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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 JUNE 30, 2007
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 Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
58 Main Street, Franklin, MA (Address of Principal Executive Offices) | 02038 (Zip Code) |
Registrant’s telephone number, including area code:(508) 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 filerþ Non-accelerated filero
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 August 6, 2007: 8,067,867
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Ex-31.1 Certification of CEO | ||||||||
Ex-31.2 Certification of CFO | ||||||||
Ex-32.1 Certification of CEO | ||||||||
EX-32.2 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)
June 30, | December 31, | |||||||
2007 | 2006 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 14,484 | $ | 16,115 | ||||
Cash supplied to ATM customers | 46,630 | 39,732 | ||||||
Short-term investments | 10,461 | 16,748 | ||||||
Total cash and cash equivalents | 71,575 | 72,595 | ||||||
Securities available for sale, at fair value | 152,033 | 126,982 | ||||||
Securities held to maturity, at amortized cost | 27 | 31 | ||||||
Restricted equity securities, at cost | 11,184 | 10,951 | ||||||
�� | ||||||||
Total securities | 163,244 | 137,964 | ||||||
Loans | ||||||||
Residential real estate | 199,923 | 212,131 | ||||||
Commercial real estate | 259,225 | 231,372 | ||||||
Construction | 68,090 | 68,877 | ||||||
Commercial business | 34,566 | 28,871 | ||||||
Consumer | 40,114 | 39,656 | ||||||
Net deferred loan costs | 897 | 913 | ||||||
Total loans, gross | 602,815 | 581,820 | ||||||
Allowance for loan losses | (5,887 | ) | (5,781 | ) | ||||
Loans, net | 596,928 | 576,039 | ||||||
Loans held for sale, net | — | 63,730 | ||||||
Premises and equipment, net | 5,429 | 5,202 | ||||||
Accrued interest receivable | 3,499 | 3,480 | ||||||
Bank-owned life insurance | 10,493 | 10,298 | ||||||
Goodwill | 33,763 | 33,763 | ||||||
Other intangible assets | 2,827 | 3,069 | ||||||
Other assets | 8,442 | 7,538 | ||||||
$ | 896,200 | $ | 913,678 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Regular savings accounts | $ | 82,353 | $ | 81,569 | ||||
Money market accounts | 108,484 | 93,988 | ||||||
NOW accounts | 48,794 | 28,606 | ||||||
Demand deposit accounts | 122,102 | 120,966 | ||||||
Time deposit accounts | 273,154 | 308,050 | ||||||
Total deposits | 634,887 | 633,179 | ||||||
Short-term borrowings | 3,000 | 10,000 | ||||||
Long-term debt | 138,884 | 148,969 | ||||||
Deferred gain on sale of premises | 3,657 | 3,783 | ||||||
Other liabilities | 8,404 | 8,342 | ||||||
Total liabilities | 788,832 | 804,273 | ||||||
Common stock, no par value; 75,000,000 shares authorized; 8,304,287 shares issued and 8,085,952 shares outstanding at June 30, 2007; 8,468,137 shares issued and 8,249,802 shares outstanding at December 31, 2006 | — | — | ||||||
Additional paid-in capital | 80,900 | 82,909 | ||||||
Retained earnings | 37,210 | 36,634 | ||||||
Unearned compensation | (7,516 | ) | (7,938 | ) | ||||
Accumulated other comprehensive loss | (3,226 | ) | (2,200 | ) | ||||
Total stockholders’ equity | 107,368 | 109,405 | ||||||
$ | 896,200 | $ | 913,678 | |||||
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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | 9,712 | $ | 9,236 | $ | 19,418 | $ | 18,078 | ||||||||
Debt securities | 1,953 | 1,377 | 3,639 | 2,639 | ||||||||||||
Dividends | 165 | 23 | 331 | 143 | ||||||||||||
Short-term investments | 222 | 186 | 503 | 402 | ||||||||||||
Total interest and dividend income | 12,052 | 10,822 | 23,891 | 21,262 | ||||||||||||
Interest expense: | ||||||||||||||||
Interest on deposits | 4,308 | 3,535 | 8,464 | 6,637 | ||||||||||||
Interest on borrowings | 1,692 | 1,373 | 3,549 | 2,799 | ||||||||||||
Total interest expense | 6,000 | 4,908 | 12,013 | 9,436 | ||||||||||||
Net interest income | 6,052 | 5,914 | 11,878 | 11,826 | ||||||||||||
Provision (credit) for loan losses | (24 | ) | 122 | 146 | 128 | |||||||||||
Net interest income, after provision for loan losses | 6,076 | 5,792 | 11,732 | 11,698 | ||||||||||||
Other income: | ||||||||||||||||
ATM servicing fees | 622 | 752 | 1,319 | 1,377 | ||||||||||||
Deposit service fees | 369 | 341 | 709 | 670 | ||||||||||||
Loan servicing fees | 141 | 155 | 472 | 277 | ||||||||||||
Gain on sale of loans, net | 193 | 73 | 296 | 138 | ||||||||||||
Security impairment writedown | — | (35 | ) | — | (35 | ) | ||||||||||
Gain on sale of bank-owned premises, net | 63 | — | 313 | — | ||||||||||||
Gain on sale of CSSI customer list | 100 | — | 100 | — | ||||||||||||
Income from bank-owned life insurance | 99 | 85 | 195 | 150 | ||||||||||||
Miscellaneous | 206 | 206 | 361 | 410 | ||||||||||||
Total other income | 1,793 | 1,577 | 3,765 | 2,987 | ||||||||||||
Operating expenses: | ||||||||||||||||
Salaries and employee benefits | 3,829 | 2,725 | 7,442 | 5,446 | ||||||||||||
Occupancy and equipment | 836 | 642 | 1,744 | 1,308 | ||||||||||||
Data processing | 598 | 452 | 1,202 | 900 | ||||||||||||
Professional fees | 235 | 355 | 472 | 733 | ||||||||||||
Marketing and advertising | 201 | 148 | 329 | 310 | ||||||||||||
Amortization of intangible assets | 205 | 277 | 422 | 578 | ||||||||||||
Other general and administrative | 775 | 786 | 1,867 | 1,441 | ||||||||||||
Total operating expenses | 6,679 | 5,385 | 13,478 | 10,716 | ||||||||||||
Income before income taxes | 1,190 | 1,984 | 2,019 | 3,969 | ||||||||||||
Provision for income taxes | 361 | 724 | 599 | 1,441 | ||||||||||||
Net income | $ | 829 | $ | 1,260 | $ | 1,420 | $ | 2,528 | ||||||||
Weighted-average shares outstanding: | ||||||||||||||||
Basic | 7,663,634 | 8,030,629 | 7,739,036 | 8,028,636 | ||||||||||||
Diluted | 7,699,363 | 8,030,629 | 7,768,666 | 8,028,636 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.11 | $ | 0.16 | $ | 0.18 | $ | 0.32 | ||||||||
Diluted | $ | 0.11 | $ | 0.16 | $ | 0.18 | $ | 0.32 |
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, except share amounts)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Unearned | Comprehensive | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Compensation | Loss | Equity | ||||||||||||||||||||||
Balance at December 31, 2005 | 8,488,898 | $ | — | $ | 82,849 | $ | 32,942 | $ | (5,353 | ) | $ | (2,326 | ) | $ | 108,112 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | — | — | — | 2,528 | — | — | 2,528 | |||||||||||||||||||||
Net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects | — | — | — | — | — | (976 | ) | (976 | ) | |||||||||||||||||||
Total comprehensive income | 1,552 | |||||||||||||||||||||||||||
Release of ESOP stock | — | — | 17 | — | 92 | — | 109 | |||||||||||||||||||||
Dividends declared ($.06 per share) | — | — | — | (508 | ) | — | — | (508 | ) | |||||||||||||||||||
Balance at June 30, 2006 | 8,488,898 | $ | — | $ | 82,866 | $ | 34,962 | $ | (5,261 | ) | $ | (3,302 | ) | $ | 109,265 | |||||||||||||
Balance at December 31, 2006 | 8,249,802 | $ | — | $ | 82,909 | $ | 36,634 | $ | (7,938 | ) | $ | (2,200 | ) | $ | 109,405 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | — | — | — | 1,420 | — | — | 1,420 | |||||||||||||||||||||
Net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects | — | — | — | — | — | (1,127 | ) | (1,127 | ) | |||||||||||||||||||
