-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pw3cp3ovxmWPoDj5I7qOhwTOFDLeWpWeO1UkqTvaEZfMpA3ZjC5YxuzdHe3Vpdef zAgt86lmJKfVZ5afJBSzpw== 0000914317-02-000525.txt : 20020509 0000914317-02-000525.hdr.sgml : 20020509 ACCESSION NUMBER: 0000914317-02-000525 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IPSWICH BANCSHARES INC CENTRAL INDEX KEY: 0001089857 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 043459169 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26663 FILM NUMBER: 02639817 BUSINESS ADDRESS: STREET 1: 23 MARKET STREET CITY: IPSWICH STATE: MA ZIP: 01938 BUSINESS PHONE: 9783567777 MAIL ADDRESS: STREET 1: 23 MARKET STREET CITY: IPSWICH STATE: MA ZIP: 01938 10-Q 1 form10q-45042.txt 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 March 31, 2002. [ ] 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 May 6, 2002 was 1,936,286.
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except per share data) March 31, December 31, 2002 2001 --------- ------------ Assets (unaudited) (unaudited) ------ Cash and due from banks $ 7,425 $ 10,935 Federal funds and other short-term investments 4,816 1 Securities available for sale, at market value 74,202 50,405 Securities held to maturity, amortized cost 33,755 35,343 Loans held for sale 928 14,946 Loans: Residential loans 154,083 159,806 Home equity 30,462 31,733 Commercial/construction 11,865 11,636 Consumer 504 535 ---------- ---------- Total gross loans 196,914 203,710 Allowance for loan losses -2,144 -2,121 ---------- ---------- Net loans 194,770 201,589 ---------- ---------- Stock in FHLB of Boston 3,000 3,000 Banking premises and equipment, net 2,949 2,824 Accrued interest receivable 1,758 1,251 Other assets 895 821 ---------- ---------- Total assets $ 324,498 $ 321,115 ========== ========== Liabilities and Stockholders' Equity Liabilities: Deposits: Interest- and non-interest bearing checking accounts $ 62,524 $ 64,296 Savings accounts 47,361 45,931 Money market accounts 86,222 79,806 ---------- ---------- Total core deposits 196,107 190,033 Certificates of deposit 56,170 59,480 ---------- ---------- Total deposits 252,277 249,513 Borrowed funds 48,000 47,859 Mortgagors' escrow accounts 1,030 1,148 Deferred income tax liability and other liabilities 4,305 3,976 ---------- ---------- Total liabilities 305,612 302,496 ---------- ---------- Company obligated, mandatorily redeemable capital securities 3,500 3,500 Equity capital 20,897 20,564 Treasury stock (604,900 and 604,900 shares, respectively) -5,783 -5,783 Unrealized gain on investment securities available for sale, net 272 338 ---------- ---------- Total stockholders' equity 15,386 15,119 ---------- ---------- Total liabilities and stockholders' equity $ 324,498 $ 321,115 ========== ========== Shares outstanding 1,934,474 1,925,628 Selected data (end of period): - ------------------------------ Regulatory tier 1 leverage capital ratio (in %) 5.82 5.76 Book value per share $ 7.95 $ 7.85
2
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except per share data) Three Months Ended March 31, 2002 2001 ---------- ---------- (unaudited) (unaudited) Interest and dividend income: Loans $ 3,299 $ 3,820 Investment securities available for sale 722 607 Investment securities held to maturity 563 526 Federal funds and interest bearing deposits 19 60 ---------- ---------- Total interest and dividend income 4,603 5,013 Interest expense: Deposits 1,339 2,140 Borrowed funds 561 627 ---------- ---------- Total interest expense 1,900 2,767 ---------- ---------- Net interest and dividend income 2,703 2,246 Provision for loan losses 30 25 ---------- ---------- Net interest and dividend income after provision for loan losses 2,673 2,221 Non-interest income: Retail banking fees 490 418 Mortgage banking revenues, net 390 131 Investment sales income 46 18 Net gain/(loss) on sales of securities -27 0 ---------- ---------- Total non-interest income 899 567 ---------- ---------- Net interest, dividend and non-interest income 3,572 2,788 Non-interest expenses: Salaries and employee benefits 1,032 808 Occupancy and equipment 263 271 Data processing services 243 244 Advertising & marketing 148 131 Professional fees 108 75 Distribution on securities of subsidiary trust 91 38 Merger expenses 409 0 Other 234 225 ---------- ---------- Total non-interest expenses 2,528 1,792 Income before income taxes 1,044 996 Income tax expense 523 349 ---------- ---------- Net income $ 521 $ 647 ========== ========== Basic earnings per share $ 0.27 $ 0.32 Diluted earnings per share $ 0.26 $ 0.31 Quarterly dividends per share $ 0.12 $ 0.11 ========== ========== Weighted average common shares outstanding (basic) 1,942,641 2,050,496 Weighted average common shares outstanding (diluted) 2,026,531 2,082,190 Selected performance data: - -------------------------- Return on average equity (in %) 13.43 17.02 Return on average assets (in %) 0.65 0.90 Net interest margin (in %) 3.48 3.21 Expenses to average assets (in %) 3.16 2.49 Efficiency ratio (in %) 70.25 62.95 Mortgage and equity loan production $ 22,179 $ 18,884
