================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1999.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OR THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
Commission File Number 0-23299
BAY BANCSHARES, INC.
(Name of small business issuer 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)
(Zip Code)
(281) 471-4400
(Issuer's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, par value $1.00 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues as of December 31, 1999: $25,055,000
Aggregate market value of the voting stock held by non-affiliates as of
March 27, 2000: $25,468,000.
As of March 15, 2000, the number of outstanding shares of Common Stock was
1,990,983.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III Items 9, 10, 11 and 12 will be
included in the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, and is incorporated herein by reference.
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1 - Description of Business ......................................... 2
ITEM 2 - Description of Property ......................................... 13
ITEM 3 - Legal Proceedings ............................................... 14
ITEM 4 - Submission of Matters to a Vote of Security Holders ............. 14
PART II
ITEM 5 - Market for Common Equity and Related Stockholder Matters ........ 14
ITEM 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................... 15
ITEM 7 - Financial Statements ............................................ 35
ITEM 8 - Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure ................................................. 36
PART III
ITEM 9 - Directors, Executive Officers, Promoters and Control
Persons: Compliance With Section 16(a) of the Exchange Act ............... 36
ITEM 10 - Executive Compensation ......................................... 36
ITEM 11 - Security Ownership of Certain Beneficial Owners and Management . 36
ITEM 12 - Certain Relationships and Related Transactions ................. 36
ITEM 13 - Exhibits and Reports on Form 8-K ............................... 37
1
<PAGE>
PART I
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Statements and financial discussion and analysis contained in this Annual
Report on Form 10-KSB that are not historical facts are 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) increased credit risk in the Company's assets and increased
operating risk caused by a material change in commercial, consumer, including
indirect automobile dealer paper, and/or real estate loans as a percentage of
the total 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 impact of changes in market
rates and prices on the level and composition of deposits, loan demand and the
values of loan collateral, securities and interest rate protection agreements;
(6) increased competition for deposits and loans adversely affecting rates and
terms; (7) the failure of assumptions underlying the establishment and provision
made to the allowance for credit losses; (8) the Company's ability to acquire,
operate and maintain cost effective and efficient systems without incurring
unexpectedly difficult or expensive but necessary technological changes
(including changes to address Year 2000 data systems issues); and (9) 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 1. - DESCRIPTION OF BUSINESS
GENERAL
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"), which was chartered in
1965, and for Bayport National Bank, which was chartered in 1979. The two banks
merged in 1985 in conjunction with a change in Texas branching laws. In 1991,
the Company began to expand its operations, diversify its lending base and seek
additional deposits by assuming the deposits of Liberty County Federal Savings
and Loan Association and Bayshore Federal Savings and Loan, which added branch
locations in the cities of Liberty, Cleveland, and Seabrook, Texas. In 1994, the
Company established a new branch in Pasadena, Texas. In 1996, the Company
assumed the deposits of the Cleveland branch of a commercial bank and opened two
Loan Production Offices ("LPOs") in Houston. In the fourth quarter of 1997, the
Company successfully completed an initial public offering of 690,000 shares of
common stock and completed the planned acquisitions of Texas Bank, Baytown,
Texas, Texas National Bank of Baytown, Texas and First Bank of Deer Park, Texas
(collectively, the "1997 Acquisitions") and launched the Mortgage Lending
Division. In 1999, the Company obtained preferred lending status from the
Dallas, Texas Small Business Administration ("SBA") district and opened a LPO in
Longview, Texas to serve the Longview/Dallas markets.
The Company currently serves its market areas from its headquarters in La
Porte, its ten full-service banking offices in La Porte, Liberty, Cleveland,
Seabrook, Pasadena, Baytown, Deer Park and Mont Belvieu, Texas and its four
LPOs, three in Houston and one in Longview, Texas.
2
<PAGE>
BUSINESS
The Company's commitment to being the premier provider of financial
services in the eastern portion of the greater Houston metropolitan area is
reflected in the types of products and services that it makes available to its
commercial and retail customers. The Company offers a wide variety of lending
products, including term loans, lines of credit and fixed asset loans to small
and medium-sized businesses, and offers consumers automobile, home improvement
and personal loans. In addition, the Company has developed expertise in the
following lending areas:
o INDIRECT LENDING - Through its indirect lending program, the Company
purchases almost exclusively "A"-rated loans from a select list of automobile
dealers after performing its own analysis of the loan application. At
December 31, 1999, the Company had a total of $80.5 million or 40.37% of
outstanding loans in indirect loans with an associated delinquency ratio of
0.77%. Senior management of the Company has extensive experience in indirect
automobile financing as well as consumer lending in general.
Due to increasing competition and accompanying pressure on yields in the
indirect market, management has shifted its focus to other lending products,
as described below, in an effort to further diversify its lending risk.
o COMMERCIAL LENDING/REAL ESTATE LENDING - The Company's primary market is
located in the heart of the eastern Harris County manufacturing and
petrochemical district. While the Company has no extensions of credit to oil
production or exploration concerns and historically has not pursued this line
of business, the Company has gained an expertise in fulfilling the banking
needs of the businesses that service this industry. Maintaining a reasonably
diverse commercial customer base, the Company offers real estate financing
for owner-occupied businesses, lines of credit, working capital, equipment
and inventory financing. At December 31, 1999, the Company had a total of
$98.4 million or 49.37% of outstanding loans in commercial and real estate
loans.
o SBA LENDING - The Bank is a Preferred Lender in the Houston and Dallas
districts under the federally guaranteed SBA lending program. Through this
program, the Bank originates and funds SBA 7-A and 504 chapter loans
qualifying for federal guarantees of 75% to 90% of principal and accrued
interest. The guaranteed portion of these loans is generally sold into the
secondary market with servicing retained. At December 31, 1999, the Company
had a total of $6.4 million or 3.22% of outstanding loans in the retained
portion of SBA commercial and real estate loans. The Company generates SBA
loans through three LPOs located in Houston and one located in Longview,
Texas.
o MORTGAGE LENDING DIVISION - The Company's Mortgage Lending Division is
comprised of two departments; the Construction Department and the Retail
Department. The Construction Department provides financing to build new homes
for builders and individuals in established subdivisions. All construction
loans are funded as work is completed and have a maturity of six to 12
months. The Retail Department originates long-term (permanent) financing for
individuals and families for terms of ten to 30 years and then immediately
sells them in the secondary market, which generates loan fee income. The
financing can be for the purchase or refinancing of a homestead or investment
property. All types of plans are available including conventional, FHA and VA
loans that include fixed rate, six month to ten year adjustable rate
mortgages, LIBOR, limited documentation, no income and no ratio loans.
The Company funds its lending activities primarily from its core deposit
base. The Company receives deposits from the local market with no material
portion dependent upon any one person, entity or industry. The Company pursues
public deposits from entities such as schools, cities and colleges. The Company
has developed an ability to compete with regional banks for public deposits
through competitive pricing, responsive service, technology and continuing
relationships with the individuals responsible for the administration or
placement of these funds. The Company also utilizes the Federal Home Loan Bank
from time to time as either a short term or long-term funding source.
3
<PAGE>
The Company is committed to providing technologically advanced banking
solutions to its customers. Although the Internet banking arena has become
highly competitive, the Company believes that online banking combined with the
traditional physical office locations is the most convenient for the customer.
The Company's online technology branch includes ClickBank!
(www.clickbankbnb.com) and ClickBank! for Business. ClickBank! offers retail
customers state-of-the-art capabilities such as viewing transactions real time
as they occur, viewing check images front and back, transferring funds between
accounts, bill paying and statement viewing and printing. ClickBank! for
Business allows commercial customers the same basic features as ClickBank! but
with added treasury management services such as automated mutual fund investment
sweeps, online automated clearing house origination, online wire-transfers and
online stop payments. The Company's state-of-the-art communications network
allows highly trained customer care specialists to focus on providing superior
customer service while initiating outbound sales calls. Management believes the
Company's technology will allow it to compete efficiently and effectively with
any regional, super-regional or national banking organization with respect to
communications and electronic convenience to the customer.
The Company has enhanced its relationship banking capabilities with its
most profitable customers by marketing individually to the top 5% of its
customer base (Tier 1 accounts) and the next 10% of its customer base (Tier 2
accounts). The Tier 1 customers are provided with a pass key which enables them
to enter the Bank through a private entrance before and after normal banking
hours and are assigned a specific Bank officer to service their banking needs.
Each Tier 1 and Tier 2 customer is personally contacted a minimum of eight times
per year by an assigned officer.
The Company builds customer loyalty through exceptional service levels,
technology, a wide variety of products and responsive local decision making. To
complement its traditional banking products, the Company endeavors to be a full
financial services organization by developing and offering additional financial
services to its customers. The Company employs five full-time investment brokers
who offer various alternative investments such as annuity and mutual fund
products. Additionally, the Bank established an insurance subsidiary, BayBanc
Independent Insurance Agency, Inc. ("BBIIA") which was granted a license to sell
both life insurance and property and casualty insurance by the Texas Department
of Insurance in January 1998. The Company also established a direct affiliation
with Bayshore Insurance Agency ("BIA") which became operational in June 1998
with the acquisition of a long-standing profitable insurance operation in La
Porte, Texas. The Bank has agreed to lease space and provide, data processing,
clerical, payroll and other related fee-based services to BIA. Additionally, the
Bank will review and consider opportunities presented for direct insurance
agency ownership and expansion.
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally upon the Company's ability to compete in its market
areas. The Company competes with other commercial banks, Internet banks, savings
banks, savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking firms, asset-based
non-bank lenders and certain other nonfinancial institutions, including retail
stores which may maintain their own credit programs and certain governmental
organizations which may offer more favorable financing than the Company. Many of
such competitors may have greater financial and other resources than the
Company. The Company has been able to compete effectively with other financial
institutions by emphasizing customer service, technology and local office
decision-making, by establishing long term customer relationships and building
customer loyalty, and by providing products and services designed to address the
specific needs of its customers. Although the Company has been able to compete
effectively in the past, no assurances may be given that the Company will
continue to be able to compete effectively in the future.
Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities
firms and insurance companies that elect to become financial
4
<PAGE>
holding companies may acquire banks and other financial institutions. The
Gramm-Leach-Bliley Act may significantly change the competitive environment in
which the Company and its subsidiaries conduct business. See "-Supervision and
Regulation - The Company". The financial services industry is also likely to
become even more competitive as further technological advances enable more
companies to provide financial services. These technological advances may
diminish the importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
The Company's strategy is to compete effectively not just with other
commercial banks but with a variety of providers of financial services by
providing a responsive blend of relationship banking, technology and a full line
of financial service products, including a full line of brokerage and insurance
products. The Company continually looks for additional acquisitions and
branching opportunities to enhance its retail delivery systems throughout the
greater Houston metropolitan area.
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the Federal Deposit Insurance Corporation ("FDIC") and the
banking system as a whole, and not for the protection of the bank holding
company shareholders or creditors. The banking agencies have broad enforcement
power over bank holding companies and banks including the power to impose
substantial fines and other penalties for violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
THE COMPANY. The Company is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended ("BHCA"), and it is subject to
supervision, regulation and examination by the Board of Governors of the Federal
Reserve System ("Federal Reserve"). The BHCA and other federal laws subject bank
holding companies to particular restrictions on the types of activities in which
they may engage, and to a range of supervisory requirements and activities,
including regulatory enforcement actions for violations of laws and regulations.
REGULATORY RESTRICTIONS ON DIVIDENDS; SOURCE OF STRENGTH. It is the policy
of the Federal Reserve that bank holding companies should pay cash dividends on
common stock only out of income available over the past year and only if
prospective earnings retention is consistent with the organization's expected
future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the bank
holding company's ability to serve as a source of strength to its banking
subsidiaries.
Under Federal Reserve policy, a bank holding company is expected to act as
a source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve policy, a holding company may not be inclined to provide
it. As discussed below, a bank holding company in certain circumstances could be
required to guarantee the capital plan of an undercapitalized banking
subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
FINANCIAL MODERNIZATION. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act which eliminated the barriers to
affiliations among banks, securities firms, insurance companies and other
financial service providers. The Gramm-Leach-Bliley Act, effective March 11,
2000,
5
<PAGE>
permits bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. No regulatory approval will be
required for a financial holding company to acquire a company, other than a bank
or savings association, engaged in activities that are financial in nature or
incidental to activities that are financial in nature, as determined by the
Federal Reserve.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a
financial holding company by filing a declaration with the Federal Reserve if
each of its subsidiary banks is well capitalized under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") prompt corrective action
provisions, is well managed, and has at least a satisfactory rating under the
Community Reinvestment Act of 1977 ("CRA"). The Gramm-Leach-Bliley Act defines
"financial in nature" to include securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Federal Reserve
has determined to be closely related to banking. Subsidiary banks of a financial
holding company must remain well capitalized and well managed in order to
continue to engage in activities that are financial in nature without regulatory
actions or restrictions, which could include divestiture of the financial in
nature subsidiary or subsidiaries. In addition, a financial holding company may
not acquire a company that is engaged in activities that are financial in nature
unless each of its subsidiary banks has a CRA rating of satisfactory or better.
While the Federal Reserve will serve as the "umbrella" regulator for
financial holding companies and has the power to examine banking organizations
engaged in new activities, regulation and supervision of activities which are
financial in nature or determined to be incidental to such financial activities
will be handled along functional lines. Accordingly, activities of subsidiaries
of a financial holding company will be regulated by the agency or authorities
with the most experience regulating that activity as it is conducted in a
financial holding company.
SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not
permitted to engage in unsafe and unsound banking practices. The Federal
Reserve's Regulation Y, for example, generally requires a holding company to
give the Federal Reserve prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve may oppose the transaction if it believes that the transaction would
constitute an unsafe or unsound practice or would violate any law or regulation.
Depending upon the circumstances, the Federal Reserve could take the position
that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations,
and can assess civil money penalties for certain activities conducted on a
knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1 million for each day
the activity continues.
ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates
are prohibited from tying the provision of certain services, such as extensions
of credit, to other services offered by a holding company or its affiliates.
CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of December 31, 1999, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 10.05% and its
6
<PAGE>
ratio of total capital to total risk-weighted assets was 10.93%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources."
In addition to the risk-based capital guidelines, the Federal Reserve
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
bank holding companies. The leverage ratio is a company's Tier 1 capital divided
by its average total consolidated assets. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis points
above the regulatory minimum. As of December 31, 1999, the Company's leverage
ratio was 7.43%.
The federal banking agencies' risk-based and leverage ratios are
minimum supervisory ratios generally applicable to banking organizations that
meet certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit a
capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized
bank is limited to the lesser of 5% of the institution's assets at the time it
became undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve before it
may acquire all or substantially all of the assets of any bank, or ownership or
control of any voting shares of any bank, if after such acquisition it would own
or control, directly or indirectly, more than 5% of the voting shares of such
bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.
CONTROL ACQUISITIONS. The Change in Bank Control Act prohibits a person
or group of persons from acquiring "control" of a bank holding company unless
the Federal Reserve has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve, the
acquisition of 10% or more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act, such
as the Company, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the Company.
In addition, any entity is required to obtain the approval of the
Federal Reserve under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding Common Stock
of the Company, or otherwise obtaining control or a "controlling influence" over
the Company.
7
<PAGE>
THE BANK. The Bank is a national banking association, the deposits of
which are insured by the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF") of the FDIC. The Bank is subject to supervision and
regulation by the Office on the Comptroller of the Currency ("OCC"). Such
supervision and regulation subjects the Bank to special restrictions, potential
enforcement actions and period examination by the OCC. Because the Federal
Reserve regulates the bank holding company parent of the Bank, the Federal
Reserve also has supervisory authority which directly affects the Bank.