Total comprehensive income | 293 | |||||||||||||||||||||||||||
Common stock repurchased | (163,850 | ) | — | (2,449 | ) | — | — | — | (2,449 | ) | ||||||||||||||||||
Restricted stock expense | — | — | — | — | 330 | — | 330 | |||||||||||||||||||||
Stock option expense | — | — | 413 | — | — | — | 413 | |||||||||||||||||||||
Release of ESOP stock | — | — | 27 | — | 92 | — | 119 | |||||||||||||||||||||
FASB Statement No. 158 tax effect adjustment | — | — | — | — | — | 101 | 101 | |||||||||||||||||||||
Dividends declared ($.10 per share) | — | — | — | (844 | ) | — | — | (844 | ) | |||||||||||||||||||
Balance at June 30, 2007 | 8,085,952 | $ | — | $ | 80,900 | $ | 37,210 | $ | (7,516 | ) | $ | (3,226 | ) | $ | 107,368 | |||||||||||||
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)
Six Months Ended June 30, | ||||||||
2007 | 2006 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,420 | $ | 2,528 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Accretion of securities, net | (341 | ) | (398 | ) | ||||
Amortization (accretion) of loans, net | 64 | (45 | ) | |||||
Gain on sale of bank-owned premises, net | (313 | ) | — | |||||
Provision for loan losses | 146 | 128 | ||||||
Accretion of deposits and borrowings, net | (6 | ) | (26 | ) | ||||
Amortization of mortgage servicing rights | 152 | 124 | ||||||
Depreciation and amortization | 465 | 499 | ||||||
Amortization of intangible assets | 422 | 578 | ||||||
Stock-based compensation and ESOP expense | 862 | 109 | ||||||
Income from bank-owned life insurance | (195 | ) | (150 | ) | ||||
Gains on sales of loans, net | (296 | ) | (138 | ) | ||||
Loans originated for sale | (26,560 | ) | (12,849 | ) | ||||
Proceeds from sales of loans | 26,856 | 12,987 | ||||||
Increase in accrued interest receivable | (19 | ) | (132 | ) | ||||
Security impairment writedown | — | 35 | ||||||
Other, net | (697 | ) | 977 | |||||
Net cash provided by operating activities | 1,960 | 4,227 | ||||||
Cash flows from investing activities: | ||||||||
Activity in available-for-sale securities: | ||||||||
Maturities, calls, and principal repayments | 30,220 | 41,780 | ||||||
Purchases | (56,342 | ) | (44,403 | ) | ||||
Principal repayments on held-to-maturity securities | 4 | 49 | ||||||
Net change in restricted equity securities | (233 | ) | (503 | ) | ||||
Purchases of mortgage loans | — | (16,118 | ) | |||||
Loan originations, net | (20,036 | ) | (2,791 | ) | ||||
Proceeds from sales of loans held for sale | 62,122 | — | ||||||
Proceeds from sales of bank-owned premises | 821 | — | ||||||
Purchases of bank-owned life insurance | — | (2,500 | ) | |||||
Purchases of identifiable intangible assets | (180 | ) | — | |||||
Additions to premises and equipment | (692 | ) | (479 | ) | ||||
Net cash provided by (used for) investing activities | 15,684 | (24,965 | ) | |||||
(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)
Six Months Ended June 30, | ||||||||
2007 | 2006 | |||||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 1,726 | 17,869 | ||||||
Net proceeds from (repayments of) short-term borrowings | (7,000 | ) | 15,000 | |||||
Proceed from long-term debt | 10,000 | — | ||||||
Repayments of long-term debt | (20,097 | ) | (5,403 | ) | ||||
Common stock repurchased | (2,449 | ) | — | |||||
Dividends paid on common stock | (844 | ) | (508 | ) | ||||
Net cash provided by (used for) financing activities | (18,664 | ) | 26,958 | |||||
Net change in cash and cash equivalents | (1,020 | ) | 6,220 | |||||
Cash and cash equivalents at beginning of period | 72,595 | 65,750 | ||||||
Cash and cash equivalents at end of period | $ | 71,575 | $ | 71,970 | ||||
Supplemental cash flow information: | ||||||||
Interest paid on deposits | $ | 8,591 | $ | 6,676 | ||||
Interest paid on short-term borrowings | 147 | 39 | ||||||
Interest paid on long-term debt | 3,429 | 2,773 | ||||||
Income taxes paid | 989 | 1,920 | ||||||
Loans held for sale transferred to loans, net | 1,063 | — | ||||||
Loans held for sale transferred to other assets | 545 | — |
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, 2006. | ||
Recent Accounting Pronouncements | ||
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement is effective for the Company on January 1, 2008 and is not expected to have a material impact on the Company’s consolidated financial statements. | ||
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, to permit all entities to choose to elect to measure eligible financial instruments at fair value. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings. Eligible items include any recognized financial assets and liabilities with certain exceptions including but not limited to, deposit liabilities, investments in subsidiaries, and certain deferred compensation arrangements. The decision about whether to elect the fair value option is generally applied on an instrument-by-instrument basis, is generally irrevocable, and is applied only to an entire instrument and not to only specified risks, specific cash flows, or portions of that instrument. This Statement is effective as of the beginning of each reporting entity’s first fiscal year that begins after November 15, 2007. Management is currently analyzing the impact of making this election for any of the Company’s eligible financial assets or liabilities. | ||
In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets”, which amends FASB Statement No. 140. This Statement requires 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 Statement permits 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 (the “fair value method”). This Statement also requires additional disclosures for all separately recognized servicing rights. The Company adopted SFAS No. 156 effective January 1, 2007. Adoption had no effect on the Company’s financial statements. | ||
In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting |
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for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has determined that the adoption of FIN 48 did not have a material effect on the financial statements. | ||
2. | Commitments | |
Outstanding loan commitments totaled $114.4 million at June 30, 2007, compared to $108.1 million as of December 31, 2006. Loan commitments consist of commitments to originate new loans as well as the outstanding undrawn portions of lines of credit. | ||
The Bank has received approval from the Massachusetts Commissioner of Banks and the FDIC to open a new branch in Watertown, Massachusetts. It is anticipated that this branch will become operational in August of 2007. The annual direct costs of operating this branch are estimated at $700,000, including annual lease payments for the new branch facility of approximately $127,000 per annum for the initial ten-year term of the lease. | ||
3. | Earnings per share | |
Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were issued during the period. For the three and six month periods ending June 30, 2007, potentially dilutive common stock equivalents totaled 35,729 and 29,630 shares, respectively, representing the effect of dilutive restricted stock. There were no potentially dilutive common stock equivalents outstanding during the comparable periods in 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. |
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.
