U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB/A (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 AMENDED For the quarterly period ended March 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________to____________ Commission File Number: 0-12231 BAY COMMERCIAL SERVICES (Exact name of small business issuer as specified in its charter) California 94-2760444 ---------- ---------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 1495 East 14th Street San Leandro, California 94577 ----------------------------- (Address of principal executive offices) (510) 357-2265 -------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at April 30, 1998 - ----- ----------------------------- Common stock, no par value 1,080,720 shares Transitional Small Business Disclosure Format YES NO X ---- ---- This report contains a total of 15 pages. BAY COMMERCIAL SERVICES AND SUBSIDIARY Consolidated Condensed Balance Sheets March 31, 1998 December 31, (Dollars in thousands): .....................................................(unaudited) 1997 - ----------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks ..................................................... $ 14,150 $ 7,548 Federal funds sold and reverse repurchase agreements ........................ 8,400 --- - ----------------------------------------------------------------------------------------------------- Cash and cash equivalents ................................................. 22,550 7,548 - ----------------------------------------------------------------------------------------------------- Securities available for sale, stated at fair value (amortized cost of $11,469 for 1998; $24,663 for 1997) .................... 11,482 24,651 Securities held to maturity (fair values of $8,094 for 1998; $8,057 for 1997) ......................................................... 8,003 7,929 Loans held for sale ......................................................... 1,002 1,501 Loans held for investment ................................................... 78,713 72,628 Allowance for loan losses ................................................. (1,005) (1,000) - ----------------------------------------------------------------------------------------------------- Net loans ................................................................. 78,710 73,129 - ----------------------------------------------------------------------------------------------------- Premises and equipment, net ................................................. 2,063 2,111 Interest and fees receivable ................................................ 682 566 Other assets ................................................................ 370 435 - ----------------------------------------------------------------------------------------------------- Total assets .............................................................. $ 123,860 $ 116,369 ===================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand ................................................ $ 35,098 $ 29,076 Savings and interest-bearing demand ....................................... 32,741 29,203 Time ...................................................................... 29,892 30,022 Certificates of deposit, $100 and over .................................... 13,571 12,834 - ----------------------------------------------------------------------------------------------------- Total deposits ............................................................ 111,302 101,135 - ----------------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase .............................. 1,192 1,290 Federal funds purchased ..................................................... --- 2,500 Interest payable and other liabilities ...................................... 916 1,271 - ----------------------------------------------------------------------------------------------------- Total liabilities ......................................................... 113,410 106,196 - ----------------------------------------------------------------------------------------------------- Commitments and contingent liabilities ...................................... --- --- Shareholders' equity: Common stock - no par value: authorized 20,000,000 shares; issued & outstanding 1,080,720 in 1998; 1,078,720 in 1997 ................ 3,680 3,671 Retained earnings ......................................................... 6,763 6,509 Net unrealized gain (loss) on securities available for sale, net of taxes . 7 (7) - ----------------------------------------------------------------------------------------------------- Total shareholders' equity ................................................ 10,450 10,173 - ----------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity ................................ $ 123,860 $ 116,369 ===================================================================================================== See accompanying notes to consolidated condensed financial statements BAY COMMERCIAL SERVICES AND SUBSIDIARY Consolidated Condensed Statements of Income (unaudited) Three Months Ended March 31, (Dollars in thousands, except per share amounts): .... 