FINANCIAL MODERNIZATION. Under the Gramm-Leach-Bliley Act, a national bank
may establish a financial subsidiary and engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting as principal, insurance company portfolio investment real estate
development, real estate investment, annuity issuance and merchant banking
activities. To do so, a bank must be well capitalized, well managed and have a
CRA rating of satisfactory or better. National banks with financial subsidiaries
must remain well capitalized and well managed in order to continue to engage in
activities that are financial in nature without regulatory actions or
restrictions, which could include divestiture of the financial in nature
subsidiary or subsidiaries. In addition, a bank may not acquire a company that
is engaged in activities that are financial in nature unless the bank has a CRA
rating of satisfactory or better.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. Transactions
between the Bank and its nonbanking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
RESTRICTIONS ON DISTRIBUTION OF SUBSIDIARY BANK DIVIDENDS AND ASSETS.
Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and for the foreseeable future it is anticipated that dividends
paid by the Bank to the Company will continue to be the Company's principal
source of operating funds. Capital adequacy requirements serve to limit the
amount of dividends that may be paid by the Bank. Until a national bank's
capital surplus equals or exceeds its capital stock, the bank must transfer 10%
of its net income to capital surplus prior to paying a dividend. Without the
prior approval of the OCC, a national bank may not pay dividends in excess of
the bank's total net profits for that year, plus its retained profits for the
preceding two years, less any required transfers to capital surplus.
Additionally, a national bank may not pay dividends in excess of total retained
profits, including current year's earnings. Under federal law, the Bank cannot
pay a dividend if, after paying the dividend, the Bank will be
"undercapitalized." The OCC may declare a dividend payment to be unsafe and
unsound even though the Bank would continue to meet its capital requirements
after the dividend.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated
8
<PAGE>
creditors are entitled to a priority of payment over the claims of holders of
any obligation of the institution to its shareholders, including any depository
institution holding company (such as the Company) or any shareholder or creditor
thereof.
EXAMINATIONS. The OCC periodically examines and evaluates insured banks.
Based upon such an evaluation, the OCC may revalue the assets of the institution
and require that it establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such assets.
AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by
the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. FDICIA requires that independent audit committees be formed,
consisting of outside directors only. The committees of such institutions must
include members with experience in banking or financial management, must have
access to outside counsel, and must not include representatives of large
customers.
CAPITAL ADEQUACY REQUIREMENTS. The OCC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The OCC may establish higher minimum requirements if, for example,
a bank has previously received special attention or has a high susceptibility to
interest rate risk.
The OCC's risk-based capital guidelines generally require national banks
to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0%
and a ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for the Bank as for the Company. As of
December 31, 1999, the Bank's ratio of Tier 1 capital to total risk-weighted
assets was 9.51% and its ratio of total capital to risk-weighted assets was
10.40%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Resources."
The OCC's leverage guidelines require national banks to maintain Tier 1
capital of no less than 5.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets. As of December 31, 1999, the Bank's ratio of Tier 1 capital to average
total assets (leverage ratio) was 7.03%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources."
CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank has a total risk based
capital ratio of 10.0% or higher; a Tier 1 risk based capital ratio of 6.0% or
higher; a leverage ratio of 5.0% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk based
capital ratio of 8.0% or higher; a Tier 1 risk based capital ratio of 4.0% or
higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated
a composite 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "under capitalized" if it fails to meet any one of the ratios required
to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a
capital restoration plan, agency regulations contain broad restrictions on
certain activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including
9
<PAGE>
dividends, and is prohibited from paying management fees to control persons if
the institution would be undercapitalized after any such distribution or
payment.
As an institution's capital decreases, the OCC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management, and other restrictions. The OCC's has
only very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
DEPOSIT INSURANCE ASSESSMENTS. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk based
assessment system as required by FDICIA. Under this system, FDIC- insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to the
regulators. In addition, the FDIC can impose special assessments in certain
instances. The current range of BIF and SAIF assessments is between 0% and 0.27%
of deposits.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalize the SAIF and assure the
payment of the Financing Corporation's ("FICO") bond obligations. Under this new
act, banks insured under the BIF are required to pay a portion of the interest
due on bonds that were issued by FICO to help shore up the ailing Federal
Savings and Loan Insurance Corporation in 1987. The BIF-rate was required to
equal one-fifth of the SAIF rate through year-end 1999, or until the insurance
funds merged, whichever occurred first. Thereafter, BIF and SAIF payers will be
assessed pro rata for the FICO bond obligations. With regard to the assessment
for the FICO obligation, for the fourth quarter 1999, the BIF rate was .01184%
of deposits and the SAIF rate was .05920% of deposits, and for the first quarter
of 2000, both the BIF and SAIF rates are .02120% of deposits.
ENFORCEMENT POWERS. The FDIC and the other federal banking agencies
have broad enforcement powers, including the power to terminate deposit
insurance, impose substantial fines and other civil and criminal penalties and
appoint a conservator or receiver. Failure to comply with applicable laws,
regulations and supervisory agreements could subject the Company or its banking
subsidiaries, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and potentially
substantial civil money penalties. The appropriate federal banking agency may
appoint the FDIC as conservator or receiver for a banking institution (or the
FDIC may appoint itself, under certain circumstances) if any one or more of a
number of circumstances exist, including, without limitation, the fact that the
banking institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized; fails to become adequately capitalized when
required to do so; fails to submit a timely and acceptable capital restoration
plan; or materially fails to implement an accepted capital restoration plan.
BROKERED DEPOSIT RESTRICTIONS. Adequately capitalized institutions
cannot accept, renew or roll over brokered deposits except with a waiver from
the OCC, and are subject to restrictions on the interest rates
10
<PAGE>
that can be paid on such deposits. Undercapitalized institutions may not accept,
renew or roll over brokered deposits.
CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository institutions liable
to the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
COMMUNITY REINVESTMENT ACT. CRA and the regulations issued thereunder are
intended to encourage banks to help meet the credit needs of their service area,
including low and moderate income neighborhoods, consistent with the safe and
sound operations of the banks. These regulations also provide for regulatory
assessment of a bank's record in meeting the needs of its service area when
considering applications to establish branches, merger applications and
applications to acquire the assets and assume the liabilities of another bank.
FIRREA requires federal banking agencies to make public a rating of a bank's
performance under the CRA. In the case of a bank holding company, the CRA
performance record of the banks involved in the transaction are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction.
CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the expedited Funds Availability Act, the Equal Credit Opportunity
Act, and the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.
INSTABILITY OF REGULATORY STRUCTURE. Various legislation, such as the
Gramm-Leach-Bliley Act which expanded the powers of banking institutions and
bank holding companies, and proposals to overhaul the bank regulatory system and
limit the investments that a depository institution may make with insured funds,
is from time to time introduced in Congress. Such legislation may change banking
statutes and the operating environment of the Company and the Bank in
substantial and unpredictable ways. The Company cannot determine the ultimate
effect that the Gramm-Leach-Bliley Act will have, or the effect that potential
legislation, if enacted, or implementing regulations with respect thereto, would
have upon the financial condition or results of operations of the Company or its
subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY. One of the major additional burdens
imposed on the banking industry by FDICIA is the increased ability of banking
regulators to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve and FDIC are possessed of extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. For example,
the FDIC may terminate the deposit insurance of any institution which it
determines has engaged in an unsafe or unsound practice. The agencies can also
assess civil money penalties, issue cease and desist or removal orders, seek
injunctions, and publicly disclose such actions. FDICIA, FIRREA and other laws
have expanded the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
EFFECT ON ECONOMIC ENVIRONMENT. The policies of regulatory authorities,
including the monetary policy of the Federal Reserve, have a significant effect
on the operating results of bank holding companies and their subsidiaries. Among
the means available to the Federal Reserve to affect the money supply are open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member bank
deposits. These means are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
may affect interest rates charged on loans or paid for deposits.
11
<PAGE>
Federal Reserve monetary policies have materially affected the operating
results of commercial banks in the past and are expected to continue to do so in
the future. The nature of future monetary policies and the effect of such
policies on the business and earnings of the Company and the Bank cannot be
predicted.
EMPLOYEES
As of December 31, 1999, the Company had 179 full-time employees, 39 of
whom were officers of the Bank, and 23 part-time employees. The Company provides
medical and hospitalization insurance to its full-time employees. The Company
actively and continually trains its employees in the areas of successful sales
and service, long-term customer relationships, teller excellence, business
development and consumer lending. As part of this process, virtually every
employee is placed on incentive and merit standards which award compensation
based on the achievement of sales goals and other business development-related
goals. The Company is not a party to any collective bargaining agreement. The
Company considers its relations with employees to be excellent.
12
<PAGE>
ITEM 2 - DESCRIPTION OF PROPERTY
FACILITIES
The Company conducts business at ten full-service banking offices and four
LPOs. The Company's headquarters are located at 1001 Highway 146 South in La
Porte in a two story office building owned by the Bank. Unless otherwise noted,
all facilities are owned by the Company. The following table sets forth specific
information on each such location:
BANKING OFFICE LOCATION
- -------------- --------
La Porte - Main Office 1001 Highway 146 South
La Porte, Texas 77571
La Porte - Spencer Office 9841 Spencer Highway
La Porte, Texas 77571
Deer Park 1601 Center
Deer Park, Texas 77536
Pasadena 5960 Fairmont Parkway
Pasadena, Texas 77505
Seabrook 2929 Nasa Road One
Seabrook, Texas 77589
Baytown - Decker Office 1900 Decker Drive
Baytown, Texas 77520
Baytown - Garth Office 6810 Garth Road
Baytown, Texas 77521
Mont Belvieu 11522 Eagle Drive
Mont Belvieu, Texas 77580
Liberty 2329 North Main
Liberty, Texas 77535
Cleveland 1408 East Houston
Cleveland, Texas 77327
La Porte LPO - La Porte (1) 9841 Spencer Highway
La Porte, Texas 77571
West LPO - Houston (1)(2) 8323 Southwest Freeway, Suite 270
Houston, Texas 77074
Longview LPO (1)(3) 911 Northwest Loop 281, Suite 211-29
Longview, Texas 75604
Bayshore Center (1)(4)(5) 719 8th Street
La Porte, Texas 77571
- ------------------------------------------------------------------
(1) Indicates loan production office.
(2) This facility is leased at an annual cost of $16,000.
(3) This facility is leased at an annual cost of $4,800.
(4) Mortgage Lending Division headquarters and lease space for BIA.
(5) This facility is leased at an annual cost of $46,000.
13
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
Neither the Company nor the Bank is currently a party to, nor is any of
their property the subject of, any material pending legal proceedings incidental
to the business of the Company or the Bank.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on The Nasdaq Stock Market National
Market System under the symbol "BAYB". As of March 15, 2000, there were
1,990,983 shares of the Company's Common Stock outstanding and held of record by
approximately 700 shareholders. The following table presents the high and low
closing sale prices of the Common Stock, as quoted on the Nasdaq National
Market, for the periods indicated during the fiscal years ended December 31,
1999 and 1998:
HIGH LOW
--------- --------
1999
----
Fourth Quarter $ 19.63 $ 17.00
Third Quarter 19.25 15.50
Second Quarter 15.50 11.62
First Quarter 15.34 11.75
1998
----
Fourth Quarter 15.25 12.25
Third Quarter 19.50 12.44
Second Quarter 24.00 17.00
First Quarter 23.00 19.00
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. While the Company has declared dividends on its Common Stock since
December 1992 and paid quarterly dividends aggregating $0.24 per share per annum
in 1999, there is no assurance that the Company will continue to pay dividends
in the future.
For a foreseeable period of time, the principal source of cash revenues to
the Company will be dividends paid by the Bank with respect to the Bank's
capital stock. There are certain restrictions on the payment of such dividends
imposed by federal banking laws, regulations and authorities. Prior to declaring
a dividend, a national bank must transfer to surplus 10% of its net profits
earned since its last dividend unless its surplus equals or exceeds stated
capital. As of December 31, 1999, the Bank's surplus exceeded its stated
capital. Without approval of the OCC, dividends may not be paid in excess of a
bank's total net profits for that year, plus its retained profits for the
preceding two years, less any required transfers to capital surplus. See
"Business-Supervision and Regulation-The Bank".
In the future, the declaration and payment of dividends on the Common
Stock will depend upon the earnings and financial condition of the Company,
liquidity and capital requirements, the general economic and regulatory climate,
the Company's ability to service any equity or debt obligations senior to the
Common Stock and other factors deemed relevant by the Company's Board of
Directors.
14
<PAGE>
The cash dividends paid per share by quarter were as follows:
1999 1998
------ ------
Fourth Quarter $0.06 $0.06
Third Quarter 0.06 0.06
Second Quarter 0.06 0.06
First Quarter 0.06 0.06
On January 6, 1999, the Company announced the completion of the June 30,
1998 Common Stock repurchase plan whereby the Company's Board of Directors
authorized the Company to spend up to $500,000 to repurchase shares of its
Common Stock. On February 2, 1999 the Company announced that its Board of
Directors authorized the Company to spend up to an additional $1.0 million to
repurchase shares of its Common Stock and as of December 31, 1999, the Company
had spent $329,000 to repurchase such shares. Such repurchases have been made
through broker transactions in the open market at current market price. The
Company intends to use its available cash to fund the share repurchase.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's balance sheets and
statements of earnings. This section should be read in conjunction with the
Company's consolidated financial statements and accompanying notes and other
detailed information appearing elsewhere in this Annual Report on Form 10-KSB.
OVERVIEW
Net earnings available to stockholders were $2.9 million, $2.7 million and
$1.8 million for the years ended December 31, 1999, 1998 and 1997, respectively,
and earnings per share (diluted) were $1.40, $1.25 and $1.16 for these same
periods. Earnings per share (basic) for the years ended December 31, 1999, 1998
and 1997 were $1.45, $1.30 and $1.22 respectively. Earnings growth from 1998 to
1999 resulted primarily from strong internally generated loan growth and only
slightly higher operating costs. Contributing to earnings growth during 1999 was
an increase in ATM fees and fees generated from the Company's brokerage and
alternative investment sales. Revenue from SBA loan sales was not as strong
during 1999 compared with 1998, but the pipeline and market opportunities remain
strong for 2000. Earnings growth from 1997 to 1998 resulted primarily from a
higher dollar amount of interest-earning assets derived from the 1997
Acquisitions, a gain on the sale of SBA loans and the income resulting from the
Company's origination of third party mortgage loans. However, 1998 earnings were
impacted by the expenses related to the Company's mainframe computer conversion.
The Company posted returns on average assets of 0.95%, 0.97% and 0.91% and
returns on average common equity of 10.99%, 11.05% and 12.39% for the years
ended December 31, 1999, 1998 and 1997, respectively.
Total assets at December 31, 1999, 1998 and 1997 were $309.2 million,
$284.3 million and $276.3 million, respectively. Total deposits at December 31,
1999, 1998 and 1997 were $269.2 million, $252.7 million and $249.0 million,
respectively. In 1999, the Company increased its asset and deposit base
primarily through internal growth. Loans, net of allowance for credit losses,
were $197.4 million at December 31, 1999, compared with $169.6 million at the
end of 1998. The growth in net loans is primarily attributable to an increase in
real estate loans and indirect consumer loans due in part to the Company's sales
and marketing efforts. Net loans were $153.8 million at the end of 1997. During
1999, the Company increased its short-term borrowings with the FHLB to $11.0
million compared with $3.0 million during 1998. Common stockholders' equity was
$26.6 million, $26.5 million and $24.5 million at December 31, 1999, 1998 and
1997, respectively.
