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 March 31, 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 SERVICES
(Exact name of small business issuer as specified in its charter)
California 94-2760444
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(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 April 30, 1998
- ----- -----------------------------
Common stock, no par value 1,080,720 shares
Transitional Small Business Disclosure Format
YES NO X
---- ----
This report contains a total of 15 pages.
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Balance Sheets
<CAPTION>
March 31,
1998 December 31,
(Dollars in thousands): .....................................................(unaudited) 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ..................................................... $ 14,150 $ 7,548
Federal funds sold and reverse repurchase agreements ........................ 8,400 ---
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents ................................................. 22,550 7,548
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Securities available for sale, stated at fair value
(amortized cost of $11,469 for 1998; $24,663 for 1997) .................... 11,482 24,651
Securities held to maturity (fair values of $8,094 for 1998;
$8,057 for 1997) ......................................................... 8,003 7,929
Loans held for sale ......................................................... 1,002 1,501
Loans held for investment ................................................... 78,713 72,628
Allowance for loan losses ................................................. (1,005) (1,000)
- -----------------------------------------------------------------------------------------------------
Net loans ................................................................. 78,710 73,129
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Premises and equipment, net ................................................. 2,063 2,111
Interest and fees receivable ................................................ 682 566
Other assets ................................................................ 370 435
- -----------------------------------------------------------------------------------------------------
Total assets .............................................................. $ 123,860 $ 116,369
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand ................................................ $ 35,098 $ 29,076
Savings and interest-bearing demand ....................................... 32,741 29,203
Time ...................................................................... 29,892 30,022
Certificates of deposit, $100 and over .................................... 13,571 12,834
- -----------------------------------------------------------------------------------------------------
Total deposits ............................................................ 111,302 101,135
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Securities sold under agreements to repurchase .............................. 1,192 1,290
Federal funds purchased ..................................................... --- 2,500
Interest payable and other liabilities ...................................... 916 1,271
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Total liabilities ......................................................... 113,410 106,196
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Commitments and contingent liabilities ...................................... --- ---
Shareholders' equity:
Common stock - no par value: authorized 20,000,000 shares;
issued & outstanding 1,080,720 in 1998; 1,078,720 in 1997 ................ 3,680 3,671
Retained earnings ......................................................... 6,763 6,509
Net unrealized gain (loss) on securities available for sale, net of taxes . 7 (7)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity ................................................ 10,450 10,173
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Total liabilities and shareholders' equity ................................ $ 123,860 $ 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>
Three Months Ended
March 31,
(Dollars in thousands, except per share amounts): .... 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans, including fees .............................. $1,935 $1,731
Federal funds sold and reverse repurchase agreements 55 48
Securities:
Taxable .......................................... 279 197
Tax exempt ....................................... 60 45
- ------------------------------------------------------------------------------
Total interest income .......................... 2,329 2,021
- ------------------------------------------------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing demand .............. 204 154
Time ............................................. 386 365
Certificates of deposit, $100 and over ........... 184 118
Other borrowed funds ............................... 18 28
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Total interest expense ......................... 792 665
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Net interest income ............................ 1,537 1,356
Provision for loan losses ............................ 10 ---
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Net interest income after
provision for loan losses .................... 1,527 1,356
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Noninterest income:
Bankcard income .................................... 96 66
Service charges and fees ........................... 68 68
Gain on sale of loans .............................. 33 ---
Loan servicing ..................................... 24 35
Other .............................................. 27 25
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Total noninterest income ....................... 248 194
- ------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits ..................... 793 708
Occupancy .......................................... 170 174
Data processing .................................... 85 77
Bankcard processing expense ........................ 79 52
Professional services .............................. 28 36
Other .............................................. 232 205
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Total noninterest expenses ..................... 1,387 1,252
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Income before income tax expense ............... 388 298
Income tax expense ................................... 134 116
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Net income ..................................... $ 254 $ 182
==============================================================================
Net income per common share - basic ............ $0.24 $0.17
Weighted average common shares - basic ......... 1,079,653 1,076,720
Net income per common share - diluted .......... $0.20 $0.15
Weighted average common shares - diluted ....... 1,279,707 1,244,652
