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, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to____________
Commission File Number: 0-12231
BAY COMMERCIAL SERVICES
(Exact name of small business issuer as specified in its charter)
California 94-2760444
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1495 East 14th Street
San Leandro, California 94577
(Address of principal executive offices)
(510) 357-2265
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at July 31, 1997
Common stock, no par value 1,076,720 shares
Transitional Small Business Disclosure Format
YES NO __X_
This report contains a total of 17 pages.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Balance Sheets
June 30,
1997 December 31,
(Dollars in thousands): (unaudited) 1996
- --------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 8,295 $ 6,945
Federal funds sold 1,500 0
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents 9,795 6,945
- --------------------------------------------------------------------------------------------------
Investment securities available for sale, stated at market value
(amortized cost of $16,526 for 1997; $9,364 for 1996) 16,473 9,339
Investment securities held to maturity (market values of $6,800 for 1997;
$6,743 for 1996) 6,749 6,704
- --------------------------------------------------------------------------------------------------
Total investment securities 23,222 16,043
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Loans held for sale 1,284 2,923
Loans held for investment 70,190 68,439
Allowance for loan losses (1,000) (971)
- --------------------------------------------------------------------------------------------------
Net loans 70,474 70,391
- --------------------------------------------------------------------------------------------------
Premises and equipment, net 2,196 2,164
Interest and fees receivable 564 585
Other assets 571 641
- -------------------------------------------------------------------------------------------------
Total assets $106,822 $96,769
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 29,337 $26,198
Savings and interest-bearing demand 23,959 23,250
Time 31,714 27,823
Certificates of deposit, $100,000 and over 9,261 6,020
- --------------------------------------------------------------------------------------------------
Total deposits 94,271 83,291
- --------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 1,730 2,304
Federal funds purchased 0 500
Interest payable and other liabilities 895 1,256
- --------------------------------------------------------------------------------------------------
Total liabilities 96,896 87,351
- --------------------------------------------------------------------------------------------------
Commitments and contingent liabilities 0 0
Shareholders' equity:
Common stock - no par value: authorized 20,000,000
shares; issued & outstanding 1,076,720 shares in 1997 and 1996 3,662 3,662
Retained earnings 6,296 5,771
Net unrealized loss on securities available for sale (32) (15)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 9,926 9,418
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $106,822 $96,769
==================================================================================================
See accompanying notes to consolidated condensed financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Statements of Income (unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
(In thousands, except per share amounts): 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------
Interest income:
Loans, including fees $3,526 $3,095 $1,795 $1,570
Federal funds sold 140 115 92 80
Investment securities:
Taxable 413 509 216 247
Nontaxable 92 76 47 40
- --------------------------------------------------------------------------------------------
Total interest income 4,171 3,795 2,150 1,937
- --------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Savings and interest-bearing demand 319 320 165 166
Time 751 667 386 348
Certificates of deposit, $100,000 and over 245 139 127 67
Other borrowed funds 50 51 22 26
- --------------------------------------------------------------------------------------------
Total interest expense 1,365 1,177 700 607
- --------------------------------------------------------------------------------------------
Net interest income 2,806 2,618 1,450 1,330
Provision for loan losses 47 0 47 0
- --------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,759 2,618 1,403 1,330
- --------------------------------------------------------------------------------------------
Noninterest income:
Service charges and fees 133 125 65 60
Bankcard income 145 120 79 63
Loan servicing 62 65 27 29
Gain on sale of loans 57 108 57 45
Other 192 74 167 33
- --------------------------------------------------------------------------------------------
Total noninterest income 589 492 395 230
- --------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 1,421 1,208 713 596
Occupancy 347 297 173 151
Data processing 155 144 78 70
Bankcard processing expense 117 91 65 47
Professional services 69 104 33 57