3
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Three Months Ended March 31, 2002 and 2001 (Dollars in thousands, except for share data) (unaudited) Accumulated Additional other Total Shares Common paid-in Retained Treasury comprehensive stockholders' issued stock capital earnings stock income equity --------- ---------- ---------- ----------- -------- ------------- ------------- Balance at December 31, 2000 2,525,552 $ 253 $ 2,297 $ 16,150 -$4,054 $ 473 $ 15,119 Stock options exercised 2,050 $ 15 15 Issuance of stock rights 5 5 Cash dividends -225 -225 Treasury stock purchased (34,700 shares at an average price of $9.80) -340 -340 Comprehensive income: Net income 647 647 Other comprehensive income: Unrealized holding gains on securities, net of taxes of $45 67 Reclassification adjustment for amounts included in net income, net of taxes of $6 9 ---------- Other comprehensive income 76 76 ---------- ---------- Total comprehensive income 723 ---------- ---------- ---------- ---------- --------- ---------- ---------- Balance at March 31, 2001 2,527,602 253 2,317 16,572 -4,394 549 15,297 Stock options exercised 2,926 15 15 Issuance of stock rights 13 13 Cash dividends -767 -767 Treasury stock purchased (116,200 shares at an average price of $11.96) -1,389 -1,389 Comprehensive income: Net income 2,161 2,161 Other comprehensive income: Unrealized holding gains on securities, net of taxes of $95 -155 Reclassification adjustment for amounts included in net income, net of taxes of $36 -56 Other comprehensive income -211 -211 ---------- Total comprehensive income 1,950 ---------- ---------- ---------- ---------- --------- ---------- ---------- Balance at December 31, 2001 2,530,528 253 2,345 17,966 -5,783 338 15,119 Stock options exercised 8,846 1 48 49 Issuance of stock rights 3 3 Cash dividends -240 -240 Comprehensive income: Net income 521 521 Other comprehensive income: Unrealized holding gains on securities, net of taxes of $80 -136 Reclassification adjustment for amounts included in net income, net of taxes of $49 70 ---------- Other comprehensive income -66 -66 ---------- ---------- Total comprehensive income 455 ---------- ---------- ---------- ---------- --------- ---------- ---------- Balance at March 31, 2002 2,539,374 $ 254 $ 2,396 $ 18,247 -$5,783 $ 272 $15,386 ---------- ---------- ---------- ---------- --------- ---------- ----------
4
IPSWICH BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Three Months Ended March 31, 2002 and 2001 (Dollars in thousands) (unaudited) 2002 2001 ------- ------- Net cash flows from operating activities: Net income $ 521 $ 647 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 30 25 Depreciation expense 85 88 Amortization of premiums on investment securities, net 92 15 (Gain) on sale of loans, net -329 -101 Loss on sale of investment securities available for sale, net 27 0 Origination of loans held for sale -15,472 -9,534 Proceeds from sale of loans 23,802 7,341 Proceeds from sale of securitized loans 6,016 2,002 Decrease (increase) in loan origination fees and loan discounts 94 -52 (Increase) in deferred premium on loans sold and mortgage servicing rights -102 -25 (Increase) decrease in accrued interest receivable -508 44 Decrease (increase) in other assets, net 28 -97 Increase in accrued expenses and other liabilities 360 365 ------- ------- Net cash provided by operating activities 14,644 718 Net cash flows from investing activities: Purchase of investment securities available for sale -39,352 -3,136 Principal paydowns on mortgage-backed investment securities available for sale 4,586 3,849 Proceeds from the sale of investment securities available for sale 10,773 2,000 Purchase of investment securities held to maturity 0 -2,372 Principal paydowns on mortgage-backed investment securities held to maturity 1,569 295 Principal from the call of investment securities held to maturity 0 3,500 Net decrease in loans 6,695 1,066 Purchases of equipment, net -210 -16 ------- ------- Net cash (used) provided by investing activities -15,939 5,186 Cash flows from financing activities: Net proceeds from the issuance of common stock 52 20 Proceeds from issuance of capital securities 0 3,500 Purchase of