================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB
----------------------
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 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
----------------------
First Ipswich Bancorp
(Exact name of small business issuer as specified in its charter)
----------------------
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)
----------------------
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 |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: At July 31, 2004, there were
2,057,630 shares of common stock outstanding, par value $1.00 per share.
Transitional Small Business Disclosure Format (Check one): YES |_| NO |X|
================================================================================
FIRST IPSWICH BANCORP AND SUBSIDIARIES
FORM 10-QSB
Index
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003 3
Consolidated Statements of Income for the quarter and
six months ended June 30, 2004 and 2003 4
Consolidated Statements of Changes in Stockholders' Equity for
the six months ended June 30, 2004 and 2003 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 8
Item 3. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 23
2
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share data)
June 30, December 31,
2004 2003
--------- ------------
ASSETS
- ------
Cash and due from banks $ 12,881 $ 9,620
Federal funds sold 410 65
--------- ---------
Total cash and cash equivalents 13,291 9,685
--------- ---------
Certificate of deposit 2,279 2,253
Securities available for sale, at fair value 155,984 117,046
Securities held to maturity, at amortized cost 34,417 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 $1,318 and $1,334 163,968 156,504
Banking premises and equipment, net 5,887 5,631
Other assets 5,808 4,304
--------- ---------
Total assets $ 387,713 $ 340,719
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 244,750 $ 198,058
Short-term borrowings 54,281 62,254
Long-term borrowings 42,944 54,481
Subordinated debentures 9,000 9,000
Due to broker 17,475 --
Other liabilities 1,390 1,658
--------- ---------
Total liabilities 369,840 325,451
--------- ---------
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,
2,078,120 and 1,778,120 issued, respectively 2,078 1,778
Additional paid-in capital 9,198 5,894
Retained earnings 8,092 7,826
Accumulated other comprehensive loss (1,384) (119)
Treasury stock, at cost - 20,490 shares (111) (111)
--------- ---------
Total stockholders' equity 17,873 15,268
--------- ---------
Total liabilities and stockholders' equity $ 387,713 $ 340,719
========= =========
See accompanying notes to consolidated financial statements.
3
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share data)
Six Months Ended
Quarter Ended June 30, June 30,
-------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Interest and dividend income:
Interest and fees on loans $ 2,575 $ 2,537 $ 5,098 $ 4,919
Interest on debt securities:
Taxable 1,203 1,030 2,498 2,319
Tax-exempt 191 140 383 238
Dividends on equity securities 57 101 110 194
Other interest 35 2 70 3
-------- -------- -------- --------
Total interest and dividend income 4,061 3,810 8,159 7,673
-------- -------- -------- --------
Interest expense:
Interest on deposits 705 660 1,223 1,325
Interest on borrowed funds 623 618 1,286 1,227
Interest on subordinated debentures 144 146 288 293
-------- -------- -------- --------
Total interest expense 1,472 1,424 2,797 2,845
-------- -------- -------- --------
Net interest income 2,589 2,386 5,362 4,828
Provision for loan losses -- -- -- --
-------- -------- -------- --------
Net interest income, after provision for loan losses 2,589 2,386 5,362 4,828
Other income:
Gain (loss) on sales and calls of securities, net (11) 294 375 934
Service charges on deposit accounts 364 285 650 531
Credit card fees 176 173 311 334
Trust fees 112 84 203 168
Non-deposit investment fees 70 45 163 113
Miscellaneous 77 30 99 115
-------- -------- -------- --------
Total other income 788 911 1,801 2,195
-------- -------- -------- --------
Operating expenses:
Salaries and employee benefits 1,821 1,536 3,696 2,937
Occupancy and equipment 513 450 959 877
Professional fees 208 140 495 316
Credit card interchange 146 132 240 233
Advertising and marketing 193 124 263 216
Data processing 156 110 300 233
ATM processing 101 77 191 145
Other general and administrative 381 295 684 568
-------- -------- -------- --------
Total operating expenses 3,519 2,864 6,828 5,525
-------- -------- -------- --------
Income (loss) before income taxes (142) 433 335 1,498
Provision (credit) for income taxes (100) 128 25 464
-------- -------- -------- --------
Net income (loss) $ (42) $ 305 $ 310 $ 1,034
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 1,761 1,753 1,759 1,753
-------- -------- -------- --------
Diluted 1,854 1,806 1,852 1,806
-------- -------- -------- --------
Earnings (loss) per share:
Basic $ (0.02) $ 0.17 $ 0.18 $ 0.59
======== ======== ======== ========
Diluted $ (0.02) $ 0.17 $ 0.17 $ 0.57
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(In thousands, except share data)
Accumulated
Additional Other
Paid-in Retained Comprehensive
Common Stock Capital Earnings Income (Loss) Treasury Stock Total
------------ ------- -------- ------------- -------------- -----
Balance at December 31, 2002 $ 1,778 $ 5,881 $ 5,872 $ 613 $ (136) $ 14,008
--------
Comprehensive income:
Net income 1,034 1,034
Unrealized loss on securities
available for sale, net of
reclassification adjustment
and tax effect (564) (564)
--------
Total comprehensive income 470
--------
Treasury stock issued (250 shares) 1 2 3
Cash dividends declared ($.025 per
share) (46) (46)
------- ------- ------- -------- ------ --------
Balance at June 30, 2003 1,778 5,882 6,860 49 (134) 14,435
======= ======= ======= ======== ====== ========
Balance at December 31, 2003 1,778 5,894 7,826 (119) (111) 15,268
--------
Comprehensive loss:
Net income 310 310
Unrealized loss on securities
available for sale, net of
reclassification adjustment
and tax effect (1,265) (1,265)
--------
Total comprehensive loss (955)
--------
Proceeds from issuance of common
stock (300,000 shares) 300 3,304 3,604
Cash dividends declared ($.025 per
share) (44) (44)
------- ------- ------- -------- ------ --------
Balance at June 30, 2004 $ 2,078 $ 9,198 $ 8,092 $ (1,384) $ (111) $17,873
======= ======= ======= ======== ====== ========
See accompanying notes to consolidated financial statements.
