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 September 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 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23 Market Street, Ipswich, Massachusetts 01938 - ------------------------------------------------------ ------------ (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 [ ] The number of shares outstanding of the Registrant's common stock as of November 9, 2001 was 1,930,102. IPSWICH BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except per share data) SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- (unaudited) (unaudited) Assets Cash and due from banks $ 7,174 $ 8,836 Federal funds and other short-term investments 1,500 0 Securities available for sale, at market value 47,968 34,228 Securities held to maturity, at amortized cost 27,895 30,282 Loans held for sale 2,562 5,003 Loans: Residential fixed rate 70,975 62,707 Residential adjustable rate 97,602 102,218 Home equity 32,525 31,212 Commercial 8,081 5,698 Consumer 1,074 1,302 ----------- ----------- Total gross loans 210,257 203,137 Allowance for loan losses (2,053) (1,803) ----------- ----------- Net loans 208,204 201,334 ----------- ----------- Stock in FHLB of Boston 3,000 3,000 Premises and equipment, net 2,937 2,983 Accrued interest receivable 1,564 1,435 Other assets 828 733 ----------- ----------- Total assets $ 303,632 $ 287,834 =========== =========== Liabilities and Stockholders' Equity Liabilities: Deposits: Non-interest-bearing checking accounts $ 26,222 $ 22,855 Interest-bearing checking accounts 34,830 34,871 Savings accounts 45,477 39,531 Money market accounts 73,259 66,083 Certificates of deposit 65,161 73,897 ----------- ----------- Total deposits 244,949 237,237 Borrowed funds 34,849 32,108 Mortgagors' escrow accounts 956 972 Deferred income tax liability and other liabilities 4,149 2,398 ----------- ----------- Total liabilities 284,903 272,715 ----------- ----------- Company obligated, mandatorily redeemable capital securities 3,500 0 Equity capital 20,154 18,700 Treasury stock (583,100 and 454,000 shares at September 30, (5,515) (4,054) 2001 and December 31, 2000 respectively) Unrealized gain on investment securities available for sale, net 590 473 ----------- ----------- Total stockholders' equity 15,229 15,119 ----------- ----------- Total liabilities and stockholders' equity $ 303,632 $ 287,834 =========== =========== Shares outstanding 1,945,002 2,071,552 Selected data (end of period): Regulatory tier 1 leverage capital ratio (in %) 5.98% 5.04 Book value per share $ 7.83 $ 7.30 2 IPSWICH BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except per share data) THREE MONTHS ENDED NINE MONTH ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) Interest and dividend income: Loans $ 3,641 $ 3,854 $ 11,141 $ 10,993 Investment securities available for sale 707 719 1,843 2,089 Investment securities held to maturity 513 467 1,531 1,410 Federal funds and interest bearing deposits 39 74 200 266 ----------- ----------- ----------- ----------- Total interest and dividend income 4,900 5,114 14,715 14,758 Interest expense: Deposits 1,844 2,076 5,980 5,876 Borrowed funds 491 790 1,642 2,230 ----------- ----------- ----------- ----------- Total interest expense 2,335 2,866 7,622 8,106 ----------- ----------- ----------- ----------- Net interest and dividend income 2,565 2,248 7,093 6,652 Provision for loan losses 25 15 75 45 ----------- ----------- ----------- ----------- Net interest and dividend income after provision for loan losses 2,540 2,233 7,018 6,607 Non-interest income: Mortgage banking revenues, net 165 (78) 389 14 Retail banking fees 577 448 1,567 1,260 Net gain/(loss) on sales of securities 0 0 182 2 ----------- ----------- ----------- ----------- Total non-interest income 742 370 2,138 1,276 ----------- ----------- ----------- ----------- Net interest, dividend and non-interest income 3,282 2,603 9,156 7,883 Non-interest expenses: Salaries and employee benefits 926 834 2,681 2,483 Occupancy and equipment 257 229 785 681 Data processing services 240 211 801 655 Marketing 141 103 365 407 Audit, legal and consulting 72 82 247 260 Postage, telephone, supplies 109 92 330 276 Distribution on securities of subsidiary trust 92 0 219 0 Other 247 103 527 323 ----------- ----------- ----------- ----------- Total non-interest expenses 2,084 1,654 5,955 5,085 Income before income taxes 1,198 949 3,201 2,798 Income tax expense 420 332 1,120 789 ----------- ----------- ----------- ----------- Net income $ 778 $ 617 $ 2,081 $ 2,009 =========== =========== =========== =========== Basic earnings per share $ 0.39 $ 0.26 $ 1.03 $ 0.82 Diluted earnings per share $ 0.38 $ 0.26 $ 1.01 $ 0.81 Dividends per share $ 0.11 $ 0.10 $ 0.33 $ 0.30 =========== =========== =========== =========== Weighted average shares outstanding (basic) 2,000,877 2,376,908 2,026,928 2,460,534 Weighted average shares outstanding (diluted) 2,059,125 2,395,805 2,064,223 2,478,903 3 IPSWICH BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Nine Months Ended September 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 27 27 Cash dividends (723) (723) Treasury stock purchased (262,400 shares at an average price of $8.74) (2,295) (2,295) Comprehensive income: Net income 2,009 2,009 Other comprehensive income: Unrealized holding gains on securities, net of taxes of $178 267 Reclassification adjustment for amounts included in net income, net of taxes of $10 26 ----------- Other comprehensive income 293 293 ----------- Total comprehensive income 2,302 ----------- ------- ------- -------- ---------- ---------- ----------- Balance at September 30, 2000 2,525,427 253 2,289 15,736 (2,295) 303 16,286 Stock options exercised 125 1 1 Issuance of stock rights 8 8 Cash dividends (233) (233) Treasury stock purchased (191,600 shares at an average price of $9.18) (1,759) (1,759) Comprehensive income: Net income 646 646 Other comprehensive income: Unrealized holding gains on securities, net of taxes of $108 179 Reclassification adjustment for amounts included in net income, net of taxes of $0 (9) ----------- Other comprehensive income 170 170 ----------- Total comprehensive income 816 ----------- ------- ------- -------- ---------- ---------- ----------- Balance at December 31, 2000 2,525,552 253 2,298 16,149 (4,054) 473 15,119 Stock options exercised 2,550 19 19 Issuance of stock rights 13 13 Cash dividends (659) (659) Treasury stock purchased (129,100 shares at an average price of $11.33) (1,461) (1,461) Comprehensive income: Net income 2,081 2,081 Other comprehensive income: Unrealized holding gains on securities, net of taxes of $147 176 Reclassification adjustment for amounts included in net income, net of taxes of ($41) (59) ----------- Other comprehensive income 117 117 ----------- Total comprehensive income 2,198 ----------- ------- ------- -------- ---------- ---------- ----------- Balance at September 30, 2001 2,528,102 $253 $2,330 $17,571 ($5,515) $590 $15,229 ========= ==== ====== ======= ======= ==== ======= 4 IPSWICH BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 2001 and 2000 (Dollars in thousands) (unaudited) 2001 2000 ------- ------- Net cash flows from operating activities: Net income $ 2,081 $ 2,009 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 75 45 Depreciation expense 267 259 Amortization of premiums on investment securities, net 82 41 (Gain) loss on sale of loans, net (324) 78 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 (30,866) (16,014) Proceeds from sale of loans 28,641 3,459 Proceeds from sale of securitized loans 4,990 9,544 (Increase) in loan origination fees (95) (275) Increase (decrease) in loan discounts 47 (4) (Increase) in deferred premium on loans sold and mortgage servicing rights (2) (97) (Increase) in accrued interest receivable (129) (367) (Increase) decrease in other assets, net (93) (77) Increase (decrease) in accrued expenses and other liabilities 1,645 (5) -------- -------- Net cash provided (used) by operating activities 6,137 (1,405) Net cash flows from investing activities: Purchase of investment securities available for sale (33,205) (13,329) Principal paydowns on mortgage-backed investment securities available for sale 16,143 7,197 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 1,614 743 Principal from the call of investment securities held to maturity 9,750 0 Redemption of stock in FHLB of Boston 0 977 Net (increase) in loans (6,897) (10,619) Proceeds from sale of real estate acquired by foreclosure 0 110 Purchases of equipment, net (221) (137) -------- -------- Net cash (used) by investing activities (18,148) (8,073) Cash flows from financing activities: Net proceeds from the issuance of common stock 32 27 Net proceeds from the issuance of trust preferred securities 3,500 0 Purchase of treasury stock (1,461) (2,295) Cash dividends (659) (723) Net increase in deposits 7,712 15,194 Proceeds from Federal Home Loan Bank advances 20,849 53,454 Repayment of Federal Home Loan Bank advances (18,108) (55,870) (Decrease) in mortgagors' escrow accounts (16) (21) -------- -------- Net cash provided by financing activities 11,849 9,766 -------- -------- Net (decrease) increase in cash and cash equivalents (162) 288 Cash and cash equivalents at beginning of period 8,836 8,259 -------- -------- Cash and cash equivalents at end of period $ 8,674 $ 8,547 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest on deposit accounts $ 5,980 $ 5,876 Interest on borrowed funds 1,482 2,230 Income tax expense, net 140 789 Supplemental schedule of non-cash investing and financing activities: Net change required by Statement of Financial Accounting Standards No. 115: Investment securities 223 483 Deferred income tax liability 106 190 Net unrealized gain (loss) on investment securities available for sale 117 293 Transfer of securitized mortgage loans to mortgage-backed securities available for sale 0 575 Conversion of residential real estate loans to mortgage-backed securities $ 5,030 $ 3,276 5 IPSWICH BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 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. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. 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 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 and nine month periods ended September 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. Nine Months Ended September 30, 2001 Income Shares Per-Share ---- (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS $2,081 2,027 $ 1.03 Effect of stock options -- 37 (.02) ------ ------ -------- Diluted EPS $2,081 2,064 $ 1.01 ====== ====== ======== 2000 ---- Basic EPS $2,009 2,461 $ 0.82 Effect of stock options -- 18 (.01) ------ ------ -------- Diluted EPS $2,009 2,479 $ 0.81 ====== ====== ======== Three Months Ended September 30, 2001 Income Shares Per-Share ---- (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS $ 778 2,001 $ 0.39 Effect of stock options -- 58 (.01) ----- ----- -------- Diluted EPS $ 778 2,059 $ 0.38 ====== ====== ======== 2000 ---- Basic EPS $ 617 2,377 $ 0.26 Effect of stock options -- 19 -- ------ ----- -------- Diluted EPS $ 617 2,396 $ 0.26 ====== ====== ======== Other Comprehensive Income Accumulated other comprehensive income consists solely of unrealized appreciation on investment securities available for sale, net of taxes. 