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 June 30, 1998
[ ] 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 SERVICE
(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 July 31, 1998
Common stock, no par value 1,079,520 shares
Transitional Small Business Disclosure Format
YES NO __X_
This report contains a total of 20 pages.
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Balance Sheets
<CAPTION>
June 30
1998 December 31,
(Dollars in thousands): ......................................(unaudited) 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks ..................................... $ 13,431 $ 7,548
Federal funds sold and reverse repurchase agreements ......... 6,900 ---
- -------------------------------------------------------------------------------------
Cash and cash equivalents .................................. 20,331 7,548
- -------------------------------------------------------------------------------------
Securities available for sale, stated at fair value
(amortized cost of $19,518 for 1998; $24,663 for 1997) ..... 19,544 24,651
Securities held to maturity (fair values of $6,465 for 1998;
$8,057 for 1997) .......................................... 6,332 7,929
Federal Home Loan Bank stock ................................. 350 ---
Loans held for sale .......................................... 864 1,501
Loans held for investment .................................... 79,487 72,628
Allowance for loan losses .................................. (900) (1,000)
- -------------------------------------------------------------------------------------
Net loans .................................................. 79,451 73,129
- -------------------------------------------------------------------------------------
Premises and equipment, net .................................. 2,001 2,111
Interest and fees receivable ................................. 593 566
Other assets ................................................. 391 435
- -------------------------------------------------------------------------------------
Total assets ............................................... $ 128,993 $ 116,369
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand ................................. $ 33,609 $ 29,076
Savings and interest-bearing demand ........................ 37,490 29,203
Time ....................................................... 29,556 30,022
Certificates of deposit, $100 and over ..................... 15,425 12,834
- -------------------------------------------------------------------------------------
Total deposits ............................................. 116,080 101,135
- -------------------------------------------------------------------------------------
Securities sold under agreements to repurchase ............... 1,317 1,290
Federal funds purchased ...................................... --- 2,500
Interest payable and other liabilities ....................... 897 1,271
- -------------------------------------------------------------------------------------
Total liabilities .......................................... 118,294 106,196
- -------------------------------------------------------------------------------------
Commitments and contingent liabilities........................ --- ---
Shareholders' equity:
Common stock - no par value: authorized 20,000,000 shares;
issued & outstanding 1,079,520 in 1998; 1,078,720 in 1997 . 3,616 3,671
Retained earnings .......................................... 7,066 6,509
Net unrealized gain (loss) on securities available for sale,
net of taxes .......................................... 17 (7)
- -------------------------------------------------------------------------------------
Total shareholders' equity ................................. 10,699 10,173
- -------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ................ $ 128,993 $ 116,369
=====================================================================================
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Statements of Income (unaudited)
<CAPTION>
Six months ended Three months ended
June 30, June 30,
(Dollars in thousands, except per share amounts): 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees .............................. $ 3,971 $ 3,526 $ 2,036 $ 1,795
Federal funds sold and reverse repurchase agreements 193 140 138 92
Securities:
Taxable .......................................... 555 413 276 216
Tax exempt ....................................... 124 92 64 47
- ----------------------------------------------------------------------------------------------------
Total interest income .......................... 4,843 4,171 2,514 2,150
- ----------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing demand .............. 479 319 275 165
Time ............................................. 761 751 375 386
Certificates of deposit, $100 and over ........... 384 245 200 127
Other borrowed funds ............................... 34 50 16 22
- ----------------------------------------------------------------------------------------------------
Total interest expense ......................... 1,658 1,365 866 700
- ----------------------------------------------------------------------------------------------------
Net interest income ............................ 3,185 2,806 1,648 1,450
Provision for loan losses ............................ 69 47 59 47
----------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses .................... 3,116 2,759 1,589 1,403
- ----------------------------------------------------------------------------------------------------
Noninterest income:
Bankcard income .................................... 205 145 109 79
Service charges and fees ........................... 148 133 80 65
Gain on sale of loans .............................. 88 57 55 57
Loan servicing ..................................... 49 62 25 27
Other .............................................. 30 192 3 167
- ----------------------------------------------------------------------------------------------------
Total noninterest income ....................... 520 589 272 395
- ----------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits ..................... 1,561 1,421 768 713
