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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to____________
Commission File Number: 0-12231
BAY COMMERCIAL SERVICES
(Exact name of small business issuer as specified in its charter)
California 94-2760444
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1495 East 14th Street
San Leandro, California 94577
(Address of principal executive offices)
(510) 357-2265
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at July 31, 1999
Common stock, no par value 1,324,110 shares
Transitional Small Business Disclosure Format
YES NO __X_
This report contains a total of 24 pages.
<PAGE>
<TABLE>
<CAPTION>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Balance Sheets (unaudited)
June 30, December 31,
1999 1998
(Dollars in thousands): unaudited)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 11,975 $9,077
Federal funds sold and reverse repurchase agreements 1,200 ---
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents 13,175 9,077
- --------------------------------------------------------------------------------------------------
Securities available for sale, stated at fair value (amortized cost of
$19,337 at June 30, 1999; $31,969 at December 31, 1998) 19,123 32,033
Securities held to maturity (fair values of $7,538 at June 30, 1999;
$7,748 at December 31, 1998) 7,457 7,509
Federal Home Loan Bank stock 432 359
Loans held for sale 733 939
Loans held for investment 107,159 92,190
Allowance for loan losses (1,081) (980)
- ---------------------------------------------------------------------------------------------------
Net loans 106,811 92,149
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Premises and equipment, net 2,004 1,949
Interest and fees receivable 695 635
Other assets 889 491
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Total assets $150,586 $144,202
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 39,732 $ 33,904
Savings and interest-bearing demand 46,277 37,571
Time 29,530 30,309
Certificates of deposit, $100 and over 21,143 21,611
- --------------------------------------------------------------------------------------------------
Total deposits 136,682 123,395
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Securities sold under agreements to repurchase 200 1,344
Other short-term borrowing --- 7,000
Interest payable and other liabilities 765 1,068
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Total liabilities 137,647 132,807
- --------------------------------------------------------------------------------------------------
Commitments and contingent liabilities --- ---
Shareholders' equity:
Common stock - no par value: authorized 20,000,000 shares;
issued & outstanding 1,324,110 at June 30, 1999;
1,080,670 at December 31, 1998 4,802 3,622
Retained earnings 8,268 7,734
Accumulated other comprehensive income, net of tax (131) 39
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 12,939 11,395
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $150,586 $144,202
==================================================================================================
See accompanying notes to consolidated condensed financial statements (unaudited)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Statements of Income (unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
(Dollars in thousands, except per share amounts): 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $4,462 $3,971 $2,344 $2,036
Federal funds sold and reverse repurchase agreements 66 193 40 138
Securities:
Taxable 725 555 345 276
Tax exempt 155 124 78 64
- ------------------------------------------------------------------------------------------------------
Total interest income 5,408 4,843 2,807 2,514
- ------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing demand 589 479 314 275
Time 679 761 337 375
Certificates of deposit, $100 and over 506 384 257 200
Other borrowed funds 21 34 4 16
- ------------------------------------------------------------------------------------------------------
Total interest expense 1,795 1,658 912 866
- ------------------------------------------------------------------------------------------------------
Net interest income 3,613 3,185 1,895 1,648
Provision for loan losses 101 69 60 59
- ------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,512 3,116 1,835 1,589
- ------------------------------------------------------------------------------------------------------
Noninterest income:
Bankcard income 231 205 123 109
Service charges and fees 156 148 78 80
Gain on sale of loans 24 88 0 55
Loan servicing 47 49 25 25
Other 16 30 6 3
- ------------------------------------------------------------------------------------------------------
Total noninterest income 474 520 232 272
- ------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 1,640 1,561 812 768
Occupancy 349 343 175 173
Data processing 201 174 101 89
Bankcard processing expense 192 175 103 96
Professional services 90 68 40 40
Other 474 457 232 225
- ------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,946 2,778 1,463 1,391
- ------------------------------------------------------------------------------------------------------
Income before income tax expense 1,040 858 604 470
Income tax expense 373 301 221 167
- ------------------------------------------------------------------------------------------------------
Net income $ 667 $ 557 $ 383 $ 303
======================================================================================================
Net income per common share - basic $0.54 $0.52 $0.30 $0.28
Weighted average common shares - basic 1,235,832 1,080,419 1,287,401 1,081,177
Net income per common share - diluted $0.51 $0.44 $0.29 $0.24
Weighted average common shares - diluted 1,304,997 1,280,350 1,315,642 1,280,986
======================================================================================================
See accompanying notes to consolidated condensed financial statements (unaudited)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows (unaudited)
Six Months Ended
June 30,
(Dollars in thousands): 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 667 $ 557
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization (221) (327)
Provision for loan losses 101 69
Unamortized deferred loan fees, net 160 (68)
Originations of SBA loans held for sale (889) (760)
Proceeds from the sale of SBA loans held for sale 622 2,125
Change in interest and fees receivable and other assets (194) 40
Change in interest payable and other liabilities (108) (59)
- -------------------------------------------------------------------------------------
Net cash provided by operating activities 138 1,577
- ------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 77,024 33,175
Proceeds from maturities of securities held to maturity 60 2,271
Purchase of securities available for sale (64,040) (27,848)
Purchase of securities held to maturity --- (739)
Purchase of Federal Home Loan Bank stock (73) ---
Net change in loans (14,662) (7,716)
Purchases of premises and equipment (194) (30)
- -------------------------------------------------------------------------------------
Net cash used in investing activities (1,885) (887)
- -------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 13,287 14,945
Net change in securities sold under agreements to repurchase (1,144) 27
Net change in other short-term borrowing (7,000) (2,500)
Exercise of stock options 1,180 29
Repurchase and retirement of common stock --- (84)
Cash dividends paid (478) (324)
- -------------------------------------------------------------------------------------
Net cash provided by financing activities 5,845 12,093
- ------------------------------------------------------------------------------------
Net change in cash and cash equivalents 4,098 12,783
Cash and cash equivalents at beginning of year 9,077 7,548
- ------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $13,175 $20,331
====================================================================================
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $1,850 $1,700
Income taxes 76 151
Noncash investing and financing activities during the year:
Tax benefit of exercise of nonqualified stock options $345 ---
See accompanying notes to consolidated condensed financial statements (unaudited)
</TABLE>
<PAGE>
Bay Commercial Services and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
As of June 30, 1999 and December 31, 1998 and for the
Three and Six Months Periods ended June 30, 1999 and 1998
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, 1999 and December 31, 1998 and the
results of its operations and its cash flows for the three month and six
periods ended June 30, 1999 and 1998 have been included. The results of
operations and cash flows for the periods presented are not necessarily
indicative of the results that may be expected for a full year. These
unaudited consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements, and notes thereto,
included in the Company's Annual Report on SEC Form 10KSB for the year
ended December 31, 1998.
