UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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 registrant 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)
Registrant's telephone number, including area code: (617) 739-9500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 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 8, 2000, was 1,856,866.
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION...............................................1
Item 1 - Consolidated Financial Statements.................................1
Consolidated Balance Sheets - September 30, 2000 and
March 31, 2000 (unaudited)..............................................1
Consolidated Income Statements - For the three and six months
ended September 30, 2000 and 1999 (unaudited)...........................2
Consolidated Statements of Cash Flows - For the six months
ended September 30, 2000 and 1999 (unaudited)...........................3
Consolidated Statements of Changes in Stockholders' Equity -
For the six months ended September 30, 2000 and 1999 and the
years ended March 31, 2000 and 1999 (unaudited).........................4
Notes to Unaudited Consolidated Financial Statements for
the Period Ended September 30, 2000.....................................5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................6
Item 3 - Quantitative and Qualitative Disclosures about Market Risk.......17
PART II - OTHER INFORMATION.................................................19
Item 1 - Legal Proceedings................................................19
Item 2 - Changes in Securities and Use of Proceeds........................19
Item 3 - Defaults Upon Senior Securities..................................19
Item 4 - Submission of Matters to a Vote of Security Holders..............19
Item 5 - Other Information................................................19
Item 6 - Exhibits and Reports on Form 8-K.................................19
SIGNATURES................................................................20
EXHIBITS..................................................................21
Computation of per share earnings - Exhibit 11.........................21
Financial Data Schedule - Exhibit 27...................................22
<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,
2000 2000
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $ 8,933 $ 5,392
Short-term investments 6,310 600
--------- ---------
Cash and Cash Equivalents 15,243 5,992
Investment in available-for-sale securities (at fair value) 31,089 31,812
Investments in held-to-maturity securities (fair values of $438 and $535) 434 527
Stock in Federal Home Loan Bank of Boston 8,321 8,051
Loans receivable, net 414,858 393,093
Other real estate owned 68 62
Accrued interest receivable 3,041 2,470
Premises and equipment, net 3,288 3,078
Deferred tax asset, net 3,463 3,811
Investment in bank owned life insurance 8,097 7,888
Other assets 3,473 3,353
--------- ---------
Total assets $ 491,375 $ 460,137
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 268,561 $ 247,344
Federal Home Loan Bank Advances 161,418 147,527
Other borrowed funds 2,291 8,137
Accrued expenses and other liabilities 5,113 4,499
--------- ---------
Total liabilities 437,383 407,507
--------- ---------
Stockholders' equity:
Common stock, par value $.01 per share,
2,535,232 shares issued 25 25
Additional paid-in capital 49,192 49,207
Retained earnings 22,874 21,600
Accumulated other comprehensive loss (364) (1,788)
Unearned ESOP shares (2,826) (2,826)
Unearned 1998 Stock-Based Incentive Plan Shares (1,532) (1,681)
Treasury stock, 638,852 and 578,952 shares (13,377) (11,907)
--------- ---------
Total stockholders' equity 53,992 52,630
--------- ---------
Total liabilities and stockholders' equity $ 491,375 $ 460,137
========= =========
Equity-to-asset ratio 10.99% 11.44%
Book value per share $ 30.84 $ 29.06
</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,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 8,510 $ 6,807 $ 16,575 $ 13,067
Investments 715 744 1,411 1,323
----------- ----------- ----------- -----------
Total interest income 9,225 7,551 17,986 14,390
----------- ----------- ----------- -----------
Interest expense:
Deposits 2,887 2,168 5,542 4,287
Borrowed funds 2,494 1,797 4,771 3,033
----------- ----------- ----------- -----------
Total interest expense 5,381 3,965 10,313 7,320
----------- ----------- ----------- -----------
Net interest income before provision for loan losses 3,844 3,586 7,673 7,070
Provision for loan losses 150 225 315 450
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 3,694 3,361 7,358 6,620
----------- ----------- ----------- -----------
Non-interest income:
Service charges on deposit accounts 105 71 205 143
Unrealized gain on trading securities 68 138 12 138
Gain on sale of investments 40 -- 40 --
Gain on sale of loans 4 7 7 6
Net increase in cash surrender value of bank owned life insurance policies 104 75 208 146
Other income 90 13 131 39
----------- ----------- ----------- -----------
Total non-interest income 411 304 603 472
----------- ----------- ----------- -----------
Income before non-interest expense and income taxes 4,105 3,665 7,961 7,092
----------- ----------- ----------- -----------
Non-interest expense:
Salaries and employee benefits 1,757 1,730 3,458 3,342
Occupancy and equipment expense 379 275 728 543
Professional fees 77 167 145 402
Advertising 119 73 253 141
Data processing 92 62 163 131
Other expenses 315 320 618 587
----------- ----------- ----------- -----------
Total non-interest expense 2,739 2,627 5,365 5,146
----------- ----------- ----------- -----------
