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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 September 30, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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)
-----------------------
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 October 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|
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FIRST IPSWICH BANCORP AND SUBSIDIARIES
FORM 10-QSB
Index
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 3
Consolidated Statements of Income for the quarter and nine
months ended September 30, 2004 and 2003 4
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 2004 and 2003 5
Consolidated Statements of Cash Flows for the nine months
ended September 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. Unregistered Sales of Equity Securities and Use of Proceeds 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 23
Signatures 24
2
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share data)
September 30, December 31,
2004 2003
------------- ------------
ASSETS
Cash and due from banks $ 13,297 $ 9,620
Federal funds sold 1,678 65
--------- ---------
Total cash and cash equivalents 14,975 9,685
--------- ---------
Certificate of deposit 3,190 2,253
Securities available for sale, at fair value 153,019 117,046
Securities held to maturity, at amortized cost 32,971 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 $1,295 and $1,334 165,604 156,504
Banking premises and equipment, net 5,811 5,631
Other assets 5,220 4,304
--------- ---------
Total assets $ 386,869 $ 340,719
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 257,691 $ 198,058
Short-term borrowings 59,811 62,254
Long-term borrowings 38,667 54,481
Subordinated debentures 9,000 9,000
Due to broker 1,385 --
Other liabilities 1,272 1,658
--------- ---------
Total liabilities 367,826 325,451
--------- ---------
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 8,390 7,826
Accumulated other comprehensive loss (512) (119)
Treasury stock, at cost - 20,490 shares (111) (111)
--------- ---------
Total stockholders' equity 19,043 15,268
--------- ---------
Total liabilities and stockholders' equity $ 386,869 $ 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)
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Interest and dividend income:
Interest and fees on loans $ 2,647 $ 2,561 $ 7,745 $ 7,480
Interest on debt securities:
Taxable 1,462 1,102 3,961 3,421
Tax-exempt 187 185 570 423
Dividends on equity securities 64 64 174 258
Other interest 37 1 106 4
-------- -------- -------- --------
Total interest and dividend income 4,397 3,913 12,556 11,586
-------- -------- -------- --------
Interest expense:
Interest on deposits 856 573 2,079 1,897
Interest on borrowed funds 672 622 1,958 1,850
Interest on subordinated debentures 152 143 440 435
-------- -------- -------- --------
Total interest expense
1,680 1,338 4,477 4,182
-------- -------- -------- --------
Net interest income 2,717 2,575 8,079 7,404
Provision (credit) for loan losses -- (25) -- (25)
-------- -------- -------- --------
Net interest income, after provision
for loan losses 2,717 2,600 8,079 7,429
Other income:
Gain on sales and calls of securities, net 403 60 778 994
Service charges on deposit accounts 363 304 1,013 835
Credit card fees 196 185 508 518
Trust fees 104 100 307 267
Non-deposit investment fees 105 119 267 232
Miscellaneous (38) 275 60 392
-------- -------- -------- --------
Total other income 1,133 1,043 2,933 3,238
-------- -------- -------- --------
Operating expenses:
Salaries and employee benefits 1,745 1,614 5,440 4,551
Occupancy and equipment 542 443 1,501 1,320
Professional fees 250 151 744 467
Credit card interchange 139 124 380 357
Advertising and marketing 113 132 376 348
Data processing 161 124 459 357
ATM processing 103 74 294 219
Other general and administrative 362 297 1,049 866
-------- -------- -------- --------
Total operating expenses 3,415 2,959 10,243 8,485
-------- -------- -------- --------
Income before income taxes 435 684 769 2,182
Provision for income taxes 110 206 134 670
-------- -------- -------- --------
Net income $ 325 $ 478 $ 635 $ 1,512
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 2,058 1,756 1,859 1,754
-------- -------- -------- --------
Diluted 2,161 1,814 1,962 1,812
-------- -------- -------- --------
Earnings per share:
Basic $ 0.16 $ 0.27 $ 0.34 $ 0.86
======== ======== ======== ========
Diluted $ 0.15 $ 0.26 $ 0.32 $ 0.83
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 1,512 1,512
Unrealized loss on
securities available for
sale, net of reclassification
adjustment and tax effect (299) (299)
----------
Total comprehensive income 1,213
----------
Treasury stock issued (3,290 shares) 9 18 27
Cash dividends declared ($.0375
per share) (68) (68)
-------- ---------- ---------- -------- -------- ----------
Balance at September 30, 2003 1,778 5,890 7,316 314 (118) 15,180
======== ========== ========== ======== ======== ==========
Balance at December 31, 2003 1,778 5,894 7,826 (119) (111) 15,268
----------
Comprehensive loss:
Net income 635 635
Unrealized loss on
securities available for
sale, net of reclassification
adjustment and tax effect (393) (393)
----------
Total comprehensive loss 242
----------
Proceeds from issuance of common
stock (300,000 shares) 300 3,304 3,604
Cash dividends declared ($.0375
per share) (71) (71)
-------- ---------- ---------- -------- -------- ----------
Balance at September 30, 2004 $ 2,078 $ 9,198 $ 8,390 $ (512) $ (111) $ 19,043
======== ========== ========== ======== ======== ==========
See accompanying notes to consolidated financial statements.
