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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
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 Number 1-13691
BAY STATE BANCORP, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 04-3398630
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
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1299 BEACON STREET, BROOKLINE, MASSACHUSETTS 02146
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(Address of principal executive offices) (Zip Code)
(617) 739-9500
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changes since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes N/A No
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Yes No X
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APPLICABLE ONLY TO CORPORATE ISSUERS.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: No shares were
outstanding as of March 16, 1998.
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
Bay State Bancorp, Inc. (the "Company") is a recently formed holding
company, formed for the purpose of acquiring all of the common stock of Bay
State Federal Savings Bank (the "Bank") concurrent with the Bank's conversion
from mutual to stock form of organization. At this time and until the conversion
is complete, Bay State Bancorp, Inc. is a noncapitalized shell corporation with
no business activities. The financial statements of Bay State Bancorp, Inc.,
which are set forth after Item 3 below, reflect such status. For a further
discussion of Bay State Bancorp, Inc.'s formation and intended operations see
"Bay State Bancorp, Inc." in the Company's Prospectus (the "Prospectus") dated
February 12, 1998, which is a part of its Registration Statement under the
Securities Act of 1933 on Form SB-2, initially filed on November 13, 1997 and
declared effective on February 11, 1998. Such description of Bay State Bancorp,
Inc. is incorporated herein by reference and attached hereto as Exhibit 99(a).
Additionally, "Recent Developments" on pages 11 through 14 of the Prospectus is
incorporated herein by reference and attached hereto as Exhibit 99(b). Such
Recent Developments presents financial information regarding the Bank for the
nine months ended and at December 31, 1997, including a "Management's Discussion
and Analysis of Recent Developments." Upon completion of its conversion, the
Bank will become the wholly-owned subsidiary of the Company.
2
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BAY STATE BANCORP, INC.
STATEMENTS OF CONDITION
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<CAPTION>
December 31, March 31,
1997 1997
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<S> <C> <C>
Assets................................................ $ -- NA
Liabilities and Equity ............................... $ -- NA
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See accompanying notes to financial statements
STATEMENTS OF OPERATIONS
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<CAPTION>
For the Three Months and Nine Months
Ended December 31,
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1997 1996
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Income................................................ $ -- NA
Expenses.............................................. $ -- NA
Net income................................... $ -- NA
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See accompanying notes to financial statements
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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<CAPTION>
Nine Months Ended December 31, 1997
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Additional
Common Paid-in Retained
Stock Capital Earnings Total
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Balance March 31, 1996............... $ -- $ -- $ -- $ --
Balance September 30, 1996........... $ -- $ -- $ -- $ --
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See accompanying notes to financial statements.
STATEMENTS OF CHANGE IN CASH FLOW
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<CAPTION>
Nine Months Ended December 31,
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1997 1996
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Funds provided................................................ $ -- NA
Funds used.................................................... $ -- NA
</TABLE>
See accompanying notes to financial statements.
3
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BAY STATE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
Bay State Bancorp, Inc. is a recently formed holding company formed for
the purpose of acquiring all of the common stock of Bay State Federal Savings
Bank concurrent with its conversion from mutual to stock form of organization.
At December 31, 1997, Bay State Bancorp, Inc. was a shell corporation with no
business activities and no assets.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
See Item 1.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Item 1.
4
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (SS.249.308 OF THIS CHAPTER).
a. Exhibits
Exhibit 99(a) Bay State Bancorp, Inc.
Exhibit 99(b) Recent Developments
b. Reports on Form 8-K
None
5
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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 STATE BANCORP, INC.
Date: March 23, 1998 By: /s/ John F. Murphy
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John F. Murphy
President, Chief Executive Officer and
Chairman of the Board
(principal executive and financial officer)
Date: March 23, 1998 By: /s/ Denise M. Renaghan
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Denise M. Renaghan
Executive Vice President and
Chief Operating Officer
6
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EXHIBIT 99(a)
BAY STATE BANCORP, INC.
