<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 June 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
July 29, 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
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FINANCIAL STATEMENTS
BAY COMMERCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(unaudited)
---------- ---------
(000'S OMITTED)
ASSETS
<S> <C> <C>
Cash and due from banks.................................. $ 9,077 $ 5,057
Federal funds sold....................................... 3,300 6,700
------- -------
Cash and cash equivalents.............................. 12,377 11,757
------- -------
Securities available for sale, stated at market value
(amortized cost of $12,413 for 1996;
$13,045 for 1995)...................................... 12,361 13,199
Securities held to maturity (market values of $6,584
for 1996; $7,339 for 1995)............................ 6,603 7,211
Loans held for sale...................................... 4,039 4,984
Loans.................................................... 60,678 53,168
Allowance for loan losses.............................. (968) (982)
------- -------
Net loans.............................................. 63,749 57,170
------- -------
Premises and equipment, net.............................. 2,022 2,139
Interest and fees receivable............................. 619 600
Other real estate owned.................................. 359 359
Other assets............................................. 467 384
------- -------
Total assets........................................... $98,557 $92,819
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand............................. $26,002 $26,841
Savings and interest-bearing demand.................... 27,449 24,516
Time................................................... 28,069 23,773
Certificates of deposit, $100,000 and over............. 4,950 5,123
------- -------
Total deposits......................................... 86,470 80,253
------- -------
Securities sold under agreements to repurchase........... 2,242 2,203
Interest payable and other liabilities................... 709 1,596
------- -------
Total liabilities...................................... 89,421 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...................................... 5,506 5,011
Net unrealized gain(loss) on securities available for sale (32) 94
------- -------
Total shareholders' equity............................. 9,136 8,767
------- -------
Total liabilities and shareholders' equity............. $98,557 $92,819
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 3
3
BAY COMMERCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
------ ------ ------ -------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees .......................... $3,095 $ 2,804 $1,570 $ 1,426
Federal funds sold ............................. 115 177 80 104
Investment securities
Taxable ....................................... 509 594 247 296
Nontaxable .................................... 76 57 40 29
------ ------- ------ -------
Total interest income ........................ 3,795 3,632 1,937 1,855
------ ------- ------ -------
Interest expense:
Deposits:
Savings & interest-bearing demand ............ 320 368 166 193
Time ......................................... 667 601 348 310
Certificates of deposit, $100,000 and over ... 139 140 67 75
Other borrowed funds ........................... 51 21 26 11
------ ------- ------ -------
Total interest expense ....................... 1,177 1,130 607 589
------ ------- ------ -------
Net interest income .......................... 2,618 2,502 1,330 1,266
Benefit for loan losses .......................... 0 50 0 50
------ ------- ------ -------
Net interest income after
benefit for loan losses .................... 2,618 2,552 1,330 1,316
------ ------- ------ -------
Noninterest income:
Service charges and fees ....................... 125 113 60 58
Bankcard income ................................ 120 100 63 54
Gain on sale of loans .......................... 108 7 45 7
Loan servicing ................................. 65 91 29 45
Net gain on sale of OREO ....................... 0 81 0 6
Securities losses .............................. 0 (35) 0 (35)
Other .......................................... 74 27 33 13
------ ------- ------ -------
Total noninterest income ..................... 492 384 230 148
------ ------- ------ -------
Noninterest expenses:
Salaries and employee benefits ................. 1,208 1,186 596 589
Occupancy ...................................... 297 296 151 146
Professional services .......................... 104 98 57 51
Data processing ................................ 144 139 70 71
Bankcard expenses .............................. 91 77 47 41
FDIC insurance ................................. 1 86 0 43
Other .......................................... 454 338 278 177
------ ------- ------ -------
Total noninterest expenses ................... 2,299 2,220 1,199 1,118
------ ------- ------ -------
Income before income tax expense ............. 811 716 361 346
Income tax expense ............................... 316 276 137 131
------ ------- ------ -------