5
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
For the Nine Months
Ended September 30,
2004 2003
--------- ---------
Cash flows from operating activities:
Net income $ 635 $ 1,512
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision (credit) for loan losses -- (25)
Gain on sales and calls of securities, net (778) (994)
Depreciation and amortization of banking premises and equipment 516 488
Net amortization of securities, including certificate of deposit 684 1,333
Equity loss in limited partnership -- 64
Derivative fair value adjustment 116 --
Core deposit intangible (535) --
Amortization of core deposit intangible 31 --
Net change in other assets and other liabilities (730) (765)
--------- ---------
Net cash provided (used) by operating activities (61) 1,613
--------- ---------
Cash flows from investing activities:
Purchase of certificates of deposit (896) --
Activity in available-for-sale securities:
Purchases (148,059) (103,674)
Sales 76,418 70,280
Maturities, calls and paydowns 36,594 51,610
Activity in held-to-maturity securities:
Purchases (1,476) (31,112)
Sales allowed under SFAS No. 115 1,116 --
Maturities, calls and paydowns 6,541 1,383
Purchase of Federal Home Loan Bank stock -- (1,228)
Purchase of Federal Reserve Bank stock -- (168)
Loan originations, net of repayments (9,100) (17,240)
Additions to premises and equipment, net (696) (691)
--------- ---------
Net cash used by investing activities (39,558) (30,840)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 59,633 11,745
Net decrease in short-term borrowings (2,443) (2,197)
Proceeds from long-term debt -- 16,000
Repayment of long-term debt (15,814) (1,902)
Proceeds from issuance of treasury stock -- 27
Proceeds from issuance of common stock 3,604 --
Cash dividends paid (71) (68)
--------- ---------
Net cash provided by financing activities 44,909 23,605
--------- ---------
Net increase (decrease) in cash and cash equivalents 5,290 (5,622)
Cash and cash equivalents at beginning of period 9,685 15,163
--------- ---------
Cash and cash equivalents at end of period $ 14,975 $ 9,541
========= =========
Supplemental disclosures:
Interest paid $ 4,379 $ 4,208
Income taxes paid, net 122 645
Due to broker 1,385 --
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"), its wholly-owned subsidiary
The First National Bank of Ipswich (the "Bank"), 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 in the Company's Annual Report
on Form SB-2 for the year ended December 31, 2003.
(2) Stockholders' Equity and Earnings per Share
On June 30, 2004, the Company completed a public offering of its common
stock. 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 September 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 September
30, 2004 and 2003 and nine months ending September 30, 2004 and 2003, the
Company has no potential common shares outstanding that are considered
anti-dilutive.
(3) Commitments
At September 30, 2004, the Bank had outstanding commitments to originate
loans of $4.5 million. Unused lines of credit and open commitments available to
customers at September 30, 2004 amounted to $36.0 million, of which $17.5
million related to construction loans, $9.0 million related to home equity lines
of credit, $4.7 million related to credit card loans and $4.8 million related to
other open commitments.
7
(4) Subsequent Events
On October 1, 2004, the board of directors of the Company approved the
prepayment (without premium) of $3,000,000 of the Company's subordinated
debentures issued in 2000, subject to certain conditions. The prepayment was
expressly conditioned upon notification that The Federal Reserve Bank of Boston
did not pose an objection to the redemption. On October 8, 2004, the Company was
notified by The Federal Reserve Bank of Boston that it did not pose an
objection. On October 8, 2004, the Company sent letters to all of the holders of
the Company's 2000 "trust preferred" capital securities issued in conjunction
with the subordinated debentures offering to prepay all of the trust preferred
capital securities. All holders were required to notify the Company of their
intentions by October 22, 2004. As a result of the offer, $2.0 million of the
trust preferred capital securities were subsequently redeemed by the Company
resulting in a reduction of subordinated debentures from $9 million to $7
million. In connection with the redemption, expenses related to the original
offering will be charged to operating expense.
On October 12, 2004, the Bank sent a notice of termination of the Bank's
lease of premises at 22 Market Square, Portsmouth, New Hampshire, to its then
landlord thereunder, LBJ Properties, LLC, because the premises had been
determined by the Bank's consultants to be unsuitable for the Bank's purposes. A
dispute exists between the Bank and LBJ Properties, LLC over whether the Bank
had the right to terminate the lease. Discussions are underway between the Bank
and LBJ Properties, LLC in an effort to resolve the dispute.
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
and securities portfolio positions, 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
The Federal Open Market Committee increased the Federal Funds target rate
25 basis points to 1.75% on September 21st, the third 25 basis point increase
this year. The committee cited underlying growth in productivity, modestly
improved labor conditions, and an easing of inflation and inflation expectations
in recent months. The committee believes that the upside and downside risks of
attaining sustainable growth and price stability for the next few quarters are
roughly equal.