Income before income taxes 1,366 1,038 2,596 1,946
Income tax expense 510 365 933 689
----------- ----------- ----------- -----------
Net income $ 856 $ 673 $ 1,663 $ 1,257
=========== =========== =========== ===========
Comprehensive net income(loss) $ 1,949 $ (139) $ 3,087 $ 469
=========== =========== =========== ===========
Weighted average common shares outstanding - Basic 1,787,953 2,122,658 1,799,301 2,150,171
=========== =========== =========== ===========
Weighted average common and common equivalent shares
outstanding - Diluted 1,834,490 2,125,314 1,821,452 2,161,316
=========== =========== =========== ===========
Basic earnings per share $ 0.48 $ 0.32 $ 0.92 $ 0.58
=========== =========== =========== ===========
Diluted earnings per share $ 0.47 $ 0.32 $ 0.91 $ 0.58
=========== =========== =========== ===========
</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,
------------------------------
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Net cash flows from operating activities:
Net income $ 1,663 $ 1,257
Adjustments to reconcile net income to net cash provided
by operating activities:
Earned stock based incentive plan 134 --
Provision for loan losses 315 450
Net decrease mortgage loans held-for-sale -- 321
(Gain) loss on sale of loans (7) 6
Gain on sale of other real estate owned (7) --
Depreciation and amortization 208 155
Gain on sale of investments (40) --
Amortization of securities, net of accretion (35) (105)
Unrealized gain on trading securities (12) --
Decrease in deferred income tax assets, net 95 --
Amortization of loan fees and discounts 9 2
(Increase)in accrued interest receivable (571) (344)
Increase in cash surrender value B.O.L.I (209) --
(Increase) in prepaid expense and other assets (104) (475)
Increase in other liabilities 614 785
--------- ---------
Net cash provided by operating activities 2,053 2,052
--------- ---------
Net cash flows from investing activities:
Maturities and principal repayments on investments held to maturity 93 310
Maturities and principal repayments on investments available for sale 4,451 5,883
Proceeds from sales of available for sale securities 1,205 --
Purchases of investments available for sale (3,185) (21,859)
Purchases of Federal Home Loan Bank of Boston Stock (270) (3,000)
Investment in bank owned life insurance -- (1,646)
Proceeds from sales of other real estate owned 49 --
Payment received on other real estate owned 20 --
Net increase in loans (22,150) (60,313)
Capital expenditures (418) (258)
--------- ---------
Net cash used for investing activities (20,205) (80,883)
--------- ---------
Net cash flows from financing activities:
Net deposit activity 21,217 8,746
Proceeds of borrowings 143,000 156,973
Repayment of borrowings (129,109) (97,572)
Net increase (decrease) in other borrowed funds (5,846) 10,130
Dividends on common stock (389) (278)
Purchases of treasury stock (1,470) (2,592)
--------- ---------
Net cash provided by financing activities 27,403 75,407
--------- ---------
Net increase (decrease) in cash and cash equivalents 9,251 (3,424)
Cash and cash equivalents at beginning of period 5,992 10,107
--------- ---------
Cash and cash equivalents at end of period $ 15,243 $ 6,683
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 10,222 $ 7,050
Income taxes $ 1,128 $ 830
Loans transferred to other real estate owned $ 68 $ --
</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, except per share data)
(Unaudited)
For the six months ended September 30, 2000 and 1999, and the Fiscal years ended
March 30, 2000 and 1999.
<TABLE>
<CAPTION>
Accumulated Unearned
Additional Other Stock-based
Common Paid-in Retained Comprehensive Unearned Incentive
Stock Capital Earnings Income (Loss) ESOP Shares Plan Shares
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 -- -- -- -- -- --
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)
Issuance of stock incentive plan shares -- (12) -- -- -- 96
-------------------------------------------------------------------------------
Balance at March 31, 1999 25 49,277 19,463 45 (3,232) (2,173)
Net Income -- -- 2,755 -- -- --
Net change in unrealized gain on available
for sale securities, net of tax effect -- -- -- (1,833) -- --
Comprehensive income -- -- -- -- -- --
Purchase of treasury stock, 452,190 shares -- -- -- -- -- --
Dividends paid, $0.28 per share -- -- (618) -- -- --
Reduction in unearned ESOP shares charged
to expense -- -- -- -- 406 --
Reduction in fair value of unearned ESOP
shares charged to expense -- (10) -- -- -- --
Issuance of stock incentive plan shares -- (60) -- -- -- 492
-------------------------------------------------------------------------------
Balance at March 31, 2000 25 49,207 21,600 (1,788) (2,826) (1,681)
Net Income -- -- 1,663 -- -- --
Net change in unrealized loss on available
for sale securities, net of tax effect -- -- -- 1,424 -- --
Comprehensive income -- -- -- -- -- --
Purchase of treasury stock, 59,900 shares -- -- -- -- -- --
Dividends paid, $0.20 per share -- -- (389) -- -- --
Issuance of stock incentive plan shares -- (15) -- -- -- 149
-------------------------------------------------------------------------------
Balance at September 30, 2000 (Unaudited) $ 25 $ 49,192 $ 22,874 $ (364) $ (2,826) $ (1,532)
===============================================================================
-------------------------------------------------------------------------------
Balance at March 31, 1999 $ 25 $ 49,277 $ 19,463 $ 45 $ (3,232) $ (2,173)
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 -- -- -- -- -- --
Dividends paid, $0.12 per share -- -- (278) -- -- --
-------------------------------------------------------------------------------
