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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
[ ]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
September 30, 1995
Common stock, no par value 1,080,220 shares
Transitional Small Business Disclosure Format
YES NO X
This report contains a total of 15 pages
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FINANCIAL STATEMENTS
BAY COMMERCIAL SERVICES
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
September 30, December 31,
1995 1994
------------- ------------
(000'S OMITTED)
ASSETS
Cash and due from banks.................................. $ 6,775 $ 5,476
Federal funds sold....................................... 9,400 2,530
------- -------
Cash and cash equivalents.............................. 16,175 8,006
Securities available for sale, stated at market value
(amortized cost of $4,196 for 1995; $11,399 for 1994) 4,199 11,165
Securities held to maturity (market values of $18,358
for 1995; $14,146 for 1994)............................ 18,341 14,823
Loans held for sale...................................... 4,655 3,929
Loans.................................................... 48,987 47,637
Allowance for loan losses.............................. (966) (756)
------- -------
Net loans.............................................. 52,676 50,810
Premises and equipment, net.............................. 2,171 2,286
Interest and fees receivable............................. 719 539
Other real estate owned.................................. 378 854
Other assets............................................. 572 710
------- -------
Total assets........................................... $95,231 $89,193
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand............................. 27,834 24,252
Savings and interest-bearing demand.................... 26,429 28,593
Time................................................... 23,755 21,123
Certificates of deposit, $100,000 and over............. 5,125 5,290
------- -------
Total deposits......................................... 83,143 79,258
Securities sold under agreements to repurchase........... 2,078 1,036
Interest payable and other liabilities................... 1,168 953
------- -------
Total liabilities...................................... 86,389 81,247
Commitments and contingent liabilities................... 0 0
Shareholders' equity:
Common stock - no par value: authorized 20,000,000
shares; issued & outstanding 1,080,220 in 1995 and
1,079,985 in 1994 ................................... 3,696 3,695
Retained earnings...................................... 5,144 4,389
Net unrealized gain(loss) on securities available
for sale.............................................. 2 (138)
------- -------
Total shareholders' equity............................. 8,842 7,946
------- -------
Total liabilities and shareholders' equity............. $95,231 $89,193
======= =======
* 1994 figures are derived from the audited consolidated balance sheet included
in the Company's 1994 annual report to shareholders
See accompanying notes to consolidated condensed financial statements.
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BAY COMMERCIAL SERVICES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
Nine months ended Three Months Ended
September 30, September 30,
1995 1994 1995 1994
------ ------ ------ ------
Interest income:
Loans, including fees $4,249 $3,435 $1,445 $1,215
Federal funds sold 290 88 113 43
Investment securities:
Taxable 924 740 330 261
Nontaxable 77 96 20 32
------ ------ ------ ------
Total interest income 5,540 4,359 1,908 1,551
Interest expense:
Deposits:
Savings & interest-bearing demand 559 460 191 165
Time 917 569 316 209
Certificates of deposit, $100,000 and over 216 196 76 65
Other borrowed funds 34 24 13 9
------ ------ ------ ------
Total interest expense 1,726 1,249 596 448
------ ------ ------ ------
Net interest income 3,814 3,110 1,312 1,103
Benefit for loan losses 130 50 80 50
------ ------ ------ ------
Net interest income after
benefit for loan losses 3,944 3,160 1,392 1,153
Noninterest income:
Service charges and fees 175 199 62 61
Loan servicing 137 155 46 50
Bancard income 150 133 50 48
Net gain (loss) on sale of OREO 77 58 (4) 0
Gain on sale of loans 7 7 0 0
Securities gains (losses) (35) 11 0 0
Other 51 309 24 12
------ ------ ------ ------
Total noninterest income 562 872 178 171
Noninterest expenses:
Salaries and employee benefits 1,765 1,780 579 579
Occupancy 442 459 146 146
Data processing 208 159 69 56
Professional services 146 252 48 51
Bankcard expense 117 103 40 36
Directors' fees 110 59 35 20
FDIC insurance 81 145 (5) 46
Other 399 440 136 129
------ ------ ------ ------
Total noninterest expenses 3,268 3,397 1,048 1,063
------ ------ ------- ------
Income before income tax expense 1,238 635 522 261
Income tax expense 483 240 207 95
------ ------ ------ ------
Net income $ 755 $ 395 $ 315 $ 166
====== ====== ====== ======
Net income per common and equivalent share $ 0.65 $ 0.35 $ 0.26 $ 0.14
====== ====== ====== ======
See accompanying notes to consolidated condensed financial statements.
