UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K - ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number (0-26663)
IPSWICH BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3459169
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 Market Street Ipswich, Massachusetts 01938
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 356-7777 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Title of each class: Name of each exchange on which
registered:
Common Stock, $0.10 par value NASDAQ National Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, as of March 3, 2000, was $17,460,925. Although directors and
executive officers of the registrant and its subsidiaries were assumed to be
"affiliates" of the registrant for the purposes of this calculation, this
classification is not to be interpreted as an admission of such status.
The number of shares outstanding of the Company's common stock, as of March 3,
2000, was 2,525,427.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Information called for by Part III (Items 10, 11, 12 and 13) of this Form is
incorporated by reference from the Company's definitive proxy statement (the
"Proxy Statement") relating to the Annual Meeting of Stockholders of the Company
to be held on April 26, 2000.
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward looking statements", as
that term is defined under the Private Securities Litigation Reform Act of 1995.
The words "believe", "expect", "anticipate", "intend", "plan", "assume", and
other similar expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward looking
statements. Reliance should not be placed on forward looking statements because
they involve known and unknown risks, uncertainties and other factors, which are
in some cases beyond the control of the Company and may cause the actual
results, performance, or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward looking statements.
Certain factors that may cause such differences include, but are not limited to
the following: interest rates may increase, unemployment in the Company's market
area may increase, property values may decline, and general economic and market
conditions in the Company's market area may decline, all of which could
adversely affect the ability of borrowers to re-pay loans; general economic and
market conditions in the Company's market area may decline, the value of real
estate securing payment of loans and the Company's ability to make profitable
loans; adverse legislation or regulatory requirements may be adopted; and
competitive pressure among depository institutions may increase. Any of the
above may also result in lower interest income, increased loan losses,
additional charge-offs and write-downs and higher operating expenses. The
Company disclaims any intent or obligation to update publicly any of the forward
looking statements herein, whether in response to new information, future events
or otherwise.
PART I
- ------
ITEM 1 BUSINESS
GENERAL
Ipswich Bancshares, Inc. (the Company) is a Massachusetts corporation whose
primary business is serving as the holding company for Ipswich Savings Bank (the
Bank). On July 1, 1999, in connection with the formation of the Company as the
holding company for the Bank, each share of the Bank's common stock previously
outstanding was converted automatically into one share of common stock of the
Company, and the Bank became a wholly owned subsidiary of the Company. The
reorganization had no impact on the consolidated financial statements.
The Company operates out of its main office located at 23 Market Street,
Ipswich, Essex County, Massachusetts, and its seven full-service retail branch
offices, located in Beverly, Essex, Marblehead, North Andover, Rowley, Reading
and Salem, Massachusetts. The Company operates automatic teller machines at its
main office and each of its full-service retail branch offices. As a bank
holding company, the Company is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve (FRB) and the Bank
is subject to regulation, supervision and examination by the Federal Deposit
Insurance Corporation (the FDIC) and the Massachusetts Commissioner of Banks
(the Commissioner).
<PAGE>
The Company's principal business is attracting deposits from the general public
and using such deposits to fund its residential mortgage banking function. The
Company also performs residential mortgage loan servicing. The Bank is a member
of the FDIC and deposits are insured by the Bank Insurance Fund to the fullest
extent authorized by law (generally $100,000 per depositor). All deposits in
excess of FDIC limits are insured by the Depositors Insurance Fund. At December
31, 1999, the Company had total assets of approximately $276 million, gross
loans of $193 million, total deposits of $210 million, stockholders' equity of
$17 million and a regulatory Tier 1 leverage capital ratio of 6.33%.
LENDING ACTIVITIES
General. At December 31, 1999, the Company's loan portfolio, including net
deferred costs and unearned discounts, totaled $193.3 million, representing
70.0% of its total assets. The principal categories of loans in the Company's
portfolio are residential real estate loans secured by 1-4 family residences;
residential owner-occupied construction loans; home equity loans; commercial
real estate loans, which are primarily secured by multi-family residential,
retail, office and industrial properties; and consumer loans. Substantially all
of the mortgage loans in the Company's loan portfolio are secured by properties
located in areas north and west of Boston, Massachusetts.
Residential Real Estate. The Company originates both long term fixed-rate and
adjustable-rate residential real estate loans, secured by 1-4 family residences,
through its mortgage lending function. The Company's mortgage operations are
designed to provide consistent and ongoing earnings. Those products that the
Company offers through its mortgage operations are typically 1-4 family
residential loans, home equity products and residential owner-occupied
construction loans. These loans are offered on both a fixed and adjustable-rate
basis, which depend largely on the level of interest rates and consumer demand.
In 1999, the Company originated approximately $111.7 million in residential loan
and home equity products, consisting of $66.3 million of fixed and $45.4 million
of adjustable-rate mortgages and home equity loans. The Company sold
approximately $83.5 million in fixed-rate loans in the secondary market. The
mortgage division underwrites and originates loans for the ultimate sale in the
secondary market to the Federal National Mortgage Association (FNMA), the
Federal Home Loan Mortgage Corporation (FHLMC) and institutional secondary
market investors, as well as for the Company's portfolio.
The Company also originates "B" and "C" rated loans which are not saleable in
the secondary market due to the borrower's inability to meet certain
underwriting criteria. The Company has established guidelines on the amount
loaned to a single borrower and the percentage of the loan portfolio that these
loans may comprise. The maximum loan-to-value is typically 80%. At December 31,
1999, the Company held $5.3 million of B and C rated loans.
Residential Owner-Occupied Construction. The Company makes construction loans to
prospective owner-occupants of single family homes. These loans require
interest-only payments until completion of construction or the disbursement of
the maximum allowed under the terms of the loan, whichever occurs first, at
which time the loan automatically converts to a permanent, fully-amortizing,
adjustable-rate loan that has a fixed-rate conversion feature. The Company's
standard underwriting guidelines are used to evaluate loans that are made for
amounts not exceeding 90% of the lesser of the projected appraised value of the
property upon completion of construction or the cost of construction (including
<PAGE>
the purchase price of the land). Private mortgage insurance is required for all
loans that exceed 80% of the lower of cost or appraised value. The Company
requires borrowers to submit plans and specifications for the home, along with
an executed contract with a licensed contractor. Scheduled progress payments are
made only after inspections and periodic title updates are completed.
Home Equity Loans. A home equity loan may be made as a term loan or as a
revolving line of credit and is typically secured by a second mortgage on the
borrower's home. The Company will typically originate home equity loans in an
amount up to 90% of the appraised value of the home, less any loans outstanding
that are secured by the home. These loans have a maximum life of twenty years.
Commercial Real Estate Loans. The Company offers limited commercial banking
services to small businesses in its immediate market area. The Company has
established underwriting criteria to limit its exposure to risk from one
particular industry or borrower concentration. The current portfolio of
commercial real estate loans are primarily secured by mixed-use commercial
properties, multi-family residential properties, commercial and industrial
buildings, land and several churches. Commercial real estate loans traditionally
carry higher credit risk than residential loans. As a result, the Company
assigns a higher allocation percentage of the allowance for possible loan losses
to commercial real estate and industrial loans than to other types of loans in
the portfolio.
Consumer Loans. The Company also makes loans for personal or consumer purposes.
The Company's consumer loans consist of passbook, credit cards, installment and
overdraft protection loans.
Loan Portfolio and Maturity. The following table sets forth information
concerning the Company's loan portfolio by type of loan at the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997 1996 1995
---------------- --------------- -------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential $162,633 84.4% $160,153 84.9% $136,345 82.6% $94,384 78.2% $64,323 69.7%
Residential owner-
occupied construction 890 0.5 1,412 0.7 2,638 1.6 4,568 3.8 6,074 6.6
Home equity 23,385 12.1 19,772 10.5 18,035 10.9 14,545 12.0 13,507 14.6
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Subtotal 186,908 97.0 181,337 96.1 157,018 95.1 113,497 94.0 83,904 90.9
Commercial real estate 4,873 2.5 6,191 3.3 6,717 4.1 6,618 5.5 7,670 8.3
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Mortgage loans, gross 191,781 99.5 187,528 99.4 163,735 99.2 120,115 99.5 91,574 99.2
Consumer loans 1,060 0.5 1,188 0.6 1,255 0.8 630 0.5 690 0.8
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Gross loans 192,841 100.0% 188,716 100.0% 164,990 100.0% 120,745 100.0% 92,264 100.0%
===== ===== ===== ===== =====
Plus deferred loan origination
costs 586 378 606 427 357
Less unearned discount (100) (103) (143) (147) (154)
-------- -------- -------- ------- -------
Loans, net 193,327 188,991 165,453 121,025 92,467
Less allowance for possible
loan losses (1,798) (1,742) (1,673) (1,548) (2,154)
-------- -------- -------- ------- -------
Loans, net $191,529 $187,249 $163,780 $119,477 $90,313
======== ======== ======== ======== =======
</TABLE>
The following table sets forth residential owner-occupied construction and
commercial real estate loans by maturity date as of December 31, 1999:
<TABLE>
<CAPTION>
Residential Owner-Occupied Commercial Real Estate
-------------------------- ----------------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Within one year $ 890 100.0% $ 14 0.3%
One to five years - - 1,385 28.4
Over five years - - 3,474 71.3
------ ----- ------ -----
Total $ 890 100.0% $4,873 100.0%
====== ===== ====== =====
</TABLE>
<PAGE>
Commercial real estate loans with maturity dates over one year:
Amount
------
(Dollars in thousands)
Fixed interest rate $2,770
Adjustable interest rate 2,089
-----
Total $4,859
=====
A primary focus of the Company in 1999 continued to be an emphasis on its
residential lending activities. The Company experienced a decline in residential
originations principally as a result of a substantial rise in interest rates.
Despite the challenging environment, the Company originated approximately $111.7
in residential mortgage loans and home equity loans in 1999. Although a
significant portion of the residential loans originated are sold in the
secondary market, the Company's portfolio of residential loans increased by $2.5
million during 1999 to $162.6 million at December 31, 1999, representing 84.4%
of the total loan portfolio at year end. Residential loans increased by $23.8
million in 1998 to $160.2 million or 84.9% of the loan portfolio.
Home equity loans increased by $3.6 million to $23.4 million in outstanding
balances at December 31, 1999. The Company originated over $15.3 million in home
equity loans in 1999, written at an introductory rate of 3.99% for the first six
months, and repricing thereafter at the Prime Rate for the remaining term of the
loan if the line is greater than $25,000 (Prime +1% for lines less than
$25,000). These loans have a maximum life of twenty (20) years. Home equity
loans increased by $1.7 million in 1998 versus 1997.
Residential owner-occupied construction loans decreased by $522,000 in 1999.
This was principally due to the ability of developers to secure financing to
build housing, thereby decreasing consumer demand for this product. It is
anticipated the Company will continue to offer these loan products when it is
profitable for the Company to do so. Construction loans decreased $1.2 million
in 1998 versus 1997 for the same reasons.
Commercial real estate loans decreased by $1.3 million in 1999 primarily due to
the Company's focus on residential mortgage lending, which offers lower risk
relative to commercial real estate loans. Commercial loans decreased by $526,000
in 1998 versus 1997.
Consumer loans decreased by $128,000 in 1999 versus 1998. Consumer loans
remained relatively flat in 1998 decreasing by $67,000 to $1.2 million at year
end compared to the 1997 year-end balance of $1.3 million.
Loan and OREO Concentrations. The Company was an active construction and
commercial real estate lender during the mid-1980s. Several large individual
loans, as well as multiple loans to individual or related borrowers, were made
during that period. Due principally to loan payoffs and growth in stockholders'
equity, there were no loans or OREO concentrations that exceeded 10% of capital,
or $1,697,500, at December 31, 1999.
<PAGE>
Origination and Sale of Loans. Applications for residential mortgage loans are
obtained through loan originators employed by the Company who solicit
residential mortgage loan applications. There were six loan originators employed
by the Company at December 31, 1999. These representatives, who are compensated
primarily by commission, provide origination services during banking and
non-banking hours at the Company or applicant's location. Residential mortgage
loan applications come from referrals from real estate brokers and builders,
existing customers, walk-in customers, and advertising. Consumer loan
applications are primarily obtained from existing and walk-in customers who have
been made aware of the Company's programs by advertising and other means. All
commercial and mortgage loans must be approved by an Officer Credit Committee
and exceptions to policy by the Executive Committee of the Board of Directors.
The Company's residential mortgage loans are generally originated on terms,
conditions and documentation that permit their sale to the FHLMC, FNMA or other
institutional investors in the secondary market. Loan sales in the secondary
market provide additional funds for new residential lending.
Residential first mortgages and home equity loan originations totaled
approximately $111.7 million in 1999, a decrease of 47.1%, compared to or $211.2
million in 1998. Originations decreased as a result of a substantial rise in
interest rates during the year and a resulting lower level of mortgage
refinancing activity.
The Company's strategy involves originating both fixed and adjustable-rate
residential mortgage loans. The decision to retain loans in portfolio or to sell
them in the secondary market is dependent upon the Company's liquidity and
market factors.
<PAGE>
The following table sets forth information concerning mortgage and commercial
loans originated, sold, repaid, charged-off and transferred during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Beginning balance $187,528 $163,735 $120,115
Mortgage and commercial loan originations:
Residential 94,954 192,195 101,410
Residential owner-occupied construction 1,394 1,673 3,306
Commercial - - 743
Home equity 15,339 17,311 14,729
-------- -------- --------
Total mortgage and commercial loan originations 111,687 211,179 120,188
Loans held for sale at January 1 24,000 8,031 311
Conventional loan sales:
Servicing retained 67,101 84,216 18,079
Servicing released 16,444 26,700 20,165
Amortization, payoffs, charge-offs, unadvanced funds 38,831 60,501 30,604
Securitized and transferred to investment portfolio 8,996 - -
Transfers to OREO 62 - -
Transfers to loans held for sale - 24,000 8,031
-------- -------- --------
Total loan sales, amortization, payoffs, charge-offs,
transfers, and unadvanced funds 131,434 195,417 76,879
-------- -------- --------
Ending balance $191,781 $187,528 $163,735
======== ======== ========
</TABLE>
Loan Fee Income. In addition to interest earned on loans, the Company receives
income from fees in connection with late payments, prepayments or modifications
and miscellaneous services related to its loans. Income from these activities
varies from period to period with the volume and types of loans made, size of
servicing portfolio, amounts of prepayments in the servicing portfolio and other
factors. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 122, Accounting for Mortgage Servicing Rights, and SFAS No. 125, Accounting
for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities, the Company recognizes on its balance sheet the estimated value of
the rights to service mortgages it originates and sells in the secondary market
on a servicing retained basis. The asset created is amortized on a level yield
method over the estimated life of the underlying loans under which the asset was
created. On a quarterly basis, the Company estimates the fair value of the
unamortized asset and adjusts the recorded amount to the lower of unamortized
cost or fair value through a valuation allowance charged to loan servicing fee
income. The Company can recover any allowance amount if the fair value increases
in subsequent periods. The servicing rights recognized in 1999 and 1998 were
$1.2 and $1.5 million, respectively. The Company carried no mortgage servicing
rights at December 31, 1999. The unamortized asset at December 31, 1998 totaled
$229,000, for which the Company determined no valuation allowance was necessary.
<PAGE>
Loan Servicing. Typically, the Company originates loans for sale in the
secondary market, for which it may retain the servicing. Under its loan
servicing agreements, the Company generally continues to collect payments on
loans, to make certain insurance and tax advances on behalf of borrowers, and to
provide other services related to the loans. The principal balance of the loans
serviced by the Company for secondary market investors amounted to $0, $18.8
million and $45.4 million at December 31, 1999, 1998 and 1997, respectively.
The Company completed sales of mortgage servicing rights in the fourth quarter
of 1999 and 1998, respectively. The Company sold the rights to service
approximately $90 million in FNMA loans in both 1999 and 1998, respectively, as
a method of managing the Company's exposure to future declines in interest
rates. A gain of $63,000 and a loss of $196,000 was recognized as a result of
the sales in 1999 and 1998, respectively.
Net loan servicing income (expense) amounted to $21,000, $(341,000) and
$(21,000), for 1999, 1998 and 1997, respectively. SFAS No. 122 and SFAS No. 125
require the Company to realize the value of the servicing through the net gain
on sale of mortgage loans. The Company experienced an increase in net loan
servicing income in 1999 as a result of the rise in interest rates, which
eliminated the need to establish a valuation reserve against the Company's
servicing rights. In 1998, the Company recognized a total charge of $337,000
against servicing income as a result of the decline in the value of its
servicing rights. The Company realized a decrease in the value of its servicing
rights in 1998 as a result of the decline in interest rates during the year,
which precipitated higher than normal prepayments. The value of servicing
decreases as market interest rates decline which necessitates the Company
recording the decline in value through a charge to the income statement and the
establishment of a reserve. The Company booked an additional reserve of $141,000
in 1998 prior to completion of the servicing sale. The reserve was eliminated as
a result of the servicing sale in the fourth quarter of 1998.
Allowance for Possible Loan Losses. The allowance for possible loan losses is
established by management to absorb future charge-offs of loans deemed
uncollectible. This allowance is increased by provisions charged to operating
expense and by recoveries on loans previously charged off. In evaluating current
information and events regarding borrowers' ability to repay their obligations,
management considers commercial loans over $200,000 to be impaired when it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the note agreement; other loans are evaluated
collectively for impairment. When a loan is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or the fair
value of collateral if the loan is collateral dependent. Impairment losses are
included in the allowance for loan losses through a charge to the provision for
loan losses.