In our local markets, credit quality remains solid, although new loan
originations in 2004 have retreated from 2003 levels. New customers and purchase
originations continue to be targeted. Commercial loan demand has also moderated
in local markets due primarily to competition and reduced business lending
activity at this point in the economic cycle. Retail deposit growth has
primarily occurred in money market deposit accounts, as consumers appear to be
hesitant to commit funds to longer maturity accounts. We continue to target
growth in personal and business checking accounts in several markets.
8
As anticipated, positive earnings were achieved in the third quarter. The
Company is optimistic, though can offer no assurance, of its prospects for
growth in core deposit balances and loan balances at both of the new retail
branches in Beverly and Cambridge. The launch of the Portsmouth, New Hampshire
branch has been delayed and it cannot be determined whether such opening will
occur in the fourth quarter. The Company hopes to acquire an investment
management company near the end of 2004, although no assurances can be given.
Comparison of Financial Condition at September 30, 2004 versus December 31, 2003
Total assets were $386.9 million at September 30, 2004, an increase of
$46.2 million, or 13.5%, from $340.7 million as of December 31, 2003. The
increase was due to an increase in all major loan categories as well as total
investment securities balances. These increases were funded by the increase in
deposits during the year.
Loans
Total net loan balances were $165.6 million as of September 30, 2004, an
increase of $9.1 million, or 5.8%, from $156.5 million as of December 31, 2003.
The Bank's lending activities are focused in northeastern Massachusetts and
southern New Hampshire and are diversified by loan types and industries. While
loan growth slowed in the quarter, the Bank continues to focus on originating
high quality loans and not compromising credit quality to increase the quantity
of loan balances. The Bank continues to target expansion of its geographic loan
footprint and the hiring of new commercial lenders, although the maintenance of
high credit quality and continued growth in loan balances is not assured.
Total loans increased primarily due to an increase in construction loans
to $22.1 million, an increase of $4.5 million, or 25.6%, from $17.6 million as
of December 31, 2003. Construction loan activity moderated, though remained
positive, in the third quarter of 2004. Housing activity and residential
construction trends have slowed since earlier in the year, though overall trends
continue to be favorable. The primary focus of construction lending continues to
relate to the conservative financing of small residential construction projects
for its highly rated commercial customers.
Commercial real estate loans increased to $57.8 million at September 30,
2004, an increase of $4.4 million, or 8.2%, from $53.4 million as of December
31, 2003. Commercial loans were $19.3 million at September 30, 2004, a decrease
of $200,000, or 1.0%, from $19.5 million as of December 31, 2003. The Bank's
commercial real estate lending strategy stresses quality loan originations to
local businesses, professionals, experienced developers, and investors.
Residential real estate loan balances of $65.9 million as of September 30,
2004 reflected an increase of $800,000, or 1.2%, from $65.1 million as of
December 31, 2003. Continued volatility in market rates for residential loans,
combined with an extended period of time at or near historical lows for interest
rates, has reduced loan refinance activity in recent months. The rate of
increase of home prices, as well as new and existing home sales, has slowed in
the third quarter, reducing the volume of loan applications and closings.
9
The following table presents the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
September 30, December 31,
2004 2003
------------- ------------
Real estate mortgage loans:
Residential $ 57,162 $ 56,683
Commercial 57,846 53,365
Construction 22,108 17,620
Equity lines of credit 8,700 8,429
Commercial loans 19,288 19,468
Consumer loans 1,843 2,279
--------- ---------
Total loans 166,947 157,844
Net deferred origination costs (fees) (48) (6)
Allowance for loan losses (1,295) (1,334)
--------- ---------
Loans, net $ 165,604 $ 156,504
========= =========
Asset Quality and Allowance for Loan Losses
The table below summarizes certain key ratios regarding the quality of the
Bank's loan portfolio:
September 30, December 31,
2004 2003
------------- ------------
(Dollars in thousands)
Non-accrual loans $ -- $ --
Troubled debt restructurings -- --
Loans past due 90 days or more and still accruing 11 19
Non-accrual loans to total loans -- --
Non-performing assets to total assets -- --
Allowance for loan losses as a percentage of
total loans 0.78% 0.85%
For the nine months ended September 30, 2004, the Bank recorded no
provision for loan losses. The Bank recorded charge-offs of $43,000 and
recoveries of $4,000 for the nine months ended September 30, 2004. The allowance
for loan losses was $1.3 million at September 30, 2004 and December 31, 2003.
The decrease in the allowance as a percentage of total loans was the result of
the net charge-off activity during the period and continued loan growth.
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 before the end of 2004 as management expects continued loan growth
in the fourth quarter of 2004.
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 balance to be
increased through charges to current earnings by increasing the loan loss
provision.
10
Investment Securities
Total investment securities balances were $195.3 million as of September
30, 2004, an increase of $30.7 million, or 18.6%, from $164.6 million as of
December 31, 2003. The increase in investment securities balances in 2004 is due
primarily to an increase in retail deposit balances. 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 $149.5 million in the first nine months
of 2004 were partially offset by investment securities sales of $77.5 million
and calls and principal pay-downs on investment securities of $43.1 million.
