UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003.
Commission file number: 333-87781
Bay National Corporation
(Exact name of small business issuer 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
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Address of principal executive offices
(410) 494-2580
--------------
Issuer's telephone number
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
---------- ----------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
At May 12, 2003, the issuer had 1,862,710 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (Check One):
Yes ____ No X
---
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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BAY NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
---------------------------
As of March 31, 2003 and December 31, 2002
March 31, December 31,
2003 2002
---------------- ---------------
ASSETS (Unaudited)
Cash and due from banks $ 102,780 $ 363,031
Federal funds sold and other overnight investments 19,802,835 11,752,705
Loans held for sale 4,056,343 2,818,500
Investment securities available for sale (AFS) - at fair value 1,197,852 948,361
Other equity securities 444,340 355,840
Loans, net of unearned fees 81,654,513 68,078,261
Less: Allowance for credit losses (1,021,000) (851,500)
---------------- ---------------
Loans, net 80,633,513 67,226,761
Premises and equipment, net 700,402 709,203
Accrued interest receivable and other assets 494,702 434,782
---------------- ---------------
Total Assets $ 107,432,767 $ 84,609,183
================ ===============
LIABILITIES
Non-interest-bearing deposits $ 9,907,313 $ 10,533,475
Interest-bearing deposits 85,891,796 65,244,381
---------------- ---------------
Total deposits 95,799,109 75,777,856
Short-term borrowings 1,171,000 507,000
Accrued expenses and other liabilities 3,059,401 714,669
---------------- ---------------
Total Liabilities 100,029,510 76,999,525
---------------- ---------------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value, authorized: 9,000,000 shares authorized,
1,242,020 issued and outstanding as of March 31, 2003 and December 31,
2002, respectively: 12,420 12,420
Surplus 12,407,780 12,407,780
Accumulated deficit (5,016,943) (4,810,542)
---------------- ---------------
Total Stockholders' Equity 7,403,257 7,609,658
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 107,432,767 $ 84,609,183
================ ===============
See accompanying notes to consolidated financial statements.
2
BAY NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the three-months ended March 31, 2003 and 2002
(Unaudited)
2003 2002
------------- -----------
INTEREST INCOME:
Interest and fees on loans $ 1,143,795 $ 624,789
Interest on federal funds sold and other
overnight investments 21,047 31,190
Taxable interest and dividends on investment
securities 3,960 -
------------- -----------
Total interest income 1,168,802 655,979
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INTEREST EXPENSE:
Interest on deposits 438,935 288,616
Interest on short-term borrowings 1,836 -
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Total interest expense 440,771 288,616
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Net interest income 728,031 367,363
Provision for credit losses 169,500 58,000
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Net interest income after provision for
credit losses 558,531 309,363
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NON-INTEREST INCOME:
Service charges on deposit accounts 40,566 18,398
Gain on sale of mortgage loans 147,554 117,693
Other income 9,697 8,206
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Total non-interest income 197,817 144,297
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NON-INTEREST EXPENSES:
Salaries and employee benefits 580,744 447,981
Occupancy expenses 61,015 52,955
Furniture and equipment expenses 45,127 49,075
Legal and professional fees 36,169 29,100
Data processing and other outside services 118,988 66,044
Advertising and marketing related expenses 37,524 37,420
Other expenses 83,182 62,168
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Total non-interest expenses 962,749 744,743
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Loss before income taxes (206,401) (291,083)
Income tax benefit - -
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NET LOSS $ (206,401) $ (291,083)
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Per Share Data:
Cash Dividends Paid $ - $ -
Net Loss (basic and diluted) $ (.17) $ (.23)
Average shares outstanding (basic and diluted) 1,242,020 1,242,020
See accompanying notes to consolidated financial statements.
