Exhibit 16(a)(3)(i)
FIRST IPSWICH BANCORP
31 Market Street
Ipswich, Massachusetts 01938
(978) 356-3700
November 19, 2007
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders,
which will be held at 8:30 a.m. on December 21, 2007, at our main office located
at 31 Market Street, Ipswich, Massachusetts 01938. I hope that you will be able
to attend the meeting, and I look forward to seeing you.
At the meeting, shareholders will vote on a proposed amendment to our
Articles of Organization (the "Articles of Amendment"). The Articles of
Amendment provide for the reclassification of shares (the "Reclassification") of
our common stock held by shareholders who are the record holders of fewer than
200 shares of common stock into shares of Series A Preferred Stock, on the basis
of one share of Series A Preferred Stock for each share of common stock held by
such shareholders. All other shares of common stock will remain outstanding and
be unaffected by the Reclassification. No cash will be paid to shareholders as
consideration for their shares (unless appraisal rights are exercised)--only
shares of Series A Preferred Stock will be issued. Appraisal rights are
available to shareholders whose shares will be reclassified to Series A
Preferred Stock, and shareholders who exercise those rights as described in the
enclosed proxy statement will be entitled to receive cash for their shares.
Generally, the Series A Preferred Stock has limited voting rights,
dividend and liquidation preferences to our common stock, and equal
participation with the common stock in the event of a sale or change in control
of First Ipswich Bancorp.
The primary effect of the Reclassification will be to reduce below 300 our
total number of record holders of common stock. As a result, our reporting
obligations under the Securities Exchange Act of 1934 (the "Exchange Act") will
be suspended as of January 1, 2008, which we believe will allow us to realize
significant cost savings.
Our principal reason for effecting the Reclassification is the estimated
direct and indirect cost savings of approximately $285,000 per year that we
expect to realize as a result of the suspension of our reporting obligations
under the Exchange Act. We also believe that while our shareholders will lose
the benefits of holding registered stock, such as a reduction in the amount of
publicly available information about the Company and the elimination of certain
corporate governance safeguards resulting from the Sarbanes-Oxley Act, these
benefits are outweighed by the costs relating to the registration of our common
stock. These costs and benefits are discussed in more detail in the enclosed
proxy statement.
We plan to effect the Reclassification by filing the Articles of Amendment
as soon as possible after we obtain shareholder approval to do so. This date
will also serve as the record date for determining the ownership of shares for
purposes of the Reclassification.
The board has established November 14, 2007 as the record date for
determining shareholders who are entitled to notice of the special meeting and
to vote on the matters presented at the meeting. Whether or not you plan to
attend the special meeting, please complete, sign and date the proxy card and
return it in the envelope provided in time for it to be received by
December 20, 2007. If you attend the meeting, you may vote in person, even
if you have previously returned your proxy card.
The board of directors has determined that the Reclassification is fair to
First Ipswich Bancorp's unaffiliated and affiliated shareholders and has voted
in favor of the approval of the Articles of Amendment. The board unanimously
recommends that you vote FOR approval of the Articles of Amendment.
Sincerely,
/s/ Russell G. Cole
-----------------------------
Russell G. Cole
President and Chief Executive Officer
FIRST IPSWICH BANCORP
31 Market Street
Ipswich, Massachusetts 01938
(978) 356-3700
NOTICE OF THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 21, 2007
A special meeting of shareholders of First Ipswich Bancorp will be held at
8:30 a.m. on December 21, 2007, at our main office located at 31 Market Street,
Ipswich, Massachusetts 01938, for the following purposes:
(1) To vote on a proposed amendment to the Articles of Organization of
First Ipswich Bancorp, which provides for the reclassification of shares of
First Ipswich Bancorp common stock held by shareholders who are the record
holders of fewer than 200 shares of common stock into shares of Series A
Preferred Stock, on the basis of one share of Series A Preferred Stock for each
share of common stock held by such shareholders; and
(2) To transact any other business as may properly come before the meeting
or any adjournment of the meeting.
The board of directors unanimously recommends that you vote FOR the above
proposals.
We have concluded that appraisal rights are available to shareholders
whose shares will be reclassified in this transaction under Part 13 of the
Massachusetts Business Corporation Act, a copy of which is attached. If our
shareholders approve the proposal to reclassify our common stock, shareholders
who elect to dissent from approval of that amendment are entitled to receive the
"fair value" of any shares of their common stock that will get reclassified. In
order to perfect appraisal rights, you must deliver to our office (at the
address listed above) before the special meeting, a written notice of your
intent to demand payment for your shares if the Reclassification is effected.
You must also not vote your shares in favor of the proposed Articles of
Amendment and Reclassification. Failure to comply with these and other
requirements set forth in Part 13 will constitute a waiver of your appraisal
rights.
The board has set the close of business on November 14, 2007 as the record
date for determining the shareholders who are entitled to notice of, and to vote
at, the meeting or any adjournment of the meeting. We hope that you will be able
to attend the meeting. We ask, however, whether or not you plan to attend the
meeting, that you mark, date, sign, and return the enclosed proxy card as soon
as possible. Promptly returning your proxy card will help ensure the greatest
number of shareholders are present whether in person or by proxy.
If you attend the meeting in person, you may revoke your proxy at the
meeting and vote your shares in person. You may revoke your proxy at any time
before the proxy is exercised.
By Order of the Board of Directors
/s/ Russell G. Cole
-----------------------------
Russell G. Cole
President and Chief Executive Officer
November 19, 2007
FIRST IPSWICH BANCORP
31 Market Street
Ipswich, Massachusetts 01938
(978) 356-3700
PROXY STATEMENT
For the Special Meeting of Shareholders
To Be Held on December 21, 2007
The board of directors of First Ipswich Bancorp (the "Company") is
furnishing this proxy statement in connection with its solicitation of proxies
for use at a special meeting of shareholders. At the meeting, shareholders will
be asked to vote on a proposed amendment to our Articles of Organization (the
"Articles of Amendment") providing for the reclassification of certain shares
(the "Reclassification") of the Company's common stock into Series A Preferred
Stock.
The Reclassification is designed to reduce below 300 the number of the
Company's common shareholders of record, which will allow us to suspend our
reporting obligations with the Securities and Exchange Commission (the "SEC").
The board has determined that it is in the best interests of the Company and our
shareholders to effect the Reclassification because we will realize significant
cost savings as a result of the suspension of our reporting obligations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The board
believes these cost savings and the other benefits of deregistration described
in this proxy statement outweigh the loss of the benefits of registration to our
shareholders, such as a reduction in publicly available information about the
Company and the elimination of certain corporate safeguards resulting from the
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act").
In the Reclassification, shareholders who are the record holders of fewer
than 200 shares of our common stock, par value $1.00 per share, will receive one
share of Series A Preferred Stock, par value $1.00 per share, for each share of
common stock they own on the effective date of the Reclassification. All
shareholders will benefit from the estimated cost savings of $285,000 per year.
We anticipate that only 158 shareholders owning an aggregate of 12,081 shares
(0.5% of the issued and outstanding shares) will receive Series A Preferred
Stock.
No cash will be paid to shareholders as consideration for their
shares--only shares of Series A Preferred Stock will be issued. All other shares
of our common stock will remain outstanding and will be unaffected by the
Reclassification. Appraisal rights are available to shareholders whose shares
will be reclassified, and shareholders who exercise those rights as described in
this proxy statement will be entitled to receive cash for their shares.
Generally, the Series A Preferred Stock has limited voting rights,
dividend and liquidation preferences to our common stock, and equal
participation with the common stock in the event of a sale or change in control
of the Company.
This proxy statement provides you with detailed information about the
proposed Reclassification. We encourage you to read this entire document
carefully.
The board has determined that the Reclassification is fair to the
Company's unaffiliated shareholders and has approved the Articles of Amendment.
The Reclassification cannot be completed, however, unless the Articles of
Amendment are approved by the holders of at least two-thirds of the issued and
outstanding shares of common stock. The current directors and executive officers
of the Company own approximately 47.99% of the issued and outstanding shares,
and if they exercise all of their vested warrants and options, they would own
approximately 48.08% of the issued and outstanding shares. The directors and
executive officers have indicated that they intend to vote their shares in favor
of the Articles of Amendment.
Neither the SEC nor any state securities commission has approved or
disapproved the Reclassification or the transactions contemplated thereby or has
determined if this proxy statement is truthful or complete. The SEC has not
passed upon the fairness or merits of the Reclassification or the transactions
contemplated thereby, nor upon the accuracy or adequacy of the information
contained in this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this proxy statement is November 19, 2007. We first
mailed this proxy statement to the shareholders of the Company on or about that
date.
IMPORTANT NOTICES
Neither our common stock nor our Series A Preferred Stock is a deposit or
bank account and is not insured by the Federal Deposit Insurance Corporation
(the "FDIC") or any other governmental agency.
We have not authorized any person to give any information or to make any
representations other than the information and statements included in this proxy
statement. You should not rely on any other information. The information
contained in this proxy statement is correct only as of the date of this proxy
statement, regardless of the date it is delivered or when the Reclassification
is effected.
We will update this proxy statement to reflect any factors or events
arising after its date that individually or together represent a material change
in the information included in this document.
We make forward-looking statements in this proxy statement that are
subject to risks and uncertainties. Forward-looking statements include
information about possible or assumed future results of the operations or our
performance after the Reclassification is accomplished. When we use words such
as "believes," "anticipates," "expects," "intends," "targeted," "may," "will,"
and similar expressions, we are making forward-looking statements that are
subject to risks and uncertainties. Various future events or factors may cause
our results of operations or performance to differ materially from those
expressed in our forward-looking statements. These factors include:
- significant increases in competitive pressure in the banking and
financial services industries;
- changes in the interest rate environment which could reduce
anticipated or actual margins;
- changes in political conditions or the legislative environment;
- changing regulatory requirements;
- general economic conditions, either nationally or regionally and
especially in our primary service areas, becoming less favorable
than expected resulting in, among other things, a deterioration in
credit quality;
- changes occurring in business conditions and inflation;
- changes in technology;
- the level of the allowance for loan loss;
- the rate of delinquencies and amounts of charge-offs;
- the rates of loan growth;
- adverse changes in asset quality and resulting credit risk-related
losses and expenses;
- changes in monetary and tax policies;
- loss of consumer confidence and economic disruptions resulting from
terrorist activities;
- changes in the securities markets; and
- other risks and uncertainties detailed from time to time in our
filings with the SEC.
The words "we," "our," "us," and the "Company" as used in this proxy
statement, refer to First Ipswich Bancorp and its wholly-owned subsidiary, The
First National Bank of Ipswich, collectively, unless the context indicates
otherwise.
TABLE OF CONTENTS
SUMMARY TERM SHEET 1
QUESTIONS AND ANSWERS 8
SPECIAL FACTORS 10
Purpose of the Reclassification 10
Alternatives Considered 12
Background of the Reclassification 13
Reasons for the Reclassification 17
Effects of the Reclassification on the Company 18
Effects of the Reclassification on Affiliated Shareholders 21
Effects of the Reclassification on Unaffiliated Shareholders 22
Effects of the Reclassification on Shareholders Generally 22
Recommendation of the Board of Directors; Fairness of the
Reclassification 24
Determination of Exchange Ratio 30
Opinion of Financial Advisor 31
Availability of Documents 40
U.S. Federal Income Tax Consequences of the Reclassification 41
Pro Forma Effect of the Reclassification 43
PROPOSAL 1: APPROVAL OF THE ARTICLES OF AMENDMENT 44
Description of the Articles of Amendment 44
Source of Funds and Expenses 46
Appraisal Rights 46
Reservation of Rights 48
ADDITIONAL INFORMATION REGARDING THE SPECIAL MEETING OF SHAREHOLDERS
Time and Place of Meeting 49
Record Date and Mailing Date 49
Number of Common Shares Outstanding 49
Proposal to be Considered 49
Appraisal Rights 49
Procedures for Voting by Proxy 49
Requirements for Shareholder Approval 50
Solicitation of Proxies 50
INFORMATION ABOUT THE COMPANY 51
Overview 51
Directors and Executive Officers 52
Stock Ownership by Significant Shareholders 53
Stock Ownership by Directors and Executive Officers 54
Recent Transactions in the Company's Stock 55
Prior Stock Purchases 55
Related Party Transactions 55
Stock Option Plans 56
i
Market for Common Stock and Dividends 57
Description of Capital Stock 58
Terms of the Series A Preferred Stock to be Issued in the
Reclassification 59
Shareholder Communications 60
Other Matters 60
FINANCIAL INFORMATION ABOUT THE COMPANY 61
Selected Historical Consolidated Financial Data 61
Pro Forma Consolidated Financial Information 62
APPENDIX A - ARTICLES OF AMENDMENT TO THE ARTICLES OF ORGANIZATION OF
FIRST IPSWICH BANCORP TOGETHER WITH ATTACHMENT 1 A-1
APPENDIX B - FIRST IPSWICH BANCORP SERIES A PREFERRED STOCK RELATIVE RIGHTS
AND PREFERENCES AND OTHER TERMS AS DESIGNATED BY THE BOARD OF DIRECTORS B-1
APPENDIX C - APPRAISAL RIGHTS; PART 13 OF MBCA C-1
APPENDIX D - FAIRNESS OPINION OF NORTHEAST CAPITAL & ADVISORY, INC.
DATED AS OF JUNE 21, 2007 D-1
APPENDIX E - FAIRNESS OPINION OF NORTHEAST CAPITAL & ADVISORY, INC.
DATED AS OF NOVEMBER 2, 2007 E-1
APPENDIX F - FIRST IPSWICH BANCORP AND SUBSIDIARY CONSOLIDATED (UNAUDITED)
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2007 F-1
APPENDIX G - FIRST IPSWICH BANCORP AND SUBSIDIARY CONSOLIDATED AUDITED
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE
YEAR ENDED DECEMBER 31, 2006 G-1
ii
SUMMARY TERM SHEET
The following is a summary of the material terms of the Articles of
Amendment. This summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere in or accompanying this proxy
statement, including the financial information and appendices. We urge you to
review the entire proxy statement and accompanying materials carefully.
- Structure of the Reclassification. The Articles of Amendment provide
for the Reclassification of shares of our common stock into shares
of Series A Preferred Stock. In the Reclassification, shareholders
who are the record holders of fewer than 200 shares of our common
stock will receive one share of Series A Preferred Stock for each
share of common stock they own on the effective date of the
Reclassification. No cash will be paid to shareholders as
consideration for their shares (unless appraisal rights are
exercised)--only shares of Series A Preferred Stock will be issued.
All other shares of common stock will remain outstanding and will be
unaffected by the Reclassification. Appraisal rights are available
to shareholders whose shares will be reclassified, and shareholders
who exercise those rights as described in this proxy statement and
in Appendix C will be entitled to receive cash for their shares. See
pages 47 and 50 for additional information.
We selected this structure, as opposed to a transaction in which
some of our shareholders would receive cash for their shares,
principally because it presented a means by which all of our
shareholders could retain an equity interest in the Company. In
addition, the structure would enable the Company to conserve cash,
which is important since the Company would prefer to limit raising
additional capital and is unable to dividend funds from its
wholly-owned subsidiary, The First National Bank of Ipswich (the
"Bank"), without prior approval from the Office of the Comptroller
of the Currency (the "OCC"). As a result of the Bank's Formal
Agreement with the OCC and related heightened capital ratio
requirements, the Company does not anticipate that the OCC will
permit the Company to dividend funds from the Bank in the near
future. Accordingly, the Company will probably need to rely on its
limited cash reserves to cover payments due on its trust preferred
obligations.
See page 10 for additional information.
- Terms of the Series A Preferred Stock to be Issued in the
Reclassification. Our board has designated 20,000 shares of our
authorized preferred stock as Series A Preferred Stock, subject to
shareholder approval of the Articles of Amendment. The terms of the
Series A Preferred Stock are set forth in Appendix B and provide as
follows:
- Voting Rights: Unlike the common stock, the Series A Preferred
Stock will not have voting rights except under very limited
circumstances. Except as provided by law, holders of Series A
Preferred Stock will be entitled to vote only upon proposals
for a business combination resulting in the transfer of a
majority of the outstanding common stock or of all or
substantially all of the Company's assets and upon which
holders of the Company's common stock are entitled to vote (a
"Change in Control"). For those matters on which holders of
Series A Preferred Stock are entitled to vote, such holders
will have the right to one vote for each share held, and will
be entitled to receive notice of any shareholders' meeting
1
held to act upon such matters in accordance with the bylaws of
the Company. When voting on a proposed Change in Control or
any other matter on which holders of Series A Preferred Stock
are entitled to vote by law, the holders of Series A Preferred
Stock will vote together with the holders of common stock and
not as a separate class.
- Generally, under Section 10.04 of the Massachusetts Business
Corporation Act (the "MBCA"), the holders of the Series A
Preferred Stock will be entitled to vote as a separate voting
group on any future amendments to the Company's Articles of
Organization that would adversely affect the designations,
rights, preferences or limitations of all or part of the
shares of the Series A Preferred Stock. However, this section
does not apply to the creation of a new series of shares
pursuant to the authority reserved to the board under the
Articles of Organization.
- Seniority. After the Reclassification, the Company will still
have shares of authorized but unissued preferred stock. The
Articles of Organization authorize the board, without further
action by the holders of common stock or the Series A
Preferred Stock, to provide for the issuance of these shares
in one or more classes or series and to establish the relative
rights, preferences and limitations of each class or series of
preferred stock. As a result, after the Reclassification, the
board, which will be elected by the holders of the common
stock, may authorize the issuance of other classes or series
of preferred stock or equity securities that rank senior to or
on parity with the Series A Preferred Stock.
- The Series A Preferred Stock will rank senior to the common
stock with respect to dividends and rights upon liquidation,
dissolution or winding up of the Company. The relative rights
and preferences of the Series A Preferred Stock may be
subordinated to the relative rights and preferences of holders
of subsequent issues of other series or classes of stock and
equity securities designated by the board. The Series A
Preferred Stock will be junior to indebtedness issued from
time to time by the Company, including notes and debentures.
- Dividend Rights: Holders of Series A Preferred Stock will be
entitled to a preference in the distribution of dividends,
when and if declared and paid by the Company, so that holders
of the Series A Preferred Stock will be entitled to receive
dividends in an amount equal to that paid to common
shareholders prior to the receipt of dividends by the holders
of common stock. The Company will not be required to pay any
dividends on the Series A Preferred Stock and will have the
right to waive the declaration or payment of dividends. Any
dividends waived by the Company will not accumulate to future
periods and will not represent a contingent liability of the
Company.
- Perpetual Stock: The Series A Preferred Stock will be
perpetual stock, which means stock that does not have a
maturity date, cannot be redeemed at the option of the holder,
and has no other provisions that will require future
redemption of the issue.
- Conversion Rights: The shares of Series A Preferred Stock will
automatically convert to shares of common stock upon a Change
in Control, with each share of Series A Preferred Stock
convertible into one share of common stock.
- Liquidation Rights: Holders of Series A Preferred Stock will
be entitled to a preference in the distribution of assets of
the Company in the event of any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary,
equal to the greater of book value per share at the time of
payment, the amount per share to be paid to common
shareholders, or $9.05.
2
- Preemptive Rights: Holders of Series A Preferred Stock will
not have any preemptive rights to purchase any additional
shares of Series A Preferred Stock or shares of any other
class of capital stock of the Company that may be issued in
the future.
- Antidilution Adjustments: If the number of outstanding shares
of common stock are increased or decreased or changed into or
exchanged for a different number or kind of shares or other
securities of the Company or any other company, by reason of
any merger, consolidation, liquidation, reclassification,
recapitalization, stock split up, combination of shares or
stock dividend, an appropriate adjustment shall be made by the
board in the number and relative terms of the Series A
Preferred Stock.
- Redemption Rights: Holders of Series A Preferred Stock will
have no right to require the Company to redeem their shares.
See page 61 for more information regarding the terms of the Series A
Preferred Stock.
- Series A Preferred Stock Issued in Reliance on Exemption from
Registration. We are issuing the shares of Series A Preferred Stock
without registration under the Securities Act of 1933, as amended
(the "Securities Act") in reliance on an exemption under Section
3(a)(9) of the Securities Act for the exchange by a company of any
security with its existing shareholders exclusively, where no
commission or other remuneration is paid or given directly or
indirectly for soliciting the exchange. We believe that exemption is
available for the Reclassification because we are only issuing the
Series A Preferred Stock to our holders of common stock, and to no
other persons or entities. Further, we are not paying any commission
or other remuneration in connection with the Reclassification.
- Determination of Shares "Held of Record." Because SEC rules require
that "record holders" be counted for purposes of determining the
Company's reporting obligations, the Reclassification will be based
on shares held of record without regard to the ultimate control of
the shares. A shareholder "of record" is the shareholder whose name
is listed on the stock certificate, regardless of who ultimately has
the power to vote or sell the shares. For example, if a shareholder
holds separate certificates individually, as a joint tenant with
someone else, as trustee, and in an IRA, those four certificates
represent shares held by four different "record holders," even if a
single shareholder controls the voting or disposition of those
shares. Similarly, shares held by a broker in "street name" on a
shareholder's behalf are held of record by the broker.
As a result, a single shareholder with 200 or more shares held by
different record holders could receive Series A Preferred Stock in
the Reclassification for all of his or her shares if those accounts
individually hold fewer than 200 shares. To avoid this, the
shareholder may either consolidate his or her ownership into a
single form of ownership representing a minimum of 200 shares, or
acquire additional shares in the market prior to the effective date
of the Reclassification. Additionally, a shareholder who holds fewer
than 200 shares of common stock through a broker may be unaffected
by the Reclassification if the broker holds an aggregate of 200 or
more shares.
- Effects of the Reclassification. As a result of the
Reclassification:
3
- Our number of common shareholders of record, measured as of
August 10, 2007, will be reduced from approximately 402 to
approximately 244, and the number of issued and outstanding
shares of our common stock will decrease from 2,344,630 to
approximately 2,332,549, resulting in a decrease of 12,081
shares of the Company's common stock (0.5% of the issued and
outstanding shares) that will be available for purchase and
sale in the market.
- We estimate that approximately 12,081 shares of Series A
Preferred Stock will be issued in connection with the
Reclassification.
- We will be entitled to suspend our reporting obligations under
the Exchange Act which will mean that we will no longer be
required to file reports with the SEC or be classified as a
public company. This will greatly reduce the amount of
information that is publicly available about the Company and
will eliminate certain corporate governance safeguards
resulting from the Sarbanes-Oxley Act, such as the requirement
for an audited report on our internal controls over financial
reporting.
- We will need to wait until January 1, 2008 to suspend our
reporting obligations once the Reclassification becomes
effective as a result of the Company's inability to file
information required under Item 9.01(a) of Form 8-K in 2005.
The Bank acquired certain assets and assumed certain
liabilities of the Boston, Massachusetts branch (the "Boston
Branch") of the Atlantic Bank of New York ("ABNY") on June 24,
2005 for a purchase price of $49,000,000. SEC rules required
us to file two years of pre-acquisition audited financial
statements for the Boston Branch because of the significance
of the Boston Branch to the Company's financial statements. We
were unable to file these audited financial statements because
they did not exist and we could not create them. The Boston
Branch had never been audited separately from ABNY, which had
consolidated assets of $3.2 billion at December 31, 2004. We
have presented financial statements as part of this proxy
statement that include eight quarters of post-acquisition
operating results for the Boston Branch.
- If we have 300 or more record shareholders on any future
January 1st, we will again become subject to the reporting
requirements of the Exchange Act and will lose the benefits of
the Reclassification.
- We will eliminate the direct and indirect costs and expenses
associated with our reporting obligations under the Exchange
Act, which we estimate will be approximately $285,000 on an
annual basis.
- In addition to the annual estimated cost savings referenced
above, the Reclassification and subsequent suspension of our
reporting requirements would result in a significant one-time
cost savings due to our not being subject to the new internal
control audit requirements imposed by Section 404 of the
Sarbanes-Oxley Act. Preparing ourselves to be able to comply
with Section 404 of the Sarbanes-Oxley Act would require
significant expenditures during the current and next fiscal
year, including fees to third parties for compliance planning,
assessment, documentation and testing of our internal controls
over financial reporting. Such costs are expected to be
approximately $240,000 for 2007 and 2008 combined.
- We estimate that professional fees and other expenses related
to the Reclassification will be approximately $179,500, which
we intend to pay with existing working capital.
4
- Earnings (Losses) Per Share. Pro forma basic and diluted
earnings (losses) per share will not change from the $0.06 per
share reported for the nine months ended September 30, 2007.
However, pro forma basic and diluted earnings (losses) per
share (assuming a January 1, 2006 reclassification date) will
decrease from the $(0.52) per share reported for the year
ended December 31, 2006 to $(0.61) per share because of the
projected cost of the reclassification process.
- Book Value Per Common Equivalent Share. Book value per common
equivalent share, which includes the Series A Preferred Stock,
will decrease approximately 1.0% from $8.24 on a historical
basis to $8.17 on a pro forma basis as of September 30, 2007.
- The percentage ownership of common stock beneficially owned by
our executive officers and directors as a group as of
September 4, 2007 will increase from approximately 48.08% to
48.33%. We do not anticipate that any of our directors or
executive officers will receive Series A Preferred Stock in
the reclassification.
For a more detailed description of these effects and the effects of the
Reclassification on our affiliated shareholders and shareholders generally,
including those receiving Series A Preferred Stock and those retaining common
stock, see pages 21 through 25.
- Reasons for the Reclassification. Our principal reasons for
effecting the Reclassification are:
- The direct and indirect cost savings of approximately $285,000
per year and the one-time cost savings of approximately
$240,000 due to our not being subject to the new internal
control audit requirements imposed by Section 404 of the
Sarbanes-Oxley Act that we expect to experience as a result of
the suspension of our reporting obligations under the Exchange
Act and the anticipated decrease in expenses relating to
servicing a relatively large number of shareholders holding
small positions in our common stock; and
- Our belief that our shareholders have not benefited
proportionately from the costs relating to the registration of
our common stock, principally as a result of the thin trading
market for our stock.
See page 17 for more detailed information.
- Fairness of the Reclassification. Based on a careful review of the
facts and circumstances relating to the Reclassification, our board
believes that the Reclassification and the terms and provisions of
the Reclassification and the Series A Preferred Stock are
substantively and procedurally fair to our unaffiliated
shareholders. Our board unanimously approved the Reclassification
and recommends that shareholders vote in favor of the
Reclassification.
- You should be aware that each of our directors and executive
officers has interests in the Reclassification that may present
actual or potential, or the appearance of actual or potential,
conflicts of interests in connection with the Reclassification. Our
directors acknowledge that they have a conflict of interest with
respect to the Reclassification because they were in a position to
structure the Reclassification in a way that benefits the interests
of affiliated shareholders differently from the interests of
unaffiliated shareholders. In addition, each of our directors and
executive officers currently holds at least 200 shares of the
Company's common stock, and, as a result, they will retain their
shares of common stock in the Reclassification. Since there will be
fewer outstanding shares of common stock after the Reclassification,
5
the directors and executive officers as a group will own a slightly
larger relative percentage (48.64% versus 48.88%) of the outstanding
common stock after the Reclassification, and the common stock will
continue to have voting rights as compared to the Series A Preferred
Stock, which will have limited voting rights. See "Special
Factors--Effects of the Reclassification on Affiliated Shareholders"
on page 21 and "Information About the Company--Stock Ownership by
Directors and Executive Officers" on page 56 for additional
information regarding the effects of the Reclassification on our
affiliated shareholders.
- In the course of determining that the Reclassification is fair to
and in the best interests of our unaffiliated shareholders,
including both unaffiliated shareholders who will continue to hold
shares of common stock as well as those shareholders whose shares of
common stock will be reclassified into shares of Series A Preferred
Stock, the board considered a number of factors affecting these
groups of shareholders in making their determinations. The board
retained Northeast Capital & Advisory, Inc. ("Northeast Capital") to
act as its financial advisor in connection with the
Reclassification. The factors considered by the board include:
- All shareholders will continue to hold an equity interest in
the Company, and no shareholder will be forced to
involuntarily liquidate his or her equity interest in the
Company;
- On the other hand, shareholders who wish to liquidate their
holdings instead of having their shares of common stock
reclassified to shares of Series A Preferred Stock may do so
through the exercise of appraisal rights;
- The advantages and disadvantages of the rights, preferences
and limitations of the Series A Preferred Stock in comparison
to the relative rights of our common stock;
- The Reclassification will have no effect on basic or diluted
earnings (losses) per share for the nine months ended
September 30, 2007 or the year ended December 31, 2006;
- Book value per common equivalent share will decrease
approximately 1.0% from $8.24 on a historical basis to $8.17
on a pro forma basis as of September 30, 2007;
- The Reclassification should not be a taxable event for any
shareholders, except for those who exercise appraisal rights;
and
- The fairness opinion issued by Northeast Capital that the
Reclassification is fair from a financial point of view to all
of the Company's unaffiliated shareholders.
See "Special Factors--Recommendation of the Board of Directors; Fairness of the
Reclassification" on page 25 below for additional information pertaining to the
fairness of the Reclassification.
- Effectiveness of the Reclassification. The Reclassification will not
be effected unless and until the Articles of Amendment are approved
by the affirmative vote of at least two-thirds of the issued and
outstanding shares of our common stock. Based on the number of
issued and outstanding shares as of the record date, the Articles of
Amendment must be approved by the affirmative vote of at least
1,563,087 shares. Assuming the shareholders approve the Articles of
Amendment, as shortly thereafter as is practicable, we will file the
Articles of Amendment with the Secretary of the Commonwealth of
Massachusetts and thereby effect the Reclassification. We anticipate
that the Reclassification will be effected shortly after our special
meeting of shareholders. See pages 46 and 51 for more detailed
information.
6
- Effect of the Reclassification on Outstanding Options and Warrants.
Outstanding options and warrants will not be affected by the
Reclassification. See page 46 for more information.
- Conditions and Regulatory Approvals. Aside from shareholder approval
of the Articles of Amendment, the Reclassification is not subject to
any conditions or regulatory approvals.
- Appraisal Rights. Shareholders whose shares are subject to the
Reclassification will be entitled to exercise appraisal rights with
respect to such shares, and receive the fair value of such shares in
cash upon perfection of their rights in accordance with Part 13 of
the MBCA. See page 47 and Appendix C for more information.
7
QUESTIONS AND ANSWERS
Q: Why did you send me this proxy statement?
A: We sent you this proxy statement and the enclosed proxy card because our
board of directors is soliciting your votes for use at our special meeting
of shareholders. This proxy statement includes all of the information that
is required and necessary in order for you to cast an informed vote at the
meeting. However, you do not need to attend the meeting to vote your
shares. Instead, you may simply complete, sign and return the enclosed
proxy card. We first sent this proxy statement, notice of the special
meeting and the enclosed proxy card on or about November 19, 2007 to all
shareholders entitled to vote. The record date for those entitled to vote
is November 14, 2007. On that date, there were 2,344,630 shares of our
common stock issued and outstanding. Shareholders are entitled to one vote
for each share of common stock held as of the record date.
Q: What is the time and place of the special meeting?
A: The special meeting will be held on December 21, 2007, at our main office
at 31 Market Street, Ipswich, Massachusetts 01938, at 8:30 a.m. Eastern
Time.
Q: Who may be present at the special meeting and who may vote?
A: All holders of our common stock may attend the special meeting in person.
However, only holders of our common stock of record as of November 14,
2007 may cast their votes in person or by proxy at the special meeting.
Q: What is the vote required?
A: The proposal to approve the Articles of Amendment must receive the
affirmative vote of the holders of at least two-thirds of our shares of
issued and outstanding common stock. If you do not vote your shares,
either in person or by proxy, or if you abstain from voting on the
proposal, it has the same effect as if you voted against the proposal to
approve the Articles of Amendment. In addition, if your shares are held in
a brokerage account and you do not instruct your broker on how to vote on
the proposal, your broker will not be able to vote for you. This will have
the same effect as a vote against the proposal to approve the Articles of
Amendment.
Q: What is the recommendation of our board of directors regarding the
proposals?
A: Our board of directors has unanimously determined that the Articles of
Amendment are fair to our unaffiliated shareholders, both those retaining
their common stock and those receiving Series A Preferred Stock, and that
approval is advisable and in the best interests of the Company and each of
these constituent groups. Our board of directors has therefore approved
the Articles of Amendment and all transactions contemplated thereby and
recommends that you vote "FOR" approval of the Articles of Amendment.
Q: What do I need to do now?
A: Please sign, date, and complete your proxy card and promptly return it in
the enclosed, self-addressed, prepaid envelope so that your shares can be
represented at the special meeting. If you wish to exercise appraisal
rights, see page 47 and Appendix C.
8
Q: May I change my vote after I have mailed my signed proxy card?
A: Yes. Just send by mail a written revocation or a new, later-dated,
completed and signed proxy card before the special meeting, or attend the
special meeting and vote in person. You may not change your vote by
facsimile or telephone.
Q: If my shares are held in "street name" by my broker, how will my shares be
voted?
A: Following the directions that your broker will mail to you, you may
instruct your broker how to vote your shares. If you do not provide any
instructions to your broker, your shares will not be voted on the proposal
to approve the Articles of Amendment.
Q: Will my shares held in "street name" or another form of record ownership
be combined for voting purposes with shares I hold of record?
A: No. Because any shares you may hold in street name will be deemed to be
held by a different shareholder from any shares you hold of record, any
shares so held will not be combined for voting purposes with shares you
hold of record. Similarly, if you own shares in various registered forms,
such as jointly with your spouse, as trustee of a trust, or as custodian
for a minor, you will receive, and will need to sign and return, a
separate proxy card for those shares because they are held in a different
form of record ownership. Shares held by a corporation or business entity
must be voted by an authorized officer of the entity, and shares held in
an IRA must be voted under the rules governing the account.
Q: If I am receiving Series A Preferred Stock in the Reclassification, when
will I get my stock?
A: After the special meeting and the closing of the transaction, we will mail
you instructions on how to exchange your common stock certificate(s) for
Series A Preferred Stock. After you sign the forms provided and return
your stock certificate(s), we will send you your Series A Preferred Stock.
Q: Will I have Appraisal Rights in connection with the Reclassification?
A: If you are the record holder of fewer than 200 shares of common stock, you
will have appraisal rights. See page 47 and Appendix C for additional
information.
Q: What if I have questions about the Reclassification or the voting process?
A: Please direct any questions about the Reclassification or the voting
process to our Chief Financial Officer, Timothy L. Felter, at our main
office located at 31 Market Street, Ipswich, Massachusetts, telephone
(978) 356-3700.
9
SPECIAL FACTORS
Purpose of the Reclassification
The primary purpose of the Reclassification is to enable us to reduce the
costs of regulatory compliance by suspending our reporting obligations with the
SEC under the Exchange Act. Although we intend to keep our common and Series A
Preferred shareholders informed as to our business and financial status after
the Reclassification, we anticipate that the Reclassification will enable us to
save significant legal, accounting and administrative expenses relating to our
public disclosure and reporting requirements under the Exchange Act.
After the Reclassification, we intend to keep our common and Series A
Preferred shareholders informed about our business and financial condition by
posting annual audited financial statements and quarterly unaudited financial
statements on our website, which also contains other information about our
business. Moreover, our business operations are primarily conducted through the
Bank which is required to file quarterly financial reports with the FDIC. These
reports are available online at www.fdic.gov.
Although we will still be required to file quarterly financial information
with the FDIC and will still provide annual audited and interim unaudited
financial information to our shareholders, as a non-SEC reporting company our
auditing expenses will decrease significantly because we and our auditors will
not be required to comply with standards prescribed by the SEC and the Public
Company Accounting Oversight Board with respect to our audit and because our
auditors will not be required to review the information we must now include in
our periodic SEC reports as described more fully below. Our other reporting
processes will also be significantly simplified because we will no longer be
required to comply with disclosure and reporting requirements under the Exchange
Act and the Sarbanes-Oxley Act. These requirements include preparing and filing
current and periodic reports with the SEC regarding our business, financial
condition, board and management team, having these reports reviewed by outside
counsel and independent auditors, and, for the year ended December 31, 2007,
documenting, testing and reporting on our internal control structure.
In particular, as a private company, we will no longer be required to file
annual reports on Form 10-KSB or quarterly reports on Form 10-QSB with the SEC.
The Form 10-KSB rules require detailed disclosures regarding executive
compensation, corporate governance and management stock ownership, which are not
required in our financial reports to the FDIC or our audited financial
statements. Additionally, we will no longer be required to include management's
discussion and analysis of our financial results in annual reports to
shareholders or financial reports to the FDIC. Currently, our external auditors
read the entire Form 10-KSB for consistency with audited financial statements
and to ensure we are in compliance with applicable disclosure requirements.
We also incur substantial costs in management time and legal and
accounting fees related to the preparation, review and filing of our periodic
reports. Unlike the periodic reports that we currently file with the SEC, the
quarterly financial information that we file with the FDIC does not require the
review of either our independent accountants or legal counsel. As a result of
the suspension of the disclosure and reporting requirements under the Exchange
Act, we estimate that we will save approximately $70,000 per year in management
time and $180,000 per year in legal and accounting fees.
10
Furthermore, as a private company, we will not be required to comply with
Section 404 of the Sarbanes-Oxley Act, which would require that we document,
test and assess our internal control structure and that our external auditors
report on management's assessment of our internal control structure. These
requirements would become effective, in part, for our fiscal year ending 2007,
with the remaining requirements becoming effective for our fiscal year ending
2008. As a result of our limited personnel resources, we anticipate that we
would need to engage an outside consultant to assist management in documenting
and testing our internal control structure. Additionally, we estimate that our
external audit fees will increase as a result of Section 404 because our
external auditors will be required to perform additional audit procedures in
order to report on management's assessment of our internal control structure. We
estimate that we would incur approximately $110,000 annually in consulting,
compensation, and accounting expenses related to compliance with Section 404 of
the Sarbanes-Oxley Act, plus one-time fiscal 2007 and 2008 fees of approximately
$240,000 for initial consultation activities in these areas. If our SEC
reporting obligations are suspended prior to the effective date of Section 404
of the Sarbanes-Oxley Act, we will not need to incur these expenses.
Additionally, we are currently required to file our periodic reports
electronically with the SEC through the SEC's "EDGAR" filing system. We incur
substantial expense in converting documents to be filed with the SEC into an
EDGAR format. By suspending our reporting requirements with the SEC, we will be
able to save approximately $10,000 per year in costs related to preparing
documents for filing via the EDGAR system.
We are required to comply with many of the same securities law
requirements that apply to large public companies with substantial compliance
resources. Our resources are more limited, however, and these compliance
activities represent a significant administrative and financial burden to a
company of our relatively small size and market capitalization. We also incur
less tangible but nonetheless significant expenditure of management's time and
attention that could otherwise be deployed toward revenue-enhancing activities.
In summary, our estimated cost of compliance with the Exchange Act and the
Sarbanes-Oxley Act is substantial, representing an estimated direct and indirect
annual cost to us of approximately $285,000 with the expected effect of Section
404 of the Sarbanes-Oxley Act. Our anticipated cost savings are also summarized
under "Special Factors--Reasons for the Reclassification" on page 17.
As of August 10, 2007, we had approximately 402 common shareholders of
record, but approximately 56.38% of the outstanding shares as of that date were
held by two shareholders. Additionally, of our 402 common shareholders,
approximately 158 shareholders each held fewer than 200 shares, or an aggregate
of approximately 0.5% of our outstanding common stock as of August 10, 2007. Our
common stock is not listed on an exchange and has historically been thinly
traded. However, because we have more than 300 shareholders of record, we are
required to comply with the disclosure and reporting requirements under the
Exchange Act and the Sarbanes-Oxley Act.
Even after the Company suspends its reporting obligations with the SEC,
the Company's common and preferred stock will still be eligible for quotation on
the OTC Bulletin Board ("OTCBB"), a listing service for NASD members. The OTCBB
is not an exchange and the Company's stock is not, and will not be, "traded" on
the OTCBB. The Company's stock will be eligible for quotation on the OTCBB
because the Company and the Bank file publicly available financial information
with their regulators. If our common stock continues to be quoted on the OTCBB,
we will have no direct control over the number of record shareholders of our
common stock. Therefore, if we have 300 or more record shareholders on any
future January 1st, we will again become subject to the reporting requirements
of the Exchange Act and will lose the benefits of the Reclassification.
11
In light of the limited market for the Company's common stock, the
availability of capital from sources other than the public markets, and the
Company's present inability to conduct a public offering due to our inability to
file pre-acquisition audited financial statements for the Boston Branch in
connection with its acquisition, the Committee believes that going private will
not have a significant impact on any anticipated needs of the Company to raise
additional capital. If the Company needs to raise additional capital to pay the
trust preferred obligations or to support future growth, the Company's financing
alternatives will not be substantially, adversely affected by its status as a
private company.
We believe the Reclassification will provide a more efficient means of
using our capital to benefit our shareholders by allowing us to save significant
administrative, accounting, and legal expenses incurred in complying with
disclosure, reporting and compliance requirements described above. Moreover, we
believe that our limited trading market and the resulting inability of our
shareholders to realize the full value of their investment in our common stock
through an efficient market has resulted in little relative benefit for our
shareholders as compared to the costs of maintaining our registration.
Additionally, the Reclassification will give all of our shareholders the
opportunity to retain an equity interest in the Company and therefore to
participate in any future growth and earnings of the Company and in any future
value received as a result of the sale of the Company.
Alternatives Considered
In making our determination to proceed with the Reclassification, we
considered other alternatives. We rejected these alternatives because we
believed the Reclassification would be the simplest and most cost-effective
manner in which to achieve the purposes described above. These alternatives
included:
Cash-Out Merger. The board considered the reorganization of the Company through
a merger with a new corporation formed solely to effect a reorganization. In a
cash-out merger, shareholders owning fewer than 200 shares of our common stock
would have received cash equal to the fair value of the common stock in exchange
for their shares, and all other shares of our common stock would have remained
outstanding. Accordingly, a cash-out merger would not offer all shareholders an
opportunity to retain an equity interest in the Company, to participate in
future growth and earnings of the Company, or to benefit from any future value
received as a result of the sale of the Company. While shareholders could
consolidate their accounts or acquire sufficient shares to attain the 200 share
threshold in order to retain an equity interest in the Company, the board
preferred to structure a transaction that would allow shareholders to retain an
equity interest without being required to pay for additional shares or
consolidate their holdings in a way that might not otherwise be advantageous for
them. Further, the receipt of cash in exchange for shares of common stock would
generally result in a negative tax consequence for those shareholders receiving
cash.
Additionally, based on the number of shares held by shareholders holding
fewer than 200 shares of record, management estimated that a cash-out merger
could have cost more than $100,000. As a result, the board anticipated that the
Company would have to incur debt to finance such a reorganization, which it does
not want to do because of the difficulty for the Company's trust preferred
obligations. The board also believes it is important to maintain a strong
capital position in order to support the future growth and operations of the
Bank.
Based on the foregoing reasons, the board rejected this alternative.
12
Reverse Stock Split. The board considered declaring a reverse stock split, with
cash payments to shareholders who would hold less than one share on a post-split
basis. This alternative would also have the effect of reducing the number of
shareholders, but would require us either to account for outstanding fractional
shares after the transaction, engage in a forward stock split at the reverse
split ratio, or pay cash to shareholders holding any resulting fractional
shares. The estimated cost of this alternative was approximately the same as the
cash-out merger. This alternative would have also required the Company to incur
debt to finance the repurchase of shares. A reverse stock split also would not
have offered all shareholders an opportunity to retain an equity interest in the
Company. Accordingly, a reverse stock split was rejected for the same reasons as
the cash-out merger alternative, as well as administrative inconvenience and
potential additional cost involved in issuing or eliminating fractional shares
as described above.
Issuer Tender Offer. We also considered an issuer tender offer to repurchase
shares of the Company's outstanding common stock. The results of an issuer
tender offer would be unpredictable, however, due to its voluntary nature. We
were uncertain as to whether this alternative would result in shares being
tendered by a sufficient number of shareholders so as to result in our common
stock being held by fewer than 300 shareholders of record. Additionally, if a
sufficient number of shares were tendered, we estimate the cost of this
alternative would be approximately the same as the cash-out merger. Therefore,
this alternative would also require the Company to incur debt to finance the
repurchase of the tendered shares. As a result, we also rejected this
alternative.
Expense Reductions in Other Areas. While we might be able to offset a portion of
the expenses relating to SEC reporting requirements by reducing expenses in
other areas, we have not pursued such an alternative because there are no areas
in which we could achieve comparable savings without unacceptably, adversely
affecting vital parts of its business and impeding our future growth. We believe
the expense savings a Reclassification would enable us to accomplish will not
adversely affect our ability to execute our business plan, but will instead
position us to execute it more efficiently. For these reasons, we did not
believe cost reductions in other areas were an alternative to the
Reclassification.
Business Combination. The board considered a business combination but determined
that it would not be in the best interests of the shareholders and that
shareholder value could be maximized by the Company increasing its
profitability.
Maintaining the Status Quo. The board considered maintaining the status quo. In
that case, we would continue to incur the significant expenses of being an
SEC-reporting company without commensurate benefits. Thus, the board considered
maintaining the status quo not to be in the best interests of the Company or any
of its shareholders.
Background of the Reclassification
We have filed reports with the SEC since 2004. These reports include
annual, quarterly and current reports analyzing our business, financial
condition, results of operations and management structure; and disclosure about
our directors and officers, their compensation and our corporate governance
process. We are also required to comply with the Sarbanes-Oxley Act, which
governs our activities in a variety of areas, including disclosure and internal
controls, internal and external audit relationships, and the duties and
qualifications of our board committees. While we have complied with these
requirements and believe they are generally beneficial to our shareholders, our
compliance costs have increased each year, while our already limited personnel
13
resources have remained essentially constant. We anticipate further increases in
compliance costs as a result of the detailed report of our internal controls
that we will be required to file for fiscal year 2007 under Section 404 of the
Sarbanes-Oxley Act. See "Special Factors--Reasons for the Reclassification"
below.
On several occasions in 2005 and 2006, the Company's management and the
board discussed generally the relative benefits and costs, both direct and
indirect, relating to continuing the Company's status as a public company. These
discussions intensified after the Bank became subject to the Formal Agreement
with the OCC in June 2006, principally because the Bank was under heightened
regulatory pressure to increase its capital ratios and achieve consistent
profitability.
In late 2006, in order to achieve such objectives and as required by the
Formal Agreement, the Company developed a Strategic Plan to become a highly
profitable community bank. One of the principal ways to accomplish this is for
the Company to maintain a focused effort to grow the small business client base,
which will generate more loans and deposits. A primary goal of the strategic
plan was, and is, to evaluate operations and identify locations and business
lines which are not enhancing the profitability of the Company.
In connection with the development and implementation of the Strategic
Plan the Company considered the possible sale of material assets to several
other banking organizations. The Company engaged in serious negotiations which
resulted in the sale of its trust department, the Cambridge branch, the
Londonderry branch loan portfolio, 40% of its investment portfolio, and
$1,000,000 of the Company's common stock.
On November 13, 2006, our Audit Committee and certain members of
management met with our independent auditors, Wolf & Company, P.C., and
discussed generally the impending application of the increased internal control
requirements under Section 404 of the Sarbanes-Oxley Act. The committee members
were informed that the costs of compliance with Section 404 could be significant
as a result of the requirement for management to document and assess the
Company's internal controls over financial reporting, and the related
requirement for the independent auditors to render an opinion on management's
assessment of such controls. Compliance with Section 404 would include
significant documentation and testing on the part of both management and the
independent auditors. In view of the extensive nature of the compliance
undertaking and the Bank's limited personnel and economic resources, and the
existing costs of being a public company, discussion ensued concerning the
possibility of going private. The committee determined that they would further
discuss this alternative with management, counsel and other members of the board
of directors.
