10-Q 1 d51288_10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission file number 1-13691 Bay State Bancorp, Inc. (Exact name of registrant as specified in its charter) Delaware 04-3398630 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 1299 Beacon Street, Brookline, Massachusetts 02446 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 739-9500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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.|X| Yes |_| No The number of shares of common stock, par value $0.01, outstanding as of August 2, 2002 was 1,624,226 (4,872,678 after adjusting for a 3 for 1 stock split to be distributed on September 3, 2002) BAY STATE BANCORP, INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements Bay State Bancorp, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Dollars in thousands, except per share data)

(1) Restated to reflect a 3 for 1 stock split declared on July 25, 2002. The accompanying notes are an integral part of these condensed consolidated financial statements. Page 1 Bay State Bancorp, Inc. and Subsidiaries Condensed Consolidated Income Statements (Dollars in thousands, except per share data)

(1) Restated to reflect a 3 for 1 stock split declared on July 25, 2002. The accompanying notes are an integral part of these condensed consolidated financial statements. Page 2 Bay State Bancorp, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (In thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 Bay State Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity (Dollars in thousands, except per share data) (Unaudited)

(1) Restated to reflect a 3 for 1 stock split declared on July 25, 2002. The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 2002 (Unaudited) (1) Organization Bay State Bancorp, Inc. (the "Company" or "Bay State") was incorporated under the laws of Delaware in October 1997 for the purpose of serving as the holding company of Bay State Federal Bank (the "Bank") as part of the Bank's conversion from the mutual form of organization to the stock form of organization (the "Conversion"). The Company is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision (the "OTS") and the Securities and Exchange Commission (the "SEC"). Prior to the Conversion, Bay State had not engaged in any material operations. (2) Accounting Principles The accompanying unaudited condensed consolidated financial statements of Bay State have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the current fiscal year. For further information, refer to the consolidated financial statements included in the Company's annual report and Form 10-K for the period ended March 31, 2002, filed with the SEC. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. (3) Stock Split On July 25, 2002, the Board of Directors declared a 3 for 1 split of the shares of the Company's common stock in the form of a 200% stock dividend. The additional shares to stockholders of record as of August 19, 2002 will be distributed on or about September 3, 2002. In the accompanying financial statements and in the Management's Discussion and Analysis of Financial Condition and Results of Operation the computation of basic and fully diluted earnings per share have been adjusted retroactively for all periods presented to reflect the stock split. In addition, other per share data in the financial statements and in the Management's Discussion and Analysis of Financial Condition and Results of Operation have been adjusted to reflect the stock split. Page 5 (4) Stock Repurchase Program On July 31, 2002, the Company announced that it had completed the repurchase of 84,315 shares, or 5%, of its outstanding common stock at an average price of $41.03 per share. Upon completion of the repurchase program the Company has 1,624,226 shares outstanding. These share amounts do not include the 3-for-1 stock split recently declared by the Company to be distributed on September 3, 2002 to stockholders of record as of August 19, 2002. Assuming such stock split had already occurred, the current repurchase would have amounted to 252,945 shares at an average price of $13.67 resulting in 4,872,678 shares currently outstanding. The Company also announced that its Board of Directors approved an additional repurchase of 5%, or 81,211 shares of its outstanding common stock (or 243,633 shares factoring in the 3-for-1 stock split). (5) Impact of New Accounting Standards In June 1998, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133, as amended by SFAS No. 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In management's opinion, SFAS No. 133 did not have a material effect on the Company's consolidated financial statements. FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement replaced SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and rescinded SFAS Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001; however, the disclosure provisions are effective for fiscal years ending after December 15, 2000. The effect of this Statement did not have a material impact on the Company's financial position or result of operations. SFAS No. 141 improves the consistency of the accounting and reporting for business combinations by requiring that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. Use of the pooling-of-interests method is no longer permitted. Adoption of this Statement had no impact on the consolidated financial statements. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed at least annually for impairment. The amortization of goodwill ceases upon adoption of the Statement, which for most companies was January 1, 2002. Adoption of this Statement had no impact on the consolidated financial statements. Page 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's Form 10-K filing with the SEC for the fiscal year ended March 31, 2002. Except as required by applicable law and regulations, the Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. General The Bank is a federally chartered savings bank and is subject to regulation and examination by the OTS. The Bank's business activities are concentrated in Eastern Massachusetts through six full service retail banking offices located in Norfolk and Suffolk Counties, Massachusetts. Through these offices, the Bank offers a full range of retail and commercial banking products and services and conducts other business as allowable for federally chartered banks. The Bank primarily invests in residential first mortgages, commercial and multi-family real estate loans and, to a lesser extent, home equity lines of credit, other consumer loans, residential construction loans, development and land loans and commercial loans. Lending operations, particularly loan originations, are conducted from the retail offices and at the point of sale. Neither the Company nor the Bank nor any of their subsidiaries conduct business on a national or international basis. The operating results of the Company depend primarily on its net interest and dividend income, which is the difference between (i) interest and dividend income on earning assets, primarily loans and investment securities and (ii) interest expense on interest bearing liabilities, which consist of deposits and borrowings. Results of operations are also affected by the provision for loan losses, the level of non-interest income, including deposit and loan fees, gains on sales of assets, operating expenses and income taxes. Page 7 Comparison of Financial Condition at June 30, 2002 and March 31, 2002 (Unaudited) Total assets at June 30, 2002 were $544.2 million, compared to $528.7 million at March 31, 2002, an increase of $15.5 million, or 2.9%. Net loans receivable, including mortgage loans held for sale, increased $18.0 million, or 4.0%, primarily in residential one-to four-family loans, commercial real estate and construction loans as a result of the increased level of loan originations during the period. Short-term investments, which consist mainly of overnight investments, decreased $3.2 million. The increase in assets was funded primarily from a $8.5 million, or 2.6%, increase in deposits, and a $5.8 million, or 4.3%, increase in Federal Home Loan Bank (the "FHLB") advances. The increase in deposits was a result of increased marketing efforts and competitively priced products offered by the Bank. Total stockholders' equity was $56.7 million, or 10.41% of total assets, at June 30, 2002, an increase of $1.7 million, or 3.0%, from $55.0 million, or 10.41% of total assets, at March 31, 2002. The increase in equity was the result of the net income for the period, an increase in the market value of investment securities classified as available-for-sale and a reduction in the stock-based benefit plans due to the vesting of stock awards, offset by the repurchase of 21,600 shares of treasury stock at a cost of $360,000 and the payment of dividends. The Company's book value per share at June 30, 2002 was $12.28, compared to $11.88 at March 31, 2002, an increase of 3.4%. Investments Short-term investments were $3.2 million at June 30, 2002, primarily consisting of overnight investments at the FHLB. This represents a decrease of $3.2 million from the $6.4 million at March 31, 2002. Investment securities available-for-sale decreased $152,000, or 0.44%, due to a decrease in mortgage-backed securities from principal pay-downs received. The Company's investment portfolio at June 30, 2002 reflects a pre-tax unrealized gain on available-for-sale securities of $1.8 million, compared to $1.2 million at March 31, 2002. The table below shows the investment securities portfolio at the dates presented. The amortized cost and estimated fair value of investments available-for-sale were: June 30, 2002 March 31, 2002 ------------- -------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- -------- --------- -------- (Dollars in thousands) Marketable equity securities $ 8,106 $ 9,365 $ 8,045 $ 9,316 Mortgage-backed securities 6,234 6,447 6,977 7,087 Trust preferred equity securities 10,600 10,987 10,599 10,754 Corporate bonds and notes 6,456 6,407 6,454 6,240 Preferred stocks 1,500 1,446 1,500 1,407 --------- -------- --------- -------- Total $ 32,896 $ 34,652 $ 33,575 $ 34,804 ========= ======== ========= ======== Page 8 The amortized cost and estimated market values of investments held-to-maturity were:

Loans During the first quarter of fiscal year 2003, net loans receivable, including mortgage loans held for sale, increased by $18.0 million, or 4.0%, as detailed below:

At June 30, 2002 loans serviced for others was $35.9 million, compared to $33.0 million at March 31, 2002. Page 9 Asset Quality At June 30, 2002, non-performing assets totaled $114,000, an increase of $5,000, or 4.6%, from $109,000 at March 31, 2002. Non-performing assets consist of all loans that are delinquent 90 days or more, and any real estate owned. The Bank had other real estate owned totaling $113,000 at June 30, 2002 and no other real estate owned at March 31, 2002. At June 30, 2002 and March 31, 2002, non-performing assets represented 0.02% of total assets and 0.02% of loans receivable net. The composition of non-performing assets for the dates presented was: June 30, March 31, 2002 2001 2002 ---- ---- ---- (Dollars in thousands) Non-accrual loans: Mortgage Loans: One-to-four-family $ 1 $233 $109 Multi-family -- -- -- Commercial real estate -- -- -- Construction and development -- -- -- ---- ---- ---- Total mortgage loans 1 233 109 ---- ---- ---- Consumer Loans: Equity lines -- -- -- Other consumer loans -- -- -- ---- ---- ---- Total consumer loans -- -- -- ---- ---- ---- Total non-accrual loans 1 233 109 Real estate owned, net 113 -- -- ---- ---- ---- Total non-performing assets $114 $233 $109 ==== ==== ==== Non-performing assets as a percentage of: Loans receivable, net 0.02% 0.06% 0.02% Total assets 0.02 0.05 0.02 The following represents the activity in the allowance for loan losses for the three months ended June 30, 2002: (Dollars in thousands) Balance at March 31, 2001 $4,535 Provision for loan losses 75 Losses charged to allowance (2) Recoveries -- ------ Balance at June 30, 2002 $4,608 ====== Page 10 The allowance for loan losses is based on management's estimate of the credit losses inherent in the loan portfolio and management's ongoing review of the existing loan portfolio, current market conditions and the volume and mix of the Bank's existing loan origination pipeline. To assess reasonable and probable loss exposure in the Bank's loan portfolio, management establishes an allocated allowance based upon its review of internal loan classification reports which identify any loans classified as special mention, substandard, doubtful or loss and applies an allocation factor based upon its estimated exposure on these specific loans. An unallocated allowance is maintained based on the remaining portfolio, which is classified into various groups based upon loan type, underlying collateral, and delinquency status and payment performance history. The loss factor applied to these loans is based upon management's review of historical loss experience, current local and national economic conditions and industry experience and standards. In addition, as part of the regulatory examination process, the OTS periodically reviews the Company's allowance for loan losses and may require additional provisions for estimated losses based upon judgments different from those of management. The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. While management believes the Company's allowance for loan losses was sufficient to absorb any losses inherent in its loan portfolio at June 30, 2002, no assurances can be given that the Company's level of allowance for loan losses will be sufficient to cover potential loan losses incurred by the Company or that any adjustments to the allowance for loan losses will not be necessary if economic conditions and actual loss experience differs from those assumed by management in determining the current level of the allowance for loan losses. Deposits and Borrowed Funds Deposits increased during the three-month period ending June 30, 2002, as detailed below: June 30, % of total March 31, % of total 2002 deposits 2002 deposits -------- -------- -------- -------- (Dollars in thousands) Regular savings accounts $ 30,443 9.03% $ 29,810 9.07% NOW accounts 45,874 13.61 34,570 10.52 Money market accounts 115,703 34.32 128,932 39.24 Non-interest bearing deposits 22,099 6.56 17,951 5.46 -------- -------- -------- -------- 214,119 63.52 211,263 64.29 Term deposits 122,969 36.48 117,363 35.71 -------- -------- -------- -------- Total deposits $337,088 100.00% $328,626 100.00% ======== ======== ======== ======== During the period, FHLB advances increased $5.8 million, or 4.3% and other borrowed funds, consisting of federal funds purchased decreased $802,000, or 27.6%. Page 11 Comparison of Operating Results for the Three Months Ended June 30, 2002 and 2001. General Consolidated net income for the three months ended June 30, 2002 totaled $1.9 million, or $0.41 basic earnings per share and $0.38 fully diluted earnings per share, compared to $1.2 million, or $0.24 per basic earnings per share and $0.23 fully diluted per share, for the same period last year. This represents an increase of $723,000, or 62.0%, in net income, a $0.17, or 70.8%, increase in basic earnings per share and a $0.15, or 65.2%, increase in fully diluted earnings per share. The increase was primarily a result of higher net interest income due to an increase in the average balance of interest earning assets, a decrease in deposit interest expense due to the growth in lower-costing core deposits, a reduction in interest on borrowed funds due to the lower cost and level of borrowings offset in part by higher income taxes and a slight increase in non-interest expense. Interest Income Interest income for the three months ended June 30, 2002 decreased $20,000, or 0.21%, to $9.5 million, compared to $9.6 million for the same period last year. The decrease in interest income was primarily due to a decrease of $82,000, or 11.0%, in interest on investments, due to a decline in the yield on the investment portfolio offset by an increase of $62,000, or 0.70%, in loan interest income. The average balance of interest-earning assets increased from $459.2 million for the quarter ended June 30, 2001 to $498.4 million for the quarter ended June 30, 2002, an increase of $39.2 million, or 8.5%. The increase in the average balance of interest-earning assets was primarily a net