The Company sets the level of its allowance for possible loan losses based on a
number of factors. Management uses available information (such as current
economic conditions, levels of nonperforming loans, delinquency trends and
collateral values) to assess the adequacy of the allowance and to determine
future additions to the allowance. The process involves substantial
uncertainties; ultimate losses may vary from current estimates. Management
believes that the allowance for possible loan losses is adequate as of year end
1999. While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary. In addition, various
<PAGE>
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for possible loan losses. Such
agencies may require the Company to recognize additions to the allowance based
on judgments different from those of management. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Provision for Possible Loan Losses," and "Item 8 - Note 6 of Notes to
Consolidated Financial Statements".
The following table summarizes changes in the allowance for possible loan losses
and certain ratios for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average loans (1) $ 200,265 $190,072 $142,512 $108,805 $89,859
========= ======== ======== ======== =======
Period-end loans (2) $ 193,327 $188,991 $165,453 $121,025 $92,467
========= ======== ======== ======== =======
Allowance for possible loan losses at
beginning of period $ 1,742 $ 1,673 $ 1,548 $ 2,154 $ 2,609
Loans charged-off:
Commercial - - - 736 469
Residential real estate 4 42 7 8 74
Home equity and other consumer 77 89 24 1 -
-------- ------- ------ ------ ------
81 131 31 745 543
Loan recoveries:
Commercial - - - 14 44
Residential real estate 3 3 33 5 4
Home equity and other consumer 34 17 3 - -
-------- ------- ------ ------ ------
37 20 36 19 48
-------- ------- ------ ------ ------
Net charge-offs/(recoveries) 44 111 (5) 726 495
Provision charged to operations 100 180 120 120 40
-------- ------- ------ ------ ------
Allowance for possible loan losses at end of period $ 1,798 $ 1,742 $1,673 $1,548 2,154
========= ======= ====== ======= ======
</TABLE>
<PAGE>
Selected Ratios:
- ---------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses to period-end loans, net 0.93% 0.92% 1.01% 1.28% 2.33%
Net charge-offs/(recoveries) to average loans 0.02% 0.06% - 0.67% 0.55%
Net charge-offs/(recoveries) to allowance for possible
loan losses 2.45% 6.37% (0.30)% 46.90% 22.98%
Allowance as a percentage of non-performing loans 5800.00% 372.22% 176.11% 92.14% 80.92%
</TABLE>
(1) Includes loans held for sale
(2) Represents net loans, excluding loans held for sale
Allocation of the Allowance for Possible Loan Losses. The allocation of the
allowance for possible loan losses at December 31, and the percent of loans in
each category to total loans, follows:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial real estate $ 151 2.5% $ 215 3.3% $ 217 4.1% $ 291 5.5% $1,290 8.3%
Residential real estate 1,065 84.9 1,030 85.6 1,014 84.2 929 82.0 601 76.3
Home equity and other
consumer 582 12.6 497 11.1 442 11.7 328 12.5 263 15.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$1,798 100.0% $1,742 100.0% $1,673 100.0% $1,548 100.0% $2,154 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The Company sets the level of its allowance for possible loan losses based on a
number of factors. An individual analysis of all delinquent loans, as well as
internally classified loans, is conducted and specific allowances are allocated
for those loans that are determined to have certain weaknesses that make
ultimate collectibility of both principal and interest questionable. In
conjunction with its review, management considers external factors that may
affect the adequacy of the allowance for possible loan losses. Such factors may
include, but are not limited to, present real estate trends and regional
economic conditions, past estimates of possible loan losses as compared to
actual losses, potential problems with larger loans, loan concentrations and
historical losses on loans. Management and the Executive Committee of the Board
of Directors assess the amount of the allowance for possible loan losses
monthly. The Board of Directors reviews a detailed assessment on at least a
quarterly basis.
<PAGE>
INVESTMENT SECURITIES
The Company invests in debt and equity securities, subject to restrictions
imposed by federal and state law. The Company's securities portfolio is managed
in accordance with a written investment policy adopted by the Board of
Directors. Investments may be made by the President of the Company within
specified limits and types. Transactions exceeding these limits must be approved
in advance by the Executive Committee. All securities transactions are approved
by the Board of Directors after execution of the transaction.
At December 31, 1999, the Company maintained an investment portfolio comprised
mainly of adjustable-rate (ARM) and fixed-rate mortgage-backed securities (MBS),
U.S. Treasury bills and U.S. Government Agency callable debentures. The Company
has managed its investment portfolio with the intent of maintaining adequate
liquidity and maximizing yields. The Company has categorized $11.7 million of
MBS's and $16.4 million of U.S. Government Agency debentures as held to
maturity, carried at amortized cost, and $30.7 million of MBS's and $8.8 million
of U.S. Treasury bills and U.S. Government Agency callable debentures as
available for sale, carried at market value. These categorizations are
consistent with the standards defined in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Accordingly, as of December 31, 1999,
the Company has a net unrealized appreciation, net of taxes, of $10,000. This
amount is reported as accumulated other comprehensive income within
stockholders' equity.
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as of October 1, 1998. In conjunction with adopting this
statement, the Company transferred $4.7 million of mortgage-backed securities
and $6.0 million of U.S. Government Agency obligations from held to maturity to
available for sale.
The aggregate market value of the investment portfolios at December 31, 1999 was
$66.6 million. At December 31, 1999, the Company's portfolio of mortgage-backed
securities was comprised of one-year adjustable-rate instruments and fixed rate
mortgage-backed securities scheduled to mature after 2012. Due to amortization
and prepayments of the underlying loans, the actual maturities of the ARM and
fixed-rate mortgage-backed securities are typically less than the scheduled
maturities. The rates on the ARM securities are indexed to the one year Constant
Maturity Treasury (CMT) with annual period caps of 2% and life caps ranging from
9.03% to 13.96%. The margins over the one year CMT ranged from 1.95% to 2.63%.
<PAGE>
The maturity distribution and weighted average yield of investments in debt
obligations at December 31, 1999 follows:
<TABLE>
<CAPTION>
One Five Over Total
Within to Five to Ten Ten Market
One Year Years Years Years Value
-------- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Available for Sale (at market value)
Mortgage-backed securities:
FNMA participation certificates $ - $ - $ - $25,631 $ 25,631
FHLMC participation certificates - - - 5,112 5,112
U.S. Treasury bills and U.S.
Government Agency obligations 4,865 - 3,894 - 8,759
------- ------- ------- ------- ----------
$ 4,865 $ - $ 3,894 $30,743 $ 39,502
======= ======= ======= ======= ==========
Weighted average coupon 5.64% -% 7.16% 6.95% 6.81%
<CAPTION>
One Five Over Total
Within to Five to Ten Ten Market
One Year Years Years Years Value
-------- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Held to Maturity (at amortized cost)
Mortgage-backed securities:
FNMA participation certificates $ - $ - $ - $ 3,077 $ 3,077
FHLMC participation certificates - - - 4,868 4,868
GNMA participation certificates - - - 3,731 3,731
U.S. Government Agency obligations - 2,000 14,393 - 16,393
------- ------ ------- -------- -------
$ - $2,000 $14,393 $ 11,676 $28,069
======= ====== ======= ======== =======
Weighted average coupon -% 6.13% 7.02% 6.57% 6.77%
</TABLE>
<PAGE>
The carrying value of investments in debt obligations at December 31, follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Available for Sale (at market value)
- ------------------------------------
Mortgage-backed securities:
FNMA participation certificates $25,631 $ 12,990 $ 3,471
FHLMC participation certificates 5,112 11,883 9,839
U.S. Treasury bills 4,865 - -
U.S. Government Agency obligations 3,894 4,101 -
------- -------- --------
$39,502 $ 28,974 $ 13,310
======= ======== ========
<CAPTION>
1999 1998 1997
------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Held to Maturity (at amortized cost)
- ------------------------------------
Mortgage-backed securities:
FNMA participation certificates $ 3,077 $ 1,980 $ 8,761
FHLMC participation certificates 4,868 741 2,092
GNMA participation certificates 3,731 3,975 -
U.S. Government Agency obligations 16,393 3,500 16,498
------ ------- -------
$28,069 $ 10,196 $ 27,351
====== ======= =======
</TABLE>
At December 31, 1999 and 1998, investments in the securities of any one issuer
(excluding investments in securities of the U.S. government and federal agencies
and stock in the Federal Home Loan Bank of Boston (the FHLB)) did not exceed
more than 10% of the Company's stockholders' equity. See Item 8 - Notes 1 and 3
of Notes to Consolidated Financial Statements.
SOURCES OF FUNDS
Deposits. Deposits obtained through retail banking offices of the Company have
been the principal source of the Company's funds for use in lending and for
other general business purposes. The Company's deposit products include passbook
savings and club accounts, personal and commercial demand accounts, NOW
accounts, money market deposit accounts and certificates of deposit ranging in
term from three to 60 months. The Company also offers Individual Retirement
Account deposits among these products.
The Company markets a deposit program designed to attract transaction account
deposits to the Company (e.g., demand and NOW accounts). The program has been
well received, and the Company fully expects to continue this program.
<PAGE>
The Company's deposits are obtained primarily from residents of and businesses
located in Ipswich, Rowley, North Andover, Beverly, Salem, Marblehead, Reading
and Essex, Massachusetts. The Company attracts deposit accounts primarily by
offering a wide variety of services and accounts, competitive interest rates,
and convenient office locations and service hours. The Company prices its
products competitively within its market area. The Company has no brokered
deposits.
In recent years, the Company has focused on providing customers with deposit
products that meet their liquidity preferences. As a result, the Company has
promoted certain deposit products, such as its checking account program and
Ipswich Advantage money market account, which resulted in an increase in total
deposits of $10.3 million or 5.2% during 1999. Total demand deposits, NOW
accounts, money market deposit accounts and savings deposits totaled $143.3
million or 68.2% of total deposits at December 31, 1999, which represented a
$8.5 million or 6.3% increase from 1998 levels of $134.8 million or 67.5% of
total deposits.
<PAGE>
The following table shows the distribution of the Company's deposits at December
31,
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------- ------------------------------
Weighted Weighted Weighted
% of Average % of Average % of Average
Amounts Deposits Rate Amounts Deposits Rate Amounts Deposits Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 15,209 7.2% .00% $ 18,656 9.3% .00% $ 16,044 9.4% .00%
-------- ----- -------- ----- -------- -----
Savings:
Savings 37,704 17.9 2.31 37,768 18.9 2.38 37,069 21.6 2.67
NOW accounts 27,481 13.1 .76 22,954 11.5 .92 18,204 10.6 1.21
Money markets 62,859 30.0 4.49 55,418 27.8 4.63 34,828 20.3 4.47
-------- ----- -------- ----- -------- -----
Total demand
and savings 143,253 68.2 2.75 134,796 67.5 2.73 106,145 61.9 2.61
Certificates of
deposit 66,829 31.8 5.09 64,961 32.5 5.34 65,096 38.1 5.73
-------- ----- -------- ----- -------- -----
Total deposits $210,082 100.0% 3.40% $199,757 100.0% 3.58% $171,241 100.0% 3.79%
======== ===== ======== ===== ======== =====
</TABLE>
Deposits of $100,000 or more totaled approximately $72.6 and $66.0 million at
December 31, 1999 and 1998, respectively.
The following table presents, by various rate categories, the amount of
certificate of deposit accounts and the periods to maturity of the certificate
accounts outstanding at the dates indicated:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31,
------------------------------------------ ---------------------------
Maturing Maturing Maturing 1999 1998 1997
Within 1 Year 1-3 Years Thereafter Total Total Total
------------- --------- ---------- ----- ----- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
4.00% to 4.99% $25,391 $ 1,602 $ - $26,993 $19,381 $ -
5.00% to 5.99% 21,185 9,299 193 30,677 39,891 43,553
6.00% to 6.99% 4,366 3,812 - 8,178 5,189 18,427
7.00% to 7.99% 981 - - 981 500 3,116
------- ------- ------- ------- ------- -------
Total $51,923 $14,713 $ 193 $66,829 $64,961 $65,096
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Certificates at or over $100,000 totaled $11.2 million in 86 certificates at
December 31, 1999 and $11.3 million in 92 certificates at December 31, 1998.
The maturity distribution of certificates of deposit in amounts of $100,000 or
more at December 31, 1999 follows:
Amount
------
(Dollars in Thousands)
Within 3 months $ 3,702
3 to 6 months 3,463
6 to 12 months 1,877
After one year 2,169
-------
$ 11,211
========
The ability of the Company to attract and retain deposits and the cost to the
Company of these deposits have been, and will continue to be, significantly
affected by economic and competitive conditions. See "Item 8 - Note 11 of Notes
to Consolidated Financial Statements".
Borrowings. The Company is a member of the FHLB of Boston, one of 12 regional
Federal Home Loan Banks in the Federal Home Loan Bank System. The Federal Home
Loan Banks provide a central credit facility primarily for member institutions.
A member of the FHLB of Boston is required to hold shares of common stock in the
FHLB of Boston. At December 31, 1999, the Company held $3,977,000 of FHLB of
Boston stock.
At December 31, 1999, there were $45.0 million in borrowings outstanding at the
FHLB of Boston, there were $53.0 million at December 31, 1998 and $40.4 million
at December 31, 1997. The Company has a total borrowing capacity with the FHLB
of Boston of $99.1 million at December 31, 1999, which would require the
purchase of additional FHLB of Boston stock, if fully utilized. See "Item 8 -
Note 12 of Notes to Consolidated Financial Statements".
NON-DEPOSIT INVESTMENT SALES
The Company entered into a contract with Linsco Private Ledger Financial
Services (LPL) to offer non-deposit investment products in late 1996. Through
this arrangement, LPL and the Company employ an investment consultant to offer
investment products to customers. LPL provides marketing support and retains
compliance supervision of the program.
COMPETITION
The Company's deposit gathering activities are concentrated in Ipswich, Rowley,
North Andover, Beverly, Salem, Marblehead, Reading and Essex, Massachusetts. The
Company's residential loan origination activities are concentrated in Essex and
Middlesex Counties in Massachusetts and Southern New Hampshire.
The Company faces strong competition for deposits from other savings banks,
savings and loan associations, cooperative banks, credit unions and commercial
banks located in its market area. The Company also competes for deposits with
mutual funds and corporate and government securities. The Company competes for
deposits principally by offering depositors a wide variety of deposit programs,
automated teller machines, tax-deferred retirement programs and other services.
It does not rely upon any individual, group or entity for a material portion of
its deposits.
<PAGE>
Competition for residential real estate loans is strong and comes primarily from
savings banks, mortgage banking companies, commercial banks, savings and loan
associations, and other institutional lenders. The Company competes for loan
originations primarily based on the interest rates and loan fees that it charges
and the efficiency and quality of the services it provides. Competition for
loans varies from time to time depending on general and local economic
conditions, interest rate levels, and conditions in the mortgage market, among
other factors.
SUBSIDIARIES AND INVESTMENTS IN REAL ESTATE
At December 31, 1999, Ipswich Bancshares, Inc. had one wholly-owned subsidiary,
Ipswich Savings Bank. At December 31, 1999, the Bank had five subsidiaries;
Ipswich Preferred Capital Corporation, Ipswich Securities Corporation, Rowley
Investment Corporation, Historic Ipswich, Inc. and North Shore Financial
Services, Inc., all of which are Massachusetts corporations.
Ipswich Preferred Capital Corporation (IPCC) was formed in 1999 as a
Massachusetts business corporation which has elected to be taxed as a real
estate investment trust for federal and Massachusetts tax purposes. IPCC is 99%
owned by Ipswich Savings Bank. IPCC holds mortgage loans which were previously
originated by the Company.
Ipswich Securities Corporation (ISC) was formed in 1995 to engage exclusively in
the buying, selling and holding of securities on its own behalf as a subsidiary
of the Bank. At December 31, 1999, ISC held a portfolio of fixed-rate and
adjustable-rate mortgage-backed securities and U.S. Government Agency callable
debentures, with total amortized cost of $36.9 million and an aggregate market
value of $35.8 million.
ISC also holds the title to a limited partnership interest in a mixed-income
housing complex in Dorchester, Massachusetts. The book value of the partnership
is $1. The investment qualifies for low income housing tax credits under the
Internal Revenue Code.
Rowley Investment Corporation (RIC) is a limited dividend corporation. RIC was
formed in 1992 to hold an option to purchase 89 acres out of a parcel of 98
acres of land in Rowley, Massachusetts. In December 1999, the land was sold
generating a pre-tax gain of $320,000.
Historic Ipswich, Inc. (HII) was formed in 1981 for the purpose of holding
direct investments in real estate. The company assets were comprised of $226,000
in cash at December 31, 1999.
North Shore Financial Services, Inc. (NSFSI) (formerly known as North Shore
Mortgage Company, Inc.) was formed in 1987 for the purpose of holding title to
foreclosed properties. At December 31, 1999, NSFSI held title to three OREO
properties with a carrying value totaling $49,000.
The Company believes that its investments in the subsidiaries described above,
and the activities and investments of those subsidiaries are permitted.
EMPLOYEES
At December 31, 1999, the Company had 63 full-time employees and 32 part-time
employees. The Company believes its employee relations are good.
