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 June 30, 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.
------------------------
(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 Identification No.)
incorporation or organization)
23 Market Street, Ipswich, Massachusetts 01938
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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 August
6, 2001 was 2,001,102.
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
JUNE 30, DECEMBER 31,
2001 2000
------------ -----------
(unaudited) (unaudited)
Assets
------
Cash and due from banks $ 7,563 $ 8,836
Federal funds and other short-term investments 4,495 0
Securities available for sale, at market value 39,147 34,228
Securities held to maturity 30,983 30,282
Loans held for sale 1,804 5,003
Loans:
Residential fixed rate 70,338 62,707
Residential adjustable rate 98,380 102,218
Home equity 32,178 31,212
Commercial 6,120 5,698
Consumer 1,122 1,302
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Total gross loans 208,138 203,137
Allowance for loan losses (1,963) (1,803)
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Net loans 206,175 201,334
Stock in FHLB of Boston 3,000 3,000
Premises and equipment, net 3,091 2,983
Accrued interest receivable 1,437 1,435
Other assets 884 733
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Total assets $ 298,579 $ 287,834
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest-bearing checking accounts $ 24,216 $ 22,855
Interest-bearing checking accounts 34,359 34,871
Savings accounts 42,919 39,531
Money market accounts 74,196 66,083
Certificates of deposit 66,959 73,897
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Total deposits 242,649 237,237
Borrowed funds 32,750 32,108
Mortgagors' escrow accounts 926 972
Deferred income tax liability, accrued expenses
and other liabilities 3,708 2,398
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Total liabilities 280,033 272,715
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Company obligated, mandatorily redeemable capital securities 3,500 0
Equity capital 19,585 18,700
Treasury stock (527,000 and 454,000 shares ) (4,790) (4,054)
Unrealized gain on investment securities available for sale 251 473
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Total stockholders' equity 15,046 15,119
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Total liabilities and stockholders' equity $ 298,579 $ 287,834
=========== ===========
Shares outstanding 2,001,102 2,071,552
Selected data (end of period):
Regulatory tier 1 leverage capital ratio (in %) 6.23 5.04
Total non-performing assets, net $ 224 $ 229
Book value per share $ 7.52 $ 7.30
- 2 -
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
THREE MONTHS ENDED SIX MONTH ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---------- ----------- ----------- -----------
Interest and dividend income: (unaudited) (unaudited) (unaudited) (unaudited)
Loans $ 3,680 $ 3,634 $ 7,500 $ 7,139
Investment securities available for sale 529 702 1,136 1,370
Investment securities held to maturity 492 470 1,018 943
Federal funds and interest bearing deposits 101 163 161 192
---------- ---------- ---------- ----------
Total interest and dividend income 4,802 4,969 9,815 9,644
Interest expense:
Deposits 1,996 1,956 4,136 3,800
Borrowed funds 524 807 1,151 1,440
---------- ---------- ---------- ----------
Total interest expense 2,520 2,763 5,287 5,240
---------- ---------- ---------- ----------
Net interest and dividend income 2,282 2,206 4,528 4,404
Provision for loan losses 25 15 50 30
---------- ---------- ---------- ----------
Net interest and dividend income after provision
for loan losses 2,257 2,191 4,478 4,374
Non-interest income:
Mortgage banking revenues, net 94 48 224 92
Retail banking fees 553 430 990 812
Net gain/(loss) on sales of securities 182 0 182 2
---------- ---------- ---------- ----------
Total non-interest income 829 478 1,396 906
---------- ---------- ---------- ----------
Net interest, dividend and non-interest income 3,086 2,669 5,874 5,280
Non-interest expenses:
Salaries and employee benefits 947 832 1,755 1,649
Occupancy and equipment 257 227 528 452
Data processing services 317 230 561 444
Marketing 93 110 224 304
Audit, legal and consulting 100 49 175 178
Postage, telephone, supplies 116 102 221 184
Distribution on securities of subsidiary trust 89 0 127 0
Other 160 124 280 221
---------- ---------- ---------- ----------
Total non-interest expenses 2,079 1,674 3,871 3,432
---------- ---------- ---------- ----------
Income before income taxes 1,007 995 2,003 1,848
Income tax expense 352 351 701 457
---------- ---------- ---------- ----------
Net income $ 655 $ 644 $ 1,302 $ 1,391
========== ========== ========== ==========
Basic earnings per share $ 0.32 $ 0.26 $ 0.64 $ 0.56
Diluted earnings per share $ 0.32 $ 0.26 $ 0.63 $ 0.55
Dividends per share $ 0.11 $ 0.10 $ 0.22 $ 0.20
========== ========== ========== ==========
Weighted average common shares outstanding (basic) 2,023,800 2,475,263 2,041,406 2,502,806
Weighted average common shares outstanding (diluted) 2,057,978 2,492,760 2,067,921 2,520,983
Selected performance data:
Return on average equity (in %) 17.36 14.80 17.21 15.99
Return on average assets (in %) 0.89 0.89 0.90 0.98
Net interest margin (in %) 3.20 3.13 3.21 3.20
Expenses to average assets (in %) 2.83 2.32 2.66 2.43
