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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
/ / 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.
<TABLE>
<CAPTION>
Class Outstanding at
July 31, 1995
<S> <C>
Common stock, no par value 1,080,220 shares
</TABLE>
Transitional Small Business Disclosure Format
YES NO X
This report contains a total of 15pages
<PAGE> 2
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FINANCIAL STATEMENTS
BAY COMMERCIAL SERVICES
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
June 30, December 31,*
1995 1994
------ ------
(000'S OMITTED)
ASSETS
<S> <C> <C>
Cash and due from banks........................................ $ 6,659 $ 5,476
Federal funds sold............................................. 10,100 2,530
------- -------
Cash and cash equivalents.................................... 16,759 8,006
Securities available for sale, stated at market value
(amortized cost of $3,234 for 1995 and $11,399 for 1994)..... 3,236 11,165
Securities held to maturity (market values of $20,031 for 1995;
$14,146 for 1994)........................................... 20,127 14,823
Loans held for sale............................................ 4,303 3,929
Loans.......................................................... 48,206 47,637
Allowance for loan losses.................................... (778) (756)
------- -------
Net loans.................................................... 51,731 50,810
Premises and equipment, net.................................... 2,201 2,286
Interest and fees receivable................................... 624 539
Other real estate owned........................................ 378 854
Other assets................................................... 576 710
------- -------
Total assets................................................. $95,632 $89,193
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand................................... $26,828 $24,252
Savings and interest-bearing demand.......................... 29,309 28,593
Time......................................................... 23,929 21,123
Certificates of deposit, $100,000 and over................... 5,146 5,290
------- -------
Total deposits............................................... 85,212 79,258
Securities sold under agreements to repurchase................. 1,067 1,036
Interest payable and other liabilities......................... 827 953
------- -------
Total liabilities............................................ 87,106 81,247
Commitments and contingent liabilities......................... 0 0
Shareholders' equity:
Common stock - no par value: authorized 20,000,000
shares; issued & outstanding 1,080,220 in 1995 and
1,079,985 in 1994 ......................................... 3,696 3,695
Retained earnings............................................ 4,829 4,389
Net unrealized gain (loss) on securities available for sale.. 1 (138)
------- -------
Total shareholders' equity................................... 8,526 7,946
------- -------
Total liabilities and shareholders' equity................... $95,632 $89,193
======= =======
</TABLE>
* 1994 figures are derived from the audited consolidated balance sheet included
in the Company's 1994 annual report to shareholders
See accompanying notes to consolidated condensed financial statements.
<PAGE> 3
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BAY COMMERCIAL SERVICES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1995 1994 1995 1994
------ ------ ------ ------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees....................... $2,804 $2,220 $1,426 $1,151
Federal funds sold.......................... 177 45 104 31
Investment securities
Taxable................................... 594 479 296 242
Nontaxable................................ 57 64 29 31
------ ------ ------ ------
Total interest income..................... 3,632 2,808 1,855 1,455
Interest expense:
Deposits:
Savings & interest-bearing demand......... 368 295 193 152
Time...................................... 601 360 310 188
Certificates of deposit, $100,000 and over 140 131 75 65
Other borrowed funds........................ 21 15 11 8
------ ------ ------ ------
Total interest expense.................... 1,130 801 589 413
------ ------ ------ ------
Net interest income....................... 2,502 2,007 1,266 1,042
Provision for loan losses..................... (50) 0 (50) 0
------ ------ ------ ------
Net interest income after
provision for loan losses............... 2,552 2,007 1,316 1,042
Noninterest income:
Service charges and fees.................... 113 138 58 68
Loan servicing.............................. 91 105 45 56
Net gain on sale of OREO.................... 81 58 6 4
Gain on sale of loans....................... 7 7 7 0
Securities gains............................ (35) 11 (35) 0
Other....................................... 127 382 67 309
------ ------ ------ ------
Total noninterest income.................. 384 701 148 437
Noninterest expenses:
Salaries and employee benefits.............. 1,186 1,201 589 594
