UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10Q - QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X [ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 2000.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of1934
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
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(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
requirement for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by court. Yes [ ] No [ ]
The number of shares outstanding of the Registrant's common stock as of August
11, 2000 was 2,381,327.
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<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
June 30, December 31,
2000 1999
---------- ----------
Assets (unaudited) (unaudited)
------
<S> <C> <C>
Cash and due from banks $ 7,061 $ 6,552
Interest-bearing deposits and federal funds sold 6,699 1,707
Investment and mortgage-backed securities available for sale 40,078 39,502
Investment and mortgage-backed securities held to maturity 27,670 28,069
Loans held for sale 1,810 0
Loans:
Residential fixed rate 74,319 77,490
Residential adjustable rate 96,206 86,519
Home Equity 28,196 23,385
Commercial 5,494 4,873
Consumer 976 1,060
---------- ----------
Total gross loans 205,191 193,327
Allowance for possible loan losses (1,811) (1,798)
---------- ----------
Net loans 203,380 191,529
Stock in FHLB of Boston 3,000 3,977
Savings Bank Life Insurance Company stock 253 253
Banking premises and equipment, net 3,103 3,168
Other real estate owned 0 111
Accrued interest receivable 1,405 1,248
Other assets 156 182
---------- ----------
Total assets $ 294,615 $ 276,298
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest-bearing checking accounts $ 22,118 $ 15,209
Interest-bearing checking accounts 29,720 27,481
Savings accounts 38,438 37,704
Money market accounts 63,033 62,859
Certificates of deposit 71,746 66,829
---------- ----------
Total deposits 225,055 210,082
Borrowed funds 48,000 45,000
Mortgagors' escrow accounts 998 993
Deferred income tax liability, accrued expenses and other liabilities 3,346 3,248
---------- ----------
Total liabilities 277,399 259,323
Equity capital 17,879 16,965
Treasury stock (924) 0
Unrealized gain on investment securities available for sale 261 10
---------- ----------
Total stockholders' equity 17,216 16,975
---------- ----------
Total liabilities and stockholders' equity $ 294,615 $ 276,298
========== ==========
Shares outstanding 2,412,027 2,525,427
Selected data (end of period):
------------------------------
Equity to assets (in %) 5.84 6.14
Total equity to risk-weighted assets (in %) 13.34 14.38
Total non-performing assets, net $ 29 $ 142
Book value per share $ 7.14 $ 6.72
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<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 3,634 $ 3,417 $ 7,139 $ 7,229
Investment securities available for sale 702 524 1,370 1,073
Investment securities held to maturity 470 291 943 459
Federal funds and interest bearing deposits 163 57 192 72
---------- ---------- ---------- ----------
Total interest and dividend income 4,969 4,289 9,644 8,833
Interest expense:
Deposits 1,956 1,576 3,800 3,221
Borrowed funds 807 666 1,440 1,448
---------- ---------- ---------- ----------
Total interest expense 2,763 2,242 5,240 4,669
---------- ---------- ---------- ----------
Net interest and dividend income 2,206 2,047 4,404 4,164
Provision for possible loan losses 15 45 30 90
---------- ---------- ---------- ----------
Net interest and dividend income after
provision for possible loan losses 2,191 2,002 4,374 4,074
Non-interest income:
Mortgage banking revenues, net 50 267 94 762
Retail banking fees 422 378 799 723
Net gain/(loss) on sales of securities 0 16 2 65
Other 6 5 11 7
---------- ---------- ---------- ----------
Total non-interest income 478 666 906 1,557
---------- ---------- ---------- ----------
Net interest, dividend and non-interest income 2,669 2,668 5,280 5,631
Non-interest expenses:
Salaries and employee benefits 832 790 1,649 1,562
Occupancy and equipment expenses 227 229 452 450
Data processing services 230 187 444 359
Marketing expense 110 124 304 266
Professional fees 49 95 178 160
Office expense 102 95 184 194
Other 124 158 221 329
---------- ---------- ---------- ----------
Total non-interest expenses 1,674 1,678 3,432 3,320
Expenses from Holding Company & REIT formation 0 0 0 380
---------- ---------- ---------- ----------
Income before income taxes 995 990 1,848 1,931
Income tax expense 351 297 457 579
---------- ---------- ---------- ----------
Net income $ 644 $ 693 $ 1,391 $ 1,352
========== ========== ========== ==========