3
BAY NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the three-months ended March 31, 2003 and 2002
(Unaudited)
2003 2002
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Cash Flows From Operating Activities
Net loss $ (206,401) $ (291,083)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation 43,992 46,344
Accretion of investment discounts (2,986) -
Provision for credit losses 169,500 58,000
Gain on sale of loans (147,554) (117,693)
Origination of loans held for sale (10,200,548) (6,202,016)
Proceeds from sale of loans 9,110,259 6,276,534
Net increase in accrued interest receivable and other assets (59,920) (37,015)
Net decrease in accrued expenses and other liabilities (98,199) (125,373)
------------- ------------
Net cash used by operating activities (1,391,857) (392,302)
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Cash Flows From Investing Activities
Purchases of investment securities - AFS (1,196,505) -
Maturities of investment securities - AFS 950,000 -
Purchase of Federal Home Loan Bank of Atlanta stock (88,500) -
Net increase in loans (13,576,252) (4,490,139)
Capital expenditures (35,191) (6,350)
------------- ------------
Net cash used by investing activities (13,946,448) (4,496,489)
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Cash Flows From Financing Activities
Net increase in deposits 20,021,253 4,122,042
Net increase in short-term borrowings 664,000 -
Stock subscriptions received 2,442,931 -
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Net cash provided by financing activities 23,128,184 4,122,042
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Net increase (decrease) in cash and cash equivalents 7,789,879 (766,749)
Cash and cash equivalents at beginning of period 12,115,736 9,553,940
------------- ------------
Cash and cash equivalents at end of period $ 19,905,615 $ 8,787,191
============= =============
See accompanying notes to consolidated financial statements.
4
BAY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Organization
Bay National Corporation (the "Company") 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 obtaining
the approval of the Federal Deposit Insurance Corporation to insure its deposit
accounts, and meeting 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 and balances 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. The balances as of December 31, 2002 have been derived from
audited financial statements. These statements should be read in conjunction
with the financial statements and accompanying notes included in Bay National
Corporation's 2002 Annual Report on Form 10-KSB. There have been no significant
changes to the Company's Accounting Policies as disclosed in the 2002 Annual
Report. The results shown in this interim report are not necessarily indicative
of results to be expected for the full year 2003.
The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America.
Reclassifications
Certain reclassifications have been made to amounts previously reported
to conform to the current presentation. These reclassifications had no effect on
previously reported results of operations or retained earnings.
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 Company'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.
5
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios. Management
believes, as of March 31, 2003, that the Bank meets all capital adequacy
requirements to which it is subject.
As of March 31, 2003, the Bank has been categorized as "Well
Capitalized" by the 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.
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.
4. EARNINGS PER SHARE
The Company's common stock equivalents were not considered in the
computation of diluted earnings per share because the result would have been
anti-dilutive.
5. STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), but applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock option plan. No
compensation expenses related to the Company's stock option plan was recorded
during the three-month periods ended March 31, 2003 and 2002.
The following table illustrates the effect on net loss and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 and SFAS No. 148 to stock-based employee compensation for the
three-months ended March 31:
2003 2002
---- ----
Net loss, as reported $ (206,401) $ (291,083)
Less pro forma stock-based compensation expense determined
under the fair value method, net of related tax effects (16,623) -
------------ ------------
Pro forma net loss $ (223,024) $ (291,083)
============ ============
Net loss per share:
Basic and Diluted - as reported $ (.17) $ (.23)
Basic and Diluted - pro forma $ (.18) $ (.23)
6
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 (the "Parent")
and its national bank subsidiary, Bay National Bank (the "Bank"), collectively
(the "Company"), as of March 31, 2003 and December 31, 2002 and for the three
month periods ended March 31, 2003 and 2002.
General
On May 12, 2000 the Parent became a bank holding company by purchasing
all of the common stock of the Bank. The Bank opened its first office on May 12,
2000, and a second office on May 26, 2000.
The Bank was formed to serve the business communities of North
Baltimore and Salisbury, Maryland.
Critical Accounting Policies
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).
The financial information contained within the financial statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. Management uses many factors including 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 of the
Company in determining the inherent loss that may be present in the Company's
loan portfolio. Actual losses could differ significantly from management's
estimates. In addition, GAAP itself may change from one previously acceptable
method to another. Although the economics of transactions would be the same, the
timing of events that would impact the transactions could change.
The Company believes its most critical accounting policy relates to the
allowance for credit losses. The allowance for credit losses is an estimate of
the losses in the loan portfolio as of the balance sheet date. The allowance is
based on two basic principles of accounting: (i) SFAS 5, "Accounting for
Contingencies", which requires that losses be accrued when they are probable of
occurring and estimable; and (ii) SFAS 114, "Accounting by Creditors for
Impairment of a Loan", which requires that losses be accrued based on the
differences between the loan balance and the value of collateral, present value
of future cash flows, or values that are observable in the secondary market.