treasury stock 0 -340 Cash dividends -240 -226 Net increase in deposits 2,764 405 Proceeds from Federal Home Loan Bank advances 141 11,000 Repayment of Federal Home Loan Bank advances 0 -11,608 (Decrease) increase in mortgagors' escrow accounts -118 47 ------- ------- Net cash provided by financing activities 2,599 2,798 ------- ------- Net increase in cash and cash equivalents 1,304 8,702 Cash and cash equivalents at beginning of period 10,937 8,836 ------- ------- Cash and cash equivalents at end of period $12,241 $17,538 ======= ======= Supplemental disclosure of cash flow information: Cash paid for: Interest on deposit accounts $ 888 $ 1,426 Interest on borrowed funds 369 450 Income tax expense, net 375 125 Supplemental schedule of non-cash investing and financing activities: Net change required by Statement of Financial Accounting Standards No. 115: Investment securities -97 129 Deferred income tax liability -31 53 Net unrealized gain (loss) on investment securities available for sale -66 76
5 IPSWICH BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2002 and 2001 BASIS OF PRESENTATION - --------------------- The consolidated financial statements include the accounts of Ipswich Bancshares, Inc. and its wholly owned subsidiaries, Ipswich Statutory Trust I and 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 Statutory Trust I is a Connecticut Trust established in February 2001. It exists for the exclusive purpose of issuing and selling common securities to the Company and Preferred Securities to the public. 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 Bank. 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 accounting principles generally accepted in the United States of America. 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. Management's approach to establishing these estimates is discussed in note 1 to the Company's December 31, 2001 financial statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations included in Form 10K for the year ended December 31, 2001. 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 month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2002. For further information, refer to the audited consolidated financial statements and footnotes thereto for the fiscal year ended December 31, 2001 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. 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. Three Months Ended March 31, 2002 Income Shares Per-Share ---- (Numerator) (Denominator) Amount ----------- ------------- ---------- Basic EPS $ 521 1,943 $ 0.27 Effect of stock options -- 84 (.01) ------ ----- -------- Diluted EPS $ 521 2,027 $ 0.26 ====== ===== ======== 2001 ---- Basic EPS $ 647 2,050 $ 0.32 Effect of stock options -- 32 (.01) ------ ----- --------- Diluted EPS $ 647 2,082 $ 0.31 ====== ===== ======== TOTAL COMPREHENSIVE INCOME - -------------------------- Accumulated other comprehensive income consists solely of unrealized appreciation on investment securities available for sale, net of taxes. ITEM 2 - ------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS - -------------------------- This Financial Release contains certain statements that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that its expectations are based upon reasonable assumptions within the bounds of its knowledge of its business operations, there can be no assurance that actual results will not differ materially from those projected in the forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the factors set forth in the Company's filings with the Securities and Exchange Commission, which include, among other factors, changes in general economic conditions, changes in asset quality, changes in interest rates, regulatory issues and changes in the assumptions used in making such forward-looking statements. Certain factors that may cause such differences include, but are not limited to the following: interest rates may increase, unemployment in the Company's market area may increase, property values may decline, and general economic and market conditions in the Company's market area may decline, all of which could adversely affect the ability of borrowers to re-pay loans; general economic and market conditions in the Company's market area may decline, the value of real estate securing payment of loans may decline and the Company's ability to make profitable loans may be impacted; 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. 