FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-13691
Bay State Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 04-3398630
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1299 Beacon Street, Brookline, Massachusetts 02446
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (617) 739-9500
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
__x__ Yes _____ No
The number of shares of common stock outstanding of each of the issuer's classes
of common stock, as of November 9, 1999 was 2,266,646
Transitional Small Business Disclosure Format _____ Yes __x__ No
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION............................................................................1
Item 1 - Consolidated Financial Statements.............................................................1
Consolidated Balance Sheets - September 30, 1999 (unaudited) and March 31, 1999 ....................1
Consolidated Income Statements - Three and six months ended September 30, 1999 and 1998
(unaudited).........................................................................................2
Consolidated Statements of Cash Flows - Six months ended September 30, 1999 and 1998
(unaudited).........................................................................................3
Consolidated Statements of Changes in Stockholders' Equity - Six months ended
September 30, 1999 (unaudited)......................................................................4
Notes to Consolidated Financial Statements for the Period Ended September 30, 1999..................5
Item 2 - Management's Discussion and Analysis or Plan of Operation.....................................6
PART II - OTHER INFORMATION..............................................................................21
Item 1 - Legal Proceedings............................................................................21
Item 2 - Changes in Securities and Use of proceeds....................................................21
Item 3 - Defaults Upon Senior Securities..............................................................21
Item 4 - Submission of Matters to a Vote of Security Holders..........................................21
Item 5 - Other Information............................................................................21
Item 6 - Exhibits and Reports on Form 8-K.............................................................21
SIGNATURES............................................................................................22
EXHIBITS..............................................................................................23
Computation of per share earnings - Exhibit 11.....................................................23
Financial Data Schedule - Exhibit 27...............................................................24
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $ 3,587 $ 3,738
Short-term investments 3,096 6,369
Investment in available-for-sale securities (at fair value) 39,206 24,350
Investments in held-to-maturity securities (fair values of $644 as of 644 956
September 30, 1999 and $978 as of March 31, 1999)
Stock in Federal Home Loan Bank of Boston 6,850 3,850
Mortgage loans held for sale -- 321
Loans receivable, net 364,227 304,372
Accrued interest receivable 2,264 1,920
Premises and equipment, net 2,667 2,564
Deferred tax asset, net 3,167 2,728
Investment in bank owned life insurance 7,700 6,054
Other assets 2,657 2,182
--------- ---------
Total assets $ 436,065 $ 359,404
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 223,817 $ 216,397
Federal Home Loan Bank Advances 135,485 76,751
Other borrowed funds 15,578 3,240
Accrued expenses and other liabilities 3,288 2,718
--------- ---------
Total liabilities $ 378,168 $ 299,106
--------- ---------
Stockholders' equity:
Common stock, par value $.01 per share, issued
and outstanding 2,535,232 shares 25 25
Additional paid-in capital 49,277 49,277
Retained earnings 20,442 19,463
Accumulated other comprehensive income (743) 45
Less: Unearned ESOP shares (3,232) (3,232)
Unearned shares, 1998 Stock-Based Incentive Plan (2,173) (2,173)
Treasury stock at cost, 247,186 and 126,762 shares (5,699) (3,107)
--------- ---------
Total stockholders' equity 57,897 60,298
--------- ---------
Total liabilities and stockholders' equity $ 436,065 $ 359,404
========= =========
Equity-to-asset ratio 13.28% 16.78%
Book value per share $ 27.28 $ 26.88
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 1
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Income Statements
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------- ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Unaudited Unaudited
<S> <C> <C> <C> <C>
Interest income:
Loans $6,807 $4,998 $13,067 $ 9,650
Investments 744 544 1,323 1,310
--------- --------- --------- ---------
Total interest income 7,551 5,542 14,390 10,960
--------- --------- --------- ---------
Interest expense:
Deposits 2,168 2,248 4,287 4,490
Borrowed funds 1,797 246 3,033 462
--------- --------- --------- ---------
Total interest expense 3,965 2,494 7,320 4,952
--------- --------- --------- ---------
Net interest income before provision for loan losses 3,586 3,048 7,070 6,008
Provision for loan losses 225 100 450 150
--------- --------- --------- ---------
Net interest income after provision for loan losses 3,361 2,948 6,620 5,858
--------- --------- --------- ---------
Non-interest income:
Service charges on deposit accounts 71 70 143 132
Gain on sale of loans 7 16 6 28
Other income 88 -- 185 --
--------- --------- --------- ---------
Total non-interest income 166 86 334 160
--------- --------- --------- ---------
Income before non-interest expense and income taxes 3,527 3,034 6,954 6,018
--------- --------- --------- ---------
Non-interest expense:
Salaries and employee benefits 1,592 1,142 3,204 2,331
Occupancy and Equipment Expense 275 261 543 497
Federal deposit insurance premiums 32 32 64 63
Advertising 73 55 141 101
Data processing 62 65 131 122
Other expenses 455 451 925 959
--------- --------- --------- ---------
Total non-interest expense 2,489 2,006 5,008 4,073
--------- --------- --------- ---------
Income before income taxes 1,038 1,028 1,946 1,945
Income tax expense 365 422 689 825
--------- --------- --------- ---------
Net income $ 673 $ 606 $ 1,257 $ 1,120
========= ========= ========= =========
Comprehensive net income(loss) $ (139) $ 0 $ 469 $ 515
========= ========= ========= =========
