baynational10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2009
Commission
file number: 000-51765
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)
(410)
494-2580
(Registrant’s
telephone number, including area code)
Indicate
by checkmark 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.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 (§232.405 of this chapter) of
Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
|
|
Non-accelerated
filer o (Do not
check if a smaller reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ____ No X
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
At November 16, 2009, the issuer had
2,154,301 shares of
Common Stock outstanding.
PART
I - FINANCIAL INFORMATION
BAY
NATIONAL CORPORATION
CONSOLIDATED
BALANCE SHEETS
As of
September 30, 2009 and December 31, 2008
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
59,931,031 |
|
|
$ |
7,263,034 |
|
Federal
funds sold and other overnight investments
|
|
|
943,374 |
|
|
|
2,023,478 |
|
Investment
securities available for sale (AFS) - at fair value
|
|
|
20,914,032 |
|
|
|
- |
|
Federal
Reserve and Federal Home Loan Bank Stock
|
|
|
1,151,150 |
|
|
|
1,239,600 |
|
|
|
|
|
|
|
|
|
|
Loans
held for sale
|
|
|
2,318,791 |
|
|
|
1,187,954 |
|
Loans,
net of unearned fees
|
|
|
201,068,836 |
|
|
|
247,162,767 |
|
Total
Loans
|
|
|
203,387,627 |
|
|
|
248,350,721 |
|
Less:
Allowance for credit losses
|
|
|
(6,202,759
|
) |
|
|
(5,675,035
|
) |
Loans, net
|
|
|
197,184,868 |
|
|
|
242,675,686 |
|
Other
real estate owned, net
|
|
|
4,127,070 |
|
|
|
3,873,405 |
|
Premises
and equipment, net
|
|
|
864,165 |
|
|
|
1,151,246 |
|
Investment
in bank owned life insurance
|
|
|
5,438,830 |
|
|
|
5,268,529 |
|
Current
and deferred income taxes
|
|
|
5,395,443 |
|
|
|
5,745,739 |
|
Accrued
interest receivable and other assets
|
|
|
1,578,408 |
|
|
|
1,347,271 |
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
297,528,371 |
|
|
$ |
270,587,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
deposits
|
|
$ |
52,925,290 |
|
|
$ |
49,945,354 |
|
Interest-bearing
deposits
|
|
|
224,605,407 |
|
|
|
194,682,678 |
|
Total deposits
|
|
|
277,530,697 |
|
|
|
244,628,032 |
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
- |
|
|
|
1,864,010 |
|
Subordinated
debt
|
|
|
8,000,000 |
|
|
|
8,000,000 |
|
Accrued
expenses and other liabilities
|
|
|
1,200,801 |
|
|
|
1,073,945 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
286,731,498 |
|
|
|
255,565,987 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock - $.01 par value, authorized: 9,000,000 shares
|
|
|
|
|
|
|
|
|
authorized,
2,154,301 and 2,153,101 issued and outstanding as of
September
30, 2009 and December 31, 2008, respectively:
|
|
|
21,543 |
|
|
|
21,531 |
|
Additional
paid in capital
|
|
|
17,950,285 |
|
|
|
17,954,770 |
|
Accumulated
deficit
|
|
|
(7,329,570 |
) |
|
|
(2,954,300 |
) |
Accumulated
other comprehensive gain
|
|
|
154,615 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total Stockholders'
Equity
|
|
|
10,796,873 |
|
|
|
15,022,001 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders' Equity
|
|
$ |
297,528,371 |
|
|
$ |
270,587,988 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BAY
NATIONAL CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
For the
three and nine month periods ended September 30, 2009 and 2008
|
|
Three Months
Ended
September
30
|
|
|
Nine
Months Ended
September
30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
2,854,766 |
|
|
$ |
3,556,294 |
|
|
$ |
9,025,431 |
|
|
$ |
11,650,759 |
|
Interest
on federal funds sold and other overnight investments
|
|
|
31,392 |
|
|
|
25,179 |
|
|
|
65,812 |
|
|
|
110,291 |
|
Taxable
interest and dividends on investment securities
|
|
|
160,681 |
|
|
|
4,649 |
|
|
|
200,092 |
|
|
|
43,612 |
|
Total
interest income
|
|
|
3,046,839 |
|
|
|
3,586,122 |
|
|
|
9,291,335 |
|
|
|
11,804,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
1,455,512 |
|
|
|
1,358,319 |
|
|
|
4,455,485 |
|
|
|
4,385,777 |
|
Interest
on short-term borrowings
|
|
|
- |
|
|
|
68,539 |
|
|
|
2,191 |
|
|
|
220,633 |
|
Interest
on subordinated debt
|
|
|
158,204 |
|
|
|
151,523 |
|
|
|
461,354 |
|
|
|
451,645 |
|
Total
interest expense
|
|
|
1,613,716 |
|
|
|
1,578,381 |
|
|
|
4,919,030 |
|
|
|
5,058,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
1,433,123 |
|
|
|
2,007,741 |
|
|
|
4,372,305 |
|
|
|
6,746,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for credit losses
|
|
|
1,800,164 |
|
|
|
2,491,623 |
|
|
|
5,694,230 |
|
|
|
5,517,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for credit losses
|
|
|
(367,040 |
) |
|
|
(483,882 |
) |
|
|
(1,321,925 |
) |
|
|
1,229,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
72,687 |
|
|
|
58,711 |
|
|
|
243,859 |
|
|
|
184,090 |
|
Gain
on sale of mortgage loans
|
|
|
105,733 |
|
|
|
73,387 |
|
|
|
430,291 |
|
|
|
214,024 |
|
Increase
in cash surrender value of bank owned
life insurance
|
|
|
56,755 |
|
|
|
58,473 |
|
|
|
170,301 |
|
|
|
171,795 |
|
(Loss)
Gain on sale of OREO Properties
|
|
|
(11,398 |
) |
|
|
(1,235 |
) |
|
|
(180,490 |
) |
|
|
1,111 |
|
Gain
(Loss) on disposal of furniture & equipment
|
|
|
1,032 |
|
|
|
250 |
|
|
|
(19,845 |
) |
|
|
250 |
|
Other
income
|
|
|
13,148 |
|
|
|
12,397 |
|
|
|
36,114 |
|
|
|
43,301 |
|
Total non-interest
income
|
|
|
237,957 |
|
|
|
201,983 |
|
|
|
680,230 |
|
|
|
614,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
875,264 |
|
|
|
1,545,944 |
|
|
|
2,682,238 |
|
|
|
4,730,271 |
|
Occupancy
expenses
|
|
|
140,532 |
|
|
|
193,306 |
|
|
|
494,421 |
|
|
|
567,724 |
|
Furniture
and equipment expenses
|
|
|
96,718 |
|
|
|
105,349 |
|
|
|
332,372 |
|
|
|
304,800 |
|
Legal
and professional fees
|
|
|
119,453 |
|
|
|
194,543 |
|
|
|
518,425 |
|
|
|
651,614 |
|
Data
and item processing
|
|
|
203,073 |
|
|
|
183,352 |
|
|
|
603,444 |
|
|
|
595,880 |
|
Outsourcing
Costs
|
|
|
193,443 |
|
|
|
29,438 |
|
|
|
580,144 |
|
|
|
147,365 |
|
Advertising
and marketing related expenses
|
|
|
26,831 |
|
|
|
110,067 |
|
|
|
124,895 |
|
|
|
411,157 |
|
Provision
for losses on other real estate owned
|
|
|
61,900 |
|
|
|
56,173 |
|
|
|
101,900 |
|
|
|
117,323 |
|
FDIC
|
|
|
370,891 |
|
|
|
46,229 |
|
|
|
668,781 |
|
|
|
135,604 |
|
Other
expenses
|
|
|
186,865 |
|
|
|
125,359 |
|
|
|
521,955 |
|
|
|
605,571 |
|
Total non-interest
expenses
|
|
|
2,274,970 |
|
|
|
2,589,760 |
|
|
|
6,628,576 |
|
|
|
8,267,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax benefit
|
|
|
(2,404,054
|
) |
|
|
(2,871,659
|
) |
|
|
(7,270,270
|
) |
|
|
(6,423,383
|
) |
Income
tax benefit
|
|
|
(957,490
|
) |
|
|
(1,092,899
|
) |
|
|
(2,895,000
|
) |
|
|
(2,382,191
|
) |
NET
LOSS
|
|
$ |
(1,446,564 |
) |
|
|
(1,778,760
|
) |
|
$ |
(4,375,270 |
) |
|
$ |
(4,041,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss (basic)
|
|
$ |
(0.67 |
) |
|
|
(0.83
|
) |
|
$ |
(2.03 |
) |
|
$ |
(1.88 |
) |
Net Loss
(diluted)
|
|
$ |
(0.67 |
) |
|
|
(0.83
|
) |
|
$ |
(2.03 |
) |
|
$ |
(1.88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average shares outstanding (basic)
|
|
|
2,154,301 |
|
|
|
2,151,825 |
|
|
|
2,153,778 |
|
|
|
2,144,519 |
|
Effect
of Dilution – Stock options and Restricted shares
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Weighted
Average shares outstanding (diluted)
|
|
|
2,154,301 |
|
|
|
2,151,825 |
|
|
|
2,153,778 |
|
|
|
2,144,519 |
|
See
accompanying notes to consolidated financial statements.
BAY
NATIONAL CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the
nine months ended September 30, 2009 and 2008
(Unaudited)
|
|
Common
Stock
|
|
|
Additional
Paid in Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other Comprehensive Gain
|
|
|
Total
Stockholders’ Equity
|
|
Balances
at January 1, 2009
|
|
$ |
21,531 |
|
|
$ |
17,954,770 |
|
|
$ |
(2,954,300 |
) |
|
$ |
0 |
|
|
$ |
15,022,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Stock-based compensation recovery
|
|
|
|
|
|
|
(4,473 |
) |
|
|
|
|
|
|
|
|
|
|
(4,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities available for sale (net of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,615 |
|
|
|
154,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for vested restricted stock units
|
|
|
12 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
(4,375,270 |
) |
|
|
|
|
|
|
(4,375,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 30, 2009
|
|
$ |
21,543 |
|
|
$ |
17,950,285 |
|
|
$ |
(7,329,570 |
) |
|
$ |
154,615 |
|
|
$ |
10,796,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid in Capital
|
|
|
Retained
Earnings/(Deficit)
|
|
|
Accumulated
Other Comprehensive Gain
|
|
|
Total
Stockholders’ Equity
|
|
Balances
at January 1, 2008
|
|
$ |
21,376 |
|
|
$ |
17,788,833 |
|
|
$ |
2,110,343 |
|
|
$ |
- |
|
|
$ |
19,920,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
62,800 |
|
|
|
- |
|
|
|
- |
|
|
|
62,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock
|
|
|
155 |
|
|
|
90,420 |
|
|
|
- |
|
|
|
- |
|
|
|
90,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
- |
|
|
|
- |
|
|
|
(4,041,192
|
) |
|
|
- |
|
|
|
(4,041,192
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 30, 2008
|
|
$ |
21,531 |
|
|
$ |
17,942,053 |
|
|
$ |
(1,930,849 |
) |
|
$ |
- |
|
|
$ |
16,032,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
BAY
NATIONAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the
nine months ended September 30, 2009 and 2008
(Unaudited)
|
|
2009
|
|
|
2008
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(4,375,270 |
) |
|
$ |
(4,041,192 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
249,062 |
|
|
|
244,911 |
|
Loss
(gain) on disposal of furniture & equipment
|
|
|
19,845 |
|
|
|
(250 |
) |
Accretion
of investment discounts
|
|
|
(192 |
) |
|
|
(471
|
) |
Amortization
of investment premiums
|
|
|
32,324 |
|
|
|
- |
|
Provision
for credit losses
|
|
|
5,694,230 |
|
|
|
5,517,252 |
|
Provision
for losses on other real estate owned
|
|
|
101,900 |
|
|
|
117,323 |
|
Loss
(gain) on sale of real estate acquired through foreclosure
|
|
|
180,490 |
|
|
|
(1,111 |
) |
Stock-based
(recovery) compensation, net
|
|
|
(4,473 |
) |
|
|
62,800 |
|
Increase
in cash surrender of bank owned life insurance
|
|
|
(170,301 |
) |
|
|
(171,795
|
) |
Deferred
income taxes
|
|
|
(2,926,443 |
) |
|
|
(1,890,000
|
) |
Decrease
in income taxes receivable
|
|
|
3,276,739 |
|
|
|
- |
|
Gain
on sale of loans held for sale
|
|
|
(430,291 |
) |
|
|
(214,024
|
) |
Origination
of loans held for sale
|
|
|
(52,316,969 |
) |
|
|
(70,412,407
|
) |
Proceeds
from sale of loans
|
|
|
51,616,422 |
|
|
|
79,803,097 |
|
Net
increase in accrued interest receivable and other assets
|
|
|
(231,137 |
) |
|
|
(322,772 |
) |
Net
increase (decrease) in accrued expenses and other
liabilities
|
|
|
23,825 |
|
|
|
(233,389 |
) |
Net
cash provided by operating activities
|
|
|
739,761 |
|
|
|
8,457,972 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Redemption
of investment securities available for sale
|
|
|
789,941 |
|
|
|
400,000 |
|
Purchases
of investment securities available for sale
|
|
|
(21,478,412 |
) |
|
|
- |
|
Redemption
(purchase) of Federal Reserve Bank Stock
|
|
|
40,750 |
|
|
|
(96,900 |
) |
Redemption
of Federal Home Loan Bank of Atlanta Stock
|
|
|
47,700 |
|
|
|
572,300 |
|
Net
decrease (increase) in loans
|
|
|
39,114,028 |
|
|
|
(21,957,327
|
) |
Proceeds
from sale and recoveries of real estate acquired through
foreclosure
|
|
|
1,503,264 |
|
|
|
1,141,721 |
|
Expenditures
for other real estate owned
|
|
|
(225,921 |
) |
|
|
(34,087
|
) |
Proceeds
(expenditures) for premises and equipment
|
|
|
18,173 |
|
|
|
(298,889
|
) |
Net
cash provided by (used in) investing activities
|
|
|
19,809,523 |
|
|
|
(20,273,182
|
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
32,902,664 |
|
|
|
31,362,489 |
|
Net
decrease in short-term borrowings
|
|
|
(1,864,056 |
) |
|
|
(9,654,164
|
) |
Net
proceeds from issuance of common stock
|
|
|
- |
|
|
|
90,575 |
|
Net
cash provided by financing activities
|
|
|
31,038,608 |
|
|
|
21,798,900 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
51,587,893 |
|
|
|
9,983,690 |
|
Cash
and cash equivalents at beginning of year
|
|
|
9,286,512 |
|
|
|
7,173,671 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at September 30,
|
|
$ |
60,874,405 |
|
|
$ |
17,157,361 |
|
Supplemental
information:
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
4,526,972 |
|
|
$ |
5,072,088 |
|
Income
taxes paid
|
|
$ |
- |
|
|
$ |
353,894 |
|
Accrued
director fees paid in common stock
|
|
$ |
- |
|
|
$ |
67,835 |
|
Amount
transferred from loans to other real estate owned
|
|
$ |
1,813,398 |
|
|
$ |
5,262,512 |
|
Amount
transferred from loans held for sale to loans
|
|
$ |
- |
|
|
$ |
972,144 |
|
See
accompanying notes to consolidated financial statements.
