U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
1-13691
Commission File Number
BAY STATE BANCORP, INC.
(Name of small business issuer as specified in its charter.)
Delaware 04-3398630
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1299 Beacon Street, Brookline, Massachusetts 02446
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (617) 739-9500
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, par value The American Stock Exchange
$0.01 per share (Name of Exchange on which registered)
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
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. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $23,816,000.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer was $47,086,000. This figure is based on the
closing price on the American Stock Exchange for a share of the issuer's common
stock on May 26, 1999, which was $22.125 as reported in The Wall Street Journal
on May 27, 1999. For purposes of this calculation, the issuer is assuming that
directors and executive officers are affiliates.
The issuer had 2,329,670 shares of Common Stock outstanding as of May 26, 1999.
Transitional Small Business Disclosure Format. Yes [_] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-KSB.
<PAGE>
INDEX
Page No.
--------
PART I
Item 1. Description of Business......................................... 1
Item 2. Description of Property......................................... 27
Item 3. Legal Proceedings............................................... 27
Item 4. Submission of Matters to a Vote of Security Holders............. 27
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........ 28
Item 6. Management's Discussion and Analysis or Plan of Operation....... 28
Item 7. Financial Statements............................................ 39
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............................. 40
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............... 40
Item 10. Executive Compensation.......................................... 40
Item 11. Security Ownership of Certain Beneficial Owners and Management.. 40
Item 12. Certain Relationships and Related Transactions.................. 40
Item 13. Exhibits and Reports on Form 8-K................................ 41
SIGNATURES
<PAGE>
Item 1. Description of Business.
- --------------------------------
General
Bay State Bancorp, Inc. (the "Company") was incorporated under Delaware law
on October 24, 1997. The Company was formed to acquire Bay State Federal Savings
Bank, Brookline, Massachusetts (the "Bank") and its subsidiaries as part of the
Bank's conversion from a mutual to stock form of organization (the
"Conversion"). In connection with the Conversion, on March 27, 1998 the Company
issued an aggregate 2,535,232 shares of its common stock, par value $0.01 per
share (the "Common Stock"), at a purchase 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"), a charitable foundation established by the Bank. 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"). Currently, the Company does
not transact any material business other than through the Bank. At March 31,
1999, the Company had total assets of $359.4 million, total deposits of $216.4
million and total stockholders' equity of $60.3 million.
The Bank was organized in 1920 as a state-chartered mutual co-operative
bank under the name Coolidge Corner Co-operative Bank. In 1936, the Bank
converted to a federally-chartered mutual savings and loan association and
changed its name to Brookline Federal Savings and Loan Association. In 1960, the
Bank changed its name to Bay State Federal Savings and Loan Association and, in
1983, changed its name again to Bay State Federal Savings Bank. In February
1997, the Bank merged with Union Federal Savings Bank ("Union Federal"), which
at the time of the merger had $38.2 million of total assets, $35.5 million of
deposits and $2.7 million of retained earnings and operated two branches located
in Boston and Westwood, Massachusetts. The Bank currently maintains five banking
offices located in the greater Boston metropolitan area.
The Bank's principal business has been and continues to be attracting
retail deposits from the general public in the areas surrounding its branch
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in adjustable-rate and shorter-term
fixed-rate one- to four-family residential mortgage loans, multi-family and
commercial real estate. To a lesser extent, the Bank invests in construction and
development, commercial and consumer loans. The Bank operates through its five
full service banking offices and one administrative office, all of which are
located in the greater Boston metropolitan area. The Bank originates loans for
investment and loans for sale in the secondary market, generally retaining the
servicing rights on all loans sold. The Bank's revenues are derived principally
from interest on its mortgage loans and, to a lesser extent, interest on its
investment and mortgage-backed and mortgage-related securities and loan
servicing income. The Bank's primary sources of funds are deposits, principal
and interest payments on loans and securities and Federal Home Loan Bank
("FHLB") advances.
Market Area and Competition
The Bank is headquartered in Brookline, Massachusetts and is a
community-oriented savings institution offering a variety of financial products
and services to meet the needs of the communities it serves. The Bank's primary
deposit gathering area is concentrated in the communities surrounding its five
full service banking offices located in Brookline, Boston, Dedham, Norwood and
Westwood, Massachusetts. All of the Bank's branch offices are located within 15
miles of Brookline. The Bank's primary lending area is significantly broader
than its deposit gathering area and includes all of Massachusetts, with a
concentration in the greater Boston metropolitan area.
Brookline, Massachusetts is a fully-developed and densely populated town
located west of and adjacent to Boston. The major traffic roadways running
through Brookline are heavily traveled and lined with commercial and retail
business operations and Brookline's 1990 census population was approximately
54,000. The residents of Brookline are generally comprised of white- and
blue-collar workers and college students. The towns of Dedham, Norwood and
Westwood are situated southwest of Boston. These towns are primarily residential
communities consisting of single-family residences and are populated by middle-
to high-income individuals employed in the greater Boston metropolitan area.
1
<PAGE>
New England has generally lagged behind the rest of the nation in coming
out of the recession of the late 1980s and early 1990s. During this time, the
market values of many one- to four-family residences declined throughout the
region. Loan demand diminished and competition for such loans increased.
However, over the past few years, the regional economy in the Bank's primary
market area, based on economic indicators such as unemployment rates,
residential and commercial real estate values and vacancy rates and household
income trends, has strengthened. Small business, technology and service firms,
institutions of higher education and tourism form the backbone of the economy of
the greater Boston metropolitan area.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Bank. The Bank's competition for
loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from other financial
institutions. In addition, the Bank faces significant competition for deposits
from non-bank institutions such as brokerage firms and insurance companies in
such instruments as short-term money market funds, corporate and government
securities funds, mutual funds and annuities. Competition may also increase as a
result of the lifting of restrictions on the interstate operations of financial
institutions. The Bank has also experienced significant competition from credit
unions which have a competitive advantage as they do not pay state or federal
income taxes. This competitive disadvantage has placed increased pressure on the
Bank with respect to its loan and deposit pricing.
Personnel
As of March 31, 1999 the Bank had 79 full-time employees and 11 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
first mortgage loans secured by one- to four-family residences. At March 31,
1999, gross loans totalled $309.0 million, of which $168.8 million were one- to
four-family residential mortgage loans, or 54.6% of the Bank's total loans. At
such date, the remainder of the loan portfolio consisted of: $57.7 million of
multi-family residential loans, or 18.7% of total loans; $67.8 million of
commercial real estate loans, or 21.9% of total loans; $5.5 million of
construction and development loans, including unadvanced loan amounts, or 1.8%
of total loans; $5.2 million of equity lines of credit, or 1.7% of total loans;
and $3.5 million of other consumer loans, or 1.1% of total loans.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and local competitive influences. These factors are, in turn,
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board ("FRB") and legislative
tax policies.
2
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ------------------ ----------------- ------------------ -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family $168,786 54.62% $157,240 68.23% $162,837 77.34% $149,941 78.74% $152,025 80.93%
Multi-family ......... 57,744 18.69 22,411 9.73 14,624 6.95 13,294 6.98 12,505 6.65
Commercial real estate... 67,806 21.94 35,468 15.39 25,260 12.00 19,129 10.05 17,820 9.49
Construction and
development(1) ....... 5,494 1.78 7,821 3.39 2,831 1.34 5,359 2.81 3,393 1.81
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans.. 299,830 97.03 222,940 96.74 205,552 97.63 187,723 98.58 185,743 98.88
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial ............... 500 0.16 43 0.02 31 0.02 -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Equity lines .......... 5,156 1.67 4,028 1.75 2,359 1.12 268 0.14 -- --
Other consumer loans .. 3,535 1.14 3,434 1.49 2,594 1.23 2,434 1.28 2,110 1.12
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans.. 8,691 2.81 7,462 3.24 4,953 2.35 2,702 1.42 2,110 1.12
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans .............. 309,021 100.00% 230,445 100.00% 210,536 100.00% 190,425 100.00% 187,853 100.00%
====== ====== ====== ====== ======
Allowance for loan
losses................. (3,027) (2,513) (1,687) (1,774) (1,825)
Undisbursed proceeds of
construction and
development loans in
process ............... (1,424) (2,534) (1,349) (1,622) (909)
Deferred loan origination
fees, net ............. (198) (470) (437) (495) (588)
-------- -------- -------- -------- --------
Loans, net ......... 304,372 224,928 207,063 186,534 184,531
Mortgage loans held-for-
sale ................... 321 822 -- 47 --
-------- -------- -------- -------- --------
Loans, net and mortgage
loans held-for-sale... $304,693 $225,750 $207,063 $186,581 $184,531
======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Includes committed but unadvanced loan amounts.
3
<PAGE>
Loan Maturity. The following table shows the remaining contractual maturity
of the Bank's loans at March 31, 1999. The table does not include the effect of
future principal prepayments.
<TABLE>
<CAPTION>
At March 31, 1999
-------------------------------------------------------------------------------------
One- to Construction
Four- Multi- Commercial and Develop- Total
Family (1) Family Real Estate ment(2) Commercial Consumer Loans
-------- -------- ----------- ------------ ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less ..................... $ 1,236 $ 1,315 $ 20 $ 2,852 $ -- $ 620 $ 6,043
-------- -------- -------- -------- -------- -------- --------
After one year:
More than one year
to three years .................... 1,547 690 2,673 -- -- 565 5,475
More than three years
to five years ..................... 1,162 513 932 -- -- 333 2,940
More than five years
to ten years ...................... 13,744 5,027 6,197 -- 225 460 25,653
More than ten years
to twenty years ................... 51,867 18,492 28,467 42 275 795 99,938
More than
twenty years ...................... 104,386 31,707 29,517 2,600 -- 762 168,972
-------- -------- -------- -------- -------- -------- --------
Total due after
one year .................... 172,706 56,429 67,786 2,642 500 2,915 302,978
-------- -------- -------- -------- -------- -------- --------
Total amount due .................. $173,942 $ 57,744 $ 67,806 $ 5,494 $ 500 $ 3,535 309,021
======== ======== ======== ======== ======== ========
Less:
Allowance for loan losses............................................................................................ (3,027)
Undisbursed proceeds of construction and development loans in process................................................ (1,424)
Deferred loan origination fees, net.................................................................................. (198)
--------
Loans, net............................................................................................................. $304,372
========
</TABLE>
- ----------
(1) Includes equity lines.
(2) Includes construction and development loans which will convert to one- to
four-family mortgage loans upon the completion of the construction.
The following table sets forth at March 31, 1999, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after March 31,
2000 and whether such loans have fixed interest rates or adjustable interest
rates.
Due After March 31, 2000
------------------------------------
Fixed Adjustable Total
-------- ---------- --------
(In thousands)
Mortgage loans:
One- to four-family ............... $ 63,748 $103,802 $167,550
Multi-family ...................... 13,410 43,019 56,429
Commercial real estate ............ 13,148 54,638 67,786
Construction and development ...... -- 2,642 2,642
-------- -------- --------
Total mortgage loans ........... 90,306 204,101 294,407
-------- -------- --------
Commercial loans ..................... -- 500 500
-------- -------- --------
Consumer loans:
Equity lines ...................... -- 5,156 5,156
Other consumer loans .............. 974 1,941 2,915
-------- -------- --------
Total consumer loans ........... 974 7,097 8,071
-------- -------- --------
Total loans .......................... $ 91,280 $211,698 $302,978
======== ======== ========
4
<PAGE>
Origination, Sale and Servicing of Loans. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its five
branch offices and one administrative office and through a network of loan
correspondents, wholesale loan brokers and other financial institutions approved
by the Bank. All loans originated by the Bank, either through internal sources
or external sources, are underwritten by the Bank pursuant to the Bank's
policies and procedures. The Bank originates both adjustable-rate and fixed-rate
loans. The Bank's ability to originate fixed- or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates.
Generally, all adjustable-rate mortgage loans ("ARM") originated by the
Bank are originated for investment. While the Bank has from time-to-time,
retained fixed-rate one- to four-family loans, it is currently the general
policy of the Bank to sell substantially all one- to four-family fixed-rate
mortgage loans with scheduled repricing greater than 15 years. The one- to
four-family mortgage loan products currently originated for sale by the Bank
include a variety of loans which conform to the underwriting standards specified
by Freddie Mac ("FHLMC") ("conforming loans") and, to a lesser extent, loans
which do not conform to FHLMC standards due to loan amounts ("jumbo loans").
While the Bank generally does not originate mortgage loans insured by the FHA
and VA, the Bank has, from time-to-time, purchased such loans for its own
portfolio. All one- to four-family mortgage loans sold by the Bank are sold
pursuant to master commitments negotiated with FHLMC and other investors to
purchase loans meeting such investors' defined criteria. Although the Bank has
entered into such master commitment contracts, such contracts generally do not
require the purchasers to buy or the Bank to deliver a specific amount of
mortgage loans. All conforming loans currently sold by the Bank are sold to
FHLMC and all non-conforming loans which are sold are generally sold to private
investors. Sales of loans are made without recourse to the Bank in the event of
default by the borrower. The Bank generally retains the servicing rights on the
mortgage loans sold to FHLMC.
At March 31, 1999, the Bank maintained a servicing portfolio consisting of
$307.6 million of loans held for portfolio, net, and $22.6 million of loans
serviced for others. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, making certain insurance and tax payments on behalf of the
borrowers and generally administering the loans. Substantially all of the loans
currently being serviced for others are loans which have been sold by the Bank.
The gross servicing fee income from loans sold is generally 24 to 48 basis
points of the total balance of the loan serviced.
During the fiscal years ended March 31, 1999, 1998 and 1997, the Bank
originated and purchased $84.0 million, $41.1 million and $38.1 million of
fixed-rate and adjustable-rate one- to four-family loans, respectively, of which
$73.2 million, $38.0 million and $37.8 million, respectively, were retained for
the Bank's portfolio. When loans are sold the Bank recognizes, at the time of
sale, the cash gain or loss on the sale of the loans based on the difference
between the net cash proceeds received and the carrying value of the loans sold.
On April 1, 1996, the Bank implemented SFAS No. 122 pursuant to which the value
of servicing rights may be recognized as an asset of the Bank. In the fiscal
years ended March 31, 1999 and 1998, the fair value of servicing rights under
SFAS No. 122 and SFAS No. 125 was not material and was not recognized in the
consolidated financial statements for those periods. The Bank has, from
time-to-time, purchased whole loans, primarily one- to four-family mortgage
loans or purchased a participation interest in loans originated by other
financial institutions, primarily multi-family and commercial real estate loans
and, at March 31, 1999, had $44.0 million of purchased loans and $2.5 million in
loan participation interests. Loans purchased from correspondent financial
institutions are underwritten pursuant to the Bank's policies and generally
closed in the name of the correspondent financial institution and then purchased
by the Bank.
5
<PAGE>
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended March 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Beginning balance, loans, net(1) ............... $ 224,928 $ 207,063 $ 186,581
--------- --------- ---------
Loans originated and purchased:
Mortgage loans:
One- to four-family ................... 84,033 41,107 38,062
Multi-family .......................... 36,904 5,768 1,129
Commercial real estate ................ 48,136 16,657 9,262
Construction and development .......... 3,985 5,940 3,750
--------- --------- ---------
Total mortgage loans ............... 173,058 69,472 52,203
--------- --------- ---------
Commercial .................................. 250 -- 38
--------- --------- ---------
Consumer:
Equity lines ............................. 6,843 4,166 3,737
Other consumer loans ..................... 4,253 3,277 1,312
--------- --------- ---------
Total consumer loans .................. 11,096 7,443 5,049
--------- --------- ---------
Total loans ........................... 184,404 76,915 57,290
--------- --------- ---------
Total ....................................... 409,332 283,978 243,871
Principal repayments and other, net ............ (93,676) (55,609) (35,546)
Loan charge-offs, net .......................... (103) (30) (204)
Sale of mortgage loans, principal balance ...... (10,860) (2,359) (749)
Transfer of mortgage loans to REO .............. -- (230) (309)
--------- --------- ---------
Loans, net and mortgage loans held-for-sale.. 304,693 225,750 207,063
Mortgage loans held-for-sale ................... (321) (822) --
--------- --------- ---------
Ending balance, loans, net .................. $ 304,372 $ 224,928 $ 207,063
========= ========= =========
</TABLE>
- ----------
(1) Includes mortgage loans held-for-sale.
One-to Four-Family Lending. The Bank currently offers both fixed-rate and
adjustable-rate mortgage loans with maturities of up to 30 years secured by one-
to four-family residences. Most of such loans are located in the Bank's primary
market area. One- to four-family mortgage loan originations are generally
obtained through the Bank's in-house loan representatives, existing or past
customers, mortgage brokers and referrals from members of the Bank's local
communities. At March 31, 1999, the Bank's one- to four-family mortgage loans
totalled $168.8 million, or 54.6%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, 38.1% were fixed-rate mortgage loans
and 61.9% were ARM loans.
The Bank currently offers fixed-rate mortgage loans with terms from ten to
30 years. The Bank sells substantially all of the fixed-rate residential loans
with maturities greater than 15 years that it originates and retains the
servicing on all loans sold to FHLMC. From time-to-time, the Bank will purchase
one- to four-family mortgage loans. Such purchased loans may be secured by real
estate located outside the Bank's primary market area and outside of
Massachusetts. Such loans are generally purchased with servicing retained by the
seller.
The Bank currently offers a number of ARM loans with terms of up to 30
years and interest rates which adjust every one, three or five years from the
outset of the loan and adjust annually after the initial rate period. The
interest rates for the Bank's ARM loans are indexed to either the one, three or
five year Constant Maturity Treasury ("CMT") Index. The Bank originates ARM
loans with initially discounted rates, often known as "teaser rates." The Bank's
ARM loans generally provide for periodic (not more than 2%) and overall (not
more than 6%) caps on the increase or decrease in the interest rate at any
adjustment date and over the life of the loan. The Bank generally retains for
its portfolio all adjustable-rate one- to four-family loans.
6
<PAGE>
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the risks associated with adjustable-rate loans but also limit
the interest rate sensitivity of such loans.
All one- to four-family mortgage loans are underwritten according to the
Bank's policies and guidelines. Generally, the Bank originates one- to
four-family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
95% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.
The Bank requires fire, casualty, title and, in certain cases, flood insurance
on all properties securing real estate loans made by the Bank.
In an effort to provide financing for first-time home buyers, the Bank
offers its own first-time home buyer loan program. This program offers one- to
four-family residential mortgage loans to qualified individuals. These loans are
offered with adjustable- and fixed-rates of interest and terms of up to 30
years. Pursuant to this program, borrowers receive reduced loan origination fees
and closing costs. Such loans must be secured by an owner-occupied residence.
These loans are originated using the same underwriting guidelines as are the
Bank's other one- to four-family mortgage loans. Such loans are originated in
amounts up to 95% of the lower of the property's appraised value or the sale
price. Private mortgage insurance is normally required for loans with
loan-to-value ("LTV") ratios of over 80%.
Multi-Family and Commercial Real Estate Lending. The Bank originates
multi-family and commercial real estate loans that are generally secured by 5 or
more unit apartment buildings and properties used for business purposes such as
office buildings, industrial facilities or retail facilities located in the
Bank's primary market area. The Bank's multi-family and commercial real estate
underwriting policies provide that such real estate loans may be made in amounts
up to 80% of the appraised value of the property, subject to the Bank's current
loans-to-one-borrower limit, which at March 31, 1999 was $6.6 million. The
Bank's multi-family and commercial real estate loans may be made with terms up
to 30 years and are offered with interest rates that adjust periodically and are
generally indexed to the prime rate as reported in The Wall Street Journal. In
reaching its decision on whether to make a multi-family or commercial real
estate loan, the Bank considers the net operating income of the property, the
borrower's expertise, credit history, the value of the underlying property, and
the financial conditions of the Borrower/Guarantor. The Bank generally requires
that the properties securing these real estate loans have debt service coverage
ratios (the ratio of earnings before debt service to debt service) of at least
1.25x. In addition, depending on the perceived environmental risk of the
property an environmental impact survey may be required for multi-family and
commercial real estate loans. Generally, all multi-family and commercial real
estate loans made to corporations, partnerships and other business entities
require personal guarantees by the principals. The Bank may not require a
personal guarantee on such loans depending on the creditworthiness of the
borrower, the amount of the downpayment and other mitigating circumstances. The
Bank's multi-family real estate loan portfolio at March 31, 1999 was $57.7
million, or 18.7%, of total loans and the Bank's commercial real estate loan
portfolio at such date was $67.8 million, or 21.9%, of total loans. The largest
multi-family or commercial real estate loan in the Bank's portfolio at March 31,
1999 was a $4.9 million real estate loan secured by a blanket mortgage on five
retail/office buildings.
The Bank also purchases participation interests in multi-family and
commercial real estate loans. Most of these loans are secured by real estate
located in the Bank's primary market area. When determining whether to
participate in such loans, the Bank will underwrite its participation interest
according to its own underwriting standards. At March 31, 1999, the Bank had
$2.5 million in multi-family and commercial real estate loan participation
interests, or 0.81% of total loans.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts. Additionally, because payments on
loans secured by multi-family and commercial real estate properties are
7
<PAGE>
often dependent on successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate
market or the economy and thus poses a greater degree of risk than one- to
four-family residential mortgage loans. The Bank seeks to minimize these risks
through its underwriting standards.
Construction and Development Lending. The Bank originates short-term
balloon fixed-rate construction loans for the development of residential and
commercial property. Construction and development loans are offered primarily to
experienced local developers operating in the Bank's market area. The Bank
currently does not originate loans secured by raw land. The majority of the
Bank's construction and development loans are originated to finance the
construction by developers of one- to four-family residential real estate and,
to a lesser extent, multi-family and commercial real estate properties located
in the Bank's primary market area. Construction loans are generally offered with
terms of up to 12 months and may be made in amounts up to 80% of the appraised
value of the property on multi-family and commercial real estate construction
and 85% on one- to four-family residential construction. Construction loan
proceeds are disbursed periodically, in increments, as construction progresses
and as inspections by the Bank's lending officers warrant. At March 31, 1999,
the Bank's largest construction and development loan was a performing loan with
a $1.2 million outstanding principal balance secured by two condominium units
located in Boston, Massachusetts. At March 31, 1999, construction and
development loans totalled $5.5 million (including unadvanced loan amounts), or
1.8%, of the Bank's total loans. At March 31, 1999, $4.8 million, or 88.9%, of
construction and development loans had permanent financing commitments by the
Bank or third-parties or were secured by properties which were pre-sold pending
completion of the projects.
The Bank also originates construction and development loans to individual
borrowers for the construction of single-family owner-occupied residential
properties with permanent financing commitments by the Bank. The Bank's
underwriting standards and procedures for such loans are similar to those
applicable for one- to four-family residential mortgage lending. Proceeds for
such loans are disbursed as phases of the construction are completed. All such
loans are originated as one- to four-family interest-only adjustable-rate
mortgage loans. Upon completion of the construction, such loans convert to
principal and interest over the remaining term. At March 31, 1999, such loans
totalled $2.6 million, or 48.1%, of the $5.5 million of construction and
development loans.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction and other assumptions, including the
estimated time to sell residential properties. If the estimate of value proves
to be inaccurate, the Bank may be confronted with a property, when completed,
having a value which is insufficient to assure full repayment.
Consumer and Other Lending. Total consumer loans at March 31, 1999 amounted
to $8.7 million, or 2.8%, of the Bank's total loans and consisted primarily of
equity lines of credit and, to a significantly lesser extent, secured and
unsecured personal loans and new and used automobile loans. Such loans are
generally originated in the Bank's primary market area and generally are secured
by real estate, deposit accounts, personal property and automobiles. These loans
are typically shorter term and generally have higher interest rates than one- to
four-family mortgage loans.
