<PAGE> 1
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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 September 30, 1996
[ ]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 October 31, 1996
<S> <C>
Common stock, no par value 1,076,720 shares
</TABLE>
Transitional Small Business Disclosure Format
YES NO X
This report contains a total of 19 pages
<PAGE> 2
FINANCIAL STATEMENTS
BAY COMMERCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION> September 30, December 31,
1996 1995
(unaudited)
-------- ---------
(000'S OMITTED)
ASSETS
<S> <C> <C>
Cash and due from banks............................... $ 8,176 $ 5,057
Federal funds sold.and securities purchased under
repurchase agreements............................... 5,000 6,700
------- -------
Cash and cash equivalents........................... 13,176 11,757
------- -------
Securities available for sale, stated at market value
(amortized cost of $11,393 for 1996; $13,045 for 1995) 11,346 13,199
Securities held to maturity (market values of $6,549
for 1996; $7,339 for 1995).......................... 6,557 7,211
Loans held for sale................................... 2,673 4,984
Loans................................................. 63,088 53,168
Allowance for loan losses........................... (964) (982)
------- -------
Net loans........................................... 64,797 57,170
------- -------
Premises and equipment, net........................... 1,979 2,139
Interest and fees receivable.......................... 727 600
Other real estate owned............................... 41 359
Other assets.......................................... 505 384
------- -------
Total assets........................................ $99,128 $92,819
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand.......................... $25,598 $26,841
Savings and interest-bearing demand................. 27,224 24,516
Time................................................ 28,505 23,773
Certificates of deposit, $100,000 and over.......... 5,307 5,123
------- -------
Total deposits...................................... 86,634 80,253
------- -------
Securities sold under agreements to repurchase........ 2,167 2,203
Interest payable and other liabilities................ 820 1,596
------- -------
Total liabilities................................... 89,621 84,052
------- -------
Commitments and contingent liabilities................ 0 0
Shareholders' equity:
Common stock - no par value: authorized 20,000,000
shares; issued & outstanding 1,076,720 shares in 1996
and 1995 ........................................ 3,662 3,662
Retained earnings................................... 5,873 5,011
Net unrealized gain(loss) on securities
available for sale................................ (28) 94
------- -------
Total shareholders' equity.......................... 9,507 8,767
------- -------
Total liabilities and shareholders' equity.......... $99,128 $92,819
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 3
BAY COMMERCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION> Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ ------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees................. $4,736 $4,249 $1,641 $1,445
Federal funds sold and securities
purchased under repurchase agreements 209 290 94 113
Investment securities
Taxable.............................. 740 924 231 330
Nontaxable........................... 122 77 46 20
------ ------ ------ ------
Total interest income............... 5,807 5,540 2,012 1,908
------ ------ ------ ------
Interest expense:
Deposits:
Savings & interest-bearing demand... 497 559 177 191
Time................................ 1,041 917 374 316
Certificates of deposit,
$100,000 and over................. 212 216 73 76
Other borrowed funds.................. 77 34 26 13
------ ------ ------ ------
Total interest expense.............. 1,827 1,726 650 596
------ ------ ------ ------
Net interest income................. 3,980 3,814 1,362 1,312
Benefit for loan losses................. 0 130 0 80
------ ------ ------ ------
Net interest income after
benefit for loan losses........... 3,980 3,944 1,362 1,392
------ ------ ------ ------
Noninterest income:
Service charges and fees.............. 192 175 67 62
Bankcard income....................... 186 150 66 50
Gain on sale of loans................. 174 7 66 0
Loan servicing........................ 99 137 34 46
Net gain(loss) on sale of OREO....... 111 77 111 (4)
Securities losses..................... 0 (35) 0 0
Other................................. 128 51 54 24
------ ------ ------ ------
Total noninterest income............ 890 562 398 178
------ ------ ------ ------
Noninterest expenses:
Salaries and employee benefits........ 1,831 1,765 623 579