On March 21, 2007 the board met with representatives from Craig and
Macauley, our corporate counsel, and Northeast Capital & Advisory, Inc., a
financial advisor experienced in assisting financial institutions in going
private transactions, to discuss the Company's options for reducing its
shareholder base. Counsel provided the board with an overview of the steps
necessary to engage in a going private transaction. In addition, counsel noted
that if the Company were able to reduce its shareholder base below 300 by
year-end, the Company would still need to wait until January 1, 2008 to suspend
its reporting obligations with the SEC due to our inability to file
pre-acquisition audited financial statements for the Boston Branch in connection
with its acquisition.
The board's discussion at the March 21st meeting focused on the relative
costs and benefits of being a public company as described in "Special
Factors--Purpose of the Reclassification" and on the transactional alternatives
of a reclassification, reverse stock-split, cash-out merger, issuer tender
offer, and business combination. At the conclusion of this discussion, and on
the recommendation of Craig and Macauley, the board formed a special committee
of independent directors to:
14
o Evaluate the benefits and feasibility of taking the Company private;
o Establish a process for investigating alternative approaches for the
taking the Company private by decreasing the number of shareholders below
300 by January 1, 2008;
o Make a recommendation to the full board regarding going private; and
o Ensure that the process established above and the recommendation made to
the full board each take into consideration the fairness of the
transaction to unaffiliated shareholders.
The special committee was comprised of four independent directors: Robert
Borden, Timothy Collins, Craig Deery, and Stephanie Gaskins. The committee spent
three months considering whether the Company should go private, and if so,
whether the Reclassification was the best alternative for accomplishing this
goal. The committee met a total of nine times. The committee engaged Craig and
Macauley and Northeast Capital to provide legal and financial advice,
respectively. The committee also consulted with Wolf & Company, P.C. on
accounting and audit questions, and regularly solicited management's opinions on
key business issues.
The special committee met for the first time on April 3, 2007. At the
committee's request, counsel distributed a memorandum (that was earlier prepared
and distributed to the board) for use in discussion. The memorandum described
some of the advantages and disadvantages of a going private transaction to both
affiliated and unaffiliated shareholders, and transactional alternatives,
including a reclassification, reverse stock split, cash-out merger, tender
offer, and business combination. Counsel also answered questions for the
committee concerning the timetable and process of a going private transaction.
Additional information was requested from management for the next meeting.
At the next three meetings of the special committee on April 17, April 24
and May 8, 2007, the special committee focused on the Company's heightened
capital needs and other unique issues as it considered a going private
transaction. For instance, the committee was especially sensitive to the effects
of alternatives on unaffiliated, minority shareholders in light of the high
concentration of the Company's common stock with directors, executive officers
and significant shareholders. The committee also considered the Company's
alternatives for raising capital, and that the Company may need to raise capital
in the near term to cover interest payments on its trust preferred obligations.
A representative from Northeast Capital answered questions for the committee
concerning alternative methods for the Company to raise capital.
On May 8, 2007, the special committee continued its discussion of the
transactional alternatives described above. The committee ultimately decided a
cash transaction would not be in the best interests of the Company and its
shareholders in light of our heightened capital needs and management's
prediction that we will have limited excess cash in the next year. Moreover, the
committee preferred a transaction in which all shareholders would have the
ability to retain an equity interest in the Company.
Between May 15 and 30, 2007, the special committee discussed the features
of a stock reclassification. The discussion focused on the different
characteristics that the preferred stock would need to have, including
differences in voting, liquidation preference, dividend entitlement, and
treatment upon a change in control. The committee also discussed the appropriate
individual stock ownership threshold for the reclassification of common stock
into preferred stock. Management distributed a schedule that showed the impact
of ten different stock ownership thresholds on our shareholders and the
percentage of outstanding stock.
15
The special committee ultimately concluded that the "below 200 share"
threshold represented the optimal division point. This decision was based on the
relative record ownership of the Company's shareholders and the need to reduce
the number of common shareholders of record below 300 and generate fewer than
500 preferred shareholders of record (so that the class of preferred stock does
not automatically become subject to registration due to the number of its record
shareholders), while leaving room for expansion in each class.
On June 13, 2007, the special committee discussed the substantive and
procedural fairness of the Reclassification to the Company's affiliated and
unaffiliated shareholders as described in "Special Factors--Recommendation of
the Board of Directors; Fairness of the Reclassification." The committee also
summarized its analyses and recommendations to the board concerning a going
private transaction generally, and the Reclassification specifically, in a
unanimous final report to the board.
At its final meeting on June 20, 2007, the special committee reviewed the
report prepared by Northeast Capital entitled "The Efficacy of a Going Private
Transaction," which sets forth various financial analyses performed by Northeast
Capital in connection with the Reclassification. In addition, the committee
delivered its final report to the full board of directors.
At the board's regularly scheduled meeting on June 20, 2007, the board
carefully reviewed and extensively discussed the final report of the special
committee to the board along with the proposed terms of the Reclassification.
The board also discussed and evaluated the fairness of the Reclassification to
our unaffiliated shareholders. Finally, a representative from Northeast Capital
delivered a presentation to the board, entitled "The Efficacy of a Going Private
Transaction." Northeast Capital rendered a written fairness opinion to the board
on the following day stating its conclusion that from a financial point of view,
the Reclassification was fair to the Company's unaffiliated shareholders.
The board decided to consult with the Company's Board of Advisors
concerning the proposed terms of the Reclassification prior to taking a final
vote on it. The Board of Advisors is comprised of twenty-one highly esteemed
individuals from the community who are unaffiliated with the Company except that
many are customers and shareholders (less than 5%). As the members of the Board
of Advisors are not affiliated shareholders, the board felt they were in a
position to provide helpful comments about the proposed transaction. No
suggestions for changes were offered by the Board of Advisors.
On June 21, 2007, after reviewing Northeast Capital's fairness opinion and
consulting with the Company's Board of Advisors, the board unanimously
determined that the Reclassification was in the best interests of the Company
and its shareholders, and that the Reclassification was fair to both the
affiliated and unaffiliated shareholders of the Company. The board adopted the
recommendations and supporting analyses of the special committee concerning the
Reclassification and voted to seek shareholder approval for the
Reclassification. The board also instructed management to work with Craig and
Macauley to prepare the necessary filings and disclosure documents to effect the
Reclassification.
Between June and August, 2007, management worked with Craig and Macauley,
Wolf & Company, P.C., and Northeast Capital to prepare this proxy statement and
the other documents necessary for the Reclassification. During this time, the
board was regularly updated on the status of the proposed Reclassification. On
September 5, 2007, after review of the preliminary proxy statement and the other
necessary materials, the directors approved the Schedule 13E-3, and the same was
filed with the SEC on September 11, 2007.
At the board's request, Northeast Capital rendered an updated fairness
opinion to the board on November 2, 2007, stating its conclusion that from a
financial point of view the Reclassification was fair to the Company's
unaffiliated shareholders. On November 2, 2007, after reviewing Northeast
Capital's updated fairness opinion, the board unanimously determined that the
Reclassification was in the best interests of the Company and its shareholders,
and that the Reclassification was fair to both the affiliated and unaffiliated
shareholders of the Company. In addition, the board unanimously approved the
first amendment to the Schedule 13E-3, and the same was filed with the SEC on
November 5, 2007.
On November 13, 2007, the board fixed the record date for the special
meeting of shareholders as November 14, 2007, and the second amendment to the
Schedule 13E-3, of which this definitive proxy statement is a part, was filed
with the SEC on or about November 19, 2007.
16
Reasons for the Reclassification
Our decision to pursue the Reclassification is one of a series of
cost-cutting steps we have taken since the Bank became subject to a Formal
Agreement with the OCC in June 2006. The Formal Agreement calls for the Bank to
maintain heightened capital levels, among other requirements. To this end, the
Bank has sold considerable assets in the past year, including its trust
department, Cambridge branch, Londonderry loan portfolio and 40% of its
investment portfolio. In early 2007, we conducted a $1 million private offering
to further bolster the capital position of the Company and the Bank.
As described above in "Special Factors--Purpose of the Reclassification,"
the Reclassification will allow us to save significant costs related to the
preparation, review and filing of our periodic reports. We also expect to
experience savings related to EDGAR conversion costs and proxy solicitation
costs, including printing and mailing costs. We expect printing and mailing
costs to be lower because financial statements and other reports that we deliver
to shareholders after the Reclassification will not include many of the
disclosures required under the periodic reporting rules, such as disclosures
regarding executive compensation, corporate governance and management ownership,
and management's discussion and analysis of our financial results. Additionally,
we plan to go private before we are required to take substantial steps toward
compliance with Section 404 of the Sarbanes-Oxley Act so that we will save
additional anticipated costs related to documenting, testing and reporting on
our internal control structure.
We estimate that we will save up to approximately $175,000 per year in the
areas listed in the tables below as a result of the reduction in the number of
common shareholders and the suspension of our SEC reporting obligations. We
expect to save the following fees and expenses related to the preparation,
review and filing of periodic and current reports (Form 10-KSB, Form 10-QSB and
Form 8-K) with the SEC:
Management and Staff Time $ 50,000
Legal Fees 70,000
Independent Auditor Fees 35,000
EDGAR conversion, proxy solicitation, printing and mailing costs 20,000
--------
Total $175,000
========
In addition, we anticipate that the Company will not be required to pay
additional one-time fiscal 2007 and 2008 fees of approximately $100,000 for
initial Section 404 consulting fees as well as $100,000 and $40,000 for related
2007 and 2008 management time and expenses.
17
In addition to the above costs, we expect to save the following annual
fees and expenses each year related to compliance with the requirements under
Section 404 of the Sarbanes-Oxley Act.
Annual Consulting Fees $ 15,000
Independent Auditor Fees 75,000
Management and Staff time 20,000
--------
Total Section 404 Compliance Costs $110,000
========
Total Estimated Annual Savings $285,000
Additional One-Time 2007 and 2008 Savings $240,000
As is noted above, we incur substantial costs in management time spent on
securities compliance activities. Although it is impossible to quantify these
costs specifically, management estimates that they currently spend a substantial
amount of their time on activities directly related to compliance with federal
securities laws, such as preparing and reviewing SEC-compliant financial
statements and periodic reports, maintaining and overseeing disclosure and
internal controls, and consulting with external auditors and counsel on
compliance issues. In addition, if we do not suspend our reporting obligations,
management expects to spend several additional days per quarter on activities
related to compliance with Section 404 of the Sarbanes-Oxley Act.
Effects of the Reclassification on the Company
The Reclassification is designed to reduce the number of our common
shareholders of record below 300 by January 1, 2008, which will allow us to
suspend our reporting obligations with the SEC after such date. Based on
information as of August 10, 2007, we believe that the Reclassification will
reduce our number of common shareholders of record from approximately 402 to
approximately 244. We estimate that approximately 12,081 shares (or
approximately 0.5% of the issued and outstanding shares of our common stock)
held by approximately 158 common shareholders of record will be exchanged for
Series A Preferred Stock in the Reclassification and that approximately
2,332,549 shares of our common stock will be issued and outstanding after the
Reclassification. In addition to the exchange of shares of our common stock for
shares of our Series A Preferred Stock, we believe the Reclassification will
have the following effects on us:
POSITIVE EFFECTS:
- Suspension of SEC Reporting Obligations. After the Reclassification,
we will not be subject to the periodic reporting requirements under
the Exchange Act. Additionally, we will maintain our existing
internal control procedures and continue to evaluate them for
potential improvements but will not be required to document, test
and report on our internal control structure as required by Section
404 of the Sarbanes-Oxley Act. We expect to eliminate direct and
indirect costs and expenses associated with our SEC reporting, which
we estimate would be up to approximately $285,000 on an annual
basis, including costs related to compliance with Section 404 of the
Sarbanes-Oxley Act. We also expect that these savings will
positively impact our annual earnings per share by approximately
$0.12 per share. Additionally, as a non-SEC reporting company, we
believe our management team, which currently spends a significant
amount of time on activities related to compliance with the Exchange
Act, will have significantly more time to devote to business
development and revenue-enhancing activities. See "Special
Factors--Background of the Reclassification" and "Special
Factors--Reasons for the Reclassification" for a discussion of the
nature of the information we will no longer be required to provide.
18
- Outstanding Stock Options. The Reclassification will have no effect
on outstanding warrants and options to purchase our common stock.
- Elimination of Liability Under Section 18 of the Exchange Act.
Because the Company will no longer be required to file any reports
under the Exchange Act, it will no longer be subject to liability
under Section 18 of the Exchange Act. Generally, Section 18 provides
that if the Company makes a false or misleading statement with
respect to any material fact in any of its filings pursuant to the
Exchange Act, in light of the circumstances at the time the
statement was made, the Company will be liable to any person who
purchases or sells a security at a price that is affected by the
statement.
NEGATIVE EFFECTS:
- Effect on Market for Shares. Our common stock is not listed on an
exchange and has historically been thinly traded. The public
information concerning the Company as a result of its not being
required to file reports under the Exchange Act may adversely affect
the already limited liquidity of our common stock and result in
limited liquidity for our Series A Preferred Stock. Additionally,
the liquidity of the common stock may also be reduced because the
number of shares available to be traded will decrease after the
Reclassification. A decrease in the market liquidity for the shares
of our common stock may cause a decrease in the value of the shares.
Conversely, however, the more limited supply of our common stock
could also prompt a corresponding increase in its market price,
assuming a stable or increased demand for the stock.
- Earnings (Losses) Per Share. Pro forma basic and diluted earnings
(losses) per share will not change from the $0.06 per share reported
for the nine months ended September 30, 2007. However, pro forma
basic and diluted earnings (losses) per share (assuming a January 1,
2006 reclassification date) will decrease from the $(0.52) per share
reported for the year ended December 31, 2006 to $(0.61) per share
because of the projected cost of the reclassification process.
- Book Value Per Common Equivalent Share. Book value per common
equivalent share, which includes the Series A Preferred Stock, will
decrease approximately 1.0% from $8.24 on a historical basis to
$8.17 on a pro forma basis as of September 30, 2007.
- Financial Effects of the Reclassification. We estimate that
professional fees and other expenses related to the transaction will
total approximately $179,000. We plan to pay these fees and expenses
out of our existing working capital and do not expect that the
payment of these expenses will have a material adverse effect on our
capital adequacy, liquidity, results of operations or cash flow. You
should read the discussion under "Approval of the Articles of
Amendment--Source of Funds and Expenses" for a description of our
source of funds for the fees and expenses we expect to incur in
connection with the transaction.
19
OTHER EFFECTS:
- Conduct of Business After the Reclassification. We expect our
business and operations to continue as they are currently being
conducted and, except as disclosed below, the transaction is not
anticipated to have any effect upon the conduct of our business.
- Raising Additional Capital and Obtaining Financing After the
Reclassification. In light of the limited market for the Company's
common stock, the availability of capital from sources other than
the public markets, and the Company's present inability to conduct a
public offering due to our inability to file pre-acquisition audited
financial statements for the Boston Branch in connection with its
acquisition, we believe the suspension of our status as an
SEC-registered reporting company will not have a significant impact
on any future efforts by the Company to raise additional capital. If
we need to raise additional capital to pay the trust preferred
obligations or to support future growth, our financing alternatives
will not be substantially, adversely affected by our status as a
private company.
- Certain Federal Tax Consequences of the Reclassification. Neither
the Company nor the Bank will recognize gain or loss for U.S.
federal income tax purposes as a result of the Reclassification. See
"Special Factors--U.S. Federal Income Tax Consequences of the
Reclassification" on page 42 below for additional information.
- Plans or Proposals. Other than as described in this proxy statement,
we do not have any current plans or proposals to effect any
extraordinary corporate transaction such as a merger, reorganization
or liquidation; to sell or transfer any material amount of our
assets; to change our board of directors or management or any
material terms of the employment contract of any executive officer;
to change materially our indebtedness or capitalization; or
otherwise to effect any material change in our corporate structure
or business. As stated throughout this proxy statement, we believe
that our strategic objective of becoming a highly profitable
community bank will be significantly assisted by the
Reclassification and becoming a non-reporting company.
We announced on September 24, 2007 that we plan to sell the
downtown Boston office building that houses our Boston branch, which
is located at 31-33 State Street. We plan to retain a long-term
lease for the branch as part of the deal. The Bank retained CB
Richard Ellis to sell the building through a "call for offers"
process, and expects that the sale and leaseback will be completed
before the end of the year.
In June, 2007, we engaged an investment banker to advise us
regarding our review of possible material corporate transactions.
Our review of possible material corporate transactions will assist
us in the scheduled update of our Strategic Plan. Such transactions
include our contingent plan to consider selling the Company, the
possible sale of a material amount of our assets, and the possible
change of our indebtedness or capitalization. The investment banker
also advised us regarding our responses to banks which have inquired
about material transactions, including our initial discussions (now
concluded) with one bank which contacted us. The advice of this
investment banker is in addition to the advice provided by Northeast
Capital relating to the Reclassification, which is described under
"Special Factors--Background of the Reclassification and--Opinion of
Financial Advisor."
In April, 2007, the board of the Bank approved, subject to OCC
approval, a two year employment agreement with Mr. Cole (President
and Chief Executive Officer of the Company and the Bank) and change
in control agreements with Mr. Cole and Mr. Felter (Senior Vice
President and Chief Financial Officer of the Company and the Bank)
(two years salary each) and Ms. Brett (Senior Vice President,
Operations and Information Systems) and Ms. Costa (Senior Vice
President, Retail Banking) (one year salary each). The proposed
contracts will be submitted to the OCC for its approval.
20
Although management has no intention at present to enter into
any of the transactions described above (other than the proposed
agreements with the executive officers described above), there is
always a possibility that we may enter into such an arrangement or
transaction in the future, including, but not limited to, entering
into a merger transaction, selling a material amount of our assets,
making a public or private offering of our shares, or any other
arrangement or transaction we may deem appropriate.
Effects of the Reclassification on Affiliated Shareholders
In addition to the effects the Reclassification will have on shareholders
generally, which are described below, the Reclassification will have some
additional effects on our affiliated shareholders. As used in this proxy
statement, the term "affiliated shareholder" means any shareholder who is a
director or executive officer of the Company or the beneficial owner of 10% or
more of our outstanding common stock, and the term "unaffiliated shareholder"
means any shareholder other than an affiliated shareholder.
POSITIVE EFFECTS:
- No Further SEC Disclosure Obligations. After the Reclassification,
we will no longer be subject to the periodic reporting requirements
under the Exchange Act. As a result, information about the
compensation and stock ownership of our directors and executive
officers will no longer be publicly available.
- Consolidation of Management Ownership. As a result of the
Reclassification, we expect that the percentage of beneficial
ownership of our common stock held by our affiliated shareholders as
a group as of September 4, 2007 will increase from approximately
62.34% before the Reclassification to approximately 62.66% after the
Reclassification. See "Information about the Company--Stock
Ownership by Significant Shareholders" and "Information about the
Company--Stock Ownership by Directors and Executive Officers" for
information about the number of shares of common stock held by our
directors, executive officers and significant shareholders.
- Elimination of Liability Under Section 18 of the Exchange Act.
Because the Company will no longer be required to file any reports
under the Exchange Act, our directors and executive officers will no
longer be subject to liability under Section 18 with respect to such
reports. Currently, if any of our directors and executive officers
make a statement in any of the Company's filings under the Exchange
Act that, in light of the circumstances at the time the statement is
made, is false or misleading with respect to any material fact, such
director or executive officer may be liable under Section 18 of the
Exchange Act to any person that purchases or sells a security at a
price that is affected by the statement.
NEGATIVE EFFECTS:
- Earnings (Losses) Per Share. Pro forma basic and diluted earnings
(losses) per share will not change from the $0.06 per share reported
for the nine months ended September 30, 2007. However, pro forma
basic and diluted earnings (losses) per share (assuming a January 1,
2006 reclassification date) will decrease from the $(0.52) per share
reported for the year ended December 31, 2006 to $(0.61) per share
because of the projected cost of the reclassification process.
21
- Book Value Per Share. Because each of our affiliated shareholders
will retain his common stock in the Reclassification, his book value
per common equivalent share, which includes the Series A Preferred
Stock, will decrease 1.0% from $8.24 on a historical basis to $8.17
on a pro forma basis as of September 30, 2007.
- Rule 144 Not Available. Because we will no longer file periodic
reports with the SEC, our affiliated shareholders will be deprived
of the ability to dispose of their shares of common stock under Rule
144 of the Securities Act, which provides a "safe harbor" for
resales of stock by affiliates of an issuer. As a result, they will
need to resell their shares in a private transaction, which can
result in reduced liquidity for the recipient and a lower purchaser
price for the shares.
Effects of the Reclassification on Unaffiliated Shareholders
In addition to the effects the Reclassification will have on shareholders
generally, which are described in the next section, the Reclassification will
also have the following negative effects on our unaffiliated shareholders:
Reduction in Publicly Available Information. We will no longer be required
to file public reports of our financial condition and other aspects of our
business with the SEC after the Reclassification. Specifically, we will no
longer be required to make public disclosures regarding executive compensation,
corporate governance matters, or management stock ownership. As a result,
unaffiliated shareholders will have less legally-mandated access to information
about our business and results of operations than they had prior to the
Reclassification. Our affiliated shareholders who are directors and executive
officers of the Company, however, will continue to have continuous access to all
information regarding our financial condition and other aspects of our business
because of their positions with the Company.
Elimination of Protections Under Section 18 of the Exchange Act. Because
the Company will no longer be required to file any reports with the SEC, our
unaffiliated shareholders will no longer be afforded the protections under
Section 18 with respect to false or misleading statements in such reports.
Currently, if the Company or any of its directors or executive officers makes a
false or misleading statement with respect to any material fact in any of the
Company's filings under the Exchange Act, in light of the circumstances at the
time the statement was made, the Company or the director or executive officer
may be liable under Section 18 of the Exchange Act to any person who purchases
or sells a security at a price that is affected by the statement.
Effects of the Reclassification on Shareholders Generally
The Reclassification will have the following effects on shareholders
regardless of whether they are affiliated or unaffiliated shareholders. We
expect, however, that no shares held by our affiliated shareholders will be
reclassified to Series A Preferred Stock because none of our affiliated
shareholders will likely hold fewer than 200 shares of record at the effective
time of the Reclassification. The effects will vary depending on whether a
shareholder receives Series A Preferred Stock for his or her shares of our
common stock in the Reclassification. Because a shareholder may own shares in
more than one capacity (for example, individually and through an individual
retirement account), a shareholder may receive Series A Preferred Stock for some
of his or her shares of common stock while retaining ownership of other shares
of common stock following the Reclassification.
22
The following sections describe the material effects that we expect to
result from the Reclassification with respect to shares that are exchanged for
Series A Preferred Stock and shares that are unaffected by the Reclassification.
You may experience a combination of these effects if you receive Series A
Preferred Stock for some of your shares while retaining ownership of other
shares of common stock. The effects described below assume that 12,081 shares
are exchanged for Series A Preferred Stock in the Reclassification.
Shares Exchanged for Series A Preferred Stock. As to shares of our common
stock that are exchanged in the Reclassification for Series A Preferred Stock,
shareholders will experience the following effects:
POSITIVE EFFECTS:
- Shareholders whose shares are subject to the Reclassification will
be entitled to exercise appraisal rights under Section 13.02 of the
MBCA. Upon perfection, we will pay such shareholders the fair value
of their shares in cash.
- The Series A Preferred Stock will automatically convert into shares
of common stock upon a Change in Control of the Company, on the
basis of one share of common stock for each share of Series A
Preferred Stock (subject to antidilution protection), and thus
holders of the Series A Preferred Stock will participate equally
with the holders of common stock in any sale of the Company.
- Holders of the Series A Preferred Stock will have a preference to
holders of common stock upon any liquidation of the Company in an
amount equal to the greater of the book value per share of the
Series A Preferred Stock at the time of payment, the amount per
share to be paid to common shareholders, or $9.05.
- Holders of the Series A Preferred Stock will be entitled to a
preference in the distribution of dividends, when and if declared by
the Company, so that the holders of the Series A Preferred Stock
will be entitled to receive dividends in an amount equal to that
paid to common shareholders prior to the receipt of dividends by the
holders of common stock.
- Under Massachusetts law, the designations, rights, preferences and
limitations of the Series A Preferred Stock cannot be changed
without the approval of the holders of the Series A Preferred Stock
voting as a separate group. However, see the discussion below under
"Negative Effects" regarding our board's authority to issue new
classes or series of preferred stock or equity securities in the
future that rank senior to or on parity with the Series A Preferred
Stock.
- At December 31, 2006, the Company had a federal net operating loss
carry forward of $1,263,000 which expires in 2026. All affiliated
and unaffiliated shareholders, including shareholders whose shares
will be reclassified to Series A Preferred Stock, will share pro
rata (on a fully diluted and converted basis) in the future benefit
of the net operating loss carry forward.
NEGATIVE EFFECTS:
- Pro forma basic and diluted earnings (losses) per share will not
change from the $0.06 per share reported for the nine months ended
September 30, 2007. However, pro forma basic and diluted earnings
(losses) per share (assuming a January 1, 2006 reclassification
date) will decrease from the $(0.52) per share reported for the year
ended December 31, 2006 to $(0.61) per share because of the
projected cost of the reclassification process.
23
- Book value per common equivalent share, which includes the Series A
Preferred Stock, will decrease approximately 1.0% from $8.24 on a
historical basis to $8.17 on a pro forma basis as of September 30,
2007.
- Holders of Series A Preferred Stock will be entitled to vote only
upon a Change in Control of the Company, which generally is a
business combination resulting in the transfer of a majority of the
outstanding common stock, or the acquisition of all or substantially
all of the Company's assets. Holders of Series A Preferred Stock
will not be entitled to vote on the election of directors. However,
because such shareholders only hold an aggregate of approximately
0.5% of the Company's outstanding common stock as of September 30,
2007, these shareholders currently have limited influence on
shareholder votes.
- Our board of directors, which will be elected by the holders of the
common stock after the Reclassification, may authorize the issuance
of other classes or series of preferred stock or equity securities
that rank senior to or on parity with the Series A Preferred Stock.
As a result, the rights and preferences of the Series A Preferred
Stock may be subordinate to the rights and preferences of any new
class or series of preferred stock or equity securities issued in
the future. Any new class or series of preferred stock or equity
securities that ranks senior to or on parity with the Series A
Preferred Stock would also be senior to our common stock.
Remaining Common Shareholders. As to shares of our common stock that are
not exchanged for Series A Preferred Stock in the Reclassification, shareholders
will experience the following effects:
POSITIVE EFFECTS:
- Common shareholders will continue to exercise sole voting control
over the Company, except with respect to a Change in Control of the
Company.
- Shareholders continuing to hold common stock after the
Reclassification will have relatively increased voting control over
the Company because the number of outstanding shares of common stock
will be reduced.
- At December 31, 2006, the Company had a federal net operating loss
carry forward of $1,263,000 which expires in 2026. All affiliated
and unaffiliated shareholders, including shareholders whose shares
will be reclassified to Series A Preferred Stock, will share pro
rata (on a fully diluted and converted basis) in the future benefit
of the net operating loss carry forward.
NEGATIVE EFFECTS:
- Our common stock will rank junior in priority to the Series A
Preferred Stock because holders of Series A Preferred Stock will
have a preference upon any liquidation of the Company as well as
with respect to dividends.
- We anticipate the liquidity of the common stock will be reduced as a
result of the Reclassification. The reduced liquidity may cause a
decrease in the market value of our common stock. See "Special
Factors--Effects of the Reclassification on the Company."
Recommendation of the Board of Directors; Fairness of the Reclassification
The board believes that the Reclassification is substantively and
procedurally fair to our unaffiliated shareholders who will receive Series A
Preferred Stock in the Reclassification. The board also believes that the
24
Reclassification is substantively and procedurally fair to unaffiliated
shareholders who will retain their shares of common stock following the
Reclassification. The board of directors, including those directors who are not
employees of the Company, has approved the Reclassification and the Articles of
Amendment, and the board recommends that the shareholders vote for approval of
the Articles of Amendment, which will effect the Reclassification.
All of our directors and executive officers have indicated that they
intend to vote their shares of common stock (and any shares with respect to
which they have or share voting power) in favor of the Articles of Amendment.
Our directors and executive officers owned approximately 47.99% of the shares
outstanding as of September 4, 2007, and if they had exercised all of their
vested warrants and options, they would have owned 48.08% of the outstanding
shares. Although the board as a whole recommends that the shareholders vote in
favor of the Articles of Amendment for the reasons set forth in "Special
Factors--Reasons for the Reclassification," no director or executive officer is
making any recommendation to the shareholders in his or her individual capacity.
In addition, no director or executive officer currently intends to sell any of
his or her shares.
We considered a number of factors in determining to approve the
Reclassification, including the effects described under "Special
Factors--Effects of the Reclassification on the Company," "Special
Factors--Effects of the Reclassification on Affiliated Shareholders," and the
relative advantages and disadvantages described under "Special Factors--Reasons
for the Reclassification" and "Special Factors--Effects of the Reclassification
on Shareholders Generally." The board also reviewed the tax and pro forma
financial effects of the Reclassification on the Company and its shareholders.
After the Reclassification, we will no longer be an SEC reporting company.
The board considered the views of management regarding the cost savings to be
achieved by eliminating the reporting and disclosure requirements related to our
SEC registration, including indirect savings resulting from reductions in the
time and effort currently required of management to comply with the reporting
and other requirements associated with continued SEC registration. Similarly,
the board also considered the prospective decrease in the administrative expense
we incur in connection with soliciting proxies for routine meetings of
shareholders. Management determined that the Reclassification would result in
cost savings of approximately $285,000 per year.
Additionally, the board considered the effect that terminating the SEC
registration would have on the market for the common stock and the ability of
shareholders to buy and sell shares. However, the board determined that, even as
an SEC-registered company, we have not had an active, liquid trading market for
our common stock and that our shareholders derive little relative benefit from
our status as an SEC-registered company. The board determined that the cost
savings and reduced management time to be achieved by suspending SEC
registration outweighed any potential detriment from suspending registration.
We considered alternatives to the proposed going-private transaction but
ultimately approved the Reclassification proposal. Please read the discussion
under "Special Factors--Alternatives Considered" for a description of these
alternatives.
Substantive Fairness. The board considered numerous factors, discussed
below, in reaching its conclusions that the Reclassification and the Articles of
Amendment are substantively fair to our unaffiliated shareholders who will
receive Series A Preferred Stock in the Reclassification and to our unaffiliated
25
shareholders who will retain their shares of common stock. In reaching these
conclusions, the board considered all of the factors as a whole and did not
assign specific weights to particular factors:
FACTORS AFFECTING SHAREHOLDERS RECEIVING SERIES A PREFERRED STOCK AND
SHAREHOLDERS RETAINING COMMON STOCK
- Equity Interest in the Company. All shareholders will continue to
hold an equity interest in the Company and will continue to have the
opportunity to participate in any future growth and earnings,
including any future sale or Change in Control of the Company. The
board viewed this factor as supporting its determination of fairness
because no shareholders will be forced to involuntarily liquidate
their equity interest in the Company, as would be the case in a
cash-out merger or a reverse stock split. See "Special
Factors--Alternatives Considered."
- Substantial Cost and Management Time Savings. All shareholders will
benefit from the significant reduction in expenses that will result
from the Company going private as well as the substantial reduction
in management time spent on securities compliance activities. The
board viewed this factor as strongly supporting the fairness of the
Reclassification because all shareholders will benefit from the cost
savings despite that only 0.5% of the shares will be reclassified to
Series A Preferred Stock.
- Earnings (Losses) Per Share. Pro forma basic and diluted earnings
(losses) per share will not change from the $0.06 per share reported
for the nine months ended September 30, 2007. However, pro forma
basic and diluted earnings (losses) per share (assuming a January 1,
2006 reclassification date) will decrease from the $(0.52) per share
reported for the year ended December 31, 2006 to $(0.61) per share
because of the projected cost of the reclassification process. The
board viewed the decrease as nominal and believes the effect on
earnings per share supports its determination of fairness,
especially because the decrease in earnings per share affects both
the shareholders receiving Series A Preferred Stock and those
retaining common stock.
- Book Value Per Common Equivalent Share. Book value per common
equivalent share, which includes the Series A Preferred Stock, will
decrease approximately 1.0% from $8.24 on a historical basis to
$8.17 on a pro forma basis as of September 30, 2007. The board
viewed the 1.0% decrease as nominal and believes the effect on book
value supports its determination of fairness, especially because the
decrease in book value affects both the shareholders receiving
Series A Preferred Stock and those retaining common stock.
- Tax Consequences. The board noted that the Reclassification should
not result in a taxable event for shareholders receiving Series A
Preferred Stock and would not result in a taxable event for
shareholders retaining their shares of common stock. These tax
consequences contributed to the board's recommendation and
conclusion as to the fairness of the Reclassification to
unaffiliated shareholders who will receive Series A Preferred Stock
and those who will retain their shares of common stock following the
Reclassification. The board noted that if the transaction had been
structured as a cash-out merger or a reverse stock split, it would
have been a taxable event for those shareholders receiving cash. See
"Special Factors--Alternatives Considered" and "Special
Factors--U.S. Federal Income Tax Consequences of the
Reclassification" for more information regarding the tax
consequences of the Reclassification.
26
- Loss of Benefits of SEC Registration. After the Reclassification,
the Company will not be subject to SEC reporting obligations. This
will greatly reduce the amount of information that is publicly
available about the Company, including detailed analyses by
management of our financial results, current reports of significant
corporate events, copies of material contracts involving the
Company, and information as to executive and director compensation
and stock ownership. It will also eliminate certain corporate
governance safeguards resulting from the Sarbanes-Oxley Act, such as
the requirement for an audited report on the Company's internal
controls. The board noted that while the loss of the benefits of SEC
registration was, standing alone, a negative factor in its fairness
determination, the fact that detailed financial data about the
Company and the Bank would continue to be publicly available from
the Company, the Federal Reserve Board and the FDIC after the
Reclassification provided an offsetting benefit.
FACTORS AFFECTING SHAREHOLDERS RECEIVING SERIES A PREFERRED STOCK
In making its determination that the Reclassification was fair to
shareholders receiving Series A Preferred Stock, the board considered the
relative advantages and disadvantages of the following terms of the Series A
Preferred Stock:
- Liquidation Preference. In the event of the liquidation or
dissolution of the Company, before any payment is made to the
holders of the common stock, the holders of the Series A Preferred
Stock will be entitled to be paid in full (on a per-share basis) an
amount equal to the greater of book value per share at the time of
payment, the amount per share to be paid to common shareholders, or
$9.05. Although the board acknowledged that the liquidation
preference is not likely to affect shareholders, it nevertheless
viewed it as a benefit to the shareholders receiving Series A
Preferred Stock.
- Dividend Preference. The holders of the Series A Preferred Stock
will be entitled to a preference in the distributions of any
dividends prior to the payment of any dividends to the holders of
common stock. We have not declared or paid cash dividends in the
past five (5) quarters, and there is no guarantee that we will
declare or pay such dividends in the future. In addition, dividends
payable on the Series A Preferred Stock will not accumulate to
future periods. The board viewed the dividend preference as a
benefit to the shareholders receiving Series A Preferred Stock.
- Conversion to Common Stock on a Change in Control. Upon a Change in
Control of the Company, the Series A Preferred Stock will convert
automatically into shares of the Company's common stock. Therefore,
holders of the Series A Preferred Stock will participate in any
value received as a result of any future sale of the Company at the
same value per share as the holders of the common stock. Although a
sale of the Company is not contemplated in the near future, the
board viewed the conversion provision as a benefit to the
shareholders receiving Series A Preferred Stock.
- Limited Voting Rights. The holders of the Series A Preferred Stock
will be entitled to vote only upon a proposed Change in Control of
the Company. The holders of the Series A Preferred Stock will not be
entitled to vote on the election of directors and will therefore
have no influence on the future composition of the board of
27
directors or the senior management team of the Company. The board
noted, however, that the shareholders receiving Series A Preferred
Stock currently have limited influence on shareholder votes, because
those shareholders hold an aggregate of approximately 0.5% of our
outstanding common stock as of August 10, 2007. The board viewed the
limited voting rights as a negative factor for the shareholders
receiving Series A Preferred Stock.
While the board viewed the limited voting rights as a negative factor for
the shareholders receiving Series A Preferred Stock, the board concluded that
the overall terms of Series A Preferred Stock were fair to the shareholders
receiving Series A Preferred Stock because the Series A Preferred Stock includes
a liquidation preference to the common stock and a conversion provision and
voting rights in the event of a change of control of the Company. Additionally,
although shareholders receiving Series A Preferred Stock in the Reclassification
will be required to surrender their shares of common stock involuntarily in
exchange for the Series A Preferred Stock, the board believes that because the
shares of Series A Preferred Stock are convertible into common stock upon a
Change in Control, these shareholders will have an opportunity to participate in
any future growth and earnings of the Company.
FACTORS AFFECTING SOLELY THOSE SHAREHOLDERS RETAINING SHARES OF COMMON
STOCK
The board paid special attention to the following factors in determining
that the Reclassification was fair to shareholders retaining their shares of
common stock:
- Voting Rights. Holders of our common stock are entitled to one vote
per share on all matters which the holder of common stock are
entitled to vote, including but not limited to a proposed Change in
Control of the Company and the election of directors. The board
viewed these broad voting rights as a benefit to the shareholders
retaining common stock.
- Junior in Priority to Series A Preferred Stock. The Series A
Preferred Stock will rank senior in priority to the common stock
with respect to dividend rights and rights related to the
liquidation or dissolution of the Company. The board viewed the
liquidation and dividend preference of the Series A Preferred Stock
as a disadvantage to the shareholders retaining common stock.
- Increased Concentration of Common Stock. The board viewed the
increased concentration of common stock as a benefit to shareholders
retaining common stock as they will have a greater ability to
control the management and direction of the Company through the
election of directors.
The board noted that although shareholders retaining common stock will
rank junior in priority to the Series A Preferred Stock in liquidation and
dividend distributions, the Reclassification will be fair to them because they
will retain their broad voting rights, and, most importantly, the ability to
participate in any future growth and earnings of the Company.
Procedural Fairness. The board of directors, including those who are not
employees of the Company, has unanimously approved the Reclassification and the
Articles of Amendment and is seeking shareholder approval of the
Reclassification contemplated by the Articles of Amendment.
28
As described above under "Special Factors--Background," the board created
a special committee of independent directors to consider whether the Company
should go private, and if so, whether the Reclassification was the best
alternative for accomplishing this goal. The Committee considered these issues
for a period of three months, and met a total of nine times. The Committee
engaged Craig and Macauley and Northeast Capital to assist it with legal and
financial issues, and also consulted with Wolf & Company, P.C., on accounting
and audit questions. In addition, the Committee regularly solicited management's
opinions on key business issues.
On June 20, 2007, the Committee delivered a final report to the full board
of directors presenting its conclusions. Guided by the recommendations of the
Committee, the board carefully considered the procedural fairness of the
Reclassification.
The board acknowledged that its members had a conflict of interest with
respect to the Reclassification because they were in a position to structure the
Reclassification in a way that benefits the interests of affiliated shareholders
differently from the interests of unaffiliated shareholders. In light of this,
the board closely evaluated the positive effects the Reclassification would have
on affiliated shareholders that it would not have on unaffiliated shareholders.
In particular, the board noted that no shares of common stock held by the
Company's affiliated shareholders would be reclassified to Series A Preferred
Stock in the Reclassification. Since there will be fewer outstanding shares of
common stock after the Reclassification, the affiliated shareholders will own a
slightly larger relative percentage (62.34% versus 62.66%) of the outstanding
common stock after the Reclassification, and the common stock will continue to
have voting rights as compared to the Series A Preferred Stock, which will have
limited voting rights.
The board then considered the protection afforded to unaffiliated
shareholders by their right to vote on the Reclassification, and whether
additional protections would be needed. Under Massachusetts law, the
Reclassification will need to be approved by holders of at least two-thirds of
the shares of common stock. The board considered requiring the transaction to be
approved by a majority of the unaffiliated shareholders, but determined that
this was not necessary for the following reasons:
- Two-thirds of all of the outstanding shares eligible to vote must
vote in favor of the Reclassification. Affiliated shareholders only
own 62.34% of the outstanding shares. Thus, shareholder approval
requires that more than 4% of the shares held by unaffiliated
shareholders approve the Reclassification in order for it to be
approved by 2/3 of all shareholders. The Reclassification will only
impact 0.5% of the Company's shares held by all shareholders, which
represent 1.4% of the shares held by all unaffiliated shareholders;
- The Articles of Amendment apply regardless of whether a shareholder
is an affiliate. Thus, both affiliated and unaffiliated shareholders
who own fewer than 200 shares are treated in the same manner. The
board recognized that because of the below 200 share threshold all
of our affiliates would remain common shareholders. However, the
board also noted that the below 200 share threshold was set because
it represented an optimal division point for the classes while
leaving room for expansion in either class and impacting as few
shareholders as possible, and not to ensure that all of our
affiliates would retain their shares of common stock.
The board next noted that shareholders who wish to increase their record
holdings in order to avoid the exchange of their common stock for Series A
Preferred Stock may do so by purchasing shares of common stock from other
shareholders prior to the effective time of the Reclassification or placing them
in "street name" with a broker holding at least 200 shares. Conversely,
shareholders who wish to receive Series A Preferred Stock but hold 200 or more
shares of common stock may subdivide or sell their shares of common stock before
the Reclassification is effected.
29
The board also took into account that all shareholders whose shares are
subject to the Reclassification will be entitled to exercise appraisal rights
under Section 13.02 of the MBCA. Upon exercise, the Company will pay such
shareholders the fair value of their shares in cash. The board considered
whether to voluntarily extend appraisal rights to those shareholders who will
retain their shares of common stock, but determined that this was unnecessary in
light of the ability of these shareholders to vote against the transaction, sell
their shares in advance of the consummation of the transaction, or subdivide
their shareholdings so that their shares become subject to the Reclassification.
The board consulted with the Bank's Board of Advisors concerning the
proposed terms of the Reclassification prior to taking a final board vote on the
Reclassification. As the members of the Board of Advisors are not affiliated
shareholders, the board recognized that they were in a position to provide
helpful comments about the proposed transaction. No suggestions for changes were
offered by the Board of Advisors.
The board considered several other protections that it determined were not
necessary to ensure the procedural fairness of the Reclassification because, in
its view, the ability of the shareholders to vote on the transaction as a single
class and the time and means afforded to them to obtain their desired
consideration were sufficient to support the board's determination that the
transaction is procedurally fair to each shareholder constituency. Specifically,
the board did not retain an unaffiliated representative acting solely on behalf
of unaffiliated shareholders for the purpose of negotiating the terms of the
Reclassification or preparing a report covering its fairness.
In addition, the board does not think it is necessary in connection with
the Reclassification to grant unaffiliated shareholders access to the Company's
corporate files, except as provided under Massachusetts law and the Company's
bylaws. The board believes that the Company's filings with the SEC will provide
adequate information for unaffiliated shareholders to make an informed decision
with respect to the Reclassification. The board considered whether the Company
should allow unaffiliated shareholders to obtain legal counsel at the Company's
expense, but the board determined that this was not necessary or customary. In
deciding not to adopt these additional procedures, the board also took into
account factors such as the Company's size and the cost of such procedures.
Determination of Exchange Ratio
While the Series A Preferred Stock has limited voting rights, the board
determined that a one-for-one exchange ratio is fair to the shareholders
receiving Series A Preferred Stock and to the shareholders retaining their
common stock because the Series A Preferred Stock converts to common stock on a
Change in Control and contains a liquidation preference to the common stock.
This determination was made based on the board's review of the relative rights
and preference of Series A Preferred Stock as compared to the common stock, and
no quantitative analysis of the value of Series A Preferred Stock or common
stock was considered.
Specifically, the board weighed subjectively the collective advantages of
the Series A Preferred Stock-- the existence of the liquidation preference, the
existence of the conversion feature and the ability to vote on a Change in
Control--against the relative advantages of the common stock, such as unlimited
voting rights, and determined that those rights were in balance. It also weighed
subjectively the relative disadvantages of the two classes--the general lack of
voting power in the case of the Series A Preferred Stock and the subordination
in terms of rank and liquidation preference in the case of the common stock, and
determined that the relative drawbacks were also in balance. Finally, it
considered the benefits that would be shared by the classes, such as voting and
consideration payable upon a Change in Control and the ability to benefit from
the expense savings of the Reclassification and share in future growth of the
Company, and determined that these represented factors that would have the same
immediate and long-term effect on the value of each class. As a result of these
analyses, the board determined that the advantages and disadvantages of the
terms of the Series A Preferred Stock were in balance compared to those of the
Company's common stock and that a one-for-one exchange ratio was therefore
appropriate.
30
Although the Series A Preferred Stock has substantially different rights
and preferences from the Company's common stock, the board believes, from a
financial point of view, that the value of the Series A Preferred Stock is
equivalent to the Company's common stock. Because the board believes the value
of the Series A Preferred Stock is equivalent to the value of the common stock,
the actual cash value of the Series A Preferred Stock and the common stock is
immaterial to the determination of the fairness of the Reclassification because
the cash value of the Series A Preferred Stock and the common stock would be the
same. Additionally, an appraisal of the Series A Preferred Stock was not
necessary for tax purposes as counsel advised the board that the
Reclassification should not be taxable to shareholders receiving Series A
Preferred Stock or to shareholders retaining common stock.
The board received a written opinion dated June 21, 2007, of Northeast
Capital, a financial advisor to the board. Northeast Capital also rendered a
written opinion dated November 2, 2007, which updated the June 21, 2007 opinion.
The opinion stated that as of its date and based upon and subject to the various
assumptions and limitations described in the opinion, the Reclassification was
fair from a financial point of view to the unaffiliated shareholders who will
receive Series A Preferred Stock in the Reclassification and to the unaffiliated
shareholders who will retain their shares. Copies of Northeast Capital's written
opinion and updated opinion are attached as Appendices D and E to this Proxy
Statement and incorporated herein by reference. You should read both opinions
carefully. The opinions do not constitute a recommendation by Northeast Capital
to any shareholder as to how the shareholder should vote on the Reclassification
at the special meeting or any other matter.
In reaching its conclusion that the Reclassification is substantively fair
to the Company's unaffiliated shareholders who will receive Series A Preferred
Stock and who will retain their shares of common stock, the board did not
consider the current or historical market price of the Company's common stock,
the Company's going concern value, or the liquidation value of the Company's
assets to be material for the reasons set forth above.
The board is not aware of any material contacts, negotiations or
transactions, other than in conjunction with the Reclassification as described
in "Special Factors--Background of the Reclassification" or as otherwise
described herein during the preceding two years for (1) the merger, acquisition
or consolidation of the Company into or with another person or entity; (2) the
sale or other transfer of all or any substantial part of the assets of the
Company; (3) a tender offer for any outstanding shares of the Company common
stock; or (4) the election of directors to our board.
Opinion of Financial Advisor
Our board of directors retained Northeast Capital to act as our financial
advisor in connection with the Reclassification. Northeast Capital was selected
by our board because it is a recognized national investment banking firm that
has substantial experience in the financial institutions industry. As part of
its business, Northeast Capital is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, private placements and valuation for corporate and other
purposes, particularly those of financial institutions and financial institution
holding companies.
At the board's request, Northeast Capital delivered an oral opinion (which
opinion was subsequently confirmed in writing) to the board at its June 20, 2007
meeting. Northeast Capital also delivered a presentation to the board on June
20, 2007 entitled, "The Efficacy of a Going Private Transaction," which detailed
the financial analyses conducted by Northeast Capital in support of its fairness
opinion. On June 21, 2007, Northeast Capital rendered its written opinion to the
board that as of such date, the Reclassification of shares of the Company's
31
common stock by shareholders of record of less than 200 shares into the
Company's Series A Preferred Stock is fair, from a financial point of view, to
the unaffiliated shareholders who will receive Series A Preferred Stock in the
Reclassification and to the unaffiliated shareholders who will retain their
common shares. Northeast Capital also rendered a fairness opinion letter, dated
November 2, 2007, which updated the June 21, 2007 opinion.
