UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10Q - QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to_________
Commission File Number: (0-26663)
IPSWICH BANCSHARES, INC.
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(Exact name of Registrant as specified in its charter)
Massachusetts 04-3459169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 Market Street, Ipswich, Massachusetts 01938
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 356-7777 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, $0.10 par value NASDAQ National Market
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
requirement for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by court. Yes [ ] No [ ]
The number of shares outstanding of the Registrant's common stock as of May 3,
2001 was 2,005,602. .
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
March 31, December 31,
2001 2000
---------- ----------
Assets (unaudited) (unaudited)
Cash and due from banks $ 6,873 $ 8,836
Federal funds and other short-term investments 10,665 0
Securities available for sale, at market value 31,629 34,228
Securities held to maturity 28,859 30,282
Loans held for sale 5,295 5,003
Loans:
Residential fixed rate 62,302 62,707
Residential adjustable rate 101,493 102,218
Home Equity 31,454 31,212
Commercial 5,698 5,698
Consumer 1,149 1,302
---------- ----------
Total gross loans 202,096 203,137
Allowance for loan losses -1,801 -1,803
---------- ----------
Net loans 200,295 201,334
---------- ----------
Stock in FHLB of Boston 3,000 3,000
Premises and equipment, net 2,911 2,983
Accrued interest receivable 1,391 1,435
Other assets 855 733
---------- ----------
Total assets $ 291,773 $ 287,834
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest-bearing checking accounts $ 21,548 $ 22,855
Interest-bearing checking accounts 33,351 34,871
Savings accounts 41,497 39,531
Money market accounts 69,398 66,083
Certificates of deposit 71,848 73,897
---------- ----------
Total deposits 237,642 237,237
Borrowed funds 31,500 32,108
Mortgagors' escrow accounts 1,019 972
Deferred income tax liability, accrued expenses and other liabilities 2,816 2,398
---------- ----------
Total liabilities 272,977 272,715
---------- ----------
Company obligated, mandatorily redeemable capital securities 3,500 0
Stockholders' Equity:
Equity capital 19,141 18,700
Treasury stock (488,700 shares) -4,394 -4,054
Unrealized gain on investment securities available for sale 549 473
---------- ----------
Total stockholders' equity 15,296 15,119
---------- ----------
Total liabilities and stockholders' equity $ 291,773 $ 287,834
========== ==========
Shares outstanding 2,038,902 2,071,552
Book value per share $ 7.50 $ 7.30
2
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
2001 2000
---------- ----------
(unaudited) (unaudited)
Interest and dividend income:
Loans $ 3,820 $ 3,505
Investment securities available for sale 609 668
Investment securities held to maturity 526 473
Federal funds and interest bearing deposits 58 29
---------- ----------
Total interest and dividend income 5,013 4,675
Interest expense:
Deposits 2,140 1,844
Borrowed funds 627 633
---------- ----------
Total interest expense 2,767 2,477
---------- ----------
Net interest and dividend income 2,246 2,198
Provision for loan losses 25 15
---------- ----------
Net interest and dividend income after
provision for loan losses 2,221 2,183
Non-interest income:
Mortgage banking revenues, net 131 48
Retail banking fees 436 378
Net gain/(loss) on sales of securities 0 2
---------- ----------
Total non-interest income 567 428
---------- ----------
Net interest, dividend and non-interest income 2,788 2,611
Non-interest expenses:
Salaries and employee benefits 808 817
Occupancy and equipment 271 225
Data processing services 244 214
Marketing 131 194
Audit, legal and consulting 75 129
Postage, telephone, supplies 105 82
Trust preferred distribution 38 0
Other 121 97
---------- ----------
Total non-interest expenses 1,793 1,758
Income before income taxes 995 854
Income tax expense 348 107
---------- ----------
Net income $ 647 $ 747
========== ==========
Basic earnings per share $ 0.32 $ 0.30
Diluted earnings per share $ 0.31 $ 0.29
Dividends per share $ 0.11 $ 0.10
========== ==========
Weighted average common shares outstanding (basic) 2,050,496 2,525,427
Weighted average common shares outstanding (diluted) 2,082,190 2,549,142
Selected performance data:
- ---------------------------
Return on average equity (in %) 17.02 17.12
Return on average assets (in %) 0.90 1.08
Net interest margin (in %) 3.21 3.26
Expenses to average assets (in %) 2.49 2.54
Efficiency ratio (in %) 62.95 67.62
Mortgage and equity loan production $ 18,884 $ 12,645