1998 1997 - ------------------------------------------------------------------------------ Interest income: Loans, including fees .............................. $1,935 $1,731 Federal funds sold and reverse repurchase agreements 55 48 Securities: Taxable .......................................... 279 197 Tax exempt ....................................... 60 45 - ------------------------------------------------------------------------------ Total interest income .......................... 2,329 2,021 - ------------------------------------------------------------------------------ Interest expense: Deposits: Savings and interest-bearing demand .............. 204 154 Time ............................................. 386 365 Certificates of deposit, $100 and over ........... 184 118 Other borrowed funds ............................... 18 28 - ------------------------------------------------------------------------------ Total interest expense ......................... 792 665 - ------------------------------------------------------------------------------ Net interest income ............................ 1,537 1,356 Provision for loan losses ............................ 10 --- - ------------------------------------------------------------------------------ Net interest income after provision for loan losses .................... 1,527 1,356 - ------------------------------------------------------------------------------ Noninterest income: Bankcard income .................................... 96 66 Service charges and fees ........................... 68 68 Gain on sale of loans .............................. 33 --- Loan servicing ..................................... 24 35 Other .............................................. 27 25 - ------------------------------------------------------------------------------ Total noninterest income ....................... 248 194 - ------------------------------------------------------------------------------ Noninterest expenses: Salaries and employee benefits ..................... 793 708 Occupancy .......................................... 170 174 Data processing .................................... 85 77 Bankcard processing expense ........................ 79 52 Professional services .............................. 28 36 Other .............................................. 232 205 - ------------------------------------------------------------------------------ Total noninterest expenses ..................... 1,387 1,252 - ------------------------------------------------------------------------------ Income before income tax expense ............... 388 298 Income tax expense ................................... 134 116 - ------------------------------------------------------------------------------ Net income ..................................... $ 254 $ 182 ============================================================================== Net income per common share - basic ............ $0.24 $0.17 Weighted average common shares - basic ......... 1,079,653 1,076,720 Net income per common share - diluted .......... $0.20 $0.15 Weighted average common shares - diluted ....... 1,279,707 1,244,652 ============================================================================== See accompanying notes to consolidated condensed financial statements. BAY COMMERCIAL SERVICES AND SUBSIDIARY Consolidated Condensed Statements of Cash Flows Three Months Ended March 31, (Dollars in thousands): ....................................... 1998 1997 - ---------------------------------------------------------------------------------- Cash flows from operating activities: Net income .................................................. $ 254 $ 182 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................... (4) 74 Provision (benefit) for loan losses ..................... 10 --- Unamortized deferred loan fees, net ..................... (62) (27) Originations of SBA loans held for sale ................. (158) (146) Proceeds from the sale of SBA loans held for sale ....... 734 --- Change in interest and fees receivable and other assets . (48) (3) Change in interest payable and other liabilities ........ (37) (65) - ---------------------------------------------------------------------------------- Net cash provided by operating activities ................. 689 15 - ---------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities of securities available for sale ... 17,244 97 Proceeds from maturities of securities held to maturity ..... 71 160 Purchase of securities available for sale ................... (3,975) --- Purchase of securities held to maturity ..................... (144) (205) Net change in loans ......................................... (6,113) 936 Purchases of premises and equipment ......................... (24) (157) - ---------------------------------------------------------------------------------- Net cash provided by investing activities ................. 