SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000. Commission file number: 333-87781
Bay National Corporation
(Exact name of Registrant as specified in its charter)
Maryland 52-2176710
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2328 West Joppa Road, Lutherville, MD 21093
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (410) 494-2580
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
-------- --------
The number of shares outstanding of the registrant's common stock on
November 13, 2000:
$.01 Par Value - 1,242,020
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
BAY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2000 and December 31, 1999
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 4,211,728 $ 763,957
Federal funds sold 10,993,703 0
Investment securities available for sale (AFS) - at fair value 2,268,159 0
Loans 1,521,622 0
Less: Allowance for credit losses (23,000) 0
------------ ------------
Loans, net 1,498,622 0
Premises and equipment, net 942,509 22,768
Accrued interest receivable and other assets 58,061 49,659
------------ ------------
Total Assets $ 19,972,782 $ 836,384
============ ============
LIABILITIES
Non-interest bearing deposits $ 1,805,077 $ 0
Interest bearing deposits 7,121,170 0
------------ ------------
Total deposits 8,926,247 0
Accrued expenses and other liabilities 258,515 260,633
------------ ------------
Total Liabilities 9,184,762 260,633
------------ ------------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value, authorized:
9,000,000 shares authorized, 1,242,020 and 112,500
issued and outstanding: 12,420 1,125
Surplus 12,407,780 1,123,875
Accumulated Deficit (1,632,730) (549,249)
Accumulated other comprehensive income 550 0
------------ ------------
Total Stockholders' Equity 10,788,020 575,751
------------ ------------
Total Liabilities and Stockholders' Equity $ 19,972,782 $ 836,384
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
1
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<TABLE>
<CAPTION>
BAY NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine and three month periods ended September 30, 2000 and 1999
(Unaudited)
Three Months Ending September 30, Nine Months Ending September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 10,143 $ 0 $ 10,613 $ 0
Interest on federal funds sold 135,514 0 325,821 0
Interest and dividends on investment securities: 91,489 4,567 129,488 4,728
--------- --------- --------- ---------
Total interest income 237,146 4,567 465,922 4,728
--------- --------- --------- ---------
INTEREST EXPENSE:
Interest on deposits 63,120 0 66,937 0
--------- --------- --------- ---------
Total interest expense 63,120 0 66,937 0
--------- --------- --------- ---------
Net interest income 174,026 4,567 398,985 4,728
Provision for credit losses 23,000 0 23,000 0
--------- --------- --------- ---------
Net interest income after provision for credit losses 151,026 4,567 375,985 4,728
--------- --------- --------- ---------
OTHER OPERATING INCOME:
Service charges on deposit accounts 1,108 0 1,128 0
Other income 1,582 0 1,886 0
--------- --------- --------- ---------
Total other operating income 2,690 0 3,014 0
--------- --------- --------- ---------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 397,902 59,502 838,750 65,759
Occupancy expenses 59,713 5,700 152,283 5,700
Furniture and equipment expenses 37,673 0 69,756 0
Legal and professional fees 7,987 69,859 54,954 69,859
Outside Services 63,283 0 129,521 0
Other expenses 70,901 19,937 217,216 19,937
--------- --------- --------- ---------
Total other operating expenses 637,459 154,998 1,462,480 161,255
--------- --------- --------- ---------
Loss before income taxes (483,743) (150,431) (1,083,481) (156,527)
Income tax benefit 0 0 0 0
--------- --------- --------- ---------
NET LOSS $(483,743) $(150,431) $(1,083,481) $(156,527)
========= ========= ========= =========
Per Share Data:
Cash Dividend Paid $ -- $ -- $ -- $ --
Net Loss (Basic) $ (0.39) $ (1.34) $ (1.45) $ (1.39)
Net Loss (Diluted) $ (0.39) $ (1.34) $ (1.45) $ (1.39)
Average Shares Outstanding (Basic) 1,242,020 112,500 747,340 112,500
Average Shares Outstanding (Diluted) 1,242,020 112,500 747,340 112,500
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
BAY NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine month periods ended September 30, 2000 and 1999
(Unaudited)
<S> <C> <C>
2000 1999
------------ ----------
Cash Flows From Operating Activities
Net loss $(1,083,481) $(156,527)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation 51,397 0
Amortization of investment (discounts)/premiums, net (55,069) 0
Provision for credit losses 23,000 0
Net (increase)decrease in accrued interest receivable and other assets (8,402) (48,130)
Net increase (decrease) in accrued expenses and other liabilities (2,118) 65,641
------------ ----------
Net cash used by operating activities (1,074,673) (139,016)
------------ ----------
