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 June 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 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 August 10, 2000 was 1,936,280.
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION.................................................1
Item 1 - Consolidated Financial Statements...................................1
Consolidated Balance Sheets - June 30, 2000 (unaudited)
and March 31, 2000 ........................................................1
Consolidated Income Statements - For the three months
ended June 30, 2000 and 1999 (unaudited)...................................2
Consolidated Statements of Cash Flows - For the three
months ended June 30, 2000 and 1999 (unaudited)............................3
Consolidated Statements of Changes in Stockholders'
Equity - For the three months ended June 30, 2000 and
1999 (unaudited) and the years ended March 31, 2000 and 1999...............4
Notes to Unaudited Consolidated Financial Statements for
the Period Ended June 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.........14
PART II - OTHER INFORMATION...................................................16
Item 1 - Legal Proceedings..................................................16
Item 2 - Changes in Securities and Use of Proceeds..........................16
Item 3 - Defaults Upon Senior Securities....................................16
Item 4 - Submission of Matters to a Vote of Security Holders................16
Item 5 - Other Information..................................................16
Item 6 - Exhibits and Reports on Form 8-K...................................16
SIGNATURES..................................................................17
EXHIBITS....................................................................18
Computation of per share earnings - Exhibit 11............................18
Financial Data Schedule - Exhibit 27......................................19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $ 6,152 $ 5,392
Short-term investments 101 600
--------- ---------
Cash and Cash Equivalents 6,253 5,992
Investment in available-for-sale securities (at fair value) 29,761 31,812
Investments in held-to-maturity securities (fair values of $483 as of
June 30, 2000 and $535 as of March 31, 2000) 475 527
Stock in Federal Home Loan Bank of Boston 8,051 8,051
Loans receivable, net 405,431 393,093
Other real estate owned 42 62
Accrued interest receivable 2,648 2,470
Premises and equipment, net 3,223 3,078
Deferred tax asset, net 3,740 3,811
Investment in bank owned life insurance 7,993 7,888
Other assets 3,332 3,353
--------- ---------
Total assets $ 470,949 $ 460,137
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 258,356 $ 247,344
Federal Home Loan Bank Advances 152,180 147,527
Other borrowed funds 2,066 8,137
Accrued expenses and other liabilities 4,707 4,499
--------- ---------
Total liabilities 417,309 407,507
--------- ---------
Stockholders' equity:
Common stock, par value $.01 per share,
2,535,232 shares issued 25 25
Additional paid-in capital 49,200 49,207
Retained earnings 22,211 21,600
Accumulated other comprehensive loss (1,457) (1,788)
Less: Unearned ESOP shares (2,826) (2,826)
Unearned 1998 Stock-Based Incentive Plan (1,606) (1,681)
Treasury stock, 578,952 and 578,952 shares (11,907) (11,907)
--------- ---------
Total stockholders' equity 53,640 52,630
--------- ---------
Total liabilities and stockholders' equity $ 470,949 $ 460,137
========= =========
Equity-to-asset ratio 11.39% 11.44%
Book value per share $ 29.62 $ 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
June 30,
--------
2000 1999
----------- -----------
Unaudited
---------
<S> <C> <C>
Interest income:
Loans $ 8,065 $ 6,260
Investments 696 579
----------- -----------
Total interest income 8,761 6,839
----------- -----------
Interest expense:
Deposits 2,655 2,119
Borrowed funds 2,277 1,236
----------- -----------
Total interest expense 4,932 3,355
----------- -----------
Net interest income before provision for loan losses 3,829 3,484
Provision for loan losses 165 225
----------- -----------
Net interest income after provision for loan losses 3,664 3,259
----------- -----------
Non-interest income:
Service charges on deposit accounts 100 72
Net loss on trading activities (56) --
Gain (loss) on sale of loans 3 (1)
Net increase in cash surrender value of bank owned life insurance policies 104 71
Other income 41 26
----------- -----------
Total non-interest income 192 168
----------- -----------
Income before non-interest expense and income taxes 3,856 3,427
----------- -----------
Non-interest expense:
Salaries and employee benefits 1,701 1,612
Occupancy and equipment expense 349 268
Advertising 134 68
Data processing 71 69
Professional fees 68 235
Other expenses 303 267
----------- -----------