The Company was organized in October 1997 at the direction of the Board
of Directors of the Bank for the purpose of acquiring all of the capital stock
to be issued by the Bank in the Conversion. The Company has applied to the OTS
to become a savings and loan holding company and, upon approval, will be subject
to regulation by the OTS. Upon consummation of the Conversion, the Company will
conduct business initially as a unitary savings and loan holding company. See
"Regulation--Holding Company Regulation." After completion of the Conversion,
the Company's assets will consist of all of the outstanding shares of the Bank's
capital stock issued to the Company in the Conversion and that portion of the
net proceeds of the Offerings retained by the Company. The Company intends to
use part of the net proceeds it retains to form and capitalize the ESOP Loan
Subsidiary which subsidiary will loan funds to the ESOP to enable the ESOP to
purchase 8% of the Common Stock issued in the Conversion, including shares
issued to the Foundation. Based on certain regulatory and market conditions, the
Company and Bank may, however, alternatively choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The Company
intends to initially invest any remaining proceeds in federal funds and
short-term mortgage-backed and mortgage-related securities. See "Use of
Proceeds." Immediately after the Conversion, the Company will have no
significant liabilities. The management of the Company is set forth under
"Management of the Company." Initially, the Company will neither own nor lease
any property, but will instead use the premises, equipment and furniture of the
Bank. At the present time, the Company does not intend to employ any persons
other than officers of the Company who are also officers of the Bank, but will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. In addition, management believes that the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and expansion
opportunities that may arise. There are no current arrangements, understandings
or agreements, written or oral, regarding any such opportunities or
transactions. The initial activities of the Company are anticipated to be funded
by the net proceeds retained by the Company and earnings thereon or,
alternatively, through dividends from the Bank.
The Company's executive offices are located at 1299 Beacon Street,
Brookline, Massachusetts 02146 and the telephone number is (617) 739-9500.
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EXHIBIT 99(b)
RECENT DEVELOPMENTS
The selected financial and other data presented below at December 31,
1997 and for the nine month periods ended December 31, 1997 and 1996 are derived
from unaudited financial data, but, in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for such interim periods. The results of
operations for the nine months ended December 31, 1997 are not necessarily
indicative of the results of operations that may be expected for the fiscal year
ending March 31, 1998.
AT AT
DECEMBER 31, MARCH 31,
1997(1) 1997(2)
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(IN THOUSANDS)
SELECTED FINANCIAL DATA:
Assets ................................. $249,858 $233,074
Loans, net(3) .......................... 224,301 207,063
Securities(4) .......................... 12,611 16,456
Deposits ............................... 203,770 197,059
FHLB advances .......................... 22,500 14,500
Retained earnings ...................... 20,184 19,091
Allowance for loan losses .............. 2,131 1,687
Non-performing loans ................... 2,009 1,546
Non-performing assets .................. 2,009 1,619
FOR THE NINE MONTHS
ENDED DECEMBER 31,
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1997(1) 1996(1)(2)
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(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest income ........................ $14,122 $12,975
Interest expense ....................... 7,521 6,860
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Net interest income .................. 6,601 6,115
Provision for loan losses .............. 474 42
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Net interest income after
provision for loan losses .......... 6,127 6,073
Total noninterest income ............... 214 276
Total noninterest expense .............. 4,472 5,538
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Income before income tax expense ....... 1,869 811
Income tax expense ..................... 776 323
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Net income ........................... $ 1,093 $ 488
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<CAPTION>
AT OR FOR THE NINE MONTHS
ENDED DECEMBER 31,
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1997(1) 1996(1)(2)
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SELECTED FINANCIAL RATIOS AND OTHER DATA(5):
PERFORMANCE RATIOS:
Return on average assets....................................................... 0.60% 0.28%
Return on average retained earnings............................................ 7.42 3.59
Average retained earnings to average assets.................................... 8.13 7.90
Retained earnings to total assets at end of period............................. 8.08 7.65
Average interest rate spread(6)................................................ 3.53 3.48
Net interest margin(7)......................................................... 3.83 3.77
Average interest-earning assets to average
interest-bearing liabilities................................................. 106.89 106.78
Total noninterest expense to average assets.................................... 2.47 3.22
Efficiency ratio(8)............................................................ 65.62 86.65
REGULATORY CAPITAL RATIOS(9):
Tangible capital............................................................... 8.11 7.66
Core capital................................................................... 8.11 7.66
Risk-based capital............................................................. 15.20 15.26
ASSET QUALITY RATIOS:
Non-performing loans as a percent of loans(10)(11)............................. 0.89 1.01
Non-performing assets as a percent of total assets............................. 0.80 0.90
Allowance for loan losses as a percent of loans(10)............................ 0.94 0.82
Allowance for loan losses as a percent of non-
performing loans(11)......................................................... 106.07 81.45
NUMBER OF FULL-SERVICE BANKING FACILITIES........................................ 5 5
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(1) The data presented for the nine months ended December 31, 1997 and 1996
was derived from unaudited consolidated financial statements and reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the nine months ended
December 31, 1997 are not necessarily indicative of the results that may
be expected for the fiscal year ended March 31, 1998.