The Company paid Northeast Capital a retainer fee of $25,000 and a fee of
$17,500 for the delivery of the June 21, 2007 fairness opinion and the November
2, 2007 updated fairness opinion. In addition, the Company has agreed to
reimburse Northeast Capital for all reasonable expenses, incurred by it on the
Company's behalf, and to indemnify Northeast Capital against certain liabilities
arising from the engagement, including those which may arise under the federal
securities laws. Northeast Capital has rendered investment banking services to
the Company in the past and may provide additional services in the future. In
connection with previous engagements, the Company paid Northeast Capital
approximately $147,000 in 2006 for consulting services related to responding to
regulatory criticism, developing a capital plan, liquidity plan, strategic plan,
profit plan, and assessing the adequacy of management, as well as investment
banking advice relating to the sale of the Londonderry loan portfolio and
Cambridge branch, and the private placement. In 2007, excluding the services
being rendered in connection with the Reclassification, the Company paid
Northeast Capital approximately $95,000 to consummate the private placement,
branch sale, and loan sale transactions. No future material relationship between
Northeast Capital and the Company is currently contemplated.
In connection with providing its fairness opinion and other services
rendered in connection the Reclassification, Northeast Capital received no
specific instructions from our board other than to provide the board with an
opinion stating whether or not the Reclassification would be fair to all
unaffiliated shareholders from a financial point of view. No limitation was
imposed on Northeast Capital with respect to the scope of Northeast Capital's
investigation in rendering its services.
The full text of Northeast Capital's fairness opinion dated June 21, 2007,
which sets forth the procedures followed, the assumptions made, matters
considered and qualifications and limitations on the review undertaken by
Northeast Capital, is attached to this Proxy Statement as Appendix D. A copy of
Northeast Capital's fairness opinion update letter, dated November 2, 2007, is
attached to this Proxy Statement as Appendix E. You are urged to read the
attached Northeast Capital fairness opinion, including the update, and the
related presentation entitled, "The Efficacy of a Going Private Transaction,"
carefully and in their entirety. The fairness opinion is addressed to the board
and is directed only to the consideration offered to unaffiliated shareholders
as a result of the Reclassification. The fairness opinion does not address the
Company's underlying business decision to effect the proposed Reclassification,
nor does it constitute a recommendation to any shareholder as to how such
shareholder should vote with respect to the proposed Reclassification at any
shareholder meeting or as to any other matter. The fairness opinion was among
many factors taken into consideration by the board in making its determination.
The fairness opinion does not address the relative merits of the
Reclassification as compared to any alternative business strategies that might
exist for the Company or the effect of any other strategy in which the Company
might engage. The following summary of Northeast Capital's opinion is qualified
in its entirety by reference to the full text of the document.
Factors Considered. Prior to rendering its opinion, Northeast Capital
reviewed and analyzed, among other things, (i) the draft of the Proxy Statement
describing the Reclassification, which we assume will correspond in all material
respects to the final documents to be mailed to all shareholders, (ii) reports
32
and minutes of meetings provided by the Special Committee, (iii) the Company's
annual reports to shareholders and financial statements as filed on Form 10-KSB,
as amended, for each of the three years ended December 31, 2004, 2005 and 2006,
(iv) the Company's quarterly reports and financial statements as filed on Form
10-QSB, as amended, for the three, six and nine month periods ending March 31,
June 30, and September 30, 2006, respectively, and for the three months ending
March 31, 2007, (v) certain information regarding the historical record of
reported prices, trading activity and dividend payments of the Company's common
stock, (vi) certain forecasts and supporting information prepared by the
Company's management with respect to the Reclassification, (vii) discussions
with the Company's management regarding the reasons and basis for the
Reclassification and management's opinion of future business prospects for the
Company, including financial forecasts and projections of the Company prepared
by management, (viii) certain reported financial terms of selected recent going
private transactions which Northeast Capital deemed to be relevant, (ix)
publicly available business financial information regarding the Company, (x)
other studies, analyses and investigations, particularly of the banking
industry, and such other information as Northeast Capital deemed appropriate.
For more information regarding the financial forecasts and projections provided
by management see "Fairness Opinion of Northeast Capital - Information Provided
by Company to Northeast Capital." Northeast Capital did not obtain, make or
receive any independent appraisal or evaluations with respect to the Company's
assets or liabilities. It also did not make or receive any analyses or
evaluations of the rights of shareholders, creditors or others holding any
claims or rights against the Company.
Information Provided by Company to Northeast Capital. At the June 20, 2007
board meeting, the Company's management presented a financial forecast
consisting of a balance sheet and income statement prepared by management for
2007 to 2012. The forecasts were derived from the Company's strategic plan
update which incorporated the effects of going private. The forecasts
incorporated the following material assumptions:
- Earning Assets. Earning assets were forecast to grow by 2.4% in the
remainder of 2007, 0.9% between December 31, 2007 and December 31,
2008, 4.9% between December 31, 2008 and December 31, 2009, and 7.5%
between December 31, 2009 and December 31, 2010. Forecasted growth
of the investment portfolio in 2007 and forecasted growth of
commercial real estate and residential loan portfolios during 2008,
2009, and 2010 were the most significant contributors to the growth
of earning assets.
- Funding Growth. Funding growth is forecast to consist of growth of
deposit liabilities, primarily money market accounts and
certificates of deposit. However the Company will continue to
implement programs which support the growth of core deposit accounts
including savings accounts and checking accounts.
- Interest Rate Environment. The interest rates used in the forecast
were assumed to remain level and the shape of the yield curve was
expected to remain relatively flat.
- Non-Interest Income Growth. Fee income was projected to increase
slightly over the forecasted period. The primary sources of the
increases were fee income from deposits as well as investment
advisory fees. Non-interest income was forecasted to drop by 10.7%
in the year ended December 31, 2008 as compared to the same period
in 2007 because of one-time items included in 2007. Non-interest
income was projected to increase by 5.1% in each of the years ended
December 31, 2009 and December 31, 2010.
33
- Non-Interest Expense Control. The forecast for non-interest expenses
assumed that the Company will continue to emphasize expense controls
and expense reductions. Expenses for the year ended December 31,
2008 were forecasted to decrease by 4.4%. Expenses were forecasted
to increase by 2.8%, below the estimated rate of inflation and
salary increases, in each of the years ended December 31, 2009 and
2010.
The Company's resulting forecast is summarized as follows:
--------------------------------------------------------------------------
Net Income
Year Asset Growth ($thousands)
--------------------------------------------------------------------------
2007 2.39% $ 951.5
--------------------------------------------------------------------------
2008 0.94% 1,151.3
--------------------------------------------------------------------------
2009 4.88% 1,645.8
--------------------------------------------------------------------------
2010 7.50% 2,093.3
--------------------------------------------------------------------------
2011 7.60% 2,609.5
--------------------------------------------------------------------------
2012 7.70% 3,201.9
--------------------------------------------------------------------------
Following the presentation of the forecast at the June 20, 2007 board
meeting, the board and management discussed the forecast and its underlying
assumptions. The board determined that the forecast was supported by the
Company's strategic plan and marketing program and determined that Northeast
Capital's reliance on the forecast was reasonable. Numerous risks and
uncertainties could cause the Company's actual results to be materially
different from the results set forth in the forecast, including changes in
general economic conditions, local and national market interest rates, monetary
and fiscal policies of the federal government, legislative, local competitive
environment and regulatory changes and other factors disclosed periodically in
the Company's securities filings. The projections of the Company have been
prepared by management in accordance with the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
omitted in accordance with such rules and regulations. The Company, however,
believes that the disclosures are adequate to make the information presented not
misleading.
Summary of Financial Analyses. In connection with rendering the fairness
opinion to the Company's board, Northeast Capital performed a variety of
financial and comparative methodologies, which are summarized briefly below. No
company used in any analysis as a comparison is identical to the Company and
they all differ in various ways. As a result, Northeast Capital applied its
experience and professional judgment in making such analyses. Accordingly, an
analysis of the results is not purely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial
characteristics, performance characteristics and trading value of the comparable
companies to which the Company is being compared. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analyses or summary description. In arriving at the fairness opinion, Northeast
Capital considered the results of all of its analyses as a whole and did not
attribute any particular weight to any analysis or factor considered by it.
Northeast Capital believes that the summary provided and the analyses described
below must be considered as a whole and that selecting portions of these
analyses, without considering all of them, would create an incomplete view of
the process underlying its analyses and opinion. In addition, Northeast Capital
may have given various analyses or factors more or less weight than other
analyses and factors and may have deemed various assumptions more or less
34
probable than other assumptions, therefore the range of valuations resulting
from any particular analysis described below should not be taken to be Northeast
Capital's view of the actual value of the Company.
The fairness opinion letter rendered by Northeast Capital to the board,
dated June 21, 2007, and the updated fairness opinion letter, dated November 2,
2007, were necessarily based upon economic, monetary, financial market and other
relevant conditions as of the date of the fairness opinion in question.
Accordingly, the fairness opinion states that although subsequent developments
may affect the fairness opinion, Northeast Capital does not have any obligation
to further update, revise or reaffirm its fairness opinion.
In performing its analyses, with the consent of the board, Northeast
Capital assumed and relied upon the accuracy and completeness of the financial
information and other pertinent information provided by the Company to Northeast
Capital for purposes of rendering its fairness opinion. Northeast Capital did
not assume any obligation to independently verify any of the information
provided, including without limitation information from published sources, as
being complete and accurate in all material aspects. With regard to the
financial forecasts prepared by the Company's management, as well as projections
of cost savings, Northeast Capital assumed that this information reflected the
best available estimates and judgments of the Company as to the future
performance and that the projections provided a reasonable basis upon which
Northeast Capital could formulate its fairness opinion. The Company does not
normally publicly disclose its internal management projections of the type
utilized by Northeast Capital in connection with Northeast Capital's role as a
financial advisor to the Company. Actual results could vary significantly from
those set forth in the respective projections. The projections were based upon
numerous variables and assumptions that are inherently uncertain, including,
among others, factors relative to the general economic and competitive
conditions facing the Company.
In providing its opinion, Northeast Capital assumed and relied upon,
without independent verification, the accuracy and completeness of all
accounting, legal, tax and other information provided to them by the Company, as
well as all of the materials made available to Northeast Capital by the Company
and other public sources. Northeast Capital assumed that no material change in
the Company's assets, financial conditions, results of operations, business or
prospects had occurred since the most recent financial statements made available
to Northeast Capital.
With the Company's consent, Northeast Capital does not purport to be an
expert in the evaluation of loan portfolios or the allowance for loan losses
with respect to loan portfolios and, accordingly, assumes that those allowances
by the Company are adequate to cover such losses. In addition, Northeast Capital
has not reviewed, and does not assume responsibility for, any individual credit
files and did not make an independent evaluation, appraisal or physical
inspection of the assets or individual properties of the Company, nor was
Northeast Capital provided with those types of appraisals.
Northeast Capital's analyses included (i) a comparison of certain market
multiples between the Company and similar publicly traded companies, (ii) a
dividend discount analysis and (iii) an analysis of premiums paid with respect
to similar transactions. Northeast Capital also considered the current and
historic trading activity and prices of the Company's common stock. Northeast
Capital presented a report of these analyses to the board at its June 20, 2007
meeting.
35
Historical Performance of the Bank Equity Market
Northeast Capital first considered the performance of the market for bank
equity over the period between August 27, 2004 and ended May 31, 2007. Northeast
Capital compared the market performances of the NASDAQ Bank Index and the S&P
Banking Index. During this period, the Company's common stock had declined
39.33%, while the NASDAQ Bank Index and the S&P Banking Index had increased
11.10% and 11.81%, respectively.
Historical Trading Price and Volume
Northeast Capital then reviewed the trading volume and closing prices of
the Company's common stock on each day during the twelve months prior to May 31,
2007 on which a trade had been reported. In analyzing this trading history,
Northeast Capital calculated the weighted average closing price per share to be
$9.21, $9.56 and $9.26 for the prior twelve months, six months and three months,
respectively, ending May 31, 2007. Excluding January 24, 2007 and January 25,
2007, the 52 week high and low intraday prices were $10.50 and $8.10,
respectively.
Recapitalization Premium Analysis
In addition to the other financial analyses performed by Northeast
Capital, Northeast Capital also looked at transactions deemed similar to the
Reclassification to determine what premium, if any, has been paid in other
transactions deemed similar. In its analysis, Northeast Capital selected 17
transactions deemed comparable during the past two years engaged ultimately to
deregister that company's common stock from Exchange Act reporting requirements.
The 17 selected transactions included reverse stock splits, reclassifications
and cash out mergers conducted by bank or thrift institutions or their holding
companies. None of the comparable transactions selected resulted in change of
control of the entity. Northeast Capital relied on the reported prices paid by
these companies in connection with the comparable transactions and compared
those prices to the most recently reported trading prices before announcement of
the transactions for the same shares in order to determine the range of premiums
paid. In addition, Northeast Capital compared the reported prices to the closing
prices on the day the fairness opinions were rendered. By observing premiums
paid in other transactions of publicly traded banks, Northeast Capital was able
to estimate a range of premiums comparable for this transaction. The results
were as follows:
- --------------------------------------------------------------------------------
Premium Over Market Value
- --------------------------------------------------------------------------------
At Announcement(1) On Day of Fairness Opinion(2)
- --------------------------------------------------------------------------------
Maximum 30.50% 28.50%
- --------------------------------------------------------------------------------
Median 13.86% 12.49%
- --------------------------------------------------------------------------------
Minimum 2.42% 0.00%
- --------------------------------------------------------------------------------
Average 15.70% 11.30%
- --------------------------------------------------------------------------------
(1) - Based on closing trading price on the day prior to announcement of such
transaction.
(2) - Based on closing trading price on the day of the fairness opinion.
Based on the data presented above, Northeast Capital applied a 13.18%
premium to the Company's stand-alone valuation derived from the comparable
public companies, recent trading activity and the dividend discount analysis to
derive a range of fair values per share for the common stock. In the proposed
transaction, all common shares held by shareholders owning less than 200 shares
will be converted to Series A Preferred Stock on a one share of common stock for
one share of preferred stock basis. The liquidation value of the Series A
Preferred Stock will equal the greater of book value upon liquidation, the
amount to be paid to common shareholders, or $9.05 per share, which was the
Company's closing share price on June 21, 2007.
36
Comparable Company Analysis
In order to establish a range of fair values for the Company's common
stock, Northeast Capital identified a specific peer group of fifteen companies
deemed relevant and looked at historical pricing and other ratios to consider
the Company's common stock value. Although these fifteen companies do not
exactly match all of the unique financial characteristics of the Company, the
group as a whole better reflects certain material financial characteristics of
the Company as compared to broad national peer groups. In order to derive the
peer group, Northeast Capital selected publicly traded banks and thrifts,
excluding mutual holding companies, in New England or New York, with assets
between $150 million and $700 million. Northeast Capital then removed companies
which (i) had non-performing assets to total assets greater than 1.5%, (ii) were
announced as merger targets, and (iii) were publicly traded less than 2 years.
Northeast Capital analyzed pricing multiples and financial ratios with respect
to the selected peer group (i.e. book value, tangible book value and reported
earnings for the last twelve months) and calculated the first and third
quartiles, as well as the median, minimum and maximum of such pricing ratios.
Shown below is a comparison of the overall performance of the Company to that of
the peer group using selected balance sheet and financial measures.
- ---------------------------------------------------------------------------------------------------------------------------------
Net Loan Deposit Tangible
Growth Growth NPAs to Equity to
(3 Year (3 Year Total Tangible
ROAA ROAE Efficiency CAGR) CAGR) Assets Assets
(%) (%) Ratio (%) (%) (%) (%) (%)
- ---------------------------------------------------------------------------------------------------------------------------------
Minimum 0.12 1.10 60.12 -1.11 -0.72 0.00 5.44
- ---------------------------------------------------------------------------------------------------------------------------------
1st Quartile 0.45 3.85 70.45 7.11 2.76 0.05 6.40
- ---------------------------------------------------------------------------------------------------------------------------------
Median 0.60 6.92 75.19 9.39 4.04 0.09 8.02
- ---------------------------------------------------------------------------------------------------------------------------------
3rd Quartile 0.90 8.86 77.87 15.14 5.19 0.29 10.56
- ---------------------------------------------------------------------------------------------------------------------------------
Maximum 1.30 12.65 86.75 21.45 11.84 0.81 25.13
- ---------------------------------------------------------------------------------------------------------------------------------
First Ipswich -0.13 -2.76 100.14 7.52 7.49 0.00 4.92
- ---------------------------------------------------------------------------------------------------------------------------------
Based on the selected ratios above, the Company generally underperformed in
comparison to the peer group.
37
The following table summarizes the range of trading multiples, as of May 31,
2007, of the selected peer group compared to the Company's implied prices based
on March 31, 2007 numbers:
- ------------------------------------------------------------------------------------------------
Price to
- ------------------------------------------------------------------------------------------------
Last Twelve Months
Book Tangible Book Core EPS
- ------------------------------------------------------------------------------------------------
Multiples
- ------------------------------------------------------------------------------------------------
1st Quartile 120.0% 126.0% 15.08x
- ------------------------------------------------------------------------------------------------
Median 127.0% 133.0% 18.11x
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Price per Share
- ------------------------------------------------------------------------------------------------
First Ipswich Implied
- ------------------------------------------------------------------------------------------------
1st Quartile $10.01 $7.88 NA
- ------------------------------------------------------------------------------------------------
Median 10.59 8.31 NA
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
First Ipswich Implied Plus Transaction Premium
- ------------------------------------------------------------------------------------------------
1st Quartile $11.33 $8.91 NA
- ------------------------------------------------------------------------------------------------
Median 11.99 9.41 NA
- ------------------------------------------------------------------------------------------------
As illustrated in the table above, Northeast Capital derived a range of
stand-alone values of $7.88 to $10.59 per share. Northeast Capital applied a
13.18% transaction premium to the implied stand-alone values of the Company from
the comparables to compute adjusted per share values relevant for this
transaction. The adjusted per share values range from $8.91 to $11.99.
No company used in the comparable company analysis is identical to the
Company. Accordingly, an analysis of the results involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies involved, market areas in which the companies operate and other
factors that could affect the trading values of the securities of the company or
companies to which they are being compared.
Dividend Discount Analysis
Northeast Capital also performed a dividend discount analysis to determine
a range of fair values of the Company's common stock based on the present value
of expected future dividends to be received. As a basis for performing this
analysis, Northeast Capital utilized 2007 - 2011 earnings and dividends per
share estimates for the Company, which were based on projections provided by
management. These projections are based upon various factors and assumptions,
many of which are beyond the control of the Company. These projections are, by
their nature, forward-looking and may differ materially from the actual future
values or actual future results for the reasons discussed above. Actual future
values or results may be significantly more or less favorable than suggested by
such projections. In producing a range of per share values for the Company's
common stock, Northeast Capital utilized several assumptions that, in its
judgment, it considered appropriate, relating to the discount rates and terminal
year multiples. Northeast Capital discounted the estimated future dividends and
38
terminal value to a present value using discount rates between 10% and 14%.
Northeast Capital determined that this was an appropriate range of discount
rates based on industry averages for companies similar to the Company. The
terminal year price to earnings multiples, based on historic trading multiples
of the banking industry, ranged from 14.0x to 17.0x.
- --------------------------------------------------------------------------------
Discount Rate 14x 15x 16x 17x
- --------------------------------------------------------------------------------
14.00% $ 5.54 $ 5.90 $ 6.27 $ 6.64
- --------------------------------------------------------------------------------
13.00% 5.78 6.16 6.55 6.93
- --------------------------------------------------------------------------------
12.00% 6.04 6.44 6.84 7.24
- --------------------------------------------------------------------------------
11.00% 6.31 6.73 7.14 7.56
- --------------------------------------------------------------------------------
10.00% 6.59 7.03 7.47 7.91
- --------------------------------------------------------------------------------
Northeast Capital calculated that a range of price for the Company's
common stock implied by this dividend discount analysis was between $5.54 and
$7.91 per share. Northeast Capital applied a 13.18% recapitalization premium to
this range of values to compute a range of adjusted per share values relevant to
this transaction. The adjusted per share valuation ranged from $6.27 to $8.95,
with a median adjusted valuation at $7.49. While the dividend discount analysis
is a widely used valuation methodology, it relies on numerous assumptions,
including projected dividends, terminal values and discount rates. As such, it
often yields the widest range of values as a result of the number of assumptions
necessary to employ this model and the high degree of sensitivity to these
assumptions. This analysis does not purport to be indicative of the actual
values or expected values of the Company's common stock.
Summary of Fair Value Analyses
Northeast Capital estimated the fair value of the preferred shares by
analyzing the recent market value of the Company's common stock, as well as
estimates of the fair values of the Company's common stock using the comparable
company analysis and the dividend discount analysis. A transaction premium of
13.18% was then applied to those values due to the involuntary nature of the
transaction. The table below summarizes these values:
- --------------------------------------------------------------------------------
Low Median High
- --------------------------------------------------------------------------------
Historical Prices $ 9.17(1) $ 10.41 $13.58(2)
- --------------------------------------------------------------------------------
Comparable Company Analysis 8.91 10.37 11.99
- --------------------------------------------------------------------------------
Dividend Discount Analysis 6.27 7.49 8.95
- --------------------------------------------------------------------------------
(1) - Based on the 52 week low price of $8.10.
(2) - Based on the 52 week high price of $12.00.
Based upon its analyses, Northeast Capital believes that the fair value price
range of preferred shares should be $7.49 to $10.41.
Comparison of Fair Value Price
Northeast Capital's price range of $7.49 to $10.41 per share represents a
discount of 17.24% and a premium of 15.03%, respectively, to the Company's
closing price of $9.05 on June 21, 2007.
39
Financial Impact Analysis
In order to measure the impact of the Reclassification on the Company's
operating results, financial condition, capital ratios, and unaffiliated
shareholders, Northeast Capital also analyzed the pro forma effects of the
Reclassification on operating results for the last twelve months ended March 31,
2007 (assuming the Reclassification had been completed on March 31, 2006). In
performing this analysis, Northeast Capital utilized the Form 10-QSB for the
period ending March 31, 2007 and the Form 10-KSB for the period ending December
31, 2006 and relied on certain assumptions provided by the management of the
Company relating to earnings projections, as well as cost savings associated
with becoming a non-SEC-reporting company. The Company estimated the annual cost
savings related to becoming a non-SEC-reporting company to be $285,000 pre-tax,
along with one time cost savings of $200,000 pre-tax and one time expenses of
$179,500 pre-tax.
The following table highlights the expected pro forma impact of the
Reclassification on the Company. The actual results achieved may vary materially
from the projected results.
- --------------------------------------------------------------------------------
LTM Estimated EPS Accretion 35.22%(1)
- --------------------------------------------------------------------------------
Book Value per Share Dilution 0.09%(2)
- --------------------------------------------------------------------------------
Tangible Book Value per Share Dilution 0.29%(2)
- --------------------------------------------------------------------------------
Tier 1 Leverage Ratio 6.87%(2)
- --------------------------------------------------------------------------------
(1) - Excludes one time cost savings of $200,000 for the twelve month period
ending March 31, 2007.
(2) - For the period ending March 31, 2007.
Conclusion. Based upon these factors, limitations, assumptions and
analyses, Northeast Capital's report of June 20, 2007, which was provided to the
Board, indicates a fair value range of the common stock to be $7.49 to $10.41
per share. As the market price for the Company's shares at that time was
approximately $9.05 per share and well within the range, Northeast Capital
delivered its fairness opinion dated June 21, 2007 to the board as to the
fairness of the consideration being exchanged to the unaffiliated shareholders
who will receive Series A Preferred Stock in the Reclassification, as well as
the unaffiliated holders who will retain their common shares. The fairness
opinion was updated as of November 2, 2007 in a separate letter.
Availability of Documents
Northeast Capital's fairness opinion dated June 21, 2007, as well its
updated fairness opinion dated November 2, 2007, are attached as Appendices D
and E, respectively, to this proxy statement. In addition, the fairness opinion,
as well as Northeast Capital's presentation entitled, "The Efficacy of a Going
Private Transaction," will be made available for inspection and copying by
seeing our Corporate Secretary at our main office, located at 31 Market Street,
Ipswich, Massachusetts 01938, during our regular business hours by any
interested shareholder or representative who has been designated in writing. A
copy of these materials will also be sent to any interested shareholder or
representative who has been designated in writing, upon written request to our
Corporate Secretary and at the expense of the requesting shareholder. In
addition, these materials were filed as exhibits to the Company's Schedule 13E-3
filed on September 11, 2007 and may therefore also be accessed via the EDGAR
system on the SEC website at www.sec.gov.
40
U.S. Federal Income Tax Consequences of the Reclassification
This summary discusses the material U.S. federal income tax consequences
relating to the Reclassification. This summary does not provide a complete
analysis of all potential tax considerations, and the information provided is
based on existing U.S. federal income tax authorities, all of which are subject
to change or differing interpretations, possibly with retroactive effect. There
can be no assurances that the Internal Revenue Service (the "IRS") will not
challenge one or more of the tax consequences described herein, and we have not
obtained, nor do we intend to obtain, a ruling from the IRS with respect to the
U.S. federal income tax consequences of the Reclassification.
This summary is limited to holders that hold their common stock as
"capital assets" (generally, for investment). This discussion does not purport
to deal with all aspects of U.S. federal income taxation that may be relevant to
a particular holder in light of the holder's circumstances (for example, persons
subject to the alternative minimum tax provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), or a U.S. Holder (as defined below) whose
"functional currency" is not the U.S. dollar). This summary does not describe
the effect of the U.S. federal estate and gift tax laws or the effects of any
applicable foreign, state or local laws. The following summary does not address
all U.S. federal income tax considerations applicable to all categories of
investors including, without limitation:
- financial institutions;
- insurance companies;
- tax-exempt organizations;
- dealers in securities or currencies;
- traders in securities that elect to mark-to-market;
- persons holding common stock as part of a hedge, straddle or
conversion transaction;
- persons who are considered foreign persons for U.S. federal income
tax purposes; and
- persons who acquired or acquire shares of the Company common stock
pursuant to the exercise of employee stock options or otherwise as
compensation.
As used herein, the term "U.S. holder" means a beneficial owner of the
common stock for U.S. federal income tax purposes that is:
- an individual who is a citizen or resident of the United States;
- a corporation created or organized in or under the laws of the
United States or any state of the United States, including the
District of Columbia;
- an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
- a trust that (a) is subject to the primary supervision of a U.S.
court and the control of one of more U.S. persons or (b) has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
If a partnership (including for this purpose any entity or arrangement, domestic
or foreign, treated as a partnership for U.S. federal income tax purposes) is a
beneficial owner of common stock, the U.S. federal income tax treatment of a
partner in the partnership generally will depend upon the status of the partner
and the activities of the partnership. A beneficial owner of common stock that
is a partnership, and the partners in such partnership, should consult their own
tax advisors about the U.S. federal income tax consequences of the
Reclassification.
41
U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
RECLASSIFICATION AND THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO
THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES OF U.S. FEDERAL ESTATE OR GIFT
TAX LAWS AND FOREIGN, STATE AND LOCAL LAWS.
U.S. Federal Income Tax Consequences to U.S. Holders Receiving Series A
Preferred Stock in the Reclassification. The Reclassification will be treated as
a "recapitalization," which is considered a "tax-free" reorganization under
Section 368(a)(1)(E) of the Code for U.S. federal income tax purposes.
Accordingly, a U.S. holder who receives Series A Preferred Stock in the
Reclassification should not recognize any gain or loss. Further, the U.S.
holder's basis in the Series A Preferred Stock should be the same as such
holder's basis in his or her common stock surrendered in the Reclassification,
and the period such holder is considered to have held the Series A Preferred
Stock should include the period the holder held his or her common stock of the
Company surrendered in the Reclassification.
While ordinarily the receipt of stock, such as the Series A Preferred
Stock, in a transaction such as the Reclassification will not result in a
taxable transaction for U.S. federal income tax purposes, certain types of
stock, such as "nonqualified preferred stock" may not be exchanged "tax-free" in
a reorganization. If the Series A Preferred Stock were treated as "nonqualified
preferred stock," a U.S. holder would recognize gain or loss equal to the
difference between the fair market value of the Series A Preferred Stock
received and such holder's tax basis in the common stock exchanged. A U.S.
holder's tax basis in common stock will generally equal the amount such holder
paid for their stock.
In general, "nonqualified preferred stock" is preferred stock if (1) the
holder of such stock has the right to require the issuer (or a related person)
to redeem or purchase the stock within 20 years of the date of issue of such
stock; (2) the issuer (or a related person) is required to redeem or purchase
such stock within 20 years of the date of issue of such stock; (3) the issuer
(or a related person) has the right to redeem or purchase the stock within 20
years of the date of issue of such stock and, as of the issue date of such
stock, it is more likely than not that such right will be exercised; or (4) the
dividend rate on such stock varies in whole or in part (directly or indirectly)
with reference to interest rates, commodity prices, or similar indices.
Furthermore, in general, "preferred stock" is limited and preferred as to
dividends and does not participate in corporate growth to any significant
extent. Stock shall not be treated as participating in corporate growth to any
significant extent unless there is a real and meaningful likelihood of the
shareholder actually participating in the earnings and growth of the
corporation.
The Series A Preferred Stock should not be considered either "preferred
stock" or "nonqualified preferred stock" for federal income tax purposes
because:
- the amount distributed with respect to a share of the Series A
Preferred Stock in the event of a liquidation cannot be less than
the amount distributed with respect to one share of the Company's
common stock; and
- the Series A Preferred Stock automatically will convert to common
stock on a share-for-share basis in the event of a transaction that
results in a Change in Control of the Company.
42
Federal Income Tax Consequences to U.S. Holders Who Do Not Receive Series
A Preferred Stock in the Reclassification. U.S. holders who remain common
shareholders following the Reclassification will not recognize gain or loss as a
result of the Reclassification. The Reclassification will not affect the
adjusted tax basis or holding period of any shares of the Company's common stock
that a U.S. holder continues to own after the Reclassification.
Federal Income Tax Consequences to the Company and the Bank. Neither the
Company nor the Bank will recognize gain or loss for U.S. federal income tax
purposes as a result of the Reclassification.
Federal Income Tax Consequences to Shareholders who Exercise their
Appraisal Rights and Receive Cash for their Common Stock. A holder of the
Company's common stock who exercises his or her right to dissent and receive
cash in exchange for his or her common stock generally will recognize capital
gain or loss with respect to those shares equal to the difference between the
amount of cash received and his or her basis in the common stock, so long as he
or she no longer holds shares of the Company's common stock after the
Reclassification. Generally, such gain or loss will be long-term capital gain or
loss if the shares have been held by the shareholder for more than one year or
short-term capital gain if the shareholder has held the common stock for one
year or less. Long-term capital gain is generally subject to federal income
taxation at a maximum rate of 15%, while short-term capital gain is taxed at
ordinary income tax rates of up to 35% for federal income tax purposes. If the
shareholder either actually or constructively owns shares of the Company's stock
after the Reclassification, the full amount of cash received for the shares
(without reduction for any basis in the shares of stock cancelled in the
Reclassification) may be taxable to the shareholder as a dividend, instead of
giving rise to long-term capital gain or loss, unless the shareholder satisfies
one of the tests for redemption treatment contained in Section 302 of the Code.
Currently, dividend income also is subject to federal income taxation at a
maximum rate of 15%. The redemption rules of Section 302 of the Code and the
Code's constructive ownership rules are, in part, fact specific as to a
shareholder's particular situation. Accordingly, shareholders who exercise their
right to dissent and who continue to actually or constructively own shares of
the Company's stock after the Reclassification should consult their tax advisers
to determine whether they satisfy any of the redemption tests of Section 302 of
the Code after application of the constructive ownership rules. Any capital loss
resulting from a shareholder's exercising his or her right to dissent and the
receipt of cash may be subject to limitation as to the amount of loss that may
be deducted by the shareholder.
The preceding discussion of material U.S. federal income tax considerations is
for general information only. It is not tax advice. Each shareholder should
consult its own tax advisor regarding the particular U.S. federal, state, local
and foreign tax consequences of the Reclassification.
PRO FORMA EFFECT OF THE RECLASSIFICATION
The following selected pro forma financial data illustrates the pro forma
effect of the Reclassification on our consolidated financial statements as of
and for the nine months ended September 30, 2007, and as of and for the year
ended December 31, 2006. Management has prepared this information based on its
estimate that 12,081 shares of common stock will be reclassified into 12,081
shares of Series A Preferred Stock in the Reclassification and that the
transaction expenses related to the Reclassification will be $179,500. Please
see "Financial Information About the Company--Pro Forma Consolidated Financial
Information" for the complete pro forma financial information relating to this
transaction.
43
Selected Pro Forma Consolidated Financial Data
(In thousands except per share data) As of and for the As of and for the
nine months ended year ended
September 30, 2007 December 31, 2006
------------------ -----------------
Net interest income $ 7,195 $ 11,039
Provision (credit) for loan losses 14 36
Non-interest income 3,811 4,245
Non-interest expenses 10,573 17,277
Income tax provision (benefit) 286 (693)
Net income (loss) 133 (1,336)
PER COMMON SHARE
Basic income (loss) per share 0.06 (0.61)
Diluted income (loss) per share 0.06 (0.61)
Book value 8.17 7.97
AT PERIOD END
Total assets 291,288 332,595
Stockholders' equity 19,149 17,691
Common shares outstanding 2,333 2,208
Series A Preferred shares outstanding 12 12
Weighted average shares outstanding:
Basic 2,321 2,208
Diluted 2,336 2,220
PROPOSAL 1: APPROVAL OF THE ARTICLES OF AMENDMENT
Description of the Articles of Amendment
Structure of the Reclassification. The Articles of Amendment provide for
the Reclassification of our common stock into shares of Series A Preferred
Stock. In the Reclassification, shareholders owning fewer than 200 shares of
common stock will receive one share of Series A Preferred Stock for each share
of common stock they own on the effective date of the Reclassification. All
other shares will remain outstanding and will be unaffected by the
Reclassification.
Determination of Shares "Held of Record." Shareholders who are the record
holders of fewer than 200 shares of our common stock will receive one share of
Series A Preferred Stock for each share of common stock they own on the
effective date of the Reclassification. A record holder of 200 or more shares
will be unaffected. Because SEC rules require that we count "record holders" for
purposes of determining our reporting obligations, our Articles of Amendment are
based on the number of shares held of record without regard to the ultimate
control of the shares.
A shareholder "of record" is the shareholder whose name is listed on the
front of the stock certificate, regardless of who ultimately has the power to
vote or sell the shares. For example, if a shareholder holds four separate
certificates (individually, as a joint tenant with someone else, as trustee, and
in an IRA), those certificates represent shares held by four different record
holders, even if a single shareholder controls the voting or disposition of
those shares. Similarly, shares held by a broker in "street name" on a
shareholder's behalf are held of record by the broker.
44
As a result, a single shareholder with 200 or more shares held in various
accounts could receive Series A Preferred Stock in the Reclassification for all
of his or her shares if those accounts individually hold fewer than 200 shares.
To avoid this, the shareholder could either consolidate his or her ownership
into a single form of ownership representing 200 or more shares, or acquire
additional shares in the market prior to the effective date of the
Reclassification, or place all of the shares into a "street name" account with a
broker holding 200 or more shares.
Effect on Outstanding Warrants and Stock Options. The holders of our
outstanding warrants and stock options will continue to hold those securities.
The terms of the warrants and options will not be affected by the
Reclassification.
Legal Effectiveness. As soon as practicable after shareholder approval, we
will file the Articles of Amendment with the Secretary of the Commonwealth of
Massachusetts and will send a Letter of Transmittal to all record holders of
common stock who are entitled to receive Series A Preferred Stock in the
Reclassification directing them to submit their common stock certificates for
exchange. The Reclassification will be effective upon the filing of the Articles
of Amendment with the Secretary of the Commonwealth of Massachusetts. We
anticipate that this will occur shortly after the special meeting of
shareholders.
On the effective date of the Reclassification, each shareholder who owns
fewer than 200 shares of record immediately prior to the Reclassification will
not have any rights as a common shareholder and will instead have the rights of
a Series A Preferred shareholder.
Exchange of Stock Certificates for Series A Preferred Stock. The Letter of
Transmittal will provide the means by which shareholders will surrender their
common stock certificates and obtain the Series A Preferred Stock certificates
to which they are entitled. If certificates evidencing common stock have been
lost or destroyed, we may, in our sole discretion, accept a duly executed
affidavit and indemnity agreement of loss or destruction in a form satisfactory
to us in lieu of the lost or destroyed certificate. If a certificate is lost or
destroyed, the shareholder will be required to submit, in addition to other
documents, a bond or other security, satisfactory to the board, indemnifying us
and all other persons against any losses incurred as a consequence of the
issuance of a new stock certificate. Shareholders whose certificates have been
lost or destroyed should contact us as soon as possible. Additional instructions
regarding lost or destroyed stock certificates will be included in the Letter of
Transmittal that will be sent to shareholders after the Reclassification becomes
effective.
Except as described above with respect to lost stock certificates, there
will be no service charges or costs payable by shareholders in connection with
the exchange of their common stock certificates for Series A Preferred Stock
certificates in the Reclassification. We will bear these costs.
The Letter of Transmittal will be sent to shareholders promptly after the
effective date of the Reclassification. Do not send in your common stock
certificates until you have received the Letter of Transmittal. Assuming you
submit your common stock certificates promptly thereafter, we expect that you
will receive your Series A Preferred Stock certificates as soon as practicable
after the effective date of the Reclassification.
Conditions and Regulatory Approvals. Aside from shareholder approval of
the Articles of Amendment, the Reclassification is not subject to any conditions
or regulatory approvals.
45
Suspension of SEC Registration. Pursuant to Section 15(d) of the Exchange
Act, our reporting obligations with the SEC will be automatically suspended as
of January 1, 2008, the first day of our new fiscal year, if we have fewer than
300 common shareholders of record at such time. Upon the completion of the
Reclassification, we will have approximately 244 common shareholders of record
and approximately 158 Series A Preferred Stock shareholders of record. We will
not be able to apply for the immediate suspension of our SEC reporting
obligations after the effective date of the Reclassification because of our
inability to file pre-acquisition audited financial statements for the Boston
Branch in connection with its acquisition.
Suspension of our SEC reporting obligations will substantially reduce the
information we are required to furnish to our shareholders and to the SEC.
Furthermore, our affiliated shareholders will be deprived of the ability to
dispose of their common stock under Rule 144 promulgated under the Securities
Act unless the Company elects to provide current public information about itself
to the investing public.
We estimate that suspension of our SEC reporting obligations will save the
Company approximately $285,000 per year in legal and accounting fees, printing
costs, management time and other expenses. See "Special Factors--Effects of the
Reclassification on the Company."
Source of Funds and Expenses
We will pay all of the expenses related to the Reclassification. We
estimate these expenses will be as follows:
SEC filing fees $ 2,000
Legal fees 125,000
Accounting fees 5,000
Financial advisor fees 42,500
Printing, mailing costs, and miscellaneous 5,000
--------
Total $179,500
========
We intend to pay the expenses related to the Reclassification with
existing working capital. We believe our working capital is adequate to cover
the expenses of the Reclassification, and therefore we have not arranged for any
alternative financing arrangements to cover these expenses.
Appraisal Rights
Section 13.02 of the MBCA provides that a shareholder is entitled to
dissent from and obtain payment for the fair value of his or her shares under
certain conditions in the event of specified corporate actions. One such action
which triggers these "appraisal rights" is an amendment to the Company's
Articles of Organization which materially and adversely affects the dissenters'
shares because it alters or abolishes stated rights or preferences of the shares
owned by the dissenter. Therefore, the shareholders of the Company who are to
receive shares of Series A Preferred Stock in exchange for their shares of
common stock and take the necessary steps to perfect their appraisal rights are
entitled to dissent from the Reclassification and Articles of Amendment and
obtain payment for the fair value of their shares which are being reclassified
pursuant to the Reclassification under Part 13 of the MBCA ("Part 13"). A copy
of Part 13 is attached hereto as Appendix C.
46
A Company shareholder who wishes to assert appraisal rights must follow
the very specific requirements set forth in Part 13. In addition to certain
other requirements, a dissenting shareholder must deliver to the Company before
the special meeting, a written notice (the "Intent Notice") of that
shareholder's intent to demand payment for his shares if the Reclassification is
effected. The dissenting shareholder must also not vote his shares in favor of
the proposed Reclassification. Failure to comply with these and other
requirements set forth in Part 13 will constitute a waiver of the shareholder's
right to dissent.
If the Reclassification is approved by the Company's shareholders, and the
Reclassification is consummated, the Company will mail by registered or
certified mail, return receipt requested, a written notice to all shareholders
who properly delivered an Intent Notice and satisfied the requirements of a
dissenting shareholder set out in Part 13 (a "Dissenters' Notice") no later than
10 days following shareholder approval of the Reclassification. The shareholder
who receives a Dissenters' Notice must demand payment and deposit his or her
certificates for the shares of Company common stock in accordance with the terms
of the Dissenters' Notice. The shareholder will have at least 30 days to
determine if he wants to demand payment in accordance with the terms of the
Dissenters' Notice. A shareholder who does not satisfy the foregoing
requirements is not entitled to payment for his or her shares under Part 13.
Upon receipt of the qualified dissenting shareholder's payment demand(s),
we will offer to pay, subject to the qualified dissenter properly demanding
payment and depositing his share certificates, the amount we estimate to be the
fair value of the Company common stock owned by such shareholders at the
effective time of the Reclassification, plus interest accrued to the date of
payment, and we will pay this amount to the dissenters.
Under certain terms and conditions specified in Part 13, a dissenter may
notify the Company in writing of his own estimate as to the fair value of his
shares and the amount of interest due, and that dissenter may demand payment of
the excess amount over the Company's payment and interest due. The shareholder
waives the right to demand payment if he fails to demand additional payment in
accordance with Part 13.
Part 13 also sets forth the procedure to be followed in the event that a
demand for payment remains unsettled. This procedure involves an appraisal
proceeding in which the court may appoint one or more persons as an appraiser to
receive evidence and recommend a decision on the question of fair value.
A beneficial owner who is not the record owner may assert Appraisal Rights
as to any shares held on his behalf only if (i) we receive the record
shareholder's written consent to the dissent prior to or simultaneously with the
beneficial shareholder's assertion of Appraisal Rights and (ii) he does so with
respect to all shares of which he is the beneficial owner.
The foregoing is only a summary of the rights of dissenting shareholders
under the MBCA. Because Part 13 contains more detailed provisions and
requirements, each dissenting shareholder should carefully review the text of
Part 13 attached hereto as Appendix C and should also consult with his or her
own legal counsel concerning the specific procedures and available remedies
under Part 13. Any failure to follow this specific procedure set forth in Part
13 may result in a shareholder losing the right to claim fair value as described
above.
As discussed above, you are advised that any notice of intent to demand
payment pursuant to Part 13 must be in writing and must be received by the
Company prior to the vote at the special meeting. If you desire to mail your
Intent Notice to demand payment, you should mail such notice to the Company at
the address set forth at the beginning of this Proxy Statement.
47
As previously stated, in order to exercise Appraisal Rights, you must not
vote in favor of the Reclassification and must give the written notice required
by Part 13. Your vote against the Reclassification alone will not satisfy the
written notice requirement. You must deliver a separate written notice to the
Company.
Reservation of Rights
The board reserves the right to abandon the Reclassification without
further action by our shareholders at any time before the filing of the
necessary amendment to our Articles of Organization with the Secretary of the
Commonwealth of Massachusetts, even if the Reclassification has been approved by
our shareholders at the special meeting. By voting in favor of the
Reclassification you also are expressly authorizing the board to determine not
to proceed with the Reclassification if it should decide on that course of
action.
48
ADDITIONAL INFORMATION REGARDING THE
SPECIAL MEETING OF SHAREHOLDERS
Time and Place of Meeting
We are soliciting proxies through this proxy statement for use at the
special meeting of the Company's shareholders. The special meeting will be held
at 8:30 a.m. on December 21, 2007, at our main office at 31 Market Street,
Ipswich, Massachusetts 01938.
Record Date and Mailing Date
The close of business on November 14, 2007 is the record date for the
determination of shareholders entitled to notice of and to vote at the special
meeting. We first mailed the proxy statement and the accompanying form of proxy
to shareholders on or about November 19, 2007.
Number of Common Shares Outstanding
As of the close of business on the record date, the Company had 4,000,000
shares of common stock, par value $1.00 per share, authorized, of which
2,344,630 shares were issued and outstanding. Each issued and outstanding share
is entitled to one vote on all matters presented at the meeting. No shares of
preferred stock were issued and outstanding as of the record date.
Proposal to be Considered
Shareholders will be asked to vote on the Articles of Amendment, which
provide for the Reclassification of each share of our common stock held by
record holders of fewer than 200 shares of common stock into one share of Series
A Preferred Stock for each share of common stock they own on the effective date
of the Reclassification. The terms of the Articles of Amendment and the
Reclassification are described beginning on page __. The full text of the
Articles of Amendment is set forth in Appendix A to the enclosed proxy
statement, and the terms of the Series A Preferred Stock are contained in
Appendix B. The Reclassification is designed to reduce our number of
shareholders of record to below 300.
Appraisal Rights
Shareholders are entitled to appraisal rights in connection with the
proposal to amend our Articles of Organization to effect the Reclassification.
See "Appraisal Rights" and Appendix C.
Procedures for Voting by Proxy
If you properly sign, return and do not revoke your proxy, the persons
appointed as proxies will vote your shares according to the instructions you
have specified on the proxy. If you sign and return your proxy but do not
specify how the persons appointed as proxies are to vote your shares, your proxy
will be voted FOR approval of the Articles of Amendment and in the best judgment
of the persons appointed as proxies on all other matters that are unknown to us
as of a reasonable time prior to this solicitation and that are properly brought
before the special meeting.
49
You can revoke your proxy at any time before it is voted by delivering to
Timothy L. Felter, Chief Financial Officer, 31 Market Street, Ipswich,
Massachusetts 01938, either a written revocation of the proxy or a duly signed
proxy bearing a later date or by attending the special meeting and voting in
person.
Requirements for Shareholder Approval
A quorum will be present at the meeting if a majority of the issued and
outstanding shares of the Company's common stock are represented in person or by
valid proxy. Based on the 2,344,630 shares issued and outstanding as of the
record date, a quorum will consist of 1,172,315 shares represented either in
person or by proxy. We will count abstentions and broker non-votes, which are
described below, in determining whether a quorum exists.
Approval of the Articles of Amendment requires the affirmative vote of at
least two-thirds of the issued and outstanding shares of the Company's common
stock. On September 4, 2007, the Company's directors and executive officers
owned approximately 1,125,143 shares, representing approximately 47.99% of the
issued and outstanding shares of common stock as of that date, and if they had
exercised all of their vested options and warrants, they would have owned 48.08%
of the issued and outstanding shares. Every director and executive officer has
indicated that he intends to vote his shares in favor of the Articles of
Amendment.
Any other matter that may properly come before the special meeting
requires that more shares be voted in favor of the matter than voted against the
matter.
Abstentions. A shareholder who is present in person or by proxy at the
special meeting and who abstains from voting on any or all proposals will be
included in the number of shareholders present at the special meeting for the
purpose of determining the presence of a quorum. Abstentions do not count as
votes in favor of or against a given matter. Based on the 2,344,630 shares
outstanding as of the record date, a quorum will consist of 1,172,315 shares
represented either in person or by proxy.
Broker Non-Votes. Generally, brokers who hold shares for the accounts of
beneficial owners must vote these shares as directed by the beneficial owner.