Other 403 455 198 278
- --------------------------------------------------------------------------------------------
Total noninterest expenses 2,512 2,299 1,260 1,199
- --------------------------------------------------------------------------------------------
Income before income tax expense 836 811 538 361
Income tax expense 311 316 195 137
- --------------------------------------------------------------------------------------------
Net income $ 525 $ 495 $ 343 $ 224
============================================================================================
Net income per common and equivalent share $ 0.42 $ 0.42 $ 0.27 $ 0.19
============================================================================================
See accompanying notes to consolidated condensed financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
Six Months Ended
June 30,
(In thousands): 1997 1996
- ----------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 525 $ 495
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 115 157
Provision for loan losses 47 0
Unamortized deferred loan fees, net (75) (112)
Originations of SBA loans held for sale (191) (611)
Proceeds from the sale of SBA loans held for sale 1,095 1,742
Change in interest and fees receivable and other assets 117 (82)
Change in interest payable and other liabilities (38) (504)
- ----------------------------------------------------------------------------------
Net cash provided by operating activities 1,595 1,085
- ----------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 113 635
Proceeds from maturities of securities held to maturity 1,161 1,132
Purchase of securities available for sale (8,246) 0
Purchase of securities held to maturity (205) (541)
Net change in loans (974) (7,598)
Purchases of premises and equipment (177) (26)
- ----------------------------------------------------------------------------------
Net cash used in investing activities (8,328) (6,398)
- ----------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 10,980 6,217
Net change in securities sold under agreements to repurchase (574) 39
Net change in federal funds purchased (500) 0
Cash dividends paid (323) (323)
- ----------------------------------------------------------------------------------
Net cash provided by financing activities 9,583 5,933
- ----------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,850 620
Cash and cash equivalents at beginning of period 6,945 11,757
- ----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 9,795 $12,377
==================================================================================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 1,445 $ 1,187
Income taxes 108 719
See accompanying notes to consolidated condensed financial statements.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
1) All adjustments (consisting only of normal recurring accruals) which, in
the opinion of Management, are necessary for a fair presentation of the
Company's financial position at June 30, 1997 and December 31, 1996 and the
results of its operations and its cash flows for the three and six month
periods ended June 30, 1997 and 1996 have been included. The results of
operations and cash flows for the periods presented are not necessarily
indicative of the results for a full year.
2) The accompanying unaudited financial statements have been prepared on a
basis consistent with the accounting principles and policies reflected in
the Company's annual report for the year ended December 31, 1996.
3) Net income per share for the three and six month periods ended June 30,
1997 and 1996 was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the periods, including
the dilutive effects of stock options, if material. The weighted average
number of common and equivalent shares outstanding for the six month
periods ended June 30, 1997 and 1996 was 1,251,507 and 1,181,690,
respectively. The weighted average number of common and equivalent shares
outstanding for the second quarter of 1997 and 1996 was 1,255,752 and
1,155,642, respectively.
In February 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
The Company is required to adopt SFAS 128 in the fourth quarter of 1997 and
will restate at that time earnings per share (EPS) data for prior periods
to conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods,
basic EPS would have been $0.49 and $0.46 for the six month periods ended
June 30, 1997 and 1996, respectively. Basic EPS for the second quarter of
1997 and 1996 would have been $0.32 and $0.21, respectively. Diluted EPS
under SFAS 128 would not have been significantly different than EPS
currently reported for the periods.
4) The provision for income taxes for the periods presented is based on a
projected tax rate for the entire year. The Company's effective tax rate
was 37% and 39% for the six month periods ended June 30, 1997 and 1996,
respectively. The decrease in the tax rate was partially attributable to an
increase in nontaxable municipal bond income in 1997 and a reduction of the
California franchise tax rate to 10.84% in 1997 from 11.3% in 1996.