Weighted average common and common equivalent shares outstanding 2,122,658 2,352,696 2,150,171 2,352,696
========= ========= ========= =========
Basic earnings per share $ 0.32 $ 0.26 $ 0.58 $ 0.48
========= ========= ========= =========
Diluted earnings per share $ 0.32 $ 0.26 $ 0.58 $ 0.48
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 2
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended September 30,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Net cash flows from operating activities:
Net income $ 1,257 $ 1,120
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 450 150
Net decrease in mortgage loans held-for-sale 321 586
Gain on sale of loans 6 (28)
Depreciation and amortization 155 138
Amortization of securities, net of accretion (105) 3
Amortization of loan fees and discounts 2 (282)
Increase in accrued interest receivable (344) (320)
Increase (decrease) in prepaid expense and other assets (475) 70
Increase in accrued expenses and other liabilities 570 277
--------- ---------
Net cash provided (used) by operating activities 1,837 1,714
--------- ---------
Net cash flows from investing activities:
Maturities and principal repayments on investments held to maturity 310 2,648
Maturities and principal repayments on investments available for sale 5,883 1,000
Purchase of investments available for sale (21,859) (19,141)
Purchase of Federal Home Loan Bank of Boston Stock (3,000) --
Investment in bank owned life insurance (1,646) --
Net decrease (increase) in loans (60,313) (32,196)
Capital expenditures (258) (146)
--------- ---------
Net cash provided (used) for investing activities (80,883) (47,835)
--------- ---------
Net cash flows from financing activities:
Net deposit activity 7,420 (1,351)
Proceeds from Federal Home Loan Bank advances 156,973 16,500
Repayment of Federal Home Loan Bank advances (98,239) (5,000)
Net increase in other borrowed funds 12,338 160
Dividend on common stock (278) --
Purchase of treasury stock (2,592) --
--------- ---------
Net cash provided by financing activities 75,622 10,309
--------- ---------
Net decrease in cash and cash equivalents: (3,424) (35,812)
Cash and cash equivalents at beginning of period 10,107 49,513
--------- ---------
Cash and cash equivalents at end of period $ 6,683 $ 13,701
========= =========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 7,265 $ 2,465
Income taxes $ 830 $ 78
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 3
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Additional Accumulated Other Unearned
Common Paid-in Retained Comprehensive ESOP Treasury
Stock Capital Earnings Income(Loss) Shares Stock
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ -- $ -- $19,091 $ 383 $ -- $ --
Net Loss -- -- (1,751) -- -- --
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 -- -- -- --
Net Change in unrealized gain on available
for sale securities -- -- -- 283 -- --
------------------------------------------------------------------------
Balance at March 31, 1998 25 49,194 17,340 666 (3,651) --
Net Income -- -- 2,234 -- -- --
Net change in unrealized gain on available
for sale securities, net of tax effect -- -- -- (621) -- --
Comprehensive income -- -- -- -- -- --
Purchase of treasury stock, 126,762 shares -- -- -- -- -- (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 -- -- -- --
Common stock acquired for stock-based
Incentive plans -- -- -- -- -- --
Issuance of stock incentive plan shares -- (12) -- -- -- --
------------------------------------------------------------------------
Balance at March 31, 1999 $ 25 $49,277 $19,463 $ 45 $(3,232) $(3,107)
Net Income -- -- 1,257 -- -- --
Net change in unrealized gain on available
for sale securities, net of tax effect -- -- -- (788) -- --
Comprehensive income -- -- -- -- -- --
Purchase of treasury stock, 120,424 shares -- -- -- -- -- (2,592)
Dividends paid, $0.12 per share -- -- (278) -- -- --
------------------------------------------------------------------------
Balance at September 30, 1999 (Unaudited) $ 25 $49,277 $20,442 $ (743) $(3,232) $(5,699)
========================================================================
<CAPTION>
Unearned
Stock-based
Incentive Total
Plan Stockholders'
Shares Equity
-----------------------
<S> <C> <C>
Balance at March 31, 1997 $ -- $19,474
Net Loss -- 1,751
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
Net Change in unrealized gain on available
for sale securities -- 283
-----------------------
Balance at March 31, 1998 -- 63,574
Net Income -- --
Net change in unrealized gain on available
for sale securities, net of tax effect -- --
Comprehensive income -- 1,613
Purchase of treasury stock, 126,762 shares -- (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
Common stock acquired for stock-based
Incentive plans (2,269) (2,269)
Issuance of stock incentive plan shares 96 84
-----------------------
Balance at March 31, 1999 $(2,173) $60,298
Net Income -- --
Net change in unrealized gain on available
for sale securities, net of tax effect -- --
Comprehensive income -- 469
Purchase of treasury stock, 120,424 shares -- (2,592)
Dividends paid, $0.12 per share -- (278)
-----------------------
Balance at September 30, 1999 (Unaudited) $(2,173) $57,897
=======================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
(1) Organization
Bay State Bancorp, Inc. ("Company" or "Bay State") was incorporated under
the laws of Delaware in October 1997 for the purpose of serving as the holding
company of Bay State Federal Savings Bank ("Bank") as part of the Bank's
conversion from a mutual form of organization to a stock form of organization
(the "Conversion"). The Company is a savings and loan holding company and is
subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal
Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC"). The Conversion, completed on March 29, 1998, resulted in the
Company issuing an aggregate 2,535,232 shares of its common stock, par value
$.01 per share. Prior to the Conversion, Bay State had not engaged in any
material operations.
(2) Accounting Principles
The accompanying unaudited consolidated financial statements of Bay State
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
of Regulation S-B. Accordingly, the financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of a normal recurring nature) considered necessary for a
fair presentation have been included. Operating results for the three and six
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the current fiscal year.
