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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 333-114018
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First Ipswich Bancorp
(Exact name of small business issuer as specified in its charter)
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Massachusetts 04-2955061
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
31 Market Street,
Ipswich, Massachusetts 01938
(Address of principal executive offices)
(978) 356-3700
(Issuer's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES |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 April 30, 2005, there were
2,219,630 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 March 31, 2005 and
December 31, 2004 3
Consolidated Statements of Income for the three months
ended March 31, 2005 and 2004 4
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 2005 and 2004 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004 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 23
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)
March 31, December 31,
2005 2004
----------------------------
ASSETS
- ------
Cash and due from banks $ 10,568 $ 8,970
Federal funds sold 95 106
--------- ---------
Total cash and cash equivalents 10,663 9,076
--------- ---------
Certificates of deposit 3,233 3,212
Securities available for sale, at fair value 147,639 153,987
Securities held to maturity, at amortized cost 31,553 31,909
Federal Home Loan Bank stock, at cost 6,012 5,590
Federal Reserve Bank stock, at cost 549 549
Loans, net of allowance for loan losses of $1,361 and $1,340 172,592 168,883
Banking premises and equipment, net 6,124 5,806
Other assets 8,832 8,168
--------- ---------
Total assets $ 387,197 $ 387,180
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 232,423 $ 254,842
Short-term borrowings 89,239 66,468
Long-term borrowings 36,093 37,383
Subordinated debentures 7,000 7,000
Other liabilities 3,141 1,669
--------- ---------
Total liabilities 367,896 367,362
--------- ---------
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, 2,240,120 issued 2,240 2,240
Additional paid-in capital 9,936 9,936
Retained earnings 8,328 8,210
Accumulated other comprehensive loss (1,092) (457)
Treasury stock, at cost (20,490 shares) (111) (111)
--------- ---------
Total stockholders' equity 19,301 19,818
--------- ---------
Total liabilities and stockholders' equity $ 387,197 $ 387,180
========= =========
See accompanying notes to consolidated financial statements.
3
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share data)
For the Three Months Ended March 31,
-----------------------------------
2005 2004
---------- ----------
Interest and dividend income:
Interest and fees on loans $ 2,721 $ 2,523
Interest on debt securities:
Taxable 1,300 1,296
Tax-exempt 187 192
Dividends on equity securities 193 53
Other interest 45 34
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Total interest and dividend income 4,446 4,098
---------- ----------
Interest expense:
Interest on deposits 763 518
Interest on borrowed funds 915 663
Interest on subordinated debentures 114 144
---------- ----------
Total interest expense 1,792 1,325
---------- ----------
Net interest income 2,654 2,773
Provision for loan losses 40 --
---------- ----------
Net interest income, after provision for
loan losses 2,614 2,773
Other income:
Investment advisory fees 390 --
Service charges on deposit accounts 282 286
Credit card fees 159 136
Trust fees 113 91
Non-deposit investment fees 107 93
Gain on sales and calls of securities, net 45 386
Miscellaneous 94 21
---------- ----------
Total other income 1,190 1,013
---------- ----------
Operating expenses:
Salaries and employee benefits 2,081 1,875
Occupancy and equipment 569 446
Professional fees 217 287
Data processing 179 144
Credit card interchange 96 94
ATM processing 93 90
Advertising and marketing 60 70
Other general and administrative 382 303
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Total operating expenses 3,677 3,309
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Income before income taxes 127 477
Provision (benefit) for income taxes (19) 124
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Net income $ 146 $ 353
========== ==========
Weighted average common shares outstanding:
Basic 2,220 1,758
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Diluted 2,220 1,819
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Earnings per share:
Basic $ 0.07 $ 0.20
========== ==========
Diluted $ 0.07 $ 0.19
========== ==========
See accompanying notes to consolidated financial statements.
4
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(In thousands, except share data)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Treasury Stock Total
-------------- -------------- -------------- -------------- -------------- --------------
Balance at December 31, 2003 $1,778 $5,894 $7,826 $ (119) $(111) $15,268
Comprehensive income:
Net income 353 353
Unrealized gain on securities
available for sale, net of
adjustment and tax effect 101 101
-----------
Total comprehensive income 454
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Cash dividends declared ($.0125
per share) (24) (24)
-------------- -------------- -------------- -------------- -------------- --------------
Balance at March 31, 2004 $1,778 $5,894 $8,155 $ (18) $(111) $15,698
============== ============== ============== ============== ============== ==============
Balance at December 31, 2004 $2,240 $9,936 $8,210 $ (457) $(111) $19,818
Comprehensive loss:
Net income 146 146
Unrealized loss on
securities available for
sale, net of reclassification
adjustment and tax effect (635) (635)
-----------
Total comprehensive loss (488)
-----------
Cash dividends declared ($.0125
per share) (28) (28)
-------------- -------------- -------------- -------------- -------------- --------------
Balance at March 31, 2005 $2,240 $9,936 $8,328 $(1,092) $(111) $19,301
============== ============== ============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
5
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
For the Three Months Ended March 31,
2005 2004
---------- ----------
Cash flows from operating activities:
Net income $ 146 $ 353
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 40 --
Gain on sales and calls of securities, net (45) (386)
Depreciation and amortization of banking
premises and equipment 187 163
Net amortization of securities, including
certificate of deposit 91 364
Derivative fair value adjustment (35) 37
Amortization of core deposit intangible 30 --
Net change in other assets and other liabilities (371) (108)
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Net cash provided (used) by operating activities 43 423
---------- ----------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (28,523) (51,453)
Sales 27,597 49,618
Maturities, calls and paydowns 7,764 13,344
Activity in held-to-maturity securities:
Purchases -- --
Sales -- 652
Maturities, calls and paydowns 348 553
Purchase of Federal Home Loan Bank stock (422) --
Loan originations, net of repayments
Deposit on branch acquisition (500) --
Additions to premises and equipment, net (5) (91)
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Net cash used by investing activities 2,510 9,833
---------- ----------
Cash flows from financing activities:
Net decrease in deposits (22,419) (3,516)
Net increase in short-term borrowings 22,771 370
Repayment of long-term borrowings (1,290) (7,266)
Cash dividends paid (28) (24)
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Net cash provided by financing activities (966) (10,436)
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Net increase (decrease) in cash and cash equivalents 1,587 (180)
Cash and cash equivalents at beginning of period 9,076 9,685
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Cash and cash equivalents at end of period $ 10,663 $ 9,505
========== ==========
Supplemental disclosures:
Interest paid $ 1,792 $ 1,330
Income taxes paid, net 73 48
Due to broker 1,499 1,448
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 10-KSB for the year ended December 31, 2004.