Financial Condition
As of March 31, 2003, total assets were $107,432,767. This represents
growth of $22,823,584 or 26.98% since December 31, 2002. The growth in total
assets included increases of $8,050,130 in federal funds sold and other
overnight investments, $1,237,843 in loans held for sale, $249,491 in investment
securities available for sale, $88,500 in other equity securities, and
$13,406,752 in loans net of the allowance for credit losses. These increases
were offset by a decrease of $209,132 in other non-earning assets.
As of March 31, 2003, loans excluding loans held for sale (net of a
$1,021,000 allowance for credit losses) totaled $80,633,513. The increase of
19.94%, from a balance of $67,226,761 as of December 31, 2002, is a direct
result of the ongoing marketing efforts of bank employees as
7
well as members of the Board of Directors, and the Baltimore and Salisbury
Advisory Boards. The composition of the loan portfolio as of March 31, 2003 was
approximately $49.6 million of commercial loans, $4.8 million of consumer loans,
and $27.3 million of real estate loans (excluding mortgage loans held for sale).
The composition of the loan portfolio as of December 31, 2002 was approximately
$42.6 million of commercial loans, $4.0 million of consumer loans, and $21.5
million of real estate loans (excluding mortgage loans held for sale). There
were $4,056,343 and $2,818,500 of mortgage loans held for sale as of March 31,
2003 and December 31, 2002, respectively. The mix of loans is consistent with
the initial plans for the business.
Funds not extended in loans are held in cash and due from banks,
federal funds sold and other overnight investments, and short-term U.S. Treasury
securities. At March 31, 2003, the Company had federal funds sold and other
overnight investments totaling $19,802,835 as compared to $11,752,705 as of
December 31, 2002. The Company held $275,940 of Federal Reserve Bank stock at
both March 31, 2003, and December 31, 2002. The Company also held Federal Home
Loan Bank of Atlanta stock of $168,400 and $79,900 as of March 31, 2003 and
December 31, 2002, respectively, and United States Treasury bills with a
maturity value of $1,200,000 and $950,000 as of March 31, 2003 and December 31,
2002, respectively. The Treasury securities are used to collateralize repurchase
agreements under which $1,171,000 and $507,000 was outstanding as of March 31,
2003 and December 31, 2002, respectively.
The growth in assets was funded by deposit growth of $20,021,253 or
26.42%, an increase in short-term borrowings of $664,000, and an increase in
accrued expenses and other liabilities of $2,344,732 resulting from the stock
subscriptions received during the three-months ended March 31, 2003.
Deposits at March 31, 2003 were $95,799,109. A total of $8,344,989 or
41.68% of deposit growth was related to one customer. Total deposits for this
customer were $14,892,414 as of March 31, 2003, as compared to $6,547,425 of
deposits as of December 31, 2002. The deposits for this customer tend to
fluctuate significantly; as a result, management monitors these deposits on a
daily basis to ensure that liquidity levels are adequate to compensate for these
fluctuations. The remaining deposit growth resulted from the continued marketing
efforts of officers and directors, direct mail campaigns, and the listing of
money market and certificate of deposit rates in print publications and on the
Internet. Management has set the interest rates paid on deposits to be
competitive in the market and will continue its marketing activities to generate
growth in deposits.
While the Bank does not rely on or solicit brokered deposits,
regulatory rules require that approximately $2.4 million of deposits at March
31, 2003, and $4.0 million of deposits at December 31, 2002 be classified as
brokered deposits. These deposits were obtained through the listing of
certificate of deposit rates on Internet-based listing services. These deposits
were obtained at rates that are typically lower than or equal to the prevailing
market rate for similar deposits in the Company's local markets. The brokered
deposits outstanding at March 31, 2003 were issued with an average interest rate
of 3.43% and an average term of 18.24 months. The Company has not paid broker
fees for deposits as of March 31, 2003.
Short-term borrowings consist of repurchase agreements collateralized
by pledges of U.S. Government Treasury Securities, based upon their market
values, equal to 100% of the principal and accrued interest of its short-term
borrowings. The outstanding balance of short-term borrowings increased from
$507,000 at December 31, 2002 to $1,171,000 at March 31, 2003, due to increases
in available funds of the customers participating in this program.