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BAY COMMERCIAL SERVICES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
September 30,
1995 1994
------ ------
(000'S OMITTED)
Cash flows from operating activities:
Net income $ 755 $ 395
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 105 66
Loan loss benefit (130) (50)
Unamortized deferred loan fees, net 126 33
Securities (gains) losses 35 (11)
Originations of mortgage loans held for resale 0 (1,906)
Originations of SBA loans held for resale (1,090) (1,915)
Proceeds from the sale of mortgage loans held for resale 0 1,954
Proceeds from the sale of SBA loans held for resale 188 221
Receipts net of expenses due to OREO (77) (32)
Loss on sale of equipment 0 12
Change in interest and fees receivable and other assets (139) (64)
Change in interest payable and other liabilities 431 (20)
-------- --------
Net cash used in operating activities 204 (1,317)
Cash flows from investing activities:
Proceeds from sales of securities available for sale 965 261
Proceeds from maturities of securities 21,709 24,171
Purchase of securities (18,923) (22,259)
Net change in loans (485) 1,395
Receipts net of expenses due to OREO 77 70
Purchases of premises and equipment (92) (77)
Proceeds from sale of equipment 2 29
-------- --------
Net cash provided by investing activities 3,253 3,590
-------- --------
Cash flows from financing activities:
Net change in noninterest-bearing demand deposits 3,582 4,216
Net change in savings and interest-bearing demand deposits (2,164) 1,643
Net change in time deposits 2,632 1,788
Net change in certificates of deposit, $100,000 and over (165) (685)
Net change in securities sold under agreement to repurchase 1,042 114
Exercise of stock option 1 0
Cash dividends paid (216) 0
-------- --------
Net cash provided by financing activities 4,712 7,076
-------- --------
Net change in cash and cash equivalents 8,169 9,349
Cash and cash equivalents at beginning of period 8,006 5,126
-------- --------
Cash and cash equivalents at end of period $ 16,175 $ 14,475
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,719 $ 1,193
Income taxes 129 148
Noncash investing activities during the period:
Loans made in connection with sale of OREO $ 794 $ 0
Repossession of loan collateral 319 0
Noncash financing activities during the period:
Reduction of guaranteed ESOP obligation 0 49
See accompanying notes to consolidated condensed financial statements.
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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 September 30, 1995 and December 31, 1994
and the results of its operations and its cash flows for the three and nine
month periods ended September 30, 1995 and 1994 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) Except as discussed in Note 5 below, 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.
3) Net income per share for the three and nine month periods ended September
30, 1995 and 1994 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 was 1,167,389
and 1,116,480 for the nine month periods ended September 30, 1995 and 1994,
respectively. The weighted average number of shares outstanding was
1,197,193 and 1,157,212 for the third quarter of 1995 and 1994,
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 39% and 38% for the nine month periods ended September 30, 1995 and
1994, respectively.
5) On January 1, 1995, Financial Accounting Standards Board (FASB) Statement
No. 114, "Accounting by Creditors for Impairment of a Loan" and Statement
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures", became effective. Statement No. 114 provides
new rules for measuring losses on impaired loans. Impaired loans are
required to be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Statement No. 118 amends
Statement No. 114 and eliminates its provisions regarding how a creditor
should report income on an impaired loan and, as a result, allows creditors
to continue to use existing methods for recognizing income on impaired
loans. The implementation of these Statements for the first nine months of
1995 had no material impact on the Company's financial statements.