3
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 2001 and 2000
(Dollars in thousands, except for share data)
(unaudited)
Accumulated
Additional other Total
Shares Common paid-in Retained Treasury comprehensive stockholders'
issued Stock capital earnings Stock income equity
---------- --------- ---------- ----------- ----------- ------------- --------------
Balance at December 31, 1999 2,525,427 $253 $2,262 $14,450 $0 $10 $16,975
Issuance of stock rights 8 8
Cash dividends -254 -254
Comprehensive income:
Comprehensive income:
Net income 747 747
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of $105 161
Reclassification adjustment
for amounts included in net
income, net of taxes of ($2) -4
--------
Other comprehensive income 157 157
--------
Total comprehensive income 904
---------- ------- --------- ------- ------ ----------- --------
Balance at March 31, 2000 2,525,427 253 2,270 14,943 0 167 17,633
Stock options exercised 125 1 1
Issuance of stock rights 26 26
Cash dividends -701 -701
Comprehensive income:
Treasury stock purchased
(454,000 shares at an average
price of $8.93) -4,054 -4,054
Comprehensive income:
Net income 1,908 1,908
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of $181 285
Reclassification adjustment
for amounts included in net
income, net of taxes of $12 21
---------
Other comprehensive income 306 306
--------
Total comprehensive income 2,214
---------- ------- --------- -------- ------ ------- --------
Balance at December 31, 2000 2,525,552 253 2,297 16,150 -4,054 473 15,119
Stock options exercised 2,050 0 15 15
Issuance of stock rights 5 5
Cash dividends -226 -226
Comprehensive income:
Treasury stock purchased
(34,700 shares at an average
price of $9.80) -340 -340
Comprehensive income:
Net income 647 647
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of $45 67
Reclassification adjustment
for amounts included in net
income, net of taxes of $6 9
---------
Other comprehensive income 76 76
--------
Total comprehensive income 723
---------- ------- --------- -------- ------ ------- --------
Balance at March 31, 2001 2,527,602 253 2,317 16,571 -4,394 549 15,296
4
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000
(Dollars in thousands)
(unaudited)
2001 2000
------- -------
Net cash flows from operating activities:
Net income $ 647 $ 747
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for loan losses 25 15
Depreciation expense 88 85
Amortization of premiums on investment securities, net 15 -4
(Gain) loss on sale of loans, net -101 0
(Gain) on sale of real estate acquired by foreclosure 0 -4
(Gain) on sale of investment securities available for sale, net 0 -2
Origination of loans held for sale -9,534 -2,556
Proceeds from sale of loans 7,341 1,949
Proceeds from sale of securitized loans 2,002 0
(Increase) in loan origination fees -53 -84
(Decrease) in loan discounts 1 2
(Decrease) in deferred premium on loans sold and mortgage servicing rights -25 0
(Decrease) increase in accrued interest receivable 44 -144
(Increase) decrease in other assets, net -97 -9
Increase (decrease) in accrued expenses and other liabilities 365 -439
------- -------
Net cash provided (used) by operating activities 718 -444
Net cash flows from investing activities:
Purchase of investment securities available for sale -3,136 -2,105
Principal paydowns on mortgage-backed investment securities available for sale 3,849 1,909
Proceeds from the sale of investment securities available for sale 2,000 6,985
Purchase of investment securities held to maturity -2,372 0
Principal paydowns on mortgage-backed investment securities held to maturity 295 196
Principal from the call of investment securities held to maturity 3,500 0
Net decrease (increase) in loans 1,066 -2,883
Proceeds from sale of real estate acquired by foreclosure 0 66
Purchases of equipment, net -16 -76
------- -------
Net cash provided by investing activities 5,186 4,092
Cash flows from financing activities:
Net proceeds from the issuance of common stock 20 7
Net proceeds from issuance of trust preferred 3,500 0
Purchase of treasury stock -340 0
Cash dividends -226 -253
Net increase in deposits 405 6,163
Proceeds from Federal Home Loan Bank advances 11,000 16,454
Repayment of Federal Home Loan Bank advances -11,608 -18,454
(Decrease) increase in mortgagors' escrow accounts 47 164
------- -------
Net cash provided by financing activities 2,798 4,081
------- -------
Net increase in cash and cash equivalents 8,702 7,729
Cash and cash equivalents at beginning of period 8,836 8,259
------- -------
Cash and cash equivalents at end of period $17,538 $15,988
======= =======
Supplemental disclosure of cash flow information: Cash paid for:
Interest on deposit accounts $ 1,426 $ 1,844
Interest on borrowed funds 450 633
Income tax expense, net 125 363
Supplemental schedule of non-cash investing and financing activities:
Net change required by Statement of Financial Accounting Standards No. 115:
Investment securities 129 263
Deferred income tax liability 53 106
Net unrealized gain (loss) on investment securities available for sale 76 157
Conversion of residential real estate loans to mortgage-backed securities 57,114 57,114
Transfer of real estate acquired by foreclosure to loans 0 0
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5
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2001 and 2000
Basis of Presentation
The consolidated financial statements include the accounts of Ipswich
Bancshares, Inc. and its wholly owned subsidiaries, Ipswich Statutory Trust I
and, Ipswich Savings Bank (the Bank) and the Bank's subsidiaries, Ipswich
Preferred Capital Corporation, Ipswich Securities Corporation and North Shore
Financial Services, Inc. (collectively herein referred to as the Company). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Ipswich Statutory Trust I is a Connecticut Trust established in February 2001.
It exists for the exclusive purpose of issuing and selling common securities to
the Company and Preferred Securities to unrelated third parties.
Ipswich Preferred Capital Corporation (IPCC) was formed in 1999 as a
Massachusetts business corporation which elected to be taxed as a real estate
investment trust for Federal and Massachusetts tax purposes. IPCC is 99% owned
by Ipswich Savings Bank. IPCC holds mortgage loans which were previously
originated by the Company. Ipswich Securities Corporation was formed to
exclusively transact in securities on its own behalf as a wholly-owned
subsidiary of the Bank. North Shore Financial Services, Inc. was incorporated
for the purpose of holding direct investments in real estate and foreclosed real
estate.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for possible loan
losses, the valuation of real estate acquired by foreclosure, and the valuation
of originated mortgage servicing rights.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month periods ended March 31,
2001 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2001. For further information, refer to the
audited consolidated financial statements and footnotes thereto for the fiscal
year ended December 31, 2000 included in the Company's Annual Report on Form
10-K.
A substantial portion of the Company's loans are secured by real estate in Essex
County in Massachusetts. In addition, other real estate owned is located in that
market. Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio and the recovery of the carrying amount of other real
estate owned are susceptible to changes in market conditions in its geographic
area.
1
Earnings Per Share
The computation of basic earnings per share is based on the weighted average
number of shares of common stock outstanding during each period. The computation
of diluted earnings per share is based on the weighted average number of shares
of common stock outstanding and dilutive potential common stock equivalents
outstanding during each period. Stock option grants are included only in periods
when the results are dilutive.
Three Months Ended March 31,
2001 Income Shares Per-Share
----
(Numerator) (Denominator) Amount
Basic EPS $647 2,050 $0.32
Effect of stock options ---- 32 (.01)
---- ----- -----
Diluted EPS $647 2,082 $0.31
============================================
2000
Basic EPS ---- $747 2,525 $0.30
Effect of stock options ---- 24 (.01)
---- ----- ----
Diluted EPS $747 2,549 $0.29
============================================
Other Comprehensive Income
Accumulated other comprehensive income consists solely of unrealized
appreciation on investment securities available for sale, net of taxes.
2
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
This Financial Release contains certain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Although Ipswich Bancshares, Inc. believes that its expectations are based upon
reasonable assumptions within the bounds of its knowledge of its business
operations, there can be no assurance that actual results will not differ
materially from those projected in the forward-looking statements. Certain
factors that might cause such difference include, but are not limited to, the
factors set forth in the Corporation's filings with the Securities and Exchange
Commission, which include, among other factors, changes in general economic
conditions, changes in asset quality, changes in interest rates, regulatory
issues and changes in the assumptions used in making such forward-looking
statements.