==============================================================================
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
<CAPTION>
Three Months Ended
March 31,
(Dollars in thousands): ....................................... 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 254 $ 182
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ........................... (4) 74
Provision (benefit) for loan losses ..................... 10 ---
Unamortized deferred loan fees, net ..................... (62) (27)
Originations of SBA loans held for sale ................. (158) (146)
Proceeds from the sale of SBA loans held for sale ....... 734 ---
Change in interest and fees receivable and other assets . (48) (3)
Change in interest payable and other liabilities ........ (37) (65)
- ----------------------------------------------------------------------------------
Net cash provided by operating activities ................. 689 15
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Cash flows from investing activities:
Proceeds from maturities of securities available for sale ... 17,244 97
Proceeds from maturities of securities held to maturity ..... 71 160
Purchase of securities available for sale ................... (3,975) ---
Purchase of securities held to maturity ..................... (144) (205)
Net change in loans ......................................... (6,113) 936
Purchases of premises and equipment ......................... (24) (157)
- ----------------------------------------------------------------------------------
Net cash provided by investing activities ................. 7,059 831
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Cash flows from financing activities:
Net change in deposits ...................................... 10,167 5,676
Net change in securities sold under agreements to repurchase (98) (98)
Net change in federal funds purchased ....................... (2,500) (500)
Exercise of stock options ................................... 9 --
Cash dividends paid ......................................... (324) (323)
- ----------------------------------------------------------------------------------
Net cash provided by financing activities ................. 7,254 4,755
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Net change in cash and cash equivalents ................... 15,002 5,601
Cash and cash equivalents at beginning of year ................ 7,548 6,945
- ----------------------------------------------------------------------------------
Cash and cash equivalents at end of year ...................... $22,550 $12,546
==================================================================================
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest ................................................. $676 $655
Income taxes ............................................. --- ---
See accompanying notes to consolidated 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 Bay
Commercial Services and Subsidiary (the "Company") financial position at
March 31, 1998 and December 31, 1997 and the results of its operations
and its cash flows for the three month periods ended March 31, 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 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 month periods ended
March 31, 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 month periods ended March 31, 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 month periods ended March 31, 1998 and 1997 was 1,079,653
and 1,076,720, respectively. The weighted average number of outstanding
common shares including the dilutive effect of stock options for the
three month periods ended March 31, 1998 and 1997 was 1,279,707 and
1,244,652, 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 39% for the three month periods ended March 31, 1998 and
1997, respectively. The decrease in the tax rate was partially
attributable to higher levels in the 1998 period of tax exempt municipal
bond income and loan interest exempt from state tax.
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 $268,000 and $138,000 for the
first quarters of 1998 and 1997, respectively.
<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
March 31, (Decrease)
(Dollars in thousands): 1998 1997 $ %
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Balances:
Assets * ............................. $114,300 $99,507 $14,793 14.9%
Securities - taxable* ................ 18,359 12,565 5,794 46.1
Securities - tax exempt .............. 4,671 3,426 1,245 36.3
Total loans .......................... 77,355 70,234 7,121 10.1
Nonaccrual loans ..................... 433 261 172 65.9
Deposits ............................. 101,547 86,735 14,812 17.1
Shareholders' equity * ............... 10,340 9,561 779 8.1
Interest-earning assets .............. 103,965 89,821 14,144 15.7
Interest-bearing liabilities ......... 74,057 63,259 10,798 17.1
Income Statements:
Interest income (1) .................. $ 2,357 $ 2,042 $ 315 15.4%
Interest expense ..................... 792 665 127 19.1
- -------------------------------------------------------------------------------
Net interest income (1) ............ 1,565 1,377 188 13.7
Taxable equivalent adjustment ........ 28 21 7 33.3
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Net interest income ................ 1,537 1,356 181 13.3
Provision for loan losses ............ 10 -- 10
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Net interest income after provision
for loan losses .................. 1,527 1,356 171 12.6
- -------------------------------------------------------------------------------
Noninterest income ................... 248 194 54 27.8
Noninterest expenses ................. 1,387 1,252 135 10.8
Income tax expense ................... 134 116 18 15.5
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Net income ......................... $ 254 $ 182 $ 72 39.6%
===============================================================================
<FN>
* before unrealized gain or loss on securities available for sale
</FN>
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Performance Ratios: (2) Change
------
Yield on average earning assets .......... 9.09% 9.13% (0.04)%
Yield on average earning assets (1) ...... 9.19% 9.22% (0.03)%
Interest rate on average interest-bearing
liabilities .......................... 4.34% 4.26% 0.08 %
Interest expense as a percent of average
earning assets ....................... 3.09% 3.00% 0.09 %
Net yield on average earning assets ...... 6.00% 6.13% (0.13)%
Net yield on average earning assets (1) .. 6.10% 6.22% (0.12)%
<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
Three months ended March 31, 1998 compared to
three months ended March 31, 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 $254,000 for the first quarter of 1998 compared to
$182,000 for the first quarter of 1997. Net income per common share - basic was
$0.24 and $0.17 for the first quarter of 1998 and 1997, respectively. Net income
per common share - diluted was $0.20 and $0.15 for the first quarter of 1998 and
1997, respectively.