Investment securities balances increased since December 31, 2003 due primarily
to the raising of $31 million in the branch-wide term deposit promotion and
$10.2 million in acquired deposits from the new Cambridge location.
Investment securities purchases and sales in the third quarter were
primarily focused on increasing the level of shorter duration securities to
mitigate the interest rate risk from current consumer preferences for longer
term and/or fixed rate loans and short term non-maturity deposits. The loan
portfolio continues to generate primarily intermediate and longer duration
assets, while growth in liabilities has centered around premium rate money
market deposits and short-term wholesale funding. Loan customers continue to
prefer longer term and/or fixed rate loans, while a relatively high percentage
of the Company's liabilities, short-term Federal Home Loan Bank advances and
non-maturity money market deposit balances, reprice over a short-term horizon.
Investment securities activity has been aimed at neutralizing the interest rate
risk of this activity. At September 30, 2004, the unrealized loss on available
for sale securities was $778,000 as compared to $201,000 as of December 31,
2003. The decline in market value is primarily due to a flattening of the yield
curve as of September 30, 2004 and the recognition of gains on the sale of
several investment securities in 2004. Unrealized losses that are considered
other than temporary, if any, are charged to earnings. There was no such
impairment identified during the nine months ended September 30, 2004.
The following table presents the composition of the Company's
available-for-sale and held-to-maturity securities portfolios at the dates
indicated
September 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 $ 46,403 $ 46,389 $ 22,545 $ 22,773
Trust preferred securities 971 975 14,171 14,094
Mortgage-backed securities 96,176 95,718 78,038 77,857
Corporate bonds 5,757 5,710 -- --
Municipal bonds 636 614 639 626
-------- -------- -------- --------
Total debt securities 149,943 149,406 115,393 115,350
Marketable equity securities 84 98 84 98
Money market preferred stock 2,000 2,000 -- --
U.S. Government agency preferred stock 1,770 1,515 1,770 1,598
-------- -------- -------- --------
Total securities available for sale $153,797 $153,019 $117,247 $117,046
======== ======== ======== ========
Securities held to maturity
U.S. Government agency obligations $ 3,000 $ 2,932 $ 3,000 $ 2,918
Municipal bonds 16,192 16,119 16,325 16,071
Mortgage-backed securities 13,779 13,565 19,892 19,673
-------- -------- -------- --------
Total securities held to maturity $ 32,971 $ 32,616 $ 39,217 $ 38,662
======== ======== ======== ========
11
Deposits
Total deposit balances were $257.7 million as of September 30, 2004, an
increase of $59.6 million, or 30.1%, from $198.1 million as of December 31,
2003. Total deposit balances increased primarily due to a term deposit special
promotion, growth in money market deposit balances, and the acquisition of the
Cambridge branch deposits in April. The Bank 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.
Regular savings and money market deposit balances increased to $97.5
million as of September 30, 2004, an increase of $23.9 million, or 32.6% from
$73.5 million as of December 31, 2003. The Bank continues to experience growth
in premium rate money market deposit balances as retail customers opt for
non-maturity accounts with competitive short-term yields as the economy shows
signs of improvement. This increase is also due to the acquisition of regular
savings balances at the Cambridge branch. Personal and business checking
balances increased to $84.8 million as of September 30, 2004, an increase of
$12.4 million, or 17.2%, from $72.4 million as of December 31, 2003. While
management strategies in 2004 included raising premium rate term deposit funds
to gain initial market share, growth in market-priced savings, money market, and
checking balances, as well as the establishment of new lending relationships,
continues to be targeted. The Bank is hopeful that solid growth will occur in
all core deposit categories, particularly in new markets. Growth cannot be
assured, however, particularly during a period whereby consumers may perceive
more value in other investment options. Technological innovation, as well as
competitors with more resources, also could limit growth in these categories.
To following table shows the composition of the Bank's deposit balances at
the dates indicated.
September 30, December 31,
2004 2003
------------- ------------
Demand $ 45,071 $ 38,426
NOW 39,732 33,936
Regular savings 35,598 31,120
Money market deposits 61,858 42,402
Term certificates 75,432 52,174
-------- --------
$257,691 $198,058
======== ========
Borrowings
Total borrowings were $107.5 million as of September 30, 2004, a decrease
of $18.3 million, or 15.7%, from $125.7 million as of December 31, 2003.
Borrowings include 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, a complement to
the volume or mix of retail funding products, or as a source of funding for
leverage opportunities. 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 $6.0 million advance, $6.0 million of called
advances and scheduled monthly paydowns on amortizing advances. Subordinated
debentures, a significant portion of which are eligible for inclusion in
regulatory Tier 1capital, did not change during the periods reported.
Stockholder's Equity
Total stockholder's equity increased from $15.3 million at December 31,
2003 to $19.0 million as of September 30, 2004 due primarily to the sale of
common stock, raising net proceeds of $3.6 million. This increase was partially
offset by the increase in accumulated other comprehensive loss of $393,000
associated with an unrealized loss, net of tax, on available for sale
securities.
