Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 30, 1999.
OR
{ } TRANSACTION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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)
(978) 356-7777
(Registrant's telephone number, including area code)
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 August
2, 1999 is:
Common stock, par value $.10 per share 2,524,902
- --------------------------------------------------------------------------------
(Class) (Outstanding)
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
June 30, December 31,
1999 1998
---- ----
Assets (unaudited) (unaudited)
Cash and due from banks $6,418 $7,079
Interest-bearing deposits and federal funds sold 5,626 5,016
Investment securities available for sale 29,917 29,085
Investment securities held to maturity 19,336 10,196
Loans held for sale 6,588 24,000
Loans:
Residential 165,898 161,840
Home equity 21,056 19,772
Commercial 5,047 6,191
Consumer 1,102 1,188
------------- -------------
Total gross loans 193,103 188,991
Allowance for possible loan losses -1,830 -1,742
------------- -------------
Net loans 191,273 187,249
------------- -------------
Stock in FHLB of Boston 3,977 2,905
Savings Bank Life Insurance Company stock 253 253
Banking premises and equipment, net 3,245 3,298
Other real estate owned, net 718 718
Accrued interest receivable 1,254 1,053
Deferred premium on loans sold/mortgage servicing rights, net 922 229
Other assets 230 247
------------- -------------
Total assets $269,757 $271,328
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest-bearing checking accounts $16,502 $18,656
Interest-bearing checking accounts 28,661 22,954
Savings accounts 36,038 37,768
Money market accounts 56,961 55,418
Certificates of deposit 64,047 64,961
------------- -------------
Total deposits 202,209 199,757
Borrowed funds 48,000 53,000
Mortgagors' escrow accounts 977 1,043
Deferred income tax liability, accrued expenses and other liabilities 2,986 3,305
------------- -------------
Total liabilities 254,172 257,105
------------- -------------
Equity capital 15,393 14,038
Unrealized gain on investment securities available for sale, net 192 185
------------- -------------
Total stockholders' equity 15,585 14,223
------------- -------------
Total liabilities and stockholders' equity $269,757 $271,328
============= =============
Shares outstanding 2,524,902 2,392,286
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------- -------------- -------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest and dividend income:
Loans $3,417 $3,508 $7,229 $6,903
Investment securities available for sale 524 207 1,073 415
Investment securities held to maturity 291 360 459 827
Interest-bearing deposits and federal funds sold 57 31 72 46
------------- -------------- -------------- -------------
Total interest and dividend income 4,289 4,106 8,833 8,191
------------- -------------- -------------- -------------
Interest expense:
Deposits 1,576 1,509 3,221 3,055
Borrowed funds 666 716 1,448 1,368
------------- -------------- -------------- -------------
Total interest expense 2,242 2,225 4,669 4,423
------------- -------------- -------------- -------------
Net interest and dividend income 2,047 1,881 4,164 3,768
Provision for possible loan losses 45 45 90 90
------------- -------------- -------------- -------------
Net interest and dividend income after
provision for possible loan losses 2,002 1,836 4,074 3,678
------------- -------------- -------------- -------------
Non-interest income:
Mortgage banking revenues, net 267 317 762 682
Retail banking fees 385 295 723 543
Net gain on sales of securities 16 0 65 16
Other -2 3 7 4
------------- -------------- -------------- -------------
Total non-interest income 666 615 1,557 1,245
------------- -------------- -------------- -------------
Net interest, dividend and non-interest income 2,668 2,451 5,631 4,923
------------- -------------- -------------- -------------
Non-interest expenses:
Salaries and employee benefits 790 662 1,562 1,269
Occupancy and equipment expenses 229 162 450 302
Data processing services 187 136 359 266
Marketing expense 124 189 266 290
Professsional fees 95 86 160 140
Office expense 95 101 194 180
Other 158 158 329 263
------------- -------------- -------------- -------------
