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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, 2006
|_| 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)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES |_| NO |X|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: At April 30, 2006, there were
2,240,120 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
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2006
and December 31, 2005 3
Consolidated Statements of Operations for the three
months ended March 31, 2006 and 2005 4
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 2006 and 2005 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 2006 and 2005 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 8
Item 3. Controls and Procedures 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 23
2
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share data)
March 31, December 31,
2006 2005
--------- ---------
ASSETS
Cash and due from banks $ 12,687 $ 11,179
Federal funds sold 1,045 82
--------- ---------
Total cash and cash equivalents 13,732 11,261
--------- ---------
Certificates of deposit 3,316 3,295
Securities available for sale, at fair value 87,086 88,375
Securities held to maturity, at amortized cost 27,622 28,768
Federal Home Loan Bank stock, at cost 6,647 6,647
Federal Reserve Bank stock, at cost 774 774
Loans, net of allowance for loan losses of $1,814 and $1,739 237,728 234,613
Banking premises and equipment, net 4,925 4,758
Real estate held for sale 4,486 4,486
Other assets 11,543 11,427
--------- ---------
Total assets $ 397,859 $ 394,404
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 253,136 $ 258,860
Short-term borrowings 81,532 71,262
Long-term borrowings 30,761 31,087
Subordinated debentures 13,000 13,000
Other liabilities 1,122 1,235
--------- ---------
Total liabilities 379,551 375,444
--------- ---------
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 7,843 8,054
Accumulated other comprehensive loss (1,600) (1,159)
Treasury stock, at cost (20,490 shares) (111) (111)
--------- ---------
Total stockholders' equity 18,308 18,960
--------- ---------
Total liabilities and stockholders' equity $ 397,859 $ 394,404
========= =========
See accompanying notes to consolidated financial statements.
3
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)
For the Three
Months Ended March 31,
------------------------
2006 2005
---------- ----------
Interest and dividend income:
Interest and fees on loans $ 4,035 $ 2,721
Interest on debt securities:
Taxable 1,061 1,300
Tax-exempt 128 187
Dividends on equity securities 99 193
Other interest 47 45
---------- ----------
Total interest and dividend income 5,370 4,446
---------- ----------
Interest expense:
Interest on deposits 1,162 763
Interest on borrowed funds 1,234 915
Interest on subordinated debentures 224 114
---------- ----------
Total interest expense 2,620 1,792
---------- ----------
Net interest income 2,750 2,654
Provision for loan losses -- 40
---------- ----------
Net interest income, after provision
for loan losses 2,750 2,614
Non-interest income:
Investment advisory fees 444 390
Service charges on deposit accounts 284 282
Credit card fees 164 159
Trust fees 103 113
Rental income 90 --
Non-deposit investment fees 75 107
Gain (loss) on sales and calls of
securities, net (60) 45
Miscellaneous 213 94
---------- ----------
Total other income 1,313 1,190
---------- ----------
Non-interest expenses:
Salaries and employee benefits 2,237 2,081
Occupancy and equipment 710 569
Professional fees 491 217
Data processing 181 179
Credit card interchange 94 96
ATM processing 104 93
Advertising and marketing 87 60
Other general and administrative 453 382
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Total operating expenses 4,357 3,677
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Income (loss) before income taxes (294) 127
Income tax benefit (111) (19)
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Net income (loss) $ (183) $ 146
========== ==========
Weighted average common shares outstanding:
Basic 2,220 2,220
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Diluted 2,220 2,220
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Earnings (loss) per share:
Basic $ (0.08) $ 0.07
========== ==========
Diluted $ (0.08) $ 0.07
========== ==========
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, 2006 AND 2005
(In thousands, except per share data)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Loss Stock Total
----- ------- -------- ---- ----- -----
Balance at December 31, 2004 $2,240 $9,936 $8,210 $(457) $(111) $19,818
Comprehensive income:
Net income 146 146
Unrealized loss on
securities available for
sale, net of reclassification
adjustment and tax effect (635) (635)
-------
Total comprehensive loss (489)
Cash dividends declared ($.0125
per share) (28) (28)
------ ------ ------ ------- ----- -------
Balance at March 31, 2005 $2,240 $9,936 $8,328 $(1,092) $(111) $19,301
====== ====== ====== ======= ===== =======
