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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 MARCH 31, 2006
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero Accelerated filero Non-accelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
Shares outstanding of the registrant’s common stock (no par value) at May 9, 2006: 8,488,898
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Ex-31.1 Section 302 Certification of CEO | ||||||||
Ex-31.2 Section 302 Certification of CFO | ||||||||
Ex-32.1 Section 906 Certification of CEO | ||||||||
Ex-32.2 Section 906 Certification of CFO |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 19,247 | $ | 16,499 | ||||
Cash supplied to ATM customers | 33,137 | 37,200 | ||||||
Short-term investments | 24,720 | 12,051 | ||||||
Total cash and cash equivalents | 77,104 | 65,750 | ||||||
Securities available for sale, at fair value | 129,349 | 122,379 | ||||||
Securities held to maturity, at amortized cost | 80 | 109 | ||||||
Restricted equity securities, at cost | 10,012 | 10,012 | ||||||
Total securities | 139,441 | 132,500 | ||||||
Loans | ||||||||
Residential real estate | 296,476 | 286,204 | ||||||
Commercial real estate | 217,227 | 209,009 | ||||||
Construction | 51,191 | 60,399 | ||||||
Commercial business | 19,409 | 19,162 | ||||||
Consumer | 36,272 | 34,814 | ||||||
Net deferred loan costs | 1,188 | 1,214 | ||||||
Total loans, gross | 621,763 | 610,802 | ||||||
Allowance for loan losses | (5,666 | ) | (5,670 | ) | ||||
Total loans, net | 616,097 | 605,132 | ||||||
Premises and equipment, net | 11,152 | 11,167 | ||||||
Accrued interest receivable | 3,235 | 3,045 | ||||||
Bank-owned life insurance | 7,516 | 7,451 | ||||||
Goodwill | 33,763 | 33,763 | ||||||
Identifiable intangible asset | 3,832 | 4,133 | ||||||
Other assets | 3,938 | 4,116 | ||||||
$ | 896,078 | $ | 867,057 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Regular savings | $ | 98,706 | $ | 97,960 | ||||
Money market accounts | 117,753 | 94,347 | ||||||
Now accounts | 30,790 | 32,147 | ||||||
Demand deposit accounts | 123,940 | 124,396 | ||||||
Time deposit accounts | 280,964 | 262,823 | ||||||
Total deposits | 652,153 | 611,673 | ||||||
Long-term debt | 127,945 | 140,339 | ||||||
Other liabilities | 7,221 | 6,933 | ||||||
Total liabilities | 787,319 | 758,945 | ||||||
Common stock, no par value; 75,000,000 shares authorized; 8,488,898 shares issued and outstanding | — | — | ||||||
Additional paid-in capital | 82,857 | 82,849 | ||||||
Retained earnings | 33,956 | 32,942 | ||||||
Unearned compensation | (5,307 | ) | (5,353 | ) | ||||
Accumulated other comprehensive loss | (2,747 | ) | (2,326 | ) | ||||
Total stockholders’ equity | 108,759 | 108,112 | ||||||
$ | 896,078 | $ | 867,057 | |||||
See accompanying notes to condensed consolidated financial statements
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BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
Interest and dividend income: | ||||||||
Loans, including fees | $ | 8,842 | $ | 4,892 | ||||
Debt securities | 1,262 | 661 | ||||||
Dividends | 120 | 68 | ||||||
Short-term investments | 216 | 93 | ||||||
Total interest and dividend income | 10,440 | 5,714 | ||||||
Interest expense: | ||||||||
Interest on deposits | 3,102 | 1,232 | ||||||
Interest on borrowings | 1,426 | 853 | ||||||
Total interest expense | 4,528 | 2,085 | ||||||
Net interest income | 5,912 | 3,629 | ||||||
Provision for loan losses | 6 | 168 | ||||||
Net interest income, after provision for loan losses | 5,906 | 3,461 | ||||||
Non-interest income: | ||||||||
ATM servicing fees | 625 | — | ||||||
Deposit service fees | 329 | 207 | ||||||
Loan servicing fees | 122 | 72 | ||||||
Gain on sale of loans, net | 65 | 15 | ||||||
Income from bank-owned life insurance | 65 | 59 | ||||||
Miscellaneous | 191 | 140 | ||||||
Total non-interest income | 1,397 | 493 | ||||||
Non-interest expense: | ||||||||
Salaries and employee benefits | 2,721 | 2,014 | ||||||
Occupancy and equipment | 666 | 440 | ||||||
Data processing | 448 | 337 | ||||||
Professional fees | 365 | 129 | ||||||
Amortization of core deposit intangible | 301 | 45 | ||||||
Other general and administrative | 817 | 500 | ||||||
Total non-interest expense | 5,318 | 3,465 | ||||||
Income before income taxes | 1,985 | 489 | ||||||
Provision for income taxes | 717 | 159 | ||||||
Net income | $ | 1,268 | $ | 330 | ||||
Weighted-average shares outstanding: | ||||||||
Basic | 8,026,644 | n/a | ||||||
Diluted | 8,026,644 | n/a | ||||||
Earnings per share: | ||||||||
Basic | $ | 0.16 | n/a | |||||
Diluted | $ | 0.16 | n/a |
See accompanying notes to condensed consolidated financial statements
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BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Unearned | Comprehensive | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Compensation | Loss | Equity | ||||||||||||||||||||||
Balance at December 31, 2004 | — | $ | — | $ | — | $ | 32,997 | $ | — | $ | (1,669 | ) | $ | 31,328 | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net income | — | — | — | 330 | — | — | 330 | |||||||||||||||||||||
Net unrealized loss on securities available for sale, net of tax effects | — | (858 | ) | (858 | ) | |||||||||||||||||||||||
Total comprehensive loss | (528 | ) | ||||||||||||||||||||||||||
Balance at March 31, 2005 | — | $ | — | $ | — | $ | 33,327 | $ | — | $ | (2,527 | ) | $ | 30,800 | ||||||||||||||