7,059 831 - ---------------------------------------------------------------------------------- Cash flows from financing activities: Net change in deposits ...................................... 10,167 5,676 Net change in securities sold under agreements to repurchase (98) (98) Net change in federal funds purchased ....................... (2,500) (500) Exercise of stock options ................................... 9 -- Cash dividends paid ......................................... (324) (323) - ---------------------------------------------------------------------------------- Net cash provided by financing activities ................. 7,254 4,755 - ---------------------------------------------------------------------------------- Net change in cash and cash equivalents ................... 15,002 5,601 Cash and cash equivalents at beginning of year ................ 7,548 6,945 - ---------------------------------------------------------------------------------- Cash and cash equivalents at end of year ...................... $22,550 $12,546 ================================================================================== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest ................................................. $676 $655 Income taxes ............................................. --- --- See accompanying notes to consolidated financial statements. Bay Commercial Services and Subsidiary Notes to Consolidated Condensed Financial Statements (Unaudited) 1) All adjustments (consisting only of normal recurring accruals) which, in the opinion of Management, are necessary for a fair presentation of Bay Commercial Services and Subsidiary (the "Company") financial position at March 31, 1998 and December 31, 1997 and the results of its operations and its cash flows for the three month periods ended March 31, 1998 and 1997 have been included. The results of operations and cash flows for the periods presented are not necessarily indicative of the results for a full year. 2) The accompanying unaudited financial statements have been prepared on a basis consistent with the accounting principles and policies reflected in the Company's annual report for the year ended December 31, 1997. 3) Net income per common share - basic for the three month periods ended March 31, 1998 and 1997 was computed by dividing net income by the weighted average number of outstanding common shares. Net income per common share - diluted for the three month periods ended March 31, 1998 and 1997 is computed by dividing net income by the weighted average number of outstanding common shares including the dilutive effect of stock options. The weighted average number of outstanding common shares for the three month periods ended March 31, 1998 and 1997 was 1,079,653 and 1,076,720, respectively. The weighted average number of outstanding common shares including the dilutive effect of stock options for the three month periods ended March 31, 1998 and 1997 was 1,279,707 and 1,244,652, respectively. 4) The provision for income taxes for the periods presented is based on a projected tax rate for the entire year. The Company's effective tax rate was 35% and 39% for the three month periods ended March 31, 1998 and 1997, respectively. The decrease in the tax rate was partially attributable to higher levels in the 1998 period of tax exempt municipal bond income and loan interest exempt from state tax. 5) Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement requires disclosure of total nonowner changes in shareholders' equity as comprehensive income. Comprehensive income includes net income and net unrealized gain (loss) on securities available for sale, net of taxes. Total comprehensive income was $268,000 and $138,000 for the first quarters of 1998 and 1997, respectively. 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 March 31, (Decrease) (Dollars in thousands): 1998 1997 $ % - ------------------------------------------------------------------------------- Average Balances: Assets * ............................. $114,300 $99,507 $14,793 14.9% Securities - taxable* ................ 18,359 12,565 5,794 46.1 Securities - tax exempt .............. 4,671 3,426 1,245 36.3 Total loans .......................... 77,355 70,234 7,121 10.1 Nonaccrual loans ..................... 433 261 172 65.9 Deposits ............................. 101,547 86,735 14,812 17.1 Shareholders' equity * ............... 10,340 9,561 779 8.1 Interest-earning assets .............. 103,965 89,821 14,144 15.7 Interest-bearing liabilities ......... 74,057 63,259 10,798 17.1 Income Statements: Interest income (1) .................. $ 2,357 $ 2,042 $ 315 15.4% Interest expense ..................... 792 665 127 19.1 - ------------------------------------------------------------------------------- Net interest income (1) ............ 1,565 1,377 188 13.7 Taxable equivalent adjustment ........ 28 21 7 33.3 - ------------------------------------------------------------------------------- Net interest income ................ 