Net income ................................... $ 495 $ 440 $ 224 $ 215
====== ======= ====== =======
Net income per common and equivalent share ... $ 0.42 $ 0.38 $ 0.19 $ 0.19
====== ======= ====== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 4
4
BAY COMMERCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
------- --------
(000'S OMITTED)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 495 $ 440
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ......................................... 157 33
Loan loss benefit ..................................................... 0 (50)
Unamortized deferred loan fees, net ................................... (112) 108
Securities losses ..................................................... 0 35
Originations of SBA loans held for resale ............................. (611) (730)
Proceeds from the sale of SBA loans held for resale ................... 1,742 188
Loss on sale of equipment ............................................. 0 2
Change in interest and fees receivable and other assets ............... (82) (47)
Change in interest payable and other liabilities ...................... (504) 90
-------- --------
Net cash provided by operating activities ............................... 1,085 69
-------- --------
Cash flows from investing activities:
Proceeds from maturities of securities held for sale ...................... 635 14,196
Proceeds from maturities of securities held to maturity ................... 1,132 1,254
Purchase of securities held for sale ...................................... 0 (6,926)
Purchase of securities held to maturity ................................... (541) (5,597)
Net change in loans ....................................................... (7,598) 38
Purchases of premises and equipment ....................................... (26) (51)
-------- --------
Net cash provided by investing activities ............................... (6,398) 2,914
-------- --------
Cash flows from financing activities:
Net change in noninterest-bearing demand deposits ......................... (839) 2,576
Net change in savings and interest-bearing demand deposits ................ 2,933 716
Net change in time deposits ............................................... 4,296 2,806
Net change in certificates of deposit, $100,000 and over .................. (173) (144)
Net change in securities sold under agreement to repurchase ............... 39 31
Exercise of stock option .................................................. 0 1
Cash dividends paid ....................................................... (323) (216)
-------- --------
Net cash provided by financing activities ............................... 5,933 5,770
-------- --------
Net change in cash and cash equivalents ................................. 620 8,753
Cash and cash equivalents at beginning of period ............................ 11,757 8,006
-------- --------
Cash and cash equivalents at end of period................................... $ 12,377 $ 16,759
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .............................................................. $ 1,187 $ 1,123
Income taxes .......................................................... 719 129
Noncash investing activities during the period:
Loan made in connection with sale of OREO ............................. $ 0 $ 794
Repossession of loan collateral ....................................... 0 319
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE> 5
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 June 30, 1996 and December 31, 1995 and the
results of its operations and its cash flows for the three month and six
month periods ended June 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 six month periods ended June 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 six month
periods ended June 30, 1996 and 1995 was 1,181,690 and 1,152,487,
respectively. The weighted average number of common and equivalent shares
outstanding for the second quarter of 1996 and 1995 was 1,155,642 and
1,160,364, 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, 1996 and 1995, respectively.
The Company's effective tax rate was 38% for the second quarters of 1996 and
1995, respectively.
<PAGE> 6
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>
Six Months Ended Increase
June 30, (Decrease)
1996 1995 $ %
------- -------- ------- ------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Assets * .......................... $92,449 $89,759 $ 2,690 3.0 %
Securities - taxable* ............. 16,366 20,408 (4,042) (19.8)%
Securities - nontaxable ........... 3,102 1,919 1,183 61.6
Total loans ....................... 59,651 52,019 7,632 14.7
Nonaccrual loans .................. 141 408 (267) (65.4)
Other real estate owned ........... 359 492 (133) (27.0)
Deposits .......................... 80,226 79,693 533 0.7
Shareholders' equity * ............ 8,971 8,330 641 7.7
Interest-earning assets ........... 83,541 80,084 3,457 4.3
Interest-bearing liabilities ...... 58,045 56,997 1,048 1.8
Income Statements:
Interest income (1) ............... $ 3,830 $ 3,659 $ 171 4.7%
Interest expense .................. 1,177 1,130 47 4.2
