FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 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 number 1-13691
Bay State Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 04-3398630
(State or other jurisdiction of I.R.S. Employer
Incorporation or organization) Identification No.)
1299 Beacon Street, Brookline, Massachusetts 02446
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (617) 739-9500
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 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.[x] Yes [_]No
The number of shares of common stock outstanding of each of the issuer's classes
of common stock, as of July 31, 1998 was 2,535,232.
Transitional Small Business Disclosure Format [_] Yes [x] No
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION ....................................................... 1
Item 1 - Financial Statements ..................................................... 1
Consolidated Balance Sheets - June 30, 1998 and March 31, 1998 ................ 1
Consolidated Income Statements - Three months ended June 30, 1998
and 1997 ................................................................... 2
Consolidated Statements of Cash Flows - Three months ended June 30, 1998
and 1997 ................................................................... 3
Consolidated Statements of Changes in Stockholders' Equity - Three months ended
June 30, 1998 .............................................................. 4
Notes to Consolidated Financial Statements for the Period Ended
June 30, 1998 ................................................................. 5
Item 2 - Management's Discussion and Analysis or Plan of Operation ................ 6
PART II - OTHER INFORMATION .......................................................... 18
Item 1 - Legal Proceedings ........................................................ 18
Item 2 - Changes in Securities and use of proceeds ................................ 18
Item 3 - Defaults Upon Senior Securities .......................................... 18
Item 4 - Submission of Matters to a Vote of Security Holders ...................... 18
Item 5 - Other Information ........................................................ 18
Item 6 - Exhibits and Reports on Form 8-K ......................................... 18
SIGNATURES ........................................................................... 19
EXHIBITS ............................................................................. 20
Computation of per share earnings - Exhibit 11 .................................... 20
Financial Data Schedule - Exhibit 27 .............................................. 21
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30 March 31
1998 1998
--------- ---------
<S> <C> <C>
ASSETS Unaudited
Cash and due from banks $ 3,852 $ 3,513
Short-term investments 17,900 46,000
Investment and mortgage-backed securities
Available for sale (amortized cost of $19,474
and $ 5,391) 20,612 6,523
Held to maturity (market value of $3,956 and $4,274) 3,943 4,272
Mortgage loans held for sale 867 822
Loans receivable, net 231,053 224,928
Stock in Federal Home Loan Bank of Boston 1,873 1,873
Accrued interest receivable 1,420 1,260
Premises and equipment, net 2,595 2,581
Deferred tax asset 2,060 2,065
Other assets 1,442 1,454
--------- ---------
Total assets $ 287,617 $ 295,291
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 204,547 $ 207,780
Borrowed funds 15,000 20,000
Other borrowed funds 1,561 2,176
Accrued expenses and other liabilities 2,420 1,761
--------- ---------
Total liabilities 223,528 231,717
--------- ---------
Stockholders' equity:
Common stock, par value $.01 per share, issued
and outstanding 2,535,232 and 2,535,232 shares 25 25
Additional paid-in capital 49,194 49,194
Retained earnings 17,854 17,340
Net unrealized gain on investments available for sale 667 666
Less: Unearned ESOP shares (3,651) (3,651)
Total stockholders' equity -- --
Total liabilities and stockholders' equity 64,089 63,574
--------- ---------
$ 287,617 $ 295,291
========= =========
Equity-to-asset ratio 22.28% 21.53%
Book value per share $ 27.24 $ 27.02
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 1
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
June 30,
--------
1998 1997
---------- ----------
Interest income: Unaudited
<S> <C> <C>
Loans $ 4,652 $ 4,216
Investments 238 277
Other interest 527 23
---------- ----------
Total interest income 5,417 4,516
---------- ----------
Interest expense:
Deposits 2,242 2,150
Borrowed funds 216 240
---------- ----------
Total interest expense 2,458 2,390
---------- ----------
Net interest income before provision for loan losses 2,959 2,126
Provision for loan losses 50 --
Net interest income after provision for loan losses 2,909 2,126
---------- ----------
Non-interest income:
Service charges on deposit accounts 62 70
Gain on sale of loans 13 3
Gain on sale of other real estate owned -- 19