The Bank originates equity lines of credit, substantially all of which are
secured by second mortgages on residential real estate located in the Bank's
primary market area. At March 31, 1999, these loans totalled $5.2 million, or
1.7%, of the Bank's total loans. Equity lines of credit generally have
fixed-rates of interest for the initial six months of the loan and
adjustable-rates of interest thereafter which adjust on a monthly basis. The
adjustable-rate of interest charged on such loans is indexed to the prime rate
as reported in The Wall Street Journal. Equity lines of credit generally have an
18% lifetime cap on interest rates and may never adjust to be less than the
initial interest rate. Generally, the combined LTV ratio on equity lines of
credit is 80% where the Bank possesses the first mortgage lien interest and 75%
when another lender possesses the first mortgage lien interest. However,
exceptions may be made for previous customers of the Bank.
The Bank also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans. Secured
personal loans may be secured by deposit accounts or other forms of
8
<PAGE>
collateral. At March 31, 1999, personal loans (both secured and unsecured)
totalled $3.5 million, or 1.1%, of the Bank's total loans.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. At March 31, 1999, the Bank
had three consumer loans 90 days or more delinquent, whose balances totalled
$77,000.
At March 31, 1999, the Bank had two outstanding commercial loans which were
unsecured and whose outstanding principal balances totalled $500,000.
Loan Approval Procedures and Authority
The Board of Directors of the Bank establishes the lending policies of the
Bank. Such policies provide that all loans up to $300,000 are approved by the
Bank's Internal Loan Committee. The Board of Directors approves all loans prior
to funding. In the event a loan is above $300,000, it is approved by the
President or Executive Vice President. Any loans approved by the President or
Executive Vice President are submitted to the full Board of Directors or the
Bank's Executive Committee for ratification on a monthly basis.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 90 days or more and all REO. The procedures taken by
the Bank with respect to delinquencies vary depending on the nature of the loan,
period and cause of delinquency and whether the borrower is habitually
delinquent. When a borrower fails to make a required payment on a loan, the Bank
takes a number of steps to have the borrower cure the delinquency and restore
the loan to current status. The Bank generally sends the borrower a written
notice of non-payment after the loan is first past due. The Bank's guidelines
provide that telephone, written correspondence and/or face-to-face contact will
be attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Bank attempts to obtain full payment, work out a repayment
schedule with the borrower to avoid foreclosure and in rare instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan not otherwise satisfied, additional letters and telephone calls generally
are made. If the loan is still not brought current or satisfied and it becomes
necessary for the Bank to take legal action, which typically occurs after a loan
is 90 days or more delinquent, the Bank will commence foreclosure proceedings
against any real property that secures the loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the property securing the loan generally is sold at
foreclosure and, if purchased by the Bank, becomes real estate owned.
Federal regulations and the Bank's Asset Classification Policy require that
the Bank utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The Bank has incorporated the OTS internal
asset classifications as a part of its credit monitoring system. The Bank
currently classifies problem and potential problem assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"Doubtful" have all of the weaknesses inherent in those classified "Substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions and
values, "highly questionable and improbable." Assets classified as "Loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution
9
<PAGE>
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
The Bank's Classification of Assets Committee reviews and classifies the
Bank's assets on a quarterly basis and the Board of Directors reviews the
results of the reports on a quarterly basis. The Bank classifies assets in
accordance with the management guidelines described above. At March 31, 1999,
the Bank had $1.9 million, or 0.5%, of total assets, designated as Substandard
consisting of thirteen one- to four-family mortgage loans, one consumer
installment loan, one land loan and one multi-unit family mortgage loan. At
March 31, 1999, one single-family residential loan was classified as Doubtful,
totalling $64,000. Included in total classified assets at March 31, 1999, were
$485,000 of assets classified as Substandard, which represent the outstanding
balance of second mortgage loans purchased by Union Federal and secured by
properties located outside the Bank's primary market area, predominately in
California and other southwestern states. During early 1997, such second
mortgage loans experienced increased delinquencies which caused the Bank to
adversely classify the entire pool of such loans and increase its provision for
loan losses. To the extent delinquencies continue to increase in such portfolio
of loans, the Bank may establish additional reserves against such loans through
provisions for loan losses or charge off portions of such loans which would
adversely affect the Company's net income. As of March 31, 1999, the Bank had a
total of four one- to four-family loans and two commercial real estate loans,
totaling $1.3 million, designated as Special Mention. At March 31, 1999, the
largest loan designated as Special Mention had a carrying balance of $530,000
and was secured by commercial real estate. At March 31, 1999, all of the Bank's
classified and special mention assets totalled $1.3 million, representing 0.4%
of loans.
10
<PAGE>
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At March 31, 1999 At March 31, 1998
--------------------------------------------- -----------------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More
---------------------- -------------------- ------------------- -------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family ................. 7 $ 431 6 $ 862 8 $ 616 8 $1,258
Multi-family ........................ -- -- 1 280 1 699 1 254
Commercial real estate .............. 1 275 2 745 -- -- 2 739
Construction and development ........ 1 42 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans ............. 9 748 9 1,887 9 1,315 11 2,251
------ ------ ------ ------ ------ ------ ------ ------
Consumer loans:
Equity lines ........................ 1 36 1 65 1 45 -- --
Other consumer loans ................ 3 65 2 12 5 37 6 28
------ ------ ------ ------ ------ ------ ------ ------
Total consumer loans ............. 4 101 3 77 6 82 6 28
------ ------ ------ ------ ------ ------ ------ ------
Total loans ............................ 13 $ 849 12 $1,964 15 $1,397 17 $2,279
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to loans, net ......... 0.28% 0.65% 0.62% 1.01%
====== ====== ====== ======
</TABLE>
At March 31, 1997
-------------------------------------------
30-89 Days 90 Days or More
-------------------- -------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- -------- -------- --------
(Dollars in thousands)
Mortgage loans:
One- to four-family .......... 14 $1,622 12 $1,499
Multi-family ................. -- -- -- --
Commercial real estate ....... 1 530 -- --
------ ------ ------ ------
Construction and development . -- -- -- --
Total mortgage loans ...... 15 2,152 12 1,499
------ ------ ------ ------
Consumer loans:
Equity lines ................. -- -- 1 40
Other consumer loans ......... 3 13 2 7
------ ------ ------ ------
Total consumer loans ...... 3 13 3 47
------ ------ ------ ------
Total loans ..................... 18 $2,165 15 $1,546
====== ====== ====== ======
Delinquent loans to loans, net .. 1.04% 0.75%
====== ======
11
<PAGE>
Nonperforming Assets and Impaired Loans. The following table sets forth
information regarding nonaccrual loans and REO. At March 31, 1999, the Bank had
no REO in its portfolio. It is the policy of the Bank to cease accruing interest
on loans 90 days or more past due and to charge off all accrued interest. For
the fiscal years ended March 31, 1999, 1998 and 1997, the amount of interest
income that was recorded on nonaccrual loans was $213,000, $130,000 and $78,000,
respectively. For the fiscal years ended March 31, 1999, 1998 and 1997, the
amount of additional interest income that would have been recognized on
nonaccrual loans if such loans had continued to perform in accordance with their
contractual terms was $87,000, $144,000 and $79,000, respectively. On April 1,
1995, the Bank adopted SFAS No. 114 "Accounting by Creditors for Impairment of a
Loan" ("SFAS No. 114"), as amended by SFAS No. 118. There were no loans that met
the definition of an impaired loan per SFAS No. 114 at or during the fiscal
years ended March 31, 1998 and 1997. As of March 31, 1999 loans totaling
$280,000 were considered to be impaired with an allowance for credit loss of
$82,000.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Mortgage loans:
One- to four-family ............. $ 862 $1,258 $1,499 $1,128 $ 996
Multi-family .................... 280 254 -- -- --
Commercial real estate .......... 745 739 -- -- --
Construction and development .... -- -- -- -- 158
------ ------ ------ ------ ------
Total mortgage loans ........... 1,887 2,251 1,499 1,128 1,154
------ ------ ------ ------ ------
Consumer loans:
Equity lines .................... 65 -- 40 -- --
Other consumer loans ............ 12 28 7 22 18
------ ------ ------ ------ ------
Total consumer loans ........... 77 28 47 22 18
------ ------ ------ ------ ------
Total nonaccrual loans ......... 1,964 2,279 1,546 1,150 1,172
Real estate owned, net ................ -- -- 73 65 70
------ ------ ------ ------ ------
Total nonperforming assets (2).. $1,964 $2,279 $1,619 $1,215 $1,242
====== ====== ====== ====== ======
Allowance for loan losses as a percent
of loans(1) ........................ 0.98% 1.10% 0.81% 0.94% 0.98%
Allowance for loans losses as a percent
of nonperforming loans(2) .......... 154.12 110.27 109.12 154.26 155.72
Nonperforming loans as a percent of
loans(1)(2) ........................ 0.64 1.00 0.74 0.61 0.63
Nonperforming assets as a percent of
total assets(3) .................... 0.55 0.77 0.69 0.55 0.61
</TABLE>
- ----------
(1) Loans are presented before allowance for loan losses.
(2) Nonperforming 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.
(3) Nonperforming assets consist of nonperforming loans and REO.
12
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses on loans which are deemed probable and estimable based on
information currently known to management. The allowance is based upon a number
of factors, including economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management. The economy
in the Bank's primary market area suffered significantly in the late 1980s and
early 1990s. These adverse economic conditions negatively affected the Bank's
loan loss and delinquency activities and led to a deterioration of the
collateral values of the Bank's loans during those years. In more recent years,
the economy and real estate market in and around the greater Boston metropolitan
area has improved which has had a positive impact on the Bank's loan loss and
delinquency activities and the value of properties securing the Bank's loans. As
of March 31, 1999, the Bank's allowance for loan losses was 0.98% of total loans
as compared to 1.10% as of March 31, 1998. The Bank had nonaccrual loans of $2.0
million and $2.3 million at March 31, 1999 and March 31, 1998, respectively. The
Bank will continue to monitor and modify its allowances for loan losses as
conditions dictate. 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 loan 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 used by management to determine the current level of the allowance
for loan losses.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods as indicated.
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ........... $2,513 $1,687 $1,774 $1,825 $2,480
------ ------ ------ ------ ------
Provision for loan losses ................ 617 856 117 1 6
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
One- to four-family ................ 103 49 225 94 241
Commercial real estate ............. -- -- -- -- 296
Construction and development ....... -- -- -- -- 145
Consumer loans ........................ -- -- -- 55 9
------ ------ ------ ------ ------
Total charge-offs ............... 103 49 225 149 691
------ ------ ------ ------ ------
Recoveries ............................... -- 19 21 97 30
------ ------ ------ ------ ------
Balance at end of period ................. $3,027 $2,513 $1,687 $1,774 $1,825
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period ..................... 0.03% 0.01% 0.10% 0.03% 0.36%
====== ====== ====== ====== ======
Allowance for loan losses as a percent
of loans(1) ........................... 0.98% 1.10% 0.81% 0.94% 0.98%
====== ====== ====== ====== ======
Allowance for loans losses as a percent of
nonperforming loans(2) ................ 154.12% 110.27% 109.12% 154.26% 155.72%
====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Loans are presented before deducting the allowance for loan losses.
(2) Nonperforming 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.
13
<PAGE>
The following table sets forth the Bank's percentage of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Percent of in Each Percent of in Each Percent of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- ----- ------ --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential, multi-family,
construction and
development ............... $1,221 40.34% 75.09% $1,131 45.01% 81.35% $ 793 47.00% 85.63%
Commercial real estate ....... 1,314 43.41 21.94 955 38.00 15.39 523 31.00 12.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Total .................. 2,535 83.75 97.03 2,086 83.01 96.74 1,316 78.00 97.63
Commercial loans .............. -- -- 0.16 -- -- 0.02 -- -- 0.02
Consumer loans ................ 124 4.10 2.81 50 1.99 3.24 34 2.02 2.35
Unallocated ................... 368 12.15 -- 377 15.00 -- 337 19.98 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses............... $3,027 100.00% 100.00% $2,513 100.00% 100.00% $1,687 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------ --------- -------- ------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential, multi-family,
construction and
development ............. $ 781 44.03% 88.53% $1,022 56.00% 89.39%
Commercial real estate ..... 514 28.97 10.05 420 23.01 9.49
------ ------ ------ ------ ------ ------
Total ................ 1,295 73.00 98.58 1,442 79.01 98.88
Commercial loans .............. -- -- -- -- -- --
Consumer loans ................ 18 1.01 1.42 18 0.99 1.12
Unallocated ................... 461 25.99 -- 365 20.00 --
------ ------ ------ ------ ------ ------
Total allowance for
loan losses............... $1,774 100.00% 100.00% $1,825 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Real Estate Owned. At both March 31, 1999 and March 31, 1998, the Bank had
no real estate-owned. When the Bank acquires property through foreclosure or
deed in lieu of foreclosure, it is initially recorded at the lower of the
recorded investment in the corresponding loan or the fair value of the related
assets at the date of foreclosure, less costs to sell. Thereafter, if there is a
further deterioration in value, the Bank provides for a specific valuation
allowance and charges operations for the diminution in value. It is the policy
of the Bank to have obtained an appraisal on all real estate subject to
foreclosure proceedings prior to the time of foreclosure. It is the Bank's
policy to require appraisals on a periodic basis on foreclosed properties and
conduct inspections on foreclosed properties.
Securities Investment Activities
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally-chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate
14
<PAGE>
debt securities and mutual funds whose assets conform to the investments that a
federally-chartered savings institution is otherwise authorized to make
directly. Additionally, the Bank must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. Historically, the Bank has
maintained liquid assets above the minimum OTS requirements and at a level
considered to be adequate to meet its normal daily activities.
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity and a high quality investment
portfolio. The Bank primarily utilizes investments in securities for liquidity
management and as a method of deploying excess funds not utilized for investment
in loans. Generally, the Bank's investment policy is more restrictive than the
OTS regulations allow and, accordingly, the Bank has invested primarily in U.S.
Government and agency securities, which qualify as liquid assets under the OTS
regulations, federal funds and U.S. Government sponsored agency issued
mortgage-backed securities. The Bank is required by SFAS No. 115 to categorize
its securities as held-to-maturity, available-for-sale or held for trading. As
of March 31, 1999, the Bank's securities portfolio consisted of investment
securities, marketable equity securities and mortgage-backed and
mortgage-related securities. The held-to-maturity portfolio totaled $956,000, or
0.27% of total assets, and the available-for-sale securities portfolio totaled
$24.4 million, or 6.78% of total assets.
Short term investments primarily consist of overnight deposits at the
Federal Home Loan Bank of Boston and the Co-operative Central Bank Liquidity
Fund. The Liquidity Fund is a no-load diversified, open-ended money market
investment fund whose objective is maximum current income consistent with
liquidity and the preservation of capital. The Fund is designed solely for use
by eligible investors as an economical and convenient way to make liquid
investments. Fund shares are currently offered to the following eligible
investors: Massachusetts co-operative banks, Massachusetts savings banks,
Massachusetts trust companies, federally chartered savings banks and savings and
loan associations with their principal place of business in Massachusetts, the
Co-operative Central Bank Reserve Fund, the Savings Bank Life Insurance Company
of Massachusetts and the National Co-operative Bank.
As of March 31, 1999, $19.0 million, or 5.28% of total assets, of the
Bank's securities portfolio consisted of investment securities, primarily debt
securities issued by the U.S. Government or government sponsored agencies (such
as the FHLB) and marketable equity securities, primarily consisting of mutual
fund securities, common stocks, preferred stocks, trust preferred stocks and
corporate bonds and notes. The Bank generally invests in U.S. Treasury and
agency obligations with maturities of 24 to 60 months. The weighted average
maturities of the Bank's investment securities portfolio, excluding any equity
securities, was 44.8 months as of March 31, 1999.
At March 31, 1999, the Bank had $6.3 million of mortgage-backed and
mortgage-related securities, or 1.8% of total assets, substantially all of which
were backed by fixed-rate mortgages and which consisted of mortgage-backed
securities and collateralized mortgage obligations ("CMOs") insured or issued by
Ginnie Mae ("GNMA"), FHLMC, Fannie Mae ("FNMA") or private issuers, such as
Countrywide Mortgage Corp., GE Capital Mortgage Services, Inc. and Independent
Mortgage Corp. The Bank generally invests in mortgage-backed or mortgage-related
securities with estimated maturities of 18 to 36 months. At March 31, 1999, the
weighted average estimated maturity of its mortgage-backed and mortgage-related
securities portfolio was 32 months. Investments in mortgage-backed and
mortgage-related securities involve a risk that actual prepayments will be
greater than estimated prepayments over the life of the security, which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. While investments in privately issued mortgage-backed
securities generally bear yields higher than mortgage-backed securities insured
by government sponsored agencies, they involve a greater degree of risk than
those issued by government sponsored agencies, as such, securities are not
insured or guaranteed by such government sponsored agencies.
15
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Investment securities ........... $ -- $ -- $ 2,001 $ 1,999 $10,303 $10,129
Mortgage-backed and mortgage-
related securities ........... 956 978 2,271 2,275 3,250 3,177
------- ------- ------- ------- ------- -------
Total held-to-maturity ....... $ 956 $ 978 $ 4,272 $ 4,274 $13,553 $13,306
------- ------- ------- ------- ------- -------
Available-for-sale securities:
Marketable equity securities .... $ 9,525 $ 9,737 $ 5,391 $ 6,523 $ 2,250 $ 2,903
Mortgage-backed securities ...... 5,371 5,391 -- -- -- --
Trust preferred equity
securities.................... 2,506 2,521 -- -- -- --
Corporate bonds and notes ....... 1,247 1,234 -- -- -- --
Preferred stocks ................ 1,500 1,460 -- -- -- --
Government agency securities .... 4,000 4,007 -- -- -- --
------- ------- ------- ------- ------- -------
Total available for sale .. $24,149 $24,350 $ 5,391 $ 6,523 $ 2,250 $ 2,903
------- ------- ------- ------- ------- -------
Total securities .......... $25,105 $25,328 $ 9,663 $10,797 $15,803 $16,209
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed and mortgage-related
securities.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- -------------------------------
Percent Percent Percent
Amortized of Fair Amortized of Fair Amortized of Fair
Cost Total (1) Value Cost Total (1) Value Cost Total (1) Value
--------- --------- ------ --------- --------- ------ --------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed and mortgage-
related securities:
Fixed rate:
GNMA ................... $ 314 4.96% $ 328 $ 383 16.86% $ 383 $ 529 16.28% $ 529
FHLMC .................. 134 2.12 142 183 8.06 185 239 7.35 239
CMOs ................... 5,879 92.92 5,899 1,705 75.08 1,707 2,419 74.43 2,345
------ ------ ------ ------ ------ ------ ------ ------ ------
Total fixed rate .... 6,327 100.00 6,369 2,271 100.00 2,275 3,187 98.06 3,113
Adjustable rate:
FNMA ................... -- -- -- -- -- -- 63 1.94 64
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage-backed and
mortgage-related
securities.............. $6,327 100.00% $6,369 $2,271 100.00% $2,275 $3,250 100.00% $3,177
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Based on amortized cost.
16
<PAGE>
The following table sets forth the Bank's mortgage-backed and
mortgage-related securities activities for the periods indicated.
For the Year Ended March 31,
-----------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Beginning balance .................... $ 2,271 $ 3,250 $ 3,877
Principal repayments .............. (2,010) (973) (631)
Purchases ......................... 6,074 -- --
Accretion of discount and
amortization of (premium) ...... (8) (6) 4
------- ------- -------
Ending balance ....................... $ 6,327 $ 2,271 $ 3,250
======= ======= =======
The table below sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Bank's debt
securities.
<TABLE>
<CAPTION>
At March 31, 1999
------------------------------------------------------------------------------------------------------
More than One Year More than Five Years
One Year or Less to Five Years to Ten Years More than Ten Years Total
------------------- ------------------- ------------------- ------------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- -------- --------- -------- --------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
Investment securities(1).. $ 753 6.85% $ 4,000 6.00% $ -- --% $ 494 5.63% $ 5,247 6.09%
Fixed-rate:
GNMA .................. -- -- -- -- 314 8.00 -- -- 314 8.00
FHLMC ................. -- -- -- -- 134 8.57 -- -- 134 8.57
CMOs .................. -- -- -- -- 5,371 6.50 508 7.00 5,879 6.54
------- ------- ------- ------- -------
Total debt securities ..... $ 753 6.85% $ 4,000 6.00% $ 5,819 6.63% $ 1,002 6.32% $11,574
======= ======= ======= ======= =======
</TABLE>
- ----------
(1) Consists of government agency obligations, and corporate bonds and notes.
Sources of Funds
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and FHLB advances are the primary
sources of the Bank's funds for use in lending, investing and for other general
purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the year ended March
31, 1999, the average balance of core deposits represented 46.4% of total
average deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. The Bank's deposits are obtained predominantly from the areas
surrounding its branch offices. The Bank has historically relied primarily on
providing a higher level of customer service and long-standing relationships
with customers to attract and retain these deposits; however, market interest
rates and rates offered by competing financial institutions significantly affect
the Bank's ability to attract and retain deposits. The Bank uses traditional
means of advertising its deposit products, including print media, and generally
does not solicit deposits from outside its market area. While the Bank does not
actively solicit certificate accounts in excess of $100,000 or use brokers to
obtain deposits, the Bank may solicit, from time-to-time, such deposits
depending upon market conditions. The Bank offers negotiated rates on some of
its certificate accounts. At March 31, 1999, $109.6 million, or 50.6%, of total
deposits were certificate accounts with a weighted average remaining maturity of
11.1 months. The increase in certificate accounts was due to offering new
competitively priced certificate account products which, in part, resulted in a
decrease in the average cost of certificates of deposit from 5.65% for fiscal
1998 to 5.43% for fiscal 1999. For the year ended March 31, 1999, certificate
accounts in excess of $100,000 increased $436,000, or 2.93%, from $14.9 million
to
17
<PAGE>
$15.3 million. Further increases in certificate accounts, which tend to be more
sensitive to movements in market interest rates than core deposits, may result
in the Bank's deposit base being less stable than if it had a larger amount of
core deposits which, in turn, may result in further increases in the Bank's cost
of deposits and may adversely affect net interest income in future periods.
The following table presents the deposit activity of the Bank for the
periods indicated:
For the Year Ended March 31,
--------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Net deposits .............................. $ (207) $ 1,727 $ 854
Interest credited on deposit accounts ..... 8,824 8,994 8,272
------- ------- -------
Total increase in deposit accounts ........ $ 8,617 $10,721 $ 9,126
======= ======= =======
At March 31, 1999, the Bank had $15.3 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
Weighted
Average
Maturity Period Amount Rate
- --------------- ------ ----
(Dollars in thousands)
3 months or less ........................... $ 5,845 5.19%
Over 3 through 6 months .................... 3,824 5.26
Over 6 through 12 months ................... 2,189 5.08
Over 12 months ............................. 3,454 5.93
------- ----
Total ................................ $15,312 5.36%
======= ====
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize month-end balances.
