10-Q 1 form10q40050-88.txt IPSWICH UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001. [ ] 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 Identification No.) incorporation or organization) 23 Market Street, Ipswich, Massachusetts 01938 -------------------------------------------------------------------------------- Registrant's telephone number, including area code: (978) 356-7777 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class: Name of each exchange on which registered: Common Stock, $0.10 par value NASDAQ National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by court. Yes [ ] No [ ] The number of shares outstanding of the Registrant's common stock as of August 6, 2001 was 2,001,102.

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- 5 - IPSWICH BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2001 and 2000 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 was formed in February 2001 to issue and sell 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 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, respectively. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for possible loan losses, the valuation of real estate acquired by foreclosure, and the valuation of originated mortgage servicing rights. The accompanying unaudited condensed and consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2001. For further information, refer to the audited consolidated financial statements and footnotes thereto for the fiscal year ended December 31, 2000 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. Six Months Ended June 30, (Dollars in Thousands) 2001 ---- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS $1,302 2,041 $0.64 Effect of stock options -- 27 (.01) ------ ----- ----- Diluted EPS $1,302 2,068 $0.63 ====== ===== ===== 2000 ---- Basic EPS $1,391 2,503 $0.56 Effect of stock options -- 18 (.01) ------ ----- ----- Diluted EPS $1,391 2,521 $0.55 ====== ===== ===== Three Months Ended June 30, (Dollars in Thousands) 2001 ---- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS $655 2,024 $0.32 Effect of stock options -- 34 -- ---- ----- ----- Diluted EPS $655 2,058 $0.32 ==== ===== ===== 2000 ---- Basic EPS $644 2,475 $0.26 Effect of stock options -- 18 -- ---- ----- ----- Diluted EPS $644 2,493 $0.26 ==== ===== ===== Other 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 ------------- 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. - 7 - Although Ipswich Bancshares Inc. 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 difference include, but are not limited to, the factors set forth in the Corporation's filings with the Securities and Exchange Commission, which include, among other factors, changes in general economic conditions, credit risk management, 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. 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) and Ipswich Statutory Trust I. The Company's operating results for the three and six months ended June 30, 2001 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. The Company is in the business of making 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 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 $10.1 million at June 30, 2001. - 8 - Interest rate sensitivity statistics are static measures that do not necessarily take into consideration external factors which may affect the sensitivity of assets and liabilities, and consequently can not be used alone to predict the operating results of a financial institution in a changing environment. LIQUIDITY --------- The Company seeks to ensure that sufficient liquidity is available to meet cash requirements while earning a return on liquid assets. The Company uses its liquidity primarily to fund loans and investment commitments, to supplement deposit outflows, to fund its share repurchase program and to meet operating expenses. The primary sources of liquidity are interest and principal amortization from loans, mortgage backed securities and investments, sales and maturities of investments, loan sales, deposits, and Federal Home Loan Bank of Boston (the FHLBB) advances, which includes a $3.2 million overnight line of credit. The Company also uses longer term borrowed facilities within its total available credit line with the FHLBB. Advances from the FHLBB were $32.8 million at June 30, 2001. During 2001 the primary sources of liquidity were $21.4 million in loan sales, principal amortization from mortgage backed securities of $12.4 million, payoffs and principal amortization is the loan portfolio of $22 million and the sale and call of investment securities of $11.1 million. The primary uses of funds were $43.4 million in residential first mortgage loan originations and $29.4 million in investment purchases. CAPITAL RESOURCES ----------------- Total stockholders' equity at June 30, 2001 was $15 million, a decrease of $100,000 from $15.1 million at the end of 2000. Included in stockholders' equity at June 30, 2001 is an unrealized gain on marketable securities available for sale, net of taxes, of $251,000, a decrease of $222,000 as compared to $473,000 at December 31, 2000. The decrease is primarily due to the liquidation of the Company's equity security portfolio which produced a pre-tax gain of $182,000. Future interest rate increases could reduce the market value of these securities and reduce stockholders' equity. In the first quarter of fiscal 2001, the Ipswich Statutory Trust I sold $3.5 million of its trust preferred securities to the public and $109,000 of its common securities to the Company. The trust preferred securities are manditorially redeemable upon the maturity of the Junior Subordinated Debentures on February 22, 2031 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem the Junior Subordinated Debentures, in whole or in part on or after February 22, 2011 at a redemption price specified in the Indenture plus any accrued but