Balance at December 31, 2005 $2,240 $9,936 $8,054 $(1,159) $(111) $18,960
Comprehensive loss:
Net loss (183) (183)
Unrealized loss on
securities available for
sale, net of reclassification
adjustment and tax effect (441) (441)
-------
Total comprehensive loss (624)
Cash dividends declared ($.0125
per share) (28) (28)
------ ------ ------ ------- ----- -------
Balance at March 31, 2006 $2,240 $9,936 $7,843 $(1,600) $(111) $18,308
====== ====== ====== ======= ===== =======
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,
2006 2005
-------- --------
Cash flows from operating activities:
Net income (loss) $ (183) $ 146
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses -- 40
Loss (gain) on sales and calls of securities, net
Depreciation and amortization of banking premises
and equipment 176 187
Net amortization of securities, including 38 91
certificate of deposit
Derivative fair value adjustment 133 (35)
Amortization of core deposit intangible 61 30
Net change in other assets and other liabilities (191) (371)
-------- --------
Net cash provided by operating activities 94 43
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (2,887) (28,523)
Sales -- 27,597
Maturities, calls and paydowns 3,464 7,764
Activity in held-to-maturity securities:
Purchases -- --
Sales -- --
Maturities, calls and paydowns 1,066 348
Purchase of Federal Home Loan Bank stock -- (422)
Loan originations, net of repayments (3,115) (3,749)
Deposit on branch acquisition -- (500)
Additions to premises and equipment, net (343) (5)
-------- --------
Net cash provided (used) by investing activities (1,815) 2,510
-------- --------
Cash flows from financing activities:
Net decrease in deposits (5,724) (22,419)
Net increase in short-term borrowings 10,270 22,771
Repayment of long-term borrowings (326) (1,290)
Cash dividends paid (28) (28)
-------- --------
Net cash provided (used) by financing activities 4,192 (966)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,471 (1,587)
Cash and cash equivalents at beginning of period 11,261 9,076
-------- --------
Cash and cash equivalents at end of period $ 13,732 $ 10,663
======== ========
Supplemental disclosures:
Interest paid $ 2,620 $ 1,792
Income taxes paid, net 27 73
Due to broker -- 1,499
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, 2005.
(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. For the three months ended March 31, 2006 and March 31, 2005,
the Company had no common stock equivalents. Accordingly, results of the basic
and dilutive earnings per share computations are the same.
(3) Commitments
At March 31, 2006, the Bank had outstanding commitments to originate loans
of $6.0 million. Unused lines of credit and open commitments available to
customers at March 31, 2006 amounted to $50.9 million, of which $18.3 million
related to construction loans, $11.5 million related to home equity lines of
credit, $5.4 million related to credit card loans and $15.7 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 quarters
ended March 31, 2006 and March 31, 2005 is below.
Investment Consolidated
Banking Advisory Totals
------- -------- ------
(Dollars in thousands)
March 31, 2006:
Net interest and dividend income $ 2,750 -- $ 2,750
Other revenue: external customers 869 $ 444 1,313
Net income (loss) (278) 95 (183)
Assets $ 395,046 $ 2,813 $ 397,859
March 31, 2005:
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 the Bank's continued ability to comply with existing and
future 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 acquisitions of the Boston and Cambridge branches 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, and a full
service branch in the same community in April 2006.
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 Company is reporting a net loss of $183,000 for the quarter ended
March 31, 2006 as compared to net income of $146,000 in the same period of 2005.
The Company's loss for the three months ended March 31, 2006 reflects continued
pressure on the Company's net interest spread and increased expenses, primarily
associated with the Company's growth initiatives. With a zero basis point spread
recently between the yields on two- and ten-year treasury bonds, the narrowest
spread in five years, net interest income at the Company, and the banking
industry in general, continues to be under pressure. Growth of the loan
portfolio allowed the Company to maintain its net interest income level for the
first quarter of 2006 as compared to the same quarter of 2005. Loan growth was
attained through the purchase of the new Boston branch in June 2005. However,
salaries and occupancy costs incurred to operate the new branch have had a
negative impact on non-interest expenses. In addition, increased professional
fees had a negative impact on non-interest expenses. It is expected that net
interest income will continue to be under pressure for the remainder of the
year. Management continues to look for strategic steps to improve profitability
by increasing earnings and decreasing expenses.
