================================================================================
FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
E SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-23299
BAY BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
TEXAS 76-0046244
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 HIGHWAY 146 SOUTH
LA PORTE, TEXAS 77571
(Address of principal executive offices)
(281) 471-4400
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 9, 2000, there were 1,976,183 shares of the registrant's Common
Stock, par value $1.00 per share outstanding.
================================================================================
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I - FINANCIAL INFORMATION
ITEM 1. - Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and December 31,
1999 Consolidated Statements of Earnings for the Three and Six
Months ended June 30, 2000 and 1999
Consolidated Statement of Comprehensive Income for the Three and
Six Months ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Six Months ended
June 30, 2000 and 1999
Notes to Interim Consolidated Financial Statements
ITEM 2. - Management's Discussion and Analysis or Plan of Operation
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
ITEM 2. - Changes in Securities and Use of Proceeds
ITEM 3. - Defaults Upon Senior Securities
ITEM 4. - Submission of Matters to a Vote of Security Holders
ITEM 5. - Other Information
ITEM 6. - Exhibits and Reports on Form 8-K
Signatures
1
<PAGE>
ITEM 1. - Financial Statements
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks ............................................................. $ 11,639 $ 11,170
Federal funds sold .................................................................. 12,422 2,715
--------------- ---------------
Total cash and cash equivalents .................................................. 24,061 13,885
Securities available-for-sale ............................................................ 80,393 75,551
Loans, net of allowance for credit losses of $1,863 and $1,985 ........................... 202,656 197,427
Bank premises and equipment, net ......................................................... 8,538 8,881
Other assets ............................................................................. 14,508 13,437
--------------- ---------------
Total assets ..................................................................... $ 330,156 $ 309,181
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing .............................................................. $ 59,923 $ 56,556
Interest-bearing deposits ........................................................ 229,480 212,670
--------------- ---------------
Total deposits ................................................................... 289,403 269,226
Borrowings ......................................................................... 11,000 11,000
Other liabilities .................................................................. 2,335 2,343
--------------- ---------------
Total liabilities ................................................................ 302,738 282,569
Stockholders' equity
Common stock ........................................................................ 2,092 2,092
Additional paid-in capital .......................................................... 17,550 17,548
Retained earnings ................................................................... 10,961 9,660
Accumulated other comprehensive income .............................................. (2,089) (1,592)
--------------- ---------------
28,514 27,708
Less: Treasury stock .................................................................... (1,096) (1,096)
--------------- ---------------
Total stockholders' equity ....................................................... 27,418 26,612
--------------- ---------------
Total liabilities and stockholders' equity ....................................... $ 330,156 $ 309,181
=============== ===============
</TABLE>
(See accompanying notes to interim consolidated financial statements)
2
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees ............................................. $ 4,526 $ 3,926 $ 8,852 $ 7,661
Securities ........................................................ 1,319 1,141 2,522 2,159
Federal funds sold ................................................ 98 150 279 466
------------ ------------ ------------ ------------
Total interest income ............................................. 5,943 5,217 11,653 10,286
Interest expense
Deposits .......................................................... 2,319 1,909 4,539 3,810
Other ............................................................. 176 57 339 99
------------ ------------ ------------ ------------
Total interest expense ............................................ 2,495 1,966 4,878 3,909
------------ ------------ ------------ ------------
Net interest income ............................................ 3,448 3,251 6,775 6,377
Provision for credit losses ....................................... 310 150 535 280
------------ ------------ ------------ ------------
Net interest income after provision for credit losses .................. 3,138 3,101 6,240 6,097
Noninterest income
Service charges ................................................... 577 564 1,151 1,146
Other ............................................................. 414 388 882 696
------------ ------------ ------------ ------------
Total noninterest income ....................................... 991 952 2,033 1,842
Noninterest expense
Salaries and employee benefits .................................... 1,534 1,558 3,097 3,138
Occupancy expense, net ............................................ 460 462 936 926
Other noninterest expense ......................................... 965 967 1,936 1,941
