10-Q 1 0001.txt FORM 10-Q 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 September 30, 2000. { } 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 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 November 8, 2000 was 2,137,352. IPSWICH BANCSHARES, INC. AND SUBSIDIARY Consolidated Balance Sheets (Dollars in thousands, except per share data)
September 30, December 31, 2000 1999 --------------------- ---------------------- ((unaudited) (unaudited) Assets Cash and due from banks $8,547 $6,552 Interest-bearing deposits and federal funds sold 0 1,707 Investment and mortgage-backed securities available for sale 39,669 39,502 Investment and mortgage-backed securities held to maturity 27,325 28,069 Loans held for sale 2,358 0 Loans: Residential fixed rate 70,554 77,490 Residential adjustable rate 98,837 86,519 Home equity 28,296 23,385 Commercial 5,461 4,873 Consumer 1,057 1,060 --------------------- ---------------------- Total gross loans 204,205 193,327 Allowance for possible loan losses -1,823 -1,798 --------------------- ---------------------- Net loans 202,382 191,529 Stock in FHLB of Boston 3,000 3,977 Savings Bank Life Insurance Company stock 253 253 Banking premises and equipment, net 3,046 3,168 Other real estate owned 0 111 Accrued interest receivable 1,615 1,248 Other assets 356 182 --------------------- ---------------------- Total assets $288,551 $276,298 ===================== ====================== Liabilities and Stockholders' Equity Liabilities: Deposits: Non-interest-bearing checking accounts $20,464 $15,209 Interest-bearing checking accounts 31,711 27,481 Savings accounts 36,989 37,704 Money market accounts 62,563 62,859 Certificates of deposit 73,549 66,829 --------------------- ---------------------- Total deposits 225,276 210,082 Borrowed funds 42,584 45,000 Mortgagors' escrow accounts 972 993 Deferred income tax liability, accrued expenses and other liabilities 3,433 3,248 --------------------- ---------------------- Total liabilities 272,265 259,323 Equity capital 18,278 16,965 Treasury stock (262,400 shares) -2,295 0 Unrealized gain on investment securities available for sale 303 10 --------------------- ---------------------- Total stockholders' equity 16,286 16,975 --------------------- ---------------------- Total liabilities and stockholders' equity $288,551 $276,298 ===================== ====================== Shares outstanding 2,263,027 2,525,427 Selected data (end of period): --------------------------------------------------------- Equity to assets (in %) 5.64 6.14 Total equity to risk-weighted assets (in %) 12.67 14.38 Total non-performing assets, net $27 $142 Book value per share $7.20 $6.72
Page -2- IPSWICH BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Income (Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ---------------- -------------- -------------- -------------- (unaudited) (unaudited) (unaudited) (unaudited) Interest and dividend income: Loans $3,854 $3,586 $10,993 $10,815 Investment securities available for sale 719 539 2,089 1,612 Investment securities held to maturity 467 344 1,410 803 Federal funds and interest bearing deposits 74 65 266 137 ---------------- -------------- -------------- -------------- Total interest and dividend income 5,114 4,534 14,758 13,367 Interest expense: Deposits 2,076 1,623 5,876 4,844 Borrowed funds 790 633 2,230 2,081 ---------------- -------------- -------------- -------------- Total interest expense 2,866 2,256 8,106 6,925 ---------------- -------------- -------------- -------------- Net interest and dividend income 2,248 2,278 6,652 6,442 Provision for possible loan losses 15 10 45 100 ---------------- -------------- -------------- -------------- Net interest and dividend income after provision for possible loan losses 2,233 2,268 6,607 6,342 Non-interest income: Mortgage banking revenues, net -78 436 14 1,195 Retail banking fees 449 380 1,250 1,106 Net gain/(loss) on sales of securities 0 0 2 65 Other -1 4 10 11 ---------------- -------------- -------------- -------------- Total non-interest income 370 820 1,276 2,377 ---------------- -------------- -------------- -------------- Net interest, dividend and non-interest income 2,603 3,088 7,883 8,719 Non-interest expenses: Salaries and employee benefits 834 834 2,483 2,396 Occupancy and equipment expenses 229 226 681 676 Data processing services 211 205 655 564 Marketing expense 103 102 407 368 Professional fees 82 71 260 611 Office expense 92 100 276 294 Other 103 80 323 409 ---------------- -------------- -------------- -------------- Total non-interest expenses 1,654 1,618 5,085 5,318 ---------------- -------------- -------------- -------------- Income before income taxes 949 1,470 2,798 3,401 Income tax expense 332 442 789 1,021 ---------------- -------------- -------------- -------------- Net income $617 $1,028 $2,009 $2,380 ================ ============== ============== ============== Basic earnings per share $0.26 $0.41 $0.82 $0.97 Diluted earnings per share $0.26 $0.40 $0.81 $0.94 Dividends per share $0.10 $0.05 $0.30 $0.15 Weighted average common shares outstanding (basic) 2,369,795 2,525,227 2,454,597 2,460,572 Weighted average common shares outstanding (diluted) 2,395,805 2,550,388 2,478,903 2,539,217 Selected performance data: --------------------------------------------------- (Expense ratios exclude one time charges) Return on average equity (in %) 14.58 25.74 15.53 20.78 Return on average assets (in %) 0.85 1.52 0.94 1.18 Net interest margin (in %) 3.18 3.51 3.20 3.27 Expenses to average assets (in %) 2.26 2.40 2.38 2.44 Efficiency ratio (in %) 60.09 53.35 63.33 56.84 Mortgage and equity loan production $20,145 $23,076 $50,711 $96,189