Balance at December 31, 2005 | 8,488,898 | $ | — | $ | 82,849 | $ | 32,942 | $ | (5,353 | ) | $ | (2,326 | ) | $ | 108,112 | |||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net income | — | — | — | 1,268 | — | — | 1,268 | |||||||||||||||||||||
Net unrealized loss on securities available for sale, net of tax effects | — | — | — | — | — | (421 | ) | (421 | ) | |||||||||||||||||||
Total comprehensive income | 847 | |||||||||||||||||||||||||||
Dividends declared ($.03 per share) | — | — | — | (254 | ) | — | — | (254 | ) | |||||||||||||||||||
Release of ESOP stock | — | — | 8 | — | 46 | — | 54 | |||||||||||||||||||||
Balance at March 31, 2006 | 8,488,898 | $ | — | $ | 82,857 | $ | 33,956 | $ | (5,307 | ) | $ | (2,747 | ) | $ | 108,759 | |||||||||||||
See accompanying notes to condensed consolidated financial statements
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BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2006 | 2005 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,268 | $ | 330 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization (accretion) of securities, net | (177 | ) | 118 | |||||
Amortization (accretion) of loans, net | (46 | ) | 39 | |||||
Provision for loan losses | 6 | 168 | ||||||
Accretion of deposit and borrowings, net | (17 | ) | — | |||||
Amortization of mortgage servicing rights | 64 | 76 | ||||||
Depreciation and amortization | 250 | 184 | ||||||
Amortization of core deposit intangible | 301 | 45 | ||||||
Amortization of unearned compensation | 54 | — | ||||||
Deferred income tax benefit | (174 | ) | (22 | ) | ||||
Income from bank-owned life insurance | (65 | ) | (59 | ) | ||||
Gains on sales of loans, net | (65 | ) | (15 | ) | ||||
Loans originated for sale | (5,879 | ) | (4,425 | ) | ||||
Proceeds from sales of loans | 5,944 | 4,440 | ||||||
Increase in accrued interest receivable | (190 | ) | (102 | ) | ||||
Other, net | 607 | (165 | ) | |||||
Net cash provided by operating activities | 1,881 | 612 | ||||||
Cash flows from investing activities: | ||||||||
Activity in available-for-sale securities: | ||||||||
Maturities, calls, and principal repayments | 12,577 | 4,477 | ||||||
Purchases | (19,843 | ) | (3,647 | ) | ||||
Principal repayments on held-to-maturity securities | 29 | 30 | ||||||
Purchases of mortgage loans | (16,118 | ) | (288 | ) | ||||
Loan repayments (originations), net | 5,199 | (10,884 | ) | |||||
Additions to premises and equipment | (220 | ) | (231 | ) | ||||
Net cash used for investing activities | (18,376 | ) | (10,543 | ) | ||||
(Continued)
See accompanying notes to condensed consolidated financial statements
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BENJAMIN FRANKLIN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2006 | 2005 | |||||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 40,506 | 18,211 | ||||||
Funds received in stock subscription offering, net of costs incurred in connection with stock offering and impending merger | — | 50,778 | ||||||
Net repayments of short-term borrowings | — | (4,250 | ) | |||||
Net repayments of long-term debt | (12,403 | ) | — | |||||
Dividends paid on common stock | (254 | ) | — | |||||
Net cash provided by financing activities | 27,849 | 64,739 | ||||||
Net change in cash and cash equivalents | 11,354 | 54,808 | ||||||
Cash and cash equivalents at beginning of period | 65,750 | 14,204 | ||||||
Cash and cash equivalents at end of period | $ | 77,104 | $ | 69,012 | ||||
Supplemental cash flow information: | ||||||||
Interest paid on deposits | $ | 3,655 | $ | 1,231 | ||||
Interest paid on short-term borrowings | — | 1 | ||||||
Interest paid on long-term debt | 1,382 | 849 | ||||||
Income taxes paid | 132 | 193 |
See accompanying notes to condensed consolidated financial statements
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BENJAMIN FRANKLIN BANCORP, INC AND SUBSIDIARY
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. (the “Company’’) and its 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, 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 became effective as of January 1, 2006 for the Company. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally is now measured at fair value at the grant date. The grant date fair value is required to 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 must be recognized over the requisite service period, often the vesting period. | ||
The provisions of SFAS No. 123R do not have an impact on the Company’s results of operations at this time. However, as anticipated in the prospectus used in the Company’s stock offering related to the mutual-to-stock conversion, the Board of Directors has adopted a stock-based incentive plan, subject to shareholder approval, which will be sought at the annual meeting on May 11, 2006. 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 August 2005, the FASB issued an exposure draft that would amend FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for servicing of financial assets. This proposed Statement would require that all separately recognized servicing rights be initially measured at fair value, if practicable. For each class of separately recognized servicing assets and liabilities, this proposed Statement would permit an entity to choose either of the following subsequent measurement methods: (1) amortize servicing assets or liabilities in proportion to and over the period of estimated net servicing income or net servicing loss, or (2) report servicing assets or liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. This proposed Statement also would require additional disclosures for all separately recognized servicing rights. This proposed Statement would be effective for new transactions occurring and for subsequent measurement in the earlier of the first fiscal year that begins after September 15, 2006, or fiscal years beginning during the fiscal quarter in which the final Statement is issued. This Statement is not expected to have a material impact on the Company’s consolidated financial statements. |