Occupancy................................... 296 313 146 157
Data processing............................. 139 103 71 50
Professional services....................... 98 201 51 100
FDIC insurance.............................. 86 99 43 50
Other....................................... 415 417 218 235
------ ------ ------ ------
Total noninterest expenses................ 2,220 2,334 1,118 1,186
------ ------ ------ ------
Income before income tax expense.......... 716 374 346 293
Income tax expense............................ 276 145 131 113
------ ------ ------ ------
Net income................................ $ 440 $ 229 $ 215 $ 180
====== ====== ====== ======
Net income per common and equivalent share $ 0.38 $ 0.21 $ 0.19 $ 0.17
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 4
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BAY COMMERCIAL SERVICES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1994
-------- --------
(000'S OMITTED)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 440 $ 229
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization........................... 33 49
Loan loss provision (benefit)........................... (50) 0
Unamortized deferred loan fees, net..................... 108 (33)
Securities (gains) losses............................... 35 (11)
Originations of mortgage loans held for resale.......... 0 (1,906)
Originations of SBA loans held for resale............... (730) (1,159)
Proceeds from the sale of mortgage loans held for resale 0 1,954
Proceeds from the sale of SBA loans held for resale..... 188 221
Receipts net of expenses due to OREO.................... (80) 0
Loss (gain) on sale of equipment........................ 2 (1)
Change in interest and fees receivable and other assets. (47) 110
Change in interest payable and other liabilities........ 90 (61)
-------- --------
Net cash used in operating activities..................... (11) (608)
Cash flows from investing activities:
Proceeds from sales of securities available for sale........ 965 261
Proceeds from maturities of securities...................... 14,485 20,042
Purchase of securities...................................... (12,523) (16,851)
Net change in loans......................................... 38 1,268
Proceeds from sale of OREO.................................. 80 0
Purchases of premises and equipment......................... (51) (34)
Proceeds from sale of equipment............................. 0 2
-------- --------
Net cash provided by investing activities................. 2,994 4,688
Cash flows from financing activities:
Net change in noninterest-bearing demand deposits........... 2,576 1,042
Net change in savings and interest-bearing demand deposits 716 (419)
Net change in time deposits................................. 2,806 1,720
Net change in certificates of deposit, $100,000 and over.... (144) (71)
Net change in securities sold under agreement to repurchase. 31 0
Exercise of stock option.................................... 1 0
Cash dividends paid......................................... (216) 0
-------- --------
Net cash provided by financing activities................. 5,770 2,272
-------- --------
Net change in cash and cash equivalents................... 8,753 6,352
Cash and cash equivalents at beginning of period.............. 8,006 5,126
-------- --------
Cash and cash equivalents at end of period.................... $ 16,759 $ 11,478
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1,123 $ 787
Income taxes............................................ 129 16
Noncash investing activities during the period:
Loan in connection with sale of OREO.................... $ 794 $ 0
Repossession of loan collateral......................... 319 2,224
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 5
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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 June 30, 1995 and December 31, 1994 and
the results of its operations and its cash flows for the three and six
month periods ended June 30, 1995 and 1994 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) Except as noted in Note 5 below, 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, 1994.
3) Net income per share for the three and six month periods ended June 30,
1995 and 1994 was computed by dividing net income by the weighted
average number of shares of common stock outstanding during the periods,
including the dilutive effects of stock options, if material. The
weighted average number of shares outstanding was 1,152,487 and
1,079,985 for the six month periods ended June 30, 1995 and 1994,
respectively. The weighted average number of shares outstanding was
1,160,364 and 1,079,985 for the second quarter of 1995 and 1994,
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 39% for the six month periods ended June 30, 1995 and 1994.
5) On January 1, 1995, Financial Accounting Standards Board (FASB)
Statement No. 114, "Accounting by Creditors for Impairment of a Loan"
and Statement No. 118, "Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosures", became effective. Statement No.