For further information, refer to the consolidated financial statements
included in the Company's annual report and Form 10-KSB for the period ended
March 31, 1999 and Form 10-QSB for the period ended June 30, 1999, all of which
were filed with the Securities and Exchange Commission.
(3) Stock Repurchase Program
On September 27, 1999 the Company announced it had received approval from
the OTS to repurchase up to 5% of the Company's outstanding common stock, or
114,402 shares of its common stock. As of November 9, 1999 the Company has
repurchased 27,400 shares of the 114,402 shares approved. This is the third
repurchase program approved by the Board since becoming a public company in
March of 1998.
Page 5
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filing with the SEC.
The Company does not undertake-and specifically disclaims any obligation-to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
General
Bay State, a savings and loan holding company, was incorporated under the
laws of Delaware in October 1997 for the purpose of serving as the holding
company of the Bank as part of the Bank's conversion from a mutual to stock form
of organization. The Bank is a federally chartered savings bank and is subject
to regulation by the Office of Thrift Supervision.
The Bank's business activities are concentrated in Eastern Massachusetts
through five full service retail banking offices located in Norfolk and Suffolk
Counties, Massachusetts. All retail banking activity is conducted through the
banking offices. Through these offices, the Bank offers a full range of retail
and commercial banking products and services and conducts other business as
allowable for federally chartered banks. The Bank primarily makes residential
first mortgages, commercial and multi-family real estate loans and to a lesser
extent home equity lines of credit, consumer loans and residential construction
loans. Lending operations, particularly loan originations, are conducted from
the retail offices and at the point of sale. Neither the Company nor the Bank
nor any of their subsidiaries conduct business on a national or international
basis.
The operating results of the Company depend primarily on its net interest
and dividend income, which is the difference between (i) interest and dividend
income on earning assets, primarily loans and investment securities and (ii)
interest expense on interest bearing liabilities, which consist of deposits and
borrowings. Results of operations are also affected by the provision for loan
losses, the level of non-interest income, including deposit and loan fees, gains
on sales of assets, operating expenses and income taxes.
Page 6
<PAGE>
Comparison of Financial Condition at September 30, 1999 and March 31, 1999
Total assets at September 30, 1999 were $436.1 million, compared to $359.4
million at March 31, 1999, an increase of $76.7 million or 21.3%. Loans
receivable increased $59.9 million, or 19.7%, primarily in multi-unit
residential and commercial real estate loans, and to a lesser extent 1-4 family
residential mortgages, which were originated and purchased. The increase in
assets was funded mainly from an increase of $58.7 million, or 76.5% in Federal
Home Loan Bank Advances, a $12.3 million, or 380.8% increase in other borrowed
funds consisting mainly of federal funds purchased and repurchase agreements,
and a $7.4 million, or 3.4% increase in deposits.
Total stockholder's equity was $57.9 million, or 13.3% of total assets at
September 30, 1999, a decrease of $2.4 million, or 4.0%, from the $60.3 million,
or 16.8% of total assets at March 31, 1999. The change in equity was the result
of the completion of a 5% stock repurchase program during the period and the
reduction in market value of investment securities classified as
available-for-sale, offset by an increase in retained earnings due to net income
for the period. The Company's book value per share at September 30, 1999 was
$27.28, compared to $26.88 at March 31, 1999.
Investments
The company had short-term investments of $3.1 million at September 30,
1999, which consisted mainly of overnight deposits in the Federal Home Loan Bank
of Boston, this represented a decrease of $3.3 million, or 51.4%, from the $6.4
million at March 31, 1999. Investment securities increased $14.5 million, or
57.5%, primarily due to increases in short-term agencies and various
collateralized mortgage obligations. . The Company's investment portfolio at
September 30, 1999 reflects a $743,000 net unrealized loss on available-for-sale
securities, compared to an unrealized gain of $45,000 at March 31, 1999.
The following tables show the investment securities portfolios at the
periods presented. The amortized cost and fair value of investments
available-for-sale were:
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------------- -------------------------
Amortized Fair Amortized Fair
cost value cost value
------- ------- ------- -------
(Dollars in thousands)
Investment securities
<S> <C> <C> <C> <C>
Marketable equity securities $ 9,676 $ 9,570 $ 9,525 $ 9,737
Mortgage-backed securities $19,340 $18,894 5,371 5,391
Trust preferred equity securities 4,968 4,965 2,506 2,521
Corporate bonds and notes 1,245 1,209 1,247 1,234
Preferred stocks 4,003 3,590 1,500 1,460
Government agency securities 1,000 978 4,000 4,007
------- ------- ------- -------
Total $40,232 $39,206 $24,149 $24,350
======= ======= ======= =======
</TABLE>
Page 7
<PAGE>
The amortized cost and fair value of investments held to maturity were:
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
--------------------- ---------------------
Amortized Fair Amortized Fair
cost Value cost Value
--------- ----- --------- -----
(In thousands)
<S> <C> <C> <C> <C>
Investment securities
Mortgage-backed and mortgage-related securities $644 $644 $956 $978
---- ---- ---- ----
Total mortgage-backed and mortgage-related
securities $644 $644 $956 $978
==== ==== ==== ====
</TABLE>
Loans
During the first six months of the fiscal year, loans receivable increased
by $59.9 million, or 19.7%, as detailed below:
<TABLE>
<CAPTION>
September 30, % of total March 31, % of total
1999 Loans 1999 Loans
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential 1 - 4 family $190,401 51.29% $168,786 54.62%
Multi-family 73,572 19.82 57,744 18.69
Commercial real estate 86,184 23.22 67,806 21.94
Construction and development 9,526 2.57 5,494 1.78
-------- -------- -------- --------
Total mortgage loans 359,683 96.90 299,830 97.03
-------- -------- -------- --------
Commercial loans 225 0.06 500 0.16
-------- -------- -------- --------
Consumer loans:
Equity lines 7,393 1.99 5,156 1.67
Other consumer loans 3,902 1.05 3,535 1.14
-------- -------- -------- --------
Total loans 371,203 100.00% 309,021 100.00%
======== ========
Deduct:
Allowance for loan loss 3,490 3,027
Undisbursed proceeds of construction
and development loans in process 3,287 1,424
Deferred loan fees 199 198
-------- --------
Net loans receivable $364,227 $304,372
======== ========
</TABLE>
At September 30, 1999 loans serviced for others was $22.5 million, compared
to $22.6 million at March 31, 1999.
