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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
FOR THE QUARTERLY PERIOD ENDED JUNE 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 August 9, 1999, there were 1,990,003 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, 1999 and December 31,
1998
Consolidated Statements of Earnings for the Three and Six Months
ended June 30, 1999 and 1998
Consolidated Statement of Comprehensive Income for the Three and
Six Months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Six Months ended
June 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>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, December 31,
1999 1998
--------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents
Cash and due from banks ...................... $ 12,948 $ 15,466
Federal funds sold ........................... 2,491 9,990
--------- ------------
Total cash and cash equivalents ........... 15,439 25,456
Securities available-for-sale ..................... 77,994 69,235
Loans, net of allowance for credit losses of $1,922
and $1,944.................................... 183,981 169,588
Bank premises and equipment, net .................. 8,413 8,588
Other assets ...................................... 12,463 11,415
--------- ------------
Total assets .............................. $ 298,290 $ 284,282
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing ......................... $ 59,981 $ 60,776
Interest-bearing deposits ................... 201,788 191,942
--------- ------------
Total deposits ............................ 261,769 252,718
Borrowings .................................. 9,000 3,000
Other liabilities ........................... 1,844 2,022
--------- ------------
Total liabilities ......................... 272,613 257,740
Stockholders' equity
Common stock ................................. 2,091 2,091
Additional paid-in capital ................... 17,542 17,542
Retained earnings ............................ 8,285 7,252
Accumulated other comprehensive
income ....................................... (1,096) 379
--------- ------------
26,822 27,264
Less: Treasury stock ............................. (1,145) (722)
--------- ------------
Total stockholders' equity ................ 25,677 26,542
--------- ------------
Total liabilities and stockholders' equity $ 298,290 $ 284,282
========= ============
(See accompanying notes to interim consolidated financial statements)
2
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees .......................... $ 3,926 $ 3,693 $ 7,661 $ 7,252
Securities ..................................... 1,141 1,072 2,159 2,027
Federal funds sold ............................. 150 112 466 428
-------- -------- -------- --------
Total interest income .......................... 5,217 4,877 10,286 9,707
Interest expense
Deposits ....................................... 1,909 1,802 3,810 3,666
Other .......................................... 57 -- 99 --
-------- -------- -------- --------
Total interest expense ......................... 1,966 1,802 3,909 3,666
-------- -------- -------- --------
Net interest income ......................... 3,251 3,075 6,377 6,041
Provision for credit losses .................... 150 144 280 288
-------- -------- -------- --------
Net interest income after provision for credit losses 3,101 2,931 6,097 5,753
Noninterest income
Service charges ................................ 564 518 1,146 1,196
Other .......................................... 388 436 696 882
-------- -------- -------- --------
Total noninterest income .................... 952 954 1,842 2,078
Noninterest expense
Salaries and employee benefits ................. 1,558 1,639 3,138 3,178
Occupancy expense, net ......................... 462 414 926 849
Other noninterest expense ...................... 967 958 1,941 1,868
-------- -------- -------- --------
Total noninterest expense ...................... 2,987 3,011 6,005 5,895
-------- -------- -------- --------
Earnings before federal income taxes ................ 1,066 874 1,934 1,936
Provision for income taxes ..................... 368 318 662 685
-------- -------- -------- --------
Net earnings ................................ $ 698 $ 556 $ 1,272 $ 1,251
======== ======== ======== ========
Net earnings per share (basic) .............. $ 0.35 $ 0.27 $ 0.64 $ 0.61
Net earnings per share (diluted) ............ 0.34 0.26 0.62 0.59
</TABLE>
(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,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings ............................................... $ 698 $ 556 $ 1,272 $ 1,251
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (1,171) (19) (1,426) 12
Less: reclassification adjustment for gains included
in net earnings ................................... -- -- (32) (2)
------- ------- ------- -------
(1,171) (19) (1,458) 10
------- ------- ------- -------
Comprehensive income ....................................... $ (473) $ 537 $ (186) $ 1,261
======= ======= ======= =======
</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>
Six Months Ended
June 30,
---------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................... $ 1,272 $ 1,251
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for credit losses .............................. 280 288
Depreciation and amortization ............................ 753 692
Gain on sale of bank premises and equipment .............. -- (74)
Gain on sale of available-for-sale securities ............ (49) (3)
Amortization of premiums, net of (accretion) and discounts
on securities ...................................... 89 63
Effect of phantom stock plan ............................. 32 32
Decrease in other assets ................................. (1,627) (360)
Increase (decrease) in other liabilities ................. 607 (745)
-------- --------