7 ITEM 2 - ------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF - -------------------------------------------------------------------------- OPERATIONS - ---------- Certain statements in this Form 10-Q constitute "forward looking statements", as that term is defined under the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "intend", "plan", "assume", and other similar expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward looking statements. Reliance should not be placed on forward looking statements because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the control of the Company and may cause the actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward looking statements. Certain factors that may cause such differences include, but are not limited to the following: interest rates may increase, adversely affecting the ability of borrowers to repay adjustable rate loans and the Company's earnings and income which derive in significant part from loans to borrowers; unemployment in the Company's market area may increase, adversely affecting the ability of individual borrowers to re-pay loans; property values may decline, adversely affecting the ability of borrowers to re-pay loans and the value of real estate securing repayment of loans; general economic and market conditions in the Company's market area may decline, adversely affecting the ability of borrowers to re-pay loans, the value of real estate securing payment of loans and the Company's ability to make profitable loans; 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 nine months ended September 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 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). 8 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 adjustable rate mortgage backed securities are shown as if the entire balance comes due on the repricing date. Estimates of fixed rate loan and fixed rate mortgage backed securities 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 $14.7 million at September 30, 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 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 borrowed facilities within its total available credit line with the FHLBB. Advances from the FHLBB were $34.8 million at September 30, 2001. During 2001 the primary sources of liquidity were $33.6 million in loan sales, principal amortization from mortgage backed securities of $17.8 million, payoffs and principal amortization in the loan portfolio of $45.7 million and the sale/call of investment securities of $13.4 million. The primary uses of funds were $83.4 million in residential and home equity mortgage loan originations and $42.2 million in investment purchases. CAPITAL RESOURCES - ----------------- Total stockholders' equity at September 30, 2001 was $15.2 million, an increase of $110,000 from $15.1 million at the end of 2000. Included in stockholders' equity at September 30, 2001 is an unrealized gain on marketable securities available for sale, net of taxes, of $590,000, an increase of $117,000 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. The Company announced three stock repurchase plans of 10% each since March 2000. Through September 30, 2001, the Company had repurchased 583,100 or 23% of the outstanding shares at an average price of $9.46 totaling $5.5 million, which is reflected as a 9 decrease to equity. There remains approximately 98,000 shares left to complete the third repurchase program. 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 September 30, 2001 Tier 1 leverage capital ratio for the Company was 5.98% compared to 5.04% at December 31, 2000 and 5.52% and 5.14% for the Bank on September 30, 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 September 30, 2001, the Company's total and Tier 1 risk-based capital ratios were 11.85% and 10.64% (compared to 11.53% and 10.28% at December 31, 2000). At September 30, 2001, the Bank's total and Tier 1 risk based capital ratios were 10.94% and 9.73% (compared to 11.72% and 10.47% at December 31, 2000). As of September 30, 2001, the Bank was considered "well-capitalized" under applicable regulatory capital guidelines. FINANCIAL CONDITION - ------------------- The Company's total assets at September 30, 2001 were $303.6 million, an increase of $15.8 million from December 31, 2000 assets of $287.8 million. The increase was largely due to the addition of $7.1 million in total loans and $13.7 million in securities available for sale. Funding the increase in assets for the first nine months of 2001 was deposit growth of $7.7 million, primarily in checking accounts, savings, money market accounts and borrowed funds of $2.7 million. Federal Funds Sold - ------------------ Interest-bearing deposits and federal funds sold at September 30, 2001 was $1.5 million versus zero at December 31, 2000. The increase in fed funds sold was primarily due to accelerated cash flows during the year acerbated by the decline in interest rates during the year. Investment