5
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
For the Six Months Ended June 30,
2004 2003
---------- ----------
Cash flows from operating activities:
Net income $ 310 $ 1,034
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Gain on sales and calls of securities, net (375) (934)
Depreciation and amortization 336 323
Net amortization of securities, including certificate of deposit 494 753
Equity loss in limited partnership -- 19
Derivative fair value adjustment 15 --
Core deposit intangible (535) --
Amortization of core deposit intangible 18 --
Net change in other assets and other liabilities (393) (167)
---------- ----------
Net cash provided (used) by operating activities (130) 1,028
---------- ----------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (103,195) (76,723)
Sales 52,142 65,722
Maturities, calls and paydowns 27,372 34,186
Activity in held-to-maturity securities:
Purchases -- (16,195)
Sales 669 --
Maturities, calls and paydowns 4,062 853
Purchase of Federal Home Loan Bank stock -- (1,228)
Purchase of Federal Reserve Bank stock -- (168)
Loan originations, net of repayments (7,464) (15,972)
Additions to premises and equipment, net (592) (627)
---------- ----------
Net cash used by investing activities (27,006) (10,152)
---------- ----------
Cash flows from financing activities:
Net increase in deposits 46,692 13,650
Net increase (decrease) in short-term borrowings (7,973) (16,670)
Proceeds from long-term debt -- 10,000
Repayment of long-term debt (11,537) (649)
Proceeds from issuance of treasury stock -- 3
Proceeds from issuance of common stock 3,604 --
Cash dividends paid (44) (46)
---------- ----------
Net cash provided by financing activities 30,742 6,288
---------- ----------
Net increase (decrease) in cash and cash equivalents 3,606 (2,836)
Cash and cash equivalents at beginning of period 9,685 15,163
---------- ----------
Cash and cash equivalents at end of period $ 13,291 $ 12,327
========== ==========
Supplemental disclosures:
Interest paid $ 2,769 $ 2,846
Income taxes paid 48 446
Due to broker 17,475 --
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) Stockholder's Equity and Earnings per Share
On June 30, 2004, the Company completed a public offering of its
securities. Pursuant to the offering, the Company sold 300,000 shares of common
stock, $1.00 par value, at an offering price of $13.00 per share. Proceeds
received, net of offering costs of approximately $300,000, amounted to $3.6
million. Proceeds are intended to be used to fund continued bank growth, as well
as the possible acquisition of an investment advisory firm.
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 June 30, 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 three months ending June 30,
2004, no common stock equivalents are included in the calculation of earnings
per share as the Company is reporting a net loss, the effect of which would be
anti-dilutive. For the three months ending June 30, 2003 and six months ending
June 30, 2004 and 2003, the Company has no potential common shares outstanding
that are considered anti-dilutive.
(3) Commitments
At June 30, 2004, the Company had outstanding commitments to originate
loans of $10.7 million. Unused lines of credit and open commitments available to
customers at June 30, 2004 amounted to $34.3 million, of which $18.1 million
related to construction loans, $7.6 million related to home equity lines of
credit, $4.3 million related to credit card loans and $4.3 million in other open
commitments.
7
(4) Subsequent Events
On March 19, 2004, the Bank executed a lease agreement for a new branch
office in Portsmouth, New Hampshire with an opening anticipated for late in the
third quarter of 2004. The lease has a term of five years with three five-year
options to renew. Rent under the lease is approximately $72,000 per year with
increases tied to the Consumer Price Index. The Bank received regulatory
approval for the opening of this branch on June 24, 2004.
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.
Executive Summary
As anticipated by the financial markets, the Federal Open Market Committee
raised the Federal Funds target rate 25 basis points on both June 30th and
August 10th. Three straight months of stronger than expected employment data,
although followed by weaker than expected reports in July and August, combined
with rising inflation indicators, were the primary basis for the tightening.
Although strength in key economic data is evident, several national concerns
persist; for example, reduced consumer spending as the 2003 tax and refinancing
incentives wane, increasing consumer debt levels, and higher industrial and
office vacancy rates. In our local markets, credit quality remains solid, though
the volume of new loan originations in 2004 has retreated from the frenzied pace
in 2003 with the recent climb in market interest rates and a resultant slowdown
in mortgage refinancing activity. New customers and purchase originations
continue to be targeted.
In the second quarter, several community banks were acquired in
Massachusetts by large multi-state bank holding companies, continuing the
consolidation trend in the industry. Although the increasing presence of these
large banking institutions in several of the Bank's markets continues,
increasing competitive pricing challenges, the Company has continued to pursue
expansion of its banking footprint in several new markets. The Company views the
continued absorption of certain community banks as an opportunity to grow the
franchise as we continue to cater to the personal banking needs of consumers and
businesses.
Primarily as a result of continued investment in new retail branches, and
the consequent increase in legal, marketing, and other expenses, as well as due
to staffing infrastructure costs, the Company recorded a net loss for the
quarter ended June 30, 2004. A return to positive earnings is anticipated in the
third quarter as revenues increase as a result of increased capital capacity,
while amounts associated with certain one-time expenses incurred in the first
six months of 2004 are not anticipated in the last six months. The Company is
optimistic, though can offer no assurance, about its prospects for core deposit
and lending growth at both of the new retail branches in Beverly and Cambridge,
and eagerly anticipates the successful launch of the Portsmouth, New Hampshire
branch late in the third quarter or early in the fourth quarter of this year.