2) Net income per common share - basic for the three and six month periods
ended June 30, 1999 and 1998 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, 1999 and
1998 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 six and
three month periods ended June 30, 1999 was 1,235,832 and 1,287,401,
respectively. The weighted average number of outstanding common shares for
the six and three month periods ended June 30, 1998 was 1,080,419 and
1,081,177, respectively. The weighted average number of outstanding common
shares including the dilutive effect of stock options for the six and three
month periods ended June 30, 1999 was 1,304,997 and 1,315,642,
respectively. The weighted average number of outstanding common shares
including the dilutive effect of stock options for the six and three months
periods ended June 30, 1998 and 1998 was 1,280,350 and 1,280,986,
respectively.
3) 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 36% and 35% for the six months periods ended June 30, 1999 and 1998,
respectively.
4) Comprehensive income includes net income and other comprehensive income.
The Company's only source of other comprehensive income is derived from
unrealized gains and losses on investment securities available for sale.
Reclassification adjustments resulting from gains or losses on investment
securities that were realized and included in net income of the current
period that also had been included in other comprehensive income as
unrealized holding gains or losses in the period in which they arose are
excluded from comprehensive income of the current period. The Company's
total comprehensive income was $497,000 and $581,000 for the six months
ended June 30, 1999 and 1998, respectively. The Company's total
comprehensive income was $301,000 and $317,000 for the three months ended
June 30, 1999 and 1998, respectively.
5) In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". This statement defers the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. The deferral applies to
quarterly and annual financial statements. The Company is in the process of
determining the impact of adopting SFAS 133, however, the Company currently
does not have any derivative instruments and is not involved in any hedging
activities.
6) On April 30, 1999 the Company and Greater Bay Bancorp, the parent of
Cupertino National Bank, Mid-Peninsula Bank, Peninsula Bank of Commerce,
Golden Gate Bank and Bay Area Bank, signed a definintive agreement for a
merger between the two companies. The agreement provides for the Company's
shareholders to receive approximately 945,000 shares of Greater Bay Bancorp
stock subject to certain adjustments based on movements in the price of
Greater Bay Bancorp's stock, in a tax-free exchange to be accounted for as
a pooling-of-interests. Following the transaction, the shareholders of the
Company's will own approximately 7.8% of the combined company's stock. The
transaction is expected to be completed in the fourth quarter of 1999
subject to approval of the transaction by the Company's shareholders and
receipt of regulatory approvals.
<PAGE>
<TABLE>
<CAPTION>
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)
Six Months Ended Increase
June 30, (Decrease)
(Dollars in thousands): 1999 1998 $ %
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Balances:
Assets (1) $143,427 $119,002 $24,425 20.5%
Securities - taxable (1) 26,794 18,446 8,348 45.3
Securities - tax exempt 6,127 4,844 1,283 26.5
Federal funds sold and reverse repurchase agreements 2,832 6,999 (4,167) (59.5)
Total loans 97,593 78,834 18,759 23.8
Nonaccrual loans 28 363 (335) (92.3)
Deposits 129,388 106,294 23,094 21.7
Shareholders' equity (1) 12,276 10,464 1,812 17.3
Interest-earning assets (1) 133,318 108,760 24,558 22.6
Interest-bearing liabilities 93,155 77,210 15,945 20.7
Income Statements:
Interest income (2) 5,480 4,900 580 11.8%
Interest expense 1,795 1,658 137 8.3
- -----------------------------------------------------------------------------------------------
Net interest income (2) 3,685 3,242 443 13.7
Taxable equivalent adjustment 72 57 15 26.3
- -----------------------------------------------------------------------------------------------
Net interest income 3,613 3,185 428 13.4
Provision for loan losses 101 69 32 46.4
- -----------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 3,512 3,116 396 12.7
- -----------------------------------------------------------------------------------------------
Noninterest income 474 520 (46) (8.8)
Noninterest expenses 2,946 2,778 168 6.0
Income tax expense 373 301 72 23.9
- -----------------------------------------------------------------------------------------------
Net income $ 667 $ 557 $ 110 19.7%
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Performance Ratios: (3) Change
<S> <C> <C> <C>
Yield on average interest-earning assets 8.18% 8.98% (0.80 %
Yield on average interest-earning assets (2) 8.29% 9.09% (0.80)%
Interest rate on average interest-bearing
liabilities 3.89% 4.33% (0.44)%
Interest expense as a percent of average
interest-earning assets 2.72% 3.07% (0.35)%
Net yield on average interest-earning assets 5.46% 5.91% (0.45)%
Net yield on average interest-earning assets (2) 5.57% 6.02% (0.45)%
</TABLE>
(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 that may be expected for a full year.