(2) Includes effect of the one-time special assessment of $1.2 million, on a
pre-tax basis, to recapitalize the SAIF, which was recorded by the Bank in
late 1996.
(3) Loans, net, consist of loans receivable minus the allowance for loan
losses, deferred loan fees and unadvanced loan funds. The allowance for
loan losses at December 31, 1997 and March 31, 1997 was $2.1 million and
$1.7 million, respectively.
(4) The Bank adopted SFAS No. 115 as of April 1, 1994. On April 1, 1994, a
portion of the Bank's portfolio was classified as "available-for-sale."
Securities do not include FHLB-Boston stock of $1.7 million at both
December 31, 1997 and March 31, 1997.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(6) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets (which includes
FHLB-Boston stock and other equity securities) and the weighted average
cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
(9) For definitions and further information relating to the Bank's regulatory
capital compliance requirements, see "Regulation--Federal Savings
Institution Regulation--Capital Requirements." See "Regulatory Capital
Compliance" for the Bank's pro forma capital levels as a result of the
Offerings.
(10) Loans include total loans before the allowance for loan losses.
(11) Non-performing assets consist of non-performing loans and REO.
Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or principal.
It is the Bank's policy to cease accruing interest on all such loans. See
"Business of the Bank."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND MARCH 31, 1997
Total assets at December 31, 1997 totalled $249.9 million, an increase
of $16.8 million, or 7.2%, as compared to $233.1 million at March 31, 1997. The
increase in assets is primarily due to an increase of $17.2 million, or 8.3%, in
loans, net. The increase in loans, net, is mainly due to a $2.7 million, or
1.7%, increase in one- to four-family loans, a $3.4 million, or 23.1%, increase
in multi-family loans, a $4.8 million, or 19.0%, increase in commercial real
estate loans, a $4.7 million, or 315%, increase in construction and development
loans and a $1.8 million, or 35.9% increase in consumer loans. The increase in
loans was funded primarily by an increase in FHLB advances and, to a lesser
extent, an increase in deposits. The increase in loans was offset, in part, by a
$3.8 million, or 23.4% decrease in securities, primarily due to the call of $3.7
million of FHLB debentures. In addition, federal funds sold increased $1.8
million, premises and equipment increased $500,000, or 27.7%, and other assets
increased $1.4 million, or 60.0%. FHLB advances increased by $8.0 million, or
55.2%, to $22.5 million at December 31, 1997 as compared to $14.5 million at
March 31, 1997. Deposit accounts increased $6.7 million, or 3.4%, from $197.1
million at March 31, 1997 to $203.8 million at December 31, 1997. The deposit
growth occurred primarily in certificate accounts which increased $3.4 million,
or 3.2%, and savings and NOW accounts which increased $3.2 million, or 3.5%.
Non-performing loans totalled $2.0 million at December 31, 1997 as compared to
$1.5 million at March 31, 1997, an increase of $500,000, or 30.0%. The increase
is mainly due to an increase of $735,000 in commercial real estate loans offset
by a decrease of $241,000 in one- to four-family loans. Non-performing assets
totalled $2.0 million at December 31, 1997 as compared to $1.6 million at March
31, 1997, an increase of $400,000, or 24.1%. The increase is mainly due to the
aforementioned changes to non-performing loans and a decrease of $73,000 in REO.
Retained earnings increased from $19.1 million at March 31, 1997 to $20.2
million at December 31, 1997, an increase of $1.1 million, or 5.7%. The increase
in retained earnings is a result of net income for the nine months ended
December 31, 1997 of $1.1 million.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL
The Bank's net income for the nine months ended December 31, 1997
increased $605,000, or 124%, from $488,000 for the nine months ended December
31, 1996, to $1.1 million for the same period in 1997. The change is mainly due
to an increase in net interest income of $486,000, or 8.0%, a decrease in
noninterest expense of $1.1 million, or 19.3%, offset by an increase in the
provision for loan losses of $432,000 and an increase in income taxes of
$453,000, or 140%. The net interest spread for the nine months ended December
31, 1997 increased 5 basis points to 3.53% and the net interest margin for the
nine months ended December 31, 1997 increased 6 basis points to 3.83%. The
decrease in noninterest expense is primarily due to the absence of the one-time
special assessment to recapitalize the SAIF (the "SAIF Special Assessment"). The
increase in income taxes is also due to the absence of the SAIF Special
Assessment.