8
Comparison of Financial Condition at June 30, 2004 versus December 31, 2003
Total assets were $387.7 million at June 30, 2004, an increase of $47.0
million, or 13.8%, from $340.7 million as of December 31, 2003. All major loan
categories increased, as did total investment securities balances.
Loans
Total net loan balances were $164.0 million as of June 30, 2004, an
increase of $7.5 million, or 4.8%, from $156.5 million as of December 31, 2003.
The Company's lending activities are focused in northeastern Massachusetts and
southern New Hampshire and are diversified by loan types and industries. If and
where possible, emphasis has continued to be placed on originating commercial
hybrid loans that carry shorter initial fixed-rate periods and shorter principal
amortization periods. While loan growth slowed somewhat in the quarter, the
Company continues to focus on originating high quality loans and not
compromising credit quality to increase the quantity of loan balances. With
geographic expansion and the hiring of new commercial lenders, continued growth
in high quality loan balances is anticipated in 2004, though not assured.
Total loans increased primarily due to an increase in construction loans
to $22.4 million, an increase of $4.8 million, or 27.3%, from $17.6 million as
of December 31, 2003. Construction loan activity remained positive in the second
quarter of 2004, due to continued favorable residential construction trends and
housing activity, despite competitive lending conditions. The primary focus of
construction lending relates predominantly to the financing of single-family
houses to experienced builders, with concentration guidelines on extension of
credit on unsold homes.
Commercial real estate loans increased to $56.1 million at June 30, 2004,
an increase of $2.7 million, or 5.1%, from $53.4 million as of December 31,
2003. Commercial loans were $20.4 million at June 30, 2004, an increase of
$934,000, or 4.8%, from $19.5 million as of December 31, 2003. Despite increased
office vacancy rates and steady commercial development, favorable origination
activity and credit quality continued during the second quarter in the
commercial real estate lending area, as well as small business lending.
Residential real estate loan balances of $56.7 million as of June 30, 2004
reflected a decrease of only $17 thousand, or .03%, from December 31, 2003. With
loan rates gradually increasing throughout the second quarter, after returning
in March 2004 to the recent lows of June 2003, residential real estate loan
originations and inquiries have slowed. Although new and existing home sales, as
well as home prices, have stabilized, particularly in the high-end market,
consumers continue to capitalize on desirable financing alternatives as compared
to historical standards. New residential mortgage loan originations have,
therefore, kept pace with increased prepayment activity and monthly principal
amortization. A climb in long-term fixed rate mortgage loan rates in excess of
100 basis points in the second quarter has re-kindled some interest in
adjustable rate products.
9
The following table presents the composition of the Company's loan
portfolio by type of loan at the dates indicated.
June 30, December 31,
2004 2003
--------- ------------
Real estate mortgage loans:
Residential $ 56,666 $ 56,683
Commercial 56,072 53,365
Construction 22,412 17,620
Equity lines of credit 7,921 8,429
Commercial loans 20,402 19,468
Consumer loans 1,871 2,279
-------- --------
Total loans 165,344 157,844
Net deferred origination costs (fees) (58) (6)
Allowance for loan losses (1,318) (1,334)
-------- --------
Loans, net $163,968 $156,504
======== ========
Investment Securities
Total investment securities, which includes certificates of deposit,
available-for-sale securities, held-to-maturity securities and Federal Home Loan
Bank and Federal Reserve Bank stock were $198.8 million as of June 30, 2004, an
increase of $34.2 million, or 20.8%, from $164.6 million as of December 31,
2003. The increase in investment securities in 2004 was due primarily to an
increase in retail deposit balances, as well as forward settling securities. The
objectives of the investment portfolio are to assist with the achievement of
liquidity needs, complement or supplement the interest rate sensitivity of loan
and deposit balances, utilize excess capital and/or liquidity, and generate
interest income.
Investment securities purchases of $103.2 million in the first six months
of 2004 were partially offset by investment securities sales of $52.1 million
and calls and principal pay-downs on investment securities of $27.4 million.
Investment securities balances increased $46.7 million in the second quarter due
primarily to the investment of $31 million acquired in the branch-wide term
deposit promotion and the investment of $10.2 million in acquired deposits from
the new Cambridge location. Approximately $18 million of investment securities
balances as of June 30, 2004 consist of trades on or before June 30, 2004 that
settle in the third quarter. These bonds were acquired as delayed re-investment
of investment securities sold in the first quarter and pre-investment of
expected monthly investment securities cash flow, which were traded during
periods of perceived value in the market. Additional growth in investment
securities balances in excess of that supported by the Cambridge deposits and
the term deposit promotion was a result of maintaining a lower leverage ratio in
anticipation of additional capital at June 30, 2004, lower than anticipated loan
balances, and the availability of additional liquidity as a result of the retail
deposit growth.
Whereas investment securities purchases in the first quarter consisted
primarily of adjustable-rate bonds indexed to LIBOR and the Prime Rate,
investment purchases in the second quarter were generally longer-term in nature.
