U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to____________
Commission File Number: 0-12231
BAY COMMERCIAL SERVICES
(Exact name of small business issuer as specified in its charter)
California 94-2760444
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1495 East 14th Street
San Leandro, California 94577
(Address of principal executive offices)
(510) 357-2265
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at October 31, 1997
Common stock, no par value 1,076,720 shares
Transitional Small Business Disclosure Format
YES NO __X_
This report contains a total of 18 pages.
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Balance Sheets
<CAPTION>
September 30,
1997 December 31,
(Dollars in thousands): (unaudited) 1996
- ---------------------------------------------------------------------------------------------------
<S>
ASSETS <C> <C>
Cash and due from banks $ 8,257 $ 6,945
Federal funds sold and securities purchased under repurchase agreements 6,800 ---
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents 15,057 6,945
- ---------------------------------------------------------------------------------------------------
Investment securities available for sale, stated at market value
(amortized cost of $17,589 for 1997; $9,364 for 1996) 17,538 9,339
Investment securities held to maturity (market values of $7,654 for 1997;
$6,743 for 1996) 7,574 6,704
- ---------------------------------------------------------------------------------------------------
Total investment securities 25,112 16,043
- --------------------------------------------------------------------------------------------------
Loans held for sale 1,521 2,923
Loans held for investment 67,841 68,439
Allowance for loan losses (1,000) (971)
- ---------------------------------------------------------------------------------------------------
Net loans 68,362 70,391
- ---------------------------------------------------------------------------------------------------
Premises and equipment, net 2,152 2,164
Interest and fees receivable 708 585
Other assets 439 641
- ---------------------------------------------------------------------------------------------------
Total assets $111,830 $96,769
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 30,058 $26,198
Savings and interest-bearing demand 26,025 23,250
Time 31,725 27,823
Certificates of deposit, $100,000 and over 11,298 6,020
- ---------------------------------------------------------------------------------------------------
Total deposits 99,106 83,291
- ---------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 1,732 2,304
Federal funds purchased --- 500
Interest payable and other liabilities 810 1,256
- ---------------------------------------------------------------------------------------------------
Total liabilities 101,648 87,351
- ---------------------------------------------------------------------------------------------------
Commitments and contingent liabilities --- ---
Shareholders' equity:
Common stock - no par value: authorized 20,000,000
shares; issued & outstanding 1,076,720 shares in 1997 and 1996 3,662 3,662
Retained earnings 6,551 5,771
Net unrealized loss on securities available for sale (31) (15)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 10,182 9,418
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $111,830 $96,769
===================================================================================================
See accompanying notes to consolidated condensed financial statements
</TABLE>
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Statements of Income (unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
(In thousands, except per share amounts): 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
<S>
Interest income: <C> <C> <C> <C>
Loans, including fees $5,327 $4,736 $1,801 $1,641
Federal funds sold and securities purchased
under repurchase agreements 199 209 59 94
Investment securities:
Taxable 741 740 328 231
Nontaxable 143 122 51 46
- ---------------------------------------------------------------------------------------
Total interest income 6,410 5,807 2,239 2,012
- ---------------------------------------------------------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing demand 496 497 177 177
Time 1,166 1,041 415 374
Certificates of deposit, $100,000 and over 398 212 153 73
Other borrowed funds 73 77 23 26
- ---------------------------------------------------------------------------------------
Total interest expense 2,133 1,827 768 650
- ---------------------------------------------------------------------------------------
Net interest income 4,277 3,980 1,471 1,362
Provision for loan losses 52 --- 5 ---
- ---------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,225 3,980 1,466 1,362
- ---------------------------------------------------------------------------------------
Noninterest income:
Service charges and fees 200 192 67 67
Bankcard income 225 186 80 66
Loan servicing 99 99 37 34
Gain on sale of loans 57 174 --- 66