Total non-interest expenses 1,678 1,494 3,320 2,710
------------- -------------- -------------- -------------
Expenses from Holding Company & REIT formation 0 0 380 0
Income before income taxes 990 957 1,931 2,213
Income tax expense 297 345 579 797
------------- -------------- -------------- -------------
Net income $693 $612 $1,352 $1,416
============= ============== ============== =============
Weighted average common shares outstanding (basic) 2,462,742 2,389,648 2,427,708 2,388,734
Weighted average common shares outstanding (diluted) 2,544,482 2,470,235 2,533,987 2,563,822
Basic earnings per share $0.28 $0.26 $0.56 $0.59
Diluted earnings per share $0.27 $0.24 $0.53 $0.55
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1999 and 1998
(Dollars in thousands, except for share data)
(unaudited)
Accumulated
Additional Other Total
Shares Common paid-in Retained comprehensive stockholders'
outstanding stock capital earnings income equity
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 2,385,076 $ 239 $ 1,969 $ 9,559 $ 66 $ 11,833
Comprehensive income:
Net income 0 0 0 1,416 0 1,416
Change in net unrealized gain/
(loss) on investment securities
available for sale 0 0 0 0 -38 -38
--------- --------- --------- --------- --------- ---------
Total comprehensive income 0 0 0 1,416 -38 1,378
Cash dividends ($.08 per share) 0 0 0 -191 0 -191
Stock options exercised 4,660 0 13 0 0 13
Issuance of stock rights 0 0 11 0 0 11
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1998 2,389,736 239 1,993 10,784 28 13,044
Comprehensive income:
Net income 0 0 0 1,222 0 1,222
Change in net unrealized gain/
(loss) on investment securities
available for sale 0 0 0 0 157 157
--------- --------- --------- --------- --------- ---------
Total comprehensive income 0 0 0 1,222 157 1,379
Cash dividends ($.09 per share) 0 0 0 -216 0 -216
Stock options exercised 2,550 0 5 0 0 5
Issuance of stock rights 0 0 11 0 0 11
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 2,392,286 239 2,009 11,790 185 14,223
Comprehensive income:
Net income 0 0 0 1,352 0 1,352
Change in net unrealized gain/
(loss) on investment securities
available for sale 0 0 0 0 7 7
--------- --------- --------- --------- --------- ---------
Total comprehensive income 0 0 0 1,352 7 1,359
Cash dividends ($.10 per share) 0 0 0 -246 0 -246
Stock options exercised 132,616 13 224 0 0 237
Issuance of stock rights 0 0 12 0 0 12
--------- --------- --------- --------- --------- ---------
Balance June 30, 1999 2,524,902 $ 252 $ 2,245 $ 12,896 $ 192 $ 15,585
========= ========= ========= ========= ========= =========
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998
(Dollars in thousands)
(unaudited)
1999 1998
------------------ ------------------
Net cash flows from operating activities:
Net income $1,352 $1,416
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for possible loan losses 90 90
Depreciation expense 167 102
Amortization of premiums on investment securities, net 80 37
(Gain) on sale of loans, net -762 -857
(Gain) on sale of real estate acquired by foreclosure 0 -80
(Gain) on investment securities available for sale, net -65 -16
Origination of loans held for sale -47,609 -77,266
Proceeds from sale of loans 7,981 12,340
Proceeds from sale of securitized loans 57,802 56,939
(Increase) decrease in loan origination fees -206 107
(Decrease) in loan discounts -1 0
(Increase) in deferred premium on loans sold and mortgage servicing rights -693 -574
(Increase) in accrued interest receivable -201 -41
Increase (decrease) in other assets, net 17 -4
(Decrease) in accrued expenses and other liabilities -324 -649
------------------ ------------------
Net cash provided (used) by operating activities 17,628 -8,456
Net cash flows from investing activities:
Purchase of investment securities available for sale -13,380 -5,696
Principal paydowns on investment securities available for sale 7,680 3,379
Proceeds from the sale of investment securities available for sale 4,860 1,474
Purchase of investment securities held to maturity -9,579 0
Principal paydowns on investment securities held to maturity 444 2,442
Principal from the call of investment securities held to maturity 0 5,000
Purchases of stock in FHLB of Boston -1,072 -861
Net (increase) in loans -3,907 -3,238
Proceeds from sale of real estate acquired by foreclosure 0 90