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): 1997 1996 $ %
- --------------------------------------------------------------------------------
Average Balances:
Assets * $101,518 $92,449 $ 9,069 9.9%
Investment securities - taxable* 14,270 16,366 (2,096) (12.8)
Investment securities - nontaxable 3,453 3,102 351 11.3
Federal funds sold 4,303 4,563 (260) (5.7)
Total loans 70,112 59,651 10,461 17.5
Nonaccrual loans 315 141 174 123.4
Other real estate owned 0 359 (359) (100.0)
Deposits 88,855 80,226 8,629 10.8
Shareholders' equity * 9,690 8,971 719 8.0
Interest-earning assets 91,823 83,541 8,282 9.9
Interest-bearing liabilities 64,382 58,045 6,337 10.9
Income Statements:
Interest income (1) $ 4,214 $ 3,830 $ 384 10.0%
Interest expense 1,365 1,177 188 16.0
- --------------------------------------------------------------------------------
Net interest income (1) 2,849 2,653 196 7.4
Taxable equivalent adjustment 43 35 8 22.9
- --------------------------------------------------------------------------------
Net interest income 2,806 2,618 188 7.2
Provision for loan losses 47 0 47 NA
- --------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,759 2,618 141 5.4
- --------------------------------------------------------------------------------
Noninterest income 589 492 97 19.7
Noninterest expenses 2,512 2,299 213 9.3
Income tax expense 311 316 (5) (1.6)
- --------------------------------------------------------------------------------
Net income $ 525 $ 495 $ 30 6.1%
================================================================================
<FN>
* before unrealized gain or loss on securities available for sale
</FN>
Performance Ratios: (2) Change
Yield on average earning assets 9.16% 9.14% 0.02 %
Yield on average earning assets (1) 9.25% 9.22% 0.03 %
Interest rate on average interest-bearing
liabilities 4.28% 4.08% 0.20 %
Interest expense as a percent of average
earning assets 3.00% 2.83% 0.17 %
Net yield on average earning assets 6.16% 6.31% (0.15)%
Net yield on average earning assets (1) 6.25% 6.39% (0.14)%
<FN>
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
</FN>
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): 1997 1996 $ %
- --------------------------------------------------------------------------------
Average Balances:
Assets * $103,506 $94,470 $ 9,036 9.6%
Investment securities - taxable* 15,955 15,966 (11) (0.1)
Investment securities - nontaxable 3,480 3,228 252 7.8
Federal funds sold 4,744 6,381 (1,637) (25.7)
Total loans 69,992 60,192 9,800 16.3
Nonaccrual loans 369 219 150 68.5
Other real estate owned 0 359 (359) (100.0)
Deposits 90,951 82,272 8,679 10.5
Shareholders' equity * 9,818 9,101 717 7.9
Interest-earning assets 93,802 85,548 8,254 9.6
Interest-bearing liabilities 65,492 59,925 5,567 9.3
Income Statements:
Interest income (1) 2,172 $ 1,955 $ 217 11.1%
Interest expense 700 607 93 15.3
- --------------------------------------------------------------------------------
Net interest income (1) 1,472 1,348 124 9.2
Taxable equivalent adjustment 22 18 4 22.2
- --------------------------------------------------------------------------------
Net interest income 1,450 1,330 120 9.0
Provision for loan losses 47 0 47 NA
- --------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,403 1,330 73 5.5
- --------------------------------------------------------------------------------
Noninterest income 395 230 165 71.7
Noninterest expenses 1,260 1,199 61 5.1
Income tax expense 195 137 58 42.3
- --------------------------------------------------------------------------------
Net income $ 343 $ 224 $ 119 53.1%
================================================================================
<FN>
* before unrealized gain or loss on securities available for sale
</FN>
Performance Ratios: (2) Change
Yield on average earning assets 9.19% 9.11% 0.08 %
Yield on average earning assets (1) 9.29% 9.19% 0.10 %
Interest rate on average interest-bearing
liabilities 4.29% 4.07% 0.22 %
Interest expense as a percent of average
earning assets 2.99% 2.85% 0.14 %
Net yield on average earning assets 6.20% 6.26% (0.06)%
Net yield on average earning assets (1) 6.30% 6.34% (0.04)%
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
BAY COMMERCIAL SERVICES AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1996
OVERVIEW
Certain matters discussed in this Management's Discussion and Analysis are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties include, among others,
(1) significant increases in competitive pressure in the banking industry; (2)
changes in the interest rate environment affect margins; (3) general economic
conditions, either nationally or regionally, are less favorable than expected,
resulting in, among other things, a deterioration in credit quality; (4) changes
in the regulatory environment; (5) changes in business conditions and inflation;
and (6) changes in securities markets. Therefore, the information set forth in
such forward-looking statements should be carefully considered when evaluating
the business prospects of Bay Commercial Services Company (the "Company") and
Bay Bank of Commerce (the "Bank").
Net income of the Company was $525,000 for the first six months of 1997 compared
to $495,000 for the first six months of 1996. Net income per share was $0.42 for
both the 1997 and 1996 periods.
The $30,000 or 6% increase in net income for the 1997 period compared to the
1996 period was principally due to a $188,000 or 7% increase in net interest
income and a $97,000 or 20% increase in noninterest income. These increases in
income were partially offset by a $213,000 or 9% increase in noninterest
expenses and a $47,000 provision for loan losses in the 1997 period.