Basic earnings per share $ 0.26 $ 0.28 $ 0.56 $ 0.56
Diluted earnings per share $ 0.26 $ 0.27 $ 0.55 $ 0.53
Dividends per share $ 0.10 $ 0.05 $ 0.20 $ 0.10
========== ========== ========== ==========
Weighted average common shares outstanding (basic) 2,469,502 2,462,742 2,497,464 2,427,708
Weighted average common shares outstanding (diluted) 2,492,760 2,544,482 2,520,983 2,533,987
Selected performance data:
--------------------------
(Expense ratios exclude one time charges)
Return on average equity (in %) 14.80 18.18 15.99 18.13
Return on average assets (in %) 0.89 1.05 0.98 1.00
Net interest margin (in %) 3.13 3.19 3.20 3.16
Expenses to average assets (in %) 2.32 2.55 2.43 2.47
Efficiency ratio (in %) 62.50 61.19 65.02 58.70
Mortgage and equity loan production $ 17,920 $ 35,925 $ 30,566 $ 73,113
</TABLE>
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<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 2000 and 1999
(Dollars in thousands, except for share data)
(unaudited)
Accumulated
Additional other Total
Shares Common paid-in Retained Treasury comprehensive stockholders'
outstanding stock capital earnings stock income equity
----------- ----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 2,392,286 $239 $2,009 $11,790 $0 $185 $14,223
Stock options exercised 132,616 13 223 236
Issuance of stock rights 12 12
Cash dividends ($.10 per share) (245) (245)
Comprehensive income:
Net income 1,352 1,352
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of ($1) (2)
Reclassification adjustment
for amounts included in net
income, net of taxes of $5 9
-------
Other comprehensive income 7 7
-------
1,359
Total comprehensive income
--------- ---- ------ ------- -- ---- -------
Balance at June 30, 1999 2,524,902 252 2,244 12,897 0 192 15,585
Stock options exercised 525 1 3 4
Issuance of stock rights 15 15
Cash dividends ($.15 per share) (384) (384)
Comprehensive income:
Net income 1,937 1,937
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of ($147) (221)
Reclassification adjustment
for amounts included in net
income, net of taxes of $26 39
-------
Other comprehensive income (182) (182)
-------
Total comprehensive income 1,755
--------- ---- ------ ------- ----- ---- -------
Balance at December 31, 1999 2,525,427 253 2,262 14,450 0 10 16,975
Issuance of stock rights 19 19
Purchase of treasury stock (113,400) (924) (924)
Cash dividends ($.20 per share) (496) (496)
Comprehensive income:
Net income 1,391 1,391
Other comprehensive income:
Unrealized holding gains on
securities, net of taxes of $174 260
Reclassification adjustment
for amounts included in net
income, net of taxes of ($7) (9)
-------
251 251
-------
Other comprehensive income 1,642
Total comprehensive income
--------- ---- ------ ------- ---- ---- -------
Balance at June 30, 2000 2,412,027 $253 $2,281 $15,345 ($924) $261 $17,216
========= ==== ====== ======= ===== ==== =======
</TABLE>
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<TABLE>
<CAPTION>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(Dollars in thousands)
(unaudited)
2000 1999
-------- --------
<S> <C> <C>
Net cash flows from operating activities:
Net income $ 1,391 $ 1,352
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for possible loan losses 30 90
Depreciation expense 172 167
Amortization of premiums on investment securities, net 14 80
(Gain) on sale of loans, net (1) (762)
Loss on sale of real estate acquired by foreclosure 1 0
(Gain) on sale of investment securities available for sale, net (2) (65)
Origination of loans held for sale (5,964) (47,609)
Proceeds from sale of loans 4,155 7,981
Proceeds from sale of securitized loans 0 57,802
(Increase) in loan origination fees (183) (206)
(Decrease) in loan discounts (3) (1)
(Increase) in deferred premium on loans sold and mortgage servicing rights 0 (693)
(Increase) in accrued interest receivable (157) (201)
Decrease in other assets, net 26 17
Increase (decrease) in accrued expenses and other liabilities (68) (324)
--------- ---------
Net cash provided (used) by operating activities (589) 17,628
Net cash flows from investing activities:
Purchase of investment securities available for sale (11,055) (13,380)
Principal paydowns on mortgage-backed investment securities available for sale 3,900 7,680
Proceeds from the sale of investment securities available for sale 6,985 4,860
Purchase of investment securities held to maturity 0 (9,579)
Principal paydowns on mortgage-backed investment securities held to maturity 398 444
Redemption (purchase) of stock in FHLB of Boston 977 (1,072)
Net (increase) in loans (11,695) (3,907)
Proceeds from sale of real estate acquired by foreclosure 110 0
Purchases of equipment, net (107) (114)
--------- ---------