---------- ----------
Total non-interest income 75 92
---------- ----------
Income before non-interest expense and income taxes 2,984 2,218
---------- ----------
Non-interest expense:
Salaries and employee benefits 1,190 852
Equipment Expense 80 63
Occupancy Expense 156 157
Federal deposit insurance premiums 31 31
Advertising 45 42
Data processing 57 55
Other 508 289
---------- ----------
Total non-interest expense 2,067 1,489
---------- ----------
Income before income taxes 917 729
Income tax expense 403 295
---------- ----------
Net income $ 514 $ 434
========== ==========
Comprehensive net income $ 515 $ 559
========== ==========
Weighted average common and common equivalent shares outstanding 2,352,696 n/a
==========
Basic earnings per share $ 0.22 n/a
==========
Diluted earnings per share $ 0.22 n/a
==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 2
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Net cash flows from operating activities: Three months ended June 30,
---------------------------
1998 1997
---- ----
Unaudited
<S> <C> <C>
Net income $ 514 $ 434
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 50 --
Net increase in mortgage loans held-for-sale (45) --
Gain on sale of mortgage loans (13) (3)
Depreciation and amortization 65 55
Increase (decrease) in deferred loan origination fees (99) 57
Amortization of securities, net of accretion 2 2
Gain on sale of other real estate owned -- (19)
Increase in accrued interest receivable (160) (106)
Decrease in deferred income tax assets, net -- 131
Decrease in prepaid expenses and other assets 12 60
Increase in other liabilities 659 187
-------- --------
Net cash provided by operating activities 985 798
-------- --------
Cash flows from investing activities:
Proceeds from sales of other real estate owned -- 92
Proceeds from maturities of held-to-maturity securities 327 224
Purchases of available-for-sale securities (14,083) (34)
Net increase in loans (6,063) (8,693)
Capital expenditures (79) (394)
-------- --------
Net cash used in investing activities (19,898) (8,805)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits (3,233) 1,475
Repayment of advances from the Federal Home Loan Bank (5,000) (14,500)
Advances from the Federal Home Loan Bank -- 19,500
Net increase (decrease) in other borrowed funds (615) 1,460
-------- --------
Net cash (used in) provided by financing activities (8,848) 7,935
-------- --------
Net increase (decrease) in cash and cash equivalents (27,761) (72)
Cash and cash equivalents at beginning of period 49,513 3,617
-------- --------
Cash and cash equivalents at end of period $ 21,752 $ 3,545
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,465 $ 2,391
Taxes 78 93
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Additional Net Unearned Total
Common Paid-in Retained Unrealized ESOP Stockholders'
Stock Capital Earnings Gain shares Equity
-------- ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ -- $ -- $19,091 $383 $ -- $19,474
Net loss -- -- (1,751) -- -- (1,751)
Stock issued pursuant to
initial common
stock offering 23 45,245 -- -- -- 45,268
Issuance of 187,795 shares of
common stock
to The Bay State Federal
Savings Charitable
Foundation 2 3,754 -- -- -- 3,756
Common stock acquired by ESOP -- -- -- -- (4,056) (4,056)
Reduction in unearned ESOP
shares charged to expense -- -- -- -- 405 405
Appreciation in fair value of
unearned ESOP shares
charged to expenses -- 195 -- -- -- 195
Change in net unrealized gain on
investments available for sale -- -- -- 283 -- 283
-------- -------- -------- -------- -------- --------
Balance at March 31, 1998 25 49,194 17,340 666 (3,651) 63,574
Net income -- -- 514 -- -- 514
Change in net unrealized gain
on investments available for sale -- -- -- 1 -- 1
-------- -------- -------- -------- -------- --------
Balance at June 30, 1998 (Unaudited) $25 $49,194 $17,854 $667 $(3,651) 64,089
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED June 30, 1998
(1) Organization
Bay State Bancorp, Inc. ("Company" or "Bay State") was incorporated under
the laws of Delaware in October 1997 for the purpose of serving as the holding
company of Bay State Federal Savings Bank ("Bank") as part of the Bank's
conversion from a mutual form of organization to a stock form of organization
(the "Conversion"). The Company is a savings and loan holding company and is
subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal
Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC"). The Conversion, completed on March 29, 1998, resulted in the
Company issuing an aggregate 2,535,232 shares of its common stock, par value
$.01 per share, at a price of $20 per share, of which 2,347,437 shares were
issued in a subscription offering and 187,795 shares were issued to The Bay
State Federal Savings Charitable Foundation (the "Foundation), established by
the Bank. Prior to the Conversion, Bay State had not engaged in any material
operations.