<PAGE>
YEAR 2000 ISSUES
The Year 2000 Issue (commonly referred to as "Y2K"), is the result of computer
programs being written using two digits, rather than four digits, to define the
applicable year. The Y2K issue, which is common to most corporations, including
banks, concerns the inability of information systems, primarily (but not
exclusively) computer software programs, to properly recognize and process
date-sensitive information as the Year 2000 approached.
As of year-end 1999, the Company had completed all phases of its Y2K assessment,
renovation and validation processes. The Company has experienced no problems or
issues relating to Y2K as of the date of this report nor is the Company aware of
any material problems or issues among its customers or vendors. The Company does
not anticipate any significant issues manifesting itself as a result of Y2K. It
will continue to monitor its systems for any potential problems.
STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Company is subject to regulation by the Board of Governors of the Federal
Reserve. The Bank is subject to extensive regulation and examination by the
Commissioner and the FDIC. Federal and state laws and regulations applicable to
banks regulate, among other things, the scope of their business, investments,
the timing of the availability of deposited funds and the nature and amount of
collateral for certain loans. The laws and regulations governing the Bank
generally have been promulgated to protect depositors and the insurance funds,
not stockholders. See "Item 8 - Note 14 of Notes to Consolidated Financial
Statements".
The following table summarizes the Company's and Bank's required and actual
regulatory capital ratios and amounts at December 31, 1999. The required ratios
included in the table are the capital minimums for December 31, 1999, as
required by FRB and FDIC regulations:
<TABLE>
<CAPTION>
Required Actual Excess
------------------ ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Regulatory Tier 1
leverage capital ratio
Company $ 10,713 4.0% $ 16,964 6.33%(1) $ 6,251 2.33%
Bank 10,717 4.0 16,852 6.29 (1) 6,135 2.29
Risk-based:
Tier 1
Company $ 5,169 4.0%(2) $ 16,964 13.13%(2) $ 11,795 9.13%
Bank 5,169 4.0 (2) 16,852 13.04(2) 11,683 9.04
Total risk-based
Company $ 10,338 8.0%(2) $ 18,582 14.38%(2) $ 8,244 6.38%
Bank 10,337 8.0 (2) 18,469 14.29 (2) 8,132 6.29
</TABLE>
(1) Regulatory Tier 1 leverage capital differs from the ratio of stockholders'
equity to total assets calculated in accordance with generally accepted
accounting principles. Additionally, the Regulatory Tier 1 leverage capital
calculation utilizes average assets for the fourth quarter of 1999, which
were $267,837 and $267,919 for the Company and Bank, respectively.
(2) Based upon total risk-based assets of $129,228 and $129,214 for the Company
and Bank, respectively.
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was enacted
on December 19, 1991; regulations implementing the prompt corrective action
provisions of FDICIA became effective one year later. In addition to the prompt
corrective action requirements, FDICIA made significant changes to the legal and
regulatory environment for insured depository institutions, including reductions
in insurance coverage for certain kinds of deposits, increased supervision by
the federal regulatory agencies, increased reporting requirements for insured
institutions, and new regulations concerning internal controls, accounting, and
operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized".
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirements to file a capital plan with their
primary federal regulator, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the institution by the FDIC, including requirements to raise additional capital,
sell assets, or sell the entire institution. Once an institution becomes
"critically undercapitalized" it must generally be placed in receivership or
conservatorship within ninety (90) days. The Bank has been categorized as "well
capitalized" during 1999.
ITEM 2 PROPERTIES
At December 31, 1999, the Company conducted its business from its headquarters
and main office at 21-23 Market Street, Ipswich, Massachusetts and seven branch
offices. The Company owns its main office facilities on Market Street, and its
branch office in Essex, Massachusetts, and leases branch office space in Rowley,
North Andover, Salem, Marblehead, Reading and Beverly, Massachusetts. The Rowley
lease runs through the year 2000, with three five-year renewal options
thereafter. The Salem lease runs through the year 2000, with four five-year
renewal options thereafter. The North Andover lease runs through the year 2004,
with two five-year renewal options thereafter. The Beverly lease runs through
the year 2001, with 5 five-year renewal options thereafter. The Marblehead lease
runs through the Year 2003 with three five-year renewal options thereafter. The
Reading lease runs through the Year 2003 with three five-year renewal options
thereafter. The Company's properties that are not leased are owned free and
clear of any mortgages. The Company leases the facilities at 25 Market Street to
unrelated third parties.
ITEM 3 LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings other than
ordinary routine litigation incidental to its business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
<PAGE>
PART II
- -------
ITEM 5 MARKET FOR THE BANK'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Ipswich Bancshares, Inc. Common Stock is traded in the over-the-counter market
and quoted on the NASDAQ National Market under the symbol "IPSW". On February
18, 2000, there were approximately 253 holders of record of the 2,525,427 shares
of the Ipswich Bancshares, Inc. Common Stock outstanding.
The following table presents the quarterly high and low sales prices for the
Company's Common Stock during the periods in 1999, and 1998, as reported by
NASDAQ. The quotations represent high and low sales prices for the stock as
reported by NASDAQ.
<TABLE>
<CAPTION>
SALES PRICE DIVIDENDS
----------- ---------
Quarter-ending HIGH LOW DECLARED
-------------- ---- --- --------
<S> <C> <C> <C>
December 31, 1999 $11.75 $8.375 $.10
September 30, 1999 10.375 8.875 .05
June 30, 1999 10.938 9.75 .05
March 31, 1999 12.00 9.688 .05
December 31, 1998 13.75 10.00 .05
September 30, 1998 18.835 11.50 .04
June 30, 1998 20.75 15.50 .04
March 31, 1998 16.5 13.50 .04
</TABLE>
Future dividends, if any, will be at the discretion of the Board of Directors
based upon a variety of factors including earnings, financial condition, capital
adequacy, general economic conditions and regulatory and legal restrictions.
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
At or for the Year Ended December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands of dollars except for per share datat
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
- ------------------
Total assets $ 276,298 $ 271,328 $ 227,244 $ 158,942 $130,586
Loans 193,327 188,991 165,453 121,025 92,467
Deposits 210,082 199,757 171,241 129,343 110,842
Stockholders' equity 16,975 14,223 11,833 9,851 8,092
Income Statement Data:
- ---------------------
Net interest income $ 8,698 $ 7,461 $ 6,435 $ 5,073 $ 4,031
Provision for possible loan losses 100 180 120 120 40
---------- ------- ------- ------- ------
Net interest income after provision for
possible loan losses 8,598 7,281 6,315 4,953 3,991
Total non-interest income 2,925 2,437 1,700 1,520 1,166
Total non-interest expenses 6,910 5,596 4,476 4,049 3,542
---------- ------- ------- ------- ------
Pretax income 4,613 4,122 3,539 2,424 1,615
Income tax expense 1,324 1,484 1,327 632 148
---------- ------- ------- ------- ------
Net income $ 3,289 $ 2,638 $ 2,212 $ 1,792 $ 1,467
========= ======== ======= ======= ======
Per Share Data:
- --------------
Book value per share (1) $ 6.72 $ 5.95 $ 4.96 $ 4.15 $ 3.45
Basic earnings per share (1) 1.33 1.10 .93 .76 .63
Diluted earnings per share (1) 1.29 1.03 .88 .73 .61
Dividends per share (1) .25 .17 .125 .10 .01
Selected Operating Ratios:
- -------------------------
Return on average stockholders' equity 21.04% 20.09% 20.38% 20.07% 20.67%
Return on average assets 1.22 1.09 1.18 1.22 1.27
Gross interest margin 3.36 3.23 3.60 3.63 3.64
Operating expense to average assets 2.42 2.32 2.39 2.75 3.06
Dividends/net income 19.12 15.43 13.43 13.17 1.57
Capital Ratios:
- --------------
Average equity to average assets 5.74% 5.37% 5.71% 6.04% 6.09%
Total risk-based capital ratio 14.38 11.70 10.81 12.01 12.42
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Other Data:
- ----------
Residential and home equity loan $ 111,687 $ 211,179 $ 119,445 $ 101,336 $ 68,263
originations
Non-performing assets $ 142 $ 1,186 $ 2,164 $ 3,213 $ 3,772
Non-performing assets as a percent of .05% .44% .95% 2.02% 2.89%
total assets
Number of checking accounts 13,959 12,622 10,599 8,417 5,120
Number of employees 95 96 80 64 55
</TABLE>
(1) Adjusted for 5 for 1 stock split effective December 11, 1995, and adjusted
for 2 for 1 stock split effective August 27, 1997
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in Item 8 of this Report. Certain Guide 3
information is included in Item 1 of this Report.
FINANCIAL CONDITION
General. The Company's financial condition continued to improve in 1999 as
evidenced by increased earnings, the maintenance of adequate capital and the
growth in both earning assets and deposits. The focus in 1999 was on building
the residential mortgage business as evidenced by the Company's expanding its
market coverage throughout Essex County. The Company's focus in the deposit area
was on generating transaction accounts, as evidenced by the ongoing checking
account acquisition program the Company implemented in 1995. The Company
introduced its internet banking site in 1999 offering its full array of products
and access to its bill pay option. The Company has experienced higher than
expected results to date.
Cash and Cash Equivalents. Cash and cash equivalents decreased by $3.8 million
at December 31, 1999, from the year end 1998 balance of $12.1 million. This was
primarily a result of a reallocation of liquid assets into higher yielding loans
and investments.
Investment Securities. Total investment securities increased by $28.3 million or
72.0% during 1999, primarily due to the investment of funds from loans sold in
the secondary market into investment securities. The Company adopted SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, as of October
1, 1998. In conjunction with adopting this statement, the Company transferred
$4.7 million of mortgage-backed securities and $6.0 million of U.S. Government
Agency obligations from held to maturity to available for sale. At December 31,
1999, the Company had identified $29.0 million in adjustable-rate
mortgage-backed securities as available for sale. The Company has also
identified $8.8 million of callable debentures and U.S. Treasury bills as
available for sale, and held $1.7 million in fixed-rate mortgage-backed
securities in its available for sale portfolio. The Company's portfolio of held
<PAGE>
to maturity securities consisted of $11.7 million of fixed-rate mortgage-backed
securities and $16.4 million of callable securities. The Company included net
unrealized gains on investment securities available for sale, net of taxes, of
$10,000 in accumulated other comprehensive income within stockholders' equity at
December 31, 1999, as a result of the application of SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. See "Item 8 - Note 3 of
Notes to Consolidated Financial Statements".
Loans. Gross loans increased by $4.3 million or 2.3% during 1999, and increased
by $23.5 million or 14.2% during 1998. Residential and owner-occupied
construction loans increased by $2.0 million and home equity loans increased by
$3.6 million. Primarily from these lending efforts, the residential component of
the loan portfolio increased to 97.0% of total loans from 96.1% at December 31,
1998. Commercial real estate loans continued to decrease as a percentage of
gross loans, declining from 3.3% in 1998 to 2.5% in 1999.
Deposits. Deposits ended the year at $210.1 million, an increase of $10.3
million or 5.2% over the year-end 1998 balance of $199.8 million. Deposit growth
is attributed to a combined strategy of providing superior convenience and
service while offering competitive rates.
Borrowings. The Company borrows from the FHLB of Boston to support liquidity and
manage its asset/liability position. Borrowings decreased to $45.0 million, a
decrease of $8.0 million in 1999 from the year-end 1998 balance of $53.0
million.
NON-PERFORMING ASSETS
General. Non-performing assets, consisting of non-performing loans and OREO,
peaked at December 31, 1990 at $15.3 million. This level, to a great extent, was
the result of deterioration in the regional economy in the late 1980's and in
particular, significant decreases in the market values of real estate in
northeast Massachusetts. Since that time, the Company has taken steps to
decrease its exposure to non-performing assets through aggressive workout and
sales management of these assets. As a result, non-performing assets stood at
$142,000 at December 31, 1999 versus $1.2 million at the end of 1998.
Non-performing Loans. When a loan is originated, interest on the loan is accrued
(i.e., recognized as income) on a regular periodic basis even if the loan
payment has not yet been received. The recording of interest income on problem
loan accounts generally ceases when the loans become 90 days past due and the
loans are not in the process of collection.
It is also the policy of the Company to classify as non-accrual, loans less than
90 days delinquent and loans performing in accordance with their terms, if in
management's judgment such loans are likely to present future principal or
interest repayment problems and could ultimately be classified as
non-performing.
There were no loans on non-performing status at December 31, 1999 and 1998 that
were considered troubled debt restructurings. At December 31, 1997, loans
totaling $592,000 had been renegotiated and were carried in non-performing
status as restructured loans. This balance represents 62.3% of non-performing
loans at December 31, 1997. The Company generally carries restructured loans as
non-performing for 6 to 18 months before considering their reclassification to
performing status.
<PAGE>
The following table sets forth information regarding delinquent loans and other
non-performing assets held by the Company at the dates indicated. The Company
had $650,000 in loans greater than 90 days past due and still accruing at
December 31, 1999. These loans were not classified non-performing loans.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Delinquent loans 30-89 days past due (not included in
non-performing loans) $ 250 $ 194 $1,218 $ 827 $ 468
Delinquent loans 90+ days past due (not included in
non-performing loans) 650 442 3 292 99
----- ----- ----- ----- -----
$ 900 $ 636 $1,221 $1,119 $ 567
===== ===== ===== ===== =====
Delinquent loans as a percent of gross loans .47% .34% .74% .92% .61%
====== ====== ====== ====== ======
Non-performing loans:
Loans accounted for on a non-accrual basis $ 31 $ 468 $ 358 $ 337 $ 719
Restructured loans - - 592 1,343 1,943
----- ----- ----- ----- -----
Total non-performing loans 31 468 950 1,680 2,662
OREO, net of allowance for possible OREO losses 111 718 1,214 1,533 1,110
----- ----- ----- ----- -----
Total non-performing assets $ 142 $1,186 $2,164 $3,213 $3,772
===== ===== ===== ===== =====
Non-performing assets as a percent of total assets .05% .44% .95% 2.02% 2.89%
====== ====== ====== ====== ======
</TABLE>
See "Item 8 - Notes 1 and 5 of Notes to Consolidated Financial Statements".
Potential Non-performing Loans. In addition to non-performing loans, at December
31, 1999, the Company had classified an additional $673,658 of performing loans
as "substandard" based on an internal rating system used by the Company. These
substandard loans evidence one or more weaknesses or potential weaknesses
related to repayment history, the borrower's financial condition, adequacy of
collateral, or other factors. Depending on the local economy and other factors,
these loans, as well as other performing loans not so classified, may become
non-performing in the future. These loans were primarily commercial real estate
loans.
<PAGE>
OREO. The following table sets forth the types of properties which comprised the
Company's OREO portfolio at the dates shown. All of the properties held on
December 31, 1999 are located in Essex County, Massachusetts.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1999 1998 1997
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Land $ - $ 669 $ 693
Commercial 49 49 521
Residential 1-4 family 62 - -
------ ------ ------
OREO $ 111 $ 718 $1,214
====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
General. The Company's results of operations depend primarily on its net
interest income and the efficiency of the Company's operations. The Company's
net income is affected by its costs of operations, including non-interest
expenses such as salaries and employee benefits, occupancy costs and expenses
associated with the administration and disposition of OREO, non-performing loans
and other classified assets. For the year ended December 31, 1999, the Company
reported net income of $3.3 million, or $1.29 per fully diluted share ($1.33
basic), compared to $2.6 million or $1.03 per fully diluted share ($1.10 basic)
for 1998 and $2.2 million or $.88 per fully diluted share ($.93 basic) for 1997.
Interest Income and Interest Expense. The following table sets forth, for the
periods indicated, information based on average monthly balances during the
periods indicated regarding (i) the total dollar amount of interest income from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest income; (iv) interest rate spread; and (v)
gross interest margin. Non-accrual loan balances have been included in the
appropriate category; however, only interest actually paid on such loans has
been included in interest income.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ---------------------------- ---------------------------
Interest Interest Interest
Average Earned/ Average Average Earned/ Average Average Earned/ Average
Balance Paid Yield Balance Paid Yield Balance Paid Yield
------- ---- ----- ------- ---- ----- ------- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans:
Residential (1) $172,407 $12,170 7.06% $163,660 $11,784 7.20% $119,167 $ 8,996 7.55%
Commercial 5,490 477 8.69 6,487 557 8.59 6,575 572 8.70
Home equity 21,251 1,561 7.35 18,807 1,464 7.78 15,692 1,364 8.69
Consumer 1,117 105 9.40 1,118 102 9.12 1,078 87 8.07
-------- ------- -------- ------- -------- -------
Total loans 200,265 14,313 7.15 190,072 13,907 7.32 142,512 11,019 7.73
Investments (2) 58,397 3,642 6.24 40,577 2,551 6.29 36,167 2,423 6.70
-------- ------- -------- ------- -------- -------
Total interest-
earning assets 258,662 17,955 6.94 230,649 16,458 7.14 178,679 13,442 7.52
Cash and due from
Banks 6,247 6,447 4,640
Other assets 4,248 4,303 4,107
-------- -------- --------
Total assets $269,157 $241,399 $187,426
======== ======== ========
Interest-bearing liabilities:
Savings deposits $35,987 868 2.41% $37,005 937 2.53% $36,755 1,056 2.87%
NOW accounts 23,787 176 .74 19,343 203 1.05 15,070 178 1.18
Money market
deposit accounts 58,115 2,441 4.20 44,165 2,030 4.60 27,337 1,128 4.13
Certificates of deposit 63,608 3,091 4.86 62,346 3,372 5.41 58,580 3,306 5.64
-------- ------- -------- ------- -------- -------
Total interest-
bearing deposits 181,497 6,576 3.62 162,859 6,542 4.02 137,742 5,668 4.11
Borrowed funds 50,995 2,681 5.26 44,100 2,455 5.57 23,828 1,339 5.62
-------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities 232,492 9,257 3.98 206,959 8,997 4.35 161,570 7,007 4.34
Demand deposits 18,048 18,207 12,709
Other liabilities 3,154 3,263 2,452
------- ------- -------
Total liabilities 253,694 228,429 176,731
Stockholders' equity 15,463 12,970 10,695
------- -------- -------
Total liabilities and
Stockholders'
Equity $269,157 $241,399 $187,426
======= ======== ========
Net interest income $ 8,698 $ 7,461 $ 6,435
======= ======= ======
Interest rate spread 2.96% 2.79% 3.18%
Gross interest margin 3.36% 3.23% 3.60%
</TABLE>
(1) Residential loans include portfolio loans and loans held for sale.