Gain on sale of OREO --- 111 --- 111
Other 198 128 6 54
- ---------------------------------------------------------------------------------------
Total noninterest income 779 890 190 398
- ---------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 2,116 1,831 695 623
Occupancy 511 446 164 149
Data processing 233 213 78 69
Bankcard processing expense 179 149 62 58
Professional services 90 190 21 86
Other 638 612 235 157
- ---------------------------------------------------------------------------------------
Total noninterest expenses 3,767 3,441 1,255 1,142
- ---------------------------------------------------------------------------------------
Income before income tax expense 1,237 1,429 401 618
Income tax expense 457 567 146 251
- ---------------------------------------------------------------------------------------
Net income $ 780 $ 862 $ 255 $ 367
=======================================================================================
Net income per common and equivalent share $ 0.62 $ 0.71 $ 0.20 $ 0.30
=======================================================================================
See accompanying notes to consolidated condensed financial statements
</TABLE>
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
<CAPTION>
Nine Months Ended
September 30,
(In thousands): 1997 1996
- -----------------------------------------------------------------------------------------
<S>
Cash flows from operating activities: <C> <C>
Net income $ 780 $ 862
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 51 181
Provision for loan losses 52 --
Unamortized deferred loan fees, net (59) (60)
Originations of SBA loans held for sale (659) (810)
Proceeds from the sale of SBA loans held for sale 1,095 3,106
Net income related to OREO --- (111)
Change in interest and fees receivable and other assets 104 (230)
Change in interest payable and other liabilities (123) (393)
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 1,241 2,545
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 17,464 1,655
Proceeds from maturities of securities held to maturity 1,271 1,661
Purchase of securities available for sale (26,532) ---
Purchase of securities held to maturity (1,139) (1,028)
Net change in loans 1,585 (9,685)
Proceeds from sale of OREO --- 251
Purchases of premises and equipment (198) (50)
Sales of premises and equipment --- 48
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (7,549) (7,148)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 15,815 6,381
Net change in securities sold under agreements to repurchase (572) (36)
Net change in federal funds purchased (500) ---
Cash dividends paid (323) (323)
- -----------------------------------------------------------------------------------------
Net cash provided by financing activities 14,420 6,022
- -----------------------------------------------------------------------------------------
Net change in cash and cash equivalents 8,112 1,419
Cash and cash equivalents at beginning of period 6,945 11,757
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,057 $ 13,176
=========================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,171 $ 1,817
Income taxes 413 854
Noncash investing activities during the period:
Loans made in connection with sale of OREO --- 178
See accompanying notes to consolidated condensed financial statements
</TABLE>
<PAGE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1) All adjustments (consisting only of normal recurring accruals) which, in the
opinion of Management, are necessary for a fair presentation of the
Company's financial position at September 30, 1997 and December 31, 1996 and
the results of its operations and its cash flows for the three and nine
month periods ended September 30, 1997 and 1996 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, 1996.
3) Net income per share for the three and nine month periods ended September
30, 1997 and 1996 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, 1997 and 1996 was 1,255,715 and 1,214,788,
respectively. The weighted average number of common and equivalent shares
outstanding for the third quarter of 1997 and 1996 was 1,264,133 and
1,220,296, respectively.
In February 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
The Company is required to adopt SFAS 128 in the fourth quarter of 1997 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods,
basic EPS would have been $0.72 and $0.80 for the nine month periods ended
September 30, 1997 and 1996, respectively. Basic EPS for the third quarter
of 1997 and 1996 would have been $0.24 and $0.34, respectively. Diluted EPS
under SFAS 128 would not have been significantly different than EPS
currently reported for the periods.
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
37% and 40% for the nine month periods ended September 30, 1997 and 1996,
respectively. The decrease in the tax rate was partially attributable to an
increase in nontaxable municipal bond income in 1997 and a reduction of the
California franchise tax rate to 10.84% in 1997 from 11.3% in 1996.