Total assets were $106,822,000 at June 30, 1997, representing a $10,053,000 or
10% increase over December 31, 1996. Total deposits grew $10,980,000 or 13%
during the period; nearly half related to deposit growth at the newest branch of
the Bank in San Ramon. Due to flat loan growth during the first six months of
1997, the funds contributed by the deposit growth were principally invested in
investment securities and federal funds sold.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the principal source of the Company's earnings, is the
amount by which interest and fees generated by interest-earning assets, loans
and investments, exceed the interest cost of deposits and other interest-bearing
liabilities. Net interest income is affected by changes in interest rates as
well as the composition and volume of interest-earning assets and
interest-bearing liabilities.
Net interest income of $2,806,000 for the first six months of 1997 increased
$188,000 or 7% compared to the first six months of 1996. The increase
principally reflected an $8,282,000 or 10% growth in average earning assets. The
net interest margin declined slightly to 6.16% for the 1997 period compared to
6.31% for the 1996 period.
The growth in average interest-earning assets between the 1997 and 1996 periods
was principally due to growth of $10,287,000 or 17% in average earning loans.
Average total securities and average federal funds sold declined $1,745,000 or
9% and $260,000 or 6%, respectively, between the periods. The yield on average
earning assets remained relatively unchanged at 9.16% compared to 9.14% during
the 1996 period. The yield was enhanced by an increase in the proportion of
earning assets invested in higher yielding loans, 76% for the 1997 period
compared to 71% for the 1996 period.
Average interest-bearing liabilities increased $6,337,000 or 11% between the
1997 and 1996 periods. The average rate paid for interest-bearing liabilities
increased to 4.28% for the 1997 period compared to 4.08% for the 1996 period.
The higher average rate paid during the 1996 period principally reflected a
shift in the deposit mix. The proportion of total interest-bearing liabilities
that were higher cost time deposits increased to 59% for the 1997 period
compared to 53% for the 1996 period.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. If more assets than liabilities reprice in a given period (an asset
sensitive position), interest rate changes will be reflected more quickly in
rates on earning assets. If interest rates decline, an asset sensitive position
could adversely affect net interest income. Alternatively, where liabilities
reprice more quickly than assets in a given period (a liability sensitive
position) a decline in market rates could benefit net interest income. The
results would reverse if market rates were to increase.
The following table presents the Company's interest rate sensitivity gap
position at June 30, 1997. For any given period, the repricing is matched when
an equal amount of assets and liabilities reprice. The repricing of a fixed rate
asset or liability is considered to occur at its contractual maturity or, for
those assets which are held for sale, within the time period during which sale
may reasonably be expected to be accomplished. Floating rate assets or
liabilities are considered to reprice in the period during which the rate can
contractually change. Any excess of either assets or liabilities in a period
results in a gap, or mismatch, shown in the table. A positive gap indicates
asset sensitivity and a negative gap indicates liability sensitivity.
Interest Sensitivity Period
----------------------------------------
3 Over Over 1
As of June 30, 1997: months 3 months year to Over 5
(Dollars in thousands) or less to 1 year 5 years years Total
- --------------------------------------------------------------------------------------------
Interest rate sensitive assets:
Loans (net of nonaccrual) $48,375 $ 3,624 $ 8,053 $11,602 $71,654
Securities (before unrealized loss on
securities available for sale) 9,385 3,201 5,228 5,461 23,275
Federal funds sold 1,500 0 0 0 1,500
- --------------------------------------------------------------------------------------------
Total 59,260 6,825 13,281 17,063 96,429
- --------------------------------------------------------------------------------------------
Interest rate sensitive liabilities:
Interest-bearing transaction accounts 18,096 0 0 0 18,096
Savings deposits 5,863 0 0 0 5,863
Time deposits >$100,000 18,347 3,867 1,018 100 23,332
Other time deposits 9,928 5,994 1,721 0 17,643
Other borrowed funds 136 1,594 0 0 1,730
- --------------------------------------------------------------------------------------------
Total 52,370 11,455 2,739 100 66,664
- --------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 6,890 $(4,630) $10,542 $16,963 $29,765
- --------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap $ 6,890 $ 2,260 $12,802 $29,765
- --------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap to total assets 6.5% 2.1% 12.0% 27.9%
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, 1997, indicates that the Company, on a cumulative gap
basis, is asset sensitive over all the time periods.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company provides for potential loan losses by a charge to operating income
based upon the current composition of the loan portfolio, past loan loss
experience, current and projected economic conditions, an evaluation of the risk
elements in the loan portfolio and other factors that, in Management's judgment,
deserve recognition in estimating loan losses. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to make additions to the allowance based on their evaluations of information
available to them at the time of their examination. Management will charge off
loans to the allowance when it determines there has been a permanent impairment
of the related carrying values.