(2) Accounting Principles
The accompanying unaudited consolidated financial statements of Bay State
Bancorp, Inc. have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and of Regulation S-B. Accordingly, the financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the current fiscal year.
For further information, refer to the consolidated financial statements
included in the Company's annual report and Form 10-KSB for the period ended
March 31, 1998, filed with the Securities and Exchange Commission.
Page 5
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation
General
Bay State Bancorp, Inc. a savings and loan holding company was incorporated
under the laws of Delaware in October 1997 for the purpose of serving as the
holding company of Bay State Federal Savings Bank as part of the Bank's
conversion from a mutual to stock form of organization. Bay State Federal
Savings Bank is a federally chartered savings bank and is subject to regulation
by the Office of Thrift Supervision.
The Bank has five full service retail banking offices located in Norfolk
and Suffolk counties. Through these offices, the Bank offers a full range of
retail and commercial banking products and services and conduct other business
as allowable for federally chartered banks. The Banks' lending operations focus
on, residential first mortgages, commercial real estate loans, residential
construction loans, home equity lines of credit, and consumer loans.
The Banks' business activities are concentrated in Eastern Massachusetts.
All retail banking activity is conducted through the banking offices. Lending
operations, particularly loan originations, are conducted from the retail
offices and at the point of sale. Neither the Company and the Bank nor any of
their subsidiaries conduct business on a national or international basis.
The operating results of the Company depend primarily on its net interest
and dividend income, which is the difference between (i) interest and dividend
income on earnings assets, primarily loans and investment securities, and (ii)
interest expense on interest bearing liabilities, which consist of deposits and
borrowings. Results of operations are also affected by the provision for loan
losses, the level of non-interest income, including deposit and loan fees, and
gains on sales of assets, operating expenses, and income taxes.
Comparison of Financial Condition at June 30, 1998 and March 31, 1998
Total assets at June 30, 1998 were $287.6 million, compared to $295.3
million at March 31, 1998, a decrease of 2.6%. The decrease in total assets was
primarily the result of a reduction of $3.2 million in deposits and $5.0 million
in borrowed funds, these outflows were funded with short-term investments. While
total assets declined, there were increases in loans receivable of $6.1 million,
or 2.8%, and investment securities increased $13.8 million, or 127.8%. The
increases in the respective portfolios were funded from short-term investments.
Loan receivable growth was mainly in the residential mortgage area, while the
increase in the investment portfolio was primarily in government agencies and
certain equity investments.
Total equity was $64.1 million, or 22.28%, of total assets at June 30,
1998, an increase of $515,000 or 0.81%, from the $63.6 million, or 21.53%, of
total assets at March 31, 1998. The Company's book value per share at June 30,
1998 was $27.24.
Page 6
<PAGE>
Investments
Short-term investments of $17.9 million at June 30, 1998, consisted solely
of overnight deposits in the Federal Home Loan Bank of Boston, a decrease of
$28.1 million, or 61.1%, from the $46.0 million at March 31, 1998. This decrease
was a result of funding the growth in the investment securities and loan
portfolios, to fund the minor outflow of deposits and payoff borrowed funds.
As a result of the stability in interest rates, and the corresponding
impact on the market value of the investments classified as available for sale,
a $667,000 net unrealized gain was recognized as an increase to equity at June
30, 1998, compared to an unrealized gain of $666,000 at March 31, 1998.