(2) Stockholders' Equity and Earnings per Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share in 2004 reflects additional common
shares (common stock equivalents) that would have been outstanding if dilutive
potential shares had been issued, as well as any adjustment to income that would
result from the assumed issuance. As of March 31, 2004, potential common shares
that may be issued by the Company related solely to warrants issued in
connection with the Company's subordinated debentures and were determined using
the treasury stock method. Assumed conversion of the outstanding warrants would
increase the number of shares outstanding, but would not require an adjustment
to income as a result of the conversion. All warrants outstanding were exercised
on December 29, 2004. For the three months ended March 31, 2004, the Company had
no potential common shares outstanding that are considered anti-dilutive.
(3) Commitments
At March 31, 2005, the Bank had outstanding commitments to originate loans
of $22.6 million. Unused lines of credit and open commitments available to
customers at March 31, 2005 amounted to $32.6 million, of which $13 million
related to construction loans, $8.4 million related to home equity lines of
credit, $4.8 million related to credit card loans and $6.4 million related to
other open commitments.
(4) Segment Reporting
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the
quarter-ended March 31, 2005 is below. There were no reportable segments prior
to the acquisition of the de Burlo Group, Inc, on December 31, 2004.
Investment Consolidated
Banking Advisory Totals
------- -------- ------
Net interest and dividend income $ 2,654 -- $ 2,654
Other revenue: external customers 800 $ 390 1,190
Net income 69 77 146
Assets $384,485 $2,712 $387,197
7
ITEM 2. Management's Discussion and Analysis
Forward-looking statements
This quarterly report on Form 10-QSB contains and incorporates by
reference "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. All statements, other than
statements of historical facts, including statements regarding our strategy,
effectiveness of investment programs, evaluations of future interest rate trends
and liquidity, expectations as to growth in assets, deposits and results of
operations, receipt of regulatory approval for pending acquisitions, success of
acquisitions, future operations, market position, financial position, and
prospects, plans and objectives of management are forward-looking statements.
Words such as "believes", "expects," "may," "will," "should," "contemplates," or
"anticipates" may also 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, a deterioration in general economic conditions on a national
basis or in the local markets in which the Company operates, the Bank's
continued ability to attract and retain deposits, the risk that difficulties
will arise in connection with the integration of the operations of acquired
businesses with the operations of the Company's banking or investment management
businesses, 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 Bank is a nationally chartered commercial bank that has focused
primarily on originating quality loans and raising consumer and commercial
deposits in the markets it serves. The Bank seeks to expand its product
offerings to its existing customers, as well as increase its customer base in
new markets. Through its acquisition of the Cambridge branch of Atlantic Bank of
New York, and the pending acquisition of the Boston branch of Atlantic bank of
New York, the Bank has initiated the strategic expansion of its geographic
footprint into the Boston market. The Bank opened a loan production office in
Portsmouth, New Hampshire in the first quarter of 2005, thus initiating its
expansion plans into this market.
As a result of the investment management company acquisition at the end of
2004, the Company has also initiated its goal of expanding its product offerings
within the investment management area and broadening its fee-generating
businesses. The Bank plans to cross-sell its core banking services to the new
investment customers acquired, as well as cross-sell additional investment
products to its existing customer base. Investment in the investment management
business has increased the percentage of fee revenue to total revenue, thus
reducing reliance on revenue from the interest margin. The newly acquired
investment management company generated $390,000 in fee revenue in its first
quarter of operation under the Company. With a 55 basis point spread recently
between the two- and ten-year treasury, its narrowest point in four years, the
interest margin at the Company, and the banking industry in general, continues
to be pressured. Despite this margin pressure, the Company anticipates higher
earnings in 2005 as compared to 2004, primarily due to the anticipated
acquisition of the Boston branch and a full year of earnings from the investment
management company.
Critical Accounting Policies
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and the application of which could potentially
result in materially different results under different assumptions and
conditions. Accounting policies considered critical to the Company's financial
statements include the allowance for loan losses and impairment of securities
and intangible assets, including goodwill. The methodology for assessing the
appropriateness of the allowance for loan losses is considered a critical
accounting policy by management due to the degree of judgment involved, the
subjectivity of the assumptions utilized, and the potential for changes in the
8
economic environment that could result in changes to the amount of the allowance
for loan losses considered necessary. Management considers impairment of
investment securities to be a critical accounting policy because of its possible
materiality to the financial statements. Management considers impairment of
intangible assets to be a critical accounting policy because it is a material
balance sheet item and inherent valuation. This valuation involves
identification of reporting units and estimation of fair values. The estimation
of fair values involves a high degree of judgment and subjectivity in the
assumptions utilized.
Major Growth Initiatives
In December 2004, Bancorp completed the acquisition of The de Burlo Group.
Based in Boston, Massachusetts, The de Burlo Group is an investment advisory
firm with approximately $340 million in assets under management. The de Burlo
Group offers investment advice to individuals, institutions, and nonprofit
organizations, and has built a reputation for providing experienced, successful,
and professional investment management services to meet the unique needs of each
of its clients. In completing this acquisition, the Company has taken a
significant step toward diversifying its revenue stream and broadening the array
of services that it intends to offer to its customers.
