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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)
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 November 8, 1999, there were 1,990,603 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 September 30, 1999 and
December 31, 1998
Consolidated Statements of Earnings for Nine Months ended
September 30, 1999 and 1998
Consolidated Statement of Comprehensive Income for the
Nine Months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1999 and 1998
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
1
<PAGE>
PART I - FINANCIAL INFORMATION
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
(UNAUDITED)
ASSETS
Cash and cash equivalents
Cash and due from banks ...................... $ 10,793 $ 15,466
Federal funds sold ........................... 808 9,990
--------- ---------
Total cash and cash equivalents ........... 11,601 25,456
Securities available-for-sale ..................... 78,346 69,235
Loans, net of allowance for credit losses of $1,931 193,901 169,588
and $1,944
Bank premises and equipment, net .................. 8,973 8,588
Other assets ...................................... 11,928 11,415
--------- ---------
Total assets .............................. $ 304,749 $ 284,282
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing ....................... $ 59,694 $ 60,776
Interest-bearing deposits ................. 205,690 191,942
--------- ---------
Total deposits ............................ 265,384 252,718
Borrowings ................................... 11,000
Other liabilities ............................ 2,136 2,022
--------- ---------
Total liabilities ......................... 278,520 257,740
Stockholders' equity
Common stock ................................. 2,092 2,091
Additional paid-in capital ................... 17,546 17,542
Retained earnings ............................ 8,886 7,252
Accumulated other comprehensive income ....... (1,199) 379
--------- ---------
27,325 27,264
Less: Treasury stock ............................. (1,096) (722)
Total stockholders' equity ................ 26,229 26,542
--------- ---------
Total liabilities and stockholders' equity $ 304,749 $ 284,282
========= =========
(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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees .......................... $ 4,147 $ 3,824 $11,808 $11,076
Securities ..................................... 1,188 1,054 3,347 3,081
Federal funds sold ............................. 41 63 507 491
------- ------- ------- -------
Total interest income .......................... 5,376 4,941 15,662 14,648
Interest expense
Deposits ....................................... 1,986 1,820 5,796 5,486
Other .......................................... 127 30 226 30
------- ------- ------- -------
Total interest expense ..................... 2,113 1,850 6,022 5,516
------- ------- ------- -------
Net interest income ......................... 3,263 3,091 9,640 9,132
Provision for credit losses .................... 150 144 430 432
------- ------- ------- -------
Net interest income after provision for credit losses 3,113 2,947 9,210 8,700
Noninterest income
Service charges ................................ 612 631 1,758 1,827
Other .......................................... 336 345 1,032 1,227
------- ------- ------- -------
Total noninterest income .................... 948 976 2,790 3,054
Noninterest expense
Salaries and employee benefits ................. 1,560 1,556 4,698 4,734
Occupancy expense, net ......................... 465 478 1,391 1,327
Other noninterest expense ..................... 950 965 2,891 2,833
------- ------- ------- -------
Total noninterest expense ...................... 2,975 2,999 8,980 8,894
------- ------- ------- -------
Earnings before federal income taxes ................ 1,086 924 3,020 2,860
Provision for income taxes ..................... 366 306 1,028 991
------- ------- ------- -------
Net earnings ................................ $ 720 $ 618 $ 1,992 $ 1,869
======= ======= ======= =======
Net earnings per share (basic) .............. $ 0.36 $ 0.30 $ 1.00 $ 0.91
Net earnings per share (diluted) ............ 0.35 0.29 0.97 0.88
</TABLE>
(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,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings ............................................... $ 720 $ 618 $ 1,992 $ 1,869
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (108) 393 (1,550) 405
Less: reclassification adjustment for gains (losses)
included in net earnings .......................... 5 -- (28) (2)
------- ------- ------- -------
(103) 393 (1,578) 403
------- ------- ------- -------
Comprehensive income ....................................... $ 617 $ 1,011 $ 414 $ 2,272
======= ======= ======= =======
</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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................ $ 1,992 $ 1,869