Net cash (used) provided by investing activities (10,487) (15,068)
Cash flows from financing activities:
Net proceeds from the issuance of common stock 19 248
Purchase of treasury stock (924) 0
Cash dividends (496) (245)
Net increase in deposits 14,973 2,452
Proceeds from Federal Home Loan Bank advances 53,454 156,100
Repayment of Federal Home Loan Bank advances (50,454) (161,100)
(Decrease) increase in mortgagors' escrow accounts 5 (66)
--------- ---------
Net cash (used) provided by financing activities 16,577 (2,611)
--------- ---------
Net (decrease) in cash and cash equivalents 5,501 (51)
Cash and cash equivalents at beginning of year 8,259 12,095
--------- ---------
Cash and cash equivalents at end of year $ 13,760 $ 12,044
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest on deposit accounts $ 3,800 $ 3,221
Interest on borrowed funds 1,440 1,448
Income tax expense, net 373 417
Supplemental schedule of non-cash investing and financing
activities:
Net increase required by Statement of Financial
Accounting Standards NO. 115:
Investment securities 418 12
Deferred income tax liability 167 5
Net unrealized gain on investment
Securities available for sale 251 7
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IPSWICH BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000 and 1999
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Ipswich
Bancshares, Inc. and its wholly owned subsidiary, Ipswich Savings Bank (the
Bank) 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 herein referred
to as the Company). All significant intercompany accounts and transactions have
been eliminated in consolidation.
Ipswich Preferred Capital Corporation (IPCC) was formed in 1999 as a
Massachusetts business corporation which 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 was formed to
exclusively transact in securities on its own behalf as a wholly-owned
subsidiary of the Bank. 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.
Subsequent to quarter-end, on July 19, 2000, the Bank liquidated two of its
subsidiaries, Historic Ipswich, Inc. and Rowley Investment Corporation. The
subsidiaries have no material impact on the financial position and earnings of
the Company.
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 originated mortgage servicing rights.
The accompanying unaudited condensed and consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2000. For further information, refer to the
audited consolidated financial statements and footnotes thereto for the fiscal
year ended December 31, 1999 included in the Company's Annual Report on Form
10-K.
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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.
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.
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000
---------------- Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS $1,391 2,497 $0.56
Effect of stock options -- 24 ($0.01)
------ ---- -----
Diluted EPS $1,391 2,521 $0.55
====== ===== =====
Basic EPS $1,352 2,428 $0.56
Effect of stock options -- 106 ($0.03)
------ ----- -----
Diluted EPS $1,352 2,534 $0.53
====== ===== =====
<CAPTION>
Three Months Ended June 30,
2000
---------------- Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS $ 644 2,470 $0.26
Effect of stock options -- 23 --
----- ----- -----
Diluted EPS $ 644 2,493 $0.26
===== ===== =====
1999
----
Basic EPS $ 693 2,463 $0.28
Effect of stock options -- 81 ($0.01)
----- ----- -----
Diluted EPS $ 693 2,544 $0.27
===== ===== =====
</TABLE>
Other Comprehensive Income
--------------------------
Accumulated other comprehensive income consists solely of unrealized
appreciation on investment securities available for sale, net of taxes.
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ITEM 2
------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ ---------- --- ----------- --------- --------- ---
RESULTS OF OPERATIONS
---------------------
Certain statements in this Form 10-Q 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, adversely affecting the ability of
borrowers to repay adjustable rate loans and the Company's earnings and income
which derive in significant part from loans to borrowers; unemployment in the
Company's market area may increase, adversely affecting the ability of
individual borrowers to re-pay loans; property values may decline, adversely
affecting the ability of borrowers to re-pay loans and the value of real estate
securing repayment of loans; general economic and market conditions in the
Company's market area may decline, adversely affecting the ability of borrowers
to re-pay loans, 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.