Balance at September 30, 1999 (Unaudited) $ 25 $ 49,277 $ 20,442 $ (743) $ (3,232) $ (2,173)
===============================================================================
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
-------------------------
<S> <C> <C>
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) (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)
Issuance of stock incentive plan shares -- 84
-------------------------
Balance at March 31, 1999 (3,107) 60,298
Net Income -- --
Net change in unrealized gain on available
for sale securities, net of tax effect -- --
Comprehensive income -- 922
Purchase of treasury stock, 452,190 shares (8,800) (8,800)
Dividends paid, $0.28 per share -- (618)
Reduction in unearned ESOP shares charged
to expense -- 406
Reduction in fair value of unearned ESOP
shares charged to expense -- (10)
Issuance of stock incentive plan shares -- 432
-------------------------
Balance at March 31, 2000 (11,907) 52,630
Net Income -- --
Net change in unrealized loss on available
for sale securities, net of tax effect -- --
Comprehensive income -- 3,087
Purchase of treasury stock, 59,900 shares (1,470) (1,470)
Dividends paid, $0.20 per share -- (389)
Issuance of stock incentive plan shares -- 134
-------------------------
Balance at September 30, 2000 (Unaudited) $(13,377) $ 53,992
=========================
-------------------------
Balance at March 31, 1999 $ (3,107) $ 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) (2,592)
Dividends paid, $0.12 per share -- (278)
-------------------------
Balance at September 30, 1999 (Unaudited) $ (5,699) $ 57,897
=========================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED September 30, 2000
(1) Organization
Bay State Bancorp, Inc. (the "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 Bank (the "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 (the "OTS"), the
Federal Deposit Insurance Corporation (the "FDIC") and the Securities and
Exchange Commission (the "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
Bancorp, Inc. have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and of Regulation S-X. 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 six months ended September 30, 2000 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-K for the period ended March
31, 2000 and Form 10-Q for the period ended June 30, 2000 filed with the SEC.
(3) Stock Repurchase Program
On October 31, 2000 the Company announced the completion of its fifth 5%,
or 97,814 shares, stock repurchase program and the approval of a sixth 5%, or
92,293 shares, repurchase program. Upon completion of this sixth repurchase the
Company will have 1,765,543 shares outstanding and will have repurchased
approximately 30% of its outstanding shares.
(4) Impact on New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133, as amended by SFAS No.
138, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. In management's opinion, SFAS No. 133 when
adopted will not have a material effect on the Company's consolidated financial
statements.
Page 5
<PAGE>
Item 2 - Management's Discussion and analysis of Financial Condition and Results
of Operations (Unaudited)
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 on Form 10-K
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. The Bank is a federally
chartered savings bank and is subject to regulation by the OTS.
The Bank's business activities are concentrated in Eastern Massachusetts
through six full service retail banking offices located in Norfolk and Suffolk
Counties, Massachusetts. 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 are primarily
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 Bank depend primarily on its net 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.
Comparison of Financial Condition at September 30, 2000 and March 31, 2000
Total assets at September 30, 2000 were $491.4 million, compared to $460.1
million at March 31, 2000, an increase of 6.8%. Net loans receivable increased
$21.8 million, or 5.5%, primarily in 1-4 family residential mortgages,
multi-family and to a lesser extent commercial real estate loans and home equity
lines of credit. Short-term investments, which consist mainly of overnight
investments, increased $5.7 million. The increase in assets was funded primarily
from a $21.2 million, or 8.6%, increase in deposits, and a $13.9 million, or
9.4% increase in Federal Home Loan Bank advances. The increase in deposits was a
result of increased marketing efforts of the Bank's new deposit products and
continued customer migration resulting from the recent merger activity in the
Bank's primary market area.
Page 6
<PAGE>
Total stockholders' equity was $54.0 million, or 10.99% of total assets, at
September 30, 2000, an increase of $1.4 million, or 2.6%, from $52.6 million, or
11.44% of total assets, at March 31, 2000. The change in equity was the net
result of net income for the period, an increase in the market value of
investment securities classified as available for sale, offset by the purchase
of additional treasury stock. The Company's book value per share at September
30, 2000 was $30.84, compared to $29.06 at March 31, 2000.
Investments
Short-term investments were $6.3 million at September 30, 2000, consisting
of federal funds sold to the Federal Home Loan Bank of Boston ("FHLB"), and to a
lesser extent funds invested in The Bank Investment Fund which represented an
increase of $5.7 million, or 951.7%, from the $600,000 at March 31, 2000.
Investment securities available-for-sale decreased $723,000, or 2.3%, primarily
in mortgage-backed securities. The total increase in investments was $5.0
million.
