
decreased in the first six month of 1998 to 9.54% as compared to 9.60% in the
first six months of 1997. The cost of the Bank's deposits and advances
(including demand deposits), which averaged $115.3 million in the first six
months of 1998, rose to 3.01% as compared to 2.82% in the first six months of
1997, when the deposits and advances averaged $96.3 million. Management believes
that further compression of net interest margin may occur in the second half of
1998 and into 1999 primarily as a result of competitive pressures on loan
pricing.
Loan loss provisions were $30,000 in the second quarter of 1998 and $80,000 in
the second quarter of 1997. Loan loss provisions for the first six months of
1998 were $70,000 as compared $120,000 for the first six month of 1997. Th
decrease in loan loss provisions in 1998, as compared to 1997, is a result of a
decline in nonperforming assets and a continued local economic expansion. Non
performing assets at June 30, 1998 were $145,000 or .10% of total assets and
8.2% of loan loss reserves. Non performing assets at December 31, 1997 were
$373,000 or .31% of total assets and 22% of loan loss reserves. There have been
$33,000 in loans charged off during the six months of 1998 and $98,000 in
recoveries of loans previously charged off as compared to $42,000 in loans
charged off and $22,000 in recoveries in the first six months of 1997. Loan loss
reserves of $1.77 million at June 30, 1998 represent a ratio of 1.74% of gross
loans outstanding as compared to a loan loss reserve of $1.64 million or 1.90%
of gross loans at December 31, 1997.
The Bank's ATM revenues were down $35,000 or 6.8% in the second quarter of 1998
and fell $65,000 or 6.5% in the first six months of 1998 in comparison to the
same periods in 1997. Revenue per machine has averaged $3,394 thus far in 1998,
an increase of 3% over the first six months of 1997 in which average revenue per
machine was $3,295. The average number of machines in operation was
approximately 51 in the first six months of 1997 and fell to 47 in the first six
months of 1998.
The reduction in the average number of machines in service was a result of
certain contracts that expired and certain unprofitable sites that were closed,
primarily during 1997. The Bank hopes to find acceptable machines sites to
redeploy some of the excess machines in the future. The department contributed
$157,000 to pretax profits in the first six months of 1998 as compared to
$148,000 in the first six months of 1997. The ATM department expects to realize
significant cost reductions in the future. These cost reductions include $10,000
a month savings as a result of a consultant contract that was fully amortized in
June of 1998, an expected savings of approximately $6,000 per month as a result
of new contractual terms with a major service provider that begins in July 1998
and a reduction of depreciation expense as certain existing capital costs become
fully depreciated resulting in a $7,000 a month saving of depreciation on the
existing infrastructure by January of 1999.
Non interest expense was up $113,000 or 7.84% in the second quarter of 1998 as
compared to the second quarter of 1997 and $256,000 or 9.0% for the first six
months of 1998. The increase in both periods was comprised primarily of
additional salaries and benefits which are up 13% in the first six months of
1998.
(8)
<PAGE>
ITEM 6
(a) Exhibits.
3.1 Restated Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988).
3.2 Amendment to Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1989).
3.3 Bylaws of the Company, as
amended (incorporated by reference to Exhibit 3.2 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987).
3.4 Amendment to
Bylaws of Company (incorporated by reference to Exhibit 3.3 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1987).
27 Financial Data Schedule (filed herewith)
Part 2, Item 4
(a) The 1998 Annual Meeting of the Shareholders of the Registrant was held on
May 19, 1998.
(b) The following table shows the votes for, against or withheld, and the
broker nonvotes as to each candidate for director. Each candidate was
elected.
<TABLE>
<CAPTION>
Name Votes For Votes Against or Withheld Broker Nonvotes
<S> <C> <C> <C>
Gary S. Goss 769,669 17,946 0
Robert R. Haight 771,710 75,905 0
Stanley A. Kangas 770,069 17,546 0
David J. Macdonald 713,189 74,426 0
Thorwald A. Madsen 768,190 19,425 0
Dennis W. Royer 770,069 17,546 0
</TABLE>
To approve Amendment No. 1 of the Bay Area Bancshares 1993 Stock Option Plan.
For - 578,083 Against - 53,716 Abstain - 3,912
Broker Non Votes - 151,904
(9)
<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 AREA BANCSHARES
Registrant
Dated: August 13, 1998
/s/Robert R. Haight
Robert R. Haight
President and Chief Executive Officer
/s/Anthony J. Gould
Anthony J. Gould
Chief Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet, and Statement of Income, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,578
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,609
<INVESTMENTS-CARRYING> 12,282
<INVESTMENTS-MARKET> 12,410
<LOANS> 102,031
<ALLOWANCE> 1,773
<TOTAL-ASSETS> 138,830
<DEPOSITS> 123,338
<SHORT-TERM> 1,500
<LIABILITIES-OTHER> 1,071
<LONG-TERM> 0
0
0
<COMMON> 4,854
<OTHER-SE> 8,067
<TOTAL-LIABILITIES-AND-EQUITY> 138,830
<INTEREST-LOAN> 4,837
<INTEREST-INVEST> 448
<INTEREST-OTHER> 293
<INTEREST-TOTAL> 5,578
<INTEREST-DEPOSIT> 1,697
<INTEREST-EXPENSE> 1,734
<INTEREST-INCOME-NET> 3,844
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,096
<INCOME-PRETAX> 1,887
<INCOME-PRE-EXTRAORDINARY> 1,887
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,099
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 9.54
<LOANS-NON> 145
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,773
<CHARGE-OFFS> 34
<RECOVERIES> 99
<ALLOWANCE-CLOSE> 1,773
<ALLOWANCE-DOMESTIC> 1,773
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