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
The Table Below Illustrates Changes in
Major Categories of the Average Balance Sheets and Statements of Income and in
Certain Performance Ratios (Unaudited)
<CAPTION>
Nine Months Ended Increase
September 30, (Decrease)
(Dollars in thousands): 1997 1996 $ %
- --------------------------------------------------------------------------------------------------------------
<S>
Average Balances:
<C> <C> <C> <C>
Assets * $104,094 $94,425 $9,669 10.2%
Investment securities - taxable* 15,926 15,934 (8) (0.1)
Investment securities - nontaxable 3,618 3,113 505 16.2
Federal funds sold 5,025 5,459 (434) (8.0)
Total loans 70,318 61,218 9,100 14.9
Nonaccrual loans 374 194 180 92.8
Other real estate owned --- 336 (336) (100.0)
Deposits 91,381 82,134 9,247 11.3
Shareholders' equity * 9,836 9,112 724 7.9
Interest-earning assets 94,513 85,530 8,983 10.5
Interest-bearing liabilities 66,221 59,609 6,612 11.1
Income Statements:
Interest income (1) $6,476 $5,864 $ 612 10.4%
Interest expense 2,133 1,827 306 16.7
- --------------------------------------------------------------------------------------------------------------
Net interest income (1) 4,343 4,037 306 7.6
Taxable equivalent adjustment 66 57 9 15.8
- --------------------------------------------------------------------------------------------------------------
Net interest income 4,277 3,980 297 7.5
Provision for loan losses 52 --- 52 NA
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 4,225 3,980 245 6.2
- --------------------------------------------------------------------------------------------------------------
Noninterest income 779 890 (111) (12.5)
Noninterest expenses 3,767 3,441 326 9.5
Income tax expense 457 567 (110) (19.4)
- --------------------------------------------------------------------------------------------------------------
Net income $ 780 $ 862 $ (82) (9.5)%
==============================================================================================================
<FN>
* before unrealized gain or loss on securities available for sale
</FN>
</TABLE>
<TABLE>
<CAPTION>
<S>
Performance Ratios: (2) Change
<C> <C> <C>
Yield on average earning assets 9.07% 9.07% 0.00 %
Yield on average earning assets (1) 9.16% 9.16% 0.00 %
Interest rate on average interest-bearing
liabilities 4.31% 4.09% 0.22 %
Interest expense as a percent of average
earning assets 3.02% 2.85% 0.17 %
Net yield on average earning assets 6.05% 6.22% (0.17)%
Net yield on average earning assets (1) 6.14% 6.31% (0.17)%
<FN>
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
</FN>
</TABLE>
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
The Table Below Illustrates Changes in
Major Categories of the Average Balance Sheets and Statements of Income and in
Certain Performance Ratios (Unaudited)
<CAPTION>
Three Months Ended Increase
September 30, (Decrease)
(Dollars in thousands): 1997 1996 $ %
- --------------------------------------------------------------------------------------------------------------
<S>
Average Balances:
<C> <C> <C> <C>
Assets * $109,163 $98,334 $10,829 11.0%
Investment securities - taxable* 21,353 15,078 6,275 41.6
Investment securities - nontaxable 3,941 3,134 807 25.7
Federal funds sold 4,283 7,234 (2,951) (40.8)
Total loans 70,722 64,316 6,406 10.0
Nonaccrual loans 490 299 191 63.9
Other real estate owned --- 291 (291) (100.0)
Deposits 96,351 85,906 10,445 12.2
Shareholders' equity * 10,122 9,393 729 7.8
Interest-earning assets 99,809 89,463 10,346 11.6
Interest-bearing liabilities 69,841 62,699 7,142 11.4
Income Statements:
Interest income (1) $2,262 $2,034 $ 228 11.2%
Interest expense 768 650 118 18.2
- --------------------------------------------------------------------------------------------------------------
Net interest income (1) 1,494 1,384 110 7.9
Taxable equivalent adjustment 23 22 1 4.5
- --------------------------------------------------------------------------------------------------------------
Net interest income 1,471 1,362 109 8.0
Provision for loan losses 5 --- 5 NA
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,466 1,362 104 7.6
- --------------------------------------------------------------------------------------------------------------
Noninterest income 190 398 (208) (52.3)
Noninterest expenses 1,255 1,142 113 9.9
Income tax expense 146 251 (105) (41.8)
- --------------------------------------------------------------------------------------------------------------
Net income $ 255 $ 367 $(112) (30.5)%
==============================================================================================================
<FN>
* before unrealized gain or loss on securities available for sale
</FN>
</TABLE>
<TABLE>
<CAPTION>
<S>
Performance Ratios: (2) Change
<C> <C> <C>
Yield on average earning assets 8.90% 8.95% (0.05)%
Yield on average earning assets (1) 8.99% 9.04% (0.05)%
Interest rate on average interest-bearing
liabilities 4.36% 4.12% 0.24%
Interest expense as a percent of average
earning assets 3.05% 2.89% 0.16%
Net yield on average earning assets 5.85% 6.06% (0.21)%
Net yield on average earning assets (1) 5.94% 6.15% (0.21)%
<FN>
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
</FN>
</TABLE>
<PAGE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nine months ended September 30, 1997 compared to nine months
ended September 30, 1996
OVERVIEW
Certain matters discussed in this Management's Discussion and Analysis are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties include, among others,
(1) significant increases in competitive pressure in the banking industry; (2)
changes in the interest rate environment affect margins; (3) general economic
conditions, either nationally or regionally, are less favorable than expected,
resulting in, among other things, a deterioration in credit quality; (4) changes
in the regulatory environment; (5) changes in business conditions and inflation;
and (6) changes in securities markets. Therefore, the information set forth in
such forward-looking statements should be carefully considered when evaluating
the business prospects of Bay Commercial Services (the "Company") and Bay Bank
of Commerce (the "Bank").
