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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2005 |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-51194
Benjamin Franklin Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)
Massachusetts | 04 -3336598 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) | |
58 Main Street, Franklin, MA | 02038 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code:(617) 528-7000
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. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Shares outstanding of the registrant’s common stock (no par value) at November 14, 2005: 8,488,898
See accompanying notes to condensed consolidated financial statements.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BENJAMIN FRANKLIN BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 20,641 | $ | 8,691 | ||||
Cash supplied by CSSI to ATM customers | 27,508 | — | ||||||
Short-term investments | 13,546 | 5,513 | ||||||
Total cash and cash equivalents | 61,695 | 14,204 | ||||||
Securities available for sale, at fair value | 117,105 | 86,070 | ||||||
Securities held to maturity, at amortized cost | 133 | 217 | ||||||
Restricted equity securities, at cost | 10,015 | 6,975 | ||||||
Total securities | 127,253 | 93,262 | ||||||
Loans: | ||||||||
Residential real estate mortgage | 290,195 | 241,090 | ||||||
Commercial real estate mortgage | 215,776 | 85,911 | ||||||
Construction mortgage | 47,297 | 28,651 | ||||||
Commercial business | 18,931 | 4,375 | ||||||
Consumer | 35,226 | 25,370 | ||||||
Net deferred loan costs | 1,292 | 1,148 | ||||||
Total loans | 608,717 | 386,545 | ||||||
Allowance for loan losses | (5,631 | ) | (3,172 | ) | ||||
Loans, net | 603,086 | 383,373 | ||||||
Premises and equipment, net | 9,217 | 11,147 | ||||||
Accrued interest receivable | 2,988 | 1,490 | ||||||
Goodwill | 33,762 | 4,248 | ||||||
Core deposit intangible | 4,489 | — | ||||||
Bank-owned life insurance | 7,386 | 7,182 | ||||||
Other assets | 6,299 | 2,487 | ||||||
$ | 856,175 | $ | 517,393 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Regular savings accounts | $ | 103,455 | $ | 95,875 | ||||
Money market accounts | 99,243 | 53,167 | ||||||
Now accounts | 29,508 | 22,460 | ||||||
Demand deposit accounts | 127,425 | 87,776 | ||||||
Time deposit accounts | 244,855 | 137,221 | ||||||
Total deposits | 604,486 | 396,499 | ||||||
Short-term borrowings | — | 4,250 | ||||||
Long-term debt | 137,926 | 81,000 | ||||||
Other liabilities | 6,031 | 4,316 | ||||||
Total liabilities | 748,443 | 486,065 | ||||||
Common stock, no par value; authorized 75,000,000 shares; issued 8,488,898 shares at September 30, 2005 | — | — | ||||||
Additional paid-in capital | 82,845 | — | ||||||
Unallocated common shares held by ESOP; 422,073 shares at September 30, 2005 | (4,797 | ) | — | |||||
Retained earnings | 31,860 | 32,997 | ||||||
Accumulated other comprehensive loss | (2,176 | ) | (1,669 | ) | ||||
Total stockholders’ equity | 107,732 | 31,328 | ||||||
$ | 856,175 | $ | 517,393 | |||||
See accompanying notes to condensed consolidated financial statements.
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BENJAMIN FRANKLIN BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | 8,716 | $ | 4,578 | $ | 21,656 | $ | 12,567 | ||||||||
Debt securities | 1,103 | 744 | 2,657 | 2,374 | ||||||||||||
Equity securities | 110 | 76 | 271 | 175 | ||||||||||||
Short-term investments | 100 | 21 | 344 | 107 | ||||||||||||
Total interest and dividend income | 10,029 | 5,419 | 24,928 | 15,223 | ||||||||||||
Interest expense: | ||||||||||||||||
Interest on deposits | 2,375 | 1,085 | 5,798 | 3,221 | ||||||||||||
Interest on short-term borrowings | 33 | — | 55 | — | ||||||||||||
Interest on long-term debt | 1,301 | 672 | 3,068 | 1,804 | ||||||||||||
Total interest expense | 3,709 | 1,757 | 8,921 | 5,025 | ||||||||||||
Net interest income | 6,320 | 3,662 | 16,007 | 10,198 | ||||||||||||
Provision for loan losses | 152 | 150 | 648 | 470 | ||||||||||||
Net interest income, after provision for loan losses | 6,168 | 3,512 | 15,359 | 9,728 | ||||||||||||
Other income (charges): | ||||||||||||||||
Deposit service fees | 356 | 198 | 857 | 682 | ||||||||||||
Loan servicing fees | 126 | 11 | 331 | 188 | ||||||||||||
CSSI ATM servicing fees | 493 | — | 1,002 | — | ||||||||||||
Gain on sale of loans, net | 52 | 8 | 72 | 106 | ||||||||||||
Gain on sales of securities, net | — | — | — | 8 | ||||||||||||
Loss on sale/write-down of bank-owned land, net | — | — | (1,020 | ) | — | |||||||||||
Income from bank-owned life insurance | 83 | 48 | 204 | 145 | ||||||||||||
Miscellaneous | 204 | 179 | 605 | 538 | ||||||||||||
Total other income | 1,314 | 444 | 2,051 | 1,667 | ||||||||||||
Operating expenses: | ||||||||||||||||
Salaries and employee benefits | 2,529 | 1,962 | 7,010 | 5,679 | ||||||||||||
Occupancy and equipment | 654 | 289 | 1,753 | 1,035 | ||||||||||||
Data processing | 468 | 345 | 1,339 | 1,047 | ||||||||||||
Professional fees | 257 | 74 | 624 | 191 | ||||||||||||
Contribution to Benjamin Franklin Bank Charitable Foundation | — | — | 4,000 | — | ||||||||||||
Amortization of core deposit intanglible | 445 | 45 | 1,044 | 136 | ||||||||||||
Other general and administrative | 986 | 430 | 2,174 | 1,369 | ||||||||||||
Total operating expenses | 5,339 | 3,145 | 17,944 | 9,457 | ||||||||||||
Income (loss) before income taxes | 2,143 | 811 | (534 | ) | 1,938 | |||||||||||
Provision for income taxes | 814 | 277 | 348 | 626 | ||||||||||||
Net income (loss) | $ | 1,329 | $ | 534 | $ | (882 | ) | $ | 1,312 | |||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.16 | n/a | n/a | n/a | |||||||||||
Diluted | $ | 0.16 | n/a | n/a | n/a | |||||||||||
Weighted-average shares outstanding: | ||||||||||||||||
Basic | 8,148,113 | n/a | n/a | n/a | ||||||||||||
Diluted | 8,148,113 | n/a | n/a | n/a |
See accompanying notes to condensed consolidated financial statements.