7 SIGNIFICANT ACCOUNTING POLICIES - ------------------------------- The Notes to the Consolidated Financial Statements contain a summary of the Company's significant accounting policies. Certain of these policies are considered to be important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. These policies include determining the level of the allowance for loan losses and the valuation of mortgage servicing rights. The statements below contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 8. Allowance for loan losses - ------------------------- The allowance for loan losses represents management's estimate of possible losses inherent in the loan portfolio. This evaluation process is subject to numerous estimates and judgments. The frequency of default, risk ratings, and the loss recovery rates, among other things, are considered in making this evaluation. Changes in these estimates could have a direct impact on the provision and could result in a change in the allowance. Each portfolio of homogeneous loans, primarily residential mortgages, is collectively evaluated for impairment. The allowance for loan losses is established via a process that begins with management considering overall portfolio indicators including historical credit losses, delinquent, non-performing and classified loans, and trends in loan characteristics. During the first quarter of 2002, there were no discernible trends in net loan losses nor increases in the level of delinquency. If such an experience occurred, management would consider the viability of the level of provisions necessary to maintain an adequate allowance for loan losses. Mortgage servicing rights - ------------------------- The carrying value of the Company's mortgage servicing represents management's estimate of the probable market value of rights. This evaluation process is subject to numerous estimates and judgments including the direction of interest rates, the prepayment characteristics of the portfolio of loans serviced and the strength of the secondary market for servicing rights. Changes in these estimates could have a direct impact on the establishment or size of the allowance established for market impairment of the rights. During the first quarter of 2002, a general trend in interest rates was not discernible necessitating no adjustment in the valuation allowance previously established. 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). The Company's operating results for the three months ended March 31, 2002 reflect the operations of the Company and its direct and indirect subsidiaries, Ipswich Statutory Trust I, Ipswich Savings Bank, Ipswich Preferred Capital Corporation, Ipswich Securities Corporation and North Shore Financial Services, Inc. On February 26, 2002, the Board of Directors of the Company approved an Agreement and Plan of Merger between Banknorth Group, Inc. (Banknorth) and Ipswich Bancshares, Inc. whereby Banknorth will acquire the Company for $41.1 million, or $20.50 per share of Company stock, payable in cash or in equivalent shares of Banknorth stock, at the option of each stockholder, subject to limitations intended to ensure that 51% of the outstanding common stock of the Company will be converted into the right to receive Banknorth common stock and 49% of the outstanding common stock of the Company will be converted into the right to receive cash. The transaction is subject to the approval of the Company's shareholders and various state and federal regulatory bodies. If approved, it is anticipated the transaction will be finalized in July 2002. 8 The Company's principal business is attracting deposits from the general public and using these deposits to fund its residential mortgage banking and commercial banking functions. The Company also performs residential mortgage loan servicing. 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 Deposit Insurance Corporation (the FDIC) and the Massachusetts Commissioner of Banks (the Commissioner). ASSET / LIABILITY MANAGEMENT - ---------------------------- The goal of asset/liability management is the prudent control of market risk, liquidity and capital. 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 $34.2 million at March 31, 2002. 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 continually monitors and forecasts its liquidity position. 