On October 31, 2002, Bay National Corporation commenced a private
offering, to accredited investors only, of an aggregate of 550,000 shares of its
common stock, which was subsequently increased to 620,690 shares of its common
stock. The purchase price per share was
8
$7.25 for an aggregate purchase price of $4,500,002. The private offering closed
on April 30, 2003 with 620,690 shares issued and net proceeds after offering
costs of approximately $4,450,000. As of March 31, 2003 and December 31, 2002,
Bay National Corporation had received and accepted subscriptions for 378,456 and
41,500 shares, respectively. The proceeds from these subscriptions of $2,743,806
and $300,875 as of March 31, 2003 and December 31, 2002, respectively, are
included in accrued expenses and other liabilities.
Total capital at March 31, 2003 was $7,403,257 as compared to
$7,609,658 at December 31, 2002. The decrease in capital is a result of the
losses incurred in 2003 and is consistent with the initial expectations of
management. The capital balances do not include the proceeds from the private
offering, which will increase capital by approximately $4,450,000. Management
believes that this capital and the capital raised in the private offering are
adequate to support expected asset growth and losses in 2003.
Results of Operations
On a consolidated basis, the Company recorded a net loss of $206,401
for the three-months ended March 31, 2003, as compared to a net loss of $291,083
for the three-months ended March 31, 2002. The improvement in results for the
three-month period as compared to the same period in 2002 is a direct result of
the 102.35% growth in the loan portfolio from $40,352,194 at March 31, 2002 to
$81,654,513 at March 31, 2003. The losses for the periods ended March 31, 2003
and 2002 were expected since loan and deposit growth initially were not expected
to produce net interest income sufficient to cover operating expenses. On
average, community banks do not achieve profitability for the first 24 to 36
months of operation. Management does not expect the Company to achieve monthly
profitability, if at all, until sometime during the second or third quarter of
2003.
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, investments, and federal funds sold; while interest-bearing deposits and
other short-term borrowings 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.
Net interest income for the three-month period ended March 31, 2003 was
$728,031, as compared to $367,363 for the same period in 2002. The 98.18%
increase for the three-month period is directly related to the increase in
average earning assets during the period. Average earning assets increased
$39,184,428 or 81.26% for the three-months ended March 31, 2003 as compared to
the three-months ended March 31, 2002. The yield on these assets was 5.35% for
the three-months ended March 31, 2003 and 5.44% for the three-months ended March
31, 2002.
The percentage of average earning assets represented by loans increased
from 79.32% for the three-month period ended March 31, 2002, to 86.80% for the
three-month period ended March 31, 2003. Growth in the percentage of
interest-earning assets represented by the loan portfolio would normally be
expected to result in an increase in average yields on earning assets. This
would occur because the yields on loans are normally higher than yields on
investment securities. However, the Bank's significant loan growth was partially
offset by a reduction in loan and investment yields as a result of actions taken
by the Federal Reserve to reduce its target for the federal funds rate from
1.75%, which was in effect for the entire three month period ending March 31,
2002, to 1.25% on November 6, 2002. Management expects that this action by the
Federal Reserve will continue to suppress yields and margins, although the
actual impact to the Company cannot be readily determined.
9
The market in which the Company operates is very competitive, and the
rates of interest paid on deposits are affected by rates paid by other
depository institutions. Management closely monitors rates offered by other
institutions and seeks to be competitive within the market. The Company has
chosen to selectively compete for jumbo certificates of deposits. The Company
will choose to pursue such deposits when expected loan growth provides for
adequate interest spreads to support the cost of those funds. During the
three-month period ended March 31, 2003, the Company increased funding from the
listing of certificate of deposit rates on Internet-based listing services by
approximately $6.8 million. The outstanding certificates of deposit issued
through Internet listings have an average interest rate of 3.00% and an average
term of 23.52 months. As of March 31, 2003, total deposit balances from Internet
listings were approximately $22.7 million, including the $2.4 million of
deposits classified as brokered deposits.
The average rate on interest-bearing liabilities was 2.50% for the
three-month period ended March 31, 2003, as compared to 3.19% for the same
period in 2002. The decrease in average rate was the result of the declining
rate environment discussed above. It is anticipated that interest expense will
continue to increase during the remainder of 2003 based upon continued growth in
deposits.
Comparing the three-month periods ended March 31, 2003 and 2002, the
net interest margin on average earning assets increased by 28 basis points, to
3.33% in 2003, from 3.05% in 2002, reflecting the impact of the increase in
loans as a percentage of average earning assets and declining rates in the
deposit portfolio.