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BAY COMMERCIAL SERVICES
THE TABLE BELOW ILLUSTRATES CHANGES IN MAJOR CATEGORIES
OF THE AVERAGE BALANCE SHEETS AND STATEMENTS OF INCOME
AND IN CERTAIN PERFORMANCE RATIOS (unaudited)
Nine Months Increase
September 30, (Decrease)
1995 1994 $ %
------- ------- ------ ------
(000'S OMITTED)
Assets * ............................ $90,857 $84,458 $6,399 7.6%
Securities - taxable* ............... 20,839 20,408 431 2.1
Securities - nontaxable ............. 2,053 2,134 (81) (3.8)
Total loans ......................... 51,937 48,714 3,223 6.6
Nonaccrual loans .................... 271 895 (624) (69.7)
Other real estate owned ............. 454 832 (378) (45.4)
Deposits ............................ 80,549 75,118 5,431 7.2
Shareholders' equity* ............... 8,458 7,825 633 8.1
Interest-earning assets ............. 81,300 73,475 7,825 10.7
Interest-bearing liabilities ........ 57,400 54,436 2,964 5.4
Income Statements:
Interest income (1) ................. $ 5,576 $ 4,405 $1,171 26.6
Interest expense .................... 1,726 1,249 477 38.2
------- ------- ------ -----
Net interest income (1) ........... 3,850 3,156 694 22.0
Taxable equivalent adjustment ....... 36 46 (10) (21.7)
Net interest income ............... 3,814 3,110 704 22.6
Benefit for loan losses ............. 130 50 80 160.0
------- ------- ------ -----
Net interest income after benefit
for loan losses ................. 3,944 3,160 784 24.8
Noninterest income .................. 562 872 (310) (35.6)
Noninterest expenses ................ 3,268 3,397 (129) (3.8)
Income tax expense .................. 483 240 243 101.3
------- ------- ------ -----
Net income ........................ $ 755 $ 395 $ 360 91.1%
======= ======= ====== =====
* Before unrealized gain (loss) on securities available for sale
Change
------
Performance Ratios: (2)
Yield on average earning assets............ 9.11% 7.93% 1.18%
Yield on average earning assets (1)........ 9.17% 8.02% 1.15%
Interest rate on average interest-bearing
liabilities............................ 4.02% 3.07% 0.95%
Interest expense as a percent of average
earning assets......................... 2.84% 2.27% 0.57%
Net yield on average earning assets........ 6.27% 5.66% 0.61%
Net yield on average earning assets (1).... 6.33% 5.75% 0.58%
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
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BAY COMMERCIAL SERVICES
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
September 30, (Decrease)
1995 1994 $ %
------- ------- ------ -----
(000'S OMITTED)
Assets *............................. $93,016 $85,759 $7,257 8.5%
Securities - taxable*................ 21,690 21,170 520 2.5
Securities - nontaxable.............. 2,317 2,106 211 10.0
Total loans.......................... 51,774 48,463 3,311 6.8
Nonaccrual loans..................... 3 541 (538) (99.4)
Other real estate owned.............. 378 828 (450) (54.3)
Deposits............................. 82,231 76,224 6,007 7.9
Shareholders' equity *............... 8,712 8,023 689 8.6
Interest-earning assets.............. 83,692 75,288 8,404 11.2
Interest-bearing liabilities......... 58,191 54,618 3,573 6.5
Income Statements:
Interest income (1).................. $ 1,917 $ 1,566 $ 351 22.4%
Interest expense..................... 596 448 148 33.0
------- ------- ------ -----
Net interest income (1)............ 1,321 1,118 203 18.2
Taxable equivalent adjustment........ 9 15 (6) (40.0)
Net interest income................ 1,312 1,103 209 18.9
Benefit for loan losses............... 80 50 30 60.0
------- ------- ------- -----
Net interest income after benefit
for loan losses.................. 1,392 1,153 239 20.7
Noninterest income................... 178 171 7 4.1
Noninterest expenses................. 1,048 1,063 (15) (1.4)
Income tax expense................... 207 95 112 117.9
------- ------- ------ -----
Net income......................... $ 315 $ 166 $ 149 89.8%
======= ======= ====== =====
* Before unrealized gain (loss) on securities available for sale
Change
------
Performance Ratios: (2)
Yield on average earning assets 9.04% 8.17% 0.87%
Yield on average earning assets (1) 9.09% 8.25% 0.84%
Interest rate on average interest-bearing
liabilities 4.06% 3.25% 0.81%
Interest expense as a percent of average
earning assets 2.83% 2.36% 0.47%
Net yield on average earning assets 6.21% 5.81% 0.40%
Net yield on average earning assets (1) 6.26% 5.89% 0.37%
(1) Federal taxable equivalent basis.