While immediate earnings have been generated on the term deposit funds, adding
longer term assets funded by short-term liabilities increases the liability
sensitivity on the balance sheet, during a period of consensus expectations for
rising interest rates, while also adding more relative price risk to the
investment portfolio. Although price risk has been added to the portfolio, the
yield on these assets produces a favorable spread currently and an expected
continued positive spread through the remainder of 2004 with a rise in
short-term funding costs that accompanies a bear flattening interest rate
scenario in a recovering economy. At June 30, 2004, the unrealized loss on
available for sale securities was $2.4 million as compared to $200,000 as of
December 31, 2003. The decline in market value was due to higher interest rates
as of June 30, 2004, the recognition of gains on the sale of several investment
securities in the first quarter of 2004, and the aforementioned price
sensitivity of longer duration assets. Unrealized losses that are considered
other than temporary, if any, are charged to earnings. There was no such
impairment identified during the six months ended June 30, 2004.
10
The following table presents the composition of the Company's
available-for-sale and held-to-maturity securities portfolios at the dates
indicated
June 30, 2004 December 31, 2003
--------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
(Dollars in thousands)
Securities available for sale
U.S. Government agency obligations $ 57,707 $ 57,287 $ 22,545 $ 22,773
Trust preferred securities 971 975 14,171 14,094
Mortgage-backed securities 91,408 89,906 78,038 77,857
Corporate bonds 5,750 5,554 -- --
Municipal bonds 637 617 639 626
-------- -------- -------- --------
Total debt securities 156,473 154,339 115,393 115,350
Marketable equity securities 84 101 84 98
U.S. Government agency preferred stock 1,770 1,544 1,770 1,598
-------- -------- -------- --------
Total securities available for sale $158,327 $155,984 $117,247 $117,046
======== ======== ======== ========
Securities held to maturity
U.S. Government agency obligations $ 3,000 $ 2,838 $ 3,000 $ 2,918
Municipal bonds 16,183 15,549 16,325 16,071
Mortgage-backed securities 15,234 14,728 19,892 19,673
-------- -------- -------- --------
Total securities held to maturity $ 34,417 $ 33,115 $ 39,217 $ 38,662
======== ======== ======== ========
Deposits
Total deposit balances were $244.8 million as of June 30, 2004, an
increase of $46.7 million, or 23.6%, from $198.1 million as of December 31,
2003. Total deposit balances increased primarily due to the aforementioned term
deposit special promotion and the acquisition of the Cambridge deposits, both of
which produced several new customers at each branch and significantly added to
our liquidity position to support 2004 growth plans. The Company anticipates,
although cannot assure, that a significant portion of these new customers will
remain customers for the indefinite future and avail themselves of additional
bank products and services. Though largely consisting of premium-rate term
deposit funds, deposit balances have increased to $5.2 million as of June 30,
2004 in the Beverly branch in less than two months since its opening, while
deposit balances have increased, primarily in premium-rate term deposit
accounts, to $16.7 million as of June 30, 2004 in the Cambridge branch, an
increase of $6.5 million, or 63.7% since its opening on April 2, 2004.
Regular savings and money market deposit balances increased to $83.7
million as of June 30, 2004, an increase of $10.2 million, or 13.9% from $73.5
million as of December 31, 2003. Personal and business checking balances
increased to $81.4 million as of June 30, 2004, an increase of $9 million, or
12.4%, from $72.4 million as of December 31, 2003. Although a significant
portion of the growth in these categories was a result of the acquisition of the
Cambridge branch, additional branches have also produced some growth in these
critical deposit categories. While management strategies include raising
premium-rate term deposit funds to gain initial market share, growth in savings,
money market, and checking balances, as well as the establishment of new lending
relationships, continues to be targeted. The Company anticipates solid growth,
and in fact requires it to achieve its growth targets, in all deposit categories
and new markets. Growth cannot be assured, however, particularly during a period
whereby consumers may perceive more value in other investment options in an
improving economy.
11
To following table shows the composition of the Company's deposit balances
at the dates indicated.
June 30, December 31,
2004 2003
-------- ------------
Demand $ 45,017 $ 38,426
NOW 36,387 33,936
Regular savings 33,416 31,120
Money market deposits 50,288 42,402
Term certificates 79,642 52,174
-------- --------
$244,750 $198,058
======== ========
Borrowings
Total borrowings were $106.2 million as of June 30, 2004, a decrease of
$19.5 million, or 15.5%, from $125.7 million as of December 31, 2003. Borrowings
consist primarily of short and long-term advances from the Federal Home Loan
Bank that are collateralized by certain mortgage loans and government securities
and are utilized as either an interest rate risk management tool or as a
complement to the volume or mix of retail funding products. Short-term
borrowings decreased since December 31, 2003 due primarily to the planned
replacement of these funds with acquired and promotional deposit balances.
Long-term borrowings decreased since December 31, 2003 due to the maturity of a
$6 million advance and scheduled monthly paydowns on amortizing advances.
Due to Broker
The balance in the due to broker account represents investment securities
purchased in the normal course of business that were traded on or before June
30, 2004 and will settle in the third quarter.
Stockholder's Equity
Total stockholder's equity increased from $15.3 million at December 31,
2003 to $17.9 million as of June 30, 2004 due primarily to the sale of 300,000
shares of common stock at a price of $13.00 per share, raising net proceeds of
$3.6 million after offering costs of approximately $300,000. This increase was
partially offset by the decrease in accumulated other comprehensive income of
$1.3 million associated with the unrealized loss, net of tax, on
available-for-sale securities.
