SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED June 30, 1995 Commission File Number 2-76003 BAY AREA BANCSHARES California #94-2779021 900 Veterans Blvd., Redwood City, CA 94063 Telephone (415) 367-1600 The registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months, and x Yes No (2) has been subject to such filing requirements for the past 90 days. x Yes No 809,593 Shares of Common Stock Outstanding as of June 30, 1995 Part 1 Item 1 BAY AREA BANCSHARES & SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS 6/30/95 12/31/94 Cash and due from banks $10,617,796 $8,406,265 Federal Funds Sold 9,770,000 6,355,000 Cash and cash equivalents 20,387,796 14,761,265 Time deposits with other financial instituions 102,647 197,585 Investment securities available for sale (market value approximates book value) 1,498,751 1,439,872 Investment securities held to maturity (market value of $9,779,000 in 1995 and $8,122,000 in 1994) 9,731,338 8,426,348 Loans, net of reserve for possible loan losses of $1,537,508 in 1995 and $1,505,355 in 1994 49,001,201 52,016,341 Loans held for sale 1,869,717 327,586 Premises and equipment,net 933,012 1,023,060 Real estate owned 0 0 Interest receivable and other assets 1,250,289 1,344,825 Total assets $84,774,751 $79,536,882 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY ---------------------------------------------- Deposits Demand $21,221,333 $20,818,159 Interest-bearing transaction 35,944,568 32,884,654 Savings 4,184,340 4,439,217 Time 15,246,866 13,871,559 ------------- -------------- Total Deposits 76,597,107 72,013,589 Interest payable and other liabilities 679,976 552,649 ------------- -------------- Total liabilities 77,277,083 72,566,238 ------------- -------------- Sharehoders' equity: Preferred stock, $10 stated value; 6% Series A, convertible and redeemable: Authorized - 10,000,000 shares; issued & outstanding 5,000 in 1995 and 10,300 1994 50,000 103,000 Common stock, no par value: Authorized - 20,000,000 shares; issues & outstanding 3,998,809 3,908,616 809,593 in 1995 and 789,525 in 1994 Unrealized loss on securities held for sale (13,000) (76,000) Retained earnings 3,461,859 3,035,028 ------------- -------------- Total shareholders' equity 7,497,668 6,970,644 ------------- -------------- Total liabilities and shareholders' equity $84,774,751 $79,536,882 ============= ============== Part 1 Item 1 BAY AREA BANCSHARES & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Three Months Ended Ended 6/30/95 6/30/94 Interest Income: ------------- -------------- Interest and fees on loans $1,546,240 $1,382,013 Interest on investment securities 151,761 147,688 Interest on federal funds sold 151,226 71,797 Interest on time deposits with other financial institutions 1,450 1,239 ------------- -------------- Total Interest Income 1,850,677 1,602,737 Interest Expense: ------------- -------------- Interest on interest-bearing transaction accounts 327,437 215,227 Interest on savings deposits 52,082 14,847 Interest on time deposits 181,971 149,265 Interest on short-term borrowing 0 0 Interest on notes payable and redeemable debentures 0 3,312 ------------- -------------- Total Interest Expense 561,490 382,651 ------------- -------------- Net interest income 1,289,187 1,220,086 Provision for possible loan losses 35,000 105,000 ------------- -------------- Net interest income after provision for possible loan losses 1,254,187 1,115,086 Noninterest income: ------------- -------------- Service charges on deposit accounts 65,269 75,789 Net gain (loss) on sales of securities 0 0 Net gain on disposal of assets 0 647 Net gain on sale of loans held for sale 136,312 226,020 Other mortgage banking revenue 47,240 37,246 ATM network revenue 383,860 159,915 Other 45,253 10,013 ------------- -------------- Total noninterest income 677,934 509,630 Noninterest expense: ------------- -------------- Salaries and related benefits 648,233 598,752 Occupancy 93,324 88,984 Equipment 143,968 78,099 Professional fees 51,980 79,407 Stationery and supplies 38,517 31,963 Other 467,028 315,595 ------------- -------------- Total noninterest expense 1,443,050 1,192,800 ------------- -------------- Income before provision for income taxes 489,071 431,916 Provision for income taxes 204,000 182,000 ------------- -------------- Net Income $285,071 $249,916 Earnings per share: ============= ============== Average common and common equivalent shares outstanding 890,000 865,000 ============= ============== Net income per share $0.32 $0.29 ============= ============== Part 1 Item 1 BAY AREA BANCSHARES & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Six Months Six Months Ended Ended 6/30/95 6/30/94 Interest Income: ------------- -------------- Interest and fees on loans 3,078,465 $2,706,726 Interest on investment securities 292,864 279,410 Interest on federal funds sold 217,792 129,122 Interest on time deposits