SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
PRE-EFFECTIVE AMENDMENT NO. 1
FORM SB-2A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FIRST IPSWICH BANCORP
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(Name of small business issuer in its charter)
MASSACHUSETTS 6711 04-2955061
(State or Jurisdiction) (Primary Standard (IRS Employer of Organization
Industrial Code) Identification No.)
----------------------
31 MARKET STREET
IPSWICH, MASSACHUSETTS 01938
(978) 356-3700
(Address and telephone number of principal executive offices)
----------------------
DONALD P. GILL, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
31 MARKET STREET
IPSWICH, MASSACHUSETTS 01938
(978) 356-3700
(Name, address and telephone number of agent for service)
---------------------
Copies to: David F. Hannon, Esq.
Craig and Macauley Professional Corporation
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210
(617) 367-9500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered |_|
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box.
If this Form is filed to register additional securities for an offering |_|
pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) |_|
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) |_|
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering
If delivery of the Prospectus is expected to be made pursuant to Rule 434, |_|
please check the following box.
CALCULATION OF REGISTRATION FEE
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Dollar Proposed
Title of Each Class of Amount Maximum Offering Proposed Maximum Amount of
Securities to be to be Number of Shares Price Aggregate Registration
Registered Registered to be Registered Per Share Offering Price Fee
---------- ---------- ---------------- --------- -------------- ---
Common Stock $3,900,000 300,000 $13.00 $3,900,000 $494.13
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
THE INFORMATION CONTAINED HEREIN IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 5, 2004
FIRST IPSWICH BANCORP
Document Table of Contents
(sequential) (alphabetical)
------------ --------------
Prospectus Summary Capitalization
Summary Consolidated Financial and Other Certain Relationships and Related
Data Transactions
Recent Developments Counsel
Risk Factors Description of Bancorp's Securities
Special Note Regarding Forward Looking Description of Business
Statements
Use of Proceeds Description of Property
Determination of Offering Price Determination of Offering Price
Market for the Common Stock Dilution
Dilution Directors, Executive Officers, and Control
Persons
Capitalization Disclosure of Commission Position on
Indemnification For Securities
Plan of Distribution Executive Compensation
Description of Business Experts
Management's Discussion and Analysis of Index for Consolidated Financial Statements
Financial Condition and Results of
Operations
Description of Property Legal Proceedings
Legal Proceedings Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Supervision and Regulation Market for the Common Stock
Certain Relationships and Related Plan of Distribution
Transactions
Directors, Executive Officers, and Control Prospectus Summary
Persons
Security Ownership of Certain Beneficial Recent Developments
Owners and Management
Executive Compensation Risk Factors
Description of Bancorp's Securities Security Ownership of Certain Beneficial
Owners and Management
Counsel Special Note Regarding Forward Looking
Statements
Experts Summary Consolidated Financial and Other
Data
Where You Can Get More Information Supervision and Regulation
Disclosure of Commission Position on Use of Proceeds
Indemnification For Securities
Index for Consolidated Financial Where You Can Get More Information
Statements
[LOGO] First Ipswich Bancorp
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
RIGHTS OFFERING
300,000 SHARES
SHARES OF COMMON STOCK
OFFERING PRICE $13.00 PER SHARE
First Ipswich Bancorp is the parent company of the First National Bank of
Ipswich, a national bank headquartered in Ipswich, Massachusetts, that opened
for business in 1892. We are offering for sale non-transferable subscription
rights to purchase up to 300,000 shares of our common stock, $1.00 par value,
at a price of $13.00 per share.
We are offering our shares on a "best efforts" basis. The shares are being
offered on our behalf by certain of our executive officers, to whom no
commissions or other compensation will be paid on account of such activities. We
are not required to sell any minimum number of shares in this offering. Proceeds
of the offering shall be placed in an escrow account until the closing of the
rights offering. The offering is expected to terminate on June 18, 2004 at 5:00
p.m. eastern daylight savings time. We may extend this termination date without
notice to you until June 30, 2004. There is currently no public market for our
common stock. Only shareholders who own Bancorp's shares on May 10, 2004 will be
entitled to subscribe for shares in the rights offering. Some shareholders may
not be eligible to subscribe for shares if they reside in a state in which this
offering is not qualified or is otherwise prohibited by the laws of a state.
Subject to the minimum subscription amount set forth below, each
shareholder will be entitled to a basic subscription right to subscribe for and
purchase the same percentage of the 300,000 shares being offered as is equal to
the shareholder's percentage of the current outstanding shares of Bancorp's
stock. Each shareholder shall be entitled to purchase an additional share if the
shareholder's percentage of the offering results in a fractional share. However,
if the number of shares owned by a shareholder prior to the offering is less
than one hundred (100), the shareholder must purchase a minimum number of shares
such that, following the close of the offering, the participating shareholder
owns at least 100 shares.
If there are any unsubscribed shares, shareholders who exercised all basic
subscription rights to which they were entitled to will have oversubscription
rights to subscribe for additional shares. If the shares subscribed for in the
exercise of oversubscription rights exceed the number of unsubscribed for
shares, the unsubscribed shares will be allocated pro rata among all
shareholders who have exercised their oversubscription rights.
If there are any unsubscribed shares after the exercise of the basic and
oversubscription rights, Bancorp may, on a best efforts basis, offer unsold
shares to individuals, corporations, partnerships or other entities, including
Bancorp's officers and directors and the Bank's employees, officers, directors,
as Bancorp in its sole discretion may determine. To be eligible to participate
in the general offering, participants must subscribe for at least one hundred
(100) shares. Bancorp contemplates that sales of unsubscribed shares may be made
for a period of up to ten (10) days after the closing of the rights offering.
All of these remaining shares shall be offered at the subscription price.
The directors and executive officers of Bancorp and the bank have
individually notified us of their present intentions to subscribe for 64,674
shares in the aggregate (including any oversubscription rights). In addition, if
the rights offering does not yield net proceeds equal to $3,500,000, a director
of Bancorp has notified us of his present intention to purchase enough shares so
that the offering will yield net proceeds of $3,500,000.
INVESTING IN THE SHARES INVOLVES RISKS. WE URGE YOU TO CAREFULLY READ THE
"RISK FACTORS" BEGINNING ON PAGE 10 BEFORE MAKING YOUR INVESTMENT DECISION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE BANK INSURANCE
FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
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Per Share Total
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Public Offering Price $13.00 $3,900,000
Underwriting Discounts and Commissions $ 0 $ -0-
Proceeds to First Ipswich Bancorp $13.00 $3,900,000
May __, 2004
FIRST IPSWICH BANCORP
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2
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA ................................
RECENT DEVELOPMENTS...........................................................
RISK FACTORS .................................................................
Risks Related to Bancorp...................................................
Because most of our loan portfolio is secured by real estate,
negative developments affecting real estate may harm our business....
If our allowance for loan losses is not adequate to cover actual
losses, our net income may decrease..................................
If economic conditions in Essex County, Massachusetts and southeastern
New Hampshire deteriorate, our business may be negatively affected...
Losing key personnel will negatively affect us..........................
We are controlled by major shareholders who may exert substantial
control over matters requiring shareholder approval..................
There is a limited trading market for our common stock, and this may
limit resale of the common stock.....................................
The offering price of the common stock may not be indicative of the
future price of our common stock.....................................
Without a minimum offering amount, the proceeds of this offering
may not be enough to implement Bancorp's growth plan, in which
case the return to investors may be small............................
If we do not purchase an investment advisory firm, we may use
100% of the funds in our discretion for any corporate purpose........
A recent accounting change may give rise to a future regulatory capital
event that may reduce our consolidated capital ratios................
Risks Related to the Banking Industry and Affecting Us.....................
We may be adversely affected by changes in interest rates, which could
decrease our net interest income.....................................
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS.............................
USE OF PROCEEDS...............................................................
DETERMINATION OF OFFERING PRICE
MARKET FOR THE COMMON STOCK...................................................
DILUTION......................................................................
CAPITALIZATION................................................................
PLAN OF DISTRIBUTION..........................................................
DESCRIPTION OF BUSINESS.......................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS.......
OF OPERATIONS..............................................................
DESCRIPTION OF PROPERTY.......................................................
LEGAL PROCEEDINGS.............................................................
SUPERVISION AND REGULATION....................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................
DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS............................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................
EXECUTIVE COMPENSATION........................................................
DESCRIPTION OF BANCORP'S SECURITIES...........................................
COUNSEL.......................................................................
EXPERTS.......................................................................
WHERE YOU CAN GET MORE INFORMATION............................................
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES...........
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................................
[LOGO] First Ipswich Bancorp
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
business information and the financial statements and related notes that appear
elsewhere in this prospectus. In this prospectus, unless the context otherwise
requires, references to "we," "us," "our," and "Bancorp" are to First Ipswich
Bancorp.
WHO WE ARE:
FIRST IPSWICH BANCORP
Organized in 1985, we are a Massachusetts chartered bank holding company
headquartered in Ipswich, Massachusetts. As a bank holding company, we are
subject to regulation by the Board of Governors of the Federal Reserve Bank.
Through our wholly-owned subsidiary, The First National Bank of Ipswich, we
provide community banking services to our principal market areas of northeastern
Massachusetts and southeastern New Hampshire.
At December 31, 2003, we had grown to $340.7 million in assets and $198.1
million in deposits. Deposits are insured by the Federal Deposit Insurance
Corporation up to certain limits (generally $100,000 per depositor).
Our executive office is located at 31 Market Street, Ipswich,
Massachusetts 01938 and our telephone number is (978) 356-3700.
THE FIRST NATIONAL BANK OF IPSWICH
The bank was founded in 1892. The bank is a national banking association
chartered under the National Bank Act. Its deposits are insured by the FDIC, and
it is subject to regulation by the office of the Comptroller of the Currency.
The bank offers a full range of retail banking services to individuals,
businesses, and nonprofit organizations through eleven (11) banking offices
located in northeastern Massachusetts and southeastern New Hampshire. Such
services include a wide range of retail checking and savings accounts, loans,
safe deposit facilities, and automated teller machines at selected branch
locations.
The bank also provides lending, depository and related financial services
to commercial, industrial, financial, and governmental customers. These services
include short- and long-term loans and revolving credit arrangements, letters of
credit, inventory and accounts receivable financing, real estate construction
lending, and mortgage loans.
The bank's trust department offers a wide range of trust services to
individuals, corporations, municipalities and charitable organizations. The bank
acts as trustee of personal, corporate, and other trusts, provides investment
advisory and custody services, acts as executor, administrator and trustee of
estates, and may act as our transfer agent. The market value of assets under
administration in the bank's trust department was $54.6 million at December 31,
2003.
As of December 31, 2003, the bank employed 100 full-time and 27 part-time
employees.
OUR MARKET AREA
The bank's primary market area consists of the Massachusetts communities
of Ipswich, Rowley, Essex, Newburyport, Gloucester, Cambridge, and, following
the opening of our newest branch, Beverly, the New Hampshire communities of
Londonderry, Manchester, Newington and Salem as well as other communities
adjacent to and in close proximity to these communities. In addition, the bank
has filed an application with the OCC to open a branch office in Portsmouth, New
Hampshire. Other surrounding communities located in the north shore area of
Boston, Massachusetts and southeastern New Hampshire make up its secondary
market area. In addition to its main office, the bank also operates full service
branch offices in the Massachusetts communities of Gloucester, Essex,
Newburyport, Rowley and Cambridge as well as the New Hampshire communities of
Londonderry, Manchester, Newington and Salem.
The banking business in the bank's primary market area is highly
competitive. The bank competes actively with other banks, as well as with other
financial institutions engaged in the business of accepting deposits or making
loans and providing trust services. Competitors include commercial banks,
savings banks, savings and loan associations, mortgage banking companies,
finance companies, credit unions, brokerage firms, insurance companies, money
market funds, and mutual funds.
Many of the bank's competitors may have greater financial and other
resources than does the bank. Among the advantages which such competitors may
have are their ability to conduct large advertising campaigns and to allocate
investment assets, including loans, to regions of highest demand and yield. Such
competitors may have greater lending limits than does the bank and perform
certain other functions which the bank does not directly offer.
2
The locations of our banking offices are:
THE FIRST NATIONAL BANK OF IPSWICH
Main Office
31 Market Street
Ipswich, MA 01938
THE FIRST NATIONAL BANK OF IPSWICH THE FIRST NATIONAL BANK OF IPSWICH
Rowley Branch Essex Branch
167 Main Street 8-10 Martin Street
Rowley, MA 01969 Essex, MA 01929
THE FIRST NATIONAL BANK OF IPSWICH THE FIRST NATIONAL BANK OF IPSWICH
Gloucester Branch Newburyport Branch
207 Main Street 155 State Street
Gloucester, MA 01930 Newburyport, MA 01950
THE FIRST NATIONAL BANK OF IPSWICH THE FIRST NATIONAL BANK OF IPSWICH
Rowley, Route 1 Branch Cambridge Branch
144 Newburyport Turnpike 2067 Massachusetts Avenue
Rowley, MA 01969 Cambridge, MA 02138
THE FIRST NATIONAL BANK OF IPSWICH THE FIRST NATIONAL BANK OF IPSWICH
Manchester Branch Londonderry Branch
300 Keller Street 23 Orchard View Road
Manchester, NH 03103 Londonderry, NH 03053
THE FIRST NATIONAL BANK OF IPSWICH THE FIRST NATIONAL BANK OF IPSWICH
Salem Branch Newington Branch
300-344 North Broadway 2200 Woodbury Avenue
Salem, NH 03079 Newington, NH 03801
BUSINESS STRATEGY
We seek growth by developing our core banking operations, deepening our
market penetration by providing additional banking services to our present
customers, expanding our geographic market area and customer base by opening new
offices in selected areas and expanding the range of services offered to our
clients as well as acquiring new clients through the possible acquisition of a
registered investment advisory firm. The major components of our strategy are
set forth below.
o acquisition of registered investment advisory firm
o growth of our community banking franchise
o providing a full-range of financial products
o efficient capital management
As of the date of this prospectus, neither we nor the bank has any
agreement or understanding with any investment advisory firm regarding the
acquisition of such a firm by either us or the bank.
3
THE OFFERING
Securities offered for sale Shares of our common stock, $1.00 par value.
The shares will be represented by certificates.
Number of shares being offered 300,000
Offering price $13.00 per share.
Number of shares of common
stock to be outstanding
after the offering A maximum of 2,057,630 shares.
Market for common stock Currently, Bancorp's shares do not trade on any
exchange and are not quoted on any inter-dealer
electronic quotation system such as the NASD
OTC Bulletin Board. Following the closing of
the offering, however, we intend to provide
quotations of our common stock on the NASD OTC
Bulletin Board. Even if such quotations are
made, however, there may not be any market for
the common stock. See "Risk Factors - There is
a limited trading market for our common stock,
and this may limit resales of the common
stock."
Dividend policy Shareholders are entitled to receive such
dividends as are declared by its board of
directors out of funds legally available for
the payment of dividends. Our payment of
dividends may be subject to the approval of the
Federal Reserve Bank. For the last nine (9)
fiscal quarters, Bancorp has paid a dividend on
its common stock equal to $0.0125 per share. We
intend to continue to pay dividends quarterly.
Use of proceeds Assuming that the offering will be fully
subscribed, we estimate the net proceeds from
the shares we are offering will be
approximately $3,641,500 million, assuming
an offering price of $13.00 per share and after
deducting estimated offering expenses of
approximately $258,500. We intend to
contribute the net proceeds from the offering
to the bank to be used as follows: (i) first,
to acquire a registered investment advisory
firm (if market conditions are favorable for
such an acquisition); (ii) second, to provide
capital to support growth and additional branch
locations; (iii) third, to expand the bank's
loan and investment portfolios; and (iv)
fourth, for general corporate purposes. We do
not currently have any agreement or
understanding to acquire any such investment
advisory firm, but are constantly evaluating
opportunities to do so.
Risk factors You should read the "Risk Factors" section
beginning on page 10 before deciding to invest
in the offering.
4
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The summary consolidated financial and other data presented below should
be read in conjunction with, and is qualified in its entirety by, the audited
financial statements and related notes of Bancorp, appearing in the prospectus
following the "Index to Consolidated Financial Statements" section. HISTORICAL
INFORMATION IN THIS PROSPECTUS RELATING TO THE NUMBER OF OUTSTANDING SHARES AND
PER SHARE DATA HAS BEEN ADJUSTED TO REFLECT THE 10 FOR 1 STOCK SPLIT DECLARED ON
FEBRUARY 18, 2004 AND EFFECTIVE ON MARCH 19, 2004.
INCOME STATEMENT DATA
Years Ended December 31,
-------------------------------------------------------------
(in thousands, except per share data) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Interest and Dividend Income $ 15,752 $14,721 $13,956 $12,106 $10,468
Interest Expense 5,527 5,740 5,801 4,983 4,190
Provision (Credit) for Loan Losses (55) 50 235 34 51
Other Income 4,234 3,751 3,119 2,082 1,965
Operating Expenses 11,541 10,284 9,168 7,656 7,145
Net Income 2,042 1,666 1,367 964 678
Earnings per Common Share:
Basic $ 1.16 $ 0.95 $ 0.78 $ 0.55 $ 0.46
Diluted 1.13 0.93 0.77 0.55 0.41
Dividends per Common Share .05 .05 0.01 -- --
Weighted Average Common Shares Outstanding:
Basic 1,755 1,751 1,753 1,756 1,475
Diluted 1,813 1,790 1,779 1,756 1,656
BALANCE SHEET DATA
At December 31,
--------------------------------------------------------
(in thousands, except per share data) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total Assets $340,719 $303,505 $232,601 $176,981 $161,715
Investments 164,660 144,141 94,103 61,221 55,977
Loans, Net 156,504 136,452 117,789 98,053 88,854
Total Deposits 198,058 189,808 178,347 131,541 124,781
Subordinated Debentures 9,000 9,000 3,000 3,000 --
Other Borrowed Funds 116,735 88,632 37,676 29,495 25,507
Stockholders' Equity 15,268 14,008 11,703 10,157 8,661
Common Shares Outstanding 1,758 1,753 1,748 1,752 1,777
Book Value per Share (stockholders' equity
divided by shares outstanding at end of
year) 8.69 7.99 6.70 5.80 4.87
5
SELECTED OPERATING RATIOS
Years Ended December 31,
---------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Return on average assets .64% .66% .68% .58% .45%
Return on average stockholders' equity 13.96 12.87 12.17 10.58 8.11
Interest rate spread(1) 3.21 3.61 3.88 4.06 4.07
Net interest margin(2) 3.43 3.91 4.41 4.69 4.58
Non-interest income as a percentage of total revenue(3) 21.18 20.31 18.27 14.67 15.80
Non-interest income as a percentage of average assets 1.33 1.50 1.54 1.24 1.30
Non-interest expense as a percentage of average assets 3.62 4.10 4.53 4.57 4.74
Efficiency ratio(4) 88.67 88.92 86.34 83.41 86.92
(1) Interest rate spread is the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
(2) The net interest margin is calculated by dividing net interest income by
average interest earning assets.
(3) Total revenue consists of interest income and non-interest income.
(4) Efficiency ratio is non-interest expense divided by the sum of net
interest income and non-interest income, excluding net gains on sales and
calls of securities.
ASSET QUALITY RATIOS
At or for Years Ended December 31,
-----------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Non-performing loans to year-end loans 0.00% 0.00% 0.09% 0.82% 1.02%
Allowance for loan losses to year-end loans .85 1.00 1.16 1.19 1.32
Non-performing assets to total assets(1) 0.00 0.00 0.05 0.46 0.57
Net loan charge-offs to average loans 0.00 0.03 0.04 0.05 0.01
(1) Non-performing assets consist of non-accrual loans, restructured loans and
foreclosed assets, where applicable.
SELECTED CONSOLIDATED CAPITAL RATIOS
At December 31,
---------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total Capital (to risk weighted assets) 13.64% 14.81% 11.99% 13.55% 11.62%
Tier 1 Capital (to risk weighted assets) 10.86 11.12 10.97 12.45 10.37
Tier 1 Capital (to average assets) 5.99 6.31 6.77 7.83 6.11
Equity to assets ratio(1) 4.48 4.62 5.03 5.74 5.36
(1) Equity to assets ratio is year-end total equity to year-end total assets.
6
RECENT DEVELOPMENTS
Our board of directors approved a 10-for-1 stock split in the form of a
stock dividend of nine shares of common stock. The split took place on March 19,
2004. As a result of the stock split, the number of outstanding shares of the
common stock increased from 175,763 to 1,757,630. HISTORICAL INFORMATION IN THIS
PROSPECTUS RELATING TO THE NUMBER OF OUTSTANDING SHARES AND PER SHARE DATA HAS
BEEN ADJUSTED TO REFLECT THE 10 FOR 1 STOCK SPLIT EFFECTIVE MARCH 19, 2004.
At a shareholder meeting held on March 31, 2004, the shareholders approved
an increase in the authorized common stock of Bancorp from 2,000,000 shares to
4,000,000 shares.
On April 2, 2004, the bank purchased the assets and the liabilities of a
branch office of another institution located in Cambridge, Massachusetts.
Further, on or about May 15, 2004, the bank plans to open a new branch in
Beverly, Massachusetts.
The bank has entered into an agreement with a third-party landlord to
lease a building in Portsmouth, New Hampshire for a new branch. An application
for approval of the proposed branch has been filed with the OCC. Subject to OCC
approval, the bank anticipates opening the branch in the third quarter of 2004.
The bank has entered into an agreement with a landlord for a built-to-suit
branch in northeastern Massachusetts, which branch shall be leased to the bank.
The transaction is contingent upon the bank obtaining all permits and approvals
required for the project and the approval of the OCC. There is no assurance that
the bank will obtain such permits and approvals.
On April 23, 2004, Bancorp released a report to its shareholders on its
2004 first quarter financial performance. That report showed consolidated net
income of $353,000 and basic earnings per share of $.20 ($.19 on a diluted
basis). This compares to consolidated net income of $729,000 and basic earnings
per share of $.42 ($.40 on a diluted basis) for the quarter ended March 31,
2003. This decrease in net income in the lower past quarter can primarily be
attributed to a one-time gain on sales of securities in the first quarter of
2003 and by increased operating costs associated with the implementation of our
strategic initiatives. See "Management's Discussion and Analysis - Overview."
Gains on the sales of securities fell 39.6% in the past quarter to $386,000 from
$639,000. Total operating expenses in the first quarter increased 24.4% to $3.31
million from $2.66 million in the first quarter of 2003. These increases can be
attributed primarily to increases in salaries due to the addition of new
employees and increases in professional fees incurred in connection with the
implementation of our growth plan.
Net interest income increased in the first quarter of this year 13.5 %
from approximately $2.44 million to $2.77 million compared to the same period in
2003. This increase can be attributed to growth in loans and investment
securities. Management believes that in the following periods of 2004, this item
is likely to decrease because of the bank's recent sale of certain long-term,
higher yielding debt securities for shorter-term, lower-yielding securities as
part of its effort to decrease the sensitivity of its securities portfolio to
higher interest rates in the current interest rate environment. See "Risk
Factors - We may be adversely affected by changes in interest rates which could
decrease our net income."
Total interest and dividend income increased 6.1% in the first quarter to
$4.1 million compared with $3.86 million one year earlier. This increase can be
attributed to growth in average loan balances and securities balances.
7
FIRST IPSWICH BANCORP
Consolidated Balance Sheets
UNAUDITED
March 31
(In thousands, except share data) 2004 2003
---- ----
ASSETS
Cash and cash equivalents $ 9,505 $ 10,066
Certificate of deposit 2,266 --
Securities available for sale, at fair value 105,760 128,861
Securities held to maturity, at amortized cost 37,969 14,285
Federal Home Loan Bank stock, at cost 5,590 5,248
Federal Reserve Bank stock, at cost 489 489
Loans, net 159,294 143,903
Premises and equipment, net 5,559 5,320
Other assets 3,789 3,917
--------- ---------
$ 330,221 $ 312,089
========= =========
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 194,542 $ 188,897
Federal Home Loan Bank advances 100,418 89,619
Other borrowed funds 9,421 8,352
Subordinated debentures 9,000 9,000
Other liabilities 1,142 1,811
--------- ---------
Total liabilities $ 314,523 $ 297,679
--------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued -- --
Common stock, $1.00 par value; 4,000,000 shares
authorized, 1,778,120 shares issued 1,778 1,778
Additional paid-in capital 5,894 5,881
Retained earnings 8,155 6,577
Accumulated other comprehensive income (loss) (18) 309
Treasury stock, at cost (20,490 shares in 2004 and
24,930 shares in 2003) (111) (135)
--------- ---------
Total stockholders' equity 15,698 14,410
--------- ---------
Total liabilities and stockholders' equity $ 330,221 $ 312,089
========= =========
Book value per share $ 8.93 $ 8.22
Allowance for loan losses (ALLL) $ 1,333 $ 1,372
Non-accrual loans $ 0 $ 0
Non-performing assets $ 0 $ 0
Net charged-off loans (recoveries) $ 26 $ 12
Non-performing assets to total assets 0.00% 0.00%
Non-performing assets to ALLL 0.00% 0.00%
Leverage ratio 6.22% 6.15%
Risk based capital ratio 14.12% 14.10%
8
FIRST IPSWICH BANCORP
Consolidated Statements of Income
UNAUDITED
Three Months Ended
(In thousands, except per share data) March 31,
2004 2003
---- ----
Interest and dividend income:
Interest and fees on loans $2,523 $2,382
Interest and dividends on securities 1,541 1,480
Other interest 34 1
------ ------
Total interest and dividend income 4,098 3,863
------ ------
Interest expense:
Interest on deposits 518 665
Interest on borrowed funds 663 609
Interest on subordinated debentures 144 147
------ ------
Total interest expense 1,325 1,421
------ ------
Net interest income 2,773 2,442
Provision for loan losses -- --
------ ------
Net interest income, after provision for loan losses 2,773 2,442
Other income:
Gain on sales and calls of securities, net 386 639
Service charges on deposit accounts 286 246
Trust fees 91 84
Non-deposit investment fees 93 68
Miscellaneous 157 247
------ ------
Total other income 1,013 1,284
------ ------
Operating expenses:
Salaries and employee benefits 1,875 1,401
Occupancy and equipment 446 453
Professional fees 287 175
Other 701 632
------ ------
Total operating expenses 3,309 2,661
------ ------
Income before income taxes 477 1,065
Provision for income taxes 124 336
------ ------
Net income $ 353 $ 729
====== ======
Weighted average common shares outstanding:
Basic 1,758 1,753
Diluted 1,819 1,806
Earnings per share:
Basic $ 0.20 $ 0.42
Diluted 0.19 0.40
Return on average assets 0.42% 0.95%
Return on average equity 9.10% 21.50%
Net interest margin 3.81% 3.67%
9
RISK FACTORS
You should consider the following risk factors in addition to the other
information in this prospectus before investing in the shares.
