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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
[X] FOR THE QUARTERLY PERIOD ENDED JUNE 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 (I.R.S. Employer
of 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 July 31, 1998, there were 2,049,103 shares of the registrant's Common
Stock, par value $1.00 per share outstanding.
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<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I - FINANCIAL INFORMATION
ITEM 1. - Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and December 31,
1997
Consolidated Statements of Earnings for Six Months ended June 30,
1998 and 1997
Consolidated Statement of Comprehensive Income for the Six Months
ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Six Months ended
June 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>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, December 31,
1998 1997
---------- -----------
(Unaudited)
ASSETS
Cash and cash equivalents
Cash and due from banks ....................... $ 5,603 $ 18,165
Federal funds sold ............................ 8,500 21,900
--------- ---------
Total cash and cash equivalents ............ 14,103 40,065
Interest bearing deposits with banks ............... 492 492
Securities available-for-sale ...................... 69,663 62,963
Loans, net of allowance for credit losses of $1,948 163,201 153,766
and $1,999
Bank premises and equipment, net ................... 8,383 7,241
Other assets ....................................... 11,888 11,767
--------- ---------
Total assets ............................... $ 267,730 $ 276,294
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing ........................ $ 60,062 $ 66,397
Interest-bearing deposits .................. 180,083 182,690
--------- ---------
Total deposits ............................. 240,145 249,087
Other liabilities ............................. 2,021 2,658
--------- ---------
Total liabilities .......................... 242,166 251,745
Stockholders' equity
Common stock .................................. 2,091 2,091
Additional paid-in capital .................... 17,541 17,541
Retained earnings ............................. 6,092 5,087
Accumulated other comprehensive
income ........................................ 114 104
--------- ---------
25,838 24,823
Less: Treasury stock .............................. (274) (274)
--------- ---------
Total stockholders' equity ................. 25,564 24,549
--------- ---------
Total liabilities and stockholders' equity .. $ 267,730 $ 276,294
========= =========
(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 Six Months
Ended Ended
June 30, June 30,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
Interest income
Loans, including fees ............. $3,693 $2,463 $7,252 $4,951
Securities ........................ 1,072 659 2,027 1,344
Federal funds sold ................ 112 124 428 242
------ ------ ------ ------
Total interest income ............. 4,877 3,246 9,707 6,537
Interest expense
Deposits .......................... 1,802 1,353 3,666 2,718
Other ............................. -- 2 -- 14
------ ------ ------ ------
Total interest expense ............ 1,802 1,355 3,666 2,732
------ ------ ------ ------
Net interest income ............ 3,075 1,891 6,041 3,805
Provision for credit losses ....... 144 48 288 168
------ ------ ------ ------
Net interest income after
provision for credit losses ........... 2,931 1,843 5,753 3,637
Noninterest income
Service charges ................... 518 370 1,196 741
Other ............................. 436 191 882 456
------ ------ ------ ------
Total noninterest income ....... 954 561 2,078 1,197
Noninterest expense
Salaries and employee
benefits ............................... 1,639 1,017 3,178 1,843
Occupancy expense, net ............ 414 280 849 583
Other noninterest expense ......... 958 564 1,868 1,189
------ ------ ------ ------
Total noninterest expense ......... 3,011 1,861 5,895 3,615
------ ------ ------ ------
Earnings before federal income
taxes ................................. 874 543 1,936 1,219
Provision for income taxes ........ 318 170 685 364
------ ------ ------ ------
Net earnings ................... $ 556 $ 373 $1,251 $ 855
====== ====== ====== ======
Net earnings per share (basic).. $0.27 $0.28 $0.61 $0.63
Net earnings per share (diluted) 0.26 0.26 0.59 0.59
(See accompanying notes to interim consolidated financial statements)
3
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings ........................... $ 556 $ 373 $ 1,251 $ 855
Other comprehensive income, net of
tax:
Unrealized gains (losses) on securities:
Unrealized holding gains
(losses) arising during period......... (19) 230 12 108
Less: reclassification
adjustment for gains included
in net earnings ............... -- -- (2) (8)
------- ------- ------- -------
(19) 230 10 100
------- ------- ------- -------
Comprehensive income ................... $ 537 $ 603 $ 1,261 $ 955
======= ======= ======= =======
</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)
Six Months Ended
June 30,
--------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net earnings .................................. $ 1,251 $ 855