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Provision for credit losses ............................ 430 432
Depreciation ........................................... 896 713
Gain on sale of bank premises and equipment ............ -- (74)
Gain on sale of available-for-sale securities .......... (42) (3)
Amortization of premiums, net of accretion and discounts
on securities ...................................... 87 154
Effect of phantom stock ................................ 48 48
(Increase) decrease in other assets .................... (877) 39
Increase (decrease) in other liabilities ............... 881 (521)
-------- --------
Net cash provided by operating activities .......... 3,415 2,657
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities ......... 7,943 4,542
Proceeds from principal repayments, maturities, and calls of
available-for-sale securities .......................... 10,479 20,987
Purchases of available-for-sale securities .................. (30,012) (31,369)
Net increase in loans ....................................... (24,602) (12,111)
Proceeds from sales of bank premises and equipment .......... -- 234
Purchases of bank premises and equipment .................... (1,017) (1,805)
-------- --------
Net cash used in investing activities .............. (37,209) (19,522)
Cash flows from financing activities:
Sale of common stock ........................................ 5 --
Purchase of treasury stock .................................. (374) (187)
Net increase (decrease) in deposits ......................... 12,666 (6,354)
Advance from Federal Home Loan .............................. 8,000 3,000
Dividends paid .............................................. (358) (369)
-------- --------
Net cash provided (used) by financing activities ... 19,939 (3,910)
Net increase in cash and cash equivalents .......... (13,855) (20,775)
Cash and cash equivalents at beginning of period ............................ 25,456 40,065
-------- --------
Cash and cash equivalents at end of period .................................. $ 11,601 $ 19,290
======== ========
</TABLE>
(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 1998
Annual Report on Form 10-KSB. Operating results for the nine month period ended
September 30, 1999, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
(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,
1999 1998 1999 1998
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net earnings available to common shareholders $ 720 $ 618 $1,992 $1,869
Basic weighted average shares outstanding ... 1,991 2,045 1,991 2,048
Diluted weighed average shares outstanding .. 2,050 2,130 2,050 2,136
Basic earnings per common share ............. $ 0.36 $ 0.30 $ 1.00 $ 0.91
Diluted earnings per common share ........... $ 0.35 $ 0.29 $ 0.97 $ 0.88
</TABLE>
(3) COMPREHENSIVE INCOME
Effective January 1, 1999, 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, 1999 SEPTEMBER 30, 1998
------------------------------- -------------------------------
(UNAUDITED) (UNAUDITED)
BEFORE TAX TAX NET OF BEFORE TAX TAX NET OF
AMOUNT EXPENSE TAX AMOUNT AMOUNT EXPENSE TAX AMOUNT
---------- ------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding (losses) gains arising during period $(145) $ 37 $(108) $ 527 $(134) $ 393
Less: reclassification adjustments for (losses) gains 8 (3) 5 - - -
included in net earnings
----- ----- ----- ----- ----- -----
Comprehensive income .................................... $(137) $ 34 $(103) $ 527 $(134) $ 393
===== ===== ===== ===== ===== =====
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------- -------------------------------
(UNAUDITED) (UNAUDITED)
TAX TAX
BEFORE TAX (EXPENSE) NET OF BEFORE TAX (EXPENSE) NET OF
AMOUNT BENEFIT TAX AMOUNT AMOUNT BENEFIT TAX AMOUNT
---------- ------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period $(2,077) $ 527 $(1,550) $ 543 $ (138) $ 405
Less: reclassification adjustments for (losses) gaoms
included in net earnings .......................... (42) 14 (28) (3) 1 (2)
------- ------- ------- ------- ------- -------
Comprehensive income ...................................... $(2,119) $ 541 $(1,578) $ 540 $ (137) $ 403
======= ======= ======= ======= ======= =======
</TABLE>
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in the
documents incorporated into this document by reference, including matters
discussed under the captions "Management's Discussion and Analysis or Plan of
Operation," may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, and as such may involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. The words "expects," "estimates," "anticipates,"
"contemplated," "intends," "plans," "believes," "seek," "will," "would,"
"should," "projected" and similar expressions are intended to identify such
forward-looking statements.