INTEREST INCOME
Interest income for the nine months ended December 31, 1997 was $14.1
million, compared to $13.0 million for the nine months ended December 31, 1996,
an increase of $1.1 million, or 8.8%. The increase in interest income was
primarily due to an increase in the average balance of interest-earning assets
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and an increase in the yield on interest-earning assets. The average balance of
interest-earning assets increased from $217.5 million for the nine months ended
December 31, 1996 to $231.2 million for the nine months ended December 31, 1997,
an increase of $13.7 million, or 6.3%. The increase in the average balance of
interest-earning assets is primarily a result of an increase in the average
balance of loans, net, of $20.0 million, or 10.4%, offset by a decrease in the
average balance of federal funds sold of $4.6 million, or 76.9%, and a decrease
of $1.7 million, or 8.9%, in the average balance of investment securities and
mortgage-backed and mortgage-related securities. The yield on average
interest-earning assets increased 20 basis points to 8.15% due to an increase on
the yield on loans, net.
INTEREST EXPENSE
Interest expense for the nine months ended December 31, 1997 was $7.5
million compared to $6.9 million for the same period in 1996, an increase of
$661,000, or 9.6%. The increase in interest expense is primarily due to an
increase in the average balance of interest-bearing liabilities coupled with an
increase in the cost of interest-bearing liabilities. The average balance of
interest-bearing liabilities for the nine months ended December 31, 1997
increased to $216.3 million from $203.7 million for the same period in 1996, an
increase of $12.6 million, or 6.2% due to an increase in the balance on deposit
accounts and an increase in rates on certificate accounts. The cost of
interest-bearing liabilities for the nine months ended December 31, 1997
increased 15 basis points to 4.62%.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses increased by $432,000, or 1,029%,
to $474,000 for the nine months ended December 31, 1997 from $42,000 for the
nine months ended December 31, 1996. The increase in the provision for loan
losses resulted from management's review and evaluation of the risks inherent in
its loan portfolio. In particular, management considered increased delinquencies
in four pools of purchased one- to four-family loans which were internally
classified by the Bank. See "Business of the Bank--Lending Activities" and
"--Delinquent Loans, Classified Assets and Real Estate Owned." As a result of
the increased provision, the Bank's allowance for loan losses as a percent of
loans equaled 0.94% at December 31, 1997 as compared to 0.82% at December 31,
1996. Management believes that the provision for loan losses and the allowance
for loan losses are currently reasonable and adequate to cover any losses
reasonably expected in the existing loan portfolio. While management estimates
loan losses using the best available information, no assurance can be given that
future additions to the allowance will not be necessary based on changes in
economic and real estate market conditions, further information obtained
regarding problem loans, identification of additional problem loans and other
factors, both within and outside of management's control.
NONINTEREST INCOME
Total noninterest income decreased $62,000, or 22.3%, from $276,000 for
the nine months ended December 31, 1996 to $214,000 for the nine months ended
December 31, 1997. The decrease is primarily due to a decrease of $48,000 in
gain on sale of available-for-sale securities and a decrease of $14,000 in other
noninterest income.
NONINTEREST EXPENSE
Noninterest expense for the nine months ended December 31, 1997
decreased $1.1 million, or 19.3%, from $5.5 million for the nine months ended
December 31, 1996 to $4.5 million for the same period in 1997. The decrease
consisted primarily of the following: compensation and employee benefits
increased
<PAGE> 5
$401,000, or 16.3%, due to normal salary increases and merger-related
compensation and additional board of directors meetings held during the nine
month period. In addition, office occupancy and equipment expense increased
$61,000, or 10.0%, FDIC insurance premium expense decreased $1.1 million, or
92.4%, due to the payment of $1.2 million in late 1996 for the SAIF Special
Assessment and due to a decrease in the Bank's assessment rate from 23 basis
points to 6.48 basis points, advertising expense increased $26,000, or 23.0%,
data processing expense increased $13,000, or 8.5%, and other noninterest
expense decreased $432,000, or 44.0%. Management attempts to control costs on an
ongoing basis; however, the Bank expects that compensation and employee benefits
may increase after the Conversion, primarily as a result of the adoption of
various stock-based employee benefit plans and compensation adjustments
contemplated in connection with the Conversion. See "Management of the
Bank--Benefits."
INCOME TAXES
Income tax expense for the nine months ended December 31, 1997 was
$776,000, compared to $323,000 for the same period in 1996, an increase of
$453,000, or 140%, primarily due to an increase in before tax income of $1.1
million, or 130%, as a result of the absence of the SAIF Special Assessment in
1997. The effective tax rate for the nine months ended December 31, 1997 was
41.5% as compared to 39.8% for the same period in 1996.