with other financial institutions 3,125 3,369 ------------- -------------- Total Interest Income 3,592,246 3,118,627 Interest Expense: ------------- -------------- Interest on interest-bearing transaction accounts 590,942 419,269 Interest on savings deposits 104,051 31,787 Interest on time deposits 338,675 297,249 Interest on short-term borrowing 0 0 Interest on notes payable and redeemable debentures 0 6,288 ------------- -------------- Total Interest Expense 1,033,668 754,593 ------------- -------------- Net interest income 2,558,578 2,364,034 Provision for possible loan losses 80,000 225,000 ------------- -------------- Net interest income after provision for possible loan losses 2,478,578 2,139,034 Noninterest income: ------------- -------------- Service charges on deposit accounts 131,609 150,822 Net gain (loss) on sales of securities 0 0 Net gain on disposal of assets 0 21,081 Net gain on sale of loans held for sale 234,937 342,867 Other mortgage banking revenue 102,467 72,185 ATM network revenue 687,563 258,167 Other 57,517 21,383 ------------- -------------- Total noninterest income 1,214,093 866,505 Noninterest expense: ------------- -------------- Salaries and related benefits 1,277,599 1,142,663 Occupancy 187,972 176,564 Equipment 284,956 140,345 Professional fees 108,705 137,102 Stationery and supplies 75,445 55,205 Other 834,855 578,610 ------------- -------------- Total noninterest expense 2,769,532 2,230,489 ------------- -------------- Income before provision for income taxes 923,139 775,050 Provision for income taxes 380,000 323,000 ------------- -------------- Net Income $543,139 $452,050 Earnings per share: ============= ============== Average common and common equivalent shares outstanding 890,000 865,000 ============= ============== Net income per share $0.61 $0.52 ============= ============== Part 1 Item 1 BAY AREA BANCSHARES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Six Months Six Months Ended Ended 6/30/95 6/30/94 Cash flows from operating activities: ------------- -------------- Net Income $543,139 $452,050 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment 209,287 86,718 Provision for possible loan losses 80,000 225,000 Net gain on sale of assets 0 (21,081) Funding of loans held for sale (15,453,386) (12,221,580) Proceeds from the sale of loans held for sale 14,146,192 12,545,513 Net gain on sale of loans held for sale (234,937) (342,867) Net loss on sale of investment securities 0 0 Net ammortization and accretion of investment premiums and discounts 20,530 37,381 Net decrease (increase) in interest receivable and other assets 94,536 (133,577) Net increase in interest payable and other liabilities 127,327 111,012 Net decrease in deferred loan fees (54,203) (18,578) ------------- -------------- Total adjustments (1,064,654) 267,941 ------------- -------------- Net cash provided by operating activities (521,515) 719,991 Cash flows from investing activities: Net decrease in time deposits with other financial institutions 94,938 99,000 Proceeds from sale of investment securities 0 0 Proceeds from the maturity of investment securities held to maturity 1,000,000 195,000 Mortgage backed securities principal payments 114,379 607,705 Purchase of investment securities held to maturity (2,433,778) (1,907,853) Purchase of investment securities held for sale 0 0 Net decrease in gross loans 2,933,148 4,595,226 Capital expenditures (119,239) (534,078) ------------- -------------- Net cash provided by investing activities 1,589,448 3,055,000 Cash flows from financing activities: Net increase in demand deposits, transaction and savings 3,208,211 3,393,195 Net increase in time deposits 1,375,307 728,306 Principle payments on short term notes payable 0 (50,000) Proceeds from stock warrants and options exercised 36,718 83,277 Cash dividends paid (61,638) (45,266) ------------- -------------- Net cash provided by financing activities 4,558,598 4,109,512 ------------- -------------- Net increase in cash and cash equivalents 5,626,531 7,884,503 Cash and cash equivalents,beginning of period 14,761,265 11,980,321 ------------- -------------- Cash and cash equivalents,end of period $20,387,796 $19,864,824 ============= ============== There were no Loans transferred to Real Estate Owned in the second quarter of 1995 or 1994. BAY AREA BANCSHARES & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All adjustments, which in the opinion of management are necessary for a fair statement of the Company's financial condition at June 30, 1995, results of operations for the three month and six month periods ended June 30, 1995 and the statement of cash flows for the six month period ended June 30, 1995 have been included. These adjustments are of a normal and recurring nature. The results of operations and statement of cash flows are not necessarily indicative of the results for a full year's activity. 