If, after the broker transmits proxy materials to the beneficial owner, no
voting direction is given by the beneficial owner, the broker may vote the
shares in his or her own discretion, if permitted to do so by the exchange or
other organization of which the broker is a member. Brokers may not vote in
their own discretion with respect to the proposal to approve the Articles of
Amendment. Proxies that contain a broker vote on one or more proposals but no
vote on others are referred to as "broker non-votes" with respect to the
proposals not voted upon. A broker non-vote, with respect to a proposal for
which the broker has no discretionary voting authority, does not count as a vote
in favor of or against that particular proposal. Based on the same reasoning
that applies to abstentions as discussed above, broker non-votes will
effectively function as votes against the approval of the Articles of Amendment
but will not affect the outcome of any other proposal properly brought before
the meeting.
Solicitation of Proxies
Proxies are being solicited by our board, and we will pay all costs for such
solicitation. In addition, our directors, officers and employees may, without
additional compensation, solicit proxies by personal interview, telephone or
fax. We will direct brokerage firms or other custodians, nominees or fiduciaries
to forward our proxy solicitation materials to the beneficial owners of common
stock held of record by these institutions and will reimburse them for the
reasonable out-of-pocket expenses they incur in connection with this process.
50
INFORMATION ABOUT THE COMPANY
Overview
First Ipswich Bancorp. First Ipswich Bancorp was organized in 1985 as a
Massachusetts-chartered bank holding company. The Company is headquartered in
Ipswich, Massachusetts. As a bank holding company, the Company is subject to
regulation by the Federal Reserve Board. Through the Company's wholly-owned
subsidiary, The First National Bank of Ipswich, the Company currently provides
community banking services to its principal market area of northeastern
Massachusetts and its secondary market areas of Boston, Massachusetts and
Portsmouth, New Hampshire. As of September 30, 2007, we had $291.5 million in
consolidated assets, $225.2 million in deposits and $19.3 million in
shareholders' equity.
The First National Bank of Ipswich. The Bank was founded in 1892. The Bank
is a national banking association chartered under the National Bank Act. Its
deposits are insured by the FDIC, and it is subject to regulation by the OCC and
the FDIC. The Bank offers a full range of retail banking services to
individuals, businesses, and nonprofit organizations, currently through eight
(8) banking offices located in the Bank's primary and secondary markets. Such
services include a wide range of retail checking and savings accounts, loans,
safe deposit facilities, and automated teller machines at select branch
locations.
The Bank also provides lending, depository and related financial services
to commercial, industrial, financial, and governmental customers. These services
include short- and long-term loans and revolving credit arrangements, letters of
credit, inventory and accounts receivable financing, real estate construction
lending, and mortgage loans.
As of September 30, 2007, the Company, including the Bank and its
subsidiaries, had 100 employees, of whom 76 were full-time. None of these
employees is covered by a collective bargaining agreement and we believe that
our employee relations are good.
51
Directors and Executive Officers
The following table sets forth, as to each of the Company's directors and
executive officers and certain significant employees of the Company's
subsidiaries, such person's age, position, principal occupation, principal
business address (if other than the Company), and the period during which such
person has been in such position at the Company or a subsidiary. Each director
of the Company is also a director of the Bank.
Position (and Principal Occupation and Director (Officer)
Name Age Principal Business Address (if other than the Company)(1) since
---- --- --------------------------------------------------------- -----
Robert R. Borden, III 64 Director (President & CEO, LandVest, Inc., 1992
Ten Post Office Square, Boston, Massachusetts 02109)
Maryjon Brett 42 Senior Vice President - Information Technology & 2006
Operations of Bank
Russell G. Cole 49 Director and President & CEO of the Company and Bank (2) 2006
Timothy R. Collins 43 Director (President, EBSCO Publishing, 2003
10 Estes Street, Ipswich, Massachusetts 01938)
Janice M. Costa 37 Senior Vice President - Retail Banking of Bank 2006
Dr. C. Russell de Burlo, Jr. 82 President & CEO of The de Burlo Group 2004
Craig H. Deery 59 Director (Private Investor, 44 School Street, 2005
Manchester, MA 01944)
John P. DiIorio, Jr. 44 Senior Vice President - Lending of Bank 2003
Robin W. Dushman 58 Senior Vice President of The de Burlo Group 2004
Timothy L. Felter 46 Senior Vice President & CFO and Treasurer of the 2006
Company and Bank (3)
Stephanie R. Gaskins 67 Director (Community Volunteer), 136 County Road, 1995
Ipswich, MA 01938
Neil St. John Raymond 63 Chairman of Board of the Company and Bank 1969
(President, Raymond Property Company LLC,
306 Dartmouth Street, Boston, Massachusetts 02116)(4)
Neil St. John Raymond, Jr. 29 Director (Project Manager, Cabot, Cabot & Forbes, 2003
125 Summer Street, Suite 1800,
Boston, Massachusetts 02110) (4)(5)
William J. Tinti 67 Director (Attorney-Tinti, Quinn, Grover & Frey, P.C., 2002
27 Congress Street, Suite 414, Salem, Massachusetts 01970)
(1) Unless otherwise noted, the principal occupation of each individual set
forth above has been the principal occupation of such individual for the
past five years. In addition, except as otherwise provided above, the
address of the employers of the directors and executive officers are the
same as those of the Company.
(2) Mr. Cole was the President - Northern Division of the Bank from November
2004 through June 2006 when he was appointed President and Chief Executive
Officer. Prior to joining the Bank in November 2004, Mr. Cole was the
President and Chief Executive Officer of GBSI Insurance Group from
February 2003 to June 2004, located at 501 Islington Street, Portsmouth,
NH 03801. Mr. Cole was also the President and Chief Executive Officer of
Ocean National Bank from November 1995 to February 2003, located at 325
State Street, Portsmouth, New Hampshire 03801.
(3) Mr. Felter joined the Company and Bank as Senior Vice President and Chief
Financial Officer and Treasurer on March 20, 2006. Prior to joining the
Company, Mr. Felter served in a number of positions at Lawrence Savings
Bank from 1990 through 2006, including Senior Vice President & Chief
Financial Officer, Senior Vice President - Residential Lending, Executive
Vice President - Personal Banking, and Investment Officer. Lawrence
Savings Bank is located at 30 Massachusetts Avenue, North Andover,
Massachusetts 01845.
(4) Mr. Raymond is the father of Mr. Raymond, Jr.
52
(5) Mr. Raymond, Jr. has been a project manager with Cabot, Cabot & Forbes
since March 2005. Prior to that, Mr. Raymond, Jr. was a project manager
for Raymond Property Company, 306 Dartmouth Street, Boston, Massachusetts
02116. Mr. Raymond, Jr., is the son of Mr. Raymond, the Company's chairman
and largest shareholder.
All of the persons listed and discussed above are U.S. citizens. During
the past five years, none of them had been a party in any judicial or
administrative proceeding that resulted in a judgment, decree, or final order
enjoining them from future violations of, or prohibiting activities subject to,
federal or state securities laws, or finding any violation with respect to such
laws. In addition, none of the above individuals have been convicted in any
criminal proceeding during the past five years, excluding traffic violations and
similar misdemeanors.
No director of the Company is also a director of any other company with a
class of securities registered pursuant to Section 12 of the Exchange Act or
subject to the requirements of Section 15(d) thereof, or any company registered
as an investment company under the Investment Company Act of 1940.
Stock Ownership by Significant Shareholders
The following table and related notes set forth certain information as of
September 4, 2007 with respect to all persons known to the Company to be the
beneficial owner of more than 5% of its outstanding common stock: The table also
sets forth the number and approximate percentage of shares of common stock that
the persons named in the table would beneficially own after the effective date
of the Reclassification on a pro forma basis, assuming 12,081 shares are
exchanged for Series A Preferred Stock in the Reclassification and there are no
changes in the named person's ownership between September 4, 2007 and the
effective date of the Reclassification.
Name and Address of Amount and Nature of Percent of Class before Percent of Class after
Beneficial Owner(1) Beneficial Ownership Reclassification Reclassification
------------------- -------------------- ---------------- ----------------
Joseph A. Brear, Jr., Trustee, Raymond 338,720 (2)(3) 14.26 14.33
Children's Trust 1981
c/o Craig and Macauley, PC
600 Atlantic Avenue
Boston, MA 02210(2)
Neil St. John Raymond 1,000,588 (4)(5)(6) 42.12 42.33
34 Heartbreak Road
Ipswich, MA 01938(3)(4)
(1) For purposes of this chart, a person is treated as the beneficial owner of a
security if the person, directly or indirectly (through contract, arrangement,
understanding, relationship or otherwise) has or shares (a) voting power,
including the power to vote or to direct the voting, of such security, or (b)
investment power with respect to such security, including the power to dispose
or direct the disposition of such security. A person is also deemed to be a
beneficial owner of a security if a person directly or indirectly, creates or
uses a trust, proxy, power of attorney, pooling arrangement or any contract,
arrangement or device with the purpose or effect of divesting such person of
beneficial ownership of such security or preventing the vesting of such
beneficial ownership. A person is also deemed to have beneficial ownership of
any security that such person has the right to acquire within sixty (60) days.
Unless indicated in another footnote to this table, a person has sole voting and
investment power with respect to the shares set forth opposite his or her name.
53
(2) 230,720 shares owned by Joseph A. Brear, Jr., Trustee, Raymond Children's
Trust 1981 (the "Children's Trust") have been pledged to Mr. Eyk Van Otterloo as
collateral for certain obligations. The pledge agreements between the Children's
Trust and Mr. Van Otterloo provide that Mr. Van Otterloo shall have the power to
vote and/or sell all of the pledged shares upon default by the Children's Trust.
(3) In addition to the 230,720 shares of the Children's Trust pledged to Mr. Van
Otterloo, the Children's Trust has pledged 100,000 shares to Eastern Bank as
collateral to secure certain obligations.
(4) Includes 1,808 shares with respect to which Mr. Raymond shares voting and
investment power with one other person. Also includes 1,400 shares Mr. Raymond
has the right to acquire through the exercise of rights under a warrant
agreement.
(5) 997,380 shares of Mr. Raymond's common stock and a warrant to purchase 1,400
shares of common stock have been pledged to Windham Realty II Limited Liability
Company ("Windham Realty II") as collateral for certain obligations. 997,380 of
such shares of Mr. Raymond's common stock have also been pledged to Joseph A.
Brear, Jr., Trustee, the Children's Trust and to Joseph A. Brear, Jr., Trustee,
The Buttonwood Trust (collectively, the "Trusts") as collateral for certain
obligations, subject to the prior pledge to Windham Realty II.
Stock Ownership by Directors and Executive Officers
The following table and related notes set forth information as of
September 4, 2007 regarding the beneficial ownership of the Company's common
stock by each of the Company's and the Bank's directors and executive officers,
and by all of the Company's and the Bank's executive officers and directors as a
group.
Percent of Class Percent of Class
Amount and Nature of before after
Name and Address of Beneficial Owner(1) Beneficial Ownership (2)(3) Reclassification Reclassification
--------------------------------------- --------------------------- ---------------- ----------------
Neil St. John Raymond, Chairman of the Board 1,000,588 42.68% 42.89%
Robert R. Borden, III, director 34,670 1.48% 1.49%
Maryjon Brett, SVP of Information Technology &
Operations of Bank 200 * *
Russell G. Cole, President & CEO 1,800 * *
Timothy R. Collins, director 26,293 1.13% 1.13%
Janice M. Costa, SVP of Retail Banking of Bank 920 * *
Dr. C. Russell de Burlo, Jr. 1,000 * *
Craig H. Deery, director 23,500 * *
John P. DiIorio, Jr., SVP - Lending 1,150 * *
Robin W. Dushman, SVP of The de Burlo Group 1,800 * *
Timothy L. Felter, SVP and CFO 7,600 * *
Stephanie R. Gaskins, director 10,652 * *
Neil St. John Raymond, Jr., director 4,890 * *
William J. Tinti, director 27,130 1.16% 1.16%
All Directors and Executive Officers as a Group 1,142,193 48.08% 48.33%
* One percent or less.
(1) All business addresses and the business telephone number of the listed
officers and directors are care of First Ipswich Bancorp, 31 Market
Street, Ipswich, MA 01938, (978) 356-3700. Additionally, the beneficial
share ownership of each of the persons listed in the table set forth above
may be outright or deemed due to ownership by an entity or person with
whom such person is related or otherwise affiliated.
54
(2) Totals include warrants issued January 26, 2007 to Messrs. Borden, Cole,
Collins, Deery, DiIorio, Felter, Raymond, Raymond, Jr., and Tinti and Ms.
Gaskins in the amounts of 625, 250, 2500, 2500, 125, 1100, 1400, 25, 2500,
and 25, respectively.
(3) Totals include vested stock options (1,000 each) that were granted May 18,
2007 to Messrs. Borden, Collins, Deery, Raymond Jr. and Tinti and Ms.
Gaskins.
Recent Transactions in the Company's Stock
Neither the Company nor any of its executive officers, directors,
affiliates or subsidiaries has engaged in any transaction in the Company's
common stock during the past sixty (60) days.
Prior Stock Purchases
The following table sets forth information with respect to purchases of
shares of the Company's common stock, if any, by our executive officers and
directors during the past two years, or since becoming an affiliate, whichever
is later. During the past two years, we have not repurchased any shares of our
common stock.
- -----------------------------------------------------------------------------------------------------------------------------
Name Quarter Ended Number of Shares Price Range(s) Average Price Paid
- ---- ------------- ---------------- -------------- ------------------
- -----------------------------------------------------------------------------------------------------------------------------
Robert R. Borden, III 03/31/2007 3,125 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
Russell G. Cole 03/31/2007 1,250 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
Timothy R. Collins 03/31/2007 12,500 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
Craig H. Deery 03/31/2007 12,500 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
John P. DiIorio, Jr. 03/31/2007 625 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
Timothy L. Felter 03/31/2007 5,500 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
Stephanie R. Gaskins 03/31/2007 125 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
Neil St. John Raymond 03/31/2007 7,000 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
Neil St. John Raymond, Jr. 03/31/2007 125 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
William J. Tinti 03/31/2007 12,500 $8.00/share $8.00
- -----------------------------------------------------------------------------------------------------------------------------
Related Party Transactions
The Company, through its wholly-owned bank subsidiary, has had, currently
has, and expects to continue to have in the future, banking (including loans and
extensions of credit) transactions in the ordinary course of its business with
its directors, executive officers, members of their families and associates.
Such banking transactions have been and are on substantially the same terms,
including interest rates, collateral and repayment conditions, as those
prevailing at the same time for comparable transactions with others and did not
involve more than the normal risk of collectibility or present other unfavorable
features. At June 30, 2007, the aggregate outstanding extensions of credit to
all directors, officers, principal shareholders and members of their respective
immediate families and trusts in which they have a substantial beneficial
interest, or as to which they serve as trustee, as a group, were $515,000 an
amount which was equal to 1.8% of the Company's total capital.
55
Stock Option Plans
On March 31, 2004, the shareholders of the Company approved the First
Ipswich Bancorp 2004 Incentive Stock Option Plan (the "ISO Plan") for key
employees of the Company and its subsidiaries. Under the ISO Plan, the board of
directors may grant options to purchase shares of the Company's common stock to
key employees who are deemed capable of making substantial contributions to the
management and operations of the Company.
The board of directors will administer the ISO Plan and will determine
which employees shall be granted options, the number of options granted, the
times when the options will vest, and the exercise price of the option. The ISO
Plan provides that the board may grant options to purchase an aggregate of
200,000 shares of the Company's common stock, subject to adjustments in the
event of stock splits, stock dividends or reclassification, recapitalization or
other possible future changes. The ISO Plan shall terminate on February 18, 2014
and no options may be granted thereafter. The board may at any time modify,
amend or terminate the ISO Plan, except that approval of the holders of at least
a majority of the common stock of the Company is required in certain
circumstances such as increasing the amount of shares that may be granted under
the plan, increasing the maximum amount of options that may be granted to an
individual employee or extending the plan's termination date.
The options granted under the ISO Plan are incentive stock options. They
are entitled to favorable tax treatment if certain conditions are satisfied.
These conditions include approval of the stock option plan by the Company's
shareholders, the exercise price may not be less than the fair market value of
the Company's common stock at the time the option is granted (or 110% of such
value in certain circumstances), the option must be exercised within 10 years
after it is granted (or 5 years in certain circumstances) or within three months
after the employee is no longer employed by the Company, the option is generally
nontransferable, the value of the shares subject to the option which vest in any
one year cannot exceed $100,000 as determined at the time the option is granted,
and the employee has not sold the common stock acquired by the exercise of any
option during the periods two years after the date of grant or one year from the
date of exercise. An option may be exercised by the payment in full of the
option price for the shares to be purchased. If an option expires or terminates
for any reason without being exercised, the shares represented by the option
will again be available for grant under the stock option plan.
As of the date hereof, the board has granted options to the following
senior managers which vest over four years, beginning on the first anniversary
of the grant date.
Number of
Name and Title of Employee Date of Grant Exercise Price Options
- -------------------------- ------------- -------------- -------
Neil St. John Raymond, Chairman May 16, 2007 $10.45/share 7,500
Russell G. Cole, President May 16, 2007 $9.50/share 10,000
Timothy L. Felter, SVP and CFO May 16, 2007 $9.50/share 8,000
Maryjon Brett, SVP Operations and Information Systems May 16, 2007 $9.50/share 5,500
Maryjon Brett, SVP Operations and Information Systems July 18, 2007 $9.25/share 2,500
Janice Costa, SVP Retail Banking May 16, 2007 $9.50/share 5,500
Janice Costa, SVP Retail Banking July 18, 2007 $9.25/share 2,500
John DiIorio, SVP, Sr. Lending Officer May 16, 2007 $9.50/share 7,500
John DiIorio, SVP, Sr. Lending Officer July 18, 2007 $9.25/share 500
56
On March 17, 2004, the Company adopted the First Ipswich Bancorp 2004
Directors Plan (the "Directors Plan") to provide for the issuance of stock
options to directors. Under the Directors Plan, the board may grant options to
purchase shares of the Company's common stock to directors.
The board of directors will administer the Directors Plan, and will
determine which directors will be granted options, the times when the options
will vest, and the exercise price of the options, which shall not be less than
the fair market value of the common stock of the Company on the date of grant of
the option. The aggregate number of shares of the Company's common stock for
which options may be granted under the Directors Plan is 20,000 shares, subject
to adjustments in the event of stock splits, stock dividends or
reclassification, recapitalization or other possible future changes. The
Directors Plan terminates in 2014 and no options may be granted thereafter. The
board of directors may at any time modify, amend or terminate the Directors
Plan. The options granted under the Directors Plan are non-qualified options,
which do not qualify for special tax treatment under the Internal Revenue Code.
On May 16, 2007, the board granted Messrs. Borden, III, Collins, Deery,
Raymond, Jr., and Tinti and Ms. Gaskins (the non-employee directors) 2,000
options each, of which 1,000 vested immediately with the remaining options
vesting over four years.
Market for Common Stock and Dividends
The Company's common stock has been quoted on the NASD OTCBB since August
24, 2004 under the symbol "FIWC." Our common stock is not listed on an exchange
and has historically been thinly traded. As of August 10, 2007, the Company had
402 shareholders of record and 2,344,630 shares of common stock outstanding.
The following table sets forth market price and dividend information for
the Company's common stock for the last two years ended September 30, 2007. The
information in the tables below reflects Over-the-Counter Market quotes, without
retail mark-up, mark-down, or commission, and may not represent actual
transactions.
Year Ended
December 31, 2007 High Price Low Price Average Price Dividends per Share
- ----------------- ---------- --------- ------------- -------------------
First Quarter $12.00 $8.50 $9.27 $0.0000
Second Quarter $9.50 $9.00 $9.20 $0.0000
Third Quarter $9.50 $8.75 $9.08 $0.0000
Year Ended
December 31, 2006 High Price Low Price Average Price Dividends per Share
- ----------------- ---------- --------- ------------- -------------------
First Quarter $12.50 $10.25 $11.04 $0.0125
Second Quarter $11.00 $9.50 $10.22 $0.0125
Third Quarter $9.75 $8.10 $8.86 $0.0000
Fourth Quarter $8.75 $8.15 $8.53 $0.0000
Year Ended
December 31, 2005 High Price Low Price Average Price Dividends per Share
- ----------------- ---------- --------- ------------- -------------------
Fourth Quarter $13.00 $10.25 $11.45 $0.0125
57
Payment of dividends on the Company's common stock is subject to
determination and declaration by the board and depends upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, including limitations arising under the Bank's Formal Agreement with
the OCC, the Company's results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
Description of Capital Stock
The authorized capital stock of First Ipswich Bancorp consists of
4,000,000 shares of common stock, par value $1.00 per share, and 1,000,000
shares of preferred stock, par value $1.00 per share. As of the record date,
2,344,630 shares of common stock were issued and outstanding and were held of
record by approximately 402 shareholders. We estimate the number of shares of
common stock outstanding after the Reclassification will be approximately
2,332,549 shares. As of the record date, no shares of preferred stock were
issued or outstanding. We estimate that the number of shares of Series A
Preferred Stock outstanding after the Reclassification will be approximately
12,081 shares. The exact number of shares of common stock and Series A Preferred
Stock outstanding after the Reclassification will depend on the number of shares
of common stock that are reclassified into Series A Preferred Stock. The
following summary describes the material terms of our capital stock.
Common Stock. All holders of our common stock are entitled to share
equally in dividends from funds legally available therefor when, as, and if
declared by the board, and upon liquidation or dissolution of the Company,
whether voluntary or involuntary, to share equally in all assets of the Company
available for distribution to the common shareholders. We may pay dividends in
cash (to the extent available), property or shares of common stock, unless we
are insolvent or the dividend payment would render us insolvent. Each holder of
our common stock is entitled to one vote for each share on all matters submitted
to the shareholders. Holders of our common stock do not have any preemptive
right to acquire authorized but unissued capital stock. There is no cumulative
voting, redemption right, or right of conversion in existence with respect to
our common stock. All outstanding shares of our common stock are fully paid and
non-assessable. Generally, we may issue additional shares of common stock
without regulatory or shareholder approval, and common stock may be issued for
cash or other property.
Preferred Stock. Our Articles of Organization authorize us to issue up to
1,000,000 shares of preferred stock and provide that the board is authorized,
without further action by the holders of the common stock, to provide for the
issuance of shares of preferred stock in one or more classes or series and to
fix the designations, powers, preferences, and relative, participating, optional
and other rights, qualifications, limitations, and restrictions, including the
dividend rate, conversion rights, voting rights, redemption price, and
liquidation preference, and to fix the number of shares to be included in any
such classes or series. Any preferred stock so issued may rank senior to the
common stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding-up, or both. In addition, any such shares of
preferred stock may have class or series voting rights.
Our board has designated 20,000 shares of our authorized preferred stock
as Series A Preferred Stock with the rights and limitations described below
under "Information About the Company--Terms of the Series A Preferred Stock to
be Issued in the Reclassification" and reproduced in full in Appendix B, subject
to shareholder approval of the Articles of Amendment. These shares of Series A
58
Preferred Stock will be issued to record holders of fewer than 200 shares of our
common stock in the Reclassification. As to the remaining shares of authorized
preferred stock that will not be issued in this transaction, our board has the
authority, without approval of our shareholders, to authorize from time to time
the issuance of such stock. Because our board has the power to establish the
relative rights, preferences and limitations of each series of preferred stock,
it may afford to holders of any series preferences and rights senior to the
rights of the holders of the shares of common stock, as well as the shares of
Series A Preferred Stock to be issued in the Reclassification.
Terms of the Series A Preferred Stock to be Issued in the Reclassification
General. The shares of Series A Preferred Stock to be issued in the
Reclassification will be fully paid and nonassessable shares of stock.
Seniority. After the Reclassification, the Company will still have shares
of authorized but unissued preferred stock. The Articles of Organization
authorize the board, without further action by the holders of common stock or
the Series A Preferred Stock, to provide for the issuance of these shares in one
or more classes or series and to establish the relative rights, preferences and
limitations of each class or series of preferred stock. As a result, after the
Reclassification, the board, which will be elected by the holders of the common
stock, may authorize the issuance of other classes or series of preferred stock
or equity securities that rank senior to or on parity with the Series A
Preferred Stock.
The Series A Preferred Stock will rank senior to the common stock with
respect to dividends and rights upon liquidation, dissolution or winding up of
the Company. The relative rights and preferences of the Series A Preferred Stock
may be subordinated to the relative rights and preferences of holders of
subsequent issues of other series or classes of stock and equity securities
designated by the board. The Series A Preferred Stock will be junior to
indebtedness issued from time to time by the Company, including notes and
debentures.
Dividend Rights. Holders of Series A Preferred Stock will be entitled to a
preference in the distribution of dividends, when and if declared and paid by
the Company, so that holders of the Series A Preferred Stock will be entitled to
receive dividends in an amount equal to that paid to common shareholders prior
to the receipt of dividends by the holders of common stock. The Company will not
be required to pay any dividends on the Series A Preferred Stock and will have
the right to waive the declaration or payment of dividends. Any dividends waived
by the Company will not accumulate to future periods and will not represent a
contingent liability of the Company.
Perpetual Stock. The Series A Preferred Stock will be perpetual stock,
which means stock that does not have a maturity date, cannot be redeemed at the
option of the holder, and has no other provisions that will require future
redemption of the issue.
Voting Rights. Unlike the common stock, the Series A Preferred Stock will
not have voting rights except under very limited circumstances. Except as
provided by law, holders of Series A Preferred Stock will be entitled to vote
only upon proposals for a business combination resulting in the transfer of a
majority of the outstanding common stock or of all or substantially all of the
Company's assets and upon which holders of the Company's common stock are
entitled to vote. For those matters on which holders of Series A Preferred Stock
are entitled to vote, such holders will have the right to one vote for each
share held, and will be entitled to receive notice of any shareholders' meeting
held to act upon such matters in accordance with the bylaws of the Company. When
voting on a proposed Change in Control or any other matter on which holders of
Series A Preferred Stock are entitled to vote by law, the holders of Series A
Preferred Stock will vote together with the holders of common stock and not as a
separate class.
59
Generally, under Section 10.04 of the MBCA, the holders of the Series A
Preferred Stock will be entitled to vote as a separate voting group on any
future amendments to the Company's Articles of Organization that would adversely
affect the designations, rights, preferences or limitations of all or part of
the shares of the Series A Preferred Stock. However, this section does not apply
to the creation of a new series of shares pursuant to the authority reserved to
the board under the Articles of Organization.
Conversion Rights. The shares of Series A Preferred Stock will
automatically convert to shares of common stock upon a Change in Control, with
each share of Series A Preferred Stock convertible into one share of common
stock.
Liquidation Rights. Holders of Series A Preferred Stock will be entitled
to a preference in the distribution of assets of the Company in the event of any
liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, equal to the greater of book value per share at the time of
payment, the amount per share to be paid to common shareholders, or $9.05.
Preemptive Rights. Holders of Series A Preferred Stock will not have any
preemptive rights to purchase any additional shares of Series A Preferred Stock
or shares of any other class of capital stock of the Company that may be issued
in the future.
Antidilution Adjustments. If the number of outstanding shares of common
stock are increased or decreased or changed into or exchanged for a different
number or kind of shares or other securities of the Company or any other
company, by reason of any merger, consolidation, liquidation, reclassification,
recapitalization, stock split up, combination of shares or stock dividend, an
appropriate adjustment shall be made by the board in the number and relative
terms of the Series A Preferred Stock.
Redemption Rights. Holders of Series A Preferred Stock will have no right
to require the Company to redeem their shares.
Shareholder Communications
Shareholders wishing to communicate with the board or with a particular
director may do so in writing addressed to the board, or to the particular
director, by sending it to the Secretary of the Company at our principal office
at 31 Market Street, Ipswich, Massachusetts 01938. The Secretary will promptly
forward such communications to the applicable director or to the chairman of the
board for consideration at the next scheduled meeting.
Other Matters
The board of the Company knows of no other matters that may be brought
before the meeting. If, however, any matter should properly come before the
meeting, votes will be cast pursuant to the proxies in accordance with the best
judgment of the proxyholders. If you cannot be present in person, you are
requested to complete, sign, date, and return the enclosed proxy promptly. An
envelope has been provided for that purpose. No postage is required if mailed in
the United States.
60
FINANCIAL INFORMATION ABOUT THE COMPANY
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following historical financial data is derived from, and qualified by
reference to, our consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-KSB for the year ended December 31,
2006 and our Quarterly Report on Form 10-QSB for the nine months ended September
30, 2007. You should read the selected financial data set forth below in
conjunction with the foregoing financial statements and notes and in the context
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the reports listed above. The portions of our annual and
quarterly reports described above are attached as Appendices F and G to this
proxy statement.
As of and for the As of and for the
(In thousands, except per share data) year ended December 31, nine months ended September 30,
-------------------------------------------------------------
2006 2005 2007 2006
--------- --------- --------- ---------
Net interest income $ 11,039 $ 11,109 $ 7,195 $ 8,281
Provision (credit) for loan losses 36 240 14 131
Non-interest income 4,245 5,115 3,811 2,818
Non-interest expenses 17,097 16,325 10,573 13,231
Provision (benefit) for income taxes (693) (296) 286 (805)
Net income (loss) $ (1,156) $ (45) $ 133 $ (1,458)
PER COMMON SHARE
Basic income (loss) per share $ (0.52) $ (0.02) $ 0.06 $ (0.66)
Diluted income (loss) per share (0.52) (0.02) 0.06 (0.66)
Cash dividends per share 0.025 0.05 -- 0.025
Book value per share $ 8.05 $ 8.54 $ 8.24 $ 7.76
AT PERIOD END
Loans, net $ 234,890 $ 234,613 $198,252 $ 250,429
Earning assets 299,095 362,554 259,333 367,312
Total assets 332,775 394,404 291,468 402,947
Deposits 268,868 258,860 225,211 276,520
Stockholders' equity $ 17,871 $ 18,960 $ 19,329 $ 17,219
Common shares outstanding 2,220 2,220 2,345 2,220
AVERAGE BALANCES
Loans, net $ 244,918 $ 200,068 $206,838 $ 241,296
Earning assets 360,782 357,812 276,353 365,083
Total assets 393,177 391,197 305,252 396,355
Deposits 274,759 242,403 242,200 273,859
Stockholders' equity $ 18,178 $ 19,741 $ 19,363 $ 18,284
Weighted average shares outstanding:
Basic 2,220 2,220 2,333 2,220
Diluted 2,220 2,220 2,336 2,220
KEY PERFORMANCE RATIOS
Return (loss) on average assets (annualized) (0.29%) (0.01%) 0.06% (0.49%)
Return (loss) on average shareholders' equity (annualized) (6.36%) (0.23%) 0.92% (10.65%)
Net interest margin (annualized) 3.06% 3.10% 3.48% 3.03%
Dividend payout ratio N/A N/A N/A N/A
Average equity to average assets 4.62% 5.05% 6.34% 4.61%
RATIO OF EARNINGS TO FIXED CHARGES
Pretax income (loss) $ (1,849) $ (341) $ 419 $ (2,263)
Add fixed charges - interest on deposits 6,561 3,317 4,713 4,727
Interest on borrowed funds and subordinated debt 5,222 5,068 1,806 4,066
Total applicable fixed charges 11,783 8,385 6,519 8,793
Adjusted pretax income - before total interest expense 9,934 8,044 6,938 6,530
Adjusted pretax income - before non-deposit interest expense $ 3,373 $ 4,727 $ 2,225 $ 1,803
Ratio of earnings to fixed charges (including interest on deposits) 84.31% 95.93% 106.43% 74.26%
61
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet as of
September 30, 2007 (the "Pro Forma Balance Sheet"), and the unaudited pro forma
consolidated statements of operations for the year ended December 31, 2006, and
for the nine months ended September 30, 2007 (collectively, the "Pro Forma
Statements of Operations"), show the pro forma effect of the Reclassification.
Pro forma adjustments to the Pro Forma Balance Sheet are computed as if the
Reclassification occurred at September 30, 2007, while the pro forma adjustments
to the Pro Forma Statements of Operations are computed as if the
Reclassification were consummated on January 1, 2006, the earliest period
presented. The following financial statements do not reflect any anticipated
cost savings that may be realized by us after consummation of the
Reclassification.
The pro forma information does not purport to represent what our results
of operations actually would have been if the Reclassification had occurred on
January 1, 2006.
62
FIRST IPSWICH BANCORP AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet
September 30, 2007
(In thousands, except per share data)
Pro Forma
Adjustments
----------- Pro Forma
ASSETS Historical Debit Credit Combined
- ------ ---------- ----- ------ --------
Cash and due from banks $ 9,398 180 $ 9,218
Federal funds sold and interest bearing accounts 15,637 15,637
-------- --------
Total cash and cash equivalents 25,035 24,855
-------- --------
Certificates of deposit 3,440 3,440
Securities available-for-sale, at fair value 39,783 39,783
Federal Home Loan Bank stock, at cost 1,447 1,447
Federal Reserve Bank stock, at cost 774 774
Loans, net of allowance for loan losses of $1,537 198,252 198,252
Real estate held for sale, net 6,281 6,281
Premises and equipment, net 3,675 3,675
Goodwill 3,641 3,641
Other intangible assets 1,184 1,184
Other assets 7,956 7,956
-------- --------
Total assets $291,468 $291,288
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $225,211 $225,211
Short-term borrowings 10,802 10,802
Long-term borrowings 20,831 20,831
Subordinated debentures 13,000 13,000
Other liabilities 2,295 2,295
-------- --------
Total liabilities 272,139 272,139
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized -- 12 12
Common stock, $1.00 par value; 4,000,000 shares authorized 2,365(1) 12 2,353
Additional paid-in capital 10,806 10,806
Retained earnings 6,976 180 6,796
Accumulated other comprehensive loss (707) (707)
Treasury stock, at cost (20,490 shares) (111) (111)
-------- --------
Total stockholders' equity 19,329 19,149
-------- --------
Total liabilities and stockholders' equity $291,468 $291,288
======== ========
(1) Assumes the issuance of one share of Series A Preferred
Stock, is exchange for one share of common stock
Shares outstanding (common and Series A Preferred) 2,345 2,345
Book value per common share $ 8.24 $ 8.17
63
FIRST IPSWICH BANCORP AND SUBSIDIARIES
Pro Forma Consolidated Statements of Operations
For the Nine Months Ended September 30, 2007
(In thousands, except per share data)
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
Interest and dividend income:
Interest and fees on loans $ 11,516 $ 11,516
Interest and debt securities:
Taxable 1,302 1,302
Tax-exempt 68 68
Dividend on equity securities 167 167
Other interest 661 661
--------- ---------
Total interest and dividend income 13,714 13,714
--------- ---------
Interest expense:
Interest on deposits 4,713 4,713
Interest on borrowed funds 1,100 1,100
Interest on subordinated debentures 706 706
--------- ---------
Total interest expense 6,519 6,519
--------- ---------
Net interest income 7,195 7,195
Credit for loan losses 14 14
--------- ---------
Net interest income after credit for loan losses 7,181 7,181
Other income:
Investment advisory fees 1,422 1,422
Service charges on deposit accounts 884 884
Credit card fees 408 408
Non-deposit investment fees 212 212
Derivative fair value adjustment 147 147
Gain on sale of loans, net 311 311
Rental income 216 216
Miscellaneous 211 211
--------- ---------
Total other income 3,811 3,811
--------- ---------
Operating expenses:
Salaries and employee benefits 5,635 5,635
Occupancy and equipment 1,560 1,560
Professional fees 970 970
Credit card interchange 168 168
Advertising and marketing 183 183
Data processing 488 488
ATM processing 303 303
Telephone 202 202
FDIC insurance 425 425
Other general and administrative 639 639
--------- ---------
Total operating expenses 10,573 10,573
--------- ---------
Income before income taxes 419 419
Provision for income taxes 286 286
--------- ---------
Net income $ 133 $ 133
========= =========
Earnings per share:
Basic $ 0.06 $ 0.06
========= =========
Diluted $ 0.06 $ 0.06
========= =========
The proposed transaction would not have an effect on the historical statement of
operations of First Ipswich Bancorp as all transaction costs would be financed
with existing non-interest bearing cash.
64
FIRST IPSWICH BANCORP AND SUBSIDIARIES
Pro Forma Consolidated Statements of Operations
For the Year Ended December 31, 2006
(In thousands, except per share data)
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
Interest and dividend income:
Interest and fees on loans $ 17,737 $ 17,737
Interest and debt securities:
Taxable 3,968 3,968
Tax-exempt 468 468
Dividend on equity securities 336 336
Other interest 313 313
--------- ---------
Total interest and dividend income 22,822 22,822
--------- ---------
Interest expense:
Interest on deposits 6,561 6,561
Interest on borrowed funds 4,279 4,279
Interest on subordinated debentures 943 943
--------- ---------
Total interest expense 11,783 11,783
--------- ---------
Net interest income 11,039 11,039
Provision for loan losses 36 36
--------- ---------
Net interest income after provision for loan losses 11,003 11,003
--------- ---------
Other income:
Investment advisory fees 1,800 1,800
Service charges on deposit accounts 1,185 1,185
Credit card fees 778 778
Trust fees 382 382
Non-deposit investment fees 290 290
Gain (loss) on securities sold or written down, net (945) (945)
Derivative fair value adjustment 364 364
Gain on sale of trust department 395 395
Valuation allowance - real estate held for sale (319) (319)
Rental income 370 370
Write-down of premises and equipment (349) (349)
Miscellaneous 294 294
--------- ---------
Total other income 4,245 4,245
--------- ---------
Operating expenses:
Salaries and employee benefits 8,999 8,999
Occupancy and equipment 2,629 2,629
Professional fees 1,469 180 1,649
Data processing 1,114 1,114
Credit card interchange 510 510
Advertising and marketing 396 396
Telephone 402 402
Prepayment penalties on borrowings 209 209
Other general and administrative 1,369 1,369
--------- ---------
Total operating expenses 17,097 17,277
--------- ---------
Loss before income taxes (1,849) (2,029)
Benefit for income taxes (693) (693)
--------- ---------
Net loss $ (1,156) $ (1,336)
========= =========
Loss per share:
Basic $ (0.52) $ (0.61)
========= =========
Diluted $ (0.52) $ (0.61)
========= =========
The proposed transaction would not have an effect on net interest income on the
historical statement of operations of First Ipswich Bancorp as all transaction
costs would be financed with existing non-interest bearing cash.
See accompanying notes to pro forma consolidated financial statements.
65
FIRST IPSWICH BANCORP AND SUBSIDIARIES
Notes to Consolidated Pro Forma Financial Statements
(1) The unaudited pro forma consolidated balance sheet as of September 30,
2007 and consolidated statements of operations of the year ended December
31, 2006 and for the nine months ended September 30, 2007 have been
prepared based on the historical consolidated balance sheets and
statements of operations, which give effect to the Reclassification as if
it had occurred on the earliest date presented.
(2) In the opinion of management, all adjustments considered necessary for a
fair presentation of the financial position and results for the period
presented have been included. Adjustments, if any, are normal and
recurring nature.
WHERE YOU CAN FIND MORE INFORMATION
We file periodic reports and other information with the SEC. Copies of
these reports and other information may be inspected and copied at the SEC's
public reference facilities located at Station Place, 100 F Street, N.E.,
Washington, D.C. 20549. Copies of these reports and other information can also
be obtained by mail at prescribed rates from the SEC at the address provided
above, via telephone at 1-800-SEC-0330, or via the SEC's website at www.sec.gov.
We have filed a Schedule 13E-3 under the Exchange Act in connection with
the Reclassification. This proxy statement does not contain all the information
contained in the Schedule 13E-3 because certain portions have been omitted in
accordance with SEC rules and regulations. The Schedule 13E-3 is available at
the SEC for inspection and copying as described above.
66
APPENDIX A
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF ORGANIZATION
OF
FIRST IPSWICH BANCORP
A-1
The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
FORM MUST BE TYPED Articles of Amendment FORM MUST BE TYPED
(General Laws Chapter 156D, Section 10.06; 950 CMR 113.34)
(1) Exact name of corporation: First Ipswich Bancorp
-----------------------------------------------
(2) Registered office address: 31 Market Street, Ipswich, Massachusetts 01938
-----------------------------------------------
(number, street, city or town, state, zip code)
(3) These articles of amendment affect article(s): Articles III, IV and VI
---------------------------
(specify the number(s) of article(s) being amended (I-VI))
(4) Date adopted:
------------------------------------------------------------
(month, day, year)
(5) Approved by:
(check appropriate box)
|_| the incorporators.
|_| the board of directors without shareholder approval and shareholder
approval was not required.
|X| the board of directors and the shareholders in the manner required
by law and the articles of organization.
(6) State the article number and the text of the amendment. Unless contained
in the text of the amendment, state the provisions for implementing the
exchange, reclassification or cancellation of issued shares.
Article III - 20,000 shares of the Corporation's authorized preferred
stock, par value $1.00 per share, are hereby designated as Series A
Preferred Stock, par value $1.00 per share, with the rights and
limitations set forth in Article IV, Section 3.
Article IV - See Continuation Sheets 4D and 4E.
Article VI - See Continuation Sheet 6I.
A-2
To change the number of shares and the par value, * if any, of any type, or to
designate a class or series, of stock, or change a designation of class or
series of stock, which the corporation is authorized to issue, complete the
following:
Total authorized prior to amendment:
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
Common 4,000,000 $1.00
- --------------------------------------------------------------------------------
Preferred 1,000,000 $1.00
- --------------------------------------------------------------------------------
Total authorized after amendment:
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
Common 4,000,000 $1.00
- --------------------------------------------------------------------------------
Preferred 980,000 $1.00
- --------------------------------------------------------------------------------
Series A Pref 20,000 $1.00
- --------------------------------------------------------------------------------
(7) The amendment shall be effective at the time and on the date approved by
the Division, unless a later effective date not more than 90 days from the
date and time of filing is specified: _________________________
*G.L. Chapter 156D eliminates the concept of par value, however a corporation
may specify par value in Article III. See G.L. Chapter 156D, Section 6.21, and
the comments relative thereto.
A-3
Signed by: ____________________________________________________________________,
(signature of authorized individual)
|_| Chairman of the board of directors,
|_| President,
|_| Other officer,
|_| Court-appointed fiduciary,
on this ___________ day of ______________________________, ____________________.
A-4
COMMONWEALTH OF MASSACHUSETTS
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston,
Massachusetts 02108-1512
Articles of Amendment
(General Laws Chapter 156D, Section 10.06; 950 CMR 113.34)
I hereby certify that upon examination of these articles of amendment, it
appears that the provisions of the General Laws relative thereto have been
complied with, and the filing fee in the amount of $______ having been paid,
said articles are deemed to have been filed with me this _______ day of
_____________, 20_____ , at _______a.m./p.m.
time
Effective date: _________________________________________________
(must be within 90 days of date submitted)
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
Filing fee: Minimum filing fee $100 per article amended, stock increases $100
per 100,000 shares, plus $100 for each additional 100,000 shares or any fraction
thereof.
TO BE FILLED IN BY CORPORATION
Contact Information:
David F. Hannon, Esquire
- ----------------------------------------------------------
Craig and Macauley Professional Corporation
- ----------------------------------------------------------
600 Atlantic Avenue, Boston, Massachusetts 02210
- ----------------------------------------------------------
Telephone: 617-367-9500
-----------------------------------------------
Email: hannon@craigmacauley.com
---------------------------------------------------
Upon filing, a copy of this filing will be available at www.sec.state.ma.us/cor.
If the document is rejected, a copy of the rejection sheet and rejected document
will be available in the rejected queue.
____________________
Examiner
____________________
Name approval
____________________
C
____________________
M
A-5
The following Article IV, Section 3 is hereby added to the Articles of
Organization:
"3. Series A Preferred Stock
(a) Designation and Initial Number. The initial number of authorized
shares of the Series A Preferred Stock shall be 20,000 shares, par value $1.00
per share.
(b) Rank. The Series A Preferred Stock, with respect to rights of
liquidation, dissolution or winding up of the Corporation, ranks senior to the
Common Stock and all of the classes and series of equity securities of the
Corporation, other than any classes or series of equity securities of the
Corporation subsequently issued ranking on a parity with, or senior to, the
Series A Preferred Stock, as to dividend rights and rights upon liquidation,
dissolution or winding up of the Corporation. The Series A Preferred Stock will
rank pari passu with the Common Stock with respect to dividend rights. The
relative rights and preferences of the Series A Preferred Stock may be
subordinated to the relative rights and preferences of holders of subsequent
issues of other classes or series of preferred stock and equity securities of
the Corporation designated by the Board of Directors. The Series A Preferred
Stock is junior to indebtedness issued from time to time by the Corporation,
including notes and debentures.
(c) Voting Rights. Except as provided by law, the holders of the Series A
Preferred Stock shall have limited voting rights, and shall be entitled to vote
only upon any proposal for a Change of Control (as defined in subsection (k)).
On those matters in which the holders of Series A Preferred Stock are entitled
to vote, the holders shall have the right to one vote for each share of Series A
Preferred Stock, and shall be entitled to receive notice of any shareholders
meeting held to act upon such matters in accordance with the Bylaws of the
Corporation, and shall be entitled to vote in such manner as provided by law.
Except as provided by law, the holders of Series A Preferred Stock shall vote
together with the holders of Common Stock as a single class, and not as a
separate class.
(d) Dividend Rights. The holders of shares of Series A Preferred Stock
shall be entitled to a preference in the distributions of any dividends and
shall receive dividends in an amount equal to that declared to be paid to the
holders of shares of Common Stock prior to the payment of any dividends to the
holders of shares of Common Stock. The shares of Series A Preferred Stock shall
be non-cumulative with respect to dividends, and the Corporation shall have the
right to waive the declaration of payment of dividends. Any dividends waived by
the Corporation shall not accumulate to future periods and shall not represent a
contingent liability of the Corporation.
(e) Liquidation or Dissolution. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the affairs of the
Corporation, then, before any distribution or payment shall be made to the
holders of any junior stock, the holders of Series A Preferred Stock shall be
entitled to be paid in full (on a per share basis) an amount equal to the
greater of book value per share at the time of payment, the amount per share to
be paid to holders of the Corporation's common stock, or $9.05. To the extent
such payment shall have been made in full to the holders of the Series A
Preferred Stock and any parity stock, the remaining assets and funds of the
Corporation shall be distributed among the holders of the junior stock,
according to their respective rights and preferences and in each case according
to their respective shares, with the holders of the Series A Preferred Stock and
any parity stock sharing ratably in such subsequent distribution. If upon
liquidation, dissolution or winding up, the amounts so payable are not paid in
full to the holders of all outstanding shares of Series A Preferred Stock, and
all other shares on a parity with the Series A Preferred Stock, then the holders
of Series A Preferred Stock and all other shares on a parity with the Series A
Preferred Stock will share ratably in any distribution of assets in proportion
to the full amounts to which they would otherwise be respectively entitled.
Neither a Change of Control nor any purchase or redemption of stock of the
Corporation of any class shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of the provisions of this
subsection.
(f) Convertibility. The Series A Preferred Stock shall automatically
convert into shares of the Corporation's Common Stock, on the basis of one share
of Common Stock for each share of Series A Preferred Stock, immediately prior to
the closing of a Change of Control; provided, however, that such conversion
shall be conditioned upon the closing of any such Change of Control, and the
holder entitled to receive the Common Stock upon conversion of the Series A
Preferred Stock shall be deemed to have converted such shares of Series A
Preferred Stock immediately prior to the closing of such Change of Control. If
the shares of Series A Preferred Stock shall be converted into Common Stock
pursuant to this subsection, the shares that are converted shall be cancelled
and shall not be issuable by the Corporation thereafter.
(g) Antidilution Adjustments. If the outstanding shares of Common Stock
are increased or decreased or
-4D-
A-6
changed into or exchanged for a different number or kind of shares or other
securities of the Corporation or of any other corporation by reason of any
merger, consolidation, liquidation, reclassification, recapitalization, stock
split up, combination of shares or stock dividend, appropriate adjustment shall
be made by the Board of Directors of the Corporation in the number, and relative
terms, of the shares of Series A Preferred Stock.