Occupancy .......................................... 343 347 173 173
Data processing .................................... 174 155 89 78
Bankcard processing expense ........................ 175 117 96 65
Professional services .............................. 68 69 40 33
Other .............................................. 457 403 225 198
- ----------------------------------------------------------------------------------------------------
Total noninterest expenses ...................... 2,778 2,512 1,391 1,260
- ----------------------------------------------------------------------------------------------------
Income before income tax expense ............... 858 836 470 538
Income tax expense ................................... 301 311 167 195
- ----------------------------------------------------------------------------------------------------
Net income ..................................... $ 557 $ 525 $ 303 $ 343
====================================================================================================
Net income per common share - basic ............ $ 0.52 $ 0.49 $ 0.28 $ 0.32
Weighted average common shares - basic ......... 1,080,419 1,076,720 1,081,177 1,076,720
Net income per common share - diluted .......... $ 0.44 $ 0.42 $ 0.24 $ 0.27
Weighted average common shares - diluted ....... 1,280,350 1,248,764 1,280,986 1,252,877
======================================================================================================
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows (Unaudited)
<CAPTION>
Six Months Ended
June 30,
(Dollars in thousands): 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 557 $ 525
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......................... (327) 115
Provision for loan losses .............................. 69 47
Unamortized deferred loan fees, net .................... (68) (75)
Originations of SBA loans held for sale ................ (760) (191)
Proceeds from the sale of SBA loans held for sale ...... 2,125 1,095
Change in interest and fees receivable and other assets 40 117
Change in interest payable and other liabilities ....... (59) (38)
-------------------------------------------------------------------------------------
Net cash provided by operating activities ................ 1,577 1,595
- -------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale .. 33,175 113
Proceeds from maturities of securities held to maturity .... 2,271 1,161
Purchases of securities available for sale ................. (27,848) (8,246)
Purchases of securities held to maturity ................... (739) (205)
Net change in loans ........................................ (7,716) (974)
Purchases of premises and equipment ........................ (30) (177)
- -------------------------------------------------------------------------------------
Net cash used in investing activities .................... (887) (8,328)
- -------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits ..................................... 14,945 10,980
Net change in securities sold under agreements to repurchase 27 (574)
Net change in federal funds purchased ...................... (2,500) (500)
Exercise of stock options .................................. 29 ---
Repurchase and retirement of common stock .................. (84) ---
Cash dividends paid ........................................ (324) (323)
- -------------------------------------------------------------------------------------
Net cash provided by financing activities ................ 12,093 9,583
- -------------------------------------------------------------------------------------
Net change in cash and cash equivalents .................. 12,783 2,850
Cash and cash equivalents at beginning of year ................ 7,548 6,945
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of period .................... $ 20,331 $ 9,795
=====================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................... $ 1,700 $ 1,445
Income taxes ............................................... 151 108
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 June 30, 1998 and December 31, 1997 and
the results of its operations and its cash flows for the three and six
month periods ended June 30, 1998 and 1997 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 condensed financial statements have been
prepared on a basis consistent with the accounting principles and
policies reflected in the Company's annual report for the year ended
December 31, 1997.
3) Net income per common share - basic for the three and six month periods
ended June 30, 1998 and 1997 was computed by dividing net income by the
weighted average number of outstanding common shares. Net income per
common share - diluted for the three and six month periods ended June
30, 1998 and 1997 is computed by dividing net income by the weighted
average number of outstanding common shares including the dilutive
effect of stock options. The weighted average number of outstanding
common shares for the three and six month periods ended June 30, 1998
was 1,081,177 and 1,080,419, respectively. The weighted average number
of outstanding common shares for the three and six month periods ended
June 30, 1997 was 1,076,720. The weighted average number of outstanding
common shares including the dilutive effect of stock options for the
three and six month periods ended June 30, 1998 was 1,280,986 and
1,280,350, respectively. The weighted average number of outstanding
common shares including the dilutive effect of stock options for the
three and six month periods ended June 30, 1997 was 1,252,877 and
1,248,764, 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 35% and 37% for the six month periods ended June 30, 1998 and 1997,
respectively.
5) Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
Statement requires disclosure of total nonowner changes in shareholders'
equity as comprehensive income. Comprehensive income includes net income
and net unrealized gain (loss) on securities available for sale, net of
taxes. Total comprehensive income was $581,000 and $508,000 for the six
months ended June 30, 1998 and 1997, respectively. Total comprehensive
income was $317,000 and $370,000 for the three months ended June 30,
1998 and 1997, respectively.