Asset Quality and Allowance for Loan Losses
The table below summarizes certain key ratios regarding the quality of the
Company's loan portfolio:
June 30, 2004 December 31, 2003
------------- -----------------
(Dollars in thousands)
Non-accrual loans $ -- $ --
Troubled debt restructurings -- --
Loans past due 90 days or more and still
accruing 19 19
Non-accrual loans to total loans -- --
Non-performing assets to total assets -- --
Allowance for loan losses as a percentage of
total loans 0.80% 0.85%
12
For the six months ended June 30, 2004, the Company recorded no provision
for loan losses. The Company recorded charge-offs of $19,000 and recoveries of
$3,000 for the six months ended June 30, 2004. The allowance for loan losses was
$1.3 million at June 30, 2004 and December 31, 2003. Management considers the
loan loss allowance to be adequate to provide for potential loan losses, though
a charge to earnings via a loan loss provision is anticipated at or before the
end of 2004, principally as a result of expected growth in the portfolio.
Management evaluates the allowance for loan losses on a quarterly basis.
While the growth in the loan portfolio was in the higher-risk segments of
commercial and construction loans, the Bank has continued to enjoy a very low
level of loan charge-offs and non-accrual loans. Management expects to continue
to enjoy the current low level of charge-offs and non-accrual loans. 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 balance to be
increased through charges to current earnings by increasing the loan loss
provision.
Comparison of Operating Results for the Quarter and Six Months Ended
June 30, 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 results are also impacted by revenue from non-interest related sources
(such as service charges on deposit accounts), the provision for loan losses,
and operating expenses. Operating results are significantly impacted by general
economic conditions; in particular the general level of interest rates and the
resultant impact on asset yields and the cost of funds, as well the ability and
willingness of borrowers to fulfill their debt obligations during various
economic cycles.
Net income for the six months ended June 30, 2004 was $310,000 compared
with $1,034,000 for the six months ended June 30, 2003, a decrease of $724,000,
or 70%. For the six months ended June 30, 2004, net interest income increased
$534,000, or 11.1%, non-interest income decreased $394,000, or 18.0%, and
operating expenses increased $1,303,000, or 23.6%, as compared to the six months
ended June 30, 2003. The decline in net income for the six months ended June 30,
2004 was primarily the result of reduced levels of gains on sales of securities
and a significant increase in operating expenses.
Net loss for the three months ended June 30, 2004 was $42,000 compared
with net income of $305,000 for the three months ended June 30, 2003, a decrease
of $347,000, or 113.8%. For the three months ended June 30, 2004, net interest
income increased $203,000, or 8.5%, non-interest income decreased $123,000, or
13.5%, and operating expenses increased $655,000, or 22.9%, as compared to the
three months ended June 30, 2003. The significant increase in operating expenses
was related to increases in salaries and employee benefits, occupancy and
equipment expenses, professional fees, and advertising costs. Because of the
Company's increased capital capacity, as well as continued loan growth,
management anticipates, though cannot assure, improved earnings in the third
quarter of 2004.
Interest and Dividend Income
Total interest and dividend income for the six months June 30, 2004 was
$8.2 million, which was $486,000, or 6.3%, higher than the six months ended June
30, 2003. This increase was due to the favorable impact on interest and dividend
income of higher average interest-earning assets of $320.1 million for the six
months ended June 30, 2004, as compared to $289.1 million for the six months
ended June 30, 2003. The yield on earning assets of 5.1% for the six months
ended June 30, 2004 was 21 basis points lower than for the six months ended June
30, 2003. Average net loans for the six months ended June 30, 2004 increased
$16.7 million, or 11.7%, to $159.4 million, while the yield on loans for the six
months ended June 30, 2004 was 6.39%; 50 basis points lower than the six months
ended June 30, 2003. A lower loan yield was due to lower average treasury yields
in early 2004 and competitive conditions, which produced lower rates on new
loans and loans re-pricing as well as increased residential refinancing activity
into lower fixed rates. A higher concentration of higher-yielding commercial
loan balances and construction loan balances in 2004 as compared to 2003
partially mitigated the impact of lower residential loan yields.
13
Total interest and dividend income for the quarter-ended June 30, 2004 was
$4.1 million, which was $251,000, or 6.6%, higher than the quarter-ended June
30, 2003. This increase was due to the favorable impact on interest and dividend
income of higher average interest-earning assets of $324.8 million for the
quarter ended June 30, 2004, as compared to $292.2 million for the quarter ended
June 30, 2003. This increase was partially offset by the impact of a lower yield
on earning assets of 5.0% for the quarter-ended June 30, 2004; 22 basis points
lower than the quarter ended June 30, 2003. Average net loans for the quarter
ended June 30, 2004 increased $14.6 million, or 9.9%, to $161.6 million, while
the yield on loans for the quarter ended June 30, 2004 was 6.37%; 54 basis
points lower than the quarter-ended June 30, 2003.
Interest Expense
Interest expense on interest-bearing deposits for the six months ended
June 30, 2004 decreased $102,000, or 7.7%, to $1.2 million as compared to the
six months ended June 30, 2003. This decrease was due to a lower cost of
deposits of 1.42% for the six months ended June 30, 2004 versus 1.67% for the
six months ended June 30, 2003, partially offset by an increase in average
deposit balances in 2004 of $13.4 million, or 8.4%, to $172.3 million. The
decrease in the cost of deposits was due primarily to a lower deposit cost on
savings and NOW account balances which were due primarily to the general level
of interest rates, a 19.8% increase, or $5.4 million, in lower cost savings
balances, and a lower cost on term deposits, partially offset by a higher yield
on money market deposit accounts as the Bank attempts to attract new money in
this popular category.
Interest expense on deposits for the quarter-ended June 30, 2004 increased
$45,000, or 6.8%, to $705,000 as compared to the quarter-ended June 30, 2003 due
primarily to an increase of $23.9 million, or 14.7%, to $186.1 million in
average interest-bearing deposit balances as a result of the aforementioned term
deposit promotion in May.