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Provision for credit losses ................ 288 168
Depreciation and amortization .............. 692 290
Gain on sale of bank premises and equipment (74) 4
Gain (loss) on sale of available-for-sale
securities ................................. (3) (12)
Amortization of premiums, net of (accretion)
and discounts on securities ............... 63 32
Effect of phantom stock plan ............... 32 72
(Decrease) in other assets ................. (360) (57)
(Decrease) in other liabilities ............ (745) (294)
-------- --------
Net cash provided by operating activities 1,144 1,058
Cash flows from investing activities:
Proceeds from sale of available-for-sale
securities .................................... 8,770 1,218
Proceeds from principal repayments, maturities,
and calls of available-for-sale securities ... 9,862 1,012
Purchases of available-for-sale securities .... (25,277) (2,609)
Net (increase) decrease in loans .............. (9,791) 4,485
Proceeds from sales of bank premises and
equipment .................................... 234 22
Purchases of bank premises and equipment ...... (1,716) (240)
-------- --------
Net cash (used) provided by investing
activities ............................. (17,918) 3,888
Cash flows from financing activities:
Net decrease in securities sold under
agreements to repurchase ...................... -- (1,000)
Purchase of treasury
stock ......................................... -- 3
Net (decrease) increase in deposits ........... (8,942) (3,444)
Dividends paid ................................ (246) (163)
-------- --------
Net cash (used) by financing activities . (9,188) (4,604)
Net (decrease) increase in cash and cash
equivalents ............................ (25,470) 342
Cash and cash equivalents at beginning of period ....... 40,065 18,472
-------- --------
Cash and cash equivalents at end of period ............. $ 14,103 $ 18,814
======== ========
(See accompanying notes to interim consolidated financial statements)
5
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(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 six month period ended
June 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:
Three Months Ended Six Months Ended
------------------ -----------------
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- -------
(Unaudited) (Unaudited)
Net earnings available to
common shareholders ................... $ 556 $ 373 $1,251 $ 855
Basic weighted average shares
outstanding ........................... 2,049 1,356 2,049 1,356
Diluted weighed average shares
outstanding ........................... 2,139 1,439 2,138 1,439
Basic earnings per common share ........ $ 0.27 $ 0.28 $ 0.61 $ 0.63
Diluted earnings per common
share ................................. $ 0.26 $ 0.26 $ 0.59 $ 0.59
(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
June 30, 1998 June 30, 1997
--------------------------------- -----------------------------------
(Unaudited) (Unaudited)
Before Tax Before Tax
tax (Expense) Net of tax (Expense) Net of
amount Benefit Tax amount amount Benefit Tax amount
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains(losses on
securities):
Unrealized holding gains
(losses) arising during period .......... $ (25) $ 6 $ (19) $ 308 $ (78) $ 230
Less: reclassification
adjustments for gains included
in net earnings .................. -- -- -- -- -- --
------- ------- ---------- ------- ------- -------
Comprehensive (loss) income .............. $ (25) $ 6 $ (19) $ 308 $ (78) $ 230
======= ======= ========== ======= ======= =======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
--------------------------------- -----------------------------------
(Unaudited) (Unaudited)
Before Tax Before Tax
tax (Expense) Net of tax (Expense) Net of
amount Benefit Tax amount amount Benefit Tax amount
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains(losses on
securities):
Unrealized holding gains
(losses) arising during period .......... $ 16 $ (4) $ 12 $ 145 $ (37) $ 108
Less: reclassification
adjustments for gains included
in net earnings .................. (3) 1 (2) (12) 4 (8)
----- ----- ----- ----- ----- -----
Comprehensive income ..................... $ 13 $ (3) $ 10 $ 133 $ (33) $ 100
===== ===== ===== ===== ===== =====
</TABLE>
ITEM 2. -MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The Company's performance during the six month period ended June 30, 1998,
as compared to the six month period ended June 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.
Net income for the six months ended June 30, 1998 was $1.3 million
compared with $855,000 for the six months ended June 30, 1997, an increase of
$396,000 or 46.31%. Per share (basic) earnings decreased $0.02 to $0.61 for the
six months ended June 30, 1998 from $0.63 for the same period ended June 30,
1997. Per share (diluted) earnings remained unchanged at $0.59 for the six
months ended June 30, 1998 and 1997 respectively. Net income for the second
quarter of 1998 was $556,000, an increase of $183,000 or 49.06% compared with
$373,000 for the same period in 1997. Per share (basic) earnings decreased $0.01
to $0.27 for the second quarter of 1998 from $0.28 for the same period in 1997.