Asset Quality
At September 30, 1999 non-performing assets totaled $2.0 million, an
increase of $15,000, or 0.8%, from $2.0 million at March 31, 1999.
Non-performing assets consist of all loans that are delinquent 90 days or more.
The Bank had no real estate owned at September 30, 1999 or March 31, 1999. At
September 30, 1999, non-performing assets represented 0.45% of total assets and
0.54% of loans receivable, compared to 0.55% and 0.64%,
Page 8
<PAGE>
respectively, at March 31, 1999. The increase in non-performing assets was
primarily in other loans which consists mainly of consumer loans.
The composition of non-performing assets, which consist solely of
non-performing loans for the periods presented was:
September 30, March 31,
1999 1998 1999
------ ------ ------
(Dollars in thousands)
Non-accrual loans:
One-to-four-family $ 861 $ 678 $ 862
Multi-family 279 281 280
Commercial real estate 774 740 745
Construction and development -- -- --
Equity lines -- -- 65
Other 65 16 12
------ ------ ------
$1,979 $1,715 $1,964
====== ====== ======
Non-performing assets as a percentage of:
Net loans receivable 0.54% 0.67% 0.64%
Total assets 0.45 0.56 0.55
The following represents the activity in the allowance for loan losses for
the six months ended September 30, 1999:
(In thousands)
Balance at March 31, 1999 $ 3,027
Provision for loan losses 450
Losses charged to allowance (1)
Recoveries 14
-------
Balance at September 30, 1999 $ 3,490
=======
The Bank continually reviews its delinquency position, underwriting and
appraisal procedures, charge-off experience and current real estate market
conditions with respect to its entire loan portfolio. While management uses the
best information available in establishing the allowance, future adjustments may
be necessary if economic conditions differ from the assumptions used in making
the current evaluation.
Page 9
<PAGE>
Deposits and Borrowed Funds
Deposits increased slightly during the six month period ended September 30,
1999 as detailed below:
<TABLE>
<CAPTION>
September 30, % of total March 31, % of total
1999 deposits 1999 deposits
------------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Regular savings accounts $ 25,200 11.26% $ 27,460 12.70
NOW accounts 22,551 10.08 24,155 11.16
Money market accounts 59,206 26.45 54,305 25.09
Non-interest bearing deposits 1,569 0.70 867 0.40
-------- ------ -------- ------
108,526 48.49 106,787 49.35
Term deposits 115,291 51.51 109,610 50.65
-------- ------ -------- ------
Total deposits $223,817 100.00% $216,397 100.00%
======== ====== ======== ======
</TABLE>
During the period, FHLB advances increased $58.7 million, or 76.5%, as the
Bank primarily utilized FHLB advances to fund asset growth. Other borrowed funds
increased $12.3 million, or 380.8% consisting of federal funds purchased and
repurchase agreements.
Comparison of Operating Results for the Three Months Ended September 30, 1999
and 1998
General
Consolidated net income for the three months ended September 30, 1999
totaled $673,000, or $0.32 per share, compared to $606,000, or $0.26 per share
for the same period last year. This represents an increase of $67,000 or 11.1%
in net income and a $0.06 or 23.1% increase in earnings per share.
Interest Income
Interest income for the three months ended September 30, 1999 increased
$2.0 million, or 36.3%, to $7.6 million, compared to $5.5 million for the same
period last year. The increase in interest income was primarily due to an
increase in the average balance of interest-earning assets primarily funded by
the increase in Federal Home Loan Bank Advances and other borrowings. The
average balance of interest-earning assets increased from $280.8 million for the
quarter ended September 30, 1998 to $399.4 million for the quarter ended
September 30, 1999, an increase of $118.6 million, or 42.2%. The increase in the
average balance of interest-earning assets was primarily a net result of an
increase in the average balance of investment securities of $3.4 million, or
14.1%, an increase in loans, net, and mortgage-loans held for sale of $106.0
million or 43.6% and an increase in mortgage-backed and mortgage related
securities of $19.1 million, or 1,074.1%. The increase in interest income was
offset by the yield on interest-earning assets, which decreased 33 basis points
to 7.56%.
Interest Expense
Interest expense for the three months ended September 30, 1999 increased
$1.5 million, or 59.0%, to $4.0 million compared to $2.5 million for the same
period last year. The increase in interest expense was the result of a $130.2
million, or 58.3%, increase in the average balance of interest-bearing
liabilities which increased from $223.3
Page 10
<PAGE>
million for the three months ended September 30, 1998 to $353.5 million for the
three months ended September 30, 1999. A 2 basis point increase in the cost of
funds to 4.49% also contributed to the increase. The increase in the average
balance of interest-bearing liabilities was primarily a result of an increase in
the average balance of total borrowings of $116.0 million, or 599.8%.