Purchases of equipment, net -114 -248
------------------ ------------------
Net cash (used) provided by investing activities -15,068 2,342
Cash flows from financing activities:
Net proceeds from the issuance of common stock 249 25
Cash dividends -246 -192
Net increase in deposits 2,452 4,532
Proceeds from Federal Home Loan Bank advances 156,100 95,213
Repayment of Federal Home Loan Bank advances -161,100 -94,005
(Decrease) increase in mortgagors' escrow accounts -66 116
------------------ ------------------
Net cash (used) provided by financing activities -2,611 5,689
------------------ ------------------
Net (decrease) in cash and cash equivalents -51 -425
Cash and cash equivalents at beginning of year 12,095 6,798
------------------ ------------------
Cash and cash equivalents at end of year $12,044 $6,373
================== ==================
Supplemental disclosure of cash flow information: Cash paid for:
Interest on deposit accounts $3,221 $3,056
Interest on borrowed funds 1,448 1,368
Income tax expense, net 417 797
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999 and 1998
Basis of Presentation
The consolidated financial statements include the accounts of Ipswich
Bancshares, Inc. and its wholly owned subsidiary, Ipswich Savings Bank (the
"Bank") and the Bank's wholly owned subsidiaries, Ipswich Preferred Capital
Corporation, Ipswich Securities Corporation, Historic Ipswich, Inc., North Shore
Financial Services, Inc. and Rowley Investment Corporation (Ipswich Bancshares,
Inc. and its subsidiaries are sometimes collectively referred to as the
Company). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Ipswich Preferred Capital Corporation was formed as a mortgage real estate
investment trust to hold residential mortgages as a subsidiary of the Bank.
Ipswich Securities Corporation was formed to exclusively transact in securities
on its own behalf as a wholly-owned subsidiary of the Bank. Historic Ipswich,
Inc. and North Shore Financial Services, Inc. were incorporated for the purpose
of holding direct investments in real estate and foreclosed real estate,
respectively. Rowley Investment Corporation was incorporated to facilitate the
holding and permitting of certain bank-owned real estate.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for possible loan
losses, the valuation of real estate acquired by foreclosure, the valuation of
the deferred premium on loans sold and the valuation of originated mortgage
servicing rights.
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.
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.
Components of Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists solely of unrealized
appreciation on investment securities available for sale, net of taxes.
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; competitive pressure among depository institutions
may increase; and the impact of the Year 2000 issue may be more significant than
currently anticipated. 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"). On July 1, 1999, in connection with the formation of the Company as the
holding company for the Bank, each share of the Bank's common stock previously
outstanding was converted automatically into one share of common stock of the
Company, and the Bank became a wholly owned subsidiary of the Company. The
reorganization had no impact on the consolidated financial statements.
The Company's operating results for the three and six months ended June 30, 1999
reflect the operations of the Company and its direct and indirect subsidiaries,
Ipswich Savings Bank, Ipswich Preferred Capital Corporation ("IPCC"), Ipswich
Securities Corporation, North Shore Financial Services, Rowley Investment
Corporation and Historic Ipswich, Inc. 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 (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
A primary objective of the Asset/Liability Management Policy is to manage
interest rate risk over time to achieve a prudent level of net interest income
in changing interest rate environments. Management's strategies are intended to
be responsive to changes in interest rates and to recognize market demands for
particular types of deposit and loan products. The strategies are overseen by an
internal Asset/Liability Management Committee.