Certain factors that may cause such differences include, but are not limited to
the following: interest rates may increase, unemployment in the Company's market
area may increase, property values may decline, and general economic and market
conditions in the Company's market area may decline, all of which could
adversely affect the ability of borrowers to re-pay loans; general economic and
market conditions in the Company's market area may decline, the value of real
estate securing payment of loans may decline and the Company's ability to make
profitable loans may be impacted; adverse legislation or regulatory requirements
may be adopted; and competitive pressure among depository institutions may
increase. Any of the above may also result in lower interest income, increased
loan losses, additional charge-offs and write-downs and higher operating
expenses. The Company disclaims any intent or obligation to update publicly any
of the forward-looking statements herein, whether in response to new
information, future events or otherwise.
GENERAL
Ipswich Bancshares, Inc. (the Company) is a Massachusetts corporation whose
primary business is serving as the holding company for Ipswich Savings Bank (the
Bank). The Company's operating results for the three months ended March 31, 2001
reflect the operations of the Company and its direct and indirect subsidiaries,
Ipswich Statutory Trust I, Ipswich Savings Bank, Ipswich Preferred Capital
Corporation, Ipswich Securities Corporation and North Shore Financial Services.
The Company is primarily in the business of making residential mortgage loans,
while attracting deposits from the general public to fund those loans. The
Company operates out of its main office located at 23 Market Street, Ipswich,
Essex County, Massachusetts, and its seven full-service retail branch offices,
located in Beverly, Essex, Marblehead, North Andover, Rowley, Reading and Salem,
Massachusetts. The Company operates Automatic Teller Machines at its Main Office
and each of its full-service retail branch offices. As a bank holding company,
the Company is subject to regulation, supervision and examination by the Board
of Governors of the Federal Reserve (the Federal Reserve) and the Bank is
subject to regulation, supervision and examination by the Federal Deposit
Insurance Corporation (the FDIC) and the Massachusetts Commissioner of Banks
(the Commissioner).
ASSET / LIABILITY MANAGEMENT
The Company does not use static GAP analysis to manage its interest rate risk.
It believes that simulation modeling more accurately encompasses the impact of
changes in interest rates on the earnings of the Company over time. However, the
Company prepares a GAP schedule to measure its static position.
Assets and liabilities are classified as interest rate sensitive if they have a
remaining term to maturity of 0-12 months, or are subject to interest rate
adjustment in those time periods. Adjustable rate loans and mortgage backed
securities are shown as if the entire balance comes due on the repricing date.
Estimates of fixed rate loan amortization prepayments are included with rate
sensitive assets. Because regular savings, demand deposits, money market
accounts and NOW accounts may be withdrawn at any time and are subject to
interest rate adjustments at any time, they are presented based upon assumed
maturity structures. As a result of this analysis, the static GAP position in
the 0 to 12 months range is a negative $765,000 at March 31, 2001.
Interest rate sensitivity statistics are static measures that do not necessarily
take into consideration external factors which may affect the sensitivity of
assets and liabilities, and consequently can not be used alone to predict the
operating results of a financial institution in a changing environment.
LIQUIDITY
The Company seeks to ensure that sufficient liquidity is available to meet cash
requirements while earning a return on liquid assets. The Company uses its
liquidity primarily to fund loans and investment commitments, to supplement
deposit outflows, to fund its share repurchase program and to meet operating
expenses. The primary sources of liquidity are interest and principal
3
amortization from loans, mortgage backed securities and investments, the sales
and maturities of investments, loan sales, deposits, and Federal Home Loan Bank
of Boston (the FHLBB) advances, which includes a $3.2 million overnight line of
credit. The Company also uses longer term borrowing facilities within its total
available credit line with the FHLBB. Advances from the FHLBB were $31.5 million
at March 31, 2001.
During 2001 the primary sources of liquidity were $9.3 million in loan sales,
principal amortization from mortgage backed securities of $4.1 million, payoffs
and principal amortization from the loan portfolio of $7.0 million and the call
of investment securities of $5.5 million. The primary uses of funds were $15.3
million in residential first mortgage loan originations and $5.5 million in
investment purchases.
CAPITAL RESOURCES
Total stockholders' equity at March 31, 2001 was $15.3 million, an increase of
$177,000 from $15.1 million at the end of 2000. Included in stockholders' equity
at March 31, 2001 is an unrealized gain on marketable securities available for
sale, net of taxes, of $549,000, an increase of $76,000 as compared to $473,000
at December 31, 2000. Future interest rate increases could reduce the market
value of these securities and reduce stockholders' equity.