Net interest income
The table below shows the average balances, the interest earned and paid on
interest-earning assets and interest-bearing liabilities and the resulting net
interest spread and margin for the periods presented.
<TABLE>
<CAPTION>
For the three months ended September 30, 1999 1998
-------------------------------------- --------------------------------------
Interest Interest
Average income/ Yield/ Average income/ Yield/
balance expense rate balance expense rate
-------- -------- ------ -------- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Short-term investments $ 2,123 $ 25 4.80% $ 12,010 $ 177 5.90%
Investment securities 27,195 407 5.98 23,835 336 5.64
Mortgage-backed and mortgage related
securities 20,887 312 5.97 1,779 31 6.97
Loans and mortgage loans held-for-sale 349,173 6,807 7.80 243,192 4,998 8.22
-------- -------- -------- ------
Total interest-earning assets 399,378 7,551 7.56 280,816 5,542 7.89
-------- ------
Non interest-earning assets 27,306 11,305
-------- --------
Total $426,684 $292,121
======== ========
Liabilities and Equity
Interest-bearing liabilities:
NOW accounts $ 23,695 66 1.12 $ 21,316 94 1.76
Regular savings accounts 25,438 125 1.96 27,153 166 2.45
Money market accounts 59,991 578 3.85 46,846 471 4.02
Certificate accounts 109,102 1,399 5.13 108,652 1,517 5.58
-------- -------- -------- ------
Total interest-bearing deposits 218,226 2,168 3.97 203,967 2,248 4.41
Other Borrowings 7,505 107 5.73 -- -- --
FHLB advances 127,811 1,690 5.23 19,337 246 4.98
-------- -------- -------- ------
Total interest-bearing liabilities 353,542 3,965 4.49 223,304 2,494 4.47
-------- ------
Demand deposits 1,526 610
Other liabilities 13,586 4,147
Equity 58,030 64,060
-------- --------
Total $426,684 $292,121
======== ========
Net interest income $ 3,586 $3,048
======== ======
Interest rate spread 3.08% 3.43%
==== ====
Net interest margin 3.59% 4.18%
==== ====
</TABLE>
Page 11
<PAGE>
The Following table presents the effects of changing rates and volumes on
the interest income and interest expense of the Company. The rate column shows
the effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net column represents the sum
of the prior columns.
Quarters ended September 30,
1999 vs. 1998
------------------------------------------
Change due to Increase (Decrease)
------------------------------------------
Volume Rate Net
------- ------- -------
(Dollars in thousands)
Interest income:
Loans $ 2,051 $ (242) $ $1,809
Investments 211 (11) 200
------- ------- -------
Total 2,262 (253) 2,009
------- ------- -------
Interest expense:
Deposits 134 (214) (80)
Borrowings 1,434 117 1,551
------- ------- -------
Total 1,568 (97) 1,471
------- ------- -------
Net interest income $ 694 $ (156) $ 538
======= ======= =======
Provision for Loan Losses
Provisions for loan losses are charged to operations to bring the allowance
for loan losses to a level considered by management to be adequate to cover
estimated losses on loans receivable which are deemed probable and estimable
based on information currently known to management. The provision for loan
losses totaled $225,000 for the quarter ended September 30, 1999, compared to
$100,000 for the same period last year. The increase in the provision reflects
management's analysis of the risks associated with the Banks' primary lending
objective to increase the overall loan portfolio. The increased level of
provision is reflective of the increase in the overall size and mix of the loan
portfolio during the period.
At September 30, 1999 and March 31, 1999, the allowance for loan losses was
$3.5 million and $3.0 million, respectively, which represents 176.4% of
non-performing loans and 0.95% of total loans at September 30, 1999 compared to
154.1% of non-performing loans and 0.98% of total loans at March 31, 1999.
While management believes the Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that the Bank's level of allowance for loan losses will
be sufficient to cover future losses incurred by the Bank, or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ from the economic and other conditions analyzed by
management to determine the current level of the allowance for loan losses.
Non-interest income
Total non-interest income increased $80,000, or 93.0%, to $166,000. Due to
the purchase of Bank Owned Life Insurance, the implementation of the new debit
card program and the new alternative investment services the bank offers, other
income increased $88,000, compared to the same period last year.
Page 12
<PAGE>
Non-interest expense
Total Non-interest expense was $2.5 million for the three months ended
September 30, 1999, compared to $2.0 million for the same period last year, an
increase of $483,000, or 24.1%. Total salaries and benefits increased $450,000,
or 39.4%, the result of an increase of $193,000 in compensation expense
associated with the funding of the company's stock-based benefit plans and a
general increase in salaries and benefits due a increase in the number of
employees over the same period last fiscal year. Advertising expense increased
$18,000, or 32.7% primarily as a result of the development and introduction of
new products and retail services, specifically the Bank's new debit card program
and internet banking services.
Income Taxes
Income taxes for the three months ended September 30, 1999 were $365,000 on
pretax income of $1.0 million, for an effective rate of 35.2%, compared to
$422,000 on pretax income of $1.0 million, for an effective rate of 41.0% for
the same period last year. The lower effective tax rate for the current period
is due various tax planning strategies implemented by the Company, specifically
the purchase of non-taxable bank owned life insurance and the establishment of a
Massachusetts securities corporation at the Bank level.