Occupancy............................. 446 442 149 146
Professional services................. 190 146 86 48
Data processing....................... 213 208 69 69
Bankcard expenses..................... 149 117 58 40
FDIC insurance........................ 2 81 1 (5)
Other................................. 610 509 156 171
------ ------ ------ ------
Total noninterest expenses.......... 3,441 3,268 1,142 1,048
------ ------ ------ ------
Income before income tax expense.... 1,429 1,238 618 522
Income tax expense...................... 567 483 251 207
------ ------ ------ ------
Net income.......................... $ 862 $ 755 $ 367 $ 315
====== ====== ====== ======
Net income per common and equivalent share $0.71 $0.65 $0.30 $0.26
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 4
BAY COMMERCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------- -------
(000'S OMITTED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................$ 862 $ 755
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization......................... 181 105
Loan loss benefit..................................... 0 (130)
Unamortized deferred loan fees, net................... (60) 126
Securities losses..................................... 0 35
Originations of SBA loans held for resale............. (810) (1,090)
Proceeds from sale of SBA loans held for resale....... 3,106 188
Net income related to OREO............................ (111) (77)
Change in interest and fees receivable and
other assets........................................ (230) (139)
Change in interest payable and other liabilities...... (393) 431
------- -------
Net cash provided by operating activities............... 2,545 204
------- -------
Cash flows from investing activities:
Proceeds from sale of securities available for sale....... 0 965
Proceeds from maturities of securities available for sale. 1,655 19,215
Proceeds from maturities of securities held to maturity... 1,661 2,494
Purchase of securities available for sale................. 0 (12,891)
Purchase of securities held to maturity................... (1,028) (6,032)
Net change in loans....................................... (9,685) (485)
Proceeds from sale of OREO................................ 251 77
Purchases of premises and equipment....................... (50) (92)
Sales of premises and equipment........................... 48 2
------- -------
Net cash provided by (used in) investing activities..... (7,148) 3,253
------- -------
Cash flows from financing activities:
Net change in noninterest-bearing demand deposits......... (1,243) 3,582
Net change in savings and interest-bearing demand deposits 2,708 (2,164)
Net change in time deposits............................... 4,732 2,632
Net change in certificates of deposit, $100,000 and over.. 184 (165)
Net change in securities sold under agreements
to repurchase........................................... (36) 1,042
Exercise of stock option.................................. 0 1
Cash dividends paid....................................... (323) (216)
------- -------
Net cash provided by financing activities............... 6,022 4,712
------- -------
Net change in cash and cash equivalents................. 1,419 8,169
Cash and cash equivalents at beginning of period............ 11,757 8,006
------- -------
Cash and cash equivalents at end of period..................$13,176 $16,175
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest..............................................$ 1,817 $ 1,719
Income taxes.......................................... 854 129
Noncash investing activities during the period:
Loan made in connection with sale of OREO.............$ 178 $ 794
Repossession of loan collateral....................... 0 319
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 5
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, 1996 and December 31, 1995
and the results of its operations and its cash flows for the three month
and nine month periods ended September 30, 1996 and 1995 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 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, 1995.
3) Net income per share for the three and nine month periods ended
September 30, 1996 and 1995 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 common and equivalent shares outstanding
for the nine month periods ended September 30, 1996 and 1995 was
1,214,788 and 1,167,389, respectively. The weighted average number of
common and equivalent shares outstanding for the third quarters of 1996
and 1995 was 1,220,296 and 1,197,193, 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 40% and 39% for the nine month periods ended September 30, 1996 and
1995, respectively. The Company's effective tax rate was 41% and 40% for
the third quarters of 1996 and 1995, respectively.
