FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-23299
BAY BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
TEXAS
76-0046244
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 HIGHWAY 146 SOUTH
LA PORTE, TEXAS 77571
(Address of principal executive offices)
(281) 471-4400
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 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
As of October 21, 1998, there were 2,035,603 shares of the registrant's Common
Stock, par value $1.00 per share outstanding.
================================================================================
BAY BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I - FINANCIAL INFORMATION
ITEM 1. - Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and December
31, 1997
Consolidated Statements of Earnings for Nine Months ended
September 30, 1998 and 1997
Consolidated Statement of Comprehensive Income for the Nine
Months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1998 and 1997
Notes to Interim Consolidated Financial Statements
ITEM 2. - Management's Discussion and Analysis or Plan of Operation
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
ITEM 2. - Changes in Securities and Use of Proceeds
ITEM 3. - Defaults Upon Senior Securities
ITEM 4. - Submission of Matters to a Vote of Security Holders
ITEM 5. - Other Information
ITEM 6. - Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks ..................... $ 11,890 $ 18,165
Federal funds sold .......................... 7,400 21,900
------------ ------------
Total cash and cash equivalents .......... 19,290 40,065
Interest bearing deposits with banks ............. 492 492
Securities available-for-sale .................... 69,249 62,963
Loans, net of allowance for credit losses
of $2,018 and $1,999 ............................. 165,095 153,766
Bank premises and equipment, net ................. 8,451 7,241
Other assets ..................................... 11,764 11,767
------------ ------------
Total assets ............................. $ 274,341 $ 276,294
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing ...................... $ 60,791 $ 66,397
Interest-bearing deposits ................ 181,942 182,690
------------ ------------
Total deposits ........................... 242,733 249,087
Other liabilities ........................... 5,343 2,658
------------ ------------
Total liabilities ........................ 248,076 251,745
Stockholders' equity
Common stock ................................ 2,091 2,091
Additional paid-in capital .................. 17,541 17,541
Retained earnings ........................... 6,587 5,087
Accumulated other comprehensive income ...... 507 104
------------ ------------
26,726 24,823
Less: Treasury stock ............................ (461) (274)
Total stockholders' equity ............... 26,265 24,549
------------ ------------
Total liabilities and
stockholders' equity ..................... $ 274,341 $ 276,294
============ ============
</TABLE>
(See accompanying notes to interim consolidated financial statements)
2
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Interest income
Loans, including fees ............. $ 3,824 $ 2,584 $11,076 $ 7,535
Securities ........................ 1,054 662 3,081 2,006
Federal funds sold ................ 63 155 491 397
------- ------- ------- -------
Total interest income ............. 4,941 3,401 14,648 9,938
Interest expense
Deposits .......................... 1,820 1,431 5,486 4,149
Other ............................. 30 2 30 16
------- ------- ------- -------
Total interest expense ............ 1,850 1,433 5,516 4,165
------- ------- ------- -------
Net interest income ............ 3,091 1,968 9,132 5,773
Provision for credit losses ....... 144 144 432 312
------- ------- ------- -------
Net interest income after provision for
credit losses ........................ 2,947 1,824 8,700 5,461
Noninterest income
Service charges ................... 631 378 1,827 1,119
Other ............................. 345 229 1,227 685
------- ------- ------- -------
Total noninterest income ....... 976 607 3,054 1,804
Noninterest expense
Salaries and employee benefits .... 1,556 898 4,734 2,741
Occupancy expense, net ............ 478 293 1,327 876
Other noninterest expense ......... 965 663 2,833 1,852
------- ------- ------- -------
Total noninterest expense ......... 2,999 1,854 8,894 5,469
------- ------- ------- -------
Earnings before federal income taxes ... 924 577 2,860 1,796
Provision for income taxes ........ 306 197 991 561
------- ------- ------- -------
Net earnings ................... $ 618 $ 380 $ 1,869 $ 1,235
======= ======= ======= =======
Net earnings per share (basic) . $ 0.30 $ 0.28 $ 0.91 $ 0.91
Net earnings per share (diluted) 0.29 0.26 0.88 0.86