In February 2005, the Company entered into an agreement to acquire the
Boston branch of the Atlantic Bank of New York and the commercial building in
which the Boston branch is located at 33 State Street. The branch acquisition
involves the purchase of approximately $47 million in loans, at a purchase price
of par for a significant majority of the loans, and the assumption of
approximately $25 million in deposits, which shall immediately increase the net
interest income of the Company. The purchase price of the building is $5.25
million and the premium to be paid on the deposits is 8%. The transaction is
scheduled to close in June 2005, subject to regulatory approval. To support Tier
II capital needs for this transaction, the Company is participating in a pooled
trust preferred offering.
Comparison of Financial Condition at March 31, 2005 versus December 31, 2004
Total assets were $387.2 million at March 31, 2005 and December 31, 2004.
Growth in net loan balances in the first quarter of 2005 was partially offset by
a decrease in available-for-sale securities balances.
Total net loan balances were $172.6 million as of March 31, 2005, an
increase of $3.8 million, or 2.2%, from $168.9 million as of December 31, 2004.
The Bank's lending activities are focused in northeastern Massachusetts and
southern New Hampshire and are diversified by loan types and industries. The
Bank continues to focus on originating high quality loans and targeting
expansion of its geographic loan footprint.
Loans increased primarily due to an increase in commercial real estate
loans to $68.0 million, an increase of $7.4 million, or 12.2%, from $60.6
million as of December 31, 2004. The Bank's commercial real estate lending
strategy stresses quality loan originations to local businesses, professionals,
experienced developers, and investors. If and where possible, emphasis has been
placed on originating commercial hybrid ARM's that carry shorter initial fixed
rate periods and shorter principal amortization periods. Commercial loans
increased $2.9 million, or 14.8%, to $22.5 million during the first quarter of
2005 due to increased business development, lending in new markets, and
favorable small business lending conditions.
Construction loan balances decreased $3.5 million, or 15.2%, to $19.5
million during the first quarter of 2005 due primarily to sales activity, and
the cyclical nature of the level of advanced funds, as well as one large loan
conversion to permanent financing. Housing activity and residential construction
trends have slowed since the latter part of 2004, though overall credit 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.
Residential loan refinancing activity has slowed in 2005 due primarily to
modestly higher long-term interest rates after a protracted period of low
interest rates that supported significant refinancing activity and loan turnover
in 2003 and 2004. Residential real estate loan balances, including equity lines
of credit, of $62.3 million as of March 31, 2005 decreased $2.9 million, or
4.4%, from $65.2 million as of December 31, 2004. As the Company does not sell
9
fixed rate residential loans into the secondary market, long-term fixed rate
loans have not been priced aggressively at this point in the economic cycle.
Credit conditions have continued to be favorable, although new and existing home
sales prices and activity has moderated in recent months.
The following table presents the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
March 31, December 31,
2005 2004
------------ ------------
Real estate mortgage loans:
Commercial $ 67,960 $ 60,616
Residential 52,848 55,749
Construction 19,448 23,016
Equity lines of credit 9,450 9,465
Commercial loans 22,530 19,627
Consumer loans 1,739 1,792
------------ ------------
Total loans 173,975 170,265
Net deferred origination fees (22) (42)
Allowance for loan losses (1,361) (1,340)
------------ ------------
Loans, net $ 172,592 $ 168,883
============ ============
Asset Quality and Allowance for Loan Losses
The table below summarizes certain key ratios regarding the quality of the
Bank's loan portfolio:
March 31, 2005 December 31, 2004
-------------- -----------------
(Dollars in thousands)
Non-accrual loans $ -- $ --
Troubled debt restructurings -- --
Loans past due 90 days or more and still accruing -- 16
Non-accrual loans to total loans -- --
Non-performing assets to total assets -- --
Allowance for loan losses as a percentage of
total loans 0.78% 0.79%
For the three months ended March 31, 2005, the Company recorded a $40,000
provision for loan losses as a result of loan growth. The Company recorded
charge-offs of $21,000 and recoveries of $2,000 for the three months ended March
31, 2005. The allowance for loan losses balance was $1,361,000 at March 31,
2005, an increase of $21,000 since December 31, 2004. Management considers the
loan loss allowance to be adequate to provide for potential loan losses, though
a continued charge to earnings via a loan loss provision is anticipated in 2005
due to the anticipation of continued loan growth.
While the Company has continued to enjoy a very low level of loan
charge-offs and non-accrual loans, and expects to continue to do so, economic or
other external factors, a 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 reserve balance to be
increased in the future, perhaps substantially, through charges to current
earnings by increasing the loan loss provision.
10
Investment Securities
Total investment securities balances were $189.0 million as of March 31,
2005, a decrease of $6.2 million, or 3.2%, from $195.2 million as of December
31, 2004. Investment security sales of $27.6 million and calls and principal
pay-downs on investment securities of $7.8 million in the first quarter were
partially replaced by investment security purchases of $28.5 million, while the
remaining proceeds on investment securities sales and calls were utilized to
fund loan demand. In planning for the anticipated higher interest rates and
increasing loan demand, a greater percentage of investment securities purchases
were amortizing securities, many with average lives under one year, short-term
money market preferred stock, or shorter maturity agency securities. This
purchasing strategy is intended to minimize the need to sell securities at
unfavorable prices by providing sufficient cash flow to meet anticipated funding
projections.
Investment securities may be sold for a variety of reasons, including, but
not limited to, swapping into other investment sectors with greater perceived
relative value, neutralizing interest rate risk created by loan, deposit, or
borrowed funds activity, and managing the level of qualifying collateral for
borrowing purposes. In the first quarter of 2005, certain investment securities
were sold and re-invested into different investment sectors to neutralize the
interest rate risk impact of higher balances and rates on short-term borrowings.
Investment securities sold consisted primarily of 10/1 agency mortgage backed
obligations, which earn a fixed rate for ten years and then adjust annually
thereafter, and certain longer maturity agency bonds. Proceeds from these sales
were re-invested primarily into floating rate instruments. Certain non-agency
bonds that are not eligible to be used as collateral for borrowing purposes were
also sold and re-invested into agency bonds in order to increase the level of
qualifying collateral. Due to a continued flattening of the yield curve, the
short-term yield give-up on floating rate assets as compared to intermediate and
longer-term fixed rate alternatives is not as significant as it had been several
months ago.