15
<PAGE>
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
earnings. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
1999 VERSUS 1998. Net interest income totaled $13.0 million in 1999
compared with $12.3 million in 1998, an increase of $725,000 or 5.91%. The
increase is the result of internally generated loan growth evidenced by an
increase in average interest-earning assets of $26.5 million. Interest expense
increased by $832,000 due to an increase in interest-bearing deposits, but was
offset by a $1.6 million increase in interest income. Increased competition and
interest rate fluctuations placed pressure on earning assets while the cost of
funds has remained relatively low. This resulted in net interest margins of
4.81% and 5.03% and net interest spreads of 3.96% and 4.06% for 1999 and 1998,
respectively. Average loans increased $19.7 million or 11.99% to $184.0 million
in 1999 from $164.3 million in 1998. The average securities portfolio increased
$6.5 million or 9.47% to $75.4 million in 1999 from $68.9 million in 1998.
1998 VERSUS 1997. Net interest income totaled $12.3 million in 1998
compared with $8.3 million in 1997, an increase of $4.0 million or $48.19%. The
increase is due to higher interest income on a higher amount of interest-earning
assets derived from the 1997 Acquisitions and internal loan growth. Interest
expense increased by $1.6 million due to an increase in deposits but was offset
by a $5.6 million increase in interest income. This resulted in net interest
margins of 5.03% and 4.64% and net interest spreads of 4.06% and 3.84% for 1998
and 1997, respectively. An increase in average interest-earning assets of $65.1
million, which combined with an increase in net interest margin of 39 basis
points, resulted in an increase in net interest income of $4.0 million. Average
loans increased $43.1 million or 35.56% to $164.3 million in 1998 from $121.2
million in 1997. The average securities portfolio increased $22.6 million or
48.81% to $68.9 million in 1998 from $46.3 million in 1997 primarily as a result
of the 1997 Acquisitions.
16
<PAGE>
The following table presents for the periods indicated the total dollar
amount of 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 yearly average balances. Nonaccruing loans have been
included in the tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
Years Ended December 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 $ 184,045 $ 16,130 8.76% $ 164,333 $ 14,948 9.10%
Securities 75,392 4,524 6.00% 68,866 4,114 5.97%
Federal funds sold and other temporary
investments 10,867 574 5.28% 10,588 609 5.75%
------------- ------------- ---------- ------------- ------------- ---------
Total interest-earning assets 270,304 21,228 7.85% 243,787 19,671 8.07%
------------- ------------- ---------- ------------- ------------- ---------
Less allowance for credit losses (1,972) (2,009)
------------- -------------
Total interest-earning assets, net of
allowance 268,332 241,778
Nonearning assets 34,195 32,093
------------- -------------
Total assets $ 302,527 $ 273,871
============= =============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 31,838 $ 336 1.06% $ 29,467 $ 336 1.14%
Public fund deposits 6,351 245 3.86% 3,034 131 4.32%
Savings and money market accounts 61,740 1,935 3.13% 56,417 1,894 3.36%
Certificates of deposit 104,909 5,338 5.09% 94,355 4,971 5.27%
Federal funds purchased, FHLB line of
credit and other borrowings 6,907 383 5.55% 1,290 73 5.66%
------------- ------------- ---------- ------------- ------------- ---------
Total interest-bearing liabilities 211,745 8,237 3.89% 184,563 7,405 4.01%
------------- ------------- ---------- ------------- ------------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 62,704 62,204
Other liabilities 1,821 3,060
------------- -------------
Total liabilities 276,270 249,827
------------- -------------
Stockholders' equity 26,257 24,044
------------- -------------
Total liabilities and stockholders'
equity $ 302,527 $ 273,871
============= =============
Net interest income $ 12,991 $ 12,266
============= =============
Net interest spread 3.96% 4.06%
========== =========
Net interest margin 4.81% 5.03%
========== =========
<CAPTION>
-----------------------------------------
1997
----------------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Rate
------------- ------------- ----------
<S> <C> <C> <C>
Assets
Interest-earning assets:
Loans $ 121,191 $ 10,584 8.73%
Securities 46,288 2,834 6.12%
Federal funds sold and other temporary
investments 11,199 669 5.97%
------------- ------------- ----------
Total interest-earning assets 178,678 14,087 7.88%
------------- ------------- ----------
Less allowance for credit losses (1,496)
-------------
Total interest-earning assets, net of
allowance 177,182
Nonearning assets 18,137
-------------
Total assets $ 195,319
=============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 20,247 $ 238 1.18%
Public fund deposits 5,358 106 1.98%
Savings and money market accounts 42,776 1,450 3.39%
Certificates of deposit 74,929 3,989 5.32%
Federal funds purchased, FHLB line of
credit and other borrowings 334 21 6.29%
------------- ------------- ----------
Total interest-bearing liabilities 143,644 5,804 4.04%
------------- ------------- ----------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 34,325
Other liabilities 2,870
-------------
Total liabilities 180,839
-------------
Stockholders' equity 14,480
-------------
Total liabilities and stockholders'
equity $ 195,319
=============
Net interest income $ 8,283
=============
Net interest spread 3.84%
==========
Net interest margin 4.64%
==========
</TABLE>
The following schedule presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase related
to higher outstanding balances and the volatility of interest rates. For
purposes of this table, changes attributable to both rate and volume which can
be segregated have been allocated.
17
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 vs. 1998
--------------------------------------------------
Increase
(Decrease)
Due to
--------------------------------------------------
Volume Rate Total
-------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earnings assets:
Loans $ 1,793 $ (611) $ 1,182
Securities 390 20 410
Fed funds sold and other temporary investments 16 (51) (35)
-------------- --------------- ---------------
Total increase (decrease) in interest income 2,199 (642) 1,557
Interest-bearings liabilities:
Interest-bearing demand deposits (10) (121) (131)
Savings and money market accounts 392 (106) 286
Certificates of deposits 556 (189) 367
Other borrowings 318 (8) 310
-------------- --------------- ---------------
Total increase (decrease) in interest expense 1,256 (424) 832
-------------- --------------- ---------------
Increase (decrease) in net interest income $ 943 $ (218) $ 725
============== =============== ===============
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1998 vs. 1997
--------------------------------------------------
Increase
(Decrease)
Due to
--------------------------------------------------
Volume Rate Total
-------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earnings assets:
Loans $ 3,768 $ 596 $ 4,364
Securities 1,383 (103) 1,280
Fed funds sold and other temporary investments (36) (24) (60)
-------------- --------------- ---------------
Total increase (decrease) in interest income 5,115 469 5,584
Interest-bearings liabilities:
Interest-bearing demand deposits 94 29 123
Savings and money market accounts 462 (18) 444
Certificates of deposits 1,034 (52) 982
Other borrowings 60 (8) 52
-------------- --------------- ---------------
Total increase (decrease) in interest expense 1,650 (49) 1,601
-------------- --------------- ---------------
Increase (decrease) in net interest income $ 3,465 $ 518 $ 3,983
============== =============== ===============
</TABLE>
Provision for Credit Losses
Provisions for credit losses are charged to income in order to bring the
Company's allowance for credit losses to a level deemed appropriate by
management based on the factors discussed under "-Allowance for Credit Losses."
The provision for credit losses for the year ended December 31, 1999 increased
to $588,000 from $480,000 in 1998, an increase of $108,000 or 22.50%. The
provision for the year ended December 31, 1998 increased to $480,000 from
$456,000 in 1997, an increase of $24,000 or 5.26%.
Noninterest Income
Noninterest income for the year ended December 31, 1999 was $3.8 million,
a decrease of $290,000 or 7.04% from $4.1 million in 1998. After excluding the
gains on the sale of SBA loans in 1999 and 1998, as of December 31, 1999,
noninterest income increased $53,000 compared with $3.7 million at December 31,
1998. The decrease in the gain on the sale of SBA loans was the primary reason
for the decline in noninterest income during 1999. However, the Company believes
growth in SBA lending remains a viable market going forward. Contributing to
other noninterest income was ATM fees, which increased $111,000 or 32.27% to
$455,000 for the year ended December 31, 1999 compared with 1998, and the
Company's brokerage and alternative investment sales, resulting in net fee
income of $184,000 for the year ended December 31, 1999. After excluding the
gains on the sale of Bank-owned property in 1998 and 1997, as of December 31,
1998, noninterest income increased $1.5 million compared with $2.7 million at
December 31, 1997. This increase was primarily due to the increase in service
charges from increased volume as a result of the 1997 Acquisitions, an increase
on the gain recognized on the sale of SBA loans, an increase in ATM fee income
and increases in other noninterest income (which includes safe deposit fees,
credit life insurance fees, stop payment charges and other miscellaneous
customer service charges). The following table presents for the periods
indicated the major categories of noninterest income:
YEARS ENDED
DECEMBER 31,
---------------------------
1999 1998 1997
-------- --------- --------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts $ 2,369 $ 2,478 $ 1,617
Gain on sale of SBA loans 120 463 241
ATM fee income 455 344 204
Alternative investments 184 174 216
Gain on sale of Bank-owned property - 63 84
Other noninterest income 699 595 293
-------- --------- --------
Total noninterest income $ 3,827 $ 4,117 $ 2,655
======== ========= ========
18
<PAGE>
Noninterest Expense
For the years ended December 31, 1999, 1998 and 1997, noninterest expenses
totaled $11.9 million, $11.8 million and $7.8 million, respectively. The $15,000
or 0.13% increase in 1999 compared with 1998 reflects the Company's strategy of
growth while containing costs. The $4.0 million or 51.28% increase in 1998
compared with 1997 reflects additional expenses including increased staffing and
facility costs associated with the 1997 Acquisitions, operational expenses
incurred during the Company's conversion to a new mainframe computer system and
communications network, amortization of goodwill, and start-up costs associated
with the Mortgage Lending Division. The following table presents for the periods
indicated the major categories of noninterest expense:
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
Employee compensation and benefits .......... $ 6,193 $ 6,248 $ 3,958
Non-staff expense:
Net bank premises expense .............. 855 861 562
Equipment rentals, depreciation
and maintenance....................... 976 929 667
Data processing ........................ 299 287 154
Professional fees ...................... 435 459 316
Regulatory assessments/FDIC insurance .. 127 157 103
Ad valorem and franchise taxes ......... 278 238 187
Amortization of goodwill ............... 393 392 68
Other .................................. 2,301 2,271 1,803
------- ------- -------
Total non-staff expenses ............ 5,664 5,594 3,860
------- ------- -------
Total noninterest expense ........... $11,857 $11,842 $ 7,818
======= ======= =======
Employee compensation and benefit expense for the year ended December 31,
1999 was $6.2 million, a decrease of $55,000 or 0.88% from $6.2 million in 1998.
The decrease during 1999 is due to the Company's efforts to control staffing
costs while gaining operational efficiencies through technology. The increase in
1998 compared with 1997 is primarily due to the increased staffing from the 1997
Acquisitions, additional staff hired, temporary staffing costs associated with
the mainframe computer conversion and startup staffing costs of the Mortgage
Lending Division. The number of full-time employees at December 31, 1999, 1998,
and 1997 was 178, 154 and 149, respectively.
Non-staff expenses were $5.7 million in 1999, an increase of $70,000 or
1.25% from $5.6 in 1998. Non-staff expenses were $5.6 million in 1998, an
increase of $1.7 million or 43.59% from $3.9 million in 1998. The slight
increase during 1999 compared with 1998 is due to the incremental costs
associated with the Company's balance sheet growth. The increase in 1998
compared with 1997 was due to additional expenses including the amortization of
goodwill associated with the 1997 Acquisitions, increased advertising costs
related to the Company's expansion efforts, increased legal fees as the Company
continued to pursue collection activities, start up costs associated with the
Mortgage Lending Division and expenses related to the Company's mainframe
computer and communication systems. Net bank premises expense, depreciation and
maintenance increased primarily due to the additional facility cost associated
with the 1997 Acquisitions, the opening of the Seabrook banking office and the
mainframe computer conversion.
19
<PAGE>
Income Taxes
Income tax expense includes the regular federal income tax at the
statutory rate, plus the income tax component of the Texas franchise tax. The
amount of federal income tax expense is influenced by the amount of taxable
income, the amount of tax-exempt income, the amount of non-deductible interest
expense and the amount of other non-deductible expenses. Taxable income for the
income tax component of the Texas franchise tax is the federal pre-tax income,
plus certain officers salaries, less interest income from federal securities.
The income tax component of the Texas franchise tax was zero in 1999, 1998 and
1997. Income tax expense was $1.5 million in 1999, $1.4 million in 1998 and
$870,000 in 1997. The effective tax rates in 1999, 1998 and 1997, were 34.03%,
34.60% and 32.66%, respectively. Income taxes for financial purposes in the
consolidated statements of earnings differ from the amount computed by applying
the statutory income tax rate of 34% to earnings before income taxes.
Impact of Inflation
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities.
FINANCIAL CONDITION
Loan Portfolio
Total gross loans increased by $27.9 million or 16.27% to $199.4 million
at December 31, 1999, from $171.5 million at December 31, 1998 primarily due to
internal loan growth resulting from the Company's intensified marketing efforts.
Total gross loans increased by $15.7 million or 10.08% to $171.5 million at
December 31, 1998, from $155.8 million at December 31, 1997 primarily due to
internal loan growth.
At December 31, 1999, total loans represented 74.07% of deposits and
64.50% of total assets. Total loans as a percentage of deposits were 67.87% at
December 31, 1998, compared with 62.53% at December 31, 1997.
20
<PAGE>
The following table summarizes the loan portfolio of the Company by type
of loan as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ----------------------------- ----------------------------
Amount Percent Amount Percent Amount Percent
-------------- ------------ -------------- ------------ -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $ 24,935 12.50% $ 26,109 15.22% $ 24,176 15.52%
Real estate:
Construction and land
development 18,245 9.15% 15,248 8.89% 4,941 3.17%
1-4 family residential 15,489 7.77% 12,105 7.06% 7,513 4.82%
Multi-family residential 78 0.04% 1,149 0.67% 1,270 0.82%
Non-farm/non residential 39,695 19.91% 31,943 18.62% 31,594 20.28%
Consumer:
Indirect 80,511 40.37% 65,080 37.94% 71,333 45.80%
Direct 20,459 10.26% 19,898 11.60% 14,938 9.59%
-------------- ------------ -------------- ------------ -------------- ------------
Total loans $ 199,412 100.00% $ 171,532 100.00% $ 155,765 100.00%
============== ============ ============== ============ ============== ============
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1996 1995
---------------------------- ----------------------------
Amount Percent Amount Percent
------------- ------------ -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and
industrial $ 17,407 14.52% $ 11,378 10.76%
Real estate:
Construction and land
development 3,306 2.76% 3,390 3.20%
1-4 family residential 3,115 2.60% 2,879 2.72%
Multi-family residential 625 0.52% 62 0.06%
Non-farm/non residential 11,834 9.87% 11,388 10.76%
Consumer:
Indirect 74,657 62.28% 69,087 65.30%
Direct 8,936 7.45% 7,612 7.20%
------------- ------------ -------------- ------------
Total loans $ 119,880 100.00% $ 105,796 100.00%
============= ============ ============== ============
</TABLE>
The contractual maturity ranges of the commercial and industrial and real
estate loan portfolio and the amount of such loans with fixed interest rates and
floating rates in each maturity range as of December 31, 1999 are summarized in
the following table:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------------------------------
After One
One Year Through After Five
or Less Five Years Years Total
-------------------- ------------------- -------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial $ 15,223 $ 8,056 $ 1,656 $ 24,935
Real estate 19,068 22,768 31,671 73,507
-------------------- ------------------- -------------------- -------------------
Total $ 34,291 $ 30,824 $ 33,327 $ 98,442
==================== =================== ==================== ===================
Loans with a predetermined interest rate $ 11,568 $ 24,125 $ 22,337 $ 58,030
Loans with a floating interest rate 22,723 6,699 10,990 40,412
-------------------- ------------------- -------------------- -------------------
Total $ 34,291 $ 30,824 $ 33,327 $ 98,442
==================== =================== ==================== ===================
</TABLE>
The lending focus of the Company is on small and medium-sized business
loans on both a direct and SBA supported basis and on consumer direct and
indirect loans throughout the Company's market areas. The Company offers a
variety of commercial lending products including term loans, lines of credit and
equipment financing. The Company also offers a broad range of short to
medium-term commercial loans, primarily collateralized, to businesses for
working capital (including inventory and receivables), business expansion
(including acquisitions of real estate and improvements) and the purchase of
equipment and machinery. The purpose of a particular loan generally determines
its structure.
