UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
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 Identification No.)
Incorporation or Organization)
1299 Beacon Street, Brookline, Massachusetts 02446
(Address of Principal Executive Offices)
(617) 739-9500
(Registrant's telephone number, including area code)
Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(b) of the Act
American Stock Exchange
(Name of Exchange on which registered)
NONE
Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of May 31, 2000, there were issued and outstanding 1,956,280 shares of the
registrant's common stock. The common stock is listed for trading on the
American Stock Exchange under the symbol "BYS." Based on the closing price on
May 31, 2000 the aggregate value of the common stock outstanding held by the
nonaffiliates of the registrant was $22.9 million. For purposes of this
disclosure, shares of common stock held by persons who hold more than 5% of the
outstanding common stock and common stock held by certain officers and directors
of the registrant have been excluded in that such persons may be deemed to be
"affiliates" as that term is defined under the rules and regulations promulgated
under the Securities Act of 1933, as amended.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page No.
PART I
<S> <C> <C> <C>
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 28
Item 3. Legal Proceedings.............................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders............................ 29
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......... 29
Item 6. Selected Financial Data........................................................ 29
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation........................................................... 30
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..................... 42
Item 8. Financial Statements and Supplementary Data.................................... 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... 43
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 43
Item 11. Executive Compensation......................................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 43
Item 13. Certain Relationships and Related Transactions................................. 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 44
</TABLE>
SIGNATURES
2
<PAGE>
Item 1. Business
General
Bay State Bancorp, Inc. (the "Company") was incorporated under Delaware law
on October 24, 1997. The Company was formed to acquire Bay State Federal Savings
Bank, Brookline, Massachusetts (the "Bank") and its subsidiaries as part of the
Bank's conversion from a mutual to stock form of organization (the
"Conversion"). In connection with the Conversion, on March 27, 1998 the Company
issued an aggregate 2,535,232 shares of its common stock, par value $0.01 per
share (the "Common Stock"), at a purchase price of $20 per share, of which
2,347,437 shares were sold in a subscription offering and 187,795 shares were
issued to The Bay State Federal Savings Charitable Foundation (the
"Foundation"), a charitable foundation established by the Bank. The Company is a
savings and loan holding company and is subject to regulation by the Office of
Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC")
and the Securities and Exchange Commission ("SEC"). Currently, the Company does
not transact any material business other than through the Bank. At March 31,
2000, the Company had total assets of $460.1 million, total deposits of $247.3
million and total stockholders' equity of $52.6 million.
The reporting entity is Bay State Bancorp, Inc. and its wholly owned
subsidiaries, Bay State Funding Corporation and Bay State Federal Savings Bank,
and the Bank's wholly owned subsidiaries: BSF Service Corporation, BSFS
Securities Corporation and Bay Leaf Securities Corporation.
The Bank was organized in 1920 as a state-chartered mutual co-operative
bank under the name Coolidge Corner Co-operative Bank. In 1936, the Bank
converted to a federally-chartered mutual savings and loan association and
changed its name to Brookline Federal Savings and Loan Association. In 1960, the
Bank changed its name to Bay State Federal Savings and Loan Association and, in
1983, changed its name again to Bay State Federal Savings Bank. In February
1997, the Bank merged with Union Federal Savings Bank ("Union Federal"), which
at the time of the merger had $38.2 million of total assets, $35.5 million of
deposits and $2.7 million of retained earnings and operated two branches located
in Boston and Westwood, Massachusetts. On February 7, 2000 the Bank opened its
sixth retail office in Walpole, Massachusetts. The Bank currently maintains six
banking offices located in the greater Boston metropolitan area.
The Bank's principal business has been and continues to be attracting
retail deposits from the general public in the areas surrounding its branch
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in adjustable-rate and shorter-term
fixed-rate one- to four-family residential mortgage loans, multi-family and
commercial real estate. To a lesser extent, the Bank invests in construction and
development, commercial and consumer loans. The Bank operates through its six
full service banking offices and one administrative office, all of which are
located in the greater Boston metropolitan area. The Bank originates loans for
investment and loans for sale in the secondary market; generally retaining the
servicing rights on all loans sold. The Bank's revenues are derived principally
from interest on its mortgage loans and, to a lesser extent, interest on its
investment and mortgage-backed and mortgage-related securities and loan
servicing income. The Bank's primary sources of funds are deposits, principal
and interest payments on loans and securities and Federal Home Loan Bank
("FHLB") advances.
Market Area and Competition
The Bank is headquartered in Brookline, Massachusetts and is a
community-oriented savings institution offering a variety of financial products
and services to meet the needs of the communities it serves. The Bank's primary
deposit gathering area is concentrated in the communities surrounding its six
full service banking offices located in Brookline, Boston, Dedham, Norwood,
Westwood and Walpole Massachusetts. All of the Bank's branch offices are located
within 20 miles of Brookline. The Bank's primary lending area is significantly
broader than its deposit gathering area and includes all of Massachusetts, with
a concentration in the greater Boston metropolitan area.
Brookline, Massachusetts is a fully-developed and densely populated town
located west of and adjacent to Boston. The major traffic roadways running
through Brookline are heavily traveled and lined with commercial and retail
business operations and Brookline's 1990 census population was approximately
54,000.
3
<PAGE>
The residents of Brookline are generally comprised of white- and
blue-collar workers and college students. The towns of Dedham, Norwood, Westwood
and Walpole are situated southwest of Boston. These towns are primarily
residential communities consisting of single-family residences and are populated
by middle- to high-income individuals employed in the greater Boston
metropolitan area.
New England has generally lagged behind the rest of the nation in coming
out of the recession of the late 1980s and early 1990s. During this time, the
market values of many one- to four-family residences declined throughout the
region. Loan demand diminished and competition for such loans increased.
However, over the past few years, the regional economy in the Bank's primary
market area, based on economic indicators such as unemployment rates,
residential and commercial real estate values and vacancy rates and household
income trends, has strengthened. Small business, technology and service firms,
institutions of higher education and tourism form the backbone of the economy of
the greater Boston metropolitan area.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Bank. The Bank's competition for
loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from other financial
institutions. In addition, the Bank faces significant competition for deposits
from non-bank institutions such as brokerage firms and insurance companies in
such instruments as short-term money market funds, corporate and government
securities funds, mutual funds and annuities. Competition may also increase as a
result of the lifting of restrictions on the interstate operations of financial
institutions. The Bank has also experienced significant competition from credit
unions, which have a competitive advantage, as they do not pay state or federal
income taxes. This competitive disadvantage has placed increased pressure on the
Bank with respect to its loan and deposit pricing.
The increase of internet accessible financial institutions, which solicit
deposits and originate loans on a nationwide basis, may also increase
competition for the Bank's customers. Additionally, competition is likely to
increase as a result of recent regulatory actions and legislative changes, most
notably the recent enactment of the Gramm-Leach-Bliley Act of 1999. These
changes have eased and likely will continue to ease restrictions on interstate
banking and the entrance into the financial services market by non-depository
and non-traditional financial services providers, including insurance companies,
securities brokerage and underwriting firms and specialty financial services
companies (such as internet-based providers).
Personnel
As of March 31, 2000 the Bank had 83 full-time employees and 17 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good.
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may originate
are subject to federal and state laws and regulations. Interest rates charged by
the Bank on loans are affected by the demand for such loans and the supply of
money available for lending purposes and local competitive influences. These
factors are, in turn, affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve Board
("FRB") and legislative tax policies.
4
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
One-to four-family ...... $ 201,256 50.32% $ 168,786 54.62% $ 157,240 68.23%
Multi-family ............ 78,610 19.65 57,744 18.69 22,411 9.73
Commercial real estate .... 95,869 23.97 67,806 21.94 35,468 15.39
Construction and
Development(1) .......... 10,009 2.50 5,494 1.78 7,821 3.39
--------- --------- --------- --------- --------- ---------
Total mortgage loans .... 385,744 96.44 299,830 97.03 222,940 96.74
--------- --------- --------- --------- --------- ---------
Commercial ................ 225 0.06 500 0.16 43 0.02
--------- --------- --------- --------- --------- ---------
Consumer loans:
Equity lines ............ 9,500 2.37 5,156 1.67 4,028 1.75
Other consumer loans .... 4,520 1.13 3,535 1.14 3,434 1.49
--------- --------- --------- --------- --------- ---------
Total consumer loans... 14,020 3.50 8,691 2.81 7,462 3.24
--------- --------- --------- --------- --------- ---------
Total loans ............... 399,989 100.00% 309,021 100.00% 230,445 100.00%
========= ========= =========
Allowance for loan losses . (3,915) (3,027) (2,513)
Undisbursed proceeds of
construction and
development loans in
process ................. (2,825) (1,424) (2,534)
Deferred loan origination
fees, net ............... (156) (198) (470)
--------- --------- ---------
Loans, net ............ 393,093 304,372 224,928
--------- --------- ---------
Mortgage loans held-for-
sale .................... -- 321 822
--------- --------- ---------
Loans, net and mortgage
loans held-for-sale .... $ 393,093 $ 304,693 $ 225,750
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------
1997 1996
------------------------------------------------
Percent Percent
Amount of Total Amount of Total
------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential:
One-to four-family ...... $ 162,837 77.34% $ 149,941 78.74%
Multi-family ............ 14,624 6.95 13,294 6.98
Commercial real estate .... 25,260 12.00 19,129 10.05
Construction and
Development(1) .......... 2,831 1.34 5,359 2.81
--------- --------- --------- ---------
Total mortgage loans .... 205,552 97.63 187,723 98.58
--------- --------- --------- ---------
Commercial ................ 31 0.02 -- --
--------- --------- --------- ---------
Consumer loans:
Equity lines ............ 2,359 1.12 268 0.14
Other consumer loans .... 2,594 1.23 2,434 1.28
--------- --------- --------- ---------
Total consumer ........ 4,953 2.35 2,702 1.42
--------- --------- --------- ---------
Total loans ............... 210,536 100.00% 190,425 100.00%
========= ==========
Allowance for loan losses . (1,687) (1,774)
Undisbursed proceeds of
construction and
development loans in
process ................. (1,349) (1,622)
Deferred loan origination
fees, net ............... (437) (495)
--------- ---------
Loans, net ............ 207,063 186,534
--------- ---------
Mortgage loans held-for-
sale .................... -- 47
--------- ---------
Loans, net and mortgage
loans held-for-sale .... $ 207,063 $ 186,581
========= =========
</TABLE>
------------------------------------------------------
(1) Includes committed but unadvanced loan amounts.
5
<PAGE>
Loan Maturity. The following table shows the remaining contractual maturity
of the Bank's loans at March 31, 2000. The table does not include the effect of
future principal prepayments.
<TABLE>
<CAPTION>
At March 31, 2000
-------------------------------------------------------------------------------------------
One- to Construction
Four- Multi- Commercial and Total
Family (1) Family Real Estate Development(2) Commercial Consumer Loans
-------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less ................. $ 1,967 $ 315 $ -- $ 3,577 $ -- $ 1,792 $ 7,651
-------- -------- -------- -------- -------- -------- --------
After one year:
More than one year
to three years ................ 25,491 745 2,794 2,025 -- 336 31,391
More than three years
to five years ................. 28,317 44 1,325 -- -- 227 29,913
More than five years
to ten years .................. 11,759 4,109 9,969 39 225 938 27,039
More than ten years
to twenty years ............... 54,626 32,237 42,536 1,125 -- 613 131,137
More than twenty years ........... 88,596 41,160 39,245 3,243 -- 614 172,858
-------- -------- -------- -------- -------- -------- --------
Total due after
one year ................ 208,789 78,295 95,869 6,432 225 2,728 392,338
-------- -------- -------- -------- -------- -------- --------
Total amount due .............. $210,756 $ 78,610 $ 95,869 $ 10,009 $ 225 $ 4,520 399,989
======== ======== ======== ======== ======== ======== ========
Less:
Allowance for loan losses............................................................................................. (3,915)
Undisbursed proceeds of construction and development loans in process................................................. (2,825)
Deferred loan origination fees, net................................................................................... (156)
--------
Loans, net............................................................................................................ $393,093
========
</TABLE>
----------
(1) Includes equity lines.
(2) Includes construction and development loans, which will convert to one- to
four-family mortgage loans upon the completion of the construction.
The following table sets forth at March 31, 2000, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after March 31,
2001 and whether such loans have fixed interest rates or adjustable interest
rates.
Due After March 31, 2001
-----------------------------------
Fixed Adjustable Total
------- ---------- -------
(In thousands)
Mortgage loans:
One- to four-family.......... $43,662 $155,634 $199,296
Multi-family................. 28,746 49,550 78,296
Commercial real estate....... 19,940 75,923 95,863
Construction and development. 3,150 3,280 6,430
------- -------- --------
Total mortgage loans...... 95,498 284,387 379,885
------- -------- --------
Commercial loans................ -- 225 225
------- -------- --------
Consumer loans:
Equity lines................. -- 9,500 9,500
Other consumer loans......... 893 1,835 2,728
------- -------- --------
Total consumer loans...... 893 11,335 12,228
------- -------- --------
Total loans.................... $96,391 $295,947 $392,338
======= ======== ========
6
<PAGE>
Origination, Sale and Servicing of Loans. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its six
branch offices and one administrative office and through a network of loan
correspondents, wholesale loan brokers and other financial institutions approved
by the Bank. All loans originated by the Bank, either through internal sources
or external sources, are underwritten by the Bank pursuant to the Bank's
policies and procedures. The Bank originates both adjustable-rate and fixed-rate
loans. The Bank's ability to originate fixed- or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates.
Generally, all adjustable-rate mortgage loans ("ARM") originated by the
Bank are originated for investment. While the Bank has from time-to-time,
retained fixed-rate one- to four-family loans, it is currently the general
policy of the Bank to sell substantially all one- to four-family fixed-rate
mortgage loans with scheduled repricing greater than 15 years. The one- to
four-family mortgage loan products currently originated for sale by the Bank
include a variety of loans which conform to the underwriting standards specified
by Freddie Mac ("conforming loans") and, to a lesser extent, loans which do not
conform to Freddie Mac standards due to loan amounts ("jumbo loans"). All one-
to four-family mortgage loans sold by the Bank are sold pursuant to master
commitments negotiated with Freddie Mac and other investors to purchase loans
meeting such investors' defined criteria. The Bank generally retains the
servicing rights on the mortgage loans sold.
At March 31, 2000, the Bank maintained a servicing portfolio consisting of
$379.2 million of loans held for portfolio, net, and $20.8 million of loans
serviced for others. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, making certain insurance and tax payments on behalf of the
borrowers and generally administering the loans. Substantially all of the loans
currently being serviced for others are loans which have been sold by the Bank.
The gross servicing fee income from loans sold is generally 24 to 48 basis
points of the total balance of the loan serviced.
During the fiscal years ended March 31, 2000 and 1999, the Bank originated
and purchased $66.6 million and $84.0 million of fixed-rate and adjustable-rate
one- to four-family loans, respectively, of which $64.4 million, and $73.2
million, respectively, were retained for the Bank's portfolio. When loans are
sold the Bank recognizes, at the time of sale, the cash gain or loss on the sale
of the loans based on the difference between the net cash proceeds received and
the carrying value of the loans sold. On April 1, 1996, the Bank implemented
SFAS No. 122 "Accounting for Mortgage Servicing Rights an amendment of FASB
Statement No. 65" ("SFAS No. 122") pursuant to which the value of servicing
rights may be recognized as an asset of the Bank. In the fiscal years ended
March 31, 2000 and 1999, the fair value of servicing rights under SFAS No. 122
and SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") was not material and was not
recognized in the consolidated financial statements for those periods. The Bank
has, from time-to-time, purchased whole loans, primarily one- to four-family
mortgage loans or purchased a participation interest in loans originated by
other financial institutions, primarily multi-family and commercial real estate
loans and, at March 31, 2000, had $64.2 million of purchased loans and $9.3
million in loan participation interests. Loans purchased from correspondent
financial institutions are underwritten pursuant to the Bank's policies and
generally closed in the name of the correspondent financial institution and then
purchased by the Bank.
7
<PAGE>
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended March 31,
--------------------------------------
2000 1999 1998
--------------------------------------
(In thousands)
<S> <C> <C> <C>
Beginning balance, loans, net (1) ........................... $ 304,372 $ 224,928 $ 207,063
--------- --------- ---------
Loans originated and purchased:
Mortgage loans:
One- to four-family ................................ 66,556 84,033 41,107
Multi-family ....................................... 30,346 36,904 5,768
Commercial real estate ............................. 35,866 48,136 16,657
Construction and development ....................... 8,031 3,985 5,940
--------- --------- ---------
Total mortgage loans ............................ 140,799 173,058 69,472
--------- --------- ---------
Commercial ............................................ -- 250 --
--------- --------- ---------
Consumer:
Equity lines ....................................... 3,686 6,843 4,166
Other consumer loans ............................... 3,453 4,253 3,277
--------- --------- ---------
Total consumer loans .................................. 7,139 11,096 7,443
--------- --------- ---------
Total loans ........................................... 147,938 184,404 76,915
--------- --------- ---------
Total .................................................... 452,310 409,332 283,978
Principal repayments and other, net ......................... (56,996) (93,676) (55,609)
Loan charge-offs, net ....................................... 13 (103) (30)
Sale of mortgage loans, principal balance ................... (2,172) (10,860) (2,359)
Transfer of mortgage loans to REO (62) -- (230)
--------- --------- ---------
Loans, net and mortgage loans held-for-sale .............. 393,093 304,693 225,750
Mortgage loans held-for-sale -- (321) (822)
--------- --------- ---------
Ending balance, loans, net ............................... $ 393,093 $ 304,372 $ 224,928
========= ========= =========
</TABLE>
------------------------
(1) Includes mortgage loans held-for-sale.
One-to Four-Family Lending. The Bank currently offers both fixed-rate and
adjustable-rate mortgage loans with maturities of up to 30 years secured by one-
to four-family residences. Most of such loans are located in the Bank's primary
market area. One- to four-family mortgage loan originations are generally
obtained through the Bank's in-house loan representatives, existing or past
customers, mortgage brokers and referrals from members of the Bank's local
communities. At March 31, 2000, the Bank's one- to four-family mortgage loans
totalled $201.3 million, or 50.3%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, 21.9% were fixed-rate mortgage loans
and 78.1% were ARM loans.
The Bank currently offers ARM loans with terms of up to 30 years and
interest rates which adjust every one, three or five years from the outset of
the loan and adjust annually after the initial rate period. The interest rates
for the Bank's ARM loans are indexed to either the one, three or five year
Constant Maturity Treasury ("CMT") Index. The Bank originates ARM loans with
initially discounted rates, often known as "teaser rates." The Bank's ARM loans
generally provide for periodic (not more than 2%) and overall (not more than 6%)
caps on the increase or decrease in the interest rate at any adjustment date and
over the life of the loan. The Bank generally retains for its portfolio all
adjustable-rate one- to four-family loans.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the risks associated with adjustable-rate loans but also limit
the interest rate sensitivity of such loans.
8
<PAGE>
All one- to four-family mortgage loans are underwritten according to the
Bank's policies and guidelines. Generally, the Bank originates one- to
four-family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
95% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.
The Bank requires fire, casualty, title and, in certain cases, flood insurance
on all properties securing real estate loans made by the Bank.