The tables below show the investment securities portfolios for the periods
presented:
The amortized cost and estimated market values of investments available for
sale were:
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
-------------- --------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
--------- -------- --------- ---------
Investment securities (In thousands)
<S> <C> <C> <C> <C>
Marketable equity securities $ 8,009 $ 9,067 $ 5,391 $ 6,523
Trust preferred equity securities 1,468 1,480 -- --
Preferred stocks 1,000 1,066 -- --
Government agency securities 8,997 8,999 -- --
------- ------- ------- -------
$19,474 $20,612 $ 5,391 $ 6,523
======= ======= ======= =======
</TABLE>
The amortized cost and estimated market values of investments held to
maturity were:
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
-------------------- ---------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
------ ------ ------ ------
Investment securities (In thousands)
<S> <C> <C> <C> <C>
Government agency securities $2,000 $2,000 $2,001 $1,999
Mortgage-backed securities 1,943 1,956 2,271 2,275
------ ------ ------ ------
$3,943 $3,956 $4,272 $4,274
====== ====== ====== ======
</TABLE>
Page 7
<PAGE>
Loans
During the first quarter, loans receivable increased by $6.1 million, or
2.72%, as detailed below:
<TABLE>
<CAPTION>
June 30, % of total March 31, % of total
1998 loans 1998 loans
--------- ------ ------- -------
Mortgage loans: (Dollars in thousands)
<S> <C> <C> <C> <C>
Residential 1 - 4 family $ 156,147 66.76% $157,240 68.99%
Equity lines 4,181 1.79 4,028 1.77
Residential multi-family 22,738 9.72 22,411 9.83
Commercial real estate 39,298 16.80 35,468 15.56
Construction and development 5,455 2.33 5,287 2.32
--------- ------ -------- -------
Total mortgage loans 227,819 97.40 224,434 98.47
Commercial loans 2,396 1.02 43 0.02
Other loans 3,692 1.58 3,434 1.51
--------- ------ -------- -------
Total loans 233,907 100.00% 227,911 100.00%
====== =======
Deduct:
Allowance for loan losses 2,483 2,513
Deferred loan fees 371 470
--------- --------
Net loans receivable $ 231,053 $224,928
========= ========
</TABLE>
The Banks' primary lending focus is real estate lending. At June 30, 1998,
residential, commercial real estate, and construction and development loans
represented 97.40% of total loans, compared to 98.47% at March 31, 1998.
At June 30, 1998 loans serviced for investors was $16.5 million compared to
$15.6 million at March 31, 1998.
Asset Quality
At June 30, 1998 non-performing assets totaled $2.0 million, a decrease of
$249,000, or 10.93%, from $2.3 million at March 31, 1998. Non-performing assets
consist of all loans that are delinquent 90 days or more. The Bank had no other
real estate owned at June 30, 1998 or March 31, 1998. At June 30, 1998,
non-performing assets represented 0.71% of total assets and 0.88% of loans
receivable, compared to 0.77% and 1.00%, respectively, at March 31, 1998. The
decrease in non-performing assets was primarily in one-to-four family
residential mortgages.
Page 8
<PAGE>
The composition of non-performing assets for the periods presented was:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1997 1998
----- ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans:
One-to-four-family $ 994 $1,605 $1,258
Multi-family 254 -- 254
Commercial real estate 739 -- 739
Construction and development -- -- --
Equity lines -- 39 --
Other 43 2 28
------ ------ ------
$2,030 $1,646 $2,279
====== ====== ======
Non-performing assets as a percentage of:
Loans receivable 0.88% 0.76% 1.00%
Total assets 0.71 0.68 0.77
</TABLE>
The following represents the activity in the allowance for loan losses
for the three months ended June 30, 1998:
(In thousands)
Balance at March 31, 1998 $2,513
Provision for loan losses 50
Losses charged to allowance 80
Recoveries --
Balance at June 30, 1998 $2,483
======
The Bank continually reviews its delinquency position, underwriting and
appraisal procedures, charge-off experience, and current real estate market
conditions with respect to its entire loan portfolio. While management uses the
best information available in establishing the allowance, future adjustments may
be necessary if economic conditions differ substantially from the assumptions
used in making the evaluation.