12
Comparison of Operating Results for the Nine Months and Quarter Ended September
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 advances). Net
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 increase or decrease in 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. 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 nine months ended September 30, 2004 was $635,000
compared with $1.5 million for the nine months ended September 30, 2003, a
decrease of $877,000, or 58%. For the nine months ended September 30, 2004, net
interest income increased $675,000, or 9.1%, non-interest income decreased
$305,000, or 9.4%, and operating expenses increased $1.8 million, or 20.7%, as
compared to the nine months ended September 30, 2003.
Net income for the three months ended September 30, 2004 was $325,000
compared with net income of $478,000 for the three months ended September 30,
2003, a decrease of $153,000, or 32%. For the three months ended September 30,
2004, net interest income increased $142,000, or 5.5%, non-interest income
increased $90,000, or 8.6%, and operating expenses increased $456,000, or 15.4%,
as compared to the three months ended September 30, 2003.
Interest and Dividend Income
Total interest and dividend income for the nine months ended September 30,
2004 was $12.6 million, which was $970,000, or 8.4%, higher than the nine months
ended September 30, 2003. This increase was due to the favorable impact on
interest and dividend income of higher average interest-earning assets of $331.5
million for the nine months ended September 30, 2004, as compared to $292.3
million for the nine months ended September 30, 2003. The favorable impact of
higher average interest-bearing assets was partially offset by a lower yield on
assets of 5.05% for the nine months ended September 30, 2004, which was 24 basis
points lower than for the nine months ended September 30, 2003. Average net
loans for the nine months ended September 30, 2004 increased $14.7 million, or
10%, to $161.1 million, while the yield on loans for the nine months ended
September 30, 2004 was 6.41%, 40 basis points lower than the nine months ended
September 30, 2003. A lower loan yield was due primarily to lower average
treasury yields in early 2004, as well as competitive conditions, which produced
lower rates on new loans and loans re-pricing and 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.
Total interest and dividend income for the quarter ended September 30,
2004 was $4.4 million, which was $484,000, or 12.4%, higher than the quarter
ended September 30, 2003. This increase was due to the favorable impact on
interest and dividend income of higher average interest-earning assets of $354.1
million for the quarter ended September 30, 2004, as compared to $298.5 million
for the quarter ended September 30, 2003. The impact of higher average
interest-bearing assets was partially offset by the impact of a lower yield on
earning assets of 4.97% for the quarter-ended September 30, 2004, 27 basis
points lower than the quarter ended September 30, 2003. Average net loans for
the quarter ended September 30, 2004 increased $10.8 million, or 7.1%, to $164.3
million, while the yield on loans for the quarter ended September 30, 2004 was
6.44%, 23 basis points lower than the quarter-ended September 30, 2003.
13
Interest Expense
Interest expense on interest-bearing deposits for the nine months ended
September 30, 2004 increased $182,000, or 9.6%, to $2.1 million as compared to
the nine months ended September 30, 2003. This increase was due primarily to an
increase in average interest-bearing deposit balances for the nine months ended
September 30, 2004 of $24.6 million, or 15.4%, to $184.8 as compared to the nine
months ended September 30, 2003, in addition to higher average rates paid on
premium money market deposit balances. The increase in average total deposit
balances was partially offset by a lower cost of total deposits of 1.50% for the
nine months ended September 30, 2004 versus 1.58% for the nine months ended
September 30, 2003. The decrease in the cost of deposits was due primarily to a
higher average balance on lower cost savings and NOW account balances and a
lower average rate paid on term deposits.
Interest expense on deposits for the quarter ended September 30, 2004
increased $283,000, or 49.4%, to $856,000 as compared to the quarter ended
September 30, 2003 due primarily to an increase in average interest-bearing
deposits of $46.7 million, or 28.7%, to $209.5 million, combined with an
increase in the cost of deposits to 1.63% for the quarter ended September 30,
2004 as compared to 1.41% for the quarter ended September 30, 2003. The increase
in the cost of deposits was a result of higher balances and rates paid on money
market deposit balances and the premium rate paid on the term deposit promotion
in May, which raised $31.0 million. These factors were partially offset by the
favorable impact of higher average balances in lower cost regular savings and
NOW account balances, primarily a result of the Cambridge branch acquisition.
Interest expense on borrowed funds for the nine months ended September 30,
2004 increased $113,000, or 4.7%, to $2.4 million as compared to the nine months
ended September 30, 2003. The increase was due primarily to an increase of $2.4
million, or 26.3%, to $11.6 million in other borrowed funds and a higher average
balance in Federal Home Loan Bank advances in 2004 of $4.2 million, or 5%.
Interest expense on borrowed funds for the quarter ended September 30,
2004 increased $50,000, or 8%, to $672,000 as compared to the quarter ended
September 30, 2003 due primarily to an increase in other borrowed funds of $4.1
million, or 42.5%, to $13.9 million for the quarter ended September 30, 2004.
Interest expense on subordinated debentures has increased to $152,000 for the
quarter ended September 30, 2004 compared to $143,000 for the quarter ended
September 30, 2003. This increase was the result of rising interest rates on
$6.0 million of the subordinated debentures which reprice on a quarterly basis.