<PAGE>
<TABLE>
<CAPTION>
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)
Three Months Ended Increase
June 30, (Decrease)
(Dollars in thousands): 1999 1998 $ %
- ------------------------------------------------------------------------------------------------
Average Balances:
<S> <C> <C> <C> <C>
Assets (1) $147,718 $123,671 $ 24,047 19.4 %
Securities - taxable (1) 25,747 18,530 7,217 38.9
Securities - nontaxable 6,130 5,016 1,114 22.2
Federal funds sold and reverse repurchase agreements 3,453 9,951 (6,498) (65.3)
Total loans 102,169 80,296 21,873 27.2
Nonaccrual loans 27 293 (266) (90.8)
Deposits 133,850 110,988 22,862 20.6
Shareholders' equity (1) 12,862 10,586 2,276 21.5
Interest-earning assets (1) 137,472 113,500 23,972 21.1
Interest-bearing liabilities 94,943 80,326 14,617 18.2
Income Statements:
Interest income (2) 2,843 2,543 300 11.8%
Interest expense 912 866 46 5.3
- -------------------------------------------------------------------------------------------------
Net interest income (2) 1,931 1,677 254 15.1
Taxable equivalent adjustment 36 29 7 24.1
- -------------------------------------------------------------------------------------------------
Net interest income 1,895 1,648 247 15.0
Provision for loan losses 60 59 1 1.7
- -------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,835 1,589 246 15.5
- -------------------------------------------------------------------------------------------------
Noninterest income 232 272 (40) (14.7)
Noninterest expenses 1,463 1,391 72 5.2
Income tax expense 221 167 54 32.3
- -------------------------------------------------------------------------------------------------
Net income $383 $303 $ 80 26.4%
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Performance Ratios: (3) Change
<S> <C> <C> <C>
Yield on average interest-earning assets 8.19% 8.88% (0.69)%
Yield on average interest-earning assets (2) 8.29% 8.99% (0.70)%
Interest rate on average interest-bearing
liabilities 3.85% 4.32% (0.47)%
Interest expense as a percent of average
interest-earning assets 2.66% 3.06% (0.40)%
Net yield on average interest-earning assets 5.53% 5.82% (0.29)%
Net yield on average interest-earning assets (2) 5.63% 5.93% (0.30)%
</TABLE>
(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 that may be expected for a full year.
<PAGE>
BAY COMMERCIAL SERVICES AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six months ended June 30, 1999 compared to
Six months ended June 30, 1998
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 which could 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 $667,000 for the first six months of 1999 compared
to $557,000 for the first six months of 1998. Net income per common share basic
was $0.54 for the first six months of 1999 compared to $0.52 for the first six
months of 1998. Net income per common share - basic for the 1999 period was
impacted by an increase in the weighted average number of common shares - basic
to 1,235,832 shares for the 1999 period from 1,080,419 shares for the 1998
period. The increase in the weighted average number of common shares - basic was
due to the exercise of stock options during the first six months of 1999. Net
income per common share - diluted was $0.51 for the first six months of 1999
compared to $0.44 for the first six months of 1998.
The $110,000 or 20% growth in net income for the first six months of 1999
compared to the first six months of 1998 principally reflected higher net
interest income for the 1999 period, which was partially offset by increases in
noninterest expenses and the provision for loan losses as well as reduced
noninterest income compared to the 1998 period. Net interest income for the 1999
period increased $428,000 or 13% compared to the 1998 period due to strong
growth in average interest-earning assets. A $168,000 or 6% increase in
noninterest expenses in the 1999 period was principally the result of higher
salaries and employee benefits expense and other expenses for Year 2000
compliance measures. The provision for loan losses increased $32,000 or 46%
compared to the 1998 period. Noninterest income declined $46,000 or 9% in the
1999 period largely due to reduced gain on sale of loans guaranteed by the Small
Business Administration ("SBA loans").
Total assets were $150,586,000 at June 30, 1999, representing a $6,384,000 or 4%
increase from December 31, 1998. Total deposits of $136,682,000 at June 30, 1999
grew $13,287,000 or 11% from year-end 1998 while securities sold under
agreements to repurchase declined $1,144,000 or 85% and other short-term
borrowing decreased $7,000,000. Funds from the deposit growth net of the
reduction in repurchase agreements and short-term borrowing and a $12,889,000
reduction in securities as of June 30, 1999 were principally invested in loans
and cash and cash equivalents. Loans grew $14,763,000 or 16% during the first
six months of 1999 and cash and cash equivalents increased $4,098,000 or 45%.
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 $3,613,000 for the first six months of 1999 increased
$428,000 or 13% compared to the first six months of 1998. The increase was due
to growth of $24,558,000 or 23% in average interest-earning assets. The net
yield on average interest-earning assets declined to 5.46% for the 1999 period
from 5.91% for the 1998 period.
The increase in average interest-earning assets between the 1999 and 1998
periods was principally due to growth of $19,094,000 or 24% in average earning
loans and $5,464,000 or 18% in average other investments. The average yield on
interest-earning assets declined to 8.18% for the 1999 period compared to 8.98%
for the 1998 period. The yield on average earning loans declined to 9.22% from
10.20% for the 1998 period, primarily reflecting the 0.75% drop in the prime
lending rate during the second half of 1998. Average earning loans were 73.2%
and 72.2% of average interest-earning assets for the 1999 and 1998 periods,
respectively. A reduction in the average yield on total securities to 5.39% for
the 1999 period from 5.88% for the 1998 period reflected a significant increase
in the percentage of the portfolio invested in short-term securities as well as
lower overall money market rates for the 1999 period.
