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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 333-114018
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First Ipswich Bancorp
(Exact name of small business issuer as specified in its charter)
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Massachusetts 04-2955061
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
31 Market Street,
Ipswich, Massachusetts 01938
(Address of principal executive offices)
(978) 356-3700
(Issuer's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES |_| NO |X|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: At May 31, 2004, there were
1,757,630 shares of common stock outstanding, par value $1.00 per share.
Transitional Small Business Disclosure Format (Check one): YES |_| NO |X|
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FIRST IPSWICH BANCORP AND SUBSIDIARIES
FORM 10-QSB
Index
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balances Sheets as of March 31, 2004 and
December 31, 2003 3
Consolidated Statements of Income for the quarter ended
March 31, 2004 and 2003 4
Consolidated Statements of Changes in Stockholders' Equity for the
three months ended March 31, 2004 and 2003 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 8
Item 3. Controls and Procedures 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
2
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share data)
March 31, December 31,
2004 2003
--------- ------------
ASSETS
- ------
Cash and due from banks $ 9,505 $ 9,620
Federal funds sold -- 65
--------- ---------
Total cash and cash equivalents 9,505 9,685
--------- ---------
Certificate of deposit 2,266 2,253
Securities available for sale, at fair value 105,760 117,046
Securities held to maturity, at amortized cost 37,969 39,217
Federal Home Loan Bank stock, at cost 5,590 5,590
Federal Reserve Bank stock, at cost 489 489
Loans, net of allowance for loan losses of $1,333 and $1,334 159,294 156,504
Banking premises and equipment, net 5,559 5,631
Other assets 3,789 4,304
--------- ---------
Total assets $ 330,221 $ 340,719
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 194,542 $ 198,058
Short-term borrowings 62,624 62,254
Long-term borrowings 47,215 54,481
Subordinated debentures 9,000 9,000
Other liabilities 1,142 1,658
--------- ---------
Total liabilities 314,523 325,451
--------- ---------
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 issued 1,778 1,778
Additional paid-in capital 5,894 5,894
Retained earnings 8,155 7,826
Accumulated other comprehensive loss (18) (119)
Treasury stock, at cost - 20,490 shares (111) (111)
--------- ---------
Total stockholders' equity 15,698 15,268
--------- ---------
Total liabilities and stockholders' equity $ 330,221 $ 340,719
========= =========
See accompanying notes to consolidated financial statements.
3
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except per share data)
For the Three Months Ended March 31,
2004 2003
---- ----
Interest and dividend income:
Interest and fees on loans $2,523 $2,382
Interest on debt securities:
Taxable 1,296 1,289
Tax-exempt 192 98
Dividends on equity securities 53 93
Other interest 34 1
------ ------
Total interest and dividend income 4,098 3,863
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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
Credit card fees 136 160
Trust fees 91 84
Non-deposit investment fees 93 68
Miscellaneous 21 87
------ ------
Total other income 1,013 1,284
------ ------
Operating expenses:
Salaries and employee benefits 1,875 1,401
Occupancy and equipment 446 427
Professional fees 287 175
Credit card interchange 94 102
Advertising and marketing 70 92
Data processing 144 124
ATM processing 90 69
Other general and administrative 303 271
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Total operating expenses 3,309 2,661
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Income before income taxes 477 1,065
Provision for income taxes 124 336
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Net income $ 353 $ 729
====== ======
Weighted average common shares outstanding:
Basic 1,758 1,753
------ ------
Diluted 1,819 1,806
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Earnings per share:
Basic $ 0.20 $ 0.42
------ ------
Diluted $ 0.19 $ 0.40
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See accompanying notes to consolidated financial statements.
4
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(In thousands, except per share data)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
----- ------- -------- ------------- ----- -----
Balance at December 31, 2002 $1,778 $5,881 $5,872 $ 613 $(136) $14,008
-------
Comprehensive income:
Net income 729 729
Unrealized loss on
securities available for
sale, net of
reclassification
adjustment and tax effect (304) (304)
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Total comprehensive income 425
-------
Cash dividends declared ($.0125
per share) (22) (22)
------ ------ ------ ----- ----- -------
Balance at March 31, 2003 1,778 5,881 6,579 309 (136) 14,411
====== ====== ====== ===== ===== =======
Balance at December 31, 2003 1,778 5,894 7,826 (119) (111) 15,268
-------
Comprehensive income:
Net income 353 353
Unrealized gain on
securities available for
sale, net of
reclassification
adjustment and tax effect 101 101
-------
Total comprehensive income 454
-------
Cash dividends declared ($.0125
per share) (24) (24)
------ ------ ------ ----- ----- -------
Balance at March 31, 2004 $1,778 $5,894 $8,155 $ (18) $(111) $15,698
====== ====== ====== ===== ===== =======
See accompanying notes to consolidated financial statements.