The risk factors set forth below are cautionary statements identifying
important factors that could negatively affect our results or the value of your
investment in our shares or cause actual results to differ materially from those
in forward-looking statements.
An investment in the shares involves a number of risks. We urge you to
carefully consider this information, together with the other information in this
prospectus and in the documents that we have incorporated by reference in this
prospectus.
RISKS RELATED TO BANCORP:
Because most of our loan portfolio is secured by real estate, any negative
developments affecting real estate may harm our business.
Approximately $136.1 million, or 86.2%, of our loan portfolio consists of
residential and commercial loans that are secured by various types of real
estate as collateral, as well as real estate loans on residential commercial
properties. Because these loans rely on real estate as collateral, either
totally in the case of real estate loans or partially in the case of residential
or commercial loans secured by real estate, they are sensitive to economic
conditions and interest rates. Real estate lending also presents additional
credit related risks, including a borrower's inability to pay and deterioration
in the value of real estate held as collateral.
If our allowance for loan losses is not adequate to cover actual losses, our net
income may decrease.
We are exposed to the risk that our customers will be unable to repay
their loans in a timely fashion and that collateral securing the payment of
loans may be insufficient to assure repayment. Borrowers' inability to repay
their loans could erode our bank's earnings and capital. We maintain an
allowance for loan losses to cover loan defaults. We base our allowance for loan
losses on various assumptions and judgments regarding the collectability of
loans, including our prior experience with loan losses, as well as an evaluation
of the risks in our loan portfolio. We maintain this allowance at a level we
consider adequate to absorb anticipated losses. The amount of future loan losses
is susceptible to changes in economic, operating and other conditions, including
changes in interest rates that may be beyond our control. The allowance,
however, is maintained at a level management believes is adequate given known
circumstances but could prove to be inadequate in the event of prolonged local
economic stress.
Actual losses may exceed our estimates and we may have to increase the
allowance for loan losses. This would cause us to increase our provision for
loan losses, which would decrease our net income. Further, state and federal
regulatory agencies, as an integral part of their examination process, review
our loans and our allowance for loan losses. Regulators, when reviewing our loan
portfolio, may require us to increase our allowance for loan losses, which would
negatively affect our net income.
As of December 31, 2003, our allowance for loan losses was $1,334,000. Net
recoveries for the year ended December 31, 2003, were $5,000. The credit for
loan loss for the year ended December 31, 2003 was unusual, and investors should
not anticipate a credit in future years.
10
If economic conditions in Essex County, Massachusetts or southeastern New
Hampshire deteriorate, our business may be negatively affected.
Our success depends on the general economic conditions of the markets we
serve. Our operations are concentrated in Essex County, Massachusetts, where
70.00% of our loan customers are located and 79.07% of our deposit customers are
located, and southeastern New Hampshire, where 4.95% of our loan customers are
located and 4.53% of our deposit customers are located. If economic conditions
in these areas are unfavorable or deteriorate, the number of borrowers that are
unable to repay their loans on a timely basis could increase. This could lead to
higher rates of loss and loan payment delinquencies.
Losing key personnel will negatively affect us.
Competition for personnel is strong in the banking industry. We may not be
able to attract or retain the personnel we require to compete successfully. We
currently depend heavily on the services of our chief executive officer, Donald
P. Gill, and a number of other members of our senior management team. Mr. Gill
is bound by an employment agreement with the bank which has an initial term that
expires in three years. Losing Mr. Gill's services or those of certain other
members of senior management could affect us in a material and adverse way.
Furthermore, we do not presently carry key man insurance on Mr. Gill. Our
success will also depend on attracting and retaining additional qualified
management personnel.
We are controlled by major shareholders, who may exert substantial control over
matters requiring shareholder approval.
Neil St. John Raymond, a director of Bancorp, directly owns approximately
56.35% of our outstanding common stock. Furthermore, if Mr. Raymond and all
others were to exercise warrants to purchase additional shares of our common
stock (all of which they are currently able to exercise), Mr. Raymond would
directly own 57.22% of our outstanding common stock. Further, Joseph A. Brear,
Trustee of the Raymond Children's Trust (a trust for the benefit of Mr.
Raymond's children), owns approximately 13.13% of our outstanding common stock.
Even if neither of them purchases any shares in this offering and Mr. Raymond
has not exercised his warrants, Mr. Raymond will continue to have effective
control over the election of directors and other matters submitted to a vote of
our stockholders, as Mr. Raymond's and Mr. Brear's percentage interests would be
48.13% and 11.21%, respectively (assuming a full subscription to the offering).
This would include any unsolicited proposals by third parties to acquire
Bancorp. These proposals could be voted down by Mr. Raymond whether or not such
proposals were supported by stockholders generally.
There is a limited trading market for our common stock, and this may limit
resale of the common stock.
Because of the limited trading market for our shares, there is no
assurance that you will be able to resell your shares of common stock for an
aggregate amount per share that is equal to or more than the price in the
offering should you need to sell your investment. Currently, Bancorp shares are
not listed on any stock exchange, the NASDAQ(SM) market, the NASDAQ SmallCap
Market(SM), or quoted on the NASD OTC Bulletin Board. This lack of a market for
Bancorp's shares could negatively affect your ability to sell the stock. Also,
even if there was a market for the stock, there is a lack of liquidity in the
market because, as of the date hereof, only 432,376 outstanding shares of our
common stock (24.6% of the outstanding shares) are held by persons other than
officers and directors. There is currently no market maker for our common stock
and there is no external central source of information concerning the prices and
volume of trades in the stock. Following the offering, however, Bancorp intends
to address certain of these factors by providing quotations of our common stock
on the NASD OTC Bulletin Board. In addition, over a longer time horizon, Bancorp
11
desires to list on the NASDAQ SmallCap Market(SM). However, there can be no
guarantees that such a listing will ever occur. Furthermore, the development of
a public trading market depends upon the existence of willing buyers and sellers
which is not within our control. Market makers are not required to maintain a
continuous two-sided market and are free to withdraw firm quotations at any
time. Even with a market maker, the limited size of this offering will impede
the development of an active and liquid market for common stock. Accordingly,
you should carefully consider the limited liquidity of your investment in the
shares.
In the event that there are a small number of nonaffiliate purchasers and
our directors and executive officers purchase a large number of shares, the
marketability of our stock may be further limited due to the reselling
restrictions imposed upon certain individuals, including our directors and
executive officers, under federal securities laws. Under Rule 144 of the SEC,
during any three month period, a director or executive officer may sell no more
than the greater of (i) 1% of outstanding shares, or (ii) the average weekly
trading volume for our stock during the preceding four weeks. If these
restrictions on resale are applicable to the holders of a large percentage of
our shares or a large percentage of our shareholders (as is the case now), the
marketability of our shares may be further reduced. Accordingly, before
purchasing, you should consider the limited trading market for the shares and be
financially prepared and able to hold your shares for an indefinite period. See
"Market for Common Stock."
The offering price of the common stock may not be indicative of the future price
of our common stock.
Because there is no active trading market for our common stock, the board
of directors established the offering price based on factors it considered
appropriate. Also, there is no underwriter involved in this offering. When an
underwriter is involved, the offering price typically reflects market forces at
work because the underwriter works with the issuer to price the offering, based
on factors that include demand for the shares from securities dealers and the
underwriter's analysis of the issuer's financial performance. Although
imperfect, this process provides some protection that the offering price is the
market price. Accordingly, we cannot assure you that if you purchase common
stock in the offering you will later be able to sell it at or above the purchase
price. See "Determination of Offering Price."
Without a minimum offering amount, the proceeds of this offering may not be
enough to implement Bancorp's growth plan, in which case the return to investors
may be small.
Without a requirement to raise a minimum amount in the offering, the funds
raised may not be sufficient to undertake the acquisition of an investment
advisory firm and other growth plans contemplated by management. If Bancorp does
not have sufficient capital to move forward with its growth plans, the return to
investors may be small, if any. Bancorp may have to obtain additional capital on
terms which are not favorable to Bancorp. We believe that this risk is mitigated
by the fact that one of our directors has indicated a present intention to
purchase enough shares so that the offering will yield at least $3.5 million,
which we believe to be adequate to acquire an investment advisory firm meeting
our acquisition profile. Nevertheless, the intention of this director is not
binding.
If we do not purchase an investment advisory firm, we may use 100% of the funds
in our discretion for any corporate purpose.
We intend to use a majority of the proceeds of this offering for the
acquisition of a registered investment advisory firm. However, market or other
conditions may preclude us from doing so. In such case, we may use some or all
such proceeds for general corporate purposes with the goal of growing the bank,
either internally or through acquisitions, and to increase our capital to permit
us to make loans in larger amounts. Because of the uncertainty involved in
12
purchasing an investment advisory firm and our discretion to use the proceeds in
the absence of a favorable transaction, there is no assurance that you will
agree with the uses we choose to make of these funds. See "Use of Proceeds."
Recent accounting changes may give rise to a future regulatory capital event
that may reduce our consolidated capital ratios.
As of December 31, 2003, we have issued $9 million in subordinated
debentures to First Ipswich Capital Trusts I and II, a portion of which we treat
as Tier 1 regulatory capital to the extent allowable by Federal Reserve capital
guidelines. See "Subordinated Debentures-Trust Preferred." In January 2003, the
Financial Accounting Standards Board, the "FASB," issued FASB Interpretation No.
46, Consolidation of Variable Interest Entities ("FIN 46") that addresses the
consolidation rules to be applied to "variable interest entities" such as the
trusts. The Company applied FIN 46 as of December 31, 2003. Application of FIN
46 resulted in us no longer consolidating such subsidiaries, but recording them
on the equity method.
Given the issues raised by FIN 46, there could be a change to the
regulatory capital treatment of trust preferred securities issued by
subsidiaries of U.S. bank holding companies. Specifically, it is possible that
the Federal Reserve Board may conclude that trust preferred securities should no
longer be treated as Tier 1 regulatory capital. Exclusion of trust preferred
securities may adversely affect our capital adequacy ratios, and may negatively
affect our plan for growth. At December 31, 2003, trust preferred securities
aggregating $5,097,000 are included in Tier 1 capital, as current regulatory
guidelines limit the amount of trust preferred securities included in Tier 1
capital to no more than 25% of Tier 1 capital. We believe that the adverse
effect of an overall exclusion of trust preferred securities would be at least
partially mitigated by our ability to raise additional Tier 1 capital through
means which may include (1) the issuance of additional common stock in
connection with the likely exercise of outstanding warrants in December, 2004,
with approximate proceeds of $900,000, and (2) the sale of additional common
stock in the future.
RISKS RELATED TO THE BANKING INDUSTRY AND AFFECTING US:
We may be adversely affected by changes in interest rates, which could decrease
our net interest income.
We may not be able to effectively manage changes in interest rates that
affect what we charge as interest on our earning assets and the expense we must
pay on interest-bearing liabilities, which may significantly reduce our
13
earnings. In addition, there are costs associated with our risk management
techniques, and these costs could be material. Fluctuations in interest rates
are not predictable or controllable. Therefore, there can be no assurances of
our ability to continue to maintain a consistent positive spread between the
interest earned on our earning assets and the interest paid on our
interest-bearing liabilities.
Our profitability is based in part on the difference or "spread" between
the interest rates we earn on investments and loans we make and the interest
rates we pay on deposits and other interest-bearing liabilities. Like most
banks, our net interest spread and margin is affected by general economic
conditions and other factors that influence market interest rates and by our
ability to respond to changes in interest rates. At any given time, our assets
and liabilities are affected differently by a given change in interest rates,
principally because we do not match the maturities of our loans and investments
precisely with our deposits and other funding sources. As a result, an increase
or decrease in interest rates could have a material adverse effect on our net
income, capital and liquidity.
We have recently restructured our securities portfolio to make it less
sensitive to the possibility of rising interest rates in the future.
Accordingly, we may experience a decrease in interest income from our securities
portfolio in the short term. If interest rates do not increase as we have
anticipated, or instead decrease, then our net interest margins may decline
until interest rates increase and/or strategies are modified.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have used and incorporated by reference "forward-looking statements" in
this offering memorandum. Words such as "believes," "expects," "may," "will,"
"should," "projected," "contemplates" or "anticipates" may constitute
forward-looking statements. These statements are subject to risks and
uncertainties that could cause our actual results to differ materially. We have
used these statements to describe our expectations and estimates in various
areas, including:
o our overall business conditions, particularly in the markets in
which we operate,
o fiscal and monetary policy,
o the market for loan originations and purchases,
o competitive products and pricing,
o credit risk management, and
o changes in regulations affecting financial institutions.
Our actual results could vary materially from the future results covered
in our forward-looking statements. The statements in the "Risk Factors" section
are cautionary statements identifying important factors, including certain risks
and uncertainties that could cause our results to vary materially from the
future results covered in such forward-looking statements. Other factors, such
as the general state of the United States economy, could also cause actual
results to vary materially from the future results covered in such
forward-looking statements. We disclaim any obligation to announce publicly
future events or developments that affect the forward-looking statements in this
offering memorandum.
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations not contained in this prospectus in
connection with the offering of the capital securities. If given or made, such
information or representations must not be relied upon as having been authorized
by us. This prospectus does not constitute an offer to sell, or a solicitation
of an offer to buy, the shares in any jurisdiction where, or to any person to
14
whom, it is unlawful to make such offer or solicitation. Neither the delivery of
this prospectus nor any sale made hereunder shall, under any circumstances,
imply that there has not been any change in the facts in this prospectus or our
affairs since the date of this prospectus.
USE OF PROCEEDS
Assuming that the offering will be fully subscribed, we estimate the net
proceeds from the sale of the shares we are offering will be approximately
$3,641,500 million, assuming an offering price of $13.00 per share and after
deducting estimated offering expenses of approximately $258,500. We intend to
contribute all of the net proceeds to the bank as a capital contribution. We
intend to use proceeds contributed to the bank as follows: (i) first, to acquire
a registered investment advisory firm (if market conditions are favorable for
such an acquisition); (ii) second, to provide capital to the bank to support
growth and additional branch locations; (iii) third, to expand the bank's loan
and investment portfolios; and (iv) fourth, for general corporate purposes. At
the current time, we do not have any agreements or understandings to acquire an
investment advisory firm, but are constantly evaluating opportunities to do so.
DETERMINATION OF OFFERING PRICE
Our board of directors set the offering price for the shares of common
stock at $13.00 per share. The board appointed a pricing committee to make a
recommendation to the board based on the committee's evaluation of those factors
which would affect the offering price. In setting the offering price, the board
of directors considered our present earnings and prospects for future earnings,
the prospects of the banking industry in which we compete, the prices at which
the stock of our competitors trade and the board of directors' belief that there
will be a demand for shares of our common stock. Based upon these
considerations, the committee and the board fixed the per share offering price
at $13.00 which is approximately 1.5 times Bancorp's book value per share at
December 31, 2003 and 11.2 times Bancorp's 2003 base earnings per share.
MARKET FOR THE COMMON STOCK
There currently is no market for any of our securities. Although Bancorp
intends to request a registered broker-dealer to provide quotations of our
common stock on the NASD OTC Bulleting Board following the closing of this
offering, there can be no assurances that an active and liquid market will
develop for the common stock. See "Risk Factors - There is a limited trading
market for our common stock, and this may limit resales of the common stock."
Shareholders are entitled to receive dividends as are declared by the
board of directors out of funds available for the payment of dividends. Our
payment of dividends may be subject to the approval of the Federal Reserve Bank.
For the last nine (9) fiscal quarters, Bancorp has paid a dividend on its common
stock equal to $0.0125 per share. We intend to continue to pay dividends
quarterly.
As of the date of this prospectus, there are:
o 162,000 shares of common stock that are subject to outstanding
options or warrants convertible thereinto;
o approximately 432,470 shares of common stock that could be sold
without restriction pursuant to Rule 144 as promulgated under the
Securities Act;
o no shares of common stock that Bancorp has agreed to register under
the Securities Act for the benefit of a securities holder; and
15
o approximately 293 holders of the shares of our common stock.
As of December 31, 2003, there were no securities issued under an equity
compensation plan. See "Executive Compensation - Compensation Pursuant to Stock
Option Plans."
DILUTION
The following shows the weighted average price paid by officers,
directors, promoters and affiliated persons who purchased shares of Bancorp's
common stock since 1999:
Year Price
---- -----
1999 $6.00
2000 4.97
2001 5.76
2002 7.29
2003 8.25
In December 2000, directors and affiliated persons received warrants in
connection with the issuance of trust preferred securities. The exercise price
was $5.555 per share. See "Description of Bancorp's Securities - Warrants Issued
with Trust Preferred."
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
December 31, 2003, on an actual basis and on a pro forma basis as adjusted to
give effect to the sale of 300,000 shares in this offering, assuming an offering
price of $13.00 per share and estimated offering expenses of $259,000. You
should read this information together with our consolidated financial statements
and related notes, which are included elsewhere in this prospectus.
At December 31, 2003
----------------------
Pro Forma
100% of the
Actual shares sold
------ -----------
Long-Term Debt:
Guaranteed preferred beneficial interests in our subordinated
debentures(1) .......................................................... $ 9,000 $ 9,000
-------- -------
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized, none issued
Common stock, $1.00 par value; 4,000,000 shares authorized,
1,778,120 and 2,078,120 shares issued, respectively .................... 1,778 2,078
Additional paid-in capital ............................................... 5,894 9,236
Retained earnings ........................................................ 7,826 7,826
Accumulated other comprehensive loss ..................................... (119) (119)
Treasury stock, at cost (20,490 shares) .................................. (111) (111)
-------- -------
Total stockholders' equity .................................................. 15,268 18,910
-------- -------
Total guaranteed preferred beneficial interests on our subordinated
debentures and stockholders' equity ...................................... $ 24,268 $27,910
======== =======
Consolidated capital ratios:(2)
Total Capital (to risk-weighted assets) .................................. 13.64% 15.29%
Tier 1 Capital (to risk-weighted assets) ................................. 10.86% 12.55%
Tier 1 Capital (to average assets) ....................................... 5.99% 6.98%
16
(1) The subordinated debentures are the primary asset of certain affiliated
trusts whose obligations have been guaranteed by Bancorp. $3,000,000 of
these debentures will mature on December 29, 2030, with the remaining
$6,000,000 maturing on September 25, 2032. See "Description of Bancorp's
Securities - Subordinated Debentures - Trust Preferred."
(2) The newly issued common stock is treated as Tier 1 capital for risk-based
and leverage capital ratios.
The following table sets forth our capital ratios as of December 31, 2003,
and as adjusted to give effect, after deducting estimated offering expenses of
$259,000, to the sale of 300,000 shares offered by this prospectus at an assumed
price of $13.00 per share, as well as the minimum required regulatory capital.
This table assumes that 100% of the net proceeds received from the offering were
used to acquire a registered investment advisory firm.
At December 31, 2003
-----------------------------------------------------
Adjusted to
Reflect Sale of Minimum
RISK BASED CAPITAL: Actual 100% of shares Capital Requirements
------ -------------- --------------------
Total Capital (to risk-weighted assets) 13.64% 15.29% 8.00%
Tier 1 Capital (to risk-weighted assets) 10.86% 12.55% 4.00%
Tier 1 Capital (to average assets) 5.99% 6.98% 4.00%
17
PLAN OF DISTRIBUTION
RIGHTS OFFERING: We are offering for sale non-transferable
subscription rights to purchase 300,000 shares of
Bancorp common stock at a price of $13.00 per
share. Initially, Bancorp is making this offer
exclusively to our shareholders on a best efforts
basis. No commission fees will be paid to
underwriters, brokers, or dealers in connection
with the sale of shares being offered. The
offering is expected to terminate on June 18,
2004, 5:00 daylight savings time. We may extend
this termination date without notice to you until
June 30, 2004. There is no public market for our
common stock.
ELIGIBLE SHAREHOLDER
RIGHTS OFFERING: Only shareholders who own Bancorp's shares on May
10, 2004 will be entitled to subscribe for shares
in the rights offering. Some shareholders may not
be entitled to subscribe for shares if they reside
in a state in which this offering is not qualified
or otherwise prohibited by the laws of a state.
SUBSCRIPTION RIGHTS: Subject to the minimum subscription amount set
forth below, each shareholder will be entitled to
a basic subscription right to subscribe for and
purchase the same percentage of the 300,000 shares
being offered as is equal to the shareholder's
percentage of the current outstanding shares of
Bancorp's stock. The shareholder shall be entitled
to purchase an additional share if the
shareholder's percentage of the offering results
in a fractional share. However, if the number of
shares owned by a shareholder prior to the
offering is less than one hundred (100), then, in
order to participate in this offering, the
shareholder must purchase a minimum number of
shares equal to the greater of (i) the number of
shares the shareholder is entitled to purchase in
the rights offering described above or (ii) 100
minus the number of shares held by the shareholder
prior to the offering. Although there is no
present intention on the part of Bancorp to apply
for listing on the NASDAQ SmallCap Market(SM),
Bancorp would like to take steps to allow itself
the opportunity to do so. Among the requirements
for listing on the NASDAQ SmallCap Market(SM), is
a provision that applicant companies have at least
300 non-management shareholders each holding at
least 100 shares or more. Accordingly, the minimum
subscription amount provided in this offering has
been implemented in an effort to increase the
number of non-management shareholders with
holdings of 100 shares or more. Nevertheless,
management expects that following this offering,
Bancorp will continue not to meet this specific
NASDAQ SmallCap Market(SM) listing standard.
UNSUBSCRIBED SHARES: If there are any unsubscribed shares, shareholders
who exercised all basic subscription rights to
which they were entitled to will have
oversubscription rights to subscribe for
additional shares. If the shares subscribed for in
the exercise of oversubscription rights exceed the
number of unsubscribed for shares, the
unsubscribed shares will be allocated pro rata
among all shareholders who have exercised the
oversubscription privilege.
If there are any unsubscribed shares after the
exercise of the basic and oversubscription rights,
Bancorp may, on a best efforts basis, offer unsold
shares to individuals, corporations, partnerships
or other entities, including Bancorp's officers
18
and directors and the Bank's employees, officers,
directors, as Bancorp in its sole discretion may
determine. To be eligible to participate in the
general offering, a participant must subscribe for
at least one hundred (100) shares. Bancorp
contemplates that sales of unsubscribed shares may
be made for a period of up to ten (10) days after
the closing of the rights offering. All of these
remaining shares shall be offered at the
subscription price.
INTENTION OF MANAGEMENT: The directors and executive officers of Bancorp
and the bank have individually notified us of
their present intentions to subscribe for shares.
The total number of shares which the directors and
executive officers intend, in the aggregate, to
subscribe for is 64,674 of the available shares,
including any oversubscription rights. In
addition, if the rights offering does not yield
net proceeds equal to $3,500,000, a director of
Bancorp has committed to purchase enough shares in
the general offering so that the offering will
yield net proceeds of at least $3,500,000.
HOW TO SUBSCRIBE: If you wish to purchase shares, you must complete
and sign the subscription agreement accompanying
this prospectus and delivery the completed
subscription agreement to Bancorp prior to the
termination date of the offering, together with
payment in full of the subscription price of all
shares subscribed for. Payment must be by check or
bank draft drawn upon a U.S. bank, payable to
"First Ipswich Bancorp." If you wish to wire funds
to us, you may call Bancorp at 978-356-3700 to
obtain wiring instructions. If paying by
uncertified personal check, you should allow at
least five business days prior to the termination
date for the funds to clear.
The address to which subscription agreements and
payment of the subscription price should be
delivered is:
First Ipswich Bancorp
31 Market Street
Ipswich, Massachusetts 01938
Attention: Tammy Hartmann, Clerk
Telephone: 978-356-3700
We recommend that you send your subscription
agreement and payment by registered mail, return
receipt requested, and allow a sufficient number
of days for delivery and clearance of payment
prior to the termination date of the offering. THE
FULL SUBSCRIPTION PRICE FOR THE SHARES SUBSCRIBED
MUST BE INCLUDED WITH THE SUBSCRIPTION AGREEMENT.
FAILURE TO INCLUDE THE FULL SUBSCRIPTION PRICE
WITH THE SUBSCRIPTION AGREEMENT MAY CAUSE US TO
REJECT THE SUBSCRIPTION.
19
ACCEPTANCE, CANCELLATION
AND REFUNDING OF
SUBSCRIPTIONS: Although subscribers may not revoke their
subscriptions, subscription agreements are not
binding on us until we accept them. We reserve the
right to reject, at our sole discretion, any
subscription agreement or to allot a smaller
number of shares than the number for which a
person has subscribed. We will promptly return
funds provided as part of an oversubscription that
are not honored.
ISSUANCE OR
TRANSFER OF SHARES: The shares to be purchased upon exercise of the
subscription rights will not be issued or
transferred by us until the closing of this
offering.
20
DESCRIPTION OF BUSINESS
FIRST IPSWICH BANCORP
Organized in 1985, we are a Massachusetts chartered bank holding company
headquartered in Ipswich, Massachusetts. As a bank holding company, we are
subject to regulation by the Board of Governors of the Federal Reserve System
("FRB"). Through our wholly-owned subsidiary, The First National Bank of
Ipswich, we provide community banking services to our principal market areas of
northeastern Massachusetts and southeastern New Hampshire.
THE FIRST NATIONAL BANK OF IPSWICH
The bank was founded in 1892. The bank is a national banking association
chartered under the National Bank Act. Its deposits are insured by the FDIC, and
it is subject to regulation by the office of the Comptroller of the Currency
("OCC") and the FDIC. The bank offers a full range of retail banking services to
individuals, businesses, and nonprofit organizations through eleven (11) banking
offices located in northeastern Massachusetts and southeastern New Hampshire.