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BENJAMIN FRANKLIN BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
(Dollars in thousands)
Unallocated | Accumulated | |||||||||||||||||||||||||||
Additional | Common | Other | Total | |||||||||||||||||||||||||
Common Stock | Paid-in | Stock Held | Retained | Comprehensive | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | by ESOP | Earnings | Loss | Equity | ||||||||||||||||||||||
Balance at December 31, 2003 | — | $ | — | $ | — | $ | — | $ | 31,308 | $ | (2,007 | ) | $ | 29,301 | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net income | — | — | — | — | 1,312 | — | 1,312 | |||||||||||||||||||||
Net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects | — | (27 | ) | (27 | ) | |||||||||||||||||||||||
Total comprehensive loss | 1,285 | |||||||||||||||||||||||||||
Balance at September 30, 2004 | — | $ | — | $ | — | $ | — | $ | 32,620 | $ | (2,034 | ) | $ | 30,586 | ||||||||||||||
Balance at December 31, 2004 | — | $ | — | $ | — | $ | — | $ | 32,997 | $ | (1,669 | ) | $ | 31,328 | ||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net loss | — | — | — | — | (882 | ) | — | (882 | ) | |||||||||||||||||||
Net unrealized gain on securities available for sale, net of tax effects | — | — | — | — | — | (507 | ) | (507 | ) | |||||||||||||||||||
Total comprehensive loss | (1,389 | ) | ||||||||||||||||||||||||||
Dividends paid | — | — | — | — | (255 | ) | — | (255 | ) | |||||||||||||||||||
Issuance of common stock for initial public offering, net of expenses of $2.1 million | 5,577,419 | — | 53,721 | — | — | — | 53,721 | |||||||||||||||||||||
Issuance of common stock to Benjamin Frankin Bank Charitable Foundation | 400,000 | — | 4,000 | — | — | — | 4,000 | |||||||||||||||||||||
Issuance of common stock for acquisition of Chart Bank, A Cooperative Bank | 2,511,479 | — | 25,115 | — | — | — | 25,115 | |||||||||||||||||||||
Stock purchased for ESOP | — | (4,911 | ) | (4,911 | ) | |||||||||||||||||||||||
Release of ESOP stock | — | 9 | 114 | — | — | 123 | ||||||||||||||||||||||
Balance at September 30, 2005 | 8,488,898 | $ | — | $ | 82,845 | $ | (4,797 | ) | $ | 31,860 | $ | (2,176 | ) | $ | 107,732 | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
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BENJAMIN FRANKLIN BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | ||||||||
2005 | 2004 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (882 | ) | $ | 1,312 | |||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||||||
Amortization of securities, net | 99 | 703 | ||||||
Amortization (accretion) of loans, net | (88 | ) | 214 | |||||
Loss (gain) on sales of securities, net | — | (8 | ) | |||||
Provision for loan losses | 648 | 470 | ||||||
Accretion of certificates of deposit and borrowings | (249 | ) | — | |||||
Amortization of mortgage servicing rights | 214 | 423 | ||||||
Depreciation expense | 709 | 509 | ||||||
Amortization of core deposit intangible | 1,044 | 136 | ||||||
Amortization of unearned compensation | 123 | — | ||||||
Deferred income tax (benefit) provision | (1,760 | ) | 48 | |||||
Income from bank-owned life insurance | (204 | ) | (145 | ) | ||||
Gains on sales of loans, net | (72 | ) | (106 | ) | ||||
Loans originated for sale | (11,203 | ) | (28,566 | ) | ||||
Proceeds from sales of loans | 11,275 | 28,672 | ||||||
Increase in accrued interest receivable | (1,498 | ) | (107 | ) | ||||
Gain on sale of bank-owned land | (380 | ) | — | |||||
Writedown of bank-owned land | 1,400 | — | ||||||
Charitable Foundation Contribution | 4,000 | — | ||||||
Other, net | 1,980 | (804 | ) | |||||
Net cash provided by operating activities | 5,156 | 2,751 | ||||||
Cash flows from investing activities: | ||||||||
Activity in available-for-sale securities: | ||||||||
Sales | — | 2,015 | ||||||
Maturities, calls, and principal repayments | 34,127 | 35,829 | ||||||
Purchases | (33,495 | ) | (30,411 | ) | ||||
Principal repayments on held-to-maturity securities | 84 | 120 | ||||||
Net change in restricted equity securities | 798 | 360 | ||||||
Purchases of mortgage loans | — | (34,207 | ) | |||||
Loan originations, net | (36,237 | ) | (53,131 | ) | ||||
Proceeds from sales of bank-owned land | 868 | — | ||||||
Additions to premises and equipment | (343 | ) | (590 | ) | ||||
Purchases of bank-owned life insurance | — | (1,400 | ) | |||||
Net cash purchased in acquisition of Chart Bank | 9,879 | — | ||||||
Net cash used for investing activities | (24,319 | ) | (81,415 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
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BENJAMIN FRANKLIN BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2005 | 2004 | |||||||
(In thousands) | ||||||||
Cash flows from financing activities: | ||||||||
Net increase (decrease) in deposits | (9,406 | ) | 19,305 | |||||
Net proceeds (repayments) from short-term borrowings | (24,750 | ) | 29,000 | |||||
Net proceeds from long-term debt | 52,000 | 10,000 | ||||||
Net proceeds from common stock offering | 53,721 | — | ||||||
Acquisition of Common Stock by ESOP | (4,911 | ) | — | |||||
Net cash provided by financing activities | 66,654 | 58,305 | ||||||
Net change in cash and cash equivalents | 47,491 | (20,359 | ) | |||||
Cash and cash equivalents at beginning of the period | 14,204 | 35,485 | ||||||
Cash and cash equivalents at end of the period | $ | 61,695 | $ | 15,126 | ||||
Supplemental cash flow information: | ||||||||
Interest paid on deposits | $ | 5,794 | $ | 3,222 | ||||
Interest paid on short-term borrowings | 55 | 39 | ||||||
Interest paid on long-term debt | 2,873 | 1,726 | ||||||
Income taxes paid (refunded) | 665 | 640 | ||||||
Assets acquired and liabilities assumed were as follows: | ||||||||
Fair value of noncash assets acquired | $ | 259,008 | ||||||
Fair value of liabilities assumed | 243,772 | |||||||
Fair value of common stock issued | 25,115 |
See accompanying notes to condensed consolidated financial statements.
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BENJAMIN FRANKLIN BANCORP, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of presentation and consolidation | |
The accompanying unaudited consolidated interim financial statements include the accounts of Benjamin Franklin Bancorp, Inc and subsidiaries (the “Company’’) including its main wholly-owned subsidiary, Benjamin Franklin Bank (the “Bank’’). These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been included. | ||
These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2004. | ||
Stock Conversion and Merger The Company completed its mutual-to-stock conversion and related stock offering with the issuance of 5,977,419 shares (including 400,000 shares contributed to the Benjamin Franklin Bank Charitable Foundation) on April 4, 2005. An additional 2,511,479 shares were issued in connection with the acquisition of Chart Bank, which was consummated immediately following the stock conversion. The cash portion of the consideration paid to Chart Bank shareholders totaled $21,534,960. The Company’s stock began trading on April 5, 2005, on the Nasdaq National Market, under the symbol “BFBC”. | ||
In connection with the stock conversion, the Company established the Benjamin Franklin Bank Charitable Foundation (the “Foundation”), funded with a contribution of 400,000 shares of newly-issued Benjamin Franklin common stock. This contribution resulted in the recognition of expense in the second quarter of 2005 equal to the $10 offering price for each of the shares contributed, net of tax benefits. The effect of this transaction on the Company’s results for the second quarter was $2.6 million ($4.0 million expense, net of $1.4 million in tax benefits). The Foundation provides funding to support charitable causes and community development activities in the communities served by the Company. | ||
The acquisition of Chart Bank was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. The allocation of purchase price is as follows: |
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Chart Bank | Purchase | Final Allocation of | ||||||||||
Balance at | Accounting | Purchase | ||||||||||
April 4, 2005 | Adjustments | Price | ||||||||||
(In thousands) | ||||||||||||
Assets: | ||||||||||||
Cash and cash equivalents | $ | 35,643 | $ | (4,229 | ) | $ | 31,414 | |||||
Securities | 36,743 | (607 | ) | 36,136 | ||||||||
Loans, less allowance for loan losses | 185,022 | (987 | ) | 184,035 | ||||||||
Premises and equipment | 2,054 | 569 | 2,623 | |||||||||
Goodwill | — | 29,515 | 29,515 | |||||||||
Core deposit intangible | — | 5,488 | 5,488 | |||||||||
Other assets | 1,211 | 1,211 | ||||||||||
260,673 | 29,749 | 290,422 | ||||||||||
Liabilities: | ||||||||||||
Deposits | 216,903 | 473 | 217,376 | |||||||||
Borrowed funds | 25,500 | (101 | ) | 25,399 | ||||||||
Other liabilities | 725 | 272 | 997 | |||||||||
243,128 | 644 | 243,772 | ||||||||||
Net assets acquired | $ | 46,650 | ||||||||||
The goodwill created in the acquisition of Chart Bank, in the amount of $29.5 million, is not tax deductible. In accordance with SFS No. 142, “Goodwill and Other Intangibles”, goodwill will not be amortized, but will be subject to periodic testing for impairment. Any impairment detected in the future as a result of such testing would result in a charge to earnings. Certain other purchase accounting adjustments are being amortized/accreted into income over the estimated lives of those adjustments. The following table summarizes the Company’s current estimates for the future amortization or accretion of the most significant of the purchase accounting adjustments: |
Estimated Accretion/(Amortization) | ||||||||||||||||||||||||||||
Actual- | ||||||||||||||||||||||||||||
Quarter | Three Months | |||||||||||||||||||||||||||
Ended | Ended | Year Ended | Year Ended | Year Ended | Year Ended | After | ||||||||||||||||||||||
September 30, | December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | ||||||||||||||||||||||
2005 | 2005 | 2006 | 2007 | 2008 | 2009 | 2009 | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Core deposit intangible | $ | (445 | ) | $ | (356 | ) | $ | (1,064 | ) | $ | (779 | ) | $ | (574 | ) | $ | (408 | ) | $ | (1,308 | ) | |||||||
Loan discount | 144 | 126 | 337 | 154 | 53 | 21 | 16 | |||||||||||||||||||||
Investments discount | 93 | 98 | 252 | 62 | 8 | — | — | |||||||||||||||||||||
Time deposit premium | 131 | 67 | 66 | 31 | 20 | 13 | ||||||||||||||||||||||
Borrowed funds discount | (11 | ) | (10 | ) | (33 | ) | (20 | ) | (11 | ) |
The forecasted accretion and amortization of the fair market value adjustments for loans, investments, time deposits and borrowed funds approximates the level yield method and may vary in the future if actual prepayments or other dispositions differ from current estimates. The core deposit intangible is |
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being amortized on an accelerated basis over its estimated life of 15 years. The core deposit intangible will be tested periodically for impairment which, if detected, would result in a charge to earnings. | ||
The results of Chart Bank are included in the results of the Company subsequent to April 3, 2005. The unaudited condensed pro forma consolidated statements of operations for the nine months ended September 30, 2005 and 2004 assume that Chart Bank had been acquired as of January 1, 2005 and 2004. The pro forma information is theoretical in nature and is not necessarily indicative of future consolidated results of operations of the Company or the consolidated results of operations that would have resulted had the Company acquired the stock of Chart Bank during the periods presented: |