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, 1994. BAY AREA BANCSHARES & SUBSIDIARIES ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 2A Financial Condition Liquidity Liquid assets (Cash, Federal Funds Sold, Time Deposits with other Financial Institutions and Investments) increased $6.9 million to $31.7 million over the six month period from December 31, 1994 to June 30, 1995. At year-end, total liquid assets as a percentage of total assets was 31.2% whereas on June 30, 1995 it had increased to 37.4%. Cash & due from banks increased $2.2 million over the first six months of 1995 to $10.6 million at June 30, 1995. During the first six months of 1995 cash and due from banks averaged $8.8 million. The portion of the total cash & due from banks representing ATM network cash inventory has averaged approximately $2.3 million during 1995 and at June 30, 1995 ATM cash was approximately $3.1 million. At December 31, 1994, there was approximately $3.0 in ATM network cash inventory. The reduction in average ATM cash is a result of more aggressive cash management and the closure of unproductive sites. The increase in total liquid investments was a result of a decline in total net loans outstanding of $3.0 million (5.8%) to $49.0 million and an increase in deposits of $4.6 million (6.4%) to $76.6 million during the first six months of 1995. Deposits have averaged $72.4 million thus far in 1995 and $74.6 million in the second quarter of 1995 while they averaged $73.4 million during 1994. Gross loans outstanding have averaged $53.5 million thus far in 1995 as compared to $54.2 million averaged in 1994. Management feels the decline in demand for loans is primarily a result of intense pricing competition in the marketplace as well as the continuation of a sluggish local real estate economy. Management has embarked on other lending areas to stimulate loan demand, and continues to explore new avenues for lending. Management feels current liquid assets and current available credit lines are adequate to cover the working capital requirements of the Company and any reasonable needs arising from deposit withdrawals. Capital Consolidated equity capital plus reserves increased $559,000 in the first six months of 1995 from $8.5 million or 10.46% of total gross assets at December 31, 1994 to $9.0 million or 10.47% of total gross assets at June 30, 1995. Bay Area Bank, the Company's wholly owned subsidiary (the Bank) capital plus reserves totaled $9.0 million on June 30, 1995 or 10.42% of total adjusted assets as compared to capital plus reserves of $8.5 million or 10.45% of total adjusted assets at December 31, 1994. At June 30, 1995 the Bank maintained a tier one capital ratio of 10.42% and a tier two capital ratio of 13.20%. The Bank's capital level continues to exceed State and Federal Deposit Insurance Corporation requirements and satisfies the Federal Reserve Board's current risk-based capital Guidelines. The Bank declared $150,000 in dividends to the Company in the first quarter. The Company also declared a cash dividends to common shareholders of $.07 per share in the first and second quarters. The second quarter dividend represents sixteen consecutive cash dividends declared by the Company to shareholders. Item 2B Results of Operations Results of Operations Consolidated operating profits were $285,100 ($.32 per share vs. $.29 in the prior year) for the second quarter of 1995, the highest second quarter in the company's history. This represents a 14% increase over the second quarter of 1994. The second quarter operating profits were comprised of Bank earnings of $301,800 and a Company loss of $16,700. Consolidated operating profits were $543,200 ($.61 per share vs. $.52 in the prior year) for the first six months of 1995, a 20.2% increase over the same period in 1994 and the highest mid year results in the Company's history. The first half operating profits were comprised of Bank earnings of $577,600 and a Company loss of $34,400. The increase in second quarter earnings in 1995 versus the second quarter of 1994 is primarily a result of an increase in net interest income of $69,100, a reduction in loan loss provisions of $70,000 and an increase in non interest income of $168,300, offset by an increase of $250,300 in non interest expense. The increase in earnings for the first six months of 1995 versus the first six months of 1994 is primarily a result of an increase in net interest income of $194,500, a reduction in loan loss provisions of $145,000 and an increase in non interest income of $347,600, offset by an increase of $539,000 in non interest expense. The growth in net interest income throughout 1995 is primarily a result of rising interest rates throughout the first quarter when 64% ($125,400) of the net interest income growth occurred. This $194,500 increase during the first six months of 1995 was comprised of