5
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
For the Three Months Ended March 31,
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 353 $ 729
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Gain on sales and calls of securities, net (386) (639)
Depreciation and amortization 163 157
Net amortization of securities, including certificate of
deposit 364 349
Equity loss in limited partnership -- 13
Derivative fair value adjustment 37 --
Net change in other assets and other liabilities (108) (944)
-------- --------
Net cash provided (used) by operating activities 423 (335)
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (51,453) (45,922)
Sales 49,618 33,605
Maturities, calls and paydowns 13,344 12,424
Activity in held-to-maturity securities:
Purchases -- (4,629)
Sales 652 --
Maturities, calls and paydowns 553 391
Purchase of Federal Home Loan Bank stock -- (1,228)
Purchase of Federal Reserve Bank stock -- (168)
Loan originations, net of repayments (2,790) (7,451)
Additions to premises and equipment, net (91) (190)
-------- --------
Net cash provided (used) by investing activities 9,833 (13,168)
-------- --------
Cash flows from financing activities:
Net increase in deposits (3,516) (911)
Net increase in short-term borrowings 370 3,664
Proceeds from long-term debt -- 6,000
Repayment of long-term debt (7,266) (324)
Cash dividends paid (24) (22)
-------- --------
Net cash provided (used) by financing activities (10,436) 8,407
-------- --------
Net decrease in cash and cash equivalents (180) (5,096)
Cash and cash equivalents at beginning of period 9,685 15,163
-------- --------
Cash and cash equivalents at end of period $ 9,505 $ 10,067
======== ========
Supplemental disclosures:
Interest paid $ 1,330 $ 1,421
Income taxes paid 48 16
See accompanying notes to consolidated financial statements
6
FIRST IPSWICH BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(1) Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of First Ipswich Bancorp (the "Company"), The First National Bank of
Ipswich (the "Bank"), the Company's subsidiaries, and the Bank's subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
These unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") for interim financial information and the instructions for Form 10-QSB
and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation have been included. Interim results
are not necessarily indicative of the results that may be expected for the
entire year. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with GAAP have been omitted. A
summary of significant accounting policies followed by the Company is set forth
in the Notes to Consolidated Financial Statements of the Company's Annual Report
on Form SB-2 for the year ended December 31, 2003.
(2) Earnings per Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects additional common shares
(common stock equivalents) that would have been outstanding if dilutive
potential shares had been issued, as well as any adjustment to income that would
result from the assumed issuance. As of March 31, 2004, potential common shares
that may be issued by the Company related solely to warrants issued in
connection with the Company's subordinated debentures and were determined using
the treasury stock method. Assumed conversion of the outstanding warrants would
increase the number of shares outstanding, but would not require an adjustment
to income as a result of the conversion. For the periods presented, the Company
has no potential common shares outstanding that are considered anti-dilutive.
(3) Commitments
At March 31, 2004, the Company had outstanding commitments to originate
loans of $5.6 million. Unused lines of credit and open commitments available to
customers at March 31, 2004 amounted to $30.8 million, of which $14.5 million
related to construction loans, $7.2 million related to home equity lines of
credit, $4.6 million related to credit card loans and $4.5 million in other open
commitments.
(4) Subsequent Events
Subsequent to quarter end, the Company engaged in a public rights offering
of its securities. See Part II, Item 2. for further information.
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 May 15, 2004, the Bank opened a new branch in Beverly,
Massachusetts.
7
ITEM 2. Management's Discussion and Analysis
General
This quarterly report on Form 10-QSB contains and incorporates by
reference "forward-looking statements". Words such as "believes", "expects,"
"may," "will," "should," "contemplates," or "anticipates" may indicate
forward-looking statements. There are a number of important factors that could
cause the Company's actual results to differ materially from those contemplated
by such forward-looking statements. These important factors include, without
limitation, competitive conditions in the Bank's marketplace generally, the
Bank's continued ability to originate quality loans, fluctuation in interest
rates including fluctuations which may affect the Bank's interest rate spread,
real estate conditions in the Bank's lending areas, changes in the securities or
financial markets, changes in loan defaults and charge-off rates, general and
local economic conditions, the Bank's continued ability to attract and retain
deposits, the Company's ability to control costs, new accounting pronouncements,
and changing regulatory requirements. The Company undertakes no obligation to
publicly release the results of any revisions to those forward-looking
statements, which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Comparison of Financial Condition at March 31, 2004 versus December 31, 2003
Total assets were $330.2 million at March 31, 2004, a decrease of $10.5
million, or 3.1%, from $340.7 million as of December 31, 2003.
Total net loan balances were $159.3 million as of March 31, 2004, an
increase of $2.8 million, or 1.8%, from $156.5 million as of December 31, 2003.