Page -3- IPSWICH BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Nine Months Ended September 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 ------------ ------- -------- -------- -------- --------- ----------- Balance at December 31, 1998 2,392,286 $ 239 $ 2,009 $ 11,790 $ 0 $ 185 $14,223 Stock options exercised 133,141 14 226 240 Issuance of stock rights 19 19 Cash dividends ($.15 per share) -372 -372 Comprehensive income: 2,380 2,380 Net income Other comprehensive income: Unrealized holding gains on -129 securities, net of taxes of $86 Reclassification adjustment for amounts included in net 78 income, net of taxes of $52 --------- -51 -51 Other comprehensive income --------- Total comprehensive income 2,329 ---------- ------- ---------- --------- -------- ------- --------- Balance at September 30, 1999 2,525,427 253 2,254 13,798 0 134 16,439 Issuance of stock rights 8 8 Cash dividends ($.10 per share) -257 -257 Comprehensive income: Net income Other comprehensive income: 909 909 Unrealized holding gains on securities, net of taxes of $64 -94 Reclassification adjustment for amounts included in net income, net of taxes of ($19) -30 --------- Other comprehensive income -124 -124 --------- Total comprehensive income 785 ---------- ------- ---------- --------- -------- ------- --------- Balance at December 31, 1999 2,525,427 253 2,262 14,450 0 10 16,975 Issuance of stock rights 27 27 Purchase of treasury stock -262,400 -2,295 -2,295 Cash dividends ($.30 per share) -723 -723 Comprehensive income: Net income Other comprehensive income: 2,009 2,009 Unrealized holding gains on securities, net of taxes of $178 267 Reclassification adjustment for amounts included in net income, net of taxes of $10 26 --------- Other comprehensive income 293 293 --------- Total comprehensive income 2,302 ---------- ------- ---------- --------- -------- ------- --------- Balance at September 30, 2000 2,263,027 $ 253 $ 2,289 $ 15,736 $-2,295 $ 303 $16,286 ========== ======= ========== ========= ======== ======= =========
Page -4- IPSWICH BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Nine Months Ended September 30, 2000 and 1999 (Dollars in thousands) (unaudited)
2000 1999 ------------------- ------------------ Net cash flows from operating activities: Net income $2,009 $2,380 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for possible loan losses 45 100 Depreciation expense 259 252 Amortization of premiums on investment securities, net 41 129 (Gain) Loss on sale of loans, net 78 -977 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 -16,014 -72,592 Proceeds from sale of loans 3,459 11,544 Proceeds from sale of securitized loans 9,544 76,954 (Increase) in loan origination fees -275 -170 (Decrease) in loan discounts -4 -2 (Increase) in deferred premium on loans sold and mortgage servicing rights -97 -1,097 (Increase) in accrued interest receivable -367 -248 (Increase)decrease in other assets, net -77 33 Increase (decrease) in accrued expenses and other liabilities -5 489 ------------------- ------------------ Net cash provided (used) by operating activities -1,405 16,730 Net cash flows from investing activities: Purchase of investment securities available for sale -13,329 -13,380 Principal paydowns on mortgage-backed investment securities available for sale 7,197 10,674 Proceeds from the sale of investment securities available for sale 6,985 4,860 Purchase of investment securities held to maturity 0 -13,926 Principal paydowns on mortgage-backed investment securities held to maturity 743 736 Principal from the call of investment securities held to maturity 0 2,000 Redemption (purchase) of stock in FHLB of Boston 977 -1,072 Net (increase) in loans -10,619 -2,047 Proceeds from sale of real estate acquired by foreclosure 110 0 Purchases of equipment, net -137 -155 ------------------- ------------------ Net cash (used) by investing activities -8,073 -12,310 Cash flows from financing activities: Net proceeds from the issuance of common stock 27 259 Purchase of treasury stock -2,295 0 Cash dividends -723 -372 Net increase in deposits 15,194 3,266 Proceeds from Federal Home Loan Bank advances 53,454 69,500 Repayment of Federal Home Loan Bank advances -55,870 -74,500 (Decrease) increase in mortgagors' escrow accounts -21 4 ------------------- ------------------ Net cash (used) provided by financing activities 9,766 -1,843 ------------------- ------------------ Net increase in cash and cash equivalents 288 2,577 Cash and cash equivalents at beginning of period 8,259 12,095 ------------------- ------------------ Cash and cash equivalents at end of period $8,547 $14,672 =================== ================== Supplemental disclosure of cash flow information: Cash paid for: Interest on deposit accounts $5,876 $4,844 Interest on borrowed funds 2,230 2,081 Income tax expense, net 789 1,021 Supplemental schedule of non-cash investing and financing activities: Net change required by Statement of Financial Accounting Standards No. 115: Investment securities 483 -91 Deferred income tax liability -190 40 Net unrealized gain (loss) on investment securities available for sale 293 -51 Conversion of residential real estate loans to mortgage-backed securities 5,008 67,100 Transfer of securitized mortgage loans to mortgage-backed securities available for sale 575 8,996