Total non-interest expense 2,626 2,519
----------- -----------
Income before income taxes 1,230 908
Income tax expense 423 324
----------- -----------
Net income $ 807 $ 584
=========== ===========
Comprehensive net income $ 1,138 $ 608
=========== ===========
Weighted average common and common equivalent shares outstanding 1,810,744 2,177,986
=========== ===========
Basic earnings per share $ 0.45 $ 0.27
=========== ===========
Diluted earnings per share $ 0.45 $ 0.27
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
Page 2
<PAGE>
Bay State Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Net cash flows from operating activities:
Net income $ 807 $ 584
Adjustments to reconcile net income to net cash provided by operating activities:
Earned stock based incentive plan 68 --
Provision for possible loan losses 165 225
Net increase in mortgage loans held-for-sale -- (92)
(Gain) Loss on sale of loans (3) 1
Depreciation and amortization 97 76
Accretion of securities, net of amortization (22) (17)
Change in loan fees and discounts (73) (11)
Net loss on Trading activities 56 --
Increase in cash surrender value B.O.L.I (105) --
Increase in accrued interest receivable (178) (224)
Decrease in deferred income tax assets, net 98 --
Increase in prepaid expense and other assets (35) (315)
Increase in accrued expenses and other liabilities 208 340
-------- --------
Net cash provided by operating activities 1,083 567
-------- --------
Net cash flows from investing activities:
Maturities and principal repayments on investments held to maturity 52 215
Maturities and principal repayments on investments available for sale 3,463 4,734
Purchases of investments available for sale (1,086) (21,783)
Purchase of Federal Home Loan Bank of Boston Stock -- (1,836)
Net increase in loans (12,427) (26,806)
Payment received on other real estate owned 20 --
Capital expenditures (242) (92)
-------- --------
Net cash used in investing activities (10,220) (45,568)
-------- --------
Net cash flows from financing activities:
Net deposit activity 11,012 (173)
Proceeds of borrowings 78,000 82,191
Repayment of borrowings (73,347) (46,714)
Net increase (decrease) in other borrowed funds (6,071) 5,630
Dividends on common stock (196) (141)
Purchases of treasury stock -- (2,593)
-------- --------
Net cash provided by financing activities 9,398 38,200
-------- --------
Net increase (decrease) in cash and cash equivalents 261 (6,801)
Cash and cash equivalents at beginning of period 5,992 10,107
-------- --------
Cash and cash equivalents at end of period $ 6,253 $ 3,306
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 4,903 $ 3,330
Income taxes $ 173 $ 346
</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)
For the three months ended June 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 Plan
Stock Capital Earnings Income(Loss) ESOP Shares 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 -- -- 807 -- -- --
Net change in unrealized loss on available
for sale securities, net of tax effect -- -- -- 331 -- --
Comprehensive income -- -- -- -- -- --
Dividends paid, $0.10 per share -- -- (196) -- -- --
Issuance of stock incentive plan shares -- (7) -- -- -- 75
------------------------------------------------------------------------
Balance at June 30, 2000 (Unaudited) $ 25 $ 49,200 $ 22,211 $ (1,457) $ (2,826) $ (1,606)
========================================================================
------------------------------------------------------------------------
Balance at March 31, 1999 $ 25 $ 49,277 $ 19,463 $ 45 $ (3,232) $ (2,173)
Net Income -- -- 584 -- -- --
Net change in unrealized gain on available --
for sale securities, net of tax effect -- -- -- 24 -- --
Comprehensive income -- -- -- -- -- --
Purchase of treasury stock, 120,424 shares -- -- -- -- -- --
Dividends paid, $0.06 per share -- -- (141) -- -- --
------------------------------------------------------------------------
Balance at June 30, 1999 (Unaudited) $ 25 $ 49,277 $ 19,906 $ 69 $ (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 -- 1,138
Dividends paid, $0.10 per share -- (196)
Issuance of stock incentive plan shares -- 68
----------------------
Balance at June 30, 2000 (Unaudited) $(11,907) $ 53,640
======================
----------------------
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 -- 608
Purchase of treasury stock, 120,424 shares (2,592) (2,592)
Dividends paid, $0.06 per share -- (141)
----------------------
Balance at June 30, 1999 (Unaudited) $ (5,699) $ 58,173
======================
</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 JUNE 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-K. Accordingly, the financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three months ended June 30, 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 filed with the SEC.