10
The following tables set forth, for the periods indicated, information
regarding the average balances of interest-earning assets and interest-bearing
liabilities, the amount of interest income and interest expense and the
resulting yields on average interest-earning assets and rates paid on average
interest-bearing liabilities. Average balances are also provided for
non-interest-earning assets and non-interest-bearing liabilities.
Three Months Ended March 31, 2003
Average Interest Yield/
Balance and fees Rate
------- -------- ----
ASSETS
Loans $ 75,870,243 $ 1,143,795 6.03%
Investment Securities 1,363,514 3,960 1.16
Federal funds sold and other overnight investments 10,172,444 21,047 .83
------------- ------------
Total Earning Assets 87,406,201 1,168,802 5.35%
------------
Less: Allowance for credit losses (889,383)
Cash and due from banks 801,374
Premises and equipment, net 702,884
Accrued interest receivable and other assets 418,902
-------------
Total Assets $ 88,439,978
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 28,171,458 93,094 1.32%
Regular savings deposits 2,139,557 4,508 .84
Time deposits 39,457,735 341,333 3.46
Short-term borrowings 652,482 1,836 1.13
------------ ------------
Total interest-bearing liabilities 70,421,232 440,771 2.50%
------------ ------------
Net interest income and spread $ 728,031 2.85%
============ ============
Non-interest-bearing demand deposits 8,427,739
Accrued expenses and other liabilities 2,011,353
Stockholders' equity 7,579,654
-------------
Total Liabilities and Stockholders' Equity $ 88,439,978
=============
Interest and fee income/earning assets 5.35 %
Interest expense/earning assets 2.02
-------------
Net interest margin 3.33 %
=============
11
Three Months Ended March 31, 2002
Average Interest Yield/
Balance and fees Rate
------- -------- ----
ASSETS
Loans $ 38,248,628 $ 624,789 6.53%
Investment Securities 275,940 - -
Federal funds sold and other overnight investments 9,697,205 31,190 1.29
------------- ------------
Total Earning Assets 48,221,773 655,979 5.44%
------------
Less: Allowance for credit losses (457,311)
Cash and due from banks 748,164
Premises and equipment, net 813,740
Accrued interest receivable and other assets 242,819
-------------
Total Assets $ 49,569,185
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 19,877,308 152,200 3.06%
Regular savings deposits 2,463,448 7,585 1.23
Time deposits 13,821,505 128,831 3.73
------------- ------------
Total interest-bearing liabilities 36,162,261 288,616 3.19%
------------ ------------
Net interest income and spread $ 367,363 2.25%
============ ============
Non-interest-bearing demand deposits 4,694,911
Accrued expenses and other liabilities 227,241
Stockholders' equity 8,484,772
-------------
Total Liabilities and Stockholders' Equity $ 49,569,185
=============
Interest and fee income/earning assets 5.44 %
Interest expense/earning assets 2.39
-------------
Net interest margin 3.05 %
=============
Allowance and Provision for Credit Losses
The provision for credit losses represents an expense to fund the
allowance for credit losses. This allowance is established to absorb credit
losses in the current loan portfolio as of the balance sheet date. The amount of
the allowance is determined by management based on many factors, including
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 of the Company.
Management uses a loan grading system where all loans are graded based
on management's evaluation of the risk associated with each loan. A factor,
based on the loan grading, is applied to the loan balance to reserve for losses.
In addition, management judgmentally establishes an additional unallocated
reserve. The unallocated portion of the allowance reflects management's estimate
of probable inherent but undetected losses within the portfolio due to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable information about a borrower's financial condition, the difficulty
in identifying triggering events that correlate perfectly to subsequent loss
rates, and risk factors that have not yet manifested themselves in loss
allocation factors.
Based upon management's analysis of the loan portfolio as of March 31,
2003, the allowance for credit losses increased to $1,021,000 as compared to
$851,500 at December 31, 2002. The increase is reflective of the overall
increase in the size of the loan portfolio. The amount equates to 1.25% of
outstanding loans, net of loans held for sale, as of March 31, 2003
12
and December 31, 2002. This percentage has remained consistent because no
additional information has indicated that the overall level of reserves is
inappropriate. This is an estimate based on limited historical information, and
may be revised over time for changes in economic conditions, experience with the
portfolio, and other factors which may arise.
