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, 1996 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 837,138 Shares of Common Stock Outstanding as of June 30, 1996 Part 1 Item 1 BAY AREA BANCSHARES & SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED, IN THOUSANDS) ASSETS 6/30/96 12/31/95 Cash and due from banks $11,927 $8,276 Federal Funds Sold 6,800 9,800 Cash and cash equivalents 18,727 18,076 Time deposits with other financial institutions 100 103 Investment securities available for sale (market value approximates book value) 3,096 3,111 Investment securities held to maturity (market value of $10,365 in 1996 and $10,269 in 1995) 10,348 10,133 Loans, net of reserve for possible loan losses of $1,694 in 1996 and $1,516 in 1995 63,022 59,209 Loans held for sale 793 772 Premises and equipment,net 829 948 Real estate owned 0 0 Interest receivable and other assets 1,417 1,463 Total assets $98,332 $93,815 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Demand $23,396 $22,998 Interest-bearing transaction 40,747 40,480 Savings 5,219 4,376 Time 19,090 16,125 Total Deposits 88,452 83,979 Interest payable and other liabilities 710 758 Federal funds purchased 0 1,000 Federal Home Loan Bank advances 500 0 Total liabilities 89,662 85,737 Shareholders'equity: Preferred stock, $10 stated value; 6% Series A, convertible and redeemable: Authorized - 10,000,000 shares; issued & outstanding none in 1996 and 1,000 in 1995 0 10 Common stock, no par value: Authorized - 20,000,000 shares; issued & outstandig 4,125 4,053 837,138 in 1996 and 821,829 in 1995 Unrealized (loss) gain on securities held for sale (10) 10 Retained earnings 4,555 4,005 Total shareholders' equity 8,670 8,078 Total liabilities and shareholders' equity $98,332 $93,815 (1) Part 1 Item 1 BAY AREA BANCSHARES & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED,DOLLARS IN THOUSANDS) Three Months Three Months Ended Ended 6/30/96 6/30/95 Interest Income: Interest and fees on loans $1,792 $1,546 Interest on investment securities 195 153 Interest on federal funds sold 69 151 Interest on time deposits with other financial institutions 1 1 Total Interest Income 2,057 1,851 Interest Expense: Interest on interest-bearing transaction accounts 324 327 Interest on savings deposits 56 52 Interest on time deposits 245 182 Interest on short-term borrowing 7 0 Interest on notes payable and redeemable debenture 0 0 Total Interest Expense 632 561 Net interest income 1,425 1,289 Provision for possible loan losses 150 35 Net interest income after provision for possible loan losses 1,275 1,254 Noninterest income: Service charges on deposit accounts 54 65 Net loss on sales of securities 0 0 Net gain on disposal of assets 0 0 Net gain on sale of loans held for sale 158 136 Other Mortgage Banking Revenue 45 47 ATM network revenue 445 384 Other 27 46 Total noninterest income 729 678 Noninterest expense: Salaries and related benefits 654 648 Occupancy 97 93 Equipment 134 144 Professional fees 49 52 Stationery and supplies 31 39 Other 442 467 Total noninterest expense 1,407 1,443 Income before provision for income taxes 597 489 Provision for income taxes 250 204 Net Income $347 $285 Earnings per share: Average common and equivalent shares outstanding 945,000 890,000 Fully Diluted Net income per share $0.37 $0.32 (2) Part 1 Item 1 BAY AREA BANCSHARES & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, DOLLARS IN THOUSANDS) Six Months Six Months Ended Ended 6/30/96 6/30/95 Interest Income: Interest and fees on loans $3,614 3,078 Interest on investment securities 400 293 Interest on federal funds sold 106 218 Interest on time deposits with other financial institutions 3 3 Total Interest Income 4,123 3,592 Interest Expense: Interest on interest-bearing transaction accounts 644 591 Interest on savings deposits 112 104 Interest on time deposits 464 339 Interest on short-term borrowing 9 0 Interest on notes payable and redeemable debenture 0 0 Total Interest Expense 1,229 1,034 Net interest income 2,894 2,559 Provision for possible loan losses 235 80 Net interest income after provision for possible loan losses 2,659 2,479 Noninterest income: Service charges on deposit accounts 106 132 Net loss on sales of securities 0 0 Net gain on disposal of assets 2 0 Net gain on sale of loans held for sale 308 235 Other Mortgage Banking Revenue 92 102 ATM network revenue 842 687 Other 75 58 Total noninterest income 1,425 1,214 Noninterest expense: Salaries and related benefits 1,369 1,278 Occupancy 195 188 Equipment 268 285 Professional fees 113 109 Stationery and supplies 64 75 Other 886 835 Total noninterest expense 2,895 2,770 Income before provision for income taxes 1,189 923 Provision for income taxes 500 380 Net Income $689 $543 Earnings per share: Average common and equivalent shares outstanding 945,000 890,000 Fully Diluted Net income per share $0.73 $0.61 (3) Part 1 Item 1 BAY AREA BANCSHARES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED, IN THOUSANDS) Six Months Six Months Ended Ended 6/30/96 6/30/95 