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, retail 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 March 31, 2002. During 2002 the primary sources of liquidity were $29.8 million in loan sales, the sale of $10.8 million of investment securities, principal amortization from mortgage backed securities of $6.2 million and payoffs and principal amortization from the loan portfolio of $9.1 million. The primary uses of funds were $18.1 million in residential first mortgage loan originations and $39.4 million in investment purchases. CAPITAL RESOURCES - ----------------- Total stockholders' equity at March 31, 2002 was $15.4 million, an increase of $267,000 from $15.1 million at the end of 2001. Included in stockholders' equity at March 31, 2002 is an unrealized gain on marketable securities available for sale, net of taxes, of $272,000, a decrease of $66,000 from 9 $338,000 at December 31, 2001. Future interest rate increases could reduce the market value of these securities and reduce stockholders' equity. The Company paid a $.12 per share dividend on its common stock in the first quarter of 2002, a 9% increase over the $.11 paid in the first quarter of 2001. 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 March 31, 2002, the Tier 1 leverage capital ratio for the Company was 5.82% compared to 5.76% at December 31, 2001. For the Bank, the Tier 1 leverage capital ratio was 5.54% and 5.55% on March 31, 2002 and December 31, 2001, respectively. The Federal Reserve and the FDIC have also established risk-based capital requirements applicable to 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 March 31, 2002, the Company's total and Tier 1 risk-based capital ratios were 12.40% and 11.15% (compared to 11.56% and 10.35% at December 31, 2001). At March 31, 2002, the Bank's total and Tier 1 risk based capital ratios were 11.92% and 10.63% (compared to 11.05% and 9.85% at December 31, 2001). FINANCIAL CONDITION - ------------------- The Company's total assets at March 31, 2002 were $324 million, an increase of $3.4 million from December 31, 2001 assets of $321 million. The increase was largely due to the addition of $23.8 million in investment securities offset by a decline of $20.8 million in loans. Funding the increase in assets for the first three months of 2002 was deposit growth of $2.8 million. Federal Funds Sold - ------------------ Interest-bearing deposits and federal funds sold at March 31, 2002 was $4.8, versus $0 at December 31, 2001. The increase in federal funds sold was primarily due to accelerated cash flows from assets. Investment and Mortgage-Backed Securities - ----------------------------------------- Total investments and mortgage backed securities available for sale at March 31, 2002 was $74.2 million, an increase of $23.8 from March 31, 2001. The increase was primarily the result of the investment of $20.8 million in cash flow from loans and loans held for sale. Origination volumes declined in the first quarter of 2002 relative to the fourth quarter of 2001 necessitating investing in securities rather than the loan portfolio. The unrealized gain on the portfolio of available for sale securities was $465,000 at March 31, 2002. Total investments and mortgage-backed securities held to maturity were $33.8 million at March 31, 2002 compared to $35.3 million at December 31, 2001. The decline is due to principal amortization on the portfolio of mortgage-backed securities of $1.6 million. Loans and Loans Held for Sale - ----------------------------- Loans held for sale decreased to $928,000 at March 31, 2002 from $14.9 million at year-end 2001. The Company's portfolio of mortgages held for sale decreased due to the delivery of loans previously originated for sale. The level of refinancing activity declined in the first quarter of 2002 versus the last quarter of 2001 as a result of a general increase in market rates. This resulted in lower origination volume and a decline in loans held for sale. The loan portfolio at March 31, 2002 was $196.9 million, a decrease of $6.8 million from $203.7 million at December 31, 2001. The decrease resulted from accelerated cash flows from 10 prepayments of loans and a decline in originate volumes which did not keep pace with prepayments. Deposits - -------- Deposits increased by $2.8 million from $249.5 million at December 31, 2001 to $252.3 million at March 31, 2002. Certificates of deposit decreased by $3.3 million as falling rates made CDs a less attractive investment vehicle for depositors; money market accounts increased by $6.4 million as depositors invested in more liquid deposit types. Borrowings - ---------- Federal Home Loan Bank of Boston advances increased by $141,000 in 2002 to $48.0 million at March 31, 2002. 