The $72,000 or 40% growth in net income for the first quarter of 1998 compared
to the first quarter of 1997 principally reflected higher net interest income
and noninterest income during the 1998 quarter which were partially offset by
increases in noninterest expenses, income tax expense and provision for loan
losses. Net interest income increased $181,000 or 13% in the 1998 quarter
principally due to growth in average interest-earning assets which was partially
offset by a decline in the net yield on those assets. Noninterest income rose
$54,000 or 28% in the 1998 quarter due to a gain on sale of loans guaranteed by
the Small Business Administration ("SBA loans") and increased merchant bankcard
activity. These increases in income were partially offset by increases of
$135,000 or 11% in noninterest expenses, $18,000 or 16% in income tax expense
and a $10,000 provision for loan losses during the 1998 quarter. The largest
factor contributing to the higher noninterest expenses during the 1998 quarter
was an $85,000 or 12% increase in salaries and employee benefits, which
primarily reflected staff growth in the Bank.
Total assets reached $123,860,000 at March 31, 1998, representing a $7,491,000
or 6% increase from December 31, 1997. Total deposits of $111,302,000 at March
31, 1998 grew $10,167,000 or 10% from year-end 1997 while federal funds
purchased decreased $2,500,000 or 100%. Funds from the deposit growth and
$12,995,000 received as securities matured during the quarter were principally
invested in cash and cash equivalents and in loans. Cash and cash equivalents
<PAGE>
increased $15,002,000 or 199% and loans increased $5,586,000 or 8% during the
first quarter 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 $1,537,000 for the first quarter of 1998 increased
$181,000 or 13% compared to the first quarter of 1997. The increase reflected a
$14,144,000 or 16% growth in average interest-earning assets. The net yield on
average earning assets declined to 6.00% for the 1998 quarter from 6.13% for the
1997 quarter.
The increase in average interest-earning assets between the 1998 and 1997
quarters was principally due to growth of $7,039,000 or 44% in average total
securities and $6,949,000 or 10% in average earning loans. The average yield on
interest-earning assets for the first quarter of 1998 declined to 9.09% compared
to 9.13% for the 1997 quarter due to increased investment in short-term
securities. The average yield on earning loans for the 1998 quarter increased to
10.20% from 10.03% for the 1997 quarter, however the ratio of loans to
interest-earning assets for the 1998 quarter dropped to 74% from 78% for the
1997 quarter.
Average interest-bearing liabilities increased $10,798,000 or 17% between the
1998 and 1997 quarters. The average rate paid for interest-bearing liabilities
increased to 4.34% for the 1998 quarter compared to 4.26% for the 1997 quarter.
The higher average rate paid during the 1998 quarter principally reflected an
increase in money market deposit rates. The ratio of time deposits to average
total interest-bearing liabilities remained at 59% for both quarters.