(2) Ratios have been annualized and are not necessarily indicative of results
for a full year.
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BAY COMMERCIAL SERVICES AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1994
OVERVIEW
Net income of Bay Commercial Services ("the Company") was $755,000 for the first
nine months of 1995 compared to $395,000 for the first nine months of 1994. Net
income per share was $0.65 for the 1995 period compared to $0.35 for the 1994
period.
The $360,000 or 91% increase in net income for the 1995 period compared to the
1994 period was principally due to a $704,000 or 23% increase in net interest
income, a $129,000 or 4% reduction in noninterest expenses, and a $130,000
credit to the provision for loan losses. These improvements were partially
offset by a $310,000 or 36% decrease in noninterest income and a $243,000 or
101% increase in income tax expense.
Total assets were $95,231,000 at September 30, 1995, representing a $6,038,000
or 7% increase over December 31, 1994. The increase in assets reflected the use
of funds generated principally from deposit growth of $3,885,000 or 5% and
increases of $1,042,000 or 101% in repurchase agreements and $896,000 or 11% in
total shareholders' equity during the period. Additionally, the asset mix
shifted during the 1995 period as total securities declined $3,448,000 or 13%
while federal funds sold increased $6,870,000 or 272% and total loans increased
$2,076,000 or 4%.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the principal source of the Company's earnings, is the
amount by which interest and fees generated by interest-earning assets, loans
and investments, exceed the interest cost of deposits and other interest-bearing
liabilities. Net interest income is affected by changes in interest rates as
well as the composition and volume of interest-earning assets and
interest-bearing liabilities.
Net interest income of $3,814,000 for the first nine months of 1995 increased
$704,000 or 23% compared to the first nine months of 1994. The increase
reflected a $7,825,000 or 11% growth in average earning assets and an increase
in the net interest margin to 6.33% from 5.75% for the same period in 1994. The
growth in average interest-earning assets between the 1995 and 1994 periods was
principally due to growth of $3,847,000 or 8% in average earning loans and
$3,628,000 or 117% in average federal funds sold. The yield on average earning
assets increased to 9.11% for the 1995 period compared to 7.93% for the 1994
period, reflecting higher market interest rates between the periods.
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), market interest rate changes will be reflected more quickly
in asset rates. 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 September 30, 1995. 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.
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INTEREST SENSITIVITY PERIOD
----------------------------------------
(000'S OMITTED)
3 Over 3 Over 1
months months year to Over 5
or less to 1 year 5 years years Total
Interest rate sensitive assets:
Loans (net of nonaccrual) $39,604 $2,966 $ 6,130 $ 4,943 $53,643
Securities (before unrealized gain or
loss on securities available for sale) 3,983 2,232 9,016 7,306 22,537
Federal funds sold 9,400 0 0 0 9,400
------- ------ ------- ------- -------
Total 52,987 5,198 15,146 12,249 85,580
Interest rate sensitive liabilities:
Interest-bearing
transaction accounts 5,301 0 0 0 5,301
Savings deposits 21,127 0 0 0 21,127
Time deposits >$100,000 9,976 2,267 1,303 0 13,546
Other time deposits 9,324 3,583 2,426 1 15,334
Other borrowed funds 2,078 0 0 0 2,078
------- ------ ------- ------- -------
Total 47,806 5,850 3,729 1 57,386
------- ------ ------- ------- -------
Interest rate sensitivity gap $ 5,181 $ (652) $11,417 $12,248 $28,194
Cumulative interest rate
sensitivity gap $ 5,181 $4,529 $15,946 $28,194
Cumulative interest rate
sensitivity gap to total assets 5.4% 4.8% 16.7% 29.6%
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 September 30, 1995, indicates that the Company, on a cumulative gap
basis, is asset sensitive over all the time periods shown. This suggests that if
interest rates were to rise, net interest income could rise while in a declining
interest rate environment, net interest income could fall.