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. Equity Capital - -------------- Equity capital increased by $267,000 to $15.4 million at March 31, 2002. Equity was principally impacted by earnings of $521,000 for the first three months of the year and a decrease in the unrealized gain or loss on investment securities of $66,000, net of taxes. Offsetting these increases were payments of cash dividends to shareholders which totaled $240,000 in 2002. ASSET QUALITY - ------------- Non-Performing Loans - -------------------- Loans on non-performing status at March 31, 2002 totaled $180,000, 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 becomes contractually past due by ninety (90) days or more, unless the loan is adequately secured and is 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 possible. Following collection procedures, the Company generally institutes appropriate actions to foreclose the property. The Company also had $203,000 in performing loans that it currently is negotiating with the borrower which may result in a charge-off of $166,000 of the non-performing loans and the $203,000. The charge-off would be recognized against the allowance for loan losses. Allowance for Loan Loss - ----------------------- The allowance for loan losses at March 31, 2002 was $2.1 million, substantially unchanged since year-end 2001. 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 adequate as of March 31, 2002. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary. 11 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2001 SUMMARY - ------- The Company reported net income of $521,000 or $.26 per fully diluted share for the first quarter of 2002. This compares with $647,000 or $.31 per fully diluted share for the first quarter of 2001. The first quarter 2002 earnings were impacted by a non-tax deductible charge of $409,000 resulting from the previously announced proposed merger with Banknorth Group, Inc. Return on equity for the first quarter of 2002 was 13.43%, versus 17.02% for the same quarter of 2001. The return on assets for the first quarter of 2002 was ...65% versus .90% for the same quarter in 2001. Net Interest and Dividend Income - -------------------------------- Net interest income for the first quarter of 2002 was $2.7 million, versus $2.2 million for the same time frame in 2001. The net interest margin percentage was 3.48% for the first quarter of 2002 versus 3.21% for the same quarter the previous year. Net Interest Income - ------------------- Net interest income was favorably impacted in the first quarter of 2002 from a continuing repricing of certificates of deposit to lower market interest rates. The unprecedented reduction in short term rates of 475 basis points in 2001 has substantially reduced market rates on short term deposits. This has had a favorable impact on the Company's net interest margin. Provision for Loan Losses - ------------------------- The Company made a provision of $30,000 in the first quarter of 2002 and $25,000 in the first quarter of 2001. Provisions are made to the allowance for loan losses in order to maintain the allowance at a level which management believes is reasonable and reflective of the overall risk of loss inherent in the loan portfolio. Non-interest Income - ------------------- Non-interest income for the first quarter of 2002 was $899,000 versus $567,000 in the first quarter of 2001. Non-interest income was substantially higher in 2002 as a result of higher mortgage banking revenues and retail banking fees. 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 originated a substantial volume of fixed rate mortgages for sale in the secondary market in the fourth quarter of 2001 and the first quarter of 2002. The result is that mortgage banking revenues for the first quarter of 2002, when the loans were delivered, was $390,000 versus $131,000 for the first quarter of 2001. Retail banking fees for the first quarter of 2002 was $490,000 versus $418,000 for the same quarter in 2001. This 17.2% increase is principally the result of the Company's successful efforts to acquire checking account customers in its market place, which generates significant fee income. Non-interest Expense - -------------------- Total non-interest expenses were $2.5 million for the first quarter of 2002 versus $1.8 million for the same time frame in 2001. The increase in non-interest expenses was partially due to an increase in salaries and employee benefits resulting from additions to operating staff. Additionally, the Company incurred a non-tax deductible expense of $409,000 related to its proposed merger with Banknorth Group, Inc. Income Tax Expense - ------------------ The first quarter of 2002 effective tax rate, excluding merger expenses, was 36%, versus 35% for the first quarter of 2001. 