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's operating results for the three and six months ended June 30, 2000
reflect the operations of the Company and its direct and indirect subsidiaries,
Ipswich Savings Bank, Ipswich Preferred Capital Corporation, Ipswich Securities
Corporation, North Shore Financial Services, Rowley Investment Corporation and
Historic Ipswich, Inc. The Company is in the business of making residential
mortgage loans, while attracting deposits from the general public to fund those
loans. The Company operates out of its main office located at 23 Market Street,
Ipswich, Essex County, Massachusetts, and its
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<PAGE>
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 at 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 (the Federal Reserve) 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).
ASSET / 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.
Assets and liabilities are classified as interest rate sensitive if they have a
remaining term to maturity of 0-12 months, or are subject to interest rate
adjustment in those time periods. Adjustable rate loans and mortgage backed
securities are shown as if the entire balance comes due on the repricing date.
Estimates of fixed rate loan amortization prepayments are included with rate
sensitive assets. Because regular savings, demand deposits, money market
accounts and NOW accounts may be withdrawn at any time and are subject to
interest rate adjustments at any time, they are presented based upon assumed
maturity structures. As a result of this analysis, the static GAP position in
the 0 to 12 months range is a negative $6.1 million at June 30, 2000.
Interest rate sensitivity statistics are static measures that do not necessarily
take into consideration external factors which may affect the sensitivity of
assets and liabilities, and consequently can not be used alone to predict the
operating results of a financial institution in a changing environment.
LIQUIDITY
---------
The Company seeks to ensure that sufficient liquidity is available to meet cash
requirements while earning a return on liquid assets. The Company uses its
liquidity primarily to fund loans and investment commitments, to supplement
deposit outflows, to fund its share repurchase program and to meet operating
expenses. The primary sources of liquidity are interest and principal
amortization from loans, mortgage backed securities and investments, sales and
maturities of investments, loan sales, deposits, and Federal Home Loan Bank of
Boston (the FHLBB) advances, which includes a $3.2 million overnight line of
credit. The Company also uses longer term borrowed facilities within its total
available credit line with the FHLBB. Advances from the FHLBB were $48 million
at June 30, 2000.
During 2000 the primary sources of liquidity were $4.2 million in loan sales,
principal amortization from mortgage backed securities of $4.3 million payoff,
principal amortization in the loan portfolio of $10.6 million and the sale of
investment securities of $7.0 million. The primary uses of funds were $22.6
million in residential first mortgage loan originations and $11.8 million in
investment purchases.
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<PAGE>
CAPITAL RESOURCES
-----------------
Total stockholders' equity at June 30, 2000 was $17.2 million, an increase of
$200,000 from $17.0 million at the end of 1999. Included in stockholders' equity
at June 30, 2000 is an unrealized gain on marketable securities available for
sale, net of taxes, of $261,000, an increase of $251,000 as compared to $10,000
at December 31, 1999. Future interest rate increases could reduce the market
value of these securities and reduce stockholders' equity.
The Company announced a stock repurchase plan of 10% of the outstanding shares
in March 2000. Through June 30, 2000, the Company had repurchased 113,400 or
4.5% of the outstanding shares at an average price of $8.15 totaling $923,700.
The Federal Reserve's and the FDIC's capital guidelines require the Company and
the Bank, respectively, generally to maintain a minimum Tier 1 leverage capital
ratio of at least 4% (5% to be classified as "well-capitalized"). At June 30,
2000 Tier 1 leverage capital ratio for the Company was 5.84% compared to 6.33%
at December 31, 1999 and 5.86% and 6.29% for the Bank on June 30, 2000 and
December 31, 1999, respectively.
The Federal Reserve and the FDIC have also imposed risk-based capital
requirements on the Company and the Bank, respectively, which give different
risk weightings to assets and to off balance sheet assets, such as loan
commitments. The Federal Reserve's and the FDIC's risk-based capital guidelines
require the Company and the Bank, respectively, to maintain a minimum total
risk-based capital ratio of 8% (10% to be classified as "well-capitalized") and
a Tier 1 risk-based capital ratio of 4% (6% to be classified as
"well-capitalized"). At June 30, 2000, the Company's total and Tier 1 risk-based
capital ratios were 13.34% and 12.09% (compared to 14.38% and 13.13% at December
31, 1999). At June 30, 2000, the Bank's total and Tier 1 risk based capital
ratios were 13.30% and 12.05% (compared to 14.29% and 13.04% at December 31,
1999).