Per share (diluted) earnings remained unchanged at $0.26 for the second quarter
of 1998 and 1997 respectively. With the major core system upgrades finalized and
the 1997 Acquisitions integrated, management has begun taking operational steps
to reduce expenses and capitalize on the efficiencies gained through the
technology investments and economies of scale.
Following the December 1997 formation of the Mortgage Lending Division,
the retail and wholesale operations reached a break even point and began showing
an increasing level of income late in the second quarter of 1998. Additionally,
in compliance with current regulatory guidelines, the Company established an
operating subsidiary, BayBanc Independent Insurance Agency. The Company also
established a direct affiliation with Bayshore Insurance Agency ("BIA"). This
agency became operational in June, 1998 with the acquisition of a long standing
profitable insurance operation in the La Porte, Texas community. While BIA does
not currently represent an equity investment to the Company, the Company's
wholly-owned subsidiary Bayshore National Bank has agreed to provide lease
space, data processing, clerical, payroll and other related fee based services.
Also, in May 1998, the Bank completed and opened its new building in Seabrook,
Texas. Operations from the existing facility were moved into the new facility at
completion.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including
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<PAGE>
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 six months ended June 30, 1998 was $6.0
million compared with $3.8 million for the six months ended June 30, 1997, an
increase of $2.2 million or 57.89%, an increase of $1.2 million or 58.17% in the
second quarter of 1998 as compared with the second quarter of 1997. Net interest
income increased as a result of a higher dollar amount of interest-earning
assets derived from the 1997 Acquisitions, internal loan growth and shifts in
the composition of the loan portfolio. The Company continues to broaden its
focus by expanding niche lending products, including SBA guaranteed credits via
the Company's three Loan Production Offices ("LPOs"), commercial lending to
local manufacturing and petrochemical service companies and in commercial real
estate lending. Average gross loans increased to $160.5 million for the six
months ended June 30, 1998 from $117.4 million for the six months ended June 30,
1997, an increase of $43.1 million or 36.71%. However, average interest-earning
assets decreased from 92.37% of total average assets at June 30, 1997 to 88.72%
of total average assets at June 30, 1998 primarily as a result of the goodwill
purchase accounting adjustment totaling $7.8 million, along with facility
investments, recorded following the 1997 Acquisitions.
Net interest income improved through an increase in the yield on
interest-earning assets from 7.66% on June 30, 1997 to 8.00% for the six months
ended June 30, 1998. Average interest-earning assets increased to $242.6 million
for the six months ended June 30, 1998 from $170.7 million for the six months
ended June 30, 1997, an increase of $71.9 million or 42.12%. Average
interest-bearing deposits increased to $183.3 million for the six months ended
June 30, 1998 from $138.4 million for the six months ended June 30, 1997, an
increase of $44.9 million or 32.44%.
The Company posted net interest margins of 4.98% and 4.46% and net
interest spreads of 4.00% and 3.71% for the periods ended June 30, 1998 and June
30, 1997, respectively. The increase in net interest margin from the second
quarter of 1997 to the second quarter of 1998 was accomplished through both a 34
basis point increase in the yield on average interest-earning assets coupled
with only a 5 basis point increase 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. There were no nonaccruing loans during the periods covered.