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 came 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 results of this analysis, the static GAP position in
the 0 to 12 months range is a negative $21.7 million at April 30, 1999, the
latest assessment period.
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. However,
these measurements do reflect major trends and thus the Company's sensitivity to
interest rate changes over time.
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 flows and to meet operating expenses. The primary sources of liquidity
are interest and amortization from loans, mortgage backed securities and
investments, sales and maturities of investments, loan sales, deposits, and
Federal Home Loan Bank of Boston (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 $48.0 million at June 30, 1999.
During 1999 the primary sources of liquidity were $65.8 million in loan sales,
principal amortization from mortgage backed securities of $8.1 million and the
sale of a fixed rate mortgage backed security of $4.9 million. The primary uses
of funds were $73.1 million in residential mortgage loan originations and $23
million in investment purchases.
CAPITAL ADEQUACY
Total stockholders' equity at June 30, 1999 was $15.6 million, an increase of
$1.4 million from $14.2 million at the end of 1998. Included in stockholders'
equity at June 30, 1999 is an unrealized gain on marketable securities available
for sale, net of taxes, of $192,000, an increase of $7,000 as compared to
$185,000 at December 31, 1998. At June 30, 1999, neither the Federal Reserve
Board nor the FDIC permitted the unrealized gain or loss to be used in the
calculation of the Tier 1 leverage capital (see below). Future interest rate
increases could reduce the market value of these securities and reduce
stockholders' equity. As a percentage of total assets, stockholders equity was
5.78% at June 30, 1999, compared to 5.24% at December 31, 1998.
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% for a bank to be classified as "well-capitalized"). At
June 30, 1999, the Bank's Tier 1 leverage capital ratio was 5.90% (compared to
5.55% at December 31, 1998).
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, 1999, the Bank's total and Tier 1 risk-based
capital ratios were 12.96% and 11.70% (compared to 11.70% and 10.45% at December
31, 1998).
As of June 30, 1999, the Bank was considered "well-capitalized" under applicable
regulatory capital guidelines.
YEAR 2000
The Year 2000 issue (commonly referred to as "Y2K"), is the result of computer
programs being written using two digits, rather than four digits, to define the
applicable year. The Y2K issue, which is common to most corporations, including
banks, concerns the inability of information systems, primarily (but not
exclusively) computer software programs, to properly recognize and process
date-sensitive information as the Year 2000 approaches. The following
constitutes the Company's Y2K readiness disclosure under the Year 2000
Information and Readiness Disclosure Act.
Since the Company's information systems functions are either outsourced to
service bureaus or processed in-house using programs developed by third-party
vendors, the direct effort to correct Y2K issues will be undertaken largely by
third parties and will therefore not be within the company's direct control. The
Company expects to bring its mission critical operating systems into compliance
with Y2K requirements through installation of updated or replacement programs
developed by third parties.
Bank regulators have recently issued additional guidance under which they are
assessing Year 2000 readiness. The failure of a financial institution, such as
the Company, to address deficiencies in the Year 2000 management process could
result in (I) enforcement actions that could have a material adverse effect on
the institution; (ii) the imposition of civil money penalties; or (iii) the
delay of receipt of regulatory approval for certain activities or acquisitions.
Awareness Phase
This phase consists of defining the Y2K problem; developing the resources
necessary to perform compliance work, establishing a Y2K program committee and
developing an overall strategy that encompasses in-house systems, service
bureaus for systems that are outsourced, vendors, auditors, customers, and
suppliers (including correspondents). Currently all of the Company's major
computer processing functions are outsourced to third party vendors. This phase
has been completed by the Company's Y2K committee (see below).
Assessment Phase
The Company has organized a Y2K committee, comprised of senior officers, staff
employees and a consultant, to research, develop and implement a plan that will
correct the issue within the time lines established by the Company's regulators.