result of an increase in the average balance of loans, net of $36.9 million, or 8.9%. The yield on interest-earning assets decreased 67 basis points to 7.66%, due to the lower interest rate environment. Interest Expense Interest expense for the three months ended June 30, 2002 decreased $1.4 million, or 27.9%, to $3.7 million compared to $5.1 million for the same period last year. The decrease in interest expense was the net result of a $32.3 million, or 7.8%, increase in the average balance of interest-bearing liabilities which increased from $415.5 million for the three months ended June 30, 2001 to $447.9 million for the three months ended June 30, 2002, and a decrease of 162 basis points in the cost of interest-bearing liabilities to 3.27%, from 4.89%. The increase in the average balance of interest-bearing liabilities was primarily a net result of an increase in the average balance of lower costing core deposits of $48.6 million, or 35.6%, a decrease in the average balance of FHLB advances of $13.7 million, or 9.9% and a decrease in the average balance of higher costing certificates of deposits of $2.9 million, or 2.3%. Although the average balance of interest bearing liabilities increased, the decrease in interest expense was attributable to the deposit growth being in the lower costing core deposits, the reduction and repricing of maturing certificates of deposit at current interest rate levels, along with the reduction and repricing of FHLB advances to lower interest rate levels. Page 12 Net interest income The table below shows the average balance sheet, the interest earned and paid on interest-earning assets and interest-bearing liabilities and the resulting net interest spread and margin for the periods presented. The average yields and costs are:

Provision for Loan Losses Provisions for loan losses are charged to operations to bring the allowance for loan losses to a level considered by management to be adequate to cover estimated losses on loans receivable which are deemed probable and estimable based on information currently known to management. The provision for loan losses totaled $75,000 for the quarter ended June 30, 2001, compared to $62,000 for the same period last year. The current quarter's provision was based upon the growth in the loan portfolio during the period, specifically in higher risk construction, commercial real estate loans and commercial loans. Page 13 The provision also reflects management's analysis of the overall portfolio mix and the current level of non-performing loans and delinquency trends, which continued to decline during the period. The Company plans to add to the provision for loan losses to support any loan portfolio expansion and change in non-performing loan levels, as considered necessary by management. Non-interest income Total non-interest income, net of gains and losses on investment activities, was $339,000 for the quarter ended June 30, 2002, compared to $313,000 for the same period last year, an increase of $26,000, or 8.3%. These changes were primarily a result of an increase from the gain on sale of loans, increased debit card fees and income from the sale of alternative investment products. The Company recognized a $16,000 loss on the sale of trading securities for the period ended June 30, 2002, compared to a $69,000 gain for the same period last year. These gains and losses represent the change in the market value of the assets supporting certain employee benefit plans. During the period, the Company also recognized a $30,000 loss on the disposal of fixed assets associated with the write-off of leasehold improvements in a branch office that is being relocated. Non-interest expense Total non-interest expense was $3.1 million for the quarter ended June 30, 2002, compared to $2.9 million for the same period last year, an increase of $185,000, or 6.4%. Total salaries and benefits increased $187,000, or 10.2%, primarily the result of a general increase in salaries and benefits due to the increased number of employees and an increase in the costs associated with the Bank's ESOP due to the increased stock price. Occupancy and equipment expense totaled $416,000, compared to $393,000 for the same period last year, an increase of $23,000, or 5.8%. This increase was the result of the increased level of depreciation on building and leasehold improvements. Advertising expense totaled $96,000, compared to $153,000 for the same period last year, a decrease of $57,000, or 37.3%, primarily a result of decreased spending in media advertising and special product promotions offered during the same period last year. Data processing expense increased $10,000, or 9.3%, as a result of the increased level of deposit and loan accounts. Other expenses increased $33,000, or 11.4%, a result of general increases in the cost of postage and telecommunications services. Income Taxes For the quarter ended June 30, 2002, income taxes of $1.2 million were provided on net income before tax of $3.1 million for an effective rate of 38.2%, compared to $749,000 on income before taxes of $1.9 million for an effective rate of 39.1%, for the same period last year. Item 3 - Quantitative and Qualitative Disclosures about Market Risk Management is responsible for monitoring and limiting the Bank's exposure to interest rate risk within established guidelines while maximizing net interest income. The Bank will continue to monitor its interest rate risk sensitivity with the primary objective to prudently structure the balance