8
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 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 ......................... $ 160,546 $ 7,252 9.03% $ 117,361 $ 4,951 8.44%
Securities .................... 67,204 2,027 6.03% 44,578 1,344 6.03%
Federal funds sold
and other temporary
investments .................. 14,806 428 5.78% 8,749 242 5.53%
--------- --------- ---- --------- --------- ----
Total interest-earning
assets ................... 242,556 9,707 8.00% 170,688 6,537 7.66%
--------- --------- ---- --------- --------- ----
Less allowance for
loan losses .................. (2,011) (1,471)
--------- ---------
Total interest-earning assets,
net of allowance ............. 240,545 169,217
--------- ---------
Nonearning assets ............. 30,571 13,980
--------- ---------
Total assets .............. $ 271,116 $ 183,197
========= =========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing
demand deposits .............. $ 29,643 $ 163 1.10% $ 19,332 $ 112 1.16%
Public fund deposits .......... 4,918 73 2.97% 5,551 48 1.73%
Savings and money market
accounts ..................... 54,675 954 3.49% 41,691 697 3.34%
Certificates of deposit ....... 94,093 2,476 5.26% 71,263 1,861 5.22%
Federal funds
purchased, FHLB line of credit
and other borrowings ......... -- -- -- 548 14 5.10%
--------- --------- ---- --------- --------- ----
Total interest-bearing
liabilities .............. 183,329 3,666 4.00% 138,385 2,732 3.95%
--------- --------- ---- --------- --------- ----
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits .............. 63,550 30,153
Other liabilities ............. 2,019 1,773
--------- ---------
Total liabilities ......... 248,898 170,311
--------- ---------
Stockholders' equity .............. 22,218 12,886
--------- ---------
Total liabilities and
stockholders' equity ..... $ 271,116 $ 183,197
========= =========
Net interest income ........... $ 6,041 $ 3,805
========= =========
Net interest spread ........... 4.00% 3.71%
===== ====
Net interest margin ........... 4.98% 4.46%
===== ====
</TABLE>
Provision for Loan Losses
The provision for loan losses increased to $288,000 for the six months
ended June 30, 1998 from $168,000 for the same time period in 1997, an increase
of $120,000 or 71.43%.
Noninterest Income
Noninterest income is an important source of revenue for financial
institutions in a deregulated environment. The Company's primary source of
noninterest income is service charges on deposit accounts and other banking
service related fees. Noninterest income for the six months ended June 30, 1998
was $2.1 million compared with $1.2 million for the six months ended June 30,
1997, an increase of
9
<PAGE>
$881,000 or 73.42%, and an increase of $393,000 or 70.05% in the second quarter
of 1998 as compared with the second quarter of 1997. Noninterest income in the
second quarter of 1998 increased primarily as a result of additional service
fees generated from the 1997 Acquisitions, gain on sale of SBA loans and
alternative investment income.
The following table presents for the periods indicated the major
categories of noninterest income:
Three Months
Ended Six months Ended
June 30, June 30,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
Service charges on deposit accounts .... $ 518 $ 370 $1,196 $ 741
Gain on sale of SBA loans .............. 168 54 302 141
ATM fee income ......................... 83 60 157 105
Alternative investments ................ 75 39 94 89
Other noninterest income ............... 110 38 329 121
------ ------ ------ ------
Total noninterest income .......... $ 954 $ 561 $2,078 $1,197
====== ====== ====== ======
Noninterest Expense
In the six month period ended June 30, 1998, noninterest expense increased
$2.3 million or 63.89% to $5.9 million from $3.6 million for the period ended
June 30,1997 and an increase of $1.1 million or 57.89% in the second quarter of
1998 as compared with the second quarter of 1997. The increase reflects
additional expenses including amortization of goodwill of $196,000, 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 impacted 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.
The following table presents for the periods indicted the major categories
of noninterest expense:
Three Months
Ended Six months Ended
June 30, June 30,
---------------- ------------------
1998 1997 1998 1997
------ ------ -------- --------
Employee compensation and benefits ...... $1,639 $1,017 $3,178 $1,843
Non-staff expense:
Net bank premises expense .......... 197 126 409 274
Equipment rentals, depreciation
and maintenance ......................... 217 154 440 309
Data processing .................... 68 35 129 71
Professional fees .................. 138 61 243 159
Regulatory assessments/FDIC
insurance ............................... 31 40 61 51
Ad valorem and franchise taxes ..... 72 43 142 91
Other .............................. 649 385 1,293 817
------ ------ ------ ------
Total non-staff expenses ........ 1,372 844 2,717 1,772
------ ------ ------ ------
Total noninterest expense ....... $3,011 $1,861 $5,895 $3,615
====== ====== ====== ======
10
<PAGE>
Employee compensation and benefit expense for the six months ended June
30, 1998 was $3.2 million, an increase of $1.4 million or 77.78% from $1.8
million in the same period of 1997 and an increase of $622,000 or 61.16% in the
second quarter of 1998 as compared with the second 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 $2.7 million for the six month period ended
June 30, 1998 from $1.8 million for the same period in 1997, an increase of
$945,000 or 52.50% and an increase of $528,000 or 62.56% in the second quarter
of 1998 as compared with the second 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 June 30, 1998 were $267.7 million compared with $276.3
million at December 31, 1997 a decrease of $8.6 million or 3.11%. At June 30,
1998, investment securities totaled $69.7 million, an increase of $6.7 million
or 10.63% from $63.0 at December 31, 1997. Net loans were $163.2 million at June
30, 1998, an increase of $9.4 million or 6.11% from $153.8 million at December
31, 1997.