------- ------- ------- ------
Net interest income (1) ......... 2,653 2,529 124 4.9
Taxable equivalent adjustment ..... 35 27 8 29.6
Net interest income ............. 2,618 2,502 116 4.6
Benefit for loan losses ........... 0 50 (50) (100.0)
------- ------- ------- ------
Net interest income after benefit
for loan losses ............... 2,618 2,552 66 2.6
------- ------- ------- ------
Noninterest income ................ 492 384 108 28.1
Noninterest expenses .............. 2,299 2,220 79 3.6
Income tax expense ................ 316 276 40 14.5
------- ------- ------- ------
Net income ...................... $ 495 $ 440 $ 55 12.5%
======= ======= ======= ======
</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............ 9.14% 9.15% (0.01)%
Yield on average earning assets (1)........ 9.22% 9.21% 0.01 %
Interest rate on average interest-bearing
liabilities............................ 4.08% 4.00% 0.08 %
Interest expense as a percent of average
earning assets......................... 2.83% 2.85% (0.02)%
Net yield on average earning assets........ 6.31% 6.30% 0.01%
Net yield on average earning assets (1).... 6.39% 6.36% 0.03%
</TABLE>
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
<PAGE> 7
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
June 30, (Decrease)
1996 1995 $ %
------- ------- ------ ------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Assets * .......................... $94,470 $90,397 $ 4,073 4.5 %
Securities - taxable* ............. 15,966 19,992 (4,026) (20.1)
Securities - nontaxable ........... 3,228 1,940 1,288 66.4
Total loans ....................... 60,192 52,286 7,906 15.1
Nonaccrual loans .................. 219 193 26 13.5
Other real estate owned ........... 359 277 82 29.6
Deposits .......................... 82,272 80,130 2,142 2.7
Shareholders' equity * ............ 9,101 8,442 659 7.8
Interest-earning assets ........... 85,548 81,116 4,432 5.5
Interest-bearing liabilities ...... 59,925 57,713 2,212 3.8
Income Statements:
Interest income (1) ............... $ 1,955 $ 1,869 $ 86 4.6 %
Interest expense .................. 607 589 18 3.1
------- ------- ------- -----
Net interest income (1) ......... 1,348 1,280 68 5.3
Taxable equivalent adjustment ..... 18 14 4 28.6
------- ------- ------- -----
Net interest income ............. 1,330 1,266 64 5.1
Benefit for loan losses ........... 0 50 (50) (100.0)
------- ------- ------- -----
Net interest income after benefit
for loan losses ............... 1,330 1,316 14 1.1
------- ------- ------- -----
Noninterest income ................ 230 148 82 55.4
Noninterest expenses .............. 1,199 1,118 81 7.2
Income tax expense ................ 137 131 6 4.6
------- ------- ------- -----
Net income ...................... $ 224 $ 215 $ 9 4.2 %
======= ======= ======= =====
</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 9.11% 9.17% (0.06)%
Yield on average earning assets (1) 9.19% 9.24% (0.05)%
Interest rate on average interest-bearing
liabilities 4.07% 4.09% (0.02)%
Interest expense as a percent of average
earning assets 2.85% 2.91% (0.06)%
Net yield on average earning assets 6.26% 6.26% 0.00 %
Net yield on average earning assets (1) 6.34% 6.33% 0.01 %
</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, 1996 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1995
OVERVIEW
Net income of Bay Commercial Services ("the Company") was $495,000 for the first
six months of 1996 compared to $440,000 for the first six months of 1995. Net
income per share was $0.42 for the 1996 period compared to $0.38 for the 1995
period.
The $55,000 or 13% increase in net income for the 1996 period compared to the
1995 period was principally due to a $116,000 or 5% increase in net interest
income and a $108,000 or 28% increase in noninterest income. These increases
were partially offset by a $79,000 or 4% increase in noninterest expenses, a
$50,000 benefit for loan losses credited during the 1995 period and a $40,000 or
15% increase in income tax expense.
Total assets were $98,557,000 at June 30, 1996, representing a $5,738,000 or 6%
increase over December 31, 1995. Total deposits increased $6,217,000 or 8%
during the period and these additional funds were principally invested in loans,
which grew $6,579,000 or 12% from year-end 1995.
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 $2,618,000 for the first six months of 1996 increased
$116,000 or 5% compared to the first six months of 1995. The increase
principally reflected a $3,457,000 or 4% growth in average earning assets. The
net interest margin remained relatively unchanged at 6.31% and 6.30% 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 $7,899,000 or 15% in average earning loans.
Average total securities and average federal funds sold declined $2,859,000 or
13% and $1,583,000 or 26%, respectively. The yield on average earning assets
remained relatively unchanged at 9.14% compared to 9.15% during the 1995 period.
The positive effects of an increase in the proportion of earning assets invested
in higher yielding loans, 71% for the 1996 period compared to 64% for the 1995
period, were offset by the lower overall lending and money market rates during
the 1996 period.