In an effort to provide financing for first-time home buyers, the Bank
offers a first-time home buyer loan program, which offers one- to four-family
residential mortgage loans to qualified individuals. These loans are offered
with adjustable- and fixed-rates of interest and terms of up to 30 years.
Pursuant to this program, borrowers receive reduced loan origination fees and
closing costs. Such loans must be secured by an owner-occupied residence. These
loans are originated using the same underwriting guidelines as are the Bank's
other one- to four-family mortgage loans.
Multi-Family and Commercial Real Estate Lending. The Bank originates
multi-family and commercial real estate loans that are generally secured by 5 or
more unit apartment buildings and properties used for business purposes such as
office buildings, industrial facilities or retail facilities located in the
Bank's primary market area. The Bank's multi-family and commercial real estate
underwriting policies provide that such real estate loans may be made in amounts
up to 80% of the appraised value of the property, subject to the Bank's current
loans-to-one-borrower limit, which at March 31, 2000 was $6.9 million. The
Bank's multi-family and commercial real estate loans are made with terms up to
30 years and with interest rates that adjust periodically and are generally
indexed to the prime rate as reported in The Wall Street Journal. In reaching
its decision on whether to make a multi-family or commercial real estate loan,
the Bank considers the net operating income of the property, the borrower's
expertise, credit history, the value of the underlying property, and the
financial conditions of the Borrower/Guarantor. The Bank generally requires that
the properties securing these real estate loans have debt service coverage
ratios (the ratio of earnings before debt service to debt service) of at least
1.25x. In addition, depending on the perceived environmental risk of the
property an environmental impact survey may be required for multi-family and
commercial real estate loans. Generally, all multi-family and commercial real
estate loans made to corporations, partnerships and other business entities
require personal guarantees by the principals. On occasion the Bank may not
require a personal guarantee on such loans depending on the creditworthiness of
the borrower, the amount of the down payment and other mitigating circumstances.
The Bank's multi-family real estate loan portfolio at March 31, 2000 was $78.6
million, or 19.7%, of total loans and the Bank's commercial real estate loan
portfolio at such date was $95.9 million, or 24.0%, of total loans. The largest
multi-family or commercial real estate loan in the Bank's portfolio at March 31,
2000 was a $4.9 million real estate loan secured by a blanket mortgage on five
retail/office buildings.
The Bank also purchases participation interests in multi-family and
commercial real estate loans. Most of these loans are secured by real estate
located in the Bank's primary market area. The Bank will underwrite its
participation interest according to its own underwriting standards. At March 31,
2000, the Bank had $9.3 million in multi-family and commercial real estate loan
participation interests, or 2.3% of total loans.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts. Additionally, because payments on
loans secured by multi-family and commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to adverse conditions in the real estate market or the
economy and thus poses a greater degree of risk than one- to four-family
residential mortgage loans. The Bank seeks to minimize these risks through its
underwriting standards.
9
<PAGE>
Construction and Development Lending. The Bank originates short-term
balloon fixed-rate construction loans for the development of residential and
commercial property. Construction and development loans are offered primarily to
experienced local developers operating in the Bank's market area. The Bank
currently does not originate loans secured by raw land. The majority of the
Bank's construction and development loans are originated to finance the
construction by developers of one- to four-family residential real estate and,
to a lesser extent, multi-family and commercial real estate properties located
in the Bank's primary market area. Construction loans are generally offered with
terms of up to 12 months and may be made in amounts up to 80% of the appraised
value of the property on multi-family and commercial real estate construction
and 85% on one- to four-family residential construction. Construction loan
proceeds are disbursed periodically, in increments, as construction progresses
and as inspections by the Bank's lending officers warrant. At March 31, 2000,
the Bank's largest construction and development loan was a performing loan with
a $1.3 million outstanding principal balance secured by three residential
properties in Wellesley. At March 31, 2000, construction and development loans
totalled $10.0 million (including unadvanced loan amounts), or 2.5%, of the
Bank's total loans.
The Bank also originates construction and development loans to individual
borrowers for the construction of single-family owner-occupied residential
properties with permanent financing commitments by the Bank. The Bank's
underwriting standards and procedures for such loans are similar to those
applicable for one- to four-family residential mortgage lending. Proceeds for
such loans are disbursed as phases of the construction are completed. All such
loans are originated as one- to four-family interest-only adjustable-rate
mortgage loans. Upon completion of the construction, such loans convert to
principal and interest over the remaining term. At March 31, 2000, such loans
totalled $4.4 million, or 44.0%, of the $10.0 million of construction and
development loans.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction and other assumptions, including the
estimated time to sell residential properties. If the estimate of value proves
to be inaccurate, the Bank may be confronted with a property, when completed,
having a value which is insufficient to assure full repayment.
Consumer and Other Lending. Total consumer loans at March 31, 2000 amounted
to $14.0 million, or 3.5%, of the Bank's total loans and consisted primarily of
equity lines of credit and, to a significantly lesser extent, secured and
unsecured personal loans and new and used automobile loans. Such loans are
generally originated in the Bank's primary market area and generally are secured
by real estate, deposit accounts, personal property and automobiles. These loans
are typically shorter term and generally have higher interest rates than one- to
four-family mortgage loans.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. At March 31, 2000, the Bank
had three consumer loans 90 days or more delinquent, whose balances totalled
$50,000.
Loan Approval Procedures and Authority
The Board of Directors of the Bank establishes the lending policies of the
Bank. Such policies provide that all loans up to $300,000 are approved by the
Bank's Internal Loan Committee. In the event a loan is above $300,000, it may be
approved by the President or Executive Vice President. All loans are submitted
to the full Board of Directors or the Bank's Executive Committee for approval or
ratification on a monthly basis.
10
<PAGE>
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 90 days or more and all Real Estate Owned ("REO"). The
procedures taken by the Bank with respect to delinquencies vary depending on the
nature of the loan, period and cause of delinquency and whether the borrower is
habitually delinquent. When a borrower fails to make a required payment on a
loan, the Bank takes a number of steps to have the borrower cure the delinquency
and restore the loan to current status. The Bank generally sends the borrower a
written notice of non-payment after the loan is first past due. The Bank's
guidelines provide that telephone, written correspondence and/or face-to-face
contact will be attempted to ascertain the reasons for delinquency and the
prospects of repayment. When contact is made with the borrower at any time prior
to foreclosure, the Bank attempts to obtain full payment, work out a repayment
schedule with the borrower to avoid foreclosure and in rare instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan not otherwise satisfied, additional letters and telephone calls generally
are made. If the loan is still not brought current or satisfied and it becomes
necessary for the Bank to take legal action, which typically occurs after a loan
is 90 days or more delinquent, the Bank will commence foreclosure proceedings
against any real property that secures the loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the property securing the loan generally is sold at
foreclosure and, if purchased by the Bank, becomes real estate owned.
Federal regulations and the Bank's Asset Classification Policy require that
the Bank utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The Bank has incorporated the OTS internal
asset classifications as a part of its credit monitoring system. The Bank
currently classifies problem and potential problem assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected.
Assets classified as "Doubtful" have all of the weaknesses inherent in
those classified "Substandard" with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as "Loss" are those considered "uncollectable" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets which do not currently expose the
insured institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
"Special Mention."
When an insured institution classifies one or more assets or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances, which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectability of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
11
<PAGE>
Although management believes that, based on information currently available
to it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
The Bank's Classification of Assets Committee reviews and classifies the
Bank's assets on a quarterly basis and the Board of Directors reviews the
results of the reports on a quarterly basis. The Bank classifies assets in
accordance with the management guidelines described above. At March 31, 2000,
the Bank had $774,000, or 0.2%, of total assets, designated as Substandard
consisting of two one- to four-family mortgage loans and two commercial real
estate loans. At March 31, 2000, one single-family residential loan totalling
$63,000 and two installment loans totalling $28,000 were classified as Doubtful.
As of March 31, 2000, the Bank had a total of three one- to four-Family loans,
totaling $480,000, designated as Special Mention.
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At March 31, 2000 At March 31, 1999
------------------------------------------------------------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More
------------------------------------------------------------------------------------
Principal Principal Principal Number Principal
Number Balance Number Balance Number Balance of Balance
of Loans of Loans of Loans of Loans of Loans of Loans Loans of Loans
------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family ................. 14 $1,281 5 $ 731 7 $ 431 6 $ 862
Multi-family ........................ -- -- -- -- -- -- 1 280
Commercial real estate .............. -- -- 2 443 1 275 2 745
Construction and development ........ -- -- -- -- 1 42 -- --
------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans ............. 14 1,281 7 1,174 9 748 9 1,887
------ ------ ------ ------ ------ ------ ------ ------
Consumer loans:
Equity lines ........................ 1 150 -- -- 1 36 1 65
Other consumer loans ................ 5 363 3 50 3 65 2 12
------ ------ ------ ------ ------ ------ ------ ------
Total consumer loans ............. 6 513 3 50 4 101 3 77
------ ------ ------ ------ ------ ------ ------ ------
Total loans ............................ 20 $1,794 10 $1,224 13 $ 849 12 $1,964
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to loans, net ......... 0.46% 0.31% 0.28% 0.65%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1998
--------------------------------------
30-89 Days 90 Days or More
-------------------- -----------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
--------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family ........... 8 $ 616 8 $1,258
Multi-family ............... 1 699 1 254
Commercial real estate ..... -- -- 2 739
Construction and development -- -- -- --
------ ------ ------ ------
Total mortgage loans .... 9 1,315 11 2,251
------ ------ ------ ------
Consumer loans:
Equity lines ............... 1 45 -- --
Other consumer loans ....... 5 37 6 28
------ ------ ------ ------
Total consumer loans .... 6 82 6 28
------ ------ ------ ------
Total loans ................... 15 $1,397 17 $2,279
====== ====== ====== ======
Delinquent loans to loans, net 0.62% 1.01%
====== ======
</TABLE>
12
<PAGE>
Nonperforming Assets and Impaired Loans. The following table sets forth
information regarding nonaccrual loans and REO. At March 31, 2000, the Bank had
$62,000 of REO in its portfolio. It is the policy of the Bank to cease accruing
interest on loans 90 days or more past due and to charge off all accrued
interest. For the fiscal years ended March 31, 2000, 1999 and 1998, the amount
of interest income that was recorded on nonaccrual loans was $157,000, $213,000
and $130,000, respectively. For the fiscal years ended March 31, 2000, 1999 and
1998, the amount of additional interest income that would have been recognized
on nonaccrual loans if such loans had continued to perform in accordance with
their contractual terms was $83,000, $87,000 and $144,000, respectively. There
were no loans that met the definition of an impaired loan per SFAS No. 114 at or
during the fiscal year ended March 31, 2000 and 1998. As of March 31, 1999 loans
totaling $280,000 were considered to be impaired with an allowance for credit
loss of $82,000.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods as indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Mortgage loans:
One- to four-family ......................... $ 731 $ 862 $1,258 $1,499 $1,128
Multi-family ................................ -- 280 254 -- --
Commercial real estate ...................... 443 745 739 -- --
Construction and development ................ -- -- -- --
------ ------ ------ ------ ------
Total mortgage loans ..................... 1,174 1,887 2,251 1,499 1,128
------ ------ ------ ------ ------
Consumer loans:
Equity lines ................................ -- 65 -- 40 --
Other consumer loans ........................ 50 12 28 7 22
------ ------ ------ ------ ------
Total consumer loans ..................... 50 77 28 47 22
------ ------ ------ ------ ------
Total nonaccrual loans ................... 1,224 1,964 2,279 1,546 1,150
Real estate owned, net ............................ 62 -- -- 73 65
------ ------ ------ ------ ------
Total nonperforming assets (2) ........... $1,286 $1,964 $2,279 $1,619 $1,215
====== ======= ====== ====== ======
Allowance for loan losses as a percent
of loans (1) ................................... 0.99% 0.98% 1.10% 0.81% 0.94%
Allowance for loans losses as a percent
of nonperforming loans (2) ..................... 319.85 154.12 110.27 109.12 154.26
Nonperforming loans as a percent of
loans (1)(2) ................................... 0.31 0.64 1.00 0.74 0.61
Nonperforming assets as a percent of
total assets (3) ............................... 0.28 0.55 0.77 0.69 0.55
</TABLE>
-------------------------
(1) Loans are presented before allowance for loan losses.
(2) Nonperforming loans consist of all loans 90 days or more past due and other
loans which have been identified by the Bank as presenting uncertainty with
respect to the collectibility of interest or principal.
(3) Nonperforming assets consist of nonperforming loans and REO.
13
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses on loans which are deemed probable and estimable based on
information currently known to management. The allowance is based upon a number
of factors, including economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management. The economy
in the Bank's primary market area suffered significantly in the late 1980s and
early 1990s. These adverse economic conditions negatively affected the Bank's
loan loss and delinquency activities and led to a deterioration of the
collateral values of the Bank's loans during those years. In more recent years,
the economy and real estate market in and around the greater Boston metropolitan
area has improved which has had a positive impact on the Bank's loan loss and
delinquency activities and the value of properties securing the Bank's loans. As
of March 31, 2000, the Bank's allowance for loan losses was 0.99% of total
loans, as compared to 0.98% as of March 31, 1999. The Bank had nonaccrual loans
of $1.2 million and $2.0 million at March 31, 2000 and March 31, 1999,
respectively. The Bank will continue to monitor and modify its allowances for
loan losses as conditions dictate. While management believes the Bank's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover loan losses incurred by
the Bank or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods as indicated.
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ................. $3,027 $2,513 $1,687 $1,774 $1,825
------ ------ ------ ------ ------
Provision for loan losses ...................... 875 617 856 117 1
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
One- to four-family ...................... -- 103 49 225 94
Commercial real estate ................... -- -- -- -- --
Construction and development ............. -- -- -- -- --
Consumer loans .............................. 1 -- -- -- 55
------ ------ ------ ------ ------
Total charge-offs ..................... 1 103 49 225 149
------ ------ ------ ------ ------
Recoveries ..................................... 14 -- 19 21 97
------ ------ ------ ------ ------
Balance at end of period ....................... $3,915 $3,027 $2,513 $1,687 $1,774
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period ........................... 0.00% 0.03% 0.01% 0.10% 0.03%
====== ====== ====== ====== ======
Allowance for loan losses as a percent
of loans (1) ................................ 0.99% 0.98% 1.10% 0.81% 0.94%
====== ====== ====== ====== ======
Allowance for loans losses as a percent of
Nonperforming loans (2) ..................... 319.85% 154.12% 110.27% 109.12% 154.26%
====== ====== ====== ====== ======
</TABLE>
--------------------------
(1) Loans are presented before deducting the allowance for loan losses.
(2) Nonperforming loans consist of all loans 90 days or more past due and other
loans which have been identified by the Bank as presenting uncertainty with
respect to the collectibility of interest or principal.
14
<PAGE>
The following table sets forth the Bank's percentage of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------ ---------- -------- ------ ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans ....................... $1,918 48.99% 72.47% $1,221 40.34% 75.09%
Commercial real estate ............... 1,549 39.56 23.97 1,314 43.41 21.94
------ ------ ------ ------ ------ ------
Total ....................... 3,467 88.55 96.44 2,535 83.75 97.03
Commercial loans ..................... -- -- .06 -- -- 0.16
Consumer loans ....................... 124 3.17 3.50 124 4.10 2.81
Unallocated .......................... 324 8.28 -- 368 12.15 --
------ ------ ------ ------ ------ ------
Total allowance for loan
losses $3,915 100.00% 100.00% $3,027 100.00% 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
At March 31,
-----------------------------------
1998
-----------------------------------
Percent
of Loans
Percent of in Each
Allowance Category
to Total to Total
Amount Allowance Loans
-----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage loans ........................ $1,131 45.01% 81.35%
Commercial real estate ................ 955 38.00 15.39
------ ----- -----
Total ........................ 2,086 83.01 96.74
Commercial loans ...................... -- -- 0.02
Consumer loans ........................ 50 1.99 3.24
Unallocated ........................... 377 15.00 --
------ ----- -----
Total allowance for loan
losses $2,513 100.00% 100.00%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------------------------------------------
1997 1996
--------------------------------------- --------------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------ ---------- -------- ------ ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans ............................. $ 793 47.00% 85.63% $ 781 44.03% 88.53%
Commercial real estate ..................... 523 31.00 12.00 514 28.97 10.05
Total ............................. 1,316 78.00 97.63 1,295 73.00 98.58
Commercial loans ........................... -- -- 0.02 -- -- --
Consumer loans ............................. 34 2.02 2.35 18 1.01 1.42
Unallocated ................................ 337 19.98 -- 461 25.99 --
------ ------ ------ ------ ------ ------
Total allowance for loan losses ............ $1,687 100.00% 100.00% $1,774 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Real Estate Owned At March 31, 2000 the Bank had $62,000 in REO. At March
31, 1999 the Bank had no REO. When the Bank acquires property through
foreclosure or deed in lieu of foreclosure, it is initially recorded at the
lower of the recorded investment in the corresponding loan or the fair value of
the related assets at the date of foreclosure, less costs to sell. Thereafter,
if there is a further deterioration in value, the Bank provides for a specific
valuation allowance and charges operations for the diminution in value. It is
the policy of the Bank to have obtained an appraisal on all real estate subject
to foreclosure proceedings prior to the time of foreclosure. It is the Bank's
policy to require appraisals on a periodic basis on foreclosed properties and
conduct inspections on foreclosed properties.
15
<PAGE>
Investment Activities
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally-chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally-chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations.
Historically, the Bank has maintained liquid assets above the minimum OTS
requirements and at a level considered being adequate to meet its normal daily
activities.
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity and a high quality investment
portfolio. The Bank primarily utilizes investments in securities for liquidity
management and as a method of deploying excess funds not utilized for investment
in loans. Generally, the Bank's investment policy is more restrictive than the
OTS regulations allow and, accordingly, the Bank has invested primarily in U.S.
Government and agency securities, which qualify as liquid assets under the OTS
regulations, federal funds and U.S. Government sponsored agency issued
mortgage-backed securities. The Bank is required by SFAS No. 115 to categorize
its securities as held-to-maturity, available-for-sale or held for trading. As
of March 31, 2000, the Bank's securities portfolio consisted of investment
securities, marketable equity securities and mortgage-backed and
mortgage-related securities. The carrying amounts of the held-to-maturity
portfolio totalled $527,000, or 0.11% of total assets, and the
available-for-sale securities portfolio totalled $31.8 million, or 6.9% of total
assets.
Short term investments primarily consist of overnight deposits at the FHLB
and the Co-operative Central Bank Liquidity Fund. The Liquidity Fund is a
no-load diversified, open-ended money market investment fund whose objective is
maximum current income consistent with liquidity and the preservation of
capital. The Fund is designed solely for use by eligible investors as an
economical and convenient way to make liquid investments.
As of March 31, 2000, $15.3 million, or 3.33% of total assets, of the
Bank's securities portfolio consisted of investment securities, primarily debt
securities issued by the U.S. Government or government sponsored agencies (such
as the FHLB) and marketable equity securities, primarily consisting of mutual
fund securities, common stocks, preferred stocks, trust preferred stocks and
corporate bonds and notes. The Bank generally invests in U.S. Treasury and
agency obligations with maturities of 24 to 60 months. The weighted average
maturities of the Bank's fixed rate investment securities portfolio, excluding
any equity securities, were 22 months as of March 31, 2000.