BAY
NATIONAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited)
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 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, 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
periods have been included. The balances as of December 31, 2008 have been
derived from audited financial statements. These consolidated financial
statements should be read in conjunction with the financial statements and
accompanying notes included in Bay National Corporation’s 2008 Annual Report on
Form 10-K. There have been no significant changes to the Company’s accounting
policies as disclosed in the 2008 Annual Report.
The
results shown in this interim report are not necessarily indicative of results
to be expected for the full year 2009 or any other interim period.
The
accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices in the banking industry.
The Company has evaluated subsequent
events for potential recognition and /or disclosure through November 16, 2009,
the date the consolidated financial statements included in this Quarterly Report
on Form 10-Q were issued.
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.
Recent
Accounting Pronouncements and Developments
In June
2009, the Financial Accounting Standards Board’s (FASB) issued guidance on “The
FASB Accounting Standards Codification and Hierarchy of Generally Accepted
Accounting Principles” and established the FASB Accounting Standards
Codification as the source of authoritative accounting principles in the
preparation of financial statements in conformity with generally accepted
accounting principles (“GAAP”). This guidance also explicitly
recognized rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC
registrants. This guidance is effective for financial statements
issued for periods ending after September 15, 2009. The adoption of
this guidance did not have an impact on our consolidated financial
statements.
In May
2009, the FASB issued guidance on “Subsequent Events.” This guidance established
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or available
to be issued. This guidance defines (i) the period after the balance sheet date
during which a reporting entity’s management should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (iii) the disclosures an entity should make about
events or transactions that occurred after the balance sheet
date. This guidance is effective for the Company’s financial
statements for periods ending after June 15, 2009 and did not have a significant
impact on the Company’s financial statements.
In April
2009, the FASB issued guidance on “Interim Disclosures about
Fair Value of Financial Instruments.” This guidance requires an
entity to provide disclosures about the fair value of financial instruments in
interim financial information and annual financial statements and is effective
for periods ending after June 15, 2009. The new interim disclosures
are included in Note 4 – Fair Value Measurements.
In April
2009, FASB issued guidance on the “Recognition and Presentation of
Other-Than-Temporary Impairments.” This guidance (i) changes existing
guidance for determining whether an impairment to debt securities is other than
temporary and (ii) replaces the existing requirement that the entity’s
management assert it has both the intent and ability to hold an impaired
security until recovery with a requirement that management assert: (a) it does
not have the intent to sell the security; and (b) it is more likely than not it
will not have to sell the security before recovery of its cost
basis. Under the Recognition and Presentation of Other
–Than-Temporary Impairments guidance, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount
of the impairment related to other factors is recognized in other comprehensive
income. The Company adopted the provision of the Recognition and
Presentation of Other –Than-Temporary Impairments during the second quarter of
2009 and adoption did not significantly impact the Company’s financial
statements.
In April
2009, the FASB issued guidance on “Determining Fair Value When the Volume and
Level of Activity for Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” This guidance affirms
that the objective of fair value when the market for an asset is not active is
the price that would be received to sell the asset in an orderly transaction,
and clarifies and includes additional factors for determining whether there has
been a significant decrease in market activity for an asset when the market for
that asset is not active. This guidance requires an entity to base
its conclusion about whether a transaction was not orderly on the weight of the
evidence. This guidance is effective for periods after June 15, 2009
and did not significantly impact the Company’s financial
statements.
In
December 2008, the FASB issued guidance on the “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities.” This guidance increases disclosure requirements
for public companies and are effective for reporting periods (interim and
annual) that end after December 15, 2008. The purpose of this
guidance is to promptly improve disclosures by public entities and enterprises
until the pending amendments to FASB guidance on “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and
Consolidation of Variable Interest Entities” is finalized by the
Board. This guidance amends “Statement Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities” to require
public entities to provide additional disclosures about transferors’ continuing
involvement with transferred financial assets. This guidance also
amends the “Consolidation of Variable Interest Entities” guidance to require
public enterprises, including sponsors that have a variable interest in a
variable interest entity, to provide additional disclosures about their
involvement with variable interest entities. This guidance is related
to disclosures only and does not have an impact on our consolidated financial
statements.
In August
2008, the FASB issued guidance on “Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities.” This
new guidance accounts for unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) that are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class
method. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008. The Company has
not granted any share-based payment awards with non-forfeitable rights to
dividends or dividend equivalents and therefore, the adoption of this new
standard does not have a material impact on its consolidated financial
statements.
Accounting
pronouncements issued but not yet effective.
In June
2009, the FASB issued guidance on “Accounting for Transfers of Financial Assets”
that requires enhanced disclosures about transfer of financial assets and a
company’s continuing involvement in transferred assets. This guidance
is effective for financial statements issued for fiscal years beginning after
November 15, 2009. We do not expect the adoption of this guidance to
have any impact on the Company’s disclosure, since we do not engage in transfer
of financial assets.
In June
2009, the FASB issued guidance which 1) replaces the quantitative-based risks
and rewards calculations for determining whether an enterprise is the primary
beneficiary in a variable interest entity with an approach that is primarily
qualitative, 2) requires ongoing assessments of whether an enterprise is the
primary beneficiary of a variable interest entity, and 3) requires additional
disclosure about an enterprise’s involvement in variable interest entities. This
guidance is effective for financial statements issued for fiscal years beginning
after November 15, 2009. We do not expect the adoption of this
guidance to have a material impact, if any, on the Company’s consolidated
financial condition or results of operation.
2. INVESTMENT SECURITIES
AVAILABLE FOR SALE
As of
December 31, 2008, there were no investment securities available for
sale. Amortized cost and estimated fair value of securities available
for sale as of September 30, 2009 are summarized as follows:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
US
Government Agency Securities
|
|
$ |
3,999,725 |
|
|
$ |
29,205 |
|
|
$ |
- |
|
|
$ |
4,028,930 |
|
Mortgage-backed
Securities
|
|
|
16,656,614 |
|
|
|
243,819 |
|
|
|
15,332 |
|
|
|
16,885,102 |
|
Total
Investment Securities
|
|
$ |
20,656,339 |
|
|
$ |
273,024 |
|
|
$ |
15,332 |
|
|
$ |
20,914,032 |
|
Gross
unrealized losses and fair value by length of time that the individual available
securities have been in a continuous unrealized loss position are as
follows:
|
|
Less
than 12 months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized Losses
|
|
Mortgage-backed
Securities
|
|
$ |
1,386,452 |
|
|
$ |
15,332 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,386,452 |
|
|
$ |
15,332 |
|
Total
Investment Securities
|
|
$ |
1,386,452 |
|
|
$ |
15,332 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,386,452 |
|
|
$ |
15,332 |
|
Gross
unrealized losses that exist are the result of changes in market interest rates
since original purchases. Because the Company does not intend
to sell the investments nor is it more likely than not that the Company will be
required to sell the investments before recovery of their amortized cost basis,
the Company does not consider these investments to be other–than-temporarily
impaired at September 30, 2009.
Contractual
maturities of debt securities at September 30, 2009 are shown
below. Actual maturities may differ from contractual maturities
because borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
Available
for Sale:
Due
in one year or less
|
|
$ |
- |
|
|
$ |
- |
|
Due
after one year through five years
|
|
|
3,999,725 |
|
|
|
4,028,930 |
|
Due
after five years through ten years
|
|
|
- |
|
|
|
- |
|
Due
after ten years
|
|
|
- |
|
|
|
- |
|
Mortgage-backed
securities
|
|
|
16,656,614 |
|
|
|
16,885,102 |
|
Total
Investment Securities
|
|
$ |
20,656,339 |
|
|
$ |
20,914,032 |
|
3. FAIR
VALUE MEASUREMENTS
Effective
January 1, 2008, the Company adopted the FASB’s guidance on the accounting for
fair value measurements which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. In accordance with the FASB’s
literature, the Company must apply this guidance whenever other standards
require (or permit) assets or liabilities to be measured at fair value but it
does not expand the use of fair value in any new circumstances. In this
standard, the FASB clarifies the principle that fair value should be based on
the assumptions that market participants would use when pricing the asset or
liability. In support of this principle, the FASB’s guidance establishes a fair
value hierarchy that prioritizes the information used to develop those
assumptions. The fair value hierarchy is as follows:
Level 1
inputs – Unadjusted quoted prices in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement
date.
Level 2
inputs - Inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. These might include
quoted prices for similar assets and liabilities in active markets, and inputs
other than quoted prices that are observable for the asset or liability, such as
interest rates and yield curves that are observable at commonly quoted
intervals.
Level 3
inputs - Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entity’s own assumptions about the assumptions that
market participants would use in pricing the assets or liabilities.
Investment
Securities Available for Sale
Investment
Securities available for sale are recorded at fair value on a recurring
basis. Fair value measurement is based upon quoted prices, if
applicable. If quoted prices are not available, fair value is
measured using independent pricing models or other model-based valuation
techniques such as present value of future cash flows, adjusted for the
security’s credit rating, prepayment assumptions and other factors such as
credit loss assumption. Level 1 securities include those traded on an active
exchange such as the New York Stock Exchange, Treasury securities that are
traded by dealers or brokers in active over-the-counter markets and money market
funds. Level 2 securities include mortgage-backed securities issued
by government sponsored entities, municipal bonds and corporate debt
securities. Securities classified as Level 3 include asset-backed
securities in less liquid markets.
Loans
The
Company does not record loans at fair value on a recurring basis, however, from
time to time, a loan is considered impaired and, if appropriate, a specific
allowance for credit loss is established. Loans for which it is
probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan are considered impaired. Once
a loan is identified as individually impaired, management measures impairment in
accordance with FASB’s guidance for accounting by creditors for the impairment
of a loan. The fair value of impaired loans is estimated using one of several
methods, including the collateral value, market value of similar debt,
enterprise value, liquidation value and discounted cash flows. Those
impaired loans not requiring a specific allowance represent loans for which the
fair value of expected repayments or collateral exceed the recorded investment
in such loans. At September 30, 2009, substantially all of the
impaired loans were evaluated based upon the fair value of the
collateral. In accordance with FASB’s guidance, impaired loans where
an allowance is established based on the fair value of collateral require
classification in the fair value hierarchy. When the fair value of
the collateral is based on an observable market price or a current appraised
value, the Company measures and records the loan as nonrecurring Level
2. When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company measures and records the
loan as nonrecurring Level 3.
Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
The table
below presents the recorded amount of assets and liabilities measured at fair
value on a recurring basis as of September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Carrying
Value (Fair Value)
|
|
|
Quoted
Prices
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Other Unobservable Inputs
(Level
3)
|
|
Investment
securities available for sale
|
|
$ |
20,914 |
|
|
$ |
- |
|
|
$ |
20,914 |
|
|
$ |
- |
|
Total
assets measured on a recurring basis at fair value
|
|
$ |
20,914 |
|
|
$ |
- |
|
|
$ |
20,914 |
|
|
$ |
- |
|
The value
of other real estate owned (“OREO”) property is determined at the time of
foreclosure and generally is based upon the lower of cost or net realizable
value (as determined by third party real estate appraisals) less the estimated
cost of disposal. Also at the time of foreclosure, the excess (if
any) of the carrying value of the underlying loan receivable over the net
realizable value is charged-off before transferring the remaining balance from
loan receivable into OREO.
On a
nonrecurring basis, the Company may be required to measure certain assets at
fair value in accordance with generally accepted accounting
principles. These adjustments usually result from application of
lower-of-cost-or-market accounting or write-downs of specific
assets.
The
following table includes the assets measured at fair value on a nonrecurring
basis as of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Carrying
Value (Fair Value)
|
|
|
Quoted
Prices
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Other Unobservable inputs
(Level
3)
|
|
Impaired
Loans
|
|
$ |
31,675 |
|
|
$ |
- |
|
|
$ |
31,675 |
|
|
$ |
- |
|
Real
estate acquired through foreclosure
|
|
|
4,127 |
|
|
|
- |
|
|
|
4,127 |
|
|
|
- |
|
Total
assets measured on a non-recurring basis at fair value
|
|
$ |
35,802 |
|
|
$ |
- |
|
|
$ |
35,802 |
|
|
$ |
- |
|
The
Company discloses fair value information about financial instruments, for which
it is practicable to estimate the value, whether or not such financial
instruments are recognized on the balance sheet. Financial
instruments have been defined broadly to encompass 98.5% of the Company's assets
and 100% of its liabilities. Fair value is the amount at which a financial
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation, and is best evidenced by a quoted
market price, if one exists.
Quoted
market prices, where available, are shown as estimates of fair market values.
Because no quoted market prices are available for a significant part of the
Company's financial instruments, the fair values of such instruments have been
derived based on the amount and timing of future cash flows and estimated
discount rates.
Present
value techniques used in estimating the fair value of many of the Company's
financial instruments are significantly affected by the assumptions used. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate cash settlement of the instrument. Additionally, the accompanying
estimates of fair values are only representative of the fair values of the
individual financial assets and liabilities and should not be considered an
indication of the fair value of the Company.
The
following disclosure of estimated fair values of the Company's financial
instruments at September 30, 2009 and December 31, 2008 are made in accordance
with the requirements of SFAS No. 107 and are as follows:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and temporary investments (1)
|
|
$ |
60,874,405 |
|
|
$ |
60,874,405 |
|
|
$ |
9,286,512 |
|
|
$ |
9,286,512 |
|
Investments
available-for-sale
|
|
|
20,914,032 |
|
|
|
20,914,032 |
|
|
|
- |
|
|
|
- |
|
Other
equity securities
|
|
|
1,151,150 |
|
|
|
1,151,150 |
|
|
|
1,239,600 |
|
|
|
1,239,600 |
|
Bank
owned life insurance
|
|
|
5,438,830 |
|
|
|
5,438,830 |
|
|
|
5,268,529 |
|
|
|
5,268,529 |
|
Loans,
net of allowances (2)
|
|
|
197,184,868 |
|
|
|
198,710,560 |
|
|
|
242,675,686 |
|
|
|
245,112,847 |
|
Accrued
interest receivable and other assets (3)
|
|
|
6,848,408 |
|
|
|
6,848,408 |
|
|
|
7,093,010 |
|
|
|
7,093,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
277,530,697 |
|
|
$ |
278,313,564 |
|
|
$ |
244,628,032 |
|
|
$ |
245,085,887 |
|
Short-term
borrowings
|
|
|
- |
|
|
|
- |
|
|
|
1,864,056 |
|
|
|
1,864,056 |
|
Subordinated
debt
|
|
|
8,000,000 |
|
|
|
6,218,143 |
|
|
|
8,000,000 |
|
|
|
5,796,000 |
|
Accrued
interest payable and other liabilities (3)
|
|
|
1,200,801 |
|
|
|
1,200,801 |
|
|
|
1,073,899 |
|
|
|
1,073,899 |
|
|
(1)
|
Temporary
investments include federal funds sold and overnight
investments.
|
|
(2)
|
Loans,
net of allowances, include loans held for
sale.
|
|
(3)
|
Only
financial instruments as defined in SFAS guidance “Disclosure about Fair
Value of Financial Instruments,” are included in other assets and other
liabilities.
|
The
following methods and assumptions were used to estimate the fair value of each
category of financial instruments for which it is practicable to estimate that
value:
Cash and due from banks, federal
funds sold and overnight investments. The carrying amount approximated
the fair value.
Investment Securities. The
fair value for U.S. Government Agency and Mortgage-backed securities was based
upon quoted market bids.
Other equity securities. The
fair values of Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) of
Atlanta stock are not readily determinable since these stocks are restricted as
to marketability.
Loans. The fair value was
estimated by computing the discounted value of estimated cash flows, adjusted
for potential credit losses, for pools of loans having similar characteristics.
The discount rate was based upon the current loan origination rate for a similar
loan. Non-performing loans have an assumed interest rate of 0%. The
carrying amount for residential mortgage loans held for sale approximated the
fair value due to the fact, historically, the loans held for sale have been sold
within 60 days of the origination date.
Bank owned life
insurance. The carrying amount approximated the fair value due
to the variable interest rate.
Accrued interest receivable.
The carrying amount approximated the fair value of accrued interest, considering
the short-term nature of the receivable and its expected
collection.
Other assets. The carrying
amount approximated the fair value.
Deposit liabilities. The fair
value of demand, money market savings and regular savings deposits, which have
no stated maturity, were considered equal to their carrying amount, representing
the amount payable on demand. These estimated fair values do not
include the intangible value of core deposit relationships, which comprise a
significant portion of the Bank’s deposit base. Management believes
that the Bank’s core deposit relationships provide a relatively stable, low-cost
funding source that has a substantial intangible value separate from the value
of the deposit balances.
The fair
value of time deposits was based upon the discounted value of contractual cash
flows at current rates for deposits of similar remaining maturity.
Short-term borrowings. The
carrying amount approximated the fair value due to their variable interest
rates.
Subordinated Debt. Fair values
were calculated by discounting the carrying values using a cash flow approach
based on market rates as of September 30, 2009 and December 31,
2008. The September 30, 2009 fair value does not reflect the
Company’s election in January of 2009 to defer interest payments.
Other liabilities. The
carrying amount approximated the fair value of accrued interest payable, accrued
dividends and premiums payable, considering their short-term nature and expected
payment.
Off-balance sheet instruments.
The Company charges fees for commitments to extend credit. Interest rates on
loans, for which these commitments are extended, are normally committed for
periods of less than one month. Fees charged on standby letters of credit and
other financial guarantees are deemed to be immaterial and these guarantees are
expected to be settled at face amount or expire unused. It is impractical to
assign any fair value to these commitments.
4.
INCOME TAXES
The
Company employs the liability method of accounting for income taxes as required
by the FASB literature on the 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 basis 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. The Company adopted the provisions of the FASB literature
for the accounting for uncertainty in income taxes in the first quarter of
2007. The Company utilizes statutory requirements for its income tax
accounting and avoids risks associated with potentially problematic tax
positions that may incur challenge upon audit, where an adverse outcome is more
likely than not. Therefore, no provisions are made for either
uncertain tax positions or accompanying potential tax penalties and interest for
underpayments of income taxes in the Company’s tax reserves.
5. EARNINGS
PER SHARE
Earnings per common share are
computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share is computed by
dividing net income by the weighted average number of common shares outstanding
during the period, including any potential dilutive common shares outstanding,
such as options. The Company’s common stock options totaling 135,441 were not
considered in the computation of diluted earnings per share for the three or
nine month periods ended September 30, 2009 or September 30, 2008 because the
results would have been anti-dilutive in both periods.
6. STOCK-BASED
COMPENSATION
Effective
January 1, 2006, the Company adopted FASB’s guidance on the accounting for
share-based payments and has included the stock-based employee compensation cost
in its income statements for the three and nine month periods ended September
30, 2009 and 2008. Amounts recognized in
the financial statements with respect to stock-based compensation are as
follows:
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amounts expensed (recovered) against income, before tax
benefit
|
|
$ |
1,525 |
|
|
$ |
10,155 |
|
|
$ |
(4,473 |
) |
|
$ |
62,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of related income tax benefit (expense) recognized in
income
|
|
$ |
519 |
|
|
$ |
3,453 |
|
|
$ |
(1,521 |
) |
|
$ |
20,650 |
|
The
recovery related to forfeitures of restricted stock units. An
estimated forfeiture rate was not considered in the fair value calculation at
time of grant.
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during the year ended December 31,
2002:
Dividend
yield
|
|
|
|
|
-
|
|
Expected
volatility
|
|
|
|
|
20.00%
|
|
Risk-free
interest rate
|
|
|
|
|
4.17%
|
|
Expected
lives (in years)
|
|
|
|
|
8
|
|
No stock
options have been issued since 2002.
The Bay
National Corporation 2007 Stock Incentive Plan (the “Incentive Plan”) was
established effective May 22, 2007 and provides for the granting of incentive
stock options intended to comply with the requirements of Section 422 of the
Internal Revenue Code (“incentive stock options”), non-qualified stock options,
stock appreciation rights (“SARs”), restricted or unrestricted stock awards,
awards of phantom stock, performance awards, other stock-based awards, or any
combination of the foregoing (collectively “Awards”). Awards are
available for grant to officers, employees and directors of the Company and its
affiliates, including the Bank, except that non-employee directors are not
eligible to receive awards of incentive stock options.
The
Incentive Plan authorizes the issuance of up to 200,000 shares of common stock
plus any shares that were available under the Company’s 2001 Stock Option Plan
(“Option Plan”) that terminated as of May 22, 2007 and shares subject to options
granted under the Option Plan that expire or terminate without having been fully
exercised. The Incentive Plan has a term of ten years and is
administered by the Compensation Committee of the Board of Directors. The
Compensation Committee consists of at least three non-employee directors
appointed by the Board of Directors. In general, the options have an exercise
price equal to 100% of the fair market value of the common stock on the date of
the grant.
As of
September 30, 2009, twelve Awards had been granted under the Incentive
Plan. Five of these Awards included an unrestricted stock grant of
550 shares to five employees in August 2007 based on their 2006
performance. The Awards vested immediately upon issuance and the
closing stock price on the grant date was $15.46. The remaining seven
Awards represent restricted stock awards and are discussed in more detail below
in the section entitled “Restricted Stock Units.”
The
following is a summary of changes in outstanding options for the nine month
periods ended September 30, 2009 and 2008:
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
Balance,
January 1, 2008
|
|
|
138,741 |
|
|
$ |
6.99 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
(3,300 |
) |
|
$ |
6.89 |
|
Balance,
September 30, 2008
|
|
|
135,441 |
|
|
$ |
6.99 |
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2009
|
|
|
135,441 |
|
|
$ |
6.99 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
|
|
Balance,
September 30, 2009
|
|
|
135,441 |
|
|
$ |
6.99 |
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted during 2002
|
|
$ |
2.77 |
|
|
|
|
|
The
following table summarizes information about options outstanding at September
30, 2009:
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
Range
of Exercise Price
|
|
Number
|
|
Weighted
Average Remaining Contractual Life
(in
years)
|
|
Weighted
Average Exercise Price
|
|
|
Number
|
|
Weighted
Average Exercise Price
|
$6.89
|
|
116,945
|
|
1
|
|
$6.89
|
|
|
116,945
|
|
$6.89
|
$7.61
|
|
18,496
|
|
1
|
|
$7.61
|
|
|
18,496
|
|
$7.61
|
|
|
135,441
|
|
|
|
$6.99
|
|
|
135,441
|
|
$6.99
|
Based
upon a closing stock price of $1.98 per share as of September 30, 2009, there
was no aggregate intrinsic value in options outstanding and
exercisable.