(See accompanying notes to interim consolidated financial statements)
3
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings ............................. $ 618 $ 380 $ 1,869 $ 1,235
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period ............. 393 109 405 217
Less: reclassification adjustment
for gains included in net earnings -- -- (2) (8)
------- ------- ------- -------
393 109 403 209
------- ------- ------- -------
Comprehensive income ..................... $ 1,011 $ 489 $ 2,272 $ 1,444
======= ======= ======= =======
</TABLE>
(See accompanying notes to interim consolidated financial statements)
4
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
---------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net earnings ................................ $ 1,869 $ 1,235
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Provision for loan losses ................ 432 312
Depreciation ............................. 713 425
Gain on sale of bank premises and
equipment ............................... (74) (5)
Gain on sale of available-for-sale
securities .............................. (3 (12)
Amortization of premiums, net of
(accretion) and discounts on securities . 154 53
Effect of phantom stock plan ............. 48 134
Decrease (increase) in other assets ...... 39 (131)
Decrease in other liabilities ............ (521) (330)
-------- --------
Net cash provided by operating activities 2,657 1,681
Cash flows from investing activities:
Proceeds from sale of available-for-sale
securities ................................. 4,542 1,012
Proceeds from principal repayments,
maturities, and calls of
available-for-sale securities .............. 20,987 3,323
Purchases of available-for-sale securities .. (31,369) (2,817)
Net (increase) decrease in loans ............ (12,111) 3,487
Proceeds from sales of bank premises and
equipment .................................. 234 62
Purchases of bank premises and equipment .... (1,805) (490)
-------- --------
Net cash (used in) provided by
investing activities .................. (19,522) 4,577
Cash flows from financing activities:
Issuance of common stock .................... -- 4
Net decrease in securities sold under
agreements to repurchase ................... -- (1,000)
Sale of treasury stock ...................... -- 3
Purchase of treasury stock .................. (187) --
Net decrease in deposits .................... (6,354) (2,027)
Advance from Federal Home Loan Bank ......... 3,000 --
Dividends paid .............................. (369) (244)
-------- --------
Net cash (used) provided by financing
activities ........................... (3,910) (3,264)
Net increase in cash and cash
equivalents .......................... (20,775) 2,994
Cash and cash equivalents at beginning of period ....... 40,065 18,472
-------- --------
Cash and cash equivalents at
end of period ......................................... $ 19,290 $ 21,466
======== ========
(See accompanying notes to interim consolidated financial statements)
5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Bay
Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries Bayshore
National Bank (the "Bank"), Bay Bancshares of Delaware, Inc. ("BBDI") and
BayBanc Independent Insurance Agency ("BBIIA"). All significant intercompany
transactions and balances have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the statements reflect all
adjustments necessary for a fair presentation of the financial position, results
of operations and cash flows of the Company on a consolidated basis, and all
such adjustments are of a normal recurring nature. These financial statements
and the notes thereto should be read in conjunction with the Company's 1997
Annual Report on Form 10-KSB. Operating results for the Nine month period ended
September 30, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
(2) EARNINGS PER COMMON SHARE
Earnings per common and common equivalent share was computed based on
the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings available to common shareholders $ 618 $ 380 $1,869 $1,235
Basic weighted average shares
outstanding ................................ 2,045 1,357 2,048 1,357
Diluted weighed average shares
outstanding ................................ 2,130 1,440 2,136 1,440
Basic earnings per common share ............. $ 0.30 $ 0.28 $ 0.91 $ 0.91
Diluted earnings per common share ........... $ 0.29 $ 0.26 $ 0.88 $ 0.86
</TABLE>
(3) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company has adopted Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which requires an entity to
report and display comprehensive income and its components. Comprehensive income
includes net earnings plus unrealized gain or loss on securities.