The committee has substantially completed an assessment, identified mission
critical systems, and created a formal tracking system identifying all third
party vendors and their Y2K compliant version of systems. Mission critical
systems include hardware, software, program interfaces, operating systems as
well as other mechanical systems. Based upon the results of the assessment, the
Company has established internal time frames to upgrade or replace its existing
hardware and software systems. During 1998, the Company replaced its teller
system hardware and software in its retail branch network.
The assessment phase has been materially completed but is considered an ongoing
phase for the Company. The Company is in the process of developing its
contingency plan. The Company has currently estimated the total costs associated
with the Y2K issues to be $140,000. As of June 30, 1999, the Company has
incurred approximately $60,000 of Y2K expenses. The Company continues to
evaluate the estimated costs associated with achieving Y2K readiness based upon
its experience to date. However, no assurances can be given that the Company or
the third party vendors to whom the Company outsources it information systems
will solve all the issues in a successful and timely fashion or that the costs
of such efforts will not exceed current estimates.
Renovation Phase
This phase includes hardware and software upgrades, system replacements, vendor
certification, and other associated changes. Work has been prioritized based on
information gathered during the assessment phase. The Company relies on outside
servicers for its data processing and third party vendors for certain in-house
processing functions. Each servicer and vendor has been contacted and has or
will provide information to the Company concerning their efforts to comply with
the Y2K issue.
Validation Phase
Testing is a multifaceted process that is critical to the Y2K project and
inherent in each phase of the project management plan. This process includes the
testing of incremental changes to hardware and software components. In addition
to testing upgraded components, connections with other systems must be verified,
and all changes should be accepted by internal and external users. Management
will work with its service bureau and third-party software vendors to establish
controls to assure the effective and timely completion of all hardware and
software testing prior to final implementation. As with the renovation phase,
the Company will be in ongoing discussions with its vendors on the success of
their validation efforts.
Implementation Phase
In this phase, systems should be validated as Y2K compliant and be accepted by
the Company. For any system failing certification, the business effect must be
assessed clearly and the organization's Y2K contingency plans should be
implemented. Any potentially noncompliant mission-critical system should be
brought to the attention of executive management immediately for resolution. In
addition, this phase must ensure that any new systems or subsequent changes to
verified systems are compliant with Y2K requirements.
In summary, the Company recognizes Y2K as a global issue with potentially
catastrophic results if not addressed. The Company has and will continue to
undertake all the necessary steps to protect itself and its customers concerning
the Y2K issue. If the Company does not solve such issues, or does not do so in a
timely manner, the Y2K issue could have a material adverse impact on the
Company's business, future operating results and financial condition.
FINANCIAL CONDITION
The Company's total assets decreased to $269.8 million at June 30, 1999 from
$271.3 million at December 31, 1998. The decrease was principally due to the
securitization and delivery of loans held for sale which were originated in the
fourth quarter of 1998 and the first quarter of 1999. The Company also incurred
a small run-off in its portfolio of certificates of deposit which declined to
$64.0 million at June 30, 1999 from $65 million at year-end 1998. This run-off
was principally in high rate CDs.
Investment and Mortgage-Backed Securities
Investments and mortgage backed securities available for sale increased by
$832,000 to $29.9 million at June 30, 1999 primarily as a result of the purchase
of $13.4 million of mortgage-backed securities, offset by the sale of $4.9
million of securities and amortization of $7.7 million. The portfolio of
investment and mortgage-backed securities held to maturity increased to $19.3
million, an increase of $9.1 million, as a result of the purchase of $9.6
million of mortgage-backed securities. Future increases in interest rates could
reduce the value of these investments.
Loans and Loans Held for Sale
Loans held for sale decreased by $17.4 million during the first half of 1999, as
a result of the decrease in fixed rate loan production during the first half of
1999. Total mortgage loan production for the first six months of 1999 totaled
$73.1 million.
The permanent loan portfolio increased by $4.1 million to $193.1 million at June
30, 1999. The increase was primarily in residential first mortgage loans.
