FORM 10-QSB
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, 1999
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
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. |x| Yes |_| No
The number of shares of common stock outstanding of each of the issuer's classes
of common stock, as of August 6, 1999 was 2,288,046.
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 - Consolidated Financial Statements.................................................................1
Consolidated Balance Sheets at June 30, 1999 (unaudited) and March 31, 1999 ............................1
Consolidated Income Statements for the three months ended June 30, 1999 and 1998........................2
Consolidated Statements of Cash Flows for the three months ended June 30, 1999 (unaudited)
and June 30, 1998....................................................................................3
Consolidated Statements of Changes in Stockholders' Equity for the three months ended
June 30, 1999 (unaudited)............................................................................4
Notes to Consolidated Financial Statements..............................................................5
Item 2 - Management's Discussion and Analysis or Plan of Operation.........................................6
PART II - OTHER INFORMATION..................................................................................20
Item 1 - Legal Proceedings................................................................................20
Item 2 - Changes in Securities and Use of Proceeds........................................................20
Item 3 - Defaults Upon Senior Securities..................................................................20
Item 4 - Submission of Matters to a Vote of Security Holders..............................................20
Item 4 - Continued Submission of Matters to a Vote of Security Holders....................................21
Item 5 - Other Information................................................................................21
Item 6 - Exhibits and Reports on Form 8-K.................................................................21
SIGNATURES................................................................................................22
EXHIBITS..................................................................................................23
Computation of per share earnings - Exhibit 11.........................................................23
Selected Financial Data - Exhibit 27...................................................................24
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,215 $ 3,738
Short-term investments 91 6,369
Investment in available-for-sale securities (at fair value) 41,473 24,350
Investments in held-to-maturity securities (fair values of $740 as of
June 30, 1999 and $978 as of March 31, 1999) 739 956
Stock in Federal Home Loan Bank of Boston 5,686 3,850
Mortgage loans held for sale 413 321
Loans receivable, net 330,963 304,372
Accrued interest receivable 2,144 1,920
Premises and equipment, net 2,580 2,564
Deferred tax asset, net 2,698 2,728
Investment in bank owned life insurance 6,125 6,054
Other assets 2,426 2,182
--------- ---------
Total assets $ 398,553 $ 359,404
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 215,515 $ 216,397
Federal Home Loan Bank Advances 111,947 76,751
Other borrowed funds 9,970 3,240
Accrued expenses and other liabilities 2,948 2,718
--------- ---------
Total liabilities $ 340,380 $ 299,106
--------- ---------
Stockholders' equity:
Common stock, par value $.01 per share, issued
and outstanding 2,535,232 shares 25 25
Additional paid-in capital 49,277 49,277
Retained earnings 19,906 19,463
Accumulated other comprehensive income 69 45
Less: Unearned ESOP shares (3,232) (3,232)
Unearned 1998 Stock-Based Incentive Plan (2,173) (2,173)
Treasury stock, 247,186 and 126,762 shares (5,699) (3,107)
--------- ---------
Total stockholders' equity 58,173 60,298
--------- ---------
Total liabilities and stockholders' equity $ 398,553 $ 359,404
========= =========
Equity-to-asset ratio 14.60% 16.78%
Book value per share $ 27.41 $ 26.88
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Income Statements
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------------
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 6,260 $ 4,652
Investments 579 765
----------- -----------
Total interest income 6,839 5,417
----------- -----------
Interest expense:
Deposits 2,119 2,242
Borrowed funds 1,236 216
----------- -----------
Total interest expense 3,355 2,458
----------- -----------
Net interest income before provision for possible loan losses 3,484 2,959
Provision for loan losses 225 50
----------- -----------
Net interest income after provision for possible loan losses 3,259 2,909
----------- -----------
Non-interest income:
Service charges on deposit accounts 72 62
Other income 97
Gain on sale of loans (1) 13
----------- -----------
Total non-interest income 168 75
----------- -----------
Income before non-interest expense and income taxes 3,427 2,984