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 credit 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 June
30, 1998 was $1.9 million or 1.18% 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 six months ended June 30, 1998 were
$240.1 million, a decrease of $9.0 million or 3.61% from $249.1 million at
December 31, 1997. While some deposit runoff was experienced following the 1997
Acquisitions, management believes the decrease in deposits from December 31,
1997 to June 30, 1998 is primarily seasonal in nature.
Stockholders' equity increased from $24.5 million at June 30, 1997 to
$25.6 million at June 30, 1998, an increase of $1.1 million or 4.30%. As of June
30, 1998 the Company's ratio of stockholders' equity to total assets was 9.55%
as compared with 8.89% as of December 31, 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.
11
<PAGE>
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 $1.1
million and $1.1 million for the six months ended June 30, 1998 and 1997
respectively.
Net cash (used in) provided by investing activities was ($17.9) million
and $3.9 million for the six months ended June 30, 1998 and 1997, respectively.
The net cash (used in) investing activities for the six months ended June 30,
1998 compared with the same period in 1997 was primarily due to the purchase of
available for sale securities.
Net cash used in financing activities was ($9.2) million and ($4.6)
million for the six months ended June 30, 1998 and 1997, respectively. The net
cash provided by (used in) financing activities for the six months ended June
30, 1998 compared with the same period in 1997 was primarily due to the decrease
in deposits.
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 June 30, 1998 and the regulatory standards.
Minimum Actual Ratio
Required June 30, 1998
---------------------------
THE COMPANY
Leverage ratio .......... 3.00% 7.55%
Tier 1 risk-based capital 4.00% 9.77%
Risk-based capital ratio 8.00% 10.82%
THE BANK
Leverage ratio .......... 3.00% 6.69%
Tier 1 risk-based capital 4.00% 9.37%
Risk-based capital ratio 8.00% 10.42%
Year 2000
The Company has established a Year 2000 Committee and has made an
assessment of its key financial, informational and operational systems. The Year
2000 Committee does not anticipate that the Company will encounter significant
operational issues or difficulties related to the Year 2000. Management does not
expect the costs of bringing the Company's systems into Year 2000 compliance,
including making systems changes if necessary, to have a materially adverse
effect on the Company's ability to predict the costs associated with Year 2000
compliance is subject to some uncertainties, and the Company could incur
unexpected additional expenditures in connection with Year 2000 compliance.
The Company has entered into the testing phase of internal
mission-critical systems with an anticipated completion date of March 31, 1999.
In addition, the Company is coordinating efforts with third parties to test Y2K
compatibility between the Company and external systems. Furthermore, the Company
is proactively informing customers of the Y2K problem. The Company is also in
the process of determining the credit and liquidity risk posed by customers, and
incorporating such risk, if any, into the liquidity planning model.
12
<PAGE>
PART II - Other Information
ITEM 1. - Legal Proceedings
Not Applicable
ITEM 2. - Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. - Defaults Upon Senior Securities
Not Applicable
ITEM 4. - Submission of Matters to a Vote of Security Holders
On May 27, 1998, the Company's Annual Meeting of Shareholders was held to
consider and act upon the following items:
1. The election of four persons to serve as Class I directors to serve on
the Board of Directors of the Company until the Company's 2001 Annual
Meeting of Shareholders and until their successors are duly elected and
qualified. The vote for each nominee was as follows:
NOMINEE FOR WITHHELD BROKER NON-VOTE
- ------- --- -------- ---------------
Knox W. Askins ....... 1,574,761 3,346 -
Albert D. Fields...... 1,574,995 3,112 -
Ken Strum ............ 1,571,995 6,112 -
L.D. Wright .......... 1,569,861 8,246 -
2. The appointment of Grant Thornton LLP as the independent auditors of
the financial statements of the Company for the fiscal year ended
December 31, 1998.
The vote for each was as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTE
- --- ------- ------- ---------------
1,565,917 10,383 1,807 -
ITEM 5. - Other Information
Not Applicable
ITEM 6. - Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report;
EXHIBIT
NUMBER DESCRIPTION
------ -----------
13
<PAGE>
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 six
months ended June 30, 1998
14
<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
Larry D. Wright
Chief Executive Officer
By:/s/ KIM LOVE
Kim Love
Controller
15
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<PERIOD-END> JUN-30-1998
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0
0
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