Net income was $780,000 or $0.62 per share for the first nine months of 1997
compared to $862,000 or $0.71 per share for the 1996 period, a decline of
$82,000 or 10%. The annualized return on average assets was 1.0% and 1.2% and
the annualized return on average shareholders' equity was 10.6% and 12.6% for
the 1997 and 1996 periods, respectively. These annualized ratios are not
necessarily indicative of results for a full year.
The decline in net income during the 1997 period reflected increased noninterest
expenses, primarily operating expenses of the Bank's new San Ramon Regional
Branch, and certain nonrecurring noninterest income earned in 1996, both of
which were partially offset with increased net interest income and decreased tax
expense.
With a significant contribution from the Bank's San Ramon office, strong deposit
growth propelled total assets to $111,830,000 at September 30, 1997, an increase
of $15,061,000 or 16% over December 31, 1996. During the same period, total
loans declined by $2,000,000 as a result of loan sales, payoffs and reduced loan
originations. Investment securities and other short-term investments increased
by $15,869,000 or 99%.
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
<PAGE>
and investments, exceed the interest cost of deposits and other interest-bearing
liabilities. Net interest income is affected by changes in interest rates as
well as the composition and volume of interest-earning assets and
interest-bearing liabilities.
Net interest income of $4,277,000 for the first nine months of 1997 increased
$297,000 or 8% compared to the same 1996 period. The increase principally
reflected an $8,983,000 or 11% increase in average interest-earning assets.
Although average interest-bearing liabilities increased a smaller $6,612,000 or
11%, the net interest margin for the 1997 period declined to 6.05% compared to
6.22% in 1996. The lower margin was mostly due to a $7,664,000 or 24% increase
in the average volume of higher cost time deposits.
As a result of exceptionally strong loan growth during the second half of 1996,
most of the increase in average interest-earning assets between the 1997 and
1996 periods was due to the increase in outstanding loan balances. However, with
reduced loan originations, loan pay-offs and loan sales during the 1997 period,
total outstanding loans actually declined as of September 30, 1997. Lower
lending rates, in addition to reduced loan fee income, caused average loan
yields to decline to 10.18% compared to 10.36% for the 1996 period. Despite the
larger proportion of earning assets held in higher yielding loans, the yield on
average total interest-earning assets remained unchanged at 9.07% for both the
1997 and 1996 periods.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. If more assets than liabilities reprice in a given period (an asset
sensitive position), interest rate changes will be reflected more quickly in
rates on earning assets. If interest rates decline, an asset sensitive position
could adversely affect net interest income. Alternatively, where liabilities
reprice more quickly than assets in a given period (a liability sensitive
position) a decline in market rates could benefit net interest income. The
results would reverse if market rates were to increase.
