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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 MARCH 31, 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 April 29, 1999, there were 1,993,903 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 March 31, 1999 and
December 31, 1998
Consolidated Statements of Earnings for Three Months ended
March 31, 1999 and 1998
Consolidated Statements of Comprehensive Income for the
Three Months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the three
months ended March 31, 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
<PAGE>
PART I - FINANCIAL INFORMATION
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents
Cash and due from banks ......................... $ 15,690 $ 15,466
Federal funds sold .............................. 22,230 9,990
--------- ---------
Total cash and cash equivalents .............. 37,920 25,456
Securities available-for-sale ........................ 70,902 69,235
Loans, net of allowance for credit losses of $1,958 .. 168,405 169,588
and $1,944
Bank premises and equipment, net ..................... 8,590 8,588
Other assets ......................................... 11,879 11,415
--------- ---------
Total assets ................................. $ 297,696 $ 284,282
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing .......................... $ 60,921 $ 60,776
Interest-bearing deposits .................... 205,370 191,942
--------- ---------
Total deposits ............................... 266,291 252,718
Borrowings ...................................... 3,000 3,000
Other liabilities ............................... 2,030 2,022
--------- ---------
Total liabilities ............................ 271,321 257,740
Stockholders' equity
Common stock .................................... 2,091 2,091
Additional paid-in capital ...................... 17,542 17,542
Retained earnings ............................... 7,706 7,252
Accumulated other comprehensive income .......... 75 379
--------- ---------
27,414 27,264
Less: Treasury stock ................................ (1,039) (722)
Total stockholders' equity ................... 26,375 26,542
--------- ---------
Total liabilities and stockholders' equity ... $ 297,696 $ 284,282
========= =========
</TABLE>
(See accompanying notes to interim consolidated financial statements)
2
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
------ ------
Interest income
Loans, including fees ............................. $3,735 $3,559
Securities ........................................ 1,018 955
Federal funds sold ................................ 316 316
------ ------
Total interest income ............................. 5,069 4,830
Interest expense
Deposits .......................................... 1,901 1,864
Other ............................................. 42 --
------ ------
Total interest expense ............................ 1,943 1,864
------ ------
Net interest income ............................ 3,126 2,966
Provision for credit losses ....................... 130 144
------ ------
Net interest income after provision for credit losses .. 2,996 2,822
Noninterest income
Service charges ................................... 582 678
Other ............................................. 308 446
------ ------
Total noninterest income ....................... 890 1,124
Noninterest expense
Salaries and employee benefits .................... 1,580 1,539
Occupancy expense, net ............................ 464 435
Other noninterest expense ......................... 974 910
------ ------
Total noninterest expense ......................... 3,018 2,884
------ ------
Earnings before federal income taxes ................... 868 1,062
Provision for income taxes ........................ 294 367
------ ------
Net earnings ................................... $ 574 $ 695
====== ======
Net earnings per share (basic) ................. $ 0.29 $ 0.34
Net earnings per share (diluted) ............... 0.28 0.33
(See accompanying notes to interim consolidated financial statements)
3
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BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
------ ------
Net earnings ......................................... $ 574 $ 695
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising
during period ................................. (272) 31
Less: reclassification adjustment for gains
included in net earnings ...................... (32) (2)
----- -----
Comprehensive income ................................. $ 270 $ 724
===== =====
(See accompanying notes to interim consolidated financial statements)
4
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BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................. $ 574 $ 695
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Provision for credit losses ............................ 130 144
Depreciation and amortization .......................... 376 304
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 ..................................... 37 34
Effect of phantom stock plan ........................... 16 16
(Increase) decrease in other assets .................... (543) 78
Decrease (increase) increase in other liabilities ...... 149 (272)
-------- --------
Net cash provided by operating activities ......... 690 922
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities .......... 3,442 14,861
Proceeds from principal repayments, maturities, and calls of
available-for-sale securities .......................... 6,413 352