<PAGE> 6
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
<TABLE>
<CAPTION>
Nine Months Ended Increase
September 30, (Decrease)
1996 1995 $ %
------- ------- ------ ------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Average Balances:
Assets *............................. $94,425 $90,857 $ 3,568 3.9%
Securities - taxable*................ 15,934 20,839 (4,905) (23.5)
Securities - nontaxable.............. 3,113 2,053 1,060 51.6
Total loans.......................... 61,218 51,937 9,281 17.9
Nonaccrual loans..................... 194 271 (77) (28.4)
Other real estate owned.............. 336 454 (118) (26.0)
Deposits............................. 82,134 80,549 1,585 2.0
Shareholders' equity *............... 9,112 8,458 654 7.7
Interest-earning assets.............. 85,530 81,300 4,230 5.2
Interest-bearing liabilities......... 59,609 57,400 2,209 3.8
Income Statements:
Interest income (1).................. $5,864 $5,576 $ 288 5.2%
Interest expense..................... 1,827 1,726 101 5.9
------- ------ ------ ------
Net interest income (1)............ 4,037 3,850 187 4.9
Taxable equivalent adjustment........ 57 36 21 58.3
Net interest income................ 3,980 3,814 166 4.4
Benefit for loan losses.............. 0 130 (130) (100.0)
------- ------- ------ ------
Net interest income after benefit
for loan losses.................. 3,980 3,944 36 0.9
------- ------- ------ ------
Noninterest income................... 890 562 328 58.4
Noninterest expenses................. 3,441 3,268 173 5.3
Income tax expense................... 567 483 84 17.4
------- ------- ------ ------
Net income......................... $ 862 $ 755 $ 107 14.2%
======= ======= ====== ======
</TABLE>
* Before unrealized gain (loss) on securities available for sale
<TABLE>
<CAPTION>
Change
------
<S> <C> <C> <C>
Performance Ratios: (2)
Yield on average earning assets...... 9.07% 9.11% (0.04)%
Yield on average earning assets (1).. 9.16% 9.17% (0.01)%
Interest rate on average interest-
bearing liabilities................ 4.09% 4.02% 0.07 %
Interest expense as a percent of
average earning assets............. 2.85% 2.84% 0.01 %
Net yield on average earning assets.. 6.22% 6.27% (0.05)%
Net yield on average earning assets (1) 6.31% 6.33% (0.02)%
</TABLE>
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
<PAGE> 7
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
<TABLE>
<CAPTION>
Three Months Ended Increase
September 30, (Decrease)
1996 1995 $ %
------- ------- ------ ------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Average Balances:
Assets *............................. $98,334 $93,016 $ 5,318 5.7%
Securities - taxable*................ 15,078 21,690 (6,612) (30.5)
Securities - nontaxable.............. 3,134 2,317 817 35.3
Total loans.......................... 64,316 51,774 12,542 24.2
Nonaccrual loans..................... 299 3 296 9,866.7
Other real estate owned.............. 291 378 (87) (23.0)
Deposits............................. 85,906 82,231 3,675 4.5
Shareholders' equity *............... 9,393 8,712 681 7.8
Interest-earning assets.............. 89,463 83,692 5,771 6.9
Interest-bearing liabilities......... 62,699 58,191 4,508 7.7
Income Statements:
Interest income (1).................. $2,034 $1,917 $117 6.1%
Interest expense..................... 650 596 54 9.1
------- ------- ------ ------
Net interest income (1)............ 1,384 1,321 63 4.8
Taxable equivalent adjustment........ 22 9 13 144.4
------- ------- ------ ------
Net interest income................ 1,362 1,312 50 3.8
Benefit for loan losses.............. 0 80 (80) (100.0)
------- ------- ------ ------
Net interest income after benefit
for loan losses.................. 1,362 1,392 (30) (2.2)
------- ------- ------ ------
Noninterest income................... 398 178 220 123.6
Noninterest expenses................. 1,142 1,048 94 9.0
Income tax expense................... 251 207 44 21.3
------- ------- ------ ------
Net income......................... $ 367 $ 315 $ 52 16.5%
======= ======= ====== ======
</TABLE>
* Before unrealized gain (loss) on securities available for sale
<TABLE>
<CAPTION>
Change
------
<S> <C> <C> <C>
Performance Ratios: (2)
Yield on average earning assets...... 8.95% 9.04% (0.09)%
Yield on average earning assets (1).. 9.04% 9.09% (0.05)%
Interest rate on average interest-
bearing liabilities................ 4.12% 4.06% 0.06 %
Interest expense as a percent of
average earning assets............. 2.89% 2.83% 0.06 %
Net yield on average earning assets.. 6.06% 6.21% (0.15)%
Net yield on average earning assets (1) 6.15% 6.26% (0.11)%
</TABLE>
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
<PAGE> 8
BAY COMMERCIAL SERVICES AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1995
OVERVIEW
Net income of Bay Commercial Services (the "Company") was $862,000 for the
first nine months of 1996 compared to $755,000 for the first nine months of
1995. Net income per share was $0.71 for the 1996 period compared to $0.65
for the 1995 period. Annualized return on average assets was 1.2% and 1.1% for
the 1996 and 1995 periods, respectively. Annualized return on average
shareholders' equity was 12.6% and 11.9% for the 1996 and 1995 periods,
respectively. These annualized ratios are not necessarily indicative of
results for a full year.