------------ ------------ ------------ ------------
Total noninterest expense ......................................... 2,959 2,987 5,969 6,005
------------ ------------ ------------ ------------
Earnings before federal income taxes ................................... 1,170 1,066 2,304 1,934
Provision for income taxes ........................................ 386 368 764 662
------------ ------------ ------------ ------------
Net earnings ................................................... $ 784 $ 698 $ 1,540 $ 1,272
============ ============ ============ ============
Net earnings per share (basic) ................................. $ 0.39 $ 0.35 $ 0.77 $ 0.64
Net earnings per share (diluted) ............................... 0.38 0.34 0.74 0.62
</TABLE>
(See accompanying notes to interim consolidated financial statements)
3
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings .................................................... $ 784 $ 698 $ 1,540 $ 1,272
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period .... (142) (1,171) (497) (1,426)
Less: reclassification adjustment for gains included
in net earnings ........................................ -- -- -- (32)
------------ ------------ ------------ ------------
(142) (1,171) (497) (1,458)
------------ ------------ ------------ ------------
Comprehensive income ............................................ $ 642 $ (473) $ 1,043 $ (186)
============ ============ ============ ============
</TABLE>
(See accompanying notes to interim consolidated financial statements)
4
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................................. $ 1,540 $ 1,272
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Provision for credit losses ............................................. 535 280
Depreciation and amortization ........................................... 679 753
Gain on sale of bank premises and equipment ............................. -- --
Gain on sale of available-for-sale securities ........................... -- (49)
Amortization of premiums, net of (accretion) and discounts
on securities ...................................................... 16 89
Effect of phantom stock plan ............................................ -- 32
Decrease in other assets ................................................ (1,042) (1,627)
Increase (decrease) in other liabilities ................................ 375 607
--------------- ---------------
Net cash provided by operating activities .......................... 2,103 1,357
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities .......................... -- 3,393
Proceeds from principal repayments, maturities, and calls of
available-for-sale securities ........................................... 4,712 10,387
Purchases of available-for-sale securities ................................... (10,450) (24,888)
Net increase in loans ........................................................ (5,990) (14,274)
Purchases of bank premises and equipment ..................................... (139) (381)
--------------- ---------------
Net cash used by investing activities .............................. (11,867) (25,763)
Cash flows from financing activities:
Proceeds from borrowing ...................................................... -- 6,000
Proceeds from the issuance of stock .......................................... 2 --
Purchase of treasury stock ................................................... -- (423)
Net increase in deposits ..................................................... 20,177 9,051
Dividends paid ............................................................... (239) (239)
--------------- ---------------
Net cash provided by financing activities .......................... 19,940 14,389
Net increase (decrease) in cash and cash equivalents ............... 10,176 (10,017)
Cash and cash equivalents at beginning of period ............................................ 13,885 25,456
--------------- ---------------
Cash and cash equivalents at end of period .................................................. $ 24,061 $ 15,439
=============== ===============
</TABLE>
(See accompanying notes to interim consolidated financial statements)
5
<PAGE>
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Bay
Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries Bayshore
National Bank (the "Bank"), Bay Bancshares of Delaware, Inc. ("BBDI") and
BayBanc Independent Insurance Agency ("BBIIA"). All significant intercompany
transactions and balances have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the statements reflect all
adjustments necessary for a fair presentation of the financial position, results
of operations and cash flows of the Company on a consolidated basis, and all
such adjustments are of a normal recurring nature. These financial statements
and the notes thereto should be read in conjunction with the Company's 1999
Annual Report on Form 10-KSB. Operating results for the six month period ended
June 30, 2000, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
(2) EARNINGS PER COMMON SHARE
Earnings per common and common equivalent share was computed based on the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net earnings available to common shareholders .......................... $ 784 $ 698 $ 1,540 $ 1,272
Basic weighted average shares outstanding .............................. 1,991 1,992 1,991 1,998
Diluted weighed average shares outstanding ............................. 2,086 2,074 2,084 2,080
Basic earnings per common share ........................................ $ 0.39 $ 0.35 $ 0.77 $ 0.64
Diluted earnings per common share ...................................... $ 0.38 $ 0.34 $ 0.74 $ 0.62
</TABLE>
(3) COMPREHENSIVE INCOME
Comprehensive income includes net earnings plus unrealized gain or loss on
securities.