Page 9
<PAGE>
Deposits and Borrowed Funds
Deposits decreased slightly during the three month period as detailed
below:
<TABLE>
<CAPTION>
June 30, % of total March 31, % of total
1998 deposits 1998 deposits
-------- ---------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Regular savings accounts $ 27,026 13.21% $ 32,216 15.51%
NOW accounts 21,782 10.65 22,989 11.06
Money market accounts 45,663 22.32 42,440 20.43
Non-interest bearing deposits 536 0.26 485 0.23
-------- ------ -------- ------
95,007 46.44 98,130 47.23
Term deposits 109,540 53.56 109,650 52.77
-------- ------ -------- ------
Total deposits $204,547 100.00% $207,780 100.00%
======== ====== ======== ======
</TABLE>
During the period, borrowed funds decreased $5,000,000, or 25.00%, as the
Bank used short-term investments to pay off Federal Home Loan Bank borrowings as
they matured.
Comparison of Operating Results for the three months ended June 30, 1998 and
1997
Results of Operations
Consolidated net income for the three months ended June 30, 1998 totaled
$514,000, or $0.22 per share, compared to $434,000 for the same period last
year. This represents an increase of 18.43% in earnings. Due to the recent
Conversion, the earnings per share numbers for the prior period are not
meaningful. The increase in earnings was directly attributable to an increase in
net interest income. This increase in net interest income is directly
attributable to the increased level of earning assets funded by the Conversion
proceeds.
Interest Income
Interest income for the three months ended June 30, 1998 increased
$901,000, or 20.0%, to $5.4 million, compared to $4.5 million for the same
period last year. The increase in interest income was primarily due to an
increase in the average balance of interest-earning assets, partially offset by
a decrease in the yield on interest-earning assets. The average balance of
interest-earning assets increased from $228.7 million for the quarter ended June
30, 1997 to $277.4 million for the quarter ended June 30, 1998, an increase of
$48.7 million, or 21.3%. The increase in the average balance of interest-earning
assets was primarily a result of an increase in the average balance of
short-term investments of $35.8 million, or 34.1%, an increase in loans, net, of
$14.2 million or 6.7% and a decrease in mortgage-backed and mortgage related
securities of $1.0 million, or 33.2%. The yield on interest-earning assets
decreased 9 basis points to 7.81%.
Page 10
<PAGE>
Interest Expense
Interest expense for the three months ended June 30, 1998 increased
$68,000, or 2.9%, to $2.5 million, compared to $2.4 million for the three months
ended June 30, 1997. The increase in interest expense was primarily due to a
$7.3 million, or 3.4%, increase in the average balance of interest-bearing
liabilities which increased from $213.5 million for the three months ended June
30, 1997 to $220.9 million for the three months ended June 30, 1998. The
increase in the average balance of interest-bearing liabilities was primarily a
result of an increase in the average balance of deposits of $6.8 million, or
3.5% and a decrease in the average balance of borrowed funds of $.5 million, or
2.9%. The cost of average interest-bearing liabilities decreased 3 basis points
to 4.45%.
Page 11
<PAGE>
Net interest income
The table below shows the average balance sheet, the interest earned and
paid on interest-earning assets and interest-bearing liabilities, and the
resulting net interest spread and margin for the periods presented.