Strong loan growth during the 1996 period was a significant factor in the
$107,000 or 14.2% increase in net income compared to the 1995 period. Net
interest income increased $166,000 or 4.4%, principally due to a $9,358,000 or
18.1% growth in average earning loans during the first nine months of 1996
compared to the first nine months of 1995. Noninterest income also increased
during the 1996 period, up $328,000 or 58.4% over the 1995 period, with the
largest contribution from a $167,000 increase in gain on sale of loans. These
increases in income were partially offset by a $173,000 or 5.3% increase in
noninterest expenses, a $130,000 credit to the provision for loan losses
during the 1995 period which was not repeated in the 1996 period, and an
$84,000 or 17.4% increase in income tax expense. The increase in noninterest
expenses was largely attributable to the settlement of a litigation matter
during the 1996 period.
Total assets were $99,128,000 at September 30, 1996, representing a $6,309,000
or 6.8% increase over December 31, 1995. The increase in assets reflected the
use of funds generated principally from deposit growth of $6,381,000 or 8.0%
and an increase of $740,000 or 8.4% in total shareholders' equity during the
period. The asset mix shifted during the 1996 period as total securities
declined $2,507,000 or 12.3% while total loans increased $7,627,000 or 13.3%
and cash and cash equivalents increased $1,419,000 or 12.1%.
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.
<PAGE> 9
Net interest income of $3,980,000 for the first nine months of 1996 increased
$166,000 or 4.4% compared to the first nine months of 1995. The increase
principally reflected a $4,230,000 or 5.2% growth in average earning assets.
The net interest margin remained relatively unchanged at 6.31% and 6.33% for
the 1996 and 1995 periods, respectively.
The growth in average interest-earning assets between the 1996 and 1995
periods was principally due to growth of $9,358,000 or 18.1% in average
earning loans. Average total securities and average overnight funds (federal
funds sold and securities purchased under repurchase agreements) declined
$3,845,000 or 16.8% and $1,283,000 or 19.0%, respectively. The yield on
average earning assets remained relatively unchanged at 9.07% compared to
9.11% during the 1995 period. The positive effects of an increase in the
proportion of earning assets invested in higher yielding loans, 71.4% for the
1996 period compared to 63.6% for the 1995 period, were offset by the lower
overall lending and money market rates during the 1996 period.
Average interest-bearing liabilities increased $2,209,000 or 3.9% between the
1996 and 1995 periods. The average rate paid for interest-bearing liabilities
remained relatively unchanged at 4.09% for the 1996 period compared to 4.02%
for the 1995 period. Although the average rates paid by individual deposit
categories declined during the 1996 period in response to overall lower market
rates compared to the 1995 period, the composition of the portfolio shifted to
a larger proportion of higher cost time deposits. Average time deposits as a
percentage of average interest-bearing liabilities increased to 53.5% for the
1996 period from 48.5% for the 1995 period.
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 September 30, 1996. 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 available 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> 10
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIOD
-------------------------------------
(000'S OMITTED)
3 Over 3 Over 1
months months to year to Over 5
or less 1 year 5 years years Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest rate sensitive assets:
Loans (net of nonaccrual)........$42,346 $ 1,566 $10,621 $11,609 $66,142
Securities (before unrealized
gain or loss on securities
available for sale)............ 2,000 373 10,378 5,198 17,949
Federal funds sold and securities
purchased under repurchase
agreements..................... 5,000 0 0 0 5,000
------- ------- ------- ------- -------
Total.......................... 49,346 1,939 20,999 16,807 89,091
------- ------- ------- ------- -------
Interest rate sensitive liabilities:
Interest-bearing
transaction accounts......... 6,241 0 0 0 6,241
Savings deposits................. 20,983 0 0 0 20,983
Time deposits >$100,000.......... 14,972 2,532 603 0 18,107
Other time deposits.............. 10,356 4,160 1,189 0 15,705
Other borrowed funds............. 2,167 0 0 0 2,167
------- ------- ------- ------ -------
Total.......................... 54,719 6,692 1,792 0 63,203
------- ------- ------- ------ -------
Interest rate sensitivity gap......$(5,373) $(4,753) $19,207 $16,807 $25,888
------- ------- ------- ------- -------
Cumulative interest rate
sensitivity gap...................$(5,373)$(10,126) $ 9,081 $25,888 $25,888
------- ------- ------- -------
Cumulative interest rate
sensitivity gap to total assets... (5.4)% (10.2)% 9.2% 26.1%
</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, 1996, indicates that the Company, on a
cumulative gap basis, is liability sensitive over the 3 months or less period
and the over 3 months to 1 year period and asset sensitive over the remaining
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.