As of June 30, 2000, the Bank was considered "well-capitalized" under applicable
regulatory capital guidelines.
FINANCIAL CONDITION
-------------------
The Company's total assets at June 30, 2000 were $294.6 million, an increase of
$18.3 million from December 31, 1999 assets of $276.3 million. The increase was
largely due to the addition of $11.9 million in total loans, $1.8 million in
mortgages held for sale, and $5.0 million in fed funds sold. Funding the
increase in assets for the first six months of 2000 was deposit growth of $15
million, primarily in checking accounts, savings, certificates of deposit and
money market accounts. Additionally, borrowed funds increased by $3 million in
2000 from year-end 1999.
Federal Funds Sold
------------------
Interest-bearing deposits and federal funds sold at June 30, 2000 was $6.7
million, versus $1.7 million at December 31, 1999. The increase in fed funds
sold was primarily due to the Company's accumulation of cash to manage its
borrowing position and to take advantage of opportunities to purchase investment
securities and manage the Company's interest rate risk position.
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<PAGE>
Investment and Mortgage-Backed Securities
-----------------------------------------
Total investments and mortgage backed securities available for sale at June 30,
2000 was $40.1 million, an increase of $576,000 in 2000. The increase was
primarily the result of the purchase of $11.1 million in adjustable rate
mortgage-backed securities, offset by $7.0 million in sales and $3.9 million in
amortization.
Total investments and mortgage-backed securities held to maturity was $27.7
million at June 30, 2000, versus $28.1 million at December 31, 1999. The decline
is due to principal amortization on the portfolio of mortgage-backed securities.
The unrealized gain on the portfolio of available for sale securities, was
$434,000 at June 30, 2000. The increase in value is principally in the portfolio
of adjustable rate mortgage-backed securities, which in a rising rate
environment, will increase in yield as the underlying loans reprice. The
repricing aspect of these securities helps to sustain the market values.
Loans and Loans Held for Sale
-----------------------------
Loans held for sale increased to $1.8 million at June 30, 2000, versus $0 at
year-end 1999. The Company's portfolio of mortgages held for sale increased due
to the recent origination of fixed rate loans.
The loan portfolio at June 30, 2000 was $205.2 million, an increase of $11.9
million in comparison to the portfolio at December 31, 1999 of $193.3 million.
The increase was principally in adjustable rate mortgages, which are written for
portfolio versus sale in the secondary market. The Company will continue to
place adjustable rate mortgages in its portfolio as a result of the more
favorable interest rate risk profile for these loans in comparison to fixed rate
loans. Current originations of fixed rate loans originated are sold in the
secondary market.
CREDIT QUALITY
--------------
Non-Performing Loans
--------------------
Loans placed on non-performing status at June 30, 2000 was $29,000,
substantially unchanged since year-end. Accrual of interest on loans is
discontinued either when a reasonable doubt exists, as to the full timely
collection of principal and interest, or when a loan comes contractually past
due by ninety (90) days or more, unless the loan is adequately secured and in
the process of collection.
When a loan is placed on non-accrual status, all interest previously accrued,
but not collected, is reversed against current period interest income. Income on
such loans is recognized to the extent that cash is received and the ultimate
collection of principal and interest is probable. Following collection
procedures, the Company generally institutes appropriate actions to foreclose
the property.
Real Estate Acquired by Foreclosure
-----------------------------------
Real estate acquired by foreclosure totaled $0 at June 30, 2000, a decrease of
$111,000 since year-end 1999. The decrease is due to the sale of OREO during the
first half of the year. The Company owns two parcels of land which have
previously been written down to $1 each. Real estate acquired by foreclosure is
reflected at the lower of the net carrying value, or fair value, of the
property, less estimated costs of disposition.
Page - 11 -
<PAGE>
Allowance for Possible Loan Losses
----------------------------------
The allowance for loan loss at June 30, 2000 was $1.8 million, unchanged since
year-end 1999. The entire allowance for loan losses is available to absorb
charge-offs in any category of loans. Loan losses are charged against the
allowance when management believes that the collectibility of the loan principal
is unlikely. The allowance for possible loan losses is established by management
to absorb future charge-offs of loans deemed uncollectible. The 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. Management believes
that the allowance for possible loan losses is accurate as of June 30, 2000.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary.