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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 2006 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, 2006.
Comparison of Financial Condition at June 30, 2007 and December 31, 2006
Overview
Total assets decreased by $17.5 million, or 1.9%, to $896.2 million at June 30, 2007 from $913.7 million at December 31, 2006. The reduction in assets was primarily attributable to the liquidation of loans held for sale, which aggregated $63.7 million at December 31, 2006. Offsetting this decrease, in part, was an increase in securities totaling $25.3 million, or 18.3%, and an increase in net portfolio loans outstanding of $20.9 million, or 3.6%, during the first half of 2007. The liquidation of loans held for sale allowed the Bank to pay down borrowings, which decreased in total by $17.1 million, or 10.7%, in the first six months of 2007.
On May 1, 2007, the Bank and its subsidiary, Creative Strategic Solutions, Inc. (“CSSI”), entered into an agreement to sell certain of CSSI’s assets (principally its customer list and rights and obligations under its customer contracts) to another bank with an ATM servicing division. Although most rights and obligations of CSSI and the Bank under its various customer contracts were assigned to the buyer as part of this transaction, the Bank has retained the right to continue to supply ATM cash in accordance with the needs of its former customers, for a minimum of 30 months. At May 1, 2007, the cash needs of CSSI customers approximated $33 million, an amount that subsequently has grown to $46.6 million as of June 30, 2007. The Bank earns fees for supplying this cash at a rate that is tied to the prime rate of interest. This rate will vary over time with changes in prime and with changes in the blended rate paid by former CSSI customers to the buyer. The purchase price for this sale is structured as a series of payments over 24 months, subject to adjustment up or down based on a) former CSSI customer cash balances outstanding, and b) rates paid by former CSSI customers for the use of that cash. The first such payment of $100,000 was received in May 2007. If former CSSI customer balances and rates remain at levels outstanding at closing, the remaining payments to the Bank over the 24-month period will aggregate approximately $300,000.
Investment Activities
Cash and cash equivalent balances decreased by $1.0 million to $71.6 million at June 30, 2007, compared to $72.6 million at December 31, 2006. That change was the result of decreases in cash/correspondent bank balances and short-term investments of $1.6 million and $6.3 million, respectively, offset by an increase in cash supplied to ATM customers of $6.9 million. The increase in ATM cash outstanding is the result of normal seasonal fluctuations.
At June 30, 2007, the Company’s investment portfolio amounted to $163.2 million, or 18.2% of total assets. When compared to year end 2006, securities increased by $25.3 million, or 18.3%, as of June 30, 2007. The increase, almost entirely made up of increases in mortgage-backed securities, was the result of the re-deployment of part of the proceeds realized upon the sale of $63.7 million of loans held for sale during the first half of 2007. The following table sets forth certain information regarding the amortized cost and fair values of the Company’s securities at the dates indicated:
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June 30, 2007 | December 31, 2006 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
Government-sponsored enterprise obligations | $ | 92,171 | $ | 91,985 | $ | 97,723 | $ | 97,502 | ||||||||
Municipal obligations | 1,707 | 1,692 | 1,707 | 1,687 | ||||||||||||
Mortgage-backed securities | 61,691 | 58,356 | 29,677 | 27,793 | ||||||||||||
Total securities available for sale | $ | 155,569 | $ | 152,033 | $ | 129,107 | $ | 126,982 | ||||||||
Securities held to maturity: | ||||||||||||||||
Mortgage-backed securities | $ | 27 | $ | 27 | $ | 31 | $ | 31 | ||||||||
Restricted equity securities: | ||||||||||||||||
Federal Home Loan Bank of Boston stock | $ | 8,703 | $ | 8,703 | $ | 8,470 | $ | 8,470 | ||||||||
Access Capital Strategies Community Investment Fund | 1,965 | 1,965 | 1,965 | 1,965 | ||||||||||||
SBLI & DIF stock | 516 | 516 | 516 | 516 | ||||||||||||
Total restricted equity securities | $ | 11,184 | $ | 11,184 | $ | 10,951 | $ | 10,951 | ||||||||
Lending Activities
The Company’s net loan portfolio aggregated $596.9 million on June 30, 2007, or 66.6% of total assets on that date. As of December 31, 2006, the net loan portfolio, including loans held for sale, totaled $639.8 million, or 70.0% of total assets. In February of 2007, the Company sold $63.7 million of below-market-rate adjustable rate residential mortgage loans that had previously been designated as held for sale in the fourth quarter of 2006. Much of the proceeds realized was reinvested in securities (net growth of $25.3 million) and in commercial real estate and commercial business loans, which increased (net) by $27.9 million and $5.7 million, respectively, during the first half of 2007. Proceeds were also used to pay down borrowed funds, which decreased by $17.1 million during the six months ended June 30, 2007. Residential mortgage loans outstanding (excluding loans held for sale) decreased by $12.2 million or 5.8% during the first six months of 2007. Most new residential loan originations are fixed rate loans, which the Company sells in the secondary market. The following table sets forth the composition of the loan portfolio at the dates indicated:
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June 30, 2007 | December 31, 2006 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||
Residential | $ | 199,923 | 33.2 | % | $ | 212,131 | 36.5 | % | ||||||||
Commercial | 259,225 | 43.1 | % | 231,372 | 39.8 | % | ||||||||||
Construction | 68,090 | 11.3 | % | 68,877 | 11.9 | % | ||||||||||
Home equity | 37,584 | 6.2 | % | 36,546 | 6.3 | % | ||||||||||
564,822 | 93.8 | % | 548,926 | 94.5 | % | |||||||||||
Other loans: | ||||||||||||||||
Commercial business | 34,566 | 5.8 | % | 28,871 | 5.0 | % | ||||||||||
Consumer | 2,530 | 0.4 | % | 3,110 | 0.5 | % | ||||||||||
37,096 | 6.2 | % | 31,981 | 5.5 | % | |||||||||||
Total loans, gross | 601,918 | 100.0 | % | 580,907 | 100.0 | % | ||||||||||
Other items: | ||||||||||||||||
Net deferred loan costs | 897 | 913 | ||||||||||||||
Allowance for loan losses | (5,887 | ) | (5,781 | ) | ||||||||||||
Total loans, net | $ | 596,928 | $ | 576,039 | ||||||||||||
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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June 30, 2007 | December 31, 2006 | |||||||
(Dollars in thousands) | ||||||||
Non-accrual loans: | ||||||||
Residential mortgage | $ | 1,189 | $ | 230 | ||||
Commercial mortgage | 2,247 | 1,257 | ||||||
Construction | — | — | ||||||
Commercial business | — | — | ||||||
Consumer | 161 | 61 | ||||||
Total non-accrual loans | $ | 3,597 | (2) | $ | 1,548 | |||
Loans greater than 90 days delinquent and still accruing: | ||||||||
Residential mortgage | $ | — | $ | — | ||||
Commercial mortgage | — | — | ||||||
Construction | — | — | ||||||
Commercial business | — | — | ||||||
Consumer | — | — | ||||||
Total loans 90 days and still accruing | $ | — | $ | — | ||||
Total non-performing assets | $ | 3,597 | $ | 1,548 | ||||
Ratios: | ||||||||
Non-performing loans to total loans(1) | 0.60 | % | 0.24 | % | ||||
Non-performing assets to total assets | 0.40 | % | 0.17 | % |
(1) | Total loans include loans held for sale. | |
(2) | The increase in non-accrual loans at June 30, 2007 compared to year end 2006 is due primarily to the addition of two commercial loans totalling $1.0 million, which management believes are well-secured, and to the addition of several residential mortgage loans totalling approximately $960,000. Residential mortgage loans on non-accrual are also generally well-secured, with the exception of two loans that carry $186,000 in specific reserves within the allowance for loan losses. |
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 borrowers’ abilities 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.