For the Nine Months Ended Sept 30, | ||||||||
2005 | 2004 | |||||||
(In thousands except share and per share amounts) | ||||||||
Interest and dividend income | $ | 28,346 | $ | 24,079 | ||||
Interest expense | 9,923 | 7,454 | ||||||
Net interest income | 18,423 | 16,625 | ||||||
Provision for loan losses | 678 | 560 | ||||||
Non-interest income | 2,776 | 3,570 | ||||||
Non-interest expense | 21,232 | 16,592 | ||||||
Income (loss) before income taxes | (711 | ) | 3,043 | |||||
Income tax provision | 556 | 1,177 | ||||||
Net income (loss) | $ | (1,267 | ) | $ | 1,866 | |||
Earnings (loss) per share — diluted | $ | (0.16 | ) | $ | 0.23 | |||
Weighted average shares outstanding — diluted | 8,124,296 | 8,124,296 | ||||||
The pro forma results of operations for the nine months ended September 30, 2005 include a net $1.0 million loss on sale/write-down of bank-owned land and a $4.0 million expense item for the contribution of 400,000 shares of Benjamin Franklin Bancorp common stock to the Foundation. Tax benefits have been reflected for the $4.0 million Foundation contribution, but no tax benefit has been recognized for the $1.0 loss on sale/write-down of bank owned land. These results also include $709,000 of non-tax deductible merger-related expenses recorded by Chart Bank during the period from January 1, 2005 to April 4, 2005. |
Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which changes, among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies. SFAS No. 123R will be effective beginning with the first interim or annual reporting period of the Company’s first fiscal year that begins after June 15, 2005, which would be January 1, 2006 for the Company. For public companies, the cost of employee services |
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received in exchange for equity instruments including options and restricted stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the vesting period, and will be re-measured subsequently at each reporting date through settlement date. On March 29, 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 expresses the views of the SEC staff regarding SFAS No. 123R and certain rules and regulations and provides the SEC’s view regarding the valuation of share-based payment arrangements for public companies. | ||
The provisions of SFAS No. 123R and SAB 107 do not have an impact on the Company’s results of operations at this time. However, as disclosed in the prospectus used in the Company’s stock offering related to the mutual-to-stock conversion and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, the Company expects to adopt a stock-based incentive plan in 2006, subject to shareholder approval. The granting of restricted stock awards and stock options under the stock-based incentive plan will increase the Company’s compensation costs in the periods in which such awards and options vest. | ||
In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). This Statement replaces Accounting Principles Board Opinion No. 20 (“APB 20”), “Accounting Changes” and Statement of Financial Accounting Standard No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. In accordance with the prior guidance of APB 20, most voluntary changes in an accounting principle required recognizing the cumulative effect of a change in accounting principle in net income in the period of change. SFAS 154 requires retrospective application to prior periods’ financial statements for the direct effects of a change in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Indirect effects of a change in accounting principle should be recognized in the period of accounting change. SFAS 154 carries forward the guidance of APB 20 relating to the reporting for correction of an error in previously issued financial statements, change in accounting estimate and the justification requirement for a change in accounting principle on the basis of preferability. Provisions of this statement are effective for accounting changes made in the fiscal years beginning after December 15, 2005. At this time, the Company is uncertain how the application of SFAS 154 will impact prior period financial statements for the implementation of future accounting pronouncements. | ||
2. | Commitments | |
Outstanding loan commitments totaled $122.3 million at September 30, 2005, compared to $70.6 million as of December 31, 2004. Loan commitments consist of commitments to originate new loans as well as the outstanding undrawn portions of lines of credit. | ||
The Bank recently received approval from the Massachusetts Commissioner of Banks to open a new branch in Wellesley Hills, Massachusetts. It is anticipated that this branch will become operational in the second quarter of 2006. The annual direct costs of operating this branch are estimated at $610,000. | ||
3. | Earnings per share | |
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Earnings per share were not meaningful for the nine months ended September 30, 2005 and for the 2004 periods presented, because the Company did not complete its public offering until April 4, 2005. |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following analysis discusses the changes in financial position and results of operations of the Company, and should be read in conjunction with the Company’s unaudited consolidated interim financial statements and the notes thereto, appearing in Part I, Item 1 of this document.
Forward-Looking Statements
Certain statements herein constitute “forward-looking statements” and actual results may differ from those contemplated by these statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” Certain factors that could cause actual results to differ materially from expected results include changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the businesses in which the Company is engaged and changes in the securities market.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in the Company’s 2004 Annual Report on Form 10-K, the Company considers its critical accounting policies to be those associated with income taxes, intangible assets and the determination of the allowance for loan losses. The Company’s critical accounting policies have not changed since December 31, 2004.
Comparison of Financial Condition at September 30, 2005 and December 31, 2004
Overview
Total assets increased by $338.8 million, or 65.5%, from $517.4 million at December 31, 2004 to $856.2 million at September 30, 2005. The Chart Bank acquisition added $290.4 million to total assets on April 4, 2005, consisting primarily of loans ($184.0 million), investments ($39.3 million), and goodwill and other intangibles ($35.0 million). Funding liabilities added through the Chart Bank acquisition included $217.4 million in deposits and $25.4 million of borrowed funds. The mutual-to-stock conversion and acquisition added $82.8 million to stockholders’ equity. The Company has also grown internally since December 31, 2004, with additions to loans and cash/cash equivalents totaling $38.1 and $16.1 million, respectively. Funding that internal asset growth was $27.2 million of additional borrowed funds, offset by net of deposit outflows of $9.4 million.
Investment Activities
Cash and correspondent bank balances increased by $47.5 million to $61.7 million as of September 30, 2005 when compared to December 31, 2004. Of that increase, $27.5 million consists of cash supplied by Creative Strategic Solutions, Inc. (“CSSI”) to its ATM customers. CSSI is a wholly-owned subsidiary of Benjamin Franklin Bank that supplies cash to ATMs owned by independent service organizations and provides related cash management services to a nationwide customer base. Over the same period, short-term investments, comprised of overnight fed funds sold ($10.5 million) and money market funds ($3.0 million), increased $8.0 million to $13.5 million at September 30, 2005. The higher level of short-term investments at quarter-end was caused by normal fluctuations in the Bank’s short-term liquidity accounts.
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At September 30, 2005, the Company’s investment portfolio amounted to $127.3 million, or 14.9% of total assets. The following table sets forth certain information regarding the amortized cost and market values of the Company’s investment securities at the dates indicated:
At September 30, 2005 | At December 31, 2004 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
U.S. Government and agency obligations | $ | 76,162 | $ | 75,649 | $ | 33,607 | $ | 33,306 | ||||||||
Corporate bonds and other obligations | 4,523 | 4,502 | 5,056 | 5,014 | ||||||||||||
Municipal bonds | 1,708 | 1,702 | — | — | ||||||||||||
Mortgage-backed securities | 37,097 | 35,252 | 49,246 | 47,750 | ||||||||||||
Total available for sale securities | $ | 119,490 | $ | 117,105 | $ | 87,909 | $ | 86,070 | ||||||||
Securities held to maturity: | ||||||||||||||||
Mortgage-backed securities | $ | 133 | $ | 133 | $ | 217 | $ | 221 | ||||||||
Restricted equity securities: | ||||||||||||||||
Federal Home Loan Bank of Boston stock | $ | 7,497 | $ | 7,497 | $ | 4,459 | $ | 4,459 | ||||||||
Access Capital Strategies | ||||||||||||||||
Community Investment Fund | 2,000 | 2,000 | 2,000 | 2,000 | ||||||||||||
SBLI & DIF stock | 518 | 518 | 516 | 516 | ||||||||||||
Total equity securities | $ | 10,015 | $ | 10,015 | $ | 6,975 | $ | 6,975 | ||||||||
Increases in the investment portfolio during the nine months ended September 30, 2005 were the result of the acquisition of the Chart Bank securities portfolio, consisting primarily of U.S. Government and agency obligations.
Lending Activities
The Company’s net loan portfolio aggregated $603.1 million on September 30, 2005, or 70.4% of total assets on that date. The following table sets forth the composition of the loan portfolio at the dates indicated:
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At September 30, 2005 | At December 31, 2004 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||
Residential | $ | 290,195 | 47.77 | % | $ | 241,090 | 62.56 | % | ||||||||
Commercial | 215,776 | 35.52 | % | 85,911 | 22.29 | % | ||||||||||
Construction | 47,297 | 7.79 | % | 28,651 | 7.43 | % | ||||||||||
Home equity | 32,915 | 5.42 | % | 23,200 | 6.02 | % | ||||||||||
586,183 | 96.50 | % | 378,852 | 98.30 | % | |||||||||||
Other loans: | ||||||||||||||||
Commercial | 18,931 | 3.12 | % | 4,375 | 1.14 | % | ||||||||||
Consumer | 2,311 | 0.38 | % | 2,170 | 0.56 | % | ||||||||||
21,242 | 3.50 | % | 6,545 | 1.70 | % | |||||||||||
Total loans | 607,425 | 100.00 | % | 385,397 | 100.00 | % | ||||||||||
Deferred loan origination costs | 1,292 | 1,148 | ||||||||||||||
Allowance for loan losses | (5,631 | ) | (3,172 | ) | ||||||||||||
Total loans, net | $ | 603,086 | $ | 383,373 | ||||||||||||
The net loan portfolio increased by $219.7 million, or 57.3%, during the first nine months of 2005. While the Chart Bank acquisition accounted for $184.0 million of that growth, another $35.7 million of net loan growth was generated internally, primarily in commercial real estate loans. With the addition of the Chart Bank loan portfolio and internal growth, commercial loans (including commercial real estate, construction and commercial business loans) have grown to 46.8% of total loans, compared to 30.9% at December 31, 2004. The Company remains committed to expanding its commercial lending business, and to that end has increased the size of its commercial lending staff to twelve at present, compared to four at year-end 2004. Commercial credit analysis, processing, review and monitoring resources have also been increased to support this effort.