CREDIT QUALITY
Non-Performing Loans
Non-accrual loans were $249,000 at June 30, 1999. 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 becomes contractually past
due by ninety (90) days or more, unless the loan is adequately secured and is 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 action to foreclose the
property.
Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure totaled $718,000 at June 30, 1999, the same
as at December 31, 1998. 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. These properties consist mainly of land and single family
and multi-family dwellings. The Company currently has one piece of property
totaling $650,000, which is a 98 acre parcel of land in Rowley, Massachusetts,
which has been permitted to create a 40-lot detached single family residential
subdivision and 10 commercial building lots. There remains outstanding a title
claim to a portion of the property. The claim is being defended by the Company's
title insurance company on behalf of Historic Ipswich, Inc., the owner. The
Company anticipates that the title issue will be resolved in Land Court during
1999; however, the ultimate resolution cannot be predicted. The residential and
commercial portions of the property are currently under agreement to purchase
for more than the book value of the entire parcels. One of the stipulations in
the purchase agreement on the residential side is favorable resolution of the
title issue.
Allowance for Loan Loss
The allowance for loan loss was $1.8 million at June 30, 1999 and $1.7 million
at December 31, 1998. 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. This 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 amount due according to the contractual terms of the note
agreement; other loans are evaluated collectively for impairment. When a loan is
considered to be impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or the fair value of collateral, if the loan is
collateral-dependent. Impairment losses are included in the allowance for loan
losses through a charge to the provision for loan losses. Management believes
that the allowance for possible loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary.
Liabilities
Deposits increased by $2.5 million to $202.2 million at June 30, 1999 from
$199.8 million at December 31, 1998. The increase took place primarily in
interest-bearing checking accounts as a result of the Company's continuing
program to attract transaction account balances.
Federal Home Loan Bank of Boston advances decreased by $5.0 million to $48.0
million at June 30, 1999 from $53.0 million at December 31, 1998 as a function
of cash and liquidity management.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1998
General
The Company reported net income of $693,000 or $.27 per fully diluted share for
the second quarter of 1999. This compares with $612,000 or $.24 per fully
diluted share for the second quarter of 1998. This represents a 13% increase in
net income compared to the same period last year. The second quarter return on
equity was 18.18% which compared to 19.03% in the second quarter of 1998. The
second quarter return on assets was 1.05% which compares to 1.03% for the same
period in 1998.
Net Interest and Dividend Income
Compared to the second quarter of 1998, net interest income grew $166,000 or 9%
as a result of $24.7 million growth in earning assets. For the second quarter of
1999, net interest margin was 3.19% compared to 3.25% for the second quarter of
1998.
Non-interest Income
The second quarter non-interest income of $666,000 is an increase of $51,000, or
8% from the second quarter of 1998. This increase is principally due to the
growth in retail banking fees as a result of the Company's effort to attract
transaction accounts. This growth was realized as a result of the opening of two
new Bank branches in the second half of 1998 and the corresponding deposit
balances generated from those openings. Net mortgage banking revenues declined
by $50,000 in the second quarter of 1999 versus the same quarter of 1998. The
level of mortgage loan production declined $11.8 million from $47.8 million in
1998 to $36 million in 1999. The decline in loan volume translates into lower
mortgage banking fees and gains on sale of loans.
Non-interest Expense
Total non-interest expenses were $1.7 million for the second quarter of 1999
versus $1.5 million for the same quarter in 1998. This represents a 12% increase
in expenses. The increase is principally the result of the addition of two new
branches in the second half of 1998 which resulted in a higher level of salary
and benefit costs and occupancy and equipment costs. Additionally, the Company
added support level operational staff in the second half of 1998 as a means to
support potential future expansion.