(2) Includes Federal funds sold.
<PAGE>
The following table presents the changes in interest and dividend income and the
changes in interest expense attributable to changes in interest rates or changes
in the volume of interest-earning assets and interest-bearing liabilities for
the periods indicated. Changes which are attributable to both rate and volume
have been allocated to changes due to volume.
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
Changes Due to Changes Due to
Increased (Decreased) Increased (Decreased)
-------------------------- -------------------------
Rate Volume Total Rate Volume Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $(322) $ 728 $ 406 $(580) $3,468 $ 2,888
Mortgage-backed securities 46 803 849 (154) 261 107
Short-term investments (22) 73 51 19 47 66
Investment securities (31) 222 191 3 (48) (45)
---- ----- ----- ---- ----- ------
Total (329) 1,826 1,497 (712) 3,728 3,016
Interest expense:
Deposits (641) 675 34 (135) 1,009 874
Borrowed funds (136) 362 226 (20) 1,136 1,116
---- ----- ----- ---- ----- ------
Total (777) 1,037 260 (155) 2,145 1,990
---- ----- ----- ---- ----- ------
Net interest and dividend income $ 448 $ 789 $1,237 $(557) $1,583 $ 1,026
==== ===== ===== ==== ===== ======
</TABLE>
Total interest income amounted to $18.0 million for 1999, an increase of $1.5
million, or 9.1% from $16.5 million in 1998. The increase was primarily due to
the volume of loans in 1999 which, on average, increased $10.2 million during
the year, partially offset by decreases in interest rates. As a result of this
increase, total interest income on the loan portfolio increased by $406,000. The
yield on the investment portfolio decreased by five basis points, primarily due
to the redemption of callable debentures. Callable debentures typically offer a
higher yield than other investment securities due to the call feature which
gives the issuer the right to redeem an investment at certain times during the
life of the security. The portfolio of adjustable-rate mortgage-backed
securities typically reprice up to market rates in the second and third year of
the life of these securities which tends to increase the yield in a rising rate
environment and decrease in a falling rate environment on a delayed basis
depending upon the scheduled roll date of the underlying loans. In addition,
average investments increased by $17.8 million. As a result, interest income on
the investment portfolio increased by $1.1 million in 1999 over the previous
year.
Total interest income in 1998 was $16.5 million, an increase of $3.1 million, or
22.4% from 1997. The increase was due primarily to growth in earning assets of,
on average, $52.0 million. The growth was primarily in fixed-rate mortgages and
in the investment portfolio.
<PAGE>
Interest on loans was also impacted by the amount of non-performing and
restructured loans. For 1999, 1998 and 1997, the amount of interest due on
non-performing and restructured loans, which was not recognized, totaled $0,
$32,000 and $3,000, respectively.
Total interest expense in 1999 was $9.3 million versus $9.0 million in 1998.
Interest expense increased primarily as a result of increased borrowings as well
as the growth in money market accounts from, on average, $44.2 million in 1998
to $58.1 million in 1999. This growth was primarily from the Company's continued
promotion efforts in the Marblehead and Reading de novo branch locations opened
in June and August 1998, respectively. Interest expense on borrowings increased
by $226,000 primarily as a result of borrowings increasing on average by $6.9
million, partially offset by a decline in the rate on borrowings from 5.57% in
1998 to 5.26% in 1999.
Total interest expense in 1998 increased by $2.0 million compared to 1997. The
increase was due to the growth in average interest-bearing liabilities of $45.4
million.
Net Interest Income. Net interest income was $8.7 million for 1999, an increase
of $1.2 million, or 16.6%, from 1998. This increase is primarily due to the
growth in earning assets of the Company, specifically, residential mortgage
loans and adjustable-rate mortgage-backed securities. Net interest income was
$7.5 million for 1998, an increase of $1.0 million or 15.9% from 1997.
Provision for Possible Loan Losses. The provision for possible loan losses in
1999 was $100,000, a decrease of $80,000 or 44.4% from 1998 as growth of the
loan portfolio slowed and quality improved in 1999. The ratio of the allowance
for possible loan losses to non-performing loans was 5,800.0% at December 31,
1999, and 372.2% at December 31, 1998. For 1999, net loan charge-offs against
the allowance for possible loan losses amounted to $44,000. See "Item 1 -
Business Lending Activities - Loan Portfolio and Maturity.
The provision for possible loan losses in 1998 was $180,000, an increase of
$60,000 or 50% from 1997 principally as a result of growth in the loan
portfolio. The ratio of the allowance for possible loan losses to non-performing
loans was 372.2% at December 31, 1998, and 176.1% at December 31, 1997. For
1998, net loan charge-offs against the allowance for possible loan losses
amounted to $111,000. See "Item 1 - Business - Lending Activities--Allowance for
Possible Loan Losses".
The amount of provision for loan losses that the Company records is predicated
on several factors including asset quality, growth in the loan portfolio and
market and economic conditions. The Company recorded significant provisions in
1993 and 1994 to reserve for several specific commercial real estate loans that
had been originated in the mid to late "80's". Subsequently, these credits were
resolved through payoffs, amortizations and charge-offs. The level of provisions
recorded in 1995 through 1999 reflect the fact that the composition of the
portfolio is primarily residential mortgages which carry a lower risk than
commercial real estate. Levels of non-performing loans have also decreased. The
decrease in the provision in 1999 is reflective of slower growth in the loan
portfolio and continued strong asset quality. Future provisions will be dictated
by the ongoing quality of the portfolio and economic conditions that may impact
the loan portfolio. Loan loss provisions may be substantially increased if
conditions dictate.
<PAGE>
Increases in the allowance for possible loan losses or reductions in the
carrying values of non-performing assets could be required by regulatory
agencies as a result of their examinations. The Company was most recently
examined by the Federal Deposit Insurance Corporation in the first quarter of
1999.
Non-interest Income. Non-interest income for 1999 and 1998 increased $488,000 or
20.0% and $737,000 or 43.4%, over the previous year, respectively, most notably
in net loan servicing income (expenses) and deposit account fees. The Company
realized significant gains from the sale of loans in the secondary market in
1999 due to substantial originations in the first quarter of 1999 and the fourth
quarter of 1998. Gains on the sale of mortgages totaled $1.0 million in 1999
versus $1.5 million in 1998. The Company recognized increases of $308,000 and
$254,000 in 1999 and 1998, respectively, over the previous year, in deposit
account fees, primarily as a result of the ongoing transaction account
acquisition program.
In accordance with SFAS No. 122 and SFAS No. 125, the Company recognized $1.2
million of mortgage servicing rights in 1999 and $1.5 million in 1998. The
Company recognizes on its balance sheet the estimated value of the rights to
service mortgages it originated and sold in the secondary market on a servicing
retained basis. The asset created is amortized on a level yield method over the
estimated life of the underlying loans under which the asset was created. On a
quarterly basis, the Company estimates the fair value of the unamortized asset
and adjusts the recorded amount to the lower of unamortized cost or fair value
through a valuation allowance charged to loan servicing fee income. The Company
can recover any allowance amount if the fair value increases in subsequent
periods. The unamortized asset totaled $0 and $229,000, at December 31, 1999 and
1998, respectively. The Company determined no valuation allowance was necessary
at December 31, 1998.
Non-interest Expenses. Total non-interest expenses increased in 1999 by $1.3
million, or 23.5% over the 1998 total of $5.6 million. The increase is primarily
due to expenses of $380,000 to establish the Holding Company and REIT and full
year expenses for the two de novo branches opened in mid-1998 in Marblehead and
Reading.
Total non-interest expenses increased in 1998 by $1.1 million, or 25.0% over the
1997 total of $4.5 million. Salaries and employee benefits, as well as occupancy
and equipment expenses increased by a total of $608,000, primarily due to the
opening of the Marblehead and Reading branches in the second and third quarters
of 1998, respectively, the addition of sales people and support staff in the
mortgage banking division and overall growth in the Company. Data processing
expenses increased by $161,000 or 62.4% primarily as a result of the added
transaction deposit accounts generated from the Company's deposit program and
the implementation of a new teller system.
ASSET AND LIABILITY MANAGEMENT
The Company does not use static GAP analysis to manage its interest rate risk.
It believes that simulation modeling more accurately encompasses the impact of
changes in interest rates on the earnings of the Company over time. However, the
Company prepares a GAP schedule to measure its static position.
<PAGE>
Our assumption is that NOW and DDA accounts and savings accounts, which
generally are subject to immediate withdrawal, have effective maturities over
five years. Money market accounts have an effective maturity up to six months.
At December 31, 1999, the Company's cumulative gap with respect to assets and
liabilities maturing or repricing within one year was a negative $49.2 million
or 17.8% of total assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect income while a positive gap would tend to result in an increase in
income. During a period of falling interest rates, a negative gap would tend to
result in an increase in net income while a positive gap would tend to adversely
affect income. A principal focus has been the origination of prime interest
rate-based home equity loans and the sale in the secondary market of the
majority of fixed-rate loans originated. The home equity loans reprice to market
rates as the prime rate, as published by the Wall Street Journal, fluctuates.
These loans mature or reprice more quickly and are, therefore, more interest
rate sensitive than long-term, fixed-rate, single family residential loans. The
Company also maintains a significant portfolio of adjustable-rate
mortgage-backed securities in its investment portfolio.
<PAGE>
The following table summarizes the contractual maturities or assumed repricing
of the Company's assets, and liabilities and equity at December 31, 1999:
<TABLE>
<CAPTION>
Assets/Liabilities Maturing or Repricing at December 31, 1999 in:
-----------------------------------------------------------------------------------
0-6 6-12 1-2 3-5 Over 5
Months Months Years Years Years Total
------ ------ ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Residential ARM loans $ 14,206 $ 17,373 $ 18,674 $ 35,780 $ - $ 86,033
Residential fixed rate mortgage loans 5,456 5,020 9,218 22,587 35,209 77,490
Home equity loans 23,137 3 7 20 218 23,385
Commercial loans 760 545 968 1,564 1,036 4,873
Consumer loans 363 150 28 20 499 1,060
Federal funds and interest bearing deposits 1,707 - - - - 1,707
Fixed MBS held-to-maturity 471 488 1,028 2,870 6,819 11,676
U.S. Treasury bills and callable
debentures held-to-maturity 11 10 10 2,082 14,280 16,393
Fixed and MBS available-for-sale 118 112 209 519 779 1,737
ARM MBS available-for-sale 18,560 8,235 2,211 - - 29,006
Callables debentures available-for-sale 4,865 - - 1,977 1,917 8,759
Equity securities 3,977 - - - 253 4,230
Cash and due from banks - - - - 6,552 6,552
Non-earnings assets - - - - 3,397 3,397
--------- --------- --------- --------- --------- ---------
Total 73,631 31,936 32,353 67,419 70,959 276,298
Liabilities and equity capital:
Interest bearing NOW accounts - - - - 27,481 27,481
Demand deposits - - - - 15,209 15,209
Savings - - - - 37,704 37,704
Money market deposits 62,859 - - - - 62,859
Certificates of deposit 38,503 13,420 12,374 2,532 - 66,829
Borrowings 37,000 3,000 5,000 - - 45,000
Other liabilities - - - - 4,241 4,241
Equity capital - - - - 16,975 16,975
--------- --------- --------- --------- --------- ---------
Total 138,362 16,420 17,374 2,532 101,610 276,298
--------- --------- --------- --------- --------- ---------
Excess (deficiency) of assets over
liabilities and equity capital $ (64,731) $ 15,516 $ 14,979 $ 64,887 $ (30,651) $ -
========= ========= ========= ========= ========= =========
Cumulative Gap $ (64,731) $ (49,215) $(34,236) $ 30,651 $ - $ -
Cumulative assets as a % of cumulative
liabilities and equity capital 53.22% 68.20% 80.11% 117.55% 100.00%
Cumulative excess (deficiency) of assets
over liabilities and equity capital as a
% of total assets (23.43)% (17.81)% (12.39)% 11.09% 0.00%
</TABLE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of funds for the Company are deposits, borrowings from the
FHLB of Boston, the sale of loans, loan amortization, prepayments and
maturities, and the sale of investments and mortgage-backed securities available
for sale. Total deposits and FHLB borrowings increased by $2.3 million, or 0.9%,
during 1999, and increased by $41.2 million, or 19.4%, during 1998.
During 1999 and 1998, the Company used its sources of funds primarily to meet
commitments to pay maturing certificates of deposit and savings withdrawals, to
fund loan commitments and to purchase investment securities. At December 31,
1999 and 1998, approved loan commitments outstanding amounted to $6.8 million
and $10.3 million, respectively. At the same dates, commitments of the Company
to borrowers under unused lines of credit and home equity credit lines amounted
to $31.9 million and $26.3 million, respectively, and the unadvanced portions of
residential owner-occupied construction loans amounted to $573,000 and $355,000,
respectively.
The Company monitors its liquidity in accordance with guidelines established by
its Asset/Liability and Investment Policies. Management believes that the
Company currently has adequate liquidity available to meet operating needs. To
meet unexpected demands, the Company has borrowing capabilities with the FHLB of
Boston. At December 31, 1999, the total borrowing capacity was $99.1 million.
See "Item 1 - Business - Source of Funds - Borrowings".
For further information regarding the Company's capital resources, see "Item 1 -
Business - Stockholders' Equity and Regulatory Matters".
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related notes thereto presented in
Item 8 of this Report have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. Unlike many
industrial companies, most of the assets and virtually all of the liabilities of
the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the general level of
inflation. Over short periods of time, interest rates may not necessarily move
in the same direction or in the same magnitude as the price of goods and
services.
DIVIDENDS
During 1995, the Company established a policy whereby the Board of Directors
declares quarterly cash dividends, after a review of earnings, capital and asset
quality trends. Dividends were initiated in the third quarter of 1995 by the
declaration of a post-split $.005 dividend per common share. In total, the
Company declared dividends of $629,000, $407,000 and $297,000 or $.25, $.17 and
$.125 per share in 1999, 1998 and 1997, respectively. The declaration of future
cash dividends will be subject to operating results, financial conditions,
regulatory, tax considerations and other factors.
In the third quarter of 1997, the common stock was split 2-for-1, effected by
means of a stock dividend. This dividend was paid as a result of the Company's
desire to increase the number of shares outstanding, in order to improve the
trading liquidity of its shares. As a result, the number of shares outstanding
at December 31, 1999 and 1998 was approximately 2.5 million and 2.4 million,
respectively.
<PAGE>
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. It requires that an enterprise display an amount
representing total comprehensive income for each period. It does not require per
share amounts of comprehensive income to be disclosed. SFAS No. 130 is effective
for both interim and annual periods beginning after December 15, 1997. The
Company adopted this statement effective for the 1998 financial statements; all
prior periods have been reclassified to reflect the provisions of this
statement.
In June of 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. The Company manages its operations as one segment.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The adoption of SFAS No. 133 on October 1, 1998, did not
have a material effect on the Company; however, in conjunction with adopting
this statement, the Company transferred $4.7 million of mortgage-backed
securities and $6.0 million of U.S. Government Agency obligations from held to
maturity to available for sale.
In 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by Mortgage
Banking Enterprises. SFAS No. 134 amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. SFAS No. 134 was effective for the first fiscal quarter beginning
after December 31, 1998. Early application was encouraged. The adoption of this
statement did not have a significant effect on the Company's financial
condition, liquidity or results of operations.
<PAGE>
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's success is dependent upon its ability to manage interest rate
risk. Interest rate risk can be defined as the exposure of the Company's net
interest income to adverse movements in interest rates. Although the Company
manages other risks, as in credit and liquidity risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition and results of operations. Because the Company
does not maintain a trading portfolio it is not exposed to significant market
risk from trading activities.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO). ALCO establishes policies that
monitor and coordinate the Company's sources, uses and pricing of funds. The
committee is also involved in formulating the economic projections for the
Company's budget and strategic plan.
The Company continues to reduce the volatility of its net interest income by
managing the relationship of interest-rate sensitive assets to interest-rate
sensitive liabilities. In recent years, the focus has been to originate
adjustable-rate residential loans for portfolio, which reprice or mature more
quickly than fixed-rate residential loans. The Company's adjustable-rate loans
are primarily tied to published indices, such as the one- year Constant Maturity
Treasury (CMT).