The tax effects of comprehensive income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
----------------------------------------- -----------------------------------------
(UNAUDITED) (UNAUDITED)
TAX TAX
BEFORE TAX EXPENSE NET OF BEFORE TAX EXPENSE NET OF
AMOUNT (BENEFIT) TAX AMOUNT AMOUNT (BENEFIT) TAX AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains(losses) on securities:
Unrealized holding gains (losses)
arising during period ................ $ (215) $ 73 $ (142) $ (1,569) $ 398 $ (1,171)
Less: reclassification adjustments
for gains included in net earnings ... -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income ....................... $ (215) $ 73 $ (142) (1,569) $ 398 $ (1,171)
============ ============ ============ ============ ============ ============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------ ------------------------------------------
(UNAUDITED) (UNAUDITED)
TAX TAX
BEFORE TAX EXPENSE NET OF BEFORE TAX EXPENSE NET OF
AMOUNT (BENEFIT) TAX AMOUNT AMOUNT (BENEFIT) TAX AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains(losses) on securities:
Unrealized holding gains (losses)
arising during period .............. $ (753) $ 256 $ (497) $ (1,911) $ 485 $ (1,426)
Less: reclassification adjustments
for gains included in net earnings . (49) 17 (32)
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income ..................... $ (753) $ 256 $ (497) $ (1,960) $ 502 $ (1,458)
============ ============ ============ ============ ============ ============
</TABLE>
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in the documents
incorporated into this document by reference, including matters discussed under
the captions "Management's Discussion and Analysis or Plan of Operation," may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. The words "expects," "estimates," "anticipates,"
"contemplated," "intends," "plans," "believes," "seek," "will," "would,"
"should," "projected" and similar expressions are intended to identify such
forward-looking statements.
The Company's actual results or experience may differ materially from the
results anticipated in such forward-looking statements due to a variety of
factors, including, but not limited to: (1) the effects of future acquisitions,
if any; (2) the concentration of indirect automobile dealer paper in the loan
portfolio; (3) the effects of future economic conditions on the Company and its
customers; (4) governmental monetary and fiscal policies, as well as legislative
and regulatory changes; (5) the risks of changes in interest rates on the level
and composition of deposits, loan demand and the values of loan collateral,
securities and interest rate protection agreements, as well as interest rate
risks; (6) the effects of competition from other commercial banks, thrifts,
mortgage banking firms, insurance companies, money market and other mutual fund
and other financial institutions operation in the Company's market areas and
elsewhere, including competitors offering banking products and services by mail,
telephone, computer and the Internet; and (7) other uncertainties set forth in
the Company's other public reports and filings and public statements. All
written or oral forward-looking statements attributable to the Company are
expressly qualified in their entirety by these cautionary statements.
ITEM 2. -MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Bay Bancshares, Inc. (the "Company") was incorporated as a business
corporation in 1982 under the laws of the State of Texas to be a multi-bank
holding company for Bayshore National Bank (the "Bank"). The Company currently
serves its market areas from its headquarters in La Porte and ten full-service
banking office locations in La Porte, Liberty, Cleveland, Seabrook, Pasadena,
Baytown, Deer Park and Mont Belvieu, Texas. Additionally, the Company operates
three Loan Production Offices ("LPOs") in the Houston area and an Internet
banking site WWW.BANKBNB.COM.