114 provides new rules for measuring losses on impaired loans. Impaired
loans are required to be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
Statement No. 118 amends Statement No. 114 and eliminates its provisions
regarding how a creditor should report income on an impaired loan and,
as a result, allows creditors to continue to use existing methods for
recognizing income on impaired loans. The implementation of these
Statements for the first six months of 1995 had no material impact on
the Company's financial statements.
<PAGE> 6
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BAY COMMERCIAL SERVICES
THE TABLE BELOW ILLUSTRATES CHANGES IN MAJOR CATEGORIES
OF THE AVERAGE BALANCE SHEETS AND STATEMENTS OF INCOME
AND IN CERTAIN PERFORMANCE RATIOS
<TABLE>
<CAPTION>
Six Months Ended Increase
June 30, (Decrease)
1995 1994 $ %
------- ------- ------ -----
(000'S OMITTED)
<S> <C> <C> <C> <C>
Assets *................................... $89,759 $83,765 $5,994 7.2%
Securities - taxable*...................... 20,408 19,971 437 2.2
Securities - nontaxable.................... 1,919 2,148 (229) (10.7)
Total loans................................ 52,019 48,841 3,178 6.5
Nonaccrual loans........................... 408 1,075 (667) (62.0)
Other real estate owned.................... 492 834 (342) (41.0)
Deposits................................... 79,693 74,557 5,136 6.9
Shareholders' equity *..................... 8,330 7,692 638 8.3
Interest-earning assets.................... 80,084 72,503 7,581 10.5
Interest-bearing liabilities............... 56,997 54,344 2,653 4.9
Income Statements:
Interest income (1)........................ 3,659 2,839 820 28.9
Interest expense........................... 1,130 801 329 41.1
------- ------- ------ -----
Net interest income (1).................. 2,529 2,038 491 24.1
Taxable equivalent adjustment.............. 27 31 (4) (12.9)
Net interest income...................... 2,502 2,007 495 24.7
Provision (benefit) for loan losses........ (50) 0 (50) NA
------- ------- ------ -----
Net interest income after provision
for loan losses........................ 2,552 2,007 545 27.2
Noninterest income......................... 384 701 (317) (45.2)
Noninterest expenses....................... 2,220 2,334 (114) (4.9)
Income tax expense......................... 276 145 131 90.3
------- ------- ------ -----
Net income............................... $ 440 $ 229 $ 211 92.1%
======= ======= ====== =====
</TABLE>
* Before unrealized loss on securities available for sale
<TABLE>
<CAPTION>
Change
------
<S> <C> <C> <C>
Performance Ratios: (2)
Yield on average earning assets............ 9.15% 7.81% 1.34%
Yield on average earning assets (1)........ 9.21% 7.90% 1.31%
Interest rate on average interest-bearing
liabilities............................ 4.00% 2.97% 1.03%
Interest expense as a percent of average
earning assets......................... 2.85% 2.23% 0.62%
Net yield on average earning assets........ 6.30% 5.58% 0.72%
Net yield on average earning assets (1).... 6.36% 5.67% 0.69%
</TABLE>
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
<PAGE> 7
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BAY COMMERCIAL SERVICES
THE TABLE BELOW ILLUSTRATES CHANGES IN MAJOR CATEGORIES
OF THE AVERAGE BALANCE SHEETS AND STATEMENTS OF INCOME
AND IN CERTAIN PERFORMANCE RATIOS
<TABLE>
<CAPTION>
Three Months Ended Increase
June 30, (Decrease)
1995 1994 $ %
------- ------- ------ ------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Assets *................................... $90,397 $84,104 $6,293 7.48%
Securities - taxable*...................... 19,992 19,103 889 4.66
Securities - nontaxable.................... 1,940 2,111 (171) (8.10)
Total loans................................ 52,286 49,300 2,986 6.06
Nonaccrual loans........................... 193 1,064 (871) (81.86)
Other real estate owned.................... 277 834 (557) (66.79)
Deposits................................... 80,130 74,913 5,217 6.96
Shareholders' equity *..................... 8,442 7,727 715 9.25
Interest-earning assets.................... 81,116 72,807 8,309 11.41
Interest-bearing liabilities............... 57,713 54,336 3,377 6.22
Income Statements:
Interest income (1)........................ $ 1,869 $ 1,470 $ 399 27.14%