Net cash provided by operating activities .......... 1,357 1,144
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities ............ 3,393 8,770
Proceeds from principal repayments, maturities, and calls of
available-for-sale securities ............................ 10,387 9,862
Purchases of available-for-sale securities ..................... (24,888) (25,277)
Net increase in loans .......................................... (14,274) (9,791)
Proceeds from sales of bank premises and equipment ............. -- 234
Purchases of bank premises and equipment ....................... (381) (1,716)
-------- --------
Net cash used by investing activities .............. (25,763) (17,918)
Cash flows from financing activities:
Proceeds from borrowing ........................................ 6,000 --
Purchase of treasury stock ..................................... (423) --
Net increase (decrease) in deposits ............................ 9,051 (8,942)
Dividends paid ................................................. (239) (246)
-------- --------
Net cash provided (used) by financing activities ... 14,389 (9,188)
Net decrease in cash and cash equivalents .......... (10,017) (25,962)
Cash and cash equivalents at beginning of period ........................... 25,456 40,065
-------- --------
Cash and cash equivalents at end of period.................................. $ 15,439 $ 14,103
======== ========
</TABLE>
(See accompanying notes to interim consolidated financial statements)
5
<PAGE>
(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 six month period ended
June 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 Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings available to common shareholders $ 698 $ 556 $ 1,272 $ 1,251
Basic weighted average shares outstanding ... 1,992 2,049 1,998 2,049
Diluted weighed average shares outstanding .. 2,074 2,139 2,080 2,138
Basic earnings per common share ............. $ 0.35 $ 0.27 $ 0.64 $ 0.61
Diluted earnings per common share ........... $ 0.34 $ 0.26 $ 0.62 $ 0.59
</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
June 30, 1999 June 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(losses) on securities:
Unrealized holding gains (losses) arising during period $ (1,569) $ 398 $ (1,171) $ (25) $ 6 $ (19)
Less: reclassification adjustments for gains included
in net earnings ................................... -- -- -- -- -- --
---------- -------- ---------- ---------- -------- ----------
Comprehensive income ...................................... $ (1,569) $ 398 $ (1,171) $ (25) $ 6 $ (19)
========== ======== ========== ========== ======== ==========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 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(losses) on securities:
Unrealized holding gains (losses) arising during period $ (1,911) $ 485 $ (1,426) $ 16 $ (4) $ 12
Less: reclassification adjustments for gains included
in net earnings ................................... (49) 17 (32) (3) 1 (2)
---------- -------- ---------- ---------- -------- ----------
Comprehensive income ...................................... $ (1,960) $ 502 $ (1,458) $ 13 $ (3) $ 10
========== ======== ========== ========== ======== ==========
</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 three months ended June 30, 1999 was $698,000 compared
with $556,000 for the three months ended June 30, 1998, an increase of $142,000
or 25.54%. Per share (basic) earnings
7
<PAGE>
increased $0.08 to $0.35 for the three months ended June 30, 1999 from $0.27 for
the same period ended June 30 , 1998. Per share (diluted) earnings increased
$0.08 to $0.34 for the three months ended June 30, 1999 from $0.26 for the same
period ended June 30, 1998. Net income for the six months ended June 30, 1999
was $1.3 million compared with $1.3 million for the six months ended June 30,
1998, an increase of $21,000 or 1.68%. Per share (basic) earnings increased
$0.03 to $0.64 for the six months ended June 30, 1999 from $0.61 for the same
period ended June 30, 1998. Per share (diluted) earnings increased $0.03 to
$0.62 for the six months ended June 30, 1999 from $0.59 for the same period
ended June 30, 1998.
On February 2, 1999 the Company announced that the Board of Directors
approved the repurchase of up to $1.0 million of Company Common Stock. As of
April 29, 1999 the Company, using excess funds, repurchased 24,600 shares of
Common Stock in the open market in eight separate trades at a total cost of
$329,000. As of August 9, 1999 there were 1,990,003 shares of Common Stock
outstanding.
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 six months ended June 30, 1999 was $6.4
million compared with $6.0 million for the six months ended June 30, 1998, an
increase of $336,000 or 5.56%, an increase of $176,000 or 5.72% in the second
quarter of 1999 as compared with the same period in 1998. Net interest income
increased primarily as a result of increased loan volume internally generated
through the Company's marketing efforts. Average gross loans increased to $175.0
million for the six months ended June 30, 1999 from $160.5 million for the six
months ended June 30, 1998, an increase of $14.5 million or 9.03%.
Net interest income was further affected by a decrease in the yield on
interest-earning assets from 8.00% on June 30, 1998 to 7.69% for the six months
ended June 30, 1999. Average interest-earning assets increased from 87.75% of
total average assets at June 30, 1998 to 88.44% of total average assets at June
30, 1999. Average interest-earning assets increased to $265.5 million for the
six months ended June 30, 1999 from $240.5 million for the six months ended June
30, 1998, an increase of $25.0 million or 10.40%. Average interest-bearing
liabilities increased to $208.1 million for the six months ended June 30, 1999
from $183.3 million for the six months ended June 30, 1998, an increase of $24.8
million or 13.53%.