<PAGE>
6) In June 1998, the Financial Accounting Standards Board Issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 1999.
Because of the Company's minimal use of derivatives, Management does not
anticipate that the adoption of the new Statement will have a
significant effect on earnings or the financial position of the Company.
<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>
Six Months Ended Increase
June 30, (Decrease)
(Dollars in thousands): 1998 1997 $ %
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Balances:
Assets (1) .........................................$119,002 $101,518 $ 17,484 17.2%
Securities - taxable (1) ........................... 18,446 14,270 4,176 29.3
Securities - tax exempt ............................ 4,844 3,453 1,391 40.3
Federal funds sold and reverse repurchase agreements 6,999 4,303 2,696 62.7
Total loans ........................................ 78,834 70,112 8,722 12.4
Nonaccrual loans ................................... 363 315 48 15.2
Deposits ........................................... 106,294 88,855 17,439 19.6
Shareholders' equity (1) ........................... 10,464 9,690 774 8.0
Interest-earning assets ............................ 108,760 91,823 16,937 18.4
Interest-bearing liabilities ....................... 77,210 64,382 12,828 19.9
Income Statements:
Interest income (2) ................................$ 4,900 $ 4,214 $ 686 16.3%
Interest expense ................................... 1,658 1,365 293 21.5
- -----------------------------------------------------------------------------------------------
Net interest income (2) .......................... 3,242 2,849 393 13.8
Taxable equivalent adjustment ...................... 57 43 14 32.6
- -----------------------------------------------------------------------------------------------
Net interest income .............................. 3,185 2,806 379 13.5
Provision for loan losses .......................... 69 47 22 46.8
- -----------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses ................................ 3,116 2,759 357 12.9
- -----------------------------------------------------------------------------------------------
Noninterest income ................................. 520 589 (69) (11.7)
Noninterest expenses ............................... 2,778 2,512 266 10.6
Income tax expense ................................. 301 311 (10) (3.2)
- -----------------------------------------------------------------------------------------------
Net income .......................................$ 557 $ 525 $ 32 6.1%
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Performance Ratios: (3) Change
------
Yield on average earning assets..................... 8.98% 9.16% (0.18)%
Yield on average earning assets (2)................. 9.09% 9.25% (0.16 %
Interest rate on average interest-bearing
liabilities..................................... 4.33% 4.28% 0.05 %
Interest expense as a percent of average
earning assets.................................. 3.07% 3.00% 0.07 %
Net yield on average earning assets................. 5.91% 6.16% (0.25)%
Net yield on average earning assets (2)............. 6.02% 6.25% (0.23)%
<FN>
(1) Before unrealized gain or loss on securities available for sale
(2) Federal taxable equivalent basis
(3) 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
June 30, (Decrease)
(Dollars in thousands): 1998 1997 $ %
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Balances:
Assets (1) .........................................$123,671 $103,506 $ 20,165 19.5%
Securities - taxable (1) ........................... 18,530 15,955 2,575 16.1
Securities - nontaxable ............................ 5,016 3,480 1,536 44.1
Federal funds sold and reverse repurchase agreements 9,951 4,744 5,207 109.8
Total loans ........................................ 80,296 69,992 10,304 14.7
Nonaccrual loans ................................... 293 369 (76) (20.6)
Deposits ........................................... 110,988 90,951 20,037 22.0
Shareholders' equity (1) ........................... 10,586 9,818 768 7.8
Interest-earning assets ............................ 113,500 93,802 19,698 21.0
Interest-bearing liabilities ....................... 80,326 65,492 14,834 22.7
Income Statements:
Interest income (2) ................................$ 2,543 $ 2,172 $ 371 17.1%
Interest expense ................................... 866 700 166 23.7
- ------------------------------------------------------------------------------------------------
Net interest income (2) .......................... 1,677 1,472 205 13.9
Taxable equivalent adjustment ...................... 29 22 7 31.8
- ------------------------------------------------------------------------------------------------
Net interest income .............................. 1,648 1,450 198 13.7
Provision for loan losses .......................... 59 47 12 25.5
- ------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses ................................ 1,589 1,403 186 13.3
- ------------------------------------------------------------------------------------------------
Noninterest income ................................. 272 395 (123) (31.1)
Noninterest expenses ............................... 1,391 1,260 131 10.4
Income tax expense ................................. 167 195 (28) (14.4)
- ------------------------------------------------------------------------------------------------
Net income .......................................$ 303 $ 343 $ (40) (11.7)%
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Performance Ratios: (3) Change
------
Yield on average earning assets..................... 8.88% 9.19% (0.31)%
Yield on average earning assets (2)................. 8.99% 9.29% (0.30)%
Interest rate on average interest-bearing
liabilities..................................... 4.32% 4.29% 0.03 %
Interest expense as a percent of average
earning assets.................................. 3.06% 2.99% 0.07 %
Net yield on average earning assets................. 5.82% 6.20% (0.38)%
Net yield on average earning assets (2)............. 5.93% 6.30% (0.37)%
<FN>
(1) Before unrealized gain or loss on securities available for sale
(2) Federal taxable equivalent basis
(3) 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
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1997
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 reduce 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 of the Company was $557,000 for the first six months of 1998 compared
to $525,000 for the first six months of 1997. Net income per common share -
basic was $0.52 and $0.49 for the first six months of 1998 and 1997,
respectively. Net income per common share - diluted was $0.44 and $0.42 for the
first six months of 1998 and 1997, respectively.