(3) Stock Repurchase Program
On July 27, 2000 the Board of Directors approved the repurchase of 5%, or
97,814, of the Company's outstanding common stock. Since becoming a public
company in March of 1998 the Company has repurchased approximately 25% of its
outstanding shares, with four repurchase programs. Upon completion of this 5%
repurchase the Company will have 1,858,466 shares outstanding.
Page 5
<PAGE>
Item 2 - Management's Discussion and analysis of Financial Condition and Results
of Operations
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 Bancorp, Inc., a savings and loan holding company, was
incorporated under the laws of Delaware in October 1997 for the purpose of
serving as the holding company of 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 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 June 30, 2000 and March 31, 2000
Total assets at June 30, 2000 were $470.9 million, compared to $460.1
million at March 31, 2000, an increase of 2.4%. Loans receivable increased $12.3
million, or 3.1%, primarily in multi-family residential and 1-4 family
residential mortgages, which were originated and purchased. The increase in
assets was funded from an increase of $11.0 million, or 4.5%, in deposits,
offset by a reduction in investment securities, due to various securities
maturing.
Page 6
<PAGE>
Total stockholder's equity was $53.6 million, or 11.4% of total assets, at
June 30, 2000, an increase of $1.0 million, or 1.9%, from the $52.6 million, or
11.4% of total assets, at March 31, 2000. The change in equity was the result of
the net income for the period, and an increase in the market value of investment
securities classified as available for sale. The Company's book value per share
at June 30, 2000 was $29.62, compared to $29.06 at March 31, 2000.
Investments
Short-term investments of $101,000 at June 30, 2000, consisting of funds
invested in The Bank Investment Fund, decreased $499,000, or 83.2%, from the
$600,000 at March 31, 2000. Investment securities available-for-sale decreased
$2.1 million, or 6.5%, primarily in government agency securities and
mortgage-backed securities. The total decrease in investments was $2.1 million.
The Company's investment portfolio at June 30, 2000 reflects a $1.8 million
net unrealized loss on available-for-sale securities, compared to a net
unrealized loss of $2.1 million at March 31, 2000.
The tables below shows the investment securities portfolios at the periods
presented. The amortized cost and estimated fair value of investments
available-for-sale were:
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
------------- --------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Marketable equity securities $ 9,931 $ 9,474 $ 9,840 $ 9,049
------- ------- ------- -------
Mortgage-backed securities 16,095 15,623 16,937 16,476
Trust preferred equity securities 2,501 2,001 2,501 1,916
Corporate bonds and notes 495 462 495 462
Preferred stocks 1,500 1,235 1,500 1,342
Government agency securities 1,000 967 2,607 2,567
------- ------- ------- -------
Total $31,522 $29,761 $33,880 $31,812
======= ======= ======= =======
</TABLE>
The amortized cost and estimated fair values of investments
held-to-maturity were:
<TABLE>
<CAPTION>
June 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 $475 $483 $527 $535
---- ---- ---- ----
Total Mortgage-backed and mortgage related
Securities $475 $483 $527 $535
---- ---- ---- ----
</TABLE>
Page 7
<PAGE>
Loans
During the first quarter of fiscal 2001, loans receivable increased by
$12.3 million, or 3.1%, as detailed below:
<TABLE>
<CAPTION>
June 30, % of total March 31, % of total
2000 Loans 2000 Loans
---- ----- ---- -----
<S> <C> <C> <C> <C>
Mortgage loans: (Dollars in thousands)
Residential 1 - 4 family $205,917 50.02% $201,256 50.32%
Multi-family 88,262 21.44 78,610 19.65
Commercial real estate 93,719 22.77 95,869 23.97
Construction and development/land 7,688 1.87 10,009 2.50
-------- ------ -------- ------
Total mortgage loans 395,586 96.10 385,744 96.44
Commercial loans 912 0.22 225 0.06
Consumer loans:
Equity lines 10,477 2.55 9,500 2.37
Other consumer loans 4,681 1.13 4,520 1.13
-------- ------ -------- ------
Total loans 411,656 100.00% 399,989 100.00%
====== ======
Deduct:
Allowance for loan loss 4,080 3,915
Undisbursed proceeds of construction
and development loans in process 2,062 2,825
Deferred loan fees 83 156
-------- --------
Net loans receivable $405,431 $393,093
======== ========
</TABLE>
At June 30, 2000 loans serviced for others was $20.7 million, compared to
$20.8 million at March 31, 2000.