The Company's investment portfolio at September 30, 2000 reflects a
$364,000 net unrealized loss on available-for-sale securities, net of tax,
compared to a net unrealized loss of $1.8 million, net of tax, at March 31,
2000.
The tables below show the investment securities portfolios at the periods
presented. The amortized cost and estimated fair value of investments
available-for-sale were:
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
------------------ --------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Marketable equity securities $ 8,865 $ 9,337 $ 9,840 $ 9,049
Mortgage-backed securities 15,120 14,772 16,937 16,476
Trust preferred equity securities 4,499 4,167 2,501 1,916
Corporate bonds and notes 496 464 495 462
Preferred stocks 1,500 1,373 1,500 1,342
Government agency securities 1,000 976 2,607 2,567
------- ------- ------- -------
Total $31,480 $31,089 $33,880 $31,812
======= ======= ======= =======
</TABLE>
The amortized cost and estimated fair values of investments
held-to-maturity were:
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
------------------ --------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Mortgage-backed and mortgage-related securities $434 $438 $527 $535
---- ---- ---- ----
Total Mortgage-backed and mortgage related
Securities $434 $438 $527 $535
==== ==== ==== ====
</TABLE>
Page 7
<PAGE>
Loans
During the six month period ended September 30, 2000, net loans increased
by $21.8 million, or 5.5%, as detailed below:
<TABLE>
<CAPTION>
September 30, % of total March 31, % of total
2000 Loans 2000 Loans
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential 1 - 4 family $ 207,741 49.12% $ 201,256 50.32%
Multi-family 92,189 21.80 78,610 19.65
Commercial real estate 96,123 22.73 95,869 23.97
Construction and development/land 9,837 2.33 10,009 2.50
----------- ------ ----------- ------
Total mortgage loans 405,890 95.98 385,744 96.44
Commercial loans 1,322 0.31 225 0.06
Consumer loans:
Equity lines 11,002 2.60 9,500 2.37
Other consumer loans 4,703 1.11 4,520 1.13
----------- ------ ----------- ------
Total loans 422,917 100.00% 399,989 100.00%
Deduct:
Allowance for loan loss 4,230 3,915
Undisbursed proceeds of construction
and development loans in process 3,663 2,825
Deferred loan fees 166 156
----------- -----------
Net loans receivable $ 414,858 $ 393,093
=========== ===========
</TABLE>
At September 30, 2000 loans serviced for others was $22.0 million, compared
to $20.8 million at March 31, 2000.
Asset Quality
At September 30, 2000 non-performing assets totaled $1.5 million, an
increase of $200,000, or 18.5%, from $1.3 million at March 31, 2000.
Non-performing assets consist of all loans that are delinquent 90 days or more,
and any real estate owned. The increase in non-performing assets was the net
result of one loan being placed on non-accrual status. The Bank had $68,000 in
real estate owned at September 30, 2000, compared to $62,000 at March 31, 2000,
a decrease of $6,000, or 9.7%. At September 30, 2000, non-performing assets
represented 0.31% of total assets and 0.35% of loans receivable net, compared to
0.28% and 0.33%, respectively, at March 31, 2000.
Page 8
<PAGE>
The composition of non-performing assets for the periods presented was:
<TABLE>
<CAPTION>
September 30, March 31,
2000 1999 2000
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans:
Mortgage Loans:
One-to-four-family $ 568 $ 861 $ 731
Multi-family -- 279 --
Commercial real estate 818 774 443
Construction and development -- -- --
------ ------ ------
Total mortgage loans 1,386 1,914 1,174
------ ------ ------
Consumer Loans:
Equity lines 20 -- --
Other consumer loans 50 65 50
------ ------ ------
Total consumer loans 70 65 50
------ ------ ------
Total non-accrual loans 1,456 1,979 1,224
Real estate owned, net 68 -- 62
------ ------ ------
Total non-performing assets $1,524 $1,979 $1,286
------ ------ ------
Non-performing assets as a percentage of:
Loans receivable, net 0.35% 0.54% 0.33%
Total assets 0.31 0.45 0.28
</TABLE>
The following represents the activity in the allowance for loan
losses for the six months ended September 30, 2000:
(Dollars in thousands)
Balance at March 31, 2000 $3,915
Provision for loan losses 315
Losses charged to allowance (2)
Recoveries 2
------
Balance at September 30, 2000 $4,230
======
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 $21.2 million, or 8.6%, during the six month period
ending September 30, 2000, as detailed below:
<TABLE>
<CAPTION>
September 30, % of total March 31, % of total
2000 deposits 2000 deposits
-------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Regular savings accounts $ 28,698 10.69% $ 26,876 10.87%
NOW accounts 27,733 10.33 22,392 9.05
Money market accounts 67,697 25.21 71,117 28.75
Non-interest bearing deposits 8,163 3.04 6,301 2.55
-------- ------ -------- ------
132,291 49.27 126,686 51.22
Term deposits 136,270 50.73 120,658 48.78
-------- ------ -------- ------
Total deposits $268,561 100.00% $247,344 100.00%
======== ====== ======== ======
</TABLE>
During the period, FHLB advances increased $13.9 million, or 9.4%. Other
borrowed funds, consisting of a Fannie Mae Repurchase Agreement and Federal
Funds purchased, decreased $5.8 million, due to the maturity of the repurchase
agreement.