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The allowance consists of specific, general and unallocated components. The specific component relates to loans that are impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors considered include general business and economic conditions, the level of real estate values in Massachusetts, the tenure and experience of the Company’s lending staff, the seasoning of the loan portfolio, and delinquency trends in the loan portfolio. 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.
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 June 30, 2007 and December 31, 2006, the Company’s impaired loans totaled $2.9 million and $1.3 million, respectively. At June 30, 2007, $186,000 was carried as a specific valuation allowance within the allowance for loan losses for impaired loans. At December 31, 2006, no specific valuation allowance was carried for impaired loans.
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.
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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Balance at beginning of period | $ | 5,929 | $ | 5,666 | $ | 5,781 | $ | 5,670 | ||||||||
Charge-offs: | ||||||||||||||||
Mortgage loans on real estate | — | — | — | — | ||||||||||||
Other loans: | ||||||||||||||||
Commercial business | (2 | ) | — | (7 | ) | — | ||||||||||
Consumer | (29 | ) | (17 | ) | (61 | ) | (46 | ) | ||||||||
Total other loans | (31 | ) | (17 | ) | (68 | ) | (46 | ) | ||||||||
Total charge-offs | (31 | ) | (17 | ) | (68 | ) | (46 | ) | ||||||||
Recoveries: | ||||||||||||||||
Mortgage loans on real estate | — | — | — | — | ||||||||||||
Other loans: | ||||||||||||||||
Commercial business | 2 | 16 | 4 | 24 | ||||||||||||
Consumer | 11 | 10 | 24 | 21 | ||||||||||||
Total other loans | 13 | 26 | 28 | 45 | ||||||||||||
Total recoveries | 13 | 26 | 28 | 45 | ||||||||||||
Net (charge-offs) recoveries | (18 | ) | 9 | (40 | ) | (1 | ) | |||||||||
Provision (credit) for loan losses | (24 | ) | 122 | 146 | 128 | |||||||||||
Balance at end of period | $ | 5,887 | $ | 5,797 | $ | 5,887 | $ | 5,797 | ||||||||
Ratios: | ||||||||||||||||
Net (charge-offs) recoveries to average loans outstanding (annualized) | -0.01 | % | 0.01 | % | -0.01 | % | 0.00 | % | ||||||||
Allowance for loan losses to non-performing loans at end of period | 163.66 | % | 4354.94 | % | 163.66 | % | 4354.94 | % | ||||||||
Allowance for loan losses to total loans at end of period | 0.98 | % | 0.92 | % | 0.98 | % | 0.92 | % |
Deposits
The following table sets forth the Company’s deposit accounts for the periods indicated:
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June 30, | % of | December 31, | % of | |||||||||||||
2007 | Total | 2006 | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Deposit type: | ||||||||||||||||
Demand deposit accounts | $ | 122,102 | 19.2 | % | $ | 120,966 | 19.1 | % | ||||||||
NOW accounts | 48,794 | 7.7 | % | 28,606 | 4.5 | % | ||||||||||
Regular savings accounts | 82,353 | 13.0 | % | 81,569 | 12.9 | % | ||||||||||
Money market accounts | 108,484 | 17.1 | % | 93,988 | 14.8 | % | ||||||||||
Total non-certificate accounts | 361,733 | 57.0 | % | 325,129 | 51.3 | % | ||||||||||
Term certificates less than $100,000 | 162,801 | 25.6 | % | 176,677 | 27.9 | % | ||||||||||
Term certificates of $100,000 or more | 110,353 | 17.4 | % | 131,373 | 20.8 | % | ||||||||||
Total certificate accounts | 273,154 | 43.0 | % | 308,050 | 48.7 | % | ||||||||||
Total deposits | $ | 634,887 | 100.0 | % | $ | 633,179 | 100.0 | % | ||||||||
In the first half of 2007, total deposits increased by $1.7 million, or 0.3%, compared to December 31, 2006. Though the increase was small, the mix of deposits improved, as core deposit accounts increased in the aggregate by $36.6 million or 11.3% during the first six months of 2007. This growth was primarily the result of increased commercial cash management offerings and associated sales efforts, as well as to the introduction of new retail deposit product offerings. A $34.9 million decrease in time deposits during the first six months of 2007 occurred as the Bank cut back its premium-rate promotional certificate offerings.
Borrowed Funds
Borrowed funds decreased by $17.1 million, or 10.7%, during the first half of 2007. The reduction was the result of the repayment of $7.0 million in short-term borrowings with the Federal Home Loan Bank of Boston (“FHLBB”) and the repayment of $10.1 million of long-term FHLBB advances. These repayments were made with the liquidity provided by loan sales during the first six months of the year.
Stockholder’s Equity
Total stockholders’ equity was $107.4 million as of June 30, 2007, a decrease of $2.0 million when compared to the balance at December 31, 2006. The decrease was primarily attributable to the repurchase of 163,850 shares ($2.4 million), dividends paid ($844,000), and a decrease in the fair value of securities available for sale ($1.1 million), offset in part by earnings of $1.4 million and amortization of unearned compensation ($862,000).
Comparison of Operating Results for the Three and Six Months Ended June 30, 2007 and 2006
The Company earned net income of $829,000 for the quarter ended June 30, 2007, a decrease of $431,000, or 34.2%, compared to net income of $1.3 million earned in the second quarter of 2006. The earnings decline primarily reflected higher operating expenses, which were partially offset by growth in net interest income and non-interest income and a decrease in the loan loss provision.
The Company earned net income of $1.4 million for the six months ended June 30, 2007, a decline of $1.1 million, or 43.8%, compared to the $2.5 million earned in the first six months of 2006. Growth in operating expenses when comparing the two six-month periods more than offset enhanced non-interest income, while net interest income was little changed.