----------- -----------
Non-interest expense:
Salaries and employee benefits 1,612 1,190
Occupancy and equipment 268 236
Federal deposit insurance premiums 32 31
Advertising 68 45
Data processing 69 57
Other 470 508
----------- -----------
Total non-interest expense 2,519 2,067
----------- -----------
Income before income taxes 908 917
Income tax expense 324 403
----------- -----------
Net income $ 584 $ 514
=========== ===========
Comprehensive net income $ 608 $ 515
=========== ===========
Weighted average common and common equivalent shares outstanding 2,177,986 2,352,696
=========== ===========
Basic earnings per share $ 0.27 $ 0.22
=========== ===========
Diluted earnings per share $ 0.27 $ 0.22
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Net cash flows from operating activities:
Net income $ 584 $ 514
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 225 50
Provision for depreciation and amortization 76 65
Amortization of securities, net of accretion (17) 2
Amortization of loan fees and discounts (11) (99)
Net decrease (increase) in mortgage loans held-for-sale (92) (45)
(Gain) loss on sale of loans 1 (13)
Increase (decrease) in accrued interest receivable (224) (160)
Decrease (increase) in prepaid expense and other assets (315) 12
Increase (decrease) in accrued taxes 230 659
-------- --------
Net cash provided (used) by operating activities 457 985
-------- --------
Net cash flows from investing activities:
Maturities and principal repayments on investments held to maturity 215 327
Maturities and principal repayments on investments available for sale 4,734 --
Purchase of investments available for sale (21,783) (14,083)
Purchase of Federal Home Loan Bank of Boston Stock (1,836) --
Net decrease (increase) in loans (26,806) (6,063)
Capital expenditures (92) (79)
Proceeds from sales of and receipts on other real estate owned -- --
-------- --------
Net cash provided (used) for investing activities (45,568) (19,898)
-------- --------
Net cash flows from financing activities:
Net deposit activity (882) (3,233)
Proceeds of borrowings 82,191 --
Repayment of borrowings (46,995) (5,000)
Repayment of borrowings 6,730 (615)
Dividend on common stock (141) --
Purchase of treasury stock (2,593) --
-------- --------
Net cash provided by financing activities 38,310 (8,848)
-------- --------
Net increase (decrease) in cash and cash equivalents: (6,801) (27,761)
Cash and cash equivalents at beginning of period 10,107 49,513
-------- --------
Cash and cash equivalents at end of period $ 3,306 $ 21,752
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 3,330 $ 2,465
Income taxes $ 346 $ 78
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated Unearned
Other Stock-based Total
Additional Compre- Unearned Incentive Stock-
Common Paid-in Retained hensive ESOP Treasury Plan holders'
Stock Capital Earnings Income Shares Stock Shares Equity
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ -- $ -- $ 19,091 $ 383 $ -- $ -- $ -- $ 19,474
Net Loss -- -- (1,751) -- -- -- --
Net Change in unrealized gain on available
for sale securities, net of tax effect -- -- -- 283 -- -- --
Comprehensive income -- -- -- -- -- -- -- (1,468)
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 expense -- 195 -- -- -- -- -- 195
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1998 25 49,194 17,340 666 (3,651) -- -- 63,574
Net Income -- -- 2,234 -- -- -- --
Net change in unrealized gain on available
for sale securities, net of tax effect -- -- -- (621) -- -- --
Comprehensive income -- -- -- -- -- -- -- 1,613
Purchase of treasury stock, 126,762 shares -- -- -- -- -- (3,107) -- (3,107)
Dividends paid, $0.05 per share -- -- (111) -- -- -- -- (111)
Reduction in unearned ESOP shares charged
to expense -- -- -- -- 419 -- -- 419
Appreciation in fair value of unearned ESOP
Shares charged to expense -- 95 -- -- -- -- -- 95
Common stock acquired for stock-based
Incentive plans -- -- -- -- -- -- (2,269) (2,269)
Issuance of stock incentive plan shares -- (12) -- -- -- -- 96 84
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1999 $ 25 $ 49,277 $ 19,463 $ 45 $ (3,232) $ (3,107) $ (2,173) 60,298
Net Income -- -- 584 -- -- -- --
Net change in unrealized gain on available
for sale securities, net of tax effect -- -- -- 24 -- -- --
Comprehensive income -- -- -- -- -- -- -- 608
Purchase of treasury stock, 120,424 shares -- -- -- -- -- (2,592) -- (2,592)
Dividends paid, $0.06 per share -- -- (141) -- -- -- -- (141)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1999 (Unaudited) $ 25 $ 49,277 $ 19,906 $ 69 $ (3,232) $ (5,699) $ (2,173) $ 58,173
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 1999
(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 27, 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 sold
in a subscription offering and 187,795 shares were issued to The Bay State
Federal Savings Charitable Foundation (the "Foundation), established by the
Company 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, 1999 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, 1999, filed with the Securities and Exchange Commission.