Loans increased primarily due to an increase in commercial real estate loans to
$56.8 million, an increase of $2.8 million, or 5.2%, from $54.0 million as of
December 31, 2003. If and where possible, emphasis has been placed on
originating commercial hybrid loans that carry shorter initial fixed rate
periods and shorter principal amortization periods. Commercial loans increased
during the first quarter of 2004 due to a modest improvement in small business
lending conditions. Construction loan activity remained active in the first
quarter of 2004, due to continued favorable residential construction trends and
housing activity, despite competitive lending conditions. Despite a new surge in
residential loan refinancing activity associated with a challenging interest
rate environment in February and March 2004 with treasury yields approaching the
recent lows of June 2003, residential real estate loans of $65.3 million as of
March 31, 2004 reflected an increase of $200,000, or .35%, from $65.1 million as
of December 31, 2003. New and existing home sales, although moderating, have
continued to be favorable in the Bank's primary markets, sparked at least
partially by desirable financing alternatives in the marketplace. As a result,
the Bank originated $6.3 million in residential and commercial mortgage loans in
the first quarter, which substantially offset increased prepayment activity and
monthly principal amortization. A recent jump in short and intermediate term
market interest rates has generated a customer re-emphasis towards fixed rate
loans as opposed to adjustable rate products. Commercial loans were $19.5
million at March 31, 2004, an increase of $.7 million, or 3.7%, from $18.8
million as of December 31, 2003. With geographic expansion and the hiring of new
commercial lenders, continued growth in loan balances is anticipated in 2004,
though not assured.
Total investment securities balances were $152.1 million as of March 31,
2004, a decrease of $12.5 million, or 7.6%, from $164.6 million as of December
31, 2003. Investment securities sales of $50.3 million and calls and principal
pay-downs on investment securities of $13.9 million in the first quarter were
partially replaced by investment securities purchases of $51.5 million, while
the remaining proceeds on investment securities sales and calls were utilized to
pay down borrowings and fund net deposit outflows of $3.5 million. Investment
securities sold consisted primarily of certain longer-term agency obligations
and certain other debt securities, certain preferred term securities that are
not eligible to be used as collateral for borrowing purposes, and other
longer-term assets. The sale of these securities was completed in order to
improve the Bank's interest rate risk profile, given the likelihood of higher
interest rates in 2004 with continued signs of an improving economy, as well as
to enhance the Bank's liquidity position in preparation for an expected increase
in loan funding requirements in the second quarter. Investment purchases
consisted primarily of adjustable rate bonds indexed to LIBOR and the Prime Rate
8
that are intended to defensively position the interest rate risk profile of the
Bank. Although the short-term yield give-up on these bonds is significant in
comparison to fixed rate agency alternatives due to the steepness of the yield
curve, these adjustable rate bonds add adjustable rate diversification to the
investment portfolio, while also adding assets that possess an interest rate
that re-sets periodically and is thus a desirable security to own, from a market
valuation and coupon reset perspective, as the Federal Open Market Committee
tightening cycle commences. These adjustable rate bonds also complement the
composition of actual and expected loan production as a result of the continued
consumer preference for fixed rate, as opposed to adjustable rate, loans. Fixed
rate loans continue to be attractive by historical yield measures. As a result
of management's quarterly review of investment securities for
"other-than-temporary" impairment, no such impairment was identified as of March
31, 2004.
Total deposit balances were $194.5 million as of March 31, 2004, a
decrease of $3.5 million, or 1.8%, from $198.1 million as of December 31, 2003.
Total deposit balances decreased primarily due to the strategic pricing of term
deposits to discourage the renewal of premium rate funds of approximately $8
million, a significant majority of which exited the bank, that matured in
February in anticipation of special deposit promotions in the second quarter to
celebrate the grand opening of two new branches. The decrease was partially
offset by the raising of $3 million of two year brokered term deposits in March,
which are intended to serve as an interest rate risk management tool with the
advent of higher market rates. The term of these brokered funds also complement
the consumer tendency in the retail branch network to opt for either short-term
certificates of deposit or non-maturity money market funds in the first quarter
of 2004. In early April 2004, the bank completed the acquisition of a new branch
in Cambridge, Massachusetts, which immediately generated approximately $10.5
million of new deposit balances, primarily consisting of savings and checking
accounts. Also subsequent to March 31, 2004, the Bank received approximately
$31.5 million in nine-month term deposits as a result of a bank-wide promotion,
which produced several new customers at each branch and significantly added to
our liquidity position to support 2004 growth plans.
Total borrowings were $109.8 million as of March 31, 2004, a decrease of
$6.9 million, or 5.9%, from $116.7 million as of December 31, 2003. Borrowings
were lower than year-end due to the pay-off of a $6 million term borrowing that
matured in February. Borrowings were paid down from funds received on the
aforementioned sale of certain investment securities.