Net income for the three months ended June 30, 2000 was $784,000 compared
with $698,000 for the three months ended June 30, 1999, an increase of $86,000
or 12.32%. Per share (basic) earnings increased $0.04 to $0.39 for the three
months ended June 30, 2000 from $0.35 for the same period ended June 30 , 1999.
Per share (diluted) earnings increased $0.04 to $0.38 for the three months ended
June 30, 2000 from $0.34 for the same period ended June 30, 1999. Net income for
the six months ended June 30, 2000 was $1.5 million compared with $1.3 million
for the six months ended June 30, 1999, an increase of
7
<PAGE>
$268,000 or 21.07%. Per share (basic) earnings increased $0.13 to $0.77 for the
six months ended June 30, 2000 from $0.64 for the same period ended June 30,
1999. Per share (diluted) earnings increased $0.12 to $0.74 for the six months
ended June 30, 2000 from $0.62 for the same period ended June 30, 1999.
On February 2, 1999 the Company announced that the Board of Directors
approved the repurchase of up to $1.0 million of Company Common Stock (the
"Plan"). As of August 9, 2000 the Company, using excess funds, repurchased
39,600 shares of Common Stock in the open market in nine separate trades at a
total cost of $556,000. Additionally, on July 25, 2000 the Company's Board of
Directors approved $500,000 for the repurchase of Company Common Stock bringing
the amount to be repurchased by the Plan to $1.5 million. As of August 9, 2000
there were 1,976,183 shares of Common Stock outstanding.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Company's
income. Interest rate fluctuations, as well as changes in the amount and type of
earning assets and liabilities, combine to affect net interest income.
Net interest income for the six months ended June 30, 2000 was $6.8
million compared with $6.4 million for the six months ended June 30, 1999, an
increase of $398,000 or 6.24% and an increase of $197,000 or 6.06% to $3.4
million in the second quarter of 2000 as compared with $3.3 million for the same
period in 1999. Net interest income increased primarily as a result of increased
loan volume generated through the Company's market growth strategies and an
overall volume increase in earning assets. Average gross loans increased $25.7
million or 14.69% to $200.7 million for the six months ended June 30, 2000 from
$175.0 million for the six months ended June 30, 1999.
Net interest income was affected by a increase in the cost of average
interest-bearing liabilities to 4.25% on June 30, 2000 from 3.76% for the six
months ended June 30, 1999. Average interest-earning assets increased from
89.09% of total average assets at June 30, 1999 to 89.64% of total average
assets at June 30, 2000. Average interest-earning assets increased to $287.8
million for the six months ended June 30, 2000 from $267.5 million for the six
months ended June 30, 1999, an increase of $20.3 million or 7.59%. Average
interest-bearing liabilities increased to $229.6 million for the six months
ended June 30, 2000 from $208.1 million for the six months ended June 30, 1999,
an increase of $21.5 million or 10.33%. The Company's net interest margin has
remained stable in a competitive and changing rate environment and as a result,
the Company's net interest margin decreased only six basis points from 4.77% to
4.71%.