At March 31, 2000, the Bank had $17.0 million of mortgage-backed and
mortgage-related securities, or 3.69% of total assets, all of which were backed
by fixed-rate mortgages and which consisted of mortgage-backed securities and
collateralized mortgage obligations ("CMOs") insured or issued by Ginnie Mae,
Fannie Mae and Freddie Mac or private issuers, such as GE Capital Mortgage
Services, Inc. At March 31, 2000, the weighted average estimated maturity of its
mortgage-backed and mortgage-related securities portfolio was 39 months.
Investments in mortgage-backed and mortgage-related securities involve a risk
that actual prepayments will be greater than estimated prepayments over the life
of the security, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
changing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. In addition, the market value of such
securities may be adversely affected by changes in interest rates.
While investments in privately issued mortgage-backed securities generally
bear yields higher than mortgage-backed securities insured by government
sponsored agencies, they involve a greater degree of risk than those issued by
government sponsored agencies, as such, securities are not insured or guaranteed
by such government sponsored agencies.
16
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Investment securities ....................... $ -- $ -- $ -- $ -- $ 2,001 $ 1,999
Mortgage-backed and mortgage-
related securities ....................... 527 535 956 978 2,271 2,275
------- ------- ------- ------- ------- -------
Total held-to-maturity ................... 527 535 956 978 4,272 4,274
------- ------- ------- ------- ------- -------
Available-for-sale securities:
Marketable equity securities ................ 9,840 9,049 9,525 9,737 5,391 6,523
Mortgage-backed securities .................. 16,937 16,476 5,371 5,391 -- --
Trust preferred equity securities ........... 2,501 1,916 2,506 2,521 -- --
Corporate bonds and notes ................... 495 462 1,247 1,234 -- --
Preferred stocks ............................ 1,500 1,342 1,500 1,460 -- --
Government agency securities ................ 2,607 2,567 4,000 4,007 -- --
------- ------- ------- ------- ------- -------
Total available-for-sale .................... 33,880 31,812 24,149 24,350 5,391 6,523
------- ------- ------- ------- ------- -------
Total securities ...................... $34,407 $32,347 $25,105 $25,328 $ 9,663 $10,797
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed and mortgage-related
securities.
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------
Percent Percent
Amortized of Fair Amortized of Fair
Cost Total (1) Value Cost Total (1) Value
--------- -------- ------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed and mortgage- related securities:
Ginnie Mae ........................................... $ 239 1.36% $ 247 $ 314 4.96% $ 328
Freddie Mac .......................................... 97 0.56 99 134 2.12 142
CMOs ................................................. 17,128 98.08 16,665 5,879 92.92 5,899
------- ------ ------- ------- ------ -------
Total mortgage-backed and
mortgage-related securities ............................. $17,464 100.00% $17,011 $ 6,327 100.00% $ 6,369
======= ====== ======= ======= ====== =======
<CAPTION>
At March 31,
-----------------------------------------
1998
-----------------------------------------
Percent
Amortized of Fair
Cost Total (1) Value
---------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage-backed and mortgage- related securities:
Ginnie Mae ................................ $ 383 16.86% $ 383
Freddie Mac ............................... 183 8.06 185
CMOs ...................................... 1,705 75.08 1,707
--------- -------- ---------
Total mortgage-backed and
mortgage-related securities .................. $ 2,271 100.00% $ 2,275
========= ======== =========
</TABLE>
-----------------------------
(1) Based on amortized cost.
17
<PAGE>
The following table sets forth the Bank's mortgage-backed and
mortgage-related securities activities for the periods indicated.
For the Year Ended March 31,
---------------------------------------
2000 1999 1998
---------------------------------------
(In thousands)
Beginning balance ............. $ 6,327 $ 2,271 $ 3,250
Principal repayments ....... (4,741) (2,010) (973)
Purchases .................. 15,830 6,074 --
Accretion of discount and
amortization of (premium) 48 (8) (6)
-------- -------- --------
Ending balance ................ $ 17,464 $ 6,327 $ 2,271
======== ======== ========
The table below sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Bank's debt
securities.
<TABLE>
<CAPTION>
At March 31, 2000
------------------------------------------------------------------------------
More than One Year More than Five Years
One Year or Less to Five Years to Ten Years
--------------------- ------------------------- ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
Investment securities (1) ................ $1,607 5.73% $1,000 6.26% $ -- --%
Fixed-rate:
Ginnie Mae ............................ -- -- -- -- 239 8.00
Freddie Mac ........................... -- -- -- -- 97 8.57
CMOs .................................. -- -- -- -- 4,262 6.50
------ ------ ------
Total debt securities ....................... $1,607 5.73% $1,000 6.26% $4,598 6.51%
====== ====== ======
<CAPTION>
At March 31, 2000
----------------------------------------------------------------
More than Ten
Years Total
--------------------------- ---------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Debt securities:
Investment securities (1) ........................... $ 2,996 7.28% $ 5,603 6.14%
Fixed-rate:
Ginnie Mae ....................................... -- -- 239 8.00
Freddie Mac ...................................... 3,744 6.49 3,841 6.54
CMOs ............................................. 9,122 6.34 13,384 6.39
------- -------
Total debt securities .................................. $15,862 6.42% $26,067 6.38%
======= =======
</TABLE>
-------------------------------------------------------
(1) Consists of government agency obligations, and corporate bonds and notes.
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and FHLB advances are the primary
sources of the Bank's funds for use in lending, investing and for other general
purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the year ended March
31, 2000, the average balance of core deposits represented 49.2% of total
average deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. The Bank's deposits are obtained predominantly from the areas
surrounding its branch offices. The Bank has historically relied primarily on
providing a higher level of customer service and long-standing relationships
with customers to attract and retain these deposits; however, market interest
rates and rates offered by competing financial institutions significantly affect
the Bank's ability to attract and retain deposits. The Bank uses traditional
means of advertising its deposit products, including print media, and generally
does not solicit deposits from outside its market area. While the Bank does not
actively solicit certificate accounts in excess of $100,000 or use brokers to
obtain deposits, the Bank may solicit, from time-to-time, such deposits
depending upon market conditions. The Bank offers negotiated rates on some of
its certificate accounts. At March 31, 2000, $112.8 million, or 50.3%, of total
average deposits were certificate accounts with a weighted average remaining
maturity of 11.1 months.
18
<PAGE>
For the year ended March 31, 2000, certificate accounts in excess of
$100,000 increased $9.0 million, or 58.8%, from $15.3 million to $24.3 million.
The increase in certificate accounts was due to offering new competitively
priced certificate account products which, in part, resulted in a decrease in
the average cost of certificates of deposit from 5.43% for fiscal 1999 to 5.18%
for fiscal 2000. Further increases in certificate accounts, which tend to be
more sensitive to movements in market interest rates than core deposits, may
result in the Bank's deposit base being less stable than if it had a larger
amount of core deposits which, in turn, may result in further increases in the
Bank's cost of deposits and may adversely affect net interest income in future
periods.
The following table presents the average deposit activity of the Bank for
the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------------------------
2000 1999 1998
----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net deposits .................................................... $19,505 $ (175) $ 2,838
Interest credited on deposit accounts ........................... 8,884 8,824 8,994
------- ------- -------
Total increase in deposit accounts .............................. $28,389 $ 8,999 $11,832
======= ======= =======
</TABLE>
At March 31, 2000, the Bank had $24.3 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
Amount Weighted
Average
Maturity Period Rate
------------------------ ----------------------
(Dollars in thousands)
3 months or less ....... $ 5,687 5.21%
Over 3 through 6 months 8,248 5.32
Over 6 through 12 months 5,043 5.50
Over 12 months ......... 5,302 6.06
------- ----
Total ............ $24,280 5.49%
======= ====
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize month-end balances.
<TABLE>
<CAPTION>
For the Year Ended March 31,
---------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits ............................. $ 4,212 1.88% --% $ 658 0.32% --%
Money market accounts ....................... 58,644 26.17 3.88 46,489 22.51 4.08
Regular savings accounts .................... 25,484 11.37 2.01 27,250 13.20 2.24
NOW accounts ................................ 22,993 10.26 1.11 21,872 10.59 1.51
-------- ------ -------- ------
Total ................................. 111,333 49.67 2.79 96,269 46.62 2.95
-------- ------ -------- ------
Certificate accounts (1)(2):
Less than 6 months ....................... 46,614 20.80 5.01 5,363 2.60 4.91
Over 6 through 12 months ................. 44,260 19.75 5.15 71,216 34.48 5.32
Over 12 through
36 months ............................. 18,655 8.32 5.51 26,045 12.61 5.70
Over 36 months ........................... 3,269 1.46 5.98 7,622 3.69 6.57
-------- ------ -------- ------
Total certificate accounts ............... 112,798 50.33 5.18 110,246 53.38 5.43
-------- ------ -------- ------
Total average deposits ................... $224,131 100.00% 3.96% $206,515 100.00% 4.27%
======== ====== ======== ======
<CAPTION>
For the Year Ended March 31,
---------------------------------
1998
---------------------------------
Percent
of Total Weighted
Average Average Average
Balance Deposits Rate
---------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Demand deposits .......................... $ 257 0.13% --%
Money market accounts .................... 43,019 21.32 3.91
Regular savings accounts ................. 29,167 14.46 2.83
NOW accounts ............................. 21,494 10.65 1.81
-------- ------
Total .............................. 93,937 46.56 3.08
-------- ------
Certificate accounts (1)(2):
Less than 6 months .................... 4,981 2.47 5.32
Over 6 through 12 months .............. 69,005 34.20 5.54
Over 12 through
36 months .......................... 21,715 10.76 5.75
Over 36 months ........................ 12,119 6.01 6.52
-------- ------
Total certificate accounts ............ 107,820 53.44 5.65
-------- ------
Total average deposits ................ $201,757 100.00% 4.46%
======== ======
</TABLE>
------------------------------------------
(1) Based on remaining maturity of certificates.
(2) Includes retirement accounts such as IRA and Keogh accounts.
19
<PAGE>
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 2000.
<TABLE>
<CAPTION>
Period to Maturity from March 31, 2000
---------------------------------------------------------------------------------------
Less One Two Three Four More
than to to to to than
One Two Three Four Five Five
Year Years Years Years Years Years
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00% ...................... $ 577 $ -- $ -- $ -- $ -- $ --
4.01% to 5.00% .................. 31,895 2,716 358 -- -- --
5.01% to 6.00% .................. 56,718 10,716 1,452 434 371 1
6.01% to 7.00% .................. 2,517 6,471 2,323 225 2,480 --
7.01% to 8.00% .................. 1,305 -- 99 -- -- --
8.01% to 9.00% .................. -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total ........................ $93,012 $19,903 $ 4,232 $ 659 $ 2,851 $ 1
======= ======= ======= ======= ======= =======
<CAPTION>
At March 31,
2000 1999 1998
-------- -------- --------
Certificate accounts:
0 to 4.00% ..................... $ 577 $ 330 $ 326
4.01% to 5.00% ................. 34,969 32,226 363
5.01% to 6.00% ................. 69,692 66,827 95,096
6.01% to 7.00% ................. 14,016 7,541 10,737
7.01% to 8.00% ................. 1,404 2,686 3,127
8.01% to 9.00% ................. -- -- 1
-------- -------- --------
Total ....................... $120,658 $109,610 $109,650
======== ======== ========
</TABLE>
Borrowings. As part of its operating strategy, the Bank utilizes advances
from the FHLB as an alternative to retail deposits to fund its operations. The
Bank has increased its emphasis on the utilization of FHLB borrowings to fund
its asset growth. By utilizing FHLB advances, which possess varying stated
maturities, the Bank can meet its liquidity needs without otherwise being
dependent upon retail deposits and revising its deposit rates to attract retail
deposits, which have no stated maturities (except for certificates of deposit),
which are interest rate sensitive and which are subject to withdrawal from the
Bank at any time. These FHLB advances are collateralized primarily by mortgage
loans and mortgage-backed securities held by the Bank and secondarily by the
Bank's investment in capital stock of the FHLB. FHLB advances are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time-to-time in accordance
with the policies of the FHLB. At March 31, 2000, the Bank had $147.5 million in
outstanding advances from the FHLB and $8.1 million in other borrowings, as
compared to $77.1 million and none at March 31, 1999, respectively.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
------------------------------------------------
2000 1999 1998
------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding ......................................... $131,015 $ 39,404 $ 21,102
Maximum amount outstanding at any month-end
during the period ................................................ 156,027 77,119 25,000
Balance outstanding at end of period ................................ 147,527 77,119 20,000
Weighted average interest rate during the period .................... 5.40% 4.84% 5.72%
Weighted average interest rate at end of period ..................... 5.68% 4.82% 5.13%
Other borrowed funds:
Average balance outstanding ......................................... $ 7,035 -- --
Maximum amount outstanding at any month-end
during the period ................................................ 15,130 -- --
Balance outstanding at end of period ................................ 8,137 -- --
</TABLE>
20
<PAGE>
REGULATION AND SUPERVISION.
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank System and
its deposit accounts are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company was not generally restricted as to the
types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, such as the Company, so long as the Bank continues to
comply with the QTL Test. Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
21
<PAGE>
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company.
In addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system), and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard. The OTS regulations also require that, in meeting
the tangible, leverage and risk-based capital standards, institutions must
generally deduct investments in and loans to subsidiaries engaged in activities
as principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At March 31, 2000, the Bank met each of its
capital requirements.
22
<PAGE>
The following table presents the Bank's capital position at March 31, 2000.
<TABLE>
<CAPTION>
Capital
------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- ------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible ...................... $41,612 $ 6,825 $34,787 9.15% 1.50%
Core (Leverage) ............... $41,612 $18,200 $23,412 9.15% 4.00%
Risk-based .................... $45,680 $23,067 $22,613 15.84% 8.00%
</TABLE>
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there is equal
sharing of FICO payments between SAIF and BIF members as of January 1, 2000.
The Bank's assessment rate for fiscal 2000 ranged from 2.08 to 5.92 basis
points and the premium paid for this period was $90,000, which represents
payment toward the FICO bonds. The FDIC has the authority to increase insurance
assessments. A significant increase in SAIF Insurance premiums would likely have
an adverse effect on the operating expenses and results of the operations of the
Bank. Management cannot predict what insurance assessment rates will be in the
future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
23
<PAGE>
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March 31,
2000, the Bank's limit on loans to one borrower was $6.9 million, and the Bank's
largest aggregate outstanding balance of loans to one borrower was $6.6 million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of March 31, 2000, the Bank maintained 76.5% of its portfolio
assets in qualified thrift investments and, therefore, met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Under the new OTS regulation effective
on April 1, 1999, an application to and the prior approval of the OTS is
required prior to any capital distribution if the institution does not meet the
criteria for "expedited treatment" of applications under OTS regulations (i.e.,
generally, examination ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with OTS. If an
application is not required, the institution must still provide prior notice to
OTS of the capital distribution if, like the Bank, it is a subsidiary of a
holding company. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%. Monetary penalties may
be imposed for failure to meet these liquidity requirements. The Bank's
regulatory liquidity ratio for March 31, 2000 was 6.12%, which exceeded the
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended March 31, 2000 totaled $82,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law.
24
<PAGE>
The purchase of low quality assets from affiliates is generally prohibited.
The transactions with affiliates must be on terms and under circumstances, that
are at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank, is required to acquire and hold shares of capital
stock in that Federal Home Loan Bank in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the Federal Home Loan Bank, whichever is greater. The Bank was in
compliance with this requirement with an investment in Federal Home Loan Bank
stock at March 31, 2000 of $8.1 million.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
25
<PAGE>
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $44.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.329
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $44.3
million. The first $5.0 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank complies with the foregoing requirements.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year,
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company. The Bank has not been audited by the IRS or the
Massachusetts Department of Revenue for eight years, since 1992, which covered
the tax years 1992 and previous. For its 2000 taxable year, the Company is
subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, repeals the reserve method of accounting for bad
debts for tax years beginning after 1995 and requires savings institutions to
recapture (i.e., take into income) certain portions of their accumulated bad
debt reserves. Thrift institutions eligible to be treated as "small banks"
(assets of $500 million or less) are allowed to use the Experience Method
applicable to such institutions, while thrift institutions that are treated as
large banks (assets exceeding $500 million) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to a
2-year suspension if the "residential loan requirement" is satisfied.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Bank's 1996 taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
26
<PAGE>
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision, which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
State and Local Taxation
Commonwealth of Massachusetts Taxation. On July 27, 1995, the Governor of
Massachusetts approved legislation to reduce the tax rate applicable to
financial institutions, including savings banks, from 12.54% on their net income
to 10.50% on their net income apportioned to Massachusetts. The reduced rate is
to be phased-in over a five year period whereby the rate was 11.71% for 1996,
11.32% for 1997, 10.91% for 1998, and will be 10.50% for future years. Net
income for years beginning before January 1, 1999 includes gross income as
defined under the provisions of the Code, plus interest from bonds, notes and
evidences of indebtedness of any state, including Massachusetts, less the
deductions, excluding the deductions for dividends received, state taxes, and
net operating losses, as defined under the provisions of the Code. For taxable
years beginning on or after January 1, 1999, the definition of state taxable
income is modified to allow a deduction for 95% of dividends received from stock
where the Company owns 15% or more of the voting stock of the institution paying
the dividend and to allow deductions from certain expenses allocated to
federally tax exempt obligations. Subsidiary corporations of the Company
conducting business in Massachusetts must file separate Massachusetts state tax
returns and are taxed as financial institutions, with certain modifications and
grandfathering for taxable years before 1996. The net worth or tangible property
of such grandfathered subsidiaries is taxed at a rate of 0.26%. Such
grandfathered subsidiaries may file consolidated tax returns on the net earnings
portion of the corporate tax.
Corporations that qualify as "securities corporations," as defined by the
Massachusetts tax code, are taxed at a special rate of 0.33% of their gross
income if they qualify as a "bank-holding company" under the Massachusetts tax
code. The Company qualifies for this reduced tax rate provided that it is
exclusively engaged in activities of a "securities corporation." The Company
qualifies as a securities corporation because a separate subsidiary was formed
to make the loan to the Bank's Employee Stock Ownership Plan and related trust
and all of the Company's other activities qualify as activities permissible for
a securities corporation. If the Company fails to so qualify, however, it will
be taxed as a financial institution at a rate of 10.50% beginning in fiscal
2001.
The Bank has two subsidiary corporations that qualify as "securities
corporations," as defined by the Massachusetts tax code, which are taxed at a
special rate of 1.32% of their net income under the Massachusetts tax code. The
subsidiaries qualify for this reduced tax rate provided that they exclusively
engaged in investment activities that can also be done by the Bank.
27
<PAGE>
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Item 2. Properties
The Bank currently conducts its business through its executive,
administrative and full service offices. The Company believes that the Bank's
current facilities are adequate to meet the present needs of the Bank and the
Company.