In the first quarter of fiscal 2001, the Ipswich Statutory Trust I sold $3.5
million of its trust preferred securities to the public and $109,000 of its
common securities to the Company. The trust preferred securities are mandatory
redeemable upon the maturity of the Junior Subordinated Debentures on February
22, 2031 or upon earlier redemption as provided in the Indenture. The Company
has the right to redeem the Junior Subordinated Debentures, in whole or in part
on or after February 22, 2011 at a redemption price specified in the Indenture
plus any accrued but unpaid interest to the redemption date. The costs will be
amortized into operating expense over the life of the securities. The Company
owns all of the common securities of the Trust, the only voting security, and as
a result, the Trust is a subsidiary of the Company.
The Company completed a stock repurchase plan of 10% of the outstanding shares
announced October 19, 2000. Through March 31, 2001, the Company had repurchased
488,700 or 19% of the outstanding shares at an average price of $8.99 per share
totaling $4.4 million, which is reflected as a decrease to equity. Subsequently,
the Company announced a third 10% stock repurchase plan on February 22, 2001.
The Federal Reserve's and the FDIC's capital guidelines require the Company and
the Bank, respectively, generally to maintain a minimum Tier 1 leverage capital
ratio of at least 4% (5% to be classified as "well-capitalized"). At March 31,
2001 Tier 1 leverage capital ratio for the Company was 6.33% compared to 5.04%
at December 31, 2000 and 5.14% and 5.21% for the Bank on March 31, 2001 and
December 31, 2000, respectively.
The Federal Reserve and the FDIC have also imposed risk-based capital
requirements on the Company and the Bank, respectively, which give different
risk weightings to assets and to off balance sheet assets, such as loan
commitments. The Federal Reserve's and the FDIC's risk-based capital guidelines
require the Company and the Bank, respectively, to maintain a minimum total
risk-based capital ratio of 8% (10% to be classified as "well-capitalized") and
a Tier 1 risk-based capital ratio of 4% (6% to be classified as
"well-capitalized"). At March 31, 2001, the Company's total and Tier 1
risk-based capital ratios were 12.36% and 11.19% (compared to 10.31% and 9.19%
at December 31, 2000). At March 31, 2001, the Bank's total and Tier 1 risk based
capital ratios were 10.36% and 9.20% (compared to 10.46% and 9.19% at December
31, 2000).
FINANCIAL CONDITION
The Company's total assets at March 31, 2001 were $292 million, an increase of
$3.9 million from December 31, 2000 assets of $288 million. The increase was
largely due to the addition of $11 million in federal funds offset by a $4
million decline in investment securities resulting from cash flow amortization
of mortgage-backed securities of $4.1 million. Funding the increase in assets
for the first three months of 2001 was the issuance of $3.5 million of trust
preferred securities.
Federal Funds Sold
Interest-bearing deposits and federal funds sold at March 31, 2001 was $10.7,
versus $0 at December 31, 2000. The increase in fed funds sold was primarily due
to accelerated cash flows from assets as a result of the first quarter decline
in market rates.
Investment and Mortgage-Backed Securities
Total investments and mortgage backed securities available for sale at March 31,
2001 was $31.6 million, a decrease of $2.6 in 2001. The decrease was primarily
the result of principal amortization of $3.8 million in adjustable rate
mortgage-backed securities, and the call of $2.0 million of callable agency
securities offset by the purchase of $2.5 million of fixed rate mortgage-backed
securities and $811,000 of equity securities. The unrealized gain on the
portfolio of available for sale securities, was $906,000 at March 31, 2001. The
increase in value is principally in the portfolio of adjustable rate
mortgage-backed securities.
4
Total investments and mortgage-backed securities held to maturity were $28.9
million at March 31, 2001, versus $30.3 million at December 31, 2000. The
decline is due to principal amortization on the portfolio of mortgage-backed
securities of $295,000, the call of $3.5 million of callable agency securities
offset by the purchase of $2.4 million of trust preferred securities.
Loans and Loans Held for Sale
Loans held for sale increased to $5.3 million at March 31, 2001, versus $5.0 at
year-end 2000. The Company's portfolio of mortgages held for sale increased due
to the origination of fixed rate loans.
The loan portfolio at March 31, 2001 was $202.1 million, a decrease of $1.0
million in comparison to the portfolio at December 31, 2000 of $203.1 million.
The decrease resulted from accelerated cash flows from prepayments of loans due
to the first quarter decline in market interest rates.