The following table presents for the periods indicated the total dollar
amount of average balances, interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No tax
equivalent adjustments were made and all average balances are daily average
balances. There were no nonaccruing loans during the periods covered.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------------
2000 1999
---------------------------------------- -----------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans ................................... $ 200,714 $ 8,852 8.82% $ 174,988 $ 7,661 8.76%
Securities .............................. 78,405 2,522 6.43% 74,162 2,159 5.82%
Federal funds sold and other temporary
investments ......................... 8,666 279 6.44% 18,361 466 5.08%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets ....... 287,785 11,653 8.10% 267,511 10,286 7.69%
------------ ------------ ------------ ------------ ------------ ------------
Less allowance for credit losses ........ (2,086) (1,967)
------------ ------------
Total interest-earning assets, net of
allowance ........................... 285,699 265,544
Nonearning assets ....................... 35,362 34,717
------------ ------------
Total assets ........................ $ 321,061 $ 300,261
============ ============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits ........ $ 33,019 $ 171 1.04% $ 32,023 $ 168 1.05%
Public fund deposits .................... 5,648 131 4.64% 9,109 190 4.17%
Savings and money market accounts ....... 55,364 913 3.30% 65,799 1,011 3.07%
Certificates of deposit ................. 124,453 3,324 5.34% 97,650 2,441 5.00%
Federal funds purchased, FHLB line of
credit and other borrowings ......... 11,084 339 6.12% 3,533 99 5.60%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities .. 229,568 4,878 4.25% 208,114 3,909 3.76%
------------ ------------ ------------ ------------ ------------ ------------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits ..... 62,613 64,027
Other liabilities ....................... 2,119 1,860
------------ ------------
Total liabilities ................... 294,300 274,001
------------ ------------
Stockholders' equity ........................ 26,761 26,260
------------ ------------
Total liabilities and stockholders'
equity .......................... $ 321,061 $ 300,261
============ ============
Net interest income ..................... $ 6,775 $ 6,377
============ ============
Net interest spread ..................... 3.85% 3.93%
============ ============
Net interest margin ..................... 4.71% 4.77%
============ ============
</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 "-Financial Condition." The
provision for Credit Losses increased to $535,000 for the six months ended June
30, 2000 from $280,000 for the same time period in 1999, an increase of $255,000
or 91.07%. The increase in the provision coincides with the overall increase in
loan volume and Management's analysis of the allowance for credit losses.
9
<PAGE>
Noninterest Income
The Company's primary source of noninterest income is service charges on
deposit accounts and other banking service related fees. Noninterest income for
the six months ended June 30, 2000 was $2.0 million compared with $1.8 million
for the six months ended June 30, 1999, an increase of $191,000 or 10.37%, and
an increase of $39,000 or 4.10% to $991,000 in the second quarter of 2000 as
compared with $952,000 during second quarter of 1999. Service charges on deposit
accounts in the second quarter increased primarily due to the increased deposit
volume. The Small Business Administration ("SBA") gain component of noninterest
income increased $45,000 during the second quarter 2000 to $69,000 from $24,000
for the same period in 1999. Even though the funding and subsequent sale of SBA
loans varies from quarter to quarter, the SBA pipeline remains strong for 2000.
Contributing to other noninterest income was another strong quarter in income
generated from the Company's broad network of ATM's.
The following table presents for the periods indicated the major
categories of noninterest income:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Service charges on deposit accounts $ 577 $ 564 $ 1,151 $ 1,146
Gain on sale of SBA loans 69 24 150 62
ATM fee income 134 109 257 200
Alternative investments 62 70 92 99
Other noninterest income 149 185 383 335
--------- --------- --------- ---------
Total noninterest income $ 991 $ 952 $ 2,033 $ 1,842
========= ========= ========= =========
Noninterest Expense
In the six month period ended June 30, 2000, noninterest expense decreased
$36,000 or 0.60% to $6.0 million from $6.0 million for the period ended June
30,1999 and a decrease of $28,000 or 0.94% in the second quarter of 2000 as
compared with the second quarter of 1999. Employee compensation and benefit
expense for the six months ended June 30, 2000 was $3.1 million, a decrease of
$41,000 or 1.31% from $3.1 million in the same period of 1999 and a decrease of
$24,000 or 1.54% in the second quarter of 2000 as compared with the second
quarter of 1999. Non staff expense for the six months ended June 30, 2000 was
$2.9 million, an increase of $5,000 or 0.17% from $2.9 million in the same
period of 1999 and a decrease $4,000 or 0.28% to $1.4 million in the second
quarter of 2000 as compared with $1.4 million during the second quarter of 1999.
Non staff expenses remained flat due the Company's commitment to growth while
controlling costs. The Company continues to control costs and as a result, the
efficiency ratio decreased to 64.43% from 68.71% during the second quarter 2000
compared with the same period in 1999.