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 for loan losses when it determines there has been a
permanent impairment of the related carrying values.
The allowance for loan losses reflects an amount sufficient to cover estimated
loan losses and is maintained 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 September 30, 1995, the allowance for loan losses was $966,000 compared to
$756,000 at December 31, 1994. The increased allowance reflected net loan
recoveries of $340,000 during the first nine months of 1995, partially offset by
a $130,000 credit to the provision for loan losses during the second and third
quarters of 1995. The ratio of the allowance for loan losses to total loans was
1.8% at September 30, 1995, and 1.5% at December 31, 1994. While 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 September 30, 1995, 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. Due to
reductions in nonperforming loans and recoveries of loans previously written
off, in addition to moderate loan growth and the level of the allowance in
relation to both nonperforming and total outstanding loans, no provision for
loan losses was made during the first nine months of either 1995 or 1994, and
the reserve was decreased by $130,000 by a credit to the provision for loan
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losses during the first nine months of 1995 and a $50,000 credit during the
first nine months of 1994.
Information on nonperforming loans for the nine month periods ending September
30, 1995 and September 30, 1994, and the twelve month period ended December 31,
1994, is summarized in the following table.
September 30, December 31, September 30,
1995 1994 1994
----------- ----------- ------------
(000's OMITTED)
Net loan charge-offs (recoveries)... $ (340) $ 10 $ (180)
Ratio of net loan charge-offs
(recoveries) to average loans..... (0.7)% 0 (0.2)%
Nonperforming loans:
Nonaccrual loans.................. 0 $626 $ 832
Accruing loans past due
90 days or more................. 0 0 0
------- ------- -----
Total nonperforming loans....... 0 $626 $ 832
Ratio of nonperforming loans
to total loans.................... 0 % 1.2% 1.7 %
Ratio of allowance for loan
losses to nonperforming loans..... 0 % 120.8% 110.9 %
Other real estate owned............. $ 378 $854 $ 796
There were no nonperforming loans at September 30, 1995 compared to $626,000 at
December 31, 1994, and $832,000 at September 30, 1994.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) of $378,000 at September 30, 1995, consisted of
three properties. OREO balances declined $476,000 or 56% compared to December
31, 1994, due to the sale of two OREO properties during the first six months of
1995. OREO consists of real estate acquired as a result of legal foreclosure or
through receipt of a deed in lieu of foreclosure. OREO amounts are carried at
the lower of cost or fair value less estimated disposal costs. When the property
is acquired, any excess of the loan balance over fair value of the property is
charged to the allowance for loan losses. Subsequent write-downs, if any, and
disposition gains and losses are included in noninterest income or noninterest
expense. OREO assets are not being depreciated and any rental income is applied
against current expenses or the recorded balance of the asset.
NONINTEREST INCOME
Total noninterest income of $562,000 for the first nine months of 1995 declined
$310,000 or 36% compared to the first nine months of 1994. The largest change
was a $258,000 or 84% decrease in other income which principally reflected a
nonrecurring $215,000 recovery in 1994 of prior years' legal and foreclosure
costs and other expenses related to the sale of OREO property. Other changes in
noninterest income included a $24,000 or 12% reduction in service charges and
fees, principally due to reduced deposit account analysis service charges, and a
$35,000 loss on sale of securities in 1995 compared to an $11,000 gain on sale
of securities in 1994. Partially offsetting these decreases in noninterest
income was an increase of $19,000 or 33% in net gain on the sale of OREO.
NONINTEREST EXPENSE
Total noninterest expenses of $3,268,000 for the first nine months of 1995
declined $129,000 or 4% compared to the same period in 1994. The most
significant change in noninterest expenses was a $106,000 or 42% decrease for
the 1995 period in professional services fees, principally legal expenses
related to problem loans. FDIC insurance costs declined $64,000 or 44% compared
to the 1994 period due to a recent reduction by the FDIC in assessment rates and
the consequent refund of excess premiums paid earlier in 1995. Partially
offsetting these improvements were increases of $51,000 or 86% in directors fees
and $49,000 or 31% in data processing expenses. The increase in directors' fees
reflected a higher rate of compensation in 1995 while the higher data processing
charges were due to outsourcing of check and statement processing.