1,537 1,356 181 13.3 Provision for loan losses ............ 10 -- 10 - ------------------------------------------------------------------------------- Net interest income after provision for loan losses .................. 1,527 1,356 171 12.6 - ------------------------------------------------------------------------------- Noninterest income ................... 248 194 54 27.8 Noninterest expenses ................. 1,387 1,252 135 10.8 Income tax expense ................... 134 116 18 15.5 - ------------------------------------------------------------------------------- Net income ......................... $ 254 $ 182 $ 72 39.6% =============================================================================== <FN> * before unrealized gain or loss on securities available for sale </FN> Performance Ratios: (2) Change ------ Yield on average earning assets .......... 9.09% 9.13% (0.04)% Yield on average earning assets (1) ...... 9.19% 9.22% (0.03)% Interest rate on average interest-bearing liabilities .......................... 4.34% 4.26% 0.08 % Interest expense as a percent of average earning assets ....................... 3.09% 3.00% 0.09 % Net yield on average earning assets ...... 6.00% 6.13% (0.13)% Net yield on average earning assets (1) .. 6.10% 6.22% (0.12)% <FN> (1) Federal taxable equivalent basis. (2) Ratios have been annualized and are not necessarily indicative of results for a full year. </FN> BAY COMMERCIAL SERVICES AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended March 31, 1998 compared to three months ended March 31, 1997 OVERVIEW Certain matters discussed in this Management's Discussion and Analysis are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressure in the banking industry; (2) changes in the interest rate environment reduce margins; (3) general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; and (6) changes in securities markets. Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of Bay Commercial Services (the "Company") and Bay Bank of Commerce (the "Bank"). Net income of the Company was $254,000 for the first quarter of 1998 compared to $182,000 for the first quarter of 1997. Net income per common share - basic was $0.24 and $0.17 for the first quarter of 1998 and 1997, respectively. Net income per common share - diluted was $0.20 and $0.15 for the first quarter of 1998 and 1997, respectively. The $72,000 or 40% growth in net income for the first quarter of 1998 compared to the first quarter of 1997 principally reflected higher net interest income and noninterest income during the 1998 quarter which were partially offset by increases in noninterest expenses, income tax expense and provision for loan losses. Net interest income increased $181,000 or 13% in the 1998 quarter principally due to growth in average interest-earning assets which was partially offset by a decline in the net yield on those assets. Noninterest income rose $54,000 or 28% in the 1998 quarter due to a gain on sale of loans guaranteed by the Small Business Administration ("SBA loans") and increased merchant bankcard activity. These increases in income were partially offset by increases of $135,000 or 11% in noninterest expenses, $18,000 or 16% in income tax expense and a $10,000 provision for loan losses during the 1998 quarter. The largest factor contributing to the higher noninterest expenses during the 1998 quarter was an $85,000 or 12% increase in salaries and employee benefits, which primarily reflected staff growth in the Bank. Total assets reached $123,860,000 at March 31, 1998, representing a $7,491,000 or 6% increase from December 31, 1997. Total deposits of $111,302,000 at March 31, 1998 grew $10,167,000 or 10% from year-end 1997 while federal funds purchased decreased $2,500,000 or 100%. Funds from the deposit growth and $12,995,000 received as securities matured during the quarter were principally invested in cash and cash equivalents and in loans. Cash and cash equivalents increased $15,002,000 or 199% and loans increased $5,586,000 or 8% during the first quarter of 1998. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income, the principal source of the Company's earnings, is the amount by which interest and fees generated by interest earning assets, loans and investments, exceed the interest cost of deposits and other interest-bearing liabilities. Net interest income is affected by changes in interest rates as well as the composition and volume of interest-earning assets and interest-bearing liabilities. Net interest income of $1,537,000 for the first quarter of 1998 increased $181,000 or 13% compared to the first quarter of 1997. The increase reflected a $14,144,000 or 16% growth in average interest-earning assets. The net yield on average earning assets declined to 6.00% for the 1998 quarter from 6.13% for the 1997 quarter. The increase in average interest-earning assets between the 1998 and 1997 quarters was principally due to growth of $7,039,000 or 44% in average total