Interest expense........................... 589 413 176 42.62
------- ------- ------ ------
Net interest income (1).................. 1,280 1,057 223 21.10
Taxable equivalent adjustment.............. 14 15 (1) (6.67)
Net interest income...................... 1,266 1,042 224 21.50
Provision (benefit) for loan losses........ (50) 0 (50) NA
------- ------- ------ ------
Net interest income after provision
for loan losses........................ 1,316 1,042 274 26.30
Noninterest income......................... 148 437 (289) (66.13)
Noninterest expenses....................... 1,118 1,186 (68) (5.73)
Income tax expense......................... 131 113 18 15.93
------- ------- ------ ------
Net income............................... $ 215 $ 180 $ 35 19.44
======= ======= ====== ======
</TABLE>
* Before unrealized loss on securities available for sale
<TABLE>
<CAPTION>
Change
------
<S> <C> <C> <C>
Performance Ratios: (2)
Yield on average earning assets 9.17% 8.02% 1.15%
Yield on average earning assets (1) 9.24% 8.10% 1.14%
Interest rate on average interest-bearing
liabilities 4.09% 3.05% 1.04%
Interest expense as a percent of average
earning assets 2.91% 2.28% 0.63%
Net yield on average earning assets 6.26% 5.74% 0.52%
Net yield on average earning assets (1) 6.33% 5.82% 0.51%
</TABLE>
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
<PAGE> 8
8
BAY COMMERCIAL SERVICES AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1994
OVERVIEW
Net income of Bay Commercial Services ("the Company") was $440,000 for the first
six months of 1995 compared to $229,000 for the first six months of 1994. Net
income per share was $0.38 for the 1995 period compared to $0.21 for the 1994
period.
The $211,000 or 92% increase in net income for the 1995 period compared to the
1994 period was principally due to a $495,000 or 25% increase in net interest
income, a $114,000 or 5% reduction in noninterest expenses and a $50,000 credit
to the loan loss provision. These improvements were partially offset by a
$317,000 or 45% decrease in noninterest income and a $131,000 or 90% increase in
income tax expense.
Total assets were $95,632,000 at June 30, 1995, representing a $6,439,000 or 7%
increase over December 31, 1994. Total deposits increased $5,954,000 or 8%
during the period and these additional funds were principally invested in
overnight federal funds sold. Securities available for sale declined $7,929,000
or 71% during the period, principally due to maturities, and the proceeds were
principally reinvested in federal funds sold or securities held to maturity.
Federal funds sold balances were $7,570,000 or 299% above December 31, 1994.
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 $2,502,000 for the first six months of 1995 increased
$495,000 or 25% compared to the first six months of 1994. The increase reflected
a $7,581,000 or 11% growth in average earning assets and an increase in the net
interest margin to 6.30% for the 1995 period from 5.58% for the 1994 period.
The growth in average interest-earning assets between the 1995 and 1994 periods
was principally due to growth of $3,845,000 or 8% in average earning loans and
$3,528,000 or 135% in average federal funds sold. The yield on average earning
assets increased to 9.15% for the 1995 period compared to 7.81% for the 1994
period, reflecting higher market interest rates between the periods and the
asset sensitive position of the Bank.
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), market interest rate changes will be reflected more quickly
in asset rates. 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 June 30, 1995. For any given period, the repricing is matched when
an equal amount of assets and liabilities reprice. The repricing of a fixed rate
asset or liability is considered to occur at its contractual maturity or, for
those assets which are held for sale, within the time period during which sale
may reasonably be expected to be accomplished. Floating rate assets or
liabilities are considered to reprice in the period during which the rate can
contractually change. Any excess of either assets or liabilities in a period
results in a gap, or mismatch, shown in the table. A positive gap indicates
asset sensitivity and a negative gap indicates liability sensitivity.