The following table presents the Company's interest rate sensitivity gap
position at September 30, 1997. 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>
<TABLE>
<CAPTION>
Interest Sensitivity Period
------------------------------------------
3 Over Over 1
As of September 30, 1997: months 3 months year to Over 5
(Dollars in thousands) or less to 1 year 5 years years Total
- ----------------------------------------------------------------------------------------------------
<S>
Interest rate sensitive assets:
<C> <C> <C> <C> <C>
Loans (net of nonaccrual) $49,001 $ 2,146 $ 7,406 $10,897 $ 69,450
Investment securities (before unrealized
loss on securities available for sale) 9,986 1,309 5,309 8,559 25,163
Federal funds sold and securities
purchased under repurchase agreements 6,800 --- --- --- 6,800
----------------------------------------------------------------------------------------------------
Total 65,787 3,455 12,715 19,456 101,413
----------------------------------------------------------------------------------------------------
Interest rate sensitive liabilities:
Interest-bearing transaction accounts 19,527 --- --- --- 19,527
Savings deposits 6,499 --- --- --- 6,499
Time deposits $100,000 and over 20,832 3,409 1,525 100 25,866
Other time deposits 10,329 5,076 1,751 --- 17,156
Other borrowed funds 1,632 100 --- --- 1,732
- -----------------------------------------------------------------------------------------------------
Total 58,819 8,585 3,276 100 70,780
- -----------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 6,968 $(5,130) $ 9,439 $19,356 $ 30,633
- -----------------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap $ 6,968 $ 1,838 $11,277 $30,633
- -----------------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap to total assets 6.2% 1.6% 10.1% 27.4%
</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, 1997, indicates that the Company, on a cumulative gap
basis, is asset sensitive over all the time periods.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company provides for potential loan losses by a charge to operating income
based upon the current composition of the loan portfolio, past loan loss
experience, current and projected economic conditions, an evaluation of the risk
elements in the loan portfolio and other factors that, in Management's judgment,
deserve recognition in estimating loan losses. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to make additions to the allowance based on their evaluations of information
available to them at the time of their examination. Management will charge off
loans to the allowance when it determines there has been a permanent impairment
of the related carrying values.
The provision for loan losses reflects an amount sufficient to cover estimated
loan losses and to maintain the allowance for loan losses at a level which, in
Management's opinion, is adequate to absorb potential credit losses inherent in
loans, outstanding loan commitments and standby letters of credit.
<PAGE>
As of September 30, 1997, the allowance for loan losses was $1,000,000 compared
to $971,000 at December 31, 1996. The ratio of the allowance for loan losses to
total loans was 1.4% at September 30, 1997 and December 31, 1996. A $52,000
provision for loan losses was added during the first nine months of 1997 while
no provision for loan losses was made during the first nine months of 1996.
Although Management uses available information to provide for losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions. Based upon information currently available, Management believes that
the allowance for loan losses at September 30, 1997 is adequate to absorb future
possible losses. However, no assurance can be given that the Company may not
sustain charge-offs which are in excess of the size of the allowance in any
given period.
Information on nonperforming loans and other real estate owned for the nine
months ended September 30, 1997 and 1996 and the year ended December 31, 1996 is
summarized in the following table.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(Dollars in thousands) 1997 1996 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loan charge-offs $ 23 $ 11 $ 18
Ratio of net loan charge-offs to average loans --- --- ---
Nonperforming loans:
Nonaccrual $464 $208 $171
Accruing loans past due
90 days or more 168 227 267
- --------------------------------------------------------------------------------------
Total nonperforming loans $632 $435 $438
- --------------------------------------------------------------------------------------
Ratio of nonperforming loans to total loans 0.9% 0.6% 0.7%
Ratio of allowance for loan losses to nonperforming
loans 158% 223% 220%
Other real estate owned --- --- $ 41
</TABLE>
Although there has been an increase in total nonperforming loans from September
1996 to September 1997, 37% of the September 1997 total represents loans
guaranteed by the Small Business Administration ("SBA loans"). The remaining
unguaranteed nonperforming balance of $401,000 is comprised of loans in the
process of recovery and/or liquidation and represents 0.6% of total outstanding
loans. Management believes that the increase in nonperforming loans since
September 30, 1996 is not representative of any specific trend within the loan
portfolio.