Average interest-bearing liabilities increased $15,945,000 or 21% between the
1999 and 1998 periods. The average rate paid for interest-bearing liabilities
declined to 3.89% for the 1999 period compared to 4.33% for the 1998 period,
reflecting a decrease in overall money market and deposit rates between the
periods and a slight shift in the composition of the deposit portfolio. The
ratio of higher cost time deposits to average total interest-bearing liabilities
declined to 55.0% from 56.5% for the 1999 and 1998 periods, respectively.
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 have a greater effect on earning
assets. If interest rates decline, an asset sensitive position could adversely
affect net interest income. Alternatively, where more liabilities than assets
reprice in a given period (a liability sensitive position) a decline in interest
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, 1999. For any given period, the repricing is matched when
an equal amount of assets and liabilities reprice. The repricing of a fixed rate
asset or liability is considered to occur at its contractual maturity or, for
those assets which are held for sale, within the time period during which sale
may reasonably be expected to be accomplished. Floating rate assets or
liabilities are considered to reprice in the period during which the rate can
contractually change. Any excess of either assets or liabilities in a period
results in a gap, or mismatch, shown in the table. A positive gap indicates
asset sensitivity and a negative gap indicates liability sensitivity.
<TABLE>
<CAPTION>
Interest Sensitivity Period
-----------------------------------------
3 Over Over 1
As of June 30, 1999: 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 and
deferred fees) $66,543 $10,227 $20,038 $11,599 $108,407
Securities (before unrealized
loss on securities available for sale) 9,172 272 10,712 6,638 26,794
Federal funds sold and reverse
repurchase agreements 1,200 --- --- --- 1,200
- -------------------------------------------------------------------------------------------------
Total 76,915 10,499 30,750 18,237 136,401
- -------------------------------------------------------------------------------------------------
Interest rate sensitive liabilities:
Interest-bearing transaction accounts 38,497 --- --- --- 38,497
Savings deposits 7,780 --- --- --- 7,780
Time deposits, $100 and over 19,496 11,107 1,037 --- 31,640
Other time deposits 11,359 6,448 1,225 1 19,033
Other borrowed funds 100 100 --- --- 200
- -------------------------------------------------------------------------------------------------
Total 77,232 17,655 2,262 1 97,150
- -------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (317) (7,156) 28,488 18,236 $39,251
- -------------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap $ (317) $(7,473) $21,015 $39,251
- -------------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap to total assets (0.2)% (5.0)% 14.0% 26.1%
</TABLE>
This table presents a static gap, which is a position at a point in time. It
does not address the interest rate sensitivity of assets or liabilities which
would be added through growth, nor does it anticipate the future interest rate
sensitivity of assets and liabilities once they have repriced, and it assumes
equivalent elasticity of assets and liabilities. The interest rate sensitivity
analysis at June 30, 1999, indicates that the Company, on a cumulative gap
basis, is liability sensitive in the periods "3 months or less" and "Over 3
months to 1 year" and asset sensitive over the remaining time periods.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Bank provides for probable loan losses by a charge to operating income based
upon the composition of the loan portfolio, past loan loss experience, current
economic conditions and other factors which, in management's judgment, deserve
recognition in estimating loan losses. Management will charge off loans when it
determines there has been a permanent impairment of the related carrying values.
The allowance for loan losses is reviewed by management monthly and approved by
the Board of Directors at least quarterly. Management attributes general
reserves to different types of loans using percentages which are based upon
perceived risk associated with the portfolio and underlying collateral,
historical loss experience, and vulnerability to changing economic conditions
which may affect the collectibility of the loans. Specific allowances are
allocated for impaired loans, for loans which have experienced a decline in
internal loan grading, and when management believes additional loss exposure
exists. Although the allowance for loan losses is allocated to various portfolio
segments, it is general in nature and is available for the loan portfolio in its
entirety. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for losses on loans. Such agencies may require the Company to recognize
additions to the allowance based on their analysis of information available to
them at the time of their examination.
The Senior Loan Officer assesses the loan portfolio monthly to determine which
loans are specifically identifiable problem credits in order to update the
Bank's internal watch list, which tracks all such credits. The Bank's internal
Loan Review Examiner grades all new commercial loans and all credits where the
total liability equals or exceeds certain thresholds established by management.
If either the Senior Loan Officer or the Loan Review Examiner identifies a
serious deficiency, the loan is placed on the next quarterly watch list.
Management provides a specific reserve allowance for the effects of the problem
applicable to each watchlisted credit. When management identifies a generalized
risk not evidenced by a specially identifiable loan or portfolio segment as of
the evaluation date, management's evaluation of the probable loss exposure
concerning this condition will be provided for by adjusting the level of general
reserve for this exposure.
The provision for loan losses reflects an amount necessary to adjust the
allowance for loan losses to 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, 1999, the allowance
for loan losses was $1,081,000 compared to $980,000 at December 31, 1998. The
increased allowance was a result of a $101,000 provision for loan losses made in
the first six months of 1999. The provision for loan losses was $69,000 in the
first six months of 1998. Although nonperforming loans dropped slightly from
June 30, 1998, (see information on non-performing loans below), strong loan
growth, particularly in construction loans, also added additional inherent
credit risk which was reflected in the provision.. The ratio of the allowance
for loan losses to total loans was 1.0% at June 30, 1999 and 1.1% at December
31, 1998. Based upon information currently available, management believes that
the allowance for loan losses at June 30, 1999, 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.