Interest expense on borrowed funds for the six months ended June 30, 2004
increased $54,000, or 3.6%, to $1.6 million as compared to the six months ended
June 30, 2003. The increase was due primarily to an increase of 41 basis points
to 2.53% in other borrowings and a higher average balance in Federal Home Loan
Bank advances in 2004 of $8.2 million, or 9.8%, partially offset by a lower cost
of Federal Home Loan Bank advances of 2.49%, 19 basis points, or 7.1% lower than
the six months ended June 30, 2003.
Interest expense on borrowed funds for the quarter-ended June 30, 2004
increased $3,000, or .4%, to $767,000 as compared to the quarter-ended June 30,
2003.
Net Interest Income
Net interest income for the six months ended June 30, 2004 increased
$534,000, or 11.1%, to $5.4 million as compared to the six months ended June 30,
2003. The increase in net interest income in 2004 was due primarily to higher
average earning assets. Average earning assets increased $30.9 million, or
10.7%, to $320.1 million for the six months ended June 30, 2004 as a result of
an increase in average loans and average investment securities. 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. This was partially offset by a lower yield on loans and higher balances
and yields on money market deposit balances. The cost of average deposits
decreased 25 basis points, or 14.9%, to 1.42% for the six months ended June 30,
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.
Although the Company has increased deposits through premium-rate pricing, the
actual rates paid in the current year are still lower than those in the prior
year. Despite the reduction in rates paid, average deposit balances increased
for the six months ended June 30, 2004 as compared to the six months ended June
30, 2003 due primarily to the branch-wide certificate of deposit promotion in
14
May and the acquisition of the Cambridge branch in April. The net interest
margin was also impacted favorably by an increase of $6.4 million, or 19.3%, to
$39.5 million in average non-interesting bearing deposit balances for the six
months ended June 30, 2004 as compared to the six months ended June 30, 2003.
Net interest income for the quarter ended June 30, 2004 increased
$203,000, or 8.5%, to $2.6 million as compared to the quarter ended June 30,
2003. The increase in net interest income in the second quarter of 2004 was due
primarily to higher average earning assets, partially offset by a lower net
interest margin of 3.19%, or 8 basis points, as compared to the quarter ended
June 30, 2003. Average earning assets increased $32.6 million, or 11.2%, to
$324.8 million in the first quarter of 2004 primarily as a result of the
increase in average loans.
Retail deposit marketing efforts primarily focus on generating
non-maturity core deposit accounts, particularly in new markets. Due to
competitive conditions, market conditions, and other factors, lack of growth in
non-maturity accounts may ultimately limit asset growth. Growth sufficient to
support loan funding requirements is considered likely, though not assured. The
Bank may thus rely upon higher cost certificates of deposit, or wholesale
sources, 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 primary objective of raising new funds
in new markets is to develop new and expanded long-term deposit and loan banking
relationships. In the meantime, however, premium-rate short-term funds have
produced an immediate increase in the cost of funds. The Company is, however,
planning on market-priced long-term growth in all core deposit categories in all
markets it serves for the remainder of 2004.
15
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 rates for the six months ended June 30, 2004 and 2003. The average
balances are derived from average daily balances.
Six Months Ended June 30,
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 $ 70 $ 2,560 5.47% $ 3 $ 607 0.99%
Investment securities(1):
Taxable 2,608 141,147 3.70% 2,513 135,656 3.70%
Tax-exempt 383 16,933 4.52% 238 10,099 4.71%
Loans, net 5,098 159,442 6.39% 4,919 142,766 6.89%
----------------------- ----------------------
Total interest-earning assets 8,159 320,082 5.10% 7,673 289,128 5.31%
------- --------
Noninterest-earning assets 20,358 21,029
--------- ---------
Total assets 340,440 310,157
========= =========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings 81 32,627 0.50% 103 27,238 0.76%
NOW 36 36,006 0.20% 48 34,433 0.28%
MMDA 419 46,077 1.82% 339 41,118 1.65%
CD's 687 57,586 2.39% 835 56,079 2.98%
----------------------- ----------------------
Total interest-bearing deposits 1,223 172,296 1.42% 1,325 158,868 1.67%
Other borrowed funds 133 10,528 2.53% 95 8,961 2.12%
Federal Home Loan Bank advances 1,153 92,616 2.49% 1,132 84,373 2.68%
Subordinated debentures 288 9,000 6.40% 293 9,000 6.51%
----------------------- ----------------------
Total interest-bearing liabilities 2,797 284,440 1.97% 2,845 261,202 2.18%
------- --------
Noninterest-bearing deposits 39,453 33,101
Other noninterest-bearing liabilities 1,246 1,483
--------- ---------
Total liabilities 325,139 295,786
Total stockholders' equity 15,301 14,371
--------- ---------
Total liabilities and stockholders'
Equity $340,440 $310,157
========= =========
Net interest income $5,362 $4,828
======= ========
Interest rate spread 3.13% 3.13%
======= ========
Net interest margin 3.35% 3.34%
======= ========
(1) Excludes investment securities traded and not settled.
16
The following table presents a summary of the Company's interest-earning
assets and their average yields, and interest-bearing liabilities and their
average rates for the three months ended June 30, 2004 and 2003. The average
balances are derived from average daily balances.