Loans up to $300,000 are evaluated and acted upon by an Officers' Loan
Committee, which meets weekly. Loans above that amount must be approved by the
Directors' Loan Committee, which meets bi-monthly.
Generally, the Company's commercial loans are underwritten in the
Company's market area on the basis of the borrower's ability to service such
debt from identified cash flow. As a general practice, the Company takes as
collateral a lien on any available real estate, equipment or other assets and
obtains a
21
<PAGE>
personal guaranty of the business principals. Working capital loans are
primarily collateralized by short-term assets whereas term loans are primarily
collateralized by long-term assets.
In addition to commercial loans secured by real estate, the Company makes
commercial mortgage loans to finance the purchase of real property which
generally consists of real estate on which structures have already been
completed or will be completed and occupied by the borrower. The Company offers
a variety of mortgage loan products which generally are amortized over five to
20 years.
Direct consumer loans collateralized by single-family residential real
estate generally have been made in amounts of no more than 80% of appraised
value. The Company requires mortgage title insurance, hazard insurance and flood
insurance when applicable, in the amount of the loan. Customers requiring fixed
rate full term loans are accommodated via an automated interactive application
process direct from the Bank's premises to the acquiring mortgage company. As a
result, the Company is able to meet all of the mortgage needs of its present and
potential customer base.
The Company's commercial mortgage loans are secured by first liens on real
estate, typically have both fixed and variable interest rates and amortize over
a ten to 20 year period with balloon payments due at the end of three to five
years. As a Preferred SBA Lender (discussed below), the Company also issues full
term variable rate real estate loan commitments when the facility is enhanced by
the underlying SBA guaranty. In underwriting commercial mortgage loans,
consideration is given to the property's operating history, future operating
projections, current and projected occupancy, location and physical condition.
The underwriting analysis also includes credit checks, appraisals, environmental
assessments and a review of the financial condition of the borrower.
The Company makes loans to finance the construction of residential and
nonresidential properties. Construction loans generally are secured by first
liens on real estate and have floating rates. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above
are also used in the Company's construction lending activities. In keeping with
the community-oriented nature of its customer base, the Company provides
construction and permanent financing for churches located within its market
area.
The Company is an active SBA lender having achieved the "Preferred Lender"
status in the Houston and Dallas districts, the highest status awarded to a
lender by the SBA. The Company uses a system of satellite LPOs staffed by SBA
loan specialists located in the Houston and Longview/Dallas markets. The LPO
lenders generate the potential customer prospects and produce the SBA loan
package using packaging software loaded on notebook computers. Following loan
committee approval, the LPO lender passes the customers to closing and servicing
specialists located in the main banking office.
The Company provides a factoring product known as "Cash Flow Manager" to
address the working capital needs of businesses which do not meet the loan
guidelines of the Company for commercial lines of credit but are deemed
creditworthy.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 84 months and vary based
upon the nature of collateral and size of loan.
Approximately 79.74% of the Company's consumer loan portfolio as of
December 31, 1999, was composed of "indirect loans" (representing 40.37% of the
Company's total loan portfolio) compared with 76.58% as of December 31, 1998
(representing 37.94% of the Company's total loan portfolio). Indirect loans are
installment loans, with typical maturities of three to five years, which are
originated by automobile dealers for the purpose of financing consumer
automobile purchases and sold by automobile dealers to commercial banks and
other sources of financing. Marketing is directed to new car dealers with a
specialty in class "A" credit quality loans. Since its inception, the program
has provided the Company with a predictable source of cash flow, liquidity and
revenue stream.
22
<PAGE>
The Company's indirect loan programs are administered by an experienced
staff specially trained in evaluating and servicing this particular type of
loan. The Company uses three loan buyers with indirect loan experience ranging
from ten to 28 years. Mr. Wright, the Chief Executive Officer of the Company,
has managed an indirect product line in banks for over 32 years and holds
substantial expertise in the area, having lectured on indirect lending at the
American Bankers Association National Consumer Lending Schools.
The Company competes for indirect loans with a number of other financial
and non-financial institutions, including the captive financial services
subsidiaries of automobile manufacturers, on the basis of interest rate and
quality of service. The Company purchases primarily "A"-rated credit quality
loans from new car dealers. To obtain dealer response in this area, the Company
must timely provide superior service while purchasing contracts on a consistent
basis. Additionally, the market requires that the Company price products below
the buy rates of the captive finance companies.
The Company generally receives credit applications on a daily basis from
one or more of the 20 automobile dealerships from which it actively purchases
indirect auto loans. Upon receipt of a credit application, the Company
undertakes a credit analysis of the prospective purchaser, ordering credit
reports on the borrower which are analyzed by one of the officers specializing
in buying indirect loans. In making credit decisions, such officers evaluate,
among other things, the general credit quality of the applicant, the proposed
income to debt ratio, and residential and employment stability.
The collection of overdue indirect loans is administered by a staff
specially trained for such purpose. Holders of loans that are ten days past due
generally receive written notice of such delinquency. When any loan becomes 15
days past due, the collectors establish telephone contact with the borrower and
obtain payment promises. If the loan remains past due for 30 days, the Company
generally sends a demand letter requiring payment within ten days before
asserting its legal rights. The Company's collection staff makes all reasonable
efforts to work out credit problems before the accounts are turned over to
independent repossession agents. Repossessed automobiles are sold as soon as
possible through a number of means in order to minimize any potential losses.
In addition to the underwriting of the individual loan contracts, the
Company requires the automobile dealerships to provide annual financial
information to the Company for analysis and review. Management believes that the
Company incurs greater risk by purchasing indirect auto loans from dealerships
which have demonstrated financial weakness and therefore would possibly be
unable to facilitate the return of any rebates due to the Company on payoffs and
repossessions.
A loan is considered impaired based on current information and events if
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the loan's observable market price or based on the fair value of the collateral
if the loan is collateral-dependent.
Nonperforming Assets
The Company has several procedures in place to assist it in maintaining
the overall quality of its loan portfolio. The Company has established
underwriting guidelines to be followed by its officers and also monitors its
delinquency levels for any negative or adverse trends. There can be no
assurance, however, that the Company's loan portfolio will not become subject to
increasing pressures from deteriorating borrower credit due to general economic
conditions.
The Company's conservative lending approach, as well as a healthy local
economy, has resulted in strong asset quality. Nonperforming assets at December
31, 1999 were $1.4 million compared with $705,000 at December 31, 1998 and
$777,000 at December 31, 1997. The increase during 1999 reflects an increase in
other real estate which is primarily due to one SBA credit in which the SBA
guarantees 75% of
23
<PAGE>
principal. Pursuant to the SBA operating procedures, the real estate will be
liquidated. Should there be a shortfall in proceeds, the SBA will assume 75% of
that shortfall. The Company anticipates payoff by the end of the second quarter
2000. The ratio of nonperforming assets to total loans plus other real estate of
0.68%, 0.41% and 0.49% for the years ended 1999, 1998 and 1997, respectively.
The following table presents information regarding nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Repossessions $ 138 $ 84 $ 136 $ 143 $ 136
Nonaccrual loans - 13 - - -
Restructured loans - 186 203 216 228
Other real estate 1,232 422 438 208 234
----------------- ----------------- ----------------- ----------------- -----------------
Total nonperforming assets $ 1,370 $ 705 $ 777 $ 567 $ 598
================= ================= ================= ================= =================
Nonperforming assets to total
loans and other real estate 0.68% 0.41% 0.49% 0.47% 0.56%
</TABLE>
The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payments performance is deemed unsatisfactory. All
loans past due 90 days, however, are placed on nonaccrual status, unless the
loan is both well-secured and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a deduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayments terms in a troubled debt
restructuring. As of December 31, 1999, the Company had no restructured loans.
The Company had performing restructured loans of $186,000 and $203,000 at
December 31, 1998 and 1997, respectively. The Company's internal loan review
department evaluates additional loans which are potential problem loans as to
risk exposure in determining the adequacy of the allowance for credit losses.
The Company reviews collateral value on loans secured by real estate
during the internal loan review process. New appraisals are acquired when loans
are categorized as nonperforming loans or potential problem loans. In instances
where updated appraisals reflect reduced collateral values, an evaluation of the
borrower's overall financial condition is made to determine the need, if any,
for possible write downs or appropriate additions to the allowance for credit
losses.
Allowance for Credit Losses
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. Based on an evaluation of the
loan portfolio, management presents a quarterly review of the allowance for
credit losses to the Bank's Board of Directors, indicating any change in the
allowance since the last review and any recommendations as to adjustments in the
allowance. In making its evaluation, management considers the diversification by
industry of the Company's commercial loan portfolio, the effect of changes in
the local real estate market on collateral values, the results of recent
regulatory examinations, the effects on the loan portfolio of current economic
indicators and their probable impact on borrowers, the amount of charge-offs for
the period, the amount of nonperforming loans and related collateral security,
the evaluation of its loan portfolio by the loan review function and the annual
examination of the Company's financial statements by its independent auditors.
Charge-offs occur when loans are deemed to be uncollectible.
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
24
<PAGE>
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.
Loans classified as "doubtful/potential loss" are those loans which have
characteristics similar to substandard accounts but with an increased risk that
a loss may occur, or at least a portion of the loan may require a charge-off if
liquidated at present. Although loans classified as substandard do not duplicate
loans classified as doubtful, both substandard and doubtful loans include some
loans that are delinquent at least 30 days or on nonaccrual status. Loans
classified as "potential loss" are those loans which are identified as having a
high probability of being liquidated with loss within the next 12 months.
In addition to the loans on the internal watch list classified as
substandard or doubtful/potential loss, the Company maintains additional
classifications on a separate watch list which further aids the Company in
monitoring loan portfolios. These additional loan classifications reflect
warning elements where the present status portrays one or more deficiencies that
require attention in the short-term or where pertinent ratios of the loan
account have weakened to a point where more frequent monitoring is warranted.
These loans do not have all of the characteristics of a classified loan
(substandard, doubtful/potential loss) but do show weakened elements as compared
with those of a satisfactory credit. The Company reviews these loans to assist
in assessing the adequacy of the allowance for credit losses.
In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification or delinquency status of loans and
other factors, such as collateral value, portfolio composition, trends in
economic conditions, including those discussed below, and the financial strength
of borrowers. Management establishes specific allowances for loans which
management believes require reserves greater than those allocated according to
their classification or delinquent status. Additionally, the Company uses three
approaches for the analysis of the performing portfolio: migration, historical
and examiner rule of thumb. These methods are further broken down to identified
loan pools within the Company's portfolio. Using these methodologies, the
Company allocates reserves to each identified loan classification and to
performing loan pools. All methods are evaluated by loan pools, however, in the
migration method, commercial industrial and real estate loans are evaluated on
an individual bases. The Company then charges to operations a provision for
credit losses to maintain the allowance for credit losses at an adequate level
determined by the foregoing methodology.
As an energy center, the Houston economy has historically been affected by
the price of oil and gas. The economic downturn in the energy industry in the
mid 1980's resulted in diversification and a broader economic base in the
Houston area. Consequently, economic reliance on energy has been lessened
through these diversification efforts. Although the Company has no extensions of
credit to production or exploration companies and has not historically pursued
this line of business, it provides financing and other banking services to
companies that service the petrochemical industry. Even given the industry
diversification in Houston, management believes the economy in the Company's
market areas remains somewhat dependent on 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.
Consequently, in making its evaluation of the adequacy of the allowance
for credit losses, management incorporates among many other factors, the effects
on borrowers of an economic downturn in the energy industry, the diversification
of the loan portfolio and economic indicators and conditions. Additionally, the
Company has several procedures in place to assist it in minimizing credit risk
and maintaining the overall quality of its loan portfolio. The Company has
established, and frequently reviews, underwriting guidelines and monitors its
delinquency levels for any negative or adverse trends. To date, given the
diversification of the Company's loan portfolio along with current economic
indicators, management has not deemed it necessary to increase the allowance for
credit losses or to alter current credit underwriting standards. However, no
assurances can be given that an increase in the allowance or alteration of
underwriting standards will not be necessary in the future.
25
<PAGE>
For the year ended December 31, 1999, net charge-offs totaled $547,000 or
0.30% of average loans outstanding for the period, compared with $535,000 or
0.33% in net charge-offs during 1998. During 1999, the Company recorded a
provision for credit losses of $588,000 compared with $480,000 for 1998. At
December 31, 1999, the allowance for credit losses totaled $2.0 million or 1.00%
of total loans. For the year ended December 31, 1998, net charge-offs totaled
$535,000 or 0.33% of average loans outstanding for the period, compared with
$449,000 or 0.37% in net charge-offs during 1997. During 1998, the Company
recorded a provision for credit losses of $480,000 compared with $456,000 for
1997. At December 31, 1998, the allowance totaled $1.9 million or 1.13% of total
loans.
The following table presents, for the periods indicated, an analysis of
the allowance for credit losses and other data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average loans outstanding $184,045 $164,333 $121,191
------------------ ------------------ -------------------
Gross loans outstanding at end of period $199,412 $171,532 $155,765
------------------ ------------------ -------------------
Allowance for credit losses at beginning of period $ 1,944 $ 1,999 $ 1,430
Increase resulting from acquisitions - - 562
Provision for credit losses 588 480 456
Charge-offs:
Commercial and industrial (276) (277) (104)
Real estate (197) (30) -
Consumer (396) (388) (448)
Recoveries:
Commercial and industrial 57 34 28
Real estate - 1 3
Consumer 265 125 72
------------------ ------------------ -------------------
Net (charge-offs) recoveries (547) (535) (449)
------------------ ------------------ -------------------
Allowance for credit losses at end of period $ 1,985 $ 1,944 $ 1,999
================== ================== ===================
Ratio of allowance to end of period loans 1.00% 1.13% 1.28%
Ratio of net charge-offs to average loans .30% .33% .37%
Ratio of allowance to end of period non-
performing loans - 976.88 984.72
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995
------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average loans outstanding $113,014 $107,286
------------------- ------------------
Gross loans outstanding at end of period $119,880 $105,796
------------------- ------------------
Allowance for credit losses at beginning of period $ 1,185 $ 1,230
Increase resulting from acquisitions - -
Provision for credit losses 510 150
Charge-offs:
Commercial and industrial - (2)
Real estate - (29)
Consumer (483) (349)
Recoveries:
Commercial and industrial 29 14
Real estate 103 82
Consumer 86 89
------------------- ------------------
Net (charge-offs) recoveries (265) (195)
------------------- ------------------
Allowance for credit losses at end of period $ 1,430 $ 1,185
=================== ==================
Ratio of allowance to end of period loans 1.19% 1.12%
Ratio of net charge-offs to average loans 0.23% 0.18%
Ratio of allowance to end of period non-
performing loans 662.04 519.74
</TABLE>
26
<PAGE>
The following tables describe the allocation of the allowance for credit
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1999 1998
------------------------------------- -----------------------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
-------------- -------------------- --------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance of allowance for credit losses applicable to:
Commercial and industrial $ 184 12.50% $ 198 15.22%
Real estate:
Construction and land development - 9.15% 1 8.89%
1-4 family residential 42 7.77% 64 7.05%
Commercial mortgage 128 19.91% 233 18.62%
Multi-family - 0.04% - 0.68%
Consumer 192 50.63% 49 49.54%
Unallocated 1,439 - 1,399 -
-------------- -------------------- --------------- ------------------
Total allowance for credit losses $1,985 100.00% $1,944 100.00%
============== ==================== =============== ==================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------------- ------------------- -------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for credit losses
applicable to:
Commercial and industrial $ 26 15.52% $ 105 14.52%
Real estate:
Construction and land development - 3.17% 7 2.76%
1-4 family residential 16 4.82% 19 2.60%
Commercial mortgage 51 20.28% 11 9.87%
Multi-family - 0.82% - 0.52%
Consumer 95 55.39% 89 69.73%
Unallocated 1,811 - 1,199 -
--------------- ------------------- -------------- --------------------
Total allowance for credit losses $1,999 100.00% $1,430 100.00%
=============== =================== ============== ====================
<CAPTION>
DECEMBER 31,
-----------------------------------
1995
-----------------------------------
PERCENT OF
LOANS TO
AMOUNT TOTAL LOANS
--------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance of allowance for credit losses
applicable to:
Commercial and industrial $ 8 10.76%
Real estate:
Construction and land development - 3.20%
1-4 family residential 1 2.72%
Commercial mortgage 61 10.76%
Multi-family - 0.06%
Consumer 53 72.50%
Unallocated 1,062 -
--------------- ------------------
Total allowance for credit losses $1,185 100.00%
=============== ==================
</TABLE>
The Company believes that the allowance for credit losses at December 31,
1999 is adequate to cover losses inherent in the portfolio as of such date.