(3) Stock Repurchase Program
On April 6, 1999 the Company announced it had received approval from the
OTS to repurchase up to 5% of the Company's outstanding common stock, or 120,424
shares. During the quarter the Company completed the purchase of the stock at a
total cost of $2,592,000, or $21.52 per share. This second repurchase program
reduced the company's outstanding shares to 2,288,046.
5
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation
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.
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's business activities are concentrated in Eastern Massachusetts.
The Bank has five full service retail banking offices located in Norfolk and
Suffolk Counties, Massachusetts. All retail banking activity is conducted
through the banking offices. Through these offices, the Bank offers a full range
of retail and commercial banking products and services and conducts other
business as allowable for federally chartered banks. The Bank primarily makes
residential first mortgages, commercial and multi-family real estate loans, home
equity lines of credit, consumer loans and to a lesser extent residential
construction loans. Loan originations, are conducted from the retail offices and
at the point of sale. Neither the Company nor 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 earning 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, gains
on sales of assets, operating expenses and income taxes.
6
<PAGE>
Comparison of Financial Condition at June 30, 1999 and March 31, 1999
Total assets at June 30, 1999 were $398.6 million, compared to $359.4
million at March 31, 1999, an increase of $39.2 million, or 10.9%. This was
primarily due to an increase in originations and purchases in loans receivable
of $26.6 million, or 8.7%, primarily in multi-family and commercial real estate
loans, and to a lesser extent one-to-four family residential mortgages. Also,
investments, excluding stock in Federal Home Loan Bank, increased $10.6 million,
or 33.6%. The increase in assets was funded mainly from an increase of $35.2
million, or 45.9%, in Federal Home Loan Bank borrowings and a $6.7 million, or
208%, increase in other borrowed funds, consisting mainly of repurchase
agreements.
Total stockholder's equity was $58.2 million, or 14.6% of total assets, at
June 30, 1999, a decrease of $2.1 million, or 3.5%, from the $60.3 million, or
16.8% of total assets at March 31, 1999. The change in equity was the result of
the net income for the period, offset by a reduction in capital from the
completion of a 5% stock repurchase program during the quarter. The Company's
book value per share at June 30, 1999 was $27.41, compared to $26.88 at March
31, 1999.
Investments
Short-term investments of $91,000 at June 30, 1999, consisted solely of
funds invested in the Co-operative Central Bank Liquidity Fund, a decrease of
$6.3 million, or 98.6% from the $6.4 million at March 31, 1999. This decrease
was a result of funding the growth in the investment securities and loan
portfolios and to fund the minor outflow of deposits.
As a result of the current interest rate environment, and the corresponding
impact on the market value of the investments classified as available for sale,
a $69,000 net unrealized gain was recognized as an increase to equity at June
30, 1999, compared to an unrealized gain of $45,000 at March 31, 1999.