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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:
Three Months Ended June 30, | ||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Outstanding | Outstanding | |||||||||||||||||||||||
Balance | Interest | Yield/Rate(1) | Balance | Interest | Yield/Rate(1) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 604,459 | $ | 9,712 | 6.38 | % | $ | 620,986 | $ | 9,236 | 5.91 | % | ||||||||||||
Securities | 169,543 | 2,118 | 5.00 | % | 139,739 | 1,400 | 3.94 | % | ||||||||||||||||
Short-term investments | 12,891 | 222 | 6.81 | % | 15,504 | 186 | 4.75 | % | ||||||||||||||||
Total interest-earning assets | 786,893 | 12,052 | 6.09 | % | 776,229 | 10,822 | 5.54 | % | ||||||||||||||||
Non-interest-earning assets | 109,495 | 113,054 | ||||||||||||||||||||||
Total assets | $ | 896,388 | $ | 889,283 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings accounts | $ | 83,086 | 103 | 0.50 | % | $ | 94,810 | 121 | 0.51 | % | ||||||||||||||
Money market accounts | 108,825 | 748 | 2.76 | % | 116,061 | 716 | 2.47 | % | ||||||||||||||||
NOW accounts | 38,269 | 217 | 2.27 | % | 28,250 | 10 | 0.15 | % | ||||||||||||||||
Certificates of deposit | 284,314 | 3,240 | 4.57 | % | 277,996 | 2,688 | 3.88 | % | ||||||||||||||||
Total deposits | 514,494 | 4,308 | 3.36 | % | 517,117 | 3,535 | 2.74 | % | ||||||||||||||||
Borrowings | 140,225 | 1,692 | 4.77 | % | 126,214 | 1,373 | 4.30 | % | ||||||||||||||||
Total interest-bearing liabilities | 654,719 | 6,000 | 3.66 | % | 643,331 | 4,908 | 3.05 | % | ||||||||||||||||
Non-interest bearing liabilities | 132,490 | 136,999 | ||||||||||||||||||||||
Total liabilities | 787,209 | 780,330 | ||||||||||||||||||||||
Equity | 109,179 | 108,953 | ||||||||||||||||||||||
Total liabilities and equity | $ | 896,388 | $ | 889,283 | ||||||||||||||||||||
Net interest income | $ | 6,052 | $ | 5,914 | ||||||||||||||||||||
Net interest rate spread(2) | 2.43 | % | 2.49 | % | ||||||||||||||||||||
Net interest-earning assets(3) | $ | 132,174 | $ | 132,898 | ||||||||||||||||||||
Net interest margin(4) | 3.08 | % | 3.06 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 120.19 | % | 120.66 | % |
(1) | Yields and rates for the three months ended June 30, 2007 and 2006 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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Six Months Ended June 30, | ||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Outstanding | Outstanding | |||||||||||||||||||||||
Balance | Interest | Yield/Rate(1) | Balance | Interest | Yield/Rate(1) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 615,099 | $ | 19,418 | 6.30 | % | $ | 613,788 | $ | 18,078 | 5.88 | % | ||||||||||||
Securities | 160,220 | 3,970 | 4.96 | % | 138,280 | 2,782 | 4.03 | % | ||||||||||||||||
Short-term investments | 17,600 | 503 | 5.69 | % | 17,589 | 402 | 4.55 | % | ||||||||||||||||
Total interest-earning assets | 792,919 | 23,891 | 6.01 | % | 769,657 | 21,262 | 5.51 | % | ||||||||||||||||
Non-interest-earning assets | 109,016 | 114,487 | ||||||||||||||||||||||
Total assets | $ | 901,935 | $ | 884,144 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings deposits | $ | 83,315 | 205 | 0.50 | % | $ | 95,712 | 239 | 0.50 | % | ||||||||||||||
Money market accounts | 103,693 | 1,368 | 2.66 | % | 107,372 | 1,226 | 2.30 | % | ||||||||||||||||
NOW accounts | 33,390 | 307 | 1.86 | % | 27,706 | 20 | 0.15 | % | ||||||||||||||||
Certificates of deposit | 290,765 | 6,585 | 4.57 | % | 276,957 | 5,152 | 3.75 | % | ||||||||||||||||
Total deposits | 511,163 | 8,465 | 3.34 | % | 507,747 | 6,637 | 2.64 | % | ||||||||||||||||
Borrowings | 149,136 | 3,548 | 4.73 | % | 131,314 | 2,799 | 4.24 | % | ||||||||||||||||
Total interest-bearing liabilities | 660,299 | 12,013 | 3.65 | % | 639,061 | 9,436 | 2.97 | % | ||||||||||||||||
Non-interest bearing liabilities | 132,130 | 136,372 | ||||||||||||||||||||||
Total liabilities | 792,429 | 775,433 | ||||||||||||||||||||||
Equity | 109,506 | 108,711 | ||||||||||||||||||||||
Total liabilities and equity | $ | 901,935 | $ | 884,144 | ||||||||||||||||||||
Net interest income | $ | 11,878 | $ | 11,826 | ||||||||||||||||||||
Net interest rate spread(2) | 2.36 | % | 2.54 | % | ||||||||||||||||||||
Net interest-earning assets(3) | $ | 132,620 | $ | 130,596 | ||||||||||||||||||||
Net interest margin(4) | 3.02 | % | 3.10 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 120.08 | % | 120.44 | % |
(1) | Yields and rates for the six months ended June 30, 2007 and 2006 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. |
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
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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 June 30, | ||||||||||||
2007 vs. 2006 | ||||||||||||
Increase (Decrease) | ||||||||||||
Due to | Total | |||||||||||
Increase | ||||||||||||
Volume | Rate | (Decrease) | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | (251 | ) | $ | 727 | $ | 476 | |||||
Securities | 333 | 385 | 718 | |||||||||
Short-term investments | (35 | ) | 71 | 36 | ||||||||
Total interest-earning assets | 47 | 1,183 | 1,230 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Savings accounts | (15 | ) | (3 | ) | (18 | ) | ||||||
Money market accounts | (46 | ) | 78 | 32 | ||||||||
NOW accounts | 5 | 202 | 207 | |||||||||
Certificates of deposit | 62 | 490 | 552 | |||||||||
Total deposits | 6 | 767 | 773 | |||||||||
Borrowings | 161 | 158 | 319 | |||||||||
Total interest-bearing liabilities | 167 | 925 | 1,092 | |||||||||
Change in net interest income | $ | (120 | ) | $ | 258 | $ | 138 | |||||
Six Months Ended June 30, | ||||||||||||
2007 vs. 2006 | ||||||||||||
Increase (Decrease) | ||||||||||||
Due to | Total | |||||||||||
Increase | ||||||||||||
Volume | Rate | (Decrease) | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 39 | $ | 1,301 | $ | 1,340 | ||||||
Securities | 483 | 705 | 1,188 | |||||||||
Short-term investments | — | 101 | 101 | |||||||||
Total interest-earning assets | 522 | 2,107 | 2,629 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Savings accounts | (31 | ) | (3 | ) | (34 | ) | ||||||
Money market accounts | (43 | ) | 185 | 142 | ||||||||
NOW accounts | 5 | 282 | 287 | |||||||||
Certificates of deposit | 267 | 1,166 | 1,433 | |||||||||
Total deposits | 198 | 1,630 | 1,828 | |||||||||
Borrowings | 404 | 345 | 749 | |||||||||
Total interest-bearing liabilities | 602 | 1,975 | 2,577 | |||||||||
Change in net interest income | $ | (80 | ) | $ | 132 | $ | 52 | |||||
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Net interest income for the quarter ended June 30, 2007 was $6.1 million, an increase of $138,000 or 2.3% when compared to $5.9 million earned for the quarter ended June 30, 2006. The $138,000 year-over-year increase was the result of both a two basis point increase in the net interest margin and modest balance sheet growth. Average interest-earning assets increased by $10.7 million, or 1.4%, comparing the two quarters year-over-year.