<TABLE>
<CAPTION>
For the Year Ended March 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- ------------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- -------- ------- -------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits ............. $ 658 0.32% --% $ 257 0.13% --% $ 132 0.07% --%
Money market accounts ....... 46,489 22.51 4.08 43,019 21.32 3.91 34,839 18.37 4.12
Regular savings accounts .... 27,250 13.20 2.24 29,167 14.46 2.83 30,863 16.27 2.14
NOW accounts ................ 21,872 10.59 1.51 21,494 10.65 1.81 20,835 10.99 1.85
-------- -------- -------- -------- -------- -------
Total ................. 96,269 46.62 2.95 93,937 46.56 3.08 86,669 45.70 2.86
-------- -------- -------- -------- -------- -------
Certificate accounts (1)(2):
Less than 6 months ....... 5,363 2.60 4.91 4,981 2.47 5.32 24,744 13.05 5.13
Over 6 through 12 months . 71,216 34.48 5.32 69,005 34.20 5.54 48,117 25.37 5.54
Over 12 through
36 months ............. 26,045 12.61 5.70 21,715 10.76 5.75 25,360 13.36 5.95
Over 36 months ........... 7,622 3.69 6.57 12,119 6.01 6.52 4,774 2.52 6.85
-------- -------- -------- -------- -------- -------
Total certificate
accounts............... 110,246 53.38 5.43 107,820 53.44 5.65 102,995 54.30 5.62
-------- -------- -------- -------- -------- -------
Total average deposits ... $206,515 100.00% 4.27 $201,757 100.00% 4.46 $189,664 100.00% 4.36
======== ======== ======== ======== ======== =======
</TABLE>
- ----------
(1) Based on remaining maturity of certificates.
(2) Includes retirement accounts such as IRA and Keogh accounts.
18
<PAGE>
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 1999.
<TABLE>
<CAPTION>
Period to Maturity from March 31, 1999
---------------------------------------------------------------------
Less One Two Three Four More
than to to to to than At March 31,
One Two Three Four Five Five ----------------------------------
Year Years Years Years Years Years 1999 1998 1997
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00% ....... $ 230 $ 100 $ -- $ -- $ -- $ -- $ 330 $ 326 $ 197
4.01% to 5.00% ... 24,704 7,275 197 50 -- -- 32,226 363 1,912
5.01% to 6.00% ... 52,092 9,487 4,138 143 695 272 66,827 95,096 93,782
6.01% to 7.00% ... 3,650 631 1,130 1,330 800 -- 7,541 10,737 6,520
7.01% to 8.00% ... 289 2,264 -- 52 81 -- 2,686 3,127 3,611
8.01% to 9.00% ... -- -- -- -- -- -- -- 1 1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total ......... $ 80,965 $ 19,757 $ 5,465 $ 1,575 $ 1,576 $ 272 $109,610 $109,650 $106,023
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Borrowings. As part of its operating strategy, the Bank utilizes advances
from the FHLB as an alternative to retail deposits to fund its operations. The
Bank has increased its emphasis on the utilization of FHLB borrowings to fund
its asset growth. By utilizing FHLB advances, which possess varying stated
maturities, the Bank can meet its liquidity needs without otherwise being
dependent upon retail deposits and revising its deposit rates to attract retail
deposits, which have no stated maturities (except for certificates of deposit),
which are interest rate sensitive and which are subject to withdrawal from the
Bank at any time. These FHLB advances are collateralized primarily by mortgage
loans and mortgage-backed securities held by the Bank and secondarily by the
Bank's investment in capital stock of the FHLB. FHLB advances are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time-to-time in accordance
with the policies of the FHLB. At March 31, 1999, the Bank had $76.8 million in
outstanding advances from the FHLB and $3.2 million in other borrowings as
compared to $20.0 million and $2.2 million at March 31, 1998, respectively.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
---------------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding .................... $39,404 $21,102 $16,813
Maximum amount outstanding at any month-end
during the period ........................... 76,751 25,000 25,500
Balance outstanding at end of period ........... 76,751 20,000 14,500
Weighted average interest rate during
the period................................... 4.84% 5.72% 5.63%
Weighted average interest rate at end
of period.................................... 4.82% 5.13% 5.46%
Other borrowed funds (1):
Average balance outstanding .................... $ 2,787 $ 2,053 $ 926
Maximum amount outstanding at any month-end
during the period ........................... 4,640 3,144 2,214
Balance outstanding at end of period ........... 3,240 2,176 1,065
</TABLE>
- ----------
(1) Represents noninterest-bearing credit balance on the FHLB-Boston account.
19
<PAGE>
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank System and
its deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-KSB does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
20
<PAGE>
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. Previously, the OTS capital regulations required
savings institutions to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 3% leverage ratio and an 8% risk-based capital ratio. Effective
April 1, 1999, the leverage requirement was changed to 4% (3% of institutions
receiving the highest rating on the CAMELS financial institution examination
rating system). In addition, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
financial institution rating system), and, together with the risk-based capital
standard itself, a 4% Tier 1 risk-based capital standard. The OTS regulations
also require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At March 31, 1999, the Bank met each of its
capital requirements.
The following table presents the Bank's capital position at March 31, 1999.
Capital
------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------------------
(Dollars in thousands)
Tangible .............. $40,677 $ 5,231 $35,446 11.66% 1.50%
Core (Leverage) ....... $40,677 $13,949 $26,728 11.66% 4.00%
Risk-based ............ $44,017 $17,616 $26,401 19.99% 8.00%
21
<PAGE>
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there will be
equal sharing of FICO payments between SAIF and BIF members on the earlier of
January 1, 2000, or the date the SAIF and BIF are merged.
The Bank's assessment rate for fiscal 1999 ranged from 5.82 to 6.22 basis
points and the premium paid for this period was $128,000, which represents
payment toward the FICO bonds. The FDIC has the authority to increase insurance
assessments. A significant increase in SAIF Insurance premiums would likely have
an adverse effect on the operating expenses and results of the operations of the
Bank. Management cannot predict what insurance assessment rates will be in the
future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that
the BIF and SAIF were to have merged on January 1, 1999, if there were no more
savings associations as of that date. Various proposals to eliminate the federal
savings association charter, create a uniform financial institutions charter,
abolish the OTS and restrict savings and loan holding company activities have
been introduced in Congress. The Bank is unable to predict whether such
legislation will be enacted or the extent to which the legislation would
restrict or disrupt its operations.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March 31,
1999, the Bank's limit on loans to one borrower was $6.6 million, and the Bank's
largest aggregate outstanding balance of loans to one borrower was $6.1 million.
22
<PAGE>
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of March 31, 1999, the Bank maintained 75% of its portfolio
assets in qualified thrift investments and, therefore, met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998 established
three tiers of institutions based primarily on an institution's capital level.
An institution that exceeded all capital requirements before and after a
proposed capital distribution ("Tier 1 Bank") and had not been advised by the
OTS that it was in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during the calendar year equal to the greater of (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce, by one-half,
the excess capital over its capital requirements at the beginning of the
calendar year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions required prior regulatory approval. At December
31, 1998, the Bank was a Tier 1 Bank. Effective April 1, 1999, the OTS's capital
distribution regulation will change. Under the new regulation, an application to
and the prior approval of the OTS will be required prior to any capital
distribution if the institution does not meet the criteria for "expedited
treatment" of applications under OTS regulations (i.e., generally, examination
ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with the OTS. If an application is not
required, the institution must still provide prior notice to the OTS of the
capital distribution. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%. Monetary penalties may
be imposed for failure to meet these liquidity requirements. The Bank's
liquidity ratio for March 31, 1999 was 6.80%, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended March 31, 1999 totaled $72,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under
23
<PAGE>
circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank complies with the foregoing requirements.
24
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year,
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company. The Bank has not been audited by the IRS or the
Massachusetts Department of Revenue for six years, since 1992, which covered the
tax years 1992 and previous. For its 1999 taxable year, the Bank is subject to a
maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, repeals the reserve method of accounting for bad
debts for tax years beginning after 1995 and requires savings institutions to
recapture (i.e., take into income) certain portions of their accumulated bad
debt reserves. Thrift institutions eligible to be treated as "small banks"
(assets of $500 million or less) are allowed to use the Experience Method
applicable to such institutions, while thrift institutions that are treated as
large banks (assets exceeding $500 million) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to a
2-year suspension if the "residential loan requirement" is satisfied.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Bank's 1996 taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
The Bank is required to recapture (i.e., take into income) over a six year
period the excess of the balance of its tax bad debt reserves as of December 31,
1995 other than its supplemental reserve for losses on loans, if any over the
balance of such reserves as of December 31, 1987 (or a lesser amount since the
Bank's loan portfolio decreased since December 31, 1987). As a result of such
recapture, the Bank will incur an additional tax liability of approximately
$89,000 which is generally expected to be taken into income beginning in 1998
over a six year period.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
25
<PAGE>
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
State and Local Taxation
Commonwealth of Massachusetts Taxation. On July 27, 1995, the Governor of
Massachusetts approved legislation to reduce the tax rate applicable to
financial institutions, including savings banks, from 12.54% on their net income
to 10.50% on their net income apportioned to Massachusetts. The reduced rate is
to be phased-in over a five year period whereby the rate was 11.71% for 1996,
11.32% for 1997, 10.91% for 1998, and will be 10.50% for future years. Net
income for years beginning before January 1, 1999 includes gross income as
defined under the provisions of the Code, plus interest from bonds, notes and
evidences of indebtedness of any state, including Massachusetts, less the
deductions, excluding the deductions for dividends received, state taxes, and
net operating losses, as defined under the provisions of the Code. For taxable
years beginning on or after January 1, 1999, the definition of state taxable
income is modified to allow a deduction for 95% of dividends received from stock
where the Company owns 15% or more of the voting stock of the institution paying
the dividend and to allow deductions from certain expenses allocated to
federally tax exempt obligations. Subsidiary corporations of the Company
conducting business in Massachusetts must file separate Massachusetts state tax
returns and are taxed as financial institutions, with certain modifications and
grandfathering for taxable years before 1996. The net worth or tangible property
of such grandfathered subsidiaries is taxed at a rate of 0.26%. Such
grandfathered subsidiaries may file consolidated tax returns on the net earnings
portion of the corporate tax.
Corporations which qualify as "securities corporations," as defined by the
Massachusetts tax code, are taxed at a special rate of 0.33% of their gross
income if they qualify as a "bank-holding company" under the Massachusetts tax
code. The Company qualifies for this reduced tax rate provided that it is
exclusively engaged in activities of a "securities corporation." The Company
qualifies as a securities corporation because a separate subsidiary was formed
to make the loan to the Bank's Employee Stock Ownership Plan and related trust
and all of the Company's other activities qualify as activities permissible for
a securities corporation. If the Company fails to so qualify, however, it will
be taxed as a financial institution at a rate of 10.50% beginning in fiscal
2000.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
26
<PAGE>
Item 2. Description of Property.
- --------------------------------
The Bank currently conducts its business through its executive,
administrative and full service offices. The Company believes that the Bank's
current facilities are adequate to meet the present needs of the Bank and the
Company.
<TABLE>
<CAPTION>
Net Book Value of
Property or
Leased Original Date of Leasehold
or Year Leased Lease Improvements at
Location Owned or Acquired Expiration March 31, 1999
- -------- ----- ----------- ---------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Executive/Branch Office:
1299 Beacon Street
Brookline, MA 02446 .... Owned 1950 -- $ 674
Administrative Office:
1309 Beacon Street
Brookline, MA 02446 .... Leased 1987 February 2002 (1) 130
Branch Offices:
184 Massachusetts Avenue
Boston, MA 02115 ....... Leased 1973 December 2000 16
Dedham Mall
Dedham, MA 02026 ....... Leased 1982 February 2000 1
61 Lenox Street
Norwood, MA 02062 ...... Owned 1975 -- 223
705 High Street
Westwood, MA 02090 ..... Owned 1977 -- 145
------
Total ..................................................... $1,189
======
</TABLE>
- ----------
(1) The Bank has an option to renew this lease for one additional five-year
period.
Item 3. Legal Proceedings.
- --------------------------
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
None.
27
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
- -------------------------------------------------------------------------------
The Common Stock of the Company is traded on the American Stock Exchange
under the symbol "BYS." The stock began trading on March 30, 1998. On February
22, 1999, the Company paid a cash dividend of $0.05 per share to shareholders of
record as of February 8, 1999. For information relating to restrictions on the
Company's declaration of dividends, see "Item 1. Description of
Business--Regulation and Supervision." As of May 24, 1999, there were 498
registered recordholders of the Common Stock of the Company, which includes
shares held in street name. The following table sets forth for the quarters
indicated the range of high and low sale price information for the Common Stock
of the Company as reported on the American Stock Exchange.
<TABLE>
<CAPTION>
Year Ended March 31, 1999
----------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
High.................. $23.50 $26.00 $28.50 $33.75
Low................... $20.25 $18.625 $19.25 $26.625
</TABLE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
- ------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company does not transact any material business other than through its
wholly-owned subsidiary, the Bank. The Bank's results of operations are
dependent primarily on net interest income, which is the difference between the
income earned on its loan and investment portfolios and its cost of funds,
consisting of the interest paid on deposits and borrowings. Results of
operations are also affected by the Bank's provision for loan losses, loan sale
activities and loan servicing. The Bank's noninterest expense principally
consists of compensation and employee benefits, office occupancy and equipment
expense, federal deposit insurance premiums, data processing, advertising and
business promotion and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact the Bank.
The following discussion may contain certain forward-looking statements
which are based on management's current expectations regarding economic,
legislative, and regulatory issues that may impact the Company's earnings in
future periods. Factors that could cause future results to vary materially from
current management expectations include, but are not limited to: general
economic conditions, changes in interest rates, deposit flows, real estate
values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory and technological factors affecting the
Company's operations, pricing, products and services. In particular, these
issues may impact management's estimates used in evaluating market risk and
interest rate risk in its GAP and net portfolio value tables, loan loss
provisions, classification of assets, Year 2000 issues, accounting estimates and
other estimates used throughout this discussion. For a further description of
the risks and uncertainties to the business, see "Item 1.--Description of
Business."
Management Strategy
Management's primary goal has been to maintain the Bank's profitability,
asset quality and its capital position by: (i) investing primarily in one- to
four-family loans secured by properties located in its primary market area; (ii)
investing in multi-family, commercial real estate and construction and
development loans secured by properties located in the Bank's primary market
area, to the extent that such loans meet the Bank's general underwriting
criteria; (iii) investing funds not utilized for loan investments in short-term
U.S. Treasury and mortgage-backed and mortgage-related securities; and (iv)
managing interest rate risk by emphasizing the origination of adjustable-rate
loans and short-term fixed-rate loans and investing in short-term securities and
generally selling longer-term fixed-rate loans that the
28
<PAGE>
Bank originates. The Bank intends to continue this operating strategy in an
effort to enhance its long-term profitability while maintaining a reasonable
level of interest rate risk and enhance such strategy by expanding the products
and services it offers, as necessary, in order to improve its market share in
its primary market area. In this regard, the Bank has begun to offer business
checking accounts, 24-hour banking by telephone and, in the future, may expand
its consumer retail products to include debit card services and Internet
banking.
Management of Interest Rate Risk and Market Risk Analysis
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 an Asset/Liability Committee which
reviews its asset/liability policies and interest rate risk position. Such
Committee, which meets on a quarterly basis, 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.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
and liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At March 31, 1999, the Bank's cumulative one year interest
rate gap (which is the difference between the amount of interest-earning assets
maturing or repricing within one year and interest-bearing liabilities maturing
or repricing within one year) as a percentage of total assets, was a negative
13.19%. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. Accordingly, during a
period of rising interest rates, an institution with a negative gap position
would be in a worse position to invest in higher yielding assets as compared to
an institution with a positive gap position which, consequently, may result in
the cost of its interest-bearing liabilities increasing at a rate faster than
its yield on interest-earning assets than if it had a positive gap. During a
period of falling interest rates, an institution with a negative gap position
would tend to have its interest-bearing liabilities repricing downward at a
faster rate than its interest-earning assets as compared to an institution with
a positive gap which, consequently, may tend to positively affect the growth of
its net interest income.
29
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1999, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "Gap Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
March 31, 1999, on the basis of contractual maturities, and scheduled rate
adjustments within a one year period and subsequent selected time intervals. The
loan amounts in the table reflect principal balances expected to be redeployed
and/or repriced as a result of contractual amortization of adjustable-rate loans
and fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. Money Market accounts, Regular Savings accounts and NOW
accounts are assumed to have annual decay rates of 80%, 15% and 5%,
respectively. Deposit decay rates can have a significant impact on the Bank's
estimated gap. While the Bank believes such assumptions to be reasonable, there
can be no assurance that assumed decay rates will approximate future withdrawal
activity.
<TABLE>
<CAPTION>
More More More More
than than than than
1 Year 2 Years 3 Years 4 Years More Total Fair
1 Year to to to to than Amount Value
or Less 2 Years 3 Years 4 Years 5 Years 5 Years (1) (2)(3)
-------- -------- -------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments ......... $ 6,369 $ -- $ -- $ -- $ -- $ -- $ 6,369 $ 6,369
Securities ..................... 10,277 4,000 -- -- -- 4,501 18,778 18,959
Mortgage-backed
securities .................. -- -- -- -- -- 6,327 6,327 6,369
Stock in FHLB-Boston ........... 3,850 -- -- -- -- -- 3,850 3,850
Loans .......................... 78,478 34,057 35,462 10,839 37,098 109,500 305,434 305,563
Loans held-for-sale ............ 321 321 321
-------- -------- -------- -------- --------- -------- -------- --------
Total interest-earning assets.. $ 99,295 $ 38,057 $ 35,462 $ 10,839 $ 37,098 $120,328 $341,079 $342,431
======== ======== ======== ======== ========= ======== ======== ========
Interest-bearing liabilities:
Money market accounts .......... $ 43,443 $ 10,862 $ -- $ -- $ -- $ -- $ 54,305 $ 54,305
Regular savings accounts ....... 4,119 4,119 4,119 4,119 4,119 6,865 27,460 27,460
NOW accounts ................... 1,208 1,208 1,208 1,208 1,208 18,115 24,155 24,155
Certificate accounts ........... 80,965 19,757 5,465 1,575 1,576 272 109,610 110,359
FHLB advances .................. 16,957 10,810 1,829 1,271 10,884 35,000 76,751 76,492
-------- -------- -------- -------- --------- -------- -------- --------
Total interest-bearing
liabilities .............. $146,692 $ 46,756 $ 12,621 $ 8,173 $ 17,787 $ 60,252 $292,281 $292,771
======== ======== ======== ======== ========= ======== ======== ========
Interest-earning assets less
interest-bearing liabilities ... $(47,397) $ (8,699) $ 22,841 $ 2,666 $ 19,311 $ 60,076 $ 48,798
======== ======== ======== ======== ========= ======== ========
Cumulative interest-rate
sensitivity gap ................ (47,397) (56,096) (33,255) (30,589) (11,278) 48,798
======== ======== ======== ======== ========= ========
Cumulative interest-rate gap as
a percentage of total assets ... (13.19)% (15.61)% (9.25)% (8.51)% (3.14)% 13.58%
Cumulative interest-rate gap as
a percentage of total interest-
earning assets ................. (13.90)% (16.45)% (9.75)% (8.97)% (3.31)% 14.31%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities .................... 67.69% 71.00% 83.86% 85.72% 95.14% 116.70%
</TABLE>
- ----------
(1) Excludes nonaccrual loans.
(2) Fair value of securities, including mortgage-backed securities, is based on
quoted market prices, where available. If quoted market prices are not
available, fair value is based on quoted market prices of comparable
instruments. Fair value of loans is, depending on the type of loan, based
on carrying values or estimates based on discounted cash flow analyses.
Fair value of deposit liabilities are either based on carrying amounts or
estimates based on a discounted cash flow calculation. Fair values for FHLB
advances are estimated using a discounted cash flow analysis that applies
interest rates concurrently being offered on advances to a schedule of
aggregated expected monthly maturities on FHLB advances.
(3) Fair value of loans includes nonaccrual loans.
30
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react to different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Net Portfolio Value. 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 December 31, 1998 (the latest NPV analysis
prepared by the OTS), as calculated by the OTS.
<TABLE>
<CAPTION>
Change in NPV as % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
in Basis Points ----------------------------------------------------------- ---------------------------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change (1)
- --------------- ------------ ------------- ------------ ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 $29,220 $(9,879) (25)% 9.23% (252)
300 32,372 (6,726) (17) 10.08 (167)
200 35,147 (3,951) (10) 10.80 (95)
100 37,360 (1,738) (4) 11.34 (41)
Static 39,098 -- -- 11.75 --
(100) 40,844 1,746 4 12.15 40
(200) 42,334 3,235 8 12.48 72
(300) 44,810 5,711 15 13.04 129
(400) 47,319 8,220 21 13.60 185
</TABLE>
- ----------
(1) Expressed in basis points.
As is the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Bank's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
31
<PAGE>
Average Balance Sheets. The following table sets forth certain information
relating to the Bank for the years ended March 31, 1999, 1998, and 1997. The
average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown except where noted otherwise and reflect
annualized yields and costs. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any accrued
interest from non-accruing loans.
<TABLE>
<CAPTION>
For the Years Ended March 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ---------------------------- ------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Federal funds sold/FHLB
overnight account ...... $ 15,478 $ 839 5.42% $ 5,150 $ 368 7.15% $ 5,985 $ 321 5.36%
Investment securities (1) .... 21,898 1,250 5.71 13,642 819 6.00 15,041 951 6.32
Mortgage-backed and
mortgage-related securities 4,045 253 6.26 2,787 190 6.82 3,380 246 7.28
Loans, net and mortgage
loans held-for-sale (2) ... 261,080 21,084 8.08 215,542 17,872 8.29 195,471 15,958 8.16
-------- ------- -------- ------- -------- -------
Total interest-earning
assets .............. 302,501 23,426 7.74 237,121 19,249 8.12 219,877 17,476 7.95
------- ------- -------
Noninterest-earning assets ... 11,584 8,096 6,931
-------- -------- --------
Total assets ........... $314,085 $245,217 $226,808
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts .............. $ 21,872 $ 331 1.51% $ 21,494 $ 389 1.81% $ 20,835 $ 386 1.85%
Regular savings accounts .. 27,250 610 2.24 29,167 824 2.83 30,863 660 2.14
Money market accounts ..... 46,489 1,895 4.08 43,019 1,684 3.91 34,839 1,436 4.12
Certificate accounts ...... 110,246 5,988 5.43 107,820 6,097 5.65 102,995 5,790 5.62
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits ............ 205,857 8,824 4.29 201,500 8,994 4.46 189,532 8,272 4.36
FHLB advances ............. 39,404 1,934 4.84 21,102 1,206 5.72 16,813 946 5.63
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities ......... 245,261 10,758 4.38 222,602 10,200 4.58 206,345 9,218 4.47
------- ------- -------
Demand deposits (3) .......... 658 257 132
Other liabilities ............ 5,719 2,088 1,511
-------- -------- --------
Total liabilities ...... 251,638 224,947 207,988
Equity ....................... 62,447 20,270 18,820
-------- -------- --------
Total liabilities and
equity .............. $314,085 $245,217 $226,808
======== ======== ========
Net interest income/Net
interest rate spread (4) .. $12,668 3.36% $ 9,049 3.54% $ 8,258 3.48%
======= ==== ======= ==== ======= ====
Net interest margin (5) ...... 4.19% 3.82% 3.76%
==== ==== ====
Ratio of interest-earning
assets to interest-bearing
liabilities ............... 123.34% 106.52% 106.56%
======== ======== ========
</TABLE>
- ----------
(1) Includes investment securities available-for-sale and held-to-maturity,
Co-operative Central Bank Liquidity Fund, and stock in FHLB-Boston.
(2) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes
non-accruing loans. The Bank records interest income on non-accruing loans
on a cash basis.