Such services include a wide range of retail checking and savings accounts,
loans, safe deposit facilities, and automated teller machines at selected branch
locations.
The bank also provides lending, depository and related financial services
to commercial, industrial, financial, and governmental customers. These services
include short- and long-term loans and revolving credit arrangements, letters of
credit, inventory and accounts receivable financing, real estate construction
lending, and mortgage loans.
The bank's trust department offers a wide range of trust services to
individuals, corporations, municipalities and charitable organizations. The bank
acts as trustee of personal, corporate, and other trusts, provides investment
advisory and custody services, acts as executor, administrator and trustee of
estates, and may act as transfer agent for Bancorp. The market value of assets
under administration in the bank's trust department was $54.6 million at
December 31, 2003.
As of December 31, 2003, the bank employed 100 full-time and 27 part-time
employees. None of these employees is covered by a collective bargaining
agreement and we believe that our employee relations are good.
The bank's operations are based upon our belief that a need exists in our
marketplace for a locally-based provider of financial services. The bank is
focused on serving the financial needs of individuals, including high net-worth
individuals, small to medium-sized businesses, and professional practices. We
believe that our marketplace welcomes an institution which strives to provide
timely and personalized services and direct access to decision makers. We
believe that this opportunity has been amplified by the significant amount of
bank consolidation in our marketplace. Further, economic growth has created a
growing number of consumers and businesses in need of high quality banking and
other financial services delivered with personalized attention. We determined
that we would need additional capital to fund the acquisition of an investment
advisory firm, continued expansion of our branch network and other potential
growth initiatives.
21
During the past three years, the bank has opened or acquired branches in
the following locations:
o Londonderry, New Hampshire o Salem, New Hampshire
o Manchester, New Hampshire o Cambridge, Massachusetts
o Newington, New Hampshire
The bank offers the commercial, consumer, and mortgage-lending products
typically offered by community banks. We believe that we have distinguished
ourselves from our competitors through prompt service and customized lending
products. The bank's lending activities are oriented to the small-to-medium
sized businesses, high net worth individuals and professional practices located
in our market area, as well as to consumer and retail customers living and
working in the bank's market area. The bank concentrates on customer
relationships in building our customer deposit base and competes aggressively in
the area of transaction accounts.
We are highly involved in the communities we serve through our
participation in and sponsorship of civic and charitable activities. We believe
this demonstrates our commitment to serving the communities in which we do
business, enhances our image in the community, develops brand awareness, creates
customer loyalty and assists in the development of our business. Our business
strategy for the future is to capitalize on the opportunities in our area, which
arise as a result of economic growth and consolidation, as well as through the
contacts of our directors, officers and other associates of the bank.
We believe that we are able to compete favorably with our competitors
because we provide responsive personalized services through management's
knowledge and awareness of our service area, customers and businesses. We
believe that our approach to building our franchise, our focus on service and
our commitment to the community, when coupled with the application of sound
banking principles, will create value for our shareholders.
LENDING ACTIVITIES
The bank provides to its customers a full range of short- to medium-term
commercial, mortgage, construction and consumer loans, both secured and
unsecured. A significant portion of the loan portfolio consists of commercial
and residential mortgage loans in Ipswich and surrounding communities.
22
LOAN COMPOSITION. The following table sets forth at the dates indicated
our loan portfolio composition by type of loan:
At December 31,
-----------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of of of of of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(in thousands)
Commercial real estate $ 53,415 33.84% $ 47,442 34.43% $ 37,105 31.14% $25,705 25.89% $23,677 26.28%
Residential real estate 56,683 35.91 54,985 39.90 48,841 41.00 44,972 45.30 41,247 45.77
Construction 17,570 11.13 11,243 8.16 7,833 6.58 10,389 10.47 5,399 5.99
Commercial 19,468 12.33 14,667 10.64 15,206 12.76 10,258 10.33 11,269 12.51
Home equity 8,429 5.34 7,081 5.14 7,021 5.89 5,192 5.23 5,566 6.18
Consumer 2,279 1.45 2,377 1.73 3,122 2.63 2,752 2.78 2,956 3.27
-------- ------ -------- ------ -------- ------ ------- ------ ------- ------
Total loans 157,844 100.00% 137,795 100.00% 119,128 100.00% 99,268 100.00% 90,114 100.00%
====== ====== ====== ====== ======
Net deferred origination
costs (fees) (6) 41 37 (34) (69)
Allowance for loan
losses (1,334) (1,384) (1,376) (1,181) (1,191)
-------- -------- -------- ------- -------
Loans, net $156,504 $136,452 $117,789 $98,053 $88,854
======== ======== ======== ======= =======
The following table sets forth the maturity ranges of certain components
of our loan portfolio at December 31, 2003.
Within 1 year 1 to 5 years After 5 years Total
------------- ------------ ------------- -----
(in thousands)
Construction $1,111 $13,152 $3,307 $17,570
Commercial 8,590 4,607 6,271 19,468
The following table sets forth certain loans with fixed and variable rates
having contractual maturities greater than one year at December 31, 2003:
Fixed Rate Variable Rate Total
---------- ------------- -----
(in thousands)
Construction $ 961 $15,498 $16,459
Commercial 9,061 1,817 10,878
COMMERCIAL LOANS. The bank has made and anticipates continuing to make
commercial loans. Commercial loans include both secured and unsecured loans for
working capital, expansion, and other business purposes. Short-term working
capital loans generally are secured by accounts receivable, inventory and/or
equipment. The bank also makes term commercial loans secured by equipment, real
estate and marketable securities. Lending decisions are based on an evaluation
of the financial strength, cash flow, management and credit history of the
borrower, and the quality of the collateral securing the loan. With few
exceptions, the bank requires personal guarantees and secondary sources of
repayment. Historically, commercial loans provide greater yields and reprice
more frequently than other types of loans, such as real estate loans. More
frequent repricing means that yields on our commercial loans adjust with changes
in interest rates. Commercial loans are generally deemed to entail significantly
greater risk than residential real estate or consumer lending. The repayment of
commercial loans typically is dependent on the successful operations and income
stream of the borrower or entity. These risks can be significantly affected by
economic conditions, as well as the borrower's skill and ability in running
their business. In addition, commercial lending generally requires substantially
greater oversight efforts compared to residential real estate lending.
23
REAL ESTATE LOANS. Real estate loans are made for purchasing, constructing
and refinancing 1-4 family and commercial properties. The bank offers fixed and
adjustable rate options.
The bank has made, and anticipates continuing to make, commercial real
estate loans. This lending has involved loans secured principally by commercial
buildings for office, storage and warehouse space. The bank generally requires
the personal guaranty of borrowers and a demonstrated cash flow capability
sufficient to service the debt. Loans secured by commercial real estate may be
in greater amount and involve a greater degree of risk than one to four family
residential mortgage loans. Payments on such loans are often dependent on
successful operation or management of the properties. Real estate loans are
subject to risks associated with the economic conditions in our market area, to
a potential rise in interest rates and to potential dramatic decreases in real
estate values. In addition, the repayment of commercial real estate loans is
typically dependent on the income stream and successful operations of the
borrowers. The repayment of residential real estate loans is dependent on the
personal financial condition of the borrowers.
CONSUMER. Consumer loans are loans to individuals and consist primarily of
credit card loans and miscellaneous other consumer loans, unsecured loans and
automobile loans. Consumer loans are subject to risks associated with unsecured
loans and with loans secured by rapidly depreciating assets, such as
automobiles. In the case of secured loans, any repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance since there is a greater likelihood of damage, loss or
depreciation of the underlying collateral. Further, consumer loan collections
are dependent on the borrower's continuing financial stability, and therefore
are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy.
HOME EQUITY LINES OF CREDIT. Home equity lines of credit are loans issued
to consumers as first or second liens on 1-4 family residential properties.
These loans may be used for a variety of purposes, including for home
improvement and other personal needs. We believe the home equity lending we do
lends itself better to creating a fuller and longer term banking relationship
with the consumer and providing cross marketing opportunities. These loans may
entail similar risks as those associated with consumer and installment loans,
including the dependence on the borrower's continuing financial stability.
Further, the risk to the bank is greater than that inherent in the single family
residential real estate portfolio when the security for home equity lines of
credit is not the first lien on the property and therefore ultimate collection
of amounts due may be dependent on whether any value remains after collection by
a holder with a higher priority than the bank. Finally, the application of
various laws, including Federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered in the event of default.
LOAN APPROVALS. The bank's loan policies and procedures establish the
basic guidelines governing its lending operations. Generally, the guidelines
address the type of loans we seek, target markets, underwriting and collateral
requirements, terms, interest rate and yield considerations and compliance with
laws and regulations. All loans or credit lines are subject to approval
procedures and amount limitations. These limitations apply to the borrower's
total outstanding indebtedness to the bank, including the indebtedness of any
guarantor. The policies are reviewed and approved at least annually by the board
of directors of the bank. The bank supplements its own supervision of the loan
underwriting and approval process with periodic loan reviews by independent,
outside professionals experienced in loan review work.
24
NONPERFORMING ASSETS
The following table sets forth, for the periods indicated, information
about our nonaccrual loans, restructured loans, other real estate owned, and
total nonperforming assets.
At December 31,
--------------------------------------------------
(dollars in thousands) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Nonaccrual loans $ -- $ -- $ 109 $ 816 $ 922
Other real estate owned -- -- -- -- --
Troubled debt restructurings -- -- 308 -- 74
Loans past due 90 days or more and still
accruing 19 5 11 25 369
Non-accrual loans to total loans 0.00% 0.00% 0.09% 0.82% 1.02%
Non-performing assets to total assets 0.00% 0.00% 0.05% 0.46% 0.57%
Allowance for loan losses as a percentage of
non-performing loans n/a n/a 1,262.39% 144.73% 129.18%
Our financial statements are prepared on the accrual basis of accounting,
including the recognition of interest income on loans, unless a loan is placed
on non-accrual basis. Loans are placed on non-accrual status when there are
serious doubts about the collectibility of principal or interest. In general, a
loan is placed on nonaccrual status when the loan becomes past due 90 days.
Loans are also placed on nonaccrual status in cases where there is uncertainty
as to whether the borrower can satisfy the contractual terms of the loan
agreement. Amounts received on nonaccrual loans generally are applied first to
principal and then to interest only after all principal has been collected.
Restructured loans are those for which concessions, including the reduction of
interest rates below a rate otherwise available to that borrower or the deferral
of interest or principal, have been granted due to the borrower's weakened
financial condition. Interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur. Potential problem loans are loans which are currently performing and
are not included in nonaccrual or restructured loans above, but about which we
have serious doubts as to the borrower's ability to comply with present
repayment terms. These loans are likely to be included later in nonaccrual, past
due or restructured loans, so they are considered by management in assessing the
adequacy of the allowance for loan losses. At December 31, 2003, no loans had
been identified as potential problem loans which caused management to have
serious doubts regarding the ability of such borrowers to comply with the
present loan repayment terms.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on estimates, and ultimate losses
may vary from the current estimates. The adequacy of the allowance is evaluated
regularly by management. As adjustments become necessary, they are reported in
operations for the period in which they become known. Losses are charged against
the allowance when management believes that collection is doubtful. Key elements
of the estimates, including those used in independent appraisals, are dependent
upon the economic conditions prevailing at the time of the estimates. The
inherent uncertainties in the assumptions relative to real estate project sales,
prices or rental rates and the ability of various borrowers to continue to
perform under their current contractual lending arrangements may result in
results which defer from those projected by management.
The allowance consists of specific, general and unallocated loss
components. The specific loss component relates to loans that are classified as
doubtful, substandard or special mention. Classified loans relate to
individually identified borrowers and relationships that exhibit potential
repayment deficiencies. These loans are identified through the ongoing loan
review process that takes into account various factors such as borrower payment
25
history, financial status and collateral shortfalls. In reviewing these loans,
management determines, on a case-by-case basis, the need for specific reserves.
For such loans that are also classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market price)
of the impaired loan is lower than the carrying value of that loan. In
determining the general component, the portfolio is segmented by various loan
types that contain similar attributes. These individual types are evaluated for
historical loss experience. The resultant historical loss percentage is then
adjusted for various qualitative factors. Qualitative factors reviewed include
the following:
o Levels and trends in delinquencies and impaired loans
o Levels and trends in charge-offs
o Trends in volume and terms of loans
o Effects of changes in underwriting standards, policy exceptions, and
lending policy
o Experience of lending management staff
o Economic trends
o Industry conditions
o Effects of changes in credit conditions
An unallocated component is maintained to cover uncertainties that could
affect management's estimate of probable losses. The unallocated component of
the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specified and general
losses in the portfolio. The ongoing level of the allowance for loan losses,
loan underwriting standards and identification of classified loans are
periodically reviewed by independent, outside professionals experienced in loan
review work.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY CATEGORY
At December 31,
---------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
Balance applicable to:
Commercial real estate loans $ 470 33.84% $ 431 34.43% $ 526 31.14% $ 397 25.89% $ 462 26.28%
Residential real estate loans (1) 206 41.25 131 45.04 331 46.89 295 50.53 252 51.95
Construction loans 132 11.13 82 8.16 80 6.58 128 10.47 54 5.99
Commercial loans 183 12.33 144 10.64 169 12.76 117 10.33 202 12.51
Consumer loans 170 1.45 159 1.73 108 2.63 100 2.78 113 3.27
Unallocated 173 -- 437 -- 162 -- 144 -- 108
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan losses $1,334 100.00% $1,384 100.00% $1,376 100.00% $1,181 100.00% $1,191 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
(1) Includes home equity lines of credit.
26
The following table presents, for the periods indicated, information
regarding changes in the allowance for loan losses:
Years Ended December 31,
---------------------------------------------------------------
(in thousands) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance at the beginning of the year $ 1,384 $ 1,376 $ 1,181 $ 1,191 $ 1,150
Charge-offs:
Commercial real estate -- -- (24) -- --
Consumer (53) (84) (52) (52) (91)
Commercial -- (20) -- -- --
------- ------- ------- ------- -------
Total charge-offs (53) (104) (76) (52) (91)
------- ------- ------- ------- -------
Recoveries:
Residential real estate -- -- -- -- 81
Commercial real estate -- -- 30 -- --
Commercial 26 26 -- -- --
Consumer 32 36 6 8 --
------- ------- ------- ------- -------
Total recoveries 58 62 36 8 81
------- ------- ------- ------- -------
Net (charge-offs) recoveries 5 (42) (40) (44) (10)
Provision (credit) for loan losses (55) 50 235 34 51
------- ------- ------- ------- -------
Balance of allowance at the end of the
year $ 1,334 $ 1,384 $ 1,376 $ 1,181 $ 1,191
======= ======= ======= ======= =======
Ratio of net charge-offs to average
loans outstanding 0.00% 0.03% 0.04% 0.05% 0.01%
Allowance for loan losses as a percent
of total loans at the end of the year 0.85% 1.00% 1.16% 1.19% 1.32%
INVESTMENT ACTIVITIES
Our portfolio of investment securities consists primarily of U.S.
Government Agency securities.
Debt securities that management has the positive intent and ability to
hold to maturity are classified as "held to maturity" and recorded at amortized
cost. All other securities are classified as "available for sale" and recorded
at fair value, with unrealized gains and losses excluded from earnings and
reported in other comprehensive income (loss).
Purchase premiums and discounts are recognized in interest income using
the interest method over the terms of the securities. Although none have been
recognized in 2003 or 2002, declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be other than
temporary would be reflected in earnings as realized losses. Gains and losses on
the sale of securities are recorded on the trade date and are determined using
the specific identification method.
27
The following table summarizes, at the dates indicated, the amortized cost
and fair market value of securities.
At December 31,
------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
---- ---------- ---- ---------- ---- ----------
(in thousands)
Securities available for sale:
- -----------------------------
U.S. Government agency obligations $ 22,545 $ 22,773 $ 500 $ 513 $16,199 $16,402
Corporate bonds -- -- 2,520 2,584 4,349 4,560
Trust preferred securities 14,171 14,094 10,755 10,758 -- --
Mortgage-backed securities 78,038 77,857 104,220 105,235 38,953 38,720
Municipal bonds 639 626 -- -- -- --
-------- -------- -------- -------- ------- -------
Total debt securities 115,393 115,350 117,995 119,090 59,501 59,682
Marketable equity securities 84 98 298 309 -- --
Agency preferred stock 1,770 1,598 9,860 9,791 18,596 18,300
-------- -------- -------- -------- ------- -------
Total securities available for sale $117,247 $117,046 $128,153 $129,190 $78,097 $77,982
======== ======== ======== ======== ======= =======
Securities held to maturity:
- ---------------------------
U.S. Government agency obligations $ 3,000 $ 2,918 $ -- $ -- $ 92 $ 99
Municipal bonds 16,325 16,071 6,382 6,355 885 895
Mortgage-backed securities 19,892 19,673 3,667 4,082 9,788 9,903
-------- -------- -------- -------- ------- -------
Total securities held to maturity $ 39,217 $ 38,662 $ 10,049 $ 10,437 $10,765 $10,897
======== ======== ======== ======== ======= =======
The following table summarizes debt securities by contractual maturity
date, with weighted average yields, at December 31, 2003.
----------------------------------------------------------------------------------------
More than One Year More than Five Years
One Year or Less To Five Years To Ten Years More than Ten Years
----------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Book Average Book Average Book Average Book Average
Value Yield Value Yield Value Yield Value Yield
----------------------------------------------------------------------------------------
(in thousands)
Securities available for sale(1):
- -----------------------------
U.S. Government agency
obligations $ -- --% $8,998 3.08% $13,547 5.01% $ -- --%
Trust preferred securities -- -- -- -- -- -- 14,171 4.95%
Mortgage-backed securities -- -- 539 3.16% 10,221 4.27% 67,278 4.66%
Municipal bonds -- -- -- -- -- -- 639 2.84%
---- ---- ------ ------- -------
Total securities available for sale $ -- $9,537 $23,768 $82,088
==== ====== ======= =======
Securities held to maturity:
- ---------------------------
U.S. Government agency
obligations $ -- --% $ -- --% $ 3,000 3.50% $ -- --%
Municipal bonds 45 5.27% 437 5.13% 1,063 1.72% 14,780 4.44%
Mortgage-backed securities -- -- 535 6.62% 54 6.50% 19,303 7.62%
---- ------ ------- -------
Total securities held to maturity $ 45 $ 972 $ 4,117 $34,083
==== ====== ======= =======
(1) Yields on these exempt obligations were not computed on a tax equivalent
basis.
28
The following table summarizes securities by issuer (excluding securities
issued by U.S. Government Agencies), at December 31, 2003, which represent
investments greater than 10% of stockholders' equity:
Amortized Cost Fair Value
-------------- ----------
(in thousands)
Issuer
- ------
Countrywide Home Loans $2,421 $2,410
Preferred Term Securities VIII, Ltd. 4,500 4,486
I-Preferred Term Securities I, Ltd. 2,200 2,203
I-Preferred Term Securities II, Ltd. 4,000 3,958
BORROWINGS
The following table presents information regarding certain borrowed funds
at or for the years ended on the dates indicated:
Years Ended December 31,
-------------------------------
(in thousands) 2003 2002 2001
---- ---- ----
Securities sold under agreements to repurchase:
Average balance outstanding $ 9,220 $ 8,633 $ 9,049
Maximum amount outstanding at any month-end during the year 10,542 8,808 10,828
Balance outstanding at the end of the year 10,542 8,611 7,774
Weighted average interest rate during the year 2.06% 2.36% 3.66%
Weighted average interest rate at the end of the year 2.06% 2.06% 2.24%
Federal Home Loan Bank short-term advances:
Average balance outstanding $42,628 $ 7,048 $ 7,423
Maximum amount outstanding at any month-end during the year 57,422 38,082 17,000
Balance outstanding at the end of the year 57,422 38,082 0
Weighted average interest rate during the year 1.21% 1.59% 2.94%
Weighted average interest rate at the end of the year 1.13% 1.43% 0.00%
Securities sold under agreements to repurchase are funds borrowed from
customers on an overnight basis that are secured by U.S. Government agency
obligations. The amount of securities collateralizing the agreements to
repurchase remains in securities and the obligation to repurchase securities
sold is reflected as a liability in the consolidated balance sheets.
Federal Home Loan Bank ("FHLBB") advances are utilized as a compliment to
the bank's deposit balances to leverage the balance sheet and enhance net
interest income. The bank also has an available line of credit with the FHLBB at
an interest rate that adjusts daily. Borrowings under the line are limited to 2%
of the bank's total assets. There were no advances outstanding under the line of
credit at December 31, 2003 and 2002. All borrowings from the FHLBB are secured
by a blanket lien on qualified collateral, defined principally as 75% of the
carrying value of first mortgage loans on owner-occupied residential property.
29
DEPOSIT ACTIVITIES
We offer a variety of deposit programs to individuals and to
small-to-medium size businesses, professional practices and other organizations.
Our range of deposit services includes non-interest bearing checking accounts,
interest bearing checking and savings accounts, money market accounts and
certificates of deposit. These accounts generally earn interest at rates
established by management based on competitive market factors and the desire to
increase or decrease certain types or maturities of deposits.
The following table sets forth the average balances and weighted average
rates paid for each deposit category for the periods indicated:
Years Ended December 31,
-----------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(dollars in thousands)
Non-interest bearing accounts $ 35,225 0.00% $ 31,034 0.00% $ 30,928 0.00%
Savings accounts 28,793 0.62 24,813 1.04 20,409 1.87
NOW accounts 34,765 0.23 33,057 0.33 27,788 0.64
Money market deposit accounts 41,184 1.53 31,984 2.45 20,330 3.57
Certificates of deposit 55,073 2.80 62,285 3.68 42,460 5.02
-------- -------- --------
Total $195,040 $183,173 $141,915
======== ======== ========
The following table indicates the amount of our certificates of deposit
with balances of $100,000 and over by time remaining until maturity as of
December 31, 2003.
Maturity period: Amount
---------------- ------
(dollars in thousands)
Three months or less $ 4,641
Over three months through six months 957
Over six months through twelve months 2,606
Over twelve months 2,440
-------
Total $10,644
=======
BANKING TECHNOLOGY
We offer internet banking and bill payment services to our customers. The
bank also offers telephone banking through our call center service program to
retain and expand our customer base. The bank has ATM facilities at each of its
existing banking offices. The bank has stand-alone ATM facilities throughout our
market area. The bank's ATM cards are linked to systems allowing the bank's
customers to withdraw funds from any ATM machine honoring those systems.
We offer customers modern banking services without forsaking community
values such as prompt, personal service and friendliness. We offer many
personalized services and attract customers by being responsive and sensitive to
their individualized needs. We believe our approach to business builds goodwill
among our customers, shareholders, and the communities we serve that results in
referrals from shareholders and satisfied customers. We also rely on traditional
marketing to attract new customers. To enhance a positive image in the
30
community, we support and participate in local events and our officers and
directors serve on boards of local civic and charitable organizations.
MARKET AREA
The bank's primary market area consists of the Massachusetts communities
of Ipswich, Rowley, Essex, Newburyport, Gloucester, Cambridge, and, upon the
opening of our newest branch in May of 2004, Beverly, and other communities
adjacent to and in close proximity to these communities. Our secondary market
area consists of the New Hampshire communities of Londonderry, Manchester,
Newington and Salem, and other communities adjacent to and in close proximity to
these communities, as well as other surrounding communities located in the north
shore area of Massachusetts and southeastern New Hampshire. In addition to its
main office, the bank also operates full service branch offices in the
Massachusetts communities Cambridge, Gloucester, Essex, Newburyport and Rowley
as well as the New Hampshire communities of Londonderry, Manchester, Newington
and Salem.
The banking business in the bank's primary market area is highly
competitive. The bank competes actively with other banks, as well as with other
financial institutions engaged in the business of accepting deposits or making
loans and providing trust services. Competitors include commercial banks,
savings banks, savings and loan associations, mortgage banking companies,
finance companies, trade unions, brokerage firms, insurance companies, money
market funds, and mutual funds.
Many of the bank's competitors may have greater financial and other
resources than does the bank. Among the advantages which such competitors may
have are their ability to conduct large advertising campaigns and to allocate
investment assets, including loans, to regions of highest demand and yield. Such
competitors may have greater lending limits than does the bank and perform
certain other functions which the bank does not directly offer.
The Massachusetts economy suffered a larger percentage decline in
employment from the 2001 recession than any other state in New England or the
country. All industries experienced declines in job growth. The worst job losses
were in natural resources, and high technology manufacturing. The Massachusetts
unemployment rate was 5.7% at December 31, 2003, the same as the national rate
of 5.7%. The primary market area had an unemployment rate of 5.04%. The primary
market area has been insulated somewhat from the recession due to its diverse
economy that includes tourism, and farming as well as businesses that serve
communities in the local area.
There were two industries in the primary market area that did not have
economic downturns. They are the financial activities section and the
construction sector. Employment gains were also noted in the education and
health services sector.
The 2002 average annual wages in the primary market area is $38,155, which
is still below the statewide figure of $44,982.
The dramatic increase in home sales is consistent with regional growth
pressure and demand for a limited inventory of affordable homes. Rental housing
in eastern Massachusetts has become more expansive in recent years. Pressure on
suburban rental markets has risen, as housing availability grows tighter in
urban areas.
31
The local market has no low income areas and only a few moderate income
areas. Low interest rates intensified refinancing activity and competition for
loans. Commercial lending demand has cooled during the current recession. The
occupancy rate for commercial properties in the bank's primary market area as of
December 31, 2003, was approximately 22.4%, as compared with 22.2% in all of
Massachusetts.
COMPETITION
We operate in a highly competitive environment competing for deposits and
loans with commercial banks, thrifts and other financial institutions, many of
which have greater financial resources than we do. Many large financial
institutions compete for business in our service area. In addition, in November
1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999 was passed into
law. The Act permits insurance companies and securities firms, among others, to
acquire financial institutions and has increased competition within the
financial services industry. Certain of our competitors have significantly
higher lending limits than we do and provide services to their customers that we
do not offer.