a $473,600 increase in interest income offset in part by a $279,100 increase in interest expense over the same period in 1994. The year to date net interest income to total average assets has been 6.46% in the first six months of 1995 as compared to 5.91% in the first six months of 1994. The decline in loan loss provisions in the first half of 1995 as compared to 1994 is primarily a result of lack of loan growth and improved delinquency and performance ratios in the loan portfolio. Loan loss reserves of $1.54 million at June 30, 1995 represent a ratio of 2.93% of gross loans outstanding. Total nonearning assets, comprised solely of nonaccrual loans, at June 30, 1995 were $225,000 or 14.6% of loan loss reserves, and .27% of total assets. Total nonearning assets at December 31, 1994 were $200,000 or 13.3% of loan loss reserves and .25% of total assets. The $539,000 increase in non interest expense in 1995 can primarily be attributed to the Bank's Electronic Funds Transfer (EFT) department which operates approximately 45 ATM's throughout the state. EFT department expenses were $693,600 in the first six months of 1995 as compared to $284,200 in the first six months of 1994. EFT department revenues grew from $258,200 in the six months of 1994 to $692,300 in the first six months of 1995. The department has experienced a loss of $1,300 thus far in 1995 as compared to $26,000 in the first six months of 1994. Revenues have been growing consistently and management expects the department to contribute to Bank profitability as early as the third quarter of 1995. The Bank's mortgage department revenues for the first six months of 1995 total $437,700 (which includes $100,300 in interest income) as compared to $467,900 (including $52,900 in interest income) in the first six months of 1994. Mortgage department expenses have been $405,000 during the first six months of 1995 as compared to $398,500 during the first six months of 1994. Part II Item 4 (a) The 1995 Annual Meeting of the Shareholders of the Registrant was held on May 16, 1995. (b) The following table shows the votes for, against or withheld, and the broker nonvotes as to each candidate for director. Each candidate was elected. Name Votes For Votes Against or Withheld Broker Nonvotes Mario A. Biagi 615,862 269 0 Gary S. Gross 615,862 269 0 Robert R. Haight 615,862 269 0 David J. Macdonald 610,804 5,327 0 Thorwald A. Madsen 611,362 4,769 0 Alan B. Miller 615,862 269 0 The shareholders also voted in favor of ratifying Ernst & Young as the Registrant's auditors, with 611,280 shares in favor, 356 shares against, 4,495 shares abstaining, and no broker nonvotes. Part II - Item 6 (a) Exhibit Number Exhibit 3.1 Restated Articles of Incorporation of Company4* 3.2 Amendment to Restated Articles of Incorporation5* 3.3 Bylaws of Company, as amended2* 3.4 Amendment to Bylaws of Company2* 4.1 Certificate of Determination of Preferred Stock3* 10.1 # 1983 Non-Qualified Stock Option Plan of the Company1* 10.2 # Non-Qualified Stock Option Agreement Pursuant to the 1983 Non-Qualified Stock Option Plan of the Company1* 10.3 Lease Entered Into By and Between Alan B. Miller and Bay Area Bank* 10.4 # Employment Agreement Between John O. Brooks, Bay Area Bancshares and Bay Area Bank dated as of September 2, 1992* 10.5 # Amendment to 1983 Non-Qualified Stock Option Plan of Company5* 10.6 Lease Entered Into By and Between Eureka Bank and Bay Area Bank dated dated December 18, 19906* 10.7 Promissory Note with Liberty Bank dated November 18, 19928* 10.8 # 1993 Stock Option Plan9* 10.9 # Forms of Stock Option Agreements9* 10.10 Lease entered into by and between Nine C Corporation and Bay Area Bank dated March 18, 19939* 10.11 #Director Emeritus Agreement* 27 Financial Data Schedule (b) Not Applicable *Previously filed. 1 Filed as Exhibits 10.8 and 10.9, respectively, to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 2 Filed as Exhibits 3.2, and 3.3, respectively, to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 3 Filed as Exhibits 4.1, to the Company's Current Report on Form 8-K filed September 15, 1988. 4 Filed as Exhibits 3.1, to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 5 Filed as Exhibits 3.2 and 10.11, respectively, to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 6 Filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. 7 Filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 8 Filed as Exhibits 10.4 and 10.7, respectively, to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 9 Filed as Exhibits 10.8, 10.9 and 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. # Management contracts and compensation plans are identified with a number sign ("#"). 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 AREA BANCSHARES Registrant Dated: August 8, 1995 /s/ Robert R. Haight President and Chief Executive Officer /s/ Anthony J. Gould Chief Accounting Officer