securities and $6,949,000 or 10% in average earning loans. The average yield on interest-earning assets for the first quarter of 1998 declined to 9.09% compared to 9.13% for the 1997 quarter due to increased investment in short-term securities. The average yield on earning loans for the 1998 quarter increased to 10.20% from 10.03% for the 1997 quarter, however the ratio of loans to interest-earning assets for the 1998 quarter dropped to 74% from 78% for the 1997 quarter. Average interest-bearing liabilities increased $10,798,000 or 17% between the 1998 and 1997 quarters. The average rate paid for interest-bearing liabilities increased to 4.34% for the 1998 quarter compared to 4.26% for the 1997 quarter. The higher average rate paid during the 1998 quarter principally reflected an increase in money market deposit rates. The ratio of time deposits to average total interest-bearing liabilities remained at 59% for both quarters. INTEREST RATE SENSITIVITY Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. If more assets than liabilities reprice in a given period (an asset sensitive position), interest rate changes will be reflected more quickly in rates on earning assets. If interest rates decline, an asset sensitive position could adversely affect net interest income. Alternatively, where liabilities reprice more quickly than assets in a given period (a liability sensitive position) a decline in market rates could benefit net interest income. The results would reverse if market rates were to increase. The following table presents the Company's interest rate sensitivity gap position at March 31, 1998. For any given period, the repricing is matched when an equal amount of assets and liabilities reprice. The repricing of a fixed rate asset or liability is considered to occur at its contractual maturity or, for those assets which are held for sale, within the time period during which sale may reasonably be expected to be accomplished. Floating rate assets or liabilities are 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 March 31, 1998: months 3 months year to Over 5 (Dollars in thousands) or less to 1 year 5 years years Total - ---------------------------------------------------------------------------------------------- Interest rate sensitive assets: Loans (excluding nonaccrual) ........ $56,593 $ 3,074 $ 7,761 $12,395 $ 79,823 Securities (before unrealized loss on securities available for sale...... 3,697 1,303 4,730 9,742 19,472 Federal funds sold and reverse repurchase agreements ............. 8,400 -- -- -- 8,400 - ---------------------------------------------------------------------------------------------- Total ............................. 68,690 4,377 12,491 22,137 107,695 - ---------------------------------------------------------------------------------------------- Interest rate sensitive liabilities: Interest-bearing transaction accounts 26,145 -- -- -- 26,145 Savings deposits .................... 6,595 -- -- -- 6,595 Time deposits, $100 and over ........ 19,748 4,150 1,309 100 25,307 Other time deposits ................. 11,603 4,675 1,877 1 18,156 Other borrowed funds ................ 1,192 -- -- -- 1,192 - ---------------------------------------------------------------------------------------------- Total ............................. 65,283 8,825 3,186 101 77,395 - ---------------------------------------------------------------------------------------------- Interest rate sensitivity gap ......... $ 3,407 $(4,448) $ 9,305 $22,036 $ 30,300 - ---------------------------------------------------------------------------------------------- Cumulative interest rate sensitivity gap ..................... $ 3,407 $(1,041) $ 8,264 $30,300 - ---------------------------------------------------------------------------------- Cumulative interest rate sensitivity gap to total assets ...... 2.8% (0.8)% 6.7% 24.5% This table presents a static gap, which is a position at a point in time. It does not address the interest rate sensitivity of assets or liabilities which would be added through growth, nor does it anticipate the future interest rate sensitivity of assets and liabilities once they have repriced, and it assumes equivalent elasticity of assets and liabilities. The interest rate sensitivity analysis at March 31, 1998, indicates that the Company, on a cumulative gap basis, is liability sensitive for the period "Over 3 months to 1 year" and asset sensitive over the remaining time periods. PROVISION AND ALLOWANCE FOR LOAN LOSSES The Company provides for potential loan losses by a charge to operating income based upon the current composition of the loan portfolio, past loan loss experience, current and projected economic conditions, an evaluation of the risk elements in the loan portfolio and other factors that, in Management's judgment, deserve recognition in estimating loan losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to make additions to the allowance based on their evaluations of information available to them at the time of their