Purchases of available-for-sale securities ................... (11,971) (16,061)
Net decrease (increase) in loans ............................. 1,034 (3,364)
Proceeds from sales of bank premises and equipment ........... 0 234
Purchases of bank premises and equipment ..................... (280) (322)
-------- --------
Net cash used by investing activities ............. (1,362) (4,300)
Cash flows from financing activities:
Purchase of treasury stock ................................... (317) --
Net increase (decrease) in deposits ......................... 13,573 (9,060)
Dividends paid ............................................... (120) (123)
-------- --------
Net cash provided (used) by financing activities .. 13,136 (9,183)
Net increase in cash and cash equivalents ......... 12,464 (12,561)
Cash and cash equivalents at beginning of period ................. 25,456 40,065
-------- --------
Cash and cash equivalents at end of period ....................... $ 37,920 $ 27,504
======== ========
</TABLE>
(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 1998
Annual Report on Form 10-KSB. Operating results for the three month period ended
March 31, 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:
THREE MONTHS ENDED
--------------------
MARCH 31,
1999 1998
------- -------
(Dollars in thousands
except per share data)
Net earnings available to common shareholders ..... $ 574 $ 695
Basic weighted average shares outstanding ......... 2,004 2,049
Diluted weighed average shares outstanding ........ 2,086 2,138
Basic earnings per common share ................... $ 0.29 $ 0.34
Diluted earnings per common share ................. $ 0.28 $ 0.33
(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
March 31, 1999 March 31, 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 ................. $(410) $ 138 $(272) $ 47 $ (16) $ 31
Less: reclassification adjustments
for gains included in net earnings .... (49) 17 (32) (3) 1 (2)
----- ----- ----- ----- ----- -----
Comprehensive income ........................ $(456) $ 155 $(304) $ 44 $ (15) $ 29
===== ===== ===== ===== ===== =====
</TABLE>
6
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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 March 31, 1999 was $574,000 compared
with $695,000 for the three months ended March 31, 1998, a decrease of $121,000
or 17.41%. Per share (basic) earnings decreased $0.05 to $0.29 for the three
months ended March 31, 1999 from $0.34 for the same period ended March 31, 1998.
Per share (diluted) earnings decreased $0.05 to $0.28 for the three months ended
March 31, 1999 from $0.33 for the same period ended March 31, 1998. First
quarter 1999 earnings were primarily affected by a decrease in noninterest
income.
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 21,000 shares of
Common Stock in the open market in six separate trades at a total cost of
$283,000. As of April 29, 1999 there were 1,993,903 shares of Common Stock
outstanding.
The Company continues to grow the Bank's premier full service Internet
banking site, "Click Bank!." Click Bank! offers a convenient alternative to
traditional banking and allows 24 hour access to
7
<PAGE>
account activity while giving the customer the ability to open accounts, apply
for loans, view check images and conduct other banking transactions online. In
the fourth quarter 1998, the Bank introduced the "Navigator Series", a
comprehensive Internet-based treasury management program which offers an array
of commercial banking products and services allowing commercial customers to
manage cash, investments and general account activity. Management believes the
new Internet-based technology allows the Company to generate additional fee
income, compete effectively and promote a higher level of community banking
service.
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 three months ended March 31, 1999 was $3.1
million compared with $3.0 million for the three months ended March 31, 1998, an
increase of $100,000 or 3.33%. Net interest income increased as a result of a
higher dollar amount of interest-earning assets derived primarily from loan
growth. Average interest-earning assets increased from 87.93% of total average
assets at March 31, 1998 to 88.86% of total average assets at March 31, 1999.
Average gross loans increased to $170.1 million for the three months ended March
31, 1999 from $157.3 million for the three months ended March 31, 1998, an
increase of $12.8 million or 8.14%. Average interest-bearing deposits increased
to $206.4 million for the three months ended March 31, 1999 from $186.6 million
for the three months ended March 31, 1998, an increase of $19.8 million or
10.61%.
The Company posted net interest margins of 4.70% and 4.87% and net
interest spreads of 3.85% and 3.93% for the periods ended March 31, 1999 and
March 31, 1998, respectively. The decrease in net interest margin from the first
quarter of 1998 to the first quarter of 1999 reflects a 31 basis point decrease
in the yield on average interest-earning assets and a 23 basis point reduction
in the cost of interest-bearing liabilities. Net interest margin decreased
during the first quarter 1999 compared to the same period in 1998 due primarily
to two factors: First, a downward turn in interest rates, including both the
Prime Rate and the Federal Funds rate; second, an increase in public fund
deposits. Public fund deposits require a higher degree of liquidity this results
in shorter term, lower interest-earning assets that are matched to the public
fund deposits.