<TABLE>
<CAPTION>
For the three months ended June 30, 1998 1997
--------------------------------- --------------------------------
Interest Interest
Average income/ Yield/ Average income/ Yield/
balance expense rate balance expense rate
------- -------- ------ ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Short-term investments $ 36,813 $ 527 5.73% $ 1,050 $ 23 8.76%
Investment securities 14,007 203 5.80 14,242 225 6.32
Mortgage-backed and mortgage related
securities 2,094 35 6.88 3,133 52 6.64
Loans, net and mortgage loan
held-for-sale 224,494 4,652 8.29 210,313 4,216 8.02
-------- -------- -------- --------
Total interest-earning assets 277,408 5,417 7.81 228,738 4,516 7.90
-------- --------
Non interest-earning assets 12,291 7,093
-------- --------
Total $289,699 $235,831
======== ========
Liabilities and Equity
Interest-bearing liabilities:
NOW accounts $ 21,776 94 1.73 $ 20,751 94 1.81
Regular savings accounts 28,627 174 2.43 30,262 186 2.46
Money market accounts 38,571 450 4.67 38,733 385 3.98
Certificate accounts 114,416 1,524 5.33 106,800 1,485 5.56
-------- -------- -------- --------
Total interest-bearing deposits 203,390 2,242 4.41 196,546 2,150 4.38
FHLB advances 17,500 216 4.88 17,000 240 5.59
-------- -------- -------- --------
Total interest-bearing liabilities 220,890 2,458 4.45 213,546 2,390 4.48
-------- --------
Demand deposits 498 92
Other liabilities 4,461 2,423
Equity 63,850 19,770
-------- --------
Total $289,699 $235,831
======== ========
Net interest income $ 2,959 $ 2,126
======== ========
Interest rate spread 3.36% 3.42%
==== ====
Net interest margin 4.14% 3.72%
==== ====
</TABLE>
Page 12
<PAGE>
The increase of $833,000 in net interest income is analyzed as follows:
<TABLE>
<CAPTION>
Quarters ended June 30,
1998 vs. 1997
------------------------
Change due to Increase (Decrease)
---------------------------------
Volume Rate Net
------ ---- ----
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans $ 291 $ 144 $ 435
Investment securities 487 (21) 466
----- ----- -----
Total 778 123 901
Interest expense:
Deposits 83 9 92
Borrowings 7 (31) (24)
Total 90 (22) 68
----- ----- -----
Net interest income $ 688 $ 145 $ 833
===== ===== =====
</TABLE>
Provision for Loan Losses
The provision for loan losses totaled $50,000 for the quarter ended June
30, 1998, compared to none for the same period last year. The increase in the
provision reflected the risks associated with the Banks' primary lending
objective to increase the overall loan portfolio. The allowance for loan losses
is maintained at an amount management considers adequate to cover estimated
losses on loans receivable which are deemed probable and estimable based on
information currently known to management. While management believes the Bank's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover future losses incurred by
the Bank, or that future adjustments to the allowance for loan losses will not
be necessary if economic and other conditions differ substantially from the
economic and other conditions analyzed by management to determine the current
level of the allowance for loan losses.
Non-interest income
Total non-interest income decreased $17,000, or 18.5%, to $75,000. Other
fees and charges decreased $8,000 due to decreased volumes in transaction
accounts and fees charged on certain transactions. Gain on sale of loans
increased $10,000, or 333.33%, due to the increased level of sales over the same
period last year. During the previous fiscal quarter the Bank recognized $19,000
in gains on the sale of other real estate, of which there were none in the
current fiscal quarter.
Page 13
<PAGE>
Non-interest expense
Salaries and benefits increased $338,000, or 39.7%, the result of $147,000
in compensation expense associated with the Employee Stock Option Plan
allocation, a general increase in salaries and benefits, and an increase in the
number of employees over the same period last fiscal year. Occupancy and
equipment expenses increased $16,000, or 7.3%, primarily a result of the
increased level of depreciation on building and leasehold improvements. Other
expenses increased $219,000, or 75.8%, primarily as a result of $188,000 in
non-recurring expenses associated with the implementation of certain
developmental strategies and programs associated with the strategic planning for
the future.
Income Taxes
Income taxes for the three months ended June 30, 1998 were $403,000 on
pretax income of $917,000, for an effective rate of 43.95%, compared to $295,000
on pretax income of $729,000, for an effective rate of 40.47% for the same
period last fiscal year. The higher than previous years effective tax rate is
mainly due to the non-deductibility of certain expenses in the current fiscal
year.