Concurrent with its mutual-to-stock conversion and acquisition of Chart Bank, the Company increased its policy guideline for maximum loans to one borrower (or related entity) to $10.0 million. Exceptions to this limit require the approval of the Executive Committee of the Board prior to loan origination. As of September 30, 2005, Benjamin Franklin had no borrower relationships over the $10.0 million policy guideline. Benjamin Franklin Bank’s internal lending limit is lower than the Massachusetts legal lending limit, which is 20.0% of a bank’s surplus and capital stock accounts, or $18.2 million for Benjamin Franklin Bank as of September 30, 2005. The Company has also increased other loan authorities in light of its larger size and increased lending limit, including individual loan officer authorities and management Credit Committee authority.
Non-performing Assets
The table below sets forth the amounts and categories of the Company’s non-performing assets at the dates indicated. At each date presented, the Company had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates):
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At September 30, 2005 | At December 31, 2004 | |||||||
(In thousands) | ||||||||
Non-accrual loans: | ||||||||
Residential mortgage | $ | 184 | $ | — | ||||
Commercial mortgage | 8 | — | ||||||
Construction | — | — | ||||||
Commercial | 274 | 334 | ||||||
Consumer and other | — | — | ||||||
Total non-performing loans | 466 | 334 | ||||||
Loans greater than 90 days delinquent and still accruing: | ||||||||
Residential mortgage | — | — | ||||||
Commercial mortgage | — | — | ||||||
Construction | — | — | ||||||
Commercial | — | — | ||||||
Consumer and other | — | 3 | ||||||
Total loans 90 days and still accruing | — | 3 | ||||||
Total non-performing assets | $ | 466 | $ | 337 | ||||
Ratios: | ||||||||
Non-performing loans to total loans | 0.08 | % | 0.09 | % | ||||
Non-performing assets to total assets | 0.05 | % | 0.07 | % |
Allowance for Loan Losses
In originating loans, the Company recognizes that losses will be experienced on loans and that the risk of loss will vary with many factors, including the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan over the term of the loan. The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio, and as such, this allowance represents management’s best estimate of the probable known and inherent credit losses in the loan portfolio as of the date of the financial statements.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, portfolio volume and mix, geographic and large borrower concentrations, estimated credit losses based on internal and external portfolio reviews, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated
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component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. At September 30, 2005, impaired loans totaled $235,000 and in the aggregate carried a specific reserve allocation of $100,000, as compared to $334,000 of impaired loans with a specific reserve allocation of $210,000 at December 31, 2004.
While the Company believes that it has established adequate specific and general allowances for losses on loans, adjustments to the allowance may be necessary if future conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Company’s regulators periodically review the allowance for loan losses. These regulatory agencies may require the Company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination, thereby negatively affecting the Company’s financial condition and earnings.
The following table sets forth activity in the Company’s allowance for loan losses for the periods indicated:
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At or For the | At or For the | |||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Balance at beginning of period | $ | 5,531 | $ | 2,861 | $ | 3,172 | $ | 2,523 | ||||||||
Allowance added from acquisition of Chart Bank | — | — | 1,812 | — | ||||||||||||
Charge-offs: | ||||||||||||||||
Mortgage loans on real estate | — | — | — | — | ||||||||||||
Other loans: | ||||||||||||||||
Commercial | (57 | ) | — | (68 | ) | — | ||||||||||
Consumer | (5 | ) | (5 | ) | (8 | ) | (9 | ) | ||||||||
(62 | ) | (5 | ) | (76 | ) | (9 | ) | |||||||||
Total charge-offs | (62 | ) | (5 | ) | (76 | ) | (9 | ) | ||||||||
Recoveries: | ||||||||||||||||
Mortgage loans on real estate | — | — | — | — | ||||||||||||
Other loans: | ||||||||||||||||
Commercial | 8 | 7 | 68 | 28 | ||||||||||||
Consumer | 2 | 4 | 7 | 11 | ||||||||||||
10 | 10 | 75 | 39 | |||||||||||||
Total recoveries | 10 | 10 | 75 | 39 | ||||||||||||
Net (charge-offs) recoveries | (52 | ) | 5 | (1 | ) | 30 | ||||||||||
Provision for loan losses | 152 | 150 | 648 | 470 | ||||||||||||
Balance at end of period | $ | 5,631 | $ | 3,017 | $ | 5,631 | $ | 3,023 | ||||||||
Ratios: | ||||||||||||||||
Net (charge-offs) recoveries to average loans outstanding (annualized) | (0.03 | %) | 0.01 | % | 0.00 | % | 0.01 | % | ||||||||
Allowance for loan losses to non-performing loans at end of period | 1208.37 | % | 845.01 | % | 1208.37 | % | 846.85 | % | ||||||||
Allowance for loan losses to total loans at end of period | 0.93 | % | 0.80 | % | 0.93 | % | 0.81 | % |
Deposits
The following table sets forth the Company’s deposit accounts for the periods indicated:
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September 30, | % of | December 31, | % of | |||||||||||||
2005 | Total | 2004 | Total | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Deposit type: | ||||||||||||||||
Demand deposit accounts | $ | 127,425 | 21.08 | % | $ | 87,776 | 22.14 | % | ||||||||
NOW accounts | 29,508 | 4.88 | 22,460 | 5.66 | ||||||||||||
Regular savings accounts | 103,455 | 17.11 | 95,875 | 24.18 | ||||||||||||
Money market accounts | 99,243 | 16.42 | 53,167 | 13.41 | ||||||||||||
Total non-certificate accounts | 359,631 | 59.49 | 259,278 | 65.39 | ||||||||||||
Term certificates less than $100,000 | 149,504 | 24.74 | 97,114 | 24.49 | ||||||||||||
Term certificates of $100,000 or more | 95,351 | 15.77 | 40,107 | 10.12 | ||||||||||||
Total certificate accounts | 244,855 | 40.51 | 137,221 | 34.61 | ||||||||||||
Total deposits | $ | 604,486 | 100.00 | % | $ | 396,499 | 100.00 | % | ||||||||
The $208.0 million increase in the Bank’s deposits is attributable to an increase of $217.4 million in deposits as a result of the Chart Bank acquisition, offset by a $9.4 million decline since December 31, 2004, due primarily to outflows of deposits in the former Chart Bank branches. These outflows occurred mainly in certificate accounts, and as a result of this and competitive pressures generally, the Bank has since increased interest rates on most certificate products. Some of those rate increases, particularly for short-term certificates, were significant, and may have the effect of narrowing the Bank’s net interest margin over the next twelve months. Interest rates paid by the Bank on money market accounts have tended to lag the rise in market interest rates over the past year. Management considers it likely that those rates may rise significantly in the coming months, another factor that may cause the net interest margin to narrow from its current level of 3.34%.
The Bank recently received approval from the Massachusetts Commissioner of Banks to open a new branch in Wellesley Hills, Massachusetts. It is anticipated that this branch will become operational in the second quarter of 2006. The annual direct costs of operating this branch are estimated at $610,000. The Company will continue to search for promising de novo branch locations, with the goal of identifying two to three additional sites over the next two years.
Borrowed Funds
Funds borrowed from the Federal Home Loan Bank of Boston (“FHLBB”) increased during the first nine months of 2005 by $52.7 million to $128.9 million at September 30, 2005. Of this increase, $25.4 million was provided by the Chart Bank acquisition. Of the borrowed funds acquired from Chart, $20.5 million matured during the second and third quarters of 2005. Those borrowings and the remainder of the increase, or $27.3 million, were placed in new FHLBB borrowings with original maturities of three to five years, in order to match the estimated repricing characteristics of the net growth in earning assets year to date. The $9.0 million balance in subordinated debt remained unchanged during the first nine months of 2005.
Stockholder’s Equity
Total stockholders’ equity was $107.7 million as of September 30, 2005, an increase of $76.4 million when compared to the balance at December 31, 2004. The increase was primarily attributable to the Company’s mutual-to-stock conversion and issuance of shares in connection with the acquisition of Chart Bank. The components of
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the net increase were: a) the recording of common stock and additional paid-in capital in the initial public offering in the amount of $53.7 million, net of offering expenses of $2.1 million, b) shares issued to the Benjamin Franklin Bank Charitable Foundation in the amount of $4.0 million, c) shares issued to Chart Bank shareholders in the amount of $25.1 million, d) a net loss of $882,000, e) dividends paid in the amount of $255,000, f) a change of $507,000 in other comprehensive income resulting from a decrease in the fair market value of investments available for sale, and g) a decrease of $4.8 million, representing the $4.9 million purchase price of the shares purchased by the employee stock ownership plan, net of $123,000 attributable to shares released from the ESOP suspense account.