Mortgage and equity loan production $ 31,587 $ 17,920 $ 50,471 $ 30,566
- 3 -
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 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 19 19
Cash dividends -496 -496
Treasury stock purchased
(113,400 shares at an average
price of $8.15) -924 -924
Comprehensive income:
Net income 1,391 1,391
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of $174 260
Reclassification adjustment
for amounts included in net
income, net of taxes of ($7) -9
-------
Other comprehensive income 251 251
-------
Total comprehensive income 1,642
--------- ---- ------ ------- ----- --- -------
Balance at June 30, 2000 2,525,427 253 2,281 15,345 -924 261 17,216
Stock options exercised 125 1 1
Issuance of stock rights 15 15
Cash dividends -459 -459
Treasury stock purchased
(340,600 shares at an average
price of $9.19) -3,130 -3,130
Comprehensive income:
Net income 1,264 1,264
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of $112 186
Reclassification adjustment
for amounts included in net
income, net of taxes of $17 26
--------
Other comprehensive income 212 212
--------
Total comprehensive income 1,476
--------- ---- ------ ------- ----- --- -------
Balance at December 31, 2000 2,525,552 253 2,297 16,150 -4,054 473 15,119
Stock options exercised 2,550 19 19
Issuance of stock rights 9 9
Cash dividends -445 -445
Treasury stock purchased
(73,000 shares at an average
price of $10.08) -736 -736
Comprehensive income:
Net income 1,302 1,302
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of ($78) -148
Reclassification adjustment
for amounts included in net
income, net of taxes of ($51) -74
--------
Other comprehensive income -222 -222
--------
Total comprehensive income 1,080
--------- ---- ------ ------- ----- --- --------
Balance at June 30, 2001 2,528,102 $253 $2,325 $17,007 -$4,790 $251 $15,046
========= ==== ====== ======= ====== ==== =======
- 4 -
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000
(Dollars in thousands)
(unaudited)
2001 2000
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Net cash flows from operating activities:
Net income $ 1,302 $ 1,391
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for possible loan losses 50 30
Depreciation expense 177 172
Amortization of premiums on investment securities, net 57 14
(Gain) loss on sale of loans, net -174 -1
Loss on sale of real estate acquired by foreclosure 0 1
(Gain) on sale of investment securities available for sale, net -182 -2
Origination of loans held for sale -18,044 -5,964
Proceeds from sale of loans 16,427 4,155
Proceeds from sale of securitized loans 4,990 0
(Increase) in loan origination fees -69 -183
Increase (decrease) in loan discounts 2 -3
(Increase) in deferred premium on loans sold and mortgage servicing rights -41 0
(Increase) in accrued interest receivable -2 -157
(Increase) decrease in other assets, net -110 26
Increase (decrease) in accrued expenses and other liabilities 1,439 -68
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Net cash provided (used) by operating activities 5,822 -589
Net cash flows from investing activities:
Purchase of investment securities available for sale -20,403 -11,055
Principal paydowns on mortgage-backed investment securities available for sale 11,611 3,900
Proceeds from the sale of investment securities available for sale 3,642 6,985
Purchase of investment securities held to maturity -8,974 0
Principal paydowns on mortgage-backed investment securities held to maturity 778 398
Principal from the call of investment securities held to maturity 7,500 977
Net (increase) in loans -4,824 -11,695
Proceeds from sale of real estate acquired by foreclosure 0 110
Purchases of equipment, net -285 -107
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Net cash (used) by investing activities -10,955 -10,487
Cash flows from financing activities:
Net proceeds from the issuance of common stock 28 18
Net proceeds from the issuance of trust preferred securities 3,500 0
Purchase of treasury stock -736 -924
Cash dividends -445 -495
Net increase in deposits 5,412 14,973
Proceeds from Federal Home Loan Bank advances 18,750 53,454
Repayment of Federal Home Loan Bank advances -18,108 -50,454
(Decrease) increase in mortgagors' escrow accounts -46 5
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Net cash provided by financing activities 8,355 16,577
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Net increase in cash and cash equivalents 3,222 5,501
Cash and cash equivalents at beginning of period 8,836 8,259
------- -------
Cash and cash equivalents at end of period $12,058 $13,760
======= =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposit accounts $ 3,507 $ 3,800
Interest on borrowed funds 1,006 1,440
Income tax expense, net 135 373
Supplemental schedule of non-cash investing and financing activities:
Net change required by Statement of Financial Accounting Standards No. 115:
Investment securities -351 418
Deferred income tax liability -129 167
Net unrealized gain (loss) on investment securities available for sale -222 251
- 5 -
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 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 was formed in February 2001 to issue and sell common
securities to the company and preferred securities to the public. 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, respectively.