7
<PAGE>
The table below shows the amortized cost and estimated market values of
investments available for sale for the periods presented:
June 30, 1999 March 31, 1999
------------------ ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(Dollars in thousands)
Investment securities
Marketable equity securities $ 9,600 $10,027 $ 9,525 $ 9,737
Mortgage-backed securities 20,474 20,485 5,371 5,391
Trust preferred equity securities 4,893 4,883 2,506 2,521
Corporate bonds and notes 1,246 1,226 1,247 1,234
Preferred stocks 4,005 3,867 1,500 1,460
Government agency securities 1,000 985 4,000 4,007
------- ------- ------- -------
Total Available for Sale Securities $41,218 $41,473 $24,149 $24,350
======= ======= ======= =======
The amortized cost and estimated market values of investments held to maturity
were:
June 30, 1999 March 31, 1999
------------------ ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(In thousands)
Investment securities
Mortgage-backed
and mortgage-related securities $ 739 $ 740 $ 956 $ 978
------- ------- ------- -------
Total Mortgage-backed and
mortgage related Securities $ 739 $ 740 $ 956 $ 978
======= ======= ======= =======
8
<PAGE>
Loans
During the first quarter of Fiscal 2000, loans receivable increased by
$26.6 million, or 8.7%, as detailed below:
<TABLE>
<CAPTION>
June 30, % of total March 31, % of total
1999 Loans 1999 Loans
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential 1 - 4 family $175,972 52.12% $168,786 54.62%
Multi-family 69,479 20.58 57,744 18.69
Commercial real estate 74,421 22.04 67,806 21.94
Construction and development 7,196 2.13 5,494 1.78
-------- -------- -------- --------
Total mortgage loans 327,068 96.87 299,830 97.03
-------- -------- -------- --------
Commercial loans 225 0.07 500 0.16
-------- -------- -------- --------
Consumer loans:
Equity lines 6,404 1.90 5,156 1.67
Other consumer loans 3,951 1.16 3.535 1.14
-------- -------- -------- --------
Total loans 337,648 100.00% 309,021 100.00%
======== ========
Deduct:
Allowance for loan loss 3,266 3,027
Undisbursed proceeds of construction
and development loans in process 3,233 1,424
Deferred loan fees 186 198
-------- --------
Net loans receivable $330,963 $304,372
======== ========
</TABLE>
The Banks' primary lending focus is real estate lending. At June 30, 1999,
residential, commercial real estate, and construction and development loans
represented 96.9% of total loans, compared to 97.0% at March 31, 1999.
At June 30, 1999 loans serviced for investors was $22.7 million compared to
$22.6 million at March 31, 1999.
Asset Quality
At June 30, 1999 non-performing assets totaled $1,700,000, a decrease of
$264,000, or 13.4%, from $1,964,000 at March 31, 1999. Non-performing assets
consist of all loans that are delinquent 90 days or more. The Bank had no real
estate owned at June 30, 1999 or March 31, 1999. At June 30, 1999,
non-performing assets represented 0.43% of total assets and 0.51% of loans
receivable, compared to 0.55% and 0.64%, respectively, at March 31, 1999. The
decrease in non-performing assets was primarily in one-to-four family
residential mortgages.
9
<PAGE>
The composition of non-performing assets for the periods presented was:
June 30,
----------------- March 31,
1999 1998 1999
------ ------ ------
(Dollars in thousands)
Non-accrual loans:
One-to-four-family $ 574 $ 994 $ 862
Multi-family 279 254 280
Commercial real estate 770 739 745
Equity lines 65 -- 65
Other 12 43 12
------ ------ ------
$1,700 $2,030 $1,964
====== ====== ======
Non-performing assets as a percentage of:
Loans receivable 0.51% 0.88% 0.64%
Total assets 0.43 0.71 0.55
The following represents the activity in the allowance for loan losses for
the three months ended June 30, 1999:
(In thousands)
Balance at March 31, 1999 $3,027
Provision for possible loan losses 225
Losses charged to allowance --
Recoveries 14
------
Balance at June 30, 1999 $3,266
======
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 from the assumptions used in making
the evaluation.