Three Months Ended June 30,
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 $ 35 $ 2,621 5.34% $ 2 $ 812 0.99%
Investment securities(1):
Taxable 1,260 143,650 3.51% 1,131 132,849 3.41%
Tax-exempt 191 16,907 4.52% 140 11,591 4.83%
Loans, net 2,575 161,572 6.37% 2,537 146,934 6.91%
---------------------- ----------------------
Total interest-earning assets 4,061 324,750 5.00% 3,810 292,186 5.22%
------- --------
Noninterest-earning assets 21,575 21,074
--------- ---------
Total assets 346,325 313,260
========= =========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings 42 34,027 0.49% 52 27,898 0.75%
NOW 23 37,941 0.24% 23 34,482 0.27%
MMDA 261 49,501 2.11% 166 42,175 1.57%
CD's 379 64,634 2.35% 419 57,687 2.91%
---------------------- ----------------------
Total interest-bearing deposits 705 186,103 1.52% 660 162,242 1.63%
Other borrowed funds 79 11,332 2.79% 50 9,296 2.15%
Federal Home Loan Bank advances 544 82,063 2.65% 568 83,127 2.73%
Subordinated debentures 144 9,000 6.40% 146 9,000 6.49%
---------------------- ----------------------
Total interest-bearing
liabilities 1,472 288,498 2.04% 1,424 263,665 2.16%
------- --------
Noninterest-bearing deposits 41,789 34,188
Other noninterest-bearing
liabilities 1,068 789
--------- ---------
Total liabilities 331,355 298,642
Total stockholders' equity 14,970 14,618
--------- ---------
Total liabilities and
stockholders' equity $346,325 $313,260
========= =========
Net interest income $2,589 $2,386
======= ========
Interest rate spread 2.96% 3.06%
======= ========
Net interest margin 3.19% 3.27%
======= ========
(1) - Excludes investment securities traded and not settled.
Non-interest Income
Total non-interest income decreased $394,000, or 18.0%, to $1,801,000 for
the six months ended June 30, 2004 as compared to the six months ended June 30,
2003. The decrease was primarily due to a decrease in gains on the sale of
securities of $559,000, or 59.9%, to $375,000. 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 risk attributes of securities owned, the level
17
and slope of the yield curve, product spreads and other market forces that
change on a daily basis. Additionally, the ongoing evaluation of the composition
of the Bank's loan and deposit balances are critical factors that are considered
in the determination of investment security purchases and sales. Service charges
on deposit accounts increased $119,000, or 22.4%, to $650,000 for the six months
ended June 30, 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, as well as an updated fee schedule. Management anticipates, but cannot
assure, that branch expansion and continued focus on growth in core deposit
categories will generate continued growth in service charges fee income on
deposit accounts.
Total non-interest income decreased $123,000, or 13.5%, to $788,000 for
the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003.
The decrease in the second quarter of 2004 was primarily due to a decrease in
gains on the sale of securities of $305,000, or 103.7%. Service charges on
deposit accounts increased $79,000, or 27.7%, to $364,000 for the quarter-ended
June 30, 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.
Trust fees increased $28,000, or 33.3%, to $112,000 for the quarter ended June
30, 2004 as compared to June 30, 2003 due to higher assets under management and
more favorable equity market conditions versus 2003. Non-deposit investment fees
increased $25,000, or 55.6%, to $70,000 for the quarter-ended June 30, 2004 due
primarily to a higher rate of successful referrals from the retail staff and
growth in the branch network. Although management is pleased with the growth in
fee income in its major business lines and expects continued growth in all areas
through the remainder of 2004, there can be no assurance that such trends
continue.
Non-interest Expense
Total operating expenses increased $1.3 million, or 23.6%, to $6.8 million
for the six months ended June 30, 2004. Salaries and employee benefits increased
$759,000, or 25.8%, due primarily to an increase in full-time equivalent
employees to 124 as of June 30, 2004 from 107 at June 30, 2003, a 2004 executive
bonus approved by the Board of Directors in January 2004, and the initial
accrual in the second quarter for the supplemental executive retirement
agreements of which $91,000 represented prior service costs. An increase in
full-time equivalent employees was primarily associated with staffing for new
branch locations, new lenders hired for new markets, the addition of an
investment executive to lead the search for the acquisition of an investment
company, and the growth in the staff infrastructure at the main office to
support continued growth and expansion. Professional fees increased $179,000, or
56.7%, to $495,000 for the six months ended June 30, 2004 due primarily to an
increase in legal expenses associated with several matters related to growth
plans and expansion initiatives. Occupancy and equipment expenses increased
$82,000, or 9.4%, to $959,000 for the six months ended June 30, 2004 due
primarily to increased rent, maintenance, and other operating expenses
associated with the opening of new branches and the renovation of existing
sites. Advertising and marketing expenses increased $47,000, or 21.8%, to
$263,000 for the six months ended June 30, 2004 due to a new marketing campaign
and promotional costs associated with new branches. Data processing expenses
increased $67,000, or 28.8%, to $300,000 for the six months ended June 30, 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. Although the Company anticipates a reduced rate
of growth in operating expense in the last six months of 2004 in comparison to
the first six months of 2004, there can be no assurance that this will occur.
Total operating expenses increased $655,000, or 22.9%, to $3.5 million for
the quarter ended June 30, 2004. Salaries and employee benefits increased
$285,000, or 18.6%, due primarily to the aforementioned increase in full-time
equivalent employees and the initial accrual for the supplemental executive
retirement agreements. Due to branch expansion, occupancy and equipment expenses
increased $63,000, or 14%, to $513,000, for the quarter ended June 30, 2004. As
a result of several business initiatives, professional fees, primarily legal
expenses, increased $68,000, or 48.6%, to $208,000 for the quarter-ended June
30, 2004. Advertising and marketing expenses increase $69,000, or 55.7%, to
$193,000 for the quarter-ended June 30, 2004 due primarily to an enhanced
marketing campaign and promotional costs at the new Beverly and Cambridge
branches that opened for business in the second quarter of 2004.