Cash flows from operating activities: Net Income $689 $543 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment 221 209 Provision for possible loan losses 235 80 Net gain loss on sale of assets (2) 0 Funding of loans held for sale (8,948) (15,454) Proceeds from the sale of loans held for sale 8,661 14,146 Net gain on sale of loans held for sale (308) (235) Net loss on sale of investment securities 0 0 Net amortization and accretion of investment premiums and discounts 31 21 Net decrease in interest receivable and other assets 46 95 Net (decrease) increase in interest payable and other liabilities (48) 127 Net decrease in deferred loan fees 0 (54) Total adjustments (112) (1,065) Net cash provided by (used in) operating activities 577 (522) Cash flows from investing activities: Net decrease in time deposits with other financial institutions 3 95 Proceeds from sale of investment securities 0 0 Proceeds from the maturity of investment securities held to maturity 1,170 1,000 Mortgage backed securities principal payments 748 115 Purchase of investment securities held to maturity (2,183) (2,433) Purchase of investment securities held for sale 0 0 Net (increase) decrease in gross loans (3,463) 2,933 Proceeds from the sale of Real Estate Owned 0 0 Capital expenditures (102) (119) Net cash (used in) provided by investing activities (3,827) 1,591 Cash flows from financing activities: Net increase in demand deposits,transaction and savings 1,508 3,208 Net increase in time deposits 2,965 1,375 Repayment of Federal Funds Purchased (1,000) 0 Net proceeds of Federal Home Loan Bank advances 500 0 Proceeds from stock warrants and options exercised 62 37 Cash Dividends paid (134) (62) Net cash provided by financing activities 3,901 4,558 Net increase in cash and cash equivalents 651 5,627 Cash and cash equivalents,beginning of period 18,076 14,761 Cash and cash equivalents,end of period $18,727 $20,388 There were no loans transferred to Real Estate Owned in 1996 and 1995 respectively. (4) 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, 1996, results of operations for the three and six month periods ended June 30, 1996 and the statement of cash flows for the six month period ended June 30, 1996 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, 1995. All references to the "Bank" are in reference to the Company's sole, and wholly owned, subsidiary Bay Area Bank. (5) 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 $848,000 or 2.7% to $32.3 million over the six month period from December 31, 1995 to June 30, 1996. At year-end, total liquid assets as a percentage of total assets was 33.5% whereas on June 30, 1996 it had decreased to 32.8% as a result of an increase of $4.5 million or 4.8% in total assets. Cash & due from banks increased $3.7 million over the first six months of 1996 to $11.9 million at June 30, 1996. During the first six months of 1996 cash and due from banks averaged $9.8 million. The portion of the total cash & due from banks representing ATM network cash inventory has averaged approximately $2.9 million during 1996 and at June 30, 1996 ATM cash was approximately $3.5 million . At December 31, 1995, there was approximately $2.7 in ATM network cash inventory. The increase in total liquid assets, during the first half of 1996, was a result of a increase in deposits of $4.5 million or 5.3% offset in part by an increase in total net loans outstanding (including loans held for sale) of $3.8 million (6.4%) to $63.0 million. Deposits have averaged $84.6 million thus far in 1996 while they averaged $72.3 million during the first half of 1995. Gross loans outstanding have averaged $66.3 million thus far in 1996 as compared to $53.5 million averaged in the first half of 1995. Management believes 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 $770,000 in the six months of 1996 from $9.6 million or 10.06% of total gross assets at December 31, 1995 to $10.4 million or 10.36% of total gross assets at June 30, 1996. Bank capital plus reserves totaled $10.3 million on June 30, 1996 or 10.33% of total adjusted assets as compared to capital plus reserves of $9.6 million or 10.03% of total adjusted assets at December 31, 1995. At June 30, 1996 the Bank maintained a tier one capital ratio of 12.55% and a tier two capital ratio of 13.80%. (6) 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 has declared $100,000 in dividends to the Parent company in the first six months of 1996 and the Company also declared a cash dividend to common shareholders of $.08 per share in March of 1996 and June of 1996. The second quarter dividend represents nineteen consecutive quarterly cash dividends declared by the Parent company to shareholders. Item 2B Results of Operations Results of Operations Consolidated operating profits were $347,000 ($.37 per share vs. $.32 in the prior year) for the second quarter of 1996, the highest second quarter in the company's history. This represents a $62,000 or 22% increase over the second quarter of 1995. Consolidated