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PROVISION FOR INCOME TAXES
The provision for income tax expense was $483,000 for the first nine months of
1995 compared to $240,000 for the first nine months of 1994. The increased
income tax expense reflected higher taxable income during the 1995 period. The
effective income tax rates were 39% and 38% for the 1995 and 1994 periods,
respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1994
OVERVIEW
Net income for the Company for the third quarter of 1995 was $315,000 compared
to $166,000 for the third quarter of 1994. Net income per share was $0.26 for
the 1995 quarter compared to $0.14 for the 1994 quarter.
The $149,000 or 90% increase in net income for the 1995 quarter compared to the
1994 quarter was principally due to a $209,000 or 19% increase in net interest
income and a $30,000 additional credit to the loan loss provision. These
improvements were partially offset by a $112,000 or 118% increase in income tax
expense.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income of $1,312,000 for the third quarter of 1995 increased
$209,000 or 19% compared to the third quarter of 1994. The increase reflected
the $8,404,000 or 11% growth in average earning assets and an increase in the
net interest margin to 6.26% for the 1995 quarter from 5.89% for the 1994
quarter.
The growth in average interest-earning assets between the 1995 and 1994 quarters
was due to growth of $3,849,000 or 8% in average earning loans and $3,824,000 or
94% in average federal funds sold. The yield on average earning assets increased
to 9.04% for the 1995 quarter compared to 8.17% for the 1994 quarter, reflecting
higher market interest rates between the quarters and the asset sensitive
position of the Bank.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
An $80,000 credit to the provision for loan losses was provided during the third
quarter of 1995 compared to a credit of $50,000 during the third quarter of
1994. These credits were made to reflect reductions in nonperforming loans and
recoveries on loans previously written off as well as moderate loan growth and
the level of the allowance in relation to both nonperforming and total
outstanding loans. Based upon information currently available, Management
believes that the allowance for loan losses at September 30, 1995, 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.
NONINTEREST INCOME
Total noninterest income of $178,000 for the third quarter of 1995 declined
$7,000 or 4% compared to the third quarter of 1994. There were no significant
fluctuations in any of the individual items comprising noninterest income.
NONINTEREST EXPENSE
Total noninterest expenses of $1,048,000 for the third quarter of 1995 declined
$15,000 or 1% compared to the same quarter in 1994. The most significant change
in noninterest expenses was a $51,000 or 111% decrease for the 1995 quarter in
FDIC insurance expense, reflecting the recent reduction in premium costs and a
refund of higher premium payments made earlier in fiscal 1995. This decrease was
partially offset by a $15,000 or 75% increase in directors' fees and a $13,000
or 23% increase in data processing charges. The increase in directors' fees
reflected a higher rate of compensation in 1995 while the higher data processing
charges were due to outsourcing of check and statement processing.
PROVISION FOR INCOME TAXES
The provision for income tax expense was $207,000 for the third quarter of 1995
compared to $95,000 for the third quarter of 1994. The increased income tax
expense reflected higher taxable income during the 1995 quarter. The effective
income tax rates were 39% and 36% for the 1995 and 1994 quarters, respectively.
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FINANCIAL CONDITION
LOANS AND INVESTMENTS
Total loans of $53,642,000 at September 30, 1995 increased $2,076,000 or 4% from
December 31, 1994. Average total loans for the first nine months of 1995
increased $3,223,000 or 7% compared to the first nine months of 1994. Total
securities at September 30, 1995, declined $3,448,000 or 13% as maturing
short-term securities were reinvested in overnight federal funds sold. The
$6,870,000 or 272% increase in federal funds sold compared to year-end 1994
allowed the Bank to maintain a strong liquidity position and still earn a
relatively high short-term rate of return.
OTHER ASSETS AND OTHER LIABILITIES
As previously discussed, OREO assets at September 30, 1995, declined $476,000 or
56% from December 31, 1994, due to the sale of two properties. Interest and fees
receivable increased $180,000 or 33% during the first nine months of 1995,
reflecting the increased volume of and higher yield on earning assets. Interest
payable and other liabilities at September 30, 1995 were $215,000 or 23% higher
than year-end 1994 principally due to an increase in accrued interest payable
resulting from the higher average balances and costs of interest-bearing
liabilities.