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2. | Commitments | ||
Outstanding loan commitments totaled $128.5 million at March 31, 2006, compared to $118.2 million as of December 31, 2005. Loan commitments consist of commitments to originate new loans as well as the outstanding undrawn portions of lines of credit. Further, on April 28, 2006, the Company committed to purchase a pool of adjustable-rate mortgage loans with an aggregate principal balance of approximately $20 million. | |||
On May 2, 2006, the Company entered into a purchase and sale agreement to sell the property it owns at 500 West Central St., Franklin, MA. The sale price is $825,000 and the closing is expected within the next twelve months. The Company’s carrying value for this property is $634,000. | |||
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. There were no potentially dilutive common stock equivalents outstanding during the quarter ended March 31, 2006. Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations. Earnings per share are not presented for the three months ended March 31, 2005, because the Company did not complete its public offering until April 4, 2005. |
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 2005 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, 2005.
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Comparison of Financial Condition at March 31, 2006 and December 31, 2005
Overview
Total assets increased by $29.0 million, or 3.3%, from $867.1 million at December 31, 2005 to $896.1 million at March 31, 2006. Asset growth was nearly evenly split between cash/cash equivalents, which increased by $11.4 million or 17.3% and loans, which increased by $11.0 million or 1.8% during the quarter. Growth in assets was funded primarily by increases in deposit balances aggregating $40.5 million, or 6.6%, offset by a $12.4 million, or 8.8%, decrease in borrowed funds.
Investment Activities
Cash and cash equivalent balances increased by $11.4 million to $77.1 million at March 31, 2006 when compared to December 31, 2005. Of that increase, $2.7 million was due to an increase in cash and correspondent balances, exclusive of a $4.1 million decrease in cash supplied to customers of Creative Strategic Solutions, Inc. (“CSSI”), the Bank’s ATM servicing subsidiary. The decline in CSSI-managed cash was the result of normal seasonal fluctuations. Over the same period, short-term investments, comprised of overnight fed funds sold ($22.1 million) and money market funds ($2.6 million), increased $12.7 million to $24.7 million at March 31, 2006. The higher level of short-term investments at quarter-end was the result of the Bank’s successful deposit account promotions during the quarter. The Company expects to invest the majority of those funds in loans during the second quarter of 2006.
At March 31, 2006, the Company’s investment portfolio amounted to $139.4 million, or 15.6% of total assets. When compared to year end 2005, securities increased by $6.9 million, or 5.2%, at March 31, 2006. The increase was generally consistent with overall growth in the balance sheet during the quarter. The following table sets forth certain information regarding the amortized cost and market values of the Company’s securities at the dates indicated:
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March 31, 2006 | December 31, 2005 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
Government-sponsored enterprise obligations | $ | 97,183 | $ | 96,437 | $ | 86,141 | $ | 85,494 | ||||||||
State agency and municipal obligations | 2,210 | 2,183 | 2,211 | 2,191 | ||||||||||||
Corporate bonds and other obligations | — | — | 2,508 | 2,500 | ||||||||||||
Mortgage-backed securities | 33,017 | 30,729 | 34,107 | 32,194 | ||||||||||||
Total securities available for sale | $ | 132,410 | $ | 129,349 | $ | 124,967 | $ | 122,379 | ||||||||
Securities held to maturity: | ||||||||||||||||
Mortgage-backed securities | $ | 80 | $ | 80 | $ | 109 | $ | 109 | ||||||||
Restricted equity securities: | ||||||||||||||||
Federal Home Loan Bank of Boston stock | $ | 7,496 | $ | 7,496 | $ | 7,496 | $ | 7,496 | ||||||||
Access Capital Strategies Community Investment Fund | 2,000 | 2,000 | 2,000 | 2,000 | ||||||||||||
SBLI & DIF stock | 516 | 516 | 516 | 516 | ||||||||||||
Total equity securities | $ | 10,012 | $ | 10,012 | $ | 10,012 | $ | 10,012 | ||||||||
Lending Activities
The Company’s net loan portfolio aggregated $616.1 million on March 31, 2006, or 68.8% of total assets on that date. As of December 31, 2005, the net loan portfolio totaled $605.1 million, or 69.8% of total assets. The following table sets forth the composition of the loan portfolio at the dates indicated:
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March 31, 2006 | December 31, 2005 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||
Residential | $ | 296,476 | 47.77 | % | $ | 286,204 | 46.95 | % | ||||||||
Commercial | 217,227 | 35.00 | % | 209,009 | 34.29 | % | ||||||||||
Construction | 51,191 | 8.25 | % | 60,399 | 9.91 | % | ||||||||||
Home equity | 34,038 | 5.48 | % | 32,419 | 5.32 | % | ||||||||||