(3) Demand deposits primarily represent noninterest-bearing custodial accounts.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
32
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
Year Ended March 31, 1999 Year Ended March 31, 1998
Compared to Compared to
Year Ended March 31, 1998 Year Ended March 31, 1997
--------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------- --------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold/FHLB overnight account ......... $ 535 $ (64) $ 471 $ (34) $ 81 $ 47
Investment securities ............................. 469 (38) 431 (86) (46) (132)
Mortgage-backed securities ........................ 77 (14) 63 (41) (15) (56)
Loans, net, and mortgage loans held-for-sale ...... 3,664 (452) 3,212 1,661 253 1,914
------- ------- ------- ------- ------- -------
Total interest-earning assets ............... 4,745 (568) 4,177 1,500 273 1,773
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW accounts ...................................... 7 (65) (58) 11 (8) 3
Regular savings accounts .......................... (51) (163) (214) (34) 198 164
Money market accounts ............................. 140 71 211 316 (68) 248
Certificate accounts .............................. 144 (253) (109) 273 34 307
------- ------- ------- ------- ------- -------
Total deposits .............................. 240 (410) (170) 566 156 722
FHLB advances ..................................... 884 (156) 728 245 15 260
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities .......... 1,124 (566) 558 811 171 982
------- ------- ------- ------- ------- -------
Net change in net interest income .................... $ 3,621 $ (2) $ 3,619 $ 689 $ 102 $ 791
======= ======= ======= ======= ======= =======
</TABLE>
Comparison of Financial Condition at March 31, 1999 and March 31, 1998
Total assets at March 31, 1999 were $359.4 million, compared to $295.3
million at March 31, 1998, an increase of $64.1 million, or 21.7%. Asset growth
was primarily due to the increased loan and investment securities portfolios,
funded by an increase of $56.8 million in Federal Home Loan Bank borrowings and
an $8.6 million increase in deposits.
Loans receivable, net of allowance for loan losses and deferred loan
origination fees, increased $79.5 million to $304.4 million at March 31, 1999,
or 35.3%, compared to $224.9 million at March 31, 1998. The increase in loans
was due to a $11.5 million, or 7.3%, increase in one- to four-family loans, a
$35.3 million, or 157.7%, increase in multi-family loans, a $32.3 million, or
91.2%, increase in commercial real estate loans, a $2.3 million, or 29.8%,
decrease in construction and development loans and a $1.2 million, or 16.5%,
increase in consumer loans. This increase was funded primarily from the net
reduction in investments of $25.1 million, an $8.6 million increase in deposits
and $56.8 million increase in Federal Home Loan Bank borrowings.
Nonperforming assets at March 31, 1999 were $2.0 million, compared to $2.3
million at March 31, 1998, a decrease of 13.8%. This decrease was the result of
certain nonaccrual loans being paid off or brought current. The allowance for
loan losses increased $514,000 to $3.0 million at March 31, 1999, compared to
$2.5 million at March 31, 1998, an increase of 20.5%. At March 31, 1999 the
allowance represents 154.1% of nonperforming assets and 0.98% of total loans,
compared to 110.3% of nonperforming assets and 1.1% of total loans at March 31,
1998. There was no Real Estate Owned at March 31, 1999 or March 31, 1998.
Deposits increased 4.2%, to $216.4 million at March 31, 1999 from $207.8
million at March 31, 1998. The deposit growth occurred primarily in savings and
NOW accounts which increased $8.3 million, or 8.5%. Borrowed funds which consist
of Federal Home Loan Bank borrowings, totalled $76.8 million at March 31, 1999,
a 284% increase over the $20.0 million in borrowings at March 31, 1998. The
increased level of borrowings were in the 10-year
33
<PAGE>
maturity, with callable features after one-year at the option of the lender,
fixed maturity advances, and two-, three- and five-year amortizing advances.
Investments at March 31, 1999 totalled $31.7 million, a decrease of $25.1
million, or 44.2%, compared to $56.8 million at March 31, 1998. This decrease
was primarily due to a reduction in short-term investments used to fund loan
growth. Investment securities totalled $25.3 million at March 31, 1999, compared
to $10.8 million at March 31, 1998. This increase was the result of purchasing,
corporate bonds, common and preferred stocks and mortgaged-backed securities.
Short-term investments were $6.4 million at March 31, 1999 and consisted solely
of short-term overnight investments, compared to $46.0 million at March 31,
1998.
Total equity was $60.3 million, or 16.8% of total assets at March 31, 1999,
a decrease of $3.3 million, or 5.15%, from the $63.6 million, or 21.5% of total
assets at March 31, 1998. The decrease in equity was the net result of net
income for the period, the reduction in capital from the purchase of treasury
stock and stock associated with the Company's stock-based benefit plans, the
payment of dividends, and a reduction in other comprehensive income. The
Company's book value per share at March 31, 1999 was $26.88 compared to $27.02
at March 31, 1998.
Comparison of Operating Results for the Year Ended March 31, 1999 and 1998
General
Net income for the fiscal year ended March 31, 1999 totalled $2.2 million,
or $0.97 per share, compared to a net loss of $1.8 million for the same period
last year. Since the Company converted to a stock form of ownership on March 27,
1998, earnings per share data for the previous year is not available. The net
loss for the fiscal year ended March 31, 1998 resulted primarily from the
recognition of certain items related to the Conversion. As part of the
Conversion the Company established The Bay State Federal Savings Charitable
Foundation (the "Foundation") by donating 187,795 shares of the Company's stock
to the Foundation. The total contribution expense associated with the
transaction was $3.8 million, or $2.5 million net of income taxes. Additionally,
due to the timing of the consummation of the Conversion and the establishment of
the Bank's Employee Stock Ownership Plan ("ESOP"), which was funded with 8% of
stock issued in the Conversion, or 202,818 shares, the Company incurred
additional compensation expense of $601,000, or $433,000 net of income taxes,
relating to the ESOP allocation for the fiscal year ended March 31, 1998. In
addition, certain non-recurring expenses and adjustments associated with the
Conversion totalled $688,000, or $405,000 net of income taxes. Excluding the
effect of these items, the Company would have recognized net income for the
fiscal year ended March 31, 1998 of approximately $1.6 million. The increased
level of earnings for the fiscal year ended March 31, 1999 was primarily
attributable to increases in interest earned on loans and securities due to the
asset growth of the Company.
Interest Income
Interest income for the fiscal year ended March 31, 1999 was $23.4 million,
compared to $19.2 million for the same period last year, an increase of $4.2
million, or 21.7%. The increase in interest income was the net result of an
increase in the average balance of interest-earning assets and a decrease in the
yield on interest-earning assets. The average balance of interest-earning assets
increased from $237.1 million for fiscal 1998 to $302.5 million for fiscal 1999,
an increase of $65.4 million, or 27.6%. The increase in the average balance of
interest-earning assets was primarily a result of an increase in the average
balance of loans, net, of $45.5 million, or 21.1%, and an increase in short-term
investments and investment securities of $19.8 million, or 92.0%. The yield on
average interest-earning assets decreased 38 basis points to 7.74%.
Interest Expense
Interest expense for the fiscal year ended March 31, 1999 was $10.8
million, compared to $10.2 million for the same period last year, an increase of
$600,000, or 5.5%. This increase in interest expense was primarily due to an
increase in the average balance of interest-bearing liabilities offset by a
decrease in the cost of interest-bearing liabilities. The average balance of
interest-bearing liabilities increased from $222.6 million for fiscal 1998 to
$245.3 million for
34
<PAGE>
fiscal 1999, an increase of $22.7 million, or 10.2%. The increase in the average
balance of interest-bearing liabilities was primarily a result of an increase in
the average balance of deposits of $4.4 million, or 2.2%, and an increase in
borrowed funds of $18.3 million, or 86.7%. The cost of average interest-bearing
liabilities decreased 19 basis points to 4.39%.
Net Interest Income
Net interest income before the provision for loan losses increased $3.6
million, or 40.0%, for the fiscal year. The increase was primarily the result of
the increased level of the loan and investment portfolios and a 37 basis point
increase in net interest margin. The net interest margin was 4.19% for the
fiscal year ended March 31, 1999, compared to 3.82% for the same period last
year.
Provision for Loan Losses
The provision for loan losses was $617,000 for the fiscal year ended March
31, 1999, compared to $856,000 for the same period last year. The level of
reserve provision for the fiscal year ended March 31, 1998 was made after an
assessment of the Bank's loan portfolio, in particular specific loan pools that
were internally classified by the Bank, specifically loans acquired in the Union
Federal merger. The level of reserve provision for the fiscal year ended March
31, 1999, was a result of management's assessment of the loan portfolio and,
more specifically, the growth in the loan portfolio. The Company plans to add to
the provision for loan losses to support any loan portfolio expansion as
considered necessary by management. At March 31, 1999 the allowance for loan
losses totalled $3.0 million, representing 154.12% of nonperforming assets and
0.98% of total loans, compared to $2.5 million, representing 110.27% of
nonperforming assets and 1.10% of total loans at March 31, 1998. 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 assurances 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. Additionally, with the Conversion and the
expectations of the Bank to grow its existing loan portfolio, future additions
to the allowance may be necessary to maintain adequate coverage ratios.
Noninterest Income
Noninterest income for the fiscal year ended March 31, 1999 totalled
$390,000 compared to $313,000 for the same period last year, an increase of
$77,000, or 24.6%. These increases were primarily the result of an increase in
gains on the sale of loans, fees on deposit accounts and income recognized on
bank owned life insurance policies purchased by the Bank.
Noninterest Expense
Total noninterest expense was $8.7 million for the fiscal year ended March
31, 1999, compared to $11.0 million for the same period last year, a decrease of
21.3%. Total salaries and benefits increased $953,000, or 21.0%, the result of
an increase of $418,000 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 totalled $1.0 million compared to $944,000
for the same period last year, an increase of 7.94%, primarily from the
increased level of depreciation on building and leasehold improvements.
Advertising expense increased $66,000, or 37.9% associated with the development
and marketing of certain new deposit products and investment services. Other
expenses, after adjusting for the previous years contribution expense of $3.8
million in forming the Foundation and $439,000 in expenses associated with the
Conversion, increased $710,000, primarily as a result of increases in general
expenses associated with the development of certain products and programs as
part of the strategic planning for the future and approximately $35,000 in
expenses associated with upgrades to certain systems for Year 2000 compliance.
35
<PAGE>
Income Taxes
For the fiscal year ended March 31, 1999 income taxes of $1.5 million were
provided on net income before tax of $3.8 million for an effective rate of
40.8%, compared to a tax benefit of $751,000 on a loss before taxes of $2.5
million for an effective rate of 30.0%, for the same period last year. The
effective tax rate for the current period was different than the prior periods
due to the nondeductibility of certain expenses associated with the Conversion
and the reduction in the state tax rate for banks.
Liquidity and Capital Resources
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 current required liquidity
ratio is 4%. At March 31, 1999 and March 31, 1998, the Bank's liquidity ratios
were 5.8% and 24.7%, respectively. The decrease in the Bank's liquidity ratio
was a result of the net proceeds generated from the conversion on March 27, 1998
being invested in overnight funds. 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 March 31, 1999,
cash and cash equivalents and investment securities totaled $35.4 million, or
9.9% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At March 31, 1999, the Bank had $76.8 million
in advances outstanding from the FHLB and an additional overall borrowing
capacity from the FHLB of $80.5 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.
At March 31, 1999, the Bank had commitments to fund loans and unused
outstanding lines of credit and undisbursed proceeds of construction mortgages
totaling $42.9 million. The Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Certificate
accounts, including IRA and Keogh accounts, which are scheduled to mature in
less than one year from March 31, 1999, totaled $81.0 million.
At March 31, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $40.7 million, or 11.7%, of total
adjusted assets, which is above the required level of $5.2 million, or 1.5%;
core capital of $40.7 million, or 11.7%, of total adjusted assets, which is
above the required level of $13.9 million, or 4.0%; and risk-based capital of
$44.0 million, or 20.0%, of risk-weighted assets, which is above the required
level of $17.6 million, or 8.0%.
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.
36
<PAGE>
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 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 were 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. 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 phase. At the
current time, it is anticipated that the system will be compliant and
implemented by June 30, 1999. 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 is completed and tested.
The Company has expensed approximately $35,000 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.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP"), which require the measurement of financial position and
operating results generally in terms of historical dollar amounts without
considering the changes in the
37
<PAGE>
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Impact of New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996 the FASB issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with a pledge of collateral. The Statement was effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, applied prospectively. Earlier or retroactive
application of this Statement was not permitted. The adoption of the
non-deferred provisions of this Statement as of January 1, 1997 did not have a
material impact on the Company's consolidated financial statements.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"). This statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. It does not address issues of recognition or
measurement for comprehensive income and its components. SFAS No. 130 is
effective for fiscal years beginning after December 31, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. Upon adoption, this statement did not have a material effect on the
Company's consolidated financial statements.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"). This Statement
establishes standards for the way public business enterprises report information
about operating segments in financial statements. SFAS No. 131 was effective for
financial statements for periods beginning after December 15, 1997. Under this
statement the Company does not report additional information because its present
organization consists of only one operating segment as defined by the Statement.
Other New Accounting Standards. SFAS No. 128, "Earnings per Share" ("SFAS
No. 128") is effective for periods ending after December 15, 1997. SFAS No. 129,
"Disclosure of Information about Capital Structure" ("SFAS No. 129") is
effective for periods ending after December 15, 1997. The adoption of these
standards did not have a material impact on the Company's consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
38
<PAGE>
establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS 133 requires an entity to measure
all derivatives at fair value and to recognize them in the balance sheet as an
asset or liability, depending on the entity's rights or obligations under the
applicable derivative contract. Bay State Bancorp, Inc. will designate each
derivative as belonging to one of several possible categories, based on the
intended use of the derivative. The recognition of changes in fair value of a
derivative that affects the income statement will depend on the intended use of
the derivative. If the derivative does not qualify as a hedging instrument, the
gain or loss on the derivative will be recognized currently in earnings. If the
derivative qualifies for special hedge accounting, the gain or loss on the
derivative will either (1) be recognized in income along with an offsetting
adjustment to the basis of the item being hedged, or (2) be deferred in other
comprehensive income and reclassified to earnings in the same period or periods
during which the hedged transaction affects earnings. SFAS 133 will be effective
for Bay State Bancorp, Inc. no later than the quarter ending March 31, 2001.
SFAS 133 may not be applied retroactively to financial statements of prior
periods. SFAS 133 is not expected to have a material impact on Bay State
Bancorp, Inc.'s consolidated results of operations, financial position or cash
flows.
Item 7. Financial Statements.
- -----------------------------
39
<PAGE>
[LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY, P.C.]
The Board of Directors and Stockholders
Bay State Bancorp, Inc.
Brookline, Massachusetts
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Bay State
Bancorp, Inc. and Subsidiaries as of March 31, 1999 and 1998 and the related
consolidated income statements, changes in stockholders' equity and cash flows
for each of the years in the three-year period ended March 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bay
State Bancorp, Inc. and Subsidiaries as of March 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended March 31, 1999, in conformity with
generally accepted accounting principles.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
April 16, 1999
F-1
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 3,738 $ 3,513
Short-term investments 6,369 46,000
--------- ---------
Cash and cash equivalents 10,107 49,513
Investments in available-for-sale securities (at fair value) 24,350 6,523
Investments in held-to-maturity securities (fair values of $978 as of
March 31, 1999 and $4,274 as of March 31, 1998) 956 4,272
Stock in Federal Home Loan Bank of Boston, at cost 3,850 1,873
Loans, net of the allowance for loan losses of $3,027 as of March 31, 1999
and $2,513 as of March 31, 1998 304,372 224,928
Loans held-for-sale 321 822
Premises and equipment, net of depreciation and amortization 2,564 2,581
Investment in bank owned life insurance 6,054 --
Accrued interest receivable 1,920 1,260
Deferred tax asset, net 2,728 2,065
Other assets 2,182 1,454
--------- ---------
Total assets $ 359,404 $ 295,291
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Demand deposits $ 867 $ 485
Savings and NOW deposits 105,920 97,645
Certificate accounts 109,610 109,650
--------- ---------
Total deposits 216,397 207,780
Advances from Federal Home Loan Bank of Boston 76,751 20,000
Other borrowed funds 3,240 2,176
Other liabilities 2,718 1,761
--------- ---------
Total liabilities 299,106 231,717
--------- ---------
Stockholders' equity:
Common stock, par value $.01 per share; authorized 11,000,000 shares;
issued 2,535,232 shares 25 25
Paid-in capital 49,277 49,194
Retained earnings 19,463 17,340
Accumulated other comprehensive income 45 666
Unearned ESOP shares (3,232) (3,651)
Treasury stock at cost, 126,762 shares (3,107) --
Unearned shares, stock-based incentive plan, 97,069 shares (2,173) --
--------- ---------
Total stockholders' equity 60,298 63,574
--------- ---------
Total liabilities and stockholders' equity $ 359,404 $ 295,291
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 21,084 $ 17,872 $ 15,958
Interest and dividends on securities:
Taxable 1,503 1,009 1,197
Other interest 839 368 321
-------- -------- --------
Total interest and dividend income 23,426 19,249 17,476
-------- -------- --------
Interest expense:
Interest on deposits 8,824 8,994 8,272
Interest on FHLB advances 1,934 1,206 946
-------- -------- --------
Total interest expense 10,758 10,200 9,218
-------- -------- --------
Net interest and dividend income 12,668 9,049 8,258
Provision for loan losses 617 856 117
-------- -------- --------
Net interest and dividend income after provision for loan losses 12,051 8,193 8,141
-------- -------- --------
Other income:
Other fees and charges 269 174 163
Securities gains -- -- 123
Gain on sale of mortgage loans 67 15 6
Other income 54 124 115
-------- -------- --------
Total other income 390 313 407
-------- -------- --------
Other expense:
Salaries and employee benefits 5,498 4,545 3,804
Occupancy expense 675 644 611
Equipment expense 344 300 238
Federal deposit insurance premiums 128 125 1,432
Advertising 240 174 144
Data processing 249 225 164
Contribution of shares of the common stock of Bay State Bancorp, Inc.
to The Bay State Federal Savings Charitable Foundation at the
conversion issued price -- 3,756 --
Other expense 1,531 1,239 1,016
-------- -------- --------
Total other expense 8,665 11,008 7,409
-------- -------- --------
Income (loss) before income taxes (benefit) 3,776 (2,502) 1,139
Income taxes (benefit) 1,542 (751) 10
-------- -------- --------
Net income (loss) $ 2,234 $ (1,751) $ 1,129
======== ======== ========
Earnings per share
Earnings per common share $ .97 N/A N/A
========
Earnings per common share,
assuming dilution $ .95 N/A N/A
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Compre- Unearned
Common Paid-in Retained hensive ESOP
Stock Capital Earnings Income Shares
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996 $ -- $ -- $ 17,962 $ 377 $ --
Comprehensive income:
Net income -- -- 1,129 -- --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect of $64 -- -- -- 6 --
Comprehensive income -- -- -- -- --
-------- -------- -------- -------- --------
Balance, March 31, 1997 -- -- 19,091 383 --
Comprehensive income:
Net loss -- -- (1,751) -- --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect of $196 -- -- -- 283 --
Comprehensive income -- -- -- -- --
Stock issued pursuant to initial common stock offering 23 45,245 -- -- --
Issuance of 187,795 shares of common stock to The Bay
State Federal Savings Charitable Foundation 2 3,754 -- -- --
Common stock acquired by ESOP -- -- -- -- (4,056)
Reduction in unearned ESOP shares charged to expense -- -- -- -- 405
Appreciation in fair value of unearned ESOP shares
charged to expense -- 195 -- -- --
-------- -------- -------- -------- --------
Balance, March 31, 1998 25 49,194 17,340 666 (3,651)
Comprehensive income:
Net income -- -- 2,234 -- --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect
Comprehensive income -- -- -- (621) --
Purchase of shares of treasury stock -- -- -- -- --
Dividends paid, $0.05 per share -- -- (111) -- --
Reduction in unearned ESOP shares charged to expense -- -- -- -- 419
Appreciation in fair value of unearned ESOP shares
charged to expense -- 95 -- -- --
101,409 shares of Company common stock acquired
for stock-based incentive plan -- -- -- -- --
Issuance of 4,340 stock-based incentive plan shares -- (12) -- -- --
-------- -------- -------- -------- --------
Balance, March 31, 1999 $ 25 $ 49,277 $ 19,463 $ 45 $ (3,232)
======== ======== ======== ======== ========
<CAPTION>
Unearned
Stock-based
Incentive
Treasury Plan
Stock Shares Total
-------- -------- --------
<S> <C> <C> <C>
Balance, March 31, 1996 $ -- $ -- $ 18,339
Comprehensive income:
Net income -- -- --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect of $64 -- -- --
Comprehensive income -- -- 1,135
-------- -------- --------
Balance, March 31, 1997 -- -- 19,474
Comprehensive income:
Net loss -- -- --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect of $196 -- -- --
Comprehensive income -- -- (1,468)
Stock issued pursuant to initial common stock offering -- -- 45,268
Issuance of 187,795 shares of common stock to The Bay
State Federal Savings Charitable Foundation -- -- 3,756
Common stock acquired by ESOP -- -- (4,056)
Reduction in unearned ESOP shares charged to expense -- -- 405
Appreciation in fair value of unearned ESOP shares
charged to expense -- -- 195
-------- -------- --------
Balance, March 31, 1998 63,574
Comprehensive income:
Net income -- -- --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect
Comprehensive income -- -- --
Purchase of shares of treasury stock (3,107) -- (3,107)
Dividends paid, $0.05 per share -- -- (111)
Reduction in unearned ESOP shares charged to expense -- -- 419
Appreciation in fair value of unearned ESOP shares
charged to expense -- -- 95
101,409 shares of Company common stock acquired
for stock-based incentive plan -- (2,269) (2,269)
Issuance of 4,340 stock-based incentive plan shares -- 96 84
-------- -------- --------
Balance, March 31, 1999 $ (3,107) $ (2,173) $ 60,298
======== ======== ========
</TABLE>
F-4
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(In Thousands)
(Continued)
Reclassification disclosure for the year ended March 31, 1999:
Net unrealized losses on available-for-sale securities $(931)
Less reclassification adjustment for realized gains or
losses in net income --
-----
Other comprehensive loss before income tax effect (931)
Income tax benefit 310
-----
Other comprehensive loss, net of tax $(621)
=====
Accumulated other comprehensive income as of March 31, 1999, 1998 and 1997
consists of net unrealized holding gains on available-for-sale securities, net
of taxes.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,234 $ (1,751) $ 1,129
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Contribution of shares to The Bay State Federal Savings
Charitable Foundation -- 3,756 --
Appreciation in fair value of ESOP shares 95 195 --
Reduction in unearned ESOP shares 419 405 --
Earned compensation on stock-based incentive plan 84 -- --
Gain on sales of premises and equipment -- -- (5)
Disposals of premises and equipment -- -- 17
Provision for loan losses 617 856 117
Net (increase) decrease in mortgage loans
held-for-sale 501 (822) 47
Gain on sale of mortgage loans (67) (15) (6)
Depreciation and amortization 282 235 199
Increase (decrease) in deferred loan origination fees (272) 33 (58)
Gains from sales of available-for-sale securities, net -- -- (123)
Amortization of securities, net of accretion 13 9 3
Deferred tax benefit (353) (1,707) (626)
Gain on sale of other real estate owned -- (19) (33)
Increase in other liabilities 957 774 336
(Increase) decrease in other assets (327) (231) 186
Increase in accrued interest receivable (660) (27) (55)
--------- --------- ---------
Net cash provided by operating activities 3,523 1,691 1,128
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of other real estate owned -- 322 49
Proceeds from maturities of held-to-maturity securities 3,309 9,272 2,625
Proceeds from sales of available-for-sale securities -- -- 139
Proceeds from maturities of available-for-sale securities 6,701 -- 1,500
Purchases of available-for-sale securities (25,465) (3,141) (1,127)
Purchases of Federal Home Loan Bank of Boston stock (1,977) (201) --
Distribution to Rabbi Trust (455) (704) --
Investment in bank owned life insurance (6,000) -- --
Net increase in loans (79,722) (18,969) (20,606)
Proceeds from sales of premises and equipment -- -- 14
Capital expenditures (265) (918) (604)
--------- --------- ---------
Net cash used in investing activities (103,874) (14,339) (18,010)
--------- --------- ---------
</TABLE>
F-6
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(Continued)
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Dividends paid on common stock (111) -- --
Purchases of Company shares for stock-based incentive plan (2,269) -- --
Purchases of treasury stock (3,107) -- --
Proceeds from issuance of common stock -- 46,949 --
Costs related to issuance of common stock -- (1,681) --
Payments to acquire common stock for ESOP -- (4,056) --
Net increase in demand deposits, NOW and savings accounts 8,657 7,094 5,227
Net increase (decrease) in certificate accounts (40) 3,627 3,899
Repayment of advances from the Federal HomeLoan Bank (6,626) (74,000) (71,300)
Advances from the Federal Home Loan Bank 63,377 79,500 74,150
Net increase in other borrowed funds 1,064 1,111 17
-------- -------- --------
Net cash provided by financing activities 60,945 58,544 11,993
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (39,406) 45,896 (4,889)
Cash and cash equivalents at beginning of period 49,513 3,617 8,506
-------- -------- --------
Cash and cash equivalents at end of period $ 10,107 $ 49,513 $ 3,617
======== ======== ========
Supplemental disclosures:
Interest paid $ 10,758 $ 10,194 $ 9,220
Income taxes paid 1,622 1,074 916
Loans transferred to other real estate owned -- 230 309
Loans originated from sales of other real estate owned -- -- 285
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
BAYSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 and 1997
(Dollars in Thousands)
NOTE 1 - NATURE OF OPERATIONS
Bay State Bancorp, Inc. (Company) is a Delaware corporation that was organized
to become the holding company of Bay State Federal Savings Bank (Bank). The
Company's primary purpose is to act as the holding company for the Bank.