<PAGE> 9
9
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIOD
------------------------------------------
(000's OMITTED)
3 Over 3 Over 1
months months year to Over 5
or less to 1 year 5 years years Total
<S> <C> <C> <C> <C> <C>
Interest rate sensitive assets:
Loans (net of nonaccrual)............... $41,350 $ 2,454 $ 4,529 $ 4,136 $52,469
Securities (before unrealized gain or
loss on securities available for sale) 5,215 1,129 9,141 7,875 23,360
Federal funds sold...................... 10,100 0 0 0 10,100
------- ------- ------- ------- -------
Total................................. 56,665 3,583 13,670 12,011 85,929
Interest rate sensitive liabilities:
Interest-bearing
transaction accounts.................. 5,547 0 0 0 5,547
Savings deposits........................ 23,762 0 0 0 23,762
Time deposits >$100,000................. 9,786 2,698 1,532 0 14,016
Other time deposits..................... 7,820 4,303 2,935 1 15,059
Other borrowed funds.................... 1,067 0 0 0 1,067
------- ------- ------- ------- -------
Total................................. 47,982 7,001 4,467 1 59,451
Interest rate sensitivity gap............. $ 8,683 $(3,418) $ 9,203 $12,010 $26,478
------- ------- ------- ------- -------
Cumulative interest rate
sensitivity gap.......................... $ 8,683 $ 5,265 $14,468 $26,478
Cumulative interest rate
sensitivity gap to total assets.......... 9.1% 5.5% 15.1% 27.7%
</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 June 30, 1995, indicates that the Company, on a cumulative gap
basis, is asset sensitive over all the time periods shown. This suggests that if
interest rates were to rise, net interest income could rise while in a declining
interest rate environment, net interest income could fall.
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.
The allowance for loan losses reflects an amount sufficient to cover estimated
loan losses and is maintained 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 June 30, 1995, the allowance for loan losses was $778,000 compared to
$756,000 at December 31, 1994. The increased allowance reflected net loan
recoveries of $72,000 during the first six months of 1995, partially offset by a
$50,000 credit to the provision for loan losses during the second quarter of
1995. The ratio of the allowance for loan losses to total loans was 1.5% at June
30, 1995, and at December 31, 1994. While 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
June 30, 1995, 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. Due to reductions in
nonperforming loans and recoveries on loans previously written off, in addition
to moderate loan growth and the level of the allowance in relation to both
nonperforming and total outstanding loans, no provision for loan losses was made
during either the first six months of 1995 or 1994, and the reserve was
decreased by $50,000 by a credit to the provision for loan losses during the
first six months of 1995.
<PAGE> 10
10
Information on nonperforming loans for the six month periods ending June 30,
1995 and June 30, 1994, and the twelve month period ended December 31, 1994, is
summarized in the following table.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
-------- ------------ --------
(000's OMITTED)
<S> <C> <C> <C>
Net loan charge-offs (recoveries)...... $(72) $ 10 $(85)
Ratio of net loan charge-offs
(recoveries) to average loans........ (0.1)% 0 (0.2)%
Nonperforming loans:
Nonaccrual loans..................... $ 40 $626 $536
Accruing loans past due
90 days or more.................... 0 0 0
---- ---- ----
Total nonperforming loans.......... $ 40 $626 $536
Ratio of nonperforming loans
to total loans....................... 0% 1.2% 1.1%
Ratio of allowance for loan
losses to nonperforming loans........ 1945.0% 120.8% 177.4%
Other real estate owned................ $378 $854 $834
</TABLE>
The level of total nonperforming loans was $40,000 at June 30, 1995, which was
$586,000 or 94% less than the level at December 31, 1994, and $496,000 or 93%
less than the level at June 30, 1994.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) of $378,000 at June 30, 1995, consisted of three
properties. OREO balances declined $476,000 or 56% compared to December 31,
1994, due to the sale of two OREO properties during the first six months of
1995. OREO consists of real estate acquired as a result of legal foreclosure or
through receipt of a deed in lieu of foreclosure. OREO amounts are carried at
the lower of cost or fair value less estimated disposal costs. When the property
is acquired, any excess of the loan balance over fair value of the property is
charged to the allowance for loan losses. Subsequent write-downs, if any, and
disposition gains and losses are included in noninterest income or noninterest
expense. OREO assets are not being depreciated and any rental income is applied
against current expenses or the recorded balance of the asset.