598,932 | 96.51 | % | 588,031 | 96.46 | % | |||||||||||
Other loans: | ||||||||||||||||
Commercial | 19,409 | 3.13 | % | 19,162 | 3.14 | % | ||||||||||
Consumer | 2,234 | 0.36 | % | 2,395 | 0.39 | % | ||||||||||
21,643 | 3.49 | % | 21,557 | 3.54 | % | |||||||||||
Total loans | 620,575 | 100.00 | % | 609,588 | 100.00 | % | ||||||||||
Other items: | ||||||||||||||||
Deferred loan origination costs | 1,188 | 1,214 | ||||||||||||||
Allowance for loan losses | (5,666 | ) | (5,670 | ) | ||||||||||||
Total loans, net | $ | 616,097 | $ | 605,132 | ||||||||||||
The net loan portfolio increased by $11.0 million, or 1.8%, during the first three months of 2006. The increase was principally a result of growth in residential mortgage loans (up $10.3 million or 3.6%) and commercial real estate loans (up $8.2 million or 3.9%), offset by a decrease in construction loans outstanding of $9.2 million, a reduction of 15.2%. The decrease in construction loans represents normal fluctuation in this portfolio, and is likely temporary. The increase in residential mortgage loans resulted primarily from the purchase of two whole loan pools, consisting of adjustable rate loans collateralized by Massachusetts properties. On April 28, 2006, the Bank further committed to the purchase of a whole loan pool of adjustable-rate mortgage loans in the amount of approximately $20.0 million. With regard to commercial lending, although the net increase in commercial credits during the quarter was small, the Company remains committed to expanding this segment of its lending business over the next several years.
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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March 31, 2006 | December 31, 2005 | |||||||
(Dollars in thousands) | ||||||||
Non-accrual loans: | ||||||||
Residential mortgage | $ | 61 | $ | 184 | ||||
Commercial mortgage | 25 | — | ||||||
Construction | — | — | ||||||
Commercial | 245 | 256 | ||||||
Consumer and other | — | 25 | ||||||
Total non-accrual loans | 331 | 465 | ||||||
Loans greater than 90 days delinquent and still accruing: | ||||||||
Residential mortgage | 0 | 0 | ||||||
Commercial mortgage | 0 | 0 | ||||||
Construction | 0 | 0 | ||||||
Commercial | 0 | 0 | ||||||
Consumer and other | 8 | 2 | ||||||
Total loans 90 days and still accruing | 8 | 2 | ||||||
Total non-performing loans | $ | 339 | $ | 467 | ||||
Ratios: | ||||||||
Non-performing loans to total loans | 0.05 | % | 0.08 | % | ||||
Non-performing loans to total assets | 0.04 | % | 0.05 | % |
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 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.
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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 March 31, 2006, the Company had no impaired loans. At December 31, 2005, impaired loans totaled $264,000 and in the aggregate carried a valuation allowance within the allowance for loan losses of $140,000.
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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Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Balance at beginning of period | $ | 5,670 | $ | 3,172 | ||||
Charge-offs: | ||||||||
Mortgage loans on real estate | — | — | ||||||
— | — | |||||||
Other loans: | ||||||||
Commercial | — | — | ||||||
Consumer | (29 | ) | — | |||||
Total other loans | (29 | ) | 0 | |||||
Total charge-offs | (29 | ) | 0 | |||||
Recoveries: | ||||||||
Mortgage loans on real estate | — | — | ||||||
— | — | |||||||
Other loans: | ||||||||
Commercial | 8 | 8 | ||||||
Consumer | 11 | 3 | ||||||
Total other loans | 19 | 11 | ||||||
Total recoveries | 19 | 11 | ||||||
Net (charge-offs) recoveries | (10 | ) | 11 | |||||
Provision for loan losses | 6 | 168 | ||||||
Balance at end of period | $ | 5,666 | $ | 3,351 | ||||
Ratios: | ||||||||
Net (charge-offs) recoveries to average loans outstanding (annualized) | -0.01 | % | 0.01 | % | ||||
Allowance for loan losses to non-performing loans at end of period | 1671.29 | % | 1147.60 | % | ||||
Allowance for loan losses to total loans at end of period | 0.91 | % | 0.84 | % |
Deposits
The following table sets forth the Company’s deposit accounts for the periods indicated:
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March 31, | % of | December 31, | % of | |||||||||||||
2006 | Total | 2005 | Total | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Deposit type: | ||||||||||||||||
Demand deposit accounts | $ | 123,940 | 19 | % | $ | 124,396 | 20 | % | ||||||||
NOW accounts | 30,790 | 5 | % | 32,147 | 5 | % | ||||||||||
Regular savings accounts | 98,706 | 15 | % | 97,960 | 16 | % | ||||||||||
Money market accounts | 117,753 | 18 | % | 94,347 | 15 | % | ||||||||||
Total non-certificate accounts | 371,189 | 57 | % | 348,850 | 57 | % | ||||||||||
Term certificates less than $100,000 | 160,017 | 25 | % | 157,933 | 26 | % | ||||||||||
Term certificates of $100,000 or more | 120,947 | 19 | % | 104,890 | 17 | % | ||||||||||
Total certificate accounts | 280,964 | 43 | % | 262,823 | 43 | % | ||||||||||
Total deposits | $ | 652,153 | 100 | % | $ | 611,673 | 100 | % | ||||||||
Total deposits increased by $40.5 million, or 6.6%, when compared to December 31, 2005. The increase in deposits came primarily in money market accounts, which increased by $23.4 million or 24.8%, and time deposit accounts, which rose by $18.1 million or 6.9% during the quarter. Product promotions with an emphasis on premium rates were responsible for most of the increases in these two deposit categories.