In connection with the organization of the Company, on March 27, 1998, the Bank
became a wholly owned subsidiary of the Company and the Bank converted from a
federally-chartered mutual savings bank to a federally-chartered capital stock
savings bank as described in Note 16.
The Bank was incorporated in 1920 and is headquartered in Brookline,
Massachusetts. The Bank operates its business from five banking offices located
in Massachusetts. The reporting entity is Bay State Bancorp, Inc. and its wholly
owned subsidiaries Bay State Funding Corporation and Bay State Federal Savings
Bank and the Bank's wholly owned subsidiary, BSF Service Corporation. In the
fiscal year ended March 31, 1997 Union Federal Savings Bank ("Union Federal"), a
mutual entity was merged with and into Bay State Federal Savings Bank. The
merger was accounted for as a pooling-of-interests. The merger met all of the
conditions specified by APB 16 to be accounted for by the pooling-of-interests
method. The two banks were independent of each other and combined in their
entirety to continue what was once previously separate operations, with Bay
State Federal Savings Bank being the surviving entity. The depositors of Union
Federal became depositors of Bay State Federal Savings Bank. There were no
transactions after the merger that were inconsistent with the combining of the
interests of the depositors. See Note 15.
The Company provides a full range of banking services to individual and business
customers in eastern Massachusetts. The Company is subject to competition from
other financial institutions doing business in eastern Massachusetts.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and predominant practices
within the banking industry. The consolidated financial statements were prepared
using the accrual basis of accounting. The significant accounting policies are
summarized below to assist the reader in better understanding the consolidated
financial statements and other data contained herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from the
estimates.
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
Bay State Bancorp, Inc. and its wholly owned subsidiaries Bay State Funding
Corporation and Bay State Federal Savings Bank and the Bank's wholly owned
subsidiary, BSF Service Corporation. BSF Service Corporation is a
subsidiary which was formed for the purpose of real estate development
activities. Bay State Funding Corporation was established to lend funds to
the Company sponsored employee stock ownership plan and related trust for
the purchase of stock in the initial public offering. All significant
intercompany balances and transactions have been eliminated in
consolidation.
F-8
<PAGE>
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, Federal Home Loan Bank overnight
account and shares of the Co-operative Central Bank Liquidity Fund.
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts calculated using the interest method. Gains or
losses on sales of investment securities are computed on a specific
identification basis.
The Company classifies debt and equity securities into one of two
categories: available-for-sale or held-to-maturity. In general, securities
may be classified as held-to-maturity only if the Company has the positive
intent and ability to hold them to maturity. All other securities must be
classified as available-for-sale.
-- Available-for-sale securities are carried at fair value on the
balance sheet. Unrealized holding gains and losses are not
included in earnings, but are reported as a net amount (less
expected tax) in a separate component of capital until realized.
-- Held-to-maturity securities are measured at amortized cost in the
balance sheet. Unrealized holding gains and losses are not
included in earnings or in a separate component of capital. They
are merely disclosed in the notes to the consolidated financial
statements.
LOANS:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal balances reduced by amounts due to borrowers on
unadvanced loans, any charge-offs, the allowance for loan losses and any
deferred fees or costs on originated loans, or unamortized premiums or
discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination and commitment fees and certain direct origination costs
are deferred, and the net amount amortized as an adjustment of the related
loan's yield. The Company is amortizing these amounts over the contractual
life of the related loans using the interest method.
Cash receipts of interest income on impaired loans is credited to principal
to the extent necessary to eliminate doubt as to the collectibility of the
net carrying amount of the loan. Some or all of the cash receipts of
interest income on impaired loans is recognized as interest income if the
remaining net carrying amount of the loan is deemed to be fully
collectible. When recognition of interest income on an impaired loan on a
cash basis is appropriate, the amount of income that is recognized is
limited to that which would have been accrued on the net carrying amount of
the loan at the contractual interest rate. Any cash interest payments
received in excess of the limit and not applied to reduce the net carrying
amount of the loan are recorded as recoveries of charge-offs until the
charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance is increased by provisions charged to current operations and
is decreased by loan losses, net of recoveries. The allowance for loan
losses is established through a provision for loan losses based on
management's evaluation of the risks inherent in its loan portfolio and the
general economy. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses on loans which are
deemed probable and estimable based on information currently known to
management. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends.
F-9
<PAGE>
The Company considers a loan to be impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Statement requires that impaired loans be measured by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent.
The Statement is applicable to all loans, except large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment,
loans that are measured at fair value or at the lower of cost or fair
value, leases, and convertible or nonconvertible debentures and bonds and
other debt securities. The Company considers its residential real estate
loans and consumer loans that are not individually significant to be large
groups of smaller balance homogeneous loans.
Factors considered by management in determining impairment include payment
status, net worth and collateral value. An insignificant payment delay or
an insignificant shortfall in payment does not in itself result in the
review of a loan for impairment. The Company reviews its loans for
impairment on a loan-by-loan basis. The Company does not review
aggregations of loans that have risk characteristics in common with other
impaired loans. Interest on a loan is not generally accrued when the loan
becomes ninety or more days overdue. The Company may place a loan on
nonaccrual status but not classify it as impaired, if (i) it is probable
that the Company will collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is an individually
insignificant residential mortgage loan or consumer loan. Impaired loans
are charged-off when management believes that the collectibility of the
loan's principal is remote. Substantially all of the Company's loans that
have been identified as impaired have been measured by the fair value of
existing collateral.
LOANS HELD-FOR-SALE:
Loans held-for-sale are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of are
removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated principally
on the straight-line method over the estimated useful lives of the assets.
BANK-OWNED LIFE INSURANCE:
During 1999, the Company invested an aggregate of $6 million in bank-owned
life insurance (BOLI) to help finance the cost of certain employee benefit
plan expenses. BOLI represents life insurance on the lives of certain
employees through insurance companies. The Company is the beneficiary of
the insurance policies. Increases in the cash value of the policies, as
well as insurance proceeds received, are recorded in other income, and are
not subject to income taxes as long as those policies are not surrendered
for the cash value prior to the death of the individual employees.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through foreclosure
and properties classified as in-substance foreclosures in accordance with
Financial Accounting Standards Board Statement No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring." These properties
are carried at the lower of cost or estimated fair value less estimated
costs to sell. Any writedown from cost to estimated fair value required at
the time of foreclosure or classification as in-substance foreclosure is
charged to the allowance for loan losses. Expenses incurred in connection
with maintaining these assets, subsequent writedowns and gains or losses
recognized upon sale are included in other expense.
The Company classifies loans as in-substance repossessed or foreclosed if
the Company receives physical possession of the debtor's assets regardless
of whether formal foreclosure proceedings take place.
F-10
<PAGE>
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are realized
or settled.
PENSION:
Pension costs are funded as accrued.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair value for its financial instruments. Fair value methods and
assumptions used by the Company in estimating its fair value disclosures
are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The carrying amount
of accrued interest approximates its fair value.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings and money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for fixed-rate
certificate accounts are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on certificate accounts.
Federal Home Loan Bank Advances: Fair values for FHLB advances are
estimated using a discounted cash flow technique that applies interest
rates currently being offered on advances to a schedule of aggregated
expected monthly maturities on FHLB advances.
Other borrowed funds: Fair values of other borrowed funds are estimated
using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Off-balance sheet instruments: The fair value of commitments to originate
loans is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligation with the counterparties at the reporting
date.
F-11
<PAGE>
EARNINGS PER SHARE (EPS):
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
NOTE 3 - SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost basis of securities
and their approximate fair values are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities:
March 31, 1999:
Marketable equity securities $ 9,525 $ 1,303 $ 1,091 $ 9,737
Mortgage-backed securities 5,371 20 -- 5,391
Trust preferred equity securities 2,506 36 21 2,521
Corporate bonds and notes 1,247 1 14 1,234
Preferred stocks 1,500 -- 40 1,460
Government agency securities 4,000 7 -- 4,007
------- ------- ------- -------
$24,149 $ 1,367 $ 1,166 $24,350
======= ======= ======= =======
March 31, 1998:
Marketable equity securities $ 5,391 $ 1,135 $ 3 $ 6,523
======= ======= ======= =======
Held-to-maturity securities:
March 31, 1999:
Mortgage-backed securities $ 956 $ 22 $ -- $ 978
======= ======= ======= =======
March 31, 1998:
U.S. Government securities $ 2,001 $ -- $ 2 $ 1,999
Mortgage-backed securities 2,271 5 1 2,275
------- ------- ------- -------
$ 4,272 $ 5 $ 3 $ 4,274
======= ======= ======= =======
</TABLE>
The scheduled maturities of debt securities were as follows as of March 31,
1999:
<TABLE>
<CAPTION>
Available-For-Sale Held-To-Maturity
---------------------- ----------------------
Amortized Amortized
Cost Fair Cost Fair
Basis Value Basis Value
--------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Debt securities other than mortgage-backed securities:
Due within one year $ 753 $ 754 $ -- $ --
Due between one year and five years 4,000 4,007 -- --
Due between five years and ten years -- -- -- --
Due after ten years 494 480 -- --
Mortgage-backed securities 5,371 5,391 956 978
------- ------- ------- -------
$10,618 $10,632 $ 956 $ 978
======= ======= ======= =======
</TABLE>
F-12
<PAGE>
There were no securities pledged as of March 31, 1999 and 1998.
During the years ended March 31, 1999, 1998 and 1997 proceeds from sales of
available-for-sale securities amounted to $0, $0 and $139, respectively. During
the years ended March 31, 1999, 1998 and 1997 gross realized gains on those
sales amounted to $0, $0 and $123, respectively.
There were no issuers of securities whose amortized cost basis and fair value
exceeded 10% of stockholders' equity as of March 31, 1999.
NOTE 4 - LOANS
Loans consisted of the following as of March 31:
1999 1998
--------- ---------
(In Thousands)
Mortgage loans:
Residential - secured by 1-4 family $ 168,786 $ 157,240
Equity lines 5,156 4,028
Residential - secured by multi-family 57,744 22,411
Construction and development 4,070 5,287
Commercial real estate 67,806 35,468
--------- ---------
Total mortgage loans 303,562 224,434
--------- ---------
Commercial loans 500 43
--------- ---------
Other loans:
Loans secured by deposit accounts 375 564
Other consumer loans 3,160 2,870
--------- ---------
Total other loans 3,535 3,434
--------- ---------
Total principal balance 307,597 227,911
--------- ---------
Allowance for loan losses (3,027) (2,513)
Deferred loan origination fees (198) (470)
--------- ---------
(3,225) (2,983)
--------- ---------
Loans, net $ 304,372 $ 224,928
========= =========
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during the
year ended March 31, 1999. Total loans to such persons and their companies
amounted to $4,779 as of March 31, 1999. During the year ended March 31, 1999
principal payments and advances totaled $740 and $3,105, respectively.
Changes in the allowance for loan losses were as follows for the years ended
March 31:
1999 1998 1997
------- ------- -------
(In Thousands)
Balance at beginning of period $ 2,513 $ 1,687 $ 1,774
Loans charged off (103) (49) (225)
Provision for loan losses 617 856 117
Recoveries of loans previously charged off -- 19 21
------- ------- -------
Balance at end of period $ 3,027 $ 2,513 $ 1,687
======= ======= =======
F-13
<PAGE>
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of March
31:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----------- ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Loans for which there is a related allowance for
credit losses $280 $ 82 $-- $--
Loans for which there is no related allowance for
credit losses -- -- -- --
---- ---- ---- ----
Totals $280 $ 82 $-- $--
==== ==== ==== ====
Average recorded investment in impaired loans during
the year ended March 31 $210 $--
==== ====
Related amount of interest income recognized during the
time, in the year ended March 31 that the
loans were impaired
Total recognized $ 14 $--
==== ====
Amount recognized using a cash-basis method
of accounting $-- $--
==== ====
</TABLE>
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," SFAS No. 122, became effective for the Bank on April 1, 1996.
For transactions after December 31, 1996, SFAS No. 122 was superceded by
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125). In the fiscal years ending March 31, 1999 and 1998 the Company sold
mortgage loans totaling $10,860 and $2,359, respectively and retained the
servicing rights. The fair value of those rights under SFAS No. 122 and SFAS No.
125 is not material and has not been recognized in the financial statements for
the years ended March 31, 1999 and 1998.
NOTE 5 - PREMISES AND EQUIPMENT, NET OF DEPRECIATION AND AMORTIZATION
The following is a summary of premises and equipment as of March 31:
<TABLE>
<CAPTION>
Estimated
Useful
1999 1998 Life
------- ------- ------------
(In Thousands)
<S> <C> <C> <C>
Land $ 355 $ 355
Building and improvements 1,936 2,144 25-50 years
Furniture, fixtures and equipment 1,558 1,869 5-10 years
Leasehold improvements 203 263 5-10 years
Construction in progress 8 68
------- -------
4,060 4,699
Accumulated depreciation and amortization (1,496) (2,118)
------- -------
$ 2,564 $ 2,581
======= =======
</TABLE>
F-14
<PAGE>
NOTE 6 - DEPOSITS
The aggregate amount of certificate accounts, each with a minimum denomination
of $100 was approximately $15,312 and $14,876 as of March 31, 1999 and 1998,
respectively. Deposits greater than $100 are not federally insured.
For certificate accounts as of March 31, 1999, the aggregate amount of
maturities for each of the following five years ended March 31, and thereafter
are:
(In Thousands)
2000 $ 80,965
2001 19,757
2002 5,465
2003 1,575
2004 1,576
Thereafter 272
--------
$109,610
========
NOTE 7 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
The Bank is a member of the FHLB of Boston and as such is required to invest in
$100 par value stock in the amount of 1% of its outstanding home loans or 5% of
its outstanding advances from the FHLB or 1% of 30% of total assets, whichever
is highest. When such stock is redeemed, the Bank receives from the FHLB an
amount equal to the par value of the stock.
FHLB of Boston advances by year of maturity were as follows as of March 31,
1999:
Average
Stated
Amount Rate
------ ----
(In Thousands)
2000 $16,957 4.93%
2001 10,810 4.89
2002 1,829 4.88
2003 1,271 4.88
2004 10,884 4.53
Thereafter 35,000 4.82
-------
$76,751 4.82
=======
The advances with maturity dates past 2004 all have call dates in the year ended
March 31, 2000 and are callable quarterly thereafter.
In accordance with the FHLB of Boston's collateral requirements, a portion of
first mortgage loans on residential property and all deposits and stock in the
FHLB of Boston are available as collateral to secure such advances.
NOTE 8 - OTHER BORROWED FUNDS
Other borrowed funds consist of overdrawn accounts with the Federal Home Loan
Bank of Boston.
F-15
<PAGE>
NOTE 9 - INCOME TAXES (BENEFIT)
The components of the income tax expense (benefit) are as follows for the years
ended March 31:
1999 1998 1997
------- ------- -------
(In Thousands)
Current:
Federal $ 1,366 $ 672 $ 461
State 529 284 175
------- ------- -------
1,895 956 636
------- ------- -------
Deferred:
Federal (224) (1,572) (317)
State (129) (135) (100)
------- ------- -------
(353) (1,707) (417)
------- ------- -------
Change in valuation allowance -- -- (209)
------- ------- -------
Total income tax expense (benefit) $ 1,542 $ (751) $ 10
======= ======= =======
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended March
31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% (34.0)% 34.0%
Increase (decrease) in tax resulting from:
Cash surrender value of life insurance (.4) .3 (.8)
Other .4 (.2) (19.2)
Change in valuation allowance -- -- (18.3)
State income tax, net of federal income tax benefit 6.9 3.9 4.3
------ ------ ------
40.9% (30.0)% 0%
====== ====== ======
</TABLE>
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of March 31:
1999 1998
------- -------
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 1,186 $ 961
Deferred loan fees 18 29
Contribution carryover 1,053 1,203
ESOP expense 97 56
Accrued retirement expense 26 67
Accrued deferred compensation 456 265
Accrued stock-based incentive plan awards 172 --
Other 61 98
------- -------
Gross deferred tax assets 3,069 2,679
------- -------
Deferred tax liabilities:
Depreciation (185) (148)
Net unrealized holding gain on securities (156) (466)
------- -------
Gross deferred tax liabilities (341) (614)
------- -------
Net deferred tax assets $ 2,728 $ 2,065
======= =======
F-16
<PAGE>
Based on the Company's historical and current pretax earnings, management
believes it is more likely than not that the Company will realize the net
deferred tax asset existing as of March 31, 1999 and 1998. Management believes
that existing net deductible temporary differences which give rise to the net
deferred tax asset will reverse during periods in which the Company generates
net taxable income. In addition, gross deductible temporary differences are
expected to reverse in periods during which offsetting gross taxable temporary
differences are expected to reverse. Factors beyond management's control, such
as the general state of the economy and real estate values, can affect future
levels of taxable income and no assurance can be given that sufficient taxable
income will be generated to fully absorb gross deductible temporary differences.
In prior years, the Bank was allowed a special tax-basis bad debt deduction
under certain provisions of the Internal Revenue Code. As a result, retained
earnings of the Bank as of March 31, 1999 includes approximately $5,812 for
which federal and state income taxes have not been provided. If the Bank no
longer qualifies as a bank as defined in certain provisions of the Internal
Revenue Code, this amount will be subject to recapture in taxable income ratably
over six (6) years, subject to a combined federal and state tax rate of
approximately 41%.
NOTE 10 - REGULATORY MATTERS
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 weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), of Tier 1 capital (as
defined) to adjusted total assets (as defined) and Tangible capital (as defined)
to Tangible assets (as defined). Management believes, as of March 31, 1999, that
the Company and the Bank meets all capital adequacy requirements to which they
are subject.
As of March 31, 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. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 and
Tangible capital ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
---------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollar amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated $63,207 27.39% $18,462 >|=8.0% N/A N/A
Bank 44,017 19.99 17,616 >|=8.0 $ 22,020 >|=10.0%
Core Capital (to Adjusted Tangible Assets):
Consolidated 60,253 16.77 14,368 >|=4.0 N/A N/A
Bank 40,677 11.66 13,949 >|=4.0 17,436 >|=5.0
Tangible Capital (to Tangible Assets):
Consolidated 60,253 16.77 N/A N/A N/A N/A
Bank 40,677 11.66 5,231 >|=1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 60,253 26.11 N/A N/A N/A N/A
Bank 40,677 18.47 N/A N/A 9,370 >|=6.0
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
---------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollar amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $64,865 41.53% $12,494 >|=8.0% N/A N/A
Bank 40,991 26.25 12,494 >|=8.0 $ 15,617 >|=10.0%
Core Capital (to Adjusted Tangible Assets):
Consolidated 62,908 21.45 11,732 >|=4.0 N/A N/A
Bank 39,034 13.31 11,732 >|=4.0 14,665 >|=5.0
Tangible Capital (to Tangible Assets):
Consolidated 62,908 21.45 N/A N/A N/A N/A
Bank 39,034 13.31 4,399 >|=1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 62,908 40.28 N/A N/A N/A N/A
Bank 39,034 24.99 N/A N/A 9,370 >|=6.0
</TABLE>
NOTE 11 - EMPLOYEE BENEFIT PLANS
All eligible officers and employees are included in a noncontributory defined
benefit pension plan provided by the Company as a participating employer in the
Financial Institutions Retirement Fund (Fund), a multi-employer plan as defined
by Statement of Financial Accounting Standards No. 87. Employees are eligible to
participate in the Retirement Plan after the completion of 12 consecutive months
of employment with the Company and the attainment of age 21. Hourly paid
employees are excluded from participation in the Retirement Plan. Contributions
are based on individual employers' experience. According to the Fund's
administrators, as of June 30, 1998, the date of the latest actuarial valuation,
the market value of the Fund's net assets exceeded the actuarial present value
of vested and nonvested benefits in the aggregate, using an assumed rate of
return of 8.0%.
Contributions by the Company for this plan were $203, $170 and $177 for the
years ended March 31, 1999, 1998 and 1997, respectively.
The Company sponsors a defined contribution plan, the Financial Institutions
Thrift Plan (Thrift Plan), covering substantially all of its employees.
Employees are eligible to participate in the Thrift Plan upon the completion of
12 months of continuous employment with the Company (during which period they
complete at least 1,000 hours of service) and the attainment of age 21.
Employees paid on a hourly basis are not eligible for participation. Thrift Plan
contributions made by the Company were $53, $45 and $34 for the years ended
March 31, 1999, 1998 and 1997, respectively.
In the fiscal year ended March 31, 1997 the Company established a deferred
compensation benefit equalization plan for officers and employees designated by
management. The liability for such plan as of March 31, 1999 and 1998 was $1,205
and $766, respectively, and is included in other liabilities on the balance
sheets.
In the years ended March 31, 1999 and 1998 the Company distributed $455 and
$704, respectively to a Rabbi Trust in connection with the deferred compensation
benefit equalization plan. This asset has been included in the Company's balance
sheets as of March 31, 1999 and 1998 under other assets because it is available
to the general creditors of the Company in the event of the Company's
insolvency.