10
<PAGE>
Deposits and Borrowed Funds
Deposits decreased slightly during the three month period ended June 30,
1999 as detailed below:
June 30, % of total March 31, % of total
1999 deposits 1999 deposits
-------- -------- -------- --------
(Dollars in thousands)
Regular savings accounts $ 26,597 12.34% $ 27,461 12.70%
NOW accounts 23,069 10.70 24,154 11.16
Money market accounts 59,467 27.59 54,305 25.09
Non-interest bearing deposits 1,211 0.57 867 0.40
-------- -------- -------- --------
110,344 51.20 106,787 49.35
Term deposits 105,171 48.80 109,610 50.65
-------- -------- -------- --------
Total deposits $215,515 100.00% $216,397 100.00%
======== ======== ======== ========
During the period, borrowed funds increased $41.9 million, or 52.4%.
Comparison of Results of Operations for the three months ended June 30, 1999 and
1998
General
Consolidated net income for the three months ended June 30, 1999 totaled
$584,000, or $0.27 per share, compared to $514,000, or $0.22 per share for the
same period last year. This represents an increase of $70,000 or 13.6% in net
income and a $0.05 or 22.7% increase in earnings per share.
Interest Income
Interest income for the three months ended June 30, 1999 increased $1.4
million, or 26.3%, to $6.8 million, compared to $5.4 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 $277.4 million for the quarter ended June 30, 1998 to
$359.0 million for the quarter ended June 30, 1999, an increase of $81.6
million, or 29.4%. The increase in the average balance of interest-earning
assets was primarily a net result of an increase in the average balance of
investment securities of $6.6 million, or 47.2%, an increase in loans, net, and
mortgage-loans held for sale of $93.2 million or 41.5% and an increase in
mortgage-backed and mortgage related securities of $15.7 million, or 749.8%. The
yield on interest-earning assets decreased 19 basis points to 7.62%.
11
<PAGE>
Interest Expense
Interest expense for the three months ended June 30, 1999 increased
$897,000, or 36.5%, to $3,355,000 compared to $2,458,000 for the same period
last year. The increase in interest expense was the net result of a $91.7
million, or 41.5%, increase in the average balance of interest-bearing
liabilities which increased from $220.9 million for the three months ended June
30, 1998 to $312.7 million for the three months ended June 30, 1999. The
increase in the average balance of interest-bearing liabilities was primarily a
result of an increase in the average balance of deposits of $10.1 million, or
4.9% and the average balance of FHLB advances and other borrowings of $81.7
million, or 466.8%. The cost of interest bearing liabilities decreased 16 basis
points to 4.29%, compared to 4.45% for the same period last year.
12
<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, 1999 1998
---------------------------- --------------------------
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 $ 2,855 $ 34 4.74% $ 36,813 $ 527 5.73%
Investment securities 20,622 278 5.39 14,007 203 5.80
Mortgage-backed and mortgage related
securities 17,822 267 6.00 2,094 35 6.88
Loans, net and mortgage loan held-
for-sale 317,654 6,260 7.88 224,494 4,652 8.29
-------- -------- -------- --------
Total interest earning assets 358,953 6,839 7.62 277,408 5,417 7.81
-------- --------
Non interest earning assets 21,631 12,291
-------- --------
Total $380,584 $289,699
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
NOW accounts $ 23,371 64 1.10 $ 21,776 94 1.73
Regular savings accounts 26,463 136 2.06 28,627 174 2.43
Money market accounts 56,226 534 3.80 38,571 450 4.67
Certificate accounts 107,398 1,385 5.16 114,416 1,524 5.33
-------- -------- -------- --------
Total interest bearing deposits 213,458 2,119 3.97 203,390 2,242 4.41
FHLB advances and other borrowings 99,192 1,236 4.98 17,500 216 4.88
-------- -------- -------- --------
Total interest-bearing liabilities 312,650 3,355 4.29 220,890 2,458 4.45
-------- --------
Demand deposits 1,415 498
Other liabilities 7,391 4,461
Stockholders' equity 59,128 63,850
-------- --------
Total $380,584 $289,699
======== ========
Net interest income $ 3,484 $ 2,959
======== ========
Interest rate spread 3.33% 3.36%
==== ====
Net interest margin 3.88% 4.14%
==== ====
</TABLE>
13
<PAGE>
The increase of $525,000 in net interest income is analyzed as follows:
Quarters ended June 30,
1999 vs. 1998
---------------------------------
Change due to Increase (Decrease)
---------------------------------
Volume Rate Net
------- ------- -------
(Dollars in thousands)
Interest income:
Loans $ 1,823 (215) $ 1,608
Investment securities 88 (13) 75
Mortgage backed and Mortgage-
related securities 235 (4) 231
Short-term investments (416) (76) (492)
------- ------- -------
Total 1,730 (308) 1,422
------- ------- -------
Interest expense:
Deposits 45 (168) (123)
Borrowings 1,018 2 1,020
------- ------- -------
Total 1,063 (166) 897
------- ------- -------
Net interest income $ 667 $ (142) $ 525
======= ======= =======
Provision for loan losses
Provisions for possible loan losses are charged to operations to bring the
total losses to a level considered by management to be adequate to cover
estimated losses on loans receivable which are deemed probable and estimable
based on information currently known to management. The provision for possible
loan losses totaled $225,000 for the quarter ended June 30, 1999, compared to
$50,000 for the same period last year. The increase in the provision reflected
managements analysis of the risks associated with the Banks' primary lending
objective to increase the overall loan portfolio. The increased level of
provision is reflective of the increase in the overall size and mix of the loan
portfolio during the period.