and Mortgage-Backed Securities - ----------------------------------------- Total investments and mortgage backed securities available for sale at September 30, 2001 was $48 million, an increase of $13.7 million in 2001. The increase was primarily the result of the purchase of $33.2 million of fixed rate mortgage-backed securities, offset by $3.6 million in sales and $16.1 million in principal amortization. The unrealized gain on the portfolio of available for sale securities was $999,000 at September 30, 2001. Total investments and mortgage-backed securities held to maturity were $27.9 million at September 30, 2001, versus $30.3 million at December 31, 2000. The decline is due to principal amortization on the portfolio of mortgage-backed securities of $1.6 million. Loans and Loans Held for Sale - ----------------------------- Loans held for sale decreased to $2.6 million at September 30, 2001, versus $5 million at year-end 2000. The Company's portfolio of mortgages held for sale decreased due to the delivery of loans into sale commitments. 10 The loan portfolio at September 30, 2001 was $210.3 million, an increase of $7.1 million in comparison to the portfolio at December 31, 2000 of $203.1 million. The increase was principally in fixed rate mortgages, primarily 15-year, as a result of an asset liability strategy to retain fixed rate loans in the portfolio. CREDIT QUALITY - -------------- Non-Performing Loans - -------------------- Loans placed on non-performing status at September 30, 2001 was $221,000, 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 $2 at September 30, 2001, unchanged since year-end 2000. 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 September 30, 2001 was $2.1 million, an increase of $250,000 since year-end 2000. The increase is attributable to a year-to-date provision of $75,000 and net recoveries of $175,000. Charge-offs during 2001 have primarily been contained to consumer over-drafts. The allowance is reviewed on a quarterly basis by the Board of Directors for reasonableness in light of economic conditions that are applicable at the time. 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 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 loan losses is adequate as of September 30, 2001. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary. Liabilities - ----------- Deposits increased by $7.7 million in the nine months of 2001, to end September 30, 2001 at $244.9 million. Deposits totaled $237.2 million at December 31, 2000. The increase in deposits resulted from the Company's ongoing checking account program which generated 11 an increase of $3.3 million in checking account balances in 2001. In addition, savings and money market deposits increased by $13.1 million while certificates of deposit declined by $8.7 million. As a result of the decline in interest rates during 2001, deposit customers have opted for more liquid deposit accounts versus certificate of deposit accounts. Federal Home Loan Bank of Boston advances increased by $2.7 million in 2001 to $34.8 million at September 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 weighted average maturity of its borrowings is approximately 2.1 years at September 30, 2001 with a weighted average rate of 5.71%. Equity Capital - -------------- Equity capital increased by $110,000 to $15.2 million at September 30, 2001. Equity was principally impacted by earnings for the first nine months of the year of $2.1 million and an increase in the unrealized gain on investment securities of $117,000, net of taxes. Offsetting these increases were payments of cash dividends to shareholders which totaled $659,000 in 2001. Additionally, the Company repurchased 129,100 shares of its outstanding shares in executing its previously announced 10% share repurchase plan. The average price per share was $11.33 totaling $1.5 million. The cost of the shares is reflected in the equity capital section of the balance sheet as "Treasury Stock". 12 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 General - ------- The Company reported net income of $778,000 or $.38 per fully diluted share for the third quarter of 2001. This compares with $617,000 or $.26 per fully diluted share for the third quarter of 2000. The third quarter of 2001 was impacted by the write-off of $106,000 of fixed assets and leasehold improvements as a result of a computer conversion and the renovation of a leased branch. The third quarter 2000 earnings were impacted by a pre-tax charge of $153,000 resulting from a restructuring of a portion of the loan portfolio, consisting of the sale of $6.0 million of below market loans in the secondary market and the reinvestment of these funds in higher rate loans with less interest rate risk. Return on equity for the third quarter of 2001 was 20.32%, versus 14.58% for the same quarter of 2000. The third quarter of 2001 return on assets was 1.03% versus .85% for the same quarter in 2000. Net Interest and Dividend Income - -------------------------------- Net interest income for the third quarter of 2001 was $2.6 million, versus $2.2 million for the same time frame in 2000. The net interest margin percentage was 3.50% for the third quarter of 2001 versus 3.19% for the same quarter the previous year. The Company's net interest margin has benefited from the fall in market interest rates in 2001. Should rates continue to decline, the Company may experience compression of its margin resulting