Asset Quality
At June 30, 2000 non-performing assets totaled $1.6 million, an increase of
$300,000, or 22.2%, 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 Bank had $42,000 in real estate owned at June 30, 2000, compared to
$62,000 at March 31, 2000, a decrease of $20,000, or 32.3%, due to the receipt
of private mortgage insurance. At June 30, 2000, non-performing assets
represented 0.34% of total assets and 0.39% of loans receivable net, compared to
0.28% and 0.33%, respectively, at March 31, 2000. The increase in non-performing
assets was the result of four residential loans being added to non-accrual
loans.
Page 8
<PAGE>
The composition of non-performing assets, which consist solely of
non-performing loans for the periods presented was:
<TABLE>
<CAPTION>
June 30, March 31,
2000 1999 2000
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans:
Mortgage Loans:
One-to-four-family $1,036 $ 574 $ 731
Multi-family -- 279 --
Commercial real estate 443 770 443
Construction and development -- -- --
------ ------ ------
Total mortgage loans 1,479 1,623 1,174
------ ------ ------
Consumer Loans:
Equity lines -- 65 --
Other consumer loans 50 12 50
------ ------ ------
Total consumer loans 50 77 50
------ ------ ------
Total non-accrual loans 1,529 1,700 1,224
Real estate owned, net 42 -- 62
------ ------ ------
Total non-performing assets $1,571 $1,700 $1,286
------ ------ ------
Non-performing assets as a percentage of:
Loans receivable, net 0.39% 0.51% 0.33%
Total assets 0.34 0.43 0.28
</TABLE>
The following represents the activity in the allowance for loan losses for
the three months ended June 30, 2000:
(In thousands)
Balance at March 31, 2000 $3,915
Provision for loan losses 165
Losses charged to allowance --
Recoveries --
------
Balance at June 30, 2000 $4,080
------
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 three month period ending June 30,
2000, as detailed below:
<TABLE>
<CAPTION>
June 30, % of total March 31, % of total
2000 deposits 2000 deposits
-------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Regular savings accounts $ 26,376 10.21% $ 26,876 10.87%
NOW accounts 22,742 8.80 22,392 9.05
Money market accounts 71,744 27.77 71,117 28.75
Non-interest bearing deposits 6,866 2.66 6,301 2.55
-------- ------ -------- ------
127,728 49.44 126,686 51.22
Term deposits 130,628 50.56 120,658 48.78
-------- ------ -------- ------
Total deposits $258,356 100.00% $247,344 100.00%
======== ====== ======== ======
</TABLE>
During the period, FHLB advances increased $4.7 million, or 3.2% and other
borrowed funds, consisting of a FNMA Repurchase Agreement and Federal Funds
purchased, decreased $6.1 million.
Comparison of Operating Results for the Three Months ended June 30, 2000 and
1999
General
Consolidated net income for the three months ended June 30, 2000 totaled
$807,000, or $0.45 per share, compared to $584,000, or $0.27 per share, for the
same period last year. This represents an increase of $223,000, or 38.2%, in net
income and a $0.18 or 66.7% increase in earnings per 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 June 30, 2000 increased $1.9
million, or 28.1%, to $8.8 million, compared to $6.8 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 $359.0
million for the quarter ended June 30, 1999 to $438.1 million for the quarter
ended June 30, 2000, an increase of $79.1 million, or 22.0%. The increase in the
average balance of interest-earning assets was primarily a net result of an
increase in the average balance of loans, net of $77.0 million, or 24.2%, and an
increase in mortgage-backed and mortgage related securities of $2.6 million, or
14.3%. The increase was also due to an increase in the yield on interest-earning
assets of 38 basis points, to 8.00%.
Interest Expense
Interest expense for the three months ended June 30, 2000 increased $1.6
million, or 47.0%, to $4.9 million compared to $3.4 million for the same period
last year. The increase in interest expense was the result of a $84.3 million,
or 26.9%, increase in the average balance of interest-bearing liabilities which
increased from $312.6 million for the three months ended June 30, 1999 to $396.9
million for the three months ended June 30, 2000. The increase was also due to
an increase in the cost of funds of 68 basis points to 4.97%, 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 MMDA accounts. The increase in the
average balance of interest-bearing liabilities was primarily a result of an
increase in the average balance of deposits of $30.1 million, or 14.1% and the
average balance of FHLB advances and other borrowings of $54.2 million, or
54.6%.