There can be no assurance, however, that the Company will not sustain losses in
future periods, which could be substantial in relation to the size of the
allowance at December 31, 1999.
27
<PAGE>
Securities Portfolio
The Company uses its securities portfolio to ensure liquidity for cash
flow requirements, to manage interest rate risk, to provide a source of income,
to ensure collateral is available for municipal pledging requirements and to
manage asset quality diversification. Mortgage-backed securities are securities
which have been developed by pooling a number of real estate mortgages and are
principally issued by federal agencies such as the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. These securities are
deemed to have high credit ratings, with minimum regular monthly cash flows of
principal and interest guaranteed by the issuing agencies.
At December 31, 1999, 19.58% of the mortgage-backed securities held by the
Company had final maturities of more than ten years. However, unlike U.S.
Treasury and U.S. Government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the
securities. Therefore, the average life, or the average amount of time until the
Company receives the total amount invested, of the mortgage-backed security will
be shorter than the contractual maturity. The Company estimates the remaining
average life of the fixed-rate mortgage backed security portfolio to be less
than six years. Mortgage-backed securities which are purchased at a premium will
generally suffer decreasing net yields as interest rates drop because home
owners tend to refinance their mortgages. Thus, the premium paid must be
amortized over a shorter period. Therefore, securities purchased at a discount
will obtain higher net yields in a decreasing interest rate environment. As
interest rates rise, the opposite will generally be true. During a period of
increasing interest rates, fixed-rate mortgage-backed securities do not tend to
experience heavy prepayments of principal and consequently, the average life of
this security will not be unduly shortened. If interest rates begin to fall,
prepayments will increase. Approximately $5.7 million of the Company's
mortgage-backed securities earn interest at floating rates and reprice within
one year, and accordingly are less susceptible to declines in value should
interest rates increase.
At the date of purchase, the Company is required to classify debt and
equity securities into one of three categories: held-to-maturity, trading or
available-for-sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified as
held-to-maturity and measured at amortized cost in the financial statements only
if management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the financial statements with unrealized gains and losses included in
earnings. Investments not classified as either held-to-maturity or trading are
classified as available-for-sale and measured at fair value in the financial
statements with unrealized gains and losses reported, net of tax, in a separate
component of stockholders' equity until realized. In order to pro-actively
manage the investment portfolio and asset/liability position and to respond to
changes in the fixed income market, the Company maintains 100% of securities
owned as available-for-sale.
28
<PAGE>
The following table presents the amount of securities classified as
available-for-sale and their approximate values at December 31, 1999, December
31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------------- -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,032 $ - $ (21) $ 5,011
U.S. Government agency
securities 16,678 - (646) 16,032
Mortgage-backed securities 33,414 - (1,086) 32,328
Other securities 22,861 47 (728) 22,180
-------------- -------------- ------------- -------------
Total $ 77,985 $ 47 $ (2,481) $ 75,551
============== ============== ============= =============
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,736 $ 129 $ - $ 5,865
U.S. Government agency
securities 9,516 40 (15) 9,541
Mortgage-backed securities 42,097 220 (34) 42,283
Other securities 11,311 251 (16) 11,546
------------- ------------- ------------- -------------
Total $ 68,660 $ 640 $ (65) $ 69,235
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------------- -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 14,249 $ 60 $ (21) $ 14,288
U.S. Government agency
securities 20,589 31 - 20,620
Mortgage-backed securities 22,260 85 (92) 22,253
Other securities 5,707 95 - 5,802
-------------- -------------- ------------- -------------
Total $ 62,805 $ 271 $ (113) $ 62,963
============== ============== ============= =============
</TABLE>
The following table summarizes the contractual maturity of investment
securities and their weighted average yields:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT WITHIN YEARS BUT WITHIN
ONE YEAR FIVE YEARS TEN YEARS
-------------------------- --------------------------- ---------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------- ----------- ------------- ------------ -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $2,003 5.89% $3,020 6.21% $ - -
U.S. Government agency
securities - - 4,189 6.10% 12,499 6.10%
Mortgage-backed securities 7,129 5.62% 11,106 6.10% 15,619 6.56%
Other securities 5,035 5.78% 859 6.59% 2,531 6.80%
------------- ----------- ------------- ------------ -------------- ------------
Total $14,167 5.72% $19,174 6.14% $ 30,649 6.39%
============= =========== ============= ============ ============== ============
<CAPTION>
December 31, 1999
-------------------------------------------------------
After Ten Years
--------------------------
Amount Yield Total Yield
------------- ----------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ - - $5,023 6.08%
U.S. Government agency
securities - - 16,688 6.10%
Mortgage-backed securities 8,243 6.29% 42,097 6.23%
Other securities 5,752 7.21% 14,177 6.59%
------------- ----------- ------------- ------------
Total $13,995 6.67% $77,985 6.26%
============= =========== ============= ============
</TABLE>
At December 31, 1999, securities totaled $75.6 million, an increase of
$6.4 million from $69.2 million at December 31, 1998. During 1998, securities
increased $6.2 million from $63.0 million at December 31, 1998. Increases in the
portfolio are a result of the investment of excess liquidity.
29
<PAGE>
Deposits
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings,
money market and time accounts. The Company relies primarily on competitive
pricing policies, customer service, and referrals to attract and retain these
deposits. The Company does not have or accept any brokered deposits.
Total deposits at December 31, 1999 increased to $269.2 million from
$252.7 million at December 31, 1998, an increase of $16.5 million or 6.53%. The
increase was primarily due to internal deposit growth and an increase in public
fund deposits. Deposits rose to $252.7 million at December 31, 1998 from $249.1
million at December 31, 1997, an increase of $3.6 million or 1.45%. The increase
was primarily due to internal growth and public fund deposit fluctuations. The
Company's ratio of average noninterest-bearing demand deposits to average total
deposits for years ended December 31, 1999, 1998 and 1997 was 23.44%, 25.34% and
19.32%, respectively.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1999, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998
----------------------------------------- -----------------------------------------
AMOUNT RATE AMOUNT RATE
------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NOW $ 31,838 1.06% $ 29,467 1.14%
Public funds 6,351 3.86% 3,034 4.32%
Regular savings 15,408 2.09% 15,393 2.17%
Money market 10,302 2.09% 12,634 2.74%
Investor's savings & Liquidity Plus 36,030 3.85% 28,390 4.28%
Time deposits less than $100,000 82,659 5.03% 77,932 5.15%
Time deposits $100,000 and over 22,250 5.29% 16,423 5.84%
------------------- ------------------- ------------------- -------------------
Total interest-bearing deposits 204,838 3.83% 183,273 4.00%
Noninterest-bearing deposits 62,704 - 62,204 -
------------------- ------------------- ------------------- -------------------
Total deposits $ 267,542 2.94% $ 245,477 2.99%
=================== =================== =================== ===================
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997
------------------------------------------
AMOUNT RATE
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NOW $ 20,186 1.20%
Public funds 5,358 1.98%
Regular savings 9,597 2.30%
Money market 13,279 2.58%
Investor's savings & Liquidity Plus 20,185 4.32%
Time deposits less than $100,000 67,248 5.34%
Time deposits $100,000 and over 7,457 5.48%
-------------------- --------------------
Total interest-bearing deposits 143,310 4.04%
Noninterest-bearing deposits 34,325 -
-------------------- --------------------
Total deposits $ 177,635 3.26%
==================== ====================
</TABLE>
The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
DECEMBER 31, 1999
-----------------
(DOLLARS IN THOUSANDS)
3 months or less ....................................... $ 3,713
Over 3 months through 12 months ........................ 16,904
Over 1 year through three years ........................ 5,329
Over 3 years ........................................... 1,301
-----------------
Total ............................................. $ 27,247
=================
30
<PAGE>
Interest Rate Sensitivity and Liquidity
The Company's Asset/Liability Management and Interest Rate Risk Policy,
along with the Company's Investment Policy, provides management with the
necessary guidelines for effective funds management. The Company has established
a measurement system for monitoring its net interest rate sensitivity position.
The Company manages its sensitivity position within established guidelines.
An interest rate sensitive asset or liability is one that, within a
defined time period, either matures or experiences an interest rate change in
line with general market interest rates. The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between
interest-earnings assets and interest-bearing liabilities at specific points in
time ("GAP") and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments. Interest
rate sensitivity reflects the potential effect on net interest income of a
movement in interest rates. A company is considered to be asset sensitive, or
having a positive GAP, when the amount of its interest-earning assets maturing
or repricing within a given period exceeds the amount of its interest-bearing
liabilities also maturing or repricing within that time period. Conversely, a
company is considered to be liability sensitive, or having a negative GAP, when
the amount of its interest-bearing liabilities maturing or repricing within a
given period exceeds the amount of its interest-earning assets also maturing or
repricing within that time period. During a period of rising interest rates, a
negative GAP would tend to affect net interest income adversely, while a
positive GAP would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative GAP would tend to result in an
increase in net interest income, while a positive GAP would tend to affect net
interest income adversely.
Shortcomings are inherent in GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change. Consequently,
in addition to GAP analysis the Company uses a simulation model and shock
analysis to test the interest rate sensitivity of net interest income and the
balance sheet, respectively. Contractual maturities and repricing opportunities
of loans are incorporated in the model as are prepayment assumptions, maturity
data and call options within the investment portfolio. Assumptions based on past
experience are incorporated into the model for non-maturity deposit accounts.
The Company has found that historically, interest rates on these deposits change
more slowly in a rising rate environment than in a declining rate environment.
31
<PAGE>
The following table sets forth an interest rate sensitivity analysis for
the Company at December 31, 1999:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
-------------------------------------------------------------------------------------------
0-90 91-180 181-365 AFTER
DAYS DAYS DAYS ONE YEAR TOTAL
----------------- ----------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities $ 733 $ 5,018 $ 4,181 $ 65,961 $ 75,551
Loans 10,769 26,662 25,477 136,504 199,412
Federal sold and other
temporary investments 2,715 - - - 2,715
----------------- ----------------- ----------------- ----------------- -----------------
Total interest-earning assets 14,217 31,680 29,658 202,123 277,678
----------------- ----------------- ----------------- ----------------- -----------------
Interest-bearing liabilities:
Demand, money market and savings
deposits 150,739 - - - 150,739
Certificates of deposit and other
time deposits 5,328 37,527 38,315 37,317 118,487
Federal Home Loan Bank advances 3,000 2,000 6,000 - 11,000
----------------- ----------------- ----------------- ----------------- -----------------
Total interest-bearing
liabilities 159,067 39,527 44,315 37,317 280,226
----------------- ----------------- ----------------- ----------------- -----------------
Period GAP $ (144,850) $ (7,847) $ (14,657) $ 164,806 $ (2,548)
Cumulative GAP $ (144,850) $(152,697) $(167,354) $ (2,548)
Period GAP to total assets (46.85%) (2.54%) (4.74%) 53.30%
Cumulative GAP to total assets (46.85%) (49.39%) (54.13%) (0.82%)
</TABLE>
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
investments along with payments and maturities within the loan portfolio, have
historically created an adequate liquidity position.
Federal Home Loan Bank ("FHLB") advances may be utilized from time to time
as either a short- term funding source or a longer-term funding source. FHLB
advances can be particularly attractive to balance interest rate sensitivity and
reduce interest rate risk. The Company is eligible for two borrowing programs
through the FHLB. The first, called "Short Term Fixed," requires delivery of
eligible securities for collateral. Maturities under this program range from
1-35 days. The Company does not currently have any borrowings under this
program. The second borrowing program, the "Blanket Borrowing Program," is under
a borrowing agreement which does not require the delivery of specific collateral
but is limited to 65% of the Company's 1-4 family residential mortgage loans. As
of December 31, 1999, the Company had short term borrowings of $11.0 million
under this program.
32
<PAGE>
Capital Resources
Capital management consists of providing equity to support both current
and future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve and the Bank is subject to capital adequacy
requirements imposed by the OCC. Both the Federal Reserve and the OCC have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards define capital and establish minimum
capital requirements in relation to assets and off-balance sheet exposure,
adjusted for credit risk. The risk-based capital standards currently in effect
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
The risk-based capital standards issued by the Federal Reserve require all
bank holding companies to have "Tier 1 capital" of at least 4.0% and "total
risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted
assets. "Tier 1 capital" generally includes common stockholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings, less deductions for goodwill and various other intangibles.
"Tier 2 capital" may consist of a limited amount of intermediate-term preferred
stock, a limited amount of term subordinated debt, certain hybrid capital
instruments and other debt securities, perpetual preferred stock not qualifying
as Tier 1 capital, and a limited amount of the general valuation allowance for
credit losses. The sum of Tier 1 capital and Tier 2 capital is "total risk-based
capital."
The Federal Reserve has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to average
total consolidated assets ("leverage ratio") of 3.0% for institutions with well
diversified risk, including no undue interest rate exposure; excellent asset
quality; high liquidity; good earnings; and that are generally considered to be
strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets.
Pursuant to FDICIA, each federal banking agency revised its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multifamily mortgages. The Bank is subject to capital adequacy guidelines of
the OCC that are substantially similar to the Federal Reserve's guidelines. Also
pursuant to FDICIA, the OCC has promulgated regulations setting the levels at
which an insured institution such as the Bank would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under the OCC's
regulations, the Bank is classified "well capitalized" for purposes of prompt
corrective action. See "Business-Supervision and Regulation-The Company" and
"The Bank."
Stockholder's equity increased to $26.6 million at December 31, 1999 from
$26.5 million at December 31, 1998, an increase of $70,000 or 0.26%. This
increase was primarily the result of $2.9 million in net income offset by
dividends of $477,000, treasury stock purchases of $374,000 and a decrease in
accumulated other comprehensive income of $2.0 million. During 1998,
stockholders' equity increased to $26.5 million from $24.5 million at December
31, 1997, an increase of $1.9 million or 7.72%. This increase was primarily the
result of $2.7 million in net income offset by dividends of $491,000, treasury
stock purchases of $448,000 and an increase in accumulated other comprehensive
income of $275,000.