unpaid interest to the redemption date. The costs will be amortized into operating expense over the life of the securities. The Company owns all of the common securities of the Trust, the only voting security, and as a result, the Trust is a subsidiary of the Company. The Company announced a third stock repurchase plan of 10% of the outstanding shares in February 2001. Through June 30, 2001, the Company had repurchased 527,000 or 21% of the outstanding shares at an average price of $9.09 totaling $4.8 million. The Federal Reserve's and the FDIC's capital guidelines require the Company and the Bank, respectively, generally to maintain a minimum Tier 1 leverage capital ratio of at least 4% (5% to be classified as "well-capitalized"). At June 30, 2001 Tier 1 leverage capital ratio for the Company was 6.23% compared to 5.04% at December 31, 2000 and 5.39% and 5.14% for the Bank on June 30, 2001 and December 31, 2000, respectively. - 9 - The Federal Reserve and the FDIC have also imposed risk-based capital requirements on the Company and the Bank, respectively, which give different risk weightings to assets and to off balance sheet assets, such as loan commitments. The Federal Reserve's and the FDIC's risk-based capital guidelines require the Company and the Bank, respectively, to maintain a minimum total risk-based capital ratio of 8% (10% to be classified as "well-capitalized") and a Tier 1 risk-based capital ratio of 4% (6% to be classified as "well-capitalized"). At June 30, 2001, the Company's total and Tier 1 risk-based capital ratios were 12.26% and 11.07% (compared to 10.31% and 9.19% at December 31, 2000). At June 30, 2001, the Bank's total and Tier 1 risk based capital ratios were 10.69% and 9.50% (compared to 10.46% and 9.19% at December 31, 2000). As of June 30, 2001, the Bank was considered "well-capitalized" under applicable regulatory capital guidelines. FINANCIAL CONDITION ------------------- The Company's total assets at June 30, 2001 were $298.6 million, an increase of $10.7 million from December 31, 2000 assets of $287.8 million. The increase was largely due to the addition of $5.0 million in total loans, $4.9 million in mortgage-backed securities available for sale, and $4.5 million in fed funds sold. Funding the increase in assets for the first six months of 2001 was deposit growth of $5.4 million, primarily in checking accounts, savings and money market accounts. Additionally, the Company issued $3.5 million in trust preferred securities in February 2001. Federal Funds Sold ------------------ Interest-bearing deposits and federal funds sold at June 30, 2001 was $4.5 million, versus $0 at December 31, 2000. The increase in fed funds sold was primarily due to accelerated cash flows from loans and investments resulting from the decline in interest rates in the first six months of 2001. Investment and Mortgage-Backed Securities ----------------------------------------- Total investments and mortgage backed securities available for sale at June 30, 2001 was $39.1 million, an increase of $4.9 million in 2001. The increase was primarily the result of the purchase of $20.4 million in fixed rate mortgage-backed securities, offset by $1.6 million in equity security sales, $2.0 million in called bonds, and $11.6 million in principal amortization. The unrealized gain on the portfolio of available for sale securities, was $425,000 at June 30, 2001. -10- Total investments and mortgage-backed securities held to maturity was $31.0 million at June 30, 2001, versus $30.3 million at December 31, 2000. The increase is due to principal amortization on the portfolio of mortgage-backed securities of $778,000 and the call of $7.5 million in bonds offset by the purchase of $9 million of mortgage-backed securities. Loans and Loans Held for Sale ----------------------------- Loans held for sale decreased to $1.8 million at June 30, 2001, versus $5.0 at year-end 2000. The loan portfolio at June 30, 2001 was $208.1 million, an increase of $5.0 million in comparison to the portfolio at December 31, 2000 of $203.1 million. The increase was principally in fixed rate mortgages, resulting from an asset/liability strategy of adding a selective number of fixed rate loans to the portfolio. CREDIT QUALITY -------------- Non-Performing Loans -------------------- Loans placed on non-performing status at June 30, 2001 was $224,000, substantially unchanged since year-end. Accrual of interest on loans is discontinued either when a reasonable doubt exists as to the full timely collection of principal and interest, or when a loan comes contractually past due by ninety (90) days or more, unless the loan is adequately secured and in the process of collection. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is recognized to the extent that cash is received and the ultimate collection of principal and interest is probable. Following collection procedures, the Company generally institutes appropriate actions to foreclose the property. Real Estate Acquired by Foreclosure ----------------------------------- Real estate acquired by foreclosure totaled $0 at June 30, 2001. 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 June 30, 2001 was $2.0 million, an increase of $160,000 primarily from a recovery of a loan partially charged-off totaling $146,000. The entire allowance for loan losses is available to absorb charge-offs in any category of loans. Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. The allowance for possible loan losses is established by management to absorb future charge-offs of loans deemed uncollectible. The allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged-off. In evaluating current information and events regarding borrowers ability to repay their obligations, management considers commercial loans over $200,000 to be impaired when it is probable that the Company will be unable to collect all amounts due, according to the contractual terms of the note agreement; other loans are evaluated collectively for impairment. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of collateral, if the loan is collateral-dependent. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Management believes that the allowance for possible loan losses is accurate as of June 30, 2001. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary. Liabilities ----------- Deposits increased by $5.4 million in the first half of 2001, to end June 30, 2001 at $242.6 million. Deposits totaled $237.2 million at December 31, 2000. Money market deposits increased by $8.1 million offset by a decrease of $6.9 million in CDs. Federal Home Loan Bank of Boston advances increased by $642,000 in 2001 to $32.8 million at June 30, 2001. 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 restructured a portion of its borrowings in the second quarter which resulted in reducing the weighted average rate from 6.60% at December 31, 2000 to 5.84% at June 30, 2001. - 11 - Equity Capital -------------- Equity capital decreased by $73,000 to $15 million at June 30, 2001. Equity was principally impacted by earnings for the first six months of the year of $1.3 million. Offsetting these increases were payments of cash dividends to shareholders which totaled $445,000 in 2001, and a decline in the unrealized gain on investment securities of $222,000. Additionally, the Company repurchased 73,000 shares or 4.5% of its outstanding shares in executing its previously announced 10% stock repurchase plan. The average price per share was $10.08 totaling $736,000. The cost of the shares as reflected in the equity capital section of the balance sheet as "Treasury Stock". - 12 - RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2000 General ------- The Company reported net income of $655,000 or $.32 per fully diluted share for the second quarter of 2001. This compares with $644,000 or $.26 per fully diluted share for the second quarter of 2000. The second quarter 2001 earnings were favorably impacted by securities gains of $182,000. Return on equity for the second quarter of 2001 was 17.36%, versus 14.80% for the same quarter of 2000. Return on assets was .89% for the second quarter in 2001 and 2000. Net Interest and Dividend Income -------------------------------- Net interest income for the second quarter of 2001 was $2.3 million, versus $2.2 million for the same time frame in 2000. The net interest margin percentage was 3.20% for the second quarter of 2001 versus 3.13% for the same quarter the previous year. Non-interest Income ------------------- Non-interest income for the second quarter of 2001 was $829,000 versus $478,000 in the second quarter of 2000. Non-interest income was substantially higher in 2001, as a result of higher retail banking fees and mortgage income. 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 fixed rate mortgages for sale versus adjustable rate loans for portfolio. The resulting impact is that mortgage banking revenues for the second quarter of 2001 was $94,000 versus $48,000 for the second quarter of 2000. Retail banking fees for the second quarter of 2001 was $553,000 versus $430,000 for the same quarter in 2000. The 29% increase is principally the result of the Company's successful efforts to promote its checking account products and substantial increases in ATM and debit card income. Non-interest Expense -------------------- Total noninterest expenses were $2.1 million for the second quarter of 2001 versus $1.7 million for the same time frame in 2000. Expenses which exhibited increases included salary and benefit costs which increased $115,000 or 14% and data processing costs which increased $87,000, or 38% in the current quarter versus the same quarter in 2000. Salary increases were primarily the result of the Company's efforts in building a Commercial Banking Department. Data processing costs increased as a result of the sale of the Company's credit card portfolio and an ATM conversion which created one-time expenses. Income Tax Expense ------------------ The 2001 effective tax rate was 35% for the second quarter of 2001 and 2000. A tax rate of 35% in 2001 is expected to continue through the remainder of the year. - 13 - RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000 General ------- The Company reported net income of $1.3 million or $.63 per fully diluted share for the first six months of 2001. This compares with $1.4 million or $.55 per fully diluted share for the first six months of 2000. Positive variances which contributed to an increase in earnings were in the net interest income of $124,000, and noninterest income of $490,000. In 2000, the Company realized a one-time tax benefit of $190,000. Return on equity for the first six months of 2001 was 17.21%, versus 15.99% for the same time frame in 2000. The first six months of 2001 return on assets was .90% versus .98% for the time frame in 2000. Net Interest and Dividend Income -------------------------------- Net interest income for the first six months of 2001 was $4.5 million, versus $4.4 million for the same time frame in 2000. The net interest margin percentage was 3.21% versus 3.20% for the same time frame the previous year. Non-interest Income ------------------- Non-interest income for the first six months of 2001 was $1.4 million versus $906,000 in the first half of 2000. Non-interest income increased as a result of higher mortgage banking revenues of $132,000, an increase of $178,000 in retail banking fees, and securities gains of $182,000. 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 primarily originating fixed rate loans for sale versus adjustable rate loans which are originated for portfolio. Total mortgage banking revenues for the first six months of 2001 were $224,000 versus $92,000 for the same time frame in 2000. Retail banking fees totaled $990,000 for the first six months of 2001 versus $812,000 for the same time frame in 2000, an increase of $178,000 or 22%. 