The Company posted net interest margins of 4.77% and 4.98% and net
interest spreads of 3.93% and 4.00% for the periods ended June 30, 1999 and June
30, 1998, respectively.
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,
------------------------------------------------------------------------
1999 1998
--------------------------------- -----------------------------------
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 .............................................. $ 174,988 $ 7,661 8.76% $ 160,546 $ 7,252 9.03%
Securities ......................................... 74,162 2,159 5.82% 67,204 2,027 6.03%
Federal funds sold and other temporary
investments .................................... 18,361 466 5.08% 14,806 428 5.78%
----------- -------- ------- ----------- -------- ---------
Total interest-earning assets .................. 267,511 10,286 7.69% 242,556 9,707 8.00%
----------- -------- ------- ----------- -------- ---------
Less allowance for credit losses ................... (1,967) (2,011)
----------- ------------
Total interest-earning assets, net of
allowance ...................................... 265,544 240,545
Nonearning assets .................................. 34,717 33,581
----------- -----------
Total assets ................................... $ 300,261 $ 274,126
=========== ===========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits ................... $ 32,023 $ 168 1.05% $ 29,643 $ 163 1.10%
Public fund deposits ............................... 9,109 190 4.17% 4,918 73 2.97%
Savings and money market accounts .................. 65,799 1,011 3.07% 54,675 954 3.49%
Certificates of deposit ............................ 97,650 2,441 5.00% 94,093 2,476 5.26%
Federal funds purchased, FHLB line of
credit and other borrowings .................... 3,533 99 5.60%
----------- -------- ------- ----------- -------- ---------
Total interest-bearing liabilities ............. 208,114 3,909 3.76% 183,329 3,666 4.00%
----------- -------- ------- ----------- -------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits ................ 64,027 63,550
Other liabilities .................................. 1,860 2,019
----------- -----------
Total liabilities .............................. 274,001 248,898
----------- -----------
Stockholders' equity ................................... 26,260 25,228
----------- -----------
Total liabilities and
stockholders' equity ......................... $ 300,261 $ 274,126
=========== ===========
Net interest income ................................ $ 6,377 $ 6,041
======== ========
Net interest spread ................................ 3.93% 4.00%
======= =========
Net interest margin ................................ 4.77% 4.98%
======= =========
</TABLE>
9
<PAGE>
Provision for Credit Losses
The provision for Credit Losses decreased to $280,000 for the six months
ended June 30, 1999 from $288,000 for the same time period in 1998, a decrease
of $8,000 or 2.86%.
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, 1999
was $1.8 million compared with $2.1 million for the six months ended June 30,
1998, a decrease of $236,000 or 11.57%, and a decrease of $2,000 or 0.21% in the
second quarter of 1999 as compared with the second quarter of 1998. Service
charges on deposit accounts in the second quarter increased primarily due to the
increased deposit volume. 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 and currently has over $4.0 million in SBA loans
expected to be at some level of funding during 1999. Contributing to other
noninterest income was another strong quarter in income generated from the
Company's ATM's along with fees generated from alternative investment sales.
The following table presents for the periods indicated the major
categories of noninterest income:
Three Months Ended Six months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Service charges on deposit accounts $ 564 $ 518 $ 1,146 $ 1,196
Gain on sale of SBA loans .......... 24 168 62 302
ATM fee income ..................... 109 83 200 157
Alternative investments ............ 70 72 99 91
Other noninterest income ........... 185 113 335 332
-------- -------- -------- --------
Total noninterest income ...... $ 952 $ 954 $ 1,842 $ 2,078
======== ======== ======== ========
Noninterest Expense
In the six month period ended June 30, 1999, noninterest expense increased
$110,000 or 1.87% to $6.0 million from $5.9 million for the period ended June
30,1998 and a decrease of $24,000 or 0.80% in the second quarter of 1999 as
compared with the second quarter of 1998. Employee compensation and benefit
expense for the six months ended June 30, 1999 was $3.1 million, a decrease of
$40,000 or 1.26% from $3.2 million in the same period of 1998 and a decrease of
$81,000 or 4.94% in the second quarter of 1999 as compared with the second
quarter of 1998. Non staff expense for the six months ended June 30, 1999 was
$2.9 million, an increase of $150,000 or 5.52% from $2.7 million in the same
period of 1998 and an increase of $57,000 or 4.15% in the second quarter of 1999
as compared with the second quarter of 1998. Non staff expenses increased
slightly due the Company's growth. The Company remains committed to controlling
cost and as a result of this commitment, the efficiency ratio decreased to
68.71% from 72.28% during the second 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 Six months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Employee compensation and benefits ................. $ 1,558 $ 1,639 $ 3,138 $ 3,178
Non-staff expense:
Net bank premises expense ..................... 202 197 412 409
Equipment rentals, depreciation and maintenance 260 217 514 440
Data processing ............................... 78 68 157 129