Net Interest Income
Net interest income for the nine months ended September 30, 2004 increased
$675,000, or 9.1%, to $8.1 million as compared to the nine months ended
September 30, 2003. The increase in net interest income in 2004 was due
primarily to higher average earning assets. Average earning assets increased
$39.2 million, or 13.4%, to $331.5 million for the nine months ended September
30, 2004 as a result of an increase in average loans and average investment
securities. The net interest margin decreased primarily as a result of lower
yields on average loans and a lower loans-to-average assets ratio, partially
offset by higher average loan balances, a lower cost of interest-bearing
liabilities, and higher average balances in low interest bearing deposits. A
lower loan-to-average assets ratio was due to a higher rate of increase in
average investment securities balances as compared to the increase in average
loan balances. The cost of average interest-bearing liabilities decreased 9
basis points, or 4.3%, to 2.03% for the nine months ended September 30, 2004.
Despite the reduction in rates paid, average deposit balances increased for the
nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003.
14
Net interest income for the quarter ended September 30, 2004 increased
$142,000, or 5.5%, to $2.7 million as compared to the quarter ended September
30, 2003. The increase in net interest income in the third quarter of 2004 was
due primarily to higher average earning assets, partially offset by a lower net
interest margin of 3.07%, or 38 basis points, versus the quarter ended September
30, 2003. Average earning assets increased $55.6 million, or 18.6%, to $354.1
million in the first quarter of 2004 primarily as a result of the increase in
average loans. A narrower net interest margin was due primarily to shorter
duration and lower yielding investment securities balances in 2004 and higher
short-term funding costs on both retail money market deposit balances and
wholesale Federal Home Loan bank advances. These factors were partially offset
by the favorable benefit of higher average non-interest bearing deposit
balances.
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, growth in
non-maturity accounts may not be in accordance with expectations, which
ultimately limits 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. The Bank 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, though not assured of
being achieved, 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 marginal cost of funds. An increase
in market interest rates, continued competition from several local and national
financial institutions, and increased reliance on higher cost funding sources
could also cause a narrower net interest margin in the future. The Company is,
however, hopeful that it can fund its asset growth with market-priced core
deposit categories in all markets it serves.
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 nine months ended September 30, 2004 and 2003. The average
balances are derived from average daily balances.
Nine Months Ended September 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
certificates of deposit $ 106 $ 2,740 5.16% $ 4 $ 595 0.90%
Investment securities(1):
Taxable 4,135 150,793 3.66% 3,679 133,137 3.68%
Tax-exempt 570 16,896 4.50% 423 12,161 4.64%
Loans, net 7,745 161,088 6.41% 7,480 146,387 6.81%
-------------------- ---------------------
Total interest-earning assets 12,556 331,517 5.05% 11,586 292,280 5.29%
------- -------
Noninterest-earning assets 21,365 21,116
-------- --------
Total assets 352,882 313,396
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings 123 33,070 0.50% 139 28,006 0.66%
NOW 70 37,140 0.25% 65 34,664 0.25%
MMDA 718 50,075 1.91% 482 41,640 1.54%
CD's 1,168 64,514 2.41% 1,211 55,879 2.89%
-------------------- ---------------------
Total interest-bearing deposits 2,079 184,799 1.50% 1,897 160,189 1.58%
Federal Home Loan Bank advances 1,734 88,601 2.61% 1,703 84,380 2.69%
Subordinated debentures 440 9,000 6.52% 435 9,000 6.44%
Other borrowed funds 224 11,649 2.56% 147 9,221 2.13%
-------------------- ---------------------
Total interest-bearing
liabilities 4,477 294,049 2.03% 4,182 262,790 2.12%
------- -------
Noninterest-bearing deposits 41,180 34,692
Other noninterest-bearing liabilities 1,301 1,761
-------- --------
Total liabilities 336,530 299,243
Total stockholders' equity 16,352 14,153
-------- --------
Total liabilities and
stockholders' Equity $352,882 $313,396
======== ========
Net interest income $ 8,079 $ 7,404
======= =======
Interest rate spread 3.02% 3.16%
======= =======
Net interest margin 3.25% 3.38%
======= =======
(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 September 30, 2004 and 2003. The
average balances are derived from average daily balances.