The following table provides a comparison of the Company's and the Bank's
leverage and risk weighted capital ratios as of December 31, 1999 and the
regulatory standards:
33
<PAGE>
<TABLE>
<CAPTION>
TO BE
MINIMUM REQUIRED WELL-CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL RATIO
ADEQUACY PURPOSES ACTION PROVISIONS DECEMBER 31, 1999
----------------- ------------------------ -----------------
<S> <C> <C> <C>
The Company
Leverage ratio 4.00% (1) N/A 7.43%
Tier 1 risk-based capital 4.00% N/A 10.05%
Risk-based capital ratio 8.00% N/A 10.93%
The Bank
Leverage ratio 4.00% (2) 5.00% 7.03%
Tier 1 risk-based capital 4.00% 6.00% 9.51%
Risk-based capital ratio 8.00% 10.00% 10.40%
</TABLE>
- ------------------------
(1) The Federal Reserve may require the Company to maintain a leverage ratio of
up to 100 basis points above the required minimum.
(2) The OCC may require the Bank to maintain a leverage ratio of up to 100
basis points above the required minimum.
Year 2000
GENERAL. The Year 2000 risk involves computer programs and computer
software that are not able to perform without interruption into the Year 2000.
If computer systems did not correctly recognize the date change from December
31, 1999 to January 1, 2000 or do not correctly recognize certain other date
changes throughout the year 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 supported the Year 2000 initiative. This plan, as well
as the Company's compliance with the Year 2000 initiative, was reviewed by the
OCC in 1999. An inventory of all systems and products (including both
information technology ("IT") and non-information technology ("non-IT") systems)
was developed and categorized as to its importance to us and a risk assessment
of all IT and non-IT was 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 had been certified as Year 2000 compliant by IBM. The
mainframe computer application was 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.
COST OF COMPLIANCE. As of March 14, 2000, the Company's expenses related
to Year 2000 issues did not exceed the amount budgeted. While the Company
believes that it will incur no additional material expenses related to the Year
2000 issue, there can be no assurance that the Company will not be impacted
34
<PAGE>
by a Year 2000 related problem which occurs after the date hereof or by the
failure of a third party to achieve proper 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
reflected that the majority of the Company's customers were aware of the Year
2000 issue and those whose business is dependent upon software and/or hardware
had acquired compliant software or were in the process of updating their
systems. 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. 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.
TRANSITION INTO THE YEAR 2000. The Company suffered no failures in any
system or product upon the date change from December 31, 1999 to January 1,
2000. In addition, management is not aware of any vendor or provider used by the
Company for data processing or related services which experienced a material
failure of its product or service due to a Year 2000 related problem. The
Company is also subject to risks associated with Year 2000 noncompliance by its
customers. Management is not aware of any customer which suffered losses related
to a Year 2000 problem which would adversely affect that customer's financial
condition or its ability to repay any outstanding loan it has from the Company.
ONGOING PLANS. Although many of the critical dates related to potential
Year 2000 related problems have passed, experts predict that Year 2000 related
failures could occur throughout the year, such as on October 10, 2000 and
December 31, 2000. Accordingly, the Company's Year 2000 Action Committee will
continue to monitor the Company's IT and non-IT systems and attempt to identify
any potential problems during the course of the year. In addition, the Company
will continue to monitor the Year 2000 compliance of the third parties with
which the Company transacts business.
CONTINGENCY PLANS. The Company continues to maintain its contingency plans
with respect to Year 2000 related issues 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.
ITEM 7 - FINANCIAL STATEMENTS
The financial statements, the reports thereon, the notes thereto and
supplementary data commence at page F-1 of this Annual Report on Form 10-KSB.
35
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants or any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure during the two year period ended December 31, 1999.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information under the captions "Election of Directors," "Continuing
Directors and Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the 2000 Annual
Meeting of Shareholders (the "2000 Proxy Statement") is incorporated herein by
reference in response to this item.
ITEM 10 - EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Matters" in the 2000 Proxy Statement is incorporated herein by reference in
response to this item.
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Beneficial Ownership of Common Stock by
Management of the Company and Principal Shareholders" in the 2000 Proxy
Statement is incorporated herein by reference in response to this item.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Interests of Management and Others in
Certain Transactions" in the 2000 Proxy Statement is incorporated herein by
reference in response to this item.
36
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Consolidation by and between Bay Bancshares,
Inc., Bayshore National Bank and Texas Bank and certain shareholders
of Texas Bank dated June 24, 1997, together with the exhibits
thereto (incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-36185) (the "Registration Statement")).
2.2 Agreement and Plan of Consolidation by and between Bay Bancshares,
Inc., Bayshore National Bank and Texas National Bank of Baytown
dated August 7, 1997, together with the exhibits thereto
(incorporated herein by reference to Exhibit 10.4 to the
Registration Statement).
2.3 Agreement and Plan of Consolidation by and between Bay Bancshares,
Inc., Bayshore National Bank and First Bank of Deer Park dated
August 7, 1997, together with the exhibits thereto (incorporated
herein by reference to Exhibit 10.5 to the Registration Statement).
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the Registration
Statement).
3.2 Amended and Restated Bylaws of the Company (incorporated herein by
reference to Exhibit 3.2 to the Registration Statement).
4 Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4 to the Registration
Statement).
10.1 Bay Bancshares, Inc. 1997 Stock Incentive Plan (incorporated herein
by reference to Exhibit 10.1 to the Registration Statement).
10.2 Amended and Restated Bay Bancshares, Inc. 1997 Stock Option Plan
(incorporated herein by reference to Exhibit 10.2 to the
Registration Statement).
10.3 Bay Bancshares, Inc. 1993 Phantom Stock Plan (incorporated herein by
reference to Exhibit to the Registration Statement).
21 Subsidiaries of the Company.
*23 Consent of Grant Thornton LLP
*27 Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 1999.
37
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Bay Bancshares, Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of La Porte and State of Texas on March 17, 2000.
BAY BANCSHARES, INC.
By: /s/ L.D. WRIGHT
-------------------------
L.D. Wright
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant and in the indicated capacities on March 17, 2000.
SIGNATURE POSITION
--------- --------
/s/ L.D. WRIGHT Chief Executive Officer and Director
- --------------------------- (principal executive officer)
L.D. Wright
/s/ KIM E. LOVE Controller and Director
- --------------------------- (principal financial officer and
Kim E. Love principal accounting officer)
/s/ DOUG LATIMER Chairman of the Board
- ---------------------------
Doug Latimer
/s/ LINDSAY R. PFEIFFER Vice Chairman of the Board
- ---------------------------
Lindsay R. Pfeiffer
/s/ ALBERT D. FIELDS Director
- ---------------------------
Albert D. Fields
/s/ KNOX W. ASKINS Director
- ---------------------------
Knox W. Askins
/s/ EDDIE V. GRAY Director
- ---------------------------
Eddie V. Gray
/s/ LESTER A. MARKS Director
- ---------------------------
Lester A. Marks
/s/ WILLIAM L.H. MORGAN, JR. Director
- ---------------------------
William L.H. Morgan, Jr.
/s/ HENRY C. ROBSON, JR. Director
- ---------------------------
Henry C. Robson, Jr.
/s/ RUEDE M. WHEELER, D.D.S. Director
- ---------------------------
Ruede M. Wheeler, D.D.S.
38
<PAGE>
FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
BAY BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1999 AND 1998
<PAGE>
ACCOUNTANTS AND [LOGO OF GRANT THORNTON]
MANAGEMENT CONSULTANTS GRANT THORNTON LLP
The US Member Firm of
Grant Thornton International
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Bay Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Bay
Bancshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of earnings, comprehensive income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bay Bancshares, Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ GRANT THORNTON LLP
Grant Thornton LLP
Houston, Texas
January 20, 2000
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands, except share amounts)
ASSETS 1999 1998
--------- ---------
Cash and cash equivalents
Cash and due from banks .......................... $ 11,170 $ 15,466
Federal funds sold ............................... 2,715 9,990
--------- ---------
Total cash and cash equivalents ............ 13,885 25,456
Available-for-sale securities ....................... 75,551 69,235
Loans, net of allowance for credit losses of
$1,985 and $1,944 ................................. 197,427 169,588
Bank premises and equipment, net .................... 8,881 8,588
Other real estate ................................... 1,232 422
Accrued interest receivable ......................... 1,813 1,480
Other assets ........................................ 10,392 9,513
--------- ---------
$ 309,181 $ 284,282
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing ........................... $ 56,556 $ 60,776
Interest-bearing deposits ..................... 212,670 191,942
--------- ---------
Total deposits ............................. 269,226 252,718
Accrued interest payable ......................... 674 576
Borrowings ....................................... 11,000 3,000
Other liabilities ................................ 1,669 1,446
--------- ---------
Total liabilities .......................... 282,569 257,740
Commitments and contingencies ....................... -- --
Stockholders' equity
Common stock, $1 par value, 50,000,000 shares
authorized; 2,091,929 shares issued in 1999
and 2,091,029 shares issued in 1998; 1,990,903
shares outstanding in 1999 and 2,017,603 shares
outstanding in 1998 ............................ 2,092 2,091
Additional paid-in capital ....................... 17,548 17,542
Retained earnings ................................ 9,660 7,252
Accumulated other comprehensive income (loss) .... (1,592) 379
--------- ---------
27,708 27,264
Less 101,026 and 73,426 shares of common stock in
treasury - at cost ............................. (1,096) (722)
Total stockholders' equity ................. 26,612 26,542
--------- ---------
$ 309,181 $ 284,282
========= =========
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
(Dollars in thousands, except per share amounts)
1999 1998 1997
-------- -------- --------
Interest income
Loans, including fees ................ $ 16,130 $ 14,948 $ 10,584
Securities ........................... 4,524 4,114 2,834
Federal funds sold ................... 574 609 669
-------- -------- --------
Total interest income .......... 21,228 19,671 14,087
Interest expense
Deposits ............................. 7,854 7,332 5,783
Other ................................ 383 73 21
-------- -------- --------
Total interest expense ......... 8,237 7,405 5,804
-------- -------- --------
Net interest income ............ 12,991 12,266 8,283
Provision for credit losses ............. 588 480 456
-------- -------- --------
Net interest income after
provisions for credit losses . 12,403 11,786 7,827
Noninterest income
Service charges ...................... 2,369 2,478 1,617
Other ................................ 1,458 1,639 1,038
-------- -------- --------
Total noninterest income ....... 3,827 4,117 2,655
Noninterest expense
Salaries and employee benefits ....... 6,193 6,248 3,958
Occupancy expenses, net .............. 1,831 1,790 1,229
Other operating expenses ............. 3,833 3,804 2,631
-------- -------- --------
Total noninterest expenses ..... 11,857 11,842 7,818
-------- -------- --------
Earnings before income taxes ... 4,373 4,061 2,664
Provision for income taxes
Current .............................. 1,342 1,341 952
Deferred expense (benefit) ........... 146 64 (82)
-------- -------- --------
1,488 1,405 870
-------- -------- --------
NET EARNINGS ................... $ 2,885 $ 2,656 $ 1,794
======== ======== ========
Earnings per share (basic) .............. $ 1.45 $ 1.30 $ 1.22
======== ======== ========
Earnings per share (diluted) ............ $ 1.40 $ 1.25 $ 1.16
======== ======== ========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31,
(Dollars in thousands, except per share amounts)
1999 1998 1997
------- ------- -------
Net earnings ................................... $ 2,885 $ 2,656 $ 1,794
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
Unrealized holding gains (losses)
arising during period ..................... (1,945) 308 301
Less: reclassification adjustment ....... (26) (33) (8)
for losses included in net earnings
(1,971) 275 293
------- ------- -------
Comprehensive income .................. $ 914 $ 2,931 $ 2,087
======= ======= =======
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COMMON TOTAL
ADDITIONAL RETAINED COMPREHENSIVE STOCK IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME TREASURY EQUITY
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997 1,391 $ 1,391 $ 8,344 $ 3,660 $ (189) $ (277) $12,929
Net earnings ............................... -- -- -- 1,794 -- -- 1,794
Net proceeds from issuance of
stock .................................... 700 700 9,197 -- -- -- 9,897
Treasury stock sold ........................ -- -- -- -- -- 3 3
Dividends .................................. -- -- -- (367) -- -- (367)
Other comprehensive income,
net ..................................... -- -- -- -- 293 -- 293
-------- ------- ------- ------- ------- ------- -------
Balance at December 31,
1997 2,091 2,091 17,541 5,087 104 (274) 24,549
Net earnings ............................... -- -- -- 2,656 -- -- 2,656
Net proceeds from issuance of
stock .................................... -- -- 1 -- -- -- 1
Treasury stock purchased ................... -- -- -- -- -- (448) (448)
Dividends .................................. -- -- -- (491) -- -- (491)
Other comprehensive income,
net ...................................... -- -- -- -- 275 -- 275
-------- ------- ------- ------- ------- ------- -------
Balance at December 31,
1998 2,091 2,091 17,542 7,252 379 (722) 26,542
Net earnings ............................... -- -- -- 2,885 -- -- 2,885
Net proceeds from issuance of
stock .................................... 1 1 6 -- -- -- 7
Treasury stock purchased ................... -- -- -- -- -- (374) (374)
Dividends .................................. -- -- -- (477) -- -- (477)
Other comprehensive income,
net ...................................... -- -- -- -- (1,971) -- (1,971)
-------- ------- ------- ------- ------- ------- -------
Balance at December 31,
1999 2,092 $ 2,092 $17,548 $ 9,660 $(1,592) $(1,096) $26,612
======== ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings ..................................................................... $ 2,885 $ 2,656 $ 1,794
Adjustments to reconcile net earnings to net cash provided
Provision for credit losses .................................................. 588 480 456
Depreciation and amortization ................................................ 1,313 878 624
Amortization of premiums, net of accretion of discounts on securities ........ 120 194 74
Gain on sale of bank premises and equipment .................................. -- (66) (89)
Gain on sale of available-for-sale securities ................................ (40) (50) (12)
Gain (loss) on sale of other real estate ..................................... 29 (31) --
Valuation adjustment to other real estate .................................... 165 (10) 9
Compensation expense related to phantom stock plan ........................... 90 64 94
Change in assets and liabilities, net of effects resulting from acquisitions
(Increase) decrease in accrued interest receivable and other assets ..... (1,606) 570 (8,399)
(Decrease) increase in accrued interest payable ......................... 98 (115) 224
Increase (decrease) in other liabilities ................................ 1,153 (958) 460
-------- -------- --------
Net cash provided (used) by operating activities .................... 4,795 3,612 (4,765)
Cash flows from investing activities
Maturities of interest-bearing deposits with banks ............................... -- 492 --
Proceeds from maturities, calls, and principal repayments of
available-for-sale securities................................................... 14,883 27,670 8,146
Proceeds from sale of available-for-sale securities .............................. 7,983 9,602 1,012
Purchase of available-for-sale securities ........................................ (32,250) (43,272) (4,805)
(Increase) decrease in loans, net of the effects resulting from acquisitions...... (29,658) (16,404) 51
Proceeds from sale of other assets ............................................... 227 159 --
Purchases of bank premises and equipment ......................................... (1,212) (2,572) (1,211)
Proceeds from sale of bank premises and equipment ................................ -- 413 493
Net increase in cash resulting from acquisitions ................................. -- -- 15,715
-------- -------- --------
Net cash (used) provided by investing activities .................... (40,027) (23,912) 19,401
Cash flows from financing activities
Net (decrease) increase in securities under agreements to repurchase ............. -- -- (1,000)
Change in deposits, net of the effects resulting from acquisitions ............... 16,508 3,631 (1,457)
Proceeds from borrowings ......................................................... 8,000 3,000 --
Repayment of borrowings .......................................................... -- -- (162)
Net proceeds from issuance of stock .............................................. 7 1 9,897
Purchase of treasury stock ....................................................... (374) (448) --
Sale of treasury stock ........................................................... -- -- 3
Dividends paid ................................................................... (480) (493) (324)
-------- -------- --------
Net cash provided by financing activities ........................... 23,661 5,691 6,957
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................ (11,571) (14,609) 21,593
Cash and cash equivalents at beginning of period ...................................... 25,456 40,065 18,472
-------- -------- --------
Cash and cash equivalents at end of period ............................................ $ 13,885 $ 25,456 $ 40,065
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in
the preparation of the consolidated financial statements. The policies
conform to generally accepted accounting principles and to general practices
within the banking industry.