NONINTEREST INCOME
Total noninterest income of $384,000 for the first six months of 1995 declined
$317,000 or 45% compared to the first six months of 1994. The largest change was
a $255,000 or 67% decrease in other income which principally reflected a
nonrecurring $215,000 recovery in 1994 of prior years' legal and foreclosure
costs and other expenses related to the sale of OREO property. Other changes
included a $25,000 or 18% reduction in service charges and fees, principally due
to reduced deposit account analysis service charges, and a $35,000 loss on sale
of securities in 1995 compared to an $11,000 gain on sale of securities in 1994.
Partially offsetting these decreases in noninterest income was an increase of
$23,000 or 40% in net gain on the sale of OREO.
NONINTEREST EXPENSE
Total noninterest expenses of $2,220,000 for the first six months of 1995
declined $114,000 or 5% compared to the same period in 1994. The most
significant change in noninterest expenses was a $103,000 or 51% decrease for
the 1995 period in professional services fees, principally legal expenses
related to problem loans. Noninterest expenses which increased during the 1995
period compared to the 1994 period included data processing, up $36,000 or 35%,
due to outsourcing of check and statement processing.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $276,000 for the first six months of
1995 compared to $145,000 for the first six months of 1994. The increased income
tax expense reflected higher taxable income during the 1995 period. The
effective income tax rates was 39% for both the 1995 and 1994 periods.
<PAGE> 11
11
THREE MONTHS ENDED JUNE 30, 1995 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1994
OVERVIEW
Net income for the Company for the second quarter of 1995 was $215,000 compared
to $180,000 for the second quarter of 1994. Net income per share was $0.19 for
the 1995 quarter compared to $0.17 for the 1994 quarter.
The $35,000 or 19% increase in net income for the 1995 quarter compared to the
1994 quarter was principally due to a $224,000 or 22% increase in net interest
income, a $68,000 or 6% reduction in noninterest expenses and a $50,000 credit
to the provision for loan losses. These improvements were partially offset by a
$289,000 or 66% decrease in noninterest income and an $18,000 or 16% increase in
income tax expense.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income of $1,266,000 for the second quarter of 1995 increased
$224,000 or 22% compared to the second quarter of 1994. The increase reflected a
$8,309,000 or 11% growth in average earning assets and an increase in the net
interest margin to 6.26% for the 1995 quarter from 5.74% for the 1994 quarter.
The growth in average interest-earning assets between the 1995 and 1994 quarters
was due to growth of $3,857,000 or 8% in average earning loans and $3,734,000 or
111% in average federal funds sold. The yield on average earning assets
increased to 9.17% for the 1995 quarter compared to 8.02% for the 1994 quarter,
reflecting higher market interest rates between the quarters and the asset
sensitive position of the Bank.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
A $50,000 credit to the provision for loan losses was provided during the second
quarter of 1995. Due to reductions in nonperforming loans and recoveries on
loans previously written off, in addition to moderate loan growth and the level
of the allowance in relation to both nonperforming and total outstanding loans,
no provision for loan losses was made during either the second quarter of 1995
or 1994, and the reserve was decreased by $50,000 by a credit to the provision
for loan losses during the second quarter of 1995. Based upon information
currently available, Management believes that the allowance for loan losses at
June 30, 1995, 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.
NONINTEREST INCOME
Total noninterest income of $148,000 for the second quarter of 1995 declined
$289,000 or 66% compared to the second quarter of 1994. The largest change was a
$242,000 or 78% decrease in other income which principally reflected a $215,000
recovery during the 1994 quarter of prior years' legal, foreclosure and other
expenses related to the sale of OREO property. Also contributing to the reduced
income during the 1995 quarter was a $35,000 loss on sale of securities during
the 1995 quarter.