18
The operating efficiency ratio, which represents operating expenses
divided by total revenue excluding securities gains, increased to 96.3% for the
six months ended June 30, 2004 versus 87.7% for the six months ended June 30,
2003. The ratio was higher for the six months ended June 30, 2004 due primarily
to a higher rate of growth in operating expenses than revenue. The increases in
net interest income of $534,000, or 11.1%, and non-interest income, excluding
securities gains, of $165,000, or 13.1%, were offset by the increase in
operating expenses of $1.3 million, or 23.6%.
Income Taxes
The provision for income taxes decreased $439,000, or 94.6%, to $25,000
for the six months ended June 30, 2004 as a result of lower pre-tax income for
the six months ended June 30, 2004 as compared to the six months ended June 30,
2003. The Company's effective tax rate has declined to 7.5% for the six months
ending June 30, 2004 from 31.0% for the six months ended June 30, 2003. The
decrease in the effective tax rate from 31.0% for the six months ended June 30,
2003 to 7.5% for the six months ended June 30, 2004 is primarily due to two
factors. First, the significant decrease in pre-tax income is primarily related
to a decrease in income at the Bank level, as opposed to the subsidiary security
corporations which have a lower state tax rate. Second, federal tax-exempt
income represents a higher percentage of pre-tax income in 2004 than 2003.
The level of federal tax-exempt income is also the primary reason that the
effective tax benefit rate is 70.4% for the three months ended June 30, 2004, as
compared to the effective tax rate of 29.6% for the three months ended June 20,
2003. The federal tax-exempt income effectively increases the loss for tax
purposes in 2004.
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 increases. 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 the impact of projected behavioral changes in the components of the
balance sheet as a result of changes in interest rates.
Certain strategies were implemented in the first quarter of 2004 to reduce
the current level of interest rate risk on the balance sheet 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.
Certain retail strategies were implemented in the second quarter of 2004
to generate deposit growth, particularly in new markets. As a result of
significant new deposit funds added at a premium rate from the term deposit
special in May, certain investment securities were acquired to generate
additional net interest income. To generate the desired amount of incremental
income, a significant mismatch between the expected maturity or average life of
the investment securities and the final maturity on the nine-month term deposits
exists.
19
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.
On a quarterly basis, an outside advisor performs financial modeling of
the balance sheet using certain industry data assumptions. The output from the
models, which project the Bank's financial performance over certain periods
under certain interest rate environments, are reviewed and analyzed as a basis
for targeting certain product structures in the future, as well as commenting on
pricing decisions in order to encourage or discourage customer choices.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans and investment securities, sales of
securities, maturities and early calls of securities, and funds provided from
operations. While scheduled repayments of loans and investment securities are
predictable sources of funds, prepayments on loans and investment securities as
well as other behavioral variables on certain other balance sheet components are
not predictable with certainty. For example, the general level of interest
rates, economic conditions, and competition largely influence prepayments on
loans and investment securities and the renewal rate on term deposits. 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, complement or
supplement the volume of retail funding, as well as to selectively capitalize on
leverage opportunities. Total advances outstanding at June 30, 2004 amounted to
$83.9 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 mortgage loans and federal agency obligations. As of June 30, 2004,
the Bank's total borrowing capacity through the FHLB was $167.3 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 June 30, 2004, the Bank had $15.7 million
of outstanding commitments to originate loans and $35.9 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 $62.1 million at June 30, 2004. Based upon
historical experience, the Bank 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 $6 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.
20
At June 30, 2004, the Company and the Bank continued to exceed all
regulatory capital requirements applicable to them. The table below presents the
capital ratios at June 30, 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 $24,456 11.81% $16,566 8.00%
Tier 1 capital to risk-weighted assets 23,138 11.17% 8,283 4.00%
Tier 1 capital to average assets 23,138 6.68% 13,850 4.00%
Company:
Total capital to risk-weighted assets $28,984 13.97% $16,602 8.00%
Tier 1 capital to risk-weighted assets 24,887 11.99% 8,301 4.00%
Tier 1 capital to average assets 24,887 7.18% 13,868 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.
21
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
On June 30, 2004, the Company completed a public offering of its
securities. Pursuant to the offering, the Company sold 300,000 shares of common
stock, $1.00 par value, at an offering price of $13.00 per share pursuant to a
Registration Statement filed with the SEC by the Company on May 12, 2004 on form
SB-2 (as the prospectus contained therein was supplemented on each of June 23
and 30, 2004). The SEC file number assigned to the registration statement is
333-114018. The offering's effective date was May 13, 2004. No underwriters were
involved in the offering. The offering commenced on May 14, 2004.
Aggregate Price of the Amount Aggregate Offering Price of the
Amount Registered Offering Amount Registered Sold Amount Sold
- ----------------- -------------------------- ---- -----------
300,000 shares $3,900,000 300,000 shares $3,900,000
Offering expenses from the Registration Statement totaled approximately
$300,000 yielding net offering proceeds of $3.6 million. Subsequent to June 30,
2004, $2.0 million of the net proceeds were invested in the Bank for general
operations. The issuance expanded the number of shares issued and outstanding
common stock from 1,757,630 to 2,057,630. Shareholders not participating in this
offering would, consequentially, have been diluted by the issuance.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
22
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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
Not applicable.
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: August 16, 2004 By: /s/ Donald P. Gill
----------------------
Donald P. Gill
President and Chief
Executive Officer
Date: August 16, 2004 By: /s/ Michael J. Wolnik
----------------------
Michael J. Wolnik
Senior Vice President,
Chief Financial Officer,
and Treasurer
23