The Company utilizes a simulation model to analyze net interest income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both a rise or fall in interest rates (rate shock) over
a twelve and twenty-four month period. The model is based on the actual maturity
and repricing characteristics of interest-rate sensitive assets and liabilities.
The model incorporates assumptions regarding the impact of changing interest
rates on the prepayment rate of certain assets and liabilities. The assumptions
are based on nationally published prepayment speeds on assets and liabilities
when interest rates increase or decrease by 200 basis points or greater. The
model factors in projections for anticipated activity levels by product lines
offered by the Company. The simulation model also takes into account the
Company's increased ability to control the rates on deposit products more so
than adjustable-rate loans tied to published indices.
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change the interest income and expense streams
associated with the Company's financial instruments also change, thereby
impacting net interest income (NII), the primary component of the Company's
earnings. ALCO utilizes the results of the simulation model and static GAP
reports to quantify the estimated exposure of NII to sustained interest rate
changes.
The following reflects the Company's NII sensitivity analysis as of December 31:
Estimated
Rate Change NII Sensitivity
----------- ---------------
1999 1998
---- ----
+200bp (5.29)% (13.3%)
-200bp 6.04% 8.5%
The preceding sensitivity analysis does not represent the Company's forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to: prepayment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable-rate assets, the potential effect of changing debt service
levels on customers with adjustable-rate loans, depositor early withdrawals and
product preference changes, and other internal/external variables. Furthermore,
the sensitivity analysis does not reflect actions that ALCO might take in
responding to or anticipating changes in interest rates.
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report 30
Consolidated Balance Sheets 31
Consolidated Statements of Income 33
Consolidated Statements of Changes in Stockholders' Equity 35
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ipswich Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Ipswich
Bancshares, Inc. and Subsidiary (the Company) as of December 31, 1999 and 1998,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ipswich
Bancshares, Inc. and Subsidiary at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
Portland, Maine Limited Liability Company
January 10, 2000
<PAGE>
<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in Thousands Except Per Share Data)
ASSETS
------
1999 1998
<S> <C> <C>
Cash and due from banks (note 2) $ 6,552 $ 7,079
Interest-bearing deposits 2 5
Federal funds sold (note 2) 1,705 5,011
--------- ---------
Total cash and cash equivalents 8,259 12,095
Investment securities available for sale, at market value; amortized
cost of $39,485 and $28,776 (notes 3 and 12) 39,502 29,085
Investment securities held to maturity, at cost; market value
of $27,061 and $10,271 (notes 3 and 12) 28,069 10,196
Loans held for sale (note 4) - 24,000
Loans (notes 5 and 12) 193,327 188,991
Allowance for possible loan losses (note 6) (1,798) (1,742)
--------- ---------
Net loans 191,529 187,249
Stock in Savings Bank Life Insurance Company 253 253
Stock in FHLB of Boston (notes 9 and 12) 3,977 2,905
Banking premises and equipment, net (note 7) 3,168 3,298
Other real estate owned (note 8) 111 718
Accrued interest receivable 1,248 1,053
Mortgage servicing rights (note 10) - 229
Other assets 182 247
--------- ---------
Total assets $ 276,298 $ 271,328
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1999 1998
-------- --------
<S> <C> <C>
Liabilities:
Deposits (note 11) $210,082 $199,757
Borrowed funds (note 12) 45,000 53,000
Mortgagors' escrow accounts 993 1,043
Accrued expenses and other liabilities 2,731 2,759
Deferred income tax liability (note 13) 517 546
-------- --------
Total liabilities 259,323 257,105
Commitments and contingencies (notes 4, 7, 13 and 17)
Stockholders' equity (notes 14 and 15):
Serial preferred stock, $.10 par value per share; 1,000,000 shares
authorized, none issued - -
Common stock, $0.10 par value per share; 12,000,000 shares authorized,
2,525,427 and 2,392,286 shares issued and outstanding 253 239
Additional paid-in capital 2,262 2,009
Retained earnings 14,450 11,790
Accumulated other comprehensive income (note 3) 10 185
-------- --------
Total stockholders' equity 16,975 14,223
Total liabilities and stockholders' equity $276,298 $271,328
======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands, Except Per Share Data)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 14,313 $ 13,907 $ 11,019
Federal funds sold and interest bearing deposits 187 136 70
Investment securities available for sale 2,233 1,108 953
Investment securities held to maturity 1,222 1,307 1,400
-------- -------- --------
Total interest and dividend income 17,955 16,458 13,442
Interest expense:
Deposits (note 11) 6,576 6,542 5,668
Borrowed funds 2,681 2,455 1,339
-------- -------- --------
Total interest expense 9,257 8,997 7,007
-------- -------- --------
Net interest and dividend income 8,698 7,461 6,435
Provision for possible loan losses (note 6) 100 180 120
-------- -------- --------
Net interest and dividend income after provision
for possible loan losses 8,598 7,281 6,315
Non-interest income:
Net mortgage banking gains (note 4) 1,030 1,466 619
Net gain (loss) on sale of mortgage servicing rights (note 10) 63 (196) --
Loan servicing income (expenses), net (note 10) 21 (341) (21)
Deposit account fees 1,504 1,196 942
Other loan fees 217 204 135
Gains (losses) on sales of securities available for sale,
net (note 3) 78 93 (5)
Other 12 15 30
-------- -------- --------
Total non-interest income 2,925 2,437 1,700
-------- -------- --------
Net interest, dividend and non-interest income 11,523 9,718 8,015
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands, Except Per Share Data)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Non-interest expenses:
Salaries and employee benefits (note 15) $ 3,196 $ 2,559 $ 2,110
Occupancy and equipment expenses (note 7) 886 661 502
Data processing expenses 465 419 258
Professional fees 778 248 218
Advertising and marketing expenses 537 632 430
FDIC deposit insurance 36 27 19
OREO income, net (note 8) (308) (148) (49)
Other 1,320 1,198 988
------- ------- -------
Total non-interest expenses 6,910 5,596 4,476
------- ------- -------
Income before income taxes 4,613 4,122 3,539
Income tax expense (note 13) 1,324 1,484 1,327
------- ------- -------
Net income $ 3,289 $ 2,638 $ 2,212
======= ======= =======
Basic earnings per share (notes 1 and 16) $ 1.33 $ 1.10 $ .93
Diluted earnings per share (notes 1 and 16) 1.29 1.03 .88
Dividends per share .25 .17 .125
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands Except Per Share Data)
Accumulated
Other Total
Additional Compre- Stock-
Shares Common Paid-in Retained hensive holders'
Outstanding Stock Capital Earnings Income Equity
----------- ----- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,187,811 $ 119 $ 1,936 $ 7,763 $ 33 $ 9,851
Stock options exercised 9,454 1 27 - - 28
Issuance of stock rights - - 6 - - 6
Cash dividends - - - (297) - (297)
Transfer resulting from
2-for-1 stock split 1,187,811 119 - (119) - -
Comprehensive income:
Net income - - - 2,212 - 2,212
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of $40 - - - - - 64
Reclassification adjustment
for amounts included in net
income, net of taxes of $20 - - - - - (31)
Other comprehensive income - - - - 33 33
---------
Total comprehensive income - - - - - 2,245
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 2,385,076 239 1,969 9,559 66 11,833
Stock options exercised 7,210 - 18 - - 18
Issuance of stock rights - - 22 - - 22
Cash dividends - - - (407) - (407)
Comprehensive income:
Net income - - - 2,638 - 2,638
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of $63 - - - - - 93
Reclassification adjustment
for amounts included in net
income, net of taxes of $17 - - - - - 26
---------
Other comprehensive income - - - - 119 119
---------
Total comprehensive income - - - - - 2,757
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 2,392,286 239 2,009 11,790 185 14,223
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands Except Per Share Data)
Accumulated
Other Total
Additional Compre- Stock-
Shares Common Paid-in Retained hensive holders'
Outstanding Stock Capital Earnings Income Equity
----------- ----- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 2,392,286 $ 239 $ 2,009 $ 11,790 $ 185 $ 14,223
Stock options exercised 133,141 14 226 - - 240
Issuance of stock rights - - 27 - - 27
Cash dividends - - - (629) - (629)
Comprehensive income:
Net income - - - 3,289 - 3,289
Other comprehensive income:
Unrealized holding losses on
securities, net of taxes of $150 - - - - - (223)
Reclassification adjustment
for amounts included in net
income, net of taxes of $33 - - - - - 48
---------
Other comprehensive income (loss) - - - - (175) (175)
---------
Total comprehensive income - - - - - 3,114
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 2,525,427 $ 253 $ 2,262 $ 14,450 $ 10 $ 16,975
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 3,289 $ 2,638 $ 2,212
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for possible loan losses 100 180 120
Reduction of allowance for possible losses on other
real estate owned - - (150)
Deferred income tax expense 88 61 143
Depreciation expense 337 244 169
Amortization of premiums on investment securities, net 148 59 86
Gains on sale of loans (1,030) (1,466) (619)
(Gains) losses on sales of investment securities available for sale (78) (93) 5
Gains on sale of other real estate owned (340) (224) (61)
Loss on disposal of fixed assets - - 4
Origination of loans held for sale (59,545) (134,915) (45,964)
Proceeds from sale of loans 16,620 28,872 20,491
Proceeds from sale of securitized loans 67,955 91,540 16,855
(Increase) decrease in net loan origination costs (208) 228 (179)
Decrease on loan discounts (3) (40) (4)
(Increase) decrease in mortgage servicing rights 229 257 (100)
(Increase) decrease in accrued interest receivable (195) 83 (279)
(Increase) decrease in other assets, net 65 (85) 263
(Decrease) increase in accrued expenses and other liabilities (28) 52 695
-------- -------- ---------
Net cash provided (used) by operating activities 27,404 (12,609) (6,313)
Net cash flows from investing activities:
Purchase of investment securities available for sale (19,490) (16,722) (7,064)
Principal paydowns on investment securities available for sale 12,722 8,390 4,568
Proceeds from the sale of investment securities available for sale 4,963 3,475 7,001
Purchase of investment securities held to maturity (20,826) (4,008) (25,547)
Principal paydowns on investment securities held to maturity 2,964 10,498 8,972
Purchases of stock in FHLB of Boston (1,072) (861) (969)
Net increase in loans (13,216) (23,837) (43,913)
Proceeds from sales of other real estate owned 1,009 720 203
Purchases of equipment, net (207) (883) (373)
-------- -------- ---------
Net cash used in investing activities (33,153) (23,228) (57,122)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from the issuance of common stock and stock rights $ 267 $ 40 $ 34
Cash dividends (629) (407) (297)
Net increase in deposits 10,325 28,516 41,898
Proceeds from Federal Home Loan Bank advances 120,000 96,012 49,360
Repayment of Federal Home Loan Bank advances (128,000) (83,372) (26,000)
(Decrease) increase in mortgagors' escrow accounts (50) 345 204
--------- --------- ---------
Net cash provided by financing activities 1,913 41,134 65,199
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (3,836) 5,297 1,764
Cash and cash equivalents at beginning of year 12,095 6,798 5,034
--------- --------- ---------
Cash and cash equivalents at end of year $ 8,259 $ 12,095 $ 6,798
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposit accounts $ 6,576 $ 6,542 $ 5,668
Interest on borrowed funds 2,711 2,412 1,268
Income tax expense, net 601 1,191 992
Supplemental schedule of non-cash investing and financing activities:
Conversion of residential real estate loans to mortgage-
backed securities $ 76,097 $ 90,451 $ 18,079
Transfer of investment securities held to maturity to
investment securities available for sale (note 2) - 10,698 -
Transfer of other real estate owned to loans - - 327
Transfer of loans to other real estate owned 62 - -
Transfer from retained earnings to common stock resulting
from 2-for-1 in 1997 - - 119
Net (decrease) increase required by Statement of Financial
Accounting Standards No. 115:
Investment securities (292) 199 53
Deferred income tax liability (117) 80 20
Net unrealized gain on investment securities
available for sale (175) 119 33
</TABLE>
See accompanying notes.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
1. Summary of Significant Accounting Policies
------------------------------------------
(a) Business
Ipswich Bancshares, Inc. (the Company) is a Massachusetts corporation
whose primary business is serving as the holding company for Ipswich
Savings Bank - d/b/a IpswichBank - (the Bank), a state chartered
savings bank located in Ipswich, Massachusetts. On July 1, 1999, in
connection with the formation of the Company as the holding company
for the Bank, each share of the Bank's common stock previously
outstanding was converted automatically into one share of common stock
of the Company, and the Bank became a wholly owned subsidiary of the
Company. The reorganization had no impact on the consolidated
financial statements. The Company is subject to regulation by the
Federal Reserve Board (the FRB).
The Bank provides a variety of loan and deposit services to its
customers through eight branch locations. The Bank is subject to
competition from other financial institutions. The Bank is subject to
the regulations of, and periodic examination by, the Federal Deposit
Insurance Corporation (FDIC) and the Massachusetts Commissioner of
Banks (the Commissioner) and to certain requirements established by
the FRB. The Bank's deposits are insured by the Bank Insurance Fund of
the FDIC to the fullest extent authorized by law (generally $100 per
depositor). All deposits in excess of FDIC limits are insured by the
Depositors Insurance Fund.
(b) Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Ipswich
Bancshares, Inc. and its wholly-owned subsidiary, IpswichBank, and the
Bank's subsidiaries; Ipswich Preferred Capital Corporation, Ipswich
Securities Corporation, Historic Ipswich, Inc., North Shore Financial
Services, Inc. and Rowley Investment Corporation (collectively
hereinafter referred to as the Company). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Ipswich Preferred Capital Corporation, 99%-owned by the Bank, was
formed as a mortgage real estate investment trust to hold residential
mortgages as a subsidiary of IpswichBank. Ipswich Securities
Corporation was formed to exclusively transact in securities on its
own behalf as a subsidiary of IpswichBank. Historic Ipswich, Inc. and
North Shore Financial Services, Inc. were incorporated for the purpose
of holding direct investments in real estate and foreclosed real
estate, respectively. Rowley Investment Corporation was incorporated
to facilitate the holding and permitting of certain bank-owned real
estate.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, 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 revenues and expenses for the
period. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for possible loan losses, the valuation of real estate acquired by
foreclosure and the valuation of mortgage servicing rights.
A substantial portion of the Company's loans are secured by real
estate in Essex County in Massachusetts. In addition, other real
estate owned is located in that market. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan
portfolio and the recovery of the carrying amount of other real estate
owned are susceptible to changes in market conditions in its
geographic area.
(c) Investments
-----------
Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held to maturity and reported at
amortized cost; and debt and equity securities not classified as held
to maturity are classified as available for sale and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported, net of tax, as accumulated other comprehensive income within
stockholders' equity.
Premiums and discounts are taken into income by a method the result of
which approximates that of the level yield method. Realized gains or
losses are computed using the specific identification method. When, in
management's judgment, an other than temporary decline in the value of
a security occurs, the carrying value of such security is written down
to its fair value and the amount of the impairment is charged to
earnings.
(d) Loans
-----
Loan origination fees and certain direct loan origination costs are
capitalized and recognized over the life of the related loan by use of
the level yield method or recognized as an adjustment to the gain or
loss when loans are sold.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
(e) Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate
cost or fair value, based upon commitments from investors to purchase
such loans and upon prevailing market values. Net deferred loan
origination fees are included in the fair value determination and are
included in the determination of gains or losses on sales of mortgage
loans. Interest income on loans held for sale is accrued and
classified as interest income on loans. When loans are sold, a gain or
loss is recognized to the extent that the sale proceeds exceed or are
less than the carrying value of the loans, net of the value of
servicing rights retained, using the specific identification method.
The Company periodically enters into commitments to sell mortgage
loans to investors at a fixed price. The Company recognizes these
commitments as derivatives. In June 1998, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. The Statement requires
the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of SFAS No. 133 on
October 1, 1998, did not have a material effect on the Company's
operations.
(f) Allowance for Possible Loan Losses
----------------------------------
The allowance for possible loan losses is established by management to
absorb future charge-offs of loans deemed uncollectible. This
allowance is increased by provisions charged to operating expense and
by recoveries on loans previously charged off. Management, in
evaluating current information and events regarding the borrowers'
ability to repay their obligations, considers commercial loans over
$200 to be impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms
of the note agreement; other loans are evaluated collectively for
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
valuation. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or the
fair value of collateral if the loan is collateral dependent.
Impairment losses are included in the allowance for loan losses
through a charge to the provision for loan losses.
The Company sets the level of its allowance for possible loan losses
based on a number of factors. Management uses available information
(such as current economic conditions, levels of nonperforming loans,
delinquency trends and collateral values) to assess the adequacy of
the allowance and to determine future additions to the allowance. The
process involves substantial uncertainties; ultimate losses may vary
from current estimates. Management believes that the allowance for
possible loan losses is adequate as of year end 1999. While management
uses available information to recognize losses on loans, future
additions to the allowance may be necessary. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for possible loan losses.
Such agencies may require the Company to recognize additions to the
allowance based on judgments different from those of management. See
"Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations - Provision for Possible Loan Losses," and
"Item 8 - Note 6 of Notes to Consolidated Financial Statements".