<PAGE> 9
9
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, 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.
<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) ........ $ 44,500 $ 1,320 $ 9,446 $ 9,667 $64,933
Securities (before unrealized
gain or loss on securities
available for sale) ............ 3,284 269 10,398 5,065 19,016
Federal funds sold ............... 3,300 0 0 0 3,300
-------- ------- ------- ------- -------
Total .......................... 51,084 1,589 19,844 14,732 87,249
-------- ------- ------- ------- -------
Interest rate sensitive liabilities:
Interest-bearing
transaction accounts ......... 7,535 0 0 0 7,535
Savings deposits ................. 19,914 0 0 0 19,914
Time deposits >$100,000 .......... 15,012 2,520 559 0 18,091
Other time deposits .............. 8,845 4,986 1,097 0 14,928
Other borrowed funds ............. 1,359 883 0 0 2,242
-------- ------- ------- ------- -------
Total .......................... 52,665 8,389 1,656 0 62,710
-------- ------- ------- ------- -------
Interest rate sensitivity gap ...... $ (1,581) $(6,800) $18,188 $14,732 $24,539
-------- ------- ------- ------- -------
Cumulative interest rate
sensitivity gap ................... $ (1,581) $(8,381) $ 9,807 $24,539
-------- ------- ------- -------
Cumulative interest rate
sensitivity gap to total assets ... (1.6)% (8.5)% 10.0% 24.9%
</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
<PAGE> 10
10
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, 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.
As of June 30, 1996, the allowance for loan losses was $968,000 compared to
$982,000 at December 31, 1995. The reduced allowance reflected net loan
chargeoffs of $14,000 during the first six months of 1996. The ratio of the
allowance for loan losses to total loans was 1.5% at June 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 June 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 six months of either 1996 or 1995, and the reserve was
decreased by a $50,000 credit to the provision for loan losses during the first
six months of 1995.
<PAGE> 11
11
Information on nonperforming loans for the six months ended June 30, 1996 and
the year ended December 31, 1995 is summarized in the following table.
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -----------
(000's OMITTED)
<S> <C> <C>
Net loan (charge-offs) recoveries $ (14) $381
Ratio of net loan (charge-offs)
recoveries to average loans ... 0% 0.7%
Nonperforming loans:
Nonaccrual loans .............. $ 318 $ 0
Accruing loans past due
90 days or more ............. 0 99
----- ----
Total nonperforming loans ... $ 318 $ 99
===== ====
Ratio of nonperforming loans
to total loans ................ 0.5% 0.2%
Ratio of allowance for loan
losses to nonperforming
loans ......................... 304% 992%
Other real estate owned ......... $ 359 $359
</TABLE>
Total nonperforming loans increased from $99,000 at December 31, 1995 to
$318,000 at June 30, 1996. The current ratio of nonperforming loans to total
loans at 0.5% is well below industry averages. The loans in this category are
generally well secured and Management believes they represent a relatively low
risk of loss.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) of $359,000 at June 30, 1996, was unchanged since
December 31, 1995, and consists of three properties acquired through
foreclosure. 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 $492,000 for the first six months of 1996 increased
$108,000 or 28% compared to the first six months of 1995. The greatest change
was a $101,000 increase in gain on sale of loans, reflecting a larger sale of
loans guaranteed by the Small Business
<PAGE> 12
12
Administration ("SBA loans") during the first six months of 1996 compared to the
first six months of 1995. Other noninterest income increased $47,000 or 174%
between the periods, principally due to the 1996 recovery of prior years'
expenses related to charged-off loans. Bankcard income was also higher for the
1996 period, with a $20,000 or 20% increase over the 1995 period. These
increases in noninterest income for the 1996 period were partially offset by
nonrecurring 1995 events which netted $46,000 in noninterest income during the
1995 period, consisting of an $81,000 gain on the sale of other real estate
owned and a $35,000 loss on the sale of securities. Noninterest income was
further reduced during the 1996 period by a $26,000 or 29% drop in loan
servicing income, principally due to SBA loan payoffs.