Income Tax Expense
The second quarter effective tax rate was 30% compared to 36% for the second
quarter of 1998. A lower tax rate for 1999 was due primarily to the formation of
a residential mortgage REIT which resulted in the Company realizing a lower
state tax expense.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
General
The Company reported net income for the six months ended June 30, 1999 of $1.4
million, or $.53 per fully diluted share compared to $1.4 million, or $.55 per
fully diluted share for the same period last year. Return on equity was 18.13%
and 22.6% for the six months ended June 30, 1999 and 1998, respectively. Return
on average assets was 1.00% and 1.21% for the six months ended June 30, 1999 and
1998, respectively.
Net Interest and Dividend Income
Total net interest and dividend income was $4.1 million for the six months ended
June 30, 1999 versus $3.7 million for the same time frame in 1998. This reflects
the Company's growth in its average earning assets of $33.9 million for the
first half of 1999 versus the same time frame in 1998. The 1999 net interest
margin was 3.23% compared to 3.37% for the same time frame in 1998. This
reflects the declining interest rate environment experienced in the second half
of 1998 and the interest rates on loans placed in the portfolio during that time
frame. Additionally, the Company experienced significant amortization and
pre-payment in its investment portfolio, which is primarily comprised of
mortgage-backed securities. The pre-payments resulted in the Company realizing a
decline for the interest rate earned on those investments.
Non-Interest Income
Non-interest income for the first half of 1999 was $1.6 million, versus $1.2
million for the same time frame in 1998. The Company continued to realize strong
growth in its retail banking fees, which increased by 33% in 1999 versus 1998.
This was a result of the Company's continuing efforts to generated transaction
accounts and corresponding fees generated from those accounts. Mortgage banking
revenues increased by $80,000, or 12% in 1999 versus 1998. In the first half of
1998, the Company created a reserve for a write-down on its mortgage servicing
rights of $140,000 as a result of declining interest rates. The Company created
a reserve of $153,000 in the first half of 1999.
Non-Interest Expenses
Non-interest expenses for the first six months of 1999 excluding the one-time
charge for the holding company and REIT formations, was $3.3 million versus $2.7
million for the first six months of 1998. The increase in expenses reflects the
addition of two new branches which were added in the second half of 1998. The
line items affected by these branches were salary and benefits, occupancy and
data processing costs. Additionally, the Company realized an increase in
operating expenses as a result of the addition of support staff to manage
potential future expansion.
Income Tax Expense
The six-month 1999 effective tax rate was 30% compared to 36% for the six-month
time frame ended June 30, 1998. The lower rate for 1999 was due primarily to the
establishment of the REIT, which will allow the Company to realize a lower state
tax expense.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of the Company's asset/liability management
process which is governed by policies of the Asset/Liability Committees (ALCO).
In this capacity ALCO develops guidelines and strategies impacting the Company's
asset/liability management related activities based upon estimated market risk
sensitivity, policy limits and overall market interest rate levels/trends.
Interest Rate Risk
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 a simulation model and static GAP reports
to quantify the estimated exposure of NII to sustained interest rate changes.
ALCO monitors simulated NII sensitivity over a rolling two-year horizon to gauge
its interest rate risk.
The simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all assets and liabilities
reflected on the Company's balance sheet. A parallel and pro forma shift in
rates of 200 basis points (bp) upward and downward on a static balance sheet
over a 12 month period is assumed. The following reflects the Company's NII
sensitivity analysis as of the most recently reviewed time frame, April 30, 1999
versus December 31, 1998.
Rate Change Estimated NII Sensitivity
1999 1998
------------------
+200pb (5.60%) (13.3%)
-200pb 5.59% 8.5%
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, investment/ 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.
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
a. The Bank's Annual Meeting of Stockholders was held on April 28,
1999.
b. The following is a brief description of the matters voted upon at
the Annual Meeting, including the tabulation of votes:
1. Approval of the reorganization of Ipswich Savings Bank into
the holding company form of ownership by approving a Plan of Reorganization and
Acquisition pursuant to which Ipswich Savings Bank has become a wholly owned
subsidiary of the Company and each outstanding share of common stock of the Bank
was exchanged for one share of the common stock of the Company.