At June 30, 1999 and March 31, 1999, the allowance for loan losses was $3.3
million and $3.0 million, respectively, which represents 192.1% of
non-performing loans and 0.98% of total loans at June 30, 1999 compared to
154.1% of non-performing loans at 0.98% of total loans at March 31, 1999.
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 from the economic and other conditions analyzed by
management to determine the current level of the allowance for loan losses.
14
<PAGE>
Non-interest income
Total non-interest income was $168,000 for the three months ended June 30,
1999, compared to $75,000 for the same period last year, an increase of $93,000,
or 124%. The increase was primarily the result of income recognized on bank
owned life insurance policies purchased by the Bank, income recognized from the
new alternative investment services and insurance products being offered by the
Bank, partially offset by a decrease in the gain on the sale of loans from
mortgage banking activities.
Non-interest expense
Total non-interest expense was $2.5 million for the three months ended June
30, 1999, compared to $2.1 million for the same period last year, an increase of
$452,000 or 21.9%. This was primarily due to an increase in total salaries and
benefits of $422,000 or 35.5%, the result of an increase of $179,000 in
compensation expense associated with the company's stock-based benefit plans and
a general increase in salaries and benefits due to the increase in the number of
employees compared to the same period last year. Occupancy and equipment expense
totaled $268,000 compared to $236,000 for the same period last year, an increase
of 13.6%. Advertising expense increased $23,000, or 51.1%, primarily as a result
of the development and roll out of new deposit products and retail services.
Data processing expense increased $12,000, or 21.1%, as a result of the
increased number of deposit accounts serviced and the implementation of new
retail deposit products. Other expenses decreased $38,000, or 7.5%, primarily as
a result of last year's period including one time expenses associated with the
development of certain products and programs as part of the strategic planning
for the future.
Income taxes
For the three months ended June 30, 1999 income taxes of $324,000 were paid
on net income before tax of $908,000 for an effective rate of 35.7%, compared to
income taxes of $403,000 on income before tax of $917,000 for an effective rate
of 43.9%, for the same period last year. The effective tax rate for the current
period is lower than the prior period due to various tax planning strategies
implemented by the Company, specifically the purchase of non-taxable life
insurance products and the establishment of a Massachusetts securities
corporation at the Bank level.
Capital Adequacy
The Company and the 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 condition.
15
<PAGE>
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, 1999 the Company's capital ratio was 14.6% of total assets. The
Bank at June 30, 1999 had tangible capital of 10.56% and risk based capital of
18.89% (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, 1999 the Company and the Bank met all the capital adequacy
requirements to which they are subject. As of June 30, 1999, the most recent
notification from the Office of Thrift Supervision categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action.
Asset/Liability Management
The principal objectives of the Bank's interest rate risk management
function are 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.
16
<PAGE>
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. In preparing such
model, the OTS estimates loan prepayment rates, reinvestment rates and deposit
decay rates.