Cash Flows From Investing Activities
Purchases of investment securities - AFS (3,212,540) 0
Maturities of investment securities - AFS 1,000,000 0
Net increase in loans (1,521,622) 0
Capital expenditures (971,138) (17,531)
----------- ----------
Net cash used by investing activities (4,705,300) (17,531)
----------- ----------
Cash Flows From Financing Activities
Net increase in deposits 8,926,247 0
Issuance of common stock 11,295,200 1,125,000
----------- ----------
Net cash provided by financing activities 20,221,447 1,125,000
----------- ----------
Net increase in cash and cash equivalents 14,441,474 968,453
Cash and cash equivalents at beginning of year 763,957 0
----------- ----------
Cash and cash equivalents at end of period $15,205,431 $ 968,453
=========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
BAY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Organization
Bay National Corporation was incorporated on June 3, 1999 under the
laws of the State of Maryland to operate as a bank holding company of a national
bank with the name Bay National Bank (the "Bank"). On May 12, 2000, the Company
purchased all the shares of common stock issued by the Bank. The Company's
operations through that date were limited to taking the necessary actions to
organize and capitalize the Company and the Bank. The Bank commenced operations
on May 12, 2000 after successfully meeting the conditions of the Office of the
Comptroller of the Currency (the "OCC") to receive its charter authorizing it to
commence operations as a national bank, and obtained the approval of the Federal
Deposit Insurance Corporation to insure its deposit accounts, and has met
certain other regulatory requirements.
Basis of Presentation
The accompanying consolidated financial statements include the activity
of Bay National Corporation and its wholly owned subsidiary, Bay National Bank.
All significant intercompany transactions have been eliminated in consolidation.
The foregoing consolidated financial statements are unaudited; however,
in the opinion of management, all adjustments (comprising only normal recurring
accruals) necessary for a fair presentation of the results of the interim period
have been included. These statements should be read in conjunction with the
financial statements and accompanying notes included in Bay National
Corporation's 1999 Annual Report on Form 10-KSB. The results shown in this
interim report are not necessarily indicative of results to be expected for the
full year 2000.
The accounting and reporting policies of Bay National Corporation (the
"Company") conform to generally accepted accounting principles.
Costs Associated with Start-Up Activities
The Company expensed costs incurred during the start-up phase of
organization in accordance with the American Institute of Certified Public
Accountants' Statement of Position 98-5 Reporting on the Costs of Start-Up
Activities.
2. REGULATORY MATTERS
The Bank is 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 the Bank's financial statements. Under capital action, the
Bank must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios. Management
believes, as of September 30, 2000, that the Bank meets all capital adequacy
requirements to which it is subject.
4
<PAGE>
Due to the Bank's recent formation, as of May 12, 2000, the Bank has
not been categorized by the Office of the Comptroller of the Currency (OCC)
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios. There are no conditions or events that
management believes would prevent the Bank from being categorized as well
capitalized.
3. INCOME TAXES
The Company uses the liability method of accounting for income taxes as
required by SFAS No. 109, "Accounting for Income Taxes". Under the liability
method, deferred-tax assets and liabilities are determined based on differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities (i.e., temporary differences) and are measured at the
enacted rates that will be in effect when these differences reverse. Deferred
income taxes will be recognized when it is deemed more likely than not that the
benefits of such deferred income taxes will be realized, accordingly, no
deferred income taxes or income tax benefits have been recorded by the Company.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis provides an overview of the financial
condition and results of operations of Bay National Corporation ("Company") and
Bay National Bank ("Bank") as of September 30, 2000 and for the three and
nine-month periods ended September 30, 2000. Comparative discussion of the
results of operations for the three and nine months ended September 30, 2000 and
September 30, 1999 is not provided, as the Company had no operations other than
organizational activity until May 2000, and as such, comparisons do not provide
accurate or meaningful information regarding the Company's financial position or
results of operations.