Borrowed Funds
Borrowed funds decreased by $12.4 million, or 8.8%, during the first quarter of 2006. The reduction was primarily the result of the repayment of a $10.0 million Federal Home Loan Bank of Boston (“FHLBB”) borrowing bearing an interest rate of 3.99% that was called by the FHLBB. The Company did not replace that borrowing due to the success of its deposit-gathering efforts during the quarter. At March 31, 2006, the Company had $36.0 million remaining in callable FHLBB advances. Of that amount, $20.0 million, bearing an interest rate of 4.58%, was called on May 5, 2006 and replaced with a short-term advance bearing an interest rate of 5.14%.
Stockholder’s Equity
Total stockholders’ equity was $108.8 million as of March 31, 2006, an increase of $647,000 when compared to the balance at December 31, 2005. The increase was primarily attributable to earnings of $1.3 million, net of dividends paid of $254,000 and a decrease of $421,000 in the fair value of securities available for sale.
Comparison of Operating Results for the Three Months Ended March 31, 2006 and 2005
The Company earned net income of $1.3 million for the quarter ended March 31, 2006, an increase of $937,000 when compared to net income of $331,000 earned in the first quarter of 2005. This growth in net income was primarily the result of the acquisition of Chart Bank on April 4, 2005, the receipt of $53.7 million in net proceeds as a result of the Company’s mutual-to-stock conversion and related stock offering on that same date, and internally-generated business development efforts.
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.
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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:
Three Months Ended March 31, | ||||||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Outstanding | Outstanding | |||||||||||||||||||||||
Balance | Interest | Yield/Rate(1) | Balance | Interest | Yield/Rate(1) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 606,510 | $ | 8,842 | 5.91 | % | $ | 388,346 | $ | 4,892 | 5.11 | % | ||||||||||||
Securities | 136,805 | 1,382 | 4.10 | % | 91,636 | 729 | 3.23 | % | ||||||||||||||||
Short-term investments | 19,697 | 216 | 4.45 | % | 16,115 | 93 | 2.34 | % | ||||||||||||||||
Total interest-earning assets | 763,012 | 10,440 | 5.55 | % | 496,097 | 5,714 | 4.67 | % | ||||||||||||||||
Non-interest-earning assets | 115,936 | 35,717 | ||||||||||||||||||||||
Total assets | $ | 878,948 | $ | 531,814 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings deposits | $ | 96,624 | 118 | 0.50 | % | $ | 95,036 | 116 | 0.50 | % | ||||||||||||||
Money market | 98,587 | 510 | 2.10 | % | 57,267 | 210 | 1.49 | % | ||||||||||||||||
NOW accounts | 27,155 | 10 | 0.15 | % | 22,081 | 9 | 0.16 | % | ||||||||||||||||
Certificates of deposits | 275,787 | 2,464 | 3.62 | % | 142,409 | 897 | 2.55 | % | ||||||||||||||||
Total deposits | 498,153 | 3,102 | 2.53 | % | 316,793 | 1,232 | 1.58 | % | ||||||||||||||||
Borrowings | 141,797 | 1,426 | 4.08 | % | 81,112 | 853 | 4.26 | % | ||||||||||||||||
Total interest-bearing liabilities | 639,950 | 4,528 | 2.87 | % | 397,905 | 2,085 | 2.13 | % | ||||||||||||||||
Non-interest bearing liabilities | 130,530 | 102,270 | ||||||||||||||||||||||
Total liabilities | 770,480 | 500,175 | ||||||||||||||||||||||
Equity | 108,468 | 31,639 | ||||||||||||||||||||||
Total liabilities and equity | $ | 878,948 | $ | 531,814 | ||||||||||||||||||||
Net interest income | $ | 5,912 | $ | 3,629 | ||||||||||||||||||||
Net interest rate spread(2) | 2.68 | % | 2.54 | % | ||||||||||||||||||||
Net interest-earning assets(3) | $ | 123,062 | $ | 98,192 | ||||||||||||||||||||
Net interest margin(4) | 3.14 | % | 2.97 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 119.23 | % | 124.68 | % |
(1) | Yields and rates for the three months ended March 31, 2006 and 2005 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 divided by average total 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.