NONINTEREST EXPENSE
Total noninterest expenses of $2,299,000 for the first six months of 1996
increased $79,000 or 4% compared to the same period in 1995. The principal
factor contributing to the increase in noninterest expenses was a $116,000 or
34% increase in other noninterest expense, principally attributable to the
settlement of a litigation matter, which was partially offset by an $85,000 or
99% 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. Other factors contributing to the increase in noninterest
expenses included a $22,000 or 2% increase in salaries and employee benefits, a
$14,000 or 18% increase in bankcard expense and a $6,000 increase in fees for
professional services.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $316,000 for the first six months of
1996 compared to $276,000 for the first six months of 1995. The increased income
tax expense reflected higher taxable income during the 1996 period. The
effective income tax rate was 39% for both the 1996 and 1995 periods.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1995
OVERVIEW
Net income for the Company for the second quarter of 1996 was $224,000 compared
to $215,000 for the second quarter of 1995. Net income per share was $0.19 for
both the 1996 and 1995 quarters.
The $9,000 or 4% increase in net income between the 1996 and 1995 quarters
resulted from increases of $64,000 or 5% in net interest income and $82,000 or
55% in noninterest income which were partially offset by an $82,000 or 7%
increase in noninterest expense and a nonrecurring $50,000 credit to the
provision for loan losses in the 1995 quarter.
<PAGE> 13
13
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income of $1,330,000 for the second quarter of 1996 increased
$64,000 or 5% compared to the second quarter of 1995. The increase principally
reflected a $4,432,000 or 5% growth in average earning assets. The net interest
margin remained unchanged at 6.26% 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 $7,880,000 or 15% in average earning loans.
Average total securities and average federal funds sold declined $2,738,000 or
12% and $710,000 or 10%, respectively. The yield on average earning assets
declined to 9.11% compared to 9.17% during the 1995 period. The positive effects
of an increase in the proportion of earning assets invested in higher yielding
loans, 70% for the 1996 quarter compared to 64% for the 1995 quarter, were
offset by the lower overall lending and money market rates during the 1996
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 second quarter of 1996 and the reserve was decreased by a $50,000
credit to the provision for loan losses during the second quarter of 1995.
NONINTEREST INCOME
Total noninterest income of $230,000 for the second quarter of 1996 increased
$82,000 or 55% compared to the second quarter of 1995. The largest change was a
$38,000 or 543% increase during the 1996 quarter in gain on sale of loans. Also
contributing to higher noninterest income for the 1996 quarter was a
nonrecurring loss of $35,000 on sale of securities during the second quarter of
1995. Other changes in noninterest income between the quarters included a
$20,000 or 153% increase in other noninterest income, principally due to the
1996 recovery of prior years' expenses related to charged-off loans, and a
$16,000 or 36% decrease in loan servicing income, reflecting loan payoffs during
1996.
NONINTEREST EXPENSE
Total noninterest expenses of $1,199,000 for the second quarter of 1996
increased $81,000 or 7% compared to the same quarter in 1995. The principal
factor contributing to the increase in noninterest expenses was a $101,000 or
57% increase in other noninterest expense, principally attributable to the
settlement of a litigation matter. Other factors contributing to the increase in
noninterest expense included a $7,000 increase in salaries and employee
benefits, a $6,000 increase in fees for professional services and a $6,000
increase in bankcard expense.
<PAGE> 14
14
These increases were partially offset by a $43,000 decrease in assessment fees
paid to the FDIC resulting from a reduction in deposit insurance rates for the
Bank Insurance Fund.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $137,000 for the second quarter of 1996
compared to $131,000 for the second quarter of 1995. The increased income tax
expense reflected higher taxable income during the 1996 quarter. The effective
income tax rate was 38% for both the 1996 and 1995 quarters, respectively.
FINANCIAL CONDITION
LOANS AND DEPOSITS
Total loans of $64,717,000 at June 30, 1996 increased $6,565,000 or 11% from
December 31, 1995. Total securities declined $1,446,000 or 7% and cash and cash
equivalents increased $620,000 or 5% compared to December 31, 1995.
OTHER ASSETS AND OTHER LIABILITIES
As previously discussed, OREO assets of $359,000 at June 30, 1996, were
unchanged from December 31, 1995. Interest and fees receivable increased $19,000
or 3% during the first six months of 1996, reflecting the increased volume of
earning assets. Interest payable and other liabilities at June 30, 1996,
declined $887,000 or 56% 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 36% at June 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.