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 and 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 and six month periods ended June
30, 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.
- 6 -
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.
Six Months Ended June 30,
(Dollars in Thousands)
2001
---- Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $1,302 2,041 $0.64
Effect of stock options -- 27 (.01)
------ ----- -----
Diluted EPS $1,302 2,068 $0.63
====== ===== =====
2000
----
Basic EPS $1,391 2,503 $0.56
Effect of stock options -- 18 (.01)
------ ----- -----
Diluted EPS $1,391 2,521 $0.55
====== ===== =====
Three Months Ended June 30,
(Dollars in Thousands)
2001
---- Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $655 2,024 $0.32
Effect of stock options -- 34 --
---- ----- -----
Diluted EPS $655 2,058 $0.32
==== ===== =====
2000
----
Basic EPS $644 2,475 $0.26
Effect of stock options -- 18 --
---- ----- -----
Diluted EPS $644 2,493 $0.26
==== ===== =====
Other Comprehensive Income
- --------------------------
Accumulated other comprehensive income consists solely of unrealized
appreciation on investment securities available for sale, net of taxes.
ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -----------------------------------------------------------------------
OF OPERATIONS
- -------------
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.
- 7 -
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, credit risk management, 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) and Ipswich Statutory Trust I.
The Company's operating results for the three and six months ended June 30, 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 in the business of making 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 $10.1 million at June 30, 2001.
- 8 -
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
amortization from loans, mortgage backed securities and investments, 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 borrowed facilities within its total
available credit line with the FHLBB. Advances from the FHLBB were $32.8 million
at June 30, 2001.
During 2001 the primary sources of liquidity were $21.4 million in loan sales,
principal amortization from mortgage backed securities of $12.4 million, payoffs
and principal amortization is the loan portfolio of $22 million and the sale and
call of investment securities of $11.1 million. The primary uses of funds were
$43.4 million in residential first mortgage loan originations and $29.4 million
in investment purchases.
CAPITAL RESOURCES
- -----------------
Total stockholders' equity at June 30, 2001 was $15 million, a decrease of
$100,000 from $15.1 million at the end of 2000. Included in stockholders' equity
at June 30, 2001 is an unrealized gain on marketable securities available for
sale, net of taxes, of $251,000, a decrease of $222,000 as compared to $473,000
at December 31, 2000. The decrease is primarily due to the liquidation of the
Company's equity security portfolio which produced a pre-tax gain of $182,000.
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 manditorially 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 announced a third stock repurchase plan of 10% of the outstanding
shares in February 2001. Through June 30, 2001, the Company had repurchased
527,000 or 21% of the outstanding shares at an average price of $9.09 totaling
$4.8 million.
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 June 30,
2001 Tier 1 leverage capital ratio for the Company was 6.23% compared to 5.04%
at December 31, 2000 and 5.39% and 5.14% for the Bank on June 30, 2001 and
December 31, 2000, respectively.
- 9 -
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 June 30, 2001, the Company's total and Tier 1 risk-based
capital ratios were 12.26% and 11.07% (compared to 10.31% and 9.19% at December
31, 2000). At June 30, 2001, the Bank's total and Tier 1 risk based capital
ratios were 10.69% and 9.50% (compared to 10.46% and 9.19% at December 31,
2000).
As of June 30, 2001, the Bank was considered "well-capitalized" under applicable
regulatory capital guidelines.
FINANCIAL CONDITION
- -------------------
The Company's total assets at June 30, 2001 were $298.6 million, an increase of
$10.7 million from December 31, 2000 assets of $287.8 million. The increase was
largely due to the addition of $5.0 million in total loans, $4.9 million in
mortgage-backed securities available for sale, and $4.5 million in fed funds
sold. Funding the increase in assets for the first six months of 2001 was
deposit growth of $5.4 million, primarily in checking accounts, savings and
money market accounts. Additionally, the Company issued $3.5 million in trust
preferred securities in February 2001.