The following table sets forth the Bank's NPV as of March 31, 1999 (the
latest NPV analysis prepared by the OTS), as calculated by the OTS.
Change in
Interest Rates in Net Portfolio Value NPV as % of Portfolio
Basis Points Value of Assets
(Rate Shock)
NPV
Amount $ Change % Change Ratio Change(1)
---------------------------------------------------------
(Dollars in thousands)
300 25,373 (10,563) (29) 7.68 (275)
200 29,422 (6,514) (18) 8.77 (166)
100 32,973 (2,962) (8) 9.69 (74)
Static 35,936 -- -- 10.43 --
(100) 39,055 3,119 9 11.19 76
(200) 41,929 5,993 17 11.87 144
(300) 45,655 9,719 27 12.74 232
(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, 1999 the Bank's liquidity ratio was 7.96%. 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.
17
<PAGE>
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, 1999, cash
and cash equivalents and available-for-sale securities totaled $44.8 million, or
11.2% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 1999, the Bank had $111.9 million
in advances outstanding from the FHLB, and at June 30, 1999, had an additional
overall borrowing capacity from the FHLB of $72 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.
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. In addressing the Year 2000, the Company has broken
down the process into four steps: assessment, correction/replacement, testing
and implementation. In addition, the Company has developed a business resumption
plan to address any Year 2000 problems that may occur over the year end.
The Company has completed the assessment phase. During this phase the
Company identified all potential programs and applications that were date
sensitive. The Company also assessed the various utility companies that it uses
as to their readiness for Year 2000. The assessment phase also included an
analysis of all hardware and software applications as well as vendor
identification. The various applications identified were then prioritized in
consideration of their overall importance of use to the Company. Correspondence
was sent to all vendors inquiring into their applications Year 2000 compliance.
For a number of applications, the correction, testing and vendor certification
and implementation has been completed. For all priority applications, the
Company is continuing to ensure compliance by continuing to follow up with
vendors for Year 2000 certification. At this point in time, the Company remains
in the correction/replacement, testing and implementation phases of the process.
The most critical application to the Company is the software package
utilized to process all loan and deposit accounts and transactions, the internal
accounting system and utility services for the various facility locations. The
Bank utilizes a third-party vendor for processing the primary banking
applications and does not have any proprietary or self-developed software. In
addition, the Bank also uses third-party vendor application software for all
ancillary computer applications, specifically general ledger and accounting
systems.
18
<PAGE>
The third-party vendor for the Bank's banking applications is in the final
stages of modifying and upgrading its ancillary computer applications to ensure
Year 2000 compliance. The Bank has completed the testing and implementation
phases and the system is Year 2000 compliant. The Company's accounting software
and applications are Year 2000 compliant.
The Bank has also sent correspondence to its customers addressing the Year
2000 issue as it specifically applies to banks, including a variety of commonly
asked questions and how they are being addressed by the Bank.
Additionally, a review of the loan portfolio was completed to assess any
customers that were susceptible to any Year 2000 issues. However, since the
Bank's loans are primarily secured by real estate, there were no major concerns
to any impact on the loan portfolio.
The Company has created a contingency plan to deal with any unforeseen
events that could occur which would have a negative impact on the day-to-day
operations of the Company. The contingency plan identifies the critical systems
and identifies various processing alternatives depending on the severity of the
circumstances. These procedures vary from using back-up sites and systems to
reverting to manual processes. The business resumption plan for retail banking
services has been completed and tested.
The Company has expensed approximately $45,000 to replace and upgrade
existing software for Year 2000 compliance. In addition, the Company purchased a
new accounting system, which is Year 2000 compliant. The cost of this system was
approximately $75,000 and was capitalized and will be depreciated over its
expected useful life. Additional expenses will be incurred over the next year to
meet Year 2000 compliance; however, at this time these expenses are not expected
to be material in nature.
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.
19
<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
On July 22, 1999, the company held its Annual Meeting of Shareholders. At
that meeting the following items were brought before the shareholders for a vote
and the results were as indicated.