At June 30, 1999 and December 31, 1998, the Bank also held California Capital
Access Program ("CalCAP") deposits of $282,000 and $203,000, respectively, which
CalCAP has pledged to offset any losses on loans in the Bank's CalCAP portfolio.
The Bank had a total of $1,851,000 and $1,584,000 in CalCAP loans as of June 30,
1999 and December 31, 1998, respectively. CalCAP is a program authorized by the
California Legislature to encourage California financial institutions to make
loans to small businesses whose operations affect the state's environment and
which may not meet the normal underwriting standards of the financial
institution.
Information on nonperforming loans for the six month periods ended June 30, 1999
and 1998 and the year ended December 31, 1998 is summarized in the following
table.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(Dollars in thousands) 1999 1998 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loan charge-offs --- $(154) $(169)
Ratio of net loan charge-offs to average loans --- (0.2)% (0.2)%
Nonperforming loans:
Nonaccrual $ 27 $ 30 $231
Accruing loans past due 90 days or more --- --- ---
Restructured 469 469 469
- ----------------------------------------------------------------------------------- ------------
Total nonperforming loans $496 $499 $700
- ----------------------------------------------------------------------------------- ------------
Ratio of nonperforming loans to total loans 0.5% 0.5% 0.9%
Ratio of allowance for loan losses to nonperforming loans 217.9% 196.4% 129%
</TABLE>
NONINTEREST INCOME
Noninterest income declined $46,000 or 9% between the first six months of 1999
and 1998. The largest change was a $64,000 or 73% reduction in gain on sale of
loans which was attributable to the sale of a smaller volume of loans during the
1999 period. Other noninterest income declined $14,000 or 47% principally due to
the recovery during the 1998 period of income and expenses related to previously
charged-off or paid-off loans, which was not repeated in the first six months of
1999. The decreases in noninterest income were partially offset by a $26,000 or
13% increase in bankcard income which reflected increased merchant activity.
NONINTEREST EXPENSES
Total noninterest expenses of $2,946,000 for the first six months of 1999
increased $168,000 or 6% compared to the first six months of 1998. Salaries and
employee benefits rose $79,000 or 5%, principally due to merit increases and
performance bonuses associated with loan and deposit growth. Professional
services expense for the first six months of 1999 was $22,000 or 32% above the
1998 period, reflecting increased accounting and legal services expense. Other
expenses which were higher for the 1999 period included data processing expense,
up $27,000 or 16%, and bankcard expense up $17,000 or 10%. Data processing
expenses for the 1999 period reflected costs associated with the Bank's Year
2000 efforts as well as increased processing volume associated with the Bank's
asset growth. Bankcard expenses grew with increased merchant activity.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $373,000 for the first six months of
1999 compared to $301,000 for the first six months of 1998. The $72,000 or 24%
increase in income tax expense reflected the increase in pretax income for the
1999 period. The effective income tax rate was 36% and 35% for the 1999 and 1998
periods, respectively.
Three months ended June 30, 1999 compared to
Three months ended June 30, 1998
OVERVIEW
Net income of the Company was $383,000 for the second quarter of 1999 compared
to $303,000 for the second quarter of 1998. Net income per common share - basic
was $0.30 and $0.28 for the second quarter of 1999 and 1998, respectively. Net
income per common share - diluted was $0.29 and $0.24 for the second quarter of
1999 and 1998, respectively.
Net interest income for the second quarter of 1999 increased $247,000 or 15%
compared to the 1998 quarter, reflecting strong growth in average
interest-earning assets. The increase in net interest income was partially
offset by a $72,000 or 5% increase in noninterest expenses, a $40,000 or 15%
reduction in noninterest income and a $54,000 or 32% increase in income tax
expense.
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 $1,895,000 for the second quarter of 1999 increased
$247,000 or 15% compared to the second quarter of 1998. The increase reflected
the $23,972,000 or 21% growth in average interest-earning assets. The net
interest margin on average interest-earning assets declined to 5.53% for the
1999 quarter from 5.82% for the 1998 quarter.
The increase in average interest-earning assets between the 1999 and 1998
quarters was principally due to growth of $22,139,000 or 28% in average earning
loans and $8,331,000 or 35% in average total securities. These increases were
partially offset by a $6,498,000 or 65% decrease in average federal funds sold
and securities purchased under repurchase agreements. The average yield on
interest-earning assets for the second quarter of 1999 declined to 8.19%
compared to 8.88% for the 1998 quarter. The average yield on earning loans for
the 1999 quarter declined to 9.20% from 10.21% for the 1998 quarter while the
average ratio of earning loans to interest-earning assets increased to 74.3%
from 70.5% for the 1998 quarter.
Average interest-bearing liabilities increased $14,617,000 or 18% between the
1999 and 1998 quarters. The average rate paid for interest-bearing liabilities
declined to 3.85% for the 1999 quarter compared to 4.32% for the 1998 quarter,
reflecting a decrease in overall money market and deposit rates between the
quarters. The ratio of time deposits to average total interest-bearing
liabilities was little changed at 54.0% for the 1999 quarter compared to 54.3%
for the 1998 quarter.
NONINTEREST INCOME
A $40,000 or 15% reduction in noninterest income for the 1999 quarter compared
to the 1998 quarter largely reflected a $55,000 decrease in gain on sale of
loans. There were no loans sales during the 1999 quarter. Partially offsetting
the reduction in noninterest income, bankcard income rose $14,000 or 13% due to
increased merchant activity.