The following table presents the composition of the Company's
available-for-sale and held-to-maturity securities portfolios at the dates
indicated
March 31, 2005 December 31, 2004
--------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------- --------------------------
(Dollars in thousands)
Securities available for sale
Mortgage-backed securities $ 75,540 $ 74,485 $ 78,946 $ 78,575
U.S. Government agency obligations 51,331 50,791 54,105 53,868
Corporate bonds 1,794 1,723 1,786 1,746
Trust preferred securities 965 971 970 974
Municipal bonds 634 603 635 610
---------- ---------- ---------- ----------
Totaldebtsecurities 130,264 128,573 136,442 135,773
Marketable equity securities 84 96 84 104
Money market preferred stock 16,000 16,000 15,200 15,200
U.S. Government agency preferred stock 2,956 2,970 3,256 2,910
---------- ---------- ---------- ----------
Total securities available for sale $ 149,304 $ 147,639 $ 154,982 $ 153,987
========== ========== ========== ==========
Securities held to maturity
U.S. Government agency obligations $ 3,000 $ 2,855 $ 3,000 $ 2,928
Municipal bonds 16,309 15,878 16,201 16,098
Mortgage-backed securities 12,244 11,924 12,708 12,524
---------- ---------- ---------- ----------
Total securities held to maturity $ 31,553 $ 30,657 $ 31,909 $ 31,550
========== ========== ========== ==========
11
Deposits
Total deposit balances were $232.4 million as of March 31, 2005, a
decrease of $22.4 million, or 8.8%, from $254.8 million as of December 31, 2004.
Total deposit balances decreased primarily due to the strategic pricing of term
deposits to discourage the renewal of premium rate funds. Term deposit balances
decreased $20.5 million, or 27.9%, to $53.1 million, as of March 31, 2005.
Approximately 40% of the $31 million in nine-month funds raised last May were
retained at a favorable spread to shorter term treasury rates, during a period
of a continued expectation of an increase in the Federal funds target rate by
the FOMC. Term deposit outflows were funded primarily by short-term borrowings.
Non-interest bearing demand deposit accounts increased $2.3 million, or 5.7%, to
$43.4 million as of March 31, 2005. Total money market deposit balances
decreased $2.9 million, or 4.3%, to $65 million after increasing significantly
in 2004, as management has opted to price this account less aggressively in 2005
as short-term interest rates continue to rise, after pricing more aggressively
in 2004 to increase market share while rates were lower. While deposit-raising
strategies in 2005 may include promotional programs, growth in market-priced
savings, money market, and checking balances continues to be targeted. The
Company is also hopeful that additional commercial deposits will be generated
from its geographic lending plans.
The following table summarizes the composition of the Bank's deposit
balances at the dates indicated.
March 31, December 31,
2005 2004
------------- -------------
Demand $ 43,434 $ 41,098
NOW 35,251 37,505
Regular savings 35,680 34,767
Money market deposits 64,959 67,858
Term certificates 53,099 73,614
------------- -------------
$ 232,423 $ 254,842
============= =============
Borrowings
Total borrowings were $125.3 million as of March 31, 2005, an increase of
$21.4 million, or 20.6%, from $103.9 million as of December 31, 2004. Borrowings
were higher than year-end due to the aforementioned net deposit outflows. The
growth in borrowings has occurred in short-term maturities in order that these
funds may at least partially be paid down by deposits acquired in Boston, as
well as by additional deposit growth in 2005 from existing branches.
Stockholder's Equity
Total stockholder's equity decreased from $19.8 million at December 31,
2004 to $19.3 million as of March 31, 2005 due primarily to an increase in
accumulated other comprehensive loss of $635,000 associated with an unrealized
loss, net of tax, on available for sale securities, partially offset by net
income of $146,000 for the three months ended March 31, 2005.
12
Comparison of Operating Results for the Three Months Ended March 31, 2005
and 2004
General
Operating results are largely determined by the net interest spread on the
Company's primary assets (loans and investment securities) and its primary
liabilities (consumer deposit balances and Federal Home Loan Bank borrowings).
Operating income is also dependent upon revenue from non-interest related
sources (such as investment advisory fees and service charges on deposit
accounts), the provision for loan losses, and the increase or decrease in
operating expenses. Revenue from gains on the sale of investment securities has
been produced, and can continue to be produced in certain market conditions,
although it cannot be consistently relied upon. Operating results are also
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 as the ability and willingness of borrowers to fulfill their debt
obligations during various economic cycles.
Net income for the three months ended March 31, 2005 was $146,000 compared
with net income of $353,000 for the three months ended March 31, 2004, a
decrease of $207,000, or 58.6%. Pre-tax operating income (pre-tax income
excluding investment securities gains) was $82,000 for the three months ended
March 31, 2005 as compared to $92,000 for the three months ended March 31, 2004.
For the three months ended March 31, 2005, net interest income decreased
$119,000, or 4.3%, non-interest income increased $177,000, or 17.5%, and
operating expenses increased $368,000, or 11.1%, to $3.7 million.