F-18
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases space for three branches and one ATM site under noncancelable
operating leases which expire between February 2000 and February 2002. The
following is a schedule by years of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of March 31, 1999:
Year ended March 31, (In Thousands)
2000 $ 407
2001 350
2002 287
-------
Total minimum lease payments $ 1,044
=======
The rental expense for all operating leases except those with terms of a month
or less that were not renewed for the years ended March 31, 1999, 1998 and 1997
was $406, $387 and $358, respectively.
NOTE 13 - FINANCIAL INSTRUMENTS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
F-19
<PAGE>
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of March
31:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 10,107 $ 10,107 $ 49,513 $ 49,513
Available-for-sale securities 24,350 24,350 6,523 6,523
Held-to-maturity securities 956 978 4,272 4,274
Stock in Federal Home Loan Bank
of Boston 3,850 3,850 1,873 1,873
Loans, net 304,372 305,563 224,928 224,466
Loans held-for-sale 321 321 822 822
Accrued interest receivable 1,920 1,920 1,260 1,260
Financial liabilities:
Deposits 216,397 217,146 207,780 208,176
Federal Home Loan Bank advances 76,751 76,492 20,000 19,849
Other borrowed funds 3,240 3,240 2,176 2,176
</TABLE>
The carrying amounts of financial instruments shown in the above tables are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
Notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows as of March 31:
1999 1998
------- -------
Notional Notional
Amount Amount
------- -------
(In Thousands)
Commitments to originate loans $30,417 $14,353
Unadvanced funds on loans:
Residential loans 1,505 503
Multi-family loans 2,941 186
Equity loans 3,836 2,753
Commercial loans 2,743 1,707
Construction loans 1,424 2,534
------- -------
$42,866 $22,036
======= =======
There is no material difference between the notional amount and the estimated
fair value of loan commitments and unadvanced portions of loans.
The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments."
NOTE 14 - CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the state.
There are no concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Company's loan portfolio is comprised of
loans collateralized by real estate located in the state of Massachusetts.
The short-term investments included in the consolidated balance sheets as of
March 31, 1999 consist of an investment in the Co-operative Central Bank
Liquidity Fund. This short-term investment exceeds 10% of stockholders' equity.
F-20
<PAGE>
NOTE 15 - MERGER WITH UNION FEDERAL SAVINGS BANK
On February 21, 1997 Union Federal Savings Bank (Union), a mutual entity, was
merged with and into Bay State Federal Savings Bank (Bay State). The merger was
accounted for as a pooling of interests, and accordingly, the accompanying
consolidated financial statements include the accounts and operations of Union
for all periods prior to the merger.
Separate results of the combining entities are as follows:
<TABLE>
<CAPTION>
Bay State Union Combined
--------- ----- --------
(In Thousands)
<S> <C> <C> <C>
April 1, 1996 to February 20, 1997
Net interest and dividend income $6,372 $1,257 $7,629
Net income 1,177 56 1,233
Year ended March 31, 1996
Net interest and dividend income 6,683 1,442 8,125
Net income 1,513 171 1,684
</TABLE>
Union's fiscal years ended on December 31. The restated financial statements
reflect a change in fiscal years for Union to March 31, to conform to Bay
State's presentation.
NOTE 16 - CONVERSION TO FEDERALLY CHARTERED CAPITAL STOCK SAVINGS BANK
On September 9, 1997, the Board of Directors of the Bank approved a Plan of
Conversion, as amended, for Bay State Federal Savings Bank ("Plan"). Under the
Plan, the Bank converted from a federally-chartered mutual savings bank to a
federally-chartered capital stock savings bank. As of March 31, 1999, all of the
stock of the Bank was held by the Company.
The Company issued 2,535,232 shares of its common stock through a public
offering which provided net proceeds of $49,024 after costs of $1,681.
Pursuant to the Plan, the Company established a charitable foundation
("Foundation") in connection with the Conversion. Under the Plan, the Bank and
the Company donated an amount of the Company's common stock equal to 8% of the
common stock sold in the Conversion. The Foundation is dedicated to charitable
purposes within the communities in which the Bank operates and to complement the
Bank's existing community activities.
A contribution of common stock to the Foundation by the Company is tax
deductible, subject to a limitation based on 10% of the Company's annual taxable
income. The Company, however, will be able to carry forward any unused portion
of the deduction for five years following the contribution. Upon funding the
Foundation, the Company recognized an expense in the full amount of the
contribution, offset in part by the corresponding tax deduction.
At the time of the Conversion, the Bank established a liquidation account in an
amount equal to its equity as reflected in the latest balance sheet used in the
conversion prospectus. The liquidation account is maintained for the benefit of
eligible account holders and supplemental eligible account holders who continue
to maintain their accounts at the Bank after the Conversion. The liquidation
account is reduced annually to the extent that eligible account holders and
supplemental eligible account holders have reduced their qualifying deposits as
of each anniversary date. Subsequent increases will not restore an eligible
account holder's or supplemental eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank, each
eligible account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
The balance of the liquidation account was $9,563 and $12,871 as of March 31,
1999 and 1998, respectively.
The Bank may not declare or pay dividends on its stock if such declaration and
payment would violate statutory or regulatory requirements.
F-21
<PAGE>
NOTE 17 - STOCK COMPENSATION PLAN
In September 1998, the stockholders of the Company approved the Bay State
Bancorp, Inc. 1998 Stock-Based Incentive Plan (Plan) which includes grants of
options to purchase Company stock and awards of Company stock which is described
below. The Company applies APB Opinion 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
for its stock options granted. The compensation cost that has been charged
against income for its stock awards was $506 for the year ended March 31, 1999.
The number of shares awarded was 97,609 with a weighted-average fair value per
share of $19.75. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant and award
dates under the plan consistent with the method of FASB Statement 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
(Amounts in thousands, except per share data)
1999
------
Net income As reported $2,234
Pro forma $2,057
Basic earnings per share As reported $0.97
Pro forma $0.89
Fully diluted earnings per share As reported $0.95
Pro forma $0.87
The stock subject to the Plan is the common stock of the Company. The number of
shares of the common stock reserved for grants and awards is 354,932, consisting
of 253,523 shares for stock options and 101,409 shares for stock awards. All
employees and outside directors of the Company are eligible to receive awards.
The Company determines the exercise price of stock options but such exercise
price shall not be less than 100% of the fair market value of the common stock
of the Company at the date of the grant. The Company determines the term during
which a participant may exercise a stock option, but in no event may a
participant exercise a stock option more than ten years from the date of grant.
The Company determines the date on which each stock option becomes exercisable.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for stock option grants in the year ended March 31, 1999:
dividend yield of .25 percent; expected volatility of 35 percent; risk-free
interest rate of 4.55 percent; and expected lives of 8 years.
A summary of the status of the Company's stock options as of March 31, 1999 and
changes during the year then ended is presented below:
Weighted-Average
Shares Exercise Price
------ --------------
Outstanding at beginning of year -- N/A
Granted 242,550 $19.75
Exercised --
Forfeited --
-------
Outstanding at end of year 242,550 $19.75
=======
Options exercisable at year-end 10,851
Weighted-average fair value of
options granted during the year $ 9.41
F-22
<PAGE>
The following table summarizes information about fixed stock options outstanding
as of March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------- ----------------------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
as of 3/31/99 Contractual Life Exercise Price as of 3/31/99 Exercise Price
------------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
242,550 9.5 years $19.75 10,851 $19.75
</TABLE>
The Company determines the date on which stock awards granted to a participant
vest and any terms or conditions which must be satisfied prior to the vesting of
any stock award. The awards vest in installments over five years.
Under the Plan, the Company may make awards of the common stock of the Company
contingent upon the satisfaction of any conditions related to the performance of
the Company. The common stock may be issued without consideration.
The First Bankers Trust Company is the Trustee for the Bay State Bancorp, Inc.
1998 Stock-Based Incentive Plan. A summary of purchases of the Company's common
stock for issuance of awards under the Plan is as follows for the year ended
March 31, 1999.
Number of
Shares Cost
------- -------
(In Thousands)
Purchases 101,409 $ 2,269
Vested and distributed on death of a participant 4,340 96
------- -------
Balance March 31, 1999 carried as a negative component
of stockholders' equity on the balance sheets 97,069 $ 2,173
======= =======
NOTE 18 - EMPLOYEE STOCK OWNERSHIP PLAN
On March 27, 1998 (the Conversion date) the Company adopted the Bay State
Federal Savings Bank Employee Stock Ownership Plan (ESOP) that became effective
as of April 1, 1997. On March 27, 1998 the ESOP purchased 202,818 shares of the
common stock of the Company. To fund the purchases, the ESOP borrowed $4,056
from Bay State Funding Corporation, a subsidiary of the Company. The borrowing
is at an interest rate of 8.5% and is to be repaid in ten equal installments of
$615 commencing on March 31, 1998 through March 31, 2007. In addition, dividends
paid on unreleased shares are used to reduce the principle balance of the loan.
The collateral for the borrowing is the common stock of the Company purchased by
the ESOP. Contributions by the Company to the ESOP are discretionary, however,
the Company intends to make annual contributions to the ESOP in an aggregate
amount at least equal to the principal and interest requirements on the debt.
The shares of stock of the Company are held in a suspense account until released
for allocation among participants. The shares will be released annually from the
suspense account and the released shares will be allocated among the
participants on the basis of the participant's compensation for the year of
allocation. As any shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares and the
shares will be outstanding for earnings-per-share purposes. The shares not
released are reported as unearned ESOP shares in the stockholders' equity
section of the balance sheet. ESOP expense for the years ended March 31, 1999
and 1998 was $514 and $600, respectively. The ESOP shares as of March 31, were
as follows:
1999 1998
------- -------
Allocated shares 20,282 --
Shares released for allocation 20,948 20,282
Unreleased shares 161,588 182,536
------- -------
Total ESOP shares 202,818 202,818
======= =======
(In Thousands)
Fair value of unreleased shares $3,313 $5,453
F-23
<PAGE>
NOTE 19 - CONTRIBUTION TO CHARITABLE FOUNDATION
On March 27, 1998, the Company contributed 187,795 shares of its common stock to
The Bay State Federal Savings Charitable Foundation (Foundation). The
contribution has been reflected as an expense of the Company at the conversion
issue price of $20.00 per share. The Foundation directors are also officers of,
or members of the Board of the Company or the Bank.
NOTE 20 - EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN
The Bank and the Company entered into employment agreements with its President
and Executive Vice President. The employment agreements provide for the
continued payment of specified compensation and benefits for specified periods.
The agreements also provide for termination by the Company for cause (as defined
in the agreements) at any time. The employment agreements provide for the
payment, under certain circumstances, of amounts upon termination following a
"change in control" as defined in the agreements. The agreements also provide
for certain payments in the event of the officers' termination for other than
cause and in the case of voluntary termination.
The Bank and the Company entered into change-in-control agreements with certain
officers, none of who are covered by an employment agreement. The agreements
provide that in the event voluntary or involuntary termination follows a change
in control of the Bank or the Company, the officer would be entitled to a
severance payment equal to two times or three times (as the case may be) the
officers annual compensation.
The Bank's Board of Directors established a severance plan which will provide
eligible employees with severance pay benefits in the event of a change in
control of the Bank or the Company. Management personnel with employment or
change in control agreements are not eligible to participate in the severance
plan. The benefit is equal to one-twelfth of annual compensation for each year
of service up to a maximum of 199% of annual compensation.
NOTE 21 - EARNINGS PER SHARE
Reconciliation of the numerators and the denominators of the basic and diluted
per share computations for net income are as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
(Amounts in thousands, except per share amounts)
Year ended March 31, 1999
Basic EPS
Net income and income available to common stockholders $2,234 2,312 $ 0.97
Effect of dilutive securities, options 48
------ -----
Diluted EPS
Income available to common stockholders and assumed
conversions $2,234 2,360 $ 0.95
====== =====
</TABLE>
Earnings per share data has not been presented for the years ended March 31,
1998 and 1997 because such data would not be meaningful for fiscal 1998 given
the short period during which common stock was outstanding and because the Bank
was in mutual form in fiscal 1997.
NOTE 22 - RECLASSIFICATION
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
F-24
<PAGE>
NOTE 23 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following financial statements are for Bay State Bancorp, Inc. (Parent
Company Only) and should be read in conjunction with the consolidated financial
statements of Bay State Bancorp, Inc. and Subsidiaries.
BAY STATE BANCORP, INC.
(Parent Company Only)
Balance Sheets
March 31, 1999 and 1998
(Dollars in Thousands)
ASSETS 1999 1998
- ------ ------- -------
Cash $ 5,990 $ 13
Federal funds sold -- 18,575
------- -------
Cash and cash equivalents 5,990 18,588
Investments in available-for-sale securities (at fair value) 7,985 --
Investment in subsidiary, Bay State Federal Savings Bank 41,445 39,700
Investment in subsidiary, Bay State Funding Corp. 3,222 4,056
Accrued interest receivable 93 --
Deferred tax asset 1,429 1,203
Other assets 190 93
------- -------
Total assets $60,354 $63,640
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Other liabilities $ 56 $ 66
Stockholders' equity 60,298 63,574
------- -------
Total liabilities and stockholders' equity $60,354 $63,640
======= =======
F-25
<PAGE>
BAY STATE BANCORP, INC.
(Parent Company Only)
Income Statements
For the year ended March 31, 1999 and for the period from March 28, 1998
to March 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the period
from
For the March 28, 1998
Year Ended to
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Income:
Dividend from Bay State Federal Savings $ 750 $ --
Interest income 570 15
------- -------
Total income 1,320 15
------- -------
Expenses:
Contribution of shares to The Bay State Federal Savings
Charitable Foundation at the conversion issued price -- 3,756
Other expense 370 70
------- -------
Total expenses 370 3,826
------- -------
Income (loss) before income tax (benefit) expense and equity in undistributed net
income of subsidiaries 950 (3,811)
Income tax (benefit) expense 49 (1,295)
------- -------
Income (loss) before equity in undistributed net income of subsidiaries 901 (2,516)
Equity in undistributed net income of subsidiaries 1,333 36
------- -------
Net income (loss) $ 2,234 $(2,480)
======= =======
</TABLE>
F-26
<PAGE>
BAY STATE BANCORP, INC.
(Parent Company Only)
Statements of Cash Flows
For the year ended March 31, 1999 and for the period from March 28, 1998
to March 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the period
from
For the March 28, 1998
Year Ended to
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,234 $ (2,480)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Earned compensation on stock-based incentive plan 84 --
Contribution of shares to The Bay State Federal
Savings Charitable Foundation -- 3,756
Appreciation in fair value of ESOP shares -- 195
Increase in taxes receivable (51) (93)
Deferred tax benefit 150 (1,203)
Increase in prepaid expenses and other assets (46) --
Increase (decrease) in accrued expenses (10) 66
Amortization of securities, net of accretion 6 --
Increase in accrued interest receivable (93) --
Undistributed net income of subsidiaries (1,333) (36)
-------- --------
Net cash provided by operating activities 941 205
-------- --------
Cash flows from investing activities:
Return of investment, Bay State Funding Corp. 1,038 --
Purchases of available-for-sale securities (9,090) --
Investment in subsidiary, Bay State Federal Savings Bank -- (22,829)
Investment in subsidiary, Bay State Funding Corp. (4,056)
-------- --------
Net cash used in investing activities (8,052) (26,885)
-------- --------
Cash flows from financing activities:
Dividends paid on common stock (111) --
Purchases of Company shares for stock-based incentive plan (2,269) --
Purchases of treasury stock (3,107) --
Proceeds from issuance of common stock 46,949
Costs related to issuance of common stock (1,681)
-------- --------
Net cash provided by financing activities (5,487) 45,268
-------- --------
Net increase (decrease) in cash and cash equivalents (12,598) 18,588
Cash and cash equivalents at beginning of period 18,588 --
-------- --------
Cash and cash equivalents at end of period $ 5,990 $ 18,588
======== ========
</TABLE>
F-27
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosures.
----------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
---------------------------------------
The information relating to Directors, Executive Officers, Promoters and
Control Persons of the Registrant is incorporated herein by reference to the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on July 22, 1999 at pages 4 through 7.
Item 10. Executive Compensation.
- --------------------------------
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on July 22, 1999 at pages 8 through 12.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 22, 1999, at
pages 3 and 5.
Item 12. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on July 22, 1999, at pages 12 through
13.
40
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) The following exhibits are filed as a part of this report:
2.1 Amended Plan of Conversion (including the Federal Stock Charter
and Bylaws of Bay State Federal Savings Bank)*
3.1 Certificate of Incorporation of Bay State Bancorp, Inc.*
3.2 Amended and Restated Bylaws of Bay State Bancorp, Inc.**
4.0 Draft Stock Certificate of Bay State Bancorp, Inc.*
10.1 Employment Agreement between Bay State Bancorp, Inc. and John F.
Murphy
10.2 Employment Agreement between Bay State Federal Savings Bank and
John F. Murphy
10.3 Employment Agreement between Bay State Bancorp, Inc. and Denise
M. Renaghan
10.4 Employment Agreement between Bay State Federal Savings Bank and
Denise M. Renaghan
10.5 Change in Control Agreement between Bay State Bancorp, Inc. and
Michael O. Gilles
10.6 Change in Control Agreement between Bay State Federal Savings
Bank and Michael O. Gilles
10.7 Change in Control Agreement between Bay State Federal Savings
Bank and Philip R. McNulty
10.8 Form of Bay State Federal Savings Bank Management Supplemental
Executive Retirement Plan*
10.9 Form of Bay State Federal Savings Bank Retirement Benefit
Equalization Plan*
10.10 Bay State Federal Savings Bank Employee Severance Compensation
Plan*
10.11 Bay State Bancorp, Inc. 1998 Stock-Based Incentive Plan***
11.0 Computation of earnings per share is incorporated herein by
reference to Note 21 of the Financial Statements
21.0 Subsidiary information is incorporated herein by reference to
"Item 1. Business--General"
23.0 Consent of Shatswell, MacLeod & Company, P.C.
27.0 Financial Data Schedule
- ----------
* Incorporated by reference into this document from the Exhibits to Form
SB-2, Registration Statement, and any amendments thereto, Registration No.
333-40115
** Incorporated by reference into this document from the Exhibits to Form
10-QSB as filed with the Securities and Exchange Commission on February 12,
1999.
*** Incorporated by reference into this document from the Appendix to the Proxy
Statement for the Annual Meeting of Shareholders held on September 29,
1998, as filed with the Securities and Exchange Commission on August 14,
1998.
(b) Reports on Form 8-K.
None.
41
<PAGE>
CONFORMED
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BAY STATE BANCORP, INC.