Page 10
<PAGE>
Net interest income
The table below shows the average balance sheet, the interest earned and
paid on interest-earning assets and interest-bearing liabilities and the
resulting net interest spread and margin for the periods presented.
<TABLE>
<CAPTION>
For the three months ended June 30, 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 $ 1,692 $ 26 6.15% $ 2,854 $ 34 4.76%
Investment securities 21,365 369 6.91 20,622 278 5.39
Mortgage backed & related securities 20,375 301 5.90 17,822 267 5.99
Loans and mortgage loans held-for-sale 394,652 8,065 8.17 317,654 6,260 7.88
-------- -------- -------- --------
Total interest-earning assets 438,084 8,761 8.00 358,952 6,839 7.62
-------- --------
Non interest-earning assets 26,928 21,632
-------- --------
Total $465,012 $380,584
======== ========
Liabilities and Equity
Interest-bearing liabilities:
NOW accounts $ 22,645 $ 63 1.12% $ 23,371 $ 64 1.10%
Regular savings accounts 26,225 135 2.05 26,463 136 2.06
Money market accounts 69,233 741 4.28 56,226 534 3.80
Certificate accounts 125,462 1,716 5.47 107,398 1,385 5.16
-------- -------- -------- --------
Total interest-bearing deposits 243,565 2,655 4.36 213,458 2,119 3.97
FHLB advances 147,391 2,191 5.95 97,073 1,207 4.97
Other Borrowings 5,956 86 5.79 2,119 28 5.29
-------- -------- -------- --------
Total interest-bearing liabilities 396,912 4,932 4.97 312,650 3,354 4.29
-------- --------
Demand deposits 6,593 4,683
Other liabilities 8,213 4,123
Equity 53,294 59,128
-------- --------
Total $465,012 $380,584
======== ========
Net interest income $ 3,829 $ 3,485
======== ========
Interest rate spread 3.03% 3.33%
==== ====
Net interest margin 3.50% 3.88%
==== ====
</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 June 30,
2000 vs. 1999
-----------------------
Change due to Increase (Decrease)
Volume Rate Net
------ ------ ------
(In thousands)
Interest income:
Loans $1,566 $ 239 $1,805
Investments 18 99 117
------ ------ ------
Total 1,584 338 1,922
------ ------ ------
Interest expense:
Deposits 374 162 536
Borrowings 770 271 1,041
------ ------ ------
Total 1,144 433 1,577
------ ------ ------
Net interest income $ 440 $ (95) $ 345
====== ====== ======
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 $165,000 for the quarter ended June 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 increase in
the overall size and mix of the loan portfolio during the period.
At June 30, 2000 and March 31, 2000, the allowance for loan losses was $4.1
million and $3.9 million, respectively, which represents 266.7% of
non-performing loans and 1.0% of total loans at June 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 $24,000, or 14.3%, to $192,000,
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. Such increases were offset by unrealized losses on trading
securities, which represents a decrease in the market value of the assets
supporting certain benefit plans, which also results in a corresponding
reduction in salaries and benefits.
Page 12
<PAGE>
Non-interest expense
Total non-interest expense was $2.6 million for the quarter ended June 30,
2000, compared to $2.5 million for the same period last year, an increase of
4.3%. Total salaries and benefits increased $89,000, or 5.5% primarily as a
result of a general increase in salaries and benefits and due to the increased
number of employees compared to the same quarter 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
$349,000 compared to $268,000 for the same period last year, an increase of
30.2%, primarily from the increased level of depreciation on building and
leasehold improvements associated with the addition of the new Walpole branch
and additional leased space for the administrative and support service areas of
the Bank. Advertising expense totaled $134,000 compared to $68,000 for the same
period last year, an increase of 97.1%, primarily as a result of the promotion
and introduction of new deposit products and retail services. The total of
Professional fees and other expenses had a net decrease of $131,000, or 26.1%,
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 June 30, 2000 were $423,000 on
pretax income of $1.2 million, for an effective rate of 34.4%, compared to
$324,000 on pretax income of $908,000, for an effective rate of 35.7% for the
same period last year. The effective tax rate for the current period is lower
than the prior periods due to various tax planning strategies implemented by the
Company, specifically the purchase of tax-advantaged life insurance products and
the establishment of two Massachusetts securities corporations at the Bank
level, which lowered state taxes.