Capital Adequacy
The Company and its subsidiary Bank are 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
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weighting and other factors.
At June 30, 1998 the Company's capital ratio was 22.28% of total assets.
The Bank at June 30, 1998 had total capital of 14.09% and risk based capital of
26.23% (unaudited).
The FDIC sets minimum leverage ratios for each insured institution
depending upon its CAMELS rating. Banks with the highest ratings are required to
carry a 3.0% leverage ratio, with less highly rated institutions required to
have minimum ratios at least 1.0% to 2.0% greater. Additionally, the FDIC has
risk-based capital regulations. Under these requirements, banks must have a
minimum risk-based capital rate of 8.00%.
At June 30, 1998 the Company and the Bank met all the capital adequacy
requirements to which they are subject. As of June 30, 1998, the most recent
notification from the Office of Thrift Supervision categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action.
Page 14
<PAGE>
Asset/Liability Management
The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given the Bank's business
strategy, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates.
The Bank monitors its interest rate risk as such risk relates to its
operating strategies. The Bank's Board of Directors has established an
Asset/Liability Committee, responsible for reviewing its asset/liability
policies and interest rate risk position, which meets on a quarterly basis and
reports trends and interest rate risk position to the Board of Directors on a
quarterly basis. The extent of the movement of interest rates is an uncertainty
that could have a negative impact on the earnings of the Bank.
In recent years, the Bank has primarily utilized the following strategies
to manage interest rate risk: (i) emphasizing the origination and purchase of
adjustable-rate loans; (ii) investing primarily in short-term U.S. Government
securities or mortgage-backed and mortgage-related securities with shorter
estimated maturities; (iii) utilizing FHLB advances to better structure the
maturities of its interest rate sensitive liabilities; and (iv) to a
substantially lesser extent, selling in the secondary market longer-term
fixed-rate mortgage loans originated while generally retaining the servicing
rights on such loans.
As part of its interest rate risk analysis, the Bank uses an interest rate
sensitivity model which generates estimates of the change in the Bank's net
portfolio value ("NPV") over a range of interest rate scenarios and which is
prepared by the OTS on a quarterly basis. NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The NPV
ratio, under any interest rate scenario, is defined as the NPV in that scenario
divided by the market value of assets in the same scenario. The OTS produces
such analysis using its own model, based upon data submitted on the Bank's
quarterly Thrift Financial Reports, including estimated loan prepayment rates,
reinvestment rates and deposit decay rates. The following table sets forth the
Bank's NPV as of March 31, 1998 (the latest NPV analysis prepared by the OTS),
as calculated by the OTS.
Page 15
<PAGE>
<TABLE>
<CAPTION>
Change in
Interest
Rates in Net Portfolio Value NPV as % of
Basis Points Portfolio
(Rate Shock) Value of Assets
NPV
Amount $ Change % Change Ratio Change(1)
-------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 $38,326 $(6,256) (14)% 13.22% (167)
300 40,766 (3,816) (9) 13.91 (98)
200 42,745 (1,837) (4) 14.45 (45)
100 44,096 (487) (1) 14.79 (10)
Static 44,582 -- -- 14.89 --
(100) 44,750 168 -- 14.90 1
(200) 44,883 301 1 14.89 --
(300) 45,491 909 2 15.02 13
(400) 46,820 2,238 5 15.35 45
</TABLE>
(1) Expressed in basis points.
Liquidity
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's currently required liquidity
ratio is 4%. At June 30, 1998 the Bank's liquidity ratio was 14.7%. Management's
strategy is to maintain liquidity as close as possible to the minimum regulatory
requirement and to invest any excess liquidity in higher yielding
interest-earning assets. The Bank manages its liquidity position and demands for
funding primarily by investing excess funds in short-term investments and
utilizing FHLB advances in periods when the Bank's demands for liquidity exceed
funding from deposit inflows.
The Bank's most liquid assets are cash and cash equivalents and securities.