Our primary market area competition consists primarily of other small and
mid-size community banks, be it in the form of co-operative banks, commercial
banks, or savings banks. Each of these community financial organizations in each
of our markets generally offers similar products at similar rates. The
increasing presence of aggressive regional and national banking companies has
increased the competitive landscape. Our share of deposits in Essex County,
Massachusetts as of June 30, 2003, was 1.29%, and in each of Rockingham and
Hillsborough counties of New Hampshire was less than 1.0%. As of June 30, 2003,
we did not have a presence in Middlesex County, Massachusetts, but with the
acquisition of Atlantic Bank of New York's Cambridge branch, we gained a
presence in Middlesex County. We purchased the Cambridge branch on April 2,
2004, which held 0.04% of that county's market share as of June 30, 2003. We
estimate that our market share in Middlesex County is approximately the same as
that of Atlantic Bank of New York in June of 2003.
We believe that we are able to compete favorably with our competitors
because we provide responsive personalized services through management's
knowledge and awareness of our market area, customers and businesses.
IMPACT OF INFLATION AND CHANGING PRICES
A commercial bank has an asset and liability composition that is
distinctly different from that of a company with substantial investments in
plant and inventory because the major portion of its assets is monetary in
nature. As a result, a bank's performance may be significantly influenced by
changes in interest rates. Although the banking industry is more affected by
changes in interest rates than by inflation in the prices of goods and services,
inflation is a factor, which may influence interest rates. However, the
frequency and magnitude of interest rate fluctuations do not necessarily
coincide with changes in the general inflation rate. Inflation does affect
operating expenses in that personnel expenses and the cost of supplies and
outside services tend to increase more during periods of high inflation.
AVERAGE BALANCE AND AVERAGE RATES EARNED AND PAID
The following table sets forth, for the periods indicated, information
with regard to average balances of assets and liabilities, as well as the total
dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities, resultant yields or costs, net interest
income, interest rate spread, net interest margin and ratio of average
32
interest-earning assets to average interest-bearing liabilities. Average loans
include non-accruing loans, the effect which is to lower the average rates
shown.
Years Ended December 31,
-----------------------------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(dollars in thousands)
ASSETS:
Interest-earning assets:
Short-term investments $ 475 $ 4 0.84% $ 2,031 $ 32 1.58% $ 1,926 $ 69 3.58%
Certificate of deposit 417 27 6.47 -- -- -- -- -- --
Investment securities:
Taxable 135,587 5,130 3.78 97,230 5,112 5.26 72,827 4,862 6.69
Tax-exempt 13,422 615 4.58 1,384 68 4.91 1,428 67 4.69
Loans, net 148,450 9,976 6.72 129,042 9,509 7.37 108,721 8,958 8.22
-------- ------- -------- ------- -------- -------
Total interest-earning
assets 298,351 15,752 5.28 229,687 14,721 6.41 184,902 13,956 7.54
------- ------- -------
Non-interest-earning
assets 20,843 20,867 17,477
-------- -------- --------
TOTAL ASSETS $319,194 $250,554 $202,379
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings accounts $ 28,793 $ 178 0.62% $ 24,813 $ 259 1.04% $ 20,409 $ 381 1.87%
NOW accounts 34,765 81 0.23 33,057 108 0.33 27,788 177 .64
Money market deposit
Accounts 41,184 631 1.53 31,984 785 2.45 20,330 725 3.57
Certificates of deposit 55,073 1,544 2.80 62,285 2,292 3.68 42,460 2,132 5.02
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposit accounts 159,815 2,434 1.52 152,139 3,444 2.26 110,987 3,415 3.08
Federal Home Loan
Bank advances 89,339 2,321 2.60 39,158 1,704 4.35 35,145 1,741 4.95
Other borrowed funds 9,441 192 2.03 8,944 208 2.33 9,505 345 3.63
Subordinated debentures 9,000 580 6.44 4,611 384 8.33 3,000 300 10.00
-------- ------- -------- ------- -------- -------
Total interest-bearing
Liabilities 267,595 5,527 2.07 204,852 5,740 2.80 158,637 5,801 3.66
------- ------- -------
Noninterest-bearing
Deposits 35,225 31,034 30,928
Other liabilities 1,751 1,726 1,584
-------- ------- -------
Total liabilities 304,571 237,612 191,149
Total stockholders'
Equity 14,623 12,942 11,230
-------- ------- -------
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY $319,194 $250,554 $202,379
======== ======== ========
Net interest income $10,225 $ 8,981 $ 8,155
======= ======= =======
Interest rate spread 3.21% 3.61% 3.88%
====== ====== ======
Net interest margin 3.43% 3.91% 4.41%
====== ====== ======
Ratio of average
interest-earning
assets to interest-
bearing liabilities 111.49% 112.12% 116.56%
====== ====== ======
33
RATE/VOLUME ANALYSIS
The following tables analyze the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The tables distinguish between (i) changes
attributable to volume (changes in volume multiplied by the prior period's rate)
and (ii) changes attributable to rate (changes in rate multiplied by the prior
period's volume). The change attributable to both rate and volume (changes in
rate multiplied by changes in volume) has been allocated proportionately to both
the changes attributable to volume and the changes attributable to rate.
Year Ended
December 31, 2003
vs.
December 31, 2002
Increase (Decrease)
Due to Changes In:
-----------------------------------------
Average Volume Average Rate Total
-------------- ------------ -----
(in thousands)
INTEREST INCOME:
Short-term investments $ (17) $ (11) $ (28)
Certificate of deposit 14 13 27
Investment securities:
Taxable 1,686 (1,668) 18
Tax-exempt 552 (5) 547
Loans, net 1,351 (884) 467
------- ------- -------
Total interest income 3,586 (2,555) 1,031
------- ------- -------
INTEREST EXPENSE:
Savings accounts 37 (118) (81)
NOW accounts 5 (32) (27)
Money market deposit accounts 189 (343) (154)
Certificates of deposit (245) (503) (748)
------- ------- -------
Total interest-bearing deposit accounts (14) (996) (1,010)
Federal Home Loan Bank advances 1,514 (897) 617
Other borrowed funds 11 (27) (16)
Subordinated debentures 299 (103) 196
------- ------- -------
Total interest expense 1,810 (2,023) (213)
------- ------- -------
Change in net interest income $ 1,776 $ (532) $ 1,244
======= ======= =======
34
Year Ended
December 31, 2002
vs.
December 31, 2001
Increase (Decrease)
Due to Changes In:
-----------------------------------------
Average Volume Average Rate Total
-------------- ------------ -----
(in thousands)
INTEREST INCOME:
Short-term investments $ 4 $ (41) $ (37)
Investment securities:
Taxable 1,423 (1,773) 250
Tax-exempt (2) 3 1
Loans, net 1,544 (993) 551
Total interest income 2,969 (2,204) 765
------- ------- -----
INTEREST EXPENSE:
Savings accounts 70 (192) (122)
NOW accounts 29 (98) (69)
Money market deposit accounts 332 (272) 60
Certificates of deposit 826 (666) 160
------- ------- -----
Total interest-bearing deposit accounts 1,257 (1,228) 29
Federal Home Loan Bank advances 187 (224) (37)
Other borrowed funds (21) (116) (137)
Subordinated debentures 141 (57) 84
------- ------- -----
Total interest expense 1,564 (1,625) (61)
------- ------- -----
Change in net interest income $ 1,405 $ (579) $ 826
======= ======= =====
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of our
financial condition and results of operations and should be read in conjunction
with the consolidated financial statements and related notes included elsewhere
in this prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ significantly
from those anticipated in the forward-looking statements as a result of various
factors, including those discussed in "Risk Factors" and "Special Note Regarding
Forward-Looking Statements" sections of this prospectus. All per share data has
been adjusted to give retroactive effect to the 10-for-1 stock split effected as
of March 19, 2004. A discussion of Bancorp's results for the first quarter of
2004 appears in the "Recent Developments" section set forth above.
Critical Accounting Policies
Management's discussion and analysis of Bancorp's financial condition and
results of operations are based on the consolidated financial statements which
are prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of such financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates,
including those related to the allowance for loan losses. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis in making judgments about the carrying values of assets and liabilities
35
that are not readily apparent from other sources. Actual results could differ
from the amount derived from management's estimates under different assumptions
or conditions. Management believes the following critical accounting policy
represents the more significant estimate used in the preparation of the
consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses, established
through a charge or credit to the provision for loan losses, is based on
management's evaluation of the level of the allowance required in relation to
the estimated loss exposure in the loan portfolio. Losses are charged against
the allowance when management believes that the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management regularly evaluates the allowance for adequacy by taking
into consideration (1) specific reserves on individual loans, determined on a
case-by-case basis, (2) general reserves on various loan types that contain
similar attributes, determined based on historical loss experience and other
qualitative factors, such as, among others, economic, industry and loan
portfolio trends. An unallocated component is maintained to cover uncertainties
that could affect management's estimate of probable losses. The level of the
allowance is periodically reviewed by independent, outside professionals
experienced in loan review work, and by regulatory authorities. The use of
different estimates or assumptions could produce different provisions for loan
losses. Refer to the "Description of Business - Analysis of Allowance of Loan
Losses" section for a detailed description of management's estimation process
and methodology related to the allowance for loan losses.
Overview
Bancorp's primary business strategy is through its subsidiary the bank, to
operate as an independent well-capitalized local commercial bank dedicated to
the needs of its personal and business customers. This strategy primarily
involves raising deposits from the general public and investing these funds in a
variety of loan products. Bancorp is personally devoted to its customer base by
offering prompt and quality service and competitive products, while also
investing heavily in the communities it serves.
To ensure efficient use of available capital, Bancorp prudently utilizes
excess capital to invest in a variety of investment securities in order to
generate incremental income, manage interest rate risk, and put to work
available liquidity. Bancorp also utilizes wholesale funding sources to
complement and supplement the composition and quantity of retail funding.
Bancorp's primary business lines are commercial lending, retail banking,
and investment services. In addition to these primary services, Bancorp offers
on-line banking services, business and personal credit cards, and a variety of
additional products and services. Bancorp offers a wide array of commercial loan
products, residential loan products, and construction loan products and is
targeting geographic growth in new markets as well as increased penetration in
existing markets.
Bancorp's primary goal is to generate sustained, profitable growth by
increasing our loan and deposit market share in the communities it serves.
Bancorp is also targeting growth in its fee-based businesses of investment
management and trust, retail deposit services, retail investment services, and
credit card services. Management continually seeks and analyzes opportunities to
enhance its existing products and services, as well as introduce new ones.
Bancorp is also focused on investing in new technology to improve its delivery
channels and otherwise improve its service to its customers.
Bancorp maintains a stable and growing source of deposit funding in its
Essex County, Massachusetts branch offices and a growing deposit share in its
southern New Hampshire offices. Bancorp has committed to opening several new
36
retail branches in 2004 targeting geographic growth in both loan balances and
deposit balances. Rapid retail expansion may offer significant long-term growth
and earnings benefits. It also entails certain risks including that expense
growth may exceed projections, deposits may not be raised at a reasonable cost,
in a reasonable time or in a reasonable amount, and new loans may not be
generated in a quantity or of the quality anticipated by management.
Bancorp's total assets increased $37.2 million, or 12%, since December 31,
2002 to $340.7 million as of December 31, 2003. The increase in total assets
relates to an increase in net loans of $20.1 million, or 15%, to $156.5 million
and an increase in investment securities of $21.0 million, or 15%, to $164.6
million. The increase in net loans was due primarily to increases in commercial
loans and commercial real estate loans. The increase in investment securities
was due primarily to an increase in U.S. Government Agency obligations. The
increase in net loans and investment securities was partially offset by a
decrease in cash and due from bank balances, increasing the ratio of earning
assets to total assets.
Deposit balances increased $8.3 million since December 31, 2002, or 4%, to
$198.1 million as of December 31, 2003. The increase in deposit balances was due
primarily to an increase in both regular savings account balances and money
market deposit balances. Time deposit balances decreased $2.8 million, or 5%, to
$52.2 million reflecting management's intention to limit the growth of premium
rate accounts. Short-term borrowings, comprised substantially of short term
wholesale funding, increased $15.3 million, or 32%, to $62.3 million as of
December 31, 2003. The growth in short-term funding has been utilized to
supplement retail deposit growth and produce favorable spreads on incremental
asset growth during a protracted low interest rate environment.
As a result of Bancorp's decision to make investments in new initiatives
to support future long term growth, Bancorp's net income may be uneven during
the short term. The expenses associated with these investments may reduce
increases in earnings or cause a decrease in net income during the short term.
Management expects that there will be a decrease in Bancorp's net income
in 2004, as compared with 2003. Several factors are expected to contribute to
that decrease. During 2004, Bancorp does not expect to generate as much income
from the sale of securities as it had in 2003. In addition, Bancorp will have
higher expenses during 2004, as compared to 2003, because of the additional
personnel the bank hired during the past twelve months.
Management intends to continue with its plan of branch expansion in 2004.
While assets may increase as a result of the addition of new deposits, earnings
may be reduced due to the additional costs associated with staffing new
locations and ongoing operational costs such as rent, supplies, etc., until the
new branches reach their objective for deposits and loans. In addition, net
interest income will likely be reduced in the short term because we have
recently restructured our securities portfolio to make it less sensitive to the
possibility of rising interest rates in the future and intend to offer premium
rates or specials on deposits. We also incur one-time startup costs such as
marketing and legal costs. See "Risk Factors - We may be adversely affected by
changes in interest rates, which could decrease our net interest income."
Management believes that the acquisition of a registered investment
advisory firm will have several benefits. If consummated, an acquisition will
likely diversify our sources of income through our entrance into a new line of
business. The acquisition is also likely to enhance the bank's ability to
increase its deposit base and fee income through the offering of private banking
and other services to the existing clients of the advisory firm. Additionally,
the bank may increase its fee income upon the acquisition by providing
investment advisory services to the bank's current customers including, its
trust clients. The bank believes its focus on individual client services rather
than volume of clients will offer it a competitive advantage relative to the
37
larger banks in the metropolitan Boston area offering investment advisory
services. If an acquisition is made in the third or fourth quarters of 2004,
management expects the financial impact on Bancorp to be negative as
unamortizable costs related to the acquisition will reduce earnings. Thereafter,
management expects that the financial impact of an acquisition to be positive,
as increased deposits and fee income are realized.
Comparison of Operating Results for the Years ended December 31, 2003 and
December 31, 2002
Bancorp earned $2.0 million for the years ended December 31, 2003, a
return on average assets of .64%, as compared to $1.7 million, or .66%, for the
same period in 2002. Net income increased primarily due to the increase in
Bancorp's earning assets to $321.2 million in the first quarter of 2003, an
increase of $40.6 million, or 15%. Net income in 2003 was $376,000 (23%) higher
than 2002 due primarily to growth in net interest income, associated with higher
average assets, and higher investment securities gains. This was partially
offset by higher operating expenses associated with staffing and other
investments in infrastructure to support continued growth.
Asset quality continues to be strong as evidenced by zero non-performing
loans as December 31, 2003 and December 31, 2002. The allowance for loan losses
is considered adequate by management at .85% and 1.00% of gross loans at
December 31, 2003 and December 31, 2002, respectively. The allowance for loan
losses as a percent of gross loans has decreased as a result of continued high
credit quality and a resultant reduction in the unallocated allowance amount.
Net Interest Income
Earnings of Bancorp are substantially driven by net interest income, which
increased $1.2 million, or 14%, in 2003 to $10.2 million. This increase was
largely due to the aforementioned growth in earning asset balances, primarily
loan and investment securities balances, partially offset by a slight decrease
in the net interest margin on average earning assets from 3.91% in 2002 to 3.43%
in 2003. The net interest margin has been maintained despite monetary conditions
that have translated into a historically low yield curve for an extended period
of time.
Interest and Dividend Income
Interest and dividend income totaled $15.8 million in 2003, an increase of
$1.0 million, or 7%, from 2002. The yield on average earning assets was 5.28% in
2003, down from 6.41% in 2002. As a result of competitive factors and
unprecedented refinancing activity, loan yields decreased in 2003. Commercial
mortgage loan yields decreased from 8.23% in 2002 to 7.48% in 2003. Average
earning assets increased $68.7 million, or 30%, to $298.4 million in 2003.
Average loan balances increased to $148.5 million in 2003 from $129.0
million in 2002. This increase consisted primarily of an increase in average
commercial mortgage loans to $50.8 million in 2003 from $40.4 million in 2002,
and an increase in average construction loans to $15.0 million in 2003 from
$10.4 million in 2002. The average yield on loans was 6.72% in 2003 compared to
7.37% in 2002.
Average investment securities increased to $149.9 million in 2003 from
$100.6 million in 2002, due to a higher growth in available funding sources and
increased balance sheet leverage. The average yield on investment securities was
3.85% in 2003 compared to 5.18% in 2002. The decrease in yields on investment
38
securities was primarily the result of a historically low interest rate
environment and management strategies to reduce the overall duration of the
portfolio.
Interest Expense
Total interest expense decreased $213,000, or 4%, to $5.5 million in 2003.
This decrease was due primarily to a significantly lower cost on all funding
sources due to the interest rate environment, despite an increase of $62.7
million, or 31%, in average interest-bearing liabilities to $267.6 million. The
average rate paid on interest-bearing liabilities decreased to 2.07% in 2003
from 2.80% in 2002, due primarily to continued success in retaining checking
account balances, growth in regular savings balances, and an increase in short
wholesale funding.
Average interest-bearing deposits increased to $159.8 million in 2003 from
$152.1 million in 2002, due primarily to increases in regular savings and money
market deposits balances. Due partly to a decrease in higher yielding term
certificate accounts, the protracted low interest rate environment in 2003
resulted in a weighted average rate paid on interest-bearing deposits in 2003 of
1.52%, as compared to 2.26% in 2002. Average non-interest bearing deposits
increased to $35.2 million in 2003 from $31.0 million in 2002.
Average short-term borrowings (which consists primarily of repurchase
agreements) were $9.4 million and $8.9 million for 2003 and 2002, respectively.
The weighted average rate paid on such borrowings was 2.03% and 2.33%,
respectively.
Average Federal Home Loan Bank advances amounted to $89.3 million in 2003
and $39.2 million in 2002. The weighted average rate paid on such borrowings was
2.60% in 2003 and 4.35% in 2002.
Loan Loss Provision
The loan loss provision (credit) represents a charge (credit) to current
earnings and an increase (decrease) in the allowance for loan losses. The credit
for loan losses was $55,000 in 2003 as compared to a provision for loan losses
of $50,000 in 2002. The timing and amount of loan loss provisions is based on
management's assessment of the credit risk inherent in the loan portfolio. The
credit for loan losses taken in 2003 was the result of two loan recoveries
during the year. When the recoveries were received, the current level of the
allowance for loan losses was reviewed and it was deemed prudent to take a
credit as the allowance continues to operate with an adequate unallocated
component. An assessment of the credit risk is based on a number of factors,
including the level and trends of non-performing assets, growth in loan
balances, the composition of the loan portfolio, loan concentrations and other
credit risks, economic conditions, and underwriting policies and guidelines. As
of December 31, 2003, the allowance for loan losses was $1.3 million, while
non-performing loans were zero. Non-performing loans as a percent to total loans
were zero at December 31, 2003 and December 31, 2002. Net charge-offs
(recoveries) were ($5,000) in 2003 and $42,000 in 2002. Recognition of Bancorp's
sustained credit quality resulted in a reduction of the unallocated portion of
the allowance during 2003.
Non-Interest Income
Non-interest income consists principally of service charges on deposit
accounts, gains on investment securities, and other fees and commissions.
Non-interest income increased $483,000, or 13%, in 2003 to $4.2 million. Service
charges on deposit accounts increased $119,000, or 11%, to $1.2 million due
primarily to growth in the number and volume of checking and other deposit
accounts and retail branch expansion. On an ongoing basis, management evaluates
39
service charges on deposits and adjusts fees charged as necessary in response to
changing market conditions. With the continued increases in the bank's branch
network, service charges are expected to continue to grow in the future. Gains
on the sale of securities increased $277,000, or 24%, to $1.4 million. Sales of
securities are a result of current portfolio strategies and market conditions.
There are no assurances that gains will continue to be realized in the future.
Non-Interest Expense
Non-interest expense increased $1.3 million, or 12%, to $11.5 million in
2003 versus $10.3 million in 2002. Salaries and benefits expense increased
$810,000, or 15%, to $6.2 million in 2003. This increase was due primarily to
investment in infrastructure staff positions to support substantial growth
plans. Occupancy and equipment expense increased $213,000, or 13%, to $1.9
million due primarily to an increase in branch lease costs and expansion of the
ATM network. Marketing and advertising expense increased $108,000, or 36%, to
$412,000 due to creation of a new marketing campaign and theme. With the planned
increases in bank branches in 2004 and beyond, we anticipate that non-interest
expense will continue to increase.
Provision for Income Taxes
Bancorp's effective tax rate was 31.3% in 2003 and 30.5% in 2002. The
slight increase is due to higher relative growth in taxable investments and
higher pre-tax earnings in 2003.
Liquidity
The bank has commitments to originate loans and to advance funds on
outstanding loans. The bank also has on occasion commitments under standby
letters of credits. As of December 31, 2003, the bank had commitments under
standby letters of credit in the amount of $60,000. As of December 31, 2003, the
bank had commitments to originate loans and to advance funds on outstanding
loans in the amount of $36,813,000. These loans include consumer loans,
commercial real estate loans, equity loans, lines of credit and residential
construction loans. See Note 11 to the Consolidated Financial Statements.
The bank has commitments to originate loans and to advance funds on
outstanding loans. The bank also has on occasion commitments under standby
letters of credits. As of December 31, 2003, the bank had commitments under
standby letters of credit in the amount of $60,000. As of December 31, 2003, the
bank had commitments to originate loans and to advance funds on outstanding
loans in the amount of $36,813,000. These loans include consumer loans,
commercial real estate loans, equity loans, lines of credit and residential
construction loans. See Note 11 to the Consolidated Financial Statements.
Capital Resources
Bancorp and the bank are subject to various regulatory capital
requirements as prescribed by federal banking agencies. These guidelines are
used to evaluate capital adequacy based primarily on the perceived credit risk
associated with balance sheet assets, as well as certain off-balance sheet
exposures such as unused loan commitments, interest rate risk management tools,
and commitments to originate loans. These risk-based capital guidelines are
40
supplemented by a leverage ratio requirement. The capital ratios of the bank
currently exceed the minimum capital requirements to be categorized under the
highest regulatory classification of "Well-Capitalized". At December 31, 2003,
the bank had a Tier 1 leverage capital to average total assets ratio of 6.82%,
which was in excess of the "Well-Capitalized" minimum of 5.0%. The total capital
to risk-weighted assets ratio of the bank was 13.08% at December 31, 2003, also
in excess of the "Well-Capitalized" minimum of 10.0%.
At December 31, 2003, Bancorp had a total capital to risk-weighted assets
ratio of 13.64%, which was well in excess of the minimum capital requirements of
8.0%. The Tier 1 capital to risk-weighted assets ratio of Bancorp was 10.86% at
December 31, 2003, also well in excess of the minimum capital requirement of
4.0%. The Tier 1 average leverage capital to average total assets ratio of 5.99%
was also in excess of the 4.0% minimum capital requirement.
If the federal banking regulators determine, as discussed in the "Risk
Factors" section (above), that trust preferred securities should no longer be
includible in Bancorp's Tier 1 capital, such a determination would negatively
impact Bancorp's capital adequacy ratios, and its ability to continue its steady
growth and expansion would be negatively impacted. The adverse effect of an
overall exclusion of trust preferred securities would be mitigated by Bancorp's
ability to raise additional Tier 1 capital through means which may include (1)
the issuance of additional common stock in connection with the likely exercise
of outstanding warrants in December, 2004, with approximate proceeds of
$900,000, and (2) the sale of additional common stock in the future.
Return on Equity and Assets
The following table summarizes various operating ratios of Bancorp for the
periods indicated:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Return on average total assets (net income
divided by average total assets) .64% .66% .68%
Return on average stockholders' equity (net
income divided by average stockholders' equity) 13.96% 12.87% 12.17%
Equity to assets (average stockholders' equity
divided by average total assets) 4.58% 5.17% 5.55%
Dividend payout ratio (dividends per share
divided by diluted earnings per share) 4.42% 5.38% 1.62%
Off-Balance Sheet Arrangements
The bank issues standby letters of credit from time-to-time on an
infrequent basis. Standby letters of credit are conditional commitments issued
by the bank to guarantee the performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Asset/liability Management
It is our objective to manage assets and liabilities to provide a
satisfactory, consistent level of profitability within the framework of
established loan, investment, liquidity, interest rate risk and capital
policies. Interest rate risk is inherent in banking and can not be avoided.
Certain of our officers are responsible for monitoring policies and risk limits
to ensure acceptable asset/liability mix as well as to respond to changes in
market conditions and the behavior of balance sheet components.
41
The primary goal of interest rate risk management is to maintain
acceptable interest rate risk exposure within the risk limits prescribed by the
asset/liability committee and the board of directors while maximizing current
earnings. Our asset/liability position is monitored on a regular basis with
several reports that summarize the bank's interest rate risk, currently and in
future periods, using various market interest rates and spread assumptions. The
nature and extent of interest rate risk is dependent upon the expected behavior
of assets and liabilities in various rate scenarios, the relative willingness
for risk, the likelihood and magnitude of the direction of, and changes in,
future interest rates and anticipated growth in deposit and/or lending products.
In 2003 and 2002, management and the board of directors opted to maintain
a liability sensitive position to capitalize on the earning benefit of this
position, without unduly compromising interest rate risk or liquidity or the
future ability to shift to a more neutral or asset sensitive position as
prospects for higher interest rates become more apparent. The primary tool for
assessing and monitoring interest rates is income simulation. Management also
uses gap analysis and economic value of equity. The objective of these models is
to monitor interest rate sensitive assets and liabilities so as to minimize the
impact of substantial movements in interest rates on earnings. An asset or
liability is considered to be interest rate-sensitive if it will re-price or
mature within the time period analyzed. The interest rate-sensitivity gap is the
difference between the interest-earning assets and interest-bearing liabilities
scheduled to mature or re-price within such time period.
A simple interest rate "gap" analysis by itself is not an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, we also evaluate how the repayment of particular assets and
liabilities is impacted by changes in interest rates. Income associated with
interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the
magnitude and duration of changes in interest rates may have a significant
impact on net interest income. For example, although certain assets and
liabilities may have similar maturities or periods of re-pricing, they may react
in different degrees to changes in market interest rates. Interest rates on
certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind changes
in general market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features which may limit changes in interest rates. Loan
and investment prepayments, the elasticity in certain deposit balances and other
factors could deviate significantly from those assumed in calculating the
interest rate gap and the income simulation. The ability of many borrowers to
service their debts also may decrease in the event of an interest rate increase.