NONINTEREST EXPENSES
Total noninterest expenses of $1,463,000 for the second quarter of 1999
increased $72,000 or 5% compared to the second quarter of 1998. Salaries and
employee benefits rose $44,000 or 6%, principally due to salary increases and
higher bonuses associated with loan growth. Data processing expense increased
$12,000 or 14% principally due to deposit and loan growth between the quarters.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $221,000 for the second quarter of 1999
compared to $167,000 for the second quarter of 1998. The $54,000 or 32% increase
in income tax expense reflected increased taxable income for the 1999 quarter.
The effective income tax rate was 37% and 36% for the 1999 and 1998 quarters,
respectively.
FINANCIAL CONDITION - June 30, 1999 compared to December 31, 1998
CASH AND CASH EQUIVALENTS, INVESTMENTS AND LOANS
Total loans of $107,892,000 at June 30, 1999 increased $14,763,000 or 16% and
cash and cash equivalents of $13,175,000 at June 30, 1999 increased $4,098,000
or 45% from December 31, 1998. Funding for these increases was provided by
deposit growth of $13,287,000 or 11% and a $12,889,000 or 32% decline in
securities as of June 30, 1999. The decline in securities balances as of June
30, 1999 principally reflected maturities of short-term investments.
DEPOSITS AND OTHER BORROWED FUNDS
Reflecting a continuation of the Bank's strong growth trend, total deposits of
$136,682,000 at June 30, 1999 increased $13,287,000 or 11% compared to December
31, 1998. Noninterest-bearing demand deposits grew $5,828,000 or 17% and savings
and interest-bearing demand deposits increased $8,706,000 or 23% from December
31, 1998. There were no short-term borrowings outstanding as of June 30, 1999
compared to $7,000,000 at December 31, 1998. Securities sold under agreements to
repurchase declined $1,144,000 or 85% during the first six months of 1999.
OTHER ASSETS AND OTHER LIABILITIES
Interest and fees receivable at June 30, 1999 of $695,000 increased $60,000 or
10% from December 31, 1998 principally due to loan growth. Other assets
increased $398,000 or 81%, a portion of which reflected $179,000 in prepaid
expenses which were incurred during the 1999 quarter for services related to the
pending merger with Greater Bay Bancorp which is expected take place in the
fourth quarter of 1999. Additionally, the exercise during the first six months
of 1999 of nonqualified stock options resulted in a $186,000 increase in
deferred tax assets. Interest payable and other liabilities at June 30, 1999,
declined $303,000 or 28% from year-end 1998 principally due to the payment of
income taxes during the first six months of 1999 and the application of $159,000
in tax benefits related to the exercise of nonqualified stock options during the
period.
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 cash equivalents , 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 22% and 30% at June 30, 1999 and December 31, 1998,
respectively. The decline in the liquidity ratio at June 30, 1999 reflected the
decrease in short-term securities during the first six months of 1999. 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
borrowing arrangements with two correspondent banks, which include federal funds
borrowing lines totaling $8,500,000 and a repurchase facility, as well as access
to collateralized borrowing capacity of approximately $10,000,000 from the
Federal Home Loan Bank of San Francisco. As of June 30, 1999, 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, 1999, and average assets for the second quarter of 1999.
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital. $13,070 10.1% $12,620 9.8%
Tier 1 Capital minimum requirement 5,158 4.0 5,146 4.0
- -------------------------------------------------------------------------------
Excess. $ 7,912 6.1% $ 7,474 5.8%
Total Capital $14,151 11.0% $13,701 10.7%
Total Capital minimum requirement 10,315 8.0 10,291 8.0
- ---------------------------------------------------------- -------------------
Excess $ 3,836 3.0% $ 3,410 2.7%
Risk weighted assets $128,941 $128,639
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 Capital to average total assets $13,070 8.9% $12,620 8.6%
Range of minimum leverage 4,432- 3.0- 4,427- 3.0-
requirement 7,386 5.0% 7,379 5.0%
- ------------------------------------------------------ -------- ---------------
Range of excess 5,684- 3.9- 5,241- 3.6-
$ 8,638 5.9% $ 8,193 5.6%
Average total assets for the second quarter* $147,718 $147,574
</TABLE>
(* Average total assets do not include unrealized gains/losses on securities
available for sale.)
The Company currently does not have any material commitments for capital
expenditures, and in the opinion of Management, the Company's and the Bank's
capital positions are sufficient to meet their respective needs.
INFLATION
It is Management's opinion that the effects of inflation on the consolidated
financial statements for the periods ended June 30, 1999 and 1998 have not been
material.
YEAR 2000 READINESS DISCLOSURE
The following discussion of the implications of the Year 2000 problem for the
Company contains numerous forward-looking statements based on inherently
uncertain information. The cost of the project and the date on which the Company
plans to complete the internal Year 2000 modifications are based on management's
best estimates, which were derived utilizing a number of assumptions of future
events including the continued availability of internal and external resources,
third party modifications and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse affect on the Company.
In addition, the Company places a high degree of reliance on computer systems of
third parties, such as customers, suppliers, and other financial and
governmental institutions. Although the Company continues to assess the
readiness of these third parties and is preparing contingency plans, there can
be no guarantees that the failure of any one of these third parties to modify
their systems in advance of December 31, 1999 would not have a material adverse
affect on the Company.
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 many systems and
programs that are date sensitive will treat "00" as the year 1900, and not
properly recognize the date transition at the year 2000. An additional issue is
that 1900 was not a leap year, whereas the year 2000 is. Therefore, some
programs may not properly provide for February 29, 2000.