Comparison of Operating Results for the Six Months Ended September 30, 1999 and
1998
General
Consolidated net income for the six months ended September 30, 1999 totaled
$1.3 million, or $0.58 per share, compared to $1.1 million, or $0.48 per share,
for the same period last year. This represents an increase of $137,000, or 12.2%
in net income and a $0.10, or 20.8%, increase in earnings per share.
Interest Income
Interest income for the six months ended September 30, 1999 increased $3.4
million, or 31.3%, to $14.4 million, compared to $11.0 million for the same
period last year. The increase in interest income was primarily due to an
increase in the average balance of interest-earning assets, specifically loans
receivable. The average balance of interest-earning assets increased from $279.1
million for the six months ended September 30, 1998 to $379.2 million for the
six months ended September 30, 1999, an increase of $100.1 million, or 35.8%.
The increase in the average balance of interest-earning assets was primarily the
net result of an increase in the average balance of investment securities and
mortgage backed securities of $22.4 million, or 107.4%, an increase in loans,
net, of $99.6 million, or 42.6%, offset by a decrease in short-term investments
of $21.9 million, or 89.8%. The increase in interest income was offset by a 26
basis point decrease in the yield on interest-earning assets to 7.59%.
Interest Expense
Interest expense for the six months ended September 30, 1999 increased $2.4
million, or 47.8%, to $7.3 million, compared to $5.0 million for the same period
last year.
The increase in interest expense was primarily due to a $111.0 million, or
50.0%, increase in the average balance of interest-bearing liabilities which
increased from $222.1 million for the six months ended September 30, 1998 to
$333.1 million for the six months ended September 30, 1999, offset by a decrease
of 7 basis points in the
Page 13
<PAGE>
cost of interest-bearing liabilities to 4.39%.
The increase in the average balance of interest-bearing liabilities was
primarily a result of an increase in the average balance of FHLB advances of
$94.0 million, or 510.5%, and increase in the average balance of other
borrowings of $4.8 million, or 100.0% and an increase in deposits of $12.2
million, or 6.0%.
Net interest income
The table below shows the average balances, the interest earned and paid on
interest-earning assets and interest-bearing liabilities and the resulting net
interest spread and margin for the periods presented.
<TABLE>
<CAPTION>
For the six months ended September 30,
1999 1998
----------------------------------- ----------------------------------
Interest Interest
Average income/ Yield/ Average Income/ Yield/
balance expense rate balance expense rate
-------- -------- ------ --------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Short-term investments $2,489 $59 4.77% $24,411 $704 5.77%
Investment securities 23,908 685 5.73 18,921 539 5.70
Mortgage-backed and mortgage related
securities 19,354 579 5.98 1,936 67 6.92
Loans, net and mortgage loan held-for-sale 333,414 13,067 7.84 233,843 9,650 8.25
-------- -------- --------- --------
Total interest-earning assets 379,165 14,390 7.59 279,111 10,960 7.85
-------- --------
Non interest-earning assets 24,469 11,799
-------- ---------
Total $403,634 $290,910
======== ========
Liabilities and Equity
Interest-bearing liabilities:
NOW accounts $23,533 131 1.11% $21,546 188 1.75
Regular savings accounts 25,950 261 2.01 27,890 340 2.44
Money market accounts 58,109 1,111 3.82 42,709 921 4.31
Certificate accounts 108,250 2,784 5.14 111,534 3,041 5.45
-------- -------- --------- --------
Total interest-bearing deposits 215,842 4,287 3.97 203,679 4,490 4.41
Other Borrowings 4,812 136 5.65 -- -- --
FHLB advances 112,442 2,897 5.10 18,419 462 4.93
-------- -------- --------- --------
Total interest-bearing liabilities 333,096 7,320 4.39 222,098 4,952 4.46
-------- --------
Demand deposits 1,471 554
Other liabilities 10,488 4,303
Equity 58,579 63,955
-------- --------
Total $403,634 $290,910
======== ========
Net interest income $7,070 $6,008
======== ========
Interest rate spread 3.20% 3.39%
======== ====
Net interest margin 3.73% 4.16%
======== ====
</TABLE>
Page 14
<PAGE>
The Following table presents the effects of changing rates and volumes on
the interest income and interest expense of the Company. The rate column shows
the effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net column represents the sum
of the prior columns.
Six months ended September 30,
1999 vs. 1998
Change due to Increase (Decrease)
Volume Rate Net
------- ------- -------
(Dollars in thousands)
Interest income:
Loans $ 3,875 $ (458) $ 3,417
Investments 122 (109) 13
------- ------- -------
Total 3,997 (567) 3,430
------- ------- -------
Interest expense:
Deposits 186 (389) (203)
Borrowings 2,422 149 2,571
------- ------- -------
Total 2,608 (240) 2,368
------- ------- -------
Net interest income $ 1,389 $ (327) $ 1,062
======= ======= =======
Provision for Loan Losses
The provision for loan losses totaled $450,000 for the six months ended
September 30, 1999, compared to $150,000 for the same period last year. The
level of reserve provisions for the six months ended September 30, 1999 was made
after an assessment of the composition of and 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 September 30, 1999 and March 31, 1999, the allowance for loan losses was $3.5
million and $3.0 million, respectively, which represents 176.4% of
non-performing loans and 0.95% of total loans at September 30, 1999 compared to
154.1% of non-performing loans and 0.98% of total loans at March 31, 1999.
While management believes the Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that the Bank's level of allowance for loan losses will
be sufficient to cover future losses incurred by the Bank, or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ from the economic and other conditions analyzed by
management to determine the current level of the allowance for loan losses.