8
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 and core deposit intangibles. 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 economic environment that could result in changes
to the total amount of the allowance for loan losses considered necessary.
Management considers impairment of investment securities to be a critical
accounting policy because of the impairments' possible materiality to the
financial statements and the judgments involved. Management considers impairment
of intangible assets to be a critical accounting policy because of their
materiality to the balance sheet item and because the estimation of fair values
involves a high degree of judgment and subjectivity in the assumptions utilized.
Major Growth Initiatives
In June 2005, the Company purchased 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 involved the purchase of approximately
$43 million in loans and approximately $21 million in deposits, at an overall
purchase price of $29 million.
In April 2006, the company opened a full service branch in Portsmouth, New
Hampshire. The branch replaced a retail branch in Newington, New Hampshire
(closed in March 2006) and a loan production office in Portsmouth. It is
expected that the new location in downtown Portsmouth will better be able to
meet the financial needs of the Company's New Hampshire and southern Maine
customers.
Comparison of Financial Condition at March 31, 2006 versus December 31, 2005
The structure of the consolidated balance sheet has not changed
significantly during the three months ended March 31, 2006. Total assets were
$397.9 million at March 31, 2006 as compared to $394.4 million as of December
31, 2005. The increase of assets is primarily due to the growth in net loan
balances in the first quarter of 2006. Loan growth and deposit outflows were
primarily funded by a higher level of short-term Federal Home Loan Bank (FHLB)
advances.
Total net loan balances were $237.7 million as of March 31, 2006, an
increase of $3.1 million, or 1%, from $234.6 million as of December 31, 2005.
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 construction loans to
$21.8 million, an increase of $2.9 million, or 15%, from $18.9 million as of
December 31, 2005. Commercial real estate loans increased $1.7 million, or 2%,
to $110.1 million during the first quarter of 2006. The Company continues to
develop business relationships with borrowers and depositors. Intense
competition in our marketplace makes it difficult to quickly build these
relationships and still maintain the Company's traditional credit and pricing
standards.
The residential loan portfolio grew to $55.2 million from $53.7 million at
December 31, 2005. The increase occurred even though the residential real estate
market has slowed significantly due to modestly higher long-term interest rates.
Long-term fixed rate loans have not been priced aggressively at this point in
the economic cycle because the Company does not sell fixed rate residential
loans into the secondary market. Credit conditions have continued to be
favorable, although new and existing home sales prices and activity has
moderated during the past year.
9
The following table presents the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
March 31, 2006 December 31, 2005
-------------- -----------------
(Dollars in thousands)
Real estate mortgage loans:
Commercial $ 110,073 $ 108,404
Residential 55,350 53,690
Construction 21,846 18,918
Equity lines of credit 9,073 10,243
Commercial loans 41,468 43,376
Consumer loans 1,841 1,770
--------- ---------
Total loans 239,651 236,401
Net deferred origination fees (109) (49)
Allowance for loan losses (1,814) (1,739)
--------- ---------
Loans, net $ 237,728 $ 234,613
========= =========
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, 2006 December 31, 2005
(Dollars in thousands)
Non-accrual loans $ -- $ --
Troubled debt restructurings -- --
Loans past due 90 days or more and still accruing 9 --
Non-accrual loans to total loans -- --
Non-performing assets to total assets -- --
Allowance for loan losses as a percentage of
total loans 0.76% 0.74%
For the three months ended March 31, 2006, the Company recorded a
provision for loan losses of $0, charge-offs of $2,000 and recoveries of
$77,000. The allowance for loan losses balance was $1,814,000 at March 31, 2006,
an increase of $75,000 since December 31, 2005. 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 in 2006 due to the
anticipation of continued loan growth.
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.