The Company’s net interest margin was 3.08% for the three months ended June 30, 2007, twelve basis points higher than the first quarter of 2007 and 28 basis points better than a cyclical low of 2.80% in the fourth quarter of 2006. Throughout much of a two-year period, increased price competition for time deposits and money market accounts, as well as a flattening, flat or inverted yield curve, have contributed to a decrease in the Company’s net interest margin. Management actions taken over the past three quarters to counter the downward trend in margin included the sale of $63.7 million of low-rate residential mortgages and a six-branch sale/leaseback transaction, which served to convert non-earning real estate assets to earning assets. In 2007, the Company has worked to reshape its mix of earning assets and deposits to promote the widening of its net interest margin, through growth in core deposit accounts (up $36.6 million or 11.3%) and growth in commercial loans (up $32.8 million or 10.0%).
Interest income for the quarter ended June 30, 2007 was $12.1 million, an increase of $1.2 million or 11.4% compared to $10.8 million earned in the quarter ended June 30, 2006. The $1.2 million increase arose primarily from a 55 basis point increase in the yield earned on average interest-earning assets, complemented slightly by growth of $10.7 million (or 1.4%) in those assets. The largest growth in average interest-earning assets between the two periods was in securities ($29.8 million), while average loan balances declined $16.5 million. In the first quarter of 2007, the Company sold $63.7 million of low-yield residential mortgage loans and used approximately two-thirds of the proceeds to purchase mortgage-backed securities earning current market yields. An increase in the loan yield of 47 basis points, comparing the year-over-year quarterly periods, was caused largely by a shift in loan mix toward higher-earning accounts. The commercial loan portfolio, on average, grew by $70.6 million, or 24.5%, while the residential mortgage portfolio, on average, decreased by $89.1 million, or 30.2%. The yield earned on securities increased by 106 basis points, due both to re-investments of maturities at higher market rates and the purchase of $34.6 million in higher-yielding mortgage-backed securities in the first quarter of 2007.
Interest expense for the three months ended June 30, 2007 was $6.0 million, an increase of $1.1 million or 22.2% over interest expense of $4.9 million for the comparable quarter of 2006. The $1.1 million increase stemmed primarily from a 61 basis point increase in the cost of average interest-bearing liabilities, augmented by an $11.4 million increase in the average balance of those liabilities. Customer demand for time accounts as an alternative to savings products, the short duration of the Company’s time deposit portfolio, and intense pricing competition all fueled a 69 basis point increase in the cost of time accounts, year-over-year. The cost of borrowed funds also increased, by 47 basis points, as new borrowings and rollovers of existing borrowings bore higher prices than in the comparable 2006 period. The growth in average interest-bearing liabilities between the comparable 2007 and 2006 quarters consisted of borrowed funds ($14.0 million), offset in part by a $2.6 million decrease in average deposits. Within the deposit portfolio, time accounts increased on average by $6.3 million, while other interest-bearing deposits decreased on average by $8.9 million.
Net interest income for the first half of 2007 was $11.9 million, a small increase of $52,000, or 0.4%, over the total earned in the first six months of 2006. While the net interest margin declined year-over-year by eight basis points, balance sheet growth offset its negative impact.
Interest income for the six months ended June 30, 2007 was $23.9 million, an increase of $2.6 million or 12.4% compared to $21.3 million earned during the same period of 2006. The $2.6 million increase arose predominantly from a 50 basis point increase in the yield earned on average interest-earning assets, supplemented by growth of $23.3 million (or 3.0%) in those assets. Growth, on average, in the securities portfolio between the two periods was $21.9 million, while average loan balances increased $1.3 million. In the first quarter of 2007, the Company sold $63.7 million of residential mortgage loans and used approximately two-thirds of the proceeds to purchase securities. The increase in earning-asset yield included increases of 42 basis points on loans and 93 basis points
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on securities. A change in mix helped to improve the loan yield, as on average commercial loans grew by $63.0 million, or 21.9%, while residential mortgages decreased by $64.5 million, or 22.3%. The securities yield increased due both to re-investments of maturities at higher market rates and the purchase of $34.6 million in higher-yielding mortgage-backed securities in the first quarter of 2007.
Interest expense for the six months ended June 30, 2007 was $12.0 million, an increase of $2.6 million or 27.3% over interest expense of $9.4 million for the comparable period in 2006. The $2.6 million increase resulted primarily from a 68 basis point increase in the cost of average interest-bearing liabilities, while the average balance of those liabilities increased by $21.2 million, or 3.3%. The 68 basis point increase was due largely to the an 82 basis point rise in the cost of time accounts, as new and rollover money was priced at higher short-term rates prevalent in a highly competitive regional market. The Company also introduced new retail (NOW) and business core deposit products (MMA) to the market over the past twelve months, generating over $46 million in account balances by June 30, 2007, albeit at higher pay rates. The cost of borrowed funds also increased by 49 basis points between the six-month periods, as new borrowings and rollovers bore higher prices. The growth in average interest-bearing liabilities between the comparable 2007 and 2006 six-month periods consisted of $17.8 million in borrowed funds and $3.4 million in deposits.
Provision for Loan Losses
The Company recorded a credit to the provision for loan losses of $24,000 for the three months ended June 30, 2007, compared to a provision of $122,000 for the second quarter of 2006. For the first six months of 2007 and 2006, provisions for loan losses amounted to $146,000 and $128,000, respectively. The provisions generally reflected growth and changes in mix in the loan portfolio. The allowance for loan losses totaled $5.9 million, or .98% of the loan portfolio, at June 30, 2007 as compared to $5.8 million, or .99% of total loans, at December 31, 2006.
The credit provision of $24,000 for the second quarter of 2007 arose primarily from a change made in the method of calculating loan loss reserves for loan commitments and the undrawn portions of lines of credit. The Company re-analyzed the risk characteristics of these various off-balance sheet credit exposures and determined it appropriate to reduce its allowance by $260,000 for this category. Without this reduction, the provision for loan losses for the three and six months ended June 30, 2007 would have approximated $236,000 and $406,000, respectively.
Non-interest Income
Non-interest income increased by $216,000, or 13.7% to $1.8 million for the three-month period ended June 30, 2007, compared to $1.6 million earned in the second quarter of 2006. Approximately 56% of the year-over-year increase, or $120,000, was from incremental gains earned on the sale of residential mortgage loans. The Company sells its fixed rate mortgage originations into the secondary market, and the volume of these loans sold increased by 141.9%, or $13.9 million, year-over-year. Deposit service fees increased in this time frame by $28,000, largely from higher fees earned in the Company’s overdraft checking account product. The Company also recorded $63,000 in income in the three months ended June 30, 2007, representing accretion of a deferred gain on a six branch sale / leaseback transaction completed in the fourth quarter of 2006. The remaining deferred gain of $3.7 million will be accreted into income over the duration of a 15-year lease term.