1. PRINCIPLES OF CONSOLIDATION AND INVESTMENT IN SUBSIDIARIES
The consolidated financial statements include the accounts of Bay Bancshares,
Inc. (BBI) and its wholly-owned subsidiaries, Bayshore National Bank of La
Porte (BNB) and Bay Bancshares of Delaware, Inc. (BBDI), collectively
referred to as the Company. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements of
the Company.
2. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks with a maturity at date of purchase of three
months or less, and federal funds sold.
3. SECURITIES
At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held-to-maturity, trading, or
available-for-sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified
as held-to-maturity and measured at amortized cost in the financial
statements only if management has the positive intent and ability to hold
those securities to maturity. Securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
and are measured at fair value in the financial statements with unrealized
gains and losses included in earnings. Investments not classified as
held-to-maturity or trading are classified as available-for-sale and are
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, in a separate component of stockholders' equity
until realized. The Company has classified all investment securities as
available-for-sale.
Gains or losses on disposition are recorded in other income on the trade
date, based on the net proceeds and the adjusted carrying amount of the
securities sold using the specific identification method.
Declines in the fair values of individual held-to-maturity and
available-for-sale securities below their carrying value that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
F-7
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
4. LOANS
The Company grants loans to customers primarily in Harris County, Texas and
surrounding counties. Although the Company has a diversified loan portfolio,
a substantial portion of its debtors' ability to honor their contracts is
dependent upon the economy in this area.
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal, adjusted for unearned discounts, any chargeoffs and
the allowance for credit losses. Accretion of unearned discount on certain
installment loans is recognized principally using the sum-of-the-periodic
balance method which approximates the level yield method. For other loans,
interest income is recognized using the simple interest method.
The Company applies SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN and SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN-INCOME RECOGNITION AND DISCLOSURES. A loan is identified as impaired
when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreement.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. All loans past due 90 days are placed on nonaccrual status unless
the loan is both well-secured and in the process of collection. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are
received. Loans are returned to accrual status when payments are brought
current and, in management's judgment, the loan will continue to pay as
agreed.
5. ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is considered adequate to provide for credit
losses based on past loan loss experience and management's evaluation of the
loan portfolio under current economic conditions. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions.
Recognized losses, net of recoveries, are charged to the allowance for loan
losses. Additions to the allowance are included in the consolidated
statements of earnings as provision for credit losses.
F-8
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets. Maintenance, repairs and minor
improvements are charged to noninterest expense as incurred.
7. OTHER REAL ESTATE AND REPOSSESSED ASSETS
Real estate properties acquired by foreclosure and repossessed assets are
recorded at fair value at the date of foreclosure, establishing a new cost
basis. After foreclosure, valuations are periodically performed by management
and the real estate is carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other non-interest expenses. Repossessed
assets consist of primarily automobiles and trucks and are presented on the
Balance Sheet as a component of other assets.
8. INCOME TAXES
The Company files a consolidated federal income tax return. By agreement with
BBI and BBDI, BNB records a provision or benefit for federal income taxes on
the same basis as if it filed a separate federal income tax return.
Deferred income tax assets and liabilities are reported for temporary
differences between items of income or expense reported in the financial
statements and those reported for income tax purposes. For income tax
purposes, BNB deducts the statutory provision for possible loan losses and
depreciates bank premises and equipment using accelerated methods. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
9. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Company enters into off-balance sheet
financial instruments consisting of commitments to extend credit, commercial
letters of credit and standby letters of credit. Such financial instruments
are recorded in the financial statements when they are funded. Related fees
are recognized when they are incurred or received.
F-9
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
11. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding. Dilutive earnings per share is calculated by dividing net income
available for common stockholders by the weighted average number of common
shares and dilutive potential common shares outstanding. Stock options may be
dilutive potential common shares and are therefore considered in the earnings
per share calculations, if dilutive. The number of dilutive potential common
shares is determined using the treasury stock method.
12. RECLASSIFICATIONS
Certain amounts in prior financial statements have been reclassified to
conform to the 1999 financial statement presentation.
F-10
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE B - SECURITIES
The Company has classified all securities as available-for-sale, which are
carried at fair value. The carrying amounts of securities and their
approximate fair value are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
December 31, 1999:
U. S. Treasury securities ....................... $ 5,032 $ -- $ (21) $ 5,011
Obligations of U.S. government
agencies ..................................... 16,678 -- (646) 16,032
Mortgage-backed securities ...................... 33,414 -- (1,086) 32,328
Other ...... .................................... 22,861 47 (728) 22,180
------- ------- ------- -------
$77,985 $ 47 $(2,481) $75,551
======= ======= ======= =======
December 31, 1998:
U. S. Treasury securities ....................... $ 5,736 $ 129 $ -- $ 5,865
Obligations of U.S. government
agencies ..................................... 9,516 40 (15) 9,541
Mortgage-backed securities ...................... 42,097 220 (34) 42,283
Other ........................................... 11,311 251 (16) 11,546
------- ------- ------- -------
$68,660 $ 640 $ (65) $69,235
======= ======= ======= =======
</TABLE>
F-11
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE B - SECURITIES - CONTINUED
Gross realized gains and gross realized losses on sales of available-for-sale
securities for the periods ended are as follows as of December 31:
1999 1998 1997
---- ---- ----
Gross realized gains
U.S. Treasury securities ................ $ -- $ 23 $ --
U.S. Government Agency .................. -- 28 --
Mortgage-backed securities .............. -- 2 12
Collateralized mortgage obligation ...... 48 -- --
---- ---- ----
$ 48 $ 53 $ 12
==== ==== ====
Gross realized losses
U.S. Government Agency .................. $ -- $ 3 $ --
U.S. Treasury securities ................ -- -- --
Mortgage-backed securities .............. 8 -- --
---- ---- ----
$ 8 $ 3 $ --
==== ==== ====
The scheduled maturities of available-for-sale securities at December 31,
1999 are as follows.
ESTIMATED
AMORTIZED MARKET
COST VALUE
------- -------
Due in one year or less ....................... $ 2,003 $ 2,001
Due after one through five years .............. 7,189 7,163
Due after five through ten years .............. 12,499 11,879
Mortgage-backed securities and other .......... 56,294 54,508
------- -------
$77,985 $75,551
======= =======
Contractual maturities will differ from expected maturities because borrowers
may call or prepay obligations with or without call or prepayment penalties.
The carrying value of securities pledged to secure public deposits, as
required or permitted by law, is approximately $33,536 and $49,300 at
December 31, 1999 and 1998.
F-12
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE C - LOANS AND ALLOWANCE FOR CREDIT LOSSES
Major classifications of loans are as follows at December 31:
1999 1998
--------- ---------
Commercial ................................... $ 24,935 $ 26,109
Real estate
Construction and land development .......... 18,245 15,248
1-4 family residential ..................... 15,489 12,105
Multi-family residential ................... 78 1,149
Non-farm/non-residential ................... 39,695 31,943
Consumer ..................................... 100,987 85,063
--------- ---------
199,429 171,617
Less unearned interest ....................... (17) (85)
Allowance for credit losses .................. (1,985) (1,944)
--------- ---------
$ 197,427 $ 169,588
========= =========
As of December 31, 1999 and 1998, the Company has no significant loans which
meet the impairment definition; therefore, no valuation for credit losses
related to impaired loans has been established.
The Company has loans, deposits and other transactions with its principal
stockholders, officers, directors and organizations with which such persons
are associated. The aggregate amount of loans outstanding to these related
parties at December 31, 1999 and 1998 is approximately $3,250 and $2,649. In
addition, the Company makes consumer loans through several automobile
dealerships, two of which are controlled by two members of the board of
directors. Loans obtained through these dealerships totaled approximately
$13,581 and $13,810 at December 31, 1999 and 1998.
F-13
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE C - LOANS AND ALLOWANCE FOR CREDIT LOSSES - CONTINUED
Changes in the allowance for credit losses were as follows at December 31:
1999 1998 1997
------- ------- -------
Balance at January 1 .................... $ 1,944 $ 1,999 $ 1,430
Increase resulting from acquisitions .... -- -- 562
Provision ............................... 588 480 456
Charge-offs ............................. (869) (695) (552)
Recoveries .............................. 322 160 103
------- ------- -------
Balance at end of period ................ $ 1,985 $ 1,944 $ 1,999
======= ======= =======
NOTE D - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows at December 31:
ESTIMATED
USEFUL LIVES 1999 1998
------------ ------- -------
Land ................................ -- $ 2,052 $ 2,052
Building and improvements ........... 15-30 years 7,024 6,314
Furniture and fixtures .............. 5-10 years 5,875 5,373
Automobiles ......................... 3 years 135 135
------- -------
15,086 13,874
Less accumulated depreciation ....... 6,205 5,286
------- -------
$ 8,881 $ 8,588
======= =======
F-14
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE E - INTEREST BEARING DEPOSITS
The types of accounts and their respective balances included in
interest-bearing deposits are as follows at December 31:
1999 1998
-------- --------
NOW accounts ............................. $ 38,251 $ 37,638
Money market accounts .................... 24,726 26,841
Savings accounts ......................... 31,206 32,684
Other time deposits ...................... 118,487 94,779
-------- --------
$212,670 $191,942
======== ========
Included in other time deposits at December 31, 1999 and 1998 are
approximately $27,427 and $16,400, in certificates of deposit in
denominations of $100,000 or more.
As of December 31, 1999, the scheduled maturities of other time deposits are
as follows:
YEAR ENDED
DECEMBER 31, AMOUNT
------------ --------
2000 .................................... $ 85,146
2001 .................................... 23,547
2002 .................................... 5,980
2003 .................................... 2,726
2004 and Thereafter ..................... 1,088
--------
$118,487
F-15
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE F - BORROWINGS
Borrowings at December 31, consists of advances payable to the Federal Home
Loan Bank as follows:
1999 1998
------- ------
Principal due March 2000, interest due monthly at 5.43% ... $ 6,000 $ --
Principal due August 2000; interest due monthly at 5.40% .. 5,000 --
Principal due July 1999; interest due monthly at 5.613% ... -- 3,000
------- ------
$11,000 $3,000
======= ======
NOTE G - INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are presented below:
1999 1998
------- -------
Deferred tax assets:
Allowance for credit losses ......................... $ 417 $ 403
Unrealized loss on available-for-sale securities .... 820 --
Stock grant expense ................................. 184 152
Difference in basis of other real estate ............ 50
125
Other ............................................... -- 15
Valuation allowance ................................. (43) (45)
------- -------
$ 1,428 $ 650
======= =======
Deferred tax liabilities:
Depreciation and amortization differences ........... $ (662) $ (545)
Unrealized gain on available-for-sale securities .... -- (197)
Other ............................................... (61) (74)
------- -------
$ (723) $ (816)
======= =======
F-16
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE G - INCOME TAXES - CONTINUED
The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate is as follows at December 31:
1999 1998 1997
----- ----- -----
Statutory federal income tax rate ....... 34.00% 34.00% 34.00%
Decrease in valuation allowance ......... (.05) (1.92) (.11)
Tax exempt income ....................... (3.32) (2.56) (1.88)
Other ................................... .60 2.08 .65
Goodwill amortization ................... 2.79 3.00 --
----- ----- -----
Effective income tax rate ............... 34.02% 34.60% 32.66%
===== ===== =====
The valuation allowance on the deferred tax asset was decreased by
approximately $2, $78 and $3 during 1999, 1998 and 1997 based on management's
reevaluation of the likelihood of realization.
NOTE H - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting
principles, are not included in the consolidated balance sheets. These
transactions are referred to as "off-balance sheet commitments". The Company
enters into these transactions to meet the financing needs of its customers.
These transactions include commitments to extend credit and letters of credit
which involve elements of credit risk in excess of the amounts recognized in
the consolidated balance sheets. The Company minimizes its exposure to loss
under these commitments by subjecting them to credit approval and monitoring
procedures.
The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and
for specific purposes. Customers use credit commitments to ensure that funds
will be available for working capital purposes, for capital expenditures and
to ensure access to funds at specified terms and conditions. Substantially
all of the Company's commitments to extend credit are contingent upon
customers maintaining specific credit standards at the time of loan funding.
Management assesses the credit risk associated with certain commitments to
extend credit in determining the level of the allowance for credit losses.
F-17
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED
Letters of credit are written conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The Company's
policies generally require that letters of credit arrangements contain
security and debt covenants similar to those contained in loan agreements.
Outstanding commitments and letters of credit are approximately as follows at
December 31:
1999 1998
------- -------
Commitments to extend credit ................. $30,238 $22,090
======= =======
Letters of credit ............................ $ 581 $ 274
======= =======
The Company is involved in certain claims and lawsuits occurring in the
normal course of business. Management, after consultation with outside legal
counsel, does not believe that the outcome of these actions would have a
material impact on the financial statements of the Company.
BNB has a 401(k) plan which covers substantially all employees. BNB matches
50% of each employee's contribution up to 6% of annual salary. Total
contributions accrued or paid for the period ended December 31, 1999, 1998
and 1997 are approximately $95, $79 and $58.
During 1997, the Company created the 1997 Stock Plan (the "1997 Stock Plan").
This plan authorizes the issuance of up to 150,000 shares of common stock
under both "nonqualified" and "incentive stock" options to employees and
"nonqualified" options to directors who are not employees. Under the 1997
Stock Plan, the vesting of options is governed by individual option
agreements. The option agreements provide that 20% of the options granted
vest one year from the date of grant and an additional 20% each year
thereafter. Options granted under the 1997 Stock Plan generally must be
exercised within 10 years following the date of grant.
The Company's Board of Directors and shareholders approved a new stock option
plan in 1997 (the "1997 Incentive Plan") which authorizes the issuance of up
to 1,000,000 shares of common stock under both "non-qualified" and "incentive
stock" options to employees and "non-qualified" options to directors who are
not employees. Generally, the options vest 60% at the end of the third year
following the date of grant and an additional 20% at the end of the next two
years; however, an individual option may vest as much as 20% a year during
the first two years following the date of the grant if necessary to maximize
the "incentive" tax treatment to the optionee for the particular option being
granted. Options under the 1997 Incentive Plan must be exercised within 10
years following the date of grant. No options have been granted under the
1997 Incentive Plan.
F-18
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED
Following is a summary of the status of the stock option plans:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------- ------
Options outstanding at January 1, 1997 ........... -- $ --
Options granted ($7.05-$18.50 a share) ........... 34,300 7.38
Options exercised ($7.05 a share) ................ (200) 7.05
------- ------
Options outstanding at January 1, 1998 ........... 34,100 7.39
Options granted ($17.00-$21.78 a share) .......... 2,500 19.87
Options exercised ($7.05 a share) ................ (300) 7.05
Options terminated ($21.78 a share) .............. (500) 21.78
------- ------
Options outstanding at December 31, 1998 ......... 35,800 8.05
Options granted ($13.13-$17.00 a share) .......... 31,000 16.88
Options exercised ($7.05 a share) ................ (900) 7.05
Options terminated ($7.05 a share) ............... (1,050) 7.05
------- ------
Options outstanding at December 31, 1999 ......... 64,850 $12.30
======= ======
Options exercisable at December 31, 1999 ......... 26,110 10.02
Options exercisable at December 31, 1998 ......... 13,220 7.73
Options exercisable at December 31, 1997 ......... 6,660 7.39
Following is a summary of the options outstanding at December 31, 1999:
OUTSTANDING
----------------------
WEIGHTED
AVERAGE
REMAINING
EXERCISE CONTRACTUAL EXCERCISABLE
PRICE NUMBER LIFE NUMBER
------ ------ ---------- ------
$ 7.05 30,850 7.48 years 18,510
$13.13 1,000 9.42 years 200
$17.00 31,000 9.72 years 6,400
$18.50 1,000 8.64 years 600
$21.78 1,000 8.15 years 400
------ ------
64,850 26,110
====== ======
F-19
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company applies APB 25 and related Interpretations in accounting for
stock-based compensation. Had compensation costs been determined based on the
fair value at the grant dates for awards consistent with the method of FASB
Statement 123, the Company's net earnings and earnings per share would have
been as follows at December 31:
1999 1998 1997
------ ------ ------
Net earnings As reported $2,885 $2,656 $1,794
Pro forma $2,820 $2,633 $1,755
Basic earnings per share As reported $ 1.45 $ 1.30 $ 1.22
Pro forma $ 1.41 $ 1.29 $ 1.19
Diluted earnings per share As reported $ 1.40 $ 1.25 $ 1.16
Pro forma $ 1.37 $ 1.23 $ 1.13
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the grants issued:
1999 1998 1997
------- ------- -------
Weighted average fair value $ 5.54 $11.57 $ 2.78
Expected volatility 30% 79% 29%
Risk free rate 5.7% 5.5% 6.1%
Expected life of options 5 years 5 years 5 years
Expected dividend yield 1.3% 1.9% 1.3%
NOTE I - EXECUTIVE COMPENSATION
The Company has a phantom stock grant plan whereby the Company may issue
shares of phantom stock to certain officers and key employees. The aggregate
number of shares that may be issued under the Plan is limited to 135,000. The
number of shares issued is determined based on a financial performance test
for BNB. The phantom stock is nonvoting, accrues dividends declared on the
Company's common stock, and is granted subject to a vesting schedule. At
December 31, 1999, all shares of phantom stock have vested.