The Company's actual results or experience may differ materially from
the results anticipated in such forward-looking statements due to a variety of
factors, including, but not limited to: (1) the effects of future acquisitions,
if any; (2) the concentration of indirect automobile dealer paper in the loan
portfolio; (3) the effects of future economic conditions on the Company and its
customers; (4) governmental monetary and fiscal policies, as well as legislative
and regulatory changes; (5) the risks of changes in interest rates on the level
and composition of deposits, loan demand and the values of loan collateral,
securities and interest rate protection agreements, as well as interest rate
risks; (6) the effects of competition from other commercial banks, thrifts,
mortgage banking firms, insurance companies, money market and other mutual fund
and other financial institutions operation in the Company's market areas and
elsewhere, including competitors offering banking products and services by mail,
telephone, computer and the Internet; (7) the failure of assumptions underlying
the establishment of reserves for credit losses and the fact that estimations of
values of collateral and various financial assets and liabilities and
technological changes, including "Year 2000" data systems compliance issues, are
more difficult or expensive than anticipated; and (8) other uncertainties set
forth in the Company's other public reports and filings and public statements.
All written or oral forward-looking statements attributable to the Company are
expressly qualified in their entirety by these cautionary statements.
ITEM 2. -MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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
three Loan Production Offices ("LPOs") in the Houston area and an
Internet banking site (WWW.BANKBNB.COM).
Net income for the nine months ended September 30, 1999 was $2.0
million compared with $1.9 million for the nine months ended September 30, 1998,
an increase of $123,000 or 6.58%. Per share (basic) earnings increased $0.09 to
$1.00 for the nine months ended September 30, 1999 compared to $0.91 for the
same period ended September 30, 1998. Per share (diluted) earnings increased
$0.09 to $0.97 for the nine months ended September 30, 1999 from $0.88 for the
same period ended September 30,
7
<PAGE>
1998. Net income for the third quarter 1999 was $720,000, an increase of
$102,000 or 16.50% compared with $618,000 for the same period in 1998. Per share
(basic) earnings increased $0.06 to $0.36 for the third quarter 1999 from $0.30
for the same period in 1998. Per share (diluted) earnings increased $0.06 to
$0.35 for the third quarter 1999 from $0.29 for the same period in 1998.
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, 1999 was
$9.6 million compared with $9.1 million for the nine months ended September 30,
1998, an increase of $508,000 or 5.56% and an increase of $172,000 or 5.56% in
the third quarter 1999 as compared with the third quarter 1998. Average
interest-earning assets increased from 88.98% of total average assets at
September 30, 1998 to 89.36% of total average assets at September 30, 1999.
Average interest-earning assets for the nine months ended September 30, 1999
compared to the same period in 1998 increased primarily due to the Company's
internally generated loan growth. Average gross loans increased to $179.8
million for the nine months ended September 30, 1999 from $162.6 million for the
nine months ended September 30, 1998, an increase of $17.2 million or 10.58%.
Net interest income was improved by an increase in average loans and
a decrease in the cost of interest-bearing liabilities from 4.02% in September
30, 1998 to 3.84% for the nine months ended September 30, 1999. Average
interest-bearing liabilities increased to $209.1 million for the nine months
ended September 30, 1999 from $183.2 million for the nine months ended September
30, 1998, an increase of $25.9 million or 14.14%.
The Company posted net interest margins of 4.79% and 5.03% and net
interest spreads of 3.95% and 4.05% for the periods ended September 30, 1999 and
September 30, 1998, respectively. The decrease in net interest margin for the
nine months ended 1998 compared to the same period during 1999 reflects a 28
basis point decrease in the yield on average interest-earning assets and a 18
basis point reduction in the cost of interest-bearing liabilities.