Comparison of Operating Results for the Three Months and Nine Months Ended September 30, 2005 and 2004
The Company earned net income of $1.3 million for the quarter ended September 30, 2005, an increase of $795,000 when compared to net income of $534,000 earned in the third quarter of 2004. The growth in net income was primarily due to the acquisition of the operations of Chart Bank and to internally generated growth. For the nine months ended September 30, 2005, the Company incurred a loss of 882,000, primarily as a result of two non-recurring charges incurred in the second quarter of 2005: i) a $4.0 million contribution made to the Benjamin Franklin Bank Charitable Foundation, and ii) the recognition of a net loss of $1.0 million on the sale/write-down of bank-owned land. Partially offsetting the non-recurring charges were significant increases in net interest income and non-interest income, due to the acquisition of the operations of Chart Bank and to internally generated balance sheet growth. Operating expenses also increased significantly when compared to the three and nine-month periods ended September 30, 2004, due to the addition of Chart Bank’s operations, as well as to higher costs related to generating internal growth and meeting the demands of operating as a public company.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Most average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense:
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Three Months Ended September 30, | ||||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Outstanding | Outstanding | |||||||||||||||||||||||
Balance | Interest | Yield/Rate(1) | Balance | Interest | Yield/Rate(1) | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 607,136 | $ | 8,716 | 5.70 | % | $ | 365,231 | $ | 4,578 | 4.99 | % | ||||||||||||
Securities | 128,734 | 1,213 | 3.74 | % | 103,982 | 820 | 3.14 | % | ||||||||||||||||
Short-term investments | 15,139 | 100 | 2.62 | % | 7,185 | 21 | 1.16 | % | ||||||||||||||||
Total interest-earning assets | 751,009 | 10,029 | 5.30 | % | 476,398 | 5,419 | 4.53 | % | ||||||||||||||||
Non-interest-earning assets | 111,195 | 30,449 | ||||||||||||||||||||||
Total assets | $ | 862,204 | $ | 506,847 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings deposits | $ | 106,123 | 133 | 0.50 | % | $ | 100,300 | 125 | 0.50 | % | ||||||||||||||
Money market | 106,015 | 432 | 1.62 | % | 52,500 | 124 | 0.94 | % | ||||||||||||||||
NOW accounts | 36,438 | 12 | 0.13 | % | 23,736 | 9 | 0.15 | % | ||||||||||||||||
Certificates of deposits | 247,960 | 1,798 | 2.88 | % | 135,643 | 827 | 2.43 | % | ||||||||||||||||
Total deposits | 496,536 | 2,375 | 1.90 | % | 312,179 | 1,085 | 1.38 | % | ||||||||||||||||
Borrowings | 121,854 | 1,334 | 4.34 | % | 69,427 | 672 | 3.85 | % | ||||||||||||||||
Total interest-bearing liabilities | 618,390 | 3,709 | 2.38 | % | 381,606 | 1,757 | 1.83 | % | ||||||||||||||||
Non-interest bearing liabilities | 134,899 | 95,111 | ||||||||||||||||||||||
Total liabilities | 753,289 | 476,717 | ||||||||||||||||||||||
Equity | 108,915 | 30,130 | ||||||||||||||||||||||
Total liabilities and equity | $ | 862,204 | $ | 506,847 | ||||||||||||||||||||
Net interest income | $ | 6,320 | $ | 3,662 | ||||||||||||||||||||
Net interest rate spread(2) | 2.92 | % | 2.70 | % | ||||||||||||||||||||
Net interest-earning assets(3) | $ | 132,619 | $ | 94,792 | ||||||||||||||||||||
Net interest margin(4) | 3.34 | % | 3.06 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 121.45 | % | 124.84 | % |
(1) | Yields and rates for the three months ended September 30, 2005 and 2004 are annualized. | |
(2) | 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. | |
(3) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. | |
(4) | Net interest margin represents net interest income as a percent of average interest-earning assets. |
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Nine Months Ended September 30, | ||||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Outstanding | Outstanding | |||||||||||||||||||||||
Balance | Interest | Yield/Rate(1) | Balance | Interest | Yield/Rate(1) | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 528,411 | $ | 21,656 | 5.48 | % | $ | 327,700 | $ | 12,567 | 5.12 | % | ||||||||||||
Securities | 116,350 | 2,928 | 3.37 | % | 109,897 | 2,549 | 3.10 | % | ||||||||||||||||
Short-term investments | 19,230 | 344 | 2.39 | % | 15,382 | 107 | 0.93 | % | ||||||||||||||||
Total interest-earning assets | 663,991 | 24,928 | 5.02 | % | 452,979 | 15,223 | 4.49 | % | ||||||||||||||||
Non-interest-earning assets | 84,433 | 31,055 | ||||||||||||||||||||||
Total assets | $ | 748,424 | $ | 484,034 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings deposits | $ | 103,492 | 391 | 0.50 | % | $ | 99,172 | 369 | 0.50 | % | ||||||||||||||
Money market | 93,744 | 1,099 | 1.57 | % | 51,779 | 331 | 0.85 | % | ||||||||||||||||
NOW accounts | 31,584 | 52 | 0.22 | % | 23,955 | 27 | 0.15 | % | ||||||||||||||||
Certificates of deposits | 211,602 | 4,256 | 2.69 | % | 133,492 | 2,494 | 2.50 | % | ||||||||||||||||
Total deposits | 440,422 | 5,798 | 1.76 | % | 308,398 | 3,221 | 1.40 | % | ||||||||||||||||
Borrowings | 100,931 | 3,123 | 4.14 | % | 53,421 | 1,804 | 4.51 | % | ||||||||||||||||
Total interest-bearing liabilities | 541,353 | 8,921 | 2.20 | % | 361,819 | 5,025 | 1.86 | % | ||||||||||||||||
Non-interest bearing liabilities | 125,076 | 92,257 | ||||||||||||||||||||||
Total liabilities | 666,429 | 454,076 | ||||||||||||||||||||||
Equity | 81,995 | 29,958 | ||||||||||||||||||||||
Total liabilities and equity | $ | 748,424 | $ | 484,034 | ||||||||||||||||||||
Net interest income | $ | 16,007 | $ | 10,198 | ||||||||||||||||||||
Net interest rate spread(2) | 2.82 | % | 2.63 | % | ||||||||||||||||||||
Net interest-earning assets(3) | $ | 122,638 | $ | 91,160 | ||||||||||||||||||||
Net interest margin(4) | 3.22 | % | 3.01 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 122.65 | % | 125.20 | % |
(1) | Yields and rates for the nine months ended September 30, 2005 and 2004 are annualized. | |
(2) | 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. | |
(3) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. | |
(4) | Net interest margin represents net interest income as a percent of average interest-earning assets. |
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The following table presents the dollar amount of changes in interest income and interest expense for the major categories of the Company’s interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
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Three Months Ended September 30, | ||||||||||||
2005 vs. 2004 | ||||||||||||
Increase (Decrease) | ||||||||||||
Due to | Total | |||||||||||
Increase | ||||||||||||
Volume | Rate | (Decrease) | ||||||||||
(In thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 3,393 | $ | 745 | $ | 4,138 | ||||||
Securities | 216 | 177 | 393 | |||||||||
Short-term investments | 37 | 42 | 79 | |||||||||
Total interest-earning assets | 3,646 | 964 | 4,610 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Savings deposits | 7 | 1 | 8 | |||||||||
Money market | 180 | 128 | 308 | |||||||||
NOW accounts | 4 | (1 | ) | 3 | ||||||||
Certificates of deposits | 789 | 182 | 971 | |||||||||
Total deposits | 980 | 310 | 1,290 | |||||||||
Borrowings | 564 | 98 | 662 | |||||||||
Total interest-bearing liabilities | 1,544 | 408 | 1,952 | |||||||||
Change in net interest income | $ | 2,102 | $ | 556 | $ | 2,658 | ||||||
Nine Months Ended September 30, | ||||||||||||
2005 vs. 2004 | ||||||||||||
Increase (Decrease) | ||||||||||||
Due to | Total | |||||||||||
Increase | ||||||||||||
Volume | Rate | (Decrease) | ||||||||||
(In thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 8,172 | $ | 917 | $ | 9,089 | ||||||
Securities | 155 | 224 | 379 | |||||||||
Short-term investments | 33 | 204 | 237 | |||||||||
Total interest-earning assets | 8,360 | 1,345 | 9,705 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Savings deposits | 16 | 6 | 22 | |||||||||
Money market | 379 | 389 | 768 | |||||||||
NOW accounts | 10 | 15 | 25 | |||||||||
Certificates of deposits | 1,558 | 204 | 1,762 | |||||||||
Total deposits | 1,963 | 614 | 2,577 | |||||||||
Borrowings | 1,482 | (163 | ) | 1,319 | ||||||||
Total interest-bearing liabilities | 3,445 | 451 | 3,896 | |||||||||
Change in net interest income | $ | 4,915 | $ | 894 | $ | 5,809 | ||||||
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Net interest income for the quarter ended September 30, 2005 was $6.3 million, an increase of $2.6 million when compared to net interest income of $3.7 million for the three months ended September 30, 2004. This increase was the result of an increase in average interest-earning assets of $274.6 million, greater than the $236.8 million increase in interest-bearing liabilities, coupled with a 28 basis point increase in the net interest margin. The funds received in the Company’s public stock offering and an increase in non-interest bearing deposit accounts were the primary reasons that average interest-earning assets grew by more than average interest-bearing liabilities, when compared to the comparable quarter in 2004.