Three Months Ended March 31, | ||||||||||||
2006 vs. 2005 | ||||||||||||
Increase (Decrease) | Total | |||||||||||
Due to | Increase | |||||||||||
Volume | Rate | (Decrease) | ||||||||||
(In thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 3,086 | $ | 864 | $ | 3,950 | ||||||
Securities | 422 | 231 | 653 | |||||||||
Short-term investments | 25 | 98 | 123 | |||||||||
Total interest-earning assets | 3,533 | 1,193 | 4,726 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Savings deposits | 2 | — | 2 | |||||||||
Money market accounts | 191 | 109 | 300 | |||||||||
NOW accounts | 2 | (1 | ) | 1 | ||||||||
Certificates of deposit | 1,083 | 484 | 1,567 | |||||||||
Total deposits | 1,278 | 592 | 1,870 | |||||||||
Borrowings | 613 | (40 | ) | 573 | ||||||||
Total interest-bearing liabilities | 1,891 | 552 | 2,443 | |||||||||
Change in net interest income | $ | 1,642 | $ | 641 | $ | 2,283 | ||||||
Net interest income for the quarter ended March 31, 2006 was $5.9 million, an increase of $2.3 million when compared to net interest income of $3.6 million for the three months ended March 31, 2005. This increase was the result of an increase in average interest-earning assets of $266.9 million, greater than the $242.0 million increase in interest-bearing liabilities, coupled with a 17 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 increased by more than average interest-bearing liabilities, when compared to the comparable quarter in 2005.
The Company’s net interest margin (“NIM”) was 3.14% for the three months ended March 31, 2006, which, as noted above, represents an increase of 17 basis points compared to the first quarter of 2005. While the NIM increased when compared to the year earlier period, it has narrowed from its more recent high of 3.34% in the third quarter of 2005. The widening of the NIM in mid-2005 was due to the Chart Bank acquisition on April 4, 2005 and the addition of its more commercially-oriented balance sheet to that of the Company. More recently, increased price competition for time deposits and money market accounts has caused the NIM to narrow. The
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continued flattening of the Treasury yield curve has also contributed to a decrease in the margin, in that a relatively flat yield curve has the effect of reducing the spread between the Company’s earning assets and its core deposit accounts. Management believes that the Company’s NIM may contract further in 2006 as a result of the relatively flat yield curve and continued competitive pressure on both certificate and money market account interest rates.
Interest income for the quarter ended March 31, 2006 was $10.4 million, compared to $5.7 million for the quarter ended March 31, 2005, an increase of $4.7 million or 82.7%. Most of the increase was the result of the $266.9 million increase in average interest-earning assets, augmented by an 88 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 $218.2 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 $45.2 million and $3.6 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 0.87% and 2.11%, respectively, were due mainly to the increase in market interest rates during the twelve months ended March 31, 2006. The increase in the loan yield of 80 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 $2.3 million compared to the prior year, due in large measure to the Chart Bank acquisition, which added $242.8 million to the Company’s funding liabilities. Also contributing was the overall cost of interest-bearing deposits, which increased by 95 basis points in the first quarter of 2006 compared to the first quarter of 2005. This is due in part to the increase in market interest rates over the twelve months ended March 31, 2006, to increased local competition for deposits, 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 Bank. The cost of borrowed funds decreased between periods, by 18 basis points, as new borrowings and rollovers of existing borrowings were less expensive than the 4.26% weighted average cost of borrowings in the first quarter of 2005.
Provision for Loan Losses
The loan loss provision for the first quarter of 2006 was $6,000, a significant reduction from the $168,000 provided in the comparable 2005 quarter. The small size of the provision in the 2006 quarter was due primarily to a 15.2% reduction in construction loans and to a reduction in impaired loans during the quarter, offset in part by increases in residential and commercial mortgage loans. At March 31, 2006, the allowance for loan losses totaled $5.7 million, or .91% of the loan portfolio, as compared to $3.4 million, or .84% of total loans, at March 31, 2005. The increase in the allowance for loan losses as a percentage of the loan portfolio as of March 31, 2006 compared to March 31, 2005 was primarily due to an increase in the proportion of commercial loans in the portfolio.
Non-interest Income
Non-interest income for the three-month period ended March 31, 2006 rose to $1.4 million, an increase of $904,000, or 183.4%, when compared to non-interest income of $493,000 earned during the first quarter of 2005. This increase was produced by growth in fee-based deposit accounts and the acquisition of Chart Bank.
In the first quarter of 2006, fees earned on deposit accounts and other miscellaneous income increased by 58.9% and 36.4%, respectively, when compared to the first quarter of 2005. 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. Loan servicing fees and gains on sales of loans increased by $100,000 in the aggregate in the first quarter of 2006 compared to the 2005 quarter. This increase was largely independent
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of the Chart Bank acquisition and was instead the result of growth in sales 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 $625,000 in the first quarter of 2006. CSSI supplies cash to ATMs owned by independent service organizations nationwide.