Page -5- IPSWICH BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 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 and North Shore Financial Services, Inc. (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. North Shore Financial Services, Inc. was incorporated for the purpose of holding direct investments in real estate and foreclosed real estate. 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 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 nine month periods ended September 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. 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. Page -6- 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. Nine Months Ended September 30, 2000 Income Shares Per-Share (Numerator) (Denominator) Amount -------------------------------------------- Basic EPS $2,009 2,455 $0.82 Effect of stock options -- 24 (.01) -------------------------------------------- Diluted EPS $2,009 2,479 $0.81 ============================================ 1999 Basic EPS $2,380 2,461 $0.97 Effect of stock options -- 78 (.03) -------------------------------------------- Diluted EPS $2,380 2,539 $0.94 ============================================ Three Months Ended September 30, 2000 Income Shares Per-Share (Numerator) (Denominator) Amount -------------------------------------------- Basic EPS $617 2,370 $0.26 Effect of stock options -- 26 -- -------------------------------------------- Diluted EPS $617 2,396 $0.26 ============================================ 1999 Basic EPS $1,028 2,525 $0.41 Effect of stock options -- 25 (.01) -------------------------------------------- Diluted EPS $1,028 2,550 $0.40 ============================================ Other Comprehensive Income Accumulated other comprehensive income consists solely of unrealized appreciation on investment securities available for sale, net of taxes. Page -7- 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 nine months ended September 30, 2000 reflect the operations of the Company and its direct and indirect subsidiaries, Ipswich Savings Bank, Ipswich Preferred Capital Corporation, Ipswich Securities Corporation and North Shore Financial Services. 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 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 (the Federal Reserve) and the Bank is subject to regulation, supervision and examination by the Federal Page -8- 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 $13.1 million at September 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, the 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 $42.6 million at September 30, 2000. During 2000 the primary sources of liquidity were $13.0 million in loan sales, principal amortization from mortgage backed securities of $7.9 million, payoffs and principal amortization is the loan portfolio of $11.9 million and the sale of investment securities of $7.0 million. The primary uses of funds were $38.1 million in residential first mortgage loan originations and $13.3 million in investment purchases. CAPITAL RESOURCES Total stockholders' equity at September 30, 2000 was $16.3 million, a decrease of $689,000 from $17.0 million at the end of 1999. Included in stockholders' equity at September 30, 2000 is an unrealized gain on marketable securities available for sale, net of taxes, of $303,000, an increase of $293,000 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. Page -9- The Company completed a stock repurchase plan of 10% of the outstanding shares announced March 2000. Through September 30, 2000, the Company had repurchased 262,400 or 10% of the outstanding shares at an average price of $8.75 totaling $2.3 million, which is reflected as a decrease to equity. Subsequently, the Company announced a second 10% stock repurchase plan on October 19, 2000. 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 September 30, 2000 Tier 1 leverage capital ratio for the Company was 5.48% compared to 6.33% at December 31, 1999 and 5.49% and 6.29% for the Bank on September 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 September 30, 2000, the Company's total and Tier 1 risk-based capital ratios were 12.66% and 11.41% (compared to 14.38% and 13.13% at December 31, 1999). At September 30, 2000, the Bank's total and Tier 1 risk based capital ratios were 12.61% and 11.42% (compared to 14.29% and 13.04% at December 31, 1999). As of September 30, 2000, the Bank was considered "well-capitalized" under applicable regulatory capital guidelines. FINANCIAL CONDITION The Company's total assets at September 30, 2000 were $288.6 million, an increase of $12.3 million from December 31, 1999 assets of $276.3 million. The increase was largely due to the addition of $10.9 million in total loans, $2.4 million in mortgages held for sale, and $12.4 million in adjustable rate mortgaged backed securities. Funding the increase in assets for the first nine months of 2000 was deposit growth of $15.2 