Interest income for the quarter ended September 30, 2005 was $10.0 million, compared to $5.4 million for the quarter ended September 30, 2004, an increase of $4.6 million or 85.2%. Most of the increase was the result of the $274.6 million increase in average interest earning assets, augmented by a 77 basis point increase in the yield earned on average interest-earning assets. The increase in average interest-earning assets was primarily the result of the acquisition of Chart Bank and the Company’s public stock offering. The largest increase was seen in average loan balances, which increased by $241.9 million due to the acquisition of the $184.0 million Chart Bank loan portfolio and internally generated growth. Increases in average balances of securities and short-term investments of $24.8 million and $8.0 million, respectively, were also related to both the acquisition of Chart Bank and the stock offering. The increases in yields earned on securities and short-term investments of 60 basis points and 146 basis points, respectively, were due mainly to the increase in market interest rates during the twelve months ended September 30, 2005. The increase in the loan yield of 71 basis points was due to the increase in market interest rates, to the addition of the Chart Bank loan portfolio, which was more heavily weighted toward higher-yielding commercial loans than that of Benjamin Franklin, and to internally-generated growth in higher-yielding commercial loans.
Interest expense for the quarter increased $2.0 million compared to the prior year, due primarily to the Chart Bank acquisition, which added $242.8 million to the Company’s funding liabilities. The remainder of the increase in average funding liabilities between the comparable quarters in 2005 and 2004 of $32.8 million consists of increases in borrowed funds ($27.0 million), interest-bearing deposits ($4.0 million) and non-interest bearing liabilities ($1.8 million). Overall, the cost of interest-bearing deposits increased by 55 basis points in the third quarter of 2005 compared to the third quarter of 2004. This is due in part to the increase in market interest rates over the twelve months ended September 30, 2005 and to the composition of the Chart Bank deposit base, which had a greater proportion of higher-cost certificate balances than did that of Benjamin Franklin. The cost of borrowed funds also increased between periods, by 49 basis points, as new borrowings and rollovers of existing borrowings were more expensive than in the comparable 2004 period due to increases in market interest rates.
Net interest income for the first nine months of 2005 increased by $5.8 million to $16.0 million, compared to $10.2 million earned in the first nine months of 2004. The increase was the result of an increase in average interest-earning assets of $211.0 million, greater than the increase in average interest-bearing liabilities of $179.5 million, and to an increase in the net interest margin of 21 basis points. The increase in interest earning assets was due primarily to the Chart Bank acquisition, which added $144.4 million on average for the nine months ended September 30, 2005, and to internally generated growth in loans outstanding, which increased by $80.0 million on average, independent of the addition of the Chart Bank loan portfolio. Funding liabilities also increased due to the Chart Bank acquisition, which added average interest-bearing deposits of $118.3 million, average non-interest bearing balances of $24.3 million and average borrowed funds of $16.6 million. Internally generated interest-bearing deposit growth added $13.7 million on average, while the average balances of outstanding borrowings, exclusive of the Chart Bank addition, increased by $30.9 million. The Company also grew the average balances outstanding in demand deposits and other non-interest bearing funds by $8.5 million over and above those balances provided by Chart Bank. Rates earned on interest-earning assets increased by 53 basis points, due to the increase in market interest rates and the favorable mix of the Chart Bank assets. Rates paid on interest-bearing liabilities increased by 34 basis points, as an increase in deposit costs was offset in part by a reduction in the weighted average rate paid on borrowed funds.
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Provision for Loan Losses
The Company recorded provisions for loan losses of $152,000 and $150,000 for the three months ended September 30, 2005 and 2004, respectively. For the first nine months of 2005 and 2004, provisions for loan losses amounted to $648,000 and $470,000, respectively. The provisions were reflective of growth in the loan portfolio and net charge-offs/recoveries recorded in each period. At September 30, 2005, the allowance for loan losses totaled $5.6 million, or .93% of the loan portfolio, as compared to $3.2 million, or .82% of total loans, at December 31, 2004.
Non-interest Income
Non-interest income for the three month period ended September 30, 2005 rose to $1.3 million, an increase of $870,000, or 195.9%, when compared to non-interest income of $444,000 earned during the third quarter of 2004. This increase was produced by growth in fee-based deposit accounts and the acquisition of Chart Bank. These same factors, offset in part by a $1.0 million net loss on the sale/write-down of bank-owned land in June 2005, caused non-interest income to increase by $384,000 or 23.0% to $2.1 million for the nine month period ended September 30, 2005, compared to the same period in 2004.
During the second quarter of 2005, two parcels of land that had been held as future branch sites were sold for an aggregate gain of $380,000. A third parcel that had been held as a future branch site was written down by $1.4 million to its estimated net fair market value, once the decision was made by the Company to market the parcel for sale. The Company’s determination to sell the property followed a decision by the town planning board to reject the Company’s proposed plans for combined retail-banking development of the parcel, after the Company had reworked the plans to deal with the concerns previously raised by the planning board. Although the Company’s Executive Committee considered whether to again revise and resubmit development plans that would be acceptable both to the Company and the planning board, the Committee decided that under the circumstances it would not continue to pursue its combined retail-banking development plans. This decision was consistent with the Company’s emerging strategy of opting in favor of leasing rather than owning future branch locations. The Company’s current strategy contemplates the opening of several new branches over the next few years and in all likelihood future branch locations will be leased rather than owned.
In the third quarter of 2005, fees earned on deposit accounts and other miscellaneous income increased by 79.8% and 14.0%, respectively, when compared to the third quarter of 2004. This growth was mainly the result of the addition of the Chart Bank deposit accounts and branch locations, plus the addition of a new overdraft checking account offering to the Bank’s product line. Increases in loan servicing fees in both the three month and nine month periods amounting to $115,000 and $143,000, respectively, were largely independent of the Chart Bank acquisition and were instead the result of growth in the Bank’s portfolio of fixed rate loans serviced for others. The Chart Bank acquisition also provided a new non-interest income source, fees earned on ATM servicing performed by CSSI, which yielded $493,000 in the third quarter of 2005. CSSI provides cash to ATMs owned by independent service organizations nationwide. Fees are collected from the independent service organizations for managing the ATMs and for the use of the cash in the machines. A summary of CSSI’s operating performance, pre-tax, for the third quarter of 2005 is as follows:
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For the Three | ||||
Months Ended | ||||
September 30, 2005 | ||||
(In thousands) | ||||
Income: | ||||
Fees earned on ATM servicing contracts | $ | 493 | ||
Expenses: | ||||
Interest expense | 281 | |||
Personnel costs | 78 | |||
Occupancy and equipment | 9 | |||
Total expenses | 368 | |||
Pre-tax contribution margin | $ | 125 | ||
The expenses shown reflect direct expenses only and do not include any allocation for overhead costs or support services provided to CSSI by the Bank. Interest expense is charged to CSSI by the Bank on the amount of cash CSSI employs, based on a short-term FHLBB advance rate. The average balance of the cash deployed by CSSI in the third quarter of 2005 was $27.4 million. A recent expansion by one customer and the addition of a sizable new customer have the potential to increase the cash deployed by CSSI by $14.0 million over the next twelve months.
Non-interest Expense
Non-interest expenses increased significantly in the third quarter of 2005 when compared to the same period in 2004, due primarily to the acquisition of Chart Bank, expansion of the Company’s lending capabilities and the stock conversion, which has brought new costs associated with operating a public company. These same factors caused the increase in the nine month period ended September 30, 2005, as expenses rose to $17.9 million from $9.5 million in the first nine months of 2004. Also contributing to the rise in the first nine months of 2005 was the $4.0 million contribution made to the Benjamin Franklin Bank Charitable Foundation in April of 2005. The contribution to the Foundation was one-time in nature, since the Company has no intention of making future contributions to the Foundation.
Expenses increased by $2.2 million, or 69.8%, to $5.3 million in the third quarter of 2005, compared to $3.1 million recorded in the three months ended September 30, 2004. The largest increase was in salaries and employee benefits expense, which rose by $567,000 or 28.9%, attributable to the acquisition of Chart Bank and to a lesser degree to the addition of loan origination and support staff in 2005. Amortization of the core deposit intangible asset created in the Chart Bank acquisition added $445,000 to expense for the quarter, an increase of $400,000 over the comparable period in 2004. Occupancy and equipment expenses increased by $365,000 or 126.3%, mainly due to the addition of costs associated with Chart Bank’s three branch locations and its former corporate headquarters. The rental expense associated with the lease of the headquarters location ceased at the end of July 2005. Increases in data processing costs ($123,000 or 35.7%) and miscellaneous expenses ($556,000 or 129.3%) were both due primarily to the effect of adding Chart Bank operations. Professional fees for the third quarter of 2005 amounted to $257,000, an increase of $183,000 over the comparable period in 2004, due to increased legal, consulting and audit fees that for the most part were related to the Company’s conversion to public company status.
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Year-to date, operating expenses excluding the $4.0 million Foundation contribution increased by $4.5 million to $13.9 million, compared to $9.5 million incurred in the first nine months of 2004. The reasons for the increases in various expense categories are essentially the same as those described above for the third quarter of 2005 compared to the third quarter of 2004.