Non-interest Expense
Non-interest expenses increased significantly in the first quarter of 2006 when compared to the same period in 2005, 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. Expenses increased by $1.9 million, or 53.5%, to $5.3 million in the first quarter of 2006, compared to $3.5 million recorded in the three months ended March 31, 2005. The largest increase was in salaries and employee benefits expense, which rose by $707,000 or 35.1%, 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 $301,000 to expense for the quarter, an increase of $256,000 over the comparable period in 2005. Occupancy and equipment expenses increased by $226,000 or 51.4%, mainly due to the addition of costs associated with Chart Bank’s three branch locations. Increases in data processing costs ($111,000 or 32.9%) and miscellaneous expenses ($318,000 or 63.7%) were both due primarily to the effect of adding Chart Bank operations. Professional fees for the first quarter of 2006 amounted to $365,000, an increase of $236,000 over the comparable period in 2005, due to increased legal, consulting and audit fees that for the most part were related to the Company’s conversion to public company status, including compliance costs in 2006 related to requirements of Section 404 of the Sarbanes-Oxley Act.
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.
Income Taxes
The income tax provision of $717,000 recorded for the three months ended March 31, 2006 resulted in an effective tax rate of 36.1%, compared to a provision of $159,000 recorded for the three months ended March 31, 2005, which resulted in an effective tax rate of 32.4%. In the quarter ended March 31, 2005, the favorable tax effect of the Company’s BOLI investments and the effect of the relatively low state tax rate for income earned on investments held in the Benjamin Franklin Securities Corp. were more pronounced than in the current quarter, accounting for the higher effective tax rate in the quarter ended March 31, 2006.
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 March 31, 2006, cash and due from banks, short-term investments and debt securities maturing within one year totaled $98.1 million (excluding cash supplied by CSSI to ATM customers, which is not a liquid asset) or 10.9% of total assets.
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The Company borrows from the Federal Home Loan Bank of Boston as an additional funding source. As of March 31, 2006, the Company had the ability to borrow an additional $83.3 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:
Contractual Obligations:
At March 31, 2006 | ||||||||||||||||||||
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) | $ | 118,945 | $ | 19,000 | $ | 39,945 | $ | 60,000 | $ | — | ||||||||||
Subordinated debt | 9,000 | — | — | — | 9,000 | |||||||||||||||
Operating leases(2) | 741 | 235 | 334 | 172 | ||||||||||||||||
Other contractual obligations(3) | 6,013 | 2,353 | 3,660 | |||||||||||||||||
Total contractual obligations | $ | 134,699 | $ | 21,588 | $ | 43,939 | $ | 60,172 | $ | 9,000 | ||||||||||
(1) | Secured under a blanket security agreement on qualifying assets, principally 1-4 Family Residential mortgage loans. At March 31, 2006, advances totalling $26 million were callable at the sole option of the FHLB. On May 5, 2006, one of those advances, in the amount of $20.0 million bearing a rate of 4.58%, was called by the FHLB. Another callable advance in the amount of $10.0 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 non-cancelable operating leases for branch offices. | |
(3) | Represents contracts for technology services and employment agreements. |
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Loan Commitments
March 31, 2006 | ||||||||||||||||||||
More than | More than | |||||||||||||||||||
One Year | Three Years | |||||||||||||||||||
One Year | through | through | Over Five | |||||||||||||||||
Total | or Less | Three Years | Five Years | Years | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commitments to grant loans(1) | $ | 41,008 | $ | 41,008 | $ | — | $ | — | $ | — | ||||||||||
Unadvanced funds on commercial lines of credit | 19,840 | 18,332 | 1,508 | — | — | |||||||||||||||
Unadvanced funds on home equity lines of credit(3) | 40,319 | — | — | — | 40,319 | |||||||||||||||
Unadvanced funds on construction loans(4) | 23,580 | 15,168 | 7,891 | — | 521 | |||||||||||||||
Unadvanced funds on personal lines of credit(2) | 2,410 | — | — | — | 2,410 | |||||||||||||||
Commercial letter of credit | 1,327 | 1,327 | — | — | — | |||||||||||||||
Total loan commitments | $ | 128,484 | $ | 75,835 | $ | 9,399 | $ | — | $ | 43,250 | ||||||||||
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. Commitments generally have fixed expiration dates or other termination clauses.
(1) | Commitments for loans are extended to customers for up to 180 days after which they expire. | |
(2) | Unused portion 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. |
Minimum Regulatory Capital Requirements:
As of March 31, 2006, 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 March 31, 2006 and December 31, 2005 are also presented in this table:
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Minimum | ||||||||||||||||||||||||
To Be Well | ||||||||||||||||||||||||
Minimum | Capitalized Under | |||||||||||||||||||||||
Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Requirements | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
March 31, 2006: | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | $ | 88,578 | 15.2 | % | $ | 46,656 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank | 62,855 | 10.8 | 46,591 | 8.0 | $ | 58,239 | 10.0 | % | ||||||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | 82,912 | 14.5 | 23,328 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 57,189 | 9.5 | 23,295 | 4.0 | 34,943 | 6.0 | ||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||
Consolidated | 82,912 | 9.9 | 33,654 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 57,189 | 6.5 | 33,622 | 4.0 | 42,027 | 5.0 | ||||||||||||||||||
December 31, 2005: | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | $ | 87,212 | 15.3 | % | $ | 45,614 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank | 61,393 | 10.8 | 45,528 | 8.0 | $ | 56,910 | 10.0 | % | ||||||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | 81,543 | 14.3 | 22,807 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 55,724 | 9.8 | 22,764 | 4.0 | 34,146 | 6.0 | ||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||
Consolidated | 81,543 | 9.9 | 33,115 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 55,724 | 6.7 | 33,085 | 4.0 | 41,356 | 5.0 |
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 March 31, 2006 the estimated changes in the Company’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.