<TABLE>
<CAPTION>
Net Book Value of
Property or
Leased Original Date of Leasehold
or Year Leased Lease Improvements at
Location Owned or Acquired Expiration March 31, 2000
------------------------------------ ------ ----------- ------------------ -----------------
(In thousands)
<S> <C> <C> <C> <C>
Executive/Branch Office:
1299 Beacon Street
Brookline, MA 02446.............. Owned 1950 -- $ 653
Administrative Office:
1309 Beacon Street
Brookline, MA 02446............. Leased 1987 February 2002 (1) 117
1319 Beacon Street
Brookline, MA 02446............. Leased 1999 November 2004 (1) 131
Branch Offices:
184 Massachusetts Avenue
Boston, MA 02115................. Leased 1973 December 2000 14
Dedham Mall
Dedham, MA 02026............... Leased 1982 June 2000 (2) _
61 Lenox Street
Norwood, MA 02062.............. Owned 1975 -- 196
705 High Street
Westwood, MA 02090............. Owned 1977 -- 130
931 Main Street
Walpole, MA. 02081................ Leased 2000 January 2010 (3) 148
------
Total............................................................................ $1,389
======
</TABLE>
---------------------
(1) The Bank has an option to renew this lease for one additional five-year
period.
(2) The Bank is in the process of renewing this lease for a five-year period,
with an option for an additional five-year period.
(3) The Bank has an option to renew this lease for one additional ten-year
period.
Item 3. Legal Proceedings.
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
28
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Common Stock of the Company is traded on the American Stock Exchange
under the symbol "BYS." The stock began trading on March 30, 1998. As of May 31,
2000, there were 432 registered recordholders of the Common Stock of the
Company, which includes shares held in street name. The following table sets
forth for the quarters indicated the range of high and low sale price
information for the Common Stock of the Company as reported on the American
Stock Exchange.
<TABLE>
<CAPTION>
Year Ended March 31, 2000
-------------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
High ............................. $ 19.625 $ 20.00 $ 21.00 $ 22.25
Low .............................. $ 15.875 $ 19.00 $ 19.125 $20.3125
Dividend Paid .................... $ 0.08 $ 0.08 $ 0.06 $ 0.06
</TABLE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
At or for the years ended March 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------
Selected Balance Sheet Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total Assets ...................................... $ 460,137 $ 359,404 $ 295,291 $ 233,074 $ 219,850
Investments ....................................... 32,939 31,675 56,795 16,456 19,467
Loans, net ........................................ 393,093 304,372 224,928 207,063 186,534
Mortgage loans held for sale ...................... -- 321 822 -- 47
Deposits .......................................... 247,344 218,955 209,956 198,124 188,981
FHLB advances ..................................... 147,527 77,119 20,000 14,500 11,650
Stockholders' equity .............................. 52,630 60,298 63,574 19,474 17,962
Allowance for loan losses ......................... 3,915 3,027 2,513 1,687 1,774
Non-performing loans .............................. 1,224 1,964 2,279 1,546 1,150
Non-performing assets ............................. 1,286 1,964 2,279 1,619 1,215
Book value per share .............................. $ 29.06 $ 26.88 $ 27.02 N/A N/A
Selected Operating Data:
Interest income ................................. $ 30,973 $ 23,426 $ 19,249 $ 17,476 $ 16,548
Interest expense ................................ 16,355 10,758 10,200 9,218 8,423
--------- --------- --------- --------- ---------
Net interest income ........................... 14,618 12,668 9,049 8,258 8,125
Provision for loan losses ....................... 875 617 856 117 1
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses ............................. 13,743 12,051 8,193 8,141 8,124
Total noninterest income ........................ 1,106 431 313 407 366
Total noninterest expense ....................... 10,612 8,706 11,008 7,409 5,537
--------- --------- --------- --------- ---------
Income before income taxes .................... 4,237 3,776 (2,502) 1,139 2,953
Income taxes (benefit) .......................... 1,482 1,542 (751) 10 1,269
--------- --------- --------- --------- ---------
Net Income (loss) ........................... $ 2,755 $ 2,234 $ (1,751) $ 1,129 $ 1,684
========= ========= ========= ========= =========
Per Share Data:
Basic earnings ................................... $ 1.34 $ 0.97 N/A N/A N/A
Diluted earnings ................................. $ 1.34 $ 0.95 N/A N/A N/A
Dividends paid ................................... $ 0.28 $ 0.05 N/A N/A N/A
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
At or for the years ended March 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets .......................... 0.65% 0.71% (0.71)% 0.50% 0.84%
Return on average equity .......................... 4.82 3.58 (8.64) 6.00 10.1
Average equity as a percent of average
assets ............................................ 13.38 19.88 8.27 8.30 8.30
Interest rate spread .............................. 3.13 3.36 3.54 3.48 3.90
Net interest margin ............................... 3.63 4.19 3.82 3.76 4.20
Average interest-earning assets to
average interest bearing liabilities........... 112.36 123.34 106.52 106.56 107.03
Operating expense as a percent of
average total assets .......................... 2.49 2.77 4.49 3.27 2.77
Dividend payout ratio ............................ 20.90 5.26 N/A N/A N/A
Capital Ratios:
Leverage capital ratio............................. 9.15 11.66 13.31 8.20 8.20
Risk-based capital ratio .......................... 15.84 19.99 26.25 16.02 16.86
Asset Quality Ratios:
Nonperforming loans as a percent
of loans receivable, net ...................... 0.31 0.64 1.00 0.74 0.61
Nonperforming assets as a percent
of total assets ............................... 0.28 0.55 0.77 0.69 0.55
Allowance for loan losses as a percent
of loans before allowance for loan
losses ..................................... 0.99 0.98 1.10 0.81 0.94
Allowance for loan losses as a percent
of nonperforming loans ........................ 319.85% 154.12% 110.27% 109.12% 154.26%
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion should be read in conjunction with the "Selected
Financial Data" and Consolidated Financial Statements and related Notes
appearing elsewhere in this Form 10-K.
General
The Company does not transact any material business other than through its
wholly-owned subsidiary, the Bank. The Bank's results of operations are
dependent primarily on net interest income, which is the difference between the
income earned on its loan and investment portfolios and its cost of funds,
consisting of the interest paid on deposits and borrowings. Results of
operations are also affected by the Bank's provision for loan losses, loan sale
activities and loan servicing. The Bank's non interest expense principally
consists of compensation and employee benefits, office occupancy and equipment
expense, federal deposit insurance premiums, data processing, advertising and
business promotion and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact the Bank.
30
<PAGE>
This Form 10-K contains forward looking statements that are based on
assumptions and describe future plans, strategies, and expectations of the
Company. These forward looking statements 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 and 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 changes in relevant
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. 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 the statements or to reflect the occurrence
of anticipated or unanticipated events.
Operating Strategy
Management's primary goal has been to maintain the Bank's profitability,
asset quality and its capital position by: (i) investing primarily in one- to
four-family loans secured by properties located in its primary market area; (ii)
investing in multi-family, commercial real estate and construction and
development loans secured by properties located in the Bank's primary market
area, to the extent that such loans meet the Bank's general underwriting
criteria; (iii) investing funds not utilized for loan investments in short-term
U.S. Treasury and mortgage-backed and mortgage-related securities; and (iv)
managing interest rate risk by emphasizing the origination of adjustable-rate
loans and short-term fixed-rate loans and investing in short-term securities and
generally selling longer-term fixed-rate loans that the Bank originates. The
Bank intends to continue this operating strategy in an effort to enhance its
long-term profitability while maintaining a reasonable level of interest rate
risk and enhance such strategy by expanding the products and services it offers,
as necessary, in order to improve its market share in its primary market area.
In this regard, the Bank offers business checking accounts, 24-hour banking by
telephone, debit card services and Internet banking.
Comparison of Financial Condition at March 31, 2000 and March 31, 1999
Total assets at March 31, 2000 were $460.1 million, compared to $359.4
million at March 31, 1999, an increase of $100.7 million, or 28.0%. Asset growth
was primarily due to the increased loan and investment securities portfolios;
funded by an increase of $70.4 million in FHLB borrowings and an $28.4 million
increase in deposits.
Investments at March 31, 2000 totalled $32.9 million, an increase of $1.2
million, or 3.8%, compared to $31.7 million at March 31, 1999. The increase was
the result of the purchase of mortgage backed securities, offset by a reduction
in short-term investments, which were used to fund loan growth.
Loans receivable, net of allowance for loan losses and deferred loan
origination fees, increased $88.7 million to $393.1 million at March 31, 2000,
or 29.1%, compared to $304.4 million at March 31, 1999. The increase in loans
was due to a $32.5 million, or 19.2%, increase in one- to four-family loans, a
$20.9 million, or 36.1%, increase in multi-family loans, a $28.0 million, or
41.4%, increase in commercial real estate loans, a $3.1 million, or 76.5%,
increase in construction and development loans and a $5.3 million, or 61.3%,
increase in consumer loans.
Non-performing assets at March 31, 2000 were $1.3 million, compared to $2.0
million at March 31, 1999, a decrease of 35.0%. This decrease was the result of
certain non-accrual loans being paid off or brought current. The allowance for
loan losses increased $875,000 to $3.9 million at March 31, 2000, compared to
$3.0 million at March 31, 1999, an increase of 30.0%. At March 31, 2000 the
allowance represents 319.8% of non-performing loans and 0.99% of total loans,
compared to 154.1% of non-performing loans and 0.98% of total loans at March 31,
1999. Total REO at March 31, 2000 was $62,000 and there was no REO at March 31,
1999.
31
<PAGE>
Deposits increased 12.9%, to $247.3 million at March 31, 2000 from $219.0
million at March 31, 1999. The deposit growth occurred primarily in MMDA
accounts and Certificate of Deposit accounts, which increased $16.9 million, or
31.2%, and $11.0 million, or 10.1%, respectively. Borrowed funds which consist
of Federal Home Loan Bank borrowings, and to a lesser extent a repurchase
agreement and Federal Funds Purchased, totalled $155.7 million at March 31,
2000, a 101.9% increase over the $77.1 million in borrowings at March 31, 1999,
which consisted solely of Federal Home Loan Bank borrowings. The increased level
of FHLB borrowings were in the 10-year maturity, with callable features after
one-year at the option of the lender, fixed maturity advances, and two-, three-
and five-year amortizing advances. The repurchase agreement totalled $5.6
million and Federal Funds purchased totalled $2.5 million, at March 31, 2000.
The increased borrowings were used to fund asset growth.
Total equity was $52.6 million, or 11.4% of total assets at March 31, 2000,
a decrease of $7.7 million, or 12.7%, from the $60.3 million, or 16.8% of total
assets at March 31, 1999. The change in equity was primarily the result of the
repurchase of 452,190 shares of common stock at a cost of $8.8 million, and the
reduction in the market value of investment securities classified as
available-for-sale offset by net income of $2.8 million for the period. The
Company's book value per share at March 31, 2000 was $29.06, compared to $26.88
at March 31, 1999.
Comparison of Operating Results for the Years Ended March 31, 2000 and 1999
General
Net income for the fiscal year ended March 31, 2000, totalled $2.8 million,
or $1.34 per share, compared to $2.2 million, or $0.97 per share for the fiscal
year ended March 31, 1999. This represents an increase of 23.3% in net income
and a 38.1% increase in earnings per share, over the last fiscal year. The net
income for the fiscal year ended March 31, 2000 represents a return on average
assets of 0.65% and a return on average equity of 4.82%, compared to 0.71% and
3.58% for the last fiscal year, respectively.
Interest Income
Interest income for the fiscal year ended March 31, 2000 was $31.0 million,
compared to $23.4 million for the year ended March 31, 1999, an increase of $7.6
million, or 32.5%. The increase in interest income was a result of an increase
in the average balance of interest earning assets. The average balance of
interest-earning assets increased from $302.5 million for fiscal year 1999 to
$402.2 million for fiscal year 2000, an increase of $99.7 million, or 33.0%. The
increase in the average balance of interest-earning assets was primarily a
result of an increase in the average balance of loans, net, of $95.4 million, or
36.5%, and an increase in investment securities and mortgage-backed securities
totalling $17.8 million, or 68.4%. The yield on average interest-earning assets
decreased 4 basis points to 7.70%.
Interest Expense
Interest expense for the fiscal year ended March 31, 2000 was $16.4
million, compared to $10.8 million for the year ended March 31, 1999, an
increase of $5.6 million, or 52.0%. The increase in interest expense was
primarily due to an increase in the average balance and cost of interest-bearing
liabilities. The average balance of interest-bearing liabilities increased from
$245.3 million for fiscal year 1999 to $358.0 million, an increase of $112.7
million, or 45.9%. The increase in the average balance of interest-bearing
liabilities was primarily a result of an increase in the average balance of
borrowed funds totalling $98.7 million, or 250%, and an increase in the average
balance of deposit accounts totalling $14.1 million, or 6.8%. The cost of
average interest-bearing liabilities increased 19 basis points to 4.57%, for the
fiscal year ended March 31, 2000.
32
<PAGE>
Net Interest Income
Net interest income before the provision for loan losses increased $2.0
million, or 15.4%, for the fiscal year ended March 31, 2000, primarily
attributable to a growth in the loan portfolio. For the fiscal year ended March
31, 2000 the net interest margin was 3.63%, compared to 4.19% for the Fiscal
year ended March 31, 1999
Provision for Loan Losses
The provision for loan losses was $875,000 for the fiscal year ended March
31, 2000, compared to $617,000 for the fiscal year ended March 31, 1999. The
level of the reserve position for the fiscal year ended March 31, 2000 was a
direct result of the growth in the loan portfolio and the increased level of
multi-family and commercial real estate loans, which generally bear a higher
risk than single family residential lending. Management believes that the
provision for loan losses and the allowance for loan losses are currently
reasonable and adequate to cover any losses reasonably expected in the existing
loan portfolio.
While management estimates loan losses using the best available
information, no assurances can be given that future additions to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding problem loans, identification
of additional problem loans and other factors, both within and outside of
management's control. Additionally, with the expectation of the Bank to grow its
existing loan portfolio, future additions to the allowance may be necessary to
maintain adequate coverage ratios.
Noninterest Income
For the fiscal year ended March 31, 2000 noninterest income totalled $1.1
million, compared to $431,000 for the fiscal year ended March 31, 1999, an
increase of $675,000, or 157%. These increases were primarily a result of
tax-advantaged income received on bank owned life insurance policies, fees on
loans and deposit accounts and income received from alternative investment
services offered by the bank. In addition the Company recognized unrealized
gains on trading securities, which represents an increase in the market value of
the assets supporting certain employee benefit plans, which also results in a
corresponding expense in salaries and benefits.
Noninterest Expense
Total noninterest expense was $10.6 million for the fiscal year ended March
31, 2000, compared to $8.7 million for the fiscal year ended March 31, 1999, an
increase of $1.9 million, or 21.9%. Total salaries and benefits increased $1.3
million, or 23.5%, the result of an increase in compensation expense associated
with the Company's stock-based benefit plans, and a general increase in salaries
and employee benefit plans due to the increase in the number of employees,
compared to the year ended March 31, 1999. Occupancy and equipment expenses
totalled $1.2 million compared to $1.0 million for the fiscal year ended March
31, 1999, an increase of $180,000, or 17.7%. This increase was a result of the
increased depreciation on building and leasehold improvements, and lease
payments and expenses associated with the purchases of furniture, fixtures and
equipment for the additional office space leased and the opening of the new
branch location. Advertising expenses totalled $538,000 for the fiscal year
ended March 31, 2000, compared to $240,000 for the fiscal year ended March 31,
1999, an increase of $298,000, or 124%, primarily a result of the development
and roll out of new deposit products and retail services and the opening of the
Walpole branch. Data processing expense totalled $274,000 for the fiscal year
ended March 31, 2000, compared to $249,000 for the fiscal year ended March 31,
1999, an increase of 10.0%. Other expenses increased $252,000, or 27.0%.
33
<PAGE>
Income Taxes
For the fiscal year ended March 31, 2000, income taxes of $1.5 million were
provided on net income before tax of $4.2 million, for an effective rate of
35.0%, compared to $1.5 million on income before taxes of $3.8 million for an
effective rate of 40.9%, for the fiscal year ended March 31, 1999. The effective
tax rate for the current periods are 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.
Comparison of Operating Results for the Years Ended March 31, 1999 and 1998
General
Net income for the fiscal year ended March 31, 1999 totalled $2.2 million,
or $0.97 per share, compared to a net loss of $1.8 million for the March 31,
1998 period. Since the Company converted to a stock form of ownership on March
27, 1998, earnings per share data for the previous year is not available. The
net loss for the fiscal year ended March 31, 1998 resulted primarily from the
recognition of certain items related to the Conversion. As part of the
Conversion the Company established The Bay State Federal Savings Charitable
Foundation by donating 187,795 shares of the Company's stock to the Foundation.
The total contribution expense associated with the transaction was $3.8 million,
or $2.5 million net of income taxes.
Additionally, due to the timing of the consummation of the Conversion and
the establishment of the Bank's Employee Stock Ownership Plan ("ESOP"), which
was funded with 8% of stock issued in the Conversion, or 202,818 shares, the
Company incurred additional compensation expense of $601,000, or $433,000 net of
income taxes, relating to the ESOP allocation for the fiscal year ended March
31, 1998. In addition, certain non-recurring expenses and adjustments associated
with the Conversion totalled $688,000, or $405,000 net of income taxes.
Excluding the effect of these items, the Company would have recognized net
income for the fiscal year ended March 31, 1998 of approximately $1.6 million.
The increased level of earnings for the fiscal year ended March 31, 1999 was
primarily attributable to increases in interest earned on loans and securities
due to the asset growth of the Company.
Interest Income
Interest income for the fiscal year ended March 31, 1999 was $23.4 million,
compared to $19.2 million for the March 31, 1998 period, an increase of $4.2
million, or 21.7%. The increase in interest income was the net result of an
increase in the average balance of interest-earning assets and a decrease in the
yield on interest-earning assets. The average balance of interest-earning assets
increased from $237.1 million for fiscal 1998 to $302.5 million for fiscal 1999,
an increase of $65.4 million, or 27.6%.
Interest Expense
Interest expense for the fiscal year ended March 31, 1999 was $10.8
million, compared to $10.2 million for the March 31, 1998 period, an increase of
$600,000, or 5.5%. This increase in interest expense was primarily due to an
increase in the average balance of interest-bearing liabilities offset by a
decrease in the cost of interest-bearing liabilities. The average balance of
interest-bearing liabilities increased from $222.6 million for fiscal 1998 to
$245.3 million for fiscal 1999, an increase of $22.7 million, or 10.2%.
Net Interest Income
Net interest income before the provision for loan losses increased $3.6
million, or 40.0%, for the fiscal year. The increase was primarily the result of
the increased level of the loan and investment portfolios and a 37 basis point
increase in net interest margin. The net interest margin was 4.19% for the
fiscal year ended March 31, 1999, compared to 3.82% for the March 31, 1998
period.
34
<PAGE>
Provision for Loan Losses
The provision for loan losses was $617,000 for the fiscal year ended March
31, 1999, compared to $856,000 for the March 31, 1998 period. The level of
reserve provision for the fiscal year ended March 31, 1998 was made after an
assessment of the Bank's loan portfolio, in particular specific loan pools that
were internally classified by the Bank, specifically loans acquired in the Union
Federal merger. The level of reserve provision for the fiscal year ended March
31, 1999, was a result of management's assessment of the loan portfolio and,
more specifically, the growth in the loan portfolio.
At March 31, 1999 the allowance for loan losses totalled $3.0 million,
representing 154.12% of nonperforming loans and 0.98% of total loans, compared
to $2.5 million, representing 110.27% of nonperforming loans and 1.10% of total
loans at March 31, 1998.