The $32,000 or 6% growth in net income for the first six months of 1998 compared
to the first six months of 1997 reflected strong growth in net interest income
which was partially offset by increases in noninterest expenses and a decrease
in noninterest income. Net interest income increased $379,000 or 14% in the 1998
period principally due to strong growth in average interest-earning assets.
Noninterest expenses increased $266,000 or 11%, largely due to higher salaries
and employee benefits associated with staff growth in the Bank. Noninterest
income dropped $69,000 or 12% between the two periods principally due to the
1997 recovery of $149,000 in loan collection expenses.
Total assets reached $128,993,000 at June 30, 1998, representing a $12,624,000
or 11% increase from December 31, 1997. Total deposits of $116,080,000 at June
30, 1998 grew $14,945,000 or 15% from year-end 1997 while federal funds
purchased dropped $2,500,000 or 100%. Funds from the deposit growth and from
securities which matured or were called during the period were principally
invested in cash and cash equivalents and in loans. Cash and cash equivalents
increased $12,783,000 or 169% and loans increased $6,222,000 or 8% during the
first six months of 1998.
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 $3,185,000 for the first six months of 1998 increased
$379,000 or 14% compared to the first six months of 1997. The increase reflected
a $16,937,000 or 18% growth in average interest-earning assets. The net yield on
average earning assets declined to 5.91% for the 1998 period from 6.16% for the
1997 period.
The increase in average interest-earning assets between the 1998 and 1997
periods was principally due to growth of $8,674,000 or 12% in average
interest-earning loans, $5,567,000 or 31% in average total securities and
$2,696,000 or 63% in federal funds sold and reverse repurchase agreements.
Despite the strong loan growth, the ratio of average interest-earning loans to
average interest-earning assets dropped to 72% for the 1998 period compared to
76% for the 1997 period. The larger proportion of interest-earning assets
invested in short term securities reduced the yield on interest-earning assets
to 8.98% for the 1998 period compared to 9.16% for the 1997 period.
Average interest-bearing liabilities increased $12,828,000 or 20% between the
1998 and 1997 periods. The average rate paid for interest-bearing liabilities
increased to 4.33% for the 1998 period compared to 4.28% for the 1997 period.