Interest and Dividend Income
Total interest and dividend income for the three months ended March 31,
2005 was $4.4 million, which was $348,000, or 8.5%, higher than the three months
ended March 31, 2004. This increase was due to the favorable impact on interest
and dividend income of higher average interest-earning assets of $361.2 million
for the three months ended March 31, 2005, as compared to $315.4 million for the
three months ended March 31, 2004. The favorable impact of higher average
interest-bearing assets was partially offset by a lower yield on assets of 4.92%
for the three months ended March 31, 2005, which was 28 basis points lower than
for the three months ended March 31, 2004. Average net loans for the three
months ended March 31, 2005 increased $13.1 million, or 8.4%, to $170.5 million,
while the yield on loans for the three months ended March 31, 2005 was 6.39%, 3
basis points lower than the three months ended March 31, 2004. Interest income
on taxable investment securities increased $174,000 to $1.5 million for the
three months ended March 31, 2005 due primarily to an increase of $32.1million,
or 23.1%, in the average balance in taxable investment securities. The favorable
impact on interest income on taxable investments associated with higher balances
was partially offset by a decrease of 32 basis points in yield to 3.57% for the
three months ended March 31, 2005 due primarily to a higher concentration of
floating rate bonds and shorter maturity agency bonds. The loan yield decreased
only slightly for the three months ended March 31, 2005 as a higher
concentration of higher-yielding commercial and commercial real estate loan
balances in 2005 mitigated the impact of lower residential loan yields.
Interest Expense
Interest expense on interest-bearing deposits for the three months ended
March 31, 2005 increased $245,000, or 47.3%, to $763,000 as compared to the
three months ended March 31, 2004. This increase was due primarily to an
increase in average interest-bearing deposit balances for the three months ended
March 31, 2005 of $40.5 million, or 25.6%, to $199 million as compared to the
three months ended March 31, 2004. The increase in average balances for the
three months ended March 31, 2005 was primarily due to an increase of $23.6
million, or 55.3%, in average money market deposit balances to $66.2 million and
an increase of $12.8 million, or 25.4%, in average certificate of deposits
balances to $63.3 million. The increase in interest expense for the three months
ended March 31, 2005 was also due to an increase in the cost of total
interest-bearing deposits of 1.53% for the three months ended March 31, 2005
versus 1.31% for the three months ended March 31, 2004. The increase in the cost
of interest-bearing deposits was due primarily to an increase in the rate paid
on money market deposit balances of 48 basis points to 1.96%. 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, in addition to higher average balances in
non-interest bearing deposits.
13
Interest expense on borrowed funds for the quarter-ended March 31, 2005
increased $252,000, or 38%, to $915,000 as compared to the quarter-ended March
31, 2004 due primarily to an increase in the cost of Federal Home Loan Bank
advances of 84 basis points to 3.20% for the quarter ended March 31, 2005. The
cost of short-term advances increased as a result of an increase in short term
interest rates by the FOMC. Interest expense on subordinated debentures for the
quarter-ended March 31, 2005 decreased $30,000, or 20.8%, due to the early
retirement of $2 million of debt in October 2004.
Net Interest Income
Net interest income for the three months ended March 31, 2005 decreased
$119,000, or 4.3%, to $2.6 million as compared to the three months ended March
31, 2004. The decrease in net interest income in the first quarter of 2005 was
due primarily to a decrease of 58 basis points in the net interest margin to
2.94%, partially offset by higher average interest-earning assets and higher
average non-interest bearing deposit balances. The net interest margin decreased
as a result of an increase in short-term interest rates, the primary driver of
funding costs, and flattening of the yield curve, limiting the increase in
yields on assets. The net interest margin also declined as a result of an
increase in shorter-reset, lower yielding investment securities to neutralize
the interest rate risk associated with the growth in money market deposit
balances and nine-month term deposits, as well as the consumer preference for
intermediate and longer-term loan rates. A lower loan-to-average assets ratio of
47% in the first quarter of 2005 as compared to 50% in the first quarter of
2004, which was due to a higher rate of increase in average investment
securities balances as compared to the increase in average loan balances, also
reduced the margin.
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 three months ended March 31, 2005 and 2004. The average
balances are derived from average daily balances.
Three Months Ended March 31,
-------------------------------------------------------------------------------------------
2005 2004
----------------------------------------- -------------------------------------------
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 $ 15 $ 3,151 1.90% $ 34 $ 2,499 5.44%
Investment securities(1):
Taxable 1,523 170,784 3.57% 1,349 138,646 3.89%
Tax-exempt 187 16,837 4.44% 192 16,959 4.53%
Loans, net 2,721 170,455 6.39% 2,523 157,311 6.42%
----------------------- -------------------------
Total interest-earning assets 4,446 361,227 4.92% 4,098 315,415 5.20%
--------- ----------
Noninterest-earning assets 24,167 18,935
------------ -----------
Total assets 385,394 334,350
============ ===========
14
Three Months Ended March 31,
-------------------------------------------------------------------------------------------
2005 2004
----------------------------------------- -------------------------------------------
Interest Interest
Income/ Average Average Rate Income/ Average Average Rate
Expense Balance Earned/Paid Expense Balance Earned/Paid
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings 45 35,244 0.51% 39 31,228 0.50%
NOW 16 34,244 0.19% 13 34,070 0.15%
MMDA 324 66,217 1.96% 158 42,652 1.48%
CD's 378 63,305 2.39% 308 50,538 2.44%
----------------------- -------------------------
Total interest-bearing deposits 763 199,010 1.53% 518 158,488 1.31%
Federal Home Loan Bank advances 840 105,019 3.20% 609 103,169 2.36%
Subordinated debentures 114 7,000 6.51% 144 9,000 6.40%
Other borrowed funds 75 11,327 2.65% 54 9,723 2.22%
----------------------- -------------------------
Total interest-bearing 1,792 322,356 2.22% 1,325 280,380 1.89%
liabilities --------- ----------
Noninterest-bearing deposits 41,833 37,659
Other noninterest-bearing
liabilities 1,475 679
------------ -----------
Total liabilities 365,664 318,718
Total stockholders' equity 19,730 15,632
------------ -----------
Total liabilities and stockholders'
equity $385,394 $334,350
============ ===========
Net interest income $2,654 $2,773
========= ==========
Interest rate spread 2.70% 3.31%
=========== ==========
Net interest margin 2.94% 3.52%
=========== ==========
(1) - Excludes investment securities traded and not settled.