(g) Mortgage Loan Servicing
-----------------------
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing revenues. Industry average
prepayment rates are considered when estimating the lives of the
mortgage servicing rights. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values are
obtained from an independent servicing portfolio valuation. For
purposes of measuring impairment, the rights are stratified based on
the following predominant risk characteristics of the underlying
loans: maturity term, interest rate and product type (fixed-rate,
adjustable-rate, etc.). The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a
stratum exceed their fair value.
(h) Banking Premises and Equipment
------------------------------
Banking premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets or the term of the
lease, if shorter. Maintenance and repairs are charged to current
expense as incurred and the cost of major renewals and betterments are
capitalized.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
(i) Other Real Estate Owned
-----------------------
Other real estate owned includes those properties acquired through
foreclosure or deed-in-lieu of foreclosure. Costs relating to the
development and improvement of property are capitalized, whereas those
relating to holding the property are charged to expense. Gains on
sales subsequent to foreclosure are recognized in operations when
realized.
After foreclosure, foreclosed assets are presumed to be held for sale
and are carried at the lower of fair value minus estimated costs to
sell or cost. When fair value minus selling costs declines below cost,
a valuation allowance is established. If the fair value of the asset
minus the estimated costs to sell subsequently increases and this
amount is more than the asset's carrying value, the valuation
allowance is reversed. Increases or decreases in the valuation
allowance are charged or credited to income. The carrying value of
other real estate owned is determined by management's evaluation of
the risk of loss based upon an assessment of the types of other real
estate owned, review and assessment of independent appraisals and
other factors. While management uses information available in
determining the carrying value, future adjustments to carrying value
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's carrying value of other real estate
owned. Such agencies may require the Company to recognize additional
write-downs based upon judgments different from those of management.
(j) Investment in Real Estate Limited Partnerships
----------------------------------------------
Investments in real estate limited partnerships are accounted for on
the equity method. They are included in other assets.
(k) Accrual of Interest Income and Expense
--------------------------------------
Interest on loans and investment securities is taken into income using
methods which relate the income earned to the balances of loans and
investment securities outstanding. The recording of interest income on
problem loan accounts generally ceases when the loans become 90 days
past due and are not in the process of collection. Cash receipts on
impaired loans are applied to reduce the principal amount of such
loans until the principal has been reduced to an amount deemed
collectable. Restructured loans are returned to accrual status when
the borrower has complied with the repayment terms of the loan for a
period of six to eighteen months. Interest expense on liabilities is
derived by applying applicable interest rates to principal amounts
outstanding.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
(l) Advertising Costs
-----------------
Advertising costs are expensed as they are incurred.
(m) Incentive Compensation
----------------------
The Company has a Management Incentive Compensation Plan as a means of
recognizing achievement on the part of its Senior Management and
certain other officers of the Company. Incentive awards are determined
according to a formula based upon the Company's return on average
stockholders' equity in the calendar year, as compared with a group of
peer banks, as well as the individual participant's performance.
Awards are paid as a bonus calculated as a percentage of an individual
officer's salary within the limitations of the plan.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require, companies to recognize compensation expense for
grants of common stock, stock options and other equity instruments to
employees based upon the fair value of the instruments when issued.
Companies electing not to recognize compensation expense are required
to disclose what net income and earnings per share would have been if
the expense were recognized. The Company elected to adopt the
disclosure option of SFAS No. 123 rather than recognition of
compensation expense.
(n) Pension Plan
------------
Pension costs are funded as accrued.
(o) Income Taxes
------------
The Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis
and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when the amounts related to such
temporary differences are realized or settled. The Company's deferred
tax asset is reviewed and adjustments to such asset are recognized as
deferred income tax expense or benefit based upon management's
judgment relating to the realizability of such asset.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
(p) Other Comprehensive Income
--------------------------
Accumulated other comprehensive income consists solely of unrealized
appreciation on investment securities available for sale, net of
taxes.
(q) Earnings per Share
------------------
The computation of basic earnings per share is based on the weighted
average number of shares of common stock outstanding during each
period. The computation of diluted earnings per share is based on the
weighted average number of shares of common stock outstanding and
dilutive potential common stock equivalents outstanding during each
period. Stock option grants are included only in periods when the
results are dilutive. During 1997, the Company declared a two-for-one
stock split which has been reflected in all per share computations.
(r) Statement of Cash Flows
-----------------------
For purposes of the statement of cash flows, cash and cash equivalents
include cash, due from banks, interest-bearing deposits and federal
funds sold.
2. Federal Funds Sold, Reserve Requirements and Compensating Balance Agreements
----------------------------------------------------------------------------
Federal funds sold at December 31, 1999 and 1998 were $1,705 and $5,011,
respectively, stated at cost, which approximates market, and mature within
one month.
The Federal Reserve Board requires the Company to maintain a reserve
balance; the amount of this reserve balance at December 31, 1999 was
$1,105.
The Company has arrangements with a third party for processing money orders
and treasurers checks. The arrangement requires the maintenance of a
compensating balance. At December 31, 1999, the Company was required to
maintain a compensating balance of $255.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
3. Investment Securities
---------------------
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as of October 1, 1998. In conjunction with adopting
this statement, the Company transferred $4,700 of mortgage-backed
securities and $6,000 of U.S. Government Agency obligations from held to
maturity to available for sale.
Available for Sale
------------------
The amortized cost and approximate market values of investment securities
available for sale at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------ ---- ---- -------
<S> <C> <C> <C> <C>
U.S. Treasury bills and U.S. Government
Agency obligations $ 8,865 $ - $(106) $ 8,759
Mortgage-backed securities 30,620 217 (94) 30,743
------ ---- ---- -------
$39,485 $ 217 $(200) $ 39,502
====== ==== ==== =======
<CAPTION>
1998
-------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------ ---- ---- -------
<S> <C> <C> <C> <C>
U.S. Government Agency obligations $ 3,999 $ 102 $ - $ 4,101
Mortgage-backed securities 24,685 194 (6) 24,873
Marketable equity securities 92 19 - 111
------ ---- --- -------
$28,776 $ 315 $ (6) $ 29,085
====== ==== === =======
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
3. Investment Securities (Continued)
---------------------------------
The following table sets forth the maturity distribution of investment
securities available for sale at December 31. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Within one year $ 4,865 $ 4,865 $ - $ -
Due after five years through ten years 4,000 3,894 3,999 4,101
Mortgage-backed securities maturing
after ten years:
FNMA participation certificates 25,531 25,631 12,886 12,990
FHLMC participation certificates 5,089 5,112 11,799 11,883
------ ------- ------ -------
$39,485 $ 39,502 $28,684 $ 28,974
======= ======== ======= ========
</TABLE>
Proceeds from sales of investment securities available for sale during
1999, 1998 and 1997 amounted to $4,963, $3,475 and $7,001, respectively.
The realized gains and losses on investment securities available for sale,
for each of the three years ended December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ -------------------
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury notes $ - $ - $ - $ - $ 6 $ (1)
U.S. Government Agency
obligations - - 63 - - (24)
Mortgage-backed securities 49 - 16 (1) 14 -
Marketable equity securities 29 - 15 - - -
----- ---- ---- ---- ---- -----
$ 78 $ - $ 94 $ (1) $ 20 $ (25)
===== ==== ==== ==== ==== =====
</TABLE>
The Company had $324 of investment securities pledged for Treasury, Tax and
Loan purposes to the FRB as of December 31, 1999.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
3. Investment Securities (Continued)
---------------------------------
The following table summarizes the amounts of unrealized gains and losses
on investment securities at December 31 which are included in accumulated
other comprehensive income within stockholders' equity:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net unrealized gain on available for sale securities $ 17 $ 309
Related income tax benefit (7) (124)
--- ----
$ 10 $ 185
=== ====
</TABLE>
Held to Maturity
The amortized cost and approximate market values of investment securities
held to maturity at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999
--------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Agency obligations $16,393 $ - $ (617) $ 15,776
Mortgage-backed securities 11,676 - (391) 11,285
------ ---- ------ -------
$28,069 $ - $(1,008) $ 27,061
====== ==== ====== =======
<CAPTION>
1998
--------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Agency obligations $ 3,500 $ 27 $ - $ 3,527
Mortgage-backed securities 6,696 48 - 6,744
------ ---- ---- -------
$10,196 $ 75 $ - $ 10,271
====== ==== ==== =======
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
3. Investment Securities (Continued)
---------------------------------
The following table sets forth the maturity distribution of investment
securities held to maturity at December 31. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1999 1998
-------------------- -----------------
Amortized Market Amortized Market
Cost Value Cost Value
------ ------ ------- ------
<S> <C> <C> <C> <C>
After one to five years $ 2,000 $ 1,935 $ - $ -
After five to ten years 14,393 13,841 3,500 3,527
Mortgage-backed securities maturing after ten years:
FNMA participation certificates 3,077 3,004 1,980 2,013
FHLMC participation certificates 4,868 4,796 741 750
GNMA participation certificates 3,731 3,485 3,975 3,981
------ ------ ------- ------
$28,069 $27,061 $ 10,196 $10,271
====== ====== ======= ======
</TABLE>
4. Loans Held for Sale and Gains on Sales of Loans
The following table summarizes the amortized cost and estimated market
value of loans held for sale at December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------- --------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Loans held for sale $ - $ - $24,000 $24,000
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
4. Loans Held for Sale and Gains on Sales of Loans (Continued)
-----------------------------------------------------------
The realized gains and losses on mortgage loans sold for each of the three
years ended December 31, is as follows:
<TABLE>
<CAPTION>
Realized Realized
Gains Losses Net Gains
----- ------ ---------
<S> <C> <C> <C>
1999 $1,036 $ (6) $ 1,030
1998 1,474 (8) 1,466
1997 622 (3) 619
</TABLE>
Certain loans sold by the Company are subject to repurchase. In the event
one of these loans becomes 60 days or more delinquent in the first six
months, beginning with the first payment due the purchaser, the Company
would be required to repurchase the loan. Total loans sold subject to
repurchase were approximately $5,096, $0 and $13,700 at December 31, 1999,
1998 and 1997, respectively.
5. Loans
-----
The Company's lending activities are conducted principally in Essex and
Middlesex Counties in Massachusetts and Southern New Hampshire. The Company
grants residential and consumer loans, commercial real estate and
industrial loans, and loans for the construction of residential
owner-occupied homes. Substantially all loans granted by the Company are
secured by real estate collateral. The ability and willingness of
residential mortgage and consumer loan borrowers to honor their repayment
commitments is generally dependent on the level of overall economic
activity within the borrower's geographic areas and real estate values. The
ability and willingness of commercial real estate and construction loan
borrowers to honor their repayment commitments is generally dependent on
the health of the real estate economic sector in the borrower's geographic
areas and the general economy.
The Bank is generally prohibited by Massachusetts banking statutes from
lending to any one borrower amounts in excess of 20% of stockholders'
equity.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
5. Loans (Continued)
-----------------
Loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Loans:
Residential $162,633 $ 160,153
Residential owner-occupied construction 1,463 1,767
Land 28 32
Commercial real estate 4,845 6,159
Home equity 52,706 43,426
------- --------
221,675 211,537
Less:
Unadvanced funds on home equity loans (29,321) (23,654)
Unadvanced funds on owner-occupied construction loans (573) (355)
Deferred loan origination costs, net 586 378
Unearned discount (100) (103)
------- --------
Loans, net 192,267 187,803
Other loans, net 1,060 1,188
------- --------
Total loans $193,327 $ 188,991
======= ========
</TABLE>
In the ordinary course of business, the Company has granted loans to
officers, directors and employees on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at
the same time for comparable transactions with unrelated borrowers. These
loans do not, in the opinion of management, involve more than normal credit
risk or present other unfavorable features.
The following schedule summarizes the loan activity to such related parties
for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 468 $ 655 $ 496
Loan originations 413 317 393
Amortization and payoffs (239) (353) (15)
Loans sold (112) - -
Directors/employees left company (98) (151) (219)
---- ---- ----
Balance at end of year $ 432 $ 468 $ 655
==== ==== ====
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
5. Loans (Continued)
-----------------
The recorded investment in loans for which an impairment has been
recognized at December 31, 1999 and 1998 was $31 and $468, respectively.
The related allowance for loan losses at December 31, 1999 and 1998 was $16
and $56, respectively. The average recorded investment in impaired loans
during 1999 and 1998 was $333 and $884, respectively. Interest income
recognized on impaired loans during 1999, 1998 and 1997 was $71, $37 and
$105, respectively, all of which was recorded on a cash basis.
The Company has no material outstanding commitments to lend additional
funds to customers whose loans have been placed on non-accrual status or
the terms of which have been modified.
6. Allowance for Possible Loan Losses
An analysis of the allowance for possible loan losses for the years ended
December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 1,742 $ 1,673 $ 1,548
Provision charged to operations 100 180 120
Less loans charged-off (81) (131) (31)
Recoveries on loans previously charged-off 37 20 36
------ ------ ------
Net (charge-offs) recoveries (44) (111) 5
------ ------ ------
Balance at end of year $ 1,798 $ 1,742 $ 1,673
====== ====== ======
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
6. Allowance for Possible Loan Losses (Continued)
----------------------------------------------
The allowance for possible loan losses is allocated as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Commercial real estate $ 151 $ 215
Residential real estate 1,056 1,016
Home equity and other consumer 582 497
Residential owner-occupied construction 9 14
------- -------
Total allowance $ 1,798 $ 1,742
======= =======
</TABLE>
7. Banking Premises and Equipment
------------------------------
A summary of banking premises and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Land $ 207 $ 207
Building 2,179 2,147
Equipment 2,646 2,473
Leasehold improvements 788 786
------- -------
5,820 5,613
Less accumulated depreciation (2,652) (2,315)
------- -------
$ 3,168 $ 3,298
======= =======
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
7. Banking Premises and Equipment (Continued)
------------------------------------------
As of December 31, 1999, the Company was obligated under six non-cancelable
operating leases for banking premises. Minimum future rentals over the next
five years under the non-cancelable operating leases are as follows:
Year ending
December 31, Amount
----------- ------
2000 $ 213
2001 171
2002 169
2003 116
2004 29
Rent expense amounted to $235, $199 and $144 for each of the years ended
December 31, 1999, 1998 and 1997, respectively.
The Company leased out part of its facility, located in Ipswich, under a
non-cancelable lease agreement. Rental income under this lease totaled $50,
$56 and $62 at December 31, 1999, 1998 and 1997, respectively.
8. Other Real Estate Owned
-----------------------
Other real estate owned at December 31, for which the Company has
determined no allowance for possible losses is necessary, is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ - $669
Commercial 49 49
Residential 62 -
---- ----
$111 $718
==== ====
</TABLE>
An analysis of activity in other real estate owned for each of the years
ended December 31, is as follows:
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
8. Other Real Estate Owned
-----------------------
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Balance at beginning of year $ 718 $1,214 $ 1,683
Foreclosures 62 - -
Net sales proceeds, including loans made to facilitate sales (1,009) (720) (530)
Gains on sales, net 340 224 61
------ ----- ------
Balance at end of year $ 111 $ 718 $ 1,214
====== ===== ======
</TABLE>
The Company had no allowance for possible losses on other real estate owned
or any related activity during each of the years ended December 31, 1999,
1998 and 1997 other than a reduction of the allowance to $0 during the year
ended December 31, 1997 through a credit of $150 to operating expenses.
An analysis of (income) expense for other real estate owned for each of the
years ended December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Rental income $ (8) $ (26) $ (65)
Gains on sales (340) (224) (61)
Reduction in allowance - - (150)
Permitting costs 29 112 67
Foreclosure expense (reimbursement) 11 (10) 160
----- ------ ------
$(308) $ (148) $ (49)
===== ====== ======
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
9. Stock in Federal Home Loan Bank of Boston
-----------------------------------------
As a member of the Federal Home Loan Bank of Boston (FHLB of Boston), the
Company is required to invest in $100 par value (per share) stock of the
FHLB of Boston in the amount of 1% of its outstanding loans secured by
residential housing, or 1% of 30% of total assets, or 5% of its
outstanding advances from the FHLB of Boston, whichever is higher. As and
when such stock is redeemed, the Company would receive from the FHLB of
Boston an amount equal to the par value of the stock. As of December 31,
1999 and 1998, the Company held the required investment of $3,977 and
$2,905, respectively.
10. Mortgage Servicing Rights
-------------------------
Loans serviced for others amounted to approximately $0, $18,848 and
$45,358 at December 31, 1999, 1998 and 1997, respectively. Net servicing
income (expense) amounted to approximately $21, $(341) and $(21) for the
years ended December 31, 1999, 1998 and 1997, respectively.
