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SECURITIES AND EXCHANGE COMMISSION
450 5TH STREET, N.W.
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NO. 0-22499
BAYONNE BANCSHARES, INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-3511899
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
568 BROADWAY, BAYONNE, NEW JERSEY 07002
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(Address of Principal Executive Offices) (Zip Code)
(201) 437-1000
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(Registrant's Telephone Number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
-----------------
VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES X No
----- -----
There were 9,139,507 shares of the Registrant's Common Stock issued and
outstanding as of November 13, 1998.
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BAYONNE BANCSHARES, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................3
SIGNATURES
2
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The Registrant hereby amends the following item of its Quarterly Report on
Form 10-Q for the period ended September 30, 1998, which was filed with the
Commission on November 13, 1998, as set forth below:
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations.
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FINANCIAL CONDITION
Stockholder's equity decreased by $3.4 million to $95.2 million at
September 30, 1998 from $98.6 million at March 31, 1998. The decrease in
stockholders equity is attributable to the acquisition of 194,768 shares of
common stock for $3.3 million to be used for stock awards under the Bayonne
Bancshares, Inc. 1998 Stock Based Incentive Plan, and a $2.8 million of
comprehensive loss relating to the market-to market adjustment on securities
available for sale, partially offset by net income of $2.4 million for the six
months ended September 30, 1998. At September 30, 1998, the tangible, core and
risk-based ratios were 12.24%, 12.24%, and 27.30%, respectively.
Total assets increased by $26.6 million to $672.7 million at September 30,
1998 compared to $646.1 million at March 31, 1998. Securities available for
sale, at market value decreased by $38.3 million or 10.6% to $324.5 million at
September 30, 1998 from $362.8 million at March 31, 1998. The decrease was
primarily attributable to the sale of $45.0 million of US Government treasuries
and agencies and $12.0 million of mortgage backed securities, which was
partially offset by the purchase of $25.0 million of variable rate trust
preferred securities.
Loan receivable, net, increased by $73.3 million or 31.1% to $308.8
million at September 30, 1998 compared to $235.5 million at March 31, 1998. The
increase primarily resulted from the purchase of $80.0 million of seasoned,
fixed rate single family loans yielding approximately 6.5%, with approximately
$58.0 million of these loans located in New Jersey, New York and Pennsylvania.
The increase in loans receivable, net, was partially reduced by net amortization
and payoffs of $18.8 million on mortgage loans during the quarter.
Total liabilities increased by $30.1 million or 5.50% to $577.5 million as
of September 30, 1998 compared to $547.4 million at March 31, 1998. Borrowings
increased by $31.8 million or 27.6% to $146.8 million at September 30, 1998
compared to $115.0 million at March 31, 1998. Wholesale borrowings were used to
increase the Bank's holdings of variable-rate trust preferred and mortgage
backed securities, to fund a portion of the whole loan purchase and to fund the
outflow of maturing high yielding certificates of deposit.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Net income was $1,321,000 for the three months ended September 30, 1998
compared to $969,000 for the quarter ended September 30, 1997. Total interest
and dividend income increased by $844,000 or 8.2% to $11.1 million for the three
months ended September 30, 1998 compared to $10.3 million for the comparable
prior year quarter. This increase primarily resulted from an increase in average
earning assets of $73.6 million to $662.0 million for the three months ended
September 30, 1998 compared to $588.4 million for the comparable period ending
September 30, 1997. The increase was partially offset by a decrease in the yield
on average interest earning assets to 6.73% for the three months ended September
30, 1998 from the 7.00% yield for the three months ended September 30, 1997. The
increase in average interest earning assets was primarily due to the $80.0
million in whole loans purchased on June 30, 1998. The interest income from
these loans approximated $1.4 million for the quarter ended September 30, 1998.