Restricted Stock
Units
The
following table summarizes the changes in outstanding shares under restricted
stock grants for the nine month periods ended September 30, 2009 and
2008.
|
|
Number
of Shares
|
|
|
Weighted
Value at Issuance Date
|
|
Unvested
grants at January 1, 2009
|
|
|
13,200 |
|
|
$ |
13.24 |
|
Granted
|
|
|
|
|
|
|
- |
|
Vested
|
|
|
(1,200 |
) |
|
|
10.21 |
|
Cancelled
|
|
|
(9,600 |
) |
|
|
14.38 |
|
Unvested
grants at September 30, 2009
|
|
|
2,400 |
|
|
$ |
10.17 |
|
|
|
|
|
|
|
|
|
|
Unvested
grants at January 1, 2008
|
|
|
24,000 |
|
|
$ |
15.91 |
|
Granted
|
|
|
10,500 |
|
|
|
10.23 |
|
Vested
|
|
|
(5,550 |
) |
|
|
15.92 |
|
Cancelled
|
|
|
(15,750 |
) |
|
|
- |
|
Unvested
grants at September 30, 2008
|
|
|
13,200 |
|
|
$ |
13.24 |
|
|
|
|
|
|
|
|
|
|
The
Company recovered $4,473 of compensation net of amortization, associated with
the forfeiture of restricted stock units for the nine month period ending
September 30, 2009.
7. 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.
As of
September 30, 2009, the Bank has been categorized as “Adequately Capitalized” by
the OCC under the regulatory framework for prompt corrective
action. On February 6, 2009, the Bank voluntarily entered into
a Consent Order with the OCC. Among other things, the Consent Order
required that by April 30, 2009 the Bank maintain certain regulatory capital
ratios in excess of the minimum required under the risk-based capital adequacy
guidelines adopted by our regulators. The Bank was not in compliance
with the minimum capital requirements at April 30, 2009 and our request for an
extension of time to meet the requirements was denied. As a result,
we were required to develop a contingency plan for the Bank. Our
current contingency plan consists of a recapitalization of the Bank by the
Company through the issuance of an additional number of shares of the Company’s
common stock in one or more private placements. Any such
private placement would require stockholder authorization and would likely
result in a change in control of the Company. Our stockholders had
previously authorized the issuance of new shares of the Company’s common stock
to be sold in one or more private placements, but this authorization expired on
August 26, 2009. We believe that such issuance will satisfy the
contingency plan requirement as well as applicable minimum capital
requirements.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain amounts and ratios (set forth in the table below) of total and Tier
1 capital (as defined in the regulations) to risk-weighted assets (as defined)
and Tier 1 capital (as defined) to average assets (as defined).
The
Bank’s actual capital amounts and ratios as of September 30, 2009 and December
31, 2008 are presented in the following tables:
September
30, 2009
|
|
|
Actual
|
|
|
For
Capital
Adequacy
Purpose
|
|
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
Total
Capital (to Risk Weighted Assets)*:
|
$
|
17,781,000
|
|
8.21
|
%
|
$
|
17,321,200
|
|
8.00
|
%
|
$
|
21,651,500
|
|
10.00
|
%
|
Tier
I Capital (to Risk Weighted Assets)*:
|
|
15,031,000
|
|
6.94
|
%
|
|
8,660,600
|
|
4.00
|
%
|
|
12,990,900
|
|
6.00
|
%
|
Tier
I Capital (to Average Assets)*:
|
|
15,031,000
|
|
4.98
|
%
|
|
9,054,510
|
|
3.00
|
%
|
|
15,090,850
|
|
5.00
|
%
|
*In
order to be in compliance with the terms of the Consent Order, the Bank
must meet minimum Total Capital, Tier 1 Capital (to Risk
Weighted Assets) and Tier 1 Capital (to Average Assets) ratios of 12.00%,
11.00% and 9.00%, respectively.
|
December
31, 2008
|
|
|
Actual
|
|
|
For
Capital
Adequacy
Purpose
|
|
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
Total
Capital (to Risk Weighted Assets)*:
|
$
|
26,322,000
|
|
9.57
|
%
|
$
|
22,000,960
|
|
8.00
|
%
|
$
|
27,501,200
|
|
10.00
|
%
|
Tier
I Capital (to Risk Weighted Assets)*:
|
|
22,857,000
|
|
8.31
|
%
|
|
11,000,480
|
|
4.00
|
%
|
|
16,500,720
|
|
6.00
|
%
|
Tier
I Capital (to Average Assets)*:
|
|
22,857,000
|
|
8.31
|
%
|
|
8,254,920
|
|
3.00
|
%
|
|
13,758,200
|
|
5.00
|
%
|
*In
order to be in compliance with the terms of the Consent Order, the Bank
must meet minimum Total Capital, Tier 1 Capital (to Risk
Weighted Assets) and Tier 1 Capital (to Average Assets) ratios of 12.00%,
11.00% and 9.00%, respectively.
|
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 September 30, 2009 and December 31, 2008 and for the three
month and nine month periods ended September 30, 2009 and 2008.
Overview
The
Parent was incorporated on June 3, 1999 under the laws of the State of Maryland
to operate as a bank holding company of the Bank. The Bank commenced operations
on May 12, 2000.
The
principal business of the Company is to make loans and other investments and to
accept time and demand deposits. The Company’s primary market areas are in the
Baltimore Metropolitan area, Baltimore-Washington corridor and on Maryland’s
Eastern Shore, although the Company’s business development efforts generate
business outside of these areas. The Company offers a broad range of banking
products, including a full line of business and personal savings and checking
accounts, money market demand accounts, certificates of deposit, and other
banking services. The Company funds a variety of loan types including commercial
and residential real estate loans, commercial term loans and lines of credit,
consumer loans, and letters of credit with an emphasis on meeting the borrowing
needs of small businesses. The Company’s target customers are small and
mid-sized businesses, business owners, professionals, nonprofit institutions and
high net worth individuals.
The
Company experienced a significant operating loss during the nine months ended
September 30, 2009 resulting from difficulties in its loan portfolio from
deteriorating economic conditions and industry-wide problems in commercial and
residential real estate lending. As such, management continues to
emphasize prudent asset/liability management and it has significantly tightened
its underwriting standards for commercial and residential real estate loans. Key
measurements for the three month and nine month periods ended September 30, 2009
include the following:
|
·
|
Total
assets at September 30, 2009 increased to $297.5 million from $270.6
million as of December 31, 2008.
|
|
·
|
Total
loans outstanding decreased from $248.4 million as of December 31, 2008 to
$203.4 million as of September 30,
2009.
|
|
·
|
There
was approximately $10.9 million in non-accrual loans as of September 30,
2009. In addition, the Company foreclosed on or accepted a
deed-in-lieu of foreclosure on three residential real estate properties
related to investor-owned residential real estate during the quarter.
These properties were placed into other real estate owned (“OREO”) at
estimated net realizable value of approximately $1.2
million. As of September 30, 2009, fifteen properties remained
with a net realizable value of $4.1 million. Also, the Company
had troubled debt restructurings totaling $6 million. The Company
continues to maintain appropriate reserves for credit
losses.
|
|
·
|
Seven
properties held in real estate acquired through foreclosure or a
deed-in-lieu of foreclosure, were sold during the nine months ending
September 30, 2009. Net losses were realized on five of the
seven properties sold. In aggregate, losses on the five
properties totaled $183 thousand while a gain of $2 thousand was realized
on the other two properties. The Company also recovered $70
thousand for a loan originally transferred into OREO during 2008 and a
refunded escrow deposit.
|
|
·
|
Deposits
at September 30, 2009 increased to $277.5 million from $244.6 million as
of December 31, 2008.
|
|
·
|
The
Company incurred net losses of $1.4 million and $4.4 million for the three
month and nine month periods ended September 30, 2009, respectively,
compared to net losses of $1.8 million and $4.0 million for the three
month and nine month periods ended September 30, 2008,
respectively.
|
|
·
|
Net
interest income, the Company’s main source of income, was $1.4 million and
$4.4 million during the three month and nine month periods ended September
30, 2009, respectively, compared to $2.0 million and $6.7
million for the comparable three month and nine month periods in
2008.
|
|
·
|
The
Company increased the allowance for credit losses by $528 thousand from
December 31, 2008 to September 30, 2009. Over this nine month
period, the allowance for credit losses was increased by a provision of
$5.7 million in order to reserve for credit losses inherent in the loan
portfolio and was reduced by net charge-offs totaling $5.2
million. Reserves against commercial loans, Home Equity Lines
of Credit (“HELOCs”), residential and commercial real estate loans have
increased from June 30, 2009 to September 30, 2009, reflecting recognition
of an increase in losses inherent in these portfolios. Net
charge-offs were $2.3 million for both second and third quarters of 2009,
preceded by $508 thousand the first quarter, resulting in year-to-date net
charge-offs of $5.2 million for the first nine months of
2009.
|
|
·
|
Non-interest
income increased by $36 thousand and $66 thousand, or 17.8% and 10.7% for
the three month and nine month periods ended September 30, 2009,
respectively, as compared to the same periods in 2008 due
principally to the gains on sale of mortgages partially offset by losses
realized on the sales of other real estate
owned.
|
|
·
|
Non-interest
expenses decreased by $315 thousand and $1.6 million or 12.2% and 19.8%,
for the three month and nine month periods ended September 30, 2009, as
compared to the comparable three month and nine month periods in 2008 due
largely to continued cost savings from several staff reductions subsequent
to the first quarter of 2008 and staff turnover during
2009.
|
|
·
|
The
Company’s common stock closed at $1.98 on September 30, 2009, which
represented a 65% decline from its closing price of $5.70 on September 30,
2008.
|
A
detailed discussion of the factors leading to these changes can be found in the
discussion below.
In
addition, as previously reported, on February 6, 2009, the Bank voluntarily
entered into a Consent Order with the Office of the Comptroller of the Currency
(the “OCC”), its primary banking regulator ( the “Consent Order”), that requires
the Bank to take certain actions.
Results
of Operations
General
The
Company recorded net losses of $1.4 million and $4.4 million for the three month
and nine month periods ended September 30, 2009. This compares to net losses of
$1.8 million and $4.0 million for the same periods in 2008. This is a decrease
of $332 thousand or 18.7 % for the three month period and an increase of $334
thousand or 8.3% for the nine month period. The increase in losses in the nine
month period is due primarily to reductions in net interest income
and higher Federal Deposit Insurance Corporation (“FDIC”) insurance
and outsourcing costs partially offset by reductions in salary expense and
additional income tax benefits during the first nine months of 2009 as compared
to the first nine months of 2008.
The
Bank’s mortgage origination operations, located in Lutherville and Salisbury,
Maryland, originate conventional first and second lien residential mortgage
loans. The Bank sells most of its first and second lien residential mortgage
loans in the secondary market and typically recognizes a gain on the sale of
these loans after the payment of commissions to the loan origination officers.
For the nine month periods ended September 30, 2009 and 2008, net gains on the
sale of mortgage loans totaled $430 thousand and $214 thousand, respectively.
Gains on the sale of mortgage loans have increased for the three and nine month
periods ended September 30, 2009 as compared to the same periods in 2008 due to
a general increase in refinance activity in the Company’s markets.
In 2004,
the Company began purchasing 100% participations in mortgage loans originated by
a mortgage company in the Baltimore metropolitan area. The participations were
for loans for which a secondary market investor had committed to purchase. The
participations were typically held for a period of three to four weeks before
being sold to the secondary market investor. The Bank terminated the
program in August 2008 due to deterioration in the national mortgage markets
and, as of September 30, 2009, the Company had no such loans outstanding under
this program, which were classified as held for sale. The Company
earned $97 thousand from this program for the same period in 2008.
Management
expects the remainder of 2009 to continue to be challenging for earnings as we
limit loan growth and face a weakened economy. Future results
will be subject to the volatility of the provision for credit losses, which is
related to loan quality, loan growth, and the fluctuation of mortgage loan
production, all of which is sensitive to economic and interest rate instability
and other competitive pressures that arise in a recessionary
economy.
Net
Interest Income
Net
interest income is the difference between income on earning assets and the cost
of funds supporting those assets. Earning assets are composed primarily of
loans, investments, and federal funds sold. Interest-bearing deposits, other
short-term borrowings and subordinated debt 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 was $1.4 million and $4.4 million for the three month and nine
month periods ended September 30, 2009 as compared to $2.0 million and $6.7
million for the same three month and nine month periods in 2008. This represents
a decrease of 29% and 35% for the three month and nine month periods ended
September 30, 2009, as compared to the same periods in 2008.
Total
interest income for the three month and nine month periods ended September 30,
2009 was $3.0 million and $9.3 million respectively, compared to $3.6 million
and $11.8 million for the same periods ended September 30, 2008. The
15% and 21% decrease for the three month and nine month periods, respectively,
over the same periods in 2008 were primarily attributable to lost interest from
an increase in the average balance of non-accrual loans and the decline in
average total loans outstanding. In addition, the average target federal funds
rate decreased from 2.44% for the first nine months of 2008 to a range of 0 to
..25% for the first nine months of 2009. As a result, due
to the substantial number of variable rate loans in our portfolio,
which re-price based on the federal funds target rate, the yields on interest
earning assets decreased from 6.09% for the nine months ended September 30, 2008
to 4.47% for the nine months ended September 30, 2009.