Federal Funds Sold
- ------------------
Interest-bearing deposits and federal funds sold at June 30, 2001 was $4.5
million, versus $0 at December 31, 2000. The increase in fed funds sold was
primarily due to accelerated cash flows from loans and investments resulting
from the decline in interest rates in the first six months of 2001.
Investment and Mortgage-Backed Securities
- -----------------------------------------
Total investments and mortgage backed securities available for sale at June 30,
2001 was $39.1 million, an increase of $4.9 million in 2001. The increase was
primarily the result of the purchase of $20.4 million in fixed rate
mortgage-backed securities, offset by $1.6 million in equity security sales,
$2.0 million in called bonds, and $11.6 million in principal amortization. The
unrealized gain on the portfolio of available for sale securities, was $425,000
at June 30, 2001.
-10-
Total investments and mortgage-backed securities held to maturity was $31.0
million at June 30, 2001, versus $30.3 million at December 31, 2000. The
increase is due to principal amortization on the portfolio of mortgage-backed
securities of $778,000 and the call of $7.5 million in bonds offset by the
purchase of $9 million of mortgage-backed securities.
Loans and Loans Held for Sale
- -----------------------------
Loans held for sale decreased to $1.8 million at June 30, 2001, versus $5.0 at
year-end 2000.
The loan portfolio at June 30, 2001 was $208.1 million, an increase of $5.0
million in comparison to the portfolio at December 31, 2000 of $203.1 million.
The increase was principally in fixed rate mortgages, resulting from an
asset/liability strategy of adding a selective number of fixed rate loans to the
portfolio.
CREDIT QUALITY
- --------------
Non-Performing Loans
- --------------------
Loans placed on non-performing status at June 30, 2001 was $224,000,
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.
Real Estate Acquired by Foreclosure
- -----------------------------------
Real estate acquired by foreclosure totaled $0 at June 30, 2001. The Company
owns two parcels of land which have previously been written down to $1 each.
Real estate acquired by foreclosure is reflected at the lower of the net
carrying value, or fair value, of the property, less estimated costs of
disposition.
Allowance for Loan Loss
- -----------------------
The allowance for loan loss at June 30, 2001 was $2.0 million, an increase of
$160,000 primarily from a recovery of a loan partially charged-off totaling
$146,000. 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 accurate as of June 30, 2001.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary.
Liabilities
- -----------
Deposits increased by $5.4 million in the first half of 2001, to end June 30,
2001 at $242.6 million. Deposits totaled $237.2 million at December 31, 2000.
Money market deposits increased by $8.1 million offset by a decrease of $6.9
million in CDs.
Federal Home Loan Bank of Boston advances increased by $642,000 in 2001 to $32.8
million at June 30, 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 restructured a portion of
its borrowings in the second quarter which resulted in reducing the weighted
average rate from 6.60% at December 31, 2000 to 5.84% at June 30, 2001.
- 11 -
Equity Capital
- --------------
Equity capital decreased by $73,000 to $15 million at June 30, 2001. Equity was
principally impacted by earnings for the first six months of the year of $1.3
million. Offsetting these increases were payments of cash dividends to
shareholders which totaled $445,000 in 2001, and a decline in the unrealized
gain on investment securities of $222,000. Additionally, the Company repurchased
73,000 shares or 4.5% of its outstanding shares in executing its previously
announced 10% stock repurchase plan. The average price per share was $10.08
totaling $736,000. The cost of the shares as reflected in the equity capital
section of the balance sheet as "Treasury Stock".
- 12 -
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2000
General
- -------
The Company reported net income of $655,000 or $.32 per fully diluted share for
the second quarter of 2001. This compares with $644,000 or $.26 per fully
diluted share for the second quarter of 2000. The second quarter 2001 earnings
were favorably impacted by securities gains of $182,000.
Return on equity for the second quarter of 2001 was 17.36%, versus 14.80% for
the same quarter of 2000. Return on assets was .89% for the second quarter in
2001 and 2000.
Net Interest and Dividend Income
- --------------------------------
Net interest income for the second quarter of 2001 was $2.3 million, versus $2.2
million for the same time frame in 2000. The net interest margin percentage was
3.20% for the second quarter of 2001 versus 3.13% for the same quarter the
previous year.
Non-interest Income
- -------------------
Non-interest income for the second quarter of 2001 was $829,000 versus $478,000
in the second quarter of 2000. Non-interest income was substantially higher in
2001, as a result of higher retail banking fees and mortgage income. 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 originating primarily fixed rate mortgages for sale versus adjustable
rate loans for portfolio. The resulting impact is that mortgage banking revenues
for the second quarter of 2001 was $94,000 versus $48,000 for the second quarter
of 2000.