Votes For Votes Against Abstentions Broker Non-Votes
-----------------------------------------------------------
1,805,069 35,302 7,170 400,808
2. Approval of the Ipswich Savings Bank 1998 Stock Incentive Plan.
Votes For Votes Against Abstentions Broker Non-Votes
2,017,135 202,914 28,300
3. Election of two Directors, each for a three-year term
Votes For Votes Withheld
William E. George 2,104,505 143,844
Lawrence J. Pszenny 2,109,755 138,594
4. Election of the Clerk of the Bank for a one-year term
Votes For Votes Withheld Abstentions
Mariell Lyons 2,103,051 134,000 10,632
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
b. Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K (Item 5) on July 9, 1999.
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.
3.2 By-laws of the Company.
4.1 Specimen stock certificate for the Company's Common Stock
10.1 Lease dated August 10, 1992 for premises located at Route 133 and Route 1, Rowley, Massachusetts.
10.2 Lease dated April 25, 1994 for premises located at 451 Andover Street, North Andover, Massachusetts.
10.3 Lease dated March 4, 1996 for premises located at 588 Cabot Street, Beverly, Massachusetts.
10.4 Lease dated July 27, 1997 for premises located at 600 Loring Avenue, Salem, Massachusetts.
10.5 Lease dated February 27, 1998 for premises located at 89 Pleasant Street, Marblehead, Massachusetts
10.6 Lease dated June 12, 1998 for premises located at 470 Main Street, Reading, Massachusetts.
10.7* Incentive Compensation Plan for Senior Management and certain other officers
dated September 15, 1995.
10.8* Director Recognition and Retirement Plan adopted as of May 18, 1999.
10.9* Merger and Severance Benefits Program dated February 18, 1998.
1010* Amended and Restated Employment and Severance Agreement dated May 18, 1999
between Ipswich Savings Bank and David L. Grey.
10.11* Amended and Restated Employment and Severance Agreement dated May 18, 1999
between Ipswich Savings Bank and Francis Kenney
10.12* Amended and Restated Severance Agreement dated May 18, 1999 between Ipswich Savings Bank and
Thomas R. Girard
10.13* Employment Agreement dated June 18, 1998 between Ipswich Savings Bank
and Richard P. Duffett.
10.14(a)* Amended and Restated Split Dollar Agreement dated May 18, 1999 among
Ipswich Savings Bank, Eastern Bank and David L. Grey.
10.14(b)* Amended and Restated Ipswich Irrevocable Insurance Trust dated as of May 18, 1999 by and between
Ipswich Savings Bank and Eastern Bank.
10.15 Contract with Bank's data processor dated February 14, 1997.
10.16* 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.
10.17* 1996 Stock Incentive Plan incorporated by reference to the Company's Registration Statement on Form
S-8 filed on July 22, 1999.
10.18* 1998 Stock Incentive Plan incorporated by reference to the Company's Registration Statement on Form
S-8 filed on July 22, 1999.
10.19* Deferred Stock Compensation Plan for Directors incorporated by reference to the Company's Form S-8
filed on July 22, 1999.
10.20* Savings Bank Employees Retirement Associations 401 (k) Plan as adopted by Ipswich Savings Bank
incorporated by the Company's Registration Statement on Form S-8 filed on July 22, 1999.
11. A statement regarding the computation of earnings per share is included in the Notes to Consolidated
Financial Statements.
12. Not applicable.
27. Financial Data Schedule.
* 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 12, 1999
------------------------------------- -----
David L. Grey
President and Chief Executive Officer
By: /s/ Francis Kenney Date: August 12, 1999
------------------------------------- -----
Francis Kenney
Treasurer
(Principal Financial Officer and Principal Accounting Officer)