million, primarily in checking accounts and certificates of deposit. Conversely, borrowed funds decrease by $2.4 million in 2000 from year-end 1999. Federal Funds Sold Interest-bearing deposits and federal funds sold at September 30, 2000 was zero, versus $1.7 million at December 31, 1999. The decrease in fed funds sold was primarily due to the payoff of borrowings that matured in the first nine months of 2000. Investment and Mortgage-Backed Securities Total investments and mortgage backed securities available for sale at September 30, 2000 was $39.7 million, an increase of $167,000 in 2000. The increase was primarily the result of the purchase of $12.4 million in adjustable rate mortgage-backed securities, and $920,000 of equity securities and the securitization from the loan portfolio of $575,000 of fixed rate mortgages, offset by $7.0 million in sales and $7.2 million in principal amortization. The unrealized gain on the portfolio of available for sale securities, was $510,000 at September 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. Page -10- Total investments and mortgage-backed securities held to maturity were $27.3 million at September 30, 2000, versus $28.1 million at December 31, 1999. The decline is due to principal amortization on the portfolio of mortgage-backed securities of $743,000. Loans and Loans Held for Sale Loans held for sale increased to $2.4 million at September 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 September 30, 2000 was $204.2 million, an increase of $10.9 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 are sold in the secondary market. CREDIT QUALITY Non-Performing Loans Loans placed on non-performing status at September 30, 2000 was $27,000, 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 September 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. Allowance for Loan Loss The allowance for loan loss at September 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 Page -11- 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 adequate as of September 30, 2000. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary. Liabilities Deposits increased by $15.2 million in the nine months of 2000, to end September 30, 2000 at $225.3 million. Deposits totaled $210.1 million at December 31, 1999. The increase in deposits resulted from the Company's ongoing checking account program which generated an increase of $9.5 million in checking accounts balances in 2000. In addition, certificates of deposit increased by $6.7 million as rising rates made CDs a more attractive investment vehicle for depositors. Federal Home Loan Bank of Boston advances decreased by $2.4 million in 2000 to $42.6 million at September 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 1.5 years at September 30, 2000. Equity Capital Equity capital decreased by $689,000 to $16.3 million at September 30, 2000. Equity was principally impacted by earnings for the first nine months of the year of $2.0 million and an increase in the unrealized gain or loss on investment securities of $293,000, net of taxes. Offsetting these increases were payments of cash dividends to shareholders which totaled $723,000 in 2000. Additionally, the Company repurchased 262,400 shares or 10% of its outstanding shares in executing its previously announced 10% share repurchase plan. The average price per share was $8.75 totaling $2.3 million. The cost of the shares as reflected in the equity capital section of the balance sheet as "Treasury Stock". Subsequent to quarter end, on October 19, 2000, the Company announced a second 10% share repurchase program. Page -12- RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 General The Company reported net income of $617,000 or $.26 per fully diluted share for the third quarter of 2000. This compares with $1.0 million or $.40 per fully diluted share for the third quarter of 1999. The third quarter 2000 earnings were impacted by a pre-tax charge of $153,000 resulting from a restructuring of a portion of the loan portfolio consisting of the sale of $6.0 million of below market loans in the secondary market and the reinvestment of those funds in higher rate loans with less interest rate risk. Return on equity for the third quarter of 2000 was 14.58%, versus 25.74% for the same quarter of 1999. The third quarter of 2000 return on assets was .85% versus 1.52% for the same quarter in 1999. Net Interest and Dividend Income Net interest income for the third quarter of 2000 was $2.2 million, versus $2.3 million for the same time frame in 1999. The net interest margin percentage was 3.18% for the third quarter of 2000 versus 3.51% 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 resulted 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 third quarter of 2000 was $370,000 versus $820,000 in the third quarter of 1999. Non-interest income was substantially lower in 2000, as a result of lower mortgage banking revenues and a pre-tax charge of $153,000 taken from a partial restructuring of the loan portfolio. 