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 47% at September 30, 1995, and 42% at December 31, 1994. 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 $4,000,000 with two correspondent banks and a $3,000,000
repurchase facility to meet unforeseen outflows. As of September 30, 1995, no
borrowed funds were outstanding on these credit agreements. As of September 30,
1995, the Bank did not carry any brokered deposit balances.
CAPITAL
The Company and the Bank are subject to Federal Reserve Board guidelines and
regulations of the FDIC governing capital adequacy. The Federal Reserve Board's
risk-based and leverage capital guidelines for bank holding companies are
substantially the same as the FDIC's capital regulations for nonmember banks.
The Federal Reserve Board capital guidelines for bank holding companies and the
FDIC's regulations for nonmember banks set total capital requirements and define
capital in terms of "core capital elements" (comprising Tier 1 capital) and
"supplemental capital elements" (comprising Tier 2 capital). Tier 1 capital is
generally defined as the sum of the core capital elements less goodwill, with
core capital elements including (i) common stockholders' equity; (ii) qualifying
noncumulative perpetual preferred stock; and (iii) minority interests in the
equity accounts of consolidated subsidiaries. Supplementary capital elements
include: (i) allowance for loan and lease losses (which cannot exceed 1.25% of
risk weighted assets); (ii) perpetual preferred stock not qualifying as core
capital; (iii) hybrid capital instruments and mandatory convertible debt
instruments; and (iv) term subordinated debt and intermediate-term preferred
stock. The maximum amount of supplemental capital elements which qualifies as
Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Federal Reserve Board to those assets. Both
bank holding companies and nonmember banks are required to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of 8%, at least
one-half of which must be in the form of Tier 1 capital.
The Federal Reserve Board and the FDIC also have established a minimum leverage
ratio of 3% of Tier 1 capital to total assets for bank holding companies and
nonmember banks that have received the highest composite regulatory rating and
are not anticipating or experiencing any significant growth. All other
institutions will be required to maintain a leverage ratio of at least 100 to
200 basis points above the 3% minimum.
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The following tables present the Company's and the Bank's regulatory capital
positions at September 30, 1995, and average total assets for the nine month
period ended September 30, 1995:
RISK BASED CAPITAL RATIO
At September 30, 1995
(000's OMITTED)
Company Bank
Amount Ratio Amount Ratio
------ ---- ------ ----
Tier 1 Capital................................. $8,840 14.1% $8,577 13.7%
Tier 1 Capital minimum requirement 2,514 4.0 2,508 4.0
------ ---- ------ ----
Excess......................................... $6,326 10.1% $6,069 9.7%
Total Capital.................................. $9,626 15.3% $9,361 14.9%
Total Capital minimum requirement.............. 5,028 8.0 5,016 8.0
------ ---- ------ ----
Excess......................................... $4,598 7.3% $4,345 6.9%
------ ---- ------ ----
Risk weighted assets........................... $62,850 $62,704
LEVERAGE RATIO
For nine month period ended
September 30, 1995
(000's OMITTED)
Company Bank
Amount Ratio Amount Ratio
------ ----- ------ -----
Tier 1 Capital to average total assets......... $8,840 9.7% $8,577 9.4%
Range of minimum leverage 2,726- 3.0- 2,721- 3.0-
requirement.................................. 4,543 5.0% 4,535 5.0%
------ ---- ------ ----
Range of excess................................ 4,297- 4.7- 4,042- 4.4-
$6,114 6.7% $5,856 6.4%
------ ---- ------ ----
Average total assets........................... $90,857 $90,706
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 September 30, 1995 and 1994 have not
been material.
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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 September 30, 1995.
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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: October 24, 1995 By R. M. Kahler
----------------------------
R. M. Kahler
President and
Chief Executive Officer
(Principal Executive Officer)
Date: October 24, 1995 By R. D. Greenfield
----------------------------
R. D. Greenfield
Chief Financial Officer
(Principal Accounting Officer)
16
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
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27 Financial Data Schedule