The Company continues to expand its lending into new geographic areas
including Greater Boston, MA and Greater Portsmouth, NH. While the Company
continues to follow its historical underwriting practices, a higher level of
risk is associated with lending in new areas. It is possible that the Company
may have to increase the level of the allowance for loan losses as a percentage
of total loans in order to adequately reflect the additional risk assumed.
10
Investment Securities
Total investment securities balances were $122.1 million as of March 31,
2006, a decrease of $2.4 million, or 2%, from $124.6 million as of December 31,
2005. Investment security calls and principal pay-downs on investment securities
of $4.5 million in the first quarter were partially replaced by investment
security purchases of $2.9 million, while the remaining proceeds from investment
securities sales and calls were utilized to fund loan demand. It is expected
that the Company's strategy of using principal paydowns to fund loan demand will
continue for the remainder of the year. This strategy is intended to minimize
the need to sell securities by using investment cash flows to meet anticipated
loan 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.
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, 2006 December 31, 2005
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(Dollars in thousands)
Securities available for sale
Mortgage-backed securities $ 63,970 $ 61,983 $ 64,571 $ 63,257
U.S. Government agency obligations 23,283 22,934 23,287 22,940
Corporate bonds 1,823 1,703 1,816 1,713
Municipal bonds 350 345 369 347
-------- -------- -------- --------
Total debt securities 89,426 86,965 90,043 88,257
Marketable equity securities 101 121 101 118
Total securities available for sale $ 89,527 $ 87,086 $ 90,144 $ 88,375
======== ======== ======== ========
Securities held to maturity
U.S. Government agency obligations $ 3,000 $ 2,816 $ 3,000 $ 2,853
Municipal bonds 14,302 14,019 15,128 14,904
Mortgage-backed securities 10,320 9,774 10,641 10,257
-------- -------- -------- --------
Total securities held to maturity $ 27,622 $ 26,609 $ 28,769 $ 28,014
======== ======== ======== ========
Deposits
Deposit balances totaled $253.1 million as of March 31, 2006, a decrease
of $5.7 million, or 2%, from $258.9 million as of December 31, 2005.
Approximately half of the decrease is due to the maturity of $3 million of
brokered CD's; the company did not attempt to immediately replace these
deposits. The Bank introduced a premium rate money market account in January
2006. Net growth of $13.2 million in money market accounts offset decreases in
all other categories of deposits. Term deposit balances decreased $6.4 million,
or 8%, to $76.1 million, as of March 31, 2006 and demand deposit accounts
decreased to $44.6 million, at March 31, 2006, from $50.7 million at December
31, 2005. Net deposit outflows were primarily funded by short-term borrowings
from the FHLB. Deposit-raising strategies in 2006 will include promotional
programs, growth of market-priced savings, money market, and checking balances
continues to be targeted. In April 2006, the Bank was successful in raising over
$50 million of new certificates of deposit through a special CD promotion. The
Company is also hopeful that additional commercial deposits will be generated
from its increased lending in new geographic areas.
11
The following table summarizes the composition of the Bank's deposit
balances at the dates indicated.
March 31, December 31,
2006 2005
--------- ------------
(Dollars in thousands)
Demand $ 44,601 $ 50,734
NOW 35,040 39,743
Regular savings 34,190 35,875
Money market deposits 63,225 50,058
Term certificates 76,080 82,450
-------- --------
$253,136 $258,860
======== ========
Borrowings
Total borrowings were $125.3 million as of March 31, 2006, an increase of
$9.9 million, or 9%, from $115.3 million as of December 31, 2005. Borrowings
were higher than year-end due to the aforementioned net deposit outflows. The
growth in borrowings has occurred in short-term maturities.
Stockholder's Equity
Total stockholder's equity decreased from $19.0 million at December 31,
2005 to $18.3 million as of March 31, 2006 primarily due to an increase in the
accumulated other comprehensive loss of $441,000 associated with an unrealized
loss, net of tax, on available-for-sale securities, and a net loss of $183,000
for the three months ended March 31, 2006.
Comparison of Operating Results for the Three Months Ended March 31, 2006 and
2005
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 FHLB 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. 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.