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 March 31, 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 March 31, 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) ........ $56,593 $ 3,074 $ 7,761 $12,395 $ 79,823
Securities (before unrealized loss on
securities available for sale...... 3,697 1,303 4,730 9,742 19,472
Federal funds sold and reverse
repurchase agreements ............. 8,400 -- -- -- 8,400
- ----------------------------------------------------------------------------------------------
Total ............................. 68,690 4,377 12,491 22,137 107,695
- ----------------------------------------------------------------------------------------------
Interest rate sensitive liabilities:
Interest-bearing transaction accounts 26,145 -- -- -- 26,145
Savings deposits .................... 6,595 -- -- -- 6,595
Time deposits, $100 and over ........ 19,748 4,150 1,309 100 25,307
Other time deposits ................. 11,603 4,675 1,877 1 18,156
Other borrowed funds ................ 1,192 -- -- -- 1,192
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Total ............................. 65,283 8,825 3,186 101 77,395
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Interest rate sensitivity gap ......... $ 3,407 $(4,448) $ 9,305 $22,036 $ 30,300
- ----------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap ..................... $ 3,407 $(1,041) $ 8,264 $30,300
- ----------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap to total assets ...... 2.8% (0.8)% 6.7% 24.5%
</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 March 31, 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 March 31, 1998, the allowance for loan losses was $1,005,000 compared to
$1,000,000 at December 31, 1997. The ratio of the allowance for loan losses to
total loans was 1.3% at March 31, 1998 and December 31, 1997. A $10,000
provision for loan losses was added during the first three months of 1998 while
no provision for loan losses was made during the first three months of 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 March 31, 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 quarters ended March 31, 1998 and
1997 and the year ended December 31, 1997 is summarized in the following table.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(Dollars in thousands) 1998 1997 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loan charge-offs .............................. $ 5 $ 23 $ 17
Ratio of net loan charge-offs to average loans .... --- --- ---
Nonperforming loans:
Nonaccrual ...................................... $ 395 $ 440 $ 384
Accruing loans past due 90 days or more ......... 299 --- 224
Restructured .................................... 469 471 ---
- --------------------------------------------------------------------------------------
Total nonperforming loans ...................... $1,163 $ 911 $ 608
- --------------------------------------------------------------------------------------
Ratio of nonperforming loans to total loans ....... 1.5% 1.2% 0.9%
Ratio of allowance for loan losses to nonperforming
loans ........................................... 86% 110% 157%
</TABLE>
Total Bank nonperforming loans increased during the 1998 quarter by $252,000
primarily due to the addition of two loans in the amount of $299,000 in the
"Accruing loans past due 90 days or more" category. Subsequent to the end of the
first quarter of 1998 these loans were performing in accordance with their
terms.
NONINTEREST INCOME
The most significant changes in noninterest income between the first quarters of
1998 and 1997 came from a gain on sale of loans in the 1998 quarter and higher
bankcard income. A sale of SBA loans during the first quarter of 1998 produced a
gain of $33,000. There were no loan sales
<PAGE>
during the same quarter of 1997. A higher volume of merchant bankcard
activity during the 1998 quarter resulted in a $30,000 or 46% increase in
bankcard income compared to the first quarter of 1997. These increases in
income were partially offset by a decrease of $11,000 or 31% in loan servicing
income for the 1998 quarter, principally due to SBA loan payoffs between
the periods.
NONINTEREST EXPENSES
Total noninterest expenses of $1,387,000 for the first quarter of 1998 increased
$135,000 or 11% compared to the first quarter of 1997, including an $85,000 or
12% increase in salaries and employee benefits related principally to increased
staffing. Other areas of noninterest expenses exhibiting significant increases
included bankcard processing expense, up $27,000 or 52%, and other noninterest
expenses, up $27,000 or 13% compared to the first quarter of 1997. 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 quarter. The
increase in other noninterest expenses included losses on customer deposit
accounts and several smaller increases in areas of business development and
customer services.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $134,000 for the first quarter of 1998
compared to $116,000 for the first quarter of 1997. The $18,000 or 16% increase
in income tax expense reflected higher taxable income for the 1998 quarter. The
effective income tax rates were 35% and 39% for the 1998 and 1997 quarters,
respectively. The lower rate for the 1998 quarter reflects higher levels of tax
exempt income from municipal securities and loan interest exempt from state tax.
FINANCIAL CONDITION
LOANS AND INVESTMENTS
Cash and cash equivalents of $22,550,000 at March 31, 1998 increased $15,002,000
or 199% from year-end 1997, reflecting both the deposit growth and a $13,095,000
or 40% decline in securities balances during the first quarter of 1998. The drop
in securities balances reflected maturities and calls during the first three
months of 1998. Total loans of $79,715,000 at March 31, 1998 increased
$5,586,000 or 8% from December 31, 1997.