(h) Registration Rights. None.
(i) No Implied Limitations. Nothing herein shall limit, by inference or
otherwise, the discretionary right of the Board of Directors to divide any or
all of the shares of any preferred or special classes into series and, within
the limitations set forth in the Massachusetts Business Corporation Act (MGL
c.156D) or successor statutes, to fix and determine the relative rights and
preferences of the shares of any series so established, to the full extent
provided in the Articles of Organization of the Corporation.
(j) General Provisions. In addition to the above provisions with respect
to the Series A Preferred Stock, such Series A Preferred Stock shall be subject
to, and entitled to the benefits of, the provisions set forth in the
Corporation's Articles of Organization with respect to preferred stock
generally.
(k) Definitions. As used herein with respect to the Series A Preferred
Stock, the following terms have the following meanings:
a. The term "Change of Control" shall mean the consummation of (i) a
merger, share exchange, consolidation or other business combination of the
Corporation with any other "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) or affiliate thereof,
other than a merger, share exchange, consolidation or business combination that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock of the surviving entity or a parent or
affiliate thereof) more than fifty percent (50%) of the outstanding common stock
of the Corporation or such surviving entity or parent or affiliate thereof
outstanding immediately after such merger, consolidation or business
combination, or (ii) an agreement for the sale or disposition by the Corporation
of all or substantially all of the Corporation's assets
b. The term "parity stock" means any class of capital stock or
series of preferred stock (including but not limited to Series A Preferred
Stock) and any other class of stock of the Corporation hereafter authorized that
ranks on a parity with the Series A Preferred Stock in the payment of dividends
or in the distribution of assets on any liquidation, dissolution or winding up
of the Corporation.
c. The term "junior stock" shall mean the Common Stock and any other
class of stock of the Corporation hereafter authorized over which the Series A
Preferred Stock has preference or priority in the payment of dividends or in the
distribution of assets on any liquidation, dissolution or winding up of the
Corporation.
(l) Notices. All notices required or permitted to be given by the
Corporation with respect to the Series A Preferred Stock shall be in writing,
and if delivered by first class United States mail, postage prepaid, to the
holders of the Series A Preferred Stock at their last addresses as they shall
appear upon the books of the Corporation, shall be conclusively presumed to have
been duly given, whether or not the shareholder actually receives such notice;
provided, however, that failure to duly give such notice by mail, or any defect
in such notice, to the holders of any stock designated for repurchase, shall not
affect the validity of the proceedings for the repurchase of any other shares of
Series A Preferred Stock.
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The following Article VI, Section 17 is hereby added to the Articles of
Organization:
"17. Reclassification of Common Stock
Upon the filing of these Articles of Amendment, each share of Common
Stock outstanding immediately prior to such filing owned by a shareholder who is
the record holder of 199 or fewer shares of such Common Stock shall, by virtue
of the filing of these Articles of Amendment and without any action on the part
of the holder thereof, hereafter be reclassified as Series A Preferred Stock, on
the basis of one share of Series A Preferred Stock for each share of Common
Stock so reclassified, which shares of Series A Preferred Stock shall thereupon
be duly issued and outstanding, fully paid and nonassessable. Each share of
Common Stock outstanding immediately prior to the filing of these Articles of
Amendment owned by a shareholder who is the record holder of more than 199
shares of Common Stock shall not be reclassified and shall continue in existence
as a share of Common Stock.
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APPENDIX B
FIRST IPSWICH BANCORP
SERIES A PREFERRED STOCK
Relative Rights and Preferences and Other Terms
As Designated By the Board of Directors
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Terms of Series A Preferred Stock
(a) Designation and Initial Number. The initial number of authorized
shares of the Series A Preferred Stock shall be 20,000 shares, par value $1.00
per share.
(b) Rank. The Series A Preferred Stock, with respect to rights of
liquidation, dissolution or winding up of the Corporation, ranks senior to the
Common Stock and all of the classes and series of equity securities of the
Corporation, other than any classes or series of equity securities of the
Corporation subsequently issued ranking on a parity with, or senior to, the
Series A Preferred Stock, as to dividend rights and rights upon liquidation,
dissolution or winding up of the Corporation. The Series A Preferred Stock will
rank pari passu with the Common Stock with respect to dividend rights. The
relative rights and preferences of the Series A Preferred Stock may be
subordinated to the relative rights and preferences of holders of subsequent
issues of other classes or series of preferred stock and equity securities of
the Corporation designated by the Board of Directors. The Series A Preferred
Stock is junior to indebtedness issued from time to time by the Corporation,
including notes and debentures.
(c) Voting Rights. Except as provided by law, the holders of the Series A
Preferred Stock shall have limited voting rights, and shall be entitled to vote
only upon any proposal for a Change of Control (as defined in subsection (k)).
On those matters in which the holders of Series A Preferred Stock are entitled
to vote, the holders shall have the right to one vote for each share of Series A
Preferred Stock, and shall be entitled to receive notice of any shareholders
meeting held to act upon such matters in accordance with the Bylaws of the
Corporation, and shall be entitled to vote in such manner as provided by law.
Except as provided by law, the holders of Series A Preferred Stock shall vote
together with the holders of Common Stock as a single class, and not as a
separate class.
(d) Dividend Rights. The holders of shares of Series A Preferred Stock
shall be entitled to a preference in the distributions of any dividends and
shall receive dividends in an amount equal to that declared to be paid to the
holders of shares of Common Stock prior to the payment of any dividends to the
holders of shares of Common Stock. The shares of Series A Preferred Stock shall
be non-cumulative with respect to dividends, and the Corporation shall have the
right to waive the declaration of payment of dividends. Any dividends waived by
the Corporation shall not accumulate to future periods and shall not represent a
contingent liability of the Corporation.
(e) Liquidation or Dissolution. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the affairs of the
Corporation, then, before any distribution or payment shall be made to the
holders of any junior stock, the holders of Series A Preferred Stock shall be
entitled to be paid in full (on a per share basis) an amount equal to the
greater of book value per share at the time of payment, the amount per share to
be paid to holders of the Corporation's common stock, or $9.05. To the extent
such payment shall have been made in full to the holders of the Series A
Preferred Stock and any parity stock, the remaining assets and funds of the
Corporation shall be distributed among the holders of the junior stock,
according to their respective rights and preferences and in each case according
to their respective shares, with the holders of the Series A Preferred Stock and
any parity stock sharing ratably in such subsequent distribution. If upon
liquidation, dissolution or winding up, the amounts so payable are not paid in
full to the holders of all outstanding shares of Series A Preferred Stock, and
all other shares on a parity with the Series A Preferred Stock, then the holders
of Series A Preferred Stock and all other shares on a parity with the Series A
Preferred Stock will share ratably in any distribution of assets in proportion
to the full amounts to which they would otherwise be respectively entitled.
Neither a Change of Control nor any purchase or redemption of stock of the
Corporation of any class shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of the provisions of this
subsection.
(f) Convertibility. The Series A Preferred Stock shall automatically
convert into shares of the Corporation's Common Stock, on the basis of one share
of Common Stock for each share of Series A Preferred Stock, immediately prior to
the closing of a Change of Control; provided, however, that such conversion
shall be conditioned upon the closing of any such Change of Control, and the
holder entitled to receive the Common Stock upon conversion of the Series A
Preferred Stock shall be deemed to have converted such shares of Series A
Preferred Stock immediately prior to the closing of such Change of Control. If
the shares of Series A Preferred Stock shall be converted into Common Stock
pursuant to this subsection, the shares that are converted shall be cancelled
and shall not be issuable by the Corporation thereafter.
(g) Antidilution Adjustments. If the outstanding shares of Common Stock
are increased or decreased or changed into or exchanged for a different number
or kind of shares or other securities of the Corporation or of any other
corporation by reason of any merger, consolidation, liquidation,
reclassification, recapitalization, stock split up, combination of shares or
stock dividend, appropriate adjustment shall be made by the Board of Directors
of the Corporation in the number, and relative terms, of the shares of Series A
Preferred Stock.
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(h) Registration Rights. None.
(i) No Implied Limitations. Nothing herein shall limit, by inference or
otherwise, the discretionary right of the Board of Directors to divide any or
all of the shares of any preferred or special classes into series and, within
the limitations set forth in the Massachusetts Business Corporation Act (MGL
c.156D) or successor statutes, to fix and determine the relative rights and
preferences of the shares of any series so established, to the full extent
provided in the Articles of Organization of the Corporation.
(j) General Provisions. In addition to the above provisions with respect
to the Series A Preferred Stock, such Series A Preferred Stock shall be subject
to, and entitled to the benefits of, the provisions set forth in the
Corporation's Articles of Organization with respect to preferred stock
generally.
(k) Definitions. As used herein with respect to the Series A Preferred
Stock, the following terms have the following meanings:
a. The term "Change of Control" shall mean the consummation of (i) a
merger, share exchange, consolidation or other business combination of the
Corporation with any other "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) or affiliate thereof,
other than a merger, share exchange, consolidation or business combination that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock of the surviving entity or a parent or
affiliate thereof) more than fifty percent (50%) of the outstanding common stock
of the Corporation or such surviving entity or parent or affiliate thereof
outstanding immediately after such merger, consolidation or business
combination, or (ii) an agreement for the sale or disposition by the Corporation
of all or substantially all of the Corporation's assets
b. The term "parity stock" means any class of capital stock or
series of preferred stock (including but not limited to Series A Preferred
Stock) and any other class of stock of the Corporation hereafter authorized that
ranks on a parity with the Series A Preferred Stock in the payment of dividends
or in the distribution of assets on any liquidation, dissolution or winding up
of the Corporation.
c. The term "junior stock" shall mean the Common Stock and any other
class of stock of the Corporation hereafter authorized over which the Series A
Preferred Stock has preference or priority in the payment of dividends or in the
distribution of assets on any liquidation, dissolution or winding up of the
Corporation.
(l) Notices. All notices required or permitted to be given by the
Corporation with respect to the Series A Preferred Stock shall be in writing,
and if delivered by first class United States mail, postage prepaid, to the
holders of the Series A Preferred Stock at their last addresses as they shall
appear upon the books of the Corporation, shall be conclusively presumed to have
been duly given, whether or not the shareholder actually receives such notice;
provided, however, that failure to duly give such notice by mail, or any defect
in such notice, to the holders of any stock designated for repurchase, shall not
affect the validity of the proceedings for the repurchase of any other shares of
Series A Preferred Stock.
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APPENDIX C
APPRAISAL RIGHTS
PART 13 OF MBCA
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The General Laws of Massachusetts
PART I. ADMINISTRATION OF THE GOVERNMENT
TITLE XXII. CORPORATIONS
CHAPTER 156D. BUSINESS CORPORATIONS
PART 13
SUBDIVISION A.
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
Chapter 156D: Section 13.01. Definitions
Section 13.01. DEFINITIONS
In this PART the following words shall have the following meanings unless the
context requires otherwise:
"Affiliate", any person that directly or indirectly through one or more
intermediaries controls, is controlled by, or is under common control of or with
another person.
"Beneficial shareholder", the person who is a beneficial owner of shares held in
a voting trust or by a nominee as the record shareholder.
"Corporation", the issuer of the shares held by a shareholder demanding
appraisal and, for matters covered in sections 13.22 to 13.31, inclusive,
includes the surviving entity in a merger.
"Fair value", with respect to shares being appraised, the value of the shares
immediately before the effective date of the corporate action to which the
shareholder demanding appraisal objects, excluding any element of value arising
from the expectation or accomplishment of the proposed corporate action unless
exclusion would be inequitable.
"Interest", interest from the effective date of the corporate action until the
date of payment, at the average rate currently paid by the corporation on its
principal bank loans or, if none, at a rate that is fair and equitable under all
the circumstances.
"Marketable securities", securities held of record by, or by financial
intermediaries or depositories on behalf of, at least 1,000 persons and which
were
(a) listed on a national securities exchange,
(b) designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., or
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(c) listed on a regional securities exchange or traded in an interdealer
quotation system or other trading system and had at least 250,000 outstanding
shares, exclusive of shares held by officers, directors and affiliates, which
have a market value of at least $5,000,000.
"Officer", the chief executive officer, president, chief operating officer,
chief financial officer, and any vice president in charge of a principal
business unit or function of the issuer.
"Person", any individual, corporation, partnership, unincorporated association
or other entity.
"Record shareholder", the person in whose name shares are registered in the
records of a corporation or the beneficial owner of shares to the extent of the
rights granted by a nominee certificate on file with a corporation.
"Shareholder", the record shareholder or the beneficial shareholder.
Section 13.02. RIGHT TO APPRAISAL
(a) A shareholder is entitled to appraisal rights, and obtain payment of the
fair value of his shares in the event of, any of the following corporate or
other actions:
(1) consummation of a plan of merger to which the corporation is a party if
shareholder approval is required for the merger by section 11.04 or the articles
of organization or if the corporation is a subsidiary that is merged with its
parent under section 11.05, unless, in either case, (A) all shareholders are to
receive only cash for their shares in amounts equal to what they would receive
upon a dissolution of the corporation or, in the case of shareholders already
holding marketable securities in the merging corporation, only marketable
securities of the surviving corporation and/or cash and (B) no director, officer
or controlling shareholder has a direct or indirect material financial interest
in the merger other than in his capacity as (i) a shareholder of the
corporation, (ii) a director, officer, employee or consultant of either the
merging or the surviving corporation or of any affiliate of the surviving
corporation if his financial interest is pursuant to bona fide arrangements with
either corporation or any such affiliate, or (iii) in any other capacity so long
as the shareholder owns not more than five percent of the voting shares of all
classes and series of the corporation in the aggregate;
(2) consummation of a plan of share exchange in which his shares are included
unless: (A) both his existing shares and the shares, obligations or other
securities to be acquired are marketable securities; and (B) no director,
officer or controlling shareholder has a direct or indirect material financial
interest in the share exchange other than in his capacity as (i) a shareholder
of the corporation whose shares are to be exchanged, (ii) a director, officer,
employee or consultant of either the corporation whose shares are to be
exchanged or the acquiring corporation or of any affiliate of the acquiring
corporation if his financial interest is pursuant to bona fide arrangements with
either corporation or any such affiliate, or (iii) in any other capacity so long
as the shareholder owns not more than five percent of the voting shares of all
classes and series of the corporation whose shares are to be exchanged in the
aggregate;
(3) consummation of a sale or exchange of all, or substantially all, of the
property of the corporation if the sale or exchange is subject to section 12.02,
or a sale or exchange of all, or substantially all, of the property of a
corporation in dissolution, unless:
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(i) his shares are then redeemable by the corporation at a price not greater
than the cash to be received in exchange for his shares; or
(ii) the sale or exchange is pursuant to court order; or
(iii) in the case of a sale or exchange of all or substantially all the property
of the corporation subject to section 12.02, approval of shareholders for the
sale or exchange is conditioned upon the dissolution of the corporation and the
distribution in cash or, if his shares are marketable securities, in marketable
securities and/or cash, of substantially all of its net assets, in excess of a
reasonable amount reserved to meet unknown claims under section 14.07, to the
shareholders in accordance with their respective interests within one year after
the sale or exchange and no director, officer or controlling shareholder has a
direct or indirect material financial interest in the sale or exchange other
than in his capacity as (i) a shareholder of the corporation, (ii) a director,
officer, employee or consultant of either the corporation or the acquiring
corporation or of any affiliate of the acquiring corporation if his financial
interest is pursuant to bona fide arrangements with either corporation or any
such affiliate, or (iii) in any other capacity so long as the shareholder owns
not more than five percent of the voting shares of all classes and series of the
corporation in the aggregate;
(4) an amendment of the articles of organization that materially and adversely
affects rights in respect of a shareholder's shares because it:
(i) creates, alters or abolishes the stated rights or preferences of the shares
with respect to distributions or to dissolution, including making non-cumulative
in whole or in part a dividend theretofore stated as cumulative;
(ii) creates, alters or abolishes a stated right in respect of conversion or
redemption, including any provision relating to any sinking fund or purchase, of
the shares;
(iii) alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities;
(iv) excludes or limits the right of the holder of the shares to vote on any
matter, or to cumulate votes, except as such right may be limited by voting
rights given to new shares then being authorized of an existing or new class; or
(v) reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
section 6.04;
(5) an amendment of the articles of organization or of the bylaws or the
entering into by the corporation of any agreement to which the shareholder is
not a party that adds restrictions on the transfer or registration or any
outstanding shares held by the shareholder or amends any pre-existing
restrictions on the transfer or registration of his shares in a manner which is
materially adverse to the ability of the shareholder to transfer his shares;
(6) any corporate action taken pursuant to a shareholder vote to the extent the
articles of organization, bylaws or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to appraisal;
(7) consummation of a conversion of the corporation to nonprofit status pursuant
to subdivision B of PART 9; or
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(8) consummation of a conversion of the corporation into a form of other entity
pursuant to subdivision D of PART 9.
(b) Except as otherwise provided in subsection (a) of section 13.03, in the
event of corporate action specified in clauses (1), (2), (3), (7) or (8) of
subsection (a), a shareholder may assert appraisal rights only if he seeks them
with respect to all of his shares of whatever class or series.
(c) Except as otherwise provided in subsection (a) of section 13.03, in the
event of an amendment to the articles of organization specified in clause (4) of
subsection (a) or in the event of an amendment of the articles of organization
or the bylaws or an agreement to which the shareholder is not a party specified
in clause (5) of subsection (a), a shareholder may assert appraisal rights with
respect to those shares adversely affected by the amendment or agreement only if
he seeks them as to all of such shares and, in the case of an amendment to the
articles of organization or the bylaws, has not voted any of his shares of any
class or series in favor of the proposed amendment.
(d) The shareholder's right to obtain payment of the fair value of his shares
shall terminate upon the occurrence of any of the following events:
(i) the proposed action is abandoned or rescinded; or
(ii) a court having jurisdiction permanently enjoins or sets aside the action;
or
(iii) the shareholder's demand for payment is withdrawn with the written consent
of the corporation.
(e) A shareholder entitled to appraisal rights under this chapter may not
challenge the action creating his entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
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Section 13.03. ASSERTION OF RIGHTS BY NOMINEES AND BENEFICIAL OWNERS
(a) A record shareholder may assert appraisal rights as to fewer than all the
shares registered in the record shareholder's name but owned by a beneficial
shareholder only if the record shareholder objects with respect to all shares of
the class or series owned by the beneficial shareholder and notifies the
corporation in writing of the name and address of each beneficial shareholder on
whose behalf appraisal rights are being asserted. The rights of a record
shareholder who asserts appraisal rights for only part of the shares held of
record in the record shareholder's name under this subsection shall be
determined as if the shares as to which the record shareholder objects and the
record shareholder's other shares were registered in the names of different
record shareholders.
(b) A beneficial shareholder may assert appraisal rights as to shares of any
class or series held on behalf of the shareholder only if such shareholder:
(1) submits to the corporation the record shareholder's written consent to the
assertion of such rights no later than the date referred to in subclause (ii) of
clause (2) of subsection (b) of section 13.22; and
(2) does so with respect to all shares of the class or series that are
beneficially owned by the beneficial shareholder.
Section 13.20. NOTICE OF APPRAISAL RIGHTS
(a) If proposed corporate action described in subsection (a) of section 13.02 is
to be submitted to a vote at a shareholders' meeting or through the solicitation
of written consents, the meeting notice or solicitation of consents shall state
that the corporation has concluded that shareholders are, are not or may be
entitled to assert appraisal rights under this chapter and refer to the
necessity of the shareholder delivering, before the vote is taken, written
notice of his intent to demand payment and to the requirement that he not vote
his shares in favor of the proposed action. If the corporation concludes that
appraisal rights are or may be available, a copy of this chapter shall accompany
the meeting notice sent to those record shareholders entitled to exercise
appraisal rights.
(b) In a merger pursuant to section 11.05, the parent corporation shall notify
in writing all record shareholders of the subsidiary who are entitled to assert
appraisal rights that the corporate action became effective. Such notice shall
be sent within 10 days after the corporate action became effective and include
the materials described in section 13.22.
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Section 13. Section 13.21. NOTICE OF INTENT TO DEMAND PAYMENT
(a) If proposed corporate action requiring appraisal rights under section 13.02
is submitted to vote at a shareholders' meeting, a shareholder who wishes to
assert appraisal rights with respect to any class or series of shares:
(1) shall deliver to the corporation before the vote is taken written notice of
the shareholder's intent to demand payment if the proposed action is
effectuated; and
(2) shall not vote, or cause or permit to be voted, any shares of such class or
series in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is not
entitled to payment under this chapter.
Section 13.22. APPRAISAL NOTICE AND FORM
(a) If proposed corporate action requiring appraisal rights under subsection (a)
of section 13.02 becomes effective, the corporation shall deliver a written
appraisal notice and form required by clause (1) of subsection (b) to all
shareholders who satisfied the requirements of section 13.21 or, if the action
was taken by written consent, did not consent. In the case of a merger under
section 11.05, the parent shall deliver a written appraisal notice and form to
all record shareholders who may be entitled to assert appraisal rights.
(b) The appraisal notice shall be sent no earlier than the date the corporate
action became effective and no later than 10 days after such date and must:
(1) supply a form that specifies the date of the first announcement to
shareholders of the principal terms of the proposed corporate action and
requires the shareholder asserting appraisal rights to certify (A) whether or
not beneficial ownership of those shares for which appraisal rights are asserted
was acquired before that date and (B) that the shareholder did not vote for the
transaction;
(2) state:
(i) where the form shall be sent and where certificates for certificated shares
shall be deposited and the date by which those certificates shall be deposited,
which date may not be earlier than the date for receiving the required form
under subclause (ii);
(ii) a date by which the corporation shall receive the form which date may not
be fewer than 40 nor more than 60 days after the date the subsection (a)
appraisal notice and form are sent, and state that the shareholder shall have
waived the right to demand appraisal with respect to the shares unless the form
is received by the corporation by such specified date;
(iii) the corporation's estimate of the fair value of the shares;
(iv) that, if requested in writing, the corporation will provide, to the
shareholder so requesting, within 10 days after the date specified in clause
(ii) the number of shareholders who return the forms by the specified date and
the total number of shares owned by them; and
(v) the date by which the notice to withdraw under section 13.23 shall be
received, which date shall be within 20 days after the date specified in
subclause (ii) of this subsection; and
(3) be accompanied by a copy of this chapter.
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Section 13.23. PERFECTION OF RIGHTS; RIGHT TO WITHDRAW
(a) A shareholder who receives notice pursuant to section 13.22 and who wishes
to exercise appraisal rights shall certify on the form sent by the corporation
whether the beneficial owner of the shares acquired beneficial ownership of the
shares before the date required to be set forth in the notice pursuant to clause
(1) of subsection (b) of section 13.22. If a shareholder fails to make this
certification, the corporation may elect to treat the shareholder's shares as
after-acquired shares under section 13.25. In addition, a shareholder who wishes
to exercise appraisal rights shall execute and return the form and, in the case
of certificated shares, deposit the shareholder's certificates in accordance
with the terms of the notice by the date referred to in the notice pursuant to
subclause (ii) of clause (2) of subsection (b) of section 13.22. Once a
shareholder deposits that shareholder's certificates or, in the case of
uncertificated shares, returns the executed forms, that shareholder loses all
rights as a shareholder, unless the shareholder withdraws pursuant to said
subsection (b).
(b) A shareholder who has complied with subsection (a) may nevertheless decline
to exercise appraisal rights and withdraw from the appraisal process by so
notifying the corporation in writing by the date set forth in the appraisal
notice pursuant to subclause (v) of clause (2) of subsection (b) of section
13.22. A shareholder who fails to so withdraw from the appraisal process may not
thereafter withdraw without the corporation's written consent.
(c) A shareholder who does not execute and return the form and, in the case of
certificated shares, deposit that shareholder's share certificates where
required, each by the date set forth in the notice described in subsection (b)
of section 13.22, shall not be entitled to payment under this chapter.
Section 13.24. PAYMENT
(a) Except as provided in section 13.25, within 30 days after the form required
by subclause (ii) of clause (2) of subsection (b) of section 13.22 is due, the
corporation shall pay in cash to those shareholders who complied with subsection
(a) of section 13.23 the amount the corporation estimates to be the fair value
of their shares, plus interest.
(b) The payment to each shareholder pursuant to subsection (a) shall be
accompanied by:
(1) financial statements of the corporation that issued the shares to be
appraised, consisting of a balance sheet as of the end of a fiscal year ending
not more than 16 months before the date of payment, an income statement for that
year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
(2) a statement of the corporation's estimate of the fair value of the shares,
which estimate shall equal or exceed the corporation's estimate given pursuant
to subclause (iii) of clause (2) of subsection (b) of section 13.22; and
(3) a statement that shareholders described in subsection (a) have the right to
demand further payment under section 13.26 and that if any such shareholder does
not do so within the time period specified therein, such shareholder shall be
deemed to have accepted the payment in full satisfaction of the corporation's
obligations under this chapter.
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Section 13.25. AFTER-ACQUIRED SHARES
(a) A corporation may elect to withhold payment required by section 13.24 from
any shareholder who did not certify that beneficial ownership of all of the
shareholder's shares for which appraisal rights are asserted was acquired before
the date set forth in the appraisal notice sent pursuant to clause (1) of
subsection (b) of section 13.22.
(b) If the corporation elected to withhold payment under subsection (a), it
must, within 30 days after the form required by subclause (ii) of clause (2) of
subsection (b) of section 13.22 is due, notify all shareholders who are
described in subsection (a):
(1) of the information required by clause (1) of subsection (b) of section
13.24;
(2) of the corporation's estimate of fair value pursuant to clause (2) of
subsection (b) of said section 13.24;
(3) that they may accept the corporation's estimate of fair value, plus
interest, in full satisfaction of their demands or demand appraisal under
section 13.26;
(4) that those shareholders who wish to accept the offer shall so notify the
corporation of their acceptance of the corporation's offer within 30 days after
receiving the offer; and
(5) that those shareholders who do not satisfy the requirements for demanding
appraisal under section 13.26 shall be deemed to have accepted the corporation's
offer.
(c) Within 10 days after receiving the shareholder's acceptance pursuant to
subsection(b), the corporation shall pay in cash the amount it offered under
clause (2) of subsection (b) to each shareholder who agreed to accept the
corporation's offer in full satisfaction of the shareholder's demand.
(d) Within 40 days after sending the notice described in subsection (b), the
corporation must pay in cash the amount if offered to pay under clause (2) of
subsection (b) to each shareholder deserved in clause (5) of subsection (b).
Section 13.26. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
(a) A shareholder paid pursuant to section 13.24 who is dissatisfied with the
amount of the payment shall notify the corporation in writing of that
shareholder's estimate of the fair value of the shares and demand payment of
that estimate plus interest, less any payment under section 13.24. A shareholder
offered payment under section 13.25 who is dissatisfied with that offer shall
reject the offer and demand payment of the shareholder's stated estimate of the
fair value of the shares plus interest.
(b) A shareholder who fails to notify the corporation in writing of that
shareholder's demand to be paid the shareholder's stated estimate of the fair
value plus interest under subsection (a) within 30 days after receiving the
corporation's payment or offer of payment under section 13.24 or section 13.25,
respectively, waives the right to demand payment under this section and shall be
entitled only to the payment made or offered pursuant to those respective
sections.
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Section 13.30. COURT ACTION
(a) If a shareholder makes demand for payment under section 13.26 which remains
unsettled, the corporation shall commence an equitable proceeding within 60 days
after receiving the payment demand and petition the court to determine the fair
value of the shares and accrued interest. If the corporation does not commence
the proceeding within the 60-day period, it shall pay in cash to each
shareholder the amount the shareholder demanded pursuant to section 13.26 plus
interest.
(b) The corporation shall commence the proceeding in the appropriate court of
the county where the corporation's principal office, or, if none, its registered
office, in the commonwealth is located. If the corporation is a foreign
corporation without a registered office in the commonwealth, it shall commence
the proceeding in the county in the commonwealth where the principal office or
registered office of the domestic corporation merged with the foreign
corporation was located at the time of the transaction.
(c) The corporation shall make all shareholders, whether or not residents of the
commonwealth, whose demands remain unsettled parties to the proceeding as an
action against their shares, and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law or otherwise as ordered by the court.
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (b) is plenary and exclusive. The court may appoint 1 or more persons
as appraisers to receive evidence and recommend a decision on the question of
fair value. The appraisers shall have the powers described in the order
appointing them, or in any amendment to it. The shareholders demanding appraisal
rights are entitled to the same discovery rights as parties in other civil
proceedings.
(e) Each shareholder made a party to the proceeding is entitled to judgment (i)
for the amount, if any, by which the court finds the fair value of the
shareholder' s shares, plus interest, exceeds the amount paid by the corporation
to the shareholder for such shares or (ii) for the fair value, plus interest, of
the shareholder's shares for which the corporation elected to withhold payment
under section 13.25.
Section 13.31. COURT COSTS AND COUNSEL FEES
(a) The court in an appraisal proceeding commenced under section 13.30 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess cost against all or
some of the shareholders demanding appraisal, in amounts the court finds
equitable, to the extent the court finds such shareholders acted arbitrarily,
vexatiously, or not in good faith with respect to the rights provided by this
chapter.
(b) The court in an appraisal proceeding may also assess the fees and expenses
of counsel and experts for the respective parties, in amounts the court finds
equitable:
(1) against the corporation and in favor of any or all shareholders demanding
appraisal if the court finds the corporation did not substantially comply with
the requirements of sections 13.20, 13.22, 13.24 or 13.25; or
(2) against either the corporation or a shareholder demanding appraisal, in
favor of any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this chapter.
(c) If the court in an appraisal proceeding finds that the services of counsel
for any shareholder were of substantial benefit to other shareholders similarly
situated, and that the fees for those services should not be assessed against
the corporation, the court may award to such counsel reasonable fees to be paid
out of the amounts awarded the shareholders who were benefited.
(d) To the extent the corporation fails to make a required payment pursuant to
sections 13.24, 13.25, or 13.26, the shareholder may sue directly for the amount
owed and, to the extent successful, shall be entitled to recover from the
corporation all costs and expenses of the suit, including counsel fees.
C-10
APPENDIX D
FAIRNESS OPINION OF NORTHEAST CAPITAL & ADVISORY, INC.
DATED AS OF JUNE 21, 2007
D-1
[LETTERHEAD OF NORTHEAST CAPITAL & ADVISORY, INC.]
June 21, 2007
The Board of Directors
First Ipswich Bancorp
31 Market Street
Ipswich, MA 01938
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, of the consideration received by certain
shareholders of First Ipswich Bancorp ("First Ipswich" or the "Company") in
connection with a going-private transaction ("Transaction"). The Transaction is
being completed through a reclassification of shares of the Company's common
stock held by shareholders of record of 199 or fewer shares into the Company's
Series A Preferred Stock. Under the terms of the Transaction, which is more
fully described in the report by the Special Committee of Independent Directors,
each shareholder of record of 199 or fewer shares of the Company's common stock,
par value $1.00 per share, will receive one share of Series A Preferred Stock,
no par value, for each share of common stock held as of the effective date of
the reclassification.
Northeast Capital and Advisory, Inc., as part of its investment banking
business, is regularly engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to First Ipswich in
connection with the Transaction and we expect to receive compensation for our
services in connection with the Transaction, which is contingent upon rendering
this opinion. First Ipswich also has agreed to reimburse our reasonable expenses
and to indemnify us against certain liabilities arising out of our engagement,
including liabilities under federal securities laws. We may provide financial
advisory services to First Ipswich in the future.
In connection with this opinion, we have reviewed, analyzed and relied
upon material relative to the financial and operating condition of First
Ipswich, including among other things, the following: (i) the reports provided
by the Special Committee of Independent Directors; (ii) First Ipswich's annual
financial statements as filed on Form 10-K as amended for each of the
D-2
First Ipswich Bancorp
Fairness Opinion Letter
June 21, 2007
Page - 2
three years ended December 31, 2004, 2005 and 2006; (iii) First Ipswich's
quarterly reports and financial statements as filed on Form 10-Q for the three,
six, and nine month periods ending March 31, June 30, and September 30, 2006,
respectively, and for the three months ending March 31, 2007; (iv) recent
trading activity of First Ipswich's common stock; and (v) other financial
information concerning the businesses and operations of First Ipswich furnished
to us by First Ipswich for purposes of our analysis. We have also held
discussions with senior management of First Ipswich regarding the past and
current business operations, regulatory regulations, financial condition and the
future prospects of First Ipswich and such other matters as we have deemed
relevant to our inquiry. In addition, we have compared certain financial and
stock market information for First Ipswich with similar information for certain
other companies the securities of which are publicly traded, reviewed the
financial terms of recent reclassifications and other going private transactions
in the banking industry and performed such other studies and analyses as we
considered appropriate.
In conducting our review and arriving at our opinion, we have relied upon
the accuracy and completeness of all of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independently verifying the accuracy or completeness of any such
information. We have relied upon the management of First Ipswich as to the
reasonableness and achievability of the financial and operating forecasts and
projections provided to us, and we have assumed that such forecasts and
projections reflect the best currently available estimates and judgments of
management and that such forecasts and projections will be substantially
realized in the amounts and in the time periods currently estimated by
management. With your consent, we relied upon advice of counsel and independent
accountants to First Ipswich as to legal and financial matters, respectively,
concerning First Ipswich and the Transaction, and have assumed that the
Transaction will be conducted in a manner that complies in all respects with
applicable statutes, law, rules and regulations. In rendering our opinion, we
have not made or obtained any evaluations or appraisals of the property of First
Ipswich, nor have we examined any individual credit files.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of First
Ipswich, (ii) all shareholders will continue to hold an equity interest in First
Ipswich and no shareholder will be forced to involuntarily liquidate his or her
equity interest in First Ipswich; (iii) the advantages and disadvantages of the
rights, preferences and limitations of the Series A Preferred Stock in
comparison to the relative rights of the Company's common stock; (iv) the
reclassification will have a positive effect on pro
D-3
First Ipswich Bancorp
Fairness Opinion Letter
June 21, 2007
Page - 3
forma earnings per share while pro forma book value per share will initially
decrease approximately 0.10% to $8.45; (v) the reclassification should not be a
taxable event for any shareholders; (vi) the nature and terms of certain other
similar transactions involving banks and bank holding companies; (vii) the
trading activity of First Ipswich's stock; and (viii) the projected future
prospects of First Ipswich. We have also taken into account our assessment of
general economic, market and financial conditions and our experience in other
similar transactions, as well as our experience in securities valuation and
knowledge of the banking industry generally. Our opinion is necessarily based
upon conditions as they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof.
It is understood that this letter is for the information of the Board of
Directors and may not be used for any other purpose without our prior written
consent; provided however, that First Ipswich may include the opinion in its
entirety as an exhibit or appendix to any report, statement or schedule filed by
First Ipswich with the Securities and Exchange Commission under the Securities
Act of 1934 in connection with the Transaction.
This opinion does not address the relative merits of the Transaction, nor
the privatization impact for either First Ipswich or an opinion with respect to
the price at which First Ipswich will trade subsequent to the Transaction and
de-registration from the SEC.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the reclassification of shares of the
Company's common stock held by shareholders of record of 199 or fewer shares
into the Company's Series A Preferred Stock is fair, from a financial point of
view, to the unaffiliated shareholders who will receive Series A Preferred Stock
in the reclassification and to the unaffiliated shareholders who will retain
their shares.
Respectfully,
/s/ Northeast Capital & Advisory, Inc.
NORTHEAST CAPITAL & ADVISORY, INC.
D-4
APPENDIX E
FAIRNESS OPINION OF NORTHEAST CAPITAL & ADVISORY, INC.
DATED AS OF NOVEMBER 2, 2007
E-1
[LETTERHEAD OF NORTHEAST CAPITAL & ADVISORY, INC.]
November 2, 2007
The Board of Directors
First Ipswich Bancorp
31 Market Street
Ipswich, MA 01938
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, of the consideration received by certain
shareholders of First Ipswich Bancorp ("First Ipswich" or the "Company") in
connection with a going-private transaction ("Transaction"). The Transaction is
being completed through a reclassification of shares of the Company's common
stock held by shareholders of record of less than 200 shares into the Company's
Series A Preferred Stock. Under the terms of the Transaction, which is more
fully described in Schedule 13E-3/A and the Amended Proxy Statement, each
shareholder of record of less than 200 shares of the Company's common stock, par
value $1.00 per share, will receive one share of Series A Preferred Stock, no
par value, for each share of common stock heid as of the effective date of the
reclassification.
Northeast Capital and Advisory, Inc., as part of its investment banking
business, is regularly engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to First Ipswich in
connection with the Transaction and we expect to receive compensation for our
services in connection with the Transaction, which is contingent upon rendering
this opinion. First Ipswich also has agreed to reimburse our reasonable expenses
and to indemnify us against certain liabilities arising out of our engagement,
including liabilities under federal securities laws. We may provide financial
advisory services to First Ipswich in the future.
In connection with this opinion, we have reviewed, analyzed and relied
upon material relative to the financial and operating condition of First
Ipswich, including among other things, the following: (i) the Amended Proxy
Statement describing the Transaction; (ii) the reports provided by the Special
Committee of Independent Directors; (iii) First Ipswich's annual
E-2
First Ipswich Bancorp
Fairness Opinion Letter
November 2, 2007
Page - 2
financial statements as filed on Form 10-K as amended for each of the three
years ended December 31, 2004, 2005 and 2006; (iv) First Ipswich's quarterly
reports and financial statements as filed on Form 10-Q for the three, six and
nine month periods ending March 31, June 30, and September 30, 2007,
respectively; (v) recent trading activity of First Ipswich's common stock; and
(vi) other financial information concerning the businesses and operations of
First Ipswich furnished to us by First Ipswich for purposes of our analysis. We
have also held discussions with senior management of First Ipswich regarding the
past and current business operations, regulatory regulations, financial
condition and the future prospects of First Ipswich and such other matters as we
have deemed relevant to our inquiry. In addition, we have compared certain
financial and stock market information for First Ipswich with similar
information for certain other companies the securities of which are publicly
traded, reviewed the financial terms of recent reclassifications and other going
private transactions in the banking industry and performed such other studies
and analyses as we considered appropriate.
In conducting our review and arriving at our opinion, we have relied upon
the accuracy and completeness of all of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independently verifying the accuracy or completeness of any such
information. We have relied upon the management of First Ipswich as to the
reasonableness and achievability of the financial and operating forecasts, cost
savings, and projections provided to us, and we have assumed that such
forecasts, cost savings, and projections reflect the best currently available
estimates and judgments of management and that such forecasts, cost savings, and
projections will be substantially realized in the amounts and in the time
periods currently estimated by management. With your consent, we relied upon
advice of counsel and independent accountants to First Ipswich as to legal and
financial matters, respectively, concerning First Ipswich and the Transaction,
and have assumed that the Transaction will be conducted in a manner that
complies in all respects with applicable statutes, law, rules and regulations.
In rendering our opinion, we have not made or obtained any evaluations or
appraisals of the property of First Ipswich, nor have we examined any individual
credit files.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of First
Ipswich, (ii) all shareholders will continue to hold an equity interest in
First Ipswich and no shareholder will be forced to involuntarily liquidate his
or her equity interest in First Ipswich; (iii) the advantages and disadvantages
of the rights, preferences and limitations of the Series A Preferred Stock in
comparison to the relative
E-3
First Ipswich Bancorp
Fairness Opinion Letter
November 2, 2007
Page - 3
rights of the Company's common stock; (iv) the reclassification will have a
positive effect on pro forma earnings per share in 2008 and beyond while pro
forma book value per share will initially decrease approximately 1.0% to $8.20
from $8.28; (v) the reclassification should not be a taxable event for any
shareholders; (vi) the nature and terms of certain other similar transactions
involving banks and bank holding companies; (vii) the trading activity of First
Ipswich's stock; and (viii) the projected future prospects of First Ipswich. We
have also taken into account our assessment of general economic, market and
financial conditions and our experience in other similar transactions, as well
as our experience in securities valuation and knowledge of the banking industry
generally. Our opinion is necessarily based upon conditions as they exist and
can be evaluated on the date hereof and the information made available to us
through the date hereof.
It is understood that this letter is for the information of the Board of
Directors and may not be used for any other purpose without our prior written
consent; provided however, that First Ipswich may include the opinion in its
entirety as an exhibit or appendix to any report, statement or schedule filed by
First Ipswich with the Securities and Exchange Commission under the Securities
Act of 1934 in connection with the Transaction.
This opinion does not address the relative merits of the Transaction, nor
the privatization impact for either First Ipswich or an opinion with respect to
the price at which First Ipswich will trade subsequent to the Transaction and
de-registration from the SEC.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the reclassification of shares of the
Company's common stock held by shareholders of record of less than 200 shares
into the Company's Series A Preferred Stock is fair, from a financial point of
view, to the unaffiliated shareholders who will receive Series A Preferred Stock
in the reclassification and to the unaffiliated shareholders who will retain
their common stock shares.
Respectfully,
/s/ Northeast Capital & Advisory, Inc.
NORTHEAST CAPITAL & ADVISORY, INC.
E-4
APPENDIX F
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION
AND ANALYSIS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
F-1
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share data)
September 30, December 31,
2007 2006
------------ ------------
ASSETS
Cash and due from banks $ 9,398 $ 11,335
Federal funds sold and interest bearing accounts 15,637 2,164
------------ ------------
Total cash and cash equivalents 25,035 13,499
------------ ------------
Certificates of deposit 3,440 3,378
Securities available-for-sale, at fair value 39,783 53,962
Federal Home Loan Bank stock, at cost 1,447 3,927
Federal Reserve Bank stock, at cost 774 774
Loans, net of allowance for loan losses of $1,537 and $1,827 198,252 234,890
Real estate held for sale, net 6,281 5,727
Premises and equipment, net 3,675 4,099
Goodwill 3,641 3,641
Other intangible assets 1,184 1,761
Foreclosed real estate 1,484 --
Other assets 6,472 7,117
------------ ------------
Total assets $ 291,468 $ 332,775
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 225,211 $ 268,868
Short-term borrowings 10,802 13,720
Long-term borrowings 20,831 16,047
Subordinated debentures 13,000 13,000
Other liabilities 2,295 3,269
------------ ------------
Total liabilities 272,139 314,904
------------ ------------
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, 2,365,120 and
2,240,120 shares issued at September 30, 2007 and December 31, 2006 2,365 2,240
Additional paid-in capital 10,806 9,936
Retained earnings 6,976 6,843
Accumulated other comprehensive loss (707) (1,037)
Treasury stock, at cost (20,490 shares) (111) (111)
------------ ------------
Total stockholders' equity 19,329 17,871
------------ ------------
Total liabilities and stockholders' equity $ 291,468 $ 332,775
============ ============
See accompanying notes to consolidated financial statements.
F-2
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Interest and dividend income:
Interest and fees on loans $ 3,701 $ 4,692 $ 11,516 $ 13,054
Interest on debt securities:
Taxable 406 1,010 1,302 3,156
Tax-exempt 23 131 68 386
Dividends on equity securities 35 159 167 267
Other interest 227 94 661 211
-------- -------- -------- --------
Total interest and dividend income 4,392 6,086 13,714 17,074
-------- -------- -------- --------
Interest expense:
Interest on deposits 1,456 1,829 4,713 4,727
Interest on borrowed funds 401 1,083 1,100 3,365
Interest on subordinated debentures 235 243 706 701
-------- -------- -------- --------
Total interest expense 2,092 3,155 6,519 8,793
-------- -------- -------- --------
Net interest income 2,300 2,931 7,195 8,281
Provision for loan losses 274 66 14 131
-------- -------- -------- --------
Net interest income after provision for loan losses 2,026 2,865 7,181 8,150
Other income:
Investment advisory fees 482 453 1,422 1,337
Service charges on deposit accounts 297 296 884 879
Credit card fees 99 219 408 579
Trust fees -- 106 -- 316
Non-deposit investment fees 78 83 212 239
Derivative fair value adjustment (20) 85 147 187
Loss on securities sold or written down, net -- (526) -- (575)
Gain on sale of loans, net -- -- 311 --
Rental income 65 99 216 288
Write-down of fixed assets -- (340) -- (340)
Valuation reserve for real estate held for sale -- (33) -- (319)
Miscellaneous 84 77 211 227
-------- -------- -------- --------
Total other income 1,085 519 3,811 2,818
-------- -------- -------- --------
Operating expenses:
Salaries and employee benefits 1,964 2,392 5,635 7,001
Occupancy and equipment 477 702 1,560 2,057
Professional fees 336 332 970 1,211
Credit card interchange 22 140 168 382
Advertising and marketing 97 51 183 384
Data processing 150 199 488 551
ATM processing 99 114 303 328
Telephone 60 93 202 284
FDIC insurance 139 8 425 25
Other general and administrative 227 319 639 1,008
-------- -------- -------- --------
Total operating expenses 3,571 4,350 10,573 13,231
-------- -------- -------- --------
Income (loss) before income taxes (460) (966) 419 (2,263)
Provision (benefit) for income taxes (74) (340) 286 (805)
-------- -------- -------- --------
Net income (loss) $ (386) $ (626) $ 133 $ (1,458)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 2,345 2,220 2,333 2,220
-------- -------- -------- --------
Diluted 2,348 2,220 2,336 2,220
-------- -------- -------- --------
Earnings (loss) per share:
Basic $ (0.16) $ (0.28) $ 0.06 $ (0.66)
======== ======== ======== ========
Diluted $ (0.16) $ (0.28) $ 0.06 $ (0.66)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(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, 2005 $ 2,240 $ 9,936 $ 8,054 $ (1,159) $ (111) $ 18,960
Comprehensive loss:
Net loss -- -- (1,458) -- -- (1,458)
Unrealized loss on securities
available-for-sale, net of
reclassification
adjustment and tax effect -- -- -- (228) -- (228)
--------
Total comprehensive loss -- -- -- -- -- (1,686)
--------
Cash dividends declared
($.025 per share) -- -- (55) -- -- (55)
-------- -------- -------- -------- -------- --------
Balance at September 30, 2006 $ 2,240 $ 9,936 $ 6,541 $ (1,387) $ (111) $ 17,219
======== ======== ======== ======== ======== ========
Balance at December 31, 2006 $ 2,240 $ 9,936 $ 6,843 $ (1,037) $ (111) $ 17,871
Comprehensive income:
Net income -- -- 133 -- -- 133
Unrealized gain on securities
available-for-sale, net of
reclassification
adjustment and tax effect -- -- -- 330 -- 330
--------
Total comprehensive income -- -- -- -- -- 463
--------
Stock option expense -- 48 -- -- -- 48
Private placement of common stock
(125,000 shares) 125 822 -- -- -- 947
-------- -------- -------- -------- -------- --------
Balance at September 30, 2007 $ 2,365 $ 10,806 $ 6,976 $ (707) $ (111) $ 19,329
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Nine Months Ended September 30,
-------------------------------
2007 2006
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 133 $ (1,458)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision for loan losses 14 131
Depreciation and amortization 357 554
Losses on sales and calls of securities, sold or written down, net -- 575
Net amortization of securities, including certificates of deposit 53 92
Valuation reserve for real estate held for sale -- 319
Derivative fair value adjustment (147) (188)
Amortization of core deposit intangible 126 121
Write-down of fixed assets 340
Gain on sale of loans, net (311) --
Stock option expense 48 --
Net change in other assets and other liabilities (661) 1,300
---------- ----------
Net cash provided (used) by operating activities (388) 1,786
---------- ----------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases -- (2,887)
Sales 2,760 101
Maturities, calls and paydowns 11,706 17,656
Activity in held-to-maturity securities:
Maturities, calls and paydowns -- 2,094
Redemption of Federal Home Loan Bank stock 2,480 2,507
Additions to premises and equipment, net (602) (675)
Deferred payment to the de Burlo Group, Inc. (1,188) --
Proceeds from the sale of loans 15,330 --
Loan originations, net of repayments 9,753 (15,685)
---------- ----------
Net cash provided by investing activities 40,239 3,111
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits (28,388) 17,660
Net increase (decrease) in short-term borrowings (1,615) 359
Proceeds from long-term borrowings 5,000 10,000
Repayment of long-term borrowings (216) (18,695)
Proceeds from private placement 947 --
Net cash paid on sale of Cambridge branch (4,043) --
Cash dividends paid -- (55)
---------- ----------
Net cash provided (used) by financing activities (28,315) 9,269
---------- ----------
Net increase in cash and cash equivalents 11,536 14,166
Cash and cash equivalents at beginning of period 13,499 11,261
---------- ----------
Cash and cash equivalents at end of period $ 25,035 $ 25,427
========== ==========
Supplemental disclosures:
Interest paid $ 6,523 $ 8,609
Income taxes paid, net 138 58
Reclassification of goodwill to fixed assets related to final purchase
accounting of Boston branch -- 750
Transfer to securities available-for-sale from held-to-maturity -- 26,566
Transfer from loans to foreclosed real estate 1,484 --
See accompanying notes to consolidated financial statements
F-5
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 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, 2006.