examination. Management will charge off loans to the allowance when it determines there has been a permanent impairment of the related carrying values. The provision for loan losses reflects an amount sufficient to cover estimated loan losses and to maintain the allowance for loan losses at a level which, in Management's opinion, is adequate to absorb potential credit losses inherent in loans, outstanding loan commitments and standby letters of credit. As of March 31, 1998, the allowance for loan losses was $1,005,000 compared to $1,000,000 at December 31, 1997. The ratio of the allowance for loan losses to total loans was 1.3% at March 31, 1998 and December 31, 1997. A $10,000 provision for loan losses was added during the first three months of 1998 while no provision for loan losses was made during the first three months of 1997. Although Management uses available information to provide for losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Based upon information currently available, Management believes that the allowance for loan losses at March 31, 1998 is adequate to absorb future possible losses. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the size of the allowance in any given period. Information on nonperforming loans for the quarters ended March 31, 1998 and 1997 and the year ended December 31, 1997 is summarized in the following table. March 31, December 31, March 31, (Dollars in thousands) 1998 1997 1997 - -------------------------------------------------------------------------------------- Net loan charge-offs .............................. $ 5 $ 23 $ 17 Ratio of net loan charge-offs to average loans .... --- --- --- Nonperforming loans: Nonaccrual ...................................... $ 395 $ 440 $ 384 Accruing loans past due 90 days or more ......... 299 --- 224 Restructured .................................... 469 471 --- - -------------------------------------------------------------------------------------- Total nonperforming loans ...................... $1,163 $ 911 $ 608 - -------------------------------------------------------------------------------------- Ratio of nonperforming loans to total loans ....... 1.5% 1.2% 0.9% Ratio of allowance for loan losses to nonperforming loans ........................................... 86% 110% 157% Total Bank nonperforming loans increased during the 1998 quarter by $252,000 primarily due to the addition of two loans in the amount of $299,000 in the "Accruing loans past due 90 days or more" category. Subsequent to the end of the first quarter of 1998 these loans were performing in accordance with their terms. NONINTEREST INCOME The most significant changes in noninterest income between the first quarters of 1998 and 1997 came from a gain on sale of loans in the 1998 quarter and higher bankcard income. A sale of SBA loans during the first quarter of 1998 produced a gain of $33,000. There were no loan sales during the same quarter of 1997. A higher volume of merchant bankcard activity during the 1998 quarter resulted in a $30,000 or 46% increase in bankcard income compared to the first quarter of 1997. These increases in income were partially offset by a decrease of $11,000 or 31% in loan servicing income for the 1998 quarter, principally due to SBA loan payoffs between the periods. NONINTEREST EXPENSES Total noninterest expenses of $1,387,000 for the first quarter of 1998 increased $135,000 or 11% compared to the first quarter of 1997, including an $85,000 or 12% increase in salaries and employee benefits related principally to increased staffing. Other areas of noninterest expenses exhibiting significant increases included bankcard processing expense, up $27,000 or 52%, and other noninterest expenses, up $27,000 or 13% compared to the first quarter of 1997. As with the increase in bankcard income, the increase in bankcard expense was due to a higher volume of merchant bankcard activity during the 1998 quarter. The increase in other noninterest expenses included losses on customer deposit accounts and several smaller increases in areas of business development and customer services. PROVISION FOR INCOME TAXES The provision for income tax expense was $134,000 for the first quarter of 1998 compared to $116,000 for the first quarter of 1997. The $18,000 or 16% increase in income tax expense reflected higher taxable income for the 1998 quarter. The effective income tax rates were 35% and 39% for the 1998 and 1997 quarters, respectively. The lower rate for the 1998 quarter reflects higher levels of tax exempt income from municipal securities and loan interest exempt from state tax. FINANCIAL CONDITION LOANS AND INVESTMENTS Cash and cash equivalents of $22,550,000 at March 31, 1998 increased $15,002,000 or 199% from year-end 1997, reflecting both the deposit growth and a $13,095,000 or 40% decline in securities balances during the first quarter of 1998. The drop in securities balances reflected maturities and calls during the first three months of 1998. Total loans of $79,715,000 at March 31, 1998 increased $5,586,000 or 8% from December 31, 1997. DEPOSITS AND OTHER BORROWED FUNDS Reflecting the strong economy, total deposits of $111,302,000 at March 31, 1998 increased $10,167,000 or 10% compared to December 31, 1997. Noninterest-bearing demand deposits experienced strong growth during the quarter, up $6,022,000 or 21%. Savings and interest-bearing demand deposits increased $3,538,000 or 12% and federal funds purchased dropped $2,500,000 from December 31, 1997. Other assets and other liabilities Interest and fees receivable at March 31, 1998 increased $116,000 or 20% from year-end 1997, principally reflecting the increase in interest-earning assets during the quarter. A $65,000 or 15% decrease in other assets was principally due to receipt of accrued receivables and a decline in prepaid expenses. Interest payable and other liabilities at March 31, 1998, dropped $355,000 or 28% from year-end 1997 principally due to the payment in 1998 of a cash dividend declared in 1997. LIQUIDITY Liquidity is defined as the ability of the Company to meet present and future obligations either through the sale or maturity of existing assets, or by the acquisition of funds through liability management. The Company manages its liquidity to provide adequate funds to support both the borrowing needs of its customers and fluctuations in deposit flows. The Company defines liquid assets to include cash and noninterest-bearing deposit balances, federal funds sold and reverse repurchase agreements, all marketable securities with maturities of one year or less, securities available for sale with maturities beyond one year, and loans held for sale, less any reserve requirements being met by any of the above. Net deposits and short-term liabilities include all deposits, federal funds purchased, repurchase agreements and other borrowings and debt due in one year or less. The liquidity ratio is calculated by dividing total liquid assets by net deposits and short term liabilities. The Company's liquidity ratio by this measure was 31% at March 31, 1998 and 32% at December 31, 1997. It is the opinion of Management that the Company's and the Bank's liquidity positions are sufficient to meet their respective needs. In addition, the Bank has informal, non-binding, federal funds borrowing arrangements totaling $6,000,000 with a correspondent bank and also has a repurchase facility to meet unforeseen outflows. As of March 31, 1998, no borrowed funds were outstanding from these credit facilities. CAPITAL The following tables present the Company's and the Bank's regulatory capital positions at March 31, 1998, and average assets over the three month period ended March 31, 1998: RISK BASED CAPITAL RATIO Company Bank (Dollars in thousands) Amount Ratio Amount Ratio - ---------------------------------------------------------------------------- Tier 1 Capital ................... $10,336 11.2% $10,154 11.0% Tier 1 Capital minimum requirement 3,692 4.0 3,687 4.0 - ---------------------------------------------------------------------------- Excess ........................... $ 6,644 7.2% $ 6,467 7.0% Total Capital .................... $11,341 12.3% $11,159 12.1% Total Capital minimum requirement 7,385 8.0 7,373 8.0 - ---------------------------------------------------------------------------- Excess ........................... $ 3,956 4.3% $ 3,786 4.1% Risk weighted assets $92,307 $92,168 LEVERAGE RATIO Company Bank (Dollars in thousands) Amount Ratio Amount Ratio - ---------------------------------------------------------------------------- Tier 1 Capital to average total assets $10,336 9.1% $10,154 8.9% Range of minimum leverage ............ 3,425- 3.0- 3,422- 3.0- requirement ........................ 5,709 5.0% 5,704 5.0% - ---------------------------------------------------------------------------- Range of excess ...................... 4,627- 4.1- 4,450- 3.9- $ 6,911 6.1% $ 6,732 5.9% Average total assets for first quarter* $114,182 $114,078 (* Average total assets do not include unrealized gains/losses on securities available for sale or excess servicing.) The Company currently does not have any material commitments for capital expenditures, and in the opinion of Management, the Company's and the Bank's capital positions are sufficient to meet their respective needs. INFLATION It is Management's opinion that the effects of inflation on the consolidated financial statements for the periods ended March 31, 1998 and 1997 have not been material. PART II - OTHER INFORMATION Item 5. Other Information: None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: None. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company for the quarter ended March 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized. BAY COMMERCIAL SERVICES (Registrant) Date: June 4, 1998 /s/ R. M. Kahler ------------------- R. M. Kahler President and Chief Executive Officer (Principal Executive Officer) Date: June 4, 1998 /s/ R. D. Greenfield --------------------- R. D. Greenfield Chief Financial Officer (Principal Accounting Officer)