Non-interest Income
Total non-interest income increased $177,000, or 17.5%, to $1,190,000 for
the three months ended March 31, 2005 as compared to the three months ended
March 31, 2004 primarily due to the fee revenue from the de Burlo Group, the
investment management company acquired on December 31, 2004. Fee income from the
investment management company was $390,000 in the first quarter of 2005. Credit
card fees increased $23,000, or 16.9%, to $159,000 for the three months ended
March 31, 2005 due to transaction volume. Trust fees increased $22,000, or
24.2%, to $113,000 for the three months ended March 31, 2005 due to an increase
in the market value of assets under management. These increases were partially
offset by a decrease in gains on the sale of securities of $341,000, or 88.3%,
to $45,000 for the three months ended March 31, 2005. The existence or level of
gains on the sale of securities cannot be assured or predicted as the amounts
derived from such activity are a function of many factors, including, but not
limited to, the duration, mix, and other attributes of securities owned and the
level and slope of the yield curve, product spreads and other market forces that
change on a daily basis.
Non-interest Expense
Total operating expenses increased $368,000, or 11.1%, to $3.7 million for
the three months ended March 31, 2005. Salaries and employee benefits increased
$206,000, or 11%, to $2.1 million due primarily to an increase in full-time
equivalent employees to 133 as of March 31, 2005 from 118 at March 31, 2004 and
the beginning of salary and benefit expenses from the investment management
company, partially offset by the bonus paid to the President of $159,000 in
January 2004. 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 staff infrastructure at
15
the main office to support continued growth and expansion. Occupancy and
equipment expenses increased $123,000, or 27.6%, to $569,000 for the three
months ended March 31, 2005 primarily due to three months of rent expense in
2005 associated with office space acquired in 2004 for two new branches, the
loan production office, and the investment management company, in addition to an
increase in utilities and other operating expenses as a result of opening these
new locations. Professional fees decreased $70,000, or 24%, to $217,000 for the
three months ended March 31, 2005 due primarily to a decrease in legal expenses
associated with several matters in 2004 related to growth plans and expansion
initiatives. Other general and administrative expenses increased $108,000, or
35.6%, to $411,000 for the three months ended March 31, 2005 due primarily to an
increase in telephone, office supplies and other expenses associated with
operating new locations, in addition to core deposit intangible amortization of
$30,000 as compared to zero in 2004. Data processing expenses increased $38,000,
or 16.2%, to $272,000 for the three months ended March 31, 2005 due primarily to
investment in new and enhanced technologies to support expansion.
Income Taxes
The provision (benefit) for income taxes decreased $143,000, or 115.3%, to
a benefit of $19,000 for the three months ended March 31, 2005 primarily as a
result of lower pre-tax income for the three months ended March 31, 2005 as
compared to the three months ended March 31, 2004, a higher percentage of
pre-tax income at the security corporations, and a higher percentage of federal
tax exempt municipal bond interest income. The effective tax rates were lower
than the statutory federal and state tax rates for both periods due to the
Company's three security corporations, which are taxed at a lower state tax
rate.
Asset/Liability Management
A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets generally have longer terms to maturity than its primary
source of funds, i.e., deposit liabilities, increases in general interest rates
will generally result in an increase in the Bank's cost of funds before the
yield on its asset portfolio adjusts upward. A continual trade-off, which is
managed and monitored on an ongoing basis, exists between exposure to interest
rate risk and current income. In general, during periods with a normalized yield
curve, a wider mismatch between the re-pricing periods of interest rate
sensitive assets and liabilities can produce higher current net interest income.
The management of interest rate risk considers several factors, including, but
not limited to, the nature and extent of actual and anticipated embedded options
and other attributes of the balance sheet, the perceived direction of market
interest rates, and the risk appetite of management and the Asset/Liability
Management Committee ("ALCO"). Members of the ALCO consist of the chief
executive officer, the chief financial officer, the senior loan officer, one
board member, and others. The Committee discusses the asset/liability mix on the
balance sheet and reviews exposures to changes in interest rates.
Certain strategies have continued to be implemented in early 2005 to
reduce the current level of interest rate risk given the prospects for an
improving economy and an increase in market interest rates. These strategies
currently include, but are not limited to, fixing the cost of certain liability
sources, adding interest rate sensitivity to the investment securities
portfolio, and shortening the duration of certain newly originated commercial
loan products. On an ongoing basis, management analyzes the pros and cons of
positioning with a narrower or wider interest rate mismatch and whether an asset
sensitive or liability sensitive balance sheet is targeted and to what degree.
This analysis considers, but is not limited to, originating adjustable and fixed
rate mortgage loans, managing the cost and structure of deposits, analyzing
actual and projected asset cash flow, considering the trade-offs of short versus
long-term borrowings, and reviewing the pros and cons of certain investment
security sectors.
Quarterly, ALCO modeling is performed with the assistance of an outside
advisor which projects the Bank's financial performance over certain periods
under certain interest rate environments. The results of the ALCO process are
reported and discussed at the ALCO meeting on at least a quarterly basis.
16
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales of securities, maturities and early
calls of securities, and funds provided from operations. While scheduled
repayments of loans and maturities of investment securities are predictable
sources of funds, deposit flows and the general level of interest rates,
economic conditions, and competition largely influences prepayments on loans and
investment securities. The Bank primarily uses its liquidity resources to fund
existing and future loan commitments, to fund net deposit outflows, to invest in
other interest-earning assets, to maintain liquidity, and to pay operating
expenses.