Changes in interest rates also can affect the average life of, and demand for,
loans and mortgage-related securities. In a declining interest rate environment,
for example, a financial institution is subject to reinvestment risk to the
extent that it is not able to reinvest such prepayments at rates which are
comparable to the rates on the paid-off loans.
As of December 31, 2003, we had a negative interest rate gap (interest
rate-sensitive liabilities exceed interest rate-sensitive assets) of 4% of total
assets in the one-year time frame. Our earnings could be adversely affected in
periods of rising interest rates because, during such periods, the interest
expense paid on deposits and borrowings could increase more rapidly than the
interest income earned on loans and investments. While management takes measures
to mitigate interest rate risk on an ongoing basis, we cannot assure you that
such measures will be effective in minimizing our exposure to interest rate risk
and maximizing our net interest income.
42
The following table illustrates the bank's interest income simulation
position as of December 31, 2003 under various interest rate scenarios.
Down 100 Basis Points Base Up 200 Basis Points
--------------------- ----- -------------------
Year 2004 $13,504,000 $13,183,000 $11,950,000
Year 2005 $13,121,000 $13,236,000 $11,479,000
The following table illustrates the bank's interest rate gap position
summarized by year as of December 31, 2003.
Total Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 2009 and after
Name Volume/Rate Volume/Rate Volume/Rate Volume/Rate Volume/Rate Volume/Rate Volume/Rate
---- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Asset
- -----
Fed Funds Sold and Short
Term Investment 2,318/3.40 2,318/3.40 -- -- -- -- --
Total Investments 162,244/4.63 65,977/4.91 20,391/3.64 21,187/4.34 10,518/4.45 11,871/4.51 32,300/4.97
Real Estate Mortgages 119,408/6.13 41,762/5.89 22,100/6.24 17,252/6.28 15,777/6.27 11,392/6.41 11,125/6.15
Consumer and
Non-mortgage Commercial 38,165/6.66 29,327/6.51 2,590/7.03 1,647/7.09 1,090/7.02 651/7.07 2,861/7.46
Other Loan Items (1,356)/(0.00) -- -- -- -- -- (1,356)/(0.00)
Total Other Assets 19,482/-- -- -- -- -- -- 19,482/--
-------------- ------------- ----------- ----------- ----------- ----------- --------------
Total Assets 340,262/5.13 139,384/5.51 45,081/5.11 40,086/5.29 27,385/5.60 23,914/5.48 64,412/3.89
Liability
- ---------
Demand Deposits 39,077/-- -- -- -- -- -- 39,077/--
NOW 33,936/0.10 -- -- -- -- -- 33,936/0.10
Savings 30,624/0.50 -- -- -- -- -- 30,624/0.50
First Investment (MMDA) 42,402/1.03 42,402/1.03 -- -- -- -- --
Certificates 52,174/2.52 36,710/2.29 7,514/2.73 6,081/3.25 1,414/3.93 455/2.95 0/3.68
Repo & TTL 10,833/2.01 10,833/2.01 -- -- -- -- --
Total Borrowings 105,903/2.36 64,058/1.24 3,714/2.16 3,381/2.16 3,000/1.35 3,000/4.49 28,750/4.79
Total Other Liabilities 2,159/-- -- -- -- -- -- 2,159/--
Total Equity 23,154/-- -- -- -- -- -- 23,154/--
-------------- ------------- ----------- ----------- ----------- ----------- --------------
Total Liabilities 340,262/1.37 154,003/1.49 11,228/2.54 9,462/2.86 4,414/2.18 3,455/4.29 157,700/0.99
Gap (and Rate Spread) -- (14,591)/4.03 33,853/2.56 30,624/2.43 22,971/3.43 20,459/1.20 (93,318)/2.89
Cumulative Gap (Spread) -- (14,591)/4.03 19,263/3.86 49,887/3.76 72,859/3.77 93,318/3.73 0/3.76
RSA/RSL -- --/0.91 --/4.01 --/4.24 --/6.20 --/6.92 --/0.41
Cumulative RSA/RSL -- --/0.91 --/1.12 --/1.29 --/1.41 --/1.51 --/1.00
Gap/Total Assets -- --/0.04 --/0.10 --/0.09 --/0.07 --/0.06 --/(0.27)
Cum. Gap/Total Assets -- --/0.04 --/0.06 --/0.15 --0.21 --/0.27 --/0.00
43
DESCRIPTION OF PROPERTY
The bank owns its main office in Ipswich, Massachusetts, and a parcel to
the rear of the main office. It leases all of its branches as of the date of
this prospectus. We own no property of significant value.
The bank completed its acquisition of its Cambridge, Massachusetts branch
on April 2, 2004. In conjunction with such acquisition, the bank paid a premium
of 7% on approximately $10,000,000 of deposit liabilities assumed. Further, the
bank plans to open a new branch in Beverly, Massachusetts in May of 2004.
The following table summarizes the bank's respective leases for its ten
(10) currently open branch offices and its one (1) new branch which it plans to
open in Beverly, Massachusetts in May of 2004. With the exception of our Essex,
Massachusetts branch, all of our branch leases are with independent third
parties. John T. Coughlin, a director of Bancorp, owns a material financial
interest in the landlord of our Essex branch. Our New Hampshire branches in
Newington, Manchester and Salem are located in Wal-Mart stores.
Current Monthly Rental* Lease Expires Lease Renewable Until
---------------------- ------------- ---------------------
Martin St., Essex, MA $ 6,146 05/31/09 2019
Main St., Rowley, MA 750 01/31/07 n/a
Newburyport Turnpike, Rowley, MA 3,700 05/31/08 n/a
Main St., Gloucester, MA 6,677 09/30/09 2019
State St., Newburyport, MA 3,210 03/31/06 2011
Massachusetts Avenue, Cambridge, MA 7,127 03/31/09 2024
Cabot Street, Beverly, MA** 4,307 04/16/09 2024
Orchard View Road, Londonderry, NH 5,937 09/30/11 2026
Keller Street, Manchester, NH 2,250 02/28/06 2016
Woodbury Avenue, Newington, NH 2,250 01/30/06 2016
North Broadway, Salem, NH 2,750 03/31/06 2016
Pleasant Street, Portsmouth, NH*** $ 6,000 05/31/09 2024
--------
TOTAL $ 51,104
========
* Including current monthly prorations for taxes, insurance, and
maintenance, as applicable.
** Branch anticipated to commence operations in May of 2004.
*** The lease commences on the earlier of June 1, 2004, or upon receipt of OCC
approval to open the branch. Lease payments commence sixty (60) days after
lease commences. The lease may be terminated if OCC approval is not
received prior to July 1, 2004.
In the opinion of management, all properties occupied by the bank are in
good condition, are adequate at present and for the foreseeable future for their
current and contemplated purposes.
LEGAL PROCEEDINGS
We are periodically parties to or otherwise involved in legal proceedings
arising in the normal course of business, such as claims to enforce liens,
claims involving the making and servicing of real property loans, and other
issues incident to the business of the company and the bank. Management does not
believe that there is any pending or threatened proceeding against the company
or the bank, which if determined adversely, would have a material effect on the
business or financial position of the company.
44
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of Bancorp and the bank. Neither Bancorp nor any of its
subsidiaries is party to any agreement, understanding with or subject to any
order from the relevant federal regulators.
BANK HOLDING COMPANY REGULATION
As a bank holding company registered under the Bank Holding Company Act,
Bancorp is subject to the regulation and supervision applicable to bank holding
companies by the Board of Governors of the Federal Reserve System. Bancorp is
required to file with the FRB annual reports and other information regarding its
business operations and those of its subsidiaries.
The Bank Holding Company Act requires, among other things, the prior
approval of the FRB in any case where a bank holding company proposes to (i)
acquire all or substantially all of the assets of any other bank, (ii) acquire
direct or indirect ownership or control of more than 5% of the outstanding
voting stock of any bank (unless it owns a majority of such company's voting
shares) or (iii) merge or consolidate with any other bank holding company. The
FRB will not approve any acquisition, merger, or consolidation that would have a
substantially anti-competitive effect, unless the anti-competitive impact of the
proposed transaction is clearly outweighed by a greater public interest in
meeting the convenience and needs of the community to be served. The FRB also
considers capital adequacy and other financial and managerial resources and
future prospects of the companies and the banks concerned, together with the
convenience and needs of the community to be served, when reviewing acquisitions
or mergers.
The Bank Holding Company Act generally prohibits a bank holding company,
with certain limited exceptions, from (i) acquiring or retaining direct or
indirect ownership or control of more than 5% of the outstanding voting stock of
any company which is not a bank or bank holding company, or (ii) engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries, unless such
non-banking business is determined by the FRB to be so closely related to
banking or managing or controlling banks as to be properly incident thereto.
The Bank Holding Company Act was substantially amended through the
Gramm-Leach-Bliley Financial Modernization Act of 1999, (the "Modernization
Act"). The Modernization Act permits bank holding companies and banks which meet
certain capital, management and Community Reinvestment Act standards to engage
in a broader range of non-banking activities. In addition, bank holding
companies which elect to become financial holding companies may engage in
certain banking and non-banking activities without prior FRB approval. Finally,
the Modernization Act imposes certain new privacy requirements on all financial
institutions and their treatment of consumer information. At this time, the
company has elected not to become a financial holding company, as it does not
engage in any activities which are not permissible for banks.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
45
institution becomes in danger of default. Under a policy of the FRB with respect
to bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions and
to commit resources to support such institutions in circumstances where it might
not do so absent such policy. The FRB also has the authority under the Bank
Holding Company Act to require a bank holding company to terminate any activity
or to relinquish control of a non-bank subsidiary upon the FRB's determination
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES
The FRB has adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Under these guidelines, assets
and off-balance sheet items are assigned to broad risk categories each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items.
The minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be "Tier 1 Capital," consisting
of common shareholders' equity, qualifying perpetual preferred stock and
minority interests in equity accounts of subsidiaries, less certain goodwill
items, other intangible assets, interest only strips, receivables and
non-financial equity investments. The remainder ("Tier 2 Capital") may consist
of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b)
non-qualifying perpetual preferred stock, (c) hybrid capital instruments, (d)
perpetual debt, (e) mandatory convertible securities, and (f) qualifying
subordinated debt and intermediate-term preferred stock up to 50% of Tier 1
capital. Tier 2 capital is only includable to the extent it does not exceed Tier
1 capital. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal
holdings of other banking organizations' capital instruments, investments in
unconsolidated subsidiaries and any other deductions as determined by the
Federal Reserve Board (determined on a case by case basis or as a matter of
policy after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighting and loans secured by deposits in the bank which carry
a 20% risk weighting. Most investment securities (including, primarily, general
obligation claims of states or other political subdivisions of the United
States) are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury
or obligations backed by the full faith and credit of the U.S. government, which
have a 0% risk-weight. In converting off-balance sheet items, direct credit
substitutes including general guarantees and standby letters of credit backing
financial obligations are given a 100% risk-weighting. Transaction related
contingencies such as bid bonds, standby letters of credit backing nonfinancial
obligations, and undrawn commitments (including commercial credit lines with an
initial maturity of more than one year) have a 50% risk-weighting. Short term
commercial letters of credit have a 20% risk-weighting and certain short-term
unconditionally cancelable commitments have a 0% risk-weighting.
46
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier 1 capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier 1 capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio higher than the stated minimum.
See discussion of FASB Interpretation No. 46 in the "Management's
Discussion and Analysis - Capital Resources" section set forth above.
BANK REGULATION
The bank is subject to regulation and supervision by the OCC, an agency of
the federal government. The regulations of the FDIC and the OCC impact virtually
all of the bank's activities, including the minimum level of capital we must
maintain, our ability to pay dividends, our ability to expand through new
branches or acquisitions and various other matters.
INSURANCE OF DEPOSITS. The bank's deposits are insured up to a maximum of
$100,000 per depositor under the Bank Insurance Fund of the FDIC. The FDIC has
established a risk-based assessment system for all insured depository
institutions. Under the risk-based assessment system, deposit insurance premium
rates range from 0-27 basis points of assessed deposits. For the year ended
December 31, 2003, we paid $30,000 in deposit insurance premiums.
DIVIDENDS. The bank may pay dividends as declared from time to time by the
board of directors out of funds legally available, subject to certain
restrictions. In addition, the bank cannot pay dividends in such amounts as
would reduce the bank's capital below regulatory imposed minimums.
CAPITAL ADEQUACY GUIDELINES. The OCC has promulgated risk-based capital
guidelines which are designed to make regulatory capital requirements more
sensitive to differences in risk profile among banks, to account for off-balance
sheet exposure, and to minimize disincentives for holding liquid assets. Under
these guidelines, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. These guidelines are substantially similar to the FRB guidelines
discussed above.
The FDIC required the federal banking agencies to take "prompt corrective
action" in respect of depository institutions that do not meet minimum capital
requirements. There are five capital tiers: (i) well capitalized; (ii)
adequately capitalized; (iii) undercapitalized; (iv) significantly
undercapitalized; and (v) critically undercapitalized.
The capital measures used by the federal banking regulators are the total
capital ratio, the Tier 1 capital ratio, and the leverage ratio. Under the
regulations, a bank will be: (i) well capitalized if it has a total capital
ratio of 10.0% or greater, a Tier 1 capital ratio of 6.0% or greater, a leverage
ratio of 5.0% or greater, and is not subject to any written agreement, order,
capital directive, or prompt corrective action directive by a federal bank
regulatory agency to meet and maintain a specific capital level for any capital
measure; (ii) adequately capitalized if it has a total capital ratio of 8.0% or
greater, a Tier 1 capital ratio of 4.0% or greater, and a leverage ratio of 4.0%
or greater, or 3.0% in some circumstances, and is not well capitalized; (iii)
undercapitalized if it has a total capital ratio of less than 8.0%, a Tier 1
capital ratio of less than 4.0%, a leverage ratio of less than 4.0%, or 3.0% in
some circumstances; (iv) significantly undercapitalized if it has a total
47
capital ratio of less than 6.0%, a Tier 1 capital ratio of less than 3.0%, or a
leverage ratio of less than .0%; or (v) critically undercapitalized if its
tangible equity is equal to or less than 2.0% of average quarterly tangible
assets.
As of December 31, 2003, the bank's ratio of total capital to
risk-weighted assets was 13.08%. Our Tier 1 capital to risk-weighted assets was
12.36% and our Tier 1 capital to average assets was 6.82%.
See discussion of FASB Interpretation No. 46 in the "Management's
Discussion and Analysis - Capital Resources" section set forth above.
COMMUNITY REINVESTMENT ACT AND CONSUMER REGULATIONS
Bancorp and the bank are subject to the provisions of the Community
Reinvestment Act and the federal banking agencies' regulations under that Act.
Under the Community Reinvestment Act, all banks have a continuing and
affirmative obligation, consistent with safe and sound operation, to help meet
the credit needs for their entire communities, including low- and
moderate-income neighborhoods. The bank received a "Satisfactory" rating at its
most recent Community Reinvestment Act examination.
The Community Reinvestment Act requires a depository institution's primary
federal regulator, in connection with its examination of the institution, to
assess the institution's record in assessing and meeting the credit needs of the
community served by that institution, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the institution's record is
made available to the public. Further, the assessment is required of any
institution with regard to most regulatory applications.
In the case of a bank holding company applying for approval to acquire a
bank or other bank holding company, or to become a financial holding company,
the FRB will assess the records of each subsidiary depository institution of the
applicant bank holding company, and those records may be the basis for denying
the application.
The Modernization Act and the federal bank regulatory agencies have made
various changes to the Community Reinvestment Act. Among other changes,
Community Reinvestment Act agreements with private parties must be disclosed,
and annual Community Reinvestment Act reports must be made to a bank's primary
federal regulator. A bank holding company will not be permitted to become a
financial holding company, and no new activities authorized under the
Modernization Act may be commenced, by a holding company or by a bank financial
subsidiary if any of its bank subsidiaries received less than a "satisfactory"
Community Reinvestment Act rating in its latest examination.
OTHER REGULATIONS
Interest and other charges collected or contracted for by the bank will be
subject to state usury laws and federal laws concerning interest rates. Our loan
operations will also be subject to federal laws applicable to credit
transactions, such as: (i) the federal Truth-In-Lending Act governing
disclosures of credit terms to consumer borrowers; (ii) the Home Mortgage
Disclosure Act of 1975, requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves; (iii) the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed, or other prohibited factors in
extending credit; (iv) the Fair Credit Reporting Act of 1978 governing the use
and provision of information to credit reporting agencies; (v) the Fair Debt
48
Collection Act governing the manner in which consumer debts may be collected by
collection agencies; and (vi) the rules and regulations of the various federal
agencies charged with the responsibility of implementing these federal laws.
The OCC, the FRB and other bank regulatory agencies have adopted
guidelines for safeguarding confidential customer information. The guidelines
require each financial institution, under the supervision and ongoing oversight
of its board of directors, to create a comprehensive written information
security program designed to ensure the security and confidentiality of customer
information, protect against any anticipated threats or hazards to the security
or integrity of such information, and protect against unauthorized access to or
use of such information that could result in substantial harm or inconvenience
to any customer.
The "Modernization Act" requires financial institutions to implement
policies and procedures regarding the disclosure of nonpublic personal
information about consumers to nonaffiliated third parties. In general, the
statute requires the bank to explain to consumers the bank's policies and
procedures regarding the disclosure of such nonpublic information, and, except
as otherwise required by law, the bank is prohibited from disclosing such
information except as provided in the bank's policies and procedures.
The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the "Patriot Act"),
designed to deny terrorists and others the ability to obtain anonymous access to
the United States financial system, has significant implications for depositary
institutions, brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act requires financial institutions to implement additional
policies and procedures with respect to money laundering, suspicious activities
and currency transactions reporting.
The International Money Laundering Abatement and Anti-Terrorism Funding
Act of 2001 restricts money laundering by terrorists in the United States and
abroad. This act specifies new "know your customer" requirements that obligate
financial institutions to take actions to verify the identity of the account
holders in connection with opening an account at any U.S. financial institution.
Banking regulators will consider compliance with the act's money laundering
provisions in making decisions regarding approval of acquisitions and mergers.
In addition, sanctions for violations of the act can be imposed in an amount
equal to twice the sum involved in the violating transaction, up to $1 million.
LEGISLATIVE AND REGULATORY CHANGES
Legislative and regulatory proposals regarding changes in banking laws,
the regulation of banks, thrifts and other financial institutions, as well as
bank and bank holding company powers are being considered by the executive
branch of the Federal government, Congress and various state governments. We
cannot predict whether any of these proposals will be adopted, and, if adopted,
how these proposals will affect us.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We, through our wholly-owned subsidiary the bank, have had, currently
have, and expect to continue to have in the future, banking (including loans and
extensions of credit) transactions in the ordinary course of our business with
our directors and various corporations of which they are officers. At December
31, 2003, the aggregate outstanding extensions of credit to all directors,
officers, principal stockholders and members of their respective immediate
families and trusts in which they have a substantial beneficial interest, or as
to which they serve as trustee, as a group, were $1,753,000, an amount which was
49
equal to 11.5% of Bancorp's total capital. These banking transactions have been
and are on substantially the same terms, including interest rates, collateral
and repayment conditions, as those prevailing at the same time for comparable
transactions with others and did not involve more than the normal risk of
collectibility or present other unfavorable features.
John T. Coughlin, a director of Bancorp, owns a substantial interest in
PMC Realty Trust, the landlord of the bank's branch in Essex, Massachusetts.
Further, Gateway Realty Trust, an entity owned by Mr. Coughlin's son, leases the
bank its operations center for a monthly rental payment of $5,480. We believe
that the terms, conditions and fees charged in our arrangements with PMC Realty
Trust and Gateway Realty Trust are comparable to those that could be obtained
from an unrelated third party.
DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS
The following table sets forth, as to each of our directors and executive
officers, such person's age, position, principal occupation, and the period
during which such person has been director and/or executive officer of Bancorp
or bank. Each of our executive officers is elected to serve until the first
annual meeting of the Directors following the annual meeting of stockholders and
thereafter until his successor is elected and has qualified. Each director of
Bancorp is also a director of the bank.
Director
(Officer) of
Position with Bancorp Bancorp or
Name Age (and Principal Occupation)(1) Bank since
---- --- ----------------------------- ----------
Robert R. Borden, III 61 Director (President & CFO, LandVest, Inc.) 1992
Timothy R. Collins 40 Director (President, EBSCO Publishing) 2003
Franz Colloredo-Mansfeld 41 Director (CEO & President, Cabot Properties, Inc.)(2) 1999
John T. Coughlin 56 Director (President, Quinn Brothers, Inc.) 1996
Stephanie R. Gaskins 64 Director (retired) 1995
John P. DiIorio, Jr. 41 Senior Vice President - Lending of bank 2003
Donald P. Gill 50 President of Bancorp and Director, President and Chief Executive
Officer of bank 1998
Fitz O. Lufkin, Jr. 69 Director (President, Fitz Lufkin Realtors) 1983
Peter A. Maistrellis 62 Director (President Ipswich Maritime Products) 1975
H.A. Patrican, Jr. 55 Director (President, Ipswich Bay Glass Company, Inc.) 2003
Neil St. John Raymond 60 Chairman of Board of Bancorp and bank (President, Raymond Property
Company) 1969
Neil St. John Raymond, Jr. 27 Director (Project Manger, Raymond Property Company)(3) 2003
William J. Tinti 64 Director (Attorney-Tinti, Quinn, Grover & Frey, P.C.) 2002
Michael J. Wolnik 43 Chief Financial Officer of bank and Treasurer of Bancorp 1999
Peter M. Whitman, Jr. 60 President of Ipswich Capital Investment Corp.,
a subsidiary of the bank(4) 2003
(1) Unless otherwise noted, the principal occupation of each individual set
forth below has been the principal occupation of such individual for the
past five years.
(2) Mr. Colloredo-Mansfeld's employment history is discussed below. See
"Executive Compensation - Audit Committee".
(3) Mr. Raymond has held his position with Raymond Properties since 2001.
Prior to that, Mr. Raymond played lacrosse professionally.
50
(4) Prior to joining Ipswich Capital Investment Corp. in 2003, Mr. Whitman was
an executive with Old Mutual PLC, which firm was acquired by Asset
Management Co.
As permitted by Section 13(b)(1 1/2 ) of Chapter 156B of the Massachusetts
General Laws, Article 5, ss. 17 of our Articles of Organization imposes certain
limitations on the ability of Bancorp and its shareholders to recover monetary
damages from Bancorp's Directors for breach of fiduciary duty by such directors
in their capacity as director. Our Directors continue to have liability to us
and our shareholders for monetary damages for any breach of fiduciary duty
involving (i) breaches of the duty of loyalty to us or our shareholders, (ii)
acts or omissions not in good faith which involve intentional misconduct or a
knowing violation of law, (iii) liability under Sections 61 and 62 of Chapter
156B of the Massachusetts General Laws (involving unauthorized distributions by
us and loans to directors or officers) or (iv) any transaction from which the
director derived an improper personal benefit. Equitable remedies such as an
injunction or rescission also continue to be available.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and related notes set forth certain information as of
December 31, 2003 with respect to all persons known to us to be the beneficial
owner of more than 5% of our outstanding common stock:
Name and Address of Beneficial Amount and Nature of
Title of Class Owner(1) Beneficial Ownership Percent of Class
-------------- -------- -------------------- ----------------
Common Stock Joseph A. Brear, Jr., Trustee, 230,720 12.02%
Raymond Children's Trust 1981
c/o Craig and Macauley, PC
600 Atlantic Avenue
Boston, MA 02210(2)
Common Stock Neil St. John Raymond 1,098,380 57.22%
34 Heartbreak Road
Ipswich, MA 01938(3)(4)
(1) For purposes of this prospectus, a person is treated as the beneficial
owner of a security if the person, directly or indirectly (through
contract, arrangement, understanding, relationship or otherwise) has or
shares (a) voting power, including the power to vote or to direct the
voting, of such security, or (b) investment power with respect to such
security, including the power to dispose or direct the disposition of such
security. A person is also deemed to have beneficial ownership of any
security that such person has the right to acquire within sixty (60) days.
Unless indicated in another footnote to this tabulation, a person has sole
voting and investment power with respect to the shares set forth opposite
his or her name.
(2) 230,720 shares held by Joseph A. Brear, Jr., Trustee, Children's Trust
1981 have been pledged to secure certain obligations.
(3) 967,270 shares of Mr. Raymond's common stock have been pledged to secure
certain of his obligations. Should Mr. Raymond default in the performance
of such obligations, a change in control of Bancorp could result.
(4) Includes 990,380 shares held by Mr. Raymond and 108,000 shares issuable
upon the exercise of immediately exercisable warrants held by Mr. Raymond.
51
The following table and related notes set forth information as of December
31, 2003, regarding the beneficial ownership of our common stock by each of our
and the bank's Directors, and by all of our and the bank's executive officers
and directors as a group, but does not reflect any shares for which they may
subscribe in this offering.
Amount and Nature of
Title of Class Name and Address of Beneficial Owner(1) Beneficial Ownership Percent of Class
-------------- --------------------------------------- -------------------- ----------------
Common Stock Neil St. John Raymond, Chairman of the Board(2) 1,098,380 57.22%
Common Stock Robert R. Borden, III, director 21,700 1.13
Common Stock Timothy R. Collins, director 250 *
Common Stock Franz Colloredo-Mansfeld, director 2,290 *
Common Stock John T. Coughlin, director 34,357 1.79
Common Stock John P. DiIorio, Jr., SVP - Lending 0 *
Common Stock Stephanie R. Gaskins, director 6,460 *
Common Stock Donald P. Gill, director, President and CEO of
Bancorp and the Bank 2,900 *
Common Stock Fitz O. Lufkin, Jr., director 45,420 2.37
Common Stock Peter A. Maistrellis, director 10,730 *
Common Stock H.A. Patrican, Jr. , director 1,150 *
Common Stock Neil St. John Raymond, Jr., director 3,740 *
Common Stock William J. Tinti, director 3,430 *
Common Stock Peter M. Whitman, Jr., President, Ipswich Capital 0 *
Investment Corp.