The net loss for the three months ended March 31, 2006 was $183,000
compared with net income of $146,000 for the three months ended March 31, 2005,
a decrease of $329,000. For the three months ended March 31, 2006, net interest
income increased $96,000, non-interest income increased $123,000, and operating
expenses increased by $680,000.
Interest and Dividend Income
Total interest and dividend income for the three months ended March 31,
2006 was $5.4 million, which was $924,000 higher than the three months ended
March 31, 2005. This increase was primarily due to the change in mix of earning
assets. A $65.0 million decrease of average investment securities outstanding
during the first quarter of 2006, as compared to the same quarter of 2005,
funded a $64.8 million increase in average loans outstanding for the same
comparable periods. The increase in average loans outstanding was partially
accomplished through the Bank's purchase, in June 2005, of the Boston branch of
the Atlantic Bank of New York. The average yield on loans during the first
quarter of 2006 was 6.96% as compared to the 4.26% average yield earned on the
investment portfolio during the same period.
12
Interest Expense
Interest expense was $2.6 million for the quarter ended March 31, 2006;
this is an $828,000 increase over the same quarter of 2005. Much of the increase
is attributable to higher short-term market rates that have continued to
increase and significantly impact the Bank's funding of liabilities with short
maturities.
Interest expense on interest-bearing deposits for the three months ended
March 31, 2006 increased by $399,000 to $1.2 million as compared to the three
months ended March 31, 2005. This increase was primarily due to an increase in
the average rate paid for interest-bearing liabilities. The average rate paid on
deposits increased from 1.53% in the first quarter of 2005 to 2.27% in the first
quarter of 2006. The Bank's average interest-bearing deposit balances for the
three months ended March 31, 2006 totaled $207.7 million, an $8.6 million
increase as compared to the three months ended March 31, 2005. A shift of
average deposit balances from lower costing money market accounts to higher
costing certificates of deposit also contributed to the increase in average rate
paid for interest-bearing deposits.
Interest expense on borrowed funds for the quarter-ended March 31, 2006
increased by $429,000 to $1.5 million as compared to the quarter-ended March 31,
2005. The increase was primarily due to an increase in the cost of FHLB
advances. Although the average balance of FHLB advances outstanding decreased by
$9.8 million to $95.2 million for the quarter ended March 31, 2006, the average
rate paid for FHLB advances increased to 4.64% for the quarter ended March 31,
2006 from 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 Federal Reserve Bank's Federal Open Market Committee. Interest expense on
subordinated debentures for the quarter-ended March 31, 2006 increased by
$110,000 due to the issuance of $6 million of debt in June 2005.
Net Interest Income
Net interest income for the three months ended March 31, 2006 increased by
$96,000 to $2.8 million as compared to $2.7 million for the three months ended
March 31, 2005. The increase occurred because of the Company's plan to fund an
increase of average loans outstanding with proceeds from the reduction of the
investment portfolio. The resulting shift from lower yield investments to higher
yielding loans resulted in an increase of interest income that was sufficient to
offset the continually escalating costs of deposits and borrowings.
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, 2006 and March 31, 2005. The
average balances are derived from average daily balances.
13
Three Months Ended March 31,
------------------------------------------------------------------------------------------
2006 2005
------------------------------------------- -------------------------------------------
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 $ 47 $ 3,678 5.18% $ 15 $ 3,151 1.90%
Investment securities (1):
Taxable 1,160 107,620 4.37% 1,523 170,784 3.57%
Tax-exempt 128 14,957 3.47% 187 16,837 4.44%
Loans, net 4,035 235,268 6.96% 2,721 170,455 6.39%
---------------------------- ----------------------------
Total interest-earning assets 5,370 361,523 6.02% 4,446 361,227 4.92%
------------- -------------
Noninterest-earning assets 31,831 24,167
------------- -------------
Total assets 393,354 385,394
============= =============
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings 42 34,146 0.50% 45 35,244 0.51%
NOW 8 36,585 0.09% 16 34,244 0.19%
MMDA 402 56,108 2.91% 324 66,217 1.96%
CD's 710 80,811 3.56% 378 63,305 2.39%
---------------------------- ----------------------------
Total interest-bearing deposits 1,162 207,650 2.27% 763 199,010 1.53%
Federal Home Loan Bank advances 1,090 95,239 4.64% 840 105,019 3.20%
Subordinated debentures 224 13,000 6.99% 114 7,000 6.51%
Other borrowed funds 144 12,501 4.67% 75 11,327 2.65%
---------------------------- ----------------------------
Total interest-bearing
liabilities 2,620 328,390 3.24% 1,792 322,356 2.22%
------------- -------------
Noninterest-bearing deposits 45,046 41,833
Other noninterest-bearing liabilities 1,126 1,475
------------- -------------
Total liabilities 374,562 365,664
Total stockholders' equity 18,792 19,730
------------- -------------
Total liabilities and
stockholders' equity $ 393,354 $ 385,394
============= =============
Net interest income $ 2,750 $ 2,654
============= =============
Interest rate spread 2.78% 2.70%
============= ============
Net interest margin 3.08% 2.94%
============= ============
(1)- Excludes investment securities traded and not settled.