Liabilities
-----------
Deposits increased by $15 million in the first half of 2000, to end June 30,
2000 at $225.1 million. Deposits totaled $210.1 million at December 31, 1999.
The increase in deposits resulted from the Company's ongoing checking account
acquisition program which generated $9.1 million in checking accounts balances
in 2000. In addition, certificates of deposit increased by $4.9 million as
rising rates made CDs a more attractive investment vehicle for depositors.
Federal Home Loan Bank of Boston advances increased by $3.0 million in 2000 to
$48 million at June 30, 2000. Borrowed funds are typically used to manage the
liquidity of the Company and the utilization of borrowings is dependent on cash
flows from other assets and liabilities. The Company extended a substantial
portion of its borrowings in the first six months of 2000 to hedge its risk
against rising interest rates. The weighted average maturity of its borrowings
is approximately 1.6 years at June 30, 2000.
Equity Capital
--------------
Equity capital increased by $241,000 to $17.2 million at June 30, 2000. Equity
was principally impacted by earnings for the first six months of the year of
$1.4 million and an increase in the unrealized gain or loss on investment
securities, $251,000, net of taxes. Offsetting these increases were payments of
cash dividends to shareholders which totaled $496,000 in 2000. Additionally, the
Company repurchased 113,400 shares or 4.5% of its outstandings in executing its
previously announced 10% stock repurchase plan. The average price per share was
$8.15 totaling $923,700. The cost of the shares as reflected in the equity
capital section of the balance sheet as "Treasury Stock".
Page - 12 -
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999
General
-------
The Company reported net income of $644,000 or $.26 per fully diluted share for
the second quarter of 2000. This compares with $693,000 or $.27 per fully
diluted share for the second quarter of 1999. The second quarter 2000 earnings
were favorably impacted by an increase of 7.8% in the net interest income
totaling $159,000, and an increase of $44,000 or 11.6% in retail banking fees.
Return on equity for the second quarter of 2000 was 14.80%, versus 18.18% for
the same quarter of 1999. The second quarter of 2000 return on assets was .89%
versus 1.05% for the same quarter in 1999.
Net Interest and Dividend Income
--------------------------------
Net interest income for the second quarter of 2000 was $2.2 million, versus $2
million for the same time frame in 1999. The net interest margin percentage was
3.13% for the second quarter of 2000 versus 3.19% for the same quarter the
previous year.
As a result of the Company's interest rate risk position, net interest margins
have experienced compression during the current quarter. This compression
results from the rates on borrowings and deposits increasing at a faster rate
than those on loans and investment.
Non-interest Income
-------------------
Non-interest income for the second quarter of 2000 was $478,000 versus $666,000
in the second quarter of 1999. Non-interest income was substantially lower in
2000, as a result of lower mortgage banking revenues. Mortgage banking revenues
are principally generated from the sale of fixed rate loans in the secondary
market. As a result of the current interest rate environment, the Company is
originating primarily adjustable rate mortgages for portfolio versus fixed rate
loans to sell in the secondary market. The resulting impact is that mortgage
banking revenues for the second quarter of 2000 was $50,000 versus $267,000 for
the second quarter of 1999 when the Company sold a significant amount of fixed
rate mortgages in the secondary market.
Retail banking fees for the second quarter of 2000 was $422,000 versus $378,000
for the same quarter in 1999. This 11.6% increase is principally the result of
the Company's successful efforts to acquire checking account customers in its
market place, which generates fee income.
Non-interest Expense
--------------------
Total non-interest expenses were $1.7 million for the second quarter of 2000
versus $1.7 million for the same time frame in 1999. Expenses which exhibited
increases included salary and benefit costs which increased $42,000 or 5.3% and
data processing costs which increased $43,000, or 23% in the current quarter
versus the same quarter in 1999. These expenses were primarily the result of the
Company's successful efforts to generate checking accounts for which branch
staff are incented, and the resulting accounts which generate additional data
processing expenses. Offsetting these increases was a decline in marketing
expenses of $14,000 or 11.3% and professional fees $46,000 or 48.4%.