Income Taxes
The income tax provision of $814,000 recorded for the three months ended September 30, 2004 resulted in an effective tax rate of 38.0%, compared to a provision of $277,000 recorded for the three months ended September 30, 2004, which resulted in an effective tax rate of 34.2%. The effective tax rate for the first nine months of 2004 was 32.3%, while for the nine months ended September 30, 2005, the Company recorded income tax expense of $348,000 despite incurring a pre-tax loss of $534,000 for the period. This occurred because no tax benefit was recognized on the $1.0 million net loss on sale/write-down of bank-owned land.
Liquidity and Capital Resources
The Company’s primary sources of funds are from deposits, borrowings, amortization of loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided by operations. While scheduled payments from amortization of loans and mortgage-backed securities and maturing loans and investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. The Company maintains excess funds in cash and short-term interest-bearing assets that provide additional liquidity. At September 30, 2005, cash and due from banks, short-term investments and debt securities maturing within one year totaled $75.5 million (excluding cash supplied by CSSI to ATM customers) or 8.8% of total assets.
The Company borrows from the Federal Home Loan Bank of Boston as an additional funding source. As of September 30, 2005, the Company had the ability to borrow an additional $72.7 million from the Federal Home Loan Bank of Boston.
The Company uses its liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and borrowings, to fund other deposit withdrawals, to invest in other interest-earning assets and to meet operating expenses. The Company anticipates that it will continue to have sufficient funds and alternative funding sources to meet its current commitments.
The following tables present information indicating various contractual obligations and commitments of the Company as of the dates indicated and the respective maturity dates:
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Contractual Obligations:
At September 30, 2005 | ||||||||||||||||||||
More than | More than | |||||||||||||||||||
One Year | Three Years | |||||||||||||||||||
One Year | through Three | through five | Over Five | |||||||||||||||||
Total | or Less | Years | Years | Years | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Federal Home Loan Bank advances(1) | $ | 128,926 | $ | 1,969 | $ | 56,957 | $ | 40,000 | $ | 30,000 | ||||||||||
Subordinated Debt | 9,000 | — | — | — | 9,000 | |||||||||||||||
Other(2) | 5,671 | 1,732 | 3,363 | 576 | — | |||||||||||||||
Total Contractual Obligations | $ | 143,597 | $ | 3,701 | $ | 60,320 | $ | 40,576 | $ | 39,000 | ||||||||||
(1) | Secured under a blanket security agreement on qualifying assets, principally 1-4 Family Residential mortgage loans. Advances totalling $36 million shown with maturities of greater than three years may be called by the FHLB during the period remaining to maturity. These advances bear rates ranging from 3.99% to 4.91%, with a weighted average rate of 4.47%. Based on the current and predicted level of market interest rates, management considers it likely that these advances will be called by the FHLBB in the next 12 months. One “knock-out” advance in the amount of $10 million maturing in June, 2010 will become immediately payable if 3-month LIBOR rises above 6.0% (measured on a quarterly basis, beginning in June 2006). | |
(2) | Represents contracts for technology services and employee compensation. |
Loan Commitments
At September 30, 2005 | ||||||||||||||||||||
More than | More than | |||||||||||||||||||
One Year | Three Years | |||||||||||||||||||
One Year | through Three | through five | Over Five | |||||||||||||||||
Total | or Less | Years | Years | Years | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commitments to grant loans(1) | $ | 37,507 | $ | 37,507 | $ | — | $ | — | $ | — | ||||||||||
Commercial loan lines of credit | 18,230 | 18,230 | — | — | — | |||||||||||||||
Unused portion of home equity loans(3) | 38,790 | — | — | — | 38,790 | |||||||||||||||
Unused portion of construction loans(4) | 25,288 | 18,632 | 6,656 | — | — | |||||||||||||||
Unused portion of personal lines of credit(2) | 2,460 | — | — | — | 2,460 | |||||||||||||||
Total Loan Commitments | $ | 122,275 | $ | 74,369 | $ | 6,656 | $ | — | $ | 41,250 | ||||||||||
General: Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, and generally have fixed expiration dates or other termination clauses.
(1) | Commitments for loans are typically extended to customers for up to 180 days, after which they expire. | |
(2) | Unused portions of checking overdraft lines of credit are available to customers in “good standing” indefinitely. | |
(3) | Unused portions of home equity loans are available to the borrower for up to 10 years. | |
(4) | Unused portions of construction loans are available to the borrower for up to 2 years for development loans and up to 1 year for other construction loans. |
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Minimum Regulatory Capital Requirements:
As of September 30, 2005, the most recent notification from the Federal Deposit Insurance Corporation 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 and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category. Prompt corrective action provisions are not applicable to bank holding companies. The Company’s and the Bank’s actual capital amounts and ratios as of September 30, 2005 and December 31, 2004 are also presented in this table:
Minimum | ||||||||||||||||||||||||
To Be Well | ||||||||||||||||||||||||
Minimum | Capitalized Under | |||||||||||||||||||||||
Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Requirements | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
September 30, 2005: | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | $ | 86,287 | 15.5 | % | $ | 44,600 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank | 60,435 | 10.9 | 44,494 | 8.0 | $ | 55,617 | 10.0 | % | ||||||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | 80,656 | 14.5 | 22,300 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 54,804 | 9.9 | 22,247 | 4.0 | 33,370 | 6.0 | ||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||
Consolidated | 80,656 | 9.8 | 32,958 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 54,804 | 6.7 | 32,883 | 4.0 | 41,103 | 5.0 | ||||||||||||||||||
December 31, 2004: | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | $ | 40,875 | 12.5 | % | $ | 26,200 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank | 40,022 | 12.3 | 26,125 | 8.0 | $ | 32,656 | 10.0 | % | ||||||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | 37,703 | 11.5 | 13,100 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 36,850 | 11.3 | 13,062 | 4.0 | 19,594 | 6.0 | ||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||
Consolidated | 37,703 | 7.3 | 20,545 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 36,850 | 7.2 | 20,513 | 4.0 | 25,641 | 5.0 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company’s Asset/Liability Committee’s primary method for measuring and evaluating interest rate risk is income simulation analysis. This analysis considers the maturity and repricing characteristics of assets and liabilities, as well as the relative sensitivities of these balance sheet components over a range of interest rate scenarios. Interest rate scenarios tested generally include instantaneous rate shocks, rate ramps over a one year period, and static (or flat) rates. The simulation analysis is used to measure the exposure of net interest income to changes in interest rates over a specified time horizon, usually a two-year period.
The table below sets forth, as of September 30, 2005 the estimated changes in Benjamin Franklin’s net interest income that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
Percentage Change in Estimated | ||
Net Interest Income over 12 | ||
months | ||
200 basis point increase in rates | 1.04% | |
100 basis point increase in rates | .62% | |
Flat interest rates | — | |
100 basis point decrease in rates | (2.50)% |
As indicated in the table above, an immediate 100 basis point increase in interest rates is estimated to increase net interest income by .62% over a 12-month horizon, when compared to the flat rate scenario. For an immediate 200 basis point parallel increase in the level of interest rates, net interest income is estimated to increase by 1.04% over a 12-month horizon, when compared against the flat rate scenario. Inherent in these estimates is the assumption that savings account deposit rates would only increase by 25 basis points and that money market deposit account rates would only increase by 36 basis points for each 100 basis point increase in market interest rates. These scenarios also assume no change in checking account interest rates. These assumptions are based on the Bank’s past experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates. The estimated change in net interest income from the flat rate scenario for a 100 basis point decline in the level of interest rates is a decrease of 2.50%, which assumes no decrease in interest-bearing checking rates, a 25 basis point decrease in savings rates and an average decrease in money market rates of 35 basis points.
There are inherent shortcomings in income simulation, given the number and variety of assumptions that must be made in performing the analysis. The assumptions relied upon in making these calculations of interest rate sensitivity include the level of market interest rates, the shape of the yield curve, the degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in market interest rates, the degree to which non-maturity deposits react to changes in market rates, the expected prepayment rates on loans and mortgage-backed securities, the degree to which early withdrawals occur on certificates of deposit and the volume of other deposit flows. As such, although the analysis shown above provides an indication of the Company’s sensitivity to interest rate changes at a point in time, these estimates are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.
In its management of interest rate risk, Benjamin Franklin also relies on the analysis of its interest rate “gap,” which is the measure of the mismatch between the amount of Benjamin Franklin’s interest-earning assets and
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interest-bearing liabilities that mature or reprice within specified timeframes. An asset-sensitive position (positive gap) exists when there are more rate-sensitive assets than rate-sensitive liabilities maturing or repricing within a particular time horizon, and generally signifies a favorable effect on net interest income during periods of rising interest rates and a negative effect during periods of falling interest rates. Conversely, a liability-sensitive position (negative gap) would generally indicate a negative effect on net interest income during periods of rising rates and a positive effect during periods of falling rates.
The table below shows Benjamin Franklin’s interest sensitivity gap position as of September 30, 2005, indicating the amount of interest-earning assets and interest-bearing liabilities that are anticipated to mature or reprice in each of the future time periods shown. Generally, these assets and liabilities are shown in the table based on the earlier of the time remaining to repricing or contractual maturity. However, residential mortgage loans and mortgage-backed securities have been presented in a manner that also incorporates the estimated effects of prepayment assumptions. Interest-bearing checking, savings and money market deposit accounts are assumed to have annual rates of withdrawal (decay rates) of 9.2%, 38.3% and 59.5%, respectively.