The
percentage of average interest-earning assets represented by loans was 84.1% and
94.8% for the nine month periods ended September 30, 2009 and 2008,
respectively. The high percentage of loans to earning assets is consistent with
management’s strategy to maximize net interest income by maintaining a higher
concentration of loans, which typically earn higher yields than investment
securities. For the nine month period ended September 30, 2009, the average
yield on the loan portfolio decreased to 5.16% from 6.34% for the nine month
period ended September 30, 2008, primarily as a result of the decrease in the
federal funds rate and the high percentage of variable-rate loans in our loan
portfolio noted above.
The
average yield on the investment portfolio and other earning assets, such as
federal funds sold, was .81% for the nine month period ended September 30, 2009
as compared to 1.52% for the same period in 2008. This decline in the average
yield was a direct result of a decrease in federal funds rate for the 2009
period. The percentage of average interest-earning assets represented
by investment securities, federal funds sold and interest bearing cash balances
was 15.9% and 5.2% for the nine month periods ended September 30, 2009 and 2008,
respectively. As of September 30, the weighted average yield
for the available for sale investment portfolio was approximately
3.10%.
Interest
expense from deposits and borrowings for the three month and nine month periods
ended September 30, 2009 was $1.6 million and $4.9 million, respectively,
compared to $1.6 million and $5.1 million, respectively for the same periods in
2008. The decrease for the nine month period is the result of the previously
discussed reduction in the target federal funds rate offset by an increase in
the percentage of deposits held in the form of Certificates of Deposit (“CDs”).
CDs are the Bank’s most expensive form of deposits. As of September 30, 2009,
CDs comprised 78.7% of average interest-bearing liabilities compared to 52.3% of
average interest-bearing liabilities as of September 30, 2008, due to
management’s decision to maintain a higher level of liquidity since it has no
available back up lines of credit. Average rates paid on all
interest-bearing liabilities decreased from 3.20% for the nine month period
ended September 30, 2008 to 2.90% for the nine month period ended September 30,
2009.
As a
result of the factors discussed above, the net interest margin decreased to
2.10% for the nine month period ended September 30, 2009 from 3.48% for the same
period in 2008. Although management has been able to decrease deposit rates, the
yield on loans and investments decreased to a greater extent than the cost of
funds. Management has observed ongoing pressure to offer lower rates on loans as
the market for loans has become more competitive while demand remains
low. In addition, the market is very competitive for deposits, which
has limited management’s ability to maintain margins through reductions in the
interest rates on deposit accounts generally and certificate of deposit rates in
particular.
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.
No tax
equivalent adjustments were made and no income was exempt from federal income
taxes. All average balances are daily average balances. The amortization of loan
fees is included in computing interest income; however, such fees are not
material.
Nine
Months Ended September 30, 2009
|
|
|
|
Average
Balance
|
|
|
Interest
and fees
|
|
|
Yield/
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Loans
and loans held for sale
|
|
$ |
233,836,584 |
|
|
$ |
9,025,431 |
|
|
|
5.16
|
% |
Investment
securities
|
|
|
8,661,377 |
|
|
|
200,092 |
|
|
|
3.09 |
|
Federal
funds sold and interest bearing cash balances
|
|
|
35,401,069 |
|
|
|
65,812 |
|
|
|
.25 |
|
Total
earning assets
|
|
|
277,899,030 |
|
|
|
9,291,335 |
|
|
|
4.47
|
% |
Less:
Allowance for credit losses
|
|
|
(5,930,245 |
) |
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
5,602,900 |
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
|
|
3,532,883 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
1,011,552 |
|
|
|
|
|
|
|
|
|
Investment
in bank owned life insurance
|
|
|
5,346,298 |
|
|
|
|
|
|
|
|
|
Current
and deferred taxes receivable
|
|
|
5,823,277 |
|
|
|
|
|
|
|
|
|
Accrued
interest receivable and other assets
|
|
|
2,589,503 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
295,875,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
38,733,863 |
|
|
|
85,631 |
|
|
|
.30
|
% |
Regular
savings deposits
|
|
|
1,047,747 |
|
|
|
- |
|
|
|
.00 |
|
Time
deposits
|
|
|
178,374,265 |
|
|
|
4,369,854 |
|
|
|
3.28 |
|
Short-term
borrowings
|
|
|
620,025 |
|
|
|
2,191 |
|
|
|
.47 |
|
Subordinated
debt
|
|
|
8,000,000 |
|
|
|
461,354 |
|
|
|
7.71 |
|
Total
interest-bearing liabilities
|
|
|
226,775,900 |
|
|
|
4,919,030 |
|
|
|
2.90
|
% |
Net
interest income and spread
|
|
|
|
|
|
$ |
4,372,305 |
|
|
|
1.57
|
% |
Non-interest-bearing
demand deposits
|
|
|
53,024,502 |
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
1,057,313 |
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
15,017,483 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
295,875,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fee income/average earning assets
|
|
|
4.47
|
% |
|
|
|
|
|
|
|
|
Interest
expense/average earning assets
|
|
|
2.37 |
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
2.10
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on Average Assets (Annualized)
|
|
|
(1.92 |
)
% |
|
|
|
|
|
|
|
|
Return
on Average Equity (Annualized)
|
|
|
(38.95 |
)
% |
|
|
|
|
|
|
|
|
Average
Equity to Average Assets
|
|
|
5.08
|
% |
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
Average
Balance
|
|
|
Interest
and fees
|
|
|
Yield/
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Loans
and loans held for sale
|
|
$ |
245,469,775 |
|
|
$ |
11,650,759 |
|
|
|
6.34
|
% |
Investment
securities
|
|
|
1,335,063 |
|
|
|
43,612 |
|
|
|
4.36 |
|
Federal
funds sold and other overnight investments
|
|
|
12,197,159 |
|
|
|
110,291 |
|
|
|
1.21 |
|
Total
earning assets
|
|
|
259,001,997 |
|
|
|
11,804,662 |
|
|
|
6.09
|
% |
Less:
Allowance for credit losses
|
|
|
(6,292,206
|
) |
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
616,815 |
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
|
|
1,926,912 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
1,290,746 |
|
|
|
|
|
|
|
|
|
Investment
in bank owned life insurance
|
|
|
5,118,128 |
|
|
|
|
|
|
|
|
|
Current
and deferred tax receivable
|
|
|
3,262,819 |
|
|
|
|
|
|
|
|
|
Accrued
interest receivable and other assets
|
|
|
1,579,842 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
266,505,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
|
75,649,935 |
|
|
|
1,041,630 |
|
|
|
1.84 |
|
Regular
Savings deposits
|
|
|
1,586,431 |
|
|
|
3,632 |
|
|
|
.31 |
|
Time
deposits
|
|
|
110,540,597 |
|
|
|
3,340,515 |
|
|
|
4.04 |
|
Short-term
borrowings
|
|
|
15,580,423 |
|
|
|
220,633 |
|
|
|
1.89 |
|
Subordinated
debt
|
|
|
8,000,000 |
|
|
|
451,645 |
|
|
|
7.54 |
|
Total
interest-bearing liabilities
|
|
|
211,357,386 |
|
|
|
5,058,055 |
|
|
|
3.20
|
% |
Net
interest income and spread
|
|
|
|
|
|
$ |
6,746,607 |
|
|
|
2.89
|
% |
Non-interest-bearing
demand deposits
|
|
|
35,765,362 |
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
1,098,372 |
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
18,283,933 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
266,505,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fee income/average earning assets
|
|
|
6.09
|
% |
|
|
|
|
|
|
|
|
Interest
expense/average earning assets
|
|
|
2.61 |
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
3.48
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on Average Assets (Annualized)
|
|
|
(2.03 |
)
% |
|
|
|
|
|
|
|
|
Return
on Average Equity (Annualized)
|
|
|
(29.52 |
)
% |
|
|
|
|
|
|
|
|
Average
Equity to Average Assets
|
|
|
6.86
|
% |
|
|
|
|
|
|
|
|
Provision
for Credit Losses
The
provision for
credit losses was $1.8 million and $5.7 million for the three month and nine
month periods ended September 30, 2009, respectively, compared to $2.5 million
and $5.5 million for the comparable periods in 2008. The amount of the provision
for credit losses is reflective of the ongoing economic difficulties that many
businesses and households are experiencing. The economy continues to
suffer the effects of further declines in the values of real estate, which
represents a substantial portion of the collateral for non-performing
loans.
Non-Interest
Income
Non-interest
income consists primarily of gains on the sale of mortgage loans, deposit
account service charges, income on bank owned life insurance and cash management
fees. For the three month and nine month periods ended September 30, 2009, the
Company realized non-interest income of $238 thousand and $680 thousand,
respectively, as compared to $202 thousand and $615 thousand for the same
periods in 2008. Gains on the sale of mortgage loans of $105 thousand and $430
thousand comprised 44.3% and 63.3% of the total for the three month and nine
month periods ended September 30, 2009, respectively. This compares to gains on
the sale of mortgage loans of $73 thousand and $214 thousand, or 36% and 35%, of
total non-interest income for the three month and nine month periods,
respectively, ended September 30, 2008. The level of gains on the sale of
mortgage loans increased for the three month and nine month periods ended
September 30, 2009 due to a general increase in home refinance activity in the
Company’s markets.
Losses on
the sale of OREO properties totaled $11 thousand and $180 thousand for the three
month and nine month periods ended September 30, 2009 as compared to a loss of
$1 thousand in the three month period and a gain of $1 thousand in the nine
month period ended September 30, 2008. Increased foreclosure activity and
deteriorating economic conditions beginning early in 2008 and continuing during
the first nine months of 2009 has caused housing prices to decrease, which is
the reason for the increased loss during the 2009 periods. During the
first nine months of 2008, there were six OREO properties sold compared to seven
properties that were sold during the first nine months of 2009.
Service
charges on deposit accounts totaled $73 thousand and $244 thousand for the three
month and nine month periods ended September 30, 2009, respectively, as compared
to $59 thousand and $184 thousand for the same periods in 2008. The increase of
23.8% and 32.5% is attributable to an increase in overdraft fees charged on
transaction accounts as well as an increase in analysis fees charged on business
checking accounts. Although overdraft fees increased, the Company continues to
maintain a very low level of average overdrafts. Analysis fees have increased as
a result of the previously discussed Federal Reserve actions with respect to the
target federal funds rate, which reduced the rates used to calculate credits
available to customers to offset any analysis fees they incurred.
Gains on
the sales of fixed assets totaled $1 thousand and losses totaled $20 thousand
for the three month and nine month periods ended September 30,
2009. The loss for the nine months is associated with the closing of
our loan production office in Columbia, Maryland in March 2009 and the
relocation of our former mortgage loan origination office from Towson, Maryland
to the Company’s headquarters building in Lutherville, Maryland in November
2008.
The year
to date decrease in other income of 16.6% is attributable to lower wire transfer
and official check fees as a result of our providing fewer of these services
during the first three quarters of 2009.
The
Company will continue to seek ways to expand its sources of non-interest income.
In the future, the Company may enter into fee arrangements with strategic
partners that offer investment advisory, risk management and employee benefit
services. Bay National Bank has not entered into any such fee
arrangements, although the Bank does offer such services to customers through
referral relationships for which it is not compensated. No assurance can be
given that any such fee arrangements will be obtained or
maintained.
Non-Interest
Expense
Non-interest
expense for the three month and nine month periods ended September 30, 2009
totaled $2.3 million and $6.6 million, respectively. This compares to
non-interest expense for the comparable periods in 2008 of $2.6 million and $8.3
million. The decrease of $315 thousand and $1.6 million, or 12.2% and 19.8%, is
primarily attributable to a decrease in salary and employee benefits as a result
of reductions in personnel subsequent to March 31, 2008 and the turnover of
existing staff, partially offset by increases in outsourcing costs and FDIC
insurance costs. Salaries and benefits expense decreased to $875
thousand and $2.7 million for the three month and nine month periods ended
September 30, 2009 from $1.5 million and $4.7 million for the same periods of
2008. The decreases in salaries and benefits for the 2009 periods
related to three separate reductions in personnel since March 31, 2008,
including the closing of the loan production office in Columbia, Maryland during
the first quarter of 2009. As of September 30, 2009, we had 43 active
employees as opposed to 60 at September 30, 2008.
Occupancy
expenses decreased by $53 thousand and $73 thousand for the three-months and
nine months ended September 30, 2009. During the second quarter of 2009, the
Company successfully negotiated sub-leases of its former Towson, Maryland
mortgage origination office and for space that became available in the Company’s
Lutherville, Maryland headquarters building. In addition, the Company negotiated
with a sub-tenant for the space in the former loan production office in
Columbia, Maryland who began sub-leasing the space in June 2009. As a
result, net occupancy expenses have decreased from 2008 levels and also
decreased slightly from second quarter levels of 2009.