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 June 30, 2000, the Company's capital ratio was 11.39% of total assets.
The Bank at June 30, 2000 had total capital of 9.02% and risk based capital of
13.66% (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 June 30, 2000 the Company and the Bank met all the capital adequacy
requirements to which they are subject. As of June 30, 2000, 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 13
<PAGE>
Liquidity
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The Bank's currently required
liquidity ratio is 4%. At June 30, 2000 the Bank's liquidity ratio was 5.71%.
Management's strategy is to maintain liquidity as close as possible to the
minimum regulatory requirement and to invest any excess liquidity in higher
yielding interest-earning assets. The Bank manages its liquidity position and
demands for funding primarily by investing excess funds in short-term
investments and utilizing FHLB advances in periods when the Bank's demands for
liquidity exceed funding from deposit inflows.
The Bank's most liquid assets are cash and cash equivalents and securities.
The levels of these assets are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At June 30, 2000, cash
and due from banks, short-term investments and securities, excluding FHLB stock,
totaled $36.5 million, or 7.7% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 2000, the Bank had $152.2 million
in advances outstanding from the FHLB, and at June 30, 2000, had an additional
overall borrowing capacity from the FHLB of $30.9 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 14
<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 June 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 18.0%. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities.
<TABLE>
<CAPTION>
More More More More
than than than than
1 Year 2 Years 3 Years 4 Years More Total
1 Year to to to to than Amount
or Less 2 Years 3 Years 4 Years 5 Years 5 Years (1)
-------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments ............ $ 101 $ -- $ -- $ -- $ -- $ -- $ 101
Securities ........................ 14,428 -- -- 1,000 -- 316 15,744
Mortgage-backed
Securities ..................... -- -- -- -- -- 16,253 16,253
Stock in FHLB-Boston .............. 8,051 -- -- -- -- -- 8,051
Loans (1) ......................... 113,391 35,798 57,062 83,720 43,593 74,417 407,981
--------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets .. $ 135,971 $ 35,798 $ 57,062 $ 84,720 $ 43,593 $ 90,986 $ 448,130
========= ========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Money market accounts ............. $ 57,395 $ 10,762 $ 3,587 $ -- $ -- $ -- $ 71,744
Regular savings accounts .......... 3,956 3,956 3,956 3,956 3,956 6,596 26,376
NOW accounts ...................... 1,137 1,137 1,137 1,137 1,137 17,057 22,742
Certificate accounts .............. 97,712 25,110 3,854 565 3,367 20 130,628
Other borrowed funds .............. 2,066 -- -- -- -- -- 2,066
FHLB advances ..................... 58,558 24,794 9,328 -- -- 59,500 152,180
--------- --------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities ................. $ 220,824 $ 65,759 $ 21,862 $ 5,658 $ 8,460 $ 83,173 $ 405,736
========= ========= ========= ========= ========= ========= =========
Interest-earning assets less
interest-bearing liabilities ...... $ (84,853) $ (29,961) $ 35,200 $ 79,062 $ 35,133 $ 7,813 $ 42,394
========= ========= ========= ========= ========= ========= =========
Cumulative interest-rate
sensitivity gap ................... $ (84,853) $(114,814) $ (79,614) $ (552) $ 34,581 $ 42,394
========= ========= ========= ========= ========= =========
Cumulative interest-rate gap as
a percentage of total assets ...... (18.02)% (24.38)% (16.90)% (0.12)% 7.34% 9.00%
Cumulative interest-rate gap as
a percentage of total interest-
earning assets .................... (18.93)% (25.62)% (17.77)% (0.12)% 7.72% 9.46%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities ....................... 61.57% 59.94% 74.19% 99.82% 110.72% 110.45%
</TABLE>
----------
(1) Excludes nonaccrual loans.
Page 15
<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 (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-KSB, as filed
with the Securities Exchange Commission on June 14, 1999.
(b) Reports on Form 8-K
(i) None
Page 16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1939, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Bay State Bancorp, Inc.
August 10, 2000
---------------------- --------------------------------
Date John F. Murphy
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
August 10, 2000
---------------------- --------------------------------
Date Michael O. Gilles
Senior Vice President and
Chief Financial Officer
(Principal Accounting and Financial Officer)
Page 17