The tax effects of comprehensive income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------ ------------------------------
(Unaudited) (Unaudited)
BEFORE TAX TAX NET OF BEFORE TAX TAX NET OF
AMOUNT EXPENSE TAX AMOUNT AMOUNT EXPENSE AMOUNT
-------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising
during period $ 527 $ (134) $ 393 $ 146 $ (37) $ 109
Less:reclassification adjustments
for gains included in net earnings - - - - - -
-------- --------- --------- --------- --------- --------
Comprehensive income 527 (134) 393 146 (37) 109
======== ========= ========= ========= ========= ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------ ------------------------------
(Unaudited) (Unaudited)
BEFORE TAX BEFORE TAX
TAX (EXPENSE) NET OF TAX (EXPENSE) NET OF
AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
-------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising
during period $ 543 $ (138) $ 405 $ 291 $ (74) $ 217
Less: reclassification
adjustments for gains included
in net earnings (3) 1 (2) (12) 4 (8)
-------- --------- --------- --------- --------- --------
Comprehensive income $ 540 $ (137) $ 403 $ 279 $ (70) $ 209
======== ========= ========= ========= ========= ========
</TABLE>
ITEM 2. -MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The Bay Bancshares, Inc. (the "Company") was incorporated as a business
corporation in 1982 under the laws of the State of Texas to be a multi-bank
holding company for Bayshore National Bank (the "Bank"). The Company currently
serves its market areas from its headquarters in La Porte and ten full-service
banking office locations in La Porte, Liberty, Cleveland, Seabrook, Pasadena,
Baytown, Deer Park and Mont Belvieu, Texas. Additionally, the Company operates
two LPOs in Houston and another in the Clear Lake/NASA area of Houston, Texas.
OVERVIEW
The Company's performance during the nine month period ended September
30, 1998, as compared to the nine month period ended September 30, 1997, was
affected by several events. In November 1997, the Bank acquired Texas Bank,
Baytown, Texas, Texas National Bank of Baytown, Texas and First Bank of Deer
Park, Texas (the "1997 Acquisitions"). As a result of these acquisitions, the
Company experienced increased earnings through volume growth, margin
improvements and increases in fee based income. During this same period
operating expenses increased as the Company fully integrated the 1997
Acquisitions, completed the conversion to a new Year 2000 ("Y2K") compliant
mainframe computer system and incorporated comprehensive communication upgrades.
Operational expenses have increased and will affect future periods as a result
of the major technology investments. However, the capabilities provided by these
investments position the Company not only for future expansion but to also offer
state-of-the art customer products that facilitate the ability to capitalize on
technological efficiencies, remain competitive and generate internal growth.
Working towards a paper-less environment, the Company rolled out imaged
statements on all retail and commercial customer accounts during the third
quarter, 1998. Additionally, the Company began offering Internet banking for
retail customers enabling account access and automated bill paying. For
commercial customers, the Company introduced cash management capabilities that
include both Internet account access and an automated sweep investment product.
On June 30, 1998 the Company announced that the Board of Directors
approved the repurchase of up to $500,000 of Company common stock. As of October
21, 1998 the Company, using excess funds repurchased 13,500 shares of common
stock in the open market in two separate trades at a total cost of $187,000. As
of October 21, 1998 there were 2,035,603 shares of common stock outstanding.
Net income for the nine months ended September 30, 1998 was $1.9 million
compared with $1.2 million for the nine months ended September 30, 1997, an
increase of $634,000 or 51.34%. Per share (basic) earnings remained unchanged at
$0.91 for the nine months ended September 30, 1998 and 1997 respectively. Per
share (diluted) earnings increased $0.02 to $0.88 for the nine months ended
September 30, 1998 from $0.86 for the same period ended September 30, 1997. Net
income for the third quarter of 1998 was $618,000, an increase of $238,000 or
62.63% compared with $380,000 for the same period in 1997. Per share (basic)
earnings increased $0.02 to $0.30 for the third quarter of 1998 from $0.28 for
the same period in 1997. Per share (diluted) earnings increased $0.03 to $0.29
for the third quarter of 1998 from $0.26 for the same period in 1997. Net income
increased in the third quarter 1998 primarily due to a higher dollar amount of
interest earning assets, continued margin improvements, fees generated by the
Mortgage Lending Division, gains on the sale of SBA loans and volumes generated
by the 1997 Acquisitions. Volumes in the Mortgage Lending Division continue to
grow as a result of the decline in mortgage lending rates and the increased
sales emphasis on generating new loans. As the Company
7
<PAGE>
immediately sells the loans, subsequent fee income and the profitability of the
department continues to grow. Fee income generated year to date is $190,000 and
generated quarter to date is $76,000. With start up costs expensed during the
first half of 1998, the affiliation with Bayshore Insurance Agency ("BIA") has
generated a small level of fee income for the Company. Existing customer
referrals, continued sales development and other new business production efforts
should provide for increasing levels of fee income as the Mortgage Lending
Division, SBA LPOs, and BIA continues to grow. The increase in net income was
supplemented through the elimination of acquisition and conversion related
expenses following the full integration of the 1997 acquisitions and the
completion of the Y2K compliant mainframe and communication system conversions.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Company's
income. Interest rate fluctuations, as well as changes in the amount and type of
earning assets and liabilities, combine to affect net interest income.