CREDIT QUALITY
Non-Performing Loans
Loans on non-performing status at March 31, 2001 was $228,000, substantially
unchanged since year-end. Accrual of interest on loans is discontinued either
when a reasonable doubt exists, as to the full timely collection of principal
and interest, or when a loan comes contractually past due by ninety (90) days or
more, unless the loan is adequately secured and in the process of collection.
When a loan is placed on non-accrual status, all interest previously accrued,
but not collected, is reversed against current period interest income. Income on
such loans is recognized to the extent that cash is received and the ultimate
collection of principal and interest is probable. Following collection
procedures, the Company generally institutes appropriate actions to foreclose
the property.
Allowance for Loan Loss
The allowance for loan loss at March 31, 2001 was $1.8 million, unchanged since
year-end 2000. The entire allowance for loan losses is available to absorb
charge-offs in any category of loans. Loan losses are charged against the
allowance when management believes that the collectibility of the loan principal
is unlikely. The allowance for possible loan losses is established by management
to absorb future charge-offs of loans deemed uncollectible. The allowance is
increased by provisions charged to operating expense and by recoveries on loans
previously charged-off. In evaluating current information and events regarding
borrowers ability to repay their obligations, management considers commercial
loans over $200,000 to be impaired when it is probable that the Company will be
unable to collect all amounts due, according to the contractual terms of the
note agreement; other loans are evaluated collectively for impairment. When a
loan is considered to be impaired, the amount of the impairment is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of collateral, if the loan is
collateral-dependent. Impairment losses are included in the allowance for loan
losses through a charge to the provision for loan losses. Management believes
that the allowance for possible loan losses is adequate as of March 31, 2001.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary.
Liabilities
Deposits increased by $405,000 in the three months of 2001, to end March 31,
2001 at $237.6 million. Deposits totaled $237.2 million at December 31, 2000.
Certificates of deposit decreased by $2.0 million as falling rates made CDs a
less attractive investment vehicle for depositors; money market accounts
increased by $3.3 million as depositors invested in more liquid deposit types.
Federal Home Loan Bank of Boston advances decreased by $608,000 in 2001 to $31.5
million at March 31, 2001. Borrowed funds are typically used to manage the
liquidity of the Company and the utilization of borrowings is dependent on cash
flows from other assets and liabilities. The Company prepaid $11.5 million of
longer term borrowings with a weighted average rate of 6.14% and replaced the
borrowings with $11 million at a weighted average rate of 5.03%. The Company
incurred a prepayment penalty of approximately $90,000 as a result. The
corresponding weighted average life of the borrowings remained essentially
unchanged at 1.7 years.
Equity Capital
Equity capital increased by $177,000 to $15.3 million at March 31, 2001. Equity
was principally impacted by earnings for the first three months of the year of
$647,000 and an increase in the unrealized gain or loss on investment securities
of $76,000, net of taxes. Offsetting these increases were payments of cash
dividends to shareholders which totaled $226,000 in 2001. Additionally, the
Company repurchased 34,700 shares at a weighted average price of $9.80 or
$340,000. The cost of the shares as reflected in the equity capital section of
the balance sheet as "Treasury Stock". (See Capital Resources - Item 2)
5
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2000
General
The Company reported net income of $647,000 or $.31 per fully diluted share for
the first quarter of 2001. This compares with $747,000 or $.29 per fully diluted
share for the first quarter of 2000. The first quarter 2001 earnings were
impacted by a pre-tax charge of $90,000 resulting from a restructuring of a
portion of the Company's borrowing with the Federal Home Loan Bank of Boston.
Return on equity for the first quarter of 2001 was 17.02%, versus 17.12% for the
same quarter of 2000. The first quarter of 2001 return on assets was .90% versus
1.08% for the same quarter in 2000.
Net Interest and Dividend Income
Net interest income for the first quarter of 2001 was $2.2 million, versus $2.2
million for the same time frame in 2000. The net interest margin percentage was
3.21% for the first quarter of 2001 versus 3.26% for the same quarter the
previous year.
Non-interest Income
Non-interest income for the first quarter of 2001 was $567,000 versus $428,000
in the first quarter of 2000. Non-interest income was substantially higher in
2001, as a result of higher mortgage banking revenues and retail banking fees.