General
Bay National Corporation (the "Company") is a bank holding company,
which on April 30, 2000, completed its efforts to raise capital and closed with
$11,295,200.
On May 12, 2000 the Company became a bank holding company by purchasing
all of the common stock of Bay National Bank. Bay National Bank opened its first
office on May 12, 2000, and a second office on May 26, 2000.
Bay National Bank was formed to serve the business communities of North
Baltimore and Salisbury, Maryland.
Financial Condition
As of September 30, 2000, assets were $19,972,782. This represents
growth of $19,136,398 since December 31, 1999. The growth in assets was
attributable to the proceeds from the Company's initial public offering, as well
as funds invested from deposit growth, and an increase in the Company's loan
portfolio. Deposits at September 30, 2000 were $8,926,247. Deposit growth was
attributable to demand for banking services developed by officers, and directors
during the organizational period, as well as subsequent to the opening of the
bank. Management has set the interest rates paid on deposits to be competitive
in the market and will continue to increase marketing activities during the
fourth quarter of 2000. The Bank has no brokered funds.
As of September 30, 2000, loans (net of a $23,000 allowance for loan
losses) totaled $1,498,622. The composition of the loan portfolio was
approximately $870,000 of Commercial Loans, and $652,000 of Consumer Loans.
Funds not extended in loans are held in federal funds sold and the investment
portfolio. At September 30, 2000, the Bank had federal funds sold and
investments totaling $13,261,862. All investments, other than the Federal
Reserve Bank stock held by the Bank, were held in overnight or short-term
government agency securities.
Total capital at September 30, 2000 was $10,788,020. Management
believes this capital will be adequate to fund the Company's and Bank's
operations for at least the next 12 months.
Results of Operations
On a consolidated basis, the Company recorded a net loss of $483,743
for the three-month period ended September 30, 2000 and a net loss of $1,083,481
for the nine-month period ended September 30, 2000. Of the total amount of
$1,083,481, $708,135 was the loss associated with Bank operations. The remainder
of the loss was the result of organizational activities performed prior to the
opening of the bank.
Operating results for the year ending December 31, 2000 are projected
to reflect losses as loan and deposit growth initially will not produce net
interest income sufficient to cover operating expenses.
6
<PAGE>
Net Interest Income
Net interest income is the difference between income on assets and the
cost of funds supporting those assets. Earning assets are composed primarily of
loans and investments; interest-bearing deposits make up the cost of funds.
Non-interest bearing deposits and capital are also funding sources. Changes in
the volume and mix of earning assets and funding sources along with changes in
associated interest rates determine changes in net interest income.
The net interest income for the three and nine month periods ended
September 30, 2000 was $174,026 and $398,985, respectively. For the nine-month
period, $10,613 was income from lending activities; $455,309 was income from
overnight and security investments; and the Bank's cost of deposits was $66,937.
Growth in the loan portfolio resulted in greater contributions to
interest income in the third quarter, because the yields on loans are normally
3% to 4% higher than yields on investment securities. At September 30, 2000, the
weighted average yield on the loan portfolio was 9.67%; the weighted average
yield on federal funds sold and the investment portfolio was 6.47%.
The market in which the Bank operates is very competitive, and the
rates of interest paid on deposits are somewhat driven by rates paid by other
depository institutions. Management closely monitors rates offered by other
institutions, and seeks to be competitive within the market. The Bank has chosen
not to aggressively compete for jumbo certificates of deposits, which are highly
rate sensitive, and are not normally perceived to be as stable as demand
deposits or money market accounts. At September 30, 2000, the Bank's weighted
average cost of deposits was 4.54%. It is anticipated that both the volume of
deposits and the interest expense will increase during the next twelve-month
period based upon increased marketing activities.