sheet so that movements of interest rates on assets and liabilities are highly correlated and produce a reasonable net interest margin even in periods of volatile interest rates changes. Further discussion on market risk is in the Company's Form 10-K for the year ended March 31, 2002. Page 14 Asset/Liability Management The principal objective of the Bank's interest rate risk management function is to evaluate the interest rate risk included in certain balance sheet accounts, determine the appropriate level of risk given the Bank's business strategy, operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with the Board of Directors' approved guidelines. Through such management, the Bank seeks to reduce the vulnerability of its operations to changes in interest rates. The Bank monitors its interest rate risk as such risk relates to its operating strategies. The Bank's Board of Directors has established an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets on a monthly basis and reports trends and interest rate risk position to the Board of Directors on a quarterly basis. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Bank. In recent years, the Bank has primarily utilized the following strategies to manage interest rate risk: (i) emphasizing the origination and purchase of adjustable-rate loans; (ii) investing in corporate bonds and notes, equity 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) 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." Assets and liabilities are said to be interest rate sensitive within a specific time period if they will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. At June 30, 2002, 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 20.00%. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of rising interest rates, an institution with a negative gap position would be in a worse position to invest in higher yielding assets which, consequently, may result in the cost of its interest-bearing liabilities increasing at a rate faster than its yield on interest-earning assets than if it had a positive gap. Conversely, during a period of falling interest rates, an institution with a negative gap would tend to have its interest-bearing liabilities repricing downward at a faster rate than its interest earning assets as compared to an institution with a positive gap which, consequently, may tend to positively affect the growth of its net interest income. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2002, which are anticipated by the Bank, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "Gap Table"). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. Page 15 The table sets forth an approximation of the projected repricing of assets and liabilities on the basis of contractual maturities, and scheduled rate adjustments within a one-year period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Money Market accounts, regular savings accounts and NOW accounts are assumed to have annual decay rates of 80%, 15% and 5%, respectively. Deposit decay rates can have a significant impact on the Bank's estimated gap. While the Bank believes such assumptions to be reasonable, there can be no assurance that assumed decay rates will approximate future withdrawal activity. The increase in liability sensitivity from the previous period was directly related to the increased level of non-maturity deposits within one year and the reduction in the repricing of interest-bearing assets within one-year and an increase in three-and five-year adjustable loans as well as an increase in fifteen-year fixed rate loans.

---------- (1) Excludes non-accrual loans Page 16 PART II - OTHER INFORMATION Item 1 - Legal Proceedings Neither the Company nor any of its subsidiaries is party to any pending legal proceedings which are material other than routine litigation incidental to their business activities. Item 2 - Changes in Securities and Use of Proceeds Not applicable. Item 3 - Defaults Upon Senior Securities Not applicable. Item 4 - Submission of Matters to a Vote of Security Holders Not applicable. Item 5 - Other Information Not applicable. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Certificate of Incorporation of Bay State Bancorp, Inc. * 3.2 Amended and Restated Bylaws of Bay State Bancorp, Inc. ** 4.0 Stock Certificate of Bay State Bancorp, Inc. * 11.0 Computation of per share earnings (filed herewith) 99.1 Certification of Chief Executive Officer and Chief Financial Officer (filed herewith) * Incorporated herein by reference from the exhibits to Form SB-2 registration statement as amended, Registration No. 333-40115 ** Incorporated herein by reference from the registrants Form 10-KSB, as filed with the Securities and Exchange Commission on June 14, 1999. (b) Reports on Form 8-K On April 17, 2002, the Company filed an 8-K in which it disclosed, under Item 5, the date, place and time of its 2002 annual meeting of stockholders. The press release announcing the annual meeting was filed by exhibit. Page 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Bay State Bancorp, Inc. August 7, 2002 \s\ John F. Murphy ------------------------------ ---------------------------------------- Date John F. Murphy Chairman, President, and Chief Executive Officer (Principal Executive Officer) August 7, 2002 \s\ Michael O. Gilles ------------------------------ ---------------------------------------- Date Michael O. Gilles Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) Page 18

BAY STATE BANCORP INC 10-Q