The higher average rate paid during the 1998 period principally reflected an
increase in money market deposit rates. The ratio of time deposits to average
total interest-bearing liabilities declined to 56% for the 1998 period compared
to 59% for the 1997 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), 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 June 30, 1998. 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
<PAGE>
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
3 Over Over 1
As of June 30, 1998: months 3 months year to Over 5
(Dollars in thousands) or less to 1 year 5 years years Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate sensitive assets:
Loans (excluding nonaccrual) ................... $ 56,446 $ 1,973 $ 8,532 $ 13,718 $ 80,669
Securities (before unrealized gain(loss)
on securities available for sale) ............ 12,085 1,171 5,276 7,318 25,850
Federal funds sold and reverse
repurchase agreements ........................ 6,900 --- --- --- 6,900
- --------------------------------------------------------------------------------------------------------------
Total ........................................ 75,431 3,144 13,808 21,036 113,419
- --------------------------------------------------------------------------------------------------------------
Interest rate sensitive liabilities:
Interest-bearing transaction accounts .......... 30,552 --- --- --- 30,552
Savings deposits ............................... 6,937 --- --- --- 6,937
Time deposits, $100 and over ................... 18,095 7,842 1,109 100 27,146
Other time deposits ............................ 10,201 5,877 1,757 1 17,836
Other borrowed funds ........................... 243 1,074 --- --- 1,317
- --------------------------------------------------------------------------------------------------------------
Total ........................................ 66,028 14,793 2,866 101 83,788
- --------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap .................... 9,403 (11,649) 10,942 20,935 $ 29,631
- --------------------------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap ................................ $ 9,403 $ (2,246) $ 8,696 $ 29,631
==============================================================================================================
Cumulative interest rate
sensitivity gap to total assets ................. 7.3% (1.7%) 6.7% 23.0%
</TABLE>
This table presents a static gap, which is a position at a point in time. It
does not address the interest rate sensitivity of assets or liabilities which
would be added through growth, nor does it anticipate the future interest rate
sensitivity of assets and liabilities once they have repriced, and it assumes
equivalent elasticity of assets and liabilities. The interest rate sensitivity
analysis at June 30, 1998, indicates that the Company, on a cumulative gap
basis, is liability sensitive for the period "Over 3 months to 1 year" and asset
sensitive over the remaining 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.
<PAGE>
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.
As of June 30, 1998, the allowance for loan losses was $900,000 compared to
$1,000,000 at December 31, 1997. The reduction principally reflected net
charge-offs totaling $169,000, partially offset by a $69,000 provision for loan
losses. The ratio of the allowance for loan losses to total loans was 1.1% at
June 30, 1998 and 1.3% at December 31, 1997. A $69,000 provision for loan losses
was added during the first six months of 1998 compared to a $47,000 provision
during the same period in 1997. 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
June 30, 1998 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 for the periods ended June 30, 1998 and 1997
and the year ended December 31, 1997 is summarized in the following table.
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, December 31, June 30,
1998 1997 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loan charge-offs .............................. $169 $ 23 $ 18
Ratio of net loan charge-offs to average loans .... 0.2% -- --
Nonperforming loans:
Nonaccrual ...................................... $231 $440 $359
Accruing loans past due 90 days or more ......... -- -- 223
Restructured .................................... 469 471 --
- ------------------------------------------------------------------------------------
Total nonperforming loans ...................... $700 $911 $582
====================================================================================
Ratio of nonperforming loans to total loans ....... 0.9% 1.2% 0.8%
Ratio of allowance for loan losses to nonperforming
loans ........................................... 129% 110% 172%
</TABLE>
Total Bank nonperforming loans dropped $211,000 during the 1998 period
principally due to the charge-off of $163,000 in nonaccruing loan balances. Of
the current nonperforming balance, $231,000 represents loans guaranteed by the
Small Business Administration ("SBA loans") while the $469,000 restructured loan
balance consists of one loan which is fully secured by real estate and is paying
as agreed.
NONINTEREST INCOME
The most significant change in noninterest income between the first six month
periods of 1998 and 1997 was a $162,000 or 84% decrease in other noninterest
income. The largest contribution
<PAGE>
to higher noninterest income for the first six months of 1997 was a $149,000
recovery of loan collection expenses from previous years. Loan servicing income
also declined, $13,000 or 21% for the 1998 period compared to the 1997 period,
due to SBA loan payoffs between the periods. Partially offsetting the decreases
in noninterest income were increases of $60,000 or 41% in bankcard income,
$31,000 or 54% from gain on sale of loans and $15,000 or 11% in service charges
and fees. The increase in bankcard income reflected an increase in merchant
bankcard activity between the 1998 and 1997 periods. The larger gain on sale of
loans for the 1998 period was due to a larger volume of loans sold compared to
the 1997 period.