Up to | More than | More than | More than | More than | More than | |||||||||||||||||||||||
one | one year to | two years to | three years to | four years to | five | |||||||||||||||||||||||
year | two years | three years | four years | five years | years | Total | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||
Loans (1) | $ | 243,867 | $ | 107,930 | $ | 89,224 | $ | 81,758 | $ | 37,875 | $ | 46,304 | $ | 606,958 | ||||||||||||||
Securities (2) | 47,922 | 37,677 | 10,049 | 5,846 | 2,068 | 26,076 | 129,638 | |||||||||||||||||||||
Short-term investments | 13,546 | 13,546 | ||||||||||||||||||||||||||
Total interest-earning assets | 305,335 | 145,607 | 99,273 | 87,604 | 39,943 | 72,380 | 750,142 | |||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||
Savings deposits | 39,623 | 24,448 | 15,084 | 9,307 | 5,742 | 9,251 | 103,455 | |||||||||||||||||||||
Money market | 59,050 | 23,915 | 9,686 | 3,923 | 1,589 | 1,081 | 99,243 | |||||||||||||||||||||
NOW accounts | 2,715 | 2,465 | 2,238 | 2,032 | 1,845 | 18,212 | 29,508 | |||||||||||||||||||||
Certificates of deposits | 171,877 | 56,444 | 10,350 | 4,258 | 1,926 | 244,855 | ||||||||||||||||||||||
Short-term borrowings | — | — | ||||||||||||||||||||||||||
Long-term debt | 38,000 | 24,000 | 33,000 | — | 33,926 | 9,000 | 137,926 | |||||||||||||||||||||
Total interest-bearing liabilities | $ | 311,265 | $ | 131,272 | $ | 70,358 | $ | 19,520 | $ | 45,028 | $ | 37,545 | $ | 614,987 | ||||||||||||||
Interest rate sensitivity gap | (5,930 | ) | 14,335 | 28,915 | 68,084 | (5,085 | ) | 34,835 | 135,155 | |||||||||||||||||||
Interest rate sensitivity gap as a % of total assets | -0.69 | % | 1.67 | % | 3.38 | % | 7.95 | % | -0.59 | % | 4.07 | % | ||||||||||||||||
Cum. interest rate sensitivity gap | (5,930 | ) | 8,406 | 37,321 | 105,405 | 100,320 | 135,155 | |||||||||||||||||||||
Cum. interest rate sensitivity gap as a % of total assets | -0.69 | % | 0.98 | % | 4.36 | % | 12.31 | % | 11.72 | % | 15.79 | % |
(1) | Excludes the allowance for loan losses, deferred fees and costs, and non-performing loans. | |
(2) | Securities are shown at amortized cost. |
Certain factors may serve to limit the usefulness of the measurement of the interest rate gap. For example, interest rates on certain assets and liabilities are discretionary and may change in advance of, or may lag behind, changes in market rates. The gap analysis does not give effect to changes Benjamin Franklin may undertake to mitigate interest rate risk. Certain assets, such as adjustable-rate loans, have features that may restrict the magnitude of changes in interest rates both on a short-term basis and over the life of the assets. Further, in the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the gap analysis. Lastly, should interest rates increase, the ability of borrowers to service their debt may decrease.
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Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.The Company’s President and Chief Executive Officer, its Chief Financial Officer, and other members of its senior management team have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the periods covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by the Company, including its consolidated subsidiaries, in reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.
(b) Changes in Internal Controls Over Financial Reporting.There were no changes in the Company’s internal control over financial reporting during the first nine months of 2005 that have materially affected, or that are reasonably likely to materially affect, its internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) | Unregistered Sale of Equity Securities.Not applicable. | ||
(b) | Use of Proceeds. Not applicable. The Use of Proceeds from the Company’s stock offering, which closed on April 4, 2005, was reported in the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005. | ||
(c) | Repurchases of Our Equity Securities.The Company’s employee stock ownership plan, an affiliated purchaser, purchased the following shares of the Company’s common stock during the quarter: |
(a) Total | (c) Total Number of | (d) Maximum number (or | ||||||||||||||
Number of | (b) Average | Shares Purchased as Part | approximate dollar value) of | |||||||||||||
Shares | Price Paid per | of Publicly Announced | shares that may yet be purchased | |||||||||||||
Period | Purchased | Share | Plans or Programs (1) | under the Plans or Programs (1) | ||||||||||||
July 1-31 | 0 | 0 | 178,194 | |||||||||||||
August 1-31 | 77,500 | $ | 14.15 | 77,500 | 100,694 | |||||||||||
September 1-30 | 55,200 | $ | 13.96 | 55,200 | 45,494 |
(1) | In a press release issued on March 31, 2005 and in a Current Report on Form 8-K filed on April 1, 2005, the Company announced that its employee stock ownership plan (the “ESOP”) intended to purchase in the public offering after market up to 478,194 shares of the Company’s common stock, or 8% of the shares sold in the offering and issued to the Benjamin Franklin Bank Charitable Foundation. In the second quarter of 2005, the ESOP purchased 300,000 shares, resulting in a total of 432,700 shares purchased through September 30, 2005. There is no expiration date for these planned purchases. These purchases have been and will continue to be effected by the independent corporate trustee of the Company’s ESOP. |
Item 3. Defaults on 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.
The following exhibits, required by Item 601 of Regulation S-K, are filed as part of this Quarterly Report on Form 10-Q. Exhibit numbers, where applicable, in the left column correspond to those of Item 601 of Regulation S-K.
Exhibit No. | Description | Footnotes | ||||
2.1 | Plan of Conversion of Benjamin Franklin Bancorp. | 3 |
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Exhibit No. | Description | Footnotes | ||||
2.2 | Agreement and Plan of Merger among Benjamin Franklin Bancorp, M.H.C., Benjamin Franklin Savings Bank and Chart Bank, a Cooperative Bank, dated as of September 1, 2004. | 2 | ||||
3.1 | Articles of Organization of Benjamin Franklin Bancorp, Inc. | 2 | ||||
3.2 | Bylaws of Benjamin Franklin Bancorp, Inc. | 2 | ||||
4.1 | Form of Common Stock Certificate of Benjamin Franklin Bancorp, Inc. | 5 | ||||
10.1.1 | Form of Employment Agreement with Thomas R. Venables. * | 6 | ||||
10.1.2 | Form of Employment Agreement with Claire S. Bean. * | 6 | ||||
10.2 | Form of Change in Control Agreement with five other Executive Officers, providing one year’s severance to Brian E. Ledwith, Michael J. Piemonte and Kathleen P. Sawyer, and two years’ severance to Mariane E. Broadhurst and Rose M. Buckley. This form contains all material information concerning the agreement and the only differences are the name and contact information of the executive officer who is party to the agreement and the number of years of severance provided. * | 2 | ||||
10.3 | Form of Benjamin Franklin Bank Benefit Restoration Plan. * | 2 | ||||
10.4.1 | Benjamin Franklin Bank Salary Continuation Agreement with Thomas R. Venables dated as of August 22, 2002. * | 2 | ||||
10.5 | Benjamin Franklin Bancorp Director Fee Continuation Plan. * | 4 | ||||
10.6 | Benjamin Franklin Bancorp Employee Salary Continuation Plan. * | 2 | ||||
10.7.1 | Payments and Waiver Agreement among Richard E. Bolton, Jr., Benjamin Franklin Bancorp, M.H.C., Benjamin Franklin Savings Bank and Chart Bank, a Cooperative Bank, dated as of September 1, 2004. * | 2 | ||||
10.7.2 | Consulting and Noncompetition Agreement between Richard E. Bolton, Jr. and Benjamin Franklin Bancorp, M.H.C., dated as of September 1, 2004. * | 2 | ||||
11 | See Note 3 to the Financial Statements for a discussion of earnings per share. | |||||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 1 | ||||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 1 | ||||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 1 | ||||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 1 |
* | Relates to compensation. |
1 | Filed herewith. | |
2 | Incorporated by reference to the Registrant’s Registration Statement on Form S-1, File No. 333-121154, filed on December 10, 2004. | |
3 | Incorporated by reference to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, File No. 333-121154, filed on January 24, 2005. | |
4 | Incorporated by reference to the Registrant’s Registration Statement on Form S-4, File No. 333-121608, filed on December 23, 2004. |
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5 | Incorporated by reference to the Registrant’s Registration Statement on Form 8-A, File No. 000-51194, filed on March 9, 2005. | |
6 | Incorporated by reference to the Registrant’s Annual Report on Forma 10-K, filed on March 29, 2005. |
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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.
Benjamin Franklin Bancorp, Inc. | ||||||||
Date: November 14, 2005 | By: | /s/ Thomas R. Venables | ||||||
Thomas R. Venables | ||||||||
President and Chief Executive Officer | ||||||||
Date: November 14, 2005 | By: | /s/ Claire S. Bean | ||||||
Claire S. Bean | ||||||||
Treasurer and Chief Financial Officer |
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EXHIBIT INDEX
Exhibit
No. | Item | |||||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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