Comparison of Operating Results for the Three Months ended September 30, 2000
and 1999
General
Net income for the three months ended September 30, 2000 totaled $856,000,
or $0.48 per basic share, compared to $673,000, or $0.32 per basic share, for
the same period last year. This represents an increase of $183,000, or 27.2%, in
net income and a $0.16 or 50.0% increase in earnings per basic share. The
increase was primarily due to higher net interest income due to an increase in
the average balance of interest earning assets, primarily loans, a decrease in
the provision for loan losses, and an increase in non-interest income. These
increases were offset in part by higher income taxes and slightly higher
non-interest expense.
Interest Income
Interest income for the three months ended September 30, 2000 increased
$1.7 million, or 22.2%, to $9.2 million, compared to $7.6 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, which increased from
$399.4 million for the quarter ended September 30, 1999 to $450.4 million for
the quarter ended September 30, 2000, an increase of $51.0 million, or 12.8%.
The increase in the average balance of interest-earning assets was primarily a
result of an increase in the average balance of net loans of $58.2 million, or
16.7%, an increase in the average balance of interest-earning deposits and
federal funds sold of $1.1 million, or 50.7%, to $3.2 million from $2.1 million
for the same period last year. The average balance of Investment securities and
Mortgage-backed and mortgage related securities totaling $39.8 decreased $8.3
million, or 17.2%, from $48.1 million for the same period last year. Also the
growth in interest income was due to an increase in the yield on
interest-earning assets of 63 basis points, to 8.19%.
Interest Expense
Interest expense for the three months ended September 30, 2000 increased
$1.4 million, or 35.7%, to $5.4 million compared to $4.0 million for the same
period last year. The increase in interest expense was the result of a $56.6
million, or 16.0%, increase in the average balance of interest-bearing
liabilities which increased from $353.5 million for the three months ended
September 30, 1999 to $410.2 million for the three months ended September 30,
2000. The increase in the average balance of interest-bearing liabilities was
primarily a result of an increase of $36.5 million, or 16.7%, in the average
balance of deposits, and an increase in the average balance of FHLB advances and
other borrowings of $20.1 million, or 14.9%.
Page 10
<PAGE>
The increase in interest expense was also due to an increase in the cost of
funds of 70 basis points to 5.19%, due to an increase in market rates and
increases in the average balance of term deposit accounts and FHLB advances,
which generally bear higher interest rates than core deposits, such as savings
accounts and money market accounts.
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, 2000 1999
-------------------------------------------------------------------------
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 $ 2,431 $ 42 6.91% $ 2,123 $ 25 4.80%
Interest-earning deposits 769 12 6.24 -- -- --
Taxable investment securities 21,260 363 6.83 27,195 407 5.98
Mortgage backed & related securities 18,570 297 6.40 20,887 312 5.97
Loans (net of unearned income) 407,342 8,511 8.36 349,173 6,807 7.80
-------- -------- -------- --------
Total interest-earning assets 450,372 9,225 8.19 399,378 7,551 7.56
-------- --------
Non interest-earning assets 36,392 27,306
-------- --------
Total $486,764 $426,684
-------- --------
Liabilities and Equity
Interest-bearing liabilities:
NOW accounts $ 24,183 $ 54 0.88% $ 23,695 $ 66 1.12%
Regular savings accounts 26,642 134 2.01 25,438 125 1.96
Money market accounts 67,912 739 4.35 59,991 578 3.85
Certificate accounts 135,987 1,960 5.77 109,102 1,399 5.13
-------- -------- -------- --------
Total interest-bearing deposits 254,724 2,887 4.48 218,226 2,168 3.97
FHLB advances 153,318 2,459 6.34 127,811 1,690 5.23
Other Borrowings 2,146 35 6.45 7,505 107 5.73
-------- -------- -------- --------
Total interest-bearing liabilities 410,188 5,381 5.19 353,542 3,965 4.49
Demand deposits 7,549 3,967
Other liabilities 15,070 11,145
Equity 53,957 58,030
-------- --------
Total $486,764 $426,684
======== ========
Net interest income $ 3,844 $ 3,586
======== ========
Interest rate spread 3.00% 3.08%
==== ====
Net interest margin 3.41% 3.59%
==== ====
</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.
<TABLE>
<CAPTION>
Quarters ended September 30,
2000 vs. 1999
-------------
Change due to Increase (Decrease)
---------------------------------
Volume Rate Net
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans $ 1,191 $ 513 $ 1,704
Interest earning deposits 12 -- 12
Federal Funds Sold 4 13 17
Investments (166) 107 (59)
------- ------- -------
Total 1,041 633 1,674
------- ------- -------
Interest expense:
Deposits 462 257 719
Borrowings 283 414 697
------- ------- -------
Total 745 671 1,416
------- ------- -------
Net interest income $ 296 $ (38) $ 258
------- ------- -------
</TABLE>
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 $150,000 for the quarter ended September 30, 2000, compared to
$225,000 for the same period last year. The decrease in the loan loss provision
for the period is a direct result of the slower growth in the loan portfolio
from the previous year. The provision reflects management's analysis of the
risks associated with the Banks' primary lending objective to increase the
overall loan portfolio. The level of provision is reflective of the overall size
and mix of the loan portfolio during the period.