ATM servicing fees declined by $130,000, or 17.3%, comparing the second quarter of 2007 to 2006. As a result of the sale of certain CSSI assets in May 2007, the Company continues to earn fees for providing cash to former CSSI customers, but those fees are now lower, since the Company is no longer providing full administrative and operational service for these customers. As of May 1, 2007, the rate on cash provided declined to 6.76% from 8.30%, the approximate rate earned in the 6 months prior to the sale. The Company also received $100,000, the first in a series of four payments for the sale, in the second quarter of 2007. If former CSSI customer balances and
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rates remain at levels outstanding at closing, the remaining payments to the Bank will aggregate approximately $300,000.
Non-interest income of $3.8 million for the six-month period ended June 30, 2007 was $777,000 (or 26.0%) higher than the $3.0 million earned in the identical period in 2006. Fees for ATM servicing, including the $100,000 gain on sale of the CSSI customer list, increased by $41,000 or 3.0% in comparing the two six-month periods. Loan servicing fees and gains on sales of loans increased by $197,000 and $159,000, respectively, when comparing the first halves of 2007 and 2006. These increases were largely the result of collection of prepayment penalties and other fees, and growth in sales of fixed rate loans originated and sold, or serviced for others. The Company recorded $313,000 in gains on the sale of bank-owned premises in the first half of 2007, including $187,000 on land for which there were no plans for future use. The remaining $126,000 represented accretion of the deferred gain on the branch sale / leaseback transaction completed in the fourth quarter of 2006. Year-over-year, the Company also benefited from increases of $39,000 (or 5.8%) in deposit service fees and $45,000 in income from bank-owned life insurance. Miscellaneous income declined by $52,000 year-over-year, including a $73,000 drop in investment sales commissions (non-deposit investment products). The Company entered into a strategic alliance in May of 2007 with a small investment services firm, in order to revitalize its investment sales program.
Non-interest Expense
Non-interest expenses totaled $6.7 million for the three-month period ended June 30, 2007, an increase of $1.3 million, or 24.0%, over the $5.4 million incurred during the same quarter in 2006. Non-interest expenses were $13.5 million in the first six months of 2007, $2.8 million or 25.8% higher than the six months ended June 30, 2006. The primary factors for the increases in non-interest expenses include investments in human resources, new customer product offerings, and expansion of the Company’s geographic footprint. The Company has been aggressive in making resource commitments in order to improve business opportunities long-term.
Comparing the second quarter of 2007 to 2006, the largest increase in non-interest expense ($1.1 million, or 40.5%) was in salaries and employee benefits. The Company began to accrue stock compensation expense, in conformity with FAS 123R accounting guidelines, in August 2006. The stock compensation expense for the second quarter of 2007 was $374,000. The Company is using an accelerated method of expense recognition for stock compensation, resulting in higher expenses in the earlier portion of the multi-year vesting periods. Further, since July 2006, the Company has added staff for two new branch locations and other business development staff (commercial lending, commercial cash management and investment sales). In late June of 2007, the Company reduced its staff by 8% (half of which was related to the CSSI operation) and recorded $148,000 in related severance costs. Excluding the effect of changes to CSSI operations, discussed below, the remaining staff reductions are expected to reduce pre-tax operating expenses by approximately $450,000 annually.
Excluding salaries and benefits, all other non-interest expenses for the second quarter of 2007 were $190,000, or 7.1%, higher than the same quarter of 2006, largely because increases in occupancy and equipment and data processing more than offset a decline in professional fees. Occupancy and equipment expenses increased by $194,000 or 30.2%, mainly due to the inception of rental expense at eight locations (two new branches, and six branches involved in a sale/leaseback transaction in December 2006). A $146,000, or 32.3% increase in data processing costs between the two quarters was largely attributable to higher product development, software licensing and support, and service bureau costs. A decrease of $120,000 in professional fees (or 33.8%) between the two periods was primarily attributable to the expiration of consulting contracts entered into in connection with the 2005 Chart Bank merger. In addition, amortization of a core deposit intangible asset created in the Chart Bank transaction decreased $75,000 from the comparable 2006 period.
Salaries and employee benefits expense represented the largest increase comparing the six-month periods ended June 30, 2007 and 2006, rising by $2.0 million or 36.7%. The Company added several positions for two new branches and other business development activities since July 2006. Payroll taxes and insurance costs also increased by 19.6% year-over-year, as a result of both the staffing expansion and higher insurance prices. In
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addition, the accrual for stock compensation expense, which began in August 2006, was $743,000 for the first half of 2007.
Excluding salaries and benefits, all other non-interest expenses combined grew by $765,000, or 14.5%, comparing the six-month periods ended 2007 to 2006. Occupancy and equipment expenses increased by $435,000 or 33.3%, mainly due to the inception of rental expense at eight locations (two new branches, and six branches involved in a sale/leaseback transaction in December 2006). A $302,000, or 33.6% increase in data processing costs between the two six-month periods was largely attributable to higher product development, software licensing and support, and service bureau costs. General and administrative expense increased by $427,000 or 29.6% between the two periods as well. The Company accelerated its amortization of capitalized debt issuance costs in connection with its intention to prepay $9.0 million of subordinated debt in November 2007, resulting in $189,000 of increased costs year-over-year. In addition, the Company expensed $130,000 for costs that it expects to incur upon the operational transition of the ATM cash management business. Amortization of a core deposit intangible asset created in a 2005 acquisition fell $159,000 from the comparable six-month period in 2006, and will continue to decline in future periods. In addition, a drop of $261,000 (35.6%) in professional fees between the two six-month periods was primarily attributable to the expiration of consulting contracts entered into in connection with the Chart Bank merger, as well as smaller reductions in legal and external audit fees.
The sale of certain CSSI assets in May of 2007 will have the effect of reducing the Company’s operating expenses in the future. The total direct operating expenses of CSSI were $947,000 and $611,000 in the year ended December 31, 2006 and the six months ended June 30, 2007, respectively. Measured against operating expenses incurred in the first half of 2007, CSSI-related operating expenses are expected to decline by approximately 85%, beginning in the third quarter of 2007.
Income Taxes
Income tax expense of $361,000 recorded for the second quarter of 2007 resulted in an effective tax rate of 30.3%. In the second quarter of 2006, the income tax expense of $724,000 equated to an effective tax rate of 36.5%. Income tax expense of $599,000 for the six months ended June 30, 2007 resulted in an effective tax rate of 29.7%, while for the same six-month period in 2006 the income tax expense was $1.4 million, resulting in an effective tax rate of 36.3%. The lower effective tax rate in the 2007 periods partially reflects favorable tax treatment on the gain on sale of bank-owned land, as well as a higher relative proportion of taxable income being earned at the Benjamin Franklin Securities Corporation, whose earnings are taxed at lower state rates.
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 and mortgage-backed security 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 June 30, 2007, cash and due from banks, short-term investments and debt securities maturing within one year totaled $83.9 million (excluding cash supplied to ATM customers) or 9.4% of total assets.
The Company borrows from the Federal Home Loan Bank of Boston as an additional funding source. As of June 30, 2007, the Company had the ability to borrow an additional $59.4 million from the Federal Home Loan Bank of Boston.