Management considers the allowance appropriate and adequate to cover
possible losses inherent in the loan portfolio; however, management's judgment
is based upon a number of assumptions, which are believed to be reasonable, but
which may or may not prove valid. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for credit losses or
that additional increases in the allowance will not be required. Management
considers, among other things, the findings and recommendations of the Bank's
primary regulator and an independent loan review service that evaluates
management's underwriting decisions in determining the adequacy of the
allowance.
As of March 31, 2003, the Company had loans totaling $246,780 that were
more than 90 days past due and, therefore, were classified as non-accrual loans.
The Company has had no loan charge-offs since inception.
Non-Interest Income
Non-interest income consists primarily of gains on the sale of mortgage
loans, mortgage origination fees, deposit account service charges, and cash
management fees. For the three-months ended March 31, 2003, the Company realized
non-interest income in the amount of $197,817 as compared to $144,297 for the
same period in 2002. Gains on the sale of mortgage loans of $147,554 are the
most significant element of non-interest income, comprising 74.59% of the total
for the three-months ended March 31, 2003. This compares to gains on the sale of
mortgage loans of $117,693 or 81.56% of total non-interest income for the
three-months ended March 31, 2002. The increase in gains on the sale of mortgage
loans is due to the ongoing low interest rate environment, combined with a
strong housing market, creating an exceptional market for mortgage products. An
increase in interest rates or a slow down in the housing market could negatively
impact the Company's ability to maintain the same level of income associated
with mortgage loan production.
Service charges on deposit accounts totaled $40,566 for the
three-months ended March 31, 2003, as compared to $18,398 for the same period in
2002. This increase of 120.49% can be directly attributed to the growth in the
Company's deposit portfolio, and an increase in the level of fee-based cash
management relationships.
The Company will continue to seek ways to expand its sources of
non-interest income. The Company may enter into fee arrangements with strategic
partners that offer investment advisory services, risk management and employee
benefit services. No assurance can be given that such fee arrangements will be
obtained or maintained.
Non-Interest Expense
Non-interest expense for the three-month periods ended March 31, 2003
and 2002 totaled $962,749 and $744,743, respectively. The increase of $218,006
or 29.27% for the three-month period is primarily a result of increased salaries
and benefits of $132,763 related to planned staff growth initiated to increase
marketing efforts, manage the growth of the loan and deposit portfolios and
support increased operational volume. The increase in salaries and benefits also
includes approximately $17,000 of increased mortgage commissions and benefits
resulting from the heavy mortgage volume experienced during the period. The
$52,944 or 80.16% increase in data processing and other outside services for the
three months ended March 31, 2003 as compared to the same period in 2002 is the
result of increased data and item processing costs paid
13
to external service providers. These costs are volume driven based upon the
number of customer accounts and related transaction volume. As a result, these
costs increase with the growth of the Company. The increase of $21,014, or
33.80%, in other expenses relates to various costs associated with the increased
size and complexity of the Company.
Liquidity And Interest Rate Sensitivity
The Company's principal sources of liquidity are cash and assets that
can be readily converted into cash, including investment securities. As of March
31, 2003, the Company had $102,780 in cash and due from banks, and $19,802,835
in federal funds sold and other overnight investments. This represents an
increase in liquid assets of $7,789,879 or 64.30% since December 31, 2002, at
which time liquid assets consisted of $363,031 in cash and due from banks, and
$11,752,705 in federal funds sold and other overnight investments. As of March
31, 2003, the Company had approximately $32.4 million of unfunded loan
commitments, of which various types of revolving credit facilities represented
$25.1 million. Typically, revolving credit facilities are not fully funded.
Growth in the Company's loan portfolio, without corresponding growth in deposits
would reduce liquidity, as would reductions in the level of customer deposits.
The primary objective of asset/liability management is to ensure the
steady growth of the Company's primary earnings component, net interest income.
Net interest income can fluctuate with significant interest rate movements. To
minimize the risk associated with these rate swings, management works to
structure the Company's balance sheet so that the ability exists to adjust
pricing on interest-earning assets and interest-bearing liabilities in roughly
equivalent amounts at approximately the same time intervals. Imbalances in these
repricing opportunities at any point in time constitute interest rate
sensitivity.