Noninterest Income
Noninterest income for the fiscal year ended March 31, 1999 totalled
$431,000 compared to $313,000 for the March 31, 1998 period, an increase of
$118,000, or 37.7%. These increases were primarily the result of an increase in
gains on the sale of loans, fees on deposit accounts and income recognized on
bank owned life insurance policies purchased by the Bank.
Noninterest Expense
Total noninterest expense was $8.7 million for the fiscal year ended March
31, 1999, compared to $11.0 million for the March 31, 1998 period, a decrease of
20.9%. Total salaries and benefits increased $994,000, or 21.9%, the result of
an increase of $418,000 in compensation expense associated with the Company's
stock-based benefit plans, and a general increase in salaries and benefits due
to the increase in the number of employees compared to the same period last
year. Occupancy and equipment expense totalled $1.0 million compared to $944,000
for the same period last year, an increase of 7.94%, primarily from the
increased level of depreciation on building and leasehold improvements.
Advertising expense increased $66,000, or 37.9% associated with the development
and marketing of certain new deposit products and investment services.
Other expenses, after adjusting for the previous years contribution expense
of $3.8 million in forming the Foundation and $439,000 in expenses associated
with the Conversion, increased $710,000, primarily as a result of increases in
general expenses associated with the development of certain products and
programs as part of the strategic planning for the future and approximately
$35,000 in expenses associated with upgrades to certain systems for Year
2000 compliance.
Income Taxes
For the fiscal year ended March 31, 1999 income taxes of $1.5 million were
provided on net income before tax of $3.8 million for an effective rate of
40.9%, compared to a tax benefit of $751,000 on a loss before taxes of $2.5
million for an effective rate of 30.0%, for the same period last year. The
effective tax rate for the current period was different than the prior periods
due to the nondeductibility of certain expenses associated with the Conversion
and the reduction in the state tax rate for banks.
35
<PAGE>
Average Balances, Interest and Average Yields/Costs.
The following table sets forth certain information relating to the Bank for
the years ended March 31, 2000, 1999, and 1998. The average yields and costs are
derived by dividing income or expense by the average balance of interest-earning
assets or interest-bearing liabilities, respectively, for the periods shown
except where noted otherwise and reflect annualized yields and costs. Average
balances are derived from average month-end balances. Management does not
believe that the use of average monthly balances instead of average daily
balances has caused any material differences in the information presented. The
yields and costs include fees, which are considered adjustments to yields. Loan
interest and yield data does not include any accrued interest from non-accruing
loans.
<TABLE>
<CAPTION>
For the Years Ended March 31,
-------------------------------------------------------------------------------------
2000 1999
----------------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Federal funds sold/FHLB
overnight account ............... $ 2,032 $ 97 4.77% $ 15,478 $ 839 5.42%
Investment securities (1) ............. 23,727 1,406 5.91 21,898 1,250 5.71
Mortgage-backed and
mortgage-related securities ........ 19,971 1,256 6.29 4,045 253 6.26
Loans, net and mortgage ............... 356,468 28,214 7.91 261,080 21,084 8.08
------- ------ ------- ------
loans held-for-sale (2)
Total interest-earning
assets ....................... 402,198 30,973 7.70 302,501 23,426 7.74
------ ------
Noninterest-earning assets ............ 24,746 11,584
-------- --------
Total assets .................... $426,944 $314,085
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts ....................... $ 22,993 $ 256 1.11% $ 21,872 $ 331 1.51%
Regular savings accounts ........... 25,484 512 2.01 27,250 610 2.24
Money market accounts .............. 58,644 2,278 3.88 46,489 1,895 4.08
Certificate accounts ............... 112,798 5,838 5.18 110,246 5,988 5.43
-------- -------- -------- --------
Total interest-bearing
deposits ..................... 219,919 8,884 4.04 205,857 8,824 4.29
Other Borrowings ................... 7,035 396 5.63 -- -- --
FHLB advances ...................... 131,015 7,075 5.40 39,404 1,934 4.84
-------- -------- -------- --------
Total interest-bearing
liabilities .................. 357,969 16,355 4.57 245,261 10,758 4.38
-------- --------
Demand deposits (3) ................... 4,212 658
Other liabilities ..................... 7,634 5,719
-------- --------
Total liabilities ............... 369,815 251,638
Equity ................................ 57,129 62,447
-------- --------
Total liabilities and
equity ....................... $426,944 $314,085
======== ========
Net interest income/Net
interest rate spread (4) ........... $ 14,618 3.13% $ 12,668 3.36%
======== ==== ======== ====
Net interest margin (5) ............... 3.63% 4.19%
==== ====
Ratio of interest-earning
assets to interest-bearing
liabilities ........................ 112.36% 123.34%
====== ======
<CAPTION>
For the Years Ended March 31,
---------------------------------------------
1998
---------------------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- -------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Federal funds sold/FHLB
overnight account .............................. $ 5,150 $ 368 7.15%
Investment securities (1) ............................ 13,642 819 6.00
Mortgage-backed and
mortgage-related securities ....................... 2,787 190 6.82
Loans, net and mortgage .............................. 215,542 17,872 8.29
loans held-for-sale (2) -------- --------
Total interest-earning
assets ...................................... 237,121 19,249 8.12
--------
Noninterest-earning assets ........................... 8,096
--------
Total assets ................................... $245,217
========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts ...................................... $ 21,494 $ 389 1.81%
Regular savings accounts .......................... 29,167 824 2.83
Money market accounts ............................. 43,019 1,684 3.91
Certificate accounts .............................. 107,820 6,097 5.65
-------- -------
Total interest-bearing
deposits .................................... 201,500 8,994 4.46
Other Borrowings .................................. -- -- --
FHLB advances ..................................... 21,102 1,206 5.72
-------- -------
Total interest-bearing
liabilities ................................. 222,602 10,200 4.58
-------
Demand deposits (3) .................................. 257
Other liabilities .................................... 2,088
--------
Total liabilities .............................. 224,947
Equity ............................................... 20,270
--------
Total liabilities and
equity ...................................... $245,217
========
Net interest income/Net
interest rate spread (4) .......................... $ 9,049 3.54%
======= ====
Net interest margin (5) .............................. 3.82%
====
Ratio of interest-earning
assets to interest-bearing
liabilities ....................................... 106.52%
=======
</TABLE>
-----------------------------------------
(1) Includes investment securities available-for-sale and held-to-maturity,
Co-operative Central Bank Liquidity Fund, and stock in FHLB-Boston.
(2) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes
non-accruing loans. The Bank records interest income on non-accruing loans
on a cash basis.
(3) Demand deposits primarily represent noninterest-bearing custodial accounts
and Treasurers checks issued not yet cleared.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
36
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
Year Ended March 31, 2000
Compared to
Year Ended March 31, 1999
-----------------------------------------------
Increase (Decrease)
Due to
--------------------------------
Volume Rate Net
-----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold/FHLB overnight account ........................... $ (680) $ (63) $ (743)
Investment securities ............................................... 49 156 469
Mortgage-backed securities .......................................... 1,002 2 1,004
Loans, net, and mortgage loans held-for-sale ........................ 7,540 (410) 7,130
------- ------- -------
Total interest-earning assets ................................. 7,969 (422) 7,547
------- ------- -------
Interest-bearing liabilities:
NOW accounts ........................................................ 18 (93) (75)
Regular savings accounts ............................................ (38) (60) (98)
Money market accounts ............................................... 467 (84) 383
Certificate accounts ................................................ 145 (295) (150
------- ------- -------
Total deposits ................................................ 592 (532) 60
Other Borrowings ................................................... -- 396 396
FHLB advances ....................................................... 4,928 213 5,141
------- ------- -------
Total interest-bearing liabilities ............................ 5,520 77 5,597
------- ------- -------
Net change in net interest income ...................................... $ 2,449 $ (499) $ 1,950
======= ======= =======
<CAPTION>
Year Ended March 31, 1999
Compared to
Year Ended March 31, 1998
-----------------------------------------------
Increase (Decrease)
Due to
--------------------------------
Volume Rate Net
-----------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold/FHLB overnight account ........................... $ 535 $ (64) $ 471
Investment securities ............................................... 469 (38) 431
Mortgage-backed securities .......................................... 77 (14) 63
Loans, net, and mortgage loans held-for-sale ........................ 3,664 (452) 3,212
------- ------- -------
Total interest-earning assets ................................. 4,745 (568) 4,177
------- ------- -------
Interest-bearing liabilities:
NOW accounts ........................................................ 7 (65) (58)
Regular savings accounts ............................................ (51) (163) (214)
Money market accounts ............................................... 140 71 211
Certificate accounts ................................................ 144 (253) (109)
------- ------- -------
Total deposits ................................................ 240 (410) (170)
Other Borrowings ................................................... -- -- --
FHLB advances ....................................................... 884 (156) 728
------- ------- -------
Total interest-bearing liabilities ............................ 1,124 (566) 558
------- ------- -------
Net change in net interest income ...................................... $ 3,621 $ (2) $ 3,619
======= ======= =======
</TABLE>
Management of Interest Rate Risk and Market Risk Analysis
The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given the Bank's business
strategy, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates. The
Bank monitors its interest rate risk as such risk relates to its operating
strategies. The Bank's Board of Directors has an Asset/Liability Committee which
reviews its asset/liability policies and interest rate risk position. Such
Committee, which meets on a regular basis, reports trends and interest rate risk
position to the Board of Directors on a quarterly basis. The extent of the
movement of interest rates is an uncertainty that could have a negative impact
on the earnings of the Bank.
37
<PAGE>
In recent years, the Bank has primarily utilized the following strategies
to manage interest rate risk: (i) emphasizing the origination and purchase of
adjustable-rate loans; (ii) investing primarily in short-term U.S. Government
securities or mortgage-backed and mortgage-related securities with shorter
estimated maturities; (iii) utilizing FHLB advances to better structure the
maturities of its interest rate sensitive liabilities; and (iv) to a
substantially lesser extent, selling in the secondary market longer-term
fixed-rate mortgage loans originated while generally retaining the servicing
rights on such loans.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
and liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At March 31, 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
16.4%. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. Accordingly, during a
period of rising interest rates, an institution with a negative gap position
would be in a worse position to invest in higher yielding assets as compared to
an institution with a positive gap position which, consequently, may result in
the cost of its interest-bearing liabilities increasing at a rate faster than
its yield on interest-earning assets than if it had a positive gap. During a
period of falling interest rates, an institution with a negative gap position
would tend to have its interest-bearing liabilities repricing downward at a
faster rate than its interest-earning assets as compared to an institution with
a positive gap which, consequently, may tend to positively affect the growth of
its net interest income. The following table sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at March
31, 2000, which are anticipated by the Company, based upon certain assumptions,
to reprice or mature in each of the future time periods shown (the "Gap Table").
Except as stated below, the amount of assets and liabilities shown which reprice
or mature during a particular period were determined in accordance with the
earlier of term to repricing or the contractual maturity of the asset or
liability. The table sets forth an approximation of the projected repricing of
assets and liabilities at March 31, 2000, on the basis of contractual
maturities, and scheduled rate adjustments within a one year period and
subsequent selected time intervals. The loan amounts in the table reflect
principal balances expected to be redeployed and/or repriced as a result of
contractual amortization of adjustable-rate loans and fixed-rate loans, and as a
result of contractual rate adjustments on adjustable-rate loans. Money Market
accounts, Regular Savings accounts and NOW accounts are assumed to have annual
decay rates of 80%, 15% and 5%, respectively. Deposit decay rates can have a
significant impact on the Company's estimated gap. While the Company believes
such assumptions to be reasonable, there can be no assurance that assumed decay
rates will approximate future withdrawal activity.
38
<PAGE>
<TABLE>
<CAPTION>
More More More
than than than
1 Year 2 Years 3 Years
1 Year to to to
or Less 2 Years 3 Years 4 Years
-----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments .......................... $ 600 $ -- $ -- $ --
Securities ...................................... 15,944 -- -- 1,000
Mortgage-backed
Securities ................................... -- -- -- --
Stock in FHLB-Boston ............................ 8,051 -- -- --
Loans ........................................... 122,155 35,648 50,899 35,232
--------- --------- --------- ---------
Total interest-earning assets ................ $ 146,750 $ 35,648 $ 50,899 $ 36,232
========= ========= ========= =========
Interest-bearing liabilities:
Money market accounts ........................... $ 56,894 $ 10,668 $ 3,556 $ --
Regular savings accounts ........................ 4,031 4,031 4,031 4,031
NOW accounts .................................... 1,120 1,120 1,120 1,120
Certificate accounts ............................ 93,012 19,903 4,233 659
Repurchase Agreements and Other
borrowed funds ............................... 8,137 -- -- --
FHLB advances ................................... 58,848 29,570 4,609 --
--------- --------- --------- ---------
Total interest-bearing
liabilities ............................... $ 222,042 $ 65,292 $ 17,549 $ 5,810
========= ========= ========= =========
Interest-earning assets less
interest-bearing liabilities .................... $ (75,293) $ (29,644) $ 33,350 $ 30,422
========= ========= ========= =========
Cumulative interest-rate
sensitivity gap ................................. $ (75,293) $(104,936) $ (71,586) $ (41,164)
========= ========= ========= =========
Cumulative interest-rate gap as
a percentage of total assets .................... (16.36)% (22.81)% (15.56)% (8.95)%
Cumulative interest-rate gap as
a percentage of total interest-
earning assets .................................. (17.16)% (23.91)% (16.31)% (9.38)%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities ..................................... 66.09% 63.48% 76.52% 86.75%
<CAPTION>
More
than
4 Years More Total Fair
to than Amount Value
5 Years 5 Years (1) (2)(3)
-----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments .......................... $ -- $ -- $ 600 $ 600
Securities ...................................... -- 4,080 16,943 15,336
Mortgage-backed
Securities ................................... -- 13,385 17,464 17,011
Stock in FHLB-Boston ............................ -- -- 8,051 8,051
Loans ........................................... 39,909 111,941 395,784 388,207
--------- --------- --------- ---------
Total interest-earning assets ................ $ 39,909 $ 129,406 $ 438,842 $ 429,205
========= ========= ========= =========
Interest-bearing liabilities:
Money market accounts ........................... $ -- $ -- $ 71,117 $ 71,117
Regular savings accounts ........................ 4,031 6,719 26,876 26,876
NOW accounts .................................... 1,120 16,794 22,392 22,392
Certificate accounts ............................ 2,851 1 120,659 120,588
Repurchase Agreements and Other
borrowed funds ............................... -- -- 8,137 8,137
FHLB advances ................................... -- 54,500 147,527 146,937
--------- --------- --------- ---------
Total interest-bearing
liabilities ............................... $ 8,002 $ 78,014 $ 396,708 $ 396,047
========= ========= ========= =========
Interest-earning assets less
interest-bearing liabilities .................... $ 31,907 $ 51,392 $ 42,134
========= ========= =========
Cumulative interest-rate
sensitivity gap ................................. $ (9,257) $ 42,134
========= =========
Cumulative interest-rate gap as
a percentage of total assets .................... (2.01)% 9.16%
Cumulative interest-rate gap as
a percentage of total interest-
earning assets .................................. (2.11)% 9.60%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities ..................................... 97.10% 110.62%
</TABLE>
(1) Excludes nonaccrual loans.
(2) Fair value of securities, including mortgage-backed securities, is based on
quoted market prices, where available. If quoted market prices are not
available, fair value is based on quoted market prices of comparable
instruments. Fair value of loans is, depending on the type of loan, based
on carrying values or estimates based on discounted cash flow analyses.
Fair value of deposit liabilities are either based on carrying amounts or
estimates based on a discounted cash flow calculation. Fair values for FHLB
advances are estimated using a discounted cash flow analysis that applies
interest rates concurrently being offered on advances to a schedule of
aggregated expected monthly maturities on FHLB advances.
(3) Fair value of loans includes nonaccrual loans.
39
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react to different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Net Portfolio Value. As part of its interest rate risk analysis, the Bank
uses an interest rate sensitivity model which generates estimates of the change
in the Bank's net portfolio value ("NPV") over a range of interest rate
scenarios and which is prepared by the OTS on a quarterly basis. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The OTS produces such analysis using its own model, based upon data
submitted on the Bank's quarterly Thrift Financial Reports, including estimated
loan prepayment rates, reinvestment rates and deposit decay rates. The following
table sets forth the Bank's NPV as of December 31, 1999 (the latest NPV analysis
prepared by the OTS), as calculated by the OTS.
<TABLE>
<CAPTION>
Change in NPV as % of Portfolio
Interest Rates --------------------------------------------------- Value of Assets
In Basis Points Net Portfolio Value ----------------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change (1)
--------------- ------ -------- -------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 $16,044 (16,353) (50)% 3.93 % (360)
200 22,056 (10,341) (32) 5.30 (223)
100 27,846 (4,550) (14) 6.57 (96)
Static 32,397 -- -- 7.53 --
(100) 35,986 3,589 11 8.26 73
(200) 39,387 6,990 22 8.93 140
(300) 38,326 5,929 18 8.67 114
</TABLE>
-------------
(1) Expressed in basis points
As is the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions, which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Bank's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
40
<PAGE>
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's current required liquidity
ratio is 4%. At March 31, 2000 and March 31, 1999, the Bank's liquidity ratios
were 6.1% and 5.8%, respectively. The Bank manages its liquidity position and
demands for funding primarily by investing excess funds in short-term
investments and utilizing FHLB advances in periods when the Bank's demands for
liquidity exceed funding from deposit inflows.
The Bank's most liquid assets are cash and cash equivalents and securities.
The levels of these assets are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At March 31, 2000,
cash and cash equivalents and investment securities totalled $38.3 million, or
8.3% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At March 31, 2000, the Bank had $147.5 million
in advances outstanding from the FHLB and an additional overall borrowing
capacity from the FHLB of $49.6 million. Depending on market conditions, the
pricing of deposit products and FHLB advances, the Bank may continue to rely on
FHLB borrowings to fund asset growth.
At March 31, 2000, the Bank had commitments to fund loans and unused
outstanding lines of credit and undisbursed proceeds of construction mortgages
totalling $25.0 million. The Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Certificate
accounts, including IRA and Keogh accounts, which are scheduled to mature in
less than one year from March 31, 2000, totalled $93.0 million.
At March 31, 2000, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $41.6 million, or 9.2%, of total
adjusted assets, which is above the required level of $6.8 million, or 1.5%;
core capital of $41.6 million, or 9.2%, of total adjusted assets, which is above
the required level of $18.2 million, or 4.0%; and risk-based capital of $45.7
million, or 15.8%, of risk-weighted assets, which is above the required level of
$23.1 million, or 8.0%.
Year 2000 Compliance
The Bank accomplished the objectives established in its Year 2000 Action
Plan. All internal software and hardware used in Bank's business made it through
the transition from 1999 to 2000 without any known abnormalities or inaccurate
results. In addition, the Bank's critical vendors and suppliers have informed
the Bank that they have also made the transition successfully. Furthermore, the
Bank has not been notified by any of its significant borrowers of any material
Year 2000 related problems that would adversely affect the borrowers' abilities
to satisfy their current obligations to the Bank.
Other critical, future dates previously identified as being potentially
vulnerable to the Year 2000 problem were tested as part of the century rollover
testing. All critical applications thought to be impacted by future dates were
evaluated and further testing of various dates conducted as necessary. Any
potential problems identified during this testing have been corrected.