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Percentage Change in Estimated | ||||
Net Interest Income over 12 | ||||
months | ||||
200 basis point increase in rates | (2.83 | )% | ||
100 basis point increase in rates | (1.32 | )% | ||
Flat interest rates | — | |||
100 basis point decrease in rates | 1.04 | % |
As indicated in the table above, the result of an immediate 100 basis point increase in interest rates is estimated to decrease net interest income by 1.32% 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 decline by 2.83% 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 increase by 25 basis points and that money market deposit account rates would increase by 37 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 an increase of 1.04%, which assumes no decrease in interest-bearing checking rates or in savings rates and an average decrease in money market rates of 37 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, the Company also relies on the analysis of its interest rate “gap,” which is the measure of the mismatch between the amount of the Company’s interest-earning assets and 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 the Company’s interest sensitivity gap position as of March 31, 2006, 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, money market checking and money market savings deposit accounts are assumed to have annual rates of withdrawal (decay rates) of 9.2%, 38.3%, 59.5% and 100.0%, respectively.
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Repricing Gap as of March 31, 2006
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) | $ | 214,556 | $ | 114,665 | $ | 106,720 | $ | 84,651 | $ | 40,587 | $ | 59,057 | $ | 620,236 | ||||||||||||||
Securities (2) | 59,041 | 39,350 | 8,820 | 5,198 | 4,054 | 26,039 | 142,502 | |||||||||||||||||||||
Short-term investments | 24,720 | 24,720 | ||||||||||||||||||||||||||
Total interest-earning assets | 298,317 | 154,015 | 115,540 | 89,849 | 44,641 | 85,096 | 787,458 | |||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||
Savings deposits | 37,804 | 23,325 | 14,392 | 8,880 | 5,479 | 8,826 | 98,706 | |||||||||||||||||||||
Money market | 82,400 | 21,035 | 8,519 | 3,450 | 1,397 | 951 | 117,753 | |||||||||||||||||||||
NOW accounts | 2,833 | 2,572 | 2,335 | 2,121 | 1,925 | 19,004 | 30,790 | |||||||||||||||||||||
Certificates of deposits | 235,890 | 30,753 | 7,925 | 4,705 | 1,691 | 280,964 | ||||||||||||||||||||||
Long-term debt | 45,000 | 22,000 | 26,945 | — | 34,000 | 127,945 | ||||||||||||||||||||||
Total interest-bearing liabilities | $ | 403,927 | $ | 99,685 | $ | 60,116 | $ | 19,156 | $ | 44,493 | $ | 28,781 | $ | 656,158 | ||||||||||||||
Interest rate sensitivity gap | (105,610 | ) | 54,330 | 55,424 | 70,693 | 148 | 56,315 | 131,300 | ||||||||||||||||||||
Interest rate sensitivity gap as a % of total assets | -11.79 | % | 6.06 | % | 6.19 | % | 7.89 | % | 0.02 | % | 6.28 | % | ||||||||||||||||
Cum. interest rate sensitivity gap | (105,610 | ) | (51,281 | ) | 4,143 | 74,837 | 74,985 | 131,300 | ||||||||||||||||||||
Cum. interest rate sensitivity gap as a % of total assets | -11.79 | % | -5.72 | % | 0.46 | % | 8.35 | % | 8.37 | % | 14.65 | % |
(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.
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
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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 three months of 2006 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 1A. Risk Factors That May Affect Future Results
Risk factors that may affect future results were discussed in the Company’s 2005 Annual Report on Form 10-K. The Company’s evaluation of its risk factors has not changed materially since December 31, 2005.
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. | ||
(c) | Repurchases of Our Equity Securities.The Company had no share repurchases during the quarter. |
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 | ||||
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. | 7 | ||||
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, | 2 |
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Exhibit No. | Description | Footnotes | ||||
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. * | ||||||
10.3 | Form of Benjamin Franklin Bank Benefit Restoration Plan. * | 2 | ||||
10.4.1 | Amended and Restated Supplemental Executive Retirement Agreement between Benjamin Franklin Bank and Thomas R. Venables dated as of March 22, 2006. | 8 | ||||
10.4.2 | Amended and Restated Supplemental Executive Retirement Agreement between Benjamin Franklin Bank and Claire S. Bean dated as of March 22, 2006. | 8 | ||||
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 | ||||
10.8 | Benjamin Franklin Bancorp, Inc. 2006 Stock Incentive Plan | 9 | ||||
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. | |
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 Form 10-K, filed on March 29, 2005. | |
7 | Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on March 3, 2006. | |
8 | Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed on March 28, 2006 | |
9 | Incorporated by reference to Appendix B to the Registrant’s Proxy Statement for the 2006 Annual Meeting of Stockholders, filed on March 28, 2006. |
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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: May 9, 2006 | By: | /s/ Thomas R. Venables | ||||
Thomas R. Venables | ||||||
President and Chief Executive Officer | ||||||
Date: May 9, 2006 | 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. |
30