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 and substantial increases in ATM and debit card income. Non-interest Expense -------------------- Total noninterest expense was $3.9 million for the first six months of 2001 versus $3.4 million for the same time frame in 2000. Non-interest expenses line items which increased in 2001 over 2000 were salaries and benefits, an increase of $106,000 or 6%, and data processing expenses which increased by $117,000 or 26%. These cost increases are a result of the Company's successful efforts to generate checking accounts. Income Tax Expense ------------------ The first six months of 2001 effective tax rate was 35% versus 24.7% for the same time frame in 2000. 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. The tax rate in 2001 is expected to be 35%. - 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 or mature more quickly than fixed-rate residential loans. The Company's adjustable-rate loans are primarily tied to published indices, such as the one-year Constant Maturity Treasury (CMT). The Company utilizes a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on both a rise or fall in interest rates (rate shock) over a twelve and twenty-four month period. The model is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. The model incorporates assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The assumptions are based on nationally published prepayment speeds on assets and liabilities when interest rates increase or decrease by 200 basis points or greater. The model factors in projections for anticipated activity levels by product lines offered by the Company. The simulation model also takes into account the Company's increased ability to control the rates on deposit products more so than adjustable-rate loans tied to published indices. Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change the interest income and expense streams associated with the Company's financial instruments also change, thereby impacting net interest income (NII), the primary component of the Company's earnings. ALCO utilizes the results of the simulation model and static GAP reports to quantify the estimated exposure of NII to sustained interest rate changes. The following reflects the Company's NII sensitivity analysis as of the time frames analyzed: Rate Change Estimated NII Sensitivity Over Twelve Months -------------------------------------------------------------------------------- June 30, 2001 June 30, 2000 ------------- ------------- +200bp -1.18% -2.29% -200bp -0.36% -2.18% The preceding sensitivity analysis does not represent the Company's forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable-rate assets, the potential effect of changing debt service levels on customers with adjustable-rate loans, depositor early withdrawals and product preference changes, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. - 15 - 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 --------------------------------------------------------------------- The following were nominated to the Board of Directors to serve three-year terms as directors of the Company. For Withheld --------- -------- Thomas A. Ellsworth 1,557,185 150,917 William J. Tinti 1,556,785 151,317 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 September 15, 2000 for premises located at Route 133 and Route 1, Rowley, Massachusetts is incorporated by reference herein from the Company's September 30, 2000 Form 10-Q. 10.2 Lease dated April 25, 1994 for premises located at 451 Andover Street, North Andover, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.3 Lease dated March 4, 1996 for premises located at 588 Cabot Street, Beverly, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.4 Lease dated July 27, 1997 for premises located at 600 Loring Avenue, Salem, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.5 Lease dated February 27, 1998 for premises located at 89 Pleasant Street, Marblehead, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. - 16 - 10.6 Lease dated June 12, 1998 for premises located at 470 Main Street, Reading, Massachusetts is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.7* Incentive Compensation Plan for Senior Management and certain other officers dated September 15, 1995 is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.8* Director Recognition and Retirement Plan adopted as of May 18, 1999 is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.9* Merger and Severance Benefits Program dated February 18, 1998 is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.10* Amended and Restated Employment and Severance Agreement dated May 18, 1999 between Ipswich Savings Bank and David L. Grey is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.11* Amended and Restated Employment and Severance Agreement dated May 18, 1999 between Ipswich Savings Bank and Francis Kenney is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.12* Amended and Restated Severance Agreement dated May 18, 1999 between Ipswich Savings Bank and Thomas R. Girard is incorporated by reference herein from the Company's June 30, 1999 Form 10-Q. 10.13(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. 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. - 17 - 10.21*Split Dollar Agreement dated March 30, 2001 between Ipswich Savings Bank and Francis Kenney is incorporated by reference herein from the Company's March 31, 2001 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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IPSWICH BANCSHARES, INC. By: /s/ David L. Grey Date: August 10, 2001 ----------------- David L. Grey President and Chief Executive Officer By: /s/ Francis Kenney Date: August 10, 2001 ------------------ Francis Kenney Treasurer (Principal Financial Officer and Principal Accounting Officer) - 18 -

IPSWICH BANCSHARES INC 10-Q