From time to time, the Bank utilizes advances from the Federal Home Loan
Bank of Boston (the "FHLB") primarily in connection with its management of the
interest rate sensitivity of its assets and liabilities, as well as to
selectively capitalize on leverage opportunities. Total advances outstanding at
March 31, 2005 amounted to $114.2 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 property and federal agency obligations. As of
March 31, 2005, the Bank's total borrowing capacity through the FHLB was $142.4
million. The Bank has additional capacity to borrow federal funds from other
banks and through such instruments as repurchase agreements utilizing federal
agency obligations and mortgage-backed securities as collateral, as well as
brokered deposits.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term investments, U.S. Government and federal agency
obligations, mortgage-backed securities, and other debt securities. The level of
these assets is dependent upon the Bank's operating, lending, and financing
activities during any given period. Certificates of deposit, which are scheduled
to mature in one year or less, totaled $40 million at March 31, 2005. 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 $5 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 March 31, 2005, the Company and the Bank continued to exceed all
regulatory capital requirements applicable to them. The table below presents the
capital ratios at March 31, 2005, 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 $24,951 10.87% $18,367 8.00%
Tier 1 capital to risk-weighted assets 23,590 10.27% 9,183 4.00%
Tier 1 capital to average assets 23,590 6.16% 15,311 4.00%
Company:
Total capital to risk-weighted assets $25,939 11.27% $18,413 8.00%
Tier 1 capital to risk-weighted assets 24,420 10.61% 9,206 4.00%
Tier 1 capital to average assets 24,420 6.37% 15,334 4.00%
17
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business primarily associated with meeting the
financing needs of our customers. We may also enter into off-balance sheet
strategies to manage the interest rate risk profile of the Company. Loan
commitments and all other off-balance sheet instruments involve, to varying
degrees, elements of credit, interest rate, and liquidity risk.
Lending commitments include commitments to originate loans and to fund
unused lines of credit. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. At March 31, 2005, the Bank had $22.6 million of outstanding
commitments to originate loans and $32.6 million of unused lines of credit. The
Bank anticipates that it will have sufficient funds available to meet these
commitments, though some commitments may expire and many unused lines are not
drawn upon.
Business Risks
Our expansion into the investment management business poses several risks
Our financial condition may be negatively impacted by a write-down of
goodwill. A substantial portion of the purchase price of the investment
management company is allocated to goodwill. If we determine that goodwill is
impaired at a future date, we would have to write-down its value.
We may not be able to retain existing investment management clients, nor
attract new ones. Lack of new clients or the loss of existing clients could
reduce the fee income generated from this business. In addition, the business
acquired generates a majority of its revenue from a handful of clients, thus the
loss of one or two large clients could materially reduce fee income.
We may not be able to indefinitely retain existing investment management
personnel. Loss of key personnel could negatively impact customer retention or
growth due to the high orientation to customer knowledge and customer service in
this industry.
Our current loan quality and historical loan growth may not continue,
particularly in new markets or with the loans acquired at the new Boston branch
While the Bank has shown a very low level of loan charge-offs and
non-accrual loans in recent years, and expects to continue to do so, there can
be no assurance that these favorable results will continue in the future. Credit
quality standards may change, substantial growth may weaken underwriting or
other controls, or new customers or relationships may not perform as expected.
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.
There can be no assurance that loan customers associated with the loan
balances acquired with the Boston office will choose to remain our customers
after the transaction closes. Competition for loans is intense and a majority of
the loans could be refinanced elsewhere without financial hardship to the
borrower. Despite our due diligence on the portfolio, there is a risk that loan
quality may deteriorate as these loans are to customers we do not know, nor did
we perform the original underwriting.
As the Company continues to target expansion of its geographic loan
footprint and the hiring of new commercial lenders, the maintenance of high
credit quality and continued growth in loan balances is not assured.
18
The opening of a loan production office in Portsmouth, New Hampshire
offers no assurances that sufficient loan balances of acceptable quality can be
generated to offset the current and future operating expenses of the operation.
The origination of high quality loans, which the Bank is accustomed to, also
cannot be assured.
Our strategy involves significant growth and earnings may not be in accordance
with expectations
We have experienced significant growth in assets, acquired an investment
management business, purchased two new branches in two non-contiguous markets,
and opened a loan production office in a non-contiguous market. Revenue growth
may not meet our expectations in one or more of these areas, while expenses have
already been incurred and expense commitments for the future have been made.
Entering into new markets and new lines of businesses with limited or no
experience or pre-existing business presence poses an inherent risk.
Due to competitive conditions, market conditions, and other factors,
growth in deposit balances, loan balances, or investment management revenues may
not be in accordance with expectations and thus revenue may not support future
growth or an increase in shareholder value. Operating results are also
significantly impacted by factors beyond management's control such as interest
rate conditions and 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 as the ability and willingness of borrowers to fulfill their debt
obligations during various economic cycles.
If we are unable to increase revenue to offset our committed increase in
expenses, our earnings may not improve. If our earnings do not improve, our
access to capital may be impacted or regulatory or governmental scrutiny may
increase.
The Company also may not be successful in retaining or attracting key
management personnel. Loss of key management personnel may result in the delay
or cancellation of plans or strategies under consideration, increased expenses,
operational inefficiencies, or lost revenue.
We may not be successful in leasing the commercial space acquired in
Boston on the terms or lease-up ratio we anticipate. Lower than anticipated
rental income from this location may reduce our net income.
We may not be able to attract new deposit customers in new markets or retain
existing deposit customers
We have opened new branches in several non-contiguous markets that are
presently served by other financial institutions. We may not be successful in
generating revenue by raising deposits and originating loans to offset the
initial and ongoing expense of operating these new locations due to lack of
recognition of our name, loyalty to existing banks, or other competitive or
market factors.
The Company anticipates, although cannot assure, that a significant
portion of new customers obtained from its premium-rate term deposit specials
will remain customers for the indefinite future and avail themselves of
additional bank products and services. Our business may be negatively impacted
if we are unable to retain new customers with market-priced deposit products or
cross-sell loan and investment products.
Management anticipates, but cannot assure, that branch expansion and
continued focus on growth in core deposit categories will generate sufficient
growth in targeted deposit categories and continued growth in deposit fee
income.
The Company 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. The inability to grow deposits ultimately limits asset
growth. An inability to grow deposits sufficient to support loan-funding
requirements would result in an increase in Bancorp's already high level of
reliance on generally higher cost wholesale funding.
19
Our capital and expense budgets may limit our ability to compete with larger
financial institutions
We have completed, and will continue to consider, the acquisition of new
businesses or the establishment of new products. Additional such plans may
require an additional issuance of common stock, which may be dilutive to
existing shareholders. These strategies may also significantly increase
operating expenses, which may reduce our net income if sufficient revenue is not
generated.