Total stockholder's equity increased from $15.3 million at December 31,
2003 to $15.7 million as of March 31, 2004 due primarily to growth in the bank's
retained earnings of $400,000, which represents net income for the quarter ended
March 31, 2004.
Asset Quality and Allowance for Loan Losses
The table below summarizes certain key ratios regarding the quality of
the Company's loan portfolio:
March 31, 2004 December 31, 2003
-------------- -----------------
(Dollars in thousands)
Non-accrual loans $ -- $ --
Troubled debt restructurings -- --
Loans past due 90 days or more and still accruing 32 19
Non-accrual loans to total loans -- --
Non-performing assets to total assets -- --
Allowance for loan losses as a percentage of
total loans 0.83% 0.85%
9
For the three months ended March 31, 2004, the Company recorded no
provision for loan losses. The Company recorded charge-offs of $2,000 and
recoveries of $1,000 in the quarter. At March 31, 2004 and December 31, 2003,
the allowance for loan losses balance was $1.3 million. Management considers the
loan loss allowance to be adequate to provide for potential loan losses.
While the Bank has continued to enjoy a very low level of loan
charge-offs and non-accrual loans, and expects to continue to do so, there can
be no assurance that these favorable results will continue in the future.
Economic or other external factors, deterioration in credit quality, or
appropriate changes in the reserve estimation process as a result of changes in
assumptions, as well as other possible factors, may cause the loan loss
allowance to be increased through charges to current earnings by increasing the
loan loss provision.
Comparison of Operating Results for the Quarters Ended March 31, 2004 and 2003
General
Operating results are largely determined by the net interest spread on
the Company's primary assets (loans and investment securities) and its primary
liabilities (consumer deposit balances and Federal Home Loan Bank borrowings).
Operating income is also dependent upon revenue from non-interest related
sources (such as service charges on deposit accounts), the provision for loan
losses, and the growth and variability of operating expenses. Revenue has been
produced, and can continue to be produced in certain market conditions, although
it cannot be consistently relied upon, from gains on the sale of investment
securities.
Net income for the quarter-ended March 31, 2004 was $353,000 compared
with $729,000 for the quarter-ended March 31, 2003, a decrease of $376,000, or
51.6%. For the quarter-ended March 31, 2004, net interest income increased
$331,000, or 13.6%, non-interest income decreased $271,000, or 21.1%, and
operating expenses increased $648,000, or 24.4%, as compared to the
quarter-ended March 31, 2003.
Interest and Dividend Income
Total interest and dividend income for the quarter-ended March 31, 2004
was $4.1 million, which was $235,000, or 6.1%, higher than the quarter-ended
March 31, 2003. The favorable impact on interest and dividend income of higher
average interest-earning assets of $315.4 million for the quarter-ended March
31, 2004, as compared to $286.0 million for the quarter-ended March 31, 2003,
was partially offset by the impact of a lower average yield on earning assets of
5.2% for the quarter-ended March 31, 2004 as compared to 5.4% for the
quarter-ended March 31, 2003. Average net loans for the quarter-ended March 31,
2004 increased $18.8 million since the first quarter of 2003, or 13.5%, to
$157.3 million, while the yield on loans in the first quarter of 2004 was 6.42%,
46 basis points lower than the first quarter of 2003. A lower loan yield was due
to lower treasury yields in 2004, which produced lower rates on new loans and
loans re-pricing as well as increased residential refinancing activity into
lower fixed rates, and competitive conditions. A higher concentration of
higher-yielding commercial loan balances and construction loan balances in the
first quarter of 2004 as compared to 2003 partially mitigated the impact of
lower residential loan yields.
Interest Expense
Interest expense on deposits for the quarter-ended March 31, 2004
decreased $147,000, or 22.1%, to $518,000 as compared to the quarter-ended March
31, 2003. The decrease in interest expense was due primarily to a lower deposit
cost on non-maturity deposits due primarily to the general level of interest
rates, a 17.5% increase, or $4.7 million, in lower cost savings balances, a
lower rate paid on new versus maturing certificates of deposits, and a 7.2%, or
$3.9 million, decrease in higher cost certificates of deposit.
10
Interest expense on borrowed funds for the quarter-ended March 31, 2004
increased $54,000, or 8.9%, to $663,000 as compared to the quarter-ended March
31, 2003. The increase was due primarily to a higher average balance in Federal
Home Loan Bank advances in 2004 of $17.5 million, or 20.5%, partially offset by
a lower cost of Federal Home Loan Bank advances of 2.36%, 27 basis points, or
10.3% lower than the first quarter of 2003. Higher average balances were
partially due to capitalizing on historically low short-term borrowing rates to
leverage the balance sheet in order to generate additional net interest income,
while maintaining a reasonable interest rate risk profile.