NONINTEREST EXPENSES
Total noninterest expenses of $2,778,000 for the first six months of 1998
increased $266,000 or 11% compared to the first six months of 1997, including a
$140,000 or 10% increase in salaries and employee benefits related principally
to increased staffing. Other areas of noninterest expenses exhibiting
significant increases included bankcard processing expense, up $58,000 or 50%,
other noninterest expenses, up $54,000 or 13%, and data processing expense, up
$19,000 or 12%, compared to the 1997 period. As with the increase in bankcard
income, the increase in bankcard expense was due to a higher volume of merchant
bankcard activity during the 1998 period. The increase in other noninterest
expenses included check fraud losses and increased expenses associated with
business development. Higher data processing costs reflected the account growth
between the quarters.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $301,000 for the first half of 1998
compared to $311,000 for the first half of 1997. The $10,000 or 3% decrease in
income tax expense reflected reduced taxable income for the 1998 period. The
effective income tax rates were 35% and 37% for the 1998 and 1997 periods,
respectively. The lower rate for the 1998 period reflects higher levels of tax
exempt income from municipal securities and loan interest exempt from state tax.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1997
OVERVIEW
Net income for the Company for the second quarter of 1998 was $303,000 compared
to $343,000 for the second quarter of 1997. Net income per common share - basic
was $0.28 and $0.32 for the second quarter of 1998 and 1997, respectively. Net
income per common share - diluted was $0.24 and $0.27 for the second quarter
of 1998 and 1997, respectively.
The $40,000 or 12% decrease in net income between the 1998 and 1997 quarters
principally resulted from a $131,000 or 10% increase in noninterest expenses and
a $123,000 or 31% decrease in noninterest income, which were partially offset by
a $198,000 or 14% increase in net interest income and a $28,000 or 14% decrease
in income tax expense. The largest contributions to higher noninterest expenses
included increases of $55,000 or 8% in salaries and employee benefits expenses
and $31,000 or 48% in bankcard processing expense. The decline in other
<PAGE>
income for the 1998 quarter was principally due to a 1997 recovery of $149,000
in loan collection expenses.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income of $1,648,000 for the second quarter of 1998 increased
$198,000 or 14% compared to the second quarter of 1997. The increase principally
reflected $19,698,000 or 21% growth in average earning assets between the
quarters. The net interest margin declined to 5.82% for the 1998 quarter from
6.20% for the 1997 quarter.
The growth in average interest-earning assets between the 1998 and 1997 quarters
was due to increases of $10,380,000 or 15% in average earning loans, $4,111,000
or 21% in average total securities and $5,207,000 or 110% in average federal
funds sold and reverse repurchase agreements between the quarters. A larger
proportion of earning assets was invested in lower yielding short-term
securities during the 1998 quarter, which was the principal factor in the drop
in the yield on average earning assets to 8.88% from 9.19% for the 1997 quarter.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
As a result of growth in loans held for investment and net loan charge-offs
during the 1998 quarter, a $59,000 provision for loan losses was added to the
reserve for loan losses during the 1998 quarter compared to a $47,000 provision
for loan losses made during the second quarter of 1997.
NONINTEREST INCOME
Total noninterest income of $272,000 for the second quarter of 1998 decreased
$123,000 or 31% compared to the second quarter of 1997. The largest change was a
$164,000 or 98% decrease in other noninterest income, principally reflecting the
1997 recovery of $149,000 of loan collection expenses from prior periods.
Partially offsetting the decreased income was a $30,000 or 38% increase in
bankcard income associated with growth in merchant bankcard activity.
NONINTEREST EXPENSES
Total noninterest expenses of $1,391,000 for the second quarter of 1998
increased $131,000 or 10% compared to the same quarter in 1997. Salaries and
employees benefits increased $55,000 or 8% principally due to staff additions.
A $31,000 or 48% rise in bankcard expenses reflected the increase in merchant
bankcard account activity. Other noninterest expenses rose $ $27,000 or 14%,
primarily due to increases in business development expenses and operational
costs associated with the increase in the Bank's asset size. Higher data
processing costs, $11,000 or 14% above the 1997 quarter, also reflected the
Bank's strong asset growth between the quarters.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $167,000 for the second quarter of 1998
compared to $195,000 for the second quarter of 1997. The reduced income tax
expense reflected the decline in taxable income for the 1998 quarter. The
effective income tax rate was 36% for both quarters.
<PAGE>
FINANCIAL CONDITION
LOANS AND INVESTMENTS
Cash and cash equivalents of $20,331,000 at June 30, 1998 increased $12,783,000
or 169% from year-end 1997. Total loans of $80,351,000 grew $6,222,000 or 8%
during the same period. The funding for these increases came from a $14,945,000
or 15% increase in deposits and a $6,704,000 or 21% decline in securities
balances during the first six months of 1998. The drop in securities balances
reflected maturities and calls during the period.