Furniture
and equipment expense decreased by $9 thousand and increased by $28 thousand, or
8.2% and 9.1%, for the three months and nine months ended September 30, 2009,
respectively, as compared to the same periods in 2008. The increase
year to date is primarily due to real estate taxes paid on a higher number of
foreclosed properties owned in 2009 compared to 2008. Management
agreed to pay the real estate taxes on properties that were securing
non-performing loans in the process of workout in order to prevent auction of
such properties by various local governments.
Legal and
professional fees decreased $75 thousand and $133 thousand, or 38.6% and 20.4%,
for the three months and nine months ended September 30, 2009, respectively, as
compared to the same periods in 2008. A significant portion of the decrease this
year was attributable to a higher level of workout activity during the first
nine months of 2008 compared to 2009.
Data
processing costs increased by $20 thousand and by $9 thousand, or 10.8% and
1.3%, for the three months and nine months ended September 30, 2009,
respectively, as compared to the same periods in 2008. The increased data
processing costs in the third quarter of 2009 was primarily attributable to
additional expense for the upgrade of a commercial loan software package and
these increased costs will continue for the next eight months.
Outsourcing
costs increased by $164 thousand and by $433 thousand, or 557% and 294%,
respectively, for the three months and nine months ended September 30, 2009 as
compared to the same periods in 2008. Most of the increase is due to
the cost of outside professional services firms providing additional personnel
to assist the Company with streamlining process flows, bridging gaps in the
workforce caused by the departure of several employees and with preparing
materials required by the OCC Consent Order.
Advertising
and marketing-related expenses decreased $83 thousand and $286 thousand, or
75.6% and 69.6%, respectively, for the three months and nine months ended
September 30, 2009 as compared to the same periods in 2008. The decrease is a
result of the combination of expenses incurred in 2008 as the Company expanded
the business development staff and is pursuant to the opening of the office in
Columbia, Maryland in December 2007, as well as an effort to reduce overall
costs for 2009. With a focus on minimizing costs, the Company deemed
advertising a discretionary expenditure and has curtailed such expenditures
beginning in January 2009.
There was
a decrease of $15 thousand, or 13.2%, in the provision for losses on other real
estate owned for the nine month period ended September 30, 2009 compared to the
same period in 2008. The decrease is due to the fact that management accepted
contract offers to purchase various OREO properties before updated appraisals
could be obtained. There were further declines in the values of OREO
during 2009 but they are evidenced by the increase in losses on the sales of
OREO that were discussed previously under the heading “Noninterest Income.”
There was an increase of $6 thousand, or a 10.2% increase during the three month
period ended September 30, 2009 as compared to the same period in
2008.
FDIC
insurance premiums have increased $324 thousand and $533 thousand or 702.3% and
393.2 % for the three month and nine month periods ended September 30, 2009,
respectively, over the same periods in 2008. The FDIC insurance
premium increases are the direct result of the Company’s rating downgrade and
also reflects a special assessment of $150 thousand payable on September 30,
2009. The higher FDIC insurance rate will remain at the elevated level until the
Bank’s rating improves, which could happen after a capital infusion and several
consecutive quarters of net earnings.
Other
expenses for the three month and nine month periods ended September 30, 2009
totaled $187 thousand and $522 thousand, respectively. This compares
to other expense for the comparable periods in 2008 of $125 thousand and $606
thousand, respectively. An increase of $62 thousand in the third
quarter is largely attributable to higher loan collection costs as compared to
the third quarter of 2008. Higher loan collection costs are
attributable to greater amounts of tax, legal and maintenance expenses
associated with maintaining and recovering troubled assets. There was
also a reversal of $64 thousand in accrued director fees in the third quarter
2008 that decreased the other expenses amount during the 2008
period. There are no director fees accrued for 2009 since the
directors waived their fees effective January 1, 2008 for an indefinite period
of time going forward. The year to date decrease of $84 thousand, or 13.8% is
primarily attributable to lower membership dues, telephone and printing expenses
as a result of cost control measures instituted during 2008 which were partially
offset by increases in OCC assessments and loan collection costs.
The
banking industry utilizes an “efficiency ratio” as a key measure of expense
management and overall operating efficiency. This ratio is computed by dividing
non-interest expense by the sum of net interest income before provision for
credit losses and non-interest income. The Company’s efficiency ratio was 136.1%
and 131.2% for the three month and nine month periods ended September 30, 2009.
This compares to 117.2% and 112.3% for the same periods in 2008. The increase in
the efficiency ratio from the prior year is primarily a result of the previously
discussed decline in interest revenues.
Income
Taxes
For the
three month and nine month periods ended September 30, 2009, the Company
recorded an income tax benefit of $957 thousand and $2.9 million, respectively,
compared to benefits of $1.1 million and $2.4 million recorded for the same
periods in 2008. The changes in tax benefits are directly
proportional to the changes in pre-tax losses recognized for the three months
and nine months ended September 30, 2009, when compared to the comparable
periods in 2008.
Financial
Condition
Composition
of the Balance Sheet
As of
September 30, 2009, total assets were $297.5 million. This represents an
increase of $26.9 million, or 10%, since December 31, 2008. The change in total
assets includes increases of $52.7 million in cash and due from banks, $20.9
million in investment securities and $254 thousand in other real estate owned,
net. These increases were partially offset by decreases of $45.5 million in
loans net of the allowance for credit losses, $1.1 million in federal funds sold
and other overnight investments, $350 thousand in current and deferred taxes,
and $287 thousand in premises and equipment.
As of
September 30, 2009, loans net of unearned fees and excluding loans held for
sale, totaled $201.1 million. This represents a decrease of $46.1 million, or
18.7%, from a balance of $247.2 million as of December 31, 2008.
The
composition of the loan portfolio as of September 30, 2009 was approximately
$94.6 million of commercial loans, $3.1 million of consumer loans, and $103.4
million of real estate loans (excluding mortgage loans held for sale). The
composition of the loan portfolio as of December 31, 2008 was approximately
$125.3 million of commercial loans, $3.8 million of consumer loans, and $118.1
million of real estate loans (excluding mortgage loans held for sale). Mortgage
loans held for sale were $2.3 million and $1.2 million as of September 30, 2009
and December 31, 2008, respectively. The decrease in the loan portfolio is due
to management’s efforts to restrict loan growth in order to increase capital
levels, liquidity and the Bank’s regulatory capital ratios.
Out of
$201.1 million in total loans outstanding, the Company carried on its books
$22.0 million in its Towson mortgage loan portfolio at September 30,
2009. The Towson portfolio includes loans to investors for
residential construction and reconstruction projects which continue to exhibit
especially high levels of credit risk. During the first nine months
of 2009, the Company charged-off $2.8 million of loans from this
portfolio. Nearly 55% of the Bank’s total charge-offs in the third
quarter of 2009 were Towson mortgage consumer construction
credits. At September 30, 2009, approximately 73% or $16.1 million,
of Towson portfolio loans were on the Company’s watch list of carefully managed
credits. Of these watch list loans, $14.1 million were impaired at
September 30, 2009, including $5.0 million of troubled debt
restructures. The Towson portfolio has specific reserves totaling
$2.3 million. In addition, the Towson portfolio had $568 thousand of
loans at September 30, 2009 which were 30 to 89 days past due. The
Company is no longer originating loans to investors for consumer and commercial
construction except for owner-occupied projects. Management has
devoted significant time and resources to resolving problems in the Towson
portfolio. These efforts have included working with borrowers on
restructuring where appropriate and where possible, to secure the pledge of
additional collateral, and seeking potential investors to facilitate property
sales. Since the economic climate and housing market are making it
difficult for borrowers to sell or refinance their projects, management cannot
assure that its actions will result in decreasing rates of non-accrual and
past-due loans in its Towson portfolio in future periods. In October
2009 the loan officer who was managing the workout of troubled Towson mortgage
loans resigned his position with the Bank. His duties are currently
being performed by existing staff and management does not anticipate significant
adverse effects on its credit administration over this portfolio as a result of
such resignation.
The
Company’s credit quality issues are no longer contained predominantly within the
Towson mortgage portfolio, however. As unemployment has remained high
and continues to increase, the effects of the recession continue, characterized
by a continuing depressed real estate environment and lower property
values. These conditions have adversely affected an increasing number
of the Company’s borrowers. Through September 30, 2009, net
charge-offs of commercial loans that were not from the Towson mortgage portfolio
totaled $1.5 million, including $365 thousand during the third quarter of 2009.
Commercial loans on the watch list reached $14.7 million at September 30,
2009. These loans represent core business loans to clients for the
operation of their small to middle-market enterprises or professional service
firms. In addition, among loans not in the Towson mortgage portfolio,
commercial construction loans past due 30 to 89 days totaled $653 thousand at
September 30, 2009, while commercial real estate past due credits were $841
thousand. Overall, loans outside the Towson portfolio comprised
nearly three-quarters of 30-89 days past due credits at September 30,
2009. During the third quarter of 2009, management analyzed its large
HELOC portfolio, identifying a number of borrowers for downgrade and for closer
monitoring of those who have weak credit scores. Delinquency reports and
charge-offs did not indicate a problem with this portfolio at September 30,
2009. However, given economic conditions and the repeated appearance
of some HELOC customers on reports of loans past-due less than 30 days, coupled
with experience that HELOC credits can move quickly from performing to loss
without normal migration over time through watch list grades, management is
allocating more time, effort and reserves to this
portfolio. Management is aware of credit deterioration, especially in
our commercial, commercial real estate and HELOC portfolios, and is applying
sound and improved credit and workout administration to address them timely and
thoroughly.
Troubled
debt restructures amounted to $6.0 million at September 30, 2009, comprised
exclusively of real estate secured credits, principally from the commercial real
estate portfolio, compared to $952 thousand of troubled debt restructures at
December 31, 2008.
During
the nine month period ending September 30, 2009, the Company either foreclosed
or accepted deeds-in-lieu of foreclosure on eight pieces of residential real
estate related to investor-owned residential real estate. These properties were
placed into other real estate owned at estimated net realizable value of
approximately $1.8 million. The difference between the related loan balances and
the net realizable value, $1.3 million, was charged off to the allowance for
credit losses during the period. The foreclosures combined with additional
property sales, certain capitalized expenditures, and allowance adjustments
resulted in a net increase in other real estate owned of $254 thousand between
the December 31, 2008 net carrying value of $3.9 million and the September 30,
2009 net carrying value of $4.1 million.
At
September 30, 2009, the Company had cash and due from banks of $59.9 million as
compared to $7.3 million as of December 31, 2008. This increase is a result of
management’s increased focus on liquidity during 2009. See the Liquidity section later in
this Management’s Discussion and Analysis for further information.
Funds not
extended in loans are invested in cash and due from banks and various
investments including federal funds sold and other overnight investments,
investment securities, Federal Reserve Bank stock, Federal Home Loan Bank stock
and bank owned life insurance. Excluding cash and due from banks, these
overnight investments totaled approximately $943 thousand as of September 30,
2009 compared to approximately $2.0 million as of December 31, 2008. The
decrease is temporary and is a result of management’s increased focus on capital
ratios at quarter end September 30, 2009.
In
March 2009, the Board of Directors approved a new investment policy and
authorized management of the Company to invest in a traditional securities
portfolio in order to provide ongoing liquidity, income and a ready source of
collateral that can be pledged in order to access other sources of
funds. The investment securities available for sale balances of $20.9
million as of September 30, 2009 are investment securities such as agency-backed
bonds and mortgage-backed securities. The Company held Federal
Reserve Bank stock and FHLB of Atlanta stock in other equity securities of
$663,450 and $487,700 as of September 30, 2009 and $704,200 and $535,400 as of
December 31, 2008, respectively.
Included
in other assets at September 30, 2009 is approximately $132 thousand of deferred
stock issuance costs. These are costs incurred predominately for
services rendered by legal counsel and investment advisors for the specific
purpose of raising capital via the issuance of stock to qualified sophisticated
investors in a private placement. If the Company is successful in its
capital raising efforts, these costs will be charged to the additional paid in
capital account thereby partially offsetting the increase to
capital. If the Company is not able to raise additional capital, the
costs must be eliminated from the asset category by a charge to expense in the
period that such efforts to raise capital are abandoned.
Deposits
at September 30, 2009 were $277.5 million of which approximately $11.0 million,
or 3.96%, was related to one customer. Deposits at December 31, 2008 were $244.6
million of which deposits for the same customer stood at approximately $5.3
million, or 2.2%, of total deposits. 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 increase in total deposits from December 31, 2008
was primarily related to efforts to gather reasonably priced national market CDs
to fund current and anticipated maturities of brokered certificates of deposit.
National market certificates of deposit are discussed in more detail
below.