Allowance and Provision for Credit Losses
The provision for credit losses represents an expense to fund the
allowance for credit losses. These funds are set aside in anticipation of
potential of credit losses in the current loan portfolio. The amount allocated
is based on many factors, which are considered in management's assessment of the
loan portfolio. These factors include economic conditions and trends, the value
and adequacy of collateral, the volume and mix of the loan portfolio, the
performance of the portfolio, and internal loan processes.
Based upon management's analysis of the loan portfolio as of September
30, 2000, management allocated an amount of $23,000 to the provision for credit
losses. This allocation is an estimate based on current information, and may be
revised over time for changes in economic conditions, experience with the
portfolio, and other factors, which may arise.
Non-Interest Income
Non-interest income is primarily deposit account service charges, and
cash management fees. For the three-month period ended September 30, 2000, the
Bank realized non-interest income in the amount of $2,690. This compares to $324
realized in the second quarter of 2000. These fees are volume driven, based
mostly on the deposit customer base and should increase as the customer base
increases.
The Bank expects to expand its sources of non-interest incoming through
fees received from strategic partners that will offer mutual fund investment
products, investment advisory services, and insurance products.
7
<PAGE>
Non-Interest Expense
Non-interest expense for the three and nine-month periods ended
September 30, 2000 were $637,459 and $1,462,480. The largest portion of these
operating expenses were salaries and employee benefits which totaled $838,750
for the nine month period ended September 30, 2000. This represents 57% of all
other operating expenses.
Liquidity and Capital Resources
Stockholders' equity at September 30, 2000 was $10,788,020. The Company
has declared no cash dividends since its inception.
Banking regulatory authorities have implemented strict capital
guidelines directly related to the credit risk associated with an institution's
assets. Banks and bank holding companies are required to maintain capital levels
based on their "risk adjusted" assets so that categories of assets with higher
"defined" credit risks will require more capital support than assets with lower
risks. The Bank has exceeded its capital adequacy requirements to date.
The Bank's liquidity is provided by its cash and cash equivalents,
which are its cash on hand and on deposit with other financial institutions and
its federal funds sold. The levels of such assets are dependent upon the Bank's
operating, financing and investment activities at any given time. Variations in
levels of cash and cash equivalents are mostly influenced by deposit flows and
loan activity.
IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED IN PART I OF THIS
QUARTERLY REPORT ON FORM 10-QSB, THE DISCUSSION IN PART I OF THIS QUARTERLY
REPORT ON FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS SUCH AS
STATEMENTS OF BAY NATIONAL CORPORATION'S PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE RISKS AND UNCERTAINTIES
INCLUDE, AMONG OTHERS, THOSE DISCUSSED IN BAY NATIONAL CORPORATION'S
REGISTRATION STATEMENT UNDER THE CAPTION "RISK FACTORS," SUCH AS THE LACK OF AN
OPERATING HISTORY AND EXPECTATION OF LOSSES; DEPENDENCE ON KEY PERSONNEL; RISKS
RELATED TO BAY NATIONAL BANK'S CHOICE OF LOAN PORTFOLIO; RISKS RELATED TO BAY
NATIONAL BANK'S LENDING LIMIT; RISKS OF A COMPETITIVE MARKET; IMPACT OF
GOVERNMENT REGULATION ON OPERATING RESULTS; AND EFFECT OF DEVELOPMENTS IN
TECHNOLOGY. BAY NATIONAL CORPORATION'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DISCUSSED HEREIN.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibit is being filed herewith:
EXHIBIT 27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Bay National Corporation
Date: November 13, 2000 By: /s/ Hugh W. Mohler
---------------------------------
Hugh W. Mohler, President
(Principal Executive Officer)
Date: November 13, 2000 By: /s/ Mark A. Semanie
---------------------------------
Mark A. Semanie, Treasurer
(Principal Accounting and Financial Officer)
10