Net interest income for the nine months ended September 30, 1998 was
$9.1 million compared with $5.8 million for the nine months ended September 30,
1997, an increase of $3.3 million or 56.90% and an increase of $1.1 million or
55.00% in the third quarter of 1998 as compared with the third quarter of 1997.
Average interest-earning assets decreased from 91.43% of total average assets at
September 30, 1997 to 88.98% of total average assets at September 30, 1998.
Average interest-earning assets for the nine months ended September 30, 1998
compared to the same period in 1997 decreased primarily due to the Company's
technology investment along with the 1997 Acquisition related land and building
purchases. Average gross loans increased to $162.6 million for the nine months
ended September 30, 1998 from $117.2 million for the nine months ended September
30, 1997, an increase of $45.4 million or 38.74%.
Net interest income was improved by a decrease in the cost of
interest-bearing liabilities from 4.06% in September 30, 1997 to 4.02% for the
nine months ended September 30, 1998. Average interest-bearing deposits
increased to $183.2 million for the nine months ended September 30, 1998 from
$136.7 million for the nine months ended September 30, 1997, an increase of
$46.5 million or 34.02%. This growth was primarily attributable to the 1997
Acquisitions.
The Company posted net interest margins of 5.03% and 4.51% and net
interest spreads of 4.05% and 3.71% for the periods ended September 30, 1998 and
September 30, 1997, respectively. The increase in net interest margin from the
third quarter of 1997 to the third quarter of 1998 reflects a thirty basis point
increase in the yield on average interest-earning assets and a four basis point
reduction in the cost of interest-bearing liabilities.
The following table presents for the periods indicated the total dollar
amount of average balances, interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No tax
equivalent adjustments were made and all average balances are daily average
balances.
8
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------------
1998 1997
------------------------------------- ------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans ............................... $ 162,632 $ 11,076 $ 9.08% $ 117,196 $ 7,535 $ 8.57%
Securities .......................... 67,992 3,081 6.04% 44,209 2,006 6.05%
Federal funds sold and other
temporary investments ............. 11,475 491 5.71% 9,038 397 5.86%
----------- --------- --------- --------- --------- ---------
Total interest-earning
assets ............................ 242,099 14,648 8.07% 170,443 9,938 7.77%
----------- --------- --------- --------- --------- ---------
Less allowance for loan losses ...... (1,998) (1,457)
----------- ---------
Total interest-earning assets,
net allowance ..................... 240,101 168,986
Nonearning assets ................... 31,975 17,425
----------- ---------
Total assets .................... $ 272,076 $ 186,411
=========== =========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits .... $ 29,472 $ 249 1.13% $ 19,285 $ 169 1.17%
Public fund deposits ................ 3,162 78 3.29% 3,174 77 3.25%
Savings and money market
accounts .......................... 55,661 1,422 3.41% 41,778 1,054 3.36%
Certificates of deposit ............. 94,170 3,737 5.29% 72,015 2,849 5.27%
Federal funds purchased, FHLB
line of credit and other borrowings 714 30 5.60% 429 16 5.10%
----------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities .................. 183,179 5,516 4.02% 136,681 4,165 4.06%
----------- --------- --------- --------- --------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits .......................... 62,298 32,350
Other liabilities ................... 3,335 3,876
----------- ---------
Total liabilities ............... 245,477 172,907
----------- ---------
Stockholders' equity .................... 23,264 13,504
----------- ---------
Total liabilities and
stockholders' equity .......... $ 272,076 $ 186,411
=========== =========
Net interest income ................. $ 9,132 $ 5,773
========= =========
Net interest spread ................. 4.05% 3.71%
========= =========
Net interest margin ................. 5.03% 4.51%
========= =========
</TABLE>
9
<PAGE>
Provision for Loan Losses
The provision for loan losses increased to $432,000 for the nine months
ended September 30, 1998 from $312,000 for the same time period in 1997, a
increase of $120,000 or 38.46%.