By: /s/ John F. Murphy
-----------------------------------------
John F. Murphy
President and Chief Executive Officer
Treasurer and Chairman of the Board
DATED: June 14, 1999
In accordance with the Exchange Act, this report has been signed by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ John F. Murphy President, Chief Executive Officer, June 14, 1999
- ------------------------------- Treasurer and Chairman of the Board
John F. Murphy (Principal Executive Officer)
/s/ Denise M. Renaghan Executive Vice President, Chief June 14, 1999
- ------------------------------- Operating Officer and Director
Denise M. Renaghan
/s/ Michael O. Gilles Chief Financial Officer June 14, 1999
- ------------------------------- (Principal Accounting and
Michael O. Gilles Financial Officer)
/s/ Robert B. Cleary Director June 14, 1999
- -------------------------------
Robert B. Cleary
/s/ Leo F. Grace Director June 14, 1999
- -------------------------------
Leo F. Grace
/s/ Richard F. Hughes Director June 14, 1999
- -------------------------------
Richard F. Hughes
/s/ Richard F. McBride Director June 14, 1999
- -------------------------------
Richard F. McBride
/s/ Kent T. Spellman Director June 14, 1999
- -------------------------------
Kent T. Spellman
</TABLE>
42
<PAGE>
Selected Consolidated Financial and Other Data
On March 27, 1998, the Company became a savings and loan holding company by
its acquisition of the Bank in connection with the completion of the conversion
of the Bank from a federally chartered mutual savings bank to a federally
chartered stock savings bank. Prior to the conversion the Company had no
significant assets, liabilities or operations. Accordingly, the results of
operations and other financial data represents financial information of the
Bank, with the exception of balance sheet data at March 31, 1999 and 1998 and
selected operating data for the year ended March 31, 1999 which are presented on
a consolidated basis.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Assets ..................... $359,404 $295,291 $233,074 $219,850 $204,386
Loans, net ................. 304,372 224,928 207,063 186,534 184,531
Investments ................ 31,675 56,795 16,456 19,467 7,613
Mortgage loans held for sale 321 822 -- 47 --
Deposits ................... 216,397 207,780 197,059 187,933 178,337
FHLB advances .............. 76,751 20,000 14,500 11,650 8,000
Stockholders' equity ....... 60,298 63,574 19,474 17,962 16,278
Allowance for loan losses .. 3,027 2,513 1,687 1,774 1,825
Nonperforming loans ........ 1,964 2,279 1,546 1,150 1,172
Nonperforming assets ....... 1,964 2,279 1,619 1,215 1,242
Book value per share ....... $ 26.88 $ 27.02 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended March 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income .......................... $ 23,426 $ 19,249 $ 17,476 $ 16,548 $ 14,950
Interest expense ......................... 10,758 10,200 9,218 8,423 6,506
-------- -------- -------- -------- --------
Net interest income ................... 12,668 9,049 8,258 8,125 8,444
Provision for loan losses ................ 617 856 117 1 6
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses ........................ 12,051 8,193 8,141 8,124 8,438
Total noninterest income ................. 390 313 407 366 420
Total noninterest expense ................ 8,665 11,008 7,409 5,537 5,994
-------- -------- -------- -------- --------
Income before income taxes ............ 3,776 (2,502) 1,139 2,953 2,864
Income taxes (benefit) ................... 1,542 (751) 10 1,269 1,163
-------- -------- -------- -------- --------
Net income (loss) ..................... $ 2,234 $ (1,751) $ 1,129 $ 1,684 $ 1,701
======== ======== ======== ======== ========
</TABLE>
BAY STATE BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of February 13, 1998, by
and between Bay State Bancorp, Inc. (the "Holding Company"), a corporation
organized under the laws of Delaware with its principal offices at 1299 Beacon
Street, Brookline, Massachusetts 02146 and John F. Murphy ("Executive"). Any
reference to "Institution" herein shall mean Bay State Federal Savings Bank or
any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees to
serve as President and Chief Executive Officer of the Holding Company. The
Executive shall render administrative and management services to the Holding
Company such as are customarily performed by persons in a similar executive
capacity. During said period, Executive also agrees to serve, if elected, as an
officer or director of any subsidiary of the Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the board of directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the third anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder, including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
subsidiaries ("Subsidiaries") and participation in community, professional and
civic
<PAGE>
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Holding Company or its
Subsidiaries, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, Executive's
employment with the Holding Company may be terminated by the Holding Company or
Executive during the term of this Agreement, subject to the terms and conditions
of this Agreement. However, Executive shall not perform, in any respect,
directly or indirectly, during the pendency of his temporary or permanent
suspension or termination from the Institution, duties and responsibilities
formerly performed at the Institution as part of his duties and responsibilities
as President and Chief Executive Officer of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding Company or
its Subsidiaries of $250,000 per year ("Base Salary"). Base Salary shall include
any amounts of compensation deferred by Executive under any tax-qualified
retirement or welfare benefit plan or any other deferred compensation
arrangement maintained by the Holding Company and its Subsidiaries. Such Base
Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement. Such
review shall be conducted by the Board or by a Committee of the Board delegated
such responsibility by the Board. The Committee or the Board may increase
Executive's Base Salary. Any increase in Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), the Holding Company shall also provide Executive, at no
premium cost to Executive, with all such other benefits as provided uniformly to
permanent full-time employees of the Holding Company and its Subsidiaries. In
addition, Executive shall be entitled to incentive compensation and bonuses as
provided in any plan or arrangement of the Holding Company or its Subsidiaries
in which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company and its
Subsidiaries will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder, except to the extent
that such changes are made applicable to all Holding Company and Institution
employees eligible to participate in such plans, arrangements and perquisites on
a non-discriminatory basis. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under all plans relating to stock options, restricted stock
awards, stock purchases, pension, thrift, supplemental retirement,
profit-sharing, employee
2
<PAGE>
stock ownership, group life insurance, medical and other health and welfare
coverage, education, cash or stock bonuses that are now or hereafter made
available by the Holding Company or its Subsidiaries to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Holding Company and its Subsidiaries in which Executive is
eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) The Holding Company shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred in the performance of Executive's
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ, upon, any (A) failure to elect or reelect or to
appoint or reappoint Executive as President and Chief Executive Officer, unless
consented to by the Executive, (B) a material change in Executive's function,
duties, or responsibilities with the Holding Company or its Subsidiaries, which
change would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, unless consented to by the Executive, (C) a relocation of
Executive's principal place of employment by more than 25 miles from its
location at the effective date of this Agreement, unless consented to by the
Executive, (D) a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (E) a liquidation or dissolution of the
Holding Company or the Institution, or (F) breach of this Agreement by the
Holding Company. Upon the occurrence of any event described in clauses (A), (B),
(C), (D), (E) or (F), above, Executive shall have the right to elect to
terminate his employment under this Agreement by resignation upon not less than
sixty (60) days prior written notice given within six full calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a sum equal to the sum of: (i)
the Base Salary and bonuses in accordance with Section 3(a) of this Agreement
that would have been paid to Executive for the remaining term of this Agreement
had the Event of Termination not occurred, plus the value as calculated by a
recognized firm
3
<PAGE>
customarily performing such valuation, of any stock options or related rights
which as of the Date of Termination have been granted to Executive but are not
exercisable by Executive and the value of any restricted stock or related rights
which have been granted to Executive; but in which Executive does not have a
non-forfeitable or fully-vested interest as of the Date of Termination; and (ii)
all benefits, including health insurance in accordance with Section 3(b) that
would have been provided to Executive for the remaining term of this Agreement
had an Event of Termination not occurred. At the election of the Executive,
which election is to be made prior to an Event of Termination, such payments
shall be made in a lump sum. In the event that no election is made, payment to
the Executive will be made on a monthly basis in approximately equal
installments during the remaining term of the Agreement. Such payments shall not
be reduced in the event the Executive obtains other employment following
termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to his termination at no premium cost to
the Executive. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Holding
Company or the Institution shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries, or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though he
4
<PAGE>
were a member of the Incumbent Board, or (C) a plan of reorganization, merger,
consolidation, sale of all or substantially all the assets of the Institution or
the Holding Company or similar transaction occurs or is effectuated in which the
Institution or Holding Company is not the resulting entity; provided, however,
that such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required federal regulatory approvals not
including the lapse of any statutory waiting periods, or (D) a proxy statement
has been distributed soliciting proxies from stockholders of the Holding
Company, by someone other than the current management of the Holding Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Holding Company or Institution with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Institution or
the Holding Company shall be distributed, or (E) a tender offer is made for 20%
or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d), of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or reduction
in benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the change in control, unless such
termination is because of his death or termination for Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of: (i)
the Base Salary and bonuses in accordance with Section 3(a) of this Agreement
that would have been paid to Executive for the remaining term of this Agreement
had the event described in Subsection (b) of this Section 5 not occurred, plus
the value, as calculated by a recognized firm customarily performing such
valuation, of any stock option or related rights which as of the Date of
Termination have been granted to Executive, but are not exercisable by Executive
and the value of restricted stock awards or related rights which have been
granted to Executive, but which Executive does not have a non-forfeitable or
fully vested interest as of the Date of Termination and all benefits, including
health insurance, in accordance with Section 3(b) that would have been provided
to Executive for the remaining term of this Agreement had the event described in
Subsection (b) of this Section 5 not occurred; or (ii) three (3) times
Executive's Average Annual Compensation (as defined herein) for the five (5)
preceding taxable years that Executive has been employed by the Holding Company
or its Subsidiaries or such lesser number of years in the event Executive shall
have been employed with the Holding Company or its Subsidiaries less than five
(5) years. Such Average Annual Compensation shall include all taxable income
paid by the Holding Company or its Subsidiaries, including but not limited to,
Base Salary, commissions and bonuses, as well as contributions on
5
<PAGE>
behalf of Executive to any pension and profit sharing plan, severance payments,
directors or committee fees and fringe benefits paid or to be paid to the
Executive during such years. At the election of the Executive, which election is
to be made prior to a Change in Control, such payment shall be made in a lump
sum. In the event that no election is made, payment to the Executive will be
made on a monthly basis in approximately equal installments during the remaining
term of the Agreement. Such payments shall not be reduced in the event Executive
obtains other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Company will cause to be continued life, medical, dental and disability
coverage substantially equivalent to the coverage maintained by the Institution
for Executive at no premium cost to Executive prior to his severance. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Change in Control.
6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the provisions of Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess parachute
payment" under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar
($1.00) less than an amount equal to three (3) times Executive's
"base amount," as determined in accordance with said Section 280G
and the Non-Triggering Amount less the product of the marginal
rate of any applicable state and federal income tax and the
Non-Triggering Amount would be greater than the aggregate value
of the Termination Benefits (without such reduction) minus (i)
the amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount. The
allocation of the reduction required hereby among the Termination Benefits shall
be determined by the Executive.
6
<PAGE>
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 8 hereof through the
Date of Termination, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the
Institution, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination, such stock options and related limited rights and
any such unvested awards shall become null and void and shall not be exercisable
by or delivered to Executive at any time subsequent to such Termination for
Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be
7
<PAGE>
extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the
Holding Company will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given (including, but not limited
to, Base Salary) and continue him as a participant in all compensation, benefit
and insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement.
Amounts paid under this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other amounts due
under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
8
<PAGE>
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Holding Company. In the event of a
breach or threatened breach by the Executive of the provisions of this Section,
the Holding Company will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Holding Company or its Subsidiaries or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Holding
Company from pursuing any other remedies available to the Holding Company for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company subject to Section 11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated February 13, 1998,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by the Executive as
determined by the Holding Company and the Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to the
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
9
<PAGE>
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware
without regards to principles of conflicts of law of this state.
10
<PAGE>
18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Institution, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Part 359 and any rules or regulations promulgated thereunder.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to
11
<PAGE>
perform the Holding Company's obligations under this Agreement, in the same
manner and to the same extent that the Holding Company would be required to
perform if no such succession or assignment had taken place.
12
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Bay State Bancorp, Inc. has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized officer and
its directors, and Executive has signed this Agreement, on the 24th day of
November, 1998.
ATTEST: BAY STATE BANCORP, INC.
/s/ Jill W. Lacy By: /s/ Denise M. Renaghan
- ----------------------- ---------------------------------
Denise M. Renaghan
For the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Noelle G. Nickerson By: /s/ John F. Murphy
- -------------------------- ---------------------------------
John F. Murphy
Executive
13
BAY STATE FEDERAL SAVINGS BANK
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of February 13, 1998, by
and among Bay State Federal Savings Bank (the "Bank"), a federally chartered
stock savings bank, with its principal administrative office at 1299 Beacon
Street, Brookline, Massachusetts 02446, Bay State Bancorp, Inc. a corporation
organized under the laws of the State of Delaware, the holding company for the
Bank (the "Holding Company"), and John F. Murphy ("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
President, Chief Executive Officer and Treasurer of the Bank. Executive shall
render administrative and management services to the Bank such as are
customarily performed by persons situated in a similar executive capacity.
During said period, Executive also agrees to serve, if elected, as an officer
and director of the Holding Company or any subsidiary of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the Bank
("Board") may extend the Agreement an additional year such that the remaining
term of the Agreement shall be thirty-six (36) months unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 8 of this Agreement. The Board will review the Agreement
and Executive's performance annually for purposes of determining whether to
extend the Agreement and the rationale and results thereof shall be included in
the minutes of the Board's meeting. The Board shall give notice to the Executive
as soon as possible after such review as to whether the Agreement is to be
extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence,
<PAGE>
Executive shall devote substantially all his business time, attention, skill,
and efforts to the faithful performance of his duties hereunder including
activities and services related to the organization, operation and management of
the Bank and participation in community and civic organizations; provided,
however, that, with the approval of the Board, as evidenced by a resolution of
such Board, from time to time, Executive may serve, or continue to serve, on the
boards of directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Bank, or materially affect the performance of Executive's
duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's employment
with the Bank may be terminated by the Bank or the Executive during the term of
this Agreement, subject to the terms and conditions of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of $250,000 per
year ("Base Salary"). Base Salary shall include any amounts of compensation
deferred by Executive under any tax-qualified retirement or welfare benefit plan
or any other deferred compensation arrangement maintained by the Bank. Such Base
Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement. Such
review shall be conducted by the Board or by a Committee of the Board, delegated
such responsibility by the Board. The Committee or the Board may increase
Executive's Base Salary. Any increase in Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), the Bank shall also provide Executive, at no premium cost
to Executive, with all such other benefits as are provided uniformly to
permanent full-time employees of the Bank. In addition, Executive shall be
entitled to incentive compensation and bonuses as provided in any plan or
arrangement of the Bank in which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would materially adversely affect Executive's rights or
benefits thereunder; except to the extent such changes are made applicable to
all Bank employees on a non-discriminatory basis. Without limiting the
generality of the foregoing provisions of this Subsection (b), Executive shall
be entitled to participate in or receive benefits under all plans relating to
stock options, restricted stock awards, stock purchases, pension, thrift,
supplemental retirement, profit-sharing, employee stock ownership, group life
insurance, medical and other health and welfare coverage, education, cash or
stock bonuses that are now or hereafter made available by the Bank in the future
to its senior executives and key management employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Nothing paid to the Executive under any
- 2 -
<PAGE>
such plan or arrangement will be deemed to be in lieu of other compensation to
which the Executive is entitled under this Agreement.
(c) The Bank shall pay or reimburse Executive for all reasonable travel and
other reasonable expenses incurred by Executive performing his obligations under
this Agreement and may provide such additional compensation in such form and
such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a termination governed by Section 5(a) hereof, or Termination
for Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Bank's employ upon any (A) failure to elect or reelect or to appoint or
reappoint Executive as President, Chief Executive Officer and Treasurer, unless
consented to by the Executive, (B) a material change in Executive's function,
duties, or responsibilities, which change would cause Executive's position to
become one of lesser responsibility, importance, or scope from the position and
attributes thereof described in Section 1, above, unless consented to by
Executive, (C) a relocation of Executive's principal place of employment by more
than 25 miles from its location at the effective date of this Agreement, unless
consented to by the Executive, (D) a material reduction in the benefits and
perquisites to the Executive from those being provided as of the effective date
of this Agreement, unless consented to by the Executive, (E) a liquidation or
dissolution of the Bank or Holding Company, or (F) breach of this Agreement by
the Bank. Upon the occurrence of any event described in clauses (A), (B), (C),
(D), (E) or (F), above, Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within six full months after the event giving
rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be a sum equal to the sum of: (i)
the Base Salary and bonuses in accordance with Section 3(a) of this Agreement
that would have been paid to Executive for the remaining term of this Agreement
had the Event of Termination not occurred; and (ii) all benefits, including
health insurance in accordance with Section 3(b) that would have been provided
to Executive for the remaining term of the this Agreement had an Event of
Termination not occurred; provided, however, that any payments pursuant to this
subsection and subsection 4(c) below shall not, in the aggregate, exceed three
times Executive's average annual compensation for the five most recent taxable
years that Executive has been employed by the Bank or such lesser number of
years in the event that Executive shall have been employed by the Bank for less
than five years. In the event the Bank is not in compliance with its minimum
capital requirements or if such payments pursuant to this
- 3 -
<PAGE>
subsection (b) would cause the Bank's capital to be reduced below its minimum
regulatory capital requirements, such payments shall be deferred until such time
as the Bank or successor thereto is in capital compliance. At the election of
the Executive, which election is to be made prior to an Event of Termination,
such payments shall be made in a lump sum as of the Executive's Date of
Termination. In the event that no election is made, payment to Executive will be
made on a monthly basis in approximately equal installments during the remaining
term of the Agreement. Such payments shall not be reduced in the event the
Executive obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
Executive prior to his termination at no premium cost to the Executive, except
to the extent such coverage may be changed in its application to all Bank or
Holding Company employees. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act and
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency), as in effect on the date hereof (provided,
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Bank or the Holding Company representing
25% or more of the Bank's or the Holding Company's outstanding voting securities
or right to acquire such securities except for any voting securities of the Bank
purchased by the Holding Company and any voting securities purchased by any
employee benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he were a member
of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Holding Company
or similar transaction occurs in which the Bank or Holding Company is not the
resulting entity; provided, however, that such an event listed above will be
- 4 -
<PAGE>
deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory waiting
periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, material reduction in annual compensation or
benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death, disability, retirement or termination for
Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Bank shall pay Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to
the greater of: (1) the Base Salary and bonuses in accordance with Section 3(a)
of this Agreement that would have been paid to Executive for the remaining term
of this Agreement had the event described in Subsection (b) of this Section 5
not occurred; or 2) three (3) times Executive's Average Annual Compensation (as
defined herein) for the five (5) most recent taxable years that Executive has
been employed by the Bank or such lesser number of years in the event that
Executive shall have been employed by the Bank for less than five (5) years.
Such "Average Annual Compensation" shall include all taxable income paid by the
Bank, including but not limited to, Base Salary, commissions, and bonuses, as
well as contributions on Executive's behalf to any pension and/or profit sharing
plan, retirement payments, directors or committee fees and fringe benefits paid
or to be paid to the Executive in any such year and payment of any expense items
without accountability or business purpose or that do not meet the Internal
Revenue Service requirements for deductibility by the Bank; provided, however,
that any payment under this provision and subsection 5(d) below shall not exceed
three (3) times the Executive's average annual compensation. In the event the
Bank is not in compliance with its minimum capital requirements or if such
payments would cause the Bank's capital to be reduced below its minimum
regulatory capital requirements, such payments shall be deferred until such time
as the Bank or successor thereto is in capital compliance. At the election of
the Executive, which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum as of the Executive's Date of Termination.
In the event that no election is made, payment to the Executive will be made in
approximately equal installments on a monthly basis over a period of thirty-six
(36) months following the Executive's termination. Such payments shall not be
reduced in the event Executive obtains other employment following termination of
employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Bank will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to his severance at no premium cost to the Executive, except to
the extent that such coverage may be changed in its application for all
- 5 -
<PAGE>
Bank employees on a non-discriminatory basis. Such coverage and payments shall
cease upon the expiration of thirty-six (36) months following the Date of
Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Internal Revenue Code of 1986, as amended, or any
successor thereto, and in order to avoid such a result, Termination Benefits
will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the
value of which is one dollar ($1.00) less than an amount equal to three (3)
times Executive's "base amount," as determined in accordance with said Section
280G. The allocation of the reduction required hereby among the Termination
Benefits provided by Section 5 shall be determined by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after the Date of Termination for Cause. During the period beginning
on the date of the Notice of Termination for Cause pursuant to Section 8 hereof
through the Date of Termination for Cause, stock options granted to Executive
under any stock option plan shall not be exercisable nor shall any unvested
stock awards granted to Executive under any stock benefit plan of the Bank, the
Holding Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination for Cause, such stock options and any unvested stock awards shall
become null and void and shall not be exercisable by or delivered to Executive
at any time subsequent to such Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances
- 6 -
<PAGE>
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and,
provided further, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event the Executive is
terminated for reasons other than Termination for Cause, the Bank will continue
to pay Executive his Base Salary in effect when the notice giving rise to the
dispute was given until the earlier of: 1) the resolution of the dispute in
accordance with this Agreement or 2) the expiration of the remaining term of
this Agreement as determined as of the Date of Termination. Amounts paid under
this Section are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE OF BANK BUSINESS.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Bank for a period of
one (1) year following such termination in any city, town or county in which the
Executive's normal business office is located and the Bank has an office or has
filed an application for regulatory approval to establish an office, determined
as of the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this
- 7 -
<PAGE>
Subsection 10(a) agree that in the event of any such breach by Executive, the
Bank, will be entitled, in addition to any other remedies and damages available,
to an injunction to restrain the violation hereof by Executive, Executive's
partners, agents, servants, employees and all persons acting for or under the
direction of Executive. Nothing herein will be construed as prohibiting the Bank
from pursuing any other remedies available to the Bank for such breach or
threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. Further,
Executive may disclose information regarding the business activities of the Bank
to the OTS and the Federal Deposit Insurance Corporation ("FDIC") pursuant to a
formal regulatory request. In the event of a breach or threatened breach by
Executive of the provisions of this Section, the Bank will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits due from the Bank are
not timely paid or provided by the Bank, such amounts and benefits shall be paid
or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated February 13, 1998,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement. Payments
pursuant to this Agreement and the Holding Company Agreement shall be allocated
in proportion to the services rendered and time expended on such activities by
Executive as determined by the Holding Company and the Bank on a quarterly
basis.
- 8 -
<PAGE>
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(3) or (g)(1); the Bank 's obligations under this contract shall be
suspended as of the date of service, unless stayed by
- 9 -
<PAGE>
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion: (i) pay Executive all or part of the compensation
withheld while their contract obligations were suspended; and (ii) reinstate (in
whole or in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. ss.1813(x)(1) all obligations of the Bank under
this contract shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution: (i) by the Director of the OTS
(or his designee), the FDIC or the Resolution Trust Corporation, at the time the
FDIC enters into an agreement to provide assistance to or on behalf of the Bank
under the authority contained in Section 13(c) of the Federal Deposit Insurance
Act, 12 U.S.C. ss.1823(c); or (ii) by the Director of the OTS (or his designee)
at the time the Director (or his designee) approves a supervisory merger to
resolve problems related to the operations of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section
1828(k), 12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and
regulations promulgated thereunder.
16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
- 10 -
<PAGE>
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of Delaware without regards to
principles of conflicts of law of this state, but only to the extent not
superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Executive under this Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank if Executive is successful on the merits pursuant
to a legal judgment, arbitration or settlement.
- 11 -
<PAGE>
22. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) as permitted under federal law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k), 12 C.F.R. Part
359 and 12 C.F.R. Section 545.121 and any rules or regulations promulgated
thereunder.
23. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
- 12 -
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Bay State Federal Savings Bank and John F. Murphy have
caused this Agreement to be executed and their seals to be affixed hereunto by
their duly authorized officers and directors, and Executive has signed this
Agreement, on the 8th day of September, 1998.
ATTEST: BAY STATE FEDERAL SAVINGS BANK
/s/ Barbara Olafsson By: /s/ Denise M. Renaghan
- ------------------------- -----------------------------------
Barbara Olafsson Denise M. Renaghan
Corporate Secretary Executive Vice President and Chief
Operating Officer
[SEAL]
ATTEST: BAY STATE BANCORP, INC.
(Guarantor)
/s/ Barbara Olafsson By: /s/ Denise M. Renaghan
- ------------------------- -----------------------------------
Barbara Olafsson Denise M. Renaghan
Corporate Secretary Executive Vice President and Chief
Operating Officer
[SEAL]
WITNESS: EXECUTIVE
/s/ Nicolle G. Nickerson /s/ John F. Murphy
- ------------------------- -----------------------------------
John F. Murphy
- 13 -
Exhibit 10.3
Ms. Renaghan's Employment is the same as the Employment Agreement in
Exhibit 10.1, which is incorporated herein by reference except as to: (i) the
name of the signatory, which is Denise M. Renaghan; (ii) the signatory for the
Company, which is John F. Murphy; (iii) the position in Section 1, which is
Executive Vice President and Chief Operating Officer; and (iv) the amount of the
base salary in Section 3(a), which is $150,000.
Exhibit 10.4
Ms. Renaghan's Employment Agreement is the same as the Employment Agreement
in Exhibit 10.2, which is incorporated herein by reference except as to: (i) the
name of the signatory, which is Denise M. Renaghan; (ii) the position in Section
1, which is Executive Vice President and Chief Operating Officer; (iii) the
signatory for the Company, which is John F. Murphy; (iv) the guarantor for the
Company, which is John F. Murphy; and (v) the amount of the base salary in
Section 3(a), which is $150,000.
BAY STATE BANCORP, INC.
THREE YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of March 2, 1998, by and between Bay
State Bancorp, Inc. (the "Holding Company"), a corporation organized under the
laws of the State of Delaware, with its office at 1299 Beacon Street, Brookline,
Massachusetts 02146, and Michael O. Gilles ("Executive"). The term "Institution"
refers to Bay State Federal Savings Bank, the wholly-owned subsidiary of the
Holding Company or any successor thereto.
WHEREAS, the Holding Company recognizes the substantial contribution
Executive has made to the Holding Company and wishes to protect his position
therewith for the period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Holding Company
or an affiliate thereof.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT.
The period of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the date of the execution of this
Agreement, the term of this Agreement shall be extended for one day each day
until such time as the board of directors of the Holding Company (the "Board")
or Executive elects not to extend the term of the Agreement by giving written
notice to the other party in accordance with Section 4 of this Agreement, in
which case the term of this Agreement shall be fixed and shall end on the third
anniversary of the date of such written notice.
2. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control of the Holding Company (as
herein defined) followed at any time during the term of this Agreement by the
termination of Executive's employment, the provisions of Section 3 shall apply.
Upon the occurrence of a Change in Control, Executive shall have the right to
elect to voluntarily terminate his employment at any time during the term of
this Agreement following any demotion, loss of title, office or significant
authority, reduction in annual compensation or material reduction in benefits,
or relocation of his principal place of employment by more than 25 miles from
its location immediately prior to the Change in Control unless such termination
is because of death or termination for Cause.