NONINTEREST EXPENSE
Total noninterest expenses of $1,118,000 for the second quarter of 1995 declined
$68,000 or 6% compared to the same quarter in 1994. The most significant change
in noninterest expenses was a $49,000 or 49% decrease for the 1995 quarter in
professional services fees, principally legal expenses related to problem loans.
The only other significant change was a $21,000 or 42% increase in data
processing fees during the 1995 quarter which principally reflected the
outsourcing of check and statement processing.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $131,000 for the second quarter of 1995
compared to $113,000 for the second quarter of 1994. The increased income tax
expense reflected higher taxable income during the 1995 quarter. The effective
income tax rates were 38% and 39% for the 1995 and 1994 quarters, respectively.
FINANCIAL CONDITION
LOANS AND INVESTMENTS
Total loans of $52,509,000 at June 30, 1995 increased $943,000 or 2% from
December 31, 1994. Average total loans for the first six months of 1995
increased 6.5% compared to the first six months of 1994. Total securities at
June 30, 1995, declined $2,625,000 or 10% as maturing short-term securities were
reinvested in overnight federal funds sold. The $7,570,000 or 299% increase
<PAGE> 12
12
in federal funds sold compared to year-end 1994 allowed the Bank to maintain a
strong liquidity position and still earn a high short-term rate of return.
OTHER ASSETS AND OTHER LIABILITIES
As previously discussed, OREO assets at June 30, 1995, declined $476,000 or 563%
from December 31, 1994, due to the sale of two properties. Interest and fees
receivable increased $85,000 or 16% during the first six months of 1995,
reflecting the increased volume of and higher yield on earning assets. Interest
payable and other liabilities at June 30, 1995 declined $126,000 from year-end
1994 due to the payment of a cash dividend in 1995.
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,
all marketable securities less liabilities that are secured by any of the
securities, 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 48% at June 30, 1995, and 42% at December 31, 1994. 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, the Bank has informal, non-binding, federal funds borrowing
arrangements totaling $4,000,000 with two correspondent banks and a $3,000,000
repurchase facility to meet unforeseen outflows. As of June 30, 1995, no
borrowed funds were outstanding on these credit agreements. As of June 30, 1995,
the Bank did not carry any brokered deposit balances.
CAPITAL
The Company and the Bank are subject to Federal Reserve Board guidelines and
regulations of the FDIC governing capital adequacy. The Federal Reserve Board's
risk-based and leverage capital guidelines for bank holding companies are
substantially the same as the FDIC's capital regulations for nonmember banks.
The Federal Reserve Board capital guidelines for bank holding companies and the
FDIC's regulations for nonmember banks set total capital requirements and define
capital in terms of "core capital elements" (comprising Tier 1 capital) and
"supplemental capital elements" (comprising Tier 2 capital). Tier 1 capital is
generally defined as the sum of the core capital elements less goodwill, with
core capital elements including (i) common stockholders' equity; (ii) qualifying
noncumulative perpetual preferred stock; and (iii) minority interests in the
equity accounts of consolidated subsidiaries. Supplementary capital elements
include: (i) allowance for loan and lease losses (which cannot exceed 1.25% of
risk weighted assets); (ii) perpetual preferred stock not qualifying as core
capital; (iii) hybrid capital instruments and mandatory convertible debt
instruments; and (iv) term subordinated debt and intermediate-term preferred
stock. The maximum amount of supplemental capital elements which qualifies as
Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Federal Reserve Board to those assets. Both
bank holding companies and nonmember banks are required to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of 8%, at least
one-half of which must be in the form of Tier 1 capital.
The Federal Reserve Board and the FDIC also have established a minimum leverage
ratio of 3% of Tier 1 capital to total assets for bank holding companies and
nonmember banks that have received the highest composite regulatory rating and
are not anticipating or experiencing any significant growth. All other
institutions will be required to maintain a leverage ratio of at least 100 to
200 basis points above the 3% minimum.