10
<PAGE>
The following table presents for the periods indicted the major categories
of noninterest expense:
Three Months
Ended Six months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Employee compensation and benefits $ 1,534 $ 1,558 $ 3,097 $ 3,138
Non-staff expense:
Net bank premises expense 218 202 439 412
Equipment rentals, depreciation
and maintenance 242 260 497 514
Data processing 68 78 133 157
Professional fees 126 130 212 243
Regulatory assessments/FDIC
insurance 34 31 66 62
Ad valorem and franchise taxes 72 72 139 144
Other 665 656 1,386 1,335
--------- --------- --------- ---------
Total non-staff expenses 1,425 1,429 2,872 2,867
--------- --------- --------- ---------
Total noninterest expense $ 2,959 $ 2,987 $ 5,969 $ 6,005
========= ========= ========= =========
Financial Condition
Total assets as of June 30, 2000 were $330.2 million compared with $309.2
million at December 31, 1999 an increase of $21.0 million or 6.79%. At June 30,
2000, investment securities totaled $80.4 million, an increase of $4.8 million
or 6.35% from $75.6 at December 31, 1999. Gross loans were $204.5 million at
June 30, 2000, an increase of $5.1 million or 2.56% from $199.4 million at
December 31, 1999.
The allowance for credit losses is a reserve established through charges
to earnings in the form of a provision for credit losses. Management has
established an allowance for credit losses which it believes is adequate for
estimated losses in the Company's loan portfolio. The Company follows a loan
review program to evaluate the credit risk in the loan portfolio. Through the
loan review process, the Company maintains an internally classified loan watch
list which, along with the delinquency list of loans, helps management assess
the overall quality of the loan portfolio and the adequacy of the allowance for
credit losses. Loans classified as "substandard" are those loans with clear and
defined weaknesses such as a highly-leveraged position, unfavorable financial
ratios, uncertain repayment sources, or poor financial condition, which may
jeopardize recoverability of the debt. The Houston economy has historically been
affected by the price of oil and gas. However, economic reliance on energy has
been lessened through diversification efforts. The Company has no extensions of
credit to production or exploration companies and has not historically pursued
this line of business. The Company provides financing and other banking services
to companies that service the petrochemical industry. While the Company
maintains a reasonably diverse commercial and consumer loan portfolio, any major
downturn in the energy industry could have an adverse affect on borrowers'
ability to repay loans and, therefore, could potentially affect the results of
operations and the financial condition of the Company.
While loan volume has increased, the allowance for credit losses decreased
during the second quarter 2000 due to the charge off of two selected credits.
While Management had specifically reserved for these credits, they will continue
to actively pursue recoveries. The Company increased the provision for credit
losses $160,000 or 107% which included an additional provision of $85,000 during
the second quarter 2000 compared with the same period during 1999. As loan
volume continues to grow, Management remains committed to increase the allowance
for credit losses to mirror such growth. Stringent loan review procedures remain
in place for the Company and Management is confident that the allowance for
credit losses is adequate to cover losses inherent in the loan portfolio. Non
performing assets increased during the second quarter 2000 due to the addition
of one other real estate ("ORE") property which is under contract for sale
during the third quarter 2000. Through the sale of this and other ORE properties
under contract,
11
<PAGE>
along with the resolution of a non accrual loan, Management expects non
performing assets to reduce 70% during the third quarter 2000.
The Company's total deposits for the six months ended June 30, 2000 were
$289.4 million, an increase of $20.2 million or 7.50% from $269.2 million at
December 31, 1999.
Stockholders' equity increased to $27.4 million at June 30, 2000 from
$26.6 million at June 30, 1999, an increase of $806,000 or 3.03%. Excluding the
SFAS 115 adjustment, stockholder's equity increased to 29.5 million at June 30,
2000, an increase of $1.3 million or 4.62% compared to 28.2 million at December
31, 1999. As of June 30, 2000 the Company's ratio of stockholders' equity to
total assets was 8.30% as compared with 8.60% as of December 31, 1999.