The measurement of the Company's interest rate sensitivity, or "gap,"
is one of the principal techniques used in asset/liability management. The
interest sensitive gap is the dollar difference between assets and liabilities
subject to interest rate pricing within a given time period, including both
floating rate or adjustable rate instruments and instruments which are
approaching maturity.
14
The following table sets forth the amount of the Company's
interest-earning assets and interest-bearing liabilities as of March 31, 2003,
which are expected to mature or reprice in each of the time periods shown:
Maturity or repricing within
Percent 0 to 3 4 to 12 1 to 5 Over 5
Amount of Total Months Months Years Years
------ -------- ------ ------ ----- -----
Interest-earning assets
Federal funds sold and other
overnight investments $19,802,835 18.48% $19,802,835 $ - $ - $ -
Loans - Variable rate 55,035,440 51.35 55,035,440 - - -
Loans - Fixed rate 26,638,637 24.85 1,860,089 5,806,935 16,986,419 1,985,194
Other earning assets 5,698,535 5.32 5,254,195 - - 444,340
---------- ----------- ----------- ----------- ---------- ----------
Total interest-earning
assets $107,175,447 100.00% $81,952,559 $ 5,806,935 $16,986,419 $2,429,534
========== =========== =========== =========== ========== ==========
Interest-bearing liabilities
Deposits - Variable rate $42,123,833 48.38% $42,123,833 $ - $ - $ -
Deposits - Fixed rate 43,767,963 50.27 4,334,179 16,187,319 23,246,465 -
Short-term borrowings-
Variable rate 1,171,000 1.35 1,171,000 - - -
---------- ----------- ----------- ----------- ---------- ----------
Total interest-bearing
liabilities $87,062,796 100.00% $47,629,012 $16,187,319 $23,246,465 $ -
========== =========== =========== =========== ========== ==========
Periodic repricing differences
$34,323,547 $10,380,384) $(6,260,046)$2,429,534
=========== =========== ========== ==========
Cumulative gap $34,323,547 $23,943,163 $17,683,117 20,112,651
=========== =========== ========== ==========
Ratio of rate sensitive assets
to rate sensitive
liabilities 172.06% 35.87% 73.07% N/A
As indicated by the table, the excess of interest-earning assets over
interest-bearing liabilities of $20,112,651 is concentrated in the categories of
items maturing or repricing within twelve months. These items are somewhat
offset by a large concentration of interest-bearing liabilities maturing or
repricing in 1 to 5 years. These gaps exist as a result of differences in the
demand for maturities on fixed rate loan products as compared to the demand for
maturities on fixed rate deposit products. The excess of interest earning assets
over interest-bearing liabilities maturing or repricing in the next 12 months
would indicate that the Company would benefit from increases in interest rates
during that period. However, since all interest rates and yields do not adjust
at the same pace, the gap is only a general indicator of interest rate
sensitivity. The analysis of the Company's interest-earning assets and
interest-bearing liabilities presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration the
fact that changes in interest rates do not affect all assets and liabilities
equally. Net interest income may be affected by other significant factors in a
given interest rate environment, including changes in the volume and mix of
interest-earning assets and interest-bearing liabilities.
Management will constantly monitor and manage the structure of the
Company's balance sheet, control interest rate exposure, and evaluate pricing
strategies. Strategies to better match maturities of interest-earning assets and
interest-bearing liabilities could include structuring loans with rate floors
and ceilings on variable rate notes and by providing for repricing opportunities
on fixed rate notes. Management believes that a lending strategy focusing on
variable rate loans will best facilitate the goal of minimizing interest rate
risk through the origination of variable rate and short term fixed rate
products. However, management will opportunistically enter into fixed rate loans
and/or investments when, in management's judgment, rates adequately compensate
the Company for the interest rate risk. The Company's current investment
concentration in federal
15
funds sold and other overnight investments provides the most flexibility and
control over rate sensitivity since it generally can be restructured more
quickly than the loan portfolio. On the liability side, deposit products can be
restructured so as to offer incentives to attain the maturity distribution
desired, although competitive factors sometimes make control over deposits
difficult.
In theory, maintaining a nominal level of interest rate sensitivity can
diminish interest rate risk. In practice, this is made difficult by a number of
factors, including cyclical variation in loan demand, different impacts on
interest sensitive assets and liabilities when interest rates change, and the
availability of funding sources. Management generally will attempt to maintain a
balance between rate-sensitive assets and liabilities as the exposure period is
lengthened to minimize the overall interest rate risk to the Company.