operating profits were $689,000 ($.73 per share vs. $.61in the prior year) for the first six months of 1996, the highest first six months in the company's history. This represents a $146,000 or 27% increase over the first half of 1995. The increase in second quarter earnings in 1996 versus the second quarter of 1995 is a result of an increase in pretax earnings of $108,000 comprised of: an increase in net interest income of $136,000, an increase in non interest income of $51,000, a decrease in noninterest expense of $36,000; offset in part by an increase in loan loss provisions of $115,000. The increase in earnings in the first half of 1996 versus the first half of 1995 is a result of an increase in pretax earnings of $266,000 comprised of: an increase in net interest income of $335,000, an increase in non interest income of $211,000; offset in part by a an increase in noninterest expense of $125,000 and an increase in loan loss provisions of $155,000. The growth in net interest income of 10.55% in the second quarter of 1996 as compared to the second quarter of 1995 is primarily a result of growth in total earning assets throughout 1996 offset in part by a decrease in net interest margin. Average earning assets in the first six months of 1996 were $84.0 million a $13.0 million or 18.3% increase over the first half of 1995 when earning assets averaged $71.0 million. The $136,000 increase in net interest margin during the second quarter of 1996 was comprised of a $206,000 increase in interest income offset in part by a $71,000 increase in interest expense over the same period in 1995. Year to date net interest income to total average earning assets (net interest margin) has been 6.90% in the first six months of 1996 as compared to 7.21% in the first six months of 1995. The interest margin compression has been primarily caused by increasing competition for quality loans and the resulting pricing concessions the Bank has made to grow the loan portfolio in this competitive environment. (7) The increase in loan loss provisions in 1996 as compared to 1995 is primarily a result of loan growth of 6.4% and an increase in nonperforming assets. Non performing assets (consisting entirely of nonaccrual loans) at June 30, 1996 were $1.58 million or 2.41% of total gross loans and 93% of loan loss reserves. Non performing assets at December 31, 1995 were $495,000 or .81% of total gross loans and 33% of loan loss reserves. Loan loss reserves of $1.69 million at June 30, 1996 represent a ratio of 2.59% of gross loans outstanding as compared to 2.47% at December 31, 1995. The increase in nonperforming assets of $1.1 million in the first half of 1996 is primarily attributable to $837,000 in lease receivables and notes reclassified as nonperforming assets in 1996. These assets consist of approximately 150 lease receivables purchased in 1994 from Bennett Group Funding Inc. ("Bennett") which declared chapter 11 bankruptcy in March of 1996. While the Company expected to have more information on the authenticity of these assets by the filing date of the second quarter 10-Q filing, no information is yet available. In the interim the Company believes it to be prudent to reclassify all Bennett assets to nonperforming status until an official accounting is finished by the bankruptcy trustee. Non interest expense is up 4.5% thus far in 1996 but was down 1.25% in the second quarter as compared to the prior year. The increase in noninterest income of $51,000 for the second quarter and $262,000 for the first half of 1996 can primarily be attributed to an increase in EFT revenues and increase in Mortgage department premiums and fees. The Bank's Electronic Funds Transfer (EFT) department operates approximately 50 ATM's throughout the state. The department's revenues increased from $384,000 in the second quarter of 1995 to $445,000 in the second quarter of 1996. In the first half of 1996, EFT revenues were $842,000 as compared to $687,000 in the first half of 1995. The Bank's mortgage department revenues for the first six months of 1996 totaled $587,000 (which includes $176,000 in interest income) as compared to $438,000 (including $100,000 in interest income) in the first six months of 1995. Revenues in the second quarter of 1996 were $303,000 as compared to $231,000 in the second quarter of 1995. (8) ITEM 6 (a) Exhibits. 3.1 Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 3.2 Amendment to Restated Articles of Incorporation (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 3.3 Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987). 3.4 Amendment to Bylaws of Company (incorporated by reference to Exhibit 3.3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987). 27 Financial Data Schedule (filed herewith) 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 12, 1996 /s/Robert R. Haight - ----------------------------- Robert R. Haight President and Chief Executive Officer /s/Anthony J. Gould - ---------------------------------------- Anthony J. Gould Chief Accounting Officer