8
<PAGE>
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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1999 1998
------------------------------------ ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- -------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans .............................................. $ 179,803 $ 11,808 8.76% $ 162,632 $ 11,076 9.08%
Securities ......................................... 75,369 3,347 5.92% 67,992 3,081 6.04%
Federal funds sold and other temporary
Investments .................................... 12,982 507 5.21% 11,475 491 5.71%
--------- --------- ---- --------- --------- ----
Total interest-earning assets .................. 268,154 15,662 7.79% 242,099 14,648 8.07%
--------- --------- ---- --------- --------- ----
Less allowance for credit losses ................... (1,965) (1,998)
--------- ---------
Total interest-earning assets, net of
Allowance ...................................... 266,189 240,101
Nonearning assets .................................. 33,891 31,975
--------- ---------
Total assets ................................... $ 300,080 $ 272,076
========= =========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits ................... $ 31,767 $ 251 1.05% $ 29,472 $ 249 1.13%
Public fund deposits ............................... 7,484 226 4.03% 3,162 78 3.29%
Savings and money market accounts .................. 63,248 1,477 3.11% 55,661 1,422 3.41%
Certificates of deposit ............................ 101,168 3,842 5.06% 94,170 3,737 5.29%
Federal funds purchased, FHLB line of
credit and other borrowings .................... 5,481 226 5.50% 714 30 5.60%
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities ............. 209,148 6,022 3.84% 183,179 5,516 4.02%
--------- --------- ---- --------- --------- ----
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits ................ 63,031 62,298
Other liabilities .................................. 1,723 3,335
--------- ---------
Total liabilities .............................. 273,902 248,812
--------- ---------
Stockholders' equity ................................... 26,178 23,264
--------- ---------
Total liabilities and stockholders'
equity ..................................... $ 300,080 $ 272,076
========= =========
Net interest income ................................ $ 9,640 $ 9,132
========= =========
Net interest spread ................................ 3.95% 4.05%
==== ====
Net interest margin ................................ 4.79% 5.03%
==== ====
</TABLE>
9
<PAGE>
Provision for Credit Losses
The provision for credit losses decreased to $430,000 for the nine
months ended September 30, 1999 from $432,000 for the same time period in 1998,
a decrease of $2,000 or 0.46%.
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, 1999 was $2.8 million compared
with $3.1 million for the nine months ended September 30, 1998, a decrease of
$264,000 or 8.64%. Noninterest income for the three months ended September 30,
1999 was $948,000 compared with $976,000 for the three months ended September
30, 1998, a decrease of $28,000 or 2.87%. The Small Business Administration
(SBA) gain component of noninterest income was not as strong this quarter as the
same period last year. Even though the timing of the loan sales varies from
quarter to quarter, the SBA pipeline remains strong. Contributing to other
noninterest income was another strong quarter for the Company's brokerage and
alternative investment sales, resulting in net fee income of $50,000 for the
quarter ended 1999. ATM fees increased $16,000 to $112,000 for the quarter ended
1999 compared with the same period in 1998.
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,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges on deposit accounts ........ $ 612 $ 631 $ 1,758 $ 1,827
Gain on sale of SBA loans .................. 19 81 81 383
ATM fee income ............................. 112 96 312 253
Alternative investments .................... 50 26 149 117
Other noninterest income ................... 155 142 490 474
-------- -------- -------- --------
Total noninterest income .............. $ 948 $ 976 $ 2,790 $ 3,054
======== ======== ======== ========
</TABLE>
Noninterest Expense
In the nine month period ended September 30, 1999, noninterest
expense increased $86,000 or 0.97% to $9.0 million compared with the nine months
ended 1998 and decreased $24,000 or 0.80% in the third quarter 1999 as compared
with the third quarter 1998. Employee compensation and benefit expense for the
nine months ended September 30, 1999 was $4.7 million, a decrease of $36,000 or
0.76% compared with the nine months ended 1998 and an increase of $4,000 or
0.26% in the third quarter 1999 as compared with the third quarter 1998.