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Total interest expense increased by $306,000 to $6.7 million for the three
months ended September 30, 1998 compared to $6.4 million for the comparable
prior year quarter. The increase primarily resulted from an increase in average
interest bearing liabilities of $49.6 million or 9.4% to $576.1 million for the
three months ended September 30, 1998 from $526.5 million for the three months
ended September 30, 1997. The increase in average interest bearing liabilities
was primarily due to an increase in average borrowings of $65.4 million or 73.7%
to $154.1 million for the three months ended September 30, 1998 compared to
$88.7 million for the comparable prior year quarter.
The provision for loan losses totaled $75,000 and $45,000 for the
three-month period ended September 30, 1998 and 1997, respectively. The
provision is a result of management's judgment based on a review of the Bank's
loans and consideration of a variety of factors, including, but not limited to,
(1) the risk characteristics of the loan portfolio, (2) current economic
conditions, (3) actual losses previously experienced and (4) the existing levels
of reserve for possible losses in the future. Non-performing loans at September
30, 1998 and March 31, 1998 were $4.3 million and $3.8 million or 1.39% and
1.62% of loans receivable, net, respectively.
Total other income increased by $255,000 to $538,000 for the three months
ended September 30, 1998 compared to $283,000 for the comparable prior year
quarter. The increase was primarily attributable to gains on sales of securities
available for sale of $197,000 during the quarter compared to a loss of $5,000
for the quarter ended September 30, 1997 and income from Bayonne Service Corp.,
which increased by $43,000 to $69,000 for the quarter ended September 30, 1998
compared to $26,000 for the quarter ended September 30, 1997. Bayonne Service
Corp. is a wholly owned subsidiary of the Bank engaged in the sale of
non-deposit investment products.
Total operating expense increased by $204,000 or 8.0% to $2.8 million for
the three months ended September 30, 1998 compared to $2.6 million for the three
months ended September 30, 1997. Compensation and employee benefits increased by
$112,000 or 7.6% due to increased expenses from new and existing ESOP and
Management Recognition Plans of $280,000 which was partially offset by the lower
salary expense of $66,000.
Income tax expense for the quarter increased by $207,000 to $776,000 for
the three months ended September 30, 1998 compared to $569,000 for the
comparable prior year quarter as a result of an increase of $559,000 in income
before income taxes for the three months ended September 30, 1998 compared to
the income before income taxes for the same prior year quarter.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
Net income increased by $628,000 or 34.8% to $2.4 million for the six
months ended September 30, 1998 compared to $1.8 million for the six months
ended September 30, 1997. This increase resulted from an increase in average
interest earning assets of $75.4 million to $651.8 million for the six months
ended September 30, 1998 from $576.3 million for the comparable prior year
period, which was partially offset by a decrease in yield on average interest
earning assets to 6.68% for the six months ended September 30, 1998 from the
7.01% for the six months ended September 30, 1997. The increase in average
interest earning assets was primarily due to the $80.0 million in whole loans
purchased on June 30, 1998. The interest income from these loans approximated
$1.4 million for the six months ended September 30, 1998.
Total interest expense increased by $397,000 or 3.1% to $13.1 million for
the six months ended September 30, 1998 compared to $12.7 million for the
comparable prior year period. The increase primarily resulted from an increase
of $40.4 million or 7.7% in average interest bearing liabilities to $565.3
million for the six months ended September 30, 1998 compared to $524.9 million
for the six months ended September 30, 1997. This increase in average interest
bearing liabilities was primarily due to an increase in average borrowings of
$58.9 million to $143.2 million for the six months ended September 30, 1998
compared with $84.3 million for the comparable prior year period.
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The provision for loan losses totaled $125,000 and $90,000 for the
six-month periods ended September 30, 1998 and 1997, respectively. The provision
is the result of management's judgement based on a review of its loans and a
consideration of a variety of factors including, but not limited to, (1) the
risk characteristics of its loan portfolio, (2) current economic conditions, (3)
actual losses previously experienced and (4) the existing levels of reserve for
possible loan losses in the future. Non-performing loans at September 30, 1998
and March 31, 1998 were $4.3 million and $3.8 million or 1.39% and 1.62% of
loans receivable, net, respectively.