Non-interest Income
Total non-interest income increased $123,000 to $1,313,000 for the three months
ended March 31, 2006 as compared to the three months ended March 31, 2005
primarily due to the increased value of investment securities whose value is
tied to the performance of equity markets. The Company owns three investments
which have returns indexed to returns of various equity market indicies. The
change in valuation of the embedded equity options is recorded as miscellaneous
non-interest income. The net change recorded in the first quarter of 2006 was
$110,000 as compared to $35,000 in the same quarter of 2005.
Fee income from the investment management company was $444,000 in the first
quarter of 2006 as compared to $390,000 in the same quarter of 2005. These
increases were partially offset by a $105,000 decrease in gains on the sale of
securities to a loss of $60,000 for the three months ended March 31, 2006.
14
Non-interest Expense
Total operating expenses increased by $680,000 to $4.4 million for the
three months ended March 31, 2006 as compared to the same quarter of 2005.
Salaries and employee benefits increased by $156,000 to $2.2 million due
primarily to new lenders hired for new markets, and the growth in staff
infrastructure to support continued growth and expansion. Occupancy and
equipment expenses increased $141,000 to $710,000 for the three months ended
March 31, 2006. The increase is primarily attributable to the new Boston
facility and increased utility costs. Professional fees increased $274,000 to
$491,000 for the three months ended March 31, 2006 due primarily to an increase
in legal expenses associated with regulatory matters; placement agency fees
associated with the employment of new employees in 2006; and professional
services required in the absence of the Company's chief financial officer. Other
general and administrative expenses increased $71,000 to $453,000 for the three
months ended March 31, 2006 due primarily to additional training costs and
amortization of the core deposit intangible asset associated with the purchase
of the Boston branch in June 2005.
Income Taxes
The net benefit for income taxes increased by $92,000 from $19,000 for the
quarter ended March 31, 2005, to $111,000 for the quarter ended March 31, 2006.
This was primarily the result of the $421,000 reduction in pre-tax income for
the same periods. The impact of the pre-tax income reduction was partially
offset by a reduction in tax-exempt municipal income, and a reduction in
dividends eligible for the dividends received deduction.
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, two
board members, 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 utilized in 2006 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.
15
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, 2006 amounted to $98.8 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, 2006, the Bank's total borrowing capacity through the FHLB was $114.7
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.
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 $69.7 million at March 31, 2006. 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, 2006, 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, 2006, 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 $ 28,377 10.44% $ 21,798 8.00%
Tier 1 capital to risk-weighted assets 26,563 9.78% 10,899 4.00%
Tier 1 capital to average assets 26,563 6.82% 15,622 4.00%
Company:
Total capital to risk-weighted assets $ 29,596 10.86% $ 21,736 8.00%
Tier 1 capital to risk-weighted assets 21,418 7.86% 10,868 4.00%
Tier 1 capital to average assets 21,418 5.48% 15,590 4.00%
16
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, 2006, the Bank had $6.0 million of outstanding
commitments to originate loans and $50.9 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.
The opening of a branch 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.
17
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 the Company's already high level of
reliance on generally higher cost wholesale funding.
18
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.