Non-staff expense for the nine months ended September 30, 1999 was $4.3 million,
an increase of $122,000 or 2.93% from $4.2 million in the same period of 1998
and a decrease of $28,000 or 1.94% in the third quarter 1999 as compared with
the third quarter 1998. Non staff expenses for the nine months ended 1999
compared to the same period during 1998 increased slightly due the Company's
growth. The Company remains committed to growth while controlling cost and as a
result of this on going commitment, the efficiency ratio decreased to 68.32%
from 71.33% during the third quarter 1999 compared with the same period in 1998.
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,
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Employee compensation and benefits ................. $ 1,560 $ 1,556 $ 4,698 $ 4,734
Non-staff expense:
Net bank premises expense ..................... 225 241 637 650
Equipment rentals, depreciation and maintenance 240 237 754 677
Data processing ............................... 72 77 229 206
Professional fees ............................. 128 148 371 391
Regulatory assessments/FDIC insurance ......... 32 49 94 110
Ad valorem and franchise taxes ................ 72 72 216 214
Other ......................................... 646 619 1,981 1,912
-------- -------- -------- --------
Total non-staff expenses ................... 1,415 1,443 4,282 4,160
-------- -------- -------- --------
Total noninterest expense .................. $ 2,975 $ 2,999 $ 8,980 $ 8,894
======== ======== ======== ========
</TABLE>
Financial Condition
Total assets as of September 30, 1999 were $304.7 million compared
with $284.3 million at December 31, 1998 an increase of $20.4 million or 7.18%.
At September 30, 1999, investment securities totaled $78.3 million, an increase
of $9.1 million or 13.15% from $69.2 million at December 31, 1998. Net loans
were $193.9 million at September 30, 1999, an increase of $24.3 million or
14.33% from $169.6 million at December 31, 1998. Third quarter 1999 balance
sheet growth was a direct result of the Company's continued customer sales and
calling programs.
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
September 30, 1999 was $1.9 million or 0.99% of outstanding loans compared with
$1.9 million or 1.13% of outstanding loans as of December 31, 1998.
At September 30, 1999, deposits totaled $265.4 million, an increase
of $12.7 million or 5.03% from $252.7 million at December 31, 1998.
Stockholders' equity decreased from $26.5 million at September 30,
1998 to $26.2 million at September 30, 1999, a decrease of $313,000 or 1.18%. As
of September 30, 1999 the Company's ratio of stockholders' equity to total
assets was 8.61% as compared with 9.33% as of December 30, 1998. The decrease in
stockholders' equity during 1999 is primarily due to the decrease in other
accumulated comprehensive income.
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
11
<PAGE>
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
$3.4 million and $2.7 million for the nine months ended September 30, 1999 and
1998 respectively. The increase in net cash provided by operating activities for
the nine months ended September 30, 1999 compared with the same period in 1998
was primarily due to the increase in other liabilities in 1999.
Net cash used in investing activities was $37.2 million and $19.5
million for the nine months ended September 30, 1999 and 1998, respectively. The
increase in net cash used in investing activities for the nine months ended
September 30, 1999 compared with the same period in 1998 was primarily due to
the increase in loans in 1999.
Net cash provided by (used in) financing activities was $19.9 million
and ($3.9) million for the nine months ended September 30, 1999 and 1998,
respectively. The increase in net cash provided by (used in) financing
activities for the nine months ended September 30, 1999 compared with the same
period in 1998 was primarily due to the increase in deposits in 1999.
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, 1999 and
with regulatory standards.