Noninterest Income
Noninterest income is an important source of revenue for financial
institutions. The Company's primary source of noninterest income is service
charges on deposit accounts and other banking service related fees. Noninterest
income for the nine months ended September 30, 1998 was $3.1 million compared
with $1.8 million for the nine months ended September 30, 1997, an increase of
$1.3 million or 72.22%. Noninterest income in the third quarter of 1998
increased primarily as a result of additional service fees generated from the
1997 Acquisitions, gain on the sale of SBA loans and ATM fee income.
The following table presents for the periods indicated the major
categories of noninterest income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 631 $ 378 $ 1,827 $ 1,119
Gain on sale of SBA loans 81 72 383 213
ATM fee income 96 50 253 155
Alternative investments 26 56 117 145
Other noninterest income 142 51 474 172
---------- ---------- ---------- ----------
Total noninterest income $ 976 $ 607 $ 3,054 $ 1,804
========== ========== ========== ==========
</TABLE>
Noninterest Expense
In the nine month period ended September 30, 1998, noninterest expense
increased $3.4 million or 61.82% to $8.9 million from $5.5 million for the
period ended September 30,1997 and increased $1.1 million or 57.89% in the third
quarter of 1998 as compared with the third quarter of 1997. The increase
reflects additional expenses including amortization of goodwill of $294,000,
increased facility costs from the 1997 Acquisitions, operational expenses
incurred during the Company's conversions to a new mainframe computer system and
comprehensive communication network, and start up costs associated with the
Mortgage Lending Division. Accomplishment of these goals negatively impacts net
earnings. However, management believes the infrastructure is now in place
positioning the Company for future growth and to compete with any super-regional
or national banking organization with respect to communications and electronic
convenience to the customer.
10
<PAGE>
The following table presents for the periods indicted the major
categories of noninterest expense:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Employee compensation and benefits $ 1,556 $ 898 $ 4,734 $ 2,741
Non-staff expense:
Net bank premises expense 241 135 650 409
Equipment rentals, depreciation and
maintenance 237 158 677 467
Data processing 77 36 206 107
Professional fees 148 66 391 225
Regulatory assessments/FDIC insurance 49 25 110 76
Ad valorem and franchise taxes 72 48 214 139
Other 619 488 1,912 1,305
---------- ---------- ---------- ----------
Total non-staff expenses 1,443 956 4,160 2,728
---------- ---------- ---------- ----------
Total noninterest expense $ 2,999 $ 1,854 $ 8,894 $ 5,469
========== ========== ========== ==========
</TABLE>
Employee compensation and benefit expense for the nine months ended
September 30, 1998 was $4.7 million, an increase of $2.0 million or 74.07% from
$2.7 million in the same period of 1997 and an increase of $658,000 or 73.27% in
the third quarter of 1998 as compared with the third quarter of 1997. The
increase was principally due to additional staff associated with the 1997
Acquisitions, start up staffing costs of the Mortgage Lending Division and
additional temporary staff associated with the Company's mainframe computer and
communication conversions.