At September 30, 2000 and March 31, 2000, the allowance for loan losses was
$4.2 million and $3.9 million, respectively, which represents 290.5% of
non-performing loans and 1.01% of total loans at September 30, 2000, compared to
319.9% of non-performing loans and 0.99% of total loans at March 31, 2000.
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 $107,000, or 35.2%, to $411,000,
primarily due to increased fees on loans and deposit accounts because of the
increased level of accounts, income received on alternative investment services
the bank offers and tax-advantaged income received on Bank Owned Life Insurance.
In addition the Company took advantage of the improvement in the market values
to restructure certain investments, resulting in a $40,000 gain on the sale of
investments during the three month period. Such increases were offset by
unrealized gains on trading securities totaling $68,000, compared to $138,000
for the same period last year, a decrease of $70,000, or 50.7%. These gains
represent an increase in the market value of the assets supporting certain
benefit plans, which also results in a corresponding increase in salaries and
benefits expense.
Page 12
<PAGE>
Non-interest expense
Total non-interest expense was $2.7 million for the quarter ended September
30, 2000, compared to $2.6 million for the same period last year, an increase of
4.3%. Total salaries and benefits increased $27,000, or 1.6% primarily as a
result of a general increase in salaries and benefits and due to the increased
number of employees compared to the same quarter last year and the costs
associated with the Company's employee benefit plans. Occupancy and equipment
expense totaled $379,000 compared to $275,000 for the same period last year, an
increase of 37.8%, primarily from the increased level of depreciation on
leasehold improvements associated with the addition of the new Walpole branch,
the relocation of the Dedham branch and additional leased space for the
administrative and support service areas of the Bank. Advertising expense
totaled $119,000 compared to $73,000 for the same period last year, an increase
of 63.0%, primarily as a result of the promotion and introduction of new deposit
products and retail services. The total of Professional fees, data processing
and other expenses had a net decrease of $65,000, or 11.8%, primarily a result
of a reduction in professional service expenses associated with the development
of new products and services introduced during last fiscal year.
Income Taxes
Income taxes for the three months ended September 30, 2000 were $510,000 on
pretax income of $1.4 million, for an effective rate of 37.3%, compared to
$365,000 on pretax income of $1.0 million, for an effective rate of 35.2% for
the same period last year.
Comparison of Operating Results for the Six Months Ended September 30, 2000 and
1999
General
Consolidated net income for the six months ended September 30, 2000 totaled
$1.7 million, or $0.92 per basic share, compared to $1.3 million, or $0.58 per
basic share, for the same period last year. This represents an increase of
$406,000, or 32.3% in net income and a $0.34, or 58.6%, increase in basic
earnings per share.
Interest Income
Interest income for the six months ended September 30, 2000 increased $3.6
million, or 25.0%, to $18.0 million, compared to $14.4 million for the same
period last year. The increase in interest income was primarily due to an
increase in the average balance of interest-earning assets, specifically loans
receivable. The average balance of interest-earning assets increased from $379.2
million for the six months ended September 30, 1999 to $444.2 million for the
six months ended September 30, 2000, an increase of $65.0 million, or 17.2%. The
increase in the average balance of interest-earning assets was primarily the net
result of an increase in the average balance of loans receivable, net, of $67.6
million, or 20.3%, offset by a decrease in the average balance of short-term
investments and taxable investment securities of $3.0 million, or 11.5%. The
increase in interest income was also due to an increase in the yield on
interest-earning assets of 51 basis points, to 8.10%.
Interest Expense
Interest expense for the six months ended September 30, 2000 increased $3.0
million, or 40.9%, to $10.3 million, compared to $7.3 million for the same
period last year.
The increase in interest expense was primarily due to a $70.5 million, or
21.2%, increase in the average balance of interest-bearing liabilities which
increased from $333.1 million for the six months ended September 30, 1999 to
$403.6 million for the six months ended September 30, 2000. 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 $37.9 million, or 33.7%, and
an increase in the average balance of deposits of $33.3 million, or 15.4%. The
increase was also due to an increase in the cost of funds of 67 basis points to
5.06%, due to an increase in market rates and increases in the average balance
of term deposit accounts and FHLB advances, which generally bear higher interest
rates than core deposits, such as savings accounts and money market accounts.