In 2006,
the Company began using brokered certificates of deposit through the Promontory
Financial Network. Through this deposit matching network and its certificate of
deposit account registry service (CDARS), the Company has the ability to offer
its customers access to FDIC-insured deposit products in aggregate amounts
exceeding current insurance limits. When the Company placed funds through CDARS
on behalf of a customer, it was eligible to receive matching deposits through
the network. The Company also had the ability to raise deposits directly through
the network. These deposits received through the CDARS program are
considered “Brokered Deposits” for bank regulatory purposes. At December 31,
2008, the Company had approximately $3.1 million of CDARS deposits all of which
was placed on behalf of customers. As a result of falling below the
“well-capitalized” status for regulatory reporting purposes, the Company may
still place customer deposits with CDARS but it is no longer permitted to accept
brokered deposits including the match portion through the CDARS program. As of
September 30, 2009 there were no reciprocal CDARS deposits on the Bank’s
books.
The
market in which the Company operates is very competitive; therefore, 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 large certificates of deposit. As of September 30, 2009,
the Company had total outstanding certificates of deposit of $189.1 million of
which approximately $154.9 million were obtained through the listing of
certificate of deposit rates on two internet-based listing services (such
deposits are sometimes referred to herein as national market certificates of
deposit). The national market certificates of deposit were issued
with an average yield of 2.55% and an average term of 7.51 months. Included in
the $154.9 million are national market certificates of deposit totaling
approximately $21.0 million that have been classified as “Brokered Deposits” for
bank regulatory purposes. These “Brokered Deposits” were issued with an average
yield of 4.14% and an average term of 4.14 months. As of December 31,
2008, the total certificates of deposit obtained through the listing of
certificate of deposit rates on the internet-based listing services was
approximately $94.9 million. Included in the $94.9 million were national market
certificates of deposit totaling $80.5 million that had been classified as
“Brokered Deposits” for bank regulatory purposes.
Core
deposits, which management categorizes as all deposits other than brokered
deposits and national market certificates of deposit, CDARS deposits and $11.0
million of deposits from the large customer described above, stood at $114.6
million as of September 30, 2009. Core deposits declined by $32.8
million or 22.26%, from the total as of December 31, 2008 of $147.4
million. Overall, the Company did not aggressively compete for new
local deposits during 2009; as a result, deposits other than national market
certificates of deposit decreased, which is the primary reason for the decrease
in core deposits from 2008. Core deposits are closely monitored by
management because such deposits are considered not only a relatively stable
source of funding but also reflective of the growth of commercial and consumer
depository relationships.
Borrowed
funds as of December 31, 2008, consisted of $1.9 million borrowed under Federal
Funds lines of credit. These borrowings were unsecured and subordinated to all
deposits. As of September 30, 2009 there were no borrowed
funds.
Subordinated
debt consists of $8 million of fixed interest rate trust preferred securities
issued through a Delaware trust subsidiary, Bay National Capital Trust I (the
“Trust”). The Company formed the Trust on December 12, 2005, and the Trust
issued $8 million of trust preferred securities to investors at a fixed interest
rate of 7.20%. The trust preferred securities bear a maturity date of February
23, 2036, but may be redeemed at the Company’s option on any February 23, May
23, August 23 or November 23 on or after February 23, 2011, and require
quarterly distributions by the trust to the holder of the trust preferred
securities. The securities are subordinated to the prior payment of any other
indebtedness of the Company that, by its terms, is not similarly subordinated
securities. The trust preferred securities qualify as Tier 1 capital at the
holding company level, subject to regulatory guidelines that limit the amount
included to an aggregate of 25% of Tier 1 capital. On January 6,
2009, the Company provided notice under the Indenture of its election to defer
the interest payment due on February 23, 2009. On May 1, 2009, the
Company provided notice under the Indenture of its election to continue the
extension of its previous deferral and of its election to defer the interest
payment due on May 23, 2009. As a result of the Company’s restriction
on paying dividends pursuant to the Consent Order and the written agreement
between the Parent and the Federal Reserve Bank of Richmond entered into on
April 28, 2009 (the “Reserve Bank Agreement”), which events we have previously
reported, we anticipate that we will continue to defer such interest payments
for the immediate future, in any case as long as the Consent Order and Reserve
Bank Agreement are in effect. As of September 30, 2009, $501 thousand
of interest payments remains due to investors.
Allowance
for Credit Losses and Credit Risk Management
Originating
loans involves a degree of risk that credit losses will occur in varying amounts
according to, among other factors, the type of loans being made, the
credit-worthiness of the borrowers over the term of the loans, the quality of
the collateral for the loan, if any, as well as general economic
conditions. The Company charges the provision for credit losses to
earnings to maintain the total allowance for credit losses at a level considered
by management to represent its best estimate of the losses known and inherent in
the portfolio that are both probable and reasonable to estimate, based on, among
other factors, prior loss experience, volume and type of lending conducted,
estimated value of any underlying collateral, economic conditions (particularly
as such conditions relate to the Company’s market area), regulatory guidance,
peer statistics, management’s judgment, past due loans in the loan portfolio,
loan charge off experience and concentrations of risk (if any). The
Company charges losses on loans against the allowance when it believes that
collection of loan principal is unlikely. Recoveries on loans
previously charged off are added back to the allowance.
Determining
an appropriate level of allowance for credit losses involves a high degree of
judgment. The Company’s allowance for credit losses provides for
probable losses based on evaluations of inherent risks in the loan
portfolio. The allowance for credit losses is maintained at a level
considered by management to be adequate to absorb losses inherent in the loan
portfolio as of the date of the financial statements. The Company has
developed appropriate policies and procedures for assessing the adequacy of the
allowance for credit losses that reflect management’s careful evaluation of
credit risk considering all available information. Management uses
historical quantitative information to assess the adequacy of the allowance for
credit losses as well as qualitative information about the prevailing economic
and business environment, among other things. In developing this assessment,
management must rely on estimates and exercise judgment in assigning credit
risk. Depending on changing circumstances, future assessments of
credit risk may yield materially different results from the estimates, which may
require an increase or decrease in the allowance for credit
losses. The Company’s allowance consists of formula-based components
for business and consumer loans, an allowance for impaired loans and an
unallocated component. In the second quarter of 2009, management
further refined the methodologies for the formula-based components to align more
appropriately the allowance methodology with the current framework for analyzing
credit losses. Formula-based allowance calculations for business and
consumer components permit the Company to address specifically the current
trends and events affecting the credit risk in the loan portfolio.
A test of
the adequacy of the allowance for credit losses is performed and reported to the
Board of Directors on at least a quarterly basis. Management uses the
information available to make a determination with respect to the allowance for
credit losses, recognizing that the determination is inherently subjective and
that future adjustments may be necessary depending upon, among other factors, a
change in economic conditions of specific borrowers, or generally in the
economy, and new information that becomes available. However, there
are no assurances that the allowance for credit losses will be sufficient to
absorb losses on nonperforming assets or that the allowance will be sufficient
to cover losses on nonperforming assets in the future.
The
allowance for credit losses was $6.2 million at September 30, 2009, compared to
$5.7 million at December 31, 2008. These amounts, as a percentage of
total loans plus loans held for sale, represented 3.05% at September 30, 2009,
compared to 2.29% at December 31, 2008. Excluding loans held for
sale, the allowance for credit losses was 3.08% of total loans at September 30,
2009, versus 2.30% at December 31, 2008. The increase in the level of
the allowance resulted from the offsetting effects of a $5.7 million provision
for credit losses during the first nine months of 2009, coupled with net
charge-offs of $5.2 million. Significant net charge-offs in the third
quarter of 2009, totaling $2.3 million, and level with charge-offs for the
second quarter of 2009, reflected losses resulting from the impact of the recent
recession. Increases in specific reserves have resulted largely from
collateral shortfalls, when compared to the loan’s principal balance
outstanding, with the application of the collateral method of measuring
impairment under FASB guidance for “Accounting by Creditors for Impairment of a
Loan.” When this occurs, management acts to further secure the loan
with additional collateral, allocates reserves for the difference between loan
principal and its collateral net of selling costs, and, if necessary, timely
pursues foreclosure actions and charges off any losses.
Bay
National Corporation has no exposure to foreign countries or foreign borrowers.
Management believes that the allowance for credit losses is adequate for each
period presented.
As of
September 30, 2009, the Company had non-accrual loans totaling $10.9 million,
all of which were impaired and included on the watch
list. Non-accrual loans are divided in approximately equal amounts
between loans for investor residential real estate in the Towson portfolio on
the one hand, and more traditional commercial lending to small and middle-market
businesses and professional service firms on the other. The Towson
mortgage portfolio, as noted above, was adversely affected by the slowdown in
the real estate market that reduced the ability of its borrowers to refinance or
sell properties as quickly as anticipated. On the commercial lending
side, also as noted above, the length, severity and continuing impact of the
recent recession, coupled with unusually high levels of unemployment, resulted
in the deterioration in credit quality. Nonperforming loans,
comprised of non-accrual loans, loans past due 90 days or more and still
accruing and troubled debt restructures, represented 8.3% of total loans,
including loans held for sale, at September 30, 2009, in comparison to 6.6%
reported as of December 31, 2008. Of non-accrual loans, those at
least partially collateralized by real estate totaled $9.6 million at September
30, 2009.
The
Company recorded $2.3 million and $5.2 million of net charge-offs during the
three month and nine month periods ended September 30, 2009, respectively,
compared to $2.5 million and $3.8 million during the three month and nine month
periods ended September 30, 2008.
Liquidity
The Company’s overall asset/liability
strategy takes into account the need to maintain adequate liquidity to fund
asset growth and deposit runoff. Management monitors the liquidity position
daily.
The
Company’s primary sources of funds are deposits, scheduled amortization and
prepayment of loans and investment securities, funds provided by operations and
capital. The Company also has access to national markets for certificates of
deposit. While scheduled principal repayments on loans are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by market interest rates, economic conditions, and rates
offered by our competition.
The
Company's most liquid assets are cash and assets that can be readily converted
into cash, including federal funds sold, other overnight investments and
investment securities. As of September 30, 2009, the Company had $59.9 million
in cash and due from banks, $943 thousand in federal funds sold and other
overnight investments, $20.9 in investment securities and $2.3 million in loans
expected to be sold within 60 days. As of December 31, 2008, the Company had
$7.3 million in cash and due from banks, $2.0 million in federal funds sold and
other overnight investments and $1.2 million in loans expected to be sold within
60 days.
The Company had approximately $21.5
million of borrowing capacity with the FHLB of Atlanta as of December 31,
2008. This facility was rescinded on February 13,
2009. The Company took steps to restore this line of credit and it
was restored to $6.5 million on March 27, 2009. Subsequently, on April 9, 2009
the available line capacity was reduced to $5.0 million. On May 14,
2009, the Company received notification that due to the weak operating results
of the Bank for the first quarter of 2009, the line has again been
rescinded. The Company will continue to take appropriate steps to
identify and arrange for lines of credit from other sources.
The
increase in the overall level of liquid assets, other than loans expected to be
sold within 60 days, is the result of management’s decision to increase
liquidity and, when appropriate, to allow non-core time deposits to
mature.
As an
additional source of liquidity, management has also identified specific loans to
sell and has contacted several correspondent banks as potential purchasers of
such loans. Since undertaking transactions of this nature could have
an adverse impact on the profitability of the Company (i.e., loss in interest
income on the participated loans) the sale of these assets is being considered
only as a contingent source of liquidity.
To
further aid in managing the Company’s liquidity, the Board has approved and an
Investment Committee was formed to review and discuss recommendations for the
use of available cash and to establish an investment portfolio. By limiting the
maturity of securities and maintaining a conservative investment posture,
management can rely on the investment portfolio to help meet any short-term
funding needs.
Based on
the actions noted above, we believe that the Company has adequate cash on hand
and available through liquidation of investment securities to meet a liquidity
shortfall. Although the Company believes sufficient liquidity exists, if
economic conditions continue to deteriorate and consumer confidence is not
restored, this excess liquidity could be depleted, which would then materially
affect the Company’s ability to meet its operating needs and to raise additional
capital.
As
previously discussed, the Company is attempting to raise funds via a private
placement of its common stock. It is necessary for the Company to
raise these funds and to recapitalize the Bank in order for the Bank to continue
operations. If we cannot raise sufficient capital before the Bank
reaches regulatory capital levels that will result in a receivership of the
Bank, we will attempt a direct sale of the Company and/or Bank or of the Bank’s
assets.
If our
capital raising efforts are successful, proceeds from a private placement would
add approximately $15 million or more of cash to the balance sheet.
Interest
Rate Sensitivity
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 generally 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 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.