Page - 13 -
<PAGE>
Income Tax Expense
------------------
The second quarter of 2000 effective tax rate was 35.3% versus 30% for the
second quarter of 1999. A tax rate of 35% in 2000 is expected to continue
through the remainder of the year.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
General
-------
The Company reported net income of $1.4 million or $.55 per fully diluted share
for the first six months of 2000. This compares with $1.4 million or $.53 per
fully diluted share for the first six months of 1999. Positive variances which
contributed to an increase in earnings were in the net interest income of
$240,000, and in the income tax rate, which was impacted by recognition of a
$190,000 tax benefit resulting from a reduction in the Company's valuation
reserve, which was booked in the first quarter of 2000.
Return on equity for the first six months of 2000 was 15.99%, versus 18.13% for
the same time frame in 1999. The first six months of 2000 return on assets was
.98% versus 1.00% for the time frame in 1999.
Net Interest and Dividend Income
--------------------------------
Net interest income for the first six months of 2000 was $4.4 million, versus
$4.2 million for the same time frame in 1999. The net interest margin percentage
was 3.20% versus 3.16% for the same time frame the previous year.
The net interest income was positively impacted by growth of the balance sheet
from $269.8 million at June 30, 1999 to $294.6 million at June 30, 2000.
Non-interest Income
-------------------
Non-interest income for the first six months of 2000 was $906,000 versus $1.6
million in the first half of 1999. Non-interest income declined as a result of
lower mortgage banking revenues. Mortgage banking revenues are generated from
the sale of fixed rate loans in the secondary market. Due to the current
interest rate environment, the Company is originating primarily adjustable rate
loans for portfolio versus fixed rate loans which are sold in the secondary
market. Total mortgage banking revenues for the first six months of 2000 were
$94,000 versus $762,000 for the same time frame in 1999.
Retail banking fees totaled $799,000 for the first six months of 2000 versus
$723,000 for the same time frame in 1999, an increase of $76,000 or 10.5%.
Retail banking fees have increased as a result of the Company's emphasis on
generating checking accounts in its retail branch network which contributes
significantly to fee income.
Non-interest Expense
--------------------
Total non-interest expense was $3.4 million for the first six months of 2000
versus $3.7 million for the same time frame in 1999. The 1999 expenses were
impacted by a $380,000 charge to form the holding company, and its Residential
Real Estate Investment Trust. Non-interest expenses line items which increased
in 2000 over 1999 were salaries
Page - 14 -
<PAGE>
and benefits, an increase of $87,000 or 5.6%, and data processing expenses which
increased by $85,000 or 23.7%. These cost increases are a result of the
Company's successful efforts to generate checking accounts for which the branch
staff is incented, and corresponding costs to support these new accounts.
Income Tax Expense
------------------
The first six months of 2000 effective tax rate was 24.7% versus 30% for the
same time frame in 1999. The tax rate in 2000 was impacted by the Company's
realization of a $190,000 tax benefit resulting from a reduction in its
valuation reserve. Excluding the one-time credit, the tax rate in 2000 is
expected to be 35% versus 28.7% in 1999, which was impacted by one-time tax
benefits.
Page - 15 -
<PAGE>
ITEM 3
------
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 Company seeks 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 the time
frames analyzed:
Rate Change Estimated NII Sensitivity Over Twelve Months
----------- --------------------------------------------
June 30, 2000 June 30, 1999
------------- -------------
+200bp -2.29% -6.08%
-200bp -2.18% +5.03%
Page - 16 -
<PAGE>
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 - 17 -
<PAGE>
IPSWICH BANCSHARES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------------
None
Item 2. Changes in Securities and use of Proceeds
--------------------------------------------------------
None
Item 3. Defaults Upon Senior Securities
----------------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------------
None
Item 5. Other Information
--------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------------
a. Exhibits
b. Reports on Form 8-K
None
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 dated February 12, 1999
and 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.
Page - 18 -
<PAGE>
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.
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 Form10-Q.
Page - 19 -
<PAGE>
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 Contract dated April 6, 2000 with U.S. Bancorp for ATM
processing services incorporated by reference to the Company's March 31, 2000
Form 10-Q.
10.21*Severance Agreement dated August 8, 2000 between Ipswich Savings
Bank and Mark E. Foley.
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.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IPSWICH BANCSHARES, INC.
By: /s/ David L. Grey Date: August 9, 2000
David L. Grey
President and Chief Executive Officer
By: /s/ Francis Kenney Date: August 9, 2000
Francis Kenney
Treasurer
(Principal Financial Officer and Principal Accounting Officer)
Page - 20 -