41
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented elsewhere
in this Form 10-K have been prepared in accordance with generally accepted
accounting principles ("GAAP"), which require the measurement of financial
position and operating results generally in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result, interest
rates have a greater impact on the Bank's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Impact of New Accounting Standards
In June of 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 1999, the FASB issued SFAS No. 137 Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective Date of FASB
Statement No. 133, which defers the effective date of SFAS No. 133. SFAS No. 133
is now effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The adoption of this settlement is not expected to have a material
impact on the Company's financial position.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
For a discussion of the Company's Market Risk see "Management of Interest Rate
Risk and Market Risk Analysis" under Item 7 of this Form 10-K.
Item 8 Financial Statements and Supplementary Data.
42
<PAGE>
[LETTERHEAD OF SHATSWELL, MACLEOD & COMPANY, P.C.]
The Board of Directors and Stockholders
Bay State Bancorp, Inc.
Brookline, Massachusetts
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Bay State
Bancorp, Inc. and Subsidiaries as of March 31, 2000 and 1999 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended March 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bay
State Bancorp, Inc. and Subsidiaries as of March 31, 2000 and 1999 and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended March 31, 2000, in conformity with
generally accepted accounting principles.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
April 18, 2000
<PAGE>
<TABLE>
<CAPTION>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
(In Thousands, Except Per Share Data)
2000 1999
----------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,392 $ 3,738
Short-term investments 600 6,369
--------- ---------
Cash and cash equivalents 5,992 10,107
Investments in available-for-sale securities (at fair value) 31,812 24,350
Investments in held-to-maturity securities (fair values of $535 as of
March 31, 2000 and $978 as of March 31, 1999) 527 956
Stock in Federal Home Loan Bank of Boston, at cost 8,051 3,850
Loans, net of the allowance for loan losses of $3,915 as of March 31, 2000
and $3,027 as of March 31, 1999 393,093 304,372
Loans held-for-sale -- 321
Premises and equipment, net of depreciation and amortization 3,078 2,564
Other real estate owned 62 --
Investment in bank owned life insurance 7,888 6,054
Accrued interest receivable 2,470 1,920
Deferred tax asset, net 3,811 2,728
Other assets 3,353 2,182
--------- ---------
Total assets $ 460,137 $ 359,404
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 6,300 $ 3,425
Interest-bearing 241,044 215,530
--------- ---------
Total deposits 247,344 218,955
Advances from Federal Home Loan Bank of Boston 147,527 77,119
Securities sold under agreements to repurchase 5,630 --
Other borrowed funds 2,507 --
Other liabilities 4,499 3,032
--------- ---------
Total liabilities 407,507 299,106
--------- ---------
Stockholders' equity:
Common stock, par value $.01 per share; authorized 11,000,000 shares;
issued 2,535,232 shares 25 25
Paid-in capital 49,207 49,277
Retained earnings 21,600 19,463
Accumulated other comprehensive income (loss) (1,788) 45
Unearned ESOP shares, 141,306 and 161,588 shares (2,826) (3,232)
Treasury stock at cost, 578,952 and 126,762 shares (11,907) (3,107)
Unearned shares, stock-based incentive plan, 75,076 and 97,069 shares (1,681) (2,173)
--------- ---------
Total stockholders' equity 52,630 60,298
--------- ---------
Total liabilities and stockholders' equity $ 460,137 $ 359,404
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(In Thousands)
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 28,214 $ 21,084 $ 17,872
Interest and dividends on securities:
Taxable 2,662 1,503 1,009
Other interest 97 839 368
-------- -------- --------
Total interest and dividend income 30,973 23,426 19,249
-------- -------- --------
Interest expense:
Interest on deposits 8,884 8,824 8,994
Interest on Federal Home Loan Bank advances 7,075 1,934 1,206
Interest on securities sold under agreements to repurchase 258 -- --
Interest on other borrowed funds 138 -- --
-------- -------- --------
Total interest expense 16,355 10,758 10,200
-------- -------- --------
Net interest and dividend income 14,618 12,668 9,049
Provision for loan losses 875 617 856
-------- -------- --------
Net interest and dividend income after provision for loan losses 13,743 12,051 8,193
-------- -------- --------
Other income:
Other fees and charges 325 269 174
Gain on sale of mortgage loans 7 67 15
Net gain on trading securities 240 4 --
Net increase in cash surrender value of life insurance policies 334 54 --
Other income 200 37 124
-------- -------- --------
Total other income 1,106 431 313
-------- -------- --------
Other expense:
Salaries and employee benefits 6,842 5,539 4,545
Occupancy expense 761 675 644
Equipment expense 438 344 300
Advertising 538 240 174
Data processing 274 249 225
Contribution of shares of the common stock of Bay State Bancorp, Inc.
to The Bay State Federal Savings Charitable Foundation at the
conversion issued price -- -- 3,756
Professional fees 575 727 431
Other expense 1,184 932 933
-------- -------- --------
Total other expense 10,612 8,706 11,008
-------- -------- --------
Income (loss) before income taxes (benefit) 4,237 3,776 (2,502)
Income taxes (benefit) 1,482 1,542 (751)
-------- -------- --------
Net income (loss) $ 2,755 $ 2,234 $ (1,751)
======== ======== ========
Earnings per share
Earnings per common share $ 1.34 $ .97 N/A
======== ========
Earnings per common share, assuming dilution $ 1.34 $ .95 N/A
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss)
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Balance, March 31, 1997 .................................. $ -- $ -- $ 19,091 $ 383
Comprehensive income:
Net loss .............................................. -- -- (1,751) --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect of $196 ..... -- -- -- 283
Comprehensive loss ............................. -- -- -- --
2,347,437 shares of common stock issued pursuant to
initial common stock offering ......................... 23 45,245 -- --
Issuance of 187,795 shares of common stock to The Bay
State Federal Savings Charitable Foundation ........... 2 3,754 -- --
202,818 shares of common stock acquired by ESOP .......... -- -- -- --
Reduction in unearned ESOP shares charged to expense -- -- -- --
Appreciation in fair value of unearned ESOP shares
charged to expense .................................... -- 195 -- --
--------- --------- --------- -------------
Balance, March 31, 1998 .................................. 25 49,194 17,340 666
Comprehensive income:
Net income ............................................ -- -- 2,234 --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect ............. -- -- -- (621)
Comprehensive income ...........................
Purchase of 126,762 shares of treasury stock ............. -- -- -- --
Dividends paid, $0.05 per share .......................... -- -- (111) --
Reduction in unearned ESOP shares charged to expense ..... -- -- -- --
Appreciation in fair value of unearned ESOP shares
charged to expense .................................... -- 95 -- --
101,409 shares of Company common stock acquired
for stock-based incentive plan ........................ -- -- -- --
Issuance of 4,340 stock-based incentive plan shares -- (12) -- --
--------- --------- --------- -------------
Balance, March 31, 1999 .................................. 25 49,277 19,463 45
<CAPTION>
Unearned
Unearned Shares,
ESOP Treasury Stock-based
Shares Stock Incentive Plan Total
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, March 31, 1997 ............................ $ -- $ -- $ -- $ 19,474
Comprehensive income:
Net loss ........................................... -- -- -- --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect of $196 ..... -- -- -- --
Comprehensive loss .............................. -- -- -- (1,468)
2,347,437 shares of common stock issued pursuant to
initial common stock offering ...................... -- -- -- 45,268
Issuance of 187,795 shares of common stock to The Bay
State Federal Savings Charitable Foundation ........ -- -- -- 3,756
202,818 shares of common stock acquired by ESOP .... (4,056) -- -- (4,056)
Reduction in unearned ESOP shares charged to expense 405 -- -- 405
Appreciation in fair value of unearned ESOP shares
charged to expense ................................. -- -- -- 195
--------- --------- --------- -------------
Balance, March 31, 1998 ............................ (3,651) 63,574
Comprehensive income:
Net income ......................................... -- -- -- --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect ............. -- -- -- --
Comprehensive income 1,613
Purchase of 126,762 shares of treasury stock ....... -- (3,107) -- (3,107)
Dividends paid, $0.05 per share .................... -- -- -- (111)
Reduction in unearned ESOP shares charged to expense 419 -- -- 419
Appreciation in fair value of unearned ESOP shares
charged to expense ................................. -- -- -- 95
101,409 shares of Company common stock acquired
for stock-based incentive plan ..................... -- -- (2,269) (2,269)
Issuance of 4,340 stock-based incentive plan shares -- -- 96 84
--------- --------- --------- -------------
Balance, March 31, 1999 ............................ (3,232) (3,107) (2,173) 60,298
</TABLE>
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(In Thousands)
(Continued)
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss)
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Comprehensive income:
Net income -- -- 2,755 --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect -- -- -- (1,833)
Comprehensive income -- -- -- --
Purchase of 452,190 shares of treasury stock -- -- -- --
Dividends paid, $.28 per share -- -- (618) --
Reduction in unearned ESOP shares charged to expense -- -- -- --
Depreciation in fair value of unearned ESOP shares
credited to expense -- (10) -- --
Issuance of 21,993 stock-based incentive plan shares -- (60) -- --
--------- --------- --------- -------------
Balance, March 31, 2000 $ 25 $ 49,207 $ 21,600 $ (1,788)
========= ========= ========= =========
<CAPTION>
Unearned
Unearned Shares,
ESOP Treasury Stock-based
Shares Stock Incentive Plan Total
--------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Comprehensive income:
Net income -- -- -- --
Net change in unrealized holding gain on available-
for-sale securities, net of tax effect -- -- -- --
Comprehensive income -- -- -- 922
Purchase of 452,190 shares of treasury stock -- (8,800) -- (8,800)
Dividends paid, $.28 per share -- -- -- (618)
Reduction in unearned ESOP shares charged to expense 406 -- -- 406
Depreciation in fair value of unearned ESOP shares
credited to expense -- -- -- (10)
Issuance of 21,993 stock-based incentive plan shares -- -- 492 432
--------- --------- --------- -------------
Balance, March 31, 2000 $ (2,826) $ (11,907) $ (1,681) $ 52,630
========= ========= ========= =========
</TABLE>
Reclassification disclosure for the years ended March 31:
<TABLE>
<CAPTION>
Accumulated
Other Unearned
Comprehensive ESOP
Income (Loss) Shares
------------- ---------
2000 1999
------- -------
<S> <C> <C>
Net unrealized losses on available-for-sale securities $(2,269) $ (931)
Less reclassification adjustment for realized gains or losses in net income -- --
------- -------
Other comprehensive loss before income tax effect (2,269) (931)
Income tax benefit 436 310
------- -------
Other comprehensive loss, net of tax $(1,833) $ (621)
======= =======
</TABLE>
Accumulated other comprehensive income (loss) as of March 31, 2000, 1999 and
1998 consists of net unrealized holding gains (losses) on available-for-sale
securities, net of taxes.
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(In Thousands)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,755 $ 2,234 $ (1,751)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Contribution of shares to The Bay State Federal Savings
Charitable Foundation -- -- 3,756
Appreciation (depreciation) in fair value of ESOP shares
released for allocation (10) 95 195
Reduction in unearned ESOP shares 406 419 405
Earned compensation on stock-based incentive plan 432 84 --
Amortization (accretion) of securities, net (167) 13 9
Unrealized gain on trading securities (240) (4) --
Net (increase) decrease in loans held-for-sale 321 501 (822)
Provision for loan losses 875 617 856
Gain on sale of mortgage loans (7) (67) (15)
Increase (decrease) in deferred loan origination fees (42) (272) 33
Depreciation and amortization 328 282 235
Gain on sale of other real estate owned -- -- (19)
Net increase in cash surrender value of life insurance policies (334) (54) --
Increase in accrued interest receivable (550) (660) (27)
Increase in other assets (348) (269) (231)
Deferred tax benefit (647) (353) (1,707)
Increase in other liabilities 1,467 1,270 774
--------- --------- ---------
Net cash provided by operating activities 4,239 3,836 1,691
--------- --------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities (23,626) (25,465) (3,141)
Proceeds from maturities of available-for-sale securities 14,064 6,701 --
Proceeds from maturities of held-to-maturity securities 427 3,309 9,272
Purchases of Federal Home Loan Bank of Boston stock (4,201) (1,977) (201)
Net increase in loans (89,609) (79,722) (18,969)
Capital expenditures (842) (265) (918)
Proceeds from sales of other real estate owned -- -- 322
Distribution to Rabbi Trust (583) (455) (704)
Investment in bank owned life insurance (1,500) (6,000) --
--------- --------- ---------
Net cash used in investing activities (105,870) (103,874) (14,339)
--------- --------- ---------
</TABLE>
<PAGE>
BAY STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(Continued)
(In Thousands)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 17,341 9,040 8,242
Net increase (decrease) in certificate accounts 11,048 (40) 3,627
Repayment of advances from the Federal Home Loan Bank (194,498) (6,258) (74,000)
Advances from the Federal Home Loan Bank 264,906 63,377 79,500
Net increase in securities sold under agreements to repurchase 5,630 -- --
Net increase (decrease) in other borrowed funds 2,507 -- (37)
Proceeds from issuance of common stock -- -- 46,949
Costs related to issuance of common stock -- -- (1,681)
Payments to acquire common stock for ESOP -- -- (4,056)
Purchases of treasury stock (8,800) (3,107) --
Purchases of Company shares for stock-based incentive plan -- (2,269) --
Dividends paid on common stock (618) (111) --
--------- --------- ---------
Net cash provided by financing activities 97,516 60,632 58,544
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (4,115) (39,406) 45,896
Cash and cash equivalents at beginning of period 10,107 49,513 3,617
--------- --------- ---------
Cash and cash equivalents at end of period $ 5,992 $ 10,107 $ 49,513
========= ========= =========
Supplemental disclosures:
Interest paid $ 15,929 $ 10,445 $ 10,194
Income taxes paid 1,634 1,622 1,074
Loans transferred to other real estate owned 62 -- 230
</TABLE>
<PAGE>
BAYSTATE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 and 1998
(Dollars in Thousands)
NOTE 1 - NATURE OF OPERATIONS
Bay State Bancorp, Inc. (Company) is a Delaware corporation that was organized
to become the holding company of Bay State Federal Savings Bank (Bank). The
Company's primary purpose is to act as the holding company for the Bank.
In connection with the organization of the Company, on March 27, 1998, the Bank
became a wholly owned subsidiary of the Company and the Bank converted from a
federally-chartered mutual savings bank to a federally-chartered capital stock
savings bank as described in Note 16.
The Bank was incorporated in 1920 and is headquartered in Brookline,
Massachusetts. The Bank operates its business from six banking offices located
in Massachusetts. The reporting entity is Bay State Bancorp, Inc. and its wholly
owned subsidiaries, Bay State Funding Corporation and Bay State Federal Savings
Bank and the Bank's wholly owned subsidiaries, BSF Service Corporation, Bay
State Federal Savings Securities Corporation and Bay Leaf Securities
Corporation.
The Company provides a full range of banking services to individual and business
customers in eastern Massachusetts. The Company is subject to competition from
other financial institutions doing business in eastern Massachusetts.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and predominant practices
within the banking industry. The consolidated financial statements were prepared
using the accrual basis of accounting. The significant accounting policies are
summarized below to assist the reader in better understanding the consolidated
financial statements and other data contained herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from the
estimates.
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
Bay State Bancorp, Inc. and its wholly owned subsidiaries Bay State Funding
Corporation and Bay State Federal Savings Bank and the Bank's wholly owned
subsidiaries, BSF Service Corporation, Bay State Federal Savings Securities
Corporation and Bay Leaf Securities Corporation. BSF Service Corporation is
a subsidiary which was formed for the purpose of real estate development
activities. Bay State Funding Corporation was established to lend funds to
the Company sponsored employee stock ownership plan and related trust for
the purchase of stock in the initial public offering. Bay State Federal
Savings Securities Corporation and Bay Leaf Securities Corporation were
established in the fiscal year ended March 31, 2000 to hold securities for
the Bank. All significant intercompany balances and transactions have been
eliminated in consolidation.
<PAGE>
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, Federal Home Loan Bank overnight
account and shares of the Co-operative Central Bank Liquidity Fund. Cash
and due from banks as of March 31, 2000 and 1999 includes $865 and $764,
respectively which is subject to withdrawal and usage restrictions to
satisfy the reserve requirements of the Federal Reserve Bank.
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts calculated using the interest method. Gains or
losses on sales of investment securities are computed on a specific
identification basis.
The Company classifies debt and equity securities into one of three
categories: available-for-sale, held-to-maturity or trading. This security
classification may be modified after acquisition only under certain
specified conditions. In general, securities may be classified as
held-to-maturity only if the Company has the positive intent and ability to
hold them to maturity. Trading securities are defined as those bought and
held principally for the purpose of selling them in the near term. All
other securities must be classified as available-for-sale.
-- Available-for-sale securities are carried at fair value on the
balance sheet. Unrealized holding gains and losses are not
included in earnings, but are reported as a net amount (less
expected tax) in a separate component of capital until realized.
-- Held-to-maturity securities are measured at amortized cost in the
balance sheet. Unrealized holding gains and losses are not
included in earnings or in a separate component of capital. They
are merely disclosed in the notes to the consolidated financial
statements.
-- Trading securities are carried at fair value on the balance
sheet. Unrealized holding gains and losses for trading securities
are included in earnings.
LOANS:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal balances reduced by amounts due to borrowers on
unadvanced loans, any charge-offs, the allowance for loan losses and any
deferred fees or costs on originated loans, or unamortized premiums or
discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination and commitment fees and certain direct origination costs
are deferred, and the net amount amortized as an adjustment of the related
loan's yield. The Company is amortizing these amounts over the contractual
life of the related loans using the interest method.
Cash receipts of interest income on impaired loans is credited to principal
to the extent necessary to eliminate doubt as to the collectibility of the
net carrying amount of the loan. Some or all of the cash receipts of
interest income on impaired loans is recognized as interest income if the
remaining net carrying amount of the loan is deemed to be fully
collectible. When recognition of interest income on an impaired loan on a
cash basis is appropriate, the amount of income that is recognized is
limited to that which would have been accrued on the net carrying amount of
the loan at the contractual interest rate. Any cash interest payments
received in excess of the limit and not applied to reduce the net carrying
amount of the loan are recorded as recoveries of charge-offs until the
charge-offs are fully recovered.
<PAGE>
ALLOWANCE FOR LOAN LOSSES:
The allowance is increased by provisions charged to current operations and
is decreased by loan losses, net of recoveries. The allowance for loan
losses is established through a provision for loan losses based on
management's evaluation of the risks inherent in its loan portfolio and the
general economy. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses on loans which are
deemed probable and estimable based on information currently known to
management. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Company measures impaired loans by either the present value
of expected future cash flows discounted at the loan's effective interest
rate, the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent.
The Company considers for impairment all loans, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of cost
or fair value, leases, and convertible or nonconvertible debentures and
bonds and other debt securities. The Company considers its residential real
estate loans and consumer loans that are not individually significant to be
large groups of smaller balance homogeneous loans.