Net Interest Income
Net interest income for the quarter ended March 31, 2004 increased
$331,000, or 13.6%, to $2.8 million as compared to the quarter ended March 31,
2003. The increase in net interest income in the first quarter of 2004 was due
primarily to higher average earning assets and a higher net interest margin of
3.52%, or 11 basis points, versus the quarter ended March 31, 2003. Average
earning assets increased $29.4 million, or 10.3%, to $315.4 million in the first
quarter of 2004 primarily as a result of the increase in average loans. The net
interest margin increased primarily as a result of higher average balances in
loans, which earned higher yields than investment securities, and a lower cost
of funds. The cost of average deposits decreased 40 basis points, or 23.4%, to
1.31% for the quarter ended March 31, 2004. The lower cost of deposits and
borrowings was primarily a result of the interest rate environment, particularly
the short and intermediate portion of the yield curve, which is typically the
primary driver of bank funding costs. To mitigate the impact of lower asset
yields, the rates paid on both certificate of deposit accounts and non-maturity
deposit accounts were reduced to maintain the net interest margin. Despite this
reduction in rates paid, average deposit balances increased for the quarter
ended March 31, 2004 as compared to the quarter ended March 31, 2003. With a
higher rate of growth in average loans than average deposits for the quarter
ended March 31, 2004, low cost short-term Federal Home Loan Bank borrowings were
utilized as a funding source to support continued loan growth.
Retail deposit marketing efforts primarily focus on generating
non-maturity core deposit accounts, particularly in new markets. Despite this
fact, the Bank may rely upon higher cost certificates of deposit to support
funding needs. As previously noted, the Bank recently raised approximately $31
million of premium rate nine-month certificate of deposit funds in the second
quarter of 2004. The objective of raising new funds in new markets, though not
assured of being achieved, is to capitalize on significant opportunities to
create new and expanded deposit and loan banking relationships. Premium rate
short-term funds may, however, produce an immediate reduction in the net
interest margin. An increase in market interest rates, with a significant
increase in treasury yields in the second quarter having already occurred while
the Federal Reserve also appears poised to raise the Federal Funds target,
continued competition from several local and national financial institutions,
and increased reliance on higher cost funding sources could cause a narrower net
interest margin in the future.
11
Average Balances and Yields
The following table presents a summary of the Company's interest-earning
assets and their average yields, and interest-bearing liabilities and their
average costs for the three months ended March 31, 2004 and 2003. The average
balances are derived from average daily balances.
Three Months Ended March 31,
2004 2003
Interest Interest
Income/ Average Average Rate Income/ Average Average Rate
Expense Balance Earned/Paid Expense Balance Earned/Paid
----------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Interest earning assets:
Federal funds sold and certificate
of deposit $ 34 $ 2,499 5.44% $ 1 $ 399 1.00%
Investment securities:
Taxable 1,349 138,646 3.89% 1,382 138,495 3.99%
Tax-exempt 192 16,959 4.53% 98 8,591 4.56%
Loans, net 2,523 157,311 6.42% 2,382 138,552 6.88%
--------------------- ----------------------
Total interest-earning assets 4,098 315,415 5.20% 3,863 286,037 5.40%
------- --------
Noninterest-earning assets 18,935 19,518
----------- -----------
Total assets 334,350 305,555
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings 39 31,228 0.50% 51 26,572 0.77%
NOW 13 34,070 0.15% 24 34,382 0.28%
MMDA 158 42,652 1.48% 172 40,050 1.72%
CD's 308 50,538 2.44% 418 54,453 3.07%
--------------------- ----------------------
Total interest-bearing deposits 518 158,488 1.31% 665 155,457 1.71%
Other borrowed funds 54 9,723 2.22% 45 8,622 2.09%
Federal Home Loan Bank Advances 609 103,169 2.36% 564 85,632 2.63%
Subordinated debentures 144 9,000 6.40% 147 9,000 6.53%
--------------------- ----------------------
Total interest-bearing liabilities 1,325 280,380 1.89% 1,421 258,711 2.20%
------- --------
Noninterest-bearing deposits 37,659 32,002
Other noninterest-bearing liabilities 679 1,282
----------- -----------
Total liabilities 318,718 291,995
Total stockholders' equity 15,632 13,560
----------- -----------
Total liabilities and
stockholders'
equity $334,350 $305,555
=========== ===========
Net interest income $2,773 $2,442
======== ========
Interest rate spread 3.31% 3.20%
========= ========
Net interest margin 3.52% 3.41%
========= ========
Non-interest Income
Total non-interest income decreased $271,000, or 21.1%, to $1,013,000 for
the quarter ended March 31, 2004 as compared to the quarter ended March 31,
2003. The decrease in the first quarter of 2004 was primarily due to a decrease
in gains on the sale of securities of $253,000, or 39.6%, to $386,000. The
existence or level of gains on the sale of securities cannot be assured or
predicted as the amounts derived from such activity are a function of many
factors, including, but not limited to, the duration, mix, and other attributes
of securities owned and the level and slope of the yield curve, product spreads
and other market forces that change on a daily basis. Higher securities gains in
the first quarter of 2003 were at least partially due to the sale of a more
12
significant quantity of securities with longer maturities, which were acquired
as the economy weakened in 1999 and 2000. Service charges on deposit accounts
increased $40,000, or 16.3%, to $286,000 for the quarter-ended March 31, 2004
primarily as a result of growth in fee-based deposit balances, which is due at
least partially to geographic growth in the retail network. Miscellaneous income
decreased $66,000, or 75.8%, to $21,000 for the quarter-ended March 31, 2004 due
to a one-time income credit of $63,000 associated with a loan settlement in the
first quarter of 2003.