Professional fees ............................. 130 138 243 243
Regulatory assessments/FDIC insurance ......... 31 31 62 61
Ad valorem and franchise taxes ................ 72 72 144 142
Other ......................................... 656 649 1,335 1,293
-------- -------- -------- --------
Total non-staff expenses ................... 1,429 1,372 2,867 2,717
-------- -------- -------- --------
Total noninterest expense .................. $ 2,987 $ 3,011 $ 6,005 $ 5,895
======== ======== ======== ========
</TABLE>
Financial Condition
Total assets as of June 30, 1999 were $298.3 million compared with $284.3
million at December 31, 1998 an increase of $14.0 million or 4.92%. At June 30,
1999, investment securities totaled $78.0 million, an increase of $8.8 million
or 12.72% from $69.2 at December 31, 1998. Net loans were $184.0 million at June
30, 1999, an increase of $14.4 million or 8.49% from $169.6 million at December
31, 1998. Strong balance sheet growth is primarily internally generated through
the Company's intensified 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. The Houston economy has historically been
affected by the price of oil and gas. However, economic reliance on energy has
been lessened through diversification efforts. The Company has no extensions of
credit to production or exploration companies and has not historically pursued
this line of business. The Company provides financing and other banking services
to companies that service the petrochemical industry. While the Company
maintains a reasonably diverse commercial and consumer loan portfolio, any major
downturn in the energy industry could have an adverse affect on borrowers'
ability to repay loans and, therefore, could potentially affect the results of
operations and the financial condition of the Company. The allowance for credit
losses as of June 30, 1999 was $1.9 million or 1.05% of outstanding loans.
The Company's total deposits for the six months ended June 30, 1999 were
$261.8 million, an increase of $9.1 million or 3.60% from $252.7 million at
December 31, 1998.
Stockholders' equity decreased from $26.5 million at June 30, 1998 to
$25.7 million at June 30, 1999, a decrease of $865,000 or 3.25%. Excluding the
SFAS 115 adjustment, stockholder's equity increased to 26.8 million at June 30,
1999, an increase of $610,000 or 2.33% compared to 26.2 million at
11
<PAGE>
December 31,1998. As of June 30, 1999 the Company's ratio of stockholders'equity
to total assets was 8.61% as compared with 9.34% as of December 31, 1998.
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 $1.4
million and $1.1 million for the six months ended June 30, 1999 and 1998
respectively.
Net cash used by investing activities was $25.8 million and $17.9 million
for the six months ended June 30, 1999 and 1998, respectively. The net cash used
by investing activities for the six months ended June 30, 1999 compared with the
same period in 1998 was primarily due to the increase in loans.
Net cash provided (used) by financing activities was $14.4 million and
($9.2) million for the six months ended June 30, 1999 and 1998, respectively.
The net cash provided by (used in) financing activities for the six months ended
June 30, 1999 compared with the same period in 1998 was primarily due to the
proceeds from the Federal Home Loan Bank borrowing and a increase 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, 1999 and the regulatory standards.
Minimum Actual Ratio
Required June 30, 1999
7 -------- -------------
THE COMPANY
Leverage ratio .............................. 3.00% 6.78%
Tier 1 risk-based capital ................... 4.00% 9.58%
Risk-based capital ratio .................... 8.00% 10.51%
THE BANK
Leverage ratio .............................. 3.00% 6.77%
Tier 1 risk-based capital ................... 4.00% 9.60%
Risk-based capital ratio .................... 8.00% 10.53%
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
12
<PAGE>
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 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 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 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 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 were
sent a Year 2000 questionnaire. The Company received 184 responses (71%) from
the survey. An assessment
13
<PAGE>
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.
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 based upon recent evaluations that if its own systems should fail, the
Company could convert to a manual entry system for a period of up to one month
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
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
14
<PAGE>
On May 27, 1999, 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 II directors to serve on
the Board of Directors of the Company until the Company's 2002 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 ...... 1,680,244 1,600 --
Kim E. Love ......... 1,679,533 2,311 --
Ruede M. Wheeler, DDS 1,680,544 1,300 --
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, 1999. The vote for each was as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTE
- --- ------- ------- ---------------
1,679,950 1,011 883 -
The other directors whose term of office continues after the meeting are
Albert D. Fields, Eddie V. Gray, Doug Latimer, Lindsay R. Pfeiffer, Ken Strum,
James N. Wallace and L.D. Wright.
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
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the three
months ended June 30, 1999
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
Larry D. Wright
Chief Executive Officer
By: /s/ KIM LOVE
Kim Love
Controller
16
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