The Company initiated its Year 2000 planning in 1997 and has prepared a
comprehensive written plan which addresses both internal and external Year 2000
exposure and includes the following phases - Inventory and Assessment,
Renovation, Testing and Implementation, and Contingency Planning.
Inventory & Assessment
The Company completed its inventory and assessment phase during 1997. During
this process the Company made a physical inventory of information technology
("IT") systems and non-IT systems at each office location. Additionally, all
vendor supplied services were reviewed to identify IT and non-IT Year 2000
issues. The systems examined included hardware and software platforms associated
with customer account processing, computer networks and workstations, and
telecommunications systems.
Although the assessment determined that there was no significant reliance on
non-IT technology (that is, equipment with embedded microprocessor controls such
as elevators, climate control systems, etc.), it did identify mission critical
IT systems, both internal and external that were not Year 2000 compliant.
These noncompliant systems included data processing applications provided by
third party suppliers, the teller platform at two branch offices of the Bank,
and some of the hardware and software elements of the Bank's Wide Area Network
("WAN") computer network. The WAN is a centralized, server based, system that
interconnects employees' desktop PC workstations at each location.
One additional element of Year 2000 concern has been the Bank's customers. The
Bank is reliant on its customers to make the necessary preparations for the Year
2000 so that their business operations will not be interrupted, thus threatening
their ability to honor financial commitments.
In an ongoing effort to ensure that its customer base is aware of the Year 2000
issue, during the first six months of 1998 the Bank mailed to each commercial
account, and included in each commercial account loan and deposit account
statement, a letter addressing Year 2000 issues and encouraging the assessment
of Year 2000 risk. Year 2000 reference resources for businesses were also
provided.
As part of its customer Year 2000 assessment, the Bank identified all commercial
account borrowing relationships in excess of $100,000. These represented over
200 relationships and approximately 95% of the total borrowings outstanding as
of June 30, 1998. Each of these business relationships was analyzed as to its
potential for Year 2000 risk and approximately 20% were selected to receive a
detailed Year 2000 questionnaire. The questionnaire, requesting additional
information on Year 2000 status, was delivered to these selected customers
during the third quarter of 1998. The completed questionnaires were analyzed for
risk and each borrower was assigned a Year 2000 risk rating. As a result of this
analysis, the Bank modified its credit review process and its underwriting
criteria to include consideration of Year 2000 issues.
Renovation, Testing & Implementation
The correction and testing phase of the Company's Year 2000 Plan includes the
renovation and/or replacement of all mission critical IT hardware, software and
equipment identified as not compliant with the Year 2000. The majority of the
internal mission critical renovation centered around the upgrade to the Bank's
WAN and teller systems. The installation of the Year 2000 compliant teller
system was completed by December 31, 1998.
To ensure Year 2000 compliance of its WAN and reduce the administrative overhead
of its IT systems, management determined that a complete renovation of the WAN
would provide the most cost effective solution. Most of the elements of the
Bank's WAN upgrade were completed by December 31, 1998. Due to the overall
complexity of this project, however, only a few of the desktop workstations were
operational on the new system at that time. As of June 30, 1999 additional users
have been converted over, and current projections are for all users to be either
converted over to the new system during the remainder of 1999 or, as the pending
merger with Greater Bay Bancorp progresses, as discussed below, all systems may
be fully converted to the Greater Bay Bancorp systems after the consummation of
the merger and during the fourth quarter of 1999.
The Bank relies on two primary off-site data processing vendors for mission
critical processing of the Bank's customer accounting system and general ledger
applications. These vendors identified certain Year 2000 compliance issues and
the renovations to these systems were completed by December 31, 1998. Final
testing of these systems was completed during the second quarter of 1999.
Although no vendors were identified where the inability to be Year 2000
compliant would cause the Company to seek alternative suppliers, the Company has
no viable alternatives for some vendors, such as power distribution and local
telephone companies. The Year 2000 efforts of these companies continue to be
monitored and are part of the Company's contingency plan. As with all financial
institutions, the Company places a high degree of reliance on systems of other
institutions, including governmental agencies, to settle transactions.
In compliance with FFIEC guidelines, the Company has met all testing
requirements at or prior to the time such requirements were required to have
been met.
Costs
The majority of the costs associated with the Company's Year 2000 project are
for the installation and testing of the components to upgrade the Bank's teller
systems and WAN. Included in this project were improved communication
connections between offices, higher capacity computer file servers, and
operating system upgrades for the entire network. While these investments were
not specifically accelerated due to the Company's Year 2000 project, these costs
have been included.
As of June 30, 1999, and since the inception of the project, the Company had
invested approximately $203,000 for capital improvements to the WAN and $60,000
for the teller cash control system and workstations. Other project costs
incurred by the Company include staff time devoted to the issue at a cost of
approximately $27,000 and outside consulting services of $46,000. It is
anticipated that additional costs to the Company for the Year 2000 project will
not exceed $10,000.
While management believes it has identified and planned for the resolution of
the mission critical issues relevant to the Year 2000, no assurance can be given
that the Company may not be required to expend significant additional amounts
related to the Year 2000 issue.
Risks
The principal risks associated with the Year 2000 problem primarily fall into
three categories. The first risk is that the Company is unable to successfully
renovate and/or migrate to Year 2000 compliant systems. The second risk is the
disruption of operations due to the failure of third parties. The third is the
risk of business interruption among fund providers and fund users which affects
their ability to contractually perform.
The only risk largely under the Company's control for the Year 2000 project is
the identification, renovation and implementation of its internal operations.
The Company, like other financial institutions, is heavily dependent upon its
computer systems. Reliance on readily available PC-based systems and technology
for WAN and desktop workstations has simplified this process to some extent, and
management believes its systems are now Year 2000 compliant.