Three Months Ended September 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 $ 37 $ 3,095 4.78% $ 1 $ 574 0.70%
Investment securities(1):
Taxable 1,526 169,874 3.59% 1,166 128,186 3.64%
Tax-exempt 187 16,823 4.45% 185 16,215 4.56%
Loans, net 2,647 164,344 6.44% 2,561 153,512 6.67%
-------------------- -------------------
Total interest-earning assets 4,397 354,136 4.97% 3,913 298,487 5.24%
------ ------
Noninterest-earning assets 23,167 20,921
-------- --------
Total assets 377,303 319,408
======== ========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Savings 43 33,945 0.51% 36 29,517 0.49%
NOW 34 39,384 0.35% 17 35,118 0.19%
MMDA 299 57,986 2.06% 144 42,667 1.35%
CD's 480 78,220 2.45% 376 55,486 2.71%
------------------- -------------------
Total interest-bearing deposits 856 209,535 1.63% 573 162,788 1.41%
Federal Home Loan Bank advances 581 80,659 2.88% 570 84,394 2.70%
Subordinated debentures 152 9,000 6.76% 143 9,000 6.36%
Other borrowed funds 91 13,868 2.62% 52 9,733 2.14%
------------------- -------------------
Total interest-bearing
liabilities 1,680 313,062 2.15% 1,338 265,915 2.01%
------ ------
Noninterest-bearing deposits 44,697 37,637
Other noninterest-bearing
liabilities 1,114 1,703
-------- --------
Total liabilities 358,873 305,255
Total stockholders' equity 18,430 14,153
-------- --------
Total liabilities and
stockholders' equity $377,303 $319,408
======== ========
Net interest income $2,717 $2,575
====== ======
Interest rate spread 2.82% 3.23%
======== =======
Net interest margin 3.07% 3.45%
======== =======
(1) - Excludes investment securities traded and not settled.
17
Non-interest Income
Total non-interest income decreased $305,000, or 9.4%, to $2.9 million for
the nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003. The decrease was primarily due to a decrease in gains on the
sale of securities of $216,000, or 21.7%, to $778,000 and a decrease of
$332,000, or 84.7%, in miscellaneous income. Miscellaneous income decreased due
primarily to the recognition of $248,000 of income in the third quarter of 2003
that had been previously deferred on non-performing loans in prior years and
year-to-date mark-to-market write-downs on equity-indexed securities of $116,000
in 2004. Service charges on deposit accounts increased $178,000, or 21.3%, to
$1.0 million for the nine months ended September 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.
Trust fee income increased $40,000, or 15%, to $307,000 for the nine months
ended September 30, 2004 due to a modest improvement in equity market returns.
Non-deposit investment fee income increased $35,000, or 15.1%, to $267,000 for
the nine months ended September 30, 2004. Management anticipates, but cannot
assure, that branch expansion and continued focus on growth in core deposit
categories will generate continued growth in fee income from customer service
charges and other retail fees categories.
Total non-interest income increased $90,000, or 8.6%, to $1.1 million for
the quarter ended September 30, 2004 as compared to the quarter ended September
30, 2003. The increase in the third quarter of 2004 was primarily due to an
increase in gains on the sale of securities of $343,000, or 571.7%, to $403,000,
partially offset by a decrease in miscellaneous income of $313,000. The decrease
in miscellaneous income for the quarter ended September 30, 2004 was due to the
recognition of $248,000 of income during the quarter ended September 30, 2003
that had been previously deferred on non-performing loans in prior years and
mark-to-market write-downs on equity-indexed securities amounting to $103,000
during the quarter ended September 30, 2004. Service charges on deposit accounts
increased $59,000, or 19.4%, to $363,000 for the quarter-ended September 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. Management
continues to target growth in fee income in all of the Company's major business
lines, although there can be no assurance that such a result is achieved.
Non-interest Expense
Total operating expenses increased $1.8 million, or 20.7%, to $10.2
million for the nine months ended September 30, 2004. Salaries and employee
benefits increased $889,000, or 19.5%, due primarily to an increase in full-time
equivalent employees to 119 as of September 30, 2004 from 106 at September 30,
2003, an executive bonus approved by the Board of Directors in January 2004, and
accruals related to supplemental employee retirement agreements executed in
April 2004. 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. Professional fees increased
$277,000, or 59.3%, to $744,000 for the nine months ended September 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 $181,000, or 13.7%, to $1.5 million for the nine months ended
September 30, 2004 due primarily to increased rent, maintenance, and other
operating expenses associated with the opening of new branches and the
renovation and maintenance of existing sites. Data processing expenses increased
$102,000, or 28.6%, to $459,000 for the nine months ended September 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.
18
Total operating expenses increased $456,000, or 15.4%, to $3.4 million for
the quarter ended September 30, 2004. Salaries and employee benefits increased
$131,000, or 8.1%, due primarily to the aforementioned increase in full-time
equivalent employees. Due to branch expansion, occupancy and equipment expenses
increased $99,000, or 22.4%, to $542,000, for the quarter ended September 30,
2004. As a result of several business initiatives, professional fees, primarily
legal expenses, increased $99,000, or 65.6%, to $250,000 for the quarter-ended
September 30, 2004. Data processing expenses increased $37,000, or 29.8%, to
$161,000 for the quarter-ended September 30, 2004 due primarily to expenses
associated with the new Beverly and Cambridge branches.
The operating efficiency ratio, which represents operating expenses
divided by net interest income and other income excluding securities gains,
increased to 100.1% for the nine months ended September 30, 2004 versus 88.0%
for the nine months ended September 30, 2003. The ratio was higher for the nine
months ended September 30, 2004 due primarily to a higher rate of growth in
operating expenses than revenue. The increases in net interest income and
non-interest income, excluding securities gains, were offset by the increase in
operating expenses.