Non-interest income
Total non-interest income totaled $334,000 for the six months ended
September 30, 1999, compared to $160,000 for the same period last year. Service
charges on deposit accounts increased $11,000 due to the increased level of fees
collected on transaction accounts. Gain on sale of loans decreased $22,000, or
78.6%, due to the decreased level of loans sold over the same period last year.
Other income increased $185,000, primarily the result of income recognized on
bank owned life insurance policies purchased by the Bank and income recognized
from the new alternative investment services and insurance products being
offered by the Bank.
Page 14
<PAGE>
Non-interest expense
Total non-interest expense was $5.0 million for the six months ended
September 30, 1999, compared to $4.1 million for the same period last year, an
increase of $935,000, or 23.0%. Total salaries and benefits increased $873,000,
or 37.5%, the result of an increase of $368,000 in compensation expense
associated with the company's stock-based benefit plans and a general increase
in salaries and benefits due to the increase in the number of employees compared
to the same period last year. Occupancy and equipment expense totaled $543,000,
compared to $497,000 for the same period last year, an increase of 9.3%.
Advertising expense increased $40,000, or 39.6%, primarily as a result of the
development and introduction of new deposit products and retail services. Data
processing expense increased $9,000, or 7.4%, as a result of the increased
number of deposit accounts serviced and the implementation of new retail deposit
products. Other expenses decreased $34,000, or 3.6%, primarily as a result of
last year's one-time expenses associated with the development of certain
products and programs as part of the strategic planning for the future.
Income Taxes
For the six months ended September 30, 1999 income taxes of $689,000 were
provided on net income before tax of $1.9 million for an effective rate of
35.4%, compared to $825,000 on income before taxes of $1.9 million for an
effective rate of 42.4%, for the same period last year. The lower effective tax
rate for the current period is due to various tax planning strategies
implemented by the Company, specifically the purchase of non-taxable bank owned
life insurance and the establishment of a Massachusetts securities corporation
at the Bank level.
Capital Adequacy
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can result in certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial condition. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weighting and other factors.
At September 30, 1999 the Company's capital ratio was 13.28% of total
assets. The Bank at September 30, 1999 had total capital of 9.75% and risk based
capital of 17.28% (unaudited), as compared to 10.56% and 18.89% (unaudited) at
June 30, 1999.
The FDIC sets minimum leverage ratios for each insured institution
depending upon its CAMELS rating. Banks with the highest ratings are required to
carry a 3.0% leverage ratio, with less highly rated institutions required to
have minimum ratios at least 1.0% to 2.0% greater. Additionally, the FDIC has
risk-based capital regulations. Under these requirements, banks must have a
minimum risk-based capital rate of 8.00%.
At September 30, 1999 the Company and the Bank met all the capital adequacy
requirements to which they are subject. As of September 30, 1999, the most
recent notification from the Office of Thrift Supervision categorized the Bank
as "well capitalized" under the regulatory framework for prompt corrective
action.
Page 16
<PAGE>
Asset/Liability Management
The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given the Bank's business
strategy, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates.
The Bank monitors its interest rate risk as such risk relates to its
operating strategies. The Bank's Board of Directors has established an
Asset/Liability Committee, responsible for reviewing its asset/liability
policies and interest rate risk position, which meets on a monthly basis and
reports trends and interest rate risk position to the Board of Directors on a
quarterly basis. The extent of the movement of interest rates is an uncertainty
that could have a negative impact on the earnings of the Bank.
In recent years, the Bank has primarily utilized the following strategies
to manage interest rate risk: (i) emphasizing the origination and purchase of
adjustable-rate loans; (ii) investing primarily in short-term U.S. Government
securities or mortgage-backed and mortgage-related securities with shorter
estimated maturities; (iii) utilizing FHLB advances to better structure the
maturities of its interest rate sensitive liabilities; and (iv) to a
substantially lesser extent, selling in the secondary market longer-term
fixed-rate mortgage loans originated while generally retaining the servicing
rights on such loans.
As part of its interest rate risk analysis, the Bank uses an interest rate
sensitivity model which generates estimates of the change in the Bank's net
portfolio value ("NPV") over a range of interest rate scenarios and which is
prepared by the OTS on a quarterly basis. NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The NPV
ratio, under any interest rate scenario, is defined as the NPV in that scenario
divided by the market value of assets in the same scenario.
The OTS produces such analysis using its own model, based upon data
submitted on the Bank's quarterly Thrift Financial Reports. In preparing such
model, the OTS estimates loan prepayment rates, reinvestment rates and deposit
decay rates.
Page 17
<PAGE>
The following table sets forth the Bank's NPV as of June 30, 1999 (the
latest NPV analysis prepared by the OTS), as calculated by the OTS.
<TABLE>
<CAPTION>
Change in
Interest Rates in
Basis Points Net Portfolio Value NPV as % of Portfolio
(Rate Shock) Value of Assets
NPV
Amount $ Change % Change Ratio Change(1)
---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 $19,854 $ (15,496) $ (44) 5.48% $ (377)
200 25,490 (9,860) (28) 6.90 (235)
100 30,813 (4,537) (13) 8.19 (106)
Static 35,350 -- -- 9.25 --
(100) 38,908 3,558 10 10.05 80
(200) 42,338 6,989 20 10.80 155
(300) 46,039 10,689 30 11.60 234
</TABLE>
(1) Expressed in basis points.
Liquidity
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's currently required liquidity
ratio is 4%. At September 30, 1999 the Bank's liquidity ratio was 7.82%.