Common Stock Michael J. Wolnik, SVP and CFO 520 *
Common Stock All Directors and Executive Officers as a Group 1,262,667 65.78
* One percent or less.
(1) All business addresses of the listed officers and directors are care of
First Ipswich Bancorp, 31 Market Street, Ipswich, MA 01938. Additionally,
the beneficial share ownership of each of the persons listed in the table
set forth above may be outright or deemed due to ownership by an entity or
person with whom such person is related or otherwise affiliated.
(2) Includes 990,380 shares held by Mr. Raymond and 108,000 shares issuable
upon the exercise of immediately exercisable warrants.
52
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following Summary Compensation Table sets forth the aggregate
compensation paid by us and the bank on account of services performed during
2003 to the most highly compensated executive officers of us and the bank whose
aggregate compensation exceeded $100,000.
Annual Compensation
-------------------
Other Annual
Executive and Position(1) Year Salary ($) Bonus ($) Comp.($)
- ------------------------- ---- ---------- --------- --------
Donald P. Gill, President and CEO 2003 $184,957 $35,000 $5,181(2)
2002 $178,896 $50,000 $4,757(2)
2001 $166,490 $30,000 $4,334(2)
Jay S. Dunham, SVP 2003 $140,000 --- $5,967(2)
2002 --- --- ---
2001 --- --- ---
Peter M, Whitman, Jr.(3) 2003 $130,577 --- ---
2002 --- --- ---
2001 --- --- ---
Michael J. Wolnik, Treasurer, SVP and CFO 2003 $112,988 $28,000 ---
2002 $102,821 $13,500 ---
2001 $100,212 $11,000 ---
John P. DiIorio, Jr., SVP - Lending 2003 $102,252 $10,500 ---
2002 $ 83,305 $ 8,775 ---
2001 $ 79,672 $ 5,625 ---
(1) Messrs. Gill and Wolnik, hold the indicated offices for both Bancorp and
the bank. Mr. Whitman holds the indicated office with a bank subsidiary,
and Mr. DiIorio holds the indicated office with the bank.
(2) Amount related to car allowance and life insurance premiums.
(3) Mr. Whitman joined Ipswich Capital Investment Corp. in 2003.
EMPLOYMENT AND OTHER AGREEMENTS
Bancorp has entered into three-year employment agreements with Donald P.
Gill, President and Chief Executive Officer, and with Neil St. John Raymond,
chairman of the board. These employment agreements specify the employee's duties
and minimum compensation. They also provide for one-year extensions of the
initial and any extended term of the employment agreements unless prior notice
is given by either party. The employment agreements provide for the consequences
of termination of employment by death, disability, involuntary termination with
or without "cause" (as defined) and voluntary resignation whether or not for
"good reason" (as defined). Among other provisions, if employment is
involuntarily terminated by Bancorp for any reason other than "cause," or is
voluntarily terminated by the employee for "good reason," Bancorp is required to
make additional payments to the employee. During the term of the employment
agreements and for one year thereafter, the employee may not compete with
Bancorp or solicit its executives within any town in which Bancorp conducts
business or any contiguous cities or towns.
53
Bancorp has also entered into severance agreements with Mr. Gill and Mr.
Raymond regarding termination of employment by Bancorp or the bank subsequent to
a "change in control" or "potential change in control" of Bancorp, as defined in
the severance agreement. Following the occurrence of a change in control, if the
employee's employment is involuntarily terminated (except because of death,
"disability," or "cause" as defined therein) or is voluntarily terminated by the
employee for "good reason" as defined therein, then the employee is entitled to
a lump sum payment from Bancorp approximately equal to three times his annual
average compensation for the previous five years, plus accrued vacation pay and
bonus awards. If Mr. Gill or Mr. Raymond is entitled to receive benefits under
both his employment agreement and his severance agreement, he must choose the
agreement under which he will claim monetary payments on account of termination
of employment. If the change in control provisions of their respective severance
agreements had been triggered as of April 30, 2004, Mr. Gill and Mr. Raymond
would have received $539,618 and $253,574, respectively.
Bancorp has entered into executive supplemental compensation ("SERP")
agreements with Mr. Gill and with Mr. Raymond. The SERP agreement with Mr. Gill
provides for payment over Mr. Gill's lifetime following retirement in an amount
equal to the vested portion of an annual benefit calculated with reference to
the average of his highest three consecutive years salaries. The percentage is
determined on the date of retirement and is equal to two percent for each year
of service, up to a maximum of 30 years. Mr. Gill's entitlement to receive this
retirement payment vests five percent every six months of employment beginning
at age 50, with the result that Mr. Gill will be fully vested if he retires
after his 60th birthday. In addition, Mr. Gill will be fully vested if his
employment terminates within 36 months of a "change in control" or within 12
months of a "potential change in control," other than involuntary termination
for "cause" or resignation other than for "good reason" (as those terms are
defined). The benefit payable by the Bank is reduced by an amount equal to half
of the Social Security payments to which Mr. Gill is entitled, and further
reduced by an amount calculated to reflect his benefit from Bancorp's
contributions to its 401(k) plan.
Mr. Raymond's SERP agreement provides for payment of a retirement benefit
for 15 years following his retirement. The amount of the benefit is a percentage
of the average of his three consecutive years highest salaries, calculated using
two percent for each full year of service as a senior executive officer of
Bancorp or the bank, up to a maximum of 35 years, minus offsets for Social
Security and an amount calculated to reflect the benefit of Bancorp's
contributions to its 401(k) plan on his behalf. If Mr. Raymond dies before the
full benefit is paid to him, the balance is paid to his beneficiary.
The bank has entered into change in control agreements with Mr. Michael J.
Wolnik, Senior Vice President and Chief Financial Officer of the bank, and with
Mr. John P. DiIorio, Jr., Senior Vice President of the bank. These agreements
provide for the payment of one year's severance pay if Mr. Wolnik or Mr. DiIorio
is terminated within twelve months following a "change in control" of the bank
(as defined in the severance agreements) for any reason other than "cause" (as
defined in the severance agreements) or on account of death, disability or
retirement. While employed by the bank and for a period of one year thereafter,
Mr. Wolnik and Mr. DiIorio may not (i) solicit or induce any employee of the
bank or any subsidiary or affiliate of the bank to leave his or her employment,
or (ii) compete with the bank or any subsidiary or affiliate of the bank in any
city or town in which the bank or any subsidiary or affiliate operates, or
within any contiguous city or town.
54
COMPENSATION PURSUANT TO STOCK OPTION PLANS
At Bancorp's annual meeting held on March 31, 2004, the stockholders
approved the First Ipswich Bancorp 2004 Incentive Stock Option Plan (the "stock
option plan") for key employees of Bancorp and its subsidiaries, providing for
options with respect to 200,000 shares of common stock of Bancorp. The board of
directors of Bancorp had unanimously approved the stock option Plan on a
previous occasion, providing for options with respect to 200,000 shares of
common stock of Bancorp.
The stock option plan is designed to reward key employees on a long-term
basis by granting them options to purchase shares of Bancorp's common stock. Its
purpose is to facilitate the achievement of Bancorp's financial goals. The
achievement of these goals is facilitated in two ways. First, key employees will
have substantial incentives to provide exceptional services and thereby cause
Bancorp to meet the financial performance goals set by the board of directors
and to increase Bancorp's stock price. Second, the stock option plan will assist
Bancorp and the bank in hiring and retaining key employees. Attracting and
retaining key employees is critical to the long-term performance of Bancorp.
Under the stock option plan, the board of directors may grant to key
employees of Bancorp who the Board determines to be capable of making
substantial contributions to the management and operations of Bancorp, options
to purchase shares of Bancorp's common stock. The board of directors will
administer the stock option plan and will determine which employees shall be
granted options, the number of options granted, the times when the options will
vest, and the exercise price of the option. The aggregate number of shares of
Bancorp's common stock for which options may be granted under the stock option
plan is 200,000 shares subject to adjustments in the event of stock splits,
stock dividends or reclassification, recapitalization or other possible future
changes. The stock option plan shall terminate on February 18, 2014 and no
options may be granted thereafter. The board of directors may at any time
modify, amend or terminate the stock option plan, except that approval of the
holders of at least a majority of stock of Bancorp is required in certain
circumstances such as increasing the amount of shares that may be granted under
the plan, increasing the maximum amount of options that may be granted to an
individual employee or extending the plan's termination date.
The options which may be granted under the plan are incentive stock
options. They are entitled to favorable tax treatment if certain conditions are
satisfied. These conditions include approval of the stock option plan by
Bancorp's stockholders, the exercise price may not be less than the fair market
value of Bancorp's common stock at the time the option is granted (or 110% of
such value in certain circumstances), the option must be exercised within 10
years after it is granted (or 5 years in certain circumstances) or within three
months after the employee is no longer employed by Bancorp, the option is
generally nontransferable, the value of the shares subject to the option which
vest in any one year cannot exceed $100,000 as determined at the time the option
is granted, and the employee has not sold the common stock acquired by the
exercise of any option during the periods two years after the date of grant or
one year from the date of exercise. An option may be exercised by the payment in
full of the option price for the shares to be purchased. If an option expires or
terminates for any reason without being exercised, the shares represented by the
option will again be available for grant under the stock option plan.
Bancorp is not entitled to a deduction for the grant of the stock, the
exercise of the option, or upon sale of the stock. However, the pro forma impact
of the options, if any, must be disclosed in the footnotes to Bancorp's
consolidated financial statements.
55
As of the date hereof, the board of directors has not granted any options.
The board of directors currently intends to make future grants of options based
on the achievement of financial performance goals established by the board of
directors.
At a meeting of the board of directors on March 17, 2004, Bancorp adopted
the First Ipswich Bancorp 2004 Directors Plan (the "directors plan"), providing
for the issuance of stock options with respect to 20,000 shares of the common
stock of Bancorp.
The directors' plan is designed to reward directors of Bancorp by granting
them options to purchase shares of Bancorp's common stock. Its purpose is to
facilitate the achievement of Bancorp's financial goals through attracting and
retaining exceptional directors, and through their efforts and guidance to
enhance the long-term performance of Bancorp and increase Bancorp's per share
price.
Under the directors' plan, the board of directors may grant options to
purchase Bancorp's common stock to directors. The board of directors will
administer the directors' plan, and will determine which directors will be
granted options, the times when the options will vest, and the exercise price of
the options, which shall not be less than the fair market value of the common
stock of Bancorp on the date of grant of the option. The aggregate number of
shares of Bancorp's common stock for which options may be granted under the
directors' plan is 20,000 shares, subject to adjustments in the event of stock
splits, stock dividends or reclassification, recapitalization or other possible
future changes. The directors' plan terminates in 2014 and no options may be
granted thereafter. The board of directors may at any time modify, amend or
terminate the directors' plan.
The options being granted are non-qualified options, which do not qualify
for special tax treatment under the Internal Revenue Code. The exercise of the
options will result in a deduction to Bancorp. In addition, the pro forma impact
of the options, if any, must be disclosed in the footnotes to Bancorp's
consolidated financial statements. As of the date hereof, the board of directors
has not granted any options. The board of directors currently intends to make
future grants of options to all directors.
AUDIT COMMITTEE
The audit committee of the board of directors will review examinations and
responses to those examinations, select both internal and external auditors,
pre-approve all audit and non-audit services; monitor internal control; and
conduct audit planning.
The audit committee is comprised of Messrs. Borden, Collins,
Colloredo-Mansfeld, and Maistrellis and Ms. Gaskins. Mr. Colloredo-Mansfeld has
been designated as an "audit committee financial expert" and is "independent"
(as each such term is defined in Item 401(e)(2) of Regulation S-B and in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934,
respectively). Mr. Colloredo-Mansfeld has been the President of Cabot
Properties, Inc. since 2002. From 1997-2001, Mr. Colloredo-Mansfeld served as
the Chief Financial Officer of the Cabot Industrial Trust. He was a Senior
Engagement Manager of McKinsey & Company, Inc. from 1992 through 1996. He
previously worked for the Deutsche Bank real estate investment group in 1992 and
was a Robert Bosch Fellow at the German Central Bank (Bundesbank) in Frankfurt,
Germany in 1991. He was also an investment banker with Merrill Lynch & Co. from
1986 through 1989, where he specialized in mergers and acquisitions. Mr.
Colloredo-Mansfeld is a graduate of Harvard College and Harvard Business School.
56
DIRECTOR RELATIONSHIPS
No director of Bancorp is also a director of any company with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934 or subject to the requirements of Section 15(d) thereof, or any company
registered as an investment company under the Investment Company Act of 1940.
Neil St. John Raymond, Jr., a director of Bancorp, is the son of Neil St. John
Raymond, Bancorp's Chairman and largest shareholder.
DIRECTORS' COMPENSATION
Directors are paid an annual fee of $2,500. For each board meeting
attended, a director receives $500. Each director who serves on the loan/credit
committee, trust committee, asset/liability committee or audit committee
receives $200 for each meeting attended. Directors will also be eligible to
receive options under the directors' plan.
EMPLOYEES
The bank sponsors a defined contribution 401(k) plan whereby an eligible
employee may contribute up to 15% of their compensation, and the bank will make
a matching contribution equal to 50% of the first 5% of an employee's
compensation contributed to the plan. Expenses related to the 401(k) plan for
2003 and 2002 were $88,000 and $90,000, respectively.
57
DESCRIPTION OF BANCORP'S SECURITIES
CAPITAL STOCK
GENERAL. We are incorporated under the laws of the Commonwealth of
Massachusetts. Therefore, the rights of holders of our stock will be governed by
the Massachusetts Business Corporation Law and the Articles of Organization. Our
Articles of Organization provide for an authorized capitalization of 5,000,000
shares of capital stock, consisting of 4,000,000 shares of common stock, $1.00
par value per share and 1,000,000 shares of preferred stock, as may be issued in
series as determined by the board of directors.
As of December 31, 2003, there were 1,757,630 shares of common stock
outstanding and approximately 293 holders of record.
Upon completion of the offering, we expect that there will be 2,057,630
shares of common stock outstanding (assuming all shares are subscribed for in
the offering) and no shares of preferred stock issued and outstanding.
Bancorp declared a ten for one stock split in the form of a stock dividend
for shareholders of record as of February 18, 2004. Each shareholder received an
additional nine shares of common stock for each share of common stock owned by
him or her on February 18, 2004.
COMMON STOCK
DIVIDEND RIGHTS. Holders of shares of our common stock are entitled to
receive such dividends as are declared by its board of directors out of funds
legally available for the payment of dividends. As noted previously, our payment
of dividends may be subject to the approval of the FRB. For the last nine fiscal
quarters, Bancorp has paid a dividend on its common stock equal to $0.0125 per
share.
VOTING RIGHTS. Holders of shares of our common stock are entitled to one
vote for each share of stock they hold. The shares of our common stock do not
have cumulative voting rights. This means that the holders of more than 50% of
the shares of our common stock voting for the election of our directors can
elect 100% of the class of directors standing for election at any meeting if
they choose to do so, and in such event, the holders of the remaining shares
voting for the election of directors will not be able to elect any person or
persons to the our board of directors at the meeting. Neil St. John Raymond, a
director and principal shareholder of Bancorp, owns or controls approximately
57% of our common stock. See "Anti-Takeover Provisions".
PREEMPTIVE RIGHTS. Under Massachusetts law, shareholders may have
preemptive rights if these rights are provided in the Articles of Organization.
Our articles of organization do not provide for preemptive rights.
LIQUIDATION RIGHTS. In the event of dissolution of Bancorp and the
liquidation thereof, the holders of shares of our common stock will be entitled
to receive pro rata any assets able to be distributed to shareholders in respect
of shares held by them.
APPRAISAL RIGHTS. Under Massachusetts law, dissenting shareholders of
Bancorp have appraisal rights upon certain mergers or consolidations or other
events.
58
DIRECTORS. Under Massachusetts law and our articles of organization and
bylaws, Bancorp is to have a minimum of three directors, with the number of
directors at any given time to be fixed by the board of directors. We currently
have twelve members of our board of directors.
PREFERRED STOCK
Our articles of organization authorize us to issue up to 1,000,000 shares
of preferred stock, in one or more series, with such designations and such
relative voting, dividend, liquidation, conversion and other rights, preferences
and limitations as shall be set forth in resolutions providing for the issuance
thereof adopted by the board of directors. No shares of preferred stock have
been issued.
The authorized preferred stock is available for issuance from time to time
at the discretion of the board of directors without shareholder approval. The
board of directors has the authority to prescribe for each series of preferred
stock it establishes the number of shares in that series, the number of votes
(if any) to which the shares in that series are entitled, the consideration for
the shares in that series, and the designations, powers, preferences and other
rights, qualifications, limitations or restrictions of the shares in that
series. Depending on the rights prescribed for a series of preferred stock, the
issuance of preferred stock could have an adverse effect on the voting power of
the holders of common stock and could adversely affect holders of common stock
by delaying or preventing a change in control, making removal of our present
management more difficult or imposing restrictions on the payment of dividends
and other distributions to the holders of common stock.
SUBORDINATED DEBENTURES - TRUST PREFERRED
On December 29, 2000, Bancorp raised net proceeds of $2.9 million in a
sale of $3.0 million of subordinated debentures to First Ipswich Capital Trust I
("Trust I"), a wholly-owned subsidiary of Bancorp. Trust I funded the purchase
through a private placement of 3,000 capital securities representing preferred
ownership interests in the assets of Trust I with a liquidation value of $1,000
each. Using interest payments made by Bancorp on the debentures, Trust I pays
quarterly dividends to preferred security holders. The annual percentage rate of
interest payable on the subordinated debentures and the cumulative dividends
payable on the preferred securities is 10.0%. Bancorp has the option to defer
interest payments on the subordinated debentures for up to five years and,
accordingly, Trust I may defer dividend distributions for up to five years. The
debentures and the preferred securities mature in December 2030 unless Bancorp
elects and obtains regulatory approval to accelerate the maturity date to
December 2005 or thereafter.
On September 25, 2002, Bancorp raised net proceeds of $5.8 million in a
sale of $6.0 million of subordinated debentures to First Ipswich Statutory Trust
II ("Trust II"), a wholly-owned subsidiary of Bancorp. Trust II funded the
purchase by participating in a pooled offering of 6,000 capital securities
representing preferred ownership interests in the assets of Trust II with a
liquidation value of $1,000 each. Using interest payments made by Bancorp on the
debentures, Trust II pays quarterly dividends to preferred security holders. At
December 31, 2003 and 2002, the annual percentage rate of interest payable on
the subordinated debentures and the cumulative dividends payable on the
preferred securities was 4.54% and 4.69%, respectively. Each succeeding payment
date will be at a rate equal to the three month LIBOR rate plus 3.4%; not to
exceed 11.9%. Bancorp has the option to defer interest payments on the
subordinated debentures for up to five years and, accordingly, Trust II may
defer dividend distributions for up to five years. The debentures and the
preferred securities mature in September 2032 unless Bancorp elects and obtains
regulatory approval to accelerate the maturity date to September 2007 or
thereafter.
59
The outstanding preferred securities are classified as subordinated debt
in the consolidated balance sheet and may be included in regulatory Tier I
capital, subject to a limitation that such amounts not exceed 25% of Bancorp's
Tier I capital. At December 31, 2003 and 2002, subordinated debt aggregating
$5,097,000 and $4,450,000, respectively, is included in Tier I capital. Deferred
debt financing costs are being amortized over the life of the debentures. See
discussion of FASB Interpretation No. 46 in the "Management Discussion and
Analysis - Capital Resources" section.
WARRANTS ISSUED WITH TRUST PREFERRED
General. Each purchaser of the capital securities issued by First Ipswich
Capital Trust I received warrants from us ("capital warrants') entitling the
purchaser to purchase shares of our voting common stock at a price of $5.555 per
share (the "exercise price"). Each purchaser received 1,620 capital warrants for
the first $30,000 of the purchaser's investment, and received ten capital
warrants for each investment of $185.19 (or fraction thereof) in excess of
$30,000. The fair value of the warrants at the issue date was not material. As
of December 31, 2003, 162,000 capital warrants issued by Bancorp are
outstanding.
Each capital warrant entitled the holder thereof to purchase one share of
common stock at the exercise price. The exercise price and the number and kind
of securities purchasable upon exercise of each capital warrant shall be subject
to adjustment from time to time upon the occurrence of certain events, including
share dividends, share splits, mergers and reclassifications. Each capital
warrant is exercisable in whole or in part. The capital warrants may be
exercised upon the surrender of a duly completed certificate or certificates at
our office accompanied by cash or check payable to us for the amount of the
exercise price. Commencing four years after issuance, the capital warrants are
redeemable by us, upon at least ninety 90 days' written notice by first class
mail to holders of the capital warrants (which notice may be given prior to the
expiration of the four year period), at any time or from time to time, in whole
or in part, at a price of $.001 per capital warrant. The capital warrants
continue to be exercisable during such notice period.
Dilution. The holders of the warrants are protected against dilution of
their interests represented by the number of shares of common stock underlying
the warrants upon the occurrence of certain events, including share dividends,
share splits, mergers and reclassifications. The number of shares purchasable
upon exercise of each warrant immediately prior to these certain events shall be
adjusted so that the holder of each warrant shall be entitled to receive the
kind and number of shares of our common stock or other securities which he would
have owned or have been entitled to receive after the happening of any of these
certain events, had such warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto.
The holders of the warrants have no right as such to vote on matters
submitted to our stockholders or to receive dividends. The holders of the
warrants are not entitled as such to share in the assets of Bancorp in the event
of liquidation, dissolution, or the winding up of our affairs.
Shares of common stock to be issued upon exercise of the warrants have not
been registered under the Securities Act of 1933. The warrants may not be
exercised unless such shares are registered under the Securities Act of 1933 or
the issuance of such shares upon exercise of the warrants is exempt from
registration under the Securities Act of 1933. Such issuance of shares must also
comply with applicable state securities laws.
60
ANTI-TAKEOVER PROVISIONS
BANK REGULATORY REQUIREMENTS. Under the Federal Change in Bank Control Act
(the "Control Act"), a 60 day prior written notice must be submitted to the FRB
if any person, or any group acting in concert, seeks to acquire 10% or more of
any class of outstanding voting securities of a bank holding company, unless the
FRB determines that the acquisition will not result in a change of control.
Under the Control Act, the FRB has 60 days within which to act on such notice
taking into consideration certain factors, including the financial and
managerial resources of the acquirer, the convenience and needs of the community
served by the bank holding company and its subsidiary banks and the antitrust
effects of the acquisition. Under the Bank Holding Company Act of 1956, as
amended BHCA, a company is generally required to obtain prior approval of the
FRB before it may obtain control of a bank holding company. Under the BHCA,
control is generally described to mean the beneficial ownership of 25% or more
of the outstanding voting securities of a company, although a presumption of
control may exist if a party beneficially owns 10% or more of the outstanding
voting securities of a company and certain other circumstances are present.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS. Under
Massachusetts law, the approval of the holders of at least 66.66% of Bancorp's
outstanding shares of voting stock to approve certain "Business Combinations,"
and related transactions. "Business Combination," includes (i) any merger or
consolidation of Bancorp with or into any other person and (ii) any sale, lease,
exchange, mortgage, pledge, transfer, or other disposition to or with any other
person of substantially all of the assets of Bancorp.
EVALUATION OF OFFERS. The articles of organization further provide that
the board of directors, when evaluating any tender offer or other offer
involving Bancorp's securities may, in connection with the exercise of its
judgment in determining what is in the best interest of Bancorp, the bank and
the shareholders of Bancorp, give due consideration (to the extent permitted by
law) to the price offered, whether a more favorable price could be obtained, the
social and economic effects of acceptance of such offer on Bancorp's customers
and the bank's present and future account holders, borrowers and employees, the
reputation and business practices of the offeror, the value of any exchange
securities and any antitrust or other legal considerations raised by the offer.
By having these standards in the articles of organization of Bancorp, the board
of directors may be in a stronger position to oppose such a transaction if the
board concludes that the transaction would not be in the best interest of
Bancorp, even if the price offered is significantly greater than the then market
price of any equity security of Bancorp.
AMENDMENT OF ARTICLES OF ORGANIZATION AND BYLAWS. Amendments to the
articles of organization must be approved by a majority vote of Bancorp's board
of directors and, with certain limited exceptions, also by a majority of the
outstanding shares of its voting stock, provided, however, that an affirmative
vote of at least 66.66% of the outstanding voting stock entitled to vote (after
giving effect to the provision limiting voting rights) is required to amend or
repeal certain provisions of the articles of organization, including the
provision limiting voting rights and the provisions relating to approval of
certain Business Combinations. Bancorp's articles of organization provide that
the board of directors shall have the power to adopt, alter, amend and repeal
Bancorp's By-Laws. Generally speaking, such action by the directors requires the
affirmative vote of at least a majority of the directors then in office, at a
duly constituted meeting of the board.
61
MASSACHUSETTS ANTI-TAKEOVER LAW. Massachusetts has adopted a "business
combination" statute (Chapter 110F of the General Laws of Massachusetts). In
general, a Massachusetts corporation such as Bancorp is prohibited from engaging
in certain business combinations (defined by the statute to include certain
mergers and consolidations, dispositions of assets and issuances of securities,
as well as certain other transactions) with an interested stockholder (defined
by the statute to include holders of 5% or more of the outstanding stock of the
corporation) for a period of three years following the date that such
stockholder became an interested stockholder, except under certain
circumstances, which include:
o prior approval by the board of directors of the business combination
or the transaction which resulted in the stockholder becoming an
interested stockholder;
o subsequent approval of the business combination by the board of
directors and by a vote of at least two-thirds of the outstanding
voting stock which is not owned by the interested stockholder; or
o upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the stockholder
owned at least 90% of the voting stock of the corporation (excluding
shares held by certain affiliates of the corporation and shares
owned by employee stock option plans in which the participants
cannot determine confidentially whether or not the shares would be
tendered in response to a tender or an exchange offer).