NONINTEREST INCOME
Total noninterest income of $779,000 for the first nine months of 1997
declined $111,000 or 13% compared to the first nine months of 1996. The decrease
principally reflected reductions of $117,000 or 67% in gain on sale of loans and
$111,000 in gain of sale of OREO. These reductions represented larger loan sales
during the 1996 period and the absence of OREO sales
<PAGE>
during the 1997 period. Partially offsetting the decreases in noninterest
income were a $70,000 or 55% increase in other noninterest income and a $39,000
or 21% increase in bankcard income. Although other noninterest income for both
the 1997 and 1996 periods included nonrecurring and significant recoveries of
prior years' expenses related to charged-off loans, the amounts recovered were
larger in 1997. Bankcard income increased during the 1997 period due to
increased merchant account activity. Loan servicing income remained unchanged at
$99,000 for both the 1997 and 1996 periods as the average volume of serviced
loans did not change significantly.
NONINTEREST EXPENSE
Total noninterest expenses of $3,767,000 for the first nine months of 1997 rose
$326,000 or 10% compared to the same period in 1996. The largest contribution to
the increase was a $285,000 or 16% increase in salaries and employee benefits,
which principally reflected the additional staff in the Bank's San Ramon branch
and growth in other salary and employee benefits expense. The Bank's San Ramon
branch was also the principal source of the $65,000 or 15% increase in occupancy
expense and $26,000 or 4% increase in other noninterest expense. Costs
associated with settlement of a litigation matter in 1996 explain a large
portion of the $100,000 or 53% drop in professional services expense for the
1997 period.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $457,000 for the first nine months of
1997 compared to $567,000 for the first nine months of 1996. The effective
income tax rate was 37% and 40% for the 1997 and 1996 periods, respectively. The
decline in the rate for 1997 principally reflected the effects of an increase in
nontaxable municipal bond interest and a reduction in the California tax rate
for financial institutions to 10.84% for 1997 from 11.30% for 1996.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1996
OVERVIEW
Net income for the third quarter of 1997 was $255,000 or $0.20 per share
compared to $367,000 or $0.30 per share for the same 1996 quarter. The
annualized return on average assets was 0.9% and 1.5% and the annualized return
on average shareholders' equity was 10.0% and 15.5% for the 1997 and 1996
quarters, respectively. These annualized ratios are not necessarily indicative
of results for a full year.
The $112,000 or 31% reduction in net income between the 1997 and 1996 quarters
principally resulted from a $208,000 or 52% reduction in noninterest income
which primarily reflected nonrecurring gains from sales of loans and OREO during
the 1996 quarter. Net interest income, which increased $109,000 or 8% during the
1997 period, largely offset a $113,000 or 10% increase in noninterest expense.
The increased in noninterest expense primarily represented the operating costs
of the Bank's new San Ramon regional branch. With reduced taxable income and a
lower effective tax rate, the Company's income tax expense declined $105,000 or
42%.
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income of $1,471,000 for the third quarter of 1997 increased
$109,000 or 8% compared to the same 1996 period. The increase principally
reflected the $10,346,000 or 12% growth in average interest-earning assets
between the quarters. The net interest margin for the 1997 quarter declined to
5.85% from 6.05% in 1996, primarily as a result of the increased volume of
higher cost time deposits.
Growth in average interest-earning assets between the 1997 and 1996 quarters was
principally due to increases of $7,082,000 or 39% in average total investment
securities and $6,215,000 or 10% in average outstanding loans. Overnight
investments declined by $2,951,000 or 41% between the quarters. Yields on
average earning assets remained essentially unchanged at 8.90% for the 1997
quarter and 8.95% in 1996.
Average interest-bearing liabilities increased $7,142,000 or 11% compared to the
1996 quarter while the average rate paid rose to 4.36% from 4.12%. The increase
primarily reflected significant growth in higher cost time deposits which
increased $8,596,000 or 25% between the periods.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
A $5,000 provision for loan losses was added to the reserve for loan losses
during the 1997 quarter. No provision for loan losses was made during the third
quarter of 1996.
NONINTEREST INCOME
Total noninterest income of $190,000 for the third quarter of 1997 declined
$208,000 or 52% compared to the third quarter of 1996. The most significant
contributions to the decrease were gains of $111,000 on OREO sales and $66,000
from loan sales during the 1996 quarter that were not repeated in the 1997
period. Other noninterest income also declined between the quarters, by $48,000
or 89%, reflecting recovery during the 1996 quarter of prior years' expenses
related to charged-off loans. Partially offsetting the decreases in noninterest
income was a $14,000 or 21% increase in bankcard income.