The following table summarizes the changes in mortgage servicing rights at
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ------
<S> <C> <C> <C>
Balance at beginning of year $ 229 $ 543 $ 421
Additions 1,171 1,452 264
Normal amortization (86) (174) (116)
Sale of mortgage servicing rights (1,314) (1,417) -
Additional amortization for prepayments - (175) (26)
------- -------- ------
Balance at end of year $ - $ 229 $ 543
======= ======== ======
Fair value at end of year $ - $ 229 $ 486
======= ======== ======
</TABLE>
During 1999 the Company sold the rights to service approximately $90,000
in loans and recognized a gain of $63 as a result of the sale. During 1998
the Company sold the rights to service approximately $90,000 in loans and
recognized a loss of $196 as a result of the sale.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
10. Mortgage Servicing Rights (Continued)
-------------------------------------
An analysis of the mortgage servicing rights valuation account at December
31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ - $ (57) $ (35)
Write up (down) of servicing rights through charge
to servicing income - (141) (22)
Sale of mortgage servicing rights - 198 -
---- ---- ----
Balance at end of year $ - $ - $ (57)
==== ==== ====
</TABLE>
11. Deposits
--------
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Demand deposits (non-interest bearing) $ 15,209 $ 18,656
NOW accounts 27,481 22,954
Savings accounts 37,704 37,768
Money market deposit accounts 62,859 55,418
Certificates of deposit 66,829 64,961
-------- ---------
$210,082 $ 199,757
======== =========
</TABLE>
Deposits of $100 or more totaled approximately $72,592 and $65,959 at
December 31, 1999 and 1998, respectively, of which $11,211 and $11,325 are
certificates of deposit in 1999 and 1998, respectively.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
11. Deposits (Continued)
--------------------
The following table shows the scheduled maturity of certificates of
deposit accounts at December 31:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Within one year $51,923 77.7% $ 58,350 89.8%
1-2 years 12,374 18.5 5,035 7.8
2-3 years 2,339 3.5 1,232 1.9
Thereafter 193 .3 344 .5
------- ----- -------- -----
$66,829 100.0% $ 64,961 100.0%
======= ===== ======== =====
</TABLE>
Interest on deposits classified by type for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
NOW accounts $ 176 $ 203 $ 178
Saving accounts 868 937 1,056
Money market deposit accounts 2,441 2,030 1,128
Certificates of deposits 3,091 3,372 3,306
----- ----- -----
$6,576 $6,542 $5,668
====== ====== ======
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
12. Borrowed Funds
--------------
A summary of Federal Home Loan Bank of Boston advances at December 31,
follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- ---- -------- ----
<S> <C> <C> <C> <C>
Maturity in:
1999 $ - -% $24,000 5.25%
2000 40,000 5.82 3,000 5.98
2001 5,000 5.18 5,000 5.18
2002 - - 3,000 6.08
2003 - - 10,000 5.32
2008 - - 8,000 4.99
------ ---- ------- ----
$45,000 5.75% $ 53,000 5.31%
======= ==== ======== ====
</TABLE>
The Company has a total borrowing capacity of $99,100 with the Federal
Home Loan Bank of Boston at December 31, 1999. Advances from the Federal
Home Loan Bank of Boston are secured by FHLB of Boston stock, a blanket
lien on residential first mortgage loans and investment securities.
13. Income Taxes
------------
The components of income tax expense for each of the years ended December
31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax expense:
Current $1,204 $1,219 $ 981
Deferred 91 149 84
State income tax expense:
Current 32 204 203
Deferred 118 (66) 169
Change in valuation reserve (121) (22) (110)
=----- =----- =------
$1,324 $1,484 $ 1,327
====== ====== =======
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
13. Income Taxes (Continued)
------------------------
The effective income tax rate for each of the years ended December 31,
1999, 1998 and 1997 was 28.7%, 36.0% and 37.5%, respectively. A
reconciliation of expected tax expense at the statutory federal income tax
rate to income before income taxes, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- -------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense at
statutory rate $ 1,568 34.0% $ 1,401 34.0% $ 1,203 34.0%
Items affecting the federal income
tax rate:
State income taxes, net of
federal tax benefit 99 2.1 91 2.2 246 6.9
Other (222) (4.8) 14 0.3 (12) (0.3)
Reduction in valuation reserve (121) (2.6) (22) (0.5) (110) (3.1)
------- ---- ------- ---- ------- ----
$ 1,324 28.7% $ 1,484 36.0% $ 1,327 37.5%
======= ==== ======= ==== ======= ====
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are presented below:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax asset:
Loan loss reserves $ 708 $ 679
Other real estate owned 15 307
Net operating loss carryforward 184 320
Alternative minimum tax credit 40 40
Business credits carryforward 425 425
All other 100 7
------- -------
Total gross deferred tax asset 1,472 1,778
Less valuation reserve (425) (546)
------- -------
Net deferred tax asset 1,047 1,232
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
13. Income Taxes (Continued)
------------------------
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Difference between book and tax carrying value of
investment securities $ 7 $ 124
Banking premises and equipment, due to depreciation
differences 351 301
Servicing asset and deferred costs 603 756
Carrying basis of limited partnerships 603 597
------- -------
Total gross deferred tax liability 1,564 1,778
------- -------
Net deferred tax liability $ (517) $ (546)
======== ========
</TABLE>
Management believes the existing net deductible temporary differences that
give rise to the net deferred income tax asset will reverse in periods the
Company generates net taxable income. In addition, gross deductible
temporary differences are expected to reverse in periods during which
off-setting gross taxable temporary differences are expected to reverse.
Management believes that it is more likely than not that the net deferred
income tax asset, including the net operating loss carryforward, at
December 31, 1999 will be realized through the use of the on-going
earnings capabilities of the Company.
It should be noted, however, that factors beyond management's control,
such as the general state of the economy and real estate values, can
affect future levels of taxable income and that no assurance can be given
that sufficient taxable income will be generated to fully absorb gross
deductible temporary differences.
As of December 31, 1999, the Company had a net operating loss
carry-forward for federal tax purposes of $542 expiring in 2007. Tax
credit carry-forwards of approximately $425 expire in years 2003 through
2007.
The 1993 Common Stock Offering resulted in a change in control for income
tax purposes. As a result, the net operating loss and tax credit
carry-forwards are limited so that only $136 per year can be utilized to
offset taxable income generated during the years in the carry-forward
period which expires in 2007.
Tax effect of pre-1988 bad debt reserves subject to recapture in the case
of certain excess distributions is approximately $670, none of which has
been recognized in the financial statements. The use of this amount for
purposes other than to absorb losses on loans would result in taxable
income and financial statement tax expense at the then current tax rate.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
14. Stockholders' Equity
--------------------
The Company and 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 financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and Bank's
assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set
forth in the table below) 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, 1999, that the Company and Bank meet all capital adequacy
requirements to which they are subject.
The most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action as
of December 31, 1999 and 1998. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Company is also subject to similar capital adequacy requirements and
the regulatory requirements of federal banking agencies.
The actual capital amounts and ratios and minimum required amounts and
ratios for the Company and the Bank as of December 31, 1999 and for the
Bank as of December 31, 1998 are presented in the following tables:
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
14. Stockholders' Equity (Continued)
--------------------------------
<TABLE>
<CAPTION>
To be
Well Capital-
ized Under
For Capital Prompt Cor-
Adequacy rective Action
Actual Purposes Provisions
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
-----------------------
Total capital (to risk-weighted assets)
Company $ 18,582 14.38% $10,338 8.00% $12,923 10.00%
Bank 18,469 14.29 10,337 8.00 12,921 10.00
Tier I capital (to risk-weighted assets)
Company $ 16,964 13.13% $ 5,169 4.00% $ 7,754 6.00%
Bank 16,852 13.04 5,169 4.00 7,753 6.00
Tier I capital (to average assets)
Company $ 16,964 6.33% $10,713 4.00% $13,392 5.00%
Bank 16,852 6.29 10,717 4.00 13,396 5.00
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
14. Stockholders' Equity (Continued)
--------------------------------
<TABLE>
<CAPTION>
To be
Well Capital-
ized Under
For Capital Prompt Cor-
Adequacy rective Action
Actual Purposes Provisions
---------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
-----------------------
Total capital (to risk-weighted assets) $15,693 11.70% $ 10,734 8.00% $ 13,417 10.00%
Tier I capital (to risk-weighted assets) 14,015 10.45 5,367 4.00 8,050 6.00
Tier I capital (to average assets) 14,015 5.55 10,105 4.00 12,632 5.00
</TABLE>
In accordance with Massachusetts banking regulations, the Bank established
a Liquidation Account, in the amount equal to the consolidated net worth
of the Bank at December 31, 1991, for the benefit of eligible account
holders who continue to maintain their accounts in the Bank after the
Bank's conversion from mutual to stock form. The Liquidation Account
amounted to approximately $1,000 (unaudited) at December 31, 1992. The
balance will be reduced in proportion to reductions in the balances of
eligible account holders as determined on each subsequent fiscal year end.
Subsequent increases will not restore an eligible account holder's
interest in his liquidation sub-account. In the event of complete
liquidation or dissolution of the Bank, eligible account holders are
entitled to their interest in the Liquidation Account in the same
proportion of the balance of their qualifying deposit account at that
date. The existence of the Liquidation Account restricts the use or
application of net worth.
15. Benefit Plans
-------------
Management Compensation Plan
The Company has a Management Incentive Compensation Plan as a means of
recognizing achievement on the part of its Senior Management and certain
other officers of the Company.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
15. Benefit Plans (Continued)
-------------------------
Incentive awards are determined according to a formula based upon the
Company's return on average stockholders' equity in the calendar year as
compared with a group of peer banks, as well as the individual
participant's performance. Awards are paid as a bonus, calculated as a
percentage of an individual officer's salary within the limitations of the
plan. Bonus expense totaled $150, $157 and $119 during years ended
December 31, 1999, 1998 and 1997, respectively.
401(k) Plan
-----------
The Company has a 401(k) savings plan covering all salaried employees who
become eligible to participate upon attaining the age of 21 and completing
a year of service. Participants may contribute from 1% to 15% of their
pretax compensation. The Company matches participants' contributions at
the rate of 50% of the first 6% of compensation contributed by the
employee. Such matching contributions, which are fully vested when made,
amounted to $49, $41 and $36 during the years ended December 31, 1999,
1998 and 1997, respectively.
Split Dollar Agreement and Irrevocable Insurance Trust
------------------------------------------------------
The Company has a split dollar agreement and irrevocable insurance trust
agreement for the President of the Company whereby the Company may
contribute to the trust an amount necessary to permit the trust to pay the
premiums due under the policy. The retirement expense related to this
contribution totaled $60 for each of the years ended December 31, 1999,
1998 and 1997.
Stock Option Plans
------------------
At December 31, 1999 the Company has three stock option plans. Under the
1992 Stock Option Plan, the Company may grant options to its officers and
other employees for up to 230,000 shares of common stock. Under the 1996
Stock Incentive Plan, the Company may grant options to its officers,
directors and other employees for up to 118,000 shares. Under the 1998
Stock Incentive Plan, the Company may grant options to its officers,
directors and other employees for up to 100,000 shares. Both incentive
stock options and non-qualified stock options may be granted under all
three plans. The exercise price of each option equals the market price of
the Company's stock on the date of grant and an option's maximum term is
10 years under all plans. The vesting of option grants are at the
discretion of the Compensation Committee of the Board of Directors.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
15. Benefit Plans (Continued)
-------------------------
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees and Related Interpretations, in accounting for its plans.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $ 3,289 $ 2,638 $ 2,212
Pro forma 3,141 2,608 2,030
Basic earnings per share As reported $ 1.33 $ 1.10 $.93
Pro forma 1.29 1.09 .85
Diluted earnings per share As reported $ 1.29 $ 1.03 $.88
Pro forma 1.24 1.02 .80
</TABLE>
The pro forma amounts reflect only stock options granted after June 30,
1995. Therefore, the full impact of calculating the cost for stock options
under Statement No. 123 is not reflected in the pro forma amounts
presented above because the cost for options granted prior to July 1, 1995
is not considered under the requirements of Statement No. 123.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield 2.5% 1.5% 0.7%
Expected volatility 23.0% 50.0% 49.0%
Risk-free interest rates 6.7% 4.4% 5.8%
Expected lives 10 years 10 years 8.3 years
</TABLE>
The weighted average fair values of options granted during 1999, 1998 and
1997 were $2.83, $7.38 and $7.30, respectively.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
15. Benefit Plans (Continued)
-------------------------
A summary of the status of the Company's three stock options plans as of
December 31 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 251,442 $ 5.43 261,527 $ 5.16 222,078 $ 3.00
Granted 105,750 10.25 3,675 15.46 66,000 11.64
Exercised (133,141) 1.80 (7,210) 2.63 (9,454) 3.30
Forfeited (5,000) 11.33 (6,550) 3.68 (17,097) 5.37
--------- --------- -------
Outstanding at end of year 219,051 $ 9.82 251,442 $ 5.43 261,527 $ 5.16
========= ========= =======
Options exercisable at year end 192,210 $ 9.71 $ 240,234 $ 5.17 237,747 $ 4.86
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Weighted
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
--------------- ----------- ------------ --------- ----------- -------
<S> <C> <C> <C> <C> <C>
$1.00 1,500 4.0 $ 1.00 1,500 $ 1.00
$2.50 1,751 5.6 2.50 1,751 2.50
$4.9375 to 7.8125 48,500 7.0 5.81 48,500 5.81
$9.9375 to 10.25 105,750 9.6 10.25 82,686 10.25
$12.50 to 13.625 59,550 7.9 12.53 55,773 12.52
$17.00 2,000 8.5 17.00 2,000 17.00
------- -------
219,051 192,210
======= =======
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
15. Benefit Plans (Continued)
-------------------------
Employment and Severance Agreements
-----------------------------------
The Company's President, the clerk of the corporation and four other
senior officers have entered into agreements with the Company which
provide for severance and other benefits in the event of a change in
control of the Company under specific situations.
Directors' Deferred Compensation Plan
-------------------------------------
The Company has a directors' deferred compensation plan whereby the
directors accrue deferred compensation in the form of common stock units.
The accumulated deferred compensation, which has been recorded as
additional paid-in capital, was $55, $28 and $6 at December 31, 1999, 1998
and 1997 representing 4,573, 1,942 and 469 stock units, respectively. The
stock units have been treated as common stock for the purposes of
calculating earnings per share.
16. Earnings Per Share (EPS)
------------------------
The following tables represent a reconciliation of the numerators and
denominators for the basic and diluted per share computation for earnings
for the years ended December 31, 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ----------- --------
<S> <C> <C> <C>
1999
----
Basic EPS $ 3,289 2,480 $1.33
Effect of stock options - 63 -
------ ----- ----
Diluted EPS $ 3,289 2,543 $1.29
====== ===== ====
1998
----
Basic EPS $ 2,638 2,392 $1.10
Effect of stock options - 164 -
------ ----- ----
Diluted EPS $ 2,638 2,556 $1.03
====== ===== ====
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
16. Earnings Per Share (EPS) (Continued)
------------------------------------
<TABLE>
<CAPTION>
1997
----
<S> <C> <C> <C>
Basic EPS $ 2,212 2,378 $.93
Effect of stock options - 147 -
------ ----- ---
Diluted EPS $ 2,212 2,525 $.88
====== ===== ===
</TABLE>
17. Financial Instruments with Credit Risk and Off-Balance Sheet Risk,
Commitments and Contingencies
-----------------------------
Off-Balance Sheet Risk
----------------------
The Company is 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 unused lines of credit,
unadvanced portions of construction loans, commitments to originate loans
and commitments to sell loans. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The amounts of those instruments reflect
the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to its financial instruments (for unused lines of credit
and loan commitments) is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the borrower.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
17. Financial Instruments with Credit Risk and Off-Balance Sheet Risk,
Commitments and Contingencies (Continued)
-----------------------------------------
Financial instruments with off-balance sheet risk at December 31, are as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commitments to originate residential loans $ 6,816 $ 10,333
Unused lines of credit on home equity loans 29,321 23,654
Unadvanced portions of residential owner-occupied construction loans 573 355
Unused lines of credit on overdraft protection, personal lines of credit
and credit cards 2,545 2,719
Commitments to sell loans - 34,000
Commitments to purchase available for sale investments - 13,998
</TABLE>
Commitments to originate loans, unused lines of credit and unadvanced
portions of residential owner-occupied construction loans 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 may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Legal Proceedings
-----------------
The Company is involved in various legal proceedings incidental to its
business. After review with legal counsel, management does not believe
resolution of any present litigation will have a material adverse effect
on the financial condition of the Company.
Commitments to Sell Loans
-------------------------
Forward commitments to sell loans are contracts which the Company enters
into for the purpose of reducing interest rate risk and to improve
liquidity. In order to fulfill a forward commitment, the Company typically
receives cash in exchange for loans at a future date agreed to by both
parties. Risk may arise from the possible inability of the Company to
deliver the loans specified.
As of December 31, 1999 and 1998, the Company had identified $0 and
$24,000, respectively, of loans to fulfill the outstanding commitments at
weighted average rates which will satisfy the commitments without loss to
the Company.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
18. Condensed Parent Information
----------------------------
Condensed financial statements for Ipswich Bancshares, Inc. at December
31, 1999 and for the period from inception to December 31, 1999 are
presented below. As Ipswich Bancshares, Inc. was formed in 1999, parent
information does not exist for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Balance Sheet
-------------
<S> <C>
Assets
------
Cash (deposited with subsidiary) $ 290
Investment in subsidiary 16,862
-------
Total assets $ 17,152
=======
Liabilities and Stockholders' Equity
------------------------------------
Accrued expenses and other liabilities $ 177
Stockholders' equity 16,975
-------
Total liabilities and stockholders' equity $ 17,152
=======
Statement of Income
-------------------
Income:
Dividends from banking subsidiary $ 681
-------
Total income 681
Expenses:
Professional fees 133
Other expenses 59
-------
Total expenses 192
Income before income tax benefit and equity in
undistributed net income of subsidiary 489
Income tax benefit 125
-------
Income before equity in undistributed net income
of subsidiary 614
Equity in undistributed net income of subsidiary 2,675
-------
Net income $ 3,289
=======
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
18. Condensed Parent Information (Continued)
----------------------------------------
<TABLE>
<CAPTION>
Statement of Cash Flows
-----------------------
<S> <C>
Cash flows from operating activities:
Net income $ 3,289
Adjustments to reconcile net income to net cash
used by operations:
Undistributed earnings of subsidiary (2,675)
Increase in accrued expenses and other liabilities 177
-------
Net cash provided by operating activities 791
Cash flows from financing activities:
Proceeds from issuance of common stock 11
Dividends paid to stockholders (512)
-------
Net cash used by financing activities (501)
-------
Net increase in cash 290
Cash, beginning of year -
-------
Cash, end of year $ 290
=======
</TABLE>
19. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that the Company disclose estimated fair values for its financial
instruments. 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, due from banks and Federal funds sold,
approximates their relative book values at December 31, 1999 and 1998, as
these financial instruments have short maturities.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
19. Fair Value of Financial Instruments (Continued)
-----------------------------------------------
Available for Sale and Held to Maturity Securities
--------------------------------------------------
The fair value of available for sale and held to maturity securities is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers at or near December 31, 1999
and 1998.