In July 2006 the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements in
accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48
prescribes a recognition threshold and measurement attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company has implemented FIN 48 with no
resulting impact on the financial statements.
In September 2006 FASB issued Statement of Financial Account Standards No.
157, "Fair Value Measurements" (SFAS 157), which defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 is
effective for the Company on January 1, 2008 and is not expected to have a
significant impact on the Company's financial statements.
In February 2007 the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115", which provides companies with an option to report selected
financial assets and liabilities at fair value. Statement No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. This statement is effective for the
Company on January 1, 2008. The Company has not determined the impact of
implementing and adopting SFAS No. 159 on its consolidated financial statements.
The FASB has ratified EITF 06-4, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements," and EITF 06-10, "Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements," which address accounting for
arrangements whereby the employer purchases a policy to insure the life of an
employee, and enters into an agreement to split the policy benefits between the
employer and the employee. These pronouncements, effective for fiscal years
beginning after December 15, 2007, indicate that an obligation arises as a
result of a substantive agreement with an employee to provide future
postretirement benefits and that a liability should be recognized in accordance
with applicable authoritative guidance. Management does not expect that such
pronouncements will have a significant impact on the Company's consolidated
financial statements.
F-6
(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 represents income available to common
stockholders divided by the sum of the weighted-average number of common shares
outstanding and the weighted-average number of common stock equivalents for
warrants associated the Company's private placement offering and options
associated with its stock option grant. The Company employs the treasury stock
method to account for the warrants and options in the diluted earnings per share
calculations.
(3) Commitments
At September 30, 2007, the Company had outstanding commitments to
originate loans of $1.5 million. Unused lines of credit and open commitments
available to customers at September 30, 2007 amounted to $32.9 million, of which
$5.5 million related to construction loans, $10.5 million related to home equity
lines of credit, $4.0 million related to credit card loans and $12.9 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 nine
month periods ended September 30, 2007 and September 30, 2006 is below.
Investment Consolidated
Banking Advisory Totals
------- -------- ------
(Dollars in thousands)
September 30, 2007:
- -------------------
Net interest income $ 7,195 -- $ 7,195
Other revenue: external customers 2,389 $ 1,422 3,811
Other expenses: external customers 9,742 831 10,573
Net income (222) 355 133
Total assets $ 287,149 $ 4,319 $ 291,468
September 30, 2006:
- -------------------
Net interest income $ 8,281 -- $ 8,281
Other revenue: external customers 1,481 $ 1,337 2,818
Other expenses: external customers 12,387 844 13,231
Net income (loss) (1,785) 327 (1,458)
Total assets $ 400,079 $ 2,868 $ 402,947
(5) Divestitures
Cambridge, Massachusetts Branch
On March 30, 2007 the Company sold its branch located in Cambridge,
Massachusetts. Upon consummation of the sale, $16.7 million of deposits and
repurchase agreements and $11.9 million of loans were transferred. A loss of
$52,000 was recognized on the sale of the branch, which is included in
miscellaneous income on the statement of operations.
Londonderry, New Hampshire Branch
On February 5, 2007 the Company announced that it was closing its branch
located in Londonderry, New Hampshire. In conjunction with that closing, in the
first quarter of 2007 the Bank sold $15.0 million of commercial real estate
loans and commercial loans. A net gain of $311,000 was recognized on the sale of
the loans. The branch was closed on May 11, 2007.
F-7
(6) Private Placement of Common Stock
On January 26, 2007 the Company raised $1.0 million of new capital through
a private placement of 125,000 shares of common stock. The net proceeds of the
private placement totaled $947,000 after costs of $53,000. Net proceeds were
invested as additional capital in the Company's primary subsidiary, The First
National Bank of Ipswich.
Each investor in private placement also received a warrant to purchase a
number of shares of common stock equal to 20% of the shares subscribed for in
such investor's subscription agreement. The warrants vested immediately, have a
strike price of $8.00, and expire on January 26, 2010.
(7) Stock Option Grants
During 2004, the Board of Directors and stockholders approved two stock
option plans, the 2004 Incentive Stock Option Plan for Key Employees and the
2004 Directors Plan. These plans provide for the granting of up to 220,000
options to employees and directors to purchase shares of the Company's common
stock.
On May 16, 2007 the Board of Directors of First Ipswich Bancorp approved
the granting of options to non-employee directors and senior managers. The
options have an exercise price equal to fair market value of the Company's stock
of $9.50 on the grant date, except for Neil St. John Raymond, Chairman, whose
options were granted at an exercise price of $10.45 per share.
The non-employee directors include: Messrs. Borden III, Collins, Deery,
Raymond Jr., Tinti and Ms. Gaskins. Each of the listed directors received 2,000
options, of which 1,000 vested immediately and the remaining options vest over a
four year period. Directors have not received cash fees for their services to
the Company since June 30, 2006 when they temporarily waived their right to such
fees.
The following senior managers received options: Neil St. John Raymond,
7,500, Russell Cole, 10,000, Timothy Felter, 8,000, Jay DiIorio 7,500, Maryjon
Brett, 5,500 and Janice Costa 5,500. The options vest over four years, beginning
on the first anniversary of the grant date.
On July 18, 2007 the Board of Directors of First Ipswich Bancorp approved
the granting of options to certain senior managers. The following individuals
received options: Maryjon Brett 2,500, Janice Costa 2,500 and John DiIorio 500.
The options have an exercise price equal to fair market value of the Company's
stock of $9.25 on the grant date. These options vest over four years, beginning
on the first anniversary of the grant date.
SFAS 123(R) requires the Company to estimate the fair value of stock-based
awards on the date of grant. The Company employed the Binomial options pricing
model to value the options. Accordingly, the Company recognized $34,000 and
$14,000 of employee benefit expense during the second and third quarters of
2007, respectively.
(8) Income Taxes
Deferred tax assets are evaluated to determine whether it is "more likely
than not" that a tax return benefit would be realized when the deferred items
reverse. Evaluation considerations include the availability of historical and
projected taxable income to offset the deferred items in the periods they are
expected to reverse. Management has determined that operational changes which
have been made and are being made will generate sufficient income to allow for
the recognition of the deferred tax assets. No valuation reserve was recorded as
of September 30, 2007 or December 31, 2006.
(9) Executive Departure
On August 3, 2007, Ipswich Capital Investment Corp. ("ICIC"), a
wholly-owned subsidiary of the Bank, notified Peter M. Whitman, Jr., that his
employment with ICIC, would terminate on September 3, 2007. Mr. Whitman's
Employment Agreement with ICIC, dated as of January 1, 2005, also terminated on
September 3, 2007. Mr. Whitman was the President of ICIC. Mr. Whitman's
departure is not for "cause" as defined in his Employment Agreement.
F-8
Under the terms of Mr. Whitman's Employment Agreement, Mr. Whitman will
receive as severance (i) continued payment of his current annual base salary and
current benefits until September 2, 2008, and (ii) an Additional Compensation
Amount (as defined in his Employment Agreement), calculated by reference to the
value of ICIC (to be determined by an independent valuation, for which the
estimated amount has been accrued at September 30, 2007.
The foregoing description of Mr. Whitman's Employment Agreement is
qualified in its entirety by reference to the actual terms of the agreement,
which was filed as Exhibit 10.12 to the Company's Annual Report on Form 10-KSB
for the year ending December 31, 2004 and is incorporated herein by reference.
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
First Ipswich Bancorp is a nationally-chartered commercial financial
institution that historically has focused on Ipswich, MA and the surrounding
communities. Over the past several years, however, the Company expanded beyond
the eastern Essex County section of Massachusetts. In 2005 a branch in Boston,
MA was purchased, and in 2006 a de novo branch was opened in Portsmouth, NH. In
addition, the Company also expanded its product offerings over the past several
years. In 2004, The de Burlo Group, a Boston-based investment management
business was purchased. The Company's rapid expansion failed to generate revenue
streams sufficient to cover increasing levels of overhead costs. Accordingly,
the Company reported four consecutive quarterly losses through September 30,
2006.
The Bank signed a Formal Agreement with the Office of the Comptroller of
the Currency (the "OCC") on June 28, 2006. The Agreement required the Bank to
achieve higher capital levels, retain competent management, develop a new
strategic plan, adopt a new interest rate risk management plan, and improve
liquidity and profitability. Specifically, the Bank was required by December 31,
F-9
2006, to raise its Tier 1 capital to average assets ratio to a minimum of 8%,
the Tier 1 capital to risk-weighted assets ratio to a minimum of 10%, and the
total capital to risk-weighted assets ratio to a minimum of 11%. The Bank has
exceeded the minimum ratios, required by the Formal Agreement, since February
28, 2007.
As required by the Formal Agreement, the Company developed and implemented
a strategic plan during the second half of 2006 and first nine months of 2007. A
primary goal of the plan was to evaluate operations and identify locations and
business lines which were not enhancing the profitability of the Company. So far
in 2007, the Company has sold its Cambridge branch, raised $1 million in capital
through a private placement offering, sold $15.0 million of loans, and closed
its Londonderry branch.
The Company recognized a net loss of $386,000 for the quarter ended
September 30, 2007 as compared to a net loss of $626,000 for the same period of
2006. Net income for the nine months ended September 30, 2007 was $133,000 as
compared to a net loss of $1,458,000 for the same period of 2006. The net loss
for the third quarter of 2007 was primarily driven by a provision for loan
losses of $274,000 and compensation expense primarily related to the estimated
additional compensation amount due to Peter Whitman. The Bank's ability to
generate consistent profitability will be a key factor in the OCC's evaluation
of the appropriateness of relieving the Bank of the Formal Agreement.
A primary objective for the Company going forward is to become a highly
profitable community bank. One of the means by which this objective will be
accomplished is a focused effort to grow the small business client base which
will generate new loans and deposits. In addition, the Company continues to
evaluate expenses for additional reductions that can be achieved without unduly
impacting the high level of customer service the Company provides through its
branches in Beverly, Boston, Essex, Gloucester, Ipswich, Newburyport, and
Rowley, Massachusetts and Portsmouth, New Hampshire.
The deposit insurance assessment from the FDIC significantly impacted both
the third quarter and year-to-date earnings for 2007. The insurance expense
related to the FDIC assessment was $139,000 and $425,000 for the third quarter
of 2007 and the nine months ended September 30, 2007, respectively. The Company
expects that its quarterly FDIC insurance assessment will be reduced to
approximately $60,000 starting in the fourth quarter of 2007. Management
anticipates that earnings will be weak in the fourth quarter of 2007 even after
the reduction of the FDIC insurance assessment.
The Company expects to sell the downtown Boston office building that
houses the Boston branch which is located at 31-33 State Street, before the end
of the fourth quarter. The Bank has retained CB Richard Ellis to sell the
building through a "call for offers" process, and plans to retain a long-term
lease for the branch as part of the deal.
The Company is committed to a focused and disciplined approach to return
the Company to consistent profitability. While significant progress has been
made to reduce expenses, additional effort is needed to restore net income to an
acceptable level. The focus has shifted from right-sizing the Bank (to meet the
capital requirements of the Formal Agreement) to implementing a plan to enhance
profitability.
The Company contemplates calling a special meeting of shareholders later
in the fourth quarter to vote on a proposed amendment to the Articles of
Organization, which will provide for the reclassification of shares of the
Company's common stock held by shareholders who are the record holders of fewer
than 200 shares of common stock into shares of Series A Preferred Stock, on the
basis of one share of Series A Preferred Stock for each share of common stock
held by such shareholders (the "Reclassification"). The Reclassification is
designed to allow us to suspend our reporting obligations with the SEC and
realize estimated cost savings of approximately $285,000 per year.
The Company first filed a Schedule 13E-3 and preliminary proxy statement
with the SEC outlining the Reclassification on September 11, 2007. The first
amendment to the Schedule 13E-3 and preliminary proxy statement is being filed
today. The Company will file another amendment to the Schedule 13E-3 and the
definitive proxy statement upon completion of SEC review. All shareholders are
advised to read the amended Schedule 13E-3 and definitive proxy statement
carefully when these documents are available, as they will contain important
information about the Reclassification. Shareholders may obtain free copies of
the proxy statement and Schedule 13E-3 when they are available at the SEC's
website at http://www.sec.gov. The Company will mail a copy of the definitive
proxy statement to all shareholders in advance of the special meeting.
F-10
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, impairment of investment
securities and intangible assets, including goodwill, and valuation of deferred
tax assets. 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 level of the allowance for loan losses considered necessary.
Management considers impairment of investment securities to be critical due to
the potential materiality of individual investment security holdings. Management
considers impairment of intangible assets to be critical accounting policies
because of the intangible assets' materiality to the financial statements and
inherent judgment in determining 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. The valuation of deferred tax assets is considered
critical because of the degree of judgment required to determine whether it is
more likely than not that tax return benefits will be realized when deferred tax
items reverse.
Comparison of Financial Condition at September 30, 2007 versus December 31, 2006
Total assets were $291.5 million at September 30, 2007 as compared to
$332.8 million at December 31, 2006. The decrease of $41.3 million or 12% in
total assets was primarily driven by the sale of $15.0 million of loans
associated with our Londonderry branch, $11.9 million of loans associated with
the sale of our Cambridge branch, and $14.5 million of investment maturities and
redemptions. A key element of the Company's strategic plan required shrinking
the balance sheet in order to improve capital ratios.
Loans
Total net loan balances were $198.3 million at September 30, 2007, a
decrease of $36.6 million or 16%, from $234.9 million at December 31, 2006. The
decrease in total net loans was primarily driven by the aforementioned sales.
Commercial real estate loans decreased $21.1 million or 20% to $85.8 million at
September 30, 2007 from $107.0 million at December 31, 2006. Commercial loans
decreased $14.2 million or 32% to $30.2 million at September 30, 2007 from $44.4
million at December 31, 2006. The decrease of the loan portfolio occurred
primarily in the first quarter of the year; net loans were $198.0 million at
March 31, 2007 and $198.3 million at September 30, 2007. 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.
F-11
The following table presents the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
September 30, 2007 December 31, 2006
------------------ -----------------
(Dollars in thousands)
Real estate mortgage loans:
Commercial $ 85,823 $ 106,965
Residential 54,428 54,898
Construction 17,413 19,414
Home equity 9,979 9,520
Commercial loans 30,214 44,442
Consumer loans 2,071 1,599
------------ ------------
Total loans 198,928 236,838
Net deferred origination fees (139) (121)
Allowance for loan losses (1,537) (1,827)
------------ ------------
Loans, net $ 198,252 $ 234,890
============ ============
Asset Quality and Allowance for Loan Losses
The table below summarizes certain key ratios regarding the quality of the
Bank's loan portfolio:
September 30, 2007 December 31, 2006
------------------ -----------------
(Dollars in thousands)
Non-accrual loans $ -- $ --
Troubled debt restructurings -- --
Loans past due 90 days or more and
still accruing 35 3
Foreclosed real estate 1,484 --
Non-accrual loans to total loans 0.00% 0.00%
Non-performing assets to total assets 0.51% 0.00%
Allowance for loan losses as a percentage
of total loans 0.77% 0.77%
During the second quarter of 2007, the Company placed two related loans
totaling $1,748,000 on non-accrual status. During the third quarter of 2007, the
Company transferred these non-accrual loans to the in-substance foreclosures
category. Upon transfer to the in-substance foreclosures category the Company
wrote the property down by $264,000. The property is a residential subdivision.
For the nine months ended September 30, 2007, the Company recorded a
provision for loan losses of $14,000, charge-offs of $308,000, and recoveries of
$4,000. The allowance for loan losses balance stood at $1,537,000 at September
30, 2007, which represents a decrease of $290,000 since December 31, 2006.
Management considers the loan loss allowance to be adequate to provide for
potential loan losses. The Company assesses the adequacy of the allowance for
loan losses each calendar quarter. Although the Company believes that it employs
an appropriate approach to downgrading credits that are experiencing slower than
projected sales and/or increases in loan to value ratios, subsequent evaluations
of the loan portfolio by the Company and its regulators, in light of the factors
then prevailing, may require increases in the allowance for loan losses through
charges to the provision for loan losses.
F-12
Over the past several years, the Company has experienced very low levels
of loan charge-offs and non-accrual loans. Economic or other external factors,
deterioration in credit quality, or appropriate changes in the reserve
estimation process as a result of changes in assumptions, as well as other
possible factors, may cause the loan loss reserve balance to be increased in the
future, perhaps substantially, through charges to current earnings by increasing
the loan loss provision. While the real estate market has been under pressure
for the last several quarters, to date, the Company has experienced only a small
increase in problem loans.
Investment Securities
Total investments, which includes certificates of deposit,
available-for-sale securities and Federal Home Loan Bank and Federal Reserve
Bank stock totaled $45.4 million as of September 30, 2007, a decrease of $16.6
million, or 27%, from $62.0 million at December 31, 2006. The Bank has
classified all securities as available-for-sale since September 2006.
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 securities portfolio at the dates indicated
September 30, 2007 December 31, 2006
------------------------ ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
(Dollars in thousands)
Mortgage and asset-backed securities $ 29,433 $ 28,558 $ 39,391 $ 38,307
Government-sponsored enterprise obligations 6,039 5,955 10,550 10,293
Corporate bonds 1,867 1,754 1,845 1,745
Municipal bonds 3,622 3,516 3,756 3,617
---------- ---------- ---------- ----------
Total securities available-for-sale $ 40,961 $ 39,783 $ 55,542 $ 53,962
========== ========== ========== ==========
Real Estate Held for Sale
Real estate held for sale consists of the land and building acquired in
the Boston branch acquisition. The property is being carried at the lower of
depreciated cost or the estimated fair value less selling costs. A valuation
allowance has been established as appropriate. The Company anticipates that the
sale of the Boston building will be consummated before the end of 2007. It is
possible that changes to the reserve may occur prior to, and related to, the
sale of the real estate. The Company plans to maintain a retail banking branch
and loan production office on the Boston property after the sale.
Deposits
Deposit balances totaled $225.2 million as of September 30, 2007, a
decrease of $43.7 million, or 16%, from $268.9 million as of December 31, 2006.
The majority of the decrease was driven by a $34.6 million decline in
certificates of deposit. The decline in certificates of deposit was the result
of promotional certificate of deposit balances running off and the sale of our
branch in Cambridge, Massachusetts. The sale of our Cambridge branch resulted in
a reduction in total deposits (including certificates of deposit) of $15.4
million.
F-13
As part of its strategic plan, the Company is pursuing small business
owners in its geographic footprint that do not utilize its services. The Company
is hopeful that these efforts will result in new relationships that will result
in additional core deposits.
The following table summarizes the composition of the Bank's deposit
balances at the dates indicated.
September 30, December 31,
2007 2006
------------ ------------
(Dollars in thousands)
Demand $ 39,148 $ 42,682
NOW 32,805 34,537
Regular savings 27,287 29,837
Money market deposits 47,613 48,868
Certificates of deposit 78,358 112,944
------------ ------------
$ 225,211 $ 268,868
============ ============
Borrowings
Short-term borrowings were $10.8 million as of September 30, 2007, a
decrease of $2.9 million, or 21% from $13.7 million as of December 31, 2006. The
contraction related to repurchase agreements which declined $2.9 million or 21%
from $13.7 million as of December 31, 2006. The decline in repurchase agreements
was driven by lower balances in customer sweep accounts. Long-term borrowings
were $20.8 million as of September 30, 2007, an increase of $4.8 million, or 30%
from $16.0 million as of December 31, 2006. The increase was driven by a new
$5.0 million callable fixed rate advance from the Federal Home Loan Bank of
Boston.
Stockholder's Equity
Total stockholder's equity increased to $19.3 million as of September 30,
2007 from $17.9 million as of December 31, 2006. The increase was primarily
driven by: $947,000 of net proceeds from the Company's private placement,
year-to-date net income of $133,000 and improvement in the accumulated other
comprehensive loss account of $330,000 associated with an unrealized loss, net
of tax, on available-for-sale securities.
Comparison of Operating Results for the Quarters Ended September 30, 2007
and 2006
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 (deposit balances and 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.
F-14
The net loss for the three months ended September 30, 2007 was $386,000
versus a net loss of $626,000 for the three months ended September 30, 2006, an
improvement of $240,000. The improvement in earnings is primarily attributable
to a $779,000 decrease in non-interest expenses, and a $566,000 improvement in
non-interest income. The provision for loan losses was $274,000 for the three
months ended September 30, 2007 versus $66,000 for the same period in 2006. Net
interest income was $2.3 million for the three months ended September 30, 2007
versus $2.9 million for the same period in 2006. The benefit for taxes was
$74,000 for the three months ended September 30, 2007 versus a tax benefit of
$340,000 for the same period in 2006.
Interest and Dividend Income
Total interest and dividend income for the quarter ended September 30,
2007 was $4.4 million, a decrease of $1.7 million from the quarter ended
September 30, 2006. The decrease was primarily driven by lower levels of earning
assets. For the quarter ended September 30, 2007 average earning assets were
$265.0 million versus $364.9 million for the quarter ended September 30, 2006.
The lower level of earning assets is a direct result of the implementation of
the Company's strategic plan. Average investment securities declined by $65.1
million while average loans declined by $48.6 million The average yield on
average earning assets during the third quarter of 2007 was 6.58% as compared to
6.62% for the third quarter of 2006.
Interest Expense
Interest expense was $2.1 million for the quarter ended September 30,
2007; this represents a $1.1 million decrease from the same quarter of 2006. The
majority of the decline was attributable to lower levels of average interest
bearing liabilities which decreased by $98.6 million versus the same quarter of
2006. The average rate paid for interest-bearing liabilities was 3.58% for the
quarter ended September 30, 2007 versus 3.79% for the quarter ended September
30, 2006.
Interest expense on interest-bearing deposits for the quarter ended
September 30, 2007 decreased by $373,000 to $1.5 million as compared to the same
quarter of 2006. This decrease was primarily due to lower levels of
interest-bearing deposits. Average interest-bearing deposit balances for the
quarter ended September 30, 2007 totaled $187.0 million, a $51.4 million
decrease as compared to the same quarter of 2006. Offsetting the decrease in
interest bearing deposit balances was an increase in the average rate paid on
the deposits. The average rate paid on deposits increased to 3.09% from 3.04% in
the third quarter of 2007 as compared to the same quarter of 2006.
Interest expense on borrowed funds, including subordinated debentures, for
the quarter-ended September 30, 2007, decreased by $690,000 to $636,000 as
compared to the quarter-ended September 30, 2006. The decrease was primarily due
to significantly lower average levels of FHLB advances.
Net Interest Income
Net interest income for the quarter ended September 30, 2007 decreased by
$631,000 to $2.3 million as compared to $2.9 million for the quarter ended
September 30, 2006. The decline in net interest income was driven by an overall
shrinkage of the Company's balance sheet. Average total assets for the quarter
ended September 30, 2007 were $293.6 million versus $396.4 million for the same
quarter in 2006. While net interest income declined, net interest margin
improved. Net interest margin was 3.44% for the quarter ended September 30, 2007
versus 3.19% for the same quarter of 2006, an improvement of 25 basis points.
The reduction in investment securities and wholesale funding was a primary
factor in the improvement in net interest margin.
F-15
Average Balances and Yields
The following table presents a summary of the Company's interest-earning
assets and their average yields, and interest-bearing liabilities and their
average rates for the three months ended September 30, 2007 and September 30,
2006. The average balances are derived from average daily balances.
Three Months Ended September 30,
-----------------------------------------------------------------------------------------
2007 2006
----------------------------------------- --------------------------------------------
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:
Other short-term investments $ 227 $ 21,098 4.27% $ 94 $ 7,232 5.13%
Investment securities:
Taxable 441 41,027 4.28% 1,169 95,636 4.85%
Tax-exempt 23 3,634 2.47% 131 14,156 3.68%
Loans 3,701 199,260 7.37% 4,692 247,872 7.51%
----------------------- ------------------------
Total interest-earning assets 4,392 265,019 6.58% 6,086 364,896 6.62%
-------- ---------
Non-interest-earning assets 28,578 31,530
----------- -----------
Total assets $ 293,597 $ 396,426
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings 33 26,437 0.49% 39 31,309 0.49%
NOW 24 30,850 0.31% 11 35,533 0.12%
MMDA 408 46,576 3.48% 486 57,179 3.37%
CD's 991 83,173 4.72% 1,293 114,400 4.49%
----------------------- ------------------------
Total interest-bearing deposits 1,456 187,036 3.09% 1,829 238,421 3.04%
Federal Home Loan Bank advances 269 19,823 5.38% 890 63,874 5.53%
Subordinated debentures 235 13,000 7.18% 243 13,000 7.43%
Other borrowed funds 132 11,867 4.41% 193 14,990 5.08%
----------------------- ------------------------
Total interest-bearing liabilities 2,092 231,726 3.58% 3,155 330,285 3.79%
-------- ---------
Non-interest-bearing deposits 40,011 46,567
Other non-interest-bearing liabilities 2,245 1,701
----------- -----------
Total liabilities 273,982 378,553
Total stockholders' equity 19,615 17,873
----------- -----------
Total liabilities and stockholders'
equity $ 293,597 $ 396,426
=========== ===========
Net interest income $ 2,300 $ 2,931
======== =========
Interest rate spread 2.99% 2.83%
=========== ===========
Net interest margin 3.44% 3.19%
=========== ===========
F-16
Non-interest Income
Total non-interest income increased $566,000 to $1.1 million for the
quarter ended September 30, 2007 as compared to the same quarter of 2006. The
improvement in non-interest income was driven by the absence in 2007 of both
$526,000 of losses on securities sold or written down and $340,000 of fixed
asset write-downs taken during the third quarter of 2006. Partially offsetting
the losses were $106,000 of trust fees in the third quarter of 2006 versus none
in the third quarter of 2007 because the Company sold the trust department in
October of 2006. In addition, the third quarter of 2006 includes $133,000 of
merchant credit card processing fees versus $8,000 in the third quarter of 2007
because the Company has outsourced this service.
Non-interest Expense
Total operating expenses decreased by $779,000 to $3.6 million for the
quarter ended September 30, 2007 as compared to the same quarter of 2006. This
reduction in expense is a direct result of the implementation of the Company's
strategic plan. Salaries and employee benefits decreased by $428,000 to $2.0
million primarily due to a reduction in the number of employees, offset by an
increase in severance expense in the third quarter of 2007. Occupancy and
equipment expenses decreased by $225,000 to $477,000 for the quarter ended
September 30, 2007. The decrease was primarily attributable to lower levels of:
utilities expense, maintenance and repair costs, rent expense, and other
miscellaneous occupancy expenses. As part of the strategic plan the Company has
closed several facilities. In addition, other general and administrative
expenses decreased $92,000 to $227,000 for the quarter ended September 30, 2007.
Partially offsetting these declines was an increase in FDIC insurance expense in
the third quarter of 2007. FDIC insurance expense was $139,000 during the third
quarter of 2007 versus $8,000 during the third quarter of 2006. The increase was
driven by a revised FDIC insurance assessment process. As a result of tangible
improvements stemming from the implementation of the strategic plan, it is
anticipated that this expense will decrease by approximately $104,000 per
quarter after October 2007.
Income Taxes
For the quarter ended September 30, 2007 the Company recorded a benefit
for income taxes of $74,000 versus a benefit for income taxes of $340,000 for
the same quarter of 2006.
Deferred tax assets are evaluated to determine whether it is "more likely
than not" that a tax return benefit would be realized when the deferred items
reverse. Evaluation considerations include the availability of historical and
projected taxable income to offset the deferred items in the periods they are
expected to reverse. Management has determined that operational changes which
have been made and are being made will generate sufficient income to allow for
the recognition of the deferred tax assets. No valuation reserve was recorded as
of September 30, 2007 or December 31, 2006.
The effective tax benefit rate of 16% for the quarter reflects the fact
that the costs of implementing the process to reclassify common stockholders are
not deductible for income tax purposes. These non-deductible reclassification
expenses represent a significant portion of pretax income.
Comparison of Operating Results for the Nine Months Ended September 30, 2007
and 2006
General
Net income for the nine months ended September 30, 2007 was $133,000
compared with a net loss of $1,458,000 for the nine months ended September 30,
2006. For the nine months ended September 30, 2007, net interest income
decreased by $1.1 million, non-interest income increased $993,000, and operating
expenses decreased $2.7 million, as compared to the nine months ended September
30, 2006. The provision for loan losses was $14,000 for the nine months ended
September 30, 2007 versus $131,000 for the same period in 2006. The provision
for taxes was $286,000 for the nine months ended September 30, 2007 versus a
benefit for taxes of $805,000 for the same period in 2006.
F-17
Interest and Dividend Income
Total interest and dividend income for the nine months ended September 30,
2007 was $13.7 million, which was $3.4 million lower than the nine months ended
September 30, 2006. The decline was primarily resulted from by lower levels of
average interest-earning assets. While average balances declined the yield on
earning assets increased to 6.63% for the nine months ended September 30, 2007
as compared to 6.25% for the nine months ended September 30, 2006. The
improvement in yield was primarily driven by higher yielding loans replacing
lower yielding investments. Average interest earning assets of $276.4 million
for the period ended September 30, 2007 were $88.7 million lower than average
interest-bearing assets of $365.1 million for the period ended September 30,
2006.
The increase in average yield was due primarily to a changing mix of
assets. While average net loans for the nine months ended September 30, 2007
were $34.5 million lower than the same period of 2006, average investments were
$68.8 million lower than the same period of 2006. The changing mix of earning
assets reflects the Bank's efforts to increase its core lending efforts and
decrease its reliance on the investment portfolio for income.
Interest Expense
Interest expense on interest-bearing liabilities for the nine months ended
September 30, 2007 was $6.5 million, a $2.3 million decrease from the nine
months ended September 30, 2006. The decrease was driven by lower levels of
interest-bearing liabilities. Average interest-bearing liabilities of $242.9
million for the period ended September 30, 2007 were $88.5 million lower than
average interest-bearing liabilities of $331.4 million for the period ended
September 30, 2006.
The average rate paid for interest bearing liabilities was 3.59% for the
nine months ended September 30, 2007 as compared to 3.55% for the same period of
2006. The increase in average rates occurred because of the increase in market
short-term rates over the course of the past year.
Interest expense on deposits was flat on a comparative basis. The average
rate paid for deposit during the first nine months of 2007 was 3.13%, up from
2.76% in the same period of 2006. Average interest-bearing deposit balances
during the nine months ended September 30, 2007 were $27.1 million lower than
the same period of 2006.
Interest expense on borrowed funds, including subordinated debentures, for
the nine months ended September 30, 2007 decreased by $2.3 million to $1.8
million as compared to the nine months ended September 30, 2006. The impact of
lower average balances of borrowed funds during the nine month period ended
September 30, 2007 as compared to the same period of 2006 offset increasing
interest rates paid on borrowed funds for the same comparable periods. The
average rate paid on borrowed funds increased to 5.84% in the first nine months
of 2007 as compared to 5.29% during the first nine months of 2006.
The Company relies on dividends from the Bank in order to pay its interest
obligations on the subordinated debentures. At present, the Bank is required to
obtain OCC approval before it pays dividends because of its level of earnings.
The Company can give no assurance that the OCC will grant the Bank approval to
pay dividends in the future. At September 30, 2007 the Company had enough cash
on hand to pay interest on the subordinated debentures, at current prevailing
rates, through October 2007. Interest expense on subordinated debentures and the
average balance outstanding in the first nine months of 2007 were relatively
level compared to the first nine months of 2006.
F-18
Net Interest Income
Net interest income for the nine months ended September 30, 2007 decreased by
$1.1 million, to $7.2 million as compared to the nine months ended September 30,
2006. The decrease in net interest income in the 2007 period was due primarily
to the lower levels of average earning assets. Offsetting the lower levels of
earning assets was a changing mix of earning assets. The increase of higher
yielding loans and corresponding decrease of lower yielding investments as a
percentage of average earning assets helped mute the impact of lower levels of
earning assets. Average loan balances were 75% of average earning assets for the
nine months ended September 30, 2007 versus 66% for nine months ended September
30, 2006. Conversely, investment balances were 18% of average earning assets for
the nine months ended September 30, 2007 versus 32% for nine months ended
September 30, 2006.
Average Balances and Yields
The following table presents a summary of the Company's interest-earning
assets and their average yields, and interest-bearing liabilities and their
average rates for the nine months ended September 30, 2007 and 2006. The average
balances are derived from average daily balances.
Nine Months Ended September 30,
-----------------------------------------------------------------------------------------
2007 2006
----------------------------------------- --------------------------------------------
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:
Other short-term investments $ 661 $ 20,034 4.41% $ 211 $ 5,491 5.12%
Investment securities:
Taxable 1,469 45,777 4.30% 3,423 103,819 4.41%
Tax-exempt 68 3,704 2.44% 386 14,477 3.56%
Loans 11,516 206,838 7.44% 13,054 241,296 7.23%
----------------------- -------------------------
Total interest-earning assets 13,714 276,353 6.63% 17,074 365,083 6.25%
-------- ------------
Non-interest-earning assets 28,899 31,272
------------- ------------
Total assets 305,252 396,355
============= ============
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings 99 27,484 0.48% 120 32,331 0.49%
NOW 82 32,453 0.34% 30 36,138 0.11%
MMDA 1,294 49,999 3.46% 1,364 56,929 3.20%
CD's 3,238 91,594 4.73% 3,213 103,182 4.16%
----------------------- -------------------------
Total interest-bearing deposits 4,713 201,530 3.13% 4,727 228,580 2.76%
Federal Home Loan Bank advances 722 17,267 5.59% 2,854 75,984 5.02%
Subordinated debentures 706 13,000 7.26% 701 13,000 7.21%
Other borrowed funds 378 11,099 4.55% 511 13,850 4.93%
----------------------- -------------------------
Total interest-bearing liabilities 6,519 242,896 3.59% 8,793 331,414 3.55%
-------- ------------
Non-interest-bearing deposits 40,670 45,279
Other non-interest-bearing liabilities 2,323 1,378
------------- ------------
Total liabilities 285,889 378,071
Total stockholders' equity 19,363 18,284
------------- ------------
Total liabilities and stockholders'
Equity $ 305,252 $ 396,355
============= ============
Net interest income $ 7,195 $ 8,281
========= ============
Interest rate spread 3.05% 2.70%
============= ============
Net interest margin 3.48% 3.03%
============= ============
F-19
Non-interest Income
Total non-interest income for the nine months ended September 30, 2007
increased $993,000 as compared to the nine months ended September 30, 2006. The
increase was primarily driven by the absence of $575,000 of security
write-downs, the absence of $340,000 of fixed asset write-downs, and the absence
of a $319,000 valuation reserve for real estate held for sale, because the
estimated fair value at that time, less selling costs, of real estate held for
sale was less than the book value of the assets. In addition, the Company
recognized a $311,000 net gain on the sale of Londonderry loans in 2007. For the
nine months ended 2006 the Company recognized $316,000 of trust fees versus $0
for the nine months ended 2007.
Non-interest Expense
Total operating expenses for the nine months ended September 30, 2007
decreased $2.7 million or 20%, to $10.6 million. The 20% decrease in
non-interest expenses was driven by the implementation of the Company's
strategic plan. Salaries and employee benefits decreased $1.4 million to $5.6
million. The decrease was driven by a reduction in the number of employees.
Occupancy and equipment expenses decreased $497,000 to $1.6 million, advertising
and marketing expenses decreased $201,000 to $183,000. Other general and
administrative expenses decreased $369,000 to $639,000. Conversely, FDIC
insurance expense increased $400,000 to $425,000, due to a revision of the FDIC
insurance assessment process.
Income Taxes
For the nine months ended September 30, 2007 the Company recorded a
provision for income taxes of $286,000 versus a benefit for income taxes of
$805,000 for the nine months ended 2006. The shift to provision for income taxes
from benefit for income taxes was driven by a $2,682,000 improvement in pre-tax
income.
Deferred tax assets are evaluated to determine whether it is "more likely
than not" that a tax return benefit would be realized when the deferred items
reverse. Evaluation considerations include the availability of historical and
projected taxable income to offset the deferred items in the periods they are
expected to reverse. While the recent trend of operating losses increases the
likelihood that such taxable income may not occur in the future, management has
determined that operational changes which have been made and are being made will
generate sufficient income to allow for the recognition of the deferred tax
assets. No valuation reserve was recorded as of September 30, 2007 or December
31, 2006.
The effective tax rate of 68% for the nine month period reflects the fact
that the costs of implementing the process to reclassify common stockholders are
not deductible for income tax purposes. These non-deductible reclassification
expenses represent a significant portion of pretax income.
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
F-20
executive officer, the chief financial officer, the senior loan officer, the SVP
of Operations and IT and the SVP of Retail Banking, 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 retail strategies were implemented in 2006 to generate deposit
growth, particularly in new markets. As a result of significant new deposit
funds, the Bank was able to pay down Federal Home Loan Bank (FHLB) advances and
improve the Bank's liquidity position.
The principal strategies management utilizes to manage interest rate risk
with respect to the loan portfolio is associated with pricing and structure.
Although loans originated at relative low points in the interest rate cycle
produce lower short-term yields than those originated at higher points in the
rate cycle, prepayments into low rates occur more rapidly on higher rate loans
as the incentive to refinance is apparent. The Company has not positioned itself
as a market leader with respect to pricing long-term fixed-rate residential
mortgages in the current environment. However, the Company has and will continue
to originate fixed-rate loans for its portfolio in order to serve its customers,
preferring ten or fifteen year final maturities. Additional strategies employed
to mitigate loan interest rate risk in this environment include targeting
shorter amortization periods, increasing the frequency of interest rate resets
or shortening the period of time until the first interest rate reset date, and
encouraging the origination of floating rate loans.
On an ongoing basis, management analyzes the pros and cons of positioning
with a narrower or wider interest rate mismatch and whether an asset sensitive
or liability sensitive balance sheet is targeted and to what degree. This
analysis considers, but is not limited to, originating adjustable- and
fixed-rate mortgage loans, managing the cost and structure of deposits,
analyzing actual and projected asset cash flow, considering the trade-offs of
short versus long-term borrowings, and reviewing the pros and cons of certain
investment security sectors. The Company primarily relies upon the investment
securities portfolio to balance the interest rate risks produced by retail loan
and deposit activity. The interest rate risk of the balance sheet in varying
interest rate scenarios has been reduced over the past several quarters as
management has positioned the net interest income stream for reduced volatility
regardless of the direction of interest rates.
On a quarterly basis, an outside advisor performs financial modeling of
the balance sheet using certain industry data assumptions. The output from the
models, which project the Company's financial performance over certain periods
under certain interest rate environments, are reviewed and analyzed as a basis
for targeting certain product structures in the future, as well as commenting on
pricing decisions in order to encourage or discourage customer choices. While
Management is currently pleased with the interest rate sensitivity position of
the Bank, there is no guarantee that the Bank will be able to continue to
generate low cost deposits and gather high yielding assets.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans and investment securities, sales of
securities, maturities and early calls of securities, and funds provided from
operations. While scheduled repayments of loans and investment securities are
predictable sources of funds, prepayments on loans and investment securities as
well as other behavioral variables on certain other balance sheet components are
not predictable with certainty. For example, the general level of interest
rates, economic conditions, and competition largely influence prepayments on
loans and investment securities and the renewal rate on term deposits. The Bank
primarily uses its liquidity resources to fund existing and future loan
commitments, to fund net deposit outflows, to invest in other interest-earning
assets, and to maintain liquidity. .
The Bank liquidity contingency plan calls for the Bank to manage loan
originations and the level of the investment portfolio as well as Federal Home
Loan Bank of Boston (the "FHLBB") advance availability so that deposit flows can
be accommodated.
F-21
The Bank utilizes advances from the "FHLBB" primarily in connection with
its management of the interest rate sensitivity of its assets and liabilities,
to complement or supplement the volume of retail funding, as well as to
selectively capitalize on leverage opportunities. Total advances outstanding at
September 30, 2007 amounted to $20.8 million. The Bank's ability to borrow from
the FHLBB is dependent upon the amount and type of collateral the Bank has to
secure the borrowings. Such collateral consists of, but is not limited to,
one-to-four family owner-occupied residential mortgage loans and occupied
residential mortgage loans and government-sponsored enterprise obligations. As
of September 30, 2007, the Bank's total borrowing capacity through the FHLBB was
$33.0 million. The Bank has additional capacity to borrow through such
instruments as repurchase agreements utilizing federal agency obligations and
mortgage-backed securities as collateral, as well as brokered deposits. The
Formal Agreement does require that the Bank get permission of the OCC and FDIC
prior to accepting brokered deposits.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term investments, government-sponsored enterprise 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. On a monthly basis, the Bank
currently generates an average of approximately $1.4 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.
The Bank signed a Formal Agreement with the Office of the Comptroller of
the Currency on June 28, 2006. The Agreement required the Bank to take various
actions including raising capital ratios to levels prescribed in the Agreement.
Specifically the Bank was required, by December 31, 2006, to raise its Tier 1
capital to average assets ratio to a minimum of 8%, its Tier 1 capital to
risk-weighted assets ratio to a minimum of 10%, and its total capital to
risk-weighted assets to a minimum of 11%. As of December 31, 2006, the Bank did
not attain these ratios. Subsequently, the OCC extended the deadline to achieve
the capital ratios until March 31, 2007. The Bank exceeded at February 28, 2007
and continues to exceed the minimum ratios, as listed in the Formal Agreement.
At September 30, 2007, Bancorp had $123,000 of cash on hand. Projected
interest payments due in October, 2007 on Bancorp's subordinated debentures will
deplete its level of cash on hand at September 30, 2007. The Bank intends to get
a loan from a third party; the proceeds of the loan will be used to pay the
interest on the subordinated debentures. The Bank needs to borrow at least
$750,000 to cover interest payments on the subordinated debentures through
September 30, 2008. Neither the third party nor the terms of the loan have been
finalized.
At September 30, 2007, the Bank and the Company exceed all regulatory
capital requirements applicable to them. The table below presents the capital
ratios at September 30, 2007, for the Bank and Bancorp, as well as the minimum
regulatory requirements.
F-22
Minimum Capital
Statutory Minimum Requirements
Actual Capital Requirements Per OCC
------------------- --------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------- -------- ---------- ------- --------- --------
(Dollars in thousands)
Bank:
Total capital to risk-weighted assets $ 28,603 13.4% $ 17,059 8.0% $ 23,456 11.0%
Tier 1 capital to risk-weighted assets 27,066 12.7 8,530 4.0 21,324 10.0
Tier 1 capital to average assets 27,066 9.4 11,581 4.0 23,162 8.0
Consolidated:
Total capital to risk-weighted assets $ 29,748 13.9% $ 17,113 8.0% N/A N/A
Tier 1 capital to risk-weighted assets 21,891 10.2 8,557 4.0 N/A N/A
Tier 1 capital to average assets 21,891 7.5 11,608 4.0 N/A N/A
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 September 30, 2007, the Bank had $1.5 million of
outstanding commitments to originate loans and $32.9 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
The Bank is subject to a Formal Agreement with the OCC.
The Bank is subject to a Formal Agreement dated June 28, 2006 with the
OCC. The direct costs of compliance include legal and consulting fees, higher
FDIC insurance rates, and staffing costs, which all decrease earnings and reduce
the capital base. Other costs include significant dedication of resources that
shift the focus of the organization away from growing the customer base to
ensuring that heightened regulatory demands are satisfied. The agreement
requires the Bank to obtain approval from the OCC prior to paying dividends and
restricts the ability of the Bank to pursue certain growth opportunities. In
addition, it requires the Bank to maintain higher levels of capital than other
financial institutions without similar regulatory issues.
The Bank has achieved the initial requirements of the agreement, including
achieving higher capital ratios (which were achieved on February 28, 2007). The
principal initial requirements were that the Board would achieve higher capital
ratios as part of a new three-year capital program, retain competent management,
develop a new three-year strategic plan, adopt a new interest rate management
plan, improve liquidity, and establish a Compliance Committee.
The Board is required to ensure adherence on an ongoing basis to the
three-year strategic and capital plans and to perform its other obligations
under the agreement. The failure of the Board to ensure such adherence or
perform such obligations could result in further regulatory actions by the OCC,
which would have a materially adverse financial effect on the Bank and the
Company.
F-23
The value of goodwill and other intangible assets may need to be written down.
The Company recorded goodwill and other intangible assets at the time of
purchase of The de Burlo Group and the Boston branch. A substantial portion of
the purchase price of the investment management company was allocated to
goodwill and other intangible assets. If we determine that goodwill or other
intangible assets are impaired at a future date, we will have to record a
write-down of value through the Company's income statement.
Our expansion into the investment management business poses several risks.
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 more than 50% of its revenue from five Massachusetts
municipal pension funds. The loss of these clients would 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 of retention with 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 with the Boston branch.
While the Bank has shown a very low level of loan charge-offs and
non-accrual loans in recent years, 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. Despite our due
diligence on the Boston branch portfolio, there is a risk that loan quality may
deteriorate as we did not perform the original underwriting.
If our allowance for loan losses is not sufficient to cover actual loan losses,
our earnings would decrease.
In an attempt to mitigate any loan losses we may incur, we maintain an
allowance for loan losses based on, among other things, national and regional
economic conditions, historical loss experience and delinquency trends among
loan types. However, we cannot predict loan losses with certainty and we cannot
assure you that charge offs in future periods will not exceed the allowance for
loan losses. In addition, regulatory agencies, as an integral part of their
examination process, review our allowance for loan losses and may require
additions to the allowance based on their judgment about information available
to them at the time of their examination. Factors that require an increase in
our allowance for loan losses could reduce our earnings.
Economic or other external factors, deterioration in credit quality, or
appropriate changes in the reserve estimation process as a result of changes in
assumptions, as well as other possible factors, may cause the loan loss
allowance to be increased through charges to current earnings by increasing the
loan loss provision. Despite our due diligence on the Boston branch 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 Bancorp operates in its new geographic loan footprint, including Boston,
Massachusetts and Portsmouth, New Hampshire, and hires new commercial lenders,
the maintenance of high credit quality and continued growth in loan balances is
not assured.
We have acquired an investment management business, purchased a new branch
in a non-contiguous market, and opened a branch 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.
F-24
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 significantly increase revenue and decrease expenses, our
earnings may not improve to the extent necessary to permit access to capital or
to avoid increased regulatory scrutiny.
The Company initiated a strategic plan in the third quarter of 2006 to
address the concerns for poor profitability. Initiatives to improve revenues
and/or reduce expenses may not be successful in improving the Company's
profitability. Poor profitability may impact the Company's ability to retain or
attract customers and 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 suburban office space vacated by
the Bank as part of the implementation of the strategic plan, on the terms or
lease-up ratio we anticipate. Lower than anticipated rental income from these
locations 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 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.
Bancorp 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 continued focus on growth
in core deposit categories will generate sufficient growth in targeted deposit
categories and continued growth in deposit fee income.