12 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, such as 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). The 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. The ALCO utilizes the results of the simulation model 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 Ended - -------------------------------------------------------------------------------- March 31, 2002 March 31, 2001 -------------- -------------- +200bp 3.01% 0.26% - -200bp -- -1.91% - -100bp 0.56% -- 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 and reinvestment/replacement of asset and liability cash flows. 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. 13 IPSWICH BANCSHARES, INC. AND SUBSIDIARIES 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 A Current Report on Form 8-K to report an Item 5 matter was filed on February 28, 2002. c. Exhibits 2.1 Agreement and Plan of Merger, dated as of February 26, 2002 between Banknorth Group, Inc. and the Company is incorporated be reference from Exhibit 2.1 of Banknorth's Current Report on Form 8-K filed February 28, 2002 (File No. 0-16947). 2.2 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 September 15, 2000 for premises located at Routes 133 and 1, Rowley, Massachusetts is incorporated by reference herein from the Company's September 30, 2000 Form 10-Q.. 14 10.2 Lease dated April 25, 1994 for premises located at 451 Andover Street, North Andover, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.3 Lease dated March 4, 1996 for premises located at 588 Cabot Street, Beverly, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.4 Lease dated July 27, 1997 for premises located at 600 Loring Avenue, Salem, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.5 Lease dated February 27, 1998 for premises located at 89 Pleasant Street, Marblehead, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.6 Lease dated June 12, 1998 for premises located at 470 Main Street, Reading, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.7* Incentive Compensation Plan for Senior Management and certain other officers dated September 15, 1995 is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.8* Director Recognition and Retirement Plan adopted as of May 18, 1999 is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.9* Merger and Severance Benefits Program dated February 18, 1998 is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 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* Severance Agreement dated August 8, 2000 between Ipswich Savings Bank and Mark E. Foley is incorporated by reference herein from the Company's September 30, 2000 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 August 31, 2001 is incorporated by reference herein from the Company's September 30, 2001 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. 15 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* Form of Stock Option Agreement between Banknorth Group, Inc. (as grantee) and the Company (as issuer) is incorporated by reference from Exhibit 10.1 of Banknorth's Current Report on Form 8-K filed February 28, 2002 (File No. 0-16947). 10.20* Split Dollar Agreement and Collateral Assignment dated July 20, 2000 and March 30, 2001, respectively between Ipswich Savings Bank and Francis Kenney is incorporated by reference herein from the Company's March 31, 2001 Form 10-Q. 10.21* Form of Termination Agreement by and among Banknorth, the Company, Ipswich Savings Bank, Eastern Bank, as Trustee, and David L. Grey is incorporated by reference from Exhibit 10.3 of Banknorth's Current Report on Form 8-K filed February 28, 2002 (File No. 0-16947). 10.22* Form of Employment and Noncompetition Agreement between Banknorth Group, Inc. and David L. Grey is incorporated by reference from Exhibit 10.4 of Banknorth's Current Report on Form 8-K filed February 28, 2002 (File No. 0-16947). 10.23* Severance Agreement dated November 6, 2001 between Ipswich Savings Bank and Philip Bryan incorporated by reference to the Company's December 31, 2001 Form 10-K. 10.24* Severance Agreement dated November 8, 2001 between Ipswich Savings Bank and Kevin Dean incorporated by reference to the Company's December 31, 2001 Form 10-K. 10.25 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. 11. A statement regarding the computation of earnings per share is included in the Notes to Consolidated Financial Statements. 12. Not applicable. * Denotes Management Contract or Compensation Plan. 16 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: May 8, 2002 -------------------------------------- David L. Grey President and Chief Executive Officer By: /s/ Francis Kenney Date: May 8, 2002 -------------------------------------- Francis Kenney Treasurer (Principal Financial Officer and Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----