Non-interest Expense
Total operating expenses increased $648,000, or 24.4%, to $3,309,000 for
the quarter ended March 31, 2004. Salaries and employee benefits increased
$474,000, or 33.8%, due primarily to an increase in full-time equivalent
employees to 118 as of March 31, 2004 from 96 at March 31, 2003 and an executive
bonus approved by the Board of Directors in January. An increase in full-time
equivalent employees was primarily associated with staffing for new branch
locations, hiring lenders in new markets, adding an investment executive to lead
the search for the acquisition of an investment company, and growing the staff
infrastructure at the main office to support continued growth and expansion.
Salaries and employee benefits expense will be impacted in the second quarter of
2004 and thereafter by execution of the SERP agreements. Professional fees
increased $112,000, or 64%, to $287,000 for the quarter-ended March 31, 2004 due
primarily to an increase in legal expenses associated with several matters
related to growth plans and expansion initiatives. Data processing expenses
increased $20,000, or 16.1%, to $144,000 for the quarter-ended March 31, 2004
due primarily to investment in new and enhanced technologies to support
continued expansion in retail branches, staffing expansion, and growth in
customer accounts and activity.
The operating efficiency ratio, which represents operating expenses
divided by total revenue excluding securities gains, increased to 93.2% for the
quarter ended March 31, 2004 versus 84.1% for the quarter ended March 31, 2003.
The ratio was higher in the first quarter of 2004 due primarily to a higher rate
of growth in operating expenses than revenue. Revenue growth was slowed at least
partially by the sale of approximately $51 million of higher yielding investment
securities that were either re-invested in defensive shorter duration securities
in anticipation of a rising rate environment or used to pay-down borrowings to
temporarily increase the company's liquidity ratio until the liquidity benefits
of the aforementioned certificate of deposit special in the second quarter of
2004 are realized.
Income Taxes
The provision for income taxes decreased $212,000, or 63.1%, to $124,000
for the quarter ended March 31, 2004 primarily as a result of lower pre-tax
income in the first quarter of 2004 as compared to the first quarter of 2003.
The effective tax rate of 26% for the quarter ended March 31, 2004 was lower
than the 32% rate for the quarter ended March 31, 2003 due primarily to a higher
percentage of pre-tax income in the Bank's subsidiary securities corporations.
The effective tax rates were lower than the statutory federal and state tax
rates for both periods due to the Company's three securities corporations, which
are taxed at a lower state tax rate.
Asset/Liability Management
A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets generally have longer terms to maturity than its primary
source of funds, i.e., deposit liabilities, increases in general interest rates
will generally result in an increase in the Bank's cost of funds before the
yield on its asset portfolio adjusts upward. A continual trade-off, which is
managed and monitored on an ongoing basis, exists between exposure to interest
rate risk and current income. In general, during periods with a normalized yield
curve, a wider mismatch between the re-pricing periods of interest rate
sensitive assets and liabilities can produce higher current net interest income.
The management of interest rate risk considers several factors, including, but
not limited to, the nature and extent of actual and anticipated embedded options
and other attributes of the balance sheet, the perceived direction of market
interest rates, and the risk appetite of management and the Asset/Liability
Management Committee ("ALCO"). Members of the ALCO consist of the chief
executive officer, the chief financial officer, the senior loan officer, one
board member, and others. The Committee discusses the asset/liability mix on the
balance sheet and reviews exposures to changes in interest rates.
13
Certain strategies have been implemented in 2004 to reduce the current
level of interest rate risk with the prospects for an improving economy and an
increase in market interest rates. These strategies currently include, but are
not limited to, fixing the cost of certain liability sources, adding interest
rate sensitivity to the investment securities portfolio, and shortening the
duration of certain newly originated commercial loan products. On an ongoing
basis, management analyzes the pros and cons of positioning with a narrower or
wider interest rate mismatch and whether an asset sensitive or liability
sensitive balance sheet is targeted and to what degree. This analysis considers,
but is not limited to, originating adjustable and fixed rate mortgage loans,
managing the cost and structure of deposits, analyzing actual and projected
asset cash flow, considering the trade-offs of short versus long-term
borrowings, and reviewing the pros and cons of certain investment security
sectors.