NONINTEREST EXPENSE
Total noninterest expenses of $1,255,000 for the third quarter of 1997 rose
$113,000 or 10% compared to the same quarter in 1996. Salaries and employees
benefits increased $72,000 or 12%, due principally to staffing at the Bank's San
Ramon branch and growth in other salaries and employee benefits expense. The
Bank's San Ramon branch was also a principal source of the $15,000 or 10%
increase in occupancy expense and the $78,000 or 50% increase in other
noninterest expenses. The $65,000 or 76% reduction in professional services
expense was
<PAGE>
largely due to legal fees associated with the settlement of a litigation
matter during the 1996 period.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $146,000 for the third quarter of 1997
compared to $251,000 for the third quarter of 1996. The decreased income tax
expense reflected reduced taxable income during the 1997 quarter. The effective
income tax rate was 36% and 41% for the 1997 and 1996 quarters, respectively.
The decreased rate for the 1997 quarter principally reflected the effects of an
increase in nontaxable municipal bond interest and a reduction in the California
tax rate for financial institutions to 10.84% for 1997 from 11.30% for 1996.
FINANCIAL CONDITION
LOANS AND INVESTMENTS
As a result of loan sales, loan payoffs, and reduced loan originations, total
loans of $69,362,000 at September 30, 1997 were $2,000,000 lower than at
year-end 1996. Deposit growth for the first nine months of 1997 was principally
invested in investment securities and overnight investments, which increased
$15,869,000 or 99% from December 31, 1996.
DEPOSITS AND OTHER BORROWED FUNDS
Total deposits of $99,106,000 at September 30, 1997 increased $15,815,000 or 19%
from December 31, 1996. The increase in deposits was primarily the result of new
account growth in the Bank's San Ramon Regional Office and growth in time
deposits. Customer repurchase agreements and federal funds purchased declined
$1,072,000 or 38% during the same period. As of September 30, 1997, the Bank did
not carry any brokered deposit balances.
OTHER ASSETS AND OTHER LIABILITIES
As a result of growth in earning assets, interest and fees receivable increased
$123,000 or 21% during the first nine months of 1997. During the same period,
interest payable and other liabilities declined $446,000 or 36% largely due to
the payment in 1997 of a cash dividend accrued in 1996.
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
<PAGE>
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 34% at September 30, 1997 and 28% at December 31, 1996. 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 $5,000,000 with a correspondent bank and also has
repurchase facilities to meet unforeseen outflows. As of September 30, 1997, no
borrowed funds were outstanding from these credit facilities.
CAPITAL
The following tables present the Company's and the Bank's regulatory capital
positions at September 30, 1997, and average assets over the nine month period
ended September 30, 1997:
RISK BASED CAPITAL RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------
Tier 1 Capital $10,097 11.9% $ 9,924 11.7%
Tier 1 Capital minimum requirement 3,399 4.0 3,393 4.0
- ----------------------------------------------------------------------------
Excess $ 6,698 7.9% $ 6,531 7.7%
Total Capital $11,097 13.1% $10,924 12.9%
Total Capital minimum requirement 6,797 8.0 6,787 8.0
- ----------------------------------------------------------------------------
Excess $ 4,300 5.1% $ 4,137 4.9%
Risk weighted assets $84,964 $84,837
LEVERAGE RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------
Tier 1 Capital to average total assets $10,097 9.7% $9,924 9.6%
Range of minimum leverage 3,119- 3.0- 3,115- 3.0-
requirement 5,199 5.0% 5,192 5.0%
- ----------------------------------------------------------------------------
Range of excess 4,898- 4.7- 4,732- 4.6-
$ 6,978 6.7% $6,809 6.6%
Average total assets $103,978 $103,847
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.
<PAGE>
INFLATION
It is Management's opinion that the effects of inflation on the consolidated
financial statements for the periods ended September 30, 1997 and 1996 have not
been material.
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company for the quarter
ended September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAY COMMERCIAL SERVICES
(Registrant)
Date: November 6, 1997 /s/ R. M. Kahler
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 6, 1997 /s/ R. D. Greenfield
R. D. Greenfield
Chief Financial Officer
(Principal Accounting Officer)
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