<PAGE>
(b) For purposes of this Agreement, a "Change in Control" of the
Institution or Holding Company shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1(a) of the Current Report on
Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933 and the Rules and Regulations promulgated
by the Office of Thrift Supervision ("OTS") (or its predecessor agency), as in
effect on the date hereof (provided, that in applying the definition of change
in control as set forth under the rules and regulations of the OTS, the Board
shall substitute its judgment for that of the OTS); or (iii) without limitation
such a Change in Control shall be deemed to have occurred at such time as (A)
any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Institution or the
Holding Company representing 20% or more of the Institution's or the Holding
Company's outstanding securities except for any securities of the Institution
purchased by the Holding Company in connection with the conversion of the
Institution to the stock form and any securities purchased by any employee
benefit plan of the Institution, or (B) individuals who constitute the Board on
the date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by the Holding Company's stockholders was approved by
the same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (B), considered as though he were a member of the
Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Institution or the Holding Company or
similar transaction occurs in which the Institution or Holding Company is not
the resulting entity, or (D) a proxy statement is distributed soliciting proxies
from stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Institution
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Institution
or the Holding Company shall be distributed, or (E) a tender offer is made for
20% or more of the voting securities of the Institution or Holding Company then
outstanding.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, regulation (other than traffic violations or similar offenses)
or final cease and desist order, or any material breach of this Agreement.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together
2
<PAGE>
with counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, Executive was guilty of conduct justifying Termination for
Cause and specifying the particulars thereof in detail. Executive shall not have
the right to receive compensation or other benefits for any period after
Termination for Cause. During the period beginning on the date of the Notice of
Termination for Cause pursuant to Section 4 hereof through the Date of
Termination, stock options and related limited rights granted to Executive under
any stock option plan shall not be exercisable nor shall any unvested awards
granted to Executive under any stock benefit plan of the Institution, the
Holding Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination, such stock options and related limited rights and any such unvested
awards shall become null and void and shall not be exercisable by or delivered
to Executive at any time subsequent to such Termination for Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time during
the term of this Agreement by the voluntary or involuntary termination of
Executive's employment, other than for Termination for Cause, the Holding
Company shall be obligated to pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, a
sum equal to three (3) times Executive's Average Annual Compensation for the
five most recent taxable years that Executive has been employed by the
Institution or such lesser number of years in the event that Executive shall
have been employed by the Institution for less than five years. Such Average
Annual Compensation shall include all taxable income paid by the Holding Company
or its subsidiaries, including, but not limited to, base salary, commissions and
bonuses, as well as contributions on behalf of Executive to any pension and
profit sharing plan, severance payments, director or committee fees and fringe
benefits paid or to be paid to the Executive during such years. At the election
of Executive which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum. In the event that no election is made,
payment to Executive will be made on a monthly basis in approximately equal
installments during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Institution or the
Holding Company followed at any time during the term of this Agreement by
Executive's termination of employment, other than for Termination for Cause, the
Holding Company shall cause to be continued life, medical and disability
coverage substantially identical to the coverage maintained by the Institution
for Executive prior to his severance, except to the extent such coverage may be
changed in its application to all Institution employees. Such coverage and
payments shall cease upon expiration of thirty-six (36) full calendar months
following the Date of Termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to
3
<PAGE>
include an "excess parachute payment" under Section 280G of the
Code; and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar
($1.00) less than an amount equal to three (3) times Executive's
"base amount," as determined in accordance with said Section 280G
and the Non-Triggering Amount less the product of the marginal
rate of any applicable state and federal income tax and the
Non-Triggering Amount would be greater than the aggregate value
of the Termination Benefits (without such reduction) minus (i)
the amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount. The
allocation of the reduction required hereby among the Termination Benefits shall
be determined by the Executive.
4. NOTICE OF TERMINATION.
(a) Any purported termination by the Holding Company, or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of Termination for Cause, shall not be less than
thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to his current annual
salary) and continue him as a participant in all compensation, benefit and
insurance plans in which he was participating when the notice of
4
<PAGE>
dispute was given, until the dispute is finally resolved in accordance with this
Agreement. Amounts paid under this Section 4(c) are in addition to all other
amounts due under this Agreement and shall not be offset against or reduce any
other amounts due under this Agreement.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Holding
Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Holding Company and Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
Nothing in this Agreement shall confer upon Executive the right to continue
in the employ of the Holding Company or shall impose on the Holding Company any
obligation to employ or retain Executive in its employ for any period.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Holding Company and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
5
<PAGE>
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REINSTATEMENT OF BENEFITS UNDER INSTITUTION AGREEMENT.
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Institution's affairs by a notice described
in Section 9(b) of the Change in Control Agreement between Executive and the
Institution dated March 2, 1998 (the "Institution Agreement") during the term of
this Agreement and a Change in Control, as defined herein, occurs the Holding
Company will assume its obligation to pay and Executive will be entitled to
receive all of the termination benefits provided for under Section 3 of the
Institution Agreement upon the notification of the Holding Company of the
Institution's receipt of a dismissal of charges in the Notice.
10. EFFECT OF ACTION UNDER INSTITUTION AGREEMENT.
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits are paid to or received by Executive under the Institution
Agreement between Executive and Institution, the amount of such payments and
benefits paid by the Institution will be subtracted from any amount due
simultaneously to Executive under similar provisions of this Agreement.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references herein to the
masculine shall apply to both the masculine and the feminine.
6
<PAGE>
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware, without regard
to the principles of conflicts of law of this State.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Holding Company, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Part 359 and any rules or regulations promulgated thereunder.
7
<PAGE>
17. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Holding Company's obligations under this Agreement, in the same manner and to
the same extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
SIGNATURES
IN WITNESS WHEREOF, Bay State Bancorp, Inc. has caused this Agreement to be
executed by its duly authorized officer, and Executive has signed this
Agreement, on the 24th day of November, 1998.
ATTEST: BAY STATE BANCORP, INC.
/s/ Jill W. Lacy By: /s/ John F. Murphy
- ---------------------- -------------------------------
John F. Murphy
Chairman of the Board, President
and Chief Executive Officer
WITNESS:
/s/ Nicolle G. Nickerson /s/ Michael O. Gilles
- ---------------------- -------------------------------
Michael O. Gilles
Executive
Seal
8
BAY STATE FEDERAL SAVINGS BANK
THREE YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of March 2, 1998, by and among Bay
State Federal Savings Bank (the "Institution"), a federally chartered savings
bank, with its principal administrative office at 1299 Beacon Street, Brookline,
Massachusetts 02446, Michael Gilles ("Executive"), and Bay State Bancorp, Inc.
(the "Holding Company"), a corporation organized under the laws of the State of
Delaware which is the holding company of the Institution.
WHEREAS, the Institution recognizes the substantial contribution Executive
has made to the Institution and wishes to protect Executive's position therewith
for the period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Institution.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT.
The term of the Bay State Federal Savings Bank Three Year Change in Control
Agreement (the "Agreement") shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Institution ("Board") may extend the Agreement for an
additional year. The Board will review the Agreement and Executive's performance
annually for purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's meeting.
2. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control of the Institution or the
Holding Company (as herein defined) followed at any time during the term of this
Agreement by the termination of Executive's employment, other than for Cause, as
defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Upon
the occurrence of a Change in Control, Executive shall have the right to elect
to voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 25 miles from its location
immediately prior to the Change in Control; provided, however, the Executive may
consent in writing to any such demotion, loss, reduction or relocation. The
effect of any written consent of the Executive under this Section 2 (a) shall be
strictly limited to the terms specified in such written consent.
<PAGE>
(b) For purposes of this Agreement, a "Change in Control" of the
Institution or Holding Company shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1 of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Institution or the Holding Company within
the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act and the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date
hereof (provided, that in applying the definition of change in control as set
forth under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 25% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Institution or
the Holding Company, or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Holding Company's stockholders was approved by the same Nominating
Committee serving under an Incumbent Board, shall be, for purposes of this
clause (B), considered as though he were a member of the Incumbent Board, or (C)
a plan of reorganization, merger, consolidation, sale of all or substantially
all the assets of the Institution or the Holding Company or similar transaction
occurs in which the Institution or Holding Company is not the resulting entity;
provided, however, that such an event listed above will be deemed to have
occurred or to have been effectuated upon the receipt of all required regulatory
approvals not including the lapse of any statutory waiting periods.
(c) Executive shall not receive termination benefits pursuant to Section 3
hereof upon Termination for Cause. The term "Termination for Cause" shall mean
termination because of Executive's personal dishonesty, incompetence, willful
misconduct, any breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
Notice of Termination which shall include a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the members of the Board at
a meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause.
During the
2
<PAGE>
period beginning on the date of the Notice of Termination for Cause pursuant to
Section 4 hereof through the Date of Termination, stock options and related
limited rights granted to Executive under any stock option plan shall not be
exercisable nor shall any unvested awards granted to Executive under any stock
benefit plan of the Institution, the Holding Company or any subsidiary or
affiliate thereof vest. At the Date of Termination, such stock options and
related limited rights and such unvested awards shall become null and void and
shall not be exercisable by or delivered to Executive at any time subsequent to
such Date of Termination for Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time during
the term of this Agreement by termination of the Executive's employment due to:
(1) Executive's dismissal or (2) Executive's voluntary termination pursuant to
Section 2(a), unless such termination is due to Termination for Cause, the
Institution and the Holding Company shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, a sum equal to three (3) times Executive's Average Annual Compensation
for the five most recent taxable years that Executive has been employed by the
Institution or such lesser number of years in the event that Executive shall
have been employed by the Institution for less than five years. Such "Average
Annual Compensation" shall include base salary, commissions, bonuses, as well as
contributions on behalf of Executive to any pension and profit-sharing plan, and
fringe benefits paid or to be paid to the Executive during such years. At the
election of Executive, which election is to be made prior to a Change in
Control, such payment shall be made in a lump sum. In the event that no election
is made, payment to Executive will be made on a monthly basis in approximately
equal installments during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Institution or the
Holding Company followed at any time during the term of this Agreement by
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Institution shall cause to be continued life, medical
and disability coverage substantially identical to the coverage maintained by
the Institution or Holding Company for Executive prior to his severance, except
to the extent such coverage may be changed in its application to all Institution
or Holding Company employees on a nondiscriminatory basis. Such coverage and
payments shall cease upon the expiration of thirty-six (36) full calendar months
from the Date of Termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Internal Revenue Code of 1986, as
amended, or any successor thereto, and in order to avoid such a result
Termination Benefits will be reduced, if necessary, to an amount (the
"Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an
amount equal to three (3) times Executive's "base amount," as determined in
accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by the preceding paragraphs of
this Section 3 shall be determined by Executive.
3
<PAGE>
4. NOTICE OF TERMINATION.
(a) Any purported termination by the Institution or by Executive in
connection with a Change in Control shall be communicated by Notice of
Termination to the other party hereto. For purposes of this Agreement, a "Notice
of Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the instance of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute in connection with a Change in
Control, in the event that the Executive is terminated for reasons other than
Termination for Cause, the Institution will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to his annual salary) and continue him as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the earlier of: (1)
the resolution of the dispute in accordance with this Agreement; or (2) the
expiration of the remaining term of this Agreement as determined as of the Date
of Termination.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the
Institution. Further, the Holding Company guarantees such payment and provision
of all amounts and benefits due hereunder to Executive and, if such amounts and
benefits due from the Institution are not timely paid or provided by the
Institution, such amounts and benefits shall be paid or provided by the Holding
Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Institution and Executive, except
that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that
4
<PAGE>
Executive is subject to receiving fewer benefits than those available to him
without reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to continue
in the employ of Institution or shall impose on the Institution any obligation
to employ or retain Executive in its employ for any period.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Institution and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED REGULATORY PROVISIONS.
(a) The board of directors may terminate Executive's employment at any
time, but any termination by the board of directors, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive compensation
or other benefits for any period after Termination for Cause as defined in
Section 2 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Institution's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. ss.1818(e)(3) or (g)(1)), the Institution's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Institution may in its discretion (i) pay Executive all or part of the
compensation withheld while their contract
5
<PAGE>
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Institution's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
ss.1818(e)(4) or (g)(1)), all obligations of the Institution under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Institution is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, all obligations of the Institution under this
contract shall terminate as of the date of default, but this paragraph shall not
affect any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to the
extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision or her designee at the time the Federal Deposit Insurance
Corporation enters into an agreement to provide assistance to or on behalf of
the Institution under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act; or (ii) by the Director of the Office of Thrift
Supervision or her designee at the time the Director or her designee approves a
supervisory merger to resolve problems related to operation of the Institution
or when the Institution is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
ss.1828(k), 12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and
regulations promulgated thereunder.
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Institution's affairs by a notice described
in Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Institution will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of this Agreement upon the
Institution's receipt of a dismissal of charges in the Notice of Termination.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
6
<PAGE>
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware but only to the
extent not preempted by Federal law.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution's main office, in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction;
provided, however, that Executive shall be entitled to seek specific performance
of his right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
15. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Institution (which payments are guaranteed by the
Holding Company pursuant to Section 5 hereof) if Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) as permitted under federal law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
7
<PAGE>
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k), 12 C.F.R. Part
359 and 12 C.F.R. Section 545.121 and any rules or regulations promulgated
thereunder.
17. SUCCESSOR TO THE INSTITUTION.
The Institution shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution, expressly and
unconditionally to assume and agree to perform the Institution's obligations
under this Agreement, in the same manner and to the same extent that the
Institution would be required to perform if no such succession or assignment had
taken place.
8
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Bay State Federal Savings Bank and Bay State Bancorp,
Inc. have caused this Agreement to be executed by their duly authorized
officers, and Executive has signed this Agreement, on the 24th day of November,
1998.
ATTEST: BAY STATE FEDERAL SAVINGS BANK
/s/ Jill W. Lacy By: /s/ John F. Murphy
- --------------------- -------------------------------------
John F. Murphy
President and Chief Executive Officer
[SEAL]
ATTEST: BAY STATE BANCORP, INC.
(Guarantor)
/s/ Jill W. Lacy By: /s/ John F. Murphy
- --------------------- -------------------------------------
John F. Murphy
President and Chief Executive Officer
[SEAL]
WITNESS: EXECUTIVE:
/s/ Nicolle G. Nickerson /s/ Michael Gilles
- --------------------- -------------------------------------
Michael Gilles
9
BAY STATE FEDERAL SAVINGS BANK
TWO YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of February 13, 1998, by and among Bay
State Federal Savings Bank (the "Institution"), a federally chartered savings
bank, with its principal administrative office at 1299 Beacon Street, Brookline,
Massachusetts 02446, Philip McNulty ("Executive"), and Bay State Bancorp, Inc.
(the "Holding Company"), a corporation organized under the laws of the State of
Delaware which is the holding company of the Institution.
WHEREAS, the Institution recognizes the substantial contribution Executive
has made to the Institution and wishes to protect Executive's position therewith
for the period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Institution.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT.
-----------------
The term of the Bay State Federal Savings Bank Two Year Change in Control
Agreement (the "Agreement") shall be deemed to have commenced as of the date
first above written and shall continue for a period of twenty-four (24) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Institution ("Board") may extend the Agreement for an
additional year. The Board will review the Agreement and Executive's performance
annually for purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's meeting.
2. CHANGE IN CONTROL.
------------------
(a) Upon the occurrence of a Change in Control of the Institution or the
Holding Company (as herein defined) followed at any time during the term of this
Agreement by the termination of Executive's employment, other than for Cause, as
defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Upon
the occurrence of a Change in Control, Executive shall have the right to elect
to voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 25 miles from its location
immediately prior to the Change in Control; provided, however, the Executive may
consent in writing to any such demotion, loss, reduction or relocation. The
effect of any written consent of the Executive under this Section 2 (a) shall be
strictly limited to the terms specified in such written consent.
<PAGE>
(b) For purposes of this Agreement, a "Change in Control" of the
Institution or Holding Company shall mean an event of a nature that: (i) would
be required to be reported in response to Item 1 of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Institution or the Holding Company within
the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act and the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date
hereof (provided, that in applying the definition of change in control as set
forth under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 25% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Institution or
the Holding Company, or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Holding Company's stockholders was approved by the same Nominating
Committee serving under an Incumbent Board, shall be, for purposes of this
clause (B), considered as though he were a member of the Incumbent Board, or (C)
a plan of reorganization, merger, consolidation, sale of all or substantially
all the assets of the Institution or the Holding Company or similar transaction
occurs in which the Institution or Holding Company is not the resulting entity;
provided, however, that such an event listed above will be deemed to have
occurred or to have been effectuated upon the receipt of all required regulatory
approvals not including the lapse of any statutory waiting periods.
(c) Executive shall not receive termination benefits pursuant to Section 3
hereof upon Termination for Cause. The term "Termination for Cause" shall mean
termination because of Executive's personal dishonesty, incompetence, willful
misconduct, any breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
Notice of Termination which shall include a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the members of the Board at
a meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause.
During the
2
<PAGE>
period beginning on the date of the Notice of Termination for Cause pursuant to
Section 4 hereof through the Date of Termination, stock options and related
limited rights granted to Executive under any stock option plan shall not be
exercisable nor shall any unvested awards granted to Executive under any stock
benefit plan of the Institution, the Holding Company or any subsidiary or
affiliate thereof vest. At the Date of Termination, such stock options and
related limited rights and such unvested awards shall become null and void and
shall not be exercisable by or delivered to Executive at any time subsequent to
such Date of Termination for Cause.
3. TERMINATION BENEFITS.
--------------------
(a) Upon the occurrence of a Change in Control, followed at any time during
the term of this Agreement by termination of the Executive's employment due to:
(1) Executive's dismissal or (2) Executive's voluntary termination pursuant to
Section 2(a), unless such termination is due to Termination for Cause, the
Institution and the Holding Company shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, a sum equal to two (2) times Executive's Average Annual Compensation for
the five most recent taxable years that Executive has been employed by the
Institution or such lesser number of years in the event that Executive shall
have been employed by the Institution for less than five years. Such "Average
Annual Compensation" shall include base salary, commissions, bonuses, as well as
contributions on behalf of Executive to any pension and profit-sharing plan, and
fringe benefits paid or to be paid to the Executive during such years. At the
election of Executive, which election is to be made prior to a Change in
Control, such payment shall be made in a lump sum. In the event that no election
is made, payment to Executive will be made on a monthly basis in approximately
equal installments during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Institution or the
Holding Company followed at any time during the term of this Agreement by
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Institution shall cause to be continued life, medical
and disability coverage substantially identical to the coverage maintained by
the Institution or Holding Company for Executive prior to his severance, except
to the extent such coverage may be changed in its application to all Institution
or Holding Company employees on a nondiscriminatory basis. Such coverage and
payments shall cease upon the expiration of twenty four (24) full calendar
months from the Date of Termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Internal Revenue Code of 1986, as
amended, or any successor thereto, and in order to avoid such a result
Termination Benefits will be reduced, if necessary, to an amount (the
"Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an
amount equal to three (3) times Executive's "base amount," as determined in
accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by the preceding paragraphs of
this Section 3 shall be determined by Executive.
3
<PAGE>
4. NOTICE OF TERMINATION.
---------------------
(a) Any purported termination by the Institution or by Executive in
connection with a Change in Control shall be communicated by Notice of
Termination to the other party hereto. For purposes of this Agreement, a "Notice
of Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the instance of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute in connection with a Change in
Control, in the event that the Executive is terminated for reasons other than
Termination for Cause, the Institution will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to his annual salary) and continue him as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the earlier of: (1)
the resolution of the dispute in accordance with this Agreement; or (2) the
expiration of the remaining term of this Agreement as determined as of the Date
of Termination.
5. SOURCE OF PAYMENTS.
------------------
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the
Institution. Further, the Holding Company guarantees such payment and provision
of all amounts and benefits due hereunder to Executive and, if such amounts and
benefits due from the Institution are not timely paid or provided by the
Institution, such amounts and benefits shall be paid or provided by the Holding
Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
-----------------------------------------------------
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Institution and Executive, except
that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that
4
<PAGE>
Executive is subject to receiving fewer benefits than those available to him
without reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to continue
in the employ of Institution or shall impose on the Institution any obligation
to employ or retain Executive in its employ for any period.
7. NO ATTACHMENT.
-------------
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Institution and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
-----------------------
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED REGULATORY PROVISIONS.
-------------------------------
(a) The board of directors may terminate Executive's employment at any
time, but any termination by the board of directors, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive compensation
or other benefits for any period after Termination for Cause as defined in
Section 2 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Institution's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. ss.1818(e)(3) or (g)(1)), the Institution's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Institution may in its discretion (i) pay Executive all or part of the
compensation withheld while their contract
5
<PAGE>
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Institution's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
ss.1818(e)(4) or (g)(1)), all obligations of the Institution under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Institution is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, all obligations of the Institution under this
contract shall terminate as of the date of default, but this paragraph shall not
affect any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to the
extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision or her designee at the time the Federal Deposit Insurance
Corporation enters into an agreement to provide assistance to or on behalf of
the Institution under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act; or (ii) by the Director of the Office of Thrift
Supervision or her designee at the time the Director or her designee approves a
supervisory merger to resolve problems related to operation of the Institution
or when the Institution is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
ss.1828(k), 12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and
regulations promulgated thereunder.
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
--------------------------------------------
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Institution's affairs by a notice described
in Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Institution will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of this Agreement upon the
Institution's receipt of a dismissal of charges in the Notice of Termination.
11. SEVERABILITY.
-------------
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
6
<PAGE>
12. HEADINGS FOR REFERENCE ONLY.
---------------------------
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
13. GOVERNING LAW.
--------------
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware but only to the
extent not preempted by Federal law.
14. ARBITRATION.
------------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution's main office, in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction;
provided, however, that Executive shall be entitled to seek specific performance
of his right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
15. PAYMENT OF COSTS AND LEGAL FEES.
-------------------------------
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Institution (which payments are guaranteed by the
Holding Company pursuant to Section 5 hereof) if Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
----------------
(a) The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) as permitted under federal law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
7
<PAGE>
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k), 12 C.F.R. Part
359 and 12 C.F.R. Section 545.121 and any rules or regulations promulgated
thereunder.
17. SUCCESSOR TO THE INSTITUTION.
-----------------------------
The Institution shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution, expressly and
unconditionally to assume and agree to perform the Institution's obligations
under this Agreement, in the same manner and to the same extent that the
Institution would be required to perform if no such succession or assignment had
taken place.
8
<PAGE>
IN WITNESS WHEREOF, Bay State Federal Savings Bank and Bay State Bancorp,
Inc. have caused this Agreement to be executed by their duly authorized
officers, and Executive has signed this Agreement, on the 8th day of September,
1998.
ATTEST: BAY STATE FEDERAL SAVINGS BANK
/s/ Barbara L. Olafsson By: /s/ John F. Murphy
- --------------------------- -------------------------------------
Barbara L. Olafsson John F. Murphy
Corporate Secretary President and Chief Executive Officer
[SEAL]
ATTEST: BAY STATE BANCORP, INC.
(Guarantor)
/s/ Barbara L. Olafsson By: /s/ John F. Murphy
- --------------------------- -------------------------------------
Barbara L. Olafsson John F. Murphy
Corporate Secretary President and Chief Executive Officer
[SEAL]
WITNESS: EXECUTIVE
/s/ Noelle G. Nickerson /s/ Philip R. McNulty
- --------------------------- -------------------------------------
9
[LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY, P.C.]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(nos. 333-57195 and 333-71263) on Form S-8 of Bay State Bancorp, Inc., of our
report dated April 16, 1999 relating to the consolidated balance sheets as of
March 31, 1999 and 1998 and the related consolidated income statements, changes
in stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 1999, which report appears in the March 31, 1999 annual
report on Form 10-KSB of Bay State Bancorp, Inc.
/s/ Shatswell, Macleod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
June 14, 1999
<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 YEAR ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 3,738
<INT-BEARING-DEPOSITS> 216,530
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,350
<INVESTMENTS-CARRYING> 956
<INVESTMENTS-MARKET> 978
<LOANS> 304,372
<ALLOWANCE> 3,027
<TOTAL-ASSETS> 359,404
<DEPOSITS> 216,397
<SHORT-TERM> 79,991
<LIABILITIES-OTHER> 2,718
<LONG-TERM> 0
0
0
<COMMON> 26
<OTHER-SE> 60,273
<TOTAL-LIABILITIES-AND-EQUITY> 359,404
<INTEREST-LOAN> 21,084
<INTEREST-INVEST> 1,503
<INTEREST-OTHER> 839
<INTEREST-TOTAL> 23,426
<INTEREST-DEPOSIT> 8,824
<INTEREST-EXPENSE> 1,934
<INTEREST-INCOME-NET> 10,758
<LOAN-LOSSES> 617
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,665
<INCOME-PRETAX> 3,776
<INCOME-PRE-EXTRAORDINARY> 1,542
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,234
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.95
<YIELD-ACTUAL> 7.74
<LOANS-NON> 1,964
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,513
<CHARGE-OFFS> 103
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,027
<ALLOWANCE-DOMESTIC> 3,027
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