Non-staff expense increased to $4.2 million for the nine month period
ended September 30, 1998 from $2.7 million for the same period in 1997, an
increase of $1.5 million or 55.56% and an increase of $487,000 or 50.94% in the
third quarter of 1998 as compared with the third quarter of 1997. This increase
was due to additional expenses including the amortization of goodwill associated
with the 1997 Acquisitions, increased advertising costs related to the Company's
expansion, increased legal fees as the Company continues to grow and
aggressively pursue collection activities, start up costs associated with the
Mortgage Lending Division and expenses related to the Company's mainframe
computer and communication conversions.
Financial Condition
Total assets as of September 30, 1998 were $274.3 million compared with
$276.3 million at December 31, 1997 a decrease of $2.0 million or 0.72%. At
September 30, 1998, investment securities totaled $69.2 million, an increase of
$6.2 million or 9.84% from $63.0 million at December 31, 1997. Net loans were
$165.1 million at September 30, 1998, an increase of $11.3 million or 7.35% from
$153.8 million at December 31, 1997. Third quarter 1998 balance sheet growth was
attributable primarily to the 1997 Acquisitions and internal loan growth.
The allowance for credit losses is a reserve established through charges
to earnings in the form of a provision for credit losses. Management has
established an allowance for loan losses which it believes is adequate for
estimated losses in the Company's loan portfolio. The Company follows a loan
review program to evaluate the credit risk in the loan portfolio. Through the
loan review process, the Company maintains an internally classified loan watch
list which, along with the delinquency list of loans, helps management assess
the overall quality of the loan portfolio and the adequacy of the allowance for
credit losses. Loans classified as "substandard" are those loans with clear and
defined weaknesses such as a highly-leveraged position, unfavorable financial
ratios, uncertain repayment sources or poor financial condition, which may
jeopardize recoverability of the debt. Allowance for credit losses as of
September
11
<PAGE>
30, 1998 was $2.0 million or 1.20% of outstanding loans compared with $2.0
million or 1.28% of outstanding loans as of December 31, 1997.
The Company's total deposits for the nine months ended September 30,
1998 were $242.7 million, a decrease of $6.4 million or 2.57% from $249.1million
at December 31, 1997. Deposits for the nine months ended September 30, 1998
compared to December 31, 1997 decreased primarily due to a decline in
non-interest bearing demand deposits.
Stockholders' equity increased from $24.5 million at September 30, 1997
to $26.3 million at September 30, 1998, an increase of $1.8 million or 7.35%. As
of September 30, 1998 the Company's ratio of stockholders' equity to total
assets was 9.59% as compared with 8.87% as of December 30, 1997.
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. The Company's liquidity needs are primarily met by
growth in core deposits. Although access to purchased funds from correspondent
banks is available and has been utilized on occasion to take advantage of
investment opportunities, the Company does not rely on these external funding
sources. The cash and federal funds sold position, supplemented by amortizing
investment along with payments and maturities within the loan portfolio, have
historically created an adequate liquidity position.
The Company's cash flows are composed of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash provided by operating activities was
$2.7 million and $1.7 million for the nine months ended September 30, 1998 and
1997 respectively. The increase in net cash provided by operating activities for
the nine months ended September 30, 1998 compared with the same period in 1997
was primarily due to the increase in other liabilities in 1997.
Net cash (used in) provided by investing activities was ($19.5) million
and $4.6 million for the nine months ended September 30, 1998 and 1997,
respectively. The decrease in net cash (used in) provided by investing
activities for the nine months ended September 30, 1998 compared with the same
period in 1997 was primarily due to the purchase of available-for-sale
securities in 1998 and the increase in loans in 1998.
Net cash (used in) financing activities was ($3.9) million and ($3.3)
million for the nine months ended September 30, 1998 and 1997, respectively. The
decrease in net cash (used in) financing activities for the nine months ended
September 30, 1998 compared with the same period in 1997 was primarily due to
the decrease in deposits in 1998. During the third quarter of 1998, the Company
utilized the funding mechanism of the Federal Home Loan Bank by advancing $3.0
million for a one year period. The advance will be used as a low cost funding
source for the Company's lending and investment activities.