Capital Resources
The Company had stockholders' equity at March 31, 2003 of $7,403,257 as
compared to $7,609,658 at December 31, 2002. The decrease in capital is a result
of the losses incurred in 2003 and is consistent with the initial expectations
of management. The Company has declared no cash dividends since its inception.
On April 30, 2003, the Company completed a private offering with 620,690 shares
issued and net proceeds after offering costs of approximately $4,450,000.
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.
Banking regulations also limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agencies. Regulatory approval is
required to pay dividends that exceed the Bank's net profits for the current
year plus its retained net profits for the preceding two years. The Bank could
not have paid dividends to the Company without approval from bank regulatory
agencies at March 31, 2003.
Item 3. Controls and Procedures
Within 90 days prior to the date of this report, Bay National
Corporation's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of Bay National Corporation's
disclosure controls and procedures. Based upon that evaluation, Bay National
Corporation's Chief Executive Officer and Chief Financial Officer concluded that
Bay National Corporation's disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and procedures that are designed
to ensure that information required to be disclosed in Bay National
Corporation's reports filed or submitted under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
In addition, since the Chief Executive Officer's and Chief Financial
Officer's most recent review of Bay National Corporation's internal controls,
there have been no significant changes in Bay National Corporation's internal
controls or in other factors that could significantly affect those controls.
Information Regarding Forward-Looking Statements
16
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. These statements are based on Bay National Corporation's beliefs,
assumptions and on information available to Bay National Corporation as of the
date of this filing, and involve risks and uncertainties. These risks and
uncertainties include, among others, those discussed in Bay National
Corporation's Form 10-KSB under the caption "Factors Affecting Future Results",
such as: Bay National Corporation's limited 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 and you should not put undue reliance on any
forward-looking statements. All forward-looking statements speak only as of the
date of this filing, and Bay National Corporation undertakes no obligation to
make any revisions to the forward-looking statements to reflect events or
circumstances after the date of this filing or to reflect the occurrence of
unanticipated events.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable
(c) Recent Sales of Unregistered Securities
On October 31, 2002, Bay National Corporation commenced a
private offering, to accredited investors, only of an aggregate of 550,000
shares of its common stock, which was subsequently increased to 620,690 shares
of its common stock. The purchase price per share was $7.25 for an aggregate
purchase price of $4,500,002. The private offering terminated on April 30, 2003
with all shares issued and net proceeds after offering costs of approximately
$4,450,000. As of March 31, 2003, Bay National Corporation had received and
accepted subscriptions from accredited investors to purchase 378,456 shares in
the private offering.
There were and will be no underwriting discounts or
commissions paid with respect to the private offering. Bay National Corporation
believes that the private offering is exempt from the registration requirements
of the Securities Act of 1933 by virtue of Section 4(2) of the Securities Act of
1933 and Rule 506 promulgated thereunder. The transaction is not being conducted
by any form of general solicitation or general advertising and, in connection
with the transaction, Bay National Corporation is taking reasonable care to
assure that the investors are not underwriters within the meaning of Section
2(11) of the Securities Act by, among other things, making reasonable inquiry of
each investor to confirm that the investor is taking his or her securities for
investment only and not with a view to or for sale in connection with any
distribution of the securities and will place appropriate legends on the share
certificates.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
None
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Certification of Periodic Financial Report pursuant to 18
U.S.C. Section 1350
99.2 Certification of Periodic Financial Report pursuant to 18
U.S.C. Section 1350
18
(b) Reports on Form 8-K.
Form 8-K filed, dated February 4, 2003, Item 9.
19
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: May 14, 2003 By: /s/ Hugh W. Mohler
----------------------------------
Hugh W. Mohler, President
(Principal Executive Officer)
Date: May 14, 2003 By: /s/ Mark A. Semanie
----------------------------------
Mark A. Semanie, Treasurer
(Principal Accounting and Financial
Officer)
20
I, Hugh W. Mohler, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Bay National
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ Hugh W. Mohler
----------------------
Name: Hugh W. Mohler
Title: Chairman, President and Chief
Executive Officer
21
I, Mark A. Semanie, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Bay National
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ Mark A. Semanie
-------------------
Name: Mark A. Semanie
Title: Executive Vice President and
Chief Financial Officer
22