Bancorp 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.
Our capital and expense budgets may limit our ability to compete with larger
financial institutions.
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.
F-25
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.
Bancorp 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 Bank has entered into an agreement with its primary regulator, the
Office of the Comptroller of the Currency. The Bank has achieved all of the
major requirements of the Agreement, including capital ratio requirements which
were exceeded in February 2007. The agreement calls for on-going compliance with
the Agreement terms. While management will diligently attempt to maintain
compliance with the terms of the Agreement, it is possible that circumstances
might arise which would make the Bank no longer in compliance with the
Agreement. Further regulatory action could result in further limitations being
imposed upon the Bank.
Implementation of Sarbanes-Oxley Section 404
The regulations implementing Section 404 of the Sarbanes-Oxley Act of 2002
(SOX 404) will require us to provide our assessment of the effectiveness of our
internal control over financial reporting beginning with our Annual Report on
Form 10-KSB for the fiscal year ending December 31, 2007. Our independent
auditors will be required to confirm in writing whether our assessment of the
effectiveness of our internal control over financial reporting is fairly stated
in all material respects, and separately report on whether they believe we
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008.
We believe that we currently have adequate controls over financial
reporting and that any weakness identified in our internal controls will not be
material. We cannot assure you that we will not discover material weaknesses in
our internal controls. We also cannot assure you that we will complete the
process of our evaluation and the auditors' attestation on time. If a material
weakness is discovered, corrective action may be time consuming, costly and
further divert the attention of management and its resources. The disclosure of
a material weakness, even if quickly remedied, could reduce the market's
confidence in our financial statements and lower the stock price, especially if
a restatement of financial statements for past periods were to be necessary.
The Company has not started to implement SOX 404. The Company anticipates
that stockholders will approve a reclassification plan which will allow the
Company to suspend its reporting requirements with the Securities and Exchange
Commission (the "SEC"). If the reclassification plan is not effective before
December 31, 2007, the Company will not be prepared to comply with the
requirements of SOX 404.
F-26
The Bancorp is dependent upon the Bank for cash to pay interest on subordinated
debentures.
The Bancorp raised capital by issuing trust preferred stock which is
supported by subordinated debentures. The Bancorp's primary source of cash to
pay the interest on the subordinated debentures is dividends from the Bank. The
Agreement with the OCC requires that the OCC grant approval prior to the Bank
declaring dividends to its parent, Bancorp. The OCC currently withholds
permission from the Bank to pay a dividend. If the OCC does not permit the Bank
to make a dividend payment aggregating approximately $250,000, Bancorp may be
forced to elect to defer interest payments on the subordinated debentures during
December 2007 and January 2008 unless an alternative source of cash is
identified. Currently, management is evaluating several options to help address
the projected short-fall of cash at the Bancorp. No assurance can be given that
the OCC will approve future dividends to the Bancorp.
The Bancorp had $123,000 of cash on hand at September 30, 2007. This
amount is sufficient to make interest payments on subordinated debentures, at
current prevailing rates, through October 31, 2007. The Bank intends to get a
loan from a third party; the proceeds of the loan will be used to pay the
interest on the subordinated debentures. The Bank will need to borrow at least
$750,000 to cover interest payments on the subordinated debentures through
September 30, 2008. Neither the third party nor the terms of the loan have been
finalized.
The interest rate environment may reduce our earnings or liquidity or Bancorp
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 Bancorp. If interest rates rise or the
yield curve remains flat, 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.
Bancorp 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.
Bancorp 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.
Bancorp 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 it 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. Bancorp may have to slow its pace
of new loan approvals and thus may generate less interest income.
The Company's information systems may experience an interruption or breach in
security.
We rely heavily on technology and information systems to conduct our
business. Any failure, interruption or breach in security of these systems could
result in failures or disruptions in our customer relationship management,
general ledger, deposit, loan and other systems. While we have policies and
F-27
procedures designed to prevent or limit the effect of the failure, interruption
or security breach of our systems, there can be no assurance that any such
failures, interruptions or security breaches will not occur. The occurrence of
any failures, interruptions or security breaches could damage our reputation,
result in a loss of customer business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial liability, any
of which could have a material adverse effect on our financial condition and
results of operations.
The Bancorp may require additional capital in the future, but that capital may
not be available when it is needed.
Bancorp and the Bank are required by Federal regulatory authorities to
maintain adequate levels of capital to support their operations. The Company may
at some point want or need to raise additional capital to comply with regulatory
requirements, including requirements under the Bank's agreement with the OCC, or
to support growth. Bancorp's ability to raise additional capital, if needed,
will depend on conditions in the capital markets at that time, which are outside
Bancorp's control, and on its financial performance. Accordingly, Bancorp cannot
assure an investor of its ability to raise additional capital if needed or on
terms acceptable to Bancorp.
The Bancorp's inability to file audited financial statements for the Boston
branch of Atlantic Bank may impair the Company's ability to raise capital.
Typical of the banking industry, Bancorp is unable to obtain audited
financial statements of a retail branch. Under SEC rules, Bancorp 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 through a
private offering of its securities to accredited investors.
Stockholders' ability to sell your shares of common stock at the times and in
the amounts they desire may be limited.
Although our common stock is listed for trading on the Over-the-Counter
Bulletin Board, the trading volume in our common stock is thin and average daily
volumes are much lower than those of other larger financial services companies.
We are not listed on the NASDAQ or any other securities exchange. While there
are investment securities brokers/dealers who make a market in our common stock,
there is no active trading market for our common stock and thus stockholders may
not be able to sell the shares of common stock that they own at the times and in
the amounts they would otherwise like to.
Our directors and executive officers beneficially own a significant portion of
our common stock.
At September 30, 2007 our directors and executive officers beneficially
owned 48.1% of our common stock. As a result, such stockholders would most
likely control the outcome of corporate actions requiring shareholder approval,
including the election of directors and the approval of significant corporate
transactions, such as a merger or sale of all or substantially all of our
assets. We can provide no assurance that the investment objectives of such
stockholders will be the same as our other stockholders.
F-28
APPENDIX G
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION
AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2006
FIRST IPSWICH BANCORP AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
G-1
Management's Discussion and Analysis
Forward-looking statements
This annual report on Form 10-KSB 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 Bancorp'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, 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 Bancorp 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 Bancorp's banking or investment management businesses,
Bancorp's ability to control costs, new accounting pronouncements, and changing
regulatory requirements. Bancorp 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
First Ipswich Bancorp is a nationally-chartered commercial financial
institution with core operations in and around Ipswich, MA. Over the past few
years, however, the Company expanded beyond core banking services in the eastern
Essex County section of Massachusetts. A Branch was purchased in Boston, MA and
a de novo branch was opened in Portsmouth, NH and The de Burlo Group, a
Boston-based investment management business was purchased. However, the rapid
expansion did not generate revenue streams sufficient to cover the Company's
increasing overhead costs. Accordingly, the Company reported four consecutive
quarterly losses through September 30, 2006 until a $302,000 profit was reported
for the quarter ended December 31, 2006. The improved earnings resulted from the
implementation of a strategic plan, the foundation of which is a focused and
disciplined approach to managing the Company.
The Company developed and implemented a strategic plan during the second
half of 2006 and first quarter of 2007. A primary goal of the plan was to
evaluate operations and identify locations and business lines which were not
G-2
enhancing the profitability of the Company. In addition to the previously
planned divestiture of the Bank's trust department, the Bank implemented a
strategic plan which resulted in the sale of $39.1 million of investments in
2006, the sale of the Cambridge branch and the pending closing of the
Londonderry branch in 2007, the sale of $9.3 million of loans in 2006 and
another $15.0 million of loans in 2007, the closing of five off-site ATMs in
2000, the consolidation of the Rowley branches in 2006, and a reduction of 30
full-time equivalent employees in 2006. In addition, the Company continues to
evaluate expenses for additional reductions that can be achieved without unduly
impacting the high level of customer service the Company provides through its
remaining branches in Beverly, Boston, Essex, Gloucester, Ipswich, Newburyport,
and Rowley, Massachusetts and Portsmouth, New Hampshire.
The Bank signed a Formal Agreement with the Office of the Comptroller of
the Currency on June 28, 2006. The Agreement required the Bank to take various
actions including raising capital ratios to levels prescribed in the Agreement.
Specifically the Bank was required, by December 31, 2006, to raise its Tier 1
capital to average assets ratio to a minimum of 8%, the Tier 1 capital to
risk-weighted assets ratio to a minimum of 10%, and the total capital to
risk-weighted assets to a minimum of 11%. As of December 31, 2006, the Bank did
not attain these ratios. Subsequently, the OCC extended the deadline to achieve
the capital ratios until March 31, 2007. The Bank exceeded the minimum ratios,
as listed in the Formal Agreement, at February 28, 2007. A consistent level of
profitability will be a key factor in the OCC's evaluation of the Bank's
performance and the appropriateness of relieving the Bank from the Formal
Agreement.
The sale of the Cambridge branch at the end of March, 2007 was the last
major initiative from the strategic plan to be implemented. One of the primary
objectives for the Company is to become a highly profitable community bank by
following a focused and disciplined approach. One of the ways by which this will
be accomplished is a focused effort to grow the small business client base which
will generate new loans and deposits. Expense reductions will also play a
significant part in the return to consistent profitability.
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 Bancorp's financial
statements include the allowance for loan losses, impairment of investment
securities and intangible assets, including goodwill, and valuation of deferred
tax assets. 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 level of the allowance for loan losses considered necessary.
Management considers impairment of investment securities to be critical due to
the potential materiality of individual investment security holdings. Management
considers impairment of intangible assets to be critical accounting policies
because of the intangible assets' materiality to the financial statements and
inherent judgment in determining 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. The valuation of deferred tax assets is considered
critical because of the degree of judgment required to determine whether it is
more likely than not that tax return benefits will be realized when deferred tax
items reverse.
General
Bancorp's net income is dependent primarily on its net interest income,
which is the difference between the interest income earned on its
interest-earning assets and interest paid on its interest-bearing liabilities.
Net interest income is generated from the interest rate spread between
interest-earning assets and interest-bearing liabilities and the quantity and
mix of such assets and liabilities. Net income is also dependent upon the level
of non-interest income, primarily fees, commissions and service charges, and the
level of operating expenses such as salaries and occupancy costs.
The operating results of Bancorp are significantly affected by prevailing
economic conditions, competitive factors, and the monetary and regulatory
policies of government agencies. Lending activities are primarily influenced by
the economics affecting commercial businesses, demand for and supply of housing,
competition among lenders, and the level of interest rates.
G-3
Management of Market Risk and Interest Rate Risk
Bancorp's most significant form of market risk is interest rate risk, as
the significant majority of its assets and liabilities are sensitive to changes
in interest rates. Bancorp's interest rate risk management program focuses
primarily on evaluating and managing the composition of assets and liabilities
in the context of various interest rate scenarios. Factors beyond management's
control, such as market interest rates and competition, also have an impact on
interest income and interest expense. A more thorough explanation of the
Company's efforts to manage this risk can be found below in the section
"Asset/Liability Management."
Comparison of Financial Condition at December 31, 2006 versus December 31, 2005
Total assets were $332.8 million at December 31, 2006, a decrease of $61.6
million, or 16%, from $394.4 million as of December 31, 2005. The decrease of
assets resulted from the implementation of the Company's strategic plan to
dispose of unprofitable assets as well as reduce assets to improve capital
ratios. Investment securities decreased by $65.9 million during 2006 to $58.7
million, down from $124.6 million at December 31, 2005. Proceeds from the
maturity and sale of investment securities were used to pay-down borrowings and
fund loan growth that occurred through the first three quarters of the year.
Strong loan originations early in the year offset loan sales late in the
year such that net loans were up slightly to $234.9 million at December 31, 2006
as compared to $234.6 million at December 31, 2005. Loan sales totaling $9.3
million occurred in December 2006 Bancorp's lending activities are focused in
northeastern Massachusetts and southern New Hampshire and are diversified by
loan types and industries. Bancorp continues to focus on originating high
quality loans without compromising credit quality.
Total loans increased primarily due to an increase in commercial loans to
$45.4 million as of December 31, 2006, an increase of $2.0 million, or 5.0%,
from $43.4 million as of December 31, 2005. Bancorp's commercial and commercial
real estate lending strategy stresses quality loan originations to local
businesses, professionals, experienced developers, and investors.
Commercial real estate loans decreased during 2006 because of loan sales
in the fourth quarter of 2006. Commercial real estate loans totaled $106.0
million at the end of 2006 as compared to $108.4 million at the end of 2005. The
decrease of $2.4 million occurred only because of the sale of approximately $9.3
million of commercial real estate loans as part of the Company's strategic plan.
Construction loan activity was steady throughout 2006. Housing activity
and residential construction trends have slowed throughout 2005 and 2006, though
overall trends continue to be favorable. The primary focus of construction
lending continues to relate to the conservative financing of small residential
construction projects for highly rated commercial customers. Construction loans
totaled $19.4 million as of December 31, 2006, up 3% or $0.5 million from $18.9
million at December 31, 2005.
Residential real estate loan balances of $54.9 million as of December 31,
2006 reflected an increase of $1.2 million, or 2%, from $53.7 million as of
December 31, 2005. Residential mortgage loans are originated for the Bank's own
portfolio. Accordingly, the Bank does not aggressively seek long-term fixed rate
mortgage loans. Although mortgage rates stabilized in 2006, historic low rates
in recent past years decreased the number of customers seeking to refinance home
loans.
The high credit quality of the loan portfolio has resulted in the Bank
maintaining a lower allowance for loan losses as a percentage of total loans in
recent years. Non-performing loans and charge-offs have been at minimal levels
for the past two years. Non-performing loans greater than 90 days past due were
$0 at both December 31, 2006 and December 31, 2005.
G-4
The Bank's allowance for loan losses as a percent of loans was 0.77% as of
December 31, 2006 and compared to 0.74% as of December 31, 2005. Management
considers the allowance sufficient based upon the high level of credit quality
of the loan portfolio and the historical trends in credit quality over the past
several years.
Total investment balances were $58.7 million as of December 31, 2006, a
decrease of $65.9 million, or 53%, from $124.6 million as of December 31, 2005.
The decrease in investment balances in 2006 resulted from the use of investment
cash flows to fund loan growth in the first three quarters of 2006 and the sale
of $39.1 million of investments in the fourth quarter of 2006. All investments
were reclassified as available-for-sale, as of September 30, 2006, as part of
the Company's strategic plan. Subsequently, $39.1 million of investments were
sold and the proceeds were used to pay-down FHLB advances. The objectives of the
investment portfolio are to assist with the achievement of liquidity needs,
complement or supplement the interest rate sensitivity of loan and deposit
balances, utilize excess capital and/or liquidity, and generate interest income.
Management assesses other-than-temporary impairment on a quarterly basis.
The impairment of one such security, a collateralized bond obligation which was
purchased in 2004, was identified during the fourth quarter of 2006. A loss of
$0.6 million was recorded as of December 31, 2006 and the security was
subsequently sold in January 2007. The accumulated comprehensive loss related to
the investment portfolio decreased slightly even though interest rates generally
trended up during the first half of 2006 and even though the entire portfolio
was reclassified to available-for-sale. The accumulated comprehensive loss was
$1.0 million as of December 31, 2006 as compared to $1.2 million as of December
31, 2005.
Premises and equipment balances were impacted by two actions undertaken by
the Company in 2006. First, the Company spent over $0.6 million for facade and
other work on the Boston branch building acquired in 2005 as part of the branch
purchase from ABNY. Second, the Company took out of service and wrote-off $0.4
million of fixed assets during the year; this action was taken as part of the
implementation of the strategic plan. Real estate held for sale, which consists
of two properties, is being carried at its estimated fair value, less selling
costs. A valuation reserve of $319,000 was recorded during the year ended
December 31, 2006 because the estimated fair value, less selling costs, was less
than the book value of the assets.
The Company has recorded goodwill and other intangible assets as a result
of purchases in prior years of the Cambridge branch, the Boston branch, and The
de Burlo Group. Goodwill increased by $0.7 million in 2006 to $3.7 million. The
increase primarily resulted from a $1.2 million payment due to the previous
stockholders of The de Burlo Group as a result of the achievement of
profitability goals identified in the 2004 purchase and acquisition agreement.
In addition, finalization of the accounting for the Boston branch purchase
resulted in the reclassification of $0.75 million of goodwill to premises and
equipment and $0.25 million from core deposit intangibles to goodwill. Other
intangible assets decrease by $0.5 million during 2006 because of amortization
as well as the $0.25 million reclassification resulting from the Boston branch
purchase.
The Company believes that it offers deposit products and services that are
competitively priced. However, the competition in the marketplace for core
deposit accounts such as savings accounts, checking accounts, and certain money
market accounts is very aggressive. Accordingly the Company attempts to
distinguish itself by the level of customer service the Company offers in the
geographic areas it serves.
Total deposit balances were $268.9 million as of December 31, 2006, an
increase of $10.0 million, or 4%, from $258.9 million as of December 31, 2005.
Total deposit balances increased primarily due to a term deposit special
promotion which increased certificates of deposit by $50.5 million in April
2006. For the year 2006, term deposits increased by $30.4 million to $112.9
million from $82.5 million at December 31, 2005. All other categories of
deposits decreased in 2006 even though the Company offered competitive products
and services. The Company's financial difficulties may have had an impact on the
Bank's ability to maintain deposits. The Company will continue to develop
products and services which today's consumers desire. In addition, the Company
is committed to improving training opportunities and incentive programs for
employees.
G-5
Total borrowed funds were $42.8 million as of December 31, 2006, a
decrease of $72.5 million, or 63%, from $115.3 million as of December 31, 2005.
Borrowings consist of short- and long-term advances from the Federal Home Loan
Bank that are collateralized by certain mortgage loans and investment securities
and are utilized as either an interest rate risk management tool, a complement
to the volume or mix of retail funding products, or as a source of funding for
leverage opportunities. Long-term Federal Home Loan Bank (FHLB) advances totaled
$16.0 million as of December 31, 2006; this represents a $15.1 million decrease
from $31.1 million as of December 31, 2005. Short-term Federal Home Loan Bank
(FHLB) advances were $0 as of December 31, 2006; this represents a $57.2 million
decrease from December 31, 2005. Other short-term borrowings, primarily
consisting of retail repurchase agreements, decreased slightly to $13.7 million
at December 31, 2006 from $13.9 million at December 31, 2005.
Total stockholder's equity decreased from $19.0 million at December 31,
2005 to $17.9 million as of December 31, 2006 due primarily to a net loss of
$1.2 million in 2006. The decrease of retained earnings due to the operating
loss of $1.2 million was offset by the decrease in accumulated other
comprehensive loss of $0.1 million associated with a net unrealized loss, net of
tax, on available-for-sale securities.
Subsequent to December 31, 2006, the Company raised $1.0 million of
capital through a private placement of common stock and warrants to 18
accredited investors. Specifically, the Company sold an aggregate of 125,000
shares of common stock at a purchase price of $8.00 per share and warrants to
purchase an aggregate of 25,000 shares of common stock at an exercise price of
$8.00 per share. Directors and executive officers of the Company and/or the Bank
purchased an aggregate of $0.5 million of common stock and warrants in the
offering. The Company engaged an independent firm to analyze the terms of the
private placement, including the price at which the shares of common stock were
to be sold, and to issue a fairness opinion related thereto. Net proceeds of
$0.95 million, after expenses of $50,000 were used to increase the capital level
of the Bank. As a result of the private placement and operating income in the
first quarter of 2007, the Bank exceeded, at February 28, 2007, the capital
ratios required by the Bank's Formal Agreement with the OCC.
Comparison of Operating Results for the Years Ended December 31, 2006 and
December 31, 2005
General
Operating results are largely determined by the net interest spread on the
Bancorp's primary assets (loans and investment securities) and its primary
liabilities (consumer deposit balances and Federal Home Loan Bank borrowings).
Operating income is also dependent upon revenue from non-interest related
sources (such as service charges on deposit accounts), the provision for loan
losses, and the increase or decrease in operating expenses.
The net loss for the year-ended December 31, 2006 was $1.2 million
compared with a $45,000 net loss for the year-ended December 31, 2005, an
increase of $1.1 million. The loss for the year resulted from a number of
actions taken by management including the development and implementation of the
strategic plan to return the Company to profitability and improve capital
levels. The impact of these actions includes expenses and charges of $1.0
million for the development and implementation of the strategic plan, $0.6
million for the write-down of the other-than-temporarily impaired security, $0.3
million for the establishment of a reserve for the valuation of the Boston
building held for sale, $0.2 million for employment agency fees, a gain of $0.4
million from the sale of the Trust department, and a $0.1 million negative
provision for loan losses resulting from the decrease of the loan portfolio due
to loan sales. The sum of these items approximates the pre-tax loss of $1.8
million reported in 2006.
For the year-ended December 31, 2006, net interest income decreased by
$0.1 million or 1%. This small decrease was accomplished at a time when
increasing market interest rates were negatively impacting other financial
institutions' net interest margins. The achievement was attained by using cash
flows from low-yielding investments to fund new higher yielding loans. Net
interest rate spread was 2.73% in the year ended December 31, 2006 as compared
G-6
to 2.86% in the year ended December 31, 2005. The decrease was primarily
attributable to the fact that the average rate paid for deposits and borrowings
rose faster than the average yield on earning assets.
A flat and sometimes inverted yield curve, starting in the middle of 2005,
has caused significant pressure on the net interest margin. Short-term market
rates, the primary driver of the Bank's funding costs, have increased while
intermediate and long-term rates, the typical benchmark for loan rates, have
lagged the front end of the curve. The changing mix of assets resulted in a
small decrease of net interest income despite the narrower net interest margin.
The anticipation of a continued trend in 2007 of a flat yield curve is likely to
further pressure the net interest margin.
Interest and Dividend Income
Total interest and dividend income for the year-ended December 31, 2006
was $22.8 million, which was $3.3 million, or 17%, higher than the $19.5 million
reported for year-ended December 31, 2005. This significant increase was
attained even though average earning assets did not increase substantially
during the year. Average earning assets totaled $360.8 million in 2006 as
compared to $357.8 million in 2005. The increase in interest and dividend income
was primarily attributable to the changing mix of earning assets. Investment
cash flows from principal repayments and investment sales were reinvested in new
loan originations. This change in the mix of earning assets started in June 2005
with the purchase of the Boston branch and the associated commercial loans.
Average net loans for the year 2006 totaled $244.9 million as compared to $200.1
million in 2005. Conversely, average investment securities for the year 2006
totaled $108.6 million as compared to $154.2 million in 2005.
The average yields on earning assets increased in 2006 as compared to
2005. The increases occurred primarily because of increasing market rates,
including the prime rate. The average yield on loans was 7.24% in 2006 as
compared to 6.65% in 2005. The average yield on investments was 4.39 % in 2006
as compared to 3.90% in 2005.
Interest Expense
Interest expense was $11.8 million in the year ended December 31, 2006 as
compared to $8.4 million in the same period of 2005. The increase is primarily
attributable to increasing market interest rates. Although market rates
stabilized in mid-2006, increasing market rates throughout 2005 and early 2006
caused most of the Bank's interest bearing liabilities to reprice into higher
rates. The average rate paid on interest-bearing liabilities was 3.59% for the
year ended December 31, 2006 as compared to 2.59% for the same period ended
December 31, 2005.
Interest expense on interest-bearing deposits for the year-ended December
31, 2006 increased to $6.6 million as compared $3.3 million for the year ended
December 31, 2005. This increase was due primarily to an increase in the average
rates paid on certificates of deposit and money market accounts. The average
rate paid on certificates of deposit increased to 4.33% in 2006 from 2.81% in
2005 while the average rate paid on money market accounts increased to 3.21% in
the year ended December 31, 2006 as compared to 2.19% in the year ended December
31, 2005.
Interest expense on borrowed funds for the year ended December 31, 2006
increased to $5.2 million as compared to $5.1 million for the year ended
December 31, 2005. The increase in 2006 was due primarily to higher market
interest rates such that the average cost of Federal Home Loan Bank (FHLB)
advances increased to 5.01% in the year ended December 31, 2006 as compared to
3.73% in the year ended December 31, 2005. The negative impact on interest
expense caused by higher rates was partially offset by lower average outstanding
FHLB advance balances. Average outstanding FHLB advances totaled $71.8 million
for the year ended December 31, 2006 as compared to $105.7 million in the year
ended December 31, 2005.
Provision for loan losses
For the year-ended December 31, 2006, Bancorp recorded a provision for
loan losses of $36,000. Bancorp recorded charge-offs of $32,000 and recoveries
of $84,000 for the year-ended December 31, 2006. The high level of recoveries as
G-7
well as the sale of loans in the fourth quarter negated the need for further
provisions for loan losses. The allowance for loan losses was $1.8 million at
December 31, 2006 and $1.7 million at December 31, 2005. Management considers
the current year loan loss provision to be sufficient to ensure that the
allowance for loan losses is adequate.
Non-interest Income
Total non-interest income decreased $0.9 million to $4.2 million for the
year ended December 31, 2006 as compared to the year ended December 31, 2005.
The decrease was primarily due to net losses on the sale of securities of $0.9
million recorded in the year ended December 31, 2006 as compared to net gains
of $0.1 million in the year ended December 31, 2005. However, there were a
number of other transactions which impacted non-interest income. The Company
recorded a $0.3 million valuation reserve for real estate held for sale as well
as $0.3 million of fixed asset write-downs associated with the implementation of
the strategic plan in the year ended 2006. The impact of the real estate
valuation reserve was offset by the sale in 2006 of the Bank's trust department;
a net gain of $0.4 million was recorded in 2006 for the sale of the trust
department. Investment advisory fees, revenue generated by The de Burlo Group,
increased by 11% to $1.8 million in the year ended December 31, 2006 as compared
to $1.6 million in the same period of 2005. Deposit account fees decreased by
$0.1 million in the year 2006 as compared to 2005; the decrease is primarily
attributable to the impact from providing relationship-priced products to retail
customers in a very competitive consumer banking marketplace.
Non-interest Expense
Total operating expenses increased $0.7 million, or 4%, to $17.1 million
for the year ended December 31, 2006 from $16.3 million in the same period of
2005. Salaries and employee benefits increased $0.4 million due primarily to
$0.3 million of severance for staff reductions resulting from the implementation
of the strategic plan. An increase in full-time equivalent employees in the
first half of the year also caused salary expense to be higher. An additional
factor was the slightly higher staff level in the first half of the year.
Full-time equivalent employees totaled 129 at December 31, 2005, 132 at June 30,
2006, and 108 at December 31, 2006. Employee benefits costs, particularly health
insurance premiums, increased in 2006. The Company's cost to provide health
insurance to employees increased 13% from $0.6 million to $0.7 million.
Professional fees increased $0.5 million, or 50%, to $1.5 million for the
year ended December 31, 2006. The area which grew most significantly was legal
and consulting work related to the Bank's interaction with the OCC. Such costs
were approximately $0.3 million. OCC assessments increased due to the Bank's
current financial position, placement agency fees paid to retain new loan
officers and the CFO totaled approximately $0.2 million in 2006.
Total occupancy and equipment expenses decreased $0.4 million, or 12%, to
$2.6 million for the year ended December 31, 2006 due primarily to high levels
of amortization in 2005 for leasehold improvements in three Wal-Mart branches
which were identified for closure. Accelerated leasehold depreciation in 2005
totaled $0.5 million. Occupancy expenses related to the Boston branch building,
such as utilities and real estate taxes were $0.4 million in 2006 as compared to
$0.2 million in 2005; the building was only owned for six months in 2005.
Total data processing expenses were level at $1.1 million for the years
ended December 31, 2006 and 2005.
The Bank prepaid $16.3 million of Federal Home Loan Bank advances in the
fourth quarter of 2006. The Bank incurred $0.2 million of prepayment penalties.
No such prepayment penalties were paid in 2005.
Total other general and administrative expenses increased $0.1 million, or
7%, to $1.4 million for the year ended December 31, 2006. This increase was
primarily due to an increase of sales training expenses for branch employees in
2006.
G-8
Income Taxes
The income taxes benefit for the year ended December 31, 2006 was $0.7
million as compared to $0.3 million in 2005. The larger benefit is primarily
attributable to the larger loss experienced in 2006. The effect tax benefit rate
for the year ended December 31, 2006 was 37.5% as compared to 86.8% for the year
ended December 31, 2005. The decrease was due primarily to the decline in
tax-exempt income and dividend income that is eligible for tax deductions, and
the relative amounts of these items in relation to pre-tax income.
Asset/Liability Management
A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets generally have longer terms to maturity than its primary
source of funds, i.e., deposit liabilities, increases in general interest rates
will generally result in an increase in the Bank's cost of funds before the
yield on its asset portfolio increases. A continual trade-off, which is managed
and monitored on an ongoing basis, exists between exposure to interest rate risk
and current income. In general, during periods with a normalized yield curve, a
wider mismatch between the re-pricing periods of interest rate sensitive assets
and liabilities can produce higher current net interest income. In the current
interest rate environment, whereby the yield curve is inverted, net interest
margin is typically narrower. 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 senior management and one board member. The Committee
discusses the asset/liability mix on the balance sheet and reviews the impact of
projected behavioral changes in the components of the balance sheet as a result
of changes in interest rates.
Certain retail strategies were implemented in 2006 to generate deposit
growth, particularly in new markets. As a result of significant new deposit
funds, the Bank was able to pay down Federal Home Loan Bank (FHLB) advances and
improve the Bank's liquidity position.
The principal strategies management utilizes to manage interest rate risk
with respect to the loan portfolio is associated with pricing and structure.
Although loans originated at relative low points in the interest rate cycle
produce lower short-term yields than those originated at higher points in the
rate cycle, prepayments into low rates occur more rapidly on higher rate loans
as the incentive to refinance is apparent. Bancorp has not positioned itself as
a market leader with respect to pricing long-term fixed-rate residential
mortgages in the current environment. However, Bancorp has and will continue to
originate fixed-rate loans for its portfolio in order to serve its customers,
preferring ten or fifteen year final maturities. Additional strategies employed
to mitigate loan interest rate risk in this environment includes targeting
shorter amortization periods, increasing the frequency of interest rate resets
or shortening the period of time until the first interest rate reset date, and
encouraging the origination of floating rate loans.
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. Bancorp primarily relies upon the investment
securities portfolio to balance the interest rate risks produced by retail loan
and deposit activity. As of December 31, 2006, the interest rate risk of the
balance sheet in varying interest rate scenarios is the least it has been in
several quarters as management has positioned the net interest income stream for
reduced volatility regardless of the direction of interest rates.
On a quarterly basis, an outside advisor performs financial modeling of
the balance sheet using certain industry data assumptions. The output from the
models, which project the Bank's financial performance over certain periods
under certain interest rate environments, are reviewed and analyzed as a basis
for targeting certain product structures in the future, as well as commenting on
pricing decisions in order to encourage or discourage customer choices.
G-9
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans and investment securities, sales of
securities, maturities and early calls of securities, and funds provided from
operations. While scheduled repayments of loans and investment securities are
predictable sources of funds, prepayments on loans and investment securities as
well as other behavioral variables on certain other balance sheet component are
not predictable with certainty. For example, the general level of interest
rates, economic conditions, and competition largely influence prepayments on
loans and investment securities and the renewal rate on term deposits. The Bank
primarily uses its liquidity resources to fund existing and future loan
commitments, to fund net deposit outflows, to invest in other interest-earning
assets, to maintain liquidity, and to pay operating expenses.
The Formal Agreement required the Bank to formulate a liquidity
contingency plan. The plan calls for the Bank to manage loan originations and
the level of the investment portfolio as well as FHLBB advance availability so
that deposit flows can be accommodated.
The Bank utilizes advances from the Federal Home Loan Bank of Boston (the
"FHLBB") primarily in connection with its management of the interest rate
sensitivity of its assets and liabilities, to complement or supplement the
volume of retail funding, as well as to selectively capitalize on leverage
opportunities. Total advances outstanding at December 31, 2006 amounted to $16.0
million. The Bank's ability to borrow from the FHLBB is dependent upon the
amount and type of collateral the Bank has to secure the borrowings. Such
collateral consists of, but is not limited to, one-to-four family owner-occupied
residential mortgage loans and government-sponsored enterprise obligations. As
of December 31, 2006, the Bank's total borrowing capacity through the FHLBB was
$45.9 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. The Formal Agreement does require that the Bank get
permission of the OCC and FDIC prior to accepting brokered deposits.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term investments, government-sponsored enterprise 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. On a monthly basis, the Bank
currently generates an average of approximately $1.4 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.
Although the Bank did not attain the Formal Agreement-mandated minimum
capital requirements by December 31, 2006, the OCC did grant an extension of the
date to achieve the capital ratios until March 31, 2007. The ratios were
exceeded as of February 28, 2007. Bancorp continues to exceed all applicable
regulatory capital requirements. The table at the top of the next page presents
the capital ratios at December 31, 2006 and 2005, for Bancorp and the Bank, as
well as the minimum regulatory requirements.
G-10
Minimum Capital
Minimum Requirements
Capital Per OCC
Actual Requirements Formal Agreement
------------------------ ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ------------ -------- ------------ ---------
(Dollars in thousands)
December 31, 2006:
Total capital to risk weighted assets:
Bank $ 25,026 10.7% $ 20,097 8.0% $ 27,634 11.0%
Consolidated 28,334 11.2 20,169 8.0 N/A N/A
Tier 1 capital to risk weighted assets:
Bank 26,853 10.0 10,049 4.0 25,122 10.0
Consolidated 19,810 7.9 10,085 4.0 N/A N/A
Tier 1 capital to average assets:
Bank 26,853 6.6 15,208 4.0 30,415 8.0
Consolidated 19,810 5.2 15,255 4.0 N/A N/A
December 31, 2005:
Total capital to risk weighted assets:
Bank $ 28,512 10.5% $ 21,723 8.0% $ 27,154 10.0%
Consolidated 29,671 10.9 21,786 8.0 N/A N/A
Tier 1 capital to risk weighted assets:
Bank 26,773 9.9 10,861 4.0 16,292 6.0
Consolidated 21,638 8.0 10,893 4.0 N/A N/A
Tier 1 capital to average assets:
Bank 26,773 6.8 15,807 4.0 19,759 5.0
Consolidated 21,638 5.5 15,839 4.0 N/A N/A
Off-Balance Sheet Arrangements
Bancorp 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 Bancorp. 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. Bancorp evaluates each customer's creditworthiness on a
case-by-case basis. At December 31, 2006, the Bank had $5.0 million of
outstanding commitments to originate loans and $41.1 million of unadvanced loans
and 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
The Bank is subject to a Formal Agreement with the OCC.
The Bank is subject to a formal agreement with the OCC. The direct costs
of compliance include legal and consulting fees, higher FDIC insurance rates,
and staffing costs, which all decrease earnings and reduce the capital base.
Other costs include significant dedication of resources that shift the focus of
the organization away from growing the customer base to ensuring that heightened
regulatory demands are satisfied. The agreement restricts the ability of the
Bank to pay dividends without prior OCC approval and to pursue certain growth
opportunities. In addition, it requires the Bank to maintain higher levels of
capital than other financial institutions without similar regulatory issues. As
of the date hereof, the Bank has achieved all of the major requirements of the
agreement, including capital ratio requirements which were exceeded on February
28, 2007.
G-11
The agreement calls for on-going compliance with its terms. Noncompliance
with the agreement may adversely affect Bancorp and the Bank.
The value of goodwill and other intangible assets may need to be written down.
The Company recorded goodwill and other intangible assets at the time of
purchase of The de Burlo Group and the Boston branch. A substantial portion of
the purchase price of the investment management company was allocated to
goodwill and other intangible assets. If we determine that goodwill or other
intangible assets are impaired at a future date, we will have to record a
write-down of value through the Company's income statement.
Our expansion into the investment management business poses several risks.
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 more than 50% of its revenue from five Massachusetts
municipal pension funds. The loss of these clients would 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 of retention with 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 with the 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.
Despite our due diligence on the Boston branch 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.
If our allowance for loan losses is not sufficient to cover actual loan losses,
our earnings would decrease.
In an attempt to mitigate any loan losses we may incur, we maintain an
allowance for loan losses based on, among other things, national and regional
economic conditions, historical loss experience and delinquency trends among
loan types. However, we cannot predict loan losses with certainty and we cannot
assure you that charge offs in future periods will not exceed the allowance for
loan losses. In addition, regulatory agencies, as an integral part of their
examination process, review our allowance for loan losses and may require
additions to the allowance based on their judgment about information available
to them at the time of their examination. Factors that require an increase in
our allowance for loan losses could reduce our earnings.
Economic or other external factors, deterioration in credit quality, or
appropriate changes in the reserve estimation process as a result of changes in
assumptions, as well as other possible factors, may cause the loan loss
allowance to be increased through charges to current earnings by increasing the
loan loss provision. Despite our due diligence on the Boston branch 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 Bancorp operates in its new geographic loan footprint, including Boston,
Massachusetts and Portsmouth, New Hampshire, and hires new commercial lenders,
the maintenance of high credit quality and continued growth in loan balances is
not assured.
We have experienced significant growth in assets, acquired an investment
management business, purchased two new branches in two non-contiguous markets,
and opened a branch 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.
G-12
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 scrutiny may increase.
The Company implemented a strategic plan in the third quarter of 2006 to
address the concerns for poor profitability. Initiatives to improve revenues
and/or reduce expenses may not be successful in improving the Company's
profitability. Poor profitability may impact the Company's ability to retain or
attract customers and 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, or suburban office space vacated by the Bank as part of the
implementation of the strategic plan, on the terms or lease-up ratio we
anticipate. Lower than anticipated rental income from these locations 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 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.
Bancorp 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 continued focus on growth
in core deposit categories will generate sufficient growth in targeted deposit
categories and continued growth in deposit fee income.
Bancorp 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.
Our capital and expense budgets may limit our ability to compete with larger
financial institutions.
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.
G-13
Bancorp 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 Bank has entered into an agreement with its primary regulator, the
Office of the Comptroller of the Currency (OCC). The Bank has achieved all of
the major requirements of the Agreement, including capital ratio requirements
which were exceeded in February 2007. The agreement calls for on-going
compliance with the Agreement terms. While management will diligently attempt to
maintain compliance with the terms of the Agreement, it is possible that
circumstances might arise which would make the Bank no longer in compliance with
the Agreement. Further regulatory action could result in further limitations
being imposed upon the Bank.
The Bancorp is dependent upon the Bank for cash to pay interest on subordinated
debentures.
The Bancorp raised capital by issuing trust preferred stock which is
supported by subordinated debentures. The Bancorp's primary source of cash to
pay the interest on the subordinated debentures is the Bank. The Agreement with
the OCC requires that the OCC grant approval prior to the Bank declaring
dividends to its parent, Bancorp. The OCC's withholding of permission to pay a
dividend could cause the Bancorp to make an election to defer interest payments
on the subordinated debentures unless an alternative source of cash is
identified. No guarantee can be made that the OCC will approve future dividends
to the Bancorp.
The interest rate environment may reduce our earnings or liquidity or Bancorp
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 Bancorp. 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.
Bancorp 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.
Bancorp 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.
Bancorp 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 it deposits. These trends may reduce
net interest income in the future.
G-14
Given the strong emphasis on generating new loans, the risk exists that
loan demand could place a strain on liquidity. Bancorp may have to slow its pace
of new loan approvals and thus may generate less interest income.
The Company's information systems may experience an interruption or breach in
security.
We rely heavily on technology and information systems to conduct our
business. Any failure, interruption or breach in security of these systems could
result in failures or disruptions in our customer relationship management,
general ledger, deposit, loan and other systems. While we have policies and
procedures designed to prevent or limit the effect of the failure, interruption
or security breach of our systems, there can be no assurance that any such
failures, interruptions or security breaches will not occur. The occurrence of
any failures, interruptions or security breaches could damage our reputation,
result in a loss of customer business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial liability, any
of which could have a material adverse effect on our financial condition and
results of operations.
Our internal controls may be ineffective.
We regularly review and update our internal controls, disclosure controls
and procedures and corporate governance policies and procedures. As a result, we
may incur increased costs to maintain and improve our controls and procedures.
Any system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of our
controls or procedures or failure to comply with regulations related to controls
and procedures could have a material adverse effect on our business, results of
operations or financial condition.
The Bancorp may require additional capital in the future, but that capital may
not be available when it is needed.
Bancorp and the Bank are required by Federal regulatory authorities to
maintain adequate levels of capital to support their operations. The Company may
at some point want or need to raise additional capital to comply with regulatory
requirements, including requirements under the Bank's agreement with the OCC, or
to support growth. Bancorp's ability to raise additional capital, if needed,
will depend on conditions in the capital markets at that time, which are outside
Bancorp's control, and on its financial performance. Accordingly, Bancorp cannot
assure you of its ability to raise additional capital if needed or on terms
acceptable to Bancorp.
The Bancorp's inability to file audited financial statements for the Boston
branch of Atlantic Bank may impair the Company's ability to raise capital.
Typical of the banking industry, Bancorp is unable to obtain audited
financial statements of a retail branch. Under SEC rules, Bancorp 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 through a
private offering of its securities to accredited investors.
Your ability to sell your shares of common stock at the times and in the amounts
you desire may be limited.
Although our common stock is listed for trading on the Over-the-Counter
Bulletin Board, the trading volume in our common stock is thin and average daily
volumes are much lower than those of other larger financial services companies.
We are not listed on the NASDAQ or any other securities exchange. While there
are investment securities brokers/dealers who make a market in our common stock,
there is no active trading market for our common stock and thus you may not be
able to sell the shares of common stock that you own at the times and in the
amounts you would otherwise like to.
Our directors and executive officers beneficially own a significant portion of
our common stock.
Our directors and executive officers beneficially own 53.0% of our common
stock. As a result, such stockholders would most likely control the outcome of
corporate actions requiring shareholder approval, including the election of
directors and the approval of significant corporate transactions, such as a
merger or sale of all or substantially all of our assets. We can provide no
assurance that the investment objectives of such stockholders will be the same
as our other stockholders.
G-15
Item 7. Financial Statements.
Table of Contents
Page
----
Report of Independent Registered Public Accounting Firm G-17
Consolidated Balance Sheets G-18
Consolidated Statements of Operations G-19
Consolidated Statements of Changes in Stockholders' Equity G-20
Consolidated Statements of Cash Flows G-21
Notes to Consolidated Financial Statements G-22
G-16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
First Ipswich Bancorp:
We have audited the accompanying consolidated balance sheets of First Ipswich
Bancorp and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Ipswich
Bancorp and subsidiaries as of December 31, 2006 and 2005, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 31, 2007
G-17
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
ASSETS
2006 2005
--------- ---------
(In thousands, except share data)
Cash and due from banks $ 11,335 $ 11,179
Federal funds sold 2,164 82
--------- ---------
Total cash and cash equivalents 13,499 11,261
Certificates of deposit 3,378 3,295
Securities available for sale, at fair value 53,962 88,375
Securities held to maturity, at amortized cost -- 28,769
Federal Home Loan Bank stock, at cost 3,927 6,647
Federal Reserve Bank stock, at cost 774 774
Loans, net of allowance for loan losses of $1,827 and $1,739 234,890 234,613
Real estate held for sale 5,727 4,486
Premises and equipment, net 4,099 4,758
Goodwill 3,641 2,952
Other intangible assets 1,761 2,234
Other assets 7,117 6,240
--------- ---------
Total assets $ 332,775 $ 394,404
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 268,868 $ 258,860
Short-term borrowings 13,720 71,262
Long-term borrowings 16,047 31,087
Subordinated debentures 13,000 13,000
Other liabilities 3,269 1,235
--------- ---------
Total liabilities 314,904 375,444
--------- ---------
Commitments and contingencies (Notes 5, 12 and 13)
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 shares issued 2,240 2,240
Additional paid-in capital 9,936 9,936
Retained earnings 6,843 8,054
Accumulated other comprehensive loss (1,037) (1,159)
Treasury stock, at cost (20,490 shares) (111) (111)
--------- ---------
Total stockholders' equity 17,871 18,960
--------- ---------
Total liabilities and stockholders' equity $ 332,775 $ 394,404
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
G-18
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2006 and 2005
2006 2005
-------- --------
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 17,737 $ 13,301
Interest on debt securities:
Taxable 3,968 4,741
Tax-exempt 468 702
Dividends on equity securities 336 571
Other interest 313 179
-------- --------
Total interest and dividend income 22,822 19,494
-------- --------
Interest expense:
Interest on deposits 6,561 3,317
Interest on borrowed funds 4,279 4,335
Interest on subordinated debentures 943 733
-------- --------
Total interest expense 11,783 8,385
-------- --------
Net interest income 11,039 11,109
Provision for loan losses 36 240
-------- --------
Net interest income after provision for loan losses 11,003 10,869
-------- --------
Non-interest income:
Service charges on deposit accounts 1,185 1,321
Investment advisory fees 1,800 1,620
Credit card fees 778 741
Trust fees 382 472
Non-deposit investment fees 290 310
Gain (loss) on securities sold or written down, net (945) 69
Rental income 370 193
Derivative fair value adjustment 364 139
Gain on sale of trust department 395 --
Valuation allowance - real estate held for sale (319) --
Write-down of premises and equipment (349) --
Miscellaneous 294 250
-------- --------
Total non-interest income 4,245 5,115
-------- --------
Non-interest expenses:
Salaries and employee benefits 8,999 8,576
Occupancy and equipment 2,629 2,920
Data processing 1,114 1,120
Professional fees 1,469 978
Credit card interchange 510 500
Advertising and marketing 396 535
Telephone 402 379
Prepayment penalties on borrowings 209 --
Other general and administrative 1,369 1,317
-------- --------
Total non-interest expenses 17,097 16,325
-------- --------
Loss before income taxes (1,849) (341)
Benefit for income taxes (693) (296)
-------- --------
Net loss $ (1,156) $ (45)
======== ========
Weighted average common shares outstanding:
Basic 2,220 2,220
======== ========
Diluted 2,220 2,220
======== ========
Loss per share:
Basic $ (0.52) $ (0.02)
======== ========
Diluted $ (0.52) $ (0.02)
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
G-19
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2006 and 2005
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Loss Stock Total
------------ ------------- ---------- ---------------- ---------- -----------
(In thousands, except share data)
Balance at December 31, 2004 $ 2,240 $ 9,936 $ 8,210 $ (457) $ (111) $19,818
---------
Comprehensive loss:
Net loss - - (45) - - (45)
Unrealized loss on securities
available for sale, net of
reclassification adjustment
and tax effect - - - (702) - (702)
---------
Total comprehensive loss (747)
---------
Cash dividends declared ($.05 per share) - - (111) - - (111)
--------- ------------- ---------- ----------- -------- ---------
Balance at December 31, 2005 2,240 9,936 8,054 (1,159) (111) 18,960
---------
Comprehensive loss:
Net loss - - (1,156) - - (1,156)
Unrealized gain on securities
available for sale, net of
reclassification adjustment
and tax effect - - - 122 - 122
---------
Total comprehensive loss (1,034)
---------
Cash dividends declared ($.025 per share) - - (55) - - (55)
--------- ------------- ---------- ----------- -------- ---------
Balance at December 31, 2006 $ 2,240 $ 9,936 $ 6,843 $ (1,037) $ (111) $17,871
========= ============= ========== =========== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
G-20
FIRST IPSWICH BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006 and 2005
2006 2005
-------- --------
(In thousands)
Cash flows from operating activities:
Net loss $ (1,156) $ (45)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for loan losses 36 240
Gain (loss) on securities sold or written down, net 945 (69)
Depreciation and amortization of premises and equipment 660 1,267
Valuation reserve for real estate held for sale 319 --
Net amortization of securities, including
certificates of deposit 115 220
Deferred tax (benefit) provision (656) 27
Derivative fair value adjustments (364) (139)
Amortization of intangible assets 222 184
Write-down of premises and equipment 349 --
Net change in other assets and other liabilities 913 (1,139)
-------- --------
Net cash provided by operating activities 1,383 546
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (2,887) (48,115)
Sales 47,287 68,483
Maturities, calls and paydowns 15,734 44,002
Activity in held-to-maturity securities:
Maturities, calls and paydowns 2,094 3,075
Redemption (purchase) of Federal Home Loan Bank stock 2,720 (1,057)
Purchase of Federal Reserve Bank stock -- (225)
Loan originations, net of repayments (11,572) (22,638)
Proceeds from sales of portfolio loans 11,259 --
Additions to premises and equipment, net (1,151) (177)
Net cash paid in acquisition of Boston branch -- (29,233)
-------- --------
Net cash provided by investing activities 63,484 14,115
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 10,008 (16,863)
Net change in short-term borrowings (57,542) 4,794
Proceeds from long-term FHLB advances 10,000 --
Repayment of long-term debt (25,040) (6,296)
Proceeds from issuance of subordinated debentures -- 7,000
Repayment of subordinated debentures -- (1,000)
Cash dividends paid (55) (111)
-------- --------
Net cash used in financing activities (62,629) (12,476)
-------- --------
Net change in cash and cash equivalents 2,238 2,185
Cash and cash equivalents at beginning of year 11,261 9,076
-------- --------
Cash and cash equivalents at end of year $ 13,499 $ 11,261
======== ========
Supplemental disclosures:
Interest paid $ 11,662 $ 8,255
Income taxes paid, net (344) 107
Reclassification of securities from held-to-maturity to available-for-sale 26,566 --
Deferred payment for acquisition of de Burlo included in goodwill and other liabilities 1,188 --
The accompanying notes are an integral part of these consolidated financial
statements.