Capital management consists of providing equity to support both current
and future operations. The Company is subject to capital adequacy requirements
imposed by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") and the Bank is subject to capital adequacy requirements imposed
by the Office of the Comptroller of Currency ("OCC"). Both the Federal Reserve
board and the OCC have adopted risk-based capital requirements. The following
table provides a comparison of the Company's and the Bank's leverage and risk
weighted capital ratios as of September 30, 1998 and with regulatory standards.
12
<PAGE>
Actual Ratio
Minimum September 30,
Required 1998
--------------------------------
THE COMPANY
Leverage ratio 3.00% 6.86%
Tier 1 risk-based capital 4.00% 9.64%
Risk-based capital ratio 8.00% 10.71%
THE BANK
Leverage ratio 3.00% 6.79%
Tier 1 risk-based capital 4.00% 9.66%
Risk-based capital ratio 8.00% 10.74%
Year 2000
GENERAL. The Year 2000 problem affects computers, computer software, and
other devices which contain an embedded computer chip that are not able to
perform without interruption into the Year 2000. If computer systems do not
correctly recognize the date change from December 31, 1999 to January 1, 2000,
computer applications that rely on the date field could fail or create erroneous
results. Such erroneous results could affect interest calculations, payments or
due dates or cause the temporary inability to process transactions, send
invoices or engage in similar normal business activities. If these issues are
not addressed by the Company, its correspondent institutions, its suppliers, and
its significant depository and/or borrowing customers, there could be a material
adverse impact on the Company's financial condition or results of operations.
STATE OF READINESS. The Company established a Year 2000 Action Committee
in 1997 to ensure there will be no material adverse effect on customers or
disruption of business operations as a result of a failure of the Company or its
third parties to properly process any data, on or after January 1, 2000. This
committee is comprised of senior management of the Bank, as well as the manager
of each department of the Bank. The Board of Directors and senior management of
the Company fully support the Year 2000 initiative and have allocated sufficient
resources to ensure the timely completion of this project. The committee
established a Year 2000 plan, approved by the Board of Directors of the Company,
which is comprised of five phases: Awareness, Assessment, Renovation,
Validation, and Implementation. This plan, as well as the Company's compliance
with the Year 2000 initiative, was reviewed by the Office of the Comptroller of
the Currency in 1998.
The Company completed both the Awareness and Assessment phases in the
third quarter of 1997. An inventory of all systems and products (including both
information technology [IT] and non-information technology [non-IT] systems) was
performed, and a risk assessment and prioritization of those systems completed.
The Company performs all of its processing in-house, although it does not
utilize any in-house programming. The computer hardware and operating system
utilized for processing are IBM products which have been certified as Year 2000
compliant by IBM. The mainframe computer application is also certified as Year
2000 compliant by its developer, Jack Henry & Associates. All other hardware and
software utilized is provided by established companies who retain the
responsibility of Year 2000 compliance for their product. All respective vendors
of such companies (for both IT and non-IT applications) were contacted to
determine the status of their systems with regards to the Year 2000 problem.
Their responses are being actively monitored and testing strategies and
schedules have been developed based on their responses.
The Company is currently working on the Renovation and Validation phases
of the Year 2000 plan. The Renovation phase includes hardware and software
upgrades, system replacements, vendor certifications, and other associated
changes. The Validation phase includes testing upgraded components, connections
with other systems verified, and all changes should be accepted by internal and
external customers. It is anticipated that these phases will be completed by the
end of the first quarter of 1999. Further, the Company is in the process of
finalizing the Company's Year 2000 contingency plan. It is
13
<PAGE>
anticipated that the contingency plan will be completed and approved by the
Board of Directors by the end of 1998. The Company anticipates that the
Implementation phase will be completed by the end of the second quarter of 1999.
In this phase, systems are certified as Year 2000 compliant and accepted by
users. For any systems which fail certification, the Company's contingency plan
will implemented for that particular application.
COSTS OF COMPLIANCE. Management does not expect that the costs for
bringing affected hardware and software applications into Year 2000 compliance
will have a material adverse effect on the Company's financial condition,
results of operations or liquidity. However, management's ability to predict the
cost associated with Year 2000 compliance is subject to some uncertainties.