Mortgage banking revenues are principally generated from the sale of fixed rate
loans in the secondary market. As a result of the current interest rate
environment, the Company is primarily originating fixed rate mortgages for sale
in the secondary market. The resulting impact is that mortgage banking revenues
for the first quarter of 2001 was $131,000 versus $48,000 for the first quarter
of 2000.
Retail banking fees for the first quarter of 2001 was $436,000 versus $378,000
for the same quarter in 2000. This 15.3% increase is principally the result of
the Company's successful efforts to acquire checking account customers in its
market place, which generates fee income.
Non-interest Expense
Total non-interest expenses were $1.8 million for the first quarter of 2001
versus $1.8 million for the same time frame in 2000. Expenses which exhibited
increases included data processing costs which increased $30,000, or 14.0% in
the current quarter versus the same quarter in 2000; occupancy and equipment
which increased $46,000 or 20.4% and the cost of the Trust Preferred issued
February 22, 2001 which totaled $38,000 in the current quarter. Marketing
expense decreased by $63,000 to $131,000 in the first quarter of 2001 versus
$194,000 in the first quarter of 2000. The Company initiated a substantial
marketing program in the first quarter of 2000 to acquire core deposit checking
accounts.
Income Tax Expense
The first quarter of 2001 effective tax rate was 35% versus 12.4% for the first
quarter of 2000. Taxes in the first quarter of 2000 was income impacted by a
$190,000 reduction in the Company valuation allowance.
6
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's success is dependent upon its ability to manage interest rate
risk. Interest rate risk can be defined as the exposure of the Company's net
interest income to adverse movements in interest rates. Although the Company
manages other risks, as in credit and liquidity risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition and results of operations. Because the Company
does not maintain a trading portfolio, it is not exposed to significant market
risk from trading activities.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO). ALCO establishes policies that
monitor and coordinate the Company's sources, uses and pricing of funds.
The Company seeks to reduce the volatility of its net interest income by
managing the relationship of interest-rate sensitive assets to interest-rate
sensitive liabilities. In recent years, the focus has been to originate
adjustable-rate residential loans for portfolio, which reprice more quickly than
fixed-rate residential loans. The Company's adjustable-rate loans are primarily
tied to published indices, such as the one-year Constant Maturity Treasury
(CMT).
The Company utilizes a simulation model to analyze net interest income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both a rise or fall in interest rates (rate shock) over
twelve and twenty-four month periods. The model is based on the actual maturity
and repricing characteristics of interest-rate sensitive assets and liabilities.
The model incorporates assumptions regarding the impact of changing interest
rates on the prepayment rate of certain assets and liabilities. The assumptions
are based on nationally published prepayment speeds on assets and liabilities
when interest rates increase or decrease by 200 basis points or greater. The
model factors in projections for anticipated activity levels by product lines
offered by the Company. The simulation model also takes into account the
Company's increased ability to control the rates on deposit products more so
than adjustable-rate loans tied to published indices.
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change the interest income and expense streams
associated with the Company's financial instruments also change, thereby
impacting net interest income (NII), the primary component of the Company's
earnings. ALCO utilizes the results of the simulation model and static GAP
reports to quantify the estimated exposure of NII to sustained interest rate
changes.
The following reflects the Company's NII sensitivity analysis over a twelve
month period:
Rate Change Estimated NII Sensitivity Over Twelve Months
- ----------- ------------------------------------------------
March 31, 2001 March 31, 2000
--------------------------------------------------
+200bp 0.26% -3.44%
-200bp -1.91% -0.51%
The preceding sensitivity analysis does not represent the Company's forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to: prepayment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable-rate assets, the potential effect of changing debt service
levels on customers with adjustable-rate loans, depositor early withdrawals and
product preference changes, and other internal/external variables. Furthermore,
the sensitivity analysis does not reflect actions that ALCO might take in
responding to or anticipating changes in interest rates.
7
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
b. Reports on Form 8-K
None
c. Exhibits
2.1 Plan of Reorganization and Acquisition dated as of February
17, 1999 between the Company and Ipswich Savings Bank
incorporated by reference to the Company's Form 8-K filed on
July 9, 1999.
3.1 Articles of Organization of the Company dated February 12,
1999 and incorporated by reference herein from the Company's
June 30, 1999 Form 10-Q.
3.2 By-laws of the Company is incorporated by reference herein
from the Company's June 30, 1999 Form 10-Q.