from accelerated prepayments of its mortgage assets. Changes in market interest rates can have a substantial impact on revenues generated from the sale of loans. Non-interest Income - ------------------- Non-interest income for the third quarter of 2001 was $742,000 versus $370,000 in the third quarter of 2000. Non-interest income was substantially higher in 2001, as a result of higher mortgage banking revenues and a pre-tax charge of $153,000 taken from a partial restructuring of the loan portfolio in 2000. Mortgage banking revenues are principally generated from the sale of fixed rate loans in the secondary market. Retail banking fees for the third quarter of 2001 was $577,000 versus $448,000 for the same quarter in 2000. This 28.8% increase is principally the result of the Company's successful efforts to acquire checking account customers in its market place, which generates fee income, as well as increased revenue from debit card transactions and ATM fees. Non-interest Expense - -------------------- Total non-interest expenses were $2.1 million for the third 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 $92,000 in the current quarter versus the same quarter in 2000 and the cost of the Company's trust preferred securities issued in February 2001 which totaled $92,000 in the current quarter. The other expense category increased by $144,000 in 2001 versus 2000 principally from the write-off of fixed assets from a computer conversion and leasehold improvements from a branch renovation. Income Tax Expense - ------------------ The effective tax rate was 35% for the third 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 General - ------- The Company reported net income of $2.1 million or $1.01 per fully diluted share for the first nine months of 2001. This compares with $2.0 million or $.81 per fully diluted share for the first nine months of 2000. Return on equity for the first nine months of 2001 was 18.23%, versus 15.53% for the same time frame in 2000. The first nine months of 2001 and 2000 return on assets was .94%. Net Interest and Dividend Income - -------------------------------- Net interest income for the first nine months of 2001 was $7.1 million, versus $6.7 million for the same time frame in 2000. The net interest margin percentage was 3.31% versus 3.20% for the same time frame the previous year. The net interest income was positively impacted by growth of the balance sheet from $287.8 million at December 30, 2000 to $303.6 million at September 30, 2001. Non-interest Income - ------------------- Non-interest income for the first nine months of 2001 was $2.1 million versus $1.3 million in the first nine months of 2000. Non-interest income increased as a result of higher mortgage banking revenues and a pre-tax charge of $153,000 resulting from the partial restructuring of the loan portfolio in 2000. Mortgage banking revenues are generated from the sale of fixed rate loans in the secondary market. Retail banking fees totaled $1.6 million for the first nine months of 2001 versus $1.3 million for the same time frame in 2000, an increase of $307,000 or 24%. 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 increased debit card transactions and ATM fees. Non-interest Expense - -------------------- Total non-interest expense was $6.0 million for the first nine months of 2001 versus $5.1 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 $198,000; data processing expenses which increased by $146,000 and the cost of the Company's trust preferred securities totaling $219,000 in 2001. Data processing expense increased by $146,000 in 2001 versus 2000 principally from an increase in item processing costs as well as costs related to the sale of the Company's credit card portfolio. Income Tax Expense - ------------------ The first nine months of 2001 effective tax rate was 35% versus 28.2% 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. Excluding the one-time credit, the tax rate in 2000 was 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 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), which is a substantial 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 projected twelve month period: Rate Change Estimated NII Sensitivity Over Twelve Months - -------------------------------------------------------------------------- September 30, 2001 September 30, 2000 ------------------ ------------------ +200bp -1.09% -5.05% - -200bp -1.27% -3.88% A sustained decline in rates past the twelve months presented indicate the Company's NII would be further negatively impacted. 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 15 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. 16 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 - ------------------------------------------------------------------ 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 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. 17 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. 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 August 31, 2001. 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. 18 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 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: November 9, 2001 ----------------- David L. Grey President and Chief Executive Officer By: /s/ Francis Kenney Date: November 9, 2001 ------------------- Francis Kenney Treasurer (Principal Financial Officer and Principal Accounting Officer) 19