Total other income increased by $167,000 or 24.5% to $849,000 for the six
months ended September 30, 1998 compared to $682,000 for the six months ended
September 30, 1997. The increase was primarily attributable to gains on sale of
securities available for sale of $176,000 for the six months ended September 30,
1998.
Total operating expense increased by $337,000 or 6.5% to $5.5 million for
the six-months ended September 30, 1998 from $5.2 million for the comparable
prior year period. This increase was primarily the result of an increase in
compensation and employee benefits of $221,000 or 7.5% due to increased expense
of $533,000 for new and existing ESOP and Management Recognition Plans to $1.1
million for the six months ended September 30, 1998 compared to $548,000 for the
six months ended September 30, 1997. The increase was partially offset by lower
executive salary and employee benefit expenses of $346,000 compared to the
comparable prior year period. Other operating expenses increased by $124,000 to
$1.0 million from $902,000 primarily due to the increase in shareholder services
expense of $111,000.
Income tax expense increased to $1.4 million for the six months ended
September 30, 1998 from $1.1 million for the six months ended September 30, 1997
as a result of an increase of $996,000 in pre-tax income for the six-month
period ended September 30, 1998.
CAPITAL
The OTS requires that the Bank meet minimum tangible, core and risk-based
capital requirements. As of September 30, 1998, the Bank exceeded all regulatory
capital requirements. The Bank's required, actual and excess capital levels as
of September 30, 1998 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Excess of Actual
Required % of Actual % of Over Regulatory
Amount Assets Amount Assets Requirements
-------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Tangible Capital................ $ 9,885 1.50 $80,651 12.24% $70,766
Core Capital.................... $26,361 4.00 $80,651 12.24% $54,290
Risk-based Capital.............. $23,635 8.00 $80,651 27.30% $57,016
</TABLE>
If the allowance for marketable debt and equity securities was included in
capital, the Bank's tangible, core and risk-based capital ratios would be
11.82%, 11.82% and 26.25%, respectively, at September 30, 1998.
LIQUIDITY
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 5.0%. The
Bank's liquidity ratio
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averaged 20.49% during the month of September 30, 1998 and 24.17% during three
months ended September 30, 1998. The Bank adjusts liquidity as appropriate to
meet its asset and liability management objectives.
YEAR 2000 COMPLIANCE
The Company and the Bank rely on computers for the daily conduct of their
business and for data processing. There is concern among industry experts that
on January 1, 2000 computers will be unable to "read" the New Year and there may
be widespread computer malfunctions. The Bank recognized that a comprehensive
and coordinated plan of action was needed to ensure readiness to perform Year
2000 processing. A Year 2000 Committee has been formed to implement the Year
2000 project, develop policies, document readiness of the Bank and the Company
to accommodate Year 2000 processing, and track and test progress towards full
compliance. The Bank contracts with a service bureau to provide the majority of
its data processing and is dependent upon purchased application software. In
house applications are limited to word-processing and spreadsheet functions.
RISK OF YEAR 2000 ISSUES
To date, the Company has not identified any system which presents a
material risk of failing to be Year 2000 compliant in a timely manner, or for
which a suitable alternative cannot be implemented. However, as the Company
progresses with its Year 2000 transition, systems or equipment may be identified
which present a material risk of business interruption. Such disruption may
include the inability to process customers accounting transactions, including
deposits, withdrawals, loan payment and disbursements; the inability to
reconcile and record daily activity; the inability to process loan applications
or the track delinquencies; the inability to generate checks or to clear funds.
In addition, if any of the Company's major borrowers should fail to achieve Year
2000 compliance, and should they experience a disruption of their own
businesses, their ability to meet their obligations to the Company may be
seriously impaired.