DEPOSITS AND OTHER BORROWED FUNDS
Reflecting the strong economy, total deposits of $111,302,000 at March 31, 1998
increased $10,167,000 or 10% compared to December 31, 1997. Noninterest-bearing
demand deposits experienced strong growth during the quarter, up $6,022,000 or
21%. Savings and interest-bearing demand deposits increased $3,538,000 or 12%
and federal funds purchased dropped $2,500,000 from December 31, 1997. Other
assets and other liabilities Interest and fees receivable at March 31, 1998
increased $116,000 or 20% from year-end 1997, principally reflecting the
increase in interest-earning assets during the quarter. A $65,000 or 15%
<PAGE>
decrease in other assets was principally due to receipt of accrued receivables
and a decline in prepaid expenses. Interest payable and other liabilities at
March 31, 1998, dropped $355,000 or 28% 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 31% at March 31, 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, the Bank has informal, non-binding, federal funds borrowing
arrangements totaling $6,000,000 with a correspondent bank and also has a
repurchase facility to meet unforeseen outflows. As of March 31, 1998, 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 March 31, 1998, and average assets over the three month period
ended March 31, 1998:
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital ................... $10,336 10.6% $10,154 10.4%
Tier 1 Capital minimum requirement 3,892 4.0 3,887 4.0
- ----------------------------------------------------------------------------
Excess ........................... $ 6,444 6.6% $ 6,267 6.4%
Total Capital .................... $11,341 11.7% $11,159 11.5%
Total Capital minimum requirement 7,784 8.0 7,774 8.0
- ----------------------------------------------------------------------------
Excess ........................... $ 3,557 3.7% $ 3,385 3.5%
Risk weighted assets $97,296 $97,176
</TABLE>
<PAGE>
<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 $10,336 9.1% $10,154 8.9%
Range of minimum leverage ............ 3,426- 3.0- 3,422- 3.0-
requirement ........................ 5,710 5.0% 5,704 5.0%
- ----------------------------------------------------------------------------
Range of excess ...................... 4,626- 4.1- 4,450- 3.9-
$ 6,910 6.1% $ 6,732 5.9%
Average total assets for first quarter* $114,197 $114,075
</TABLE>
(* Average total assets do not include unrealized gains/losses on securities
available for sale or excess servicing.)
The Company currently does not have any material commitments for capital
expenditures, and in the opinion of Management, the Company's and the Bank's
capital positions are sufficient to meet their respective needs.
INFLATION
It is Management's opinion that the effects of inflation on the consolidated
financial statements for the periods ended March 31, 1998 and 1997 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
March 31, 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: May 4, 1998 /s/ R. M. Kahler
-------------------
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 4, 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 FIRST QUARTER 1998 10QSB AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,150
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,482
<INVESTMENTS-CARRYING> 19,472
<INVESTMENTS-MARKET> 19,576
<LOANS> 79,715
<ALLOWANCE> 1,005
<TOTAL-ASSETS> 123,860
<DEPOSITS> 111,302
<SHORT-TERM> 1,192
<LIABILITIES-OTHER> 916
<LONG-TERM> 0
<COMMON> 3,680
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 123,860
<INTEREST-LOAN> 1,935
<INTEREST-INVEST> 339
<INTEREST-OTHER> 55
<INTEREST-TOTAL> 2,329
<INTEREST-DEPOSIT> 774
<INTEREST-EXPENSE> 792
<INTEREST-INCOME-NET> 1,537
<LOAN-LOSSES> 10
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,387
<INCOME-PRETAX> 388
<INCOME-PRE-EXTRAORDINARY> 388
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 254
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 6.00
<LOANS-NON> 395
<LOANS-PAST> 299
<LOANS-TROUBLED> 469
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1000
<CHARGE-OFFS> 5
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1005
<ALLOWANCE-DOMESTIC> 1005
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 190
</TABLE>
<TABLE> <S> <C>
<ARTICLE>9
<RESTATED>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,046
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,171
<INVESTMENTS-CARRYING> 16,016
<INVESTMENTS-MARKET> 15,876
<LOANS> 70,582
<ALLOWANCE> 954
<TOTAL-ASSETS> 101,597
<DEPOSITS> 88,967
<SHORT-TERM> 2,206
<LIABILITIES-OTHER> 868
<LONG-TERM> 0
0
0
<COMMON> 3,662
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 101,597
<INTEREST-LOAN> 1,731
<INTEREST-INVEST> 242
<INTEREST-OTHER> 48
<INTEREST-TOTAL> 2,021
<INTEREST-DEPOSIT> 637
<INTEREST-EXPENSE> 665
<INTEREST-INCOME-NET> 1,356
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,252
<INCOME-PRETAX> 298
<INCOME-PRE-EXTRAORDINARY> 298
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 182
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.15
<YIELD-ACTUAL> 6.13
<LOANS-NON> 384
<LOANS-PAST> 224
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 971
<CHARGE-OFFS> 19
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 954
<ALLOWANCE-DOMESTIC> 954
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 340
</TABLE>