The shares of phantom stock may be redeemed at a maximum rate of 6,000 shares
per year. Such redemption is payable, at the Company's discretion, in shares
of the Company's common stock or cash at the then fair market value of the
Company's common stock. In 1997 and 1996, 35,411 and 18,478 shares of phantom
stock were granted and 6,000 shares of phantom stock were redeemed for 6,000
shares of the Company's common stock each year. Effective June 24, 1997, the
plan was amended and no more shares will be granted under this plan. Total
compensation expense charged to the Company's operations for the years ended
December 31, 1999, 1998 and 1997 was $90, $64 and $94.
F-20
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE I - EXECUTIVE COMPENSATION - CONTINUED
The Bank has a cash incentive plan which provides guidelines whereby key
executive employees can earn bonus compensation based on the profitability of
BNB. The bonus amounts are determined based on achievement by BNB of certain
percentages of return on equity targets. Total expense under this plan for
the years ended December 31, 1999, 1998 and 1997 was $23, $88 and $117.
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (Statement 107) and Statement of Financial
Accounting Standards No. 119, DISCLOSURES ABOUT DERIVATIVE FINANCIAL
INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Statement 119) requires
that the Company disclose estimated fair values for its financial
instruments. Such information, which pertains to financial instrument assets
and liabilities, is based on the requirements in Statements 107 and 119 and
does not purport to represent the aggregate net fair value of the Company.
Further, the fair value estimates are based on various assumptions,
methodologies and subjective considerations, which vary widely among
different financial institutions and which are subject to change.
The following methods and assumptions were used by the Company in estimating
financial instrument fair values:
CASH AND CASH EQUIVALENTS, FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
The balance sheet carrying amount approximates fair value.
SECURITIES TO BE HELD-TO-MATURITY, AND SECURITIES AVAILABLE-FOR-SALE
Fair values for investment securities are based on quoted market prices or
quotations received from securities dealers. If quoted market prices are not
available, fair value estimates may be based on quoted market prices of
similar instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
LOANS
Fair values of loans are estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage and consumer loans.
Each of these categories is further subdivided into fixed and adjustable rate
loans and performing and nonperforming loans. The fair value of performing
loans is calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the various types of loans.
F-21
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE J - FAIR VALUES OF FINANCIAL STATEMENTS - CONTINUED
DEPOSITS
Under Statement 107, the fair value of demand deposits, such as non-interest
bearing demand deposits and interest-bearing transaction accounts such as
savings, NOW and money market accounts are equal to the amount payable on
demand as of December 31, 1999 (i.e., their carrying amounts).
Statement 107 defines the fair value of demand deposits as the amount
payable, and prohibits adjustment for any value derived from the expected
retention of such deposits for a period of time. That value, commonly
referred to as the core deposit base intangible, is neither included in the
above fair value amounts nor recorded as an intangible asset in the balance
sheet.
The fair value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate used represents rates currently
offered for deposits of similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
OFF-BALANCE SHEET INSTRUMENTS
Estimated fair values for the Company's off-balance sheet instruments are
based on fees, net of related expenses, currently charged to enter into
similar agreements, considering the remaining terms of the agreements and the
counterparties' credit standing.
BORROWINGS
The fair value of borrowings is estimated based on quoted market prices for
similar agreements or current rates offered for borrowings with similar
remaining maturities.
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31.
1999 1998
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Financial assets:
Cash and cash equivalents ...... $ 13,885 $ 13,885 $ 25,456 $ 25,456
Securities ..................... 75,551 75,551 69,235 69,235
Loans, net ..................... 197,427 192,941 169,588 171,000
Financial liabilities:
Deposits
Noninterest-bearing ....... 56,566 56,566 60,776 60,776
Interest-bearing
transaction accounts .... 94,183 94,183 97,163 97,163
Certificates of deposits .. 118,487 119,912 94,779 96,000
Borrowings ..................... 11,000 10,955 3,000 3,000
F-22
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE K - REGULATORY MATTERS
BBI and BNB are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on their financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, BBI and
BNB must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require minimum amounts and ratios(set forth in the table below) of total and
Tier I capital (as defined in the regulations) to risk-weighted assets(as
defined), and of Tier I capital (as defined) to average assets (as defined)
be maintained. Management believes, as of December 31, 1999, that BBI and BNB
meet all capital adequacy requirements to which they are subject.
The most recent notification the Office of the Comptroller of the Currency
categorized BNB as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must
maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table.
BBI and BNB's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL: ADEQUACY PURPOSES: ACTION PROVISIONS:
---------------- ------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ --------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Bay Bancshares, Inc. ....................... $24,463 10.93% =>$17,897 =>8.0% N/A
Bayshore National Bank ..................... $23,203 10.40% =>$17,852 =>8.0% =>$22,306 =>10.0%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
Bay Bancshares, Inc. ....................... $22,478 10.05% => $8,948 =>4.0% N/A
Bayshore National Bank ..................... $21,218 9.51% => $8,926 =>4.0% =>$13,384 => 6.0%
TIER 1 CAPITAL (TO AVERAGE ASSETS)
Bay Bancshares, Inc. ....................... $22,478 7.43% =>$12,094 =>4.0% N/A
Bayshore National Bank ..................... $21,218 7.03% =>$12,096 =>4.0% =>$15,120 => 5.0%
</TABLE>
F-23
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE K - REGULATORY MATTERS - CONTINUED
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL: ADEQUACY PURPOSES: ACTION PROVISIONS:
---------------- ------------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ --------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Bay Bancshares, Inc. ................... $20,896 10.72% =>$15,595 =>8.0% N/A
Bayshore National Bank ................. $20,649 10.63% =>$15,540 =>8.0% =>$19,425 =>10.0%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
Bay Bancshares, Inc. ................... $18,952 9.72% =>$ 7,797 =>4.0% N/A
Bayshore National Bank ................. $18,705 9.63% =>$ 7,769 =>4.0% =>$11,654 => 6.0%
TIER 1 CAPITAL (TO AVERAGE ASSETS)
Bay Bancshares, Inc. ................... $18,952 6.84% =>$ 8,312 =>4.0% N/A
Bayshore National Bank ................. $18,705 6.76% =>$ 8,301 =>4.0% =>$13,835 => 5.0%
</TABLE>
NOTE L - SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Cash paid during the period for:
1999 1998 1997
------ ------ ------
Interest ................................ $6,987 $7,520 $5,580
Income taxes ............................ $1,157 $1,435 $ 768
Noncash transactions during the period:
Dividends payable .................... $ 119 $ 122 $ 124
NOTE M - EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings ............................................. $ 2,885 $ 2,656 $ 1,794
Divided by weighted average common shares ................ 1,993,838 2,045,453 1,472,408
---------- ---------- ----------
Earnings per share (basic) ............................... $ 1.45 $ 1.30 $ 1.22
========== ========== ==========
Net earnings ............................................. $ 2,885 $ 2,656 $ 1,794
Divided by adjusted weighted average common shares
Weighted average common shares ....................... 1,993,838 2,045,453 1,472,408
Weighted average dilutive potential common shares .... 73,612 87,069 77,396
---------- ---------- ----------
Adjusted weighted average common shares .................. 2,067,450 2,132,522 1,549,804
---------- ---------- ----------
Earnings per share (diluted) ............................. $ 1.40 $ 1.25 $ 1.16
========== ========== ==========
</TABLE>
F-24
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE N - COMPREHENSIVE INCOME
Other comprehensive income and its tax effects are as follows:
<TABLE>
<CAPTION>
BEFORE TAX TAX (EXPENSE) NET OF TAX
AMOUNT BENEFIT AMOUNT
---------- ------------ ----------
<S> <C> <C> <C>
1999
----
Unrealized losses on securities:
Unrealized holding losses arising
during period .......................... $(2,947) $ 1,002 $(1,945)
Less: reclassification adjustment
for gains included in net earnings ..... (40) 14 (26)
------- ------- -------
Other comprehensive income (loss) ............ $(2,987) $ 1,016 $(1,971)
======= ======= =======
1998
----
Unrealized gains on securities:
Unrealized holding gains arising
during period .......................... $ 466 $ (158) $ 308
Less: reclassification adjustment
for gains included in net earnings ..... (50) 17 (33)
------- ------- -------
Other comprehensive income ................... $ 416 $ (141) $ 275
======= ======= =======
1997
----
Unrealized gains on securities:
Unrealized holding gains arising
during period .......................... $ 470 $ (169) $ 301
Less: reclassification adjustment
for gains included in net earnings ..... (12) 4 (8)
------- ------- -------
Other comprehensive income ................... $ 458 $ (165) $ 293
======= ======= =======
</TABLE>
F-25
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE O - PARENT-ONLY FINANCIAL STATEMENTS
BAY BANCSHARES, INC.
(Parent Only)
BALANCE SHEETS
DECEMBER 31,
ASSETS 1999 1998
-------- --------
Cash and cash equivalents ....................... $ 375 $ 627
Investment security ............................. 250 250
Investment in subsidiary ........................ 26,449 26,291
Other assets .................................... 321 95
-------- --------
$ 27,395 $ 27,263
======== ========
LIABILITIES
Other liabilities ............................... $ 783 $ 721
-------- --------
Total liabilities .......................... 783 721
Commitments and contingencies ................... -- --
Stockholders' equity
Common stock ............................... 2,092 2,091
Additional paid-in capital ................. 17,548 17,542
Retained earnings .......................... 9,660 7,252
Accumulated other comprehensive income ..... (1,592) 379
-------- --------
27,708 27,264
Less common stock in treasury - at cost .... (1,096) (722)
-------- --------
26,612 26,542
-------- --------
$ 27,395 $ 27,263
======== ========
F-26
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE O - PARENT-ONLY FINANCIAL STATEMENTS - CONTINUED
BAY BANCSHARES, INC.
(Parent Only)
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
1999 1998 1997
------- ------- -------
Interest income
Securities ........................ $ 21 $ 13 $ --
------- ------- -------
21 13 --
Costs and expenses
General and administrative ........ 82 80 112
------- ------- -------
Loss before income taxes and equity
in net earnings of subsidiary .. (61) (67) (112)
Income taxes (benefit)
Current ........................... 13 -- (21)
Deferred .......................... (31) (18) (11)
------- ------- -------
(18) (18) (32)
------- ------- -------
Loss before equity in net earnings
of subsidiary .............. (43) (49) (80)
Equity in net earnings of subsidiary ... 2,928 2,705 1,874
------- ------- -------
NET EARNINGS ............... $ 2,885 $ 2,656 $ 1,794
======= ======= =======
F-27
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
NOTE O - PARENT-ONLY FINANCIAL STATEMENTS - CONTINUED
BAY BANCSHARES, INC.
(Parent Only)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
------- -------- --------
Cash flows from operating activities:
Net earnings ......................................................... $ 2,885 $ 2,656 $ 1,794
Adjustments to reconcile net
earnings to net cash (used) provided
in operating activities:
Earnings of subsidiaries ......................................... (2,928) (2,705) (1,874)
Compensation expenses related
Phantom stock plan .......................................... 90 64 94
Change in assets and liabilities
(Increase) decrease in other assets ......................... (226) 238 (143)
Increase (decrease) in other liabilities .................... (26) (71) 395
------- ------- --------
Net cash (used) provided in operating activities ........ (205) 182 266
Cash flows from investing activities:
Maturities of interest-bearing deposits with banks ............. -- -- --
Purchases of securities ........................................ -- (250) --
Dividends from subsidiary ...................................... 800 300 7,900
Capital contribution to subsidiary ............................. -- (750) --
Capital contribution of banks acquired ......................... -- -- (15,715)
------- ------- --------
Net cash provided (used) by investing activities ........ 800 (700) (7,815)
Cash flows from financing activities:
Proceeds from issuance of stock ................................ 7 1 9,897
Purchase of treasury stock ..................................... (374) (448) --
Sale of treasury stock ......................................... -- -- 3
Dividends paid ................................................. (480) (493) (324)
------- ------- --------
Net cash (used) provided by financing activities ........ (847) (940) 9,576
------- ------- --------
Net (decrease) increase in cash and cash equivalents ...................... (252) (1,458) 2,027
Cash and cash equivalents at beginning of year ............................ 627 2,085 58
------- ------- --------
Cash and cash equivalents at end of year .................................. $ 375 $ 627 $ 2,085
======= ======= ========
</TABLE>
F-28
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 20, 2000, accompanying the
consolidated financial statements included in the Annual Report of Bay
Bancshares, Inc. and Subsidiaries on Form 10-KSB for the year ended December 31,
1999. We hereby consent to the incorporation by reference of said report in the
Registration Statements of Bay Bancshares, Inc. and Subsidiaries on Forms S-8
(File No. 333-76387, effective April 15, 1999 and File No. 333-45583, effective
February 4, 1998).
/s/ GRANT THORNTON LLP
Grant Thornton LLP
Houston, Texas
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,170
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,715
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75,551
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 199,412
<ALLOWANCE> 1,985
<TOTAL-ASSETS> 309,181
<DEPOSITS> 269,226
<SHORT-TERM> 11,000
<LIABILITIES-OTHER> 1,669
<LONG-TERM> 0
0
0
<COMMON> 2,092
<OTHER-SE> 24,520
<TOTAL-LIABILITIES-AND-EQUITY> 309,181
<INTEREST-LOAN> 16,130
<INTEREST-INVEST> 4,524
<INTEREST-OTHER> 574
<INTEREST-TOTAL> 21,228
<INTEREST-DEPOSIT> 7,854
<INTEREST-EXPENSE> 8,237
<INTEREST-INCOME-NET> 12,991
<LOAN-LOSSES> 588
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 11,857
<INCOME-PRETAX> 4,373
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,885
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 7.85
<LOANS-NON> 0
<LOANS-PAST> 223
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,944
<CHARGE-OFFS> 869
<RECOVERIES> 322
<ALLOWANCE-CLOSE> 1,985
<ALLOWANCE-DOMESTIC> 1,985
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,439
</TABLE>