Minimum Actual Ratio
Required September 30, 1999
-------- ------------------
THE COMPANY
Leverage ratio......................... 3.00% 7.25%
Tier 1 risk-based capital.............. 4.00% 9.88%
Risk-based capital ratio............... 8.00% 10.77%
THE BANK
Leverage ratio......................... 3.00% 6.90%
Tier 1 risk-based capital.............. 4.00% 9.40%
Risk-based capital ratio............... 8.00% 10.29%
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 insure there will be no material adverse effects on
customers or disruption of business operations as a result of a
12
<PAGE>
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
Company, 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 OCC in 1998.
The Company completed both the Awareness and Assessment phases in the
third quarter 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 internally developed 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 for Year 2000 compliance of their product. All
respective vendors of such companies (for both IT and non-IT applications) were
contacted to determine the Year 2000 status of their systems. Their responses
are being actively monitored and testing strategies and schedules have been
developed based on such responses.
The Company has completed the Renovation and Validation phases of its
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, verifying connections
with other systems and acceptance of changes by internal and external customers.
The Company completed testing of the Bank's mainframe system and associated
software in January 1999 and all other mission critical systems have been
tested. Validation of the testing was completed during March 1999. The Company
has completed the Implementation phase. 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 be 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 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 were
sent a Year 2000 questionnaire. The Company received 184 responses (71%) from
the survey. An assessment of risk was made regarding non-responding customers
based upon the servicing officer's knowledge of the customer. The survey results
reflect that the majority of the Company's customers are 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 customers were deemed to have a moderate risk profile. The
Company intends to monitor such customer's progress in resolving any Year 2000
problems to determine whether any further action should be undertaken by the
Company to limit its exposure from that customer. In the event that Year 2000
noncompliance adversely affects borrowers, the Company may be required to
charge-off the loan to such borrowers. For a discussion of possible effects of
such charge-offs, see "Contingency Plans" below.
13
<PAGE>
The Company relies upon the Federal Reserve Bank for electronic fund
transfers and check clearing, and understands that the Federal Reserve expected
its systems would 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
continues to be proactive in providing information about the Year 2000 problem
to its customer base, as well as to the communities it serves.
CONTINGENCY PLANS. The Company's Year 2000 preliminary contingency
plan was approved by the Board of Directors in November 1998. The Company has
finalized its contingency planning with respect to the Year 2000 date change and
believes that if its own systems should fail, the Company could convert to a
manual entry system for a period of up to three months without significant
losses. The Company believes that any mission critical systems could be
recovered and operating within three to five days. In the event that the Federal
Reserve is unable to handle electronic funds transfers and check clearing, the
Company does not expect the impact to be material to its financial condition or
results of operations as long as the Company is able to utilize an alternative
funds transfer and clearing source. As part of its contingency planning, the
Company has reviewed its loan customer base and the potential impact on capital
of Year 2000 noncompliance. Based upon such review, using what it considers to
be a reasonable worst case scenario, the Company has assumed that certain of its
commercial borrowers whose businesses are most likely to be affected by Year
2000 noncompliance would be unable to repay their loans, resulting in
charge-offs of loan amounts in excess of collateral values. If such were the
case, the Company believes that it is unlikely that its exposure would exceed
$100,000, although there are no assurances that this amount will not be
substantially higher. Management does not believe that this amount is material
enough for the Company to adjust its current methodology for making provisions
to the allowance for credit losses. In addition, the Company plans to maintain
additional cash on hand to meet any unusual deposit withdrawal activity.
PART II - Other Information
ITEM 1. - Legal Proceedings
None
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
14
<PAGE>
ITEM 6. - Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report;
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1999
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 11/12/99
L. D. Wright
Chief Executive Officer
By: /s/ KIM E. LOVE 11/12/99
Kim E. Love
Controller
15
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<PERIOD-END> SEP-30-1999
<CASH> 10,793
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<FED-FUNDS-SOLD> 808
<TRADING-ASSETS> 0
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0
0
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