Page 13
<PAGE>
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, 2000 1999
---- ----
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 $ 2,061 $ 68 6.61% $ 2,489 $ 59 4.78%
Taxable investment securities 21,312 732 6.87 23,908 685 5.73
Interest-earning deposits 357 12 6.72 -- -- --
Mortgage-backed & related securities 19,473 598 6.14 19,354 579 5.98
Loans, net of unearned income 400,997 16,576 8.27 333,414 13,067 7.84
-------- -------- -------- --------
Total interest-earning assets 444,200 17,986 8.10 379,165 14,390 7.59
-------- --------
Non interest-earning assets 31,688 24,469
-------- --------
Total $475,888 $403,634
======== ========
Liabilities and Equity
Interest-bearing liabilities:
NOW accounts $ 23,414 117 1.00% $ 23,533 131 1.11%
Regular savings accounts 26,434 269 2.03 25,950 261 2.01
Money market accounts 68,573 1,480 4.32 58,109 1,111 3.82
Certificate accounts 130,724 3,676 5.62 108,250 2,784 5.14
-------- -------- -------- --------
Total interest-bearing deposits 249,145 5,542 4.45 215,842 4,287 3.97
FHLB advances 150,354 4,650 6.12 112,442 2,897 5.10
Other Borrowings 4,051 121 5.92 4,812 136 5.65
-------- -------- -------- --------
Total interest-bearing liabilities 403,550 10,313 5.06 333,096 7,320 4.39
Demand deposits 7,071 1,471
Other liabilities 11,641 10,488
Equity 53,626 58,579
-------- --------
Total $475,888 $403,634
======== ========
Net interest income $ 7,673 $ 7,070
======== ========
Interest rate spread 3.04% 3.20%
==== ====
Net interest margin 3.45% 3.73%
==== ====
</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.
<TABLE>
<CAPTION>
Six Months ended September 30,
2000 vs. 1999
Change due to Increase (Decrease)
---------------------------------
Volume Rate Net
------ ---- ---
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans $ 2,763 $ 746 $ 3,509
Interest-earning deposits 12 -- 12
Federal Funds Sold (7) 16 9
Investment & mortgage backed
securities (53) 119 66
------- ------- -------
Total 2,715 881 3,596
------- ------- -------
Interest expense:
Deposits 834 421 1,255
Borrowings 1,077 661 1,738
------- ------- -------
Total 1,911 1,082 2,993
------- ------- -------
Net interest income $ 804 $ (201) $ 603
======= ======= =======
</TABLE>
Provision for Loan Losses
The provision for loan losses totaled $315,000 for the six months ended
September 30, 2000, compared to $450,000 for the same period last year. The
level of reserve provisions for the six months ended September 30, 2000 was made
as 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.
Non-interest income
Total non-interest income increased $131,000, or 27.8%, to $603,000,
primarily due to increased fees on loans originated and deposit accounts because
of a larger number of accounts, income received on alternative investment
services the bank offers and tax-advantaged income received on Bank Owned Life
Insurance. In addition the Company took advantage of the improvement in the
market values to restructure certain investments, resulting in a $40,000 gain on
the sale of investments during the six month period. Such increases were offset
by unrealized gain on trading securities totaling $12,000, compared to $138,000
for the same period last year, a decrease of $126,000, or 91.3%. These gains
represent an increase in the market value of the assets supporting certain
benefit plans, which also results in a corresponding increase in salaries and
benefits.
Non-interest expense
Total non-interest expense was $5.4 million for the six months ended
September 30, 2000, compared to $5.1 million for the same period last year, an
increase of 4.3%. Total salaries and benefits increased $116,000, or 3.5%
primarily as a result of a general increase in salaries and benefits and due to
the increased number of employees compared to the same period last year in part
due to the opening of an additional branch location, and the costs associated
with the Company's employee benefit plans. Occupancy and equipment expense
totaled $728,000 compared to $543,000 for the same period last year, an increase
of 34.1%, primarily from the increased level of depreciation on leasehold
improvements associated with the addition of the new Walpole branch, the
relocation of the Dedham branch and additional leased space for the
administrative and support service areas of the Bank.
Page 15
<PAGE>
Advertising expense totaled $253,000 compared to $141,000 for the same period
last year, an increase of 79.4%, primarily as a result of the promotion and
introduction of new deposit products and retail services. The total of
professional fees, data processing, and other expenses had a net decrease of
$194,000, or 17.3%, primarily a result of a reduction in professional service
expenses associated with the development of new products and services introduced
during last fiscal year.
Income Taxes
Income taxes for the six months ended September 30, 2000 were $933,000 on
pretax income of $2.6 million, for an effective rate of 35.9%, compared to
$689,000 on pretax income of $1.9 million, for an effective rate of 35.4% for
the same period last year.
Capital Adequacy
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weighting and other factors.
At September 30, 2000, the Company's capital ratio was 10.99% of total
assets. The Bank at September 30, 2000 had total capital of 8.90% and risk based
capital of 13.54% (unaudited), as compared to 9.15% and 15.84% (unaudited) at
March 31, 2000.
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, 2000 the Company and
the Bank met all the capital adequacy requirements to which they are subject.
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, 2000 the Bank's liquidity ratio was
5.68%. 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 September 30, 2000,
cash and due from banks, short-term investments and securities, excluding FHLB
stock, totaled $46.8 million, or 9.5% of total assets.