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.
<PAGE> 11
As of September 30, 1996, the allowance for loan losses was $964,000 compared
to $982,000 at December 31, 1995. The reduced allowance reflected net loan
chargeoffs of $18,000 during the first nine months of 1996. The ratio of the
allowance for loan losses to total loans was 1.5% at September 30, 1996, and
1.7% at December 31, 1995. 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
September 30, 1996, 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 the level
of the allowance in relation to both nonperforming and total outstanding
loans, no provision for loan losses was made during the first nine months of
either 1996 or 1995, and the reserve was decreased by a $130,000 credit to the
provision for loan losses during the second and third quarters of 1995.
Information on nonperforming loans for the nine month periods ended
September 30, 1996 and 1995 and the year ended December 31, 1995 is summarized
in the following table.
<TABLE>
<Caption
September 30, December 31, September 30,
1996 1995 1995
------------ ----------- ------------
(000's OMITTED)
<S> <C> <C> <C>
Net loan (charge-offs)
recoveries during period......... $(18) $381 $340
Ratio of net loan (charge-offs)
recoveries to average loans...... (0.1%) 0.7% 0.7%
Nonperforming loans:
Nonaccrual loans................. $171 $ 0 $ 0
Accruing loans past due
90 days or more................ 267 99 0
---- ---- ----
Total nonperforming loans...... $438 $ 99 $ 0
===== ==== ====
Ratio of nonperforming loans
to total loans................... 0.7% 0.2% 0%
Ratio of allowance for loan
losses to nonperforming loans.... 220% 992% 0%
Other real estate owned............ $41 $359 $378
</TABLE>
Total nonperforming loans increased to $438,000 at September 30, 1996 compared
to $99,000 at December 31, 1995. There were no nonperforming loans at
September 30, 1995. The current ratio of nonperforming loans to total loans
at 0.7% remains well below industry averages. The loans in this category are
generally well secured and Management believes they represent a relatively low
risk of loss.
<PAGE> 12
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) of $41,000 at September 30, 1996, consisted of
one property. OREO balances declined $318,000 or 88.6% compared to December
31, 1995, due to the sale of two OREO properties during the first and third
quarters of 1996. 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 $890,000 for the first nine months of 1996
increased $328,000 or 58.4% compared to the first nine months of 1995. The
greatest change was a $167,000 increase in gain on sale of loans, reflecting a
larger sale of loans guaranteed by the Small Business Administration ("SBA
loans") during the first nine months of 1996 compared to the first nine months
of 1995. Other noninterest income increased $77,000 or 151% between the
periods, principally due to the 1996 recovery of prior years' expenses related
to charged-off loans. Increases also occurred in bankcard income and in gain
on sale of OREO, up $36,000 or 24.0% and $34,000 or 44.2%, respectively, over
1995 figures. These increases were partially offset by a decrease during the
1996 period of $38,000 or 27.7% in loan servicing income, principally due to
SBA loan payoffs. The Bank experienced increased payoffs of SBA loans during
the first nine months of 1996 as some borrowers refinanced with aggressively
priced fixed-rate (non-SBA) loans offered by other lenders. These payoffs
caused the Bank's serviced portfolio and, thereby, servicing income to
decline. The serviced portfolio may experience additional reductions if
payoffs continue at a rate in excess of SBA loan sales.
NONINTEREST EXPENSE
Total noninterest expenses of $3,441,000 for the first nine months of 1996
increased $173,000 or 5.3% compared to the same period in 1995. The largest
factor contributing to the increase in noninterest expenses was a $101,000 or
19.8% increase in other noninterest expense, principally attributable to the
settlement of a litigation matter. Salaries and employee benefits increased
$66,000 or 3.7%, reflecting higher accruals for bonuses and the addition of
staff in preparation for the opening of a new branch of the Bank during the
fourth quarter of 1996. Professional fees increased $44,000 or 30.1%
principally due to increased legal fees. Bankcard expense increased $32,000
or 27.4% due to increased merchant bankcard activity. These increases were
partially offset by a $79,000 or 97.5% decrease in assessment fees paid to the
Federal Deposit Insurance Corporation (FDIC) resulting from a reduction in
deposit insurance rates for the Bank Insurance Fund.