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 third quarter of 2000 was ($78,000) versus $436,000 for the third quarter of 1999 when the Company sold a significant amount of mortgages in the secondary market. Retail banking fees for the third quarter of 2000 was $449,000 versus $380,000 for the same quarter in 1999. This 18.2% 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 third quarter of 2000 versus $1.6 million for the same time frame in 1999. Expenses which exhibited increases included data processing costs which increased $6,000, or 2.9% in the current quarter versus the same quarter in 1999 and professional fees which increased by $11,000 or 15.5% in the current quarter versus the previous. Income Tax Expense The second quarter of 2000 effective tax rate was 35% versus 30% for the third quarter of 1999. A tax rate of 35% in 2000 is expected to continue through the remainder of the year. Page -13- RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 General The Company reported net income of $2.0 million or $.81 per fully diluted share for the first nine months of 2000. This compares with $2.4 million or $.94 per fully diluted share for the first nine months of 1999. Return on equity for the first nine months of 2000 was 15.53%, versus 20.78% for the same time frame in 1999. The first nine months of 2000 return on assets was .94% versus 1.18% for the time frame in 1999. Net Interest and Dividend Income Net interest income for the first nine months of 2000 was $6.7 million, versus $6.4 million for the same time frame in 1999. The net interest margin percentage was 3.20% versus 3.27% for the same time frame the previous year. The net interest income was positively impacted by growth of the balance sheet from $272.3 million at September 30, 1999 to $288.6 million at September 30, 2000. Non-interest Income Non-interest income for the first nine months of 2000 was $1.3 million versus $2.4 million in the first nine months of 1999. Non-interest income declined as a result of lower mortgage banking revenues and a pre-tax charge of $153,000 resulting from the partial restructuring of the loan portfolio. 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 nine months of 2000 were $14,000 versus $1.2 million for the same time frame in 1999. Retail banking fees totaled $1.3 million for the first nine months of 2000 versus $1.1 million for the same time frame in 1999, an increase of $144,000 or 13%. 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 $5.1 million for the first nine months of 2000 versus $5.3 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 and benefits, an increase of $87,000 or 3.6%, and data processing expenses which increased by $91,000 or 16.1%. 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 data processing costs to support these new accounts. Income Tax Expense The first nine months of 2000 effective tax rate was 28.2% 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 -14- 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 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 twelve and twenty-four month periods. 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 over a twelve month period: Rate Change Estimated NII Sensitivity Over Twelve Months September 30, 2000 September 30, 1999 +200bp -5.05% -4.67% -200bp -3.88% +5.08% 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 Page -15- 0 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 -16- 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 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. 10.2 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. 10.3 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. Page -17- 10.4 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. 10.5 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. 10.6* 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. 10.7* 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. 10.8* Merger and Severance Benefits Program dated February 18, 1998 is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.9* 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. 10.10* 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. 10.11* 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. 10.12* 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. 10.13(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. 10.13(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. 10.14 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. 10.15* 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. Page -18- 10.16* 1996 Stock Incentive Plan incorporated by reference to the Company's Registration Statement on Form S-8 filed on July 22, 1999. 10.17* 1998 Stock Incentive Plan incorporated by reference to the Company's Registration Statement on Form S-8 filed on July 22, 1999. 10.18* Deferred Compensation Plan for Directors incorporated by reference to the Company's Form S-8 filed on July 22, 1999. 10.19 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. 10.20* Severance Agreement dated August 8, 2000 between Ipswich Savings Bank and Mark E. Foley is incorporated by reference herein from the Company's June 30, 2000 Form 10-Q. 10.21 Lease dated September 15, 2000 for premises located at Routes 133 and 1, Rowley, Massachusetts. 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: November 13, 2000 ---------------------------- David L. Grey President and Chief Executive Officer By: /s/ Francis Kenney Date: November 13, 2000 ----------------------- Francis Kenney Treasurer (Principal Financial Officer and Principal Accounting Officer) Page -19-