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>
Three Months Ended March 31,
--------------------------------------------------------------------------------
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 .................................... $ 170,076 $ 3,735 8.78% $ 157,258 $ 3,559 9.05%
Securities ............................... 69,950 1,018 5.82% 64,292 955 5.94%
Federal funds sold and other temporary
investments .......................... 25,918 316 4.88% 22,161 316 5.70%
--------- --------- --------- --------- --------- ---------
Total interest-earning assets ........ 265,944 5,069 7.62% 243,711 4,830 7.93%
--------- --------- --------- --------- --------- ---------
Less allowance for credit losses ......... (1,937) (2,011)
--------- ---------
Total interest-earning assets, net of
allowance ............................ 264,007 241,700
Nonearning assets ........................ 35,294 35,472
--------- ---------
Total assets ......................... $ 299,301 $ 277,172
========= =========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits ......... $ 31,279 $ 82 1.05% $ 27,567 $ 79 1.15%
Public fund deposits ..................... 9,727 105 4.32% 5,567 38 2.73%
Savings and money market accounts ........ 67,214 512 3.05% 56,237 488 3.47%
Certificates of deposit .................. 95,193 1,202 5.05% 97,245 1,259 5.18%
Federal funds purchased, FHLB line of
credit and other borrowings .......... 3,000 42 5.60% -- -- --
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities ... 206,413 1,943 3.77% 186,616 1,864 4.00%
--------- --------- --------- --------- --------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits ...... 65,125 63,879
Other liabilities ........................ 1,419 1,612
--------- ---------
Total liabilities .................... 272,957 252,107
--------- ---------
Stockholders' equity ......................... 26,344 25,065
--------- ---------
Total liabilities and stockholders'
equity ........................... $ 299,301 $ 277,172
========= =========
Net interest income ...................... $ 3,126 $ 2,966
========= =========
Net interest spread ...................... 3.85% 3.93%
========= =========
Net interest margin ...................... 4.70% 4.87%
========= =========
</TABLE>
Provision for Credit Losses
The provision for credit losses decreased to $130,000 for the three months
ended March 31, 1999 from $144,000 for the same time period in 1999, a decrease
of $14,000 or 9.72%.
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 three months ended March 31, 1999 was $890,000 compared with $1.1
million for the three months ended March 31, 1998, a decrease of $210,000 or
19.09%. The decrease during the first quarter 1999 compared to the first quarter
1998 was primarily attributable to a reduction in the gains on the sale of SBA
loans. The Company has been an active SBA lender for more than five years
selling the guaranteed portion of the loans in the open market. The timing of
the gains on
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<PAGE>
the sale of SBA loans is historically inconsistent and varies from quarter to
quarter. Although the first quarter 1999 gains on the sale of SBA loans were
lower compared to 1998, the pipeline for the remainder of 1999 remains active.
Additionally affecting noninterest income during the first quarter 1999 compared
to the first quarter 1998 were non-recurring service charges on deposits related
to the mainframe conversion on March 31, 1998 and a gain on the sale of Bank
owned property during the first quarter 1998 in the amount of $63,000.
The following table presents for the periods indicated the major
categories of noninterest income:
Three Months Ended
March 31,
----------------------
1999 1998
------- -------
(Dollars in thousands)
Service charges on deposit accounts ........... $ 582 $ 678
Gain on sale of SBA loans ..................... 38 134
ATM fee income ................................ 91 74
Alternative investments ....................... 29 19
Other noninterest income ...................... 150 219
------ ------
Total noninterest income ................. $ 890 $1,124
====== ======
Noninterest Expense
In the three month period ended March 31, 1999, noninterest expense
increased $100,000 or 3.45% to $3.0 million from $2.9 million for the three
month period ended March 31,1998.
Employee compensation and benefit expense for the three months ended March
31, 1999 was $1.6 million, an increase of $41,000 or 2.66% from $1.5 for the
same period of 1998. Noninterest expense increased in the first quarter 1999
compared to the same period in 1998 primarily due to salaries associated with
the expansion of the Mortgage Lending Division. New mortgage lending officers
are paid a salary for 60 days at which time they convert to commissions only
based on business generated. The Mortgage Lending Division continues to grow and
show increasing levels of fee and interest income.