The levels of these assets are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At June 30, 1998, cash
and cash equivalents and securities totaled $48.2 million, or 16.75% of total
assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 1998, the Bank had $15.0 million in
advances outstanding from the FHLB, and at June 30, 1998, had an additional
overall borrowing capacity from the FHLB of $151.8 million. Depending on market
conditions, the pricing of deposit products and FHLB advances, the Bank may
continue to rely on FHLB borrowings to fund asset growth.
Page 16
<PAGE>
Year 2000 Compliance
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. The Bank primarily utilizes a third-party vendor
for processing the primary banking applications. In addition, the Bank also uses
third-party vendor application software for all ancillary computer applications.
The third-party vendor for the Bank's banking applications is in the process of
modifying and upgrading its computer applications to ensure Year 2000
compliance. In the event that the Bank's third party vendor or its significant
suppliers or customers do not successfully and timely achieve Year 2000
compliance, the Bank's business or operations could be adversely affected.
However, management believes that the Bank's own internal system, networks and
resources would allow the Bank to effectively operate and service its customers
in the event its significant vendors do not achieve satisfactory Year 2000
compliance. In addition, if significant vendors failed to meet Year 2000
operating requirements, the Bank intends to engage alternative vendors and
suppliers. While the Bank cannot estimate the costs and expenses associated with
hiring new vendors and suppliers, management believes that such costs would not
have a material impact on the Bank's earnings or results of operations.
Statements contained in this document, which are not historical facts, are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risk and uncertainties, which could cause actual results to differ materially
from those currently anticipated due to a number of factors, which include, but
are not limited to, factors discussed in documents filed by the Company with the
Securities and Exchange Commission from time to time.
Page 17
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Neither the Company nor any of its subsidiaries is party to any pending
legal proceedings which are material other than routine litigation incidental to
their business activities.
Item 2 - Changes in Securities and Use of Proceeds
Not applicable.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11.0
27.0
(b) Reports on Form 8-K
(i) None
Page 18
<PAGE>
SIGNATURES
Under 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.
August 10, 1998 \s\ John F. Murphy
- -------------------- --------------------------
Date John F. Murphy
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
August 10, 1998 \s\ Michael O. Gilles
- -------------------- -----------------------------
Date Michael O. Gilles
Senior Vice President and
Chief Financial Officer
(Principal Accounting and Financial
Officer)
Page 19
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
Three months ended
June 30,
--------
1998 1997
---- ----
Net Income $544,000 $434,000
========== ==========
Average shares outstanding 2,352,696 N/A
==========
Basic earnings per share $0.22 N/A
==========
Net Income $544,000 $434,000
========== ==========
Average shares outstanding 2,352,696 N/A
Net effect of dilutive stock options -- N/A
----------
Total shares outstanding 2,352,696 N/A
==========
Diluted earnings per share $0.22 N/A
==========
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BAYSTATE BANCORP, INC. AT AND FOR THE QUARTER ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,852
<INT-BEARING-DEPOSITS> 204,011
<FED-FUNDS-SOLD> 17,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,612
<INVESTMENTS-CARRYING> 3,943
<INVESTMENTS-MARKET> 3,956
<LOANS> 231,053
<ALLOWANCE> 2,483
<TOTAL-ASSETS> 287,617
<DEPOSITS> 204,547
<SHORT-TERM> 16,561
<LIABILITIES-OTHER> 2,420
<LONG-TERM> 0
0
0
<COMMON> 25
<OTHER-SE> 64,064
<TOTAL-LIABILITIES-AND-EQUITY> 287,617
<INTEREST-LOAN> 4,652
<INTEREST-INVEST> 238
<INTEREST-OTHER> 527
<INTEREST-TOTAL> 5,417
<INTEREST-DEPOSIT> 2,242
<INTEREST-EXPENSE> 216
<INTEREST-INCOME-NET> 2,959
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,067
<INCOME-PRETAX> 917
<INCOME-PRE-EXTRAORDINARY> 514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 514
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 7.81
<LOANS-NON> 2,030
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,513
<CHARGE-OFFS> 80
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,483
<ALLOWANCE-DOMESTIC> 2,483
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