1. Election of Directors
For % Withheld %
--------- ----- -------- ------
John F. Murphy 1,790,881 96.7% 60,708 3.3%
Leo F. Grace 1,790,881 96.7 60,708 3.3
Richard F. Hughes 1,790,881 96.7 60,708 3.3
2. Ratification of the amendments to the Bay State Bancorp, Inc. 1998
Stock-Based Incentive Plan.
For % Withheld % Abstain %
--------- ----- -------- ------ ---------- ----
1,679,311 90.7 144,130 7.8 28,148 1.5
3. Approval of the Bay State Bancorp, Inc. 1999 Stock Option Plan.
For % Withheld % Abstain %
--------- ----- -------- ------ ---------- ----
973,005 76.3 273,863 21.5 28,326 2.2
20
<PAGE>
PART II - OTHER INFORMATION
Item 4 continued
4. The ratification of the appointment of Shatswell, MacLeod & Company, P.C.
as independent auditors for Bay State Bancorp, Inc. for the fiscal year
ending March 31, 2000.
For % Withheld % Abstain %
--------- ----- -------- ------ ---------- ----
1,812,223 97.9 13,933 0.8 25,433 1.3
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Bay State Bancorp, Inc. *
3.2 Amended and Restated Bylaws of Bay State Bancorp, Inc. **
4.0 Stock Certificate of Bay State Bancorp, Inc. *
10.1 Amended and Restated 1998 Bay State Bancorp, Inc. Stock-Based
Incentive Plan ***
10.2 Bay State Bancorp, Inc. 1999 Stock Option Plan ***
11.0 Computation of per share earnings (filed herewith)
27.0 Financial data schedule (filed herewith)
* Incorporated herein by reference from the exhibits to Form SB-2
registration as amended, Registration No. 333-40115
** Incorporated herein by reference from the exhibits to Form 10QSB for
December 31, 1998 as filed by the company.
*** Incorporated herein by reference to the June, 1999 Proxy Statement as filed
by the Company.
(b) Reports on Form 8-K
(i) None
21
<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 11, 1999 \s\ John F. Murphy
- --------------------- --------------------------------------------
Date John F. Murphy
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
August 11, 1999 \s\ Michael O. Gilles
- --------------------- --------------------------------------------
Date Michael O. Gilles
Senior Vice President and
Chief Financial Officer
(Principal Accounting and Financial Officer)
22
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
Three months ended
June 30,
---------------------------
1999 1998
---------- ----------
Net Income $ 584,000 $ 514,000
========== ==========
Average shares outstanding 2,177,986 2,352,696
========== ==========
Basic earnings per share $ 0.27 $ 0.22
========== ==========
Net Income $ 584,000 $ 514,000
========== ==========
Average shares outstanding 2,177,986 2,352,696
Net effect of dilutive stock options 19,053 --
---------- ----------
Total shares outstanding 2,197,039 2,352,696
========== ==========
Diluted earnings per share $ 0.27 $ 0.22
========== ==========
23
<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, 1999 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-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,215
<INT-BEARING-DEPOSITS> 91
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,473
<INVESTMENTS-CARRYING> 739
<INVESTMENTS-MARKET> 740
<LOANS> 330,963
<ALLOWANCE> 3,266
<TOTAL-ASSETS> 398,553
<DEPOSITS> 215,515
<SHORT-TERM> 121,917
<LIABILITIES-OTHER> 2,948
<LONG-TERM> 0
0
0
<COMMON> 25
<OTHER-SE> 58,148
<TOTAL-LIABILITIES-AND-EQUITY> 398,553
<INTEREST-LOAN> 6,260
<INTEREST-INVEST> 579
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,839
<INTEREST-DEPOSIT> 2,119
<INTEREST-EXPENSE> 1,236
<INTEREST-INCOME-NET> 3,355
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,519
<INCOME-PRETAX> 908
<INCOME-PRE-EXTRAORDINARY> 908
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 584
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 7.62
<LOANS-NON> 1,700
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,027
<CHARGE-OFFS> 0
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 3,266
<ALLOWANCE-DOMESTIC> 3,266
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