Stock in Other Financial Institutions
-------------------------------------
This financial instrument does not have a market nor is it practical to
estimate the fair value without incurring excessive costs.
Loans Held for Sale and Forward Commitments
-------------------------------------------
The fair value of loans held for sale approximates its relative book value
at December 31, 1998. There were no loans held for sale at December 31,
1999.
Loans
-----
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair values of performing loans are calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimates of maturity are based on the
Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic, lending conditions and the effects of estimated
prepayments.
Fair values for significant non-performing loans are based on estimated
cash flows discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash
flows and discount rates are judgmentally determined using available
market information and historical information.
Accrued Interest Receivable
---------------------------
The fair market value of this financial instrument approximates the book
value as this financial instrument has a short maturity. It is the
Company's policy to stop accruing interest on loans past due by more than
ninety days. Therefore this financial instrument has been adjusted for
estimated credit loss.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
19. Fair Value of Financial Instruments (Continued)
-----------------------------------------------
Deposits and Mortgagors' Escrows
--------------------------------
The fair value of deposits, with no stated maturity, such as
non-interest-bearing demand deposits, savings, NOW accounts, money market
and checking accounts, and mortgagors' escrows, is equal to the amount
payable on demand as of December 31, 1999 and 1998. The fair values of
certificates of deposit are based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
Borrowed Funds
--------------
The fair value of the Company's borrowings with the FHLB is estimated by
discounting the cash flows through maturity or the next repricing date
based on current rates available to the Company for borrowings with
similar maturities.
Commitments to Originate Loans
------------------------------
The fair value of commitments to extend credit cannot be reasonably
estimated without incurring excessive costs as the Company does not charge
fees for such commitments and there is no ready market for this financial
instrument.
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These values do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of
a particular financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial instruments include the
deferred tax assets, mortgage servicing rights, bank premises and
equipment and other real estate owned. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in
any of the estimates.
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
19. Fair Value of Financial Instruments (Continued)
-----------------------------------------------
The following table presents the estimated fair value of the Company's
significant financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
---------------------- --------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,259 $ 8,259 $ 12,095 $ 12,095
Available for sale securities 39,502 39,502 29,085 29,085
Held to maturity securities 28,069 27,061 10,196 10,271
Stock in other financial institutions 4,230 4,230 3,158 3,158
Loans held for sale - - 24,000 24,000
Loans, net 191,529 191,256 187,249 187,766
Accrued interest receivable 1,248 1,248 1,053 1,053
Financial liabilities:
Deposits (with no stated maturity) 143,253 143,253 134,796 134,796
Time deposits 66,829 66,878 64,961 65,431
Mortgagors' escrow accounts 993 993 1,043 1,043
Borrowed funds 45,000 44,900 53,000 53,195
</TABLE>
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(All Dollar Amounts Expressed in Thousands, Except Per Share Data)
20. Quarterly Results of Operations (Unaudited)
-------------------------------------------
<TABLE>
<CAPTION>
1999 Quarters 1998 Quarters
------------------------------- -----------------------------
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $4,588 $4,536 $ 4,289 $ 4,542 $ 4,215 $ 4,053 $ 4,106 $4,085
Interest expense 2,332 2,257 2,242 2,426 2,322 2,252 2,225 2,198
------ ------ ------- ------- -------- ------- ------- ------
Net interest and dividend income 2,256 2,279 2,047 2,116 1,893 1,801 1,881 1,887
Provision for possible loan losses - (10) (45) (45) (45) (45) (45) (45)
Non-interest income 548 819 666 892 569 622 615 630
Non-interest expense (1,592) (1,618) (1,678) (2,022) (1,447) (1,439) (1,494) (1,216)
------ ------ ------- ------- -------- ------- ------- ------
Income before income taxes 1,212 1,470 990 941 970 939 957 1,256
Income tax expense (303) (441) (297) (283) (349) (338) (345) (452)
------ ------ ------- ------- -------- ------- ------- ------
Net income $ 909 $1,029 $ 693 $ 658 $ 621 $ 601 $ 612 $ 804
====== ====== ======= ======= ======== ======= ======= ======
Basic earnings per share $ .36 $ .41 $ .28 $ .28 $ .26 $ .25 $ .26 $ .34
====== ====== ======= ======= ======== ======= ======= ======
Diluted earnings per share $ .36 $ .40 $ .27 $ .26 $ .24 $ .24 $ .24 $ .31
====== ====== ======= ======= ======== ======= ======= ======
Cash dividends declared per share $ .10 $ .05 $ .05 $ .05 $ .05 $ .04 $ .04 $ .04
====== ====== ======= ======= ======== ======= ======= ======
</TABLE>
Quarterly per share figures may not total to the full year amount due to
rounding.
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
--------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 of this report is incorporated by
reference herein from the Company's Proxy Statement.
ITEM 11 EXECUTIVE COMPENSATION
Information called for by Item 11 of this report is incorporated by
reference herein from the Company's Proxy Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 of this report is incorporated by
reference herein from the Company's Proxy Statement.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 of this report is incorporated by
reference herein from the Company's Proxy Statement.
PART IV
-------
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
----------------------------------
(1) Financial Statements for 1999, 1998 and 1997. See Item 8 of this
Report.
(2) Financial Statement Schedules. The following consolidated financial
schedules of the Company are included in response to Part II, Item 8
of this Report: Schedule I - Securities - See Note 3 to the
Consolidated Financial Statements.
Schedule II - Loans to Officers, Directors, Principal Security
Holders. The following schedule of the Company is included in
response to Part II, Item 8 of this report: See Note 5 to the
Consolidated Financial Statements.
Schedule III - Loans and Lease Financing Receivables - The following
schedule of the Company is included in response to Part II, Item 8 of
this report. See Note 5 to the Consolidated Financial Statements.
Schedule IV - Bank Premises and Equipment - See Note 7 to the
Consolidated Financial Statements.
<PAGE>
Schedule V - Investments in, Income from Dividends, and Equity in
Earnings or Losses of Subsidiaries and Associated Companies - Not
Applicable.
Schedule VI - Allowance for Possible Loan Losses - See Note 6 to the
Consolidated Financial Statements.
(b) Reports on Form 8-K
-------------------
(1) No Reports on Form 8-K were filed during the last quarter of 1999.
(c) Exhibits
2.1 Plan of Reorganization and Acquisition dated as of February 17,
1999 between the Company and Ipswich Savings Bank incorporated by
reference to the Company's Form 8-K filed on July 9, 1999.
3.1 Articles of Organization of the Company are incorporated by
reference herein from the Company's June 30, 1999 Form 10-Q.
3.2 By-laws of the Company is incorporated by reference herein from
the Company's June 30, 1999 Form 10-Q.
4.1 Specimen stock certificate for the Company's Common Stock is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q.
10.1 Lease dated August 10, 1992 for premises located at Route 133 and
Route 1, Rowley, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q.
10.2 Lease dated April 25, 1994 for premises located at 451 Andover
Street, North Andover, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q.
10.3 Lease dated March 4, 1996 for premises located at 588 Cabot
Street, Beverly, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q.
10.4 Lease dated July 27, 1997 for premises located at 600 Loring
Avenue, Salem, Massachusetts is incorporated by reference herein
from the Company's June 30, 1999 Form 10-Q.
10.5 Lease dated February 27, 1998 for premises located at 89 Pleasant
Street, Marblehead, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q.
10.6 Lease dated June 12, 1998 for premises located at 470 Main
Street, Reading, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q.
*10.7 Incentive Compensation Plan for Senior Management and certain
other officers dated September 15, 1995 is incorporated by
reference herein from the Company's June 30, 1999 Form 10-Q.
*10.8 Director Recognition and Retirement Plan adopted as of May 18,
1999 is incorporated by reference herein from the Company's June
30, 1999 Form 10-Q.
<PAGE>
*10.9 Merger and Severance Benefits Program dated February 18, 1998 is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q.
*10.10 Amended and Restated Employment and Severance Agreement dated May
18, 1999 between Ipswich Savings Bank and David L. Grey is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q.
*10.11 Amended and Restated Employment and Severance Agreement dated May
18, 1999 between Ipswich Savings Bank and Francis Kenney is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q.
*10.12 Amended and Restated Severance Agreement dated May 18, 1999
between Ipswich Savings Bank and Thomas R. Girard is incorporated
by reference herein from the Company's June 30, 1999 Form 10-Q.
*10.13 Employment Agreement dated June 18, 1998 between Ipswich Savings
Bank and Richard P. Duffett is incorporated by reference herein
from the Company's June 30, 1999 Form 10-Q.
*10.14(a)Amended and Restated Split Dollar Agreement dated May 18, 1999
among Ipswich Savings Bank, Eastern Bank and David L. Grey is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q.
*10.14(b)Amended and Restated Ipswich Irrevocable Insurance Trust dated as
of May 18, 1999 by and between Ipswich Savings Bank and Eastern
Bank is incorporated by reference herein from the Company's June
30, 1999 form 10-Q.
10.15 Contract with Bank's data processor dated February 14, 1997 is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q.
*10.16 1992 Incentive and Non-Qualified Stock Option Plan incorporated
by reference to the Company's Registration Statement on Form S-8
filed on July 22, 1999.
*10.17 1996 Stock Incentive Plan incorporated by reference to the
Company's Registration Statement on Form S-8 filed on July 22,
1999.
*10.18 1998 Stock Incentive Plan incorporated by reference to the
Company's Registration Statement on Form S-8 filed on July 22,
1999.
*10.19 Deferred Compensation Plan for Directors incorporated by
reference to the Company's Form S-8 filed on July 22, 1999.
*10.20 Severance Agreement dated August 18, 1999 between Ipswich Savings
Bank and Keirsten Scanlon is incorporated by reference herein
from the Company's September 30, 1999 Form 10-Q.
<PAGE>
(11) A statement regarding the computation of earnings per share is
included in the notes to consolidated financial statements.
(12) Not applicable.
(27) Financial data schedule.
* Denotes management contract or compensation plan.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, the Company has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
IPSWICH BANCSHARES, INC.
DATE: March 15, 2000 By: /s/David L. Grey
----------------
David L. Grey,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/David L. Grey President, Chief Executive Officer, and March 15, 2000
- -------------------- Director (Principal Executive Officer)
David L. Grey
By: /s/Francis Kenney Senior Vice President, Treasurer, and Chief March 15, 2000
- --------------------- Financial Officer (Principal Financial
Francis Kenney Officer, Principal Accounting Officer)
By: /s/William M. Craft Director March 15, 2000
- -----------------------
William M. Craft
By: /s/Thomas A. Ellsworth Director March 15, 2000
- --------------------------
Thomas A. Ellsworth
By: Director March 15, 2000
William E. George
By. /s/Mark L. Klaman Director March 15, 2000
- ---------------------
Mark L. Klaman
By: /s/John H. Morrow Director March 15, 2000
John H. Morrow
By: /s/Lawrence J. Pszenny Director March 15, 2000
- --------------------------
Lawrence J. Pszenny
By: /s/William J. Tinti Director March 15, 2000
- -----------------------
William J. Tinti
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
ITEM PAGE
---- ----
<S> <C> <C>
2.1 Plan of Reorganization and Acquisition dated as of February 17,
1999 between the Company and Ipswich Savings Bank incorporated by
reference to the Company's Form 8-K filed on July 9, 1999. *
3.1 Articles of Organization of the Company dated February 12, 1999 is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q. *
3.2 By-laws of the Company is incorporated by reference herein from
the Company's June 30, 1999 Form 10-Q. *
4.1 Specimen stock certificate for the Company's Common Stock is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q. *
10.1 Lease dated August 10, 1992 for premises located at Route 133 and
Route 1, Rowley, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q. *
10.2 Lease dated April 25, 1994 for premises located at 451 Andover
Street, North Andover, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q. *
10.3 Lease dated March 4, 1996 for premises located at 588 Cabot
Street, Beverly, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q. *
10.4 Lease dated July 27, 1997 for premises located at 600 Loring
Avenue, Salem, Massachusetts is incorporated by reference herein
from the Company's June 30, 1999 Form 10-Q. *
10.5 Lease dated February 27, 1998 for premises located at 89 Pleasant
Street, Marblehead, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q. *
10.6 Lease dated June 12, 1998 for premises located at 470 Main
Street, Reading, Massachusetts is incorporated by reference
herein from the Company's June 30, 1999 Form 10-Q. *
*10.7 Incentive Compensation Plan for Senior Management and certain
other officers dated September 15, 1995 is incorporated by
reference herein from the Company's June 30, 1999 Form 10-Q. *
*10.8 Director Recognition and Retirement Plan adopted as of May 18,
1999 is incorporated by reference herein from the Company's June
30, 1999 Form 10-Q. *
*10.9 Merger and Severance Benefits Program dated February 18, 1998 is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q. *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
*10.10 Amended and Restated Employment and Severance Agreement dated May
18, 1999 between Ipswich Savings Bank and David L. Grey is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q. *
*10.11 Amended and Restated Employment and Severance Agreement dated May
18, 1999 between Ipswich Savings Bank and Francis Kenney is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q. *
*10.12 Amended and Restated Severance Agreement dated May 18, 1999
between Ipswich Savings Bank and Thomas R. Girard is incorporated
by reference herein from the Company's June 30, 1999 Form 10-Q. *
*10.13 Employment Agreement dated June 18, 1998 between Ipswich Savings
Bank and Richard P. Duffett is incorporated by reference herein
from the Company's June 30, 1999 Form 10-Q. *
*10.14(a)Amended and Restated Split Dollar Agreement dated May 18, 1999
among Ipswich Savings Bank, Eastern Bank and David L. Grey is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q. *
*10.14(b)Amended and Restated Ipswich Irrevocable Insurance Trust dated
as of May 18, 1999 by and between Ipswich Savings Bank and
Eastern Bank is incorporated by reference herein from the
Company's June 30, 1999 form 10-Q. *
10.15 Contract with Bank's data processor dated February 14, 1997 is
incorporated by reference herein from the Company's June 30, 1999
Form 10-Q. *
*10.16 1992 Incentive and Non-Qualified Stock Option Plan incorporated
by reference to the Company's Registration Statement on Form S-8
filed on July 22, 1999. *
*10.17 1996 Stock Incentive Plan incorporated by reference to the
Company's Registration Statement on Form S-8 filed on July 22,
1999. *
*10.18 1998 Stock Incentive Plan incorporated by reference to the
Company's Registration Statement on Form S-8 filed on July 22,
1999. *
*10.19 Deferred Compensation Plan for Directors incorporated by
reference to the Company's Form S-8 filed on July 22, 1999. *
*10.20 Severance Agreement dated August 18, 1999 between Ipswich Savings
Bank and Keirsten Scanlon is incorporated by reference herein
from the Company's September 30, 1999 Form 10-Q. *
(11) A statement regarding the computation of earnings per share is
included in the notes to consolidated financial statements. *
(12) Not applicable. *
(27) Financial data schedule. *
</TABLE>
* Denotes management contract or compensation plan.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,552
<INT-BEARING-DEPOSITS> 2
<FED-FUNDS-SOLD> 1,705
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,502
<INVESTMENTS-CARRYING> 28,069
<INVESTMENTS-MARKET> 27,061
<LOANS> 193,327
<ALLOWANCE> 1,798
<TOTAL-ASSETS> 276,298
<DEPOSITS> 210,082
<SHORT-TERM> 45,000
<LIABILITIES-OTHER> 4,241
<LONG-TERM> 0
0
0
<COMMON> 253
<OTHER-SE> 16,722
<TOTAL-LIABILITIES-AND-EQUITY> 276,298
<INTEREST-LOAN> 14,313
<INTEREST-INVEST> 3,455
<INTEREST-OTHER> 187
<INTEREST-TOTAL> 17,955
<INTEREST-DEPOSIT> 6,576
<INTEREST-EXPENSE> 9,257
<INTEREST-INCOME-NET> 8,698
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 78
<EXPENSE-OTHER> 6,910
<INCOME-PRETAX> 4,613
<INCOME-PRE-EXTRAORDINARY> 4,613
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,289
<EPS-BASIC> 1.33
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 6.94
<LOANS-NON> 31
<LOANS-PAST> 650
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 674
<ALLOWANCE-OPEN> 1,742
<CHARGE-OFFS> 81
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 1,798
<ALLOWANCE-DOMESTIC> 1,798
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