The provision for loan losses reflects an amount sufficient to cover estimated
loan losses and to maintain the allowance for loan losses at a level which, in
Management's opinion, is adequate to absorb potential credit losses inherent in
loans, outstanding loan commitments and standby letters of credit.
As of June 30, 1997, the allowance for loan losses was $1,000,000 compared to
$971,000 at December 31, 1996. The ratio of the allowance for loan losses to
total loans was 1.4% at June 30, 1997 and December 31, 1996. A $47,000 provision
for loan losses was added during the first six months of 1997 while no provision
for loan losses was made during the first six months of 1996. Although
Management uses available information to provide for losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. Based upon information currently available, Management believes that
the allowance for loan losses at June 30, 1997 is adequate to absorb future
possible losses. However, no assurance can be given that the Company may not
sustain charge-offs which are in excess of the size of the allowance in any
given period.
Information on nonperforming loans and other real estate owned for the six
months ended June 30, 1997 and 1996 and the year ended December 31, 1996 is
summarized in the following table.
June 30, December 31, June 30, 1996
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------
Net loan charge-offs $18 $11 $14
Ratio of net loan charge-offs to average loans 0 0 0
Nonperforming loans:
Nonaccrual $359 $208 $318
Accruing loans past due
90 days or more 223 227 0
- -----------------------------------------------------------------------------------------
Total nonperforming loans $582 $435 $318
- -----------------------------------------------------------------------------------------
Ratio of nonperforming loans to total loans 0.8% 0.6% 0.5%
Ratio of allowance for loan losses to nonperforming
loans 172% 223% 304%
Other Real Estate Owned 0 0 $359
Although there has been an increase in total nonperforming loans from June 1996
to June 1997, 62% of the June 1997 total represent loans guaranteed by the Small
Business Administration ("SBA loans"). The remaining unguaranteed nonperforming
balance of $223,000 is comprised of loans in the process of recovery and/or
liquidation and represents a small 0.3% of total outstanding loans. Management
believes that the increase in nonperforming loans since June 30, 1996 is not
representative of any specific trend within the loan portfolio.
NONINTEREST INCOME
Total noninterest income of $589,000 for the first six months of 1997 increased
$97,000 or 20% compared to the first six months of 1996. The greatest change was
a $118,000 or 160% increase in other noninterest income, principally reflecting
a nonrecurring recovery in 1997 of $149,000 in loan collection expenses from
prior periods. Bankcard income also increased during the 1997 period, up $25,000
or 21% compared to the 1996 period, due to increased merchant account activity.
With the sale of a smaller volume of SBA loans during the first six months of
1997, the gain on sale of loans declined $51,000 or 47% compared to the first
six months of 1996. Loan servicing income remained nearly unchanged at $62,000
for the 1997 period compared to $65,000 for the 1996 period as the average
volume of serviced loans did not change significantly.
NONINTEREST EXPENSE
Total noninterest expenses of $2,512,000 for the first six months of 1997
increased $213,000 or 9% compared to the same period in 1996. Contributing to
the increase in noninterest expenses was a $213,000 or 18% increase in salaries
and employee benefits principally due to additional staff for the Bank's San
Ramon branch, which opened in the fourth quarter of 1996, and salary increases
as well as increased benefits expenses. The Bank's San Ramon branch was also the
principal reason for the $50,000 or 17% increase in occupancy expense. Costs
associated with settlement of a litigation matter in the second quarter of 1996
explain a large portion of the $35,000 or 34% drop in professional services
expense and the $52,000 or 11% reduction in other noninterest expense.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $311,000 for the first six months of
1997 compared to $316,000 for the first six months of 1996. The effective income
tax rate was 37% and 39% for the 1997 and 1996 periods, respectively. The
decline in the rate for 1997 principally reflected the effects of an increase in
nontaxable municipal bond interest and a reduction in the California tax rate
for financial institutions to 10.84%% for 1997 from 11.3% for 1996.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1996
OVERVIEW
Net income for the Company for the second quarter of 1997 was $343,000 compared
to $224,000 for the second quarter of 1996. Net income per share was $0.27 and
$0.19 for the 1997 and 1996 quarters, respectively.