<PAGE> 13
13
The following tables present the Company's and the Bank's regulatory capital
positions at June 30, 1995, and average assets over the six month period ended
June 30, 1995:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
(000's OMITTED)
Company Bank
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tier 1 Capital................................. $8,525 13.7% $8,279 13.3%
Tier 1 Capital minimum requirement 2,489 4.0 2,482 4.0
------ ----- ------ -----
Excess......................................... $6,036 9.7% $5,797 9.3%
Total Capital.................................. $9,303 15.0% $9,055 14.6%
Total Capital minimum requirement.............. 4,977 8.0 4,965 8.0
------ ----- ------ -----
Excess......................................... $4,326 7.0% $4,090 6.6%
------ ----- ------ -----
Risk weighted assets........................... $62,216 $62,066
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
(000's OMITTED)
Company Bank
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tier 1 Capital to average total assets......... $8,525 9.5% $8,279 9.2%
Range of minimum leverage 2,693- 3.0- 2,688- 3.0-
requirement.................................. 4,488 5.0% 4,480 5.0%
------ ---- ------ ---
Range of excess................................ 4,037- 4.5- 3,799- 4.1-
$5,832 6.5% $5,591 6.1%
------ --- ------ ---
Average total assets........................... $89,759 $89,607
</TABLE>
The Company currently does not have any material commitments for capital
expenditures, and in the opinion of Management, the Company's and the Bank's
capital positions are sufficient to meet their respective needs.
INFLATION
It is Management's opinion that the effects of inflation on the consolidated
financial statements for the periods ended June 30, 1995 and 1994 have not been
material.
<PAGE> 14
14
PART II - OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Security Holders.
(a) The Company's Annual Meeting of Shareholders was convened on
May 23, 1995.
(b) Not required.
(c)(I) At the 1995 Annual Meeting the shareholders took the following
actions:
1. Elected Directors of the Company to serve until the 1996 Annual
Meeting of Shareholders and until their successors are elected
and qualified;
2. Ratified the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for the 1995 fiscal
year.
(i) In the election of directors, no candidates were nominated for
election as a director other than the nominees of the Board of
Directors whose names were set forth in the Company's proxy
statement dated April 20, 1995. Set forth below is a tabulation
of the votes cast in the election of Directors with respect to
each nominee for office.
<TABLE>
<CAPTION>
VOTES CAST FOR ELECTION VOTES WITHHELD
<S> <C> <C>
Joshua Fong, O.D. 762,870 40,692
William R. Henson 762,948 40,614
Richard M. Kahler 762,870 40,692
Dimitri V. Koroslev 762,948 40,614
William E. Peluso 762,492 41,070
Oswald A. Rugaard 762,633 40,929
Abstentions N/A N/A
Broker non-votes N/A N/A
</TABLE>
(ii) On the matter of the ratification of the appointment of Deloitte
& Touche LLP as independent public accountants for the 1995
fiscal year the votes cast were as follows:
<TABLE>
<S> <C> <C>
For 760,414
Against 41,070
Abstentions 2,078
Broker non-votes N/A
</TABLE>
(d) Not required.
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 June 30, 1995.
<PAGE> 15
15
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: August 10, 1995 By R. M. Kahler
----------------------------
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 1995 By R. D. Greenfield
----------------------------
R. D. Greenfield
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 6,659
<INT-BEARING-DEPOSITS> 59,451
<FED-FUNDS-SOLD> 10,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,236
<INVESTMENTS-CARRYING> 23,361
<INVESTMENTS-MARKET> 23,267
<LOANS> 52,509
<ALLOWANCE> 778
<TOTAL-ASSETS> 95,632
<DEPOSITS> 85,212
<SHORT-TERM> 1,067
<LIABILITIES-OTHER> 827
<LONG-TERM> 0
<COMMON> 3,696
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 95,632
<INTEREST-LOAN> 2,804
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<INTEREST-DEPOSIT> 1,109
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<INTEREST-INCOME-NET> 2,502
<LOAN-LOSSES> (50)
<SECURITIES-GAINS> (35)
<EXPENSE-OTHER> 2,220
<INCOME-PRETAX> 716
<INCOME-PRE-EXTRAORDINARY> 716
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