<PAGE> 15
15
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, 1996, no
borrowed funds were outstanding on these credit agreements. As of June 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.
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 are required to maintain a leverage ratio of at least 100 to 200
basis points above the 3% minimum.
<PAGE> 16
16
The following tables present the Company's and the Bank's regulatory capital
positions at June 30, 1996, and average assets over the six month period ended
June 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 ................................ $ 9,168 13.0% $ 8,934 12.7%
Tier 1 Capital minimum requirement ............ 2,829 4.0 2,823 4.0
------- ---- ------- ----
Excess ........................................ $ 6,339 9.0% $ 6,111 8.7%
Total Capital.................................. $10,052 14.2% $ 9,816 13.9%
Total Capital minimum requirement ............. 5,658 8.0 5,646 8.0
------- ---- ------- ----
Excess......................................... $ 4,394 6.2% $ 4,170 5.9%
------- ---- ------- ----
Risk weighted assets .......................... $70,722 $70,581
======= =======
</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......... $ 9,168 9.9% $ 8,934 9.7%
Range of minimum leverage...................... 2,773- 3.0- 2,769- 3.0-
requirement.................................. 4,622 5.0% 4,615 5.0%
------ ---- -------- ----
Range of excess................................ $ 4,546- 4.9- $ 4,319- 4.7-
6,395 6.9% 6,165 6.7%
------- ---- ------- ----
Average total assets........................... $92,449 $92,306
======= =======
</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, 1996 and 1995 have not been
material.
<PAGE> 17
17
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
28, 1996.
(b) Not required.
(c)(I) At the 1996 Annual Meeting, the shareholders took the following
actions:
1. Elected Directors of the Company to serve until the 1997 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 1996 fiscal year;
3. Approved a proposal to readopt Article EIGHTH of the Company's
Articles of Incorporation which requires that certain business
combinations be approved by the holders of 66-2/3% of the
outstanding shares unless approved by a majority of disinterested
directors, certain minimum price requirements are met or state
regulatory authorities having jurisdiction over the matter have
approved the fairness of the proposed transaction.
(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 May 1, 1996. 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 VOTES
NOMINEE FOR ELECTION WITHHELD
<S> <C> <C>
Joshua Fong, O.D. 780,566 56,913
William R. Henson 780,566 56,913
Richard M. Kahler 780,566 56,913
Dimitri V. Koroslev 780,566 56,913
William E. Peluso 780,566 56,913
Oswald A. Rugaard 780,566 56,913
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 1996 fiscal
year the votes cast were as follows:
For 835,322
Against 0
Abstentions 2,157
Broker non-votes 0
(iii) On the matter of the approval of the proposal to readopt Article
EIGHTH of the Company's Articles of Incorporation:
For 740,908
Against 59,252
Abstentions 9,039
Broker non-votes 28,280
<PAGE> 18
18
(d) Not required.
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) No reports on Form 8-K were filed by the Company for the quarter
ended June 30, 1996
<PAGE> 19
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: August 5, 1996 /s/ R. M. Kahler
----------------------------
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 5, 1996 /s/ 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-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,077
<INT-BEARING-DEPOSITS> 60,468
<FED-FUNDS-SOLD> 3,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,361
<INVESTMENTS-CARRYING> 19,016
<INVESTMENTS-MARKET> 18,945
<LOANS> 64,717
<ALLOWANCE> 968
<TOTAL-ASSETS> 98,557
<DEPOSITS> 86,470
<SHORT-TERM> 2,242
<LIABILITIES-OTHER> 709
<LONG-TERM> 0
3,662
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 98,557
<INTEREST-LOAN> 3,095
<INTEREST-INVEST> 585
<INTEREST-OTHER> 115
<INTEREST-TOTAL> 3,795
<INTEREST-DEPOSIT> 1,126
<INTEREST-EXPENSE> 1,177
<INTEREST-INCOME-NET> 2,618
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,299
<INCOME-PRETAX> 811
<INCOME-PRE-EXTRAORDINARY> 811
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 495
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 6.39
<LOANS-NON> 318
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 318
<ALLOWANCE-OPEN> 982
<CHARGE-OFFS> 24
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 968
<ALLOWANCE-DOMESTIC> 968
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 420
</TABLE>