Quarterly, ALCO modeling is performed with the assistance of an outside
advisor which projects the Bank's financial performance over certain periods
under certain interest rate environments. The results of the ALCO process are
reported to the Board on at least a quarterly basis.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales of securities, maturities and early
calls of securities, and funds provided from operations. While scheduled
repayments of loans and maturities of investment securities are predictable
sources of funds, deposit flows and the general level of interest rates,
economic conditions, and competition largely influences prepayments on loans and
investment securities. The Bank primarily uses its liquidity resources to fund
existing and future loan commitments, to fund net deposit outflows, to invest in
other interest-earning assets, to maintain liquidity, and to pay operating
expenses.
From time to time, the Bank utilizes advances from the Federal Home Loan
Bank of Boston (the "FHLB") primarily in connection with its management of the
interest rate sensitivity of its assets and liabilities, as well as to
selectively capitalize on leverage opportunities. Total advances outstanding at
March 31, 2004 amounted to $100.4 million. The Bank's ability to borrow from the
FHLB is dependent upon the amount and type of collateral the Bank has to secure
the borrowings. Such collateral consists of, but is not limited to, one-to-four
family owner-occupied residential property and federal agency obligations. As of
March 31, 2004, the Bank's total borrowing capacity through the FHLB was $132.4
million. The Bank has additional capacity to borrow federal funds from other
banks and through such instruments as repurchase agreements utilizing federal
agency obligations and mortgage-backed securities as collateral, as well as
brokered deposits.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term investments, U.S. Government and federal agency
obligations, mortgage-backed securities, and other debt securities. The level of
these assets is dependent upon the Bank's operating, lending, and financing
activities during any given period. At March 31, 2004, the Bank had $5.6 million
of outstanding commitments to originate loans and $30.8 million of unused lines
of credit. The Bank anticipates that it will have sufficient funds available to
meet these commitments. Certificates of deposit, which are scheduled to mature
in one year or less, totaled $24.2 million at March 31, 2004. Based upon
historical experience, management believes that a significant portion of such
deposits will remain with the Bank. On a monthly basis, the Company currently
generates an average of approximately $8 million in cash flow from the loan and
investment securities portfolios. These funds are primarily used to either
re-invest in new loans and investment securities or utilized in conjunction with
the management of the level of deposit balances or borrowed funds.
14
At March 31, 2004, the Company and the Bank continued to exceed all
regulatory capital requirements applicable to them. The table below presents the
capital ratios at March 31, 2004, for the Company and the Bank, as well as the
minimum regulatory requirements.
Minimum
Capital
Actual Requirements
Amount Ratio Amount Ratio
------------------ -------------------
Bank:
Total capital to risk-weighted assets $24,941 13.60% $14,667 8.00%
Tier 1 capital to risk-weighted assets 23,608 12.88% 7,333 4.00%
Tier 1 capital to average assets 23,608 7.07% 13,361 4.00%
Company:
Total capital to risk-weighted assets $25,933 14.12% $14,694 8.00%
Tier 1 capital to risk-weighted assets 20,800 11.32% 7,347 4.00%
Tier 1 capital to average assets 20,800 6.22% 13,374 4.00%
ITEM 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by Rule 15d-15 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Company's management conducted
an evaluation with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, regarding the effectiveness of the
Company's disclosure controls and procedures, as of the end of the last
fiscal quarter. In designing and evaluating the Company's disclosure
controls and procedures, the Company and its management recognize that any
controls and procedures, no matter how well designed and operated, can
provide only a reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment
in evaluating and implementing possible controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that they believe the Company's disclosure controls and
procedures are reasonably effective to ensure that information required to
be disclosed by the Company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission's ("SEC")
rules and forms. We intend to continue to review and document our
disclosure controls and procedures, including our internal controls and
procedures for financial reporting, and we may from time to time make
changes to the disclosure controls and procedures to enhance their
effectiveness and to ensure that our systems evolve with our business.
(b) Changes in internal controls over financial reporting.
There were no changes in the Company's internal controls over
financial reporting identified in connection with the Company's evaluation
of its disclosure controls and procedures that occurred during the
Company's last fiscal quarter that have materially affected, or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
15
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business that, in
the aggregate, involved amounts believed by management to be immaterial to the
financial condition and operations of the Company.