STATE OF READINESS
The Company's subsidiary, the Bank, is in the process of ensuring that its
external vendors and its data processing service provider are adequately
addressing the system and software issues related to the Year 2000 by obtaining
written system certifications that the systems are fully Year 2000 compliant or
that the vendor has a plan to become fully compliant by December 31, 1998. The
Bank has contacted 21 of its significant vendors and service providers and to
date has received certifications from 67% of the vendors and service providers
that they are Year 2000 compliant. The Bank will utilize the primary servicers,
end-to-end tests, which will be available by December 31, 1998, to simulate
daily processing on sensitive century change dates. In the evaluation, the Bank
will ensure that critical operations will continue if servicers or vendors are
unable to achieve the Year 2000 requirements.
The Bank has contacted 55 major borrowers to survey their Year 2000
readiness in order to anticipate any potential exposure. The Bank considers a
major borrower to be one who has a business from which the repayment of the loan
will be derived and for which the Year 2000 readiness therefore is an issue. The
value of loans for which borrowers were surveyed totaled $2.2 million, which
represents 100% of the Bank's major borrowers. The Bank has not contacted its
largest dollar deposit customers to determine their readiness for Year 2000.
The Company does not anticipate that there will be any significant or
material condition which will impact the service provider's ability to deliver
accurate data processing services before, during and after the transition to the
new millennium, therefore no formal contingency plans exist at this time.
However, results of system tests conducted by the Company and by other users of
this service provider will be carefully monitored to ensure that all issues have
been identified and successfully remediated.
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The Company believes it has developed an effective plan to address the
Year 2000 problem and that, based on the available information, its Year 2000
transition will not have a material effect on its business, operations or
financial results. However, the Company has no control over the progress of
third parties in addressing their own Year 2000 issues. If the necessary changes
are not effected or are not completed in a timely manner, or if unanticipated
problems arise, there may be a material impact on the Company's financial
condition and results of operations.
The Committee has completed a systems inventory and obtained certification
from its service bureau. The Committee has identified critical applications and
implemented hardware system upgrades and system replacements as of December 31,
1998. All upgrades have been implemented and will be substantially tested for
the Year 2000 compliance by the first quarter of 1999.
COST TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The Company's costs to achieve Year 2000 compliance are not expected to
have a material financial impact on the Company. The Company intends to fund
such costs from its current operations. However, as stated above, there can be
no assurance that all such costs have been identified, or that there may not be
some unforeseen cost which may have a material adverse effect on the Company's
financial condition and results of operations. The Company has budgeted $250,000
for hardware system upgrades and system replacements, which has been approved by
the Board of Directors.
CONTINGENCY PLANS
The Company is in the process of developing two types of contingency
plans. A remediation plan will identity components of mission critical
applications which are judged, at some point prior to December 31, 1999, to be
at risk of failure to achieve complete renovation, validation and
implementation. Business interruption plans will ensure that the Company has
sufficiently planned for unanticipated system failures at critical production
dates before, on and after January 1, 2000. The Company expects to have its
contingency plans completed by June 30, 1999.
REMEDIATION PLAN
The Company is in the process of developing a remediation plan with its
primary servicer. The plan will identify components of applications which are
judged, at some point prior to December 31, 1999, to be at risk of failure to
achieve complete renovation, validation and implementation. The contingency plan
will ensure that the company has sufficiently planned for unanticipated system
failures at critical production dates before, on and after January 1, 2000.
BUSINESS INTERRUPTION PLAN
These plans would be invoked if unanticipated Year 2000 problems occur in
production, similar to disaster recovery plans. Essentially, they require that
resources are planned for deployment to ensure that such an interruption does
not threaten the viability of the Company. The Company will review and modify
its current business interruption plan, with its primary servicer, to
specifically address the special circumstances of a disruption due to a Year
2000 related component failure.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYONNE BANCSHARES, INC.
Date: January 27, 1999 By: /s/ Michael Nilan
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Michael Nilan
Director, President and Chief Executive Officer
(Principal Executive Officer)
Date: January 27, 1999 By: /s/ Eugene V. Malinowski
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Eugene V. Malinowski
Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