G-21
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2006 and 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Operating Segments
First Ipswich Bancorp (the "Company") is a Massachusetts corporation
organized in 1985 primarily to become the holding company of The First
National Bank of Ipswich (the "Bank"). The Bank is a federally chartered
bank incorporated in 1892 and is headquartered in Ipswich, Massachusetts.
The Bank operates its business from offices located in the northeastern
and greater Boston areas of Massachusetts and southern New Hampshire. The
Bank is engaged principally in the business of attracting deposits from
the general public and investing those deposits in residential and
commercial real estate loans, and in small business, consumer and credit
card loans.
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," establishes
standards for the way that public business enterprises report information
about operating segments in annual and interim financial statements. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. Generally, financial
information is to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Management historically evaluated the Company's performance and
allocated resources based on a single segment concept. On December 31,
2004, the Bank completed its acquisition of The de Burlo Group, Inc. ("de
Burlo"). The activities of The de Burlo Group are reflected as a separate
operating segment in both 2006 and 2005. (See Note 19.) The Company does
not derive revenues from, or have assets located in foreign countries, nor
does it derive revenues from any single customer that represents 10% or
more of the Company's total revenues.
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company,
the Bank and the Bank's subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
Company's wholly-owned Trust subsidiaries (see Note 9) are accounted for
using the equity method.
Reclassifications
Certain amounts in the 2005 consolidated financial statements have been
reclassified to conform to the 2006 presentation.
Use of Estimates
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses,
the valuation of deferred tax assets and the recognition of impairment
related to securities and intangible assets.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold with original
maturities of less than ninety days.
The Bank is required to maintain average cash balances on hand or on
deposit with the Federal Reserve Bank. At December 31, 2006 and 2005,
these reserve balances amounted to $3,925,000 and $4,629,000,
respectively.
G-22
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Certificates of Deposit
Certificates of deposit, excluding embedded derivatives, are carried at
amortized cost. Embedded derivatives are reflected at fair value.
Securities
Debt securities that management has the positive intent and ability to
hold to maturity are classified as "held to maturity" and recorded at
amortized cost. All other securities are classified as "available for
sale" and recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income (loss).
During the third quarter of 2006, the Company redesignated approximately
$26.6 million of its held-to-maturity portfolio as available-for-sale.
This redesignation will limit the ability of the Bank to classify future
security purchases as "held to maturity." Accordingly, the Company is
restricted from classifying securities as held-to-maturity for the
foreseeable future.
Purchase premiums and discounts are recognized in interest income using
the interest method over the terms of the securities. Declines in the fair
value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other-than-temporary are reflected in earnings
as realized losses. Gains and losses on the sale of securities are
recorded on the trade date and are determined using the specific
identification method.
Loans
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
in Ipswich and surrounding communities. The ability of the Company's
debtors to honor their contracts is dependent upon the real estate and
general economic conditions in these areas.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal balance adjusted by the allowance for loan losses
and net deferred loan origination fees or costs. Loan origination fees,
net of certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield over the contractual lives of the
loans using the interest method.
Interest on loans is recognized on the accrual method based on the
principal amount outstanding. Accrual of interest is discontinued on a
loan, and any balance of accrued interest is reversed against current
earnings, when management believes that the collection of interest is
doubtful. This generally occurs when the loan becomes ninety days past
due, based on the contractual terms of the loan, unless the loan is
well-secured and in the process of collection.
The Bank considers all commercial loans that are in non-accrual status and
all troubled debt restructurings as impaired loans. Additionally, the Bank
reviews all other classified and delinquent assets for potential
impairment. Cash receipts of interest income on impaired loans are
credited to principal to the extent the collectibility of the net carrying
amount of the loan is considered doubtful. When recognition of interest
income on an impaired loan on the cash basis is appropriate, the amount of
income that is recognized is limited to that which would have been accrued
on the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not applied
to reduce the net carrying amount of the loan are recorded as recoveries
of charge-offs until the charge-offs are fully recovered.
G-23
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Loan Losses
The allowance for loan losses is based on estimates, and ultimate losses
may vary from the current estimates. The adequacy of the allowance is
evaluated regularly by management. As adjustments become necessary, they
are reported through a provision or credit for loan losses reflected in
the results of operations for the period in which they become known.
Factors considered in evaluating the adequacy of the allowance include
previous loss experience, current economic conditions and their effect on
borrowers, the performance of individual loans in relation to contract
terms and the estimated fair values of any collateral held by the Bank.
Losses are charged against the allowance when management believes that
uncollectibility is confirmed. Subsequent recoveries, if any, are credited
to the allowance.
Key elements of the estimates, including those used in independent
appraisals, are dependent upon the economic conditions prevailing at the
time of the estimates. The inherent uncertainties in the assumptions
relative to real estate project sales, prices or rental rates and the
ability of various borrowers to continue to perform under their current
contractual lending arrangements may result in the ultimate realization of
amounts on certain loans that are significantly different from the amounts
reflected in these consolidated financial statements.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate. As a
practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than
the recorded balance of the loan, the impairment is recorded through a
valuation allowance.
The allowance consists of specific, general and unallocated loss
components. The specific loss component relates to loans that are
classified as impaired, for which an allowance is established when the
discounted cash flows (or collateral value or observable market price) of
the impaired loan is lower than the carrying value of that loan. The
general component covers non-classified loans and is based on historical
loss experience adjusted for qualitative factors. Qualitative factors
include (1) economic trends and industry conditions, (2) the levels of and
trends in delinquent loans, impaired loans and charge-offs, (3) trends in
the volume and terms of loans, (4) effects of changes in underwriting
standards, policy exceptions and lending policy, (5) the experience of
lending management staff and (6) effects of changes in credit
concentrations. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses.
The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the
methodologies for estimating specified and general losses in the
portfolio. Management continues to monitor the acquired Boston portfolio
separately going forward and will make adjustments to these reserves as
warranted.
Real Estate Held for Sale
Real estate held for sale consists of the land and building acquired in
the Boston branch and a parcel of land behind the Company's main office.
The properties are being carried at the lower of depreciated cost or the
estimated fair value less selling costs. A valuation allowance has been
established as appropriate.
Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements and equipment
are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization is computed principally on the straight-line
method over the estimated useful lives of the related assets or the terms
of the leases, if shorter. Expected terms include lease options to the
extent that the exercise of such options is reasonably assured.
G-24
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill and Other Intangible Assets
Goodwill is associated with the acquisitions of The de Burlo Group and the
Boston branch and is evaluated for impairment on an annual basis.
Intangible assets refer to customer relationships acquired in association
with The de Burlo Group and core deposit intangibles related to the
Cambridge and Boston branch acquisitions which are being amortized on a
straight-line basis over their estimated lives. These identified
intangible assets will be evaluated for impairment whenever events or
changes in circumstances warrant such evaluation.
Derivative Financial Instruments
All derivative financial instruments, such as interest rate agreements and
embedded derivatives, are recognized as assets or liabilities in the
consolidated balance sheet and measured at fair value. At times, the
Company enters into interest rate agreements to protect against future
fluctuations in the interest rates of specifically identified assets or
liabilities. The Company records the changes in value of its interest rate
agreements and embedded derivatives in miscellaneous income in the
accompanying consolidated statements of operations.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted accordingly through the provision for income taxes. Deferred tax
assets are evaluated to determine whether it is "more likely than not"
that a tax return benefit would be realized when the deferred items
reverse. Evaluation considerations include the availability of historical
and projected taxable income to offset the deferred items in the periods
they are expected to reverse. To the extent it is determined that it is
more likely than not that tax return benefits would not be realized upon
the reversal of the deferred items, a valuation reserve is recorded. No
valuation reserve was recorded at December 31, 2006 and 2005.
Stock Option Plans
During 2004, the Board of Directors approved two stock option plans, the
2004 Incentive Stock Option Plan for Key Employees and the 2004 Directors
Plan. These plans provide for the granting of up to 220,000 options to
employees and directors to purchase shares of the Company's common stock.
Options are granted at the market price at the time of grant based on the
most recent arms-length trade price. Options expire after ten years and
vesting is determined upon grant at the Board of Directors' discretion. No
options have been granted from either of the plans.
Earnings Per Common Share and Warrants
Basic earnings per share represent income available to common stockholders
divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflect additional common shares
that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from
the assumed issuance.
G-25
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Common Share and Warrants (concluded)
There were no dilutive stock options or awards during 2006 or 2005.
Trust Assets
The Trust department was sold during the fourth quarter of 2006. Trust
assets held in a fiduciary or agent capacity are not included in the
accompanying December 31, 2005 consolidated balance sheet because they
were not assets of the Company.
Comprehensive Income/Loss
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the consolidated balance sheet, such items, along with
net income, are components of comprehensive income (loss).
The components of other comprehensive income (loss) and related tax
effects are as follows:
Years Ended December 31,
------------------------
2006 2005
------- -------
(In thousands)
Unrealized holding losses on
available-for-sale securities $ (756) $(1,005)
Reclassification adjustment for losses (gains)
realized in income 945 (69)
------- -------
Net unrealized losses (gains) 189 (1,074)
Tax effect (67) 372
------- -------
Net-of-tax amount $ 122 $ (702)
======= =======
Recent Accounting Pronouncements
In July 2006 the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48) which clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements
in accordance with FASB Statement No. 109, "Accounting for Income Taxes".
FIN 48 prescribes a recognition threshold and measurement attributable for
the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and is not
expected to have a significant impact on the Company's financial
statements.
In September 2006 FASB issued Statement of Financial Account Standards
No. 157, "Fair Value Measurements" (SFAS 157) which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. SFAS 157 is effective for the Company on January 1, 2008 and
is not expected to have a significant impact on the Company's financial
statements.
G-26
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
In September 2006 the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108 ("SAB 108") which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a potential current year
misstatement. Prior to SAB 108, Companies might evaluate the materiality
of financial statement misstatements using either the income statement or
balance sheet approach, with the income statement approach focusing on new
misstatements added in the current year, and the balance sheet approach
focusing on the cumulative amount of misstatement present in a company's
balance sheet. Misstatements that would be material under one approach
could be viewed as immaterial under another approach, and not be
corrected. SAB 108 now requires that companies view financial statement
misstatements as material if they are material according to either the
income statement or balance sheet approach. SAB 108 is applicable to all
financial statements issued by the Company for the year ended December 31,
2006.
In February 2007 the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - including an amendment of
FASB Statement No. 115", which provides companies with an option to report
selected financial assets and liabilities at fair value. Statement No. 159
also establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. This statement is
effective for the Company on January 1, 2008. The Company has not
determined the impact of implementing adopting SFAS No. 159 on its
consolidated financial statements.
The FASB has ratified EITF 06-4, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements," and EITF 06-10, "Accounting for Collatoral Assignment
Split-Dollar Life Insurance Arrangements," which address accounting for
arrangements whereby the employer purchases a policy to insure the life of
an employee, and separately enters into an agreement to split the policy
benefits between the employer and the employee. These pronouncements,
effective for fiscal years beginning after Decemeber 15, 2007, indicate
that an obligation arises as a result of a substantive agreement with an
employee to provide future postretirement benefits and that a liability
should be recognized in accordance with applicable authoritative guidance.
Management does not expect that such pronouncements will have a
significant impact on the Company's consolidated financial statements.
2. SUBSEQUENT EVENTS
Cambridge, Massachusetts Branch
On January 10, 2007 the Company entered into an agreement to sell its
branch located in Cambridge, Massachusetts. The sale closed on March 30,
2007. Approximately $18 million of deposits and repurchase agreements and
$12 million of loans were transferred upon the consummation of the branch
sale. No material gain or loss was expected to be recognized on the branch
sale.
Private Placement of Common Stock
On January 26, 2007 the Company raised $1 million of new capital through a
private placement of 125,000 shares of common stock. The net proceeds of
the private placement totaled $947,000 after costs of $53,000. Net
proceeds were invested as additional capital in the Company's primary
subsidiary, The First National Bank of Ipswich.
Londonderry, New Hampshire Branch
On February 5, 2007 the Company announced that it is closing its branch
located in Londonderry, New Hampshire. In conjunction with that closing,
the Bank sold $15.0 million of commercial real estate loans and commercial
loans. A net gain of $300,000 was recognized on the sale of the loans. It
is expected that the branch will close in May, 2007.
G-27
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SECURITIES
The amortized cost and estimated fair value of securities, with gross
unrealized gains and losses, follows:
December 31, 2006
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
(In thousands)
Securities Available-for-Sale
- -----------------------------
Government-sponsored
enterprise obligations $ 10,550 $ -- $ (257) $ 10,293
Mortgage- and asset-backed
securities 39,391 50 (1,134) 38,307
Corporate bonds 1,845 -- (100) 1,745
Municipal bonds 3,756 12 (151) 3,617
-------- -------- -------- --------
$ 55,542 $ 62 $ (1,642) $ 53,962
======== ======== ======== ========
December 31, 2005
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
(In thousands)
Securities Available-for-Sale
- -----------------------------
Government-sponsored
enterprise obligations $ 23,287 $ -- $ (347) $ 22,940
Mortgage- and asset-backed
securities 64,571 28 (1,342) 63,257
Corporate bonds 1,816 -- (103) 1,713
Municipal bonds 369 -- (22) 347
-------- -------- -------- --------
Total debt securities 90,043 28 (1,814) 88,257
Marketable equity securities 101 17 -- 118
-------- -------- -------- --------
$ 90,144 $ 45 $ (1,814) $ 88,375
======== ======== ======== ========
Securities Held-to-Maturity
- ---------------------------
Government-sponsored
enterprise obligations $ 3,000 $ -- $ (147) $ 2,853
Municipal bonds 15,128 150 (374) 14,904
Mortgage-backed securities 10,641 53 (437) 10,257
-------- -------- -------- --------
$ 28,769 $ 203 $ (958) $ 28,014
======== ======== ======== ========
G-28
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (continued)
Contractual maturities of debt securities at December 31, 2006 are
summarized as follows. Expected maturities will differ from contractual
maturities because certain obligors have the right to call debt securities
without prepayment penalties.
-----------------------
Amortized Fair
Cost Value
---------- ---------
(In thousands)
Due within 1 year $ 3,091 $ 3,069
Due after 1 year through 5 years 9,384 9,049
Due after 5 years through 10 years 360 340
Due after 10 years 3,316 3,197
------- -------
16,151 15,655
Mortgage and asset-backed securities,
amortizing monthly 39,391 38,307
------- -------
$55,542 $53,962
======= =======
For the years ended December 31, 2006 and 2005, proceeds from sales of
securities available-for-sale amounted to $47,287,000 and $68,483,000,
respectively. Gross realized gains amounted to $176,000 and $233,000,
respectively, and gross realized losses amounted to $454,000 and $127,000,
respectively. For the year ended December 31, 2006, the Company realized
$60,000 in net losses from calls of securities. For the year ended
December 31, 2005, the Company realized $37,000 in net losses from calls
of securities. The Company recognized impairment of value of $609,000 for
one security in 2006. The tax provision (benefit) applicable to these net
securities gains (losses) amounted to approximately $(321,000) and
$28,000, in the years ended December 31, 2006 and December 31, 2005,
respectively.
At December 31, 2006 and 2005, debt securities with an amortized cost of
$20,426,000 and $13,165,000, respectively, were pledged to secure treasury
tax and loan accounts and repurchase agreements. (See Note 8). In
addition, as of December 31, 2006, the Bank has debt securities with an
amortized cost of $6.4 million pledged as collateral at the Federal
Reserve Bank.
Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market
conditions warrant such evaluation. Consideration is given to (1) the
length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer,
and (3) the intent and ability of the Company to retain its investment in
the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value. During the fourth quarter of 2006 a collateralized
bond obligation was identified for sale and a loss of $0.6 million was
realized as of December 31, 2006 because the value of the security was not
expected to recover prior to the sale of the security. The security was
sold in January 2007.
G-29
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (concluded)
Information pertaining to securities with gross unrealized losses, at
December 31, 2006 and 2005, aggregated by investment category and length
of time that individual securities have been in a continuous loss
position, follows:
Less than Twelve Months Over Twelve Months
----------------------- ---------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
--------------------- ---------------------
December 31, 2006: (In thousands)
- ------------------
Securities available-for-sale
Government-sponsored
enterprise obligations $ 1 $ 500 $ 256 $ 9,793
Mortgage-backed securities 102 2,345 1,032 28,073
Corporate bonds 65 1,138 35 607
Municipal bonds 151 2,846 -- --
-------- -------- -------- --------
Total temporarily impaired securities $ 319 $ 6,829 $ 1,323 $ 38,473
======== ======== ======== ========
Less than Twelve Months Over Twelve Months
----------------------- ---------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
--------------------- ---------------------
December 31, 2005: (In thousands)
- ------------------
Securities available-for-sale
Government-sponsored
enterprise obligations $ 35 $ 5,083 $ 312 $ 17,358
Mortgage-backed securities 147 15,492 1,195 44,950
Corporate bonds -- -- 103 1,746
Municipal bonds -- -- 22 347
-------- -------- -------- --------
182 20,575 1,632 64,401
-------- -------- -------- --------
Securities held-to-maturity
Government-sponsored
enterprise obligations -- -- 147 2,853
Muncipal bonds 39 1,789 335 5,952
Mortgage-backed securities 10 1,273 427 6,871
-------- -------- -------- --------
49 3,062 909 15,676
-------- -------- -------- --------
Total temporarily impaired securities $ 231 $ 23,637 $ 2,541 $ 80,077
======== ======== ======== ========
At December 31, 2006, multiple debt securities have unrealized losses with
aggregate depreciation of approximately 3.5% from the Company's amortized
cost basis. All holdings are investment grade. Management believes that
the current unrealized loss position on all of these securities is the
result of the current interest rate environment. As management has the
intent and ability to hold debt securities until maturity, or for the
foreseeable future if classified as available-for-sale, these declines are
deemed to be temporary.
G-30
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the balances of loans follows:
December 31,
---------------------------
2006 2005
--------- ---------
(In thousands)
Real estate mortgage loans:
Commercial $ 106,965 $ 108,404
Residential 54,898 53,690
Construction 19,414 18,918
Home equity 9,520 10,243
Commercial loans 44,442 43,376
Consumer loans 1,599 1,770
--------- ---------
Total loans 236,838 236,401
Net deferred origination fees (121) (49)
Allowance for loan losses (1,827) (1,739)
--------- ---------
Loans, net $ 234,890 $ 234,613
========= =========
Changes in the allowance for loan losses are as follows:
Years Ended December 31,
------------------------
2006 2005
------- -------
(In thousands)
Balance at beginning of year $ 1,739 $ 1,340
Provision for loan losses 36 240
Allowance from Boston branch acquisition -- 198
Charge-offs (32) (45)
Recoveries 84 6
------- -------
Balance at end of year $ 1,827 $ 1,739
======= =======
There were no impaired or non-accrual loans at or during the years ended
December 31, 2006 and 2005. Loans past due 90 days or more and still
accruing interest totaled $3,000 and $0 at December 31, 2006 and 2005,
respectively.
G-31
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. PREMISES AND EQUIPMENT AND REAL ESTATE HELD FOR SALE
Premises and Equipment:
A summary of the cost and accumulated depreciation and amortization of
premises, leasehold improvements and equipment follows:
December 31,
--------------------- Estimated
2006 2005 Useful Lives
-------- -------- -------------
(In thousands)
Land $ 373 $ 484
Buildings and leasehold improvements 4,707 5,123 10-30 years
Equipment 3,037 3,563 3-10 years
-------- --------
8,117 9,170
Less accumulated depreciation and amortization (4,018) (4,412)
-------- --------
$ 4,099 $ 4,758
======== ========
Depreciation and amortization expense for the years ended December 31,
2006 and 2005 amounted to $660,000 and $1,267,000, respectively.
Real Estate Held For Sale:
At December 31, 2006, the Company holds two parcels of real estate for
sale with a carrying value of $5,727,000. One is the property located in
Boston and the other is a parcel abutting the Company's main office. The
Boston property was undergoing renovations as of December 31, 2006.
Renovation expenditures, subsequent to December 31, 2006, are expected to
exceed $800,000.
Rental income related to the Boston property for the years ended December
31, 2006 and 2005 amounted to $370,000 and $193,000, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company recognized goodwill and other intangible assets as a result of
the purchase of the Cambridge branch in 2004, de Burlo in 2004, and the
Boston branch in 2005. There was no impairment recorded in 2006 or 2005.
The following table summarizes activity related to goodwill and intangible
assets for the indicated periods:
Other Total Other
Core Deposit Identifiable Intangible
Goodwill Intangibles Intangibles Assets
-------- ----------- ----------- ------
(In thousands)
Balance, December 31, 2004 $ 1,815 $ 575 $ 590 $ 1,165
Purchase of Boston branch 1,127 1,253 -- 1,253
Amortization expense -- (125) (59) (184)
Adjustment of purchase accounting estimates 10 -- -- --
-------- -------- -------- --------
Balance, December 31, 2005 2,952 1,703 531 2,234
Deferred payment - de Burlo 1,188 -- -- --
Amortization expense -- (163) (59) (222)
Adjustment of purchase accounting estimates (499) (251) -- (251)
-------- -------- -------- --------
Balance, December 31, 2006 $ 3,641 $ 1,289 $ 472 $ 1,761
======== ======== ======== ========
G-32
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GOODWILL AND OTHER INTANGIBLE ASSETS (concluded)
Estimated future intangible amortization is as follows:
Other Total Other
Core Deposit Identifiable Intangible
Intangibles (1) Intangibles Assets
--------------- ----------- ------
(In thousands)
2007 $ 110 $ 59 $ 169
2008 110 59 169
2009 110 59 169
2010 110 59 169
2011 110 59 169
Thereafter 288 177 465
------ ------ ------
Total $ 838 $ 472 $1,310
====== ====== ======
(1) Excludes deposit intangibles associated with the Cambridge branch
(see Note 2).
The following table sets forth the components of identifiable intangible
assets at December 31, 2006:
Gross
Carrying Accumulated Net Carrying
Amount Amortization Amount
------ ------------ ------
(In thousands)
Core deposit intangibles $1,577 $ (288) $1,289
Other identifiable intangibles 590 (118) 472
------ ------ ------
Total other intangible assets $2,167 $ (406) $1,761
====== ====== ======
7. DEPOSITS
A summary of deposit balances follows:
December 31,
------------------------
2006 2005
-------- --------
(In thousands)
Demand $ 42,682 $ 50,734
NOW 34,537 39,743
Regular savings 29,837 35,875
Money market deposits 48,868 50,058
-------- --------
Total non-certificate accounts 155,924 176,410
-------- --------
Term certificates of $100,000 and over 42,947 28,737
Term certificates less than $100,000 69,997 53,713
-------- --------
Total certificate accounts 112,944 82,450
-------- --------
$268,868 $258,860
======== ========
G-33
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DEPOSITS (concluded)
A summary of term certificates, by maturity, is as follows:
December 31, 2006 December 31, 2005
------------------ -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------------ -------------------
(Dollars in thousands)
Within 1 year $109,228 4.84% $75,935 3.47%
After 1 year through 3 years 2,928 3.25 5,766 3.24
After 3 years through 5 years 788 3.96 749 3.55
-------- -------
$112,944 4.79% $82,450 3.45%
======== =======
Approximately six percent of the Bank's total deposits are owned by the
Company's directors and executive officers and their related parties.
8. BORROWED FUNDS
Short-term borrowings
Short-term borrowings with original maturities of ninety days or less
consist of the following:
December 31, 2006 December 31, 2005
----------------- -----------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------------- -----------------
(Dollars in thousands)
Securities sold under agreements
to repurchase $13,656 4.78% $13,920 4.48%
Federal Reserve Bank advances 64 4.62 109 4.00
Federal Home Loan Bank
advances -- 57,233 4.38
------- --------
$13,720 4.78% $71,262 4.40%
======= ========
Securities sold under agreements to repurchase are funds borrowed from
customers on an overnight basis that are secured by obligations of
government-sponsored enterprises and mortgage-backed securities. The
amount of securities collateralizing the agreements to repurchase remains
in securities and the obligation to repurchase securities sold is
reflected as a liability in the consolidated balance sheets.
Federal Reserve Bank of Boston ("FRB") advances represent treasury tax and
loan deposits due to the FRB. The interest rate adjusts weekly and certain
obligations of government-sponsored enterprises have been pledged as
collateral to secure the deposits.
Approximately 45% of the Bank's securities sold under agreement to
repurchase are owned by the Company's directors and executive officers and
their related parties.
G-34
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BORROWED FUNDS (concluded)
Long-term borrowings
Long-term borrowings consist of Federal Home Loan Bank of Boston ("FHLBB")
advances at fixed rates and are as follows:
December 31, Weighted Average Rate
--------------------- ---------------------
Maturity* 2006 2005 2006 2005
- -------------------------------------- ------- ------- ------- -------
(In thousands)
2008 $ -- $ 3,000 --% 4.49%
2009 15,000 5,000 5.80 5.91
2010 -- 6,000 -- 4.85
2011 -- 15,250 -- 4.74
Amortizing advances, requiring
monthly principal and interest
of $64,000 for 2006 and $112,000
for 2005 1,047 1,837 2.82 2.54
------- -------
$16,047 $31,087 5.60% 4.80%
======= =======
* Non-amortizing advances are generally callable at future specified
dates in accordance with the terms of the individual advances.
The Bank also has an available line of credit with the FHLBB at an
interest rate that adjusts daily. Borrowings under the line are limited to
2% of the Bank's total assets. There were no advances outstanding under
the line of credit at December 31, 2006 and 2005. All borrowings from the
FHLBB are secured by a lien on qualified collateral, defined principally
as 90% of the fair value of obligations of government-sponsored
enterprises and 75% of the carrying value of first mortgage loans on
owner-occupied residential property.
9. SUBORDINATED DEBENTURES
The Company has raised funds through the issuance of subordinated
debentures to its wholly-owned subsidiaries, First Ipswich Statutory Trust
II ("Trust II"), and First Ipswich Statutory Trust III ("Trust III"). The
Trusts have funded the purchases of the subordinated debentures by
offering capital securities representing preferred ownership interests in
the assets of the Trusts. Using interest payments made by the Company on
the debentures, the Trusts pay quarterly dividends to preferred security
holders. The Company has the option to defer interest payments on the
subordinated debentures for up to five years and, accordingly, the Trusts
may defer dividend distributions on the capital securities for up to five
years. In addition, the Company may elect to accelerate the maturity dates
of the subordinated debentures upon obtaining regulatory approval.
G-35
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUBORDINATED DEBENTURES (concluded)
Subordinated debentures consist of the following:
December 31, 2006 December 31, 2005
------------------------ ------------------------
Interest Interest
Maturity Issued To Amount Rate Amount Rate
- ------------------------ ---------- ----------- ---------- ----------- -----------
(Dollars in thousands)
September 2032 Trust II $6,000 8.77%(1) $ 6,000 5.95%(1)
July 2035 Trust III 7,000 6.01(2) 7,000 6.01(2)
---------- ----------
--
$13,000 $13,000
========== ==========
(1) Three-month Libor plus 3.4%; not to exceed 11.9%.
(2) Fixed through July 7, 2010; Libor plus 1.95% thereafter.
The outstanding trust preferred securities may be included in regulatory
Tier 1 capital (see Note 17), subject to a limitation that such amounts
not exceed 25% of Tier 1 capital. At December 31, 2006 and 2005, trust
preferred securities aggregating $6,303,000 and $6,706,000, respectively,
are included in Tier 1 capital. Deferred debt financing costs are being
amortized over the life of the debentures. Amortization is accelerated for
the portion of such costs that relate to debentures redeemed prior to
maturity.
10. INCOME TAXES
The components of the benefit for income taxes are as follows:
Years Ended December 31,
------------------------
2006 2005
------ ------
(In thousands)
Current tax (benefit) provision :
Federal $ (136) $ (409)
State 99 86
------ ------
(37) (323)
------ ------
Deferred tax (benefit) provision :
Federal (577) 23
State (79) 4
------ ------
(656) 27
------ ------
Total tax benefit $ (693) $ (296)
====== ======
G-36
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (continued)
The following is a reconciliation of the effective income tax rates and
amounts in the consolidated statements of operations with the statutory
federal income tax rate and amount:
Years Ended December 31,
------------------------------------------------
2006 2005
--------------------- ---------------------
Amount Rate Amount Rate
-------- -------- -------- --------
(Dollars in thousands)
Statutory tax benefit and rate $ (629) (34.0%) $ (116) (34.0%)
Increase (decrease) resulting from:
State tax, net of federal tax benefit 13 0.7 59 17.3
Dividends received deduction -- -- (60) (17.6)
Tax exempt income (127) (6.9) (192) (56.3)
Other 50 2.7 13 3.8
-------- -------- -------- --------
Effective tax benefit and rate $ (693) (37.5%) $ (296) (86.8%)
======== ======== ======== ========
The components of the net deferred tax asset, included in other assets,
are as follows:
December 31,
-----------------------
2006 2005
-------- --------
(In thousands)
Deferred tax assets:
Federal $ 2,103 $ 1,593
State 380 303
-------- --------
2,483 1,896
-------- --------
Deferred tax liabilities:
Federal (280) (284)
State (70) (68)
-------- --------
(350) (352)
-------- --------
Net deferred tax asset $ 2,133 $ 1,544
======== ========
At December 31, 2006 the Company has a Federal net operating loss
carryforward of $1,263,000 which expires in 2026.
G-37
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (concluded)
The tax effects of each item that gives rise to deferred tax assets
(liabilities) are as follows:
December 31,
--------------------
2006 2005
-------- --------
(In thousands)
Net unrealized loss on securities available for sale $ 543 $ 610
Allowance for loan losses 695 648
Employee benefit plans 243 320
Depreciation and amortization (60) (229)
Write-down of impaired security 241 --
Alternative minimum tax 25 152
Derivative fair value adjustments (121) 30
Core deposit intangible 65 31
Goodwill amortization (115) (55)
Net operating loss carryforward 429 --
Other, net 188 37
-------- --------
Net deferred tax asset $ 2,133 $ 1,544
======== ========
A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31,
------------------------
2006 2005
-------- --------
(In thousands)
Balance at beginning of year $ 1,544 $ 1,199
Deferred tax benefit (provision) 656 (27)
Change in deferred tax effect of net unrealized
loss on securities available for sale (67) 372
-------- --------
Balance at end of year $ 2,133 $ 1,544
======== ========
11. EMPLOYEE BENEFITS
401(k) Plan
The Bank sponsors a defined contribution 401(k) plan whereby an eligible
employee may contribute up to 15% of compensation, and the Bank will make
a matching contribution equal to 100% of the first 3% and 50% of the next
2% of an employee's compensation contributed to the plan. Expenses related
to the 401(k) plan for 2006 and 2005 were $181,000 and $182,000,
respectively.
Supplemental Executive Retirement Plans
Since 2004 the Company has had agreements with two executive officers
which provide supplemental retirement benefits commencing upon retirement.
One was terminated in 2006. The present value of expected retirement
benefits is being accrued over the periods in which the benefits vest to
the executive. Expenses attributable to the plans amounted to $(95,000)
and $116,000 for the respective years ended December 31, 2006 and 2005.
The negative expense for 2006 reflects the impact of the termination of
one agreement during 2006.
G-38
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. OTHER COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of December 31, 2006, the Company was obligated under non-cancelable
operating leases for premises and equipment. Minimum rentals due in future
periods under these existing agreements are as follows:
Year Ending
December 31, Amount
------------ ------------
(In thousands)
2007 $ 933
2008 874
2009 616
2010 426
2011 249
Thereafter 217
------------
$3,315
============
Certain leases contain provisions for escalation of minimum lease
payments, not included above, that are generally contingent upon increases
in real estate taxes and percentage increases in the consumer price index.
Total rent expense amounted to $717,000 and $751,000 for 2006 and 2005,
respectively.
Employment Agreements
The Bank has entered into employment agreements with certain executive
officers which generally provide for annual base salary and certain other
benefits. The Bank has also entered into agreements with certain executive
officers which also provide for lump sum severance payments following a
"change of control," as defined in the agreements.
Legal Claims
In the ordinary course of business, various legal claims arise which, in
the opinion of management, will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
The de Burlo Group, Inc.
On December 31, 2004, the Bank acquired The de Burlo Group, Inc. ("de
Burlo") at an initial purchase price of $2,126,000. The terms of the
purchase also include deferred payment provisions, which would be payable
to stockholders of de Burlo based upon the successful achievement of
certain financial milestones following each of the two- and four- year
anniversaries of the closing date. At December 31, 2006, the Company
recognized the first deferred payment of $1,187,500 due to de Burlo. This
first deferred payment resulted in additional goodwill in the amount of
$1,187,500. The initial purchase price and deferred payments shall not
exceed $4,500,000.
G-39
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK
Loan Commitments
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amounts recognized in the accompanying consolidated balance sheets.
The contractual amount of these instruments reflects the extent of
involvement that the Bank has in particular classes of financial
instruments. Management uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon the
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include secured interests in
mortgages, accounts receivable, inventory, property, plant and equipment,
and income-producing properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance by a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
At December 31, 2006 and 2005, the following financial instruments were
outstanding for which contract amounts represent credit risk:
Contract Amount
-----------------------
2006 2005
-------- --------
(In thousands)
Commitments to originate loans $ 4,958 $19,640
Unadvanced portions of consumer loans (including
credit card loans) 4,315 4,479
Unadvanced portions of commercial construction loans 11,669 16,779
Unadvanced portions of home equity loans 10,958 10,330
Unadvanced portions of commercial lines-of-credit 13,089 10,169
Unadvanced portions of residential construction loans 706 545
Standby letters-of-credit 415 492
G-40
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. DERIVATIVE INSTRUMENTS
Embedded Derivative Instruments
The Bank has purchased certificates of deposit and a corporate bond for
which the return is based on the performance of various stock indices.
These instruments guarantee a return of principal upon maturity. The
investment strategy is to diversify the investment portfolio. The embedded
equity index features are separately accounted for as derivative
instruments and recorded at fair value with the change in fair value
included in miscellaneous income. At December 31, 2006 and 2005, the
equity index features had an asset value of $843,000 and $479,000,
respectively, which is included in other assets. Changes in the fair value
of equity index features are recorded in miscellaneous income and resulted
in income of $364,000 and $139,000, respectively, for 2006 and 2005.
15. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to related
parties amounting to $547,000 and $955,000 at December 31, 2006 and 2005,
respectively. Related parties include executive officers, directors,
principal shareholders, or any associate of such persons. During the years
ended December 31, 2006 and 2005, total principal payments were $167,000
and $520,000, respectively.
Deposit accounts and securities sold under agreements to repurchase with
related parties amounted to $16,783,000 and $16,271,000 at December 31,
2006 and 2005, respectively.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of estimated fair values of all financial instruments
where it is practicable to estimate such values. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Accordingly, the derived fair
value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement
of the instrument. SFAS No. 107 excludes certain financial instruments and
all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Company.
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments.
Cash and cash equivalents: The fair value of cash and cash equivalents
approximates carrying value.
Certificates of deposit: The fair value of certificates of deposit,
excluding embedded derivatives, approximates carrying value.
Securities: Fair values for securities are based on quoted market prices.
Federal Home Loan Bank stock and Federal Reserve Bank stock: The fair
values of Federal Home Loan Bank stock and Federal Reserve Bank stock
approximate their carrying values, based on redemption provisions of the
issuer.
Loans: For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for other loans (e.g., commercial real estate and
investment property mortgage loans, commercial and industrial loans) are
estimated using discounted cash flow analyses, applying interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for non-performing loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
G-41
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
Accrued interest: The fair value of accrued interest receivable
approximates carrying value.
Derivative assets: The fair values of derivative assets are based on
market prices obtained from investment analysts.
Deposit liabilities: The fair values disclosed for demand deposits,
including NOW, regular savings and money market deposits are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings: The fair value of short-term borrowings
approximates carrying value.
Long-term Federal Home Loan Bank advances and subordinated debentures:
Fair values for long-term borrowings are estimated using discounted cash
flow analyses based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
Off-balance-sheet instruments: The fair values of the Company's
off-balance-sheet instruments (lending commitments) are based on fees
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreement and the counterparties' credit
standing. At December 31, 2006 and 2005, the estimated fair value of
off-balance-sheet financial instruments was not material.
The estimated fair values of the Company's financial instruments are as
follows:
December 31,
--------------------------------------------
2006 2005
-------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In thousands)
Financial assets:
Cash and cash equivalents $ 13,499 $ 13,499 $ 11,261 $ 11,261
Certificates of deposit 3,378 3,378 3,295 3,295
Securities available-for-sale 53,962 53,962 88,375 88,375
Securities held-to-maturity -- -- 28,769 28,014
Federal Home Loan Bank stock 3,927 3,927 6,647 6,647
Federal Reserve Bank stock 774 774 774 774
Loans 234,890 233,287 234,613 236,937
Accrued interest receivable 1,777 1,777 1,956 1,956
Derivative assets 843 843 479 479
Financial liabilities:
Deposits 268,868 269,361 258,860 258,331
Short-term borrowings 13,720 13,720 71,262 71,262
Long-term FHLB advances 16,047 16,096 31,087 31,269
Subordinated debentures 13,000 12,951 13,000 12,731
G-42
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional, discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors. Prompt corrective action provisions are not applicable
to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 2006 and 2005, that the Company met all applicable
capital adequacy requirements to which they are subject and as of December
31, 2005, that the Bank met all applicable capital adequacy requirements
to which they are subject.
The Bank signed a Formal Agreement with the Office of the Comptroller of
the Currency on June 28, 2006. The Agreement required the Bank to take
various actions including raising capital ratios to levels prescribed in
the Agreement. Specifically the Bank was required, by December 31, 2006,
to raise its Tier 1 capital to average assets ratio to a minimum of 8%,
its Tier 1 capital to risk-weighted assets ratio to a minimum of 10%, and
its total capital to risk-weighted assets to a minimum of 11%. As of
December 31, 2006, the Bank did not attain these ratios. Subsequently, the
OCC extended the deadline to achieve the capital ratios until March 31,
2007. Management believes the Bank exceeded the minimum ratios, as listed
in the Formal Agreement, at February 28, 2007.
The Company's and the Bank's actual capital amounts and ratios as of
December 31, 2006 and 2005 are presented in the table:
Minimum Capital
Minimum Requirements
Capital Per OCC
Actual Requirements Formal Agreement
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
December 31, 2006:
Total capital to risk weighted assets:
Bank $25,026 10.7% $20,097 8.0% $27,634 11.0%
Consolidated 28,334 11.2 20,169 8.0 N/A N/A
Tier 1 capital to risk weighted assets:
Bank 26,853 10.0 10,049 4.0 25,122 10.0
Consolidated 19,810 7.9 10,085 4.0 N/A N/A
Tier 1 capital to average assets:
Bank 26,853 6.6 15,208 4.0 30,415 8.0
Consolidated 19,810 5.2 15,255 4.0 N/A N/A
December 31, 2005:
Total capital to risk weighted assets:
Bank $28,512 10.5% $21,723 8.0% $27,154 10.0%
Consolidated 29,671 10.9 21,786 8.0 N/A N/A
Tier 1 capital to risk weighted assets:
Bank 26,773 9.9 10,861 4.0 16,292 6.0
Consolidated 21,638 8.0 10,893 4.0 N/A N/A
Tier 1 capital to average assets:
Bank 26,773 6.8 15,807 4.0 19,759 5.0
Consolidated 21,638 5.5 15,839 4.0 N/A N/A
G-43
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Company.
Federal Reserve Board policy provides that a bank holding company
generally should not maintain its existing rate of cash dividends on
common stock unless the entity's net income over the past year combined
with its retained net income of the preceding two years has been
sufficient to fully fund the dividends. Loans or advances from the Bank to
the Company are limited to 10 percent of the Bank's capital stock and
surplus on a secured basis.
In addition to the limitations listed in the above paragraph, the Formal
Agreement between the Bank and the OCC limits the Bank's ability to pay
dividends to the Company; dividend payments are subject to the approval of
the OCC. While the OCC approved the payment of dividends in 2006, there is
no assurance they will approve future dividend payments.
In addition, dividends paid by the Bank or the Company would be prohibited
if the effect thereof would cause the Bank's or the Company's capital to
be reduced below applicable minimum capital requirements. Accordingly,
$20,097,000 of the Company's equity in the net assets of the Bank was
restricted at December 31, 2006.
The limit on loans or advances by the Bank to the Company was
approximately $2,503,000 as of December 31, 2006.
19. SEGMENT REPORTING
Information about reportable segments and reconciliation of such
information to the consolidated financial statements as of and for the
years ended December 31, 2006 and 2005 follows.
Investment Consolidated
2006 Banking Advisory Totals
- ---- ------- -------- ------
(In thousands)
Net interest income, after provision for loan losses $ 11,003 $ -- $ 11,003
Other revenue: external customers 2,445 1,800 4,245
Other expenses: external customers 15,873 1,224 17,097
Income tax expense (benefit) (931) 238 (693)
Net income (loss) (1,499) 343 (1,156)
Total assets 328,585 4,190 332,775
Investment Consolidated
2005 Banking Advisory Totals
- ---- ------- -------- ------
(In thousands)
Net interest income, after provision for loan losses $ 10,869 $ -- $ 10,869
Other revenue: external customers 3,495 1,620 5,115
Other expenses: external customers 15,240 1,085 16,325
Income tax expense (benefit) (515) 219 (296)
Net income (loss) (361) 316 (45)
Total assets 391,605 2,799 394,404
G-44
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining to First Ipswich Bancorp is as follows:
December 31,
--------------------
BALANCE SHEETS 2006 2005
- -------------- -------- --------
(In thousands)
Assets
- ------
Cash and cash equivalents with Bank subsidiary $ 567 $ 20
Securities available-for-sale at fair value -- 118
Investment in common stock of the Bank 29,390 30,780
Investment in common stock of First Ipswich
Statutory Trust II 186 186
Investment in common stock of First Ipswich
Statutory Trust III 217 217
Other assets 625 751
-------- --------
Total assets $ 30,985 $ 32,072
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Subordinated debentures to Trust subsidiaries $ 13,000 $ 13,000
Other liabilities 114 112
-------- --------
Total liabilities 13,114 13,112
Stockholders' equity 17,871 18,960
-------- --------
Total liabilities and stockholders' equity $ 30,985 $ 32,072
======== ========
G-45
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
Years Ended December 31,
------------------------
STATEMENTS OF OPERATIONS 2006 2005
- ------------------------ -------- --------
(In thousands)
Income:
Dividends from the Bank $ 1,003 $ 1,698
Dividends on marketable equity securities 1 4
Gain on sale of marketable equity securities 11 --
-------- --------
Total income 1,015 1,702
-------- --------
Expenses:
Interest on subordinated debentures 943 733
Operating expenses 9 30
-------- --------
Total expenses 952 763
-------- --------
Income before income taxes and equity in
undistributed net loss of the Bank 63 939
Applicable income tax benefit 320 252
-------- --------
Income before equity in undistributed net loss
of the Bank 383 1,191
Equity in undistributed net loss of the Bank (1,539) (1,236)
-------- --------
Net loss $ (1,156) $ (45)
======== ========
Years Ended December 31,
------------------------
STATEMENTS OF CASH FLOWS 2006 2005
- ------------------------ -------- --------
(In thousands)
Cash flows from operating activities:
Net loss $ (1,156) $ (45)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in undistributed net loss of the Bank 1,539 1,236
Other, net 245 (144)
-------- --------
Net cash provided by operating activities 628 1,047
-------- --------
Cash flows from investing activities:
Investment in the Bank (26) (6,737)
-------- --------
Net cash used in investing activities (26) (6,737)
-------- --------
Cash flows from financing activities:
Repayment of subordinated debentures -- (1,000)
Proceeds from issuance of subordinated debentures -- 7,000
Investment in common stock of Statutory Trust III -- (217)
Cash dividends paid (55) (111)
-------- --------
Net cash provided (used) by financing activities (55) 5,672
-------- --------
Net change in cash and cash equivalents 547 (18)
Cash and cash equivalents at beginning of year 20 38
-------- --------
Cash and cash equivalents at end of year $ 567 $ 20
======== ========
G-46
FIRST IPSWICH BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
21. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share amounts)
Year Ended December 31, 2006
Interest and dividend income $ 5,748 $ 6,086 $ 5,618 $ 5,370
Interest expense 2,990 3,155 3,018 2,620
-------- -------- -------- --------
Net interest income 2,758 2,931 2,600 2,750
Provision (credit) for loan losses (95) 66 65 --
-------- -------- -------- --------
Net interest income, after provision (credit)
for loan losses 2,853 2,865 2,535 2,750
Gain (loss) on securities, net (370) (526) 11 (60)
All other income 1,797 1,045 975 1,373
Operating expenses 3,866 4,350 4,524 4,357
-------- -------- -------- --------
Income (loss) before income taxes 414 (966) (1,003) (294)
Provision (benefit) for income taxes 112 (340) (354) (111)
-------- -------- -------- --------
Net income (loss) $ 302 $ (626) $ (649) $ (183)
======== ======== ======== ========
Earnings (loss) per share:
Basic $ 0.14 $ (0.28) $ (0.29) $ (0.08)
======== ======== ======== ========
Diluted $ 0.14 $ (0.28) $ (0.29) $ (0.08)
======== ======== ======== ========
Year Ended December 31, 2005
Interest and dividend income $ 5,334 $ 5,149 $ 4,565 $ 4,446
Interest expense 2,499 2,156 1,938 1,792
-------- -------- -------- --------
Net interest income 2,835 2,993 2,627 2,654
Provision for loan losses 55 78 67 40
-------- -------- -------- --------
Net interest income, after provision
for loan losses 2,780 2,915 2,560 2,614
Gain (loss) on securities, net 11 (3) 16 45
All other income 1,311 1,457 1,133 1,145
Operating expenses 4,707 4,240 3,701 3,677
-------- -------- -------- --------
Income (loss) before income taxes (605) 129 8 127
Benefit for income taxes (276) (1) -- (19)
-------- -------- -------- --------
Net income (loss) $ (329) $ 130 $ 8 $ 146
======== ======== ======== ========
Earnings (loss) per share:
Basic $ (0.15) $ 0.06 $ -- $ 0.07
======== ======== ======== ========
Diluted $ (0.15) $ 0.06 $ -- $ 0.07
======== ======== ======== ========
G-47