<PAGE> 13
PROVISION FOR INCOME TAXES
The provision for income tax expense was $567,000 for the first nine months of
1996 compared to $483,000 for the first nine months of 1995. The increased
income tax expense reflected higher taxable income during the 1996 period.
The effective income tax rates was 40% and 39% for the 1996 and 1995 periods,
respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1995
OVERVIEW
Net income for the Company for the third quarter of 1996 was $367,000 compared
to $315,000 for the third quarter of 1995. Net income per share was $0.30 for
the 1996 quarter compared to $0.26 for the 1995 quarter. Annualized return on
average assets was 1.5% and 1.3% for the 1996 and 1995 quarters, respectively.
Annualized return on average shareholders' equity was 15.5% and 14.3% for the
1996 and 1995 quarters, respectively. These annualized ratios are not
necessarily indicative of results for a full year.
The $52,000 or 16.5% increase in net income for the 1996 quarter compared to
the 1995 quarter was principally due to an increase of $220,000 or 123.6% in
noninterest income and a $50,000 or 3.8% increase in net interest income,
which were partially offset by an increase of $94,000 or 9.0% in noninterest
expense, a nonrecurring $80,000 credit to the provision for loan losses during
the 1995 quarter, and a $44,000 or 21.3% increase in income tax expense.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income of $1,362,000 for the third quarter of 1996 increased
$50,000 or 3.8% compared to the third quarter of 1995. The increase reflected
a $5,771,000 or 6.9% growth in average earning assets which was partially
offset by a decline in the net interest margin to 6.15% for the 1996 quarter
from 6.26% for the 1995 quarter.
The growth in average interest-earning assets between the 1996 and 1995
quarters was due to growth of $12,246,000 or 23.7% in average earning loans.
Average earning loans as a percentage of average earning assets climbed to
71.6% for the 1996 quarter compared to 61.9% for the 1995 quarter. The yield
on average earning assets declined to 8.95% for the 1996 quarter compared to
9.04% for the 1995 quarter, however, largely due to a 0.5% decline in the
Bank's prime (reference) rate between the periods.
Average interest-bearing liabilities increased $4,508,000 or 7.7% between the
1996 and 1995 quarters. The average rate paid for interest-bearing
liabilities increased to 4.12% for the 1996 quarter compared to 4.06%
for the 1995 quarter. The higher average rate paid during the 1996
<PAGE> 14
quarter reflected a shift in the deposit mix. The proportion of total
interest-bearing liabilities that were higher cost time deposits increased to
53.8% for the 1996 quarter compared to 48.8% for the 1995 quarter. The
average rate paid for each deposit category declined during the 1996 quarter
in response to overall lower market rates compared to the 1995 quarter.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Due to reductions in nonperforming loans and recoveries on loans previously
written off, in addition to the level of the allowance in relation to both
nonperforming and total outstanding loans, no provision for loan losses was
made during the third quarter of 1996 and the reserve was decreased by an
$80,000 credit to the provision for loan losses during the third quarter of
1995.
NONINTEREST INCOME
Total noninterest income of $398,000 for the third quarter of 1996 was
$220,000 or 123.6% higher than for the third quarter of 1995. The most
significant factors in the increase were a $66,000 increase in gain on sale of
loans and a $115,000 increase in net gain on sale of OREO.
NONINTEREST EXPENSE
Total noninterest expenses of $1,142,000 for the third quarter of 1996
increased $94,000 or 9.0% compared to the same quarter in 1995. The most
significant changes included a $44,000 or 7.6% increase in salaries and
employee benefits related to increased accruals for bonuses and additions to
staff. Other significant changes included a $38,000 or 79.2% increase in
professional services, specifically legal fees, and an $18,000 or 45.0%
increase in bankcard expense, reflecting the increase in merchant bankcard
activity.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $251,000 for the third quarter of
1996 compared to $207,000 for the third quarter of 1995. The increased income
tax expense reflected higher taxable income during the 1996 quarter. The
effective income tax rates were 41% and 40% for the 1996 and 1995 quarters,
respectively.
FINANCIAL CONDITION
LOANS AND INVESTMENTS
Total loans of $65,761,000 at September 30, 1996 increased $7,609,000 or 13.1%
from December 31, 1995. Total securities declined $2,507,000 or 12.3% and
cash and cash equivalents increased $1,419,000 or 12.1% compared to December
31, 1995. The loan growth during the 1996 period was principally in fixed
rate commercial loans, reflecting both the Bank's competitive lending
environment and Management's intention to diversify the loan portfolio and
reduce the Bank's asset sensitive position.