Retail banking fees for the second quarter of 2001 was $553,000 versus $430,000
for the same quarter in 2000. The 29% increase is principally the result of the
Company's successful efforts to promote its checking account products and
substantial increases in ATM and debit card income.
Non-interest Expense
- --------------------
Total noninterest expenses were $2.1 million for the second quarter of 2001
versus $1.7 million for the same time frame in 2000. Expenses which exhibited
increases included salary and benefit costs which increased $115,000 or 14% and
data processing costs which increased $87,000, or 38% in the current quarter
versus the same quarter in 2000. Salary increases were primarily the result of
the Company's efforts in building a Commercial Banking Department. Data
processing costs increased as a result of the sale of the Company's credit card
portfolio and an ATM conversion which created one-time expenses.
Income Tax Expense
- ------------------
The 2001 effective tax rate was 35% for the second quarter of 2001 and 2000. A
tax rate of 35% in 2001 is expected to continue through the remainder of the
year.
- 13 -
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2000
General
- -------
The Company reported net income of $1.3 million or $.63 per fully diluted share
for the first six months of 2001. This compares with $1.4 million or $.55 per
fully diluted share for the first six months of 2000. Positive variances which
contributed to an increase in earnings were in the net interest income of
$124,000, and noninterest income of $490,000. In 2000, the Company realized a
one-time tax benefit of $190,000.
Return on equity for the first six months of 2001 was 17.21%, versus 15.99% for
the same time frame in 2000. The first six months of 2001 return on assets was
.90% versus .98% for the time frame in 2000.
Net Interest and Dividend Income
- --------------------------------
Net interest income for the first six months of 2001 was $4.5 million, versus
$4.4 million for the same time frame in 2000. The net interest margin percentage
was 3.21% versus 3.20% for the same time frame the previous year.
Non-interest Income
- -------------------
Non-interest income for the first six months of 2001 was $1.4 million versus
$906,000 in the first half of 2000. Non-interest income increased as a result of
higher mortgage banking revenues of $132,000, an increase of $178,000 in retail
banking fees, and securities gains of $182,000. Mortgage banking revenues are
generated from the sale of fixed rate loans in the secondary market. Due to the
current interest rate environment, the Company is primarily originating fixed
rate loans for sale versus adjustable rate loans which are originated for
portfolio. Total mortgage banking revenues for the first six months of 2001 were
$224,000 versus $92,000 for the same time frame in 2000.
Retail banking fees totaled $990,000 for the first six months of 2001 versus
$812,000 for the same time frame in 2000, an increase of $178,000 or 22%. Retail
banking fees have increased as a result of the Company's emphasis on generating
checking accounts in its retail branch network which contributes significantly
to fee income and substantial increases in ATM and debit card income.
Non-interest Expense
- --------------------
Total noninterest expense was $3.9 million for the first six months of 2001
versus $3.4 million for the same time frame in 2000. Non-interest expenses line
items which increased in 2001 over 2000 were salaries and benefits, an increase
of $106,000 or 6%, and data processing expenses which increased by $117,000 or
26%. These cost increases are a result of the Company's successful efforts to
generate checking accounts.
Income Tax Expense
- ------------------
The first six months of 2001 effective tax rate was 35% versus 24.7% for the
same time frame in 2000. The tax rate in 2000 was impacted by the Company's
realization of a $190,000 tax benefit resulting from a reduction in its
valuation reserve. The tax rate in 2001 is expected to be 35%.
- 14 -
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 or mature 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
a twelve and twenty-four month period. 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 as of the time
frames analyzed:
Rate Change Estimated NII Sensitivity Over Twelve Months
- --------------------------------------------------------------------------------
June 30, 2001 June 30, 2000
------------- -------------
+200bp -1.18% -2.29%
- -200bp -0.36% -2.18%
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.
- 15 -
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
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
- ---------------------------------------------------------------------
The following were nominated to the Board of Directors to serve three-year
terms as directors of the Company.
For Withheld
--------- --------
Thomas A. Ellsworth 1,557,185 150,917
William J. Tinti 1,556,785 151,317
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 Route 133
and Route 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.
- 16 -
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.
- 17 -
10.21*Split Dollar Agreement dated March 30, 2001 between Ipswich
Savings Bank and Francis Kenney is incorporated by reference
herein from the Company's March 31, 2001 Form 10-Q.
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.
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: August 10, 2001
-----------------
David L. Grey
President and Chief Executive Officer
By: /s/ Francis Kenney Date: August 10, 2001
------------------
Francis Kenney
Treasurer
(Principal Financial Officer and Principal Accounting Officer)
- 18 -