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
available-for-sale securities. The levels of these assets are dependent on the
Bank's operating, financing, lending and investing activities during any given
period. At September 30, 1999, cash and cash equivalents and available-for-sale
securities totaled $45.9 million, or 10.53% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 1999, the Bank had $135.5
million in advances outstanding from the FHLB, and at September 30, 1999, had an
additional overall borrowing capacity from the FHLB of $59.4 million. Depending
on market conditions, the pricing of deposit products and FHLB advances, the
Bank may continue to rely on FHLB borrowings to fund asset growth.
Page 18
<PAGE>
At September 30, 1999, the Company had commitments to originate loans and
unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $22.8 million. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate accounts, which are scheduled to mature in less than one year from
September 30, 1999, totaled $72.0 million. The Company expects that
substantially all of the maturing certificate accounts will be retained by the
Company at maturity.
Year 2000 Compliance
As the Year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In addressing the Year 2000, the Company has broken
down the process into four steps: assessment, correction/replacement, testing
and implementation. In addition, the Company has developed a business resumption
plan to address any Year 2000 problems that may occur over the year end.
The Company has completed the assessment phase. During this phase the
Company identified all potential programs and applications that were date
sensitive. The Company also assessed the various utility companies that it uses
as to their readiness for Year 2000. The assessment phase also included an
analysis of all hardware and software applications as well as vendor
identification. The various applications identified were then prioritized in
consideration of their overall importance of use to the Company. Correspondence
was sent to all vendors inquiring into their applications Year 2000 compliance.
For a number of applications, the correction, testing and vendor certification
and implementation has been completed. For all priority applications, the
Company is continuing to ensure compliance by continuing to follow up with
vendors for Year 2000 certification. At this point in time, the Company has
completed 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 has completed
the final stages of modifying and upgrading its ancillary computer applications
to ensure Year 2000 compliance. The Bank has completed the testing and
implementation phases and the system is Year 2000 compliant. The Company's
accounting software and applications are Year 2000 compliant.
The Bank has also sent correspondence to its customers addressing the Year
2000 issue as it specifically applies to banks, including a variety of commonly
asked questions and how they are being addressed by the Bank.
Additionally, a review of the loan portfolio was completed to assess any
customers that were susceptible to any Year 2000 issues. However, since the
Bank's loans are primarily secured by real estate, there were no major concerns
to any impact on the loan portfolio.
The Company has created a contingency plan to deal with any unforeseen
events that could occur which would have a negative impact on the day-to-day
operations of the Company. The contingency plan identifies the critical systems
and identifies various processing alternatives depending on the severity of the
circumstances. These
Page 19
<PAGE>
procedures vary from using back-up sites and systems to reverting to manual
processes. The business resumption plan for retail banking services has been
completed and tested.
The Company has expensed approximately $65,000 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 during the remainder of the 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.
Page 20
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Neither the Company nor any of its subsidiaries is party to any pending
legal proceedings which are material other than routine litigation incidental to
their business activities.
Item 2 - Changes in Securities and Use of Proceeds
Not applicable.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Bay State Bancorp, Inc. *
3.2 Amended and restated bylaws of Bay State Bancorp, Inc. **
4.0 Stock Certificate of Bay State Bancorp, Inc. *
11.0 Computation of per share earnings
27.0 Financial data schedule
* Incorporated herein by reference from the exhibits to Form SB-2
registration as amended, Registration No. 333-40115
** Incorporated herein by reference to the Form 10-QSB as filed with the
Securities and Exchange Commission on December 31, 1998.
(b) Reports on Form 8-K
(i) None
Page 21
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Bay State Bancorp, Inc.
November 10, 1999 \s\ John F. Murphy
- -------------------------- ------------------
Date John F. Murphy
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
November 10, 1999 \s\ Michael O. Gilles
- -------------------------- ---------------------
Date Michael O. Gilles
Senior Vice President and
Chief Financial Officer
(Principal Accounting and Financial Officer)
Page 22
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
Three months ended
September 30,
-----------------------------
1999 1998
---------- ----------
Net Income $ 673,000 $ 606,000
========== ==========
Average shares outstanding 2,122,658 2,352,696
========== ==========
Basic earnings per share $ 0.32 $ 0.26
========== ==========
Net Income $ 673,000 $ 606,000
========== ==========
Average shares outstanding 2,122,658 2,352,696
Net effect of dilutive stock options 2,656 --
---------- ----------
Total shares outstanding 2,125,314 2,352,696
========== ==========
Diluted earnings per share $ 0.32 $ 0.26
========== ==========
Six months ended
September 30,
-----------------------------
1999 1998
---------- ----------
Net Income $1,257,000 $1,120,000
========== ==========
Average shares outstanding 2,150,171 2,352,696
========== ==========
Basic earnings per share $ 0.58 $ 0.48
========== ==========
Net Income $1,257,000 $1,120,000
========== ==========
Average shares outstanding 2,150,171 2,352,696
Net effect of dilutive stock options 11,145 --
---------- ----------
Total shares outstanding 2,161,316 2,352,696
========== ==========
Diluted earnings per share $ 0.58 $ 0.48
========== ==========
Page 23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BAYSTATE BANCORP, INC. AT AND FOR THE SIX MONTHS ENDED
September 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,587
<INT-BEARING-DEPOSITS> 3,096
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
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<LONG-TERM> 0
0
0
<COMMON> 25
<OTHER-SE> 57,872
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<INTEREST-TOTAL> 14,390
<INTEREST-DEPOSIT> 4,287
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<ALLOWANCE-CLOSE> 3,490
<ALLOWANCE-DOMESTIC> 3,490
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