Massachusetts has adopted a "control share" statute (under Chapter 110D of
General Laws of Massachusetts). In general, any person (referred to as the
"acquiror") who makes a bona fide offer to acquire, or acquires, shares of stock
of a Massachusetts corporation that, when combined with shares already owned,
would increase the acquiror's ownership to at least 20%, 33.33% or a majority of
the voting stock of such corporation, must obtain the approval of a majority of
shares held by all stockholders except the acquiror and the officers and inside
directors of the corporation in order to vote the shares acquired. The statute
permits a Massachusetts corporation to elect not to be governed by its
provisions by including in its articles of organization or by-laws a provision
pursuant to which the corporation "opts out" of the statute. Bancorp has not
expressly opted out of the statute.
COUNSEL
Certain matters relating to Massachusetts law will be passed upon for us
by Craig and Macauley Professional Corporation. Attorneys of Craig and Macauley
Professional Corporation individually own an aggregate of 21,980 shares of
Bancorp. This total does not include the shares which Joseph A. Brear, Jr., who
is of counsel to the firm, owns as trustee of the Raymond Children's Trust.
EXPERTS
The consolidated financial statements of Bancorp and subsidiaries as of
December 31, 2003 and 2002 and for the years then ended, have been included
herein and in the Registration Statement in reliance upon the report of Wolf &
Company, P.C., independent accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
62
WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, a copy of any
exhibits to our registration statement incorporated by reference in this
prospectus. If you want more information, write or call us at:
First Ipswich Bancorp
31 Market Street
Ipswich, MA 01938
(978) 356-3700
We are subject to certain of the informational requirements of the
Securities and Exchange Act of 1934, as amended (the "1934 Act") and, as
required by the 1934 Act, we will file certain reports and other information
with the SEC. Reports and other information filed by us may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, DC 20549 and at the SEC's
regional offices located at New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Our SEC filings are
also available to the public on the SEC Internet site at http://www.sec.gov.
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this Prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell those securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITY
Insofar as indemnification of liabilities arising under the 1933 Act may
be permitted to directors, officers, and controlling person of Bancorp pursuant
to Bancorp's by-Laws, or otherwise, Bancorp has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in such Act and is, therefore unenforceable.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3 through F-4
Consolidated Statements of Changes in
Stockholders' Equity F-5
Consolidated Statements of Cash Flow F-6 through F-7
Notes to Consolidated Financial Statements F-8 through F-38
63
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
First Ipswich Bancorp
We have audited the accompanying consolidated balance sheets of First Ipswich
Bancorp and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Ipswich
Bancorp and subsidiaries as of December 31, 2003 and 2002, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
February 12, 2004, except for Note 18 as to
which the date is April 2, 2004
F-1
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
--------- ---------
(In thousands, except share data)
ASSETS
Cash and due from banks $ 9,620 $ 14,602
Federal funds sold 65 561
--------- ---------
Total cash and cash equivalents 9,685 15,163
Certificate of deposit 2,253 --
Securities available for sale, at fair value 117,046 129,190
Securities held to maturity, at amortized cost 39,217 10,049
Federal Home Loan Bank stock, at cost 5,590 4,020
Federal Reserve Bank stock, at cost 489 321
Loans, net of allowance for loan losses of
$1,334 and $1,384 156,504 136,452
Premises and equipment, net 5,631 5,287
Other assets 4,304 3,023
--------- ---------
$ 340,719 $ 303,505
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 198,058 $ 189,808
Short-term borrowings 62,254 46,989
Long-term Federal Home Loan Bank advances 54,481 41,643
Subordinated debentures 9,000 9,000
Other liabilities 1,658 2,057
--------- ---------
Total liabilities 325,451 289,497
--------- ---------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued -- --
Common stock, $1.00 par value; 4,000,000 shares
authorized, 1,778,120 shares issued 1,778 1,778
Additional paid-in capital 5,894 5,881
Retained earnings 7,826 5,872
Accumulated other comprehensive income (loss) (119) 613
Treasury stock, at cost (20,490 shares in 2003 and
24,930 shares in 2002) (111) (136)
--------- ---------
Total stockholders' equity 15,268 14,008
--------- ---------
$ 340,719 $ 303,505
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003 and 2002
2003 2002
-------- --------
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 9,976 $ 9,509
Interest on debt securities:
Taxable 4,811 4,498
Tax-exempt 615 68
Dividends on equity securities 319 614
Other interest 31 32
-------- --------
Total interest and dividend income 15,752 14,721
-------- --------
Interest expense:
Interest on deposits 2,434 3,444
Interest on borrowed funds 2,513 1,912
Interest on subordinated debentures 580 384
-------- --------
Total interest expense 5,527 5,740
-------- --------
Net interest income 10,225 8,981
Provision (credit) for loan losses (55) 50
-------- --------
Net interest income, after provision (credit) for
loan losses 10,280 8,931
-------- --------
Other income:
Gain on sales and calls of securities, net 1,443 1,166
Service charges on deposit accounts 1,154 1,035
Credit card fees 677 736
Trust fees 362 390
Non-deposit investment fees 276 317
Miscellaneous 322 107
-------- --------
Total other income 4,234 3,751
-------- --------
(continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Concluded)
Years Ended December 31, 2003 and 2002
2003 2002
-------- --------
(In thousands, except per share data)
Operating expenses:
Salaries and employee benefits 6,153 5,343
Occupancy and equipment 1,912 1,699
Professional fees 574 495
Credit card interchange 474 615
Advertising and marketing 412 304
Data processing 393 357
ATM processing 309 186
Other general and administrative 1,314 1,285
-------- --------
Total operating expenses 11,541 10,284
-------- --------
Income before income taxes 2,973 2,398
Provision for income taxes 931 732
-------- --------
Net income $ 2,042 $ 1,666
======== ========
Weighted average common shares outstanding:
Basic 1,755 1,751
======== ========
Diluted 1,813 1,790
======== ========
Earnings per share:
Basic $ 1.16 $ 0.95
======== ========
Diluted $ 1.13 $ 0.93
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2003 and 2002
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
----- ------- -------- ------------- ----- -----
(In thousands, except share data)
Balance at December 31, 2001,
as previously reported $ 178 $ 7,481 $ 4,294 $ (75) $(175) $ 11,703
Effect of 10:1 stock split declared
February 18, 2004 1,600 (1,600) -- -- -- --
------ ------- ------- ----- ----- --------
Balance at December 31, 2001, as restated 1,778 5,881 4,294 (75) (175) 11,703
--------
Comprehensive income:
Net income -- -- 1,666 -- -- 1,666
Unrealized gain on securities
available for sale, net of
reclassification adjustment
and tax effect -- -- -- 688 -- 688
--------
Total comprehensive income -- -- -- -- -- 2,354
--------
Treasury stock issued (5,430 shares) -- -- -- -- 39 39
Cash dividends declared ($.05 per share) -- -- (88) -- -- (88)
------ ------- ------- ----- ----- --------
Balance at December 31, 2002 1,778 5,881 5,872 613 (136) 14,008
--------
Comprehensive income:
Net income -- -- 2,042 -- -- 2,042
Unrealized loss on securities
available for sale, net of
reclassification adjustment
and tax effect -- -- -- (732) -- (732)
--------
Total comprehensive income -- -- -- -- -- 1,310
--------
Treasury stock issued (4,440 shares) -- 13 -- -- 25 38
Cash dividends declared ($.05 per share) -- -- (88) -- -- (88)
------ ------- ------- ----- ----- --------
Balance at December 31, 2003 $1,778 $ 5,894 $ 7,826 $(119) $(111) $ 15,268
====== ======= ======= ===== ===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003 and 2002
2003 2002
--------- ---------
(In thousands)
Cash flows from operating activities:
Net income $ 2,042 $ 1,666
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (credit) for loan losses (55) 50
Gain on sales and calls of securities, net (1,443) (1,166)
Depreciation and amortization 687 600
Net amortization of securities, including
certificate of deposit 2,475 490
Deferred tax provision 242 35
Equity loss in limited partnership 63 162
Derivative fair value adjustment 101 --
Net change in other assets and other liabilities (1,136) 652
--------- ---------
Net cash provided by operating activities 2,976 2,489
--------- ---------
Cash flows from investing activities:
Purchase of certificate of deposit (2,500) --
Activity in available-for-sale securities:
Purchases (131,432) (142,301)
Sales 77,051 65,455
Maturities, calls and paydowns 64,323 27,517
Activity in held-to-maturity securities:
Purchases (31,112) (5,696)
Maturities, calls and paydowns 1,866 6,361
Purchase of Federal Home Loan Bank stock (1,570) (1,610)
Redemption (purchase) of Federal Reserve Bank stock (168) 3
Loan originations, net of repayments (19,997) (18,597)
Additions to premises and equipment, net (1,031) (622)
--------- ---------
Net cash used in investing activities (44,570) (69,490)
--------- ---------
(continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Years Ended December 31, 2003 and 2002
2003 2002
--------- ---------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 8,063 10,673
Net change in short-term borrowings 15,265 38,563
Proceeds from long-term debt 16,000 12,500
Repayment of long-term debt (3,162) (107)
Proceeds from issuance of subordinated debentures -- 6,000
Proceeds from issuance of treasury stock 38 39
Cash dividends paid (88) (88)
--------- ---------
Net cash provided by financing activities 36,116 67,580
--------- ---------
Net increase (decrease) in cash and cash equivalents (5,478) 579
Cash and cash equivalents at beginning of year 15,163 14,584
--------- ---------
Cash and cash equivalents at end of year $ 9,685 $ 15,163
========= =========
Supplemental disclosures:
Interest paid $ 5,549 $ 5,765
Income taxes paid 877 663
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003 and 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Operating Segments
First Ipswich Bancorp (the "Company") is a Massachusetts corporation
organized in 1985 primarily to become the holding company of The First
National Bank of Ipswich (the "Bank"). The Bank is a federally chartered
bank incorporated in 1892 and is headquartered in Ipswich, Massachusetts.
The Bank operates its business from offices located in the North Shore
area of Massachusetts and southern New Hampshire. The Bank is engaged
principally in the business of attracting deposits from the general public
and investing those deposits in residential and commercial real estate
loans, and in small business, consumer and credit card loans.
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," establishes
standards for the way that public business enterprises report information
about operating segments in annual and interim financial statements. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. Generally, financial
information is to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Management evaluates the Company's performance and allocates
resources based on a single segment concept. Accordingly, there are no
separately identified operating segments for which discrete financial
information is available. The Company does not derive revenues from, or
have assets located in foreign countries, nor does it derive revenues from
any single customer that represents 10% or more of the Bank's total
revenues.
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company,
the Bank and the Bank's subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
Company's wholly-owned subsidiaries, First Ipswich Capital Trust I and
First Ipswich Statutory Trust II (see Note 7), are accounted for on the
equity method.
Reclassifications
Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform to the 2003 presentation.
F-8
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. A material
estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for loan losses.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold with original
maturities of less than ninety days.
The Bank is required to maintain average balances on hand or with the
Federal Reserve Bank. At December 31, 2003 and 2002, these reserve
balances amounted to $4,286,000 and $3,810,000, respectively.
Securities
Debt securities that management has the positive intent and ability to
hold to maturity are classified as "held to maturity" and recorded at
amortized cost. All other securities are classified as "available for
sale" and recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income (loss).
Purchase premiums and discounts are recognized in interest income using
the interest method over the terms of the securities. Although none have
been recognized in 2003 or 2002, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that
are deemed to be other-than-temporary would be reflected in earnings as
realized losses. Gains and losses on the sale of securities are recorded
on the trade date and are determined using the specific identification
method.
Loans
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
in Ipswich and surrounding communities. The ability of the Company's
debtors to honor their contracts is dependent upon the real estate and
general economic conditions in this area.
F-9
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans (concluded)
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal balance adjusted by the allowance for loan losses
and net deferred loan origination fees or costs. Loan origination fees,
net of certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield over the contractual lives of the
loans using the interest method.
Interest on loans is recognized on the accrual method based on the
principal amount outstanding. Accrual of interest is discontinued on a
loan, and any balance of accrued interest is reversed against current
earnings, when management believes that the collection of interest is
doubtful. This generally occurs when the loan becomes ninety days past
due, based on the contractual terms of the loan, unless the loan is
well-secured and in the process of collection.
The Bank considers all commercial loans that are in non-accrual status and
all troubled debt restructurings as impaired loans. Additionally, the Bank
reviews all other classified and delinquent assets for potential
impairment. Cash receipts of interest income on impaired loans are
credited to principal to the extent the collectibility of the net carrying
amount of the loan is considered doubtful. When recognition of interest
income on an impaired loan on the cash basis is appropriate, the amount of
income that is recognized is limited to that which would have been accrued
on the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not applied
to reduce the net carrying amount of the loan are recorded as recoveries
of charge-offs until the charge-offs are fully recovered.
Allowance for Loan Losses
The allowance for loan losses is based on estimates, and ultimate losses
may vary from the current estimates. The adequacy of the allowance is
evaluated regularly by management. As adjustments become necessary, they
are reported through a provision or credit for loan losses reflected in
the results of operations for the period in which they become known.
Factors considered in evaluating the adequacy of the allowance include
previous loss experience, current economic conditions and their effect on
borrowers, the performance of individual loans in relation to contract
terms and the estimated fair values of any collateral held by the Bank.
Losses are charged against the allowance when management believes that
uncollectibility is confirmed. Subsequent recoveries, if any, are credited
to the allowance.
F-10
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Loan Losses (concluded)
Key elements of the estimates, including those used in independent
appraisals, are dependent upon the economic conditions prevailing at the
time of the estimates. The inherent uncertainties in the assumptions
relative to real estate project sales, prices or rental rates and the
ability of various borrowers to continue to perform under their current
contractual lending arrangements may result in the ultimate realization of
amounts on certain loans that are significantly different from the amounts
reflected in these consolidated financial statements.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate. As a
practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than
the recorded balance of the loan, the impairment is recorded through a
valuation allowance.
The allowance consists of specific, general and unallocated loss
components. The specific loss component relates to loans that are
classified as either doubtful, substandard or special mention. For such
loans that are also classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of that loan.
The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. Qualitative
factors include (1) economic trends and industry conditions, (2) the
levels of and trends in delinquent loans, impaired loans and charge-offs,
(3) trends in the volume and terms of loans, (4) effects of changes in
underwriting standards, policy exceptions and lending policy, (5) the
experience of lending management staff and (6) effects of changes in
credit conditions. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses.
The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the
methodologies for estimating specified and general losses in the
portfolio.
Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements and equipment
are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization is computed principally on the straight-line
method over the estimated useful lives of the related assets or the terms
of the leases, if shorter.
F-11
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment in Limited Partnership
The Bank's investment in a venture capital limited partnership is
accounted for using the equity method. The investment of $8,000 and
$71,000, respectively, at December 31, 2003 and 2002 is included in other
assets in the consolidated balance sheets. The equity loss in the limited
partnership was $63,000 and $162,000 for the years ended December 31, 2003
and 2002, respectively, and has been charged to miscellaneous income in
the consolidated statements of income.
Derivative Financial Instruments
All derivative financial instruments, such as interest rate agreements and
embedded derivatives, are recognized as assets or liabilities in the
consolidated balance sheet and measured at fair value. The Company enters
into interest rate agreements to protect against future fluctuations in
the interest rates of specifically identified assets or liabilities. The
Company records the changes in value of its interest rate agreements and
embedded derivatives in miscellaneous income in the accompanying
consolidated statements of income.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted accordingly through the provision for income taxes. The Bank's
base amount of its federal income tax reserve for loan losses is a
permanent difference for which there is no recognition of a deferred tax
liability. However, the loan loss allowance maintained for financial
reporting purposes is a temporary difference with allowable recognition of
a related deferred tax asset, if it is deemed realizable.
Earnings Per Common Share and Warrants
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Company related solely to outstanding
stock warrants, and were determined using the treasury stock method.
F-12
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Common Share and Warrants (concluded)
In connection with a private placement offering in 2000 (see Note 7), the
Company issued exercisable warrants to purchase 162,000 shares of the
Company's common stock at $5.56 per share. Commencing December 29, 2004,
the warrants are redeemable by the Company (upon 90 days' written notice)
at a price of $0.001 per warrant. To date, no warrants have been
exercised.
Trust Assets
Trust assets held in a fiduciary or agent capacity are not included in the
accompanying consolidated balance sheets because they are not assets of
the Company.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the consolidated balance sheet, such items, along with
net income, are components of comprehensive income (loss).
The components of other comprehensive income (loss) and related tax
effects are as follows:
Years Ended December 31,
2003 2002
------- -------
(In thousands)
Unrealized holding gains on
available-for-sale securities $ 205 $ 2,318
Reclassification adjustment for gains
realized in income (1,443) (1,166)
------- -------
Net unrealized gains (losses) (1,238) 1,152
Tax effect 506 (464)
------- -------
Net-of-tax amount $ (732) $ 688
======= =======
F-13
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46) which establishes guidance for determining when an entity should
consolidate another entity that meets the definition of a variable
interest entity. FIN 46 requires a variable interest entity to be
consolidated by a company if that company will absorb a majority of the
expected losses, will receive a majority of the expected residual returns,
or both. On December 17, 2003, the FASB deferred the effective date of FIN
46 (through issuance of FIN 46R) to no later than the end of the first
reporting period that ends after March 15, 2004, however, for
special-purpose entities such as the Company's Trust subsidiaries (see
Note 7) the Company applied FIN 46 as of December 31, 2003. Application of
the Interpretation resulted in the Company no longer consolidating such
subsidiaries and recording them on the equity method. Such application did
not have a material effect on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. This Statement is effective for
contracts entered into or modified after June 30, 2003, except in certain
circumstances, and for hedging relationships designated after June 30,
2003. This Statement did not have a material effect on the Company's
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement provides new rules on the accounting for certain
financial instruments that, under previous guidance, issuers could account
for as equity. This Statement generally became effective in 2003 and had
no effect on the Company's consolidated financial statements.
F-14
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SECURITIES
The amortized cost and estimated fair value of securities, with gross
unrealized gains and losses, follows:
December 31, 2003
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- --------
(In thousands)
Securities Available for Sale
U.S. Government agency obligations $ 22,545 $ 228 $ -- $ 22,773
Trust preferred securities 14,171 7 (84) 14,094
Mortgage-backed securities 78,038 555 (736) 77,857
Municipal bonds 639 -- (13) 626
-------- -------- -------- --------
Total debt securities 115,393 790 (833) 115,350
-------- -------- -------- --------
Marketable equity securities 84 14 -- 98
U.S. Government agency preferred stock 1,770 -- (172) 1,598
-------- -------- -------- --------
$117,247 $ 804 $ (1,005) $117,046
======== ======== ======== ========
Securities Held to Maturity
U.S. Government agency obligations $ 3,000 $ -- $ (82) $ 2,918
Municipal bonds 16,325 123 (377) 16,071
Mortgage-backed securities 19,892 197 (416) 19,673
-------- -------- -------- --------
$ 39,217 $ 320 $ (875) $ 38,662
======== ======== ======== ========
F-15
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (continued)
December 31, 2002
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- --------
(In thousands)
Securities Available for Sale
U.S. Government agency obligations $ 500 $ 13 $ -- $ 513
Corporate bonds 2,520 64 -- 2,584
Trust preferred securities 10,755 37 (34) 10,758
Mortgage-backed securities 104,220 1,148 (133) 105,235
-------- -------- -------- --------
Total debt securities 117,995 1,262 (167) 119,090
Marketable equity securities 298 12 (1) 309
U.S. Government agency preferred stock 9,860 -- (69) 9,791
-------- -------- -------- --------
$128,153 $ 1,274 $ (237) $129,190
======== ======== ======== ========
Securities Held to Maturity
Municipal bonds $ 6,382 $ 38 $ (65) $ 6,355
Mortgage-backed securities 3,667 415 -- 4,082
-------- -------- -------- --------
$ 10,049 $ 453 $ (65) $ 10,437
======== ======== ======== ========
F-16
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (continued)
Contractual maturities of debt securities at December 31, 2003 are
summarized as follows. Expected maturities will differ from contractual
maturities because certain obligors have the right to call debt securities
without prepayment penalties.
Available for Sale Held to Maturity
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(In thousands)
Due within 1 year $ -- $ -- $ 45 $ 45
Due after 1 year through 5 years 8,998 9,037 437 439
Due after 5 years through 10 years 13,547 13,736 4,063 3,970
Due after 10 years 14,810 14,720 14,780 14,535
-------- -------- -------- --------
37,355 37,493 19,325 18,989
Mortgage-backed securities,
amortizing monthly 78,038 77,857 19,892 19,673
-------- -------- -------- --------
$115,393 $115,350 $ 39,217 $ 38,662
======== ======== ======== ========
For the years ended December 31, 2003 and 2002, proceeds from sales of
securities available for sale amounted to $77,051,000 and $65,455,000,
respectively. Gross realized gains amounted to $1,588,000 and $1,188,000,
respectively, and gross realized losses amounted to $145,000 and $30,000,
respectively. The Company realized $8,000 in net gains from calls of
securities during the year ended December 31, 2002. The tax provision
applicable to these net realized gains amounted to $452,000 and $356,000,
respectively.
At December 31, 2003 and 2002, debt securities with an amortized cost of
$12,407,000 and $9,726,000, respectively, were pledged to secure treasury
tax and loan accounts and repurchase agreements. (See Note 6.)
F-17
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (continued)
Information pertaining to securities with gross unrealized losses at
December 31, 2003, aggregated by investment category and length of time
that individual securities have been in a continuous loss position,
follows:
Less than Twelve Months Over Twelve Months
----------------------- ------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
-------- -------- -------- --------
(In thousands)
Securities Available-for-sale
Debt securities:
Trust preferred $ 84 $ 8,666 $ -- $ --
Mortgage-backed 671 47,154 65 3,386
-------- -------- -------- --------
Municipal 13 626 -- --
Total debt securities 768 56,446 65 3,386
U.S. Government agency preferred stock -- -- 172 848
-------- -------- -------- --------
$ 768 $ 56,446 $ 237 $ 4,234
======== ======== ======== ========
Securities Held-to-maturity
U.S. Government agency obligations $ 82 $ 2,918 $ -- $ --
Muncipal bonds 377 9,839 -- --
Mortgage-backed securities 416 17,059 -- --
-------- -------- -------- --------
$ 875 $ 29,816 $ -- $ --
======== ======== ======== ========
Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market
conditions warrant such evaluation. Consideration is given to (1) the
length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer,
and (3) the intent and ability of the Company to retain its investment in
the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
F-18
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (concluded)
At December 31, 2003, debt securities have unrealized losses with
aggregate depreciation of less than 2% from the Company's amortized cost
basis. Of these securities, three holdings have had unrealized losses for
a period in excess of twelve months. All three issues are mortgage-backed
securities issued or guaranteed by the federal government. The remainder
of the holdings have had unrealized losses for less than twelve months.
All holdings are investment grade with a majority being guaranteed by the
federal government. Management believes that the current unrealized loss
position on all of these securities is the result of the current interest
rate environment. As the bond market has been in a prolonged low interest
rate cycle, market anticipation is that rates may increase in the near
future which in turn causes lower valuations on current holdings. As
management has the ability to hold debt securities until maturity, or for
the foreseeable future if classified as available-for-sale, these declines
are deemed to be temporary.
At December 31, 2003, one U.S. Government agency preferred stock has an
unrealized loss with depreciation of 17% from the Company's cost basis.
Management has assessed credit risk as low. The unrealized loss is a
product of the current dividend yield and perpetual nature of the holding.
Based on the tax equivalent yield, a low credit risk assessment and the
adjustable nature of the dividend, this unrealized loss is deemed to be
temporary.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the balances of loans follows:
December 31,
------------------------
2003 2002
--------- ---------
(In thousands)
Real estate mortgage loans:
Residential $ 56,683 $ 54,985
Commercial 53,415 47,442
Construction 17,570 11,243
Home equity 8,429 7,081
Consumer loans 2,279 2,377
--------- ---------
Total loans 157,844 137,795
Net deferred origination costs (fees) (6) 41
Allowance for loan losses (1,334) (1,384)
--------- ---------
Loans, net $ 156,504 $ 136,452
========= =========
F-19
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LOANS AND ALLOWANCE FOR LOAN LOSSES (concluded)
Changes in the allowance for loan losses are as follows:
Years Ended December 31,
------------------------
2003 2002
------- -------
(In thousands)
Balance at beginning of year $ 1,384 $ 1,376
Provision (credit) for loan losses (55) 50
Charge-offs (53) (104)
Recoveries 58 62
------- -------
Balance at end of year $ 1,334 $ 1,384
======= =======
There were no impaired loans at December 31, 2003 and 2002. The average
recorded investment in impaired loans was $66,000 in 2002. No interest was
collected on impaired loans during 2002.
No additional funds are committed to be advanced in connection with
impaired loans.
4. PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
premises, leasehold improvements and equipment follows:
December 31,
--------------------
2003 2002
------- -------
(In thousands)
Land $ 484 $ 484
Buildings and leasehold improvements 4,799 4,776
------- -------
8,617 7,881
Less accumulated depreciation and amortization (2,986) (2,594)
------- -------
$ 5,631 $ 5,287
======= =======
Depreciation and amortization expense for the years ended December 31,
2003 and 2002 amounted to $687,000 and $600,000, respectively.
F-20
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. DEPOSITS
A summary of deposit balances follows:
December 31,
-----------------------
2003 2002
-------- --------
(In thousands)
Demand $ 38,426 $ 37,151
Now 33,936 33,546
Regular savings 31,120 25,487
Money market deposits 42,402 38,649
-------- --------
Total non-certificate accounts 145,884 134,833
-------- --------
Term certificates of $100,000 and over 10,644 11,849
Term certificates less than $100,000 41,530 43,126
-------- --------
Total certificate accounts 52,174 54,975
-------- --------
$198,058 $189,808
======== ========
A summary of term certificates, by maturity, is as follows:
December 31, 2003 December 31, 2002
------------------ ------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
(In thousands)
Within 1 year $36,709 2.29% $39,572 2.94%
After 1 year through 3 years 13,594 2.96 13,555 3.77
After 3 years through 5 years 1,871 3.70 1,848 4.33
------- -------
$52,174 2.51% $54,975 3.19%
======= =======
F-21
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. BORROWED FUNDS
Short-term borrowings
Short-term borrowings with original maturities of ninety days or less
consist of the following:
December 31, 2003 December 31, 2002
------------------ ------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
(In thousands)
Securities sold under agreements
to repurchase $10,542 2.06% $ 8,611 2.06%
Federal Reserve Bank advances 290 0.01 296 0.02
Federal Home Loan Bank advances 51,422 1.13 38,082 1.43
------- -------
$62,254 1.28% $46,989 1.54%
======= =======
Securities sold under agreements to repurchase are funds borrowed from
customers on an overnight basis that are secured by U.S. Government agency
obligations. The amount of securities collateralizing the agreements to
repurchase remains in securities and the obligation to repurchase
securities sold is reflected as a liability in the consolidated balance
sheets.