While the Company has made efforts to obtain appropriate representations and
assurances from third party vendors and other organizations that such entities
will be able to meet all of their obligations to the Company without disruption
as a result of the Year 2000 issue, there can be no assurance that the Company
will not be adversely impacted by the failure of such third-party entities to
achieve Year 2000 compliance.
RISKS RELATED TO THIRD PARTIES. During the second quarter of 1998, the
Company performed a risk assessment of the potential impact of third parties'
failure to adequately address the Year 2000 problem. The Company identified its
largest dollar deposit relationships (aggregate deposits over $500,000) and loan
customers (loan relationships of $200,000 or more), yielding 260 customers who
where then sent a Year 2000 questionnaire. The Company received 184 responses
(71%) from the survey. Non-responding customers were discussed with servicing
offices and an assessment of risk was made based upon the servicing officer's
knowledge of the relationship. An analysis of the survey reflects that the
majority of the Company's customers have been made aware of the Year 2000 issue
and those which are dependent upon software and/or hardware which may affect
their business operation have acquired compliant software, or are beginning to
start a process to assure compliance by the Year 2000. Out of those surveyed,
only a few relationships were deemed to have a moderate risk profile. The
Company intends to monitor these relationships to determine whether any further
action should be undertaken by the Company to limit it's exposure from that
third party. Additionally, the Company set aside an amount for potential Year
2000 related credit risk equal to 0.05% of the loan portfolio. The specific
allocation totaled $83,500, and was moved from unallocated reserves to specific
reserves in the Allowance for Credit and Lease Losses.
The Company relies upon the Federal Reserve Bank for electronic fund
transfers and check clearing and understands that the Federal Reserve expects
its systems to be Year 2000 compliant by the end of 1998. With respect to its
borrowers, the Company includes in its loan documents a Year 2000 disclosure
form and an addendum to the loan agreement in which the borrower represents and
warrants its Year 2000 compliance to the Company. In addition, the Company has
been proactive in providing information about the Year 2000 problem to its
customer base, as well as to the communities in which it serves.
PART II - Other Information
ITEM 1. - Legal Proceedings
None
14
<PAGE>
ITEM 2. - Changes in Securities
None
ITEM 3. - Defaults Upon Senior Securities
None
ITEM 4. - Submission of Matters to a Vote of Security Holders
None
ITEM 5. - Other Information
None
ITEM 6. - Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report;
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------
11 Computation of Earnings Per Share (included as
Note (2)to the Interim Consolidated Financial
Statements on page 6 of this Form 10-QSB.)
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1998
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BAY BANCSHARES, INC.
By:/S/ L.D. WRIGHT 11/13/98
Larry D. Wright
--------------------------
Chief Executive Officer
By:/S/ KIM LOVE 11/13/98
--------------------------
Kim Love
Controller
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,890
<INT-BEARING-DEPOSITS> 181,942
<FED-FUNDS-SOLD> 7,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 69,249
<INVESTMENTS-MARKET> 0
<LOANS> 167,113
<ALLOWANCE> 2,018
<TOTAL-ASSETS> 274,341
<DEPOSITS> 242,733
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,343
<LONG-TERM> 0
0
0
<COMMON> 2,091
<OTHER-SE> 24,174
<TOTAL-LIABILITIES-AND-EQUITY> 274,341
<INTEREST-LOAN> 11,076
<INTEREST-INVEST> 3,572
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,648
<INTEREST-DEPOSIT> 5,486
<INTEREST-EXPENSE> 5,516
<INTEREST-INCOME-NET> 9,132
<LOAN-LOSSES> 432
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 8,894
<INCOME-PRETAX> 2,860
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,869
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 8.07
<LOANS-NON> 512
<LOANS-PAST> 512
<LOANS-TROUBLED> 573
<LOANS-PROBLEM> 3,668
<ALLOWANCE-OPEN> 1,999
<CHARGE-OFFS> 572
<RECOVERIES> 186
<ALLOWANCE-CLOSE> 2,018
<ALLOWANCE-DOMESTIC> 2,018
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,064
</TABLE>