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. The Company's liquidity needs are primarily met by
growth in core deposits. Although access to purchased funds from correspondent
banks is available and has been utilized on occasion to take advantage of
investment opportunities, the Company does not rely on these external funding
sources. The cash and federal funds sold position, supplemented by amortizing
investment along with payments and maturities within the loan portfolio, have
historically created an adequate liquidity position.
The Company's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities was $2.1
million and $1.4 million for the six months ended June 30, 2000 and 1999
respectively.
Net cash used by investing activities was $11.9 million and $25.8 million
for the six months ended June 30, 2000 and 1999, respectively. The net cash used
by investing activities for the six months ended June 30, 2000 compared with the
same period in 1999 was primarily due to the increase in loans during 1999.
Net cash provided by financing activities was $19.9 million and $14.4
million for the six months ended June 30, 2000 and 1999, respectively. The net
cash provided by (used in) financing activities for the six months ended June
30, 2000 compared with the same period in 1999 was primarily due to the proceeds
from an increase in deposits.
Capital management consists of providing equity to support both current
and future operations. The Company is subject to capital adequacy requirements
imposed by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") and the Bank is subject to capital adequacy requirements imposed
by the Office of the Comptroller of Currency ("OCC"). Both the Federal Reserve
Board and the OCC have adopted risk-based capital requirements.
12
<PAGE>
The following table provides a comparison of the Company's and the Bank's
leverage and risk weighted capital ratios as of June 30, 2000 and the regulatory
standards.
MINIMUM ACTUAL RATIO
REQUIRED JUNE 30, 2000
--------------------------
THE COMPANY
-----------
Leverage ratio 3.00% 7.07%
Tier 1 risk-based capital 4.00% 9.46%
Risk-based capital ratio 8.00% 10.23%
THE BANK
--------
Leverage ratio 3.00% 7.02%
Tier 1 risk-based capital 4.00% 9.48%
Risk-based capital ratio 8.00% 10.26%
PART II - Other Information
ITEM 1. - Legal Proceedings
Not Applicable
ITEM 2. - Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. - Defaults Upon Senior Securities
Not Applicable
13
<PAGE>
ITEM 4. - Submission of Matters to a Vote of Security Holders
On May 17, 2000, the Company's Annual Meeting of Shareholders was held to
consider and act upon the following items:
1. The election of four persons to serve as Class III directors to serve
on the Board of Directors of the Company until the Company's 2003
Annual Meeting of Shareholders and until their successors are duly
elected and qualified. The election of one director of Class I and one
director of Class II to serve on the Board of Directors until the
Company's 2001 and 2002 Annual Meeting of Shareholders and until their
successors are duly elected and qualified. The vote for each nominee
was as follows:
NOMINEE CLASS FOR WITHHELD BROKER NON-VOTE
------- ----- --- -------- ---------------
Eddie V. Gray III 1,658,642 3,225 -
Doug Latimer III 1,658,642 3,225 -
Lester A. Marks II 1,658,642 3,225 -
William L.H. Morgan, Jr. I 1,658,642 3,225 -
Lindsay R. Pfeiffer III 1,658,642 3,225 -
Henry C. Robson, Jr. III 1,658,642 3,225 -
1. The appointment of Grant Thornton LLP as the independent auditors of
the financial statements of the Company for the fiscal year ended
December 31, 2000. The vote for each was as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
1,661,351 266 250 -
The other directors whose term of office continues after the meeting are
Knox W. Askins, Albert D. Fields, Kim E. Love, Ruede M. Wheeler and L.D. Wright.
ITEM 5. - Other Information
Not Applicable
ITEM 6. - Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report;
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the three
months ended June 30, 2000
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BAY BANCSHARES, INC.
By: /s/ L.D. WRIGHT
----------------------------------------
Larry D. Wright
Chief Executive Officer
By: /s/ KIM LOVE
----------------------------------------
Kim Love
Controller
15