Federal Reserve Bank of Boston ("FRB") advances represent treasury tax and
loan deposits due to the FRB. The interest rate adjusts weekly and certain
U.S. Government agency obligations have been pledged as collateral to
secure the deposits.
F-22
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BORROWED FUNDS (concluded)
Long-term Federal Home Loan Bank advances
Federal Home Loan Bank of Boston ("FHLBB") advances are at fixed rates and
consist of the following:
Amount
at December 31, Weighted Average Rate
---------------- ---------------------
Maturity* 2003 2002 2003 2002
------------------ ------- ------- ------- ------
(In thousands)
2004 $ 9,000 $ 3,000 1.35% 1.24%
2007 3,000 3,000 1.35 1.35
2008 3,000 3,000 4.49 4.49
2009 5,000 5,000 5.91 5.91
2010 6,000 6,000 4.85 4.85
2011 15,250 15,250 4.74 4.74
2012 2,500 2,500 2.69 2.69
Amortizing advances, requiring
monthly principal and
interest of $439,000 and
$115,000 at December 31,
2003 and 2002, respectively 10,731 3,893 2.01 2.69
------- ------- ---- ----
$54,481 $41,643 3.47% 4.25%
======= ======= ==== ====
* Certain non-amortizing advances are callable at future specified
dates in accordance with the terms of the individual advances.
The Bank also has an available line of credit with the FHLBB at an
interest rate that adjusts daily. Borrowings under the line are limited to
2% of the Bank's total assets. There were no advances outstanding under
the line of credit at December 31, 2003 and 2002. All borrowings from the
FHLBB are secured by a blanket lien on qualified collateral, defined
principally as 75% of the carrying value of first mortgage loans on
owner-occupied residential property.
F-23
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. SUBORDINATED DEBENTURES
On December 29, 2000, the Company raised net proceeds of $2.9 million in a
sale of $3.0 million of subordinated debentures to First Ipswich Capital
Trust 1 (the "Trust"), a wholly-owned subsidiary of the Company. The Trust
funded the purchase through a private placement of 3,000 capital
securities representing preferred ownership interests in the assets of the
Trust with a liquidation value of $1,000 each. Using interest payments
made by the Company on the debentures, the Trust pays quarterly dividends
to preferred security holders. The annual percentage rate of interest
payable on the subordinated debentures and the cumulative dividends
payable on the preferred securities is 10.0%. The Company has the option
to defer interest payments on the subordinated debentures for up to five
years and, accordingly, the Trust may defer dividend distributions for up
to five years. The debentures and the preferred securities mature in
December 2030 unless the Company elects and obtains regulatory approval to
accelerate the maturity date to December 2005 or thereafter.
On September 25, 2002, the Company raised net proceeds of $5.8 million in
a sale of $6.0 million of subordinated debentures to First Ipswich
Statutory Trust II (the "Trust"), a wholly-owned subsidiary of the
Company. The Trust funded the purchase by participating in a pooled
offering of 6,000 capital securities representing preferred ownership
interests in the assets of the Trust with a liquidation value of $1,000
each. Using interest payments made by the Company on the debentures, the
Trust pays quarterly dividends to preferred security holders. At December
31, 2003 and 2002, the annual percentage rate of interest payable on the
subordinated debentures and dividends payable on the preferred securities
was 4.54% and 4.69%, respectively. Each succeeding payment date will be at
a rate equal to the three month Libor rate plus 3.4%; not to exceed 11.9%.
The Company has the option to defer interest payments on the subordinated
debentures for up to five years and, accordingly, the Trust may defer
dividend distributions for up to five years. The debentures and the
preferred securities mature in September 2032 unless the Company elects
and obtains regulatory approval to accelerate the maturity date to
September 2007 or thereafter.
The outstanding trust preferred securities may be included in regulatory
Tier 1 capital (see Note 15), subject to a limitation that such amounts
not exceed 25% of Tier 1 capital. At December 31, 2003 and 2002, trust
preferred securities aggregating $5,097,000 and $4,450,000, respectively,
are included in Tier 1 capital. Deferred debt financing costs are being
amortized over the life of the debentures.
F-24
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES
The components of the provision for income taxes are as follows:
Years Ended December 31,
------------------------
2003 2002
------ ------
(In thousands)
Current tax provision:
Federal $ 571 $ 630
State 118 67
------ ------
689 697
------ ------
Deferred tax provision:
Federal 205 26
State 37 9
------ ------
242 35
------ ------
Total tax provision $ 931 $ 732
====== ======
The following is a reconciliation of the effective income tax rates in the
consolidated statements of income with the statutory federal income tax
rate:
Years Ended December 31,
------------------------
2003 2002
---- ----
Statutory rate 34.0% 34.0%
Increase (decrease) resulting from:
State tax, net of federal tax benefit 3.4 2.1
Dividends received deduction (1.0) (4.9)
Tax exempt income (5.7) (0.8)
Other 0.6 0.1
---- ----
Effective tax rates 31.3% 30.5%
==== ====
The components of the net deferred tax asset, included in other assets,
are as follows:
December 31,
------------------
2003 2002
----- -----
(In thousands)
Deferred tax assets:
Federal $ 688 $ 670
State 237 231
----- -----
925 901
----- -----
Deferred tax liabilities:
Federal (214) (400)
State (40) (94)
----- -----
(254) (494)
----- -----
Net deferred tax asset $ 671 $ 407
===== =====
F-25
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (concluded)
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
December 31,
-----------------
2003 2002
------ ------
(In thousands)
Net unrealized loss (gain) on securities
available for sale $ 82 $ (424)
Limited partnership 40 37
Allowance for loan losses 546 567
Employee benefit plans 234 259
Depreciation (254) (52)
Other, net 23 20
------ ------
Net deferred tax asset $ 671 $ 407
====== ======
A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31,
------------------------
2003 2002
------ ------
(In thousands)
Balance at beginning of year $ 407 $ 906
Deferred tax provision (242) (35)
Change in deferred tax effect of net unrealized
gain/loss on securities available for sale 506 (464)
------ ------
Balance at end of year $ 671 $ 407
====== ======
9. EMPLOYEE BENEFITS
401(k) Plan
The Bank sponsors a defined contribution 401(k) plan whereby an eligible
employee may contribute up to 15% of compensation, and the Bank will make
a matching contribution equal to 50% of the first 5% of an employee's
compensation contributed to the plan. Expenses related to the 401(k) plan
for 2003 and 2002 were $88,000 and $90,000, respectively.
F-26
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of December 31, 2003, the Company was obligated under noncancelable
operating leases for bank premises, equipment and software. Minimum
rentals due in future periods under these existing agreements is as
follows:
Year Ending
December 31, Amount
------------ ------
(In thousands)
2004 $ 650
2005 790
2006 566
2007 424
2008 385
Thereafter 357
------
$3,172
======
Certain leases contain provisions for escalation of minimum lease
payments, not included above, that are contingent upon increases in real
estate taxes and percentage increases in the consumer price index. Total
rent expense amounted to $534,000 and $456,000 for 2003 and 2002,
respectively.
Employment Agreements
The Bank has entered into employment agreements with certain executive
officers which generally provide for annual base salary and certain other
benefits. The agreements also provide for lump sum severance payments
following a "change of control," as defined in the agreements.
Legal Claims
In the ordinary course of business, various legal claims arise which, in
the opinion of management, will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
F-27
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Loan Commitments
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amounts recognized in the accompanying consolidated balance sheets.
The contractual amount of these instruments reflects the extent of
involvement that the Bank has in particular classes of financial
instruments. Management uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon the
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include secured interests in
mortgages, accounts receivable, inventory, property, plant and equipment,
and income-producing properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance by a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
F-28
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (concluded)
Loan Commitments (concluded)
At December 31, 2003 and 2002, the following financial instruments were
outstanding for which contract amounts represent credit risk:
Contract Amount
-----------------
2003 2002
------- -------
(In thousands)
Commitments to originate loans $ 6,712 $ 7,284
Unadvanced portions of consumer loans (including
credit card loans) 4,486 5,212
Unadvanced portions of commercial real estate loans 11,270 12,686
Unadvanced portions of home equity loans 7,566 7,149
Unadvanced portions of commercial lines-of-credit 4,918 3,586
Unadvanced portions of residential construction loans 1,861 49
Standby letters-of-credit 60 50
12. DERIVATIVE INSTRUMENTS
Interest Rate Agreements
Interest rate agreements are used to manage the impact of fluctuating
interest rates on net interest income. An interest rate cap agreement was
outstanding at December 31, 2003 and 2002, the purpose of which was to
reduce the impact of rising interest rates on long-term interest bearing
liabilities. The agreement matures on March 12, 2004, and covers a $10
million notional amount at a cap rate of 6%. At December 31, 2003 and
2002, the fair value of the interest rate cap agreement was $0.
Certificate of Deposit
In October of 2003, the Bank purchased a certificate of deposit from a
national bank for which the return is based on the performance of the S &
P 500 Index, with a minimum rate of return of 8% over the life of the
certificate. The investment strategy is to increase earnings while
managing credit risk. The embedded equity index feature is separately
accounted for as a derivative instrument and is recorded at fair value
with the change in fair value recorded as a component of other income. At
December 31, 2003, the equity index feature had an asset value of
$156,000, which is included in other assets. A decrease in the fair value
resulted in an adjustment of $101,000 which was charged to miscellaneous
income for the year ended December 31, 2003.
F-29
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to related
parties amounting to $1,753,000 and $2,060,000 at December 31, 2003 and
2002, respectively. Related parties include executive officers, directors,
principal shareholders, or any associate (including immediate family
members) of such persons. During the year ended December 31, 2003, total
principal payments were $307,000.
Deposit accounts and securities sold under agreements to repurchase with
related parties amounted to $7,488,000 and $10,255,000 at December 31,
2003 and 2002, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of estimated fair values of all financial instruments
where it is practicable to estimate such values. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Accordingly, the derived fair
value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement
of the instrument. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Company.
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments.
Cash and cash equivalents: The fair value of cash and cash
equivalents approximates their carrying value.
Certificate of deposit: The fair value of the certificate of deposit
is based on the quoted dealer price.
Securities: Fair values for securities are based on quoted market
prices.
Federal Home Loan Bank stock and Federal Reserve Bank stock: The
fair values of Federal Home Loan Bank stock and Federal Reserve Bank
stock approximate their carrying values, based on redemption
provisions of the issuer.
F-30
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Loans: For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for other loans (e.g., commercial real estate
and investment property mortgage loans, commercial and industrial
loans) are estimated using discounted cash flow analyses, applying
interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality. Fair values for
non-performing loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
Accrued interest: The fair value of accrued interest receivable
approximates carrying value.
Derivative assets: The fair values of derivative assets are based on
quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments.
Deposit liabilities: The fair values disclosed for demand deposits,
including NOW, regular savings and money market deposits are, by
definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Short-term borrowings: The fair value of short-term borrowings
approximates carrying value.
Long-term Federal Home Loan Bank advances and subordinated
debentures: Fair values for long-term borrowings are estimated using
discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
Off-balance-sheet instruments: The fair values of the Company's
off-balance-sheet instruments (lending commitments) are based on
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreement and the counterparties'
credit standing. At December 31, 2003 and 2002, the estimated fair
value of off-balance-sheet financial instruments was not material.
F-31
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
The estimated fair values of the Company's financial instruments, all of
which are held or issued for purposes other than trading, are as follows:
December 31,
-----------------------------------------
2003 2002
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In thousands)
Financial assets:
Cash and cash equivalents $ 9,685 $ 9,685 $ 15,163 $ 15,163
Certificate of deposit 2,253 2,270 -- --
Securities available for sale 117,046 117,046 129,190 129,190
Securities held to maturity 39,217 38,662 10,049 10,437
Federal Home Loan Bank stock 5,590 5,590 4,020 4,020
Federal Reserve Bank stock 489 489 321 321
Loans 156,504 161,005 136,452 141,845
Accrued interest receivable 1,670 1,670 1,199 1,199
Derivative assets 156 156 -- --
Financial liabilities:
Deposits 197,871 198,191 189,808 190,025
Short-term borrowings 62,254 62,254 46,989 46,989
Long-term FHLB advances 54,481 55,478 41,643 42,161
Subordinated debentures 9,000 9,048 9,000 9,108
F-32
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors. Prompt corrective action provisions are not applicable
to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 2003 and 2002, that the Company and the Bank met all
applicable capital adequacy requirements to which they are subject.
As of December 31, 2003, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the following table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
F-33
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
REGULATORY CAPITAL REQUIREMENTS (concluded)
The Company's and the Bank's actual capital amounts and ratios as of
December 31, 2003 and 2002 are also presented in the table:
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirements Action Provisions
--------------- --------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
December 31, 2003:
Total capital to risk weighted assets:
Bank $24,514 13.08% $14,999 8.0% $18,748 10.0%
Consolidated 25,626 13.64 15,026 8.0 N/A N/A
Tier 1 capital to risk weighted assets:
Bank 23,180 12.36 7,499 4.0 11,249 6.0
Consolidated 20,390 10.86 7,513 4.0 N/A N/A
Tier 1 capital to average assets:
Bank 23,180 6.82 13,601 4.0 17,001 5.0
Consolidated 20,390 5.99 13,624 4.0 N/A N/A
December 31, 2002:
Total capital to risk weighted assets:
Bank $22,852 14.29% $12,797 8.0% $15,997 10.0%
Consolidated 23,779 14.81 12,841 8.0 N/A N/A
Tier 1 capital to risk weighted assets:
Bank 21,468 13.42 6,399 4.0 9,598 6.0
Consolidated 17,845 11.12 6,421 4.0 N/A N/A
Tier 1 capital to average assets:
Bank 21,468 7.61 11,316 4.0 14,415 5.0
Consolidated 17,845 6.31 11,311 4.0 N/A N/A
16. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Company.
Federal Reserve Board policy provides that a bank or a bank holding
company generally should not maintain its existing rate of cash dividends
on common stock unless the entity's net income over the past year combined
with its retained net income of the preceding two years has been
sufficient to fully fund the dividends. Loans or advances from the Bank to
the Company are limited to 10 percent of the Bank's capital stock and
surplus on a secured basis.
F-34
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES (concluded)
At December 31, 2003, funds available for the payment of dividends from
the Bank to the Company amounted to approximately $4,356,000, and funds
available for loans or advances by the Bank to the Company amounted to
approximately $2,451,000.
In addition, dividends paid by the Bank or the Company would be prohibited
if the effect thereof would cause the Bank's or the Company's capital to
be reduced below applicable minimum capital requirements. Accordingly,
$14,999 of the Company's equity in the net assets of the Bank was
restricted at December 31, 2003.
17. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining to First Ipswich Bancorp is as follows:
December 31,
-----------------
BALANCE SHEETS 2003 2002
-------------- ------- -------
(In thousands)
Assets
Cash and cash equivalents with Bank subsidiary $ 412 $ 8
Securities available for sale in the form of
marketable equity securities, at fair value 98 310
Investment in common stock of the Bank 23,154 22,143
Investment in common stock of First Ipswich
Capital Trust I 1 1
Investment in common stock of First Ipswich
Statutory Trust II 186 186
Other assets 423 368
------- -------
Total assets $24,274 $23,016
======= =======
Liabilities and Stockholders' Equity
Subordinated debentures to Trust subsidiaries $ 9,000 $ 9,000
Other liabilities 6 8
------- -------
Total liabilities 9,006 9,008
Stockholders' equity 15,268 14,008
------- -------
Total liabilities and stockholders' equity $24,274 $23,016
======= =======
F-35
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (continued)
Years Ended December 31,
------------------------
STATEMENTS OF INCOME 2003 2002
-------------------- ------- -------
(In thousands)
Income:
Dividends from the Bank $ 625 $ 450
Dividends on marketable equity securities 7 7
Gain on sales of marketable equity securities 95 91
------- -------
Total income 727 548
------- -------
Expenses:
Interest on subordinated debentures 580 384
Operating expenses 17 48
------- -------
Total expenses 597 432
------- -------
Income before income taxes and equity in
undistributed net income of subsidiaries 130 116
Applicable income tax benefit (168) (113)
------- -------
Income before equity in undistributed net income
of subsidiaries 298 229
Equity in undistributed net income of the Bank 1,744 1,437
------- -------
Net income $ 2,042 $ 1,666
======= =======
F-36
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
Years Ended December 31,
STATEMENTS OF CASH FLOWS 2003 2002
------------------------ ------- -------
(In thousands)
Cash flows from operating activities:
Net income $ 2,042 $ 1,666
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of the Bank (1,744) (1,437)
Gain on sales of marketable equity securities (95) (91)
Other, net (57) (177)
------- -------
Net cash provided (used) by operating activities 146 (39)
------- -------
Cash flows from investing activities:
Purchases of marketable equity securities (74) (434)
Proceeds from sales of marketable equity securities 382 284
Investment in the Bank -- (5,600)
Investment in First Ipswich Statutory Trust II -- (186)
------- -------
Net cash provided (used) by investing activities 308 (5,936)
------- -------
Cash flows from financing activities
Proceeds from issuance of subordinated debentures -- 6,000
Proceeds from issuance of treasury stock 38 39
Cash dividends paid (88) (88)
------- -------
Net cash provided (used) by financing activities (50) 5,951
------- -------
Net increase (decrease) in cash and cash equivalents 404 (24)
Cash and cash equivalents at beginning of year 8 32
------- -------
Cash and cash equivalents at end of year $ 412 $ 8
======= =======
18. SUBSEQUENT EVENTS
On February 18, 2004, the Board of Directors declared a stock split
effective March 19, 2004 to shareholders of record as of February 18, 2004
from the authorized but unissued shares of common stock of the Company,
par value $1.00, in the amount of ten (10) shares of common stock for each
one (1) share of common stock held by shareholders of record. All prior
period common share and per share data have been restated accordingly. The
Board of Directors also approved an increase in the authorized shares of
common stock of the Company from 2,000,000 shares to 4,000,000 shares,
subject to shareholder approval.
F-37
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUBSEQUENT EVENTS (concluded)
On March 17, 2004, the Board of Directors approved executive supplemental
compensation agreements with the Company's Chairman and its President. The
agreements provide for defined benefits for specified periods
post-retirement.
On March 17, 2004, the Board of Directors approved the First Ipswich
Bancorp 2004 Incentive Stock Option Plan and the First Ipswich Bancorp
2004 Directors Plan. The Incentive Stock Option Plan provides for the
issuance of stock options with respect to 200,000 shares of the Company's
common stock and the Directors Plan provides for the issuance of options
with respect to 20,000 shares of the Company's common stock. The Board of
Directors will administer the Plans and determine to whom options will be
granted, the number of options granted, when options will vest, and the
exercise price of the options. The Incentive Stock Option Plan was subject
to shareholder approval, which was received on March 31, 2004.
On April 2, 2004, the Bank consummated the purchase and assumption of
certain assets and certain liabilities of the Cambridge, Massachusetts
branch of Atlantic Bank of New York. In conjunction with the purchase, the
Bank paid a premium of 7% on the deposit liabilities being assumed. The
deposit liabilities were $10,192,000 as of the close of business on April
2, 2004. The deposit amount, and accordingly the premium, is subject to
adjustment on or before August 2, 2004.
F-38
[LOGO] First Ipswich Bancorp
300,000 shares of common stock
----------------
PROSPECTUS
----------------
May ___, 2004
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 6(3) of Bancorp's Articles of Organization (Exhibit 3.1 hereto)
and Article XXIX of Bancorp's By-laws (Exhibit 3.2 hereto) provide for
indemnification of its directors and officers to the maximum extent permitted by
Massachusetts law. In addition, Article Sixth of the bank's Articles of
Association (Exhibit 3.3) and Section 8.5 of the bank's By-Laws (Exhibit 3.4)
provide for the indemnification of the bank's officers and directors to the
maximum extent permitted by Massachusetts law. Further, Bancorp maintains
directors and officers insurance which, subject to certain exclusions, insures
the directors and officers of Bancorp against certain losses which arise out of
any neglect or breach of duty (including, but not limited to, any error,
misstatement, act, or omission) by the directors or officers in the discharge of
their duties, and insures Bancorp against amounts which it has paid or may
become obligated to pay as indemnification to its directors and/or officers to
cover such losses. Furthermore, the employment agreements of Messrs. Gill and
Raymond (Exhibits 10.3 and 10.4, respectively), provide for indemnification of
each such individual to the maximum extend permitted by Massachusetts law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Bancorp
pursuant to the foregoing, Bancorp has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration Fee....................................................$ 1,000*
Printing and Engraving Expenses.....................................$ 15,000*
Legal Fees and Expenses.............................................$195,000*
Accounting Fees and Expenses........................................$ 40,000*
Blue Sky Fees and Expenses..........................................$ 7,500*
Total...............................................................$258,500*
* Amounts are estimated as of the date hereof.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 2001, Bancorp has issued and sold 14,270 shares of common
stock in private sales to certain directors, officers (or members of their
families or trusts established for the benefit of such persons) and a certain
outside accredited investor (as such term is defined under Regulation D
promulgated under the Securities Act) at per share prices ranging from $5.76 to
$8.64 (after taking into account the ten-for-one stock split effected on March
19, 2004). In addition, as described in the prospectus, Bancorp issued $5.8
million of certain subordinated debentures to an affiliated trust in 2002 which,
in turn, issued a corresponding amount of preferred trust interests to the
purchasers thereof in private transactions exempt from the registration
requirements of the Securities Act. See Description of Bancorp Securities -
Subordinated Debentures - Trust Preferred. Keefe, Bruyette & Woods, Inc. and FTN
Financial Capital Markets underwrote this trust preferred offering and, in
return, received an aggregate commission of 3%.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance to Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder. Recipients of securities
in certain of the above-described transactions represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were attached
to the share certificates issued in those transactions. All purchasers had
adequate access to information about Bancorp.
ITEM 27. INDEX TO EXHIBITS.
The following exhibits are filed with this Registration Statement:
Exhibit Description
Number
3.1 Restated Articles of Organization of First Ipswich Bancorp
3.2 Articles of Amendment of First Ipswich Bancorp
3.3 Bylaws of First Ipswich Bancorp
3.4 Articles of Association for The First National Bank of Ipswich
3.5 Bylaws of The First National Bank of Ipswich
4.1 Specimen Common Stock Certificate
4.2 Subscription Agreement
5 Opinion of Craig and Macauley Professional Corporation regarding
the legality of the securities being registered
10.1 First Ipswich Bancorp 2004 Incentive Stock Option Plan for Key
Employees
10.2 First Ipswich Bancorp 2004 Directors' Plan
10.3 Employment Agreement of Donald P. Gill
10.4 Employment Agreement of Neil St. John Raymond
10.5 Change of Control Agreement of Donald P. Gill
10.6 Change of Control Agreement of Neil St. John Raymond
10.7 Change in Control Agreement of Michael J. Wolnik
10.8 Change in Control Agreement of John P. DiIorio, Jr.
10.9 Executive Supplemental Retirement Agreement of Neil St. John
Raymond
10.10 Executive Supplemental Retirement Agreement of Donald P. Gill
10.11 Federal Home Loan Bank of Boston Agreement For Advances,
Collateral Pledge, and Security Agreement
21 Subsidiaries of First Ipswich Bancorp
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Craig and Macauley Professional Corporation
(contained in Exhibit 5 hereto)
24 Power of Attorney
99.1 Letter to Shareholders regarding first quarter 2004 financial
results with attached March 31, 2004 balance sheet and income
statement
2
ITEM 28. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period, in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would
not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b)
if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation
of the Registration Fee" table in the effective
Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective
amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration
any of the securities being registered which remain unsold at
the conclusion of the offering.
B. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
3
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
C. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was
declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that:
If the Registrant will offer the securities to existing security holders
under warrants or rights and the Registrant will re-offer to the public any
securities not taken by security holders, with any modifications that suit the
particular case, the Registrant will supplement the prospectus, after the end of
the subscription period, to include the results of the subscription offer, the
transactions by the underwriters during the subscription period, the amount of
unsubscribed securities that the underwriters will purchase and the terms of any
later re-offering. If the underwriters make any public offering of the
securities on terms different from those on the cover page of the prospectus,
the Registrant will file a post-effective amendment to state the terms of such
offering.
4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Ipswich, Commonwealth of
Massachusetts, on March 29, 2004.
FIRST IPSWICH BANCORP
BY: /s/ DONALD P. GILL
-----------------------------------------------
DONALD P. GILL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on March 29, 2004 by the following
persons in the capacities indicated.
/s/ Robert R. Borden, III
-----------------------------------------------
Robert R. Borden, III, Director
/s/ Timothy R. Collins
-----------------------------------------------
Timothy R. Collins, Director
/s/ Franz Colloredo-Mansfeld
-----------------------------------------------
Franz Colloredo-Mansfeld, Director
/s/ John T. Coughlin
-----------------------------------------------
John T. Coughlin, Director
/s/ Stephanie R. Gaskins
-----------------------------------------------
Stephanie R. Gaskins, Director
/s/ Donald P. Gill
-----------------------------------------------
Donald P. Gill, President, CEO & Director
/s/ Fitz O. Lufkin
-----------------------------------------------
Fitz O. Lufkin, Jr., Director
/s/ Peter A. Maistrellis
-----------------------------------------------
Peter A. Maistrellis, Director
/s/ H.A. Patrican
-----------------------------------------------
H.A. Patrican, Jr., Director
/s/ Neil St. John Raymond
-----------------------------------------------
Neil St. John Raymond, Chairman of the Board
/s/ Neil St. John Raymond
-----------------------------------------------
Neil St. John Raymond, Jr., Director
/s/ William J. Tinti
-----------------------------------------------
William J. Tinti, Director
/s/ Michael J. Wolnik
-----------------------------------------------
Michael J. Wolnik, CFO and Chief
Accounting Officer