The following table sets forth the
amount of the Company's interest-earning assets and interest-bearing liabilities
as of September 30, 2009, which are expected to mature or reprice in each of the
time periods shown:
|
|
|
|
|
|
|
|
Maturity
or repricing within
|
|
|
|
Amount
|
|
|
Percent
of Total
|
|
|
0
to 3 Months
|
|
|
4
to 12 Months
|
|
|
1
to 5
Years
|
|
|
Over
5 Years
|
|
Interest-earning
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold and other overnight investments
|
|
$ |
57,149,867 |
|
|
|
20.24
|
% |
|
$ |
57,149,867 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Loans
held for sale
|
|
|
2,318,791 |
|
|
|
.82 |
|
|
|
2,318,791 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loans
– Variable rate
|
|
|
106,260,082 |
|
|
|
37.63 |
|
|
|
106,260,082 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loans
– Fixed rate
|
|
|
94,808,754 |
|
|
|
33.58 |
|
|
|
9,537,862 |
|
|
|
16,436,742 |
|
|
|
60,613,679 |
|
|
|
8,220,471 |
|
Investment
& Other Equity Securities
|
|
|
21,807,489 |
|
|
|
7.73 |
|
|
|
- |
|
|
|
1,870,070 |
|
|
|
4,838,954 |
|
|
|
15,098,465 |
|
Total
interest-earning assets
|
|
$ |
282,344,983 |
|
|
|
100.00
|
% |
|
|
175,266,602 |
|
|
$ |
18,306,812 |
|
|
|
65,452,633 |
|
|
|
23,318,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
– Variable rate
|
|
$ |
35,496,933 |
|
|
|
15.26
|
% |
|
$ |
35,496,933 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Deposits
– Fixed rate
|
|
|
189,108,474 |
|
|
|
81.30 |
|
|
|
50,935,701 |
|
|
|
111,350,932 |
|
|
|
26,821,841 |
|
|
|
- |
|
Subordinated
debt and short term borrowings
|
|
|
8,000,000 |
|
|
|
3.
44 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,000,000 |
|
Total
interest-bearing liabilities
|
|
$ |
232,605,407 |
|
|
|
100.00
|
% |
|
$ |
86,432,634 |
|
|
$ |
111,350,932 |
|
|
$ |
26,821,841 |
|
|
$ |
8,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic
repricing differences
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic
gap
|
|
|
|
|
|
|
|
|
|
$ |
88,833,969 |
|
|
$ |
(93,044,120 |
) |
|
$ |
38,630,792 |
|
|
$ |
15,318,936 |
|
Cumulative
gap
|
|
|
|
|
|
|
|
|
|
$ |
88,833,969 |
|
|
$ |
(4,210,151 |
) |
|
$ |
34,420,641 |
|
|
$ |
49,739,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of rate sensitive assets to rate sensitive liabilities
|
|
|
|
|
|
|
|
|
|
|
202.52 |
% |
|
|
16.44 |
% |
|
|
244.03 |
% |
|
|
291.49 |
% |
The
Company has 59% of its interest-earning assets and 15% of its interest-bearing
liabilities in variable rate balances. Interest-earning assets exceed
interest-bearing liabilities by $49.7 million. The majority of this gap is
concentrated in items maturing or repricing within 0 to 3 months. This gap is
generally reflective of the Company’s effort, over the past 18 months, to
maintain flexibility in the balance sheet in a declining interest rate
environment. As rates have continued to drop over the past 15 months, the
Company has elected not to extend the term on time deposits in an effort to
minimize interest costs for the short-term while rates are still
declining. This analysis indicates that the Company will benefit from
increasing market rates of interest. 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
constantly monitors and manages the structure of the Company's balance sheet,
seeks to control interest rate exposure, and evaluates pricing strategies.
Strategies to better match maturities of interest-earning assets and
interest-bearing liabilities include structuring loans with rate floors and
ceilings on variable-rate notes and providing for repricing opportunities on
fixed-rate notes. Management believes that a lending strategy focusing on
variable-rate loans and short-term fixed-rate loans will best facilitate the
goal of minimizing interest rate risk. However, management will
opportunistically enter into longer term 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
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 deposit
maturity 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 attempts 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.
Off-Balance
Sheet Arrangements
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business. These financial instruments primarily
include commitments to extend credit, standby letters of credit and purchase
commitments. The Company uses these financial instruments to meet the
financing needs of its customers. Financial instruments involve, to
varying degrees, elements of credit, interest rate and liquidity
risk. These do not represent unusual risks and management does not
anticipate any losses which would have a material effect on the accompanying
financial statements.
Outstanding
loan commitments and lines and letters of credit at September 30, 2009 and
December 31, 2008 are as follows:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Loan
commitments
|
|
$ |
8,837,716 |
|
|
$ |
14,981,584 |
|
Unused
lines of credit
|
|
|
52,772,670 |
|
|
|
84,495,398 |
|
Letters
of credit
|
|
|
1,440,831 |
|
|
|
2,924,671 |
|
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. The Company
generally requires collateral to support off-balance sheet instruments with
credit risk on the same basis as it does for on-balance sheet instruments. The
collateral is based on management's credit evaluation of the counter party.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amount does
not necessarily represent future cash requirements. Each customer's
credit-worthiness is evaluated on a case-by-case basis.
Standby
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
Capital
Resources
The Company had stockholders’ equity
at September 30, 2009 of $10.8 million as compared to $15.0 million at December
31, 2008. The decrease in capital is a result of the operating loss incurred for
the nine months ended September 30, 2009.
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 is currently
considered “adequately capitalized” under these capital
guidelines. However, pursuant to the Consent Order the Bank was
required to reach and then maintain certain regulatory capital ratios in excess
of the minimum required under the risk-based capital adequacy guidelines by
April 30, 2009. The Bank has not met these regulatory capital requirements under
the Consent Order.
In
addition, the Reserve Bank Agreement prohibits the Parent from paying dividends
on any of its securities, and the Consent Order prohibits the Bank from paying
dividends to the Parent (which is the Parent’s main source of funds to pay
dividends on its securities), without the consent of our
regulators.
Reconciliation
of Non-GAAP Measures
Below is
a reconciliation of total deposits to core deposits as of September 30, 2009 and
December 31, 2008, respectively:
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Total
deposits
|
|
$ |
277,530,696 |
|
|
$ |
244,628,032 |
|
National
market certificates of deposit (includes CDARS deposits)
|
|
|
(154,910,078 |
) |
|
|
(94,920,000 |
) |
Variable
balance accounts (1 customer at September 30, 2009 and December 31,
2008)
|
|
|
(11,038,841 |
) |
|
|
(5,312,000 |
) |
Portion
of variable balance accounts considered to be core
|
|
|
3,000,000 |
|
|
|
3,000,000 |
|
Core
deposits
|
|
$ |
114,581,777 |
|
|
$ |
147,396,032 |
|
Application
of Critical Accounting Policies
The
Company’s consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
follow general practices within the industries in which it operates. Application
of these principles requires management to make estimates, assumptions and
judgments that affect the amounts reported in the consolidated financial
statements and accompanying notes. These estimates, assumptions and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions and judgments. Certain policies inherently have
a greater reliance on the use of estimates, assumptions and judgments and as
such, have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability must be recorded contingent upon a
future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available.
Based on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions and estimates underlying those amounts, management
has identified the determination of the allowance for credit losses as the
accounting area that requires the most subjective or complex judgments, and as
such could be most subject to revision as new information becomes
available.
Management
has significant discretion in making the judgments inherent in the determination
of the provision and allowance for credit losses. The establishment of allowance
factors is a continuing exercise and allowance factors may change over time,
resulting in an increase or decrease in the amount of the provision or allowance
based upon the same volume and classification of loans. Changes in allowance
factors or in management’s interpretation of those factors will have a direct
impact on the amount of the provision and a corresponding effect on income and
assets. Also, errors in management’s perception and assessment of the allowance
factors could result in the allowance not being adequate to cover losses in the
portfolio, and may result in additional provisions or charge-offs, which would
adversely affect income and capital.
For
additional information regarding the allowance for credit losses, see “Allowance
for Credit Losses and Credit Risk Management.”
The
Company accounts for income taxes under the asset/liability
method. Deferred tax assets are recognized for the future
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period indicated by the
enactment date. A valuation allowance is established for deferred tax
assets when, in the judgment of management, it is more likely than not that such
deferred tax assets will not become realizable. The judgment about
the level of future taxable income is dependent to a great extent on matters
that may, at least in part, be beyond the Company’s control. It is at
least reasonably possible that management’s judgment about the need for a
valuation allowance for deferred tax assets could change in the near
term.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Not applicable.
Item
4. Controls and Procedures.
As of the
end of the period covered by this quarterly report on Form 10-Q, Bay National
Corporation’s Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness 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 as of September
30, 2009. Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed
by Bay National Corporation in the reports that it files or submits under the
Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms.
In addition, there were no changes in
Bay National Corporation’s internal control over financial reporting (as defined
in Rule 13a-15 under the Exchange Act) during the quarter ended September 30,
2009, that have materially affected, or are reasonably likely to materially
affect, Bay National Corporation’s internal control over financial
reporting.
Information
Regarding Forward-Looking Statements
This
report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Exchange Act. Forward-looking statements also may be included
in other statements that we make. All statements that are not
descriptions of historical facts are forward-looking statements. Forward-looking
statements often use words such as “believe,” “expect,” “plan,” “may,” “will,”
“should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other
words of similar meaning. You can also identify them by the fact that they do
not relate strictly to historical or current facts.
The
statements presented herein with respect to, among other things, the Company’s
plans, objectives, expectations and intentions, including statements regarding
the Company’s expectations with respect to resolving issues in its loan
portfolio, potential increases in capital levels, liquidity and capital ratios,
changes in loan growth, investment strategies, yield on the investment
portfolio, future sources of income, decreased occupancy expenses, losses from
off-balance sheet transactions, liquidity including anticipated sources of
liquidity, the allowance for credit losses, interest rate sensitivity, deferral
of interest payments on the trust preferred securities, future market
conditions, the funding of loan commitments and letters of credit, the impact of
the resignation of the loan officer managing the workout of troubled Towson
mortgage loans on credit administration, planned capital raising and the impact
of the failure to raise such capital and financial and other goals, as well as
statements with respect to the future status of our loan portfolio are
forward-looking. These statements are based on the Company’s beliefs and
assumptions, and on information available to it as of the date of this filing,
and involve risks and uncertainties. These risks and uncertainties include,
among others, those discussed in this report on Form 10-Q; the Company’s
dependence on key personnel; risks related to the Bank’s choice of loan
portfolio; continuing declines in the real estate market in the Company’s
markets and in the economy generally, or a slower than anticipated recovery;
risks related to the Bank’s lending limit; risks of a competitive market; the
impact of any new or amended government regulations on operating results; and
the effects of developments in technology. For a more complete discussion of
these risks and uncertainties, see the discussion under the caption “Risk
Factors” in Bay National Corporation’s Form 10-K for the year ended December 31,
2008. The Company’s actual results and the actual outcome of our expectations
and strategies could differ materially from those anticipated or estimated
because of these risks and uncertainties 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 the Company undertakes no obligation to update
the forward-looking statements to reflect factual assumptions, circumstances or
events that have changed after the forward-looking statements are
made.
PART II –
OTHER INFORMATION
Item
1. Legal Proceedings.
None
Item
1A. Risk Factors
The following supplements the
discussion under, and should be read in conjunction with the risk factors
disclosed in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2008.
If we cannot raise adequate
capital we will be unable to continue operations.
As previously discussed the Bank has
experienced an unprecedented amount of loan charge-offs in recent periods as a
result of the continuing weakness in the local and national economy, in
particular in the real estate sector. These losses have caused us to
fall below “well capitalized” status, which led to our entry into the Consent
Order.
As a result of recent loan losses and
the significant provisions for the allowance for credit losses, the Bank
requires additional capital in order to continue operations. While we
are attempting to raise the required capital and are hopeful that our efforts
will be successful, we cannot guarantee that this will be the
case. If we cannot raise sufficient capital before the Bank reaches
regulatory capital levels that will result in a receivership of the Bank, we
will attempt a direct sale of the Company and/or the Bank or of the Bank’s
assets. In any such sale, stockholders may not receive an amount for
their stock that they consider adequate, and it is possible stockholders will
not receive anything at all in such a transaction, particularly if the Company
engages solely in a sale of assets.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None
Item
3. Defaults Upon Senior Securities.
Not applicable.
Item
4. Submission of Matters to a Vote of Securities
Holders.
None
Item
5. Other Information.
None.
Item
6. Exhibits.
Exhibits.
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
Bay
National Corporation
|
|
|
|
|
|
|
|
Date:
November 16, 2009
|
|
By:
|
/s/
Hugh W. Mohler
|
|
|
|
Hugh
W. Mohler, President
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
Date:
November 16, 2009
|
|
By:
|
/s/
David E. Borowy
|
|
|
|
David
E. Borowy, Treasurer
|
|
|
|
(Principal
Accounting and Financial Officer)
|
|
|
|
|