DEPOSITS AND OTHER BORROWED FUNDS
The $14,945,000 or 15% deposit growth since December 31, 1997 principally
reflected increases of $8,287,000 or 28% in savings and interest-bearing demand,
$4,533,000 or 16% in noninterest-bearing demand and $2,591,000 or 20% in
certificates of deposit of $100,000 or more. Federal funds purchased dropped
$2,500,000 from December 31, 1997.
OTHER ASSETS AND OTHER LIABILITIES
A $44,000 or 10% decrease in other assets was principally due to receipt of
accrued receivables and a decline in prepaid expenses. Interest payable and
other liabilities at June 30, 1998, dropped $374,000 or 29% from year-end 1997
principally due to the payment in 1998 of a cash dividend declared in 1997.
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 and
reverse repurchase agreements, all marketable securities with maturities of one
year or less, securities available for sale with maturities beyond one year, 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 June 30, 1998 and 32% at December 31, 1997. 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, to meet unforeseen outflows, the Bank has informal, non-binding,
federal funds borrowing arrangements totaling $8,500,000 with two correspondent
banks and a repurchase facility. As of June 30, 1998, no borrowed funds were
outstanding from these credit facilities.
<PAGE>
CAPITAL
The following tables present the Company's and the Bank's regulatory capital
positions at June 30, 1998, and average assets over the three month period ended
June 30, 1998:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital ....................... $ 10,573 10.2% $ 10,118 9.8%
Tier 1 Capital minimum requirement.... 4,149 4.0 4,144 4.0
- ------------------------------------------------------------------------------
Excess ............................... $ 6,424 6.2% $ 5,974 5.8%
Total Capital ........................ $ 11,473 11.1% $ 11,018 10.6%
Total Capital minimum requirement..... 8,298 8.0 8,288 8.0
- ------------------------------------------------------------------------------
Excess ............................... $ 3,175 3.1% $ 2,730 2.6%
Risk weighted assets............. $103,727 $103,605
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital to average total assets $ 10,573 8.6% $ 10,118 8.2%
Range of minimum leverage ............ 3,707- 3.0- 3,703- 3.0-
requirement ........................ 6,178 5.0% 6,172 5.0%
- ------------------------------------------------------------------------------
Range of excess ...................... 4,395- 3.6- 3,946- 3.2-
$ 6,866 5.6% $ 6,415 5.2%
Average total assets for second quarter* $123,555 $123,433
<FN>
(* Average total assets do not include unrealized gains/losses on securities
available for sale or excess servicing.)
</FN>
</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.
YEAR 2000 or Y2K issue
Many computer hardware systems and software programs in use today were developed
using a two digit date code to specify the year. As a result, some of these
systems and programs will not properly recognize the date transition at the year
2000 and may calculate results as if it were the year 1900, or in a manner that
may cause erroneous results.
The Company has adopted a plan to address Y2K issues. The plan includes a review
of the Bank's information systems, outside vendors, suppliers and large
customers. The plan provides for the inventory, analysis, modification, testing
and certification, and implementation, of hardware and software systems both
internal and external.
<PAGE>
Primary information systems with known Y2K issues have been identified and are
being remediated or replaced, with testing and certification scheduled for 1998
and early 1999.
The Bank relies upon third-party software vendors and service providers for
substantially all of its electronic data processing and does not operate any
proprietary programs which are critical to the Bank's operations. Therefore, the
primary focus of the Company is to monitor the progress of its primary vendors
toward compliance with Y2K issues and prepare to test and certify them.
No Y2K compliance issues have been identified yet which appear unresolvable by
December 31, 1999, however, in the event of a year 2000 failure or erroneous
results, the Company could be adversely impacted in a number of ways.
Other significant risks relating to Y2K issues are that of the unknown impact of
this problem on the operations of the Bank's customers. The Bank is making
efforts to ensure that its customer base is aware of the Y2K issue with
informational mailings to all commercial accounts. The Bank is also modifying
its credit review process to include consideration of Y2K issues. It is not
possible, however, to predict the effect of this problem on the economic
viability of its customer base and the related adverse impact it may have on the
Company's financial position and results of operations.
The primary cost of the Company's Y2K project has been and will continue to be
the reallocation of internal resources, and as such does not represent
incremental expense to the Company. The estimated value of internal resources
allocated to Y2K issues to date is under $10,000. The Company estimates the
total of such cost not to exceed $50,000. It is not expected that Y2K compliance
expenditures will have a material effect on the Company's results of operations.