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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:
June 30, 2007 | ||||||||||||||||||||
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) | $ | 132,884 | $ | 32,000 | $ | 60,000 | $ | 33,000 | $ | 7,884 | ||||||||||
Subordinated debt | 9,000 | — | — | — | 9,000 | |||||||||||||||
Operating leases(2) | 13,212 | 1,155 | 2,056 | 1,904 | 8,097 | |||||||||||||||
Other contractual obligations(3) | 7,155 | 3,635 | 3,520 | — | — | |||||||||||||||
Total contractual obligations | $ | 162,251 | $ | 36,790 | $ | 65,576 | $ | 34,904 | $ | 24,981 | ||||||||||
(1) | Secured under a blanket security agreement on qualifying assets, principally 1-4 Family Residential mortgage loans. | |
An 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. |
Loan Commitments
June 30, 2007 | ||||||||||||||||||||
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) | $ | 20,259 | $ | 20,259 | $ | — | $ | — | $ | — | ||||||||||
Unused portion of commercial loan lines of credit | 25,307 | 24,431 | 876 | — | — | |||||||||||||||
Unused portion of home equity lines of credit(2) | 41,897 | — | — | — | 41,897 | |||||||||||||||
Unused portion of construction lines of credit(3) | 23,065 | 20,192 | 2,829 | — | 44 | |||||||||||||||
Unused portion of personal lines of credit(4) | 2,423 | — | — | — | 2,423 | |||||||||||||||
Commercial letter of credit | 1,413 | 1,413 | — | — | — | |||||||||||||||
Total loan commitments | $ | 114,364 | $ | 66,295 | $ | 3,705 | $ | — | $ | 44,364 | ||||||||||
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 to grant loans are extended to customers for up to 180 days after which they expire. | |
(2) | Unused portions of home equity lines of credit are available to the borrower for up to 10 years. | |
(3) | Unused portions of construction lines of credit are available to the borrower for up to 2 years for development loans and up to 1 year for other construction loans. | |
(4) | Unused portions of personal lines of credit are available to customers in “good standing” indefinitely. |
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Minimum Regulatory Capital Requirements:
As of June 30, 2007, 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 June 30, 2007 and December 31, 2006 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) | ||||||||||||||||||||||||
June 30, 2007: | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | $ | 88,695 | 14.1 | % | $ | 50,435 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank | 68,426 | 10.9 | 50,450 | 8.0 | $ | 63,063 | 10.0 | % | ||||||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | 82,808 | 13.1 | 25,217 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 62,539 | 9.9 | 25,225 | 4.0 | 37,838 | 6.0 | ||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||
Consolidated | 82,808 | 9.6 | 35,856 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 62,539 | 7.3 | 35,875 | 4.0 | 44,844 | 5.0 | ||||||||||||||||||
December 31, 2006: | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | $ | 89,256 | 14.4 | % | $ | 49,473 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank | 66,632 | 10.8 | 49,408 | 8.0 | $ | 61,761 | 10.0 | % | ||||||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||||||
Consolidated | 83,475 | 13.5 | 24,737 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 60,851 | 9.9 | 24,704 | 4.0 | 37,056 | 6.0 | ||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||
Consolidated | 83,475 | 9.6 | 34,710 | 4.0 | N/A | N/A | ||||||||||||||||||
Bank | 60,851 | 7.0 | 34,793 | 4.0 | 43,491 | 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, static (or flat) rates and a ‘most-likely’ rate forecast. 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 June 30, 2007 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.
Percentage Change in Estimated | ||||
Net Interest Income over 12 | ||||
months | ||||
200 basis point increase in rates | (7.92 | )% | ||
100 basis point increase in rates | (4.16 | )% | ||
Flat interest rates | — | |||
100 basis point decrease in rates | 3.29 | % | ||
200 basis point decrease in rates | 4.58 | % |
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 4.16% 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 7.92% over a 12-month horizon, when compared against the flat rate scenario. The estimated change in net interest income from the flat rate scenario for 100 basis point and 200 basis point declines in the level of interest rates are increases of 3.29% and 4.58%, respectively. Inherent in these estimates is the assumption that savings and money market account deposit rates would change by 25 basis points and 37 basis points, respectively, for each 100 basis point change in market interest rates. These scenarios also assume no change in NOW account interest rates. However, interest rates for certain premium checking and money market accounts are expected to vary to the full extent of any increase or decrease in market 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.
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.
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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 period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by the Benjamin Franklin Bancorp, including its consolidated subsidiaries, in reports that are filed or submitted 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 our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. 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 our internal control over financial reporting during the quarter ended June 30, 2007 that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Benjamin Franklin Bancorp is not involved in any legal proceedings other than routine legal proceedings occurring the ordinary course of business. Management believes that those routine legal proceedings involve, in the aggregate, amounts that are immaterial to the financial condition and results of operations of Benjamin Franklin Bancorp.
Item 1A. Risk Factors
Risk factors that may affect future results were discussed in the Company’s 2006 Annual Report on Form 10-K. The Company’s analysis of its risk factors has not changed since December 31, 2006.
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.On November 14, 2006, Benjamin Franklin Bancorp announced that its Board of Directors had authorized a plan to repurchase up to 412,490 shares (approximately 5%) of the Company’s outstanding common shares, at the discretion of management through open market transactions or negotiated block transactions. In the second quarter of 2007, the Company purchased 113,850 shares under this plan, as follows: |
(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 | under the Plans or Programs | ||||||||||||
April 1-30 | — | — | — | 362,490 | ||||||||||||
May 1-31 | 57,850 | $ | 14.71 | 57,850 | 304,640 | |||||||||||
June 1-30 | 56,000 | $ | 15.20 | 56,000 | 248,640 |
Item 3. Defaults on Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on May 10, 2007 at which time the four nominees for director, as set forth in the proxy materials for the meeting, were elected with the following votes cast:
Name | For | Withheld | ||||||
William F. Brady, Jr. D.D.S. | 6,625,311 | 74,479 | ||||||
Donald P. Quinn | 6,653,226 | 46,564 | ||||||
Thomas R. Venables | 6,629,932 | 69,858 | ||||||
Alfred H. Wahlers | 6,629,502 | 70,288 |
In addition, the stockholders approved the ratification of Wolf & Company, P.C. as our independent public accounting firm with the following votes cast:
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Ratification of Wolf & Co. | ||
For | 6,665,013 | |
Against | 3,286 | |
Abstentions | 28,341 | |
Broker Non-Votes | 0 |
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, providing one year’s severance to Karen Niro, 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 | 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 |
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Exhibit No. | Description | Footnotes | ||||
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 | ||||
10.8.1 | Form of Incentive Stock Option Agreement * | 10 | ||||
10.8.2 | Form of Non-Statutory Stock Option Agreement (Officer) * | 10 | ||||
10.8.3 | Form of Non-Statutory Stock Option Agreement (Director) * | 10 | ||||
10.8.4 | Form of Restricted Stock Agreement (Officer) * | 10 | ||||
10.8.5 | Form of Restricted Stock Agreement (Director) * | 10 | ||||
10.9 | Purchase and Sale Agreement dated December 19, 2006. | 11 | ||||
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. | ||
10. | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q/A, filed on August 18, 2006. | ||
11. | Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on December 26, 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: August 8, 2007 | By: | /s/ Thomas R. Venables | ||
Thomas R. Venables | ||||
President and Chief Executive Officer | ||||
Date: August 8, 2007 | 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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