ITEM 2. Changes in Securities
Subsequent to quarter end, the Company engaged in a public rights offering
of its securities. Pursuant to the offering, the Company registered 300,000
shares of common stock $1.00 par value with the SEC at an offering price of
$13.00 per share. The SEC file number assigned to the registration statement is
333-114018. The offering's effective date was May 13, 2004. No underwriters have
been involved in the offering. The offering commenced on May 14, 2004. As
described in the registration statement, the offering consists of a rights
offering to its existing shareholders and a general offering to others, as the
Company in its sole discretion may determine. The general offering is to remain
open until June 28, 2004 at 5:00 p.m.
Amount
Subscribed for Aggregate Offering Price of the
Aggregate Price of the as of June 18, Amount Subscribed for as of
Amount Registered Offering Amount Registered 2004 June 18, 2004
----------------- -------------------------- ---- -------------
300,000 shares $3,900,000 70,772 shares $920,036
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on March 31, 2004.
At that meeting, the shareholders approved an increase in the authorized common
stock of the Company from 2,000,000 shares to 4,000,000 shares with 1,435,590
shares voting for, no shares voting against, 650 shares abstaining, and no
broker non-votes.
In addition, the following were elected as directors of the Company:
Shares Voted Shares Voted Broker
Director For Against or Withheld Abstentions Non-Votes
-------- --- ------------------- ----------- ---------
Robert R. Borden, III 1,436,240 None None None
Timothy R. Collins 1,436,240 None None None
Franz Colloredo-Mansfeld 1,436,240 None None None
John T. Coughlin 1,436,240 None None None
Stephanie R. Gaskins 1,436,240 None None None
Donald P. Gill 1,436,240 None None None
Fitz O. Lufkin, Jr. 1,436,240 None None None
Peter A. Maistrellis 1,436,240 None None None
H.A. Patrican, Jr. 1,436,240 None None None
Neil St. John Raymond, Chairman 1,436,240 None None None
Neil St. John Raymond, Jr. 1,436,240 None None None
William J. Tinti 1,436,240 None None None
The above directors constitute all of the directors of the Company, each of whom
stood for election at the annual meeting.
16
Further, at such meeting, the stockholders approved, with 1,435,590
shares voting for, no shares voting against, 690 shares abstaining, and no
broker non-votes, the First Ipswich Bancorp 2004 Incentive Stock Option Plan
(the "stock option plan") for key employees of the Company and its subsidiaries,
providing for options with respect to 200,000 shares of common stock of the
Company, subject to adjustments in the event of stock splits, stock dividends or
reclassifications, recapitalization or other possible future changes. Under the
stock option plan, the board of directors may grant to key employees of the
Company whom the board determines to be capable of making substantial
contributions to the management and operations of the Company, options to
purchase shares of the Company'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 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 the
Company 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 stock
option plan's termination date. As of June 24, 2004, 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.
ITEM 5. Other Information
At a meeting of the board of directors on March 17, 2004, the Company
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 the Company, 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. As of the date hereof, the board of directors has
not granted any options.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 First Ipswich Bancorp 2004 Incentive Stock Option Plan for Key
Employees, incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form SB-2 (File No. 333-114018).
10.2 First Ipswich Bancorp 2004 Directors' Plan, incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement on
Form SB-2 (File No. 333-114018).
10.3 Employment Agreement of Donald P. Gill, incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form SB-2
(File No. 333-114018).
10.4 Employment Agreement of Neil St. John Raymond, incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement on
Form SB-2 (File No. 333-114018).
10.5 Change of Control Agreement of Donald P. Gill, incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on
Form SB-2 (File No. 333-114018).
17
10.6 Change of Control Agreement of Neil St. John Raymond, incorporated
by reference to Exhibit 10.6 to the Company's Registration Statement
on Form SB-2 (File No. 333-114018).
10.7 Change in Control Agreement of Michael J. Wolnik, incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form SB-2 (File No. 333-114018).
10.8 Change in Control Agreement of John P. DiIorio, Jr., incorporated by
reference to Exhibit 10.8 to the Company's Registration Statement on
Form SB-2 (File No. 333-114018).
10.9 Executive Supplemental Retirement Agreement of Neil St. John
Raymond, incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form SB-2 (File No. 333-114018).
10.10 Executive Supplemental Retirement Agreement of Donald P. Gill,
incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form SB-2 (File No. 333-114018).
19.1 Letter to Shareholders regarding first quarter 2004 financial
results with attached March 31, 2004 balance sheet and income
statement, incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form SB-2 (File No. 333-114018).
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FIRST IPSWICH BANCORP
Date: June 24, 2004 By: /s/ Donald P. Gill
-----------------------
Donald P. Gill
President and Chief Executive Officer
Date: June 24, 2004 By: /s/ Michael J. Wolnik
-----------------------
Michael J. Wolnik
Senior Vice President, Chief Financial Officer,
and Treasurer
19