Non-staff expense increased to $1.4 million for the three month period
ended March 31, 1999 from $1.3 for the same period in 1998, an increase of
$100,000 or 7.69%. This increase was due to additional expenses including
increased facility and advertising costs related to the Company's internal
growth, increased professional fees related to the Company's aggressive
collection efforts, and higher data processing/software and technology costs.
10
<PAGE>
The following table presents for the periods indicted the major categories
of noninterest expense:
Three Months Ended
March 31,
----------------------
1999 1998
------- -------
(Dollars in thousands)
Employee compensation and benefits ........... $1,580 $1,539
Non-staff expense:
Net bank premises expense ............... 210 212
Equipment rentals, depreciation
and maintenance .............................. 254 223
Data processing ......................... 79 61
Professional fees ....................... 113 105
Regulatory assessments/FDIC
insurance .................................... 31 30
Ad valorem and franchise taxes .......... 72 70
Other ................................... 679 644
------ ------
Total non-staff expenses ............. 1,438 1,345
------ ------
Total noninterest expense ............ $3,018 $2,884
====== ======
Financial Condition
Total assets as of March 31, 1999 were $297.7 million compared with $284.3
million at December 31, 1998 an increase of $13.4 million or 4.71%. At March 31,
1999, investment securities totaled $70.9 million, an increase of $1.7 million
or 2.46% from $69.2 million at December 31, 1998. Net loans were $168.4 million
at March 31, 1999, a decrease of $1.6 million or 0.94% from $170.0 million at
December 31, 1998. First quarter 1999 balance sheet growth is a result of the
Company's continued efforts to increase market share through intense marketing
efforts and technology based products along with seasonal growth in public
deposits.
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 March 31, 1999 was $2.0 million or 1.15% of outstanding loans.
The Company's total deposits for the three months ended March 31, 1999
were $266.3 million, an increase of $13.6 million or 5.38% from $252.7 million
at December 31, 1998. First quarter 1999 deposit growth was primarily
attributable to internal growth and seasonally higher public fund deposits.
First quarter 1999 deposit growth is a result of the Company's continued efforts
to increase market share
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through intense marketing efforts and technology based products. Additionally,
the Company's public fund deposits were higher than their normal core levels
during the first quarter 1999.
Stockholders' equity decreased from $26.5 million at December 31, 1998 to
$26.4 million at March 31, 1999, a decrease of $100,000 or 0.38%. The first
quarter 1999 decrease was primarily the result of increased treasury stock
purchases, dividends and a decrease in other accumulated comprehensive income.
As of March 31, 1999, the Company's ratio of stockholders' equity to total
assets was 8.86% 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
$690,000 and $922,000 for the three months ended March 31, 1999 and 1998
respectively. The decrease in net cash provided by operating activities for the
three months ended March 31, 1999 compared with the same period in 1998 was
primarily due to the (increase) decrease in other assets and liabilities in
1999.
Net cash used in investing activities was $1.4 million and $4.3 million
for the three months ended March 31, 1999 and 1998, respectively. The decrease
in net cash used in investing activities for the three months ended March 31,
1999 compared with the same period in 1998 was primarily due to activity in the
Company's investment portfolio and the sale of Bank owned property.
Net cash provided by (used in) financing activities was $13.1 million and
($9.2) million for the three months ended March 31, 1999 and 1998, respectively.
The net cash used in financing activities for the three months ended March 31,
1999 compared with the same period in 1998 was primarily due to the increase in
deposits in 1999 and the Company's effort to repurchase outstanding shares of
Common Stock.
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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 March 31, 1998 and the regulatory standards.
Minimum Actual Ratio
Required March 31, 1999
---------------------------
THE COMPANY
Leverage ratio 3.00% 6.56%
Tier 1 risk-based capital 4.00% 9.66%
Risk-based capital ratio 8.00% 10.65%
THE BANK
Leverage ratio 3.00% 6.51%
Tier 1 risk-based capital 4.00% 9.59%
Risk-based capital ratio 8.00% 10.59%
- ----------------------------
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 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
13
<PAGE>
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 is completing 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
anticipates that the Implementation phase will be completed by the end of the
second quarter of 1999. In this phase, systems are certified as Year 2000
compliant and accepted by users. For any systems which fail certification, the
Company's contingency plan will 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 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 is in the
process of finalizing 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
14
<PAGE>
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
Not Applicable
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 March 31, 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 E. LOVE
Kim E. Love
Controller
16
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