<PAGE> 15
DEPOSITS AND OTHER BORROWED FUNDS
Total deposits of $86,634,000 at September 30, 1996 increased $6,381,000 or
8.0% compared to December 31, 1995. The greatest growth was experienced in
time deposits, up $4,916,000 or 17%, and savings and interest-bearing demand,
which increased $2,708,000 or 11.1% compared to year-end 1995. Securities
sold under agreements to repurchase remained relative unchanged at $2,167,000
at September 30, 1996 compared to $2,203,000 at December 31, 1995.
OTHER ASSETS AND OTHER LIABILITIES
As previously discussed, OREO assets of $41,000 at September 30, 1996,
declined $318,000 or 88.6% from December 31, 1995. Interest and fees
receivable increased $127,000 or 21.2% during the first nine months of 1996,
reflecting the increased volume of earning assets. Interest payable and other
liabilities at September 30, 1996, declined $776,000 or 48.6% from year-end
1995 due to the payment in 1996 of a cash dividend and income taxes payable.
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 33% at September 30, 1996, and
41% at December 31, 1995. 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 September 30, 1996,
no borrowed funds were outstanding on these credit agreements. As of
September 30, 1996, 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.
<PAGE> 16
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)
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 are required to maintain a leverage ratio of
at least 100 to 200 basis points above the 3% minimum.
The following tables present the Company's and the Bank's regulatory capital
positions at September 30, 1996, and average assets over the nine month period
ended September 30, 1996:
<TABLE>
<CAPTION> RISK BASED CAPITAL RATIO
(000's OMITTED)
Company Bank
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tier 1 Capital..........................$ 9,535 13.0% $ 9,280 12.7%
Tier 1 Capital minimum requirement 2,930 4.0 2,924 4.0
------- ----- ------- -----
Excess..................................$ 6,605 9.0% $ 6,356 8.7%
Total Capital...........................$10,451 14.3% $10,194 13.9%
Total capital minimum requirement....... 5,860 8.0 5,849 8.0
------- ----- ------- -----
Excess..................................$ 4,591 6.3% $ 4,345 5.9%
------- ----- ------- -----
Risk weighted assets.................... $73,246 $73,108
======= =======
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION> LEVERAGE RATIO
(000's OMITTED)
Company Bank
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tier 1 Capital to average total assets..$ 9,535 10.1% $ 9,280 9.8%
Range of minimum leverage............... 2,833- 3.0- 2,829- 3.0-
requirement........................... 4,721 5.0% 4,714 5.0%
------- ----- ------- ----
Range of excess.........................$ 4,814- 5.1- $ 4,566- 4.8-
6,702 7.1% 6,451 6.8%
------- ----- ------- ----
Average total assets.................... $94,425 $94,284
======= =======
</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 September 30, 1996 and 1995 have
not been material.
<PAGE> 18
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, 1996.
<PAGE> 19>
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 12, 1996 /s/ R. M. Kahler
----------------------------
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1996 /s/ R. D. Greenfield
----------------------------
R. D. Greenfield
Chief Financial Officer
(Principal Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PEIOD START> JAN-1-1996
<PERIOD-END> SEPTEMBER 30, 1996
<CASH> 8,176
<INT-BEARING-DEPOSITS> 61,036
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,346
<INVESTMENTS-CARRYING> 17,950
<INVESTMENTS-MARKET> 17,895
<LOANS> 65,761
<ALLOWANCE> 964
<TOTAL-ASSETS> 99,128
<DEPOSITS> 86,634
<SHORT-TERM> 2,167
<LIABILITIES-OTHER> 820
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 99,128
<INTEREST-LOAN> 4,736
<INTEREST-INVEST> 862
<INTEREST-OTHER> 209
<INTEREST-TOTAL> 5,807
<INTEREST-DEPOSIT> 1,750
<INTEREST-EXPENSE> 1,827
<INTEREST-INCOME-NET> 3,980
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,441
<INCOME-PRETAX> 1,429
<INCOME-PRE-EXTRAORDINARY> 1,429
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 862
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 6.22
<LOANS-NON> 171
<LOANS-PAST> 267
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 438
<ALLOWANCE-OPEN> 982
<CHARGE-OFFS> 33
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 964
<ALLOWANCE-DOMESTIC> 964
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 397
</TABLE>