The $119,000 or 53% increase in net income between the 1997 and 1996 quarters
principally resulted from increases of $165,000 or 72% in noninterest income and
$120,000 or 9% in net interest income which were partially offset by increases
of $61,000 or 5% in noninterest expense, $58,000 or 42% in the provision for
income taxes and $47,000 in provision for loan losses in the 1997 quarter.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income of $1,450,000 for the second quarter of 1997 increased
$120,000 or 9% compared to the second quarter of 1996. The increase principally
reflected $8,254,000 or 10% growth in average earning assets between the
quarters. The net interest margin declined to 6.21% from 6.26% for the 1996
quarter.
The growth in average interest-earning assets between the 1997 and 1996 quarters
was principally due to an increase of $9,650,000 or 16% in average earning
loans. Average total securities increased $241,000 or 1% while average federal
funds sold declined $1,637,000 or 26% between the quarters. The yield on average
earning assets rose to 9.19% compared to 9.11% during the 1996 quarter,
principally reflecting an increase in the ratio of average earning loans to
average total earning assets.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
As a result of growth in loans held for investment, a $47,000 provision for loan
losses was added to the reserve for loan losses during the 1997 quarter. No
provision for loan losses was made during the second quarter of 1996.
NONINTEREST INCOME
Total noninterest income of $395,000 for the second quarter of 1997 increased
$165,000 or 72% compared to the second quarter of 1996. The largest change was a
$134,000 or 406% increase in other noninterest income, principally reflecting
the 1997 recovery of $149,000 of loan collection expenses from prior periods.
Also contributing to higher noninterest income for the 1997 quarter was a
$16,000 or 25% increase in bankcard income and a $12,000 or 27% increase in gain
on sale of loans.
NONINTEREST EXPENSE
Total noninterest expenses of $1,260,000 for the second quarter of 1997
increased $61,000 or 5% compared to the same quarter in 1996. Salaries and
employees benefits increased $117,000 or 20% due principally to additional staff
for the Bank's San Ramon branch opened in December of 1996 and salary increases,
as well as increased employee benefits expense. Occupancy expense rose $22,000
or 15% for the 1997 quarter, principally due to the new branch of the Bank, and
bankcard expense rose $18,000 or 38% as a result of increased merchant account
activity. The settlement of a litigation matter in the second quarter of 1996
pushed expenses higher for that quarter in the areas of noninterest expenses and
professional services with the result that these expenses dropped $80,000 or 29%
and $24,000 or 42%, respectively, in the 1997 quarter.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $195,000 for the second quarter of 1997
compared to $137,000 for the second quarter of 1996. The increased income tax
expense reflected higher taxable income during the 1997 quarter. The effective
income tax rate was 36% and 38% for the 1997 and 1996 quarters, respectively.
The decreased rate for the 1997 quarter principally reflected an adjustment to
the projected tax rate for the entire year.
FINANCIAL CONDITION
LOANS AND INVESTMENTS
Loan growth slowed during the first six months of 1997 compared to the same
period in 1996. Total loans of $71,474,000 at June 30, 1997 were only $112,000
higher than at year-end 1996. Deposit growth for the first six months of 1997
was principally invested in securities and federal funds sold, up by $8,679,000
or 54% from December 31, 1996.
DEPOSITS AND OTHER BORROWED FUNDS
Total deposits of $94,271,000 at June 30, 1997 increased $10,980,000 or 13% from
December 31, 1996. The increase in deposits was primarily the result of new
account growth in the Bank's recently opened San Ramon Regional Office and an
increase in public fund time deposits. Securities sold under agreement to
repurchase and federal funds purchased declined $574,000 or 25% and $500,000 or
100%, respectively, during the first six months of 1997.