Because of the reliance on outside vendors for processing mission critical
customer accounting systems, a computer failure of a third party may jeopardize
Company operations. How serious this would be depends on the nature and duration
of such failures. Because of the complexity, integration and dependence of these
outside systems to the Company's operations, switching to another vendor on
short notice does not represent a viable option. At this time, management
believes that the necessary renovations to these third party systems for Year
2000 compliance have been completed.
Another serious impact to Company operations would occur if basic services such
as telecommunications, electric power supplies and services provided by other
governmental agencies were disrupted. To date definitive public disclosure of
the state of readiness among basic infrastructure suppliers has not been
generally available. Although inquiries continue, the Company does not yet have
the information to estimate the likelihood of significant disruptions among
these suppliers.
Contingency Planning
The Company has developed contingency plans for the Year 2000 including cash
reserves, liquidity and operational issues related to systems failures and for
reasons that are not presently foreseen. In the event of a failure, these plans
outline the steps that will be taken to deal with the situation to minimize the
effect on customers and losses to the Company. Although the Company's identified
Year 2000 risks are largely concentrated with the ability of third parties to
provide services after the year 2000, as we near the end of 1999, the Company is
actively monitoring current events, including news report, which may have an
immediate impact on its customers and therefore its operations.
Apart from the Company's Year 2000 project, federal banking regulators are
conducting special examinations of FDIC-insured financial institutions and third
party data processors, including suppliers to the Company, to determine whether
they are taking necessary steps to prepare for the Year 2000. They are closely
monitoring the progress made by these institutions in completing key steps
required by their individual Year 2000 plans.
The pending merger of the Company and Greater Bay Bancorp, which is expected to
occur early in the fourth quarter of 1999, will have some impact on Year 2000
issues at Bay Bank of Commerce. Plans have been formalized for the conversion of
the Bank's data processing applications and PC-based wide-area-network ("WAN")
to the Greater Bay Bancorp systems prior to year-end 1999. The Company has
investigated Greater Bay Bancorp's Year 2000 Plan and the compliance of their
computer systems. Based solely on information provided to the Company by Greater
Bay Bancorp, the Company believes that Year 2000 testing of Greater Bay's
systems was successfully completed by Greater Bay Bancorp and that Greater Bay
Bancorp has met the Year 2000 guidelines of the various banking regulatory
agencies.
The Company's disclosure and announcement herein concerning its Year 2000
planning and programs are intended to constitute "year 2000 readiness
disclosures" as defined in the recently-enacted Year 2000 Information and
Readiness Disclosure Act (the "Act"). The Act provided certain protection from
liability for certain public and private statements concerning an entity's Year
2000 readiness and the Year 2000 readiness of its products and services.
RECENT EVENTS On April 30, 1999 the Company and Greater Bay Bancorp, the parent
of Cupertino National Bank, Mid-Peninsula Bank, Peninsula Bank of Commerce,
Golden Gate Bank and Bay Area Bank, signed a definintive agreement for a merger
between the two companies. The agreement provides for the Company's shareholders
to receive approximately 945,000 shares of Greater Bay Bancorp stock subject to
certain adjustments based on movements in the price of Greater Bay Bancorp's
stock, in a tax-free exchange to be accounted for as a pooling-of-interests.
Following the transaction, the shareholders of the Company's will own
approximately 7.8% of the combined company's stock. The transaction is expected
to be completed in the fourth quarter of 1999 subject to approval of the
transaction by the Company's shareholders and receipt of regulatory approvals.
Greater Bay Bancorp's financial services subsidiaries and divisions have offices
located in San Jose, Cupertino, Santa Clara, Palo Alto, Redwood City, San Mateo,
Millbrae, San Francisco and Walnut Creek. As of June 30, 1999, Greater Bay
Bancorp had $2.1 billion in assets, $1.8 billion in deposits and $115 million in
shareholders' equity. The combined company, on a pro-forma basis after giving
effect to the merger, would have had total assets of approximately $2.3 billion
and shareholders' equity of over $128.0 million at June 30, 1999.
Management believes that the merger offers significant opportunities to enhance
the spectrum of financial services offered to both existing and future customers
of the Company.
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company for the
quarter ended June 30, 1999.
<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 13, 1999 /s/ R. M. Kahler
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 /s/ R. D. Greenfield
R. D. Greenfield
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM BAY COMMERCIAL SERVICES & SUBSIDIARY
SECOND QUARTER 1999 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,975
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,123
<INVESTMENTS-CARRYING> 26,794
<INVESTMENTS-MARKET> 26,871
<LOANS> 107,892
<ALLOWANCE> 1,081
<TOTAL-ASSETS> 150,586
<DEPOSITS> 136,682
<SHORT-TERM> 200
<LIABILITIES-OTHER> 765
<LONG-TERM> 0
<COMMON> 4,802
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 150,586
<INTEREST-LOAN> 4,462
<INTEREST-INVEST> 880
<INTEREST-OTHER> 66
<INTEREST-TOTAL> 5,408
<INTEREST-DEPOSIT> 1,774
<INTEREST-EXPENSE> 1,795
<INTEREST-INCOME-NET> 3,613
<LOAN-LOSSES> 101
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,946
<INCOME-PRETAX> 1,040
<INCOME-PRE-EXTRAORDINARY> 1,040
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 667
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.51
<YIELD-ACTUAL> 5.46
<LOANS-NON> 27
<LOANS-PAST> 0
<LOANS-TROUBLED> 469
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 980
<CHARGE-OFFS> 3
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1,081
<ALLOWANCE-DOMESTIC> 1,081
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