Our current and future earnings, in addition to our capital, may not allow
us to compete with other institutions with regards to pricing deposits, pricing
loans, investing in new technologies, or investing in new initiatives. Our
growth and future earnings may be limited if we are unable to keep pace with
rapid technological innovation or if we are unable to compete with marketing and
promotional expense budgets of our larger competitors.
Banking is a highly regulated industry and restrictions, limitations, or new
laws could impact our business
Several non-banking competitors are not subject to strict lending and
deposit disclosure laws that impact national banks. Our commitment to compliance
with laws and regulations and the cost to do so could impact the decision of
customers to seek our banking services or our ability to devote sufficient
attention to business development as opposed to consumer compliance.
The Company is subject to review and oversight of several governmental
regulatory agencies. Such agencies impose certain guidelines and restrictions,
such as capital requirement and lending limits that may impact our ability to
compete with other financial service providers who may not be subject to these
restrictions.
New laws or changes in existing laws may limit the ability to expand or
enter into new businesses that otherwise may be available to other financial
service providers.
The interest rate environment may reduce our earnings or liquidity or the
Company may not respond sufficiently to changes in interest rates or other
factors impacting the business
Changes in the interest rate environment may have a significant impact on
the future earnings and liquidity of the Company. If interest rates continue to
rise or the yield curve continues to flatten, net interest income may narrow
further. Liquidity could be reduced in the future if customers choose other
investment options in an improving economy. Liquidity could also be negatively
impacted if current strategies to increase deposit balances in several new
locations do not occur as planned due to competitive or other factors. Although
we may be successful raising deposits in certain markets, we may have to pay
higher than planned rates on these deposits to do so.
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 higher rates paid on deposits without an equal
or greater increase on yield on new loans.
The Company assesses its interest rate risk and liquidity needs
frequently, however, there is no assurance that its assessments result in
appropriate actions on a timely basis or that interest rates do not change
rapidly without corrective actions.
The Company maintains its entire portfolio of long-term fixed rate loans
on its books and is thus susceptible to interest rate risk in the event of a
higher rate environment to the extent the prepayment activity on these loans
falls, while the cost of funds increases. To the extent longer-term fixed rate
20
loans are being held on the books at historic lows in a protracted low interest
rate environment, it is important that growth in longer-term checking and
savings balances occurs in several markets.
The Company has had some success in increasing the level of adjustable
rate loans and loans with shorter amortization periods or maturity dates, but
has had little success in extending the terms of its deposits. These trends may
reduce net interest income in the future.
Given the strong emphasis on generating new loans, the risk exists that
loan demand could place a strain on liquidity. The Bank may have to slow its
pace of new loan approvals and thus may generate less interest income.
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
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 requested additional time
to respond to the notice. The Bank has an accrual on its books of which
potential expenses are not anticipated to exceed.
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.
The Bank has reiterated its position most recently by letter to LBJ Properties,
LLC dated January 18, 2005. A dispute exists between the Bank and LBJ
Properties, LLC over whether the Bank had the right to terminate the lease. No
litigation has been filed and settlement discussions are in progress. A
potential settlement amount is not expected to exceed the accrual on the
Company's books.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
On April 13, 2005, the Company held its Annual Meeting of Stockholders.
The following actions were taken at the Annual Meeting:
1. The following twelve nominees were elected to serve as directors for a
one-year term and until their successors are duly elected and qualified by the
following votes:
Name For Withheld
- ------------------------------ --------------- -------------
Robert R. Borden, III 1,602,681 100
Timothy R. Collins 1,602,681 100
Franz Colloredo-Mansfeld 1,602,681 100
John T. Coughlin 1,602,681 100
Craig H. Deery 1,602,681 100
Edward D. Dick 1,602,681 100
Stephanie R. Gaskins 1,602,681 100
Donald P. Gill 1,602,681 100
H.A. Patrician, Jr. 1,602,681 100
Neil St. John Raymond 1,602,681 100
Neil St. John Raymond, Jr. 1,602,681 100
William J. Tinti. 1,602,681 100
[There were no abstention or broker non-votes with respect to this action.]
22
2. A proposal to ratify the selection of Wolf & Company, P.C. as the
Company's independent registered public accounting firm for the fiscal year
ending December 31, 2005 was approved as follows: 1,601,121 votes for, and 100
votes against. [There were 1,560 abstentions and no broker non-votes with
respect to this action.]
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
(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
On January 6, 2005, the Company filed a report on Form 8-K regarding the
press release issued by the Company which stated that the Company completed its
acquisition of The de Burlo Group, Inc., an investment advisory firm.
On February 22, 2005, the Company filed a report on Form 8-K regarding the
press release issued by the Company which stated that the Bank had signed an
agreement to acquire the Boston, Massachusetts, branch of Atlantic Bank of New
York.
On February 28, 2005, the Company filed a report on Form 8-K regarding the
Bank's entry into a series of agreements with Atlantic Bank of New York to
purchase the Boston branch of Atlantic Bank of New York.
On March 1, 2005, the Company filed a report on Form 8-K regarding the
press release issued by the Company, which stated the Company's financial
results for the quarter and year ended December 31, 2004.
On March 16, 2005, the Company filed a report on Form 8-K regarding the
Bank's entry into a Non-Competition, Confidentiality and Severance Agreement
with Russell G. Cole, the President of the Northern Division of the Bank, and
Ipswich Capital Investment Corp.'s entry into an Employment Agreement with Peter
M. Whitman, Jr., President of Ipswich Capital Investment Corp.
23
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: May 12, 2005 By: /s/ Donald P. Gill
-----------------------------------------------
Donald P. Gill
President and Chief Executive Officer
Date: May 12, 2005 By: /s/ Michael J. Wolnik
-----------------------------------------------
Michael J. Wolnik
Senior Vice President, Chief Financial Officer,
and Treasurer
24