Factors considered by management in determining impairment include payment
status, net worth and collateral value. An insignificant payment delay or
an insignificant shortfall in payment does not in itself result in the
review of a loan for impairment. The Company reviews its loans for
impairment on a loan-by-loan basis. The Company does not review
aggregations of loans that have risk characteristics in common with other
impaired loans. Interest on a loan is not generally accrued when the loan
becomes ninety or more days overdue. The Company may place a loan on
nonaccrual status but not classify it as impaired, if (i) it is probable
that the Company will collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is an individually
insignificant residential mortgage loan or consumer loan. Impaired loans
are charged-off when management believes that the collectibility of the
loan's principal is remote. Substantially all of the Company's loans that
have been identified as impaired have been measured by the fair value of
existing collateral.
LOANS HELD-FOR-SALE:
Loans held-for-sale are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of are
removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated principally
on the straight-line method over the estimated useful lives of the assets.
BANK-OWNED LIFE INSURANCE:
In fiscal years ended 2000 and 1999, the Company invested in bank-owned
life insurance (BOLI) to help finance the cost of certain employee benefit
plan expenses. BOLI represents life insurance on the lives of certain
employees through insurance companies. The Company is the beneficiary of
the insurance policies. Increases in the cash value of the policies, as
well as insurance proceeds received, are recorded in other income, and are
not subject to income taxes as long as those policies are not surrendered
for the cash value prior to the death of the individual employees.
<PAGE>
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through foreclosure
and properties classified as in-substance foreclosures in accordance with
Financial Accounting Standards Board Statement No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring." These properties
are carried at the lower of cost or estimated fair value less estimated
costs to sell. Any writedown from cost to estimated fair value required at
the time of foreclosure or classification as in-substance foreclosure is
charged to the allowance for loan losses. Expenses incurred in connection
with maintaining these assets, subsequent writedowns and gains or losses
recognized upon sale are included in other expense.
The Company classifies loans as in-substance repossessed or foreclosed if
the Company receives physical possession of the debtor's assets regardless
of whether formal foreclosure proceedings take place.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are realized
or settled.
PENSION:
Pension costs are funded as accrued.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair value for its financial instruments. Fair value methods and
assumptions used by the Company in estimating its fair value disclosures
are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings and money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for fixed-rate
certificate accounts are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on certificate accounts.
Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that applies
interest rates currently being offered on advances to a schedule of
aggregated expected monthly maturities on Federal Home Loan Bank advances.
Securities sold under agreements to repurchase: The carrying amounts of
securities sold under agreements to repurchase approximate their fair
values.
<PAGE>
Other borrowed funds: Fair values of other borrowed funds are estimated
using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Off-balance sheet instruments: The fair value of commitments to originate
loans is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligation with the counterparties at the reporting
date.
EARNINGS PER SHARE (EPS):
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
RECLASSIFICATION:
Certain amounts in the prior years have been reclassified to be consistent
with the current year's statement presentation.
NOTE 3 - INVESTMENTS IN SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost basis of
available-for-sale and held-to-maturity securities and their approximate fair
values are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities:
March 31, 2000:
Marketable equity securities $ 9,974 $ 1,005 $ 1,796 $ 9,183
Mortgage-backed securities 16,937 -- 461 16,476
Capital Trust preferred securities 2,501 -- 585 1,916
Corporate bonds and notes 495 -- 33 462
Preferred stocks 1,500 -- 158 1,342
Government agency securities 2,607 -- 40 2,567
-------- -------- -------- --------
34,014 1,005 3,073 31,946
Money market mutual funds included
in cash and cash equivalents (134) -- -- (134)
-------- -------- -------- --------
$ 33,880 $ 1,005 $ 3,073 $ 31,812
======== ======== ======== ========
<PAGE>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
March 31, 1999:
Marketable equity securities $ 15,894 $ 1,303 $ 1,091 $ 16,106
Mortgage-backed securities 5,371 20 -- 5,391
Capital Trust preferred securities 2,506 36 21 2,521
Corporate bonds and notes 1,247 1 14 1,234
Preferred stocks 1,500 -- 40 1,460
Government agency securities 4,000 7 -- 4,007
-------- -------- -------- --------
30,518 1,367 1,166 30,719
Money market mutual funds included
in cash and cash equivalents (6,369) -- -- (6,369)
-------- -------- -------- --------
$ 24,149 $ 1,367 $ 1,166 $ 24,350
======== ======== ======== ========
Held-to-maturity securities:
March 31, 2000:
Mortgage-backed securities $ 527 $ 9 $ 1 $ 535
======== ======== ======== ========
March 31, 1999:
Mortgage-backed securities $ 956 $ 22 $ -- $ 978
======== ======== ======== ========
</TABLE>
The scheduled maturities of debt securities were as follows as of March 31,
2000:
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
----------------------- ------------------------
Amortized Amortized
Cost Fair Cost Fair
Basis Value Basis Value
--------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Debt securities other than mortgage-backed securities:
Due within one year $ 1,607 $ 1,606 $ -- $ --
Due between one year and five years 1,000 961 -- --
Due after ten years 2,996 2,378 -- --
Mortgage-backed securities 16,937 16,476 527 535
------- ------- ------- -------
$22,540 $21,421 $ 527 $ 535
======= ======= ======= =======
</TABLE>
As of March 31, 2000 and 1999, securities with carrying amounts totaling $6,920
and $0, respectively were pledged to secure repurchase agreements, treasury tax
and loan deposits and other borrowed funds.
During the years ended March 31, 2000, 1999 and 1998 there were no sales of
available-for-sale securities.
For information on trading securities, see Note 12.
The aggregate amortized cost basis and fair value of securities of issuers which
exceeded 10% of stockholders' equity were as follows as of March 31, 2000:
Amortized
Cost Fair
Issuer Basis Value
--------------------------- --------- ------
Asset Management Fund, Inc. $5,971 $5,894
<PAGE>
NOTE 4 - LOANS
Loans consisted of the following as of March 31:
2000 1999
--------- ---------
(In Thousands)
Mortgage loans:
Residential - secured by 1-4 family $ 201,256 $ 168,786
Equity lines 9,500 5,156
Residential - secured by multi-family 78,610 57,744
Construction and development 7,184 4,070
Commercial real estate 95,869 67,806
--------- ---------
Total mortgage loans 392,419 303,562
--------- ---------
Commercial loans 225 500
--------- ---------
Other loans:
Loans secured by deposit accounts 380 375
Other consumer loans 4,140 3,160
--------- ---------
Total other loans 4,520 3,535
--------- ---------
Total principal balance 397,164 307,597
--------- ---------
Allowance for loan losses (3,915) (3,027)
Deferred loan origination fees (156) (198)
--------- ---------
(4,071) (3,225)
--------- ---------
Loans, net $ 393,093 $ 304,372
========= =========
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during the
year ended March 31, 2000. Total loans to such persons and their companies
amounted to $5,980 as of March 31, 2000. During the year ended March 31, 2000
principal payments and advances totaled $291 and $1,492, respectively.
Changes in the allowance for loan losses were as follows for the years ended
March 31:
2000 1999 1998
------- ------- -------
(In Thousands)
Balance at beginning of period $ 3,027 $ 2,513 $ 1,687
Loans charged off (1) (103) (49)
Provision for loan losses 875 617 856
Recoveries of loans previously charged off 14 -- 19
------- ------- -------
Balance at end of period $ 3,915 $ 3,027 $ 2,513
======= ======= =======
<PAGE>
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of March
31:
<TABLE>
<CAPTION>
2000 1999
------------------------ ------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----------- ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Loans for which there is a related allowance for
credit losses $ -- $ -- $280 $ 82
Loans for which there is no related allowance for
credit losses -- --
----- ----- ---- ----
Totals $ -- $ -- $280 $ 82
===== ===== ==== ====
Average recorded investment in impaired loans during
the year ended March 31 $ 22 $210
===== ====
Related amount of interest income recognized during the
time, in the year ended March 31 that the
loans were impaired
Total recognized $ -- $ 14
===== ====
Amount recognized using a cash-basis method
of accounting $ -- $ --
===== ====
</TABLE>
In the fiscal years ending March 31, 2000 and 1999 the Company sold mortgage
loans totaling $2,172 and $10,860, respectively and retained the servicing
rights. The fair value of those rights under SFAS No. 125 is not material and
has not been recognized in the consolidated financial statements for the years
ended March 31, 2000 and 1999.
NOTE 5 - PREMISES AND EQUIPMENT, NET OF DEPRECIATION AND AMORTIZATION
The following is a summary of premises and equipment as of March 31:
Estimated
Useful
2000 1999 Life
------- ------- -----------
(In Thousands)
Land $ 355 $ 355
Building and improvements 1,936 1,936 25-50 years
Furniture, fixtures and equipment 2,038 1,558 5-10 years
Leasehold improvements 203 203 5-10 years
Construction in progress 370 8
------- -------
4,902 4,060
Accumulated depreciation and amortization (1,824) (1,496)
------- -------
$ 3,078 $ 2,564
======= =======
<PAGE>
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts in denominations of $100 or more
as of March 31, 2000 and 1999 was approximately $24,280 and $15,312,
respectively.
For time deposits as of March 31, 2000, the scheduled maturities for each of the
following five years ended March 31 and thereafter, are:
2001 $ 93,012
2002 19,903
2003 4,232
2004 659
2005 2,851
Thereafter 1
--------
$120,658
========
NOTE 7 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
The Bank is a member of the FHLB of Boston and as such is required to invest in
$100 par value stock in the amount of 1% of its outstanding home loans or 5% of
its outstanding advances from the FHLB or 1% of 30% of total assets, whichever
is highest. When such stock is redeemed, the Company receives from the FHLB an
amount equal to the par value of the stock.
Advances consist of funds borrowed from the FHLB.
Maturities of advances from the FHLB for the five fiscal years ending after
March 31, 2000 and thereafter are summarized as follows:
INTEREST RATE RANGE AMOUNT
-------------------- ------
2001 4.85% - 6.51% $ 78,118
2002 4.87% - 6.51% 12,383
2003 4.88% - 5.52% 1,535
2004 4.88% 991
2005 -- --
Thereafter 5.10% - 6.09% 54,500
--------
$147,527
========
As of March 31, 2000, $54,500 of advances from the FHLB were redeemable at par
at the option of the FHLB on dates ranging from April 10, 2000 through October
9, 2001.
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Advances are secured by the Company's stock in that institution, its residential
real estate mortgage portfolio and the remaining U.S. government and agencies
obligation not otherwise pledged.
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The securities sold under agreements to repurchase as of March 31, 2000 are
securities sold on a short term basis by the Company that have been accounted
for not as sales but as borrowings. The securities consisted of mortgage-backed
and U.S. Agency Securities. The securities were held in the Company's
safekeeping account at Morgan Stanley Dean Witter, Inc. under the control of the
Company and pledged to the purchasers of the securities. The purchasers have
agreed to sell to the Company substantially identical securities at the maturity
of the agreements.
<PAGE>
NOTE 9 - OTHER BORROWED FUNDS
Other borrowed funds consist of federal funds purchased and treasury tax and
loan deposits and generally are repaid within one to 120 days from the
transaction date.
NOTE 10 - INCOME TAXES (BENEFIT)
The components of the income tax expense (benefit) are as follows for the years
ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 1,655 $ 1,366 $ 672
State 474 529 284
------- ------- --------
2,129 1,895 956
------- ------- --------
Deferred:
Federal (456) (224) (1,572)
State (191) (129) (135)
------- ------- --------
(647) (353) (1,707)
------- ------- --------
Total income tax expense (benefit) $ 1,482 $ 1,542 $ (751)
======= ======= ========
</TABLE>
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended March
31:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% (34.0)%
Increase (decrease) in tax resulting from:
Cash surrender value of life insurance (2.7) (.4) .3
Other (.7) .4 (.2)
State income tax, net of federal income tax benefit 4.4 6.9 3.9
------- ------- --------
Effective tax rates 35.0% 40.9% (30.0)%
======= ======= ========
</TABLE>
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of March 31:
<TABLE>
<CAPTION>
2000 1999
------- -------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,559 $ 1,186
Deferred loan fees 14 18
Contribution carryover 876 1,053
ESOP expense 115 97
Accrued retirement expense 106 26
Accrued deferred compensation 591 456
Accrued stock-based incentive plan awards 338 172
Net unrealized holding loss on available-for-sale securities 280 --
Other 123 61
------- -------
Gross deferred tax assets 4,002 3,069
------- -------
Deferred tax liabilities
Depreciation (191) (185)
Net unrealized holding gain on available-for-sale securities -- (156)
------- -------
Gross deferred tax liabilities (191) (341)
------- -------
Net deferred tax assets $ 3,811 $ 2,728
======= =======
</TABLE>
<PAGE>
Based on the Company's historical and current pretax earnings, management
believes it is more likely than not that the Company will realize the net
deferred tax asset existing as of March 31, 2000 and 1999. Management believes
that existing net deductible temporary differences which give rise to the net
deferred tax asset will reverse during periods in which the Company generates
net taxable income. In addition, gross deductible temporary differences are
expected to reverse in periods during which offsetting gross taxable temporary
differences are expected to reverse. Factors beyond management's control, such
as the general state of the economy and real estate values, can affect future
levels of taxable income and no assurance can be given that sufficient taxable
income will be generated to fully absorb gross deductible temporary differences.
In prior years, the Bank was allowed a special tax-basis bad debt deduction
under certain provisions of the Internal Revenue Code. As a result, retained
earnings of the Bank as of March 31, 2000 includes approximately $5,812 for
which federal and state income taxes have not been provided. If the Bank no
longer qualifies as a bank as defined in certain provisions of the Internal
Revenue Code, this amount will be subject to recapture in taxable income ratably
over six (6) years, subject to a combined federal and state tax rate of
approximately 41.0%.
NOTE 11 - REGULATORY MATTERS
The Company and its subsidiary Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), of Tier 1 capital (as
defined) to adjusted total assets (as defined) and Tangible capital (as defined)
to Tangible assets (as defined). Management believes, as of March 31, 2000, that
the Company and the Bank meets all capital adequacy requirements to which they
are subject.
As of March 31, 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. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 and
Tangible capital ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- -------
(Dollar amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Total Capital (to Risk Weighted Assets):
Consolidated $58,112 19.67% $23,629 >/=8.0% N/A N/A
Bank 45,680 15.84 23,067 >/=8.0 $28,834 >/=10.0%
Core Capital (to Adjusted Tangible Assets):
Consolidated 54,418 11.78 18,477 >/=4.0 N/A N/A
Bank 41,612 9.15 18,200 >/=4.0 22,750 >/=5.0
Tangible Capital (to Tangible Assets):
Consolidated 54,418 11.78 N/A N/A N/A N/A
Bank 41,612 9.15 6,825 >/=1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 54,418 18.42 N/A N/A N/A N/A
Bank 41,612 14.43 N/A N/A 17,300 >/=6.0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- -------
(Dollar amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated $63,207 27.39% $18,462 >/=8.0% N/A N/A
Bank 44,017 19.99 17,616 >/=8.0 $22,020 >/=10.0%
Core Capital (to Adjusted Tangible Assets):
Consolidated 60,253 16.77 14,368 >/=4.0 N/A N/A
Bank 40,677 11.66 13,949 >/=4.0 17,436 >/=5.0
Tangible Capital (to Tangible Assets):
Consolidated 60,253 16.77 N/A N/A N/A N/A
Bank 40,677 11.66 5,231 >/=1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 60,253 26.11 N/A N/A N/A N/A
Bank 40,677 18.47 N/A N/A 13,213 >/=6.0
</TABLE>
NOTE 12 - EMPLOYEE BENEFIT PLANS
All eligible officers and employees are included in a noncontributory defined
benefit pension plan provided by the Company as a participating employer in the
Financial Institutions Retirement Fund (Fund), a multi-employer plan as defined
by Statement of Financial Accounting Standards No. 87. Employees are eligible to
participate in the Retirement Plan after the completion of 12 consecutive months
of employment with the Company and the attainment of age 21. Hourly paid
employees are excluded from participation in the Retirement Plan. Contributions
are based on individual employers' experience. According to the Fund's
administrators, as of June 30, 1999, the date of the latest actuarial valuation,
the market value of the Fund's net assets exceeded the actuarial present value
of vested and nonvested benefits in the aggregate, using an assumed rate of
return of 8.0%. Therefore, due to full funding, the Company was not required to
contribute to the plan and made no contributions for this plan for the years
ended March 31, 2000, 1999 and 1998.
The Company sponsors a defined contribution plan, the Financial Institutions
Thrift Plan (Thrift Plan), covering substantially all of its employees.
Employees are eligible to participate in the Thrift Plan upon the completion of
12 months of continuous employment with the Company (during which period they
complete at least 1,000 hours of service) and the attainment of age 21.
Employees paid on a hourly basis are not eligible for participation. Thrift Plan
contributions made by the Company were $58, $53 and $45 for the years ended
March 31, 2000, 1999 and 1998, respectively.
The Company has a deferred compensation benefit equalization plan for officers
and employees designated by management. The liability for such plan as of March
31, 2000 and 1999 was $1,957 and $1,205, respectively, and is included in other
liabilities on the balance sheets.
In the years ended March 31, 2000, 1999 and 1998 the Company distributed $583,
$455 and $704, respectively to a Rabbi Trust in connection with the deferred
compensation benefit equalization plan. This asset has been included in the
Company's balance sheets as of March 31, 2000 and 1999 under other assets. The
investment is included in assets because it is available to the general
creditors of the Company in the event of the Company's insolvency.
The investment in the Rabbi Trust as of March 31, 2000 and 1999 consisted of
mutual funds classified as trading securities and is included in other assets.
The investment as of March 31, 2000 and 1999 was carried at its fair value of
$2,109 and $1,200, respectively which includes net unrealized holding gains of
$240 and $4, respectively.
<PAGE>
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases space for three branches, two administrative offices and one
ATM site under noncancelable operating leases which expire between May 2000 and
December 2009. The following is a schedule by years of future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of March 31, 2000:
Year ended March 31, (In Thousands)
--------------------
2001 $ 561
2002 482
2003 190
2004 183
2005 138
Thereafter 180
------
Total minimum lease payments $1,734
======
The rental expense for all operating leases for the years ended March 31, 2000,
1999 and 1998 was $500, $406 and $387, respectively.
NOTE 14 - FINANCIAL INSTRUMENTS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
<PAGE>
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of March
31:
<TABLE>
<CAPTION>
2000 1999
------------------------ ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,992 $ 5,992 $ 10,107 $ 10,107
Trading securities 2,109 2,109 1,200 1,200
Available-for-sale securities 31,812 31,812 24,350 24,350
Held-to-maturity securities 527 535 956 978
Stock in Federal Home Loan Bank
of Boston 8,051 8,051 3,850 3,850
Loans, net 393,093 388,207 304,372 305,563
Loans held-for-sale -- -- 321 321
Accrued interest receivable 2,470 2,470 1,920 1,920
Financial liabilities:
Deposits 247,344 247,273 218,955 219,704
Federal Home Loan Bank advances 147,527 146,937 77,119 76,860
Securities sold under agreements to
repurchase 5,630 5,630 -- --
Other borrowed funds 2,507 2,507 -- --
</TABLE>
The carrying amounts of financial instruments shown in the above tables are
included in the consolidated balance sheets under the indicated captions except
that trading securities are included in other assets. Accounting policies
related to financial instruments are described in Note 2.
Notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows as of March 31:
2000 1999
-------- --------
Notional Notional
Amount Amount
-------- --------
(In Thousands)
Commitments to originate loans $10,429 $30,417
Unadvanced funds on loans:
Residential loans 957 1,505
Multi-family loans 2,947 2,941
Equity loans 5,668 3,836
Commercial loans 2,136 2,743
Construction loans 2,825 1,424
Consumer loans 85 --
------- -------
$25,047 $42,866
======= =======
There is no material difference between the notional amount and the estimated
fair value of loan commitments and unadvanced portions of loans.
The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments."
NOTE 15 - CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the state.
There are no concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in the state of Massachusetts.
<PAGE>
NOTE 16 - CONVERSION TO FEDERALLY CHARTERED CAPITAL STOCK SAVINGS BANK
On September 9, 1997, the Board of Directors of the Bank approved a Plan of
Conversion, as amended, for Bay State Federal Savings Bank ("Plan"). Under the
Plan, the Bank converted, in the year ended March 31, 1998, from a
federally-chartered mutual savings bank to a federally-chartered capital stock
savings bank. As of March 31, 2000, all of the stock of the Bank was held by the
Company.
In the year ended March 31, 1998, the Company issued 2,535,232 shares of its
common stock through a public offering which provided net proceeds of $49,024
after costs of $1,681.
Pursuant to the Plan, the Company established a charitable foundation
("Foundation") in connection with the Conversion. Under the Plan, the Bank and
the Company donated, in the year ended March 31, 1998, an amount of the
Company's common stock equal to 8% of the common stock sold in the Conversion.
The Foundation is dedicated to charitable purposes within the communities in
which the Bank operates and to complement the Bank's existing community
activities.
The contribution of the Company's common stock to the Foundation by the Company
is tax deductible, subject to a limitation based on 10% of the Company's annual
taxable income. The Company, however, will be able to carry forward any unused
portion of the deduction for five years following the contribution. Upon funding
the Foundation, the Company recognized an expense in the full amount of the
contribution, offset in part by the corresponding tax deduction.
At the time of the Conversion, the Bank established a liquidation account in an
amount equal to its equity as reflected in the latest balance sheet used in the
conversion prospectus. The liquidation account is maintained for the benefit of
eligible account holders and supplemental eligible account holders who continue
to maintain their accounts at the Bank after the Conversion. The liquidation
account is reduced annually to the extent that eligible account holders and
supplemental eligible account holders have reduced their qualifying deposits as
of each anniversary date. Subsequent increases will not restore an eligible
account holder's or supplemental eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank, each
eligible account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
The balance of the liquidation account was $6,462 and $9,563 as of March 31,
2000 and 1999, respectively.
The Bank may not declare or pay dividends on its stock if such declaration and
payment would violate statutory or regulatory requirements.
NOTE 17 - STOCK COMPENSATION PLAN
In September 1998, the stockholders of the Company approved the Bay State
Bancorp, Inc. 1998 Stock-Based Incentive Plan (Plan), as amended and approved by
stockholders on July 22, 1999, which includes grants of options to purchase
Company stock and awards of Company stock. The Plan is described below. The
Company applies APB Opinion 25 and related interpretations in accounting for its
Plan. Accordingly, no compensation cost has been recognized for its stock
options granted. The compensation cost that has been charged against income for
its stock awards was $842 and $506 for the years ended March 31, 2000 and 1999,
respectively. The number of shares awarded was 97,609, in the year ended March
31, 1999, with a weighted-average fair value per share of $19.75. Had
compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant and award dates under the plan
consistent with the method of FASB Statement 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(Amounts in thousands, except per share data)
2000 1999
------ ------
Net income As reported $2,755 $2,234
Pro forma $2,359 $2,057
Basic earnings per share As reported $1.34 $0.97
Pro forma $1.14 $0.89
Fully diluted earnings per share As reported $1.34 $0.95
Pro forma $1.14 $0.87
<PAGE>
The stock subject to the Plan is the common stock of the Company. The number of
shares of the common stock reserved for grants and awards is 354,932, consisting
of 253,523 shares for stock options and 101,409 shares for stock awards. All
employees and outside directors of the Company are eligible to receive awards.
The Company determines the exercise price of stock options but such exercise
price shall not be less than 100% of the fair market value of the common stock
of the Company at the date of the grant. The Company determines the term during
which a participant may exercise a stock option, but in no event may a
participant exercise a stock option more than ten years from the date of grant.
The Company determines the date on which each stock option becomes exercisable.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for stock option grants in the year ended March 31, 1999:
dividend yield of .25 percent; expected volatility of 35 percent; risk-free
interest rate of 4.55 percent; and expected lives of 8 years.
A summary of the status of the Company's stock options as of March 31, and
changes during the years then ended is presented below:
<TABLE>
<CAPTION>
2000 1999
------------------------------ -----------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 242,550 $19.75 -- N/A
Granted -- 242,550 $19.75
Exercised -- --
Forfeited (800) $19.75 --
Expired (11,051) $19.75 --
------- -------
Outstanding at end of year 230,699 $19.75 242,550 $19.75
======= =======
Options exercisable at year-end 54,418 10,851
Weighted-average fair value of
options granted during the year $ -- $ 9.41
</TABLE>
The following table summarizes information about fixed stock options outstanding
as of March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Number Weighted-Average Number
Outstanding Remaining Exercisable
as of 3/31/00 Contractual Life Exercise Price as of 3/31/00 Exercise Price
------------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
230,699 8.5 years $19.75 54,418 $19.75
</TABLE>
The Company determines the date on which stock awards granted to a participant
vest and any terms or conditions which must be satisfied prior to the vesting of
any stock award. The awards vest in installments over five years.
Under the Plan, the Company may make awards of the common stock of the Company
contingent upon the satisfaction of any conditions related to the performance of
the Company. The common stock may be issued without consideration.
<PAGE>
The First Bankers Trust Company is the Trustee for the Bay State Bancorp, Inc.
1998 Stock-Based Incentive Plan, as amended and restated. A summary of purchases
of the Company's common stock for issuance of awards under the Plan is as
follows for the years ended March 31:
<TABLE>
<CAPTION>
2000 1999
----------------------- ------------------------
Number of Number of
Shares Cost Shares Cost
--------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of year 97,069 $ 2,173 -- $ --
Purchases -- -- 101,409 2,269
Vested and distributed 21,993 492 4,340 96
------- ------- ------- -------
Balance March 31, carried as a negative component
of stockholders' equity on the balance sheets 75,076 $ 1,681 97,069 $ 2,173
======= ======= ======= =======
</TABLE>
NOTE 18 - EMPLOYEE STOCK OWNERSHIP PLAN
On March 27, 1998 (the Conversion date) the Company adopted the Bay State
Federal Savings Bank Employee Stock Ownership Plan (ESOP) that became effective
as of April 1, 1997. On March 27, 1998 the ESOP purchased 202,818 shares of the
common stock of the Company. To fund the purchases, the ESOP borrowed $4,056
from Bay State Funding Corporation, a subsidiary of the Company. The borrowing
is at an interest rate of 8.5% and is to be repaid in ten equal installments of
$615 commencing on March 31, 1998 through March 31, 2007. In addition, dividends
paid on unreleased shares are used to reduce the principal balance of the loan.
The collateral for the borrowing is the common stock of the Company purchased by
the ESOP. Contributions by the Company to the ESOP are discretionary, however,
the Company intends to make annual contributions to the ESOP in an aggregate
amount at least equal to the principal and interest requirements on the debt.
The shares of stock of the Company are held in a suspense account until released
for allocation among participants. The shares will be released annually from the
suspense account and the released shares will be allocated among the
participants on the basis of the participant's compensation for the year of
allocation. As any shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares and the
shares will be outstanding for earnings-per-share purposes. The shares not
released are reported as unearned ESOP shares in the stockholders' equity
section of the balance sheet. ESOP expense for the years ended March 31, 2000,
1999 and 1998 was $357, $514 and $600, respectively. The ESOP expense for the
year ended March 31, 2000 is net of the excess of the cost of the ESOP shares
released for allocation over the fair market value of those shares. The excess
amounted to $10. The offsetting charge was to paid-in capital. The ESOP shares
as of March 31, were as follows:
2000 1999 1998
-------- -------- --------
Allocated shares 39,596 20,282 --
Shares released for allocation 20,282 20,948 20,282
Unreleased shares 141,306 161,588 182,536
-------- -------- --------
Total ESOP shares 201,184 202,818 202,818
======== ======== ========
(In Thousands)
Fair value of unreleased shares $ 2,376 $ 3,313 $ 5,453
NOTE 19 - CONTRIBUTION TO CHARITABLE FOUNDATION
On March 27, 1998, the Company contributed 187,795 shares of its common stock to
The Bay State Federal Savings Charitable Foundation (Foundation). The
contribution has been reflected as an expense of the Company at the conversion
issue price of $20.00 per share. The Foundation directors are also officers of,
or members of the Board of the Company or the Bank.
NOTE 20 - EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN
The Bank and the Company entered into employment agreements with its President
and Executive Vice President. The employment agreements provide for the
continued payment of specified compensation and benefits for specified periods.
The agreements also provide for termination by the Company for cause (as defined
in the agreements) at any time. The employment agreements provide for the
payment, under certain circumstances, of amounts upon termination following a
"change in control" as defined in the agreements. The agreements also provide
for certain payments in the event of the officers' termination for other than
cause and in the case of voluntary termination.
<PAGE>
The Bank and the Company entered into change-in-control agreements with certain
officers, none of who are covered by an employment agreement. The agreements
provide that in the event voluntary or involuntary termination follows a change
in control of the Bank or the Company, the officer would be entitled to a
severance payment equal to two times or three times (as the case may be) the
officers annual compensation.
The Bank's Board of Directors established a severance plan which will provide
eligible employees with severance pay benefits in the event of a change in
control of the Bank or the Company. Management personnel with employment or
change in control agreements are not eligible to participate in the severance
plan. The benefit is equal to one-twelfth of annual compensation for each year
of service up to a maximum of 199% of annual compensation.
NOTE 21 - EARNINGS PER SHARE
Reconciliation of the numerators and the denominators of the basic and diluted
per share computations for net income are as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
(Amounts in thousands, except per share amounts)
Year ended March 31, 2000
Basic EPS
Net income and income available to common stockholders $2,755 2,063 $1.34
Effect of dilutive securities, options --
------ ------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,755 2,063 $1.34
====== ======
Year ended March 31, 1999
Basic EPS
Net income and income available to common stockholders $2,234 2,312 $0.97
Effect of dilutive securities, options 48
------ ------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,234 2,360 $0.95
====== ======
</TABLE>
Earnings per share data has not been presented for the year ended March 31, 1998
because such data would not be meaningful for fiscal 1998 given the short period
during which common stock was outstanding.
<PAGE>
NOTE 22 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following financial statements are for Bay State Bancorp, Inc. (Parent
Company Only) and should be read in conjunction with the consolidated financial
statements of Bay State Bancorp, Inc. and Subsidiaries.
BAY STATE BANCORP, INC.
(Parent Company Only)
Balance Sheets
March 31, 2000 and 1999
(Dollars in Thousands)
2000 1999
ASSETS ------- -------
Cash $ 2,207 $ 5,990
Investments in available-for-sale securities (at fair value) 3,592 7,985
Investment in subsidiary, Bay State Federal Savings Bank 42,127 41,445
Investment in subsidiary, Bay State Funding Corp. 3,396 3,222
Accrued interest receivable 31 93
Deferred tax asset 1,137 1,429
Other assets 222 190
------- -------
Total assets $52,712 $60,354
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 25 $ 56
Stockholders' equity 52,687 60,298
------- -------
Total liabilities and stockholders' equity $52,712 $60,354
======= =======
<PAGE>
BAY STATE BANCORP, INC.
(Parent Company Only)
Statements of Income
For the years ended March 31, 2000 and 1999 and for the period from
March 28, 1998 to March 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 28, 1998
to
2000 1999 March 31, 1998
------- ------- --------------
<S> <C> <C> <C>
Income:
Dividends from Bay State Federal Savings Bank $ 1,928 $ 750 $ --
Interest income 522 570 15
------- ------- -------
Total income 2,450 1,320 15
------- ------- -------
Expenses:
Loss on sale of securities to subsidiary 280 -- --
Contribution of shares to The Bay State Federal Savings
Charitable Foundation at the conversion issued price -- -- 3,756
Other expense 381 370 70
------- ------- -------
Total expenses 661 370 3,826
------- ------- -------
Income (loss) before income tax (benefit) expense and equity in
undistributed net income of subsidiaries 1,789 950 (3,811)
Income tax (benefit) expense (69) 49 (1,295)
------- ------- -------
Income (loss) before equity in undistributed net income of subsidiaries 1,858 901 (2,516)
Equity in undistributed net income of subsidiaries 713 1,333 36
------- ------- -------
Net income (loss) $ 2,571 $ 2,234 $(2,480)
======= ======= =======
</TABLE>
<PAGE>
BAY STATE BANCORP, INC.
(Parent Company Only)
Statements of Cash Flows
For the years ended March 31, 2000 and 1999 and for the period from
March 28, 1998 to March 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 28, 1998
to
2000 1999 March 31, 1998
-------- -------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,571 $ 2,234 $ (2,480)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Earned compensation on stock-based incentive plan 432 84 --
Contribution of shares to The Bay State Federal
Savings Charitable Foundation -- -- 3,756
Appreciation in fair value of ESOP shares -- -- 195
Increase in taxes receivable (29) (51) (93)
Deferred tax (benefit) expense 94 150 (1,203)
Increase in prepaid expenses and other assets (3) (46) --
Increase (decrease) in accrued expenses (31) (10) 66
Loss on sale of securities to subsidiary 280 -- --
Amortization of securities, net of accretion 6 6 --
(Increase) decrease in accrued interest receivable 62 (93) --
Undistributed net income of subsidiaries (713) (1,333) (36)
-------- -------- --------
Net cash provided by operating activities 2,669 941 205
-------- -------- --------
Cash flows from investing activities:
Return of investment, Bay State Funding Corp. -- 1,038 --
Investment in subsidiary, Bay State Federal Savings Bank -- -- (22,829)
Investment in subsidiary, Bay State Funding Corp. -- -- (4,056)
Purchases of available-for-sale securities -- (9,090) --
Proceeds from sales of available-for-sale securities 2,216 -- --
Proceeds from maturities of available-for-sale securities 750 -- --
-------- -------- --------
Net cash provided by (used in) investing activities 2,966 (8,052) (26,885)
-------- -------- --------
Cash flows from financing activities:
Dividends paid on common stock (618) (111) --
Purchases of Company shares for stock-based incentive plan -- (2,269) --
Proceeds from issuance of common stock -- -- 46,949
Costs related to issuance of common stock -- -- (1,681)
Purchases of treasury stock (8,800) (3,107) --
-------- -------- --------
Net cash provided by (used in) financing activities (9,418) (5,487) 45,268
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,783) (12,598) 18,588
Cash and cash equivalents at beginning of period 5,990 18,588 --
-------- -------- --------
Cash and cash equivalents at end of period $ 2,207 $ 5,990 $ 18,588
======== ======== ========
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 27, 2000 at
pages 4 through 6.
Item 11. Executive Compensation.
The information relating to Directors' and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on July 27, 2000 at pages 7 through 11
(excluding the Executive Compensation Committee Report and Stock Performance
Graph).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 27, 2000, at
pages 3 and 4.
Item 13. Certain Relationships and Related Transactions.
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on July 27, 2000, on page 15.
43
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company and its subsidiary are
filed as a part of this Form 10-K, under Item 8.
- Independent Auditors' Report
- Consolidated Balance Sheets as of March 31, 2000 and 1999
- Consolidated Statements of Income for the Years Ended March 31,
2000, 1999 and 1998
- Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended March 31, 2000, 1999 and 1998
- Consolidated Statements of Cash Flows for the Years Ended March
31, 2000, 1999 and 1998
(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are
not applicable or the required information is shown in the
Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K filed during the last quarter of fiscal 2000.
None.
(c) Exhibits required by Securities and Exchange Commission Regulation S-K:
2.1 Amended Plan of Conversion (including the Federal Stock Charter and
Bylaws of Bay State Federal Savings Bank) (1)
3.1 Certificate of Incorporation of Bay State Bancorp, Inc. (1)
3.2 Amended and Restated Bylaws of Bay State Bancorp, Inc. (2)
4.0 Draft Stock Certificate of Bay State Bancorp, Inc. (1)
10.1 Employment Agreement between Bay State Bancorp, Inc. and John F. Murphy
(filed herewith)
10.2 Employment Agreement between Bay State Federal Savings Bank and John F.
Murphy (3)
10.3 Employment Agreement between Bay State Bancorp, Inc. and Denise M.
Renaghan (filed herewith)
10.4 Employment Agreement between Bay State Federal Savings Bank and Denise M.
Renaghan (3)
10.5 Change in Control Agreement between Bay State Bancorp, Inc. and Michael
O. Gilles (3)
10.6 Change in Control Agreement between Bay State Federal Savings Bank and
Michael O. Gilles (3)
10.7 Change in Control Agreement between Bay State Federal Savings Bank and
Philip R. McNulty (3)
10.8 Form of Bay State Federal Savings Bank Management Supplemental Executive
Retirement Plan (1)
10.9 Form of Bay State Federal Savings Bank Retirement Benefit Equalization
Plan (1)
10.10 Bay State Bancorp, Inc. 1999 Option Plan (4)
10.11 Bay State Bancorp, Inc. 1998 Stock-Based Incentive Plan (as amended and
restated) (4)
11.0 Computation of earnings per share is incorporated herein by reference to
Note 21 of the Financial Statements
21.0 Subsidiary information is incorporated herein by reference to "Item 1.
Business--General"
23.0 Consent of Shatswell, MacLeod & Company, P.C.
27.0 Financial Data Schedule
----------
(1) Incorporated by reference into this document from the Exhibits to Form
SB-2, Registration Statement, and any amendments thereto, Registration No.
333-40115
(2) Incorporated by reference into this document from the Exhibits to Form
10-QSB as filed with the Securities and Exchange Commission on February 12,
1999.
(3) Incorporated by reference into this document from the Exhibits to Form
10-KSB as filed with the Securities Exchange Commission on June 14, 1999.
(4) Incorporated by reference into this document from the Appendix to the Proxy
Statement for the Annual Meeting of Shareholders held on July 22, 1999, as
filed with the Securities and Exchange Commission on June 14, 1999.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ John F. Murphy
----------------------------
John F. Murphy
President and Chief Executive Officer
Treasurer and Chairman of the Board
DATED: June 12, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ John F. Murphy President, Chief Executive Officer, June 12, 2000
------------------------ Treasurer and Chairman of the Board
John F. Murphy (Principal Executive Officer)
/s/ Denise M. Renaghan Executive Vice President, Chief June 12, 2000
------------------------ Operating Officer and Director
Denise M. Renaghan
/s/ Michael O. Gilles Chief Financial Officer June 12, 2000
------------------------ (Principal Accounting and
Michael O. Gilles Financial Officer)
/s/ Robert B. Cleary Director June 12, 2000
------------------------
Robert B. Cleary
/s/ Leo F. Grace Director June 12, 2000
------------------------
Leo F. Grace
/s/ Richard F. Hughes Director June 12, 2000
------------------------
Richard F. Hughes
/s/ Richard F. McBride Director June 12, 2000
------------------------
Richard F. McBride
/s/ Kent T. Spellman Director June 12, 2000
------------------------
Kent T. Spellman