Page 16
<PAGE>
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 2000, the Bank had $161.4
million in advances outstanding from the FHLB, and at September 30, 2000, had an
additional overall borrowing capacity from the FHLB of $43.0 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.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Management is responsible for monitoring and limiting the Bank's exposure
to interest rate risk within established guidelines while maximizing net
interest income. The Bank will continue to monitor its' interest rate risk
sensitivity with the primary objective to prudently structure the balance sheet
so that movements of interest rates on assets and liabilities are highly
correlated and produce a reasonable net interest margin even in periods of
volatile interest rates. Further discussion on market risk is in the Company's
Form 10-K for the year ended March 31, 2000.
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 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.
Page 17
<PAGE>
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 September 30,
2000, the Company'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 17.0%. 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 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. Conversely, during a period of falling interest rates, an
institution with a negative gap 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.
<TABLE>
<CAPTION>
More More More More
than than than than
1 Year 2 Years 3 Years 4 Years More
1 Year to to to to than Total
or Less 2 Years 3 Years 4 Years 5 Years 5 Years Amount
------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments ......... $ 6,310 $ -- $ -- $ -- $ -- $ -- $ 6,310
Investment in B.O.L.I .......... 8,097 -- -- -- -- -- 8,097
Securities ..................... 15,360 -- -- 1,000 -- 299 16,659
Mortgage-backed
Securities .................. -- -- -- -- -- 15,255 15,255
Stock in FHLB-Boston ........... 8,321 -- -- -- -- -- 8,321
Loans (1) ...................... 114,072 36,111 71,967 81,585 43,899 69,999 417,633
--------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets $ 152,160 $ 36,111 $ 71,967 $ 82,585 $ 43,899 $ 85,553 $ 472,275
--------- --------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Money market accounts .......... $ 54,158 $ 10,155 $ 3,384 $ -- $ -- $ -- $ 67,697
Regular savings accounts ....... 4,305 4,305 4,305 4,305 4,305 7,173 28,698
NOW accounts ................... 1,387 1,387 1,387 1,387 1,387 20,798 27,733
Certificate accounts ........... 107,100 21,410 3,440 880 3,439 1 136,270
Other borrowed funds ........... 2,291 -- -- -- -- -- 2,291
FHLB advances .................. 66,529 31,098 8,791 -- -- 55,000 161,418
--------- --------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities .............. $ 235,770 $ 68,355 $ 21,307 $ 6,572 $ 9,131 $ 82,972 $ 424,107
========= ========= ========= ========= ========= ========= =========
Interest-earning assets less
interest-bearing liabilities ... $ (83,610) $ (32,244) $ 50,660 $ 76,013 $ 34,768 $ 2,581 $ 48,168
========= ========= ========= ========= ========= ========= =========
Cumulative interest-rate
sensitivity gap ................ $ (83,610) $(115,854) $ (65,194) $ 10,819 $ 45,587 $ 48,168
========= ========= ========= ========= ========= =========
Cumulative interest-rate gap as
a percentage of total assets ... (17.02)% (23.58)% (13.27)% 2.20% 9.28% 9.80%
Cumulative interest-rate gap as
a percentage of total interest-
earning assets ................. (17.70)% (24.53)% (13.80)% 2.29% 9.65% 10.20%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities .................... 64.54% 61.91% 79.97% 103.26% 113.36% 111.36%
</TABLE>
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<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Neither the Company nor any of its subsidiaries is party to any pending
legal proceedings which are material other than routine litigation incidental to
their business activities.
Item 2 - Changes in Securities and Use of Proceeds
Not applicable.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
On July 27, 2000 the Company held its Annual Meeting of Shareholders. At
that meeting the following items were brought before the shareholders for a vote
and the results were as indicated.
1. Election of Directors
For % Withheld %
--- --- -------- ---
Denise M. Renaghan 1,752,302 98.2 31,788 1.8
Richard F. McBride 1,761,528 98.7 22,562 1.4
2. The ratification of the appointment of Shatswell, MacLeod & Company, P.C. as
independent auditors for Bay State Bancorp, Inc. for the fiscal year ending
March 31, 2001.
For % Against % Abstained %
--- --- ------- --- --------- ---
1,764,466 99 2,141 .01 16,483 .09
Item 5 - Other Information
On July 27, 2000 the Board of Directors appointed Denise M. Renaghan
President and Chief Operating Officer of Bay State Federal Bank, a subsidiary of
Bay State Bancorp, Inc.
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 (filed herewith)
27.0 Financial data schedule (filed herewith)
* Incorporated herein by reference from the exhibits to Form SB-2
registration as amended, Registration No. 333-40115
** Incorporated herein by reference from the registrants Form 10-K, as filed
with the Securities Exchange Commission on June 14, 1999.
(b) Reports on Form 8-K
(i) None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Bay State Bancorp, Inc.
November 10, 2000
----------------- -----------------------------
Date John F. Murphy
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
November 10, 2000
----------------- -----------------------------
Date Michael O. Gilles
Senior Vice President and
Chief Financial Officer
(Principal Accounting and Financial
Officer)
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