INFLATION
It is Management's opinion that the effects of inflation on the consolidated
financial statements for the periods ended June 30, 1998 and 1997 have not been
material.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Security Holders.
(a) The Company's Annual Meeting of Shareholders was held on June 9, 1998.
(b) Not required.
(c) At the 1998 Annual Meeting the shareholders took the following
actions:
1. Elected Directors of the Company to serve until the 1999
Annual Meeting of Shareholders and until their successors are
elected and qualified;
2. Readopted 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;
3. Ratified the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for the 1998 fiscal
year.
(i) In the election of directors, no candidates were nominated for
election as a director other than the nominees of the Board of
Directors whose names were set forth in the Company's proxy
statement dated April 30, 1998. Set forth below is a
tabulation of the votes cast in the election of Directors with
respect to each nominee for office.
<TABLE>
<CAPTION>
VOTES CAST FOR ELECTION VOTES WITHHELD
<S> <C> <C>
Joshua Fong, O.D .. 869,275 4,817
William R. Henson . 869,275 4,817
Richard M. Kahler . 823,731 50,361
Dimitri V. Koroslev 823,731 50,361
William E. Peluso . 868,897 5,195
Oswald A. Rugaard . 869,275 4,817
Mark A. Wilton .... 823,731 50,361
Abstentions ....... N/A N/A
Broker non-votes .. N/A N/A
</TABLE>
<PAGE>
(ii) In the matter of the readoption of Article EIGHTH the votes
cast were as follows:,
For 760,556
Against 52,717
Abstentions 12,036
Broker non-votes 48,783
(iii)In the matter of the ratification of the appointment of
Deloitte & Touche LLP as independent public accountants for
the 1998 fiscal year the votes cast were as follows:
For 859,653
Against 354
Abstentions 14,085
Broker non-votes -0-
(d) Not required.
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company for the quarter
ended June 30, 1998.
<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: August 3, 1998 /s/ R. M. Kahler
----------------
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 3, 1998 /s/ R. D. Greenfield
--------------------
R. D. Greenfield
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BAY COMMERCIAL SERVICES SECOND QUARTER 1998 10QSB AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,431
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,544
<INVESTMENTS-CARRYING> 25,850
<INVESTMENTS-MARKET> 26,009
<LOANS> 80,351
<ALLOWANCE> 900
<TOTAL-ASSETS> 128,993
<DEPOSITS> 116,080
<SHORT-TERM> 1,317
<LIABILITIES-OTHER> 897
<LONG-TERM> 0
<COMMON> 3,616
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 128,993
<INTEREST-LOAN> 3,971
<INTEREST-INVEST> 679
<INTEREST-OTHER> 193
<INTEREST-TOTAL> 4,843
<INTEREST-DEPOSIT> 1,624
<INTEREST-EXPENSE> 1,658
<INTEREST-INCOME-NET> 3,185
<LOAN-LOSSES> 69
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,778
<INCOME-PRETAX> 858
<INCOME-PRE-EXTRAORDINARY> 858
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 557
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 5.91
<LOANS-NON> 231
<LOANS-PAST> 0
<LOANS-TROUBLED> 469
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1000
<CHARGE-OFFS> 169
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 900
<ALLOWANCE-DOMESTIC> 900
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 90
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,295
<INT-BEARING-DEPOSITS> 64,934
<FED-FUNDS-SOLD> 1,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,473
<INVESTMENTS-CARRYING> 23,275
<INVESTMENTS-MARKET> 23,273
<LOANS> 71,474
<ALLOWANCE> 1,000
<TOTAL-ASSETS> 106,822
<DEPOSITS> 94,271
<SHORT-TERM> 1,730
<LIABILITIES-OTHER> 895
<LONG-TERM> 0
<COMMON> 3,662
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 106,822
<INTEREST-LOAN> 3,526
<INTEREST-INVEST> 505
<INTEREST-OTHER> 140
<INTEREST-TOTAL> 4,171
<INTEREST-DEPOSIT> 1,315
<INTEREST-EXPENSE> 1,365
<INTEREST-INCOME-NET> 2,806
<LOAN-LOSSES> 47
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,512
<INCOME-PRETAX> 836
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 525
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 6.16
<LOANS-NON> 359
<LOANS-PAST> 223
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 971
<CHARGE-OFFS> 20
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1000
<ALLOWANCE-DOMESTIC> 1000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 414
</TABLE>