OTHER ASSETS AND OTHER LIABILITIES
Interest and fees receivable decreased $21,000 or 4% during the first six months
of 1997. Interest payable and other liabilities at June 30, 1997, declined
$361,000 or 29% from year-end 1996 principally due to the payment in 1997 of a
cash dividend accrued in 1996.
LIQUIDITY
Liquidity is defined as the ability of the Company to meet present and future
obligations either through the sale or maturity of existing assets, or by the
acquisition of funds through liability management. The Company manages its
liquidity to provide adequate funds to support both the borrowing needs of its
customers and fluctuations in deposit flows. The Company defines liquid assets
to include cash and noninterest-bearing deposit balances, federal funds sold,
all marketable securities less liabilities that are secured by any of the
securities, and loans held for sale, less any reserve requirements being met by
any of the above. Net deposits and short-term liabilities include all deposits,
federal funds purchased, repurchase agreements and other borrowings and debt due
in one year or less. The liquidity ratio is calculated by dividing total liquid
assets by net deposits and short term liabilities. The Company's liquidity ratio
by this measure was 30% at June 30, 1997 and 28% at December 31, 1996. It is the
opinion of Management that the Company's and the Bank's liquidity positions are
sufficient to meet their respective needs.
In addition, the Bank has informal, non-binding, federal funds borrowing
arrangements totaling $5,000,000 with a correspondent bank and also has
repurchase facilities to meet unforeseen outflows. As of June 30, 1997, no
borrowed funds were outstanding from these credit facilities. As of June 30,
1997, the Bank did not carry any brokered deposit balances.
CAPITAL
The following tables present the Company's and the Bank's regulatory capital
positions at June 30, 1997, and average assets over the six month period ended
June 30, 1997:
RISK BASED CAPITAL RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
Tier 1 Capital $ 9,958 11.5% $ 9,776 11.3%
Tier 1 Capital minimum requirement 3,473 4.0 3,467 4.0
- --------------------------------------------------------------------------------
Excess $ 6,485 7.5% $ 6,309 7.3%
Total Capital $10,958 12.6% $10,776 12.4%
Total Capital minimum requirement 6,945 8.0 6,935 8.0
- --------------------------------------------------------------------------------
Excess $ 4,013 4.6% $ 3,841 4.4%
Risk weighted assets $86,818 $86,687
LEVERAGE RATIO
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
Tier 1 Capital to average total assets $ 9,958 9.8% $ 9,776 9.6%
Range of minimum leverage 3,046- 3.0- 3,042- 3.0-
requirement 5,076 5.0% 5,069 5.0%
- --------------------------------------------------------------------------------
Range of excess 4,882- 4.8- 4,707- 4.6-
$ 6,912 6.8% $ 6,734 6.6%
Average total assets $101,518 $101,387
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, 1997 and 1996 have not been
material.
PART II - OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Security Holders.
(a) The Company's Annual Meeting of Shareholders was held on June 3, 1997.
(b) Not required.
(c) At the 1997 Annual Meeting the shareholders took the following actions:
1. Elected Directors of the Company to serve until the 1998 Annual
Meeting of Shareholders and until their successors are elected
and qualified;
2. Ratified the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for the 1997 fiscal
year.
(i) In the election of directors, no candidates were nominated for
election as a director other than the nominees of the Board of
Directors whose names were set forth in the Company's proxy
statement dated April 28, 1997. Set forth below is a tabulation
of the votes cast in the election of Directors with respect to
each nominee for office.
VOTES CAST FOR ELECTION VOTES WITHHELD
Joshua Fong, O.D. 840,778 52,322
William R. Henson 840,778 52,322
Richard M. Kahler 835,161 57,939
Dimitri V. Koroslev 840,778 52,322
William E. Peluso 840,778 52,322
Oswald A. Rugaard 840,778 52,322
Abstentions N/A N/A
Broker non-votes N/A N/A
(ii) On the matter of the ratification of the appointment of Deloitte
& Touche LLP as independent public accountants for the 1997
fiscal year the votes cast were as follows:
For 891,460
Against 0
Abstentions 1,640
Broker non-votes N/A
(d) Not required.
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
for the quarter ended June 30, 1997.
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 4, 1997 /s/R. M. Kahler
------------------------------
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 4, 1997 /s/R. D. Greenfield
------------------------------
R. D. Greenfield
Chief Financial Officer
(Principal Accounting Officer)