Income Taxes
The provision for income taxes decreased $536,000, or 80%, to $134,000 for
the nine months ended September 30, 2004 as a result of lower pre-tax income for
the nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003. The Company's effective tax rate has declined to 17.4% for
the nine months ending September 30, 2004 from 30.7% for the nine months ended
September 30, 2003. The decrease in the effective tax rate 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.
For the three months ending September 30, 2004 the effective tax rate was
25.3% compared to 30.1% for the three months ending September 30, 2003. The
decrease in the effective tax rate is due to the decrease in income at the Bank
level, as opposed to the subsidiary security corporations which have 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 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
19
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. As a result, a substantial portion of the asset sensitivity added in the
first quarter of 2004 was eliminated by the liability sensitivity added as a
result of the investment of the proceeds from the term deposit promotion.
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. The Company primarily relies upon the investment securities
portfolio to balance the interest rate risks produced by retail loan and deposit
activity.
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 component 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, to complement or
supplement the volume of retail funding, as well as to selectively capitalize on
leverage opportunities. Total advances outstanding at September 30, 2004
amounted to $86.2 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 September 30, 2004, the Bank's total borrowing capacity through the FHLB
was $163.8 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.
20
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 September 30, 2004, the Bank had $4.5
million of outstanding commitments to originate loans and $36.0 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 $59.5 million at September 30,
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 $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.
At September 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 September 30, 2004, for the Company and the Bank, as well as
the minimum regulatory requirements.
Minimum
Capital
Actual Requirements
Bank: Amount Ratio Amount Ratio
------------------------ -------------------------
Total capital to risk-weighted assets $26,746 12.95% $16,566 8.00%
Tier 1 capital to risk-weighted assets 25,451 12.32% 8,283 4.00%
Tier 1 capital to average assets 25,451 6.75% 13,850 4.00%
Company:
Total capital to risk-weighted assets $29,100 14.04% $16,602 8.00%
Tier 1 capital to risk-weighted assets 25,270 12.20% 8,301 4.00%
Tier 1 capital to average assets 25,270 6.69% 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.
21
(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.
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
Except as described below, 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.
By letter dated July 26, 2004, the Massachusetts Department of
Environmental Protection notified the Bank of audit findings and non-compliance
concerning the parking lot behind the Bank's main office, which has been found
to contain certain contaminants. Investigations done to date observe that
contamination characteristic of coal tar and oil are located on the property.
That notice stated that the Bank has not met the requirements of "Downgradient
Property Status" for which the Bank had applied in 1996. The notice directed the
Bank to submit a revised application or to take other action as may be required
under the Massachusetts Contingency Plan. The Bank has been granted an extension
of time until November 23, 2004 to respond to the notice and it intends to
respond within that time.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 30, 2004, the Company completed a public offering of 300,000
shares of its common stock at $13.00 per share yielding net offering proceeds of
$3.6 million. Of this amount $2.0 million of the net proceeds have been invested
in the Bank for general operations and the remainder was used to paydown the
aforementioned subordinated debentures. The registration statement relating to
the offering became effective May 13, 2004. The SEC file number assigned to the
registration statement is 333-114018.
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
On September 30, 2004, the Company sent letters to all of the holders of
warrants to acquire, in the aggregate, 162,000 shares of the Company's common
stock at $5.555 per share, which warrants were acquired in the Company's private
offering of "trust preferred" securities concluded in December of 2000. These
letters notified the warrant holders of the Company's intent to redeem all of
these outstanding warrants on December 29, 2004 as permitted under the agreement
governing the warrants. The redemption price for each such warrant is $0.001.
Until December 29, 2004, each warrant holder has the right to exercise such
holder's right to acquire the stock at the $5.555 strike price. The full
exercise of these warrants would result in gross proceeds of $900,000 to the
Company's capital.
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ITEM 6. Exhibits
(a) Exhibits
20.1 Letter to Holders of Warrants regarding the redemption of warrants.
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
On July 29, 2004, the Company filed a report on Form 8-K under Item 5
"Other Events" reporting that a press release was issued regarding the
completion of its recent registered offering of its common stock and filing an
exhibit under Item 7 "Financial Statements and Exhibits" thereby, the press
release dated July 29, 2004.
On August 20, 2004, the Company filed a report on Form 8-K under Item 5
"Other Events" and Item 12 "Results of Operations and Financial Conditions".
Item 5 reported that a press release was issued announcing that quotations have
begun of its common stock on the NASD OTC Bulletin Board. Item 12 reported that
a letter was sent to shareholders announcing the Company's financial results for
the second quarter ended June 30, 2004. Exhibits were filed under Item 7
"Financial Statements and Exhibits" with the press release and Letter to
Shareholders.
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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: November 15, 2004 By: /s/ Donald P. Gill
-------------------------
Donald P. Gill
President and Chief Executive Officer
Date: November 15, 2004 By: /s/ Michael J. Wolnik
-------------------------
Michael J. Wolnik
Senior Vice President, Chief Financial
Officer, and Treasurer
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