4.1 Specimen stock certificate for the Company's Common Stock is
incorporated by reference herein from the Company's June 30,
1999 Form 10-Q.
10.1 Lease dated September 15, 2000 for premises located at Routes
133 and 1, Rowley, Massachusetts is incorporated by reference
herein from the Company's September 30, 2000 Form 10-Q..
10.2 Lease dated April 25, 1994 for premises located at 451
Andover Street, North Andover, Massachusetts is incorporated
by reference herein from the Company's June 30, 1999 Form
10-Q.
10.3 Lease dated March 4, 1996 for premises located at 588 Cabot
Street, Beverly, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q.
10.4 Lease dated July 27, 1997 for premises located at 600 Loring
Avenue, Salem, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q.
10.5 Lease dated February 27, 1998 for premises located at 89
Pleasant Street, Marblehead, Massachusetts is incorporated by
reference herein from the Company's June 30, 1999 Form 10-Q.
8
10.6 Lease dated June 12, 1998 for premises located at 470 Main
Street, Reading, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q.
10.7* Incentive Compensation Plan for Senior Management and certain
other officers dated September 15, 1995 is incorporated by
reference herein from the Company's June 30, 1999 Form 10-Q.
10.8* Director Recognition and Retirement Plan adopted as of May
18, 1999 is incorporated by reference herein from the
Company's June 30, 1999 Form 10-Q.
10.9* Merger and Severance Benefits Program dated February 18, 1998
is incorporated by reference herein from the Company's June
30, 1999 Form 10-Q.
10.10* Amended and Restated Employment and Severance Agreement dated
May 18, 1999 between Ipswich Savings Bank and David L. Grey
is incorporated by reference herein from the Company's June
30, 1999 Form 10-Q.
10.11* Amended and Restated Employment and Severance Agreement dated
May 18, 1999 between Ipswich Savings Bank and Francis Kenney
is incorporated by reference herein from the Company's June
30, 1999 Form 10-Q.
10.12* Amended and Restated Severance Agreement dated May 18, 1999
between Ipswich Savings Bank and Thomas R. Girard is
incorporated by reference herein from the Company's June 30,
1999 Form 10-Q.
10.13(a)* Amended and Restated Split Dollar Agreement dated May 18,
1999 among Ipswich Savings Bank, Eastern Bank and David L.
Grey is incorporated by reference herein from the Company's
June 30, 1999 Form 10-Q.
10.13(b)* Amended and Restated Ipswich Irrevocable Insurance Trust
dated as of May 18, 1999 by and between Ipswich Savings Bank
and Eastern Bank is incorporated by reference herein from the
Company's June 30, 1999 Form10-Q.
10.14 Contract with Bank's data processor dated February 14, 1997
is incorporated by reference herein from the Company's June
30, 1999 Form 10-Q.
10.15* 1992 Incentive and Non-qualified Stock Option Plan
incorporated by reference to the Company's Registration
Statement on Form S-8 filed on July 22, 1999.
10.16* 1996 Stock Incentive Plan incorporated by reference to the
Company's Registration Statement on Form S-8 filed on July
22, 1999.
10.17* 1998 Stock Incentive Plan incorporated by reference to the
Company's Registration Statement on Form S-8 filed on July
22, 1999.
10.18* Deferred Compensation Plan for Directors incorporated by
reference to the Company's Form S-8 filed on July 22, 1999.
10.19 Contract dated April 6, 2000 with U.S. Bancorp for ATM
processing services incorporated by reference to the
Company's March 31, 2000 Form 10-Q.
10.20* Severance Agreement dated August 8, 2000 between Ipswich
Savings Bank and Mark E. Foley is incorporated by reference
herein from the Company's June 30, 2000 Form 10-Q.
10.21* Split Dollar Agreement dated March 30, 2001 between Ipswich
Savings Bank and Francis Kenney.
11. A statement regarding the computation of earnings per share
is included in the Notes to Consolidated Financial
Statements.
12. Not applicable.
* Denotes Management Contract or Compensation Plan.
9
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.
IPSWICH BANCSHARES, INC.
By: /s/ David L. Grey Date: May 11, 2001
------------------
David L. Grey
President and Chief Executive Officer
By: /s/ Francis Kenney Date: May 11, 2001
- --- ------------------
Francis Kenney
Treasurer
(Principal Financial Officer and Principal Accounting Officer)
10