Unlike our non-bank competitors, we and our subsidiaries are subject to
extensive Federal and state governmental supervision and regulation, which are
intended primarily for the protection of depositors. In addition, we and our
subsidiaries are subject to changes in Federal and state laws, as well as
changes in regulations, governmental policies and accounting principles. The
effect of any such potential changes cannot be predicted but could adversely
affect the business and operations of us and our subsidiaries in the future.
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
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.
19
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.
The Company's inability to file audited financial statements for the Boston
branch of the Atlantic Bank may impair the Company's ability to raise capital
Typical of the banking industry, the Company is unable to obtain audited
financial statements of a retail branch. Under SEC rules, the Company may be
unable, until early 2008, to raise capital through a public offering or a
private offering to unaccredited investors without having filed audited
financial statements for the Boston branch. The Company may raise capital, if it
so chooses, through a private offering of its securities to accredited
investors. The Company may be able to raise capital through a public offering or
a private offering to unaccredited investors before early 2008 if it chooses to
submit 2005 and/or 2006 audited financial statements of the Company to the SEC
and the SEC subsequently grants a waiver of this restriction on raising capital.
Our allowance for losses on loans and leases may not be adequate to cover all
future losses on existing loan and lease balances outstanding.
We have established an allowance for loan losses that we believe is
adequate to offset probable losses on our existing loans and leases. There can
be no assurance that any future declines in real estate market conditions,
general economic conditions or changes in regulatory policies will not require
us to increase our allowance for loan and lease losses, which would adversely
affect our results of operations.
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.
20
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 set forth below, there have been no material changes in legal
proceedings from the information provided in Item 3, "Legal Proceedings" of the
Company's Annual Report on Form 10KSB for the year ended December 31, 2005.
31-33 State Street
On December 7, 2005, the Company was served with a Violation Notice by the
City of Boston Inspectional Services Department concerning unsafe maintenance
and areas of exterior spalling of masonry with respect to the building owned by
the Company's wholly owned subsidiary, First Ipswich Realty Company, LLC
("Realty LLC") at 31-33 State Street, Boston, Massachusetts. Realty LLC is
listed as a defendant in the civil action now pending before the Boston Housing
Court. Realty LLC has entered into negotiations with the City concerning
remedial actions required to bring the building facade into compliance with the
Massachusetts State Building Code and a tentative agreement has been reached in
principle with respect to the timeframe for the completion of the repairs.
Realty LLC believes, that if all of the repairs are made in a timely manner,
consistent with the agreement reached in principle, no further action will be
taken by the City and that the complaint will be dismissed. Realty LLC has, as
of this date, performed certain remedial work to eliminate what are believed to
be emergency repairs. It is expected that the remaining repair work will
commence in the fall of 2006 and be completed within eight months of
commencement, depending upon the weather, labor disputes, casualty, and other
causes beyond the control of Realty LLC.
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 19, 2006, the Company held its Annual Meeting of Stockholders.
The following actions were taken at the Annual Meeting:
1. The following eleven 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 1,581,831 1,830
Timothy R. Collins 1,581,831 1,830
John T. Coughlin 1,582,861 800
Craig H. Deery 1,581,831 1,830
Edward D. Dick 1,581,831 1,830
Stephanie R. Gaskins 1,581,831 1,830
Donald P. Gill 1,582,861 800
H.A. Patrician, Jr. 1,582,861 800
Neil St. John Raymond 1,581,831 1,830
Neil St. John Raymond, Jr. 1,582,861 800
William J. Tinti 1,582,861 800
21
There were no abstentions or broker non-votes with respect to this action.
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, 2006 was approved as follows: 1,583,601 votes for, and 60
votes against. There were no abstentions and no broker non-votes with respect to
this action.
ITEM 5. Other Information
Not applicable.
ITEM 6. 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.
22
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, 2006 By: /s/ Donald P. Gill
------------------------------------------------
Donald P. Gill
President and Chief Executive Officer
Date: May 12, 2006 By: /s/ Timothy L. Felter
------------------------------------------------
Timothy L. Felter
Senior Vice President, Chief Financial Officer,
and Treasurer
23